Earnings Labs

The Sherwin-Williams Company (SHW)

Q4 2007 Earnings Call· Mon, Nov 19, 2007

$321.98

+1.29%

Key Takeaways · AI generated
AI summary not yet generated for this transcript. Generation in progress for older transcripts; check back soon, or browse the full transcript below.

Same-Day

+0.60%

1 Week

-0.65%

1 Month

-1.61%

vs S&P

-3.72%

Transcript

Operator

Operator

Ladies and gentlemen, thank you for standing by. Welcome tothe Fourth Quarter Conference Call. At this time, all participants are in alisten-only mode. Later, we will conduct a question-and-answer session.Instructions will be given at that time. (Operator Instructions) As a reminder,this conference is being recorded. I'd now like to turn the conference over to your host, PaulReyelts. Please, go ahead.

Paul Reyelts

Management

Good morning, everyone, and welcome to our year-end EarningsCall. Today, we will be covering results for the fourth quarter and the fullyear. Bill Mansfield and Lori Walker are with me on our call this morning. I'll make a couple of brief comments before we begin. First,I would direct your attention to the press release we issued this morning,which contains much of the information that we will be covering in the call.Also, a quick reminder, that this call is subject to the "forward-lookingstatements" language contained in our press release. We will be makingcomments this morning that may include "forward-looking statements"as that term is defined by securities law. So I'll cover our fourth quarter and full year results andBill will make a few comments and then we'll get to your questions. Turning to the fourth quarter, our operating results were inline with what we discussed in our October 1st press release and on an adjustedbasis at consensus of $0.40 per share. Fourth quarter sales totaled $852.8million, up 8.8 % from last year. A result of increased sales in our businessesin markets outside of the U.S.is primarily related to our recent acquisitions. Adjusted for currency and acquisitions, sales were up 1.9%with the largest factor being soft sales in our architectural and wood coatingsproduct lines. The two businesses most affected by continued weakness in U.S.residential construction and housing markets. Our architectural sales in the second half did showimprovement compared to the first half of the year. Net income for the quarterwas $48.8 million. Adjusted earnings per share were $0.48 for the quarter,which includes an after-tax gain of $0.10 per share from the sale of assets anda $0.02 per share charge for an unfavorable tax adjustment, which I'll explainin a minute. And this number excludes a $0.03 per share non-cash adjustment forthe Huarun minority interest…

Bill Mansfield

Management

Thank you, Paul, and good morning, everyone. As Paulmentioned, in the fourth quarter we did exactly what we said we would do on ourOctober 1st call. Clearly, 2007 was a difficult year for us. At the beginning of the year, we felt the impact of theslowdown in the U.S.housing markets, particularly in our wood business and our architecturalbusiness. And, as the year progressed, we saw a slowdown start to occur in ourcoil business, particularly in our appliance part of our coil business and ourgeneral industrial business. Now those difficulties inside the U.S.were offset to some extent by reasonably good markets outside of the U.S.During 2007, we restored our U.S.wood coatings business to profitability by restructuring during the first halfof the year such that we could earn reasonable profits in a depressedmarketplace. Our packaging business did quite well during the year,particularly inside the U.S.and we had good performance in our international operation, particularly Fuller,Tekno in Braziland Huarun in China. We are pleased with our branding progress. We have madeconsistent gains in consumer awareness since our launch and we are in theprocess and have developed new business opportunities with the Valspar andCabot branded products. And we have expanded our global presence throughacquisitions, Tekno in Brazil,Teknos in Eastern Europe adds to our growing presence in China with the Huarun acquisition. I would like to say a brief word on Teknos. We announcedthis acquisition in the beginning of October. In 2006, Teknos had sales ofapproximately $42 million or EUR31 million. It provides Valspar with animmediate growth platform for coil coatings in fast growing markets of Centraland Eastern Europe, Russiaand the Baltic States and we are quite pleasedto have had the opportunity to make this acquisition. So, in 2007, we've made a solid progress on our growthinitiatives of branding, expanding our global presence and executing…

Operator

Operator

Okay. (Operator Instructions) Your first question comes fromthe line of Steve Schwartz from First Analysis. Please go ahead.

Steve Schwartz -First Analysis

Analyst

Hi, good morning.

Bill Mansfield

Management

Good morning, Steve.

Steve Schwartz -First Analysis

Analyst

Can you help me understand, if I look at the day sales ordays of inventory, it looks like you have gone up slightly versus the thirdquarter, but you just commented you were down 7%. How are you looking at thator coming up with that 7% number?

Lori Walker

Analyst · Saul Ludwig from KeyBanc.Please go ahead

Steve, I think what you need to do is our fourth quarterincludes Teknos acquisition.

Steve Schwartz -First Analysis

Analyst

Okay.

Lori Walker

Analyst · Saul Ludwig from KeyBanc.Please go ahead

So, if you take the inventory up for the Teknos acquisition,it's actually down 7%.

Steve Schwartz -First Analysis

Analyst

Okay. All right.

Lori Walker

Analyst · Saul Ludwig from KeyBanc.Please go ahead

Roughly.

Steve Schwartz -First Analysis

Analyst

Okay. Can you give me that number, what that would be?

Paul Reyelts

Management

That would be around $20 million reduction from the end ofthe third quarter.

Steve Schwartz -First Analysis

Analyst

Okay, great. And then, it sounds like you are looking for FY'08 to get price increases that are about in line with what you expect rawmaterial costs increases to be, is that right?

Bill Mansfield

Management

That would be correct, Steve.

Steve Schwartz -First Analysis

Analyst

Okay. So what we have seen here in the fourth quarter, I'mcalling 55 basis points, we probably at this point just eat?

Bill Mansfield

Management

No, I won't say that. I would tell you that pricing is adynamic function and that we are looking for probably in the order of 2% to 3%year-over-year increase in our material costs next year. And so, I wouldinclude the 55 basis points, as you said, into our overall pricing efforts.

Steve Schwartz -First Analysis

Analyst

Okay. And do you think that there is one channel retail orindustrial, where you are more likely to get more of an increase. So, in otherwords your retail channels, do you think they are receptive to a price increaseat this point?

Bill Mansfield

Management

I would contrast the U.S.versus outside the U.S.as in a weak economic environment, it's a tough challenge, but our people willmeet it, and I tend to look at it that way.

Steve Schwartz -First Analysis

Analyst

Okay, great. Thank you.

Bill Mansfield

Management

You're welcome.

Operator

Operator

Your next question comes from the line of Saul Ludwig from KeyBanc.Please go ahead.

Saul Ludwig - KeyBancCapital Markets

Analyst · Saul Ludwig from KeyBanc.Please go ahead

Hi, good morning, guys.

Bill Mansfield

Management

Good morning, Saul.

Saul Ludwig - KeyBancCapital Markets

Analyst · Saul Ludwig from KeyBanc.Please go ahead

What were the final numbers on the brand building this yearand what do you expect next year?

Bill Mansfield

Management

Well, we've talked all along in 2007 and particularly in theOctober 1st call, that we would expect a decline next year of approximately $10million or about $0.07 a share. We spent somewhere around $0.25 to $0.27 ashare in 2007.

Saul Ludwig - KeyBancCapital Markets

Analyst · Saul Ludwig from KeyBanc.Please go ahead

All right. What was the cash flow from operations for theyear?

Paul Reyelts

Management

Saul, we haven't done the cash flow statement yet.

Saul Ludwig - KeyBancCapital Markets

Analyst · Saul Ludwig from KeyBanc.Please go ahead

Order of magnitude, Paul?

Bill Mansfield

Management

What would you say, Lori?

Lori Walker

Analyst · Saul Ludwig from KeyBanc.Please go ahead

I'd [roughly get there too].

Paul Reyelts

Management

Saul, I tell you why don't you let us get back to you onthat?

Saul Ludwig - KeyBancCapital Markets

Analyst · Saul Ludwig from KeyBanc.Please go ahead

Okay. No problem.

Paul Reyelts

Management

We really haven't had a chance to do that yet.

Saul Ludwig - KeyBancCapital Markets

Analyst · Saul Ludwig from KeyBanc.Please go ahead

Okay. On the raw materials, what was sort of the swing fromthe third to the fourth quarter, would you think there was any increase?

Bill Mansfield

Management

Yeah, there was a small slight moment up.

Saul Ludwig - KeyBancCapital Markets

Analyst · Saul Ludwig from KeyBanc.Please go ahead

Kind of like maybe 1% or so.

Bill Mansfield

Management

Yeah, that would be in the ballpark, Saul.

Saul Ludwig - KeyBancCapital Markets

Analyst · Saul Ludwig from KeyBanc.Please go ahead

Okay. Now the point that you made, Bill, about the BlackBelts and the Green Belts and you made the change and you scaled down one ofyour industrial plants, if we were to look at the non-raw material costs aspart of cost of goods sold, if you look at your operating expenses in the costto goods sold why not the other operating expenses. Should they change, shouldthey go down, should they go up, there is inflation, I mean given all thethings that you're doing, what do you expect to achieve in '08 versus '07 in terms of your manufacturingcosts exclusive of raw materials?

Bill Mansfield

Management

I would answer your question this way, Saul. I don't have aquantitative answer for you. I would tell you this that I'm confident thatex-raw material, all those other things that you talked about, we will be moreefficient in 2008 than we were in 2007.

Saul Ludwig - KeyBancCapital Markets

Analyst · Saul Ludwig from KeyBanc.Please go ahead

So that number as a percentage of revenue whatever it was,should go down?

Bill Mansfield

Management

That's a good way to measure efficiency, I'd agree.

Saul Ludwig - KeyBancCapital Markets

Analyst · Saul Ludwig from KeyBanc.Please go ahead

Okay. And then finally, Paul could you give any moresegmentation of the volume, price mix 1.9%. How does that sort of split up?

Bill Mansfield

Management

Well Saul, I'll tell you what our volumes improved throughthe year, and also our price mix improved somewhat through the year.

Saul Ludwig - KeyBancCapital Markets

Analyst · Saul Ludwig from KeyBanc.Please go ahead

I was talking about the 1.9% change fourth quarter to fourthquarter. I know that would assume price mix was more than 1.9%.

Paul Reyelts

Management

That's correct.

Bill Mansfield

Management

Yeah, that's correct.

Paul Reyelts

Management

Price mix was more. Volume was slightly negative.

Saul Ludwig - KeyBancCapital Markets

Analyst · Saul Ludwig from KeyBanc.Please go ahead

Okay. And could you give us any more granularity on that?

Paul Reyelts

Management

No, sir.

Saul Ludwig - KeyBancCapital Markets

Analyst · Saul Ludwig from KeyBanc.Please go ahead

Okay. And then finally, given the pulse of things, andwithin the context of your outlook for next year, should we be thinking thatwe're going to start out on the negative side with regard to how your firstquarter might look without maybe any greater granularity but at leastdirectionally, do you see first quarter being a tough quarter?

Bill Mansfield

Management

Saul, we've not been in the practice of providing quarterlyguidance and I would tell you that I don't think any quarter next year is goingto be any easier or tougher than any other at this point.

Saul Ludwig - KeyBancCapital Markets

Analyst · Saul Ludwig from KeyBanc.Please go ahead

Okay, great. Thank you very much, guys.

Bill Mansfield

Management

You're welcome.

Operator

Operator

Your next question comes from the line of Don Carson fromMerrill Lynch. Please go ahead.

Don Carson - MerrillLynch

Analyst · Don Carson fromMerrill Lynch. Please go ahead

Yes, thank you. Paul, can you just comment on sort of your,I mean, you talked about the architectural coating difficulties we face. I knowone of the raw material suppliers was talking about maybe a 5% down market inthe U.S. again next year. What are you thinking of in terms of the strength ofthe architectural market, and what shifts do you see in channel? Do you thinkin an economic downturn that maybe more people might go DIY, which would workto Valspar's favor? And then, a question for Bill. You talked about new brandingopportunities or new sales opportunities as a result of your brandinginitiatives, if you could just expand on that?

Bill Mansfield

Management

Let me try the last one first. I think it's premature tocomment on any specific opportunity. I can tell you that the increase inconsumer awareness clearly has gotten the attention of our major customers, andconsequently has resulted in additional opportunities for both Valspar andCabot brand, but it would be premature. With respect to the architectural market, whether it's down5% or not next year, I don't know. I can tell you that we for 2008 don'tbelieve the market will improve at all, and that's how we put our businesstogether. We also believe that housing turnover is a key determinantas we view the market. And again, I know there is lots of discussion aboutdifference in channel being professional or DIY, which is paint store versusbig-box, and I don't think there will be any, at least we don't see anysignificant move one way or another in 2008.

Don Carson - MerrillLynch

Analyst · Don Carson fromMerrill Lynch. Please go ahead

Thank you.

Bill Mansfield

Management

You're welcome.

Operator

Operator

Your next question comes from the line of Dmitry Silversteynfrom Longbow Research. Please go ahead.

Dmitry Silversteyn -Longbow Research

Analyst · Dmitry Silversteynfrom Longbow Research. Please go ahead

Good morning. Just a couple of questions. I want to makesure that I understand you correctly. The inventory correction that you carriedout in the fourth quarter, you feel that you've gotten the inventory to thelevel that will support continuing slowing business in the United States?

Bill Mansfield

Management

You bring up a good point, Dmitry. That 20 million wasprimarily in the U.S.and a lot of it was in our architectural business and I think those inventoriesare in reasonably good shape. There is always room for improvement in workingcapital, so we continue to focus on being more efficient users of workingcapital.

Dmitry Silversteyn -Longbow Research

Analyst · Dmitry Silversteynfrom Longbow Research. Please go ahead

Okay. But as far as you expect continuing weakness in the U.S.,I'm assuming you are producing at slightly lower volumes throughout the year toreflect that expectation?

Bill Mansfield

Management

That will be correct.

Dmitry Silversteyn -Longbow Research

Analyst · Dmitry Silversteynfrom Longbow Research. Please go ahead

Okay. But you don't think you are going to need to correctthe inventories in a major way again?

Bill Mansfield

Management

That would also be correct.

Dmitry Silversteyn -Longbow Research

Analyst · Dmitry Silversteynfrom Longbow Research. Please go ahead

Okay, excellent. General industrial business as far ascoatings is concerned was okay in the first half of the year and then itsounded like in the third and fourth quarter, it seems to have gotten weaker?

Bill Mansfield

Management

Yes.

Dmitry Silversteyn - Longbow Research

Analyst · Dmitry Silversteynfrom Longbow Research. Please go ahead

Can you kind of take us through the sequential, kind ofmonth-to-month changes, and what you are seeing right now, and do you expectthat business becoming a major source of weakness similar to architecturalcoatings in 2008, or do you thinks it's plateauing here?

Bill Mansfield

Management

No. My sense is, I can't do month-to-month, we don't havethat kind of…

Dmitry Silversteyn - Longbow Research

Analyst · Dmitry Silversteynfrom Longbow Research. Please go ahead

I understand, but at least directionally.

Bill Mansfield

Management

Yeah, directionally. My sense is, Dmitry, that it's probablyreached a plateau. I am concerned about the number of extended shutdowns thatour customers have announced over the holiday period. Typically, you haveperhaps two weeks and now it's three weeks, but having said, that talking toour customers I think we'd probably hit a plateau that I think will just stayat for 2008.

Dmitry Silversteyn - Longbow Research

Analyst · Dmitry Silversteynfrom Longbow Research. Please go ahead

Okay. And sort of packaging and the coil coating outside ofthe appliance applications as well as Huarun sounds like are going to be thedriver and the automotive after-market, going to be drivers in 2008?

Bill Mansfield

Management

Yes, our packaging business is doing quite well. We'rereally pleased with the performance. Huarun continues to do well. And certainlyour coil business and frankly even parts of our general industrial businessoutside of the U.S.are quite healthy.

Dmitry Silversteyn - Longbow Research

Analyst · Dmitry Silversteynfrom Longbow Research. Please go ahead

Okay, very good. And then you mentioned that you expect rawmaterials to be up about 2% to 3% year-over-year in 2008. From what you'reseeing right now and kind of where you're suppliers are coming to you withtheir proposals right now. Do you see a possibility of a spike inDecember-January period as we have a couple of years ago? Or do you think itwill be more like last year, where it's more gradual increases through out theyear.

Bill Mansfield

Management

I think our suppliers have made a broad range ofannouncements that really were at the turn of the quarter, October 1st, a greatnumber of them are still being negotiated. I think it's probably premature.Although I would say there is probably more pressure in the first six months ofthe year than the second half of '08.

Dmitry Silversteyn - Longbow Research

Analyst · Dmitry Silversteynfrom Longbow Research. Please go ahead

Okay. Thank you.

Bill Mansfield

Management

You're welcome.

Operator

Operator

Your next question comes from the line of Rosemarie Morbellifrom Ingalls & Snyder. Please go ahead. Rosemarie Morbelli -Ingalls & Snyder: Good morning, all.

Bill Mansfield

Management

Good morning, Rosemarie. Rosemarie Morbelli -Ingalls & Snyder: A little clarification, Bill. You said that, you expect theweak environment to continue in the U.S. in 2008 and you also talkedabout plateau in, if I understood properly in the coatings area. Do you expectto continue an increasing decline in the other areas or plateau across theboard?

Bill Mansfield

Management

No, Rosemarie, in the U.S. we expect the currentconditions, those conditions that we have experienced in our fourth quarter tocontinue for full year 2008. Rosemarie Morbelli -Ingalls & Snyder: But not weakening further?

Bill Mansfield

Management

No, we do not have any weakening further in our outlook. Rosemarie Morbelli -Ingalls & Snyder: And if you could talk about Europe a little bit, becausethere are signs that Western Europe is slowingdown. Are you seeing it, and how large is Western Europeas part of your international business?

Bill Mansfield

Management

Well, having just been there, I would agree there is concernwith respect to the strength of the Euro, the weakness of the dollar. Andinterestingly enough, they are also experiencing in some markets, Germany, UK decline in housing prices. Ourbiggest business and most important business in Europeis our packaging business. And that has demonstrated through the years aresiliency through the ups and downs of the economic cycle. And we anticipatewe will have a good year in Europe in ourpackaging business in 2008. Rosemarie Morbelli - Ingalls & Snyder: One thing, which if my memory serves me right, affects yourpackaging business is weather, the crops are good, salmon fishing and that sortof thing. Are you hearing anything and are you anticipating some of your endmarkets to be slower for one reason or another?

Bill Mansfield

Management

Well, I will complement you on your memory Rosemarie, that'sabout every reason I have used, you captured in your comments. However, I wouldtell you that there are no unusual conditions that we see today that wouldnegatively impact the business. Rosemarie Morbelli- Ingalls & Snyder: And you are lowering your CapEx level substantially for nextyear, are you eliminating some previously anticipated projects, just pushingthem out? Or do you feel that the reason is mostly that you are done with thebranding and other big projects?

Bill Mansfield

Management

No, I think it's more our prudent approach to 2008. We arepushing some projects back such that they would be done, second half of '08,first half of '09, which on a full year '08 basis will result in some reducedcapital spending. Rosemarie Morbelli- Ingalls & Snyder: What are we talking about, expansion of plans? Can you giveus a feel for what you are pushing?

Bill Mansfield

Management

No, these are mostly internal efficiency projects,replacement perhaps of some equipment with more efficient equipment. Rosemarie Morbelli- Ingalls & Snyder: Wouldn't you benefit from doing that when you expect a lowdemand and get us as much efficiencies as you possibly can?

Bill Mansfield

Management

As I've said, our judgment, we think the prudent thing to dois to conduct it the way I described it. Rosemarie Morbelli -Ingalls & Snyder: And if I may ask one last question, regarding gross margin,it was 29% in the fourth quarter; 28.7% in the first quarter of '07, based onall of the steps you are taking and all of your comments and then lessinvestments in the branding and so on. Do you expect next year's margin to beabove those two low levels?

Bill Mansfield

Management

I don't think we have looked it at that closely yet,Rosemarie. You're asking a quarterly question, I'd go back to my prior comment. Rosemarie Morbelli -Ingalls & Snyder: No, for the full year, I am just using that particular leveland looking at the full year. Those were the two lowest levels in '07. So, I amtaking those.

Bill Mansfield

Management

Flat, Rosemarie. Rosemarie Morbelli - Ingalls & Snyder: Okay, thanks.

Bill Mansfield

Management

You're welcome.

Operator

Operator

Your next question comes from the line of [James Sheehan]from Deutsche Bank. Please go ahead.

James Sheehan -Deutsche Bank

Analyst

Thank you. Another question on raw materials, you referencedback in your previous call some pressure in Europe.Is that continuing, and do you expect more of that in '08 and could you tell usor give us a little more color on what types of raw materials you are seeing thepressure in?

Bill Mansfield

Management

Well, at $95 a barrel of crude oil, we're seeing pressureacross the board. I don't think there is any one particular segment that'soutshining another. And we're seeing a continuing of a pressure in Europe on material costs. Fortunately, sometimes in thepast, it's been perhaps just a group, propylene derivatives, as an example wehave talked about in the past. But today, given the increase in BTU costs, beit gas and/or oil, it is pretty much across the board pressure.

James Sheehan -Deutsche Bank

Analyst

And is your pricing in Europe keeping pace with the rawmaterial increase just in Europe?

Bill Mansfield

Management

We have pricing initiatives underway in Europe,and they have been underway for a while now to recover what we have experienced.

James Sheehan -Deutsche Bank

Analyst

Okay. And you mentioned on the acquisition that you did inthe Central and Eastern Europe area, is that an example of the type of M&Athat we can expect in the future or can you comment a little bit more about theM&A pipeline?

Bill Mansfield

Management

Well, the pipeline, there are still deals, potential dealsthat are under discussion. And I think your point about this is this the kindof acquisition we are likely to see Valspar make going forward. If you look atour history over the past three years that is exactly the kind of acquisitionwe have been making. And so, I would think that that's a pretty good bet forthe future.

James Sheehan -Deutsche Bank

Analyst

Okay. And real quickly on the all other segment, is theincrease in there reflective of the gain on sale of assets?

Bill Mansfield

Management

Exactly.

James Sheehan -Deutsche Bank

Analyst

Okay, thanks a lot.

Bill Mansfield

Management

You're welcome, James.

Operator

Operator

Your next question comes from the line of Sergey Vasnetsov from Lehman Brothers. Please go ahead.

Sergey Vasnetsov - Lehman Brothers

Analyst · Sergey Vasnetsov from Lehman Brothers. Please go ahead

Good morning.

Bill Mansfield

Management

Good morning, Sergey.

Sergey Vasnetsov - Lehman Brothers

Analyst · Sergey Vasnetsov from Lehman Brothers. Please go ahead

Just briefly on the results, I think you should be proud ofwhat you accomplished in conditions which are very challenging, because I certainlyremember conversations a year ago in advance of the housing cycle decline, Ithink people have been circulating that, given your exposure you would havebeen -- you will be hit a little harder than you actually have been.

Bill Mansfield

Management

Thank you for the compliment, Sergey.

Sergey Vasnetsov - Lehman Brothers

Analyst · Sergey Vasnetsov from Lehman Brothers. Please go ahead

I want to ask you when you think [of below fuel] conditionsSeptember to October to November, even though November is just in the midst ofthe month, sequentially what kind of trends do you see?

Bill Mansfield

Management

What kind of trends do we see?

Sergey Vasnetsov -Lehman Brothers

Analyst · Sergey Vasnetsov from Lehman Brothers. Please go ahead

Yeah, on volume and pricing?

Bill Mansfield

Management

On volume and pricing, September, October, November,certainly what I can comment on, is we got concerned. That's why we had the callon October 1st. We got concerned what we saw in September versus June, July,August, to a certain extent. And I would tell you that October, Novembercontinued about the same as September's performance. There wasn't any realsignificant change either up or down between either our Paint segment orCoating segment. With respect to pricing, I presume you mean our finished,our pricing to our customers and we continue to execute on pricing initiativesthat we had been doing pretty much all of 2007. They were selective rifle shotapproaches. I think we'll be doing some more broad-based pricing as we go into2008.

Sergey Vasnetsov -Lehman Brothers

Analyst · Sergey Vasnetsov from Lehman Brothers. Please go ahead

Okay. And so, could you please clarify your expectationsfrom the customers' inventories. I think you touched on this earlier, but thefirst quarter of 2007 was impacted by significant adjustments of inventories atone of your large customers. What do you see going into the winter month,between now and March of next year?

Bill Mansfield

Management

I think this question I presume is related again to thePaint segment.

Sergey Vasnetsov -Lehman Brothers

Analyst · Sergey Vasnetsov from Lehman Brothers. Please go ahead

Yes.

Bill Mansfield

Management

And I think our customers' inventories are in reasonablygood shape, and I don't anticipate there will be an inventory correction likewe experienced last year.

Sergey Vasnetsov -Lehman Brothers

Analyst · Sergey Vasnetsov from Lehman Brothers. Please go ahead

Okay, thank you.

Bill Mansfield

Management

You're welcome, Sergey.

Operator

Operator

Your next question comes from the line of Bob Koort fromGoldman Sachs. Please go ahead.

Bob Koort - GoldmanSachs

Analyst · Bob Koort fromGoldman Sachs. Please go ahead

Thank you. Good morning.

Bill Mansfield

Management

Good morning, Bob.

Bob Koort - GoldmanSachs

Analyst · Bob Koort fromGoldman Sachs. Please go ahead

Couple of questions, I think Paul you might have said thatauto refinish was down year-on-year, is that right, and if so, what's going onthere?

Paul Reyelts

Management

I don't recall saying that.

Bill Mansfield

Management

No, I don't think that's the case, Bob.

Bob Koort - GoldmanSachs

Analyst · Bob Koort fromGoldman Sachs. Please go ahead

Okay, good. I must have misheard. And then when I look atwhat Lowe's had to say today, they talked about a little bit of pick upactually in fourth quarter here, slight they termed it, but they also talkedabout opening another 10% to the store count next year. I am just wondering isthat that the inventory channel fill, is that significant to you or given thatit's only 10% of their store base and Lowe's is not 50% of your sales, is itirrelevant?

Bill Mansfield

Management

Yeah, it's not relevant, because there is no year-over-yearbenefit. New store openings occurred in '07, they are going to occur in '08,they occurred in '06 and relatively around the same size. So, on a year-over-yearbasis, it's not a significant change.

Bob Koort - GoldmanSachs

Analyst · Bob Koort fromGoldman Sachs. Please go ahead

And I was wondering if you might, Bill, be able to dumb itdown for me. If the U.S.market is going to be weaker and I can't remember the term you used for globalmarket something like reasonable. Would you expect growth outside the U.S. basically to offset whatever slippage youmight see in the U.S.or is it something more subtle at play?

Bill Mansfield

Management

No, I think that's fair, the way you just described it. Westill expect to grow in the U.S.but certainly not to the extent that we grow outside the U.S. Like Paul talked about, Huarunand some of our other businesses outside the U.S.at high single-digits and that would imply the U.S. business still growing butmuch, much smaller than that.

Paul Reyelts

Management

And on the bottom line, obviously much tighter control ofexpenses in the domestic markets and some of the faster growth markets outsideof the U.S.

Bob Koort - GoldmanSachs

Analyst · Bob Koort fromGoldman Sachs. Please go ahead

Got it. Thank you.

Bill Mansfield

Management

You are welcome, Bob.

Operator

Operator

Your next question comes from the line of P.J. Juvekar fromCiti. Please go ahead.

P.J. Juvekar - Citi

Analyst · P.J. Juvekar fromCiti. Please go ahead

Yes, hi, good morning.

Bill Mansfield

Management

Good morning, P.J.

P.J. Juvekar - Citi

Analyst · P.J. Juvekar fromCiti. Please go ahead

Bill, architectural paint organic growth was negative. Can youjust sort of break that down between pricing and volume, so that we know whathappened to volumes?

Bill Mansfield

Management

No, I can't. But I will tell you that volumes on a full yearbasis were negative.

P.J. Juvekar - Citi

Analyst · P.J. Juvekar fromCiti. Please go ahead

Sort of mid single digit?

Bill Mansfield

Management

Yeah.

P.J. Juvekar - Citi

Analyst · P.J. Juvekar fromCiti. Please go ahead

Okay. And then looking into next year, you mentioned thatyou expect raw material costs to go up 2% to 3%, that sounds conservative, Imean it could be lot more than that given where oil is and given where all theraw materials are going?

Bill Mansfield

Management

I don't disagree that it could be a lot more. We have topick a planning number that seem to be a reasonable number, and like we did in2005, if material costs should shoot up more than what we have anticipated, wewould take the appropriate pricing steps.

P.J. Juvekar - Citi

Analyst · P.J. Juvekar fromCiti. Please go ahead

Okay. And then your brand advertising for Valspar brand, howdoes that ramp up has taken place, how does that play out in '08 and when doyou begin to ramp down? When do you feel that your advertising is good enoughthat there is -- are you doing consumer service and when do you think you won'tfeel the need to advertise as heavily?

Bill Mansfield

Management

Never, we will always advertise. I think what we were tryingto communicate is with the launch in 2007 that is clearly the year of greatestexpense.

P.J. Juvekar - Citi

Analyst · P.J. Juvekar fromCiti. Please go ahead

Right.

Bill Mansfield

Management

In 2008, it will ramp down by roughly $0.07 a share or $10million of expense, and then going forward, I would expect that there would besome perhaps modest decline in '09 and '010. But more importantly, as we getthrough and reach the bottom of the housing impact, we'll start to gainleverage with that advertising expense as we grow our business.

P.J. Juvekar - Citi

Analyst · P.J. Juvekar fromCiti. Please go ahead

Right. And in your mind, how was this advertising orbranding campaign taken place so far, have you done any studies with theconsumers and what's been the feedback?

Bill Mansfield

Management

Yes. Our consumer awareness numbers have increasedsignificantly month-over-month. We do this on a monthly basis. We use aresearch firm or we conduct consumer interviews quite scientific in its design.

P.J. Juvekar - Citi

Analyst · P.J. Juvekar fromCiti. Please go ahead

Can you quantify some numbers, you said significantly, butcan you just give us some numbers?

Bill Mansfield

Management

I really can't, P.J., that would be a step too far in termsof visibility relative to the competitive environment.

P.J. Juvekar - Citi

Analyst · P.J. Juvekar fromCiti. Please go ahead

Okay. I may come back to you on that later.

Bill Mansfield

Management

That would be fine. Please feel free to call me.

P.J. Juvekar - Citi

Analyst · P.J. Juvekar fromCiti. Please go ahead

Thank you.

Bill Mansfield

Management

You're welcome, P.J.

Operator

Operator

Your next question comes from the line of Jeff Zekauskasfrom J.P. Morgan. Please go ahead.

Silke Kueck - J.P.Morgan

Analyst · Jeff Zekauskasfrom J.P. Morgan. Please go ahead

Good morning. This is Silke Kueck for Jeff. How are you?

Bill Mansfield

Management

Fine, Silke.

Silke Kueck - J.P.Morgan

Analyst · Jeff Zekauskasfrom J.P. Morgan. Please go ahead

I also have a couple of questions. The strength in thepackaging business and the coil business, to what extent is that due to marketshare opportunities caused by the Akzo ICI merger?

Bill Mansfield

Management

I think that, well, I'll tell you in our packaging business,it's more about technology and it's about having the technology that thecustomer needs and wants and contributes through efficiency in their operationsand that's the primary driver.

Silke Kueck - J.P.Morgan

Analyst · Jeff Zekauskasfrom J.P. Morgan. Please go ahead

But it seems those numbers you've given include the marketshare gains.

Bill Mansfield

Management

I would hope they would, yes.

Silke Kueck - J.P.Morgan

Analyst · Jeff Zekauskasfrom J.P. Morgan. Please go ahead

You've given the scaling back of capital outlays. What isthe likelihood of $4 million share repurchase to be completed over the next 12months?

Bill Mansfield

Management

That would be speculative on my part. We have thisauthorization each year and we would expect to execute on the authorization asmarket conditions dictate it.

Silke Kueck - J.P.Morgan

Analyst · Jeff Zekauskasfrom J.P. Morgan. Please go ahead

Okay, and maybe two more if I can?

Bill Mansfield

Management

Sure.

Silke Kueck - J.P.Morgan

Analyst · Jeff Zekauskasfrom J.P. Morgan. Please go ahead

You said that most of your hydrocarbon-based raw materialsare going up and how about the mineral-based ones, like pigments, are thosealso going up?

Bill Mansfield

Management

Well, if you are using titanium dioxide, as an example of apigment, there is a significant energy component in that. And other than that,I really frankly don't have that level of detail available.

Silke Kueck - J.P.Morgan

Analyst · Jeff Zekauskasfrom J.P. Morgan. Please go ahead

And lastly, are there other planned rationalizationopportunities that you would have, and where would those be?

Bill Mansfield

Management

There are always opportunities to more efficiently operatethe facilities, but the question is directed towards to would we anticipate amanufacturing rationalization, like we went through in '05 and '06. At thispoint, no, we do not anticipate that.

Silke Kueck - J.P.Morgan

Analyst · Jeff Zekauskasfrom J.P. Morgan. Please go ahead

Something on the smaller scale?

Bill Mansfield

Management

We have always continued to do it on a smaller scale. Wehave never really talked about it a lot in terms of a non-recurring.

Silke Kueck - J.P.Morgan

Analyst · Jeff Zekauskasfrom J.P. Morgan. Please go ahead

In the respect [just that since I am on], how important iscommercial construction versus residential and what have you seen in thecommercial construction market?

Bill Mansfield

Management

Commercial construction is quite important to us,particularly in our coil coatings business, where we have a major position,particularly in the U.S.in commercial building, like industrial metal type manufacturing buildings. Andalso in Extrusion coatings, which are used in monumental buildings, largeoffice towers. The second segment that I commented on the Extrusioncoatings are doing quite well. That major construction, big offices tends to alag in downturn and lag in upturn, whereas in our commercial building businesswe have seen some weakness in the US in the second half of the yearin that business.

Silke Kueck - J.P.Morgan

Analyst · Jeff Zekauskasfrom J.P. Morgan. Please go ahead

Thank you very much.

Bill Mansfield

Management

You're welcome, Silke.

Operator

Operator

Your next question comes from the line of John McNulty from Credit Suisse. Please go ahead.

JohnMcNulty - Credit Suisse

Analyst · John McNulty from Credit Suisse. Please go ahead

Yeah, good morning.

Bill Mansfield

Management

Good morning, John.

JohnMcNulty - Credit Suisse

Analyst · John McNulty from Credit Suisse. Please go ahead

With regard to your sales forecast,can you just let me know if that's including currency, and if so, what yourassumptions are for FX?

Bill Mansfield

Management

Yes. We will let you know. I don'tknow if I can answer that question sitting here right now.

JohnMcNulty - Credit Suisse

Analyst · John McNulty from Credit Suisse. Please go ahead

But it did include foreign currencythough?

Bill Mansfield

Management

Yes.

JohnMcNulty - Credit Suisse

Analyst · John McNulty from Credit Suisse. Please go ahead

Okay. And then in the packagingbusiness with the expectations for double-digit growth, I know you had citedtechnology as being a big driver behind kind of the growth that you are seeingthere. What if any major new platforms have you launched, because it soundslike you are looking for growth, it's about four times kind of the normalizedgrowth rate of the packaging space?

Bill Mansfield

Management

Well, normalized growth rate, the U.S.market, I don't disagree with you, that's about a flat market. But there issignificant growth in units occurring in Europe, Middle East, Eastern Europe andAsia also. Asiais a bit of a change from it was several years ago. The unit volumes actuallyare growing and no surprise are actually growing in China. So, there is an organicgrowth story there relative to units. We haven't necessarily launchedany brand new platforms in the last couple of months. In this business, productlife cycles tend to be quite long. And some of the things, some of thetechnologies that we introduced several years ago are now starting to gain somepretty good traction. One of which would be, our water-based beverage and coating,and the traction is being gained on a global scale, and we are quite pleasedwith that progress.

JohnMcNulty - Credit Suisse

Analyst · John McNulty from Credit Suisse. Please go ahead

Okay, great. And then lastquestion, with your net debt-to-cap now kind of at a pretty manageable level,it looks like it's below 40% again. Would you be more inclined to be buyingback stock now or saving up for further bolt-on acquisitions or is it kind of apick them day-to-day?

Bill Mansfield

Management

I think that's a situationalissue, John. We don't tend to look at it on an absolute basis. I think it'smore situational.

Paul Reyelts

Management

Our main goal with stockrepurchases is to offset dilution from options, and some years we bought alittle more, other years we buy a little less, but over time I think our goalis to keep our share count relatively flat. Now, circumstances could suggest wego a little more one direction or the other, but that's our longer-term goal.

JohnMcNulty - Credit Suisse

Analyst · John McNulty from Credit Suisse. Please go ahead

Okay, great. Thanks for taking myquestions.

Bill Mansfield

Management

You're welcome, John.

Operator

Operator

You have a follow-up from theline of [James Sheehan] from Deutsche Bank. Please go ahead.

James Sheehan - Deutsche Bank

Analyst

Thank you. I just want to clarify with Paul on the autorefinish business, I think you were characterizing the drop in gross margin aspartially due to lower U.S. volumes in architectural paints, and partially dueto auto refinish coatings, could you explain what was the cause for the lowermargin there?

Paul Reyelts

Management

What I was trying to suggest is that we had a mix change as itrelates to our margin. In other words, softness in architectural and in theauto refinish resulted in having fewer or less sales in higher gross marginsegment. Does that make sense to you?

James Sheehan -Deutsche Bank

Analyst

Okay. So, the overall volumes in auto refinish, could youjust characterize them, were they flat or up or what were they?

Paul Reyelts

Management

They were pretty much flat.

James Sheehan -Deutsche Bank

Analyst

Okay, thanks a lot.

Bill Mansfield

Management

You're welcome, James.

Operator

Operator

Your next question is a follow-up from Rosemarie Morbelli fromIngalls & Snyder. Please go ahead. Rosemarie Morbelli -Ingalls & Snyder: Just quickly, could you remind us what the situation is withHuarun. Are we going to see the end of this minority interest shares or is thisgoing on forever because of the situation there, [your split in] ownership. Andif it is going to go on forever, why separate them from operations?

Paul Reyelts

Management

It won't go on forever. There is a put in a call that has adate of -- I think it's July of 2009. And so, we anticipate that either theminority shareholders will put or that we will call at that date. That's ourbest guess. That's what we're assuming in terms of how the charge is beingcalculated today. Rosemarie Morbelli -Ingalls & Snyder: And so, what is going to be the net-net, whether one doesone thing or the other thing. What is the net-net in July of '09?

Paul Reyelts

Management

Well, these are relating to the shares that are owned bynon-management shareholders. So, we still have some management shareholdersthat own a small amount, less than 10%. So, the assumption is that the outsideshareholders at that point will want to exercise their put. We can't forecastfor share, but that's the assumption at this point.

Lori Walker

Analyst · Saul Ludwig from KeyBanc.Please go ahead

So, what ends up happening is that mandatory redeemablestock, non-cash charge are seeing, at the time that they put a recall, theentire amount will reverse. So it will be a pick up at that point in time. Rosemarie Morbelli -Ingalls & Snyder: I see. So this is why we are using it as a non-recurring,because it will reverse itself at the end of the period.

Lori Walker

Analyst · Saul Ludwig from KeyBanc.Please go ahead

Right.

Bill Mansfield

Management

Correct. Rosemarie Morbelli -Ingalls & Snyder: Okay, thanks.

Bill Mansfield

Management

You're welcome.

Operator

Operator

And you have a follow-up from Saul Ludwig from KeyBanc.Please go ahead.

Saul Ludwig - KeyBancCapital Markets

Analyst · KeyBanc.Please go ahead

On the incentive comp, I know back in the third quarter year-over-year,it was down and I guess, I assume it was down in the fourth quarter. What wasthe magnitude of that drop-off in incentive comp in the fourth quarter and forthe year?

Bill Mansfield

Management

Well, Saul, I don't have the number in front of me, but year-over-year,there was a drop-off in the fourth quarter. That's a pretty good headwind in 2008.I think it's fair to say, and we also have incorporated that into our guidance.

Saul Ludwig - KeyBancCapital Markets

Analyst · KeyBanc.Please go ahead

When you say a headwind, meaning there will be more of it?

Bill Mansfield

Management

Yeah. We're not going to go two years in a row.

Saul Ludwig - KeyBancCapital Markets

Analyst · KeyBanc.Please go ahead

Do you have any idea what magnitude that in a sense helpedyour earnings this year?

Bill Mansfield

Management

Not on top of my head, I don't, Saul.

Saul Ludwig - KeyBancCapital Markets

Analyst · KeyBanc.Please go ahead

Okay. And you mentioned that in the higher margin productsin the architectural, I know I was under the impression that as you were rollingout the Valspar brand as a signature product, it was moving stronger than justthe Valspar brand product, but am I to interpret from your commentary that itwas the reverse?

Paul Reyelts

Management

No.

Bill Mansfield

Management

No.

Saul Ludwig - KeyBancCapital Markets

Analyst · KeyBanc.Please go ahead

Then what was the higher margin product that wasn’t sellingso well?

Paul Reyelts

Management

Across the Board, architectural gross margins are higherthan, say, industrial margins or coatings gross margin as a whole. It goes upwith the architectural category, not within the architectural product spectrum.

Saul Ludwig - KeyBancCapital Markets

Analyst · KeyBanc.Please go ahead

All right

Paul Reyelts

Management

Exactly.

Bill Mansfield

Management

So, all we are trying to communicate was in the fourth quarter,our mix was not as rich as it had been in prior quarters.

Saul Ludwig - KeyBancCapital Markets

Analyst · KeyBanc.Please go ahead

Got you. And then, finally, do you think by spending $10million less in advertising in support of the brand, that’s going to have anynegative effect on volume?

Paul Reyelts

Management

It was always going to be a 5-year plan, and we arefollowing a 5-year plan that was put in place probably over a year ago. So, itisn’t like we decided to lower next year, to modify our approach based oncircumstances. It just was the plan all along. So, I don’t know if that answersyour question, but we are not adjusting to a good or bad environment in termsof our plan for advertising.

Saul Ludwig - KeyBancCapital Markets

Analyst · KeyBanc.Please go ahead

I am just wondering, I know it’s the plan, but if you spendless, do you think it will have any negative effect once you go out the door?

Bill Mansfield

Management

No, Saul. We don't nor do our customers.

Saul Ludwig - KeyBancCapital Markets

Analyst · KeyBanc.Please go ahead

Okay. Thank you very much.

Bill Mansfield

Management

You're welcome, Saul.

Operator

Operator

And at this time, there are no further questions.

Bill Mansfield

Management

Well, thank you everyone. We appreciate your attending ouryear-end conference call. To summarize, a difficult environment in 2007, but weaccomplished a number of things strategically. We think we're well positionedgoing forward in to 2008 to deliver improved financial results and we lookforward to speaking with you in February at our first quarter conference call.Thank you everybody.

Operator

Operator

Ladies and gentlemen, this conference will be available forreplay after 1:30 Central Time today to December 3rd. You may access theAT&T teleconference replay system at any time by dialing 1-800-475-6701 andentering the access code 894063. International participants dial 320-365-3844.Those numbers once again are 1-800-475-6701 or 320-365-3844, with the accesscode 894063. That does conclude your conference for today. Thanks you foryour participation and for using the AT&T executive teleconference. You maynow disconnect.