PPG Industries Inc (PPG) 2001 Q1 法說會逐字稿

This is Doug Atkinson, Director of Investor Relations for PPG Industries. Welcome to PPG's First Quarter, 2001 Briefing featuring comments by Senior Vice President and Chief Financial Officer, William Hernandez. These comments reflect the financial information released on Thursday, April 19, 2001. Visuals supporting this briefing can be accessed through the PPG website at www.ppg.com. Parts of the following presentation are forward-looking statements reflecting the company's view about future events and their potential effect on financial performance. These matters involve risks and uncertainties that could affect the company's operations and financial results as discussed in PPG's filings with the SEC. And now, PPG's Senior Vice President and Chief Financial Officer, William Hernandez...

This is Bill Hernandez. In the next few minutes, I would like to review our first quarter performance for 2001. I will also comment on some of the trends underlying our performance.

In summary, earnings per share excluding one-time charges were $0.75 in the quarter compared to $0.99 a year ago. A non-recurring event in the first quarter of this year was the $101 million pretax restructuring charge described in our press release. A year ago, we had a $339 million pretax writeoff of an equity investment. Referring to the slide "Issues in 2001", these factors are largely a continuation of what we have seen since late last summer. These issues that affect us, as well as many other global manufacturing companies, include a relatively strong US dollar and pound sterling versus the Euro, and high natural gas and related energy and transportation costs.

The majority of our natural gas usage is to generate electricity, to produce chlorine and caustic. Most of the rest is used to produce glass, fiberglass, and silica products. In the first quarter, the increase in natural gas reduced our operating earnings about $40 million versus the last year and the continuation of a recession - or industrial recession, or severe slowdown, whatever it is judged to have been when it becomes a matter of history.

In the second half of last year, we saw weakening demand in several North American markets, primarily those related to new automotive and other consumer durable goods. We also saw inventory reductions and production curtailments by some of our commodity chemical customers. As 2001 has progressed, we have seen that we can spread to some Asian economies, which are more reliant on exports to the United States than are the European economies. And the weakening technology sector, telecommunications, and computers has been widely reported. The slide showing market indicators depicts this accelerating weakness since the fourth quarter of last year.

North American vehicle production was down a sharp 14%: production was down 15% for Ford, 18% for General Motors, and 27% for Daimler-Chrysler, Strand-glass production was up 5% in the quarter. As vehicles in North America were off only 6%, inventories have been reduced by about 9% for cars and 2% for trucks. Inventories on a day-sales basis improved through the quarter and are now at 59 days for cars and 72 days for trucks. Vehicle sales, while down from last year, were stronger than expected by many forecasters. Western European car production declined a modest 1% and sales were down by only 4%, about a percentage point better than last year's fourth quarter. When sales are adjusted for the number of sales days, the final month of this quarter showed a slight gain after a 9% drop in February. The strongest sales in the quarter were seen in France, with a 5% growth; the weakest were in Germany, where sales fell by 6%. The low production figures in the United Kingdom are the result of the significant shifts of production to the continent.

Back in the United States, housing glass sales were off an estimated 5%, still modest compared to prior recession-like periods. You can see the degree of slowing in the overall economy, again, especially in the United States. The slide "Outside Sales Trends, Total PPG" shows a continued large drop in volume. The decline was about 3.5%, which follows a decline of about 4% in the final quarter of 2000. The weakest volume was in North American automotive OEM glass and coatings, industrial coatings, and commodity chemicals. Each of these fell further than they did in last year's fourth quarter. Overall, North American volume was off 4% and European volume fell 1%. Pricing contributed 2% and was positive in each business segment. Acquisitions added about 2%, or $35 million. Finally, currencies attracted about $50 million in sales, or 3%, and reduced operating earnings by less than $5 million.

On the slide "Financial Highlights", restructuring was the significant event and was explained in detail in the press release. The tax rate on ongoing operations was 36%, which we current project for the year. The effective rate in the first quarter was 42%, which reflects the geographic distribution of certain restructuring charges. Restructuring charges carry a tax rate of 30%. Capital spending appears to be on track, for less that $400 million, probably closer to $350 million than $400 million.

Because of PPG's seasonal pattern of sales, the first quarter is typically a period of slow cash generation. As for the use of cash, after _____ 00:07:41 funding of operations, and payment of increased dividends, our priority this year is primarily towards debt reduction rather than share repurchases. The numbers of shares outstanding at the end of the quarter was 169 million on a diluted basis.

Speaking of restructuring charges, those of you who have followed us over the years know that we have taken several as we have changed our portfolio. As this graph shows, these are truly restructuring charges largely associated with acquisitions or divestitures. Restructuring charges that we have taken in the current quarter are charges that not only are enabled by the acquisitions we have made but also that were required by the dramatic worsening of the markets in which we serve. We first called attention to this need and began working on this process last fall.

Turning to the slide "Trends in Sales for Coatings", sales dropped as volume declined about 3%, similar to the fourth quarter of last year. Price was slightly positive, and the Euro remained weak. OEM volumes were off primarily in North America, which was down 15%. European volume was flat. Refinish volumes were up about 3% in North America and off 4% in European countries. Elsewhere, volume was slightly positive. Industrial coatings volumes were also down in North America and slightly positive in Europe. Packaging volumes were down as well. Aerospace volumes were strong across all segments of the business - OEM coatings, Aftermarket, ceilings, and transparencies. Architectural coatings is off to a strong start, led by growth of the Home Centers, Manard's and Lowe's. Company-owned stores were also up somewhat. Independent dealers continued to show weak volumes.

Sales trends in glass reflect the sharp decline in automotive production in North America, which in part were offset by exports. Auto replacement glass, again, benefited from PPG AutoGlass, our alliance with Apogee. Flat glass had modest gains in volume, and fuel surcharges helped offset the rise in natural gas costs. Our fiberglass business began to show greater decline in volumes, accelerating in electronics, which is experiencing a drop in the printed wiring board market.

As for chemicals, in commodity chemicals the big issues continued to be low-capacity utilization as chlorine consumers in the PVC chain are still cut back, as well as high and still-rising natural gas prices. With chlorine production curtailed, the company-product, caustic soda, continues to be tight, and while chlorine prices have fallen, caustic prices have been rising. On balance, the combination of chlorine and caustic is rising moderately. Specialty chemical volumes were off 1% as silica volumes declined due to automotive-related products, primarily tires.

In conclusion, as we entered the year it appeared that weakness in the US economy, combined with the sharply higher natural gas prices and high inventories among some of our key customers, created a very difficult environment. Today, as we look toward the rest of the year, natural gas is still an issue. Prices are down from their peak of about $10 per million BTU in January, but are running at about $5.50, or up $2.50 from a year ago. That $2.50, over the course of the year, would subtract about $150 million from operating earnings, or about $0.55 a share. Key customers, such as car manufacturers and PVC producers, have reduced inventories. Whether they are lean enough to support meaningful production gains remains uncertain, because gains will be achieved only if future consumer demand expands. Expanding demand, however, is not guaranteed. We suspect the negative impact of the still-growing number of layoffs, as well as apprehension resulting from the decline in stock market related wealth has yet to be felt.

Overseas, signs of broad-based weakness in European economies have yet to emerge. Yet there are signs of slowing in developing Asian economies, partly related to reduced exports to a weaker US economy. Also, weakness in the technology sector will exacerbate the decline in the sector important to developing Asian economies. While I am confident that our performance will be better than our competitors, the results are still likely to reflect this difficult environment. Therefore, we will retain our focus on reducing costs, conserving capital, and paying down debt.

This concludes PPG's First Quarter, 2001 Briefing, featuring comments by William Hernandez, Senior Vice President and CFO.