Valspar Corp. F1Q09 (Qtr End 01/30/09) Earnings Call Transcript

Feb.23.09 | About: The Valspar (VAL)

Valspar Corp. (NYSE:VAL)

F1Q09 2009 Earnings Call

February 23, 2009 11:00 am ET

Executives

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

William L. Mansfield – Chairman of the Board and Chief Executive Officer

Analysts

Steven Schwartz – First Analysis Corp.

David Begleiter – Deutsche Bank

Prashant Juvekar – Citigroup

Robert Koort – Goldman Sachs

Jeffrey Zekauskas – J.P. Morgan

Saul Ludwig – Keybanc Capital Markets

Dmitry Silversteyn – Longbow Research

Sergey Vasnetsov – Barclays Capital

Michael Hamilton – RBC Capital Markets

Operator

Welcome to the first quarter earnings conference call. (Operator Instructions). I would now like to turn the conference over to our host, Ms. Lori Walker. Please go ahead.

Lori A. Walker

Welcome to our first quarter earnings conference call. Bill Mansfield, Chairman and CEO, is with me on our call this morning. A couple of brief comments before we begin, first, I would direct your attention to the press release we issued this morning, which contains much of the information that we’ll be covering in the call. Also, a quick reminder that this call is subject to the forward-looking statements language contained in our press release as our comments this morning may include forward-looking statements as that term is defined by securities law.

This morning I’ll review our first quarter results, Bill will make a few comments and then we’ll get to your questions. Despite the difficult economic environment, our earnings for the first quarter were in line with our expectations. First quarter sales totaled $639.5 million down 16.4% from last year driven by a volume decline and unfavorable currency.

Adjusted for currency and acquisition, sales were down 14%. First quarter adjusted net income per share was $0.20 in 2009 and $0.24 in 2008, excluding non-cash adjustments of $0.03 per share for Huarun minority interest shares in both 2008 and 2009 and a $0.06 per share charge in 2009 related to restructuring actions.

Net income for the first quarter of 2009 was $14.2 million. First quarter reported earnings per share were $0.11. Net income for the first quarter of 2008 was $24 million. First quarter reported earnings per share in 2008 were $0.21.

For the first quarter, our reported gross margin was 29.6% or 30.4% after excluding the impact of our restructuring actions up from 27.5% in the first quarter of 2008. The margin improvement was driven by a combination of carryover pricing, improved product mix and productivity gains in our manufacturing facilities, which were offset by higher raw material costs.

Operating expenses, excluding restructuring charges, were down approximately $5 million or 3% for the quarter driven by benefits from our previously completed restructuring actions and tight control of expenses. As a rate to revenue, operating expenses were 23.6%, excluding restructuring, which were up 330 basis points from 20.3% in the first quarter of 2008. The increase as a rate to revenue was due to de-leveraging on the decline in sales.

The tax rate for the first quarter was 34.9% this compares with 34.5% in the first quarter of 2008. We expect the effective tax rate for the full year to be 33.5% to 34%. We did not repurchase any shares in the quarter. Average shares outstanding were down 752,000 from a year ago with the decline related to the shares that we repurchased last year. Average shares outstanding were 100 million for the first quarter and are projected to be approximately the same for the second quarter.

Recapping our sales performance for the quarter, our core growth defined as volume price mix was down 14% primarily driven by a volume decline that was partially offset by carryover pricing. Currency was negative 3.1% and acquisitions were up 0.7% for the total decline of 16.4% in the quarter.

Looking at our segment results, paint sales declined 7% and were down about the same when adjusted for currency and acquisitions. Demand in the big box channel and our Huarun business held up better than the dealer and mass merchant channels.

Our coating segment sales declined 20.5% and were a few points better when adjusted for currency and acquisitions. Sales volumes were particularly challenging in our coil, general industrial and wood product lines. Sales in our other category, which includes resins, colorant, gel coats and our furniture repair business, declined 19.7% driven by our gel coat business and were a few points better when adjusted for currency and acquisitions.

Addressing margins for the quarter by segment, and this excludes restructuring charges, our coating segment EBIT margin was 8.6% up from 8.3% in the first quarter of 2008. Our paint segment EBIT margin was 7.6% down 40 basis points from 8% in 2008. The EBIT margin for our other category was negative 10.7% compared with negative 8.1% in the first quarter last year.

As a reminder, our other category includes corporate expenses. Excluding restructuring charges, the total company EBIT margin for the quarter was 6.7% essentially flat with our 2008 first quarter margin of 6.8%.

Moving to the balance sheet, total debt at the end of the first quarter was $998 million up $75 million from the end of last fiscal year due primarily to the expected seasonality of operating cash flows. We’re estimating that year end debt for fiscal year 2009 will be $825 million assuming no acquisitions or share repurchases. This implies free cash flow after dividends of approximately $100 million.

Our total debt to capital ratio at the end of the first quarter was 41.4% with net debt to capital at 39.3%. We ended our quarter with $345 million of reserved liquidity that includes $264 million of available committed credit facilities and $81 million of cash. We believe we have liquidity well in excess of our anticipated funding needs for fiscal 2009.

Capital spending in the first quarter was $10.8 million up from $8.6 million in the first quarter of 2008. Our forecast for capital spending for the full year is approximately $60 million. Depreciation and amortization for the quarter totaled $20 million up from $19.5 million in the first quarter of 2008. Our full year forecast for depreciation and amortization is approximately $80 million.

Let me give an update on the restructuring actions that we had initially announced last August. During the quarter, we expended the efforts to further reduce our cost structure. We now expect the total cost to be $0.35 to $0.38 per share up from the $0.23 to $0.25 per share estimate we discussed on our fourth quarter call.

Of the total restructuring cost 60% is cash and 40% is non-cash. To date, we have taken $0.22 per share in charges, $0.16 per share in fiscal 2008 and $0.06 this quarter. We expect our restructuring actions to be completed by the end of the third quarter of fiscal 2009. In fiscal 2010, these actions are expected to generate annual savings of $0.20 to $0.23 per share up from our previous estimate of $0.13 to $0.15.

With those comments, I’ll turn the call over to Bill.

William L. Mansfield

We’re in a global recession and our first quarter results reflect this reality. Our earnings were in line with our expectations and in line with the guidance we issued last November. As Lori reviewed, we were able to mitigate the impact of a significant decline in sales and increased raw material cost. We held our operating margins to a modest 40 basis point decline.

The quarter benefited from carryover pricing and improved product mix, a significant increase in manufacturing productivity and lower interest cost. Valspar employees did an excellent job controlling expenses, delivering the operational discipline required in the recessionary environment, and most important generating new business despite the economic downturn.

The biggest challenge we faced during the quarter was sales volume. After a November decline that was in line with our expectations, December sales dropped sharply then recovered in January back to expected levels. As we anticipated sales in or coil, general industrial and wood product lines were all off shapely.

Wood continues to be impacted by the weak housing market. In coil and general industrial, volumes were impacted by a dramatic drop in global demand. Commercial construction, heavy equipment, and consumer durable were particularly hard hit. Year end customer plant closures were also longer than normal as the companies we serve worked to reduce their inventories.

We saw far more modest volume declines in architectural, automotive refinish, packaging and Huarun. Our relative performance in architectural was particularly encouraging where market data indicate we are continuing to gain share and improve our competitive position.

Just a brief comment about our restructuring, we initiated these actions last July well in advance of the significant downturn in the global economy. Our first quarter results benefited from these actions. As Lori mentioned, we expanded the effort during the quarter to further reduce our cost structure.

We’ve closed two additional plants for a total of six since the efforts started and our global headcount is now down more than 10% since January of 2008. These are always difficult steps but absolutely necessary given today’s economic realities.

Looking ahead, as you saw in our press release, we continue to expect our earnings for the year to be in the range of $1.55 to $1.65 per share, excluding restructuring charges. Let me mention a few of the key factors behind our outlook.

The first factor is sales. We are not assuming our markets will strengthen in any meaningful way in the foreseeable future. We are expecting a difficult sales environment to continue through 2009, particularly in our coil, general industrial and wood product lines, which account for about 40% of the company’s revenues. In the remaining 60% of the company, we expect a slight improvement as customers complete inventory adjustments and we gain new business.

The second factor is raw materials. As Lori mentioned, our raw material costs were higher in the first quarter of 2009 than they were in the first quarter of 2008. We have not fully recovered the significant increases in raw materials we experienced in 2008, which were particularly pronounced in our third and fourth quarters of last year. We expect to see some easing in raw material costs in the back half of 2009.

Finally, we will see additional benefits from our restructuring actions, continued productivity improvement resulting from our Lean Six Sigma initiatives and continued tight control of expenses; in summary, a difficult environment in 2009.

We have strong brands and differentiated market positions that we have made stronger with our investments in global markets over the past several years. We are controlling expenses, working capital and employment levels, and we have committed bank credit facilities and reserve liquidity in excess of our anticipated funding needs. Despite the difficult environment, we still expect to generate $100 million of free cash during this year.

With those comments, I’ll now open the call up for your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Steve Schwartz – First Analysis Corp.

Steven Schwartz – First Analysis Corp.

Can you give us a feel for the timing of the benefits from the restructuring? I think under the original plan you were looking for maybe $0.07 to $0.09 a share this year. How much of the additional benefit do you expect to see this year?

Lori A. Walker

Steve, the $0.07 to $0.09 was what we were assuming in terms of the cost for the restructuring previously, and we had said that the savings would be about the same primarily in the back half of the year. And in terms of the increase in the restructuring, that will be completed by the end of the third quarter of the expectations, and the benefits, again, would be in the back half of the year.

Steven Schwartz – First Analysis Corp.

So is it still $0.07 to $0.09 this year because you’re now looking for about $0.08 more.

Lori A. Walker

It’ll be a little bit higher based on the new actions that we’ve taken.

Steven Schwartz – First Analysis Corp.

Then just in taking a look at this gross margin improvement here. You had almost 300 basis points and that just off your current revenue level is worth about $30 million in gross profit. Can you give us an idea of how much of that was from restructuring versus pricing?

William L. Mansfield

Probably not. That’s a level of granularity I don’t think we’re prepared to get into. Clearly, restructuring benefit the gross margin and that was my comment about a substantial increase of manufacturing productivity that we saw during the quarter. We also benefited from an improved mix and, probably for the first time in many quarters, mix truly did contribute to an improvement in the gross margin.

Operator

Your next question comes from David Begleiter – Deutsche Bank.

David Begleiter – Deutsche Bank

Can you talk about further pricing benefits in Q2 and the ability to hold pricing going forward given the very weak macro environment?

William L. Mansfield

David, I think the issue is simply in the first quarter, as I said, our raw material costs were higher in the first quarter of ’09 than they were in ’08. The raw material cost environment today is very difficult to predict. We are aware that most multinational chemical companies have announced substantial plant shutdowns. It’s unclear to us what that will entail. So I really can’t tell you what might happen on a go forward basis.

With respect to pricing, I would echo the comments I made in the fourth quarter conference call and the comments I just made, which is we haven’t completely recovered from what occurred last year, and that we will do what’s the right thing for our shareholders and for our customers over this next very difficult period of time.

David Begleiter – Deutsche Bank

And Bill, can you discuss some of the inventory levels in both the paints as well as coating segments in particular at the big box retailers?

William L. Mansfield

Let me comment on the paint segments first. Those inventories to us appear to be in reasonably good shape and it’s not on our radar screen as an area of concern. What is less clear to us is in the coating segment.

Certainly in the first quarter there was, in our opinion, a substantial effort by all of our customers on a global basis to take their inventories down. Has that process finished? We think it might have but it’s still a little unclear to us on a go forward basis.

Operator

Your next question comes from PJ Juvekar – Citigroup.

Prashant Juvekar – Citigroup

Can you describe for us the business trend in China? They’ve seen a lot of costs this year with factories shutting down, and now you have a new stimulus package working through the economy. Can you just tell us what you’re seeing in China?

William L. Mansfield

What we’re seeing in China is those customers that we serve that participated in the export Chinese market, and certainly you know that we supply a lot of furniture manufacturers in Southern China and we have coil coatings in general industrial business, and that clearly was a sharp downturn as a result of the global contraction.

With respect to the domestic Chinese business that we have through Huarun, I wouldn’t describe it as particularly robust on the top line. But it certainly has delivered bottom line results that are quite satisfactory. On a go forward basis, it’s frankly too early for us to make any comment relative to the stimulus. We certainly don’t see any impact at this point and time.

Prashant Juvekar – Citigroup

And Bill, you mentioned that these DIY stores were better then mass merchants. Do you see that some contractors are switching from paint stores to DIY stores?

William L. Mansfield

No quantitative evidence on an intuitive basis, it’s quite possible that might be the case, although, I wouldn’t necessarily describe it as contractors switching to the big box as the potentially larger issue at work. When you consider a paint project, if you hire a contractor to do a paint project for you, the biggest cost is labor.

In today’s tough economic environment, is it possible that consumers may be electing to do it themselves, and therefore save the labor component? I think that’s a reasonable proposition, but as I said before we don’t have any quantitative evidence to support the premise.

Prashant Juvekar – Citigroup

And just final, one housekeeping question, did you say how much your prices were up in 1Q, or can you just sort of give us a rough ballpark number?

William L. Mansfield

Right around 5%, PJ.

Operator

Your next question comes from Bob Koort – Goldman Sachs.

[Amy Young] for Robert Koort – Goldman Sachs

This is [Amy Young] on behalf of Bob. The first question I have is the big box retail that was reported, quite high inventory levels by the end of ‘08, and then also it is as back to take a more aggressive pricing action to maintain the traffic in their stores.

I’m wondering what will be the impact of your pricing power in that kind of scenario, and also can we expect a similar carryover impact on your pricing for instance extending to the second half FY09? Second quarter FY09.

William L. Mansfield

First of all, I have no comment on Lowe’s conference call. I think if you have questions for Lowe’s you need to ask them. And secondly, we would expect pricing in the second quarter low single digits, Amy.

[Amy Young]- Goldman Sachs

Okay. And then my second question is regarding SG&A. SG&A cost as a percentage of sales during the quarter I think that’s 23.6%. Now obviously that’s much higher then the trend line we’ve seen over the past quarters or even past several years.

So can you just provide a little bit more color on that line on what should be the range or we should think about for SG&A’s percent of your total sales going forward throughout the FY09?

William L. Mansfield

I think, as Lori mentioned, she directly commented on this issue. And that per, SG&A expenses of sales, is solely a function of the decline in sales in the first quarter. The reality of the situation is that our ex-restructuring, our SG&A expenses on an absolute dollar basis are down.

[Amy Young]- Goldman Sachs

Okay. And then do you have any guidance for what we should expect for that line going forward?

William L. Mansfield

No.

Operator

Your next question comes from Jeffrey Zekauskas – J.P. Morgan.

Jeffrey Zekauskas – J.P. Morgan

A few questions, were there any asset sales in the quarter or any gains of any sort?

William L. Mansfield

No, there weren’t Jeff.

Jeffrey Zekauskas – J.P. Morgan

What was the operating cash flow in the quarter?

Lori A. Walker

The operating cash flow was actually a use of cash of around $60 million.

Jeffrey Zekauskas – J.P. Morgan

You spoke of raw materials being up. Did your price increases offset the raw material cost inflation in the quarter or price net?

William L. Mansfield

No probably not. What we saw, Jeff was our raw material cost continued to increase through the beginning of our first quarter. And it was only until really last month or so where we started to see some moderation, if you will.

And I think on an overall basis, with respect to pricing, I have to look back at the dramatic increases in the entire third and fourth quarter of ‘08 and say no, we still need more to fully recover.

Jeffrey Zekauskas – J.P. Morgan

Can you talk about the business trends in February and how they relate to the business trends in your previous quarter?

William L. Mansfield

Well, Jeff I’d have to go back to the comments that I made where we don’t expect an improvement in 2009. Now we certainly don’t expect a repeat of December where it really was down sharply. So I would tell you February is tracking about what the November and specifically January trends were. I don’t see any material improvement, nor do I see any material down that would indicate that December might repeat itself.

Lori A. Walker

Yes. Q1 was probably accentuated by the fact that there was that inventory destocking that occurred, particularly in that December time period.

Jeffrey Zekauskas – J.P. Morgan

I guess just a very last question. Roughly your sales were down $126 million?

William L. Mansfield

That’s correct.

Jeffrey Zekauskas – J.P. Morgan

And your gross profits order of magnitude were down about $16 million. I guess that just seems relatively small relative to the sales drop, not withstanding any restructuring actions that might have had a positive benefit, so I was just wondering how you get that? Why are the numbers so good?

William L. Mansfield

Frankly, I don’t think people fully understand how variable our cost structure is, and I don’t think folks realize that we got a very early start. I’ve talked in the past calls that we’re managing the company and have been managing the company as if we were in recession.

I talked about that in early ’08, and I think what’s occurred is that these things all take time to gain traction. So initiatives and things, controlled expenses, manufacturing productivity, any number of things we were doing, frankly, as a result what our experience was in the housing downturn and its impact on the company, we are gaining substantial traction now.

Jeffrey Zekauskas – J.P. Morgan

I guess lastly the all other revenues went from $65 to $52 million, and your loss was about flat at around 5.5, at least as I calculate it. How did you do that?

William L Mansfield

Well, first let me comment on the revenue issue and then Lori can comment on the profit issue. That revenue decline fundamentally reflects almost a collapse in the gel coat business, which supplies gel coats to the marine boat industry and parts of construction industry, showers, tubs things like that, which are 100% directly correlated when new housing starts.

So that business has really dropped off and the balances of those businesses in that segment are doing fine. It’s just such a dramatic change in the one business.

Lori A. Walker

That and just what Bill said the rest of the businesses are doing fine, plus you did also have a reduction in the corporate expenses with along the tight control of expenses. So the combination of that is what allowed you to be able to hold the loss in essence to be relatively flat year-over-year.

Jeffrey Zekauskas – J.P. Morgan

Okay, because that segment seemed to perform better than all the other segments even though the revenue drop was most extreme.

Operator

Your next question comes from Saul Ludwig – Keybanc.

Saul Ludwig – Keybanc Capital Markets

Lori, in each of the three segments what was the dollar amount of restructuring cost that went against each of them?

Lori A Walker

The total amount of the restructuring is about $9 million, about $7 million is in [coating]; it’s pretty much nothing. It's a couple hundred thousand in paints and then other has $1.6 million.

Saul Ludwig – Keybanc Capital Markets

So absent, as Jeff was talking about, absent that restructuring charge other did terrific on the sales drop. On interest expense, which was very favorable, what do you think interest expense might be on a run rate going forward?

Lori A Walker

Roughly about 40% of our debt is floating rate debt so we were able to take advantage of the drop in rates here in the first quarter. But we will probably think about terming out some of our short-term debt during the year, so I would not assume that the first quarter run rate is a good rate on the full year. And we are assuming in our guidance that the interest expense will be higher than the first quarter run rate.

Saul Ludwig – Keybanc Capital Markets

You think the in second quarter it’s going to be around this $12 million number?

Lori A Walker

I think it will be a little bit up, but more in the back half. I think it will be up.

Saul Ludwig – Keybanc Capital Markets

And what do you expect your interest for the full year to be as part of your guidance.

Lori A Walker

I would say flat to down slightly from where we were last year.

Saul Ludwig – Keybanc Capital Markets

Down slightly from where you were last year, which was what around $58 million?

Lori A Walker

Roughly.

Saul Ludwig – Keybanc Capital Markets

So you think this year we should think like 55 or 54?

Lori A Walker

That’s in the ballpark.

Saul Ludwig – Keybanc Capital Markets

Okay. So have you done any refinancing yet?

William L Mansfield

No, Saul, we have not.

Saul Ludwig – Keybanc Capital Markets

And what are your thoughts in doing that? Are you just using credit lines or are you going to the capital markets or given the current environment for financing, what are your thoughts on how to best do the additional financing that you are looking to do?

William L Mansfield

Well, number one, we don’t feel we have to do anything at the moment. And number two, I think it will be premature for us to comment. Whether we choose to do something or not will be opportunistic relative to what conditions we see in the capital markets.

Saul Ludwig – Keybanc Capital Markets

But in the guidance you’ve assumed you are going to do something, which would come at a higher rate than just staying with the short-term.

William L Mansfield

Conservative, that is correct.

Saul Ludwig – Keybanc Capital Markets

Okay. And then finally from the top line standpoint where your results in the first quarter reflected both macroeconomic conditions and of course the stocking in which you net down 16%. Were you saying earlier, Bill, that you think in subsequent quarters your revenues are going to be down but maybe not quite as much as the 16% that you saw in the first quarter?

William L Mansfield

I think that’s a reasonable conclusion from the comment, Saul.

Operator

Your next question comes from Dmitry Silversteyn – Longbow Research.

Dmitry Silversteyn – Longbow Research

Couple of questions, you mentioned the fact that your manufacturing sponsors are very variable, which was indicated by the fact that despite the volume drops you’ve actually improved gross margins despite the raw material cost.

Are your SG&A expenses then by the same token much more fixed in the sense that the decline in volumes got such a big impact on SG&A as a percentage of sales, you weren’t able to offset them the same way you were off setting gross margin impact?

William L Mansfield

I think that’s probably a fair conclusion. Although, let me think about this for a second, Dmitry. I would tell you that back in late ’08 when we were looking at restructuring, a lot of our focus was on the issue of volume, expected volumes, effective recession on the manufacturing complex and so we took action. We have been all along since late ’07 been taking action on the SG&A line on pretty much a global basis.

So what I was particularly pleased with in manufacturing was, along with the restricting, which certainly had a beneficial impact, our manufacturing folks were able to manage very, very carefully their existing employment cost, existing discretionary spending to match what happened on the volume line and we were quite pleased with that.

Dmitry Silversteyn – Longbow Research

Okay. Secondly, in terms of volumes I would assume that the volume declines in coatings were significantly higher than in paint, but in terms of pricing when you talked about getting 5% price increase, was that mostly in the coating segment or was there still some carryover in the paint segment as well from last year?

William L Mansfield

There’s carryover in the paint segment from last year, Dmitry.

Dmitry Silversteyn – Longbow Research

And just to make sure when you talked about the your Huarun operations, as well as your packing results, you said they were not down as much as other segments of industrial but they were still down. So packaging in this quarter was down as well as Huarun even though it’s mostly for the internal Chinese market?

William L Mansfield

On a Huarun basis, they had some top line pressure. We saw some impact.

Dmitry Silversteyn – Longbow Research

And on the packaging portion of your industrial sales?

William L Mansfield

In packaging we saw some inventory corrections occurring pretty much on a global basis with large consumer food and beverage companies that we supply. And we also saw some significant deterioration, is probably the right word to use, in demand in the Eastern European countries, particularly Russia.

Dmitry Silversteyn – Longbow Research

Okay. So packaging clearly is more resilient than your other industrial business and clearly they’re not immune to what is going on in the economy here.

William L Mansfield

No. I think on a relative basis they’re outperforming but not immune.

Dmitry Silversteyn – Longbow Research

Okay. Then final question, on your raw material comments just want to make sure I understand them. You saw the surge in the third and fourth quarter. It depends on how you look at it but maybe they peak here in the first quarter and maybe coming down sequentially, but you don’t expect year-over-year benefit to begin until the back end of the year. Is that the correct way of interpreting it?

William L Mansfield

That’s absolutely correct.

Dmitry Silversteyn – Longbow Research

And even with the raw material pressure still being felt significantly in the first quarter and to some extent into the second quarter, the restricting actions you’ve taken and the shutdowns you’ve done in the plants still allow your gross margin to comp positive year-over-year. That is quite an accomplishment and do you expect that to continue and then maybe accelerate as raw materials start being a benefit?

William L Mansfield

Let’s take the first half of your comments. Let’s not forget the impact of mix.

Dmitry Silversteyn – Longbow Research

What was the effect of mix?

William L Mansfield

Low single digits. And relative to the second part of your comments I think at this point that’s a bridge too far. I think we have to see how the economy plays out here over the next two quarters.

Dmitry Silversteyn – Longbow Research

Okay. And the mix improvement that was just a case of lower margin business declining faster than the higher margin business, correct?

William L. Mansfield

Exactly, Dmitry.

Operator

Your next question comes from Sergey Vasnetsov – Barclays Capital.

Sergey Vasnetsov – Barclays Capital

Bill, I cover some of your raw material supplies and wish all my companies to do well, however I’m still amazed at, given the significant drop in volume and enterprise, your raw materials index is not full and prosper and deeper as it should be. So you told us about the recession, did you call your suppliers and tell them there is a recession here?

William L. Mansfield

I didn’t because I probably didn’t think it would have an impact. I understand your point. What we said was our average raw material cost in the first quarter of ’09 which is the November, December, January period were higher than what they were in ’08. We also said that we continued to see pressure a slight upward movement in that November, early December period, and then things start to change in January.

Now, I will tell you that we saw some amount of change to your point in Asia, and on a go forward basis, I don’t know what the impact from all this shutdown capacity will be and we’re being conservative in how we manage the company. We’ve been conservative last year and also conservative on how we see things on a go forward basis.

Sergey Vasnetsov – Barclays Capital

Okay. Bill, what are you expectations for the overall market change in architectural paints volumes in 2009 in the U.S.?

William L. Mansfield

You know, unclear to me. I had a conversation with a major supplier to the architectural market, their model, which is somewhat well respected, says down 10%. After what’s happened in ’07 and in ’08 it’s somewhat difficult to comprehend another down 10. I’m just happy and overjoyed that our branding proposition in the Valspar brand has enabled us to perform better than the market no matter where the market ends up, Sergey.

Sergey Vasnetsov – Barclays Capital

Lastly, given your strong performance, do you see a potential for Valspar to become a little bit more active in maybe some small incremental acquisition? Today you can buy for a couple bucks a cup of coffee in Subank, so presumably the variation multiples must have come down since our last discussion December here in New York. Any change here you see in the competitive landscape in terms of M&A opportunities?

William L. Mansfield

No, other than I’ll make a comment. I really couldn’t tell you what the appropriate price to pay today for any acquisition is because it's still unclear as to where the economy is going to settle out in what I will call the new world order, for lack of a better term.

Operator

Your last question will come from Michael Hamilton – RBC Capital Markets.

Michael Hamilton – RBC Capital Markets

I think that’s the last 12 questions, Bill.

William L. Mansfield

Okay, Mike, shoot.

Michael Hamilton – RBC Capital Markets

We’ll keep it to a couple, if we would follow on your insights on acquisition pricing that also comes down to obviously raw material costs etc. and volatility that can be in this kind of market. How are you thinking about how you’re trying to set up your inventory in this kind of environment?

William L. Mansfield

Well, we took our inventories down last year. Our inventory performance from a working capital investment basis, quite good in the first quarter, so in essence what we’re doing is we’re going short on inventory and very carefully monitoring our customer service levels because it’s not a smart play to go short on inventory and compromise your customer service levels. So I’m pleased with how our folks are managing that dynamic.

Michael Hamilton – RBC Capital Markets

What would lead you to go longer on inventory?

William L. Mansfield

An upturn in sales.

Michael Hamilton – RBC Capital Markets

Bill, could you comment a little bit on realizing this is tough, your assumption as to how much drawdown took place in your segments in the quarter looking at your customers.

William L. Mansfield

You know, I can’t. And it's not because we haven’t tried internally to get our minds around it; it was so quick, so fast, that when you look at the sort of global evidence it’s clear that there’s a drop in demand. But also we may have noticed that about every company that reports earnings these days talk about their balance sheet.

And so all our customers are focused there also and everyone’s trying to do the same thing, which is to pull cash out of the pile. And so clearly there was a significant inventory correction but I cannot quantify it.

Michael Hamilton – RBC Capital Markets

Any comments at all on capacity utilization in businesses?

William L. Mansfield

In Valspar businesses, Mike?

Michael Hamilton – RBC Capital Markets

Right.

William L. Mansfield

You know, again as I said in the past, that’s not a metric that I think personally is meaningful in our business. We’re not a major petrochemical operation that is highly capital intensive that has to run 24/7 or the fixed costs start becoming a major problem. We can ramp up and down our production by going from seven days to five days, from three shifts to two shifts in fairly short order. And part of that flexibility showed through in our first quarter results where we were able to adjust quickly our manufacturing profile.

So I don’t look so much at utilization because the fixed cost burden is not as high as in other industries, but what I do look at is our ability to respond quickly in both a situation where demand is soft and just as important as when it turns back up, do we have the flexibility and can we move quick to supply our customers' increased demands.

Michael Hamilton – RBC Capital Markets

Last one, could you comment a little bit on what you’re trying to do in this environment within Huarun tactically?

William L. Mansfield

Well, tactically we’re still focused on Tier 2 and Tier 3 cities, in penetrating and further opening up new distribution. Strategically that effort continues and I would tell you has probably been enhanced despite the overall environment and we expect that that’s a winning strategy, at least for Huarun, and we’ll deliver. As we execute and move forward, we’ll deliver a substantial revenue and earnings accretion to the Huarun model.

Michael Hamilton – RBC Capital Markets

Are you getting any opportunities off of what you’re seeing from competitors, or is it just too early to assess?

William L. Mansfield

Yes. I think that’s too early to assess.

William L. Mansfield

Okay. I believe that was the last question, if I remember correctly. So to summarize, thanks everyone for participating in the call today. Our earnings for the quarter were in line with our expectations. We reaffirmed our guidance for the full year. Valspar’s meeting the challenges of the global recession. We have liquidity in excess of our funding needs and we expect to deliver $100 million of free cash in 2009.

And with those concluding comments, thank you again for your participation and we look forward to talking with you during our second quarter conference call in May.

Operator

Ladies and gentlemen, this conference will be available for replay after 12:00 pm today until March 6, 2009 at midnight. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701 and entering the access code 985806. International participants may dial 1-320-365-3844. Again, those numbers are 1-800-475-6701 and 1-320-365-3844 entering the access code 985806.

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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