PPG Industries Inc (PPG) 2017 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the PPG Third Quarter 2017 Earnings Conference Call.

(Operator Instructions) Please also note, today's event is being recorded.

At this time, I'd like to turn the conference call over to Mr. John Bruno.

Sir, please go ahead.

Thank you, Jamie, and good afternoon, everyone.

Once again, this is John Bruno, Director of Investor Relations.

We appreciate your continued interest in PPG, and welcome you to our third quarter 2017 financial results conference call.

Joining me on the call from PPG are Michael McGarry, Chairman and Chief Executive Officer; and Vince Morales, Senior Vice President and Chief Financial Officer.

Our comments relate to the financial information released today, Thursday, October 19.

In accordance with generally accepted accounting principles, all periods present the former Glass segment as discontinued operations.

About 1 hour ago, we posted detailed commentary and accompanying presentation slides on the Investor Center of our website, ppg.com.

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

Following Michael's perspective on the company's quarterly results, we will move to a Q&A session.

Both prepared commentary and discussion during this call may contain forward-looking statements, reflecting the company's current view of future events and the 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.

This presentation also contains certain non-GAAP financial measures.

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

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

Now let me introduce PPG's Chairman and CEO, Michael McGarry.

Thank you, John, and good afternoon, everyone.

Today, we reported third quarter and year-to-date 2017 financial results.

Our net sales for the third quarter were approximately $3.8 billion, up more than 3% year-over-year.

And our reported earnings per diluted share from continuing operations were $1.52.

This quarter was filled with a lot of emotion and many operational challenges due to the number and severity of natural disasters that many experienced.

I would first like to thank our employees for their commitment and support they provided and continue to provide.

We will continue to support our impacted employees, their families and their communities as they continue to rebuild.

Turning more specifically to our results in the quarter.

Our sales growth of more than 3% was driven by improving sales volume and favorable currency translation.

Currency translation, which has been unfavorable for quite some period of time, reverted to favorable in the third quarter and is expected to be so in the fourth quarter based on current exchange rates.

Regarding our sales volumes.

I'm encouraged by the pace of growth in July and August before the hurricanes and earthquakes and by order book in the first few weeks of October.

Our overall year-over-year company sales volumes were up nearly 1% in the third quarter, including about $25 million of unfavorable sales volume impact from natural disasters.

Industrial Coatings segment volumes improved by about 3%, while Performance Coatings segment volumes declined by about 1%.

The performance segment realized most of the unfavorable sales impact from the natural disasters.

Before the natural disasters, we were tracking about 1.5% of sales volume growth in the quarter, higher than our volume performance in the first half of 2017.

Let me quickly discuss a few specific business unit performance trends, where we are tracking both above and below the market.

In the third quarter, general industrial coatings business growth again exceeded the rate of global industrial production, continuing a multi-quarter trend.

Also, volumes returned to mid-single-digit percentage growth in our packaging coatings business, stemming from increased customer conversions to our new technologies.

Our U.S. company-owned architectural stores once again grew same-store sales at mid-single digits despite the natural disasters, marking 7 consecutive quarters of sequential volume improvement.

Of note during the quarter, we are pleased to have launched PPG Timeless, a new premium stain and new interior paint brand into The Home Depot, and we will work to drive customer adoption of this new product.

This includes some additional growth-related marketing spend in the fourth quarter.

That being said, demand in the overall U.S. DIY paint market has remained soft throughout the year.

During the quarter, our sales volume in architectural coatings EMEA were below market.

While certain parts of our business remained solid, such as the U.K., where we continue to outperform the market, demand in certain other important countries of PPG, such as France, remains weak.

Also, we turned away certain business in the region due to either low profitability or lack of customer acceptance of selling price increases.

As I previously said, volume growth remains one of our key focus areas for the company.

While I'm pleased with some of the measurable progress we have made, we continue to work on a variety of initiatives to accelerate our growth rate.

From an earnings perspective, our reported EPS was consistent with our prior year adjusted EPS.

The recent natural disasters reduced our third quarter EPS results by about $0.05.

This was the result of raw material inflation, higher transitory logistics costs and impact to reduced sales volume.

In the third quarter, we made initial progress to begin -- recover our margin.

Our contribution margin compression was lower year-over-year in the third quarter than it was in the second quarter.

Specifically, in the third quarter, our contribution margin was 160 basis points lower than the last year's third quarter and would have been 130 basis points lower, excluding the natural disaster impacts.

Higher-than-expected raw material cost inflation was the largest driver of margin compression.

Our basket of raw materials were up mid-single-digit percentage year-over-year, pacing much higher versus our expectations at the beginning of the year.

The main causes continue to be various supplier force majeure issues in Europe and additional supply-driven production curtailments in China.

Selling prices were up modestly versus the prior year, with additional pricing secured for the upcoming fourth and first quarters.

We continue to work with our customers on additional selling price initiatives focused on further offsetting the persistent inflation.

We now expect the current level of raw material inflation to last through the fourth quarter and anticipate inflation to continue, but at lower rate in the early part of 2018.

We're working with our suppliers to mitigate the increases and have also expanded our research resources and efforts on another wave of raw material efficiency projects.

We were able to mitigate some margin compression with overall productivity improvements due to aggressive manufacturing and overhead cost management.

Due to the acceleration of some of our actions from our restructuring program we announced in 2016, I now expect restructuring will benefit us by more than $45 million in 2017, which is toward the upper end of our initial target range.

In the third quarter, we completed the sale of the North American fiber glass business.

This is a transformation milestone for the company, as it completes the culmination of our multiyear strategic shift in our business portfolio.

The gross sale proceeds were about $540 million, with the net after-tax gain recorded in discontinued operations.

In the third quarter, we purchased about $250 million of stock, and on October 2, we finalized the acquisition of The Crown Group, a coating services company.

Including the Crown acquisition, year-to-date, we have spent about $725 million toward our multiyear target of $3.5 billion to be deployed on acquisition and share repurchases.

Looking ahead, we expect to remain in a modest overall global economic growth environment.

Demand in the fourth quarter is seasonally lower historically, and we anticipate normal seasonal trends this year.

We expect recent favorable end-use market trends to continue in refinish and aerospace.

Additionally, we expect our general industrial growth to continue to outperform solid global industrial production and similar results in the packaging coatings industry.

Architectural coatings volumes in the U.S. are expected to remain mixed by distribution channel.

Protective marine coatings volumes are expected to positive globally, aided by growth in protective coatings and very modest declines in marine volumes.

Our U.S. automotive OEM coatings business is expected to return to at-market performance in the fourth quarter, coupled with continued PPG outperformance in the other major auto-producing regions.

We expect our architectural EMEA sales volumes to remain mixed sequentially, with improved quarterly results in Northern Europe adjusted for seasonal trends but offset by continued subdued end-use market conditions in certain countries, including France, Italy and Spain.

Finally, the automotive OEM and general industrial coatings business in Asia have a difficult fourth quarter comparison, as sales volumes grew at low double-digit percentage pace in 2016.

One unknown entering the fourth quarter relates to the China tax subsidy on certain small engine vehicles.

Last year, this subsidy was originally scheduled to expire at the end of 2016, but was extended at a lower subsidy rate.

This subsidy is now slated to expire at the end of 2017, but any change in this could impact fourth quarter demand in a favorable or unfavorable fashion.

As always, we have included additional segment and regional details in our presentation materials.

Also, for the fourth quarter, we expect additional transitory impact stemming from natural disasters, specifically raw material cost inflation and modest unfavorable sales impact, mostly from anticipated lower Mexican and Puerto Rico demand.

We expect these to have an unfavorable impact to our fourth quarter EPS of about $0.05.

Finally, we will maintain our aggressive focus on cost management.

And we will have also reduced our projected capital spending target for 2017 to be approximately 2.5% of sales to reflect the subdued growth environment.

To summarize our results, we delivered solid business results despite a variety of external factors, which impacted our sales, operations and supply chain.

We're now beginning to deliver on margin recovery.

We delivered excellent performance in many of our businesses, including a continuation of an improvement in volume growth on prenatural disaster basis.

Going forward, we remain focused first on increasing prices in a collaborative manner with our customers to recover our margins; and second, on improving our sales volume growth trends, including continued focus on deploying technology and our technology advantaged products.

We ended the third quarter with $2.3 billion in cash, our acquisition pipeline remains healthy and we will continue to repurchase shares in the fourth quarter.

Just as a reminder, we remain committed to deploying a minimum of $3.5 billion on acquisitions and repurchases in 2017 and 2018 combined.

As a result, we intend to deploy an additional $2.8 billion of cash by the end of 2018.

This concludes our prepared remarks.

Once again, thank you for your interest in PPG.

And now Jamie, would you please open the line for questions?

(Operator Instructions) Our first question today comes from Ghansham (sic) [Ghansham Panjabi] from Panjabi (sic) [Robert W. Baird].

Michael, you gave us some good insight into the fourth quarter in terms of trend line.

But as we cycle into '18, I guess, how are you thinking about the overall macro, first off, and then the related outlook for some of your major end markets?

Ghansham, I think 2018 will be somewhat of a repeat of 2017: volumes, modest up in the majority of the markets, so if you start with automotive.

The biggest wildcard there is China, but I think China's going to grow 2% or 3%.

That will take up the global market in that 1%, 2% range.

I think the U.S. will be the one market that'll be under pressure.

Industrial production should be relatively decent.

Obviously, you're going to have heavy-duty equipment improving at a faster rate.

So that's always good for us.

And then we're going to continue to have good adoption of our packaging business.

So I think that's a real positive.

I think from the -- refinish is steady eddy.

You're going to have aerospace slightly up.

Again, Boeing and Airbus have great backlogs.

I just wish they'd figure out how to make a few more planes each month.

And then I would say, architectural, we've been pleased with the pace in architecture.

We see that growing 2% or 3% next year.

So that's kind of a walk around the various businesses.

That's very helpful.

And then maybe a question for Vince on the fourth quarter just in terms of operating income year-over-year.

Should we expect an improvement there year-over-year?

Or will that be difficult, just given some of the higher raw material costs and also the residual disruptions from the hurricanes and earthquake?

Yes, Ghansham, as you know, we typically don't give guidance.

I think, for us, we've worked to try to close the margin gap.

I think you'll see additional margin recovery in Q4 on a year-over-year basis, similar to what we saw in Q3 versus Q2.

And the key factor there, again, would be additional pricing.

Still stubbornly persistent raw materials but probably ticking down seasonally a little bit.

And then, again, we'll see normal seasonal trends in most of our businesses.

Our next question comes from Duffy Fischer.

Michael, I guess, question for you on the raw material side.

Seems like a couple of quarters in a row that we've gotten a lot more dispersion geographically in the direction that raw materials have moved.

Is that something that will normalize over the next couple quarters?

Is it just kind of opening up some of your own transportation lines to move stuff around geographically?

Or should we think about that as being more structural going forward?

Well, I do think there is some structural piece of that, especially in China.

If you notice in the last couple of months in China, they have been exceptionally focused on enforcing environmental rules, which is really positive, not just for the environment, but also positive for us with our water-based technologies.

That's a great place for us to be.

And the fact that they're cracking down on dangerous goods warehouses, they're cracking down on plants that are in nonindustrial parks or not in chemical zones, we think that's a positive for us.

So there'll be more upward raw material inflation in China.

We've had a lot of force majeures in Europe.

Europe has historically been a place that operates very well, so I don't think -- I think that's more of a transitory impact.

I don't view that long term.

And obviously, the hurricanes in the U.S., this is the first major hurricane that's hit the U.S. in 10 years.

So I'm not a weather forecaster.

I'm not going to predict anything.

But historically, I view that also as transitory.

So the only real place I see as structural is China.

Great.

And then on the back of the comment on China, does that mean if your raw materials are going up because some of the competitors are getting squeezed out or shut down, will your prices go up meaningfully more in China than they will other parts of the world?

Because, again, some of your competitors may not be able to sell products or people might have to mix shift up to your higher-quality water-based products.

Well, I would describe it this way, Duffy: We would always expect our -- and we currently have margins in Asia consistent with our margins in the rest of the world.

And so if we have additional raw material inflation in China, we would have to have additional raw material recovery in China.

So I would not expect a material impact.

We would -- obviously, as you know, we lag getting price.

But I would not expect that to be a long-term issue.

So for us, I would focus more on the fact that if they continue to enforce the rules, there'll be more water-based products.

And that technology is with a limited subset of suppliers, and that will be good for us.

Our next question comes from David Begleiter from Deutsche Bank.

Michael, you've had very good success this year in U.S. refinish.

Can you remind us again what the drivers are of that success and from whom you're taking business from?

So the main drivers in refinish, first and foremost, is miles driven.

So year-to-date, miles driven are about up 1.5%.

The next is collision or think about it as accidents.

And higher employment leads to more miles driven, leads to more congestion.

More congestion leads to more accidents.

And of course, the real phenomena we see now is distracted driving.

So this is a market that historically was flattish, but we are doing well in this area.

I would just say that given our strong technology base and our strong customer base, we're probably nibbling and getting a little bit of share from everybody.

But overall, I would say, it's more driven by technology.

Our water is best-in-class.

And David, if I could go back -- if I could just add.

We think this has historically been a very modest growth market in the developed regions.

That's continued, and we haven't seen any changes in pattern with our customer base.

And we haven't seen any changes in pattern in terms of the industry itself.

And that was more of my next question.

Michael, is there still real pricing power left in refinish?

And again, no change from your view in terms of distributors exerting more pricing pressure or MSOs exerting more pricing pressure?

No, Duffy.

I would tell you, it's still a highly fragmented market.

I mean, if you drew out this MSO consolidation over a 20-year period, you might -- could extract something.

But they're so -- I would say, it's not material in any near-term pattern.

So it's not something we're worried about.

We have positive price in refinish this year, and we would expect to have positive price in the business next year as well.

Our next question comes from Bob Koort from Goldman Sachs.

I was going to ask around the raw material side.

I guess, some of us thought TiO2 was going to go up throughout the year.

So I'm guessing, that hasn't surprised you.

Can you talk about which specific raw materials have seen that unexpected inflation so that we might take a guess on what could give you some relief next year?

Yes, I would say the first one that was most unexpected was the emulsions.

So you think about VAM, that has been a problem.

Outside of the U.S., ethylene is down in the U.S., but everywhere else in the world, it's up.

I would say that was probably not on my radar screen, given the significant ethylene expansions in the U.S. Obviously, there's more coming on.

So hopefully, there'll be some relief there.

I would tell you, TiO2 is up more than we expected.

I've cautioned some of the TiO2 suppliers, don't forget 2011 where they -- there was demand destruction.

So that has been my focus on that.

The other thing that, I would say, is a little bit of a surprise is packaging.

So if you think about tin plate and steel, I think those things were probably a little bit higher than I would -- expected.

So we had low single digits in our plan, and we're in the solid mid-single digits now.

So those would be the ones that I would focus on.

And Michael, could I ask you on the architectural markets, looking at both the U.S. and in Europe, in the U.S., this deviation between do it for me and do it yourself seems pretty pronounced.

Is there historic precedent for that different direction that persists?

And if not, which do you think happens?

Does the do it for me in your stores numbers come in?

Or does the DIY market finally get some lift?

And then maybe a similar question in Europe.

I generally think of paint as being a very consistent end market.

And yet, it sounds like either the market is not doing well or maybe you've got some competitors that tolerate some pressured margins, which doesn't seem sustainable.

So maybe just an appraisal of the markets and what you expect.

I think you said volumes would be good next year.

But what do you expect maybe on the price or margin side moving forward?

Well, Bob, we normally allow only 2 questions, and that's like 7. So I'll do...

It was all about architectural.

That doesn't count as one?

I'd say the big driver in the U.S. is 2 factors: One is unemployment.

So you have low unemployment, and so people would rather pay somebody to get it done.

And the second one is baby boomers are getting older, and the millennials aren't painting as much as their parents.

They're not a DIY group as much as anybody else.

So I would say that's the U.S. I think that's going to continue.

We see real strength.

I mean, even our October order book in architectural has started out really well.

So I think that's going to continue.

I don't see a change in the unemployment situation, so we're all good there.

I think the difference between Europe and the U.S. now is the U.S. is a very much a branded market, and Europe has way too much private label.

I think the European big boxes have really erred in the way they've gone to market.

If you look at the average price of the paint in Europe versus the average price of the paint in the big boxes in the U.S., it's clear that the U.S. big boxes have a different strategy.

They're executing it very well.

In Europe, there's not been a trend to branded, and that brings in significantly more competition.

It also brings in, on a regional basis, a lot more folks.

So I think that's the big disconnect.

I do think there are people out there still chasing volume.

We're not going to chase it at this point in the cycle.

We see people trying to trade down.

We'll let them trade down.

We're trying to recover margins, and that's been our focus.

If you look back 2007, 2011, the last 2 raw material inflation cycles, we were first to get margins back.

We think we're going to be in that top quartile again.

And we can't control what other people -- how they make their own independent decisions on how to price.

Our next question comes from Christopher Parkinson from Crédit Suisse.

Can you just talk a little bit about pricing trends across your various industrial platforms, such as auto, general industrial, packaging?

And just give us any broad expectations you have regarding the time lines to recapture price costs or maybe to achieve net price over the longer term, if that's still a theme.

I think most of us understand that there's probably differences in contractual nature and COGS distribution between the various inputs.

But just any broad comments would be really appreciated.

Well, I think the broad comment is we have very sophisticated customers in automotive as well in the large industrial segment.

These guys not only are sophisticated, but they have set up what I would call choice in their distribution or paint networks.

And that allows them to move people in and out in some small segments to allow them to put pressure on their suppliers.

And what you need to do is have faith that your technology makes it difficult for them to do that.

And I would say it takes us longer to get price in those segments, but we do recover it.

We already have pricing in those segments today.

It will start to pick up a little momentum in -- late in the fourth quarter, early in the first quarter.

And I would tell you, in the packaging area, probably the bigger driver on the pace of getting into packaging is that there was consolidation in the major packaging players.

And so they were focused on trying to get their synergies, and so you had that trend going on at the same time as new technologies.

So we were pushing the new technologies, and there might have been some other folks that didn't have the new technology, that were trying to hang on to volume using price.

And that's probably the biggest differentiator in the packaging that's different than normal where historically, in the past, everybody was pushing the same technology.

Now you have some -- certain players that are very strong on the BPA non-intent and some of the others that maybe don't bring that same new technology to the table.

And just -- can you talk a little bit about some of your comments on EMEA architectural, specifically how you expect the volume headwinds to persist?

And whether or not your price comments pertain broadly to the lack of acceptance among your customer base?

Or is it more a functionality of bad behavior among some of your regional competitors?

I hate to throw our friends under the bus, so I won't do that.

I think everybody makes their own independent decisions.

And in this regard, we are very much focused on delivering margin recovery.

And it's margin first, volume second.

We have some very good markets.

We're growing share in the U.K. We're hanging in there in the Benelux.

French retail has been a very challenging environment.

We're doing well in Scandinavia, growing share up there.

I would say, Eastern Europe is more of a free-for-all.

And we have been actively pushing price aggressively in our African stores and African countries, and so it provides that mixed bag, if you will.

But right now, bottom line is we've yielded a little bit of share in order to drive profitability.

I regard these as transitory.

If I look back in history, we've done this in the past.

And once this transitory period's over, we will not have lost any share in that regard.

And good, strong performing products always win in the marketplace long term, and we feel good with our product portfolio.

Our next question comes from Frank Mitsch from Wells Fargo Securities.

Michael, for the first of my 7 questions, I was wondering, you're clearly making progress on the -- reducing the margin compression year-over-year.

You said it was 210 bps in the second quarter, 160 bps in Q3 or would have been 130 ex the hurricane.

At what point do you believe you're going to stop talking about year-over-year margin compression and start talking about year-over-year margin expansion?

I think, Frank, if I looked at history, we're probably, first quarter or second quarter next year.

I'd like to say it's first quarter, but I don't want to set unrealistic expectations.

The fact of the matter is this is top of mind.

We have a very experienced coatings leadership team, deep experience in this area.

Many of our leaders have been around through multiple cycles.

And I think that's what really allows me to sleep well at night.

It's the strong leadership of the company.

And I think that would be the focus area.

So your next 6?

Yes, so for my next 6, no, so look, I mean, not going to ask you the M&A question, but you did say, "Look, I've got $2.8 billion to spend on M&A and share buyback over the next 15 months." And -- but your company-owned store's doing extremely well here in the U.S., certainly relative to your other channels.

So I'm just curious what your plans are for growth in terms of opening up new stores.

Well, how should we think about that?

And is that also a focus area for the M&A part of your capital allocation?

Well, it's certainly -- as you know, the dealers, anytime they want to sell, if they don't have a succession plan in place, we are always the first choice.

And we are happy to do that.

We stay close to the big dealers, so we'll continue to look at that.

We're not adverse (sic) [averse] to spending in that area.

We are adding stores in the U.S. as well.

That's top of mind.

But we're also looking at not just the U.S. I mean, if you look in Canada, we're adding stores at a faster rate than anybody else in Canada.

Of course, in Mexico, we added 53 stores alone in the third quarter in Mexico.

We added stores in Europe as well.

So it's not just a U.S. play for us.

As far as the acquisition pipeline, the question you didn't ask that you wanted to ask, the pipeline remains solid.

We do continue to look at a lot of stuff.

We've continued to remain disciplined.

So when we have something, we'll let you know.

But we are actively engaged with a number of parties, talking to them about what they might -- the next steps might be.

Our next question comes from Jeff Zekauskas from JPMorgan.

Over the last 3 years, you've averaged about $330 million annually in acquisition spending.

And you have a very large target in deploying your cash.

So if you spend again at a $330 million acquisition level, in order to hit your $3.5 billion number next year, you'd have to buy back something like $1.7 billion in shares.

Are you willing to do that in that historically, you never seem to buy back more than $1 billion annually in shares.

Jeff, this is Vince.

Again, as you know, acquisitions are episodic, both in number and in size.

As Michael just mentioned, we do have a fairly active pipeline that we're vetting along with potential sellers.

We certainly would hope that, that's our primary use of cash for the next 15 months and beyond that.

But I would tell you, we don't have certainty, and you never do around acquisitions.

What we are committing to is $2.8 billion of deployment effectively from this month until the end of '18.

And we don't know how that's going to fall, acquisitions versus share repurchase, but the $2.8 billion will be spent.

And so if we have to deploy all that in share repos as opposed to acquisition because the targets are not willing or not at the right price, we will do so.

But I think, as Michael mentioned, our preference would be earnings-accretive share -- excuse me, acquisitions.

Okay.

And then for my follow-up, when you look at raw material cost inflation across the globe, which are the areas that have the most inflation?

And which are the areas that have least?

Or is it mostly all the same?

No, it's a great question, Jeff, because there are big differences in inflation by region.

Michael touched on it a little earlier, for different reasons, the regions have moved in a different direction.

Our highest inflation region is actually Europe, really predicated on all the force majeure activity that has taken place this year.

And then we're seeing inflation in Asia, primarily China, again, because of the supply curtailments that are being enforced there.

And then our -- the U.S., Canada and then Mexico would be third in terms of pace of inflation.

And just to remind everybody what Michael said earlier, we're expecting low single-digit inflation coming into the year.

We're now solidly at mid-single-digit inflation.

So inflation's certainly been higher this year than our preliminary expectations.

Our next question comes from P.J. Juvekar from Citi.

Vince, your working capital was up by $300 million.

Not a huge amount, but it was still up.

What are the different pieces in that?

Is it raw materials related?

Or is it due to slower growth that led to higher working capital?

Yes, P.J., we're a seasonal business.

So I think you're right.

Our working capital [versus] the end of the year was up, as it typically is this time of year.

If you look on a year-over-year basis, our working capital as a percent of sales is actually down about 50 basis points.

We've been targeting 100 basis points of decline, which we think we'll achieve by the end of the year.

And we'll work through the -- as we get through this lower season, work through some of the inventory, as we typically do, to achieve that goal.

So I would look at our working capital versus same quarter prior year.

And Michael, you had lower selling prices in industrial coatings despite what you described as pretty decent volume growth.

One of your competitors gave pricing concessions to automotive OEM customers.

I was wondering if you're seeing an impact from such competitive actions.

Well, everybody makes their own independent decisions.

And I would tell you that we already have gained price increases in some parts of our industrial segment, and we expect to get further increases in Q1.

And so from my standpoint, we have a lot of areas that are growing above the market.

And we're quite pleased with the pace of that, and I think that the price will come in that area.

So I'm not worried about it.

So I guess, I'm -- we'll just continue to push the team to get the price up, and that's what they're working on.

Our next question comes from Vincent Andrews from Morgan Stanley.

You mentioned since new raw material efficiency programs.

Just wondering, are you specifically talking about TiO2 or the balance of the basket?

And what, if anything, are you working on that's new and interesting?

No, we really target the whole thing, I mean, even things like antibacterial things.

The team was briefing us on, if you think all the various things that go in the paint, it's -- every aspect of it has a material cost impact.

Now TiO2 is certainly at the top of the list.

Resins are at the top of the list.

Some of the other pigments that are in there are all key.

We're driving simplification in some of our raw materials, which allows us to bundle a larger spend, and that helps us as well.

So I would say we're focused on this on several different levels, not just TiO2.

Okay.

And then you also mentioned that you're paring back growth CapEx for this year.

Are there particular projects that you're focused on not doing or, at least, just going to get pushed into '18?

Or is this stuff that you just think don't make -- does not make sense anymore, just given the overall environment?

Well, I think, Vince, as you've followed us over the years, I think you'll find we try to be aggressive on all fronts and try to make sure what we're doing, whether it be growth-related expenses or growth-related cap spending, matches what's happening in the external environment.

And as Michael started to call out, we see a little growth environment.

So we are not pushing on some growth projects that could be delayed or deferred till a later time.

And again, I think that it's just our typical management style.

Our next question comes from Kevin McCarthy from VRP.

As you put together your business plans for 2018, what sort of uplift, if any, do you anticipate from end-use markets, like autos and constructions, in the wake of the natural disasters?

And put differently, if we think about the nickel drag in EPS for 4Q, how do you think that might trend into the first quarter of '18?

Well, first of all, I don't think there'll be any drag in the first quarter '18, Kevin.

So I think we could put that behind us.

I would not have anticipated much in the fourth quarter this year, but the damage in Mexico and Puerto Rico, I mean, we went 2 weeks without a single store being open in Puerto Rico.

And even now, we only have 50% of them open.

So I think when you look at having to rebuild stores completely in Mexico, that's going to have an impact, but not into the first quarter.

So I would say, as far as looking at 2018, as I said in my very first question from Duffy, I think automotive is, we're going to be down a little bit in the U.S.; up a little bit in Europe; and up a little bit in Asia, primarily driven by China.

So overall, I would say the market's going to be up 1% to 2%.

Industrial production, I see moderate improvement in that area.

And I think housing around the world is going to be solid, but not any barn burner.

And the biggest barn burner has historically been the U.S. So housing prices are up a lot in the U.S. The amount of new permits or, I would say, should be higher, could be higher, but it hasn't shown that.

So we don't -- we're projecting 2% to 3% growth in the -- well, in the total architectural market in the U.S., higher in the do-it-for-me market than do-it-yourself market.

Okay.

Then second question, if I may, for Vince.

You've flexed your capital expenditures down slightly this year.

Would you expect to be able to maintain the pace of 2.5% of sales next year in '18?

Again, Kevin, the same [theme] as I answered the last question with.

It depends on our growth outlook.

If we see a more robust growth environment, we'll step up cap spending.

If we don't, we're going to toe the line.

We hope to start the year a little more optimistic outlook and see what happens with -- as the year develops.

But for us, we're fortunate because we're a capital-light industry.

So 2%, 2.5% of sales is, relative to other industries, is very, very favorable from a shareholder perspective.

But again, we're not going to spend if we don't see the growth trajectory established.

Our next question comes from Don Carson from Susquehanna Financial.

Two questions, Michael.

So it seems, overall, you're expecting '18 to look like '17.

So is that kind of sort of a 1% to 2% volume growth for the company overall?

And how much can you leverage that with new internal initiatives?

I would say 2-plus percent.

So I don't see the 1% to 2% because, I think, some of the things that we've seen this year won't repeat.

So I think I would be erring on the 2-plus side.

And we are always driving productivity, so we're not going to walk away from productivity initiatives.

I think that's at the top of the list.

And we're going to continue to deploy our capital, and then we're going to continue to look for ways to improve efficiencies in the plants as well.

So I think we've had a historical preference to grow EPS 10%, and I don't think we're walking away from that.

Okay.

And then a follow-up on architectural pricing.

What kind of price increase have you been able to get at your company stores?

Have you matched the 2 price increases of your competitor over the last 12 months?

And are you able to get any price in the big-box channels?

Well, I think the answer to the first question is we have announced 2 price increases.

We are getting 2 price increases.

Typically, I always say that we get 50% to 75% of any increase we announced.

The last one -- dependent upon product, you can't just draw a line around it, is anywhere from 3% to 6% dependent upon the product and the market.

So in the big boxes, the answer is, yes, we do get it.

It's never as fast or as easy as we like, but they do recognize raw material inflation.

They do understand that we have to be profitable.

And we also are very sensitive to the fact that they have a business, they also need to run.

So we collaborate very well in that regard.

Our next question comes from Stephen Byrne from Bank of America Merrill Lynch.

Michael, you were just mentioning here a minute ago about this 2% to 3% outlook for U.S. architectural business.

How would you assess that in terms of where we are in the remodeling cycle in the U.S. with respect to the average household use of paint?

Are we at that prior peak?

Or if not, why not?

And what would it take to get there?

We're certainly not at the prior peak.

As far as what it takes to get there, the last peak, if you remember, there was, what, 2 million housing starts.

So we're a long way away from that, but we do have a lot more remodeling going on.

There's a lot of value in the houses.

So I -- there's still more upward potential in that regard, but you don't see the feeding frenzy on loans that you saw the last time.

So I think we're in a more sustainable place now, so I think that's a positive.

And Steven, this is Vince.

If you look over a long period of time and you take out the peaks and valleys surrounding the last financial crisis, which was, again, in part driven by homes, this is a 2% to 3% or 4% growth market.

And that's the value of the market, from an equity investor perspective, is its stability.

And so I think we've gone back to, what I would call, a more stable growth rate over a longer period of time.

And then with respect to this new brand that you're introducing in Home Depot, can that channel handle a new brand?

And is it entering at a new price point or quality point?

Yes, so the PPG Timeless stain is a premium stain, and it has started out very well.

And I think The Home Depot associates are pleased with that.

The PPG Timeless paint has also entered at a premium point, which is -- we're excited about.

It's the first time we've had a -- what I would call a premium product in The Home Depot stores.

It has also started out well.

I think it can certainly support it.

I think we have very sophisticated customers, who make good decisions.

And I think in this regard, we'll have to wait and see how it pans out.

But we're pleased with it.

We're going to put advertising money, support behind the brand at Home Depot as well as externally.

And so we're obviously happy with that.

Our next question comes from John Roberts from UBS.

Mike, on your early response to the question on environmentally regulation-driven closures in China, your answer was directed towards hydrocarbons and solvents.

Does that mean you're really not seeing anything more on the TiO2 side?

We had a number of closures, I think, of suppliers there.

But TiO2 prices, I think in China, actually went down during the quarter.

TiO2 prices went up in the quarter in China, and they did have some of the suppliers get shut down for emissions, and some were shut down because they were too close to where the party is doing certain activities.

Like today in Beijing, starting actually about 1.5 weeks ago, they shut down all the body shops in Beijing, and they're told to be shut down all the way through the end of October.

So it's not just the hydrocarbons, but that is a much bigger portion of it.

But I would say, anybody who's making dangerous goods is under pressure if they're not in a chemical zone, first and foremost, or if you have a bad historical record performance.

Those are the 2 places that they're going to first to enact regulatory enforcement.

John, this is Vince.

Again, I think, just to echo what we said earlier, for a company like PPG that has compliant coatings products, we think if this trend continues, longer term, it's favorable for us.

We know we have some local competition there that does not currently have compliant water-based products.

So the continual move toward more high-technology coatings, I think, favors the multinationals.

And then on the second question, the initial dilution on Crown, is that due to a temporary step-up in the inventory valuations?

Or are they just lower-margin business because they're more service-oriented, and then you got to take costs out to get the margins back to your corporate average?

John, it's definitely more the latter.

We typically bring in these small acquisitions at margins below ours.

We then are able to extract synergies and get them at or closer to our margins.

And the Crown acquisition the first quarter, will be in this quarter or fourth quarter.

So again, it's coming in at a lower level, and we'll start working on synergies -- or we already have started working on synergy capture.

Our next question comes from Dmitry Silversteyn from Longbow Research.

A couple of follow-ups, if I may.

First of all, on the protective and marine business, you put up a flat volume quarter-over-quarter this -- in the third quarter here, which, I think, is the first time in 5 quarters that you haven't had a pretty big downturn in volumes there.

How should we think about this business going forward?

Is it -- is this an aberration?

Or should we truly sort of reach the bottom and we can look forward to maybe more benign, if not necessarily positive comps as we get out into 2018?

Yes, so Dmitry, I think it's actually been 7 quarters, if I remember right.

So it's been...

7 quarters?

Okay.

Yes, that's memory.

I can have John follow up and give you the exact number.

But the first answer is, with the decline in marine, your protective business gets larger.

And the protective business is not as volatile as the marine side.

So that's the first thing.

So the mix is now such that protective is really significant.

Second, marine is at a bottom.

If you look the first time in 2 years, there's been a net increase in ship orders that were placed in the third quarter.

So that's a positive.

And I think that we're going to start to see continued growth in ship orders, but don't forget that we paint typically 18 months after the orders are placed.

So I think we're at the bottom, and it's always hard to tell -- calling the bottom.

So I won't be 100% sure on this.

But when I look at the order book, I see that -- I also see that China has picked up share.

So Korea and Japan have both lost share in this enterprise downturn.

And for us, that's good for us from a mix standpoint because we, obviously, are not winning as much in Japan as we win in China.

So that's a positive trend for us as well.

So overall, we're projecting a slight improvement quarter-over-quarter, in the fourth quarter as well.

So I would say that, for the short term, we're, in our own business, seeing an upturn.

And I think the market will also start to mirror that shortly.

Okay, that's helpful.

And then just to get a little bit more granular on the North American paint market.

I understand that you guys talk about your own store volumes, and you don't really discuss much what's happening in the DIY in the independent dealer channel.

But if you look at -- I'm assuming you have those numbers internally.

So if you look at sort of the pace of declines year-over-year, is it changing?

Can we talk about maybe inventory reduction that took place in DIY over the last couple of years, maybe have played out?

Any dynamics changing in terms of demand destruction in the independent dealer channel?

Or really, we have not seen much change from, let's say, the last 4 to 6 quarters that at least the DIY business has been suffering?

Dmitry, it's Vince.

I'll take the question here.

If you look at those 2 channels, the independent dealer channel has been a perennial modest share loss channel for multiple years.

The channel requires very little maintenance.

It's a very good channel for PPG and the other parties involved.

But the fact is, it's a modestly shrinking channel, and it'll be here for quite some time, but it'll continue to shrink.

And that has not changed in terms of its trajectory.

The big box channel, as Michael alluded to earlier, we think the DIY market's being primarily affected by low unemployment.

We -- PPG this year, we personally have not seen much inventory destocking or restocking.

That does happen from year-to-year to different products.

So it's certainly plausible in this space.

We had -- if you remember, Dmitry, we had some destocking last year.

So it just depends what products are selling versus which products are not.

But the fact of the matter is it's down low to mid-single-digit percentages, and that has not changed again from the beginning of the year.

Okay, so basically, we continue to see similar trends we saw over the past several quarters.

Okay.

Our next question comes from Michael Sison from KeyBanc.

In terms of the capital deployment, you have a little over $2 billion in cash today.

Then, I would imagine, you'd generate a good amount of free cash flow again in '18.

Is there a potential to do even a lot more than the $2.8 billion as you head into '18?

Yes, Mike, as you've followed us over the years, we like to put a cash deployment target out there.

At a minimum, we like to meet that target.

We raised the target in July to a minimum $3.5 billion.

And if there's something that's earnings accretive above that, we would certainly have the balance sheet firepower to do that and would be -- you should expect us to act upon that.

Okay, and then when you think about -- I know it's a little bit early to talk specifics on '18, but volumes sound like they could be a little bit better.

You'll recoup some margin from higher raw materials.

You got capital deployments.

And you sort of noted 10% is kind of the annual goal.

But given all that, wouldn't EPS growth be -- I don't know what the right [descript] would be, but stronger than 10%?

Well, again, I think when you look across the industrial basket of companies, 10% EPS growth in a low-growth environment, like we're talking about, is admirable.

And it depends on a lot of factors.

We are -- we do think there'll be slight inflation heading into next year.

We're still going to be working on getting our pricing up.

The one you didn't mention is currency.

Right now would be a slight tailwind.

So that would be a benefit to us as well.

But I do think all the levers that you talked about are the ones we see as well.

Our next question comes from Mike Harrison from Seaport Global Securities.

Michael, going back to the architectural EMEA commentary.

And you talked about that being a fragmented market with all the private label that's out there.

Does that suggest that there are additional consolidation opportunities were you to take out some of that private label business potentially?

Or is it a situation where you would need to work with those customers if you wanted to figure out a way to reduce the amount of shelf space that some of those private labels have?

Well, there's always consolidation opportunities both ways.

First, a customer, if they want to consolidate shelf space, they know where we live.

So that's the easy one.

We're always going in and doing aggressive product line reviews.

But probably, the more realistic opportunity is the fact that some of these private-owned paint companies are not getting recovery on the raw materials.

And even though these are good cash-flow-positive businesses, even in this environment, it may be an appropriate time for them to look at whether or not this is time to monetize or whether they have family situations that may be appropriate for them to look at selling.

So we try to stay close to all the large families in Europe so that they know, if they're in a position that they're ready to sell, that the first person to call is PPG.

So we stay close to that.

And then wanted to just ask on the industrial segment overall.

That margin looks like it was, as far as I can tell, the lowest since 2013 despite some volume growth there.

So I was wondering if you can just walk us through how much of that year-on-year margin pressure is coming from pricing versus raws.

Is there some mix component factored in there?

Obviously, the natural disasters had some impact on logistics costs.

What other factors are in there?

Again, maybe a year-over-year basis makes the most sense.

So just trying to understand what that margin could look like next quarter and into next year.

Mike, this is Vince.

I think the answer -- this is very simple.

We got -- as Michael mentioned, we've got a very large amount of sophisticated customers.

Takes us further in terms of time to price with those customers.

We're still seeing very high inflation rates on raw materials.

So that's the gap as we got to continue to push pricing in order to recover the margins.

All the other things you mentioned, I think are certainly a piece of the puzzle, but the bigger piece is us -- for us to get price to offset raws.

Our next question comes from Laurence Alexander from Jefferies.

I have 2 questions, might be very quick ones.

First, most of the levers we've talked about have been either end markets or consolidation.

Is there anything on the technology or R&D side that you can do over the next couple of years, that if you're still in a slow-growth environment at the end of the decade, your growth algorithm relative to that environment changes?

And secondly, I guess, just somewhere there was some noise around the European Union debating sort of labeling risks on TiO2 as an ingredient and that possibly affecting packaging.

Has there been any update on that?

And if there has been movement, what opportunities does that create for you?

Well, if you start with the TiO2 question, there was an original push by France to label that product as a probable carcinogen, if I get my facts right.

And that's been downgraded to possible.

We're in complete disagreement with the science.

They're looking at one old report.

We have billions of man hours of safely handling TiO2 in our plants.

Of course, the TiO2 suppliers have the same thing.

But given the fact that it's embedded in a liquid matrix, there's no concern in the paint product.

We've even done testing, sanding cars and things like that.

So there's no push to impact paint.

If there were -- if we were to eventually "lose" this argument with the authorities in Europe, it would lead to us having to put more safeguarding in dispensing the TiO2 into the paint.

That is not -- we already protect our employees.

Our employees feel very comfortable handling TiO2.

But we'll do whatever is necessary to continue that.

So we don't feel like that's, in any way, a threat to the business.

But the fact of the matter is we think the science is flawed.

So when you try to stick a ton of TiO2 powder into a rat, I'm not sure that replicates what happens to a human, but so be it.

In regards to technology though, we are strongly focused on R&D.

We spend nearly $500 million a year on this.

We're -- spend more than any other coatings company.

We've led the -- if you look at the BPA non-intent, if you look at the waterborne for refinish, the compact process for automotive, what we've done as far as some of the Advantage product, passive fire protection in our PMC business.

We have a number of success stories in that regard, and we would expect to continue to drive innovation, which should allow us to grow faster than the market, which has been our historical stand.

So I don't see a lot of difference going forward.

I'm excited about our R&D pipeline.

I have a quarterly meeting with these guys, and they are really good at what they do.

Our next question comes from Arun Viswanathan from RBC Capital Markets.

I got 2 questions: one on margins and one M&A.

So first on the margins.

Industrial was down a couple of hundred basis points; year-on-year performance, also down.

Is there a specific target that you have on recovery of those margins?

And if you do, maybe you can just help us understand how much of that you'll get through price or cost reductions.

Arun, this is Vince.

We're working all levers to recover the margins.

We've got some self-help activities, obviously, that Michael talked about in the opening comments.

We're pushing price with all of our different segments of customers.

Our target, as Michael said, is to get margins back to flat in the first half of next year, hopefully earlier in that first half as opposed to later.

And I think we're on path now to do that.

We're, as Michael again mentioned earlier, 6 or maybe 7 months behind where we would like to have been if you look at past situations.

But we're comfortable we'll work back to margin parity.

Do you actually need raws to come down for that to happen?

Or is it price should get you most of the way there?

No, I think with our pricing actions predominantly as well as some productivity, we'll -- those would be sufficient to recover the raws inflation.

And just real quickly, if I may, on M&A.

Crown was in the coatings services area.

You've talked about doing adjacencies before, adhesives and so on.

Is that still an area of focus?

Or are you kind of more focused on coatings producers?

No, I would tell you that we're very comfortable in the adhesives and sealants area.

We did do one.

I think it was last -- early last year when we did the acquisition of LJF in France on the sealant side.

That's been a huge win for us.

We bought 40 -- or 60% of it.

Our partner, Total, is very happy that we bought it.

They're a lot more profitable at owning 40% than they were at 100%.

So this is -- they've been pleased with what we brought to them.

So we're very comfortable in that space.

The adhesives are certainly an area.

We have the specialty coatings and material business.

That would be another area that we would stick in.

And obviously, coatings is our bread and butter.

So those are the focus areas.

Our aerospace business is a good business in a number of areas.

So I think you're going to expect us to stay in the businesses that we're most focused on now and the near -- what I call, the near adjacencies.

So if it touches paint or touches the adhesive or touches the sealant, that would be the areas we'd be focusing on.

Our next question comes from Jim Sheehan from SunTrust Robinson Humphrey.

On the subject of AkzoNobel, there's been some deterioration in their results, management changes.

Activists are still clamoring for changes.

Is this a situation you might revisit in the future when you're able to?

Jim, I think we were very clear.

We withdrew our offer June 1. We have moved on.

Our shareholders expect us to continue to create value today, and we're not paid to wait around.

So we're going to continue to do that.

So we're happy with our acquisition pipeline.

And our goal is to improve our business every single day, and you saw that in these results.

We've closed the gap on the margin deterioration.

You're going to expect us to close that gap again the next quarter as well.

And so I'm pleased.

I guess, the last comment I would say is that I want to thank all our employees.

We had all these hurricanes and earthquakes, and our employees did a phenomenal job of supporting each other and supporting the company, and I just want to thank them in that regard.

So maybe that answers your question, Jim.

And ladies and gentlemen, that will conclude today's question-and-answer session.

At this time, I'd like to turn the conference call back over to John Bruno for any closing remarks.

Thanks, Jamie.

Once again, I'd like to thank everybody for their time and interest in PPG.

If you have any further questions, please contact me at the Investor Relations area.

This concludes our third quarter 2017 earnings call.

Have a good day.

Ladies and gentlemen, the call has now concluded.

We do thank you for attending today's presentation.

You may now disconnect.