Market outlook: PPG Industries CEO Charles Bunch aims to continue momentum

Source: ECN


Charles Bunch takes the leading global coatings company through a major transformation. See what could be next as he seeks to capitalise on opportunities

US-based coatings giant PPG Industries has been on a roll, boosting profits in a challenging economic environment, divesting non-core businesses and making major acquisitions to bolster its leading coatings franchise.


PPG CEO Bunch speaks with employees at PPG’s architectural coatings office and R&D centre in Longueil, Quebec, Canada

The company, led by chairman and CEO Charles Bunch, will seek to build on PPG’s success through operating improvements, achieving cost synergies from acquisitions and additional mergers and acquisitions (M&A) activity.

“A key challenge will be maintaining momentum, as we’ve had good success in running our coatings business with operational improvements and global growth,” said Bunch in an interview with ICIS.

“We’ll face ongoing learning challenges as we move further into emerging markets where we see solid long-term growth prospects. We see an opportunity to capitalise on the continuing recovery in the US, and Europe will also present a big opportunity for PPG if it can return to growth,” he added.

Historically a diversified industrial company with roots in glass, coatings and chemicals, PPG started focusing on its coatings business in the late 1990s.

“We made a strategic decision to focus on our best business and have grown organically and through acquisitions. In coatings we saw the opportunity to create a lot of value for our customers, developing solutions from our strengths in technology, innovation and service,” said Bunch.

PPG’s coatings business has generated a compounded annual growth rate of 10% in operating earnings from 2007 to 2012, including the impact of the recession in 2008-2009. Through the first half of 2013, earnings are up more than 20% year on year.

“When opportunities presented themselves, we reduced our exposure to glass and chemicals. It has been a more evolutionary transformation,” he added.

The coatings business offers consistent, less cyclical growth and cash flows. It is also “asset-light” – or less capital intensive, noted Bunch.

In a landmark deal announced in 2012, PPG agreed to separate its chlor-alkali business and merge it with US-based polyvinyl chloride (PVC) producer Georgia Gulf to create a fully integrated, publicly traded PVC company called Axiall.

“We were doing well in our chlor-alkali business, especially with the US shale gas revolution driving down energy costs. But ultimately, this is a commodity business that is more cyclical and capital intensive,” said Bunch.

“US shale gas is a good thing long term for the chemical industry and this has touched off an investment boom. We saw a lot of companies coming here and adding capacity, including in chlor-alkali. We would have had to invest to keep up, so it was the right time to exit the business, and to someone willing to invest in it for the longer term,” he added.

When the tax-advantaged transaction, structured as a “Reverse Morris Trust” under US tax law, was completed in January 2013, PPG received $900m (€667m) in cash, and was able to retire 7% of its outstanding common stock through an exchange offer.


And in July 2013, PPG took another step in its transformation, agreeing to sell its 51% stake in self-tinting lens company Transitions Optical to joint venture partner France-based Essilor International for an enterprise value of $3.4bn.

Upon closing of the deal, expected in the first half of 2014, PPG will receive $1.73bn in cash on a pre-tax basis, with after-tax proceeds estimated at around $1.5bn.

With the planned divestiture, Bunch calls PPG’s transformation “largely complete” with 90%, or about $13bn, of total 2012 pro forma sales of $14.2bn in its core coatings business.

With additional opportunities for organic growth and acquisitions in coatings, Bunch plans to “move that needle to more than 90%”.

The company still has a glass business comprising 7% of sales, and specialty materials the remaining 3%.

“We regard the glass business as less core, and we could look at [divesting] that over time,” Bunch said.

On the M&A side, PPG completed its purchase of AkzoNobel’s North American architectural coatings business in April 2013 for $1.05bn.

“In this deal, we saw a good opportunity for us to acquire a business here in North America that had a similar profile to our architectural coatings business,” said Bunch.

“With this we build size and scale, and position ourselves for a continued upturn in North American construction markets. We are deep into the integration and encouraged by the synergies,” he added.

In May 2013, PPG also bought US-based aerospace coatings company Deft for an undisclosed sum.

Bunch sees coatings acquisition opportunities in emerging markets in Asia and Latin America. “Those two areas have higher potential for growth, and that’s where we’re looking.”

PPG has grown its Asia coatings business from $527m in 2004, to $1.87bn in 2008, to $2.62bn in 2012, accounting for about 20% of total coatings sales on a pro forma basis. China accounts for around half of the Asia business.

The company already has a strong balance sheet, and will become more cash rich after closing the sale of its Transitions Optical stake in the first half of 2014.

At the end of the second quarter of 2013, PPG had cash and short-term investments of $1.78bn against debt of $3.38bn. With expected after-tax proceeds of $1.5bn from the Transitions deal and strong continued cash generation, it could be close to a zero net debt position.

PPG’s priorities for cash are acquisitions, followed by share buybacks, said Bunch.

In addition to coatings, the company would be open to making acquisitions in adjacent businesses such as in adhesives, sealants and pre-treatments, where it already operates.

However, “back-integration into TiO2 [titanium dioxide] is not on our radar screen,” said Bunch.

“We try to form alliances and supply agreements with TiO2 suppliers in developed and emerging regions involving technology sharing,” he noted. PPG has formed such partnerships with Canada’s Argex and China’s Henan Billions Chemicals.


 Cans of Glidden paint roll off the production line at PPG’s Huron, Ohio manufacturing plant

In the $110bn global coatings sector, PPG will continue to be a consolidator – “more outside of North America”, noted Bunch.

“We’ve been one of the leaders in global coatings consolidation and you’ll continue to see moves from us,” he said.

On a macro basis, the winds appear to be shifting in PPG’s favour, with positive signs in the US, Europe and China.

“The US economy is continuing a modest recovery and we are pleased that our automotive OEM and residential construction businesses are continuing to get moderately better,” said Bunch.

“In Europe, we saw a rough first half of 2013 after tough conditions in 2012. But things are stabilising at a low level and we see some early signs of small improvement. We are hopeful,” he added.

“China will be a good story for us. The automotive market is quite strong there, and after a pause with the new government, there are now policies in place for growth in the construction market,” Bunch said.

PPG CEO Bunch to be first to receive honour

PPG Industries chairman and CEO Charles Bunch will receive the ICIS Kavaler Award, sponsored by The Chemists’ Club, at an event at the Lotos Club in New York City on 30 October.

Bunch was selected for outstanding and newsworthy achievement by his peers among the ICIS Top 40 Power Players ranking, a global rundown of the people making the greatest impact on the chemical industry. He will be the first recipient of the award.

Bunch became CEO of PPG Industries in March 2005 and assumed the chairman role in July 2005, after holding various finance, marketing and management positions inside the company since joining PPG in 1979.