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Cost Cutting Drives Q3 Earnings at PPG

Thursday, October 18, 2012

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“Aggressive” cost reductions more than offset flat third-quarter sales at PPG Industries, reaping record earnings for the second consecutive period, the Pittsburgh-based paint maker announced Thursday (Oct. 18).

PPG followed its record second-quarter earnings with another quarterly high, implementing cost savings that produced a modest profit despite lackluster sales.

Photos: PPG Industries

U.S. architectural coatings daily sales grew by low- to mid-single-digit percentages, with growth in each channel and the strongest results in company-owned stores.

The world’s No. 2 paint and coatings company reported third-quarter 2012 net sales of $3.8 billion, the same as the year-ago period. Net income for the quarter was $339 million (or $2.18 per diluted share), up from $311 million ($1.96 per diluted share) in the same quarter of 2011, according to its third-quarter earnings report.

“We delivered record third-quarter earnings per share, despite uneven demand among regions and end-use markets,” said chairman and CEO Charles E. Bunch. “Our coatings segments drove the record performance on improved local currency sales and 20 percent earnings growth.”

Sales Ups and Downs

Sales companywide were flat versus the third quarter 2011, as the impact of negative currency translation offset local currency sales growth of 4 percent, said Bunch.

North American sales activity remained strongest, led by automotive OEM and refinish coatings growth, the company said. Performance Coatings segment sales were flat from the same quarter of 2011. Industrial Coatings sales climbed 5 percent, while Architectural Coatings—EMEA dipped by 2 percent.

Sales in Asia and Latin America were flat overall, with growth in automotive OEM and packaging coatings businesses offsetting weaker marine coatings sales due to declining newbuilds.

“European volume remained below the prior-year quarter, but the trend improved notably in comparison with second quarter year-over-year results, due to less customer inventory destocking,” said Bunch.

Cost Cutting

Bunch credited the company’s third-quarter performance with a continued “aggressive focus on cost reduction” combined with moderating raw material inflation rates.

“Improvements in manufacturing costs were coupled with savings from our restructuring actions, which remain on schedule to deliver partial-year 2012 savings of $40 million to $50 million,” he said.

Cash and short-term investments totaled about $2 billion at the end of the third quarter. Year-to-date cash from operations was slightly more than $1 billion, up more than 33 percent versus the prior year.

Divestment Charges

As in the second quarter, PPG’s third quarter included nonrecurring charges related to its commodity chemicals deal with Atlanta-based Georgia Gulf.

In the third quarter, those after-tax charges totaled $9 million, or 6 cents per diluted share; in the second quarter, PPG reported $3 million in after-tax charges that nipped two cents from its per-share price. The company anticipates additional separation costs in the fourth quarter.

Chairman and CEO Charles Bunch said restructuring activity would continue in the fourth quarter.

Adjusted net income for the quarter, excluding the nonrecurring charges, was $348 million, or $2.24 per diluted share.

Performance Coatings Results

Quarterly sales for Performance Coatings—comprised of Protective and Marine, Aerospace, Architectural (Americas and Asia Pacific) and Automotive Refinish—were $1.2 billion, flat with the third quarter of 2011. Nevertheless, segment earnings grew 7 percent to $203 million.

Unfavorable exchange rates and lower sales volume were offset by sales increases from acquisitions and higher selling prices, the company said.

Volumes increased modestly in the U.S. and declined in all other regions. Aerospace and automotive refinish sales grew.

U.S. architectural coatings daily sales grew by low- to mid-single-digit percentages, with growth in each channel and the strongest results in company-owned stores. Higher global protective coatings volume helped offset struggling sales in emerging regions caused by lower architectural demand and weakening marine newbuild activity.

The segment achieved lower costs through discretionary cost management, restructuring and slowing cost inflation, PPG reported.

Other Segments

Industrial Coatings segment sales for the quarter were $1.1 billion, a 5 percent increase over the year-ago period. Demand was lower and uneven by region and end-use application—with, for example, weaker consumer electronics demand and higher automotive parts activity.

Segment earnings for the quarter were $153 million, an increase of $52 million. The segment reported strong volume growth, pricing and acquisitions, but these were partly offset by unfavorable currency translation that reduced sales by about $50 million.

Robust automotive OEM coatings volume growth continued globally, despite European weakness, with company gains easily outpacing industry growth, PPG said.

Architectural Coatings—EMEA (Europe, Middle East and Africa) sales for the quarter were $564 million, a 2 percent from the prior year. Currency rates eroded sales by about 11 percent, while sales from the Dyrup acquisition completed in January 2012 increased sales 8 percent. Volumes declined by low-single-digit percentages, but the decline was less severe than in the previous quarter, PPG said.

Optical and Specialty Materials third-quarter sales were $282 million, down 9 percent. Commodity Chemicals segment sales for the quarter were $437 million, down 2 percent. Glass segment sales were $262 million for the quarter, down $11 million from the prior year.

Forecast: ‘Seasonally Slower’

Bunch said the fourth quarter would bring “a seasonally slower period in most end-use markets” with “little change in the inconsistent performance of economies outside North America.”

He predicted “measured economic growth in North America” and continued strong showings by automotive OEM and aerospace.

“Given the economic backdrop, we are pleased to have delivered higher earnings in each region in the third quarter and year to date. We will remain focused on aggressive management within the regions to maximize our financial performance, and we expect to benefit further from the continued implementation of restructuring actions.”