CHAIRMAN'S LETTER |
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JAMES S. MARLEN
"We are very pleased with the Company's eighth consecutive year of record earnings. Our mission is to continue to enhance value by growing and consistently delivering superior results."
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Ameron earned $3.67 per share in 2003 on sales of $600.5 million, compared to $3.49 per share in 2002 on sales of $539.5 million. This represents the eighth consecutive year of record earnings. Over the past 10 years, earnings have increased at a compounded annual growth rate of 15%. Sales in 2003 were also at a record level, exceeding $600 million for the first time. Additionally, Ameron's primary joint-venture companies achieved sales of over $228 million. Ameron's financial results in 2003 were achieved despite the significant increase in insurance and pension costs of over $11 million that we discussed at the start of the year. We are pleased with the Company's performance as our mission is to continue to enhance value for shareholders. Importantly, all business segments contributed to the record performance, highlighting the strength of our diversified portfolio of businesses. Each business segment had higher year-over-year sales, while the income performance was balanced as the Fiberglass-Composite Pipe Group had an outstanding year, and the Water Transmission Group, although down slightly from 2002, continued at the high level of recent years. The Performance Coatings & Finishes Group had slightly higher results, and the Infrastructure Products Group had solid but lower earnings. Income from joint-venture companies was down as TAMCO was confronted by rapidly rising steel scrap prices and by continued high energy costs. TAMCO is the largest steel mini-mill in California, of which Ameron owns 50% in partnership with Tokyo Steel and Mitsui & Co., each with 25%. Market conditions in our business sectors were mixed. In Coatings, the industrial sector was generally soft worldwide, while the marine and offshore markets were steady to improving. The Fiberglass-Composite Pipe Group benefited from the improving conditions in the marine and offshore market, especially in Asia. Although oil prices remain high, oil companies have continued to limit spending for onshore oilfield products, and, as a result, there was only modest improvement in this market segment. In addition, the commercial and industrial markets for fiberglass pipe in the U.S. and Europe were generally soft. The Water Transmission Group has experienced a lull recently in the scheduling of major water projects in the western U.S. after a very robust market for the past few years. Given the pent-up demand for municipal water projects in the western U.S., this lull should be temporary. The Infrastructure Products Group is driven by construction spending, and during 2003, the sector was strong, primarily due to the low-interest rate environment. Housing and infrastructure spending was robust, especially in the western and southeastern regions and Hawaii. Looking ahead, it appears as though the industrial sector worldwide will continue to gradually improve, the marine and offshore markets will strengthen, and the construction and housing markets should be solid, especially in Ameron's key geographic markets. Ameron has consistently achieved quality earnings by developing and executing specific strategies that are unique for each business and by relying on a common setoff strategic fundamentals. These can be summarized as: SELECTIVE INVESTMENTS, VALUE-ADDED GROWTH and OPERATIONAL EFFICIENCY. By SELECTIVE INVESTMENTS, we mean making capital investment decisions after rigorous risk examination to ensure that the investment returns are commensurate with the risk. In the past five years, Ameron has committed over $90 million in capital investments to enhance and grow existing businesses. Investments are targeted with the majority earmarked to introduce new products, upgrade manufacturing processes to improve productivity and product quality. Capital is also committed to increase capacity or to construct new plants, such as the recent decorative concrete pole plant constructed in Alabama to penetrate the southeastern market or the plans being evaluated for a new fiberglass-composite pipe plant to be built in Malaysia. Investments also include acquisitions- but our criteria is highly selective since there is no value created when investments are made only for the sake of growth or the premiums are excessive. While receptive to acquisitions, we evaluate opportunities principally in our core businesses or closely-related businesses that offer superior return potential. By VALUE-ADDED GROWTH, we mean focusing on sales opportunities that provide value-enhancing, profitable growth where Ameron can use its advantages in technology, marketing and manufacturing to achieve superior profits. Ameron's businesses are pursuing numerous programs aimed at achieving organic growth. Fiberglass-Composite Pipe Group's revolutionary new product-steel-strip laminate pipe (SSL)-is in the final specification and product qualification phase in conjunction with a joint program with major oil companies. Long term testing and test lines are proceeding, along with manufacturing refinements and formulation improvements, in anticipation of full commercialization. SSL represents a significant long-term growth opportunity. The Water Transmission and Fiberglass-Composite Pipe Groups have teamed to develop a new composite-pipe product to serve the growing national sewer rehabilitation market. There is a significant need to repair, replace or upgrade the national wastewater infrastructure. Ameron has targeted the larger-diameter requirements for new wastewater lines and sewer rehabilitation. Product development is proceeding, manufacturing process upgrades are in progress, and it is expected that long-term testing will be successfully completed by the end of 2004. The Performance Coatings & Finishes Group will introduce various new product lines in 2004 to serve new market segments. We will introduce an epoxy-based coatings line for the industrial flooring market, which includes concrete flooring for areas such as manufacturing and warehouse facilities. The market is sizable and is a natural extension for Ameron. A thin-film intumescent coating for fire protection of steel in high-rise buildings, currently marketed by the Company's subsidiary in Europe, will soon complete the Underwriters Laboratories' certification testing and will be introduced in the U.S. early in 2004. Another exciting development is an environmentally-friendly tin-free, antifouling coating with a low copper release rate for the marine industry. Technology is the key to growing the Performance Coatings & Finishes business, and in 2004 emphasis will continue on new product developments. For the Infrastructure Products Group, value-added growth initiatives focus on geographic expansion of pole products operations and strengthening our market leadership position in both pole product operations and in our Hawaiian operations. In Hawaii, the introduction of Isle Cell Crete, a unique lightweight concrete, provides a product differentiation opportunity and further strengthens our market leadership position. Value-added growth is also targeted in concrete sports-lighting poles and hybrid fiberglass distribution poles to serve a growing national electrical distribution need. By OPERATIONAL EFFICIENCY, we mean requiring a high standard of discipline and performance. We have assembled a quality management group which has the autonomy to execute operating plans with an entrepreneurial mind set. Strategic and operating plans are formally and informally reviewed frequently and a strong system of financial controls is in place. Essentially, our philosophy is that while management processes are important in managing the Company, our principal focus is on results. We also have made good progress in strengthening the financial condition of the company. As a result of the strong cash flow generated from operations during 2003, we were able to reduce total debt by $19 million and, over the past five years, debt has been reduced by over 50% from a high of over $200 million to $94 million at the end of 2003. The Company's financial leverage, measured by the debt-to-capital ratio, has been lowered to 27% from over 50% in recent years. Dividends have been paid for 50 consecutive years, and in 2003 the dividend rate was increased by 25% to $0.80 per share reflecting strong cash flow and our confidence in long-term sustainable performance. Ameron stock has outperformed the general stock market index and its peer group of companies. Cumulative total
shareholder return over the past five years for Ameron was 106%, which compares to a decline of 14% experienced
by a peer group of companies and a return of 5% by the broad NYSE market. While we have been rewarded for The question is often asked, "What do you want to do with the Company?" The answer is straightforward- continue to consistently grow earnings and reward our shareholders as has been done over the past several years. The answer to, "How are we going to do it?" rests with development of very well-defined strategies for each business, adherence to sound business fundamentals, and successful execution by a talented management team worldwide. I remain confident that we will continue to deliver superior results.
JAMES S. MARLEN Chairman of the Board, |
