Lower Tax Rate and Higher Share Buybacks Help Earnings Growth, but Core Business Outlook More or Less the Same; Tweaking 2012 Estimates.
Post-Call Debrief: "Following VAL's in-line quarter and raised guidance, we are tweaking our F2012 estimate from $2.93 to $2.95 (a bit below the middle of the guidance range of $2.87-3.07), and also publishing a F2013 estimate of $3.34. However, despite raising our F2012 estimate, we do not believe the outlook for the core business is materially different following this earnings report-our revised operating income estimate for F2012 is actually lower than before (mainly driven by updated FX assumptions which lowers our estimate by ~$0.07), but is more than offset by the lower tax rate guidance (which adds ~$0.05) as well as higher share repurchases than we had previously modeled. Thus, we continue to be cautious looking out over the next 12 months as housing market conditions remain sluggish and we see continued pressure from raw materials (led by TiO2, although they will more moderate than what VAL experienced in F2010/11 owing to the weak economy). Below are our key takeaways from the conf call:
Raw Materials vs. Pricing: "Management noted that they saw raw material cost inflation up mid-to-high-teens in F2011 (down from their previous expectation for raws to be up ~20%), and that their pricing is ~85-90% caught up to raws. Looking out to F2012, they expect raws materials to be up around mid-single digits (more moderate than last year), and they see a further narrowing of the price/raws gap. Mgmt noted that they expect further cost increases from TiO2, which we believe could be up ~15-20% next year (more if the economy experiences growth)."
Update on Restructuring: "Regarding VAL's restructuring initiatives on the wood coatings, gelcoat and Wattyl businesses, the company continues to expect a total of ~$0.35 in costs, of which ~$0.24 were incurred between F3Q and F4Q11, and the remaining should hit in F1H12. They continue to expect annualized savings of $0.12-0.14 from these actions, with roughly half of this to be realized in the second half of F2012 (which is baked into their guidance).
Other Tidbits-Our other key takeaways from the quarter include the following: 1) overall volumes were down 1% in F3Q (excluding the lost WMT business), and were down a little bit more in F4Q; 2) looking ahead to F2012, management expects the US and Europe to see flat to slightly positive volumes and Asia/Latin America to see mid-single digit volume growth; 3) management continues to be encouraged by new business gains, particularly in Coatings with their industrial and coil product lines; 4) in Paints, the consumer business in China continues to grow strongly and management is optimistic looking out to F2012 as well; and 5) VAL expects to spend ~$90 mil in capex in F2012 (up from $66.5 mil in F2011, and roughly split evenly between maintenance/growth/strategic spending)-of the third to be spent on strategic opportunities, management highlighted that they are building a new plant to support growth in their Huarun business and are also expanding two other plants in Southern China tied to their industrial business."
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
