Valspar Corporation (The) (VAL)

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Valspar Corporation (VAL)

F4Q11 and Yearend Earnings Call

November 22, 2011 11:00 am ET

Executives

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

Gary E. Hendrickson – President, Chief Executive Officer & Director

Analysts

Saul Ludwig – North Coast Research

Prashant J. Guptar – Citi

David Begleiter – Deutsche Bank

Robert Koort – Goldman Sachs

Analyst for John McNulty – Credit Suisse

Don Carson – Susquehanna Financial

Chris [Mozilla] – Barclays Capital Markets

Steven Schwartz – First Analysis

Dmitri Silversteyn– Longbow Research

[Mils Walen – CSLA]

Presentation

Operator

Welcome to the fourth quarter conference call. At this time all lines are in a listen only mode. Later there will be an opportunity for your question 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, Chief Financial Officer, Ms. Lori Walker.

Lori A. Walker

Welcome to our earnings conference call. Today we’ll be covering results for the fourth quarter and fiscal year 2011. Gary Hendrickson our President 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 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 start with a summary of our fourth quarter and full year results. Details are provided in the press release we issued this morning which is available under investor relations on our website at www.ValsparCorporate.com. Gary will follow with his comments including our outlook for 2012 and then we’ll respond to your questions.

Fourth quarter sales totaled $1.05 billion, a 19.4% increase from the fourth quarter of 2010. Adjusted for currency and acquisitions, sales were up 5%. Adjusted net income per share for the quarter increased to $0.84 in 2011, a 50% increase from $0.56 in 2010. Our press release includes details showing the reconciliation between our reported and adjusted results.

As you saw in our press release, during the quarter we reported a non-cash impairment charge of $363.4 million, that was net of tax, for goodwill and intangibles associated with our wood coatings and gelcoat product lines. The action is a result of our annual impairment analysis of goodwill. As a result of that review, we concluded that the economic outlook for the end markets served by these product lines that are closely tied to US housing starts is not likely to change in the foreseeable future.

After adjusting our forecast for these dynamics, the carrying amount for these businesses exceeded their fair value. The charge is subject to finalizations of fair values which we will complete before filing Form 10K for fiscal 2011. The non-cash impairment charge has no impact on the company’s liquidity or our bank credit covenants.

Both the wood and gelcoat product lines came with the acquisition of Lilly Industries in 2000 and performed well for the company when the US housing market was growing. The gelcoat product line which is reported as part of other is small and not material to our overall results. Our wood product line is part of our coatings segment. We’ve taken steps in this product line to rationalize production, lower the overall cost structure and organize the business to serve our customers well. Looking ahead, we expect the wood product line to deliver positive earnings and cash flow.

For fiscal year 2011 sales totaled $3.95 billion, a 22.5% increase from fiscal year 2010. Adjusted net income per share increased 18.8% to $2.65 in 2011 from $2.23 in 2010. Again, please refer to our press release for the reconciliation to our reported results. For the fourth quarter our gross margin excluding restructuring charges in both years was 32.9% down 40 basis points from 33.3% in 2010. Margins were impacted by rising raw material costs which were partially offset by pricing actions.

Excluding restructuring charges in both years and one time acquisition fees related to Wattyl in 2010, our operating expenses as a rate to revenue were 22.1% down slightly from 22.2% in the fourth quarter of 2010. Quarter-over-quarter operating expense dollars increased to $36 million due primarily to the addition of Wattyl operating expenses.

Now, I’m going to talk about our tax rate for the quarter and for the full year. Both will exclude the after tax non-cash impairment charge. The tax rate for the fourth quarter was 16.3% compared with a rate of 32.5% in the fourth quarter last year. Our tax rate for the full year was 26.7% compared with 30.4% in 2010. The improved tax rate for the quarter and the full year was due to a more favorable geographic mix of earnings and a onetime non-recurring benefit from favorable tax rulings and statute lapses. These onetime events contributed approximately $0.09 per share to earnings in fiscal 2011. For fiscal 2012 we expect the effective tax rate to be approximately 30% to 31%.

Average diluted shares outstanding for the fourth quarter were 95.2 million, down 5 million from last year due to repurchases which were partially offset by options. During the fourth quarter we repurchased 750,000 shares for approximately $23 million. For the full year, we repurchased 6.75 million shares for approximately $242 million and have 8.25 million shares remaining under our current authorization. We estimate average shares outstanding for the first quarter to be approximately 95 million.

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