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PPG Industries (NYSE:PPG)

Q4 2011 Earnings Call

January 19, 2012 2:00 pm ET

Executives

Vincent J. Morales - Vice President of Investor Relations

Charles E. Bunch - Chairman of the Board, Chief Executive Officer and Member of Operating Committee

David B. Navikas - Chief Financial Officer, Senior Vice President of Finance and Member of Operating Committee

Analysts

Gregg A. Goodnight - UBS Investment Bank, Research Division

P.J. Juvekar - Citigroup Inc, Research Division

Ivan M. Marcuse - KeyBanc Capital Markets Inc., Research Division

Robert Walker - Jefferies & Company, Inc., Research Division

Gaji Balakaneshan - Buckingham Research Group, Inc.

Robert Koort - Goldman Sachs Group Inc., Research Division

James Sheehan - Deutsche Bank AG, Research Division

Saul Ludwig - Northcoast Research

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

John P. McNulty - Crédit Suisse AG, Research Division

Nils-Bertil Wallin - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Dmitry Silversteyn - Longbow Research LLC

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 PPG Industries Inc. Conference Call. My name is Regina, and I will be your conference operator for today. [Operator Instructions] Today’s conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Vince Morales, Vice President, Investor Relations.

Vincent J. Morales

Thank you, Regina. This is Vince Morales, Vice President of Investor Relations for PPG Industries. Welcome to PPG's Fourth Quarter 2011 Financial Teleconference. Joining me on the call today from PPG is Chuck Bunch, Chairman of the Board and Chief Executive Officer; Dave Navikas, Senior Vice President of Finance and Chief Financial Officer.

Our comments relate to the financial information released on Thursday, January 19, 2012. As a reminder to everyone, based on our modified quarterly earnings call process, about 1 hour ago, we posted detailed commentary and the accompanying presentation slides on our Investor Center at ppg.com. The slides are also available on the webcast site for this call. We don't read those prepared remarks during the call. However, during the call, Chuck will make some opening comments reviewing the company's results and then we will move directly to Q&A.

Both the prepared commentary and discussion during the call may contain forward-looking statements reflecting the company's current view about future events and their potential effect on PPG's operating and financial performance. These statements involve uncertainties and risks which may cause actual results to differ. The company is under no obligation to provide subsequent updates to these forward-looking statements.

This presentation also contains certain non-GAAP financial measures. The company has provided in the appendix of the presentation materials, which are available on the website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures. For additional information, please refer to our filings with the SEC.

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

Charles E. Bunch

Thank you, Vince, and welcome, everyone. Today, we announced fourth quarter 2011 sales of $3.5 billion, up 4% versus the fourth quarter of 2010. Our fourth quarter earnings per share of $1.39 established a new fourth quarter record for the company and was achieved despite moderating global growth rates during the quarter. We delivered record earnings per share of $6.87 in 2011, with new records established each quarter despite persistent raw material inflation, uneven economic conditions globally and continued anemic construction activity in developed regions. Our continued record financial performance reflects strong execution by our global businesses, aggressive cost management and our amplified deployment of cash. Also, our end-use market and geographic diversity remained an important benefit during the year.

During the fourth quarter, overall sales volumes were flat as some customers curtailed inventory and remained cautious with their ordering patterns. This was most evident in our Commodity Chemicals segment where volumes declined 3%, and also in Europe, where we experienced a 1% volume drop. Emerging region volume growth continued, but was modest and tempered by lower Marine and Architectural Coatings volumes, along with the negative impacts resulting from the Thailand flooding which reduced our Optical Products activity levels.

We continued to benefit from improving global demand in Aerospace, Automotive OEM and several general industrial markets, and we supplemented this growth with PPG market share gains. Also aiding our sales was higher pricing with improvements in each business segment, marking the seventh consecutive quarter where the company has delivered higher pricing. The higher pricing offset raw material cost inflation as inflation rates stabilized during the quarter. We are implementing further pricing in 2012 to offset inflation we absorbed in 2011.

Lastly, cash generation remained strong and was about $1.4 billion for the full year, up nearly 10%. Throughout the year, we deployed our cash with a focus on earnings accretion and continuing our heritage of returning cash to shareholders. We purchased 2.7 million shares of stock in the fourth quarter and 10.2 million shares during the year. We also raised our dividend, marking 40 consecutive years of annual dividend increases. In total, dividend and share repurchases equaled $1.2 billion or 85% of the cash we generated from operations. We ended the year with about $1.5 billion in cash and short-term investments.

Looking ahead, we anticipate first quarter 2012 growth to remain uneven by region and vary by industry, similar to the fourth quarter of 2011. We expect Europe to remain the most challenging region. We anticipate moderate strengthening in the U.S. economic recovery, supported by an enhanced global cost position in the industrial sector due to lower natural gas prices. Aggregate emerging region growth rates are expected to remain high compared to developed regions, but more moderate and erratic that they have been in the past. As a result, we will be very proactive in managing our businesses as we deal with these uncertain market conditions. Also, we intend to continue to prudently deploy our strong cash position towards earnings accretion and rewarding shareholders, and are targeting to end 2012 with a cash balance below $1 billion.

That concludes our prepared remarks. Now operator, would you please give instructions and open the phone lines for questions?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question today comes from the line of Laurence Alexander with Jefferies.

Robert Walker - Jefferies & Company, Inc., Research Division

This is Rob Walker on for Laurence. I guess, in terms of -- just kind of get your thoughts, between automotive and construction end markets, I guess, which do you expect to see a larger increase in volumes, just kind in order trends in Q1 and kind of what you've seen so far?

Charles E. Bunch

Well, we see good momentum in the Automotive OEM markets around the world, with the exception of Europe. So we're looking forward to a -- good growth rates continuing in North America and Asia in particular. Construction activity, however, I think there's some early signs in North America, but still, I would say modest growth as we start up here in 2012. And Europe, we finished on what I would say would be a very modest growth rate. We're all concerned with the macroeconomic environment in Europe. Right now, we haven't seen any significant downturns, but we do not expect Europe to be strong in the construction markets nor do we think they're going to be particularly strong in Automotive OEM. That Automotive OEM business will be stronger in regions outside of Europe.

Robert Walker - Jefferies & Company, Inc., Research Division

Okay. And then if you could update us on kind of consolidation pipeline, kind of and do you expect to use a larger portion of cash in 2012 for M&A than you did in 2011?

Charles E. Bunch

You said consolidation pipeline. You meant acquisition pipeline?

Robert Walker - Jefferies & Company, Inc., Research Division

Correct.

Charles E. Bunch

We closed this month on 2 acquisitions that we have previously announced, that was Dyrup in Europe, Architectural and Colpisa which is a Colombian, South America, Automotive OEM and refinish coatings company. So we are actively pursuing a number of small- to medium-sized bolt-on acquisitions. The pipeline, we think, is solid. But we have to make further progress to bring them along to closure here in 2012.

Robert Walker - Jefferies & Company, Inc., Research Division

Okay, thanks. And then just kind of, overall, in terms of the chlor-alkali kind of outlook in Q1. And then just if you can touch on sort of whether you see further risk there, that pricing and costs, it won't keep up with the price declines in chlorine? And whether you think that the restocking will come or in Q2 versus Q1 in terms of just more of a general industrial -- in terms of your general industrial outlook going forward?

Charles E. Bunch

Well, why don't we answer your -- we'll answer the chlor-alkali question and then we'll open it up to some of the other questioners. But in chlor-alkali, we expect a seasonal upturn here in the first quarter from what were some lower operating rates in the fourth quarter. We do expect price increases to move the average cost of pricing up in the first quarter. Although as you commented, chlorine prices remain weak, but overall, we think it'll be slight positive for the first quarter. So I think we're looking forward to some return to more typical seasonal patterns here in the first quarter. And obviously, we're watching the natural gas markets, which are, right now, encouraging for us.

Operator

Your next question comes from the line of Frank Mitsch with Wells Fargo.

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

Chuck, you talked about pushing through price increases because of the inflation that you faced in 2011. Can you talk about, starting from January 1, how you see that price versus raw material balance playing out? If you say raws are kind of in balance right now, it would suggest that you should see some margin improvement there. Can you talk a little bit about that?

Charles E. Bunch

Right. We've been chasing, let's say, the raw material inflation really for about the last 18 months or so. And that continued through 2011, but started to moderate in the second half of the year and the fourth quarter, Frank, with the exception, as we've talked about in the past, of the TiO2 pricing. So overall, we think here as we went into the latter half of 2011, we have a moderating inflation outlook and we're still catching up in terms of raw -- or pricing for our product. So we think that we still have some catch-up to do. We didn't fully offset inflation from raw materials in our Coatings businesses and we are trying to now complete that catch-up process because we really haven't completely offset those inflationary impacts. And so I think there is an opportunity for us if we continue to see this moderating trend in raw materials, to show some margin improvement in Coatings as we go through the year. Some of that will also depend on volumes, but if we continue to see overall economic growth, we think that will aid the margin improvement opportunities.

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

All right, great. And speaking of TiO2, it was just over a month ago, I guess, that you talked about your ability to take 46% of TiO2 out in 2012. Now that we're 1 month further along, do your R&D people still feel confident in that regard?

Charles E. Bunch

Yes, they still feel -- we have a -- this is not a challenge that we threw out lightly to our organization. We have all of the goals and objectives, metrics by function, by business unit and we still feel that's an appropriate target level for us in our formulations, and it's still early in the year, but we are tracking it. And we feel that we will hit those targets.

Operator

Next question comes from the line of Kevin McCarthy with Bank of America.

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

This is Aleks Yefremov for Kevin. Chuck, what is your outlook, overall, for your raw material costs in the Coatings business given higher TiO2 and lower petrochemical-based raw materials?

Charles E. Bunch

We think that the overall outlook is flat. We think that what we've seen, in terms of the declines in the organic side of the raw material basket will offset what appears to be some continued increases on the TiO2 side, especially here in -- among the Western chloride producers.

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

And then moving to Architectural Coatings. In your prepared remarks, you mentioned that volumes in Asia were weaker. Do you think this is a function of sort of where you are in China geographically? Some sort of a share shift mix, share shift, or this is a sign of sort of cyclical problems in the Chinese construction market that might persist?

Charles E. Bunch

Well, we think, overall, that the Chinese construction growth will be moderating, and we've seen that here in the latter half of 2011. We think that will continue at least here in the near term in 2012. We have a relatively small business in Architectural in China. We are focused more in the Eastern half of the country where growth rates are probably even more modest. More of the growth has been in the second- and third-tier cities, and in the West. But I do think that there is a moderation of growth rates in the construction industry in China and certainly we felt that effect here in the latter half of 2011, in our business.

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

And a final question, if I may, on transitions and the rollout of Vantage (sic) [HomeVantage]. With increased sales cost, do you think you can still increase margins year-over-year in 2012 or hold them flat or down?

Charles E. Bunch

Well, for us, the Vantage product launch, which for those of you who aren't familiar, this is our clear-to-polarized, new-to-the-world technology. This will be the first time you've ever seen a product launch that will darken and darken to a polarized state in -- and so we're very excited about it. But it is, at this point, a rather limited launch. Limited geographically, limited by channel. We are quite excited about it but I would say, overall, even though the margins here will be very attractive for us, we don't think that we'll have, overall, an effect that would lift up our margins more than what you've seen just because of the -- at this point, it represents a relatively smaller volume for our Transitions business.

Operator

Your next question comes from the line of Don Carson with Susquehanna Financial.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Chuck, 2 questions. One is on the anticipated level of share repurchase in 2012. Do you think it'll be as large as last year or do you have a specific amount targeted at this time?

Charles E. Bunch

We talked, at our Investor Day in December, we had close to $1 billion in share repurchases in 2011. Our target for this year, I would put in -- more in the range of $250 million to $500 million. That would be what I would project. Obviously, it depends on successfully finding additional uses of cash for bolt-on acquisitions. But I would expect that we're going to be aggressive with the share repurchases, but not quite at the targeted -- at this point, targeting that level from 2011. So little -- half of that rate would be, I think, a good Benchmark.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

And a follow-up on chlor-alkali. What was your all-in natural gas acquisition cost in calendar 2011, including the hedge you had, I think you had 12% of your needs hedged at about $7.25?

Charles E. Bunch

It all in was around – it was a little under $5. And so this represents, I think, an opportunity as we've -- here in the first quarter of 2012, will be the last of those earlier kind of pre-shale gas hedges. So we were under a little under all-in costs of $5 and obviously we're going to start out in 2012, here in the first quarter, below $4. We did put some additional hedges on, but only over the last few months, at relatively modest level. So it does represent a nice opportunity for us especially with further reductions we've seen over the last week to 10 days in the market.

Operator

Your next question comes from the line of Bob Koort with Goldman Sachs.

Robert Koort - Goldman Sachs Group Inc., Research Division

Chuck, you made some comments in the notes here, about the refinished demand suffering from some of the inventory management. And I guess I was a little bit surprised, I didn't think that particular customer segment was as sensitive to those inventory and working capital adjustments, nor was the pricing volatile enough where they might be trying to gain some advantage in buying later. So am I wrong and that does tend to be a much more volatile purchasing decision there? Or what happened in the refinished market?

Charles E. Bunch

I think we -- typically, it's not as volatile. We saw some inventory management. If you go back over the last few years, there were inventory reductions, certainly, as we went into the recession in 2009, more so than we had typically seen. And I would say, here in the fourth quarter, there was probably some -- if you look at some of the markets in Europe, as an example or even in some markets in Asia where there's some economic uncertainty, I think the distributors and the overall customer base were somewhat cautious, I would say, in terms of ordering patterns. So I wouldn't think it's anything -- a noticeable trend but it is something we felt we needed to comment on.

Robert Koort - Goldman Sachs Group Inc., Research Division

And is there something structurally different in the European markets that, in a weaker environment, DIY would go down instead of going up as it's done in the U.S. or was it just the jarring economic anxiety there that stifled demand?

Charles E. Bunch

Well, I think in Europe, you have also some customer issues. And I think the big retailers are also being quite conservative about inventory levels and their outlook, especially the ones in the U.K. I think we saw, earlier this week, I think it was Asda in the U.K. or Tesco and some of the home improvement chains. I think they have been somewhat concerned about the economic environment in the U.K. and been, I think, quite cautious, of inventory levels. But I wouldn't say it's a pronounced trend difference between here and the U.S. at this point. It's still a little too early to tell, Bob.

Operator

Your next question comes from the line of Saul Ludwig with Northcoast.

Saul Ludwig - Northcoast Research

How much did FX help you in 2011? And what type of headwind are you, at least, thinking about as you put your 2012 plan together?

Vincent J. Morales

Saul, it's Vince. On the sales line, it was -- we provide that each quarter, as you know, in our distributed slides. But it was up around, let's say, $400 million year-over-year on the sales line. On the earnings line, we typically drop, say 7% to 10% of that to the bottom line.

Saul Ludwig - Northcoast Research

Okay. So call it about $30 million. Now does that become a headwind this year?

Vincent J. Morales

We're not currency traders, we'll leave that up to you. But based on today's rate it's going to be a headwind. We -- primarily, the rate we're talking about is the euro.

Saul Ludwig - Northcoast Research

Right, right, right. Okay. In the U.S., you commented that your Architectural volume was flat, which I guess it was pretty decent. Did the flat volume and price cost give you better earnings or lower earnings in that segment of the Architectural business?

Charles E. Bunch

North America and Architectural earnings were slightly lower in the fourth quarter on flat volumes, so.

Saul Ludwig - Northcoast Research

Okay. And then, when you think about the dividend and your dividend payout policies, it's been pretty consistent for a lot of years now. With the sharp increase that you have in earnings, is the dividend going to move more commensurate with the earnings growth or will the modest rate of dividend growth likely to continue, and thus, be a lower percentage of your earnings?

Vincent J. Morales

Well, I think what you've seen us do, Saul, over the past couple of cycles, is we've actually reduced the amount of time between dividend increases. So I think the last 3 increases were either 6 or 9 months. So we've been trying to keep in lockstep with the earnings accretion.

Saul Ludwig - Northcoast Research

I was asking about the payout ratio.

Charles E. Bunch

Well, I think, we're committed to increasing the dividend and to be in line with what we think is our -- we're already positioned at the high end of our peer group in terms of overall yield, dividend increases and payout ratio. Obviously, our cash flow has improved over the last few years as we've continued to move the portfolio. So our view is that we're going to continue to, I think, be consistent with the dividend, increase the dividend and increase it commensurate with overall earnings growth and cash flow. So if this is sustainable as we feel it is, you'll see us continue to increase that dividend and maybe at a rate that's higher than we've seen over, let's say, kind of coming out of this recessionary period where we did try to be a little more conservative.

Saul Ludwig - Northcoast Research

And my final question, Chuck. As you look at the stable of plants that you have around the world, are you kind of finished with the restructuring and -- or is there going to be any further need for restructuring activity? And if so, how should we think about the cost of that as we put our model together for 2012?

Charles E. Bunch

As we look at 2012, it's obvious from our comments and how we saw the end of the year playing out, that we have more concern over the course of the European recovery and we have made, recently, a couple of acquisitions. So we're going to be reviewing here as we go into the first quarter what we think we're going to need going forward. Are there any synergies, especially in Europe, with the acquisition that we've made and our overall ray of facilities across our businesses. With some, I would say, some additional focus on Europe if, in fact, growth trends or some of the concerns that have been talked about, externally, play out and we're dealing with a low or 0 or potentially negative growth in Europe.

Operator

Next question comes from the line of David Begleiter with Deutsche Bank.

James Sheehan - Deutsche Bank AG, Research Division

This is Jim Sheehan in for Dave. Chuck, just wondering about, do you have any update on the situation in Thailand as far as when you think some of your suppliers will be up and running again? I know that you didn't have a lot of clarity on that back at the Investor Day.

Charles E. Bunch

Right now, our operations are in good shape, both on the Optical Materials side, as well as Transitions. Some of our customers there were -- or are a little slower in getting up to speed. But we think, now that there’s been good recovery across the optical industry in Thailand -- so if there are some lingering effects here in the first quarter, we think they're going to be minimal.

James Sheehan - Deutsche Bank AG, Research Division

Okay. And just as far as caustic availability is concerned, I know that that's an issue in the fourth quarter. How much longer will caustic availability be an issue and where do you think operating rates will play out in Q1?

Charles E. Bunch

Well, caustic availability is a concern, right now, because of where the industry finished or operated in the fourth quarter. So you had lower operating rates, very low caustic inventories. Now things are tight, and that's why I think I commented that the pricing for caustic is moving up in the first quarter. So I think we're going to see higher operating rates for the industry and that's a seasonal factor that may alleviate some of what's, obviously, now a tougher supply-demand situation. But if we can get the operating rates to come up and stay here in the first quarter, I think we'll be in, as an industry, in pretty good shape. You still have this Japanese DCM planned outage that is affecting caustic supply globally. So there’s a few other short-term effects that are, I think, serving to keep the market tight.

James Sheehan - Deutsche Bank AG, Research Division

Okay. And then just with Architectural Coatings volumes declining a couple percent in the quarter and volumes seeming to be weak across the board on a regional basis. Did you see any substantial inventory build of TiO2 in the quarter?

Charles E. Bunch

I can't really comment on what was happening with TiO2 inventories. I think I've commented, in the past, that probably many customers in Coatings or elsewhere were probably keeping inventory levels higher because of concerns over price initiatives from the producers. So at this point I'm not aware of, certainly, any shortages or any supply concerns in TiO2. But overall inventory levels, I really don't have any basis to give an opinion.

Operator

Next question comes from the line of Dmitry Silversteyn with Longbow Research.

Dmitry Silversteyn - Longbow Research LLC

A couple of questions. First of all, the decline in operating margins in the Performance Coatings business, I mean you've been running at 15%, 16% pretty much for the past 6, 7 quarters and now we're down to just about just a shade over 12%. Was that just a mix issue or were there some onetime costs that have flown through the quarter, that impacted the profitability of Performance Coatings?

Charles E. Bunch

Well, I think we indicated in our notes, we had -- there are 4 businesses in that segment, 2 of them performed well; Aerospace being one of them, extremely well. Refinish had a solid quarter. Protective & Marine Coatings had a weaker quarter, and again, that was focused on the Marine side of the business. And the Marine business in Asia, this is China and Korea, volumes were down on the OEM build side of the Marine sector. Price did not keep pace with inflation in that business. And in the Marine segment, we have a slightly different raw material basket. We also include some metals that go into Marine OEM Coatings, notably zinc and copper. So they had a higher run-up during the year. We were still working off higher-cost inventories in that business and we had same activity in Marine. So that was one of the business units that had lower earnings, the other one was in Architectural. Now within Performance Coatings, we have the Americas and Asia/Pacific together in the Performance Coatings segment. So the European Architectural is in its own separate reporting segment. And there, in the Americas and Asia/Pacific Architectural business, we had lower earnings. This was, I mentioned slightly lower in North America, but lower in the smaller business in South America, in Brazil and Chile. Again, primarily price not keeping up with inflation. And in Asia/Pacific, similar challenges. I commented earlier on the China Architectural, so that had lower earnings; again, price not keeping up with inflation. And the volumes moderating in Australia, similar story, price and inflation. TiO2 is more important in these Architectural businesses. So there is, let's say, more inflationary pressure there. So if you have markets where the price initiatives aren't keeping up with what's been happening in TiO2, in particular, you're going to see some margin deterioration. So that's where I would focus your attention in terms of the Performance Coatings segment.

Dmitry Silversteyn - Longbow Research LLC

Got it. That's very helpful, Chuck. You also, in your prepared remarks, said something intriguing that I want to follow up on. When you're talking about growing in some select segments or seeing good growth in some select segments of Industrial Coatings business, can you give us a little bit more detail on what those segments are, what's driving them and what the outlook for 2012 is?

Charles E. Bunch

There are some good segments in the Industrial or General Industrial business outside of Automotive OEM, and 2 examples would be Heavy-Duty Equipment. So you've seen some of the results of some of the big players that are out in ag and construction equipment. These guys are, I think, are booming in some respects and so that Heavy-Duty Equipment segment is a very attractive one. Consumer Electronics as well. Even if Consumer Electronics overall, in the second half, as an end-use market, was maybe -- the growth rates weren't as attractive. We're seeing increased paint and Coatings usage for a number of these devices, more devices being painted, color and design, more important. So that would be another example of an end-use market in Industrial or General Industrial that's growing in addition to Automotive OEM.

Dmitry Silversteyn - Longbow Research LLC

Okay, that's very helpful color. And then just a couple of bookkeeping questions. Your Commodity Chemicals business, I understand that you sell a lot of your chlorine as not chlorine but some sort of a -- this or another. Can you give us a rough idea of how much of your chlorine business, if you will, is sold as non-chlorine?

Vincent J. Morales

Dmitry, this is Vince. That's going to fluctuate based on what's happening in the virgin chlorine market itself.

Dmitry Silversteyn - Longbow Research LLC

For 2011, what was it?

Vincent J. Morales

I'll have to get back to you on the number. I don't have it at hand. But I would consider it just – chlorine’s just a pass-through to those derivatives.

Dmitry Silversteyn - Longbow Research LLC

Right, right, I understand that. But my point is that you're not really shipping chlorine in a lot of cases. So I just wanted to understand what the percentage of the non-chlorine business was. So that's fine. We can take it offline. And then the last question. What kind of a tax rate should we be using for 2012? It's been coming down pretty significantly every year. Should we be looking at neighborhood of 25% or something lower than that?

David B. Navikas

Yes, Dmitry, this is Dave Navikas. The 25% rate that we achieved in 2011 would be the rate we're looking to maintain in 2012.

Operator

Your next question is from the line of Ivan Marcuse with KeyBanc Capital Markets.

Ivan M. Marcuse - KeyBanc Capital Markets Inc., Research Division

I just have a couple of them real quick. On Optical businesses, will you see some pent-up volume, do you think, in the first quarter from the orders and shipments that got delayed from the fourth quarter? Or do you expect it to just get back to more of a normalized type of business level?

Charles E. Bunch

I would say it's still early to tell. I would say that we're only 2 weeks into this. So I would say, at this point, we're not seeing any negative signs. So I would say, at normal activity levels, maybe a little bit higher as there's a little catch-up from some lower inventory levels and customer kind of, little bit of de-stocking there in the fourth quarter also tied to the Thailand floods.

Ivan M. Marcuse - KeyBanc Capital Markets Inc., Research Division

Great. And then I think I missed it earlier in the call, your estimate [ph] on your 2012 outlook for raw materials. Did you expect them flat from where they are right now to go across or flat for on a year-over-year basis?

Charles E. Bunch

Flat from where we are now, yes.

Ivan M. Marcuse - KeyBanc Capital Markets Inc., Research Division

So where would you think about it on a year-over-year basis for 2012?

Vincent J. Morales

From a year-over-year basis, Ivan, that would be mid-single digits in terms of inflation rate. Collated all last year.

Ivan M. Marcuse - KeyBanc Capital Markets Inc., Research Division

All right. And then my last question is the Architectural Coatings in emerging markets, was it just in China where you saw a decline in demand or was it in other regions and what regions were there? And then in China are you just primarily in the Tier 1 cities? Could you just tell me on the scale of about how big is that business and where do you mainly sell into?

Charles E. Bunch

Okay. Well, you had about 3 questions in there. But I would say that China was -- and I would say that what I described was moderating growth rates. And that would be the case in China, as well as Brazil as an example. So growth rates were being lowered in our China business, Relatively small business, so less than $100 million. And again, more concentrated, as I explained to the earlier questioner. In the Eastern half of the country, more in the bigger cities and the growth rates have been higher in the tier 2, 3 cities and in the Western region.

Operator

Your next question comes from the line of P.J. Juvekar with Citi.

P.J. Juvekar - Citigroup Inc, Research Division

You talked about share gains in Coatings. Can you discuss sort of which segments you gained share? Was it in Autos, Aerospace? And secondly, with your paint plus primer product at Lowe's, were you able to gain share there?

Charles E. Bunch

Well, as you saw from our Industrial Coatings segment, we thought we did well in that overall segment in Auto OEM, in General Industrial Refinish, even if the market is, let's call it, a more mature market, we felt we were well positioned globally. And that's a more difficult market to get a, especially a near-term share picture, but we felt we've been doing well in that market. And Olympic ONE for us was a very good launch. We certainly exceeded our initial targets in Olympic ONE and we consider it a successful launch for us. And I think our customer for Olympic ONE, Lowe's, was also pleased with the performance of our product, both at the quality and the level of support that we were giving it, plus the reception on the part of the customers.

P.J. Juvekar - Citigroup Inc, Research Division

Okay. And then secondly, quickly on TiO2. How much of the TiO2 that you buy is sulfate versus chloride-based? And are you using more Chinese -- can you just qualitatively talk about what are you doing with the Chinese TiO2 to counter the Western producers?

Charles E. Bunch

Well, the overwhelming use of our products, especially in North America and Western Europe, is chloride. We have introduced sulfate grades in those markets now and that's part of the targets that we have for improving our utilization of TiO2 in the formulas. I would say that, where you see much more sulfate usage for us is in the Asia/Pacific region, most of the Chinese-domestic producers are sulfate producers. And both through acquisitions and our own activities, we have learned how to work with those grades of TiO2 much more effectively, so we have a higher usage of sulfate TiO2 in Asia/Pacific and in the developing or emerging region.

P.J. Juvekar - Citigroup Inc, Research Division

Just would you say that sulfate is maybe 10% of your overall purchases?

Charles E. Bunch

Yes, that's probably -- maybe higher than that, P.J.

Operator

The next question comes from the line of Nils Wallin with CLSA.

Nils-Bertil Wallin - Credit Agricole Securities (USA) Inc., Research Division

One question about housing starts. They've had a fairly nice year, and probably up low-single digits, and you've seen in the back half of the year some acceleration. Yet Architectural volumes are kind of flat and chlor-alkali is negative. So are we seeing some sort of delay in order patterns? Has the overall picture of seasonality somehow changed? Or was there may be a pickup in demand that was in 2010, that was really pulled forward from 2011? What's going on here? Why aren't we seeing higher volumes given where housing starts are?

Charles E. Bunch

Well, housing starts, in our view, are still very depressed. And we started to see, over the last quarter or the last few months of 2011, a little more encouraging signs, but off some very low volumes from previous years. So I would say that we're still in the very early stages of a housing recovery. And so it wouldn't be significant enough at this point to really see big volume increases, especially at this time of year where we're still in the winter and this is not a seasonally strong quarter. So I think if this kind of nascent recovery continues, we'll probably see more volume improvements as we go through the year. And I think all of us have been waiting for a housing recovery for a few years. I've predicted it incorrectly to have happened certainly last year, probably the year before. It hasn't. I'd like to be encouraged here, as we see a few of these signs, but I'm going to probably wait until we get a little further into this thing before I declare that, yes, we're in the early stages. And we have to remember that these levels of housing starts and things are still very, very low. I think they'll come back. We talked about automotive people said, “Hey, automotive’s never going to come back, 8 million or 9 million builds is the new normal.” I think now everyone believes we'll get back to the old levels in the automotive industry. And I think we'll make more of those cars here. And I think eventually housing will correct. I think it'll improve a little bit, but at this point, we're still at very low levels. So even if the increases are, let's say, a little more than they have been, we're still increasing off some very, very low levels. So we won't -- if you look at it, overall in the industry, probably not yet significant.

Nils-Bertil Wallin - Credit Agricole Securities (USA) Inc., Research Division

Okay. On your Architectural EMEA share gains, would you kind of give a little bit more qualification around what were the regions or particular end markets? And then given that even with Dyrup, you're still perhaps somewhat underrepresented in Germany. Is there any interest in growing there? I mean, given that you still are seeing very, very nice rises in German housing prices?

Charles E. Bunch

Well, for us, most of the European market, and our business in Europe as well, is in what we would call the Maintenance segment, both Residential and Commercial Maintenance. There's not as much of a new build or new construction market in Europe. So the improvements that we've seen have been in that segment. And we have some of our stronger businesses in countries that have held up better economically and the construction businesses have held up a little better. So that would be France and the Benelux countries. As we've described, we don't have much exposure at all to the Southern Mediterranean countries. We have a business in the U.K. that I would say is weaker than these Western European countries. And we’ve still been seeing some, I would say, some slight growth in markets where we're pretty strong, like Poland, as an example, in Eastern Europe, that haven't been affected too dramatically yet by all this weakness in the rest of Europe. In the German market, we have a relatively small position. I don't follow the housing prices in Germany, but overall, the economy’s been better there. They're well served in Germany. They have a number of small- to medium-sized German paint manufacturers. It's a competitive market. We'll pick up a little more sales in Germany from the Dyrup acquisition and I think, longer term, it does present a growth opportunity for us. But we're looking in Europe although we're cognizant of the fact that growth rates, right now, aren't that exciting. And so to the extent that we can find the right acquisition at the right of value, we'll be interested. But we're in that market, so we know growth is not going to be the big driver for earnings over the next year or so. So we're being, I would say, cautious and discriminating as we look at acquisition opportunities. And there are some of it there because the market is less consolidated than it is in North America, as an example.

Nils-Bertil Wallin - Credit Agricole Securities (USA) Inc., Research Division

That’s helpful. And just one final one, if I may. On Olympic ONE, with the introduction of that product, obviously, there was some advertising costs. Are those costs going to continue through 2012 or do you have an opportunity to help some margins on that side of the business?

Charles E. Bunch

Well, we obviously supported Olympic ONE in the second of the year and then wanted to support the launch, and I think that went well. We want to continue that, I think there's some momentum in the brand. Our customer has encouraged us to continue to support it. So at this point, we would like to keep that momentum going and we're just not going to strip out all the costs in order to drive some, let's say, near-term margin improvement, although all of us realize the pressures in the Architectural business. But we're going to try to stay the course here.

Operator

Next question is from the line of Gregg Goodnight with UBS.

Gregg A. Goodnight - UBS Investment Bank, Research Division

Your Industrial Coatings margins, you mentioned were up 200 basis points, and you mentioned a couple of things. Number one is lower gas prices and you implied that you've also taken some actions in that segment. My question is, which was the bigger effect there? And if natural gas prices decide to go up, are you going to be able to keep most of that margin improvement?

Vincent J. Morales

Gregg, I think the factors in Industrial, we cited, were higher volumes.

Gregg A. Goodnight - UBS Investment Bank, Research Division

Yes, 4% volumes.

Vincent J. Morales

Yes. Natural gas was not a factor in that. We got higher volume and higher price versus prior period.

David B. Navikas

And then manufacturing costs, Gregg.

Gregg A. Goodnight - UBS Investment Bank, Research Division

Manufacturing costs. So it was some fundamental improvement that contributed to that also?

David B. Navikas

Right.

Charles E. Bunch

But natural gas has a bigger impact on our Commodity Chemicals and our Glass segments. It's not a direct raw material for our Coatings business.

Gregg A. Goodnight - UBS Investment Bank, Research Division

Okay. That make sense, appreciate the clarification. In the Performance Coatings area, you mentioned in Marine Coatings, there was some increase in customer claims. Would you characterize that as low- to mid-single-digit-type impacts and will this continue?

Charles E. Bunch

Yes, I would characterize it as low-single-digit kind of numbers and we wouldn't expect that to continue. You have this happen periodically in the Marine Coatings industry. These are products that are working in harsh environments and that fourth quarter item was triggered more to a resolution of a longer-standing claim. So you would expect that this is not a continuing quarterly item but you do get that from time to time in Marine Coatings.

Gregg A. Goodnight - UBS Investment Bank, Research Division

Got it. Last question, if I could. The $1 billion end of year cash target. What is the assumption on your asbestos settlement? And if the asbestos settlement happens, does that impact your share repurchase targets that you mentioned a little while ago?

David B. Navikas

Well, it would. It's a factor, Gregg. It goes into the calculus of how we're going to deploy the cash that we have available to us. So we're not trying to predict when that is going to occur, but certainly, would that to occur and we have that use of cash in 2012, it would tend to push down what we spend on share repurchase. But then the other dynamic is the extent to which we're able to bring acquisitions to a conclusion. So we're really trying to balance those 3 factors as the year unfolds.

Gregg A. Goodnight - UBS Investment Bank, Research Division

And what is your best guess in terms of the settlement? Will it happen this year or is this no way to tell?

Vincent J. Morales

No way to tell, Gregg.

Operator

Your next questions come from the line of John Roberts of Buckingham Research.

Gaji Balakaneshan - Buckingham Research Group, Inc.

This is Gaji Balakaneshan on for John. Maybe start off with a clarification. Are you guys thinking that the first quarter of 2012 is going to be sort of equivalent to the fourth quarter? Plus the seasonal change in demand or is it maybe a little better than that?

David B. Navikas

I think what we articulated was the macro-environment feels the same, with some seasonal uptick.

Gaji Balakaneshan - Buckingham Research Group, Inc.

Okay, I got it. And then given the de-stocking that you saw in the second half of 2011, have you seen an end to de-stocking or maybe any restocking or possibly expecting that to occur in the near future?

Charles E. Bunch

It's still early in the quarter. We're only a couple of weeks into this. I would say, in Europe, we're asking because we're trying to be very mindful of the situation over there. Right now, we have not seen any significant movements of de-stocking or restocking in Europe on top of what we saw in the fourth quarter. Chinese New Year for the Asia/Pacific region is early this year, it's coming up this week. So that's kind of -- it's going to throw off a little bit of our calculations, so we're going to have to wait until we move through the Chinese New Year and get further into the first quarter to see how activity and inventory levels are going to be in Asia. And I would say, here in North America, most of the activity that we're seeing is normal seasonal activity. And that means that there is some seasonal uptick in a normal pattern. So we have not seen anything that is out of the ordinary in terms of the trends that we finished the year with.

Gaji Balakaneshan - Buckingham Research Group, Inc.

And then lastly, are there any businesses or geographies that have irrational levels of inventories? So maybe certain levels are too low given the end demand that you're seeing?

Charles E. Bunch

Irrational levels of inventory, no. We don't have any irrational levels of inventories. We're watching it. I would say, from what I can see at our customers’ inventory levels or suppliers’, I think everyone has been fairly cautious but not overly so. So there is no either outright pessimism or unbridled optimism out there in inventories and I think it's more steady-as-she-goes.

Operator

Our final question today is from the line of John McNulty with Credit Suisse.

John P. McNulty - Crédit Suisse AG, Research Division

Just with regard to the pricing that you're going to be putting through in the Coating space to catch up to the 2011 gross margin moves that you saw. Does that make any assumptions for the TiO2 prices that are currently -- the hikes that are currently on the table or would that need more incremental pricing from you?

Charles E. Bunch

Well, I would say at this point, we're still discussing TiO2 prices and trying to determine what's going to happen with the rest of our raw material basket. So we're still operating, at this point, off of the increases that we saw in the fourth quarter for TiO2, depending on where things go. Overall, for our basket, we'll have to develop our strategies once we see the general direction, it's not strictly from a TiO2 standpoint, and we're still under discussion for impacts in 2012.

John P. McNulty - Crédit Suisse AG, Research Division

Okay, fair enough. And just on your comments on the demand environment from the housing space. Do you think the demand is actually strong enough there to warrant or support the TiO2 hikes that are out in the industry or is that up for debate at this point?

Charles E. Bunch

Well, I made some comments on that in the past. Overall, we haven't seen a big improvement in demand in the housing sector. It's still early in the season. Certainly, we haven't seen a lot of strength over the last couple years. I've described today, moderating growth in markets like China or Brazil, concern about weakness in Europe. So I would say, overall, the construction markets are still tepid overall. And we may see a little bit of improvement as we go through the year. But I think there’s been, maybe a lot written about these nascent signs of improvement here in the U.S., but from a volume standpoint, we haven't seen dramatic improvements here, just early here in January.

Operator

Ladies and gentlemen, this concludes the question-and-answer portion of today's event. I'd like to turn the call back over to management for some closing remarks.

Vincent J. Morales

Thanks, Regina. I just want to thank everybody for your time. Please feel free to contact the Investor Relations function and we'll answer any questions you have. Thank you.

Operator

Ladies and gentlemen, thank you so much for your participation today. This does conclude the presentation and you may now disconnect. Have a great day.

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