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4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
4Q 2008 FINAL11508 TRANSCRIPT
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4Q 2008 FINAL11508 TRANSCRIPT

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  • 1. PPG Industries, Inc. Fourth Quarter 2008 Financial Results Recorded Commentary - January 16, 2009 Comments by: Charles E. Bunch, Chairman & CEO In a few minutes, Bill Hernandez will discuss our fourth Agenda quarter and full-year financial results. But before he does that, I will provide a quick recap of our Opening Remarks businesses’ performance, and I’ll also review the significant progress we made in 2008 toward Financial Review continuing to transform our company. 2008 Recap & 2009 Perspectives Without question the fourth quarter was a challenge. Question & Answer Session Like many other companies, PPG experienced dramatic volume declines in several of the industrial end-use markets that we serve due to the rapid deterioration in the overall global economy. Most significant were industry activity levels in automotive Highlights – Fourth Quarter OEM which were down between 20-and-30 percent in each global region versus 2007, and a variety of Rapid deterioration in end-use markets (30% of portfolio) general industrial end-use markets which experienced Industrial end-use markets Automotive OEM equivalent declines. As a result, the earnings in our Industrial Coatings and Glass reporting segments, and Stable/growing results in other segments (70% of portfolio) the Silicas business unit which is part of our Optical and Specialty Materials segment were significantly Executing on restructuring program impacted. Both our Industrial Coatings and Glass Strong cash performance segments, which collectively account for about 30 percent of our business portfolio, actually reported operating losses in the quarter. However the remainder of our business portfolio, representing about 70 percent of the company’s sales, delivered solid performance in the quarter despite the dramatic economic slowdown. Our Commodity Chemicals segment grew earnings and Performance Coatings matched strong 2007 results. Our Optical Products business unit delivered, once again, organic volume growth. And, our Architectural Coatings EMEA segment, in what is always a slower quarter due to seasonal trends, performed slightly above our expectations. Throughout the quarter, we have continued to implement a variety of initiatives to reduce costs in all of our businesses in response to worsening global economic conditions. These actions were in addition to the initiatives we have underway as part of the restructuring program announced in September. Of equal importance is that we posted yet another strong quarter for cash. Bill will provide more details on our liquidity position in a few minutes, but let me simply state that we ended the year with $1 billion of cash on hand. This gives us tremendous financial flexibility which, as all of you know, is critical in today’s business climate.
  • 2. 2 Overall for the full year 2008, it was certainly a Highlights – Full Year 2008 challenging and dynamic year for most companies. All-time record sales PPG was no exception. Early in the year, we Sales in coatings segments up nearly 50% experienced rapid inflation, including skyrocketing raw Double-digit percent growth in Optical & Specialty Materials material, energy and freight costs. PPG reacted quickly 40% increase in cash generation to these increased costs and collectively our Improved liquidity; debt repayment ahead of schedule businesses achieved selling price increases that offset this inflation. Later in the year, the global economic SigmaKalon acquisition exceeding targets downturn resulted in significantly lower activity levels. Dividend increased for 37 consecutive year th PPG again responded quickly. During the third quarter and well ahead of most companies, we identified the severity of the declining volumes, and we announced restructuring actions focused on lowering our cost structure. This ability to swiftly adapt our businesses aided our financial results. What also helped were the broadened end-use markets served by our business portfolio as well as our enhanced geographic footprint. This diversification provided some resilience despite the sudden economic shifts and recessionary conditions we experienced in the year. Our nearly $16 billion in sales established a new PPG record and was up 30 percent over the prior year, including nearly 50 percent growth in our combined coatings segment sales. Optical and Specialty Materials sales also grew by double-digit percentages, and our Commodity Chemicals business had one of its best years ever. Our adjusted earnings-per-share results for 2008 were down slightly, falling by more than 10 percent, with the decline solely related to fourth quarter results. We anticipate this performance will exceed that of many companies in our peer groups. Also, as you would expect from PPG, throughout the year we actually enhanced our financial flexibility and greatly exceeded our debt repayment commitments for the year. The company ended the year with one of its largest cash positions in recent history and we have only minimal debt maturities in both 2009 and 2010. We have improved our liquidity through our focused effort to manage working capital and capital spending, along with the successful execution of our strategic initiatives. Foremost among the strategic actions we have taken in this regard is our acquisition of SigmaKalon, which we completed at the beginning of 2008. This acquisition has outperformed all of our expectations, including the business’s solid and stable generation of cash. As a result, the company’s cash from operations for the year was a record $1.4 billion, up nearly 40 percent from our 2007 figure. Also in September, in a difficult M&A market, we divested a majority interest in our Automotive Glass and Services business. In addition, we have continued to grow in emerging regions, where we expect economic activity to continue to outpace the growth in mature regions. Our sales in emerging regions are approaching $4 billion or nearly 25 percent of our existing portfolio. Finally, we have continued to grow or gain share in key end-use markets such as optical, aerospace and protective and marine coatings.
  • 3. 3 Our strategic actions have transformed PPG significantly. We are now a more focused company with stronger geographic and end-use market diversity. This has not only helped drive solid financial results in 2008, but has better positioned the company for today’s economic challenges and created a positive step-change in our ability to generate cash. I believe that these accomplishments will provide PPG shareholders with benefits for years to come. And now, Bill will review the financial details and then I will conclude our prepared remarks with a few comments on 2009.
  • 4. 4 Comments by: William H. Hernandez, Sr. Vice President Finance Thanks Chuck. I’ll spend a few minutes covering PPG’s overall financial performance, both fourth quarter and full year. I’ll also provide some details by business segment and discuss some macro trends relative to the year 2009. Fourth Quarter PPG Sales Fourth Quarter PPG Sales Reviewing the slide detailing our fourth quarter sales, our results increased 3 percent to a new fourth quarter 3,500 663 230 sales record with our SigmaKalon acquisition the main 169 389 3,250 driver of the gain. However, as Chuck mentioned, the 3,188 3,104 quarter was truly a global end-market demand story. 3,000 129 We, along with most other industrial companies were 2,750 heavily impacted by rapidly deteriorating volumes driven by economic weakness, including lower overall 2,500 Q407 Price Volume Currency Acquisitions Divest. Q408 consumer demand combined with industrial customer Volume decline was major factor in the quarter inventory destocking. These lower activity levels were Millions of USD apparent in most of our businesses which directly face industrial customers, resulting in our year-over-year volumes for the quarter declining by 12 percent or nearly $400 million. I’ll discuss this in more detail when I review each segment, but our Industrial Coatings and Glass segments were the most heavily affected as a result of lower global automotive OEM and general industrial end-market demand. Our sales pricing continued a positive trend, as our selling price gains accelerated during the quarter despite the slower volumes. Currency served as a headwind in the quarter, and our divestiture of our Automotive Glass business reduced our sales in comparison to last year by $230 million. Full Year PPG Sales Full Year PPG Sales The next slide details our full year results showing our 17,000 sales grew to $15.8 billion, up $3.6 billion or 30 3,418 230 15,849 16,000 percent. Again, our acquisitions accounted for the 15,000 majority of this growth, but we delivered one-half billion of favorable pricing gains as well. Volumes fell over 2 14,000 percent or approximately $325 million, with the entire 13,000 495 327 273 12,220 volume shortfall occurring in the fourth quarter, but 12,000 partially offset by favorable currency. 11,000 2007 Price Volume Currency Acquisitions Divest. 2008 Increase of 30% in full year sales Of note is that our combined coatings sales grew by 47 Millions of USD percent to $11 billion and are up over 225 percent versus just five years ago. Also sales in emerging regions now account for 25 percent of the company versus 10 percent of a much smaller base just five years ago.
  • 5. 5 Adjusted Earnings-Per-Share * Adjusted Earnings-Per-Share From an earnings perspective, our fourth quarter $6.00 $1.50 adjusted earnings-per-share was $0.41, versus $1.22 $5.34 $1.22 $5.50 $1.25 in the prior year, with the drop primarily a result of the $5.00 $4.59 $1.00 $4.50 dramatic decline in volumes that I mentioned. Our $0.75 $4.00 sales price gains and lower cost structure stemming $0.50 $0.41 $3.50 from our cost initiatives, more than offset lower equity $0.25 $3.00 $2.50 $0.00 earnings and higher inflation. Our full year tax rate YTD 2007 YTD 2008 Q4, 2007 Q4, 2008 increased as the fourth quarter decline in earnings Solid performance in difficult economic environment resulted in a geographic shift in our earnings. * Adjusted EPS from continuing operations – see presentation appendix for reconciliation to reported EPS Full year adjusted earnings per share was down more than 10 percent versus 2007. Our year over year decline in earnings in the fourth quarter pushed our full year results below our year 2007 results. Our full year performance, while negative, will likely outpace similar comparisons by many other industrial companies, and our favorable comparison to our peer groups is a result of many of the actions we have taken over the past several years focused on minimizing the impacts of steep economic shifts. 2008 Volume Performance Volume Performance Let me quickly discuss two key topics on the next few Total PPG Volumes Regional / Business Unit Volumes slides that impacted our fourth quarter and full year Q4, 2008 200 results. U.S. & Canada 100 0 Europe -100 Asia First and foremost was the fourth quarter decline in -200 volumes. The nearly $400 million dollar decline in the -300 Industrial -400 Coatings quarter resulted in our full year volumes turning Auto OEM -500 Coatings Sept Q4, Full negative. The volume drop was broad, both by end- YTD 2008 Year -30% -20% -10% 0% use market and by geography. Volumes were down at Millions of USD Q4 – YOY change Severe and broad Q4 declines resulted in negative full year least 11 percent in all of our major geographic regions. As mentioned, the most severe declines were in the general industrial and automotive OEM markets, however, many other end-use markets were impacted but to a lesser degree. We did deliver positive volume growth in key businesses such as Optical Products and also Aerospace despite the Boeing employee work stoppage. 2008 Inflation & Selling Price 2008 Inflation & Selling Price The next slide illustrates, the rapid rise in energy costs Coatings Raw Materials Inflation Selling price gains exceed inflation which pushed up our inflation rates in several areas Expected Range & Actual 200 Q1 2% 4% including natural gas, coatings raw materials and Q2 100 +495 Q3 6% freight. Our total full year inflation for the company, 4% -465 0 Q4 5% 8% including raw materials, energy and other general % change Y-O-Y -100 Natural Gas Cost ($$ per MMBTU) inflation totaled $465 million. As Chuck mentioned, -200 12.0 10.50 11.0 operationally we reacted quickly as we committed to -300 9.50 10.0 8.50 9.0 8.00 7.75 recover the inflation impacts with selling price gains, -400 7.50 7.50 8.0 7.00 7.0 -500 and we were successful as our selling price increases 6.0 Q1 Q2 Q3 Q4 Cost Inflation Selling Price 2007 2008 totaled about $500 million. Millions of USD
  • 6. 6 Depicted on the right side of the slide were our expected and actual inflation rates for coatings raw material costs each quarter. Many of our coatings raw materials are petroleum based and we typically lag petroleum inflation or deflation by about six months. Therefore, first half 2008 rises in petroleum costs were most impactful to PPG’s results in the second half of the year. As we began the fourth quarter, we expected inflation rates to continue to accelerate, which they initially did. But toward the end of the quarter we began to see very rapid abatement in the raw material pricing which allowed us to end the fourth quarter virtually flat with the prior quarter. We expect the rapid raw material price declines to continue in 2009 given both the second half 2008 slide in petroleum costs and the materially lower demand levels at our suppliers. We also expect lower natural gas costs in 2009. Our full year 2008 natural gas costs averaged about $9.00 per MMBTU which was up about $1.50 versus 2007. We use 60 to 70 trillion BTU’s of natural gas per year, so a one dollar change in our purchase price equates to $60 to $70 million pre-tax earnings impact. We expect in 2009 our natural gas costs to be lower, and we have about one-half of our gas needs hedged in the first quarter at about $8.50 per MMBTU. Based on recent market prices for the non-hedged portion, our calculated first quarter 2009 gas price would be about $7.50 per unit versus $8.50 in the first quarter of 2008. I will discuss some other macro topics that impact 2009 shortly, now I will shift our discussion to our business performance. Industrial Coatings Industrial Coatings Our Industrial coatings segment results are detailed on the next page. We recorded an operating loss of $MM (USD) Q408 Q407 Chg % 2008 2007 Chg % Sales 767 933 -166 -18% 3,999 3,646 353 10% $40 million in the quarter versus $77 million of Earnings -40 77 -117 -152% 212 370 -158 -43% earnings in 2007 as sales declined nearly 18 percent. Fourth Quarter Full Year This segment felt the full impacts of the severe Severe drop (>20%) in Majority of volume and global end-market demand earnings erosion occurred in Q4 declines in global industrial demand as fourth quarter Automotive OEM Consumer Electronics segment volumes dropped by more than 20 percent in 2008 Segment Volume Trend General industrial Q1 comparison with last year. The lower activity levels Impactful to all regions Q2 Raw material inflation Q3 were across a broad section of global end-markets Q4 Restructuring activities underway -25% -20% -15% -10% -5% 0% 5% including consumer electronics, many general industrial applications and the most dramatic declines being in the global automotive OEM market. Generally speaking, a 20 percent rate of decline was fairly consistent in our volumes serving these end-markets and in all geographies. In addition, our businesses were saddled with higher raw material inflation in the full quarter, even though raw material costs began to abate toward the tail-end of the quarter. During the quarter we not only began to implement the restructuring actions that we announced in September focused on lowering our cost structure, but we also instituted a variety of additional cost reduction measures given the rapid end-market deterioration. For the full year, segment sales grew by 10 percent reflecting the addition of the industrial coatings business we successfully integrated from our SigmaKalon acquisition, partially
  • 7. 7 offset by a 5 percent decline in volumes. Despite an economy that weakened throughout the year, the great majority of our year-over-year shortfall in both volumes and segment earnings occurred in fourth quarter when global industrial demand collapsed. Strategically, our emerging region sales now are just slightly less than 40 percent of the total segment sales, and now represent our largest base as they exceed the sales of either the U.S. region or Western European region. As we look at the first quarter of 2009, the outlook for global demand in our industrial end- markets shows further deterioration versus this past quarter. We will continue to manage our costs aggressively and are anticipating increasingly lower raw material cost from our suppliers. Performance Coatings Performance Coatings The next slide details our Performance Coatings segment results. The fourth quarter earnings were $MM (USD) Q408 Q407 Chg % 2008 2007 Chg % flat. This is more impressive when considering that Sales 1,104 1,019 85 8% 4,716 3,811 905 24% Earnings 143 143 0 0% 582 563 19 3% our aerospace business results were negatively Fourth Quarter Full Year affected by the Boeing employee strike which lasted Flat earnings in difficult Sales/earnings growth environment despite weaker economy into November. Earnings from the SigmaKalon Lower auto refinish (miles Solid pricing gains driven ↓) and architectural Acquisition results acquisition, selling price gains and tight cost controls paint volumes exceeded targets Aerospace affected by Aerospace and Protective were key factors in our delivery of these results. Our Boeing employee strike & Marine organic growth Tight cost controls architectural business continued to experience lower volumes which were down by mid-teen percentages. Also, our global automotive refinish business volumes declined reflecting the fact that fewer miles are being driven. Full year volumes were down for these same two businesses, however the Performance Coatings segment still managed to grow total sales by nearly 25 percent and segment earnings by 3 percent. A key contributor toward this growth was the acquisition and successful integration of the SigmaKalon Protective and Marine business. Additionally, sales volumes were accretive in Aerospace and our legacy Protective and Marine coatings businesses, and all businesses achieved selling price gains. Strategically, emerging region sales nearly doubled in 2008 and now account for more than 25 percent of segment sales. Given the global nature of this segment, in early 2009 we are anticipating some currency headwinds and a challenging demand environment in comparison to the first quarter of 2008. Architectural EMEA Architectural EMEA Our Architectural EMEA segment results are on the $MM (USD) Q408 Q407 Chg % 2008 2007 Chg % following slide. The segment, in what is traditionally its Sales 414 -- -- -- 2,249 -- -- -- slowest quarter due to seasonal trends, once again Earnings 0 -- -- -- 141 -- -- -- Fourth Quarter Full Year met or exceeded our various performance targets. Q4 - seasonally slowest period Earnings include $120MM non-cash amortization & Eastern Europe grew, Western depreciation Europe (U.K.) slowed From a business activity perspective, year-over-year ‘07 & ‘08 Sales Seasonality SigmaKalon Acquisition sales in Eastern Europe continued to grow in Significant strategic milestone and success the quarter, while Western European sales declined as Exceeded financial targets Strong cash generation a result of a continued sluggish United Kingdom Q1 Q2 Q3 Q4 market.
  • 8. 8 On a full year basis segment earnings were $141 million, and include a reduction of approximately $120 million of annual non-cash expenses relating to depreciation and acquisition related intangible amortization. The $261 million of segment earnings before depreciation and amortization exceeded our full year targets for this business. As a reminder, the Architectural EMEA segment represents a little less than 70 percent of the total SigmaKalon acquisition. Looking at first quarter 2009, the largest headwind we anticipate is currency versus last year’s first quarter. Now let me take a minute to reflect on the entire SigmaKalon acquisition, which was the largest acquisition in the company’s history. The acquisition was a strategic milestone as it materially altered the company by both substantially expanding our coatings profile and extending our geographic diversity. Additionally, the business provides us improved access to or expands our position in several markets and regions. The performance of the entire acquisition exceeded our financial targets, including strong cash generation and overachievement versus our synergy targets. Simply put, by any measure the acquisition has been a significant strategic and financial success for PPG. Optical & Specialty Materials Optical & Specialty Materials The Optical & Specialty Materials segment details are on the next slide. Segment sales in the quarter were $MM (USD) Q408 Q407 Chg % 2008 2007 Chg % down slightly, as higher optical sales were more than Sales 239 243 -4 -2% 1,134 1,029 105 10% Earnings 33 46 -13 -28% 244 235 9 4% offset by lower sales in the Silicas business unit. Fourth Quarter Full Year Optical sales volumes grew in all regions resulting in Optical volumes up in all Continued optical sales regions growth in key markets growth of mid single-digit percentages, despite Gen VI roll-out in Europe Results confirm Gen VI underway roll-out successful slowing consumer spending, and were aided by our Silicas volumes down Brand building and sales ~20% (auto end-market) aided by higher selling & Generation VI transitions product roll out in parts of marketing Europe. Silica volumes declined by 20 percent as the tire and battery end-markets were negatively affected by the global slowdown in the automotive markets. In both the quarter and full year, we remained aggressive in spending on selling and advertising to stimulate sales and to further build our Transitions brand. Full year optical sales grew, once again, by more than 10 percent. We had a very successful roll out of our Transitions Generation VI product in the United States in the first half of the year, followed by a partial introduction in Europe in the fourth quarter. Optical remains one of our best growth platforms, although year over year growth in early 2009 will be a challenge given the very difficult comparables due to our Generation VI product roll-out in the United States in early 2008, and currency will also be a headwind.
  • 9. 9 Commodity Chemicals Our Commodity Chemical results are displayed on the Commodity Chemicals next slide. We had another very solid quarter with $MM (USD) Q408 Q407 Chg % 2008 2007 Chg % year over year earnings improvement. Demand was Sales 419 388 31 8% 1,837 1,539 298 19% very strong at the outset of the quarter assisted by Earnings 88 53 35 66% 340 243 97 40% industrial end-market outages stemming from the third Fourth Quarter Full Year Very solid quarter Excellent performance quarter hurricanes which severely impacted a variety ECU pricing stable Average natural gas throughout quarter costs ~$9.00/MMBTU of industrial activity in the U.S. Gulf Coast. Demand Industrial demand dropped Stellar cash generation each month fell each month during the quarter reflecting pent up Inventory levels low post-hurricane demand fulfillment along with slower U.S. economic conditions, but price remained fairly stable all quarter. Our inventory levels remained low as we exited the year. On a full year basis this business delivered one of its best years ever, despite higher input costs driven by natural gas costs which averaged slightly more than $9.00 per MMBTU versus about $7.50 per unit in 2007. This business remains a stellar cash generator for the company. Looking ahead, we are anticipating that early 2009 demand levels will be less than the fourth quarter reflecting the absence of the post-hurricane related impacts. Glass The next slide details our Glass segment results. Glass Included are our reported results, which include our Q408 Q407 Chg % 2008 2007 Chg % Automotive Glass and Services business that we sold Sales 245 521 -276 -53% 1,914 2,195 -281 -13% Earnings -7 33 -40 -121% 70 138 -68 -49% in the third quarter of 2008, as well as the pro-forma Pro-forma (excluding Auto Glass): Sales 245 291 -46 -16% 1,190 1,181 9 1% results excluding this divested business. My Earnings -7 28 -35 -125% 54 90 -36 -40% comments will focus on the pro-forma results as we Fourth Quarter Full Year Fiber Glass weaker due to Auto Glass sale complete believe these are more meaningful given they reflect lower industrial demand Earnings decline all the segment on a going forward basis. Performance Glazings occurred in Q4 results solid Manufacturing costs Restructuring actions reduced by $25MM underway For the fourth quarter the segment reported a $7 million loss as the Fiber Glass business experienced slowing general industrial demand, including weakening electronics end-market activity. This lower end-market demand had a negative impact on our Fiber Glass earnings, as did lower other earnings resulting, in part, from lower equity earnings from our Asian joint ventures. These shortfalls were only partially offset by improved year-over-year results in our Performance Glazings architectural glass business. For the year, pro-forma earnings declined 40 percent on essentially flat sales with the entire decline occurring in the fourth quarter. We continued our relentless focus on cost in these businesses as our manufacturing costs improved by $25 million during the year. Additionally, during the fourth quarter we accelerated execution of our announced restructuring program focused on reducing even further our cost structure. In 2009, in addition to the recent industrial weakness, this segment will likely face a slower commercial construction market and incur higher pension costs. Needless to say we will continue to aggressively manage these businesses.
  • 10. 10 Also, from a strategic perspective in 2008, we divested our Automotive Glass and Services business in September and hold an equity interest in the new entity. Both the legacy pension and OPEB costs and the ongoing equity results from the new entity are reported in our segment earnings table in the line labeled Legacy Items. First Quarter 2009 Key Topics First Quarter 2009 Key Topics The next slide details some 2009 key topics, so let me quickly summarize our 2008 business performance. Global demand and currency rates Despite one of the most challenging environments in at least the past decade, many of our businesses posted PPG tax rate good financial results. However, several of our Pension & OPEB inflation businesses performances were severely impacted in the latter part of the year. We responded quickly and Lower input costs are taking considerable costs actions to minimize the impacts of the slowing external market place. Benefit from PPG cost reductions Now, as we look at early 2009 several of these headwinds remain. The most notable of which is overall global demand levels. Chuck will give you a more detailed read on our early 2009 demand in a minute, but as I mentioned in many end-use markets first quarter 2009 demand will certainly be lower than our first quarter 2008 levels. Also, we may be faced with a higher tax rate depending upon geographic mix of earnings in 2009 and currency is currently a negative versus the prior year. Pension and OPEB costs will inflate and we expect our first quarter 2009 impact to be in the range $25 to $30 million, pending final actuarial calculations. As I mentioned earlier, we do expect some offset from these headwinds due to lower input costs stemming from the decline in energy prices and the lower global demand environment for commodities. Also, the significant cost actions we have taken and continue to implement will provide benefits as well. This was not intended to be an all inclusive list, but does provide some of the key items for consideration for the first quarter 2009 which will be a challenging quarter. Now let me discuss our cash generation, our cash uses and liquidity. Cash Generation Cash Generation As displayed on the graph on the following slide, our Quarterly Annual cash generation results were impressive throughout 1,600 700 ~ 40% the year, including the fourth quarter despite the 600 1,400 increase 500 1,200 slipping economic environment. We generated about 400 1,000 300 $1.4 billion of cash in 2008 which exceeded our 800 200 600 100 internal targets and was nearly 40 percent higher than 400 0 Q1 Q2 Q3 Q4 200 2007, easily establishing a new record for any year in -100 0 -200 the company’s history. 2007 2008 2007 2008 Significant step change in cash generation Millions of USD – Cash from operations
  • 11. 11 Several factors influenced these results including the strong cash performance from our SigmaKalon acquisition and our Commodity Chemical segment, both of which have business models that result in high cash conversion. Also, we aggressively managed working capital during the year. Strong and consistent cash generation are hallmarks of PPG and our positive step-change in the level of cash generation is a direct result of our recent strategic actions. This new level of cash generation has and will allow us to continue to remain flexible financially. Cash Deployment Cash Deployment The next slide details our approximate 2008 deployment of cash. In the year we used about $375 Acquisitions *, $100 Pension Contr. million for capital spending necessary for Capital (Pre-tax), $125 Spending, maintenance and organic growth needs. This is only $375 slightly above 2007 despite a 30 percent increase in company sales, and provides addition insights into the Debt capital light nature of our expanding core businesses. Dividends, Repayment, $343 $650 For 2009, our capital expenditures may decline by up Well ahead on debt repayment commitments to 50 percent versus our 2008 figure as we tightly Approx. MM of USD – * Excludes SigmaKalon Acquisition ($1.6B, plus $1.5B assumed debt) control spending. Our dividend payments were $343 million, up 2 percent versus 2007. We increased our dividend payment once again in October of last year and 2008 marked the 37th consecutive year of increased payments. In anticipation of closing on the SigmaKalon acquisition on January 2, 2008, we increased our debt level at the end of 2007 and in early January by a combined $3.1 billion. During 2008 we subsequently paid down about $650 million in debt, nearly double our original debt pay down commitment which was $350 million per year. In addition, we made pre-tax pension contributions totaling about $125 million, resulting in approximately $80 million of cash outlays after-tax. In 2009, primarily as a result of 2008 equity market performance, we will likely make pension contributions of between $400 to $500 million, all voluntary except in certain non-U.S. pension plans. This is a pre-tax figure, so our actual cash outlay will be closer to $250 to $300 million. Also, we have $116 million of term debt due in 2009. Therefore, despite much higher pension funding, we currently expect our combined net cash outlays for pension and debt repayments will likely be between $375 and $425 million, several hundred million dollars less than our 2008 figure, and we will still remain ahead of pace on our debt repayment commitments. Regarding acquisitions, we completed our SigmaKalon acquisition during the year for $1.6 billion plus assumed debt of $1.5 billion. Outside of the SigmaKalon acquisition, we spent just under $100 million of cash on a few bolt on acquisitions. While we will continue to review acquisitions opportunities in 2009, this will be a lower cash use priority and we will remain extremely selective and opportunistic from a pricing perspective.
  • 12. 12 Finally, share repurchases were negligible during the year as we focused on conserving cash, and we will do so again in 2009. Generally speaking, our cash deployment in 2009 will remain cautious and flexible. However, the base case cash deployment assumptions I just provided along with our strong 2008 year- end cash balance, likely gives us hundreds of millions of dollars of excess cash and financial flexibility, and we will either conserve or deploy the cash based on our ongoing assessment of global economic conditions. Cash and Liquidity Cash and Liquidity Let me conclude our cash discussion by reviewing our liquidity on the next slide. Most impressively is that Cash on Hand Term Debt Profile 800 1,200 600 we ended the year with $1 billion of cash on hand. As 600 400 1,000 the year progressed and we identified the economic 116 71 200 800 0 slowing, we shifted to cash conservation and our 2009 2010 2011 2012 2013 600 results are up notably from earlier in the year Other 400 $200MM – Commercial paper including a $500 million increase from just the end of $550MM – Euro facilities 200 $0 drawn on U.S. $1B revolver the third quarter. 0 Q2, 2008 Q3, 2008 Q4, 2008 Well below debt covenant level Considerable financial flexibility Looking at our term debt, outside of the $116 million Millions of USD of term debt due in August, 2009, we have no additional long-term debt due till 2012. We also have about $200 million of commercial paper outstanding, which we currently plan to keep rolling over and the markets have improved versus the fourth quarter. We have just about $550 million drawn on a variety of European banking facilities which is available to us until at least 2010, and we have never drawn on our $1 billion dollar U.S. revolver that is due for renewal in 2011. And, since we receive the question frequently, the only covenant we have for our debt is a debt-to-total capital ratio, and we have nearly $4 billion of borrowing headroom before that covenant comes into the equation. Needless to say we have extreme financial flexibility and similar ability to deploy our large cash balance in the manner which best benefits the company. Financial Summary So let me quickly summarize our annual financial results. We grew annual sales by 30 percent and overcame dynamic external economic issues to post one of our best adjusted earnings per share results ever. During the year we posted record cash generation, growing these results by nearly 40 percent. Our debt repayment was nearly double our original commitment and our cash on hand doubled versus 2007 levels. And, as is our legacy, we raised our dividend for the 37th consecutive year. So it was certainly a solid overall year financially, and we move into a difficult early 2009 with a prudent fiscal approach toward running the company. Now let me turn it back over to Chuck.
  • 13. 13 Comments by: Charles E. Bunch, Chairman & CEO Thank you, Bill. As I mentioned at the outset of today’s call, our performance this past year under intensely difficult market conditions continues to demonstrate our strengthened business portfolio and the success of our strategic direction. We delivered solid earnings and record cash generation, despite rapidly rising energy costs and substantial declines in various industrial end-use market demand levels. Of equal importance is that we have continued to transform the company, and I believe our strategic accomplishments this past year, including our notable portfolio changes, were greater this year than in any of the 30 years I have been with PPG. The progress will prove even more beneficial as we move into 2009, including our stronger and more stable cash generation capabilities. Regarding 2009, Bill touched on several of the issues we and many other companies are facing entering the new year. Of these, the one issue of most concern to me is the demand levels in the global end-use markets we serve. While we have made tremendous strides in diversifying the company, and while coatings and optical remain very low fixed cost businesses, if volume declines persist at the magnitude we witnessed in the late stages of 2008, it will prove to be a challenging environment for many companies, including PPG. Our early read on 2009 is that the first quarter and possibly the first half of the year is shaping up to be an even greater challenge than this past quarter. Our immediate focus is on improving our operating margins as we will manage our businesses to cost levels that reflect the pace of the slower end-use markets. We do expect relief in the form of lower raw material and energy costs which will help mitigate a portion of the impact of the decreased volumes, and we are considering additional, permanent cost-reduction actions on top of those we announced last September which may result in additional restructuring charges and related cost savings in 2009. Obviously, we will remain focused on our cash position and maintaining complete financial flexibility. We have already taken prudent and proactive steps in both managing working capital and capital spending, along with many other initiatives to preserve our large cash position until we have more visibility on the credit markets or see more stability in the global economy. Let me add that we are proud of our track record at PPG of managing through difficult economic times. We have always been able to rapidly and decisively respond to cycles and downturns. However, unlike past downturns, today we have the added benefits of a diverse set of businesses, a broader geographic base, and a stronger cash position. My expectations are that 2009, while challenging, will ultimately prove to be another successful year for PPG. We expect most of our businesses will continue to deliver solid financial results, and for those businesses which are facing the most difficult economic conditions I assure you that we will take aggressive measures to manage those businesses to be successful.
  • 14. 14 Finally, and most importantly, we are extremely proud of our heritage of rewarding shareholders including increases in our annual dividend payments. As is well known, we are one of only a handful of U.S. companies that has paid an annual dividend since 1899, a consecutive streak of 109 years. Also, we have raised our annual dividend payment for 37 consecutive years, including an increase just a few months ago. Our portfolio transformation, our historically strong and growing cash flow and our long-standing, prudent fiscal discipline has positioned the company to continue rewarding shareholders into the future. Thanks again for your time and interest in PPG and we will now be happy to answer any questions. Would the operator please give instructions and open the line for questions.
  • 15. 15 QUESTIONS AND ANSWERS Operator: (Operator Instructions). And your first question comes from the line of Frank Mitsch of BB&T. You may proceed. Frank Mitsch - BB&T - Analyst: What's tougher, first quarter of '09 or the Ravens defense on Sunday? Chuck Bunch - PPG Industries - Chairman, CEO: Well, I would say, speaking as a Pittsburgher, I think the first quarter of '09 may be tougher than the Ravens' defense. Frank Mitsch - BB&T - Analyst: One of the things we're trying to get a handle on, and you talked about the difficulties in the fourth quarter with the destocking phenomenon that's working its way through the chain, do you have any sense as to how much further that has to go, when will we get to an underlying level of demand, and along those lines, could you offer an expectation of global GDP in 2009? Chuck Bunch - PPG Industries - Chairman, CEO: Well, let me take the first question, volume levels and destocking in the first quarter of '09. We're still at a relatively low activity level, especially in the automotive and industrial segment in January. A lot of our customers here in the US and also around the world in automotive have not yet restarted their operations in a significant way. We also have an early Chinese New Year at the end of January. So I would say on the automotive side, we're not going to have good visibility until February and March. So I think we're still going through some destocking this month, but I think you are going to see a return to, let's say lower volumes, but somewhat more normalized here as we move through the quarter. I think in some of our other non-automotive businesses, that we are seeing activity levels in January that are up from the very low December level, so I think we're going to see in other segments a modest pickup from where we were, so I think the destocking in many of the nonautomotive and industrial businesses is probably moving through the system. Overall, we looked at GDP growth probably on a global basis in 2008 of about 2.5%. We're probably going to be, in our calculus, probably slightly positive on a global basis. A couple of tenths of percentage point, but certainly here in the first quarter and the first half we're looking at negative growth on the GDP side in North America. Frank Mitsch - BB&T - Analyst: Okay. Great. Chuck, you mentioned your belief that as we march through the fourth quarter conference calls, that PPG will have outperformed the competition with the results you posted here today. What gives you the confidence to say that?
  • 16. 16 Chuck Bunch - PPG Industries - Chairman, CEO: Well, I think as we look at our businesses, we do not think that we are losing share or position in our end use markets. Obviously, the weakest end use market we have is automotive, and I think relative to other automotive peers, I think our performance is going to be at least as good, if not better. But our confidence level is more about the fact that we're well positioned in our end use markets across the board, that we are gaining share in a number of them, and not losing any share or position in other markets. Frank Mitsch - BB&T - Analyst: Terrific. Thank you. Operator: Your next question comes from the line of Kevin McCarthy, Banc of America-Merrill Lynch. You may proceed. Kevin McCarthy - Bank of America - Merrill Lynch - Analyst: Yes, good morning. Thank you. Chuck of the $465 million in cost inflation that you experienced in 2008, how much of that would you expect to unwind this year, and then of the amount that unwinds, how much do you feel you can retain versus sharing with your customers? Chuck Bunch - PPG Industries - Chairman, CEO: If you look at our input cost inflation during 2008, Kevin, we are now obviously unwinding the cost in a couple of areas. Obviously the energy markets, natural gas, and what we saw in 2008 in terms of our transportation or fuel cost bills, a lot of the surcharges. We are now seeing in the fourth quarter of '08, for the first time, declines in our key raw materials, depended on the raw material and the region, but those have started to come down now, and we're approaching levels that we saw earlier in 2008. We are, however, seeing some resistance now because the volume levels or the activity levels in our businesses are lower, with our customers they're lower, so many of our suppliers are saying, well, we're having difficulty matching the price declines that you may be expecting, because you, PPG, are not taking the kinds of volumes that you had historically been. So there's some resistance, I would say, because of this lack of economies of scale with the lower volumes, but I expect that our input costs are going to decline across the board during 2009, and my hope is that we will share some of that with our customers, but for the most part, we intend to improve our margins because, as you have seen in many of our segments, margins have declined for PPG despite our productivity actions, so we need to restore those margins, and that's a priority for PPG. Kevin McCarthy - Bank of America - Merrill Lynch - Analyst: Okay. To follow up on architectural coatings, particularly in Europe, can you comment on your expectations for volume trends as well as pricing in Western Europe and Eastern Europe in 2009?
  • 17. 17 Chuck Bunch - PPG Industries - Chairman, CEO: Well, volume trends in 2009 are going to be, I would call them relatively flat. We have not seen a recovery yet in some of the markets that started to weaken during 2008, notably the UK. We started to see in the fourth quarter a weakening on, let's stay, the Continental European market. So right now our forecast would be for flat volume for 2009 for our European architectural business. The raw material pricing has been at a slightly different phasing in Europe, Kevin. We saw a little more increases actually as we went through the year because of the weakening Euro and the fact that they had not passed some of the raw material increases on. So we are still now increasing our prices to maintain margins during 2009 and keep the levels that we had in 2008 with what is going to be, I think, a very flat volume across the board in Europe. Kevin McCarthy - Bank of America - Merrill Lynch - Analyst: Okay, thank you very much. Chuck Bunch - PPG Industries - Chairman, CEO: Thank you. Operator: Your next question comes from the line of Sergey Vasnetsov of Barclays Capital. Please proceed. Sergey Vasnetsov - Barclays Capital - Analyst: Good morning. Chuck, any comments on businesses in the past that have been somewhat counter cyclical which is refinish business, for example, if people are not buying new cars, maybe they are going to repaint their vehicles more than they have done in the past. Have you seen some of that and do you expect that for 2009? Chuck Bunch - PPG Industries - Chairman, CEO: I would say that as you saw in the performance of our refinish business, which is within our performance coatings segment, those earnings have held up relatively well. This is an aftermarket business that traditionally has played that kind of balancing role for us in our portfolio. The volumes have not been quite as resilient because we've seen some declines in miles driven, both here in North America and now in Western Europe. Gasoline prices are coming down, so I expect that we're going to see that decline reverse itself. We're also having some very severe weather here in North America, and I do agree with you, as people are keeping their vehicles longer, because we're not seeing the OEM sales here in automotive, I think that there's an opportunity in our refinish business to post a -- I think a better volume performance during 2009 for these reasons.
  • 18. 18 Sergey Vasnetsov - Barclays Capital - Analyst: Okay. And now the question is to Bill. Bill, you have a few hundred million dollars of free cash flow in 2009 and so I think you can buy decent size bank nowadays for that amount of money, but what's your range of priorities for this surplus cash? Maybe a couple scenarios you could talk about. Bill Hernandez - PPG Industries - SVP, CFO: As we said, Sergey, we do think we have several hundreds of millions of dollars of cash flexibility next year, and our current thought process is we are going to be fairly conservative, especially in the early part of this year until we get a little more visibility on what the future is going to hold for us. So I think we'll keep quite a bit of cash on hand. I mentioned, as we're starting the year here with a billion in cash, we are rolling our commercial paper, and I think we'll keep doing that. We're starting to see commercial paper rates dropping. It's getting a little better, placed for longer periods of time, so keep a good amount of cash. Then as we go into the year, I think one of the things we may look at is being a little more aggressive on paying down some of the debt. I mentioned we only have a little over $100 million of long-term debt maturing this year that we have to pay down, and actually that $100 million is from a term note we took out in ‘99 when we did our acquisitions at the end of that decade of about $300 million. We very quietly paid down that debt since it was well above 7% interest rate. So I think one of the scenarios will to be a little more aggressive in paying down some debt. Then depending on what happens there in the equity markets, as well as the effect it might have on our pension fund, we may decide to increase or decrease the amount of cash we put in our pension plan, and then probably acquisitions, as we mentioned earlier, will probably be lesser of a use of cash for the year. But we'll continue looking at that. And last, we always look at our stock price as a flywheel for any excess cash. Sergey Vasnetsov - Barclays Capital - Analyst: Thank you. Operator: Your next question comes from the line of David Begleiter of Deutsche Bank. Please proceed. David Begleiter - Deutsche Bank - Analyst: Good morning. Chuck, can you comment on the resiliency of the optical business as we enter 2009? Chuck Bunch - PPG Industries - Chairman, CEO: Well, so far, we have been quite pleased with the continuing performance of our optical business. As you know, this business has probably more of a healthcare profile with some exposure, obviously, to some consumer discretionary purchasing, but it is behaving more like a healthcare end use market. And as you know, in this economic environment, we have probably seen the strongest relative performance from the healthcare segment. So I think this
  • 19. 19 is giving us a little bit of confidence that we're going to continue to see this as an opportunity to grow and to balance our portfolio. We still have some momentum from the generation six launch in Transitions. As Bill indicated in his remarks, we only launched in that North America and in a few select market in Europe. Now that's going to be rolled out in the first quarter in the rest of Europe. That should give us a lift. So, overall, we're still looking for very good things from our Transitions portfolio, business and our optical portfolio. David Begleiter - Deutsche Bank - Analyst: And, Chuck, you mentioned potential further cost actions. What would cause you to pull that lever, and what could they be in terms of size and areas of focus? Chuck Bunch - PPG Industries - Chairman, CEO: If you looked at our last restructuring announcement, which was September of last year, a third quarter item, and it was focused really in two areas, one was capturing synergies from the SigmaKalon integration, and also select and targeted actions primarily here in North America in our automotive coatings business and also in our glass segment. What we saw, however, in the fourth quarter, was the rapid spread of this decline in automotive around the world, and we've seen continued weakness there. So we were, I think, we are now saying we probably did not do enough in that industrial coatings segment, we have to look more broadly there, and if these lower volume and activity levels persist from a overall corporate standpoint, we have to look more broadly at actions, especially in some of our weaker segments, and I would say that we're certainly a ways away from making those decisions, but I would say, throughout the first quarter, we're going to analyze this, and you will see, I think something that we will come up with early in the year if we see these conditions persist and we get confidence that we can take costs out of our operations and the magnitude I would say, it would not be significantly different than what we saw in the third quarter of last year. David Begleiter - Deutsche Bank - Analyst: Thank you very much. Operator: Your next question comes from the line of Bob Koort of Goldman Sachs. Amy Zhang - Goldman Sachs - Analyst: Good morning. This is Amy Zhang on behalf of Bob Koort. I have a few questions. First on the pricing front. Noted most of your pricing in the quarter, which is a little surprising to us given how weak the demand environment was in November and December. And my question is, what would be your pricing strategy and also pricing outlook in '09? As far as we know, several of your competitors already stopped pushing prices in the latter part of 4Q.
  • 20. 20 Chuck Bunch - PPG Industries - Chairman, CEO: At this juncture we're looking at 2009 as not being a year where we're going to be able to significant increase prices. If you look at one of the larger segments for us, from a pricing perspective which was chlor-alkali, we feel that pricing peaked in the fourth quarter, and I think we're seeing modest declines there, and in many of the other segments, I don't look for increased prices during 2009, and it will be more of trying to improve margins through our productivity actions and holding on to some of the gains that we were able to get in 2008, and again with an emphasis on restoring margins through productivity and holding on to those increases rather than passing them through, because there has been a margin shift in our businesses, either to suppliers or customers over the last couple of years. Amy Zhang - Goldman Sachs - Analyst: Okay, that's very helpful. The second question is, can you just give us a little bit more color on what's going on in Asia? And during the quarter Asian volumes actually dropped more than 10%. Is there any business line or any country that's more particularly weak during the quarter, and what's your outlook for that region? Chuck Bunch - PPG Industries - Chairman, CEO: We saw a decline in activity levels throughout Asia in the fourth quarter. We saw it even in markets that had been growing nicely prior to that. Korea was weak in the automotive sector in the fourth quarter, as was China. I think there was an anticipation after the Olympics that we would maybe pause and then resume growth, certainly the growth in the fourth quarter in a sector like automotive or our overall in industrial we did not see that return to the growth patterns earlier in 2008. In fact, if you look now at the end of the 2008 quarter, or how we're starting in other important segments in addition to automotive, like consumer electronics, those were actually starting to weaken in China and more broadly in Asia. We're seeing that start slowly in 2009. We have this early Chinese New Year at the end of January. So we're looking now to February as the real indicator of what kind of recovery we're going to see, but, yes, broadly across markets, and countries in Asia, we saw weakness in the fourth quarter that has not corrected itself as of yet in 2009. Amy Zhang - Goldman Sachs - Analyst: And my last question is regarding SigmaKalon. Not sure if you addressed this in this your prepared remarks. What is your profit expectation for that business because in the fourth quarter that business was break-even on the profit line? Is there any chance in '09, given the fast deterioration of the demand outlook in Europe, the housing construction market, is there any chance in '09 we could see that business swing to operating loss? Chuck Bunch - PPG Industries - Chairman, CEO: I would say as we talked about, there is a seasonal variability in the architectural coatings business, and in Europe it's no different there. Actually the performance in the fourth quarter for us was ahead of our plan. They had very solid growth and earnings during the course of 2008. We expect that to continue. They were able to meet their targets in the fourth quarter, even on some lower volumes. So we think they're quite resilient and have a very sound
  • 21. 21 business. So at this point, even though we're not looking for a lot of volume growth in 2009, we're looking for SigmaKalon and the Architectural EMEA business to have another solid year in 2009. Amy Zhang - Goldman Sachs - Analyst: Thank you very much. Operator: Your next question comes from the line of Dmitry Silversteyn of Longbow Research. Please proceed. Dmitry Silversteyn - Longbow Research - Analyst: Good morning. Most of my questions have been answered but I want to follow up on a couple. You have mentioned in several of your businesses headwind from foreign exchange when it comes to revenue line. Can you give us an idea of what the impact of foreign exchange would be on your operating profit line provided the dollar stays at current levels? Bill Hernandez - PPG Industries - SVP, CFO: Again, the head wind is mainly we're going to start to look at comparables versus last year. We had a very weak dollar to begin the year and I think what we're really talking about is comparables as we begin comparison with the year, and where it will go. Looking forward, I think it's anybody's guess, which way all currencies will play out for the remainder of the year. It's a headwind at the beginning of the year. I don't think it will be a head wind as we progress through the year. It's more comparison here in the first quarter. Dmitry Silversteyn - Longbow Research - Analyst: Okay. I understand that, but I'm not asking to you predict where the dollar is going to go, but if it stays at current levels, I'm just trying to determine what kind of your sensitivity is to foreign exchange on the operating profit line. Bill Hernandez - PPG Industries - SVP, CFO: Well, for every dollar change on the top line it's about 10% change on the bottom line, and we think there's about a 10% head wind. Dmitry Silversteyn - Longbow Research - Analyst: That's helpful. That's what I was looking for. Thanks. Second question, in regards to your performance coatings business, I think you talked about fourth quarter volumes in architectural coatings being down 15% for the division overall. Can you give us an idea of what was relative performance of the US market versus the Asian market? Have you seen comparable declines, or was one worse than the other?
  • 22. 22 Chuck Bunch - PPG Industries - Chairman, CEO: I would say that we saw weakness here in North America as well as in other parts of the globe. South America, they began experiencing some of the same issues that we've had here in North America during the fourth quarter, as did Australia and China was not as strong either. So I would say that this recessionary environment for the construction industries has spread rapidly around the world, not as severely as the automotive, but certainly we're seeing weakness outside of North America as well now, with Europe and our position there with our SigmaKalon business holding up the best. Dmitry Silversteyn - Longbow Research - Analyst: Okay. Turning attention to the commodity chemical sector, you talked about the overall demand in the early quarter being stronger and falling each month with the pricing holding steady. What was the volume decline that you've witnessed in the chlor-alkali segment? And what are the current utilization rates and if the volume keeps declining, can you keep shutting down capacity to maintain utilization rate? Chuck Bunch - PPG Industries - Chairman, CEO: We saw volume, or utilization rates, decline through the quarter. October was actually a very strong month. We were recovering from the September hurricane, and operating levels were quite good. In November, they declined somewhat, but were still pretty solid. In December, and you saw many of the chemical customers for our business, and some of the other industries that are served by the chlor-alkali industry started shutting down to kind of manage inventories and do destocking in December. So, we did see a sharper fall-off in December. As I said earlier in my remarks, in January we've actually seen these levels come up a little bit here in chlor-alkali. Activity levels are better, and that's in contrast to some of my comments about automotive where we've seen in January activity levels still remain low for our automotive customers in January, which we hope will pickup starting in February. Dmitry Silversteyn - Longbow Research - Analyst: Okay. So do I take it to mean that the modest reductions in capacity that you were able to execute to maintain utilization rates will be able to maintain that pace in 2009, so that utilization rates allow for some pricing stability? Chuck Bunch - PPG Industries - Chairman, CEO: I think that there are some declines in pricing right now, some industry price levels such as the alumina contract are still being discussed, so I think pricing in the first half of the year is going to be relatively stable, if at a lower level, and activity levels, they will probably be obviously weaker at the start of this quarter than they were at the start of the fourth quarter, because October was quite a good month for us. But I would tell you that I think that operating rates for us will be fairly stable and we should be able to manage our inventories and operating levels to be solidly profitable in the first quarter and first half of the year.
  • 23. 23 Dmitry Silversteyn - Longbow Research - Analyst: I appreciate it. The last question is on the glass segment, did I hear you correctly that the architectural glass business was up for the quarter and what's the current makeup now that you have deconsolidated the automotive glass? What's the current make-up of the division between fiberglass and other types of flat glass? Chuck Bunch - PPG Industries - Chairman, CEO: If you look, there are really two business segments now, or two businesses within that glass segment, and one is flat glass or performance glazings. That makes up a little more than half of the sales of that segment. Fiberglass is a smaller piece of the sales, although they do have a significant joint venture that is not consolidated on the sales line. So I would say they are equally present within the segment, and, yes, the performance glazings business had, on a relative basis, a better quarter than the previous year, where as fiberglass, because of the rapid destocking, especially in the thermoplastics side of the business, which has end use markets in automotive and industrial, they experienced a very rapid drop-off in demand starting in November, because of the higher fixed costs, in that business it's a little tougher to adjust capacity, but we are doing that now. Dmitry Silversteyn - Longbow Research - Analyst: Okay. Thank you very much. Operator : Your next question comes from the line of Steve Schuman of Lafayette Research. Please proceed. Steve Schuman - Lafayette Research - Analyst: A question on your projection for 2009. You had said things are probably a little worse than you had expected. What are the chances of doing another major restructuring, automotive in particular doesn't look to be recovering any time soon; at least on the big three side. Chuck Bunch - PPG Industries - Chairman, CEO: Well, I would say we're looking at that now, and I would say in the next couple months we will determine whether we can execute a restructuring, but certainly given the weakness of the markets that we have right now, we're going to work hard to try to identify some opportunities to lower our costs, and that would mean, more than likely, a restructuring action. But we're still working at it right now. Steve Schuman - Lafayette Research - Analyst: And then the few hundred million dollars of free cash next year, did that include or exclude the voluntary pension payment of a couple hundred million also?
  • 24. 24 Bill Hernandez - PPG Industries – SVP, CFO: It included. We still have above -- that's over and above the pension numbers that we talked about. Steve Schuman - Lafayette Research - Analyst: And that also takes into consideration that you thought could you bring CapEx down by -- did you say 50%? Bill Hernandez - PPG Industries – SVP, CFO: Yes. Steve Schuman - Lafayette Research - Analyst: Thank you, guys. Operator: Your next question comes from the line of Saul Ludwig of KeyBanc. Please proceed. Saul Ludwig - KeyBanc - Analyst: Good morning. Bill, the pension expense for 2009, for the full year, what do you expect it to increase, and as part of that answer, what are you using for your discount rate, '09 versus '08, and your assumed rate of return of assets on '09-'08? Bill Hernandez - PPG Industries - SVP, CFO: The discount rate we're using is just a little bit above 6% is the way we're looking at it for the coming year. We made about an 8% return on assets, and that's been pretty steady over that time period. And as we said, the pension expense we're talking about is several hundred million dollars for this coming year, but on an after tax basis it is going to be about 250 to 300 million. Saul Ludwig - KeyBanc - Analyst: I'm not talking about pension, cash contribution, I'm talking about pension expense going forward. Bill Hernandez - PPG Industries - SVP, CFO: Expense going forward? We're looking somewhere between $25 and $30 million a quarter for increased pension expense for each quarter of 2009 versus 2008.
  • 25. 25 Saul Ludwig - KeyBanc - Analyst: And this 6.1 or 6.2 discount rate, how did that compare with the discount rate you used in '08? Bill Hernandez - PPG Industries - SVP, CFO: It's pretty close to the same. We're talking one or two basis points difference. Saul Ludwig - KeyBanc - Analyst: Okay. And, Chuck, on the chlor-alkali outlook for '09, will you consider the effects of volume is maybe some price weakness, help on natural gas, do you think the combination of those items keeps earnings the same in that segment, or do you think it gets a little better or a little worse? Chuck Bunch - PPG Industries - Chairman, CEO: We don't like to make direct forecasts, but I would say that in view of what we see overall in the market, some of the weakness, I think it will be a challenge keeping those operating earnings at the same level for the full year. Saul Ludwig - KeyBanc - Analyst: And then your comment about SigmaKalon expecting to be flat in volume. How was their volume in '08 versus what it was when SigmaKalon had them in '07? Chuck Bunch - PPG Industries - Chairman, CEO: Volume was up slightly. It was down in the UK, but up overall, and it was modestly up. I would say this is certainly just less than 2%. Saul Ludwig - KeyBanc - Analyst: When you had up 2% in a total year which wasn't so bad economically in Europe until late in the year, and we see Europe decelerating at a fairly rapid pace, being flat in volume would be a darn good performance, and I'm wondering why -- I would call that optimistic. Why you feel so confident that volume could stay flat as the whole economic scene in Europe is deteriorating rapidly. Chuck Bunch - PPG Industries - Chairman, CEO: Well, 2008 was a record year for SigmaKalon. So it was their performance improved over 2007, and that top line is a combination of volume and price, Saul. And we've seen their ability to adjust their costs and expenses to fluctuate with volume, so we think the combination of flat volume, some pricing and margin maintenance and lower costs as an opportunity to have another good year for SigmaKalon in what is arguably going to be I think, a tougher environment next year.
  • 26. 26 Saul Ludwig - KeyBanc - Analyst: FX will work against them as well? Chuck Bunch - PPG Industries - Chairman, CEO: Yes, it will. Saul Ludwig - KeyBanc - Analyst: Great, thank you very much. Chuck Bunch - PPG Industries - Chairman, CEO: Thank you. Operator: Your next question comes from the line of Silka Keuck of JPMorgan. Please proceed. Silka Keuck - JPMorgan - Analyst: Good morning. Question on the domestic architectural coatings business. Can you talk about the magnitude of the volume decrease in the fourth quarter and what volume expectations you have for the full year '09? And also, how large is architectural coatings as part of performance coatings? Thank you. Chuck Bunch - PPG Industries - Chairman, CEO: Architectural coatings -- broadly this would be North America and the rest of the world, I would say was over 20% of the total for performance coatings. Volumes were down here in North America, modestly, and what we were able to do, because we've been adjusting costs, reducing our footprint, we actually had a better performance in the fourth quarter of '08 on lower volumes. So I think we've proven that we can make the tough decisions here, take costs out, and these were costs that we took out without the benefit of a restructuring reserve. So I would tell you that even though we're not looking for a pickup in architectural market here in North America, we think we're going to be able to continue to perform better because we've been aggressive on costs, productivity, and tried to make up for the weakness in the market with our own actions. Silka Kueck - JPMorgan - Analyst: Thanks very much. Vince Morales - PPG Industries - VP IR: One more question, please.
  • 27. 27 Operator: Your next question comes from the line of John Roberts of Buckingham Research. Please proceed. John Roberts - Buckingham Research - Analyst: Good morning, guys. Chuck Bunch - PPG Industries - Chairman, CEO: Good morning. John Roberts - Buckingham Research - Analyst: Do you manage the seasonal ramp-up for the architectural coatings business different this season at all? Do you normally build to inventory in addition to serving the inventory needs of the customers, or is that going to change given the uncertainty that's out there in the ordering patterns? Chuck Bunch - PPG Industries - Chairman, CEO: Typically we start building inventory in the architectural business at the end of the year, or the end of the fourth quarter, so you start to see that in December. This year I think we were a little more cautious, and we're starting to do that now here early in the first quarter. We're not expecting a significantly weaker environment in the architectural business here in North America this year. We're 2.5 years into what's been a housing recession. We think that there's a lot of stability in our customer base in every channel, and even though we're not expecting a lot of strong growth here, we think that we have a good handle on demand and our inventory needs, and we're managing that now, but we are starting to add inventory here in the first quarter to handle these seasonal requirements. John Roberts - Buckingham Research - Analyst: Thank you. Chuck Bunch - PPG Industries - Chairman, CEO: Okay, thank you very much, and I look forward to talking to you at our next quarterly earnings release and Q-and-A session. Thank you.
  • 28. 28 PPG INDUSTRIES, INC. Condensed Statement of Operations 4th Quarter Results (Millions of Dollars) 3 Months Ended Dec. 31, 2008 2007 % Change Net Sales $ 3,188 $ 3,104 2.7 Cost of Sales 2,029 2,017 Selling and Other 857 706 21.4 Depreciation 88 82 7.3 Interest Expense 61 26 Amortization 30 14 114.3 Asbestos Settlement - Net (5) 2 Other - net (Note A) - (48) Income Before Income Taxes, 128 305 and Minority Interest Income Tax Expense 46 87 (47.1) 11 Minority Interest 17 Income from continuing operations 71 201 - Income from discontinued operations, net of tax (1) (64.5) Net Income $ 71 $ 200 Earnings per common share Income from continuing operations $ 0.43 $ 1.22 Income from discontinued operations $ - $ - (64.8) Net Income $ 0.43 $ 1.22 Earnings per common share -- assuming dilution Income from continuing operations $ 0.43 $ 1.21 Income from discontinued operations $ - $ - (64.5) Net Income $ 0.43 $ 1.21 0.2 Average shares outstanding 164.7 164.3 Average shares outstanding -- (0.3) assuming dilution 165.5 166.0 Note A The reduction in Other - net for the three months ended Dec. 31, 2008, is largely due to lower equity earnings and the absence of gains in 2008 from certain 2007 asset sales.
  • 29. 29 PPG INDUSTRIES, INC. Business Segment Information 4th Quarter Results (Millions of Dollars) Net Sales Segment Income (Loss) 2008 2007 2008 2007 PERFORMANCE COATINGS $ 1,104 $ 1,019 $ 143 $ 143 INDUSTRIAL COATINGS 767 933 (40) 77 ARCHITECTURAL COATINGS EMEA 414 - - - OPTICAL and SPECIALTY MATERIALS 239 243 33 46 COMMODITY CHEMICALS 419 388 88 53 GLASS (NOTE A) 245 521 (7) 33 SUBTOTAL $ 3,188 $ 3,104 $ 217 $ 352 (17) - LEGACY ITEMS (NOTE B) - (3) ACQUISITION RELATED COSTS (NOTE C) 5 (2) ASBESTOS SETTLEMENT - NET (51) (15) INTEREST EXPENSE, NET OF INTEREST INCOME (NOTE D) UNALLOCATED STOCK BASED (6) (15) COMPENSATION (NOTE E) (20) (12) OTHER UNALLOCATED CORP. EXPENSE - NET INCOME BEFORE INCOME TAXES AND MINORITY INTEREST $ 128 $ 305 Note A: Glass net sales and segment income include the results of the automotive glass and services business for the three months ended Dec. 31, 2007. Note B: Legacy costs include current costs related to former operations of the Company, including certain environmental remediation, pension and other postretirement benefit costs and certain charges that are considered to be unusual or non-recurring. Legacy items also include equity earnings (loss) from PPG's 40-percent investment n the former automotive glass and services business. Note C: Represents the flow through costs of sales of sales of the step up to fair value of acquired inventory related to the inventory acquired in the Barloworld Coatings Australia transaction for the three months ended Dec. 31, 2007. These costs are considered to be unusual and non-recurring and will not reduce the segment earnings used to evaluate the performance of the operating segments. Note D: The increase in Interest expense, net of interest income, for the three months ended Dec. 31, 2008, as compared to Dec. 31, 2007, is due to increased interest costs related to the financing of the SigmaKalon acquisition. Note E: Unallocated stock-based compensation includes the cost of stock options, restricted stock units and contingent share grants which are not allocated to the operating segments.
  • 30. 30 Forward-Looking Statement Statements contained herein relating to matters that are not historical facts are forward-looking statements reflecting PPG’s current view with respect to future events and financial performance. These matters involve risks and uncertainties that may affect PPG’s operations, as discussed in PPG’s filings with the Securities and Exchange Commission pursuant to Sections 13(a), 13(c) or 15(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. Accordingly, many factors may cause actual results to differ materially from the forward-looking statements contained herein. Such factors include global economic conditions, increasing price and product competition by foreign and domestic competitors, fluctuations in cost and availability of raw materials and energy, the ability to maintain favorable supplier relationships and arrangements, economic and political conditions in international markets, foreign exchange rates and fluctuations in such rates, integration of acquisitions and achievement of expected synergies therefrom, the impact of environmental regulations, unexpected business disruptions, and the unpredictability of existing and possible future litigation, including litigation that could result if the asbestos settlement discussed in PPG’s filings with the Securities and Exchange Commission does not become effective. However, it is not possible to predict or identify all such factors. Consequently, while the list of factors presented here is considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward- looking statements. Consequences of material differences in results compared with those anticipated in the forward-looking statements could include, among other things, business disruption, operational problems, financial loss, legal liability to third parties and similar risks, any of which could have a material adverse effect on PPG’s consolidated financial condition, operations or liquidity. All information in this presentation speaks only as of January 16, 2009, and any distribution of this presentation after that date is not intended and will not be construed as updating or confirming such information.

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