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Executives

Chris Connor – Chairman, Chief Executive Officer

Sean Hennessy – Senior Vice President of Finance, Chief Financial Officer

John Ault - Vice President, Corporate Controller

Bob Wells - Vice President, Corporate Communications.

Analysts

Jeffrey Zekauskas – JP Morgan

Anthony Petaneri – Citigroup

Saul Ludwig – Keybanc

Amy Vane – Goldman Sachs

Chuck Cerankosky – FTN Midwest Research

Eric Bosshard – Cleveland Research

Stephen O’Neil - Hilliard Lyons

Ivy Zelman – Zelman and Associates

Robert Felice – Gabelli & Co.

Don Carson – Merrill Lynch

Greg Goodnight – UBS

Jim Warner – Carlton Capital

The Sherwin-Williams Co. (SHW) Q1 2008 Earnings Call April 22, 2008 11:00 AM ET

Operator

Good morning. Thank you for joining The Sherwin-Williams Company’s review of first quarter 2008 results and its expectations for the second quarter and full year. With us on today’s call are Chris Connor, Chairman and CEO; Sean Hennessy, Senior VP, Finance and CFO; John Ault, Vice President, Corporate Controller; and Bob Wells, Vice President, Corporate Communications.

This conference call is being webcast simultaneously 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, May 9, 2008 at 5:00 pm Eastern time.

This conference call will include certain forward-looking statements as defined under U.S. federal securities law with respect to sales, earnings and other matters. Any forward-looking statement speaks only as of the date on which such statement is made and the company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. A full declaration regarding forward-looking statements is provided in the company’s earnings release transmitted earlier this morning.

After the review of first quarter results, we will open this session to questions. I will now turn the call over to Bob Wells. Thank you, you may now begin.

Bob Wells

In order to allow more time for questions, we have provided balance sheet items and other selected information on our website at Sherwin.com under investor relations, first quarter press release.

Summarizing the company’s overall performance for first quarter 2008 versus first quarter 2007, consolidated net sales grew 1.5% to $1.78 billion due to strong sales by our Global Group and acquisitions that were partially offset by sales declines in The Paint Stores Group and Consumer Group.

Consolidated gross profit dollars decrease $10.9 million for the quarter to $780.5 million. Gross margin decreased 130 basis points to 43.8% of sales from 45.1% of sales in the first quarter last year.

Selling, general and administrative expenses increased to 36.6% of sales in the first quarter this year from 35.2% last year. Interest expense net of interest and investment income increased $5.7 million compared to the first quarter last year.

Consolidated profit before taxes in the quarter decreased $50.5 million or 30.9% compared to last year’s first quarter. This year our tax rate in the first quarter was 31% compared to 31.6% in the first quarter of 2007. For the full year 2008 we expect our effective tax rate to be comparable to last year’s rate of 32.6%.

Consolidated net income decreased by $33.9 million to $77.9 million from $111.8 million in the first quarter of 2007. Net income as a percent of sales was 4.4%, down from 6.4% in the first quarter of last year. Diluted net income per common share for the quarter decreased $0.19 or 22.9% to $0.64 per share.

Looking at our results by operating segment, sales for our Paint Stores Group in the first quarter of 2008 were down 1.9% at $1.03 billion. Comparable store sales -- sales by stores opened more than 12 calendar months -- declined 6.5%. The decrease in sales for this segment was the result of weak demand for architectural paint and non-paint items in most end user segments, partially offset by improved industrial maintenance coating sales and two acquisitions completed during 2007. The acquisitions increased group net sales for the quarter by 3.2%.

Regionally in the first quarter of 2008 our Eastern division led the sales performance followed by Midwestern division, Southwestern division and Southeastern division. Two of the four divisions achieved positive sales results in the quarter.

Segment profit for the group decreased 31.9% to $83.3 million in the first quarter of 2008. Acquisitions reduced segment profit by 5.6% in the quarter. Segment margin decreased to 8.1% from 11.6% in the first quarter last year, due primarily to higher product and freight costs and the negative impact of acquisitions.

In the Consumer Group for the first quarter of 2008 sales decreased 4.8% to $286.9 million. The decline was due primarily to soft DIY demand at most of the segment’s retail customers. Segment profit for the Consumer Group decreased to 23.7% in the quarter to $42.8 million. Segment profit as a percent of external sales decreased to 14.9% from 18.6% in the same period last year, due primarily to the timing and severity of raw material cost increases and lower volume throughput in our manufacturing and distribution operations.

Turning to our Global Group for the first quarter of ’08, sales in US dollars increased 14.8% to $461.9 million, due primarily to increased volume, selling price increases, favorable currency translation and acquisitions. Sales in local currencies increased 7.9% in the quarter. Acquisitions increased the group’s net sales by 3.7%. This sales increase reflects growth across all geographies outside the US, and all product lines.

Segment profit for the Global Group increased 21.7% to $43.1 million for the quarter. Profits stated in local currency improved 11.9%. This improvement was mostly attributable to increased sales, operating efficiencies related to increased volume and expense control. Acquisitions were slightly accretive to Global Group profit in the quarter.

I would now like to comment briefly on some of our balance sheet items. Our total debt on March 31, 2008 was $1.35 billion, including total short-term borrowings of $1.04 billion. Total debt on March 31, 2007 was $1.03 billion. Our cash balance at the end of the quarter was $20.1 million compared to $299.8 million at the end of first quarter 2007.

Total borrowings to capitalization were 45.4% at the end of the quarter versus 35.1% at the end of the first quarter of 2007. Long-term debt to capitalization was 16% at the end of the first quarter this year compared to 13.8% last year.

In the first quarter of 2008 the company purchased 4.1 million shares of its common stock in the open market. At March 31, 2008 the company had remaining authorization to purchase 22.9 million shares of its common stock and we expect to continue from time to time our opportunistic purchases of the company’s stock for treasury since we continue to believe our stock is a good value.

In first quarter 2008 we spent $39.8 million on capital expenditures. Depreciation expense was $35.8 million and amortization expense was $5.3 million. For full year 2008, capital expenditures will be less than $160 million. A significant share of the capital expenditures will go toward investing in new stores with continued spending to upgrade our manufacturing facilities and replace other equipment where necessary.

Depreciation will be about $150 million versus $139 million in 2007 and amortization will be about $21.4 million versus $24.5 million in 2007.

I will conclude my remarks with a brief update on the status of our lead pigment litigation. In our appeal of the Rhode Island lawsuit to the State Supreme Court, briefing has been completed and oral argument is scheduled for May 15. These proceedings will be webcast.

In the ongoing abatement proceedings in Rhode Island, the appointed co-examiners have begun interviewing individuals they believe may help them understand what is necessary to abate the nuisance found by the jury to exist in the state. So far the interviews have been primarily of Rhode Island public health officials. It is expected that the entire process will take a number of months to complete. It is not tied to any deadline or timetable relating to the appeal.

In Ohio, the lone remaining municipal lawsuit is the suit brought by the City of Columbus. The Ohio Attorney General’s suit had been consolidated with the Columbus suit but was subsequently removed to federal court by the defendant. A federal judge will determine whether this lawsuit will be heard in federal court.

In Wisconsin, the Thomas case, a personal injury case tried successfully to a jury last fall, has been appealed by the plaintiffs. Another individual plaintiff case has been accepted on appeal by the Supreme Court on the question of whether lead pigment is an inherently defective product. Approximately 36 suits were filed on behalf of individual plaintiffs in Wisconsin. Half of these have already been voluntarily dismissed by the plaintiffs.

In California, the Intermediate Appellate Court recently overruled the Santa Clara Superior Court and held that the cities and counties could retain contingent fee counsel to aid them in their suit against lead pigment companies The companies will now decide whether to ask the California Supreme Court to consider the question.

Finally in Mississippi, the Gaines case is currently scheduled to begin trial on June 17. The case involves a single plaintiff adolescent. There are currently a number of procedural and dispositive motions pending before the court.

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

Chris Connor

Thanks, Bob and good morning, everyone. Thanks for joining us today. I know many of you were on our conference call on March 24 when we lowered our guidance for the first quarter and full year of 2008. That was a disappointing day for us. It was the first time in 19 consecutive quarters that we failed to meet or exceed our original earnings guidance.

Although there were many factors that contributed to our weaker than expected earnings in the first quarter, clearly in the declining demand for architectural coatings across most of North American market segments and the increase in the price of some petroleum-based raw materials over the past four months were the principal causes.

Facing these market conditions, we began putting plans in place in the first quarter to improve our results over the balance of the year. I’ll highlight some of the things we are doing in a moment, but first let me touch briefly on a few things that we are not doing.

For example, we are not counting on a near-term recovery in the housing markets. The prolonged weakness in sales of new and existing homes in the US has been a drag on industry-wide architectural paint volumes since the middle of 2006. This downward spiral in these residential markets continued in the first quarter and we believe these markets will not show year-over-year improvement during the remainder of 2008.

I think it’s worth noting that the weakness in domestic sales in the first quarter was partially offset by stronger than expected sales growth from our Global segment. Our businesses throughout most of Latin America and Asia continue to generate double-digit sales increases and in most cases, corresponding profit improvement.

We are also not expecting help from the commercial construction market. Forecasts for US commercial construction have recently turned negative. In the first quarter, we saw a softening in the commercial construction activity which we expect will continue over the balance of the year. It’s too early in the season to get a good feel for the strength of the residential and commercial repaint markets, but we have based our outlook for the remainder of the year on the assumption that growth in these markets will be challenging.

Another thing we are not doing is counting on oil prices to drop back to the mid-2007 levels. The escalation in crude oil and natural gas and the declining U.S. dollar drove the cost of certain chemical commodities such as ethylene, propylene and methanol to all-time highs in the first quarter. Plant outages, plant and maintenance turnarounds and strong international demand, particularly in Asia, have also resulted in some supply tightness for a number of these commodities despite the weakness in the U.S. economy.

If crude oil remains in the $110 to $120 per barrel range and natural gas remains in the $10 to $11 per million BTU range, it is likely the price of many raw material commodities will continue to rise. Given this scenario, we would expect the raw material price increases in the paint and coatings industry to increase at the high end of the range of 4% to 8% for the 2007 to 2008 timeframe.

Let me take a few moments to highlight some of the things that we are doing. Internally, we refer to these efforts as trimming fat and building muscle. Throughout the first quarter, we began implementing aggressive plans to streamline the company and reduce SG&A. We have made adjustments to our part-time labor schedules and curtailed overtime hours in our stores. We froze hiring of non-essential positions across the company and consolidated functions wherever possible.

We are also accelerating our closing of redundant store locations resulting from The Paint Stores Group acquisitions. During the first quarter, The Paint Stores Group opened 17 new stores and closed 23 redundant locations for a net reduction of six stores. During 2008, we expect our Paint Stores Group to open approximately 100 new locations and at the same time, continue their accelerated pace of redundant store closings, finishing the year with a net store increase.

Our Global Group, on the other hand, opened nine new branches in the first quarter and closed none.

We have already seen the effect of these efforts in some areas, however most of the impact will benefit our results in the second half. SG&A increased in dollars and as a percent of sales in the first quarter. Virtually all of these increases were attributable to currency exchange, acquisitions and new stores opened or acquired since the first quarter of last year.

We are also building muscle, which means to us that we are taking actions that will strengthen our business in the short run and accelerate our growth in the long run. We have announced additional price increases across several of our businesses effective in the April/May timeframe. These second price increases in the year are necessary to help offset some of the raw material cost increases we are experiencing this year.

This year, additionally, we will introduce a broad range of new and unique products and technology to the market. For example, our new moisture-resistant, resilient exterior latex cures in about half the time of conventional exterior paint, allowing customers to paint outdoors even when there is rain or dew in the forecast.

Perhaps most important, we remain committed to providing the high quality service our customers have grown to expect. Raising prices and reducing expenses are not without some risk. We will manage these risks in part by ensuring that our customers continue to receive Sherwin-Williams trademark quality service across the company’s footprint.

Over the balance of the year we anticipate continued softness in most domestic end user markets and we expect that will continue to restrain our sales growth. Our outlook for the second quarter of 2008 is for sales to be up in the low single-digits over last year’s second quarter. With sales at that level, we expect diluted net income per common share to be in the range of $1.45 to $1.60 per share, compared to $1.52 per share for the second quarter of last year.

For the full year 2008 we expect sales to increase in the low single-digits over 2007. With annual sales at that level we are reaffirming our guidance that our diluted net income per common share for the year will be $4.70 to $4.85 per share compared to $4.70 per share last year.

Finally, last week, our board of directors declared a regular quarterly dividend of $0.35 per share, continuing toward our longstanding record of paying out 30% of prior-year’s earnings per share.

Again, thanks to all of you for joining us this morning, and now we would be happy to take your questions.

Question-and-Answer Session

Operator

Your first question comes from Jeffrey Zekauskas – JP Morgan.

Jeffrey Zekauskas – JP Morgan

Good morning. Was there much difference in your ability to raise price in coatings versus your ability to raise price in Paint Stores in the first quarter?

Chris Connor

Jeff, our ability to do that has been historically pretty much consistent with what we saw in first quarter. As we’ve commented in the past, we have a little more pricing leverage and ability through our stores model than we do through our consumer segment and that would have been true in the first quarter of 2008.

Jeffrey Zekauskas – JP Morgan

So order of magnitude, were prices up 2% in stores and zero in coatings? Is that the right order or is there a different order of magnitude?

Chris Connor

I think we’ve commented about the company’s performance as opposed to segment on pricing. We indicated that throughout the first quarter we were taking pricing in the range of 3.5 to 6.5 for the company. That was consistent across all segments. Sean, do you want to comment about what percentage of that pricing we actually received in the first quarter?

Sean Hennessy

In total we were in the 50% to 60% range, so that 3% to 5% Chris talks about, 50% to 60% of that we realized in the first quarter.

Jeffrey Zekauskas – JP Morgan

So 50% to 60% of 3% to 5% so that’s a little bit more than 2%? Is that what you realized?

Sean Hennessy

Yes.

Jeffrey Zekauskas – JP Morgan

Were you satisfied with your SG&A cost control in the first quarter?

Sean Hennessy

Yes. When you take a look at the annualization of the acquisitions and when you take a look at where we came in at versus what we had forecasted, we were very close to what we had forecasted.

Chris Connor

Now having said that, Jeff, we are taking aggressive steps to reduce the going forward, so room for improvement to be sure.

Jeffrey Zekauskas – JP Morgan

Are your volume expectations for the second quarter very different from the volume trends that you experienced in the first quarter?

Chris Connor

No.

Jeffrey Zekauskas – JP Morgan

It is similar same-store volumes is what you are expecting?

Chris Connor

Right. We are giving guidance that we will be in the low single-digit sales growth. We are not seeing significant mix changes, so the volume is going to be consistent with what we had in the first quarter.

Jeffrey Zekauskas – JP Morgan

Thank you very much.

Operator

Your next question comes from PJ Juvekar – Citigroup.

Anthony Petaneri – Citigroup

This is Anthony filling in for PJ. On their earnings call last week, PPG indicated that their sales to the big boxes were holding up relatively better than their paint stores. When you look at DIY customers going through big boxes and then professional contractors going through paint stores, do you have a sense of which segment will start to stabilize first?

In terms of volume and demand, where do you see the light at the end of the tunnel?

Chris Connor

I don’t think we are in a position to comment on which ones of those we think will stabilize or rebound first; this softness is pretty consistent across both of those segments, so time will tell.

Anthony Petaneri – Citigroup

Obviously the Global Group had a great quarter and I think on the year end call you indicated you expected segment sales to be up mid to high single-digits for the year. Given the strong performance this quarter, is low double-digits more realistic?

Chris Connor

Our first quarter is always the smallest quarter we have in the course of the year, so I think we are still comfortable with the guidance we have given for Global. If we start to make some progress in these next quarters we will adjust that.

Operator

Your next question comes from Saul Ludwig – Keybanc.

Saul Ludwig – Keybanc

We have now had three quarters in a row where we have heard about dilution from acquisitions. When does that turn?

Sean Hennessy

I think when you take a look at it, Saul, we are happy with the acquisitions we have made. I would tell you that if you compare it to the cycle, the integration is going well. I would tell you that we had the fourth quarter and the first quarter and as we mentioned, we believe that the second quarter we are going to see improvement and the third quarter will be close to flat and then the third quarter we will start seeing some improvement versus last year. I think that is when you are going to see it.

Just when you take a look at the market in general, as the market has gone down that has caused our sales to be a little behind on these acquisitions.

Saul Ludwig – Keybanc

When we look at the detriment in your margins in both consumer and The Paint Stores, how much of that detriment was due to a contraction in your variable margin – your price versus your raw materials -- versus volume as it impacted fixed cost absorption?

Sean Hennessy

I would tell you that the fixed piece was probably 20% to 25%.

Saul Ludwig – Keybanc

And the other the largest share, okay. In the interest expense, I was very surprised to see your interest expense lower in your first quarter this year. We had expected a substantial increase in interest expense year over year. Your average debt appeared to be much, much higher this year than last year. What was the story with interest expense and what do you see for the rest of the year, Sean?

Sean Hennessy

When we talk about interest expense, we also, if you take a look at it, Saul, the interest income was down. When you take a look at it –

Saul Ludwig – Keybanc

I am talking about the debt which is gross interest.

Sean Hennessy

Right. What we expect is our debt is going to be higher; our interest income will be lower I think than we have been talking about when you combine the two we would be up somewhere between $8 million and $10 million this year versus last year. That is what we expect. We expect that by the end of the year our total debt will be in that $950 million range.

Saul Ludwig – Keybanc

I understand why your interest income is down; I don’t understand why your interest expense, just gross interest expense that you write for the amount of debt and the rate that you pay was down in the first quarter when your debt had to be up $250 million.

Sean Hennessy

I think when you take a look at the interest rates we went out there with some of the liquidity instruments that we have that are at favorable LIBOR rates.

Saul Ludwig – Keybanc

So it was rates that did it?

Sean Hennessy

Yes.

Saul Ludwig – Keybanc

How much did you spend for the stock that you bought?

Sean Hennessy

$220 million at an average cost of $53.69.

Saul Ludwig – Keybanc

Finally, I know you skirted the question, the 6.5% drop in comp store sales, should we assume Chris that that may have been 8.5%, 9% in volume with a 2%, 2.5% increase?

Chris Connor

Yes. I didn’t intend to skirt that question at all. Absolutely, our volume in stores across the company is climbing faster than sales as it would with pricing volume.

Saul Ludwig – Keybanc

Right, but are the numbers that I –

Chris Connor

Yes, you are in the range.

Operator

Your next question comes from Amy [Vane] – Goldman Sachs.

Amy Vane – Goldman Sachs

I am curious about the industrial coating. As the U.S. manufacturing economy continues to soften, and as several of your competitors obviously have noted some weakness there. Can you give us some color?

Chris Connor

Yes, the industrial coatings business for us is in our Global segment which had a good quarter. Within that segment, the industrial coatings piece of it also contributed to the improvement for the quarter.

The vast majority of that business is domestic business. We have some exposure to Asia Pacific and some of those softening markets that our competitors might have talked about, but we are seeing some modest strength and growth in that business, Amy, both domestically and building from a very low share position outside of the United States.

Amy Vane – Goldman Sachs

Two or three of your competitors when they reported their results, obviously there were some surprising volume gains through the big box retailers, the DIY customer. Over the past one or two quarters, have you seen any market share shift in the DIY channel?

Chris Connor

Amy, we really don’t have the data to determine that. The only information we have seen on that is exactly what you have seen. We know how our business through our consumer segment is, it is obviously soft. But in terms of shift between manufacturers, we don’t know.

Amy Vane – Goldman Sachs

Lastly, the SG&A percentage of total sales nearly [inaudible] this year. On an annual basis, what is your expectation for ’08? I know you have some pretty aggressive internal initiatives going on.

The historical range for the annual rate is about 32% to 34%. Do you expect to achieve the high end of that range, or a mid-point? Can you give us some color for that line?

Sean Hennessy

Basically we have given you the annual guidance on sales and EPS. Right now we really are not going to go down the P&L and give you guidance of what we think the SG&A or give you a range for gross margin and so forth.

Amy Vane – Goldman Sachs

So going forward, do you expect SG&A as a percent of your total sales, this ratio to keep climbing on a sequential basis? Is it still high on the year over year basis?

Sean Hennessy

We believe our SG&A will be higher as a percent this year than last year, yes.

Operator

Your next question comes from Chuck Cerankosky – FTN Midwest Research.

Chuck Cerankosky – FTN Midwest Research

If we look at the acquisition environment, how does that appear to you in terms of perhaps sellers that might be a little more interested in talking to you right now versus a year ago?

Chris Connor

There are a number of opportunities in the market right now, Chuck, that we are speaking with as are others. I think given the softness in the U.S. market particularly, some sellers may be more inclined to hang on and wait for better forecasting going out. We expect that there will be a couple deals we will be able to get done this year.

Chuck Cerankosky – FTN Midwest Research

If you look at your Paint Stores segment and one makes an assumption about what percent of those sales go to new construction, what kind of shift have you seen in the sales mix there over the last few months?

That is, if one assumes it is “x” percent, how much of that percentage has gone down?

Sean Hennessy

We don’t give specific percentages of the specific customer bases inside of that. I think in Bob’s comments, the discussion about regions of the country and how they were doing. We indicated that our Eastern and Midwestern divisions, which are the Northern markets for us, actually had sales gains and it was in the Southwest and Southeast particularly where we were struggling. Those would be the areas of the country where historically we have had the most aggressive new home construction market. So there is significant mix change in those two divisions as they are taking the brunt of the new residential market slowdown, which by the way, continues. Estimates that perhaps we were nearing the bottom of that I think have now been amended and we expect the new housing market to continue to spiral downward this year, as we commented.

Operator

Your next question comes from Eric Bosshard – Cleveland Research.

Eric Bosshard – Cleveland Research

On price, can you talk – Sean, I know you had commented that you had seen 50% of the price increases stick to this point. Can you just talk about how this is going and why the need to push forward with a second price increase and perhaps a bit of guidance on the magnitude of that second price increase?

Chris Connor

Sure, I would be happy to, Eric. I think the pricing is going exactly as it has for us historically through this model. We were asked the question earlier in the call by Jeff Zekauskas regarding stores versus our other businesses. This is following the historical pattern that we have seen.

As Sean has commented, we are giving a portion of that pricing as the season unwinds and we are able to conclude those negotiations, get off some jobs that perhaps we had provided some pricing protection for. It is on track to continue to be implemented, as we commented.

Frankly, as we said on the earnings call, we did not see the rapid and steepness of this raw material climb appropriately in the fourth quarter and did not get the kind of price increases we need to cover us for the calendar year.

For those reasons, the management team has decided that it is necessary to get a second price increase in the year. As you recall, we’ve done this as recently as the ’04-’05 time period where we went out for two price increases in the course of the year and unfortunately we are in that position where we have to do it again in calendar year 2008.

Our Stores Group has announced in the month of April that they would be taking pricing up again effective May 5, 4% and those price increase announcements are out there as we speak and we are working through them.

Operator

Please stand by, ladies and gentlemen, the conference will be –

Chris Connor

Hello? Is there an operator on, please?

[music hold]

Operator

Thank you for your patience. Your teleconference will begin momentarily.

[music hold]

Operator

Okay, Mr. Wells, the conference is back on.

Bob Wells

Thank you. Welcome back from that brief intermission. We would like to continue with the question-and-answer session. Eric, we were in the middle of a question from you about pricing, so if we could continue that line of questioning, that would be great.

Chris Connor

I am not sure how much of my answer got through, Eric. Did you get that, or do I need to repeat it?

Operator

Eric is out of the queue. He needs to press *1 to get back on –

Chris Connor

Okay, well let’s take the next question, Operator and we will catch him back later.

Operator

Your next question comes from Stephen O’Neil - Hilliard Lyons.

Stephen O’Neil - Hilliard Lyons

Good morning, I didn’t realize when I input my question it was going to muck everybody up.

Bob Wells

Good morning, Steve.

Stephen O’Neil - Hilliard Lyons

I just wanted to ask about the redundant stores. I mean you purchased about 170 stores last year and I was wondering if you could give me an idea of how many you plan to close and elaborate on the situation. Have some store locations been weaker than expected in the current environment? What is the thought process as it is flowing into this movement?

Chris Connor

Very good question, Steve. I think as we comment on redundant store locations it really speaks to the acquisitions that we have made for quite some time now, not just last year. As we have discussed, we have historically taken a very slow path to integrating stores from these acquisitions; maintaining stores sometimes literally next to each other, across the street, well within a mile location.

A number of these store locations that we are speaking of are [Duran] store locations that we purchased back in 2004 and there are other store locations from acquisitions made even prior to that. In the State of Florida, for example, Flex Bond and others. So it is a combination of the groups that we had made last year plus historically. So there is quite a large number of stores to look at.

Including in that, when we say redundant acquisitions oftentimes allow us an opportunity to close an existing Sherwin-Williams store and consolidate into the acquisitions’ location which may be a better facility. We are just taking the softness in the market to accelerate what would be a normal trend for us, to start to close these things at a later point in time.

In terms of total count, it is a little difficult for us to get our arms around that for the moment. Our guess is it is going to be somewhere in the 40 to 60 to maybe even 70 range as the year unwinds, hence the comment that 100 stores will generate somewhere in the net 20, 30, 40 new stores for us as the year unwinds. Hopefully that gives you a little more color there.

Stephen O’Neil - Hilliard Lyons

That’s helpful. Lastly on interest expense, how much of the lower interest do you think was caused by moving to short-term debt? As a follow on to that, do you plan to maintain this high level or are you going to try to lock in some rates as the year goes on? If you do, what might that do to your interest expense through the year?

Sean Hennessy

Actually, 100% of the interest rate reduction was because we have not – we have stayed in the short interest rate environment. I would say we are continually watching. We have looked at the ten-year rate. Essentially as we have consistently said, we are waiting to see a little more clarity on the lead situation and once we do then we believe we can get a document to go back into the long-term market without a lot of covenants and then what we will do is we plan eventually to term some of this out and lock in the long-term rates at rates that we believe will be a little higher than what we are paying short-term, but then we will also have the ability to look at some swaps.

Operator

Your next question comes from Saul Ludwig – Keybanc.

Saul Ludwig – Keybanc

Just one quick follow-up. A lot of people have referred to the PPG release, and as you know in their public release they said that their unit raw material costs were up only 2% year over year and that they expect the full year raw material cost increase to be 2% to 4%. Those seem to be pretty modest numbers. I am trying to reconcile what they have said publicly with what you are experiencing, because if raw material costs were in fact up only 2% you wouldn’t have had the margin compression that you experienced.

Bob Wells

Saul, it is difficult for us to comment on PPG’s raw material costs because we have no specific knowledge of their mix of materials. Further, as you know, we only comment on the industry basket of raw materials which we define pretty broadly. Because the mix varies pretty significantly company to company, we prefer to just keep our comments on our outlook for the industry, both in the quarter and over the balance of the year.

Operator

Your next question comes from Chuck Cerankosky – FTN Midwest Research.

Chuck Cerankosky – FTN Midwest Research

Guys, I don’t have a question. I was just hitting buttons when you were asking if anybody could hear us, so…

Operator

Your next question comes from Ivy Zelman – Zelman and Associates.

Alan for Ivy Zelman – Zelman and Associates

Good afternoon. This is Alan on for Ivy. First a housekeeping question. On your full year EPS guidance, what tax rate and share counts are you using?

Sean Hennessy

What we have said is we believe the tax rate will be very comparable to the 32.6% tax rate we had last year. We really have not given guidance on our share count.

Alan for Ivy Zelman – Zelman and Associates

Chris, I was hoping you could elaborate a little bit more on your comments about the commercial construction market. I think you said that you saw some softening in 1Q and on your call a month ago you said you were expecting commercial to be up I believe low single digits for the year.

I was just wondering if softening in 1Q implied that it was actually negative on a year over year basis, or if it was just less positive? If so, do you still expect it to be up in that low single-digit range?

Chris Connor

I am happy to comment on that. We refer often to a number of industry data points. One of them is the McGraw Hill’s Dodge Report which I think on the last call had indicated a slowing in commercial construction but still positive for ’08. Those reports now are tending to show, particularly in the segments that we sell coatings into, negative projections for ’08.

So it is not a first quarter only phenomena; we were expecting that commercial new construction activity will be negative for the year.

Alan for Ivy Zelman – Zelman and Associates

In terms of quantifying that in low single-digits, negative?

Chris Connor

Yes.

Operator

Your next question comes from Robert Felice – Gabelli & Co.

Robert Felice – Gabelli & Co.

A couple of quick questions and I apologize in advance if they were already asked, I had to redial back into the call because the phone had technical difficulty. First, does the 3.5% to 6.5% pricing range you have spoken about include the second round of pricing?

Chris Connor

No, that was the first round we took out in the first quarter across all segments. One comment we made when you may have been offline was that our stores have announced in April effective May 5 an additional 4% price increase.

Robert Felice – Gabelli & Co.

So it would bring that range to –

Chris Connor

7.5% to 10.5%.

Robert Felice – Gabelli & Co.

Then a couple of weeks ago you had talked about maybe being 1% or 1.5% off on pricing relative to recovering raw material costs during the first quarter. I know it has only been a couple of weeks since then, but any meaningful change in terms of the price cost gap, where you stand today?

Chris Connor

No, we are making progress towards it but in that short period of time no meaningful change.

Robert Felice – Gabelli & Co.

So you are still within that 60% realization on that 3.5% to 6.5%?

Chris Connor

I think Sean made the comment around closer to 50% through the first quarter.

Robert Felice – Gabelli & Co.

Of the 7.5% to 10.5%, how much would you expect to realize for the full year.

Sean Hennessy

Typically when we take a look at the price increases over the history of the company we will eventually over a period of time – and we have actually commented sometimes it takes up to 18 months – but what we will end up with is 80% to 85%.

Robert Felice – Gabelli & Co.

But for 2008, of that amount probably are you thinking about half by the time it rolls in?

Sean Hennessy

Probably slightly higher than half.

Operator

Your next question comes from Don Carson – Merrill Lynch.

Analyst for Don Carson – Merrill Lynch

Good morning, this is Adam in for Don Carson. A question about the price increases as it relates to product mix. Historically or in the first quarter at all have you seen any change in which price points are being purchased more by the contractors or by the DIY in your store?

Sean Hennessy

If you look at our company, when you take a look at the product mix we have actually had a slight improvement in our product mix. I would not call it very material, but the product mix is slightly higher.

Chris Connor

And that would be historic and consistent with past price increases we have seen, particularly in the contractor segment. When faced with higher prices, many of them step up to a better-performing product to help reduce labor costs.

Analyst for Don Carson – Merrill Lynch

But as you said, it is not terribly material, so it probably doesn’t roll through to margins?

Chris Connor

That’s correct. As opposed to marginally moving in the wrong direction, it is performing as it has historically and moving slightly up.

Sean Hennessy

You have to realize the first quarter is typically our smallest quarter and so a lot of things that we see, even though they are positively moving it is not material for the full year.

Analyst for Don Carson – Merrill Lynch

A definitional question about your 4% to 8% outlook. You said it is a broader industry metric. Is there any component of freight in there with diesel costs and shipping costs?

Chris Connor

Yes, of course there is.

Analyst for Don Carson – Merrill Lynch

Do you have an idea, 4% to 8% is the industry, is Sherwin-Williams at the upper end of that industry range as well?

Chris Connor

No, we would hope to be at the lower end of that industry range, given our size. We would expect to do better than our smaller competitors.

Analyst for Don Carson – Merrill Lynch

A final question on the Global Group, obviously you bought Nicco Paints last year and you have commented that would be a platform for growth in India. I was wondering if you had any further developments in any of the Asian regions, coupled with your purchase in Singapore?

Chris Connor

A lot of work happening in our Nicco business in India. I think it is a little premature to comment on the next steps but as Sean said, we are pleased with these acquisitions and they are continuing to move in the right direction.

Operator

Your next question comes from Greg Goodnight – UBS.

Greg Goodnight – UBS

A lot of my questions have been asked and I appreciate your responses. The one question I still had was your comment about the Rhode Island appeal to the Supreme Court that oral arguments were going to be webcast.

A few questions. When will that be? Who is webcasting these oral arguments and why are they webcasting them?

Bob Wells

I believe that the Rhode Island court is actually controlling the webcast. It will be live so it will begin on May 15.

Greg Goodnight – UBS

And it will be on a website that the court provides?

Bob Wells

Correct.

Operator

Your next question comes from Jim Warner – Carlton Capital.

Jim Warner – Carlton Capital

Thank you for taking my call. I have two questions. As we move into warmer weather, could you first provide any color on what you are seeing with regard to exterior paint demand?

Second, what sort of exterior paint demand expectations have you built into your guidance for this year?

Chris Connor

Sure, as Sean has commented, the first quarter is our smallest quarter. We are heading into the historic painting season in the North American markets and we would expect to start to see the exterior paint market emerge.

It is following the trends that we are commenting on where we expect low single-digit growth. There is not a significant mix change occurring here between interior and exterior coatings. The softness in the residential markets will have an impact there and it is consistent with the guidance we have given for the year.

Operator

Your next question comes from Robert Felice – Gabelli & Co.

Robert Felice – Gabelli & Co.

A quick follow up. I was looking at your raw material cost expectations for the year, 4% to 8%, and if I translate that into absolute dollars it looks like it is roughly $300 million to $350 million, give or take a little bit. At the midpoint of your 7.5% to 10.5% pricing that would imply $600 million to $650 million in pricing, creating a net benefit of somewhere around $300 million.

And yet your guidance would suggest significantly less than that in terms of absolute gross margin dollars. I am curious to know where the offsetting factors are. Is it SG&A, is it weak volume or lower volume? Just trying to get a sense of what diminishes that.

Sean Hennessy

What I am doing in my head real quick, when you are using the 4% to 8% I guess you are using $3 billion in raw material purchases to get your $200 million to $300 million?

Robert Felice – Gabelli & Co.

Roughly $300 million, yes. Within the high end of your range.

Sean Hennessy

Right. A couple of things here. You might have over-estimated. I don’t believe our raw material purchases are that high. We have a lower number than that and maybe it is because a lot of times when we talk about paint, paint is not 100% of our sales so we have non-paint sales in there that you are probably adding 100% into the raw. So our numbers are a little higher.

In the paint industry, raw is typically 50% of the average selling price, so in the 4% to 8%, that means that our total costs are going to go up about 2% to 3%. Back to your point, the 4% to 7.5% to 10.5% that Chris mentioned is where you get into the 3% to 6.5% is the 12-month number. Then we have the 4% over eight months so you can’t just add the 4% to the 3.5% to 6.5%.

So when you annualize that number, if we can get the 50% to 60% our gross margin dollars would be fairly close which means that our gross margin percent will be down slightly.

Robert Felice – Gabelli & Co.

So the answer is, you don’t expect to get all 8.5%. The way it folds into the year, it will be a bit less than that.

Sean Hennessy

Yes, because Stores Group has announced May, which means that we really only have eight months to get that in.

Operator

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

Bob Wells

Thanks. We appreciate your joining us today and we apologize for the technical difficulties in the middle of the call. I will be around all day to answer any follow-up questions you might have, and as always, we greatly appreciate your interest in Sherwin-Williams.

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Source: The Sherwin-Williams Co. Q1 2008 Earnings Call Transcript
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