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CompanyName:PPGIndustriesIncCompanyTicker:PPGSector:BasicMaterialsIndustry:Chemicals
EventDescription:Q12016EarningsCallMarketCapasofEventDate:29.41BPriceasofEventDate:112.66
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PPGIndustries(PPG)EarningsReport:Q12016ConferenceCallTranscriptThefollowingPPGIndustriesconferencecalltookplaceonApril21,2016,02:00PMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
ScottMinder;PPGIndustries,Inc;IRMichaelMcGarry;PPGIndustries,Inc;PresidentandCEOVinceMorales;PPGIndustries,Inc;VPIR,TreasurerFrankSklarsky;PPGIndustries,Inc;EVPFinanceandCFO
OtherPart icipants
FrankMitsch;WellsFargoSecurities,LLC;AnalystMahulDalia;RobertW.Baird&Company,Inc;AnalystChristopherParkinson;CreditSuisse;AnalystDavidBegleiter;DeutscheBank;AnalystRobertKoort;GoldmanSachs;AnalystJeffZekauskas;JPMorgan;AnalystDuffyFischer;BarclaysCapital;AnalystVincentAndrews;MorganStanley;AnalystDonCarson;SusquehannaFinancialGroup;AnalystP.J.Juvekar;Citigroup;AnalystJohnRoberts;UBS;AnalystJamesSheehan;SunTrustRobinsonHumphrey;AnalystArunViswanathan;RBCCapitalMarkets;AnalystMikeHarrison;SeaportGlobalSecurities;AnalystNilsWallin;CLSAAmericas,LLC;AnalystLaurenceAlexander;JefferiesLLC;AnalystIvanMarcuse;KeyBancCapitalMarkets;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator :
(OperatorInstructions)
Pleasenotethiseventisbeingrecorded.
IwouldnowliketoturntheconferenceovertoScottMinder,DirectorInvestorRelations.Pleasegoahead.
Scott Minder (IR):
Thankyou,Operator
ThisisScottMinder,DirectorofInvestorRelations.WeappreciateyourinterestinPPGIndustries,andwelcomeyoutothisteleconferencetoreviewPPG'sfirstquarterof2016financialresults.
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CompanyName:PPGIndustriesIncCompanyTicker:PPGSector:BasicMaterialsIndustry:Chemicals
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JoiningmeonthecallfromPPGareMichaelMcGarry,PresidentandChiefExecutiveOfficer;FrankSklarsky,ExecutiveVicePresidentandChiefFinancialOfficer;andVinceMorales,VicePresidentofInvestorRelationsandTreasurer.
OurcommentsrelatetothefinancialinformationreleasedonThursday,April21,2016.IwillremindeveryonethatweposteddetailedcommentaryinaccompanyingpresentationslidesontheInvestorCenterofourwebsite,PPG.com.Theslidesarealsoavailableonthewebcastsiteforthiscall,andprovideadditionalsupporttotheopeningcommentsMichaelwillmakemomentarily.
FollowingMichael'sperspectiveontheCompany'sresultsforthequarter,wewillmovetoaQ&Asession.
Boththepreparedcommentaryandthediscussionduringthiscallmaycontainforward-lookingstatementsreflectingtheCompany'scurrentviewoffutureeventsandtheirpotentialeffectonPPG'soperatingandfinancialperformance.Thesestatementsinvolveuncertaintiesandriskswhichmaycauseactualresultstodiffer.
TheCompanyisundernoobligationtoprovidesubsequentupdatestotheseforward-lookingstatements.Thispresentationalsocontainscertainnon-GAAPfinancialmeasures.TheCompanyhasprovidedintheappendixofthepresentationmaterialswhichareavailableonourwebsitereconciliationsofthesenon-GAAPfinancialmeasurestothemostdirectlycomparableGAAPfinancialmeasures.
Foradditionalinformation,pleaserefertoPPG'sfilingswiththeSEC.
NowletmeintroducePPGPresidentandChiefExecutiveOfficerMichaelMcGarry.
MichaelMcGarry(PresidentandCEO):
Thankyou,Scott.Andgoodafternoon,everyone.IwanttothankyouforyourcontinuedinterestinPPG.
Todaywereportedfirstquarterof2016financialresults.Weachievedfirst-quarternetsalesof$3.7billionandrecordadjustedearningsperdilutedshareof$1.31.
Overall,wecontinuedtodeliverstrongfinancialresults,asevidencedbyouradjustedearningsperdilutedsharegrowthinthequarter,whichincreased11%versustherecordestablishedintheprioryear.Weachievedtheseresultsdespiteongoingunfavorableforeigncurrencytranslationandcontinuedunevenglobaleconomicandmarketconditions.
Severalfactorscontributedtotherecordfirst-quarterresults,includingearningsleverageonourorganicsalesvolumegrowth,ourcontinuedheritageofcostmanagementandacquisition-relatedsalesandincome.Additionally,wecontinuedtoutilizeourstrongbalancesheettodelivershareholdervalueincludingfirst-quarter2016sharerepurchasestotaling$150million.
Forthequarter,ouraveragedilutedsharesoutstandingdeclinedby2%yearoveryear.Ourstrongquarterlyresultswereaidedbyourownoperationalandstrategicactions,includingaggressiveeffortstodrivehigherorganicgrowthdespiteamixedeconomicenvironment.
Wecontinuetoaccelerateourworkondevelopingandcommercializingnewcustomer-driventechnologies.Thisincludespackagingandcoating'songoingcustomeradoptionofournewcancoatingtechnologiesalongwithcertaintytechnologyadoptionsinourprotectivecoatingsbusiness.
Inaddition,wearecontinuingtherolloutofourenhancedcustomerbrandinginitiatives.AsyouwouldexpectfromPPG,wecontinuetomaintainourdisciplineovercosts,includingfinalizingtheremainingactionsfromourpreviouslyannouncedbusinessrestructuringprogram.
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NowIwilldiscussspecificbusinesstrendsforthefirstquarter.Ournetsalesinlocalcurrenciesincreasedabout4%whilereportednetsaleswereconsistentwiththeprioryear.Localcurrencynetsalesgrowthwasdrivenbyacquisition-relatedsalesofabout3%andsalesvolumegrowthof1%.Thesegainswereoffsetbyunfavorableforeigncurrencytranslationof4%orabout$140millioninthefirstquarter.
Ourfirst-quartersalesvolumesincreased1%,consistentwiththeprioryear'sgrowthrate,reflectingacontinuationofmodestglobaleconomictrendsledbybroadeningEuropeandemandgrowth.
Salesvolumesgrewinemergingregionsby1%.ContinuedgrowthinAsia-PacificincludingChinawaspartiallyoffsetbypersistentmarketweaknessinSouthAmerica.Mostofourbusinessunits(technicaldifficulty)experiencedsalesvolumesinAsia,ledbyincreasedmarketdemandforPPG'snewtechnologiesinourpackagingandautomotiverefinishingcoatingsbusinesses,alongwithgrowthinprotectivecoatings.
AutomotiveOEMsalesvolumesinAsiaweretemperedprimarilyduetoastrongprior-yearcomparableperiodwherePPGexperiencedabove-marketdouble-digitpercentagevolumeincreases.Weexpectsecond-quarteremergingregionsalesvolumesgrowthratestoimprove,supportedbyincreasesinmostbusinessesinAsiaandmodestoverallimprovementsinLatinAmerica.
VolumesintheUSandCanadaregionswereslightlyhigherversusprioryearandrepresentedsequentialimprovementscomparedtothepriortwoquarters.RegionaldemandstrendscontinuetobemixedbybusinessandcountrywithongoingdemandsoftnessincertainmarketswithinCanada.
Intheregion,salesvolumesgrewinourpackagingandautomotiverefinishedcoatingsbusinessalongwithmodestgrowthinourArchitecturalCoatingsbusiness.Aerospacesalesvolumesdeclinedprimarilyduetolowercommercialdemandandcontinuedcustomerinventorymanagementactions.
Lookingahead,weanticipatefurtherincrementalimprovementsinregionalgrowthratesinthesecondquarter,buildinguponthemonthofMarch,whichhadthestrongestsalesvolumegrowthwithinthequarter.Regionally,ourhighestfirst-quartersalesvolumegrowthratewasinEurope,MiddleEastandAfrica,whichdeliveredover3%growth.
WecontinuetoexperienceabroadeningimprovementinEuropedemandwithourfifthconsecutivequarterofimprovinggrowthrates.PPG'svolumegrowthrateswerepositiveacrossWesternEuropewithmostcountriesimprovingyearoveryear.Despiteoverallgrowththisquarter,regionaldemandlevelsremainuneven.
ImprovedperformanceinourArchitecturalCoatingsEMEAbusinessaddedtocontinuedstrongperformanceinourpackagingandautomotiveOEMcoatingsbusinessintheregion,primarilyduetocontinuedcustomeradoptionofPPG'smarket-leadingtechnologiesandrelatedworld-classproduct,serviceandsupport.
ArchitecturalgrowthwasledbygainsintheUKandBeneluxcountrieswiththeyear-over-yeargrowthtrend.Weremainoptimisticforfutureeconomic-drivendemandexpansionintheEMEAregion.Despiterecentimprovements,regionaldemandremainswellbelowpre-recessionlevelsandwecontinuetoseesignsofongoingmodestimprovementsinvariouseconomicsubsectors.
Duringthepastseveralyearswehavecompletedsignificantactionstoreduceouroverallregionalcoststructure.Similartoourexperiencethepastseveralquarters,weexpectstrongincomeleverageonanyincrementalsalesvolumegrowth.
Iwouldliketoprovideaquickupdateonforeigncurrencytranslation.AsImentionedearlier,duringthequarter,unfavorableforeigncurrencytranslationloweredsalesbyapproximately$140millionandpretax
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incomebyabout$15million.
ThiswasprimarilyrelatedtotheMexicanpesoandtheCanadiandollarbutincludedothercurrenciesaswell,suchastheeuro.Basedoncurrentexchangerates,weanticipatefull-yearunfavorableforeigncurrencytranslationtolowernetsalesby$200millionto$260millionandincomeby$30millionto$40million.
Thisisadecreasefromthefiguresthatweprovidedduringourfourth-quarter2015earningscallinJanuary.ThischangereflectsthestrengtheningofseveralforeigncurrenciesversustheUSdollarduringthefirstquarter.
Shiftingtoearnings,year-over-yearadjustedearningsperdilutedshareincreased11%toanewfirst-quarterrecordof$1.31includingunfavorableforeigncurrencytranslation.Thismarksthe13thconsecutivequarterofdouble-digitpercentageearningsperdilutedsharegrowthandwasachieveddespiterecordperformanceinthefirstquarterof2015.
Thistrendofstrongincreasesinquarterlyearningsperdilutedshareisareflectiononthesuccessofourbusinessportfoliotransformationactionstakenoverthepastseveralyears,includingthesuccessfulintegrationandsynergyachievementandseveralmajoracquisitions.
Forthequarter,PerformanceCoatingssegmentsalesdeclinedby1%andsegmentincomewasupmorethan6%.Contributingtotheresultswerehigheracquisition-relatedsalesandincome,primarilyfromLeJointFrancaisandCummingsMicrowave,strongincomeleverageonhighersalesvolumesandbenefitsfrombusinessrestructuring,partlyoffsetbyunfavorableforeigncurrencytranslation.
Segmentincomeincludedapproximately$15millionofincrementalgrowth-relatedspendinginArchitectureUSandCanada.Iampleasedtoreportthatwearecurrentlylaunchingseveralnewproductswithinmanyofourdomesticnational-accountpartnersstorenetworks.Theselaunchesincludenewpremiumproductsatsomenationalaccountsaswellasimprovedproductformulationsanddifferentiatedproductlabeling.
IndustrialCoatingssegmentsaleswereup2%andsegmentearningsincreased9%.Earningsleveragefromorganicsalesvolumegrowth,acquisition-relatedsalesandincomealongwithdisciplinedcostmanagementwerepartiallyoffsetbyunfavorableforeigncurrencytranslation.Acquisition-relatedgrowthwasprimarilyfromtheREVOCOATandIVCindustrialbusinessesacquiredin2015.Thesebusinessescontinuetodeliverstrongfinancialresultsandtheyprovideanexcellentplatformforfutureglobalbusinessgrowth.
Glasssegmentsalesdeclined2%andearningsdeclinedby7%versustheprioryear.Highersellingpricesandcostmanagementactionswereoffsetbylowersalesvolumes,$8millioninrepair-relatedexpensesduetoaplannedfacilityoutageandlowerequityearnings.Despitethelowersalesvolumes,underlyingflatglassdemandremainssolid.Additionalsegmentandregionaldetailscanbefoundinthepresentationmaterials.
Overall,ourbusinessperformedwellinthefirstquarteraswecontinuetomanageagainstthenextglobaleconomicbackdrop,continuetofocusoureffortsonimprovingorganicgrowthratesthroughenhancedproductinnovation,customerbrandingstrategies.Weremaindiligentoverourcostsandareonpacetoachievethepreviouslyannouncedsavingsfromourongoingbusinessrestructuringprogram.
Finally,ourbalancesheetremainsstrongandwearecommittedtodeployingbetween$2billionand$2.5billionofcashinyears2015and2016combinedonacquisitionsandsharerepurchases.
Inthefirstquarter,werepurchased$150millionofourstockbringthetotalto$900millionforthetwo-
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yearperiodtodate.Coupledwiththeapproximately$400millionpaidforacquisitionsin2015,PPGhasdeployedabout$1.3billiononearnings-accretiveactionsagainstthistargettodate.Wehaveastrongglobalpipelineofacquisitioncandidatesacrossvariousend-usermarkets.
Inadditiontosharerepurchasesandacquisitions,PPGremainscommittedtosustainabledividendincreasesaspartofourcapitalallocationstrategy.
TodayourBoardofDirectorsapprovedadividendincreaseof$0.04pershare,bringingthequarterlydividendto$0.40pershare.Thisrepresentsan11%increaseversusthepriorquarterlydividend.
Ourlastquarterlydividendincreasewas7%inthesecondquarterof2015.
Asyoucanseebyouractionsandcontinuedstrongfinancialresults,weremainfocusedondrivingadditionalgrowthaimedatcreatingshareholdervalue.
Thisconcludesourpreparedremarks.Onceagain,weappreciateyourinterestinPPG.
Andnow,Operator,wouldyoupleaseopenthelineforquestions?
QUESTIONS&ANSWERS
Operator :
(OperatorInstructions)
FrankMitschwithWellsFargo.
FrankMitsch (Analyst-WellsFargoSecurities,LLC):
Michael,IwasintriguedbyyourcommentaboutMarchbeingthebestvolumemonthofthethreeinQ1.CanyougiveusanideaastowherethatwasandwhatdoesthatsuggestforQ2andbeyond?ArewelookingatPPGgettinghigherthana1%ofvolumegrowthin2016?
MichaelMcGarry(PresidentandCEO):
Well,Frank,let'sstartwiththeobviousquestion.Wearecertainlynothappywiththe1%growth.Butweareintheveryearlystagesofourgrowthprogram.SotheBPA-NIforpackagingencodings--I'msurewewillgetquestionsonthat.Butthat'sprogressingwell.TheOEMcompactprocesscontinuestodowell--refinish,waterborne.I'dsaythat'sthefirstcommentary.
Thesecondone,whichisMarch--March,wehadanicestarttothepaintseason.Clearly,weareanticipatingthatthisisgoingtobeabetterpaintseasonthanwehadlastyear.So,thatwasamanifestationofthat.AlsoyouhadtheunevenanduncertainreturnfromtheChineseNewYear.
Peoplewereworriedaboutthat,sowewere--andwetriedtotellyouthatwehadagoodorderbookcomingintotheChineseNewYearinourlastcall.WedidseethatcomingoutofChineseNewYear,sowedidseegoodgrowththere.
AndIthinktheotheroneisabroadeningofthegrowthrateinEurope.Thatwasanicewinthereaswell.SoaltogetherIwouldsaythatwewerecloserto2%to3%growthinMarchversusthe1%thatwereportedintheoverallquarter.
FrankMitsch (Analyst-WellsFargoSecurities,LLC):
Okay,allright.AndasIlookatslide9andtheautoforecast,obviouslywehavebeenspoiledinexpectingPPGtooutpacetheoverallindustry.AndinQ1,Iguesspartlyduetoadifficultcomp,the
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Companymatchedtheoverallindustryratherthanexceededtheoverallindustry.
ButasIlookatthatchart,itlookslikeQ2Chinayouaregoingtoseeamaterialramp-upinactivities.AmIreadingthiscorrectly?
MichaelMcGarry(PresidentandCEO):
IthinkthewayIwouldthinkaboutthis,Frank,iswehavealwayssaidthatwearenotalwaysgoingtooutperformtheindustry.Atsomepoint,wewouldhavesomereversiontomean.
Ifyourememberlastyear,first-quarter2015,wewereup9%andAsiawasupmuchhigherthanthat.So,whenIlookatourautomotiveperformance,wehadtworegionsthatoutperformed,oneregionthatunderperformedandoneregionwasatparity.Sowewereessentiallyatthe1.7%growthratefortheindustry.
SoIwouldsaywhenIthinkbackaboutthefouryearsofconsecutiveoutperformance,ifourteamtookaone-quarterpause--nothappybutobviously,inthegrandschemeofthings,wewerecontinuingtoperformverywellintheautomotivebusiness.AndIwouldexpectthatwearegoingtocontinuetoseegrowth.
InEurope,registrationswereup5%,soIwouldexpectEuropeanbuildstocontinue.Asiabuilds,Indiaisreallydoingwell--I'mnotgoingtocallthebottominBrazilbecauseIdon'tknowwherethatis.ButcertainlyIthink,overall,wearepleasedwiththeperformance.
FrankMitsch (Analyst-WellsFargoSecurities,LLC):
Allright,that'sveryhelpful.Thankyou.
Operator :
MahulDalia(Analyst-RobertW.Baird&Company,Inc):
It'sactuallyMahulDaliasittinginforGhansham.CanyoutalkaboutpricinginautoOEMmarketglobally?Areyouseeinganypriceconcessions,giventhedeclineinrawsandthebargainingpowerofcustomersinthatbusiness?Andthenjustmorebroadly,howshouldwethinkaboutpricingfortheCompanyasawholein2016?
MichaelMcGarry(PresidentandCEO):
Well,let'stalkaboutpricingingeneral.Attheendofthedaywehaveconsistentlybeenabletopriceinthisenvironment.Lastyear,wehadmarginallypositivepriceinanobviouslyverychallengingenvironment.Wehaveforecastedatmarginally--flattomarginallyupagainthisyear.
Intheautomotivesegment,it'snotreallyafairtolookatitonapiecebypiecebasisbecausemostofwhatwehaveisnewproducttechnology.Soit'shardtocomparethenewtechnologyversustheold.
Sooverall,wehaveverysophisticatedautomotivecustomers.Theyexpectfairpricing.Wehavenewtechnology.Weexpecttobepaidappropriatelyforournewtechnology.AndIwouldsaybothpartiesareveryhappywiththepriceandvalueandperformanceofthenewproductinthemarket.
MahulDalia(Analyst-RobertW.Baird&Company,Inc):
Thankyou.Andformynextquestion,canyouparceloutgrowthinthevariouschannelsinNorthAmerica[team]duringthequarter?SoIguessCompany-ownedstores,nationalaccounts,independentsinCanadaandhowyourperformancecomparedtothemarket.
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Scott Minder (IR):
Wearehavingalittledifficultyhearingyou.Letmerepeatthequestion.IthinkyouaskedifwecouldparseoutthedifferentvolumegrowthbyUSarchitecturalchannel.Isthatcorrect?
MahulDalia(Analyst-RobertW.Baird&Company,Inc):
Yes,exactly.
MichaelMcGarry(PresidentandCEO):
Okay.SoUSarchitecturalchannel--sooverall,wehadthelowtomidsingledigitsinthatchannel.Itdependsbyregion.Soobviously,theonethatcontinuestogobackwards,andnosurprise,isthedealer,independentdealerchannel.That'sanareawhere--thatisashrinkingenvironment.YouhavethesmallownersofhardwarestoresandpaintshopsovertimelosingsharetothebigboxesandtotheCompany-ownedstores.Sonochangeinthatenvironment.
Idon'twanttocomment,perse,onhowourretailcustomersaredoing.Ithinkit'suptothemtocommentonhowtheirretailcustomersaredoing.ButIwilltellyouthatwehadnewproductlauncheswithDiamondintheGliddenbrandinHomeDepot.Theearlysigns--it'sjustnowgettinginthemarket.Theearlysignsareverypositive.WehaveasuperpremiumpricepointofParamountandMenardsalsoofftoagoodstart,GliddenCompleteatWalmart.
SoIthinkwhenwelookatitfromourperspective,andIcertainlyhavetoletcustomerstalkaboutitfromtheirperspective,butwearepleasedwithwhatweareseeing.TheCompany-ownedstores--itvariesbyregionandvarieswhetherit'sUSandCanada.Butclearly,there'sanopportunityforustocontinuetodelivermoregrowthgoingforward.
MahulDalia(Analyst-RobertW.Baird&Company,Inc):
Great,andjustonelastone--canyougiveussomemoredetailsontheweaknessinaerospace?Isitjustsmallplanes,largeplanesorboth?Andwhatgivesyouconfidenceonanimprovementin2Q?
MichaelMcGarry(PresidentandCEO):
Sure.Sowhenyouthinkabouttheaerospacebusiness,youhaveseveralthingstothinkabout.Sooneofthemis--youknow,ayearagocustomerswerehavingsignificantlaunchprograms.Andastheyrampedup,thelastthingtheywanttodoisstoptheirlinewithlackofproduct.Andsotheytendedtooverinventory.
Nowtheyaremoreatasteady-staterate.Andsothere,itallowsthemtohavemoreconfidenceintheirbuildrateandtheirusagerate.Sothat'sashort-termhurdle.
Youdohavesomeunderlyingsoftness,though.Ifyoutaketheoilandgasmarket,theyflyalotofhelicopters.Obviously,theyareflyinglesshelicoptersinthiskindofenvironment,soyouhavelessaftermarketsalesandyouhavelessnewhelicopterbuilds.Sothatwouldbeone.
Andthen,generalaviation--there'salotofchurninthewater,asyoucantell,withoneofourcustomersinCanada.Sothere'ssomethingsgoingonupthere.
SoIthinkoverall,weareonashort-termone-quarter,two-quarterbumpintheroad.ButIanticipatethesecondhalfoftheyearforaerospacetobemuchbetter.Iwouldpointoutthattheacquisitionsthatwemade,thenewaerospaceacquisitionswemade,areperformingverywell.Andtheirgrowthrateisabovethegrowthrateoftheoverallbusiness.
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Sotheoutlook,Iwouldsay,isup.Solid.
MahulDalia(Analyst-RobertW.Baird&Company,Inc):
Great,thankyouverymuch.
Operator :
ChristopherParkinsonwithCreditSuisse.
ChristopherParkinson (Analyst-CreditSuisse):
CanyoujustwalkthroughalittlemoredetailonwhatyouareseeingintheMexicanmarketinComexandpotentiallyjustparseoutarchitecturalstoresversusindustrialenergy,governmentspending?Andjustoverall,justwhatassumptionsaregoingintoyourdoubleMexicanGDPgrowthassumption?Thankyou.
MichaelMcGarry(PresidentandCEO):
Sure.We'llstartwithfirstquarteroflastyear;wewereup10%plusinMexico.Andthisyearwewereup--oursaleswereup5%ofMexico.TheGDPinMexicois2.2%.
Ourgrowthisbeingdrivenbyseveralfactors.Thefirstoneisthenewstoregrowthrate.Lastyearweadded170storesinMexico.Weareover4,000stores.Wearenow,today,aswespeak,over4,100stores.Andwewilladdanother170storesthere.SowehavebeengainingalotofshareinMexico.TheComexteam,whenweboughtthem,hadaverylargeconcentrationoftheirmarketshareinwhatIwouldcallcentralMexico.TheywereunderrepresentedinsouthernMexicoandunderrepresentedinnorthernMexico.
ButwehaveaUSretailpartnerthathavestoresinMexico,sowerecentlyintroducedastore-in-storeconceptdownthere.That'sallowingthemtogainshareaswell.Sofromthestoresideit'saboutserviceandproductavailability,andthat'sdoingverywell.
Certainly,governmentspendinghassoftened.Andalotofthatisrelatedtoprojects.Thegovernmentistryingtoreducespending,giventhepriceofoil.Butthereareelectionscomingup,soIwouldtellyouthatwearegoingtowaitandseehowitplaysout.ButhistoricallyinMexico,whentheyhaveelections,thelocalpoliticianstrytosprucethingsuptomakethingslookalittlebitbetter.Andobviously,iftheydothat,wewillbeveryhappytoparticipate,aswehaveaverysignificantshareinMexico.
VinceMorales (VPIR,Treasurer):
IfIcouldaddoneitem,Chris,oneofthesynergieswehadearmarkedwhenwedidtheacquisitionwasarevenuesynergy.That'swhatweaddedsubsequenttotheacquisition.WearedoingverywellinourprotectivecoatingsalesintoMexico,whichwasoneofthesynergieswetargeted.Sothatisanotheraddertothegrowthrate.
ChristopherParkinson (Analyst-CreditSuisse):
That'sveryhelpful,thankyou.Andjustaquickfollow-up--youobviouslyalreadyhadafewshipmentsfrom[Billions].Canyoujustgiveusaquickupdateontheagreement,rampoutlook,etc.,goingforward?Andjustgenerally,howdoyoufeelabouttheprospectsversus,let'ssay,maybeayearago?Thankyou.
MichaelMcGarry(PresidentandCEO):
Well,IwouldtellyouthatwehavetripledourpurchasesfromBillionsinQ1versus4Q.Butwearenot
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satisfiedwiththebuildrate,ifyouwill.Wethinktheycandelivermore.Obviously,theyaresuccessfulatsellingotherplacesbesidesPBG.Butoverall,theproductqualitycontinuestogetbetter.Theconsistencygetsbetter.Andweareusingit.
WerecentlystartedbringingitintootherregionsbesidesUSandCentralAmericaandLatinAmerica.Sotheusagebroadens.Obviously,westartedinAsia.
ButIwouldtellyouoverallwehavebeenpleasedthatwehavecertainlychallengedtheHenanBillionsGrouptocontinuetoworkhardertobringtheproductionrateuptoahigherlevel.
VinceMorales (VPIR,Treasurer):
Theirproductionratehasrampedsignificantlyoverthelastsixmonths.Theyarerunningverygoodyieldsandtheyjustneedtorampuptheirpaceabitmore.
ChristopherParkinson (Analyst-CreditSuisse):
That'shelpful.Thankyouverymuch.
Operator :
DavidBegleiterwithDeutscheBank.
DavidBegleiter (Analyst-DeutscheBank):
Thankyou.Mike,howdoyouexpecttherecentriseinoilpricestoimpactPPG?AndwhenwillitbegintoimpactPPG?
MichaelMcGarry(PresidentandCEO):
David,Iwouldfirststartbysayingthat,asyouknow,wealwaystellyouthatwepullrawmaterialssixtoninemonths--ittakesussixtoninemonthstocollectthrough.Sowearestillpullingthroughthelowerpricesthatwesawin3Q,4Q.Sothat's--youknow,ifyouarelookingforthatpositive.
Thesecondthingisoilbounced--ifyouthinkaboutwhereitstartedQ1andwhereitfinishedQ1,itbounceddown,camebackalittlebit.ButI'dsayoverallit'stooearlytoseewherethatisgoing.There'salotofuncertaintyinthemarkets.Obviously,wearenotoiltraders.Butyoucanreadthesamethingswereadasfarasoil.
Sowearenotdispleasedwithwhereweareinpullingthroughtherawmaterialsstatement.
DavidBegleiter (Analyst-DeutscheBank):
AndMike,overall,doyouthinkyourmarginsarenearpeak?Orcantheygohigherwiththeoperatingleverageoffsettingmaybealittlebitofcostinflationhere?
MichaelMcGarry(PresidentandCEO):
Yes,wearecertainlynotatpeak.Don'tforget,westillhavethesavingsforEurope.Wesaid,forthefullyear,Ithinkitwas$70millionthatweweregoingtopullthroughinEurope.Sothat'sone.
Two,youhavesignificantearningsleveragewhenwegetvolumerecoveryinEurope.Obviously,yousawthemargin'sexpansioninthisquarter.ThatwasdrivenbyseveralthingstheleveragefromEurope,restructuringsavings,acquisitionsynergies,somemodestrawmaterialbenefits.
Butoverall,Istillthinkwecandobetterandcertainlyourteamthinkswecandobetter.
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DavidBegleiter (Analyst-DeutscheBank):
Thankyou.
Operator :
RobertKoortwithGoldmanSachs.
RobertKoort (Analyst-GoldmanSachs):
Michael,howdoyoudiscerniftheaerospacecustomerisinventoryadjustmentsversusdemandadjustments?
MichaelMcGarry(PresidentandCEO):
Well,onethingwedoiswehavesignificantinsightbecauseofoursharewithsomeofthesecustomers.Soweareableto--Idon'twanttocallitvendormanagedinventory,butwehavesignificantinsightintowhattheyarestocking.Thegrowthrateforthelarge--ifyouthinkBoeingandAirbus,obviouslytheyhavebigbacklogs.Buttheirbuildrateisflattomarginallydown.Andthatisobviously--whenyouthinkabouttheirinabilitytogetproductionratesup,it'sfrustratingforus.
Ican'timaginehowfrustratingitmustbeinternallyforthem.Butthat'sthetwowayswelookatthat.
RobertKoort (Analyst-GoldmanSachs):
Canyoutalkaboutthevariationinpriceacrosstheportfolio?Iassumethereareputsandtakes,butarethereanyparticularareasoutsideofnon-BPAandBPA-NIwheretherehasbeensomepriceimprovement?
MichaelMcGarry(PresidentandCEO):
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Wehaveplusesandminuses,asyounoted,throughouttheportfolio.Butthere'snooutliersoneitherside.
RobertKoort (Analyst-GoldmanSachs):
Andlastone,veryquickly
MichaelMcGarry(PresidentandCEO):
Ithinkthat'sareasonableexpectation.Aswehavealwayssaid,it'simpossibletopredictlargeones.Wehaveapipelinethatlooksverysimilartothepipelinewehadlastyear.Wehadsevendealsthathadabout$400millioninsales.IwouldexpecttoseeasimilarlevelofactivitythisyearandIthinkyouwillhave--youwillseethataswegothroughtheyear.
RobertKoort (Analyst-GoldmanSachs):
Thankyou.
Operator :
JeffZekauskaswithJPMorgan.
Jef f Zekauskas (Analyst-JPMorgan):
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Whatarethenetcashoutflowsfromasbestosthisyear?Anddoyoustillthinkyouwillsettleyourasbestosliabilities?
FrankSklarsky(EVPFinanceandCFO):
Wedoexpectwearegoingtosettleupinthefirsthalfoftheyear,beforetheendofthefirsthalfoftheyear.AndconsistentwithwhatwehavesaidinthepastandwhatyouwillseewhenwefileourQwherewelaythatout,wehavegotabout$500millionofcashgoingoutinitiallywiththeoptiontopayoutanadditionalamountofcashwhichrepresentsthepresentvalueofthefutureobligationsdiscountedat5.5%.
Wewillobviouslyevaluateeconomicadditionsatthattimetodeterminewhetherwetakeadvantageofthatdiscountthatcouldpotentiallybeattractiveforustodoso.
Sothegrossbeingsomethingover$800million,butthenalmostimmediatelywewillstartonaquarterlybasis,theadjustingofourestimatedtaxesandwill,overtheensuingfewquarters,achieveabenefitthatwillbringthenetcashoutflowintotaltoabout$500million.Thatwouldassume,ifyouweretoassumethatwetookadvantageofthediscountedannuity.
Sothatbethewaywewouldlookatit.Andofcourse,wealsohavethedonatingofthePPGstocktothetrust,inadditiontothat.
MichaelMcGarry(PresidentandCEO):
AndJeff,wehavethatstockhedgedatabout$22.Soifyoudothemath,it'sabout2.8millionsharesthatyouarelookingatsomewhereinthe$50millionrange.Thatstockisinoursharecountalready,itwillremaininoursharecountgoingforward.
FrankSklarsky(EVPFinanceandCFO):
That$50millionisincludedintheamountsthatIgaveyou.
Jef f Zekauskas (Analyst-JPMorgan):
Andformyfollow-up,yourgrossmarginlastyearexpanded110basispointsandthisquarteritexpanded160,eventhoughyouhadnosalesgrowth.Butlastyearyourcurrencyeffectswerenegative7eachquarter,andthisquartermaybeitwasalittlelessthannegative4.
Istherealinkbetweensmallercurrencypressureandthewideningofthegrossmargin?Oraretheynotlinked?Andiftheyarenotlinked,whydidyourgrossmarginqualitativelyadvancefirstwhatyouwereachievinglastyear?
MichaelMcGarry(PresidentandCEO):
Yes,itisagoodobservationdespitethefactthatwestill--eventhoughthecurrencyheadwindwasalittlebitlowerthanweexpected,itwasstillaheadwindinQ1versusprior.Ithinktherewasacombinationoffactors.
One,wedidgetsomebenefit,additionalbenefitthisyear,fromrestructuringthatwouldnothavetakenplaceinlastyear'sfirstquarterbecausetherestructuringprogramwasreallyjustgettingunderwayatthatpointinthefirsthalfoftheyear.Sothere'sthatpieceofit.Wehadsomemanufacturingproductivity.Wehavemovedmoreaggressively,obviously,particularlyinEurope,onrationalizingandmovingagainstamoresharedserviceenvironmentfromtheadministrativeside.
Acquisitionswithanicepass-throughofthemarginsfromthoseacquisitionswasalsoanuplift,asthose
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acquisitionsprovidedusamarginalittlebitabovethecorporateaverage.Soitwasacombinationoffactorsplus,admittedly,aswehadsaidbefore,amodestamountofrawmaterialsavingsinthefirsthalfofthisyear,continuingwhatwesawthebackhalfoflast.Allofthatcontributedtothe110basispoints.
FrankSklarsky(EVPFinanceandCFO):
basispointsyearoveryear.
Jef f Zekauskas (Analyst-JPMorgan):
Right.Butdidthechange,thesmallercurrencyheadwind,benefityourgrossmargin?
MichaelMcGarry(PresidentandCEO):
Iwouldsayonarelativebasisitwasstillaheadwind.Andsofromanabsolutestandpoint,Iguesstheanswerwouldbeno.Andevenwhenyougobacktolastyear'sfirstquarter,theheadwindwasn'tmateriallydifferentthanitwasinthisyear'sfirstquarter,eventhoughthisyear'sfirstquarterwasalittlelessthanwemighthaveexpected.
Jef f Zekauskas (Analyst-JPMorgan):
Okay,great.Thankyousomuch.
Operator :
DuffyFischerwithBarclays.
Duf f yFischer (Analyst-BarclaysCapital):
ThequestionjustaroundEurope--seeingsomerecoverythere.Didyouteaseoutwhereyouareseeingthatrecovery?AndtheninarchitecturalinEurope,areyougrowingwiththemarketorfasterthanthemarketoverthere?
FrankSklarsky(EVPFinanceandCFO):
Well,let'stakeitbycountryjusttoaddalittlemorecolortoit.SostartingtheUK,Ireland,itisgrowingfasterthantheCompanyaverageandtakingshare,clearly.ThenyoutakeFrance,growingslowerthantheCompanyaveragebuttakingshare.ThenyoutakeCentralEurope,IwouldsayslightlybelowtheCompanyaverage,maintainingshare.That'sthearchitecturallandscape,ifyouwill.
Butthenwhenyougetintoourotherbusinesses,wehaveabroadeningrecovery.SoSouthernEurope,Spain,Italy,forexample,significantlyacceleratinggrowthquarteroverquarterinallourbusinesses.Andthat'sabenefit.Wedon'thavearchitectural.WedohavealittlebitinSpainbutverylittle,andwehavealittlebitinItalybut,inthegrandschemeofthings,prettysmall.
Sooverall,SpainandSouthernItalyandSouthernEuropeisdoingverywell,that'sanetpositiveforus.
Theoffsettothat,ofcourse,isRussia,althoughIwouldtellyouthatweareoutperforminginRussia,especiallyinourindustrialbusiness.Theyhavedoneareallygoodjobthere.Theyaretryingtogetmorelocalization,andsothathasbenefitedus.
TheMiddleEast--theMiddleEast,Iwouldsay,slightlybetterthantheCompanyaverage,andthatencompassesallourbusiness.AndIwouldsayourprotectedbusinessisprobablyoftheonesthataredoingprettywellintheMiddleEast.
Duf f yFischer (Analyst-BarclaysCapital):
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Great.
MichaelMcGarry(PresidentandCEO):
There'saslideinourpresentationdeckthatshowstheregion,it'saheatmapthatshowstheregionbycountryyear-over-year.
Duf f yFischer (Analyst-BarclaysCapital):
Okay,fairenough.AndthenjustonBPA,youhavebeentakingsomenicemarketsharethere.Howlongshouldwethinkaboutthattrendlasting?Isthatsomethingthat'sgotanotherfourorfivequarters,ormightithaveanothereightto10quarters?
MichaelMcGarry(PresidentandCEO):
Well,IwouldgetitjustlikeIlookatautomotive.Wehadfouryearsofautomotiveoutperformance.Thisistechnologythatweareleadingin.There'sbeentwoplantsconvertedinFrance.Wehavethevastmajorityofthatbusiness.Now,withtheproposition65inCalifornia,therehavebeensixplantsconvertedintheUS.AndIwouldcallourshareat5+plusoutofthosesix.SoyoustillhavethewholewayoftherestoftheUStocome.Thefoodguysjuststartedtoconvertprobablyinthethirdquarteroflastyear.Soyoustillhavethatcomingon.
SoIthink,net-net,thisisalong-termstructuralgain.Weusedtohaveonly3%shareinsidethecan.Youwouldthink,overtime,wewouldapproach25%or30%share,ataminimum.Icertainlyhavechallengedtheteamtobebetterthanthat.ButIwouldtellyouthisisasecularchange.Theseguystake--theydon'tchangefor30yearsandthen,whentheydochange,ithappensovertime.Andweshouldexpecttoseethisrampupoverthenextseveralyears.
Duf f yFischer (Analyst-BarclaysCapital):
Great.Thanks,fellows.
Operator :
VincentAndrewswithMorganStanley.
VincentAndrews (Analyst-MorganStanley):
IwantedtorevisittheM&Aconversation.Mythoughtisthatthereobviouslywasalargetransactionannouncedbetweentwoofyourlargerpeers,andthebyproductofthatisthattheyarenolongercompetingwithyouforanyM&Aassetsthatmightbeoutthere.
SoI'mjustwonderingifthedialoguebetweenyourselfandthoseonthattargetlistofyoursisacceleratingorchanginginanyway.Hastherebeenanyimpactonthediscussionsfromthetransactionmultiplethatwasrecentlyputupontheboard?
MichaelMcGarry(PresidentandCEO):
Well,Ithinkyouhavetoevaluatetheseindependently.Thetransactionmultiplethatwasannouncedinthefirstquarterwasauniquepropertyandcamewithauniqueprice.Andwecertainly--ifanybodytriestoargueforthatpriceforPPGtopay,thatwillbeaveryshortdiscussion.Sowewillstartthere.
ThesecondthingIwouldsayisperhapstheycouldbeoutofthemarketforsomeperiodoftime.Butyouknowwhat?Theyhavecash,debtiseasytoget.Andwearenotgoingtoassumethatthisisanopenrunwayforus.W
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We'regoingtolookatwhatourcompetitionis.Wehavemultiplepeoplethatarecompetingwiththeseproperties,sowewillcontinuetoevaluatethat.
Butthebottomlineiswehavenotseenanyincreaseinthenumberofpeoplecomingtous.Iwouldtellyouthat,overall,ourmantraremainsthesame,thatweareverydisciplinedbuyersandthatbusinessteamshavetomakeajustificationandthesynergieshavetobethere,andthat'sthefocusanytimewelookatanyacquisitions.
VincentAndrews (Analyst-MorganStanley):
Veryclear,thankyouverymuch.
Operator :
DonCarsonwithSusquehannaFinancial.
DonCarson (Analyst-SusquehannaFinancialGroup):
JustaquestiononyourarchitecturalgrowthintheUSandCanada--soyoutalkedaboutlowtomid-singledigitgrowth.Doyouthinkyouareunderperformingthemarketthere?Howwouldyoucharacterizeyouroverallmarketgrowth?Andwhatkindofsnapbackdoyouseethisquarterandintothirdquarter,basedontheweather?
VinceMorales (VPIR,Treasurer):
Hey,Don.ThisisVince.Alittlebitofanearlyreadinthepastseason,andwedon'thaveenoughdatapointsyettodeterminebychannelhowweareperformingversussomeoftheotherfolks.AndMarchisalittlebitof,typically,amurkymonth.
Wefeelthatinthe--asMichaelmentioned,wehavegotnewproductsinsomeofthemajorhomecenters.Wefeelthoseproductsaregoodnewproductswithgoodnewbranding.Theindependentdealerchannelisashrinkingchannel.Wecertainlyfeelweareholdingourownthere.
AndasMichaelmentionedatthebeginning,we'vegottodobetterinourUScompany-ownedstores.AndinCanadawethinkweareatparity,atminimum.Butalittletooearlyinthepaintseasontocallitonewayortheother.
DonCarson (Analyst-SusquehannaFinancialGroup):
Thenjustafollow-uponyourchannelstrategy--you'vetalkedaboutinvestinginbranding.IsthisdesignedmoreforyourCompany-ownedstores?AndwhatkindofinvestmentshouldweexpectinyourCompany-ownedstoresgoingforward?Areyoulookingtoopenacertainnumbereveryyeartogetthatmixupabove50%ofyouroverallarchitecturalsalesvolumeinUSandCanada?
MichaelMcGarry(PresidentandCEO):
Yes.Sowhenyouthinkaboutthe[$50]millioninvestmentthatwemade,thatis--itwasthefirst-quarterinvestment.That'sanonrecurringinvestment.Wedohaveenhancedbrandstrategiesthatwearerollingout,butthat'sincorporatedwherewemightbereplacingdollaroneorcategoryAwithcategoryB.Sothere'snorealstepchangethere.
Wedoopenup--weexpecttoopenup,wetypicallysay,25,50storesintheUSandCanada.Wewillbeopeningup200storesinMexico,170to200stores.WewillbeopeningupstoresinEuropeaswell,sothatwouldalsobeinthat20to25range.Sowecontinuetoevaluateopportunitiestogrowthisbusiness.ButI'dsayoverallI'mpleasedwiththeperformancethere.
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DonCarson (Analyst-SusquehannaFinancialGroup):
Thankyou.
Operator :
P.J.JuvekarwithCiti.
P.J.Juvekar (Analyst-Citigroup):
Michael,Iwanttogobacktotherefinishbusiness.Whatkindofgrowthareyouseeingthere?Andcanyoubreakitdownbetweenpriceandvolume?AndthenareMSOsgettingbiggerandbiggervolumediscounts?
MichaelMcGarry(PresidentandCEO):
Let'sstartwiththeeasyone.TheMSOs--ithasbeenrelativelyconstant.They'dliketohavebigger,buteverybody,everycustomerwehavewantsabiggerdiscount.Ithasbeenrelativelyflat.
Whenwethinkaboutourrefinishbusiness,it'snotjusttheUS.WhenwelookatChina,thatisespeciallyagoodmarketforus.Sotheyareshiftingfromsolventstowater.There'sabigtaxinChinaonsolvent-basedproducts.Sothat'sapositiveforus.
Historically,wedohavepositivepriceinourrefinishbusiness.Youwouldexpectthatthisyearwewouldhavepositivepriceaswell.
Interestinglyenough,volumeintheUSisactuallyup.Thathas--milesdrivenisup2%.Notonlydoyouhavemilesdrivenupbutyouhavedistracteddrivingupimmensely.Iseeitabouteverydayonmywayhome.Sothat'spositive.
Theotherthingis,whenyoulookatwhat'shappeningwithtechnology,ourwater-basedproductisoutperformingineveryregionoftheworld.SoeveninArgentinarightnow,ourbusinessisgrowinginArgentina.OneofourcompetitorsvacatedBrazil.Wepickedupahugechunkofthatbusiness.OneofourothercompetitorsvacatedEurope;wepickedupthevastmajorityofthatbusiness.Sowecontinuetoperforminthatregard.SowhenIthinkaboutwhattheshiningstarsinPPG,refinishisatthetopofthelist.
FrankSklarsky(EVPFinanceandCFO):
JusttoaddtowhatMichaelsaid,andwetalkedaboutthisalittlebitinthepast,withourstrongpositionoverinAsia,particularlyinChina,andthemovefrompremiumtothemid-lineofferings,wehaveanopportunitytogrowthatbusinessoverthelongtermbecauseasproduction,over20millionunits,goesmostlystilltothatmarket,thatcarparkcontinuestogrowwhereasthedevelopedregionswherewealsohavesolidpositions--thecarparkisrelativelysteady.Soyouaredependinguponmilesdriven,distracteddrivingandthingslikethat.ButChinahastheadditionalbenefitofaddingalotofunitstothecarpark,andsothosegrowthratesoverthelongtermbodewellforthebusinessoverall.
P.J.Juvekar (Analyst-Citigroup):
Great,thankyou.Andsecondly,didtheintroductionof[GTV]atLowe'shaveanyimpactonyoursalesatLowe's?
MichaelMcGarry(PresidentandCEO):
74
Well,Ithinkthewaytothinkaboutthatiswhichpricepointstowecompetein.AndsoIthinkthewaywe
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lookatitisourtotalsalestoourretailpartnerwereupyearoveryear2015versus2014.AndI'mnotunhappywiththefirst-quarterperformance.Andourrelationshipisverystrong,andsoIwouldtellyouthatisobviouslyaretaildecisiononhowtheysplittheirbrandandhowtheypositionthem.Butoverall,wearehappywiththatrelationshipwithLowe's.
P.J.Juvekar (Analyst-Citigroup):
Allright,thankyou.
Operator :
JohnRobertswithUBS.
JohnRoberts (Analyst-UBS):
WiththecomingconsolidationinthenumberofsuppliersintotheDIYretailchannel,doyouthinkweshouldexpectsomerebalancingamongcustomers,somechurn,toseesharegoupanddownmorethanwehaveinthepast,forexample?Andifthereisadivestment,let'ssay,outoftheSherwin-WilliamsValsparbusiness,doyouthinkwemightendupwithanewcompetitorinthespaceherethatyoumighthavetoworryabout?
VinceMorales (VPIR,Treasurer):
Well,John,wedon'tspeakforourcustomers.AsMichaelsaidearlier,theirsourcingdecisionsaretypicallytheirs.Ithinkwe'vegot,asexhibitedbythenewproductsweareplacingintothechannel,youaretalkingaboutthisyear.Wealsohavegoodrelationshipwiththosecustomers,butwearenotatlibertytomakesourcingdecisionsforthem.
WithrespecttotheacquisitionofSherwinValspar,wearenotsurewhattheoutcomeofthatwillbe.Sothat'snotwithinourjurisdictionorourdecisiontree.Sowewillleavethattothepartiestobe.
JohnRoberts (Analyst-UBS):
Okay,thankyou.
Operator :
JamesSheehanwithSunTrustRobinsonHumphrey.
JamesSheehan (Analyst-SunTrustRobinsonHumphrey):
CanyoutalkaboutyourexpectationsforTiO2prices?Itlooksliketheymaybegoingupalittlebithereintheshortterm.What'syouroutlookfortherestoftheyearonTiO2?
MichaelMcGarry(PresidentandCEO):
James,TiO2,wehavealwayssaid,isthesupplyanddemand-drivenenvironment.WhenIthinkaboutwhat'sgoingonintheoverallglobalsupplyanddemandenvironment,youhaveadditionalcapacityinChina.YouaresoontohaveadditionalcapacityinMexico.
Sofromthatregard,that'sobviouslymoresupply.
Demand--ifyoulookatEurope,EuropeanTiO2consumptionisdownabout15%fromitspeak.Sonet-net,eventhoughEuropevolumesarerecoveringalittlebit,theyarestillsubstantiallydownfromwheretheywere.Then,ofcourse,youhadthematerialweaknessinBrazil,thematerialweaknessinmostofLatinAmerica,Russia.
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Andsofromasupplyanddemandstandpoint,Ithinkwestillseeitasabalancedmarket.AndIknowtheyareoutthererunningaroundwithpriceincreasesannounced.
Butifyouremember,theyhavehadpriceincreaseannouncementsforseveralquartersoutofthepasttwoorthreeyears.Andthat--justbecausetheyannouncedthatwearepaying.Sooverall,ourgoal--asyouknow,wehavetakenoutofPPG10%,soourTiO2consumptionisdownbecauseofsubstitutionstrategy,replacement,alternativeproductsandalsowiththebringinginHenanBillions.
SoIknowthere'salotofnoiseoutthere.Butwhenwetalktooursuppliers,wearetryingtogetthemfocusedonsupplyanddemand.Andthat'swherewearegoingtostayonthattopic.Iknowtheyarelookingattheyarenotmakinganymoney.Buttheydidn'twriteusacheckthelasttimewhentheywereatthetopofthecycle.
JamesSheehan (Analyst-SunTrustRobinsonHumphrey):
Great.AndcanyoualsocommentondemandtrendsthatyouareseeinginvariousendmarketsinChina?
MichaelMcGarry(PresidentandCEO):
Sure.Soobviously,automotivewasup.Everybodyseesthosenumbers,sogoodperformancethere.Industrialisamixedbag.Itdependsuponwhichsegment,soanythingtodowithcommoditiesisdown,heavy-dutyequipmentdown.
Packaging--wearealittledisappointedinthepackagingoutput.It'srelativelyflat.Withtheconsumer-driveneconomywewouldhavethoughtthatwouldhavebeenupalittlebitmore.ButwearegainingsharetherewithourVPA[non-intent]product.Sowecouldbedoingbetter.
Ifwelookatrefinish,refinish,whatFrankexplainedearlier,thecarparkisgrowing.Whentheymadethenicemovetothepremiummarketwegained.Nowweareintroducingsomemidtierproduct.Sothatshouldbeanetpositive.Ithasn'thappenedyet,butthereisComac,whichexpectstobuildanairplaneatsomepointintime.Theyrolleditoutofthehangar,buttheyrolleditbackinthehangar.
Soeverybodysawit.Itdidn'tfly.SoIdon'tknowwhenthatwillstart,butobviouslywehavealotofcontentonthatplane.Soifitdoesgetintoproductionwewillbeanetbeneficiaryofthat.
Ontheprotectiveside,wearedoingverywellinprotectiveinChina.
Marine--notbad,butyoureallyhavetobalancethatwiththefactthattheKoreanMarinehasjustfallenoffacliff.Infact,tothelargestKoreanshipbuildersdidnotevengetamajororderinQ1.SoyouhavetobalancewhatyouseeinChinawiththefactthatKorea,whichiswherethebigmarketis,isoff.
SoIguessthatwouldbemyaroundthesegmentapproachthere.
VinceMorales (VPIR,Treasurer):
Ijustwanttoreemphasize,James,that--MichaeltalkedearlieraboutIndia.WeareseeingverygoodgrowthinIndiaacrossallthemarketsinwhichweparticipatein.
It'sasmallermarketforus,butanimportantmarket,butitisaverygoodgrowthtrendrightnow.
JamesSheehan (Analyst-SunTrustRobinsonHumphrey):
Thankyouverymuch.
Operator :
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ArunViswanathanwithRBCCapitalMarkets.
ArunViswanathan (Analyst-RBCCapitalMarkets):
Justmaybediggingonthevolumesidealittlebitmore,the1%volumegrowthyoupostedacrosstheportfolio--Iknowyouguysweren'tsatisfiedbythat.Andmaybecanyouhelpusunderstandwhatkindofvisibilityyouhave,maybeonacoupleofthelargerbusinesses,OEM,refinish,aeroandarchitectural,whythatwouldaccelerateasitgoesthroughtheyear?Aretherespecificprojectsorsomethingelsespecifictoyouguys?Thanks.
FrankSklarsky(EVPFinanceandCFO):
I'lltakeashotatthat.Ifyoulookatourdifferentbusinesses,wehavethebestvisibilityinbothMarinenewbuildandaerospacewherewehaveaverylongordercycle.Wehavefairlyconcreteorderpatternsbyourcustomers.
Inthemiddleyouhavesomeindustrialcustomers,automotivecustomerswhereweareseeing,withconfidencewewillcallitamonth'sworthoforderswithfairlygoodconfidence.Andthenontheothersideoftheequationwouldbearchitectural,includingCompany-ownedstoresandindependentdealerswherepeoplearewalkinginonadailybasis.Andtheorderpatternscertainlyhasacadencetoit,butit'snotaspredictable.Sotherewehavelet'scallitafewdaysofvisibility.
Ifyouaggregateallthat,50%,60%ofourbusinesswecanseeoutprobablyseveralweeks,ifnotamonthorlonger.Andsothat'swhatgivesusourabilitytoforecastforyouwhatwethink.
ArunViswanathan (Analyst-RBCCapitalMarkets):
Okay,thanks.Andthenalso,asafollow-up,justcurious.Arewestillexpectingthatoverallvolumegrowthcouldapproachmid-singledigitsfortheyear?Andwherewouldyouseethegreatestamountofvolumegrowth?
VinceMorales (VPIR,Treasurer):
Well,wedefinitelyexpectimprovementsaswegothroughouttheyear.Again,IthinkinQ1ofthisyearwehadsomeverydifficultcompsinsomelargebusinesses.Michaelmentionedthealmost10%compwehadinautomotiveinQ1yearoveryear.Thatstartstowaneaswegothroughouttheyear.Andagain,wehad--asMichaelmentionedearlier,wehadsomeeasierweathercompsinsomeofourbusinessesintheUSaswecomeuponQ2andQ3.SoourexpectationcertainlyistomovetheneedlemorepositivelythanwedidinQ1.
ArunViswanathan (Analyst-RBCCapitalMarkets):
Okay.Andthenlastly,ifImay,ontheFXsideIknowthatyouhadsaidthattherewasstillanegativeimpactinQ1.Wouldthatalsowaneaswegothroughtheyear?Anddoyouexpectultimatelytopotentiallyevengetabenefitifwestaywhereweareontheeuro?
FrankSklarsky(EVPFinanceandCFO):
Ifwestayatcurrentratesacrosstheboard,itwilldefinitelywaneaswegothroughtheyear.SoQ2impactwillstillbeaheadwindbutabitlessthanQ1,ifyoustaywheretheyare.Anditwillcontinuetodwindledownasyougothroughtheyear.
Positiveandnegative,atsomepointintime--well,itdependsonthemixbecausewhereasthelastfewquartersthebiggestheadwindwastheeuro,withalittlebitstrongereurothananticipatedbutalittlebit
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weakerpeso,forinstance,becauseofsomeofthatoil-basedfactorsthereaswellastheweaknessinLatinAmerica,someofthatmixdoeschange.
Socouldoneofthecurrenciesturnpositiveatsomepointintime?Sure.Butoverall,ifyoulookatthewholebucket,yes,the$140milliononthetopline,the$15millionyousawonthebottomline,inthefirstquarterthatwillbealittlebitless.AndthenumbersthatMichaelgavefortheyear,that$200millionto$260milliononthetoplineandthe$30millionto$40milliononthebottomlinedictatethatatcurrentratesthingswillautomaticallycomedown.Wewillseehowthatplaysoutif[ratesfall]throughouttheyear.
MichaelMcGarry(PresidentandCEO):
AndIwillremindeverybodytheguidancewegaveinJanuarywascloseto$600milliontoplineand$70million,$80millionbottomline.Soit'sasignificantimprovementversusthreemonthsago.
ArunViswanathan (Analyst-RBCCapitalMarkets):
Right.Okay,thanks.
Operator :
MikeHarrisonwithSeaportGlobalSecurities.
MikeHarrison (Analyst-SeaportGlobalSecurities):
IwaswonderingifyoucouldgiveusanupdateonexactlywhereyouarewithsomeofthedisplayresetsyouaredoingatLowe's.Howmuchofthatiscomplete?Anddoyouhaveanymetricsthatyoucansharewithusintermsofthecustomerresponse,eitherLowe'sorwhatyouareseeingfromtheactualDIYcustomersthataregoingthrough?
MichaelMcGarry(PresidentandCEO):
Well,Iwon'ttalkaboutspecificallyLowe's.I'lltalkabouttheindustryingeneral,whenyoulookatthehomecenters.ThetypicalwaytheydotheirresetsistheystartintheSouthernandWesternstatesandthenworktheirwaynorth.Soifyouthinkaboutthat,weareprobablylessthan1/3ofthewaythroughit.Typically,theyarealldonebytheendofMay.Sothat'sthecadencethatwewouldbeworkingon.
Again,wedon'twanttotalkforourcustomers.Buttheearlyindicationsthatwesaw,wewereverypleasedwiththeearlyturnoverinthestores.Butagain,it'sasmalldatasetinQ1because,ifyouthinkaboutit,mostofthatstartedgettingsetinmid-March.TheyonlyhadtwoweeksinQ1,andthenyouwillhaveprobably1/2to2/3ofthequarterinthesecondquarter.
MikeHarrison (Analyst-SeaportGlobalSecurities):
Andthe$15millionworthofexpensewaspartiallyrelatedtothat.Thatspendingiscompleteatthispoint,correct?
FrankSklarsky(EVPFinanceandCFO):
Thatiscomplete,anditwasaone-timeexpense.
MikeHarrison (Analyst-SeaportGlobalSecurities):
AndthenthelastquestionIhadwasjustontheautorefinishbusinessinLatinAmerica.Iknowthatyouhadbeenseeingsomeweaknessthere.Hasthatstartedtoshowanysignsofimprovingorstillprettyweak?
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MichaelMcGarry(PresidentandCEO):
Well,Ithinkyouhavetolookatitbycountry.Right?SoMexico,stilldoingwellinMexico.Colombia,Iwouldsaymoreflatline.Argentinaisgettingbetter,sothatwastheonepositive.AndeventhoughBrazilisgoingdown,weareactuallygoingupbecauseoneofourcompetitorspulledoutofBrazil.Sothathasbeenapositivefromarefinishside.
FrankSklarsky(EVPFinanceandCFO):
Yes,it'sstillasignificantnegativeoverallinLatinAmericaforQ1.
MikeHarrison (Analyst-SeaportGlobalSecurities):
Allright,thanksverymuch.
Operator :
NilsWallinwithCLSA.
NilsWallin (Analyst-CLSAAmericas,LLC):
Michael,withrespecttothelong-termoutlookintheBPAnon-intent,yourfour-yearorfive-yearcycle,curioustoknowhowmuchbeveragecanpenetrationisbakedintothatandwhereyouseethebottlersandthecanproducerscurrentlyintermsoftheirBPAusagewithinthecan.
MichaelMcGarry(PresidentandCEO):
Iwouldsaythisisinning--bottomofthefirst,topofthesecondinning.Sothere'salotofworktobedoneinthisregard.Youtendtohaveonecustomeronthebeveragesideasaleaderandthenmostoftheotherguystendtobefollowers.Soweareoutinfrontwiththeleaderinthatarea.Andyouhaveacoupleofthefoodguysthataremoreaggressive,sotheymovedatafasterratethanthebeverageguyshave.
AndthenIwouldsaythatonthebeerside,it'sevenonaslowerramp.Sotherehasbeenalotofpacktestsdone,therehasbeenalotoftastetestsdone.Therehasbeenalotofworkinthatarea.Butasfarasactualproductionitisway,wayearlyinthegameforthoseguys.
VinceMorales (VPIR,Treasurer):
JusttopiggybackonwhatMichaelwassayingbefore,too,keepinmindthatinbusinesseswherewehavetypicallyoutperformedintherecentpast,wewerealreadystartingwithasolidmarketshareposition.Andthosebusinesseswerealreadyatamaturelevel.
Thishastwoadvantages,thissector.Notonlyinitsinfancyintermsofadoption,wearealsostartingatapointintimewhere,asMichaelsaid,wehaveverylowshareinsidethecan.Soeverythingisincrementalshareforus,earlypointsofadoption.That'swhatgivesustheconfidencethatthisisamultiyeartrendandithasalotoflegstoitforsometimetocome.
NilsWallin (Analyst-CLSAAmericas,LLC):
Gotit.That'sveryhelpful,thanks.Andjustasafollow-up,theindependentnetworkinNorthAmerica--andarchitecturalobviouslyhasbeendown--doyouhaveasensewhat,firstofall,overthelastcoupleofyearstheaveragerateofdeclinehasbeen?Anddoyouthinkit'saccelerating,decelerating?Andwheredoesitbottomout?Ordoesitjustcompletelydisappear?
MichaelMcGarry(PresidentandCEO):
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First,letmesaythatthischannelhasbeeninacontractionmodeforquitesometime.I'dsay,ifyoulookoveralongerperiodoftime,callitfiveorsevenyears,thecontractionhasbeenmoremodestthantheindustryhasexpected.I'ddefinitelysaythelastcoupleyearsithasacceleratedsomewhat,butit'slumpy.Sothere'snotalinearpathhere.
Andrightnow,Ithinkwe'reprobablycontractingsomewherebetweenlet'scallit1%to2%peryear,thelastcoupleyears,tothemarket.
NilsWallin (Analyst-CLSAAmericas,LLC):
Wheredoyouexpectitactuallytobottomoutasapercentofthetotalmarket?
MichaelMcGarry(PresidentandCEO):
It'salong,longtermplay.Obviously,asourretailpartnersgetbigger,astheCompany-ownedstorenetworksgetbigger,it'smorechallengeasthesepeoplethatownthesestores,astheirchildrendonotwanttobeinthehardwarebusinessordon'twanttobeinthepaintstorebusiness,theytendtosell.
Soovertime,thisisjustthedemographicplaythatwillcontinuetoplayout.Butyouaretalkingabout30,40,50years.Thisissomethingthat'sgoingtobegoneinthreeweeksorthreeyears.
NilsWallin (Analyst-CLSAAmericas,LLC):
Understood,thanksverymuch.
Operator :
LaurenceAlexanderwithJefferies.
LaurenceAlexander (Analyst-JefferiesLLC):
Tworelatedquestions--first,asyoulookatyourcommentsaroundtheoperatingleveragetotherecoveryinEuropeandalsoopportunitiestoimproveyoursupplychainandproductivity,isthereanystructuralreasonwhyyourconversionofsalestofreecashflowshouldn'timproveonatwo-tothree-yearkindofbasis?
MichaelMcGarry(PresidentandCEO):
Ithinkit'saverygoodpoint.Notonlywillwegettheoperatingleverage,butwealsohaveamulti-year,ifwearegoingon,improvementinworkingcapital.Andthatalsowillhelpusimprovethecashflowconversion.Sowestillhavetheopportunitytoimproveinventorylevels.Wearelookingatworkingonourcomplexity,whichwillimprovedaysofinventory,stillhavesomeroomtoimprovepastduereceivables.Sothatwillhelpconversion.
Theotherfactoristhatwehavesaidintherecentpastthatourcapitalspendingismoreatapeaklevelnowandwilldeclineoverthenextfiveyears.Thatwillalsoimproveourcashconversionasapercentofnetincomeandasapercentageofdepreciation.Soallthosefactorsconsideredactuallybodewellforcashconversionpercentageoverthenextthreetofiveyears.
VinceMorales (VPIR,Treasurer):
AndLawrence,over(technicaldifficulty)wearestilldownvolumewiseinEuropelet'scallitmidteens.Sothere'sstillalotofrecoveryleft.Notsayingwewillgetbackallthatasaregion,butthere'sstillalotofrecoveryleftintheregion.
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LaurenceAlexander (Analyst-JefferiesLLC):
AndthenwhenyoulookatIndustrialCoatings,thevaluepropositiontothecustomer,themixthatyouhavebetweentheprotectingservicesasopposedtodecoratingthemorbeautifyingthem,doyouhavetherightbalance?Oristhatbalancegoingtoshiftovertime?Anddoesthatshift,ifthereisone,haveanyimplicationsforeithermarginsorsalesgrowth?
MichaelMcGarry(PresidentandCEO):
Ithinkwedoboth.Ithinkthecoatingsindustry,notonlyPPG,butweprotectandbeautify.Soit'sadualpurposethatthecoatingprovides.Idon'tlikethere'samixeddifferential.Onautomobileitprotectsthesurfaceandbeautifiesthevehicleitself.Somostofourcoatingsdoboth.
LaurenceAlexander (Analyst-JefferiesLLC):
Thankyou.
Operator :
IvanMarcusewithKeyBanc.
IvanMarcuse (Analyst-KeyBancCapitalMarkets):
Justacouplequickquestions--thefirstonewasontoLaurence'squestion.Whatisyourgoalforworkingcapitalasapercentofsales?Itcontinuestoimprove.Whatdoyouthinkyoucouldgetthisdownto?
FrankSklarsky(EVPFinanceandCFO):
It'sgoingtovarybybusiness.Businesses,someofwhicharelargelytransactionalandrequirevery,veryquickresponsetocustomers,areactuallygoingtocarrysomemoreonthehighsingledigits.Ifyourunthenumbersbasedonourinventoriesrightnow,youcansaywearearound80daysofinventory,ifyourunthemoffthefinancialstatements.
Wethinkthatthere'sagoodfivetoseven,fiveto10daysofinventoryopportunitythere.Wepickedupfivedayslastyear,there'sstillseveralmoredaystogettoourbenchmark.Andwearelookingat100basispointsayear,generally,toimproveworkingcapital.Combinationofpayables,wherewe'vemadealotofprogressrecently,inventories,past-duereceivables.Andkeepinmindthateverydayofinventoryandpayablesisworth$25million;everydayofreceivablesisworth$43million.There'salotofleverageoncashflowbyimprovingitjustalittlebit.
IvanMarcuse (Analyst-KeyBancCapitalMarkets):
Great,andthenmylastquestionis--youmentionedthatMarchisyourstrongestmonthwith2%to3%typeofvolumegrowth.DidEasterhaveanysortofimpactonMarch?IknowthatfromApriltoMarch--oristhatanegligiblesortofeventforyourbusiness?
MichaelMcGarry(PresidentandCEO):
Formostofourbusinesses,Ivan,ourB2Bbusinesses,specifically,ithasanegligibleornoimpact.MostofourB2Bbusinessesrun24/7.EasterdidmoveintoQ1thisyear.ItwasinQ2lastyear.ItmighthavehadasmallcrimpimpactonsomeofourB2Cbusinesses,again,notwhatIwouldcallnoticeableinthenumbers.
IvanMarcuse (Analyst-KeyBancCapitalMarkets):
Great,thankyou.
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Operator :
Thisconcludesourquestion-and-answersession.IwouldliketoturntheconferencebackovertoMr.ScottMinderforanyclosingremarks.
Scott Minder (IR):
Onceagain,IwouldliketothankeveryonefortheirtimeandinterestinPPG.Ifyouhaveanyfurtherquestions,pleasecontactInvestorRelations.Thisconcludesourfirst-quarterearningscall.Thankyou.
Operator :
Theconferenceisnowconcluded.
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