Valspar brushes off recovery
Valspar, one of the world's biggest makers of home paints, has warned its US investors that an expected recovery this year in the Australian residential housing market had failed to materialise, with the economically vital property sector getting worse.
Such is the malaise across the Australian housing market, despite a historically low interest rate environment and relatively limited unemployment, that a sharp and prolonged downturn in Valspar's business had stained its balance sheet and forced the company to downgrade its group earnings.
"We expected some recovery in the residential housing market in Australia. That has not happened. In fact, it's possible that that market has gotten worse as the year has progressed," said Valspar president and chief executive Gary Hendrickson.
"With results for the third quarter short of expectations, we have lowered our expected sales growth rate and earnings outlook for the year to account for a near-term continuation of these trends."
Valspar, which in 2010 bought leading Australian paint brand Wattyl for $142 million, is also still recovering from a damaging decision by leading hardware chain Bunnings two years ago to delist the brand in favour of rivals Dulux and Taubmans.
That decision, speculated to be in part driven by Valspar's close relationship with Bunnings' rival Masters, which is owned by Woolworths, has cost the US paint maker more than $30 million in lost turnover.
Addressing investors and analysts last week on third-quarter results, Mr Hendrickson said its Australian paint business led by its Wattyl brand continued to be negatively affected by what he described as a "very soft residential housing market".
"Though we did see some improvement in our stores, business in the quarter was not of the pace we had originally anticipated."
Valspar chief financial officer James Muehlbauer mirrored the grim assessment of the Australian residential housing market, saying the federal government was doing everything it could to resuscitate the sector but that recent paint volumes data showed no uplift.
"The housing market is still bad," Mr Muehlbauer said. "We get Australian Paint Manufacturers' Federation data, which is the actual volumes of paint that are sold by all the paint manufacturers in the Australian market, and that data last quarter said that trade volumes - that's professional painters' volumes - were down 8 per cent to 9 per cent on the previous year.
"So hopefully, we're at the bottom and some of the moves that the government is making to stimulate home ownership will take hold, but we can't count on that."
Paint sales are a good indicator of the strength of the residential property sector, especially new housing construction, and also give an insight into the current mood of home owners as purchasing paint is one of the cheapest forms of updating or renovating a room.
Recent figures from the Bureau of Statistics have shone a light on the fragile state of the housing sector and particular weakness in the multi-unit segment of the market, with building approvals recently declining by 15 per cent in June to a level that is 36 per cent lower than 12 months earlier.
The long-term average for housing starts in Australia is 155,000 but recent trends show starts of closer to 140,000.