PPG Industries Sharper Focus on Coatings Core

December 23/30, 2013 PMA 40063731 IHS Chemical Week

Worldwide news and intelligence for the chemical industry chemweek.com PPG Industries Sharper focus on coatings core

Charles Bunch Chairman and CEO

Braskem to acquire Solvay Indupa US oil and gas production surge to continue viewpoint

Consolidating coatings

ur cover story this week features PPG Industries, which is set to soon pass a Rob 0key milestone in its portfolio transformation as coatings revenues exceed 90% of Westervelt sales (p. 3). Editor-in-Chief PPG’s growth highlights consolidation that has occurred in coatings, aided in large part by PPG and AkzoNobel. Both firms are essen- Today, four of the top five derive at least tially tied in the race to claim the leading posi- 60% of revenues from coatings. BASF is the tion in the $95-billion global coatings market. only top-five player in the segment that They are trailed closely by Sherwin-Williams does not derive more than half of revenues (SW), in third place. from coatings. A 1998 report by Market Tracking Inter- While consolidation has increased, the seg- national (MTI; London) placed PPG in fifth ment remains fragmented. The 1998 MTI place in coatings, trailing then-market leader report estimated that the top five players ac- AkzoNobel, SW, ICI (subsequently acquired counted for roughly a third of the global mar- by AkzoNobel), ket. The top five and DuPont (which Four of the top five today account for sold its coatings only slightly more business to Car- players now derive more than 40% of global lyle Group, which than half of revenues from market share, ac- renamed it Ax- cording to PPG alta). Among these coatings and company esti- top-five players in mates. 1998, only SW could claim a majority of rev- PPG, Akzo, and SW have all taken market enues from coatings. share and lead the market, which remains PPG’s coatings today account for 90%, ad- highly fragmented with more room to grow justed for the planned divestiture of its Transi- through acquisitions. tions optical business, and coatings accounted for nearly two-thirds of AkzoNobel’s revenues in 2012. Third-place SW remains a pure-play coatings firm. The rest of today’s top five is rounded out by Axalta and BASF, in fourth and fifth place, respectively. [email protected]

2 | IHS Chemical Week, December 23/30, 2013 chemweek.com PPG Industries Sharper focus on coatings core

PPG Industries (Pittsburgh, PA) will soon pass a key milestone in its portfolio transformation as coatings revenues exceed 90% of sales.

PG has announced three $1-billion-plus zoNobel’s North American architectural paint coatings had always been a critical part of the deals since 2012—two divestitures and business. That deal made PPG the clear number- company, the company moved to accelerate Pone acquisition—that leave the company two producer of architectural coatings in North coatings growth in the late 1990s. In 1997, firmly focused on coatings. Revenues in its America, behind Sherwin-Williams (SW). coatings accounted for 42% of sales, glass 36%, $13-billion coatings business will account for PPG posted revenues of $11.4 billion and chemicals were the remaining 20%. “At 90% of sales once the sale of its stake in Transi- through the first nine months of 2013, up that time, we took a look at portfolio and felt tions, a leading producer of photochromic lens- 7.6% from the year-ago quarter. Income from we had to make some decisions,” says Charles es, is complete in first-half 2014; this propor- continuing operations increased 41%, to Bunch, PPG chairman and CEO. Bunch has tion was about 55% in 2002. $822 million. Third-quarter adjusted earnings been CEO July 2005 and had been senior v.p./ The past year has been busy for PPG. In Janu- of $2.44/share, up 18% from the prior-year, strategic planning in the late 1990s. “We could ary, it completed the exit from its commod- marked 12 consecutive quarters of record not fully fund all of the opportunities that ity chemicals business, chlor-alkali and vinyls, earnings. Investors have responded favor- we thought were available in our businesses. when it merged the business with Georgia Gulf ably, sending the stock up more than 120% Markets were also starting to rapidly global- to form Axiall. PPG received more than $900 over the past two years compared with a 45% ize as companies and our customers started million in cash from the deal, and PPG share- gain for the S&P500 and 50% gain in the Dow to move more seriously into Asia.” The com- holders received an additional $1.7 billion in Ax- Jones US chemicals stock index. pany considered coatings the strongest play iall stock when the deal closed. In July, the com- available. “Coatings were the most consistent pany announced plans to sell its majority stake Shift to coatings performer,” Bunch says. “It had good returns in Transitions, from which it will receive $1.73 PPG started operations in 1883 as a glass and was less capital intensive. It would also be billion, or approximately $1.5 billion after-tax, maker at Pittsburgh. The company made its much easier to expand coatings organically in when the deal closes in the next six months. first coatings acquisition, Patton Paint, in markets such as China.” The company also had The company has also completed a key coating 1900 to diversify as flat glass and paint moved strong market and technical bases to continue acquisition with its $1-billion purchase of Ak- through the same distribution channels. While to rapidly build from, he adds. The company cover story

had a long history in coatings, and when it saw Scale won’t hinder growth Architectural coatings market shifts that would work in its favor, it de- PPG says it now leads the $110-billion glob- AkzoNobel’s North American coatings busi- cided to lead the consolidation. “Coatings were al coatings sector after growing the business ness is a key addition to the portfolio. PPG more fragmented than our other businesses,” at roughly 10%/year over the past decade. estimates that 43% of the global coatings mar- Bunch says. “We could grow organically, and PPG says that its size will not limit growth, ket is architectural finishes. The business now there were also opportunities for acquisition.” noting that there are still significant opportu- accounts for 40% of PPG sales. “We are not There were no clear global leaders in coatings at nities available in the sector. “When you look done in architectural coatings,” says Michael the time, Bunch adds. “We felt we could accel- globally, there is no one in the coating space McGarry, PPG executive v.p. “The AkzoNo- erate consolidation.” Larger players had strong that even has 15% market share,” Bunch bel business is nice addition and makes us a positions in Europe and North America, but says. “Coatings remains one of the least con- strong number two in architectural in North there were several smaller regional players in solidated segments in the chemical sector,” America. We will add more acquisitions in the both regions and wide opportunities in emerg- Bunch says. “There are some segments and space on a global basis and are looking at more ing markets. geographies that have become consolidated, growth in North America.” Divestitures in glass and chemicals were part but there are still opportunities to grow faster Architectural coatings retains strong of the strategy, but the company indicated that it than industrial production or GDP.” PPG says growth prospects and is a sector that is less would be patient. In fact, the two largest divesti- it is the only company that participates in all consolidated than other markets in which tures did not happen until the past year. PPG has end-use markets. It claims a leading position PPG has strong positions, such as automotive sold its commodity chemicals business, a subject in architectural coatings, a sector in which it is OEM, refinish, and packaging. “Architectural of divestiture speculation for more than 10 years, roughly equal in size to AkzoNobel and SW, as coatings is still a fragmented market region- to Georgia Gulf and its Transitions business to Es- ally and globally,” McGarry says. PPG has 900 silor. “We were going to look and wait for the best stories in North America and looks to add more opportunities to sell,” Bunch says. “Our financial than 50 over the next few years. The company performance and balance sheet were good enough is also seeing a favorable market push as hous- that our hand would not be forced on divestitures.” ing recovers in the United States. “We think Tax considerations were a concern with commod- new US home construction will be up 8–10% ity chemicals since the business comprised older next year,” McGarry says. “Resale will be up, assets with a low cost basis. The merger with Geor- in the 4–5% range.” Light industrial coatings gia Gulf allowed PPG to spin the business off to should grow 3–5%. “We expect a reasonable shareholders on a tax-free basis. Transitions was a growth profile next year,” McGarry says. profitable, high-growth business, but it decided to The company issued a $160-million cost sell, citing changes in the optical sector, including savings target when the AkzoNobel deal was M cGarry: Still building Sekmakas: Plenty of technology shifts, that would make the business in architectural coatings. runway left in China. announced and raised that number to $200 a better fit with Essilor, a leading optical materi- million soon after the deal was completed in als and equipment maker. A strong valuation also well as number-one positions in automotive April. The company has delivered half the sav- made the deal attractive to PPG. original equipment manufacturers (OEM) ings in the first nine months. Sales, market- The company has expanded the coatings coatings, refinish, and aerospace. PPG claims ing, and finance are well along in integration, franchise through organic growth and more number-two positions in industrial, protec- and the company is consolidating commercial than 30 coatings deals over the past 15 years. tive and marine, and packaging coatings. operations at a new architectural headquar- M&A has often been challenging in chemicals, PPG says it will compete in all sectors. The ters in Cranberry, PA. but PPG says it has now been successful by not entire market “is all potentially addressable overpaying for assets and focusing on integra- to us in the long term,” Bunch says. “There Industrial coatings tion. “First, we were mindful of the values are markets that are not as well developed Industrial coatings overall remain a frag- we were paying,” Bunch says. “We were quite and still very fragmented. But, over the long mented segment and account for 30–40% of disciplined and tried to find businesses that fit term, there is nothing in coatings today that the world’s $110-billion coatings business. well and strengthened our technology and in- we wouldn’t like to sell.” “There are still many regional companies in novation. We wanted to add strong products, Bunch says PPG can continue to grow the industrial coatings,” says executive v.p. Vik- technologies, and teams that complemented business at above-market rates. “We have tor Sekmakas. The company expects roughly what we did.” been able to consistently grow the business 60–70% of growth in industrial coatings to be As part of the focus on coatings, the compa- a couple percentage points above industrial organic, with the rest coming from acquisi- ny will also continue growth in “near adjacen- production,” Bunch says. “We think will can tions. Marine remains a concentrated sector cies,” such as adhesives, sealants, and metal continue that trend and supplement that dominated by PPG and AkzoNobel, but other pretreatment used in key sectors, such as au- with acquisitions.” Some segments are in re- protective coatings segments remain strong tomotive, refinish, architectural, and industri- gions that are more consolidated, and organic opportunities for organic and acquisition al coatings. “You are going to see us continue growth will be a priority there, but, overall, growths. Packaging offers opportunity for to develop this space, which aligns well with acquisitions still have a strong opportunity. innovation-driven growth. PPG has a strong coatings,” Bunch says. “These are companion “We may not see the same strong pace of deal position outside in external can-coatings in products that fit very well,” he says. “It also making at the higher end, but consolidation food and beverage but is now looking inside gives us a wider field to play.” will continue,” he says. as food and beverage companies try to remove chemweek.com IHS Chemical Week, December 23/30, 2013 | 4 cover story

epoxy-based linings that contain bisphenol- the deal was complete, in 2008. “But, we we can grow on,” Bunch says. A out from food-contact applications. “It is a have done a good job anticipating volume The remaining glass businesses is “less core, technology shift that gives us the potential to declines and taking cost out,” McGarry says. but we have been patient,” Bunch says. “We also get on the inside of cans,” Sekmakas says. Profits have continued to grow even though try to create value and build on those busi- volumes declined for the past four years. Eu- nesses.” The company has sold its non-US China continues to grow ropean volumes remain more than 15% below glass business and licenses glass technology. The company still sees huge opportunity in The company continues to make investments Expanding coatings core China, where no coatings company has more and upgrades in areas such as furnaces, Mc- than 10% market share. PPG’s Asia sales have (2012 revenue: $14.2 billion*) Garry says. “The business is well maintained grown from under $100 million in the late Optical 3% and capitalized with good talent. We are not 1990s to approach $3 billion today. “China Glass going to grow, and it is noncore, however. may have come down from low-double-digit 7% When time is right, and if someone wants to growth rates to 7–8%, but that is still healthy buy, we’re happy to talk.” growth with lots of opportunity,” Bunch says. “There is still a lot more for PPG to do there.” Coatings US, global outlooks improving There is still a lot of runway left in China, 90% Bunch is also very optimistic about oppor- Sekmakas adds. In the late 1990s, PPG first tunities in the United States, given shale’s im- moved aggressively into the region by align- pact on energy and manufacturing costs. “The ing with large, global customers, such as auto- *2012 pro-forma for chlor-alkali divestiture, Akzo architectural acquisition, impact is not just limited to what is happen- transition divestiture. Source: PPG Industries (Pittsburgh). motive OEMs, as they moved to China. “This ing in oil and gas and petrochemicals,” Bunch largely was in premium paints and markets.” says. “We’re a low-cost manufacturing region. Sekmakas says. Customers wanted assurances Global coatings at a glance Energy costs and chemical manufacturing are that quality and service levels in markets such (2013 Revenue: $95billion*) such important components of our industrial Aerospace 2% as China would be the same as in the United Packaging 3% base that I see this shale revolution as a boon Auto OEM 6% States and Europe. “We played very well in the to our economy,” he says. premium segment,” Sekmakas says. Reﬁnish “I’m more excited about the rebirth of man- 7% With that base established, the second ufacturing that I see gradually coming. That phase of Asian growth centered on moving Protective Architectural benefits all markets that PPG plays in and is into the “mid-segment” market in Asia as and marine 43% going to be paying dividends for our region for 13% domestic growth started to take off. “We years to come,” Bunch adds. pursued growth through frugal innova- Industrial Bunch says global conditions should re- tion,” Sekmakas says. The company worked 26% main favorable. “I’m optimistic that 2014 with customers to tailor solutions specific will be a good year,” he says. “We are three to market demand for lower-cost, no-frills *End-market demand by dollar value. years into recovery in North America, and I Source: PPG Industries (Pittsburgh). solutions in consumer goods, electronics, think we have more room to go. Automotive and automotive. “We worked to develop 2008 levels, but McGarry says Europe appears has rebounded well, and auto builds should and formulas that were appropriate for to have hit bottom. “We think we will see a be up another 4–5% in 2014. Housing is what the mid-segment was looking for,” very mild upturn next year,” he says. Recov- still in early stages of recovery. You can say Sekmakas says. The company has invested ery in Europe could drive significant cash and recovery hasn’t been as strong as it should heavily in workforce development across earnings improvements. “The leverage to re- have been in the United States but will still the region. The efforts have left the compa- covery in Europe is significant,” McGarry says. have momentum. And there are areas im- ny’s business in Asia and China in a strong The company remains interested in grow- portant to us that are still to recover—com- position as demand in China becomes more ing in all segments in Europe. “We are very mercial construction, for example.” domestically driven. “About 75–80% of interested in growth through acquisition in Growth in Europe should also turn posi- what we produce in China actually stays Europe,” McGarry adds. “We have a very ac- tive after mid-single-digit declines over the there today,” Sekmakas says. “And, as the tive pipeline. Europe does not scare us from a past few years. “We are forecasting modest middle class continues to grow in the re- growth perspective. We know how to manage growth, but that is on the back of modest sin- gion, it will remain a very nice growth en- in that tough environment. We are looking for gle-digit declines over past few years,” Bunch gine.” opportunities in Europe in all segments.” says. Key markets in South America, such as Brazil, have been less consistent but are well Europe still in focus Some specialties remain positioned with preparations for the World PPG’s largest acquisition is its $3-billion Bunch says PPG still sees growth oppor- Cup and Olympics. purchase of SigmaKalon from Bain Capital tunities in its “important and valuable” op- “I feel more optimistic going into 2014 in 2008. SigmaKalon has doubled PPG’s tical and specialty materials business. After largely because recovery in other markets coatings footprint in Europe, which now ac- the divestiture of Transitions, the company remain intact, and we’re starting to see Eu- counts for about 30% of overall sales. Tim- will have positions in optical materials and rope stabilize and start to have some growth,” ing was not ideal as global recession and ex- dyes, precipitated silica, and Teslin sheet. Bunch says. tended declines in Europe set in soon after “These are nice businesses that we think —Robert Westervelt in Pittsburgh

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