PPG Industries Inc (PPG) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2009 PPG Industries earnings conference call.

My name is Keisha and I will be your operator for today.

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

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

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

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

Vince Morales, Vice President Investor Relations.

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

Welcome to PPG's third-quarter 2009 financial teleconference.

Joining me on the call today from PPG is Chuck Bunch, Chairman of the Board and Chief Executive Officer; Bill Hernandez, Senior Vice President Finance and Chief Financial Officer; and Bob Dellinger, Senior Vice President Finance and Chief Financial Officer Designate; and Dave Navikas, Vice President and Controller.

Our comments relate to the financial information released on Thursday, October 15, 2009.

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

As shown on slide number 2, our prepared remarks and comments made 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 or Regulation G, the Company has provided in the appendix of the presentation materials reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures.

The agenda for today's discussion is noted on slide number three 3; our third-quarter recap is on slide number 4.

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

Thank you, Vince, and welcome, everyone.

This morning I will provide a brief overview of PPG's performance in the third quarter, Vince will then review some of the financial details and then I will make some closing remarks.

At that time Bill Hernandez, Bob Belanger, Dave Navikas, Vince and I will be happy to answer questions.

Overall I am pleased with the progress we are making in our efforts to return to the level of profitability experienced in 2007 and early 2008.

PPG's solid performance in the third quarter reflects the positive changes we made to our business portfolio over the past several years.

Combined our Coatings and Optical & Specialty Materials segments delivered 7% higher year-over-year earnings and collectively accounted for over 95% of our segment earnings.

We achieved these results despite a sales decline of about 15% for these businesses and in comparison with what were record levels in the prior year.

We benefited greatly from our aggressive cost reduction actions as well as a modest improvement in demand stemming from a very gradual recovery in the global economy.

In a quarter overall business conditions remained challenging in comparison with prior years, but again, general demand levels in many end-use markets we serve increased moderately versus the second quarter.

This improvement was consistent throughout the quarter and was evidenced in all of our major regions including Asia where China was the main contributor to what were very strong results.

Also, we benefited from an upturn in auto production, especially in North America.

This aided our Industrial Coatings segment which includes our automotive OEM coatings business and our silicas business unit which is part of the Optical & Specialty Materials segments.

Our Performance Coatings segment grew earnings and margins year-over-year and continues to demonstrate its resilience.

Architectural Coatings EMEA continued its solid performance and while earnings were down very slightly this quarter, they were actually up in terms of local currency.

However, conditions remained most challenging and our glass end use markets, including further deterioration in the US commercial construction market and, as expected, our Commodity Chemicals segment results declined versus last quarter and in comparison to last year's record levels.

This decrease was due to lower sales prices although pricing did improve at quarter's end.

We made good progress on our previously announced restructuring initiatives and have supplemented those actions with additional initiatives to reduce costs based on our lower volume levels.

And while we are well ahead of schedule in completing our list of restructuring actions, we have further steps to take and several plants yet too close.

This will provide us with additional savings to be realized in the next few quarters.

In the quarter currency conversion remained a head wind.

The euro, despite recent strengthening, was still 6% weaker against the US dollar year over year.

In total currency negatively impacted our segment earnings by about $11 million or about $0.04 per share.

Using today's rates currency would turn into a tail wind in the fourth quarter.

Lastly, we generated about $650 million in cash from operations in the quarter, up a noteworthy 40% versus a solid performance last year.

This was primarily due to our continued focus and execution on managing working capital.

We paid down about $700 million in debt during the quarter and still ended the quarter with about $900 million of cash.

Now here is Vince 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 $1 billion versus the third quarter of last year with nearly one quarter of that decline, or approximately $230 million, stemming from our late 2008 divestiture of a majority interest in the automotive glass and services business.

Also contributing to the sales decline were lower selling prices of about $150 million; a key factor in this regard was lower caustic pricing and Commodity Chemicals.

Currency represented an equal sized head wind.

Weaker year-over-year demand resulted in about $500 million in lower sales volume equating to a 12% volume decline.

We experienced our largest percentage decline in our Glass Segment where volumes declines exceeded 25%.

Our best volume performance was in our Architectural Coatings EMEA segment where volume results have improved each quarter this year as we experienced only a slight decline of low to mid single-digit percent this quarter.

Also our Industrial Coatings segment volumes, while down year-over-year, improved markedly in comparison with early quarters this year with the largest improvement in automotive OEM coatings.

Detailed further on the next slide, our year-over-year volume results, while still negative, have improved gradually each quarter this year in reflection of slightly better demand.

Also as illustrated, 2008 results did not deteriorate notably until the fourth quarter, so comparisons for this year's third quarter were against record third-quarter sales levels for the Company.

In terms of our regions, Asia Pacific was clearly our best-performing region this quarter delivering higher volumes versus last year driven by strong growth in China.

Our US region, along with our European region, experienced low teen percentage volume decreases.

This was a solid improvement compared to earlier this year.

Also as Chuck mentioned, negative currency translation remained a head wind.

Included on the slide is an illustration of a key benchmark currency, the euro, which despite recent strengthening is still about 6% lower in comparison with the third quarter of 2008.

This currency translation also negatively impacted earnings by about $11 million or about $0.04 a share.

The following slide details are sales by segment.

In summary total sales were down about 20% excluding the impact of Auto Glass and service business divestiture late last year.

Sales declined in all segments; Commodity Chemicals and Glass experienced the most severe decreases and the rate of decline was fairly consistent with the second quarter.

Conversely our Coatings and Optical & Specialty Materials segments were still down year-over-year, but demonstrated an improvement in comparison with earlier quarters this year.

Our historical trend is that sales seasonally drop from the second to the third quarter by roughly 2% to 4%.

However, the improving trends in these segments this quarter resulted in third-quarter sales eclipsing second-quarter levels by about 5%.

Our segment earnings are detailed on the next slide and in total were down just over 20% compared with last year.

However, earnings have been on an improving trend each quarter this year and, as you see, were actually higher in several segments.

As with sales, Commodity Chemicals experienced severe declines in comparison with what were record levels of earnings last year in reflection of lower selling prices for caustic soda.

Glass results were also negative due primarily to lower end use market demand.

In contrast and despite lower sales levels the combined earnings of our Coatings and Optical & Specialty Materials segments improved nicely and accounted for the great majority of our total segment earnings.

A major contributor to these results were the significant cost reduction steps we took over the past year.

As Chuck mentioned, we expect to realize additional savings in the coming quarters.

Our adjusted earnings per share are presented on the next slide.

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

In the quarter our adjusted earnings per share were $0.97 compared with $1.37 per share in 2008.

Our improving trend is detailed on the chart to the right side of the slide.

As you can see, our third-quarter performance, while still down year-over-year, represents a sizable improvement in comparison with the prior three quarters.

Once again aggressive cost management was key to this performance.

PPG's restructuring initiatives are detailed on the next slide, including the anticipated annual run rate of our cumulative savings from these cost reduction actions.

We initially expected to achieve an annual savings run rate of over $250 million by the end of 2010 when our restructuring programs were scheduled to be fully implemented.

This equates to over $1 in earnings per share accretion.

However we have accelerated our pace by several quarters and now anticipate achieving our targeted savings level earlier in 2010 thus benefiting us for nearly the full year of 2010.

The incremental savings next year will be about $100 million higher than this year.

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

These restructuring savings were a main contributor to our improved quarterly results and were combined with a variety of other cost measures we took based on lower activity levels and general economic conditions along with solid results stemming from our efforts to lower input costs.

Moving now to our business segment review I will start on the next slide with our Industrial Coatings segment where the impact of our cost management and restructuring actions are readily apparent.

As a reminder, this segment has business units serving the global automotive OEM, general industrial and packaging end use markets.

As detailed in the segment results, sales have improved each quarter this year, although the third-quarter sales were still about 20% below the prior year's period.

However, due in large part or aggressive cost management, we've delivered consistent improvement in segment operating margins despite the lower sales levels.

As detailed on the chart, PPG's Industrial Coatings segment earnings are higher this year versus last and nearly $100 million higher in comparison to the 2008 fourth-quarter figure on only marginally higher quarterly sales.

This clearly illustrates the operating leverage we are able to achieve due to our lower cost structure.

Further details on our Industrial Coatings segment are included in the next slide.

Sales in the quarter totaled nearly $825 million, down about $200 million.

Volumes were up 18% and currency accounted for the remainder of the decline.

As displayed on the segment volume chart, third-quarter volume declines were an improvement in comparison with the past several quarters as demand increased in each of our major regions.

The largest improvement was in the North American automotive OEM market in which year-over-year production was down about 50% in the first half of the year, but improved significantly in the third quarter.

While this increase was notable, as illustrated on the bottom graph, North American vehicle production continued to run below the level of US auto sales.

As a result inventories of automobiles in the United States are currently very low and we anticipate flat to higher auto builds in the fourth quarter which would build inventories and bring production closer to ongoing sales levels.

Business for the Industrial Coatings segment in our Asia-Pacific region reflected a stronger and growing Chinese economy.

China is now producing more cars than any country in the world.

This aided PPG's auto sales in the region and we easily eclipsed last year's sales levels.

The end use markets served by this segment, such as automotive OEM and several other industrial markets, experienced some of the most dramatic volume declines during the depths of the recent recession.

Our businesses have been working diligently over the past year to return this segment to historic profitability levels and, although we still have some work to do, surpassing last year's earnings level was an important milestone.

We remain very well positioned from a cost perspective to benefit from any level of additional volume.

Performance Coatings segment results are detailed on the next slide.

Sales were down about $150 million or 13%.

Segment volumes fell 13%, although the segment's business in Asia posted volume growth.

We delivered strong earnings topping last year by $7 million despite a negative currency conversion impact on earnings of $6 million.

Operating margins increased by 240 basis points as aggressive cost management was a key contributor in offsetting volume declines.

Looking individually at each business unit our Architectural Coatings Americas and Asia business unit had volume declines of low double-digit teen percentages, similar to last quarter.

In the US our stores and dealer channels, which primarily serve professional paint contractors, were down more while our national accounts, or DIY channel, was only slightly negative.

Asia volumes grew while Latin America was down more than 25%.

Volumes in our Automotive Refinish business were also down, but improved in comparison to last quarter primarily due to reduced distributor destocking.

Sales in both protective and marine coatings and aerospace, both which serve later cycle industries, were also down year-over-year but the overall sales levels were essentially flat with the prior quarter.

As we look ahead to the fourth quarter we anticipate normal seasonal sales declines stemming primarily from our US Architectural Coatings business.

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

Sales were about $560 million in the third quarter, down about $73 million versus last year's period with about $50 million of the decline related to currency conversion.

Sales were down only about 3% in local currencies.

Earnings were $59 million, down only slightly from last year's $61 million despite a negative $8 million impact from currency conversion.

Volumes in the business were down low single-digit percentages in comparison with record levels in the prior year.

In light of the economic conditions the business has performed extremely well all year in both sales and earnings.

This is attributed to the large maintenance nature of Architectural Coatings in the European markets we serve along with a tight cost focus.

Included on the slide are in the earnings before interest, taxes, depreciation and amortization, or EBITDA.

As you can see, our EBITDA margins improved 120 basis points this quarter.

We believe EBITDA is a relevant measure for this business given the ongoing non-cash amortization expense stemming from the acquisition.

Looking ahead, based on current exchange rates, currency conversion would shift to a slight tail wind in the fourth quarter and we expect to realize traditional notable seasonal sales declines which are customary for Architectural Coatings.

Our Optical & Specialty Materials segment results are detailed on the next slide.

Sales were $257 million, down $33 million versus last year's quarter.

However, earnings were $67 million, about 10% higher than the prior year's period.

Sales in our optical products business were comparable to last quarter while sales of our silica products, which are used as a raw material in production of tires and batteries, recovered somewhat in comparison with the past several quarters reflecting higher automotive production.

The segment operating margins, which are the highest in PPG, also expanded nicely as improved year-over-year results in silicas, complemented strong optical products results.

Both businesses benefited from cost reduction actions.

Looking ahead we expect traditional sales declines in the business and will remain focused on cost and operating margins.

On the next slide are our Commodity Chemicals segment results.

Sales declined by over $200 million versus last year's period driven by lower pricing.

Earnings fell by $97 million from record levels in the previous year's third quarter.

Aggregate pricing for chlorine and caustic soda, or the ECU price, fell versus the second quarter but moved up toward the end of the third quarter.

Demand for chlorine and caustic soda improved from the prior quarter as did our operating rates.

Our natural gas cost in the quarter was lower than a year ago and was about six dollars 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.

Looking ahead seasonal demand has historically trended down 7% to 8% from the third quarter to the fourth quarter.

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 services business we divested in late 2008.

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

Sales this quarter were about $225 million, down $100 million or about 30% from last year.

The demand environment for performance glazings or architectural glass remained extremely challenging including further deterioration in the US commercial construction end use market.

Fiberglas demand remains equally weak year over year, but did improve from extremely low activity levels in the prior two quarters of 2009.

Earnings dropped $28 million year-over-year to a loss of $6 million driven by the lower volumes and related lower manufacturing utilization.

The earnings dropped is despite aggressive cost reduction actions which yielded savings of more than $15 million in the quarter alone.

End use market demand is seasonally lower in the fourth quarter and we will continue to aggressively manage these businesses.

Let me conclude my remarks by reviewing PPG's cash position which is detailed on the next slide.

We ended the quarter with about $900 million of cash on hand.

In the quarter we generated just about $650 million of cash from operations which is up 40% from last year's third quarter.

Our cash generation performance the past two quarters driven by working capital management surpassed last year's results and I will remind you our full-year 2008 results were a record for the Company.

As with recent prior quarters, we have been holding a higher cash balance to support liquidity.

Due in part to our strong cash generation this past quarter we repaid about $700 million of debt including a repayment of all of our commercial paper.

We remain on or favorable to our full-year targets in all of our cash uses.

Let me discuss a few of them.

Debt repayment remains one of our top priorities and since our acquisition of SigmaKalon in early 2008 we have lowered our net debt by about $1.4 billion, which is double our original target despite a much more challenging economy.

We will continue to pay down debt when neutral or accretive to earnings.

Funding our pension liabilities is another cash use and we have contributed about $300 million to our pension plans this year with about one third of that being made in stock.

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

Also we are mitigating the dilutive effect to our share count through the use of equity forward agreements we made primarily in the first quarter of this year when our stock price was at a low level.

We don't anticipate any further pension contributions of meaningful size this year.

We originally targeted $200 million in full-year capital spending excluding acquisitions.

We have spent right at $50 million each quarter this year or about $150 million through the first nine months, so we remain on target.

Regarding acquisitions, we will likely remain cautious but continue to analyze acquisition candidates, particularly bolt-on opportunities.

If we continue to see slight and consistent improvement in the global economy we will likely reduce our cash balance closer towards historical levels.

Overall we are very pleased with our cash generation performance and position; however, we recently heightened our focus on working capital management and expect this effort to benefit us even further in future quarters.

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

Thanks, Vince.

Let me summarize what I believe was a solid quarter by recapping a few key items.

In most markets demand levels improved modestly in comparison with the past several quarters.

We were able to fully capitalize on this higher demand and our earnings benefited from our lower cost structure.

Our Coatings and Optical & Specialty Materials segments demonstrated their resilience and provided insight into why we have been growing our presence in these businesses.

Also, our efforts to expand our global footprint the past several years proved beneficial as we were able to grow nicely in Asia this quarter and as we expected Commodity Chemicals pricing fell during the quarter but moved up in September.

In the fourth quarter, excluding the impacts of a normal seasonal drop, we expect overall market conditions to once again improve for most of our businesses but only modestly.

We expect our growth to continue in Asia and anticipate global automotive production will remain at lease at third-quarter levels if not higher.

Currency conversion is likely to shift to a tail wind based on what today is a weaker US dollar.

We will continue to execute on our restructuring and other cost reduction actions and the related earnings benefit will grow again next quarter.

Regarding our strong cash position, we will keep debt reduction as one of our top priorities, but expect to gradually return to a more balanced use of cash in the coming quarters.

Let me conclude by saying that overall it was a solid quarter as we continue to return to our prior levels of profitability including excellent performance in Coatings and Optical & Specialty Materials.

Our ability to profitably leverage the modest volume improvements we saw versus the last few quarters was apparent.

Equally important is that our execution was and remains a critical factor as we delivered additional cost savings and focused on working capital reductions.

Before we take questions I'd like to take this opportunity to welcome Bob Dellinger to our management team at PPG.

Bob, welcome and we're looking forward to working with you.

And I would be remiss if I didn't publicly thank Bill Hernandez, our Senior Vice President and CFO, for his many years of service and many contributions to the Company.

Bill, I wish you a very happy retirement and thank you for everything you've done for PPG.

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

(Operator Instructions).

Sergey Vasnetsov, Barclays Capital.

Good morning.

I think your results have shown what strong incremental margins you can bring once the volume comes back.

And it sounds from commentaries that the fourth quarter could be a combination of seasonal weakness and some incremental recovery.

Would you think that those two factors would roughly offset each other?

Yes.

I think, Sergey, what you're seeing from us is that we're going to have seasonal weakness in many of the construction-related businesses.

These would be our Architectural Coatings businesses in Europe or in North America and also some seasonal weakness in our Chlor-Alkali business.

But we feel that with the cost reduction actions that we've taken and the momentum we have in some of the industrial businesses where you see in markets like North America or China in particular where auto builds are continuing to increase, I think we are going to have somewhat of an offset to the seasonal weakness that we traditionally experience in the fourth quarter.

Okay.

On the acquisition front even if you get more comfortable in your overall debt structure, as you think about 2010 would you expect minor opportunities or reasonable size opportunities for you?

Me are beginning to look now, Sergey.

Obviously this year we've been focused on our restructuring actions and making sure the Company was well positioned.

We're very pleased with our cash generation capabilities here over the last couple of quarters.

We have a good cash balance now and we will begin to look for acquisition opportunities in coatings in particular and we hope that in the coming quarters that some of these may develop into legitimate opportunities for us.

Thank you.

Frank Mitsch, BB&T Capital Markets.

Good morning, gentlemen, and happy retirement, Bill.

Bill, I know that you like watching the NFL, so I'm hoping you're going to be able to enjoy it this season.

But based on what I've seen in a breakdown of the Steelers tapes I'm not optimistic for you.

Frank, I take comfort from the fact that a very wise man told me to live in the present and we presently are the Super Bowl champions.

Touche, Touche.

On page 16 you showed the trend on the Chlor-Alkali side having bottomed in the July/August timeframe and moving up in the September timeframe.

We're halfway done with October.

Would you anticipate that that trend coming off the bottom is where you would see the ECU such that the fourth-quarter average ECU might be above the third-quarter average ECU?

We think the ECU will be modestly improved in the fourth quarter.

The one factor we'll have in this business unit is the seasonal volume weakness that we traditionally get typically towards the end of the fourth quarter, but we do have some positives working for the industry in general because of the weaker dollar, the strength in the Asian markets where I think we're going to see less exports out of Asia, more use of their domestic Chlor-Alkali capacity in the region.

So I think that it will set the stage for improvement as we go through the fourth quarter and into 2010, but we still expect some seasonal trends here, especially on the volume side.

So the volume is coming off with pricing moving up.

Chuck, staying with Asia, obviously you talked about the volumes being a positive in that part of the world.

What percent of sales was Asia in total for the third quarter and can you give us some indication at least to the current trends in China post the national holidays that they had there?

The percent of sales now for our businesses in Asia is over 15%, it's around 18%.

So a very positive trend here.

And we had some strength here at the end of the third quarter especially in China because of the national holiday at the beginning of October, but we have been monitoring volumes as the plants came back to work in the second week of October and activity levels are very good.

So we're picking up here after the national holiday celebration at similar levels, a very positive indicator for us.

Terrific.

Thank you and welcome aboard, Bob.

Thank you.

(Operator Instructions).

Bob Koort, Goldman Sachs.

Good morning.

This is Amy Zhang sitting in for Bob.

I have two (technical difficulty).

David Begleiter, Deutsche Bank.

Good morning.

Chuck, can you comment on what you're seeing in raw materials, whether you're taking any higher TiO2 prices and what you're seeing on your oil-based raw materials?

I would say there are trends probably in both areas.

TiO2, there are discussions going on with the TiO2 producers now.

They are attempting to get price increases and the discussions are ongoing.

I would say that certainly the trend is not down and we will see in the coming quarters if there is price increases on the TiO2 side, but certainly the suppliers are attempting to pass those costs through in a modest way to their customers.

On the oil-based side, we have obviously some strength in oil prices combined with weakness in the dollar.

I would say that right now we are experiencing conversations, let's call it, where suppliers are trying to pass some of these costs on.

You have a countervailing trend though with the weakness in natural gas prices here and a lot of the raw materials for our coatings businesses are based on natural gas or ethylene and those trends are favorable so we have a mix there and I would say that if there is any price tendency it is modestly higher, but I would say at this point very muted.

And Chuck, what's your ability to pass through any high raw materials through your selling prices?

We've seen in prior years and prior quarters that we have some ability to pass along higher raw material prices, but usually with a lag effect of one or two or more quarters.

So right now I would say we're monitoring and in discussions with both suppliers and customers making sure that the trends that we see don't accelerate.

But typically the industry and many of our end use markets have been able to pass on costs, but usually with a lag effect.

Thank you.

Amy in place of Bob Koort from Goldman Sachs.

Thank you.

I have two questions.

The first one is regarding glass and I'm wondering how should we expect an operating profit of this segment to progress in the fourth quarter and also ahead in 2010 given it looks like the commercial construction market may show further erosion.

And also on the other hand you guys may have more aggressive cost-cutting efforts there.

We continue to work hard in this business segment; we are disappointed that we continue to report an operating loss here.

We have some trends that are moving against each other.

We have some positive trends especially in our fiberglass business where the electronics market in Asia in particular is strengthening.

Also in the composite side of the business which supports transportation and a number of other plastic composites end use markets, that appears to be strengthening.

So those are good trends for us positively affecting our fiberglass business.

We do, however, see a pause in the wind energy market where we are a large supplier for wind blades to these large turbines.

That's pausing and we do have this negative trend in commercial construction that has affected our flat glass or performance glazings business.

So we're still fighting some -- I would say some difficult market conditions in some of our end-use markets.

So we are still working hard to take some more costs out, but we're trying to be patient here with these businesses.

But we are clearly disappointed that we again are reporting a loss here in the third quarter.

Thank you.

My second question is related to the US paint market.

I'm wondering how did the dynamic between the two channels, the stores in those national accounts played out.

Because if I'm right I heard you say the stores sounded weaker, national accounts declined modestly, but I recall last quarter you said national accounts were up mid single-digit level.

So I'm wondering what the trends look like on a sequential basis across the two channels?

Typically the volumes do start to weaken, especially later in the third quarter in the Architectural Coatings business here in North America, but it was a very modest weakness in our DIY Home Center channels.

The volumes, we thought, were relatively stable.

We do see, however, continued weakness on our company store channel, and there we are seeing continued volume losses.

We have been talking about a modest improvement in new home construction, but we are still at very low levels.

And we did get impacted by the weakening of the commercial construction markets here in North America.

So the third-quarter volume trends were still negative for us.

We have closed a number of stores.

We have reduced our costs and infrastructure to support the business.

We feel that we are in a position now with a stable store count, and we will be able to profitably take advantage of volume improvement.

And I think you are going to see that in new home construction, in the biggest piece of the company-owned stores business, which is the residential repaint market.

But right now, we are fighting some negative trends in the commercial construction and we are going to have to look, I think, to 2010 to see some improvement there from a volume basis.

Very helpful.

P.J.

Juvekar, Citigroup.

This is Anthony Pedinari standing in for P.J.

Just as a follow-up to Amy's question on the paint store count, can you quantify how many stores you started out with in the beginning of the year and then maybe how much you will end up with at the end of the year?

Yes, we have now a little over 400 stores.

If you look at our store count last year, we were approaching 450.

So we are down from, let's say, last year's levels to today about 10% in store count, and about half of that has taken place here in 2009.

Okay.

In the DIY channel, one of your major competitors has reduced select price points.

And granted, we are headed into a slower part of the season.

Are you seeing any price pressure in the DIY channel?

In the DIY channel -- I'm not sure exactly what you're referring to, but obviously in our channel we go to market through primarily Lowe's.

And I think that from everything that we see in the market place Lowe's is holding their own in the DIY channel and they have been, I think, successful in continuing to attract consumers into their stores as we've discussed before.

Repainting is a relatively low cost home improvement project and I think it's held up better in the home improvement centers as opposed to some of the larger ticket items such as bathroom or kitchen remodeling.

So I think the DIY segment and our home center customers have done on a relative basis better through this recession.

Okay, thank you.

Kevin McCarthy, Bank of America Merrill Lynch.

Good morning.

Chuck, as you look ahead to 2010 I was wondering if you could comment on what we should expect in terms of industry volume growth in both US and European Architectural Coatings.

And maybe you could provide some color as to what you're seeing in Europe these days in terms of trends and different country trends?

We think that volume trends, if we start in Europe I would say that volume trends are not positive.

So I would say in 2010 we are not preparing for volume growth.

I would say that we're talking about now zero volume growth to maybe negative low single digits.

So that's the kind of volume growth we have.

Obviously some markets for us are stronger than others, but we are not forecasting volume growth in Europe for next year.

In North America we think there will be modest improvement in volumes again probably on the positive side, lower single-digits because I think we'll be fighting a little bit of the head wind in commercial construction, but we think that residential, both new home and the repaint markets, will be somewhat stronger.

Don Carson, UBS.

This is Arun filling in for Don.

We just had a couple of questions, I guess first off was the corporate line.

You guys reported $15 million and I know that you had an $8 million currency gain last quarter.

So is that what's going on here or what's the real run rate for corporate going forward?

Similar to last quarter the currency gains for intercompany accounts payable and receivable benefited us; it was a few million dollars versus last quarter.

And again, that's typically a sequential event because we revalue those each quarter.

With the dollar weakening that aided us by just a few million dollars.

So I still think we're in a $15 million to $20 million run rate per quarter absent those currency gains.

Okay.

I thought last quarter that the run rate was supposed to be around $30 million?

No, first quarter we had currency go against us which pushed the first quarter above -- which pushed the first quarter up.

Okay.

All right.

And then in Chlor-Alkali, I guess what's your read on the price increases that are out there?

We've been reading this pickup in operating rates over the summer has put a little strain on realizing some of those increases, do you see that or are they proceeding?

We think that the price increases that we have been successful in some of the price increases throughout the third quarter.

And I think what you'll see through the coming quarters is that the prices will continue to firm in Chlor-Alkali again with what we think will be some positive trends some of these macroeconomic in terms of the relative strength of economies around the world and the US dollar.

Those will be positive trends and we haven't seen, as we've been talking about on the Architectural Coatings side, we haven't seen the volume in construction take off yet in a very strong direction and that will more than likely keep some of the PVC production muted.

Just real quickly, is there a chance to increase auto production -- when do you think that would help you guys get positive in glass?

Today we are -- in our company's operations we are exposed to the automotive OEM business in coatings and we are positive we made money in the third quarter in our automotive OEM coatings businesses around the world.

So that has been positive, it's benefiting obviously from some of the restructuring actions.

The automotive glass side of the ledger, that business has been divested in our -- we divested a 60% interest in the third quarter of last year and they are I think also benefiting from the restructuring actions that were taken after the divestiture.

So I think they are improving their positioning in the automotive glass market and benefiting here with the return of production levels in North America to let's say improved levels.

But do you think you can return to profitability in the fourth quarter or --?

It is profitable.

The business, the auto glass business, is profitable.

It is not included, however, in that -- in the glass operating segment.

The glass operating segment does not include our 40% interest in the auto glass and services business.

That operating segment only includes the performance of our two remaining glass businesses, fiberglass and performance glazing.

Which is down because of the construction?

In performance glazings, yes.

Fiberglass, still coming back from a very weak market tied to what we talked about the transportation market, the wind market being stalled out here for the moment.

But we see positive trends actually in the fiberglass business and we think that will be helping us in the coming quarters.

John Roberts, Buckingham Research.

If you look at the results sequentially instead of year-over-year, how much of the 3.5% sales gain was currency and how much of the $0.06 earnings sequential improvement was currency as well?

John, this is Vince again.

Currency moved up just slightly.

It's too hard to look at some of our businesses sequentially because of the seasonal nature of them.

You could do it I guess by comparing the sales dollars and our average margin for each segment, but there's too much seasonality in some of the businesses to try to estimate that.

We had a pretty sequential significant move in the euro sequentially and again you had a pretty good gain in this quarter because of that movement in the earnings.

Yes, from memory our currency impacts last quarter were close to a dime negative, this quarter they are close to $0.04 let's say.

Okay, thank you.

Saul Ludwig, KeyBanc.

Good morning, guys.

Bill, you've got no problem with your guys playing the Browns this weekend.

Well, thank you for that, Saul.

A couple of questions.

With regard to the hedging on natural gas, where do you now sit for the fourth quarter and maybe the first half of next year?

And then a second unrelated question, you talk about Asia being about 18% of the revenues, what was the change this year third quarter versus third quarter a year ago in Asia revenues and in Asia operating income?

First, the hedging position in the fourth quarter will be similar to what we have reported here in the third quarter.

So we're hedged close to 50% at around $8 level so obviously we're not taking full advantage of the lower seasonal prices that we're seeing in the $4 to $5 range in natural gas.

But it will be something similar in the fourth quarter and actually our hedging is going to decline in 2010 to more our traditional one-third, one-third hedged.

And this year we've been affected by some slightly higher hedging volumes and also lower activity levels.

So I think next year you're going to see lower hedge percentages, but probably a similar delta if prices stay where they are.

Now prices have started to move up in natural gas here during September, but then we've seen over the last few days that some of that increase has come off.

There's been a lot of activity around hedging practices.

Some of these exchange traded funds that were investing in natural gas futures so it is a little bit of a jump ball I think now in terms of what the direction is going to be in natural gas.

We didn't have any hurricanes this season.

We have some colder weather, good storage levels however.

And I think there are some external factors that are now affecting hedging going forward.

So I would tell you that we're still going to be hedged probably at a third level less than this, less than what you've seen this year or what you'll still see in the fourth quarter.

Are you hedged for the first quarter already at $8?

We are hedged for the first quarter and the hedges -- I would say $8 is more of an average, so that we will have hedging at these kinds of levels for the first quarter, yes.

So on Asia -- let me answer your question.

Our sales are up in local currencies 4% to 5% year-over-year.

Currency a slight headwind.

Earnings, we're seeing the same time of margin gains in Asia as we are globally relative to earnings.

Earnings are up more than 4% to 5%?

That's correct.

Great, great.

Okay, great.

Those were my two questions.

Thank you.

Dmitry Silversteyn, Longbow Research.

Good morning, gentlemen.

Congratulations on a very nice quarter -- all things considered.

A couple of questions.

Number one, if you look at the industrial automotive business which improved quite markedly at least year-over-year negative delta that you've been experiencing for the first half of the year, I understand that automotive business was a big part of it.

If you exclude automotive what did the rest of the industrial business look like and if you can give us a little bit more detail on what your automotive OEM business looked like in the quarter?

There are three global business units in what we report as Industrial Coatings segment.

The largest is automotive OEM coatings and the other two are Industrial Coatings or maybe more properly General Industrial Coatings and packaging coatings.

Both of those are global businesses with similar trends that we've talked about.

They had negative volumes in those business units, but we have been restructuring heavily especially in the Industrial Coatings business unit.

So we had favorable earnings trends in those businesses as well without any offsetting volume trends.

The one thing that you saw in automotive is that we do have strength in Asia and in China in particular and we had a positive sequential quarter in North America with volumes in automotive OEM, but we still have some weakness in the end-use markets for our general industrial customers.

These would be the coil and extrusion markets again partially tied to commercial construction.

We've seen some (multiple speakers).

Dmitry, are you on?

Yes.

We've seen some weakness in the appliance end use market.

So we were able to offset those negative trends in general industrial and report higher sequential and higher year-over-year earnings in those businesses despite weak volumes.

Okay.

So the low 30s volume declines that you saw on a year-over-year basis in industrials, in general industrial, that's still going on.

So the improvement it sounds like came from better automotive business with packaging holding its own being down low to mid single digits, would that be a correct --?

I would say that's correct.

And we have focused heavily on reducing cost in our automotive OEM and general industrial businesses, so that's where we've really been working hard and that's where we've seen some of the larger benefits from our restructuring programs.

Sure.

Okay, and then the second question on margins -- we saw a significant margin improvement I think setting at least a couple of years record on the optical and specialty films business or Specialty Materials business.

On the other hand, we saw a pretty sharp decline into single digits on the profitability of the commodity business.

So if you look at the optical and specialty, was the margin recovery there a result of restructuring or raw materials or better mix or silicas coming back and going from perhaps losing some money to making money?

And then on the on the commodity side, the decline in profitability, how much of that was just pricing being down significantly more sequentially as well as year-over-year?

And how much of it was perhaps natural gas or other input costs changing versus what they were in the first half of the year when you were able to maintain margins in double digits?

I'll answer the first question.

The Optical & Specialty Materials business, we had -- if you look at the two segments, the optical segment, we did have negative volumes there, modest low single digit volume declines in the optical business.

Although we still feel that in transitions our photo chromic business that represents the majority of our optical business unit, that they were still performing better than the industry as a whole.

So volume trends were still negative there but only slightly, and we have worked hard their at cost reduction, especially here over the last quarter or two.

We had a very strong first quarter in that business with some product launches in Europe, the volume trends haven't been quite as strong here over the last two quarters.

So we have been focusing on cost reduction opportunities there as well.

And in the silicas business unit, as you referred to, we did see some nice strengthening and there I would say the biggest pickup was in some end use market tied to the batteries and tire markets and we had also restructuring actions in that business plus they are a natural gas user.

So we had both a raw material benefit from natural gas, we had lower cost from our restructuring and some end market strength.

So if you looked at the two components, even though silicas is the smaller business within that reporting segment, silica has actually had more improvement than we saw even in the optical business.

And on the Chlor-Alkali side, I think that was your other question.

What was the question again?

I was just wondering was the decline into single digits and operating profits, was that just a question of pricing finally catching up or was there some negative comps weather it was natural gas or other input cost or transportation that caused the margin to decline into single digits?

No, pricing is the biggest driver of the declining earnings, it's actually been helped somewhat by lower natural gas and some of our cost efforts there as well.

But the negative trend in that business has been pricing.

Got you, okay.

Thank you very much.

Michael Judd, Greenwich Consultants.

Good morning.

Thanks for taking my question.

In terms of the pattern of sales into the automotive industry, I guess what I'm hearing is that obviously July was relatively weak, they had a very good August and September has been pretty good.

In terms of your comments about sequentially production being flattish, that must imply that you're anticipating a weaker type of December.

And just in terms of a seasonal understanding of that business, do you anticipate that December and January will be weak?

And when would you expect to begin to see a pickup in production potentially in the first quarter?

Well, I would say here if we're talking about North America and today you have different dynamics in each region of the world and you have, as we've been talking about, a lot of strength in China as an example.

But here in North America we did have a strong August and September, not by historical standards, but certainly by what we've seen earlier this year.

And that trend is continuing in October and November as the North American car makers are rebuilding their inventories.

I think that at this point December is historically a weaker month and the shutdowns can come close to Christmas or before.

And last year actually the fourth quarter in automotive production stayed strong through November and early December and then really dropped off and then they stayed down into -- well into the first quarter and actually they didn't really start having production at a significant level until the end of July.

So I would say that we have good visibility in October and November, we think they'll be rebuilding their inventories and I think then they'll probably make decisions in December depending on the demand levels or sales levels that we see.

Sales levels dropped off in September after the expiration of cash for clunkers and I think the automakers are going to wait and see how the trends develop before they say when they're going to shut down production in December or when they will start back in January.

So it's still I think a little bit of a wait and see, but obviously anything that they're making and we think they will be back making cars in January, that will be significantly higher than what we saw in the first two quarters of 2009 where production levels were at levels that were more like 5 million to 6 million auto builds in North America, that was the rate in the first two quarters of this year which I don't think is a sustainable level.

And so we'll certainly be bouncing nicely off those levels in 2010 in North America.

Thanks.

Kevin McCarthy, Bank of America Merrill Lynch.

A quick follow-up on pension.

Do you have a preliminary 2010 outlook for pension expense and potential cash contributions next year?

The cash contribution -- this is Bill -- is going to be roughly what it was in 2009, we don't anticipate much of a change there on a worldwide basis.

As you know, some of our pension contributions performance will be dictated really at the end of the year as the final data is reset.

The one thing we have done this year, as you're aware of, we did put some shares in relative to cash and we may do that as well next year rather than putting in cash.

Kevin, we had $200 million in cash, $100 million in shares, just as a clarification.

What was the rationale for the share component of that contribution?

Several reasons.

One, by putting in shares we have extremely high dividend yield and we put it into shares we're at a pretty good value and basically what we did for the first contribution was offset it with an equity forward so that basically the interest-rate we were paying on the equity forward was less than what the dividend yield was.

It was actually cash positive doing that and we got the full adduction for the pension.

Now we did it a little bit here, again, in the third quarter and that's why you see a little bit higher share count actually in the third quarter because we actually are exercising and putting that equity forward here beginning in October.

Second piece, on the income statement side, if we assume relatively stable capital markets over the next couple months, do you have an idea of what the expense might be for 2010?

I don't think we're ready to get into that detail, we still have to go through our actuarial efforts and that's something we can offer more information on as we get closer to the year-end.

Fair enough.

Thank you.

We've reached the limit for Q&A today.

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

Chuck Bunch for any closing remarks.

I want to thank all of you for your attention.

We've appreciated the dialogue and the Q&A and all of your support and we're very pleased with our results.

And we look forward to talking to you in the coming weeks.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation, you may now disconnect.

Good day.