Valspar Corporation (The) (VAL)

VAL 
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Valspar Corp. (VAL)

F1Q09 2009 Earnings Call

February 23, 2009 11:00 am ET

Executives

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

William L. Mansfield – Chairman of the Board and Chief Executive Officer

Analysts

Steven Schwartz – First Analysis Corp.

David Begleiter – Deutsche Bank

Prashant Juvekar – Citigroup

Robert Koort – Goldman Sachs

Jeffrey Zekauskas – J.P. Morgan

Saul Ludwig – Keybanc Capital Markets

Dmitry Silversteyn – Longbow Research

Sergey Vasnetsov – Barclays Capital

Michael Hamilton – RBC Capital Markets

Presentation

Operator

Welcome to the first quarter earnings conference call. (Operator Instructions). I would now like to turn the conference over to our host, Ms. Lori Walker. Please go ahead.

Lori A. Walker

Welcome to our first quarter earnings conference call. Bill Mansfield, Chairman and CEO, is with me on our call this morning. 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’ll be covering in the call. Also, a quick reminder that this call is subject to the forward-looking statements language contained in our press release as our comments this morning may include forward-looking statements as that term is defined by securities law.

This morning I’ll review our first quarter results, Bill will make a few comments and then we’ll get to your questions. Despite the difficult economic environment, our earnings for the first quarter were in line with our expectations. First quarter sales totaled $639.5 million down 16.4% from last year driven by a volume decline and unfavorable currency.

Adjusted for currency and acquisition, sales were down 14%. First quarter adjusted net income per share was $0.20 in 2009 and $0.24 in 2008, excluding non-cash adjustments of $0.03 per share for Huarun minority interest shares in both 2008 and 2009 and a $0.06 per share charge in 2009 related to restructuring actions.

Net income for the first quarter of 2009 was $14.2 million. First quarter reported earnings per share were $0.11. Net income for the first quarter of 2008 was $24 million. First quarter reported earnings per share in 2008 were $0.21.

For the first quarter, our reported gross margin was 29.6% or 30.4% after excluding the impact of our restructuring actions up from 27.5% in the first quarter of 2008. The margin improvement was driven by a combination of carryover pricing, improved product mix and productivity gains in our manufacturing facilities, which were offset by higher raw material costs.

Operating expenses, excluding restructuring charges, were down approximately $5 million or 3% for the quarter driven by benefits from our previously completed restructuring actions and tight control of expenses. As a rate to revenue, operating expenses were 23.6%, excluding restructuring, which were up 330 basis points from 20.3% in the first quarter of 2008. The increase as a rate to revenue was due to de-leveraging on the decline in sales.

The tax rate for the first quarter was 34.9% this compares with 34.5% in the first quarter of 2008. We expect the effective tax rate for the full year to be 33.5% to 34%. We did not repurchase any shares in the quarter. Average shares outstanding were down 752,000 from a year ago with the decline related to the shares that we repurchased last year. Average shares outstanding were 100 million for the first quarter and are projected to be approximately the same for the second quarter.

Recapping our sales performance for the quarter, our core growth defined as volume price mix was down 14% primarily driven by a volume decline that was partially offset by carryover pricing. Currency was negative 3.1% and acquisitions were up 0.7% for the total decline of 16.4% in the quarter.

Looking at our segment results, paint sales declined 7% and were down about the same when adjusted for currency and acquisitions. Demand in the big box channel and our Huarun business held up better than the dealer and mass merchant channels.

Our coating segment sales declined 20.5% and were a few points better when adjusted for currency and acquisitions. Sales volumes were particularly challenging in our coil, general industrial and wood product lines. Sales in our other category, which includes resins, colorant, gel coats and our furniture repair business, declined 19.7% driven by our gel coat business and were a few points better when adjusted for currency and acquisitions.

Addressing margins for the quarter by segment, and this excludes restructuring charges, our coating segment EBIT margin was 8.6% up from 8.3% in the first quarter of 2008. Our paint segment EBIT margin was 7.6% down 40 basis points from 8% in 2008. The EBIT margin for our other category was negative 10.7% compared with negative 8.1% in the first quarter last year.

As a reminder, our other category includes corporate expenses. Excluding restructuring charges, the total company EBIT margin for the quarter was 6.7% essentially flat with our 2008 first quarter margin of 6.8%.

Moving to the balance sheet, total debt at the end of the first quarter was $998 million up $75 million from the end of last fiscal year due primarily to the expected seasonality of operating cash flows. We’re estimating that year end debt for fiscal year 2009 will be $825 million assuming no acquisitions or share repurchases. This implies free cash flow after dividends of approximately $100 million.

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