The Valspar (VAL) Gary E. Hendrickson on Q1 2016 Results - Earnings Call Transcript

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The Valspar Corp. (NYSE:VAL)

Q1 2016 Earnings Call

February 18, 2016 10:00 am ET

Executives

Bill Seymour - Vice President-Finance & Investor Relations

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

Jim L. Muehlbauer - Executive Vice President, Chief Financial and Administrative Officer

Analysts

Ivan M. Marcuse - KeyBanc Capital Markets, Inc.

Robert Andrew Koort - Goldman Sachs & Co.

David I. Begleiter - Deutsche Bank Securities, Inc.

Ghansham Panjabi - Robert W. Baird & Co., Inc. (Broker)

Jeffrey J. Zekauskas - JPMorgan Securities LLC

P.J. Juvekar - Citigroup Global Markets, Inc. (Broker)

Arun Viswanathan - RBC Capital Markets LLC

Nils-Bertil Wallin - CLSA Americas LLC

Matthew Gingrich - Morgan Stanley & Co. LLC

Dmitry Silversteyn - Longbow Research LLC

Rosemarie Jeanne Morbelli - Gabelli & Company

Michael Joseph Harrison - Seaport Global Securities LLC

Operator

[Abrupt start] and welcome to The Valspar Fiscal 2016 First Quarter Results 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] As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Bill Seymour, Vice President of Investor Relations. Please go ahead, sir.

Bill Seymour - Vice President-Finance & Investor Relations

Good morning and welcome to our fiscal 2016 first quarter earnings call. We have two speakers today, Gary Hendrickson, our Chairman and Chief Executive Officer; and Jim Muehlbauer, our Executive Vice President, Chief Financial and Administrative Officer. As always, after our prepared remarks, we'll have plenty of time to take your questions.

Let me also remind you that comments made by me or by others representing Valspar may contain forward-looking statements, which are subject to risks and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations. These filings could be found in the Investor Relations section of our corporate website at valspar.com.

Also, please note that our reported results this morning include non-GAAP financial measures. These results should not be confused with the GAAP numbers in today's earnings release or with the GAAP numbers we will report in our Form 10-Q. For GAAP to non-GAAP reconciliations, please refer to the supplemental schedules in this morning's news release.

With that I'll turn the call over to Gary.

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

Good morning, everyone, and thanks for joining us. Today, I'll provide highlights of our first quarter performance and discuss our outlook for the rest of the year. The results in our first quarter finished in line with our expectations. As we discussed on our Q4 call, we expected that the unique combination of several factors would present challenges in the first quarter. I'll let Jim remind you of those details later.

But looking beyond these items, Q1 was a good quarter in terms of new business growth across our portfolio. We also continued to execute on our productivity plans, which helped contribute to improved gross margins in the quarter. The key takeaway is that the first quarter results were in line with our plan and we continue to expect growth in the balance of the year.

So let's look at a few highlights from Coatings and Paints in the quarter. Our Coatings segment continues to perform well. We saw a modest decline in volume and sales, driven by tough comparisons to last year when volume was up 10%. We increased our net new business, EBIT grew 6%, and we improved our EBIT margins by 270 basis points in the quarter.

Looking at the Coatings product lines individually, Packaging volume was up low single digits for the quarter on top of mid-single digit growth last year. Highlighting the quarter was continued strong growth in Asia and further growth in non-BPA coatings in both North America and Europe. We expect non-BPA conversions to continue in North America and Europe. And as the industry leader, we believe we are best positioned to take advantage of this dynamic.

Our Coil product line volume was up mid-single digits in Q1, driven by significant new business wins in North America, Latin America and Europe. This performance follows many quarters of growth in coil. We continue to leverage our technology and service platform to strengthen our leading market share position globally. We further enhanced this position last week through the acquisition of ISVA Vernici, a European coil coatings manufacturer headquartered in Italy. This acquisition extends Valspar's sales and manufacturing capabilities in the $1 billion European coil market.

Volume in our General Industrial product line was challenged by difficult comparisons to last year and certain end market headwinds. New business gains in Asia and Latin America were more than offset by market declines in the container and the ag and construction markets.

In our Wood product line, volume increased mid single-digits in North America driven by new business wins. Volumes were down in Asia as we were up against 30% growth in Q1 last year. You may recall that last year customers accelerated orders in Q1 ahead of a new tax on solvent-based products in China that was introduced in Q2 last year.

Overall, our Coatings businesses are positioned very well as we continue to leverage our diversified product portfolio technology leadership and strong pipeline of new business to improve growth and profitability.

I'll turn now to our Paints segment. Starting, first, with North America Consumer Paints continuing the momentum of last year, sell-through of Valspar products was up high single-digits in North America. As expected, overall volume declined, reflecting the impact of the change at Lowe's and, in addition, volumes were impacted by customer reductions to inventory levels.

Looking forward, we expect customer inventories to be more balanced with sell-through as we move into the paint season. As a reminder, exiting the first quarter, we have now substantially anniversaried the change at Lowe's, which will ease our comparisons in the balance of the year.

Last quarter, we mentioned that we were net winners in recent line reviews with our retail partners. I'd like to highlight some of those new wins. We have several new initiatives with Lowe's that will be ready for this year's paint season. These include the launch of Cabot stain products supported by a full product range at Lowe's. We're also refreshing our merchandizing display space at Lowe's, which includes the addition of 20% more display space.

At the Home Depot, after last year's successful test, we're rolling out an expanded line-up of Cabot stain for this season. And at B&Q, our brand continues to gain momentum. We're now partnering to expand our product range into several new categories with expanded shelf space in the store.

So wrapping up on the Paints segment, Consumer Paints product line volumes in Europe were up double digits. Volumes in China and Australia were down in the quarter as we were up against strong double-digit comps from last year.

And in our Auto Refinish product line, volume more than doubled in the quarter. This was driven by the impact of the Quest acquisition and from growth in our legacy Refinish business.

As we exit Q1, our view of the fiscal year has not changed. In total, we do not expect much help from the overall economy; instead, we continue to focus on what we can control: our own execution, winning new business, and continuing to be more productive in everything we do. Based on our outlook, we have reiterated our guidance for fiscal 2016.

And with that, I'll turn it over to Jim.

Jim L. Muehlbauer - Executive Vice President, Chief Financial and Administrative Officer

Good morning, everyone. Gary has covered the key business highlights for the quarter, so I'll focus my comments this morning on our first quarter financial performance and outlook for fiscal 2016.

As Gary mentioned, Q1 results finished in line with our expectations. On last quarter's call, we highlighted that the first quarter would be our most challenging period of the year from a growth perspective. As a result, we expected sales and earnings to be down in the quarter. The anticipated decline in Q1 was embedded in our annual outlook and was the result of the factors we detailed during our Q4 call, including the impact of unfavorable currency translation which lowered Q1 sales by approximately 6% or $60 million and the EPS by $0.05 in the quarter.

Second, the continued impact from the change at Lowe's, which we have now substantially annualized. Third, our Q1 results were up against exceptional performance in our Coatings segment last year, when volumes grew 10% and EBIT increased 16%.

And finally, interest expense in Q1 increased $6 million year-over-year, reflecting the impact of our bond issuances in 2015. We plan for these items and they explain the bulk of the decline in sales and earnings for the first quarter. Going forward, these items will have much less of an impact on our growth as we progress through the year.

With this as context, let's move on to discuss the balance of our results in the quarter. I'll start with volume and sales. Total volume declined 8% and sales were down 13%. Acquisitions added 2% to volume and 3% to sales in the quarter. Total sales declined approximately 7% in constant currency.

Looking at the top line performance of our two segments in Q1, Coatings segment volumes were down 3% and sales declined 3% in constant currency. These results were solid considering we were up against strong performance last year when Coatings volumes increased double-digit.

Volume growth in Coatings was led by the Coil and Packaging product lines. This growth was offset by declines in General Industrial and Asia Wood where we are up against very strong performance last year and end market softness in container and ag equipment products.

Moving to the Paints segment, Q1 volumes were down 20% and sales declined 15% in constant currency. The addition of Quest increased Paints segment volume and sales by 4% and 9% respectively during the quarter. The volume decline in Paints was primarily driven by the change at Lowe's and customer actions to lower inventory as Gary referenced earlier.

In addition, we were up against challenging comparisons to the double-digit volume growth in Asia and Australia in the first quarter of last year. Wrapping up the Paints segment, volumes in Europe at B&Q increased double-digits and Auto Refinish volumes were up reflecting the addition of Quest and growth in our legacy business.

Moving on to overall gross margin. We finished the quarter with adjusted gross margin of 36%, up 270 basis points. The improvement in gross margin was driven primarily by ongoing productivity programs, cost price and benefits from improved sales mix.

Looking at expenses in Q1, operating expense dollars were up slightly. The addition of Quest was partially offset by the impact of FX. Given the reduction in sales, adjusted OpEx as a percent of sales increased in the quarter to 25.3%, bringing it all together, consolidated adjusted EBIT declined 20% and EBIT margin finished at 10.6% down 90 basis points.

In the Coatings segment, adjusted first quarter EBIT of $97 million was up 6% and increased 270 basis points. The increase in EBIT was primarily driven by the benefits from productivity initiatives and cost price, which more than offset the decline in sales and the impact of currency translation.

Paints segment adjusted EBIT of $4.5 million and EBIT margin of 1.5% declined from the prior year. This decrease was the result of lower volumes and the impact of foreign currency translation. These items were partially offset by positive benefits from productivity initiatives, cost price and the Quest acquisition. We expect to see improved EBIT growth in Paints in the balance of the year as the year-over-year comparisons ease.

Moving on to a couple of other items in the quarter. Cash flow from operations was approximately $21 million for the first quarter, up more than $40 million compared to the first quarter last year. Our Q1 adjusted tax rate of 25.9% improved 360 basis points driven primarily by foreign tax credits and lower foreign tax rates. We continue to expect the annual tax rate will be between 30% and 31% for fiscal 2016.

Wrapping up the highlights for the quarter, we paid $26 million of dividends representing a per share increase of 10% and repurchased 221,000 shares of our company stock for a total investment of $18 million.

Moving on to the outlook for the balance of fiscal 2016, we expect the annual sales growth to be up mid single-digits in constant currency or up slightly on a reported basis including the estimated impact of FX. We expect fiscal 2016 adjusted EPS in the range of $4.80 to $5, which is unchanged from our previous outlook.

With that, we'd like to open up the call for your questions.

Question-and-Answer Session

Operator

We will go to line of Ivan Marcuse with KeyBanc. Please go ahead.

Ivan M. Marcuse - KeyBanc Capital Markets, Inc.

Hi, thanks for taking my questions. The first one is, on your Coating business, you continue to see some nice improvement in the year-over-year margins. How much would you, if you gauge, is raw materials versus the productivity that you called out? And if it's mostly productivity, do you expect to see a sort of the same year-over-year improvement as we move through the year?

Jim L. Muehlbauer - Executive Vice President, Chief Financial and Administrative Officer

Yeah. Ivan, good morning, it's Jim. A large portion of the benefit that we saw in the quarter in Coatings was the productivity initiatives that we did last year. So as we move into the balance of the year, as we noted on last quarter's call, we're going to start to anniversary some of those more in earnest as we get into Q2, Q3 and beyond. So, we expect that year-over-year improvement to diminish.

The other side of the equation is, certainly given the tough compares we had in the Coatings segment this quarter, those compares ease as we move forward. So we expect better volumes in the balance of the year, but the growth in margin rate will be less in the Coatings segment for the balance of the year as well.

Ivan M. Marcuse - KeyBanc Capital Markets, Inc.

In terms of the new business that you called out in the Coatings, is that enough with your view of the macro environment to see – start seeing growth as we move through the year on a volume basis year-over-year?

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

Yes. Yes, it is Ivan. We're expecting – every one of the business – of our Coatings product lines is expecting growth for the full year.

Ivan M. Marcuse - KeyBanc Capital Markets, Inc.

Great. And then, just one quick question, in terms of the destocking that you called out in Paints, how much did that impact your P&L if you can quantify that. And should we see the reverse happen in the second quarter as the new business that you called out starts to roll through and be filled into the channel?

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

Yeah. Let me just – I'll give you the crib notes version on the quarter, Ivan, since you've asked a question both on Coatings and Paints. So Coatings came in right where we expected, maybe a little bit better. Paints came in a little bit below where we expected. And that was basically 100% attributed to inventory – lower inventory in North America than we had in the previous year.

I wouldn't read much into that at all. Q1 is our lowest quarter for sales. Small movements in inventory levels can have a disproportionate impact. It wasn't a lot of money; it was a few tens-of-millions-of-dollars. Our sell-through in Paints in North America was very solid, again, this quarter. And we fully expect that our channel partners are going to refresh inventory to match sell-through as we go through the rest of the year.

Operator

Thank you. Our next question goes to the line of Bob Koort with Goldman Sachs. Please go ahead.

Robert Andrew Koort - Goldman Sachs & Co.

Yeah. Hi. Gary, just to follow-up on that, can you quantify what that sell-through was in North America?

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

We did – yeah. Sorry, Bob, we did in my remarks that we – across the channels in North America, sell-through of Valspar was up high single digits.

Robert Andrew Koort - Goldman Sachs & Co.

Okay. Thanks. Unfortunately, I got on late. And then, can you talk a little bit about any expectations you have in the Australian market with the change in ownership at Masters. Does that affect you at all, or has that become a small enough part of the portfolio at Wattyl that you won't really see a big impact?

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

Yeah. I mean, on a total company basis, Bob, it's de minimis. For the Australia consumer business, it was about $20 million of sales last year. So – also, the de minimis impact, given what we can do in terms of restructuring to deal with the smallish loss. So no impact in Australia that's of significance; absolutely no impact to the corporation.

And let's see what happens. I mean, it's not – I don't believe that a decision has been made to shutter the doors on Masters. We're still supporting them. We're still selling them paint. And we're in a wait-and-see mode like everyone else is.

Robert Andrew Koort - Goldman Sachs & Co.

And is there any product line reviews possible in Canada when Lowe's acquires one of the leading home supply companies up there where I don't think you have much exposure today. Is that something that could be on the horizon?

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

Maybe, Bob, but way too early to tell. And to my knowledge, we haven't had any conversations about that, yet.

Robert Andrew Koort - Goldman Sachs & Co.

And then, just real briefly, the initiatives you've had with Lowe's Pro, Ace and B&Q, couple of years into that from when you first announced them. Wondering if you can just give us a letter grade for the execution and results across those three platforms as you look back now?

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

Yeah. I think all three are more or less where we expected them to be. I mean, I called out, specifically, B&Q in my remarks that apparently you didn't hear because you joined a little bit late, but B&Q is going great. We've extended our product line into some new categories. We've got additional shelf space in the store. We called that out as about a $100 million opportunity for us. We believe that the run rate coming out of this year is going to be about $100 million.

Ace is on track. The key dimension of the Ace program that we talked about last year that we needed to improve was the penetration of the Valspar brand into the overall mix of paint that's sold in Ace stores. That's improving. That's been on a good trend and we're about 500 basis points higher in that penetration today than we were at this time last year.

And Lowe's Pro, I don't want to talk specifically about that, anymore, because the dynamics have changed there a little bit with the new entrant into the store, but we're very satisfied and pleased with the performance of our Pro program with Lowe's.

Robert Andrew Koort - Goldman Sachs & Co.

Great. Thanks for the help.

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

You're welcome.

Operator

Thank you. Next, we will go to the line of David Begleiter with Deutsche Bank. Please go ahead.

David I. Begleiter - Deutsche Bank Securities, Inc.

Thank you. Good morning. Gary, in Coatings, would you expect volume growth to remain negative for Q2 and Q3, at least.

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

No. No, we expect it to turn positive for the remainder of the year, Dave.

David I. Begleiter - Deutsche Bank Securities, Inc.

And in Coatings in earnings in Q2, should that be up at a similar rate we saw in Q1 as well?

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

Yeah. We're not going to – we've historically and we'll continue not to talk about quarters, specifically. But Jim did mention earlier, David, that some of the margin expansion that we've seen in Coatings – a good deal of it was related to productivity programs that we had last year that start to cycle off as we move through the remainder of the year. So we're not going to see the types of increases that we saw in Q1 as we move through the rest of the year.

David I. Begleiter - Deutsche Bank Securities, Inc.

Thank you very much.

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

You're welcome.

Operator

Thank you. Next, we will go to the line of Ghansham Panjabi with Robert W. Baird. Please go ahead.

Ghansham Panjabi - Robert W. Baird & Co., Inc. (Broker)

Hey, guys. Good morning. Back to the question on the Paints sell-through of high-single digits in North America. Gary, can you just give us some more color on that? What price points, in particular, drove that? And where are you in terms of the own inventories just given that your comments on how your customers are managing inventories?

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

Yeah. Ghansham, I'm not going to get specific because I think it's sensitive information whether it's for our retail partners and for us as to what particular products are selling well. But just say that the Valspar branded products as a whole, across channels in North America were up high-single digits. And we think that's stronger performance than any of our competitors.

In our inventories, they're balanced. The paint season is a predictable thing for us. We know when our retail partners are going to start to order, we start to build inventory in anticipation of those orders. Nothing is different this year with the exception of, as I mentioned in my remarks earlier, that inventory levels across channels in North America a little bit lower than they were last year.

Ghansham Panjabi - Robert W. Baird & Co., Inc. (Broker)

That's helpful. And then just in terms of General Industrial, you called on mid-single digit declines. How does that breakout across your various regions? Thanks.

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

Yeah. The big one for us is the container coatings market in China, which is very weak. And the Ag and construction market really, broadly, which is weak as well. So, that's heavy construction equipment for mining, agriculture and construction. Those are the two weak spots in the General Industrial portfolio.

But as I said today a bit earlier, we expect growth in our Coatings segment as we move through the year. We have the benefit of a very diverse portfolio across many geographies and end markets. And we think that we're going to be able balance some of that end market cyclicality with growth in other areas.

Operator

Thank you. Next, our question goes to the line of Jeff Zekauskas, JPMorgan. Please go ahead.

Jeffrey J. Zekauskas - JPMorgan Securities LLC

Hi, good morning. In the quarter, you have this remarkable gross margins. But at the same time, your absolute level of SG&A expense was about flat year-over-year even though your sales declined, I don't know, 13%. So why were the overhead expenses so unchanged?

Jim L. Muehlbauer - Executive Vice President, Chief Financial and Administrative Officer

Yeah. Two things, Jeff. And I mentioned a little bit of this in my prepared remarks. First is, we have the benefit – I'm sorry, we have the addition of Quest that we obviously haven't anniversaried yet in the business, which actually drove SG&A up, as you would expect. But that combined with the impact of FX in the quarter, remember, FX (23:18) shows up on the expense line as a benefit and Q1 was the biggest period of FX that was significant for the year. So, really that change in the SG&A was offset by reductions due to just the timing – or sorry just due to translation adjustment in FX.

Jeffrey J. Zekauskas - JPMorgan Securities LLC

Okay. I guess for my follow-up, there has been some sort of delay or some sort of depletion of inventory. Is it the case? Can you talk about what your average prices were in the course of 2015 and how you expect your average prices in 2016? Is there some connection between the delay in orders and different pricing trends?

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

No, no correlation whatsoever, Jeff.

Jeffrey J. Zekauskas - JPMorgan Securities LLC

Okay. Great. Thank you so much.

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

You're welcome.

Jim L. Muehlbauer - Executive Vice President, Chief Financial and Administrative Officer

Thanks, Jeff.

Operator

Thank you. Next, we will go to line of P.J. Juvekar with Citi. Please go ahead.

P.J. Juvekar - Citigroup Global Markets, Inc. (Broker)

Yes, good morning. Couple of questions. First on Paints. You saw 640 basis points decline in margins despite what should have been a very favorable raw material benefit environment. I know you had decline in volumes, but maybe you can comment on that? And your customer inventory adjustment comment, all your competitors that have reported so far, nobody has mentioned that. So, maybe can you just sort of tie that in with your margin decline?

Jim L. Muehlbauer - Executive Vice President, Chief Financial and Administrative Officer

Yeah. I sure can P.J. So, to your first question around the rate of decline in EBIT margins, as you know, our first quarter, especially in our Paints segment is our smallest quarter of the year. And given the SG&A fixed infrastructure of the business, changes in the top line are going to dramatically impact the bottom line from a rate, EBIT rate standpoint. And that's what you saw. You saw the combination of the fact that we hadn't anniversaried the change in Lowe's yet. You had the impact of FX. And then you had the timing adjustment of inventories in North America. The combination of all of those on an already small quarter is going to have a disproportionate impact on rates in the quarter.

Similar to the comments that Gary provided earlier really on inventory, I mean, it's Q1 we're outside of paint season. It's not unusual for us or others to have small changes at inventory between the quarters. Key thing for us is that our sell-through plans for the quarter came in line with expectations. Outlook for the balance of the year hasn't changed. So, we know that, as time goes on, inventories will match sell-through to keep product availability where it needs to be with our retail partners. So, you're going to have these timing adjustments once in a while. And we look forward to those inventories returning back to more normalized levels as we head towards (26:05).

P.J. Juvekar - Citigroup Global Markets, Inc. (Broker)

Thank you. And then Gary, in Refinish, you acquired Quest. Refinish has been a great business for lot of companies with steady margins. What are your long-term aspirations there? Thank you.

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

Yeah. It was a great business for us before we acquired Quest, P.J., and it will be at least twice as good now that we own them. We doubled the size of the Refinish business that we had from about $150 million to about $300 million, which in the part of the market that we operate in, we feel is adequate scale.

As we called out in, in our prepared comments, we grew the business this quarter, both the legacy business that we had and then obviously with the addition of Quest, it was significant growth. That acquisition, by the way, is right on track. The things that we plan to do to get synergies are occurring.

We're very, very pleased with the team that we acquired with Quest. it's really solid and the people are really solid and complementary to ours. So, we couldn't be more pleased. The long-term goal for that business is, as I've said it, I think I've said it publicly is we expect that that's a $500 million business in about four years, five years time, up from $300 million last year.

P.J. Juvekar - Citigroup Global Markets, Inc. (Broker)

Thank you.

Operator

Thank you. Next question comes from the line of Arun Viswanathan with RBC Capital. Please go ahead.

Arun Viswanathan - RBC Capital Markets LLC

Thanks. Good morning. I was just hoping maybe you could characterize the operating environment in China right now. You noted some potential softness there as well as in Australia. What are you seeing from your customers and what do you expect going forward?

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

Yeah. It's really specific to the end-market, Arun. So our packaging business in China had another quarter of almost 20% growth. Part of that is structural growth in the market as the conversion from glass to cans continues, and part of it was market share gains for us. Our consumer business was a little bit weaker than it was last year, but that was against extremely strong comparisons in the first quarter of last year. Same was true with our Wood Coatings business. I called out the fact that we had a 30% growth in Q1 last year. So we didn't expect to have growth this year. I mentioned the ag and construction market in China, that's pretty weak. We were negative in that business this year and the container business is pretty weak.

So, overall, I don't like to make comments about the overall market because we've selected markets that we think we have an opportunity to have long-term growth and have the opportunity to win in. But I will say, for our overall portfolio, we expect that we're going to have to take market share this year to get to the commitments that we've made to our board and our shareholders. So I'm not expecting a ton of growth from the overall market, but we do have some terrific market share opportunities that we expect to capitalize on.

Arun Viswanathan - RBC Capital Markets LLC

Okay. And then in North America, there has been a year or so of inventory corrections in the big box channel that various competitors have cited. I'm just curious, what do you think is going on? I mean is there a heightened level of competitive activity? Is there any difference that you see between that channel and others – I know you don't have exposure anywhere (29:53), but maybe you can just give me your overall thoughts on how the big box channel is evolving over the last year or two, and what you expect going forward?

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

I don't see any significant change. Yeah. So, we called out a modest inventory adjustment across channels. We weren't specific to a big box channel; we sell all channels in North America. And we were quite specific that it was across multiple channels that we saw a modest inventory correction. And as Jim said earlier, this is – for our quarter, which is a very small quarter, a modest change in inventory levels can have a disproportionate impact. So we felt that we should call it out. That's the reason we're talking about it.

Arun Viswanathan - RBC Capital Markets LLC

Right.

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

As I said to Ivan, I wouldn't make a big deal of this at all, because it's not.

Arun Viswanathan - RBC Capital Markets LLC

Okay. Fair enough. Thanks.

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

Yeah.

Jim L. Muehlbauer - Executive Vice President, Chief Financial and Administrative Officer

Thanks, Arun.

Operator

Thank you. Next, we will go to the line of Nils Wallin with CLSA. Please go ahead.

Nils-Bertil Wallin - CLSA Americas LLC

Hey, good morning. Thanks for taking my question. Given your comments around high sell-through at your customers in North American Paints, it sounds like you're expecting a de-stock – excuse me, a restocking in the rest of the year. So should we begin to see some positive volume growth in your Paints business from the rest of the year, and is there any reason to expect that restocking not to occur?

Jim L. Muehlbauer - Executive Vice President, Chief Financial and Administrative Officer

Yeah. Well, two things. We're going to see improved performance in the Paints segment, first and foremost, given the fact that we've anniversaried the change in Lowe's started in Q2. Our plans for the paint season really haven't changed. You saw our performance in North America last year with sell-through and we're expecting good performance this year as well from a sell-through standpoint, and inventories will balance themselves out to match that. What specific quarter it happens in and how that's through we'll have to see. But key thing for us is nothing has changed from our sell-through expectations in the North American business. And it's early, and we'll see how paint season goes.

Nils-Bertil Wallin - CLSA Americas LLC

Got it. And just on packaging, volumes up low-single-digits, but sales down low-single digits, ex-FX. Is there some sort of pricing issue or mix going on here or – kind of surprised that you see price declines when you're rolling out – you're still rolling out the BPA-free product?

Jim L. Muehlbauer - Executive Vice President, Chief Financial and Administrative Officer

Yeah, Nils, there is a combination of things going on there. You correctly point out, as we roll into more non-BPA product, that has a favorable impact on price. But as we've noted historically, we've got a nice business with a number of customers globally and our contracts with those customers include pricing escalators and de-escalators over time. So, there is just a natural balancing that goes on within those contracts.

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

The other factor, Nils, which has even greater impact in that is the growth is – most of the growth in the quarter came from Asia, and most of that growth is in beverage, which has a much lower price point than our food and general line product line does.

So, Jim, I'm not sure that we have the exact breakdown on what all that is, but mix had a significant impact as well.

Jim L. Muehlbauer - Executive Vice President, Chief Financial and Administrative Officer

That's right.

Nils-Bertil Wallin - CLSA Americas LLC

Great. And just a final one, if I may, where are you in terms of the tinting penetration at B&Q?

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

We're significantly higher than we were at this point last year. I don't know the exact number. You're going to have to get that from Bill, later.

Nils-Bertil Wallin - CLSA Americas LLC

Got it. Thanks so much.

Jim L. Muehlbauer - Executive Vice President, Chief Financial and Administrative Officer

Thanks, Nils.

Operator

Thank you. Next, we will go to the line of Vincent Andrews, Morgan Stanley. Please go ahead.

Matthew Gingrich - Morgan Stanley & Co. LLC

Hi, this is Matt Gingrich on for Vincent. I was curious if you had a sense for how sell-through in North American paints deferred between interior and exterior product lines?

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

Well, in the first quarter it's mostly interior, I think, because it's winter.

Matthew Gingrich - Morgan Stanley & Co. LLC

Well, that's fair. But I'm speaking more on a year-over-year basis and it was one of the warmest...

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

We don't know. We don't know.

Matthew Gingrich - Morgan Stanley & Co. LLC

Okay. It was something that you commented on in the past. But then to follow up, I was wondering if you could speak to the negotiations and dynamics surrounding price and how they've differed across your various coatings in the markets. Which sub-segment should we expect more resiliency or more pressure on a go-forward basis?

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

We have conversations with all of our customers on a regular basis about what the correct value proposition is for Valspar products. And so, to get specific on the nature of those conversations wouldn't be helpful, I don't think.

Matthew Gingrich - Morgan Stanley & Co. LLC

Okay. Thank you.

Operator

Thank you. Next, we will go to the line of Dmitry Silversteyn with Longbow Research. Please go ahead.

Dmitry Silversteyn - Longbow Research LLC

Good morning. Just wanted to follow up on a couple of questions, if I can. When you look at your markets in China and Australia, I understand that the weakness in the first quarter had to do with difficult comps. But as you sort of take a look what's going on there economically and within your specific end-markets, how do you see those markets performing in 2016?

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

Yeah, I answered this question in a way that's maybe not as specific as you want, Dmitry, because we can't predict. I mean we understand that the China market is not as strong as it was two years ago, maybe even last year, generally speaking. But we still have a small position in an extremely large market and we have good programs that should enable us to take market share. So when we put our plan together for the full year this year, we are quite specific internally and externally that we weren't expecting a lot of help from the macro and that we expected we'd have to generate our own growth this year. So that's the way our plans are put together if you're trying to develop or reference about how to evaluate Valspar's performance for the full year. Think about it that way.

Dmitry Silversteyn - Longbow Research LLC

Okay.

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

And in Australia, I think the market is not materially different – the paint market is not materially different than it was last year.

Dmitry Silversteyn - Longbow Research LLC

Okay. So, no incremental weakness or recovery in the housing market that would impact how you're growing in that region one way of the other?

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

That's the way we're planning our year. That's right, Dmitry.

Dmitry Silversteyn - Longbow Research LLC

Okay. With respect to B&Q, you talk about having double-digit growth there in your second sort of full year in that distribution channel. In terms of your sort of future opportunities with Kingfisher, what do you have to show in B&Q for this program to be deemed successful by your partner and perhaps position you to take the next up in expanding your position in Europe?

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

Yeah. That's a good question and one that I'm not prepared to answer in depth. But I will say that both we and B&Q are extremely pleased with the progress that we've made. And we thus far believes that this is a replicatable program through other parts of the Kingfisher organization. And I'll just say that I think if we continue to execute well, we'll given the opportunity

Dmitry Silversteyn - Longbow Research LLC

Okay. Fair enough, Gary. And then one small question on M&A both in terms of sort of your focus going forward as far as either geographic or in more particular product type or end markets that you're looking to penetrate. And also, if you can comment on this recent deal announced between the Akzo and BASF's Industrial Coatings business whether or not that changes the market dynamics in Europe that can either help you or hold you back from gaining share and growing that business in Europe, especially since ISVA (37:45) acquisition gave you a much better footprint there.

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

Yeah, we've actually done two things in Europe to enhance our position. We acquired – it was a small acquisition of a manufacturing facility that was doing tool manufacturing for us in coil coatings and had a small business to support our coil coatings business in Finland a few months ago. Not material so not reported. And then we just did the ISVA acquisition.

Our Coils business in Europe has been performing extraordinarily well. And so we are out of capacity, which is the reason that we acquired the manufacturing asset. And we have commitments, hard commitments of significant new business from very large customers in the European market that are fully baked into our plans for this year.

I think there'll be some incremental upside even from as recently as post close of the ISVA acquisition for some incremental business with some of their customers who are pleased that that business is owned by a multinational. So we're very, very happy with our position in the coil market in Europe.

With respect to the acquisition that you just mentioned, I prefer not to comment whether that creates opportunities for us or not. I'll just say that we feel that we've got tremendous opportunities in the European coil market on the basis of what we own today.

Dmitry Silversteyn - Longbow Research LLC

Fair enough, Gary. Thank you.

Operator

Thank you. Next, we will go to the line of Rosemarie Morbelli with Gabelli & Company. Please go ahead.

Rosemarie Jeanne Morbelli - Gabelli & Company

Thank you. Good morning, everyone. Gary, when you talked about – I mean your Refinishing business getting to about $500 million in revenues over the next four years to five years, are you including bolt-on or is that purely organic growth?

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

We think we can do that organically, Rosemarie.

Rosemarie Jeanne Morbelli - Gabelli & Company

And are there potentially additional acquisitions that can be attractive in that particular side of the business?

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

Sure. Yeah. There are some smaller ones there.

Rosemarie Jeanne Morbelli - Gabelli & Company

Okay. And then, I was wondering regarding and I know it is a small quarter and I know it is winter and so on, but I was wondering if, first of all, is the customer inventory correction on the Paints side was bigger than it was in previous year? And two, whether that shows that they're anticipating a slowdown in housing?

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

No, I don't think it shows that at all. In fact, the housing market in North America appears to be pretty strong. Again, Rosemarie, if this level of correction or if this level of change on a year-over-year basis happened in our Q2, we wouldn't be talking about it, because it would be immaterial. And it's really immaterial in Q1, but it has an impact on a very small quarter for us. So, we called it out.

Rosemarie Jeanne Morbelli - Gabelli & Company

Okay. That was very fair.

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

The only reason we called it out is because this quarter is an unusual quarter for us for many reasons and we thought it would be helpful to our investors to understand that our plan in Coatings is right on or above plan and in Paints was what would have been right on our plan – our internal plan, had it not been for this modest correction. That's the only reason we called it out.

Rosemarie Jeanne Morbelli - Gabelli & Company

Okay. I'm glad you did, because I was freaking out looking at that margin.

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

Well, you shouldn't freak out, looking at that margin for the reasons that Jim just said. We delever extraordinarily in the first quarter, because it's such a small quarter. And all of the costs that in our business remain in our business in the first quarter. If you look historically, the first quarter is always the weakest quarter that we have in Paints, and there's absolutely no reason to be freaked out about a 600 basis point decline in Q1.

Rosemarie Jeanne Morbelli - Gabelli & Company

All right. Thank you.

Operator

Thank you. And our final question comes from the line of Mike Harrison with Seaport Global Securities. Please go ahead. Your line is open.

Michael Joseph Harrison - Seaport Global Securities LLC

Hi. Can you hear me?

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

Yeah. We got you, Mike.

Michael Joseph Harrison - Seaport Global Securities LLC

Hi. Gary, you're getting some increases in distribution of the Cabot Stain line in North America, how important could that be to the growth rate this year. And just looking at last year, were sales depressed in stains due to the weather?

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

Well, the answer to your first question, Mike, is that it's – all of these, we knew about these opportunities as we went into our year, so they're baked into our guidance. Cabot is very broadly distributed now. I think it's something like 10,000 points of distribution in North America, which is by far the most widely-distributed premium stain product that is in our market. So, we fully expect that we're going to grow this business as we move forward through time. But at least for this year, as I said, it's baked into our guidance.

Yeah. Last year, on your second question, whether we expect a better stain season this year than last year, I think we will unless we have – we had horrific weather last year and we missed a good portion of the stain season, which is March, April, May. Consumers have – if you don't get it done in May, a lot of people decide – by May – they decide to defer until the next year. So it's possible that we could see some upside on our plan based on weather patterns.

Michael Joseph Harrison - Seaport Global Securities LLC

All right. And then a question on China and just the consumer paint business, you've talked about increasing the number of distribution points in China. How should we think about that contributing to overall volume growth in Asia and sort of when should we see the increase in channels translate to an increase in volumes and some of the share gains that you're referring to?

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

I think we've seen that over the last several years taking place. So that has been the ongoing formula that our team in China has been executing. As Gary mentioned, the unknown for this year is what type of headwinds are we going to have from a macro perspective. But once again, our share is very small in that marketplace and we have continued opportunities to grow. We know we just need to manage through these temporary headwinds and we'll continue to grow our brand there.

Michael Joseph Harrison - Seaport Global Securities LLC

All right. Thanks very much.

Gary E. Hendrickson - Chairman, President & Chief Executive Officer

Thank you.

Operator

Thank you. And speakers, there are no questions in queue, please go ahead.

Bill Seymour - Vice President-Finance & Investor Relations

Well, that's it for the call. Thank you, operator.

Operator

Thank you. And ladies and gentlemen, 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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