Valspar Corporation (The) (VAL)

VAL 
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The Valspar Corporation (VAL)

F1Q13 Earnings Call

February 12, 2013 11:00 am ET

Executives

Lori A. Walker – Senior Vice President and Chief Financial Officer

Gary E. Hendrickson – Chairman and Chief Executive Officer

Analysts

Robert A. Koort – Goldman Sachs & Co.

Jeffrey J. Zekauskas – JPMorgan Securities LLC

Dmitry Silversteyn – Longbow Research

Charles A. Dan – Morgan Stanley

Ivan M. Marcuse – KeyBanc Capital Markets

David I. Begleiter – Deutsche Bank Securities, Inc.

John McNulty – Credit Suisse Securities LLC

Steven K. Schwartz – First Analysis Securities

Daniel Jester – Citigroup

Rosemarie J. Morbelli – Gabelli & Co., Inc.

Don D. Carson – Susquehanna Financial Group LLP

Kevin W. Hocevar – Northcoast Research Partners LLC

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Valspar Fiscal 2013 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host Senior Vice President and Chief Financial Officer, Lori Walker. Please go ahead.

Lori A. Walker

Good morning and welcome to our fiscal 2013 first quarter earnings conference call. Gary Hendrickson, our Chairman and Chief Executive Officer, is with me on our call this morning.

Before we begin, I'll direct your attention to the press release we issued this morning that contains much of the information we'll be covering in the call.

This call is subject to the forward-looking statements language contained in our press release and our comments may include forward-looking statements as that term is defined by securities law. This morning, I'll begin by covering our results for the quarter. Gary will make some comments, and then we'll respond to your questions.

First quarter sales totaled $875.2 million compared to $885.6 million in the first quarter of 2012. Adjusted net income per share for the quarter was $0.60 compared to $0.62 in 2012. We had missing some end markets outside the U.S., led to the decline in revenue, but this was partially offset with significant new business and strong performance in the Americas.

As I comment on our gross margin and operating expense performance, note that restructuring is excluded in 2012. For the first quarter, our gross margin was 33.6%, up slightly from 2012. Operating expenses as it relate to revenue were 22.9%, up slightly from 22.6% last year, primarily due to lower net sales and investments to support our new business growth, which Gary will highlight.

The reported tax rate for the first quarter was 28.3%, up from a rate of 26.1% in the first quarter of last year. The higher tax rate for the quarter was due to geographic mix of earnings. For fiscal 2013, we expect the effective tax rate to be approximately 31% to 32%.

Average diluted shares outstanding were $92.4 million, down $3.1 million from last year. In the quarter, we continued to return cash to shareholders, repurchasing approximately 1.2 million shares. We have 14.4 million shares remaining under our current authorization. And we estimate average diluted shares outstanding for the second will quarter be approximately 92 million.

Recapping our sales performance in the quarter, sales declined approximately 1%, volumes were up about a 1%, but we had negative sales mix of 2%. We did not have any benefit from pricing and currency impact was negligible.

I’ll now discus our segment results for the quarter. Coating segment sales adjusted for currency increased 1.3%. Sales in this segment benefited from new business and all of our product lines that helped offset uneven market conditions. In the coating segment what we saw was market weakness in our general industrial product line, where revenue declined globally mainly due to inventory liquidation in the operating equipment market and a weak shipping container market.

There was also market weakness in two segments of our packaging business, food and general line packaging. Paint segment sales when adjusted for currency and acquisitions declined 5.3%.

In our North America consumer product line sales and volumes were up mid-single digits. This growth was more than offset by weakness in China and Australia. In China, volumes were down low single digits, as distributors were more cautious with inventories ahead of the Chinese New Year and in response to the slow economy. Volumes were down in Australia due to a weak residential construction market and the restructuring of our storage footprint.

Sales in our other segment when adjusted for currency declined 5.5% due to last years exit of our gelcoat product line.

I am now going into a discussion of our EBIT margins for the quarter. All of the numbers I’ll be discussing exclude restructuring charges in 2012. Our coating segment EBIT margin was 14.9% roughly the same as the first quarter of 2012.

Our paint segment EBIT margin was 6.9%, down 120 basis points from 8.1% in 2012. The decline was driven by lower sales and the timing of investments to support new business initiatives. The EBIT margin for our other segment was negative 8.9% compared with negative 10.3% in the first quarter last year. As a reminder, other includes our corporate expenses. The total company EBIT margin for the quarter was 10.6%, down slightly from 10.9% in the first quarter of 2012.

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