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The Valspar Corporation (NYSE:VAL)

F3Q12 Earnings Call

August 14, 2012 11:00 a.m. ET

Executives

Lori Walker – SVP and CFO

Gary Hendrickson – President and CEO

Analysts

Saul Ludwig – Northcoast Research

Steven Schwartz – First Analysis

Ram Sivalingam - Deutsche Bank

Brian Maguire - Goldman Sachs

John Mcnulty – Credit Suisse

Ivan Marcuse – Keybanc Capital Markets

Eugene Fedotoff - Longbow Research

Nils Wallin – CLSA

Phil Kirkman - Susquehanna International Group

Michael Hamilton - RBC Wealth Management

Kevin Hocevar - Northcoast Research

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the third quarter conference call. At this time, all participants are in a listen-only mode. Later, we will take your questions. (Operator Instructions) As a reminder, this conference is being recorded.

I’d now like to turn the conference over to our host, CFO Lori Walker. Please go ahead.

Lori Walker

Good morning, and welcome to our fiscal 2012 third quarter earnings conference call. Gary Hendrickson, our Chairman and Chief Executive Officer, is with me on our call this morning.

Before we begin, I'll direct your attention to the press release we issued this morning that contains much of the information that we'll be covering in the call. This call is subject to forward-looking statements language contained in our press release and our comments may include forward-looking statements as that term is defined by securities law. This morning, I’ll begin by covering our results for the quarter, Gary will provide some context and then we’ll respond to your questions.

Third quarter sales totaled $1.08 billion, a slight increase from the third quarter of 2011. Adjusted net income per share for the quarter was $0.97, a 21% increase from $0.80 in 2011. Our press release includes details, showing the reconciliation of our reported to our adjusted results.

As I comment on our gross margin and operating expense performance, note that restructuring is excluded in both years. For the third quarter, our gross margin was 34.2%, up 280 basis points from 2011.

Let me offer some context on how we achieved this improvement. First, we delivered a significant amount of new business in the quarter which is coming in at a higher average margin rate. All of our significant product lines in our coatings segment had new business wins in the quarter. This new business helped to offset soft market conditions and our decision in last year to exit a small number of high volume but unprofitable product lines.

Next, our internal initiatives around productivity as well as prior restructuring actions continued to deliver significant savings. And finally, we continued to see the benefit from previous pricing actions that we put in place to offset raw material inflation. Once again in the quarter Valspar employees did an excellent job of executing against our growth and our productivity initiatives.

Looking at raw materials, we experienced sequential low single digit increases in the quarter and for the full year, we expect raw material inflation to be in the mid-single digit range.

Operating expenses as a rate to revenue were 20.3%, up slightly from 19.8% in the third quarter of 2011 primarily related to the timing of incentive compensation accrual. The reported tax rate for the quarter was 32%, up from a rate of 29% in the third quarter of last year. The lower rate in 2011 was due to adjustments related to prior year. Our full year tax rate guidance remains unchanged at 30% to 31%. And as a reminder, our tax rate in the fourth quarter last year included a $0.09 per share benefit for non-recurring items.

Average diluted shares outstanding were 93.6 million, down 2.3 million from last year. In the quarter, we continued to return cash to shareholders, repurchasing approximately 1.2 million shares for $57.6 million and have 3.8 million shares remaining under our current authorization. We estimate average diluted shares outstanding for the fourth quarter to be approximately 93.5 million.

Recapping our sales performance, adjusted for currency net sales increased 3.3% in the quarter. Currency impact was negative 2.6% resulting in reported sales growth of about 1%. Acquisitions did not have any impact on the quarter.

Looking at our segment results for the quarter, adjusted for currency, our coatings segment sales increased 5.2%. Sales in this segment benefited from new business and prior pricing actions that offset uneven market conditions and last year’s exit of unprofitable product lines. The impact on coatings segment sales from this exited product line is in the low single digits.

Paint segment sales when adjusted for currency increased just under 2%. In our North America consumer product line, sales were up more than 10% driven by strong consumer response to our market initiatives and timing of seasonal inventory builds in the North American home improvement channel.

In China, we saw continued volume growth from our initiatives aimed at the affordable housing market. However these volume improvements were partially offset by softness in our business in Australia, due in part to a continued weak residential housing market and last year’s loss of the Bunnings business.

Sales in our other segment when adjusted for currency declined roughly 2%. I’m now going to move into a discussion of our EBIT margins for the quarter and all of the numbers I’ll be discussing exclude restructuring charges. So our coatings segment EBIT margin was 17.2%, up 360 basis points from 13.6% in the third quarter of 2011. The segment benefited from new business with higher than average margins, productivity improvements, the planned exit of unprofitable product lines and better price cost balance.

Our paint segment EBIT margin was 11.9%, up 110 basis points from 10.8% in 2011. This improvement was primarily driven by productivity gains and the restructuring benefits in our Australian business. The EBIT margin for our other segment was negative 0.5% compared with positive 0.9% in the second quarter last year. As a reminder other includes our corporate expenses. The total company EBIT margin for the quarter was 13.9%., up 230 basis points versus 11.6% in the third quarter of 2011.

Moving to the balance sheet, our net debt at the end of the third quarter was $972 million, an increase of $113 million from the end of last fiscal year. The increase was primarily driven by share repurchases. Our net debt to capital was 44.8%. Through the first nine months of the year, we generated $166 million in operating cash flow, compared with $106 million through the same period a year ago. The increase in cash flow was the result of higher earnings and improved working capital management. We estimate free cash flow which we define as operating cash flow less CapEx and dividends to be $180 million to $200 million in fiscal year 2012.

Capital spending in the third quarter was $31.3 million, up from $15 million in the third quarter of 2011. In the quarter, we invested in the expansion of our India operation to support our growth in that fast growing industrial market. Our capital spending forecast for the full year is $90 million.

Year to date depreciation and amortization was approximately $68.6 million, roughly equivalent to last year. And our full year forecast for depreciation and amortization is approximately $90 million. As mentioned in our release, we are reaffirming our fiscal year 2012 guidance of $3.20 to $3.30, which excludes restructuring related charges.

And with that, I will turn the call over to Gary for his comments.

Gary Hendrickson

Thank you, Lori and good morning everyone. Thanks for joining us on the call today. We were pleased with our performance in the quarter against the backdrop of a very challenging market conditions. A 21% improvement in earnings per share is a great result.

Let me provide a little bit of color on the market demand as we see it. Our North America business performed well in the quarter with mid-single digit volume increases. But as the quarter progressed the market began to soften somewhat.

Our businesses in Europe and China were soft throughout the quarter. In Europe, volumes were down mid-single digits. And in China, our volumes were down slightly versus 2011 in a real estate and construction market that is down more than 10% in the same period of time. So it’s a challenging environment but we performed very well, and we did have some notable bright spots that I would like to highlight.

First, our Latin America team did an exceptional job in the quarter. All of our product lines in that region performed very well with volume growth in the mid-teens and revenue growth in local currency in the mid-20s. In our paint segment, in North America the Love Your Color Guarantee is delivering on our expectations. Our mix has improved and our paint sales in the U.S. and home improvement channel have been positive.

In Australia and New Zealand, our Wattyl profit improvement plan is ahead of schedule and we were recently awarded new business at a large customer in the independent hardware channel. And our consumer business in China continues to do well in difficult market with our initiatives around the affordable housing market.

In our coatings segment, we had some notable market share gains in packaging coatings, industrial coatings and in wood coatings which helped to offset soft markets. As we said previously, many of these business wins are a result of differentiated and innovative products that carry higher margins.

We also continue our laser focus on operational discipline. Our improved margins in both coatings and paint are benefitting from productivity initiatives and prior restructuring actions. Price cost is more in balance this now than it was at this time last year, and while we did see some raw material inflation in the quarter, we expect the trend line to flatten.

So looking forward at the macro business environment, our outlook is somewhat cautious given the challenges of the weak global economy and sluggish growth in the United States. We’re anticipating a challenging fourth quarter as customers adjust the uneven demand and uncertainty about economic stability in eurozone, slowing growth in China and uneven recovery in the U.S.

All of that said, we’re confident in the fundamentals of our business and in our employees to take the actions necessary to respond to changing market conditions. Our diverse business mix, our demonstrated ability to win new business as well as successful execution of productivity initiatives will continue to serve us well and we are reaffirming our adjusted full year earnings per share guidance of $3.20 to $3.30.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from the line of Saul Ludwig with Northcoast Research.

Saul Ludwig – Northcoast Research

Hey Gary, two questions, not so much focus on the third quarter but at the beginning of the year I think one of your main – two main goals was to, for each of your businesses to gain market share, and two, to continue the introduction of new products that you had been so successful with for the past two or three years. And I am just wondering if you could address your performance versus those goals and as you talk about market share, one of the things that I am sure is on a lot of people's minds is when you look at your volume compared to the volumes reported by many other coatings companies, it would not appear as if there was any market share gains. But I wonder if you could address both the market share question and the new product question.

Gary Hendrickson

Sure. You are right, Saul. Those were the goals. I will answer the second question first. I can tell you that we are taking market share. In our coatings segment that effect is being somewhat masked by the fact that we exited some unprofitable product lines during our restructuring last year. That amounted to about 4% of the volumes in our coatings segment. So I think that maybe part of the reason that you have a perception that, or others may have a perception that we’re not taking as much market share as we have. We set a goal in the beginning of the year for each of our businesses to win new business and we do have innovation goals.

As I mentioned in my opening remarks in our coatings segment this quarter, all of our businesses in our coatings segment achieved market share gains. Packaging had an excellent quarter, including with innovative -- very innovative technology and as you being someone who’s covered the company for a long time knows that innovation and packaging these days is non-BPA. And we had some significant wins in the quarter with non-BPA technology in that business. Our pipe coatings business which we consider -- since it’s a new business we consider anything that we achieve. In that business market share gains had another good quarter.

Our container business in China, which is possibly the most innovative technology that we’ve developed in the company in recent years, converting an entire industry potentially from solvent based to water-based, signed letters of intent with two additional manufacturers of containers in the quarter. We’ve now converted four lines, and we have two in process. Our wood coatings business had three significant customers that converted their business to us in the quarter. So that’s a lot of words. You know our key metric is net new business and our net new business metric for the year is in the mid-single digits, which is exactly what we had in our plan.

Saul Ludwig – Northcoast Research

Thank you, Gary.

Gary Hendrickson

You’re welcome. Saul, is this – Tyler tells me this may be your last call?

Saul Ludwig – Northcoast Research

I think it might be.

Gary Hendrickson

Well, we’d all like to say thank you. It’s been a pleasure working with you. Thank you for your fair and balanced coverage of the company over the years and we wish you well as you transition into your new roles.

Operator

Next we will go to the line of Steve Schwartz with First Analysis.

Steven Schwartz – First Analysis

I get a question for you on the paint business in North America. I think in the past you've called out that that business is maybe 80% DIY and I am wondering of the 20% that’s non-DIY do you have a sense for how much of that goes into like new construction or is it just maintenance type paints with contractors and what have you?

Gary Hendrickson

I would say of that 20% Steve, probably none of it goes into new construction. It would all be going to professional painters like property remodelers, property maintenance – remodelers, repair modelling, contractors, property maintenance, people like that, not the painters that are doing new construction.

Steven Schwartz – First Analysis

And then just as follow-up, can you give us an idea on where the volume fell in coatings for the quarter on a year-over-year basis?

Gary Hendrickson

On a year-over-year basis volume in coatings was down very slightly.

Steven Schwartz – First Analysis

So like low single digits.

Gary Hendrickson

Very low single digits.

Steven Schwartz – First Analysis

Okay and at this point you're starting to lap the pruning that you had done, right?

Gary Hendrickson

We will and if that’s right. Some of that – some of it will lap in the fourth quarter, not all of it but some of it will.

Operator

And you do have a question from David Begleiter with Deutsche Bank.

Ram Sivalingam - Deutsche Bank

Hi good morning. This is actually Ram Sivalingam sitting in for David. Just a quick question on gross margins, propylene has come down heavily since Q2 highs and TiO2 seems to be flattening out here. How should we think about gross margins going into the back half of calendar ’12?

Gary Hendrickson

Well, you are talking about price and cost, I think Ram and yeah I think price and cost in our coatings businesses is pretty well-balanced. Price cost in our paint segment is that we still have a little bit of work to do. It’s not totally – we haven’t totally recovered all of the inflation that we've experienced over the past year or so. But it's getting a lot closer to being balance.

Ram Sivalingam - Deutsche Bank

And then just on your efforts to reduce TiO2 usage, could you elaborate there a little bit?

Gary Hendrickson

Our technical people have done a fantastic job both in terms of substituting Chinese sulfate grade TiO2 in our products in the U.S. and Europe, as well as actual elimination of TiO2 from our products. So mid-single-digit elimination and then in the 20s in terms of substitution.

Operator

Next we will go to the line of Bob Koort with Goldman Sachs.

Brian Maguire - Goldman Sachs

Hey good morning. This is actually Brian Maguire on for Bob. Just a question on the North American paint you had a nice rebound in sales after some inventory issues at Lowe's in the second quarter. But you indicated maybe that as the quarter went on it started to weaken a little bit and maybe into the fourth quarter with a little bit weak. How much of that do you think had to do with inventory issues in the channel and maybe there were some deferral of inventory building into the third quarter that was maybe one-time blip and now it’s coming back down, or how much of it do you think was actually changes in end market demand through the year?

Gary Hendrickson

Those are a lot of questions Brian. Let me try to – I will answer it in context. So you're right. Your recollection is correct. In the second quarter we -- inventories were not built at the same time as they were in 2011. Our main customer in the home-improvement channel did build inventory, seasonal inventories in our third quarter. So one way to think about how the performance there is average those two together. And if you do that our revenue was up mid-single digits in those two quarters together and our volumes were up in the low single digits in those two quarters together.

Our paint sales are positive. In that channel our paint sales are positive in North America. When I made my comment – in my prepared comments about the market softening a bit during the quarter, I wasn’t necessarily being specific to paint. I was talking about our entire North America business. Our paint sales have actually held pretty steady and POS in both of our main channels has been positive through the quarter.

Brian Maguire - Goldman Sachs

And some of your peers have been talking recently about some of their Titanium dioxide prices actually falling in maybe some select grades and geographies. But it sounds like there is also some chatter about that now becoming more universal. Are you seeing that in your negotiations with folks and when you are talking price, are you seeing that out there that we are starting to actually see some drop in Titanium dioxide pricing?

Gary Hendrickson

I’d rather not comment specifically, that’s getting pretty granular on one raw material that we have. I will say that the nomination at the TiO2 suppliers put forward for July did not stick in any geography. And I will say that in geographies outside of the U.S. we have seen some deals where we have been able to reduce our costs at least temporarily.

Brian Maguire - Goldman Sachs

I think the all-time peak gross margin for the company was around 34.7 and even averaging from little bit north of 34 recently, maybe with some of the pruning you have done on unprofitable businesses you’re getting a little bit of a benefit from that and then maybe offset by some of the acquisitions you have done in some lower margin businesses since then. But do to think that, that 34.7 from ‘09 is a high watermark that is achievable to hit again or is it one that you're thinking that you can actually exceed at some point?

Gary Hendrickson

I’d rather not talk about gross margin per se. We’ve got a cost structure that includes a lot more than gross margin. We think a lot more about our operating margin and that -- and our operating margin and our gross margin are benefitting from a lot of things that we’ve done. You mentioned the restructuring, we’re seeing the full benefit from that now. You also mentioned the pruning of unprofitable business that, that’s helped. But we've also – our employees also have been driving a huge amount productivity in the company. And then lastly new business. You talked a little bit about our new business wins and how that’s flowing through our P&L as an incremental margin. About 100 basis points of our improvement in our coatings segment is a direct result of the new business wins that we have achieved in the last six months or so. So there are lot of factors, not just the ones that are sort of the headlines.

Operator

We do have a question from the line of John Mcnulty with Credit Suisse.

John Mcnulty – Credit Suisse

Just a couple of questions. On the paint segment, what kind of pricing did you see in the quarter roughly?

Gary Hendrickson

Across the whole segment low single digits.

John Mcnulty – Credit Suisse

So it sounds like you had positive volumes in kind of the DIY market in the paint segment. I think if I remember correctly, you said China was actually – you saw some at least modest growth, and I think some of that was from the low income business that you were starting to bring in. But so I guess how bad was Australia because it seems like that’s the only major offset in that business to have – so that you would have had flat to down volumes overall.

Gary Hendrickson

Yeah your math is right. And Australia was down in the teens, and that’s a combination of three things, John. On is the loss of the Bunnings business last year which was a high volume customer, which we talked about in previous calls. Our restructuring did take us out, we closed some stores, they were unprofitable stores. So that had an impact on our revenue, but not on our income and the market is weak, the housing market is weak. So you put those three things together and it was a pretty quarter for the Australian business.

I will say this though the restructuring plan as I mentioned in my comments is ahead of schedule and that business is ahead of their target for the year in terms of EBIT growth. So some of the – the first two that I mentioned, the stores and Bunnings were in our plan, we didn’t plan on the weak market but because our restructuring plan is ahead of schedule, we’re compensating for the weak market through the cost savings.

John Mcnulty – Credit Suisse

And the first two – if you are down mid-teens, is that two-thirds of it, like I guess I am just trying to think about when that anniversary, how we should be thinking about kind of the core market growth? With Bunnings and the store closures –

Gary Hendrickson

Well, the store closings have been happening through the year up until – I know until the second quarter. Let me – I will have to ask Tyler to give you a call and walk you through that. I don’t want to say because I am not sure.

John Mcnulty – Credit Suisse

And then just with regard to pricing, can you get more pricing or does the rest of kind of the benefits going forward really just come on the high mix – the better mix that you – it looks like you are starting to get?

Gary Hendrickson

I don’t want to talk about whether we can get pricing or not. We certainly collaborate with our customers when there is a need for pricing and we have raw material inflation. As I said I expect the raw material inflation to flatten as we go forward. So I am not expecting a lot of benefit from price and the mix that we see in the next couple of quarters.

Operator

You do have a question from the line of Ivan Marcuse with Keybanc Capital.

Ivan Marcuse – Keybanc Capital Markets

Two quick questions, those have already been answered but if you look at the Latin America business that you discussed, how big of a business is that and what do you think the potential is over the next few years and I guess where do you – what product group are you seeing the most growth?

Gary Hendrickson

We’re seeing, total Latin America business, I will get you get number in a second. I will tell you first the, what we are seeing the growth. We saw growth in packaging coatings, our team took share in packaging coatings in both Mexico and Brazil. We saw our coil business perform very well and our general industrial business performed very well, and all those were -- the market there is only growing at about 3% or so in terms of GDP growth. So to get the kind of result that we get is all about market share gains. So really pleased with our performance. The business itself is a little bit short of $200 million.

Ivan Marcuse – Keybanc Capital Markets

I guess my last question would be, in China you’ve – sort of the construction we missed is really – at least over the past several quarters, has been focused on the tier 1 cities. So it sounds like you are seeing a little bit of slowing in the tier 2, tier 3 cities but it’s still growing year over year, maybe at a lower rate or how would you sort of describe I guess your core markets in that region?

Gary Hendrickson

Yeah, our core markets are the tier 2 and three cities, not tier 1, you are right about that. It’s a choppy market – let me just – I will say it’s a choppy market. Some of our cities even the tier 2 and 3 cities have been impacted by a slowdown in construction. Others are doing just fine. In aggregate that the market in terms of square meters of construction is down -- you read the same stuff that I do, some at least 10%. I haven’t seen the number that’s less than 10%. But our business is actually performing well in a really rough environment. I will do the same math that I did when I talked about our U.S. consumer business.

And we had a strong quarter, last quarter and it was a very strong quarter, and a big part of that was the new product that we’re putting through nonexclusive distribution for the affordable housing market. This quarter our volumes were up slightly but if you average the two together our volumes in our end business were up – were in the low teens. And that's a really good performance in a market that’s down at least 10% and if you read the competitive comments on the market in their business, we are taking share in that business. So we are pleased that our distributors are committed, they continue to build stores. I think our point of view is that this will pass. I know our distributors’ point of view is this will pass, and the market will recover and we’re going to be really well-positioned when it does.

Ivan Marcuse – Keybanc Capital Markets

In Australia business, I think I did – I think I caught this that you gained a bid ISR retail – a new retail customer in Australia, so will that be large enough to offset the Bunnings or when will that business start to start filling, will it be next quarter or did it already start?

Gary Hendrickson

I wish it were large enough to offset the Bunnings loss but it’s not -- I believe it’s, I know we’ve signed the contract and I am not a 100% sure we are shipping yet or not.

Operator

You do have a question from the line of Dmitri Silversteyn with Longbow.

Eugene Fedotoff - Longbow Research

Good morning. It’s actually Eugene Fedotoff sitting in for Dmitri. Question on packaging coatings, Gary, you mentioned that this business had excellent quarter. Just wondering if you can provide a little bit more color on that, how much the volume was up and how much revenues you benefitted from Olympics in Europe, just if you can provide a little bit more color on the growth there?

Gary Hendrickson

The volumes were still down slightly on a year over year basis, which is a big improvement in that business from the first two quarters of the year where because of weak markets both in Europe and in North America, our business was down both in beverage and in food. So the market hasn't really recovered much. And in fact, if you look at our customers’ comments about particularly their markets in Europe, the food market in Europe in particular, it’s a pretty weak market. But we improved our performance through new business, and they came in all geographies. Our Asia business performed really well up in the 20s in terms of revenue. I already mentioned our Latin America business performed really well and took share. We took share in Europe with three significant customers. And in North America, I mentioned with our none-BPA coatings we took some market share as well.

So the improvement that you see is not market related. It’s all about our business, our business people out there taking share.

Operator

Next we will go to the line of Nils Wallin with CLSA.

Nils Wallin – CLSA

On your Love Your Color program, I was just wondering how that’s been tracking, if you've been seeing more or less return than anticipated and what type of volume growth it's been driving or at least any type of share shift?

Gary Hendrickson

Yes Nils, and you are right that the key metric there is volume growth. That's really the only metric that we should be concerned about, and I will say that we launched the program in April and every month since then our volumes have grown. And if you take the April through July, our volumes have grown pretty significantly. A lot of that is trade up and that’s people that are trading up from our ultra-premium product below signature to the Valspar signature product. So I wouldn’t care to speculate on whether we’re taking market share or not but we’re certainly achieving our objective of trading up from a lower price points in the department to signature.

It’s just in terms of – so we’re really happy. It’s performing the way we expected it would. And in terms of returns they have been – if look at the number, and I will call it de minimis.

Nils Wallin – CLSA

So with this trade-up, I would assume that there is a mix uplift with two, would you be able to size it for us or how you would think about the mix uplift from the trade-up you are talking about?

Gary Hendrickson

I will just say that you are correct in the way that you are thinking about it, that there has been a mix shift. But I prefer not to talk about what that means in terms of dollars or margin et cetera.

Nils Wallin – CLSA

So then on the China new home sales it looks like in tier 2 and certainly in the tier 3 cities you saw a significant inflection point in new home sales in July and I am wondering since the timing of your end of the your quarter, if you saw the same thing or what you're seeing now in terms of those markets because it was a pretty significant year on year gains at the end of the quarter.

Gary Hendrickson

To be honest, I am not sure what you are referring to. You are looking at a study that I don’t believe I’ve read. We think the market is still pretty weak in China. And we haven't – our distributors know our people in the field, or both, we are planning for a weak market through the fourth quarter but that doesn't mean that we can't grow into a weak market. We've demonstrated in the last two quarters that we can grow into a weak market.

So my personal point of view is that it’s going to be weak for another quarter or two before some of other stimulus measures of the Chinese government is put in place we will start to kick in.

Nils Wallin – CLSA

I believe there was originally identified something like $0.12 to $0.14 of cost improvements from restructuring, have all of those gone through or you still have a couple more cents to make in 2012?

Lori Walker

Yeah, pretty much all of those have gone through.

Operator

You do have a question from the line of Don Carson with SIG.

Phil Kirkman - Susquehanna International Group

Good morning this is Phil Kirkman on for Don. I had a question surrounding your strategic growth initiatives. What's the status of your UK pilot paint program?

Gary Hendrickson

We are not ready to make an announcement Phil, but we're feeling extremely positive about that program.

Phil Kirkman - Susquehanna International Group

Okay. In terms of the paint EBIT margins, what drove the sequential decline?

Gary Hendrickson

Branding, timing of branding. This is when it was just off of quarter -- off of really a few weeks when we started ramping up our branding investment this year for the Love Your Color Guarantee and branding generally.

Phil Kirkman - Susquehanna International Group

In the current environment of modest demand and soft growth, can we sort of expect EBIT margins to stay in that that sort of 17% range, is that reasonable?

Gary Hendrickson

We're going to see -- so this is the high point of our year. The third quarter is always the high point of our year because it's our highest volume quarter and then they will decline as we go into Q4 and Q1. So I wouldn't put 17 into my model for the next quarter, if that's what you're asking.

It’s all about -- and that's not about price, cost. Phil, that's about volumes then operating leverage. It's the normal. It's the way our company works every year.

Phil Kirkman - Susquehanna International Group

And what about looking out towards fiscal ‘13?

Gary Hendrickson

I think our margins are in pretty good shape. I don't say any more than that. I think price cost is good. It worked. The improvements will come as we continue to win new business. We still have a fair amount of operating leverage in our factories and across our SG&A and so as we continue to grow our company with new business wins, you may see some improvements but those are pretty healthy margins. I think they are some of the strongest industrial margins in the industry.

Operator

You do have a question from Mike Hamilton with RBC.

Michael Hamilton - RBC Wealth Management

I'm wondering if you could give a picture of where you are in stores in China at this stage and what the year-over-year growth of units has been?

Gary Hendrickson

I think we are at about 2,800 stores and we started the year at about 2,500. And I say about -- that's within 50 stores on year end.

Michael Hamilton - RBC Wealth Management

Thanks. More broadly as you look across lines and geographies, is there anywhere – where you’re bumping up capacity constraints at the stage?

Gary Hendrickson

I think we mentioned in our last call that we are making an investment in new plant in Tianjin, China and that’s to support the growth of our Huarun business. So, yeah, we need a new plant to support the continuing growth of Huarun, and that's built into our CapEx projections, Mike.

Operator

Sir you do have a question from Kevin Hocevar with Northcoast Research.

Kevin Hocevar - Northcoast Research

Hey guys. I got a question on the food packaging coating business, is the drop that we're seeing here in North America, do you expect that to have any meaningful impact on that business?

Gary Hendrickson

You're already seeing it Kevin, what you see on the previous question, I answered about the packaging market. I mentioned that the food business is weak, mainly due to weak vegetable pack and the drought that we're experiencing in the U.S. and it's also been weak in Europe. And we’re pretty big player in food can coatings particularly in North America. So that is having the impact on our business. As I mentioned, our team did a very nice job in the quarter of offsetting that with new business in other geographies and segments.

Kevin Hocevar - Northcoast Research

And speaking of the new business, I think you said it was up mid-single digits or so and I think the last couple of years that's grown 2% or 3%. So it seems like that's accelerating a bit. So could you kind of go through maybe which of the new business was -- are the strongest and growing the fastest and really kind of accelerating that growth?

Gary Hendrickson

In coatings, yeah, I looked at our net new business by business just before I came in and let me just say. I'm really pleased with the progress that we've made in every one of those industrial businesses. Our wood coatings business has net new business that's very favorable so does our industrial business, some of that in new markets like container and pipe as we've talked about a lot, and in packaging where we are the market leader, some of our new technology innovations are really proving themselves in the market and they are doing extraordinarily well. So, it's really been across the board. I wouldn't single one out as more important or impactful than the others. All of those businesses are doing really well.

Operator

There are no additional questions at this time. Please continue.

Gary Hendrickson

Okay. Well, thanks everyone for joining us on the call today. Just to recap, we're pleased with the performance of our business in the quarter. Valspar employees around the world are focused on executing on our growth and productivity initiatives, and as we've said a couple times we remain confident in our guidance of $3.20 to $3.30 for the year. So, look forward to updating you on our fourth quarter conference call in November. Thank you.

Operator

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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