Valspar Corporation (The) (VAL)

VAL 
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The Valspar Corporation (VAL)

F1Q12 (Qtr End 01/27/2012) Earnings Call

February 14, 2012 11:00 am ET

Executives

Lori Walker - SVP and CFO

Gary Hendrickson - President and CEO

Analysts

Silke Kueck - JPMorgan

Nils Wallin - CLSA

Abhi Rajendran - Credit Suisse

Don Carson - Susquehanna Financial

Rosemarie Morbelli - Gabelli & Company

Chris Nocella - Barclays Capital

Saul Ludwig - Northcoast Research

James Sheehan - Deutsche Bank

Bob Koort - Goldman Sachs

P. J. Juvekar - Citi

Steve Schwartz - First Analysis

Dmitry Silversteyn - Longbow Research

Andrew Don - KeyBanc Capital Markets

Mike Hamilton - RBC

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the first quarter earnings conference call. (Operator Instructions) And I would now like to turn the conference over to our host, Lori Walker, Senior Vice President and Chief Financial Officer.

Lori Walker

Good morning and welcome to our earnings conference call. Today we'll be covering results for the first quarter. 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 cover our results for the quarter. Gary will make a few comments. And then we'll respond to your questions.

First quarter sales totaled $885.6 million, a 5.1% increase from the first quarter of 2011. Adjusted for currency and acquisitions, sales were up 3.6%. Adjusted net income per share for the quarter increased to $0.62 in 2012, a 59% increase from $0.39 in 2011. Our press release includes details showing the reconciliation of our reported to our adjusted results. My next comments regarding gross margin and operating expense performance exclude restructuring and acquisition-related charges.

For the first quarter, our gross margin was 33.5%, up from 31.7% in 2011. Our margins benefited from our carryover pricing actions, moderating raw material costs, previously completed restructuring actions and improved productivity.

As a rate to revenue, operating expenses were 22.6%, down 60 basis points from 23.2% in the first quarter of 2011 primarily due to leverage on higher sales. Quarter-over-quarter operating expense dollars increased $4.9 million or 2.5%.

The reported tax rate for the first quarter was 26.4%, down from a rate of 29.3% in the first quarter of last year. The lower rate was due to the geographical mix of earnings and a one-time favorable tax benefit for a foreign subsidiary. This one-time benefit was already anticipated in our full year tax rate guidance, which remains at 30% to 31%.

Average diluted shares outstanding were 95.5 million, down 4.1 million from last year due to repurchases which were partially offset by options. In the quarter, we repurchased 1.25 million shares for approximately $49 million and have 7 million shares remaining under our current authorization. We estimate average shares outstanding for the second quarter to be approximately 95 million.

Recapping our sales performance for the quarter, adjusted for currency and acquisitions, our overall core growth was 3.6%, primarily driven by high single-digit price increases which offset a mid single-digit decline in volume. Currency was positive 0.2% and acquisitions added another 1.3% for a total growth of 5.1% in the quarter.

Looking at our segment results for the quarter, and this is adjusted for currency and acquisitions, our Coatings segment sales increased 6.6%. Sales in this segment benefited from pricing and new business which offset core volume declines. Paints segment sales were flat, reflecting continued weak market conditions in the U.S. and Australia and slowing growth in China, which was offset by the impact of our pricing. Sales in Other increased 2.8%.

I'm now going to move into a discussion of our EBIT margins for the quarter. All the numbers that I'll be discussing exclude restructuring charges and Wattyl acquisition-related charges in the 2011 period. Our Coatings segment EBIT margin was 15%, up 360 basis points from 11.4% in the first quarter of 2011. The segment benefited from our pricing initiatives, productivity improvements and the impact of previously completed restructuring actions.

Our Paints segment EBIT margin was 8.1%, up from 7.9% in 2011. The EBIT margin for our Other category was negative-0.3% compared with negative-15% in the first quarter last year. As a reminder, Other includes our corporate expenses. The total company EBIT margin for the quarter was 10.9% compared with 8.4% in the first quarter of 2011.

Moving to the balance sheet, our net debt at the end of the first quarter was $950 million, an increase of $91 million from the end of last fiscal year. The increase was driven by share repurchases and the normal seasonality of operating cash flows. During the first quarter, our operating cash flow was a use of $25 million compared with a use of $40 million through the first quarter of last year. We estimate free cash flow, which we define as operating cash flow less CapEx and dividends, to be $160 million to $190 million in fiscal year 2012.

In January, we strengthened our balance sheet by issuing a $400 million 10-year bond with a coupon of 4.2%. We used the proceeds to pay down commercial paper and the remaining funds will be used to pay off the $200 million bond that matures on May 1, 2012.

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