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Valspar Corp. (NYSE:VAL)

F4Q09 Earnings Call

November 23, 2009; 11:00 am ET

Executives

William L. Mansfield - Chairman of the Board & Chief Executive Officer

Lori A. Walker - Senior Vice President & Chief Financial Officer

Analysts

Jason Minor - Deutsche Bank

Anthony Pettinari - Citigroup

Silka Koopf - J.P. Morgan

Don Carson - UBS

Saul Ludwig - Keybanc

Steven Schwartz - First Analysis Corp

Amy Zang - Goldman Sach

Dmitry Silversteyn - Longbow Research

Michael Hamilton - RBC Capital Markets

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Valspar Corporation year end conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session instructions will be given at that time. (Operator Instructions)

I would now like to turn the conference over to your Chief Financial Officer Ms. Lori Walker. Please go ahead.

Lori Walker

Good morning everyone, and welcome to our earnings conference call. Today we will be covering results for the fourth quarter and the full year. Bill Mansfield, our 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 Security’s Law. This morning, I’ll cover our fourth quarter and full year results. Bill will make a few comments particularly about our 2010 outlook. Then we’ll get to your questions.

We were quite pleased with our strong earnings performance for the quarter. The improvement from our third quarter guidance was driven by better than expected sales primarily in the coating segment and the benefit of a lower than expected tax rate. Fourth quarter sales totaled $776.6 million, a 15.9% decline from last year driven by a decline in volume one less week of sales and unfavorable currency.

As a reminder, our fourth quarter this year includes 13 weeks versus 14 weeks in 2008. This extra week only impact our domestic business which accounts for about 60% of total company revenues. So adjusting for currency and the fourteenth week, sales for the quarter declined 9.9%.

For the full year, sales totaled $2.879 billion a decline of 17.3% from last year. Adjusting for currency and the extra week, sales declined 13.2% from fiscal 2008. Fourth quarter adjusted net income per share increased to $0.53 in 2009 from $0.42 in 2008. Fourth quarter adjusted net income per share in 2009 excludes a $0.04 per share charge related to restructuring actions.

Fourth quarter adjusted net income per share in 2008 excludes a $0.13 per share charge related to restructuring actions, a non-cash charge of $0.03 per share for Huarun minority interest share and a $0.09 per share after tax gain from the sale of assets.

Net income from the fourth quarter of 2009 was $49.9 million and reported earnings per share were $0.49. Net income for the fourth quarter of 2008 was $38.9 million and reported earnings per share were $0.35. Again the underlying earnings per share comparison for the fourth quarter is $0.53 in 2009 and $0.42 in 2008, a 26.2% quarter-over-quarter increase.

On a full year basis, again adjusted restructuring and the non-cash charge per Huarun in both 2008 and 2009 and a one time gain in 2008. The underlying earnings per share comparison is a $1.77 in fiscal 2009 and a $1.57 in fiscal 2008, a 12.7% year-over-year improvement.

For the fourth quarter our gross margin was 36.4%, up from 28.3% in the fourth quarter of 2008. Both years exclude charges related to our restructuring actions. Margins benefited from a combination of better raw material cost comparisons, productivity gains resulting from completed restructuring actions and an improved product mix.

Adjusting for restructuring charges in 2008 and 2009 and the gain from the sale of assets in 2008, operating expenses were 24.1% of sales up from 19.6% in 2008 with the increase primarily due to expense de-leveraging on the decline in sales. On this adjusted basis, as I just mentioned, operating expense dollars for the quarter increased $6 million versus last year due to higher incentive compensation which was partially offset by favorable currency and the benefits from our previously completed restructuring actions.

The tax rate for the fourth quarter was 34% down from 34.7% in the fourth quarter of last year. For the full year our tax rate was 32.8% compared with 34.1% in 2008. The full year tax rate was lower than anticipated due to a combination of a favorable geographic mix in earnings and favorable adjustments related to prior years. For fiscal 2010, we expect the effective tax rate to be approximately 33% to 33.5%. Average shares outstanding were up around $1.6 million from last year due to option dilution.

In the quarter, we repurchased 2 million shares for $54.4 million. Average shares outstanding for the fourth quarter were approximately 102 million and are projected to be 101.5 million for the first quarter of 2010. Recaping our sales performance for the quarter, our core growth defined as volume price mix was down 14% driven by a decline in volume and an extra week in the fourth quarter of 2008.

Currency was negative 1.9% for the total decline of 15.9% in the quarter. Adjusting for the impact of foreign currency and the extra week in 2008 volume price mix declined 9.9% primarily driven by volume. Looking at our segment results for the quarter, adjusted for currency and the extra week of 2008, our coating segment sales declined 14% reflecting continued weakness in global industrial coating market.

Paint segment sales were basically flat reflecting volume growth in our global architectural product line which was offset by weakness in automotive refinished markets and promotional spending in Asia related to building our brand. Sales in other declined 18.9% due to the weakness in the US coating markets.

Looking at segment sales for the full year, again adjusted for currency and the extra week in 2008 coating segment sales were down 17.7% significant weakness in our industrial product lines were offset by our packaging product line where sales were down mid single digit for the year. Paint segment sales declined 2.7% with sales in our North America architectural product line up low single digit for the year. Sales in other were down 21.7% for the year.

I am now going to move into a discussion of our EBIT margins for the quarter and the full year and all the numbers that I will be discussing exclude restructuring charges in both years and a one time gain in 2008.

So, addressing margins for the quarter by segment, our coating segment EBIT margin was 16.8%, an increase from 10.9% in the fourth quarter of 2008. Our paint segment EBIT margin was 13.2% up from 9.4% in 2008. The EBIT margin for our other category was negative 23.5% compared with negative 10.7% in the fourth quarter last year primarily reflecting the decline in revenue along with higher incentive based compensation. As a reminder other includes corporate expenses.

The total company EBIT margin for the quarter was 12.5%, up 390 basis points from our 2008 fourth quarter margin of 8.6%. Looking at margins for the full year, our coating’s EBIT margin was 12.9%, up from 9.8% in 2008. The painting segment EBIT margin for the year was 13.1% compared to 9% last year. The EBIT margin for other was negative 11.8% compared with negative 2.4% in 2008. Total company EBIT margin for the year was 11%, a 250 basis point improvement from 8.5% in fiscal 2008.

Moving to the balance sheet, our net debt at the end of the year was $693 million, a decline of $59 million from the end of the third quarter and a $140 million from the end of fiscal 2008. The decline was driven by improved operating cash flow which was partially offset by share repurchases and the buy back of the Huarun and Orient shares.

For the fourth quarter operating cash flow was a $182 million up from a $156 million in the fourth quarter of 2008. On a full year basis, we generated $220 million in free cash flow, which we define as operating cash flow, less CapEx and dividends. We estimate free cash flow of approximately $150 million in fiscal year 2010.

Our net debt to capital was 31.5%, a 490 basis point improvement from 36.4% at the end of fiscal 2008. We ended our quarter with $609 million of reserve liquidity that includes $421 million of available committed credit facilities and $188 million of cash. This reserve liquidity was an increase of $74 million from the end of the third quarter and an increase of a $179 million from the end of fiscal 2008.

Capital spending in the fourth quarter was $24.6 million, up from $16.6 million in the fourth quarter of 2008. For the full year capital spending was $57.9 million versus $43 million in 2008. Our forecast for 2010 capital spending is approximately $80 million.

Depreciation and amortization for the quarter totaled $19.6 million down from $21.9 million in the fourth quarter of 2008. Depreciation and amortization for the full year totaled $82.9 million and includes $7.6 million for accelerated depreciation due to restructuring. Our full year forecast for depreciation and amortization in 2010 is approximately $77 million.

A quick update on our restructuring actions before Bill makes his remarks. To-date we have taken a total of $0.34 per share in charges. $0.16 per share in fiscal 2008 and $0.18 in fiscal 2009 with 60% of the charges in cash and the other 40% non-cash. We continue to expect the total restructuring program to cost $0.35 to $0.38 with the remaining $0.01 to $0.04 impacting the first quarter of fiscal 2010.

For the full year and 2009, we saw approximately $0.13 per share in total savings from restructuring. In fiscal 2010 we expect to see about $0.08 to $0.10 in carry over benefit which is included in our guidance. As mentioned in our release, our earnings guidance for fiscal 2010 is a range of a $1.85 to $2.05 per share which excludes restructuring charges.

With that I will turn the call over to Bill, for his comments on 2009 and the outlook for 2010. Bill.

William Mansfield

Thank you Lori and good morning everyone. Thanks for joining our call today. As Lori mentioned, we were pleased with our strong earnings performance for the quarter. Despite significant decline in sales our operating margin for the quarter increased 370 basis points.

Results benefited from new business and share gains in many of our product ones, improved efficiency in our operations resulting from our restructuring and productivity actions and improved raw material cost comparisons. At a $1.77 per share, our earnings for the full year were better than the high end of the 167 to 172 range we had projected on our third quarter call. There are two main reasons for the earnings improvement.

One, as Lori mentioned, our overall tax rate in the fourth quarter was better than expected, which added about $0.02 per share. The second and more important reason was better than expected sales in our coating segment across all product lines.

Sales were better than expected due primarily to share gains and the accelerated impact of our new business efforts. Overall, the year unfolded very much along the lines that we had expected, our global architectural packaging, automotive refinish, and EPS product lines all performed well. Our general industrial coil and wood product lines faced extreme top line challenges.

We made remarkable progress in reducing our overall cost structure and lowering the breakeven point in these top-line challenge business and all three remained profitable and turned in more than reasonable results considering the very difficult global economic conditions in industrial markets. We benefited from the impact of our restructuring actions earlier than anticipated, did an outstanding job of controlling expenses and deliver productivity improvements in our manufacturing operations.

By focusing on our customers, our business teams were able to generate new business and gain share in key markets. We generated $220 million in free cash flow for the year, an increase of $55 million from 2008, and despite the challenges presented by economic conditions we were able to maintain our investments in building our brands and the development of leading edge technologies.

We are understandably proud of what our management team and employees were able to accomplish during the year under very challenging economic conditions, delivering double digit earnings growth on a sales decline of 17.3% for the year, reflects our focus on operational discipline and effective execution.

Looking ahead to 2010 we expect modest revenue growth. Many of the industrial markets we serve are not improving but do appear to have stabilized. As we demonstrated in 2009, we are confident in our ability to generate new business and gain share under these conditions. We also anticipate ongoing pressure on raw material cost continuing a trend that began in third quarter. And we expect that upward pressure on material cost to continue throughout 2010.

Before taking your questions I want to make sure that clearly articulated the assumptions that have gone into our 2010 guidance range of a $1.85 to $2.05 per share. We expect a modest top-line growth due primarily to our new business efforts and share gains.

We expect upward pressure on raw material cost to continue our guidance does include expected carry over savings from our restructuring actions, our results will continue to benefit from our productivity improvement and cost control programs, will continue to invest in our brands and in differentiated technologies, and finally, again, will deliver strong free cash flow.

With those comments I will open the call up to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jason Minor - Deutsche Bank.

Jason Minor - Deutsche Bank

Bill, I realize it’s a very uncertain environment. It’s a bit wider range than you guys have historically given, and I wonder if you could help us to understand is it just general economic or demand uncertainty, is it more of pricing of raw materials or what is it that might be driving the uncertainty there more than in the past?

William Mansfield

Well, granted it’s certainly a wider range by $0.10 than the narrower range we gave last year. So I will acknowledge that point Jason. And I think the range reflects more of the uncertainty with regard to the top-line environment. I realize they are in some quarters the recession has been declared over, we don’t quite see it that way, and so I would tell you that our range in earnings more reflects hopefully an upside in the top-line.

Jason Minor - Deutsche Bank

That’s helpful thanks. On the raw materials then, you mentioned that you expect continued pressure, is that what you are seeing presently and then do you expect that that supports strong pricing or do you expect more price erosion back to your previous point?

William Mansfield

Well we started talking about the raw material cost back in our third quarter call at which point we mention that we were seeing some upward movement basically the low point was probably back in the early summer, late spring and that is continuing. We expect that we’ll face those same pressures into 2010 and as we have said in the past, we will do the right thing long term for both our customers and our shareholders.

Jason Minor - Deutsche Bank

Thank you. One last one, could you elaborate a little on where you are gaining share and what is driving that? You mentioned that a couple of times.

William Mansfield

Yes. Well, a couple of things, number one, our two basic strategic fundamentals are the strength of our brands, clearly in the architectural consumer paint business in North America we have gained share in 2009. Also, in our businesses that are differentiated on technology we have gained share in our coil business, coil coatings business, some in our general industrial business and we are really quite pleased with our new business efforts across the whole company this year.

Operator

Your next question comes from P. Juvekar - Citigroup.

Anthony Pettinari - Citigroup

If you look at the three businesses that have really been challenged wood, coil and general industrial, looking at the past quarter and the past year, is it the case that the weakness has really been volume driven that pricing is held or have you experienced a significant pricing pressure in those three businesses?

William Mansfield

I think my comments apply certainly to these three businesses and to several others that clearly its volume challenge. The impact and the effects of the downturn starting in early 2009 continue normal for the full year, is clearly a volume driven event.

Anthony Pettinari - Citigroup

Okay. And for those businesses, do you think the demand improvement you saw in 4Q is sustainable into 2010, or is visibility still limited? Is there any of those three businesses that you feel more comfortable about in terms of underlying demand?

William Mansfield

No, I would tell you that our visibility to underlying demand is cloudy to say the least, we were pleased and very pleased with our results in the fourth quarter, but they were not a result of an underlying fundamental increase and what I will call core demand. It was basically an acceleration and are delivering sooner of our new business efforts where our value proposition to our customers in a number of these businesses was quite compelling and we gained share. So it’s not as a result of what I would tell you as an underlying uplift in sort of basic demand.

Anthony Pettinari - Citigroup

Okay, and I guess one last question, over the past few quarters customers have been extremely hesitant to build inventories, can I assume it is still the case or are you seeing any customers coming back and looking at rebuilding inventories?

William Mansfield

I think there was a little bit of inventory building going on over the second half of our fiscal 2009, but I would tell you at this point that we do not see any inventory building trend at all in any of our businesses.

Operator

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

Silka Koopf - J.P. Morgan

On the coating side, are any of the share gains related to some of the consolidation that happened in the industry, and maybe then some of like the resale of like, powder coatings asset to other players?

William Mansfield

I really couldn’t point to a singular industry event that resulted in what occurred in our fourth quarter. These efforts that we saw come to fruition or efforts in some cases started two years ago, and we were quite fortunate that a number of them hit within the same quarter. So, no, I don’t think there has been any material impact at all from industry events.

Silka Koopf - J.P. Morgan

Then there is typically like some seasonality in the business, like the second half was always much stronger than the first half, and given where margins particularly in the coating business have moved to in the second half of ‘09, do we see margins above 15% in the third quarter and like close to 17% in the fourth quarter. Are those margins that are sustainable going into next year? Obviously not in the first half which is weaker, but do you expect your margins to continue to improve next year?

William Mansfield

Yes we do. But I think we have to be careful because sequentially is where we sometimes can get into some confusion. Our weakest quarter in terms of demand is historically our first fiscal quarter. So when you look at it sequentially at our operating margins in the fourth fiscal quarter of this year, it will decline somewhat in the first fiscal quarter because of just weaker top-line and this historically has been the case. But for 2010, we would expect that we would see very positive results from our continued productivity efforts.

Silka Koopf - J.P. Morgan

And in terms of pricing, what prices in the coatings business positive this quarter?

Lori Walker

The pricing was pretty much neutral in the coating segment quarter-over-quarter. So we have anniversaried a good piece of it. So there is a very small amount but it’s pretty much inconsequential quarter-over-quarter.

Silka Koopf - J.P. Morgan

And how about in architectural paints?

Lori Walker

Same story, and actually in the paint segment what you saw was low single digit volume and then you had offset with some price mix, unfavorable price mix and about the same amount, and that’s primarily related, as I mentioned earlier to the promotional efforts in our Asia architectural business to promote the brand.

Silka Koopf - J.P. Morgan

And the last question on just cash performance in 2010. Of the restructuring charges taken in 2009, was all of the cash already paid out? Or do you know what amount roughly may still flow on 2010?

Silka Koopf - J.P. Morgan

You know what I am not sure I know that number off the top of my head. I’ll probably have to get back to you on that.

Operator

Your next question comes from Don Carson - UBS.

Don Carson - UBS

A question just on you’re architectural; you seem to, you mentioned up volumes year-over-year yet the overall industry is down. What’s different about your mixes? Is it a little exposure to commercial, is it share gains? I mean how do you do better than the overall industry here? And do you think that the industry as a whole should start to pickup now that we continue to see improvement in existing home turnover?

William Mansfield

Well, we’ve benefited from three things. Number one, there was a clear trend in emersion the market in 2009 where the DIY channel was considerably stronger, I think it’s fair to say than the professional channel. Number two, the investments we have made in the Valspar brand and some of our other consumer brands clearly paid off in 2009.

The consumers were choosing our brand as opposed to other choices they may have had in the market, and frankly the relative strength of our retail partners, all three contributed to us outperforming the market. Certainly, we would hope that the market would improve next year and I think it’s just too uncertain for us to tell you that we see that.

Don Carson - UBS

Okay. And just a question on pricing. Do you think pricing power exist to us at some of these higher rows. And what specific rows are you most concerned about. I mean Ti02 still seem some what soft, I know they are trying pricing increases. Is it more just the general up-tick in oil and what that does to solvents and other raw materials?

William Mansfield

It’s a general up-tick in input cost that have occurred over the last six to nine months, there is not any one particular issue that I would point out on the call. And again, as I said in the past, we will do the right thing both for our shareholders and our customers over the long term.

Operator

Your next question comes from Saul Ludwig - Keybanc.

Saul Ludwig - Keybanc

Lori, didn’t you say something about operating expenses rough $6 million and I didn’t that right, but if I did what were you referring to there?

Lori Walker

Saul, what I was referring to is that if you actually adjust both ‘08 and ‘09 for restructuring charges, and then adjust ‘08 for the gain on the sale of assets that we had last year, and then look at the absolute dollars of expenses they will be up $6 million year-over-year.

Saul Ludwig - Keybanc

That’s with the SG&A category or is that in the plant operating costs?

Lori Walker

That’s SG&A.

Saul Ludwig - Keybanc

SG&A, if you exclude all the specials.

Lori Walker

Correct.

Saul Ludwig - Keybanc

That’s the reported number, it looks it’s up much more than that.

Lori Walker

Correct.

Saul Ludwig - Keybanc

Got you. In your guidance about the raw materials, do you think they are going to be up 3% to 5%, 5% to 10%, where is your thinking that it is embedded into the guidance. I realize it’s probably a range. But what light can you shed on that?

William Mansfield

Saul, number one, I think it’s unclear to establish an absolute number. We have seen this trend, this gradual trend of increasing material cost. If economic conditions improve as a number of people think they will, we would expect that pressure will continue, and we have incorporated our concern about that into our guidance.

Saul Ludwig - Keybanc

Okay. And your revenue guidance, how do you think about FX which was kind of a negative all year, and given where the Euro is now or what it would look like, that could be a pretty important plus number in 2010, maybe Lori has got some thoughts on that.

William Mansfield

Well, sitting here today Saul you are right that FX should be a positive contributor to the top line next year

Lori Walker

To the top line, but if you recall because we do business in those countries and the bottom line it’s an immaterial impact.

Saul Ludwig - Keybanc

I was looking at it in the context of your revenue forecast for next year is to how you would incorporate FX.

William Mansfield

Right, when I talked about modest however I was talking more really to a certain extend Saul to bid ex-FX. It was more about modest in terms of what results we would expect from our new business and share gain efforts on a volume basis.

Saul Ludwig - Keybanc

So FX would be plus or minus depending on how it plays out.

William Mansfield

Exactly, I can’t forecast the FX markets as you know.

Saul Ludwig - Keybanc

Then just finally, actually when we think about your first quarter, your first quarter of fiscal ‘09 was kind of the eye of the storm if you think about it, the months of November, December, January, would you think that the effect of things are somewhat better than they were then that we should see at least a positive comp, without quantifying the degree, but positive comp in terms of your earnings in the first quarter since they were, I think weak for a couple of years in a row.

William Mansfield

Yes, we would expect our earnings for the first quarter to be up Saul versus last year.

Operator

Your next question comes from Steve Schwartz - First Analysis.

Steven Schwartz - First Analysis Corp

Generally a question about operating expense and if I could just go back to compare to a couple of years prior. If we just look at FY06 and your revenue level there, close to what it was for FY09, but your SG&A is up quite a bit. And so, with that as a reference point can you just give us an idea as revenue might continue to grow and so forth over the next year or two, what would happen to that expense?

William Mansfield

Well, if we are taking today as a baseline of SG&A expenses and say the revenue starts growing, what’s going to happen to expense line? Clearly, we do not expect and will not allow the SG&A expenses to roll anywhere near the rate of revenue. In fact we expect them that we would be able to hold them fairly firm and generate operating leverage as a result of top-line growth.

Steven Schwartz - First Analysis Corp

What has happened between ‘06 and ‘09 here where you have got it up by 80 or so million dollars and yet you are at a similar revenue level?

William Mansfield

The driver there Steve is that we actually had a couple of acquisitions. So we have the Huarun acquisition, we have the Aries acquisition, and then you have the significant decline in the top-line due to the global recession.

Steven Schwartz - First Analysis Corp

Okay. Just moving over to the balance sheet from my second question here, you are starting to run a higher cash balance and it’s just relative to assets it’s double what you have traditionally run. What do you intend to do there with this excess cash?

William Mansfield

Well, as we have talked to for a number of years now, our priorities in terms of what we do with our cash is that we have paid out increased dividends each year for the last 31 years. We do have internal growth initiatives that we need to fund with cash, as an example, historical example would be the branding initiative that we launched back in 2007.

Capital investment clearly is a factor. Acquisitions had been a part of Valspar strategy for a long time, they continue to be a part of our ongoing go forward strategy. And finally, share repurchase, which we have talked about that we will offset dilution and anything on or above that would be on an opportunistic basis, and that’s fundamentally our prioritization for uses of cash.

Operator

Your next question comes from Amy Zang - Goldman Sachs.

Amy Zang - Goldman Sach

I have two questions. Bill, the first one is obviously over the past several quarters Valspar has benefited from this market share shift from the paint stores to the home centers. My question is, how long do you think this trend will last? Because, obviously, if the market has started to rebound more dramatically than people would expect, and then I would guess at some point, the trend will shift back in favor of the paint stores.

William Mansfield

Well, I think some of this, Amy, goes to our belief that there has been a fundamental change in the consumer economy. At 10 plus percent unemployment and projected to stay there for a while, quite candidly, I am not sure we see any basis to presume that the trend will shift back, we think consumers will stand under pressure for a long time on a go forward basis.

Amy Zang - Goldman Sach

Okay. And then the second question is, the incremental margins has been pretty strong for the coatings business. In the past two quarters, and obviously clearly reflecting the refreshing benefits.

Then the question is, what could be the timing, the question A is what could be timing for the coating demand turn around in 2010, and also what is the incremental margin for the coating business will it go higher or maybe we’ll see some decline given, if the demand started to improve and I would imagine you will add back some cost.

William Mansfield

Well, to answer your first question A, when is the turn around and demand for the coating segment, unclear. That I think goes to the core of a little uncertainty that we have with respect to top-line in 2010. And number two, you are right, we have done a most of our restructuring in the coating segment and have benefited as a result. And we would expect to continue to see benefits and incremental margins throughout 2010.

Amy Zang - Goldman Sach

I think lastly, just to follow up, what would be the cost? I mean the expenses you will have to add back if volume demand started to improve in 2010?

William Mansfield

Very little, if any at all.

Operator

Your next question comes from Dmitry Silversteyn - Longbow Research.

Dmitry Silversteyn - Longbow Research

Couple of questions, when you mentioned that you expect kind of a modest volume growth next year as part of your expectations, is that across all businesses including the challenged ones where you are seeing some stabilization, or do you expect primarily coatings and perhaps China and paints to be driving the growth in volumes while the incremental demand for some of your more challenged businesses remains not just weak but actually down year-over-year in 2010.

William Mansfield

No, it’s pretty much across the board comment on the entire company Dmitry. I would hope we are not going to see another down year year-over-year in the “challenged” businesses, I think they stabilized to the point where hopefully things can show some improvement next year.

Dmitry Silversteyn - Longbow Research

Okay. So, I mean we have seen multiple years of declines in volume. So that’s not the basis of your confidence, I think what you are saying is that you are seeing some stabilization here and you just can’t imagine things getting worse.

William Mansfield

Yes, that’s fundamentally it.

Dmitry Silversteyn - Longbow Research

Okay, all right great. Getting back to the pricing question. You do expect raw material to be a little bit of a headwind next year, currency is probably going to be neutral in margin, so there is not much you can do there assuming there is no great devaluation in any one region where you have to raise pricing to adjust for that.

How much pricing power do you think you have in terms of, both in the paints business and on the industrial coatings business, if raw materials resume their marches as, god forbid, but let’s say oil goes back to over $100 a barrel and raw materials repeat what they did in 2008.

With lack of demand out there and with plenty of capacity even after you and your competitors have taken out some capacity, can we expect you to be able to keep up with raw materials even if it’s trailing or are you in a situation where you basically are going to have to eat these costs no matter how high they get?

William Mansfield

That’s a complicated question that has a complicated answer, I think if you recall on a historic basis, when we got hit with 20 plus percent raw material inflation back in the ‘05 period, it took 18 to 24 months to recover.

The last time though when again we faced this plus 20%, that cycle of time had been reduced probably to 9 to 12. And if the industry is faced with this extraordinary increase in raw material costs that I presume plus a $100 of barrel in crude oil would imply, there is only one answer to that challenge and that was the case in ‘07 and ‘08 and that was the case in ‘05 and ’06, and so, I would expect that that same answer would emerge again, given that dire set of circumstances Dmitry.

Dmitry Silversteyn - Longbow Research

I guess my only question is deference between this time and last time is there was demand and maybe some shortages in some areas whereas right now there is a lot of slack in the industry.

William Mansfield

Yes and no, I would submit to you the last time through we were near two of the housing turn down in the U.S. So although there are, I’ll grand you the point that there were strong pieces of demand, and certainly in our portfolio there were other pieces that were quite weak Dmitry in the same timeframe work.

Dmitry Silversteyn - Longbow Research

Okay. All right, that’s right, thanks for reminding me of that. And then my final question, can you talk a little bit about your performance in China and your Huarun Paint. You mentioned you are spending some money and it looks like having increased promotional activity there to, as the business moves I’m assuming into new geographies.

William Mansfield

Correct, and also if you remember in our third quarter call, we talked that we had some inventory corrections going on at our distributor level and they were putting programs in place and we were putting program in place. To get that inventory sold in the market place and some of what Lori talked about earlier on promotional spending, was a carry over of those programs to get the inventory moved to the consumer.

Now, as an overall comment, we are pleased with our business in China, it’s performed well this year, across the board it is the one place where we did see recovery in our sort of core general industrial and coil markets, but the only place where we really saw a recovery. So we are pleased with China overall and we are particularly pleased with the Huarun performance.

Dmitry Silversteyn - Longbow Research

Then one final question, I apologize. If you look at your general industrial portfolio businesses and your outlook for 2010, which sectors of the industry or of your business do you have the most confidence in performance next year and which sectors do you think are still very difficult to call and things could be balancing along the bottom for quite sometime.

William Mansfield

Well, if you looked at our sort of, as we call it our industrial businesses or our coatings business, our packaging business has continued to perform well in 2009 and will on a go-forward basis. Still unclear to us in general industrial and our wood coatings business, and our coil business as you know is associated with new building construction and that has its own set of worries as we go into 2010.

Operator

Your final question comes from Mike Hamilton - RBC.

Michael Hamilton - RBC Capital Markets

Just a little bit more color on industrial and coil specifically. Could you kind of walk through trend in fourth quarter, what you are absorbing there?

William Mansfield

Well, I would tell you that, we’ll start with some smaller pieces on a global basis. Our China coil business recovered somewhat from the very depressed levels earlier in the year, earlier in 2009, but still is not up to what I would call the 2008 levels.

Our European business still is experiencing the impacts of the global downturn. We did talk in our third quarter in our U.S, or Americas coal business, that include Canada, the U.S and Mexico that we saw strengthen that surprised us. Though initially we thought it was as a result of some inventory build and that’s probably still the case as to what occurred, and it’s stayed not quite as strong but somewhat strong in the fourth quarter, but subsequent to that we have seen some signs that it’s softening.

Michael Hamilton - RBC Capital Markets

Then final, would you care to hazard a shot at what type of volume pick up you have taken in market share here in recent times as we go into 2010?

William Mansfield

Since you have given me the choice of hazarding a guess I prefer not to and I’m sure you understand why I might, thank you.

Operator

Ladies and gentlemen of the panel, I have no further questions in queue.

William Mansfield

Okay. Thank you everyone for your questions. Just to summarize, in ‘09, we delivered double digit earnings growth on a rather significant decline in sales which we believe is a clear indication of our operational discipline and our ability to execute.

For ‘010 we expect modest top-line growth due primarily to our new business efforts and share gains. We expect upward pressure on our raw material cost to continue and our 2010 results will benefit from carry over savings from our restructuring actions, our continued productivity improvement projects on our cost control.

We will continue to invest in our brands and in differentiated technologies and expect have another cash flow year. We are confident in our ability to deliver improved results in ‘010 and currently expect our earnings, as we said, to be in the range of a $1.85 to $2.05 per share.

Thanks for your time today and we will talk to you during our first quarter call in February.

Operator

Ladies and gentlemen that does conclude our conference call for today. On behalf of today’s panel I would like to thank you for your participation, and have a wonderful holiday. You may now disconnect.

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Source: Valspar Corp. F4Q09 (Qtr End 30/10/09) Earnings Call Transcript
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