PPG Industries Inc (PPG) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2015 PPG Industries earnings conference call.

My name is Chris and I will be your conference moderator for today.

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

At this time I would now like to turn the conference over to your host for today, Mr. Vince Morales.

Sir, you may proceed.

Thank you, Chris and good afternoon, everyone.

Again this is Vince Morales, PPG's Vice President of Investor Relations, Treasurer.

Appreciate your continued interest in PPG Industries, welcoming you to our second-quarter 2015 financial results teleconference.

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

Our comments related to financial information released Thursday, July 16, 2015.

I will remind everyone that we post detailed commentary and relating presentation slides on the Investor Center of our website at www.PPG.com.

These slides are also available on the webcast site for this call and provide supplemental support to the opening comments Chuck will make shortly.

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

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

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

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

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

The Company has provided in the appendix materials from the presentation -- which are, again, available on our website -- reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures.

For additional information please refer to PPG's filings with the SEC.

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

Thank you, Vince; and good afternoon, everyone.

I want to thank you for your continued interest in PPG.

Today we reported record second-quarter 2015 financial results.

This included record second-quarter net sales of $4.1 billion, an all-time record adjusted earnings per diluted share from continuing operations of $1.67.

Our adjusted earnings per share in the second quarter were up $0.25 or 18% versus the prior-year record.

Year to date our compounded adjusted EPS is up 20% over prior year, which is on top of our compounded EPS growth rate the past three years of about 25%.

This consistent and continued performance reflects the benefits of our portfolio transformation, the tangible customer benefits from our leading products and technologies, our continued diligence on aggressive cost-structure management, and the measurable benefits from our ongoing cash deployment.

Overall, I am pleased with our consistently strong financial performance as we continue to manage through inconsistent economic conditions in the major global regions and in the various end-use markets we supply.

In the second quarter our aggregate Company sales volumes grew 1% year-over-year, similar to the first quarter, reflecting modest global economic growth.

Regionally, in comparison with last quarter our growth rates improved in Europe and the US, moderated in Asia, and remained unfavorable in South America.

From a segment perspective we achieved all-time-record segment income in both Coatings segments, and our Glass segment delivered the largest year-over-year earnings improvement.

This record business performance was despite significant currency translation impacts to sales and earnings stemming from weakened foreign currencies.

These currencies, principally the euro as well as others in the Americas and in emerging regions, unfavorably impacted our sales by about $320 million or more than 7%, and reduced our pretax earnings by $40 million or about $0.11 per share.

Absent the foreign currency impacts, our adjusted EPS would have been up 25% year-over-year.

Based on current foreign currency exchange rates, we expect the unfavorable foreign currency translation impacts to moderate beginning in the third quarter, as foreign currencies begin to weaken in the second half of 2014 and due to the seasonality of our businesses.

Given these factors we now expect currency translation to reduce our full-year sales by $1 billion and pretax earnings by $100 million.

These ranges are slightly more favorable than our prior forecast, as we lowered the projected unfavorable currency translation impact on sales by about $100 million and on pretax earnings by about $10 million.

Contributing to our record Coatings segment income in the quarter was volume growth in several of our businesses, including automotive OEM, packaging, and automotive refinish coatings.

We grew at or above industry growth rates in these businesses, driven by customer adoption of our leading technologies.

In addition, we have maintained our aggressive operational and cost focus, as we achieved lower manufacturing and SG&A costs year-over-year.

To that end, we initiated an additional proactive restructuring plan targeting further systemwide productivity and cost-reduction actions.

We anticipate full-year savings from this program of $100 million to $105 million when fully implemented in 2017, with $15 million to $20 million of these savings expected in 2015.

Cash deployment was also a significant driver of segment income growth in the second quarter.

This includes sales and earnings from our recent acquisitions of Comex and several smaller companies.

Let me comment quickly on Comex.

We remain very excited about this acquisition.

The performance of the acquired business over the first eight months has been excellent.

The business's sales grew organically by a high single-digit percentage in the quarter versus the prior year pre-acquisition quarter; and we remain on track for full-year high single-digit percentage organic sales growth.

During the quarter we increased our initial Comex cost synergy targets and now expect to achieve $45 million to $50 million in annual run-rate savings by the end of 2016.

In addition, we announced new acquisition-related revenue synergy targets, which include capitalizing on the extensive Comex Mexican distribution platform for legacy PPG Industrial and Performance Coatings products and further leveraging the Comex and PPG participation in Central America.

Simply stated, both strategically and commercially Comex remains well ahead of our original expectations.

We also announced or closed several other acquisitions during the quarter.

In addition to acquisition spending we deployed $150 million of cash in the quarter for the repurchase of 1.3 million shares of PPG stock.

We remain committed to and on track with our previously announced earnings-accretive cash deployment targets.

Year to date we have closed or announced business acquisitions with an aggregate purchase price of about $400 million, and we repurchased $350 million of PPG stock.

Looking ahead, we anticipate global economic growth to continue but to remain uneven.

We are working to continue to capitalize on the modest growth, aided by our global footprint and participation across each of the major Coatings product categories.

Additionally, we anticipate increased financial benefits from a lower cost structure and higher earnings leverage on incremental volume growth.

In summary, we once again delivered record financial performance in the quarter.

This performance was broad-based across segments and regions as customers continue to adopt our leading products; and our strategy execution and cash deployment are yielding benefits.

We remain focused on operational execution and aggressive on cost management.

Finally, we expect disciplined earnings-accretive cash deployment to continue.

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) David Begleiter, Deutsche Bank.

Chuck, just on the gross margin in the quarter, can you talk about the year-over-year growth maybe?

I had a little bit higher assumption; I know a lot of things go into it.

But talk about the benefits you see from raw materials.

And should we see a bigger gross margin expansion in Q3 versus Q2?

Well, as we stated, David, volume growth has still been muted.

We are still seeing positive growth across the regions and businesses; but as we've talked about, we have some uneven performance across both regions and businesses.

So volume growth has not been as high as a full economic expansion would deliver.

Raw material costs, as we've stated, are modestly lower than the previous year.

So we are talking about low to mid single-digit decreases depending on regions.

And combined with other cost inflation and modest volume growth, we are seeing accretion in margins across all our segments.

So we're pleased with the performance, but again we're looking for a little more consistent economic performance and currency stabilization to deliver higher volume growth as we go through the year.

Understood.

Chuck, there's been some discussion over China auto decline rates, that market slowing.

Discuss your exposure both in China as well as via exports to the China auto OEM coatings market.

Well, China remains -- it's the largest automotive OEM market in the world.

Builds are still expected to be over 20 million this year and have growth.

We've seen -- over certainly the first quarter we were talking about 7%-plus kind of growth rates for the full year, and we saw that in the first quarter.

We saw those growth rates moderate a little bit here as we went through the second quarter.

So now as we look at some of the forecasts for the full year, we are still looking for solid volume growth in builds in China, but more in the area of 3% to 5%, maybe -- not at that 7% level that we came into the year with.

We've continued, as you know, to outperform in terms of volume growth, and we're still optimistic globally on the automotive OEM market.

We've seen very solid performance here in North America, continued strength.

And we are also seeing, especially in Western Europe as part of our EMEA region, we've seen a return to growth here in the first half.

And we expect that trend to continue in the second half of this year.

So we remain optimistic about and quite positive on the global OEM automotive market, even if we have pockets out there like Brazil or Russia where we've seen lower builds here in 2015.

Thank you very much.

Frank Mitsch, Wells Fargo Securities.

Good afternoon, gentlemen; and I guess congratulations are in order.

Congratulations, Michael, on the move up; and congratulations Chuck on the pending retirement.

Obviously a hell of a run, a hell of a decade run as CEO.

And of course, Vince, congratulations on your recent promotion.

And Frank, congratulations on these results.

I think I pretty much covered everything there.

One of the things in looking through the release that I didn't see was any mention of weather impacts on your North American architectural coatings business.

Did you notice any material impact due to the above-normal wet weather?

And what impact may that have come Q3, Q4?

Frank, this is Michael.

First of all, appreciate it.

Second, Chuck is not going anywhere, so don't be so quick about that comment.

I would tell you that overall the performance in architectural, you saw our comments about low single digits.

We do have some impact from weather.

It would be highly speculative for us to try and tell you how much that was.

We were pleased: our DIY business did have a good quarter.

And I would tell you that at this point hopefully things from a weather standpoint will get better.

But we do run a global architectural business, and I tell our team we have -- where you might have challenges in one area you probably have opportunities in the others.

So all in all I am pleased.

All right, terrific.

That's helpful.

Also staying with the North America, you mentioned packaging was a fast grower; auto OEM was among the faster growers.

But auto refinish was also mentioned as getting strong growth.

Can you talk a little bit more about what you are seeing there?

What's driving that and where do we go from here?

Frank, I'll take that.

I think one of the key indicators for growth in the automotive refinish business is miles driven.

So we had -- I think with these lower gasoline prices here and around the world, especially in North America, you are getting higher miles driven and that is helping this business.

We also had some of this weather that -- if we talk about in the first quarter we had a severe winter, the second quarter some of this rainy weather, it does -- it will drive additional economic growth.

And our business has continued to perform very well across all of the different distribution channels and collision shops.

Our team, especially with the water-based technologies and those continuing conversion rates where we feel that we have industry-leading technology, that's continued to drive our growth in the business and help us maintain a leading position.

That's very helpful.

Thanks so much.

Bob Koort, Goldman Sachs.

Thank you and my congratulations as well.

Chuck, I wanted to ask a little (technical difficulty) you have a chart in there that Vince and team put together showing the volume changes sequentially (technical difficulty) Latin American (technical difficulty) piece in particular is really quite jarring.

Do you think this is a one-off issue?

Are there particular end-markets that maybe went into the stinker here?

And what's the outlook as you look forward for volume in those emerging markets?

Well, we have, I would say in this chart -- if you look at the deceleration of some of the growth, I mentioned a couple of the markets that were unfavorable.

All of South America including Brazil was unfavorable in terms of volume.

You had several other emerging markets, and I gave the example of Russia as an example, where we saw a contraction here in the first half of the year.

I would say that our volumes in China in India continue to be positive, although we have seen -- with this discussion on automotive OEM and a few of the other industrial markets, we've seen positive volumes in China but certainly not at the level that we had last year.

So I would attribute this more to the negative growth in a couple of emerging regions.

But China was also lower overall, especially on the industrial and construction related side.

You had mentioned some changes in raw materials.

I was wondering if you could talk about what's gone on in pricing.

Are there any extremes in your pricing, or is generally flat pretty accurate across the entire portfolio?

This is pricing of the raw materials we buy, or the pricing on our end-use markets?

Yes, I guess I'm more curious about your big, tough, mean procurement guys on the customer side seeing what's happened in deflation and maybe asking for their pound of flesh.

Oh, well as we've talked we are trying to make sure that we are getting the benefit of any raw material declines here in our Coatings raw material space.

As I mentioned, costs overall have come down in raw material costs; and we continue to have these dialogues, because as we went through the second quarter what was happening is we had oil prices coming back up as we started the second quarter and moved through, but recently over the last few weeks to a month we've seen now those trends reversing.

So we continue in active discussions with our raw material suppliers.

We expect them to share that throughout their value or customer chain.

So we are looking for benefits to continue and potentially get a little stronger as we go into the second half of the year.

And Bob, on our selling prices to our customers, as you saw in the presentation materials we've had flat selling prices, which was our base case coming into the year.

There wasn't much on the way either side of that for any big customer group or any big business differential.

So flat pricing is what we predicted and that's pretty holistic through our portfolio.

Thanks very much.

Gansham Panjabi, Robert W. Baird.

Good afternoon.

It's actually Mehul Dalia sitting in for Gansham.

In packaging would you say growth momentum has accelerated for you?

And do you have any customer feedback that you can share on your non-BPA offering as it relates to Europe?

This is Michael.

Our packaging business continues to accelerate, with wins both in the US as well as Europe.

And it's being driven by our new technologies, so our BPA-free technologies.

The customers are quite pleased with the new technology as we roll it out.

Great.

Thanks.

What do you estimate the market growth was in Mexico year to date?

And can you split your Comex sales growth between comparable stores versus maybe new stores by concessionaires year to date?

Sure, let me just tackle Mexico.

The GDP and Mexico has declined moderately.

It's close to the 2% range versus where they originally had it closer to 3%.

Our business, as you saw in the commentary, growing high single digits.

We've opened up 80 new concessionaire locations already through the first six months; we have a target to open up 170 locations.

So we are certainly growing quicker than the market.

We've also launched some new products that we think will also be very favorably received in the marketplace.

Then in Central America we've launched Glidden in a number of locations in Central America that have also been favorably received.

So we're happy with what we see there.

Great.

Just one last one.

In the release you called out early 2Q weakness in Industrial Coatings.

What do you think was behind that?

And how are volumes in Industrial Coatings as a whole trending in 3Q thus far?

The biggest challenge in Industrial is the heavy-duty equipment market.

I think we called out that it's down low double digits, so that's a challenge.

I would say the rest of the business is doing relatively well.

But that's an area that we are paying close attention to.

Thank you.

P.J. Juvekar, Citi.

A question on your Lowe's business.

As HGTV paint was introduced by Sherwin, has that had an impact on your sales at Lowe's?

P.J., as you know it's difficult for us to comment about a specific customer like that.

We did call out that we had positive low single-digit comps in the DIY segment.

We have very strong relationships with all our DIY customers, and I would say there were no surprises in the second quarter.

Okay.

Thank you.

Then Henan Billions is producing chloride TiO2 that's based on your technology; but I guess there are some reports that people are saying that maybe that technology is not working as well as people thought, and the plant is not running at full rates.

I was just wondering if you could give us some color on that.

This is Michael again.

I'm not sure where that is originating.

I will just tell you what we know.

The plant is mechanically complete.

All phases of the plant have been operational.

We have samples from the plant, and both in China as well is in the US we are fully working with them.

We think the plant will be producing regular commercial-grade sometime late in the second half of the year.

And I would tell you we are on target with everything we've projected so far.

Thank you, Michael.

Arun Viswanathan.

Thanks and congrats to all of you as well.

I wanted to, I guess, delve into the North American architectural business a little bit more.

You cited low single digits, but weakness in the dealer channel.

So was your stores business up mid single digits?

And was it -- are you starting to see some benefits of the overhaul and restructuring over the last couple years and potentially some share gains?

Arun, I would tell you that our stores were in the low single digits.

The dealers in the first quarter were up and in the second quarter were slightly down; so through the first six months the dealers are actually positive.

We are doing slightly better than that in Canada.

I would just say that we certainly don't want to spend a lot of time talking about the weather, but it certainly was not helpful at all.

Arun, the dealer channel is our smallest channel, so on an averaging affect it has the smallest impact on the total business.

Okay, thanks.

What about the share gains?

Any thoughts on if that could continue, or if you saw any of that?

Or how do you look at the contractor channel?

Are you guys getting any uplift there?

I don't think there's been any meaningful share change in that regard.

Okay.

Then final follow-up, I guess in Europe you had some comments that you did see some slightly better sequential improvement in architectural.

Maybe you can just help us understand what's going on there, and then also in your Industrial businesses in Europe.

Starting with architectural, France is our largest market, so our retail business in France has now positive comps; however, our larger trade business has negative comps, but much less, so it's getting back almost near flat now.

Strong performance in the UK and Ireland.

And although the Benelux was flat in Q2, we did see a noticeable pickup starting in late May, so I would say that's good.

Central Europe was also -- had solid growth.

As far as the Industrial businesses, we've already talked about automotive doing better than the builds.

So that was a positive comp for us.

Anything else on general industrial in Europe?

General industrial, I would call that relatively flat.

No significant positives or negatives that I would call out.

Okay.

Thanks.

Nils Wallin.

You noted strength in protective and marine globally, but obviously also you saw some gains too in the US, so it's kind of a two-part question.

Since you didn't break out it between protective and marine is it right to assume that it's mainly coming from the protective side?

And then the second part -- unfortunately a weather question -- is: how is it doing so well in North America, given the weather impact that probably had some negative comps for you?

Nils, this is Michael again.

On the protective side, yes there's more wins on the protective side than the marine side.

But our China business did very well on the marine side, so nice wins there.

Overall in the US and Canada good strong wins on the protective side.

Also I would tell you we have launched a number of new what we call advantaged products in fire protection; as well as you know we did the Hi-Temp Coatings acquisition earlier this year.

That has also driven some growth.

We've been able to leverage that globally as well.

So overall even though the oil business is down, net-net we are up in that segment.

So we're pleased with how we are performing in that regard.

Nils, the only thing I would add to that is in Europe also a decent performance.

There's some additional drydock work taking place in some of the ports in Europe, so that had some sequential and year-over-year improvement too.

Okay, got it.

Just more, I guess, a question for Frank.

It sounds like this year you've already done around $750 million or so in the cash deployment.

Does that mean that $1.5 billion to $2.5 billion, you are halfway there?

Or is this $1.5 billion to $2.5 billion you're talking about incremental to the $750 million you've already done so far?

We still want to maintain that guidance of $1.5 billion to $2.5 billion for 2015 and 2016 combined.

I guess what we would say is we've closed or announced $400 million in acquisitions so far.

There's still additional pipeline there, so I anticipate more activity over the next 18 months.

I've done $350 million of share repurchase.

So as you say, closed, announced, or repurchased $750 million.

The guidance we would give is, the overall guidance is still in place but we would expect at a minimum to achieve at least that midpoint of that guidance for the two-year period.

So we are very comfortable with where we are.

Continued good pipeline in the M&A space, and also that share repurchase will continue to be a part of our capital cash allocation strategy.

So we are pretty comfortable the guidance and off to a good start on that.

Sorry, if I may, is the pipeline levered or exposed to any particular market more than any other?

There are a variety of opportunities across the regions and across our portfolio, as you can see with some of the things we did, closed or announced so far this year.

That runs the gamut between our various businesses and it's taken place in a couple of different, regions, so we have a pipeline that really spans the globe and spans the different segments.

Great.

Thanks a lot.

Jeff Zekauskas, JPMorgan.

I'm surprised that your gross margins aren't higher in that your cost of goods sold is down about 1% for the year in the quarter, and you would think that with your raw materials down low to mid single digits you would be doing better than that.

If you compare your results to your Cleveland competitor, I think their gross margin expanded 250 basis points.

Even if you make some adjustments for acquisitions and you go back a year, you still see a much larger gross margin progression.

Is that the right way to look at it?

Are there advantages to being in North America and if you are more global you have some impediments?

Are you satisfied with your gross margin?

Jeff, I will take a stab at that.

Again I think from our perspective we are trying to drive continuous improvement in all of our financial metrics.

This year, unlike most years, we have a lot of puts and takes in our numbers.

We have a very large acquisition; we have a lot of currency differences on both sales as well as cost of sales.

You alluded to some changes in raw materials.

So we've got a lot of puts and takes.

So I don't know that -- a comparison gets year-over-year gets really difficult without each of those buckets.

We are not displeased with our performance.

We certainly like to be as profitable as possible, but we do feel that we are executing very well operationally as well as commercially on the sales front.

I think if you look at the what we call our EBIT margin, (technical difficulty) margin as you know we referred to it for the business overall, we like to focus on that ROS, that business operating ROS.

And if you look at it that way we are over 150 basis points better Q2 over Q2.

It's really a combination of a number of factors, whether it be all the inputs in the cost of goods sold, some favorable, and of course we do have some annual modest improvements in salary and wages across the globe; some good manufacturing productivity improvement; G&A improvements; some benefits from the acquisitions that we've done; as well as some currency headwinds that Vince referred.

But overall when you look at the overall ROS for the business, a nice improvement.

There are some puts and takes between COGS and SG&A, but on balance pretty pleased with the improvement.

Then secondly, last year in the first half your North American business was maybe up a order of magnitude 5%; and this year it's roughly flat.

What is it about North America this year that is so much weaker than North America last year in the first half?

I think, Jeff, you have -- we continue to improve within automotive OEM, but not at the same acceleration.

It continues to be positive, so that is one of the businesses continued growing, but not at overall the 5% level.

The other, as we talked in the release, Jeff, general industrial was much more benign this year than it was last year.

And we did -- this is a Q1 (technical difficulty) but we did have some architectural pipeline fills last year for new product wins last year that we are maintaining this year, but the pipeline fills or stocking for our customers did not recur.

So do you think this is a 1% volume year for PPG?

Or do you think that you can do -- are business conditions improving, or are they steady-state?

I would say the businesses are steady-state.

There's still positive economic growth here.

We have talked about some of the weakness in the overall market, in architectural due to some weather events here in actually the first half, not just the rain in the second quarter, whereas most of the underlying economic indicators are still positive.

So we have maintained a positive outlook for the second half of the year.

And I think you will see continued volume growth from us here in the US and Canadian regions.

Remember too there's one other minor factor too, and it's in the Glass business, which is impacting that 1%.

It's (technical difficulty) that we sold our Mt.

Zion facility.

As you can see the mix is greatly improved in that business; so even though the volume and the top line is lower in that business, the profitability is greatly improved.

So that was not a huge factor, but a factor contributing to that year-over-year change in the growth rate.

Okay, great.

Thank you so much.

John Roberts, UBS.

I'll add my congratulations as well, Mike; and thank you, Chuck.

Frank, you just mentioned the Glass business.

Again the volume was down due to the plant closing, but it didn't seem to be affected much by weather.

Given that's a US OEM construction business I would've thought it would be one of the most affected businesses by weather.

Again, we are running at decent utilization levels, so profitability greatly improved.

One plant coming out of the system; mix has improved -- and that's with commercial construction still not back to levels pre-financial crisis.

So very optimistic about the way the business looks for the rest of the year.

And looking forward, if we can get continued improvement on the commercial side that business should continue to perform well.

(multiple speakers)

Not as sensitive, John, to weather as paint is.

You can still put up glass in inclement weather.

Okay.

All right.

Thank you.

Actually, could you give us a little granularity on the auto OEM paint strength?

Either, is it largely more new wins, or is it better sellthrough of previous wins?

Or any regional color that you can give us on the outperformance there?

We've continued to do well in our regions here, and in Greater Europe as well as Asia.

I would say that here it is more overall market growth, which has continued.

In Europe, especially in Western Europe, you've seen growth of what we would call some of our customer base, especially among a broader base of the European manufacturers, than we have been seeing over the last few years.

And we have good exposure across all of the manufacturers in Europe, so we're seeing some improvement in some of those European-based manufacturers.

The French and Italian manufacturers in particular, they've had a better performance.

In China I would say there we continue to win more than our share of new plant startups in China especially.

So that's where we've continued to outperform the market.

And that is more technology driven, the new compact processes that we've talked about over the last few years.

The Chinese market -- both the domestic manufacturers and the global manufacturers in China -- are starting new plants with the most modern technologies, up to date.

And this is where we are best positioned.

Okay.

Thank you.

James Sheehan, SunTrust, Robertson and Humphrey.

Thank you and my congrats to everyone as well.

I was just wondering about the slowdown that's occurring in emerging markets.

Do you expect this to impact growth in aerospace in the near and medium term?

James, this is Michael.

I don't think that's going to have a material impact.

Certainly the general aviation market isn't helped by the challenges in Russia or China, two markets that were starting to emerge to buy general aviation planes.

But overall the aviation industry is doing quite well.

In fact they are returning their cost of capital.

Right now their profitability is up, and people are traveling.

So I would say that is not going to be a material impact.

We also did see a decent growth in Asia-Pacific region aerospace in the second quarter.

In addition to that, one of the things that (technical difficulty) continued to drive our performance are some of the new technologies that we are deploying out to some of the major aircraft manufacturers.

I would add for a final comment that we do have another acquisition that closed July 1, Cuming Microwave.

It's a business that does classified defense products for radar evading for both airplanes as well as land vehicles.

That will be a contributor to the business in the third quarter as well.

Great.

You noted some positive impact from working capital in the second quarter.

Can you just comment on where you see working capital in the second half?

We continue to focus in on a couple of key areas.

One, past-due receivables: we are making some good progress there.

But more importantly in the area of supply chain efficiency and inventories we saw several days' improvement on the Performance Coatings space in the first half and we have some additional improvements that we have targeted for the back half of the year.

So I think it's safe to assume that we will continue the progress that we've made in the first half in the back half of the year and expect that to continue to improve, because we still know there's a little bit more in terms of number of days in the cash conversion cycle that we can improve on as compared to peer group.

Jim, we've had consecutive years of 100 basis point improvement in our operating working capital, and that's our target again this year.

We've made some improvement but we're not where we want to be by year-end.

Great; thank you very much.

Vincent Andrews, Morgan Stanley.

Thanks very much.

Just one question for me.

Would you mind breaking out the FX impact to gross margins in the quarter?

From an FX perspective we had $40 million of negative EBIT in the quarter, pretax EBIT.

Most of that is going to be in the COGS line.

There's some offset in the G&A line within the regions.

But since we make most of the product where we deliver it, the vast majority of that impact, that $40 million to the bottom line, is going to be in COGS.

Okay, great.

Thanks very much, guys.

Don Carson.

Just going back to FX in the interplay with ROS, so FX is about $0.25 year to date, if I add up the first two quarters.

Are you still thinking it's going to slow down in the second quarter and maybe be $0.35, $0.40?

And from a ROS standpoint, you had mentioned in first quarter you didn't see much ROS benefit as you worked down high-cost inventories.

What benefit did you see in the second quarter?

And as that accelerates in the second half, what sort of multiple would you expect that to be of the FX hit?

So Don, just sticking with the currency translation, we had our biggest impact we believe in Q2, for multiple reasons.

One, it's our highest quarter seasonally, especially in architectural Europe; and secondarily, the currency rates began to weaken last year -- the euro began to weaken last year and other currencies in Q3.

So if you will, the comps currency-wise are a bit easier in Q3.

Seasonality is the bigger factor there.

So we do expect moderation from the second-quarter level in the back half of the year.

And in Q4 the euro was markedly down versus Q3 last year.

So again, weakening euro and other currencies last year give us reason for moderation going into the back half of this year.

Frank, I don't know if you wanted to comment on that as well?

That's under the assumption that the rates stay where they were at the end of Q2.

They weakened a little bit this morning, based on some of the news out of Europe.

But under the assumption that they stay where they are, we expect sequentially an improvement both in Q3 and Q4.

And on your raw material question I think Chuck mentioned earlier that we saw some benefit in Q1.

That benefit expanded a little bit in Q2, and we expect a modestly improved benefit in Q3 and Q4.

Okay.

Then just a follow-up on acquisitions.

What's been the average (technical difficulty) EBITDA that you've been paying?

And how has that changed over the last year?

Are you seeing more competition for these properties and thus higher purchase multiples?

Well, I would say that the purchase multiples for our deals, they do vary depending on growth rates, region, performance of the business.

I would say that on average this year we have not paid at the same level as we paid last year, as an example.

We did pay, as you know, the announced multiple of around 11 for Comex, pre-synergies and this year as these are smaller deals in various regions.

So I would say the multiples are around the same over the last 18 months or so.

It's again somewhat dependent on where we finish -- I mean the types of deals and what are the quality and size of the business.

Thank you.

Eugene Fedotoff, KeyBanc Capital Markets.

Your European volumes were up 2% year-over-year, and in the past you commented on incremental profits or incremental margins for Europe, given that you took some costs out there in the past couple of years.

I was wondering if you can provide similar color for this quarter.

We are still holding to the general guideline that incrementals on European volume in the 30% to 40% range.

That's really because of plenty of headroom in terms of the manufacturing capacity, and with not only steady but generally reduced SG&A levels as we complete our restructuring program around the globe.

So that 30% to 40% is still a pretty good rule of thumb.

All right, thanks.

Then just a follow-up on the Protective Coatings in North America.

I don't know what your exposure is -- like if it's significant, probably not -- to the I guess oilfield market.

Or are you seeing any decline in the served markets due to the lower oil prices in North America and globally?

Yes, certainly the oil market is softer; but the beauty is that we've been able to capture share in that segment, and that has been a positive for us overall.

We do see oil weakness in Colombia, Mexico, Russia, some other places as well; but net-net this has been a good market for us.

Got it.

Just a last follow-up on Comex sales growth, high single digit in the quarter and year to date.

So it sounds like you should be -- or is that the right expectation, you should be towards the higher end of your mid to high single-digit sales growth guidance?

I'm sorry --

Could you repeat the question?

I'm sorry.

Sure.

Given high single digits and Comex sales so far, I believe you said you expected sales to grow mid to high single digits for 2015.

So was it fair to assume that it's likely going to be at the high end of that guidance?

I would tell you that historically what we told people we would grow 1.5 to 2.0 times GDP.

We are outperforming that right now.

I am comfortable that the team will continue to perform at the upper end of that guidance.

Just as a reminder for everybody, the seasonality of the Comex business, architectural Comex business, is a little different than the seasonality of our US and Canadian businesses.

For us what we said is Comex is about 20% in Q1, 25% in Q2/Q3, and 30% in Q4 in terms of their sales phasing.

And that again is different than the US/Canada business and Western European business we have.

Thanks a lot.

(Operator Instructions) Christopher Perrella, Bloomberg.

Thank you and congratulations to everyone.

Quick question on the China business.

With Asian volumes mixed but up, were there any end-markets where you saw declining volumes in the quarter over in Asia?

Could you repeat the question?

Any of the --?

Were volumes down in any particular Coating end-markets in Asia in the quarter?

Coatings end-markets?

Heavy-duty equipment in our industrial business was down, as we alluded to.

Electronics again in our general industrial business was flattish.

Those would be two markets that were on the weaker side of the spectrum.

What was packaging demand in Asia for you guys in the quarter?

Was it up, in line with the market, below-market growth?

Every one of our businesses was up at a minimum mid to high single digits.

Every one of them that feed into packaging (multiple speakers) market.

All right, great.

Thank you very much.

Robert Reitzes, Broad Arch Capital.

Just trying to piece everything together.

This is -- I want to ask a question.

It sounds to me like Europe is going to be better in the third quarter; US should be at least where it is or maybe a little better; and Asia will be better, but at a less of a growth rate.

Is that what I heard you guys say?

That's the first part of my question.

I think that's a fair characterization, Bob.

Okay.

The second part is that you should -- that currency will not hurt you as much in the third and fourth quarters as it did in the past; so maybe you get able to bit of a tailwind.

Even though currency was still hard, but you get maybe a little bit of a tailwind from currency moderation; is that fair?

Yes, it will still be a headwind in absolute terms on a year-over-year basis, but less so than it was in Q2.

So Q2 is the peak headwind; Q3 less so; and Q4 will be less so just based on the sequential year-over-year comparisons based on the euro.

Of course that also depends on the fact that currencies stay about where they were or they are now.

If it continues to weaken significantly, it will be more of a headwind.

But we still think that overall Q2 will be a peak quarter and it will improve sequentially after that.

So when you take a look at the one other business that people have been nervous about -- and it sounded to me like Chuck was more optimistic -- is that people have been a little bit more nervous about auto sales in China or auto builds.

It sounds to me even though you're looking for less growth, you're still looking for 3% to 5% instead of 7% in China in the back half of the year.

Is that also fair?

Yes.

I think for the full year we are looking at a mid single digits, so certainly down from 7% right now.

3% to 5% for the year we think is good.

We've seen a few blips in the Chinese market over the last few years, but we think it will still be positive for this year.

Okay.

One last question, just putting the whole thing together.

Do you think if where you are today versus where you were at the beginning of the year, is Europe where you thought it was, better, or worse?

Just making sure we understood the question, Bob.

You said is Europe?

If we would have -- at the beginning of the year when you are looking at your forecast for Europe, or what you thought the tone of business was, you had a view then.

Right now is your view that business is better than what you thought in the beginning of the year, worse, or about as you thought in the beginning of the year?

Well, I would say on balance it's slightly better.

It is better in automotive OEM, and actually there was some improvement in automotive refinish.

The construction markets, especially the big one we have in France, have really not started to move.

So I guess maybe that's meeting our expectations but net-net I would say the automotive business is a little bit better.

And as we seen here in the recovery in North America since the Great Recession, it was really led by the automotive business.

So now I'm a little more positive as they have a weaker currency, lower oil prices, a lot of quantitative easing.

So we are net-net more optimistic about Europe, but the businesses we are seeing the most tangible improvement are the automotive.

Okay.

Thanks very much.

Dmitry Silversteyn, Longbow Research.

A lot of my questions have been answered already, but I would just like to follow up on a couple of points, if I may.

First of all, getting back to the raw material pricing and the discussion that you've offered in the answer to the previous question about (technical difficulty) coming back and maybe asking you to share in some of the bounty that you're seeing on the raw materials side, it didn't sound like that was something we should expect in the second half of the year.

If we assume that raw materials stay at these levels and oil prices they at these levels, is it likely that pressure from customers is going to get more intense in the industrial markets in 2016?

Or do you expect to operate in the benign environment where you get to keep all the benefit you've realized to date on the raw material prices?

Well certainly I can add that we don't anticipate that we will keep all of the benefits.

Typically as we have discussed, whether price is on the way up or on the way down, we usually wait for a quarter or two as these things settle down and we fully realize either the impact of raw materials on the up or down side.

Those are usually shared through the value chain or supply chain with our customers.

So we are in regular dialogue now with the suppliers and with the customers, so we do not expect that we would keep all of the benefits from raw material changes.

Again, Dmitry, our raw materials are down modestly, low single digits.

So just to be clear on that number.

And there are other factors that go into our pricing too, like different kinds of value-added formulations, new products for our customers, as well as there are other cost inputs associated with labor and other non-labor items.

So over all as Vince said before, flattish environment overall for pricing.

That was the case in the previous couple quarters; we expect that for the rest of this year and probably into the first half of next year.

Okay; very good.

In (technical difficulty) we're going to get it in the 10-Q, but just for modeling purposes, can you update us on what the CapEx spend was in the quarter or for the six months?

We had in our presentation materials total for the year about $160 million with about $90 million in Q2.

Okay; helpful.

Then just a general question.

You talk about the incremental leverage that you will be able to obtain after having (technical difficulty), particularly in Europe but also in other geographies as you've integrated acquisitions and (technical difficulty) capacity out (technical difficulty) rationalize your footprint and so on.

I guess my question is (technical difficulty) growing (technical difficulty) volume.

How do you actually drive margin in your businesses to a higher level?

I understand incremental margin, but you need volume to get it.

So if you are growing at 1% to 2% is that going to be enough for you to drive the margin to generate earnings growth of midteens, let's say?

Just to make sure -- I want to make sure I spoke correctly.

Our cap spending year to date was $160 million.

$160 million, yes, $90 million in the quarter; I got it.

I just want to make sure of that.

I apologize for interrupting you.

I wanted to make sure that was clear.

But in terms of our driving incremental margin profitability, I think we continue to look for ways to be aggressive with our costs.

We continue to identify opportunities as we integrate these acquisitions.

And we are typically bringing in at lower than our operating margin, or EBIT margin.

And we continue to look for synergistic opportunities across our portfolio of businesses in terms of sales.

So those are all -- we do have a challenging environment in certain markets, but we typically look for other opportunities to make sure we're maximizing our profitability with things we control.

And again, along with the working capital improvement there are also efforts underway to improve the efficiency of the supply chain.

So there is supply chain efficiency; there's manufacturing productivity; there's SG&A improvement associated with the restructuring program; as well as the volume leverage we get from any incremental volume.

Okay.

All right; I got it.

And then final question and I guess that's revisiting maybe a question that was asked earlier, but at the beginning of the year you talked about a scenario of slower first half of the year for European markets, and then a pickup in the second half of the year as the benefit from (technical difficulty) of the currency (technical difficulty) energy costs and things like that.

Your European business in the first half I think did a little bit better than that.

Is your expectation for the second half of the year equally bullish, less bullish?

Are you seeing (technical difficulty) pickup in (technical difficulty) the economy (technical difficulty) more confidence and demand?

Or is it a little bit less bullish?

Dmitry, you've been breaking up a little bit on the connection here.

But I would say we feel here -- we talked maybe with a question from Bob Reitzes we talked about Europe being a little bit better than our expectations, especially in automotive.

Here in North America we do feel I think about the same in terms of the positive outlooks that we are seeing in automotive and the construction markets.

As weather held that back, we are looking at maybe some interest-rate increases, the impact of the strong dollar, and the weakness in the oil and gas sector here in North America -- I think overall it's probably helping us a little on the raw materials side.

But I would say North America is certainly not exceeding the expectations that we went into the year with.

Some areas a little bit better.

So I would say it's consistent, but I would say that we -- and I in particular -- probably felt that lower oil and gasoline prices were going to be more of a stimulant for the economy.

I think we've seen a little bit of improvement in consumer confidence, but I wouldn't say from a retail sales level or other areas of GDP that we've seen an outperformance as a result of lower oil and gasoline prices.

So I would say it's about where we thought it would be.

Got you.

Thank you very much for that color.

We have no further questions at this time.

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

Thank you, Chris.

Just want to thank everybody once again for their interest in PPG.

We'll be available in the Investor Relations department for any further follow-up.

Thank you.

Ladies and gentlemen, that concludes today's conference.

Thank you so much for your participation.

You may now disconnect.

Have a great day.