Apr 15, 2010
Executives
Charles Bunch – CEO Robert Dellinger – SVP & CFO David Navikas – VP & Controller Vincent Morales – VP IR
Analysts
PJ Juvekar – Citi Kevin McCarthy – Merrill Lynch Robert Koort - Goldman Sachs Frank Mitsch - BB&T Capital Markets James Sheehan – Deutsche Bank Ivan Marcuse – KeyBanc Don Carson – UBS Dmitry Silversteyn - Longbow Research John Roberts – Buckingham Research John McNulty – Credit Suisse
Presentation
Operator
Good day ladies and gentlemen, and welcome to the first quarter 2010 PPG Industries earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the presentation over to your host for today’s conference, Mr. Vince Morales, Vice President Investor Relations.
Vincent Morales
Hello. This is Vince Morales, Vice President of Investor Relations for PPG Industries.
Welcome to PPG's first quarter 2010 financial teleconference. Joining me on the call today from PPG is Charles Bunch, Chairman of the Board and Chief Executive Officer; Robert Dellinger, Senior Vice President Finance and Chief Financial Officer; and David Navikas, Vice President and Controller.
Our comments relate to the financial information released on Thursday, April 15, 2010. Visuals supporting this briefing may be accessed through the Investor Center on the PPG website at www.ppg.com.
As shown on slide number two, our prepared remarks and comments made in the subsequent question-and-answer session may contain forward-looking statements reflecting the company's current view about future events and their potential affect on PPG's operating and financial performance. These statements involve risks and uncertainties that could affect the company's operations and financial results and, as discussed in PPG Industries’ filings with the SEC, may cause actual results to differ from such forward-looking statements.
The company is under no obligation to provide subsequent updates on these forward-looking statements. This presentation also contains certain non-GAAP financial measures.
Pursuant to the requirements of Regulation G, the company has provided in the Appendix of the presentation materials reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. The agenda for today's discussion is noted on slide number three.
And now let me introduce PPG’s Chairman and CEO, Charles Bunch, who will provide the opening remarks.
Charles Bunch
Thank you Vince, and welcome everyone. This afternoon I will provide a brief overview of our first quarter performance.
Robert Dellinger will review details of our financial results. I will make a few closing remarks and then we will take questions.
Throughout the first quarter we continued to experience a moderate recovery in several of the global end use markets that we serve. This recovery combined with lower costs resulting from our restructuring initiatives the past 18 months, positively impacted our financial results in comparison with what was a very low earnings level in last year’s first quarter.
Higher year over year sales volumes were most evident in our industrial coatings segment which benefited from improving global automotive builds and gains in several general industrial applications. As evidence of the operating leverage we are experiencing the industrial coatings segment posted its highest first quarter earnings in 10 years despite industry activity levels, that while improving, still remain well below historical levels.
Also, our optical and specialty materials segment delivered double-digit percentage sales growth versus last year’s period and record first quarter earnings. Several businesses in our performance coatings segment and our architectural coatings EMEA segment experienced some weather related sales softness early in the quarter but rebounded strongly easily exceeding our internal projections for March.
The commodity chemicals segment remained at trough earnings levels as we experienced higher input and maintenance costs versus the fourth quarter of 2009. However caustic demand has improved and we anticipate this segment will be solidly profitable in the second quarter as we implement previously announced price increases.
Our glass segment improved versus a significant loss last year as higher industrial activity benefited our fiberglass business. However we still experienced a slight loss in the quarter.
Reviewing our results by region, our investments over the past several years to expand our presence in the emerging regions, such as Asia Pacific, continue to pay off. Asia Pacific remained our star performer with 25% year over year volume growth and we realized first quarter sales and earnings records in that region.
We also realized a high growth rate in Latin America. North America benefited from a modest improvement in activity with strong year over year gains in industrial end use markets including automotive OEM.
The overall construction markets here however continue to remain weak. Volumes in Europe lagged that of the other major regions due to a slower economic recovery in that region.
Lastly in general we believe our improved sales pace is consistent with improving demand levels and we are not aware of any notable inventory building in most of our end use markets. Overall for the quarter I am very pleased that the difficult actions we took and all the hard work and effort we expended over the past 18 months throughout the recession to properly position the company for a recovery is now beginning to yield measurable benefits.
Also several of our businesses that have been slower to recover such as commodity chemicals are beginning to exhibit signs of further improvement and that combined with our continued cost reduction and execution focus provides us with a clear path for continued earnings recovery. Now, I’ll turn the call over to Robert to review our financial performance for the quarter.
Robert Dellinger
Thanks Charles, let me offer a few comments as detailed on our first quarter financial recap slide. Our sales have improved from last year’s lows but we still remain well below pre-recession demand levels in many businesses.
We have been and will remain diligent in managing our costs. This is apparent if you look at our margin leverage from our incremental sales.
In aggregate the coatings and optical and specialty material segments realized a greater than 80% earnings margin on the higher sales level, excluding favorable currency conversion impacts. We have experienced modest coatings raw material inflation in the low single-digit percent range with notably different inflation rates by region and business.
We anticipate the inflation rate will be higher in the second quarter reflecting improved global demand and some transitory supply issues. We have and expect to continue to offset this inflation with selling prices and productivity.
Our blended natural gas costs both hedged and unhedged in the quarter was $6.50 per MMBTU which is up about $0.50 from the fourth quarter 2009 but down by approximately the same amount versus the prior year’s first quarter. Using recent price trends our blended unit price is expected to drop to between $5.00 and $5.50 in the second quarter.
Like many other US companies our reported earnings per share results include a negative non-reoccurring impact of $85 million after tax or $0.51 per share due to a tax law change stemming from the recently enacted US Healthcare legislation. We issued a press release on April 8th with the additional details on this matter.
And lastly our cash flow cash position and liquidity all remained very solid. We have moved away from the strong emphasis we placed on cash conservation last year to now identifying ways to deploy our cash in a balanced disciplined manner to drive earnings accretion.
And now I will review some details on the quarter. A year over year bridge of our first quarter sales is detailed on the next slide, along with some relevant trends.
First quarter sales improved about $340 million or 12% versus the first quarter of 2009 which was severely impacted by the global recession. Lower year over year pricing was primarily attributable to commodity chemicals coupled with lower energy surcharges in our glass and silica’s businesses.
Pricing in the remaining reporting segments was flat to higher year over year. Compared to the last year, currency translation added about $150 million to our sales and about $15 million to earnings.
As illustrated on the bottom left chart the value of the euro is higher against the dollar in comparison with last year’s first quarter which was depressed because of the recession. However the euro has declined versus the fourth quarter of last year.
Based on the recent exchange rates we expect currency to be a headwind in the second quarter. Volumes improved by over $300 million with the largest increases driven by higher global industrial demand and strong growth in Asia Pacific, particularly in China and Korea.
We are pleased with the increase but recognize that it is in comparison to what were very low activity levels last year. Further details on our sales are contained on the next slide.
As illustrated on the chart exhibiting our volume trends by region, Asia Pacific delivered tremendous volume growth of 25% year over year led by our industrial coatings businesses in the region. The momentum in that region has carried forward from last year and we expect the end use markets that we serve to remain robust.
Our United States and Canada volumes also experienced solid growth driven again by higher industrial activity along with improving commodity chemical demand. Our businesses selling into the construction markets were flat to negative with the prior year with declines in commercial construction a major continuing factor.
We anticipate similar improvements in industrial demand going into the second quarter although outside a favorable seasonable trends, we do not expect a meaningful change in the pace of the construction markets. Volumes in Europe were up modestly versus the prior year’s quarter yet the region lags the other major global regions in pace of economic recovery.
Latin America which is our smallest region experienced solid industrial gains as well. The chart on the right demonstrates that while our overall volumes have recovered somewhat from last year’s low levels they still remain between 10% and 15% below the pre-recession levels of early 2008.
As a result we still need further economic recovery to close this gap and we are positioned to fully benefit from improving volumes based on our lower cost structure. While I am focused on our total volume performance I want to mention that our aggregate coatings and optical and specialty material segments had a similar sales volume decline from 2008, yet have delivered an earnings improvement approaching 10% over that same time period.
Our adjusted earnings per share is presented on the next slide, a reconciliation of these amounts to our reported earnings per share is included in the Appendix of today’s presentation materials which is available at the Investor Center on our website at www.ppg.com. In the quarter our adjusted earnings per share was $0.70 versus a $0.19 adjusted figure last year.
While we are pleased with our year over year improvement we are fully aware that we are still below historical earnings levels. A key contributor in our improvement was the higher sales volume.
Another major factor was our lower cost structure including the savings stemming from our restructuring actions. Lower commodity chemicals pricing served as a partial offset.
Our effective tax rate on adjusted earnings was 30% in the first quarter of 2010 and 33% in the first quarter of 2009. Moving now to review our individual business segments, let me start on the next slide with industrial coatings.
This segment continued its rapid return to pre-recession earnings levels. In the quarter sales grew 39% or about $250 million.
Earnings improved by $117 million from a $16 million loss in the prior year’s period. And our operating margin improved to 11.3%.
This earnings level was the highest in 10 years despite sales volumes in many end use markets that remained depressed versus pre-recession levels. Cost management, restructuring related cost savings and volume were all contributors to the earnings improvement.
However improved volumes was the largest factor. This segment which was our most impacted segment during the recession experienced the largest recovery with volumes improving by 31% versus the prior year’s quarter.
The segment volume trend chart details the dramatic volume trend changes in this segment over that time. From an individual business unit perspective automotive OEM coatings which is our largest individual business in this segment had volumes which were up 50% versus last year’s extremely low level.
Each region delivered strong year over year sales growth supported by improved demand including 100% growth in our Asian region. However as depicted on the bottom right chart, auto build levels in the Americas and Europe combined still remain about 20% below pre-recession levels.
While we normally experience a seasonal uptick in the second quarter we expect that to be muted this year given the consistent level of auto production in each month during the first quarter. As such we anticipate a fairly similar global build rate in the second quarter as we experienced in the first quarter.
Our industrial coatings business unit also delivered solid growth levels up about 20% which is a reflection of the improvement in the general industrial economy in all regions. Asia Pacific is now our second largest region in the is business and its growth rate approached 50% in the quarter.
We expect the global industrial economy to continue its moderate recovery. The packaging coatings business also improved versus 2009 and once again delivered solid financial results.
Given the nature of the end use market this business is a more stable performer throughout the economic cycle. We did not experience a significant volume drop last year and we realized a moderate volume improvement during the quarter.
Overall the industrial coatings segment through much hard work has returned much closer to historic operating margins. Given the lack of traditional seasonality in the auto OEM market this year we anticipate a more modest seasonal improvement in the segment for the second quarter.
However we do expect some further gradual recovery in the general industrial economy in Asia to remain strong. Also we intend to remain diligently focused on our cost structure.
The performance coatings segment results are detailed on the next slide. In the quarter sales grew by $37 million and earnings improved by $38 million versus the prior year.
Overall volumes were slightly negative with improved volumes in Asia Pacific and Latin America offset by lower volumes in Europe and the US. However a favorable business mix within the segment and lower costs enhanced our margins and created positive earnings leverage.
Currency conversion added about $55 million to sales and $5 million to earnings. Our automotive refinish business was negatively impacted last year by the recession and customer destocking.
This quarter the business experienced high single-digit sales growth excluding favorable currency impacts, aided by an improving trend in the overall miles driven and by the general economic recovery. Sales in the second quarter are historically higher due to seasonality and we expect a similar pattern this year.
Our protective and marine coatings and aerospace businesses both of which have a sizable after market component, [inaudible] late economic cycle industries and did not experience anywhere near the same degree of volume decline in the first quarter of last year as most of our other businesses. Volumes this past quarter were down mid single-digit percent from last year but as detailed on the slide, sales have been fairly consistent the past three quarters, and current quarter sales were actually slightly higher than the fourth quarter level.
We expect this fairly stable sales performance to continue. In the quarter our architectural coatings America and Asia Pacific’s volumes declined once again.
Solid growth in Asia Pacific and Latin America was more than offset by lower volumes in the United States. Our US volumes were largely negative in both January and February reflecting in part poor weather in most of the country.
In March our year over year trend improved dramatically as we fully recovered from the weather effects early in the quarter. For the entire quarter US volumes were down due to lower commercial construction activity and the lack of any substantial rebound in residential activity.
This business is highly seasonal and we expect higher activity levels in the second quarter but expect the overall construction markets in the US to remain at low historical levels. Overall performance coatings has proven its stability, has delivered some of our most consistent earnings results through the recession and has maintained or grown operating margin due in part to lowering its cost structure.
Looking ahead in the second quarter we expect similar stability and normal upward seasonal trends in our auto refinish and architectural coatings businesses. Results for our architectural coatings Europe, Middle East, and Africa, or EMEA business, are on the following slide.
Sales in the quarter were $436 million, up $27 million versus last year’s period and earnings improved by $8 million in what is historically a seasonal slow period for this segment. Over the past year this business has been much less cyclical than most others with volumes through the full year of 2009 falling by only mid single-digit percent.
Given the slower pace of recovery in Europe our first quarter results were similar. Our higher earnings stemmed from a lower cost structure and overall cost management actions.
Currency conversion added about 7% to our top line but did not impact earnings. As we have traditionally done included on the slide are the earnings before interest, taxes, depreciation, and amortization, or EBITDA.
We believe EBITDA is a relevant measure for this segment given the ongoing non-cash amortization expense stemming from the SigmaKalon acquisition. As you can see aided by lower cost our EBITDA margins improved this past quarter versus not only 2009 but also 2008.
Looking ahead we anticipate a longer recovery timetable for the European economies and therefore continue to expect modest volume challenges in this segment. The second and third quarters should provide a sizable seasonal sales lift with currency a potential headwind.
Our focus remains on cost management and execution to maintain profitability, building our brands and positioning to grow in emerging regions. Our optical and special materials segment results are detailed on the following slide.
Versus the prior year first quarter sales increased by $39 million to $284 million on solid volume growth. Earnings grew by 37% to a new record first quarter level due to the impact of increased volumes coupled with lower costs.
Our optical products sales grew by double-digit percents with solid growth in all major regions. Our silica products some of which are used as a raw material in the production of tires and car batteries, experienced very significant volume declines early last year but have reversed that trend consistent with year over year growth in the auto market.
Looking ahead we anticipate moderate seasonal improvements in sales and intend to increase our selling and marketing efforts in the second quarter to drive further growth for the quarter and the remainder of the year. The next slide shows our commodity chemical segment results, sales dropped by about $30 million versus last year’s period, earnings fell $80 million in comparison to what was a strong performance in Q1 of the previous year.
Compared with the first quarter of 2009 sales volumes improved by over 30% but were more than offset by lower selling prices. Aggregate pricing for chlorine and caustic soda, the ECU price fell substantially.
Chlorine prices improved but those gains were erased by lower caustic prices reflecting the impacts of lower industrial demand in most of last year. Also our costs were modestly higher primarily due to a much higher ethylene cost somewhat offset by lower natural gas pricing.
Comparing first quarter results this year versus the fourth quarter of 2009 the ECU price was flat as the chlorine price slipped mildly and was offset by strengthening caustic prices. As displayed on the chart domestic caustic volumes improved especially in March drawing down our inventories but the earnings impact was nullified by increases in our primary input costs.
Our inventories have fallen in 30 of the past 36 weeks. Looking forward we expect this business to return to solid profitability in the second quarter as we implement previously announced price increases in caustic soda and based on current input costs.
Our glass segment details are on the following slide, sales were $220 million, up $24 million or 12%. Overall volumes advanced while pricing declined due in part to a lower year over year energy and fuel surcharges.
While the segment remained unprofitable the $3 million loss was a dramatic improvement over the prior year’s period when we lost $27 million. Our fiberglass business benefited from the rebound in global industrial activity and volumes improved nearly 45% in contrast to a similar percentage decline last year.
This higher activity resulted in improved manufacturing utilization. The architectural glass market both commercial and residential construction served by our performance glazing business remained at recession levels.
Both businesses benefited from considerable cost reductions. Equity and royalty earnings improved largely driven by equity results in our Asian fiberglass joint venture which supplies the electronics industry.
We expect both businesses to exhibit better seasonal trends in the second quarter. This would also improve capacity utilization including in fiberglass where inventory levels are low and where we have already announced price increases effective in the second quarter.
Let me conclude my remarks by discussing some cash details which are on the next slide, we ended the quarter with just under $700 million of cash on hand. In the quarter we used about $50 million of cash for operations including traditional seasonal working capital increases versus the fourth quarter.
Our first quarter cash from operations results puts us nearly $250 million ahead of our 2009 pace and I will remind you the full year of 2009 was our second best cash generation year on record. We spent $45 million on capital spending during the quarter and we expect our full year capital spending to be in the range of $300 to $350 million.
Our dividend payment, a long-standing heritage at PPG were $90 million. We also repaid more than $150 million of debt in the quarter and don’t anticipate any further term debt reduction of size for the remainder of the year.
As we previously stated we do expect full year contribution to our pension fund of $240 million. Last year we put approximately $450 million of cash and company stock into our plans including about $175 million in the first quarter.
Our cash position remains very strong especially when considering that our strongest cash generation quarters are late in the year. And we intend to deploy cash over the balance of the year in a disciplined manner with the focus on growing earnings per share.
We are reviewing potential bolt on acquisitions and also share repurchases will be a likely use this year. With that I will now turn it back over to Charles for some closing remarks.
Charles Bunch
Thanks Robert, I will conclude by reiterating a few key items. Global industrial demand is recovering at a moderate pace and we believe there has not been any sizable inventory building in many of our end use markets we serve.
We still have several end use markets or businesses that have yet to recover such as commodity chemicals, which is beginning to exhibit positive signs that we expect will boost our earnings in the coming quarters. We continue to experience solid earnings leverage on higher sales volumes reflecting the benefits of the structural cost reductions we completed during the recession.
Our efforts and investments over the past several years to expand our presence in emerging regions such as Asia Pacific continue to pay off as they along with our optical products business have once again proven to be critical growth drivers for the corporation. Let me conclude by commenting that global end use market activity remains well below historical levels as do our earnings and our objective is to continue to accelerate our earnings recovery back to pre-recession levels.
To do so we will remain focused on diligently managing our costs to maximize the impacts from further volume recovery. Also we intend to further deploy our strong cash position focused on bolt on acquisitions and share repurchases to further fuel our earnings growth.
I am encouraged that we are now entering what has historically been PPG’s best quarter with a very low cost position and growing momentum. That concludes our prepared remarks, now we are ready for questions.
Operator
(Operator Instructions) Your first question comes from the line of PJ Juvekar – Citi
PJ Juvekar – Citi
A question on performance coatings, your volumes fell in 1Q, can you talk a little bit about what kind of volume trend you’re expecting for the full year.
Charles Bunch
The volumes fell in the first quarter in a couple of the segments, one architectural coatings, the other protective, and marine and we had volume growth in automotive refinish. We would expect that volume trend in automotive refinish, the positive trend to continue this year.
We’re fairly optimistic about the business here in the developed regions as well as what’s happening in the emerging regions. We think the architectural business was effected by weather conditions early in this quarter, was rebounding in March as the weather improved, so we think that even though we’re not optimistic about strong volume growth in architectural we do think we’ll show better performance in the upcoming quarters than we did in the first quarter and we think that protective and marine shows some positive signs and so we’re looking for modest growth there and in aerospace.
So I think the picture is going to be slightly better as we move through the upcoming quarters.
PJ Juvekar – Citi
In the US architectural business can you talk a little bit about what you’re seeing at company-owned stores versus home centers versus the dealer channel in terms of which channels are holding up better.
Charles Bunch
The patterns have remained similar here. Its still early in the season so I would say its too early for us to reach any definitive conclusions but as we saw last year the remodeling segment of the business held up better than either commercial construction or new home residential.
That does favor the DIY segments that are either in the national home centers or in the dealer channel. So I would say early in the year here in the first quarter those trends continue.
PJ Juvekar – Citi
Would you expect your total store count to be flat for the year or up or down.
Charles Bunch
We don’t expect it to be down, I would say that if anything there may be a net very modest store count growth this year, mainly tied to lease renewals and the like.
Operator
Your next question comes from the line of Kevin McCarthy – Merrill Lynch
Kevin McCarthy – Merrill Lynch
In architectural I understand you led a price increase at the company-owned stores in the US, can you comment on the success of the realization there relative to the raw material increases, in other words are you able to hold margins and over in Europe do you foresee any need or opportunity to raise prices in architectural coatings there.
Charles Bunch
In regards to the price increase at the company-owned store channel we did implement that during the first quarter. We felt that that would offset price increases from raw materials that we were experiencing and we talked about the low 3% to 4% kind of inflationary indicators that we were seeing for raw materials.
What we’re seeing right now is as we come into the early parts of the second quarter we’re seeing a little bit higher inflation level especially in a couple of commodities so we’re watching this right now. I would say that today we’re in several of our channels where we have had pricing, we think that we’re in pretty good shape but we’re watching the trends.
In several of our segments or end use markets where we haven’t yet achieved all the price increases that we’re looking for, we will be talking to customers because this is, I would say a consistent trend across regions that we are seeing raw material inflation, combined with some shortages here that have emerged in the first quarter. And Europe is similar story even though the volume there has been I would say weak in the first quarter, had similar weather conditions in Europe to what we experienced here in North America.
There is some not as great inflationary pressure in Europe on the raw material side and we will be looking as we move through the second quarter we’re going to monitor raw material prices and see if we need to look at targeted price increases on the architectural side.
Kevin McCarthy – Merrill Lynch
And shifting gears to the optical segment margins there were exceptionally strong, could you comment on the underlying margins that transitions versus silica and what we should expect in 2Q there in terms of margins.
Charles Bunch
We were very pleased with the improvement overall in the segment and we saw improvement both in the optical business and in transitions led by volume improvement there and we picked up a little volume leverage on our prices on the transition side have not changed. But this is I think a good indicator of us keeping our overhead costs and manufacturing costs in line or lower and we’re getting some help from improved volume.
On the silica side we had a very nice improvement there as well both in volume and in margins. As Robert mentioned in his remarks the tire industry has recovered here in the first quarter so that provided some volume lift.
We also have some cost benefits in the silica business from lower natural gas costs and the restructuring actions that we took last year. So we’re seeing nice improvement in both sub segments of optical and specialty materials.
Kevin McCarthy – Merrill Lynch
Is it fair to say that the majority of the $80 per ton proposed price increase for caustic soda has gone through for April 1.
Charles Bunch
Our view, we’ve fully implemented the price increase announced earlier in Q1 which was $75 a ton. We are in the process of implementing this $80 a ton price increase in the second quarter, not all of which will be implemented April 1 but we are confident especially with the trends that we see on the volume side and overall in the market that through the course of the second quarter we will implement fully the $80 a ton caustic soda price increase.
Operator
Your next question comes from the line of Robert Koort - Goldman Sachs
Robert Koort - Goldman Sachs
Can you comment a little bit on the industrial coatings side, sort of what the raw material and pricing developments there are by sub market and then on the auto OEM what do you expect sequentially in those regions as you go forward.
Charles Bunch
In the industrial coatings segment on the raw material side first quarter again we had raw material price increases consistent with my earlier remarks, 3% to 4%, however we do use more epoxy resin in this segment of our coatings business. That was experiencing especially at the end of the quarter some higher inflationary pressure.
So we have been in all three end use markets, automotive OEM, the general industrial segment and packaging that are the three sub segments of industrial coatings, we are pushing price increases in all three of those sub segments to offset the overall increases and also to specifically address the epoxy resin increase.
Robert Koort - Goldman Sachs
And what about production trends by region OEM, what would you expect that to look like as we go through the year.
Charles Bunch
They have remained fairly solid. I would say right now, if we start hearing North America, we had a very good start to the year.
We were looking at maybe build numbers for North America at a little less than 11 million for the year which are still going to be up over 20% but now we’ve upped those and its over 11 million. Its probably going to be between 11 million and 11.5 and the sales trends in the market seem to be positive.
Europe however although we had a good first quarter we think its going to flatten out. We haven’t seen the same uptake in the sales levels so I would say that we’re still looking for maybe on a full year basis very modest volume growth in Europe, very low single-digits.
South America remains strong although it’s a smaller market and the big story as we’ve been reading about and we certainly experienced in the first quarter and we think its going to continue is the growth of sales particularly in China but more broadly in Asia Pacific. So the sales were up, you saw the March numbers in China up another 40%.
We’re predicting only 10% to 15% full year in China but it is certainly a strong sales pace and we think its going to continue through the year at that 10% to 15% level, not at what we saw on a year over year basis in the month of March.
Operator
Your next question comes from the line of Frank Mitsch - BB&T Capital Markets
Frank Mitsch - BB&T Capital Markets
I just wanted to thank you for sending us the best wide receiver in football. I wanted to follow-up, I mean obviously the optical business was awesome and you attributed part of it to transitions and part of it to the silica’s, if I look at that $20 million year over year increase how would you apportion the benefits between those two segments.
Charles Bunch
I would say in terms of the earnings, its probably the 80/20 rule here, that 80% of the improvement would be on the optical side, 20% on silica’s and optical is obviously a much bigger proportion of the overall segment so I would say that they’re both improving nicely at about the same rate.
Frank Mitsch - BB&T Capital Markets
That actually gives us a little more confidence that its mostly on the transition side which is obviously the more stable of the businesses there, and then your expectation with that material pick up have we reached a new plateau level here on this segment.
Charles Bunch
I don’t think we’ve reached the plateau level, as we’ve talked about in our discussions of the transitions business we have what we think is a very good penetration level here in the United States, about 20% market share so that means 20% of all prescription eyewear is transitions. We think that we have room to move that up and certainly our level of penetration in Europe or in Asia or in Latin America is not at that level, in fact most of those markets are less than 10% market penetration.
So we think we have plenty of upside and room to grow the business and we think that this story will continue.
Frank Mitsch - BB&T Capital Markets
Hopefully [Kenny Ferry] and [Trevor Imelman] will perform for you there. And you talked about using cash for share buyback and bolt ons, would you care to size the order of magnitude of what potentially you are looking at in both of those areas.
Robert Dellinger
On the bolt on acquisitions I think things in the $200 to $250 million range and more focused on Asia Pacific and the emerging markets. On share repurchase its something we are and will continue to evaluate but its probably not appropriate to size it at this point.
Frank Mitsch - BB&T Capital Markets
But can you refresh our memory how much is left on the current authorization.
Robert Dellinger
We have a little more than six million shares on the current authorization. We had five approved late last year and we had a little more than a million, million and a half shares outstanding under the existing authorization, so about 6.5 in total.
Operator
Your next question comes from the line of James Sheehan – Deutsche Bank
James Sheehan – Deutsche Bank
What was our operating rate in chlor alkaline in Q1 and could you also comment on where the demand improvement is coming from, is that mainly like the pulp and paper market for caustic, or is it across all the end uses.
Charles Bunch
I would say operating rates moved up in the quarter to the high 80’s, close to 90%. We did have some maintenance outages in the month of March that brought down some of our numbers and we haven’t seen the operating rates for the industry in March but they were at what I would say would be historically good levels.
And caustic demand as you know is spread across a number of end use industrial markets. We thought pulp and paper was solid if not really strong, refinery business good, we saw some pick up on the aluminum side, so we saw a number of the end use markets beginning to pick up although there was no one stand out market but just I would solid improvement across the board.
James Sheehan – Deutsche Bank
And could you estimate what percent of your natural gas costs would we hedged in Q2, would that be around 25%.
Charles Bunch
Its going to be around there, around 25%. Its going to move down each quarter so that we’re probably going to end the year because we’re not looking to hedge at this point any additional volumes and it moves down to around 20% by the end of the year but the second quarter hedges will be down slightly but around 25%.
James Sheehan – Deutsche Bank
And finally you mentioned the euro being a headwind in Q2, is there any way to quantify what that might be if the euro were to be at this level for the rest of the quarter.
Robert Dellinger
You can certainly look at our sales in euros. We have about $4.5 [billion] of sales in the euro region and roughly half of that is denominated in euros.
Operator
Your next question comes from the line of Ivan Marcuse – KeyBanc
Ivan Marcuse – KeyBanc
In the commercial markets are you looking for, how are you looking the year to play out, are you expecting it to remain at the low level it is to 2010 or do you expect a slight recovery as you go through the year.
Charles Bunch
We’re not looking for any recovery this year in new commercial construction. The architect index in commercial construction are still below 50, I think 45 was the latest number, and there is not a lot of optimism on the new construction front in commercial.
There may be some pick up later this year on the renovation side of commercial but at this point we’re saying we’re hunkered down trying to get through this year in the market and looking for improvement next year.
Ivan Marcuse – KeyBanc
In the packaging industry you mentioned that has been pretty stable, has there been any regions that are better than others or has it been pretty stable globally.
Charles Bunch
The best growth similar to the stories in the other, in many of the other end use markets is Asia Pacific region and China have been stronger than the developed region. There is still a few, if you look at can consumption as an example in those markets or packaged goods or packaged foods, they still have quite a ways to go in China and India to even get close to the consumption levels on a per capita basis here in the developed regions.
So we expect that story to continue for the coming years and this year as we get into the second and third quarters we always see some positive uplift when there’s a World Cup and there is one starting in June in South Africa and that usually leads to an increase in beer and beverage consumption during the year.
Operator
Your next question comes from the line of Don Carson – UBS
Don Carson – UBS
Just on chloralkali industry operating rates were about 84% in January, February and you indicated you were well above that, I’m just wondering where is all the chlorine going that enables you to have these kind of high operating rates.
Charles Bunch
Well it was stronger export, the export shipments of [PVC] especially in the first two months of the year. That started to slow down some from the ethylene price spikes that we saw as we moved through the quarter.
But that was contributing to higher operating rates across the industry and that historically as you know the US has not been a strong exporter of [PVC]. But we are now with some lower natural gas or energy costs and a weaker dollar there have been more opportunities although right now we see those opportunities declining because of the spike we’re seeing in ethylene costs.
Don Carson – UBS
And on natural gas hedging its been somewhat of a mixed performance over the last year, I guess the basic question would be why even bother hedging other than say during winter months when you might get a spike in pricing. Have you sort of looked to see whether hedging actually benefits you or is a net increase in your cost position.
Charles Bunch
If you look at our record over time we have experienced some periods where it really helped us. What we have been trying to do in the hedging program is take away the upside spikes in pricing.
If you look at the experience in this decade until the last year and a half or so, most of the variability came on the upside either during weather events like a hurricane or harsh periods of the winter and we saw price spikes that would go well over $10 in MMBTU and into $13 and $15 range. So we were really trying to cap some of those, the upside risk that we saw from the pricing.
Now what’s happened over the last couple of years we think has changed the game. When you have had an overall weaker economy but obviously the shale gas has made a big difference whether it’s the [Barnett] Field or the Marcellus Field here in this region, the supply picture has changed quite a bit, and so even with improving demand we see pricing very stable, volumes, and inventories continuing at very high levels.
So we think the game has changed. We’re no longer concerned about protecting ourselves against these upside price spikes so we have really, we really stopped hedging over a year ago but up until that time we were going out two or three years with some of our hedges in order to protect ourselves and we had a little more in the winter months typically where there was more potential for variability.
So we stopped hedging and we’re going to just ride this thing out and hopefully this shale play is a long-term trend for us and I think if it is, its going to be a very positive factor for the US chemical industry and for a number of our other manufacturing industries including our glass business.
Don Carson – UBS
Turning to your architectural business you seem somewhat cautious in your outlook, it appears at least if you look at the DOC data that we’re close to a bottom here, must below 600 million gallons a year, what kind of recovery do you see. Is your caution in 2010 really because of weakness in commercial and what kind of growth do you think we could see both in 2010 and 2011 in the overall US market.
Charles Bunch
Well what we’ve seen is certainly the industrial markets led by automotive have recovered more rapidly and on a more consistent basis globally. And we’re in now the fourth year of this housing recession here in North America.
I predicted that we were going to be out of this recession probably a year and a half or a year ago and I have been I think continually disappointed by the pace of the recovery. Now I don’t think we’re going to get any worse, new housing starts, we’ve talked about building from this level of 600,000 but we haven’t seen it so far and the start of the year was very weak.
Some of that we hope is weather and now we have the commercial construction market a little weaker. We think that the renovation side of residential will be better so overall its still going to be a positive story for us this year.
But I am surprised that its taken us as long as it has as a country to work through all these mortgage and foreclosure issues. We have a housing credit that is going to expire so there’s just a lot of, there’s conflicting data and so we think overall it will be positive but not strong and clearly with what we’re seeing on the automotive side from maybe a deeper decline we’re seeing more of a bounce back.
So I think 2011 for us seems like a better year to predict a strong upturn. We should get improvement in commercial, new homes should finally start to get better, maybe even later this year.
But we just haven’t seen volume on the construction markets either here in North America or in Europe that would lead us to say that we should be really bullish on that market for the rest of this year.
Operator
Your next question comes from the line of Dmitry Silversteyn - Longbow Research
Dmitry Silversteyn - Longbow Research
Couple of questions on the architectural coatings business in Europe, first what was the volume decline in EMEA business in first quarter and can you provide a little bit more color on I guess countries where you’re seeing some improvements beyond seasonality or some maybe that are getting a little bit weaker for you.
Charles Bunch
I would say that volume decline in the first quarter and again Europe had similar weather to ours here so they were very weak in January and February as a result of the weather but we ended up with low single-digit declines in volume overall for the market and I would say there was no particular market that was either stronger or weaker. And we have I would say a mix of country exposure, France, the UK, Benelux, Eastern Europe, and I would say none of those exhibited real strength nor did any of them exhibit exception weakness so it was fairly consistent through the first quarter but again its not, we’ll need a little more time to see the emergence of seasonal trends and as we get through the second quarter I think we’ll be able to see if some markets are getting a little stronger and others are not.
We do not have exposure as we’ve said in some of the weakest markets like Spain and Portugal and very small exposure in Italy or the other Mediterranean countries so we don’t have a good barometer there but certainly they have been the weakest overall in the construction industries and overall in their economies.
Dmitry Silversteyn - Longbow Research
You mentioned that you’re seeing some shortages in some raw materials, can you be a little bit more specific which raw materials you’re talking about and also can you provide a little bit more color on the raw material environment in Europe versus US.
Charles Bunch
I would say we have had, there are two things going on, we’ve had some price run up and we’ve talked about ethylene, propylene is also increasing in price. We’ve had some products in that petro chemical chain that are experiencing shortages.
I can talk about phenol, epoxy resin, some of the [accrolates], so I think as some of the production ramped up as we went through the quarter I think many of these companies and industries where there had been a lot of restructuring or they’d mothballed some facilities as demand came up, I think there were a few supply disruptions that we think will move away as we go through the second quarter. But certainly those would be some of the markets that and some of the products in the petro chemical chain that we saw either with price increases or supply disruptions.
In Europe although the demands haven’t been as strong, the economy has been weaker there and slower to recover than here, we’ve had some similar issues. There was a TIO 2 plant that has had, they had a significant supply event in the UK and that has effected short-term supply and demand balance for TIO 2 and we’ve had some raw material inflation again at the lower end of that 3% to 4% kind of inflation that we’ve been talking about but even in the, with the weakness in the economy in Europe we have had some raw material inflation in Europe as well.
Operator
Your next question comes from the line of John Roberts – Buckingham Research
John Roberts – Buckingham Research
Impressive margins, the European automotive coatings business, I thought that was by far the largest, maybe 50% larger than US or 50% larger than Europe, I don’t know if that’s correct or not, but I wanted to check your comments, did you say that the full year in Europe auto builds will be up slightly or did you say the second half, the remainder of the year will be up slightly. Because the first quarter was up materially.
Charles Bunch
Our first quarter was up as you said materially, we think production will still be up for the full year although at a lower level and what I described as low single-digit increases for the full year in Europe in automotive production. And in terms of our automotive OEM business unit, Europe is the biggest single region but it is not twice the size of our North American business.
John Roberts – Buckingham Research
No I thought more like 50% larger than North America.
Charles Bunch
No, it is larger but not 50% larger.
John Roberts – Buckingham Research
And so the rest of the year you expect to be down so that the full year is up only modestly.
Robert Dellinger
No, if you look last year the comps get more difficult in Europe. The first quarter in all of auto globally last year was very difficult.
Europe came out of that quicker because of the incentives they put in place so their comparables get harder as we go throughout the year on a year over year basis.
John Roberts – Buckingham Research
Right but if they were up a lot in the first quarter and they’re only up a little for the full year, they’re going to be flat or—
Charles Bunch
They’ll be flattish.
Robert Dellinger
Marginally for the rest of the year, that’s correct.
Operator
Your next question comes from the line of John McNulty – Credit Suisse
John McNulty – Credit Suisse
Just one quick question, with all the cost cuts that you put through last year your margins are clearly really solid in a bunch of your businesses and in some cases they’re at record levels whether it’s the optical or even industrial coatings seems to be close to that, are you in any of your businesses constrained right now because of the cost that you put in where you might be having to go out and hire or add in some incremental costs, how should we think about that going forward and maybe the impact it might have on margins.
Charles Bunch
We don’t think that we’re constrained now. We’re not contemplating in the businesses where we did close facilities either plants or warehouses, we’re not contemplating restarting or building any new facilities especially in the developed region.
We have plenty of capacity. We are as you know from previous calls we are building capacity in Asia in particular China, but we don’t see any big cost adds going through.
Now we have had our salaries frozen for the last 14 months and we also eliminated the 401K match here in North America. Those will be reinstituted in the second half of the year so we will have some cost increase on the wages and benefits side here in North America and in the developed regions in the second half of the year.
But that would be other than raw materials, the only significant cost increase that we’d be looking for.
Operator
Your final question is a follow-up from the line of Frank Mitsch - BB&T Capital Markets
Frank Mitsch - BB&T Capital Markets
Just a quick follow-up you mentioned the World Cup and possible opportunities, I actually hadn’t thought of PPG as a World Cup play, can you talk about your various touch points in South Africa and what the materiality of that would be.
Charles Bunch
Well actually we do have a significant architectural business in South Africa, its called Prominent Paints. We’re the number four player in South Africa so we are getting some lift there from a lot of the construction activity, but more importantly the overall lift for PPG at least in, is more on the beer and beverage side and its not with actual [inaudible] in South Africa, its with all the sports fans around the world who are gathered around their televisions watching their teams play in the World Cup.
And although it seems almost humorous to say that, but beer and beverage consumption during the World Cup goes up significantly and for those of us in that market we know during the World Cup there’s a lot of beer and beverages being consumed.
Frank Mitsch - BB&T Capital Markets
That makes a lot of sense and I can understand that, thanks a million.
Operator
There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.
Charles Bunch
Thank you very much for listening in and for your support and we look forward to reporting back to you in another three months with what we hope will be further improvement and another solid quarter. Thank you.