Valspar Executive Insights: Product Lines Demand, Coatings

On Tuesday, Valspar Corporation (NYSE:VAL) reported its second quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

Product Lines Demand

Prashant Juvekar – Citigroup: Gary, if inventory draw down was such a big deal in the quarter, I am just surprised that none of the other companies that have reported so far talked about it. In fact, they saw a pull-forward of demand which drove their volume growth. So I was wondering if you could reconcile why your numbers are somewhat different than what other trends and other companies are seeing so far.

Gary E. Hendrickson – President and CEO: Well, I think we saw a portfolio of demand too, P.J., in our exterior and professional product lines. As Lori mentioned, those product lines were up 30% year-over-year. Those are the product lines that are used mainly by professional contractors. So, I think because of the warm weather, we saw more exterior painting happening in the year, and we saw more of that work being done by professionals. Let me come back to that point in a second and I’ll sort of take you around the world in our Coatings segment – in our Paints segment, sorry. So, North America, our sales were up slightly. If you exclude the inventory impact that we talked about, our sales in North America would have been up mid to high single-digits. In China, our sales were up double-digits, and Australia, our sales were down high single-digits, because, as Lori mentioned, of the Bunnings loss last year and a weak residential market. So as I said, the exterior paints sold in professional lines sold really well, up 30%, but is a relatively small portion of our mix. Our mix is roughly 80% interior, 20% exterior. Our professional mix is roughly the same, about – it’s inverse to that; 20% professional to 25% professional and 75% DOI. So part of the explanation may be that we saw more professional work being done on the exterior of homes because of the warm weather, which is what you’d expect, and our mix doesn’t – isn’t ideal for that.

Prashant Juvekar – Citigroup: Just quickly on your Lowe’s business, if you can talk about – you had said that maybe you lost a little bit of share last year. What’s the strategy to get that back this year and can you describe any new promotions that you may be running at Lowe’s?

Gary E. Hendrickson – President and CEO: This year our marketing is, as I mentioned in my opening remarks, the Valspar Love Your Color Guarantee, which is a color assurance program that we are offering to consumer. So, if a consumer comes in and buys paint at Lowe’s or in our independent channel, takes it home and paints their wall and are unhappy with their color, they can go back to the retailers and buy up to two additional gallons, and hopefully get the color that they want and Valspar will rebate them for the second couple of gallons. So, we’re about four weeks into it, P.J. and the initial results are really strong. For us it’s both a strategy to bring consumers into our retailers, but it’s also a strategy to help consumers to up to our best paints. So, we should see as the year go on, both incremental sales and incremental margin from this. Relative to market share gains and losses, I mean I don’t think that was – if it happened, it was on the margins and certainly not relevant to our overall results.

Coatings

Ivan Marcuse – KeyBanc Capital Markets: You are showing on – as you continue to show nice sequential improvement in margins on the Coatings business, so with raw materials sort of – I don’t know I guess flattish here in the resin side. Would you expect with the new products that the 16 to 15 margin to continue or would you expected to sort of continue turning higher over the next several quarters?

Gary E. Hendrickson – President and CEO: We’ve done a lot of work in the Coatings segment, Ivan, to get the margins to where they are. It’s not only about price cost, but it’s about some of the things that Lori mentioned earlier, a fair amount of restructuring in our Coatings product lines. There is a fair amount of new business in our Coatings product lines and that new business is coming in a very strong incremental margins. We exited some very low profit and unprofitable business last year which is helping also and then there is cost price which is in many of the product lines in Coatings we have almost right at this point, we still have a little bit of work to do. In some of them we are experiencing inflation. But I think your point is about sustainability of those margins and I think where we’re running right now is healthy. We’ll just have to see in the short-term how the raw material dynamics play out if we see inflation in the back half of the year they might decline a little bit; but if we see benign inflation then I think we’re in pretty good shape.

Ivan Marcuse – KeyBanc Capital Markets: Then as a quick question, probably for Lori, what would you expect the sort of for the full year you may have said and I might have missed it. Your corporate line or the other you reported, what’s your expectation for the full year?

Gary E. Hendrickson – President and CEO: I would say, I’ll answer the question in terms of the back half of the year. You would expect it to be negative in the, call it, 8% to 10% range.

Ivan Marcuse – KeyBanc Capital Markets: So, second half versus last year will be down 8%?

Lori A. Walker – SVP and CFO: No, that would be what the loss would be. So, I think last year it was roughly flat and then it was down pretty substantially in the fourth quarter. So, you would expect it to be a hit. It will be a cost roughly in that 8% to 10% range.