PPG Industries Inc (PPG) 2014 Q4 法說會逐字稿

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

(Operator Instructions).

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

I would now like to turn the call over to Vince Morales.

Please proceed.

Thank you, Sally.

Good afternoon, everybody.

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

We appreciate your continued interest and welcome you to our fourth-quarter financial results teleconference.

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

Our comments and Q&A relate to the financial information released today, Thursday, January 15, 2015.

I want to remind everyone that we posted detailed commentary and the accompanying presentation slides on our investor center at our website at PPG.com.

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

Following Chuck's perspective on the Company results, Frank will provide a brief financial update and then we will move directly to Q&A.

Both the prepared commentary and discussion during the call 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.

The presentation also contains certain non-GAAP financial measures.

In the appendix of the presentation materials are reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures.

For any 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 good afternoon, everyone.

Today, we reported fourth-quarter 2014 financial results that established new fourth-quarter milestones for net sales of $3.7 billion and fourth-quarter adjusted earnings per diluted share from continuing operations of $2.11.

Our sales improved 6%, a figure that includes an unfavorable 4% impact from currency translation.

So our sales in local currencies grew by 10%.

Our sales volumes grew about 4% year-over-year, a growth rate higher than our third-quarter level.

Although the overall pace of business remained varied by region, the growth rate of each major region also improved sequentially.

Our US and Canada business delivered sales volume growth of about 5% year-over-year.

Our Asia-Pacific region also grew 5%, the highest growth rate of the year.

Sales volumes in Europe, the Middle East and Africa grew by about 1% after being flat in the third quarter.

Our sales volume growth was broad-based across our business portfolio, including our Industrial Coatings segment where each business in the segment delivered solid volume growth.

Sales volumes also improved for aerospace, automotive refinish and our architectural coatings business in the US and Canada.

For the fourth quarter, we generally experienced normal seasonal trends in all of our businesses and regions.

Supplementing the Company's volume growth in the quarter were acquisition-related sales gains of about 6% stemming primarily from the Comex acquisition, which closed in early November.

Comex had partial quarter sales of about $175 million with a mid-teen percentage return on sales reflective of the quality of the business.

From an earnings perspective, our fourth-quarter adjusted earnings per diluted share of $2.11 improved 26% versus the prior year supported by growth of at least 10% in each of our reporting segments.

The improved segment earnings were driven by higher sales volumes, continued aggressive cost management and benefits from the Comex acquisition.

Cash deployed on share repurchases was also a contributing factor to our record results.

We repurchased $300 million or about 1.4 million shares in the fourth quarter, which brings our full-year total to $750 million, or about 3.8 million shares.

In the quarter, our average diluted shares outstanding were 2.7% lower versus the previous year's fourth quarter and 3.7% lower for the full-year 2014.

Now let me comment quickly on our full-year results.

On a full-year basis, our sales were $15.4 billion, up 8% due to higher sales volumes and acquisitions.

Our full-year sales volumes grew more than 4% in the US and Canada between 3.5% and 4% in Asia and Latin America and about 2.5% in Europe, although most of the European growth occurred in the first half of the year.

Our adjusted earnings per diluted share was $9.75, up 27% versus our prior year record.

We have delivered at least 20% adjusted earnings per share growth for several consecutive years, clearly illustrating the benefits of our active portfolio management, earnings accretive cash deployment and persistent operational focus.

For the quarter and full year, I was pleased with our strong financial performance and overall operational execution in what was a modest growth year from a global economic perspective.

Just to comment on a few other highlights for the Company in 2014, our earnings improved in each major region by at least 14%.

This includes an improvement of more than $100 million, or 21% in Europe despite muted regional economic activity and currency headwinds late in the year.

Most of our businesses continue to execute very well and in several cases, we outperformed respective global industry growth rates.

I am also pleased to report that we have realized one year ahead of schedule a targeted run rate of acquisition synergies relating to our 2013 acquisition of AkzoNobel's North American architectural coatings business.

After nearly two years of successful business integration, we are now shifting to a growth focus for that business.

From a balance sheet management perspective, in the fourth quarter, we refinanced some of our debt obligations, which will result in lower net interest beginning in 2015.

Frank will talk more about this in a minute.

Strategically, 2014 was another very successful and eventful year as we continue to enhance our business portfolio.

This includes the first-quarter sale of our ownership interest in the Transitions Optical joint venture for $1.7 billion pre-tax or $1.5 billion after-tax.

Also, the Comex acquisition completed in the fourth quarter was the second-largest in our Company's history.

We are very pleased to now have this high-quality business as part of PPG.

Finally, we continued our heritage of returning cash to our shareholders with more than $1.1 billion returned for the year through dividends and share repurchases.

I will remind everyone that we have paid a dividend for 115 consecutive years and raised our annual dividend payout for 43 consecutive years.

We increased our per-share dividend 10% in April of 2014.

Again, a very strong fourth-quarter and full-year performance for our Company.

As we enter 2015, our overall outlook is similar to what we experienced last year.

We anticipate growth rates will remain mixed by region with North American and Asian economies continuing to grow at rates generally consistent with 2014.

Our base case assumption is that European growth will remain subdued overall; however, we believe that European economies stand to benefit considerably if oil prices remain at current levels, which may stimulate higher growth in that region.

Given our broad geographic reach and full array of coatings businesses, we expect to benefit from the continued global growth.

From a PPG perspective, we remain focused on new product development, operational excellence and continued opportunities to deploy cash for earnings accretion.

As many of you know, at the beginning of 2014, we provided a cash deployment target of $3 billion to $4 billion for acquisitions and share repurchases.

That target encompassed years 2014 and 2015.

Our actual cash deployed relating to acquisitions and share buybacks for 2014 alone totaled about $3.2 billion.

Our acquisition pipeline remains active and share repurchases remain an integral part of our capital allocation strategy.

We anticipate deploying an additional $1.5 billion to $2.5 billion of cash on acquisitions and buybacks in years 2015 and 2016 combined with a focus on creating shareholder value.

Let me conclude by saying 2014 was an excellent year for PPG and our shareholders.

We are looking forward to a successful 2015 and now I will turn it over to Frank to review a few 2015 financial assumptions.

Thank you, Chuck and good afternoon, everyone.

I'll now cover several items that will assist in modeling our 2015 sales and earnings.

We've included in today's presentation materials a summary of these financial assumptions on slide number 13.

First is the impact of the Comex acquisition.

As Chuck mentioned, we closed this acquisition in early November 2014, so we benefited from partial quarterly results in the fourth quarter of 2014.

For 2015, we expect the acquisition will add approximately $1 billion in full-year sales.

Incremental sales for 2015 will be $800 million to $825 million reflecting our partial year 2014 ownership.

The Comex business is expected to have a mid-teens earnings before interest and taxes, or EBIT percentage return on sales for the year.

However, this will vary by quarter due to business seasonality.

The quarterly seasonality of the business differs somewhat from PPG's European and US and Canadian architectural coatings businesses.

The Comex quarterly sales phasing is expected to be approximately 20% to 22% in the first quarter, 23% to 26% in the second and third quarters and 29% to 31% in the fourth quarter.

Next, as many of you are aware, a variety of foreign currencies began to weaken in the second half of 2014 as measured against the US dollar.

As a result, the Company expects that year-over-year currency translation will unfavorably impact sales by $650 million to $750 million and earnings by about $65 million to $75 million.

These figures represent our current assumptions and are based on current exchange rates as of this week.

Again, these impacts are currency translation-related and given the nature of our business, we typically do not incur significant transaction-related currency impacts.

The next item relates to the Company's pension and other post-employment benefits or OPEB expenses.

We are expecting these expenses to increase by about $60 million to $65 million in 2015.

This increase stems from changes to employee and retiree mortality rate tables that are commonly used by most US companies.

Also, the year-end discount rate that is used to determine OPEB and pension liabilities was lower at the end of December 2014 versus December 2013.

Both the discount rate and the mortality tables represent important calculation variables when computing estimated annual OPEB and pension expenses.

This increased expense will be recognized in our financial results ratably throughout the year.

As Chuck mentioned, we expect lower net interest expenses for 2015.

We refinanced a portion of our term debt in the fourth quarter, which is the key driver of this decrease.

Included in the appendix of the presentation materials are details of the debt obligations we refinanced.

We expect a total of $55 million of lower net interest expense year-over-year with $18 million less expense in the first quarter and $11 million, $14 million and $12 million lower in the second, third and fourth quarters respectively.

Next, we anticipate that the Company's 2015 tax rate on ongoing earnings from continuing operations will be in the range of 24% to 25%.

The comparable rate for 2014 was 23.9%.

The increase relates primarily to higher earnings in Mexico resulting from the Comex acquisition.

The Mexican tax rate is higher than PPG's global tax rate.

Other factors may also impact the 2015 tax rate throughout the year, including the regional mix of earnings.

Finally, as Chuck mentioned, the Company anticipates cash deployment of $1.5 billion to $2.5 billion in years 2015 and 2016 combined for acquisitions and share repurchases.

This is incremental to the approximate $3.2 billion that has already been deployed as part of the previous target of $3 billion to $4 billion.

Once again a summary of these financial assumptions is contained in the presentation materials for today's call.

This concludes our prepared remarks.

Once again we appreciate your interest in PPG and now, operator, would you please open the line for questions?

(Operator Instructions).

Ghansham Panjabi, Baird.

Hey, guys, good afternoon.

Just in the context of all the macro data all over the world, you obviously saw an improvement in core volumes.

Is that just your end-market exposure that leaves you better positioned on a relative basis or share gains?

I'm curious on your perspective just because comps were tougher in 4Q.

I would say that I think this reflects our exposure to the end-use markets on a regional basis.

I would say that's probably the largest factor; although we have several businesses that have outpaced the global growth rates as we look at them.

Okay.

And just switching to North American architectural, just given Lowe's announcement with the HGTV brand, just curious on your thoughts as to what your big retail partners are sharing with you in terms of strategy?

Are they pursuing a more broad-based set of brands throughout their stores or is this something just a test case and we'll wait and see what happens?

Ghansham, this is Michael.

First of all, I want to say that, with the line reviews, we did come out modestly ahead, so that's a net positive.

I think when you think about the big boxes, they are all focused on getting more traffic into the stores.

Once they get that additional traffic in the stores, they're trying to convert them at a higher rate and I think that's their strategy and we're certainly looking to be part of that higher retention and growth rate.

Okay, that's helpful.

Thanks so much.

Vincent Andrews, Morgan Stanley.

Thank you and good afternoon, everyone.

Wondering if you could talk a bit about how we should be thinking about your raw materials as we move through the year just given the move in crude and in ethylene and propylene and how we should be thinking about that both in terms of the cost line potentially in terms of how it might impact the revenue line if you have to give some of it back and just the cadence of it.

Let me give you a little bit of a background.

In the fourth quarter, we didn't see the raw material benefits we've seen throughout the course of 2014 the stability overall in raw material pricing and that's where we were in the fourth quarter.

What we have seen here at the end of the fourth quarter and now going into the first quarter of 2015 with these larger oil price declines, we are now currently negotiating with many of our suppliers around the world on the impact of these oil price declines on their pricing.

I would say the general trend of the discussions is modestly lower at this point.

We've seen some commodities that have moved more quickly.

These would be products like solvents, which are more commodity-like and trade closer between spot and contract pricing.

But I would say that right now we don't buy our raw materials for the most part on indexes, so these discussions are really taking place around the world on a variety of commodities.

We have seen a little more weakness, if I look at it regionally, a little more weakness in the Asia-Pacific region.

Their prices typically respond more quickly.

In Europe, we have seen lower economic growth, but weakness in currency that's muting some of these dollar-based oil declines.

So we're going to see where that takes us here over the first quarter.

And likewise here in North America, business conditions a little stronger and we're currently negotiating with our suppliers here and we're only two weeks into the first quarter, so it's a little too early to tell.

I think we will have a lot more visibility by the end of the first quarter.

And with our prices right now, we've had relatively stable pricing here at the end of 2014, a few puts and takes, but overall pricing is stable.

That remains our base case as we go into 2015 and we'll evaluate that as we see the trends overall in the markets both here and around the world.

Just maybe as a quick follow-up, could you just maybe tell us roughly in the raw material basket that's oil linked in one way or another, what percentage would you say is pure commodity versus what percentage might be a product that's priced for value rather than has some differentiation to it that's not necessarily going to move one for one with a propylene or an ethylene price?

Well, our raw material basket, if you look at all of the things we're doing in both the organic, inorganic area plus other packaging materials and general purchasing, I'd say about 20% overall was tied to hydrocarbon pricing broadly.

And I would say that, of that mix -- I haven't looked at it quite in terms of commodity versus polymeric differentiated resins, but certainly less than half of that total is tied directly to commodity pricing.

So I would say we are typically buying things that are either specified or somewhat differentiated, so we're not buying a lot of ethylene.

We're not buying any ethylene anymore and very little of the propylene or other monomers that you could directly attribute to these price declines.

Thank you very much.

Jeff Zekauskas, JPMorgan.

Thanks very much.

You talked about revenues from Comex being about $1 billion in 2015.

I was wondering what Mexican exchange rate you're using?

I think the peso has maybe fallen about 10% on average and so I would've thought there would have been more of a currency penalty.

Jeff, when we announced this deal, the currency was 13.2.

It peaked at about 14.7.

It's trading today at 14.5.

So it's up about 10%.

But despite that, all the $0.65 to $0.75 of accretion that we expect on EPS, we will deliver.

Jeff, this is Vince, we've seen growth in the business over that time period that eclipsed most of the currency declines.

And then for my follow-up, I think in your financial statements you call out about $36 million in Transition costs in the quarter, but in the footnotes, it looks like there's $52 million in costs.

There's a $21 million inventory stepup, $17 million in R&D, $14 million in other.

So does that mean that some of these costs were included in operating earnings?

No, I don't know if you're looking at a pre-tax/post-tax number, but associated with the acquisitions primarily Comex is that $29 million that you talked about, it's a pre-tax number.

Two-thirds of that is the inventory stepup, the rest of it is closing costs.

So that's associated with Comex.

Okay, thank you so much.

P.J. Juvekar, Citi.

Yes, hi, good afternoon.

Chuck, when it comes to your pricing of your products, historically you said that industrial customers look for a price break quickly compared to architectural business.

So I was wondering if you can talk about that dynamic of industrial versus architectural pricing.

Well, I would say, P.J., there is no real standard in terms of when we're going to have discussions with either industrial or architectural customers.

Some of it is related to either bidding or negotiating policies when we've reached agreements.

So I would say at this point that it's difficult for us to say with these movements in raw material, oil pricing, that things that we can say hard and fast rule when we're going to be able to reflect any advantages that we get from lower raw material prices or when we'll have discussions with our customer base across the board.

Okay.

And then my second question is on OEM.

You've been growing faster than the market for many years and now one of your competitors is also claiming to be growing and gaining share.

And if the overall pie is not growing, do you think somebody else is losing share?

I would say that as we reported in the fourth quarter, we continue to perform well versus a global industry growth rate.

We think over time we have very capable competitors in this space and I think over time our growth rate should reflect overall industry growth trends on a long-term basis.

Duffy Fischer, Barclays.

Yes, happy new year, guys.

A question on cash flow.

If I just do the quick math of it, you talked about between $1.5 billion and $2.5 billion paying out either from acquisitions or buyback.

Your dividend is running at about $360 million, so let's say that grows a little bit.

The dividend plus that say high end at $2.5 billion gets us to about $3.3 billion, but your cash flow from ops this year without Comex was $1.8 million so over two years that gets us somewhere north of $4 billion of operating cash flow.

It seems like there's a gap where you either build $1 billion in cash or I wouldn't think pay down debt with that.

So can you just walk through the triangulation of the cash flow generation over the next two years in the $2.5 billion number?

Yes, Duffy, this is Frank.

So we ended this 2014 with about $1.2 billion in cash and we expect to generate over $1 billion in both 2015 and 2016.

Remember that's an amount that's after CapEx and after dividend.

So what we're saying is without any of these additional actions, when you take that $1.2 billion and end up with something north of $3 billion by the end of 2016 and we intend to deploy $1.5 billion and $2.5 billion of that on acquisitions and share repurchase.

So the difference on the cash flow number that you and I are quoting is really the dividend and the CapEx.

Okay, fair enough.

And then if we just walk back, a year ago seemed very optimistic on the acquisition front.

Obviously, at that time, you didn't know you were going to (technical difficulty).

That fell in your lap, but we haven't seen other acquisitions that obviously were on your plate at that same time.

So what happened with those and I guess why weren't we able to or is it just a timing issue to do some more work on what was obviously your target list at this time last year?

Well, Duffy, we did announce in the fourth quarter the acquisition -- the agreement for an acquisition with REVOCOAT or AXSON, the automotive OEM material supplier that has not closed yet, but that was announced in the fourth quarter and we still have a number of discussions and negotiations going on.

So we remain confident and optimistic that we'll be able to deliver more acquisition growth here in 2015 and beyond.

So I feel pretty good about it and we did get the other one announced that we haven't closed obviously, but I think that was a positive step and that will be a good opportunity for us going forward in our Industrial Coatings segment.

Great, thanks, fellas.

David Begleiter, Deutsche Bank.

Thank you.

Chuck, just on your gross margin, can you talk about the 2015 versus 2014 thoughts given, one, the addition of Comex and two, obviously the big drop you will see in raws?

In the past, you've seen a pretty big uptick in the gross margin off of sharp declines in crude oil.

Well, I would say at this point, David, that we're looking to have maybe small incremental improvements in the overall gross margins with not only the acquisition of Comex, but also what we're seeing in our other businesses with some headwinds out there in terms of currency and the like.

But we think it's going to be stable to slightly up in terms of margin performance.

Obviously, we're going through this negotiation phase and we don't really know where raw materials and others have settled out.

But I think there are some opportunities for improvement here, but right now I would say we're looking for stable to just slightly higher margin opportunities.

So just on the trends in January, any destocking that you see amongst yourselves or your customers?

This year, we have an early reporting date today so we haven't seen as much of a trend.

There were some things happening in the fourth quarter with individual customers and inventory management, but I would say it's a little too early to say.

I think what we did note in our recorded documents is that weather patterns looks like so far more of a normal winter here in North America, but we also benefited in the first quarter last year from very good weather in Europe.

So right now, it's a little too early for us to see any significant trends overall for our business.

Thank you very much.

Bob Koort, Goldman Sachs.

Thank you.

Good afternoon.

Chuck, you guys noted the mid-teens operating margins in Comex and I guess I would've thought seasonally maybe it would've been a little bit lower than that.

I think your guidance is for mid-teens in 2015, but you note there is seasonality.

So is there something different about the Mexican paint markets from the US paint markets in terms of that seasonality?

Hey, Bob, this is Michael.

I think Frank covered some of this in his opening remarks, but think about 20% in Q1, 25% in Q2 and Q3 and 30% in Q4.

Generally the mid-teens in the fourth quarter is a seasonally stronger quarter for them, so we'll start a little bit slower in the first quarter, but we'll build up and we have some good opportunities there.

Their resin plant is not fully loaded, so we're looking at supplying our own Mexican operations with that -- we've looked at some synergies as well.

So I think right now we'll be trending toward that $30 million to $40 million synergy number that we gave you as well.

And Michael, I know your beating stick has a little blood on it from marking up those Ti02 companies in the last few years.

Can you give us a sense if there's any more room to rift or substitute or get some more price relief there or do you think we've come closer to the end of those trends?

I think our view of the market hasn't changed; it's still oversupplied.

You have billions coming on with the new chloride plant in China.

We've looked at the preproduction samples; they are getting better, more consistent.

It will be up and operational late in Q1 early Q2.

When you look at the industry in general, we still plan to take out Ti02, get more formulation, 1% to 2%.

We think our other folks that we compete with have similar type programs.

We saw Comex had a similar program.

So the trends that you see I think will continue.

Cost component of those substitutes which may be petrochemical-based doesn't reduce some of the likelihood of moving away from Ti02?

I don't think so.

Got it.

Okay, thanks very much.

Don Carson, Susquehanna International.

Yes, two questions.

First, going back to auto OEM and I think for over a year now you've been growing above industry growth rates.

What exactly is it that enables you to do that?

Is it your eco technology, which is quite differentiated from others?

And Chuck, why is it that you think you'll eventually fall back in line to just growing at industry levels?

And then just a follow-on on your glass business.

You seem to have an improving outlook there both from a volume and raw materials standpoint.

Is now the time to monetize glass or do you think that there's further improvements to come?

Well, on the auto OEM side first, Don, I would say that I think we've been benefiting from some technology developments, especially as they apply to new plants in the developing regions.

So we were well-positioned there to take advantage of brand-new plants that were converting to newer technologies.

So I think it was a good fit with the technologies and position that we had and we've been growing nicely with some of the most successful companies on a global basis.

So we were well-positioned with some of the customers that were growing the fastest so that we have been the beneficiary there in what has been overall a very good period for global automotive growth not only here or in China, but in general we've seen good growth trends for the industry and we think that we're positioned to do that over the next couple of years.

But as we look at the competitive arena, these companies that we're competing with either globally or on a regional basis are capable organizations so that I would say that over time we would expect that the growth trends for our Company would be similar to what we're seeing in the global industry growth trends.

And the second question is the glass business, yes, the flat glass business, and we've been talking about this for the last several quarters.

We've finally seen some improving trends there.

We had obviously one disposition of one of our glass plants here in North America, Fuyao and we think that business in particular is positioned to improve results as we go through 2015.

As we have talked about in the past, these businesses are let's call them less core and we continue, as we did with this sale to Fuyao, we continue to look for opportunities to create shareholder value in these businesses.

So if we see the right opportunity or the right transaction in either this flat glass business or the fiberglass business, we will certainly proceed and the timing, at least if these trends continue, will certainly be better than some of the things that we've faced over the last couple of years and we said we were going to be patient.

So we're going to wait and see.

This is still early days in the recovery, but very good trends here.

Thank you.

Kevin McCarthy, Bank of America.

Yes, good afternoon.

Just a question for Mike.

I was wondering if you could provide an update on your execution against your plans to increase store count in the US and Canada as you had outlined back in May in Dallas.

What have you done so far and how much do you see ahead for 2015?

Sure, Kevin, for 2014, we increased our store count by 35 in the US plus 17 -- I'm sorry -- 35 through acquisition and 17 new.

So that's a total of 52 plus 13 in Canada and then we also grew stores in Europe and of course with Comex they also added 174 concessionaires of which 32 of them were in the November/December timeframe.

For next year, we have -- for 2015 that is -- we have a count between 25 and 50 for the full year.

Great.

And then I guess a broader question.

On slide 5 of your deck, you illustrate trends by geography and it just strikes me that in Asia and Latin America you've had a very steady pattern of acceleration there.

I was wondering if you could provide a little bit more color as to what's driving that either by country or productline.

So page 5, in Asia, if we start there, Kevin, the big growth driver for us has been China and we've had a number of end-use markets that have continued to perform well for us, automotive OEM, the refinish business, the protective and marine coatings had good growth.

In industrial and businesses were segments like automotive parts.

So we have been well-positioned in Asia and in Latin America I would say the biggest trend has continued to be the Mexican automotive and industrial end-use market where we've continued to perform well and that's not including this Comex acquisition.

So let's call it the core or legacy PPG business in Mexico has continued to perform well.

The South American market has been a little spottier, especially with the currency weakness, but most of that growth in that region has come out of our core legacy PPG business in Mexico.

Great, thank you very much.

John Roberts, UBS.

Good afternoon.

How much of the pension cost increase is interest expense and how much is this mortality rate change and what triggered that since I don't think you've done that before?

It's about half-and-half between the impact of the interest rates and the impact on mortality.

The mortality tables do not get updated that often, but every several years folks that publish these things for corporate America do that and those came out in the fall.

Folks like Mercer and other consultants, they go back-and-forth with this thing and negotiate what they think the most reasonable assumptions will be and then they get published to the world.

And so that's why it's rather infrequent on that element.

The other element, the interest, is really based every year on the December 31 rate that's associated with a basket of debt securities that matches the maturity of our liability payouts to our participants.

And that rate, which is about 4.8% at the end of 2013, dropped to about 4% even at the end of 2014, which nobody would've expected at the beginning of last year, but that dynamic had an impact of $30 million of the $60 million of what we're looking for in terms of a headwind for 2015.

But that mortality rate change then will be an industrywide adoption that Mercer has now rolled out across most companies?

Yes, you're going to see that amongst a number of companies because we almost all of us use the same tables.

Okay and then, secondly, the specialty coatings and materials segment, last quarter, I think it was up -- not segment -- but the specialty coatings and materials SBU within Industrial Coatings, I think it was up double-digit last quarter and now it's mid-single.

Is that just a difficult -- more difficult comp that's there or what caused the deceleration there?

There was no deceleration.

I would say we have a variety of -- that's called specialty coatings products and optical products that are in some cases tied into the electronics material value chain.

So this can cause some lumpiness in terms of quarterly sales because of seasonal trends for equipment, electronic equipment and the like.

But there was no underlying business weakness issues.

It was just more of a seasonal pattern.

All right, thank you.

Frank Mitsch, Wells Fargo.

Hey, good afternoon.

It's Sabina Chatterjee in for Frank Mitsch today.

Just going back to the cash question, how should we think about the pace of the $1.5 billion to $2.5 billion program?

It's also a pretty wide range, so if you could just talk us through the factors that put you perhaps at the high versus low end, that would be great.

I think that if you look at the entirety of everything, we've always taken that balanced capital allocation strategy and we've said that acquisitions and share repurchase are really the two pieces of that and the allocation between those two will depend upon the acquisition pipeline and the pace of execution of that acquisition pipeline.

So in any given quarter, you might see more of one, less of the other.

We've said consistently that share repurchase will continue to be part of our capital allocation strategy.

So chances are we will be in the market on a relatively consistent basis on that element, but what might drive the number higher versus lower would be again at any time we might be in the market with share repurchase, but also could potentially have an acquisition come over the transom and reach completion in any given quarter.

As we also said before, we really don't have a limitation in terms of our cash domicile because we have enough tax-planning strategies to have the cash where we need it when we need it to execute this magnitude of returning cash to shareholders or doing acquisitions.

Okay, and then on that topic of acquisitions, you mentioned a pretty active pipeline.

Where are you seeing the greatest opportunities either by product or region?

Well, as you saw, Sabina, in 2014, we were fortunate that here in North America we were able to get a couple of smaller deals done in architectural and protective and marine coatings and then the big one here in the fourth quarter at Comex.

So I would say that we're still seeing discussions and opportunities in every region, maybe for different reasons, but many of these companies, the small to medium sized companies that have been the core acquisition targets, they are moved by, in some cases, either succession planning issues or concerns around market weakness and the like.

So for different reasons, we're seeing discussions going on around the world.

So I would say that we think -- as you saw after all these deals that we did in North America in 2013, 2014 and the announcement that we had in the fourth quarter around REVOCOAT, that's a European acquisition.

So I think that shows you that we're engaged around the world and I would say that the patterns probably will continue this year.

Okay, thank you.

I appreciate it.

Arun Viswanathan, RBC Capital Markets.

Great, thanks.

I just had a couple questions.

I guess first off, it appears that maybe one of the bigger risks that people are worried about here is Europe and in general industrial.

So maybe you can talk a little bit about both, first off general industrial globally and then also as it relates specifically to Europe.

For us, I feel that our general industrial business performed well in 2014.

Not every end-use market was as strong.

It depended on the region.

Most of the businesses were strong here in North America.

We had -- in Europe, you still had some growth in automotive and automotive parts for a number of our industrial businesses are still some of the strongest end-use markets.

Some markets specifically here in the US you see the construction market is stronger, so we've performed well there.

So I would say as we looked on for the full year of 2014, our Industrial Coatings or general industrial business did well overall even if not all the markets were growing at a consistent basis over all the regions.

And in Europe, we saw some weakness there overall in growth rates, especially compared to some of the other regions, but we've worked hard in Europe to become more productive, focused on our costs.

The automotive business in Europe hasn't been a strong growth market, but it has grown low single digit percentages and we've been able to take advantage of again our technology and service capabilities.

So we feel pretty good about the business overall and going into 2015 as well.

Okay, thanks.

And then on the performance side, just wondering about aerospace.

You've been clipping at higher single digits there.

Is there any -- what's the outlook given potential for deliveries on both the OEM side and then also for aftermarket?

And then if you have any comments further on refinish as well that would be great.

Thanks.

This is Michael.

We still see very positive trends in the aerospace business.

So I don't think that's going to change going forward.

Our refinish business, we had I would call mixed results.

The US was by far the strongest and when you look at the trends that are driving that to lower gas prices, that's a positive.

Unemployment dropping that's a positive.

Truck rate going up that's a positive.

More congestion that's a positive.

So I think we're going to continue to see good volume in our refinish business, but they are doing well in our light industrial and our commercial transport side.

So overall, we're still very bullish on both of those businesses.

Perfect.

Thanks.

Kevin Hocevar, Northcoast Research.

Good afternoon, everybody.

I'm wondering if you could provide us an outlook for your US architectural paint business either by channel or by contractor and DIY market for 2015.

Okay, Kevin, this is Michael.

I would tell you that if you start with the macro, we're looking at housing starts being up 100,000, so that should be a positive.

We're looking at the commercial market continuing to grow.

The backlog is still there with our commercial painters.

The dealer segment has been a declining segment, so we would expect that to decline 1% or 2% again.

The big boxes should have modest growth as well, so I think overall I think you can probably draw a picture of what that overall trend line looks like.

Okay.

And then just as my follow-up, you mentioned if lower oil prices are sustained, it could help stimulate EMEA growth.

I was wondering if you're seeing any signs of that at all right now in any of your productlines, maybe those tied closer to the consumer or is that more of just potential to happen down the road?

I think it's more a potential.

I think that's going to drive overall consumer spending if this continues.

The shortest term impact in our business directly, we do sell into the oil and gas business in a couple of our businesses, notably fiberglass for pipe or protective and marine has a component of their business, which is directly tied to the oil and gas industry.

We haven't seen -- in the fourth quarter, we didn't see any declines there for the most part, but we're watching now, sometimes maintenance rates actually go up a little bit during periods of lower activity.

But I would say we're watching that, let's call it limited exposure to that market and I think the longer-term benefits of these lower gasoline prices here or in Europe, we think they should start showing up here as we go through this year.

Certainly you're seeing it at the pump with the prices and that's going to keep more dollars in the pockets of the ultimate consumers and give them more opportunities to increase spending across many, many categories.

As you know in the coatings world, we're exposed to a broad range of end-use markets.

So we think that should be positive for us and the industry.

Okay, thank you very much.

Jim Sheehan, SunTrust Robinson Humphrey.

Thanks for taking my question.

In your commentary on industrial coatings, you mentioned consistent year-over-year global auto OEM industry growth for cash for the first quarter.

I'm just wondering is that consistent with the fourth-quarter trend or the 2014 full-year trend or if maybe you could be more specific.

Well, I think we feel that 2015 is shaping up similar to the growth rates that we saw in the fourth quarter.

Those were maybe slightly lower than the full-year 2014.

But we're still looking for a positive growth here in the US of North American market, China as well.

Europe is going to we think still grow, but at a very modest level.

So I would say it's closer to the growth rates that we saw in the fourth quarter.

Thank you.

What's your outlook for global industrial production that's in your assumptions?

3% to 4%.

Thank you.

Nils Wallin, CLSA.

Good afternoon and thanks for taking my questions.

Just on volumes in Europe versus earnings growth, one of the lowest volume growth regions, but obviously one of the biggest earnings growth regions.

Clearly you have taken a lot of cost out of that business.

Is that earnings growth entirely due to operating leverage or is there some other mix effect in there and can that continue to grow at that pace with provided volumes stay at these low levels?

Nils, this is Frank.

It's definitely primarily the operating leverage and in the slide deck, you saw where we stand in terms of the volumes versus where we were pre-recessionary levels and we're still high teens below peak levels.

So there's ample open capacity, capacity utilization capability in the EMEA region so that we can still accrete earnings at that 30% to 40% for every dollar to the bottom line.

Chuck made some comments on the general industrial business.

As that improves, as we continue to do well at high single digits in the aerospace business in that region and as things improve in the packaging sector, we also expect to accrete margins at a nice level because there is ample open capacity and good fixed cost leverage throughout 2015 and probably beyond.

Got it.

That's helpful.

And then just as a follow-up, more on M&A, certainly in the last year and a half, Akzo and Comex transactions were pretty unique opportunities immediately accretive, which isn't always the case.

How are you thinking about the opportunities going forward?

Do all of them also look to be immediately accretive and what's your appetite for maybe not having an immediately accretive transaction?

Well, I think a lot of the deals that we've been looking at are the small to medium-sized acquisition opportunities and there, depending on the levels of synergy, we can see accretive transactions and so that's not necessarily a hard and fast rule for us and it has certainly played out in these recent transactions.

But it just depends on what we feel is the best opportunity.

Many of them we think we should be accretive over that first year or two after the acquisition, but not always in the first quarter or so.

So we will continue to look at all of them, although we like the immediately accretive ones.

It makes the discussions go a lot easier with our shareholders and analysts.

Thanks very much.

Dmitry Silversteyn, Longbow.

Thanks for taking my call, guys.

Congratulations on the nice very strong finish to the year.

2015 I think as of January French law mandates the absence of BPA in food packaging and cans and things like that and this was an event that you and others in the industry have looked forward to.

Now that it's here, sort of what impact do you expect it to have on your European packaging business and your packaging business overall in 2015?

Dmitry, this is Michael.

As far as France, we are getting inside-the-can wins.

We are running commercial batches.

It is going well; the customers are pleased with it.

We also have BPA non-intent coatings commercially running in this space as well and those customers are happy as well.

So this is going to be a trend that's going to continue probably slowly.

It's not going to just jump right up.

This is an area that we gave up line time in 2014 so that we could position ourselves to grow as a once in a generation change inside the can.

As you know, we have very little share inside the can, so these are all positive moves for our packaging business.

I'm sure you saw that we had that positive volume in the fourth quarter as well.

So I think it's looking up for us.

Okay.

So to extrapolate Chuck's comments on 2015 being more like or possibly being more like the fourth quarter of 2014, should we expect stronger growth in the packaging business throughout the year as well?

I think we'll see continuing volume growth modestly throughout the year.

Okay, very good.

And then my follow-up question, broadly on EMEA, you've delivered very positive growth in the first half of the year.

It slowed down a little bit in the second half of the year, but you still came out a little bit ahead.

Is it possible for you given what's going on with the economy now and while you're waiting for the potential low oil prices to kick in to perhaps better economic activity later in the year, but is it possible for you to sustain positive volume growth in Europe in 2015?

Is that part of your expectation going in?

I think it is possible for us to have positive volume growth.

If you look at the GDP forecasts for Europe, they are not robust, but they are slightly positive so we can hope at this point to see positive volume growth.

We're going to really also closely focus on our costs and productivity in Europe going forward.

If we see the trends not improving as we've shown in the past, we will go after additional cost-reduction opportunities there or anywhere else in the world to keep this momentum going.

Dmitry, the only thing I'd add to that, Chuck is absolutely right.

The team over there is optimistic that we can look at modest growth consistent with 1% to 2% GDP industrial production projections over there, but keep in mind we're about 15 percentage points plus down on the exchange rate versus where we were last year.

Current rate is about 117 on the euro versus high 120s, low 130s last year at this time.

No, no, I absolutely understand the foreign exchange portion.

I was just looking at the price volume/mix organic growth.

Thank you.

Christopher Perrella, Bloomberg Intelligence.

Good afternoon; thank you for taking my call.

Could you outline your outlook for growth in the Mexican architectural paint market for 2015?

Christopher, this is Michael.

We're looking at the economy growing between 3% and 4%.

We have higher expectations than that for our PPG Comex business so I think you could probably take 1.5 times that, as much as even 2 times that.

We're really seeing that they've done well.

And how much of the synergies have you already captured with the Comex acquisition?

It's very small.

We said we'd get $30 million to $40 million and we fully anticipate getting all of that.

Thank you very much.

Richard O'Reilly, Revere Associates.

Thank you, gentlemen.

Two quick questions, both follow-ups.

The first is on the raw material comments, that was a good explanation you gave, Vince.

On the basket of goods, the other 80% of that, how much would be tied to like diesel fuel for shipping, resins for packaging?

I mean there must be great opportunity for savings there.

Rich, our freight costs for the corporation are somewhere between 7% and 10% of our total cost bucket.

A portion of that, just a portion of that is diesel-related.

We do expect diesel prices to roll through the transportation bucket at some point, but it's a portion again of 7% of our total cost bucket.

We also have another call it mid-single digit percentage from packaging materials.

Some of those are oil-derived; some of those aren't.

Again, as Chuck mentioned, as we get further and further out from the oil wellhead, some of those take much longer to work their way through the system.

Okay.

And the second question is I think you still own a piece of the Auto Glass venture and the equity owners must have owned it now for several years.

Do you know of any change in their thinking of their ownership structure?

This is Michael.

We sold 62% of that on September 30, 2008.

We did sell a small portion of that, the insurance and services business earlier this year, which we did net out a gain.

Right now, our partner is Kohlberg.

They continue to look at everything.

I would tell you it is business as usual.

But the sale was actually in 2014.

For the insurance and services.

For the extra, okay, fine.

So business as usual.

Good, thank you for those answers.

I'd now like to turn the call over to Vince Morales for closing remarks.

Thank you.

Once again, we'd like to thank everybody for their interest in PPG.

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

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Thank you.