Bill Seymour - VP, IR Gary Hendrickson - Chairman and CEO Jim Muehlbauer - EVP and Chief Financial and Administrative Officer

Kevin Hocevar - Northcoast Research Rob Koort - Goldman Sachs Ivan Marcuse - KeyBanc David Begleiter - Deutsche Bank Ghansham Panjabi - Robert W. Baird P. J. Juvekar - Citi Duffy Fischer - Barclays John McNulty - Credit Suisse Don Carson - Susquehanna Matt Grainger - Morgan Stanley Dmitry Silversteyn - Longbow Research Nils Wallin - CLSA Arun Viswanathan - RBC Capital Markets

Ladies and gentlemen, thank you for standing by, welcome to the Valspar Fiscal 2014 Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I'd now like to turn the conference over to your host, Vice President of Investor Relations, Mr. Bill Seymour. Please go ahead, sir.

Good morning, and welcome to our fiscal 2014 fourth 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 can be found in the Investor Relations section of our corporate Web site at valsparglobal.com. And finally, 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 GAAP numbers that we'll report in our Form 10-K. For GAAP to non-GAAP reconciliations of the reported to adjusted results and guidance, please refer to the supplemental schedules in this morning's news release. Before I hand over to Gary, I wanted to remind you that we're hosting an Analyst Day in New York on December 3rd. Please contact us if you need further information about this event. With that, I'll turn the call over to Gary.

Good morning, everyone, and thanks for joining us today. Today I'm going to provide highlights of our fourth quarter and full year performance. I'll also cover our outlook for 2015. Our strong fourth quarter capped off a record year of sales and earnings for Valspar. Net sales in the quarter increased to 11%, and adjusted EPS increased 42%. The Coatings segment continued its positive momentum with sales growth of 15%, and all product lines delivered increased volumes. Excluding acquisitions, coating sales were up 11%. In the Paints segment, sales increased in all regions, and we significantly increased EBIT. Highlighting the performance in paints was continued growth of the new Valspar Reserve premium paint, and strong growth in our international regions. Moving on to the full year, we grew sales 10% and EPS 23%. These record results continue to demonstrate the diversity and strength of our business portfolio. This excellent performance was driven by volume growth in the Coatings segment, continuing benefits from our new growth initiatives in paint, excellent performance from our international regions, including the successful integration of the Inver acquisition, benefits from new product introductions, and the positive impact of our productivity initiatives. Now, let me cover some segment-specific comment. For the year, our Coatings segment had very strong sales growth of 14% and adjusted EBIT growth of 19%. All product lines were up in sales and volumes for the year. Some highlights include the successful integration and positive performance of Inver, which gives us a solid foothold in the large industrial coatings market in Europe. We grew market share in packaging coatings, driven by our leading position in non-BPA coatings. And our coil and wood product lines benefited from improving end markets and new business wins. In our Paints segment, sales grew 7% and EBIT grew 11%. Highlighting the year were some significant product launches and new business wins including the highly successful launch of Valspar Reserve at Lowe's which won Lowe's Vendor Innovation of the Year award; the launch of Valspar paint in over 3200 Ace stores, and the launch of Valspar paint in over 300 B&Q stores in the U.K. In our international regions, our paints business had a very good year. Paints in China grew double-digits in 2014, as we continued our share growth in this key market. And our business in Australia experienced improving trends throughout the year. The fourth quarter was the fifth in a row of share gains for us in both the pro and DIY channels. In 2014, we continue to demonstrate our commitment to enhancing shareholder returns by increasing our dividend by 13% and buying back 5% of our stock, and this morning, we announced that our Board approved a 15% dividend increase for 2015, making it our 37th consecutive year of dividend growth. We also announced Board approval of a new $1.5 billion share repurchase authorization demonstrating our continued confidence in our business. Looking ahead to 2015, we expect another year of growth. In our Coatings segment, we expect relatively stable end markets and growth from business new initiatives. In the Paints segment, we expect that continued growth in China, Australia, and Europe will be offset by an adjustment to our product line offering at a customer in North America. We expect the revenue impact of this change to be in the range of $150 million to $180 million in fiscal 2015. This impact has been included in our 2015 guidance. Obviously given this headwind, we're making adjustments to our cost structure to mitigate the margin impact, and these adjustments are included in our earnings guidance. For some perspective on the situation, we won a lot of new paint business in North America over the years. Last year, driven by new business wins on the home improvement channel, Ace, and the independent channel, our revenue in North America was up double-digits. Business wins and losses are normal in the retail industry, as retailers continually adjust their product offerings. Fortunately over the years, we've won a lot more than we've lost. As to the future, our relationship with this customer remains excellent, and we expect to continue to grow our North America business from a reset base over the next few years. In summary, our 2014 results demonstrate the diversity and strength of our business portfolio. We have momentum, and we have exciting growth opportunities for this coming year. And with that, I'll turn it over to Jim to provide more details on the results and outlook.

Thanks, Gary, and good morning everyone. Gary has covered the key performance highlights for the year. I will focus my comments this morning on the drivers behind our fourth quarter performance and discuss our expectations for fiscal 2015. Starting first with our results in Q4; sales growth of 11% was led by volume gains in the both the Coatings and Paints segments. The increase in volume was the result of new business wins, core market growth, and from the addition of Inver. Our fourth quarter sales also included the benefit of a 53rd week that increased sales by an estimated 3.5%. Excluding acquisitions, our total sales in the quarter were up 9%. Sales in the Coatings segment increased 15%, and volumes increased in all major product lines. Excluding acquisitions, coating sales increased 11%. Within the Coatings segment, packaging sales and volumes were up double-digits, and all geographic regions performed very well. Growth was driven by market growth, share gains, and the success of our non-BPA products. General industrial product line sales and volumes also increased double-digits in the quarter. These results exclude the impact of the Inver acquisition. The increase in sales was primarily the result of new business wins in Asia, and improved results in Latin America. Coil product line sales were up double-digits, and volumes were up high single-digits in the quarter. We benefited from higher demand in the U.S. driven by improved non-residential construction trends and from new business in Europe and Asia. Rounding out our product lines in the Coatings segment, wood sales were flat, and volume was up low single-digits in the quarter. Moving on to the Paints segment, total sales increased 7% and volumes were up high single-digits. Our international paint regions had a very strong quarter with double-digit volume increases in China, Australia, and Europe. China growth was driven by increased points of distribution and market share gains across all channels. Growth in Australia was primarily driven by new store openings and new business at Masters. We also saw market share gains across all channels in Australia. In Europe, we saw continued growth from the rollout of Valspar branded paints to B&Q stores in the U.K. market. And finally, sales in North America increased low single-digits as we were up against double-digit sales growth last year, driven by the initial load-in of Valspar branded paints at Ace. Q4 sales in the home improvement channel increased high single-digits. Moving on to gross margin performance, we finished the quarter with total adjusted gross margin of 35.1%, an increase of approximately a 180 basis points over last year. This improvement was the largest increase of the year, and reflected growth from both the Coatings and Paints segments. The increase in gross margins was driven by leverage from higher sales, favorable price cost, and benefits from productivity initiatives. Shifting to expenses, Opex in the fourth quarter increased six basis points year-over-year to 20.9% of sales. Operating expense dollars increased 12% versus the previous year, and reflected an improvement over Q3, when expenses were up 20%. This improvement was the result of lower marketing and promotional spending on new growth initiatives in the Paints segment in the fourth quarter. In addition, we reached the one year anniversary of Inver. So these operating expenses are now in our base. Bringing it all together, consolidated adjusted EBIT increased 28%, and EBIT margins increased to 180 basis points, to finish at 14.2% in the fourth quarter. In the Coatings segment, adjusted fourth quarter EBIT of a 117 million increased 25% over the previous year, and was 16.9% of sales. The increase in EBIT was the result of increased volume, acquisitions, improved price costs, and productivity initiatives. In the Paints segment, EBIT of $70 million was up 41% from the prior year, and was 14.6% of sales. The increase in EBIT was the result of strong sales performance in all international regions, and modest sales growth in North America. We're beginning to see some of the benefits from the investment spending made earlier this year to support our new growth initiatives in paints. These benefits will continue to improve as we more fully leverage these investments with higher sales volumes in the future. With that overview of Q4 complete, I'd like to touch on a couple of items related to our full year fiscal 2014 performance before we discuss the outlook for next year. We finished this year with an effective annual tax rate of approximately 30%, which was 100 basis points lower than last year. The reduction was driven by our geographic mix of earnings from strong performance in China and Europe, and from benefits from tax credits. Our operating model continues to generate significant cash flow. This allows us to invest in growing the business and to enhance shareholder returns through dividends and share repurchases. Cash flow from operations excluding cash restructuring expenses finished the year at approximately $390 million. For context, this amount included some unique non-recurring uses of cash in the year, and the impact of a balance sheet reclassification, which has no impact on cash. Excluding these items, our adjusted cash flow from operations excluding restructuring was closer to 440 million, and increased approximately 7% on a comparable basis. Please note that our GAAP operating cash flow will not include the above items and will therefore be lower. Wrapping up the highlights for the year; after investing in CapEx to grow the business we paid $87 million in dividends representing a per share increase of 13%, and repurchased approximately 4.7 million shares of the company stock for a total investment of $349 million. With this as context on fiscal 2014, I'd like to move on to discuss our outlook for fiscal 2015. In fiscal 2015, we expect annual adjusted EPS in the range of $4.45 to $4.65. Within this guidance are the following assumptions. Total sales growth in the low single-digits, reflecting growth in our Coatings segment from stable end markets and new business wins. In the Paints segment, we expect continued growth in China, Australia, and Europe to be offset by the changes in North America that Gary discussed earlier. Even with this headwind, we expect to grow our operating earnings in 2015. Our operating model is strong, and remains positioned to deliver growth for the future. We're planning an effective annual tax of 31% to 32% in 2015, and CapEx of approximately $120 million. In addition to the above assumptions, I'd also like to highlight three other significant items that impact 2015, and are embedded in our guidance. As I mentioned earlier, we had a 53rd week in 2014, and consequently one less comparable week in 2015. This is approximately 1% headwind to sales and $0.04 to EPS in 2015. We've also assumed that FX will have a negative impact of approximately 3% to sales and $0.12 EPS in 2015. And finally, we're planning to take advantage of favorable credit market conditions, and issue new long-term debt during fiscal 2015. As a result, our guidance reflects approximately $75 million in annual interest expense, an increase of $10 million or $0.08 in EPS versus 2014. Proceeds from these issuances will be used to fund existing maturities of long-term debt, and to reduce our short-term borrowings. So summing all these three items, the lack of the 53rd week, FX, and increase in initial expense, the total impact to sales and EPS as outlined in our release today is a reduction of approximately 4% to sales growth and $0.24 to EPS in 2015. In closing, we delivered very strong performance in fiscal 2014, reflecting the breadth of our portfolio and leadership positions in coatings and paints. Moving into 2015, we remain focused on executing our winning strategies that have delivered superior returns for our shareholders. With that, we would like to open up the call for your questions.

Thank you. [Operator Instructions] Our first question will come from the line of Kevin Hocevar of Northcoast Research.

Hey, good morning, everybody. I was wondering if you could comment a little more on the North American product line that seemed to be a loss. Could you comment on if this was a certain product line, was it a price point, and could this lead to losses of other products with this customer in the future?

Yes. Good morning. Thanks, Kevin. It's Gary, and we've asked the question that's probably on everyone's mind. First, keep in mind that our customer hasn't publicly announced their retailing plan for 2015. And so, that limits what I can talk about today, but here's some additional information that might be helpful. First, while we are disappointed at losing some business, our relationship with this customer remains excellent. This is a partial reset of their alignment, of their line-up, something retailers do on a regular basis. With the strength of our relationship and the performance of our brand and products, we fully expect to grow again with this customer of the reset base of business. So the answer to your question about incremental losses beyond this is a no. Second, over the past several years, we've grown our global paints business significantly through the strength of the Valspar Huarun and Wattyl brands, new retail programs with many customers and through acquisitions. We're going to continue to do these things. Keep in mind, we've got a diversified portfolio of businesses that both Jim and I mentioned, both consumer and industrial, all of which are doing well as evidenced by the great year that we had, and the exceptional fourth quarter. So the breadth and the diversity of our overall business will support our revenue and earnings going forward, and I think the way to think about this, the way I think about this is the one-year step back in our plans to consistently deliver double-digit earnings growth, which I'd expect that we'd pick up again in '16.

Okay. And then in terms of raw materials, I'm wondering with the declines in oil prices that we're seeing, what you're seeing from a raw material standpoint, and if you think that this could be a tailwind for you guys in 2015?

Well, we're not seeing much, Kevin, because we really -- other than solvents and a couple of other products that we buy, our overall basket is -- it doesn't have a direct correlation with the price of oil, and supply and demand plays a larger part than the oil price. So we're seeing -- we don't expect to see significant inflation in 2015. We're looking for something that is flattish to potentially slightly inflationary again because of supply and demand issues more than the price of oil. So yes, we had a relatively benign raw material environment in 2014, and we're expecting a relatively benign raw material environment in '15.

Okay, great. And then just a final question; I wonder if you can give a little color around operating expenses, because I know you made some investments throughout 2014 to support these new business wins. So how should we think of operating expenses in 2015?

Hey, Kevin, it's Jim. You correctly point out that -- as we've been talking about the last several quarters, we've made some investments in growing in our business specifically in the Paints segment, related to the new business wins not only at Ace but B&Q. So as you saw on our fourth quarter results, just consistent with our plans as we came out of the paint season, our spending declined pretty significantly from Q3 to Q4. Looking forward into next year, those operating costs from those new businesses are in our base. So from a total company standpoint, we're going to have a lot less operating expense growth next year versus what we experienced in 2014, and it's probably going to track the growth in operating income next year should be a little bit less than our sales growth for the year.

Okay, great. Thank you very much.

Thank you. We'll go next to the line of Rob Koort with Goldman Sachs.

Thanks very much. As you might guess, Gary, more questions on the U.S. business loss. How far how do you know these things and what can you guys do to offset it? And it sounds like the scale of it is pretty substantial, about as big as the Ace business you're brining on. So, is there still scope for some fixed cost leverage and margin expansion in that segment or as with your earnings growth sort of differing that double digits for year, does this differ your chance to move margins up and paint in 2015?

Okay, Bob. You asked as you normally do you asked about four different questions in one go. So I've taken notes and I may not hit them all. So we'll come back if I miss one, okay? So, you know about these things, you know about -- we know about this, it's fairly recent news, I'd just say that retailers are constantly changing their retail line-up through process called to line review that happens on a regular basis. There are other changes that take place during -- for us what would be the painting season, but in this particular case, it's relatively recent news for us. As I said, our customer hasn't announced their retailing plans for '15. So I'm not going to -- I'm not at liberty to talk in detail about what's going on. I was going to say as I answered Kevin's question, this is a partial reset of their line-up and something that retailers do on a regular basis. You'll recall that Valspar has been the winner in some of these partial resets of retailer's line-ups in the past. In this case, obviously we're not the winner. Yes, the number sounds like a big number, but I'd say this, it's a manageable number, and the proof point for that is the confidence that we have in our guidance for next year. We're going to grow our operating income, and we're going to grow our EPS next year. Part of that will be about cost, and cost that we have to take out of the business to deal with this, and part of that will be continued growth in that segment. Both products that are not impacted by this partial change at the retailer in question, growth in Australia, growth in China, and growth in our business in Europe. So again -- I'm sorry, I can't give you a lot as much detail as you like on it, because we really have to wait until our customer discloses what they're doing with their retailing plan in 2015. But I'd like you to think about it as a manageable situation for us.

And just to clarify, you talked about EBIT growth at the corporate level or at the paint segment level?

As we always do, Bob, we try not to talk about segment level EBIT. So I'm talking about overall company EBIT.

And can you tell me what you're appetite is for the pace of your repurchase that you might do, I mean, the scale of it is pretty substantial but it's open ended. So, how shall we expect last few years maybe 5% or 6% net reduction in share count? Is that a reasonable expectation going forward or do you think it will be a little more subdued than that?

Yes, Bob, it's Jim. We've not changed our view of share repurchases going forward. So what we've announced today really is a continued reflection of the past that we've been on over the last four or five years in adding shareholder value through share repurchases. So you shouldn't read into that a stepped up pace from share repurchase activity, and our publicly-stated goal is to reduce share as by 2% a year. As you pointed out, we've done a little better than that in the last several years. We'll do better than that next year, but I think at the high-end of the range you have here, that's a little bit more than we're currently planning for next year, so ordinary course of business repurchase authorization over the next few years.

Got it. Thanks very much.

Hey, the second thing I wanted just to clean up from Kevin's conversation, I believe I've mistakenly said that the growth in operating income was going to be less than our sales growth. What I intended to say, that for 2015, we expect to grow operating expenses less than our sales growth during the year.

Thank you. We'll go next to the line of Ivan Marcuse with KeyBanc Capital Markets.

Hi, thanks for taking my questions. Real quick on the packaging coating, sort of your outlook for growth and lookout for 2015; do you expect that to continue to grow or do you expect that momentum to increase with the non-BPA continue to take hold the sort of your view there?

Yes. Good morning, Ivan, it's Gary. Yes, our packaging product line had a great year in 2014. We're fortunate that with the exception of the North America market, we're seeing market growth in all of the regions in the world, and we've got our fair share of that market growth. Our target for this business has been for 20 years that I have been involved with packaging coating at Valspar to grow at least twice the market rate, and we feel like we did that this year. We did that through good execution as the leader. We have a lot of levels that we can pull in packaging coatings. We did that through good execution and the long relationships that we have with our customers delivering new technology and some pretty significant wins with our new non-BPA technology both in North America and in Europe. So, our outlook for 2015 is to continue to grow, and we'd be targeting as we always do growth of that lately two times market growth.

Great, but you're not expecting this is some sort of non-BPA or some reason -- give a little bit of a boost beyond what typical market growth is?

Yes, this year. They did in '14, and I'd expect that we'll see some tailwinds from that again in '15, Ivan.

Great, thanks for taking my question.

You're welcome.

.: Q – David Begleiter: Thank you. Hey, Gary, just on gross margins, I know you were talking about benign raw materials environment in next year, but just go back to 2009 when raw materials dropped a lot, you saw substantial expansion in your gross margins and you're trying to be conservative about it. Why wouldn't we see at least gross margin expansion next year given that what we seen already on the oil side?

Yes, it's just hard to predict what beyond a quarter, David. So it's hard for us to predict what raw material cost will do. We look at the same macro data that you do and as I said to Kevin earlier supply and demand has a much larger role in our overall basket than the price of any particular commodity. So that's why we're remodeling in our guidance for the year relatively benign environment. Keep in mind too that if you look at our guidance for next year, you think about our gross margin, we're going to have an impact of this North America situation that we talked about, and that will be an offset to what might have been a bit more gross margin expansion than anyone would have expected. Q – David Begleiter: Fair enough. I just find the increase in debt. You're going to increase your actually amount of debt next year or we're not giving some pay-off of existing short term. A – Jim Muehlbauer: Hey, David, it's Jim. By the year end next year, it will be up a little bit. In the near term, what we're essentially going to do is term out some of the commercial paper, what we're using today to manage the business. As you know we're using a large chunk of our annual cash flow after CapEx to repurchase the company's shares. Obviously that's a long-term commitment to the growing shareholder value. We want to match that with the favorable long-term credit environment that we see right now on the loan interest rates for the future. We've been out in the market about every two years with the debt offering, so this is just ordinary course of business. Q – David Begleiter: Thank you very much. A – Jim Muehlbauer: Thanks, David.

Thank you. We'll go next to the line of Ghansham Panjabi with Robert W. Baird.

Hey, guys, good morning. Happy thanksgiving week.

Same to you.

Yes, thanks. Just on the quarterly earnings distribution for '15, obviously lot of moving pieces and did you call that the extra week for 4Q of next year, but 2014 also had a lot of moving parts with the Ace load-in and the SG&A movement around et cetera. So anything we should keep in mind, Jim as we kind of think through the quarterly distribution for the year? A – Jim Muehlbauer: First, congratulations on having an excellent memory, because you correctly pointed out a number of the drivers we'll be up against next year. One of the benefits of having a growing business is that we have got the opportunity to invest in new business, add significant amounts of volume that results in load-in patterns with retailers. If we look into next year, you're correct, Ghansham, that we are going to anniversary a lot of those activities. We're going to have pressure on volumes in the first half of the year in our Paints segment, because we were loading in the branded Valspar Paint at Ace during the first half of the year. So that's going to put some pressure on the top line. You'll also recall that we had the highest level of EBIT performance in Q1 of last year in the Paints segment, because we really hadn't matched that volume with the investment spending in promotional and marketing support that happens during paint season. So we're looking at the growth for next year to be more focused in the back half of year from the front half of the year, and Q2 is probably going to be one of our bigger challenges in total, just given the volume load-ins we had in advance for paint season in both the --primarily the North American business. As we get into the back half of the year, we'll see the roll over benefits of the initiatives that we have both in B&Q and Ace and we'll continue to see further expansion from the strong performance on our coatings businesses.

Okay that's helpful. And just to clarify your 2Q -- for your fiscal year 2Q is when you'll see the impact –- will start seeing the impacts from the market shares, correct? A – Jim Muehlbauer: Yes, I think we'll see a little bit potentially at the mid end of Q1 here, but most of that will start in Q2.

Okay. And then switching to packaging, if you could just give us some feedback on your technology on non-BPA coating the customers are sharing relative to some of the other alternatives that would be helpful too, thanks. A – Jim Muehlbauer: Sorry, I don't hear you. Could you pass that question again, Ghansham?

Yes, just on packaging, just your feedbacks from customers on your technology for non-BPA coating particularly in the food can side versus some of the other alternatives that are out there? A – Jim Muehlbauer: I think our customers would say that we're leading.

Okay, thanks.

Thank you. We go next to the line of P. J. Juvekar with Citi. Please go ahead. P. J. Juvekar: Yes, hi good morning. China seems to be slowing and Australia is heavily depended on China. But you're quite bullish on those two countries given that you already gaining share there. so can you talk about competitive landscape in those two countries in architectural paints that is allowed you to gain share?

Yes, P. J. It's Gary. First, I'll talk about Australia first. We've owned Wattyl for several years now. And really for the first three years, we were focused on fixing what was fundamentally a broken business. And it was broken in many different ways; operationally, cost-wise, relationships with customers weren't good, distribution was not right, there were some product issues. We had lots and lots of problems. We fixed those problems now. And for the last five quarters, we've been taking share, and this is independent third-party data from the Australian Paint Manufacturing Federation that says that our Wattyl team has been taking share in both DIY and the pro. So we expect in Australia that trend will continue. We also believe that at a minimum, the Australian housing market has bottomed out and is starting to improve. Their data points would suggest that the market is improving somewhat. We have the ability to grow our business now because of the changes that we've made and the very positive improvement that we've made both in our business model and our team there. We feel like we have the opportunity to grow into that market. At retail, in particular, our success with Masters and the partnership we've with Masters has been fabulous. I can't quote the exact number, but the vast majority of the paint that's sold in a Master store is the Valspar brand or one of the Wattyl brand, and Masters will continue to build out their stores. We'll have the benefit of the stores that were set halfway through '14 carrying over into '15. So we expect to be growing in the retail side, in the independent hardware channel, excuse me, in the big box channel. And in the independent hardware channel, which is the third channel in Australia, we've had some market share wins in '14 that we're carrying into '15. So, our competitive position in the Australian market is very strong, and as I said, we believe that the housing market is recovering somewhat. In China, it's true that the growth rate in China if you believe 7.5 or so GDP growth, it's lower than it used to be, but it's still 7.5% GDP growth. And recently the Chinese government has reinitiated their support for the housing market in China. This is a potentially large change for us. For the last four years at least the China government has not been supporting housing. This would be the first year that our team has the tailwinds of a China government in a long time that has tailwinds of the China government that's supporting the housing market. We think the macro in China is good, but we've grown roughly double-digits for the last four years or so, even in an environment where the housing market wasn't in a great shape, and we've done that through increasing our point of distribution with our exclusive retail. I think you know that we opened up nonexclusive distribution. We have something like, Bill, what's the number, 4000 to 5000 points of distribution, that we didn't have a few years ago for our affordable housing products that go through nonexclusive distribution. And in the project channel, which is the basically the direct sale to big housing projects, we've gone from a very small base to a reasonable sized business in the last few years. So in all channels in the Chinese market we're having success as well, and we believe that the housing market is going to be supported by the government for a while. So, probably a longer answer than you wanted, but you asked for it, P. J. P. J. Juvekar: Thank you. I appreciate that. And just one quick question on your U.S. business that you lost; it seems that your customer gives you business for a full year and for next couple of years it gives business to your competitor to keep everybody at a balanced and fair. Is that the right way to think about it?

I don't think that's the driver. I mean, retailers are always trying new things. I mean, they've -- consumer tastes are changing -- are constantly changing, and retailers are constantly trying new things to adapt to changing consumer taste, and they're trying new things to bring more customers into the store. And I think that's the real basis for which for the retailer making a change in the product line. P. J. Juvekar: Okay, thank you.

You're welcome.

Thank you. We'll next go to the line of Duffy Fischer with Barclays.

Yes. Good morning, guys. If you look at the sales in the paint store, what kind of volumes you're expecting ex the loss of this one piece of business next year in your guidance?

Yes, Duffy, it's Jim. We're not going to break out the detail volumes by the channels in our business next year as we said. This is going to put some pressure on our growth trajectory in paints in total next year, primarily driven by the North America business. We're going to be able to offset some of that pressure, with the growth that Gary described in Australia, China and certainly does continue to roll out as B&Q. But, yes, we're not going to get into the detail around the volumes in the North American channel.

But would -- I mean, would North American volumes and general store continue to grow ex this one piece of business that you lost, I mean, from a volume standpoint. Is that fair to assume?

Yes. That's kind of the -- Duffy, that's the point I made earlier when I was speaking with Kevin about a reset base, I think about this as a reset base. So we lose some business that we set the base, and we expect that all of the other products around that lost product like at this retailer will grow -- we expect that will grow eight volumes next year. And we expect it will grow volumes with the other 5000 or so independent retailers that -- the small retailers that we do business with.

Okay, great. And the two issues that are a little bit of a hit issue, obviously the loss of that piece of a business and then the interest rates step up, how should we think about the hangover from those two things as we get into '16. It feels like these will start to roll in probably in near Q2, so maybe we have one quarter of annualization [ph] when we get to 2016. Is that the right way to think about both of those?

Yes. I think that's right. I think a vast majority of the business change in North America will be this year while this little tail on in Q1 next year, and same as through for the step up in the interest expense.

Okay, great. And then just a last one on the BQ business, you mentioned you are in 300 stores there. I mean, just give us a rundown how is that going both from a penetration standpoint and then from kind of an operations profitability standpoint relative to your original expectations?

Okay. Well, it's -- we're a little bit slower in rolling the program out than we originally thought and that's because these are large format stores at B&Q are more complex to reset than both parties thought. But we expect to have all of the stores is that at the end -- by the end of this year, it'll be 350 stores. And this was a deluded program last year; it will be an accretive program this year. What changes this year is that after we get all 350 stores set, we turn on marketing. So that will be more expense in the business, in 2015. So we'll be selling though our paint at 350 stores and so we have the gross margin dollars to support the expense. So the business starts to look like a normal business and 2015 up here's another way to say that. And you asked about customer acceptance or how is it performing. This is a tinted program. We essentially brought in the same type of a program that we use with retail. Retailers in North America, where consumers have a lot more color choice and retailers carry a lot less inventory because we tint our products up of base colors. And so we set a goal and we're at the point now we're at the tinting processes within that store, is about two racks what it formally was in the stores that are set. And again, that's before we turned on any marketing, any promotion. So, we expect that the program I think our retail partner believes that the program is going to be very successful and hit all the metrics or receive the metrics that we set out in the beginning.

Great. Thanks, fellas.

You're welcome.

We'll go next to the line of John McNulty at Credit Suisse.

Yes. Good morning. Thanks for taking my question. So, in the coating segment, if I recall ex acquisitions, you saw a 11% sales growth in and kind of high single-digit volume growth. Should we assume that the rest of that is price mix around the packaging business or are there other parts that are helping to carry some of that weight as well?

Yes, John, it's Jim. Most of that is volume. Price mix, as Gary talked about before is been relatively about benign for us. We'd certainly done better given the mix shift a little bit more heavy packaging, but a vast majority of the volume improvement across each of the coatings businesses.

Okay.

Someone asked me this question last call. All of the businesses that we have in our coating segment, our all the product lines are very profitable. Our profitable product lines are to at this point in time. Some products within those product lines are more profitable in the overall average and that's where we get out mix benefit, it's not necessarily we're selling more of one product line or another but it's the mix within the product line there that can be helpful and that was the case in this quarter.

Okay, fair enough. And then it does sound like a lot of the volume growth came from some wins on the BPA free coating side. Where there any other big pockets where volumes were noticeably higher than kind of the industry growth rates or growth rates that you're servicing that we should be thinking about?

All are packaging, the packaging growth rate in general was higher than the industry. It was at least two ex the industry growth rate. Everywhere with the exception of Asia where I think we grew probably more or less at the market growth rate for some unique challenges that we had this year, but we still grew the business double-digits and I think next year will be even better, but it was just solid growth across virtually all the product lines and all of the segments within each of those product lines. It was just a good quarter all around.

Okay, fair enough. And then just with regard to the North American paint market, would you say the competitive environment has changed over the past few years or is it basically kind of the same?

Well, we -- I mean, the industry structure has obviously changed with Axel no longer in the picture. So that's been a significant change. I wouldn't -- beyond that I wouldn't say that it's changed significantly, John.

Okay. So it's not that it's more aggressive of a less aggressive that part seems like it's relatively stable?

Yes.

Okay. Thanks very much for the time.

We'll go next to the line of Don Carson with Susquehanna. Please go ahead.

Yes. You talked earlier about B&Q but I wanted to ask you question on your other retail growth initiatives, Lowe's, Pro, and Ace first off. I assume Lowe's Pro is still a program you'll have next year, that's not the one you lost, but I know the past you talked about that being a $125 million opportunity, Ace being a 150 million. So do you think you'll hit that run rate in 2015 and in what incremental accretions should we expect from those initiatives next year?

I think we'll be at our run rate at Ace. The run rate that we said would be about a $150 million in 2015, we will be at that run rate and that will be more accretive than the year we had a partial year of dilution at Ace in '14, Don, so the full year next year, we'll be accretive at Ace. And our business -- Pro business that Lowe's grew in the year, and I expect that it will grow next year.

Okay. And then in terms of your mix that sounds like paints that you must have lost a high-priced business because you're talking about revenue, I think being up more or up less rather than volume once again next year. Is that -- am I interpreting that correctly?

Yes, I'm not going to say it, Don. That's too specific. I'm just going to stick with my language, which is at least my customer would expect two years which is to say that it's a partial reset of your line-up.

All right, okay. Thank you.

Thanks, Don.

We go next to the line of Vincent Andrews with Morgan Stanley.

Hi, this is Matt Grainger on behalf of Vincent. I was wondering if you could speak more to what you're seeing on the ground in Europe and the drivers of differentiation there between your success and the broader macro environment. A – Gary Hendrickson: Sorry, Matt, I missed your -- I was taking the notes and I missed your name. It's Gary, sorry. So our business in Europe, just to make sure that everyone is clear what I'd think about it. It's a packaging business and an industrial business. A large very successful packaging business where we feel like we're differentiating particularly on non-BPA products and our Europe packaging business last year had a fantastic year. The other parts of our businesses our industrial business which is a combination of Inver, the business that we acquired in 2013, and our legacy business which is a general industrial and coil business. We integrated Inver last year. We optimized the supply chain. We organized our sales force. We did a lot of good things and complicated things. And in the midst of all that, the leadership there grew the business and made the business more profitable. So we feel like we're very well-positioned in Europe market now in packaging and industrial. And the third part of our business is B&Q, which we talked about with previous callers.

Great. Thanks, folks. I'll leave it there. A – Gary Hendrickson: Thanks.

We go next to the line of Dmitry Silversteyn with Longbow Research. Please go ahead.

Good morning, guys. Couple of questions if I may; first of all, your general industrial was up double-digits in the quarter which is quite strong and probably little bit stronger than the market overall, especially from what I'm understanding is the Ag business continues to drag in terms of capital equipment and probably will continue to do so in 2015. So how do you look at your general industrial business in 2015 in terms of our deltas in Ag getting easier to overcome with the growth in another general industrial businesses, or is there something specific sort of beyond the Inver or maybe the Inver brought you that allows you to grow faster than the market? A – Gary Hendrickson: Dmitry, now we had a rally strong year and a really strong quarter in China. That was the region of our general industrial business that grew the most and influenced the overall product lien results. Europe was good, North America, I wouldn't say that we probably grew in line with the market. Europe, I think we probably grew a little bit faster than the market. So you take those three factors together -- and Latin America is a small business for us. So U.S. at the market, Europe grew faster than the market, and Asia, a phenomenal quarter that we got the double-digits.

What was the phenomenal -- I mean that's my question I guess. Did we get through sort of the worst of the impact of the drivers that cause your 2013 to be a down year in terms of general industrial and the Ag and mining equipment sales? Is the anniversarying event or the improvement in that market, what's behind this strong result? A – Gary Hendrickson: We've had a very successful few years, Dmitry expanding our penetration into the heavy equipment market in China. And we're doing our bulk of business, a number of customers that we do business with in that market today is much larger than it was a couple of years ago. Many of the local players in the China market are now customers of Valspar. I wouldn't call a rebound in the Ag and construction market anywhere. Some of the plants that we weren't doing business are the multinationals -- customers that we have been not running their plants in 2013; we're running plants in 2014. But there are pretty reduced rates. It felt kind of like an inventory fill rather than you just topping the inventory rather than any significant rebound. So now the results in general and industrial, keep in mind, in general and industrial we have in China we have Ag and construction, we have pipe and rebar and we have our container business, and remember that we started at the Maersk container line last quarter, sorry, two quarters ago and our third quarter, and that line is running more less at operational rates now. So we got to benefit from that as well.

That's helpful, Gary. Thanks. And then one follow-up question on the Australian business, you described sort of the efforts that went into fixing Wattyl, I think at one time this was like a free percent operating margin which you got up to about 6% and then you started seeing volume growth in the past quarters and it got up into double digit range. What's your expectation for 2015 margin for that business as the growth continues? Can it approach the low timid teams you're seeing in your North American paint business? A – Gary Hendrickson: I think that might be one year early. That's what we're expecting for 2106, Dmitry. Next year we're going to be close to consistently double digit EBIT margin rates. Thanks.

Got it. I mean in a little bit of growth almost doubling your margins next year is still a pretty strong earnings driver from the way I look at it, at least. A – Gary Hendrickson: Well, we're not calling a doubling of earnings in Australia. We finished a little bit higher than you think I think you think we did this year.

Okay, all right. Okay, thank you.

We go to the line of Nils Wallin with CLSA. Please go ahead. Q – Nils Wallin: Good morning, and thanks for taking my question. Just curious how much the Australia and/or the China market can grow before you need to make further investments to fulfill that market need? A – Gary Hendrickson: Nils, we worked fine in Australia. They can roll a lot before we -- I don't know the exact number, but we have plenty of capacity in Australia. In China, you may recall that we announced 18 months or so ago that we're building a new plant in Tianjin, that plant is still under construction and that's to support the future growth of our consumer business than in some of our industrial businesses. So it will be another couple of years at least before we need another plant in China. Q – Nils Wallin: Understood. I know that obviously it's still fairly early on the B&Q roll out and seeing how that goes but certainly there is a lot of opportunity there into the Kingfisher store. So curious whether its months or years before there might be a decision to expand into the Kingfisher as well? A – Gary Hendrickson: Well, it's not our decision to make. So I really can't call that one. We are focused now this year is to execute extremely well at the end Q. and we think if we do that there would be other retailers possibly Kingfisher that would like us to do something with them in Europe. Q – Nils Wallin: Understood. And then just finally we haven't spoken other than Inver, when lapping that, but not a lot of M&A recently and some of one of your competitors has spoken publicly of seeing some degree of acceleration. I'm curious what you see in terms of pipeline and where you're most excited whether in coatings or in paints? A – Gary Hendrickson: I don't know that necessarily that -- we'd say there has been an acceleration. We're talking to a lot of people and we will continue to talk to a lot of people. I'd say it's probably more there lot more -- there's a lot more fragmentation in the industrial markets than there is in paint market. So I'd suggest that you'd see more consolidation in that industrial market. We did do one a couple of weeks ago. You may not record it. That was a small one that we have acquired a company in Canada that's in pipe coating industry, a very well-respected 30-40 year old company with global approval for the water pipe and water infrastructure market, which is the tuck in for our pipe coating business that we think is going to be very good for our sales and our customers. Q – Nils Wallin: Understood. Thanks very much for the color.

Operator, this will be the last question, and then Gary will have some closing comments afterwards.

Thank you. Our last question comes from the line of Arun Viswanathan with RBC Capital Markets.

Thanks, guys. I guess coatings were fast, it looks like you really broader margins there. What's going to drive further margin expansion in that business operating at historical peaks?

Arun, it's going to be that growth, and the operating leverage, and other benefits that we get from growth. So as I said on this call and several other occasions, if we can maintain these margin rates, which I believe we can, and continue growing the business, then we're going to -- that growth is going to be very accretive to Valspar's bottom line.

Okay. And then just to clarify, what are some of the -- couple, maybe one or two assumptions that you have that will push you to the bottom end or the upper end of your guidance range for next year? Thanks.

Yes. Arun, it's Jim. Clearly without getting into detail, the eventual sales volume for next year is obviously the biggest driver in how we'd perform overall, plus what we may or may not see in the raw material environment next year, up, flat, down, that's going to be probably the second biggest driver of the mix. Apart from that, we obviously have the most control over. These are variable spending. And we as always toggle that as best we can with the long-term goal of continuing to drive value for our shareholders. So I really say sales trends from a macro standpoint and commodities environment being the two biggest drivers in our range.

Okay, thanks.

Arun, thanks for setting up my closing comment. Let me sum up the call by explaining why we're confident about our 2015 guidance. First, our strong momentum in 2014 will continue into 2015. The U.S. economy is improving, and that bodes well for our general, industrial, and coil coatings. And improving U.S. housing markets is good for all of our paint business, and all of our retail customers in the U.S. and for our wood coatings product line. Additionally, as we talked about on the call, the sectors we serve in Australia and China housing markets are growing. So, in an improving environment we have a full fiscal year of Valspar paints at Ace, B&Q, and Masters, and at Lowe's Valspar Reserve has been an outstanding success, and we'll continue to grow next year and beyond. Our coatings business also has good momentum, particularly in Europe and Asia as I mentioned with Dmitry, and the shift to non-BPA coatings in Europe and North America is a plus for our packaging product line. Thus we expect to continue to take market share. On the cost side of the ledger, we expect carryover benefits from the productivity programs in 2014. And as I mentioned earlier, we'll be implementing new productivity and cost reduction programs in 2015. And we'll have fewer shares outstanding as more shares are purchased as part of our buyback authorization. So I'll conclude by saying that Valspar is in great shape, and all of our employees are looking forward to another year of growth in 2015. Thanks for your time today. I hope you have a happy thanksgiving, and we look forward to seeing you next week in New York at our Investor Day.

Thank you. And ladies and gentlemen, today's conference will be available for replay after 12:30 pm Central Time today running through December 9th at midnight. You may access the AT&T replay system by dialing 1 (800) 475-6701 and entering the access code of 341397. International participants may dial (320) 365-3844. Those numbers again are 1 (800) 475-6701 and (320) 365-3844 with the access code of 341397. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.