PPG's EPS Meets, Sales Trail - Analyst Blog
) racked up record quarterly earnings in second-quarter 2012
despite lower sales. The company posted earnings of $2.36 a share,
excluding items, which came in line the Zacks Consensus Estimate.
The adjusted earnings exclude charges associated with the company's
move to divest its commodity chemicals business to Georgia Gulf
Corp. for $2.1 billion.
Profit (as reported) rose 6.5% year over year to $362 million or $2.34 a share, helped by the company's cost containment measures. PPG Industries reported a profit of $340 million or $2.12 a share a year ago.
Shares of PPG Industries, which are up 22% so far this year, jumped $6.86 (or 6.58%) in pre-market trading.
Revenues slipped 0.8% year over year to $3,955 million, missing the Zacks Consensus Estimate of $4,153 million. Sales were dented by unfavorable currency exchange swings. The Pennsylvania-based company said that currency translation reduced it sales by 5% in the quarter.
PPG Industries saw mixed results across its end markets in the quarter with its aerospace and automotive OEM coatings businesses recording strong growth. Strong internal growth in domestic market was somewhat offset by softness in Europe.
Revenues from the Performance Coatings division crept up 1% year over year to roughly $1.2 billion as better selling prices helped offset the currency translation impact. The company noted that its aerospace business delivered strong growth in the quarter while architectural coatings revenues rose by mid single-digits. Weak volumes were witnessed across automotive refinish and marine coatings businesses.
Industrial Coatings sales edged up 2% year over year to $1.1 billion. Domestic sales volumes rose over 20% in the quarter driven by strong performance of automotive OEM coatings business. Results in emerging markets were mixed while Europe witnessed a decline (volume down roughly 10%).
Revenues from Architectural Coatings (Europe, Middle East and Africa) dipped 2% to $601 million as improved pricing was more than masked by lower volumes. In addition, contributions of Dyrup acquisition was neutralized by unfavorable currency exchange impact.
Optical and Specialty Materials sales fell 4% to $314 million in the quarter due to the currency impact and soft market conditions in Europe. Revenues from the Commodity Chemicals segment clipped 9% year over year to $427 million on account of weak chlorine demand and lower pricing and volume. Sales from the Glass segment fell marginally to $273 million as lower pricing and negative currency impact offset an increase in flat glass volumes.
The company ended the quarter with cash and cash equivalents and short-term investments of roughly $1.2 billion, flat year over year. Total debt decreased 3% year over year to around $3.6 billion. The company did not repurchase shares during the quarter given the negotiation associated with the spin-off of its commodity chemicals business.
Spin off of Chemical Unit
In addition to posting record earnings, the company also announced a definitive agreement, under which, it will split its commodity chemicals unit and merge it with Georgia Gulf. The deal value of roughly $2.1 billion includes $95 million of debt.
Under the agreement, the company's shareholders will receive 50.5% of the shares of the merged entity while Georgia Gulf shareholders owning the balance. The shareholders of PPG Industries will get $1 billion in Georgia Gulf shares. The transaction is expected to consummate in late 2012 or early 2013.
Outlook and Recommendation
Moving ahead, the company expects the European market to remain under pressure and foresees inconsistent growth in North America and Asia. It will continue to execute the restructuring measures in its European operation, which are expected to fetch cost savings of $40 million-$50 million in the back half of 2012. The company expects higher input costs to continue to weigh on its results in the second half. But it will implement the appropriate pricing strategy to offset the impact.
PPG Industries' strategy of diversifying its business across various products and geographies has come in handy in testing times. However, raw material inflation remains a concern for the company.
Currently, we have a long-term Outperform recommendation on PPG Industries. The company, which competes with DuPont Performance Coatings segment of EI DuPont de Nemours & Co. ( DD ), holds a short-term Zacks #2 Rank (Buy).
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