PPG Industries Inc (PPG) 2016 Q4 法說會逐字稿

Good afternoon, and welcome to the PPG Industries fourth-quarter 2016 earnings conference call.

My name is Rocco, and I will be your conference specialist today.

(Operator Instructions)

Please also note today's event is being recorded.

I would now like to turn the conference over to Mr. Vince Morales, Vice President, Finance.

Please go ahead, sir.

Thank you, Rocco, and good afternoon everyone.

Once again, thanks for joining PPG's fourth-quarter and full-year 2016 financial teleconference.

Joining me today from PPG is Michael McGarry, Chairman and Chief Executive Officer; and Frank Sklarsky, Executive Vice President and Chief Financial Officer.

One item of note is Scott Minder, our Director of Investor Relations, is not able to join the call today, due to a death in the family.

Our thoughts and prayers go out to Scott and his family during this difficult time.

I'll return to today's call.

Our remarks today relate to the financial information we released this morning, Thursday, January 19, 2016.

I will remind everyone that we have posted detailed commentary and accompanying presentation slides on our investor center at www.PPG.com.

The slides are also available on the webcast site for this call and provide additional supporting information, and the opening comments Michael will make momentarily.

Following Michael's perspective on the Company's results for the quarter and full year, and a brief financial assumptions update from Frank, we will move to Q&A.

Both our prepared commentary, and discussion and Q&A during the 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 may involve uncertainties and risks, which may cause actual results to differ.

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

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

The Company has provided in the appendix of the presentation materials reconciliations of these non-GAAP financial measures to the most directly-comparable GAAP financial measures.

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

Now, let me turn the call over to PPG's Chairman and CEO, Michael McGarry.

Thank you, Vince.

Before we start with my prepared remarks, I'd like to take a minute to recognize the announcement today that we made that Frank Sklarsky will be retiring March 1. Frank joined us four years ago and came to us with a very diverse background, serving as CFO for several companies in different industries.

Frank has applied that past experience since he has arrived, and has been truly a great thought leader, change agent, and steady hand that has guided us through financially our very strategic actions.

Both internally and externally, including with our shareholders, Frank has brought a tremendous amount of skill and energy to the job.

Frank, thank you for your many contributions to PPG, and congratulations on your well-deserved retirement.

I also want to congratulate Vince on his announcement, appointing him as CFO March 1. Vince has been an integral part of the PPG family for more had than 30 years, served in a variety of internal and external-facing financial roles.

Over that time he has proven to be a broad thinker, leader and valuable contributor to the executive team, as we transform the Company.

His deep knowledge of PPG and our businesses, the coatings and chemical industries and the capital markets, will serve him well in the new role.

So once again, congratulations both of you.

Now I want to talk a little bit about our fourth-quarter performance.

Today we reported fourth-quarter and full year 2016 results.

For the fourth quarter, our net sales were $3.5 billion, and our adjusted earnings per diluted share from continuing operations were $1.19.

This represents an EPS growth rate of 3% for the quarter, and we achieved an EPS growth rate of 7% for the year.

While these figures fall short of our EPS growth goals, both numbers were noticeably impacted by persistent unfavorable currency translation.

For the fourth quarter, our reported net sales were down 1.5%, while our sales in local currencies increased by more than 1%.

Supporting the higher local currency sales were increased volumes, approaching 2% in our coatings segment.

This figure matched our highest quarterly growth rate in 2016.

Also, minimally impacting our net sales in the quarter were our portfolio optimization actions, as acquisition-related sales modestly exceeded the absence of sales from the divested businesses we are still including in our continuing operations.

As I mentioned, foreign currency translation remained a significant factor affecting our financial results, with fourth-quarter net sales unfavorably impacted by approximately $100 million, and pre-tax income impacted by about $25 million.

For the full year, this impact was about $400 million on sales and about $70 million on pretax earnings.

Looking at some business trends in the fourth quarter, and from an end market perspective, our highest volume growth rates was achieved in our industrial coatings segment, with each business unit matching or exceeding industry growth rates by delivering at least a mid single digit percentage volume growth.

Sales volumes continued to expand in Automotive OEM coatings, and were consistent with overall mid-single digit percentage global industry build growth.

Our above-market performance in the faster growing regions of Asia-Pacific, Europe, and Latin America was in contrast to the lower industry and PPG volumes in the US and Canada.

We also continued to grow sales volumes in general industrial coatings, delivering our fourth consecutive quarter of above-market growth rates, with positive year-over-year contributions from each region.

In addition, packaging coatings growth volume remained strong, as customers continued to adopt our Innovel interior can coatings products around the globe.

In performance coatings, automotive refinish volumes grew a low single digit percentage, as growth returned to Europe, following lower year-over-year demand in the third quarter, and volumes continued to expand in Asia.

Aerospace and architectural coatings EMEA sales volumes were in line with prior year, as industry growth remained tepid for both businesses.

Specifically, in architectural coatings, sales volumes grew in Europe, with the strength in the UK, Ireland and Benelux countries, but was offset by declines in Africa, where many economies are closely linked to the depressed commodity prices.

Sales volumes improved in architectural coatings Americas and Asia-Pacific, as gains in the US and Canada Company-owned stores was partially offset by lower demand in the independent dealer network, and in certain national retail accounts.

Sales growth in Mexico continued, despite comparison to strong prior-year growth.

Sales volume growth was also positive year over year in the smaller markets, Central America, Australia, China and Brazil.

In contrast, significant low double-digit sales volume declines occurred in protective and marine coatings as further weakness in marine ship building activity more than offset PPG's specific growth in protective coatings.

We are continuing to aggressively manage our costs in this business, to neutralize the earnings impact of these expected market-based activity level declines.

Glass segment volumes declined 3% in North American fiberglass business, principally due to lower wind energy product demand.

From a regional perspective, sales volume growth was led by emerging regions.

Asian demand growth was broad based across many of our businesses, but was partly offset by significant declines in regional shipbuilding, as previously mentioned.

Volumes in Latin America were also positive, despite comparison to strong prior-year growth in several businesses, including PPG Comex.

Volume growth also improved in Europe after a relatively flat comparison to prior year, in the third quarter 2016.

Growth in this region was also broad based, which was more comparable to the growth patterns we experienced for most of 2015 and the first half of 2016, when our volumes expanded for six consecutive quarters.

From an earnings perspective, our fourth-quarter adjusted earnings per diluted share of $1.19 improved by 3% versus the prior-year quarter.

Aiding our earnings growth were higher sales volumes and lower overall costs, which included the positive impact from our prior-year restructuring program.

In addition, earnings per share benefited from our ongoing cash deployment actions.

This included the impact of our repurchase of $650 million of PPG stock in the fourth quarter, bringing our full-year 2016 share repurchase to $1.050 billion or nearly 11 million shares.

In the quarter, average diluted shares outstanding were 2.8% lower versus the fourth quarter of 2015.

Now, I'd like to comment quickly on our full-year results from continuing operations.

These results do not include the divested flat glass business financial results, which have been classified as discontinued operations.

On a full-year basis, our sales from continuing operations were $14.8 billion, consistent with the prior year, despite an unfavorable foreign currency translation impact of approximately $400 million, or about 3%.

Our full-year sales volumes grew about 1%.

Our adjusted earnings per diluted share was $5.82, up 7% versus the prior year.

We were able to grow our full-year earnings despite modest and uneven global economic growth for the second consecutive year.

We accomplished this by another strong year of operational excellence.

Our more significant actions included commercialization of new products and technologies, allowing us to deliver above-market growth in several of our businesses; continued successful integration and earnings accretion from prior and current year acquisitions; completion of our previously-announced restructuring program including achievement of savings commitments; and lastly, a hallmark of improved productivity and aggressive cost management, and our manufacturing operations, and within our overall administrative and business support cost structure.

In addition to these operational items, we allocated more resources and investments to our growth-related opportunities, and expect that this will continue to yield dividends in our organic growth rate going forward.

Over the course of the year, we continued to execute on our strategic objectives to strengthen the Company.

We further optimized our business portfolio, with the acquisition of MetoKote, a global leader in coatings applications and Univer, an Italian architectural coatings company.

In addition we closed on the acquisition of Deutek, a Romanian architectural coatings leader in early January 2017.

We were equally active in addressing the non-core part of our portfolio as we completed the divestitures of our flat glass business, our European fiberglass business, our ownership interest in two Asian fiberglass joint ventures, as well as our minority interest in Pittsburgh Glass Works.

These divestitures, which most occurred later in the year, provided us with almost $1 billion of gross proceeds.

We fully intend to deploy these proceeds in an accretive manner that will create value for our shareholders.

As a result of these portfolio actions, 97% of our 2016 net sales was composed from revenue from our core coatings, coatings services, and specialty material businesses.

Our revised business portfolio has a broader geographic reach, more opportunities for enhanced customer intimacy, and technology dependency.

It also delivers strong and consistent operating cash flow, requires less capital intensity, and we expect it to be more resilient to overall shifts in the economic activity.

In addition to the portfolio moves, we continue to reduce legacy-related risk by fully funding our portion of Pittsburgh Corning Asbestos Trust, and by annuitizing a significant portion of our US and Canadian pension obligations.

We were pleased to have put some of these significant non-core obligations behind us, thus reducing volatility in future earnings and cash flow.

We also continued our strong cash generation, with about $1.2 billion generated from continuing operations for the year.

This included a reduction associated with the net aftertax cash flow related to the full funding of Pittsburgh Corning Asbestos Trust.

Excluding this impact, cash flow from operations was almost $1.9 billion for the year.

One of the key enablers of this cash performance was our continuing effort to be more efficient with working capital.

This year, we reduced our working capital by another 120 basis points as a percentage of revenue, including noteworthy improvements in inventory efficiency.

The Company has averaged more than 100 basis point annual improvement in this metric for the past four years.

In addition, consistent with our capital allocation philosophy, we continued our legacy of returning cash to shareholders with nearly $1.5 billion in share repurchases and dividends.

Regarding dividends, 2016 marked the 117th consecutive year of dividend payouts, and the 45th consecutive year of annual payout increases, after an 11% per share increase in April 2016.

As we look ahead to 2017, we are operating in a evolving macroeconomic and regulatory environment.

Our expectations are for improved momentum in the overall global economic growth, with -- including gradually higher growth rates in developed regions, and continuing but uneven growth in emerging regions.

We anticipate economic growth rates to improve in the US and Canada, including a modest acceleration in industrial production and GDP rates versus 2016.

We expect construction markets to expand at a continued, measured rate.

Lastly, we believe that regional automotive industry builds will be flat or decline modestly year over year, after several years of post recession expansion.

In Latin America, we anticipate economic expansion in Mexico, and in South America, we expect to return to flat or slightly positive year-over-year economic growth, following a multi-year contraction in economic output.

Growth rates in Asia are expected to remain generally consistent with 2016, with continued industrial production growth in China, as well as gains in southeast Asia and India.

Automotive build growth is expected to remain positive in the region, but at a more modest growth rates in comparison to 2016.

Economic growth in Europe is expected to continue, but remain varied by sub-region and country, favorable end use market trends are expected to continue, particularly in Automotive OEM coatings, as industry build growth rates are expected to remain positive.

Despite our cautious optimism for 2017 economic growth, the time line for this growth remains uncertain.

As such, we will aggressively manage all elements of our business within our control, to ensure that we remain competitive regardless of economic conditions.

We recently initiated an almost $200 million business restructuring program, focused on reducing our costs where business conditions remain the most uncertain, and will continue to support the momentum of our recent growth related initiatives.

Additionally, we have initiated targeted selling price increases, to combat recent inflationary cost pressures in several markets and regions.

We will continue to closely monitor our input costs, and will work with customers in a collaborative and equitable manner.

Finally, we remain in a position of strength as we ended the year with $1.9 billion of cash and short-term investments, and this provides us with significant financial flexibility going forward.

Supported by our strong cash generation, we reached the top end of our cash deployment range for 2015 and 2016 combined, by deploying over $2.5 billion on share repurchases and acquisitions.

Today, we announced a new two-year cash deployment range of $2.5 billion to $3.5 billion for acquisitions and share repurchases for the years 2017 and 2018 combined, reflecting our continuing focus on shareholder value creation.

We continue to believe that the coatings space remains a consolidating industry, and our acquisition pipeline remains active across geographies and end use markets.

And of course share repurchases will also remain an important element of our capital allocation strategy.

I will conclude by saying that 2016 was a good year for PPG.

We delivered record adjusted EPS, despite uneven economic conditions, and against a volatile currency backdrop.

We competed many strategic actions to make the Company stronger and more resilient in the future.

We look forward to another successful year in 2017.

Now, I will it turn over to Frank, who will cover some 2017 financial assumptions.

Thank you, Michael.

Thanks for your kind words, and good afternoon, everyone.

I'm going to cover several items that will assist in modeling PPG's 2017 sales and earnings.

We have included in today's presentation materials a summary of these financial assumptions on slide number 12.

Before we get to the discussion of 2017, however, let me briefly cover one housekeeping item, and provide you with our total 2016 sales and adjusted EPS figures from continuing operations for each quarter in 2016.

These figures have all been adjusted to exclude the flat glass business, which is now being presented as discontinued operations.

These have previously been reported in our SEC filings or earning reports, but I quickly want to summarize them for you.

For the first quarter of 2016, net sales were $3.544 billion, and adjusted earnings per share from continuing operations was $1.27.

For the second quarter, sales were $3.921 billion, with EPS at $1.78.

For Q3, net sales were $3.789 billion with EPS at $1.56.

And Q4, as you know, was $3.497 billion, with EPS at $1.19.

For a total year of $14.751 billion, and earnings per share of $5.82.

Please note that the EPS of $5.82 for 2016 compares to $5.43 for 2015 on a comparable basis, and as Michael pointed out, that represents an increase of $0.39 or 7% year-over-year.

Turning now to 2017.

The first item relates to the impact from the MetoKote and Univer acquisitions that we completed in 2016, and the full-year impact of the Deutek acquisition that we finalized in January of 2017.

These acquisitions are expected to achieve full-year sales of about $270 million in 2017.

Since we realized about $90 million of sales in 2016, we expect an incremental $180 million in sales from these three acquisitions in 2017.

This incremental revenue will be classified in the acquisition category until each acquired entity reaches its respective acquisition anniversary date, after which time the results will be included in normal organic revenue results.

These acquisitions will typically achieve at or below segment average margins early on, as we work to fully integrate their operations into PPG.

Additionally, the Company divested its European fiberglass business in October 2016.

The divested business had sales during the first three quarters of 2016 of approximately $140 million, that will not recur in 2017.

Next, we will continue to experience the impact of foreign currency translation headwinds, as measured against the US dollar.

As a result, for the full year, the Company expects that year-over-year currency translation will unfavorably impact sales by a range of $375 million to $425 million, and impact pretax earnings by about $70 million to $90 million.

For the first quarter, we expect an impact to the top and bottom lines, similar to what we experienced in the fourth quarter of 2016.

These figures represent our current assumptions, based on exchange rates as of early this week.

Again, these impacts are for currency translation-related impacts.

Given the nature of our business, we typically do not incur significant transaction-related currency impacts.

We also initiated a restructuring program in December 2016, targeting $125 million in total run rate savings annually once fully implemented.

We anticipate that this program will generate $40 million to $50 million in savings during 2017.

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

We are expecting these expenses to decrease by about $15 million to $20 million in 2017.

This decrease stems from a US post retirement medical plan design change made in the third quarter of 2016.

We expect slightly higher net interest cost in 2017 of about $5 million year-over-year.

Next, we anticipate that the Company's 2017 tax rate on ongoing earnings from continuing operations will be in the range of 24.5% to 25.5%.

The comparable rate for 2016 was 24.5%.

The increase relates primarily to a shift in our regional earnings mix.

Finally, as Michael mentioned, we announced a new two-year cash deployment range of $2.5 billion to $3.5 billion for the years 2017 and 2018 combined, after dividends and capital expenditures, dedicated to acquisitions and share repurchases.

Once again, a summary of these financial assumptions is contained in the presentation materials provided 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)

Today's first question comes from David Begleiter of Deutsche Bank.

Please go ahead.

Mike, just on the targeted selling price increases, can you discuss where you're getting them, or targeting them, what regions, what product lines?

And what portion of the portfolio then can you recapture price over the next six months?

David, we've announced price increases in a number of regions.

So just Canada, US, Mexico, Brazil, Central America, UK, Ireland, the Benelux, as well as select countries in Central America -- central Europe, excuse me.

We've been aggressive in doing that.

As you know, historically, we've always told people that we work with our customers on a proactive basis.

We expect that as they start to see the price increases coming through, they can expect us to come and talk to them.

I think they can see it coming now, and so we're in discussions with a number of our customers.

Mike, just on gross margins, how do you expect gross margins to trend throughout the year?

Could you see some gross margin expansion by Q3, Q4, do you think?

Well, I think gross margins are -- you could see that we went down a little bit in industrial.

I'm sure somebody will ask a question about that.

And then raw materials will have some pressure.

If you think about where we were in the first quarter last year with oil at $35, now we're at oil at, let's call it $55, to round it up.

So you can expect that even though sequentially raw materials are going to be rather flattish from fourth quarter to first quarter on a year-over-year basis, raw materials are up.

So I would say margins are going to be challenged in the beginning, but we have our restructuring program we announced, and that will certainly provide us some benefit in the second half of the year.

Thank you very much.

And our next question today comes from Frank Mitsch of Wells Fargo.

Please go ahead.

Frank, congratulations on your pending retirement.

I'll never forget your first PPG conference call, when Chuck had laryngitis, and you took over like a champ during that call.

So certainly big shoes for Vince to fill, and of course, Vince, congratulations.

Looking forward to working with you in your new role and et cetera.

Michael, I know that organic volume growth is an important metric, and has become a more important metric for you.

And you've got two quarters now of over 1.5% organic volume growth.

What should we be thinking you can do in the early part of 2017 here, in terms of volume, and perhaps for the year as a whole?

Frank, clearly, we're still not happy with -- it may be our best quarter yet, call it slightly under 2% for our coatings portfolio.

So we've told people that we expect to be GDP, and when we're performing at a high performance, we would be GDP-plus.

So you probably saw in the corporate line that corporate costs were down.

That was partly driven by us not hitting our volume goals.

So you could expect to see us continue to push organic growth as a key lever for us in 2017, and I think we will continue to get better as the year goes by.

During your commentary, you mentioned, you gave the phrase of improving momentum, in terms of economic activity.

So that would almost imply that we're going to start seeing that 2%-plus type organic volume growth sooner rather than later.

Is that not the way for us to think about that?

Frank, this is Vince.

If you look at our coatings volumes, as Michael mentioned, they were actually higher than our total Company volumes.

Coatings volumes were 1.7%, 1.8%.

That's our best mark of the year.

That's part of the reason why we feel there is some improved momentum.

We did see a recovery in volumes in Europe, as well.

So those are pieces to the puzzle as to why we're hoping and continuing to see improvement as we go into 2017.

Thank you.

Our next question today comes from Kevin McCarthy of Vertical Research Partners.

Please go ahead.

So you announced a capital deployment program of $2.5 billion to $3.5 billion over the next two years.

I was wondering if you could elaborate on the thought process behind establishing the book ends of the range, and Michael, I welcome any thoughts that you might have on the mix of likely repurchases versus what you're seeing in the M&A pipeline?

Maybe not over the next two years, but perhaps over the next couple of quarters?

Thank you.

Kevin, I'll start out and then turn over to Michael.

So the book ends, if you look at the center point, the $2.5 billion to $3.5 billion, you think we're end of the year, at $1.9 billion in cash and generate over $1 billion each in 2017 and 2018.

That would still leave us a reasonable amount of cash on the balance sheet at any given time through the seasonal quarters.

And of course in the recent past, we have been under $1 billion in cash.

So what we want to do is deploy cash as we have it, either on acquisitions, which would be our preference, or share repurchases.

That will depend on the pipeline in any given quarter, but returning that cash toward value-creating activities.

But that really relates to the center point.

The variation around the mean, the $2.5 billion to the $3.5 billion really will depend upon business conditions and the amount of cash we have, and the timing of any acquisitions that we might have over the period.

And of course always as before, we can always adjust that range as we did in the last program, where we started at one range, and ended up at the top end of a higher range that we communicated later on, and that was based on the fact that we had the affordability and the net cash to do so.

Kevin, I'll take the second half of the question, which is how of do we think that mix will be.

Right now, I would describe our acquisition pipeline as similar to what we've seen in the past.

So we did slightly under $400 million the last couple of years in acquisitions.

Obviously, the prices of acquisitions have gone up.

We've adjusted our thinking on our own whack, and those returns.

At the end of the day, though, we do see a lot of people, think we see them paying exceptionally high prices for acquisitions.

So we're going to continue to be disciplined, and I would expect to see a similar type relationship between acquisitions and buying back shares.

Thanks.

I appreciate the color.

Our next question comes from began Ghansham Panjabi of Baird.

Please go ahead.

Congrats, Vince, and Frank as well.

I guess first off, on industrial coatings and the significant growth in auto OEM growth, did you see any change in pricing for that particular end market?

One of your peers has been pointing towards seeing some pricing give backs with the larger auto OEM customers.

Curious what you're seeing in that market, too?

I think the way I'd describe that, Ghansham, is that we've always said our large global sophisticated customers typically can apply more price pressure than our businesses that go through distribution.

And you saw some price degradation across the Company, so you could probably make a pretty good guess of where that would be.

What I would tell you, though, is that we have already started talking to all our customers about raw materials, so this is the early innings of that.

I would tell you that overall, though, they were paying for technology, so when you think about the industry, we've been growing at a faster rate than the industry in three of the four regions.

And most of that has to do with technology, where we have captured additional share, due to our compact process, as well as bringing better productivity in their own OEM shops.

So I think overall our growth has been pretty much driven by meeting or exceeding customer requirements.

That's helpful.

And then just Michael, in terms of your view on the macro trend line in Europe, the volume improvement in 4Q versus what you saw in 3Q, was that a catch up from 3Q being subpar, or do you sense any shift in the macro as you head into 2017 in that region?

It's such a choppy environment over there in Europe.

We have a number of countries.

You take UK-Ireland, they've consistently performed at a very high level.

Germany, doing pretty well.

The laggards -- I would say Southern Europe is also improving.

Five out of the last six quarters, we've had positive growth in Europe, and I would anticipate that we would have positive growth, but uneven, in 2017.

What also is in that number that has held it back, of course has been the Middle East.

Middle East is an important market for us.

And that market has certainly been under a lot of pressure, as well as Africa.

So Continental Europe, I am constructive on it.

I think it is improving, and of course from automotive builds, I would say that we're probably in the sixth or seventh inning.

We have a long way to go.

They only made 13 million cars in Western Europe.

We can see 16 million or 17 million cars easily.

So more growth there to come.

Okay.

Thanks so much.

By the way, I misspoke, it was 14 million in Europe, builds.

Our next question comes from Dmitry Silversteyn of Longbow Research.

Please go ahead.

You mentioned previously the expectations of price increases in your raw material costs, and your ability to get out and get this pricing over the course of months or quarters.

If you look at your 2017 guidance, how much of a raw material inflation have you baked in?

And is it more weighted towards the second half of the year, or do you expect inflation to happen in the first half of the year, and pricing to come into effect and start off setting that in the second half of the year?

Dmitry, this is Vince.

If you look at our 2017 year.

A little bit of history here, if you look at the coatings industry historically, we typically see inflation, the industry, and PPG work to get price in place.

There's typically a six to, let's call it a nine month lag between the earnest inflation and the price being adopted.

So we're right in the -- let's call it the second, third month of that window.

So we would expect additional pricing to come from our customers over the course of the back half of the year.

We're seeing, as Frank mentioned and Michael mentioned, we're seeing a little more inflation in the beginning of the year, really just because last year's first and second quarter were lower.

We saw some step-up in the back half of 2016, so we're anniversarying some inflation.

So a little inflation in the first half of the year, offset by pricing in the second half.

We expect that to neutralize the effect, and if not, we'll take additional cost action.

Got it.

And as my follow-up, you've talked about and we've seen marine being a bad guy for you, for going on three years now.

Are we getting close to the bottom of that business, or maybe anniversarying some of the more tough comps?

And hopefully seeing a little bit better results in performance coatings overall, as that business stabilizes.

Is that a 2017 or 2018 type of outlook?

Okay.

So let's think about it this way, Dmitry.

We typically paint a ship 9 to 15 months after the order is taken.

This year, orders in Korea are down 85% from the peak.

And across Asia, they're down 60% from the peak.

So there is still more downward pressure in that market, but I don't think orders are going to get worse.

I think from an orders standpoint, it's probably nearing the bottom.

Now, the good news is, we're aggressively managing our costs, so we can see as the order book thins, that we're taking aggressive action in that area, and that's part of the reason why you saw the fourth-quarter announcement about restructuring.

That was one of the businesses that was significantly impacted by that.

Got it.

Okay.

Sounds like another year, at least.

Thank you very much.

And our next question comes from Jeff Zekauskas of JPMorgan.

Please go ahead.

Thanks very much.

It looks like the aftertax costs of asbestos were maybe $675 million.

Is that right?

Which I think is, maybe originally you were expecting $500 million.

And are there additional taxes that have yet to be paid on some of the properties that you sold?

And if so, what are the magnitude of the tax payments?

For asbestos, it's a little bit lower than that in terms of the aftertax cost.

And the other number that you might have been quoting, depends on the timing of the cash payments versus the P&L tax.

But from a cash basis in 2016, it was in the low $600 millions.

We're pretty much done with that.

There are no real additional tax payments on the properties that were sold in 2016 and there was minimal tax leakage, due to some tax attributes and some tax planning that we were able to embark on.

So with respect to the flatglass business and the fiberglass businesses and the JVs, we were able to really secure more than $1 billion in aftertax proceeds.

Now, that said, the cash taxes for 2017 will probably be closer to that adjusted tax rate than they were in 2016, where we were able to use some attributes to offset some of these gains.

So that will be a dynamic going forward, but no additional taxes associated with the divestitures going forward.

Okay.

And for my follow-up, in the fourth quarter in both of your segments, both of your key coatings segments, your operating profits were down year over year, and you're talking about raw material inflation and lagging price increases.

So it sounds like you have a bearish point of view towards your first half, and maybe have some growth in your second half.

So in 2017, are we looking for maybe a flat or a flat to up year in earnings for PPG?

First, Jeff, just for the year, just to clarify each of the operating segments for full year had increases in -- we call that PTPI ROS margin.

Fourth quarter, yes.

For the fourth quarter, there were some -- a couple impacts, and most notably, as Michael mentioned before, industrial coatings was the one where you saw a little bit of a reduction.

That was driven really by a couple of different factors, so probably a couple of tenths of a point driven by some acquisitions that haven't been fully integrated yet.

There was actually about 3/10% impact from currency in Q4 in industrial coatings just because of the dynamics between the top and the bottom line.

About 0.5% associated with some of the additional costs that Michael referenced for logistics and transportation, to meet some demands in Asia.

That's really a temporary dynamic.

Then of course, from the slide, you can back into the approximately 100 basis points of price in industrial for Q4 year-over-year.

I think the wild card for 2017 will be exactly what the currency impact's going to be.

The costs we're addressing clearly.

We'll fully integrate the acquisition so that won't be a dynamic going forward.

We're going to manage very carefully, as Michael mentioned, the targeting of prices versus input costs, so that should improve.

We'll get restructuring benefits.

So it's really the currency dynamic.

Overall for the year, margins were up.

Q4, a little bit of a dip in the road based on some unique factors, but going forward, we still expect the opportunity to accrete margins in 2017.

Jeff, let me just add.

Sure.

I want to disabuse you of the thought that earnings would be flat.

That's not our base case at all.

Not only are we going to have volume growth, that's going to be a positive.

We're going to have earnings accretive cash deployment.

That will be a positive.

And we had the self help from our restructuring program.

So that's also a help.

So we will see positive EPS growth year over year.

Okay.

Great.

Thank you so much.

And our next question comes from PJ Juvekar of Citigroup.

Please go ahead.

Congratulations, both Frank and Vince.

Question on architectural paint.

Was there any inventory adjustment at the big boxes?

Was there anything going on there, that you saw the decline on the national level, in national chains?

So PJ, it's always hard to draw inferences from the fourth quarter.

Obviously we have line reviews going on.

One of the major differences, 2015 versus 2016, if you remember, 2015, we had a very warm October, early November.

We had very good stain sales in that regard.

It did not repeat in 2016.

We had positive POS, so the sell-out is better than the sell-in.

That gives us some good feelings going forward.

Like I said, fourth quarter and first quarter are always difficult to think about it from the standpoint that the home centers can make adjustments in their inventories.

But when we look at the POS data, we're -- I would say we're still optimistic.

Thank you.

And secondly, there is significant consolidation going on in paints.

Recently we saw DuPont paint coming into the US with acquisition of Dunn-Edwards.

Where do you think the multiples are that are being paid today, and what is your comfort zone, Michael, when you deploy that capital?

I don't think I want to tell you my comfort zone, because people might know where we want to bid.

Obviously when you look at the Dunn-Edwards number, I would tell you that Nippon was aggressive, overly aggressive in our opinion.

Clearly, they were wanting to get a toehold in the US market.

They viewed this as an opportunistic way to get in, and they took advantage of that.

So I would tell you that the multiples are clearly higher.

But we're just going to have to adapt to a changing environment.

PJ, if I could add.

As Frank mentioned earlier, we're going to keep our financial discipline.

We're going to try to reward our shareholders and create value for our shareholders as part of any transaction.

Thank you.

Our next question comes from Laurence Alexander of Jefferies.

Please go ahead.

This is Dan Rizzo on for Laurence.

You mentioned that Comex performed pretty well in the quarter.

Is there opportunity for expansion of Comex into other parts of Latin America?

And that's the first part of the question.

And two, is the unrest in Mexico having like a cooling effect where the growth -- the pace of growth is slowing?

So let me address a couple of those questions, Dan.

The first one is, we have taken the Comex model into Central America.

We gave guidance that it would be $60 million to $70 million in new sales.

We are tracking above that growth rate.

We said that would be over a three- to five-year period.

Central America for us grew at -- a very small business, obviously, but it grew nearly 40% year over year.

So it was an outstanding performer from that regard.

The Comex team, we've said it would grow more than 2 times GDP.

It has exceeded that significantly.

So another good year by the PPG Comex team.

The current unrest, because of the raise in gasoline prices, we've lost about 300 store days, which through the first, whatever, 19 days, it's really insignificant.

It's less than 1% of our total store days being open.

I looked at the sales through the first 19 days, the sales are ahead of last year's pace, so we're tracking pretty well in that regard.

So obviously, we're not happy with the unrest, but overall, it has not impacted our business.

I'm more concerned about the consumer sentiment.

Right now, consumer sentiment in Mexico remains solid, and so we anticipate another good year.

Last year, we opened 212 stores, which is more than one store every other day.

We're up to 4,213 stores.

We have a plan to open almost another 200 stores this year.

So overall, we expect to have another very good year in Mexico.

Is consumer sentiment such that it telegraphs well enough where you can see that events changing can alter your plans, or is it something you might be concerned that it happens coincidentally, where consumer sentiment falls and sales fall off at the same time?

I was wondering if there's any lead time there?

Typically in the paint industry, in architectural, consumer sentiment is real-time or close to real-time, Dan.

Thank you.

And our next question today comes from Nils Wallin of CLSA.

Please go ahead.

I was just curious in terms of the restructuring, where you've mentioned that a lot of it was in Marine.

If you would give us where some of the big buckets are, in terms of your restructuring program?

Sure, Nils.

It's Frank.

It's pretty broad-based.

It's covering virtually all of our functions, and virtually all of our business units and targeting those areas, mainly in USCA and EMEA, is where the vast majority of the actions are taking place.

It's where we have most of our operations in any case.

But really, I would say the administrative functions really runs the gamut, where we move more into shared services and consolidate operations from various countries into hub and spoke operations.

Then when you look at the various business units, virtually every business unit is participating, certainly you mentioned PMC.

That's one of them.

All the businesses.

And fiberglass had gotten ahead of the game, because we knew we were divesting the European operations, so they got ahead of the game, ahead of this program.

Nevertheless, they have made some reductions.

But we haven't singled out any particular business or any particular region.

It's just skewed more toward USCA and EMEA because of the size of the operations in those areas.

Nils, we use USCA for US-Canada as an abbreviation.

I finally figured that one out.

Thanks.

Just in terms of marine, does marine, the business on its own, earn its cost of capital over the cycle?

I would say right now it does.

It's certainly below the Company average.

But like many acquisitions we do, Marine was cobbled together through various acquisitions.

It starts lower.

It appreciates over time.

This business was pretty much at the Company average prior to the downturn in the shipbuilding business, and we fully expect it to be back at or above the industry or the Company average, but certainly not until the industry recovers.

And it's a great question too because we have not deployed significant new capital against some of the businesses that are having a challenging macroeconomic environment.

We came in below our CapEx plan in 2016 by mid-double digits, primarily because we look at the macro environment, we try to do our capital spending just in time, and we target the spending to those businesses where we think we can get the quickest return, and gear as much of it towards those areas that are growing, not just maintenance capital.

Cost of capital might be less but we're not deploying any new capital, until we see the light at the end of the tunnel in terms of volume growth.

Nils, one more comment.

Because the Marine shipbuilding is project oriented, and we're able to very easily see, with very good sight, projects coming and getting completed, we're able to ratchet down our cost structure as projects get completed, so there's not a heavy fixed cost load, there's a lot of project costs.

It's not -- we're able to image it to where it's not decremental to the earnings of the segment, or the Company.

Understood.

Thanks very much.

And our next question comes from John Roberts of UBS.

Please go ahead.

Do you think the antitrust review between two of your key peers will affect the timing of the North American spring channel sell-in?

That is, do you think customers might want to delay a little bit here, to see how that plays out?

John, I don't sit in either Atlanta or Charlotte or DC from a regulatory standpoint, so I really would be total speculation.

I think I should stay away from speculating.

But I think they're all looking at it, and they will all make their best judgments, depending upon how it all works out.

Maybe I'll try an easier one, and you may have answered this on the last call.

I apologize.

Will glass continue to be a reported segment through 2017, or is the objective here to just exit the rest of glass as fast as you can, and it disappears as a segment that way?

Glass will continue to be a reported segment while we have in our portfolio the North American fiberglass business.

It will continue to be in continuing operations.

We stated before that the glass businesses are not necessarily part of the core business, but the business did well in 2016.

It's expected to continue to improve in 2017, based on the actions that the business has taken.

They've done a good job.

And it will continue to be reportable segment in continuing operations until otherwise.

And John, if I could just add.

If you look at the fourth-quarter results which just included North American fiberglass business, they had significant improvement year-over-year in earnings, up 600 basis points, really reflective of the good work we're doing on the cost side, and some good work we're doing on the technology side.

Thank you.

And our next question comes from Mike Harrison of Seaport Global Securities.

Please go ahead.

I was wondering if you could talk a little bit about your strategy in Europe, and the architectural business there?

You've done a couple acquisitions.

First of all, can you talk about how long you expect it to take, to integrate those businesses.

Are there additional consolidation opportunities there, and are there ways to really leverage the PPG brand across the whole continent, or do you continue to view it as a set of individual subregions, or individual country markets there?

The first question deals with the acquisition.

So we owned 50% of Univer, so there is zero integration except that we have lower cost now with the former ownership, and some additional layers that we were able to take out, post the prior owner's leaving.

So zero, totally integrated, already performing at a higher level than previously.

Deutek in Romania, this is a standard PPG deal, where we go in and raw materials get brought in, day one.

So January 4, the raw material prices went down there, and then we're going to bring in our additional products that they can sell in Romania.

So that will be a positive.

And then we'll roll the back office into our various back office centers in Europe.

So that integration we expect to go very smoothly.

And there are more opportunities in Europe to acquire.

This is still a very regional business.

We are constantly talking to families that own coatings companies in Europe.

They are always part of our pipeline, and we just can't predict when one generation will decide to sell.

In regards to a pan-European brand, we have looked at that.

We have also been asked by several of our larger DIY customers in Europe about that.

We are expecting that they will roll out something similar, but not quite pan-European, in the early 2017 with one of our products.

We'll wait to see how that launches.

But by and large, it is still a very regional business.

And then shifting over to the architectural side in North America, it seems like we're still seeing continued sluggish architectural volumes there, even though the housing fundamentals look pretty good.

How do you explain the current weak patch that we're seeing in the paint industry, and do you think we're setting up to normalize next year, and see some better growth in 2017?

Well, I would tell you that historically we've been fairly accurate on the paint projections.

We said last year in 2016, it would be 2% to 3%.

I think that was borne out.

I think people still underestimate the size of the maintenance business.

It's, let's call it, 70% to 80% of all paint is applied in a maintenance mode.

And so despite how strong housing looks, and the house formation as well as new home sales, that doesn't move the needle as much as the maintenance side of the business.

So I would tell you that we expect to see 2% to 3% growth again in 2017.

And I might add one other item to your prior question.

And that is, we don't participate in a number of countries in Europe.

So there is still more growth opportunities in those countries that we don't even participate in.

All right.

Thanks very much.

Our next question today comes from Christopher Parkinson of Credit Suisse.

Please go ahead.

In terms of your general macro expectations, can you talk a little bit more about your growth outlooks and what you're hearing from customers in Europe and Mexico, especially across the industrial, architectural parallels, even though you just hit on that.

Just generally, do you anticipate any changes in spending behaviors over the next year or so, due to recent elections, or even in some cases some modest uncertainty pertaining to upcoming elections in Western Europe?

Just any general thoughts on how we should think about that would be helpful.

Thanks.

So when I think about Europe, there's obviously elections in France, an election later in the year in Germany.

I don't know when the elections in Italy will come, because it's very complicated country for that.

But consumer sentiment still is what I would call modest, and most of our customers are -- put that out of the back of their mind.

They say hey, we're going to continue to perform.

We're going to continue to push our own customers to grow.

And so that's why we're thinking that Europe is going to grow 2%-plus next year for us.

So I think that's our sentiment there.

For Mexico, from the supply chain standpoint, we paint cars in Mexico, and we paint cars in the US.

So whatever consternation may or may not be out there, we will paint cars, wherever they're built.

So for us, that is a bigger question for our customers than it is for us, because they know we will be there, whenever and wherever they need us.

In terms of some other macros, Chris, we are seeing some early signs of recovery in energy CapEx.

We think that's been a large drag on the US industrial production numbers, so we think that's favorable.

As Michael mentioned in his prepared remarks, we're seeing a flattening in Brazil from -- or South America, from significant negatives.

So those are two other data points.

Great, and just quickly turning back to the raw material basket outlook, can you just give us a quick update on Henan Billions, including ability to meet specs, delivery numbers, or breadth, and any expectation you have for the cadence of the production ramp over the longer term?

Thank you.

We can't speak about their production ramp per se.

It's their process, their business, their facility.

So we'll leave it up to them.

But they are working with us.

We continue to get product from them.

We expect product to continue to flow, certainly in the same manner, if not more in 2017.

And they're still going through their normal start-up process, so at this point it's been a success for us.

We continue to expect it to do so going forward.

Thank you.

And our next question comes from [Tom Nurion] of RBC Capital Markets.

Please go ahead.

Really appreciate slide 12 here, the 2017 financial guidance.

When I look at this, and let's say, assuming that I guess the GDP of 2% to 3% growth thing, the FX assumptions, then all the puts and takes below the EBIT line, it would appear that a lot of the EPS growth that you may be seeing in 2017 could be coming from the share buyback?

To what extent do you use EPS as a rationale behind deciding on how you allocate the $3 billion over 2017, 2018, or do you not really look at that at all?

We look at the $3 billion or the $2.5 billion to the $3.5 billion over the two year period, the first determinant is how much cash we have on the balance sheet, and how much cash we expect to generate.

And the fact that we do not need to carry more than I'll say, mid to high triple digits millions of dollars on the balance sheet, at any given time, to run our operations.

So it's best used to create value for the shareholders.

First priority on that, and of course this is after dividends, and after CapEx, first priority being accretive acquisitions.

In any quarter where we don't necessarily have an imminent acquisition, or line of sight to one that's taking place, we would return the cash to the shareholders in a reasonable pattern.

So in any given year, you would expect to see a balance between acquisitions and share repurchases, with the first priority being acquisitions and then repurchases.

But you're right, there is some element of EPS, EPS growth that is predicated upon deploying that cash, either toward acquisitions that you get you additional EBITDA, and against share repurchases, which obviously increases the EPS, just based on the arithmetic.

But it is a component of that.

Okay.

Thanks.

And then my last question, you just commented on the US architectural market and what's going on, despite what's going on with housing.

I get the maintenance argument.

That's very helpful.

What about the share shift from DIY to pro?

Could you maybe comment on what's going on, like within your own US architectural business, in that dynamic?

Could that be playing a role, perhaps?

We don't really see a significant share shift from DIY to pro.

Obviously, the bigger issue is the pros are full up.

There's not a lot of new painters coming in the market.

So I would say there's probably a little bit of a drag, if anything, from the professional side, because I don't see a lot of young painters out there.

Understood.

Thanks a lot.

If I could add to that, our mix of business between DIY and pro matches the industry.

So we have said in the past, we're channel agnostic.

Understood.

Thanks.

And our next question comes from Richard O'Reilly of Revere Associates.

Please go ahead.

I just have a question about the cash from operations.

I just want to understand the math.

In 2016, you generated $1.25 billion, and that was after the asbestos settlement of $800 million?

Yes, it was.

The $1.25 billion was after the $800 million asbestos settlement.

Keep in mind though, that there was some tax benefit associated with that.

So the way we like to do it in full transparency is to say that $1.25 billion would have been close to $1.9 billion, if you were to add back the aftertax cost of the asbestos settlement.

Okay.

Fine.

$1.9 billion.

So after dividends and CapEx, your free cash so-to-speak was about $1.1 billion?

It was approaching $1.1 billion.

Including that adjustment.

Okay.

Yes.

Including.

Okay.

So for this year and next you're at the low end of that -- if we double that, you're at the low end of that $2.5 billion range that you want to use?

Again, we start the year with almost $1.9 billion in cash balance, which is more than we need to have, because we got the aftertax proceeds from the divestitures all in Q4.

So we start the year, and then we add another $1 billion-plus in each of the years.

So we really have between $2.5 billion and $3.5 billion to deploy based on what we look out at, and still have plenty left to run the business.

Second question.

Outside of North American fiberglass, there's nothing else that sticks out in your portfolio, that doesn't fit the core, or whatever you want to use the word?

Am I right?

That's correct, Tom.

Okay.

Fine.

And third question, I'm surprised no one has asked you about titanium pigment pricing, or your costs going into the new year.

Do you have any comments on that?

So just as a little history lesson.

We saw little modest second quarter and third quarter increases in 2016.

In the fourth quarter, no increases, except a little bit in China.

We still believe this is a supply/demand driven business.

Supply is slightly up.

Demand is slightly up.

So they're pretty much in balance from that standpoint.

The only thing we can see is that we see some of our smaller companies that we've been looking at buying, some of them do price buying.

Obviously that's an artificial demand.

It's not a good business practice, but they feel like they need to protect themselves, because they're not like some of the larger coatings companies that can negotiate hard in this regard.

So we don't anticipate significant upward pressure but, again, it's a supply/demand driven business, and we will react accordingly.

Okay.

Good.

Thank you.

And congratulations to Vince, there.

Thank you.

And our next question today comes from Vincent Andrews of Morgan Stanley.

Please go ahead.

This is [Backing Urjohn] for Vincent.

On the restructuring initiative, does that include potential cost synergies associated with the recent acquisitions, or will those flow through separately?

And then also, how should we think about the cadence of the 2017 restructuring savings?

They do not include synergies from the acquisitions.

Those would be separate and over and above.

In terms of the cadence, we're trying to actually accelerate these as best we can, based on what we see out there.

We said 40 to 50 for the year.

It will obviously ramp up through the year, so there will be more in the back half than the first half, but we're trying to get to the execution as quickly as we can, but it will ramp up ratably throughout the year.

Hopefully we'll get some of those savings booked in the first half.

And then on packaging, how much of the market at this point in North America and EMEA has now converted to non-BPA, and where do you see that composition going?

I think the way I'd describe that is we're in the third inning of a nine inning ballgame.

We have a number of trials still going on.

We have a number of conversions that we have to get accomplished in 2017, and of course then, there's still more work to be done.

They can't take on all that work overnight, and there are still a number of countries around the world that they haven't converted.

So like I said, we're in the third inning, and we've been winning more than our fair share.

The brand owners really love PPG.

They love the technology we bring, and that's been a real positive for us.

Is your outgrowth in Asia-Pacific related to non-BPA conversions, or is that a product of other factors?

Our holistic growth in Asia-Pacific is related to many businesses.

Our packaging growth in Asia-Pacific is certainly aided by the BPA-free technology.

Great.

Thanks.

And our next question comes from James Sheehan of SunTrust Robinson Humphrey.

Please go ahead.

Can you talk about the performance of the US auto OEM business?

You're showing it as having come in a little bit below the market.

Is that because your technology is largely penetrated in that region, or are there other factors to explain that?

No, James, we covered this in previous calls.

We had to make a choice on where to take business, going into 2016.

And we preferentially picked up business in Asia and Europe, where we saw the growth rates at a higher level.

And so, we've grown so much faster than the market, our large customers wanted to make sure that we didn't get too large in that space, so that's what happened.

You should expect another one to two more quarters of negative comps versus the industry, and then we'll anniversary it.

Actually, what I anticipate going forward is that they have not moved the compact process yet in the US, and when they decide to do some brownfields in the US, we will then start to win at a very good rate.

So I'm optimistic going forward, starting in -- brownfields will probably be a 2018, 2019 initiative.

If I could elaborate, Jim, our math worked out.

We matched the global growth rate build for 2016 again, with our regional differences.

We expect to at least match that global growth rate in 2017, and likely start to exceed it again, based on the comments Michael made, and the actions we took.

Terrific.

And then could you also comment on the potential benefit you might see from any big increase in infrastructure spending from Washington, and the timing of that?

Well, I would tell you that's highly speculative.

It takes a while for policy changes to work its way through the executive and legislative branches.

Infrastructure is good.

So if it happens, we'll be all over it.

It does take a while to gear up to do some of these things, so we have not put that in our forward-looking plan for 2017.

Thank you.

And our next question comes from Don Carson of Susquehanna Financial.

Please go ahead.

Thank you.

Another question on your heat map on slide 5. Vince, you mentioned that you're agnostic as to what architectural channel you sell through.

You continue to have below market growth.

I'm just wondering what's driving that, and specifically referring to the US market.

Is it your product mix, and your greater reliance on stain that drives that difference?

No, Don.

If we harken back to a few other calls we've had this year, one of our channels that's a nice channel for us, but it does have a shrinking nature to it, is the independent dealer channel.

And so we're -- that channel's shrinking natively, and we expect that to continue.

That's certainly one of the reasons why we're below overall market.

Okay.

Thank you.

And ladies and gentlemen, this concludes our question-and-answer session.

I'd like to turn the conference back over to Vince Morales for any closing remarks.

Again, I want to thank everybody for their time and participation today.

We'll certainly be available for calls after this call.

So please reach out, and we'll handle any additional questions.

Thank you.

Thank you, sir.

Today's conference has now concluded, and we thank you all for attending today's presentation.

You may now disconnect your lines, and have a wonderful day.