Jan 17, 2008
Executives
Vince Morales – Vice President, Investor Relations Charles E. Bunch – Chairman and Chief Executive Officer William H.
Hernandez – Senior Vice President and Chief Financial Officer David B. Navikas – Vice President and Controller
Analysts
Frank Mitsch - BB&T Capital Markets Jim Brown - Mirage Research David Begleiter - Deutsche Bank Kevin McCarthy -Banc of America Gregg Goodnight – UBS P.J. Juvekar - Citi Don Carson - Merrill Lynch Sergey Vasnetsov - Lehman Brothers John Roberts - Buckingham Research Bob Goldberg - Scopus Asset Management
Operator
(Operator Instructions) Good day ladies and gentlemen, and welcome to the fourth quarter 2007 PPG Industries earnings conference call. My name is Stacey and I will be your moderator for today.
At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of the conference.
(Operator Instructions) I would now like to turn the presentation over to your host for today, Mr. Vince Morales, Vice President of Investor Relations for PPG Industries.
Vince Morales
Good morning. My name is Vince Morales, Vice President of Investor Relations for PPG Industries and I would like to welcome you to PPG’s 2007 fourth quarter and full year financial commentary.
Joining me on our call today is Chuck Bunch, Chairman and CEO; and Bill Hernandez, Senior Vice President and Chief Financial Officer. [Inaudible] supporting today’s briefing may be accessed through our investor center on the PPG website at www.ppg.com.
Turning to slide number two, please note that parts of today’s presentation contain forward-looking statements reflecting the company’s current view about future events and their potential effect on operating and financial performance. These statements involve risks and uncertainties that could affect the company’s operations and financial results as discussed in PPG Industries filings with the SEC and I would refer you to the Safe Harbor Statement therein.
Now if you turn to slide number three, let me introduce PPG’s Chairman and CEO, Chuck Bunch.
Charles Bunch
Thank you, Vince. Welcome everyone and thank you for joining us on today’s call.
I will make a few opening remarks, then Bill Hernandez will review our fourth quarter and full year financial performance. I will then highlight the accomplishments of some of our businesses, discuss several strategic achievements, and provide our current perspectives on 2008.
Regarding our fourth quarter, we are proud of our financial performance and our growth in the face of a difficult economic environment. In the quarter we posted our best organic volume results in three years with growth above 5%.
Bill and I will comment on a few of our actions that allowed us to excel in the fourth quarter and for the full year in just a few moments. However, before we do that let me just say that for 2007, while we did perform well our financial results are just one measurement of our success.
Just as our past strategic actions paved the way for a successful 2007, during this past year we took additional, even more decisive steps including the SigmaKalon acquisition that we expect will benefit the company for years to come. Here are just a few of the key 2007 accomplishments you will hear about in today’s call.
We delivered meaningful growth in sales and earnings and did so by successfully executing in all our businesses. This execution was even more critical this past year given the economic back drop that was a major contributor leading to our strong financial performance.
Next, we continued to significantly grow the core business segments of coatings and optical and specialty materials. Which combined, grew by 17%.
Also exiting 2007, these core segments approached 80% of our segment sales and earnings. Also of significant importance, we again rewarded our shareholders with two dividend increases during the past year.
Strategically during the year we took several decisive steps to shape the company’s future. Following up on our dozen or so acquisitions in 2006, we completed several additional coatings acquisitions in 2007 which further extended our global footprint.
We truly accelerated our transformation by acquiring SigmaKalon, a transaction we finalized on January 2, 2008. We expect this acquisition to grow our coating sales by an additional 40% in 2008 versus 2007.
And will provide PPG with one of the broadest geographic reaches of any coatings company in the world. In 2008 less than 50% of our segment sales will be in the United States and Canada, down from the 70% we reported at the end of 2006.
We also made decisions to divest our automotive glass and services, and fine chemicals businesses as we transform our portfolio. We completed the sale of the fine chemicals business in the fourth quarter.
And while our automotive glass business sale was not finalized as we had expected our intent remains to divest this business in 2008. These were just a few highlights from this past year and we will review some additional details throughout the call.
Before turning it over to Bill, let me reiterate that in 2007, we delivered strong financial performance, and of equal importance made considerable progress in shaping our company’s future. And now if you would please go to slide number four, here is Bill Hernandez.
William H. Hernandez
Thanks, Chuck. Let me review a few financial highlights.
For the fourth quarter and full year, we achieved new, all-time sales records. Our fourth quarter segment sales grew by 15%, with organic volume growth the largest contributor.
Our full year results are up about 14%, also due to solid organic growth as well as the performance of our acquisitions and currency. Fourth quarter earnings per share from continuing operations improved by 30% versus the prior year and were a new all time fourth quarter record.
As a reminder our earnings per share was up about 16% in the third quarter, so we have continued to perform well even in today’s slowing economy. Our full year earnings per share were also an all time record for the company.
For the full year, we again generated $1 billion of cash from operations. And during the year we raised our dividend twice, making 2007 the 36th consecutive year in which we increased our shareholder payments.
We are obviously very please with these overall results. But equally important is the fact that several of our year-over-year financial comparisons have become more positive throughout the year despite a more challenging economic backdrop.
These improving trends provide us with measurable proof of both the soundness of our strategies and the extent to which we have successfully implemented them. Now let me review some of the details.
Our fourth quarter and full year sales results are illustrated on slide number five. As I mentioned, our overall sales increased 15% to a new all time fourth quarter record.
Each business segment delivered sales growth of at least 10%, with our organic line growth leading the way. We will review some additional segment details later.
For the full year, we grew sales by about 14% to a new all time annual record. We once again achieved double-digit percentage growth in both of our coating segments, and our optical and specialty materials segments.
We also are pleased by the fact that we stretched even further our global presence, including continued rapid and profitable growth in the emerging regions. Now, as I mentioned, the largest factor in our fourth quarter sales increase was our organic volume growth.
As depicted on slide number six, our organic volume growth has continued to accelerate during the year despite a deceleration in the overall economy. Our fourth quarter volumes improved by over 5%, our best quarterly growth in three years.
These gains were broad-based, as not only did every single business segment improve but ten of our eleven individual business units posted positive volume growth. With the one remaining business unit posting essentially flat results.
From a geographic perspective, our results were also impressive with each region contributing nicely. Our volume growth in the United States and Canada was up 5%.
Also, we continue to grow rapidly in the emerging regions, with double-digit percentage growth in Asia and Latin America despite difficult comparison periods. Now let me discuss how we translated these results into earnings.
As [levels] on slide number seven, our reported fourth quarter earnings per share from continuing operations was $1.17, which includes a charge of $0.01 for a proposed asbestos settlement. This level represents a 30% increase over last year’s figure of $0.90, which included a $0.02 reduction for the asbestos settlement.
Supporting this improvement were higher operating earnings in each one of our business segments, which in total grew by 14%. Our earnings per share also benefited by $0.04 [store] in the quarter as a result of lower taxes stemming from the Canadian government reducing it’s federal corporate income tax rate.
Our total PPG earnings per share were $1.21 in the quarter, which included $0.04 stemming from our discontinued operations of fine chemicals and automotive glass and services. Let me discuss a few details regarding our strong business segment performance.
I will attempt to cover this quickly to leave sufficient time for questions. As slide eight shows, our performance coatings segment quarterly sales improved by 22%.
Once again with strong volume growth led by our aerospace and refinish businesses, and the impact from our Ratner and Barloworld acquisitions. Quarterly earnings improved to $143 million or 7%.
On a full year basis we grew the segment sales by just less than 25%, with about half relating to the acquisitions. While our 2007 acquisitions were not expected to be accretive in 2007, they will be in 2008.
Our segment earnings improved by 10% year-over-year due in part to the performance of our 2006 acquisitions. Some business unit highlights, our aerospace business volumes grew by 15% in the quarter and 13% for the full year, with the gains accelerating throughout the year, which certainly bodes well heading into 2008.
The overall North American architectural coatings market remained a challenge. However, as our results indicate we managed this end market very well, our full year volume supplying just 1%, and for each quarter within the year we posted fairly similar year-over-year volume results.
And both the quarter and the year, favorable pricing offset the slight volume decline. We expect an equally challenging environment in 2008 and we remain equally focused on execution.
Our automotive refinish business remains a key contributor with record performance all around. Our water-based product continues to perform very well in the marketplace and we are realizing continued growth in emerging regions.
We expect both of these positive factors to continue in 2008. Moving to industrial coatings on slide number nine, during the quarter our sales grew 10% supported by continued excellent gains in Europe and the emerging regions, which more than offset lower US volumes.
Volume growth in the quarter was 3% with automotive OEM coatings being the biggest contributor. For the full year sales grew 13% and earnings grew 6%.
As detailed on the chart, for the year we continue to broaden our geographic presence. Our US volumes were down mid-single digits, reflecting several slower industrial economic sectors.
However, our largest region, Europe grew by just under 20%. With just more than half of that due to currency and just less than half due to organic growth.
Also Asian sales continue to grow significantly, improving by more than 40%. For the full year our automotive OEM coatings business unit achieved 6% volume growth.
This growth was broad based with each region delivering positive results. Our footprint in this business is truly global in nature, with the United States and Canada representing only about one-third of the unit’s sales.
Also as detailed on the chart, in North America we once again delivered growth in this difficult market and outpaced the total North American automotive industry which declined. Similar to 2007, we expect the total global automotive market to grow once again in 2008.
And as our results continue to indicate this remains a growth platform for PPG. Our optical and specialty materials results are detailed on slide number ten.
Our fourth quarter sales grew by about 14%, mostly due to volume gains. One item of significant note is during the quarter our customers worked to deplete their inventory of our transition lenses Generation V product as Generation VI will be available in the United States on February 1st.
Earnings in the quarter were up 5% versus the prior year. However we recorded an additional $9 million of advertising costs versus last year.
Most of which was to drive volume growth initiatives in all regions including our Generation products. For the full year sales were up 14% in the segment and earnings improved by 8%.
We are very optimistic about 2008, given the launch of our new Generation into the marketplace. As illustrated on slide eleven, our commodity chemicals business realized 14% sales growth in the quarter aided by solid cost of sales and a healthy export market.
Earnings improved by more than 50% versus the prior year. Our full year sales reached an all time record for the business as ECU prices have remained relatively stable during the year and actually the past 18 months.
Full year earnings were down 15% but as detailed on the graph, they have trended above prior year results for the past two quarters. The recent trends carrying us into 2008 are that we announced a price increase mid-way through the fourth quarter and our fourth quarter capacity utilization was our second highest out of the past eight quarters.
Moving to slide twelve, our quarterly glass segment sales improved by 10% as our performance glazings and fiber glass businesses delivered at or just below 10% volume growth. Earnings also improved nicely growing 40%, due in large part to better fiber glass operating margins.
Full year sales were up 3%. While earnings were off 9%, primarily due to lower year-over-year earnings in the first half of the year predominately in performance glazings, reflecting a competitive end market.
As detailed on the chart, our year-over-year performance has improved throughout 2007. However, heading into 2008 these remain very competitive industries.
To summarize, we had an excellent fourth quarter with sales growing 15% and earnings per share growing 30%. For the full year we achieved combined sales growth of 17% in our coatings and optical and specialty materials segments.
And that growth was consistent and growing throughout the year. Let me conclude my comments with a discussion on cash.
Our long track record of consistently generating cash continues and as detailed on slide thirteen, our cash deployment remains balanced. For the year, we again generated $1 million in cash from operations, which includes a reduction of $100 million for voluntary US pension fund contribution.
We have remained consistent in our prioritized uses of cash with the overriding goals of strengthening our businesses, and providing sustainable benefits to our shareholders. We have balanced these uses in 2007, spending just under $600 million to strengthen our businesses and returning just over $600 million to shareholders.
To strengthen our businesses our 2007 organic capital spending, excluding acquisitions was about $350 million, within our perennial target of 3-4% of sales. And in terms of acquisitions to grow our businesses, we spent about $225 million in 2007.
PPG has paid uninterrupted dividends for 108 years and in 2007, we once again rewarded our shareholders by raising our dividends twice. We paid $335 million in dividends and this marked the 36th consecutive year of increasing dividend payments, a heritage that we are very proud to continue.
Also in 2007, we spent just about $275 million in repurchasing a little under 3.7 million shares of PPG stock. We currently have just below four million shares remaining on our current board authorized share repurchase program.
Remarkably after completing all of these activities, our year end cash balance was about $525 million, $75 million higher than the previous year. Now let me turn the call back over to Chuck.
Charles Bunch
Thanks, Bill. At our New York investor day in November, we talked about transforming PPG and several of the actions we are taking to accelerate this transformation.
One of our key objectives in transforming PPG has been to drive profitable organic growth. The two charts on slide 14 illustrate our 2007 results as they relate to this goal.
As you can see on the left chart, for each business segment we have delivered solid volume growth results. And as Bill described, our total results actually improved as the year progressed.
The chart on the right provides similar details by geography and for some of the specific business units that have either faced difficult market conditions, or where we received many questions from some of you in the equity markets. Bill discussed our growing aerospace results earlier and in regards to automotive OEM coatings, he also stated that we have continued to post positive results.
And we now have a five year trend of outperforming the US industry metrics. We have stated for a long time that the automotive OEM coatings business remains a growth platform for us.
And once again our US and global results provide measurable proof of that. Meanwhile despite a very challenging residential construction market, our North American architectural coatings and our performance glazings or architectural glass businesses have performed admirably due to our focus on operational excellence and a broad range of value added products and innovative customer relationships.
Geographically each major region has contributed nicely. Our ability to deliver this organic growth performance both in total and within the individual businesses is a direct result of our execution and leading technologies and services.
Slide 15 shows the results of our next strategic objective, which is to focus on the emerging regions. Our growth here this past year was substantial, with each of these regions growing by nearly 50%.
This performance is noteworthy because combined these regions are now a meaningful portion of our portfolio accounting for 20% of our total. And growth rates in these regions will likely remain well above the growth rates in more mature regions of the world.
On slide number 16, let me conclude our transformation update by discussing SigmaKalon. The acquisition of SigmaKalon provides us with additional earning stability and even more consistent and much higher on going cash flow.
It adds significantly to the core of our company and as detailed on the chart, enhances our overall global presence further minimizing the impact of any one region. Certainly in 2008 a major focus for the corporation will be the successful integration of SigmaKalon.
And even though the closing was just a few weeks ago, we are now fully engaged in the integration process. Like PPG, SigmaKalon also had a very successful 2007 and their results exceeded all of our projections.
Based on SigmaKalon 2007 financial results and PPG’s successful financing and currency activities for this transaction, we paid a multiple of less than nine times 2007 EBIDA to acquire this business. This is certainly a very reasonable price given the quality of these assets.
As previously announced, we are creating a separate reporting unit, architectural coatings EMEA for SigmaKalon’s architectural paint business in Europe, the Middle East, and Africa, which represents roughly three-quarters of the acquired sales. We are doing this so that everyone is able to measure the performance of the major business acquired in the largest acquisition in our company’s history.
In November, we also provided a variety of financial projections with admirably wide ranges since we had not yet closed on the transaction and did not have access to some of the detail financial information given we were still competitors. These ranges related to intangible amortization, interest cost, and acquisition related cost.
We don’t yet have any updated guidance on the one-time acquisition cost but will provide clear detail of these costs this year as we announce our quarterly earnings. Regarding the interest cost, we anticipate first quarter incremental interest will be around $40 million versus the fourth quarter of 2007.
We are currently using interim financing and permanent financing will be in place sometime in 2008. Regarding the non-cash intangible amortization, progress has been made in this complex area.
We now estimate that the amortization in the first quarter will be $20 million. This could be revised as our purchase accounting is finalized later this year, but we are not currently expecting any adjustments to be material.
Regarding the acquisition, I am happy to report that our integration process is off to a great start. This is an excellent business with strong managers and energized people.
And today more than ever, we are confident that this acquisition will provide on going benefits to PPG and its shareholders. Our execution and performance here is obviously one of our most significant tasks this year and will continue to be the focus of our future investor updates.
In summary, as you can see, 2007 was a milestone year for PPG financially and strategically. Our financial performance provided continued proof of our abilities to perform well and grow despite external challenges.
Strategically we made the most progress in any single year in the company’s history as we continued to position our company for success in today’s and tomorrow’s global economy. We have truly accelerated our transformation and positioned the company to be successful and reward shareholders for years to come.
As our performance in 2007 indicates, our past actions have us poised for continued success in 2008 despite the challenges in the economy as we enter the year. And now with the time remaining, we will take any questions that you may have.
Operator
(Operator Instructions) Your first question comes from the line of Frank Mitsch with BB&T Capital Markets, please proceed.
Frank Mitsch - BB&T Capital Markets
The transcript from this call, that I get to ask the very first question on the PPG conference call, this is a very special moment for me indeed and forgive me for choking up.
Charles Bunch
Welcome, Frank.
William H. Hernandez
Thanks, Frank.
Frank Mitsch - BB&T Capital Markets
As I listened to the commentary, it sounded as if you were putting together a thesis that things were accelerating for PPG as we progressed through the year in terms of the year-over-year comparisons, which obviously bodes well for the early part of ’08. Is that a fair takeaway?
And also, Bill, if you could provide some thoughts on the broader economic environment both domestically and internationally.
Charles Bunch
Thank you, Frank, this is Chuck Bunch. And thank you for being the historic first caller on this webcast.
And I would say that from an economic standpoint, the fourth quarter had a lot of the issues in our markets that we talked about dealing with in 2008. We’ve been dealing with a weaker residential construction market here in the US all year and certainly continued in the fourth quarter of ’07.
The automotive market also in the fourth quarter of ’07 was weaker. But I think that you saw the strength that we have with our geographic and diversity, and our mix of businesses that despite weaknesses in some of our end markets, especially here in the US, we still had a very solid quarter.
And we think some of those issues will be with us at least in the first half of 2008, especially here in the US. But overall, we do not see signs of weakness outside of the US at this point.
And I will let Bill also respond and what he’s seeing.
William H. Hernandez
I think that Chuck is right about that. As we look at it, we have seen a little bit of a soft patch here in the US, maybe for the first half of the year.
I think that we mentioned a year ago that we saw and felt that a soft patch was coming, and it is here now. In our opinion, we have really been navigating through some very choppy waters for the past six months and there is still some ahead.
But we think that the economy is doing quite well and it is absorbing these issues and it is still growing. There are still some lagging effects to be felt there, no doubt about it.
And I think that there is a great deal of pessimism baked into some people’s thoughts that may be overdone. So, we are not predicting a recession and we hope that we are right.
And if we are wrong, we can act accordingly and quickly. I think that we have just been looking at some of the specific markets.
I think in terms things like residential construction, we don’t see any meaningful change in the market to the earliest at the later half of this year, especially given some of the inventory overhang that’s out there. Now relative to commercial construction and you know that that is a bigger part for us.
In this segment continues to perform real well but we do expect a leveling off of that here in the first half. But that is a pretty good activity to level.
And turning to Europe, we think that the European economy is going to continue outpacing the US growth, primarily in the [inaudible] in support of the continued need is a question of Europe product that is going into Eastern Europe and China. And as we talked about, our footprint has really changed and emphasizing much more of a balanced worldwide distribution out there.
Again I think that is helping us too in terms of just general economics. If you look at the automotive market, mind we have only about a third of our automotive sales are in the US market and that being said, we have seen over the past several years and continue to expect a slight decline here in automotive production.
But as with the past five or six years we soon anticipate that we will once again outperform the overall market statistics. The important thing that we think is globally automotive production will continue to grow.
And we think it will be roughly in the 5% kind of growth market, growth arena.
Frank Mitsch - BB&T Capital Markets
Terrific, and then lastly, Chuck or Bill, what is your best guess in terms of timing as to when you would cash the $25 million break up fee check from Platinum Equity? And in terms of timing what would be your expectation in terms of announcing the sale of the Auto Glass business?
Charles Bunch
Right now, Frank, as you may know we have filed a countersuit against Platinum Equity. We are vigorously pursuing our rights under the contract, and as you know, we are a very experienced buyer and seller.
Nothing like this has ever happened in any of the transactions that we have done so we will intend to vigorously pursue that. The course of the legal actions and the timing, I would say is unclear.
We’ll have to depend on the legal system to do that. We still, however, intend to pursue a divestiture of this business.
We are evaluating our process now. And I would say that in the next few months that we will be back to you to tell you what we think that the prospective timing would be on any transaction for our glass business.
Frank Mitsch - BB&T Capital Markets
All right terrific, thanks guys.
Charles Bunch
Thank you.
William H. Hernandez
Before we take the next question, let me also introduce for the Q&A session, Dave Navikas, our Vice President and Controller.
Operator
Your next question comes from the line of Jim Brown - Mirage Research.
Jim Brown - Mirage Research
A couple of questions regarding guidance. What are your top three anticipated gains of your PPG’s lean and continuous improvement programs?
Vince Morales
What was your question again? Sorry, we had problem hearing you.
Jim Brown - Mirage Research
What are your top three anticipated gains of your continuous and lean improvement programs?
Charles Bunch
The top three gains would be continued improvement in terms of our labor productivity, in terms of our material usage, so that we would see continued declines in our scrap rate improvements in yield and also the first run quality that we deliver to our customers. I would say those were the three largest gains we would expect from our quality program.
Jim Brown - Mirage Research
There are a lot of world-class manufacturers similar to yours that are now seeking real-time visibility into performance across the entire plant network. How are you guys addressing this issue and what kind of concerns do you have regarding this?
Charles Bunch
I am not sure I followed your question.
Jim Brown - Mirage Research
Regarding all your plants, how are you guys looking at the real-time visibility regarding your plants in terms of capacity constraints, labor savings, over time, to help improve throughput across your plant?
Charles Bunch
You mean we would make this proprietary information available in our presentations? Is that your question?
Jim Brown - Mirage Research
No, I am just asking in general.
Charles Bunch
We have visibility throughout our organization. We have metrics and goals and objectives of which all of our executives, our teams, every associate would have a set of goals that would remain completely transparent and visible to them through our organization and would be measured against.
William Hernandez
Each of our businesses are very different, one from the other, so I don’t think we can give you a single answer for the overall company.
Jim Brown - Mirage Research
Are you guys making strides now to shorten your manufacturing cycle?
William Hernandez
We’ve done that over the years. One of, I think, key characteristics of PPG as we have discussed for years is the fact that when we manufacture our products on first run capability and the ability to shorten the production cycle very significantly over the years has actually been a hallmark of the company.
Jim Brown - Mirage Research
So you guys are real happy right now with your manufacturing cycles?
Charles Bunch
Yes.
Operator
Your next question comes from David Begleiter - Deutsche Bank.
David Begleiter - Deutsche Bank
I know it has only been two weeks of owning this company, but any further update on synergy savings? You gave a range back in November.
Any further clarity or further upside?
Charles Bunch
We’re having a little bit of a lag, could you identify yourself and repeat the question again please?
David Begleiter - Deutsche Bank
Yes, this is Dave Begleiter of Deutsche Bank.
Charles Bunch
Hi Dave. How are you doing?
David Begleiter - Deutsche Bank
Good, thank you. Just looking at SigmaKalon, any further update on synergy targets within that range you gave back in November having owned it for a short two weeks here?
Charles Bunch
No, we don’t have an update on the synergy targets. We certainly feel still very comfortable with the range, but as you know, that transaction only closed two weeks ago so we are hard at it right now, we’re still comfortable that the integration is going to produce the kinds of synergies that we talked about but we don’t have an update for you at this time.
David Begleiter - Deutsche Bank
Bill, what was SigmaKalon’s EBITDA for 2007, do you have a hard number yet?
William Hernandez
We have a hard number. I don’t think we disclosed that, but it’s close to $250 million.
Vince Morales
If you do the math we paid under nine times 2007 EBITDA, David.
William Hernandez
8.8 times EBITDA for 2007, that was our hold.
David Begleiter - Deutsche Bank
Bill, just on the permanent financing, where do you stand and what types of rates are you looking at today?
William Hernandez
We are still anticipating the rate being somewhere between 5% and 6% for the permanent financing. As you know, we have bridge financing debt that can extend through the end of the year 2008 but we are starting to see a little bit more settling in there in the market both in Europe and the US.
So if all things go well, we’ll probably be going out for permanent financing after we finalize and have our audited statements for the end of the year. So probably early part of March is what we are anticipating unless we see a real advantage to delaying that because of our future interest rates, or moving that forward, but right now I think it should be accomplished in the first quarter.
Operator
Your next question comes from Kevin McCarthy -Banc of America.
Kevin McCarthy -Banc of America
Can you comment on your outlook for raw material costs in 2008, given the energy complex and solvents, soda, ash, et cetera and some of your other key inputs?
Charles Bunch
We think there will be a little more pressure on raw materials this year. We kept the overall raw material bill around 2% last year in terms of inflation this year.
Our range is probably the low end would be 2%, maybe 2% to 4% although we do note that oil is back down to $90. Natural gas here in the U.S.
has been stable and you haven’t seen as much pressure outside of the U.S. because of the strength of the currencies with the price of oil.
So, we are hopeful that as the year progresses that we’re going to be able to certainly keep it in the lower end of that range but we are preparing right now for a worst case scenario. We’re discussing our own pricing actions and initiatives with customers and we recognized that if the inflationary environment accelerates, then we’re going to have to deal aggressively with it.
Kevin McCarthy -Banc of America
Okay. Then just a follow-up on SigmaKalon, Chuck, you referenced a multiple of 8.8; it seems as though that’s coming in better than you would have anticipated.
Can you comment on the variances perhaps versus your prior expectations and also elaborate on your expectations for the architectural coatings market in Europe here in 2008?
Charles Bunch
Well the biggest single contributor to the improvement -- and we have been discussing this throughout the process -- was the performance of the SigmaKalon businesses over the course of 2007. We have obviously a window into the market through our own businesses in Europe and we saw that there was continuing strength.
The SigmaKalon management team was very confident that they would be able to exceed the forecast. They had a very strong year throughout the year in the architectural or decorative segment.
We also were observing the growth and improvement in the marine and protective coating segment, because we are participants there as well. We thought that they would be able to improve those results and so the single biggest component of the improvement was the results of SigmaKalon.
However, we were also able, through our successful financial and currency hedging and also improvement in the overall balance sheet with a record date at SigmaKalon to improve the multiple to what is now, at 8.8, is something that we feel is a very good price, especially considering the quality of the assets here at SigmaKalon. Those were the principal drivers of the improvement in the multiple to EBITDA.
Kevin McCarthy -Banc of America
Bill, the other income line came in above the trend. Can you comment on the components of other income in the quarter and the magnitude of any gain on sale that may be embedded in that number?
Vince Morales
Kevin, I think for the quarter we were a little bit favorable in other income; a couple of items where foreign currencies included in there. We also have embedded in there, we had a couple of losses last year that as you know, we always put those in a number.
We had a casualty fire and also legal settlement last year. We also had a gain from the AZDEL sale we announced.
Those four collectively accounted for the majority of the difference. But on a year-to-date basis I think the biggest difference, I think we were off about $220 million year-to-date full year over full year, $697 million of that was environmental.
So for the full year the total number was fairly even year over year.
Operator
Your next question comes from Gregg Goodnight - UBS.
Gregg Goodnight - UBS
I noticed that your margins in the performance and applied coatings weren’t down very much, despite a lot of raw material increases. You mentioned pricing increases.
Could you please rationalize why your margins weren’t down more in a pretty tough pricing or cost environment?
Charles Bunch
In that business segment; we have really four sub-segments now. We have a refinish business.
This is automotive refinished coatings, which is a very stable margin business, it continues to do very well both in terms of growth and we also have been able to offset the inflationary pressure with pricing in that market. Aerospace had an excellent year so we have very good margins in aerospace; in fact some improvement.
The other sub-segment in there is marine and performance coatings and that is also a segment that is improving. The one other area where we had more margin pressure was in our architectural business, this was a result of (1) the weaker environment, especially here in the U.S.
and then some of the purchase accounting on the acquisitions that we made. We made two acquisitions of significance in this segment in ’07.
That was the Renner acquisition in Brazil and Barloworld in Australia. So you saw some pressure on margins from those acquisitions and the overall market conditions in the U.S.
but they were offset largely by continued strength in the other segments.
Gregg Goodnight - UBS
It seems like an improved mix story.
William Hernandez
Actually aerospace has continued to improve year-over-year for the last few months.
Gregg Goodnight - UBS
What are your plans for share repurchases in ’08? Is this going to depend upon the timing of the glass sale or how much are you going to repurchase, do you think?
William Hernandez
Really, most of the repurchases we did in 2007 were in the first half of the year. If you look at how its laid out; once we knew we were buying SigmaKalon, we really scaled back the amount of share repurchases.
I think really the emphasis is going to be here in the short term paying off some of the outstanding debt that we have out there and share repurchases probably a much smaller percentage going forward, at least for 2008.
Gregg Goodnight - UBS
If you complete your glass sale by midyear, will you relook at the possibility of repurchasing shares?
William Hernandez
I don’t think that will have much of an effect on it. We’ll probably just continue paying down debt, that will probably be the primary emphasis.
We may buy some shares back. Depending on if we see a major disruption out there in terms of what’s going on in the market, but that is not our intent at the moment.
Gregg Goodnight - UBS
Your tax rate in ’09, you said maybe 25% to 29%. Have you put a finer point on that?
William Hernandez
Gregg that 25% to 29% was SigmaKalon’s tax range on their earnings. Our full year rate next year will be likely around 31%.
Operator
Your next question comes from P.J. Juvekar - Citi.
P.J. Juvekar - Citi
We all know that housing has slowed down. In your numbers and now that you have access to Sigma’s books, do you see any spillover into industrial or commercial construction so far?
Vince Morales
You are talking about Europe?
P.J. Juvekar - Citi
I am talking about Europe and US.
Charles Bunch
Well right now the fallout here in the U.S. is principally in new home residential.
Obviously we have seen the renovation market in residential flat now, and commercial has held up. We have not seen a decline here in the U.S.
in commercial construction. For our visibility, which would be the first half of this year, we continue to feel that the commercial construction market in the U.S.
will remain healthy. Now there are predictions, potentially late in 2008 or next year you could see some softness but right now in commercial construction we haven’t seen that.
We have seen, however, continued weakness on the new home residential. In SigmaKalon, I would say the visibility there in terms of their architectural markets they are primarily on the coating side, commercial, and what we would call maintenance and renovation.
Those markets are still solid. The new home residential market in Europe has principally been in Spain where SigmaKalon is not a participant.
So right now we have not seen any weakness on the markets for architectural or decorative in SigmaKalon. On the industrial side, in Europe we are still seeing good growth in automotive, which is coming from our PPG indicators.
On the industrial side, there was a little weakness in Europe in the fourth quarter in what we would call the CO/EX market, coil and extrusion. Some of that you saw that there was some end of year imports into Europe from China contributing to some of the weakness, so that’s a market that we’re going to have to continue to watch in Europe and that market has been a little weaker here in the U.S.
as well because its tied both to residential and a little bit of commercial in that coil and extrusion market, and that’s been weaker here as well in the U.S.
P.J. Juvekar - Citi
That’s a good overview. If I may ask one more question.
On the architectural side, you sell through big boxes and through your own company-owned stores. Did your stores outperform the big boxes in terms of volume growth?
Thank you.
Charles Bunch
No, they didn’t. Our stores, where we have I would say the PPG store network has more exposure to new home residential and to some markets that were more affected regionally than the national markets.
So our same-store sales growth in our store network under performed versus the national accounts or the home centers, which are more tied to, as you know, the renovation and maintenance market.
P.J. Juvekar - Citi
Can you quantify that a little bit in terms of how much?
Charles Bunch
I would say that we saw same store-sales growth that approached minus 5% on a year-over-year basis. I would say the performance of, if you looked at Home Depot or Lowe’s, I think they had negative same-store sales growth but it was less than that 5% number.
Operator
Your next question comes from Don Carson - Merrill Lynch.
Don Carson - Merrill Lynch
A couple of clarifications on SigmaKalon. Chuck, the slide you presented back in November you were talking about $50 million to $150 million in amortization when you gave that pretty wide range of what the EPS impact would be of SigmaKalon in ’08.
So you are basically narrowing that down to about $80 million on a full year basis, is that the takeaway we should have?
Charles Bunch
That’s correct.
Don Carson - Merrill Lynch
But you are not in a position yet to narrow down that integration and purchase accounting line then?
Charles Bunch
Not yet.
Don Carson - Merrill Lynch
Bill, if you look at your base business, I know you guys don’t give out formal guidance, but based on your economic outlook of slowdown but no recession in the U.S., what kind of volume growth do you see in your business ex-SigmaKalon this year? I would presume that if volumes are growing, given your traditional excellence at productivity, you would expect base earnings ex-SigmaKalon to be up in 2008 versus 2007?
William Hernandez
That’s true, Don. As we said, we are probably in the soft patch here earlier part of the year, but we have it built into our process continued volume growth albeit not maybe at the rapid rate as the last couple years.
We do have productivity baked in too, so your assumption is correct.
Don Carson - Merrill Lynch
What’s you outlook on the chlor-alkali business? Obviously caustic pricing is very robust, I am somewhat surprised that you ran at such a higher rate in the fourth quarter given the reduced demand for chlorine.
What’s your outlook for chlor-alkali in 2008 in terms of what operating rate you might run at and year-over-year improvement in ECU price and margin?
Charles Bunch
We have been really pleased with the performance of the business in the fourth quarter. The chlorine side of the molecule is a little weaker, and that’s of course tied to PVC.
Caustic, as you know, very strong, the $75 price increase on caustic appears to be fully implemented. We have the alumina contract that settled here in the first half at around that same kind of increase.
So we are at a very attractive level for the aluminum contract, which will hold for the first six months and so we think that caustic is certainly going to hold up its side of the ECU. We were a little more active in terms of the export market and there we’re being helped by the weakness of the dollar.
That both improves our competitiveness and it makes it more difficult for potential exporters into the U.S. So that was a little bit of the flywheel here in the four quarter to help offset some of the domestic weakness of the PVC business.
So we’re relatively optimistic about chlor-alkali. This is in the phase of, as you know, the much talked about Shintech expansion should come on at some point in the second quarter.
Now we have seen maybe a small impact on the chlorine side but on caustic there has not been a ripple. So at this point, we think that the market looks solid for the next couple of quarters here and we feel pretty good about it.
Operator
Your next question comes from Sergey Vasnetsov - Lehman Brothers.
Sergey Vasnetsov - Lehman Brothers
We almost went through the conference call without the chlor-alkali question, so I thought I was listening to the Specialty Coatings Company conference call. Don would not allow us to escape without that, so that’s good.
Just a few remaining questions, one is on glass business. You have shown very strong volume gains versus last year and also about a 3% gain on currency.
Given that the only business I know that you are dealing outside the U.S. would be essentially for selling Mercedes windshield screens, is that’s the driver or there were some other product lines you were exporting out of US.
Charles Bunch
No, if you look at the two remaining businesses that are in this segment, one performance glazings or flat glass, that’s primarily a domestic business but the other business, which is fiberglass, is a global business. We have benefited there from a global footprint and strong markets in a couple of the product lines, one being what we called the direct draw business, which is the product that’s going into these wind energy markets or also the pipe markets that are going into energy and infrastructure.
So actually our fiberglass business, which had experienced some very difficult times earlier this decade, is on a strong rebound. So we still have great performance out of our PFG joint venture that’s into the electronics chain but our new join venture in China with SJJ, doing well in that market, and also these infrastructure plays are helping our fiberglass business.
We had the best performance in our fiberglass business in ‘07 in seven years and we’re looking for further improvement in ‘08.
Sergey Vasnetsov - Lehman Brothers
Opticals, this business has been growing pretty steadily, it’s about 8% to 10% and now you’re rolling out the gen 6 material. What kind of volume trends do you hope to achieve in ‘08 in optical?
Charles Bunch
We hope to again have another high single-digit growth rate for our transitions business. We think that this gen 6 especially here in the first several quarters of ‘08 will drive that and we’re still seeing very good growth in this business outside of the U.S.
I would say we’re looking for high single-digit growth out of that optical and transitions business.
Operator
Your next question comes from John Roberts - Buckingham Research.
John Roberts - Buckingham Research
Bill, in Europe, relatively good economics here, and there is a lot of debate on whether the emerging markets can hold up should the Western economies decline. I know you’re not foresting a recession but I think exports are still one-third of China’s GDP, for example.
So if we did go into a U.S. or European downturn, would you expect your relatively high emerging market growth to continue or do you think that would moderate a lot?
William Hernandez
It’ll continue but you have to expect some moderation. I think if you just look at what’s going on in China, the number of levers that the Chinese government is pulling on things, going from the financial system to changing their export tax credits to discouragement of energy intensive businesses.
They are seeking their own way. I do think it’s quite little bit unclear what the total impact would be, but it could have a moderating effect, no doubt.
John Roberts - Buckingham Research
Do you think it would be a lot less? Previously we had kind of a coordinated downturn globally; when we sneeze here they catch a cold there.
William Hernandez
No I don’t think we’ll see that at all. I think they are little more independent than they ever were before.
If we look at an awful lot of what our sales are in China they are for their own use. The major inroads we made there with automotive, there are plenty for their own use, the same with refinished, the same with aerospace.
The maintenance part of that; we think it is becoming a little more dislocated in terms of a ripple effect.
John Roberts - Buckingham Research
Thank you.
Operator
Your final question comes from line of Bob Goldberg - Scopus Asset Management. Please proceed.
Bob Goldberg - Scopus Asset Management
Two questions, one is really more of a detailed type of question. I was just curious if you were familiar with Sigma’s seasonality, wondering how much of the business is 2Q and 3Q versus 1Q and 4Q.
Charles Bunch
Actually the first quarter is one of the toughest quarters if you looked at it. I think they are probably roughly 10% to 15% in the first quarter in earnings.
You see they have a much bigger impact in the second and third quarter. I think if you add those together and you are going to get 65%, 70% of the total earnings for the year and roughly around 20% for the fourth quarter.
You can’t expect the first quarter probably to be the lightest quarter for them in the year.
Bob Goldberg - Scopus Asset Management
In terms of the optical business, I am just curious about what you think about the economic sensitivity/ That business has performed so strongly and you are expecting strong growth in ‘08. I am just wondering how sensitive that business would be if we did have a more serious global slowdown?
Charles Bunch
I think the optical business, I think some aspects of the market are tied to consumer spending but it is very much also linked to the healthcare industry. I think you have a blend that makes this market more stable than a complete consumer discretionary item.
I think that even if there is some weakness on the consumer side, the healthcare side, we’ll stabilize that and then we’ll have the growth opportunities with the new generation. This year which we think will generate a lot of interest in the brand, we are going to aggressively promote this new advertising campaign and the like; we did that last year and really reestablished a very good momentum for the brand.
We are confident even in a softer consumer market that we can still deliver these kinds of results this year.
Vince Morales
Thanks to all of you for listening in and participating. If you have further questions, feel free to give me a call, Vince Morales.
My phone number is attached into the appendix of the slides accompanying today’s presentation. Thank you very much.