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Sherwin-Williams Company (NYSE:SHW)

F1Q08 Guidance Call

March 24, 2008 11:00 am ET

Executives

John Ault – Vice President, Corporate Controller

Chris Connor – Chairman, CEO

Sean Hennessy – CFO, Senior Vice President of Finances

Bob Wells – Vice President, Corporate Communications

Analysts

[Louka] for Jeff Zekauskas – JP Morgan Chase & Co.

Chuck Cerankosky – FTN Midwest Securities

[Dennis McGill] – Zelman & Associates

Saul Ludwig – Keybanc Capital Markets

Robert Koort – Goldman Sachs

Robert Fellice – Gobelli & Company

Prashant Juvekar – Citigroup

Gregg Goodnight – UBS

[Robert Ritzes] – Bear Stearns

[Roguel Orghawa] – Marathon Asset Management

Eric Bosshard – Cleveland Research Company

John Roberts – Buckingham Research

Alex Mitchell – Scopus Asset Management

Operator

Good morning. Thank you for joining us this morning for Sherwin-Williams Company’s Updated Sales and Earnings Expectations for the First Quarter and Full Year 2008. This conference call is being webcast simultaneous in listen-only mode by VCall via the Internet at www.sherwin.com. An archived replay of this webcast will be available at www.sherwin.com beginning approximately two hours after this conference call concludes and will be available until Friday, April 11, 2008, at 5:00 p.m. Eastern Standard Time.

This conference call will include certain forward-looking statements as defined under U.S. federal security laws with respect to sales, earnings, and other matters. Any forward-looking statements speaks only as of the date on which such statements is made, and the Company undertakes no obligation to update or revise and 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 the Company’s updated sales and earnings expectations, we will open the session for questions. I will now turn the call over to Chris Connor, Sherwin-Williams Chairman and CEO. Thank you, Mr. Connor. You may begin.

Chris Connor

Thanks, Anthony; and good morning, everyone. Joining me this morning in the call are Sean Hennessy, our CFO; John Ault, our Vice President, Corporate Controller; and Bob Wells, our Vice President of Corporate Communications.

Today we’re updating our sales and earnings per share expectations for the first quarter and full year 2008 that we previously announced on January 29th of this year.

For the first quarter we now expect consolidated net sales to increase in the low single-digit percentage range over the first quarter of 2007. Our previous expectation had been for low to mid single-digit percentage increase. We expect diluted net income for common share for the quarter to be in the range of $0.56 to $0.61 per share compared to the $0.72 to $0.80 per share guidance we provided in January.

As a reminder, the Company reported $0.83 per share in the first quarter of 2007. The lower anticipated earnings per share is due primarily to the negative impact on first quarter operations of lower domestic sales and the timing and severity of raw material cost increases.

For the full year 2008, we are reaffirming our prior consolidated net sales expectation of low to mid single-digit percentage increase of 2007. We anticipate diluted net income for common share for 2008 will be in the range of $4.70 to $4.85 per share. Earnings per share guidance we provided in January for 2008 was in the range of $5.00 to $5.15 per share. The Company reported diluted net income for common share of $.4.70 for the full year 2007.

Our lower expectation of diluted net income for common share for the full year 2008 relates primarily to the first quarter shortfall and the expected continuation of the sluggish U.S. economy and housing market that will be partly offset by improved international operations.

We are disappointed that today’s news ends a consistent track record of meeting or exceeding quarterly earnings guidance through some very difficult market conditions over the past several years. The length and severity of the housing market decline has caused a business and segment mix change that is contributing to this earnings shortfall.

For example, our comp-store performance for our paint store segment will likely finish down in mid single digits for the first quarter, while our global segment is expected to report sale percentage gains in the mid to high teens. This mix change towards our lower operating margin business, coupled with increasing raw material input costs will likely result in a reduction in a reduction in our margin performance.

Appropriately the Company is well under the execution of a number of contingency programs to adjust to the current market environment. We are well underway in implementing selective expense and headcount reductions in our plants, distribution centers, and paint stores. These actions are in keeping with our discipline of prudent SG&A management and will begin to have an impact in the coming quarters.

While we intend to continue our aggressive new store opening program, we will accelerate our plans to close redundant store locations from recent acquisitions. This combined activity of openings and closings should give us an additional 40 to 50 net additional stores by the end of 2008, down from our previous guidance of approximately 100 net new stores.

We’re confident that our cash generation remains on track. It should once again be in the range of 10% to sales as it has been for the past several years. We intend to use this cash consistent with our past practices to continue to create shareholder value.

Looking forward, domestic market conditions remain very challenging with no apparent end in sight. While we can’t control or predict when the cycle will change course, we will continue to focus our efforts on strengthening the Company in preparation for the eventual rebound and importantly remain committed to generating an improved earnings per share performance year in 2008.

With these brief introductory comments behind us, we now welcome your questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions) Our first question comes from the line of Jeff Zekauskas of JP Morgan Chase. Please state your question.

Louka for Jeff Zekauskas – JP Morgan Chase & Co.

Good morning. This is Louka for Jeff.

Chris Connor

Good morning, Louka.

Louka for Jeff Zekauskas – JP Morgan Chase & Co.

Good morning. Can you talk about the sources of the demand shortfall and what’s weather-related and what’s absolutely lower demand that you’re experiencing?

Chris Connor

Louka, I would tell you that we are not crediting any of this shortfall to weather; and while we’ve come through the first quarter which is typically our most aggressive weather quarter, it’s been consistent weather patterns as we’ve seen in past years. So our guidance here is 100% related to the softness in the market. As we gave a brief comment on the call, our stores are really feeling the brunt of it and particularly in the area of low sales that we have to the new housing market. Our DIY Segment is down as well. For the first time in quite some period of time, our residential repaint market is flat to slightly down. That’s the market where paint core contractors to homes that have been recently sold or purchased is also indicated, and we’re seeing a slowdown in the existing home turnover and we’re feeling that through that store segment as well too. So those are the three areas that we’re feeling the pressure right now.

Louka for Jeff Zekauskas – JP Morgan Chase & Co.

If I can ask a question on the raw materials, which raw materials are opposite solvent-based; is it acrylics; is it TI02? Can you just comment about it?

Chris Connor

Certainly the oil derivative and natural gas derivative raws are the ones that are having the biggest impact on us right now. We’ve seen oil go from $75 a barrel in the second half of last year up towards $90 a barrel in the fourth quarter and last week up at $111 spike. So those derivative products have certainly been impacted. Those price increases have come quicker than we anticipated.

Louka for Jeff Zekauskas – JP Morgan Chase & Co.

So that’s mostly solvent-base then?

Chris Connor

There’s a lot of derivatives that come off of the fuel cost for our Company, etcetera. Then the natural gas, where a lot of the ethanol and propylene costs are driven which impacts our packaging and other chemical (inaudible) etcetera. That’s also spiking as well too. So pretty much across the board with all of the solvent-based backdrop raws we’re seeing an increase.

Louka for Jeff Zekauskas – JP Morgan Chase & Co.

Thanks so much. I’ll get back into queue.

Operator

Our next question comes from the line of Chuck Cerankosky for FTN Midwest. Please proceed with your question.

Chuck Cerankosky – FTN Midwest Securities

Good morning, everyone. If we’re looking at some of the other aspects of the business, can you talk about what you’re seeing in industrial maintenance, OEM coatings demand, and also maybe talk specifically about the consumer segment and how that’s fairing in the current environment, please?

Chris Connor

Sure, Chuck, happy to. I think, starting with the commercial and industrial segments, our commercial business remains positive through our stores. I think in the fourth quarter/year-end call we have guidance at, we had seen those commercial markets performing probably in the mid to high single digits in 2007 and ’06. Our expectations were that in ’08 they would be positive but more in the low to mid single-digit range, and that’s proving to be the case. So while we’re still seeing some growth there, it’s just certainly slower than it had been in the past. That’ll be true for our industrial maintenance and protective coatings businesses as well, still positive but not as robust as they had been.

Our consumer segment, I think our guidance for the year is going to be that that segment is going to come in flat year-over-year and it’s trending right at that line as we speak.

Chuck Cerankosky – FTN Midwest Securities

Chris, just to go back to commercial, how would you compare new commercial coatings demand with commercial architectural repaint?

Chris Connor

New commercial coatings demand is going to be positive we think for the year in the low to mid single-digit range. Residential repaint for the segment?

Chuck Cerankosky – FTN Midwest Securities

I meant commercial repaint?

Chris Connor

Commercial repaint versus new construction, I don’t have that, Chuck. My guess is they’ll both be very comparable in that low to mid single digits probably.

Chuck Cerankosky – FTN Midwest Securities

All right, thank you.

Operator

Our next question comes from the line of Dennis McGill with Zelman & Associates. Please proceed with your question.

Dennis McGill – Zelman & Associates

Good morning, guys. Thanks for the quick call. Just quickly on the guidance for the year, I realize this is difficult, but you can put some perimeters around how much of the reduction in guidance would be material related; how much of it top line, and then how much of it is the mix that you’ve talked about?

Chris Connor

I would tell you that it is pretty tough, but I would tell you that the sales and the sales mix is probably 40% to 45% of that and then the remainder, the 50%/55% is probably the raws of the margin and the SG&A.

Dennis McGill – Zelman & Associates

Second question just having to do with price, if you could talk a little bit about within the comp store how much of that mid single digit decline was split roughly with the volume in price and then maybe as you look out this year with material costs going up and demand going down putting you in a top position on increasing prices. Anything that changes relative to what you guys have added to to start the year?

Chris Connor

Sure, fair question. As we commented in the January call, we have announced price increases across all segments in the range of 3.5% to 6.5% and those price increases are going in and being implemented pretty much on a historical pattern that we’ve seen in past years. To that end, with our comp stores down in the mid single digits, buying would be down slightly more than that, though some price impact helping offset that and all of the price impact has not felt yet as it’ll take us the remainder of 6 to 9 months to implement and get this one in.

Going forward, we would not be prepared to comment on any future pricing action the Company might take. We’ll continue to monitor the raw material market in our results and reserve the right to do that at a later time.

Dennis McGill – Zelman & Associates

Then just for the guidance for the year on the revenue line basically holding that flat but I suppose moving more towards the lower end of the prior range, can you just walk through why that stays in the low to mid single-digit range given the shortfall you’ve seen and then maybe your expectations for the year in some of the other segments?

Chris Connor

Yeah, you bet, Dennis. As we normally do, we can kind of breakdown our expectations by segment for you. For the year we expect our store segment to end sales, with sales flat and up slightly for the year. The consumer segment should report near flat sales and global up in the high single digits.

Dennis McGill – Zelman & Associates

All of those would include any currency or acquisition benefits, right?

Chris Connor

Yes.

Dennis McGill – Zelman & Associates

All right, thanks again, guys.

Operator

Our next question comes from the line of Saul Ludwig with Keybanc. Please proceed with your question.

Saul Ludwig – Keybanc Capital Markets

Good morning. On the administrative line, anything noteworthy that’s there? What should we be thinking about first quarter to first quarter, year-to-year on administrative?

Chris Connor

I think really there’s nothing noteworthy. I think we got through a lot of those quarter-by-quarter changes last year. I would say that we’re going to be flat to up slightly for the quarter and for the year, Saul.

Saul Ludwig – Keybanc Capital Markets

On the raw materials, when you gave your guidance on the 29th of January, by that time you would have locked in certainly your contractual pricing for the first quarter and you kind of knew what that was when you gave that guidance. Why is there such a surprise on the raw material front as regards to the first quarter given the negotiation that you would have had long before you gave your guidance?

Chris Connor

Yeah, I think that’s a fair question, Saul. When we gave guidance in the January call, that was really the work that we had been doing in the fourth quarter of 2007 to get to our best guess at that point in time. I would remind you to your point about our contractual agreements, while that’s accurate for some of our raw material suppliers, not all of them are on a contractual basis. So some of these raws that we purchase, we have to take a sooner rather than later per our contract agreement.

We’re also buying a lot of these things just costs to operate our business. Fuel costs happens to us pretty instantly and with the fleet of trucks delivering products to our stores, with responsibility for hauling these things around, I mean we’ve taken that impact directly. So some of them have come sooner than we expected, some of the contracts had clauses in them that allows them to be reset if certain input costs for them had changed and all those things came to pass in the first quarter.

Saul Ludwig – Keybanc Capital Markets

Given that the raw material acceleration is coming faster than you thought, why can’t you be more aggressive with regard to implementing your own prices which is sort of totally within your control? Why would you let the normal pattern, if you will, continue versus changing in line with the changes that have occurred in raw materials?

Chris Connor

Saul, we do have the ability to take those actions. We had announced pricing already for the first quarter that we’re implementing as we speak. As I mentioned to the earlier caller, we’ll continue to monitor our implementation of that and make a determination of additional pricing actions that are necessary later in the year.

Saul Ludwig – Keybanc Capital Markets

You also mentioned that you’re going to do some consolidation of stores and instead of having 100, you’re going to have 40 or 50. As you close some of these redundant stores, does that depth result in any expenses that you’re factoring into both the first quarter or the year that wasn’t there before? Secondly, you had this delusion as a result of the Bruder acquisition in the third and fourth quarters of last year, what the impact is to the Bruder acquisition having here in the first quarter; and is it in line with what you thought it would be or is that also a part of the revision in your estimates?

Chris Connor

Let me take the question regarding the stores, and I’ll ask Sean to comment on the M.A. Bruder acquisition specifically. Our intention to accelerate the closing of redundant store locations is not impacted the first quarter earnings performance, and the costs that will incur in closing them will be modest at best. We will perhaps face some said rent in some locations; but for the most part, these are locations that are coming up on lease. We have opportunities to consolidate them into nearby stores. This will go both ways. For example, we’ll close some Sherwin stores and move the business into the neighboring acquired store location and vice versa depending on the power of the individual real estate, so none of the planned closings of those stores are included in this first quarter.

To that, I’ll turn it over to Sean to comment on the MAB acquisition specifically.

Sean Hennessy

When you take a look at the MAB acquisition in total, Saul, the backroom synergies have come and we’ve done very well. Again, Chris just mentioned that we’re looking at some of the store closings on the store side and what that’s going to do. MAB be just because of the cycle that we’re in with the sales does not hit every pro forma that we’ve had set. But in total, the backroom synergies has been good. The first quarter we will be dilutive in the MAB transaction because of their sales. They’re in the north and so basically they are going to be dilutive in the first quarter just like they were in the fourth. But we start to see in the second and third quarter and again as you point out in the third quarter, we went against some good size expenses for MAB in those quarters and we see that actually in the third quarter. We should have some kind of flow through compared to last year.

Saul Ludwig – Keybanc Capital Markets

So that dilution that you’re going to see in the first quarter, there’s not a change in that as it impacted your changing guidance?

Sean Hennessy

No.

Saul Ludwig – Keybanc Capital Markets

The bad debts that you took on with Bruder, are they now all cleaned out so that we’re not going to see any unusual amount of bad debts?

Sean Hennessy

Yes, and that’s what the footnote was last year in the third quarter when we did those write-offs.

Saul Ludwig – Keybanc Capital Markets

Great. Thank you very much.

Operator

Our next question comes from the line of Bob Koort from Goldman Sachs. Please proceed with your question.

Robert Koort – Goldman Sachs

Thank you. Good morning. Could you guys talk a little bit if you’ve seen much regional disparity or is it pretty much now? There was, for a while there it was coast, the coast were suffering the most. Is it now pretty well cross country or is there still greater pain around the cost?

Chris Connor

New home construction market we’re still feeling primarily in the Sun Coast markets a much more aggressive decline – Florida, the Carolinas, Southwestern part of the United States. But that has been joined now by, to your point, a much more consistent softness in the existing home turnover and other markets across the entire United States.

Robert Koort – Goldman Sachs

Chris, would you ever consider putting in some sort of index escalator into your price deck so that you could go to your customer-base and say, “It’s not the us, it’s the raws.” Or does that then take away the opportunity if raw materials ever do fall to sort of get your payback as your prices are a bit stickier?

Chris Connor

Yeah, we’ve not historically used that as a pricing mechanism and I don’t think there’s any plans to switch to it.

Robert Koort – Goldman Sachs

Then last question, obviously the economy is weak, that’s causing credit issues for consumers, to what extent have you seen any increased price elasticity? In other words, are consumers not buying as much paint because they’ve got other problems or is there at some point a price threshold where they’ll stop buying paint specifically?

Chris Connor

That’s an interesting question. I don’t have the answer to that. Through past cycles we have consumers willing to continue to buy quality products. We’ve not seen a significant mix change down to lower quality products in our group, so I would think that isn’t at play here. I think it’s just an overall softness and slowdown in demand.

Robert Koort – Goldman Sachs

Perfect. Thank you.

Operator

Our next question comes from the line of Robert Fellice with Gobelli & Company. Please proceed with your question.

Robert Fellice – Gobelli & Company

Hi guys. Most of my questions have been answered, just a couple more. If I looked, you lowered your guidance by $0.30 for the year, and the shortfall during the quarter is $0.16 to $0.24. It would suggest that as the year progresses, you’d expect some of these issues to taper off or be less of a headwind. I guess I’m wondering what your assumptions are for the rest of the year in terms of price cost gap; how much you expect raw material costs to rise? Then domestic demand, whether or not you expect that to improve a bit on a sequential basis as the year progresses or at least we near the back half of the year?

Sean Hennessy

You’re correct. I mean when you take a look at the, you asked numerous questions, I’ll try grab as many as I can if I remember here. But when you ask about that price gap, as Chris mentioned in the beginning in mid December timeframe in the first quarter, we’ve been implementing a 3.5% to 6% selling price increase (inaudible). If the past is any indication, we’ll get 80% to 85% (inaudible) year. We’re less than that right now, but as time goes on, it usually takes 6 to 9 months to really get most of that, so that’s going to continue to help us.

When you take a look at the SG&A actions that we’ve taken, in the short-term it won’t be as much goodness from the forecast, but by the third and fourth quarter we see that also helping us. So those are the types of transactions or the actions that we’ve taken that we think will help us and will alleviate the negativeness that we have in the first quarter and actually be able to give you guidance in that $4.70 to $4.85 range.

Robert Fellice – Gobelli & Company

By the third and fourth quarter, do you expect demand to pick up on a sequential basis?

Chris Connor

No, I think our forecast here are based on the current market environment that we’re seeing. I think in the comment we said we don’t see it ending any time soon. Our guidance is based on the actions we’re taking to get the Company positioned to generate the earnings guidance we’ve just given.

Robert Fellice – Gobelli & Company

Then if I remember correctly in your fourth quarter, you expected raw material cost inflation for the year between 3% and 6%. Have you revised that at all?

Chris Connor

Yes, we’re revising that today. We now think given the current levels of raw inputs that we expect the industry will take a 4% to 8%.

Robert Fellice – Gobelli & Company

Then in terms of the first quarter, can you just comment as to how much costs were up year-over-year and how much pricing you got?

Chris Connor

It would be in that 3% to 6% range, towards the high end. We’ve told you that we announced pricing in the 3.5% to 6.5% range and we’re moving towards, as Sean said, about a 80% expected full pricing implementation. But that’ll take us probably the better part of into the third quarter to get it, so we’re right on track with where we ought to be moving towards that as a goal.

Robert Fellice – Gobelli & Company

So that’s 6% cost inflation in the first quarter and pricing of maybe 2% or so out of that 3.5% to 6.5%, is that fair?

Chris Connor

You’re not directionally far off.

Robert Fellice – Gobelli & Company

Okay, which would suggest to me if you’re raw material costs are 50% of your cost and you’re off on pricing by maybe a percent to percent and a half.

Chris Connor

That’s not far off either.

Robert Fellice – Gobelli & Company

Thanks for taking my call.

Operator

Our next question comes from the line of PJ Juvekar with Citigroup. Please proceed with your question.

Prashant Juvekar – Citigroup

Can you talk about pricing in consumer segment division? You talked about your own stores, but what’s going on in consumer division? What’s your intuitions about price increases at big boxes this year?

Chris Connor

Consumer segment is included in our comments that across all segments we’ve instituted 3.5% to 6.5% price increases. Those conversations have been presented and are taking place, and we expect all of our customers to eventually get in line. As we have commented in the past, our larger retailing partners are more difficult pricing discussions for us to have. But I think given the current market conditions and the support and the need for this, those activities are moving along at the appropriate pace.

Prashant Juvekar – Citigroup

So would you say, Chris, that the discretions with the big boxes pricing is probably less than at 3.5% to 6.5% that you talked about?

Chris Connor

We wouldn’t comment specifically on any one customer or reaction or negotiations. I’m only comfortable telling you that we’ve taken pricing in the range of 3.5% to 6.5% to all customers, including the big boxes and those conversations are ongoing.

Prashant Juvekar – Citigroup

Then secondly, as our outlook changes, is there a change in the way you use your free cash flow this year?

Sean Hennessy

No, I think that we’re still out there looking at acquisitions. I think we announced Inchem. We also announced that we completed a deal with Becker Powder earlier this year, and we’re still going to be using it to increase shareholder value.

Prashant Juvekar – Citigroup

How actively are you looking at global acquisitions to globalize the business, which is truly a predominately U.S.-based?

Chris Connor

Last year with the seven acquisitions we announced, four of them were outside the United States. Sean just mentioned the two we’ve announced this year. One of them was located in Singapore. So as we go forward, we’ll continue to look for those opportunities outside North America.

Prashant Juvekar – Citigroup

Thank you.

Operator

Our next question comes from the line of Gregg Goodnight with UBS. Please proceed with your question.

Gregg Goodnight – UBS

Yes, a question for you. In terms of the same-store paint segment revenue growth, you said down mid single digits.

Chris Connor

Correct.

Gregg Goodnight – UBS

Including up tick from M&A, what would you think the total revenue growth per paint store? Is it going to breakeven or be slightly negative or?

Sean Hennessy

It’s going to be breakeven to slightly negative, right in that area.

Gregg Goodnight – UBS

Maybe down a couple percent even, huh? Is that the first time that’s ever happened?

Sean Hennessy

No, it happened back in 2001 one quarter. There was a quarter in 2001 and prior to that it’s been awhile.

Gregg Goodnight – UBS

I’m talking for the entire year, has it ever happened for the entire year?

Chris Connor

We’re 142-year-old Company, Greg, (inaudible). We’ve been through this one before. I can’t pull that year off the top of my head.

Gregg Goodnight – UBS

Very good. Commercial construction, would you comment on the direction you’re seeing with respect to new commercial construction?

Chris Connor

Sure, we rely on the McGraw-Hill’s Dodge Reports to comment on that, and I think the fourth quarter when we were discussing with this the investment community, we were relying on documents from them that talked about positive year-over-year new construction. We’ve watched those reports wane in terms of their confidence and robustness and I think the guidance that we’re giving now or expecting is that that segment is going to be flat to up low single digits as compared to past practices where it was in the mid to high single digits.

Gregg Goodnight – UBS

That’s all I had, thanks.

Sean Hennessy

Greg, one clarification: On your first question, our outlook for stores for the year is to be flat to up slightly, not down slightly.

Chris Connor

I thought you meant the first quarter, Greg.

Gregg Goodnight – UBS

That is including the perhaps 50-store shutdown from your acquisition?

Chris Connor

Yes, that would be consolidated revenue based on all the guidance and actions that we’re taking this year.

Gregg Goodnight – UBS

Great. Thanks again.

Operator

Our next question comes from the line of Robert Ritzes from Bear Stearns. Please proceed with your question.

Robert Ritzes – Bear Stearns

Just some questions: One, do you think you guys lost any market share in the first quarter or is this generic to the whole industry?

Chris Connor

It’s difficult to make that determination until we see some industry data. Anecdotally just talking with our folks, we don’t think this is a market share decline as much as it’s just an entire sector softness.

Robert Ritzes – Bear Stearns

The second question is: You guys, it was asked a couple ways differently. On the industrial non-residential, was that also weak or weaker than you thought in line with what you thought? I’m just curious in your outlook if you have any visibility in there?

Chris Connor

I think we gave guidance that those numbers would be weaker than they have been historically, and the results were in line with our expectations.

Robert Ritzes – Bear Stearns

Thanks.

Operator

Our next question comes from the line of Roguel Orghawa with Marathon Asset Management. Please proceed with your question.

Roguel Orghawa – Marathon Asset Management

Hi. Thanks for taking my question. I have two questions. One is in terms of the raw material cost inflation you’ve seen. It’s a first for a lot of things in the (inaudible). Just wanted to get your perspective, if you see another 10%/20% move in oil up tick and gas up tick, where do you see the biggest stress on the business – volumes, margins?

Chris Connor

Well it’s difficult predict whether that would happen. If it did happen I think what you would see, the risk to us would be in the raw material input cost and impacting on our margins. Just as we’ve given guidance that an industry would take 3% to 6% price increase year-over-year, now we’re adjusting that cost increase to be 4% to 8%. You can see the corresponding margin impact that’s had on our company and probably some of our peers as well. So if it continues to go higher, we’ll feel that in the margins and in the pricing impact.

Roguel Orghawa – Marathon Asset Management

So what you’re saying, you don’t see much (inaudible) from the demand say from these every increasing raw material costs?

Chris Connor

We think the demand side is mostly driven by the housing environment. That’s more of a financing issue where interest rates are high and there’s significant inventory in the market as it boosts any kind of pricing that’s driving that.

Roguel Orghawa – Marathon Asset Management

The second question, I may be restating an older question on the same (inaudible). You gave your last guidance here a certain view of (inaudible) as to how the first quarter will pan out and how the full year will pan out and given where you are right now you’ve reduced the first quarter guidance significantly. It seems like the full year is primarily the first quarter impact and driving a change for the rest of the quarters. I was wondering as to why you haven’t changed your outlook for the rest of the year more so versus what you thought it would be when given the initial (inaudible)?

Sean Hennessy

When we see that $0.30, we think that’s pretty dramatic, what we think it’s going to be down. On the sales side, we sit there and take a look at what we think by the different markets and so forth and we’ve looked at… Looking to the outside, we think that the sales will not be the biggest impact. It’ll probably be the other factors, but we brought our sales down a little bit for the year, but it’s really the $0.30, and taken it from $4.70 to $4.85 from the $5.00 to $5.15.

Roguel Orghawa – Marathon Asset Management

.

I see what you’re saying, maybe I didn’t say it very good. Where I was coming from was off the $0.30/$0.20 seems to be coming from the first quarter itself.

Chris Connor

Right, we definitely see that most of the (inaudible) we’re going to take this year was in the first quarter. I think as we reviewed the investment community in this call this morning, the action steps that management has taken and our confidence that those steps are going to have an impact on our results for the remainder of the year gives us the confidence to give the guidance we just had.

Roguel Orghawa – Marathon Asset Management

Thank you.

Operator

Our next question comes from the line of Eric Bosshard with Cleveland Research Company. Please proceed with your question.

Eric Bosshard – Cleveland Research Company

Morning. In terms of, Chris, the comment you just made that the steps you’re taking to mitigate what’s going on is why 2Q to 4Q gets better. I’m assuming that the price increase is much more important than the SG&A, but can you characterize the relevant importance of those two factors in terms of improving the results as we work through the year?

Chris Connor

I’d say that I wouldn’t agree with you. I think the SG&A reductions are as important this year as pricing. In past years, we’ve gone through this cycle and we’ve put a lot more emphasis on price; and while that’s as important as it has been historically, this year we’re putting much more emphasis on getting these SG&A reductions to get them in line with what our revenues are going to be. So there’s a lot of effort and energy right now in the Company getting those costs out and aligned appropriately with the expectations we had for the rest of the year.

Eric Bosshard – Cleveland Research Company

The big piece, are there any big pieces or buckets within the SG&A reductions that you could highlight?

Chris Connor

No, I don’t think so. There shouldn’t be. If the Company is appropriately managed, we shouldn’t have huge opportunities to lope off of bodies, and that’s the case here. This is happening store-by-store, factory-by-factor, distribution center-by-distribution, throughout our corporate headquarters here, flattening out organizations, just appropriately reducing headcount wherever we can.

Eric Bosshard – Cleveland Research Company

In terms of the opens, I understand the net, where the net goes, but in terms of the gross opens, what’s changed in that area in terms of how many stores you’re going to open?

Chris Connor

Not a lot. As we’ve commented in the past, this process of negotiating and selecting outstanding retail locations is an activity that happens well in front of the store actually opening. So as we enter into this year, we had probably 60 to 70 of those 100 net new locations kind of in the bag already. We’ll slow that down a little bit and probably maybe net new get another 10/20 on top of the 60 we entered the year with. But as we speak, we’re working on store locations that we intend to open in 2009, so the pace is continuing, a little bit slower on the total openings and the net, to your point, down to that 40 to 50 range.

Eric Bosshard – Cleveland Research Company

Lastly, Sean, can you give us any sense on the gross margin for the year? I guess in quickly going through my numbers, maybe it looks like the full year gross margin ends up down a half point or a bit more than that with the first quarter a point and a half. But can you give us any guidance on the gross margin?

Sean Hennessy

I would tell you that we really wanted to avoid going through the full model and talk about margin and an SG&A and so forth, but I wouldn’t have a big argument with the numbers you just quoted.

Eric Bosshard – Cleveland Research Company

As you think about ’09, which is a ways away, is this… Historically we’ve seen sometimes multiyear step downs in gross margin, is this something that is more likely focused as ’08 and then you could stop your gross margin decline and start to recapture this in ’09? Is there anything from a big picture standpoint, you could comment on that?

Sean Hennessy

I would tell you that really it’s going to come down to the raws and we’ll probably have a better idea of what we think the raws will be in 2009 in another two quarters or so. But right now we’ve… Our thoughts would be that it would be able to maintain our margin in ’09.

Eric Bosshard – Cleveland Research Company

Thank you.

Operator

Our next question comes from the line of John Roberts from Buckingham Research. Please proceed with your question.

John Roberts – Buckingham Research

Morning, guys. Would you characterize this as bad as the period right after 9/11? I mean that was the last really weak period I think you referred to (inaudible) response?

Chris Connor

Yeah, it’s interesting. It’s very different from that period too. I mean that was much of a corporate driven decline where corporate profits were down; we saw very little spending on infrastructure. Our industrial maintenance businesses were down significantly. This one is much broader because it’s a housing market which impacts literally every little town in America. So from a steepness, yes; but from a flavor, very different.

John Roberts – Buckingham Research

Secondly, the big box retailers sometimes can move their inventories around a lot. You’re not… It doesn’t sound like an inventory reduction at your consumer segment is an issue here?

Chris Connor

That’s correct.

John Roberts – Buckingham Research

Lastly, are you facing down pricing in any markets?

Chris Coonor

As we’ve commented in the past, particularly through our stores organization when we’re bidding on larger jobs and in a period of low demand sometimes pricing will be lower year-over-year, we’ve always experienced that. We’re experiencing some of that as we speak. But for the most part, as we commented, these price increases are going in and we do expect that on average we’ll have higher selling prices this year.

John Roberts – Buckingham Research

Thank you.

Operator

Our next question comes from the line of Mathuel Claval with Silver Point Capital. Please proceed with your question.

Mathuel Claval – Silver Point Capital

Yes, hi. Good morning. I was wondering if you could give us a sense of the volume decline in Q1 and your expectation for the full year on an (inaudible) basis in the U.S.?

Sean Hennessy

On the volume we probably will comment at the end of the first quarter and probably give you some guidance then. We’re not prepared to today.

Chris Connor

I think we had talked about just anecdotally we had said on the call, for example, our comp stores were down mid single digits and volume was a little more backwards than that with the Company in the low to mid single digits for the quarter and some pricing, volumes going to be flat to backwards slightly. As Sean said, we’ll give you that much more closely on the April 22nd call when we close the quarter.

Mathuel Claval – Silver Point Capital

In terms of the 4% to 8% increase in raw material prices, could you give a rough (inaudible) of what’s coming from oil prices and from packaging, (inaudible)…

Chris Connor

We don’t really have that information available for this call. I’m sorry.

Mathuel Claval – Silver Point Capital

Thank you.

Operator

Our next question comes from the line of Alex Mitchell with Scopus Asset Management. Please proceed with your question.

Alex Mitchell – Scopus Asset Management

Good morning. Are you budgeting in the higher marketing and promotional spend in this environment going forward?

Chris Connor

I don’t have that number in front of me either. My guess is no.

Alex Mitchell – Scopus Asset Management

So it would be comparable including the seasonal pickup and comparable to…

Chris Connor

It’ll be flat plus or minus a few points from last year’s level.

Alex Mitchell – Scopus Asset Management

Just finally, will the tax rate be consistent with your previous guidance.

Sean Hennessy

Yes, I think we said that we would be in the low 30s and 33% range for the year, and we think that the first quarter will be comparable to that.

Alex Mitchell – Scopus Asset Management

Thank you very much.

Operator

Our next question comes from the line Chuck Cerankosky from FTN Midwest. Please proceed with your question.

Chuck Cerankosky – FTN Midwest Securities

Sean, I want to follow-up a little bit about maybe some of the cash flow implications of the things you’ve been talking about. With regard to looking at the full year, any cash coming in from asset sales as you back off on some of these redundant stores? What’s the cap ex budget for this year? What’s the implication for your working capital needs?

Sean Hennessy

I would tell you that we’re working… I’ll take them in reverse order. When you take a look on the cap ex, I think our cap ex is going to be probably a little lower than the 165 that we told you earlier in the year. As far as asset sales, when you take a look at them… I mean there’s, last year I think we had an asset sale on a piece of property in (inaudible) and we’re looking at a couple little things, but we really don’t have any assets of significance for sale right now, Chuck.

Then the working capital, we’re spending a lot of time working on collecting those receivables and really inventory. So we think that we still will have, even with the sales implications, it’s tough to have working capital improvement, but we still have a goal, and we still have an idea that we can get working capital improvements this year.

Chuck Cerankosky – FTN Midwest Securities

Is the challenge with the reduced sales because the cost of the raws are going up?

Sean Hennessy

Well that’s a challenge but also just as a percent of sales, as we’ve increased, we’ve done a few acquisitions and with the low selling price, low sales increase just when you’re averaging over the year, it’s just tough to have more assets from acquisitions and have lower working capitals percent of sales because your sales are in the low single digits, call them 1% to 3% and just trying to get your working capital below that, it’s sort of tough.

Chris Connor

In fact too, Chuck, as you think about is the working capital percentages we enjoy domestically through our stores business compared to the working capital of our global segment is stronger. So as our global business grows faster and the mix changes that way, that has a negative impact on the working capital as well. So to Sean’s point, even with all those factors in play here, we’re still pushing towards a flat to perhaps tightly improved working capital year.

Chuck Cerankosky – FTN Midwest Securities

All right. Thanks.

Operator

(Operator Instructions) You have a follow-up questions from the line of Saul Ludwig from Keybanc. Please proceed with your question.

Saul Ludwig – Keybanc Capital Markets

Chris, with the guidance that you’ve given for the full year, looking at sort of from a macro picture, we’re starting off the year pretty weak, very, very soft comp-store sales, that’s a function of the housing, the less housing turnover, all the points that you made. What assumptions have you made about the macro environment in regard to the full year guidance that you’ve given because it sounds like you’re counting on some things getting much better than they are now? I wonder if you might be able to elaborate.

Chris Connor

Sure. Well I think we’re giving guidance, Saul, for the entire year that we expect the Company to be up in the low to mid single digits, which is where we’re at in the first quarter. So we’re not indicting that we’re going to see a significant improvement in the marketing condition that are going to drive this on the revenue side. This is not going to be a revenue led rebound in the next couple of quarters for our Company. We are seeing strength in our global segments as we’ve talked about. I think our expectations are that as these pricing actions take effect, as the other contingency plans that we’ve discussed on this call take effect, that we’ll be able to see the Company’s financial earnings performance come back inline.

Saul Ludwig – Keybanc Capital Markets

So in kind of a broader sense, you took $0.30 off the full year; you took $0.20 off the first quarter, so that means that you took $0.10 off maybe the second quarter, yet you’re not thinking there’s going to be much change in the back end of the year from an earnings standpoint compared to what you’ve previously expected initially?

Chris Connor

That’s correct.

Saul Ludwig – Keybanc Capital Markets

Great. Thank you. One final thing, how much have you spent on acquisitions so far this year?

Sean Hennessy

I would tell you… The only one that we’ve completed is the Beckers’ transaction. The income is not been completed. We believe that’s going to be completed in the May timeframe. So the Beckers was…

Chris Connor

Less than $50 million.

Saul Ludwig – Keybanc Capital Markets

How much?

Chris Connor

Less than $50 million.

Saul Ludwig – Keybanc Capital Markets

How much is the next one order of magnitude?

Sean Hennessy

A little higher than $50 million.

Chris Connor

Less than $100 million.

Saul Ludwig – Keybanc Capital Markets

Thanks for those precise numbers.

Chris Connor

You’re welcome, Saul. We have lots more of them over here for you too.

Saul Ludwig – Keybanc Capital Markets

Thank you.

Operator

You have a follow-up question from the line of Jeff Zekauskas with JP Morgan. Please proceed with your question.

[Louka] for Jeff Zekauskas – JP Morgan Chase & Co.

Good morning, it’s Louka again. Can you comment on (inaudible) magnitude they’re might be easier cost reductions that you could get? If I remember it right, you said maybe $200 or $300 million advertising every year and then it’s a matter of flex workers that you hire out of college over the summers? Are those all things that could come, that could come down very, very quickly?

Chris Connor

Yeah, I think it was Eric Bosshard’s regarding were there any big buckets where we’d be seeing significant cuts in this SG&A like advertising to take that to zero, for example. The answer is that there are no areas like that where we are taking extremely drastic reaction. We are taking some of our service headcount down. In our stores organization as demand softens, we’re able to do that to your point about summertime help in the stores that won’t be hired this year. It’s really across the board in a variety of different areas. We continue to invest in our R&D to continue to bring out innovative new products. We’re not cutting there. We’ll continue to invest in the training programs to insure that the people that we do have in our stores are prepared to service our demanding customer base. We’ll continue to invest in those areas that we think are appropriate to keep the Company growing. Having said all that, there’s always areas where companies can continue to trim fat and build muscle, and those are the actions we’re taking.

[Louka] for Jeff Zekauskas – JP Morgan Chase & Co.

What’s the very rough ratio in terms of full-time employees in stores versus like summer help?

Chris Connor

I don’t have that information with me.

[Louka] for Jeff Zekauskas – JP Morgan Chase & Co.

Thanks very much.

Operator

There are no further questions at this time. I would now like to turn the call over to Mr. Bob Wells for closing comments.

Bob Wells

Thank you. We appreciate you all taking time to participate in our call this morning. As are reminder, we’ll be reporting our first quarter results on April 22nd at 11:00 a.m. and we look forward to providing more detail on the quarter and on our full year expectations at that time. In the meantime, thanks for joining us this morning and thank you again for your 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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