PPG Industries Inc (PPG) 2004Q1電話會議重點和逐字稿

William Hernandez - Sr. VP and CFO

In the next few minutes I will review our first-quarter performance for 2004.

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

In summary, you can see on the slide entitled to first-quarter comparisons we reported earnings per share of 67 cents in the quarter that included a 2 cent reduction related to the asbestos settlement.

As we have been reporting since mid 2002, the reported earnings include the charge for income necessary to adjust the current value of the asbestos settlement liability.

In the first-quarter, this adjustment was a reduction of earnings of $3 million or two cents a share.

To clarify this point for those not familiar with the settlement, in June 2002 we recorded an after-tax charge of $495 million which included the net present value as of December 31st, 2002, of a 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 (ph) pretax per quarter through the end of 2004.

The second component of the adjustment, 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 last year's annual 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 drop in PPG stock price in the quarter, the adjustment related to the second component was income of about $3 million pretax.

Also included in the reported earnings is $7 million pretax or two cents reflecting our previously announced decision to begin expensing stock options in 2004.

To help eliminate any confusion, the slide entitled first-quarter comparisons, shows the after-tax amounts of the asbestos settlement adjustment for each quarter.

A year ago we reported earnings per share of 46 cents in the quarter that included two items that subtracted five cents.

They were two cents related to the change in the current value of the asbestos settlement liability and three cents related to the adoption of FAS-143, the accounting change for acid retirement obligations which affected many industrial companies.

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

Referring to the slide, issues in 2004, for more than three years now we have been saying how the impact of higher pension and retiree medical benefit costs would affect many companies, including PPG.

Our reported earnings in 2003 have been reduced by $315 million, or $1.19 cents per share compared with 2000 because of these increasing pension and OPEB costs.

Three months ago, we estimated that they would increase and 2004 by about $10 million.

At this time, it appears that in 2004 pension and OPEB costs will be down by about $30 million, less than we had previously estimated.

Our calculations do not include any benefit from last December's Medicare prescription drug legislation, the impact of which we continue to review.

Now let me restate a comment I made regarding contributions to our U.S. pension fund.

There are no mandatory funding requirements for several years; however, we are likely to make voluntary contributions this year and possibly in the next few years, just as we did in 2003 to give us more flexibility in determining both timing and amounts of future mandatory contributions under the complex ARISA IRS pension funding regulations.

Those of you who follow us closely know that we have become increasingly optimistic about the direction of the economy since July of last year.

In the past three months indications are that this improvement has continued.

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

In fact, our first-quarter reported earnings also included $9 million or three cents in costs in severance, associated with our ever continuing efforts to lower our cost structure.

In past comments we have referred to these as fast payback actions, because they will return more than this amount to earnings as the year progresses.

We experienced tremendous manufacturing efficiencies in the quarter.

Year-over-year our earnings were helped by about $50 million in manufacturing efficiencies, around 10 million in coatings, 25 million in glass, and 15 million in chemicals.

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

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

We used 60 to 70 trillion BTU's natural gas per year to generate power for the production of chlorine and caustic soda and to produce glass and fiberglass.

So, if natural gas costs changed by a dollar per million BTU, our pretax cost change by about 60 or $70 million on an annual basis.

In the first-quarter, market prices for natural gas averaged $5.69 per million BTU, up about $1.10 from the fourth quarter.

In the fourth quarter, we benefited from the fact that about a third of our requirements were hedged at $3.25 which reduced our average cost to about $4.15.

In the first quarter and throughout 2004, we have hedged about 10 percent of our requirements at about $4.80 per million BTU.

Thus our all in costs increased about $1.50 from the fourth quarter of 2003.

Our average cost in the first quarter and year ago was about $5.50.

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 2003 by about $25 million, about 5 million in glass and 20 million in chemicals.

Relative to the year ago quarter, the increased cost was negligible.

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

Coatings raw material cost in the first quarter were up less than half a percent from the year ago quarter.

Last year our tax rate on ongoing operations was 35 percent, down from 36 percent where it has been for the prior three years.

We are currently comfortable that our rate will be no higher than this for the coming year; in fact, we see indications that our rate may come down even further.

The slide showing market indicators shows that GDP figures in North America are clearly improving, probably up about five percent year over year in the first quarter.

Industrial production is estimated to be up the three percent on a year-over-year basis.

More importantly, it has been accelerating for three-quarters now, growing at a four percent annual rate in the third quarter of 2003, a five percent rate in the fourth, and DRI projects a seven percent annual rate of growth in this first-quarter of 2004.

We agree with the findings of several analysts that have correctly found that the U.S.

Federal Reserve Board index of industrial production is the one market indicator to be most positively correlated to our volume growth.

This figure captures production of a myriad of products.

They range from laptops, cell phones and PDAs, to tractors, bulldozers, office furniture and general aviation equipment.

DRI projects growth in 2004 of 5 percent for the full year.

Western European GDP continues to expand very slowly, with disparity between countries, Germany and France still weak, while Spain and the UK showed stronger growth.

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

BRI estimates 8 percent growth in 2004 and they expect it to slow only modestly between now and the 2008 Olympics.

In China, industrial production is projected to expand 13 percent.

North American vehicle production was down one percent in the quarter, with production down seven percent for General Motors, down two percent for Ford, up three percent at Chrysler and up seven percent at the Japanese producers.

Light vehicle sales were up two percent with U.S. sales at a 16.5 million annual rate.

With inventories at a moderately high level, continuing that about the same seasonally adjusted level of the past six months, incentive programs are back in fashion.

Wards now projects flat production in the second quarter versus last year and global insights expects relatively flat sales rate next quarter with slight improvement for the rest of the year, as manufactures continue there is incentive programs and more first-time buyers are supported by better employment conditions.

One question is how fast employment conditions improve.

Although last months implement report and numerous other positive employment indicators may ease that concern.

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

In the quarter, Western European car production is estimated to have fallen one percent with strength in the UK and in Spain; while Germany, France, and Italy declined about three percent.

Overall, new registrations were up three percent with a strong seven percent gain in March after two weak months.

Again, the strength is more evident in Spain and in the UK with Italy, France and Germany down one to three percent.

Because of low inventories, this year's forecasts expect production to grow slightly faster than the projected one percent gain in sales.

Back in the U.S., housing starts are up 10 percent.

The residential construction market still continues to hold up well.

Overall, commercial construction markets have bottomed and real investment in commercial construction is now about flat with a year ago.

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

For us this presents a significant potential for future growth.

And we continue to see the growing demand in our flat glass volumes.

The slide, sales trends, total PPG, for the quarter sales were up nine percent, volume grew more than seven percent, pricing was down three percent, and currency contributed five percent.

Volume was up eight percent in North America, three percent in Europe, 15 percent in South America, and about 20 percent in Asia.

Volume gains were seen in coatings, seven percent; chemicals, seven percent; and glass, eight percent.

Pricing declined in glass was roughly flat in coatings, as it typically has been for the last decade, and down in chemicals.

Mainly because of declines in commodity chemical prices.

Finally, currency added about $100 million in sales for the quarter and about $13 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 the first-quarter volume gain with the eighth consecutive quarter of volume growth, and gains continue to start strength and sharply in this quarter.

The next slide, quarterly volume change in Europe, shows finally growth in European volumes.

We saw gains there in coatings, optical, and in fiberglass.

On the slide, cash from operations, let me take a minute to talk about the strong cash flow.

With a continued expansion of the economy, we expect a continuation of the strong cash flow from operations, not unlike what we saw last year.

As you can see on this chart, we significantly improved our cash flow from operations since the recession of 1990 to 1991.

Our focus on cash allowed us to increase our cash generation in the 2001 recession and to reach a new record high last year.

And we will use it to the benefit of shareholders.

On the slide, use of cash, we list the priorities that many of you have heard us discussed for some time.

As far as prudently funding our businesses, I'll repeat what I said three months ago, that we believe capital expanding to be in the range of 250 to $300 million for the year.

Enabling us to do this is a significant reduction in our fixed capital intensity as we shifted our mix and businesses away from high capital intensive businesses and towards coatings businesses that required considerably less fixed capital.

We have a legacy of paying uninterrupted dividends since 1899.

And with our December 2003 dividend, we raised shareholder payments for the 32nd consecutive year.

We have a long-term goal of paying out one-third or more of her earnings per share over time.

Last year we used our cash to reduce debt by $400 million, paying off all our commercial paper.

As a result, we reduced our debt to total capital ratio to 36 percent.

We feel comfortable operating this ratio in the 30 to 40 percent range.

We have $300 million in long-term debt coming due in August.

We also increased our cash on hand by $375 million.

And we made a small voluntary contribution to the pension fund, an action I already mentioned we may do again.

We have seen progress towards our asbestos settlement becoming effective.

If the settlement becomes effective this year, we will use about $200 million of cash to satisfy a portion of our $300 million current asbestos liability.

On a seasonal basis, I might mention that the first quarter is typically not a strong cash generation quarter.

But the second quarter is, and the third quarter is even better as we collect receivables from the seasonally strong second-quarter sales.

Next in line is acquisitions, related to our current businesses and at the right price.

And I will say that there are currently no large, like over $100 million acquisitions, likely in the near-term.

The next priority is to repurchase stock with the remaining funds.

Now historically, PPG has used share repurchases as a means of rewarding shareholders when cash was available.

In our recent past, cash has been used to repay debt that was used to reposition our business portfolio by making acquisitions.

In the four years before we began making acquisitions, 1994 through 1997, PPG repurchased over 36 million shares, a little less than $2 billion.

As it has been in the past, our intent would be to judiciously buying stock with our remaining cash.

The temptation to become acquisitive as this cash burns a hole in our pocket is not in the PPG character.

In fact, disciplined repurchases combined with a tightly run company offers us more flexibility to potentially issue shares if needed to fund an ideal acquisition should it come along in the future.

We will address all these uses of cash while continuing to fully support our technology, customer service, and growth initiatives.

Turning to the slide, trends in sales for coatings, in the quarter sales grew 13 percent with volume gains of seven percent.

Currency contributed seven percent.

OEM sales grew 11 percent, and volumes were up nine percent in North America, flat in Europe, up over 20 percent in South America, and almost 15 percent in Asia.

Overall, OEM volumes were up six percent.

Price declined consistent with the pattern for many years.

Refinished sales grew 16 percent on volume gains of five percent overall.

Volume was up six percent in North America, 10 percent in Asia, and two percent in Europe.

Pricing improved by one percent.

In North America, our platinum distributors saw good growth and we began to see success in our light industrial coatings and fleet programs.

For the first time in several years, we saw some volume gains in Europe.

Industrial coatings sales gained 17 percent, volumes were up 11 percent with strong gains in all regions, six percent in North America, eight percent in Europe, more than 15 percent in South America and over 50 percent in Asia.

This is the second year that Asia has been a contributing factor in the positive sales performance and with margins on par with our coding segment as a whole.

Packaging volumes were down one percent, aerospace sales were up nine percent, and volumes were up six percent with gains for the 2nd consecutive quarter since 9-11, up five percent in North America.

We also had five percent gains in European markets and nearly 20 percent Asian growth in Japan and our aircraft service center in China.

Gains were primarily in transparencies and aftermarket maintenance.

Architectural coatings continues to show strong volume gains.

Fourteen percent this quarter, led by growth at Lowe's as well as at our company-owned stores.

We have five percent more company-owned stores than a year ago and same-store sales are also stronger.

Lowe's continues to buy stain in anticipation of a better exterior stain season.

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

Sales trends in OEM glass reflect volume gains from new parts we been awarded from Chrysler as they exited the auto glass fabrication business last year.

Volumes were up eleven percent for the quarter.

Now absent this new business, volume would have been down.

Auto replacement glass volumes were down four percent and pricing continues to be under pressure and was down seven percent.

Flat glass volumes were up 15 percent, gains continue to be the result of growing commercial construction products as we have been reporting since July.

Flat glass pricing was down five percent given industrial overcapacity.

Our fiberglass sales were up over the prior year for the first time in many quarters.

While pricing was down 11 percent in both the U.S. and Europe, volume was up 10 percent and in both regions.

With a shift in production of electronic printed wiring boards to Asia and a pickup of volumes in pricing there, earnings from our joint venture serving that region are now slightly positive.

The joint venture is operating two plants, one in Taiwan and our new one in China.

Both are operating essentially at capacity.

There have been several announced price increases and increased pricing in the 20 percent range is being realized.

While these are positive developments pricing is recovering from a 50 percent decline in this segment.

It appears that continued improvements will be seen.

Repositioning the business with our focus on dramatic cost cuts, improving yields and shifting production to growing markets, is producing results in the first-quarter and further improvements are likely moving ahead.

Improvements are likely to be slow but it is heartening to see the beginning.

As for chemicals, in commodity chemicals we operated still below full capacity, much like the industry.

But above the fourth quarter.

ECU prices were down about 13 percent from the fourth quarter average and from a year ago.

ECU prices were supported by strong chlorine demand and stable chlorine prices.

However, caustic prices continued to weaken.

We expect that half of the announced $75 chlorine price increase is likely to stick as allowed by contracts and are hopeful that firming in caustic demand lies ahead with improvements in industrial end markets.

Volume was up seven percent in the quarter.

As long as natural gas prices remain high, margins will be squeezed, but any relief there combined with improving demand and the 12 percent reduction in North American capacity over the past few years creates relatively favorable metrics for producers in the future.

Specialty chemical volumes were up in the quarter with gains in optical and fine chemicals.

The optical business had another record sales and earnings performance.

Advertising in European markets has begun in April.

Overall volume was up five percent.

The business experienced record yields in the quarter as it also focused on manufacturing efficiencies.

The fourth generation of transition photochromic lenses, called Next Generation, has had great success in both North America and in Europe for the past two years and the business is well positioned globally.

The relatively Trivex monomer, high-strength 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 Laboratory Associations annual trade show.

Looking to the future, there is a large category of events and conditions that we cannot control and some that we can.

Many of the things we can't control however are looking positive.

Demand as seen in our quarterly volumes, is growing.

Global economies are expanding.

In the United States, consumer wealth continues to be a plus as stock markets have risen, and employment conditions are improving, and industrial production growth is accelerating.

Rising market values are also creating lower pension and OPEB costs than last year and if interest rates begin to rise, that will help even more by reducing the present value of future obligations.

Now some investors periodically express concern about rising interest rates, however, what will make them rise is a stronger economy, which is a good thing for PPG and other participants.

It is still early in this business expansion with few shortages of productive resources.

Therefore, rising demand should be met without creating excessive inflationary pressures.

Coatings raw material costs are now steady but could rise with growing demand.

And energy prices are likely to continue confounding the forecasters.

What we can control includes costs, productivity, and actions to support future growth.

Previous restructurings lowered our costs and streamlined our operations to be continually more productive.

The fast payback actions we took in the first-quarter raised our costs then but will lower costs for the rest of the year.

And our product development and marketing efforts continue in good times and in bad.

Finally, our cash flow should continue strong for the foreseeable future.

You can be sure that things we can control, we will control, and we will continue to use our cash wisely and in the best long-term interest for all our stakeholders.

PPG Industries Inc (PPG) 2004 Q1 法說會逐字稿

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