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Executives

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

Gary E. Hendrickson – Chairman and Chief Executive Officer

Analysts

Robert A. Koort – Goldman Sachs & Co.

Jeffrey J. Zekauskas – JPMorgan Securities LLC

Dmitry Silversteyn – Longbow Research

Charles A. Dan – Morgan Stanley

Ivan M. Marcuse – KeyBanc Capital Markets

David I. Begleiter – Deutsche Bank Securities, Inc.

John McNulty – Credit Suisse Securities LLC

Steven K. Schwartz – First Analysis Securities

Daniel Jester – Citigroup

Rosemarie J. Morbelli – Gabelli & Co., Inc.

Don D. Carson – Susquehanna Financial Group LLP

Kevin W. Hocevar – Northcoast Research Partners LLC

The Valspar Corporation (VAL) F1Q13 Earnings Call February 12, 2013 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Valspar Fiscal 2013 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this 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 A. Walker

Good morning and welcome to our fiscal 2013 first quarter 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 that contains much of the information 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 make some comments, and then we'll respond to your questions.

First quarter sales totaled $875.2 million compared to $885.6 million in the first quarter of 2012. Adjusted net income per share for the quarter was $0.60 compared to $0.62 in 2012. We had missing some end markets outside the U.S., led to the decline in revenue, but this was partially offset with significant new business and strong performance in the Americas.

As I comment on our gross margin and operating expense performance, note that restructuring is excluded in 2012. For the first quarter, our gross margin was 33.6%, up slightly from 2012. Operating expenses as it relate to revenue were 22.9%, up slightly from 22.6% last year, primarily due to lower net sales and investments to support our new business growth, which Gary will highlight.

The reported tax rate for the first quarter was 28.3%, up from a rate of 26.1% in the first quarter of last year. The higher tax rate for the quarter was due to geographic mix of earnings. For fiscal 2013, we expect the effective tax rate to be approximately 31% to 32%.

Average diluted shares outstanding were $92.4 million, down $3.1 million from last year. In the quarter, we continued to return cash to shareholders, repurchasing approximately 1.2 million shares. We have 14.4 million shares remaining under our current authorization. And we estimate average diluted shares outstanding for the second will quarter be approximately 92 million.

Recapping our sales performance in the quarter, sales declined approximately 1%, volumes were up about a 1%, but we had negative sales mix of 2%. We did not have any benefit from pricing and currency impact was negligible.

I’ll now discus our segment results for the quarter. Coating segment sales adjusted for currency increased 1.3%. Sales in this segment benefited from new business and all of our product lines that helped offset uneven market conditions. In the coating segment what we saw was market weakness in our general industrial product line, where revenue declined globally mainly due to inventory liquidation in the operating equipment market and a weak shipping container market.

There was also market weakness in two segments of our packaging business, food and general line packaging. Paint segment sales when adjusted for currency and acquisitions declined 5.3%.

In our North America consumer product line sales and volumes were up mid-single digits. This growth was more than offset by weakness in China and Australia. In China, volumes were down low single digits, as distributors were more cautious with inventories ahead of the Chinese New Year and in response to the slow economy. Volumes were down in Australia due to a weak residential construction market and the restructuring of our storage footprint.

Sales in our other segment when adjusted for currency declined 5.5% due to last years exit of our gelcoat product line.

I am now going into a discussion of our EBIT margins for the quarter. All of the numbers I’ll be discussing exclude restructuring charges in 2012. Our coating segment EBIT margin was 14.9% roughly the same as the first quarter of 2012.

Our paint segment EBIT margin was 6.9%, down 120 basis points from 8.1% in 2012. The decline was driven by lower sales and the timing of investments to support new business initiatives. The EBIT margin for our other segment was negative 8.9% compared with negative 10.3% in the first quarter last year. As a reminder, other includes our corporate expenses. The total company EBIT margin for the quarter was 10.6%, down slightly from 10.9% in the first quarter of 2012.

Moving to the balance sheet; our net debt at the end of the first quarter was approximately $1 billion, an increase of $123 million from the end of last fiscal year. The increase was primarily driven by share repurchases and our acquisition of Ace Hardware's paint manufacturing assets. Our net debt to capital was 45.4%.

In the quarter, our operating cash flow was a source of $2 million compared with the use of $24 million to the same period a year ago. We estimate free cash flow, which we define as operating cash flow less CapEx and dividends to be $180 million to $200 million in fiscal year 2013.

Capital spending in the first quarter was $14 million, down slightly from $14.5 million in the first quarter of 2012. Our capital spending forecast for the full year is $120 million. In the first quarter, depreciation and amortization was $20.6 million, down from $23.1 million last year. Our full year forecast for depreciation and amortization is approximately $90 million.

Due to the end market weakness we experienced so far this year and which we expect to persist at least to the second quarter, we are adjusting our fiscal year 2013 guidance to $3.60 to $3.80. And with that, I will turn the call over to Gary for his comments.

Gary E. Hendrickson

Thanks Lori and good morning everyone. In our operating plan for 2013, we assumed uneven global demand, but with no significant end-market declines. And we plan for most of our growth to come from a significant amount of new business. As the quarter played out, our new business targets were achieved, but market weakness in China, Australia, and parts of Europe was worse than we expected and as a result we missed our revenue target.

As we adjusted to these conditions, we focused as we always do on cost management and productivity and delivered on our goals for the quarter. Normally the benefit from these initiatives would help offset the softness in our top line, but we chose instead to reinvest these savings to support recent new business wins and emerging growth opportunities. These investments position us well to capture growth in the back half of the year.

So I'll briefly highlight where we performed well in the quarter and provide some additional details on the investments that we made to support our growth plans. We were pleased with our business performance in the Americas during the quarter, while overall we delivered mid-single-digit volume and revenue growth.

Our U.S. consumer paint business grew revenue and volumes in the mid-single digits. North America posted high single-digit revenue and volume gains. The good performance of these two businesses indicate continued recovery in the U.S. housing market that we expect will maintain momentum as the year progresses. Our coil and packaging product lines in the Americas also delivered volume growth in the mid-single-digits driven by some significant new business winds.

These positives were offset, as Lori said by weak demand in some international markets, and the weakness I'd point out that we experienced the quarter was consistent with the reported performance of several of our off-road equipment customers and can makers and as Lori said, we don't expect these segments to improve significantly in our second quarter, because always you can expect that we will react to these market conditions with prudent expense control and focused on productivity. However as I said, we’re always investing for the long-term, and the investments we’re making position us well for sustained growth. Let me talk about a few examples.

First, we continue to prepare for the expansion of our B&Q partnership. Later this year, we’ll introduce Valspar branded paint to more than 300 retail locations in the U.K. and Ireland, and that requires upfront infrastructure and staffing support. Second, recently announced Ace Hardware acquisition will expand our retail presence in the U.S. and deliver additional revenue from Ace’s private-label paint which we now manufacture and sell. But the acquisition will be slightly dilutive for the first three quarters of our fiscal year.

And third, we’re investing in a significant retail program in the U.S., we can’t talk anymore about it, but we’ll have a lot more to say about this in the second quarter. The Ace acquisition and the retail program underscore our confidence in the U.S. housing market and will position us well as the market continues to recover. We believe that any investment we make now and the recovery of the U.S. housing market is a good one for the long-term.

When all three of these initiatives are fully implemented over the next year and a half or so, we expect them to generate incremental revenues in excess of $400 million per year.

I’d also like to highlight our ongoing commitment to use our strong cash flow to maximize shareholder returns. In December, our Board authorized repurchase of $50 million shares of outstanding common stock, this replaced the prior authorization under which we repurchased 13.1 million shares. We also increased our dividend for the 35th consecutive year.

As Lori indicated, our expectation is that, some end market conditions will not improve significantly in the second quarter, and so we’re adjusting our guidance to $3.60 to $3.80.

However, we remained highly confident in our ability to execute our new business plans for the second half of the year and we will continue to invest in our long-term growth opportunities.

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

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Robert Koort. Please go ahead.

Robert A. Koort – Goldman Sachs & Co.

Thanks very much. Good morning.

Gary E. Hendrickson

Good morning Bob.

Lori A. Walker

Good morning.

Robert A. Koort – Goldman Sachs & Co.

Gary, if we stepped away from a little bit of the short-term ebbs and flows, can you give us a sense of the portfolio you’ve got today, what you would see as sort of the sequence from a volume sort of an annualized run rate volume growth, secular volume growth, revenue growth, EBIT growth, EPS growth sort of how you see that slowing down in the P&L statement on a longer term basis?

Gary E. Hendrickson

That’s a big question, Bob.

Robert A. Koort – Goldman Sachs & Co.

Well, I don’t want to fish too many thoughts.

Gary E. Hendrickson

Yeah, look we fell little bit of a – you asked me to step away and talk about the long-term, but let me just give you little color on what happened in this quarter. So as I mentioned, we achieved our net new business targets for the quarter. So our net new business was up over 4% in the quarter. As Lori mentioned, some of that business came in at – some of that business has a lower price point than our coil business, so we had a little bit of a mixed impact of 2%.

And then what we saw is our core markets decline, we think at about 3% and that’s how you get to the 1% decline in revenue, 4% net new, 2% mix, 3% core shrink. As we said, and I'll answer your question about revenue, I think we're going to see some weakness in our core through the second quarter. The new business initiatives that I've talked about and others start to roll in the second quarter and the third quarter. And so we expect our revenue trends for the second half of the year to be substantially higher than the first half and as you know from studying our company, we’ve worked pretty hard over the last three or four years to develop operating leverage in all of our businesses. So as that revenue starts to roll in, the operating leverage that we’ve achieved should flow to the substantial amount of that revenue or the margin on that revenue should flow to our bottom line. So we're expecting the second half of our year to be pretty strong,

Now that's about what we can control, right. I don't expect that our markets are going to be substantially stronger in the second half than in the first half. We’ve got in our US paint business, we talked about a couple of the initiatives and there is one other one that we haven't given any details on. So I’d expect the second half of our North America paint business to be really strong on a year-over-year basis. I would expect Australia to continue to be weak throughout, potentially throughout the remainder of the year because there is no signs of improvement in the residential housing market in Australia.

And with respect to the weakness that we saw in Huarun this quarter, I think context is important. That’s a business that has grown at a compound annual rate of 15% since 2009 on the revenue line. And we've had some quarters that were a little bit weaker as distributors buy and liquidate inventory, that's typically what creates strength and weakness in any individual quarter. We’ve had a couple of quarters like the one that we had, but I would expect our Huarun business, as the year progresses to get a lot stronger than it was in Q1.

Robert A. Koort – Goldman Sachs & Co.

And then if I could just clarify face of the combination of these programs would add 10% to your revenue base, is that what I heard?

Gary E. Hendrickson

Yeah, I said both in excess of $400 million.

Robert A. Koort – Goldman Sachs & Co.

Got it. Okay, thanks Gary.

Gary E. Hendrickson

Welcome.

Operator

Our next question is from Jeff Zekauskas of JPMorgan. Please go ahead.

Jeffrey J. Zekauskas – JPMorgan Securities LLC

Thanks very much. How much was Australia down in the quarter?

Gary E. Hendrickson

They were down about 15% in volume.

Jeffrey J. Zekauskas – JPMorgan Securities LLC

All right. It looks to me like your overall raw material costs are down a percent or 2% year-over-year. Is that correct and do you expect the raw material decrease to get a little bit better as the year goes or a little bit worse?

Gary E. Hendrickson

Our raw material costs were actually flat on a year-over-year basis and flat sequentially Jeff. And as the year goes on, it’s obviously hard to predict. I would say that there is a bias towards some inflation, but I wouldn’t expect significant inflation as the year goes forward and I don’t expect any declines.

Jeffrey J. Zekauskas – JPMorgan Securities LLC

Okay. And then lastly, your inventories were up quite a lot year-over-year. They went from roughly $380 million to $425 million. So does that mean that in general the self slowdown was a little bit more surprising when you saw it. And given that the Chinese New Year is in February this year, are you going to have to deal with higher inventories for a while?

Gary E. Hendrickson

No, we don’t think so. I mean the inventory that you saw was a result of the Ace acquisition, so we bought all of the Ace inventory that was in their warehouses and distribution centers when we made the acquisition.

Jeffrey J. Zekauskas – JPMorgan Securities LLC

Sure.

Gary E. Hendrickson

And this retail program that I referenced back, I’m not in liberty to talk about as part of that as well. So we’re building inventory for that program.

Jeffrey J. Zekauskas – JPMorgan Securities LLC

Okay. In China?

Gary E. Hendrickson

Lori, China?

Lori A. Walker

China is fine from an inventory perspective.

Jeffrey J. Zekauskas – JPMorgan Securities LLC

What I mean is, coming into the next quarter will the timing of the New Year make your volume comparisons little bit more difficult?

Gary E. Hendrickson

I don’t think so. I think we have – the Chinese New Year always falls in our second quarter, Jeff so.

Jeffrey J. Zekauskas – JPMorgan Securities LLC

Okay.

Gary E. Hendrickson

Whether it was in January last year and February this year shouldn’t matter through for the entire quarter.

Jeffrey J. Zekauskas – JPMorgan Securities LLC

Okay, thank you very much.

Gary E. Hendrickson

You’re welcome.

Operator

Our next question comes from the line of Dmitry Silversteyn with Longbow Research. Please go ahead.

Dmitry Silversteyn – Longbow Research

Good morning. Can you give us some sort of recent expectations or just stating of the Australian and Chinese businesses? With China, you have both the Huarun Paints and Valspar spray paint which you’re moving some of the distribution channel and Tier 1, so could you talk about those businesses and then give us a size of the Australia business currently in terms of revenues?

Gary E. Hendrickson

Australia about $350 million in revenue. I will answer the second question first and as we’ve talked about in the past, Dmitry the Valspar program is a small program, we are taking it slow, we have low targets for that. We are working on the model to move into Tier 1 cities with the foreign brands. So we don’t talk too much about that, because it’s still small. And Huarun in the quarter, as Lori mentioned volumes were down about 3% and now it’s – China is going through a lot of change. I mean there was a leadership change in China.

They are trying to reorganize their economy toward more consumers, which I think will be good for us in the long-term and away from export. But there'll be little fits and start and you know in this quarter, our distributors weren't as aggressive in selling through their inventory as they have been in previous quarters and maybe it's the Chinese New Year, maybe it's the sort of on again, off again support of the housing market that the Chinese government is going through. But it was a relatively weak quarter at Huarun. But as I said to Bob, I don't expect that Huarun is going to be week throughout the entire year.

Dmitry Silversteyn – Longbow Research

And then Huarun are – you know as again it’s grown to 2% since 2009?

Gary E. Hendrickson

If you put the two pieces together, coatings and paints that are sold through Huarun is about $400 million.

Dmitry Silversteyn – Longbow Research

$400 million, okay thank you. Second question on the slow down which you saw in your international markets and in general industry particularly. I am assuming it happens mostly in Europe as well as parts of Asia-Pacific, parts of China. Was thee weakness sort of – kind of uniform through the quarter or did you see end of calendar year, inventory collection by your customers that may have impacted your results and what did it look like coming out January, did you see some improvement or is it remaining weak?

Gary E. Hendrickson

So, the segments that we’re weak in our industrial business, are as I mentioned, our coil business had a very strong quarter, our wood coatings business had a very strong quarter even in China, globally strong but very strong in the US. Our packaging business had a strong quarter, with volumes up mid-single digits. So it was the G.I. business that was weak and it was weak globally in a couple of segments, they are off road equipment, heavy equipment that will be Caterpillar, customers like that was weak for the whole quarter. And that segment was down about 20% globally for the quarter and I think that’s consistent with what you read about, what’s happening in that industry with the inventory liquidation, that’s the current myth.

Europe in general was weak. Our Europe industrial business which is not a large business for us, but it was down more than 20% and we think that was our market. And as you said, Asia was relatively weak. The other segment of that business that was weak was our container coatings business, which on a year-on-year business was down 50%. And that’s just a function of orders that are flowing into the container factories in China.

We actually have more, we’ve converted more plants at this point in time in China, than we had last year, but our business was up 50%. So that’s a cyclical business, and the expectation as it gets a little bit and this comes from the shipping industry, the expectation is that that industry gets a bit stronger as the year moves on.

Dmitry Silversteyn – Longbow Research

Okay, so it wasn’t so much an inventory collection at the end of the year, it’s sort of rebound as the year began. It was a general end market demand for weakness.

Gary E. Hendrickson

I think end market demand is in the off road sector where our biggest hit was in the off road and heavy equipment sector. Demand is not high and it was an inventory liquidation, but the part that impacts less more than the others, the inventory liquidation. So that’s Caterpillar and they’ve been pretty public about what they’re doing, but it’s the whole industry particularly in China. There is a lot of inventory build over the last year or so and end market demand soften and so those manufacturers are working off their inventory.

Dmitry Silversteyn – Longbow Research

Got it, got it. Okay. And then just finally, you talked about pricing or raw materials expectations being sort of flattish to maybe slightly up for the year. I am assuming you are not taking aggressive pricing actions in the paint market, but if your expectations, and the reflected expectations of other companies in your industry, what if they prove to be conservative and inflation effect accelerate sort of how quickly can you respond with pricing and do you have a feel for which market you will be able to get pricing would certainly be if you needed to adjust for raw material inflation?

Gary E. Hendrickson

We do have a feel for that and it always comes faster in our coating segment and our paint segment and some of those, in fact many of the customers in our coating segment are on contracts with raw material escalators and de-escalators. So it can come pretty quickly in some segments, but we always say that is going to, inflation is going to take us six to nine months to recover. And I wouldn’t expect if we see inflation this year, I wouldn’t expect this year to be any different.

Dmitry Silversteyn – Longbow Research

Okay, I understand. Thank you, Gary.

Gary E. Hendrickson

You’re welcome.

Operator

Our next question is from Charles Dan with Morgan Stanley. Please go ahead.

Charles A. Dan – Morgan Stanley

Good morning. Just trying to understand the updated guidance, it seems like it implies a fairly strong second half of the year, which is in line with what you guys have been saying. But just on – when we think about margins, how much of fitting margin expansion really are you expecting in the second half of the year in terms of what’s included in guidance? And then also can you clarify to what extent, share repurchases are included in the prior guidance and the updated guidance?

Lori A. Walker

Well, the share repurchases there, it was in the guidance in both times. So the assumption is the same in both guidance, 3.60 to 3.80 and 3.65 to 3.85. So there is no change in terms of the guidance from a share repurchase standpoint. And from an overall margin standpoint, we’re expecting an improvement in the back-half of the year in terms of operating margin or even margin expansion in the back-half of the year. And as Gary alluded to earlier with the new business that's rolling in, that gives us operating leverage and that we feel pretty confident about being able to deliver that.

Charles A. Dan – Morgan Stanley

So you are not assuming any gross margin expansion at this point?

Lori A. Walker

Well, we really look at trying to look at the bottom line and so as opposed to looking specifically around gross margin and operating expenses, so we manage to the operating or the EBIT margin rates.

Charles A. Dan – Morgan Stanley

Okay.

Gary E. Hendrickson

And that's what you're going to see Charles, that's what you're going to see. When we talk about operating leverage, we’re talking about EBIT. All right? You're not going to see a lot of that operating leverage at the gross margin line, even to see operating leverage flow through our P&L at the EBIT line…

Charles A. Dan – Morgan Stanley

Great.

Gary E. Hendrickson

For the most part.

Charles A. Dan – Morgan Stanley

And just to clarify, SG&A spending look like did come in, certainly lower than what I would have expected for a period when you guys are inventing in a lot of new business. So how much if any sort of targeted cost-cutting relative to your prior plan, actually happened in the quarter and have you changed your outlook for the corporate line type spending for the balance of the year?

Gary E. Hendrickson

I don't think I'll give you a number Charles, in terms of what our target for productivity and cost management is, but I will say this and I said it in my opening remarks, we hit our targets for cost management and productivity in the quarter and that's why you're not seeing a big impact from the investments that we're making. The investments are being offset at this point in time by the productivity that we've been able to achieve.

Charles A. Dan – Morgan Stanley

Great, thank you.

Gary E. Hendrickson

You're welcome.

Operator

Our next question is from the line of Ivan Marcuse of KeyBanc Capital Markets. Please go ahead.

Ivan M. Marcuse – KeyBanc Capital Markets

Hi, thanks for taking my questions. On a year-over-year basis, how much was the spend for the initiatives to each of the UK business and the business that you mentioned, North America. How much did that cost you in this quarter versus I guess would have been pretty much nothing last year this time?

Gary E. Hendrickson

Yeah, that’s a good question Ivan. But I am not going to go to that level of detail at this point. I think those things have become more clear as the year rolls forward, but I am not even talking about one of the program, so it doesn’t seem like that I should give you the number.

Ivan M. Marcuse – KeyBanc Capital Markets

Okay, but, I mean it would be safe to assume it’s significantly higher than what it was last year?

Gary E. Hendrickson

Yes.

Ivan M. Marcuse – KeyBanc Capital Markets

Great. And then in your core business, you said your core business is down about 3%. Of that down 3%, how much would you I guess account for the destocking that you mentioned I guess probably would have happened December or something that went on. How much of that down 3% was more of a function of destocking versus total market demand on a global basis?

Gary E. Hendrickson

That’s a good question. Let me think about it for a second. So I don’t know why, we’ll have to get back to you on that, 1% or 2% -- maybe 1%.

Ivan M. Marcuse – KeyBanc Capital Markets

Okay, great. And then last question, I am sorry you answered it. I appreciate it. I appreciate your time.

Gary E. Hendrickson

Welcome Ivan.

Operator

Next question is from David Begleiter with Deutsche Bank. Please go ahead.

David I. Begleiter – Deutsche Bank Securities, Inc.

Thank you, Gary. On the $4 million from the Ace in the retail program, should that all be in the numbers for 2014 or is it still a ramp-up to 2015?

Gary E. Hendrickson

It will be a ramp-up. David, I tried to call out that. I think we will hit our run rate on those programs in 2014. We will hit our run rate on those programs in 2014, but 2015 will be the year that they are fully realized.

David I. Begleiter – Deutsche Bank Securities, Inc.

Should those be eventually address paint segment margins that $4 million of sales?

Gary E. Hendrickson

$400 million would all be in the paint segment.

David I. Begleiter – Deutsche Bank Securities, Inc.

Should it be at or above existing paint segment operating margins?

Gary E. Hendrickson

When it’s fully realized they will be.

David I. Begleiter – Deutsche Bank Securities, Inc.

And just any breakdown between the Ace and B&Q in the retail program as it’s Ace is the largest of those three and?

Gary E. Hendrickson

Yeah, again as we go through the year, I will be able to talk more about this.

David I. Begleiter – Deutsche Bank Securities, Inc.

Okay, thanks a lot.

Gary E. Hendrickson

You’re welcome.

Operator

Next question comes from John McNulty with Credit Suisse. Please go ahead.

John McNulty – Credit Suisse Securities LLC

Yeah good morning. Just a couple of questions. So Australia, if I heard right, I think you said it was down mid-teens, was there any further store closures, I thought a lot of that have been anniversary back last year, but was there further store closure that was part of the pressure that you saw in that business?

Gary E. Hendrickson

No. John, we anniversary the store closures in Q3 of this year. So store closures as far as Lori mentioned, store closures were part of the problem, the other problem is the market and the market is down, we think paint volumes and our trade business for the market and this is new construction where we tend to skew in our business, were down about 8% – market volume is down about 8%.

John McNulty – Credit Suisse Securities LLC

Got it, okay. And then as far as the whole [Huarun] platform, is that profitable at this point, because it seems like your margins, they are coming in solidly lower than they have been for a number of years and this seems like this maybe the one I guess common denominator in terms of when things started to get worse.

Gary E. Hendrickson

Yeah, they are a little bit lower, I mean they are not lot but we've got – but you know this is lot of the 25% of our – almost rough numbers 25% of our paints segment and their margins are significantly lower than the rest of the segment. Well Huarun, in this quarter, if you want to look at this quarter, their volume, it's the right quarter to begin with and their volumes were down. So their margins were awful in the quarter and that's what you're seeing. Our US consumer business had as I mentioned, had a nice volume and revenue quarter so the margins were okay there.

John McNulty – Credit Suisse Securities LLC

Okay and then with regard to Huarun, I think you said the volumes were down 3%, can you break down how much was kind of traditional Huarun versus the new, I guess – I think it was low income housing platform that you have in that business?

Gary E. Hendrickson

I don't have that detail, but I think you could – I think you could say it would be equal.

John McNulty – Credit Suisse Securities LLC

Okay, fair enough. That's all my questions, thanks very much.

Gary E. Hendrickson

You’re welcome, John.

Operator

We have a question from the line of Steve Schwartz with First Analysis. Please go ahead.

Steven K. Schwartz – First Analysis Securities

Good morning everyone.

Gary E. Hendrickson

Good morning.

Lori A. Walker

Hi, Steve.

Steven K. Schwartz – First Analysis Securities

Regarding your can making or packaging, coatings, was it the beverage can or food can, that was predominantly weaker?

Gary E. Hendrickson

It was the food and general packaging market that was weaker than it was in 2012 and general packaging would be aerosol cans and decorative cans, that type of a package. Beverage was fine, in fact I mentioned that our global packaging business was up in volume mid-single digits and all of that growth came from beverage.

Steven K. Schwartz – First Analysis Securities

Okay, very good thank you.

Gary E. Hendrickson

You're welcome.

Operator

Next question is from the line of P. J. Juvekar with Citi.

Daniel Jester – Citigroup

Good morning. This is Dan Jester sitting in for PJ. Just a quick one on the Ace Hardware transaction, it’s my understanding that Ace is a co-op so the stores have some flexibility about what they actually can buy. So when you eventually launch the Valspar brand and product there, how do you win the space on that shelf from the suppliers who currently supply the Ace source?

Gary E. Hendrickson

Yeah, you’re right. The individual storeowner can make their choice of the brands that they want to carry, the co-op makes it a lot easier for them though Dan to pick the brands that the co-op has agreements with. And so we will, the Valspar brand will be – handle the Ace distribution centers and warehouses, whereas the competitor brands will not. And that's the big advantage in terms of shipment fulfillment for the retailer. The other is, Valspar brand is a good brand and it's fully competitive with any other brand that's in the market and I think with the support that Ace is giving us and with our teams in the field we'll be able to lend substantial amount of that business.

Daniel Jester – Citigroup

Great, thank you.

Gary E. Hendrickson

You’re welcome

Operator

The next question is from the line of Ivan Marcuse of KeyBanc Capital Markets.

Ivan M. Marcuse – KeyBanc Capital Markets

Just a quick follow-up and your new initiatives for the spend – I know you don't want to talk about how much you are spending, but will that accelerate through the year or is the first quarter, for instance at UK you’re sure kicking off, it's a bigger chunk or how to think about it. Should it be evenly distributed through the year?

Lori A. Walker

Yes we would expect that the initiatives would still be high in the second quarter and then you know it's going to be leveling out and then you’ll actually see the benefit from the sale from the top line. So you will see some operating leverage in the back half of the year.

Ivan M. Marcuse – KeyBanc Capital Markets

Okay. And then the Ace business, you talked about that sort of I guess it will be dilutive on a full year basis for fiscal 2013 and then you should start to see be more of an accretive opportunity starting in fiscal 2014, is that the right way to think about it?

Gary E. Hendrickson

Right, yeah. And it gets accretive for us when we get the distribution footprint correct and that will take a little while.

Ivan M. Marcuse – KeyBanc Capital Markets

Okay, great, thank you.

Operator

We have a question from the line of Rosemarie J. Morbelli with Gabelli & Company. Please go ahead.

Rosemarie J. Morbelli – Gabelli & Co., Inc.

Good morning all. Gary, do you have a feel for how long the inventory liquidation is going to go on the general industrial side?

Gary E. Hendrickson

Not really. I think if you read the Caterpillar, the Caterpillar last conference that they had, that would probably give you a better indication than I could give you [Ross Mary]. It just depends on how – big part of that – the answer to that question depends on China and when infrastructure spending in China starts to take-off again and when it does I think the inventory will be liquidated pretty quickly.

Rosemarie J. Morbelli – Gabelli & Co., Inc.

Okay.

Gary E. Hendrickson

But I don’t know when that is.

Rosemarie J. Morbelli – Gabelli & Co., Inc.

And then I was wondering if there were something special during the quarter regarding the weakness in food packaging, food cans, I mean is it the question of crops not coming in, is it the question of fishing being done, is it that people are buying fresh foods and vegetables as opposed to canned, well do you have a feel for that?

Gary E. Hendrickson

It could be all of those things Rosemarie. Just for context, we saw this happen in 2008-09 during the recession as well. People for a short period of time moved away from food cans and then the market recovered after that. So it could just be – it could be some of that.

Rosemarie J. Morbelli – Gabelli & Co., Inc.

Is then food can actually cheaper than fresh food?

Gary E. Hendrickson

I suppose it could be.

Rosemarie J. Morbelli – Gabelli & Co., Inc.

So that would be counterintuitive, wouldn't it?

Gary E. Hendrickson

Yes I guess so. Yeah, I don't have a fantastic answer for you, and that again I think our can makers are closer to that market than we are and might be better to ask them that question than us. But for us, if the demand is not there, then the demand is not there, I think time will tell what the real causes are, but right now I don't have a great answer for you.

Rosemarie J. Morbelli – Gabelli & Co., Inc.

And based on your contacts with your customers, do you have a feel as to where this is more prevalent in Europe and North America for example as opposed to Asia where the middle class is growing and therefore it's going to go more towards food can, one can argue?

Gary E. Hendrickson

You could argue that, but the predominance of our business is in Europe and North America, just because the food can market hasn't expanded to the extent they are then that has in Asia hasn't expanded to the extent. In Asia that hasn't in some other markets. And this is predominantly a Europe problem, not so much the U.S., more about Europe.

Rosemarie J. Morbelli – Gabelli & Co., Inc.

Okay. And then so looking at Europe you obviously had weak performance there, but do you feel bumping along the bottom or do you see a continuing decline on a sequential basis as opposed to versus last year?

Gary E. Hendrickson

I think it's going to be flattish.

Rosemarie J. Morbelli – Gabelli & Co., Inc.

Okay, so flattish sequentially?

Gary E. Hendrickson

From where it is today.

Rosemarie J. Morbelli – Gabelli & Co., Inc.

All right. And then lastly if I may note that, we don’t like Lori, but are you making progress, vis-a-vis the search for the new CFO, I know she wants to retire.

Gary E. Hendrickson

We are making progress.

Rosemarie J. Morbelli – Gabelli & Co., Inc.

All right. Thank you very much.

Gary E. Hendrickson

You’re welcome.

Operator

You have a question from Don Carson with Susquehanna Financial. Please go ahead.

Don D. Carson – Susquehanna Financial Group LLP

Yes, thank you. Gary, you talked about your optimism on the U.S. residential paint market. I just wanted to get your sense of what do you think the upside for the market is, I mean the numbers I have seen suggest about 3% growth last year, but it’s still barely over 600 million gallons, so do you see higher growth in 2013 than in 2012 and where do you think ultimately we get to on normalized volumes?

Gary E. Hendrickson

I do expect that 2013 is going to be stronger than 2012 Don. I am not going to predict the numbers of gallons, but here is why I am pretty optimistic about paint per se. First of all, I’ve mentioned that our wood coatings business was up high-single digit, almost 10% in the quarter in revenue and volumes. And what we saw in 2006-07 was that business leading into the recession; it was the first one of our portfolio businesses that declined substantially leading into the recession and now it’s coming out. And we think that that’s a leading indicator on general activity in the housing market in North America, because that business is perfectly correlated to the housing market, that’s one data point.

The other data point is existing home sales, which I am not sure what last month’s number was, but prior to last month, existing home sales had increased on a year-over-year basis by about 15 months I think and existing home sales are the highest – are the driver of overall architectural paint demand. New construction is relatively small portion of overall paint demand is really existing home sales too, but expect that existing home sales continued to be positive. I think the U.S. paint market is in for a good year in 2013.

Don D. Carson – Susquehanna Financial Group LLP

Okay. And then a follow-up on your growth initiatives; you’ve talked about Ace eventually being at $150 million at run rate by 2015, so are the two, are B&Q and your U.S. residential initiative that you don't want to talk about are those relatively evenly split in terms of the balance that $400 million of revenue potential by 2015?

Gary E. Hendrickson

More or less.

Don D. Carson – Susquehanna Financial Group LLP

Okay. And then finally can you just tell us how large your pipeline business is now with all the mid-stream activity going out of the country, how big a business is that for you?

Gary E. Hendrickson

That business is doing great. And I don't have the exact number, but I think it finished last year at $125 million and I think our target for this year is $150 million, $160 million or more.

Don D. Carson – Susquehanna Financial Group LLP

All right, okay, thank you.

Gary E. Hendrickson

You're welcome

Operator

You have a question for the line of Kevin Hocevar with Northcoast Research. Please go ahead.

Kevin W. Hocevar – Northcoast Research Partners LLC

Hi, good morning guys.

Gary E. Hendrickson

Hi, Kevin.

Kevin W. Hocevar – Northcoast Research Partners LLC

Given the kind of the prolonged outlook for prolonged weakness in some of the international markets, is there any room for any further restructuring, I mean I know a lot has been done already, but just wondering if there is any room for any further restructuring?

Gary E. Hendrickson

There always is Kevin and we're looking at, that we look at that or not on an ongoing basis and there we have some opportunities, but we haven't pulled the trigger on any of those opportunities yet, but I think potentially during this year we will.

Kevin W. Hocevar – Northcoast Research Partners LLC

And then just one other quick follow-up question. In terms of TiO2, I know it's Asian TiO2 is kind of creeped up in terms of the percent of the total basket, so just wondering where you are at with that and if you can continue to substitute out and use this Asian TiO2 or is it kind of at optimized level at this point?

Gary E. Hendrickson

Well, I think there is always more we can do and we're continuing to work on it. We want to give ourselves as many options as we can for as many of our product lines as we can. So we’ll continue working on it and there is more to come.

Kevin W. Hocevar – Northcoast Research Partners LLC

Okay, great. Thank you.

Gary E. Hendrickson

You’re welcome.

Operator

We have a follow up from Charles Dan with Morgan Stanley. Please go ahead.

Charles A. Dan – Morgan Stanley

Hi, just wanted to follow up on in terms of benchmarking against some of your peers. How was January in terms of year-over-year and did you see any kind of deterioration in January that your peers wouldn’t have seen?

Gary E. Hendrickson

No, basically no.

Charles A. Dan – Morgan Stanley

Thanks.

Operator

We have a last question from Jeff Zekauskas of JPMorgan.

Jeffrey J. Zekauskas – JPMorgan Securities LLC

Thanks for taking my question. Why was your depreciation and amortization lower year-over-year and why should it be lower for 2013 than in ’12?

Lori A. Walker

I think 2013 – for the full year it’s going to be about the same on a year-over-year basis, and the reason it was lower in the first quarter is because we had restructuring last year and so you have to accelerate depreciation. So that’s the reason for why it was higher last year than it is this year, plus the full year it will be about the same.

Jeffrey J. Zekauskas – JPMorgan Securities LLC

Didn’t you say earlier that it would be about $90 million and wasn’t it at about $94 million in 2012 for G&A?

Lori A. Walker

It was a little bit higher, but it’s roughly the same.

Jeffrey J. Zekauskas – JPMorgan Securities LLC

Okay. All right, thank you very much.

Operator

At this time there are no other questions.

Gary E. Hendrickson

Okay, well thanks every one for joining the call today. As we said in our opening remarks, well we’re not expecting much improvement in similar international end markets. For the second quarter we’re confident in our new business plans for the second half of the year and our continuing ability to execute, and we’ll look forward to updating you on our second quarter conference call in May. Thanks for joining us today.

Operator

Ladies and gentlemen, this conference will be available for replay after 12:30 pm today running through February 26, 2013 at midnight. You may access the AT&T Executive playback service at anytime by dialing 800-475-6701 and entering access code 280279. International participants may dial 1320-365-3844. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.

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