Architectural Demand Boosts Earnings, but Automotives Stall.

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Author: Walsh, Kerri

PAINTS AND COATINGS

Most paints and coatings makers and their raw material suppliers reported an increase in first-quarter sales and profits, helped by higher selling prices and tighter cost controls compared to the year-ago period. Producers of architectural coatings say they reported strong earnings helped by mild and dry weather, especially in the U.S. However, the European architectural paint sector has been "challenging," and suppliers to the automotive industry, reported a decline in sales, particularly in the U.S. market.

Sherwin-Williams (SW) says operating profit from its paint stores group jumped 51%, to $113.3 million, on sales up 21%, to $1.1 billion, reflecting strong domestic architectural paint sales to contractor and do-it-yourself (DIY) customers and improved industrial maintenance product sales. Operating income from the consumer group segment rose 8%, to $56.7 million on sales up 1%, to $329.9 million. The sales improvement was due primarily to increased paint sales volume and selected selling price increases. However, those increases were mostly offset by the elimination of a portion of a paint program with one large retail customer, SW says. The global group segment reported operating income up 56%, to $32.5 million, on sales up 14%, to $380.6 million. Architectural paint selling price increases and volume gains in Mexico and South America, and improved automotive and product finishes sales helped to boost sales, the company says.

"All of our operating segments managed to mitigate much of the continuing raw material cost increases with various programs of expense control and increased productivity," says Christopher Connor, chairman, president, and CEO of SW.

Rohm and Haas (R&H) reported operating income from its coatings business up 4.1%, to $51 million, on sales up Z9%, to $673 million. Operating income includes a $4-million charge for restructuring and other one-time costs within the graphic arts business. Stronger demand and higher selling prices, which more than offset higher raw material and energy costs and increased operating and support costs, helped to improve earnings, R&H says.

Architectural and functional coatings sales rose 10% because of strong demand and higher selling prices compared to the year-ago period. However, that was partly off set by unfavorable currency exchange rates, R&H says. Demand in the decorative paint segment was "particularly strong," as a result of mild and dry weather in North America, the company says. Expansion in emerging markets, including China, India, and Turkey, delivered significant volume growth, it says.

R&H says its powder coatings sales increased 4% because of higher volume and higher selling prices, which more than offset the impact of weaker European currencies. The business is expanding in emerging markets, "including Asia/Pacific, the company says.

Automotive coatings sales decreased 14%, reflecting lower demand from U.S. automotive manufacturers, R&H says. However, that demand was offset by growth from the Japanese automobile market, the company says.

DuPont, which produces paint for OEM markets including the automotive sector, says its sales fell 1%, to $1.5 billion. DuPont's pre-tax operating income from its coatings business fell 91%, to $15 million, including a $135-million restructuring charge. Income fell 7% excluding the charges. DuPont recently announced that it is cutting 1,500 jobs, about 15% of its performance coatings workforce, and will close manufacturing plants and labs within that business to improve profitability and competitiveness. The performance coatings business serves the automotive market, and the job cuts will mostly be in the OEM business (CW, March 22, p. 10).

A drop in automotive sales is tied to a slowdown in U.S. car sales, says Phil Phillips, managing partner and president of consulting firm Chemark Consulting Group (Southern Pines, NC). Automobile makers are forcing OEM paintmakers to help them become more efficient, by creating technology that wastes less paint during the coating process, which also results in lower paint sales, Phillips says. Competition from overseas automobile producers in the U.S has taken away market share from domestic producers, which also has cut paint demand from the sector, he says. Market saturation in the U.S. auto sector has also led to a drop in OEM paint sales, he adds.

PPG Industries says its coatings sales increased 8%, to $1.44 billion because of higher volumes, especially in Asia, and improved selling prices across most businesses. "These increases coupled with an increase in sales due to acquisitions were partially offset by the impact of weaker foreign currencies," the company says. Operating earnings were up $167 million compared to $9 million because of higher selling prices and volumes. Those increases were partly offset by inflation, primarily raw material costs, and the impact of business restructuring. First-quarter 2005 earnings include the impact of an adverse legal settlement.

Akzo Nobel's coatings sales improved 16%, to €1.4 billion ($1.74 billion), and operating income excluding special items rose 68%, €104 million. Volumes rose 7%, and selling price increases, 2%, the company says. Coil, marine and protective, and wood coatings had higher earnings, Akzo says. The car refinishes unit "is clearly turning the corner" helped by cost reductions, the company says.

Akzo's architectural coatings business in Western Europe has been under pressure because of high costs, "and restructuring measures to adjust the cost base in this region are being actively pursued," Akzo says. The company says it will relocate production of decorative paints at Sant Adriá de Besós, Spain, to another site in the region, which will house all production, logistics, and warehousing operations for the company's decorative coatings business in Spain. Akzo has agreed to sell its Sant Adrift. de Besós site to real estate developer Urbis (Madrid) for an undisclosed amount, and will continue to use the site for up to four years while it builds the new plant (CW, March 22, p. 21).

Meanwhile, Akzo has made a bid to acquire leading Canadian architectural coatings maker Sico (Quebec City, PQ) for C$20/share ($17.7/share), valuing the company at C$295 million. The deal will bolster Akzo's North American paint operations, the company says. Sico also manufactures and supplies industrial coatings.

Legend for Chart:

A - COMPANY
B - SALES
C - % CHANGE
D - EARNINGS
E - % CHANGE

      A                  B     C        D      E

Sherwin-Williams     $1,800    15%    $114    37%

Akzo Nobel(1)         1,740    16      129    68

PPG Industries(2)     1,440     8      167    NM

DuPont(3)             1,500    -1       15   -91

Rohm and Haas(4)        673     8       51     4

RPM(5)                  613    19        7    53

(*) First-quarter sales and income from paints and coatings
businesses. (1) First-quarter 2006 operating income excluding
special items. (2) First-quarter 2006 operating profit includes
pretax charges of $33 million. 2005 first-quarter operating
income of $9 million includes pre-tax charges $150 million.
(3) Pre-tax first-quarter 2006 operating income includes $135
million restructuring charge. (4) 2006 first-quarter operating
income includes a $4-million charge. (5) Operating income
excludes asbestos related charges.

PHOTO (COLOR): Top up: Earnings rise on architectural paint sales.

PHOTO (COLOR): Connors: Manage to offset higher costs.

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By Kerri Walsh