PPG Industries, Inc. (PPG)

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PPG Industries, Inc. (PPG)

2011 Capital Markets Day

December 05, 2011 1:30 pm ET


Vincent J. Morales - Vice President of Investor Relations

Charles E. Bunch - Chairman of the Board, Chief Executive Officer and Member of Operating Committee

Pierre-Marie De Leener - Executive Vice President of Global Automotive Refinish, Protective & Marine Coatings and Aerospace Businesses

J. Rich Alexander - Executive Vice President of Asia/Pacific Regional & Architectural Coatings and Member of Operating Committee

David B. Navikas - Chief Financial Officer, Senior Vice President of Finance and Member of Operating Committee

Charles F. Kahle - Chief Technology Officer and Vice President of Coatings Research & Development


Gregg A. Goodnight - UBS Investment Bank, Research Division

David L. Begleiter - Deutsche Bank AG, Research Division

James Barrineau - Citigroup Inc, Research Division

Unknown Analyst

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

William Young

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Kevin W. McCarthy - BofA Merrill Lynch, Research Division


Vincent J. Morales

Good afternoon, everybody. I'm Vince Morales, I'm Vice President of Investor Relations for PPG Industries. I'd like to welcome everybody to PPG's 2011 Capital Markets Day. We have a fairly full agenda today, and we certainly appreciate everybody's time both here in the room as well as those folks who are tuning in via the webcast.

Before I begin, let me quickly discuss our Safe Harbor statement. Today's discussion, including Q&A, will 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 which may cause actual results to differ. The company has no obligation to update these statements after today. Today's presentation also contains certain non-GAAP financial measures. The appendix of the presentation that appears both in the room as well as on the website have reconciliations of these non-GAAP financial measures to the most closely correlated GAAP financial measures.

Our agenda today consisted of strategic overview by our Chairman of the Board and CEO, Chuck Bunch; we will have a financial review by our CFO, David Navikas. Pierre-Marie De Leener and Rich Alexander, 2 Executive Vice Presidents, will provide some business updates for the business that they are running; Chuck Bunch will provide subsequent business updates for those businesses they're not running; we also have a Science and Technology update by our Chief Technology Officer, Chuck Kahle; and then we'll have some final commentary and final Q&A. We're expecting to have a break around 3:00 for about 10 minutes. It will be after Pierre-Marie De Leener's presentation.

And once again, I'd like to thank you for your time, and I introduce our Chairman and CEO, Chuck Bunch.

Charles E. Bunch

Thank you, Vince, and welcome, everyone. It's great to see all of you. We have a little construction in the background here but, hopefully, you'll be able to hear us. What I'd like to start with is a brief strategic update. These are the things that we said at this meeting last year, both about the macro environment, and you can see many of these trends and conditions that we talked about last year have been right on the mark, some of these unfortunately called for a slower growth at some of our markets, but certainly, I don't think we can be accused of being overly optimistic in our outlook at this time last year despite the great performance that we've had in 2011 for PPG. Here are some of the specific things we also talked about relative to our company: share gains in some of our key markets, continued growth globally in many of our key aftermarkets, inflation both in terms of our raw material input costs for coatings, but also for us, pricing opportunities in businesses like chlor-alkali and the determination on our part to raise prices where appropriate to offset some of these inflationary increases in our Coatings business. We've also had and continue to have this tailwind in U.S. natural gas prices. We've continued to execute both on our cost and our cash performance as a company. And as we've discussed in previous meetings last year and throughout this year, we're continuing to deploy that cash for PPG's growth, both in its businesses as well as returning this cash appropriately to our shareholders.

Let me just give you a brief update on current business conditions for PPG here in the fourth quarter. This is a seasonally lower quarter for us with demand typically weakening through the quarter. We have seen and we've commented already on a couple of end markets that are weak for us. This is marine OEM and the architectural businesses, both here in North America and in Europe, but we continue to have a good growth and strength in our aerospace and our automotive OEM markets. European markets in particular are a little soft. There is concern on the part of many of our end-use customers in Europe about where some of these overall debt concerns are going to take the markets. We've seen some softening, nothing dramatic, but they are on the whole a little bit softer with concerns being expressed by our customers about strength going into the beginning of 2012.

Raw material inflation. This has been a continuing story for us here in our coatings businesses at the end of 2010 and into 2011. We have seen a lessening of a raw material inflationary pressure in coatings, and it's somewhat of a tale of 2 markets. The organic side of our raw materials, we’re actually seeing some relief. Some of this is being reflected in purchases of items like resins or solvents. We still, however, have inflationary pressure on the inorganic side, pigments in particular, and specifically TiO2. We have expressed what we feel is an improving supply-demand picture for TiO2 in the sense from a coating standpoint that there seems to be, with this muted demand environment, more supply available. We've seen prices coming down in some of the regions, and I think it continues to be an item for discussion. Both here today, we brought our Chief Scientist, Chuck Kahle, to discuss some of our particular initiatives around, not only technology, but also addressing some of the questions around TiO2 usage and opportunities for PPG.

We have seen, I think in the light of these weakening, the -- let's say the concerns around the markets here and in Europe, but we have seen customers managing carefully their inventories here at year end. This has also been the case in our chlor-alkali market. We have seen some weakness as we've gone through the quarter in PBC exports and in some of our other chlorine uses here in North America. So chlorine weakness is affecting availability and supply of the co-product, in this case, the caustic soda. Some price increase initiatives, and you've seen that recently from us a little over a week ago with our announcement. We also have had -- and I'll comment briefly on the Thailand flooding. For those of you who weren't aware, Thailand is one of the production centers for the global optical industry, so the major floods that we've had over the last 2 months in Thailand have had a significant impact on the industry overall, on our operations in particular, not only in our optical monomers and our Intercast lens manufacturing operations, but also less severely on our transitions production facilities in Thailand, and more importantly, some of our key customers that we're supplying our transitions facilities from operations in Thailand. So we do have an impact in our Optical and Specialty Materials segment from those floods. And I'll just remind everyone that the fourth quarter is our best cash generation quarter. With the seasonality that we have in the business, we have continued to deploy our cash. You've seen the recent announcements over the last few months of some of the smaller acquisitions that we've made, and we have continued on our commitment to deploy cash in share repurchases through the fourth quarter of this year.

Now if I can switch from that brief fourth quarter update just to our PPG's strategy and vision, these are similar to what we have presented in the past. Our strategy has not changed. We are -- our vision is to become or continue to be the leading coatings and specialty products company in the world, accelerate profitable growth and enhance our operational excellence. And I can give you a few points about what we feel is the strategic direction. Coatings continues to be, we feel, a very attractive global industry. The industry has grown by over 40% since 2002. It's also continuing to consolidate. You can see here that today, some 60% of the market is controlled by the top 10 producers in coatings, and this is up 10 percentage points from the initial snapshot in 2002, where we held about -- the top 10 held about 50% of the market. So we continue to see these trends of global growth and consolidation. Solid industry growth rates, both here in North America as well as in Europe, and Asia Pacific coming out of the depths of the 2009 recession. We are projecting continued economic growth to outpace GDP on a global basis. This is both on a volume and value standpoint. So we think the growth trends remain in place for our industry.

And as this provides a little more background on the competitive landscape and the end-use markets, you can see here, if we look at the box on the left, that lower green bar would be now, 20% of the industry is in the hands of the 2 leading global players, Akzo and PPG. We both have more than $10 billion in global coatings sales. You have then an important band of 20 players making up some 45% of the industry that are in the range of $1 billion to $10 billion. And then the remainder of the industry is in the hands of smaller regional and local players, but I think this gives you a sense that there are still ample opportunities for further consolidation in this industry, and you've seen the bigger players leading this in 2011 as they have over the last 10 years or so.

End-use markets. The biggest single market is the architectural market, construction-related, also known as decorative coatings. And then special purpose and industrial make up some 55% of the remaining market. All now what we see as global trends both in terms of the market and our industries are increasingly global in nature.

Our coatings sales, if you look at our mix, we talked about in the last slide, 45% architectural, 55% special purpose for PPG, were more weighted to the special-purpose coatings, as so the aerospace, automotive OEM, automotive refinish, general industrial, protective and marine and packaging some 70%. Architectural for us is about 30% of our sales mix. And you can see in all of our markets, we are either 1, 2 or 3 globally, and 42% of our businesses have the #1 global position, 28% at #2 position, so you can see some 70% of our businesses are either 1 or 2 on a global basis.

If you look at the coatings markets in terms of the overall importance to PPG's portfolio, you can see that in the last 10 years, we have grown our coatings and optical business from about $5 billion in an overall portfolio of a little over $8 billion to now a 70% -- or 81%, rather, waiting in a portfolio of $13.5 billion. So we have more than doubled the size of our coatings and specialty businesses and increased the weighting over this last 8 or 9 years.

Our business portfolio, this is another snapshot. As you look here on the left, decreasing the weight in importance of our glass businesses, and our Commodity Chemical businesses with all the growth in terms of relative size and sales coming in our Coatings and the Optical and Specialty Materials business. You can see that the growth rates on the right, we have for these coatings and specialty businesses CAGR of 9% over the last 6 years. So we're getting very good organic growth out of these businesses as well as opportunities to continue to consolidate the industry. These businesses are managed at PPG on a global basis. You can see the emerging markets on the left, we have a 22% CAGR over the last 6 years. We're going to have another excellent year in 2011 in terms of our emerging market presence. And you can see now, emerging markets make up 35% of our coatings and specialty portfolio. So this is excellent growth, and we positioned ourselves, we think, in markets that are continuing to grow as we move into this phase of the economic expansion.

Global -- PPG's global presence. If you look at our acquisitions that have primarily been in our coatings businesses, some 60% were expanding into new regions; 15% expanding into new markets and only 25% have been building on strengths that we already had either in markets or regions. So some 75% of the acquired businesses resulted in expansions in either new markets or new regions. We've listed some of the key acquisitions there on the right. And here, if we look at a snapshot of 2001 versus 2010, emerging regions have gone from just 8% of our global sales to now 26%. So I think we've really gone where the growth is. We haven't gone, I think, to make -- because it's any easier to do this, but we've gone with the determination and a continued focus on execution in all of these markets. And as we talked in the past, these are profitable expansions for PPG, and our global profitability in businesses like Coatings are equivalent or, in some cases, better in Asia Pacific than they are in our traditional markets here in North America or in Europe.

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