Valspar Corporation (The) (VAL)

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The Valspar Corporation (VAL)

F3Q 2011 Earnings Conference Call

August 15, 2011 11:00 ET


Lori Walker – Chief Financial Officer

Gary Hendrickson – President and Chief Executive Officer


Jeff Zekauskas – JPMorgan

Mike Sison – KeyBanc

Saul Ludwig – Northcoast Research

Robert Koort – Goldman Sachs

David Begleiter – Deutsche Bank

John McNulty – Credit Suisse

Dmitri Silversteyn – Longbow Research

Don Carson – Susquehanna Financial

Rosemarie Morbelli – Gabelli & Company

Steve Schwartz – First Analysis

P J Juvekar – Citi



Gentlemen, thank you for standing by. Welcome to the Valspar’s Third Quarter Conference Call. At this time, all participants are in listen-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 would now like to turn the conference over to host Ms. Lori Walker, Chief Financial Officer. Please go ahead.

Lori Walker – Chief Financial Officer

Good morning and welcome to our earnings conference call. Today, we’ll be covering results for the third quarter. Gary Hendrickson, our President and CEO is with me on our call this morning.

Before we begin, I’ll 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. 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 cover our results for the quarter, Gary will make a few comments, and then we’ll respond to your questions.

Third quarter sales totaled $1.07 billion, a 22.5% increase from last year driven by acquisitions and selling price increases. Adjusted for currency and acquisitions, sales were up 6.7%.

Third quarter adjusted net income per share increased to $0.80 in 2011, a 14.3% increase from $0.70 in 2010. Pricing actions, cost control, and productivity improvements helped to mitigate the effect of rising raw material costs. Third quarter adjusted net income per share in 2011 excludes a $0.10 per share charge related to the restructuring actions we announced in May.

Third quarter adjusted net income per share for 2010 excludes an $0.08 per share benefit from the sale of assets and a $0.04 per share restructuring charge. Net income for the third quarter of 2011 was $67.4 million and reported earnings per share were $0.70. Net income for the third quarter of 2010 was $75.1 million and reported earnings per share were $0.74. Excluding restructuring charges in both years, our third quarter gross margin this year was 31.4% down 260 basis points from 34% in 2010. Margins were impacted by rising raw material costs, which were partially offset by pricing actions.

Excluding restructuring charges in both years and the gain on the sale of assets in 2010, operating expenses as a rate to revenue were 19.8%, a 110 basis point improvement from 20.9% in the third quarter of 2010 due primarily to leverage on higher sales. Quarter-over-quarter operating expense dollars increased $28.7 million, due primarily to the addition of Wattyl operating expenses. The tax rate for the third quarter was 28.6% compared with a rate of 29.6% in the third quarter of last year. The lower rate for 2011 was due to one-time adjustments related to prior years. For the full year, we anticipate the rate to be approximately 31% to 32%.

Average shares outstanding for the third quarter were $95.9 million, down $5.2 million from last year. We did not repurchase shares in the quarter and have 9 million shares remaining under our current authorization. We estimate average shares outstanding for the fourth quarter to be approximately $96 million.

Recapping our sales performance for the quarter, adjusted for currency and acquisitions, our overall core growth was up 6.7% driven by high single-digit price increases, which offset a low single-digit decline in volume. Excluding the lost Wal-Mart business, volume was down about 1% in both our Coatings and Paint segments. Currency was positive 3.9% and acquisitions added another 11.9% for total growth of 22.5% in the quarter.

Looking at our segment results for the quarter, adjusted for currency and acquisitions, our Coatings segment sales increased 8.7%. Sales in this segment benefiting from pricing and new business. Paint segment sales increased 5.1% reflecting the impact of pricing. And adjusting for the loss of the Wal-Mart business, our Paint segment sales increased 9.1%. Sales in Other were flat.

I am now going to move into a discussion of our EBIT margins for the quarter. All of the numbers I’ll be discussing exclude restructuring charges in both years and the gain on the sale of assets in 2010. Our Coatings segment EBIT margin was 13.6%, down 180 basis points from 15.4% in the third quarter of 2010. Our Paint segment EBIT margin was 10.8%, down 110 basis points from 11.9% in 2010. The EBIT margin declined in both segments was due primarily to the lag between higher raw material costs and the impact of our pricing actions.

The EBIT margin for our Other category was 0.9% compared with 2.9% in the third quarter last year. As a reminder, Other includes our corporate expenses. The total company EBIT margin for the quarter was 11.6% compared with 13.2% in the third quarter of 2010 with the decline due to higher raw material costs and lower operating margins in Wattyl.

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