PPG Industries, Inc. (PPG) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q2 2012 PPG Industries Earnings Conference Call. My name is Andrew, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Vince Morales, Vice President of Investor Relations. Please proceed, sir.

Thank you, and good afternoon, everybody. Again, my name is Vince Morales, Vice President of Investor Relations for PPG Industries. Welcome to PPG's second quarter 2012 financial teleconference. Joining me on the call today from PPG are Chuck Bunch, our Chairman and CEO; Dave Navikas, Senior Vice President, Finance and Chief Financial Officer; and Michael McGarry, Senior Vice President, Commodity Chemicals. Our comments relate to the financial information released on Thursday, July 19, 2012. As a reminder, based on our modified quarterly earnings call process, about 1 hour ago, we posted the detailed commentary and accompanying presentation slides on our Investor Center at www.ppg.com. Those slides are also available on the webcast site for this call. We do not read those prepared remarks during the call. However, during the call, Chuck will share his perspective on the results for the quarter, and then we will move directly to Q&A. Both the prepared commentary and discussion during this call may contain forward-looking statements, reflecting the company's current view about future events and their potential effect on PPG's operating and financial performance. These statements involve uncertainties and risks, which may cause actual results to differ. The company is under no obligation to provide subsequent updates to these forward-looking statements. The presentation also contains certain non-GAAP financial measures. The company has provided, in the appendix of the presentation materials, which are available on our website, reconciliations of these non-GAAP measures to the most directly comparable GAAP measures. For additional information, please refer to PPG's filings with the SEC. Now let me introduce PPG's Chairman and CEO, Chuck Bunch.

Thank you, Vince, and welcome, everyone. PPG continued our earnings growth momentum during the second quarter, posting our highest earnings in the company's history. Our adjusted earnings per diluted share of $2.36 per share were up 11% versus last year and marked the eighth consecutive quarterly record for the company. We delivered these record results despite weakened European economic conditions and sizable negative impacts from weakening foreign currencies in Europe and Latin America. Continued organic growth in our coatings businesses in the United States and emerging regions, along with the favorable impact from our recent acquisitions, offset the reduced European sales results. As a result, aggregate coatings segment earnings grew by more than 10% versus last year. The primary region for volume improvement was the United States, where our volume growth was fairly consistent with the first quarter. Sales growth in local currencies continued in the emerging regions, but was mixed by end-use market. Our effective cash deployment over the past year, including the performance of our recent acquisitions and a reduction of 5 million shares from our diluted share count, also contributed to the improved earnings. To summarize our performance, PPG's record results in the quarter and over the past 2 years continue to provide measurable evidence of the strength of our global business portfolio, strong cash generation and the effective deployment of our cash. Looking ahead, we expect European demand to remain challenging. As such, we are aggressively implementing our previously announced restructuring programs, focused primarily in this region. Targeted savings from these programs is between $40 million and $50 million in the second half of this year. We expect growth in North America and Asia to continue but to remain inconsistent by end-use market. Finally, we absorbed similar coatings input cost inflation in the first and second quarters, but we expect to offset the negative effects of this inflation in the second half of the year with selectively higher pricing and lower commodity input costs. That concludes our prepared remarks. Now operator, would you please give instructions and open the phone lines for questions?

[Operator Instructions] Your first question comes from the line of Kevin McCarthy, Bank of America Merrill Lynch.

Chuck, I was wondering if you could amplify your thoughts on raw material cost trends in the back half of the year. Is it the case that the rate of inflation is decelerating or do you expect costs to actually come down sequentially in the back half? And then related to that, Chuck, if you could provide an update on the TiO2 pigment cost trends, please.

Okay, Kevin. What we expect in the second half of this year -- we have absorbed a higher raw material cost in the first and second quarters. In the second half, we expect this trend to now stabilize with some declines in raw material prices by region and by commodity that will offset some of the price increases that we received in raw materials in the first half. In regards to the TiO2 pricing, we continue to see more favorable supply-demand environment and depending on the region, some changes in pricing for TiO2. In Asia, as we've commented in earlier calls, we have actually seen price declines in Asia in TiO2 pricing. That's versus not only the first half but also, in 2011. In Europe, we're seeing now not only stability, but some declines in the second half that we're anticipating even though we may be paying more in the second half of this year than we paid in the second half of 2011. And in North America, we're seeing stability around price trends going forward into the second half, albeit we are paying more today than we were in the second half of 2011, and prices for the second half in North America are still under discussion with our suppliers.

And then as a second question, Chuck, if I may, with regard to cash deployment, you've indicated that repurchases will be on hold, pending completion of the Georgia Gulf deal. Can you speak though to M&A and what prospects you would see for acquisitions perhaps in the Architectural or Industrial Coatings arenas around the world?

We're still pursuing acquisitions in all regions and in all segments of the business, and we think that it is a more fertile opportunity for us in these changing economic conditions. But at this point, we do not have any imminent announcements for transactions. But we are continuing to pursue those across the board in our businesses.

And the next question comes from Bob Koort, Goldman Sachs.

Chuck, I think you talked a little bit about some uneven growth rates in Asia. I'm wondering if you can give us a little more granularity around that. What businesses there are still growing nicely, and which ones maybe have fallen off a bit from where you entered the year?

If you look at Asia, but in particular, our biggest market there is China. The strongest growth rates that we have seen have been in the automotive OEM coatings. Auto refinish has also been strong, as has packaging coatings. We're still seeing growth in our Industrial Coatings segment, although there are some end-use markets in Industrial Coatings that are not as strong. And in particular, I think the weakness that we have seen in China, but we've also seen it elsewhere in Asia. The Construction markets have slowed down there, and so both in Architectural but also, Industrial or other segments -- subsegments that are tied to the construction businesses, we have seen a slowdown in volume in China and more broadly, in Asia.

Okay. And then on Transitions, you talked a little bit about some customer inventory management. Is that something that can have a duration of more than a couple of months? And does this speak to general anxiety about consumer spend? Or where do you attribute the weakness there to?

Well, we think, in part, there was a strong restocking trend in the first quarter that we talked about that really boosted our results there, and I think what you're seeing now in the second quarter, and it could have a little longer duration, is a weakness in some of the consumer markets, especially in Europe, especially in markets in southern Europe. And I think some caution on the part of our customers in Optical business to carry inventories with their concern over economic conditions over the next few quarters.

The next question comes from John McNulty, Credit Suisse. John P. McNulty - Crédit Suisse AG, Research Division: Just a couple of quick ones. On the Architectural EMEA business, the earnings were up nicely despite currency maybe impacting them in kind of the difficult economic environment. So I guess, I'm wondering how much, if any, of this improvement was tied to some of the early cost cuts and if some of the -- and the restructuring. And if some of that's coming in early, do you have any expectations for having a better number than what you originally were looking for the, for the year-end?

John, I would say that we are working on the restructuring program that we identified or outlined in the first quarter. I would say that we're on pace there. But by and large, the benefits that we're seeing here in the second quarter in our European architectural businesses are, I think, coming from good operations, no volume growth but slightly improved pricing and good operating discipline. We are starting to see the impact of some of the cost reduction, and that will be a little larger in the second half and into next year. But I would say it's too early, certainly, in the second quarter to have that really be measurable. John P. McNulty - Crédit Suisse AG, Research Division: Okay, great. And then just as a follow-up, on the auto coatings side in the U.S., it sounded like you had a lot of strength. How much of that is tied to just the overall industry? And how much of it, would you say, if any, is tied to to maybe share gains that you're starting to see?

Well, the North American volume gains for our automotive coatings business have been very strong, and I would say that you have 2 effects. You have the market recovery. So we're seeing and we have been seeing this year 15% to 20% volume improvements in North America in overall builds. Some of that being helped by a year-earlier comparisons. Remember, we had the effect of the Japanese earthquake and tsunami that really restricted some of the production in the second quarter of last year. But I would say that our strength in North America has been across the board. Yes, a recovery with the Japanese-based OEM manufacturers, but clearly we're seeing, I think, a general improvement in the overall automotive OEM market, the tsunami recovery. And actually something that we've talked about in a number of earlier calls where you're seeing more production moved here to North America, both on the part of the Japanese-based manufacturers, but the Koreans are now producing here. And we've seen solid growth in North American manufacturing for the European-based companies, such as the Germans, the BMWs, Mercedes, VW, they're all here now and ramping up production. So I think you have the effect -- all 3 of those effects. I would say our improvement is more tied to those improvements. We think we'll get share, certainly our share and probably more as we move through this cycle. But I think it is the overall improvement in the business that we're benefiting from in North America.

And the next question we have comes from David Begleiter, Deutsche Bank. .

Chuck, just in terms of U.S. demand trends, have you seen any weakening in the last few weeks or towards the end of June?

In our businesses?

Yes, generally speaking, given some of the macro headlines and any sense the U.S. is beginning to slow down at all.

Our view is that, obviously, the first quarter had strong growth year-over-year. We talked about some of the seasonality, the better weather, the caution at the end of last year around inventories. So the first quarter was stronger in terms of overall volume growth. But we've seen volume growth here in North America in the second quarter, and I would say we haven't seen any pullback or correction over the last few weeks or the last month. I would say it's been pretty steady growth even if it's not at the same level that we saw in a year-over-year basis in the first quarter.

And just on TiO2, Chuck, you talk about your target reduced consumption by 5% this year and 10% next year. Are you on track? Are you ahead of schedule?

We said we identified for this year a 4% to 6% reduction in TiO2 consumption on a similar-volume basis. Over the first half, we were a little over 2% in terms of our more efficient use of TiO2 in our formulation, so we're on track. We're still focused on this area even if the supply-demand and pricing environment has stabilized, but we're still focused. And these projects are still delivering, so so we think that we'll be within that range in terms of overall improvement in productivity for our use of TiO2.

And last, Chuck -- last thing, Chuck, given TiO2 prices rolling over in Europe and Asia, I would think you would be asking your guys to push for price decreases in the U.S. Are you and do you expect U.S. prices to be down for TiO2 in the back half of the year versus the first half of the year?

We're -- as I said in my earlier comments, we're in discussion right now on TiO2 pricing here in North America with our suppliers. And at this point, I don't have any further commentary on the outcomes. They're still undecided.

And the next question comes from Jeff Zekauskas, JPMorgan. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Are there any constraints on share repurchase following Reverse Morris Trust transaction? And if there are, do they last for, I don't know, 2 years? Or are there no constraints?

Jeff, this is Dave Navikas. So there are -- Jeff, because of the need that we have to maintain the tax-free status of the transaction and the distribution of at least 50.1% of the newly merged company stock to PPG shareholders, there are some complicated tax rules for dealing with equity transactions during the 2-year period leading up to the closing of this transaction. And given that we're starting at the 50.5% threshold, we've got a very small cushion for any of our shares to be taken out of this calculation. So on advice of counsel because of that close margin, we won't be engaging any share repurchase from now until we close the transaction, either late this year or in the first quarter of next. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: I don't think I perfectly followed you. So over the next 2-year period, does this transaction mean that you're really inhibited in what you can repurchase further?

There's only an issue, Jeff, between now and when the transaction closes. Once the transaction closes, we'll be able to continue to buy back stock at that time. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Okay. And then, lastly, your sales were flat to down year-over-year. And your cost of sales was also flat to down, and your volumes overall didn't grow. So does that mean that there really wasn't much raw material inflation that you felt in the quarter since your cost of goods sold went down a little bit?

The other complicating factor in there, Jeff, is currency conversion, and cost of sales went down in part because the weakened currencies abroad, and we brought those back. And then that affected, basically, every line of the income statement. We did still see, on an inflationary perspective, somewhere in the 3% to 5% inflation range versus last year, which was fairly consistent with the first quarter for coatings raw material input costs.

And the next question we have comes from Don Carson, Susquehanna Financial.

Chuck, in the first quarter, your strong U.S. architectural volumes suggested that you were taking share, particularly at the big box, and I know you had some tough comps given the ramp-up of Olympic ONE. But is that a correct observation that you're taking share at the big box? And maybe you can just comment on trends in your other architectural distribution channels in the U.S.

Well, Don, as you said, in the second quarter of last year, we did have a pipeline fill for Olympic ONE. So I would say that it is difficult for us to determine exactly what the share position has been for us in the channels. We haven't seen all of the reports out. I would say that as we looked -- this year, we've had a very strong exterior stain year. We've seen volume recovery in every channel. So we're up mid-single digits in terms of volume in our channels -- all our channels, if you exclude this pipeline fill for Olympic ONE in -- at Lowe's or in the national account channel. So we feel we had good volume growth. We haven't seen everything out there yet in terms of our customers and some of our competitors. So I would say it's too early for us to comment, but we have seen a nice volume improvement. The business is, I think, showing some good momentum, and we're pleased with the pace of our performance here in the architectural business.

And how big a part has Olympic ONE been? What percentage would that be of your Lowe's business now? And do you think, in this market, there's still a shift down in price point and that, that's benefiting an Olympic ONE given how it's positioned versus some of those competitors?

Well, we wouldn't comment on how volume is going between price points or we just feel that Olympic ONE has been well received by both our direct customers and the consumers. They're seeing the value in the product and the way it's been positioned and marketed. We think it's a great can of paint, and so I would say that, right now, it's clearly a strong positive for our business.

And then just switching to one of your smaller businesses, on packaging. We've heard of some weakness in Europe. If you can just comment how that business is there. And are you gaining share in your North American packaging business given some of the new products you've come out with?

For us, again, share, on a short-term basis, is harder for us to track in this business. I would say that if you looked at regionally for packaging coatings, the strongest region, by far, is the Asian, so our Asian business, in particular China. Europe overall has not been as strong. We haven't seen volume growth there. But again, one of the big development opportunities is the BPA non-intend or BPA-free coatings in our food and beverage can businesses. And here, we think we're making excellent progress in terms of our products and their qualification, and I think this will be an opportunity for us to grow the packaging coatings space here in the near term and in the years to come because we're really providing a solution now for our customers because many of the consumers are more concerned about BPA in food and beverage coatings. And we are providing a real technological solution, which is one of the hallmarks for PPG and one of the things that we feel we do best.

The next question comes from Duffy Fischer of Barclays.

If you look at your 3 coatings businesses, can you talk about the relative differences in those businesses, what we should expect kind of from incremental margins on a new dollar of volume-based sales growth?

Let me try to answer that, Duffy. The businesses that have, right now, the heavier fixed costs load would be the architectural businesses. They have store network. That's a bigger fixed cost as opposed to some of our industrial businesses. Obviously, some of our best businesses, which, we have said historically, have been aerospace, auto refinish, they're higher margins. We continue to argue for a solid incremental margin on that additional sales dollar. So those would be the -- right now, those would be the businesses with the most opportunity for incremental sales.

Okay. And then could you comment on the strength or weakness you're seeing in the European auto industry in particular?

For us, European OEM production was the weakest end-use market or region. It's both the weakest end-use market in Europe, but it was also the weakest region and really the biggest decline. So we were looking at mid- to high-single digit declines in automotive production in Europe. That wasn't in every country or among every producer, and clearly, the Germans had showed more strength than the non-German-based producers. We had some markets in addition to Germany that were stronger, Russia and the U.K. But we saw weakness in what we would call southern Europe, and the majority of the declines in the OEM build rates were among, let's call them, the mid-tier or the middle market producers in Europe. But certainly, it was a very weak market in the first and second quarter of this year.

If I could just append to that even though Europe was weak for auto OEM, globally, that was one of our strongest markets for the company because of the strong growth in the U.S. and strong growth that Chuck mentioned in Asia. So those 2 have more than offset the European weakness.

The next question we have comes from Nils Wallin, CLSA. Nils-Bertil Wallin - Credit Agricole Securities (USA) Inc., Research Division: First is really on Europe. It seems like volumes are -- volume declines are accelerating, and I'm curious to know whether you believe, in the third or fourth quarter, we will see that acceleration continue or you -- we're kind of at the bottom here, and it will abate. But what are you seeing so far this quarter? And what is your expectation for the remainder of the year in terms of European volumes?

Well, we saw, in many of our markets, including the auto OEM market that we just talked about, that the second quarter was as weak or actually slightly weaker than the first quarter. The third quarter is a little more problematic, especially at this time of the summer, to determine what are the actual trends. You got vacation season in July and August, can be difficult months to gauge volume trends. So right now, we feel it's too early to say. But we do not feel, with the information that we have, that these volume declines are accelerating from what we saw in a fairly weak second quarter. But we'll be in a better position to follow these trends in Europe as we get into September and October. But we have not seen any change for the worse in this early part of the third quarter. Nils-Bertil Wallin - Credit Agricole Securities (USA) Inc., Research Division: Okay. In terms of volumes in your architectural business, I don't -- I apologize if I missed this. Did you say that across all the channels it was relatively the same in North America, your company stores, your independent distributors and in the third -- and in the big box? Is that true?

Yes, we said that, with the exception of the pipeline fill we had last year with the new product introduction in the national accounts channel. But excluding that, volume trends were similar across the channels. Nils-Bertil Wallin - Credit Agricole Securities (USA) Inc., Research Division: Okay. Now kind of more of a strategic question. Obviously, this nice acquisition that you announced today, when you look at the reconstituted PPG in the future, how do you -- one of the areas relative to some of your competitors seems to be as much of a greater exposure on the retail side in architectural. Is there any interest in bulking that up once the transaction is complete or at least, changing the mix there?

Well, I should clarify what we announced was actually more of a divestiture than an acquisition. Nils-Bertil Wallin - Credit Agricole Securities (USA) Inc., Research Division: Sorry, sorry. My apologies.

In terms of our channel strategy, if you look on a global basis, we have a strong store and dealer network in Europe. And there with volume trends -- we're committed to the channel. It's been as you've seen. Our results have been, we think, very good under what have been difficult economic circumstances, so good performance there. So we're still committed to the -- to that store channel and our relationships with the independent dealers here in North America. We are participating in all 3 channels. We think that there are customers that are best served in each one of these channels that we participate in and that we would -- we expect to continue our participation and growth in all 3 channels here in North America.

And that's the end of today's question-and-answer session. I would now like to turn the call...

No, no, Andrew. We still have time.

The next question that we have is from Ghansham Panjabi of Robert W. Baird. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Going back to the architectural EMEA business, did the wet weather in Europe have any impact on your business, any measurable impact? I know it's affected other industries, and apparently, it has been a very, very wet summer across northern Europe. Just curious if it had any impact on you.

Well, we think that the weather in Europe has kind of been the reverse of what we've experienced here with all this hot, dry weather here. They have had a colder, rainier summer. We think it may have had some impact, although, arguably, we've probably seen more of an impact in Europe from just the challenging economic conditions. But weather may have been a factor in terms of some of the volume weakness that we have. But it's really difficult for us to determine that. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then, in your prepared comments, you cited the Argentinian import policy change by the government there. Can you just expand on that and how it impacted your auto refinish business?

Well, in Argentina, for those of you who haven't followed it, they have changed a number of their economic policies. And in fact, if you're bringing in material into Argentina now, you need an import license. Previously, you had that southern cone of South America that was operating as a free-trade zone, so in our businesses, we had focused many of our production and manufacturing activities in Brazil. And we were, let's call it, a net importer into Argentina across many of our businesses. We have one manufacturing facility in Argentina, but by and large, in refinish in particular, we were a net importer. And with these new government policies, then you had to apply for an import license, so that had the effect in the second quarter of really slowing things down because you had to take the additional step then of asking for, in effect, permission to bring in goods from outside of Argentina, whether it was Brazil or outside of South America. And that delay in approvals, especially with the rapid change of the policy, I think a lot of manufacturers were caught offguard. And I think the government was initially not prepared to handle the volume of requests. So we saw, in the second quarter, our volumes declined, especially in those businesses like refinish, where we were bringing in most of the material from outside the country. What has happened subsequently here in July, over the last few weeks, I think the government is catching up now with a lot of the permitting requests. We are getting approvals now, and we see that balancing out over the coming quarters. So we think that it will not have the same negative impact that we certainly saw in the second quarter for our Argentinian business.

And the next question comes from Ivan Marcuse, KeyBanc Capital Markets.

Most of them have been answered, and you may have already answered this one. But in the second quarter, what were your raw materials up on a year-over-year basis?

Ivan, they were up between 3% and 5%, which, again, was a trend that we saw in the first quarter.

Okay. Great, and then if you -- looking at your China business. I know it's relatively small on the architectural side. Did you see -- is construction over there getting worse or is it about the same as it has been, on a sequential basis, the last couple of quarters? Or has there been any sort of maybe signs that it is getting better?

We have not seen -- again, we're a very small player through a joint venture in Italy. You're saying, that was China or...

Yes, China, sorry.

In China, we are, again, a small player. We saw things stabilize for our business, but because we are relatively small, I'm not sure that you can take trends in our business to be an overall indicator. But what we see generally is that there's not any significant improvement in volumes in the construction industry in China. In fact, as we look at some of our other industrial businesses that touch on construction markets, those have been -- they continued weak in the second quarter, and we did not see any improvement as we went through that first half of the year.

And the next question we have comes from John Roberts, Buckingham Research.

The glass segment had up 4% volume, and since fiberglass was down, was the flat glass business up upper-single digits?

The flat glass business did improve over the second quarter of last year. We saw, however, weakness in our fiberglass business now in 2 specific areas. Remember, this is more of a global business than our flat glass business, which is North American commercial construction-related. So we had some weakness in fiberglass in our European region. And also, we participate in a joint venture in Asia that is primarily a printed circuit board into the electronics market, and there, we did see weakness in the electronics or consumer electronics space that affected our fiberglass business, in addition to that European weakness.

Still on that, Chuck, I'm just thinking if flat glass had volume that was up, let's say, upper-single digits perhaps, and natural gas costs were down a lot year-over-year for the flat glass business, I would have thought it would have had more earnings leverage to offset the fiberglass weakness.

John, the volumes -- just to finish the volume story. Part of those volume gains for our flat glass business were selling into solar, and that is a jagged type of -- still a jagged type of end market. There's inventory fleshed out and then picked up. We did have more solar sales, part of that's a little bit of market share gain. The gas cost was fairly comparable sequentially, down a little bit year-over-year, but they're not as big as a gas consumer as our commodity chemical businesses. So that would have -- did have a positive impact, but not as, much as you would expect from like our chemical business.

The next question we have is from Laurence Alexander from Jefferies. Robert Walker - Jefferies & Company, Inc., Research Division: This is Rob Walker on for Laurence. I guess, first, have you seen any indication of slowing in auto OEM globally? And just broadly, can you talk to your level of confidence in growth in that end market?

We're still seeing growth globally. Again, we were up some 5% globally. We still see good strength here in North America, as we've been talking about. Japan is rebounding from the tsunami effects of the second quarter of last year. China, although it's not the double-digit growth that we've seen over the last few years, we're up 5% to 7%, and sales have been solid in China. Europe is the weakest link, and we've talked about mid- to higher-single digit declines in the European automotive production. And I would -- we haven't seen any deterioration from what's arguably a fairly weak level. And in South America, the volumes have weakened there as well. That's not the biggest market. And if you look at Mexico, they're up significantly because they're more tied to the North American production, and they're really participating in this plus-20% kind of growth that we've seen. So I would say, overall, we still feel good about the automotive OEM market, with the caveat that we've got a couple of weak regions. Robert Walker - Jefferies & Company, Inc., Research Division: Great. And then just broadly to the segment Industrial Coatings, can you talk about your visibility there in terms of how are customers feeling about their backlogs?

I would say, in general, Industrial Coatings is a fairly broad-based reporting segment in terms of end-use markets. So automotive, we've -- automotive parts that are part of industrial, they will track what we've just talked about in OEM production. We see some recovery in kind of the industrial production indicators and some markets, though tied to construction outside of North America. So all the construction-related markets for -- including coil and extrusion for industrial in North America, are pretty solid, but outside, fairly weak. Consumer electronics has been weaker in Asia. That's primarily an Asian story. So it is a mix with, again, more of a regional flavor, with things in North America working pretty well to varying degrees across the different end-use markets. And outside of North America then, you get into just about everything, and Europe is weaker to some degree. Asia, it's mixed by end-use market, so it just depends. And industrial probably touches almost every end-use market that we participate in. And so I would say those trends are confirmed for that business, as well as overall for the company.

And the next question we have comes from Dmitry Silversteyn from Longbow Research.

A couple of questions in the businesses that haven't been talked about yet. You mentioned in your press release and in your prepared remarks about inventory correction in the Optical segment causing that division to deliver not quite a strong result as it has in the past. Has that inventory correction run its base? And what do you expect for growth on the other side of the correction? Usually, when people correct inventories, it's because they overestimated the growth rate of their markets and now they're trying to rightsize it. Should we expect growth in the other side of the correction, assuming it's over this quarter, to be somewhat slower than it's been in the recent quarters?

Yes, if we -- I would just clarify the question in the terms that we didn't see as much sales growth in that business unit. But from an overall profitability and margin performance, they had a very strong second quarter in Optical and Specialty Materials. In the Optical business, again, some weaker volume and currency trends were working against the business in markets like Europe or even in South America. We think that there is caution in the customer base, again, focused on Europe and some of the other markets where the volume trends probably are going to -- the growth, we think, will be lower as we try to get through some of these more challenging economic conditions in some of the regions. So I would say that we may continue to have, for a short period of time, maybe another quarter or so of reduced growth expectations. But we still feel good about the business and the other segments in specialty materials, including our precipitated silica business. The optical materials business and the Teslin inorganic printing material business had very solid quarters as well, so they were key contributors to the overall performance of that segment.

That's helpful, Chuck. Thanks a lot for the color. Second question. On the automotive market -- automotive OEM market, particularly in the U.S., there have been some headlines about manufacturers perhaps taking shorter downtimes this summer or in some cases, may be eliminating them in certain plants to keep up with what you've described and what, certainly, we're seeing as a pretty robust demand in the market. Will that result in sort of diminished seasonality that you would typically see between the second and third quarter? Or is kind of the European deceleration going to overwhelm that and we should expect sort of a normal seasonality second to third quarter?

I think we should -- you should expect normal seasonality. I think you described it correctly. We're going to see more strength here in North America, probably a little less strength, just from a seasonal standpoint not from an overall market standpoint, in Europe because of the vacation shutdowns. But I don't think you're going to see a marked deviation in trend in the business.

Fair enough. And then finally, in your comments about the Industrial Coatings business -- or actually, I think it was about coatings in general for the second half of the year. You talked about seeing some raw material environment being more benign, and then, you referred to selective price increases. I'm just trying to understand, given that demand is not particularly robust with the exception of 1 or 2 channels and geographies and you don't experience the raw material pressure, what would be the justification and how do you think customers will receive price increase announcement in the second half of the year? Or is this going to be just in markets that are roaring and the supply is tight and you just have sort of the power to raise prices?

I would think that my remarks are more tied to price increases that have -- that reflect the earlier raw material inflation that we experienced. And again, as we've commented, our prices today, here in the third quarter, our raw material prices, are higher on average than they were at the beginning of the year. So that there is still -- we see some stability there, and we are still trying to recapture, in some markets or regions, the raw material price increases that we experienced in 2011 or before and also, in the first half of this year.

But is it reasonable to expect these price actions to be successful given that your customers are looking at the propylene price chart same as you are and the TiO2 price chart same as you are and maybe dragging their feet for another month and then maybe they don't have to pay those prices?

I think, Dmitry, that's -- we certainly call them selective pricing, and again, there -- I think, you described it right. There are markets where we feel there is opportunity to recapture some of this inflation.

The next question comes from Gregg Goodnight, UBS.

Your currency headwind in the second quarter, how is it looking thus far in third quarter? What is your expectation?

Well, part of the headwind in the second quarter, Gregg, really reflects the strength of the euro and Latin American currencies last year, so the comparable period was extremely difficult. And then I think the euro -- our euro conversion rate in the second quarter of 2011 was 1.44. I think we ended this quarter like 1.28. The conversion in the third quarter came down last year, so the comparable period is not as difficult. That will lessen, if all things were equal, that will lessen the impact on a year-over-year basis. Sequentially, it's fairly comparable.

Got you. Second question, I saw where you recently got approval from Indian authorities to expand this -- your JV, Asian Paints Limited. Could you give us some help in terms of sizing the opportunity and what would be the timing of an expansion if you decided to move forward with it?

Well, we've had a long-term joint venture with Asian Paints. It's called Asian PPG. That is primarily participates in the automotive OEM refinish and selected segments of the industrial business. The announcement with Asian Paints is now we're going to have 2 joint ventures: one a majority-owned or controlled venture of PPG, primarily with the automotive refinish and industrial segment; and another a majority-owned and controlled Asian Paints joint venture that'll be more in the distribution of protective and marine coatings and light industrial. But what you're going to see different is we will begin this quarter, the third quarter, in consolidating the sales from the newly formed or majority-owned PPG joint venture. It won't have a material effect on the earnings because we've been reporting 50% of the earnings from the joint ventures in previous years. But you'll see some growth in our sales line now as we consolidate those sales of the new joint venture.

Okay. Last question, if I could. True to your word on investor day, you have stepped up your activity in licensing TiO2 technology with Argex in Canada and your recent Chinese announcement. My question to you is, what do you think the likelihood is that a new grassroots TiO2 plant based on your technology will happen in the next 5 years? Not naming any specific potential licensors, but what do you think the probability of that is?

Well, I'd hate to speculate on what the probability is. But obviously, in the case of Argex, we think they have a viable technology. We've been working with them to validate the technology, and it's used on our products. They have already access to the mining rights for these materials. I would say given a longer time frame, like 5 years, I would say that is -- I would give that a higher level of probability. In the case of potential Chinese TiO2 producers, I would say that these plants require a lot of investment, a lot of technology. But I would -- as we've seen over -- the growth in China across a broad array of industrial commodities and we participated in what we think is a tremendous growth story in China in industrial markets. But I would not discount the probability of -- what are now a number of TiO2 producers in China, albeit primarily in the sulfate grades. But I would not discount their ability to develop the chloride technology in the coming years and get into production within the kind of time frame that you're talking.

The next question we have comes from P.J. Juvekar from Citi.

Chuck, what kind of same-store sales growth are you seeing in your stores business? And how does that compare -- how does that volume growth compare with your big boxes business?

Yes, as I said earlier, P.J., our volume growth in the second quarter was comparable across all 3 channels. We've talked about mid-single digit kind of growth with the exception of the, let's call it, the pipeline fill last year in the second quarter in the national accounts channel. So I would say we saw a fairly consistent growth across the channels here in North America.

So you're not seeing the contractor business growing faster than the DIY business currently?

I would say as I -- again, we saw comparable volume growth across the channels. It's still -- I would say I haven't seen a significant deviation in the trends. Obviously, we go through -- we go to market in all the end-use markets and the channels, and so I would say it's been fairly consistent.

Okay, fair enough. And lastly, how much Chinese TiO2 are you currently buying?

Our total spend, P.J., it's high-single and low-double digit percentages.

The next question comes from Saul Ludwig, North Coast Research.

Which segments will benefit from the $40 million to $50 million in cost savings in the second half of the year?

Saul, we had, in our last quarterly call, a schedule that broke that out for the second half of 2012 and also, for all of 2013. We didn't replicate that here, but it's available on our website.

Okay. Looking at this sequentially, normally, you have lower earnings in your third quarter than you do in the second quarter, and that's been a pattern for most years. And you've talked about the sort of volume trends that you're expecting in the third quarter to be comparable to what you've seen in the second quarter. But when we look toward the back end of the year, it sounds like a, you're going to have the cost savings in the back end of the year that you didn't really have in the second quarter, and that your price-to-raws relationship, because of stability in pricing and in -- stability in raws and increases in pricing, should be somewhat more favorable in the back end of the year than it was in the first half of the year. So would that suggest that the seasonal pattern of earnings might be a little different, maybe more favorable than what it has been on a historical basis?

So the most pronounced impact on earnings is just the volume movements among the quarters. So if we're not buying product, regardless of the price as it is, we're not getting the benefit. So I agree with the general theory that you outlined that we should see some more favorable economics in the second half versus the first half, but we still need volume to apply to those economics.

Okay, and then finally, Dyrup contributed about $60 million in revenue in the quarter, and we are earlier discussing about the improvement in earnings in EMEA in the second quarter. Did Dyrup contribute $6 million, $7 million, $8 million of EBIT in the quarter that obviously you didn't have a year ago?

Yes, that's a good round number, so...

The next question comes from Bill Young, Chemspeak.

Many of the economists and certainly, the data collectors have indicated that the housing market seems to have bottomed here in the U.S. and starts are improving. And I realize an awful lot of the architectural goes into existing units. But are there any signs on the horizon from your perspective that would be consistent with these observations? Or how long would it take for PPG to see the impact?

I'm not sure I understand exactly, Bill. But as you referenced, the repair and the remodeling part of the paint market in architectural is, by far, the biggest share of the overall volume, and I think you are seeing some improvements there. The indicators have been, by and large, positive, and they've stayed that way most of the year. I think initially, in the first quarter, we said, "Well, there is some weather impact," but most of the indicators have still stayed positive. The biggest indicator is sales of existing homes or existing home resales. Those have been positive, so I think that is a good indicator for the architectural market here. We've seen some year-over-year growth in new home construction, albeit on some very low levels, so that's a positive. Commercial construction, on the new OE -- let's call it new commercial construction, it's been a weaker market. We participate in that, both on the coatings side and also, in our flat glass business. So that has not really ramped up as much, but overall commercial construction, we think, is going to lag a little bit this improvement in residential. So I would agree with you, most of the signs are favorable. And it should be a good news for us, and that's the way we feel, although it's not -- this is not a straight line up for us. And I think we're going to see slow but steady improvement over the next few years in this business.

And I would now like to turn the call back over to Chuck Bunch for closing remarks.

Andrew, I'm doing the closing remarks. I just want to thank everybody for their time in the call today. And if you'll need further questions, please contact me in Investor Relations. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.