PPG Industries Inc (PPG) 2003 Q3 法說會逐字稿

Good morning, this is Doug Atkinson, Vice President, Investor Relations of PPG Industries.

It's a pleasure to welcome you to PPG's third-quarter 2003 briefing, featuring comments by Senior Vice President and Chief Financial Officer William Hernandez.

These comments relate to the financial information released on Thursday, October 16th, 2003.

Visuals supporting this briefing can be accessed through the PPG Web site 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 Industries' filings with the SEC.

And now, PPG's Senior Vice President and CFO, William Hernandez.

Good day.

In the next few minutes, I will review our third-quarter performance for 2003, and I'll also have some comments on the trends in our performance.

In summary, we reported earnings per share of 83 cents in the quarter that included the three-cent reduction related to the asbestos settlement.

As we've been reporting every quarter, the asbestos settlement has two components.

In June, 2002, we recorded an after-tax charge of $495 million, which included the net present value as of December 31st, 2002, of the 21-year stream of payments to be made to the asbestos trust.

With the passage of time, we get closer to the scheduled payment dates, and thus the present value increases.

This increase will average about $8 million per quarter through the end of 2004.

Now, the second component, again, as a reminder, relates to the change in value in the quarter of the 1.4 million shares of PPG stock that will be contributed to the trust.

As we discussed in note nine to last year's financial statements, we have locked in the cost of a portion of these shares, using an equity-forward arrangement.

Currently, we've locked in about two-thirds of these shares at $47.50.

In the third quarter, the adjustment related to the second component was nominal.

To help eliminate any confusion, the slide entitled, "Third Quarter Comparisons" shows the after-tax amounts of key items for each quarter.

A year ago, we reported 87 cents in the quarter.

That included $15 million, or nine cents of income, reflecting the decline in value of the 1.4 million shares of PPG stock from the end of June, 2002 when the settlement charge was taken, and the end of the third quarter, 2002.

Therefore, you can do the math for any comparable comparison to 2003 you wish to make.

The largest change in other expense that you will see in our quarterly statement is higher environmental expense this year than last.

Third-quarter environmental expense was only $2 million last year, and it is $12 million this year.

Year to date, it is $14 million, less than our historical average.

Over the last 10 years, environmental expense ranged from $10 million to $49 million, with the average about $25 million per year.

Referring to the slide "Issues in 2003," for three years now, we've been saying how the impact of higher pension and retiree medical benefit costs would affect many companies, including PPG.

For PPG compared to 2000, our pension and OPEP costs are up by $315 million, or $1.19 per share, about a 30% reduction in reporting earnings for this factor alone.

Now last year, we explained and reported that pension and retiree medical benefit costs would be higher in 2003 by about 50 cents per share.

For those of you who used this in your modeling, this additional expense quarterly is coatings, $13 million, glass, $16 million, chemicals, $5 million, and remaining corporate, $3 million.

As to next year, our early calculations indicate yet another headwind, but only about a dime or so for the whole year.

Now, this is driven mainly by higher health-care costs, lower interest rates, which increase the discounted value of future liabilities, and other assumptions, which are partially offset by the improved market value of pension plan assets during 2003.

Now, let me repeat a comment I made nine months ago regarding any contributions to our U.S. pension fund.

In 2003, there are no mandatory funding requirements for PPG.

While we may make voluntary contributions at times in the next few years because it gives us more flexibility in planning our use of cash for the future, we are not required to make a contribution until at least 2006, even if equity markets fall back to their December 2002 levels.

Preserving this kind of financial flexibility lets us not be distracted from funding our businesses, serving our customers, and continuing to pay dividends to shareholders.

The course of the economy and our various markets are always an issue for us as well as other companies in the materials section of the S&P 500.

Our expectations have been increasingly optimistic through the last three quarters, with the belief that growth will continue to be strong in Asia and slow in North America and in Europe.

And we have positioned ourselves well to participate in Asian growth, and given the expectation of slower growth elsewhere, our focus on cash conservation and cost reduction continues aggressively.

Two important categories of cost to PPG are energy and coatings raw materials.

As a reminder, energy costs are largely for natural gas.

We use roughly 60 trillion BTUs of per year of natural gas to generate power for the production of chlorine and caustic soda, and to produce glass and fiberglass.

So, if natural gas costs change by $1 per million BTU, our pre-tax costs change by about $60 million.

In the third quarter, market prices for natural gas averaged $5 per million BTU, down about 50 cents from the second quarter.

And in 2000, we hedged about a third of our requirements at $3.25 through the end of 2003, which reduced our average cost to $4.50 in the third quarter.

While lower than the second quarter, 2003 cost, our average cost a year ago was about $3.10.

We continue, as we have for years, to be active in ways to protect ourselves from rising natural gas costs.

We have again begun to layer in hedges, and now have a small portion of our 2004 requirements at prices below $5 per million BTU.

These increased costs reduced our operating income compared to the third quarter of 2002 by about $25 million.

About $5 million in glass and $20 million in chemicals.

Raw materials for coatings are the largest component of their variable costs.

We therefore continually take actions to optimize these costs.

For over a year, we have been talking about the possible rise in these costs.

Now, we reported a second-quarter rise of about 1% in coatings raw material costs.

That slowed to about 0.5% for the third quarter.

The slide showing market indicators shows that North American vehicle production dropped by about 5%.

Production was down 5% for General Motors, 18% for Ford, 6% for DaimlerChrysler, but was up 7% for the transplants.

Vehicle inventories are up about 9% from a year ago, and on a day sales basis, now stand at about 60 days of sales for cars and 70 days for trucks.

Both are higher than the 50 to 60 days that are often thought of as desirable, but a little below three months ago.

It seems consistent with forecasts that expect another decline in light vehicle production for the third quarter, with less than 5% in the quarter just passed.

Wards currently reports a 2% decline, and DRI projects a 4% decline.

DRI forecasts fourth-quarter light vehicle sales to be about flat with a year ago.

Over time, of course, it will be the sales level that determines production.

Western European car production is estimated to have declined 5%, in line with DRI's 4%-6% expectation.

France estimates are down 4%, Italy is off 2%, Germany down 7%, Spain down 5%, and the United Kingdom even with a year ago.

Sales or new registrations were flat, which is better than recent trends, as the promotional activities I mentioned three months ago has had some success.

So the gap between sales and production continues to close, creating less concern about excess inventories.

DRI is still expecting a 4%-6% production decline in the fourth quarter, and about 1% for the year.

Year-to-date production is estimated to be down by 1%.

Back in the U.S., housing starts are up 5%.

The residential construction market still continues to hold up well.

Commercial construction markets have bottomed and the real investment construction is down an estimated 4% from a year ago, which puts it down more than 30% from the peak over 2.5 years ago.

For us, this presents a significant potential for future growth.

And the GDP figures on a year over year basis are weak both here and in Europe, but are likely improving in the United States.

This slide, Sales Trends, Total PPG shows gains in volume, price and currency of about 2%, 1% and 4% respectively.

Volume was up 2% in North America.

Strong volume gains in the high teens continue in Asia.

Volume gains were seen in coatings, specialty chemicals and glass.

Pricing declined in glass, mainly in fiberglass and auto-replacement glass.

Pricing was roughly flat in coatings, as it typically has been for the last decade, and up in chemicals because of gains in commodity chemical prices.

Finally, currency added about $80 million in sales and about $10 million for operating earnings.

The slide, Quarterly Volume Change, is one we show repeatedly and it puts into historical perspective our quarterly year over year changes in volume.

It shows that the third-quarter volume gain was the sixth consecutive quarter of volume growth, and gains were better than in the second quarter, despite the temporary lull in August that was created by a variety of factors that included weather, the Northeast blackout, a sharp 13% drop in North American vehicle production, to name a few reasons.

The next slide, quarterly volume changes in Europe, shows that volumes in Europe have now declined for 11 quarters.

On the slide, Financial Highlights, our tax rate continued at 36%, where it has been for almost three years.

However, continued growth in lower tax rate jurisdictions such as Asia and in parts of Europe could lead to a lower rate in the future.

With our laser focus on conserving cash, capital spending is still on track to be $250 to $300 million, more likely at the lower end, if not below.

Through the first nine months, we reduced debt by over $300 million, with about half of that occurring in the third quarter.

This brings our debt to total capital to under 41%, very close to our year-end goal of 40%.

In addition, and I repeat, in addition, we have accumulated $160 million in cash available for future payments to the asbestos settlement liability after the settlement becomes effective, or for future debt reductions.

Also in the quarter, we made a voluntary contribution of $22 million to our U.S. pension fund, as I said we might six months ago.

Now, we did all this while continuing to fully support our technology, customer service, growth initiatives and dividend payments.

And I would like once again to remind listeners who may not know us well that we are one of only a handful of industrial companies that have paid continuous dividends for over 100 years.

And last September's dividend marked the 31st consecutive year of increased payments.

Turning to the slide, Trends and Sales for Coatings, sales grew about 7%, with volume gains of 3%, price was down 1%, and currency contributed 5%.

OEM volumes were up 3% in North America, down 2% in Europe, up 10% in South America, and 20% in Asia.

Overall, OEM volumes were up 3%.

Price declined about 4%, consistent with the pattern for many years.

Refinished sales grew 10% on price gains of 2%, while volumes improved about 7% in North America and declined 3% in Europe.

Overall, volume was up about 2%.

Industrial coatings volumes were up 5%, with strong gains in Asia and South America and flat volumes in North America.

European volumes were up 1%.

South America was up about 20%, and Asia experienced over 50% growth.

This is the second year that Asia has been a high-margin contributory factor in the positive coatings performance, and growth has been accelerating.

Packaging volumes are up 1%.

Aerospace volumes are up 1%, with high single digit gains in European operations, and 20% gains in Asia, offsetting 2% declines in North America.

Architectural coatings continued to show volume gains, 5% this quarter, led by growth at Loew's as well as at our company-owned stores.

We saw temporary slowing in August, probably related to the rain, much like we saw in the very rainy April to May period in the Eastern United States.

The cost reducing/restructuring actions we took last year and the year before, combined with our position in Asia, produced some solid overall results for our growing coatings businesses.

Sales trends in OEM glass reflect volume gains from new parts we've been awarded in the past year.

Auto replacement glass volumes are stronger than last year, largely a result of more aggressive actions to gain share.

volumes in North America were up from a year ago, with the largest gain from our commercial construction products.

Now, this seems to confirm forecasts from others that commercial construction markets have bottomed.

Flat glass price increases were largely the result of natural gas surcharges.

Our fiberglass sales remain weak, with volume declines in electronics as the chip and printed wiring boards production to Asia has accelerated, and price declines in both electronics and reinforcements.

We have been taking some strong actions to cut costs and to shift production to growing markets.

As for chemicals, in commodity chemicals, we operated at below full capacity, much like the industry that's been mentioned to be about 89% utilization.

ECU prices were down about 5% from the second quarter average, but up about 30% from a year ago.

ECU prices strengthened in August after PVC markets recovered from a July weakness.

However, ECU prices ended about 5% below where the quarter began.

The year-over-year increase in ECU prices would have produced very strong results were it not for higher natural gas prices that cost roughly $18 million more than a year ago.

It would have been worse, of course, had we not been partially hedged.

Looking forward to the next year or two, we believe that the capacity shutdowns in the United States over the past three years create relatively favorable metrics for producers.

Specialty chemical volumes were up, with gains in fine chemicals and strong gains in optical.

Silica volumes were down in high single digit percentages.

The optical business continues its strength, mainly in North America and Europe.

This is driven by the successful launch of the fourth generation of Transitions photochromic lenses, called, "Next Generation" in Europe, and by consumer advertising in North America.

Now, some of you have commented to us on the eye-catching ads on TV -- 2003 is headed toward another record year for this business, and Transitions is enjoying all-time high shares in all regions.

The new Tribex monitor, high-strength with superior optics, continues its contribution to the success of our optical business.

In conclusion, for the past six months, I have suggested that conditions felt increasingly more positive than at the beginning of the year, and that the upward bias in our outlooks generally continues.

Although we think a rapid growth is not probable, I repeat that we still see a steady, improving escalation of conditions ahead.

Three months ago, forecasters were still looking for signs of rising capital expenditures to reduce the major force that caused us to enter this recession, and for indications of employment growth.

Since then, the news has been positive on both fronts.

The second-quarter GDP reports indicated that rising capital investment growth has begun.

Also, signs of future job growth are being seen in several reports.

Hiring plans by U.S. small business firms indicate more hiring.

Likewise, the ISM Non-Manufacturing survey has been positive this summer.

And finally, the United States non-farm payroll statistics turned positive, as reported the first Friday of this month.

Some economists say that the falling initial unemployment claims to the lowest four-week moving average since February indicate that this positive report will likely be repeated again on the first Friday in November.

Of course, not all economists agree, but they rarely do.

Now, I do know that at the beginning of the year, I said that it was easier to develop a list of things to worry about than to feel good about.

Now the opposite seems to be the case today.

Although we have an upward bias, the road remains rocky.

We see week-to-week ebbs and flows in demand, and our emphasis continues to be on cost control and cash generation.

The overall growth in demand, although positive, remains sluggish.

Part of the reason for only modest growth expectations in U.S. manufacturing has been the rapid gain in imports into the United States, as well as Europe, of products produced in Asia.

Luckily, we are well positioned to participate in supplying coatings to many of these products, wherever they are produced.

Economists will continue to debate and we realize that our crystal ball is not a precision instrument either.

We do know, as do many of you who followed us for some time, that we are fanatic about continually cutting costs.

This mindset will only positively leverage whatever opportunities the global economy presents to us.

This concludes the third-quarter 2003 briefing, featuring comments by William Hernandez, Senior Vice President and CFO.