PPG Industries, Inc. (PPG) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q2 2015 PPG Industries earnings conference call. My name is Chris, and I will be your conference moderator for today. [Operator Instructions] And at this time, I would now like to turn the conference over to your host for today, Mr. Vince Morales. Sir, you may proceed.

Thank you, Chris, and good afternoon, everyone. Again, this is Vince Morales, PPG's Vice President of Investor Relations and Treasurer. We appreciate your continued interest in PPG Industries, and welcome you to our second quarter 2015 financial results teleconference. Joining me on the call from PPG today is Chuck Bunch, Chairman and Chief Executive Officer; Michael McGarry, President and Chief Operating Officer; and Frank Sklarsky, Executive Vice President and Chief Financial Officer. Our comments relate to financial information released Thursday, July 16, 2015. I will remind everyone that we posted detailed commentary and relating presentation slides on the Investor center of our website at www.ppg.com. These slides are also available on the webcast site for this call and provide supplemental support to the opening comments Chuck will make shortly. Following Chuck's perspective on the company's results for the quarter, we will move to a extended Q&A session. Both the prepared commentary and discussion during this call may contain forward-looking statements reflecting the company's current view of 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. Today's presentation also contains certain non-GAAP financial measures. The company has provided in the appendix materials of the presentation, which are again available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information, please refer to PPG's filings with the SEC. And now, let me introduce PPG's Chairman and CEO, Chuck Bunch.

Thank you, Vince, and good afternoon, everyone. I want to thank you for your continued interest in PPG. Today, we reported record second quarter 2015 financial results. This included record second quarter net sales of $4.1 billion and all-time record adjusted earnings per diluted share from continuing operations of $1.67. Our adjusted earnings per share in the second quarter were up $0.25 or 18% versus the prior-year record. Year-to-date our compounded adjusted EPS is up 20% over prior year, which is on top our compounded EPS growth rate in the past three years of about 25%. This consistent and continued performance reflects the benefits of our portfolio transformation, the tangible customer benefits from our leading products and technologies, our continued diligence on aggressive cost structure management and the measurable benefits from our ongoing cash deployment. Overall, I am pleased with our consistently strong financial performance, as we continue to manage through inconsistent economic conditions in major global regions and in various end-use markets we supply. In the second quarter, our aggregate company sales volumes grew 1% year-over-year, similar to the first quarter, reflecting modest global economic growth. Regionally, in comparison with last quarter, our growth rates improved in Europe and the U.S., moderated in Asia and remained unfavorable in South America. From a segment perspective, we achieved all-time record segment income in both coating segments and our glass segment delivered the largest year-over-year earnings improvement. This record business performance was despite significant currency translation impacts, the sales and earnings stemming from weakened foreign currencies. These currencies, principally the euro as well as others in the Americas and in emerging regions, unfavorably impacted our sales by about $320 million or more than 7%, and reduced our pre-tax earnings by $40 million or about $0.11 per share. Absent the foreign currency impacts, our adjusted EPS would have been up 25% year-over-year. Based on current foreign currency exchange rates, we expect the unfavorable foreign currency translation impacts to moderate beginning in the third quarter, as foreign currencies begin to weaken in the second half of 2014 and due to the seasonality of our businesses. Given these factors, we now expect currency translation to reduce our full year sales by $1 billion and pre-tax earnings by $100 million. These ranges are slightly more favorable than our prior forecast as we lower the projected unfavorable currency translation impact on sales by about $100 million and on pre-tax earnings by about $10 million, contributing to our record coating segment income in the quarter with volume growth in several of our businesses including automotive OEM, packaging and automotive refinish coatings. We grew at or above industry growth rates in these businesses driven by customer adoption of our leading technology. In addition, we have maintained our aggressive operational and cost focus as we achieved lower manufacturing and SG&A cost year-over-year. To that end, we initiated an additional proactive restructuring plan targeting further system-wide productivity and cost reduction actions. We anticipate full year savings from this program of $100 million to $105 million when fully implemented in 2017 with $15 million to $20 million of these savings expected in 2015. Cash deployment was also a significant driver of segment income growth in the second quarter. This includes sales and earnings from our recent acquisitions of Comex and several smaller companies. Let me comment quickly on Comex. We remain very excited about this acquisition. The performance of the acquired business over the first eight months has been excellent. Businesses sales grew organically by a high-single digit percentage in the quarter versus the prior-year pre-acquisition quarter and we remain on track for full year high-single digit percentage organic sales growth. During the quarter, we increased our initial Comex cost synergy targets and now expect to achieve $45 million to $50 million in annual run rate savings by the end of 2016. In addition, we announced new acquisition related revenue synergy targets, which include capitalizing on the extensive Comex Mexican distribution platform for legacy PPG Industrial and Performance Coatings products and further leveraging the Comex and PPG participation in Central America, simply stated both strategically and commercially Comex remains well ahead of our original expectation. We also announced or closed several other acquisitions during the quarter. In addition to acquisition spending, we deployed $150 million of cash in the quarter for the repurchase of 1.3 million shares of PPG stock. We remain committed to and on track with our previously announced earnings-accretive cash deployment targets. Year-to-date we have closed or announced business acquisition with an aggregate purchase price of about $400 million and we repurchased $350 million of PPG stock. Looking ahead, we anticipate global economic growth to continue, but to remain uneven. We are working to continue to capitalize on the modest growth aided by our global footprint and participation across each of the major coatings product categories. Additionally, we anticipate increased financial benefits from a lower cost structure and higher earnings leverage on incremental volume growth. In summary, we once again delivered record financial performance in the quarter. This performance was broad-based across segments and regions as customers continue to adopt our leading products and our strategy execution and cash deployment are yielding benefit. We remain focused on operational execution and aggressive on cost management. Finally, we expect disciplined earnings-accretive cash deployment to continue. This concludes our prepared remarks. Once again, we appreciate your interest in PPG. And now, operator, would you please open the line for questions.

[Operator Instructions] Our first question comes from the line of David Begleiter with Deutsche Bank.

Chuck, just on the gross margin in the quarter, can you talk about the year-over-year growth maybe, I had a little bit higher assumption, I know a lot of things go into it. But talking about the benefit you see from raw materials, and should we see a bigger gross margin expansion in Q3 versus Q2?

Well, as we stated, David, volume growth has still been muted. We are still seeing positive growth across the regions and businesses, but as we've talked we have some uneven performance across both regions and businesses. So volume growth has not been as high as a full economic expansion would deliver. The raw material cost, as we've stated, are modestly lower than the previous year. So we're talking about low-to-mid single-digit decreases, depending on regions. And combined with other cost inflation and modest volume growth, we're seeing accretion in margins across all our segments. So we're pleased with the performance, but again we're looking for a little more consistent economic performance and currency stabilization to deliver higher volume growth as we go through the year.

And Chuck, just on, there has been some discussion over China auto decline rate that that market is slowing. Discuss your exposure both in China as well as via exports to the China auto OEM coatings market?

Well, China, it's the largest automotive OEM market in the world. The builds are still expected to be over 20 million this year and have growth. We've seen over -- certainly the first quarter we were talking about 7%-plus kind of growth rates for the full year, and we saw that in the first quarter. We saw those growth rates moderate a little bit here, as we went through the second quarter. So now, as we look at some of the forecast for the full year, we're still looking for solid volume growth in builds in China, but more in the area of 3% to 5%, maybe not at that 7% level that we came into the year with. We continued, as you know, to outperform in terms of volume growth, and we're still optimistic globally on the automotive OEM market. We've seen a very solid performance here in North America, continued strength. And we are also seeing, especially in Western Europe as part of our EMEA region, we've seen a return to growth here in the first half. And we expect that trend to continue in the second half of this year. So we remain optimistic and quite positive on the global OEM automotive market, even if we have pockets out there like Brazil or Russia, where we've seen lower builds here in 2015.

The next question comes from the line of Frank Mitsch with Wells Fargo Securities.

Good afternoon, gentlemen, and I guess congratulations are in order. Congratulations, Michael, on the move up; and congratulations Chuck on the pending retirement, and obviously a hell of a decade run as CEO; and of course, Vince, congratulations on your recent promotion; and Frank, congratulations on these results. I think I pretty much covered everything there. One of the things in looking through the release that I didn't see was any mention of weather impacts on your North American architectural coatings business. Did you notice any material impact due to the above-normal wet weather? And what impact may that have come Q3, Q4?

First of all, appreciated. Second, Chuck is not going anywhere. So don't be so quick about that comment. I would tell you that overall the performance in architectural, you saw our comments about low-single digits. We do have some impact from weather, it would be highly speculative for us to try and tell you how much that was. We were pleased. Our DIY business did have a good quarter. And I would tell you that, at this point, hopefully things from a weather standpoint will get better. But we do run a global architectural business, and I tell our team, whether you might have challenges in one area, you probably have opportunities in the other. So all-in-all, I'm pleased.

And also staying with the North America, you mentioned packaging was a fast grower, auto OEM was among the faster growers. But auto refinish was also mentioned as getting strong growth. Can you talk a little bit more about what you're seeing there? What's driving that and where do we go from here?

Well, Frank, I'll take that, and I think one of the key indicators for growth in the automotive refinish business is miles driven. And so we had I think with these lower gasoline prices here and around the world, especially in North America, you are getting higher miles driven and that is helping this business. We also had some of this weather that, if we talk about it in the first quarter, we had severe winter; the second quarter some of this rainy weather, it will drive additional economic growth. And our business has continued to perform very well across all of the different distribution channels and collision shops. Our team, especially with the water-based technologies and those continuing conversion rates, where we feel that we have industry-leading technology, that continue to drive our growth in the business and help us maintain a leading position.

Our next question comes from the line of Bob Koort with Goldman Sachs.

Chuck, I wanted to ask a little more, and you have a chart in there that Vince and team put together, showing the volume changes sequentially you saw for the last year-and-a-half and maybe the Latin American piece in particular is really quite jarring. Do you think this is a one-off issue? Are there particular end-markets that maybe went to the stinker here? And what's the outlook as you look forward for volume in those emerging markets?

Well, we have, I would say, in this chart, if you look at the deceleration of some of the growth, I have mentioned a couple of the markets that were unfavorable. So all of South America, including Brazil, was unfavorable in terms of volume and several other emerging markets. And I gave the example of Russia, as an example, where we saw a contraction here in the first half of the year. I would say that our volumes in China and India continue to be positive. Although, we have seen with this discussion on automotive OEM and a few of the other industrial markets, we've seen positive volumes in China, but certainly not at the level that we had last year. So I would attribute this more to the negative growth in a couple of emerging regions, but China was also lower overall, especially on the industrial and construction related side.

And you had mentioned some changes in raw materials. I was wondering if you could talk about what's gone in pricing. Are there any extremes in your pricing or is generally flat, pretty accurate across the entire portfolio?

This is pricing of the raw materials we buy or the pricing on our end-use markets?

Yes, I guess, I'm more curious about your big, tough, mean procurement guys on the customer side, seeing what's happened in deflation and maybe asking for their pound of flesh?

Well, as we've talked, we're trying to make sure that we're getting the benefit of any raw material declines here in our coatings raw material space. As I mentioned, cost overall have come down in raw material cost. And we continue to have these dialogs, because as we went through the second quarter, what was happening is we had oil prices coming back up, as we started the second quarter and moved through. But recently over the last few weeks to a month, we've seen now those trends reversing. So we continue in active discussion with our raw material suppliers. We expect them to share that throughout their value or customer chain. So we're looking for benefits to continue and potentially get a little stronger, as we go into the second half of the year.

And Bob, our selling prices to our customers, as you saw in our presentation materials, we've had flat selling prices, which was our base case coming into the year. There wasn't much on the way, either side of that for any big customer group or any big business differential. So flat pricing is what we predicted, and it's pretty holistic through our portfolio.

Our next question comes from the line of Ghansham Panjabi with Robert W. Baird.

It's actually Mehul Dalia sitting in for Ghansham. In packaging, would you say growth momentum has accelerated for you? And do you have any customer feedback that you can share on your non-BPA offering as it relates to Europe?

Our packaging business continues to accelerate with wins both in the U.S. as well as Europe. And it's being driven by our new technologies or our BPA-free technologies. And the customers are quite pleased with the new technology as we roll it out.

And what do you estimate the market growth was in Mexico year-to-date? And can you split your Comex sales growth between comparable stores versus maybe new stores by concessionaires year-to-date?

Sure. Let me just tackle Mexico. So the GDP in Mexico has decline moderately. It's closer to 2% range versus where they originally had it closer to 3%. Our business, as you saw in the commentary, growing high-single digits. We've opened up 80 new concessionaire locations already. For the first six months, we have a target to open up a 170 locations. So we are certainly growing quicker than the market. We've also launched some new products that we think will also be very favorably received in the marketplace. And then in Central America, we've launched Glidden in a number of locations in Central America that has also been favorably received. So we're happy with what we see there.

And just one last one, in the release you called out early 2Q weakness in Industrial Coatings. What do you think was behind that? And how are volumes in Industrial Coatings as a whole trending in 3Q thus far?

So the biggest challenge in Industrial is the heavy-duty equipment market. I think we called out that it's a down low-double digit, so that's a challenge. I would say the rest of the business is doing relatively well, but that's an area that we're paying close attention to.

Our next question comes from the line of PJ Juvekar with Citi.

A question on your Lowe's business. As HGTV paint was introduced by Sherwin, has that had an impact on your sales at Lowe's?

PJ, as you know, it's difficult for us to comment about a specific customer like that. We did call out that we had positive low-single digit comps in DIY segment. We have very strong relationships with all our DIY customers, and I would say there were no surprises in the second quarter.

And then Henan Billions is producing chloride TiO2 that's based on your technology, but I guess there are some reports that people are saying that maybe that technology is not working as well as people thought, and the plant is not running at full rates. I was just wondering if you could give us some color on that.

I'm not sure where that's originating. I'll just tell what we know. The plant is mechanically complete. All phases of the plant have been operational. We have samples from the plant, and both in China as well as in the U.S. We are fully working with them. We think the plant will be producing regular commercial grades sometime late in the second half of the year, and I would tell you we're on target with everything we've projected so far.

Our next question comes from the line of Arun Viswanathan.

I wanted to I guess delve into the North American architectural business a little bit more. You cited low-single digits, but weakness in the dealer channel. So was your stores business up mid-single digits? And are you starting to see some benefits of the overhaul and restructuring over the last couple of years and potentially some share gains?

Arun, I would tell you that our stores were in the low-single digits. The dealers in the first quarter were up and in the second quarter were slightly down. So through the first six months, the dealers are actually positive. We're doing slightly better than that in Canada. And I would just say that we certainly don't want to spend a lot of time talking about the weather, but it certainly was not helpful at all.

Arun, the dealer channel is our smallest channel, so on a averaging affect it has the smallest impact on the total business.

And what about the share gains, any thoughts on, if that could continue, or if you could saw any of that, or how do you look at the contractor channel? I mean, are you guys getting any uplift there?

I don't think there's many meaningful shares change in that regard.

And then final follow-up, I guess, in Europe you had some comments that you did see some slightly better sequential improvement in architectural. Maybe you can just help us understand what's going on there, and then also in your Industrial businesses in Europe?

So starting with architectural, France is our largest market, so our retail business in France has now positive comps. However, our larger trade business has negative comps, but much less, so it's getting back almost near flat now. Strong performance in the U.K. and Ireland, and although the Benelux was flat in Q2, we did see a noticeable pickups earning in late May. So I would say that's good. Central Europe was also had solid growth. As far as the industrial businesses, we've already talked about automotive doing better than the builds. So that was the positive comp force.

And anything else on general industrial in Europe?

General industrial I would call that relatively flat to no significant positives or negatives that I would call out.

Our next question comes from the line of Nils Wallin.

You noted strength in protective and marine globally, but obviously also you saw some gains too in the U.S., so it's kind of a two-part question. Since you didn't break out it between protective and marine, is it right to assume that it's mainly coming from the protective side? And then the second part, unfortunately a weather question is how is it doing so well in North America, given the weather impact that probably had some negative comps for you?

On the protective side, yes, there is more wins on the protective side than the marine side, but our China business did very well on the marine side, so a nice win there. Overall, in the U.S. and Canada, good strong wins on the protective side. Also, I would tell you we have launched a number of new, what we call advantage products, and fire protection, as well as we did the Hi-Temp Coatings acquisition earlier this year, that has also driven some growth. We've been able to leverage that globally as well. And so overall, even though the oil business is down, net-net we are up in that segment, so we're pleased with how we're performing in that regard.

And Nils, the only thing I would add to that is Europe also had a decent performance. There is some additional dry-dock work taking place in some of the ports in Europe, so that had some sequential and year-over-year improvement too.

And just more, I guess, a question for Frank. It sounds like this year you've already done around $750 million or so in the cash deployment. Does that mean that $1.5 billion to $2.5 billion, you're halfway there, or is this $1.5 billion to $2.5 billion you're talking about incremental to the $750 million you've already done so far?

We still want to maintain that guidance of $1.5 billion to $2.5 billion for 2015 and 2016 combined. I guess, what we would say is we've closed or announced $400 million in acquisition so far, there's still additional pipeline there, so I anticipate more activity over the next 18 months. I've done $350 million of share repurchase, so as you say, kind of closed, announced or repurchased $750 million, the guidance we would give is, the overall guidance is still in place, what we would have expected that at a minimum to achieve at least that midpoint of that guidance for the two-year period, so we're very comfortable with where we are. Continued good pipeline in the M&A space and also that share of purchase will continue to be part of our capital cash allocation strategy, so we're pretty comfortable with the guidance and off to a good start on that.

And just, sorry if I may, is the pipeline levered or exposed to any particular market more than any other?

There are variety of opportunities across the regions and across our portfolios as you can see with some of the things we did, the closed or announced so far this year, it runs the gamut between our various businesses and its taken place in a couple of different region, so we have a pipeline that really spans the globe and spans the different segments.

Our next question comes from the line of Jeff Zekauskas with JPMorgan.

I'm sort of surprised that your gross margins aren't higher, in that your cost of goods sold is down about 1% for the year in the quarter. And you would think that with your raw materials down low-to-mid-single digits, you would be doing better than that. And if you compare your results to your Cleveland competitor, I think their gross margin expanded 250 basis points. And even if you make some adjustments for acquisitions, and you go back a year, you still see a much larger gross margin progression. Is that the right way to look at it? Are there advantages to being in North America? And if you are more global you have some impediments? Are you satisfied with your gross margin?

I think from our perspective, we're trying to drive continuous improvement in all of our financial metrics. This year, unlike most years, we have a lot of puts and takes in our numbers. We have a very large acquisition. We have a lot of currency, differences on both sales, as well as cost of sales. You alluded to some changes in raw materials. So we've got a lot of puts and takes, so I don't know that in comparison year-over-year gets really difficult without each of those buckets. And we're not displeased with our performance. We'd certainly like to be as profitable as possible, but we do feel that we're executing very well operationally as well commercially on the sales front.

And I think if you look at the, what we call, our EBIT margins, EBITDA margin as we all refer to it for the business overall, we'd like to focus on that ROS, that business operating ROS. And if you look at it that way, we're over 150 basis points better Q2 over Q2. It's really a combination of a number of factors, whether it'd be all the inputs and the cost of goods sold, some favorable, and of course, we do have some annual modest improvements in salary and in wages across the globe. So good manufacturing, productivity improvement, G&A improvements, some benefits from the acquisitions that we've done, as well as some currency headwinds that Vince referred to. But overall, when you look at the overall ROS for the business, a nice improvement, and there are some puts and takes between COGS and SG&A, but on balance pretty pleased with the improvement.

And then secondly, last year in the first half your North American business was maybe up in order of magnitude 5%, and this year it's roughly flat. What is it about North America this year that's so much weaker than North America last year in the first half?

I think, Jeff, you have a continued improvement of automotive OEM, but not at the same acceleration. It continues to be positive. So that is one of the businesses continued growing, but not at overall 5% level.

The other, as we talked in the release, Jeff, general industrial was much more benign this year than it was last year. And we did as we, this is a Q1 comp math, so we did have some architectural pipeline fills last year for new product wins last year that we're maintaining this year. But the pipeline fills or stocking for our customers did not recur.

So do you think this is a 1% volume year for PPG or do you think that you can do -- are business conditions improving, or are they sort of steady-state?

I would say, the businesses are steady-state. There is still positive economic growth here. We have talked about some of the weakness in the overall market in architectural due to some weather events here in actually the first half, not just the rain in the second quarter, whereas most of the underlying economic indicators are still positives. So we have maintained a positive outlook for the second half of the year, and I think you'll see continued volume growth from last year in the U.S. and Canadian region.

Remember, Jeff, there is one other minor factor too, and it's in the Glass business, which is impacting that 1% of that effectively, sold our Mt. Zion facility, whereas you can see that the mix is greatly improving our business. So even though the volume and the topline is lower in that business, the profitability is greatly improved. So yes, that was not a huge factor, but a factor contributing to that year-over-year change in the growth rate.

Our next question comes from the line of John Roberts with UBS.

Frank, you just mentioned the Glass business. And again, the volume was down due to the plant closing, but it didn't seem to be affected much by weather. And given that's a U.S. OEM construction business I would've thought it would be one of the most affected businesses by weather?

Well, again, we're running at decent utilization levels, so profitability greatly improved; one plant coming out of the system, mix is improved, and as with commercial construction still not at back to levels pre-financial crisis. So very optimistic about the way that this looks for the rest of the year and looking forward, if we can get continued improvement on the commercial side that business will continue to perform well. Not as sensitive --

Not as sensitive, John, to whether its paint is, you'd still put up glass in like all inclement weather.

Actually, could you give us a little granularity on the auto OEM paint strengths either, is it largely more new wins, or is it better sell-through of previous wins? Or any regional color that you can give us on the outperformance now?

Well, we've continued to do well in our regions here and in the greater Europe as well as Asia. I would say that either it is more overall market growth, which has continued. In Europe, especially in Western Europe, you've seen growth of what we would call some of our customer base, especially among a broader base of the European manufacturers than we have been seeing over the last few years, and we have a good exposure across all of the manufacturers in Europe. So we're seeing some improvement in some of those European based manufacturers, the French and Italian manufacturers in particular they've had a better performance. And in China, I would say, there we continue to win more than our share of new plant startups in China especially, and so that's where we've continued to outperform the market. And that is more technology driven. The new compact processes that we've talked about over the last few years. The Chinese market both the domestic manufacturers and the global manufacturers in China are starting new plans with the most modern technologies of today. And this is where we are best positioned.

Our next question comes from the line of James Sheehan with SunTrust Robinson and Humphrey.

I was just wondering about the slowdown that's occurring in emerging markets. Do you expect this to impact growth in aerospace in the near and medium term?

I don't think that's going to have a material impact. Certainly, the general aviation market isn't help by the challenges in Russia or China; two markets that we're starting to emerge to buy general aviation planes. But overall, the aviation industry is doing quite well. In fact, they're returning their cost to capital. Right now, their profitability is up and people are traveling. So I would say that it's not going to be a material impact.

We also did see a decent growth in Asia-Pacific region aerospace in the second quarter. In addition to that, one of the things that's up-up, continued to drive outperform are some of the new technologies that we are deploying out to some of the major aircraft manufacturers.

And I would add for a final comment that we do another acquisition that closed July 1, Cuming Microwave. It's a business does classified defense products for radar-evading for both airplanes and as well as land vehicles. And that would be a contributor to the business in the third quarter as well.

You noted some positive impact from working capital in the second quarter. Can you just comment on where you see working capital in the second half?

We continue to focus in on a couple of key areas. One, past-due receivables, we're making some good progress there, but more importantly in the area of supply chain efficiency and inventories. However, we saw several days improvement on the Performance Coatings space in the first half. And we have some additional improvements that we have targeted for the back half of the year. So I think it's safe to assume that we'll continue progress that we've made I think in the back half of the year. And expect that to continue, to improve, because we still know there's a little bit more in terms of number of days in the cash conversion cycle that we can improve on as compared to peer group. Jim, we've had consecutive years of 100 basis point improvement in our operating working capital. And that's our target again this year. We're made some improvement, but we're not where we want to be by yearend.

Our next question comes from the line of Vincent Andrews with Morgan Stanley.

Just one question for me, would you mind breaking out the FX impact to gross margins in the quarter?

Well, we have -- from an FX perspective we had $40 million of negative EBIT in the quarter, pre-tax EBIT. And most of that's going to be in the COGS line. There's some offset in the G&A line within the regions, but since we make most of the product where we deliver it, the vast majority of that impact, that $40 million to the bottomline is going to be in the COGS.

Our next question comes from the line of Mr. Don Carson.

Just going back to FX and sort of the interplay with ROS, so FX is about $0.25 year-to-date, if I add up the first two quarters, are you still thinking it's going to slow down in the second quarter and maybe be $0.35, $0.40? And from a ROS standpoint, you had mentioned in first quarter you didn't see much ROS benefit as you worked down high cost inventories. What benefit did you see in the second quarter? And as that accelerates in the second half, what sort of multiple would you expect that to be of the FX hit?

So Don, just sticking with the currency translation, we had our biggest impact we believe in Q2 for multiple reasons. One, it's our highest quarter seasonally, especially in architectural Europe. And secondarily, the currency rates began to weaken last year, the euro began to weaken last year, dollar currencies in Q3, so if you will, the comps currency-wise are bit easier in Q3. Seasonality is the bigger factor there. So we do expect moderation from the second quarter level in the back half of the year, and in Q4 the euro was markedly down versus Q3 last year. So again, weakening euro and other currencies last year give us reason for moderation going into the back half of this year. Frank, I don't know if you wanted that or comment on that as well?

I mean, that's under the assumptions that the rate stay where they were at the end of Q2. They weakened a little bit this morning based on some of the news out of Europe. But under the assumption that they stay where they are, we expect sequentially an improvement both in Q3 and Q4.

And on your raw material question, I think Chuck mentioned earlier that we saw some benefit in Q1. That benefit expanded a little bit in Q2, and we expect a modestly improved benefit in Q3 and Q4.

Then just a follow-up on acquisitions. What sort of in the average EBITDA that you've been paying? And how has that changed over the last year, are you seeing more competition for these properties and thus higher purchase multiples?

Well, I would say that the purchase multiples for our deals, they do vary depending on growth rates, region, performance of the business. I would say that on average, this year we have not paid at the same level as we paid last year. As an example, we did pay as you know the announced multiple of around 11 for Comex pre-synergies. And these are smaller deals in various regions. So I would say the multiples are around the same over the last 18 moths or so. I think it's again somewhat dependent on where we finished, I mean, the types of deals and what are the quality and the size of the businesses.

Our next question comes from the line of Eugene Fedotoff with KeyBanc Capital Markets.

Your European volumes were up 2% year-over-year. And in the past you sort of commented on incremental profits or incremental margins for Europe, given that you took some cost out there in the past couple of years. I was wondering if you can provide similar color for this quarter.

We're still holding to the general guideline that incrementals on European volume in the 30% to 40% range. That's really because of plenty of headroom in terms of the manufacturing capacity, and not only steady, but generally reduced SG&A as we complete our restructuring program around the globe. So that 30%, 40% is still a pretty good rule of thumb.

And then just a follow-up on the protective coatings in North America. I don't know what your exposure is, like if it's significant, probably not to the, I guess, oilfield market or are you seeing any decline in the served markets due to the lower oil prices in North America and globally?

Yes, certainly, the oil market is softer, but the beauty is that we've been able to capture share in that segment, and that has been a positive for us overall. We do see oil weakness in Columbia, Mexico, Russia, some other places as well, but net-net this has been a good market for us.

And just a last follow-up on Comex sales growth, high-single digit in the quarter and year-to-date. So it sounds like you should be or is that the right expectation, you should be towards the higher end of your mid-to-high single-digit sales growth guidance?

I'm sorry. Could you repeat the question? I'm sorry.

Sure. Given high-single digits and Comex sales so far, I believe you said you expected sales to grow mid-to-high single-digits for 2015. So is it fair to assume that it's likely going to be at the high-end of that guidance?

I would tell you that historically what we told, we will grow 1.5x and 2x GDP. We are outperforming that right now. I'm comfortable that the team will continue to perform at the upper end of that guidance.

And just as a reminder for everybody, the seasonality of the Comex business, architectural Comex business, is a little different than the seasonality of our U.S. and Canadian businesses. For us, what we said is, Comex is about 20% in Q1, 25% in Q2 Q3 and 30% in Q4 in terms of their sales phasing. And that again is different than U.S./Canada business and Western European business we have.

Our next question comes from the line of Christopher Perrella with Bloomberg.

A question on the China business. With Asian or Asian volumes mixed, but up, were there any end-markets where you saw declining volumes in the quarter over in Asia?

Could you repeat the question?

Were volumes down in any particular coatings end-markets in Asia in the quarter?

Coatings end-markets, heavy-duty equipment in our industrial business was down, as we alluded to. Electronics, again, in our general industrial business was flattish. Those would be two markets that were on kind of the weaker side of the spectrum.

And what was packaging demand in Asia for you guys in the quarter? Was it up in line with the market or below market growth?

Every one of our businesses was up in mid-to-high single digits. Every one of them feed into packaging in the market.

Our next question comes from the line of Robert Reitzes with Broad Arch Capital.

Just trying to piece everything together. I want to ask a question. It sounds to me like Europe is going to be better in the third quarter, U.S. should be at least where it is or maybe a little better and Asia will be better, but at a less of a growth rate. Is that what I heard you guys say? That's the first part of my question.

I think that's a fair characterization.

And the second part is that currency will not hurt you as much in the third and fourth quarters as it did in the past. So maybe you got a little bit of a tailwind, even though currency was still hard, but you get maybe a little bit of a tailwind from currency moderation, is that fair?

It will still be a headwind in absolute terms on a year-over-year basis, but less so than it was in Q2. So Q2 is the peak headwind, Q3 a less so, and Q4 will be less so, just based on the sequential year-over-year comparisons based on the euro. And of course, that also depends on the fact that currency stay by where they were or they are now. If it continues too weaken significantly, it will be more of a headwind. But we still think that overall Q2 will be a peak quarter and it will improve sequentially after that.

So when you take a look at the one other business that people have been nervous about, and it sounds to me like Chuck was more optimistic, is that people have been a little bit more nervous about auto sales in China or auto builds. It sounds to me, even though you're looking for less growth, you're still looking for 3 to 5 instead of 7 in China in the back half of the year, is that also fair?

I think for the full year we're looking at mid-single digit, so certainly down from 7 right now. 3 to 5 for the year we think is good. And we've seen a few blips in Chinese market over the last few years, but we think it will still be positive for this year.

And one last question, just putting the whole thing together. Do you think if where you are today versus where you were in the beginning of the year, is Europe where you thought it was, better or worse?

Just making sure, we understood the question, Bob. You said Europe?

At the beginning of the year when you were looking at your forecast for Europe or what you thought the tone of business was, you had a view then. Right now is your view that business is better than what you thought in the beginning of the year, worse or about as you thought at the beginning of the year?

Well, I would say, on balance it's slightly better. It is better in automotive OEM and actually there was some improvement in automotive refinish. It's the construction markets, especially the big one we have in France have really not started to move. So I guess maybe that's meeting our expectations. But net-net I would say the automotive business is a little bit better. And as we've seen here in the recovery in North America since the great recession, it was really led by the automotive business. So now I'm a little more positive, as they have a weaker currency, lower oil prices, a lot of quantitative easing. So we're net-net more optimistic about Europe. But the businesses we're seeing the most tangible improvement are the automotive.

Our next question comes from the line of the Dmitry Silversteyn with Longbow Research.

A lot of my questions have been answered already. But I'd just like to follow-up on a couple of points, if I may. First of all, getting back to the raw material pricing and the discussion that you've offered in the answer to the previous question about [technical difficulty] coming back, and maybe asking you to share in some of the bounty that you're seeing on the raw materials side. It didn't sound like that was something we should expect in the second half of the year. If we assume that raw materials sort of stay at these levels and oil prices stay at these levels, is it likely that pressure from customers is going to get more intense in the industrial markets in 2016? Or do you still expect to sort of operate in the benign environment, where you get to keep all the benefit you have realized to date on the raw material prices?

We'll, certainly, I can add that we don't anticipate that we will keep all of the benefits. And typically as we've discussed whether prices on the way up or on the way down, we usually wait for a quarter or two as these things settle out, and we fully realize either the impact of raw materials on up or downside. And those are usually shared through the value chain or supply chain with our customers. So we're in regular dialog now with the suppliers and with the customers. So we do not expect that we would keep all of the benefits from a raw material changes.

Again, Dmitry, our raw materials are down modestly, low-single digits, so just to be clear on that number.

And there are other factors that go into our pricing too, like different kinds of value-added formulations, new products for our customers as well as there are other cost inputs associated with labor and other non-labor items. So overall, as Vince said before, a flattish environment overall for pricing, that was the case in the previous couple of quarters. We expect that for the rest of this year and probably into first half of next year.

I'm going to get in the 10-Q, but just for modeling purposes, can you update us on what the CapEx spend was in the quarter or for the six months?

We had in our presentation materials, total for the year about $160 million with about $90 million in Q2.

And then, just sort of a general question. You talk about the incremental leverage that you'll be able to obtain after having the cost, particularly in Europe, but also in other geographies, as you've integrated acquisitions and took capacity out and rationalize your footprint and so on. I guess, my question is I am not growing 22% volume, how do you actually drive margin in your business as to a higher level? I understand incremental margin, but you need volume to get it. So if you're growing at 1% to 2%, it's not going to be enough for you to drive the margin to generate earnings growth of mid-teens, let's say?

Dmitry, just to make sure, I want to make sure I spoke correctly. So our cap spending year-to-date was $160 million.

$160 million and $90 million in the quarter, I got it.

I just want to make sure of that. I apologize for interrupting you. I want to make sure that was clear. But in terms of our driving incremental margin profitability, I think we continue to look for ways to be aggressive with our cost. We continue to identify opportunity as we integrate these acquisitions, and we're typically bringing in lower than our operating margin or EBIT margin. And we continue to look for synergistic opportunities across our portfolio of businesses in terms of sales. So those are all -- again, we do have a challenging environment in certain markets, but we typically look for other opportunities to make sure we're maximizing our profitability with things we control. And again, along with the working capital improvement, there are also efforts underway to improve the efficiency of the supply chain. So the supply chain efficiency, there is manufacturing productivity, there is SG&A improvement associated with the restructuring program as well as the volume leverage we get from any incremental volume.

And then final question and I guess that that's sort of revisiting maybe a question that was asked earlier. But at the beginning of the year, you talked about a scenario of kind of slower first half of the year for European markets, and then a pickup in the second half of the year as the benefit from inflation of the currency and/or energy costs and things like that. Your European businesses in the first half I think did a little bit better than that. Is your expectation for the second half of the year equally bullish, sort of less bullish? Are you seeing [technical difficulty] more confidence and demand or is it a little bit less bullish?

Well, Dmitry, you've been breaking up a little bit on the connection here. But I'd say, we feel here, we talked maybe with a question from Bob Reitzes we talked about Europe being a little bit better than our expectations, especially in automotive. Here in North America, we do feel I think about the same in terms of the positive outlooks that we're seeing in automotive and the construction markets. As weather held that back we're looking at maybe some interest rate increases, the impact of the strong dollar and the weakness in the oil and gas sector here in the North America. I think overall it's probably helping us a little on the raw material side. But I would say North America is certainly not exceeding the expectations that we went into the year with some areas a little bit better. So I'd say, it's consistent, but I would say that, we, and I, in particular, probably felt that lower oil and gasoline prices were going to be more of a stimulant for the economy. And I think we've seen a little bit of improvement in consumer confidence, but I wouldn't say from a retail sales level or other areas of GDP and we've seen an out performance as a result of lower oil and gasoline prices. So I would say, it's about where do we thought it would be.

We have no further questions at this time. I will now like to turn the call back over to Mr. Morales for any closing remarks. End of Q&A

Thank you, Chris. Just want to thank everybody once again for their interest in PPG. And we'll be available on the Investor Relations department for any further follow-up. Thank you.

Ladies and gentleman that conclude today's conference. Thank you so much for your participation. You may now disconnect. Have a great day.