PPG Industries (PPG) Shuts Down Thailand Operations, Remains Strong in Other Regions
By: Leo Sun, dated December 1st, 2011 INVESTORGUIDE.COM
The ongoing floods in Thailand are the worst in over half a century, disrupting the supply chains of major international businesses, who once viewed Thailand’s lower labor costs as an attractive alternative to investing in China. Recently, chemical manufacturing giant PPG Industries (PPG: Charts, News, Offers) joined the mounting list of casualties as it reported that its optical products manufacturing and distribution operations in Thailand have been severely disrupted, offering no time frame for a return to normal operations. PPG has attempted to declare a “force majeure” provision – an insurance clause that frees companies from liability when extraordinary events, such as natural disasters, significantly disrupt business. Production at PPG’s facilities in Bang Pa-In and Lat Krabang have both been suspended. How does this dire news from Thailand affect PPG’s other core businesses?
Pittsburgh, Pennsylvania-based PPG’s chemical business is widely spread over multiple industries. The company is a leading producer of protective and decorative coatings, optical specialty materials, commodity chemicals and glass. The company competes on several fronts with industry leader DuPont (DD: Charts, News, Offers). For its third quarter results, PPG posted earnings of $1.96 per share, or $311 million, a vast improvement over the $1.58 per share, or $262 million, it posted a year earlier. This beat the consensus estimate by three cents. Revenue rose 11% from $3.5 to $3.8 billion, slightly missing the expectations of $3.89 billion. PPG management attributed its improved earnings to higher prices in its coating businesses, successful cost reduction initiatives and an industrial recovery on the macro level worldwide. Rising raw material costs crimped its earnings slightly, but was offset by large gains in other areas. Sales of its commodity chemicals rose 20%, 12% for industrial coatings, 12% for architectural coatings, 9.5% for performance coatings, 8% for optical and specialty materials and 5% for glass. Demand for its protective and decorative coatings climbed in Asia and Latin America – the key emerging markets – while demand in Europe declined dramatically, as expected. Its North American market posted a modest gain.
PPG announced that it would continue increasing prices across the board, which mirrors the strategy of its industry peers. The strategy is primarily focused on preserving margins and holding inflation at bay. Throughout the second half of 2011, the company is forecast to dedicate between $500 million to $1 billion to projects focused on earnings accretion, dividend increases and share buybacks. In October, the company’s board of directors authorized a share buyback for 10 million shares. “Since the beginning of 2010, we have used a portion of our expanded cash position to repurchase about 16 million shares of stock,” stated PPG senior vice president David B. Navikas, “reducing PPG’s outstanding share count by nearly 10 percent, as we believe such repurchases are an excellent means to reward our shareholders.” The company also recently increased its dividend for the third time in 18 months to 42 cents per share, making it an attractive option for income investors. In terms of growth, PPG acquired Dyrup A/S, a producer of paint and wood protection products, for $160 million, in the third quarter. Although the company is hurting in Thailand, its other avenues of growth in Asia, such as its high-growth aerospace division, should keep the company profitable.
