PPG Industries CFO Warns That Auto Demand Could Decline

Auto makers - one of PPG Industries Inc.'s key end- markets, are trying to reduce inventories, the Pittsburgh chemical company's chief financial officer warned Thursday.

However, despite the likelihood of a decline in auto-related demand and higher pension and retiree medical costs, PPG sees some clouds lifting, said William Hernandez.The CFO's taped comments were made available after the release of PPG's first-quarter earnings report.

Progress in the war in Iraq and warmer weather favor lower natural-gas prices, which would reduce PPG's input costs. Hernandez said he also sees continued improvement in volumes in the coming months, and said PPG expects the economy to recover slowly.

PPG earlier Thursday reported first-quarter net income of $78 million, or 46 cents a share, versus net income of $34 million, or 20 cents a share a year ago.

First-quarter earnings this year included charges of 5 cents a share. Excluding those charges, earnings would have been 51 cents a share, matching the consensus analyst estimate compiled by Thomson First Call.

First-quarter revenue was $2.07 billion, up 10% from a year ago and above the First Call consensus estimate of $1.95 billion.

Buckingham Research analyst John Roberts told Dow Jones that the PPG results were consistent with better-than-expected preannounced first-quarter earnings from DuPont Co. and Rohm & Haas Co. .

He said PPG and other companies that hedged their natural-gas costs had profit margins "hold up OK."

While the first quarter is typically marked slower cash generation and rising debt, in this year's first quarter debt was slightly down, said PPG Chief Financial Officer Hernandez.

"We fully expect to pay down debt, as the year progresses, with the excess cash available - after fully supporting our technology, our growth initiatives and dividend payments," Hernandez said.

He noted that PPG has paid continuous dividends for more than 100 years, including 31 consecutive years of increased payments.

PPG continues to focus on cash conservation, except for research and development, "which is an important element of our strategy," said Hernandez.

Cash will also be used for capital spending, which is on track to meet previous guidance for 2003 of $250 million to $300 million, said Hernandez.

Hernandez also noted that hedging has helped the company. PPG uses large quantities of natural gas to generate power in the production of chlorine and caustic soda as well as glass and fiberglass. A change in natural gas costs of $ 1 per million BTUs translates to a pretax cost change of $60 million for PPG.

Natural gas prices have fallen from an average of about $6.60 per million BTUs in the first quarter to a current price of about $5 per million BTUs. PPG hedged about one-third of its 2003 needs at $3.25 per million BTUs last spring, he said.

In a note Thursday, Smith Barney analyst P.J. Juvekar lowered his PPG 2003 earnings-per-share estimate to $2.85 from $2.90, citing "lower auto production in 2Q and slower global economic recovery." The Thomson First Call analyst consensus is $2.96 per share for 2003.

Juvekar also cited higher retiree costs, and said pension costs will reduce earnings by about 12 cents a share per quarter. He also said higher pension expense has reduced PPG's earnings per share by 90 cents over the last two years, a larger impact than its competitors have experienced.

With respect to pension cash contributions, Hernandez Thursday reiterated his statement from January that PPG is considering making a voluntary contribution to its employee pension fund of $20 million to $30 million.

The biggest variation between first-quarter results and Juvekar's first- quarter estimate was lower income in glass, which was partly due to pricing pressure in windshields.

That negative was partly offset by higher income in the company's chemical unit, which produces chlorine, caustic soda and other products.

Buckingham Research analyst Roberts noted that the company's chemical volumes were up 10%, with commodity volumes up 2% and specialty chemical volumes up 20%. The rise in specialties reflected "good acceptance of the latest generation of photochromic eyeglass lenses," he said.

Total volumes were up 4% companywide, including rises of 2% in coatings and 4% in glass, said Roberts.

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