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Q2 Brings Ups and Downs at Valspar

Thursday, May 28, 2015

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MINNEAPOLIS—Despite second-quarter declines that dampened the year's sales outlook, Valspar is setting a new course for growth in the months ahead, the paint and coatings maker reported Wednesday (May 27).

Industrial and coil coatings grew while paint sales dropped in Valspar's second fiscal quarter of 2015, the company said.

The mixed second-quarter earnings statement carried both a downbeat annual sales outlook and an upbeat announcement that the world's sixth-largest paint and coatings maker would be expanding its industrial business with the acquisition of the performance coatings division of Quest Specialty Chemicals.

The deal includes Quest Specialty's automotive refinish and industrial coatings business, which reported $190 million in sales in 2014. The acquisition is expected to close in the third quarter, but terms were not disclosed.

Q2 Highlights

Overall, net sales in Valspar's second quarter declined over the prior-year period by 7 percent (2 percent in local currency).

ValsparGICoating
Valspar Corp.

Net sales in Valspar's coatings segment increased by five percent in the second quarter, with strong performance by general industrial coatings.

Double-digit declines in the paint segment drove down total volumes by 3 percent. The losses, which were expected, stemmed from the recent loss of Valspar's partnership with Lowe's. Lowe's switch from Valspar to Sherwin-Williams cost the Minneapolis company's paint business up to $180 million.

Net income and earnings per diluted share, excluding non-recurring items, were fairly flat over the second quarter of 2014.

The company also reported:

  • Diluted EPS (as adjusted) increased 4 percent to $1.11;
  • Net sales in the coatings segment increased by 5 percent in local currency; and
  • Paints segment net sales decreased 12 percent in local currency, driven by declines in North America.

Coatings and paint volume both increased in the company's first quarter.

Sales Outlook Declines Again

Despite the ups and downs, Valspar reaffirmed its fiscal 2015 annual diluted EPS (as adjusted) guidance at $4.45 to $4.65.

HistoricalVolumeTrends
Valspar Corp.

The last five quarters have brought ups and downs at the world's No. 6 paint and coatings maker.

However, the company reduced its annual sales guidance for the second consecutive quarter.

Valspar started the year with a forecast of sales growth in the low single digits. That outlook dropped to "approximately flat" at the end of the first quarter.

On Wednesday, the forecast declined again, to an expectation of declines in the low single digits.

Valspar noted that the diminished sales outlook did not factor in the Quest Specialty Chemicals acquisition.

By segment, results for the second quarter were reported as follows.

Coatings

Net sales in the Coatings segment decreased 1 percent, to $615 million. Net sales in local currency increased 5 percent, with volumes up 3 percent.

Volume increased significantly in the General Industrial and the Coil product lines and declined slightly in the Packaging and Wood lines.

Coatings segment adjusted earnings before interest and taxes (EBIT) of $110 million (or 17.8 percent of net sales) increased by nine percent—reflecting, the company said, "benefits from productivity initiatives, cost/price and increased volume."

Paints

Net sales decreased 15 percent to $403 million for the quarter; in local currency, net sales and volumes each decreased 12 percent. Declines in North America overrode volume growth in Europe, Asia and Australia.

ValsparPicturePerfect
Valspar Corp.

Second-quarter net sales in Valspar's Paints segment decreased by 12 percent in local currency, driven by declines related to its Lowe's business in North America.

Valspar laid the losses to the Lowe's shift and to "difficult prior-year comparisons when the company launched several significant new products in the home improvement and hardware channels."

Adjusted EBIT of $47 million (11.7 percent of net sales) was down 17 percent from the prior year.

Quest Specialty Acquisition

The Quest Specialty acquisition will double the size of Valspar's Automotive Refinish business, the company said in an investor presentation. It will also enlarge the industrial products business.

Quest Automotive Products formulates, manufactures, and distributes paints, coatings systems, and accessories to professional refinishers under the brands Matrix, Prospray, and USC, primarily in North America and Europe.

Quest Industrial Products serves the professional and consumer markets with aerosol spray products and highly-specified coatings for industrial applications under the Patriot, Raabe and Precision Color brands, primarily in North America.

QuestAutomotive QuestIndustrial
Quest Specialty Chemicals

Valspar's acquisition of Quest Specialty Chemicals' $190 million performance coatings division will double the size of Valspar's automotive refinish business and enlarge its industrial-coatings portfolio.

"The acquisition strengthens Valspar's value proposition in automotive refinish," said Gary Hendrickson, Valspar chairman and Chief Executive Officer. "Our customers will benefit from expanded distribution of a portfolio of preferred brands they know and trust, a broader range of high-performance products, and a stronger service network."

'Solid'

Overall, Hendrickson said Valspar's second-quarter results "were in line with our expectations" and the first half of the fiscal year was "solid."

"EPS (as adjusted) grew four percent, despite the negative impact of currency translation and the expected volume decline in our Paints segment in North America,” said Hendrickson.

“We saw continued volume and profit growth from our Coatings segment, driven by new business wins and benefits from productivity and cost savings. In the Paints segment, volume and sales were up in local currency in all of our international regions.”

 

   

Tagged categories: Architectural coatings; Automotive coatings; Earnings reports; Paint and Coating Sales; Quest Specialty Chemicals; Sherwin-Williams; Valspar

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