宣偉 (SHW) 2009 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 2009 results and expectations for 2010. 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 Corporate Controller and Bob Wells, Senior Vice President Corporate Communications.

This conference call is being webcast simultaneously in listen-only mode by Vcall via the Internet at www.sherwincom. An archived replay of this webcast will be available at www.sherwin.com beginning approximately two hours after this conference call ends and will be available until Monday, February 15, 2010 at 5:00 PM EST.

This conference call will include certain forward-looking statements as defined under US Federal Securities laws with respect to sales, earnings and other matters. Any forward-looking statements speaks only as of the date on which such statement is made and the Company undertakes no obligation to update or revise any forward-looking 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 2010 expectations, we will open the session to questions. I would now turn the call over to Bob Wells.

Thank you, Jackie. In order to allow more time for questions, we've provided balance sheet items and other statistical data on our website at www.sherwin.com under Investor Relations 2009 year-end press release.

Summarizing our overall Company performance for the fourth quarter and full-year 2009. Consolidated sales for the fourth quarter decreased 5.9% to $1.6 billion due primarily to lower paint volume demand resulting from continued weak economic conditions in the US and abroad. For the full-year, sales declined 11.1% to $7.09 billion. Sales from acquisitions had no material effect on sales for the quarter or the year.

Currency translation rate changes increased consolidated net sales 2% in the quarter, and decreased consolidated net sales 1.3% in the year. Consolidated gross margin in the fourth quarter increased to 47.4% of sales from 46.2% in the fourth quarter of 2008. For the year, gross margin increased to 46% of sales from 43.8% in 2008.

Selling, General and Administrative expense in dollars decreased $14.8 million in the fourth quarter compared to fourth quarter last year, but increased as a percent of sales to 38.7% from 37.3% in the same quarter last year. For the full-year 2009, SG&A expense decreased $108.8 million, but increased as a percent of sales to 35.7% from 33.1% in 2008. Tight expense management across all operating divisions could not fully offset the effect of the decline in sales on SG&A percentages for the quarter and the year.

In the fourth quarter of 2009, asset impairment charges and a loss on dissolution of a foreign subsidiary reduced diluted net income per common share approximately $0.13 per share. Interest expense for the quarter decreased by $5.7 million, to $9 million due primarily to a reduction in short term interest rates. Interest and net investment income was down approximately $1 million in the quarter at $580,000. For the year, interest expense decreased $25.7 million due to lower short term bowrrowing rates and lower average borrowings.

Interest and net investment income decreased $1.5 million in the year due to lower overall rates and lower average investments compared to 2008. Our effective income tax rate for the fourth quarter 2009 decreased to 19.5% from 36.6% in the fourth quarter of 2008, primarily due to the tax effect of the dissolution of a foreign subsidiary. For the year our effective tax rate was 30%, compared to 33.2% in 2008.

Consolidated net income for the quarter increased by $15.1 million or 30.1% to $65.3 million from $50.2 million in the fourth quarter of 2008. For the year, net income decreased $41.1 million or 8.6%. Net income as a percent of sales increased to 4.1% in the fourth quarter this year from 3% in the fourth quarter last year. This increase was due primarily to year-over-year reduction in our fourth quarter effective tax rate and higher gross margin.

For the year, net income as a percent of sales improved to 6.1% in 2009 from 6% in 2008, largely for the same reasons. Diluted net income per common share for fourth quarter for 2009 was $0.58 per share, including the $0.13 per share impairment charge, compared to $0.42 per share in fourth quarter 2008, which included a $0.18 per share impairment charge. For the year, diluted net income per common share decreased 5.5% to $3.78 from $4 per share in 2008.

Now I'd like to review our performance by segment. Sales for our Paint Stores Group in fourth quarter 2009 decreased 11.4% to $920.2 million. For the year, net sales decreased 12.9% to to $4.21 billion. For the quarter and year, decreased paint volume sales reflected weakness across most customer segments. Comparable store sales also decreased 11.4% in the quarter and 12.9% in the year.

Regionally in the fourth quarter, our Southwestern Division led all divisions, followed by 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 increased 5.9% to $119.9 million in the fourth quarter due primarily to reduced SG&A expense and lower impairment charges that more than offset the decline in sales. For full-year, Paint Stores Group operating profit decreased 7.4% to $600.2 million due primarily to the effect of lower paint sales volumes.

Segment operating profit for the fourth quarter increased to 13% of sales from 10.9% last year. Profit margin for the full-year 2009 increased to 14.3% from 13.4% in 2008. The increase in profit margin for the quarter and the year was due primarily to higher gross margin and lower SG&A and impairment charges.

Turning now to the Consumer Group, fourth quarter external net sales decreased 2.2% to $240.1 million from $245.6 million in the fourth quarter last year. For the year, Consumer Group sales were down 3.7% to to $1.23 billion from $1.27 billion in 2008. The sales declines were due primarily to weak endmarket demand to most of the Group's retail customers.

Segment operating profit for the fourth quarter decreased decreased $7.7 million, primarily due to the effect of lower sales and manufacturing volume, partially offset by a reduction in impairment charges in the quarter. Segment operating profit for the year increased 12.2% to $157.4 million due primarily to good expense control, reduced asset impairment charges and favorable freight and other distribution costs that were partially offset by lower fixed cost absorption from reduced manufacturing and distribution volume. As a percent of net sales, Consumer Groups operating profit in the fourth quarter decreased to 1.9% from 5% last year. For the year, operating margin improved to 12.8% from 11% in 2008.

For our Global Finishes Group, net sales in the fourth quarter increased 5.5% to $437.1 million, primarily as a result of favorable currency translation. Sales for the year decreased 11.4% to $1.65 billion, due primarily to lower sales volume and unfavorable currency translation that were partially offset by acquisitions and selling price increases.

Currency translation rate changes before acquisitions increased sales in US dollars by 7.8% in the quarter and reduced sales in US dollars by 4.8% in the year. Acquisitions increased the group's sales in US dollars by 0.7% in the quarter and 1.5% in the year.

Global Finishes Group segment operating profit in the fourth quarter decreased $16.9 million to a loss of $1.1 million due primarily to $25 million of asset impairment charges and a loss on dissolution of a foreign subsidiary. Segment operating profit for the full-year decreased $87.2 million or $57.3% to $65 million primarily as a result of reduced sales volume, impairment charges and the loss on dissolution of a foreign subsidiary that were partially offset by lower SG&A expenses.

A fourth quarter pretax loss of $21.9 million resulted from the dissolution of an European subsidiary. This loss, combined with asset impairment charges taken in the fourth quarter totaled $25 million for the quarter and the year. This compares with no impairment charges in the fourth quarter 2008 and $800,000 for the full-year 2008.

Currency translation and acquisitions increased segment profit $3.9 million in the quarter and reduced segment profit $5.9 million for the year. As a percent of net sales, Global Finishes Group operating profit decreased to 3.9% for the year from 8.2% in 2008.

I'd now like to comment briefly on our balance sheet items. You'll find more balance sheet information on our website under www.sherwin.com Investor Relations Press Releases. Our total debt on December 31, 2009 was $817.6 million, including short-term borrowings of $22.7 million. The increase in long-term debt resulted from the issuance of $500 million in five-year bonds at 3.125%, the second-lowest rate paid on five-year notes this is year and the 14th lowest in history for an A-rated Company.

In January we entered into a new three-year, $500 million credit agreement to be used for general corporate purposes, including to finance working capital requirements and to support commercial paper borrowings. This agreement includes a provision to increase the size of the facility, subject to the discretion of each lender to participate in such increase, up to an aggregate amount of $750 million. The new credit agreement replaces Sherwin-Williams' $845 million, five-year revolving credit facility, which was scheduled to expire on July 20, 2010.

Our cash balance at year end 2009 was $69.3 million, compared to $26.2 million in 2008. Capital expenditures were $27.8 million in the fourth quarter and $91.3 million for the year, compared to to $117.2 million for the year in 2008. Depreciation expense was $35.6 million in the quarter and $145.2 million for the year. And amortization expense was was $6.9 million in the quarter and $25.7 million for the year.

In 2010, we anticipate capital expenditures for the year will be in the range of $100 million to $115 million. Depreciation will be about about $147 million and amortization will be about $26 million.

I'll conclude this review with two brief comments on the status of our lead litigation. In California, the State Supreme Court will decide whether it is permissible for cities and counties to retain contingent fee counsel to aid them in their suit against former manufacturers of lead pigment. Briefing has been completed. Oral arguments should not take place until at least the first quarter of 2010 and most likely not until the second quarter, with a decision most likely coming in late 2010.

The Gains Case, a single plaintiff personal injury suit was tried to a jury in Jefferson County, Mississippi beginning in June of 2009. The jury returned a verdict in favor of the plaintiff and the Company has filed a notice of appeal with the Mississippi Supreme Court, as we believe a number of significant errors were committed during the trial. Briefing has not yet begun and a decision is not expected until late 2010 or early 2011.

That concludes my review of our results for fourth quarter and full-year 2009. So, I'll turn the call over to Chris Conner who will make some general comments and highlight our expectations for 2010. Chris?

Thanks, Bob and good morning, everybody. Thank you for joining us today.

It is hard to be satisfied with the past year when many of the metrics we use to measure our performance went backwards. The culture of our Company is one of growth and continuous improvement and that does not change simply because the economy is faltering. If there is a silver lining to this dark cloud, it's that our results showed steady improvement over the course of 2009 and we ended on a relatively positive note in the fourth quarter.

Our earnings per share, for example, in the first half of this year trailed the first half of 2008 by $0.42 per share. Second half earnings, on the other hand, this year were $0.17 ahead of last year.

I think this positive trend is a function of two note worthy factors. First, the hard work that our people have done all year to manage expenses, improve margins, reduce working capital and minimize our effective tax rate. These efforts have made us a more efficient and profitable Company.

And second,a moderation in the rate of year-over-year sales declines we experienced in the second half, and particularly the fourth quarter. Although we don't believe our fourth quarter sales results signal a sustainable pickup in end market demand, they do suggest that some market segments are approaching bottom.

Throughout the year we made steady progress in streamlining our supply chain and managing gross margin and SG&A expense. These efforts, combined with lower interest expense and a lower effective tax rate resulted in a 110 basis point improvement in fourth quarter net income as a percent of sales and a 10 basis point improvement in full-year net income as a percent of sales.

Our cash flow also increased as a percent of sales for the year. We generated $859.2 million in net operating cash, slightly more than 12% of sales. This marks the fourth straight year of cash flow in excess of 10% of net sales.

This strong cash flow performance was due in large part to a decrease in year-end working capital. Our working capital ratio improved to 10.7% of sales at year-end from 11.2% at the end of 2008.

This has two important ramifications. First, the decrease in working capital requirements increased net operating cash by $136 million and, secondly, Sean will have to stop insisting that a 11% working capital ratio is optimal.

Free cash flow for the year, which operating cash minus capital expenditures and dividends, increased more than $9 million to an all-time record high of $603 million, as we appropriately pared back our capital expenditures. In the fourth quarter, we acquired 4.12 million shares of the Company's stock for treasury, bringing our full-year total to nine million shares or an investment of $530 million. At year-end we had remaining authorization to acquire another 10.75 million shares.

Over the past year, we returned nearly $165 million in cash to shareholders through quarterly dividends. 2009 marked our 31st consecutive year of increased dividends per share, a string we intend to continue. This year at our February meeting of the Board of Directors, I will recommend approval of a dividend payout rate for 2010 that will keep our record of consecutive annual dividend increases intact. I base this recommendation on our strong net operating cash performance and our commitment to returning cash to shareholders.

In 2009, we continued to invest in our control distribution platform, opening 53 stores in new markets because we believe new stores drive market penetration and share growth, even in a down market. At the same time we consolidated an additional 45 redundant locations for a net increase of eight new stores for the year. Our Paint Store count in the US, Canada and the Caribbean now stands at 3,354 locations, compared to 3,346 a year ago. Our plan for 2010 calls for net new store openings in the range of 20 to 30 locations.

Our Global Group continued to appropriately manage our Automotive and OEM Product Finishing Branches, opening 18 new locations and closing 20 for a net reduction of two. We ended the year with 539 branches in operation, compared to 541 one year ago.

Across all of our divisions in 2009, we recruited 550 high caliber people into our respected management training program and we invested more than $100 million in research, development and commercialization of new product technologies. We are confident these investments will benefit the Company in the near-term and deliver appropriate returns in the long term.

Looking ahead to 2010, the steep decline in coatings demand appears to be moderating in some market segments in the US and abroad and we are guardedly optimistic that will continue. However, there are still some end markets, most notably the commercial segments, that are likely continue to deteriorate for the better part of the coming year. Our exposure to these late cycle markets, combined with a normal seasonal weakness in first quarter should result in our first quarter consolidated net sales being flat to down slightly, compared to the first quarter of 2009.

With sales at that level, we have estimated diluted net income per common share in the first quarter to be in the range of $0.30 to $0.40 per share, compared to $0.32 per share earned in the first quarter of 2009. For the full-year 2010, we expect net sales will increase in the low to mid-single digits versus 2009. With annual sales at that level, we estimate diluted net income per common share for 2010 will be in the range of of $4.05 to $4.45 per share, compared to $3.78 per share earned in 2009.

Again, I would like to thank all of you for joining us this morning and now the team will be happy to take your questions.

Thank you. (Operator Instructions) Thank you. Our first question is coming from PJ Juvekar of Citigroup.

Yes, hi, good morning, Chris.

Good morning, PJ.

And Bob. You said in the past that the contractor business lagged the DIY business in the recession and that has certainly been true in 2009. As you get into the recovery, do you expect this trend to converge in 2010 or maybe later?

Yes, PJ. Obviously the contractors are much more affected by the new construction in the market, both from a residential and non-residential, and that's been a big lag on the Stores business, particularly. So, obviously as those new construction markets rebound and approach more normalized basis, that should revert back to its normal process.

And do you think that will happen in 2010 or is it still going to be a slow process for contractors to come back?

I think the guidance that we're giving would indicate that some of it will start to come back. The residential market, case in point, most of the data points that we're seeing would indicate that the new residential starts should be up this year. The residential repaint market, we think, will continue to show some signs of life. That will be offset by the commercial market, which we have commented we think will be in for some tough sledding in 2010.

And, Chris, can you comment as to what is happening on sales trends in your stores in key states such as -- or key areas like Southern California, Florida and Las Vegas.

Yes. I think Bob gave some direction relative to the performance of our Regionals. Of note, the Southeastern part of the United States continues to lag the other divisions as it is more impacted by some of the new construction environments, that would be true of California, as well. And I think we'll -- we're anxious to see as this year unfolds and the predicted rebound in new housing starts should help those segments, and that's included in the guidance we're giving for a better year.

Thank you.

Thanks PJ.

Thank you. Our next question is coming from Jeff Zekauskas of JP Morgan Chase.

Hi, good morning.

Good morning, Jeff.

First question is your sales came in down 6% for the quarter and you were expecting down 8% to 12%. What parts of your business performed better than you expected to lead to that above forecast result?

Jeff, really all three segments had a little better quarter than we had given guidance on, as indicated by a little better volumes in each of those segments as well as sales for them as well. We also had a little bit of help from currency from our foreign operations.

And next year in your forecast of low to mid-single digit growth is there a positive pricing variance in there, or is it neutral or is it negative?

It's neutral to slightly positive.

To slightly positive. And then lastly your corporate expense in the first quarter bounces all around in that some years it is $40 million, some years it is $20 million, what is it in 2010 in the first quarter?

In the first quarter, I don't have that in front of me. You are talking about the first quarter of 2010?

I am.

Yes. I'll have to get back to you because I think we're probably -- I'm not sure we're even going to -- really giving guidance by segment, but I'll look at that and maybe later in the call I'll comment on it, Jeff.

Okay. Thank you very much.

Thanks, Jeff.

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

Thank you, good morning.

Good morning, Amy.

My first question is your full-year revenue guidance is low to mid-single digit levels and can you just give us a little more color by segment, primarily the Paint Stores and also Consumers? Particularly, (inaudible) Paint Stores, when should we expect the timing for a meaningful topline growth?

Amy, the 2010 sales guidance incorporates positive sales growth in all three segments, so that would imply that all three segments are expected to grow in the low to mid-single digits.

But the growth for the Paint Stores -- shouldn't the growth of the Paint Store channel should be a little bit higher than the Consumer channel?

Well, I don't think that that's included in the guidance. We have commented that commercial markets that we have a significant share of are expected to struggle this year, both from a new construction and maintenance standpoint. So, time will tell whether the stores' business there has a second half rebound or not. We do expect that the residential markets will lift and that will help drive some of the positive guidance we're giving for stores, but we do think we have a headwind there, Amy that is going to impact that.

Again the second question is the volume trends across your Consumer Group in the fourth quarter look add little bit lighter than what your peers just reported last week and I'm wondering why is that and have you seen any market share shift within the retail, the retail channel?

No. I think the Consumer Group's sales performance is fairly indicative of how they've been performing throughout the year. There's always timing issues with that business as various retailers make inventory adjustments at the end of a quarter. We've looked carefully at the architectural data from the Federal government and other sources to get a sense of that Consumer Group's performance this year. We think they've held their own and perhaps gained a little bit of share given the retail partners that they've done business with. And I -- we would agree the quarter was a little softer than it might have been, but no concerns there.

Okay. My last question is really related to your pricing strategy across the Paint Stores. Obviously, since last summer you adopted a relative flat (inaudible) strategy there, you decreased listed prices in the stores for the DIY customers. I'm wondering have you seen any benefit on the volume side from that strategy?

Again, I think we've commented frequently on this point. There were a number of entry-level products that were introduced to the store and a couple of rationalizations of the lower half of our good, better, best, finest strategy, no reduction in list prices for the higher-end products that we predominantly sell through that channel and so the impact of that has had very little to do with both volume or price erosion.

Thank you so much.

Thanks.

And if I could just comment back on Jeff's question back on the first quarter. As he said, the first quarter of 2009 our administrative expense was $42 million, $41 million, the prior year was $56 million. When you look at it we don't think it is going to be dramatically different from the -- it will be inside that range from the last two years, Jeff.

Jackie, another question?

Yes. Our next question is coming from Sergey Vasnetsov from Barclay's Capital.

Good morning.

Good morning, Sergey.

I'm not sure if you have addressed the question of what's your pricing strategies for 2010, typically early in the year. You make your business plan -- so, can you talk about what you expect this year in light of slight volume recovery, slight pressure on raw materials?

Sure, Sergey. I'd be happy too. Why don't I ask Bob to comment briefly on the raw material impact as we see it today and then I'll be happy to comment on our pricing thoughts.

Sure. Clearly on the year we saw upward pressure on the primary petrochemical inputs, crude oil and natural gas, and the increase in those energy costs did have an adverse effect over the course of 2009 and early 2010 on latex. Latexes, resins, solvents, plastic, (inaudible) those types of petrochemical-based products. Assuming the energy costs remain constant at the current levels, we would expect the petrochemical-based raw materials to stabilize at or slightly above the current levels.

We are also seeing upward pressure on titanium dioxide, largely driven by some capacity rationalization in the industry and we believe that some of the titanium dioxide price increases taken in the industry have been successfully implemented in the market.

Overall I think that the -- it is difficult to forecast going forward because of volatility in energy prices and petrochemical products, but we believe that the industry basket could be up mid-single digits in 2010. That's our best view at this point.

And Sergey, as you know, we've been very open and transparent with the street regarding the Company's pricing policies, practices and announcements. And as a quick reminder, our thoughts are here, that first and foremost when faced with increasing raw materials, we attempt to push back on the suppliers. Secondarily, we look internally to see what kinds of efficiencies we can generate in order to absorb those and then finally we take them to the market in the form of a price increase and our history has been one of following that strategy and with the courage and discipline to put pricing in when it needs to go in.

We've also been very careful not to get out in front of our customers, so we don't prospectively announce price increases over calls like this. It is only after we've communicated with our customers. At this point in time, given the more petrochemical-based raw material basis, there have been some industrial coatings announcing pricing earlier in the year, but the broader core architectural product lines, there's been no pricing announcements made at this point in time.

Yes, thank you.

Thanks, Sergey.

Thank you. Our next question is coming from Kevin McCarthy of Banc of America Corporation.

Yes, good morning.

Good morning, Kevin.

I was wondering if you could comment on macro assumptions, including existing home sales and starts that are embedded in your earnings guidance of $4.05 to $4.45 and whether your internal view is materially different from consensus of economists out there?

Kevin, we're not great economic forecasters and so we rely on kind of the consensus of economists and there's a pretty broad range of assumptions out there right now. Especially in the new construction markets, but we think -- what makes sense to us would be total residential starts and completions to be up in the mid-teens for full-year 2010 and probably with growing momentum over the course of the year. So, a lot of that volume would be second-half-loaded.

In the non-residential arena, the square footage decline that we experienced in 2009 for the industry was in the mid-40% range. So, we think that the rate of decline should moderate somewhat during 2010, but we think it is still likely to finish the year down mid-to high teens in square footage. And we are late cycle on those projects, and so we're probably still going to face pretty stiff head winds in the non-residential arena.

We think that existing home turnover, perhaps -- will run perhaps not quite as strong as it did in the -- at the end of 2009, but we would expect it on a full-year basis to be up over 2009 in terms of total transactions.

We also would love to see the percentage of total transactions being foreclosure and distress sale related decline, although that -- it's been pretty stubbornly in that third, 30% range, 30% plus range. And so as we've indicated in the past those kinds of transactions do not benefit us as immediately as an owner-occupant selling to a new owner-occupant.

So, we're rooting for the tax credit for both the first-time buyer and the step-up buyers to push volume early in the year.

That's helpful. Just shifting gears, Chris, I was wondering if you could comment on your outlook for your international markets in 2010 and maybe comment on any strategic opportunities that you see there looking out over the next few years?

Yes, I think that as Bob commented earlier, the guidance for the year was sales revenues up in the low to mid-single digits would include a pretty consistent performance across all segments, including that global segment. We're seeing some improving economies in the parts of the world that we generate revenue, particularly in Latin America. There's still economic strive in these areas relative to new construction and -- et cetera. For the most part, we think they are going to be a contributor this year. In terms of opportunities going forward, we have been inquisitive outside of United States. The last several years we've added a couple of strategic platforms. There's some opportunities out there that remain and time will tell whether we're able to get any of those in.

Okay. Thank you very much.

Thanks, Kevin.

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

Yes, thank you. Bob, if you put all your macro assumptions together, two things, one, what is your final call on architectural shipments in the US for 2009 and where would you see it going in 2010?

Well, 2009 through the first three quarters, the market in architectural was down in the mid-13% range and it improved steadily over the course of the year. Third quarter was the strongest quarter that has been out so far. We have not seen fourth quarter data. Our expectation is that the rate of decline probably moderated a little more in the fourth quarter. We think that's a positive trend for 2010. And just based on all of the -- all of the inputs, and particularly what we would assume to be a better -- better vitality in the repaint markets, we would expect architectural shipments to be up in 2010.

So, you think it was, what, down maybe 10% at the end of the day for full-year 2009?

Probably more than that.

Right.

The fourth quarter is a small quarter and so we were down 13.5%.

And, what, maybe a mid-single digit bounce in 2010?

I think that's reasonable, low to mid-

And then a question on the Consumer Group on the manufacturing side, did you take significant fixed cost absorption again in the fourth quarter? Is that why the results were so low? And I know that in 2009 you were very cautious in building inventories for the paint season. Are you showing similar caution this year?

Yes. I think when you see the way our inventory dropped in the fourth quarter, you are absolutely right. You take a look at the absorption that we had in the fourth quarter, it did negatively effect how consumer segment and the reporting of the income. On the flipside I would tell you that with the inventory at this level we feel -- we feel that the inventory build should be very normal, as it has for -- prior to two years ago. So, I think that you will see our inventory build in the first quarter for the season.

Okay. Thank you.

Thanks, Don.

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

Good morning.

Good morning, Eric.

A couple of questions. First of all, on gross margin I think you commented that the input basket that you expected for the industry to be up kind of mid-single digits in 2010. Where did that end up, do you think, in 2009?

It was -- it was down slightly in 2009. So, we -- this is for the industry. Probably down slightly in 2009.

And then tied onto that, what is the -- the gross margin expanded to maybe I think an all-time peak in 2009 and punctuated by the fourth quarter which has got to be an all-time peak for the business. What is the expectation for gross margin in 2010 with input costs for the industry up in this mid-single digit range?

Yes. You are absolutely right, Eric. The gross margin in the fourth quarter, as well as the year is our all-time peak. When we take a look at our guidance for next year, we really aren't going to go down the list of SG&A or margin at this time. We're just not prepared to go through each and every line of the P&L for our guidance. As the year comes in clearer, as we get through a quarter or two, it has been our practice, I think in the last couple of years, at the end of the second quarter we give some kind of guidance for the year for the margin. So, I think that is when you will see us give a little more guidance on the margin for the year.

I guess I just -- when I hear that inputs are up five and pricing, I think you indicated earlier on the call for the year, you thought maybe flat to up slightly. Is there some other opportunity to augment gross margin in light of what those appear to be headwinds?

I want to be careful about the pricing comments. I don't think we gave a comment that it would be up flat or up slightly, I think we commented that on the Industrial products we have taken some pricing out and we've not made any announcements on our Architectural at this point in time and the second part of your question there are all kinds of levers that the Company has at its disposal to try to work on that.

Don't forget the last year was an aggressive right-sizing project for the Company. A number every manufacturing facilities were permanently closed and disposed of and gallons were moved to more efficient facilities that will potentially have a positive impact on margins as well. So, I think that Sean has got the right approach here, that let's see how this year starts to unfold, we'll get more color on that in the second quarter call and given our history, Eric, and the importance we place on margins I think you can expect we'll be paying close attention to that number as the year begins.

And then the second question that I wanted to ask related to margin. I think, Sean that you commented coming out of 3Q that 90% of the SG&A at that point was fixed and you had taken a lot of SG&A out and I know that you did some things in the organization in 2009 to tighten down on SG&A in light of the revenue pressure that you saw. As you look at a year where revenues are going to grow in 2010 and I know, again, Sean you do not want to go down the income statement, but should we expect -- how should we think about SG&A and how do you think strategically about the need to invest back into SG&A as industry starts to grow again?

Yes, I think what happens is you are absolutely right. Really we started early in 2008, to really attack the right-sizing of the Company and you saw that our SG&A was down close to $110 million, down $62 million in the -- in the first half of the year, $14 million. And that's really what my 90% comment is. Is that we've been anniversarying these cuts and these changes that we've made really over the last two years and we're -- we're getting to the point where we've anniversaried a great deal of them. I want to sell you that if the volume comes back, we think our margins -- we still have really nice room for margin and expansion, just like we will did between 2002 and 2007. But, when you take a look at the SG&A, we will grow because as we bring back -- people back to the -- to make sure that we have good customer service for our customers, we will increase the SG&A as the volume increases.

And then the last question. Was the revenue in the first quarter guided flat to slightly down and full-year revenue guidance implies material improvement 2Q to 4Q and I know those are the big quarters and 1Q is less important, but can you talk about the visibility or confidence that you have on the incremental revenue performance in 2Q and 4Q relative to1Q?

Yes. I think some of things that we're commenting on that we expect to be slightly better in the year, Eric, including new residential construction and in turnover we're seeing permit activity as we meet with our largest and our home builder customers and get a sense on their plans for the year and their confidence. Those things are all pointing to a positive lift in that part of the business. Bob has commented a little bit on the resale activity and what we think is likely to happen there as well, too. So, we think that this will be a year where we'll start to come off the bottom in some of those segments and that supports the guidance we've provided.

Great, thank you.

Thanks, Eric.

Thank you. Your next question is coming from Ivy Zelman of Zelman and Associates.

Hi. Good morning everyone and congratulations on the quarter. I guess there is not that much more to ask with respect to the macro, you've covered a lot of it. But, with respect to understanding the levers going forward, I think you've outlined where you are concerned on commercial real estate. One of the things that you have talked a little bit about in the past is understanding, Chris, what CapEx dollars your customers -- or those that are spending today. Have you seen any change in willingness to go above the bare minimum and is it possible that there could be some surprises maybe where the guidance, you would say, is marginally too conservative, if you have -- looking at the levers?

Well, that's a lot of prospective thinking. Let me just share with you the way we think about that. Clearly this year, as reports have come out, we have seen the CapEx numbers for many of these commercial type applications cut back, just as we have at our Company. That does have an impact on maintenance. Companies have done a nice job with cash across the United States, so to the extent that they would feel better about getting back on some of their CapEx spending for next year, that's a possibility.

We're more focused, however, on the fact that these assets do need to be maintained over time and failure to coat corrosive environments to protect steel and concrete eventually ends up being a much bigger ticket than repairing with paint and so we are aware that many of these projects and customers have extended already what a normal repaint cycle will be. This is very consistent to the 2001-2002 time period where this business segment went through a similar process.

There may be a little bit more of a tail to it yet, Ivy, but at some point in time we think this will come back and I think it's -- back to Eric's point about the second half guidance is a little stronger than the first half, that should start to play a role then.

No. That's very helpful, Chris. And then just quickly on the, I guess, opportunities we've asked this before, but foreclosures, lots of investors buying them and yet have yet to see a benefit and you would certainly expect that paint would be a product that they would use to try to get them salable or rentable. Anything that you can help us understand, if that is a trend that is going to benefit you that you've seen yet?

Ivy, I think -- I think eventually, yes. I think that the investors that are are buying those homes are certainly not doing so with the anticipation of being landlords long-term. They are going to -- when the markets recover -- when we start seeing home values move back up, I believe that they are going to -- a large percentage of them are going to flip those properties for profit and at that point in time, when they are really investing in premium upgrades for the properties we should see a benefit.

In the meantime in many of these markets they are parking these homes on the rental market and putting minimal cash investment in them and a lot of the pros that are working on these properties are not only doing paint work, and paint -- maintenance work, but they are replacing floor covering and doing minimal electrical and plumbing upgrades or bringing them up to code in those regards, maybe a little landscaping, and these are primarily remodelers and handymen that are buying their supplies at one-stop outlets. And we think that some of this relative strength we've seen behind the home centers has been a reflection of that type of investment in these foreclosed properties.

Okay. Terrific. Well, congratulations again, guys, that's very helpful.

Thank you, Ivy.

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

Good morning.

Good morning, Saul.

The foreign subsidiary that you dissolved, can you talk a little bit more about what that was and did that entity have an operating loss in -- and that goes away in 2010?

Yes. Let me cover the business side of it and we'll let Sean comment a little bit on the second part of your question, Saul. This was an automotive after-market company that -- that was operating in Italy. And as we commented in the call, we have dissolved that business unit. There are segments of that business. There are segments of that business that we'll continue to hang onto and service through other assets that we have in the region.

And when you take a look at the operations, Saul, it did have an operating loss, but it's not material. When we take a look at what's going to happen, we will have some improvement there next year. But, not as great as the write-offs because of the amount that we had on our balance sheet.

And then these impairment of trademarks and goodwills seem to be a recurring thing each year. Is it some additional write-offs baked into your guidance?

Yes. I think, Saul, when we take a look at our guidance each and every year, what really these impairments are is a way to take different assets, you're valuating your balance sheet and you are making sure that your balance sheet is stated correctly. And when you are doing acquisitions and you are putting goodwill on there, impairment is the only way to take some of these -- the goodwill off your balance sheet. The amortization has gone away. And so in each and every year we have some -- some room in our guidance between the $4.05 and the $4.45 for some impairments.

Sean, while you are there, what was the -- you had this decrease in SG&A in the fourth quarter. What was the decrease in the SG&A in the three segments? I think you provide that in your 10-K report if I'm correct.

When you take the -- in the Stores Group, let me --just give me ten seconds here. In Administrative, SG&A was down 17%. And the global SG&A was actually up 2%. SG&A was up 8% in Consumer. And then in Stores Group it was down 17%.

Great. The -- what are you thinking about your debt at the end of this year, Sean?

I think we're going to be relatively flat. I think that when you take a look at the cash generation, I think at the end of 2010 right now we're going to be in that $800 million to $850 million range. With the cash generation we're going to -- Bob commented, CapEx we believe right now is going to be $100 million to $115 million. We think that the dividend will be approximately $160 million and so we don't think that debt will change. We'll have acquisitions and we'll also do some stock buyback it is there is no acquisitions.

I guess we should assume or we're looking at the full of funds that given the $850 million cash from operations and then subtract the dividend to Cap spending that you are going to keep this cash in this, call it $50 million range and debt flat and the delta will be what's available for share buyback and acquisitions?

Yes.

Okay, great, thank you very much.

Thank you, Saul.

Thank you. Our next question is coming from John Roberts of Buckingham Research.

Good morning.

Good morning, John.

What's the Stores outlook for 2010 in terms of new stores and do you have any statistics on total industry stores? I assume that the total industry must be down in terms of store count.

Yes. Our store count expectations, John, for next year would be a net increase of around 20 to 30 in that Canada, US, Caribbean group that the stores is responsible for that geography. That will be made up of fewer store closings than we've experienced the last couple of years. We're nearing the end of this redundant process we've been on to try to get out some of the recent acquisitions that are in very, very close proximity to existing Sherwin-Williams stores. So, we're slowing down just the gross new store openings. Far fewer closings and that will bring us in that at that 20-30 net.

Our sense is that there's somewhere in the neighborhood of around 50,000 plus locations that sell paint in the United States and that the independent paint store or company-owned paint store channel with somewhere between 10 and 12,000 locations, prior to the downturn that we've gone through the last year-and-a-half. Don't have good numbers on that at this point in time to share with you, but I think your -- your expectations are probably accurate.

We've seen quite a number of them, primarily the smaller, what we would call the mom and pops, struggle to make it through. We've always said that 4,000 stores is our next kind of mile marker. We think that the geography clearly supports that. And that that won't be a net addition, but rather a number of these other facilities will have to go out to keep that kind of 10,000 to 12,000 location constant. So, don't have a hard number for you, but I think that your logic is right on track.

Okay, thank you.

Thanks, John.

Thank you. Our next question is coming from Chuck Cerankosky of Northcoast Research.

Good morning. Great quarter, guys.

Good morning, Chuck.

Get -- one follow-up question on that dissolution charge, Sean, I'm thinking a certain amount of that was cash. Can you give us some details on that?

Yes. When -- the other part -- one of the things about the cash, because of our tax rate, our tax rate came in at 30% for the year, without this dissolution it would have been 31.5%. So, we did get some tax goodness and when you take a look at the cash, it was was almost cash positive for us.

That's interesting.

Yes.

All right. I'll take a look at it. Within your guidance, what kind of benefit or penalty do you expect from foreign exchange?

Right now the foreign exchange, when you take a look at all of the different countries we're in, it is a combination of -- but in total I would tell you that it is going to be slightly positive, but really not much.

Okay. Could you comment on within your international operations, Chris, in 2009, how Brazil performed and what you might be willing to say about 2010?

Yes. Brazil was the star of our international operations. In 2008, it went through a similar economic slowdown in 2009 characterized by significant slowdowns in commercial and new construction and maintenance of existing property and so it has been a little bit of a swing for us in that part of the world.

2010, as we sit here now, it looks like it is going to be an okay year for us. It is included in that guidance that we gave that our Global Group would be up in that low to mid-single digit range and Brazil is our largest country outside of the North American countries, so that plays a big role in that guidance.

Okay. And then could you comment on what you think your Paint Stores did in terms of market share growth in a tough year last year, in a declining market?

Yes. I think the -- the short answer is that we probably lost a little bit of share. Mostly related to the fact that there was a significant shift from the contractor towards the DIY's we saw unfold throughout the year.

More importantly as we measure the share performance against very specific segments, and as you know we break the contractor's segments down into new residential construction and residential repaint and property management and I would say pretty much across the board, Chuck, our confidence is fairly high that we gained share and in each of those segments, but given the fact that those segments were down 35%, 40% to the industry being down in the 13% range that Bob commented on, that is a tough battle to hold yourself into and gain share overall.

So, a little bit of a share loss against a total industry, strengthening of share against the key segments and when they rebound we feel that the Company will come back fine.

Thank you very much.

Thank you, Chuck.

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

Hi, this is is Matt McGinnly calling in for Greg.

Hi, Matt.

I have two quick questions for you. One is on, Sean do you have guidance on the pension expense in 2010? I think in 2009 you originally said it would be $55 million or $60 million.

Yes, what the difference is going to be is there is going to be accretive of around $14 million to $16 million in the pension expense.

And then the second one is on the Consumer Group, as I look at the trend here from the third quarter to the fourth quarter you had about a 500 basis point improvement there. I know that you sell and that Pratt Lambert Paint falls into that and that is sold in a lot of hardware stores. If I were to bifurcate that consumer group and look at the hardware store group which I would imagine would look more like your paint store groups in terms of the volume declines, that would probably mean that the other channels that you sell through -- the home channel namely would probably would be slightly positive. Is that an accurate way to think about that?

That's pretty close, Matt.

Okay, great, that's all I have.

Thank you, Matt. Jackie?

Thank you. Our next question is coming from Jay McCanless with FTN Equity.

Hi. Good morning.

Good morning, Jay.

I wanted to ask the gross margin question a different way. The 120 basis point expansion from last year to this quarter, is that a function of better capacity utilization at your factories or is that specific inputs in the cost of goods sold going down year-over-year?

Yes. I would tell you that it's -- because when you see the production plant that you did, it actually -- the production -- the volume did not help us at all on the costs. Probably had more to do with the input costs.

Okay. And what -- is there going to be any more effect on the tax rate in 2010 from the dissolution of the foreign sub or is that -- ?

No. That is -- that is -- that is completed in the calendar year 2009. And so we're seeing that our tax rate will be -- back into that more normal range in the low 30%s.

The 30%s? Okay. And then one last question on the macros. Are your expectations with the credits -- the move up in the entry level credit, that those end as scheduled on April -- or June 30, I think is when the closing date is for those credits. Is your expectation that those end then or do they get extended through the rest of the year?

Jay, I -- I don't have a clue. I think that there will be a fair amount of pressure on -- on the Administration, on Congress to extend them, whether they will move in that direction we do not know. We do expect that either way, there will be a similar effect as we saw in late 2009 and that is you are going to see a lot of transactions bunched up in March and April for a closing, and then if they do extend it, you are probably going to see a dearth of transactions follow that because they will say we've got more time and we're going to take our time, kind of like you saw in November, December.

Okay. Great. Thanks, guys.

Thanks, Jay.

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

My questions have been answered, thank you.

Thank you, Steve.

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

I guess it is still good morning although it is getting to be early afternoon. Congratulations on finishing the year on such a good note in terms of performance versus expectations. A couple of things that I would like to address as most of my questions have been answered. The profitability of the Global Group, we've seen the decline obviously. There was a restructuring and dissolution costs there. What are you -- how do you think about margins in the Global Group in 2010, and is it likely to be influenced by volume coming back, by foreign exchange, or, excuse me, by raw material costs?

I would tell you that we expect volumes our margins to improve in the Global Group. The way that you listed them are the ways that we would expect. Number one we would expect the volume and number two would be the currency and when it comes to the raws, that's the -- that's definitely third or fourth on the list.

Okay. So you -- just -- just looking to get a better understanding on the raw material environment, you -- are the Latin America raw material costs basically moving in line with North America or is there some sort of lag? I mean as we look for these costs to start turning around in the US, is it -- can we make assumptions that it's -- same thing is happening in Latin America?

Yes. What we're seeing is -- globally -- they are moving in -- not lockstep, but in the same directionally. The interesting thing about -- on on the global side what will happen is, especially when the currencies are getting stronger, a lot of times what will happen in the local currency, a lot of these raw materials are being priced in US dollar. So, as the US dollar comparatively gets weaker, it takes a little bit more Brazilian Reals to buy the same, even though the US dollar, the currency rate is going in the positive direction for sales. And so, when you take a look at it, it's -- it does go in unison, but there is a little bit of a translational problem there when we're -- when we're seeing the currencies get stronger.

Okay. Okay, I think I understand that. And then the second question, on the contractor market or specifically the commercial contractor market or commercial construction market as it relates to paint sales in the US, am I correct in remembering that commercial is about 30% of the total market and residential is the other 70%?

You are in the range Dmitry.

Okay.

Yes.

And you expect that market, which is predominantly contractor, to continue to be down for 2010, that's also what you said at the beginning of the call, right?

Certainly those related to new construction. When you talk about commercial contractors representing 30% of the market, that is repaint and new. So, the portion of those that are engaged in new construction, yes, but there is also a commercial segment that's repaint and we sometimes call it property maintenance, but it is painting commercial structures, repainting commercial structures. That will not be down as much as the new construction segment.

You actually got a little bit ahead of me on the question because my question was I understand the dynamic of new commercial construction being down in 2010, but I would have thought that sometime this year you will see it swinging into positives on comparisons of existing repaints. Is that your view as well?

Yes, I think that was the comment that we made to one of earlier callers, relative to the fact that a lot of this paint is done for maintenance work to the extent that companies and/or owners of properties are compelled to maintain them, we would expect to see a little lift there. That is included in the guidance that we've given, Dmitry, that we'll see that up in the mid-single digit range by year-end.

And for us to kind of monitor the market or some kind of an indicator that will tell us how the market is doing. Is commercial vacancy rates the right number to look at or is there a better bogey?

Vacancy rates is one indicator. Certainly maintenance CapEx spending would be an indicator as well. But, certainly -- in retail and office space, vacancy rates, and apartment buildings, vacancy rates would be an indicator.

Thank you very much.

Thank you, Dmitry.

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

Thank you. Let me conclude this morning by asking you to save the date on your calendar of Thursday, May 6, 2010. That's the day we'll host our annual financial community presentation at our company headquarters in Cleveland and the program will consist of our customary morning presentations with Q&A's with management, followed by a reception and lunch and after lunch we'll schedule tours of our Brain Technology Center. Again, that date is Thursday, May 6 and we'll be sending out invitations and related information in the weeks ahead. Thanks again for joining us today and thank you as always 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.