Valspar Corporation (The) (VAL)

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The Valspar (VAL)

Q2 2013 Earnings Call

May 14, 2013 11:00 am ET

Executives

Tyler N. Treat - Vice President and Treasurer

Gary E. Hendrickson - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

James L. Muehlbauer - Chief Financial & Administrative Officer and Executive Vice President

Analysts

Ivan M. Marcuse - KeyBanc Capital Markets Inc., Research Division

P. J. Juvekar - Citigroup Inc, Research Division

Neal Sangani - Goldman Sachs Group Inc., Research Division

Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division

Christopher J. Nocella - RBC Capital Markets, LLC, Research Division

Ernie Ortiz

Kevin Hocevar - Northcoast Research

Charles A. Dan - Morgan Stanley, Research Division

Nils-Bertil Wallin - CLSA Asia-Pacific Markets, Research Division

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Steven Schwartz - First Analysis Securities Corporation, Research Division

Eugene Fedotoff - Longbow Research LLC

Saul Ludwig - Northcoast Research

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to The Valspar Fiscal 2013 Second Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to Tyler Treat. Please go ahead.

Tyler N. Treat

Good morning. My name is Tyler Treat, and I'm Valspar's Treasurer and Vice President of Investor Relations. Thank you for joining us on our fiscal 2013 second quarter earnings conference call.

We have 2 speakers today to provide you with insights on the results we announced this morning: Gary Hendrickson, our Chairman and Chief Executive Officer; and Jim Muehlbauer, who recently joined Valspar as Executive Vice President, Chief Financial and Administrative Officer. After our prepared remarks, we'll be happy to take your questions.

Let me also remind you that comments made by me or by others representing Valspar may contain forward-looking statements, which are subject to risks and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations. These filings can be found in the Investor Relations section of our corporate website at valsparglobal.com. And finally, please note that our reported results this morning included non-GAAP financial measures. This result should not be confused with the GAAP numbers we reported this morning in our earnings release or with the GAAP numbers we will report on our Form 10-Q.

For GAAP to non-GAAP reconciliations about reported to adjusted results and guidance, please refer to the supplemental schedules in this morning's news release.

With that, let me introduce Valspar's Chairman and CEO, Gary Hendrickson.

Gary E. Hendrickson

Thank you, Tyler, and good morning, everyone. We delivered strong volume performance in the quarter, and our overall results were in line with our expectations and reflective of the environment I discussed with you on last quarter's call.

We were particularly pleased to report total volume growth of 7% and to see volume growth in both our Paints and Coatings segments. These gains came despite continued uneven global demand and market weakness in some product lines in international markets.

Driving much of the volume growth in the quarter was new business we won from our ongoing efforts to grow in product lines that would deliver profitable growth for the long term.

Several quarters ago, we discussed our exit from some unprofitable product lines and customers, which cumulatively represented 2% of our volume. Now that we have begun to anniversary these initiatives, the new business growth we have been talking about is much more apparent.

In North America, consumer paints, excluding the new Ace business, volume grew low-teens, driven by the deployment of new retail programs designed to grow market share as the U.S. housing market continues to recover. The Love Your Color Guarantee marketing initiative is just now entering its second year, and we introduced new advertising and marketing support during the quarter to further differentiate the Valspar brand among consumers.

In late March, we launched our expanded professional program at Lowe's, which we alluded to in our last call. This program significantly enhances our ability to serve the large and growing professional paint market. And while it's early, we're encouraged by the momentum we've achieved thus far.

We're making good progress in integrating our acquisition of Ace's manufacturing assets. At this early stage, sales volume to Ace consists of private label products that carry a lower selling price than our existing business. This had a dilutive impact on average selling prices for the total Paint segment during the quarter, which we expected to happen during the integration period. Our cost synergy targets for this business are on track, and we expect further volume growth as we enter the painting season and as we launch Valspar branded paint in Ace stores later in the year.

We believe that the new initiatives with our existing Paint business, Pro Paint and Ace, position us well to capture additional sales going into the painting season.

In the Coatings segment, we grew volume in packaging, wood and coil products. Packaging volumes increased high-single digits, and sales were up low-single digits. Growth was driven by significant new business wins with key customers in all geographic regions. These gains were partially offset by continued end market weakness in the general industrial product line.

Similar to the trends we described in the first quarter, demand for coatings used for off-road equipment, pipelines and shipping containers remain weak. This environment is consistent with what some of our industrial customers have recently reported. So we were pleased with total company volume growth in the quarter and the progress we've made in bringing in profitable new business. You will notice that the company's gross margin rate did decline modestly compared to last year due to our mix of sales, and Jim will speak to the factors that caused this decline in his comments.

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