PPG Industries Inc (PPG) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2010 PPG Industries earnings conference call.

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

Later, we will conduct a question and answer session.

(Operator Instructions).

I would now like to turn the conference over to your host for today's call, Mr .Vince Morales, Vice President of Investor Relations.

Please proceed, sir.

Hello.

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

Welcome to PPG's third quarter 2010 financial teleconference.

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

Our comments relate to financial information released on Thursday, October 21, 2010.

The presentation supporting this briefing may be accessed through the investor center on the PPG website at ppg.com.

As noted on slide number two, 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 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.

Before we begin our discussion on the third quarter, let me comment on a process change that we will be implementing beginning with our fourth quarter earnings call to be held in mid-January.

Beginning with that earnings call, PPG will post on its website at ppg.com detailed prepared remarks, along with related presentation slides.

These will be posted approximately 30 minutes prior to the beginning of that call.

PPG will not read the prepared remarks on the call, but we will have a few summary opening comments from our Chairman and CEO, which will be followed by an extended period for questions.

This revised process will provide the same amount of data, will enable each of you additional time to review the information and prepare for the call, and will allow for significantly more time for Q&A.

Now, the agenda for today's discussion on the third quarter results is noted on slide number three, and let me introduce PPG's Chairman and CEO, Chuck Bunch, who will provide the opening remarks.

Thank you, Vince, and welcome, everyone.

This afternoon, I will provide a brief overview of our third quarter performance.

Bob Dellinger will review details of our financial results.

I will make a few closing remarks, and then we will take questions.

PPG once again posted very strong results.

In fact, we delivered record third quarter adjusted earnings per share, which easily eclipsed or prior record.

Our earnings per share results were more than 60% higher than last year's recession-impacted numbers, and about 15% higher than the prerecession levels of 2007 and 2008, even though volumes are still around 10% below those years.

This achievement reflects the benefits of the strategic initiatives we've undertaken to broaden our geographic footprint, especially in high growth emerging regions, and the diversity of the end use markets we serve.

In addition, our lower overall cost structure has allowed us to leverage the ongoing gradual global industrial recovery into a higher rate of earnings growth.

We achieved this, despite persistent raw material cost inflation and anemic construction markets in the developed economies of the world.

Overall, PPG's sales volumes in the quarter grew 6% in comparison with 2009.

For our businesses with links to global industrial activity, the growth trend remained fairly constant throughout the third quarter, taking into account seasonal impacts.

We anticipate that it will continue to do so for the remainder of the year.

However, given the lethargic construction markets in the mature regions, our year-over-year volumes remain negative in our architectural coatings businesses, at a rate of decline consistent with prior quarters.

We also delivered selling price increases totaling over 3% for the entire Company.

In many cases, this pricing is working to counteract elevated raw material inflation.

Year-over-year segment earnings grew by more than 35%.

Higher industrial activity resulted in sizable gains in PPG's Industrial Coatings and Commodity Chemicals segments and in our fiberglass business, all of which are experiencing strong demand recovery from the recession.

Our Performance Coatings and Optical and Specialty Materials segments once again grew earnings at double-digit percentages and delivered third quarter earnings records.

Architectural coatings Europe, Middle East, and Africa, or EMEA segment earnings fell slightly, with negative currency conversion being a major factor.

Overall, I was very satisfied with our performance for the quarter.

I believe we demonstrated that our actions have properly positioned the Company to grow in today's environment.

We are now beginning to deploy our strong balance sheet to provide additional future earnings growth opportunities.

Now, I'll turn the call over to Bob to provide more details on our financial performance for the quarter.

Thank you, Chuck.

I will begin by reviewing the year-over-year bridge of third quarter sales detailed on slide number four.

Sales increased by $235 million, or 7% versus the third quarter of 2009.

In most businesses, we experienced normal seasonal sales declines versus the second quarter.

Our overall pricing improved by over $100 million.

Our coatings segments have delivered higher pricing each quarter this year, as we continue to work to offset persistent raw materials inflation.

Year-over-year pricing was also higher in the Commodity Chemicals segment, due to continued tightening in the caustic soda market.

Currency conversion reduced sales by $75 million, primarily as a result of much weaker Euro compared to last year.

Our volumes improved by $188 million, or 6%, as illustrated on the total PPG volume trend chart during the third quarter of last year, we began to realize some economic recovery.

So, the third quarter comparable period was a more difficult comparison than the first two quarters of 2010.

Also, from a regional perspective, our growth in the emerging regions of Asia-Pacific and Latin America remain considerably higher than the developed regions of the world.

This higher growth is primarily led by our industrial businesses serving both exports from these regions and local consumption.

In the developed regions, we continued to experience higher industrial activity.

However, our Architectural Coatings businesses selling into the weak construction markets declined once again versus the prior year.

During the quarter, we once again posted strong and broad-based year-over-year sales growth, led by our growing position in emerging regions and the continued gradual global industrial recovery.

We anticipate similar trends to continue, although sales in several of our businesses are traditionally much slower in the fourth quarter due to seasonality.

Our adjusted earnings per share is presented on slide number five.

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

In the quarter, our adjusted earnings per share was $1.59 versus $0.97 last year, and $1.37 in 2008.

$1.59 per share is the highest third quarter EPS in the history of PPG, and surpasses prerecession levels of 2008 and 2007 by more than 10%.

In comparison with the third quarter of 2009, improved earnings were driven by higher sales.

The improved volumes, coupled with our lower manufacturing cost structure resulted in incremental margins on the higher volumes of about 60%.

As with prior quarters this year, higher selling prices primarily countered higher coatings raw material costs.

Raw material costs rose high single-digit percentages, although the inflation rates differ by region and by business.

We anticipate further sporadic supply-driven inflationary pressures, and our expectation remains that we will offset this inflation with pricing gains.

Another driver in our record performance was our lower tax rate.

We lowered our 2010 full year tax rate in the third quarter to 27%, reflecting stronger earnings outside the US, where our corporate tax rates are lower.

When compared with the Company's previously estimated 2010 tax rate of 28%, the lower tax rate added $0.06 per share to our third quarter results, including $0.04 of catch up from reducing the rate on earnings for the first six months of 2010.

Our third quarter 2009 tax rate was about 33%.

Turning to slide number six, for PPG in total, we had segment earnings of $484 million, 7% higher than our prior third quarter segment earnings' high of $451 million, which we achieved in 2008.

This overall result includes nearly 25% growth in the coatings and optical businesses, and our Commodity Chemical results, while up from last year, are still well below record 2008 levels.

We have also improved our total segment margins by more than 300 basis points, a 30% increase.

This is largely a result of our cost reduction initiatives and growth in emerging regions.

It's important to note that we are delivering these record earnings, despite volumes that remain about 10% below 2008 levels, and despite significant currency translation headwinds.

These results provide continued validation of our ongoing strategic actions to grow in emerging regions and lower our global cost structure.

Now, let's walk through each segment's third quarter performance.

Performance Coatings sales for the third quarter were $1.1 billion, up $28 million versus the prior year's period.

Segment earnings improved 12% to a third quarter record of $174 million.

Segment margins expanded 140 basis points to 15.8% due to a leaner cost structure and an improved sales mix resulting from continued growth in several of our top performing business units.

Each business delivered higher selling prices in an effort to offset raw material inflation.

Overall segment volumes were flat, as solid growth in protective and marine coatings, aerospace, and automotive refinish offset the decline in Architectural Coatings, Americas, and Asia-Pacific.

As illustrated on the chart, the year-over-year sales growth trends in our protective and marine and aerospace businesses continued to accelerate due to improving global activity levels in many of their end use markets.

Combined sales for these businesses in the past quarter were up 8% versus last year.

We also posted solid mid single-digit percentage sales growth in automotive refinish, aided by emerging regions growth and continuing market share gains on the success of our new water-based technology.

As in past quarters, volume trends in our Architectural Coatings Americas and Asia-Pacific business remained challenging.

Declining high single-digit percentages versus last year, on continued weakness in the US construction markets.

Despite the weaker architectural results, Performance Coatings is on pace to deliver record earnings for the full year.

As the year to date chart illustrates, we have dramatically increased our Asian presence, which is aiding growth rates in our top performing businesses.

Improving business in geographic mix is supplementing the positive impacts from our leaner cost structure.

As we look ahead to the fourth quarter, we expect these overall trends to continue in what is typically a seasonally slower sales quarter for this segment.

The Industrial Coatings segment results on the slide number eight, the Industrial Coatings segment has continued to post strong year-over-year improvement, with sales increasing 13% in the quarter to $927 million, on volume growth and sales price gains.

Currency conversion was a modest negative.

Earnings were $86 million, up $28 million, or 48% against what were improving results in 2009, aided by the US cash for clunkers program.

Our 14% volume increase reflects improving global industrial markets, plus increased market penetration by PPG.

Our improved segment margin reflects the high incremental margins on our sales growth, including the benefit of our lower manufacturing cost structure.

Similar to the prior quarters this year, higher sales pricing partially offset elevated raw material costs.

In automotive OEM coatings, we posted volume growth of over 20%, easily outpacing global industrial auto production growth, which was about 11%.

Our Industrial Coatings business unit also posted double-digit percentage growth this quarter, with increases in each major region, led by the emerging regions, where our growth exceeded 20% due to the market share gains.

As anticipated, Packaging Coatings remained a stable performer.

Emerging regions continue to be a significant growth driver for the segment, with year-to-date growth rates of nearly 40% in Asia and Latin America.

Emerging regions now account for about 45% of total segment sales and have margins comparable to or higher than operating margins in the mature regions.

For this segment as a whole, we are pleased to post solid earnings, despite volumes that still remain below prerecession levels.

As a reminder, the normal historical pattern is for seasonally lower segment sales in the fourth quarter versus the third quarter, and we anticipate this will hold true again this year.

Results for our Architectural Coatings EMEA business are on the following slide.

Sales in the quarter of $512 million were down $47 million versus last year's period, and earnings declined $9 million.

Negative currency conversion due primarily to a weakened Euro was a significant factor in segment results.

Negatively impacting sales by $45 million, and accounting for $4 million of the earnings decline.

Volume results remain steady, with prior quarters this year, declining mid single-digit percentages.

This reflects continued general sluggishness in the construction and maintenance markets.

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

EBITDA is a relevant measure for this segment, given the ongoing non-cash amortization expense in the SigmaKalon acquisition.

Over the past two years, this business has proven to be a very stable performer.

As detailed for both the quarter and year to date, EBITA margins remain fairly consistent, despite the modest volume declines and negative currency impacts.

We expect the negative currency impacts to continue in the fourth quarter, given that the Euro strengthened in the fourth quarter of last year.

This business also exhibits significant seasonal slowing from the third quarter to the fourth quarter and we anticipate this year will follow historical patterns.

Our Optical and Specialty Materials segment results on slide number 10.

Third quarter sales of $288 million were up $31 million on 13% volume growth.

Earnings grew by 22% to $82 million, a new third quarter record for the segment.

Sales growth trends were similar to prior quarters.

The growth is primarily due to increased penetration in the optical end use market of both our transition lens product and other adjacent products, coupled with a recovery in several silicas end use markets, including automotive.

Our operating margins have remained consistent all year, above 28%.

Again, the fourth quarter is typically slower due to seasonality, and we anticipate that trend to occur again this year.

We also expect our year-over-year selling and advertising costs to increase by at least $5 million in the fourth quarter, as we continue to focus on growth initiatives moving into 2011.

Turning to slide 11, the Commodity Chemical segment, compared with last year's third quarter, sales grew by $83 million and earnings increased by $41 million.

The segment has rapidly returned to solid profitability, as higher market demand increased volumes by 9%, and pricing rose for both caustic soda and chlorine.

We also benefited from higher capacity utilization and lower natural gas costs, which were partially offset by higher maintenance costs.

In comparing results this quarter versus the second quarter of this year, sales and earnings increased despite lower production volumes as a weather-related event at one of our manufacturing facilities resulted in a force majeure declaration for a portion of August.

Both caustic and chlorine pricing improved.

Our natural gas unit costs were essentially flat at about $5.25, including the impact from our prior natural gas hedges.

Looking forward, additional announced price increases are being implemented and based on current market pricing, we expect our natural gas unit costs will be flat to modestly lower in the fourth quarter.

We anticipate lower operating rates due to seasonal trends and several scheduled maintenance projects by both us and our customers.

Finally, our caustic soda inventories remain negligible with our inventory position currently at its lowest level in the past five years.

Our Glass segment results are on the following slide.

Sales were $260 million, up $37 million, aided by continued strong year-over-year fiberglass volumes stemming from improved global industrial demand.

Year-over-year sales were comparable in our performance glazings flat glass business, as we offset US construction market weakness with increased sales in other end use markets.

Improved pricing in fiberglass was offset by performance glazings.

Segment earnings were a $32 million profit compared with a loss of $6 million in the prior year.

Several factors contributed to this, including higher fiberglass sales volumes, which also aided manufacturing utilization.

Also equity and royalty earnings continued to improve during the quarter.

We remain pleased with the trend of the segment results the past two quarters.

The underlying market fundamentals remain stable.

However, like our other segments, we anticipate a traditional seasonal decline in the fourth quarter.

Let me conclude my remarks by commenting on some of the cash details, which are presented on the next slide.

We ended the quarter with $930 million of cash on hand.

We have generated about $700 million of cash from operations this year, including a deduction of $220 million for cash pension contributions.

We've spent about $65 million on capital expenditures during the quarter, bringing our 2010 year-to-date total to $158 million.

We made no substantial change to our debt in the quarter and on a year-to-date basis, we have repaid about $200 million.

We don't anticipate any further debt reduction of significance for the remainder of the year.

In the quarter, dividend payments, an important element of our cash usage and a PPG heritage, were $90 million and totaled $270 million for the year to date period.

We last raised our quarterly dividend payment this past July.

During the quarter, we spent about $160 million repurchasing PPG stock.

Year to date, we have spent $275 million and repurchased 4.2 million shares at an average price of approximately $65 per share.

We have about 3.1 million shares remaining under our current share repurchase authorizations.

Rewarding our shareholders in the form of dividends and buybacks remains a long-standing PPG tradition and we have maintained that this year.

As detailed on the chart, year-to-date, we have paid out nearly 80% of our cash from operations, as either dividends or share buybacks.

Our financial flexibility remains strong, given our current cash position and considering that due to the seasonality of our business, our strongest cash generation quarter is traditionally the fourth quarter.

We intend to remain disciplined and balanced with our cash deployment, but with a focus on growing earnings per share.

We continue to review potential bolt-on acquisitions and we anticipate further disciplined share repurchases will be a likely use of cash over the remainder of this year.

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

Thanks, Bob.

I will conclude by reiterating a few key items.

Our focus continues to be on operational excellence, as we remain committed to cost management.

As such, we are fully maximizing the continued gradual volume growth from the economic recovery by delivering strong incremental margins.

We have already established a strong coatings leadership position in the emerging regions that has and will continue to enable us to take full advantage of the expected future higher growth rates in these regions.

We will do this organically, including market share gains and through bolt-on acquisitions.

As a side benefit, these regions typically have low tax rates, which will enable us to sustain our lower overall tax rate.

The shift of our business portfolio to focus on coatings and optical products has significantly reduced our capital intensity.

As a result, we have additional cash to use for earnings growth opportunities and to return to shareholders.

Year to date, we have returned nearly 80% of our cash from operations to our shareholders.

And we are currently assessing a variety of disciplined ways to deploy our balance sheet to further accelerate our earnings growth.

Let me conclude by reiterating that we delivered record third quarter earnings, despite the fact that the sales in our businesses have yet to fully recover, and, in some cases, such as Architectural Coatings, remain at recessionary levels.

This, combined with our continued organic growth prospects and strong balance sheet, give me continued optimism about our future earnings potential.

That concludes our prepared remarks.

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

(Operator Instructions).

And your first question comes from the line of David Begleiter of Deutsche Bank.

Please proceed sir.

Thank you.

Good afternoon.

Chuck, what do the force majeure and chlor-alkali cost you in the quarter?

Well, we had, as you know, we had the lightning strike at the -- the Natrium plant.

I would say it cost us a percent or two in operating, in operating rates, and I would say low single-digit PTPI contribution.

Thank you.

And, just on raws, Chuck, what's your expectation for Q4, raw material prices year-over-year increase, and also 2011 as well?

Well, right now, we're expecting mid single-digit increases for the full year.

What we have experienced here in the second and in the third quarter is obviously a little higher rate, but the full year average should be about 5%.

We see things stabilizing for most of our raw materials.

So, we -- we view the fourth quarter as stable on the raw materials side and what I would call moderate inflation for 2011, with -- depending on the commodity.

But, overall, I would say low to mid single-digit inflation for raw materials and coatings for 2011.

And, Chuck, just last on glass, ex seasonality, are these types of results sustainable?

Certainly, they are.

Right now, our fiberglass business continues to perform well.

It's part of this overall industrial recovery story that we've described in a number of our segments.

So, we certainly see the fiberglass results continuing.

What we haven't seen yet is a significant contribution for our -- from our performance glazings business unit.

This is more tied to the construction industry, both commercial and residential.

So, right now, we feel that we're going to have to wait until 2011 and maybe even the second half of that, to see a significantly improved performance.

Although the performance of this year and this third quarter 2010 for performance glazings is certainly much better than where we were at this time last year, with that business, both from a demand, sales, and cost perspective.

Thank you very much.

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

Please proceed, sir.

Yes, good afternoon.

Chuck, with the fiberglass business having recovered so nicely here, at what point does it make sense to take a look at the portfolio composition and potential separation of that business?

We're going to continue to look at the portfolio over the next year or so, Kevin.

The one thing that we haven't seen yet in fiberglass, we've certainly had a volume recovery in that business.

So, we are performing at much higher capacity utilization levels for our operations, but the pricing in these types of businesses tend to, tends to lag that volume recovery.

So, we think there is further improvement possible in fiberglass when we can get the pricing to match some of these volume improvements, but certainly in 2011, we will continue to look at, at the portfolio and the Glass segment to see if it's appropriate time to reevaluate our position.

Okay, and then I think you made a comment that for the Company, volumes were still about 10% below prerecession levels.

If we were to assume that the macro environment remains expansionary, as you come up and close that gap, what are the contribution margins that you would envision with incremental volume growth from here?

I would say that we have in the businesses that are tied to, to the industrial production, I would say we have 1% to 3% kind of operating margin improvement possibilities in, let's say a stable raw material environment, and I would say that we can get closer to historical margin levels in those businesses.

Certainly we're there now in segments like Performance Coatings or Optical and Specialty Materials, but where we're seeing still the opportunity as the economies continue to improve, I think that's where you'll see some margin improvement in businesses like Industrial Coatings and, and our Glass, and our chlor-alkali segments.

And, last question, if I may for Bob, with the bond market rally, it seems as though discount rates are likely to decline for pension plans.

In that context, do you have a preliminary idea of how that would affect your, your cash contributions through year end or into next year, as well as pension expense in 2011?

Yes, presently we, we're not planning to contribute additional cash in the fourth quarter to our US pension plan, but we do obviously reserve the right to continue to look at that.

I think pension expense, we have some opportunity for favorability going forward.

Certainly the discount rate will change and obviously the investment return rate, everyone is looking at their investment returns given the experience of 2009 and the broad impact on the equity market.

So, how it all balances out, we're still looking at.

But I think you could start with a flat expectation year-over-year would be a good starting point.

Okay, thank you very much.

Thank you.

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

Please proceed.

Good afternoon, gentlemen, and nice results here.

Thank you, Frank.

Couple of follow-ups.

You talked about turnarounds in chlor-alkali in the fourth quarter.

Any thoughts as to what the, what the impact might be there, and along with that, what would be your expectation in terms of ECU pricing sequentially?

Well, we see typically in the fourth quarter in chlor-alkali, volumes tail off a little bit as the bleach season and construction markets weaken.

Right now, it's holding up a little better than, than normal seasonality here, at least at the start of the fourth quarter.

So, we're fairly optimistic you do have some export opportunities with the, with the weak dollar and some of the low ethylene and natural gas prices.

So, we've seen some exports increase in the, in the PVC chain.

So, I would say that has I think that bodes well for a little stronger fourth quarter than typical.

Natural gas prices have stayed, have stayed calm.

So, at this point, I would say that the market conditions remain favorable.

We are implementing the price increases announced earlier in the -- the third quarter for caustic soda.

There is another one on the table, as you know here, that's been announced by several of the market participants here in the fourth quarter.

So, caustic prices are, I think, also in a favorable trend.

We've seen a restart of operations in the aluminum refinery in Jamaica.

Pulp and paper and a number of the other end use markets for caustic are good.

There's global pricing momentum in Europe and in Asia.

So, right now I would say conditions both at an operating level, volume and pricing remain favorable.

But there will still be some seasonality here in the fourth quarter.

Got you.

But, in terms of, in terms of the turnarounds hurting your volumes, is this something that again might be low single-digit impact or not necessarily?

I would say it's going to be low single-digit.

I -- I would say low single-digit impact.

We had obviously an operating issue August, in our business, we got a couple of small turnarounds here in the fourth quarter.

I think some of the other industry players will do likewise.

So, I would say it'll have a small impact on our potential realization of all the improvements in the business.

All right.

Great.

If I could follow up on the use of the balance sheet, you mentioned looking at bolt-ons, et cetera.

It sounded, at least to my ears that, that something may be occurring here sooner rather than later.

Can you talk about the size of the, the sizes of the types of transactions that, that you're most interested in?

And, then, along with that, the pace of buyback accelerated in the third quarter versus the second quarter.

Should we expect something along those lines here in the fourth quarter as well?

The acquisition opportunities, we restarted our processes earlier this year.

We announced one two days ago, the Bairun Packaging Coatings acquisition in China.

We've said in the -- in a bolt-on small acquisition for us, $20 million to $200 million, I would say would be the range.

Bairun is certainly at the lower end of that range.

We have one or two others that we're working on that I think that we'll make some progress on in the months to come.

And I think those are easily handled with the cash on hand and from operations.

We tend to continue -- we intend to continue our share buybacks I would say at a rate at or above the -- what you saw from us in the third quarter, and -- but we will reevaluate that depending on the share price performance.

We're still at a level with our dividends that we think this is still attractive for us.

So, we'll -- we intend to continue share buybacks through the fourth quarter at this price level.

So, I think you'll see that from us and longer term, we're going to look at other acquisition opportunities that could be potentially bigger, but right now, we don't have anything that I would consider eminent.

All right.

Thank you so much.

Thank you.

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

PJ!

Yes, hi, good afternoon.

You know you mentioned that architectural volumes declined in high single digits.

It seemed a little large.

Have these declines accelerated recently?

I would say -- I don't think that the declines have accelerated.

We saw some inventory restocking and those decline levels are here in -- in North America, declines in our European business are certainly not quite that high.

They are more in the mid single digits.

Those were offset also here in North America by pricing initiatives.

So, we also saw, though some inventory management on the part of some of our customers, but I would say over the last six weeks or so I was out in the market in several of our locations this week.

I think we're showing a few signs of life out there in the marketplace.

The weather's been good here in the latter part of the quarter and starting the fourth quarter.

So, I would say that I'm not alarmed by what I see as the volume trends in the business.

It's certainly not positive.

We haven't seen in our other commercial or residential construction businesses signs of strength.

So, at this point, I would say the volume trends continue, they are not favorable, but I don't see them accelerating, in terms of volume losses.

All right.

So, no -- not getting worse going into 4Q?

No.

Okay.

The second question is on natural gas.

You had you those hedges rolling off into 2011.

Are gas prices now attractive enough for you to start rehedging?

Yes, we've had -- as you know, PJ, from some of our recent discussions, we monitor this thing closely over the last week or two.

Natural gas prices have been drifting down a little more.

We have started to nibble for 2011.

We have a very low hedge position for 2011.

It's going to average, for the full year, something like 15%, but we've -- we've started to place some small incremental hedges around the, what I would call the weather-sensitive months of -- of the first quarter and the hurricane season to incrementally add some hedging at these attractive market prices.

The hedges that we had preexisting this 15% that was previously hedged was obviously hedged at -- at higher prices around the $7 range.

But, it looks like these market conditions are fairly stable, but we're still interested in protecting ourselves, especially around these weather sensitive months.

Thank you very much.

Your next question comes from the line of Douglas Chudy of KeyBanc.

Please proceed.

Good afternoon.

Nice quarter.

I guess it sounds like demand's been pretty steady.

Are there any particular end markets where you're incrementally more cautious here heading into the fourth quarter say, versus a couple months ago?

I would say the market conditions are about the same.

We've talked about the construction markets and in Europe, we've seen probably a little more strength in a couple of the Western European markets, a little more weakness in the Eastern European markets.

But overall, kind of balanced weakness, let's say, in Europe.

I think the markets here similar.

Automotive, we feel that that market is continuing to improve here in North America and in China and Asia more broadly.

Inventories seem to be in balance there.

Aerospace, we're becoming more optimistic about the aerospace market.

So, I would say that we don't have overall a large concern about any of the end use markets other than this weak construction market that we faced here in North America and in Europe.

That's helpful.

And secondly, on the architectural side, are you seeing any kind of differing trends between the DIY and the contractor markets?

I would say for us, DIY has been, maybe on a comparable store basis, less weak, although there's been some inventory rebalancing on the part of some of the large retailers.

I would say that the general trend since the onset of this housing recession has been a little more weakness on the professional side or what would go through our Company stores.

We haven't seen a reversal of that trend, although I would say as I commented earlier, here at the end of the third quarter, the beginning of the fourth quarter, we see -- we've seen some slight improvement in the trends.

Is that weather related?

Are we going to face some additional pressure because of some of the delays on the foreclosures from the banks?

There's a few counter veiling trends here, but overall, I think we're just getting through more of a bad patch and we're looking to 2011 as an opportunity to have an improving year on the construction side.

Okay, and then just, finally, assuming raw materials have stabilized, how quickly do you expect to be able to fully I guess catch up or recapture the raw material price, or inflation with pricing?

Takes one or two quarters for us to fully adjust our pricing to our customers after we've received price increases on raw materials from our suppliers.

So, typically -- and if you go back to 2008 where we had significant raw material inflation, it did affect us for a quarter or two, but then you started to see that recover and turn around as we were able to get pricing through our markets.

Okay, thank you.

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

Please proceed.

Chuck, I wanted to follow up on the architectural volumes.

If you look at, at least the Department of Commerce data, the first half US industry volumes were up by 8.5%.

Haven't seen third quarter yet, but you've been losing volume all year.

So, just wondering, is this -- this sounds like a market share loss.

I'm just wondering if you could break out those trends between your three channels of company stores, dealers, and home centers.

Well, for us on the -- on an overall standpoint, it's still difficult to translate that, that kind of data into actually market share gains or losses.

I would say overall, our position on the professional or company-owned store side, I think has been maybe a little weaker than the overall trend.

Although we don't know that precisely.

I would say in the national -- the home center side, customer-specific, I would say overall our trends are, at least with our customers, stable.

And on what I would call the independent dealer side, the third channel, I would say we're up slightly in terms of our penetration there in that, in that channel.

So, overall, we've had some wins and losses.

But certainly we have not been in a situation where we gained significant market share or any market share overall.

Okay, and on the issue of raws, just two questions.

Do you have an index of raw materials, or can you tell us how much they are up year-over-year for coatings?

And is it just a cost issue, or have you actually had some availability issues on things like acrylic emulsions?

Overall, as I commented earlier, the pricing, we do have an index and overall, we're up about 5% to 6%.

So, mid single digits.

It depends on commodities, and in some cases, we have had more of an impact, especially earlier this year from epoxy resin, and that's an important raw material for our industrial coatings segment.

We have seen here in the middle of the year a little more pricing pressure from TiO2.

So, those would be two commodities where I would say the increases have outpaced the overall average.

Again, it depends by commodity, by region.

We've had some availability problems as well and especially in the emulsion chain, as you described, Don.

But I see those now as largely behind us.

They were disruptive in the middle of the painting season to have to make those adjustments.

But now we're moving out of the heart of the painting season, so those aren't as significant an issue.

There have been a couple of force majeures in a number of areas like TiO2, some of the other pigments, but we've managed to work through that.

We're diversifying our supplier base and working hard to make sure that we're supplied properly and at very good prices.

Okay, thank you.

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

Please proceed.

Thank you.

Good afternoon, guys.

Bob, good afternoon.

I'm just wondering if you've seen over the last couple years any effect of the reduced size of auto -- actual, physical size of autos as fuel mileage becomes more important.

And then secondly, and equally, oddball question, I guess.

Our hometown airline here just merged with United.

Can I assume that you're going to get all of that repaint business?

Well, the first question is, there is an impact if the -- if the new car production shifts sharply to smaller vehicles.

We saw somewhat of an effect of that in 2008 and 2009, especially with the higher gas prices.

I would say if anything, though, this year in North America anyway, that trend has stabilized, if not going back a little bit, as you've seen the recovery of some of the SUV models.

In markets like China and India where they do have, on average, smaller vehicles, we have a lower paint content per vehicle in a market like China or India and that is largely attributable to the smaller sizes of many of the vehicles that are sold there.

And, as far as the repaint opportunities, for us we always -- we always view these airline mergers and acquisitions as an opportunity for them to rebrand themselves, come up with a new livery and I -- I know we'll be working hard to secure that business for PPG.

So, you can visit -- you can see our -- our handy work every time we go to the airport hopefully, Bob, there in Houston.

Terrific, thanks.

Thanks.

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

Please proceed, sir.

Good afternoon, guys.

Good afternoon.

The Wal-Mart decision during the quarter primarily affected a competitor of yours, but are there some secular trends at play there that might impact other retailers, either price sensitivity or consistent brands or something like that, that we ought to watch out for at other retailers?

My read on that would be that Wal-Mart certainly made that decision on their own, but I am aware of other categories in which they consolidated supplier positions.

So, I would say it's more indicative right now of what I see as part of a Wal-Mart strategy than a broader trend in the -- in the paint industry.

We have not seen any additional follow-on activity, but they did go to one supplier in that case.

But they had -- Wal-Mart had, as you know, three or more paint suppliers.

So, I think the loss was minimized at the other manufacturers in this situation.

And, then, you did say you picked up market share here in the automotive OEM paint market.

Is there any granularity to that, that you would like to share, either specific model types or vendors or regions?

We've been quite successful, especially in Asia and in particular in China, and in particular, with not only our traditional strong customer base, like General Motors or Volkswagen in China, but also Chinese domestics, who we've done very well in.

We've continued to do well in Asia, with several of the other non-Japanese manufacturers like Hyundai, Kia.

So, I would say we have a good set of wins there and I think here in North America, we're well positioned.

It, of course, depends somewhat on the models and the manufacturers that you're with, but several of our new process-oriented technologies are doing well with the high end German manufacturers, like BMW and Mercedes, where we are, I think, gaining position overall and doing quite well with them.

And it's in both ecoat, primer and that base coat and top coat?

Yes, yes.

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

Please proceed.

Good afternoon, and congratulations on a -- on a solid quarter.

Couple of questions, if I may, and a lot of them have already been answered.

In the Commodity Chemicals space, you talked about price increases announced, working on the third quarter price increase and announcing one for the fourth quarter.

To the extent that we are entering, as you pointed out, a seasonal decline in demand and, hopefully, utilization rates are going to loosen up a little bit, is it going to make it more difficult to get pricing, or do you believe that the market dynamics are such that the little sequential decline in seasonal demand is not going to have any impact on your ability to realize higher prices?

I think we will be able to realize higher prices here in the fourth quarter.

As we, as we mentioned in the comments, we are operating at very low inventory levels in caustic soda for our business.

We see caustic increases going on around the world, dollar continues to be weak, so the threat of import substitution is decreased and we see good demand, especially from the -- some of the key caustic markets that haven't been that strong, including aluminum production, which I think is one of the bright spots for, for the caustic soda market here over the last quarter or two.

Okay.

So, the seasonal easing is not really a concern in terms of getting pricing into the market?

Not at this point, no.

On -- on the Glass segment, we've seen very good growth out of that business through the first nine months of the year.

We're coming up against a little bit more reasonable comp in the fourth quarter.

Should we continue to expect the improvements in fiberglass to drive double-digit growth in that business, or are we kind of anniversaried the easy comps and we should be looking forward to more of an industrial production type of growth number out of Glass?

I think on fiberglass, we -- for the last several quarters, but only this year, have we been operating at full capacity.

So, I would say we're still comparing to slightly weaker numbers, although they did start to improve in fiberglass in, in the fourth quarter of last year.

But as I mentioned in an earlier comment, we still think we have some pricing opportunities in this business because demand now has caught up with supply.

We also had a significant anti-dumping duty levied against the Chinese manufacturers in Europe, which should set a foundation, we hope, for improved pricing.

So, I would see the opportunity for further improvements in fiberglass and it would be more on the pricing rather than the volume side, at least in the -- in the early part of 2011.

Okay.

So, the somewhat inconsistent pricing that you've been able to, or that you posted over the last, let's call it two years, you think it's going to be more -- have a little bit better of a -- of a consistency in terms of getting pricing out?

Right, because typically if you -- if you're signing contracts that are six months or more in -- in duration and they still reflect volume or supply/demand conditions from last year, and we hope to improve on those with pricing actions that -- that we're now implementing.

Okay, very good.

That's helpful.

And then a little bit of maybe a general question.

Your -- your European architectural business is declining volume-wise.

I guess you can blame it on the economy there and lack of new construction and whatever else you want to blame it on.

Domestically, your architectural paint business has been going down for the last three years in a market that at least this year looks like it's flattish.

I guess overall, this is about $3 billion, maybe more than $3 billion of your $10 billion coating sales.

I'm just using rough numbers.

So, roughly 30% of your -- of your portfolio has not done well going back to 2007.

So, is -- is there some thinking -- first of all, is there anything that you can do to change this pattern?

Is there -- or is this just a secular fibrage that -- that you're experiencing and if there's something you -- you can do, what is it?

I would say that in Europe, the first part of your question, we don't feel we've lost any share at all in that -- in that region.

We continue to perform well, but we know without the volume growth that you would normally expect in a market like this, we've had to offset it with tactical pricing initiatives and cost reduction initiatives.

So, we have really worked hard on the cost side, pushing operating excellence and trying to lean out our supply chain, and these are the things that we're doing here in North America as well.

We don't think we've reached the end of the line in terms of our opportunities to improve the business.

We're committed to these businesses.

They have performed -- they are performing well in many regions.

Yes, the markets were probably overheated a couple years ago.

We would expect with the improvements that we've made, if we get back to something more considered a normal construction markets, both residential and housing, that these businesses will be excellent contributors for PPG.

So, we have not lost confidence in the longer term, and I feel that we're performing now at a record earnings level for PPG in the third quarter.

I mean, this is a, I think, a very strong quarter when we haven't been getting a significant contribution from the, from the construction markets that serve a number of our businesses.

So, I -- I take that as a real opportunity for PPG.

I've talked about that with a number of our investors.

If you're getting record earnings from us when a market that is important for PPG is not yet contributing and if we can get back not even to peak levels, but more normalized operating levels in these businesses, I think we'll do quite well and it'll be another opportunity to take PPG to the next level.

We have time for one final questioner.

And your final question comes from the line of Saul Ludwig of Northcoast Research.

Please proceed, sir.

Hello, good afternoon, guys.

Good afternoon, Saul.

How are you?

Just two finals.

You've done a great job answering all the other ones.

Just thinking about the results from second quarter to third quarter, you note that in the Performance Coatings sector, your -- your revenues fell by $8 million sequentially, but your profits fell $16 million.

And Industrial Coatings, your revenues fell $12 million, but your profits fell $26 million.

Total Company, your sales third quarter were about exactly the same as the second quarter and your segment operating income fell, I don't know, $23 million, $24 million.

Was all of that due to unrecovered raw material costs, or what -- if not, what was it?

And how should we think about this revenue to profit ratio as we look forward to the fourth quarter?

Well, Saul, I would only say that you -- you included quite a few numbers in there.

I would tell you that you have, through the remarks that we've made, plus the slides, a good indication of what the volume improvements have been, what the impact of currency and price, and so we are -- typically the second quarter for PPG is always our strongest quarter.

So, we tend to look at these things in a comparison to prior year and, at -- at this point, if Vince wants to handle that question, I think it's probably better to take this one offline, if you want more detail and Vince and Bob, I'm sure, can give you a little more clarity on the performance sequentially, but, certainly, overall, as I've indicated, the performance, we think, is very strong.

And, one final question, during the second quarter, Valspar came out with their new high-def product at Lowe's and promoted it very, very heavily and the people in the Lowe's stores have been trained very well in that product and it's only been out a short period of time.

But, have you noticed any slippage in share in that channel, as they introduce this new product?

And, secondarily, do you have any product that is similar to the Valspar or Masco's product, when they are talking about one coat, et cetera?

I think those products have -- have tended to be, at least on the paint and prime, if that's what you're referring to, we have products like that.

We advertise some of our products as -- as one-coat opportunities without having to prime.

So, at this point, I would say that this is not revolutionary technology and it is widely available in the industry from the major participants, and it's -- it's a question of which retailers are allowing you to present those products in their product assortment.

But, I would say from a technological or even product development standpoint, these are not revolutionary products.

At this time, there are no further questions in the queue.

I thank everybody for their time today.

And, if there's any follow-up questions, please contact Vince Morales.

Thank you.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a wonderful day.