PPG Industries, Inc. (PPG) Q2 2017 Earnings Report, Transcript and Summary

Good afternoon and welcome to the PPG Industries' Second Quarter 2017 Earnings Conference Call. My name is Gary and I will be your conference specialist today. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to John Bruno, Director of Investor Relations. Please go ahead.

Good afternoon. This is John Bruno, Director of Investor Relations. We appreciate your interest in PPG and welcome you to our second quarter 2017 financial results conference call. Joining me on the line from PPG are Michael McGarry, Chairman and Chief Executive Officer; and Vince Morales, Senior Vice President and Chief Financial Officer. Our comments relate to the financial information released on Thursday, July 20, 2017. In accordance with generally accepted accounting principles, both current and prior year PPG financial figures presented today were recast to reflect our former Glass segment as discontinued operations. As a reminder, in the second half of 2016, we sold our flat glass and European fiber glass businesses, along with divesting our two Asian fiber glass joint ventures. Our North American fiber glass business is pending sales and we expect that sale to be completed in the second-half of 2017. About one hour ago, we posted detailed commentary and accompanying presentation slides on the Investor Center of our website, ppg.com. The slides are also available on the webcast site for this call and provide additional support to the opening comments Michael will make momentarily. Following Michael's perspective on the company's quarterly results, we will move to a Q&A session. Both the prepared commentary and the 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. This presentation also contains certain non-GAAP financial measures. The company has provided in the appendix of the presentation materials which are available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information, please refer to PPG's filings with the SEC. Now, let me introduce PPG's Chairman and CEO, Michael McGarry.

Thank you, John, and good afternoon, everyone. Today, we reported second quarter and year-to-date 2017 financial results. Our net sales for the second quarter were $3.8 billion and adjusted earnings per diluted share from continuing operations were $1.83, up 6% year-over-year. Our overall sales were up less than 1% in the quarter, with benefits from acquisition related sales, partly offset by unfavorable currency translation. As a U.S. headquartered global company, currency translation has been a headwind on sales and earnings for more than a year. However, given the U.S. dollar weakening during the second quarter and assuming those current exchange rates hold, we expect only a modest currency translation effect in our sales and earnings in the third quarter. For the second quarter, our selling prices were only up slightly versus the prior year. However, this marks an improvement sequentially versus the past few quarters. This improvement is important, as it is the result of our initial efforts to offset significant raw material cost inflation that the coatings industry has experienced. Our overall company volumes are flat in the second quarter. Industrial Coatings volume improved by about 3%, while Performance Coatings volumes declined by about 2%. One factor impacting our second quarter volumes was the effect of our efforts to raise prices resulted in us turn away certain business. We expect to sell customers our products at fair prices that allow us to make a reasonable return on the tremendous amount of service and value we provide to these customers. We have additional pricing actions that are being initiated and implemented in all businesses in all regions in the third quarter to further offset raw material inflation and will continue to work collaboratively with our customers on an individual basis. Also modestly affecting our second quarter volume growth was a shift in the timing of the Easter Holiday. Easter was in the first quarter in 2016 and the second quarter 2017. This holiday-shift impact us more prominent in the Performance Coatings segment due to the retail and distribution nature of our business in that area. It has a much less significant effect in our Industrial Coatings segment. However, while this shift had a modest unfavorable impact in the second quarter, it aided first quarter volume comparisons and had no impact in our year-to-date volume growth, which came in about 1%, which is well below our target. We continue to work on a variety of actions to improve our organic volume growth rate and are delivering results on various initiatives. Some highlights include the Industrial Coatings segment, where volumes grew at well above industry rates, including our general Industrial Coatings business where our growth exceeded global industrial production growth by a factor of 2 to 1. We delivered this level of growth in this business several quarters in a row now. Also, our automotive OEM coatings business is once again outpacing global automotive build rates. In the second quarter, our volumes were up over 1% versus the decline of about 1% in the global industry auto-builds. A few of the key factors of our outperformance are our innovative products, the excellent technical service we deliver to our customers and the decision in investments we made a few years ago back to emphasize and shift our regional mix of businesses toward higher growth regions. Another solid growth trend for us has been our U.S. company-owned architectural stores. While we have some more work to do here, we have posted six consecutive quarters of improved same-store sales. Over the past several years, we have made significant structural improvements to the business we acquired and we have made certain targeted brand investments. We are now beginning to yield benefits from these initiatives. We're also realizing continued benefits from various innovative products and refinish in aerospace among others. However, given our overall performance year-to-date, volume growth remains a key focus for the company. And we continue to work on a variety of initiatives to address this issue and accelerate our growth rate. From an earnings perspective, while our adjusted EPS grew by 6%, we experience compression in our overall gross margin and also in the return on sales in both our reporting segments. The largest driver was significant raw material cost inflation. And we expect the second quarter to be our most difficult comparison for this cost category. We will continue to experience year-over-year raw material inflation in the third quarter. As I mentioned, we will be implementing additional selling price increases in the coming quarters. And we are entering a seasonally slower period which will decrease the overall demand for the commodities we buy. Additionally, we have expanded our research work team focus on raw material efficiency and innovation. And they are working on projects to decrease or expand the supply base for certain raw materials we purchase. Also, we were able to mitigate some margin compression with overall productivity improvements due to our aggressive manufacturing overhead cost management. In addition, we accelerated some actions from our restructuring program we announced in 2016. We will continue similar efforts in the coming quarters. Our cash deployment also provided some benefit to our earnings per share growth. This included several acquisitions we completed over the past 12 months, along with the synergies we have captured to date. Additionally, year-over-year, we have reduced our overall share count by about 4%. Looking ahead, we expect to remain in a consistent but modest overall global economic growth environment. Our highest growth rates continue to be in emerging regions, although these economies have moderated in recent quarters. However, we expect solid growth to continue in China, India and certain Latin American countries. Notable and specific to PPG is that we will reach the anniversary of the significant declines in marine new-build, which has had an unfavorable impact in our organic growth rate in Asia and specifically Korea the past two years. We have seen evidence of broadening early economic cycle activity in Europe. Although we are a few steps down the chain, the backdrop for this regional economy appears favorable. This continues to be an opportunity for PPG, as we have said many times in the past that our best incremental margins are in Europe, given the lack of a broad recovery to date coupled with the latent capacity we have there. And the U.S. and Canada growth has become more industry specific. The overall construction market remains solid, as does general industrial activity. However, automotive builds have move past mid-cycle. And we have still not evidenced a meaningful improvement in business investment or return of large-scale energy investment. As a result of the various puts and takes in the global economy, and specifically in the coatings industry, we will continue to manage our overall cost structure, including delivering on our targeted $40 million to $50 million in restructuring savings this year. Also, we ended the quarter with a very strong balance sheet, including approximately $1.6 billion of cash. We expect a higher level of earnings accretive cash deployment in the second half of 2017 versus the first half. We previously communicated an intent to deploy $2.5 billion to $3.5 billion of cash on acquisitions and share repurchases in 2017 and 2018, and are now targeting the upper end of that range at minimum. This deployment will likely include both acquisitions and share repurchases. Our acquisition pipeline remains solid. And we're resuming share repurchases in the third quarter and have approximately $1.7 billion remaining under its current share repurchase authorization. To summarize our results, we had a solid quarter against the backdrop of raw material cost inflation and modest global economic growth. We delivered excellent performance in several of our businesses. And overall, we work to successfully counter the effects of inflation. And we achieved a 6% EPS growth. Going forward, we have further work to do on organic growth and I believe we're up to the task based on the traction we have delivered to date on various initiatives. Also, we expect continued earnings accretive benefits from a higher level of cash deployment in the second half of 2017. This concludes our prepared remarks. Once again, thank you for your interest in PPG. And, Gary, would you please open the line for questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from David Begleiter with Deutsche Bank. Please go ahead.

Thank you. Good afternoon, Mike and Vince. Mike, on the raw versus selling price increases, do you expect to catch up in Q3 or Q4? And I guess would we still expect some margin compression in Q3 year over year?

I think Q3 we're still going to have some margin compression. But we are working hard on the price increases. And I think Q4 you'll start to see a meaningful improvement in that regard.

And, Mike, just on the lost business, when you tried to raise prices, and what businesses, what regions did it occur and how concerned are you about lack of discipline in the industry on pricing?

I'm not concerned at all, David. I mean historically you know, because such a large percentage of our costs is raw materials, our coatings peers will need to be managing their margins. And I think that's important. You have one of our competitors who is obviously going through significant change with the - as they were being acquired by Sherwin. So maybe there is some lack of focus there. I don't know, we will wait and see. Then you have another one that has additional challenges, where they're focused highly on growth, organic growth and volume. I specifically listened to that. So I think there is some divergence out here. But that's not going to continue. I think the coatings industry has had a history of pricing. And our customers know that this is a significant issue for us. We work collaboratively with our customers and we would expect to do so in the third and fourth quarters as well.

And, David, if you look at our history as an industry and certainly as a company, we've said for a longer time it typically takes six to nine months to offset these inflationary effects. And we're really in the three, four, five month category. So we do expect additional pricing from ourselves in the back half of the year consistent with past practice.

Very good. Thank you.

Thanks, David.

The next question comes from Ghansham Panjabi with Robert W. Baird. Please go ahead.

Hey, guys, good afternoon. I guess, Michael, just given some of your macro comments in press release and based on flat volume growth during 2Q, on top of a flat volume growth quarter a year ago, how are you sort of thinking about volumes in aggregate for the second-half? I guess, do you expect volumes to grow on a year-over-year basis during the back half?

Well, I do expect volume to grow. We have had a lot of traction in a number of our businesses. I will point to one area that's been a significant drag and that's marine. We've had 18 quarters in a row of volume declines in Korea. We had a nice uptick in our order book in the second quarter. Now, don't forget we paint ships 12 to 18 months after. But we saw deliveries getting I would say at the bottom. And we expect deliveries of ships in the fourth quarter to be up, that would be the first one. So I think that's a nice one. And I also - when I think about our packaging business we reported basically zero in packaging for the second quarter. But they were comping versus a plus 9%. So I think we still have more upward project ability in that business. Miles driven continues to be a positive for refinish. Aerospace deliveries were weak and if you look what their goals for the big aerospace companies are, their second half of the year have to be stronger if they're going to meet their targets. So I think I see a number of things that are positive, so I'm optimistic.

Okay. That's helpful. And I guess, on the capital allocation side, I've been assuming only a small portion - only a portion of your $3.5 billion plus of capital allocation goes towards share buybacks. That's still a very large number that can influence quarterly earnings. How should we sort of think about layering in buybacks as we work through our models, realizing you'd want to be opportunistic depending on the stock price? Thanks.

Thank you, Jim [ph]. What I would tell you is we don't give out our cadence on share repurchases. If you look at the economics, for us the acquisitions have typically been able to drive incremental value above a share repurchase just because of the synergy value of the acquisitions, [so got to get] [ph] good pricing. So if there's an opportunity to do a value creating acquisition that still remains a preference, assuming again the returns are [better than] [ph] share repo. And then if we're able to find those transactions and are able to close them, then we do share repurchases. But again historically, we've not given our cadence about what we're going to do by quarter with share repurchases.

Okay. Thanks so much.

The next question comes from Bob Koort with Goldman Sachs. Please go ahead.

Thank you very much. I was wondering, Michael, if you might be able to help us figure out what the heck is going on in the paint stores versus the DIY markets, why there seems to be such a divergent trend lately?

Well, I think you have several factors going on there. First of all, the biggest trend is that do it for me. So you have the aging baby boomers, cash in the pocket, they'd rather have somebody else go out and do it. They were the big users of DIY, so that one. You have a millennials, who have not yet moved into the housing formation market, because of call it college debt or a number of factors. So I think that's another one. And I think some of the home centers have complicated their category if you will, and made it more difficult for consumers when they come in, to initiate a paint purchase. And so we've been in a lot of discussion with our DIY customers for the need to simplify their category. So that people can come in and move the decision cycle from, say, 100 days down to 60 days. And I think that's a huge one. So I think there are a number of factors, but certainly, you saw the strength in our own company stores. It's outperforming the DIY segment. But we have a huge vested interest in our customers to be successful in DIY. And so, we're trying to talk to them about that.

All right. And can you talk a little bit about, maybe, Vince, the corporate segment, reporting segment, obviously there was a marked improvement there. What were the buckets that led to that improvement? What's the sustainability or run rate of that expense line?

Yes, Bob, the biggest impact on our corporate line was simply incentive-based compensation. As you can tell, we're running below or 10% EPS target. Our volume growth is below our target as well, so we're reflecting that. And our margins are compressed, so we're reflecting that. And our incentive-based comp, I would say that line item for the back-half of the year, we took two quarters' worth in this quarter. We took the first quarter and second quarter adjustments cumulatively in the second quarter. But for the back-half of the year, I would expect that corporate line to be slightly lower than last year, but not much so.

Got it. Thank you very much.

Thanks, Bob.

The next question comes from Kevin McCarthy with Vertical Research Partners. Please go ahead.

Yes, good afternoon. Vince, would you comment on where you think you're tracking for capital expenditures this year? And would you have any preliminary view on the trajectory for 2018 there?

Yes, Kevin. So historically, we have been somewhere between 2.5% to 3% of sales on capital spending in both 2015 and 2016, we were slightly above that number, because we were doing some cost localization projects, primarily in emerging regions. You may have saw in the quarter, we opened a new plant in Russia as well. But now we are expecting for 2017 in aggregate to be right around that 3% of sales figure. And I would say in 2018 we are going to stick right around our depreciation level maybe slightly above.

Okay. And then to come back to the notion that you exerted discipline on price and may have lost some volume in industrial, Michael, would you say that that effect was fully captured or evident in your 2Q financials or is there an effect or spillover into the back half? And perhaps you could provide a little color on which individual businesses within the segment felt that the most?

So in regards to the first question, our paint customers typically make a decision and then they don't flip flop people back and forth. So any share that we lost in 2Q and some of our businesses will likely continue. But as our competitors feel the same raw material inflation that we have, should they make their own independent decisions, then they may be impacted by customers. Our customers could say, okay, well, we see it coming now. So we'll make adjustments differently. That's something we can't predict, but what I will tell you is the raw material inflation is not new to the coatings business. This is - when it happens everybody needs to react. And so we'll be continuing to work in this area. I would say the areas that were impacted the most or the areas that have - I would say more ability to switch than others. And so that means they're likely to switch back as well. I'm not sure, I want to get into the individual businesses, but if you think big global guys have less flexibility, the smaller guys have more flexibility, so that maybe one way to think about it.

Thanks very much.

The next question comes from Frank Mitsch with Wells Fargo. Please go ahead.

Good morning, gentlemen, and congrats, John, on your new position. Michael, you mentioned that Europe is the area where you have the highest incremental margins. As I am looking at the handy-dandy heat map by geography, I am looking at Europe a little bit sequentially worse than it was in Q1 the heat map. But, yet, Q3 of 2016, Europe was relatively week. How should we think about what's going to happen in Europe in the back half of the year?

Well, I think the positive news about Europe is if you look at, like, automotive, and you still have more latent demand in automotive. I think, Eastern Europe have had a nice recovery, and I think that's going to help. I think, maybe the order book order book in France will start to get healthier now with the change in administration, certainly UK, Ireland continues to be a strong market for us. So I think a number of things I see from that regard has positive momentum. So that's how I would think about that Frank.

Frank, we're not pleased with the volume growth, but I would tell you that one of our bigger businesses there, which is architectural was down modestly in Q2, but they had two less selling days. And their sales per selling day were actually up over 2%. So again, I think there's been some caveat there with respect to one of our bigger businesses in the Q2 period.

All right, so more pronounced Easter effect taking place over there. And I think we also saw from some competitor that the Nordic region had some more - had poor weather, so that might recover. And then just a follow-up on a comment on the packaging side, which is obviously been a very strong part for the company. And as you mentioned very difficult comps, so growth was zero in Q2. I - from the commentary, it sounds like you expect that to continue in terms of the shift onto a BPA intent - non-intent, what inning are we in? And you've made a lot of progress there. Is there still a lot more to go, how should we think about that change in technology playing out?

We are still in the early innings, Frank. I think right now we have between 50 and 70 trials and conversions still ongoing around the world. So there's a number of activities, and part of that unfortunately is the fact that the new coatings, they're multiple coatings, so you don't use just one coating and have to roll it out everywhere we have multiple coatings and none of our packaging customers, they have different line configurations, different oven configurations, different airflow configurations. So I would say the conversions are not progressing quite as fast as anybody would like. The good news is, when we get it, they are very happy with it. And so we still have a lot more conversions to go, but good news is, when we get it right the customers are ecstatic.

Very helpful. Thank you, gentlemen.

Thank you, Frank.

The next question comes from Vincent Andrews with Morgan Stanley. Please go ahead.

Thanks. I just wanted to get back to the capital allocation discussion, and the subtlety I saw was that at least the upper end of the minimum. And I just wanted to know whether that was a comment on your M&A pipeline, or what you see there, or if it was indicating a willingness to ultimately be more aggressive with the size of the buyback or both, I suppose?

Well, if you look at our balance sheet, we have a very strong balance sheet. We are committed to growing the company, we're returning the money to shareholders. We do - I think our - as evidenced in the quarter, if there's an opportunity to create value for our shareholders, we will certainly try to take advantage of it. But it's really a reflection of two things, Vincent: one, our strong cash and our strong balance sheet, and our need to - Secondly our need to be creative and value creative for our shareholders with that asset.

And Vincent, this is Michael. The other thing I would say is that it, beginning of the year we thought we'd be selling fiber glass, but we didn't have a deal. Obviously, now we have a deal and we have a sight line on when that deal is going to close. So there's more certainty on the cash flow from that. So that's a positive. And as you see today, the announcement of the Crown Coating services, we're going to continue to put our money to work and acquisitions.

Okay. Thanks very much, guys.

Thank you.

The next question comes from Christopher Parkinson with Credit Suisse. Please go ahead.

Perfect. Thank you. Can you just come out with anything else you could potentially do to improve the performance in the U.S.? It appears that in the context obviously of a select market that Paramount and DIAMOND have done relatively well in their respective homes. And then also, over the past two seasons you've made efforts to improve branding, quality, et cetera. But is there anything else your team is specifically targeting to do in the back half of the year or even into next season? Thank you.

Yes, Christopher, I would tell you that we continue to work proactively with our retail partners. One of them launched Home Depot to be a specific launched, PPG Timeless Stain. It has been a little bit of a difficult stain year, given the amount of rain, and so it has impacted exterior paint as well as exterior stain. And so that's a positive, we also have pitched other new ideas to our customers, and they are proactively evaluating them. We won't know until they roll it out in the store, but those are all positive for us. DIAMOND has been a significant success. Assure at Lowe's has done very well, Paramount has done well, so I think we have a number of success stories, I think our customers are comfortable with the fact that we can play at the good better best range and that's been a positive for us. But it is an evolution, when we bought the Glidden business they had under invested in the brand, they had under invested in the resources. So we have brought all that up to speed, and now we're just now starting to see that. As you can tell, we have the same thing going on in the stores with this. Our PPG-owned stores have had significant improvement in sales on a quarter-over-quarter basis.

And just as a follow-up. You've also - you have done well in the relative basis in global auto OEM just by moderation or just flat-out slowing in key regions. Can you just comment on your position in the Asian markets specifically, given your exposure with multinationals versus some of the domestic producers, who appear to potentially be poised to gain share, just any kind of long-term comments there? Thank you.

Yes. So we're a strong number one in OEM in Asia. And we're a strong number one in both the global OEMs as well as the domestics in China. And we're a very solid performer in India, which is also growing. So I would say, we've been happy, we significantly outpaced industry rate in Asia by multiple points in our OEM business. And specifically in China, we were well above what happened in the industry. And the industry was flat, and we were up high-single-digit. So our platform in Asia is really strong.

Great color. Thank you.

Chris, the basis of that outperformance really goes back a couple of years, we've made some significant investments, we talked earlier about CapEx we've done in Asia. We've made some significant bets with customers. And so it's been plan-able [ph] and executable by our team over there.

Thank you.

The next question comes from Jeff Zekauskas with J.P. Morgan. Please go ahead.

Thanks very much. I'd like to go back to the capital expenditure question in that in your earnings brief you say that you expect your CapEx to be about 3.0% to sales. So if your sales roughly $8.7 billion that would be $262 million, or call it $265 million. Is that the number you expect for CapEx or that's not correct? the fear of that's not correct?

We typically, Jeff, if you look at our kind of our cadence of capital spending, because our businesses are very busy in the beginning of the year, operationally, we typically do a greater amount of capital spending in the back half of the year. And if you look at our sales on a full-year basis, I don't know what your model has, but I would use your sales on a full-year basis times around 3% to get our capital spending figure.

Okay. Can you - just as my follow-up. Can you talk about what's going on and do-it-yourself market, and why the results in general or the volumes seem so weak. And do you think that there is a shift downward and either pricing or complexity of the paint product that's leading to a lower mix?

Well, Michael mentioned this a little earlier about some of the factors that may be affecting the different channels in architectural. I'll add to what he said earlier, you talked earlier about baby boomers and millennials, and different preferences. But in addition to that we've typically seen the do-it-for-me category go up. And when you have a low unemployment, and unemployment in the U.S., as you know, 10 years low, and we also - I would tell you we've also seen it in the repair market, bigger repairs being done. And paint is a very cost effective and small dollar repair, but we're typically seeing bigger repairs being done such as kitchens and bath don't use much paint. So those will be other - two other contributing factors to what Michael mentioned earlier.

Okay. Got it. Thank you very much.

Thank you, Jeff.

The next question comes from PJ Juvekar with Citi. Please go ahead.

Hey, good afternoon, Michael, Vince.

PJ.

PJ.

The independent channel has been struggling for quite a few years. What's your strategy for that channel, do you want to be there? And then, if you compare your pricing across your three channels, can you just qualitatively talk about where you're seeing the most pressure and where you see the best pricing?

Yes. So, PJ, the dealer channel continues to be a very good channel for us. The beauty about that channel even though it's moderating, it's moderating in a very slow rate. It's highly predictable. We're able to manage our cost structure along with the moderation and demand, and so the profitability that segment remains quite good. So from our standpoint, we want to be in all three. We want to be in the company owned stores. We want to be with the dealers. And we want to be with DIY. So we want to play across them all. Probably the biggest thing that we probably haven't talked about is in the DIY segment, because Vince talked about the bigger projects being done, and if you look at some of the large retailers. They have a lot of big ticket growth. What we want to encourage them to do is make sure when somebody walks in and wants a $25 gallon of paint that we are not chasing them out, because we're trying to up sell everybody. So that's an area of focus is to make sure that we do that. But I would tell you all three segments are attractive to us, and we're going to continue to focus on all of them.

Thank you. And if I look at your comments on pricing, you guys seem unusually aggressive on pricing. And correct me if I am wrong, but you let your customers walk away in certain channels. When I look at your raw materials, yes, I give your TiO2 is going up, but oil is down, propylene is down. So you should see some benefit on hydrocarbon side. So can you talk about this pricing strategy in an environment where hydrocarbons are lower, and the global growth is also quite slow?

Well, first of all, I would tell you, I don't think we're - pricing any differently than we have historically. So that would be my first comment. Second, I would urge you to look at propylene and ethylene on a global basis, because if you look at some of those on a global basis, you'll find that like propylene in Asia is up year over year. You'll find that ethylene in Asia is similar, you European ethylene is up year-over-year. So it's not quite the same overall, and this period last year, you had oil at about $35 or so $40, and now you have it at $50. So we are seeing oil derivatives they typically are - again two or three steps down the value chain. So you don't get the immediate decrease that you see in oil. So solvents, yes, but for some of the other key commodities, it doesn't happen overnight. So I would just tell you, we still see raw material inflation, and TiO2 is certainly going to be still marginally up in 3Q.

And you think TiO2 continues to go up in second half in second half in a slow seasonal period? Thank you.

Well, historically, it doesn't go up in the fourth quarter. As you know, we produce the vast majority of our paint through the first seven or eight months of the year, tapers off there. A number of them have historically come to us and tried to quietly move some volume to incentivize us to make some production ahead of the next year's paint schedule. Whether or not they will do that is too early to tell, this is only July. But that is not unusual behavior, so I would tell you we should just wait and see how they respond.

Thank you.

Thanks, PJ.

The next question comes from Duffy Fischer with Barclays. Please go ahead.

Yes, good afternoon, fellows. Just want to go to your Slide 5, it's a little hard to tease everything out, but on there, it looks like you have five category - four categories you say you're below market and 11 that you're above. So would you say globally across all your markets you're still outgrowing those markets?

Duffy, I'll take a stab, and I'll let Michael add some color here, but we're fairly confident in our industrial businesses, we're outgrowing or well outgrowing the markets on a global basis, or maybe some discrepancies below or above that comment within each of the individual regions. But we've had very good volume growth in our general industrial business in mid-single-digits. We know in automotive, so we get a report card every month. And as Michael said, even though in packaging our volumes were flat that's really a factor of the prior year comparable. We're comfortable in our performance segment with our European architectural business, and certainly in our architectural businesses in emerging regions. U.S. we're - basically, we don't have all the data, yet, to make a determination, but in refinish we're above market. So there's certainly some work we have to do. But we're not losing share in many of these key markets and in many cases well outperforming the market. Michael, do you want to add?

No. I think that's a good summary, Vince.

Okay. And I guess that's the way I would read it, but then the corollary, and help me square this, is if you guys are growing at least a little bit above market, you're at zero volumes that would mean the market globally is kind of down. And to get to that raw material question of if volumes globally are down in coatings. It's - help me square kind of the pressure on some of the raw material cost you think actually they may be moving the other direction if volumes for you guys are down - or volumes for the industry are down year-over-year?

Well, part of the raw material challenge we're having, right now, is some of the force majeures on some of the larger items. So you did have the challenging environment in Europe where one of the TiO2 plants still down. You have the environmental issues in China, where they're trying to radically reduce the emission levels, so the TiO2 costs are going up there. And then, if you look at some of the things like epoxies, epoxies are up. Emulsions are up. So those are all having that kind of impact. So I think on balance, we're not happy. Obviously, we're paying more, but we don't think we pay anything different than our competitors. And we also think that after the fourth quarter it's going to be moderating, and on a year-over-year basis, the first quarter will probably be flat. But right now, it's maybe a little too early to tell that.

Great. Thanks, fellows.

Thanks.

The next question comes from Don Carson with SIG. Please go ahead.

Yes, two questions on volume. Michael, you mentioned some organic initiatives to try and get volume going. You've talked about architectural. Can you talk about your other businesses and what impact you think these overall initiatives can have on volume growth? And then secondly, Vince, on the acquisition side. What's the pipeline look like? And are you seeing the multiples go up or at least people's price expectations go up, as they look at some of these big deals that have been done?

Don, on the specific businesses, I mean, we still are going to be launching a new commercial transport product in our refinish business in back half of this year. Refinish historically has been a very good business for us. We've consistently grown that business, we think that will be the next catalyst in that. If you look at our aerospace business, we just launch what we call Aerocron. It's e-coat for the aerospace business. We have commercial customers up now. This is an industry unfortunately that thinks in terms of decades, and not in terms of years. So some of our bigger customers will take several years are growing to that process. But they're all doing testing, and they're all excited about the way that that e-coat can reduce the weight of the parts in the plane, so that's another technology we're bringing to the market. If you think about in the marine protective side, we have a number of new products, vantage products that go into our pacifier protection, so that's a positive for us. And I would tell you from the general industrial, we have developed some new products for lightweighting in that area as well. So when you think about the major themes, sustainability and lightweighting and those areas that has all been a positive for us. But I would tell you a lot of our customers move at a little bit slower pace than we'd like them to.

And, Don, relative to your second question, I think the evidence was certainly out there over the past 18 months, if you look retroactively there's been a significant amount of continued consolidation in the coating space. We said at the beginning of - not this year, but last year there are very active pipeline. We're sitting in the same place today, we think there's a very active pipeline of small to mid-size deals out there. We announced one today. And I think, we're proud to say we remain disciplined with respect to multiples, and we intend to do so going forward. But there is certainly an active - series of active discussions underway with us and other potential targets in this space.

Okay. Thank you.

The next question comes from Arun Viswanathan with RBC Capital Markets. Please go ahead.

Great. Thanks. I guess, I had a question again on the volume growth. So if I look at the two heat maps from Q1 to Q2, there were some changes, but Q4 and Q1, you saw positive volume growth across the portfolio in the 1% to 2% range. Now you went to flat. So maybe you can just characterize what happened. Did you see some weakness in some of your bigger categories? And then similarly, going forward, do you need to see those big categories really turn around? Or is there something internally you can do to drive more of your categories in the above market section?

Arun, this is Vince again. So again, I think we provide the heat map we try to be as transparent as possible. This does include by region and by end market our projections of what the market's doing. But I think we provide the most granular level detail of anybody of our expectations that we're performing for you guys. I would say, if you look at Q1 to Q2 - in Q1 versus Q2, we did see a higher level of build - auto build growth rate. Q2 build growth rate slightly negative globally and slightly positive in Q1 that is a bigger business for us. And that's probably, we talked about packaging the differences there, and we talked about architectural enough. Those are probably the three biggest differences if you look quarter-over-quarter. We do expect auto to reaccelerate, as we said in our prepared comments. We expect the business to grow globally in Q3. And as Michael said about architectural, we expect some improvement there especially in Europe.

Okay. And the auto OEM share loss in the U.S., when does that run its course? And again, do you think that the current initiatives you have in place will get you back to positive volume growth for the year?

We measure auto OEM on a global basis, because these are global customers and there are decisions you make that - to move around the world based on your competencies, and your technology. So we could pick on one region, but I would tell you that we're well above market in the Asian region, which is the biggest market in the world. As I said earlier that was orchestrated, and we're also well above market in Latin America, which predominantly is Mexico, which is the fastest growing region in the world, right now. So again, we've made very significant and plan-able decisions in the past that are allowing us to outperform globally, and we expect to continue to do so in the second half of the year.

And I guess, I'd add to that a little bit. The reason why we gained so much share in Asia was because of our compact process, where you put down multiple layers of paint at once. And that was easier to sell that benefit in Asia, when they were building new plants. Now that they see how well that is working, now they're going to, they're thinking about brownfield conversions. And you'll see that happen in Europe, before you'll see it in the U.S., because obviously energy costs are higher in Europe than they are in the U.S. But we're starting to see a number of our global customers thinking about this. And as this trend accelerates, obviously that's a good benefit for us, because we have the best technology in that regard.

Great. Thanks.

Thank you.

The next question comes from Stephen Byrne with Bank of America Merrill Lynch. Please go ahead.

Yes. Thank you. I just wanted to drill into the higher ROS expectation, particularly TiO2 in this third quarter. You made a comment, Michael, about some research efforts, and I think you said expanding the supply base. Can you comment about whether you see more opportunities to either reformulate less into the coding or maybe blend more lower quality ingredients into the mix just to lower ROS? Do you have any more bandwidth there?

Sure. So we started on this initiative probably five years ago, and we've made a significant improvement in that regard probably depend upon the formulation anywhere from 7% to 10% less TiO2. The next generation of that was either the substitute or the total conversion of fluoride to sulfate. And now I would say it's the optimization of the formulation that we're working on now. We're also working on whether or not there's more TiO2 sulfate guys in China that can reach that level of quality that we need, and so we're going with a broader set of suppliers in Asia to bring them up to the level, and we have a number of trials ongoing in that regard. So that is still to be played out. And then, of course, we have the formula optimization that we need to do as we get more cross-fertilization across the businesses, across the world. And I think that still has many more innings to play out in that respect. So this is an ongoing area of focus for the company, we spend $500 million on R&D. And this is a portion of our R&D effort is raw material formula optimization.

And then, just more broadly on cost given your outlook for higher ROS, your sales are kind of flattish. Are you looking at some new productivity initiatives or ways to maybe accelerate or pull forward some of your existing cost reduction efforts.

This is PPG, so productivity is a mandate. This isn't optional, no business, no matter how good they are get out of this. So they all have their productivity goals for the year, and I would say the vast majority of our businesses are delivering in that regard. Our manufacturing teams are doing a very good job of driving productivity. I think, we are ahead of the restructuring initiative that we said, I think we gave you a target of $40 million to $50 million for the year. And we've - we are well on our way to achieving that target. So I think we're on track in that regard. And I always have higher expectations for the team, and they know that. And I think, they're all focused to deliver more in the second half of the year.

Thank you.

Thank you.

The next question comes from Dmitry Silversteyn with Longbow Research. Please go ahead.

Good afternoon, guys. Thanks for taking my question. A couple of follow ups if I may, a lot of my questions have been answered. Specifically on the Latin America and Mexican business for architectural paint, after some pretty good quarters, after you completed the Comex requisition, I see you that in this quarter, you identified that business is growing with the market. It's just - is that just a question of anniversarying some of the initiatives and expansions that you've undertook when you first bought the business or is the competitive dynamic in the region changing any way that's making it more difficult to grow above market?

No, Dmitry, I think it's the former. We've posted a couple of really good strong growth years there. We're confident against those, we're confident in the Comex business model and the business remains very successful.

Okay. So going forward, Vince, if I understood what you said correctly, we should kind of expect more in line with the market type of growth in that business.

It's a minimum at market. And it certainly can go above market depending on how many stores we open, et cetera.

Got you fair enough.

Dmitry, this is Michael, I would tell you that in Mexico we opened 52 stores in the second quarter. And we also opened a number of stores in Central America. Last year in Central America, I think we grew 29%. So we had to overcome that. So I would tell you that the expectation for the team is to continue to perform at least two times GDP. We're not walking away from that target.

Okay. Fair enough. On the packaging side of the business, obviously, you had zero growth against a very tough comp in the second quarter. But as you get into the back end of the year, should we expect sort of a return to low-single-digit market like growth or do you expect to outgrow the market with continuing share gains or benefits of ramp up with existing customers?

No, I think we should continue no marginally pick up share. We do though expect it to be in the low-single-digit range as opposed to prior years when it was growing high-single-digits.

Right, right. And then final question on the - in the DIY channel, I mean, in North America paint business, I understand sort of the dynamics that are driving lower performance there, versus the contracted business. But are you seeing significant difference in the cadence of revenues you get from your various channels partners in the DIY market, whether it's big box versus mass merchant or mass merchant versus like Ace or True Value kind of hardware store channel? Is there any channel that's doing reasonably better in this environment or a lot worse in this environment that we can focus on?

No, again, there is still more data to come out for the quarter, Dmitry. So it's hard for us to speak. Can we give some projections about the industry, hard for us to speak holistically. But if you look at most of our national customers, we're seeing generally similar trends. There's always a little bit of difference in delta in that. But I'd say there's not a wide disparity in the dealer channel. As Michael talked about earlier, that's a channel that has a very small incremental erosion on a year-over-year basis that we can very well manage. That's typically a very sticky channel in terms of customer relationships. So I would say, we're not seeing anything unique by the customer or different customer sets.

Okay. So there is not - it's not like mass merchant is losing share to big box or picking up share from hardware stores. It's kind of across the board and the various channels are fairly close to each other in terms of performance.

Yeah, and I think the difference between the channels, trade versus DIY has been in this - we've been in this situation for well over a year. So it's not any different than prior quarters. It's not accelerating or decelerating.

Right, okay, thanks.

The next question comes from Michael Sison with ‎KeyBanc. Please go ahead.

Hey, guys. Thinking about the second half of 2017, you talked about volumes returning to more positive territory, you're going to deploy more capital and maybe catch up on raw materials a little bit. So should EPS. growth in the second half be better in terms of year-over-year ex-fiberglass than the first-half?

Well, Michael said earlier, Mike, that we hope to minimize somewhat the margin compression we saw in Q2. So for that factor alone we would hope to see improved operating earnings. We do have - again, we're going to work on our cash deployment, and again, we're not going to give a cadence there. But I think you hit on all the key elements to look at for the second half of the year in terms of earnings leverage.

Then in terms of M&A, is there a side, smaller bolt-on acquisitions? Is there opportunities for bigger type of transactions?

Well, we've always said that there's no transaction that we wouldn't look at. But we're always going to remain disciplined in that regard. We're going to look at it whether it's accretive to our shareholders. And I would tell you that the vast majority of the ones we're looking at are tend to be bolt-on types. And we still have an active pipeline and we're still going to manage that appropriately.

Great. Thank you.

The next question comes from John Roberts with UBS. Please go ahead.

Afternoon, guys.

Hi, John.

I don't understand the European DIY paint business as well as I should here. Is that relatively small for you? And is there a different dynamic in the European market between DIY, like we're talking about here with the U.S.?

No, it's a big segment. It's our second biggest segment after the U.S. and Canada. And we're bigger in trade in Europe than we are in the retail. And so, we're doing fairly well in most of our markets. But the retail segment over there is more challenging than it is in the U.S., because there's more private label in Europe than there is in the U.S. And they will tend to switch people out faster than they will here in the U.S. where you know you might lose a price point here, or a price point there. But there you can you see a lot more action in that regard. But overall, I would tell you, France is our biggest market. And when you look at the trade France, it's been flat to marginally down. And since that's our biggest market, it has more impact. But the good news is, in the U.K., Ireland, we've been significantly growing share and that's getting to be a bigger market. Benelux has been a very good market for us. And I would say the positive in Eastern Europe is we saw a nice little turnaround now. The key is whether it's sustainable, because we'll have to wait and see. But that's a good thing.

But it doesn't sound like it's underperforming the pro-applied paint market to be extent we're seeing in the U.S. The divergence doesn't sound as big at least to me in the discussion here. And then it doesn't sound like we have this issue of maybe having priced too high or having your customers priced too high in Europe like they may have done in some of the big box retail locations here in the U.S.

Yeah, I would agree with that. They don't have as much super premium paint in Europe as we do in the States, because it's more private label. And the U.S. market has done a really good job driving premium paints. So I think that is one key difference. The other thing is you don't have the full employment over there that you do have here. So the DIY segment and the do-it-for-me hasn't diverged as much as it has here.

Got it. Thank you.

Thank you, John.

The next question comes from Laurence Alexander with Jefferies. Please go ahead.

Hello, just quickly the - on the M&A tailwind for Q3, is the acquisition announced today is that - does that offset MetoKote in size or is one noticeably different in size than the other?

I'll let Michael give the size, Laurence. But I will remind you that MetoKote, which we bought last year, did anniversary July 1, so that would not be considered acquisition related on the go-forward basis. And I'll let Michael talk about the acquisition today.

Yes, so for Crown it has sales between $125 million and $150 million. We have essentially paid $1 per $1 of sales. It's a nice acquisition. The segmentation of it is I think in the sweet spot. It has a high majority of trucks, SUVs and a nice exposure to heavy-duty equipment. As you know, the heavy-duty equipment market is recovering in a nice rate. And then for the trucks and SUVs, that's by far the strongest part of the automotive market. So I think it segmented appropriately. And now that we have more density, the big, big OEM guys and the big heavy-duty equipment guys are going to be anxious to push more share I think our way long term, because we're able to supply them over a broader portfolio of products as well as a broader portfolio of locations.

And Laurence, with respect to trading off dollar for dollar in terms of impact on our - we haven't closed the transaction yet. So until we close the transaction, we won't see any effect of the acquisition.

Yeah, got it. Okay. Thank you.

The next question comes from Mike Harrison with Seaport Global Securities. Please go ahead.

Hi, good afternoon. Michael, I think it was you who referenced the confusing offering at one of your key big box retailers. Can you talk a little bit about what potentially could be done to address all the different brands and price points that are available, and maybe share your view on how that plays out going forward.

Well, I could. But maybe our retail partners would not be happy, because we don't make the decisions in their aisles. But we have encouraged them to think about how they can simplify the number of price points, simplify the number of choices, make the color decision faster and easier, and provide - I would tell you, less competition in the aisle and more conversion in the aisle. I think that's the key. We don't want to make sure that everybody that goes in the store to buy paint buys somebody's paint. That's the real key, is to make sure they walk out the door with paint. And anything we can do to help them understand what's impacting their conversion is intelligence that we're sharing with them.

All right, and then I was also just curious, with respect to the Akzo deal, were you prohibited from doing share repurchases while that proposal was in place. And also, does the management change at Akzo recently, what does that mean for your interest in that asset going forward.

Well, we did not purchase shares during that period of time. Obviously, we felt like we had inside information so we were prohibited from buying shares. In regard to the management change, we will not comment on it. I think you should call them and find out. But we have put Akzo in the rearview mirror. And we're looking forward to growing our business.

Thank you very much.

Thank you, Mike.

[Operator Instructions] The next question comes from Jim Sheehan with SunTrust. Please go ahead.

Thanks. A question on TiO2, how are your relationships with your suppliers, this cycle compared to the last up-cycle in TiO2 around 2011? Do you expect the price inflation this time around to be more manageable than it was in the past?

Well, I certainly do. I think if you look at some of their own commentary, I think they've taken an approach that is appropriate. I think they recognize, the last time they chased away permanently TiO2 volume which was not in their best long term interest. As far as relationships with them, I would tell you that we always try to keep good relationships with our suppliers. It's important, because the good times will turn into bad times. And most of our product raw materials are cyclical. And so, it's important for us to work collaboratively with them the same way we work with our own customers in a collaborative manner.

Great. And in architectural coatings in the U.S., did you see any seasonal effects or unusual seasonal - or unseasonable patterns as the quarter progressed? One of your competitors has mentioned sales slowing in the second half of June and maybe an acceleration in July. Are you seeing that trend in your order book as well?

Well, I would tell you that they were certainly rain that impacted. Exterior painted awfully difficult to do to begin with and then rain makes it impossible. We do have a good strong start to July for our stores. But it's also relatively consistent with what we saw in the first two quarters. As you know, we've had good company owned stores sales in Q1 and Q2. And we're pleased with the performance of the team and then we see similar patterns in July.

Is your volume weakness in that business causing you any fixed absorption issues for you?

So, Jim, if you look again, our U.S. architectural business in the stores network is up 5%, so our cost absorption is actually better.

Thank you.

Okay. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Vincent Morales for any closing remarks.

I just want to once again thank everybody for their time on the call today. And we will be taking investor calls. Please look at the presentation materials for the call information, to schedule a call. And again, appreciate your time and interest in PPG. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.