PPG Industries Inc (PPG) 2003 Q4 法說會逐字稿

Doug Atkinson, Vice President of Investor Relations for PPG Industries.

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

These comments reflect the financial information released on Thursday, January 15th, 2004.

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.

In the next few minutes, I'll review our fourth quarter performance for 2003.

I'll also comment on some trends underlying our performance.

In summary, you can see on the slide entitled, "Fourth Quarter Comparisons," we reported earnings per share of 71 cents in the quarter.

That included the five-cent reduction related to the asbestos settlement.

Reported earnings also included some charges for severance costs of over a penny, associated with our ever-continuing efforts to lower our cost structure.

As we have been reporting every quarter, the asbestos settlement adjustments of $8 million, or five cents a share, 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, closer to the scheduled payment dates, the present value increases.

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

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

As we discussed in Note 9 to 2002'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 per share.

Due to the rise in PPG's stock price in the quarter, the adjustment related to this second component was about $6 million, pre-tax.

To help eliminate any confusion, the slide entitled Fourth Quarter Comparisons shows the after-tax amounts of these asbestos settlement items for each quarter.

Now, a year ago, we reported 55 cents in the quarter.

That included $4 million after tax, or two cents of expense, related to our asbestos settlement.

Therefore, you are able to do the math for any comparison for 2003 you wish to make.

Once again, the slide entitled Full Year Comparisons shows reported earnings and what they included in the way of charges, so you can make whatever comparisons you wish.

For the year of 2003, we are reporting earnings per share of $2.89 per share versus a loss of 41 cents per share in 2002.

In 2003, we reported net income of $494 million.

The reported net income in 2003 included a charge for a required accounting change of $6 million, or three cents, a restructuring charge of $2 million, or one cent, and a charge of $23 million, or 14 cents a share, for the same two components of the adjustment related to the asbestos settlement charge.

In 2002, the loss of $69 million included the $484 million asbestos charge, $9 million for the required accounting change, and $52 million in restructuring charges.

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

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

As we have explained in the past, for those of you who use the data in your modeling, the additional 2003 expense quarterly over 2002 was - for coatings, $13 million, glass, $16 million, chemicals, $5 million, and the remaining corporate, $3 million.

Six months ago, I said that our early calculations indicated that 2004's headwind would be considerably smaller, only about a dime or so for the whole year.

Our current calculations have the increase next year at only about $10 million, or only a penny a quarter.

Our calculations do not include any benefit from the recently passed Medicare Prescription Drug Act, the impact of which we continue to analyze.

Let me update a prior comment I've made regarding any contributions to our U.S. pension fund.

A year ago, I said there were no mandatory funding requirements for PPG in 2003, but that we were considering making a voluntary contribution in the range of 20 to $30 million in 2003.

We did make a voluntary contribution of $22 million in the third quarter.

While we may make more voluntary contributions in the next few years because it gives us more flexibility in planning our use of cash for the future, we will not be required to make a contribution until at least 2007, even if our plan assets stay flat with December 2003 levels.

The state of the economy, and its impact on our various markets, is always an issue for us, as well as other materials companies.

And as the year went on, economies generally improved, especially in North America.

Globally, especially in Asia, evidence of growth is plentiful.

Even in Europe, slow improvement has been seen, although in some cases this just means less negative data.

Our expectations have been increasingly optimistic through the year, and that continues.

We, however, will not lose sight of the necessity of lowering our costs.

The strong U.S. market is an attractive lure to our global competitors, and we continue to be adversely impacted in our fiberglass and in our automotive replacement glass businesses by imports from competitors, who produce in low labor cost markets, such as China.

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

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

We use roughly 60 trillion BTUs 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 on an annual basis.

In the fourth quarter, market prices for natural gas averaged $4.60 per million BTU, down about 40 cents from the third quarter.

In late 2000, we hedged about a third of our requirements at $3.25 through the year 2003, which reduced our average cost to about $4.15 in the fourth quarter.

Now, while lower than the third-quarter 2003 costs, our average cost a year ago was about $3.80.

We have currently hedged about 10% of our 2004 requirements at about $4.80 per million BTU.

We continue to pursue ways to protect ourselves from high and volatile natural gas costs.

These increased costs reduced our operating income compared to the fourth quarter of 2002 by about $10 million - about $4 million of glass and $6 million in chemicals.

For the year 2003, costs associated with natural gas reduced operating income by about $100 million, about $70 million in chemicals and $30 million in glass.

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

Coatings raw material costs were up about 0.5% for the year, as well as for the fourth quarter.

The slide showing market indicators shows that GDP figures in North America are clearly improving, probably up about 4% year over year in the fourth quarter, and 3% for the year.

DRI's projection shows a 4% gain in 2004.

Industrial production is beginning to rise, estimated to be up 1.3% in the fourth quarter, but barely positive for the year.

This is important for many companies and is key to PPG's performance.

Several analysts have correctly found industrial production the one market indicator to be most positively correlated to our volume growth.

This figure captures production of a myriad of products that range from laptops, cell phones and PDAs, to tractors, bulldozers, office furniture and general aviation equipment.

DRI projects growth in 2004 of 4%.

Western European GDP continues to expand very slowly, with disparity between countries.

Germany and France, still weak, while Spain and the U.K. show stronger growth.

And, of course, China, now more important to us, continues to show very strong GDP growth.

DRI estimates 16% growth in 2003, with a continuation of about that pace in 2004.

North American vehicle production was up 1% in the quarter after declining by 9% in the second quarter and dropping 5% in the third quarter.

For the year, production was down 3%.

In the quarter, production was down 3% for General Motors and Chrysler, down 5.5% for Ford, and up 15% for the Japanese producers in North America.

For the year, GM production was down 4%, Chrysler, down 7%, Ford, up 10%, and the Japanese producers were up 7%.

Light vehicle sales were up 1% for the quarter and 1% for the year.

Inventories are up slightly from a year ago, and on a day-sales basis now stand at about 70 days of sales for cars and 65 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.

That would seem to put some downward pressure on automotive markets, near term.

However, Ward's predicts a flat market in the first quarter, and DRI, now known Global Insights, projects a 2% rise.

They see a relatively high level of sales, as manufacturers continue various incentive programs, more first-time buyers are supported by better employment conditions, and consumer confidence data shows that intentions to buy a car are still high.

Longer term, a continuation of this relatively high level of sales in North American automotive markets seems consistent with a continually expanding economy, rising employment and a rising stock market that has replaced home refinancing to sustain household wealth.

DRI is currently projecting light vehicle sales to rise slightly in 2004, and production to be up 3%.

In the quarter, Western European car production is estimated to have risen 1%, after two quarters of roughly 3% decline.

In the quarter, the U.K. and Spain led with 5% increases.

Germany rose 2%.

Italy was flat, and France was off 1%.

New registrations, or sales, were down 2% in the quarter.

For the year, Western European car production was down about 1%.

Spain grew by 5%, and the U.K. by 2%.

Germany was flat.

France was down by 1%, and Italy was off by 8%.

Overall, the pattern of second-half improvement was noticed especially where manufacturers introduced promotions.

Spain's strength was consistent with continued government incentives and a stronger economy.

Recently introduced new products, the Panda and the Idea, both with new diesel engines, are helping Fiat.

While domestic demand is down in France, their exports to Spain have been strong.

For overall Western Europe, DRI is projecting slight improvement in 2004, with sales up 1% and production up 2%.

They see a slowly improving economy - GDP up 2%, and continued but targeted use of tactical promotions by auto manufacturers.

Back in the United States, housing starts are up 13% in the quarter, and 7% for the year.

The residential construction market still continues to hold up well.

Overall commercial construction markets have bottomed, and real investment in commercial construction was down an estimated 2% in the fourth quarter, and 8% for the year.

As I've said before, this market is down more than 30% from its peak three years ago.

For us, this presents a significant potential for future growth, and we have already seen it showing up in our numbers.

The slide, Sales Trends, Total PPG - for the quarter, sales were up 9%.

Volume grew 4%.

Pricing was flat, and currency contributed 5%.

Volume was up 4% in North America, 15% in South America, and over 20% in Asia.

European volume was essentially flat.

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 has typically been for the last decade, and up in chemicals because of gains in commodity chemical prices.

Finally, currency added about $110 million in sales for the quarter, and about $13 million to operating earnings.

For the year, sales were up 9%.

Volume grew 3%, pricing was up 2%, and currency contributed 4%.

Volume was up 2% in North America, flat in Europe, 8% in South America, and over 15% in Asia.

As was true in the quarter, volume gains were seen in coatings, specialty chemicals and glass.

Pricing declined in glass, except for flat glass.

Pricing was essentially flat in coatings, and up significantly in chemicals because of gains in commodity chemical prices.

For the year, currency added about $350 million in sales, and about $50 million to operating earnings.

The slide, Quarterly Volume Change, is one we show every quarter, as it puts into historical perspective our quarterly year-over-year changes in volume.

It shows that the fourth quarter volume gain was the seventh consecutive quarter of volume growth, and gains continue to strengthen.

The next slide, Quarterly Volume Change in Europe, shows only nominal growth, but it is slightly positive.

On the slide, Financial Highlights, three months ago I said that we may reduce our tax rate.

Today, we are comfortable with moving the tax rate down from 36%, where it has been for three years, to 35%.

We are currently comfortable that our rate will be no higher than this for the coming year.

This long-term change meant five cents to our fourth quarter earnings per share, including four cents to catch up for the impact of the rate change for the first three quarters.

With our laser focus on conserving cash, capital spending came in at about $200 million for the year.

And we believe spending for 2004 will be only in the range of no more than $250 to $300 million.

During the year, we reduced debt by over $375 million.

In addition, and I repeat, in addition, we've accumulated $375 million in cash available for future payments of the asbestos settlement liability after the settlement eventually becomes effective, or for payment for our $300 million of debt that matures in 2004.

As a result, we could be in a position to buy back shares.

Now, I'm not talking about massive amounts - just small, opportunistic repurchases.

So, we will report the potential intention to do some share repurchasing so as to comply with SEC regulations.

I'll just mention again that in the third quarter, we made a voluntary contribution of $22 million to our U.S. pension fund, as I had said we might do so early last year.

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

I would like once again to remind listeners who may not know us well that we are one of only a handful of companies that have paid continuous dividends for over 100 years, and increased those payments each year for more than 30 consecutive years.

Turning to the slide, Trends and Sales for Coatings, in the quarter, sales grew 12%, with volume gains of 5%.

Price was flat, and currency contributed 7%.

OEM sales grew 13%, and volumes were up 7% in North America, 3% in Europe, up 8% in South America, and almost 20% in Asia.

Overall, OEM volume was up 5%.

Price declined about 2%, consistent with a pattern for many years.

Refinished sales grew 11% on volume gains of 1% overall.

Volume was up 2% in North America, in the teens in Asia, and down 5% in Europe.

Pricing improved about 3%.

Industrial coatings volumes were up 9%, with strong gains in all regions, 3% in North America, 5% in Europe, more than 30% in South America, and over 50% in Asia.

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 were down 2%.

Aerospace volumes were up 4%, with gains for the first time since 9/11 of 3% in North America.

We experienced 5% gains in the European markets, and nearly 20% Asian growth in Australia, Japan and our aircraft service center in China that we started up in late 2002.

Architectural coatings continues to show strong volume gains - 10% this quarter led by growth at Lowe's, as well as our company-owned stores.

The cost-reducing restructuring actions over the last three years, combined with our position in Asia, new products, and effective sales efforts, produced some solid overall results for our growing coatings businesses.

For the year of 2003, sales were up 8%, with volume gains of 2%, flat pricing, and 6% currency.

OEM volume was up 2% overall, with gains of 1% in North America, 1% in Europe and gains in the teens in Asia and South America.

Refinished volumes were down 1% in the year, with a 5% decline in Europe, a 2% gain in North America, and 3% growth in Asia.

Industrial coatings experienced 4% volume gains overall, with essentially flat volume in North America and gains of 3% in Europe, 30% in South America, and 45% in Asia.

Packaging coatings volumes were off 1%.

Aerospace volumes were up 3%, with gains of in 1% in North America, 6% in Europe, and 15% in Asia.

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

Volumes were up 10% for the quarter and 12% for the year.

Auto replacement glass volumes were flat in the fourth quarter, and up 6% for the year.

Flat glass volumes were up 8% in the fourth quarter and up 4% for the year.

Gains were the result of growing commercial construction products.

Flat glass pricing was flat in the fourth quarter.

For the year, it was up 4%, largely as a result of natural gas surcharges.

Our fiberglass sales remain weak, with declines in both pricing and volume.

For the year, pricing was down 7% and volume was off 4% in both electronics and specialty materials, and in reinforcements.

Acceleration of this shift in pitted wiring board production to Asia and new capacity of both contributed.

We will continue to focus on actions to cut costs and shift production to growing markets, and believe that a strengthening economy will bring demand in better balance with our productive capacity.

In the fourth quarter, pricing was off 9% and volume was flat overall.

Reinforcement volume was off 2%, and ESM volume grew 6%, with gains in other specialty materials - products used in filtration, reinforced tape, and screens.

As for chemicals, for the quarter in commodity chemicals, we operated at below full capacity much like the industry, and a little above the third quarter.

ECU prices were down about 5% from the third-quarter average, but up about 15% from a year ago.

ECU prices held up better than normal for the season, supported by relatively good PVC markets.

However, ECU prices ended about 8% below where the quarter began.

Volume was off 4% in the quarter and down 7% for the year.

ECU prices for the year were up 45%.

The run up in natural gas prices will be a burden in the near term, and they are likely to remain high and volatile.

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

Specialty chemical volumes were up in the quarter, with gains in silicas and very strong gains in optical.

Fine chemical volumes were down in the fourth quarter, owing to a very strong quarter a year ago.

For the year, they gained 6% in volume and had an overall good performance.

In the fourth quarter, the optical business saw the usual seasonal decline from the third quarter to the fourth quarter, but volumes were up about 20% year-over-year.

For the year in total, volume gains were up about 15%.

Strength is in both North America and Europe.

The fourth generation of Transitions Photochromic Lenses, called Next Generation, has had great success in both North America and in Europe.

The fourth quarter increases were driven largely by European success.

2003 was another record year for this business, and Transitions is enjoying all-time high market shares in all region.

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

It received the Best in Lens Treatments 2003 Award of Excellence at the Optical Laboratories Association's recent annual trade show.

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

Although we still think that rapid economic expansion in the United States and Europe is not probable, I repeat, we still see a steady, improving escalation of conditions ahead.

Looking to 2004, here are some things we know.

Despite the knowledge that accounting rules will change in the future, beginning in 2004 we will begin expensing stock options, using the fair value method of recording stock-based compensation, as defined in FAS number 123.

We expect this will increase expense by about $10 million, or about six cents a share.

This amount is less than we have been reporting in our disclosures for the past several years, since we amended the terms of our stock option plan to increase the vesting period from one to three years.

As we have been doing over the past several years, we will continue to look at actions to reduce costs, which might lead to a future restructuring.

As to the economy, through the three-year industrial downturn in North America, a lot of stimulus was pumped into the economy, mainly in the form of low interest rates and tax cuts.

During this time, the consumer, aided by record home refinancing to support his wealth and cash inflow continued to spend, even as business investment, industrial production and stock markets declined.

Today, the consumer is still healthy, and getting more so.

The sharp drop in home refinancing, which had sustained consumers' wealth, has been offset by rising stock markets.

The improving employment environment, and the consequential rise in confidence is likely to continue that trend.

Are there risks?

Well, there will always be surprises.

Two risks that can be seen include the bursting of the housing bubble or a collapse of U.S. dollar.

While most forecasters are projecting U.S. housing starts to decline in the years ahead, the already slowing in the rate of rise in home prices seems to argue against an inflating bubble followed by a collapse in housing.

The strengthening Euro, which seemed to produce continued sluggishness in many Euro zone economies, however, we have witnessed and survived similar currency swings in the past.

Another concern, while it seems far off today, is inflation followed by a rise in U.S. interest rates.

The Fed has all but promised to sit on the sidelines for a while, and when U.S. interest rates do rise, it will likely be a sign of stronger growth, which is a good thing for the global economy, and a good thing for PPG.

For now, global competition and freer trade argue for relatively low levels of inflation, probably for some time.

Given that competition will continue to intensify, we face talented and hungry competitors.

We will never relax our efforts to continually drive down our costs.

We will take actions that will create expense in the first half of this year, but will more than pay us back in the second half.

That will be a never-ending process for PPG.

We're feeling energized about 2004 because today's situation is very different than it was three years ago, when the economy was deteriorating.

Today, our efforts are aligned with an improving global economy, and we will simply make a good performance even better.

It's just as much hard work, but a lot more rewarding for us and for our shareholders.

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