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Executives

Vince Morales – Vice President, Investor Relations

Charles Bunch – Chairman, Chief Executive Officer

William Hernandez – Senior Vice President, Chief Financial Officer

David Navikas – Vice President, Comptroller

Analysts

Frank Mitsch - BB&T Capital Markets

Kevin McCarthy -Banc of America

Sergey Vasnetsov – Barclays

David Begleiter - Deutsche Bank

Amy Johnson – Goldman Sachs

Dmitri Silverstein – Longbow Research

Steve Schuman – Lafayette Research

Saul Ludwig – KeyBanc

Silka Koopf – JP Morgan

John Roberts - Buckingham Research

PPG Industries, Inc. (PPG) Q4 2008 Earnings Call January 16, 2008 10:00 AM ET

Operator

Welcome to the fourth quarter 2008 PPG Industries earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Vince Morales, Vice President of Investor Relations.

Vince Morales

Good morning, this is Vince Morales, Vice President of Investor Relations for PPG Industries. Welcome to PPG's fourth quarter and full year 2008 financial commentary. Joining me on the call for PPG is Chuck Bunch, Chairman and Chief Executive Officer, Bill Hernandez, Senior Vice President of Finance and Chief Financial Officer and Dave Dave Navikas, Vice President and Comptroller.

Our comments relate to the financial information released on Friday, January 16, 2009. Visuals supporting this briefing may be accessed through the Investor Center on the PPG website at www.ppg.com.

As shown on slide number two, our prepared remarks and possible comments in the question-and-answer session, may reflect forward-looking statements reflecting the company's current views about future events and their potential effect on PPG's operating and financial performance. These statements involve risks and uncertainties that could affect the company's operations and financial results and as discussed in PPG's filings with the SEC may cause actual results to differ from such forward-looking statements. The company is under no obligation to provide subsequent updates on these forward-looking statements.

This presentation also contains certain non-GAAP financial measures. Pursuant to the requirements of Regulation G, the company has provided in the appendix of the presentation materials a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures presented on slide number five of the visuals supporting this briefing.

Now let me introduce PPG's Chairman and CEO, Chuck Bunch.

Charles Bunch

Thank you Vince. Welcome everyone. In a few minutes Bill Hernandez will discuss our fourth quarter and full year financial results. Before he does that I will provide a quick recap of our businesses performance and I will also review the significant progress we made in 2008 toward continuing to transform our company.

Without question the fourth quarter was a challenge. Like many other companies, PPG experience dramatic volume declines and settle of the industrial end use markets that we serve due to the rapid deterioration in the overall global economy. Most significant were industry activity levels in automotive OEM which were down between 20-30% in each global region versus 2007 and a variety of general industrial end use markets which experienced equivalent declines.

As a result the earnings in our industrial coatings and glass reporting segments and the silica business unit which is part of our optical and specialty materials segment were significantly impacted. Both our industrial coatings and glass segments which collectively account for about 30% of our business portfolio actually reported operating losses in the quarter.

However, the remainder of our business portfolio representing about 70% of the company’s sales, delivered solid performance in the quarter despite the dramatic economic slow down. Our commodity chemicals segment grew earnings and performance coatings matched strong 2007 results. Our optical products business unit delivered once again organic volume growth and our architectural coatings EMEA segment in what is always a slower quarter due to seasonal trends performed slightly above our expectations.

Throughout the quarter we have continued to implement a variety of initiatives to reduce costs in all of our businesses in response to worsening global economic conditions. These actions were in addition to the initiatives we have underway as part of the restructuring program announced in September.

Of equal importance is that we posted yet another strong quarter for cash. Bill will provide more details on our liquidity position in a few minutes but let me simply state we ended the year with $1 billion of cash on hand. This gives us tremendous financial flexibility which as all of you know is critical in today’s business climate.

Overall for the full year 2008 it was certainly a challenging and dynamic year for most companies. PPG was no exception. Early in the year we experience rapid inflation including skyrocketing raw material, energy and freight costs. PPG reacted quickly to these increased costs and collectively our businesses achieved selling price increases that offset this inflation.

Later in the year the global economic downturn resulted in significantly lower activity levels. PPG again responded quickly. During the third quarter and well ahead of most companies we identified the severity of declining volumes and announced restructuring actions focused on lowering our cost structure.

This ability to swiftly adapt our businesses aided our financial results. What also helped were the broadened end-use markets served by our business portfolio as well as our enhanced geographic footprint. This diversification provided some resilience despite the sudden economic shifts and recessionary conditions we experienced in the year.

Our nearly $16 billion in sales established a new PPG record and was up 30% over the prior year including nearly 50% growth in our combined buildings segment sales. Optical and specialty material sales also grew by double digit percentages and our commodity chemicals business had one of its best years ever.

Our adjusted earnings per share results for 2008 were down slightly falling by more than 10% with the decline solely related to fourth quarter results. We anticipate this performance will exceed that of many companies in our peer group.

Also as you would expect from PPG throughout the year we actually enhanced our financial flexibility and greater exceeded our debt repayment commitments for the year. The company ended the year with one of its largest cash positions in recent history and we have only minimal debt maturities in both 2009 and 2010. We have improved our liquidity through our focused effort to manage working capital and capital spending along with the successful execution of our strategic initiatives.

Foremost among the strategic actions we have taken in this regard is our acquisition of SigmaKalon which we completed at the beginning of 2008. This acquisition has out performed all of our expectations including the business’ solid and stable generation of cash. As a result the company’s cash from operations for the year was a record $1.4 billion, up nearly 40% from our 2007 figure.

Also in September in a difficult M&A market we divested a majority interest in our automotive glass and services business. In addition we have continued to grow in emerging regions where we expect economic activity to continue to outpace the growth in mature regions. Our sales in emerging regions are approaching $4 billion or nearly 25% of our existing portfolio.

Finally, we have continued to grow or gain share in key end use markets such as optical, aerospace and protective and marine coatings. Our strategic actions have transformed PPG significantly. We are now a more focused company with stronger geographic and end use market diversity. This has not only helped drive solid financial results in 2008 but it has better positioned the company for today’s economic challenges and created a positive step change in our ability to generate cash. I believe that these accomplishments will provide PPG shareholders with benefits for years to come.

Now Bill will review the financial details and then I will conclude our prepared remarks with a few comments on 2009.

William Hernandez

Thanks Chuck. I will spend a few minutes covering PPG’s overall financial performance both fourth quarter and full year. I will also provide some details by business segment and discuss some macro trends relative to the year 2009.

Reviewing the slide detailing our fourth quarter sales our results increased 3% to a new fourth quarter sales record with our SigmaKalon acquisition the main driver of the gain. However, as Chuck mentioned, the quarter was truly a global end mark demand story. We, along with most other industrial companies, were heavily impacted by rapidly deteriorating volumes driven by economic weakness including lower overall consumer demand combined with industrial customer inventory de-stocking.

These lower activity levels were apparent in most of our businesses which directly face industrial customers resulting in our year-over-year volumes for the quarter declining by 12% or nearly $400 million. I will discuss this in more detail when I review each segment.

Our industrial coatings and glass segments were most heavily affected as a result of lower global automotive OEM and general industrial end-market demand. Our sales pricing continued a positive trend as our selling price gains accelerated during the quarter despite the slower volumes.

Currency served as a headwind in the quarter and our divestiture of our automotive glass business reduced our sales in comparison to last year by $230 million. The next slide details our full-year results showing our sales grew to $15.8 billion, up $3.6 billion or 30%. Again, our acquisitions accounted for the majority of this growth but we delivered $0.5 billion of favorable pricing gains as well.

Volume fell over 2% or approximately $325 million with the entire volume shortfall occurring in the fourth quarter but partially offset by favorable currency. Of note is that our combined coating sales grew by 47% to $11 million and are up over 225% versus just five years ago. Also, sales in emerging regions now account for 25% of the company versus 10% of a much smaller base just five years ago. From an earnings perspective our fourth quarter adjusted earnings per share was $0.41 versus $1.22 in the prior year with the drop primarily the result of the dramatic decline in volumes I mentioned.

Our sales price gains and lower cost structure stemming from our cost initiatives more than offset lower equity earning and higher inflation. Our full-year tax rate increase as the fourth quarter decline in earnings resulted in a geographic shift in our earnings.

Full-year adjusted earnings per share was down more than 10% versus 2007. Our year-over-year decline in earnings in the fourth quarter pushed our full-year results below our year 2007 results. Our full-year performance, while negative, will likely outpace a similar comparison by many other industrial companies and our favorable comparison to our peer groups is the result of many of the actions we have taken over the past several years focused on minimizing the impacts of steep economic shifts.

Let me quickly discuss two key topics on the next few slides that impacted our fourth quarter and full-year results. First and foremost was the fourth quarter decline in volumes. The nearly $400 million decline in the quarter resulted from our full-year volumes turning negative. The volume drop was broad both by end use market and by geography. Volumes were down at least 11% in all of our major geographic regions. As mentioned, the most severe declines were in the general industrial and automotive OEM markets. However, many other end use markets were impacted but to a lesser degree.

We did deliver positive volume growth in key businesses such as optical products and also aerospace despite the Boeing employee work stoppage. The next slide illustrates the rapid rise in energy costs which pushed up our inflation rates in several areas including natural gas, coatings raw materials and freight.

Our total full-year inflation for the company including raw materials, energy and other general inflation totaled $465 million. As Chuck mentioned, operationally we reacted quickly as we committed to cover the inflation impacts with selling price gains and we were successful as our selling price increases totaled about $500 million. Depicted on the right side of the slide were our expected and actual inflation rates for coatings raw materials costs each quarter. Many of our coatings raw materials are petroleum based and we typically lag petroleum inflation or deflation by about six months. Therefore, the first half 2008 rises in petroleum costs were most impactful to PPG’s results in the second half of the year.

As we began the fourth quarter we expected inflation rates to continue to accelerate which they initially did. But, toward the end of the quarter we began to see very rapid abatement for raw material pricing which allowed us to end the fourth quarter virtually flat with the prior quarter. We expect the rapid raw material price declines to continue in 2009 given both the second half 2008 slide in petroleum costs and the materially lower demand levels at our suppliers.

We also expect lower natural gas costs in 2009. Our full-year 2008 natural gas costs averaged about $9.00 per million BTU which was up about $1.50 versus 2007. We use 60-70 trillion BTU’s of natural gas per year so a $1.00 change in our purchase price equals to us $60-70 million pre-tax earnings impact. We expect 2009 natural gas costs to be lower and we have about ½ of our gas needs hedged in the first quarter at about $8.50 per million BTU. Based on recent market prices for the non-hedged portion our calculated first quarter 2009 gas price would be about $7.50 per unit versus $8.50 in the first quarter of 2008.

I will discuss some other macro topics that impacted 2009 shortly.

Now I will shift our discussion to our business performance. Our industrial base segment results are detailed on the next page. We recorded an operating loss of $40 million in the quarter versus $77 million in earnings in 2007 as sales declined nearly 18%. This segment felt the full impacts of the severe decline in the global industrial demand as fourth quarter selling volumes dropped by more than 20% in comparison with last year. The lower activity levels were across a broad section of global end-markets including consumer electronics, many general industrial applications and the most dramatic declines being in global automotive OEM markets.

Generally speaking, a 20% rate of decline was fairly consistent in our volumes serving these end-markets and in all geographies. In addition, our businesses were saddled with high raw material inflation in the fourth quarter even though raw material costs began to abate toward the tail end of the quarter.

During the quarter we had only begun to implement the restructuring efforts we announced in September focused on lowering our cost structure but we also instituted a variety of additional cost reduction measures given the rapid end-market deterioration. For the full year segment sales grew by 10% reflecting the addition of the industrial coatings business we successfully integrated from our SigmaKalon acquisition, partially offset by a 5% decline in volumes.

Despite an economy that weakened throughout the year a great majority of our year-over-year shortfall in both volumes and segment earnings occurred in the fourth quarter when global industrial demand collapsed. Strategically, our emerging region sales now are just slightly less than 40% of total segment sales and now represent our largest base as they exceed the sales of either the U.S. region or the western European region.

As we look at the first quarter of 2009 the outlook for global demand in our industrial end-markets shows further deterioration versus this past quarter. We will continue to manage our costs aggressively and are anticipating increasingly lower raw material costs from our suppliers.

The next slide details our performance coatings segment results. The fourth quarter earnings were flat. This is impressive when considering our aerospace business results were negatively affected by the Boeing employee strike which lasted into November. Earnings from the SigmaKalon acquisition, selling price gains and tight cost controls were key factors in our delivery of these results.

Our architectural business continued to experience lower volumes which were down by mid-teen percentages. Also, our global automotive refinish business volume declined reflecting the fact that fewer miles are being driven. Full-year volumes were down for these same two businesses. However, the performance co-segments still managed to grow total sales by nearly 25% and segment earnings by 3%. A key contributor towards this growth was the acquisition and successful integration of the SigmaKalon protective marine business. Additionally, sales volumes were accretive in aerospace and our legacy protective and marine coatings businesses and all businesses achieved selling price gains.

Strategically, emerging region sales nearly doubled in 2008 and now account for more than 25% of segment sales. Given the global nature of this segment, in early 2009 we are anticipating some currency headwinds and a challenging demand environment in comparison to the first quarter of 2008. Our architectural EMEA segment results are on the following slide.

This segment, in what is traditionally its slowest quarter due to seasonal trends, once again met or exceeded our various performance targets. From a business activity perspective year-over-year sales in Eastern Europe continue to grow in the quarter while western European sales declined as a result of the continued sluggish United Kingdom market.

On a full-year basis segment earnings were $141 million and include a reduction of approximately $120 million of annual non-cash expenses related to depreciation and acquisition related intangible amortization. The $261 million of segment earnings before depreciation and amortization exceeded our full-year targets for this business. As a reminder, the architectural EMEA segment represents a little less than 70% of the total SigmaKalon acquisition.

Looking at first quarter 2009 the largest headwind we anticipate is currency versus last year’s first quarter. Now let me take a minute to reflect on the entire SigmaKalon acquisition which was the largest acquisition in the company’s history. The acquisition was a strategic milestone as it materially altered the company by both substantially expanding our coatings profile and extending our geographic diversity. Additionally, the business provides us improved access to or expands our position in several markets and regions.

The performance of the entire acquisition exceeded our financial targets including drawn cash generation and over achievement versus our synergy targets. Simply put, by any measure the acquisition has been a significant strategic and financial success for PPG.

The optical and specialty materials segment details are on the next slide. Segment sales in the quarter were down slightly as higher optical sales were more than offset by lower sales in the silica business unit. Optical sales volumes grew in all regions resulting in growth in the mid single digit percentages despite slowing consumer spending and were aided by our generation six transitions product rollout in parts of Europe.

Silica volumes declined by 20% as the tire and battery end-markets were negatively impacted by the global slow down in the automotive markets. In both the quarter and full year we remained aggressive in spending on selling and advertising to stimulate sales and to further build our Transitions brand. Full year optical sales grew once again by more than 10%. We had a very successful roll out of our Transition Generation Six product in the United States in the first half of the year followed by a partial introduction in Europe in the fourth quarter.

Optical remains one of our best growth platforms although year-over-year growth in early 2009 will be a challenge given the very difficult comparables due to our Generation Six product roll out in the United States in early 2008 and currency will also be a headwind.

Our combined chemical results are displayed on the next slide. We had another very solid quarter with year-over-year earnings improvement. Demand was very strong at the outset of the quarter assisted by industrial end-market outages stemming from the third quarter hurricanes which severely impacted a variety of industrial activity in the U.S. gulf coast. Demand fell each month during the quarter reflecting pent up post hurricane demand fulfillment along with slower U.S. economic conditions but price remained fairly stable all quarter.

Our inventory levels remained low as we exited the year. On a full-year basis this business delivered one of its best years ever despite higher input costs driven by natural gas costs which averaged slightly more than $9.00 per million BTU versus about $7.50 per million in 2007. This business remains a stellar cash generator for the company. Looking ahead we are anticipating that early 2009 demand levels will be less than the fourth quarter reflecting the absence of the post-hurricane related impacts.

The next slide details our glass segment reported results which include our automotive glass and services business that we sold in the third quarter of 2008 as well as the pro forma results excluding this divested business. My comments will focus on the pro forma results as we believe these are more meaningful given they reflect the segment on a go-forward basis.

For the fourth quarter the segment reported a $7 million loss as the fiberglass business experienced slowing general industrial demand including weakening electronics end-market activity. This lower end-market demand had a negative impact on our fiberglass earnings as did lower other earnings resulting in part from lower equity earnings from our Asian joint ventures. These shortfalls were only partially offset by improved year-over-year results in our performance glazings architectural glass business.

For the year, pro forma earnings declined 40% on essentially flat sales with the entire decline occurring in the fourth quarter. We continued our relentless focus on cost in these businesses as our manufacturing costs improved by $25 million during the year. Additionally, during the fourth quarter we accelerated execution of our announced restructuring program focused on reducing even further our cost structure.

In 2009 in addition to the recent industrial weakness this segment will likely face a slower commercial construction market and incur higher pension costs. Needless to say, we will continue to aggressively manage these businesses. Also, from a strategic perspective in 2008 we divested our automotive glass and services business in September and hold an equity interest in the new entity. Both the legacy pension and OPEB costs and the ongoing equity results from the new entity are reported in our segment earnings table in the line labeled “Legacy Items.”

The next slide details some 2009 key topics.

Let me quickly summarize our 2008 business performance. Despite one of the most challenging environments in at least the past decade many of our businesses posted good financial results. However, several of our businesses’ performances were severely impacted in the latter part of the year. We responded quickly and are taking considerable cost actions to minimize the impacts of the slowing external marketplace.

Now, as we look at early 2009 several of these headwinds remain the most notable of which is overall global demand levels. Chuck will give you a more detailed read on our early 2009 demand in a minute but as I mentioned in many end-use markets first quarter 2009 demand will certainly be lower than our first quarter 2008 levels.

Also, we may be faced with a higher tax rate depending on the geographic mix of earnings in 2009 and currency is currently a negative versus the prior year. Pension and OPEB costs will inflate and we expect our first quarter 2009 impact to be in the range of $25-30 million pending final actuarial calculations. As I mentioned earlier we do expect some offset to these headwinds due to lower input costs stemming from the decline in energy prices and the lower global demand environment for commodities.

Also, the significant cost actions we have taken and continue to implement will provide benefits as well. This was not intended to be an all-inclusive list but does provide some of the key items for consideration for the first quarter 2009 which will be a challenging quarter.

Now let me discuss our cash generation, cash uses and liquidity. As displayed on the graph on the following slide our cash generation results were impressive throughout the year including the fourth quarter despite the slipping economic environment. We generated about $1.4 billion of cash in 2008 which exceeded our internal targets and was nearly 40% higher than 2007 easily establishing a new record for any year in the company’s history. Several factors influenced these results including the strong cash performance from our SigmaKalon acquisition and our commodity chemicals segment both of which had bid models that result in high cash conversion.

Also we aggressively managed working capital during the year. Strong and consistent cash generation are hallmarks of PPG and our positive step change in cash generation is the direct result of our recent strategic actions. This new level of cash generation has and will allow us to continue to remain flexible financially.

The next slide details our approximate 2008 deployment of cash. In the year we used about $375 million for capital spending necessary for maintenance and organic growth needs. This is only slightly above 2007 despite a 30% increase in company sales and provides additional insights into the capital light nature of our expanding core businesses.

For 2009 our capital expenditures may decline by up to 50% versus our 2008 figure as we tightly control spending. Our dividend payments were $343 million, up 2% versus 2007. We increased our dividend payment once again in October of last year and 2008 marked the 37th consecutive year of increased payments. In anticipation of closing the SigmaKalon acquisition on January 2, 2008, we increased our debt level at the end of 2007 and in early January by a combined $3.1 billion. During 2008 we subsequently paid down about $650 million in debt, nearly double our original debt pay down commitment which was $350 million per year.

In addition we made pre-tax pension contributions totaling about $125 million resulting in approximately $80 million of cash outlays after tax. In 2009 primarily as the result of 2008’s equity market performance we will likely make pension contributions of between $400-500 million all voluntary except in certain non-U.S. pension plans. This is a pre-tax figure so our actual cash outlay will be closer to $250-300 million.

Also, we have $116 million of term debt due in 2009. Therefore, despite much higher pension funding we currently expect our combined net outlays for pension and debt repayments will likely be between $375-425 million, several hundred million less than our 2008 figure and we will still remain ahead of pace on our debt repayment commitments.

Regarding acquisitions, we completed our SigmaKalon acquisition during the year for $1.6 billion plus assumed debt of $11.5 billion. Outside of the SigmaKalon acquisition we spent just under $100 million of cash on a few bolt on acquisitions. While we will continue to review acquisition opportunities in 2009 this will be a lower cash use priority and we will remain extremely selective and opportunistic from a pricing perspective.

Finally, share repurchases were negligible during the year as we focused on conserving cash and we will do so again in 2009. Generally speaking our cash deployment in 2009 will remain cautious and flexible. However, the base case cash deployment assumptions I just provided along with a strong 2008 year-end cash balance likely gives us hundreds of millions of dollars of excess cash and financial flexibility and we will either conserve or deploy cash based on our ongoing assessment of global economic conditions.

Let me conclude our cash discussion by reviewing our liquidity on the next slide. Most impressively is that we ended the year with $1 billion of cash on hand. As the year progressed and we identified the economic slowing we shifted to cash conservation and our results are up notably from earlier in the year including a $500 million increase from just the end of the third quarter.

Looking at our term debt, outside of $116 million term debt due in August 2009 we have no additional long-term debt due until 2012. We also have about $200 million of commercial paper outstanding which we currently plan to keep rolling over and the markets have improved versus the fourth quarter. We have just about $550 million drawn on a variety of European banking facilities which is available to us until at least 2010 and we have never drawn on our $1 billion U.S. revolver that is due for renewal in 2011.

Since we receive this question frequently, the only covenant we have for our debt is a debt to total capital ratio. We have nearly $4 billion of borrowing headroom before that covenant comes into the equation. Needless to say we have extreme financial flexibility and similar ability to deploy our large cash balance in a manner which best benefits the company.

Let me quickly summarize our annual financial results. We grew annual sales by 30% and overcame dynamic external economic issues to post one of our best adjusted earnings per share results ever. During the year we posted record cash generation, growing these results by nearly 40%. Our debt repayment was nearly double our original commitment and our cash on hand doubled versus 2007 levels and as is our legacy we raised our dividend for the 37th consecutive year.

It was certainly a solid overall year financially and we move into a difficult early 2009 with a prudent fiscal approach toward managing the company.

Now let me turn it back over to Chuck.

Charles Bunch

Thank you Bill. As I mentioned at the outset of today’s call our performance this past year under intensely difficult market conditions continues to demonstrate our strength and business portfolio and the success of our strategic direction. We delivered solid earnings and record cash generation despite rapidly rising energy costs and substantial declines in various industrial end-use market demand levels.

Of equal importance is that we have continued to transform the company and I believe our strategy accomplishments this past year including our notable portfolio changes were greater this year than in any of the 30 years I have been with PPG. The progress will prove even more beneficial as we move into 2009 including our stronger and more stable cash generation capabilities.

Regarding 2009, Bill touched on several of the issues we and many other companies are facing entering the New Year. Of these the one issue of most concern to me is the demand levels in the global end use markets we serve. While we have made tremendous strides in diversifying the company and while coatings and optical remain very low fixed cost businesses, if volume declines persist at the magnitude we witnessed in the late stages of 2008 it will prove to be a challenging environment for many companies including PPG.

Our early read on 2009 is that the first quarter and possibly the first half of the year is shaping up to be an even greater challenge than this past quarter. Our immediate focus is on improving our operating margins as we will manage our businesses to cost levels that reflect the pace of the slower end-use markets. We do expect relief in the form of lower raw material and energy costs which will help mitigate a portion of the impact of the decreased volumes and we are considering additional permanent cost reduction actions on top of those we announced last September which may result in additional restructuring charges and related cost savings in 2009.

Obviously we will remain focused on our cash position and maintaining complete financial flexibility. We have already taken prudent and proactive steps in both managing working capital and capital spending along with many other initiatives to preserve our large cash position until we have more visibility on the credit markets or see more stability in the global economy. Let me add that we are proud of our track record at PPG of managing through difficult economic times.

We have always been able to rapidly and decisively respond to cycles and downturns. However, unlike past downturns today we have the added benefits of a diverse set of businesses, a broader geographic base and a stronger cash position.

My expectations are that 2009 while challenging will ultimately prove to be another successful year for PPG. We expect more of our businesses will continue to deliver solid financial results and for those businesses which are facing the most difficult economic conditions I assure you we will take aggressive measures to manage those businesses to be successful.

Finally, and most importantly, we are extremely proud of our heritage of rewarding shareholders including increases in our annual dividend payments. As is well know we are one of only a handful of U.S. companies that has paid an annual dividend since 1899, a consecutive streak of 109 years. Also, we have raised our annual dividend payment for 37 consecutive years including an increase just a few months ago.

Our portfolio transformation, our historically strong and growing cash flow and our longstanding prudent fiscal discipline has positioned the company to continue regarding shareholders into the future.

Thanks again for your time and interest in PPG and we will now be happy to answer any questions. Would the operator please give instructions and open the line for questions?

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Frank Mitsch - BB&T Capital Markets.

Frank Mitsch - BB&T Capital Markets

What is tougher, the first quarter of 2009 or the Ravens’ defense on Sunday?

Charles Bunch

I would say speaking as a Pittsburgher I think the first quarter 2009 may be tougher than the Ravens’ defense.

Frank Mitsch - BB&T Capital

One of the things we are trying to get a handle on and you talked about difficulty in the fourth quarter with the de-stocking phenomenon working its way through the chain, do you have any sense how much further that has to go? When do we get to an underlying level of demand and along those lines could you offer an expectation of global GDP in 2009?

Charles Bunch

Let me take the first question. Volume levels and de-stocking in the first quarter of 2009, we are still at a relatively low activity level especially in the automotive and industrial segment in January. A lot of our customers here in the U.S. and also around the world in automotive have not yet restarted their operations in a significant way. We also have an early Chinese New Year at the end of January so I would say on the automotive side we are not going to have good visibility until February/March. I think we are still going through some de-stocking this month but I think you are going to see a return to lower volumes but somewhat more normalized here as we move through the quarter.

I think in some of our other non-automotive businesses we are seeing some activity levels that are up from the very low December levels. I think in other segments we are going to see a modest pick up from where we were. I think the de-stocking in many of the non-automotive and industrial businesses is moving through the system.

Overall, we looked at GDP growth on an overall global basis in 2008 of about 2.5%. We are probably going to be in our calculus probably slightly positive on a global basis, a couple of tenths of a percentage point. Certainly here in the first quarter and first half we are looking at negative growth on the GDP side in North America.

Frank Mitsch - BB&T Capital

You mentioned it is your belief as we marched through the fourth quarter conference call that PPG will have out performed the competition with the results you posted here today. What gives you the confidence to say that?

Charles Bunch

I think as we look at our businesses we do not think that we are losing share or position in our end-use markets. Obviously the weakest end-use market we have is automotive and I think relatively to other automotive peers I think our performance is going to be at least as good, if not better. Our confidence level is more about the fact we are well positioned in our end-use markets across the board. We are gaining share in a number of them and not losing any share or position in other markets.

Operator

The next question comes from Kevin McCarthy -Banc of America.

Kevin McCarthy -Banc of America

Of the $465 million in cost inflation you experienced in 2008 how much of that would you expect to unwind this year and then of the amount that unwinds how much do you feel you can retain versus sharing with your customers?

Charles Bunch

If you look at our input cost inflation during 2008 we are now obviously unwinding the costs in a couple of areas. Obviously the energy markets, natural gas and what we saw in 2008 in terms of our transportation of fuel cost bills on surcharges. We are now seeing in the fourth quarter of 2008 we started to see for the first time declines in our key raw materials dependent on the raw material at the region but those have started to come down now and we are approaching levels we saw earlier in 2008.

We are, however, seeing some resistance now because the volume or activity levels in our businesses are lower with our customers they are lower. Many of our suppliers are saying we are having difficulty matching the price declines you are expecting because you, PPG, are not taking the kind of volumes you had historically been. So there is some resistance I would say because of this lack of economies of scale with the lower volumes. I expect that our input costs are going to decline across the board during 2009 and my hope is that we will share some of that with our customers but for the most part we intend to improve our margins because as you have seen in many of our segments margins have declined for PPG despite our productivity actions. We need to restore those margins and that is a priority for PPG.

Kevin McCarthy -Banc of America

To follow-up on architectural coatings, particularly in Europe, can you comment on your expectations for volume trends as well as pricing in Western and Eastern Europe in 2009?

Charles Bunch

Volume trends in 2009 are going to be relatively flat. We have not seen a recovery yet in some of the markets that started to weaken in 2008, notably the U.K. We started to see in the fourth quarter a weakening in the continental European markets. Right now our forecast would be for flat volume for 2009 for our European architectural business.

The raw material pricing has been at a slightly different phasing in Europe. We saw a little more increase actually as we went through the year because of the weakening Euro and the fact they had not passed some of the raw material increases on. So we are still now increasing our prices to maintain margins during 2009 and keep the levels that we had in 2008 with what is going to be I think very flat volume across the board in Europe.

Operator

The next question comes from Sergey Vasnetsov – Barclays.

Sergey Vasnetsov – Barclays

Can you comment on some businesses that in the past have been counter-cyclical which is the auto refinish business for example? If people are not buying new cars maybe they will repaint the vehicles more than they have done in the past. Have you seen that and do you expect it in 2009?

Charles Bunch

I would say that as you saw in the performance of our refinish business which is within our performance coating segment those earnings have held up relatively well. This is an after-market business that has traditionally played that kind of balancing role for us in that portfolio. The volumes have not been quite as resilient because we have seen some declines in miles driven both here in North America and now in Western Europe. Gasoline prices are coming down so I expect we are going to see that decline reverse itself. We are also having some very severe weather here in North America and I do agree with you as people are keeping their vehicles longer, because we are not seeing the OEM sales here in automotive, I think that there is an opportunity in our refinish business to post a I think better volume performance during 2009 for these reasons.

Sergey Vasnetsov – Barclays

Bill, you have a few hundred million dollars of free cash flow in 2009 and I think you can find different [size] banks these days with the amount of money. What is your range of priorities for this surplus cash for expense? Maybe speak to a couple of areas?

William Hernandez

As we said, we do think we have several hundreds of millions of dollars of cash flexibility next year. Our current thought process is we are going to be fairly conservative especially in the early part of this year until we get a little more visibility on what the future is going to hold for us. I think we will keep quite a bit of cash on hand. I mentioned we are starting the year here with $1 billion in cash and we will keep commercial paper. I think we will keep doing that. We are starting to see commercial paper rates dropping. It is getting a little bit better and it is being placed for longer periods of time. So we will keep a good amount of cash.

Then as we go into the year I think one of the things we may look at is being a little more aggressive at paying down some of the debt. As I mentioned we only have a little over $100 million of long-term debt maturing this year that we have to pay down and actually that $100 million is from a term note we took out in 1999 when we did our acquisition at the end of that decade of about $300 million and we have very quietly paid down that debt since it was well above 7% interest rate. I think one of the scenarios would be a little more aggressive in paying down some debt.

Depending on what happens in the equity markets and the effect that may have on our pension fund we may decide to increase or decrease the amount of cash we put into our pension plan. Then probably acquisitions, as we mentioned earlier, will probably be less of a use of cash for year but we will continue looking at that. Last, we always look at our stock price as a flywheel for any excess cash.

Operator

The next question comes from David Begleiter - Deutsche Bank.

David Begleiter - Deutsche Bank

Can you comment on the resilience of the optical business in 2009?

Charles Bunch

So far we have been quite pleased with the continuing performance of our optical business. As you know, this business has probably more of a healthcare profile with some exposure obviously to some consumer discretionary purchasing but it is behaving more like a healthcare end-use market and as you know in this economic environment we have probably seen the strongest relative performance from the healthcare segment. I think this is giving us a little bit of confidence we are going to continue to see this as an opportunity to grow and to balance our portfolio. We still have some momentum from the Generation Six launch in Transitions. As Bill indicated in his remarks we only launched that in North America and in a few select markets in Europe. Now that is going to be rolled out in the first quarter in the rest of Europe. That should give us a lift. Overall we are still looking for very good things from our Transitions portfolio business and our optical portfolio.

David Begleiter - Deutsche Bank

You mentioned potential further cost actions. What would cause you to pull that lever and what would they be in terms of size and areas of focus?

Charles Bunch

If you look at our last restructuring announcement which was in September of last year and a third quarter item it was really focused really in two areas. One was capturing synergies from the SigmaKalon integration and also select and targeted actions primarily here in North America in our automotive coatings business and also in our glass segment. What we saw, however, in the fourth quarter was the rapid spread of this decline in automotive around the world and we have seen continued weakness there so we were, I think, now saying we probably did not do enough in that industrial coatings segment. We have to look more broadly there. If these lower volumes and activity levels persist from an overall corporate standpoint we have to look more broadly at actions especially in some of our weaker segments. I would say we are certainly a ways away from making those decisions but I would say throughout the first quarter we are going to analyze this and you will see I think something we will come up with early in the year if we see these conditions persist and we get confidence that we could take cost out of our operations and the magnitude I would say it would not be significantly different than what we saw in the third quarter of last year.

Operator

The next question comes from Amy Johnson – Goldman Sachs.

Amy Johnson – Goldman Sachs

On the pricing front, I noted most of your [inaudible] posted the pricing gains during the quarter which was a little bit surprising to us given how weak the demand environment was in November and December. My question, what would be your pricing strategy and also pricing outlook in 2009? As far as we know several of your competitors already have stopped pushing prices in the latter part of Q4.

Charles Bunch

At this juncture we are looking at 2009 as not being a year where we are going to be able to significantly increase prices. If you look at one of the larger segments for us from a pricing perspective which was chlor-alkali we feel pricing peaked in the fourth quarter and we are seeing I think modest declines there. In many of the other segments I don’t look for increased prices during 2009 and it will be more of trying to improve margins through our productivity actions and holding onto some of the gains that we were able to get in 2008 and again with an emphasis in restoring margins through productivity and holding onto those increase rather than passing them through because there has been a margin shift in our businesses either to suppliers or customers over the last couple of years.

Amy Johnson – Goldman Sachs

Can you give us a little more color on what is going on in Asia? I saw your PowerPoint during the quarter Asia volumes actually dropped more than 10%. Are there any business line or any country particularly weak in the quarter and what is your outlook for that region?

Charles Bunch

We saw a decline in activity levels throughout Asia in the fourth quarter. We saw it even in markets that had been growing nicely prior to that. Korea was weak in the automotive sector in the fourth quarter as was China. I think there was anticipation after the Olympics we would maybe pause and then resume growth. Certainly the growth in the fourth quarter in a sector like automotive or our overall industrial we did not see that return to the growth patterns earlier of 2008 and in fact if you look now at the end of the 2008 quarter or how we are starting in other important segments in addition to automotive like consumer electronics those were actually starting to weaken in China and more broadly in Asia.

We are seeing that start slowly in 2009. We have this early Chinese New Year at the end of January so we are looking now to February as the real indicator of what kind of recovery we are going to see but yes, broadly across markets and countries in Asia we saw weakness in the fourth quarter that has not corrected itself as of yet in 2009.

Amy Johnson – Goldman Sachs

Regarding SigmaKalon I am not sure if you addressed in your prepared remarks, what is your profit expectation for that business? Fourth quarter that business was break even on the profit line. Is there any chance in 2009 given the fact the deterioration of the outlook in Europe and housing and construction market is there any chance in 2009 one could see that business see to an operating loss?

Charles Bunch

I would say as we talked about there is a seasonal variability in the architectural coatings business. In Europe it is no different there. Actually the performance in the fourth quarter for us was ahead of our plan. They had very solid growth and earnings during the course of 2008. We expect that to continue. They were able to meet their targets in the fourth quarter even on some lower volumes. So we think they are quite resilient and have a very sound business. At this point even though we are not looking for a lot of volume growth in 2009 we are looking for SigmaKalon and architectural EMEA business to have another solid year in 2009.

Operator

The next question comes from Dmitri Silverstein – Longbow Research.

Dmitri Silverstein – Longbow Research

I just want to follow-up, you mentioned in several of your businesses headwind from foreign exchange when it comes to revenue line. Can you give us an idea of what the impact of foreign exchange would be on your operating profit line providing the dollar stays at current levels?

William Hernandez

The headwind is mainly in comparables versus last year. We had a very weak dollar at the beginning of the year and I think what we are really talking about is comparables as we begin comparison with the year and where we go. Looking forward I think it is anybody’s guess exactly which way all currencies will play out for the remainder of the year. It is a headwind at the beginning of the year. I don’t think it will be a headwind as we progress through the year. It is more comparison here in the first quarter.

Dmitri Silverstein – Longbow Research

I understand that. I’m not asking you to predict where the dollar is going to go but if it stays at current levels I am just trying to determine what kind of year-over-year sensitive is to foreign exchange on the operating profit line.

Charles Bunch

For every dollar change on the top line it is about 10% on the bottom line. We think there is about a 10% headwind.

Dmitri Silverstein – Longbow Research

In regard to your performance coatings business I think you talked about fourth quarter volumes in architectural coatings being down 15% for the division overall. Can you give us an idea of the relative performance of the U.S. market versus the Asian market? Have you seen comparable declines or was one worse than the other?

Charles Bunch

I would say we saw weakness here in North America as well as in other parts of the globe. South America, they began experiencing some of the same issues we have had here in North America during the fourth quarter as did Australia and China was not as strong either. I would say that this recessionary environment for the construction industries has spread rapidly around the world, not as severely as automotive but certainly we are seeing weakness outside of North America as well now with Europe and our position there and our SigmaKalon business holding up the best.

Dmitri Silverstein – Longbow Research

Turning attention to the commodity chemical sector you talked about the overall demand in early quarter being strong and then falling each month with the pricing holding steady. What was the volume decline you witnessed in the chlor-alkali segment and what are the current utilization rates? If volume keeps declining can you keep shutting down capacity to maintain utilization rates?

Charles Bunch

We saw volume or utilization rates decline through the quarter. October was actually a very strong month. We were recovering from the September hurricane and operating levels were quite good. In November they declined somewhat but were still pretty solid. In December, you saw many of the chemical customers for our business and some of the other industries that are served by the chlor-alkali industry started shutting down to kind of manage inventories and do de-stocking in December. So we did see a sharper fall off in December.

As I said earlier in my remarks in January we have actually seen these levels come up a little bit here in chlor-alkali. Activity levels are better and that is in contrast to some of my comments about automotive where we have seen in January activity levels still remain low for our automotive customers in January with we hope a pick up starting in February.

Dmitri Silverstein – Longbow Research

Do I take to mean the modest reductions in capacity in January you were able to execute to maintain utilization rates we will be able to maintain that pace in 2009 so that utilization rates allow for some pricing stability?

Charles Bunch

I think that pricing is going to…there are some declines in pricing right now, some industry price levels such as the alumina contract are still being discussed. I think pricing in the first half of the year is going to be relatively stable if at a lower level and activity levels, they will probably be obviously weaker at the start of this quarter than they were at the start of the fourth quarter because October was quite a good month for us but I would tell you I think that operating rates for us will be fairly stable and we should be able to manage our inventories and operating levels to be solidly profitable in the first quarter and first half of the year.

Dmitri Silverstein – Longbow Research

On the glass segment, did I hear you correctly the architectural glass business was up for the quarter? What is the current make up now that you have de-consolidated the automotive glass? What is the current make up of the division between fiberglass and other types of glass, flat glass?

Charles Bunch

There are really just two businesses within that glass segment. One is flat glass or performance glazing. That makes up a little more than half of the sales of that segment. Fiberglass is a smaller piece of sales although they do have a significant joint venture that is not consolidated on the sales line. I would say they are equally present within the segment and yes performance glazing business on a relative basis had a better quarter than the previous year whereas fiberglass because of the rapid de-stocking especially in the thermoplastics side of the business which has end-use markets in automotive and industrial, they experienced a very rapid drop off in demand starting in November. Because of the higher fixed costs in that business it is a little tougher to adjust capacity but we are doing that now.

Operator

The next question comes from Steve Schuman – Lafayette Research.

Steve Schuman – Lafayette Research

A question on your projection for 2009. You had said things are probably a little worse than you had expected. With that what are the chances of doing another major restructuring? Automotive in particular doesn’t look to recover any time soon; at least on the big three side.

Charles Bunch

I would say we are looking at that now and I would say in the next couple of months we will determine whether we can execute a restructuring but certainly given the weakness of the markets we have right now we are going to work hard to try to identify some opportunities to lower our costs and that would mean more than likely a restructuring action. We are still working at it right now.

Steve Schuman – Lafayette Research

The few hundred million of free cash next year does that include or exclude the voluntary pension payment of a couple hundred million also?

William Hernandez

It included it. That is over and above the pension numbers we talked about.

Steve Schuman – Lafayette Research

That also takes into consideration that you thought you could bring CapEx down by 50%?

William Hernandez

Yes.

Operator

The next question comes from Saul Ludwig – KeyBanc.

Saul Ludwig – KeyBanc

For the pension expense for 2009 for the full year what do you expect it to increase and as part of that answer what are you using for your discount rate for 2009 versus 2008 and your assumed rate of return of assets in 2009/2008?

William Hernandez

The discount rate we are using is just a little bit above 6% as what we are looking at over the coming year. We think about an 8% return on assets and it has been pretty steady over that time period. As we said, the pension expense we are talking about is several hundred million dollars for this coming year. On an after tax basis it will be about $250-300 million.

Saul Ludwig – KeyBanc

I’m not talking about pension cash contribution. I’m talking about pension expense going forward.

William Hernandez

Expense going forward we are looking somewhere between $25-30 million a quarter for increased pension expense for each quarter of 2009 versus 2008.

Saul Ludwig – KeyBanc

The 6.2 or 6.2 discount rate, how did that compare with the discount rate you used in 2008?

William Hernandez

It is pretty close to the same. We are talking one or two basis point difference.

Saul Ludwig – KeyBanc

Chuck, on the chlor-alkali outlook for 2009, when you consider the effects of both volume, price weakness, help on natural gas, do you think the combination of those items keeps earnings the same in that segment or do think it gets a little better or a little worse?

Charles Bunch

I wouldn’t want to make a direct forecast but I would say in view of what we see overall in the markets and some of the weakness I think it will be a challenge keeping those operating earnings at the same level for the full year.

Saul Ludwig – KeyBanc

Your comment about SigmaKalon expecting to be flat in volume how was their volume in 2008 versus what it was when SigmaKalon had them in 2007?

Charles Bunch

Volume was up slightly. It was down in the U.K. but up overall. It was modestly up. I would say this is certainly just less than 2%.

Saul Ludwig – KeyBanc

When you had it up 2% in the total year which wasn’t so bad economically in Europe until late in the year and we see Europe decelerating at a fairly rapid pace, being flat in volume would be a darn good performance. I would call that optimistic. Why do you feel so confident that volume could stay flat as the whole economic scene in Europe is deteriorating rapidly?

Charles Bunch

2008 was a record year for SigmaKalon. It was there performance improved over 2007 and that top line is a combination of volume and price. We have seen their ability to adjust their costs and expenses to fluctuate with volume so we think the combination of flat volume, some pricing in margin maintenance and lower cost as an opportunity to have another good year for SigmaKalon in what is arguably going to be I think a tougher environment next year.

Saul Ludwig – KeyBanc

CapEx will work against them as well?

Charles Bunch

Yes it will.

Operator

The next question comes from Silka Koopf – JP Morgan.

Silka Koopf – JP Morgan

A question on the domestic architectural coatings business. Can you talk about the magnitude of the volume decrease in the fourth quarter and what volume expectations you have for full year 2009 and also how large is architectural coatings as a part of performance in coatings?

Charles Bunch

Architectural coatings broadly, this would be North America and the rest of the world; I would say was over 20% of the total for performance coatings. Volumes were down here in North America modestly and what we were able to do though because we have been adjusting costs, reducing our footprint we actually had a better performance in the fourth quarter of 2008 on lower volumes. I think we have proven we can make the tough decisions here and take costs out. These were costs we took out without the benefit of a restructuring reserve. I would tell you that we are not looking for a pick up in architectural market here in North America. We think we are going to be able to continue to perform better because we have been aggressive on cost, productivity and trying to make up for the weakness in the market with our own actions.

Operator

The next question comes from John Roberts - Buckingham Research.

John Roberts - Buckingham Research

Do you manage the seasonal ramp up for the architectural coatings business different this season at all? Do you normally build to inventory in addition to serving the inventory needs of the customer? Is that going to change given the uncertainty that is out there in the ordering?

Charles Bunch

Typically we start building inventory in the architectural business at the end of the year or the end of the fourth quarter so you start to see that in December. This year I think we were a little more cautious and we are starting to do that now here early in the first quarter. We are not expecting a significantly weaker environment in the architectural business here in North America this year. We are 2.5 years into what has been a housing recession. We think there is a lot of stability in our customer base in every channel and even though we are not expecting a lot of strong growth here we think we have a good handle on demand and our inventory needs and we are managing that now. We are starting to add inventory here in the first quarter to handle these seasonal requirements.

Thank you very much. I look forward to talking to you at our next quarterly earnings release and question-and-answer session.

Operator

Thank you for attending today’s conference. This concludes the presentation. You may now disconnect.

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Source: PPG Industries, Inc. Q4 2008 (Qtr End 12/31/08) Earnings Call Transcript
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