宣偉 (SHW) 2009 Q1 法說會逐字稿

Good morning. Thank you for joining the Sherwin-Williams Company's review of first quarter 2009 results and expectations for the second quarter and full year. With us on today's call are Chris Connor, Chairman and CEO; Sean Hennessy, Senior Vice President of Finance and CFO; John Ault, Vice President and Corporate Controller; and Bob Wells, Senior 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. Any archived replay of this webcast will be available at www.sherwin.com beginning approximately two hours after this conference call concludes and will be available until Thursday, April 30th at 5:00 P.M. 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 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. After the review of first quarter results, we will open the session to questions. I will now turn the call over to Mr. Bob Wells.

Thanks, Jackie. In order to allow more time on the call for questions, we've provided balance sheet items and other selected information on our website at www.sherwin.com under Investor Relations First Quarter Press Release. Summarizing overall company performance in the first quarter 2009 versus first quarter 2008, consolidated net sales decreased 13% to $1.55 billion, due primarily to weak paint sales volume and unfavorable foreign currency translation rate changes partially offset by the impact of five acquisitions completed since the beginning of 2008. Consolidated gross profit dollars decreased $99.9 million for the quarter to $680.6 million. Gross margin increased 10 basis points to 43.9% of sales from 43.8% in the first quarter last year. Selling, General and Administrative expenses for the quarter declined 6.5% to $608.8 million. As a percent of sales, SG&A increased to 39.3% in the quarter this year from 36.6% last year. Interest expense decreased $5.5 million compared to the first quarter last year. Consolidated profit before taxes in the quarter decreased $62.1 million or 55% to $50.9 million. Our effective tax rate in the first quarter this year was 26.8% compared to 31% in the first quarter of 2008. For the full year 2009, we expect our effective tax rate to be comparable to last year's rate of approximately 33%. Consolidated net income decreased to $37.3 million from $77.9 million in the first quarter last year. Net income as a percent of sales was 2.4% compared to 4.4% in the first quarter last year. The diluted net income per common share for the quarter decreased $0.32 to $0.32 per share.

Looking at our results by operating segment, sales for our Paint Stores Group in the first quarter 2009 declined 12.9% to $898.4 million. Comparable store sales -- that's sales by stores open more than 12 calendar months -- declined 12.7%. The decrease in sales for the segment was due primarily to weak paint sales volume and corresponding weakness in non-paint sales categories. Regionally, in the Fourth Quarter our Southwest division led all divisions, followed by Midwest division, Eastern division, and Southeastern division. Sales by all four paint stores divisions declined in the first quarter compared to last year. Segment profit for the group decreased 32.1% to $56.6 million in the first quarter 2009. Segment margin decreased to 6.3% from 8.1% in the first quarter last year due primarily to lower sales.

Turning to our Consumer Group, sales in the first quarter increased 0.4% to $288.2 million. The increase was due primarily to incremental sales of new product to existing customers. Segment profit for the Consumer Group decreased 29.3% in the quarter to $30.2 million. Segment profit as a percent of external sales decreased to 10.5% from 14.9% in the same period last year, due primarily to poor fixed cost absorption resulting from the reduction in volume to our manufacturing and distribution operations.

For our Global Finishes Group, sales in US dollars decreased 21.5% to $362.5 million in the quarter, due primarily to lower paint sales volume and unfavorable currency translation rate changes that were partially offset by acquisitions and selling price increases. In the quarter, unfavorable currency translation rate changes decreased net sales of the group in US dollars by 10.6%. Acquisitions completed since first quarter of 2008 increased net sales by 2.3%.

In the first quarter, segment profit declined 87% to $5.3 million, due to lower sales volume and unfavorable operating efficiencies related to lower manufacturing volumes that were partially offset by good expense control. The combination of unfavorable currency translation rates and acquisitions had a dilutive effect of $3.6 million or 8.3% on segment profit.

Turning to the balance sheet, our total debt on March 31, 2009 was $1.08 billion, including total short-term borrowings of $765 million. Total debt on March 31, 2008 was $1.35 billion. Our cash balance at the end of the quarter was $42.2 million compared to $20.1 million at the end of the first quarter 2008. Total borrowings to capitalization were 40.5% at the end of the first quarter versus 45.4% at the end of first quarter 2008. Long term debt-to-capitalization was 16.5% at the end of the first quarter this year compared to 16% last year.

In the first quarter 2009, the Company purchased 500,000 shares of its common stock in the open market. At March 31 2009, the Company had remaining authorization to purchase 19.25 million shares of its common stock. We expect to continue from time to time our opportunistic purchases of company stock for Treasury since we continue to believe our stock is a good value. In the first quarter of 2009, we spent $22.4 million on capital expenditures. Depreciation expense was $35.9 million and amortization expense was $6.2 million. For full year 2009, we anticipate capital expenditures for the year will be approximately $100 million, depreciation will be about $145 million, and amortization will be about $24 million.

I customarily provide a brief update on the status of our lead pigment litigation on these calls. The only new development since our year-end call occurred on February 6, 2009, when the Ohio Attorney General dismissed the state's lawsuit against the Sherwin-Williams Company and nine other defendant companies. That concludes my review of our results for the first quarter 2009, so I'll turn the call over to Chris Connor, who will make some general comments and highlight our expectations for second quarter and full year. Chris?

Thanks, Bob, and good morning, everybody. Thank you for joining us today. The market environment we encountered during the first quarter and the financial results we reported this morning are both pretty much in line with our expectations that we gave you at the outset of the year. We did in fact see a sharp drop in demand for paint and coatings in the second half of last year and we had no reason to expect that conditions would improve early this year. And clearly, they have not. Residential and commercial new construction in the first two months of the year declined in square feet by more than 50%. Sales of existing homes, a key driver of architectural paint demand, also continued to decline in the first quarter, although at a slower pace than it had in 2008. January and February resales were down 5.3% and 4.6% respectively compared to the 13% decline we saw in 2008. However, nearly half of all resales in recent months were foreclosures and distress sales which don't necessarily generate the same volume of repainting activity in the near term that we would typically associate with an owner occupant turnover. Demand for most industrial coatings continued to track down with overall economic activity, and across every region of the globe from Latin America to Europe to most of Asia Pacific, growth has slowed significantly from the first quarter of last year.

On our last earnings call, I commented on some actions we had taken during the year in response to these difficult market conditions and I highlighted three areas. First, stemming volume erosions by pursuing market share opportunities, second, offsetting these higher input costs with both expense control and pricing actions, and finally, maximizing net operating cash. These three items continue to be our priorities in this environment. The combination of disciplined asset management, prudent investment, and share growth in some key market segments should enable us to emerge from this cycle leaner and better positioned than we were at the peak of the market two years ago.

Although volume is probably the most difficult of these factors to predict, we do believe we have opportunities to grow market share. Our consumer segment is particularly well positioned to capitalize on the apparent shift in DIY channel preferences we've seen over the past few quarters. We've bolstered this position by introducing some new product lines and programs in our existing retail customers as well as opening some new distribution. As a result of these efforts, the consumer segment managed to achieve a modest sales increase in the quarter.

Our Paint Stores Group continues to expand into new markets as well as consolidate redundant store locations. During the quarter, we opened 12 new stores and closed 19 redundant stores. For the full year, we expect to open 40 to 50 new store locations while reducing the rate at which we close redundant stores, resulting in a net new store addition in the range of 20 to 25 locations this year. Our global group added two new branches in the quarter for a total now of 543 company operated branches in this group.

Over the past year we completed five acquisitions including Inchem, a Singapore based producer of liquid coatings for the OEM market; Euronavy, a leading innovator of marine and protective coatings headquartered in Portugal; and most recently Altax, a wood finishing producer located in Poland. Although these acquisitions combined with two small domestic acquisitions had minimal impact on our first quarter consolidated sales and operating results, they increase our breadth of product offerings and expand our global reach and capacity.

Despite persistently high input costs and lower manufacturing volumes, we did in fact achieve a modest increase in consolidated gross margin in the quarter. This was the result of our ongoing efforts to shrink our fixed asset base in line with declining sales volume, and the hard work by our sales team to protect the price increases we implemented during the past year. At the same time, we made further progress in the areas of expense control and working capital management. Our success over the past year in reducing overtime and part time service hours, consolidating our sales territories, and trimming administrative expenses across the entire organization, contributed to a $43 million reduction in first quarter SG&A expense compared to the first quarter of 2008.

Our working capital ratio improved to 12.8% from 13.7% last year. During the quarter we continued to acquire shares of our stock for Treasury and we increased our quarterly cash dividend to $0.355 per share, up from $0.35 last year. We believe all these actions better prepare us for what lies ahead. The challenging market conditions we saw in the first quarter are likely to persist over the balance of the year, but sales volume comparison should get easier in the second half. Given the current demand outlook, we anticipate that our second quarter consolidated net sales will decrease 9% to 12% compared to the second quarter of 2008. With sales of that level, we estimate diluted net income per common share in the second quarter will be in the range of $1.20 to $1.45 per share, compared to $1.45 per share earned in the second quarter of 2008. For the full year 2009, we've revised our sales expectations and now anticipate net sales will decline in the mid to high single digits versus 2008. With annual sales at that level, we're reaffirming our January 22, 2009 guidance that our diluted net income per common share for 2009 is expected to be in the range of $3 to $4 per share compared to $4 per share earned in 2008.

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

(Operator Instructions). Thank you, our first question is coming from Jeff Zekauskas of JPMorgan.

Hi, good morning.

Good morning, Jeff.

A few questions. Were your average prices in the quarter up at a smaller amount than they were in the fourth quarter of 2008 or were they up a larger amount?

They were marginally higher but not materially higher. So I would say relatively flat.

And in general, was your gallonage down about 10%?

No. Our comp stores were down double digits and we did have some price in there, so it was higher than down 10%.

By higher, you mean -- ?

The decrease was --

Was greater?

Yes.

Okay, and then lastly, when I look at your administrative or corporate expense, and I net out the interest income and interest charges and other expense, it seems that the corporate burden was about $20 million this quarter compared to $40 million in the year ago quarter. And when I look at that historically, the $20 million is a relatively low number. What's going on in that piece?

When you take a look at it, we had an adjustment to the long term compensation of stock and other benefits that were adjusted for a change, just a change in estimate. And so that was the biggest part of that and then just also good admin control.

How big was the compensation adjustment?

That was probably 35% to 40% of the total number you were talking about there.

Okay, thank you very much.

Thanks, Jeff.

Thank you. Our next question is coming from Sergey Vasnetsov of Barclays Capital.

Good morning. A couple questions. What's your expectations for raw materials decline in this year? How much is in the first quarter, how much do you expect to see in the second part of the year?

Well, at the beginning of the year, we opted not to give a range for raw material costs for the industry, increase or decrease for the industry. And we did that largely because our visibility was not very good. And the decline in crude oil and natural gas prices has brought down the cost of petrochemical based raw materials like the solvents and monomers and latex, but this is coming down from historic highs. Meanwhile, a lot of the non-petrochemical based materials like titanium, a lot of the pigments, the extenders, metal cans, et cetera, have not come down significantly. So we know where our costs have gone -- and clearly industrywide, the petrochemical based materials have come down. But we don't report our own raw material costs for competitive reasons, and we don't have very good visibility into overall industry movement in that basket. So for that reason, we've opted not to give a range for raw material cost movement to the industry.

I thought that your raw materials basket could not be that much different from other industry participants, and therefore, your basket is the industry, is it not?

We negotiate raw material costs independently from the rest of the industry.

Okay. All right, so I'll take it as no answer. And then the next one is what do you think about your share buybacks in the forthcoming quarters? Do you expect it to be more or less aggressive?

We're continuing to evaluate that. We're looking at the stock price and looking at our balance sheet, and we're out there opportunistically, but we have really not given a forecast of what we think -- how much shares we're going to buy for the year.

Okay, and lastly maybe I'll get more lucky with this one. What do you think of the idea of a tradedown due to self-customers given your strength in Consumer Group versus Stores Group?

Okay, I'll take this one and hopefully you'll get lucky here.

Okay.

Clearly that is a trend that we are seeing happen in the industry as the DIY customers are in fact looking for a more value oriented paint purchase. That is impacting the Stores Group because we tend to participate at the higher end of the specialty store chain pricing. The good news for us, and I think is reflected in our Consumer Group numbers, is that we're participating with some of our retailing partners and more on the value side. So we are seeing that trend manifest itself throughout the market. Oddly enough, and I know this is not part of your question, but the painting contractor is not exhibiting those kinds of shifts and are continuing to stay loyal to the channel and products they have used historically, so shift is underway. We think it will continue throughout this calendar year in this difficult economic environment.

Thank you for your help.

Thanks.

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

Hi, good afternoon or good morning, and definitely nice to see a better than expected quarter for you guys. With respect to your ability in terms of the long term comp change, was that one-time in nature or do you think it will be sustainable?

It's mostly one-time, it's sort of a catch up. A couple years ago, if you read our CD&A, we did take our long term RSO grants to an EBITDA base, but we've not changed any EBITDA, not changed the programming -- it was a change of estimate of what we think the EBITDA will be over the years. So it was now -- that we've looked at that it was -- 90% of it was a catch up. We will have some goodness going forward, but it won't be that dramatic.

Got it. And with respect to your flexibility realizing sales are weaker than expected on your expense control, can you give us some of the levers where you can actually not unfortunately [fuel] the downward spiral if sales are worse?

Ivy, we've been pulling a lot of those levers through the cycle now, and we commented briefly on a few of them on the verbiage regarding overtime hours, part time hours, sales territories, all those activities have continued to take place. I think you're seeing impact of all that in the SG&A number. I think we've got them down to the level we would like to see them at for the year. We're operating at a fairly lean level. We have commented I think on the last call that the fixed versus variable admin expense or selling expense has moved from maybe a 75/25 mix a year ago to about a 90/10 mix now. So we have less variable cost to get at. As a reminder, these stores are open 72 to 84 hours a week depending on their markets and opening hours, and we don't have a whole lot more to do there. We have to have folks in these stores, so we'll continue to pay attention to the variable opportunities we have. They are diminishing as we go forward.

Got it. Just two bigger picture questions, Chris. Everyone realizes that foreclosure turnover is obviously a big part of overall turnover, and you have to imagine people -- I think I always ask the same question. Are you seeing benefits yet? Because people have to paint these houses at some point, you'd think -- at least a room or two. And separately I'll get my second question in. We see non-residential activity as you indicated plummeting, and realizing that that is not your biggest end market, but it's certainly a considerable part of the business outlook. How do you feel confident getting your arms around that and what are some of the things you're watching?

Well, clearly on the foreclosures your first question, we are seeing the benefit of that activity and you're right. As owners of these foreclosed properties, whether they are occupants or whether they are developers that intend to flip it again, there is painting activity happening there. We're missing the front end of that as banks are selling distressed properties, they certainly aren't preparing them for sale by painting them. And a developer who buys a home and goes in and paints the entire facility off white doesn't spend the same kind of time and energy and money that an owner/occupant would bringing color palettes unique to each and every room. So to say that we're not seeing of that would be incorrect, but it certainly isn't the ticket that we would get on the other side of that. On your second question regarding non-res --

Chris, just really quick, on the ticket, you're obviously gaining some benefit. What would sales look like without it? How much do you think of your same-store sales are actually coming from albeit a smaller ticket, but from that foreclosure activity if you were going to hazard a guess?

It would be de minimis, Ivy. I can't put a number on that, but we're talking in the low single digits.

Got it. Thank you.

On the non-residential new construction, we too are watching a variety of different reporting segments on that indicating that the next several quarters are going to be down significantly in that regard, and I think those results are included in our estimates for the year.

So you don't expect it to accelerate or get worse from where it is today?

I think the data points that we're seeing indicate that it is going to accelerate and be softer in the second half on new residential construction than the first half, and we've baked that into our estimates.

Great. Thanks guys.

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

Yes, hi, good morning.

Good morning, PJ.

Chris, Consumer Group was flat and Paint Group was down 13%. Is that a long term trend or do you see a divergence like this typical in a recession?

Well, we certainly don't think our Paint Stores Group being down 13% is a long term trend. This is the effect of the contractor segments of the market taking the biggest impact of the downturn. Certainly all the new construction activity, and we commented that new construction square footage put in place in the first quarter was down 50%. That's a 100% impact on our painting contractor customer base. As all of us are trying to grapple with these data points and figure out when the market declines moderate, bottom out and begin to come back up, we certainly don't expect that the contractor segment on this industry is going to be down that level repeatedly for a long period of time. We don't think that's accurate. The consumer segment generating flat to moderately up sales increases -- I think we've also indicated that's kind of a steady state expectation that we have for that group. It is faring a little bit better in a down market because of their particular customer mix, and as the market would come back, we would think that the consumer segment should be able to maintain that same kind of performance. So that's probably more of a long term trend we would expect. We certainly don't expect the stores to stay down.

Okay so I guess I should rephrase my question -- that maybe DIY doing better than contractor business is a long term trend?

We think that the DIY segment is gaining share at the expense of the contractor, but again primarily because the new construction markets are 100% contractor and have no DIY component to them.

Right.

I think we've shared with our entire investment community the mix between professional and contractor purchases of paint and DIY paint. It has averaged around 60/40 split in favor of contractor for the last several years. We expect that in this environment that it is cycling back towards the DIY by a couple hundred basis points. So maybe we'll see this year come in at 57/43 split or something along those lines. That's appropriate in a down market like this. We think the long term trends are -- however that returns back to close to a 60/40 split.

Okay, and then in your Global Finishes Group, which was down 21%, how much of that was FX, how much was international, and then what happened to the US industrial business? Can you give us the components?

When we take a look at that, the currency effect of that was just over 10%, so without currency it would have been down about [10]. I would tell you that we don't usually break out the domestic, non-domestic or industrial and so forth, but I would tell you that in the international was slightly weaker than the domestic, but I don't even have the breakout between industrial and so forth in front of me right now.

Thank you very much.

Thanks, PJ.

Thank you. Our next question is coming from Don Carson of UBS.

Yes, thank you. Two questions, first on the Paint Stores Group. Just wondering about variable margins. Chris, as the year goes forward, obviously you have no price actions. Do you expect that that variable margin will widen, that is price come down less than raw materials? Or is the pressure on prices sufficient that you might not see an expansion in the variable margin?

I think that the guidance that we've given here, Don, has been that the pricing activity taken last year as we get into the paint season and time will tell whether we can hold -- I think it's a little early to make that call at this point in time. And as Bob gave in his response to an earlier question regarding raw material costs -- here again, we're watching to see what's going to happen. Obviously it would be our hope that that variable margin could expand slightly. We're still operating well below our historic highs in this group of a couple years ago, but I think it's too early to make that call.

Okay. And then turning to the Consumer Group, two questions there. One on their margins. What actions are you taking to lower that unabsorbed fixed cost? Are you reducing or closing any manufacturing operations, temporarily or permanently? And then on the other side of the Consumer Group, can you quantify a bit more of this trade down in DIY? I mean what kind of price point change are you seeing? And from a channel standpoint, are people switching away from the home centers and more to the mass merchandisers like Wal-Mart that would actually help your sales in the Consumer Group?

Don, on the margins question first, regarding Consumer Group actions that we can take, we've commented I think throughout the last several quarters on these calls about actions we have undertaken to close facilities, idle facilities, reduce the number of operating shifts, et cetera. I can tell you that in the first quarter of 2009, those activities are continuing. We've recently announced the closure of yet another two facilities in North America. They are not down yet, but we have given indications that as the year unfolds that we will close these facilities. So continuing to rightsize the company's asset base in line with demand. I think as you look backwards now over the last two years, there's been north of a dozen of these closures. So we've continued to make the appropriate difficult choices when we have to do so. We will continue going forward to take advantage of all the opportunities that we have available to us with rolling shutdowns and other things to try to make this balance appropriate for the market.

On the DIY shift, I think the best place I can point you to is the building supply retailers' own announcements regarding their performance and their comp store results, and I think as all of us are watching those numbers, we can see that Wal-Mart, since you raised that in particular, customers by name, performance has been a little bit stronger as they tend to be more in the lower value side of that equation. So that's the shift that we're seeing in the marketplace. The paint departments tend to move pretty much in line with the comp store performance of these retailers as they report, and I think you can get a sense of how that shift is occurring as a result of that.

Thank you.

Thank you. Our next question is coming from Saul Ludwig of KeyBanc.

Good morning guys.

Good morning, Saul.

Sean, you had these big increase in environmental and loss of assets, loss on the sale of assets or closures of the $10 million. Which segment got dinged with those expenses?

On the environmental, that was corporate in the admin section and the other price is really in stores.

The loss on assets?

It wasn't really a loss on assets, but as we closed the stores, we had to accelerate rent and some other issues with the closing, exit costs.

Okay. Where do you see the environmental -- granted, that's maybe difficult to nail down, but in your own thinking about how do you see environmental costs for the year unfolding compared to last year given that it was $6 million worse in the first quarter?

Right. I don't think we're going to be $6 million worse for the full year. We might be marginally higher for the year, but that was -- as you know these quarters all stand by their own and they will be marginally higher.

The comment about the stock comp adjustment, 35% to 40%, what was the amount of dollars?

It was in the $8 million range, $7 million to $8 million range, call it $7.5 million.

And that was also in admin?

Yes.

So that was a hit, and the environmental was in admin was a hit, so. Oh, no, the $7 million was a catch up?

That's correct.

That was a plus. Okay, what was your pension expense versus your pension income?

Do you have another question and let me pull that out while you're asking the next one.

When we look at the savings you guys had in your SG&A, that's great the way you controlled those. Do those savings have legs to them or are we going to see similar reductions in SG&A as you look through the balance of the year? Or are they more temporary?

I think when you say do they have legs to them, I think the heavy lifting has been done throughout 2008 to get a stores closed, factories down, admin costs out, et cetera, we're probably at a run rate that's stable for the remainder of the year unless we take further actions.

And back to that pension question, the credit last year was $1.5 million in the first quarter and this year was cost of $11 million. And again, I don't know if you remember -- we said the after-tax effect of the year will be between $38 and $40 or $0.31 to $0.33 a share.

And this pension expense swing here of $12.5 million -- would that show up in admin or would that show up in the stores or where would that show up?

There's a piece in each one of the segments. The stores in consumer have the lion's share.

Call it the headcount.

Okay. And Chris, you talked about some new products and new distribution. Are these meaningful and maybe elaborate on that a little bit?

I think specifically in the Consumer Groups where we were commenting on that, Saul, our Dutch Boy product line launched a new program under a label called Refresh. This is a product that has an Arm and Hammer baking soda tag on the label that is an odor eliminating paint that's perfect for rooms in your home where there are odors -- whether that's kids rooms, laundry rooms, kitchens, et cetera, and it's been the placement of that program in a number of the Dutch Boy retailing partners that's gained shelf space for the company.

We also picked up some new doors in the co-op hardware channel.

Okay, and then Sean, I know you put this in the Q. What was the change in the gross profit and SG&A in the stores group?

It was up, when you sit there and take a look at it. I've got the Q here, but I'm trying to think how we verbally said it -- but the gross profit in the stores is up 2%.

That's in dollars or percent to sales?

Percent to sales.

In percent to sales?

Yes.

So the gross profit improved, and what about the SG&A? That also improved too I assume -- or no, that went down?

Yes, it went down approximately that $20 million that Chris mentioned in his remarks.

And then finally, what did you pay for the 500,000 shares?

It was $44.82. So we paid $22.4 million.

Great. Thank you very much guys.

Thanks, Saul.

Thank you. Our next question is coming from Robert Felice of Gabelli & Company.

Hi guys. A couple quick questions. First I wanted to follow-up on the topic of the admin expense, and I guess that $20 million for the quarter was I think a bit lower than most of us expected and there's a lot of moving pieces there. How should we think about the next three quarters in terms of that number?

And again, the $20 million was adjusted by [Jeff]. I mean the admin was down $14 million. I would tell you that when we look at the full year, there's a lot of puts and takes and so forth, but we really haven't gone out and forecasted different lines nor segments segments of the company yet. And again, we really didn't even change our guidance from $3 to $4. The first quarter is our smallest quarter, and when you think about the price, the volume, those type of things we're working on, the first quarter just wasn't large enough. I would tell you there's many scenarios where we have at the end of the second quarter we're probably -- first of all we'll narrow the range and give you some guidance on some of these things.

Okay, okay. And then I guess changing topics, you'd mentioned that the non-res portion of your business you expect to be weak through the remainder of the year. Have you gotten your hands around the extent to which the fiscal stimulus out of Washington, which seems to be targeted in part toward refurbishment infrastructure coatings that enhance energy efficiency -- to what extent that could be a benefit to you later in the year into 2010?

Let me first of all just clarify the non-res portion of the market headwinds that I think the question specifically was on the new construction piece of that. And as a reminder, new construction takes about 20% of the coatings, as opposed to the 80% which are used to maintain non-residential. So while we are certainly expecting a headwind in the non-residential new construction market, the maintenance painting cycles won't be down nearly as drastically. More specifically, Robert, to the stimulus question, we are beginning to see some clarity on where these dollars are going to show up. We were recently awarded a major interchange project, and I think there's 10 bridges as a part of this highway project in the southwestern part of the United States, and all 10 bridges have been awarded. So we're starting to see some of that activity pick up. Our expectations are that these are going to manifest themselves in paint projects very late in 2009 if at all, and we're more looking towards on our protective and marine coatings segments seeing impact of this in 2010.

Okay, so not really baked into your guidance at this point for 2009, and if anything does happen to hit late in 2009 perhaps -- ?

We've got a little bit of it in the back half of the year, but not a lot.

Okay. And then I guess flipping topics, there's been a lot of questions around raw material costs and a lot of questions around pricing. But the extent to which you can help us get our hands around the price cost variance both in the first quarter and given your volume outlook for the remainder of the year, what that price cost variance could look like for 2009 would be helpful.

I know it would be helpful and I think we've tried to indicate that we're just not in the position to give industry guidance on kind of the cost structure. We've been very transparent with the investment community regarding the price activities that we took last year. I don't want to go through that on the call right now, but happy to do so afterwards with you if you don't have those data points still. We've indicated historically that we take a period of time to get our full pricing in and we when complete have a certain percentage of it in, and this pricing activity in the market is behaving as it has historically for us. We are coming into the season now, and I think we've commented also that we're not quite sure whether we'll be able to hang on to all of the pricing or not, time will tell. And there's just too many moving parts here. We're not trying to be obtuse, Robert, but I think that's as much transparency as we can provide at this point in time.

I think you're aware, Rob, we've never disclosed our raw material cost movements up or down. We've always spoken in terms of the industry, and we just don't have great visibility on what the industry is paying for this basket of raws right now.

Okay, fair enough, but it does sound like on the pricing side, to date, you've been relatively successful holding on to the flowthrough of pricing from 2008 into 2009. Is that fair?

Exactly. And that's why we've answered the question how was it the first quarter versus the fourth quarter and so forth, because the answer is yes.

Okay, great. Thanks for taking my questions.

Thanks.

Thank you. Our next question is coming from Gregory [Nulth] of Morgan Stanley.

Hi, this is Matt calling in for Greg.

Hi, Matt.

Sorry to ask once again on price, but Sean, when you spoke earlier on it, you said price was marginally higher, and when you talk about the price increases we had last year -- I think it was 17% to 19% -- you typically get 75% to 80% of that through. And then last year I think you said you got 10% through. So if we're looking at the residual of 4% to 5% price increase in 2009, when you say marginally higher, is that closer to the 4% to 5% range or are you lower than that?

Lower than that, but -- and again I think the reason why that is is it's tough in the first quarter because the volumes are -- this is our lowest volume quarter. So typically over the years, I think again, that answer will be a lot clearer after we complete the second quarter.

Okay, and then on the mix, how is that pushing around your top line, the shift from do-it-yourself?

Not that much. I think the topline number shift doesn't make that much of a difference to us. As a consumer segment, DIY grows for us, that tends to be at a little bit of a lower retail price than the products we would sell in our own specialty stores for example, to the DIY customer. And from a contractor perspective, some of the higher quality performing products are not that far off from a price of a DIY in a retail channel. So this shift is not having a significant impact at all on our top line revenue. It's more just the lack of volume in gallons that's driving the top line revenue numbers.

And then one more. On working capital you mentioned in the press release you are having good working capital control. Do you think your working capital benefit in 2009 will be greater or less than you have in 2008?

It will be less.

Okay and that would be driven by?

Well, just take a look at it. Our working capital at the end of the year was 11.2%, and what we always said over time is that our optimal is at 11%. And last year, we were able to drive it down 1.5%. And so you think about the 1.5% on it by approximately $8 billion, we're just not going to get that kind this year.

Okay, great. Thank you.

The other thing I just want to point out is in 2007, a big reason for that was we're at 12.7% because some of the acquisitions we had completed. And we integrated those acquisitions operationally -- did a great job getting the working capital out of some of the acquisitions, which allowed us to get down to 11.2%.

I guess when I think about that number it being less, given that your sales are declining so much and you've already made pretty significant progression on reducing your inventories, it's surprising that your working capital benefit wouldn't be greater than what you had in 2008.

Yes, but if you tack a look at the work we were able to do with the third and fourth quarter of last year, I think we brought in -- we were in pretty good shape coming in this year, and so if you look at just comparisons of fourth quarter 2007 and the first quarter 2008 and 2009, part of it was also we were still integrating some acquisitions that we brought into the first quarter of 2008, so -- it's nice performance, don't get me wrong, but we just don't see that continuing all the way through the fourth quarter.

Okay, thank you very much.

Thanks, Matt.

Thank you. Our next question is coming from Dmitry Silversteyn of Longbow Research.

Good morning, gentlemen.

Good morning.

A couple of questions if I may. A lot of them have already been answered. To clarify -- on the corporate expense line, Jeff was talking about $20 million, and that's kind of the number we're coming up with. And you're saying it's more like $14 million. But regardless it looks like about $7.5 million reduction was if I understood you correctly was one-time, so should we be thinking about kind of $20 million to $25 million run rate for corporate expense going forward?

Yes, I think when you take a look at it, another big piece in there was the interest expense reduction. We see the interest expense when our balance sheet is in pretty good shape, and we're down in debt and we're also down in interest rate. So we still see our interest expense being lower, so yes.

And I might actually -- my second question on your interest expense. And if you look at the progression of your debt level, you went from just a little bit north of $1 billion in the third quarter to about $830 million] and change in the fourth, and back to over $1 billion in the first quarter of this year, and your interest expense continued to come down sequentially quarter-over-quarter over quarter. So my question is, are you experiencing lower interest expense in your variable debt? Or are you paying off your high end debt and your average debt costs are therefore coming down? It doesn't look like your debt expense or your debt level is varying enough to account for the variability or the decline in your interest expense.

And I'll tell you right now, a lot of it has to do with rate. If you think about what was going on last year with the credit crunch, especially in the second half of last year, the variable short-term rates if you could get duration, you had to pay for it. And what we're seeing now is the freeing up a little bit of the credit situation and we're taking it really in the interest rate expense.

Okay, so it is a question of your variable debt levels coming down in terms of interest expense?

Yes.

And interest rates?

Yes.

Okay, that's helpful. Secondly, with respect to your guidance, if I remember correctly from the fourth quarter conference call, you were talking about kind of I think low to mid single digit declines in revenues were your expectations for the year. And now you're at the kind of mid to high single digits -- and yet you preserved your guidance at $3 to $4. So my question is in your forecast what's gotten better to offset revenues getting worse?

You're exactly right, Dmitry. We have seen the sales volume forecast concern us a little bit about the back half, so we have increased our expectations in terms of how much of a decline we'll feel in that top line. I think as we began the year, we talked about volume, pricing, and raws being the three big drivers here for our earnings this year and as the quarter has unfolded, we're seeing stability in the pricing that we've already talked about on the call, which is giving us some confidence. And as Bob mentioned in his comments, some of the petrochemical raws are moving in the right direction. So I think as those two areas become a little bit more clear in their impact, we're able to reaffirm the guidance for the year at $3 to $4 a share.

Okay, I've got it, thanks. And then the final question on the tax rate -- it was below 27% it looks like this quarter. Obviously it's some one-time issues in there because you do expect it to go up to 33% for the year, which means you're probably looking at 33% to 33.5% for the back nine months. Is that the way to think about this?

Yes.

Okay, all right, thank you very much.

Thanks.

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

Okay, good morning.

Good morning, Amy.

My first question is maybe you mentioned that in the prepared remarks and sorry maybe I missed that, the [solid paint and coatings] producers noted better than expected demand in March. I'm wondering have you seen a similar trend in that month or maybe a good trend extending into the second quarter? Can you just provide some color on that?

I think that we typically don't comment on the month inside the quarter, and as you can tell from the results, the demands were weak for the quarter for sure. Obviously as the painting season starts to emerge, and if you get some pockets of good weather in this quarter because it's our lowest volume quarter you can in fact see some little spikes. I think we would also remind the investment community that Easter last year was in March and this year moved to April. Easter tends to be a period when people don't paint. So we gained a weekend or two of activity that we might not have had a year ago. So while there was some of that activity occurring, we don't think that it's enough of a strength of a trend to change our thoughts for the remainder of the year.

Thank you and my second question is pricing. Sean, I heard you mention the pricing for first quarter is marginally higher on a year-over-year basis. But going forward how we should think about the trends in the second quarter particularly in the second half of this year, given the fact that we see the annualized impact of the price hikes you announced last year that can -- second half last year that can create a very tough comp for you guys?

I think that's exactly right. I mean with the pricing -- as we annualize the pricing we're going to see that price differential, that difference between volume and total sales will begin to decrease. But you're absolutely right.

I remember the last quarter earnings conference call, you mentioned you expect 4% to 5% price benefit for 2009. Not sure if that's for the first half 2009 or for the full year, but obviously if we revisit that assumption, now we'll probably expect something like a flat to modest up for the full year. Is that fair?

I don't remember saying that on the conference call. I don't think we've ever given guidance on what percentage but I think--

For pricing?

For pricing.

Okay.

Again, I think Chris has told, we went through it before. Eventually, we think over in 12 to 18 months we'll get approximately 75% of the pricing that we put in, and mathematically if that works out to [4 or 5] that's fine.

Okay, thank you.

Thank you. Our next question is coming from Stephen O'Neil of Hilliard Lyons.

Good morning.

Good morning, Steve.

Just a quick question on the Global Group. Just wondered if you could elaborate on possibly which foreign markets were the weakest and possibly which were the weakest related to currency?

I'll take the comment relative to the marketing conditions and I'll ask Sean to comment on the currency at the back half of the answer. Our largest segment as you know is Latin America, and within that, Brazil and Mexico would be the two largest countries that report in. And both of those economies right now are struggling. Brazil, a year ago, very robust on the backs of ethanol production as oil prices were high and economies around the globe switch to biotype fuels, significant construction activity in Brazil last year with the number of refineries were being built. A great amount of that activity has really come to a halt if not slowdown in that country. So we're seeing the economic environment in Brazil soften. And in Mexico also I think, which is more closely tied to America's economy and NAFTA is also soft. So those two economies and countries for us will be feeling the brunt of the volume declines in economic slowdown. From a currency standpoint, Sean?

Sure, number one was Mexico and number two was Brazil and those were the two leaders when it comes to the exchange rate problems.

I haven't tracked this, worse than the Euro?

Yes, because a couple things. Number one, when I told you that, that's for our company and when you look at the amount of business we have based on the Euro versus the currency we have in South America, it's de minimis.

I guess if you could just briefly discuss -- I mean you had just a significant decline in earnings in that segment, and as I recall you had a significant decline in the fourth quarter earnings in that area as well, and I just wondered if you could elaborate a little bit on what's happening there. Is it a high fixed cost base? Is it just volume declining that dramatically? I just wondered if you could elaborate on the situation you're facing in your Global Group?

Well, one of the things you have to realize is we don't have the sometimes -- we don't have the math in some of these countries. And one of the things when you take a look at the activities we're doing here domestically -- able to close some facilities and so forth, you hit it on the head here with the fixed cost. Some of these locations we have one plant and one distribution channel center in a country -- and it's hard to consolidate or start having it shipped and you can't afford to have things in Argentina shipped from Brazil. So that's why it's volatile right now on the way down. So the volumes are really hurting us.

Thank you, and then just one quick question on the consumer area new products, you talked about the Dutch Boy paint. Was that the principal new product or were there any others of note you'd like to mention?

No, I think as Bob mentioned, just some share gains of our current program, some private label expansions, et cetera, but that is the marquis brand launch that we've had for this calendar year.

Thank you very much.

Thanks, Steve.

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

Hi. I just have two quick final questions. In the quarter that just passed in terms of your raw materials, were you squeezed a little bit because of high cost inventory and have you worked through all your high cost inventory?

Jeff, we're on a LIFO basis, so when you throw everything together, that really was not material.

So the last part that I'm a little puzzled by is I can't really see how your prices on average could have been up all that much in the quarter in that your gross profits were down about $100 million. And so if for the sake of argument, your average prices were up 5%, that would be about a $90 million benefit to gross margin. And if your volumes were down 15%, that would mean that your revenues would drop about $265 million. And let's say the incremental margin was 50%, so that would be about $133 million. And so if you net those out, you would expect a gross profit drop of really about $43 million and not $100 million. So I guess I'm a little puzzled as to how your prices could be flattish or flat to up on a sequential basis and be up all that much.

You got to also realize a lot of times we talk about pricing, we're talking about domestic. We aren't talking about -- we would have to go through Global Group and the different factors to get that. So a lot of times because years ago people would want us to say how much is price, how much is volume, how much is currency and we never wanted to get into that. We really wanted to focus on gross margin. So when we give you those selling price increases, it's a lot of times, it's with domestic and really in the stores group or stores and consumer. And so there's a difference in the foreign, there's foreign currency in there, and when we take a look at it, I would tell you that you do the math, when we look at our gross margins where we are domestically and non-domestically, it makes a lot more sense. And I think once you get the Q you can take a look at that and you'll see.

Okay, so it may be that there were some negative pricing in the offshore market that offset some of the benefits in the domestic market?

Yes, and I think that's why when you see the dramatic change also in the Global Group, you can see that if you look at the operating margins there, they were dramatically depressed because of that also. And the conversion costs that the last gentleman asked about also.

That's very very helpful. Thank you very much.

Thank you. Your next question is coming from Saul Ludwig of KeyBanc.

Just one final one. About this Global Group, you're precariously close to sort of breakeven and I think you've explained some of the reasons is volume, price givebacks, some manufacturing issues. As you think about the global group as part of your full year guidance, what actions are being taken to ameliorate some of these pressures? Because in the most simplest terms, your revenues are $360 million and you make $5 million, so that means your expenses were $355 million. Just comment further on what steps are going to be taken and how you see the Global Group sort of playing out for the balance of the year?

Saul, we're able to pull all of the same levers in the Global Group that we would historically tackle these issues domestically. So price increases in the market were acquired, and some countries are in fact implementing pricing as we speak. Cost reductions where we can on variable cost with headcount and programs and other areas. Slowing down of store opening programs so not to add additional start up expense for those types of opportunities. And we compete in country against various regional architectural players. So to the extent we can take market share as they struggle and that would be part of the goal as well. So all those things are at play. Rest assured that these numbers are getting looked at aggressively on a quarterly basis, and a whole host of action plans are in place to try to improve the operations.

So when you think about the results in the first part, Chris, with 20/20 hindsight, would it be correct to say you didn't move as swiftly as maybe you should have? Because the trends were moving down in the fourth quarter last year. They had very very weak results. When you assess the performance of the guys running that business, should there have been faster action?

Well, we've been running pretty swift here for a while, and I would tell you that team is doing a terrific job of adjusting to market conditions that are changing just as rapidly. I don't think it was easy to see the Brazilian market ramp up and rapid falloff any easier than it was to see the United States housing market collapse. And we could be held accountable for all these numbers -- we aren't dodging anything. But I've got no beef with the management team here in any of these segments that aren't focused on and doing all the right heavy lifting. Currency, we talked a little bit about that -- is something we simply cannot control. And an awful lot of times we have to monitor these countries' performance on local currency. And as we convert to the dollars, it gets worse.

Right, right.

So obviously we wish we were doing better, but I would not go as far as your comment that these guys are asleep at the switch here.

Well, that certainly sounds like some of the actions that you've taken domestically you're going to rev up the intensity thereof in the Global Group as we look to the future?

That would be fair.

Thank you very much.

Thank you. (Operator Instructions). Our next question is coming from Chuck Cerankosky of FTN Equity Capital.

Good morning, everyone.

Good morning, Chuck.

I got on the call late. I'm wondering if you might have covered this already. But Sean, I'd like you to discuss your view on share repurchase activity over the remainder of the year. And Chris, could you talk about opportunities to gain market share in the current environment, whether it's using pricing actions or assuring better products in certain markets or taking advantage of some rivals who may be faltering in the current economic environment?

Chuck, real quick before Chris jumps in here, this is Sean -- when you take a look at the share repurchase, we did purchase about 0.5 million shares in the first quarter. We really have not given guidance on what we're going to do. We're going to be out there opportunistically, and as it becomes clearer exactly how the year is going to come out we'll probably have a better forecast for you at the end of the second quarter, but as of right now, we aren't prepared to give you a forecast.

On the market share growth opportunities, Chuck, in front of us, I think we've commented a little bit about the consumer segment benefiting from the shift in the DIY segment here a little bit. On the contractor side, as you know, we break down the very distinct different types of contractor segments. There are a whole host of activities against each and every one of them. You asked if pricing would be one of the tools we would use, and I would just comment that the company has a whole basket of tools, including innovative new product launches, new store locations, -- we continued to put last year 100 locations in the new markets. Those stores are continuing to ramp up and gain share in those segments. And if and when appropriate pricing action will be used as well too. But suffice to say in a down selling environment, this is an area that's getting a lot of eyes on it here, because as you gain share, that's the best indication of how you're performing. Our expectations are that as the cycle flattens out and begins to come back, we'll be at a higher share position in most of these professional contractor segments.

All right, thank you very much.

Thanks, Chuck.

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

Thanks again for joining us this morning. As usual, I will be around the remainder of the day to take your follow-up calls and additional questions. And we greatly appreciate your interest in the company and thanks for joining us.

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