PPG Industries, Inc. (PPG) Q2 2013 Earnings Report, Transcript and Summary

Vincent J. Morales - Vice President of Investor Relations Charles E. Bunch - Chairman, Chief Executive Officer and Member of Operating Committee David B. Navikas - Chief Financial Officer, Principal Accounting Officer, Senior Vice President of Finance and Member of Operating Committee

Kevin W. McCarthy - BofA Merrill Lynch, Research Division Ramanan Sivalingam - Deutsche Bank AG, Research Division Robert A. Koort - Goldman Sachs Group Inc., Research Division Donald Carson - Susquehanna Financial Group, LLLP, Research Division P. J. Juvekar - Citigroup Inc, Research Division Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division John P. McNulty - Crédit Suisse AG, Research Division Laurence Alexander - Jefferies & Company, Inc., Research Division John Roberts - UBS Investment Bank, Research Division Ivan M. Marcuse - KeyBanc Capital Markets Inc., Research Division Nils-Bertil Wallin - CLSA Limited, Research Division Christopher J. Nocella - RBC Capital Markets, LLC, Research Division Kevin Hocevar - Northcoast Research Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division William Young Duffy Fischer - Barclays Capital, Research Division Dmitry Silversteyn - Longbow Research LLC Charles A. Dan - Morgan Stanley, Research Division Richard O'Reilly Jeffrey Stafford - Morningstar Inc., Research Division

Good day, ladies and gentlemen, and welcome to the PPG Industries Second Quarter 2013 Conference. My name is Shaquana, and I will be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Vince Morales. Please proceed, sir.

Thank you. This is Vince Morales. Good afternoon. Welcome to PPG Second Quarter 2013 Financial Teleconference. Joining me from PPG today on the call is Chuck Bunch, PPG's Chairman and Chief Executive Officer; Dave Navikas, Senior Vice President, Finance and Chief Financial Officer; and Frank Sklarsky, Executive Vice President, Finance. Our comments relate to the financial information released today, Thursday, July 28, 2013. I will remind everybody that approximately 1 hour ago, we posted detailed commentary and relating presentation slides on the Investor Center at ppg.com. These slides are also available on the webcast site for this call, and they provide additional support to the opening comments that Chuck will make momentarily. Following Chuck's perspective on the company's results for the quarter, 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. Our presentation also contains certain non-GAAP financial metrics. The company has provided in the appendix in the presentation materials, which are also available on our website, reconciliation of these non-financial -- non-GAAP financial metrics to the most comparable GAAP financial metrics. 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 good afternoon, everyone. We appreciate your continued interest in PPG. For the past several years under a variety of different economic circumstances, we have delivered consistent earnings growth. We are pleased to continue this trend as the second quarter financial results included all-time records for both sales and adjusted earnings per share. Our adjusted earnings per share of $2.45 from continuing operations exceeds our prior record set last year. Of equal importance this quarter, we more than fully replaced the earnings per share reduction stemming from separating our former Commodity Chemicals business. This record performance was achieved despite continued divergence in the level of economic activity in the major regions of the world. During the quarter, we benefited from generally modest but consistent growth in most North American end-use markets. Solid growth also continued for all our Asian businesses, except the marine coatings market. Yet again, demand in Europe was lower year-over-year, although we are experiencing a fairly consistent pace of business in the region and a few of our businesses did achieve volume growth in that region this past quarter. The major factors in our improved financial results were continued sales and earnings growth in several of our businesses, including automotive OEM, aerospace and automotive refinish; proactive and aggressive cost actions in all of our businesses, including stringent discretionary cost management and continued benefit from our 2012 restructuring program; and higher sales and earnings benefits from cash deployed on recent coatings acquisitions. As a result of these and other factors, we delivered coatings segment earnings growth of 25% versus last year's record level. Additionally, each major region achieved higher earnings with North America more than 20% higher, emerging regions growth of about 15% and higher European earnings of 8% despite the continued economic challenges in that region. At the outset of the quarter, we completed the acquisition of AkzoNobel's North American architectural coatings business. Results for the acquired business were incorporated into our Performance Coatings segment, along with PPG's companion legacy architectural business. We were pleased with the business performance in this initial quarter, as it is pacing slightly ahead of our target. The business had sales of approximately $475 million and delivered an earnings return on sales of mid-single-digit percentages. We realized $60 million of lower annual cost when the transaction closed, benefiting this quarter by about $15 million. In addition, we achieved some other initial acquisition-related synergies. We still have a great deal of work to do but remain confident that we will deliver our 3-year synergy target of $200 million annually. To that end, our Board of Directors just approved a $102 million restructuring program focused primarily on the synergy capture for the acquisition. The program also includes targeted actions for certain businesses, which continue to face challenging market conditions such as protective and marine coatings and certain European businesses, including architectural coatings and fiberglass. This restructuring program reflects the continued focus on operating and cost excellence, which is what you have come to expect from PPG. We anticipate the majority of the restructuring actions will be completed by the end of 2014. One final comment on the second quarter is that it is typically our largest quarter from a seasonal perspective, and we generally experience normal season trends in most businesses and regions. Looking ahead to the third quarter, we remain optimistic about our earnings growth momentum, driven by many of the same factors that we experienced in the first half of the year. This includes benefits from our recent acquisitions and proactive cost management. We anticipate normal seasonal trends in our businesses and regions and expect several businesses such as automotive OEM and aerospace to remain growth drivers. Our balance sheet remains very strong with about $1.8 billion of cash and short-term investments at quarter end. We continue to analyze prudent cash deployment opportunities focused on growing our earnings and rewarding our shareholders. Overall, we continue to face mixed economic conditions, and we were pleased to have delivered record results for our shareholders. Thank you for your attention. This 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 representing Bank of America Merrill Lynch.

Question for you on the growth you're experiencing in Coatings. I think you referenced to 25% growth on a year-over-year basis. Just trying to parse how much was organic versus Akzo. I think you threw out a sales number of $475 million times mid-single digit. Would it be fair to say Akzo contributed $25 million or so in the quarter?

Yes, Kevin, I think -- this is Vince. I think that's a fair number.

Okay. Very good. And then on the new restructuring initiative of $102 million, is that exclusively part of your $200 million synergy goal looking out to 2015? Or are there other areas of the company where you're taking additional cost actions at this point?

Kevin, this is Dave Navikas. Of the charge that we took, about 60% of it relates to the Akzo North American integration, and the remainder relates to other actions in some of our other businesses where there are still weak demand conditions.

Okay, great. And then a final question I had was on Europe. I guess you're running minus 4% there according to one of your slides versus minus 7% or minus 8% in the prior couple of quarters. Chuck, I think you mentioned in your prepared comments that you were seeing certain businesses that were actually growing, and I was wondering if you could elaborate on that, and maybe talk about where you might be seeing growth in the region.

Well, growth, I would say, in the region is very challenged right now, Kevin. If you look at several of our businesses like aerospace and packaging, we still have growth in those businesses. However, if you look at the automotive markets or the architectural markets, those are businesses where, from an overall market standpoint, we're still seeing negative growth.

Your next question comes from the line of David Begleiter.

This is Ram Sivalingam sitting in for David. Just a quick question on ROS given that we're past the height of the paint production season. How are you thinking about TiO2 pricing in the back half of the year? And also, any update you can give on your use and [ph] reductions of TiO2 would be helpful.

TiO2 pricing for the second half, we're in discussions now, so it would be too early. We're -- to comment, we're looking overall at stable raw material pricing in the second half of the year. We continue to have success in terms of improving our productivity in our formulations for TiO2 usage. We hit our targets last year in the 4% to 5% range. And this year, we're on track for hitting those targets, which we defined this year as closer to 2% to 3%.

The next question comes from the line of Robert Koort representing Goldman Sachs.

Chuck, the decremental margins in glass were pretty ugly, and sales looked like they changed by $4 million and profits by $15 million. Is there something in the near term that can reverse that? Or should we expect that same kind of pain from the fixed cost leverage? Or what exactly do you think is causing that?

Well, we had -- it was a disappointing quarter for actually both business units in glass for slightly different reasons. In our flat glass business, we had a poor quarter from a, let's call it, manufacturing and supply chain performance. We also saw some volume declines as we looked at some of our end-use markets like solar that were lower, and we didn't get enough of a pickup on the commercial construction side, which is our biggest market for that business. We also saw some year-over-year licensing revenue that was lower. So I would expect that the third quarter, we're going to improve our operating performance. And so I expect the flat glass business to still be challenged but not to the same level that they were in the second quarter. On the fiberglass side, we had lower volumes, especially in Europe, and we had lower equity earnings out of our PFG joint venture in Asia, which is targeted at the electronics market. So I don't expect a significant improvement on the fiberglass side. We had pretty good results here in North America. But I would say that we are looking to improve slightly over what you saw in the second quarter, but certainly, I think we're going to face some of the same challenges here in the third quarter.

And if I might follow up on the U.S. architectural side, your same-store sales looked pretty strong in your stores but through the big box, less exciting. I know Sherwin, this morning, had a similar comment about its non-store business. So was there something that's not quite as exciting in the DIY markets? Was this a function of just a couple of lost business lines? Or what do you attribute to the less robust non-stores business in the U.S. architectural?

Well, in the 2 other channels, I would say you mentioned that we did lose price points at one of our major North American home center accounts. This was on the, let's call it, the legacy PPG side, so that accounted for some of the lower comps. We also have seen some weakness in what we would call the independent dealer channel, which is an important channel for both the PPG legacy business, plus the newly acquired business. And the dealers we found were a little cautious. We had, what I would call, a second quarter -- is a -- weather and some other factors were not helping us as much as they were last year. We still think there's good growth there, but right now the dealers were quite cautious in the second quarter as well. So that's why the numbers weren't as robust for us as we would have hoped outside of the store channel.

Your next question comes from the line of Don Carson representing Susquehanna.

Yes, Chuck, question, a couple of questions on restructuring and cash redeployment. First on Transitions, I know earlier this year, you indicated you were in some discussions with Essilor about future ownership structure of that business. Can you update us on that or give us a timeline and maybe indicate what the attractiveness of being in that business going forward is as opposed to be more of a coatings play? And then just if you could comment on the coatings acquisition pipeline, are you at a point where if you don't do any additional deals this year, you might up your share repurchase targets of $500 million to $750 million?

Well, Don, we are still in discussions with Essilor relating to the future of Transitions Optical, so at this point, we do not have any additional comments on that subject. As far as the redeployment of cash, we are working the acquisition pipeline actively. We were able to complete not only the Akzo North American architectural acquisition in April, but we completed in May, the Deft acquisition, smaller, bolt-on, but quite successful. We were really pleased that this was going to be a positive for our aerospace business. And we're actively working the acquisition pipeline. We have several, we think, good potential opportunities, but obviously, we're going to keep working them and hope to bring them in. And we're pleased with our integration activities here with the Akzo business. We do think that it is -- although a challenge, we are responding very well, lots of work but lots of progress. So we're optimistic with the results of these latest acquisitions, including Spraylat, which we announced at the end of last year. So we're more confident that we can continue to make acquisitions and successfully integrate them and achieve the targets that we set. And if we, however, are not able to consummate these deals, if you look at that the range of share buybacks between $500 million and $750 million, we would be looking to move that up into the upper end of the range if we can't bring in any new targets. And obviously, as we approached year end, if we don't feel as confident about the acquisition opportunities, we would certainly look at that overall target that we've set for ourselves in share buybacks.

Your next question comes from the line of P.J. Juvekar representing Citi.

You had talked about a potential rebranding strategy in architectural paint, particularly for the Glidden brand in different channels. Any update on that? And then secondly, you talked about load share. Was there any share loss at Home Depot for the Akzo business?

We are not in a position right now to announce any change in the branding strategy for the Akzo North American business. It's been little over 3 months. It all hands on deck trying to get through the integration and ensure that all the customers are being supplied and serviced in a way consistent or better than they were prior to the acquisition. So we're working on that, but we're not in a position to announce anything right now. And I think your second question, P.J., was it Home Depot? There was no shelf space or share loss at Home Depot on the acquired business.

And secondly, on automotive OEM, you are growing 2 to 3x the market. How long can that continue? I know a competitor that exited their business, sort of lost some share towards the end. So can you just talk about the competitive dynamic in that market?

Our competitive dynamics, it's always been a very competitive market. It's not a market however, that you see a lot of share gains or losses in the short term. These are usually longer-term decisions that the automotive manufacturers make typically around model years or when they are starting new production. I think we've been well positioned in the past few years with several new technologies that we've introduced that have been well received by our automotive customers. We have been also well placed with many of the plants that have continued in service as the industry is restructured. And we're very well positioned in the markets where we've seen either the largest recovery or the most growth. So if you look at the North American market, we are very well positioned. We're #1 in this market, and we are also #1 in the Chinese market. So if you look at, overall, where are you seeing the best performance from the automotive industry, we're well placed in the areas where it's really growing. We have good technologies. We had a consistent strategy, so we continued to do well. But I don't see these things as either short term in nature. These are longer-term trends. And if we continue to do the things that we've been doing and the markets continue to hold up well, then I think this is a level of performance that we expect to continue.

Your next question comes from the line of Frank Mitsch representing Wells Fargo Securities.

I'm looking at -- very pleased to hear about the progress on the Akzo deal doing a bit better than anticipated. And you had raised your cost-reduction targets the last call from $160 million to $200 million. And looking at the math, you originally targeted 10% margin on that business, but with that upgrade, it's looking more like 12% or 13%. What are the chances that we might see you bring that all the way up a couple more points? And how confident are you and that $200 million -- in that $200 million number? And might we see some changes going on there in terms of synergy?

Well, Frank, we feel very good about the $200 million synergy number. We're ahead of our targets for realization of that, and I think we have a path forward. At this point, we're not raising the synergy targets for the acquisition, but there's a lot of hard work ahead of us. So we know that we haven't been -- we've just begun the capture all of those opportunities, but we feel increasingly confident. And -- but at this point, we still feel that $200 million is a good target.

All right, great. And in terms of getting the margins up even higher than that 13% or so?

In the Performance Coatings segment or...

The Akzo business.

Oh, the Akzo business, well, I think that we're going to see how this thing plays out, and I'm sure we're going to share more information with the investors as the year goes on. This is -- we're 3 months into this, feel good, but there's a lot of heavy lifting. So at this point, we're not going to change any of the projections or targets that we have yet.

Fair enough. Now obviously, year to date, Mr. Navikas has a little bit been slow on this, on the share repurchase side given where you want to get to by the end of the year. And obviously, you are examining some other opportunities out there in terms of bolt-ons and so on. To that end, were you surprised to see the Mexican reject the Comex deal? And is that a business that might be interesting for you? And do you think you might have better luck going in after Comex?

We've been in a PPG board meeting this morning, so although I've heard those comments, I haven't seen any of the press releases, so I'm not really in a position to comment on what's transpired with that potential acquisition, and I wouldn't have any comment on our potential interest with that.

Your next question comes from the line of Ghansham Panjabi representing Baird. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Can you give us a rough estimate of the weather impact on your European architectural business? I think it was down 8% for the quarter. And do you think that some of that was delayed into the third quarter because of the weather? Or is it just sort of lost opportunity for the industry?

Well, I don't think the weather -- the weather hasn't been good the first half of the year. It wasn't good in the first quarter. It wasn't especially good in the second quarter either. We hope things are going to get better. Some of the weather impact in the second quarter was -- we have leading positions in many of the country markets in Eastern Europe, and they were heavily impacted by the flooding. And so I think there were some volume declines resulting in that. But I would say to blame most of this volume decline on Eastern European flooding would be a stretch or maybe a couple of percentage points, yes, but the rest of it was overall market weakness in many of the key market areas. And we're not seeing a recovery in any of the markets except the U.K. The U.K. trade market, I think, has been slightly improved, and I think the U.K. economic recovery is maybe just a step ahead of what we've seen so far in Europe. So I would say weather is sometimes a short-term factor, but we have, 2 quarters now, fairly weak activity in Europe. We think we've stabilized, and the comparables should get better. So -- but you've seen our performance. I mean, the thing that's most encouraging with our performance and our results is even despite the weak volume in the European architectural market, our teams are delivering. They're working really hard to execute on the restructuring plans and to drive our cost and productivity. So we feel pretty good about the overall earnings and the cash performance despite the weaker top line. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then on the marine build market, can you share your perspective on whether this market is closer to bottom maybe from talking to your customers? That would be helpful.

Well, the marine market, I think has surprised all of us with the level of weakness. When we looked at the marine new-build market in the second quarter, it was down a little over 30% in Asia, which is, as you know, the predominant region for marine newbuilds. So it has been probably a decline that even by historical standards was much sharper than anything that we'd experienced. Now as we look at our performance during this time, I think the comparables are going to start getting a little better, even though we're still going to see negative growth numbers. So I think the third quarter, we're going to still see some declines, maybe not as sharp as what I've just described here in the second quarter. And we are winning our share of new business that we hope we would see in -- by the middle of next year as they would start to rebuild from this very low level. So I would say that I'm more optimistic going forward that I think the second quarter will be our lowest point in terms of year-over-year comparables, especially for our sales. We'll start to see some improvement in this rate of decline over the next couple of quarters, not nearly as dramatic as what we've seen here especially by the time we get to the fourth quarter. And we may begin, then, to see some improvement as we move through 2014.

Your next question comes from the line of John McNulty representing Credit Suisse. John P. McNulty - Crédit Suisse AG, Research Division: With regard to cash flow, your cash flows were up pretty significantly year-over-year despite maybe not having the cash machine, which was your commodity platform. So can you walk us through some of the changes? You highlighted working capital in the prepared remarks. Can you kind of walk us through kind of what's happened there and then also, if you think that's sustainable going forward?

John, this is Dave Navikas. If we look at the working capital results, particularly in our coatings businesses, we certainly saw the result of some concerted effort really over the last several quarters that board approved here for us in Q2, good inventory performance from a reduction perspective in all of the businesses. The improvement that we saw in working capital, both inventory and receivables, was spread through all of the businesses. So I think it's a positive that this was an across-the-board kind of improvement, good performance from a receivable collection perspective so percent current in good shape. So we're pleased to see the results here in the second quarter, and certainly, our expectations will be to keep the focus on this area and hopefully be able to retain the improvements that we see here. John P. McNulty - Crédit Suisse AG, Research Division: And then just with regard to M&A and the opportunities that you see out there, you're in the middle of putting Akzo into your current portfolio. How much more bandwidth do you have in terms of the size and scale of potential acquisitions out there? And then maybe just one quick follow-up, if you comment as to whether or not you have architectural exposure down in Mexico?

Bandwidth in terms of size of capabilities, financial -- let's just look at the capabilities of the organization. Obviously, this is a big deal for us with Akzo North America here for our North American architectural business. I think we're stepping up. I'm quite pleased. We've made a couple of acquisitions, including SigmaKalon 5 years ago that were even bigger in terms of size or scale. So I think we've proven that we can take on some of the largest businesses out there. So there are few -- there were fewer large top 10 kind of companies that would still be considered for sale in play. So I would say that the opportunities are still out there for the small and mid-sized companies. We certainly have the financial resources to -- and the borrowing capacity to step up from there. So I feel quite confident that we'll be able to, both in terms of the integration and the financial capacity, we certainly have capabilities to do whatever we would like to do in the coatings space. And then Mexico I think, John, the other part of your question, we have a very good business in Mexico in our automotive and industrial businesses, smaller positions on the other coatings side but a very what I would call, a small position in architectural coatings in Mexico.

Your next question comes from the line of Laurence Alexander representing Jefferies. Laurence Alexander - Jefferies & Company, Inc., Research Division: Two quick questions. First, do you expect your automotive sales to grow sequentially in Q3? And in Europe, how far out do you feel you'd be to look to feel comfortable that you should get back to flat to slightly positive year-over-year comparisons?

Sequential sales for automotive OEMs are -- in the third quarter, are usually down. So if you look -- they have in Western Europe or in Europe, they have August shutdowns, which I think we'll see again this year given the weakness of the market. Here, there is a usually a July shutdown. And I think we're seeing more traditional seasonal or third quarter pattern here in North America for the auto build. Last year, we didn't have as much of an effect because they were still recovering from the effects of the Japanese tsunami and the strength of the market that began to really recover in -- early in last year. So I think we're going to have more seasonal patterns in the third quarter both here and in Europe, and that would indicate that it would be typically lower than the second quarter sales. And the second part of that was?

What's your second question, Laurence, I'm sorry? Laurence Alexander - Jefferies & Company, Inc., Research Division: Sorry, just on Europe, how far out do you need to look to see positive comparisons? I mean, do you have any confidence on that?

Well, I would -- yes, if you look at -- we've been probably a little surprised by the weakness of the European economy and some of the key markets. So we've been very encouraged by our performance, of course, and we've been delivering on the bottom line and in cash flow. If you look in the year-over-year comparisons, I'd say to turn positive, certainly not for the balance of this year. I think we're still going to see 2 quarters coming up here in the second half that'll continue to be negative from a European auto build standpoint. I'm not talking about our performance because we still feel good about that, but if you look at the overall market, certainly, in the next 2 quarters, I think it's going to be down. Now when you look this year, the first quarter was abnormally weak. So could you start to see more stability when we go into 2014? I certainly hope so. And that's my feeling. Although when we'll see positive upturn from that, the market is still fairly pessimistic when you talk to a lot of the participants. But what happened here in North America, as this -- the crisis rolled through the automotive industry, there was no optimism at all. In fact, many of the so-called experts were saying we'd never get to 9 million or 10 million builds again, and the whole market had forever moved away. But now you see us moving past 15 million builds, sales getting into the 16 million range here in North America. So my hope is that even if we don't have a sharper recovery in Europe, at some point, we will stabilize and see some growth. And that could start happening next year, but in the near term, I'm not looking for that recovery.

Your next question comes from the line of John Roberts representing UBS.

The latest deep dive that you did with investors was on packaging coatings, and it had an okay quarter. It was low single digit kind of everywhere. But it sounded like from that deep dive, that's a business that should be accelerating over the next year, maybe not longer than 2 years and that it has the potential to get to be a high single, low double-digit grower for a period at least through the BPA conversion?

Right. And we're still pleased with our packaging business unit. The best opportunities in terms of overall demand and consumption is in Asia. So the business is still quite strong in Asia. And I think that's where you're going to see those types of demand or growth numbers. Obviously, the other opportunity that they talked about was these development, as you mentioned, of the BPA non-intent, and we're actively working on our formulations, qualifications. We're seeing the market gradually turn. And we're seeing a number of food companies, not only in the baby food, but recently Coca-Cola in France, as an example, is introducing the BPA non-intent coatings in those markets. And that should give us an opportunity for further growth. So based on increasing consumption in the developing world led by Asia, but also Eastern Europe and Central Europe, and the technology advances associated with BPA non-intent, as an example, give us optimism that we will continue to see good growth in the packaging coatings business.

The next question comes from the line of Ivan Marcuse representing KeyBanc Capital Markets.

Real quick on the European architectural business. The improvement in EBITDA, how much of that was -- was that all cost savings or did you have some benefit from price cost raw materials?

Ivan, almost every single penny and more was cost savings. Volumes were down, as we articulated, and we overcame that with what I would call, discretionary cost management, as well as the 2002 restructuring program savings that we're still implementing.

Is the restructuring in Europe -- is this is almost done, and are all the cost savings through there, or will that continue for another couple of quarters?

If you look at our 2002 program, Ivan -- I'm so sorry, 2012 program, the 2012 program targeted $140 million of savings. We were about $30 million away from that, so we'll see some savings in the back half of the year, still. But they're starting to diminish as we anniversary some of the actions because we still have some savings in the back half of the year related to that original program that we initiated last year.

Okay. And then, last question. You mentioned that the dealer network in the U.S. was -- or the independent dealer for architectural was fairly cautious. The weather, I guess, has improved at least the past couple of weeks. So would you expect, then, to have -- that segment to be a lot stronger in the third quarter? Or is there a reason that they would remain cautious, especially with housing being as strong as it is?

Well, we feel that the independent dealer channel will improve here in the third quarter from what we've been seeing. We've been, I guess, a little surprised that it hasn't been stronger. Some markets though, kind of, the independent dealers, don't participate in as much. So if you look at the store growth, the comp store growth that we talked about, you have some different markets that company-owned stores service, including a new homebuilders and the like. And the independent dealers, typically, don't go after some of those markets where we've probably seen the strongest growth as new home construction, up over 20%, as an example. So I think the dealers are being somewhat cautious here. And I think that the third quarter, assuming that they've been cautious on their buying patterns, we'd see a little -- a better performance in the third quarter because, overall, we still see the market as good. Yes, you can say some segments are a little better than others. Commercial is not -- it's improving, but at lower growth rates. So we still think that this is going to be a good year for us in architectural. And I think the dealers will participate in that improvement, and I just don't think we've seen it is as much. And of course, this is true two-step distribution in the case of the dealers. So many times, they buy during window periods and then, either hold less or more inventories where, in the store network, you're almost direct-to-customer. So I would -- although we don't track it directly, I think the dealers are sitting on fairly conservative inventories. So if we have continued improvement, we should see for next quarter some improved comps.

Your next question comes from the line of Nils Wallin, representing CLSA.

A couple here on the marine industry, just curious, one, if your business in the marine segment is still generating positive cash flow? And then, also, given how much weakness we've seen over the last couple of quarters, what you're seeing in terms of competitors whether you expect any type of shakeout from -- because of the weak market?

So the first question is the marine results for protective -- well, we have a broader business unit, it's Protective and Marine Coatings. So we -- in that business unit, we're also supplying power plants, industrial complexes, infrastructure and the like. But if you just look at the marine business, it's still profitable, both on an EBIT or EBITDA and has positive cash flow. So at this point, I would not say that -- we are certainly not looking to get out of the marine coatings business. This is a sharper cycle, but we plan to ride it through. And I'm not aware, at this point, of any of the global marine players that is planning on exiting the market. The market is much more consolidated today than it has been in the past. There are 4 or 5 major global players. And at this point, I think that we are just planning to ride it out. But we have profitable sales and cash flow right now. But it is, certainly, off of the levels that we were seeing in 2011 or in the early 2000 -- first half of 2012.

Understood. Do you think that in this process of returning to more normal that it normalizes at a lower level? Or can it get back to the previous peak?

Well, I would say that, yes, there was probably, like in some global industries, there was probably a little bit of a marine new build bubble. And so I think if you look at what was happening, if we go back to 2000 -- let's say, from second half of 2010 to the first half -- through the first half of 2012, that 2-year period was probably, in retrospect or hindsight, maybe a little bit of a bubble. There was a view that all these ships were going to service this growing global trade and that the market was going to be able to absorb all these new fuel-efficient ships. And I think that some of that will play out in the longer-term, but I think as we saw here in the U.S. housing market bubble and the subsequent bust, sometimes when -- you're going to have to endure this period, and the strongest players survive. And we feel that there's nothing in the market, longer-term, that's discouraged us. These are the types of, let's say, more challenging, technologically, for our customers and our chemistry problems and issues to solve for our customers. So this is a market that we belong in. I mean, we paint cars, boats, planes. And the tougher, the better for us. So we feel that this is a market we're going to bring a lot of value to over the years and okay, we're going to have to ride out this lower end of the cycle. But long-term, we feel good about the business.

So just, if I may, just follow-on. I mean, do you think you can do in marine or replicate in marine what you've done so far and create results in auto OEM in terms of bringing that technology to that market on the downturn?

Yes, well, we are continuing, because the problems are the same. In fact, if you look at -- one of the biggest issues in the marine coatings industry or the marine industry is fuel efficiency. This is a cost and an environmental issue for the large ship builders or any of the owners, and both the ship owners and the shipping company. So they're looking for solutions all the time. Better products, better technology, and this is an area that we thrive in, in our businesses. So we think that we can bring a lot of solutions over time. When you have a downturn of -- this steep, you're going to have to, I think, take corrective action. The reason we've been able to stay as profitable and positive from a cash flow standpoint is -- and as we've talked about in our European businesses, we've been taking cost out, getting more productive, focusing on the right customers and the right business. The Korean business has held up better than the Chinese markets because these are more specific, higher purpose. These are also drilling ships that are going after oil and other natural resources. So the market hasn't been quite as tough as your more commodity-oriented just oceangoing container vessels. So I think these are areas where longer-term technology will prevail. We've got a lot of things that are going to help, not only improve the painting life, but get at this key driver around the fuel efficiency for these oceangoing vessels. So yes, we feel good about what we're bringing into market, and we're going to ride it out and things will be better. And I hope that in subsequent calls, we're going to be talking about, yes, this thing has started to turn. But this quarter wasn't our best, certainly, in terms of market performance.

Your next question comes from the line of Chris Nocella, representing RBC Capital Markets.

Chuck, just as the raw material environment stabilize here, how are you seeing the pricing dynamics playing out across your coatings businesses?

In terms of -- we are looking for stability in terms of raw material pricing environment, as well as our pricing initiatives. So right now we see this as a stable period on both sides of the value chain.

Okay. And then, within auto refinish, you mentioned solid growth outside of Europe. This has been somewhat of a slower growth business recently, so do you think we're seeing an inflection point here?

Well, the toughest market in auto refinish has been Europe. We've seen good growth in Asia-Pacific and in particular, China, that's the fastest growing auto park in the world. We're well positioned there. We're the leading player in automotive refinish in China. So we see good growth there. And then, the rest of the world, outside of Europe, we feel that we have a very strong position with the new water-based technologies for automotive refinish. That's positioned us well. And so where there is growth in the market, we're -- we feel we're doing well. In Europe, despite this leading water-based technology, things are weaker there. As I also mentioned in one of our other markets, automotive refinish, typically, is a two-step distribution process. And we saw this during the last, let's call it, economic crisis 3 or 4 years ago in Europe, even though automotive refinish is a very stable market, sometimes, our customers, these two-step distributors, will take inventories down in the near term and try to run tighter and get through these periods. So sometimes, we can have a little stronger -- a little more of a cyclical effect there than you would see in the overall market. So Europe, yes, has been weaker. We think it will come back as the overall market, it is still going to be there. And outside of Europe, we feel pretty good about what's going on.

All right. And are you gaining share on refinish, like OEM, or is it a little bit more competitive?

It's harder to track. I would say, we feel good about the position that we're in. Certainly, I wouldn't say that there has been any major share shifts, but usually, it takes a while for any data to get out there. It's not tracked as well or as easily as the OEM side.

Your next question comes from the line of Kevin Hocevar, representing Northcoast Research.

Most of my questions have been answered at this point, but I was wondering if you could comment on the silica demand. It seems like that improved a bit during the quarter, and I've noticed that there's been a nice uptick in tire shipment data that's come back out the last couple of months. So I'm just wondering if you're seeing a commensurate increase in the tire production side of things and if that's what's driving demand for silica?

For precipitated silica, the tire market is the biggest end-use market, and we think we're well-positioned in the broader precipitated silica industry to serve the needs of the, let's say, let's call it the green tire movement that we see in the tire companies, where they're trying to improve mileage. Precipitated silica gives improved rolling resistance, so we can actually improve the mileage of the cars. And with CAFE standards in this country or what's happening around the world, we're seeing an uptick in demand for our products. And I think over and above the growth that we've seen in tires. So we feel good about that market and well-positioned, and yes, we had a good quarter in the second quarter.

Okay. And then, a final question just on the synergy targets for Akzo, just to follow-up on that. I believe, in the past, you stated that $30 million to $40 million in incremental savings, over and above the $60 million of savings realized upon closing, are expected to be realized in the first 12 months. Now you say $102 million by the end of 2014. Does that $30 million to $40 million increase at all over the first 12 months of owning Akzo?

No, Kevin. If you look of the restructuring charge that we just announced, the $102 million, that's the charge, that's not the savings, first of all. The majority of that, as Dave mentioned, is earmarked to the Akzo business we acquired and our legacy business and are embedded in that synergy number. There is a piece of that, that's not -- that would be what I would call new restructuring savings. The $30 million to $40 million hasn't moved. From April of this year until April of next year, we're still targeting $30 million to $40 million of cost synergies. And again, that's on top of the day one synergies.

Your next question comes from the line of Jeff Zekauskas, representing JPMorgan. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Can you tell us what organic pro forma change in revenues was for the acquired AkzoNobel business?

Jeff, it was right around flat. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: It's right around flat?

Correct. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: All right. In general, do you see the do-it-yourself market in the United States really slowing down and the do-it-for-me market really accelerating in the current environment?

I would say we haven't -- this trend, we haven't seen any changes. It's -- and I would say, if you look at the market, although we did well in our stores channel relative to our national account position, I wouldn't say that there's any -- you wouldn't see, I think, in this shorter term any change. And the one comment I would make on just your question around Akzo North America business, the Canadian market was a little weaker in -- this second quarter, our first quarter of ownership for the business. They are, I think, they've been challenged by the same weather conditions. It's been pretty cold up there, short season. And their housing cycle is maybe a little different than ours. They're not -- they don't have the same kind of growth from this very low level. They maintained pretty stable position in terms of overall housing starts and overall construction market during the crisis. So right now, I would say, the market up there is more stable. And they had a rougher second quarter, I think, in terms of the weather than even we had down here. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: And then lastly, was there much sequential change in coatings raw materials in the quarter?

No, Jeff. If you look, the raw material pricing has been fairly consistent. As we came into Q2, we felt it would be it and remained that way. And then, it will remain that way heading into Q3, as Chuck mentioned earlier. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Are there any more charges to come with Akzo after the one you're taking?

No, Jeff. There are not.

Your next question comes from the line of Bill Young, representing Chemspeak.

My question relates to, any changes in your long-term procurement strategy for raw materials? And along those lines, where do you stand on your licensing agreement with Billions?

Long-term procurement strategy for us, we've been trying -- we've had centralized global purchasing of raw materials for many years. And we continue to operate that with the same type of organization and strategy. As we've seen all of this growth for our coatings businesses in Asia and in Europe over the last few years, we think it's going to be a continuation of the same. And the opportunity and the agreement with Billions will give us, we think, as they continue their commitment to continue to grow their position in the global TiO2 industry, we think we have a good opportunity with them and with a number of our other suppliers to continue to grow with them, participate. We've talked -- we had an announcement recently about our Argex commercial development agreement. This is a startup company in Canada, as an example. So we continue to expand as we globalize and expanded our coatings business, expand our relationships with both the traditional and conventional sources of supply, but also new and emerging sources of supply or suppliers in Asia or other startup businesses around the world. So we're pretty confident that our strategy remains the same but we're going to take advantage of some of the new opportunities that we see developing, especially in the emerging regions.

Your next question comes from the line of Duffy Fischer, representing Barclays.

Two quick questions. One, on the optical business in Asia and China in particular. I've seen a few things written that looked like they're a little bit cryptic but would give you the sense that maybe you don't have the perfect positioning as far as price points go there with the Transitions business because there's a lower quality, lower price that seems to be taking some share. Can you comment how you think you're set up for the Asia and the China market with Transitions?

Well, in Asia, in general, the Transitions product lines are traditionally premium products that service high-valued customers that look for the features and benefits that you get from Transitions lens. And we do very well in Asian markets, like Australia, New Zealand, like the key city states, the Hong Kong, Shanghai, and Singapore. But a big part of the market in these emerging regions is the, let's call it, the mid-tier of that pure consumer pyramid from kind of low to low-tier to high-value add. And so we are trying to differentiate our offerings in Transitions so that we would not just try to service the very high end of that pyramid. And I think that we've seen progress that we've made with some of our product introductions in the region, where we're trying to capture more of that growth in the mid-tier price points.

Okay. And then, just lastly, on Axalta, have you seen any difference in their behavior as they would face customers in the change of ownership?

We haven't really seen that. It's been just a few months in the marketplace. And so both from an OEM standpoint or refinish, I wouldn't comment on anything that we've seen from them over the last few months. I think it's too early to make any commentary on what we're seeing.

Your next question comes from the line of Dmitry Silversteyn, representing Longbow Research.

Couple of questions, if I may. When you were talking about mid-single digit profitability for the Akzo business, was that on the EBITDA line or the EBIT line?

It was EBIT.

Okay. So all right, I got it. So that includes the $15 million incremental that you got from not picking up the liabilities?

Includes the $60 million day one synergies or about $15 million a quarter, plus some additional synergies, yes.

Got it. Second question, your gross margin, if you look at sort of over year-over-year on the company overall, obviously, because you don't break it down by segments. It was up about 1 point and your operating margin was down by about 1 point. So the incremental SG&A expense, as it relates to offsetting the gross margin, sort of what were the key drivers in terms of either business units or divisions that accounted for that?

Dmitry, the main driver, by far, was the Akzo business, which is a distribution-oriented business, including the stores and other selling costs associated with the distribution business. And if you look at our traditional distribution businesses of that nature, they carry a heavier SG&A component.

So it sounds like Akzo was a contributor to the gross margin, but a detractor from the operating margin?

Yes, it has a much lower, obviously, has a much lower, at this point, EBIT return on sales. So it's definitely a detractor to the corporation at this point.

But I think it's interesting, if I may observe this, that the gross margin profitability does not seem to be all that onerous compared to your other coating businesses or other people's coatings businesses. Is it fair to say that the margin issues that Akzo has been facing forever is related to SG&A, and that's something that you guys can get your hands around fairly quickly?

No, again, I think if you look at, traditionally, an architectural business, it has a heavy distribution component. It typically has a lot more SG&A, which is, again, all the cost of the stores.

But a high...

But a high gross margin. It has store cost, promotional costs, all the stuff that goes into selling to frontline consumers.

Got it. And then, final question on the automotive aftermarket, we've had several quarters going back to the end of 2012 when this segment and this industry was identified as a problem when it came to growth and something that impacted your Performance Coatings business. This quarter, you obviously talked about this being a contributor to the growth that you've seen in the quarter. The carpark didn't get younger, and certainly, not in North America over the last year to sort of justify increased repairs. Is it the weather being slicker out there and more collisions I mean, sort of, what -- did something change in the industry or some sense on these trends in -- and we just have to be conscious of?

Well, let's be clear. The automotive refinish business has never been a problem for PPG. And I would say that the growth that we're seeing this year, probably on the flip side of -- some of this weather discussion on architectural -- actually, bad weather, especially in the wintertime or the spring actually helps this business. So you may have some increment of business that comes from all the snow and inclement weather we had in North America. And oftentimes, what you see as the economy isn't improving as it is now, is that people -- during the recession, many people were getting the cash-outs from the insurance companies but not having their cars repaired. And so they were just putting that in their pocket and then, waiting until they felt more confident in the economy or their jobs. And I think that's what you're seeing here is that, yes, the economy, overall, is doing better. People are more confident. And regardless of what we've seen even with all these new car builds, hasn't really affected, overall, the average age of the carpark. I think what you're seeing is some positive weather, more usage with the water-based technology and the opportunities that, that's giving us. And I think there's more of a propensity to repair cars that have been in collisions because the economy, overall, is better.

Your next question comes from the line of Charles Dan, representing Morgan Stanley.

I just wanted to clarify all the sort of comments you've talked about, the trends for your U.S. architectural business. And it was down a bit year-over-year on a revenue basis, excluding Akzo, it sounded like this quarter. Your expectation is for lower, sequentially, next quarter. Would you -- does that also translate into down on a year-over-year basis next quarter? Or are you -- because I don't recall that it was a particularly tough comp this quarter, so could you just clarify that?

Charlie, if you look at our volume performance in Q2, we were down very modestly year-over-year. And up in stores and down in national accounts and dealers, as Chuck mentioned. The dealer, we hope, has some recovery next quarter. Stores has been a very consistent performer for us and we expect that to continue. And the dislocation in the national accounts has come from the product, the 2 price points we discussed earlier that we lost in the national accounts, and that's not going to change in Q3.

Okay. So putting all that together, you're still expecting revenue growth on an organic basis in the third quarter?

I think we're -- it's a fine line of whether we're positive or negative, but we're not -- it's just if we could predict the future, we would tell you that but it's not -- we were not very negative in Q2 and we would hope to be positive in Q3 EBIT [ph] .

Your next question comes from the line of Richard O'Reilly, representing Revere Associates.

Two quick questions. One is, I want to follow-up with the marine. Typically or historically, what part of your marine coatings is new build versus maintenance, refinish?

25% of the marine and coatings -- the Marine and Protective Coatings business is new builds. And if you just isolate it on marine itself, it's about half and half between OEM, new builds and aftermarket.

Okay, fine. Is there a mothballing of existing ships? And if so, would they come out first before the new builds pick up and therefore, some ships would have to be recoated quickly or early on?

That's an interesting question because there is -- there are ships that are just parked. If you go to Singapore, you have dozens of ships in the harbor that are -- don't have anything to ship right now. So they're just sitting there. But you've seen it in the commercial airline industry. If you look at the success we've seen from Boeing and Airbus, there's a lot of mothballed planes, but they keep building new ones because they're more fuel-efficient, they have higher technology. So you're still going to see some of this. So I think some of these ships that are parked around the world, waiting for cargo to go somewhere, they may never come back in service. But there will be some demand for ships that are either more fuel-efficient, easier from a maintenance standpoint or they're serving specific needs.

Second question on the prepared comments for the Industrial Coatings product line. There was a statement that said overall results by general industrial end-use markets remain mixed, and I assume it means -- you don't mean geographic, you mean custom or application end markets. Can you elaborate a little more on what's negative or what's positive?

Well, within the, let's call it, the general industrial or what -- we have an industrial strategic business unit and an Industrial Coatings segment.

I mean, the product line. Yes.

And within that Industrial Coatings business unit, we have different end-use markets. So if you look -- probably the strongest component is automotive parts for PPG. That business is in Industrial Coatings. That's not serving -- supplying coatings to General Motors or Mercedes and the like. That's for all the parts, either under the hood, in the chassis or some of the parts that get assembled later. That's the strongest end-use market right now in that general industrial business. The coil and extrusion coatings, that hasn't been very strong because that's been tied again as steel industry and some of the commercial construction, not as strong. Electronics, if you look within electronics, personal computers that take a lot of coatings. That's been down. Coatings on smartphones up, but surface area, that hasn't been as good. Appliance Coatings, good here in North America because we have a nice construction and housing recovery. Poor in Europe because overall construction markets are weak. So it's really a broad market business unit, lots of different end-use plays. So that gives you an idea of kind of some of the puts and takes within the business by end-use market and by region.

Your next question comes from the line of Jeffrey Stafford, representing Morningstar.

With lower TiO2 prices, this is maybe less of a concern, but could you update us on your progress and targets to reduce TiO2 consumption in Coatings?

I think we commented on that earlier, but last year, we said our target was 4% to 6% productivity or within our formulations of usage, not taking TiO2 out of the formulas, but using it more effectively. We said that we were in the range of 4% to 5% last year in terms of improving that productivity use of TiO2. This year, lesser target. We've gotten some of those savings last year, and we've said it's going to be probably closer to 3% in the range of improved usage given the same type of end-use applications in the formula. And a lot of this is also using other high-value added chemical molecules in our formulations and actually improving the overall performance of the coating, even if we use less TiO2 and substitute it with some of the newer developed molecules we've seen from some of our suppliers. And they're really doing good work here and we're incorporating a lot of these new technologies in our formulations. So we really feel good about the performance of our suppliers in helping us achieve these targets.

I would now like to turn the call over to Mr. Morales for closing remarks.

Again, I'd like to thank everybody for their time and interest this quarter. If you have any further questions, please feel free to contact me directly and our Investor Relations. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.