The Valspar's CEO Discusses Q2 2012 Results - Earnings Call Transcript

The Valspar Corporation. (VAL)

Q21 2012 Earnings Call

May 15, 2012 11:00 am ET

Executives

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

Gary E. Hendrickson – President and Chief Executive Officer

Analysts

Prashant J. Juvekar – Citigroup

Ivan Marcuse – Keybanc Capital Markets

Jeffrey Zekauskas – JPMorgan

Dmitry Silversteyn – Longbow Research

Robert Koort – Goldman Sachs

Saul Ludwig – Northcoast Research

Don Carson – Susquehanna Financial Group, LLP

Steven Schwartz – First Analysis

Nils Wallin – CLSA

Rosemarie Morbelli – Gabelli & Company, Inc.

John Mcnulty – Credit Suisse

Jeffrey Zekauskas – JPMorgan

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the second quarter conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question-answer session. Instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I’d now like to turn the conference over to Lori Walker, Chief Financial Officer. Please go ahead.

Lori A. Walker

Good morning, and welcome to our fiscal 2012, second quarter earnings conference call. 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 begin by covering our results for the quarter, Gary will provide some context and then we’ll respond to your questions.

Second quarter sales totaled $1.03 billion, a 4% increase from the second quarter of 2011. Adjusted for currency and acquisitions, sales were up 3.4%. Adjusted net income per share for the quarter increased to $0.84, a 31% increase from $0.64 in 2011. Our press release includes details, showing the reconciliation of our reported to our adjusted results.

As I comment on our gross margin and operating expense performance, note that restructuring is excluded in both years and acquisition related charges are excluded in the 2011 period.

For the second quarter, our gross margin was 34.6%, up 230 basis points from 2011. Our margins benefitted from carryover pricing actions, which help to offset raw material cost increases. Margins also benefited from productivity improvements, our prior restructuring actions and strong incremental margins on new business. In the quarter we experienced raw material increases sequentially and year-over-year, and we expect mid single-digit increases in the back half of the year.

As a rate to revenue, operating expenses were 21.5%, which were flat versus the second quarter of 2011. Quarter-over-quarter operating expense dollars increased $8.9 million or 4%. The reported tax rate for the second quarter was 31% down from a rate of 33% in the second quarter of last year. The lower rate was due to the geographical mix of earnings, and our full year tax rate guidance remains at 30% to 31%.

Average diluted shares outstanding were $95.1 million, down $2.4 million from last year. In the quarter, we continue to return cash to shareholders, repurchasing 2 million shares for approximately $96 million and have 5 million shares remaining under our current authorization. We estimate average diluted shares outstanding for the third quarter to be approximately 95 million.

Recapping our sales performance, our core growth was 3.4%, primarily driven by mid-single-digit price increases, which offset a 0.2% decline in volume. The currency impact was neutral and acquisitions added another 0.6% for total growth of 4% in the quarter. Let me provide some additional context on our sales, sequentially our volume trend improved from the first quarter to the second quarter, and we expect this trend to continue in the back half of the year.

However, we did experience some headwinds in the quarter. Last year we made the decision to exit a small number of relatively high volume for unprofitable products and customers as part of our restructuring actions. Also in the quarter we saw a year-over-year inventory reduction in our North America home improvement channel. Absentee’s impacts our volumes would have been positive.

Looking at our segment results for the quarter, adjusted for currency and acquisitions, our Coatings segment sales increased 6%. Sales in this segment benefited from pricing a new business, which more than offset uneven market conditions and the exit of unprofitable product lines. Paint segment sales increased roughly 1%.

Growth in China and pricing offset soft market conditions in Australia and last year’s loss of the budding business. In North America, we had extremely strong sell through in our exterior and professional lines, up more than 30%. However, our overall North America paint sales were impacted by the inventory reduction in the home improvement channel as I just mentioned.

Sales in our other segment increased roughly 1%. I’m now going to move into a discussion of our EBIT margins for the quarter. All the numbers I’ll be discussing again exclude restructuring charges and acquisition related charges in the 2011 period. Our Coating segment EBIT margin was 16.6%, up 420 basis points from 12.4% in the second quarter of 2011. The segment benefited from better price cost balance, productivity improvement, exit of unprofitable customers and products, and strong incremental margins on new business.

Our paint segment EBIT margin was 12.5%, up 200 basis points from 10.5% in 2011. This improvement was driven by the benefits of prior restructuring, productivity gains and better price cost balance in Australia. The EBIT margin for our other segment was negative 12.4% compared with 1% in the second quarter last year. This is primarily due to the timing of incentive compensation expense. As a reminder other includes our corporate expenses. The total company EBIT margin for the quarter was 13% compared with 10.9% at the second quarter of 2011.

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