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Executives

Lori Walker - Senior Vice President and Chief Financial Officer

Gary Hendrickson - Board Chairman and Chief Executive Officer

Analysts

P.J. Juvekar - Citi

Bob Koort - Goldman Sachs

David Begleiter - Deutsche Bank

Duffy Fischer - Barclays

Dmitri Silversteyn - Longbow Research

Silke Kueck - JPMorgan

John McNulty - Credit Suisse

Ivan Marcuse - KeyBanc

Kevin Hocevar - Northcoast Research

Rosemarie Morbelli - Gabelli & Company

Steve Schwartz - First Analysis

The Valspar Corporation (VAL) F4Q 2012 Earnings Call November 20, 2012 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to The Valspar Fourth Quarter and Fiscal Year End Conference Call. At this time, all participants are in a listen-only mode, and later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions). And as a reminder, today's conference is being recorded.

I would now like to turn the conference over to our host Senior Vice President and Chief Financial Officer, Lori Walker. Please go ahead.

Lori Walker

Good morning, and welcome to our fiscal 2012 fourth quarter and full year earnings conference call. Gary Hendrickson, our Chairman 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 during the call. This call is subject to forward-looking statements language contained in our press release and our comments may include forward-looking statements as that term is defined by securities laws. This morning, I'll start with a summary of our fourth quarter and full year results.

Details are provided in the press release we issued this morning, which is available in the Investor Relations section of our corporate website at valsparcorporate.com. Gary will follow with his comments including our outlook for 2013, and then we'll respond to your questions.

Fourth-quarter sales totaled $1.02 billion, compared to $1.05 billion in 2011. Excluding the negative impact of currency, sales were flat. Adjusted net income per share for the quarter increased to $0.86 in 2012, a 2% increase from $0.84 in 2011. However, last year's net income per share includes non-recurring benefit from favorable tax rulings totaling $0.09. Excluding this benefit, our net income per share increased $0.11, or 15%, and our EBIT margin for the quarter increased to 12.6% from 10.8% last year, a 180-basis point improvement. Our press release includes details showing the reconciliation of our reported to adjusted results.

For fiscal year 2012, sales totaled $4.02 billion. When adjusted for currency, sales increased roughly 3% from fiscal year 2011. Adjusted net income per share increased 24% to $3.28 in 2012 from $2.65 in 2011. Again, please refer to our press release for the reconciliation to our reported results.

As I just mentioned, our sales growth for the year was 3%, driven by new business and pricing. However, due to weak international markets and our decision to exit about 2% of our volume from unprofitable customers and product lines, volumes were down 1% for the year. As we began to anniversary some of these decisions, our volume trends have improved. So, in the third and the fourth quarter, volumes were up about 1% and 3%, respectively, driven by our new business wins.

As I comment on our fourth quarter gross margin and operating expense performance, note that restructuring is excluded in both years, also excluded is last year's non-cash impairment charge for goodwill and intangibles associated with our wood coating and some gelcoat product lines.

For the fourth quarter, our gross margin was 34%, up 110 basis points from 32.9% in 2011. Margins benefitted from productivity improvements and higher margin new business, particularly in our coatings segment.

Operating expenses as a rate to revenue were 21.5%, down from 22.1% in the fourth quarter of 2011. Quarter-over-quarter, operating expense dollars decreased $10.8 million, due to benefits from prior restructuring actions, productivity improvements and currency impact.

Now, I'll shift to a discussion of our tax rate for the quarter and the full year. As a note, the 2011 rate excludes the after-tax non-cash impairment charge. So, the tax rate for the fourth quarter of 2012 was 29.4%, compared with the rate of 16.3% in the fourth quarter last year. Our tax rate for the full year was 29.9%, compared with 26.7% in 2011. The higher tax rate for the quarter and the full year was primarily due to non-recurring benefits from favorable tax rulings in 2011.

For fiscal 2013, we expect the effective tax rate to be approximately 31% to 32%. The higher projected tax rate for 2013 is due to a non-recurring favorable benefit for a foreign subsidiary realized in the first quarter of 2012. The impact of this benefit was roughly $0.04 in the first quarter.

Average shares outstanding for the fourth quarter were 93.1 million, a decrease of 2.1 million shares resulting from share repurchases partially offset by option exercises. During the fourth quarter, we repurchased 1.3 million shares for approximately $70 million.

For the full year, we repurchased 5.7 million shares for $273 million and we have 2.5 million shares remaining under our current authorization. We estimate average shares outstanding for the first quarter to be approximately 93 million.

Recapping our sales performance in the quarter, volume was up 3%. However, this was offset by the impact of mix in currency resulting in a reported sales growth of negative 2.2%. And, as I discussed our sales performance by segment, the results will be adjusted for currency.

So, in coating, sales were up 6.3% for the year. Excluding an acquisition we had earlier in the year, sales were up 5.5%. In the quarter, coating sales were up 4.5% with volume growth of 5%. Sales in this segment benefitted from new business in every product line and we were extremely pleased with our volume growth in wood and packaging, which were up 8% and 6%, respectively. These gains more than offset uneven market conditions and our decision last year to exit unprofitable products and customers.

In our Paint segment sales for the full year were flat. In the fourth quarter, volumes in our North America home improvement channel were up low single digits with strong sell through at retail. In China, we continue to see double-digit volume growth from the successful introduction of initiatives focused on the affordable housing market.

However, the mixed impact of this product line combined with restructuring and weakness in Australia due to a soft housing market caused sales in this segment to decrease 4% in the quarter. Sales in other, declined 11.6% for the quarter and 2.8% for the full year, primarily due to lower volumes caused by the exit of our gelcoat product line.

I am now going to move into a discussion of our EBIT margins. When making comparisons to 2011, the numbers I'll be discussing excludes the restructuring charges in both years and the non-cash impairment charge and acquisition related fees from last year.

For the fourth quarter, our coatings segment EBIT margin was 16.7%, up 120 basis points from 15.5% in the fourth quarter of 2011. The EBIT margin improvement was due primarily to volume growth, including new business at higher average margins, productivity improvements and our exit from a small number of unprofitable product lines and customers.

Our Paint segment EBIT margin was 11.4%, up 150 basis points from 9.9% in 2011, due to profitability improvement in Australia consumer business, improved productivity and better price to cost balance. The EBIT margin for our other category was negative 20%, compared with negative 24.6% in the fourth quarter last year. As a reminder, other includes our corporate expenses.

So, looking at margins for the full year, our coatings' EBIT margin was 16.4%, up from 13.3% in 2011. The paint segment EBIT margin for the year was 11.1%, up from 9.9% last year. The EBIT margin for other was negative 10.5%, compared with negative 8.9% in 2011. And total company EBIT margin for the year was 12.7%, compared with 10.5% in fiscal 2011. The overall change in company and segment EBIT was due primarily to new business at higher average margins, productivity improvements and better price to cost balance.

Moving to the balance sheet, our net debt at the end of the year was $878 million, a decrease of $94 million from the end of the third quarter and an increase of $19 million from the end of fiscal 2011.

For the fourth quarter, operating cash flow was $183 million, compared with $186 million in the fourth quarter of 2011. For the full year, we generated $350 million of operating cash flow, compared to $291 million in fiscal year 2011.

On a full-year basis, we generated $187 million in free cash flow, which we define as operating cash flow less CapEx and dividends. We estimate free cash flow in the range of $185 million to $205 million in fiscal year 2013. Our net debt to capital was 41.8%. We ended our quarter with $767 million of reserved liquidity, and that included $514 million of available committed credit facilities and $253 million in cash.

Capital spending in the fourth quarter was $28 million, compared with $24.1 million in the fourth quarter of 2011. For the full year, capital spending was $89.4 million versus $66.5 million in 2011. Our forecast for 2013 capital spending is approximately $120 million, reflecting our investments in a new manufacturing facility in Tianjin, China and the expansion of our Minneapolis Research and Development Center.

Depreciation and amortization for the quarter totaled $25.2 million, down from $27.1 million in the fourth quarter of 2011. Depreciation and amortization for the full year totaled $93.8 million and our full year forecast for 2012 is approximately $90 million.

As mentioned in our release, we currently expect our fiscal 2013 net income per share to be in the range of $3.65 to $3.85.

With that, I’ll turn the call over to Gary for his comments.

Gary Hendrickson

Thanks, Lori, and good morning everyone. When we provided our original guidance for fiscal 2012, and we anticipated market conditions would be stable or slightly improving versus 2011 and our new business initiatives would drive our sales growth. We were also projecting mid-single digit increases in raw material inflation.

Looking back on the year, we were right raw material inflation, but we saw a much more challenging demand environment than we expected with market correction in some international markets. We were pleased that we were able to offset these challenging conditions with significant new business growth, particularly in coatings, and we achieved our new business targets for the year.

Against this backdrop of a tough global economy and increased raw material costs, Valspar finished fiscal 2012 with record sales, recording operating margins and earnings per share. We delivered a 24% increase in EPS versus last year and this is fourth consecutive year of double-digit earnings growth. We accomplished this by relentlessly focusing on our customers and our productivity initiatives. I have to say, we are pleased with our operating performance in all respects.

Once again, we generated a lot of cash during the year. We used this cash to reinvest in our business and to acquire 5.7 million share of the company stock and investment of $273 million. Additionally, we returned $73 million to shareholders through quarterly dividends.

2012 marks our 34th consecutive year of increased dividend per share, which is a trend that we intend to continue in 2013. Fiscal 2012 was an outstanding year for Valspar and I would like to highlight a few specific areas that stand out.

In our coating segment, we continued to deliver profitable new business in all of our product lines. W are growing market share in packaging coatings, coil coatings, wood coatings and coatings for pipes, offer equipment and shipping containers.

Volume growth of more than 5% in our fourth quarter once again demonstrates the strength of our coatings platform. We are also realizing a payback from our prior restructuring actions in this segment, including the planned exit of unprofitable products and customers and this is reflected in the strong EBIT margins of 16.4% in coatings.

In the Paint segment, the Love Your Color Guarantee program in North America and Australia continues to resonate with consumers creating positive paint sales and volumes in the home improvement channel. We recently announced the extension of this program into 2013.

Our consumer business in China performed extremely well in 2012. In a market where residential construction was down in double-digits, our business generated positive double-digit volume growth in the year and generated double-digit revenue growth in the second half of the year.

In Australia and New Zealand, our profit improvement plan is ahead of schedule despite a very challenging market environment. Our partnership with Masters, the Lowe's JV in the region is strong. Masters now has opened 22 stores and has publically recommitted to with 150-store strategy.

We are also excited about our strategic partnership with B&Q, the largest home center chain in the U.K. and Ireland. As we announced last week, we'll be rolling out the Valspar brand to all 350 B&Q stores throughout 2013. Due to the timing of the upfront investment, this initiative will not have a material impact on our earnings in 2013, but it positions Valspar for growth in the European consumer paint market. B&Q and its parent company, Kingfisher are great partners with deep expertise and understanding of the European home improvement channel.

Focusing on our customers in delivering coatings, innovation and service have made Valspar an industry leader for the past 206 years. Our results in 2012 reinforce the success and will continue to be the foundation of our plans in 2013. As we look ahead, our EPS guidance for 2013 is $3.65 to $3.85, which once again represents double-digit earnings growth.

Our assumptions behind that guidance are continuing uneven global demand, but with no significant declines, stable raw material cost, substantial productivity gains and significant new business growth across our product lines.

So with those comments, Lori and I are happy to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We'll go to the line of P.J. Juvekar at Citi. Please go ahead.

P.J. Juvekar - Citi

Good morning, Gary.

Gary Hendrickson

Hey, P.J.

P.J. Juvekar - Citi

In the last quarter, you had talked about Wattyl, that the business had stabilized then you were beginning to gain some share or some new business there. Looks like you had some issues in Wattyl this quarter. Can you just explain the moving parts and what's going on with the housing market there?

Gary Hendrickson

Sure. Yes. I mean, we had a weak quarter in Wattyl revenue wise, but we had a good year and a good quarter in terms of putting the restructuring plan for that business in place, so the key success factors for Wattyl in Australia, P.J., I would say through the year were met. But, it's a tough residential housing market, and to answer your question about the moving parts there, there are really three moving parts.

It's a tough residential housing market. That's number one. Second, we haven't fully anniversaried in the quarter, the loss of the Bunnings business that we sustained when we decided to do business with the Lowe's JV in that market. Then, third, as part of the restructuring, we were rationalizing a store count in our Australia business. We're down about 35 stores from when we brought Wattyl two years ago. And that channel, the stores channel is the channel that has the most revenue in the business, so as we rationalized those stores and exited some business, we take a hit on the revenue line, but the profitability of the business actually improved.

P.J. Juvekar - Citi

Okay. And then secondly, you mentioned that you'll be rolling out your Valspar paint and 350 B&Q stores, and you got increased costs so there is no bottom line impact in 2013. What could be the impact in 2014 from B&Q?

Gary Hendrickson

Well, I'll just provide a little context P.J. As we mentioned in our release last week, the program will be rolled out to 350 locations in the U.K. and Ireland in 2013. I think, it will be substantially completed in 2013, but this is a multiyear and a multi-phase initiative.

As you pointed out, 2013 revenue and profit will not be material to 2013 results, and our plan is to continue to update our investors as the phases are rolled out. The most important thing about this is our brand expansion in Europe distributed through the home improvement channel leader.

At least I think about this the way I think about our initiative in 2007 to launch the Valspar brand in the U.S. We're partnered with a leader, we are partnered with a company that whose parent company owns 1,000 stores throughout Europe, in eight different countries and we view this as the first step to becoming a significant presence in the European paint market.

P.J. Juvekar - Citi

Thank you.

Gary Hendrickson

You're welcome.

Operator

Thank you. Next, we'll go to the line of Bob Koort with Goldman Sachs. Please go ahead.

Bob Koort - Goldman Sachs

Thank you. Good morning.

Lori Walker

Morning.

Bob Koort - Goldman Sachs

Just following up on that B&Q, they have a thousand stores obviously in several countries. How does that compare to the scale of your exposure in Australia, or maybe the U.S.?

Gary Hendrickson

Well, why don't I reference it to Australia first? I mean, the scale is night and day potentially, Bob, I mean, the European market is a multiple of the Australian market, so I think at B&Q we need to take one step at a time.

First, 2013 is about success and rolling the program out and establishing the brand in that market and giving consumers the option to buy Valspar paint. We think we are going to execute on that really well.

The subsequent stages to that are our growth and its growth definitely with B&Q and hopefully with the other parts of the Kingfisher group which if we're successful with that, it will be a significant business.

Bob Koort - Goldman Sachs

And, do you have assets in place to produce all that paint or will you have somebody else produce it for you? I guess, you're in the Coating segments over there, but do you have much of a paint asset base in Europe?

Gary Hendrickson

At least for 2013, Bob, we are able to supply from our existing asset base. As the program gets larger, there's a possibility that we might need to build a plant to support the business.

Bob Koort - Goldman Sachs

And can you tell us the basis for B&Q making this change to whoever their existing supplier might be?

Gary Hendrickson

B&Q is looking for a paint company, it's quite simple. They're looking for a paint company that can help them drive growth in their paint department. They did a global review with multiple global branded paint companies. Valspar won that competition so to speak. They thought our consumer proposition was stronger than others that they reviewed. And as you know, we've been running the test for the last year or so and the test was the ultimate determinant as to whether we rolled it out through the rest of the stores. The test went exceedingly well. And as we roll it out through the B&Q network, we think we are going to help them achieve their goal of growing paint department.

Bob Koort - Goldman Sachs

And last one if I may. You mentioned, growing your earnings again next year. I think in the past, you discussed incremental margin expansion. Could you give us some sense of what you think the revenue progression looks like into next year?

Gary Hendrickson

We don't give revenue guidance, Bob. And, as I said in my opening remarks, we would have given you revenue guidance. Last year, we would have missed it, because we didn't expect that we were going to have weak international markets, particularly in Europe and in China. And, so what we can control is that new business that we achieve. And, we always target somewhere between 4% and 5% net new business and that's what we've got built into our plans for next year. Whatever happens with the market happens. We've got no control of that. But in terms of our organic growth, that's what we are looking for.

Bob Koort - Goldman Sachs

Great. Thanks, Gary.

Gary Hendrickson

You're welcome.

Operator

And next, we'll go to the line of David Begleiter with Deutsche Bank. Please go ahead.

David Begleiter - Deutsche Bank

Good morning. Gary, you've been successful on wood and packaging coatings lately. Can you just describe the drivers of that success and from whom you are taking share from is it just local regional players?

Gary Hendrickson

You know, I am not going to say who we are taking share from, David. We try to take the high road on that. But in the packaging coatings business, I think that that most of the players in that segment are global players.

In wood coatings, you're right. It's more of a regional business, particularly in China. And by the way, our volume growth of 8% was reasonably consistent between our business in China and in North America. So, in the Chinese market it would be regional players. You're right, and the North America market there aren't many regional players. There are multi-national players and so that would be the competitive set that we think that we won against in the quarter.

David Begleiter - Deutsche Bank

Gary, just on TiO2. How much were you able to reduce your usage this year in TiO2, and how much more Chinese TiO2 are using across your company?

Gary Hendrickson

We set a target of kind of mid single-digits in terms of replacement, David, and we are pretty close to that number. In terms of Chinese substitution, I think, I been pretty public about this number. It's approaching 25%.

David Begleiter - Deutsche Bank

Thanks very much.

Gary Hendrickson

Welcome.

Operator

We'll go next to line of Duffy Fischer with Barclays. Please go ahead.

Duffy Fischer - Barclays

Yes. Good morning. Can you walk through kind of your different segments and talk about where you grew faster than the market over the last year?

Gary Hendrickson

Well, let me just talk. I'll talk first about coatings, Duffy. For the year, in our Coatings segment our volumes. I've got a cheat sheet here that I'm going to pull out. Let me give you little context to how the year played out for us in terms of our growth. I think that might be helpful.

We got sequentially stronger in every quarter this year. In Q1, our volumes were down mid-single digits. In Q2, our volumes were down 1%. In Q3, our volumes were up 1%. And, in Q4, our volumes were up 3%. That improvement in Q3, the positive volume growth that we have in Q3 and Q4, includes the dilutive effect of some of the business that we deliberately exited last year.

So, I think the second half of the year is a better way to answer that question for you than to talk about the first half of the year, because we had a great second half. We had a great second half in packaging, in our GI business and our coil business and in our global wood business.

And, in our Paint segment, let me talk about the fourth quarter to give a little bit of color on what happened in the fourth quarter. P.J. earlier asked about Wattyl, and some of the negative volume and revenue trends that we are experiencing in Wattyl for the reasons that I mentioned.

Excluding Wattyl in the quarter, our volumes in our Paint segment would have been up mid-single digits and our revenue in our Paint segment was up mid-single digits, so that's North America and China.

North America sales were up low single-digits and volumes were up low single digits. And as Lori mentioned in her opening comments, sell-through was much higher than our revenue growth, retail sell-through POS.

In China, in the fourth quarter, sales were up in the low double digits and volume was up in the mid-teens. The dilutive effect of Wattyl in our Paint segment is the reason that you see our paint revenue and volumes in that segment appear to be weak this quarter.

Duffy Fischer - Barclays

Okay. Great, and then just if you could go back and triangulate, you had given some guidance on free cash flow, where at the low end, seems like you were basically flat but on EPS at the low end you were up 10% or 11%. Can you just kind of bridge that gap, the difference between your free cash flow forecast and your EPS forecast and where the deviation is?

Lori Walker

Duffy, can you ask that question again? We're at the low point from where?

Duffy Fischer - Barclays

Well, I think on the free cash flow forecast that you laid out on the low end of your guidance there, you would be about flat year-over-year where on the low end of your EPS guidance for next year, you are still up a little over 10%. So, it seems like we lose a little bit when we get to the free cash flow versus the growth on the EPS, and I was just wondering where that divide comes?

Lori Walker

Yes. Well, the biggest place in terms of where the difference is, is the difference in the capital spending, so our capital spending this year was around $90 million and it will be $120 million next year. We have a couple of large projects, the Tianjin plant in China, along with our Minneapolis R&D lab, so that's where the biggest difference is.

Duffy Fischer - Barclays

Okay. Great. Thank you, guys.

Gary Hendrickson

You're welcome.

Operator

Thank you. Next, we'll go to the line of Dmitri Silversteyn with Longbow Research. Please go ahead.

Dmitri Silversteyn - Longbow Research

Good morning, everybody. Excuse me I guess, it's. Yes. It's still good morning. A couple of questions, first of all, you talked about the success that you made in Wattyl on the margin side. Can you tell us where you are on your past two, whatever your ultimate goal in margins for that business is and remind us what that ultimate goal is?

Gary Hendrickson

What we publicly said, Dmitri, is that, while we'll have Wattyl operating within five years, so that's we have three years left on this commitment at the company average EBIT margins, so our EBIT margins for the year were 12-plus percent. That's the short-term target.

Our internal target is for that business and the way we think about our opportunity in that business is higher than that. Right now we are in inning two or inning three of that journey and the EBIT margins are about third of our ultimate goal, about 50% of our five-year goal.

Dmitri Silversteyn - Longbow Research

50% of the five-year goal? Okay. And if you go back to the business loss that you sustained in the big box channel in Australia, you said there were still some of that impact in the fourth quarter of this year. Is that going to be fully anniversaried as we get into 2013?

Gary Hendrickson

Yes. It will be. Fourth quarter was the full anniversary of it.

Dmitri Silversteyn - Longbow Research

Okay. Then can you remind us?

Lori Walker

Dmitri, just to let you know though what hasn't anniversary yet is exiting from the stores, so that will actually impact us through the first half of next year.

Dmitri Silversteyn - Longbow Research

Got it, and that was actually my next question. What's right now as it stands with 22 stores that you have in Masters versus your company-owned stores, and what's the mix of revenues between your sort of company-controlled stores and the mass merchants' channel?

Gary Hendrickson

Company-controlled stores are about two-thirds of the revenue in that business, Dmitri.

Dmitri Silversteyn - Longbow Research

Okay, so two-thirds of company-controlled. Okay. Great. Finally, you talked about the new U.K. business that you are picking up not going to have much of earnings impact in 2013, although I imagine there will be a little bit of a volume impact from the channel fill just not at a very high margin is the way I understand it, but is that correct?

Gary Hendrickson

That's correct.

Dmitri Silversteyn - Longbow Research

Okay. On the Chinese Huarun business as well as your initiative, you talked about the Chinese paint business benefitting from sort of the affordable housing trend, but I remember you about a year ago or so getting Valspar paint into the more of trophy properties in the high end market. Is that initiative still alive and well and as you look back on it for 2012 and you look forward in 2013, any success stories or any changes that you would make going forward that you would like to share?

Gary Hendrickson

Right now, it's alive and well. We've got new distribution, we've done a number of projects. I would say the business is on track with the plan that we had. Remember we tried to downplay that. We're going into Tier-1 cities with the Valspar brand and we've operated historically in Tier-2 and 3 cities. So, this is still a minor program for us in the context of overall Huarun and we view it as a long-term opportunity and not a short-term opportunity.

Dmitri Silversteyn - Longbow Research

Got it, and then final question on your raw material expectations for next year. For 2012, you expected to be sort of a mid-single digit, high-single digit raw materials, but I think it turned out to be more towards the mid-single digit level. I think you said, you expected flattish raw materials for 2013, if I remember your comments correctly?

Gary Hendrickson

Correct.

Dmitri Silversteyn - Longbow Research

Okay. And, is that just an all-in basket being flat and you expect some movements within that, whether in the pigment side or the resin side or packaging or anything like that? Are you just expecting generally flattish raw material environment across the board?

Gary Hendrickson

When we make those comments, Dmitri, we are talking about our total basket. So, there'll be movement up and down on specific items that we buy, but the overall basket we expect at this point in time, they are expected to be flattish.

Dmitri Silversteyn - Longbow Research

Very good. And then final question, the restructuring that you've done in the wood coatings business, obviously, improved the profitability of that business but you're also now enjoying some volume growth there.

Is that sort of the pent up furniture demand being driven by the housing market in the U.S. or is it market share gains or new products. Can you talk about what's behind the fairly strong volume growth we've seen in the wood coatings business after several years of less than stellar performance there?

Gary Hendrickson

Yes. I mean, we've had two quarters now of pretty solid volume growth in that business. Some of it is the market recovery, not so much furniture by the way, Dmitri. We don't do much furniture business anymore, most of the furniture industry has moved to Asia. But in North America, it's building products, and kitchen cabinetry and other segments of the market that have shown some signs of recovery and we also have taken some market share.

So, of the growth that we had and volume growth that we had in the quarter of 8%, I'm just going to take a stab at it and say 4% was volume growth and 4% was market share.

Dmitri Silversteyn - Longbow Research

Got it. Okay. Thank you very much.

Gary Hendrickson

You're welcome.

Operator

We'll go next to line of Jeff Zekauskas with JPMorgan. Please go ahead.

Silke Kueck - JPMorgan

Good morning. It's Silke Kueck for Jeff. How are you?

Gary Hendrickson

Good, Silke.

Silke Kueck - JPMorgan

When I look at the Paints business, the sales year-over-year were down, and the profitability was up quite significantly. How much of that was a raw material benefit versus restructuring savings?

Gary Hendrickson

About, a significant part of it was the restructuring that we've done in the Australia business and the improvement that we've made in that business that we've talked about a couple of times so far in the call. Part of it is productivity that we've had in that segment generally and the remainder of it is a better price cost balance in that segment, and it's about a third, of third, of third.

Silke Kueck - JPMorgan

Okay. My memory is, is that when you purchased the Wattyl business it was about like $500 million in sales. With the loss of the Bunnings business and shutting down 35 stores, how many stores are left and how large is the business now?

Gary Hendrickson

It was about $400 million when we bought it, Silke, not $500 million, and/or that we have about roughly 90 stores left, I mean Lori or Tyler can give you the exact number later, but it's about 90. We're down about 35 and the revenue this year was 350?

Lori Walker

Yes. A little bit more than that. About 360.

Gary Hendrickson

360. So, revenues down $40 million in the two years that we've owned it through the loss of and we've been transparent of that the Bunnings business was about $30 million in business, and the stores that we exited obviously make up the balance of that and there's been some price in the market that's supported revenue so.

But, the point about Wattyl is, sure we loss the Bunnings business. The trade for that was 70% of shelf space at Masters. Masters now has 22 stores open, they have committed to their 150 store strategy. Those stores are selling a lot more paint than we expected. They've been very successful in the paint department. That's the growth platform for us in the retail sector.

In our trade sector, which is the stores business, we had to make some cuts. We bought a business that had many, many stores that were unprofitable and we've taken the actions that were appropriate, our top line has been impacted by that but our bottom line is improving as I just said in the previous question I had answered for you.

Silke Kueck - JPMorgan

Yes. I apologize, I did not mean to complain. I just tried to get what would be.

Gary Hendrickson

I didn't take it as complaining you just gave me an opportunity to talk more about the business, so thanks for that.

Silke Kueck - JPMorgan

Okay. How are prices generally holding up in the paints business and in the coatings business?

Gary Hendrickson

We've done a nice job through the year of getting price cost about right, but we still have raw material costs today that are higher than they were last year. So, we're not in a position to be giving price back and that's the nature of the conversation that we are having with our customers, so we are in reasonable shape relative to price and cost.

Silke Kueck - JPMorgan

And, lastly I was wondering how you went about winning the B&Q business. Was it that the retailer wanted a new paint brand or they wanted in-situ tinting or how did that occur?

Gary Hendrickson

This is the question that I answered earlier for Bob.

Silke Kueck - JPMorgan

Yes.

Gary Hendrickson

It was the competition and the customer asked a number of global paint companies to help them with their challenge to grow the paint department faster than it was growing at that time, and so it was a combination what ultimately won it for us was a combination of our success with the brand in the U.S. and I think B&Q's confidence that we can do the same thing in the U.K. market.

So, it was brand. It is a tinted system, tinted program, most of the paint in the U.K. is ready mix not tinted. So, the insight that, we and B&Q have together is that, we believe that if you give consumers more color choice then you've tapped into a consumer need and that's what's going to drive the sales.

Silke Kueck - JPMorgan

And, will you need to build any manufacturing assets in the region to support that business, asset growth or, I mean, I know this has been asked before like in some form as well. I was just sort of curious, like you know because over time of the 350 stores, I don't know what your sell-through is, whether it's $300,000 per store, $200,000 or $500,000. It can become sizeable, so will you need to put capacities or will you need to build capacities in Europe at some point?

Gary Hendrickson

Yes. Eventually we will, but not in 2013. We've got a substantial business in Europe already with a number of manufacturing plants. There are a number of supply chain options that we have, Silke, that will exhaust before we make the investment in a manufacturing plant. And by the way, if we do, we're not talking about $100 million. We are probably talking about $20 million or $25 million.

Silke Kueck - JPMorgan

Okay. Thanks so much. I'll go back to queue.

Gary Hendrickson

You're welcome.

Operator

We'll go next to line of John McNulty at Credit Suisse. Please go ahead.

John McNulty - Credit Suisse

Great. Thanks for taking my question. Just a couple of things, first of all, we've seen M&A picking up in the space. And, I guess, I'm wondering are you starting to see opportunities that might be interesting to you, or is that something that maybe gets put on the back burner now that you've got this B&Q opportunity and the growth around that? How should we think about that going forward?

Gary Hendrickson

Absolutely not going on the back burner, John. I mean, we haven't talked a lot about our consumer team in Europe, but we've got a great consumer team in Europe and that will handle the B&Q deal.

For B&Q, for us this is what we do. It's additive in the sense that it's a new initiative for us, but this is what we do and we've been in the U.K. market for a long time with our spray paint business and so we know B&Q well, we know the market well, we do business with a lot of retailers in the U.K. through our spray paint business and we've got a great team and they'll just pick up and run with the B&Q initiative. So, this in no way shape or form will let slow us down.

I would say that the market has picked up a little bit and there are a number of opportunities that we are pursuing. I won't say any are eminent, but I would expect that during this year, you'll see Valspar do a deal or two.

John McNulty - Credit Suisse

Okay. Great. And then with regard to your China business, can you just walk us through what you're seeing in the China housing market and if you're starting to see signs of kind of a recovery of pickup there. I know you've had a lot of strength with your affordable housing platform picking up, but are you seeing the actual kind of China market itself starting to improve yet?

Gary Hendrickson

I wouldn't say that John. I would say it plateaued or let's say bottomed probably in second or third quarter, and it's pretty much ran along at that bottom since then. So, we haven't seen any significant change.

John McNulty - Credit Suisse

Okay. And then just the last question, in terms of your affordable housing platform can give us any color? I think earlier in the call you had spoken or Lori had spoken about some mix effect. I guess, could you give us some color as to how we should think about the profit difference or the price difference on the paint for your affordable housing platform versus your more traditional Huarun platform?

Gary Hendrickson

Sure. It has a significant mix impact and in fact we decided not to talk about it relative to our paint segment revenue results, because it's a complicated topic. But, here's the bottom line, we grew our volume in Huarun in the mid-teens and our revenue grew in around 10%, so a pretty significant mix impact in that business and has effect on the overall paint segment as well.

Here's the deal on it though, you saw that we improved our segment margins. The reason for that is that this product, while it does have a gross margin that's slightly lower than the average margin in Huarun business, it doesn't attract anywhere near the expense to support it that the Huarun business, because we're not doing a lot of company advertising for it. We're doing some. Because it goes through the non-exclusive distribution, we've got about 3,000 or 4,000 points of distribution that are non-Huarun stores. Those retailers have the responsibility to do the advertising for it to the extent that would they like to.

So, net-net, we've got reasonable gross margins on it, very little expenses. So, it's at least as profitable if not more profitable than the core Huarun business.

John McNulty - Credit Suisse

Okay. Great, and thanks very much for the color.

Gary Hendrickson

You're welcome.

Operator

We'll go next to line of Ivan Marcuse at KeyBanc. Please go ahead.

Ivan Marcuse - KeyBanc

Hi, guys. Thanks for taking my questions. On the B&Q business over in U.K. and Ireland, is the market similar to the U.S. where sort of split between DIY and contractor and what sort of sales per store in the DIY on the paint basis, is that about the same as it is in the U.S. or is it different dynamics, so could you just talk about the market a little bit?

Gary Hendrickson

Yes. So, this is a DIY program for us, Ivan. We're not going after the contractor market.

Ivan Marcuse - KeyBanc

No. I mean, like in a total market, how in U.S., it's generally like half of it is into the contractor market like stores and the other half of the total volume is maybe into the DIY. That's what?

Gary Hendrickson

Yes. I think, more or less the same and more or less the same in the distribution channel to the pro, right. DIYs are through similar channels to here there are two big home improvement chains in the U.K. market, B&Q happens to be the leader, so we're linked up with the leader. That's primarily a DIY business. Then there are other distribution channels to the pro.

Ivan Marcuse - KeyBanc

Got it, so very similar dynamics, I guess, bottom line?

Gary Hendrickson

Yes.

Ivan Marcuse - KeyBanc

Got you. And then, your partner in the U.S. talked about how they were doing line reviews and to sort of reducing inventories and figuring out what they are going to do. I know that your volumes were up this quarter, but in the previous quarters there were some inventory fluctuations you had to deal with. So, now with them it seems like your inventories are down. Would you expect going into the late winter, early spring may be an acceleration of orders beyond the typical seasonal uptick with that partner?

Gary Hendrickson

No. In fact, they did a good job of managing their inventories in this quarter as well. They are down, yes. As I mentioned, we had a low-single digit volume growth in the U.S., but the paint sell-through in all channels were stronger than the volume growth and so that's part of that is our partner doing a very nice job of meeting their inventory objectives.

Ivan Marcuse - KeyBanc

Great. And then was most of the restructuring this quarter was that all related to Australia or is that still some from the wood business that you were doing?

Lori Walker

It's mainly due to Australia.

Ivan Marcuse - KeyBanc

And will there be more of that next year?

Lori Walker

No. Not material.

Ivan Marcuse - KeyBanc

Got you, and then what were raw materials, the total basket up for the quarter?

Gary Hendrickson

Sequentially, they were flattish.

Ivan Marcuse - KeyBanc

Okay. Great. Thanks for taking my questions.

Gary Hendrickson

You're welcome.

Operator

We'll go next to line of Kevin Hocevar with Northcoast Research. Please go ahead.

Kevin Hocevar - Northcoast Research

Hi, guys. Could you comment on some of the newer products that you have? The shipping containers, pipe coatings, [type] coatings, and give us a sense for how those are doing and also what the pipeline is for new products that might be coming out shortly?

Gary Hendrickson

Sure. So, our pipe business had a great year this year and we are expecting a great year for them again next year, because pipelines are being built all over the world. Our shipping container business had a great year in the context of making conversions of lines from the conventional coatings to our Aquaguard coatings this year. We have now converted six lines.

The only problem with that business, Kevin, is that nobody is making shipping containers these days, because global trade is pretty weak and so there are more containers available than there normally would be, so the shipping companies are not ordering containers and the container companies are not ordering containers, so the market is weak. The industry expects that market to remain weak into the second half of next year and that's the nature of the shipping businesses. It goes through a lot of peaks and valleys.

In terms of the off-road segment, we've got an awful lot of new customer qualifications. We've got a very nice pipeline of business. I'll say that that's a relatively market as well. It's one of the ones that I referred to when I talked about market contraction in some of our end markets this year. I mean, I think you've probably seen the announcement from some of our customers that they have cut back production pretty substantially and that's true also those are the global company. That's true also for the companies that we do business with in China.

So, the net of all that commentary is, that we've opened up, we have a much larger book of business today than we did at the start of the year. And, the pipe coatings business remains on track and growing, and the market is strong. Pipe and off-road markets are a bit weak globally.

Kevin Hocevar - Northcoast Research

Okay. And, in terms or the Masters stores, I think you said there's 22 stores now. They are committed to bringing on 150. How many do you think will be on line by the end of 2013?

Gary Hendrickson

I don't know, but it's probably 10 or 15 more. That's my guess. That's not inside information. I don't know, but I'm guessing.

Kevin Hocevar - Northcoast Research

Okay. And then finally, you talked about raws being flattish, kind of the outlook for 2013. How is that looking sequentially going into the first quarter? It looks like TiO2 has been coming down, polypropylene has kind of stayed lower, so just kind of wondered what does that look like sequentially just moving into the first quarter?

Gary Hendrickson

We are thinking it's going to be flat for the whole year, including the first quarter.

Kevin Hocevar - Northcoast Research

Okay. Great. All right. Thank you very much.

Gary Hendrickson

You're welcome.

Operator

We'll go next to the line of Rosemarie Morbelli with Gabelli & Company. Please go ahead.

Rosemarie Morbelli - Gabelli & Company

Thank you for taking my question. Gary, you have improved the EBIT margin by 210 basis points this year or thereabout. How much more do you think you can, and this by the way is the highest EBIT margin since 2010 at least as far as the numbers I am looking at, how much more do you think you can improve it?

I know that as a general rule, you are not pushing so much for the gross margin expansion as you don't want your customers to be discouraged and that you are taking it out of operating expenses, but how much more can you take out?

Gary Hendrickson

Thanks for recognizing that it was up substantially this year, Rosemarie. I'll just point out though in context that we took a dip in 2011 from 2010, right? Last year was a year when we had massive raw material inflation and we were chasing that inflation all year long. So, what we've done this year is, restored the business to the margin rate that it should be running at, so I think that context is important.

In terms of going forward, we have expectations that we should be able to improve the company's margins through growth and through productively. You're right, I mean, the customers that we have today expect us to manage those things and what we expect that we'll do over time as we get more productive is, grow our business and share some of that with our customers.

Rosemarie Morbelli - Gabelli & Company

But that is at the gross margin level, I was looking at the operating margin. How much more can you take out of G&A?

Gary Hendrickson

No. I'm talking about operating margin. When we talk about productivity at Valspar, Rosemarie, we talk about the entire P&L. We don't focus just on one part of it.

Rosemarie Morbelli - Gabelli & Company

Okay. Just following up on that, as you are still benefiting from some of the productivity actions that you took this year, how likely is it that next year you can still improve by about 100 basis points let's say?

Gary Hendrickson

That's a big number.

Rosemarie Morbelli - Gabelli & Company

Right. Okay.

Gary Hendrickson

That's not our plan.

Rosemarie Morbelli - Gabelli & Company

All right. Okay. That is helpful. When looking at B&Q you also made a point in saying that it would not benefit to the bottom line, because of the nature of the investment. Could it have a negative impact on your operating income for a short period of time as you are ramping up?

Gary Hendrickson

Possibly, but it won't be material.

Rosemarie Morbelli - Gabelli & Company

Okay. And then two more questions, if I may. Australia has been weak now for quite a while. Are you seeing any change in the trend?

Gary Hendrickson

Not really. I mean, I know the government is doing what they can to stimulate the housing market. They have lowered interest rates pretty substantially and they are doing the things that you would expect the government to do and there is a very weak market, but no signs of life yet.

Rosemarie Morbelli - Gabelli & Company

You also said that in 2013 you expected to make an M&A deal. Is it more likely to be some kind of bolt-on type of acquisition either entering in your geography or adding technologies that you don't currently have or are you still contemplating a larger one?

Gary Hendrickson

No. We don't have any plans for what you would probably consider large ones. We are looking in the paints industry. And, all other things that you mentioned geography, technology, line extensions, et cetera, those are all in play for us as we contemplate what the types of companies that we would like to acquire.

Rosemarie Morbelli - Gabelli & Company

Okay. Thanks. And, my last question is for Lori. Although she maybe not here, good luck Lori on your new project. You had announced that you expected to lower the net number of shares by about 2 million on an annualized basis taking into considerations whatever options may add. Is that number still a good number to look at 2 million shares by year end versus beginning of the year?

Lori Walker

Right, so what our policy is that we will guarantee that we will offset dilution and the intent is over the longer term to reduce the share count by 2% and this year was actually closer to the 3%.

Rosemarie Morbelli - Gabelli & Company

Okay. Thank you very much.

Operator

We'll go next to the line of Steve Schwartz with First Analysis.

Steve Schwartz - First Analysis

Hi. Good morning, everyone.

Gary Hendrickson

Hi, Steve.

Steve Schwartz - First Analysis

Lori, I think in your commentary about EBIT margin for paint, you mentioned a favorable price cost spread, so it sounds like from your various answers this morning that pricing was positive. You had continued gains in the fourth quarter while raw materials maybe were up less. Is that correct?

Lori Walker

Correct.

Steve Schwartz - First Analysis

Okay. And, so then just to bring in, into the bigger picture, when we look at negative numbers in a price mix category on the spreadsheets we use, it sounds like that's mostly mix related to China and so forth and maybe Australia as well.

Lori Walker

Correct.

Steve Schwartz - First Analysis

Okay. And then on Wattyl, because it's Southern Hemisphere, if you could remind us a weak performance in the fourth quarter of your year, is that essentially their spring? Does that portend that the next couple of quarters will probably be weak?

Gary Hendrickson

I wouldn't expect any significant change, so we anniversary Bunnings, Steve, so that we are up a little bit. The Masters stores, Masters will continue building stores, that helps, but the rest of it has to do with the market recovery. And, until the market recovers, I wouldn't expect to see any substantial revenue improvement from Wattyl with the exception of the things that I just mentioned.

Steve Schwartz - First Analysis

Okay. That Sounds good. Thanks for taking the question.

Operator

And we have a follow-up from the line of Bob Koort with Goldman Sachs.

Bob Koort - Goldman Sachs

Thanks. Gary, I was just curious, it seems like maybe the Chinese housing market, there's some light somewhere in the tunnel. During this bleaker period I know you guys have done well by focusing on the inland cities versus maybe Dulux and Nippon which are in the bigger coastal cities. Have you seen any change in the competitive dynamic as the market went through this volatility in the last 18 months?

Gary Hendrickson

I'm not sure that it had anything to do with the market volatility, Bob, but the competitors that you just mentioned have publicly talked about their Tier-2 and Tier-3 strategies, which is where our strength is.

So, I would say the answer is yes. It has gotten a little bit more competitive, but it's a big market. The three of us together still represent less than 10% of the total market, so there's a lot of room for all of us to grow.

Bob Koort - Goldman Sachs

Great. Thank you.

Gary Hendrickson

You're welcome.

Operator

And there are no further questions in queue.

Gary Hendrickson

Okay. Well, thanks everyone for joining us on our call today. Once again just to recap, we are issuing our guidance for fiscal year 2013 of $3.65 to $3.85, and we look forward to updating you on our first quarter conference call in February.

Operator

Thank you. And, ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.

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