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PPG Industries (NYSE:PPG)

Q4 2009 Earnings Call

January 21, 2010 2:00 pm ET

Executives

Charles Bunch – CEO

Robert Dellinger – SVP & CFO

David Navikas – VP & Controller

Vincent Morales – VP IR

Analysts

David Begleiter - Deutsche Bank

Kevin McCarthy – Banc of America Merrill Lynch

Frank Mitsch - BB&T Capital Markets

John Roberts – Buckingham Research

Don Carson – UBS

Sergey Vasnetsov - Barclays Capital

PJ Juvekar – Citi

Robert Koort - Goldman Sachs

Saul Ludwig – KeyBanc

Dmitry Silversteyn - Longbow Research

Operator

Good day ladies and gentlemen and welcome to the fourth quarter 2009 PPG Industries earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Vince Morales, Vice President Investor Relations.

Vincent Morales

Hello. This is Vince Morales, Vice President of Investor Relations for PPG Industries. Welcome to PPG's fourth quarter 2009 financial teleconference. Joining me on the call today from PPG is Charles Bunch, Chairman of the Board and Chief Executive Officer, Robert Dellinger, Senior Vice President Finance and Chief Financial Officer, and David Navikas, Vice President and Controller.

Our comments relate to the financial information released on Thursday, January 21, 2010. Visuals supporting this briefing may be accessed through the Investor Center of the PPG Web site at www.ppg.com.

As shown on slide number two, our prepared remarks and comments made in the subsequent question-and-answer sessions may contain forward-looking statements reflecting the company's current view about future events and their potential affect 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 Industries’ 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 reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures.

The agenda for today's discussion is noted on slide number three. And now let me introduce PPG’s Chairman and CEO, Charles Bunch.

Charles Bunch

Thanks you Vince and welcome everyone. This afternoon I will provide a brief overview of our fourth quarter and full year performance. Robert Dellinger will review details of our financial results. I will make a few closing remarks and then we will take questions.

The fourth quarter of 2009 capped what was a challenging year. The global recession was both steep and broad and adversely effected many of our end use markets. PPG reacted decisively as we implemented aggressive restructuring and cost reduction actions and further increased our focus on cash flows.

The impact of these efforts is clearly evident in our fourth quarter and full year financial results. Led by our coatings and optical and specialty materials businesses we have continued to realize positive momentum in our financial performance.

These segments performed well and delivered higher year over year earnings. Given challenging end use market conditions our performance glazings business unit and commodity chemical segment weakened in comparison with the prior year’s quarter and a seasonally stronger third quarter.

Overall demand in the quarter was lower year over year with the exception of double-digit percentage growth in Asia and improvement in a few select global industrial end use markets such as auto production.

However activity levels were stable or modestly improved versus the third quarter 2009 when taking into account seasonal trends. Our increased operating leverage again being driven by our restructuring initiatives was a major contributor to our improved financial performance.

This was most evident in our industrial coatings segment where earnings grew by $129 million versus last year’s fourth quarter on only modest volume improvement. In fact, industrial coatings earnings were even higher than fourth quarter 2007, despite over 15% lower demand.

And our focus on cash and working capital continued with nearly $600 million of cash generation in the quarter exceeding even last year’s strong performance. PPG’s full year results provide continued validation that the strategic direction and the actions we have taken over the past few years to transform the company are yielding the intended improvements.

Despite the severity of this recession the aggregate full year earnings of our coatings and optical and specialty material segments dropped by less than 10%. Measured in local currencies this figure was only about 5% with the remainder due to negative currency conversion.

This performance includes higher earnings in local currencies from our architectural coatings EMEA segment which represents the majority of our 2008 SigmaKalon acquisition. Our focus on growing our presence in Asia also yielded significant benefits in 2009 as our markets there continued to demonstrate good growth characteristics.

Lastly our improved portfolio was important in enabling us to generate over $1.3 billion in cash from operations in 2009 which is our second highest year on record. Our strong cash performance allowed us to confidently raise our annual dividend payout yet again and we substantially reduced our debt level paying down an additional $675 million.

I am pleased with how we finished the year. Our earnings are recovering and our strong cash position provides us with financial flexibility to support earnings growth going forward. Yet until we see further signs that demand is recovering more broadly our attention will remain focused on cost management and diligent execution of our strategy.

Now I’ll turn the call over to Robert to review financial performance for the fourth quarter and full year.

Robert Dellinger

Thanks Charles, summarizing the fourth quarter, sales were down $72 million or a modest 2% decline versus fourth quarter 2008 sales which were partially impacted by the onset of the industrial recession.

Commodity chemicals experienced a sharp decline in sales due to lower pricing. This decline was partially offset by higher sales in our other businesses including higher volumes in automotive coatings, and favorable currency impacts.

Overall we experienced fairly normal seasonal sales patterns with the exception of automotive production which remained consistent throughout the quarter as opposed to the traditional pattern of trailing off in December.

Our gross margins expanded not only versus 2008 but also versus solid 2007 results reflecting the impact from our restructuring actions, additional cost management initiatives, and lower input costs. Our full year tax rate came in at 30% based on actual full year mix of earnings by geography. The lower rate added $0.12 to fourth quarter earnings per share due to the catch up from the lowering of the tax rate the prior three quarters.

We also estimated our 2010 tax rate will remain at 30%. We delivered very strong cash performance in the quarter generating almost $600 million and that is after recognizing an additional $100 million we contributed to our pension plans in December.

Also we reduced debt by an additional $175 million during the quarter and ended the year with over $1 billion of cash on hand. The year over year bridge of our fourth quarter sales along with some relevant trends is depicted on the next slide and a full year sales bridge is included in the appendix for your reference.

Negative price of $166 million is entirely attributable to lower selling prices in commodity chemicals and lower year over year energy and fuel surcharges in glass. We realized modest price improvements in coatings and optical but they were not sufficient to overcome the sharp drops in commodity chemicals and glass.

Following four consecutive quarters of headwind currency conversion finally became a tailwind and positively impacted fourth quarter sales by $150 million. As depicted on the chart the euro advanced modestly versus the third quarter of this year, however year over year improvement was realized due to a rapidly weakening euro in the fourth quarter of 2008.

Despite the favorable impact in the fourth quarter currency translation reduced full year sales by nearly $600 million. Our volumes remain negative in the quarter however they have recovered gradually over the year and the decline was less severe in the fourth quarter than prior quarters.

This reflects the lower activity level in last year’s fourth quarter, modest demand improvements in Asia in some of our industrial end use markets, and higher commodity chemicals exports. The next slide provides sales data by region.

Our regional volume variance for each quarter in 2009 is provided versus the prior year’s quarter. In the fourth quarter volumes remained modestly negative in both the United States and Europe. However we experienced growth in our emerging regions including single-digit growth in Latin America and nearly 15% growth in Asia Pacific driven by higher industrial demand.

And on a full year the emerging regions of Asia, Latin America and Eastern Europe represented nearly one third of our coatings portfolio. Our adjusted earnings per share is presented on the next slide. A reconciliation of these amounts to our reported earnings per share is included in the appendix of today’s presentation materials which is available at the Investor Center on our website at www.ppg.com.

In the quarter our adjusted earnings per share was $0.86 and includes a 30% effective tax rate. We anticipate the same tax rate of 30% for year 2010. While lower taxes were part of the earnings per share improvement a significant contributor to the earnings per share was the increase in savings generated by our restructuring actions.

As we ended 2009 we had completed all major elements of these initiatives ahead of schedule including the reduction of two European manufacturing operations during the fourth quarter. Throughout 2009 we realized partial year savings from many of our actions and we will have an incremental $100 million of savings in 2010 in recognition of the full year structural cost savings from these actions.

Our improving EPS trend is detailed on the next slide. As you can see our fourth quarter performance represented a sizable gain versus a difficult fourth quarter of 2008. The right side displays the segment earnings trends for our coatings and optical segments. While not immune to the effects of a recessionary economy these segments have experienced only modest earnings declines.

What’s more they’ve achieved these results despite the fact that several businesses are exposed to severely challenged end use markets, such as automotive and construction that were heavily impacted by this recession.

As Charles stated this strong performance during a recession provides continued validation of our strategy to grow these segments as a portion of our portfolio. Moving now to review our individual business segments, let me start on the next slide with industrial coatings which delivered dramatically improved results in the quarter versus what was a poor performance last year.

In the quarter sales grew 12% or $92 million, earnings improved by $129 million from a $40 million loss last year, and we achieved a 10% operating margin. This improvement was driven largely by lower cost including restructuring and cost management. In addition we experienced modest year over year end use market demand improvements.

All regions realized higher earnings with the largest gains in Asia and the US. Looking quickly at the full year we experienced the full effect of the global recession in 2009 as demand dropped dramatically due to lower consumer spending and significant industrial inventory destocking. While volumes have partially recovered this past quarter they still remain well below historic levels.

We reacted swiftly to the demand declines by completing major reductions in our cost structure. One bright spot this year has been Asia, which now represents more than 20% of this segment in sales and even more in earnings as the region is now delivering our highest operating margins.

Further details on our industrial coatings segment are included on the next slide. We grew volumes in the quarter versus a very weak fourth quarter 2008. To put this in perspective our volumes this past quarter were still more than 15% below fourth quarter 2007 volumes. By region volumes improved significantly in Asia, growing over 40% and also in Latin America, but remained negative in the US and Europe.

The largest end use market improvement was in automotive production. In North America year over year auto production was down about 50% versus 2008 in the first half of the year but fourth quarter 2009 was essentially flat with the weakened quarterly result from 2008. As illustrated on the bottom right graph, North America vehicle production is still running below the level of US auto sales, and automotive dealer inventories remain very low in comparison with historical levels.

Also we delivered very strong growth in Asia on a much higher year over year auto production. Overall for this segment 2009 was a remarkably challenging year. That environment required us to aggressively manage and restructure the business to succeed and we were pleased that our actions aided in achievement of double-digit operating margins this past quarter.

Looking ahead to 2010 for the full year we anticipate improvement in global industrial demand versus the low levels in 2009 especially in the early months of the year. These demand improvements will likely be led by automotive production which we expect to increase by 10% globally versus 2009 with the growth of 20% or more in North America alone.

Due to our lower cost structure we expect to fully leverage improving volume while we keep our focus on tightly managing costs and execution. The performance coatings segment results are detailed on the next slide. In the quarter despite sales volume decreases in the mid teen percents, earnings grew modestly aided by strong cost management.

Positive currency conversion added about $50 million to quarterly sales and $5 million to earnings. This segment has historically demonstrated more stability in sales and earnings given the large after market nature of the end use segments. As such our fourth quarter volume results were similar to the volume results the prior three quarters of 2009.

In the fourth quarter year over year sales comparisons in protective and marine coatings and aerospace both of which serve later cycle industries, trended down slightly. Volumes in our architectural coatings business declined slightly more than 10% which is very similar to the prior two quarters.

In the United States our stores and dealer channels which primarily serve profession paint contractors, were down more while our national accounts or DIY channel was only slightly negative. Full year earnings were down a modest $31 million or 5% including negative currency conversion of $24 million.

Yet the segments operating margins improved by 120 basis points. For the year and fourth quarter the automotive refinish business experienced the most sizable volume declines including the negative impacts from distributor inventory destocking earlier in the year. As we look ahead to 2010 we once again anticipate this segment will be a stable performer with some year over year benefit due to the absence of inventory destocking and continued cost discipline.

Results for our architectural coatings, Europe, Middle East, and Africa or EMEA business, are on the following slide. Sales in the quarter were $457 million, up $43 million versus last year’s period and earnings improved by $11 million from a break-even level last year. The table in the center of the slide displays the seasonal mix of segment sales by quarter.

You see a nearly identical trend in 2008 and 2009 including traditional seasonality in the fourth quarter. Volumes for both the quarter and the year were down slightly more than 5% with improved results in the second half of the year. This performance occurred despite a severe economic decline in the region and clearly demonstrates the resilience of this segment due to the significant maintenance component of architectural coatings in Europe.

Currency aided sales by about $40 million and earnings by $3 million in the quarter, however for the year currency represented about $200 million or two thirds of the $300 million sales decline and had a $19 million negative impact on earnings. In 2009 earnings in local currencies were higher than 2008, an exceptional achievement considering the economic environment.

Also as expected this segment delivered strong cash flow. Included on the slide are the earnings before interest, taxes, depreciation, and amortization, or EBITDA. As you can see our EBITDA margins improved for the year in spite of the recession. We believe EBITDA is a relevant measure for this business given the ongoing noncash amortization expense stemming from the SigmaKalon acquisition.

Looking ahead we anticipate a longer recovery timetable for the European economies and therefore continue to expect modest volume challenges in this segment. Our focus remains on cost management and execution to maintain profitability levels, building our brands and positioning to grow in the emerging regions.

Our optical and specialty materials segment results are detailed on the next slide. Fourth quarter sales of $245 million were up slightly versus 2008. Margins improved as earnings of $47 million were up over 40% from last year’s level aided by strong cost management. For the quarter optical product sales grew slightly aided by favorable currency translation. Sales of our silicas products which are used as a raw material in the production of tires and car batteries grew mid single-digit percents versus last year and reversed a sizable negative sequential volume trend that began in mid 2008.

Full year sales declined 12% including volume declines in silicas of nearly 20% and single-digit percent declines in optical products in comparison to 2008 which featured the benefit of a new transitions product introduction. One notable highlight was our near 25% transitions growth rate in Asia.

Full year segment earnings declined slightly in 2009 however our margins improved from focused cost management efforts. Looking ahead we expect this segment to return to a strong growth trend based on our optical products offering and anticipated improvements in the automotive OEM and after markets which would aid silicas.

The next slide shows our commodity chemicals segment results, sales declined by over $00 million versus last year’s period driven by lower pricing. Earnings fell $80 million in comparison with a strong performance the previous year. Aggregate pricing for chlorine and caustic soda, the ECU price fell significantly in comparison with last year’s record fourth quarter but was higher versus the third quarter of 2009.

Demand for our chlorine and caustic soda fell in North America versus a seasonally stronger third quarter in the prior year. Although caustic exports grew and we experienced unfavorable mix driven by higher chlorine derivative exports. Our fourth quarter and full year 2009 natural gas costs were approximately $6.00 per MMBTU. We anticipate our first quarter 2010 natural gas costs to be in the range of $6.50 to $7.00 per MMBTU which includes the effects of recently higher market prices.

In 2009 we had about 50% of our natural gas needs hedged at about $8.00 and in the full year of 2010 this drops to about 25% at similar price levels. On a full year basis this segment achieved a solid 12% operating margin and once again delivered good cash generation. Looking at early 2010 we have announced caustic soda price increases for the first quarter and has mentioned also anticipate higher natural gas prices versus the fourth quarter of 2009. We expect overall demand levels during the year to track closely with US industrial production trends.

Our glass segment details are on the following slide, as with last quarter we included 2008 results both with and without the automotive glass and services business that we divested at the end of third quarter 2008. My full year comparison comments will be against the results excluding auto glass.

Sales this quarter were $223 million, down $22 million from last year. The demand environment for performance glazings or architectural glass, deteriorated as US commercial construction declined significantly versus last year and also versus the prior quarter. Fiberglass demand strengthened modestly year over year but still remained nearly 25% below 2007 levels.

Pricing was down in reflection of lower fuel and energy surcharges. Full year sales declined 29% stemming from the volume declines. Glass had $1 million in earnings this quarter versus a loss of $700 million in last year’s quarter aided by both lower costs and higher other income including improved equity affiliate results.

Earnings for the full year are down more than $90 million as significantly lower volumes overshadowed $25 million in cost improvements including a 20% reduction in our performance glazings manufacturing capacity. The segment did however produce positive cash flow for the year.

In 2010 improving industrial demand will aid fiberglass but will likely be offset by commercial construction declines negatively impacting performance glazings. Our focus on cash and aggressively managing the cost structure will continue in 2010. Our cash position is detailed on the next slide and we ended the year with over $1 billion of cash on hand.

We intentionally maintained a higher cash balance during 2009 given the global economic environment. In light of a gradual improving economy and following two years of significant debt reduction we will begin to manage our cash balance down towards historical levels. During the quarter we generated almost $600 million of cash from operations.

This strong cash performance and more importantly step change improvement in cash stemming from our SigmaKalon acquisition continues as our full year from operations exceeded $1.3 billion, just below last year’s record level.

Several notable cash uses are detailed on the following slide, our capital spending was $240 million, well below prior year levels and indicative of our ability to manage capital expenditures of our transformed business portfolio going forward. Every payment was one of our top priorities following our acquisition of SigmaKalon in early 2008.

We repaid an additional $675 million of debt in 2009 following a similar figure in 2008. Since the acquisition we have lowered our net debt by about $1.9 billion which is over 2.5x original target despite operating in a much more challenging economic environment.

Funding our pension plans is another cash use and we have contributed about $450 million to our pension plans this year with about $100 million of that consisting of stock. We mitigated the dilutive effect to our share count through share buybacks. I will remind you that pension contribution figures are pre-tax and we do receive a tax benefit.

Lastly we once again raised our annual dividend payout marking our 38th year in doing so, the track record we are pleased to continue and made possible by our portfolio’s strong cash characteristics. This next slide details some of estimates of key financial data for 2010 as compared to the approximate 2009 figures.

First on the income statement side, we expect our pension expense to decline by about $40 million to $160 million. This reflects our high level of pension funding in 2009 along with our asset performance and finalized 2009 discount rate. We anticipate that our full year tax rate for 2010 will be 30%, consistent with 2009. Relative to cash deployment the level of our pension funding is expected to decline to the range of about $200 to $250 million.

And although we still intend to keep our 2010 capital spending below the levels in most prior years it will likely be higher than the very low 2009 figure. Following our SigmaKalon acquisition debt reduction was a primary cash use and as I mentioned we are well ahead of schedule. In 2010 we will likely make some further debt reductions but the level of debt repayment will likely be notably lower than the prior two years.

Finally as we have mentioned the past several years, if our proposed asbestos settlement is confirmed by the court we will need to fund the trust which would entail a net cash outlay totaling $310 million after tax benefit. Let me conclude by saying that the generally favorable year over year trends, the key cash uses noted here combined with our strong and consistent cash generation history, will give us even further financial flexibility in 2010 to deploy cash with an earnings growth focus.

With that I will now turn it back over to Charles for some closing remarks.

Charles Bunch

Thanks Robert, I will conclude our prepared remarks by highlighting a few key items. Overall demand in the fourth quarter improved gradually versus the third quarter when adjusted for the seasonal nature of many of our businesses. We experienced strong earnings leverage on the modest volume gains.

While earnings have not fully recovered I am pleased with the pace of our improvement given the continued challenges in the global economy. We have completed our restructuring actions ahead of schedule and these actions benefited our 2009 performance and will do so to a greater degree in 2010.

Despite the challenging environment we once again delivered strong near record cash generation in 2009 and raised our annual dividend payout. Let me end by saying that due to the severity of the recession 2009 was an extremely challenging year. Like most companies, PPG was not immune to wide reaching economic effects but we reacted quickly and decisively.

The rapid and full recovery of earnings in our coatings and optical and specialty materials segments along with our near record cash generation as a corporation provides measurable validation of the soundness and execution of our strategy to focus on these businesses and expand our geographic breadth.

As we begin 2010 we are guardedly optimistic. While recovery in a global economy remains gradual PPG is well positioned in several ways. Our strong and growing presence in Asia will continue to yield benefits based on economic growth in that region. We will also realize an incremental $100 million of savings from our completed restructuring actions that should enable us to fully leverage anticipated higher full year global activity levels.

And we have a strong cash position of just over $1 billion to support earnings growth opportunities. That concludes our prepared remarks. Now we would be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of David Begleiter - Deutsche Bank

David Begleiter - Deutsche Bank

Can you comment on what you’re seeing in industrial coating demand trends by region both for January and how it looks for longer term.

Charles Bunch

The industrial coatings segment for us, the trends are positive especially here in North America and in Asia. In North America we’re benefiting from the rebound in automotive builds and as you know 2009 and the end of 2008 were periods of real weakness. So in 2010 we’re looking for a rebound in North America on the automotive side and a lesser rebound but still a positive push here in North America on the industrial coating side.

In Europe the story is slightly different, we think that OEM automotive production will be relatively flat, maybe slightly positive depending on how the year proceeds and industrial production will be up slightly, these are low single-digit numbers in Europe. The real positive story for us is going to continue to be Asia.

As we mentioned in the report Asia now makes up about 20% of the sales of our industrial coating segment. We had record automotive builds in China in 2009. We ended the year with a lot of momentum. The beginning of 2010 appears to be strong so we’re looking again in China for another 10% or so increase in automotive production.

Korea and India are also positive and building momentum. And on the industrial side we’re seeing some strength in the consumer electronics and in automotive parts so I would say we’re looking in the industrial coatings segment to continue growth in Asia, return to growth in North America and relatively flat in Europe and South America although its less important for us, looks positive as well.

David Begleiter - Deutsche Bank

Can you comment on raws, are you seeing price increases in either T02 or some propylene based raws, if not, when might you see those price increases.

Charles Bunch

We saw the beginnings of modest price increases in coatings raw materials I would say these are now single-digit numbers in the fourth quarter as we went through the quarter. We have discussions going on now in most of those commodities for coatings. Propylene as you know has been going up throughout 2009, that’s the basis for many coatings raw materials so now I would expect modest price increases as we move through the year.

And I’m talking now low single-digit kind of increases overall for coatings.

Operator

Your next question comes from the line of Kevin McCarthy – Banc of America Merrill Lynch

Kevin McCarthy – Banc of America Merrill Lynch

To follow-up on industrial coatings your margins in that segment were the best since the first half of 2007, even well before the downturn commenced, I was just wondering if you could comment on the outlook for margins there. It sounds like you have a constructive volume outlook in raw materials are under control, should we expect margins to move higher this year.

Charles Bunch

I think we can overall look for improvement in 2010 in our industrial segment for earnings margins. I think we are going to benefit here in North America in particular from a year over year increase in automotive OEM production and the real story for us has been the restructuring activities. We have really worked hard at reducing our structural costs in our industrial coatings segment, both here and in Europe.

And as you know from Robert’s remarks earlier in the presentation we are still now achieving at the end of the fourth quarter some additional cost reductions in the industrial segment so I think the cost story for us is going to continue to be positive. We’re going to pick up volume especially here in North America and in Asia.

I think raw materials although there is some inflation out there, I think it is manageable so we’re looking for some further improvement in the coatings margins for industrial in 2010.

Kevin McCarthy – Banc of America Merrill Lynch

And as a follow-up I think you made a comment that you would intend to manage the cash balance down this year, it looks like your target for incremental debt reduction is lower at 150 to 250, perhaps you could comment on uses of free cash flow in that context and touch upon M&A and potential for repurchase this year.

Robert Dellinger

I think if we continue to have $1 billion of cash on the balance sheet same as we did the end of last year, we’ll likely return to a more balanced approach towards using our cash. Debt repayment will still be there, if its neutral or accretive to earnings to the extent our debt is trading above market and difficult to repurchase, we probably won’t chase it.

And we will continue to look at bolt on acquisitions and may selectively consider share repurchases. And so I think over time we’ll look to be a little more aggressive in our cash usage in a way that facilitates earnings growth.

Operator

Your next question comes from the line of Frank Mitsch - BB&T Capital Markets

Frank Mitsch - BB&T Capital Markets

Perhaps another use of cash could be getting a luxury box at the Super Bowl to see the Jets play this year.

Charles Bunch

We’ve enjoyed the success over the past few years from the Steelers but I wish you and the Jets all the best to you. I don’t have a dog in this fight now so if you want the Jets, we’ll root for the Jets.

Frank Mitsch - BB&T Capital Markets

Just following up on the last question, you said that you wanted to get the cash levels down to historic levels, are you taking about half a billion dollars, is that kind of the normal levels that you were thinking of.

Robert Dellinger

Yes I think that’s where we’ve operated over an extended period of time. You have to recognize that we do need to reserve some cash for a likely or potential asbestos settlement here later in the year. So, in the neighborhood of $300 million after tax, obviously we continue to expect to generate cash during full year 2010 so you’re right we will have flexibility.

Frank Mitsch - BB&T Capital Markets

A lot of flexibility, that’s not an insignificant number plus the higher CapEx is more than offset by the lower pension side of things so we can look for something of a meaningful bolt on let’s say or a fairly meaningful share buyback and something along those lines, is that something that is a first quarter or second quarter event that you’re thinking right now.

Robert Dellinger

We’re not prepared to share timing on those kind of things but as we said we are going to look to be balancing our usage of cash. Bolt ons are clearly part of that equation and we are out looking for those and we’ll continue to look for those and we’ll selectively consider share repurchases.

Frank Mitsch - BB&T Capital Markets

So obviously a very nice job in 2009 on building up that cash balance front, and then just to, there was a question earlier about raw materials inflating up modestly on the coatings side of things, how would you talk about your ability to generate price increases such that you’re offsetting some of those raw material costs.

Charles Bunch

We’re working on price increases in a number of our coatings businesses. We think we will be successful in passing along cost increases for our coatings businesses so at these levels of expected inflation which are modest we think that we will be able to successfully move pricing in those businesses that would be effected.

Frank Mitsch - BB&T Capital Markets

And on the income statement there was a note D, that talked about $40 million from improved equity affiliate results, higher royalty income, as well as impact of gains on non operating asset sales, should we think of those three items, the equity affiliate, the royalty income, and the non operating asset sales in that order in terms of size relative to the $40 million total.

Robert Dellinger

Yes, and I’d point out that this number, other income has averaged about $40 million a quarter over the last eight quarters with two exceptions. First quarter 2009 and fourth quarter 2008 where obviously we were severely impacted by the recession so our normal run rate here has been about $40 million a quarter. It has obviously jumped up a little higher in fourth quarter 2009 and we did see a significant increase in equity earnings and royalty income associated with our glass and commodity chemicals business.

Operator

Your next question comes from the line of John Roberts – Buckingham Research

John Roberts – Buckingham Research

I think you indicated the automotive OEM market was expected to be up about 10% this year, how much higher than 10% will the first half be and how much lower than 10% would the second half be because the comparisons are very uneven as we go through the year.

Charles Bunch

I think what we said there is that we’re going to expect to be up about 10% globally and I would say that the percentage will be higher we think in the first half, a percentage increase would be higher in the first half than the second half because we began to experience a recovery especially here in North America but also we were building momentum through the year in China and in Asia so I would expect that you would see higher percentage increases in the first quarter and in the second quarter then you’re going to see later in the year.

John Roberts – Buckingham Research

Would it actually flat in the back half of the year or you think you’ll still be up because you’re comparing against a little bit of a stimulus recovery here in the second half of 2009.

Charles Bunch

I think its not going to be flat in the second half of the year, it may be flat in Europe, but we’re not expecting a big difference but I would say that in North America it should be up in the second half as well and as you look at the broadening of the growth in automotive builds in the rest of Asia, places like Korea, India, even Australia, that I think you’re going to have growth in the second half in Asia as well.

Operator

Your next question comes from the line of Don Carson – UBS

Don Carson – UBS

Question on the chloralkali business you mention that gas costs will be up sequentially in Q1, I know there are some caustic price initiatives but they seem to be taking a little longer to get in place, and chlorine is coming down, so the question is when do you see the chloralkali business bottoming and a follow on to that would be, I know there’s been some talk of closing mercury cell plants and legislative pressures potentially is that something you’re looking at doing that would help firm up the industry.

Charles Bunch

I would comment on chloralkali in, let’s talk about it first in the fourth quarter, we did get chlorine price increases in the fourth quarter. Actually volumes were a little better than prior year and sequentially in the fourth quarter. Some of that was related to the healthy export business that we’re seeing from PVC back and also back in the chain and also I think at the end of December we saw a little more strength again because of some of the uncertainty surrounding price increases that had been announced for caustic.

As we went into the first quarter here earlier in the month I think there was lighter activity in part because I think there had been a number of shipments made at the end of the month around the pricing. We had bad weather. But we’re seeing now we think a positive trend on volume for chloralkali.

We also are increasingly confident about the success of the $75.00 caustic price increase so we feel that even though we’re not going to be able to achieve as much of an earnings lift in the first quarter because of some of the export or mix volume and some of the higher natural gas and ethylene costs but we think we’re at the bottom here in the fourth quarter and in the first quarter so we think we see some positive trends for our chloralkali business and the industry in general.

Don Carson – UBS

And as a follow-up any plans for closing West Virginia given the pressures on mercury cell capacity and could that be what helps turn the industry around.

Charles Bunch

I don’t at this point, we’re not contemplating a near-term decision on any mercury cell capacity. We did convert at Lake Charles several years ago and that mercury cell production for us at Natrium continue to be a part of our production planning and there is increased regulatory changer in terms of water quality and the rest but we’re confident that we can meet in the coming years the higher standards that we’re being held to in terms of emissions.

In the overall industry for chloralkali in terms of supply and demand in the near-term there have been some production disruptions among our competitors and we think that has served to tighten the supply demand in the industry and I feel that with the enhanced export volumes that you’re seeing and if we see a return of economic growth here in North America I think you’re going to see that supply demand will remain in balance and that there’s no immediate need to shutter additional capacity.

Operator

Your next question comes from the line of Sergey Vasnetsov - Barclays Capital

Sergey Vasnetsov - Barclays Capital

What do you see in the commercial construction markets.

Charles Bunch

The commercial construction market remains weak. In the fourth quarter the business units that we have especially here in North America that have exposure to the commercial construction market and this would include architectural coatings, performance glazings, also some of our general industrial coatings markets, there were some of our weakest.

We did not see a rebound in the market in the fourth quarter and in the first quarter its still early days but I would say at this point we’re not looking in the first half for an improvement in commercial construction. Obviously in some of the markets outside of North America and in particular Asia and China commercial construction activity is quite good.

The activity in Europe is what I would call flat to slightly negative. But the big concern I think because of some of the issues in the construction market and the financing markets for commercial construction is weakest right here in the US.

Sergey Vasnetsov - Barclays Capital

And what kind of trends do you see in some other long lead time cycles such as aerospace and marine.

Charles Bunch

Aerospace has been a little weaker here at the end of the fourth quarter. We saw weakness in business or general aviation. That was probably the weakest market and maybe to a lesser extent some of the military applications. Here in 2010 aerospace we think still is holding up. The backlogs continue to slide for the big commercial airliners. We’re looking at lower backlogs at Boeing and Airbus but they have kept production schedules at the OEM level in aerospace fairly steady and we think that as they move through all the qualification steps and start ramping up production for the Dreamliner, the 787 at Boeing, that presents us and a number of other suppliers with some upside.

So I think that if we can move out of this economic crisis environment 2010 should still be a good year for our aerospace business and we hope that if the recovery continues the backlog can rebuild itself over the next 18 months to two years and they can maintain some of the production schedule that we have.

So our outlook there we realize there’s some weakness but we think that it is manageable for us. Similar story on the marine business, the production schedules in Asia and in China and Korea in particular have been fairly steady over the last year and we’re only looking for a modest decline this year 2010 in the OEM builds.

Now the backlogs there are coming down as well. So we could have an impact in 2011 in our protective and marine business as they adjust production schedules if the backlog doesn’t start to rebuild. The aftermarket business for marine we think is going to be pretty steady. Most of the indicators now in terms of marine activity not the new OEM builds but overall ship usage are going up so we think that’s going to be a positive and a potential offset in the aftermarket business and the protective side of our business unit that goes across a number of industrial and infrastructure assets that’s been very solid in Asia and we look for that to continue.

And we think that the business if the stimulus dollars here or potentially in 2010 in Europe can get to those projects that that will start to give us a little bit of growth because the protective side of the business has not been very strong here in North America nor in Europe and we’re hoping that industrial activity and some of these infrastructure projects as the stimulus money gets through could give us a little better story in that protective market for 2010.

Operator

Your next question comes from the line of PJ Juvekar – Citi

PJ Juvekar – Citi

In your architectural EMEA business are all the synergies from SigmaKalon merger factored into the results and what do we look forward to in that business in 2010. And what I mean by that is your margins have always been lower than the US architectural business in Europe so how high can those European margins go.

Charles Bunch

Well we think that we were still working on our synergies and restructuring activities in the architectural business in Europe as we moved through 2009. We took a what I would call a significant restructuring in the third quarter of 2008 and that got at the initial opportunities we saw from the merger of SigmaKalon and PPG. But as we continued through 2009 the restructuring announcement in the first quarter of 2009 and our work throughout the year we think we were able to take additional costs out of our architectural coatings EMEA supply chain and so we think there is additional upside.

I think Robert commented on the EBITDA performance of the former SigmaKalon business or the architectural EMEA business which was very solid in this weaker construction environment. So we think we have good upside going forward first from additional restructuring and then when we do start to see growth returning to those markets in Europe we think we’ll have good operating leverage and we think also that the combination of the two companies in Europe has given us additional purchasing power and the ability to work a little harder on our input costs in coatings in Europe.

PJ Juvekar – Citi

I was wondering if you could quantify those savings that you generated in 2009.

Robert Dellinger

Maybe I can touch on those, our original synergy target was about $50 million in 2008. We beat that. In 2009 we’re looking for another $40 to $50 from synergies. We achieved that. We counted on a little extra maybe $20 to $30 million in 2010 and we saw most of that into 2009. So I would say we’re ahead on the synergy target. Charles talked about the additional restructuring actions. Those had some benefit this year we’ll have continued benefits into 2010.

So I think we’re on and ahead of those commitments. To your other question, this business will be less volatile on the downside in a recessionary environment and it will go up at maybe a more modest rate in an upside environment. That is the nature of it and I think we’ve seen that in the difficult economic environment in 2009. It held up very, very well.

PJ Juvekar – Citi

And I have follow-up question on chloralkali, one of the arguments put forward by PPG is that as coatings raw materials go up the same environment chloralkali makes more money so there is a natural hedge in the portfolio. And how strongly do you believe that that hedge will hold up in 2010.

Charles Bunch

I would say that if you looked at the period when we had the strongest raw material inflation and this would be during 2008 especially those first three quarters, you saw at that time the strongest performance for chloralkali. Now its typically been a lagging business unit in terms of its performance so it lags the recession. We’re feeling some of that now.

We think as my comments on Don’s question is that we are near the bottom of the chloralkali cycle and we’re looking for improvement through the year in 2010 even if we’re still at a relatively low point. So I think you’re going to see a similar phenomenon out of the chloralkali business. As I’ve commented the increases that we’re seeing in raw materials are modest at this time and we’re always going to have somewhat of a lag on that with our chloralkali business but we also feel that we also have a lag in terms of when we get raw material increases either because of contracts or our ability to negotiate with our suppliers.

So we think that we will still get the benefits of chloralkali in terms of that counter cyclical performance.

Operator

Your next question comes from the line of Robert Koort - Goldman Sachs

Robert Koort - Goldman Sachs

On the commentary around your auto refinish, you mentioned that demand was weak there and the lack of a restocking cycle, did you not push through the typical end of year price hike to [inaudible] early year price hike to incentivize those dealers to restock.

Charles Bunch

We did have some pricing activity in refinish in the fourth quarter but we did not provide any additional incentives for our customers, our dealers and distributors to incentivize them to buy and I think this is in recognition of let’s say the more fragile nature of the recovery and the balance sheet or borrowing capabilities of everyone throughout the chain and I think what we’ve seen during this cycle as you’ve heard from our commentary about how we’ve watched cash and tried to deliver good cash performance, strength in the balance sheet, we’ve see that add any number of customers including the automotive refinish customers.

So that they clearly have been watching their balance sheets more closely so rather than restock aggressively to take into consideration a buying window or some other incentive from the manufacturers we’ve seen what now is no longer a destocking because that was their initial reaction especially earlier in this year, they were destocking inventories that they had been holding but this year we’ve also been listening to them so they haven’t been asking us to hey give us some incentive so that we can restock.

Let’s manage demand and let’s manage our inventories to the level of activity that we see out there. Now we also saw at the beginning of this month some more severe weather here in North America and in Europe so we’re hopeful that that will lead to increased demand as we get into the spring because of the number of accidents and the other things that happen with that bad weather.

But it did make it a little tougher at the beginning of this year to look at economic activity in both the North American and European markets because the weather over the first two weeks, its moderating now, was much colder and we think that we’re not as able as a result of that here sitting in mid January to say that we’re going to see this sell through but we’re more confident that as the quarter goes on we get into spring, refinish will be a stronger market because we definitely experienced destocking during the course of 2009.

Robert Koort - Goldman Sachs

I can sadly say I helped your refinish business in the fourth quarter unfortunately.

Robert Dellinger

We’re sorry to hear that, slightly happy.

Robert Koort - Goldman Sachs

On the architectural EMEA obviously you have pointed to a much more stable market there given the dynamics of the paint industry, I guess that removes some of the opportunity for a big reversion to the [mean] as things get better, can you sort of put in context where historically those margins have been. You’ve shown us now they’re sort of in the 11 to 12% range, where could they go if everything starts to hit on all cylinders in Europe.

Charles Bunch

I would say if you look historically at the EBITDA margins for the business in Europe and this goes back to periods before they were part of PPG, they have traditionally been in the range of let’s call it low to mid double-digit so on an EBITDA basis you’re probably looking at 10 to 13, 14% so there is I think some modest upside if we get some good growth and we continue to work hard on the cost synergies.

But I would say some other margins that we’ve seen historically out of PPG business where you’re north of 15%, I don’t think we’re going to see that kind of growth especially for the next couple of years because I don’t think the European construction forecast is robust at this point. So I would say that I think we can see some further improvement but we’re going to need some additional growth both in the continent and also in that emerging Eastern European region for us to move it up significantly over a percentage point or two.

Operator

Your next question comes from the line of Saul Ludwig – KeyBanc

Saul Ludwig – KeyBanc

Just a clarification, that gain on the sale of the non core assets how much was that and where did those earnings fall in the segment numbers and unrelated to that did you sell any platinum in the quarter that may have contributed some earnings.

Robert Dellinger

To my knowledge we did not sell any platinum. The other income as I said is slightly higher than its historically been. We’ve normally run about $40 million a quarter, we’re up to $52. Principal driver was higher equity earnings from affiliates and royalty income streams which impact the glass and commodity chemical segments.

Saul Ludwig – KeyBanc

But can you quantify the asset sale component.

Robert Dellinger

The gap between our average and this high level. I would use the gap between where we’ve been averaging and this $52 million you mentioned.

Saul Ludwig – KeyBanc

With regard to your stores, where did you start the year in terms of numbers of stores, where did you end and what are your plans for stores for this year.

Charles Bunch

We started I would say on average around 425, we’re now at 400 and we think this is the right number of stores for our footprint and so we’re not contemplating any significant move on store count.

Saul Ludwig – KeyBanc

And with the increase in capital spending what would be an example of some of the new projects, are they cost reduction projects, are they capacity projects, what type of strategic thrust do the higher cap spending have.

Charles Bunch

Well the biggest single project that we have in 2010 is we have started, we announced this last year a new resin plant in China, Zhangjiagang, and so that is the biggest single capital project for PPG this year and that would be an example in Asia and in China in particular the capital spending increases are to meet demand.

We do have, we are running pretty hard at our facilities in Asia, so I would say Asia, the capital is more tied to growth. In North America and in Europe its mostly cost reduction, productivity, maintenance of assets, they are not capacity driven projects in North America and Europe.

Saul Ludwig – KeyBanc

Strategically when you think about your portfolio of businesses which has the glass and has the chemicals and has the silicas, what would you like to achieve. It takes two to tango obviously but what would you like to achieve during 2010 in terms of further repositioning the portfolio of businesses within PPG.

Charles Bunch

Well right now as Robert indicated in our comments about use of cash we would like to start making smaller bolt on acquisitions. We still think that there are things for us to do especially outside of North America in terms of improving our position in coatings. So that would be I think further, that would accelerate to a limited extent what is already a natural tendency of these regions to grow a little faster and our portfolio to grow a little faster.

At this point we are obviously trying to work ourselves through some tougher times in our glass businesses and also in chloralkalai, these are more asset intensive higher asset industries and businesses. We’ve been pleased during this cycle with the contributions for chloralkali. We think that the fiberglass business is coming back. The performance glazings business however is being challenged by this weak commercial construction market in North America.

So we’d like to see those businesses rebound to a position where they are contributing more to the portfolio but obviously our priority is to continue to grow our optical business and our coatings businesses especially in some of the higher growth developing regions and I think you’re going to see that our portfolio will continue to move toward those priority businesses over time regardless of whether we’re successful in making larger acquisitions.

Operator

Your final question comes from the line of Dmitry Silversteyn - Longbow Research

Dmitry Silversteyn - Longbow Research

A couple of questions I would like to follow-up on, you talked about the silicas business being up significantly in the optics and specialty business, and I think you also said that the optics business was up a little bit and yet your volumes are down in the quarter on a year over year basis so what was the offsetting business that did not do well.

Robert Dellinger

We said the silicas business volumes were up. We said the optical business sales were up aided by currency. So currency was the delta there.

Dmitry Silversteyn - Longbow Research

So actually the optical business then excluding currency was down enough to offset the improvement in the silicas.

Robert Dellinger

Correct.

Dmitry Silversteyn - Longbow Research

Then secondly on the natural gas you talked about only hedging 25% or so of your needs in 2010 at about $8.00 so is that going to trail off from 50 to 25 through the year or are you basically going to start the year at about 25% hedged.

Robert Dellinger

It does ramp down and its I think maybe it goes from 30 to 20 over the course of the year. So we are burning off those hedges so that the amount of hedged natural gas at the end of the year will be lower than what it is right now.

Dmitry Silversteyn - Longbow Research

And can you give us an idea of kind of what your outlook for natural gas is that you’ve decided to reduce your hedging.

Charles Bunch

Obviously hedges protect you on the upside, they don’t help you, they hurt you when you’re in a natural gas market like we’ve been in and we’ve been trying to understand what’s going on in natural gas. We don’t know if what we’ve seen during the course of 2009 was the result of the reduced, the recession and reduced industrial activity, was it the result of increased demand, especially with some of these shale gas finds.

So we have a little less confidence I guess you would say in our ability to forecast or predict the market and so what we’re saying now is that we’re prepared especially until we better understand the supply side and what’s happening with shale that maybe the assumptions that we were under over the last few years, that natural gas was a diminishing commodity and we were going to face inflationary pressure for the foreseeable future.

We don’t believe that now. And we’re trying to understand the market and we think we don’t need to have the positions out in the out years that we’ve had and we didn’t see even during 2009 the forward years, there wasn’t as much of a decrease from kind of a spot or monthly rate. So we seem to be paying or the hedgers that we’re paying a premium for that ability for the ability to kind of lock in those costs and maybe that’s appropriate for utilities that can pass some of those through to their regulatory agencies but it wasn’t as appropriate for us.

Dmitry Silversteyn - Longbow Research

Turning our attention to the automotive OEM side of the business, you talked about not seeing any tail offs in production in December that you would typically expect towards the end of the year, is this just being delayed. Are you seeing production being curtailed in January or do you think the inventory has been depleted enough in the second half of 2009 that the producers are basically not taking the shutdowns they typically do.

Charles Bunch

Yes, automotive OEM in this country we saw a little more strength in December versus certainly last year or historically some of the shutdowns. I think they are still working to get through, to rebuild inventories in certain models here in North America so we think that the first quarter is going to be a solid quarter and then maybe the manufacturers will kind of take stock of where their inventories are, what they see the demand being and they could make adjustments down or up following this quarter but it looks like in North America things are fairly locked in.

In Europe we think that it’s a little less clear but in Asia and especially China we see production moving through the end of the year with a lot of momentum. Chinese New Year is a little later this year. Its in the middle of February so our production levels here at the early part of the first quarter are still strong.

We are hearing as we have all been hearing about some of the movement of the Chinese government in terms of financing or borrowing and lending in China. So I think it’s a little too early for us to say that this thing is going to continue at the 25% plus kind of numbers for all of 2010. We don’t forecast that for China. Our forecasts are more modest then that. But at this point we’re seeing very good production in Asia and in China.

Dmitry Silversteyn - Longbow Research

Can you give us an idea of how big your Asian business is versus your US business in automotive OEM paint.

Charles Bunch

Our automotive OEM coatings business is about 20% of our total, we’re about a third in North America and the balance would be in Europe and in some of the outlying areas, South America and South Africa as an example.

Dmitry Silversteyn - Longbow Research

So not much in Asia then.

Charles Bunch

No, we’re 20%. For us this is very, we think its, and none of that is in Japan. We have not been able to penetrate the Japanese market at all so that we think that 20% of our sales now in automotive OEM coming out of Asia with no content in Japan and this has all been delivered for the most part over the last five plus years, we’re quite pleased with our performance and how we’ve balanced geographically in that business unit.

Dmitry Silversteyn - Longbow Research

And then on the autos, as part of your industrial coatings business how big is autos in 2009, or how big was it in 2009.

Charles Bunch

It was still, automotive OEM was still our biggest business unit within that industrial segment. You have to know that the industrial coatings or some call it the general industrial business unit which is the second largest business unit in that segment was also effected, not quite as much as automotive OEM but it was still down so in 2009 and 2010 the automotive OEM business will be the biggest one in that segment.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Charles Bunch

Thank you very much. We appreciate all of your support and your interest in PPG and we look forward to working with you in what we hope is going to be another year of recovery here in 2010. Thank you very much.

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Source: PPG Industries Q4 2009 Earnings Call Transcript
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