PPG Industries Inc (PPG) 2014 Q2 法說會逐字稿

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

My name is Jackie, and I will be your coordinator for today.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Mr. Vince Morales.

Please proceed.

Thank you, Jackie, and good afternoon, everyone.

Once again, this is Vince Morales, Vice President of Investor Relations.

We appreciate your continued interest in PPG Industries and welcome you to this teleconference to review PPG's second-quarter 2014 financial results.

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

Our comments relate to the financial information released on Thursday, July 17, 2014.

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

The slides are also available on the webcast site for this call and provide additional support to the opening remarks Chuck will make momentarily.

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

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

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

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

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

The Company has provided in the presentation appendix 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.

Out now let me introduce PPG's Chairman and CEO, Chuck Bunch.

Thank you, Vince, and welcome, everyone.

Today, we reported record second-quarter 2014 financial results from continuing operations, including all-time quarterly adjusted earnings per diluted share of $2.83 and record quarterly sales of $4.1 billion.

The benefits of our new business portfolio are measurable, as our adjusted earnings per share from continuing operations increased 24% this quarter, with an average quarterly increase the past six quarters of more than 30%.

We achieved these record results due to our global reach, as most major regional economies continued to expand.

Our sales growth was 5%, including volume growth of 3%, which was consistent across each major region.

In the US and Canada, we continued to see moderate demand increases in most of the end-use markets we supply.

The overall pace of growth was modest early in the quarter but accelerated in June.

Certain PPG businesses continued to easily outpaced the regional economic growth rate, such as our automotive OEM business, which grew high-single-digit percentages.

Our earnings in this region grew 12%, reflecting our increased sales coupled with additional synergies from our prior-year Architectural Coatings acquisition.

In Europe, the demand recovery continued and broadened in terms of its PPG impact, as more of our businesses achieved volume improvements.

The year-over-year pace of sales improvement was slightly lower than the first quarter of 2014, but that was due to the strengthening of the prior-year comparison period.

We delivered 28% earnings improvement in Europe.

We continue to realize excellent earnings contributions from the gradual regional economic improvement, illustrating our earnings leverage driven by our previous aggressive cost reduction actions.

Europe represents about one-third of our total sales, and we expect this earnings leverage to continue.

In Asia and Latin America combined, earnings grew 14%.

In Asia, we achieved higher volumes driven by increased automotive OEM and general industrial demand in China and India.

Overall, Latin American volumes declined slightly, with continuing growth in Mexico offset by weakness in South America, primarily Brazil.

In addition to our continued strong operating performance, our strategic actions and ongoing cash deployment were also notable factors in our earnings growth.

As I mentioned earlier, we achieved additional acquisition-related cost synergies from last year's North American Architectural Coatings acquisition.

And, on a run rate basis, we have already delivered about 75% of the targeted $200 million synergy target in just 15 months.

These include administrative, procurement-related, and operational cost savings, plus the earnings benefit from closing about 100 redundant or underperforming Company-owned stores in the second half of 2013.

We expect the synergy capture to be nearly complete by year end on a run rate basis, which keeps us ahead of schedule.

We have also completed several bolt-on acquisitions this year, including Canal Supplies, Painter's Supply, Masterwork, and Homax.

In aggregate, these acquisitions are expected to add about $75 million in annual sales.

But most noteworthy, on June 30 we announced an agreement to acquire Comex, a leading Latin American architectural and industrial coatings company, and one of the highest quality coatings businesses in the world.

Let me give you a brief update on the activities that have occurred in just the few weeks following the signing of the acquisition agreement.

We held a pre-filing meeting and then submitted a formal filing with the Mexican Competition Commission requesting approval of the transaction.

As is customary in transactions of this nature, the Commission issued a hold order indicating that the transaction needs to remain open pending completion of their review.

We can continue to anticipate that the Commission will complete its work in order for the acquisition to close in four to six months.

We are very excited about the value this transaction will bring to PPG, and we are looking forward to working with Comex's customers and employees.

With regard to other cash deployment actions, we repurchased $100 million, or about 500,000 shares, of PPG stock in the quarter.

We halted share repurchases in the middle of the quarter due to the Comex acquisition negotiations, which concluded by quarter end.

We ended the quarter with $2.9 billion of cash and short-term investments, and we remain highly focused on additional cash deployment for earnings-accretive opportunities.

We are still targeting earnings-accretive cash deployment of $3 billion to $4 billion in 2014 and 2015 combined.

Our acquisition pipeline remains active, and we expect to complete additional share repurchases in the second half of 2014.

Looking ahead, we anticipate moderate global expansion, and we remain well positioned geographically and with lower structural costs to deliver excellent earnings performance from the increased global demand.

In addition, we still have a variety of PPG-specific earnings levers remaining.

These include additional use of our strong balance sheet and cash position and further demand recovery in some of our largest regions, such as Europe, and end-use markets such as US commercial construction, where demand levels remain well below pre-recession levels.

In summary, we have again delivered record financial performance driven by benefits from our strategic initiatives, cash deployment, new PPG technologies, and continued aggressive management of our businesses, and we remain optimistic regarding continued growth for PPG.

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

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

(Operator Instructions).

David Begleiter, Deutsche Bank.

Chuck, you mentioned June picking up in the quarter.

Can you discuss what you think drove that pick-up?

Was it just normal seasonal activity?

And what that has led to in July trends in terms of business volume?

Well, as you know, the first quarter - especially here in North America - was weak due to the harsh winter.

We came into April, I think, still without the momentum that we had seen last year in some of our major businesses and construction-related businesses in particular.

You had a later Easter.

You had fewer selling days earlier in the month.

And I think as we saw the weather improve over all of the geographies here in North America, and I think in Europe we had what I would call regular weather patterns.

So that we felt that by the second half of the second quarter - so the last month in particular - we saw a lot of momentum building, especially in the construction markets.

But you saw it also in automotive sales.

And we had a number of new programs that were started in the back half of the second quarter.

So I would say that there were some seasonal or weather-related events, but also I think some of PPG's programs were kicking in as the quarter progressed.

Chuck, on the same bent, how would you characterize this US spring and ongoing summer paint season versus prior years or even expectations?

Well, I'm going to ask Michael McGarry, and our newly named Chief Operating Officer, to respond.

Michael's had responsibility for our architectural businesses globally.

Michael?

David, I'd say that this year is better than last year and is continuing to trend up.

We had good performance in our stores that have been opened for more than one year.

And we saw continued - actually, in Canada, we had a nice recovery in Canada as well, despite the fact that Canada, by and large, is a very challenging market.

So I'd say overall it's trending upward.

Thank you very much.

Don Carson, Susquehanna Financial.

Chuck, your OEM auto growth continues to significantly outpace the market.

I'm just wondering what's driving that.

Is that new products?

You mentioned one of the things helping business overall is just your customers adopting your new technologies.

And sort of along those lines, do you have any innovation or freshness index in terms of percentage of sales coming from new products, both current and where you'd like it to go?

Yes.

As we've discussed before, our automotive OEM business has a lot of momentum.

Two of the key drivers have been, on the technology side, both our new generation-seven electrodeposition coatings, and we're getting an adoption rate that is accelerating on a global basis.

And as the industry has continued to globalize, we're seeing adoption rates faster in our customers from new technology.

The other new technology for OEM automotive coatings is the new B1:B2 PPG compact process.

We are also getting very good success rates as this technology moves into brand-new automotive assembly plants.

I think what we had seen over the few years - we were introducing the technology, but it really paid off best in brand-new assembly plants where you could design the coding systems, the ovens, the electrodeposition coatings around this new technology.

So we've seen an acceleration of the adoption of those two technologies, B1:B2 compact process, or the top-coat systems.

So I would say that that has caused some of the acceleration in our volume growth for PPG.

We are also very well positioned with some of the companies that have been growing fastest on a global basis.

So if you look at our new products - and we're trying to have over 30% new products on a five-year rolling basis, and we're certainly ahead of that pace in the automotive OEM business.

And then just as follow up on the portfolio side, you seem to have a major announcement every quarter.

I guess the remaining business that doesn't fit is the glass business, and just wondering what the future of that business in the PPG portfolio is.

Is it something you want to get the returns up before you divested?

Or is it something you would consider keeping?

At this point, we have considered those businesses less core for PPG, but still strategically important.

We think that we have more to do in those businesses.

We have continued to invest in them.

We think there are good opportunities with the market recoveries and some of the regional growth to improve the performance.

And as you noted, we've been quite busy with our portfolio actions in last year and this year, commodity chemicals, the Transitions Optical business, these big acquisitions.

So we are aware of our performance in that business and the opportunities to improve.

And at this point we have no further news to report.

Thank you.

Duffy Fischer, Barclays.

The refinish business had talked about the rough winter should lead to a pick-up in repairs as we get into spring and summer.

One, are we seeing that uptick in refinish?

And, two, what happened with market share in refinish, as there's been a little bit of turnover in one of your big competitors changing hands, stuff like that.

Where do we stand with market share in refinish?

Well, I would say, Duffy, that first of all, we are seeing volume improvement in refinish here in North America as we come out of the winter.

And we've also seen a modest pickup in Europe in our refinish business.

And the business in Asia-Pacific also continues to grow.

So I think we are pleased to see continued growth -- top-line growth on the refinish side here in North America or even globally, with some of the - we have seen the competitors remain fairly similar in terms of the players competing in the market.

We do not have, however, with this business, let's say as up to date volume and share information.

It usually takes us a little longer in this segment because the publicly available data is not always current.

I would say that we've seen somewhat of a stable share situation from our perspective.

There is movement within the market between the large, multi-shop operators and some of the smaller ones.

So we're seeing some consolidation there in terms of the body shop network.

So there are continuing consolidation trends globally in the downstream portion of the refinish or automotive collision markets.

But I would say it's too early to really say that there have been any significant share shifts regionally or globally.

I think, Duffy, the only thing I would add to what Chuck said - this is Frank - is that in Asia-Pacific, China specifically - China is going to produce something like 23 million units this year.

And as they produce more, the car park in China will continue to grow pretty substantially, and we'll continue to benefit from that.

So the Asia, or the China, growth is probably a little bit higher than the overall global growth for us.

And we already have a significant market position in China, so we'll benefit from that sector trend going forward with that car park growth.

Great.

And then second question probably for Frank, when we anniversary the shutdown of those 100 stores on the combination between you and the acquired business, should we think about a financial impact when we anniversary that?

Do we get a pick-up or a reduction in cost at that point, or will that be pretty smooth and unnoticeable?

It is not going to be a huge financial impact.

Those were done pretty much in the - more so in the second half of 2013, so we'll lap that by the end of this year.

The impact you'll see is that overall year-over-year compares on sales will improve because those stores would have been lower performing than the legacy stores.

But no major financial impact.

Great.

Thanks, fellows.

John McNulty, Credit Suisse.

So, for the first one, as far as the marine business goes, it's been struggling for a while.

It does seem like it's leveling off, at least on a sequential basis.

But based on your knowledge of the order books that are out there, when should we be expecting the final turn in that business where we actually start to see good, positive year-over-year growth?

John, I would say that here in the second quarter, we had still modestly negative volumes in protective and marine.

The marine business, notably in China and Korea, has been continuing to weaken but at improving trends, let's call it.

And if you look at new order bookings for us, we are now - we think we've turned a corner in terms of volume growth in the business trending with this order book improvement.

So I would say by the end of this year and certainly the first quarter of next year, you're going to see these new bookings showing up on our sales top line for the business.

Great, thanks.

And then as a follow-up, in the performance business, certainly the margins continue to push higher, which is impressive at these levels.

I guess my question is with the launch that you've had around some of the rebranding that you're doing, both in the stores and in the architectural business and even outside the stores to the big boxes, can you walk us through how to think about what the incremental costs were there that might have been one-time that may have even held back the margins a little bit despite what looked like pretty good ones?

Yes.

John, this is Michael.

I would say that from the cost side we're probably not want to get into that, but the way to think about it going forward is that we continue to get our cost structure lower.

The stores are gone.

We've consolidated sales into the higher-performing stores.

Chuck talked earlier about the run rate of the synergies.

We're going north of where we were, and we're going to be probably 90% of the $200 million number we gave you by the end of the year.

So I would tell you that everything is moving in the right direction.

Great.

Thanks very much for the color.

Frank Mitsch, Wells Fargo Securities.

Congratulations, Michael, on the promotion.

Just to follow up on that, can you update us on where the margins are on the Akzo North American business?

I think you guys had indicated they were mid-single digits in Q1.

Where do we stand now, and how does that trajectory look for the balance of the year?

Yes, we were low double digits in the second quarter, and obviously our goal is to continue to move that north, Frank.

So we feel pretty good about it.

When we took it over it was basically a break-even business at best.

So a significant improvement; the team has done an outstanding job of moving that north.

It sounds like that's ahead of expectations, even your expectations.

I don't know; you'd have to ask Chuck about that.

(Laughter).

And you mentioned earlier in terms of share buyback that you stopped halfway through the quarter after doing $100 million because you knew you had the Comex negotiations going on, but that you are going to restart that here as we progress.

Is the way for us to think about that is a run rate quarterly double that number, absent another large transaction that might be on the horizon?

How should we think about the pace of the buybacks for the balance of the year?

Yes - this is Frank - well, while we don't get too specific on when exactly we'll be in the market, Q1 we did $200 million.

As you know, we did $100 million in Q2.

I think it's safe to assume that we've always said that it'll be part of our capital allocation strategy for the back half, including share repurchase.

So we'll be back in the market in the second half for some amount.

Again, it's always going to depend on the economic conditions; always going to depend on acquisition activity.

We still do look at the pipeline of acquisitions, and that is our preferred route to grow the top line organically, inorganically.

But we will be definitely doing some share repurchases in the back half.

All right, great.

And then lastly, you mentioned that the maintenance costs were heavy in the first half of 2014.

Care to quantify that?

And what sort of a tailwind will that be for the balance of this year?

Frank, this is Vince.

You're talking, I think, about our glass segment.

We had some planned maintenance and repair work coming into the year, as we communicated in the fourth quarter.

In total for the first half, it was about $17 million of year-over-year delta in terms of cost.

For the back half of the year, we expect the year-over-year delta to be negligible.

Terrific.

Thanks so much.

Kevin McCarthy, Bank of America Merrill Lynch.

Could you comment on your expectations for titanium dioxide, acrylic, and other raw material costs in the back half of the year versus the first half of 2014?

Kevin, I would say that we look at the trends as very flat right now, so for TiO2, we didn't see much movement between the first and second quarter.

And we're really not anticipating for TiO2 any movements up.

For some of our emulsions, we're seeing also similar trends of little to no inflation.

There's some noise around vinyl acetate monomer, but at this point I would say that they're not strong.

So as we have commented earlier, low single-digit inflationary pressure on raw materials, and that would include natural gas, that is up from last year although stable right now.

We have a few other inflationary costs out there, such as transportation.

But right now we see trends in the second half for raw materials and other costs, low single digits.

Okay, great.

And then second question has to do with your store count.

You mentioned the rationalization last year.

I think back in May you indicated a medium-term plan to add 180 to 220 stores through 2016.

So early days versus that timeframe, but I think you've made a number of bolt-on acquisitions that seem to be bringing stores with them.

So perhaps you could update us on where you might be this year in terms of organic and acquired stores.

Kevin, this is Michael.

So we picked up 10 stores in the Connecticut area, 13 stores here in the Pittsburgh area.

We're on a run rate to add probably in the range of 22 stores in the US and about 17 stores in Canada.

And so when you look at the number we gave you, we're certainly thinking that that's the minimum that we're looking at over that period of time.

Just a follow-up, Mike.

Do you think you may be able to exceed the 45 goal that you had for this year, given 39 are in the books?

I think that's going to be probably where we finish.

Okay.

Thank you very much.

Ghansham Panjabi, Baird.

First off, can you just update us with your thoughts on commercial construction in the US?

Your competitor that reported this morning was quite bullish on the trend line there.

Do you share that same enthusiasm?

We've been seeing an improving trend as we went through the second quarter.

We didn't see as much in the first quarter.

And as we look at a couple of our businesses that touch commercial construction, including the flat glass business that really reported in the second quarter the best volumes that they've seen for their business since 2007.

And they are a commercial construction business, although they also saw some improvement on the residential side.

I would say overall in our other businesses that touch commercial construction here, we're seeing good improvement, but it came later in the second quarter.

But we're seeing very positive trends, so we're optimistic that these will continue in the second half of the year.

Okay, that's helpful.

And then on architectural EMEA, how did the volumes come in relative to your initial expectations for the quarter?

And have you also seen any improvement in Eastern Europe?

This is Michael again.

Yes, I would tell you that we had very nice improvement.

The areas that were up where the UK, Benelux.

You had all of Eastern Europe was up significantly.

This is a nice trend for us, and overall we're - we'd say the only area that is still under pressure, or how we call it flattish, is France.

Okay.

Thanks so much.

Bob Koort, Goldman Sachs.

Congrats, Michael.

Thank you, Bob.

I wanted to ask maybe some granular data around the US architectural market.

I think you mentioned your big-box revenues were up mid-single, your stores were up better than that, and your dealer network - or independent network, worse than that.

Should I read something about the variation in pricing power across those channels, or any shift in DIY versus contractor trends?

What would you ascribe the difference between the channels to?

I think the difference, Bob, really goes to the way they go to market.

So the DIY guys show up in the home centers -- and I would tell you that we had good home center numbers.

We also had some new products that we rolled out with Ralph Lauren with the Glidden Professional.

So that was a positive.

The dealers obviously are working hard in their own segment, so they're a little more challenged than the contractor market.

So I don't think there were any surprises in there.

And you had cited an outlook of modest US growth.

Your big competitor in Cleveland certainly seemed a little bit more enthusiastic.

So might you give me a definition of modest?

Yes, I would say a 5% plus is the area that we're looking at.

Got it.

And the last one, Chuck, a hallmark of the paint industry is its stability.

And I noticed on the monthly volume trends you gave, April was up 3, May was flat, June was up 7. That doesn't really speak to stability.

Is that atypical, or is it just normally we see a quarterly number and we don't know that there's quite as much month-to-month volatility in year-on-year trends?

Well, we track these things on a daily and weekly basis, too.

I would say that typically you don't see that much variability around these normally seasonal trends.

But I would say this year, especially here in North America, the season just started coming a little later than usual.

And although we said that the first quarter was notably weaker because of the weather, we still saw that continuing.

We have a bigger share now up in Canada, which had some of these same seasonal trends.

So we were encouraged because we came into the year saying, hey, the overall construction indexes are going to get better.

We've seen the growth improving over the last couple of years.

We didn't get it in the first four months.

May was, we thought, going to be a little better than it turned out to be.

We didn't have as many ship days.

But I think as they work through some of that inventory, by the time they started to reorder in June we saw some good uptick.

So normally less variability, but we think this is the start of a good seasonal trend now for the rest of the season.

Great.

Thanks for the help.

John Roberts, UBS.

I'm looking at slide 7, and I really like the format of that presentation of the adjusted earnings per share trend.

The last four, the right-most four orange boxes, are all roughly similar in size.

And you've mentioned you are going to start to anniversary the easy comps on Akzo, and the comps get a little bit more challenging on auto OEM.

So should we think of - I know you don't give specific guidance, but we should maybe think about the orange boxes maybe back in the first half of 2013 as where we'll start seeing comps level off to?

John, this is Vince.

As you know, our portfolio has a bunch of different businesses.

I certainly agree with your comments that we'll start to anniversary some of the acquisition synergies.

But if you remember last year, first half, Europe was very weak.

We still have a lot of recovery growth left in Europe, in our opinion.

We still were battling all of last year, as we pointed out earlier, tough marine market and a sluggish commercial construction market.

We still have those - I'll call them - tailwinds coming.

And so there's still, I think - and we still have cash deployment as another avenue as we get later in this year, certainly four to six months from now, when we close Comex.

So I still think there's a lot of opportunities to continue this trend to some degree.

Good answer.

And then on slide 11, the acquisition - you said the acquisitions add $75 million in sales, but only $24 million has been spent on acquisitions.

Do we have still some cash outflow to go with those additional smaller ones you did recently?

Yes, there's the Homax one closed just after the beginning of the third quarter, so there will be more money that will have gone out at that time, which for the sales which are included in that $75 million.

Thank you.

Vincent Andrews, Morgan Stanley.

I'm just looking at the slide 5 here with the sequential volume trends.

Do you think the sequential growth rate decelerating in Europe from 4% to 3% - is that just a function of the comps being easier in the prior quarter?

Or were you not really surprised that you didn't see a pickup?

No, the weakest quarter last year for Europe was the first quarter, so it was an easier comp.

So we didn't see any deceleration.

It's still modest growth recovery, but we're not concerned that the trend is going the wrong way.

Okay.

And then just how is it looking going into 3Q so far?

In Europe, Vincent?

Yes.

We said in our prepared remarks - and we see that trend - it's very early, obviously, in the quarter.

But we actually have volume growth in almost every business in Q2, and that wasn't the case in 1Q.

So, again, we think the general recovery, again, is still modest and early innings, but we do think it's broadening.

Okay.

Thanks very much.

P.J. Juvekar, Citi.

Hi, this is Dan Jester on for P.J. this afternoon.

So on packaging coatings, it seems like your European volumes have been declining for three or four consecutive quarters now.

Even, as you just mentioned, that other volume in the regions is starting to improve.

So can you just walk us through some of the factors that are impacting that particular business?

And I think comps get better in the second half, so should we expect to see some sort of stabilization later this year?

The packaging coatings business, there are several factors at work, especially in the European market.

It has been a slower season in Europe.

You also have a technology transition going to these BPA-free coatings.

So there has been some holding back of volumes, waiting for some of these technology changes.

But as I mentioned in my previous quarterly remarks, we have seen heightened competitive activity, especially positioning before some of these technology changes.

So you are, I think, also seeing the impact of that in Europe on the overall marketplace.

Thank you.

And then quickly on - back to the US architectural market, you talked about some new products that were launched - Ralph Lauren, Olympic Elite - any channel fill benefit in the quarter that you can point to?

Not significant.

Okay.

Dan, this is Vince.

We had only a partial quarter of those products.

The products were being set throughout the quarter, so we didn't have a full benefit in the quarter.

Okay, that's helpful.

Thank you.

Nils Wallin, CLSA.

On Europe, the profit improvement of 28% or so seems pretty remarkable given volumes, I think, in that geography were only up 3%.

So would you walk us through what were the other contributors to profit growth, i.e.

price, currency?

And then if you're still tracking those 35% to 40% incremental margins in that region.

Yes, and that last comment of yours really nails it because, as we had said previously, we expected based on the cost reduction actions, all the rationalization that was taking place, that we would have expected 30% to 40% incremental to the bottom line from the additional volume.

And we are seeing accretion at the high end of that range.

And it's volume on the fact of we don't have much incremental fixed cost on either administrative side nor the capacity side because we're still obviously significantly below peak volumes.

So there is plenty of additional capacity utilization that we can take up as volumes accrete.

Very modest pricing environment; a little bit of help from currency on the euro on a year-over-year basis, as you know.

So that helped a little bit.

But volume in the basically mid-single digits range.

And some of the businesses, as Vince said, becoming more broad-based is what really drove that utilization.

So we are seeing that 40% range of the accretion.

Got it.

Then on - I know you've mentioned a number of times, back when you announced the Comex deal and obviously in the quarterly comments, the quality of the asset.

Are there other assets out there geographically that you can - that might be of a comparable quality that you could be interested in?

Nils, this is Vince.

We don't particularly like to talk about any specific targets.

We do think the coatings space, as our portfolio changes have occurred over the last decade indicate, remains a very, very good space.

There are small, medium, and in some cases large competitors out there; potential targets for us.

So, yes, I think we expect to continue to consolidate the space over the next couple of years.

One of the benefits of the coatings industry is that the amount of free cash flow we have.

And, again, we'd use that, again, for quite some time to grow inorganically.

Okay, thanks.

And then just one more if I may.

It seems like recently you've done a number of independent distributors in the US versus company-owned stores.

Is there a preference for independent distributors as you look to expand in the US/North America architectural, and why might that be?

Nils, this is Michael.

I would tell you that the independent distribution we bought really boils down to the fact that they had no succession plans.

And they came to us and asked us to facilitate their long-term plans, and we took advantage of that.

Obviously, we favor our own stores if they were a chance, but we love the dealer market as well.

So we participate in both of them.

Thanks so much.

Dmitry Silversteyn, Longbow Research.

A lot of the questions have been answered, but I just want to follow-up on the share repurchases.

I think that - was it two weeks ago when you had the conference call on the Comex announcement, you talked about suspending share repurchases until the deal closes, but now you're talking about being back in the market in the second half of this year.

So did you get a different ruling or opinion from your counsel, or was it just an internal change of direction?

No, I think we've been pretty consistent in our commentary that it was obviously appropriate for us to suspend the share repurchases when we were in discussions with earnest - with Comex during the second quarter.

So that's why we did the $100 million.

And consistent with all of our counsel and the guidance we gave a couple weeks ago, we're free to be back in the market as long as we're not in possession of any material nonpublic information.

And so that's why we're saying, as we did at that time, that we could be back in the market in the second half.

Okay, all right.

Thank you for the clarification.

Then touching base as a follow up on your international businesses outside of North America and EMEA, in Asian architectural business and industrial business you talked about seeing a little bit of a pick-up on the industrial side.

Can you talk about the environment in the architectural side of the business, both in terms of China and Australia and other parts of Asia?

And then on Latin America, this morning your Cleveland-based competitor was pretty pessimistic about at least 2014 results in that region, given the economics and the foreign-exchange issues.

What are you seeing, and how do you view that market for the balance of this year and into next year?

Dmitry, this is Michael.

If you look at China, our market was up low double digits; earnings were up as well.

Australia, we were up mid-single digits, and earnings were up.

In Brazil, it was not a good market, but our earnings were up as well as we took advantage of the cost - the ability to get cost out.

So in all the architectural segments around the world, we had improved performance.

Okay.

So you had double-digit growth in China in architectural paints?

Yes, that's correct.

Okay, great, great.

Then that was quite a reversal from - I think you had a little bit of a loss in volumes in even as late as the first quarter.

So something has changed there in the market or in how you go to market?

(Multiple speakers) question.

In China, we've had continuous upward trends, and in Australia we have also been growing there as well.

Okay.

So the overall Asian paints business being down last quarter in volumes, I assume that was areas outside of China that were weak?

Or how do I (multiple speakers)?

Dmitry, this is Vince.

That was marine impact.

Okay.

I thought that we were talking about just performance coatings and architectural coatings last time as well, but maybe I'm wrong.

All right.

Thank you.

Protective and marine is in the performance coatings segment.

James Sheehan, SunTrust.

In performance coatings, you referenced some cost inflation, and you've got some price increases out there to offset that.

When do you anticipate being fully caught up on the cost inflation that you referenced?

Yes, James, this is Vince.

Yes, we enacted pricing in the first quarter in anticipation of what we were seeing in the transportation markets, somewhat on the weak retail wage side.

We are complete in terms of costs versus price at this point.

And so we don't expect much more inflation, more than we have today in those two buckets.

And we modest targeted pricing, but not material for the segment overall in the back half of the year.

All right.

Thanks a lot, Vince.

[Aaron Viswanathan], RBC Capital Markets.

I guess the first question was just on aerospace.

It's been a pretty decent market for you guys for a little while.

What's your outlook going forward, and do you think you can keep up mid- to high-single-digit growth rates there?

We're still quite optimistic about the aerospace market.

If you look at the commercial mainframe OEM builds from Boeing and Airbus, they're quite strong with good backlogs.

We're seeing modest pickup in business aviation; and the aftermarket, especially with the airline profitability, is also improving.

So we continue to see similar trends.

Military has been somewhat muted, but overall we're not seeing a change in the trends that we've experienced, and we're quite optimistic that the market is going to continue to be - to perform well.

Okay.

Thanks.

And then another question higher level, historically your earnings and your top-line growth was very tied to global IP.

But with all the portfolio moves, it seems like that's come down a little bit.

So if we do see a material pick-up in global IP over the next couple of years, would you think to see a similar benefit from it as you did in the past?

Or do you think that would be less so?

No, I think we still have - we've obviously over the past couple of years expanded our exposure to the US commercial construction market, residential construction market, but we still have a close link to global IP.

So I think that relationship you mentioned still exists.

Okay.

Thanks.

Eugene Fedotoff, KeyBanc.

Just have a follow up on packaging coatings.

Can you talk about volume trends that you are seeing outside of Europe?

And whether you saw a pick-up in demand before or during World Cup?

The volume trends here in North America were slightly positive, but modest.

Asia continues to be a growth market for packaging coatings, and that continued.

We didn't see a noticeable change in the industry for the World Cup.

And you had a lot of other trends going on in South America at the time, both from volumes, currencies, and the like.

So we did not see a specific change in demand for the industry due to the World Cup.

Thanks for that color.

And also you mentioned the recovery in general industrial coatings.

Can you talk a little bit more in details about the specific markets, end markets, that are leading that recovery?

Well, for our industrial coatings business, the strongest market globally has been automotive parts.

We've seen good growth in the global automotive industry, as we've indicated.

But our business has continued to perform well there.

Coil and extrusion markets -- again, they're tied more to construction.

We've seen some growth there as well.

Heavy-duty equipment in the developed regions was a positive story, although in the developing regions in Asia, a little less so.

Consumer electronics, a what I would call mixed return to growth overall, but I would say not at some of the growth trends that we've seen earlier.

So those would be a few of the markets that we've seen improving.

Appliance was also better in all the regions geographically.

Great.

Thanks.

And just a last question on Comex.

Do you think - and I'm sorry if I missed that - do you think there's a potential upside to the 3%, 4% synergies that you initially identified?

We just announced the deal a couple weeks ago, Eugene, so I think we're still going with our original financial projections.

Thanks a lot.

Robert Walker, Jefferies.

On auto OEM, how much of your above-market growth can you attribute to new capacity wins versus customer retrofits or other items?

Just wondering how vulnerable the growth rates could be if auto capacity growth slowed.

Can you repeat the question again?

All right, yes.

The above-market growth you are seeing in auto OEM, how much of that is attributed to winning a higher share of new auto facilities versus de-captivating existing facilities for other customers - having a customer retrofit a plant?

Well, I would say that one of the biggest trends here recently in the global industry has been the amount of new assembly plants.

So, typically those are the best opportunities to win new business is when a plant has - is just commissioning.

And I would say that we feel that we're winning our share, more than our share, as these new plants get commissioned because it's an opportunity to introduce new technologies.

You see less share shift on, let's say, the facilities that have been in existence for a while if they are performing well.

So I would say that there will still be new automotive assembly plants starting up over the next couple of years.

You've seen a number of them in China, Mexico.

You've seen a number of new assembly plants announced.

So I'd say the trend is still encouraging there.

And I don't think that all these plants, and some of them that we're winning business at, have yet ramped up to full capacity.

So I think there's an opportunity for more growth from some of these new facilities.

But those would be the two countries that we see the most growth in terms of new construction.

Thank you.

And then I had a question for Frank.

In terms of free cash flow generation, do you expect a similar pattern to previous years?

And overall, what kind of free cash flow to net income ratio should we expect this year?

Well, without getting into too much specific on the percentage, we do expect a similar pattern to prior years, where things do pick up in the back half.

We are spending a little bit more in CapEx this year, but all that CapEx is very, very accretive in terms of capacity expansion that we expect to get a very quick return on.

We're making good progress on working capital as we go through the year, so a similar pattern.

And it's always going to be a high double-digit conversion ratio, cash flow to net income, so it's safe to assume that.

So, by high double - do you mean 90% plus, or -?

Well, it's going to depend on the quarter and on the month, but overall it will be in the - certainly more than 80% conversion ratio for the year.

Okay.

Thank you.

Richard O'Reilly, Revere Associates.

I also wanted to ask about the Comex synergy target.

And I guess why only a 3% to 4%?

Not that there's upside to that, but it just seems like a low number, low percentage.

Can you explain?

Is it because you don't have a footprint there, there's no corporate savings?

Yes, Rich, if you go back to the June 30 call we held, this is an asset that from a geographic perspective is tremendously complementary to us because we have no meaningful architectural presence in Mexico.

That limits in a certain degree some of the operational synergies we would get out of a transaction.

So this is more of a plug-and-play type transaction as opposed to our prior acquisition last year when we had tremendous overlap, both administratively and operationally.

So I think - and this is a high-quality asset because it's well-run as well.

So I think those two factors are the predominant reasons why you're seeing the synergy target we put out there.

Which is still a nice synergy target, by the way.

And second question, a quick question, a math question.

What the business unit you call now specialty coatings and materials, the old (inaudible) and optical materials, are those volumes within that aggregate coatings volume of 3% - are they within that slide there, or does that slide exclude that?

That would include - the overall coatings volume improvement would include specialty coatings and materials.

Could say the specialty coatings and materials would probably be - is a growth rate above that.

Smaller business, smaller component of the total, but it is in the number.

Okay, fine.

Okay.

So it's basically the two coatings segment, excluding the last segment?

That's correct, Rich.

Specialty coatings and materials is in the industrial coatings segment.

And it's now in the industrial - okay, good.

Thanks a lot for that.

Ladies and gentlemen, that concludes our question-and-answer session.

And with that, I would like to turn the conference back to Mr. Vince Morales.

Please proceed.

I just want to again thank everybody for their time and interest in PPG.

As is customary, I'll be available today, tomorrow, and next week for any follow-up questions you may have.

Thank you.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect, and have a great day.