PPG Industries Inc (PPG) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2009 PPG Industries financial results conference call.

I will be your coordinator for today.

At this time, all participants are in listen-only mode.

We will facilitate a question-and-answer session towards the end of this conference.

(Operator Instructions).

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

Vince Morales.

Hello.

This is Vince Morales, Vice President of Investor Relations for PPG Industries.

Welcome to to PPG's second quarter 2009 financial teleconference.

Joining me on the call from PPG 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 financial information released on Thursday, July 16, 2009.

The visual supporting this briefing may be accessed through the Investor Center on the PPG website at www.PPG.com.

As shown on slide number 2, our prepared remarks and comments in the subsequent question and answer session may contain forward-looking statements reflecting the company's 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 reconciliations 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.

I will provide a brief overview of PPG's performance in the second quarter.

Bill Hernandez will then review some of the financial details and I will add closing remarks before we field questions.

In the second quarter, we experienced a traditional seasonal sales increase versus the first quarter.

Our total sales this quarter remained fairly consistent month to month, with some slight strengthening in June, and were also steady within each major region.

This gives us a degree of confidence that most markets have stabilized, albeit at considerably lower levels than prior years.

However, we continue to experience very challenging conditions in several markets, such as the US automotive OEM sector and certain general industrial OEM markets.

In these industries, there was little improvement from the extremely difficult environment we saw in the first quarter.

In other markets, such as those for European and US architectural coatings, we did see some improvement versus the late fourth quarter 2008 and first quarter levels, even though demand was still down in comparison with the prior year's second quarter.

As for earnings, our results are still down considerably versus last year, but we're pleased our profitability improved substantially versus the previous two quarters, despite weaker results in our commodity chemicals business.

Clearly, the improved bottom line results in our coatings businesses reflect the very aggressive cost cutting measures we've taken, combined with increased savings from restructuring actions.

This is particularly evident in our industrial coatings segment, where global demand levels have remained depressed, yet we delivered substantial segment earnings improvements of $68 million and $44 million versus the fourth and first quarters respectively on a relatively similar sales base.

A major factor in the quarter that negatively impacted sales and earnings was currency conversion.

In the second quarter of 2008, the Euro peaked versus the US dollar.

As a result, year-over-year currency translation in this year's second quarter was a significant headwind.

In architectural coatings EMEA, and performance coating specifically, the negative impact from currency translation nearly equaled the year-over-year earnings decline.

So in local currencies, these segments had nearly flat year-over-year earnings performance, a very noteworthy achievement given the volume headwinds related to the weakened economy.

Lastly, we remain focused on cash.

We generated nearly $400 million in cash from operations this quarter, up 25% versus last year, driven by improvements in our businesses' working capital levels.

As a result, we once again ended the quarter with a very solid cash position, with over $1 billion of cash on hand.

While our cash position is high compared to historic PPG standards, we have been and intend to remain very prudent in our uses of cash.

Now here is Bill to review some of the financial details.

Thanks, Chuck.

I will start by reviewing our sales results, which are detailed on Slide 5.

Overall, sales for the company were down nearly $1.4 billion versus the second quarter of last year, which includes the reduction of just over $250 million stemming from our third quarter 2008 divestiture of a majority interest in the automotive glass and services business.

Demand remained weak, resulting in a decline of about $825 million in sales volumes.

Volumes declined year-over-year in each region, with Asia down the least, dropping 7%, driven by weak Asian exports offset by strong consumption within China.

Our United States and Canadian volume fell by over slightly more than 20%, driven by weak automotive and industrial activity levels.

Our European volume was down 18%, with drops well in excess of 30% in many industrial markets combined with mid single-digit declines in architectural coatings.

I will remind you that the Easter holiday shifted into the second quarter this year, but was in the first quarter in 2008.

Also, as Chuck mentioned, negative currency translation was sizable, resulting in a headwind of over $300 million.

Turning to the next slide, you will see that one key benchmark of the currency head winds is the Euro, which peaked against the dollar in the second quarter of 2008, with the exchange rate 13% lower this year.

This translation impact also hits earnings.

Our year-over-year earnings fell by about $22 million versus last year due to currency translation, or about $0.09 per share.

I will also point out that we are facing a similar, but smaller headwind in the third quarter based on current exchange rates.

Also on the slide is our seasonal sales index trend for the past several years between our first and second quarters.

The second quarter is typically our best quarter seasonally and, as illustrated, we experienced fairly comparable sequential sales growth this year compared with last.

However, as Chuck mentioned, this is from a much lower absolute sales level.

We typically experience a single-digit percentage volume drop due to seasonality between the second and third quarters and we are expecting that trend to continue.

The next slide details our sales by segment and I will review each segment in detail later.

In summary, total sales were down about 25%, excluding the impact of our automotive glass divestiture late last year.

Sales in all of our segments were down, with more pronounced declines in excess of 35% in industrial coatings, commodity chemicals, and glass.

Similar to the first quarter, our industrial coatings segment drop was driven by a continued end use market weakness for light vehicles and for general industrial products.

As I will discuss shortly, many of these markets remained at similar depressed activity levels in comparison with the first quarter.

Also, lower industrial production dampened our commodity chemicals and glass results and a slumping US commercial construction market also contributed to the glass decline.

As I mentioned previously, currency conversion was a large factor in the overall company results, and specifically in the architectural coatings EMEA segment, where currency was easily the largest single factor in the reduction of sales, accounting for just over $100 million of the $140 million difference.

Both the performance coatings and optical and specialty materials segments experienced midteen percentage declines.

In specialty materials, our silicas business experienced volume drops of about 35% in comparison with last year, which was even worse than the first quarter, reflecting weakness of the automotive and general industrial markets that it serves.

Volumes in our performance coating segment, which has a notable aftermarket component, fared somewhat better and this segment was also negatively impacted by currency.

Our segment earnings are detailed on the next slide.

These results reflect the significant impact that the global economic downturn has had on our sales volumes.

In aggregate, our second quarter segment earnings fell by about 35% versus last year, and while this is a fairly steep drop, it's important to note that our first quarter segment results were down about 50%.

This improvement was primarily in our coating segments and reflects the progress we made in implementing our cost and restructuring actions.

I will review all our segments in further detail later, but the largest earnings decline was in industrial coatings, again reflecting the severe deterioration in industrial production, including automotive OEM.

The segment was down over $80 million in the quarter and represented over 40% of the corporation's total decline.

Equally important to mention, however, is the segment was solidly profitable this quarter after incurring losses in the previous two quarters.

Earnings in both performance coatings and architectural coatings EMEA would have been flat, but for the negative impacts of currency translation.

The next slide presents our adjusted earnings per share.

A reconciliation of these amounts to our reported earnings per share is included in the appendix of today's presentation materials, which is available at the Investor Center on our website at www.PPG.com.

In the quarter, our adjusted earnings per share was $0.91.

This is down from $1.66 in 2008, and which results from the impact of volume from the continued sluggish global economy, partly offset by our cost actions.

One take-away from our results this quarter is illustrated on the trend chart on the right side of the slide.

As you can see, our second quarter performance, while down over 40% year-over-year, easily outpaced similar comparisons for both the fourth quarter 2008 and first quarter this year.

To add further perspective, the sequential earnings improvement is despite a nearly equal year-over-year sales decline this year versus last.

As Chuck noted, our aggressive cost management in addition to the savings we are yielding from our restructuring actions are important factors and are improving relative earnings performance.

Our restructuring savings are detailed on the next slide.

Depicted on the slide is the anticipated annual run rate of our cumulative savings from restructuring actions.

As detailed, we expect to achieve about $250 million annual savings run rate by the end of 2010, when our restructuring programs will be fully implemented.

This annual savings level at completion equals nearly $1 in earnings per share accretion.

The restructuring actions are generally structural in nature, as we are permanently modifying the way we conduct business.

To date, we have achieved about 20% of the targeted savings, which puts us slightly ahead of our original schedule, but obviously we still have a sizable portion of savings that will be accretive in future quarters.

Moving to our business segment review on the next slide, the impact of our cost management and restructuring actions are most apparent in our industrial coatings segment.

This segment has business units serving the global automotive OEM, general industrial, and packaging end use markets.

As detailed on the slide, while we are still at a very low earnings level, we have dramatically improved the segment earnings performance the past few quarters, despite consistently low sales levels.

Our sales are still below our fourth quarter sales level, but our quarterly earnings have improved by a dramatic $68 million in comparison.

Also reviewing results on a monthly basis, we have been solidly profitable for the past four consecutive months and are now approaching monthly profit levels we last achieved early in the fourth quarter of 2008, despite sales this quarter being 30% lower.

Some additional details on our industrial coatings segment are included in the next slide.

Sales in the quarter totaled about $740 million, down 36% versus last year.

Lower volumes accounted for the lion's share of the decline, but currency was also a sizable headwind.

As displayed on the segment volume chart, second quarter volume declines nearly matched the steep first quarter drops.

Global industrial demand remained very weak, although Asia, primarily China, easily outperformed the other major regions.

The global industrial weakness was most intense in the United States automotive OEM market, where year-over-year production dropped a remarkable 50% for the second consecutive quarter.

This is also where we have instituted the most significant cost actions and our September 2008 restructuring announced before the severe end use market collapse was focused on this segment and is now delivering positive earnings results.

Also as illustrated on the bottom graph, North American vehicle production is actually running well below the depressed level of US auto sales.

We expect production to move closer to sales levels in future quarters, as had been the case early last year.

That being said, the end use markets in this segment are still likely to remain some of our most challenging and we will continue to execute on our announced cost reduction actions to incrementally improve profitability and position this business to benefit when market demand recovers.

Performance coating segment results are detailed on the next slide.

Sales were down about $200 million, or 16% from last year's sales level, but reflect normal seasonal gains versus the first quarter.

Earnings declined slightly, slipping $13 million, which is equal to the negative impact of currency translation.

As Chuck mentioned, we are pleased with the segment's ability to achieve earnings parity in local currencies in light of today's economic climate.

Segment volumes fell low double-digit percentages, which is much less than most of our other segments and in part reflects the important after-market component of the businesses in this segment.

Operating margins improved as aggressive cost management helped offset the volume declines.

Looking individually at each of our business units, our architectural coatings America and Asia business had volume declines of low double-digit percentages.

This was a solid improvement over the past several quarters, led by our US results, where volumes improved versus the previous two quarters, but were down high single-digit percentages.

Our stores and dealer channels were down more, while our national accounts or do-it-yourself channel delivered growth in the low double-digit percentage range.

Asia volumes were down mid-single digits, while Latin American volumes were down 30%.

Our automotive refinish business continued to experience lower sales volumes, falling double-digit percentages as a result of the continued distributor restocking and less collision repairs, which are due in part to fewer miles driven versus last year.

Our volume results this quarter were only moderately different than the first quarter.

Both protective and marine coatings and aerospace sales were down mildly, excluding currency impacts.

These businesses support end use markets, which have a sizable aftermarket and both still have considerable OEM backlogs.

Also, the protective coatings market supports global infrastructure projects, and while aerospace is doing fine overall, the business jet market is experiencing extreme volume declines.

Results for our architectural coatings Europe, Middle East, and Africa, or EMEA business, are on the next slide.

Sales were about $525 million, down $140 million versus last year, with over $100 million of the decline related to currency conversion.

Sales were down only about 5% in local currencies.

Earnings declined $16 million, due largely to the impact of currency.

From a seasonal perspective, the second quarter is traditionally our highest sales quarter and we did experience a typical seasonal bounce versus the first quarter.

Also, our year-over-year volume results improved nicely in comparison to the first quarter.

Volumes in the entire segment declined mid single-digit percents and were partially offset by price gains.

Volumes in the first quarter were down double-digit percents.

As is customary, volume results differed greatly throughout the various regions, with all major regions down year-over-year, but some less so than others.

As with the first quarter, exclusive of currency, there is minimal earnings erosion compared to last year, due in large part to very strong cost management.

Also illustrated on the slide are the earnings before interest, taxes, depreciation, and amortization, or EBITDA, and our EBITDA margins were flat.

We believe EBITDA is a relevant measure for this business, given the ongoing noncash amortization stemming from the acquisition.

We estimate between 75% and 80% of architectural coatings in many of our major regions are related to recurring maintenance applications, which are less sensitive to economic swings and allow this segment to deliver more stable financial results.

Looking ahead, we expect currency to remain a headwind in the third quarter, but to a lesser degree.

Also, we anticipate a similar stable business profile in the coming quarters and anticipate normal seasonal sales patterns.

Our optical and specialty materials segment results are detailed on the next slide.

Sales were $255 million, down $55 million from last year.

Earnings were about $60 million, about 20% lower year-over-year.

Segment operating margins remained fairly constant year-over-year.

Year-over-year declines in the segment financial results were very similar to the first quarter.

I will remind you that our year-over-year comparables are very difficult, as the optical products business experienced record sales and earnings in the first half of 2008, due largely to our Generation VI transitions product introduction and pipeline fill in North America.

Looking individually at the businesses in the quarter, silicas, which is a raw material used in the production of tires and car batteries, experienced even steeper volume declines than in the first quarter, with volumes falling nearly 35% based on collapsing demand in both the automotive OEM and auto aftermarkets.

Our optical product sales were impacted by both negative currency and the lower volume impacts I mentioned earlier, along with continuing difficult economic conditions in our major regional markets.

Glancing ahead, we expect the year-over-year volume declines in silicas to lessen somewhat due to improved automotive production and easier comparables from the second half of 2008.

Also, we anticipate year-over-year sales declines in the second half of 2009 in our optical products business to moderate based on a less significant effect in the second half of 2008 from our next generation transition lens product introduction.

On the next slide are our commodity chemicals segment results.

Sales declined about $175 million versus last year, driven by both lower volumes and pricing.

Earnings fell by $26 million, due to lower volumes and the related impact of lower capacity utilization on our manufacturing costs.

Our operating rate this past quarter was in the low 80% range, down from the low to mid 90% range last year.

This lower utilization is a reflection of lower market demand, driven primarily by similar declines in the rate of US industrial production, which is the economic statistic that serves as a good measure for caustic soda market demand.

Segment operating margins remained fairly consistent with the prior year, as lower pricing was offset by lower input costs, including natural gas.

Our natural gas costs in the quarter was about $6 per million BTU.

This included the impact from our natural gas hedge position, as we had half of our normal purchases hedged at about $8 per unit in the quarter.

Pricing declined versus the prior year as a result of weaker demand.

As we look ahead, caustic soda pricing fell by double-digit percentages in each month during the quarter, so our second quarter results did not fully reflect an entire quarter's impact from the lower pricing.

Separately, we announced three chlorine price increases totaling $300 per ton, which will be implemented in the second half of the year.

Also, the business would benefit from both sales volume and capacity utilization from an increase in US industrial production.

Our glass segment details are on the following slide.

As was the case last quarter, we included 2008 results, both with and without the automotive glass and service business we divested late in 2008.

My comparison comments will be against the 2008 results, excluding auto glass.

Sales this quarter were $207 million, down about $120 million or 37% from last year.

Fiberglass sales were down nearly 50% due to severely lower global industrial demand.

Performance glazing sales dropped by over 30% due to continued weakness in US residential construction and a deteriorating US commercial construction market.

Earnings dropped $27 million year-over-year to a loss of $7 million, driven by the lower volumes and related lower manufacturing utilization.

We continue to execute on our restructuring and cost reduction actions and achieve total year-over-year cost reductions approaching $10 million.

Our second quarter earnings results were $20 million better than our first quarter results, despite only a slight seasonal sales increase.

Although we are seeing a slight improvement in demand, market conditions remain very difficult.

We will continue to aggressively pursue cost savings in these businesses.

Now, let me conclude my remarks by reviewing cash, which is detailed on the next slide.

We ended the quarter with over $1 billion of cash on hand.

In the quarter, we generated just under $400 million from cash from operations, which was up about 25% from last year's second quarter driven by strong working capital results.

Our ending cash balance includes about $235 million of cash from a $400 million multiyear term loan we attained in late June at favorable interest rates.

We immediately used about $165 million of the loan proceeds to repay existing debt and intend to use the remainder in the third quarter for similar purposes.

Excluding the excess cash from the term loan, our cash balance is still up about $0.5 billion from the prior year's second quarter levels.

As with the past several quarters, we maintain about $240 million of commercial paper outstanding.

Based on our anticipated strong second half cash generation, we will likely pay down a good portion of this commercial paper.

We remain on or favorable to our full-year targets in our uses of cash, and let me discuss a few of them.

We originally targeted $200 million in full year capital spending, excluding acquisitions, and we have spent $100 million through the first half of the year.

Relative to acquisitions, we will likely remain cautious in that area.

Regarding other cash uses, we have about $115 million in term debt maturing in the third quarter, with no other maturities of size this year.

And last, we have already made pension contributions of nearly $200 million for the year, most of which are voluntary and have actually decreased our full year funding projection from $350 million to $250 million.

I will remind you that the pension contribution figures are pretax and we do receive a tax benefit.

We are pleased with our cash performance in growth year-over-year, particularly in light of today's economy.

Given today's economic times, we intend to continue our focus on managing our cash and will likely maintain a larger than normal cash balance for the financial flexibility it provides in the current environment.

With that, I now will turn it back over to Chuck for some closing comments.

Thanks, Bill.

Let me summarize the quarter by recapping a few key items.

In most markets, demand levels remained depressed in comparison with the past several years, and improved only mildly from the first quarter.

However, demand was stable during the second quarter, and our businesses' earnings performance improved.

Our coatings and optical and speciality material segments, which combined accounted for 90% of the company's segment earnings during the quarter, delivered improved earnings performance versus the first quarter in absolute dollars and in year-over-year percentage change.

Conversely, our commodity chemicals business, while still performing solidly, experienced declines from what were truly excellent results the past several years.

In total, I was pleased with the partial recovery in earnings back towards last year's level in light of the continuing difficulties in the economy.

And as I mentioned at the outset, this was the result of our strong execution and aggressive cost cutting and restructuring actions we are taking across all of our businesses.

We believe because of these actions, we are well positioned and will have excellent operating leverage which will enable us to fully capitalize as economic conditions and demand improve.

In the third quarter, excluding the impacts of a normal seasonal drop, we expect overall market conditions to improve, but only mildly, and as Bill mentioned, the direction and magnitude of change will differ among the various pieces of our portfolio.

For example, we expect sequential improvement in US automotive OEM, but anticipate the opposite for commodity chemicals.

I will assure you that we will continue to execute on our cost reduction actions and the relating benefit will grow again next quarter.

Also, because it deserves mentioning again, we intend to remain very prudent in how we manage our cash position.

That concludes our prepared remarks.

Operator, would you please give instructions and open the phone lines for questions?

(Operator Instructions).

Our first question comes from the line of Sergey Vasnetsov.

Please proceed.

Hi, good afternoon.

Could you comment on such a big difference between the European and US decorative coatings results?

We know that your business [in commercial] housing bubble, but nonetheless, think the difference is huge.

Sergey, good afternoon.

This is Chuck Bunch.

I would say that performance in our architectural coatings business in Europe was very good.

Obviously the demand is weaker, but I think we offset that with some aggressive cost actions.

And so the performance was very solid here in North America -- the volume is actually weaker than in Europe.

But I think our team did a very good job in reducing their costs and their performance, although weaker in volume, was solid.

And could you comment, would you see in Asia broadly and China specifically when it comes to industrial coating?

Our performance in Asia-Pacific in coatings in the second quarter was very good.

Volume was down.

Sales were down, but it was a record pretax preinterest earnings performance in the second quarter despite that.

It was led by our businesses in China.

They offset what I would consider weaker results in countries like Korea or Australia.

And I would say that the businesses in China, especially the automotive OEM business -- they benefited from some of the Chinese stimulus plans, our protective and marine coatings business, our packaging coatings businesses.

These businesses in China all had very solid quarters and we're very pleased with the results there.

Industrial coatings, because some of the industrial end use markets are more tied to the Chinese export markets, weren't quite as strong, but we had many of the domestic Chinese businesses were among our strongest.

We have a question from the line of David Begleiter from Deutsche Bank.

Please proceed.

Thank you.

Chuck, could you comment on the trends you're seeing in raw material costs, as well as selling price increases in your coatings businesses?

Let's talk about raw material costs.

I would say that after some weakness at the end of last year in raw material input costs for us, the pricing environment has stabilized.

If you remember, during the first quarter, oil prices got down to below $40 a barrel.

Then they started moving up late in the first quarter and through the second quarter.

We therefore had a lot of suppliers who were attempting to get prices up in the second quarter.

And so far, what I would say is that it's a bit of a standoff in terms of raw material input.

The biggest benefit we're still experiencing is the natural gas prices, which have remained weak, and that is helping us.

That is the unhedged portion, so that's been the biggest positive story.

The other raw material prices are now -- let's call it stable.

Similar for pricing, we have I think a more stable pricing environment.

If oil prices and raw materials remain stable -- so at this point, I would say, our pricing actions are modest at this point, either positive or negative.

Is your pricing ahead of or equal to your raw material costs do you believe in coatings?

Well, I think what you saw David, last year, as we talked, we usually have a little bit of a lag both in absorbing the costs and being able to move those through to our customers.

So we were probably a little bit behind the curve at this time last year.

Then we were able to get some modest price increases and in some markets.

And so I would say now the situation for the last several quarters has been stable.

Prices for our raw materials not going up, although our suppliers are attempting to discuss those with us, and by and large, our pricing actions are neutral with our customers.

Our next question comes from the line of Kevin McCarthy of Bank of America.

Good afternoon.

I heard you say that you expect to remain pretty cautious as it relates to acquisitions and of course watch cash carefully.

However -- understandable given the last nine months, but -- on a forward-looking basis, I guess you could also argue it's a buyers' market right now.

You've got 1.5 years of SigmaKalon behind you and end use markets in architectural and industrial that are pretty fragmented.

I guess my question is what sort of conditions would you be looking for, Chuck, to accept a little bit more risk in terms of adding to the portfolio here in the coatings side?

Well, what I would say, Kevin, is that the market for coatings acquisition opportunities is a little slow right now.

We have not seen very many companies or properties being offered.

We have been fairly inactive, but I think in many cases you're seeing companies that are focusing on execution on improving their returns.

And so we have not seen a lot of opportunities.

And certainly last year and earlier this year, the discussions that we did have, there was still an expectation on the part of the sellers that the valuations should be similar to what the market was in '07 or early '08 when the earnings were stronger.

So I think there's still a little bit of a dislocation there.

So we're going to obviously look at opportunities.

We haven't seen anything yet that we would regard as a real bargain opportunity.

We also have, as you know, a stock price at PPG that we think has room to move on the upside.

So that would be an alternative if we continue to see this level of excess cash and our operating performance and cash flow continues strongly.

I think we would also look to modestly have share buybacks as part of our program.

Understood.

That's helpful.

Followup, if I may -- on Slide 6, you show a seasonal sales growth index comparing 2Q to 1Q.

Was wondering if you could comment on the outlook in coatings for 3Q versus 2Q and what sort of sequential pattern you might foresee there?

I would say that we're looking for a still decline versus the third quarter of 2008, but if you're looking from a, let's call it a seasonal standpoint, I think that it's going to be in coatings a little favorable in the third quarter to what would traditionally be a second quarter to third quarter falloff anyway.

So I think the volume declines that we would normally see from second to third quarter historically will be a little less.

And one of the reasons there is we think there will be a little more strength in the automotive OEM and industrial markets.

I think a lot of the destocking has already taken place.

We see here in North America that General Motors and Chrysler, who have -- were virtually out of the car production business in the second quarter, we do look for them to start production here later this month and through the rest of the quarter.

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

Good afternoon.

This is Amy Zhang on behalf of Bob.

Two quick questions.

First one, in terms of the saving benefit you are talking about -- $250 million on the run rate basis, how much of this target saving benefit is sensitive to the underlying economic conditions?

In other words, if we see some improvement, material improvement in this economic environment, would you still be able to produce that $1 per share savings benefit?

Or probably you have to give back some?

Well, at this point, our view would be that these reductions that we've made, these structural cost reductions are somewhat transparent to our customers.

We intend to be able to by reorganizing our supply chain.

We would not anticipate that these types of cost savings would be shared with our customers, as you know, in the businesses that have been most impacted by this downturn, such as our automotive coatings or our glass businesses.

These are businesses that are still struggling, and as Bill indicated, we're still losing money in our glass segment.

So at this point, we need these cost reductions to return to solid levels of profitability for PPG.

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

Please proceed.

With GM and Chrysler now out of bankruptcy, are they more interesting customers to you now that their balance sheets are in better shape and they shed some of the legacy liabilities?

I would think as stand-alone companies, these are healthier.

They have better balance sheets.

We feel that they represent -- they have always been good customers, although the outlook in the longer term was always somewhat cloudy.

Now I think there's a little more certainty, and so they are certainly attractive customers for us.

We intend to continue the position that we have had before their bankruptcy in terms of supply.

So we think that we will be able to start back up with them as they ramp up production, and we think that they represent good opportunities for us to grow with them.

And in the case of General Motors, their businesses outside of North America that weren't as touched by these bankruptcy, the bankruptcy challenges -- we see them continuing to do well in markets like China, like Korea, like Latin America.

So we think they present a very solid opportunities to grow.

Are you concerned at all that Europe's auto production may be propped up here by their cash for clunkers program and that there will be an uncharacteristic drop later this year when that comes off?

I think we -- I think there is obviously a risk that this has pulled forward some of the demand and that will probably mean that the continued improvement that you would like to see at the bottom of a recession won't be as strong in 2010 in Europe.

So I think that is a valid point.

We won't get to the kind of growth that maybe we would have had if we had gone down to the depths this year.

But I think especially in the case of Europe where it takes you a little longer to implement restructuring actions to close plants, I think it's given all of actions to close plants, I think it's given all of us -- the car manufacturers and the automotive suppliers, the dealers and the like -- a little more time to adjust to these economic conditions.

But I think we'll see some of that same phenomena here in North America.

The scrappage program will I think bring forward some sales and I think we're already hearing that it's bringing interest into the dealers' lots.

There's more inquiries, and we hope that in the case here that it will restart the industry, and that even though it may steal a few sales from next year, I think the sales have been so depressed at this point that eventually you will get stronger pent-up demand as we go forward.

Our next question comes from the line of PJ Juvekar.

Please go ahead.

Good afternoon.

Hi, PJ.

Chuck, you talked about this automotive OEM ramp-up in the US.

Is that a third quarter event or more like a fourth quarter event?

And if we think that production is running at 7 million units or so, where do you think that could go?

I think you're going to see improvement here in the third quarter.

If you remember last year in North America, production levels started being taken down dramatically in the third quarter.

We are going to see a restart, especially at Chrysler and General Motors in this quarter.

So we think you'll see some impact here in the third quarter and it will continue on into the fourth quarter because we have really been producing in North America at lower than these depressed sales levels.

So right now, inventories are healthier from that standpoint than they have been in a number of years.

So I think we'll see some improvement here in the third quarter and that should continue on into the fourth quarter.

Okay.

And then quickly, on chlor-alkali, spot caustic prices have come down, some contract prices are likely to come down, but you talked about chlorine prices, natural gas is down.

When you look at all of those moving parts, do you think you can hold your margins in that 13% to 14% range in the second half?

I think in the third quarter, we'll have I think a challenge to hold the margins that we saw in the fourth quarter.

The prices were coming down through the quarter, so we ended up in -- at the end of the quarter certainly not at the same pricing level or profitability.

Yes, we are helped by what's happening in natural gas or ethylene, but I think it will be a challenge for us to maintain this level of profitability in the third and fourth quarter.

Our next question comes from the line of Silke Kueck of JPMorgan.

Please proceed.

Yes, good afternoon.

I have two questions.

One is a question of clarification on the US architectural business.

Did I hear correctly that you said that the US architectural stores business was down double digit, but that the do-it-yourself business was up double digit?

Yes.

That was correct.

The stores business in the second quarter was off low double digits from the previous year, and our national accounts business and dealer business were slightly positive.

Was slightly positive.

They were in mid single digits volume gain.

Very good results.

And I have a question on the cost savings.

The annualized run rate of $50 million in cost savings, can you tell which areas of the income statement benefit?

I saw that SG&A costs were down more than $200 million in the quarter on a year-over-year basis, and also your gross margin improved nicely by a couple of hundred basis points.

So can you tell where these cost savings are more noticeable?

I would say they are split between let's call it supply chain improvements or manufacturing.

We closed a number of factories there at the end of 2008 and here recently in the second quarter.

So some of that will flow directly to the margins as part of our variable cost reduction.

But we also took out significant overhead costs, so that is why you're seeing some improvement in the RS and GA.

So I would say it's probably a mix between the two and that trend will continue.

Our next question comes from the line of Don Carson of UBS.

Please proceed.

Yes, thank you.

Just a couple of housekeeping items first.

Bill, I don't know if you went over this, but the corporate expense was down sequentially, and just wondering what drove that and what you think a sustainable corporate expense level is?

And then just also wondering about the year-over-year depreciation decline, what's driving that?

Well, I guess let's talk depreciation first.

A lot of the things we've closed down have -- we've eliminated depreciation since we no longer have them.

We've also gotten rid of our automotive glass business, so that's closed down quite a bit of our depreciation as well.

In terms of the corporate expense, part of that is equity earnings.

The biggest change in corporate expense this quarter really was in currency conversion, Don.

This is Vince.

The currency conversion, the rates shifted sequentially.

We had a currency conversion gain this quarter.

If you recall back to the first quarter, we had actually a currency conversion loss versus, again, the fourth quarter rates.

So if you look on a run rate basis, corporate was running about -- it's running on constant items of about $30 million exclusive of the stock options and the currency gain was $8 million this quarter.

The currency loss last quarter was an equivalent $8 million.

Okay, and then on the chlor-alkali, you were talking rates in the low 80s, which is quite a bit above the industry rate, which has been around the 72% range.

Just wondering what's driving your higher rates.

And can you just talk a bit about the average ECU for the quarter -- where you ended the quarter?

Well, I would say, Don, on our capacity utilization, we were a little stronger outside of our US plants.

We have four plants, two in the US, two outside the US.

Our operating rates were stronger and historically are outside the US.

So those are running above kind of US industry averages.

I would say our two US plants have been running maybe slightly ahead of industry operating rates, but, as we look at the last half of the second quarter, those operating levels came down a little bit.

And in terms of the ECU, we don't give out prices on specific prices on ECU levels.

We have said that they were coming down through the second quarter and we finished the second quarter arguably 25% below where we had been in the first quarter, and the trends right now in the third quarter are mixed.

Obviously caustic prices are still weak.

There is spot prices that have been leading the contract prices down, but there are a number of actions and pricing on chlorine, including some that we have announced that we hope will stabilize the ECU pricing environment in the second half.

Our next question comes from the line of Dmitry Silverstein of Longbow Research.

Hi.

This is Eugene Fedotoff sitting in for Dmitry.

I have --

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

Thank you.

Chuck, I know the question has been addressed or asked somewhat, but on your cost actions, how much of these costs are variable in nature that may come back as volumes ramp up, whether it's in R&D or in SG&A?

I would say that our intent is to make sure that the costs, especially the costs of where we've taken these restructuring actions, that we are making let's say a long-term judgment in our costs and ability to deliver services -- so that at this point we have talked maybe in one case, in one of our glass furnaces where we've said we've actually idled the furnace with the opportunity to bring it back at a later date.

But if you look at most of the rest of our cost actions in manufacturing, typically we're closing plants such as the one we closed in the second quarter in automotive coatings in Canada, our intent would not be to bring those to -- to bring that production not be to bring those to -- to bring that production back at that location and consolidate it in our other facilities.

And likewise, with our overhead costs, we're looking at opportunities or ways to do things more efficiently, more productively, so I would say that we are not looking to add these costs back at a later date.

We are looking for new ways to do business, because under the kinds of collapses in demand that we've seen, we understand now that we have had to challenge ourselves now on the way we do business, so we intend for these changes to be longer term.

Thank you.

Thank you, David.

The next question comes from the line of Dmitry Silverstein of Longbow Research.

Hi.

This is Eugene Fedotoff sitting in for Dmitry.

I have a follow-up question on raw material costs.

Can you quantify the delta in raw material costs year-over-year?

Eugene, this is Vince, if you remember last year, oil ran up in the second quarter, in early third quarter.

And we typically lag oil inflation, so we didn't really see a sizable inflationary impact in coatings raw materials until the second half of the year.

So our year-over-year deflation from raw materials is fairly benign in the second quarter.

Okay.

Thanks.

And then on domestic architectural market, particularly on your store [chain] sales, sales are down double digits and your competitor announced price declines in the channel.

Just wondering, what is your stand on pricing in that channel?

Are you referring to the Sherwin Williams announcement on retail prices in their stores business?

That's correct.

Our stores channel is more focused on the professional painter.

We have at this point not tried to compete aggressively in what I would call retail or DIY paint from our stores channel, and we would view Sherwin Williams as competing with our customers.

And I can't comment on whether those pricing actions on their part are designed to get them competitive at those levels.

So our pricing to the professional segment through our stores has been stable this year.

We have taken a number of actions to reduce costs.

We have lowered our store count in the face of this weaker economic and construction environment.

And we actually feel that we are stabilizing in that business and our performance is improving, despite the fact that the volume is still showing a decline in the second quarter.

Thank you.

And last question, if I may, on chlorine, price increases, given big demand, do you think those price increases will stick and do you expect them in the third quarter or fourth quarter?

Thank you.

Well, it's -- we certainly hope that these price increases will stick.

We would see some of that benefit starting in the third quarter, although if they were all implemented, the full benefits would be seen in the fourth quarter.

The next question comes from the line of Frank Mitsch of BB&T Capital Markets.

Hey, good afternoon, guys.

Hi, Frank.

Good afternoon.

Hey, sorry if I missed it, but did you quantify on an EPS basis what the foreign exchange negative impact was?

And if not, was it around 10%?

$0.09 to $0.10, Frank.

Okay, great.

If currencies stay where they are right now, you would anticipate they would be a little bit less in the third quarter, is that fair?

Yes, probably about half of that I think in the third quarter.

All right, and then I caught the part where your net gas unfortunately hedged at $8 per MMBtu in this second quarter.

Where does that stand for the third and fourth quarters right now?

It's, it will be very similar.

We did -- we've been hedging actually three years out for one third and then we have a little more of that hedged now, especially with the volume decline.

So the hedge position will be similar in the third and fourth quarters.

Our next question comes from the line of PJ Juvekar.

Yes, hi.

I just had a quick follow-up question, couple of follow-up questions.

First, on the raw materials benefit, your raw materials typically begin to lag the commodity markets by one to two quarters.

So we saw a big benefit in 2Q.

Do you expect the benefit to narrow as we go ahead, because oil prices have gone up?

I would say it -- the raw material prices, PJ, are fairly stable right now.

As you know, the prices have gone up and the suppliers would like to pass some increases on, but at this point, I think given the weak economic environment, we think that raw material prices appear stable here in the near term.

Okay, and Chuck, quickly, on the European architectural business, your volumes held up, but margins are still below the US margins.

Can you comment about the cost structure there and what have you done in last 18 months in terms of improving that cost structure?

Well, what I would say is actually we're very pleased with the performance of the architectural business in Europe and the margins were very solid.

As you could see, they were double-digit margins in the second quarter.

That's obviously the strongest point of the season.

But if you look at the comparison to our US or North American architectural business or other architectural businesses that we have around the world, this is actually a better performance.

If you look at our business here in North America, it is in the performance coating segment.

The performance coating segment has higher margins than what you see in the architectural Europe segment.

But we also have some very strong businesses in that segment as well.

So I would say like for like, the European performance is very good in architectural.

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

Thank you.

This is Amy again on behalf of Bob.

I have some quick follow-up questions.

The first one is for your North America architectural paint business, the volumes at the store channel have been underperforming the national account distribution channel dramatically.

And heading to the second half of the year, would you expect the volume trends of the store, at your stores to stabilize the weak level or we should expect some sequential improvement or even some sequential deterioration?

I think that the volume -- if you look at the stores, our stores business, it's more exposed to the commercial segment, it's more exposed to new home construction -- both of which have been weaker than what we would consider the DIY channel where I think you're seeing a little better performance on the part of the consumer.

Repainting is a low end, or a low cost way to make home improvements.

And so I would say that at this point, we don't look for any further declines in volume for our store channel.

But some of the trends where we haven't seen significant improvement in new home construction in commercial is sluggish out there.

I'm saying that volume shouldn't improve significantly and the improvements that we have seen in that channel have been from our own cost reduction initiatives.

Got you.

And then my second follow-up question is in Europe, obviously your architectural paint volume is much better than a lot of people would have expected.

And just wondering, is there any particular regions that represent a big benefit for PPG, or do you take marketing share from some of your major competitors and some product lines or areas?

I would say that as we've been talking about the former SigmaKalon architectural business, it's very well positioned.

They had a lot of momentum over the last couple of years in the marketplace.

They controlled a lot of their own distribution, so that gives us -- I think we're not as subject to the vagaries of the retailers in some cases in Europe.

We have a little more control.

I think we've done a good job in positioning the business.

Share has been stable to slightly positive, and although we've been exposed in the UK to a weak construction market, we have missed some of the weakest markets in Europe like Spain or Italy.

And I think with our focus on the repaint market, the smaller painters in Northern Europe, in France, that has given us a more stable business profile.

Ladies and gentlemen, that concludes the Q&A portion of today's presentation.

I would now like to turn the call back over to Mr.

Charles Bunch.

Thank you, very much, for joining us and we look forward to continuing our dialogue with you in October for our third quarter results.

Thank you.

Thank you for your participation in today's conference.

This concludes our presentation.

You may now disconnect.

Have a good day.