PPG Industries, Inc. (PPG) Q3 2017 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the PPG Third Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. At this time, I'd like to turn the call over to Mr. John Bruno. Sir, please go ahead.

Thank you, Jamie, and good afternoon, everyone. Once again this is John Bruno, Director of Investor Relations. We appreciate your continued interest in PPG and welcome you to our third quarter 2017 financial results conference call. Joining me on the call 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 today Thursday, October 19th. In accordance with generally accepted accounting principles, all periods present the former Glass segment as discontinued operations. About one hour ago, we posted detailed commentary and accompanied presentation slides on the Investor Center of our Web site 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 the 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 Web site, 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 third quarter and year-to-date 2017 financial results. Our net sales for the third quarter were approximately $3.8 billion, up more than 3% year-over-year and our reported earnings per diluted share from continuing operations were $1.52. This quarter was filled with a lot of emotion and many operational challenges due to the number and severity of natural disasters that many experienced. I would first like to thank our employees for their commitment and support they provided and continue to provide. We will continue to support our impacted employees, their families and their communities as they continue to rebuild. Turning more specifically to our results in the quarter. Our sales growth of more than 3% was driven by improving sales volume and favorable currency translation. Currency translation, which has been unfavorable for quite some period of time, reverted to favorable in the third quarter and is expected to be so in the fourth quarter based on current exchange rates. Regarding our sales volumes, I'm encouraged by the pace of growth in July and August before the hurricanes and earthquakes and by order book in the first few weeks of October. Our overall year-over-year Company sales volume were up nearly 1% in the third quarter, including about $25 million of unfavorable sales volume impact from natural disasters. Industrial Coatings segment volumes improved by about 3%, while our performance coating segment volumes declined by about 1%. The performance segment realized most of the unfavorable sales impact from the natural disasters. Before the natural disasters, we were tracking about 1.5% of sales volume growth in the quarter, higher than our volume performance in the first half of 2017. Let me quickly discuss a few specific business unit performance trends, where we're tracking both above and below the market. In the third quarter, general Industrial Coatings business growth again exceeded the rate of global industrial production, continuing a multi-quarter trend. Also, volumes returned to mid single-digit percentage growth in our packaging coatings business, stemming from increased customer conversions to our new technologies. Our U.S. company-owned architectural stores once again grew same-store sales at mid single-digit despite the natural disasters, marking seven consecutive quarters of sequential volume improvement. Of note, during the quarter, we're pleased to have launched PPG Timeless, a new premium stain and new interior paint brand into the Home Depot, and we'll work to drive customer adoption of this new product. This includes some additional growth related marketing spend in the fourth quarter. That being said, demand overall U.S. DIY paint market has remained soft throughout the year. During the quarter, our sales volume in architectural coatings EMEA were below market, while certain parts of our business remained solid, such as the UK where we continue to outperform the market. Demand in certain other important countries to PPG, such as France, remains weak. Also, we turned away certain business in the region due to either low profitability or lack of customer acceptance of selling price increases. As I previously said, buying growth remains one of our key focus areas for the company. While I'm pleased with some of the measurable progress we have made, we continue to work on a variety of initiatives to accelerate our growth rate. From an earnings perspective, our reported EPS was consistent with our prior year adjusted EPS. The recent natural disasters reduced our third quarter EPS results by about $0.05. This was the result of raw material inflation, higher transitory logistics costs and impact to reduce sales volume. In the third quarter, we made initial progress to begin recover our margin. Our contribution margin compression was lower year-over-year in the third quarter than it was in the second quarter. Specifically, in the third quarter, our contribution margin was 160 basis points lower than the last year's third quarter and would have been 130 basis points lower, excluding the natural disaster impact. Higher than expected raw material cost inflation was the largest drive of margin compression. Our basket of raw materials were up mid single-digit percentage year-over-year, pacing much higher versus our expectations at the beginning of the year. The main causes continue to be various supplier force majeure issues in Europe and additional supply driven production curtailments in China. Selling prices were up modestly versus the prior year with additional pricing secured for the upcoming fourth and first quarters. We continue to work with our customers on additional selling price initiatives, focused on further offsetting the persistent inflation. We now expect the current level of raw material inflation to last through the fourth quarter and anticipate inflation to continue, but at lower rate in the early part of 2018. We are working with our suppliers to mitigate the increases and have also expanded our research, resources and efforts on another wave of raw material efficiency projects. We were able to mitigate some margin compression with overall productivity improvements through the aggressive manufacturing and overhead cost management. Through the acceleration of some of our actions from our restructuring program we announced in 2016, I now expect restructuring will benefit us by more than $45 million in 2017, which is towards the upper end of our initial target range. In the third quarter, we completed the sale of the North American fiber glass business. This is a transformation milestone for the Company, and it completes the combination of our multi-year strategic shift in our business portfolio. The gross sale proceeds were about 540 million with the net after-tax gain recorded in discontinued operations. In the third quarter, we purchased about $250 million of stock and on October 2nd, we finalized the acquisition of The Crown Group, a coating services company. Including The Crown acquisition, year-to-date we have spent about $725 million toward our multi-year target of $3.5 billion to be deployed on acquisition and share repurchases. Looking ahead, we expect to remain in a modest overall global economic growth environment. Demand in the fourth quarter is seasonally lower historically and we anticipate normal seasonal trends this year. We expect recent favorable end use market trends should continue in refinish and aerospace. Additionally, we expect our general industrial growth to continue to outperform solid global industrial production and similar results in the packaging coatings industry. Architectural coatings volumes in the U. S. are expected to remain mixed by distribution channel. Protective marine coatings volumes are expected to be positive globally aided by growth in protective coatings and very modest declines in marine volumes. Our U. S. automotive OEM coatings business is expected to return to at market performance in the fourth quarter, coupled with continued PPG outperformance in other major auto producing regions. We expect our architectural EMEA sales volumes to remain mixed, sequentially with improved quarterly results in Northern Europe adjusted for seasonal trends, but offset by continued subdued end use market condition in certain countries including France, Italy and Spain. Finally, the automotive OEM and general industrial coatings business in Asia have a difficult fourth quarter comparison as sales volumes grew at low double-digit percentage pace in 2016. One unknown entering the fourth quarter relates to the China tax subsidy on certain small engine vehicles. Last year, the subsidy was originally scheduled to expire at the end of 2016, but was extended at a lower subsidy rate. This subsidy is now slated to expire at the end of 2017. But any change in this could impact fourth quarter demand in a favorable or unfavorable fashion. As always, we have included additional segment and regional details in our presentation materials. Also, for the fourth quarter, we expect additional transitory impact stemming from natural disasters. Specifically, raw material cost inflation and modest unfavorable sales impact, mostly from anticipated lower Mexican and Puerto Rico demand. We expect these have an unfavorable impact to our fourth quarter EPS of about $0.05. Finally, we will maintain our aggressive focus on cost management, and we will have also reduced our projected capital spending target for 2017 to be approximately 2.5% of sales to reflect the subdued growth environment. To summarize our results, we delivered solid business results despite a variety of external factors, which impacted our sales, operations and supply chain. We're now beginning to deliver on margin recovery. We delivered excellent performance in many of our businesses, including continuation of an improvement in volume growth on pre-natural disaster basis. Going forward, we remain focused; first, on increasing prices in a collaborative manner with our customers to recover our margins; and second, on improving our sales volume growth trends, including continued focus on deploying technology and our technology advantaged products. We ended the third quarter with $2.3 billion in cash. Our acquisition pipeline remains healthy. And we will continue to repurchase shares in the fourth quarter. Just as a reminder, we remain committed to deploying a minimum of $3.5 billion on acquisitions and repurchases in 2017 and 2018 combined. As a result, we intend to deploy an additional $2.8 billion of cash by the end of 2018. This concludes our prepared remarks. Once again, thank you for your interest in PPG. And now, Jamie, would you please open the line for questions?

Ladies and gentlemen, at this time, we'll begin the question-and-answer session [Operator Instructions]. Our first question today comes from Ghansham from Panjabi. Please go ahead with your question.

Michael, you gave us some good insight into the fourth quarter in terms of term line. But as we cycle into 0'18, I guess, how are you thinking about the overall macro first off and then the related outlook for some of your major end markets?

Ghansham, I think 2018 will be somewhat of a repeat of 2017, volumes modest up in the majority of the markets. So if you start with automotive, the biggest wild card there is China, but I think China is going to grow 2% to 3%, that'll take up the global market in that 1%, 2%. I think the U.S. will be the one market that will be under pressure. Industrial production should be relatively decent. Obviously, you're going to have heavy duty equipment improving at a faster rate. So that's always good for us. And then we're going to continue to have good adoption of our packaging business. So I think that's a real positive. I think from the refinish of steady eddy, you're going to have aerospace slightly up again the Boeing and Airbus have great backlogs, I just wished I would figure out how to make a few more planes each month. And then I would say architectural. We've been pleased with the pace in architectural. We see that growing 2% or 3% next year. So that's kind of a walk around the various businesses.

And then maybe a question for Vince on the fourth quarter just in terms of the operating income year-over-year. Should we expect an improvement there year-over-year, or will that be difficult just given some of the higher raw material costs and also the residual disruptions from the hurricanes and earthquake? Thanks so much.

Ghansham, as you know, we typically don't give guidance. I think for us we've worked to try to close the margin gap. I think you'll see additional margin recovery in Q4 on a year-over-year basis, similar to what we in Q3 versus Q2. And the key factors there again would be additional pricing, still stubbornly persistent raw materials that probably ticking down seasonally a little bit. And then again we'll see normal seasonal trends in most of our businesses.

Our next question comes from Duffy Fischer. Please go ahead with your question.

Michael, I guess, question for you on the raw material side. Seems like a couple of quarters in a row that we've gotten a lot more dispersion geographically in the direction that raw materials have moved. Is that something that will normalize over the next couple of quarters? Is it just opening up some of your own transportation lines to move stuff around geographically? Or should we think about that is being structural going forward?

Well, I do think there is some structural piece of that, especially in China. If you've noticed in the last couple of months in China, they have been exceptionally focused on enforcing environmental rules, which is really positive, not just for the environment but also positive for us. With our water based technologies, that's a great place for us to be. And the fact that they're cracking down on dangerous goods warehouses, they're cracking down on plants that are in non-industrial parks, are not in chemical zones we think that's a positive for us. So there will be more upward raw material inflation in China. We've had a lot of force majeures in Europe. Europe has historically been a place that operates very well. So I don't think, I think that's a more of a transitory impact. I don't view that long-term. And obviously, the hurricanes in the U.S., this is the first major hurricane that hits the U.S. in 10 years. So I'm not a weather forecast, I'm not going to predict anything. But historically, I view that also as transitory. So the only real place I see structural is China.

And then on the back on the comment, does that mean if your raw materials are going up because some of the competitors are getting squeezed out or shutdown. Will your prices go up meaningfully more in China than they will other parts of the world, because again some of your competitors may not be able to sale products or people might have some mixed shift up to your higher quality water based products?

Well, I would describe it this way Duffy. We would always expect and we currently have margins in Asia consistent with our margins in the rest of the world. And so, if we have additional raw material inflation in China, we would have to have additional raw material recovery in China. So, I would not expect the material impact. We would -- obviously, as you know, we lag getting price, but I would not expect that to be a long-term issue. So for us, I would focus more on the fact that if they continue to enforce the rules, there will be more water based products and that technology is with the limited subset of suppliers that will be good for us.

Our next question comes from David Begleiter from Deutsche Bank. Please go ahead with your question.

Michael, you've had very good success this year in the U.S. you finished. Can you remind us again what the drivers are of that success, and from whom you're taking business from?

So the main drivers in refinish first and foremost is miles driven. So year-to-date miles driven are about up 1.5%. The next is collision or think about it as accidents. And higher employment leads to more miles driven leads to more congestion, more congestion leads to more accidents. And of course the real phenomena we see now is distracted driving. So this is a market that historically with flattish but we are doing well in this area. I would just say that given our strong technology base and our strong customer base, we’re probably nibbling and getting a little bit of share from everybody. But overall, I would say, it’s more driven by technology. Our water is the best in class.

And David, if I could go back, if I can just add. We think this has historically been a very modest growth market in a developed region, that’s continued. We haven’t seen any changes in pattern with our customer base. And we haven’t seen any changes in pattern in terms of the industry itself.

And that was more of a next question. Michael, is there still real pricing power less than we finished? And again, no change in your view in terms of distributors exerting more pricing pressure, or MSOs is there a more pricing pressure? Thank you.

No, I doubt. I would tell you, it’s still a highly fragmented market. I mean, if you grew out this MSO consolidation over 20-year period, you might could extract something. But there is so, I would say, it’s not material in any near-term pattern. So it’s not something we’re worried about. We have positive price in refinish this year, and we would expect that positive price in the business next year as well.

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

I was going to ask around the raw material side. I guess, some of us thought the TiO2 is going to go up throughout the year, so I am guessing that hasn’t surprised you. Can you talk about which specific raw materials have seen that unexpected inflation, so that we might take a guess on what to give you some relief next year?

Yes, I would say the first one that was most unexpected was the emotions. So if you think about them has been a problem. Outside of the U.S., ethylene is down in the U.S. but everywhere else in the world, it’s up. I would say that was probably not on my radar screen, given the significant ethylene expansions in the U.S. Obviously, there is more coming-on. So hopefully, there will be some relief there. I would tell you, TiO2 is up more than we expected. I’ve cautioned some of the TiO2 suppliers, don’t forget 2011, where they -- there was demand destruction. So that has been my focus on that. The other thing that I would say is a little bit of surprise is packaging. So if you think about tin plate and steel, I think those things were probably a little bit higher than I would have expected. So we had low-single-digits in our plan and we’re in the solid mid-single-digits now. So those would be ones that I would focus on.

And Michael, can I ask you on the architectural markets, looking at both the U.S. and in Europe. In the U.S., this deviation between do-it-for-me and do-it-yourself seems pretty pronounced. Is there historical president for that different direction that persists? And if not, which you think happens is do-it-for-me in your stores numbers coming or does DIY market finally get some lift? And then maybe a similar question in Europe, I generally think of paint is being a very consistent end market and yet it sounds like either the market is not doing well or maybe you’ve got some competitors that tolerate some pressured margins, which doesn’t seem sustainable. So maybe just an appraisal to markets and what you expect? I think you said volumes will be good next year, but we expect may be on the price or margin side going forward.

Well, Bob, we normally allow only two questions, and that’s like seven.

It was all about architectural. That doesn’t count as one.

I’d say the big driver in the U. S. is two factors. One is unemployment, so you have low employment and so people would rather pay somebody to get it done. And the second one is baby boomers are getting older and the millennials aren’t paying as much as their parents. They are not a DIY group as much as anybody else. So I would say that’s the U. S. I think that’s going to continue. We see real strength. I mean even our October order book in architectural has been -- has started out real well. So I think that’s going to continue. I don’t see a change in the unemployment situation. So we’re all good there. I think the difference between Europe and the U. S. now is the U. S. is a very much a branded market and Europe has way too much private label. I think the European big boxes have really aired in the way they’ve gone to market. If you look at the average price of the paint in Europe versus the average price of the paint in the big boxes in U. S., it’s clear that the U. S. big boxes have a different strategy. They are executing it very well. In Europe, there’s not been a trend to branded. And that brings in significantly more competition. It also brings in, on a regional basis, a lot more folks. So I think that’s the big disconnect. I do think there are people out there still chasing volume. We’re not going to chase it at this point of cycle. We see people trying to trade down. We’ll let them trade down. We’re trying to recover margins and that’s been our focus. If you look back 2007, 2011, the last two raw material inflation cycles, we were first to get margins back. We think we’re going to be in that top quartile again. And we can’t control what other people -- how they make their own independent decisions on how to price.

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

Can you just talk a little bit about pricing trends across your various industrial platforms, such as auto, general industrial packaging? And just give us any broad expectations you have regarding the time line to recapture price costs, or maybe even achieve net price real longer term, if that’s the theme? I think most of us understand that there’s probably differences in contractual nature and distribution between the various inputs. But just any broad comments would be really appreciated? Thank you.

Well, I think the broad comment is we have very sophisticated customers in automotive, as well in the large industrial segment. These guys not only are sophisticated, but they have set up what I would call choice in their distribution or paint networks. And that allows them to move people in and out in some small segments to allow them and put pressure on their suppliers. And what you need to do is have faith that your technology makes it difficult for them to do that. And I would say it takes us longer to get price in those segments. But we do recover it. We already have pricing in those segments today. It will start to pick up a little momentum in late in the fourth quarter, early in the first quarter. And I would tell you in the packaging area, probably the bigger driver on the pace of getting the packaging is that there was consolidation in the major packaging players. And so they were focused on trying to get their synergies. And so you have that trend going on at the same time as new technologies. So we were pushing the new technologies and there might have been some other folks that didn't have the new technology that we're trying to hang on to buy in using price, and that's probably the biggest differentiator in the packaging that's different than normal where historically in fact everybody was pushing the same technology. Now, you have some certain players that are very strong in the BPA nine and 10 and some of the others that maybe don't bring that same new technology to the table.

And just can you talk a little bit about some of your comments in EMEA architectural, specifically how you expect the volume headwinds to persist? And whether or not your price comments pertain broadly to the lack of acceptance among your customer base? Or is there more functionality of bad behavior among some of your regional competitors? Thank you.

I hate to throw our friends under the bus, so I won't do that. I think everybody makes their own independent decisions. And in this regard, we are very much focused on delivering margin recovery, and it's margin first, volume second. We have some very good markets. We're growing share in the UK. We're hanging in there in the Benelux. French retail has been a very challenging environment. We're doing well in Scandinavia, growing share up there. I would say Eastern Europe is more of a free for all and we have been actively pushing price aggressively in our African stores and our African countries. And so it provides that mix-bag, if you will. But right now, bottom line is we yield a little bit of share in order to drive profitability. I regard these as transitory. If I look back in history, we've done this in the past and once this transitory period is over, we will not have lost any share in that regard. And good strong performing products always win in the marketplace long term, and we feel good with our product portfolio.

Our next question comes from Frank Mitsch from Wells Fargo Securities. Please go ahead with your question.

Michael, for the first of my seven questions, I was wondering you're clearly making progress on reducing the margin compression year-over-year. You said it was 210 bps in the second quarter, 160 bps in Q3, or would have been 130 ex the hurricane. At what point, do you believe you're going to stop talking about year-over-year margin compression and start talking about year-over-year margin expansion?

I think, Frank, if I look at history, we're probably first quarter second quarter next year. I'd like to say it's first quarter. But I don't want to set unrealistic expectations. The fact of the matter is this is top of mind. We have a very experienced coatings leadership team, deep experienced in this area. Many of our leaders have been around through multiple cycles. And I think that's what really allows me sleep well at night is the strong leadership of the Company. And I think that would be the focus area.

So for my next six. So look, I'm not going to ask the M&A question, but you did say look I've got 220 billion of spend on M&A and share buyback over the next 15 months. But your company owned stores doing extremely well here in the U.S. certainly relative to your other channel. So I'm just curious what your plans are for growth in terms of opening up new stores? Or how should we think about that? And is that also a focus area for the M&A part of your capital allocation?

Well, it's certainly as you know the dealers, anytime they want to sale, they don't have a succession plan in place. So we were always the first choice and we're happy to do that. And we stay close to the big dealers. So we'll continue to look at that. We're not adverse spending in that area. We are adding stores in the U.S. as well. That's top of mind but we're also looking at not just in the U.S. I mean if you look in Canada, we're adding stores at a faster rate than anybody else in Canada. Of course, in Mexico, we added 53 stores alone in the third quarter in Mexico. We add stores in Europe as well. So it's not just the U.S. play for us. As far as the acquisition pipeline, the question you didn't ask that you wanted asked. Pipeline remains solid. We do continue to look at a lot of stuff. We continue to remain disciplined. So when we have something, we'll let you know. But we are actively engaged with a number of parties talking to them about what the next steps might be.

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

Over the last three years, you've averaged about $330 million annually in acquisition spending. And do you have a very large target in deploying your cash. So if you spend again at a $330 million acquisition level in order to hit your $3.5 billion number. Next year, you would have to buyback something like $1.7 billion in shares. Are you willing to do that and that historically you never seem to buyback more than $1 billion annually in shares.

Again, as you know acquisitions, are episodic both in number and in size. As Michael just mentioned, we do have a fairly active pipeline that we're vetting, along with potential sellers. We certainly would hope that that's our primary use of cash for the next 15 months and beyond that. But I would tell you, we don't have certainly as you never do around acquisitions. What we are committing to is $2.8 billion of deployment effectively from this month until the end of '18. And we don't know how that's going to follow acquisition of our share repurchase. But the $2.8 billion will be spent. And so if we have to deploy all that in share repos as opposed acquisition because the targets are not willing or not at the right price, we will do so. But I think as Michael mentioned, our preference would earnings accretive acquisitions.

And then for my follow-up, when you look at raw material costs inflation across the globe, which are the areas that has the most inflation and which are the areas that have least or is it mostly almost there?

It’s a great question Jeff, because there are big differences in inflation by region. Michael touched on a little earlier for different reasons. The reasons have moved in different direction. Our highest inflation region is actually Europe, really predicated on all the force majeure activity that has taken place this year. And then we’re seeing inflation in Asia, primarily China. Again, because of supply curtailments that are being in force there. And then the U.S., Canada and then Mexico would be a third in terms of pace of inflation. And just to remind everybody what Michael said earlier. We’re expecting low-single-digit inflation coming into the year. We’re now solidly at mid-single-digit inflation, so inflation certainly been higher this year than our preliminary expectations.

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

Vince, your working capital was up by $300 million. Not a huge amount but was still up. What are the different pieces in that? Is it raw materials related or is it due to slower growth that led to higher working capital?

PJ, we’re a seasonal business. So I think you’re right. Our working capital versus the end of the year was up as is typically this time a year. If you look on a year-over-year basis, our working capital as a percent of sales is actually down about 50 basis points. We’ve been targeting 100 basis points of decline, which we think we’ll achieve by the end of the year. And we’ll work through as we get through this lower season, work through some of the inventory as we typically do to achieve that goal. So I would look at our working capital versus same quarter prior year.

And Michael, you had lower selling prices in industrial coatings. Despite what you describe as really decent volume growth. One of your competitors gave pricing concessions to automotive OEM customers. I was wondering if you’re seeing an impact from such competitive actions?

Well, everybody makes their own independent decisions. And I would tell you that we already have gained price increases in some parts of our industrial segment, and we expect to get further increases in Q1. And so from my standpoint, we have a lot of areas that are growing above the market, and we’re quite pleased with the pace of that. And I think that the price will come in that area. So I’m not worried about it. So I guess we’ll just continue to push the team to get the price up, and that’s what they’re working on.

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

You mentioned some new raw material efficiency programs. Just wondering, are you specifically talking about TiO2 or the balance of asset? And what if anything are you working on that’s new and interesting?

No, we really target the whole thing I mean even things like anti-bacterial things. Our team was briefing us on, if you think about all the various things that go into paint, it’s very aspect of it has a material cost impact. Now, TiO2 is certainly at the top of the list, resins are at top of the list, some of the other pigments that are in there are all key. We are driving simplification in some of our raw materials, which allows us to bundle a larger spin and that helps us as well. So I would say we’re focused on several different levels, not just TiO2.

And then you also mentioned that you’re pairing that growth CapEx for this year. Are there particular projects that you’re focused on not doing? Or least just going to get pushed into ’18? Or is this stuff that just think does not make sense anymore just given the overall environment?

Well, I think Vincent, as you follow us over the years, I think you’ll find that we try to be aggressive on all fronts and try to make sure what we’re doing, whether it would growth related expenses or growth related cap spending matches what’s happening in the external environment. And as Michael started the call out, we see a low growth environment. So we are not pushing on some growth projects that could be delayed or deferred to a later time. And again I think it’s just our typically management stuff.

Our next question comes from Kevin McCarthy from VRP. Please go ahead with your question.

Good afternoon. As you put together your business plans for 2018, what uplift if any do you anticipate from end use markets like autos and construction in the wake of the natural disasters? And put differently, if we think about the nickel drag in EPS for 4Q, how do you think that might trend into the first quarter of ‘18?

Well, first of all, I don’t think there will be any drag in the first quarter ’18, Kevin. So I think we can put that behind us. I would not anticipate it much in the fourth quarter this year, but the damage in Mexico and Puerto Rico, I mean, we went two weeks about a single store being opened in Puerto Rico. And even now we only have 50% of them open. So I think when you look at having to rebuild stores completely in Mexico, that’s going to have an impact, but not into the first quarter. So I would say as far as looking at 2018, as I said in my very first question from Duffy, I think automotive is -- we’re going to be down a little bit in the U. S., up a little bit in Europe and up a little bit in Asia, primarily driven by China. So overall, I would say the market is going to be up 1% to 2%. Industrial production, I see moderate improvement in that area. And I think housing around the world is going to be solid, but not any barn burn. And the biggest barn burn has historically been the U. S. So, housing prices are up a lot in the U. S. The amount of new permits are, I would say should be higher could be higher, but it hasn’t shown that. So we’re projecting 2% to 3% growth in the total architectural market in the U.S., higher in the do-it-for-me market than do-it-yourself market.

And then a second question, if I may for Vince, you’ve flexed your capital expenditures down slightly this year. Would you expect to be able to maintain the pace of 2.5% of sales next year in '18?

Kevin, same as I answered the last question with, it depends on our growth outlook. If we see more robust growth environment, we'll step up GAAP spending, if we don't we're going to toe the line. We hope to start the year a little more optimistic outlook and see what happens with as the year develops. But for us, we’re fortunate because we're a capitalized industry, so 2% to 2.5% sales is -- and relative to other industry is very favorable from a shareholder perspective. But again, we're not going to spend if we don't see the growth trajectory established.

Our next question comes from Don Carson from Susquehanna Financial. Please go ahead with your question.

Two questions, Michael, so it seems overall you're expecting '18 to look like '17. So is that a 1% to 2% volume growth for the Company overall, and how much can you leverage that with new internal initiatives?

I would say two plus. So I don't see the one to two, because I take some of the things that we've seen this year won't repeat. So I think that would be on the area on the two plus side. And we are always driving productivity, so we're not going to walk away from productivity initiatives. I think that's at the top of the list, and we're going to continue to deploy our capital and then we're going to continue to look for ways to improve efficiencies in the plants as well. So I think we've had a historical preference to grow EPS 10%, and I don't think we're walking away from that.

And then a follow-up on architectural pricing. What kind of price increase you've been able to get at your company stores? Have you matched the two price increases of your competitor over the last 12 months? And are you able to get any price in the big box channels?

Well, I think the answer to the first question is we have announced two price increases. We are getting two price increases -- typically I always say that we get 50% to 75% of any increase we announced. The last one -- depending upon product, you can't just draw a line around it. It’s anywhere from 3% to 6% depending upon the product in the market. And the big box is, the answer is yes we do get it, it never as faster or as easy as we like. But they do recognize raw material inflation, they do understand that we have to be profitable and we also are very sensitive of the fact that they have a business they also need to run. So we collaborate very well in that regard.

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

Michael, you were just mentioning here a minute ago about this 2% to 3% outlook for U.S. architectural business. How would you assess that in terms of where we are in the remodeling cycle in the U.S. with respect to the average household use of paint? Are we at that prior peak? Or if not, why not and nd what would it take to get there?

We're certainly not at the prior peak. As far as what it takes to get there, as you know, the least peak if you remember there was what 2 million housing starts. So we're a long way away from that. But we do have a lot more modeling going on. There is a lot of value in the houses. So there is still more upward potential in that regard. But you don't see the feeding trends on loans that you saw the last time. So I think we're in a more sustainable place now. So I think that's a positive.

If you look over a long period of time and you take out the peaks and value surrounding the last financial crisis, which was again in part driven by homes. This is 2% to 3% or 4% growth market, and that's the value of the market from an equity investment perspective is a stability. And so I think we've gone back to, what I would call more stable growth rate over a longer period of time.

And then with respect to this new brand that you're introducing in Home Depot, can that channel handle a new brand? And is it entering at a new price point or quality point?

So the PPG timeless thing is a premium stain, and it has started out very well. And I think the Home Depot associates are pleased with that. The PPG timeless paint has also in at a premium point, which is we're excited about it's the first time we've had, what I would call the premium product in the Home Depot stores. It is also started out well. I think it can certainly supported -- I think we have very sophisticated customers who make good decisions. And I think in this regard, we'll have to wait and see how it pans out, but we're pleased with it. We're going to put advertising money support behind the brand at Home Deposit, as well as externally. And so, we're obviously happy with that.

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

Mike, on your earlier response to the question on environmentally regulation driven closures in China, your answer was directed towards hydrocarbons and solvents. Does that mean you really not seeing anything more on the TiO2 side? We had a number of closures that I think suppliers there. But TiO2 prices I think in China actually went down during the quarter.

TiO2 prices went up in the quarter in China, and they did have some of the suppliers get shutdown for a mission and some were shutdown, because they were too close to where the party is doing certain activities. Like today in Beijing starting actually about a week and half ago, they shutdown all the body shops in Beijing, and they're told to be shutdown all the way through the end of October. So it's not just the hydrocarbons, but that is a much bigger portion of it. But I would say anybody who is making dangerous goods is under pressure that they're not in a chemical zone first and foremost, or if you have a bad historical record performance. Those are the two places that they're going to first to enact regulatory enforcement.

John, this is Vince. Again, I think just back to what we said earlier. For the company like PPG that has compliant coatings products, we think if this trend continues longer term, it's favorable for us. We know we have some local competition there that does not currently have compliant water based product. So the continual move toward more high technology coatings I think favors the multinationals.

And then on the second question, the initial dilution on Crown. Is that due to temporary step-up in the inventory valuations, or are they just lower margin business because they’re more service oriented then you got to take cost out to get the margins back to your corporate average?

John, it’s definitely more the latter. We typically bring in these small acquisitions at margins below ours within -- we’re able to extract synergies and get them at or closer to our margins. And the Crown acquisition first quarter will be in this quarter or fourth quarter. So again, it’s coming in at a lower level and we’ll started working on synergies. And we already have started working on synergy capture.

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

Couple of follow-ups, if I may. First of all, on the protective marine business, you put up a flat volume quarter-over-quarter that’s in the first quarter here, which I think is the first time in five quarters, which you haven’t had a pretty big downturn in volumes there. How should we think about this business going forward? Is this an aberration or should we truly reach the bottom and we can look forward to maybe more benign, if not, necessarily positive comps as we get out into 2018?

So Dmitry, I think it’s actually been seven quarters, if I remember right. And that’s memory I can have John follow-up and give you the exact number. But the first answer is with the decline in marine, your protective business gets larger and the protective business is not as volatile as the marine side. So that’s the first thing. So the mix is now set that protective is really significant. Second, marine is at a bottom. If you look the first time in two years, there has been a net increase in ship orders that were placed in the third quarter. So that’s a positive. And I think that we’re going to start to see continued growth in ship orders. Don’t forget we paint typically 18 months after the orders are placed. So I think we’re at the bottom and it’s always hard to tell calling the bottom. So I won’t be 100% sure on this. But when I look at the order book, I see that -- I also see the China has picked up share. So Korea and Japan have both lost share in this enterprise downturn. And for us that’s good for us from a mix standpoint because we obviously are not winning as much in Japan as we win in China. So that’s a positive trend for us as well. So overall we’re projecting slight improvement quarter-over-quarter in the fourth quarter as well. So I would say that for the short-term we’re in our own business seeing an upturn, and I think the market will also start to mirror that shortly.

And then just to get a little bit more granular on the North American paint market. I understand that you guys talk about your own store values and you don’t really discuss much what’s happening in the DIY and independent dealer channel. But if you look at -- I’m assuming you have those numbers internally. So if you look at the pace of declines year-over-year. Is it changing? Can we talk about maybe inventory reduction that’s replaced in DIY over the last couple of years, maybe have played out any dynamics changing in terms of demand destruction in the independent dealer channel? Or really we have not seen much change from let’s say the last four to six quarters that at least the DIY business has been suffering?

If you look at those two channels, independent dealer channel has a perennial modest share loss channel for multiple years the channel requires very little maintenance. It’s a very good channel for PPG and the other parties involved. It’s a modestly shrinking channel and it will be here for quite some time, but it will continue to shrink. And that has not changed in terms of its trajectory. The big box channel, as Michael alluded to earlier, we think the DIY market is being primarily affected by low unemployment. We, PPG this year, we personally have not seen much inventory destocking or restocking. That does happen from year-to-year to different products. So it’s certainly plausible in the space. If you remember Dmitry, we have some destocking last year. So, it just depends what products are selling versus which products are not. But the fact of the matter is it’s down low to mid single-digit percentages. And that has not changed again from the beginning of the year.

So basically, we can continue to see similar trends we saw over the past several quarters. Okay, thank you.

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

In terms of the capital deployment, you have over 2 billion in cash today than I would imagine you would generate a good amount of free cash flow again in ‘18. Is there a potential to do even a lot more than the 2.8 as we head into ‘18?

As you follow us over the years, we’d like to put a cash deployment target out there at a minimum. We’d like to meet that target. We raised the target in July to minimum 3.5. And if there’s something that’s earnings accretive above that, we would certainly have the balance sheet firepower to do that and would be -- you should expect us act upon that.

And then when you think about -- I know it’s little bit early to talk specifics on ’18, but volumes sound like they could be little bit better. You’ll recoup some margin from higher raw materials, you got capital deployments. And you certainly noted 10% is the annual goal. But given all that, whether EPS growth be -- I don’t know what the right script to be, but stronger than 10%?

Well again, I think when you look across the industrial basket of the companies, 10% EPS growth in a low growth environment like we’re trying about is admirable. And it depends on a lot of factors. We do think there will be slight inflation heading into next year. We’re still going to be working on getting our pricing up. The one you didn’t mention is currency right now would be a slight tailwind. So that would be a benefit to us as well. But I do think all the levers that you talked about are ones we see as well.

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

Michael, going back to the architectural EMEA commentary and you talked about that fragmented market with all the private label that’s out there. Does that suggest that there are additional consolidation opportunities where you could take out some of that private business potentially, or there a situation where you would need to work with those customers if you wanted to figure out a way to reduce the amount of shelf space that some of those private labels have?

Well, there's always consolidation opportunities both ways, first the customer if they want to consolidate shelf space, they know where we live. So that's the easy one. We're always going in and doing aggressive product line reviews. But probably more realistic opportunity is the fact that some of these private owned paint companies are not getting recovery on the raw materials. And even though these are good cash flow positive businesses, even in this environment, it may be an appropriate time for them to look at whether or not this is time to monetize, or whether they family situations that maybe appropriate for them to look at selling. So we try to stay close to all the large families in Europe, so that they know if they're in a position that they are ready to sell that first person to call is PPG. So we stay close to that.

And then wanted to just ask on the industrial segment, overall, that margin looks like it was -- as far as I can tell the lowest since 2013 despite some volume growth there. So I was wondering if you can just walk us through how much of that year-on-year margin pressure is coming from [indiscernible] versus raw. Is there some mix component factored in there? Obviously, the natural disasters had some impact on the logistics costs. What other factors are in there? Again, maybe a year-over-year basis makes the most sense. Just trying to understand what that margin could look like next quarter and into next year?

I think the answer is very simple. We get, as Michael mentioned, we got a very large amount of sophisticated customers, take us further in terms of time to price with those customers. We're still seeing very high inflation rates on raw materials. So that's the gap because we got to continue to push pricing in order to recover the margins. All the other things you mentioned, I think are certainly a piece of the puzzle. But the bigger piece for us to get price to offset raws.

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

Two questions, maybe very quick ones. First, most of the leverage we've talked about have been either end markets or consolidation. Is there anything on the technology or R&D side that you can do over the next couple of years that if you're still in a slow growth environment at the end of the decade, your growth algorithm relative to that environment changes? And secondly, I guess this summer there was some noise around the European Union debating labeling risks on TiO2 as an ingredient, and that possibly affecting packaging. Has there been any update on that? And if there has been movement, what opportunities would that create for you?

Well, if you start with the TiO2 question, there was an original push by France to label that product as a probable carcinogen, if I get my facts right. And that's been downgraded to possible. We're in complete disagreement with the science. They're looking at one old report. We have billion of man hours of safely handling TiO2 in our plants. Of course the TiO2 suppliers have the same thing. But given the fact that it's embedded in a liquid metrics, there is no concern in the paint product. We've been done testing standing cars and things like that. So there is no push to impact paint. If there were -- if we were to eventually quote unquote lose this argument with the authorities in Europe, it would lead to us, having to put more safeguarding and dispensing the TiO2 into the paint. That is not -- we already protect our employees, our employees feel very comfortable handling TiO2. But we'll do whatever is necessary to continue that. So we don't feel like that's in any way a threat to the business. But the fact of the matter is we think the science flawed. So when you try to stick a TiO2 powder into a rat, I'm not sure that replicates what happens to a human, but so be it. In regards to technology though, we are strongly focused on R&D. We spend nearly $500 million a year on this. We're spending more than any other coatings company. We've led the -- if you look at the BPA non-intent and you look at a water borne for refinish the compact process for automotive, what we've done as far as some of the advantage products that pass the fire protection in our PMC business, we have a number of success stories in that regard. And we would expect to continue to drive innovation, which should allow us to grow faster than market, which has been our historical stance. So I don't see a lot of difference going forward. I'm excited about our R&D pipeline. I have a quarterly meeting with these guys, and they really good at what they do.

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

I've got two questions, one on margins and one on M&A. So first on the margins, industrial was down couple of 100 basis points year-on-year, performance also down. Is there a specific target that you have on recovery of those margins? And if you do, maybe you can just help us understand how much of that you will get through price or cost reductions?

We're working all levers to recover the margins. We’ve got through self help activities, obviously, that Michael talked about in the opening comments. We're pushing price with all of our different segments of customers. Our target, as Michael said, is to get margins back to flat in the first half of next year, hopefully earlier in that first half as opposed to later. And I think we're on path now to do that. We're as Michael again mentioned earlier, six or maybe seven months behind where we would like to have been, if you look at past situations. But we're comfortable we'll work back to margin parody.

Do you actually need raws to come down for that to happen, or is it price should get you most of the way there?

No, I think with our pricing actions predominantly as well as some productivity, those will be sufficient to recover the raws inflation.

And just real quickly if may on M&A, Crown was in the coating services area, you've talked about doing adjacencies before adhesives and so on. Is that still an area of focus, or are you more focused on coatings producers? Thanks.

No, I would tell you that we are very comfortable in the adhesives and ceilings area. I think it was early last year when we did the acquisition of LJF in France on the sealant side. That’s been a huge win for us. We bought 60% of it. Our partner, Total, is very happy that we bought it. There are lot of more profitable at owning 40% than they were at 100%. So they have been pleased with what we brought them. So we’re very comfortable in that space. The adhesives are certainly in area. We have the specialty coatings and material business that would be another area that we would stick-in. And obviously -- coatings is our bread and butter. So those are the focus areas. Our aerospace business is a good business in a number of areas. So I think you’re going to expect us to stay in the businesses that we’re most focus on now in the near, what I call, the near adjacencies. So if it touches paint or touches the adhesive or touches the sealant that would be what the areas we’ll be focusing on.

Our next question comes from Jim Sheehan from SunTrust. Please go ahead with your question.

On the subject of AkzoNobel, there’s been some deterioration in their results management changes. Activists are still clamoring for changes. Is this the situation you might revisit in the future when you’re able to?

Jim, I think we were very clear. We withdrew our offer June 1. We have moved on. Our shareholders expect us to continue to create value today, and we’re not paid to wait around. So we’re going to continue to do that. So we’re happy with our acquisition pipeline, and our goal is to improve our business every single day. And you saw that and these results we closed the gap on the margin deterioration. You’re going to expect this to close that gap again, the next quarter as well. And so I’m pleased. I guess, the last time and I would say is I want to thank all our employees. We had all these hurricanes and earthquakes and our employees did a phenomenal job of supporting each other and supporting the company. And I just want to thank them in that regard. So maybe that answers your question, Jim.

And ladies and gentlemen that will conclude today’s question-and-answer session. At this time, I’d like to turn the conference call back over to John Bruno for any closing remarks.

Thanks Jamie. Once again, I’d like to thank everybody for the time and interest in PPG. If you have any further questions, please contact me at the Investor Relations area. This concludes our third quarter 2017 earnings call. Have a good day.

Ladies and gentlemen, the call has now concluded. We do thank you for attending today’s presentation. You may now disconnect.