PPG Industries (PPG)

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PPG Industries, Inc.(NYSE: PPG) makes "coatings" - materials that include simple house paint, but also higher-end chemicals used in the aerospace industry and (for example) Transitions® lenses which change from shaded to clear when the person wearing them is indoors. PPG's revenues have increased during the past few years due to strong sales in Asia (especially China-second quarter sales increased 325% in the last two years)^[1] and its January 2008 acquisition of SigmaKalon, a worldwide coatings producer.

Sales in the United States have decreased due in part to a weakened housing market. Fewer homes are being built, meaning there is a decreased demand for construction materials and thus lower sales for PPG. Also, increases in transportation costs due to inflation of fuel prices resulted in a $20 million increase in expenses.^[2] Finally, natural gas is PPG's primary source of energy-it made up 6.5% of total costs for fiscal year 2007.^[3] Natural gas prices rose $2.00 per Btu(British thermal unit) from the first to second quarters of 2008.^[4]

[edit] Business and Financials

2007 Net Income by Segment ($millions)

PPG Industries operates in five segments:

• Performance Coatings(34% of fiscal year 2007 sales) is composed of refinish, aerospace and architectural coatings businesses:

1. The refinish coatings business produces coatings for automotive and fleet repair, as well as specialty coatings for signs. Its products are sold through distributors.
2. The aerospace coatings business produces sealants, paint strippers and armor for commercial and military aircraft.
3. Architectural coatings produces both protective and decorative coatings for buildings and bridges. This business owns 440 stores in North America and 80 in Australia.

The performance coatings segment sells its products worldwide either directly to consumers or through company-owned distributors.^[6]

• The Industrial Coatings segment(32% of fiscal year 2007 sales) contains the automotive, industrial and packaging coatings businesses. These coatings are customized for each customer. The packaging businesses supplies product manufacturers with coatings and inks for consumer product containers.

The performance and industrial coatings businesses share factories around the world. They have 31 facilities in North America (28 in the United States, 2 in Canada and 1 in Mexico).^[7]

• Optical and Specialty Materials(9% of fiscal year 2007 sales) primarily produce Transitions® lenses, sunlenses and optical materials. This segment also produces Teslin® synthetic printing sheets, which are used in waterproof labels, passports and ID's. This segment operates 13 plants worldwide. This segment used to contain the fine chemicals businesses. However, PPG sold the fine chemicals business in the fourth quarter of 2007.^[8]

• The Commodity Chemicals segment(14% of fiscal year 2007 sales) sells its products directly to manufacturers in the chemical processing, rubber, paper and plastics industries. This segment operates 3 factories in the U.S., 1 in Canada and another in Taiwan.^[9]

• PPG's Glass segment(11% of fiscal year 2007 sales) produces flat glass and fiberglass. Most of its products are sold directly to manufacturers and its main markets are construction, transportation and electronics. The Glass segment operates 10 factories around the world and partially owns operations in China, Japan, Taiwan and the United States.^[10]

Net Sales and Net Income for PPG Years 2003-2007

PPG's income has increased in the past three years. In fiscal year 2007 sales increased by 14%.^[12] It also had double-digit percentage growth in Performance Coatings, Industrial Coatings and Optical and Specialty Materials. In the fourth quarter of fiscal 2007 sales volume increased by over 5% across all PPG's businesses.^[13] Also, there has been double-digit percentage growth in Asia and Latin America. China has proven to be an especially strong market for PPG, as it constructs an estimated 2 billion square meters each year.^[14] Also, in January 2008 PPG acquired SigmaKalon, a coatings producer based in the Netherlands. The acquisition increased PPG's total sales by 30%.^[15]

PPG's 2007 Sales by Geographic Region

PPG's largest markets are in Europe and the United States. Asia is also becoming a strong market for PPG. For example, in China there is an increased demand for construction materials. This increased demand in China helps offset a decrease in business in the United States. Fewer homes are being built, leading to lower demand.^[17] Demand in Europe has remained relatively stable with respect to both Asia and the United States.

[edit] Trends and Forces

[edit] Weakened Housing Market Causes Decreased U.S. Sales for PPG

New House Construction in the United States (thousands of houses)

The above chart shows how many new houses are being constructed in the United States during 2008 and compares the data to 2007. The amount of construction has decreased both from the previous quarter and even more since the first quarter of 2007. Decreased construction means less demand for architectural coatings in America. In the U.S., sales volume for PPG's Architectural Coatings segment decreased by 10%.^[19]

[edit] Increasing Costs Decrease PPG's Net Income

Natural gas is PPG's primary energy source. The price of natural gas increased from $8.50 per million Btu in the first quarter of fiscal year 2008 to $10.50 per million Btu in the second quarter of fiscal 2008.^[20] Every $1.00 per million Btu increase in the price of natural gas leads to an increased cost of 60 to 70 million dollars per year. Oil prices have increased as well, jumping from $90/barrel in January 2008 to about $130/barrel in July 2008.^[21] Due to higher oil prices, transportation costs for the second quarter of fiscal 2008 are $20 million higher than the same period in fiscal 2007.^[22] In addition, raw materials costs for the coatings department rose by $40 million in 2007 and $75 million in 2006.^[23]

[edit] Urbanization in China Means there is a Growing Market for PPG

Construction spending in China increased by 165% from 2004 to 2008, and is increasing by an average of 25% each year.^[24] According to the 11th Five Year period (2006-2010), construction plans estimate 2 billion new square meters each year. By 2010 China will have built an estimated 80 billion square meters of new housing.^[25] PPG has 6 factories in China and sales for the second quarter of fiscal 2008 were $500 million, a 325% increase from 2006.^[26] Overall sales have increased by 80% since last year.^[27]

[edit] Competition

Akzo Nobel N.V. (AKZOY) is the world's largest paint maker and one of the largest chemical manufacturers. Its business is divided into two segments: coatings and specialty chemicals.^[35]

Nippon Sheet Glass produces glass and glazing systems in four areas: Building Products, Automotive Products, Information Technology Materials, and Glass Fiber. Its flat glass business composes 90% of annual sales.^[36]

Sherwin-Williams Company (SHW) is a global producer of paints and coatings. It sells its products under brand names such as Dutch Boy®, Pratt & Lambert®, Martin-Senour®, Dupli-Color®, Krylon®, Thompson's® and Minwax®.^[37]

[edit] References

1. ↑ PPG Industries Q2 2008 Earnings Call Transcript.
2. ↑ PPG Industries Q2 2008 Earnings Call Transcript.
3. ↑ PPG 2007 10-K. Item 6, Page 34.
4. ↑ PPG Industries Q2 2008 Earnings Call Transcript.
5. ↑ PPG 2007 10-K. Item 7, Page 20.
6. ↑ PPG 2007 10-K. Item 1, Page 11.
7. ↑ PPG 2007 10-K. Item 1, Page 11.
8. ↑ PPG 2007 10-K. Item 1, Page 12.
9. ↑ PPG 2007 10-K. Item 1, Page 12.
10. ↑ PPG 2007 10-K. Item 1, Page 13.
11. ↑ PPG 2007 10-K. Item 6, Page 19.
12. ↑ PPG Industries Q4 2007 Earnings Call Transcript.
13. ↑ PPG Industries Q4 2007 Earnings Call Transcript.
14. ↑ "China: Architecture, Construction & Engineering." U.S.A. Department of Commerce.
15. ↑ PPG Industries Q2 2008 Earnings Call Transcript.
16. ↑ PPG 2007 10-K. Item 24, Page 70.
17. ↑ National Data: Housing Production.
18. ↑ National Data: Housing Production.
19. ↑ PPG Industries Q2 2008 Earnings Call Transcript.
20. ↑ PPG Industries Q2 2008 Earnings Call Transcript.
21. ↑ OPEC Monthly Average Price.
22. ↑ PPG Industries Q2 2008 Earnings Call Transcript.
23. ↑ PPG 2007 10-K. Item 1A, Page 16.
24. ↑ "China: Architecture, Construction & Engineering." U.S.A. Department of Commerce.
25. ↑ "China: Architecture, Construction & Engineering." U.S.A. Department of Commerce.
26. ↑ PPG Industries Q2 2008 Earnings Call Transcript.
27. ↑ PPG Industries Q2 2008 Earnings Call Transcript.
28. ↑ PPG 2007 10-K. Item 1, Page 14.
29. ↑ Akzo Nobel 2007 Annual Report-Page 4.
30. ↑ Akzo Nobel 2007 Annual Report-Page 4.
31. ↑ Nippon Sheet Glass 2007 Annual Report-Page 2.
32. ↑ Nippon Sheet Glass 2007 Annual Report-Page 17.
33. ↑ Sherwin-Williams Company 2007 Annual Report-Page 43.
34. ↑ Sherwin-Williams Company 2007 Annual Report-Page 50.
35. ↑ Akzo Nobel About Us.
36. ↑ About NSG.
37. ↑ Sherwin-Williams Investor Relations.