PPG Industries Inc (PPG) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 PPG Industry earnings conference call.

My name is Jasmine and I'll be your operator for today.

(Operator Instructions).

I would like to turn the presentation over to your host for today's call, Mr.

Vince Morales, Vice President of Investor Relations.

You may proceed.

Hello, this is Vince Morales, Vice President of Investor Relations at PPG Industries.

Welcome to PPG's fourth quarter and full year 2008 financial teleconference.

Joining me on the call is Chuck Bunch, Chairman and Chief Executive Officer, Bill Hernandez, Senior Vice President Finance and Chief Financial Officer, and Dave Navikas, Vice President and Controller.

Our comments relate to the financial information released on Friday, January 16th, 2009.

Visuals supporting of this briefing may be accessed through the investor center on the PPG website at www.ppg.com.

As shown on slide number two, our prepared remarks and possibly comments in the subsequent question-and-answer session 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 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 reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures.

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

Thank you, Vince, and welcome, everyone.

In a few minutes, Bill Hernandez will discuss our fourth quarter and full year financial results.

But before he does that, I will provide a quick recap of our business's performance, and I will also review the significant progress we made in 2008 toward continuing to transform our Company.

Without question, the fourth quarter was a challenge.

Like many other companies, PPG experienced dramatic volume declines in several of the industrial end use markets that we serve due to the rapid deterioration in the overall global economy.

Most significant were industry activity levels in automotive OEM, which were down between 20 and 30% in each global region versus 2007, and a variety of general industrial end use markets, which experienced equivalent declines.

As a result, the earnings in our industrial coatings and glass reporting segments and the silicas business unit, which is part of our optical and specialty materials segment, were significantly impacted.

Both our industrial coatings and glass segments, which collectively account for about 30% of our business portfolio, actually reported operating losses in the quarter.

However, the remainder of our business portfolio, representing about 70% of the Company's sales, delivered solid performance in the quarter despite the dramatic economic slowdown.

Our commodity chemicals segment grew earnings and performance coatings matched strong 2007 results.

Our optical products business unit delivered once again organic volume growth, and our architectural coatings EMEA segment, in what is always a slower quarter due to seasonal trends, performed slightly above our expectations.

Throughout the quarter, we have continued to implement a variety of initiatives to reduce costs in all of our businesses in response to worsening global economic conditions.

These actions were in addition to the initiatives we have underway as part of the restructuring program announced in September.

Of equal importance is that we posted yet another strong quarter for cash.

Bill will provide more details on our liquidity position in a few minutes, but let me simply state that we ended the year with $1 billion of cash on hand.

This gives us tremendous financial flexibility which, as all of you know, is critical in today's business climate.

Overall, for the full year 2008, it was certainly a challenging and dynamic year for most companies.

PPG was no exception.

Early in the year, we experienced rapid inflation, including skyrocketing raw material, energy, and freight costs.

PPG reacted quickly to these increased costs and collectively, our businesses achieved selling price increases that offset this inflation.

Later in the year, the global economic downturn resulted in significantly lower activity levels.

PPG again responded quickly.

During the third quarter, and well ahead of most companies, we identified the severity of the declining volumes and announced restructuring actions focused on lowering our cost structure.

This ability to swiftly adapt our businesses aided our financial results.

What also helped were the broadened end use markets served by our business portfolio as well as our enhanced geographic footprint.

This diversification provided some resilience despite the sudden economic shifts and recessionary conditions we experienced in the year.

Our nearly $16 billion in sales established a new PPG record and was up 30% over the prior year, including nearly 50% growth in our combined coatings segment sales.

Optical and specialty material sales also grew by double digit percentages, and our commodity chemicals business had one of its best years ever.

Our adjusted earnings per share results for 2008 were down slightly, falling by more than 10% with the declines solely related to fourth quarter results.

We anticipate this performance will exceed that of many companies in our peer groups.

Also, as you would expect from PPG, throughout the year, we actually enhanced our financial flexibility and greatly exceeded our debt repayment commitments for the year.

The Company ended the year with one of its largest cash positions in recent history, and we have only minimal debt maturities in both 2009 and 2010.

We have improved our liquidity through our focused effort to manage working capital and capital spending, along with the successful execution of our strategic initiatives.

Foremost among the strategic actions we have taken in this regard is our acquisition of SigmaKalon, which we completed at the beginning of 2008.

This acquisition has outperformed all of our expectations, including the business' solid and stable generation of cash.

As a result, the Company's cash from operations for the year was a record $1.4 billion, up nearly 40% from our 2007 figure.

Also in September, in a difficult M&A market, we divested a majority interest in our automotive glass and services business.

In addition, we have continued to grow in emerging regions, where we expect economic activity to continue to outpace the growth in mature regions.

Our sales in emerging regions are approaching $4 billion, or nearly 25% of our existing portfolio.

Finally, we have continued to grow or gain share in key end use markets such as optical, aerospace, and protective and marine coatings.

Our strategic actions have transformed PPG significantly.

We are now a more focused company with stronger geographic and end use market diversity.

This has not only helped drive solid financial results in 2008, but it's better positioned the Company for today's economic challenges and created a positive step change in our ability to generate cash.

I believe that these accomplishments will provide PPG shareholders with benefits for years to come.

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

Thanks, Chuck.

I will spend a few minutes covering PPG's overall financial performance, both fourth quarter and full year.

I will also provide some details by business segments and discuss some macro trends relative to the year 2009.

Reviewing the slide detailing our fourth quarter sales, our results increase 3% to a new fourth quarter sales record with our SigmaKalon acquisition the main driver of the gain.

However, as Chuck mentioned, the quarter was truly a global end market demand story.

We, along with most other industrial companies, were heavily impacted by rapidly deteriorating volumes, driven by economic weakness, including lower overall consumer demand combined with industry customer inventory de stocking.

These lower activity levels were apparent in most of our businesses which directly face industrial customers, resulting in our year-over-year volumes for the quarter declining by 12% or nearly $400 million.

I will discuss this in more detail when I review each segment.

But our industrial coatings and glass segments were the most heavily affected as a result of lower global automotive OEM and general industrial end market demand.

Our sales pricing continued a positive trend as our selling price gains accelerated during the quarter despite the slower volumes.

Currency served as a headwind in the quarter, and our divesture of our automotive glass business reduced our sales in comparison to last year by $230 million.

The next slide details our full year results showing our sales grew to $15.8 billion, up $3.6 billion, or 30%.

Again, our acquisitions accounted for the majority of this growth, but we delivered $0.5 billion of favorable pricing gains as well.

Volume fell over 2% or approximately $325 million, with the entire volume shortfall occurring in the fourth quarter, but partially offset by favorable currency.

Of note is that our combined coating sales grew by 47% to $11 billion, and are up over 225% versus just five years ago.

Also, sales in emerging regions now account for 25% of the Company versus 10% of a much smaller base just five years ago.

From an earnings perspective, our fourth quarter adjusted earnings per share was $0.41, versus $1.22 in the prior year, with a drop primarily the result of the dramatic decline in volumes that I mentioned.

Our sales price gains and lower cost structure stemming from our cost initiatives more than offset lower equity earnings and higher inflation.

Our full year tax rate increased as the fourth quarter decline in earnings resulted in a geographic shift in our earnings.

Full-year adjusted earnings per share was down more than 10% versus 2007.

Our year-over-year decline in earnings in the fourth quarter pushed our full year results below our year 2007 results.

Our full year performance, while negative, will likely outpace similar comparisons by many other industrial companies, and our favorable comparison to our peer group's is a result of many of the actions we have taken over the past several years, focused on minimizing the impact of steep economic shifts.

Let me quickly discuss two key topics on the next few slides that impacted our fourth quarter and full year results.

First and foremost was the fourth quarter decline in volumes.

The nearly $400 million decline in the quarter resulted in our full-year volumes turning negative.

The volume drop was broad, both by end use market and by geography.

Volumes were down at least 11% in all of our major geographic regions.

As mentioned, the most severe declines were in the general industrial and automotive OEM markets.

However, many other end use markets were impacted, but to a lesser degree.

We did deliver positive volume growth in key businesses, such as optical products and also aerospace, despite the Boeing employee work stoppage.

The next slide illustrates the rapid rise in energy costs, which pushed up our inflation rates in several areas, including natural gas, buildings, raw materials, and freight.

Our total full year inflation for the Company, including raw materials, energy, and other general inflation, totaled $465 million.

As Chuck mentioned, operationally, we reacted quickly as we committed to recover the inflation impact with selling price gains, and we were successful as our selling price increases totaled about $500 million.

Depicted on the right side of the slide were our expected and actual inflation rates for coatings raw material costs each quarter.

Many of our coatings raw materials are petroleum based, and we typically lag petroleum inflation, or deflation, by about six months.

Therefore, the first half 2008 rises in petroleum costs were most impactful to PPG's results in the second half of the year.

As we began the fourth quarter, we expected inflation rates to continue to accelerate, which they initially did.

But, toward the end of the quarter, we began to see very rapid abatement in raw material pricing, which allowed us to end the fourth quarter virtually flat to the prior quarter.

We expect the rapid raw material price declines to continue in 2009, given both the second half 2008 slide in petroleum costs and the materially lower demand levels at our suppliers.

We also expect lower natural gas costs in 2009.

Our full year 2008 natural gas costs averaged about $9 per million BTU, which was up about $1.50 versus 2007.

We use 60 to 70 trillion BTUs of natural gas per year.

So a $1 change in our purchase price equals to a $60 million to 70 million pretax earnings impact.

We expect 2009, our natural gas costs to be lower, and we have about one-half of our gas needs hedged in the first quarter at about $8.50 per million BTU.

Based on recent market prices for the nonhedged portion, our calculated first quarter 2009 gas price would be about $7.50 per unit versus $8.50 in the first quarter of 2008.

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

Now, I will shift our discussion to our business performance.

Our industrial coatings segment results are detailed on the next page.

We recorded an operating loss of $40 million in the quarter versus $77 million of earnings in 2007, as sales declined nearly 18%.

This segment felt the full impacts of the severe declines in global industrial demand as fourth quarter segment volumes dropped by more than 20% in comparison with last year.

The lower activity levels were across a broad section of global end markets, including consumer electronics, many general industrial applications, and the most dramatic declines being in the global automotive OEM market.

Generally speaking, a 20% rate of decline was fairly consistent in our volumes, serving these end markets and in all geographies.

In addition, our businesses were saddled with higher raw material inflation in the full quarter even though raw material costs began to abate toward the tail end of the quarter.

During the quarter, we not only began to implement the restructuring actions that we announced in September, focused on lowering our cost structure, but we also instituted a variety of additional cost reduction measures given the rapid end market deterioration.

For the full year, segment sales grew by 10%, reflecting the addition of the industrial coatings business we successfully integrated from our SigmaKalon acquisition, partially offset by a 5% decline in volumes.

Despite an economy that weakened throughout the year, the great majority of our year-over-year shortfall in both volumes and segment earnings occurred in the fourth quarter, when global industrial demand collapsed.

Strategically, our emerging region sales now are just slightly less than 40% of the total segment sales and now represent our largest base as they exceed the sales of either the US region or the western European region.

As we look at the first quarter of 2009, the outlook for global demand in our industrial end markets shows further deterioration versus this past quarter.

We will continue to manage our costs aggressively, and are anticipating increasingly lower raw material costs from our suppliers.

The next slide details our performance coatings segment results.

The fourth quarter earnings were flat.

This is more impressive when considering that our aerospace business results were negatively affected by the Boeing employee strike which lasted into November.

Earnings from the SigmaKalon acquisition, selling price gains, and tight cost controls were key factors in our delivery of these results.

Our architectural business continued to experience lower volumes, which are down by mid teens percentages.

Also, our global automotive refinish volumes declined, reflecting the fact that fewer miles are being driven.

Full-year volumes were down for these same two businesses.

However, the performance coatings segment still managed to grow total sales by nearly 25% and segment earnings by 3%.

A key contributor toward this growth was the acquisition and successful integration of the SigmaKalon protective and marine business.

Additionally, sales volumes were accretive in aerospace, and our legacy protective and marine coatings businesses and all businesses achieved selling price gains.

Strategically, emerging region sales nearly doubled in 2008, and now account for more than 25% of segment sales.

Given the global nature of this segment, in early 2009, we are anticipating some currency headwinds and a challenging demand environment in comparison to the first quarter of 2008.

Our architectural EMEA segment results are on the following slide.

The segment, in what is traditionally its slowest quarter due to seasonal trends, once again met or exceeded our various performance targets.

From a business activity perspective, year-over-year sales in eastern Europe continue to grow in the quarter while western European sales declined as a result of the continued sluggish United Kingdom market.

On a full year basis, segment earnings were $141 million, and include a reduction of approximately $120 million of annual noncash expenses related to depreciation and acquisition related intangible amortization.

The $261 million of segment earnings before depreciation and amortization exceeded our full year target for this business.

As a reminder, the architectural EMEA segment represents a little less than 70% of the total SigmaKalon acquisition.

Looking at first quarter 2009, the largest headwind we anticipate is currency versus last year's first quarter.

Now let me take a minute to reflect on the entire SigmaKalon acquisition, which was the largest acquisition in the Company's history.

The acquisition was strategic milestone as it materially altered the Company by both substantially expanding our coatings profile and extending our geographic diversity.

Additionally, the business provides us improved access to or expands our position in several markets and regions.

The performance of the entire acquisition exceeded our financial targets, including strong cash generation and overachievement versus our synergy targets.

Simply put, by any measure, the acquisition has been a significant strategic and financial success for PPG.

The optical and specialty material segment details are on the next slide.

Segment sales in the quarter were down slightly as higher optical sales were more than offset by lower sales in the silicas business unit.

Optical sales volumes grew in all regions resulting in growth of mid single-digit percentages despite slowing consumer spending and were aided by our generation six transitions product rollout in parts of Europe.

Silica volumes declined by 20% as the tire and battery end markets were negatively affected by the global slow down in the automotive markets.

In both the quarter and full year, we remained aggressive in spending on selling and advertising to stimulate sales, and to further build our transitions brand.

Full year optical sales grew once again by more than 10%.

We had a very successful rollout of our transition generation six product in the United States in the first half of the year, followed by a partial introduction in Europe in the fourth quarter.

Optical remains one of our best growth platforms, although year-over-year growth in early 2009 will be a challenge, given the very difficult comparables due to our generation six product rollout in the United States in early 2008, and currency will also be a head wind.

Our commodity chemical results are displayed on the next slide.

We had another very solid quarter, with year-over-year earnings improvement.

Demand was very strong at the outset of the quarter, assisted by industrial end market outages stemming from the third quarter hurricanes which severely impacted a variety of industrial activity in the US Gulf Coast.

Demand fell each month during the quarter, reflecting pent up post-hurricane demand fulfillment, along with slower US economic conditions.

But price remained fairly stable all quarter.

Our inventory levels remained low as we exited the year.

On a full-year basis, this business delivered one of its best years ever, despite higher input costs driven by a natural gas costs which averaged slightly more than $9 per million BTU versus about $7.50 per unit in 2007.

This business remains a stellar cash generator for the Company.

Looking ahead, we are anticipating that early 2009 demand levels will be less than the fourth quarter, reflecting the absence of the post hurricane related impact.

The next slide details our glass segment results.

Included are our reported results, which include our automotive glass and services business that we sold in the third quarter of 2008, as well as the pro forma results excluding this divested business.

My comments will focus on the pro forma results, as we believe these are more meaningful given they reflect the segment on a going forward basis.

For the fourth quarter, the segment reported a $7 million loss, as the fiberglass business experienced slowing general industrial demand, including weakening electronics end market activity.

This lower end market demand had a negative impact on our fiberglass earnings as did lower other earnings resulting in part from lower equity earnings from our Asian joint ventures.

These shortfalls were only partially offset by improved year-over-year results in our performance glazings architectural glass business.

For the year, pro forma earnings declined 40% on essentially flat sales with the entire decline occurring in the fourth quarter.

We continued our relentless focus on costs in these businesses as our manufacturing costs improved by $25 million during the year.

Additionally, during the fourth quarter, we accelerated execution of our announced restructuring program focused on reducing even further our cost structure.

In 2009, in addition to the recent industrial weakness, this segment will likely face a slower commercial construction market and incur higher pension costs.

Needless to say, we will continue to aggressively manage these businesses.

Also, from a strategic perspective in 2008, we divested our automotive glass and services business in September and hold an equity interest in the new entity.

Both the legacy pension and OPEB costs and the ongoing equity results from the new entity are reported in our segment earnings table in the line labeled legacy items.

The next slide details some 2009 key topics.

But let me quickly summarize our 2008 business performance.

Despite one of the most challenging environments in at least the past decade, many of our businesses posted good financial results.

However, several of our businesses' performances were severely impacted in the latter part of the year.

We responded quickly and are taking considerable cost actions to minimize the impacts of the slowing external marketplace.

Now as we look at early 2009, several of these head winds remain, Most notable of which is overall global demand levels.

Chuck will give you a more detailed read on our early 2009 demand in a minute, but as I mentioned in many end use markets, first quarter 2009 demand will certainly be lower than our first quarter 2008 levels.

Also, we may be faced with a higher tax rate depending upon geographic mix of earnings in 2009, and currency is currently a negative versus the prior year.

Pension and OPEB costs will inflate and we expect our first quarter 2009 impact to be in the range of $25 million to $30 million, pending final actuarial calculations.

As I mentioned earlier, we do expect some offset from these head winds due to lower input costs stemming from the decline in energy prices and the lower global demand environment for commodities.

Also, the significant cost actions we have taken and continued to implement will provide benefits as well.

This was not intended to be an all-inclusive list.

It does provide some of the key items for consideration for the first quarter 2009 which will be a challenging quarter.

Now, let me discuss our cash generation, our cash uses, and liquidity.

As displayed on the graph on the following slide, our cash generation results were impressive throughout the year, including the fourth quarter, despite the slipping economic environment.

We generated about $1.4 billion of cash in 2008, which exceeded our internal targets and was nearly 40% higher than 2007, easily establishing a new record for any year in the Company's history.

Several factors influenced these results, including the strong cash performance from our SigmaKalon acquisition and our commodity chemicals segment, both of which have business models that result in high cash conversion.

Also, we aggressively managed working capital during the year, drawing consistent cash generation are hallmarks of PPG and our positive step change in the level of cash generation is a direct result of our recent strategic actions.

This new level of cash generation has and will allow us to continue to remain flexible financially.

The next slide details our approximate 2008 deployment of cash.

In the year, we used about $375 million for capital spending, necessary for maintenance and organic growth needs.

This is only slightly above 2007, despite a 30% increase in Company sales and provides additional insights into the capital-like nature of our expanding core businesses.

For 2009, our capital expenditures may decline by up to 50% versus our 2008 figure as we tightly control spending.

Our dividend payments were $343 million, up 2% versus 2007.

We increased our dividend payment once again in October of last year, and 2008 marked the 37th consecutive year of increased payments.

In anticipation of closing of the SigmaKalon acquisition on January 2nd, 2008, we increased our debt level at the end of 2007, and in early January by a combined $3.1 billion.

During 2008, we have subsequently paid down about $650 million in debt, nearly double our original debt pay-down commitment, which was $350 million per year.

In addition, we made pretax pension contributions totaling about $125 million, resulting in approximately $80 million of cash outlays after tax.

In 2009, primarily as a result of 2008 equity market performance, we will likely make pension contributions of between $400 million to $500 million, all voluntary, except in certain non-US pension plans.

This is a pretax figure, so our actual cash outlay will be closer to $250 million to $300 million.

Also, we have $116 million of term debt due in 2009.

Therefore, despite much higher pension funding, we currently expect our combined net outlays for pension and debt repayments will likely be between $375 million and $425 million.

Several hundred million dollars less than our 2008 figure, and we will still remain ahead of pace on our debt repayment commitments.

Regarding acquisitions, we completed our SigmaKalon acquisition during the year for $1.6 billion, plus assumed debt of $1.5 billion.

Outside of the SigmaKalon acquisition, we spent just under $100 million of cash on a few bolt-on acquisitions.

While we will continue to review acquisition opportunities in 2009, this will be a lower cash use priority, and we will remain extremely selective and opportunistic from a pricing perspective.

Finally, share repurchases were negligible during the year, as we focused on conserving cash, and we will do so again in 2009.

Generally speaking, our cash deployment in 2009 will remain cautious and flexible.

However, the base case cash deployment assumptions I just provided, along with our strong 2008 year-end cash balance, likely gives us hundreds of millions of dollars of excess cash and financial flexibility.

And we will either conserve or deploy the cash based on our ongoing assessment of global economic conditions.

Let me conclude our cash discussion by reviewing our liquidity on the next slide.

Most impressively, is that we ended the year with $1 billion of cash on hand.

As the year progressed, and we identified the economic slowing, we shifted the cash conservation, and our results are up notably from earlier in the year, including a $500 million increase from just the end of the third quarter.

Looking at our term debt, outside of the $116 million of term debt due in August 2009, we have no additional long-term debt due until 2012.

We also have about $200 million of commercial paper outstanding, which we currently plan to keep rolling over and the mark have improved versus the fourth quarter.

We have just about $550 million drawn on a variety of European banking facilities, which is available to us until at least 2010.

And we have never drawn on our $1 billion US revolver that is due for renewal in 2011.

And, since we received the question frequently, the only covenant we have for our debt is a debt to total capital ratio, and we have nearly $4 billion of borrowing head room before that covenant comes into the equation.

Needless to say, we have extreme financial flexibility and similar ability to deploy our large cash balance in a manner which best benefits the Company.

Let me quickly summarize our annual financial results.

We grew annual sales by 30% and overcame dynamic external economic issues to post one of our best adjusted earnings per share results ever.

During the year, we posted record cash generation, growing these results by nearly 40%.

Our debt repayment was nearly double our original commitment, and our cash on hand doubled versus 2007 levels.

And as is our legacy, we raised our dividend for the 37th consecutive year.

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

Now let me turn it back over to Chuck.

Thank you, Bill.

As I mentioned at the outset of today's call, our performance this past year under intensely difficult market conditions continues to demonstrate our strength in business portfolio and the success of our strategic direction.

We delivered solid earnings and record cash generation despite rapidly rising energy costs and substantial declines in various industrial end use market demand levels.

Of equal importance is that we have continued to transform the Company, and I believe our strategic accomplishments this past year, including our notable portfolio changes, were greater this year than in any of the 30 years I have been with PPG.

The progress will prove even more beneficial as we move into 2009, including our stronger and more stable cash generation capabilities.

Regarding 2009, Bill touched on several of the issues we and many other companies are facing entering the new year.

Of these, the one issue of most concern to me is the demand levels in the global end use markets we serve.

While we have made tremendous strides in diversifying the Company, and while coatings and optical remain very low fixed cost businesses, if volume declines persist at the magnitude we witnessed in the late stages of 2008, it will prove to be a challenging environment for many companies, including PPG.

Our early read on 2009 is that the first quarter and possibly the first half of the year is shaping up to be an even greater challenge than this past quarter.

Our immediate focus is on improving our operating margins as we will manage our businesses to cost levels that reflect the pace of the slower end use markets.

We do expect relief in the form of lower raw material and energy costs, which will help mitigate a portion of the impact of the decreased volumes, and we are considering additional permanent cost reduction actions on top of those we announced last September, which may result in additional restructuring charges and related cost savings in 2009.

Obviously, we will remain focused on our cash position and maintaining complete financial flexibility.

We have already taken prudent and proactive steps in both managing working capital and capital spending, along with many other initiatives to preserve our large cash position until we have more visibility on the credit markets or see more stability in the global economy.

Let me add that we are proud of our track record at PPG of managing through difficult economic times.

We have always been able to rapidly and decisively respond to cycles and down turns.

However, unlike past downturns, today we have the added benefits of a diverse set of businesses, a broader geographic base, and a stronger cash position.

My expectations are that 2009, while challenging, will ultimately prove to be another successful year for PPG.

We expect most of our businesses will continue to deliver solid financial results, and for those businesses which are facing the most difficult economic conditions, I assure you that we will take aggressive measures to manage those businesses to be successful.

Finally, and most importantly, we are extremely proud of our heritage of rewarding shareholders, including increases in our annual dividend payments.

As is well-known, we are one of only a handful of US companies that has paid an annual dividend since 1899, a consecutive streak of 109 years.

Also, we have raised our annual dividend payment for 37 consecutive years, including an increase just a few months ago.

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

Thanks again for your time and interest in PPG, and we will now be happy to answer any questions.

Will the operator please give instructions and open the line for questions.

(Operator Instructions).

And your first question comes from the line of Frank Mitsch of BB&T.

You may proceed.

What's tougher, first quarter of '09 or the Ravens defense on Sunday?

Well, I would say, speaking as a Pittsburgher, I think the first quarter of '09 may be tougher than the Ravens' defense.

One of the things in we're trying to get a handle on, and you talked about the difficulties in the fourth quarter with the destocking phenomenon that's working its way through the chain, do you have any sense as to how much further that has to go, when will we get to an underlying level of demand, and along those lines, could you offer an expectation of global GDP in 2009?

Well, let me take the first question, volume levels and destocking in the first quarter of '09.

We're still at a relatively low activity level, especially in the automotive and industrial segment in January.

A lot of our customers here in the US and also around the world in automotive have not yet restarted their operations in a significant way.

We also have an early Chinese New Year at the end of January.

So I would say on the automotive side, we're not going to have good visibility until February and March.

So I think we're still going through some destocking this month, but I think you are going to see a return to, let's say lower volumes, but somewhat more normalized here as we move through the quarter.

I think in some of our other non-automotive businesses, that we are seeing activity levels in January that are up from the very low December level, so I think we're going to see in other segments a modest pickup from where we were, so I think the destock in many of the nonautomotive and industrial businesses is probably moving through the system.

Overall, we looked at GDP growth probably on a global basis in 2008 of about 2.5%.

We're probably going to be, in our calculus, probably slightly positive on a global basis.

A couple of tenths of percentage point, but certainly here in the first quarter and the first half we're looking at negative growth on the GDP side in North America.

Okay.

Great.

Chuck, you mentioned your belief that as we march through the fourth quarter conference calls, that PPG will have outperformed the competition with the results you posted here today.

What gives you the confidence to say that?

Well, I think as we look at our businesses, we do not think that we are losing share or position in our end use markets.

Obviously, the weakest end use market we have is automotive, and I think relative to other automotive peers, I think our performance is going to be at least as good if not better.

But our confidence level is more about the fact that we're well positioned in our end use markets across the board, that we are gaining share in a number of them, and not losing any share or position in other markets.

Terrific.

Thank you.

Your next question comes from the line of Kevin McCarthy, Banc of America-Merrill Lynch.

You may proceed.

Yes, good morning.

Thank you.

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

If you look at our input cost inflation during 2008, Kevin, we are now obviously unwinding the cost in a couple of areas.

Obviously the energy markets, natural gas, and what we saw in 2008 in terms of our transportation or fuel cost bills, a lot of the surcharges.

We are now seeing in the fourth quarter of '08, we started to see for the first time declines in our key raw materials, depended on the raw material and the region, but those have started to come down now, and we're approaching levels that we saw earlier in 2008.

We are, however, seeing some resistance now because the volume levels or the activity levels in our businesses are lower, with our customers they're lower, so many of our suppliers are saying, well, we're having difficulty matching the price declines that you may be expecting, because you are not -- you, PPG, are not taking the kinds of volumes that you had historically been.

So there's some resistance, I would say, because of this lack of economies of scale with the lower volumes, but I expect that our input costs are going to decline across the board during 2009, and my hope is that we will -- we will share some of that with our customers, but for the most part, we intend to improve our margins because, as you have seen in many of our segments, margins have declined for PPG despite our productivity actions, so we need to restore those margins, and that's a priority for PPG.

Okay.

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

Well, volume trends in 2009 are going to be, I would call them relatively flat.

We have not seen a recovery yet in some of the markets that started to weaken during 2008, notably the UK.

We started to see in the fourth quarter a weakening on, let's stay, the Continental European market.

So right now our forecast would be for flat volume for 2009 for our European architectural business.

The raw material pricing has been at a slightly different phasing in Europe, Kevin.

We saw a little more increases actually as we went through the year because of the weakening Euro and the fact that they had not passed some of the raw material increases on.

So we are still now increasing our prices to maintain margins during 2009 and keep the levels that we had in 2008 with what is going to be I think a very flat volume across the board in Europe.

Okay, thank you very much.

Thank you.

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

Please proceed.

Good morning.

Chuck, any comments on businesses in the past that have been somewhat counter cyclical which is finish business, for example, if people are not buying new cars, maybe they are going to repaint their vehicles more than they have done in the past.

Have you seen some of that and do you expect that for 2009?

I would say that as you saw in the performance of our refinish business, which is within our performance coatings segment, those earnings have held up relatively well.

This is an aftermarket business that traditionally has played that kind of balancing role for us in our portfolio.

The volumes have not been quite as resilient because we've seen some declines in miles driven, both here in North America and now in western Europe.

Gasoline prices are coming down, so I expect that we're going to see that decline reverse itself.

We're also having some very severe weather here in North America, and I do agree with you, as people are keeping their vehicles longer, because we're not seeing the OEM sales here in automotive, I think that there's an opportunity in our refinish business to post a -- I think a better volume performance during 2009 for these reasons.

Okay.

And now the question is to Bill.

Bill, you have a few hundred million dollars of free cash flow in 2009 and so I think you can buy decent size bank nowadays for that amount of money, but what's your range of priorities for the surplus cash?

Maybe a couple scenarios you could talk about.

As we said, Sergey, we do think we have several hundred of millions of dollars of cash flexibility next year, and our current thought process is we are going to be fairly conservative, especially in the early part of this year until we get a little more visibility on what the future is going to hold for us.

So I think we'll keep quite a bit of cash on hand.

I mentioned, as we're starting the year here with a billion in cash, commercial paper, and I think we'll keep doing that.

We're starting to see commercial paper rates dropping.

It's getting a little better, placed for longer periods of time, so keep a good amount of cash.

Then as we go into the year, I think one of the things we may look at is being a little more aggressive on paying down some of the debt.

As I mentioned, we only have a little over $100 million of long-term debt maturing this year that we have to pay down, and actually that $100 million is from a term note we took out in 99 when we did our acquisitions at the end of that decade of about $300 million.

We very quietly paid down that debt since it was well above 7% interest rate.

So I think one of the scenarios has been to pay a little more aggressive in paying down some debt.

Then depending on what happens there in the equity markets, as well as desk it might have on our pension fund, we may decide to increase or decrease the amount of cash we put in our pension plan, and then probably acquisitions, as we mentioned earlier, will probably be lesser use of cash for the year.

But we'll continue looking at that.

Last, we always look at our stock price as a flywheel for any excess cash.

Thank you.

Your next question comes from the line of David Begleiter of Deutsche Bank.

Please proceed.

Good morning.

Chuck, can you comment on the resiliency of the optical business as we enter 2009?

Well, so far, we have been quite pleased with the continuing performance of our optical business.

As you know, this business has probably more of a healthcare profile with some exposure, obviously, to some consumer discretionary purchasing, but it is behaving more like a healthcare end use market, and as you know, in this economic environment, we have probably seen the strongest relative performance from the healthcare segment.

So I think this is giving us a little bit of confidence that we're going to continue to see this as an opportunity to grow and to balance our portfolio.

We still have some momentum from the generation six launch in transitions.

As Bill indicated in his remarks, we only launched in that North America and in a few select market in Europe.

Now that's going to be rolled out in the first quarter in the rest of Europe.

That should give us a lift.

So, overall, we're still looking for very good things from our transitions portfolio, business and our optical portfolio.

And, Chuck, you mentioned potential further cost actions.

What would cause you to pull that lever, and what could they be in terms of size and areas of focus?

If you looked at our last restructuring announcement, which was September of last year, third quarter item, and it was focused really in two areas, one was capturing synergies from the SigmaKalon integration, and also select and targeted actions primarily here in North America in our automotive coatings business and also in our glass segment.

What we saw, however, in the fourth quarter, was the rapid spread of this decline in automotive around the world, and we've seen continued weakness there.

So we were, I think -- we are now saying we probably did not do enough from a -- in that industrial coatings segment, we have to look more broadly there, and if this -- these lower volume and activity levels persist from a overall corporate standpoint, we have to look more broadly at actions, especially in some of our weaker segments, and I would say that we're certainly a ways away from making those decisions, but I would say, throughout the first quarter, we're going to analyze this, and you will see -- I think something that we will come up with early in the year if we see these conditions persist and we get confidence that we can take costs out of our operations and the magnitude I would say is -- it would not be significantly different than what we saw in the third quarter of last year.

Thank you very much.

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

Good morning.

This is Amy Zhang on behalf of Bob Koort.

I have a few questions.

First on the pricing front.

Noted most of your pricing in the quarter, which is a little surprising to us given how weak the demand environment was in November and December.

And my question is, what would be your pricing strategy and also pricing outlook in '09?

As far as we know, several of your competitors already stopped pushing prices in the latter part of 4Q.

At this juncture we're looking at 2009 as not being a year where we're going to be able to significant increase prices.

As you look at one of the larger segments for us, which was chloro-alkali, we feel that pricing peaked in the fourth quarter, and I think we're seeing modest declines there, and in many of the other segments, I don't look for increased prices during 2009, and it will be more of trying to improve margins through our productivity actions and holding on to some of the gains that we -- that we were able to get in 2008, and again with an emphasis on restoring margins through productivity and holding on to those increases rather than passing them through, because there has been a margin shift in our businesses, either to suppliers or customers over the last couple of years.

Okay, that's very helpful.

The second question is, can you just give us a little bit more color on what's going on in Asia?

And -- during the quarter Asian volumes actually dropped more than 10%.

Is there any business line or any country that's more particularly weak during the quarter, and what's your outlook for that region?

We saw a decline in activity levels throughout Asia in the fourth quarter.

We saw it even in markets that had been growing nicely prior to that.

Korea was weak in the automotive sector in the fourth quarter, as was China.

I think there was an anticipation after the Olympics that we would maybe pause and then resume growth, certainly the growth in the fourth quarter in a sector like automotive or our overall industrial we did not see that return to the growth patterns earlier in 2008.

In fact, if you look now at the end of the 2008 quarter, or how we're starting in other important segments in addition to automotive, like consumer electronics, those were actually starting to weaken in China and more broadly in Asia.

We're seeing that start slowly in 2009.

We have this early Chinese New Year at the beginning -- or at the end of January.

So we're looking now to February as the real indicator of what kind of recovery we're going to see, but, yes, broadly, across markets, and countries in Asia, we saw weakness in the fourth quarter that has not corrected itself as of yet in 2009.

Okay, thank you.

And my last question is regarding SigmaKalon.

Not sure if you addressed in this your prepared remarks.

What is your profit expectation for that sentence because in the fourth quarter that business was break-even on the profit line.

Is there any chance in '09, given the fast deterioration of the demand outlook in Europe, the housing construction market, is there any chance in '09 we could see that business swing to operating loss?

I would say as we talked about, there is a seasonal variability in the architectural coatings business, and in Europe it's no different there.

Actually the performance in the fourth quarter for us was ahead of our plan.

They had very solid growth and earnings during the course of 2008.

We expect that to continue.

They were able to meet their targets in the fourth quarter, even on some lower volumes.

So we think they're quite resilient and have a very sound business.

So at this point, even though we're not looking for a lot of volume growth in 2009, we're looking for SigmaKalon and the architectural EMEA business to have another solid year in 2009.

Thank you very much.

Your next question comes from the line of Dmitry Silversteyn of Longbow Research.

Please proceed.

Good morning.

Most of my questions have been answered but I want to follow up on a couple ones.

You have mentioned in several of your businesses headwind from foreign exchange when it comes to revenue line.

Can you give us an idea of what the impact of foreign exchange would be on your operating profit line provided the dollar stays at current levels?

Again, the head wind is mainly we're going to start to look at comparables versus last year.

We had a very weak dollar to begin the years and I think what we're really talking about is comparables as we begin comparison with the year, and where it will go.

Looking forward, I think it's anybody's guess, which way all currencies will play out for the remainder of the year.

It's a headwind at the beginning of the year.

I don't think it will be a head wind as we progress through the year.

It's more comparison here in the first quarter.

Okay.

I understand that, but I'm not asking to you predict where the dollar is going to go, but if it stays at current levels, I'm just trying to determine what kind of your sensitivity is to foreign exchange on the operating profit line.

Well, for every dollar change on the top line it's about 10% change on the bottom line, and we think there's about a 10% head wind.

That's helpful.

That's what I was looking for.

Thanks.

Second question, in regards to your performance coatings business, I think you talked about fourth quarter volumes in architectural coatings being down 15% for the division overall.

Can you give us an idea of what was relative performance of the US market versus the Asian market?

Have you seen comparable declines, or was one worse than the other?

I would say that we saw weakness -- weakness here in North America as well as in other parts of the globe.

South America, they began experiencing some of the same issues that we've had here in North America during the fourth quarter, as did Australia and China was not as strong either.

So I would say that this recessionary environment for the construction industries has spread rapidly around the world, not as severely as the automotive, but certainly we're seeing weakness outside of North America as well now, with Europe and our position there with our SigmaKalon business holding up the best.

Okay.

Turning attention to the commodity chemical sector, you talked about the overall demand in the early quarter being stronger and falling each month with the pricing holding steady.

What was the volume decline that you've witnessed in chloro-alkali segment, if the volume keeps declining, can you keep shutting down capacity to maintain utilization rate?

We saw volume, or utilization rates, decline through the quarter.

October was actually a very strong month.

We were recovering from the September hurricane, and operating levels were quite good.

In November, they declined somewhat, but we're still pretty solid.

In December, and you saw many of the chemical customers for our business, and some of the other industries that are served by the chloro-alkali industries started shutting down to kind of manage inventories and do de-stocking in December.

So we did see a sharper fall-off in December.

As I said earlier in my remarks, in January, we've actually seen these levels come up a little bit here in chloro-alkali.

Activity levels are better, and that's in contrast to some of my comments about automotive where we've seen in January activity levels still remain low for our automotive customers in January, with we hope a pickup starting in February.

Okay.

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

I think that pricing is going to -- there are some declines in pricing right now, some industry price levels such as the alumina contract are still being discussed, so I think pricing in the first half of the year is going to be relatively stable, if at a lower level, and activity levels, they will probably be obviously weaker at the start of this quarter than they were at the start of the fourth quarter, because October was quite a good month for us.

But I would tell you that I think that operating rates for us will be fairly stable and we should be able to manage our inventories and operating levels to be solidly profitable in the first quarter and first half of the year.

I appreciate it.

The last question on the glass segment, did I hear you correctly that the architectural glass business was up for the quarter and what's the current makeup now that you have de consolidated the automotive glass?

What's the current make-up of the division between fiberglass and other types of glass, flat glass?

If you look, there's really two -- just two business segments now, or two businesses within that glass segment, and one is flat glass or performance glazings.

That makes up a little more than half of the sales of that segment.

Fiberglass is a smaller piece of the sales, although they do have a significant joint venture that is not consolidated on the sales line.

So I would say they are equally present within the segment, and, yes, the performance glazings business had -- on a relative basis, a better quarter than the previous year, where as fiberglass, because of the rapid de stocking, especially in the thermoplastics side of continues, which has end use markets in automotive and industrial, they experienced a very rapid drop-off in demand starting in November, because of the higher fixed costs, in that business it's a little tougher to adjust capacity, but we are doing that now.

Okay.

Thank you very much.

Your next question comes from the line of Steve Schuman of Lafayette Research.

Please proceed.

question on your projection for 2009.

You had said things are probably worse than you had expected.

What are the chances of doing another major restructuring, automotive in particular doesn't look to be recovering any time soon, at least on the big three side.

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

But we're still working at it right now.

And then the few hundred million dollars of free cash next year, did that include or exclude the voluntary pension payment of a couple hundred million also?

It included.

We still have above -- that's over and above the pension numbers that we talked about.

And that also takes into consideration that you thought could you bring CapEx down by -- did you say 50%?

Yes.

Thank you, guys.

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

Please proceed.

Good morning.

Bill, for the pension expense for 2009, for the full year, what do you expect it to increase, and as part of that answer, what are you using for your discount rate, '09 versus '08, and your assumed rate of return of assets on '09-'08?

The discount rate we're using is just a little bit above 6% is the way we're looking at it for the coming year.

We made about an 8% return on assets, and that's been pretty steady over that time period.

And as we said, the pension expense we're talking about is several hundred million dollars for this coming year, but on an after tax basis it is going to be about 250 to 300 million.

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

Expense going forward?

We're looking somewhere between 25 and $30 million a quarter for increased pension expense for each quarter of 2009 versus 2008.

And this 6.1 or 6.2 discount rate, how did that compare with the discount rate you used in '08?

It's pretty close to the same.

We're talking one or two basis points difference.

Okay.

And, Chuck, on the chloro-alkali outlook for '09, will you consider the effect of volume is maybe some price weakness, help on natural gas, do you think the combination of those items keeps earnings the same in that segment, or do you think it gets a little better or a little worse?

We don't like to make direct forecasts, but I would say that in view of what we see overall in the markets, some of the weakness, I think it will be a challenge keeping those operating earnings at the same level for the full year.

And then your comment about SigmaKalon expecting to be flat in volume, how was their volume in '08 versus what it was when SigmaKalon had them in '07?

Volume was up slightly.

It was down in the UK, but up overall, and it was modestly up.

I would say this is certainly just less than 2%.

When you had up 2% in a total year which wasn't so bad economically in Europe until late in the year, and we see Europe decelerating at a fairly rapid pace, being flat in volume would be a darn good performance, and I'm wondering why -- I would call that optimistic.

Why you feel so confident that volume could stay flat as the whole economic scene in Europe is deteriorating rapidly.

Well, 2008 was a record year for SigmaKalon.

So it was their performance improved over 2007, and that top line is a combination of volume and price, Saul.

And we've seen their ability to adjust their costs and expenses to fluctuate with volume, so we think the combination of flat volume, some pricing and margin maintenance and lower costs as an opportunity to have another good year for SigmaKalon in what is arguably going to I think, a tougher environment next year.

FX will work against them as well?

Yes, it will.

Great, thank you very much.

Thank you.

Your next question comes from the line of [Silka Lette] of JPMorgan.

Please proceed.

Good morning.

Question on the domestic architectural coatings business.

Can you talk about the magnitude of the volume decrease in the fourth quarter and what volume expectations you have for the full year '09?

And also, how large is architectural coatings as part of performance coatings?

Thank you.

architectural coatings, broadly this would be North America and the rest of the world, I would say was over 20% of the total for performance coatings.

Volumes were down here in North America, modestly, and what we were able to do, because we've been adjusting costs, reducing our footprint, we actually had a better performance in the fourth quarter of '08 on lower volumes.

So I think we've proven that we can make the tough decisions here, take costs out, and these were costs that we took out without the benefit of a restructuring reserve.

So I would tell you that even though we're not looking for a pickup in architectural market here in North America, we think we're going to be able to continue to perform better because we've been aggressive on costs, productivity, and tried to make up for the weakness in the market with our own actions.

Thanks very much.

One more question, please.

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

Please proceed.

Good morning, guys.

Good morning.

Do you manage the seasonal ramp-up for the architectural coatings business different this season at all?

Do you normally build to inventory in addition to serving the inventory needs of the customers, or is that going to change given the uncertainty that's out there in the ordering patterns?

Typically we start building inventory in the architectural business at the end of the year, or the end of the fourth quarter, so you start to see that in December.

This year I think we were a little more cautious, and we're starting to do that now here early in the first quarter.

We're not expecting a significantly weaker environment in the architectural business here in North America this year.

We're 2.5 years into what's been a housing recession.

We think that there's a lot of stability in our customer base in every channel, and even though we're not expecting a lot of strong growth here, we think that we have a good handle on demand and our inventory needs, and we're managing that now, but we are starting to add inventory here in the first quarter to handle these seasonal requirements.

Thank you.

Okay, thank you very much, and I look forward to talking to you at our next quarterly earnings release and Q-and-A session.

Thank you.

Thank you for attending today's conference.

This concludes your presentation.

You may now disconnect.

Good day.