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Sherwin-Williams Company (NYSE:SHW)

Q4 2008 Earnings Call

January 22, 2009 9:00 a.m. ET

Executives

Chris Connor – Chairman and CEO

Sean Hennessey – Senior VP of Finance and CFO

John Ault – Vice President Corporate Controller

Bob Wells – VP Corporate Communications

Analysts

Saul Ludwig – Keybanc Capital Markets

Chuck Cerankosky – FTN Midwest Securities

Dmitry Silverstein – Longbow Research

PJ Juvekar – Citigroup Incorporated

Amy Zhang – Goldman Sachs

Jeffrey Zekauskas – JP Morgan Chase

Greg Melich – Morgan Stanley

[Omar Lee] – Cleveland Research Company

Steve O'Neil – Hilliard Lyons

Dennis McGill – Zelman & Associates

[Vlad Arkimono] – Coastal Capital Management

Operator

Good morning. Thank you for joining the Sherwin-Williams company’s review of fourth quarter and full year 2000 results and expectations for 2009. With us on today’s call are Chris Connor, Chairman and CEO; Sean Hennessey, Senior VP of Finance and CFO; John Ault, Vice President Corporate Controller; and Bob Wells, Vice President and Corporate Communications.

This conference call is being broadcast simultaneously in listen-only mode by Vcall via the internet at www.sherwin.com. An archives replay of this webcast will be available at Sherwin.com beginning approximately two hours after this conference call ends and will be available until Wednesday, February 11, 2009 at 5 p.m. eastern standard time.

This conference call will include certain forward-looking statements as defined under U.S. Federal securities laws with respect to sales, earnings and other matters. Any forward-looking statement speaks only as of the date on which such statement is made, and the company under takes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.

A full declaration regarding forward-looking statements is provided in the company's earnings release, transmitted earlier this morning.

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

Bob Wells

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

Summarizing overall company performance for the fourth quarter and full year 2008, consolidated sales for the fourth quarter declined 8.3% to $1.7 billion due to sales volume declines resulting from worsening economic conditions in the U.S. and abroad. For the full year, sales declined $25 million or three-tenths of a percent to $7.98 billion.

Acquisitions completed during the year increased consolidated net sales seven-tenths of a percent in the quarter. Businesses acquired during 2007 and 2008 added 1.9% in consolidated net sales in the year.

Unfavorable currency translation rates decreased consolidated net sales 2.8% in the quarter. For the year, favorable currency translation rates increased sales four-tenths of a percent.

Consolidated gross margin in the fourth quarter increased to 46.2% of sales from 44.9% in the fourth quarter of 2007. For the year, gross margin declined to 43.8% compared to 45% in 2007. Selling general and administrative expenses in dollars decreased $8.5 million in the fourth quarter compared to fourth quarter last year, but increased at a percent of sales to 37.3% from 34.6% in the same quarter last year.

For the full year 2008, SGNA expense increased to 33.1% of sales from 32.4% in 2007. Tight expensive management across all operating positions could not fully offset an increase in SGNA from acquisitions and the effect of a slowdown in sales growth on SGNA percentage for the quarter and year.

In the fourth quarter of 2008 the company took a trademark and goodwill impairment charges totaling $30.7 million or $0.18 per share. The reflect reduction in sales and cash flow across certain acquired trademarks and businesses. During the year, the company took trademark and goodwill impairment charges totaling $0.31 per share.

As a reminder, the company took an impairment charge of $16.1 million or approximately $0.08 per share in the fourth quarter of 2007.

Interest expense for the quarter decreased by $4.5 million to $14.7 million due to a reduction in short term interest rates. Interest and net investment income was roughly flat in the quarter at $1.6 million. For the year, interest expense decreased $5.9 million due to lower short-term borrowing rates and lower average borrowings. Interest and net investment income decreased $10.5 million in the year due to lower overall rates and lower average investments compared to 2007.

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

Consolidated net income for the quarter decreased by $50.6 million or 50.2%, to $50.2 million from $100.8 million in the fourth quarter of 2007. For the year, net income decreased $138.7 million or 22.5%. Net income as a percent of sales decreased to 3% in the fourth quarter this year from 5.4% in the fourth quarter last year. This decrease was due primarily for the year-over-year SGNA expense increase as a percent of sales, the higher impairment charges, and the increase in our fourth quarter income tax rate.

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

Diluted net income for common share for the fourth quarter 2008 was $0.42 per share, including an $0.18 per share impairment charge, compared to $0.80 per share in fourth quarter 2007, which again included an $0.08 per share impairment charge.

For the year, diluted net income per common share decreased 14.9% to $4 per share from $4.70 per share in 2007.

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

The acquisitions of (inaudible) and Columbia Paint completed during 2007 had no effect on sales in the fourth quarter and increased net sales for the group, 1.8% in the year. Comparable stores sales decreased 10% in the quarter and 5.3% in the year.

Regionally in the fourth quarter, our southwest division led all divisions, followed by our eastern division, Midwestern division, and southeastern division. Sales by all four paint stores divisions declined in the fourth quarter and full year.

Segment operating profits for the paint stores group decreased 28.2% to $113.2 million in the fourth quarter and decreased 15.5% to $647.9 million for the year. Acquisitions completed during 2007 had no effect on segment profits for the quarter, and reduced segment profit by six-tenths of a percent for the year.

Segment operating profit margin for the fourth quarter decreased to 10.9% from 13.8% last year. Profit margin for the full year 2008 decreased to 13.4% from 15.5% in 2007. The reduction in profit margin for the quarter and the year was due primarily to the impairment charges.

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

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

For our global finishes group, net sales in the fourth quarter decreased 7.9% to $414.4 million as a result of unfavorable currency translations and deteriorating market demand. Sales for the year increased 7.8% to $1.87 billion.

Acquisitions increased the group’s sales in U.S. dollars by 2.6% in the quarter and 3.3% in the year. Sales in local currency before acquisitions decreased by eight-tenths of a percent in the quarter and grew by 2.9% in the year due primarily to volume growth. Global finishes group segment operating profit in the fourth quarter decreased $12.6 million or 44.5% to $15.8 million.

Segment operating profit for the full year decreased $8.5 million or 5.3% to 152.2 million. State and local currency segment profit decreased 29% and 8.2% for the fourth quarter and year respectively.

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

I would now like to comment briefly on our balance sheet items. You will find more balance sheet information on our website under sherwin.com Investor Relations Press Releases.

Our total debt on December 31st, 2008 was $833.7 million, including short-term borrowings of $516.4 million. Total debt as a percent of total capitalization decreased to 34.2% in 2008 from 35.1% at the end of 2007. Our cash balance at year end 2008 was $26.2 million compared to $27.3 million in 2007.

Capital expenditures were $25.4 million in the fourth quarter and $117.2 million for the year compared to $165.9 million for the year 2007. Depreciation expense was $35.9 million in the quarter and $143.2 million for the year. And amortization expense was $5.4 million in the quarter and $22.3 million for the year.

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

I’ll conclude this review with a brief update on the status of our lead pigments litigation. In Ohio, the Attorney General suit, which was moved to federal court by the defendant’s have remanded back to state court by a federal judge. The defendant’s have filed a motion to dismiss and are awaiting the state’s response. We do not yet know how the new Attorney General views this lawsuit.

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

In California, the State Supreme Court has agreed to consider the question of whether it is permissible for cities and counties to retain contingency counsel to aid them in their suit against the former manufacturers of lead pigment. Briefing is ongoing and oral arguments should not take place until at least the third quarter 2009 with a decision by the Court some months after that.

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

Chris Connor

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

So after visibility in the U.S. economy in the last year was simply unprecedented. Financial markets, business and consumers, all reacted strongly to the growing economic uncertainty. Businesses and consumers both reigned in spending, and nervous investors ransacked stock exchanges around the world. Each time that we thought that things couldn’t get any worse, in fact, they did.

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

It is becoming increasingly difficult to forecast our business with any degree of confidence. For this reason, we considered suspending our long-standing practice of providing sales and earnings guidance. But we believe that offering even a broad range of expectation has value and we will continue to practice or providing guidance. More on this topic in a moment.

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

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

During the year, our paint stores group closed 79 stores that were located in close proximity to other stores, as well as reducing non-essential overtime and part-time service hours. We consolidated some sales territories and focused our selling efforts on market segments and customers that offer the highest potential for share growth.

Operations at seven manufacturing and distribution sites remained idle and were closed during the year and we trimmed administrative expenses across the organization.

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

The challenging market conditions last year did not discourage us from continuing to make prudent investments in an effort to capture share. For example, our paint source group opened stores in 100 new markets. Packing up the store closures, we finished the year with 3,346 stores in operation, and increase of 21 net new facilities over year end 2007. Our global group added 22 net new branches, including our first company operative location in India.

At the end of 2008, our global group had 541 company operated branches. We continue to invest in research and development and introduced some important new product technologies to the market in 2008.

Four our sale divisions, we recruited 667 high-caliber people into our respected management training program. We are confident these investments will benefit the company in the near term and deliver appropriate returns in the long-term as well.

You know, strong cash generation has always been a focus of our company. In 2008, we generated net operating cash of $864 million surpassing 10% of net sales for the third consecutive year. This strong cash flow performance was due in large part of a $121 million decrease in our year-end working capital.

As a reminder, our working capital ratio defined as accounts receivable plus inventories, left accounts payable to 12 month sales, decreased to 11.2% in 2008 from 12.7% in 2007.

During the year we also continued to invest the company’s cash to create value for our shareholders. Again, for example, we invested over $70 million to complete three acquisitions, strengthening our industrial coating businesses in and outside of North America.

It required more than seven million shares of our company stock or treasury, reduced our total debt by more than $130 million, and returned a portion of our net operating cash to shareholders in this form of a cash dividend.

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

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

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

For the full year 2009, we expect net sales will decline in the low to mid single digits versus 2008. With annual sales at that level we estimate diluted net income per common share for 2009 will be in the range of $3 to $4 per share compared to $4 per share earned in 2008. Again, thanks to all of you for joining us this morning, and I will be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator instructions) Thank you, our first question is coming from Saul Ludwig from Keybanc Capital Markets.

Saul Ludwig – Keybanc Capital Markets

Hey, good morning, guys.

Bob Wells

Good morning Saul.

Saul Ludwig – Keybanc Capital Markets

You had this improvement in the gross margin, which was astounding considering the precipitous drop in volume. Can you talk about the factors that have allowed you to grow higher gross margins in the quarter?

Sean Hennessey

Saul, this is Sean Hennessey, and when you take a look at the gross profit in the fourth quarter, one of the things that allowed us to have that $46.2 was really the LIFO expense reduction. And so without the LIFO, you see the $45.1 there, you don't see it, but it would have been $45.1, not the $46.2, which still is an improvement and we felt that at the end of that third quarter, we did mention that we were at a trough of gross margins, but with the raw coming down in the fourth quarter, I mean adjusting in the fourth quarter, our LIFO expenses were adjusted so our expenses came down because now we went the other way. We had expense too much LIFO in the first three quarters, so without that, our gross margin at 45.1 for the fourth quarter, we are pretty pleased with.

Saul Ludwig – Keybanc Capital Markets

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

Sean Hennessey

You are absolutely right. It’s not included in the good will impairment, it actually is plus the good will impairment, and when you take a look at the majority of that, that was in the consumer group.

Saul Ludwig – Keybanc Capital Markets

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

John Ault

Saul, this is John Ault. The foreign currency gain shows up primarily in our global finishes group, although there is some impact, as well, on the administered segment on a much lower basis.

Saul Ludwig – Keybanc Capital Markets

So that loss that was one of the factors that caused your global group to have such a horrible comparison, because when you add back last year’s special charge, the sacrament was fairly dramatic.

John Ault

That's correct.

Saul Ludwig – Keybanc Capital Markets

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

Chris Connor

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

Saul Ludwig – Keybanc Capital Markets

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

Sean Hennessey

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

Saul Ludwig – Keybanc Capital Markets

Great, thank you very much.

Sean Hennessey

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

Saul Ludwig – Keybanc Capital Markets

Your pension expense or pension income?

Chris Connor

Well, we're going to go from a pension income to a pension expense, so that difference will be 55 to 60 million pretax, which is going to be around $0.32 for the year, which is going to be about $0.08 a quarter for us. So, that has been our forecast, and that has been our guidance.

Saul Ludwig – Keybanc Capital Markets

Thank you very much.

Sean Hennessy

Thanks, Saul.

Operator

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

Chuck Cerankosky – FTN Midwest Securities

Good morning, gentlemen.

Bob Wells

Good morning, Chuck.

Chuck Cerankosky – FTN Midwest Securities

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

Chris Connor

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

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

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

Bob Wells

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

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

Chuck Cerankosky – FTN Midwest Securities

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

Sean Hennessy

Yes. I think mathematically, you are going right down the right path. You can see it, but that will do.

Chuck Cerankosky – FTN Midwest Securities

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

Sean Hennessy

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

Chuck Cerankosky – FTN Midwest Securities

Yes, certainly. I think that is fair. A couple of other things, are you — besides the pension in your guidance, do you have any assumed impairment charges or room for impairment charges over the course of '09?

Sean Hennessy

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

Chuck Cerankosky – FTN Midwest Securities

Gotcha. And what's the acquisition environment like right now?

Chris Connor

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

Chuck Cerankosky – FTN Midwest Securities

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

Chris Connor

Probably.

Chuck Cerankosky – FTN Midwest Securities

Okay. Last question, did Euronavy close yet?

Chris Connor

Yes.

Chuck Cerankosky – FTN Midwest Securities

Congratulations.

Chris Connor

Thank you.

Operator

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

Dmitry Silverstein – Longbow Research

Good morning. A lot of my questions have been answered, but I would just want to follow up on a couple of things. First of all, can you look at your coatings business outside of architectural to the extent that you have some small industrial and marine and maintenance businesses. What was the performance there like in the fourth quarter versus the architectural business, and what's the outlook for the segment versus the consumer paying segment?

Sean Hennessy

Sure, Dmitry. The industrial coating segments of our company, in previous quarter last year we had commented had been performing slightly better than the architectural, but certainly in the fourth quarter as the global economics lowdown occurred, these businesses began to struggle as well, and pretty much behaved right in line with the total company's performance.

Dmitry Silverstein – Longbow Research

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

Sean Hennessy

Yes. The guidance we've given for the year with the demand down and (inaudible 00:36:38) would be consistent across architectural and industrial coating.

Dmitry Silverstein – Longbow Research

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

Sean Hennessy

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

Dmitry Silverstein – Longbow Research

Right.

Sean Hennessy

The midwestern part of the United States, not as affected. It's done well. Our southwestern division has done well. These are historic southwestern corner of the United States market, which while there's some home building down there, we're seeing some strength over there as well.

But you know, we're really splitting hairs here because it's pretty much broad base across the board that we're feeling the stress in the architectural markets across the United States.

Dmitry Silverstein – Longbow Research

Are any international markets doing better? I mean, you're still experiencing growth in Latin America and Asia, or is that turning negative —

Sean Hennessy

Our business model, Dmitry, is primarily a western hemisphere model. Most of our global coatings outside of North America are in Latin American markets. Brazil has had a reasonable year. We've commented on that frequently. We've been helped by currency through three of those four quarter. Now that's turning off a little bit, and as we commented, those markets are slowing as well too.

So, while they have the potential to be somewhat positive, I think the impacts for the company, given the currency turn, will be a rough year in our Latin American operations as well.

Dmitry Silverstein – Longbow Research

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

Sean Hennessy

Sure.

Chris Connor

Yes. When we take a look at this, what we've always said is that raw materials were around 50% of the average selling price of paint. So, when you take a look at the percentage of the cost of goods sold, it's definitely tremendously higher in there because we have the gross margin.

So, if you think about our gross margin being around a 44, 45, 50% of the selling price as raws, you can take about 5 to 6% of our sales as other; the conversion, the logistics, and the freight.

Dmitry Silverstein – Longbow Research

Okay. So the vast majority of cost of goods sold it sounds like, from a —

Chris Connor

Yes, exactly. North of 80%.

Dmitry Silverstein – Longbow Research

Okay. So, when raw materials start coming down, and this could be a big tailwind, provided that you can maintain pricing, which my understanding is at least historically at the retail level, same prices —

Chris Connor

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

Dmitry Silverstein – Longbow Research

Okay. All right. Thank you.

Sean Hennessy

Thanks, Dmitry.

Operator

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

PJ Juvekar – Citigroup Incorporated

Yes. Hi. Good morning.

Chris Connor

Good morning, PJ.

PJ Juvekar – Citigroup Incorporated

Yes. I am surprised by the weak results in the global finishes group, even after taking out the FX impact that profits were down 29%. Was the volume growth positive in the quarter in the global group?

Chris Connor

We have never really commented on unit buying as by segment, but I think you can tell. We talk about the sales without the conversion in the — with prices, and you can probably take a guesstimate of where that ended up.

PJ Juvekar – Citigroup Incorporated

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

Chris Connor

The asset impairment that we took was really dealing with trademarks, and that segment, that was just from an acquisition that was from prior years that the cash flows, you take away the cash flows, and the discount of the cash flows. We just had to write down some of the goodwill.

PJ Juvekar – Citigroup Incorporated

So it's a reduction in impairment charge?

Chris Connor

Yes.

PJ Juvekar – Citigroup Incorporated

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

Sean Hennessy

Oh, that is a great question, PJ. I have no idea. We've been through economic downturns obviously many, many times in the company's history, and recently in Latin America as well. We've made it, and I think we have commented about the Argentinean economic collapse in the first half of this decade and that our company experience had some valid gains through there.

So, we expect soft demand in our Latin American operations this year. I think it'll behave somewhat similar to the way the U.S. will behave.

PJ Juvekar – Citigroup Incorporated

Okay. Thank you.

Chris Connor

Thanks, PJ.

Operator

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

Amy Zhang – Goldman Sachs

Thank you. Good morning.

Chris Connor

Good morning, Amy.

Amy Zhang – Goldman Sachs

I have several key questions. And the first one is really the follow up on your pricing. I just wanted to get a little bit more color on the competitiveness of the environment. And obviously your rates are priced fairly aggressively in '08 and with some very nice carry over impact in first half of '09, and I heard Sean was essentially saying you expect a 5% price increase in this year.

But whatever — I heard a lot of your competitors already stopped raising prices in the later part of (inaudible) and then expect a flat pricing trend for them.

Chris Connor

Yes. Let me clarify that point. We have not announced any price increases this year. I think the question that Sean was answering was the impact of the price activities announced in 2008 as they carry forward into 2009 and would have the impact of about a 5% lift for us.

But more clearly to your point, all competitors are experiencing difficult volume issues and we think pricing is going to be a difficult prospect for the company this year.

Amy Zhang – Goldman Sachs

So, for the first half of '09, because of the carry over impact, do you think that 5% price increase could have some negative impact on your volumes, given many other competitors, they've probably started to give up some price and will just stop doing the price increases.

Chris Connor

That will be the challenge that management has to work on is to react to the market environment along those lines. Our guidance here in the range that we provided this year, which is much wider than we've historically done, recognizes the fact that that's one of the many moving parts that we're going to have to manage through.

Time will tell, and we'll obviously be reporting on that on a quarter by quarter basis. You'll be able to see how we do.

Amy Zhang – Goldman Sachs

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

Chris Connor

Well, we didn't raise any prices in the fourth quarter of '08. The last —

Amy Zhang – Goldman Sachs

Sorry. The positive impact from the previous two price increases you announced in second half.

Chris Connor

So, as we continue to implement the pricing actions that we took throughout the first half, primarily of 2008, the customers reactions were historical in terms of how we've been able to pass them through.

We've said that typically it takes us the better part of 12 months to get them in, add completion, we're somewhere in the 70% range achievement, plus or minus a few points, and that these price increases have performed in that same fashion.

So, there were no issues in the fourth quarter that would change the discussion on how that's happened historically for us.

Amy Zhang – Goldman Sachs

Great. And then a second question, SG&A has presented itself as a 30 some percent for 4Q and then I understand there is probably some charges there. Just going forward, how would you think of it, that ratio? Obviously, that's a historically high level, and I understand you guys have a lot of operational initiatives in the pipeline, and then what should we expect there?

Chris Connor

Well, if we take a look at the top line sales that we've given you, then we're going to be down in the mid single digits. We would have to drop our SG&A down in the mid — by that same percentage to have the same percent of sales.

I would say that again, we're not going to go down the P&L and give you guidance, but I wouldn't be surprised if your guidance showed that the SG&A as a percent of sales was higher next year.

Amy Zhang – Goldman Sachs

Okay. Thank you.

Bob Wells

Thanks, Amy.

Operator

Thank you. Our next question is coming from Jeffrey Zekauskas of JP Morgan Chase and Company.

Jeffrey Zekauskas – JP Morgan Chase

Hi. Good morning.

Chris Connor

Good morning, Jeff.

Jeffrey Zekauskas – JP Morgan Chase

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

Sean Hennessy

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

Jeffrey Zekauskas – JP Morgan Chase

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

Chris Connor

Yes. I think there is a couple of factors at play here. First of all, the trends coming out of the fourth quarter into the first quarter have not changed, and that's the guidance that we've giving. These are our two smallest quarters of the year —

Jeffrey Zekauskas – JP Morgan Chase

Yes.

Chris Connor

There is some movement there which has a bigger impact on us. We do think that a couple things could impact better performance in the back half of the year. One, the comparisons will get easier as we go up against this significant falloff that we had in the back half of '08, and secondly, like you, we're reading some indications that if there's going to be any kind of stabilization, a flattening of this demand curve is likely to happen in the second of this year.

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

Jeffrey Zekauskas – JP Morgan Chase

In the global group, I think in answer to Saul's question, you said that there might have been a 10 million currency hit. Is that something that is sort of one-time only, or is that something we might see in the successive quarters?

In other words, is your global group annualizing an operating profit of around 100 million or is it more like 60 million?

Sean Hennessy

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

Jeffrey Zekauskas – JP Morgan Chase

Well, maybe if I could just ask it differently. What's the meaning of foreign currency related losses? Were these hedges, or was this the effect of currency on the business?

Sean Hennessy

No. It's the effect of currency on the business. So, when the REI changes, the amount — and we report in U.S. dollars, that change occurs.

Jeffrey Zekauskas – JP Morgan Chase

I see. That's very helpful. And then lastly, is the demand trend in paint stores weaker or stronger than the demand trends in the consumer group?

Chris Connor

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

Jeffrey Zekauskas – JP Morgan Chase

What's your tax rate for the year?

Sean Hennessy

'08 was —

Jeffrey Zekauskas – JP Morgan Chase

For '09, I'm sorry.

Sean Hennessy

It will be in that same ballpark of 33.

Jeffrey Zekauskas – JP Morgan Chase

Okay. Thank you very much.

Chris Connor

Thanks, Jeff.

Operator

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

Greg Melich – Morgan Stanley

Hi. Thanks. A couple of questions; one is on SG&A. I realize you are not going to give us the number given the volatility, but you did get it to drop in dollar terms, a percent in the fourth quarter, which is a real trend from earlier in the year, (inaudible) setbacks. What could you reasonably do this year in terms of SG&A dollars, especially given the pension extension which you've already highlighted which make it a couple percent of headwind?

Sean Hennessy

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

Greg Melich – Morgan Stanley

Maybe just operationally, would it be hours in the stores? Would you consider maybe some stores not being open as long as you are or just give us some flavor there?

Chris Connor

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

Greg Melich – Morgan Stanley

Right. And then a second — could you give us just the numbers — not the forecast, but where we actually finished for all of 2008 in terms of raw materials, pricing, and volume?

Chris Connor

For the company?

Greg Melich – Morgan Stanley

Yes.

Chris Connor

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

Greg Melich – Morgan Stanley

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

Chris Connor

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

Greg Melich – Morgan Stanley

Okay. And on the other, the volume and the price, again it's historic not —

Sean Hennessy

Yes. I mean, the bottom line is, is we've never broken out our sales between volume, price, mix, those type of things, because we have paint in gallons, we have units in Minwax, we have units in brushes and rollers and so forth, so it could be really misleading. We just don't answer that question.

Greg Melich – Morgan Stanley

Okay. Well, is it fair to say that the third quarter to fourth quarter deceleration in comps, which I guess was what, 500 basis points give or take —

Sean Hennessy

Yes.

Greg Melich – Morgan Stanley

That all of that and then some was volume.

Chris Connor

Correct.

Sean Hennessy

Yes.

Greg Melich – Morgan Stanley

I mean, that is —

Sean Hennessy

Yes. Intuitively, if the price increases one end, sales performance as a negative number was not as negative as the buy in.

Greg Melich – Morgan Stanley

Great. Thanks a lot.

Chris Connor

Thanks, Greg.

Operator

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

[Omar Lee] – Cleveland Research Company

Good morning. This is Omar Lee (ph) in for Eric.

Sean Hennessy

Hey, Omar.

[Omar Lee] – Cleveland Research Company

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

Chris Connor

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

And then also I mentioned the change in pension, we have to expense — we're going to have $0.08 hit in the first quarter that we didn't have in the fourth. So, adjustments to the final year numbers and then the pension, that's the reason why.

[Omar Lee] – Cleveland Research Company

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

Chris Connor

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

[Omar Lee] – Cleveland Research Company

About mid teens or greater?

Chris Connor

Yes.

[Omar Lee] – Cleveland Research Company

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

Chris Connor

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

[Omar Lee] – Cleveland Research Company

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

Sean Hennessy

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

[Omar Lee] – Cleveland Research Company

Okay. Great. Thank you, guys.

Chris Connor

Thanks, Omar.

Operator

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

Steve O’Neil – Hilliard Lyons

Good morning.

Chris Connor

Good morning, Steve.

Steve O’Neil – Hilliard Lyons

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

Bob Wells

Sure. Yes, hang on.

Steve O’Neil – Hilliard Lyons

Otherwise I am going to add them up incorrectly and I'm going to do them wrong (laughs).

Chris Connor

For the year, the goodwill and trademark impairment was $46 million, and of that we took 22.5 million in the fourth quarter and 23 in the second quarter. And we also took, and I'm sitting here looking for the breakout here —

Steve O’Neil – Hilliard Lyons

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

Bob Wells

Okay. Steve, I think in our press release, we do break down the impairment charges by segment, and the paint stores (audio silent 00:58:30 - 00:58:33) group, the increased asset impairment charges were 42.7 million for the year and 22.3 million in the quarter, and that's just the year-over-year change.

Steve O’Neil – Hilliard Lyons

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

Bob Wells

That's correct.

Steve O’Neil – Hilliard Lyons

So, you said it was a $3.8 million increase in the consumer group for the quarter, what was it in absolute dollars?

Bob Wells

It was 8.1 million for the consumer group in the fourth quarter of '08 —

Steve O’Neil – Hilliard Lyons

Okay.

Bob Wells

— and 4.2 in the fourth quarter of '07.

Steve O’Neil – Hilliard Lyons

Okay. And see that's very well — okay, that's fine, because 4.2 and 3.8 is eight, but I was rounding, but okay, that's fine. And then it was 11 million a year ago in the global group —

Bob Wells

That's correct.

Steve O’Neil – Hilliard Lyons

But you said 11.6 or so was actually a positive 0.6 — I think somebody asked this earlier. It was actually positive 0.6 in the fourth quarter.

Chris Connor

Yes. Last year we were going up against history of 11.6, and the impairment this year was 800,000, a positive of 10.7.

Steve O’Neil – Hilliard Lyons

For the quarter?

Chris Connor

That's correct.

Steve O’Neil – Hilliard Lyons

Okay. But then you said 10.8 million for the year, but I thought there were — or is that just the absolute number because if that was the only charge for the year last year was 11 million.

Chris Connor

Yes.

Steve O’Neil – Hilliard Lyons

Okay. And then I think I can figure it out from there. Or what was — just to be sure in the consumer group for the full year of 6.6 million? What was the asset number for the year for the consumer group?

Sean Hennessy

Impairment, 11 million dollars.

Steve O’Neil – Hilliard Lyons

Even for the consumer group?

Sean Hennessy

Well, 10,975 — $10,975,000, I rounded to 11.

Steve O’Neil – Hilliard Lyons

And then I think this was asked earlier and I just want to follow up about the loss on assets sale, that would have been — that would not have occurred in the corporate or in the administrative, that would have actually been extracted from the consumer group operating profit?

Chris Connor

That's correct.

Sean Hennessy

Yes it is.

Steve O’Neil – Hilliard Lyons

And then along the same lines, the foreign exchange impact is not something that's accumulated (inaudible) gone into the global group operating income?

Sean Hennessy

Yes.

Steve O’Neil – Hilliard Lyons

Okay. So both of those figures are understated by those factors then?

Sean Hennessy

Yes.

Steve O’Neil – Hilliard Lyons

Okay, great. Thank you very much.

Chris Connor

Thanks, Steve.

Operator

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

Dennis McGill – Zelman & Associates

Hi, guys.

Chris Connor

Hey, Dennis.

Dennis McGill – Zelman & Associates

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

Sean Hennessy

No.

Chris Connor

No. Nice try, Dennis.

Dennis McGill – Zelman & Associates

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

Chris Connor

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

Dennis McGill – Zelman & Associates

Okay. And on your end channels you mentioned through the quarter it was fairly comparable in total, where there any more significant changes on a relative basis by end channel that either — I don't know if it would have to be weaker, but that got weaker through the quarter?

Sean Hennessy

In terms of specific customers?

Dennis McGill – Zelman & Associates

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

Chris Connor

You know, the one market that we've commented that has been doing slightly better in this environment is the property management market. As folks get out of homes that they don't belong in and move back into rental equipment, that segment is done marginally better, but still negative.

With that modest little trend, all of them are pretty consistently down significantly.

Dennis McGill – Zelman & Associates

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

Chris Connor

90% will go to the segments.

Dennis McGill – Zelman & Associates

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

Sean Hennessy

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

Dennis McGill – Zelman & Associates

Okay. Thanks a lot, guys.

Chris Connor

Thanks, Dennis.

Operator

Thank you. Our next question is coming from Vlad Arkimono (ph) of Coastal Capital Management.

[Vlad Arkimono] – Coastal Capital Management

Hey, guys.

Chris Connor

How are you doing?

[Vlad Arkimono] – Coastal Capital Management

Good. My question is on the guidance. Basically, as I can see it, you're projecting very steep declines in revenue in first quarter, and EPS of roughly a quarter of last year's EPS. And then you proceed on the call to state that you see no improvement whatsoever in the environment coming, and at the same time, you project a full-year EPS that implies a very big turnaround in the remainder of the year, and the same for the revenues.

So, how can you possibly project such a huge turnaround and an implied EPS for the remaining three quarters in the year that are roughly the same as the three quarters of EPS in '08, while the environment is dramatically, dramatically less.

Chris Connor

Yes, Vlad. I think when we're talking about the environment, the sense is that the demand has dropped to the second half of this year and it's kind of flat lining now at this level. At the current volume run rates and the guidance we're giving, as we go through the year we start to have much better favorable comparisons. This is the worst quarter that we're going to have in terms of volume and also in terms of raw material cost impact on a year over year.

So, as the year goes on, if we don't see further deterioration on the demand side, our visibility at this point in time would indicate to your point that the subsequent quarters get a little bit better. And then we don't have quite the deterioration in earnings that we've seen in this first quarter. That's the best we can tell you at this point in time.

Sean Hennessy

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

[Vlad Arkimono] – Coastal Capital Management

I understand on the pension and on the impairment stuff, which I acknowledge them, but they don't seem to be the defining factor. But I just wanted to come back to the comparisons becoming easier. How are comparisons becoming easier when the second quarter of last year was quite good and the third quarter was not bad either while —

Chris Connor

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

[Vlad Arkimono] – Coastal Capital Management

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

Sean Hennessy

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

[Vlad Arkimono] – Coastal Capital Management

All right. Thanks.

Chris Connor

Thank you.

Operator

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

Bob Wells

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

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

Operator

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

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