Paul Reyelts - EVP and CFO Bill Mansfield - Chairman, President and CEO Lori Walker - VP, Treasurer and Controller

Steve Schwartz - First Analysis Saul Ludwig - KeyBanc Capital Markets Don Carson - Merrill Lynch Dmitry Silversteyn - Longbow Research Rosemarie Morbelli - Ingalls & Snyder James Sheehan - Deutsche Bank Sergey Vasnetsov - Lehman Brothers Bob Koort - Goldman Sachs P.J. Juvekar - Citi Silke Kueck - J.P. Morgan John McNulty - Credit Suisse

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.

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 shares. Reported earnings per share were $0.45. In 2006, fourthquarter earnings were $52.1 million, or $0.51 per share, which included a $0.01per share charge for manufacturing rationalization and a net gain of $0.03 pershare resulting from favorable income tax adjustments. Excluding adjustments, the underlying EPS comparison for thefourth quarter is $0.40 per share in 2007 and $0.49 per share in 2006. For the fourth quarter, our gross margin was 29%, down from31.5% in the fourth quarter of 2006 and down from 31.6% when adjusted for lastyear's manufacturing rationalization. Now, about 1% of the decrease is due to three non-recurringitems that we discussed in our last call: one, manufacturing efficienciesresulting from inventory reduction; two, downsizing of an industrialmanufacturing plant; and three, manufacturing startup costs in Brazil. Roughly, another percentage pointis due to lower U.S. volume in our higher margin Paints segment, specifically,architectural and automotive refinish coatings and a little more than a halfpoint is due to increased raw material costs. Operating expenses were 20.1% forthe quarter, down two-tenths of a percent from 20.3% in 2006 with lowerincentive compensation costs, partially offsetting our investment in brandbuilding. The fourth quarter operating margin was 8.9% versus 11.2% last year. The tax rate for the fourth quarterwas 36%. The higher tax rate is related to an estimated reevaluation of our China entities'deferred tax accounts to reflect recent changes in Chinese Tax Law. Saidanother way, we expect our tax rate in China to be up going forward. Andso, we are adjusting our deferred tax accounts to reflect that expectation onour part. We expect the effective tax rate on income from ongoing operations tobe approximately 33% to 33.5% for fiscal 2008. Average shares outstanding weredown $1.1 million from a year ago, with the decline related to the acceleratedshare repurchase that we completed in the second quarter. During the fourthquarter, we didn't purchase any additional shares. Average shares outstanding were $101.8 million for thequarter and are projected to be a $102 million for the first quarter of 2008.As a reminder, we purchased approximately 2.6 million shares in 2007. Recapping our sales performance for the quarter, our coregrowth defined as volume, price mix combined was up 1.9%. Currency added 2.6%and acquisitions added another 4.3% for total net growth of 8.8% in thequarter. Now, turning to our segment results, Paint sales increased5.7% and were basically flat when adjusted for currency and acquisitions,reflecting the impact of soft architectural sales. Coatings sales increased 11.8% and were up low single-digitwhen adjusted for currency and acquisitions. As mentioned previously, coatingsales were impacted by soft sales in our wood coatings product line related tofurniture and new construction markets. General industrial sales were also somewhat soft, while ourcoil coatings achieved a solid performance in the fourth quarter. Packagingcoatings was our strongest sub-segment, up high single-digit and up midsingle-digit when adjusted for currency. Sales in our other category, which includes resins,colorants, gel coats and our furniture repair business, were up 1.4% and downslightly when adjusted for currency and for acquisitions. Looking at the full year, our Paints segment sales increased10.5% and were down low single-digit when adjusted for currency andacquisitions. Also for the full year, our Coatings segment was up 10% andbasically flat when adjusted for currency and acquisitions. Again, our best sales performance came from PackagingCoatings, which was up high single-digit for the year and up mid single-digitwhen adjusted for currency. And our Other segment was flat for the year andwhen adjusted for currency and acquisitions, down low single-digit. Addressing margins for the quarter by segment, our Paintssegment EBIT margin was 7.4%. Now adjusting for the brand spend, our Paintssegment EBIT margin would have been just under 11% for the quarter, down from12.7% in 2006 due to manufacturing inefficiencies resulting from our inventoryreduction actions. Our Coatings segment EBIT margin was 11.8% for the quarter,down from 12.9% for the fourth quarter of 2006. The EBIT margin for our Othercategory, which includes our corporate expenses, was 14.3% compared with negative4.8% last year. The increased in Other EBIT was due to the one-time sale ofassets mentioned in our press release. And excluding the gain, our Other EBITmargin would have been comparable to last year. Total company EBIT margin was 10.7% for the quarter, downfrom 11% in 2006 and without the asset sale, this year's EBIT margin would havebeen 8.7%. Looking at the full year, our Paints segment EBIT margin was9.7% versus 10.9% in 2006. The Coatings EBIT margin for the year was 10.7%compared to 12% last year. And the Other segment margin was positive 5.6%reported and positive 0.3% adjusted for the gain on sale of assets versusnegative 1.9% in 2006. Total company full year EBIT margin adjusted for theasset gain was 9.4% compared to 10.2% last year. So now, I'll move to the balance sheet. Total debt at theend of the fourth quarter was $1.17 billion, up $178 million from the $839million at the end of last fiscal year. The increase is due primarily to $172million for acquisitions and $72 million of share repurchases. We are now estimating that year end debt for fiscal 2008will be $850 million to $875 million, assuming no additional acquisitions orshare repurchases. Our year end debt-to-capital ratio was 42.4% with net debt-to-capitalat 40.3%. Capital spending in the fourth quarter was $29.2 million,down from $35 million in last year's fourth quarter. And for the full year,capital spending was $76.9 million versus $75.4 million in 2006. Our forecastfor 2008 capital spending is $60 million to $65 million. Depreciation and amortization for the fourth quarter totaled$20.3 million versus $17.7 million in the fourth quarter of 2006. Our full yeardepreciation and amortization was $71.8 million versus $68.7 million last year.The fourth quarter and full year depreciation expense figures from last yearinclude the impact of our manufacturing rationalization. Our forecast for depreciation and amortization combined in2008 is approximately $75 million. As mentioned in our release, our adjustedearnings per share from operations this year were $1.58. Looking to fiscal 2008, at this point, our currentexpectation is for 2008 adjusted earnings per share to be in the range of $1.65to $1.75. This assumes no improvement in economic conditions in the U.S.,raw material increases in the 2% to 3% range and modest improvements in ourpricing. This would represent approximately a 4% to 10% improvement in EPS fromoperations, which we think is reasonable, given our outlook for the U.S. economy. For 2008, we expect low double-digit sales growth in ourpackaging and auto refinish businesses and in Huarun Paints in China.These businesses represent about 30% of our total sales and are largely focusedon faster growth markets outside of the U.S. For the balance of ourbusinesses, we anticipate low single-digit growth exclusive of acquisitions,reflecting our conservative outlook for the U.S. economy. With those comments, I would like to turn the call over toBill Mansfield now.

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 onstrategic acquisition opportunities. Now, having said that we are not at all satisfied with our2007 financial performance; as Paul said, for 2008, we expect a weak U.S. salesenvironment to continue through the year with the exception of our packagingbusiness. And, we also expect reasonable market conditions in our internationalmarkets. So, here is what we are doing to ensure improved 2008performance. Over the last three weeks, I met with over 600 Valspar employeesat their facilities around the world in the Americas,in Europe and Asia. The purpose of these meetings was to ensure that there was acomplete understanding and alignment on our strategy, that we had theappropriate focus on execution and that there were sound plans in place togenerate and deliver new business even in the U.S. markets. To make sure that theopportunities to improve our operations have been identified that the planswith well-defined targets, milestones and accountability were in place and thatthere was a clear understanding of what needs to get done, translate that toexecute to deliver improved financial performance in 2008. I was quite pleased with what I saw and heard from ouremployees. They are pushing very hard on improvements in operations, and byoperations, I don't just mean manufacturing, I am talking about closing newbusiness opportunities, implementing needed and required price increases andprudent cost control around the globe. We were successful in reducing our inventory. We indicatedan objective of a 5% to 10% reduction over our ending third quarter levels andI am pleased to tell you that we reduced our inventories by close to 7%. Theindustrial plant downsizing we talked about in our October 1st call is nearlycompleted and should contribute to cost savings next year. One other point I would like to make is I haven't talked alot at least externally, about our Lean Six Sigma initiative that we launchedinternally at the end of '06. But I can tell you on a global basis, we have 291active projects that are being worked on by Black Belts and Green Belts aroundthe globe. And, as these projects are completed, they should result inmeaningful improvements in the operations of our business. So I came away pleased that we have clearly definedexecution plans in place for all of our businesses and regions. So with those comments, I would like to open it up forquestions.

Okay. (Operator Instructions) Your first question comes fromthe line of Steve Schwartz from First Analysis. Please go ahead. Steve Schwartz -First Analysis: Hi, good morning.

Good morning, Steve. Steve Schwartz -First Analysis: 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?

Steve, I think what you need to do is our fourth quarterincludes Teknos acquisition. Steve Schwartz -First Analysis: Okay.

So, if you take the inventory up for the Teknos acquisition,it's actually down 7%. Steve Schwartz -First Analysis: Okay. All right.

Roughly. Steve Schwartz -First Analysis: Okay. Can you give me that number, what that would be?

That would be around $20 million reduction from the end ofthe third quarter. Steve Schwartz -First Analysis: 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?

That would be correct, Steve. Steve Schwartz -First Analysis: Okay. So what we have seen here in the fourth quarter, I'mcalling 55 basis points, we probably at this point just eat?

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: 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?

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: Okay, great. Thank you.

You're welcome.

Your next question comes from the line of Saul Ludwig from KeyBanc.Please go ahead. Saul Ludwig - KeyBancCapital Markets: Hi, good morning, guys.

Good morning, Saul. Saul Ludwig - KeyBancCapital Markets: What were the final numbers on the brand building this yearand what do you expect next year?

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

Saul, we haven't done the cash flow statement yet. Saul Ludwig - KeyBancCapital Markets: Order of magnitude, Paul?

What would you say, Lori?

I'd [roughly get there too].

Saul, I tell you why don't you let us get back to you onthat? Saul Ludwig - KeyBancCapital Markets: Okay. No problem.

We really haven't had a chance to do that yet. Saul Ludwig - KeyBancCapital Markets: Okay. On the raw materials, what was sort of the swing fromthe third to the fourth quarter, would you think there was any increase?

Yeah, there was a small slight moment up. Saul Ludwig - KeyBancCapital Markets: Kind of like maybe 1% or so.

Yeah, that would be in the ballpark, Saul. Saul Ludwig - KeyBancCapital Markets: 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?

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

That's a good way to measure efficiency, I'd agree. Saul Ludwig - KeyBancCapital Markets: Okay. And then finally, Paul could you give any moresegmentation of the volume, price mix 1.9%. How does that sort of split up?

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

That's correct.

Yeah, that's correct.

Price mix was more. Volume was slightly negative. Saul Ludwig - KeyBancCapital Markets: Okay. And could you give us any more granularity on that?

No, sir. Saul Ludwig - KeyBancCapital Markets: 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?

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: Okay, great. Thank you very much, guys.

You're welcome.

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

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: Thank you.

You're welcome.

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

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: 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?

That will be correct. Dmitry Silversteyn -Longbow Research: Okay. But you don't think you are going to need to correctthe inventories in a major way again?

That would also be correct. Dmitry Silversteyn -Longbow Research: 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?

Yes. Dmitry Silversteyn - Longbow Research: 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?

No. My sense is, I can't do month-to-month, we don't havethat kind of… Dmitry Silversteyn - Longbow Research: I understand, but at least directionally.

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: 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?

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: 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.

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: Okay. Thank you.

You're welcome.

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

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?

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?

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?

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?

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?

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?

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?

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?

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.

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

You're welcome.

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

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

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: 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?

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

Exactly. James Sheehan -Deutsche Bank: Okay, thanks a lot.

You're welcome, James.

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

Good morning, Sergey. Sergey Vasnetsov - Lehman Brothers: 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.

Thank you for the compliment, Sergey. Sergey Vasnetsov - Lehman Brothers: 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?

What kind of trends do we see? Sergey Vasnetsov -Lehman Brothers: Yeah, on volume and pricing?

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: 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?

I think this question I presume is related again to thePaint segment. Sergey Vasnetsov -Lehman Brothers: Yes.

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: Okay, thank you.

You're welcome, Sergey.

Your next question comes from the line of Bob Koort fromGoldman Sachs. Please go ahead. Bob Koort - GoldmanSachs: Thank you. Good morning.

Good morning, Bob. Bob Koort - GoldmanSachs: 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?

I don't recall saying that.

No, I don't think that's the case, Bob. Bob Koort - GoldmanSachs: 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?

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: 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?

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.

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: Got it. Thank you.

You are welcome, Bob.

Your next question comes from the line of P.J. Juvekar fromCiti. Please go ahead. P.J. Juvekar - Citi: Yes, hi, good morning.

Good morning, P.J. P.J. Juvekar - Citi: 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?

No, I can't. But I will tell you that volumes on a full yearbasis were negative. P.J. Juvekar - Citi: Sort of mid single digit?

Yeah. P.J. Juvekar - Citi: 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?

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: 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?

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: Right.

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: 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?

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

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

That would be fine. Please feel free to call me. P.J. Juvekar - Citi: Thank you.

You're welcome, P.J.

Your next question comes from the line of Jeff Zekauskasfrom J.P. Morgan. Please go ahead. Silke Kueck - J.P.Morgan: Good morning. This is Silke Kueck for Jeff. How are you?

Fine, Silke. Silke Kueck - J.P.Morgan: 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?

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

I would hope they would, yes. Silke Kueck - J.P.Morgan: You've given the scaling back of capital outlays. What isthe likelihood of $4 million share repurchase to be completed over the next 12months?

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: Okay, and maybe two more if I can?

Sure. Silke Kueck - J.P.Morgan: 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?

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

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: Something on the smaller scale?

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

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: Thank you very much.

You're welcome, Silke.

Your next question comes from the line of John McNulty from Credit Suisse. Please go ahead. JohnMcNulty - Credit Suisse: Yeah, good morning.

Good morning, John. JohnMcNulty - Credit Suisse: 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?

Yes. We will let you know. I don'tknow if I can answer that question sitting here right now. JohnMcNulty - Credit Suisse: But it did include foreign currencythough?

Yes. JohnMcNulty - Credit Suisse: 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?

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: 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?

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

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: Okay, great. Thanks for taking myquestions.

You're welcome, John.

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

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

They were pretty much flat. James Sheehan -Deutsche Bank: Okay, thanks a lot.

You're welcome, James.

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?

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?

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.

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.

Right.

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

You're welcome.

And you have a follow-up from Saul Ludwig from KeyBanc.Please go ahead. Saul Ludwig - KeyBancCapital Markets: 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?

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

Yeah. We're not going to go two years in a row. Saul Ludwig - KeyBancCapital Markets: Do you have any idea what magnitude that in a sense helpedyour earnings this year?

Not on top of my head, I don't, Saul. Saul Ludwig - KeyBancCapital Markets: 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?

No.

No. Saul Ludwig - KeyBancCapital Markets: Then what was the higher margin product that wasn’t sellingso well?

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: All right

Exactly.

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: 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?

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: 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?

No, Saul. We don't nor do our customers. Saul Ludwig - KeyBancCapital Markets: Okay. Thank you very much.

You're welcome, Saul.

And at this time, there are no further questions.

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.

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.