The Valspar Corporation (VAL) F3Q12 Earnings Call August 14, 2012 11:00 a.m. ET Executives Lori Walker – SVP and CFO Gary Hendrickson – President and CEO Analysts Saul Ludwig – Northcoast Research Steven Schwartz – First Analysis Ram Sivalingam - Deutsche Bank Brian Maguire - Goldman Sachs John Mcnulty – Credit Suisse Ivan Marcuse – Keybanc Capital Markets Eugene Fedotoff - Longbow Research Nils Wallin – CLSA Phil Kirkman - Susquehanna International Group Michael Hamilton - RBC Wealth Management Kevin Hocevar - Northcoast Research Presentation Operator
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Third quarter sales totaled $1.08 billion, a slight increase from the third quarter of 2011. Adjusted net income per share for the quarter was $0.97, a 21% increase from $0.80 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. For the third quarter, our gross margin was 34.2%, up 280 basis points from 2011. Let me offer some context on how we achieved this improvement. First, we delivered a significant amount of new business in the quarter which is coming in at a higher average margin rate. All of our significant product lines in our coatings segment had new business wins in the quarter. This new business helped to offset soft market conditions and our decision in last year to exit a small number of high volume but unprofitable product lines. Next, our internal initiatives around productivity as well as prior restructuring actions continued to deliver significant savings. And finally, we continued to see the benefit from previous pricing actions that we put in place to offset raw material inflation. Once again in the quarter Valspar employees did an excellent job of executing against our growth and our productivity initiatives. Looking at raw materials, we experienced sequential low single digit increases in the quarter and for the full year, we expect raw material inflation to be in the mid-single digit range. Operating expenses as a rate to revenue were 20.3%, up slightly from 19.8% in the third quarter of 2011 primarily related to the timing of incentive compensation accrual. The reported tax rate for the quarter was 32%, up from a rate of 29% in the third quarter of last year. The lower rate in 2011 was due to adjustments related to prior year. Our full year tax rate guidance remains unchanged at 30% to 31%. And as a reminder, our tax rate in the fourth quarter last year included a $0.09 per share benefit for non-recurring items.
Average diluted shares outstanding were 93.6 million, down 2.3 million from last year. In the quarter, we continued to return cash to shareholders, repurchasing approximately 1.2 million shares for $57.6 million and have 3.8 million shares remaining under our current authorization. We estimate average diluted shares outstanding for the fourth quarter to be approximately 93.5 million.Recapping our sales performance, adjusted for currency net sales increased 3.3% in the quarter. Currency impact was negative 2.6% resulting in reported sales growth of about 1%. Acquisitions did not have any impact on the quarter. Looking at our segment results for the quarter, adjusted for currency, our coatings segment sales increased 5.2%. Sales in this segment benefited from new business and prior pricing actions that offset uneven market conditions and last year’s exit of unprofitable product lines. The impact on coatings segment sales from this exited product line is in the low single digits. Paint segment sales when adjusted for currency increased just under 2%. In our North America consumer product line, sales were up more than 10% driven by strong consumer response to our market initiatives and timing of seasonal inventory builds in the North American home improvement channel. In China, we saw continued volume growth from our initiatives aimed at the affordable housing market. However these volume improvements were partially offset by softness in our business in Australia, due in part to a continued weak residential housing market and last year’s loss of the Bunnings business. Sales in our other segment when adjusted for currency declined roughly 2%. I’m now going to move into a discussion of our EBIT margins for the quarter and all of the numbers I’ll be discussing exclude restructuring charges. So our coatings segment EBIT margin was 17.2%, up 360 basis points from 13.6% in the third quarter of 2011. The segment benefited from new business with higher than average margins, productivity improvements, the planned exit of unprofitable product lines and better price cost balance. Read the rest of this transcript for free on seekingalpha.com