PPG Industries Inc (PPG) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2014 PPG Industries earnings conference call.

My name is Philip, and I'll be your operator for today.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Vince Morales, Vice President of Investor Relations.

Please proceed, sir.

Thank you, Philip, and good afternoon, everybody.

Again, this is Vince Morales; I am the Vice President of Investor Relations for PPG.

Welcome to PPG's first-quarter 2014 financial teleconference.

Joining me from PPG today on the call is Chuck Bunch, PPG's Chairman and Chief Executive Officer; and Frank Sklarsky, Executive Vice President and Chief Financial Officer.

Our comments relate to the financial information we released today, April 17, 2014.

I will remind everybody that we posted detailed commentary and accompanying presentation slides on our investor center at our website, www.ppg.com.

These slides are available on the webcast site as well and provide additional support to the opening comments Chuck will make in a few moments.

Following Chuck's perspectives on the Company's results for the quarter, we will move directly to a Q&A session.

Both the prepared commentary and discussion during the Q&A may contain forward-looking statements reflecting the Company's current view about future events and their potential effect on PPG's operating and financial performance.

These statements involve uncertainties and risks which may cause actual results to differ.

The Company is under no obligation to provide subsequent updates to these forward-looking statements.

Today's presentation also contains certain non-GAAP financial measures.

The Company has provided in the appendix of the presentation materials, which again 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, Chuck Bunch.

Thank you, Vince, and welcome, everyone.

We appreciate your continued interest in PPG industries.

Today, we reported record first-quarter 2014 financial results for from continuing operations, including records in sales and adjusted earnings per diluted share.

This strong performance occurred despite continued mixed global economic conditions, inclement weather that postponed demand in some of our US businesses, and emerging region currency headwinds.

Even with these challenges we delivered record first-quarter sales of $3.6 billion, eclipsing last year's figure by 17%.

Our global volumes grew 5%, representing our largest gain in three years.

Each region also posted solid volume growth, led by the US and Canada as our coatings volumes here improved by 7%.

Volume improvements were achieved in most businesses as overall economic conditions in this region remain solid.

Year-over-year European volumes advanced 5%.

This represents our first volume increase in that region in 10 quarters, reflecting the early stages of an economic recovery there.

Emerging region volume performance also improved year-over-year-end sequentially versus the fourth quarter, although results remain mixed by country and industry.

Each of our major regions benefited from improved demand in automotive OEM, aerospace, and automotive refinish as we continued to outpace the industry growth rates in these end-use markets due to our leading technologies and focus on customer service.

Also, our Architectural Coatings EMEA business delivered mid-single-digit volume growth, including some benefit from favorable weather.

Supplementing our organic growth were acquisition-related sales gains of about $360 million, which represents over 11% sales growth.

From an earnings perspective, each region delivered higher pretax earnings, led by Europe, where our earnings growth was nearly 40%.

We realized excellent earnings leverage on the improved demand as a result of the actions we have taken the past several years to significantly lower our cost structure.

In addition, our ongoing cash deployment contributed to the earnings growth.

This includes higher earnings from additional acquisition-related cost synergy achievements and continued implementation of our restructuring program announced last year.

We also repurchased $200 million or 1.1 million shares of PPG stock in the quarter.

As a result of all these actions, our adjusted earnings per diluted share from continuing operations were $1.98, up more than 40% versus last year's comparable figure, and a record for the Company; and we more than fully replaced the earnings from the businesses divested in the quarter.

As we previously communicated, we finalized the sale of our interest in the Transitions Optical joint venture and our sunlens business at the end of March.

Results for the divested businesses are now reported in discontinued operations, and prior-year results have been recast accordingly.

We also introduced a new reportable business segment structure.

Lastly, we received gross proceeds of more than $1.7 billion from the divestitures, which added to our already-strong cash position.

We ended the quarter with $3 billion of cash and short-term investments, including strong first-quarter cash from operations aided by the higher earnings and continued improvements in working capital.

Looking ahead, we anticipate solid global growth to continue; but it will not be uniform across geographies or industries.

We remain well positioned with a balanced coatings portfolio both regionally and by end-use market, providing broad growth opportunities while minimizing the impact of any individual fluctuations.

We anticipate further earnings accretion from our internal actions, including additional synergy capture from the ongoing integration of our acquisitions and further implementation of our restructuring program.

Finally, we intend to deploy our cash balance in a timely yet disciplined manner, with a continued emphasis on earnings-accretive cash uses, including additional acquisitions and share repurchases.

We are still targeting earnings -accretive cash deployment of $3 billion to $4 billion through the end of next year.

Also, we remain focused on returning cash to shareholders.

Today, our Board of Directors approved a $2 billion share repurchase program.

And they also approved a 10% per-share dividend increase.

In summary, I am pleased we were able to begin 2014 by delivering record first-quarter financial results.

We remain focused on aggressively managing our business to deliver continued top- and bottom-line growth this year and on creating additional value for our shareholders.

Once again, we appreciate your interest in PPG, and this concludes our prepared remarks.

Now, operator, would you please open the lines for questions?

(Operator Instructions) Robert Koort, Goldman Sachs.

Good morning.

This is actually Neal Sangani on for Bob.

A question on your Industrial business.

In addition to the Akzo acquisition, it looks like you are annualizing a point last year where you really started to outpace the industry growth rates.

Does that suggest maybe a deceleration in the last three quarters of the year?

Or are you going to see something similar going forward?

Could you repeat the question, please?

Looking at the Industrial business, it looks like you're lapping some of the outperformance specifically in auto OEM over last year, when you started outperforming the industry rates.

Does that suggest a deceleration going forward?

Or are you going to see a similar pace of outperformance going forward?

I would say that we continue to feel optimistic about the automotive OEM business.

Both the underlying market, where we are seeing good growth rates, as well as our positions in the various geographies and with our customers.

So we can't be sure we will continue to have growth in excess of, let's call it, these global averages; but we think we are doing quite well and have good momentum in the business.

So we would say we remain optimistic overall in the Industrial segment and in the auto OEM business in particular.

You also didn't specifically called out raw materials much in the prepared remarks.

Is that something you are seeing, or is there some type of lag that we should see in the next coming quarters?

I would say raw materials for us have been relatively benign.

We have had a few commodities actually slightly below last year's average; a few slightly above.

We are projecting for the year a low single-digit inflation in raw materials, and we have some other inflationary costs: labor, transportation, natural gas.

But right now overall, I would say raw materials, it's a relatively benign story for us here early in the year.

Okay, thank you.

Ghansham Panjabi, Robert W. Baird.

Hey, guys.

Good afternoon.

First off, just on the macro outlook for Europe.

Chuck, how much of the improvement do you think is purely from just easier comparisons over the last couple of years versus any structural improvement?

And of the various end markets that you are exposed to in the region, which particular one are you most optimistic for, specific to this year?

Well, obviously, the end of 2012 and almost all of 2013 in Europe was very weak.

So we do have, let's call that, easier comparables compared to last year.

But we saw what we thought was some pretty solid volume growth, some improvement in economic indices.

So we are more optimistic that this is the early days or early stages of a modest improvement.

We talked about some of the sectors more broadly.

Automotive has been a nice bright spot in terms of improving volumes for the European region.

Aerospace, although smaller in Europe, is still a solid, solid business for us.

Refinish showed the first signs of volume improvement.

And the construction markets, they have been a little slower to recover, but we saw some of that recovery that we signaled the last quarter, especially in the, let's say, the Northern geographies.

The UK, Benelux were areas where the construction markets were also showing some early signs of improvement.

So those are all, I think, encouraging for us.

Okay.

Then a commentary on packaging being a little bit weaker in Europe.

Which particular end market did you see the weakness in?

Because presumably one of your bigger customers reported this morning the beverage can side, and Europe was actually up for them.

So just curious why the difference there.

Well, we have a big exposure in Europe on both the food and the beverage side.

There is also a lot of activity in terms of BPA non-intent or BPA-free coating; so a lot of trialing going on there.

It's also heightened competitive activity in the European packaging coatings right now.

So there are a few moving pieces on the European side, although the business for us grew nicely in the Asia-Pacific region.

But there was more competitive activity in Europe during this quarter.

Okay.

Thanks so much.

David Begleiter, Deutsche Bank.

Thank you.

Chuck, just on Comex, and I know you can't say too much, but obviously you bid the first time.

Is there still interest from an institutional standpoint towards that asset?

And even beyond Comex, can you discuss the M&A pipeline globally for coatings?

Well, we continue to be interested in making acquisitions both in the coatings space and in the near adjacencies of specialty chemicals.

We look at almost all potential acquisitions, both small and large.

We made just a couple of what I would call small ones here in the first quarter.

So we continue to be interested and look at all of the acquisitions.

I would say the pipeline I find somewhat encouraging at this point.

These are not all big deals, as we announced with Hi-Temp or Canal Supplies, but I think there is a good level of dialogue.

I am a little more optimistic today than I was six months ago as we proceed with some of these conversations.

So I would say I am encouraged.

Just on auto OEM, you're done a fantastic job in this business, growing well above the market.

How long can this continue?

Can you grow 8%, 9% for the full year, or will growth slow in the back half of the year in auto OEM?

I think auto OEM, in terms of the general market, if you look globally -- we are seeing here in the North American market, we are still seeing good growth.

It will be a little maybe slightly lower than where we were last year, but we are looking 4% or 5% growth.

We saw the sales come back here in North America in March.

So, yes, we feel pretty good about the market conditions here.

Europe, as we discussed, is finally showing some volume improvement and some strength.

And China has continued as our largest market in Asia.

It has continued fairly strong.

So we have again a good mix of technological innovations, all layers in the automotive coatings profiles, and so we think that we have a good opportunity with the technologies.

And we do business with almost all of the major automotive OEMs, both the global ones and the, let's say, strong national domestic players around the world.

So we think that we are well positioned to continue this momentum.

And the overall market on a global basis we think is pretty good.

David, this is Frank.

Recall that we continue to do well when the Japanese and European makers locate new manufacturing facilities outside their home markets, because of our quality, consistency, service, level of [owner].

So the transplant facilities, we are getting plants, we are getting a layer.

So to the extent we are able to continue to do that, while we may not have the incremental several-digits percentage above the market growth rate as we have in the past, we still believe that we have ways to continue to enhance our share position.

Thank you very much.

John McNulty, Credit Suisse.

Good afternoon.

Thanks for taking my question.

Now that you have gotten a lot of the transactions done -- Transitions is done, Akzo is being integrated in -- when we start thinking about your SG&A line and its ratio to sales, how should we be thinking about that going forward?

Where can you get that over time?

Like what are the -- you've been in the low 20s in the past.

Is that an area or a target that we can think about going forward?

Should it be lower than not?

Like, how should we think about that?

John, this is Vince.

I think the first quarter would give you a proxy.

The first quarter does not include any of the divested businesses; all of the results both last year with Commodity Chemicals and this year with Transitions has been moved to disc ops, discontinued operations.

So the first quarter would give you a proxy for that particular quarter's return on sales.

We did restate the entire 2013 year.

That is available via an 8-K filing.

And you can see again in those numbers for 2013 by quarter what our SG&A as a percent of sales was last year.

And that would include some seasonality to it.

So you really have to look at it on a quarterly basis.

But that is what I would point you to, John.

Okay.

Maybe taking it from a slightly different angle, when we think about -- I guess some of your businesses are really just starting to recover now.

You also have Akzo really early in its integration stages.

So I guess as we think about how the SG&A launch progress over the next few years versus your sales, how should we be thinking about the leverage that you should be getting off of the SG&A line going forward?

While we don't want to necessarily quote whether it's going to be 50 basis points, 100 basis points, there will definitely be operating leverage.

So when we characterize the incremental profitability of 30% to 40%-plus going to the bottom line from incremental revenue dollars, some of that comes from the fixed base in the COGS line, and some of that comes from the operating leverage from the SG&A line.

Because the only part of SG&A where we have to add traditional revenue dollars is sales resources.

The back office, as we continue to move towards shared-services environments in the regions, will definitely give us leverage in SG&A.

So not to quote a specific percentage, but there will clearly be the opportunity to gradually reduce that as a percent of revenue as the markets recover.

Particularly in Europe, where we have an infrastructure there; we're accelerating moving things into a shared-services center in the Czech Republic.

And so we don't have to add incremental resources on that pure G&A line as the revenue line accretes.

Great.

Thanks very much.

Kevin McCarthy, Bank of America.

Yes, good afternoon.

If I look at your volume growth at the Company level of nearly 5%, it's double or more than double that of your principal global competitor that reported this morning.

I guess I'm tempted to ask you about market share trends in that context.

Obviously there is a mix differential; and I saw your plus 10% on auto OEM volume.

But if I put auto OEM on the side, are there other categories where you feel you are gaining significant market share versus your competitors these days?

I would say, first of all, Kevin, that today is a busy day for us.

We had our Board meeting, our Annual Shareholders Meeting, so we haven't had an opportunity to look at our competitors, either their earnings reports or their slides or Q&A.

But I would say that we don't have the same -- even if you look at a global business profile, we don't have quite the same mix of businesses.

I think you indicated we did well in automotive OEM, as that market continues to recover; they don't have as much exposure with the acquisition that we made of their business here in North America, so some of our strongest volume growth, as you know, was here in North America as the economy, despite the weather, continues to improve.

They don't have as much exposure here.

So those would be some things that I would point to.

But it's really too early and it is only one quarter to comment that there would be any change in share.

It may be due as much to just regional mix for the companies.

Then I guess second question on returning capital to shareholders.

Is the timeline or likely pace of execution on your $2 billion share repurchase program meant to be coincident with the end of 2015 bracket on your $3 billion to $4 billion goal?

Or is that not necessarily the case?

Perhaps you can just comment on what your strategy will be there.

This is Frank.

We have left no time frame specifically on a $2 billion.

What we have said is we are going to deploy the $3 billion to $4 billion over the next 12 to 18 months in a shareholder-friendly manner.

What we would say about the share repurchase is we are committed to returning that cash to shareholders, but the pace and the timing will be dependent upon market and economic conditions; but it will also be dependent upon the magnitude and the timing of acquisition activity.

And we have said consistently that acquisitions, accretive acquisitions, would take priority.

But the message here is that we will deliver that value to shareholders by acquisitions when available, and then also making sure that we maintain that commitment to return the cash to shareholders -- or deploy that cash, I would say, in an accretive manner.

To the extent that we don't execute all that $3 billion to $4 billion in acquisition activity over the next 12 to 18 months, we will continue to have share repurchases be an integral part of the capital allocation philosophy.

Okay.

Then last question if I may.

Can you speak to your US architectural coatings sales by channel please?

Well, I would say that we had some -- there were some mix effects and I would say different strengths by channel, Kevin.

Overall, I would say that we had good strength in our US stores channel.

We are saying mid-single-digit improvement.

There again, we have some moving parts because of some of the store closures after -- as part of the integration.

We saw also volume increases in our home center channel.

The weakest of the three channels, and we think it's more related to weather here with the geographic mix, but the dealer channel was weaker from a volume standpoint in the first quarter here in North America.

Thank you very much.

Don Carson, Susquehanna Financial.

Chuck, a question on your outlook.

Does this stronger start to the year and perhaps better-than-expected operating leverage make you more optimistic on your earnings growth potential for calendar 2014?

Yes, I do feel a little better, Don.

Europe was encouraging.

Here, I think we did well despite what I think was some poor weather conditions that affected some of the end-use markets as well as just some of the supply chain, transportation.

And China, there's been a lot of discussion around China.

The automotive-related businesses in China continue to do well.

This is automotive OEM, automotive parts, automotive refinish.

It is a little mixed in some of the other end-use markets in Asia, like consumer electronics.

But as I mentioned, packaging, coatings, some of the construction-related markets in China have held up.

So I would say here in April, as we look back on the quarter, I would say I am more encouraged for 2014.

We have some geopolitical events we are monitoring: currencies in emerging regions.

There are a few watch-outs, I guess, as you would say.

But in general, especially based on the first quarter, we are encouraged.

I want to go back to the issue of how you are outgrowing the industry on autos, and not just the mix of, say, transplants.

Is it a technology issue where you have better technology, for example, E-Coat and things like that?

And are there other opportunities to grow through technology transfer amongst your various businesses?

I would say yes, we were introducing -- and I think we started talking about this last year, the introduction of our new-generation Southern E-Coat.

And I think that has continued to built momentum for us.

We have taken that product global with our global customer base.

So I would say from an E-Coat perspective, we feel that it's technology innovation and development, backed up by our service and globalization in all regions of the world.

So I would say that's an example.

Then we are also working with new contact processes that would be in the topcoat layer.

This is primers, base, and clear coats and some compression of these layers; we have had good waterborne technology introductions.

And I think the advantages of some of our new technologies are most evident when you have these new greenfield plants that are starting around the world, especially in the emerging regions, but also here in places like Mexico or the Southern part of the US.

So I would say we are very pleased with the technology that we have been developing and the receptivity on the part of our customers.

I would say this is probably the biggest story around the growth that we have had in auto OEM.

Thank you.

Frank Mitsch, Wells Fargo Securities.

Good afternoon, gentlemen.

Hey, obviously you had some positive volumes overall and certainly in Europe; and you were able to translate that into fantastic earnings improvement.

What role are cost structurings playing?

And what inning are we in some of the cost-reduction efforts that you guys had outlined in the past?

Yes, this is Frank.

We had announced of course that 2013, our restructuring program in the third quarter, which had a lot to do with completing the synergies for the North American Akzo business that we acquired, but also where we had identified some rationalization opportunities in other markets which were perhaps weak up to that point.

So that is playing a role in -- once we take that cost out, obviously, the teams have been dedicated to making sure that as revenue grows we do not add that cost back.

So that leverage is taking place.

As we go through 2014, we are expecting somewhere between $75 million and $90 million of incremental savings from these restructuring and synergy programs.

So that will continue to benefit the bottom line and the leverage that you spoke about.

All right, terrific.

You had mentioned, I guess, mid-single-digit margins on the Akzo North American business.

I guess the goal is to get it in the teens.

What sort of timing are you thinking of there?

Frank, it's Vince.

It's mid single-digits in the first quarter, which I will remind you is a seasonally slower quarter for everybody in the architectural business in this country.

Our projections would be in the -- above 10% by the end of this year on a run rate basis, and at our targeted level by the middle to end of 2015, which is 12.5%, 13%.

Terrific.

Then lastly, you referenced some of the positive benefits from weather in Europe.

Is there a case that there might have been some pull-forward from Q2 into Q1, or not necessarily?

I think it's always a good indicator when you get better weather in the first quarter, and it tends to lengthen the season.

Did it pull some things forward?

I wouldn't necessarily say that.

It depends on how the weather shapes up.

But, I would say we are encouraged, because even in a market that has been weaker in Europe, Frank -- Eastern Europe, now they did have better weather, but we saw them finally bounce back.

And we have some nice shares in markets like Poland where we had struggled a little bit during the latter half of 2012 and 2013.

So I think the weather is helping, but I don't think it's going to produce here in the second quarter some snapback in terms of the volume momentum.

I think we feel pretty good that we have some strength here, that the weather just will make the season longer and hopefully better if it holds out for the year.

Yes.

If you look at Global Insight's projections, as Chuck said in his remarks, the recovery still hasn't been totally even by country.

So there are still some countries in Western Europe that haven't recovered as fast as others.

So that still represents upside for us, particularly in some of the architectural markets.

Terrific.

Thank you so much.

John Roberts, UBS.

Afternoon.

Chuck, when you talk about adjacencies in terms of your acquisition strategies, is it anything in surface chemistry related?

Or how broad would you define adjacency areas?

Well, when we talk about adjacencies, we are talking about businesses that we are already in, in end-use markets that we were already in.

So if you look at some of the best examples -- adhesives, sealants, pretreatment -- these are three examples of adjacent chemistries that build on our strength.

We are already in these businesses in automotive, in aerospace, in industrial.

And these would be what I would call near adjacencies with good synergies and similar end-use markets.

Surface chemistries would be, obviously, one of those.

Would you build off anything in the silicas area?

We have now reconstituted the business as specialty coatings and materials.

That includes our precipitated silicas business, along with OLED dyes, Teslin, and some of our research capabilities in optical, in addition to the monitor business.

So we have not excluded silicas as a possible area of growth.

You saw the comments that we made around that business unit for the first quarter.

They had very good growth across the spectrum of the end-use markets and products there in specialty coatings and materials.

So we would not exclude growth in the silicas business.

And margins and growth performance quite good, not only in the first quarter that we just finished but over the last year and a half to two years.

We have seen good growth in that business, and we are looking forward to a very solid year for the business here.

Thank you.

Vincent Andrews, Morgan Stanley.

Thanks very much.

Just looking at your 5% volume growth and some of the markets where you're outperforming the balance of the industry, could you talk a little bit about how you are thinking about price here?

Are you happy with your price levels, particularly in Europe?

Is that something that you think could be -- maybe at a high level -- just some focus on going forward?

Are you premium priced as it relates to your business in autos?

Or what is the outlook here?

Are you talking now about the automotive business or more broadly for PPG's coatings business?

Well, I was talking more broadly about the European business.

Which, if it's about to pick up, I was just wondering if you are happy where the price points have settled out.

And then separately to autos, broadly where you are from a pricing perspective, just given your market share performance relative to the peers.

As we talked about, we see a relatively benign raw-material inflation environment at least here early in the year.

That has always been one of the drivers of the inflationary environment for our pricing strategies.

We typically don't price off a more narrowly focused, spot-pricing, opportunistic; we tend to be longer-term in our approach.

So at this point, I would say that even though there may be some tactical opportunities in products or specific markets, I would say the pricing environment today in Europe is relatively flat.

And that is consistent with the major inflationary factors -- although we are watching.

So there has been some discussion that even though there hasn't been a lot of inflation in Europe over the last few quarters, that could pick up later this year if we see continued volume growth.

So we are watching carefully, but right at this point, I would say there are no major initiatives.

Okay.

Thanks very much.

That's very helpful.

I will pass it along.

PJ Juvekar, Citi.

Good afternoon.

It's Dan Jester on for PJ.

Circling back to the architectural business in North America, one of your competitors is rolling a premium branded product through one of the bigger independent dealer channels.

I was just wondering if you are seeing any changes in that competitive landscape, or maybe promotions ahead of the spring painting season.

I think I know what you are referring to, and at this point I would say it is very early -- it's early in the season to see what, if any, impact any rollout would have in the independent dealer or hardware store channel.

I think we have all been encouraged by what we are seeing in terms of the market potential.

I think you are going to see a lot of new product line extensions.

We have seen new campaigns supporting some of these rollouts and introductions.

So I think it's going to be a competitive space here in 2014.

But I think the opportunities will be there for all of the suppliers if the current momentum around the construction markets is maintained.

Okay.

Then secondly, and apologize if I missed this from earlier, have you completed all of the Akzo-related store closings?

Can you update us on what your expectation is for the net change in your Company-owned stores will be in 2014 versus 2013?

Hey, Dan, this is Vince.

Yes, we have completed the store closures that we earmarked for the acquisition.

On a net basis it was just around 100 stores.

We've move to a growth mode from a store perspective.

On a short- to mid- to long-term basis we're looking at 25 to 40 stores a year, and a lot of these will [differ] each year.

So that is -- we are starting with that growth expectation beginning this year.

Great.

Thank you very much.

Laurence Alexander, Jefferies.

Good afternoon.

Two quick questions on incremental margins.

First for Europe, how far do you think you can expand volumes before incremental margins start to deteriorate?

Do you see there is a 10% or 15% leeway before you see a step down?

Secondly, on the emerging markets, do you think that you need to see a certain level of volume growth, underlying volume growth, to start to see higher incremental margins there?

We will take the European one first.

We still think there is a good amount of headroom.

You mentioned 10% to 15%; yes, that is definitely within the realm of possibility.

Because when you look at capacity utilization levels, as where they are, and with volumes -- still were as of the end of the year about 20% below peak, there is ample headroom to continue to accrete the bottom line at that 30% to 40% for a while.

When you talk about emerging markets, it depends on the emerging market.

Latin America, where profitability is a little leaner than it is in some of the markets like China, for instance, we have a lot of opportunity in Latin America.

For instance, by changing the mix of our inputs, so as we are putting capital into putting resin capacity in Brazil, for instance, that will give us some kind of a step-function improvement in raw material costs, which will go right to the bottom line, avoiding duties on incoming raw materials.

For China, for instance, in some cases we will be building new capacity; so while you might not get the same leverage to the bottom line on the incremental revenue, we will clearly be accreting margin to the bottom line in a way that still creates shareholder value, because we are getting good IRRs on our new capacity investments.

So we make those decisions on a case-by-case basis.

We have plans over the next couple years to enhance our capacity, particularly in the automotive and industrial space; and that tends to be very accretive from a value-creation standpoint.

But also -- while it may not substantially enhance margin percentage, it will substantially enhance margin dollars per unit per dollar invested.

Laurence, this is Vince.

One other comment I will make on Q1 in particular with respect to emerging regions is: we did see higher earnings in emerging regions in Q1.

Those earnings were on higher volumes.

But those earnings were tempered a bit by foreign currency, negative foreign currency translation.

So on a non-US-denominated or local currency perspective, our margins were higher than they were when we brought them back to the US.

Okay.

That's very helpful.

And just to tease out one nuance on the emerging markets side, are there any regions where a small acquisition could have a material change in market structure and therefore help margins that way?

I wouldn't -- I am trying to think offhand.

But I would say that's somewhat theoretical as a question.

In some cases that can happen; but at this point, I wouldn't say that that's a significant factor or something that we see as likely.

Thank you.

Nils Wallin, CLSA.

Thanks and good afternoon, gentlemen.

On marine, I know that it's stabilized over the last couple quarters, but it's still trending down.

When do you guys think that you will see at least a flat comp or a positive comp in that business?

I would say in the -- we should see stability through the course of 2014; and we are looking for growth returning on a volume basis in marine OEM in 2015.

Okay.

The independent channel in North American architecture, it's consistently been called out as weak.

Is there any reason that this needs to be a channel that PPG needs to be in?

Or is there -- even if you don't need to be in it, there is a significant loss of synergy if you tried to exit that channel?

Well, we have a long-term commitment to the dealer channel.

It's been one of PPG's strengths over the years in the North American market.

We intend to continue to support our independent dealer base.

The channel has not grown as much over the last decade or more, largely due to the growth of some of the national home centers and the Company-owned stores.

But it's still an important channel for the industry and an important channel for PPG.

We continue to support it and will work to ensure that it can be as successful as possible.

And it should be well positioned with the improvements that we see in the underlying markets over the next couple years.

It wasn't as evident in the first quarter, and the dealers do tend to watch their inventories a little more closely.

Our dealer profile is skewed more to the, let's call it, colder weather regions; so we think they were impacted a little more than the other channels.

But yes, we think there will be growth there as well during the course of this year.

Understood.

Thanks.

Just finally, in the last two years obviously there has been a dramatic change in the portfolio.

Is there any reason to expect that there are going to be dramatic changes going forward?

Or have you strategically looked now more towards just intensifying your coatings position?

We think that we have largely completed the transformation.

There are continued consolidation and growth opportunities in the coatings space and some of the near adjacencies that we talked about on this call.

So I think you have seen largely complete now the PPG transformation, although there are a couple of business units that aren't in the coatings or adjacent space, but these are very small now for PPG's total portfolio.

Thanks for your help.

Dmitry Silversteyn, Longbow Research.

Good afternoon, guys, and congratulations on a good start to the year.

Question; we touched on the weather impact in architectural and it didn't sound like it was all that material for you, although you did call it out in the press release.

But was there a weather-related factor in your collision repair business on the automotive aftermarket side?

Or maybe not in this quarter, but do you expect maybe a little bit of a pickup in that business in the second quarter, as people get around to repairing their dings and rear-ends?

We think so.

The inclement weather actually helps the automotive refinish business, Dmitry, as you know; so we had more than our share of it here in the Northern part of the US.

Although in many cases, one, it was either we saw a lot of accidents, so a lot of it, let's call it, built-up demand that didn't get completed in the first quarter.

And we also had some supply chain issues.

We are shipping a lot of water-based automotive refinish coatings now; so those supply lines were disrupted several times during the quarter.

So we think that the next few quarters for our North American business are going to be good, because there will be a -- there is a backlog of work now in the collision shops.

So we think that the next couple quarters here in North America should be good ones.

Switching gears a little bit, can you talk about your Asian paint business and how that is doing?

If I recall, for much of 2013 it was under pressure and delivered some lower volumes from time to time.

Are you seeing that business turn around or at least stabilize?

And what's your expectations for that in 2014?

This is Asia-Pacific in general for the region, or Asian Paints, our joint venture in India, Dmitry?

We were cutting out there as you were asking the question.

I am talking about the general Asian paint business as architectural coatings that you report in the Performance materials.

Well, now that you're reporting all your coatings or all your paint, but when you used to report paint -- being basically North America and Asia -- talking about the Asian piece of that.

Okay.

Well, we have in this case, if we look at architectural coatings businesses in Asia, for us those are two principal markets: Australia/New Zealand and China.

Australia/New Zealand, the market is positive.

We saw some growth here in the second half of 2013 and the first quarter.

So our position in Australia continues to improve.

We have seen volume growth and improved profitability.

China, likewise.

It is a smaller business, so we have a smaller regional business in China focused in the East Coast major cities.

And we saw an improvement there as well.

Again, smaller volume growth for our business than what you have seen in some of the other Western Tier 2 and Tier 3 cities.

But we saw a nice improvement for the business, despite the, let's call it, the smaller size of our business in China.

But good growth there in terms of volume and profitability.

Yes, the only thing I would add to that is the fact that we did have good volume growth in those architectural markets in Asia.

Unfortunately in the first quarter versus the prior year, we were subject to currency changes on the translation side, principally in Australia, a significant change over Q1 2013.

Then finally, I would just like to follow up on a question asked earlier around your strategy in the US over the North American independent dealer channel.

You have increased your exposure there, obviously, with the Akzo acquisition; and then recently you announced a closer tie with a group of stores in the Northeast.

There has been some disruptions in the business of one of the larger suppliers into that market, and they are on their third or fourth CEO; I am losing track already.

Is it an opportunity for you, even though this is a market that may be trailing the growth rate that you would expect from Company-owned stores or from big-box DIY?

Is it still a market that, given maybe a little bit easier competitive environment where you can gain some share and actually become a more meaningful supplier into that channel?

Well, we feel that we have been -- we have had a commitment to the independent dealer channel here for many years.

And we have reaffirmed that, Dmitry, even with the acquisition that we made last year, where we did pick up additional exposure to the independent dealer channel here and in Canada.

We also got additional stores and home center sales as well.

So we think it has been -- it is an opportunity for us to bring more value to the independent dealers.

Many of them are committed to staying in the market and growing, despite the competitive environment .

So we think it is a good opportunity for us.

Yes, it is not as fast growing as the other channels, but we think there is a good role for us.

We can support these dealers, and we are going to continue to do that.

Thanks very much.

Duffy Fischer, Barclays.

Hey, guys.

Just quick question- - well, maybe not quick.

Talk about the puts and takes and the difference for your business in architectural in the recovery that is left in Europe versus the recovery that is left in the US.

Where do you see the most upside in those two architectural markets, say over the next three to four years?

Let me think about that for a moment.

I think we are in the early innings of the recovery in Europe.

This has been -- we have seen negative volumes for the last three or four years in the market.

We saw the biggest drops in the Southern Mediterranean regions in Europe.

So I would say that as we look at the markets now of the UK and Benelux starting to come out, and we are encouraged there.

Our biggest market in Europe is France; we didn't see as much of an improvement overall in the construction indices in France, so I would say that is our biggest opportunity.

We don't have much exposure in Southern Europe.

There is talk of a recovery there.

We have a smaller exposure, so I don't think we have as much to benefit in Spain or in Italy at this point.

And Eastern Europe has also been battered . The first quarter you saw that for the first time we saw some nice improvement in markets like Poland.

So I would say the biggest opportunity -- I think we are still in the early innings of the regions or countries that the growth has restarted.

And I think for our biggest engine in Europe, which is France, if we can get them moving -- and you have seen recent elections and more of a commitment around returning to growth in the French markets -- and as that works its way through to the construction markets, I would say that is our biggest opportunity.

So still early days in Europe on the construction side.

I think automotive is actually probably a little bit ahead of construction because they have a large export base in Europe.

Here I would say that we are a couple years into the recovery and -- although it has been slower in coming than we thought.

So I do think that we are going to see several more years, Duffy, of growth in architectural coatings here in this market.

We haven't seen the commercial construction or nonresidential side come back as strong.

Most of the improvement we have seen in residential, and that's coming and helping us.

DIY was probably a little more effective here in the first quarter with the weather.

But I think we have more to go on residential.

And nonresidential, which we were getting more optimistic about in the back half of last year, things slowed down a little bit, we think more due to weather.

So I think that is going to provide as the impetus for the next couple of years, completing this residential recovery and the nonresidential stuff coming through on an extended basis.

Great.

Thanks, guys.

Ivan Marcuse, KeyBanc Capital Markets.

Thanks.

A couple quick questions.

On top of the European question that was just asked, what would your volumes be?

How much are they off pre-downturn levels?

So if you compared them where they are today versus I guess 2011, when they started to tail off.

We typically go back, Ivan, to 2008.

That is a point in time where we started to see volumes fall in Europe.

The volumes today versus 2008 levels are still down high-teens percentages, even with again the early recovery we saw in the first quarter.

Got you.

Then where are we on -- how much in synergies were did -- helped, I guess, Performance chemicals (inaudible) Performance Coatings from Akzo?

And how much more is there to go, or how much should you see going through the year?

Yes, we expect out of the 200 synergies that we have said will be our ultimate goal by early 2015, our run rate by the end of this year should be around 170 or so out of that 200 level, with about 30 left to go the remainder of the year.

We closed 2013 at a run rate about 100.

So about 70 incremental ramped up through 2014 from that 100 run rate to 170 run rate this year.

Great.

Thanks for taking my questions.

Robert Reitzes, Broad Arch Capital.

Hi, most of the questions I would have had have been answered.

The one I would ask is that, when you look at all the damage that was done by the storms in the first part of the year, have you guys seen a pickup or do you anticipate a pickup in the sale of paint, etc., during the second and third quarters as repair, remodeling?

Yes, we do.

Weather like we had, Bob, takes its toll.

We saw a pickup last year after Hurricane Sandy hit the East Coast.

I think we should be in a position in the second and third quarters of this year to, I think, capture more opportunities both from the storms and from the people that weren't able to get out and shop for some of their painting needs during January and February.

I think we've talked about the automotive refinish business.

A lot of accidents here in the first quarter that -- a lot of those didn't get repaired.

So those are two examples where, both on the architectural side and the automotive refinish side, where we think the next couple of quarters should get some help here from some of this demand.

Thanks.

Kevin Hocevar, Northcoast Research.

Hey, good afternoon, everybody.

I was wondering if you could give us an update on the level of success you had in the price increase that you had at the paint stores in the US; and if you expect that to spill over into any of the other channels.

We were able to capture a low single-digit price increase in the paint stores during the first quarter.

Okay.

It should help us and carry through the remainder of 2014.

Okay.

Then just another quick one.

When you parse out the pieces in the Performance Coatings segment, could you give us an idea of how much the Architectural- EMEA business margins improved in the quarter?

Yes, Kevin, this is Vince.

Again, that was the business, as Frank mentioned earlier, that had the most leverage potential.

Volumes were up 5% to.

The business sales last year were a separate segment, so you can easily do the math on a 5% volume increase.

Again, I would tell you as we said coming into this year, we expected incrementals somewhere between 30% and 50%.

And again that was the one business we certainly earmarked as having the highest potential , given the largest drop in volume over the last couple years.

Okay, great.

Thank you very much.

Jeff Zekauskas, JPMorgan.

Thanks.

What was cash flow from operations in the quarter?

Cash flow from ops in the quarter?

I think, Jeff, give me one second; I will find it.

You could ask -- if you have a question, Jeff (multiple speakers)

Sure.

On a pro forma basis, did the Akzo, both the acquired Akzo sales from the United States grow versus what they were when they were run by Akzo in the first quarter of last year?

Jeff, they were very comparable with last year.

Slightly ahead but very comparable.

And we shuttered about 100 stores as part of the synergy capture.

In the cost reduction that you are doing there, since the sales aren't growing very fast, what's left?

What are the costs that will come out for you to hit your synergy targets?

Are there more plants to close?

Or how do you conceptualize that?

Well, we still have -- we are still working through the operations and supply chain portion.

Some of these changes take quite some time is we are moving production of paint around to different plants, different distribution centers.

We still have back-office opportunities that we are working through as we integrate the two organizations.

Those would be two of the bigger buckets left.

Now that we will annualize the Akzo business, what is the normalized SG&A growth going forward?

Is it a couple of percent, or is it faster than that?

For the Company in total?

Yes.

We should be -- if you look at the run rate where we are today, we won't be going up from what our current run rate in the first quarter.

We should be continuing a downward trend, gradual downward trend, in terms of SG&A as a percent of revenue.

Right, okay.

You asked the cash flow, cash -- and I want to make sure I get the right terminology here; you will see the Q coming out in the very near future, obviously.

But cash from operating activities from continuing operations is $130 million.

Of course, that one -- and then you have some from disc ops.

But the total for disc ops and continuing ops, about $160 million.

That is before CapEx, obviously.

We will spend between $500 million, $600 million this year in CapEx, probably ramping up a little bit more later in the year, a little less earlier in the year.

Then lastly, you bought back about $200 million in stock this quarter.

How did you pick that number?

Why wasn't it zero or $500 million?

Where did $200 million come from?

Well, we have said that we will continue to have share repurchase be an integral part of our capital -- our cash deployment strategy.

Obviously, we look at the entire landscape between dividends, organic CapEx, share repurchase, and acquisition activity.

We did a little bit of acquisition in the first quarter, Hi-Temp Coatings; that was announced.

A couple other very small ones that we announced.

And that wasn't -- we had a remaining authorization on our existing share repurchase authorization when we closed the year, and that was the amount that we felt prudent about for the quarter.

Okay, great.

Thanks very much.

Richard O'Reilly, Revere Associates.

Jeff beat me to the question about Akzo.

Okay; thanks a lot, guys.

Gentlemen, at this time we have no further questions.

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

Well again, I would like to thank everybody for their time and interest in PPG today.

If there are further questions, please contact me in the Investor Relations function.

Thank you.

Ladies and gentlemen, that concludes today's conference.

Thank you all for your participation and you may now disconnect.

Have a wonderful day.