Valspar Corporation (The) (VAL)

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The Valspar Corporation (VAL)

Q3 FY08 Earnings Call

August 11, 2008, 11:00 AM ET


Lori A. Walker - Sr. VP and CFO

William L. Mansfield - Chairman of the Board and CEO


David Begleiter - Deutsche Bank

Rosemarie Morbelli - Ingalls & Snyder

Jeffrey Zekauskas - JPMorgan

Donald Carson - Merrill Lynch

Saul Ludwig - KeyBanc Capital Markets

Steven Schwartz - First Analysis

D. Silversteyn - Longbow Research

Michael A. Hamilton - RBC Dain Rauscher



Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter Conference Call. At this time, all participants are in a 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 Lori Walker, please go ahead.

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

Good morning everyone, and welcome to our third quarter earnings teleconference.

Bill Mansfield, our 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 reminder that in our comments this morning we will make statements that reflect our current views and estimates about future performance and financial results. These comments are based on certain assumptions and expectations that are subject to risk and uncertainties. Our Form-10-K filing lists some of the most important risk factors that could cause actual results to differ from our predictions.

This morning, I will cover our third quarter results. Bill will make a few comments, and then we'll get to your questions.

Results for the quarter were in line with our expectations reflecting a solid effort from Valspar employees in a challenging economic environment. Third quarter sales totaled $957.7 million, up 7.2% from last year, driven by increase sales from acquisitions and currency.

Adjusting for these two items, sales were up 0.6%. Demand for our products in international markets remained strong and our coating segment performed well. We continue to see weak demand for architectural and wood coatings products due to the softness in the U.S. housing market. Net income for the third quarter was $47 million. Third quarter adjusted net income per share was $0.50, which excludes a $0.03 per share charge related to restructuring actions, and $0.03 per share non-cash adjustment for Huarun minority interest.

In 2007, third quarter net income was $58.2 million or adjusted net income per share up $0.57 excluding a non-cash adjustment of $0.05 per share for Huarun minority interest. For the underlying EPS comparison for the third quarter is $0.50 per share in 2008, and $0.57 in 2007. Our reported gross margin was 28.7%, or 29% when excluding restructuring, down 220 basis points from the third quarter of 2007.

The decrease is due to higher raw material costs partially offset by pricing. Operating expenses were 19.7% of sales, or 19.6% excluding restructuring, essentially flat with the third quarter of 2007. The tax rate for the third quarter was 33.4% in 2008, versus 33.2% in Q3, 2007. We continue to expect the effective tax rate on income from operations for the full year to be 34% to 34.5%.

With the adoption of FIN 48, we do expect to see some volatility in our effective tax rate from quarter-to-quarter. We do not purchase any shares during the quarter. Year-to-date, we purchased 1.85 million shares; average shares outstanding were down 2 million from a year ago. So the average shares outstanding were 99.8 million for the third quarter, and are projected to be about the same for the fourth quarter.

Recapping our sales performance, we reported 7.2% growth in the quarter. Our core growth was up 0.6% for the quarter, a sequential improvement from a 2.6% decline in the second quarter. Our third quarter improvement in core growth was due primarily to pricing. Currency added another 3.9% and acquisitions added another 2.7% for the total sales growth of 7.2%.

Looking at our segment results; coating sales increased 12.2% and were up low single digits when adjusted for currency and acquisitions. Sales performance in both our packaging and industrial product lines was good, but packaging, in particular, continuing show excellent strength. Paint sales increased 3.1%, and were up slightly when adjusted for currency and acquisitions.

Our other category, which includes resins, colorants, gel coats, and our furniture repair business, was down about 5.7% and declined negative high single digit when adjusted for currency, reflecting the impact of the weak housing market in the U.S.

The EBIT margin for our coating segment was 9.6% for the quarter or 9.8% excluding restructuring, down from 12.1% in the third quarter of 2007. Our paint segment EBIT margin was 8.8% or 9.5% excluding restructuring, down from 11.1% in 2007. The EBIT margin for our other category, which includes corporate expenses, was 3.7% or 4.5% excluding restructuring compared with 10.2% last year. Total company EBIT margin was 8.8% for the quarter or 9.2% excluding restructuring, down from 11.5% in 2007, and primarily reflects the differences, the lag between the raw material cost increases and the impact from pricing actions.

Moving to the balance sheet; total debt at the end of the third quarter was $1.85 billion, up $68 million from the end of the last year. The increase is due to acquisitions and share repurchases of $40 million. We estimate that year end debt for fiscal year 2008 will be in the range of $950 to $975 million.

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