The Sherwin-Williams Company
Q4 2007 Earnings Call Transcript

Published: 29 Jan 2008

[Operator:]

Good morning. Thank you for joining The Sherwin-Williams Company's review of Fourth Quarter and Full Year 2007 Results and expectations for 2008. With us on today's call are Chris Connor, Chairman and CEO; Shaun Hennessy, Senior Vice President Finance and CFO; John Ault, Vice President, Corporate Controller, and Bob Wells, Vice President, Corporate Communications. This conference call is being web cast simultaneously in a listen-only mode by Vcall via the Internet at www.sherwin.com. An archived replay of this web cast will be available at sherwin.com returning approximately 2 hours after this conference call ends and will be available until Friday, February 15, 2008 at 5

[Bob Wells:]

Thanks, Diego. Good morning everybody. In order to allow more time for questions, we have provided balance sheet items and other statistical data on our website sherwin.com under investor relations fourth quarter press release. Summarizing overall company performance for the fourth quarter and full year 2007, consolidated sales for the fourth quarter were up 3.3% to $1.85 billion. For the full year, sales grew $195.5 million or 2.5% to $8.01 billion due to strong sales by our global group and acquisitions. Acquisition completed during the year increased consolidated net sales $52.5 million or 2.9% in the quarter and $110.6 million or 1.4% in the year. Favorable currency translation rate increased consolidated net sales $23.0 million or 1.3% in the fourth quarter and $53.7 million or 7/10 of a percent in the year. Consolidated gross margin in the fourth quarter increased to 44.9% of sales from 43.0% in the fourth quarter of 2006. For the year, gross margin increased to 44.9% of sales compared to 43.7% in 2006. Gross margin in the quarter and in the year, benefited from higher selling prices, mixed improvement, stabilizing raw material cost and improved operating efficiencies. Selling, general and administrative expense decreased as a percent of sales in the fourth quarter to 34.7% from 34.8% in the same quarter last year. For the full year 2007, SG&A expense increased to 32.4% of sales from 32.2% in 2006. Tight expense management across all operating divisions could not fully offset an increase in SGA from acquisitions, and the effect of a slowdown in sales growth on SG&A percentage for the year. In the fourth quarter, the company took a goodwill impairment charge of $15.2 million or approximately $0.08 per share in anticipation of reduction in performance of certain foreign and domestic acquisitions. Interest expense for the quarter increased by $2.7 million to $19.2 million due to an increase in short-term borrowings. Interest and net investment income declined by $5.3 million in the quarter. For the year, interest expense increased $4.5 million and interest in net investment income decreased $10.5 million. The decline in interest and net investment income in the quarter and the year, reflect our use of cash and short-term investments to continue to invest in our business. Our effective income tax rate for the fourth quarter 2007 increased to 33.7% from 22% in the fourth quarter of 2006. For the year, our effective tax rate was 32.6% compared to 31% in 2006. Consolidated net income for the quarter increased by $2.1 million, or 2.2% to $100.8 million from $98.7 million in the fourth quarter of 2006. For the year, net income increased $39.5 million, or 6.9%. Net income, as a percentage of sales decreased to 5.4% in the fourth quarter this year from 5.5% in the fourth quarter last year. This decline was due to the year-over-year increase in our fourth quarter income tax rate. For the year, net income as a percentage of sales increased to 7.7% in 2007, from 7.4% in 2006. Diluted net income per common share for the fourth quarter 2007 was $0.80 per share including $0.08 per share impairment charge compared to $0.73 per share in fourth quarter 2006. For the full year, diluted net income per common share increased 12.2% to $4.70 per share, from $4.19 per share in 2006. Breaking down our performance by segment, sales for our Paint Stores Group in fourth quarter 2007 increased 2.3% to $1.14 billion. For the year, net sales increased 2.3% to $4.96 billion, increased paint sales to commercial contractors and improved industrial maintenance product sale in the quarter in the year were more than offset by soft architectural paint sales to new residential painting contractors and DIY customers and weak sales in non-paint categories. The acquisition of M.A. Bruder and Columbia Paint increased net sales for the group 3.7% in the quarter and 1.9% for the year. Comparable store sales decreased 2.5% in the quarter and 1.1% for the year. Regionally, in the fourth quarter, Midwest division led all divisions followed by Southwest division and Eastern division. Southeastern division finished in fourth place. Three of the four paint stores divisions grew their business before acquisitions in the fourth quarter and the full year. Segment operating profit to the Paint Stores Group decreased 3.2% to $157.6 million in the fourth quarter and increased 6.5% to $766.5 million for the year. The timing of the acquisitions reduced segment operating profit by 7.4% in the quarter and 2.2% for the year. Segment operating profit margin for the fourth quarter decreased to 13.8% from 14.6% last year due to the acquisitions. Profit margin for the full year 2007 improved to 15.5% from 14.9% in 2006. Margin improvements for the year were due primarily to effective SG&A expense control and higher selling prices that more than offset the drag from acquisitions. Turning now to the Consumer Group, external net sales in the Consumer Group decreased $14 million or 5% to $264.3 million for the fourth quarter and $52.6 million or 3.9% to $1.31 billion for the year, compared to the same period last year. The sales declines were due primarily to sluggish do-it-yourself demand. Segment operating profit for the fourth quarter including a goodwill impairment charge of $4.2 million increased $400,000 or 1.8% to $21.3 million. Segment operating profit for the year rose $9.9 million or 4.6% to $224.2 million. As a percent of net sales, Consumer Group's operating profit increased to 8.1% from 7.5% for the quarter 17.1% from 15.7% for the year. For our Global Group, net sales in the fourth quarter increased $47.9 million or 11.9% to $449.8 million. Sales for the year increased $138 million or 8.7% to $1.73 billion. Sales in local currency grew by 6.1% in the quarter, and 5.3% in the year due primarily to volume growth, selling price increases and acquisitions. Global Group segment operating profit in the fourth quarter increased $7.2 million or 34.1% to $28.4 million. Segment operating profit for the full year increased $30 million or 23.2% to $160.7 million. Stated in local currency, segment profit increased 20.5% and 18.5% for the fourth quarter and full year respectively. Global Group profit for the quarter and year were negatively impacted by a fourth quarter pretax charge of $11 million for goodwill impairment. For the quarter and the year, Global segment operating profit benefited from strong sales increases, improved operating efficiencies and expense control that were partially offset by acquisitions. I'd now like to comment briefly on our balance sheet items. You will find more balance sheet information on our website under sherwin.com, investor relations press releases. Our total debt on December 31, 2007 was $965.4 million including short-term borrowings of $657.1 million. Total debt, as a percentage of total capitalization increased to 35.4% in 2007 from 30.6% at the end of 2006. Our cash balance at year end 2007 was $27.3 million compared to $469.4 million in 2006. Our working capital ratio declined, as accounts receivable plus inventories, less accounts payable to sales increased to 12.7% in 2007 from 11.7% in 2006. This increase reflects the partial year impact of the timing of acquisitions completed during the year plus the effect of foreign currency translation. Going forward, we expect working capital to decline as a percentage of sales, as we more fully integrate the acquired businesses. Capital expenditures were $48.7 million in the fourth quarter and $165.9 million for the year compared to $209.9 million in 2006. Depreciation expense was $38 million in the quarter and $139 million for the year. And amortization expense was $7.2 million in the quarter and $24.5 million for the year. In 2008, we anticipate capital expenditures for the year will be in the range of $175 million to $200 million. Depreciation will be about $145 million and amortization will be about $27 million. I will conclude this review with a brief update on our status, the status of our lead litigation. In our appeal before the Rhode Island Supreme Court, a scheduler proceeding has been set by the court. Opening breach's are due at the end of January, response rates are due in March and required rates are due in April. Oral arguments schedule to be held in mid May. In the ongoing abatement proceedings in Superior Court, the judge appointed two co-examiners, formally referred to as special masters, to assist the court in evaluating issues related to the abatement process. Their powers and responsibility were outlined in an order of the court in June 2007. In Ohio, opponents of Senate Bill 117, a bill that clarifies Ohio's product liability law, failed to gather the signatures needed to put a recall referendum on the 2008 ballot. On December 12, '07, the Lucas County Court of Common Pleas granted the defendants motion to dismiss the suit brought by the City of Toledo. In its ruling, the court stated that the plaintiff must establish a casual connection between the defendant's actions and the plaintiff's injury and their public nuisance actions brought in Ohio were intended to be aggregated by the Ohio Product Liability Act. The City of Toledo has not appealed this decision. Of the 11 Municipal Public nuisance suits filed in Ohio since late 2006, all but one has been dismissed or voluntarily withdrawn. The still remaining case is the City of Columbus suit joined by the Ohio Attorney General in motion to dismiss the pending before the court in this suit. In Wisconsin, the trial of the Thomas case, a single point of suit brought on behalf of a minor child ended in November with a unanimous jury verdict for the defendant. Importantly, the jury found that although Steven Thomas did had elevated blood lead levels as a child; he was not harmed as a result. In California, plaintiffs have appealed the Santa Clara County Superior Court ruling that government plaintiffs cannot enter into contingency fee arrangements with outside lawyers to prosecute public nuisance lawsuits. In January of this year, oral arguments were made before the court appeal. That concludes my review of our results for fourth quarter and full year 2007. So, I'll turn the call over to Chris Conner, who will make some general comments and highlight our expectations for 2008. Chris?

[Chris Connor:]

Thanks Bob and good morning everybody. Thank you for joining us today. Market conditions for paint and coatings in North America were very challenging in 2007. New residential consumption was down in a high 20% range for the year. Existing home turnover declined nearly 20%; consumer spending slowed dramatically, credit markets contracted, manufacturing activity turned negative. Consumer confidence sag and GDP growth stalled. In short, it was exactly the kind of year that we anticipated 12 months ago. We entered 2007 prepared for the inevitable slowdown in end market demand and as a result of this preparation, Sherwin turn in, what I would describe, as a solid performance last year. Consolidated net sales grew a modest 2.5% to just over $8 billion in sale. Consolidated net income increased almost 7% and earnings per share increased more than 12% to a record $4.70 per share. All three of our operating segments improved earnings and operating margin for the year and we managed expense as well across the entire company. Sales, net income and earnings per share are all pretty important indicators of our performance and vitality of the company, but I would like to take a few minutes, which I usually do on this call to highlight some of the numbers behind these numbers, because I think they help put the strength of our results last year in perspective. For example, earnings before interest taxes, depreciation and amortization increased by more than $100 million or 10%, to $1.15 billion in 2007. This increase is a reflection of our success in generating strong cash earnings leverage and our modest sales improvement for the year. As a result of our operating profit performance, net operating cash for the year increased to $874 million, well over 10% of sales from $816 million in 2006. During the year, we used this cash to continue to invest the company's cash to create value for our shareholders. For example, in 2007, we invested over $280 million to complete seven acquisitions. These acquisitions further increased our paint coat penetration in North America, adding 172 M. A. Bruder and the Columbia Paint locations for our Paint Stores Group. Our Global segment strengthened its automotive finishes, architectural, and industrial coatings portfolio in Mexico and Latin America and we gained access to the high growth Indian market for the first time last year. We also continue to invest in organic growth. In 2007, our Paint Stores Group opened 107 net new stores at year end. The combination of acquisitions and organic store openings boosted our store count to 3325 stores in the U.S. and Canada compared to 3046 stores at the end of 2006. This year, we will continue to pursue our goal of 2% to 3% organic growth in store count opening in the range 100 plus net new stores again. We are equally committed to returning a portion of the cash we generate to shareholders through treasury stock purchases and cash dividends. In the fourth quarter of 2007, the company took advantage of the continued weakness in the housing sector that has depressed our stock price. We purchased 3 million shares of our common stock in the open markets during the quarter, bringing the total shares purchased in 2007 to 13.2 million, a record level for our company. We closed 2007 with remaining board authorization to purchase 27 million shares. This strong opportunistic buying reflects management's confidence to the company's underlying value and significant earnings power remains intact. 2007 also marked our 29th consecutive year of dividend increases, the same we intend to continue. At our next meeting with the Board of Directors, I will be recommending a continuation of our policy of paying out approximately 30% of prior year's earnings per share in the form of a cash dividend in 2008. This would result in a quarterly dividend of $0.35 per share or $1.40 per share for the year, an increase of 11.1% over the $1.26 per share we paid out in 2007. Looking ahead to 2008, we expect market conditions in North America to remain difficult, particularly in the first half of the year. In spite of this fact, we are confident that we will sustain our strong operating momentum and earnings leverage. We anticipate that first quarter consolidated net sales will increase in percentage terms in the low to mid single digit versus the first quarter of 2007. With sales at that level, we estimate diluted net income per common share in the first quarter will be in the range of $0.72 to $0.80 per share, compared to $0.83 per share earned in the first quarter of 2007. For the full year 2008, we expect net sales will also increase in the low to mid single digits over 2007. With annual sales at that level, we estimate diluted net income per common share for 2008 will be in the range of $5 to $5.15 per share, compared to current analyst consensus of $5.03 for 2008, and $4.70 per share earned in 2007. One final note on January 22nd, Fortune Magazine once again named Sherwin-Williams on their list of America's 100 best companies to work for. For us, this is more than a popularity contest. Our continued growth depends on our ability to attract and retain the best and brightest talents in our industry. Being named on this prestigious list, there are significant ways with perspective employees and the firms that our current employees recognize the quality work environment we have all worked so hard to create. We sincerely appreciate the hard work and dedication our employees put into achieving another record year in 2007. And with that, we will be happy to take your questions.

[Operator:]

We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from Chuck Cerankosky with FTN Midwest Research. Please state your question.

[Chuck Cerankosky:]

Good morning everyone.

[Chris Connor:]

Hi, Chuck.

[Chuck Cerankosky:]

First question little bit of housekeeping just I want to make sure I understand something in the release. It said the Paints Stores segment saw profits down 7.4% in the quarter, as result of acquisition. Should

[Chris Connor:]

Hang on Chuck, just looking for that line.

[Chuck Cerankosky:]

It's on -- at least on my release page 2 second line.

[Chris Connor:]

7.4 okay, yeah, okay. Paint Stores Group segment increased 6.5% in the year and decreased 3.2% in the quarter. The timing of acquisitions caused the segment to be negatively impacted 2.2% in the year and 7.4% in the quarter. Yes, what you read it was correct.

[Chuck Cerankosky:]

All right, thank you. Looking at 2007

[Chris Conner:]

2007 or '08 Chuck?

[Chuck Cerankosky:]

2008 sorry.

[Chris Conner:]

Hey, do you want to take that Shaun.

[Shaun Hennessy:]

Sure. In 2008, we basically believe that the acquisitions that were completed in '07 will be flat to down slightly for the year 0 to $0.02 for the year.

[Chuck Cerankosky:]

Is that the economy or is that anticipated at the time of the acquisitions?

[Shaun Hennessy:]

Let's say timing and basically when you take a look at the market in North America, the timing of the acquisitions in that cycle of North America.

[Chuck Cerankosky:]

Got you. Now for the bigger picture, I'm thinking about your guidance for 2008 sales. Chris, how would you sort of allocate that sales growth between price volume and contribution from existing acquisitions?

[Chris Connor:]

I think, as we kind of look at next year's sales, I'll break it down in a couple of ways for you and the rest of the listeners by segment. We expect that our Stores Group for the year is going to be up in the low to mid-single digit. We expect our Consumer Group to be flat, up slightly this year and the Global Group to continue to be our strongest performer up in the mid to high single digit range. In terms of price and mix and acquisitions, I think all three of those are going to play a role and it would all be about the same percentage.

[Chuck Cerankosky:]

Okay. And to look at it yet another way

[Chris Connor:]

0 for market growth.

[Chuck Cerankosky:]

Okay.

[Chris Connor:]

That will all come from share.

[Chuck Cerankosky:]

All right got you then. Maybe Shaun back to you on the tax rate. When I'm looking at these impairment charges

[Shaun Hennessy:]

Yes. For all of '07 the impairment, because they have occurred totally in the quarter, I'd would use 35%.

[Chuck Cerankosky:]

35%?

[Shaun Hennessy:]

Right.

[Chuck Cerankosky:]

And

[Shaun Hennessy:]

What we see as -- Chuck, we have gone from 31 in 2006 to 32.6. We think it will be up slightly from that 32.6 in 2008 and as you probably also noticed we had some wild swings in '06, less than '07, but we believe next year '08 will be fairly stable for that quarters.

[Chuck Cerankosky:]

All right. And one last thing, here in Ohio, South Park Mall in Strongsville you had kiosks setup in there. I was wondering that will suite for Sherwin-Williams product, but

[Chris Connor:]

In fact given the sale of the mall

[Bob Wells:]

It's winter [tagger[ Chris.

[Chris Connor:]

As we would do from time to time across our footprint testing different types of marketing concept. That was a concept to test the implementation of a [color] program in that mall. It was only up during the holiday season.

[Chuck Cerankosky:]

Okay. And obviously DIY…

[Chris Connor:]

Correct.

[Chuck Cerankosky:]

Thank you.

[Operator:]

Thank you. Our next question comes from Saul Ludwig with KeyBanc.

[Saul Ludwig:]

Good morning guys.

[Chris Connor:]

Good morning, Saul.

[Bob Wells:]

Good morning, Saul.

[Saul Ludwig:]

Well, Shaun, I always have been complaining about high administrative costs and this quarter it has really fumbled down. What is it that gave you the big drop off in the admin expense?

[Shaun Hennessy:]

Saul, I don't know if you remember so. You've asked this question a couple of quarters ago and we thought to said that we had some timing changes and really we had forecasted the full year to be up by inflation. I don't know if you remember that.

[Saul Ludwig:]

Right.

[Shaun Hennessy:]

At the end of the year, right around 238 versus 230 last year, which is, but it really comes back to the -- in the first three quarters, we had some compensation or other benefit that we are expensing in the first three quarters that went through the P&L in the fourth quarter of last year. From that, you are seeing the flipside of that. So, when you look at the total year, then you see a better picture.

[Saul Ludwig:]

Will 2008 be similar pattern to this year than '07?

[Shaun Hennessy:]

Yeah, we believe that the pattern will be the same. But interest expense will be a little higher next year. So, we are expected to be up just slightly more than inflation next year.

[Saul Ludwig:]

And

[Shaun Hennessy:]

I don't have any answer to that Saul. I will have to get back to you. Because they it depends on, I just remember, we've different sub, so, I'll have to look and then I will get back to you.

[Saul Ludwig:]

All right. And then perhaps looking at the past two year earnings for 2008 with a weaker start, what is that you expect in the economic environment in the backend of the year to be much better than the first part of the year. What's built into your assumptions from an economic standpoint that supports the strong second half versus the weak first half?

[Bob Wells:]

Really nothing Saul and if you think about it kind of the guidance we are giving for the year is that the company is going to be up on the low to mid single for the entire year that's the same guidance we are giving for the first quarter. We are not expecting any kind of economic change in the second half that will elevate revenues and bring us forward. I think, what you are seeing in the first half is the impact of the market environment that we are facing. New residential construction is being hardest hit in the southern market and those are typically been the market that have carried us through the first quarter. Additionally, the reasons for acquisitions that we've made tend to be in the northern half of the United States and like we use to operate we didn't make money in the first quarter of our stores. So, these are not operating at our pool. Operating profit margin just there will be overtime and so, the combination of those two things are negatively impacting our first quarter. But, we still look back to the kind of earnings leverage that we can get of the stores business through the second and third throughout bring the year end of the numbers that we've given guidance on.

[Saul Ludwig:]

And in your guidance what else you do with regard to pricing usually in January, you put down a price increase through your system. What was the magnitude of the price increase? And

[Chris Connor:]

Sure, as I'd be. I'm prepared at this call to give guidance on that and let me start with what we expect the raw material cost increase to be for the industry. As we've always done at this time, we are right now looking at a industry increase of somewhere in the 3% to 6% range that's a little wide than we typically given. But I think it reflects the continued uncertainties that we are seeing out there. There are a number of other major global companies, who have on the same calls, we've been talking you about the significant price increases if they are trying to get to the industry and all that work is still on going. But we think that when all set and done, we will be somewhere in that 3% to 6% range on a cost basis. Sherwin has taken appropriate pricing actions as we typically do and announce pretty much across all of our segments in the month of December. The range of price increases as we went out would be from a low of 3.5% to a high at 6.5% again depending on the particular business segment that we are operating in and individual product lines within side of those segments. So, 3 to 6 on cost, 3.5 to 6.5 on selling pricing and with that we should be able get through the year.

[Saul Ludwig:]

Then so with given that level of pricing you are not counting very much on volume, if the volume is going to be flat to down actually to get to the sales numbers that you projected?

[Chris Connor:]

We've just come through a year, where industry volumes and architectural were down high single-digit. We out performed that with a low single-digit volume decline and we are not forecasting much improvement in the market conditions for next year.

[Saul Ludwig:]

Okay. And then finally

[Chris Connor:]

Well, when you take a look at the fourth quarter, I think, the fourth quarter was right around 127.

[Saul Ludwig:]

All right.

[Chris Connor:]

We got it slightly below that, Saul.

[Saul Ludwig:]

Okay, great. Thank you very much guys.

[Operator:]

Thank you. Our next question comes from Jeff Zekauskas with JP Morgan Chase. Please state your question.

[Jeff Zekauskas:]

Hi, good morning.

[Chris Connor:]

Good morning, Jeff.

[Jeff Zekauskas:]

In terms of the demand for the DIY market and I guess the professional contractor

[Chris Connor:]

Well, we don't know exactly what it will be like in 2008, but as it follows the trend in 2007 what we've seen Jeff is that the demand on the DIY side has been negative and the demand for professional painting contractors that are focused on the new residential construction market has been negative. That exception the other demand that we've seen for painting contractors and all the other segments, residential repaint property management, commercial painting and industrial maintenance coatings painting have all been positive. We'd expect that same trend to continue in '08.

[Jeff Zekauskas:]

What's your outlook for industrial maintenance coatings? Is it relatively positive for '08?

[Chris Connor:]

Yes.

[Jeff Zekauskas:]

And you talked about, I think, in answer to the Saul's question possibly passing through price increases of 3.5% to 6.5% in an environment where the volume characteristics are?

[Chris Connor:]

Jeff, it's always a challenge to implement price increases and pass them on. We don't like to do them and our customers don’t like to get them. But the reality of the market is that's the cost environment that we are operating in. Of note, from our analysis the vast majority of all of our competitors have taken very similar pricing actions through the fourth and first quarter of last year and this year. So, we will have those two sessions with our customers throughout the first quarter as we've commented in the past, it takes up a period of time to implement price increase, as we on our particular job. The contractors are still working on it. So, we will have a better feel as the year goes on, how effective it would be the best practices in history or any measure, we would expect to get better than 50% of those prices.

[Jeff Zekauskas:]

Okay, thank you very much.

[Chris Connor:]

Sure, Jeff.

[Bob Wells:]

Thanks, Jeff.

[Operator:]

Thank you. Our next question comes from Eric Bosshard with Cleveland Research, please state your question.

[Eric Bosshard:]

Good morning.

[Chris Connor:]

Good morning, Eric.

[Eric Bosshard:]

Couple of things, on the gross margin line, you did an impressive job in 2007. The cost environment looks more difficult in '08. What should we be thinking about in terms of the gross margin year-over-year in '08?

[Shaun Hennessy:]

Eric, this is Shaun. We were looking at the gross margin. We were looking at it for the full year forecast in a range. And we think that range is not going to be significantly of the $44.9 million that we are able to achieve this year. We don't see it going up or down very significant from that point. But we are comfortable managing the company within a small range around that.

[Eric Bosshard:]

Is the difference this year versus last year? The cost side of the equation that won't allow you to continue to expand gross margins?

[Chris Connor:]

Absolutely much more aggressive cost environment that we are facing, if you recall the same call a year ago we were indicating that the industry was going to be flat to up 1% to 2%. And this year, we were right up to that talking 3% to 6%. So, it's a little different environment that we're facing this year.

[Eric Bosshard:]

[Since I] request, I think, you kind of answered this. But I just wanted to be clear that, I understand the sales guidance of 1Q is similar to the full year sales guidance. But earnings are guided effectively down year-over-year in 1Q and going up for the full year. Can you just again explain what that is?

[Chris Connor:]

Sure. I'll take another crack at it. If we just look at our Stores segment which is we all know the lion share of our company. The southern divisions and Bob takes you through that on the call in terms of which parts of the Stores Group are performing the best and I think he made the comments that our southeastern division was the first performing of the geographic segments in the Stores division. And typically it's been the southeastern division to a lesser extent to the southwestern division carried the company to the first quarter. This is where we have a better weather, flatter sales curve throughout the year and these are the parts of the country that are being impacted the most aggressively in particularly Florida which we've talked about in this call in the past. So we are not getting the lift from the southern portions of our Stores segment, early in the year to carry the first quarter. Adding to that, the two acquisitions that we've made this past year are northern type acquisitions. And again they have a more traditional and a profit curve with a second and third quarter or the quarters when they make most of their contribution. So we've added a significant number of stores that lost money in the first quarter. So stores that have historically carried up to or something through the market environment and for that reason we guided the first quarter down to expect all those things as they typically would do to catch up in the second and third quarter and that's why we have somewhere between 8% and just below 10% guidance for the year earnings.

[Eric Bosshard:]

Next in terms of the momentum of the business relative to 90 days when we last had a call

[Chris Connor:]

I don't think we've really seen much of the meaningful change at all. The home building markets continue to deteriorate the fourth quarter. Commercial construction softened and existing turnover really kind of fell off a cliff in the fourth quarter. So if anything some of those metrics worsened for us in the fourth quarter. But when we look at over 2008 and try to make our best estimate of how those things are going to impact us, I think we have given appropriate guidance in the low to mid single-digit sales growth and I believe that we can deliver that.

[Eric Bosshard:]

And then two last questions, you bought 13 million shares in '07

[Chris Connor:]

No.

[Eric Bosshard:]

Why?

[Chris Connor:]

Well going into last year if you remember our net debt -- if you take a look at our net debt last year was right around $200 million in the cash and the balance sheet. Our net debt is around $950 million this year. If you take a look at what we've said, our net debt will be around 80 to 85 basis points of our EBITDA for the short term. So that gives us a little less cash this year to work with than it did last year. That's why I don't think we will hit 13 million.

[Eric Bosshard:]

But you expect that you will still be active?

[Chris Connor:]

Yes. If you look historically our track record are much normalized run rate here has been in the 6 million to 8 million shares and this was an opportunity to gear for us given the pricing particularly in the second half and get their other expectations if their stocks are going to come back up.

[Shaun Hennessy:]

If you remember in '06, we did buy little over $5 million. So the $5 million plus the $13 million we averaged about a $9 million in the prior year [for around 8].

[Eric Bosshard:]

And then last question

[Shaun Hennessy:]

Well I think there is always lesson. I think we've learned lessons from every acquisition. But what we've decided to do is we have no problem telling you which segment they are in, but we are not going to specifically comment on the goodwill from which acquisition. On ongoing basis 142 required us to look at the goodwill on our balance sheet on an annual basis, and as the value of those assets change an impairment curves. So, in the future it's hard to forecast but when things occurred in the marketplace and the value of that goodwill changes, we are going to take impairments. So it's hard to forecast, but we're not going to say -- we are not going to identify the acquisition.

[Chris Connor:]

I think Eric the FAS 142 ruling here that's applied the cause of this is a much shorter-term look than it has been historically. And while these acquisitions that are suffering have still remained very strategic, appropriate. We are bullish on them. In many regards they continue to meet their pro forma of what our expectations were. They just can't meet the hurdle for this stricter FAS ruling. So we've taken the impairments and we'll continue to do so going forward as John mentioned.

[Eric Bosshard:]

Perfect. Thank you very much.

[Operator:]

Thank you. Our next question comes from P. J. Juvekar with Citigroup. Please state your question.

[P. J. Juvekar:]

Yes. Hi, good morning.

[Chris Connor:]

Good morning, P.J.

[P. J. Juvekar:]

You talked about cost reductions. Can you talk about which area and can you try to quantify the amount of this cost reductions in '08?

[Chris Connor:]

I am sorry the cost reductions in '08?

[P. J. Juvekar:]

Yes.

[Chris Connor:]

Yeah. I think, basically when we talk about cost reductions, it's a generic comment P.J. just about looking consistently for those efficiencies either in our manufacturing operations, our supply chain and managing the SG&A at our stores are slightly better. None of the expectations or guidance we have given for '08 are built on any significant cost reductions in the business.

[P. J. Juvekar:]

Okay. Chris, you talked about commercial construction slowing in your comment. Can you elaborate on that and just tell us how much slowdown are you seeing on the commercial side?

[Chris Connor:]

Yes. P.J. we take a look at a number of industry documents and reports that comment on commercial construction growth. We think that last year that commercial construction growth was somewhere between in the mid-to-upper single digit, in terms of construction put in place. And looking forward, the same organizations would indicate that new commercial growth this year will be in the low-to-mid single digit as opposed to the mid-to-upper. So, still positive for the industry, slightly lower than last year's performance.

[P. J. Juvekar:]

Okay. And then, if I look at Sherwin-Williams, I mean, it's still a very U.S. centric company. Can you talk about your outlook for M&A outside of the U.S.? Thank you?

[Chris Connor:]

Sure. We've consistently share with you that our revenue mix is around 85.15 domestic outside of United States. This past year four of the seven acquisitions that we made were outside of North America. We continue to look in those markets for opportunity to add shareholder value and I expect we will continue to do that going forward. One thing we've been consistent about however is that we expect growth to come from all the market we are in including the United States. Certainly we are in a rough market environment, as we stated here today, but our continuing investment in new stores should give confidence that we see as the longer-term opportunity to continue to grow share and revenue in North America. We will, from time to time, find opportunities outside of North America and whether that volume mix changes inside our company does not necessarily goal that we have. We are just interested in driving growth; wherever we can find it and investing this money to get the appropriate returns.

[P. J. Juvekar:]

Thank you.

[Operator:]

Our next question comes from Robert Felice with Gabelli & Company. Please state your question.

[Robert Felice with Gabelli & Company:]

Hi guys, most of my questions have been answered. Just has a couple of more as the low end of your guidance and also the adjusted $4.78 you earned in 2007 that implies EPS growth for about 4.5% and that the high end about 7.5%. And if then adjust next year for the reduced share count, it really doesn't imply very much leverage from that top line growth to the EBIT line and you've mentioned that you expect gross margins to be roughly stable looking to 2008. And I'm just trying to push through

[Chris Connor:]

I think that I really didn't don't want to go down the whole P&L here. We don't usually do that. But, when you take a look at the SG&A, our SG&A, we had a fairly good year. But when you continue to go through for another year we've got a couple of things that are going on. In total, we expect our SG&A as a percent of sales to go up, with the sales increase, with the diminishing returns and savings that you can continue to get out of SG&A. I mentioned our debt is going to be higher this year for our interest is going to be up. I understand the shares will be accretive, but the interest will also will be dilutive. So, when you talk about the leverage on there, we've talked in the past of how much the sales had to increase perhaps to get leverage. Totally, when you look at our full year sales, we've to realize there is acquisitions and there are also the annualization acquisitions and yeah I mean

[Robert Felice with Gabelli & Company:]

Okay, fair enough. And then just looking at the pricing you mentioned earlier the 3.5% to 6.5% you mentioned that you'll probably get about half of that in the rolling throughout the year which would suggest to me that maybe you get 2%, 2.5% price. Your raw's are going to be up 3% to 6% as you said, which would suggest there is some pressure on gross margin, yet you expect them to be relatively flat. So, maybe you could just push through that and kind of dwell into

[Chris Connor:]

Yeah. Our raw material cost represents about 50% of the average selling price in our industry for a gallon of paint. So, we need an effective 3% selling price increase to offset a 6% cost increase. So, when you do the math and the numbers you just referenced that brings you to about a flat margin.

[Robert Felice with Gabelli & Company:]

Okay, that's very helpful. And then I guess, lastly I was hoping you could dwell into I guess the underlying economic assumptions around your guidance of $5 to $5.15

[Chris Connor:]

I think, the assumptions that we are making in giving that guidance are widely recognized and known. Again to the earlier question regarding our dominance in North America and of course the on going impact of a housing market and this particularly rising raw material, so we have a number of head wins that we will be facing going into it. The obvious answer to what things could change that would impact this number would be if those markets were to come back a quicker. We've long thoughts about existing home turnover market is being better a correlation than existing our new home construction and this was a very tough year for that I think. Some reports have commented it was the sharpest declines since the depression and the worst housing markets since that period of time. So were we to see existing home sales hit bottom sometime during earlier half of the year and then bounce off that bottom. That could have a positive impact on the company's performance. But I think it would be inappropriate and premature on this call to give that kind of guidance or expect that to happen.

[Robert Felice:]

Okay. Fair enough. Thank you.

[Chris Connor:]

Thanks, Rob.

[Operator:]

(Operator Instructions) Our next question comes from Gregg Goodnight with UBS. Please state your question.

[Gregg Goodnight:]

Good morning all.

[Chris Connor:]

Good morning, Gregg.

[Gregg Goodnight:]

Did I miss that that you gave some interest guidance for 2008?

[Sean Hennessy:]

No, but I'll give it you. If you take a look at our interest this year was up about $14 million from the prior year. I am not talking about interest, I am talking about interest expense plus income.

[Gregg Goodnight:]

All right.

[Sean Hennessy:]

As income. And so when you take a look at the next year I believe it's going to be up slightly more than that.

[Gregg Goodnight:]

Okay. Up an additional $14 million?

[Sean Hennessy:]

Yeah. A little higher than that, yes.

[Gregg Goodnight:]

Okay. Next question. Did you breakdown your expectations for '08 for the Paint store in terms of same store sales growth versus overall revenue growth?

[Sean Hennessy:]

No, we did not. We'll comment looking backwards on comp store performance, but we have not commented looking forward. And as you know this last year, our comp stores were negative 1.1%.

[Gregg Goodnight:]

Right. Do you think 2008 will be higher or lower than that number or?

[Sean Hennessy:]

I think we are giving guidance that we're expecting the markets in our sales and all the pieces and parts to be very similar to this year.

[Gregg Goodnight:]

Okay. Next question if I could and this may be something I also missed. I understood the reevaluation and the charge you took was $11 million pre-tax in the Global Group and $ $4 million in the Paint Store Group. Is that correct?

[Chris Connor:]

$4 million was in our Consumer Group.

[Gregg Goodnight:]

Consumer, okay. That's what I missed. Okay. And in terms

[Chris Connor:]

Yeah, I mean we basically said that the goodwill that we have on our book when we did the 142 testing show that the value of the assets on our books were lower than what originally had a year ago. So, that difference goes to the P&L as an impairment. We are just following 142. But the guidance we are not going to give specifically point out which are the acquisitions as the goodwill occurred that we bought.

[Gregg Goodnight:]

Okay. And that's all I have. Thanks Chris.

[Chris Connor:]

Thanks Gregg.

[Operator:]

Our next question comes from Stephen O'Neil with Hilliard Lyons. Please state your question.

[Stephen O'Neil:]

Good morning.

[Chris Connor:]

Good morning Steve.

[Stephen O'Neil:]

Just wondered

[Chris Connor:]

Yea. I think when you take a look at the -- in general when we've said that we are going to be flat to down slightly with the acquisitions, I think it goes back to something that Chris said. These acquisitions are in northern part of the county. So, timing wise and as we get the saving, if you think about the going through the different cycles, the economic cycle, and when you are going through a tougher cycle that we are going right now, where our sales are not as strong and the increases are not as strong as we originally thought as we think about this four to five years ago doing an acquisitions. The acquisitions we were able to do were accretive basically in the second quarter that we owned them. This is just taking longer. We are still getting the savings. We've looked at the SG&A. We've looked at systems. We've looked at the raw materials. We've looked at the manufacturing, rationalization and the synergies. We feel pretty good about the synergies and so forth. It's just that the sales are not being coming as strong. And so the sales, the margins increase has been good just with the sales decreases. It just they are not as accretive as quick.

[Chris Connor:]

And I'd comment and add to that, Steve that when you look at the basket of acquisitions we've made this year. The two big ones, where we used to store acquisitions and we commented on and as Shaun is said in the past -- for us to get leverage on the earning side we don't need to be running these comp stores somewhere in the 3% range, plus or minus a few points. And from the last question from Gregg, we've made the comments on comps were down last year one, one and these businesses are not significantly different. So, it's being difficult for us to get that leverage. Again we've made these acquisitions on a longer term basis. This is a business that we have great confidence in. We got good brands with excellent people and great customer relationships and it just going to take a little bit longer from a market timing standpoint to get into where will be contributing at the level we expected.

[Stephen O'Neil:]

Thank you.

[Operator:]

Our next question comes from Michael Lewittes with JL Advisors. Please state your question.

[Michael Lewittes:]

Couple of questions have you noticed any difference since Axel bought Imperial and how Imperial is competing I know it's the acquisition just closed, so if you have any or do you anticipate any difference on the competitive landscape?

[Bob Wells:]

Michael, we have not seen any significant change in the strategy and I think it's too earlier and inappropriate for me to comment what they might do.

[Michael Lewittes:]

Okay. And then maybe on this when you are doing a legal overview, but

[Chris Connor:]

The two cases in Wisconsin have gone to trial. One is the city of Milwaukee case, which was the public nuisance case. The other was the Steven Thomas case, the personal injury case both were decided by a jury for the defendant.

[Michael Lewittes:]

Okay.

[Chris Connor:]

I don't know the status of any appeal in those cases of top of my head. I understand that there maybe additional personal injury plaintiffs but I don't believe any trial dates have been set for any of those cases.

[Michael Lewittes:]

Okay. And then before, when you were talking about buyback, I mean, you are talking about how many shares you have averaged just because the stock is down so much. I guess my question is how much is the dollar amount

[Chris Connor:]

When you take a look at the authorization we have from the Boards of Directors, we currently have 27 million shares left from the authorization of 30 million that they gave us in October.

[Michael Lewittes:]

Okay.

[Chris Connor:]

We take a look at it, I can't comment for prior years but last year we averaged around $63 as we were buying throughout the year. But unfortunately it's a blackout that's when the stock really dropped. But so the average was right around $63 last year but I don't remember the prior years.

[Michael Lewittes:]

Okay. And then just in regard to price increase could you talk a little bit

[Chris Connor:]

All of our business segments, as we commented and announced pricing actions in the fourth quarter of the year.

[Michael Lewittes:]

All at the same time or throughout the fourth quarter.

[Chris Connor:]

No not all at the same time. All during the month of December, all was different implementation rollout scheduled. And depending on whether this is a business that we sell through our own company owned stores or whether it's coating that we sell through other retailing partners or whether it's products that we sell through distributors they will then sell into those markets. So, all of those factors play a role, and I think the guidance we've given is that as the year goes through we will be implementing those and effectively gaining as much of the price increases we can. I don't think we would comment specifically on which customers or business segments took which price increases in which month.

[Michael Lewittes:]

In terms of your own stores you put the price increase in at all the same time?

[Chris Connor:]

Yes.

[Michael Lewittes:]

Throughout the country.

[Chris Connor:]

Yes.

[Michael Lewittes:]

Okay. And are you assuming this wasn't clear to me, is there -- the December price increase, are you assuming that an additional '08 price increase on top of that in your own stores?

[Chris Connor:]

No. The price increase that was announced in December is the only pricing that we are talking about and that's what we have playing on these numbers.

[Michael Lewittes:]

Okay. And in '07, was there only one price increase? How many price increases traditionally in the last couple of years have you had or is it just one per year?

[Chris Connor:]

Typically, we go out with one price action a year. We have in periods of aggressive raw material going on twice. '07 was a period, when we went out one time and as we've commented we've announced just for one for '08.

[Michael Lewittes:]

And was there, did your competitors follow you in December?

[Chris Connor:]

No. We don't comment on who's leading and who's following. I think it's a rational industry, people buying from the same raw material suppliers. We intended to go out for pricing when we need to regardless of whether we were following or leading.

[Michael Lewittes:]

Okay. Thank you.

[Chris Connor:]

Thank you.

[Operator:]

Our next question comes from Chuck Cerankosky with FTN Midwest Research. Please state your question.

[Chuck Cerankosky:]

Well, I got follow-up guys and looking at the rough operating environment, how you are thinking about the acquisition market. Do you think it will be better buying opportunity and are you trying to keep the balance sheet in shape for that relative to, sounding like you have a lower appetite for stock repo for this year?

[Chris Connor:]

Yeah, I think Chuck the environment fairly close to it what it was a year ago. I think that there possible could be some later expectations between buyers and sellers this year versus last year. And our balance sheet, yeah, we are trying to feel that our balance sheet is an asset that we can use and if the right acquisition comes up, we will go for it and of that with the cash generation that we'll have in general from our operations, I don't feel it came down as debt. If we do get an opportunity, we will buy stock and we will of an acquisition, Chuck.

[Chuck Cerankosky:]

All right. And then on working capital last year Shaun let me just some quick calculations here and it was up, it looks like you, yours about $105 million of net working capital. How much of that, which you say just high raw material cost?

[Shaun Hennessy:]

Actually the biggest factor of that was acquisition Chuck. If you take a look at..

[Chuck Cerankosky:]

That's right okay.

[Shaun Hennessy:]

If you take a look at inventory and receivables without acquisitions, both numbers were down. The absolute numbers were down. The other factor was our payables were down. And so, and as we putting in system and we were working through a few things and that will happen next year. But when you take a look at it, raw materials, I was saying had a very small effect on us and we were able to get the inventory down for the year without acquisitions.

[Chuck Cerankosky:]

Thank you.

[Operator:]

Our next question comes from Saul Ludwig with KeyBanc. Please state your question.

[Saul Ludwig:]

Just quickly, how much did you spent in the fourth quarter for share buyback?

[Chris Connor:]

Saul, it was in the neighborhood, I don’t give the exact number but I think the number was about $3 million and the average selling purchase price was right around $60, so probably $180 million.

[Saul Ludwig:]

Okay.

[Chris Connor:]

Plus or minus five, ten

[Saul Ludwig:]

What the dilution from the acquisitions you said that it cost you for Chuck's questions, this question before $11 million, which was about $0.06 share and then you said that you were anticipating.

[Chris Connor:]

In the Stores group.

[Saul Ludwig:]

It would be neutral or maybe $0.02 dilutive will that be an incremental of the $0.02 dilution meaning a negative swing of $0.02 or what it means $0.02 rather than $0.06 which would constitute a favorable swing of $0.04 possibly interpret your commentary?

[Chris Connor:]

It's four.

[Saul Ludwig:]

It's what?

[Chris Connor:]

Favorable four.

[Bob Wells:]

Favorable four.

[Saul Ludwig:]

Okay. So, it would be plus in that sense.

[Chris Connor:]

Right. The absolute number is zero to $0.02.

[Saul Ludwig:]

Got you. So, that would constitute as part of your positive swing in your earnings that you are looking up this year versus last year?

[Chris Connor:]

Yes.

[Saul Ludwig:]

Okay. And then also you commented that in your consumer business your manufacturing team did a great job of holding down cost in an environment where they produce fewer gallons. Can I squeeze it some more or you sort of at the end of the line with regard to product manufacturing efficiencies?

[Chris Connor:]

You know what Saul we are not looking for the repeat in the reduction of our variable cost next year. We think that I mean they are going to continue to look but we think that there is going to be really not much difference. You also have to remember, we put in an new plant last year that currently plant which was really productive compared to the Oakwood plant that we closed. So, that help us but I don't see the big increase this year.

[Saul Ludwig:]

Great, thank you guys.

[Chris Connor:]

Thanks very much.

[Bob Wells:]

But actually other things I'll tell you is that they did a great job again the inventory down in the fourth quarter which will help us in 2008 because we didn't put that dividend on our balance sheet.

[Saul Ludwig:]

Great, good point. Thank you.

[Operator:]

Our next question comes from Gregg Goodnight with UBS.

[Gregg Goodnight:]

A question in terms of you are continuing to open them 2% to 3% more paint stores which will be about a 100 stores again this year, can you comment on doing that in the down market? And the second question is will you get any cannibalization of your existing store sales through opening new paint stores?

[Chris Connor:]

Hey Gregg we have had a long history here of taking a longer view of the store model. And I think as we've shared with you and other investors that we see a 4,000 stores being an appropriate target for us to shoot for. In doing real estate as we've commented the vast majority of this deals are leasehold situations and in the down market that's a great time to be out negotiating for rents and securing longer term rents. So, we have stayed and through cycle like this in the past on past year we are adding new stores. As you can imagine the stores that we are going to be opening in the first half of this year were all negotiated and concluded last year, this is what continue to work this year and stores that we will open in 2009, so this is a long term strategy that will say the course. We have not commented on this call about cannibalization, when we give our account store numbers we've always had to deal for the fact that we have opened the store account that business does migrate from existing stores to our new stores. But those trends lines won't change dramatically from the way they've been performing for the last decade.

[Gregg Goodnight:]

Okay. Very thanks for that answer.

[Operator:]

Thank you. Our final question comes from [Joseph Falouskey] with Credit Suisse. Please state your question?

[Joseph Falouskey:]

Good afternoon, thanks for taking my call. I wanted to ask just a clarify number you mentioned it earlier that 3% to 6% decrease is that your expectation for overall North American industry volumes for 2008?

[Chris Connor:]

The 3% to 6% number I recall giving on the call was about raw material cost increase for the industry. In terms of volume industry decrease in North America, we did comment that last year the industry saw architecturally about an 8% volume decline. We've not given guidance and while we expect the industry to remain backwards in volume for 2008.

[Joseph Falouskey:]

Okay. And finally with your historical price increases, have you been able to get 100% or close to what you seek?

[Chris Connor:]

We've never received 100%. There has been times we've been in the high 80s, close to 90, when it typical it's right around the 80%.

[Joseph Falouskey:]

Terrific. Well, thank you.

[Chris Connor:]

Thank you.

[Operator:]

Thank you. I would now like to turn the floor back over to Mr. Wells.

[Bob Wells:]

Thanks, Diego. I'll close this morning by asking you all to the save the date of Tuesday, June 24th on your calendar that's the day we will host our annual financial community presentation at our headquarters in Cleveland. The morning program will be followed by a reception and lunch, where you have an opportunity to meet with our operating level management and after lunch we have scheduled a brief technology tour at our Greentech center down the hill from our headquarters. Again, the date is Tuesday June 24th. We'll be sending out invitations and related information in the weeks ahead. Thanks for joining us today and thank you as always for your continued interest in Sherwin-Williams.

[Operator:]

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