Good afternoon, and welcome to the PPG Industries First Quarter 2018 Earnings Conference Call. My name is Jamie and I will be your conference specialist today. All participants will be in a listen only mode. After today's presentation, there will be an opportunity Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to John Bruno, Director of Investor Relations.
Sir, please go ahead.
Thank you, Jamie. Good afternoon, everyone. We appreciate your continued interest in PPG and welcome you to our first quarter 2018 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 on Thursday, April 19, 2018.
I will remind everyone that we have 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 shortly. Following Michael's perspective on the company's results for the quarter, we will move to a Q and A session. Both the prepared commentary and discussion during this call may contain forward looking statements, reflecting the company's current view of future events and their potential effect on PPE'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 updated city's 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 Chairman and CEO, Michael Metgarrett.
Thank you, John, and good afternoon, everyone. Today, we reported first quarter 2018 financial results. For the first quarter, our net sales were approximately $3,800,000,000 and our adjusted earnings per This represents an EPS growth rate of nearly and elevated raw material inflation during the quarter, which we partially countered with selling price improvements and strong cost management. In addition, we continue to For the first quarter, our reported net sales were up almost 9% while our sales in local currencies increased about 3%. Supporting the higher local currency sales were increased selling prices of nearly 2%, marking the 4th straight quarter of improvement over the prior sequential quarter.
Total sales volume increased modestly, but were negatively impacted by fewer shipping days in the first quarter 2017, Lower European architectural coatings volumes due to harsh winter weather that caused several days of store closures during the quarter, and lower U. S. Architectural DIY coating sales volumes. In addition, we passed on some business this quarter we pursued higher selling prices and have prioritized margin recovery. Foreign currency translation was favorable at several currency strengthened against the dollar with sales favorably impacted by approximately $200,000,000 and pre tax income favorably impacted by about $25,000,000.
We expect a slightly less favorable impact Our Industrial Coatings segment delivered solid organic sales growth of about 2%, which included 200 basis point improvement in selling price for the previous quarter. Organic sales volumes and packaging coatings were up mid single digit percentage as the adoption of our Inoville interior can coatings products continued and selling price increases were achieved. We also continue to grow sales volume in general industrial and specialty coatings and materials. Delivering our 9th consecutive quarter of above market growth rates, driven by strong sales growth in the Europe and Latin American regions. In addition, the general industrial selling prices gained notable traction in the quarter.
Automotive OEM coatings sales volumes were flat, consistent with the global industry automotive builds. We continue to outperform the market in Latin America due to new business we received in prior years. In China, our sales volumes were modestly lower and in line with the overall industry. Which was expected following the December expiration, the tax subsidy that was previously available in the country. We anticipate China Automotive Builds growth both for the industry and PPG to improve in the second quarter.
In the Performance Coatings segment, Aerospace Coatings had high single digit percentage by growth led by above industry performance in the U. S. And Asia Pacific Regions. Automotive refinish grew organic sales by mid single digit percentage supported by above market performance in Europe. Architectural EMEA sales volumes were down in the quarter, as I mentioned, impacted by fewer shipping days than harsh winter weather.
This business has progressive selling price initiatives working to counter raw material inflation during the quarter. Sales grew a solid mid single digit in Latin America with contributions from our Mexican PPG Comex business, Brazil and Central America. During the quarter, we opened an additional 45 stores in Mexico and Central America. Sales volumes in Architectural Coatings Americas and Asia Pacific were flat as sales dealer network sales volumes. Our company owned stores delivered their strongest quarterly growth in over 4 years on an adjusted day basis.
Our PPG timeless products continue to be added to more Home Depot stores and had good in consumer pull through the quarter. Protective and marine coatings sales volumes were up, excuse me, were flat compared to last year with solid protective coating sales driven by Asia, offset by moderating weakness in our aggregate marine coating sales volumes. Chip Building orders in Asia continue to increase boosting the prospects of our recovery in the Marine Coatings in early 2019. This will begin to add 8 paint sales volumes later this year. From a regional perspective, sales volumes growth was the highest in America driven by our market outperformance in the Industrial Coatings segment and strong Architectural Coatings sales volume.
Sales volumes were slightly lower year over year in Europe, A solid mid single digit percentage increase in the Industrial Coatings segment was offset by lower sales in the Architectural Coatings EMEA segment. We anticipate that the industrial business will continue to deliver growth in the second quarter as regional industrial production continues to remain favorable for a broader continued economic recovery. Sales volumes were flat in the U. S. And Canada in the first quarter.
Strong sales volumes in our aerospace coatings business and solid organic sales growth in automotive refinish general industrial and packaging coatings were offset by lower automotive OEM sales volumes, including the decline in regional industry automotive production. Sales in the Asia Pacific region were flat with prior year as we experienced softer demand in China as our customers had a longer shutdown after the Chinese New Year. We expect stronger sales in China during the second quarter led by higher automotive OEM demand. Sales volumes in India grew by low teen digit percentage with broad based contributions across many businesses. From an earnings perspective, our dollars was more than 4% improvement versus the prior year.
Our earnings were impacted by elevated raw material inflation in the first quarter, that while impacting most of our businesses had a heightened impact on the business in our Industrial Coatings segment. In the first part of the quarter, epoxy resins, which is a key input for automotive OEM and packaging coatings, increased by more costs. In aggregate, raw material inflation was about a mid single digit percentage increase in the quarter, which is on top of raw material inflation we incurred quarter of 2017. We expect raw material inflation to continue in the second quarter of 2018, but expect increases current inflation levels to moderate. During the first quarter, selling price initiatives gained momentum sequential improvement since the current cyclo raw material inflation started a year ago.
Noteworthy are the gains realized in our Industrial Coatings segment, which achieved 200 basis points of sequential improvement. We are continuing to work with our customers on further selling price initiatives focus on offsetting this persistent raw material inflation. In addition, we are making more progress in our efforts on raw material efficiency with more expected as we progress through continuing cost management. We reduced selling, general administrative costs by about 140 basis points compared to last year, including good progress from our $50,000,000 $55,000,000 in 2018 from our prior guidance. In addition, earnings per share benefited from our ongoing cash deployment actions.
This includes the impact diluted shares outstanding were 3% lower versus the first quarter 2017. Our effective tax rate was 23.5% in the first quarter, which is lower than the 24.9 percent rate from the first quarter 2017. The reduction mostly relates to the tax reform legislation that was implemented at the start of 2018. We are still anticipating a full year tax rate between 23% 24%. As we look ahead, we still expect continued positive momentum in overall global economic growth.
Closely monitoring and evaluating the possibility and ramifications of new tariffs. Currently, we do not see a significant direct impact to our company, but any disturbance to free trade would be concerning. Specific to our business, we still expect better growth in housing starts in the U. S. During 2018.
We believe the US Regional Automotive Industry bills will be relatively flat year over year. In Latin America, we anticipate continued economic in South America, in particular for Brazil. Growth rates in Asia are expected to remain generally consistent with 2017 with continued industrial production growth in China. We expect stronger automotive build growth rates in the second quarter based on lower inventory levels and easier prior year comparisons. We expect economic expansion to continue in India after a strong first quarter.
Economic growth in Europe is expected to continue, but remain varied by subregion and country. Favorable end use market trends are expected to continue particularly in automotive OEM coatings as industry build growth rates are expected to remain positive. We will continue to manage all elements of our business within our control to ensure that we remain competitive regardless of economic conditions. We will continue to execute on our 2016 restructuring program focused on reducing our overall cost structure. As we announced this morning, we'll be launching our highly rated Flexane products in the Home Depot during the second quarter.
Olympic has been America's most trusted stay in brands since 1938. We're very excited to expand our relationship with the leading do it for yourself retailer in the world. We will work closely with the Home Depot to optimize its success. As mentioned in our earnings press release based on the change in customer assortment that we experienced in the first quarter, We are further evaluating our cost structure and will be diligent to and execute on any opportunities to reduce costs, which is what you expect from PPG. While we do this, we will not forego our efforts and investments to continue our growth initiatives, including targeting certain growth spending in the second quarter with plans to spend an additional $5,000,000.
Finally, we remain in a position of strength as we ended the 1st quarter with over $1,400,000,000 in cash and short term investments which provides us with significant financial flexibility. We remain committed to deploy a minimum of 2,400,000,000 of cash in 2018 on acquisitions and share repurchases as part of our previously communicated target to deploy a minimum of $3,500,000,000 in 20.17 and 2018 combined. Our acquisition pipeline remains active. We plan to continue to repurchase shares in the 2nd quarter. This concludes our prepared remarks.
Once again, we appreciate your interest in PPG. And now Jamie, would you please open the line for questions?
Ladies and gentlemen, And our first question today comes from Anshoom Punjabi from R. W. Baird. Please go ahead with your question.
Hey guys, good afternoon. I guess first question on North American paint stores and the mid single digit increase during the first quarter. How does that parse out between volumes and price? And just given the ongoing weakness in independent dealer channel and the share shift in the home improvement channel, how are you thinking about your store footprint I guess, more broadly in terms of incremental investments there?
Well, we had nice volume and we had positive price. Is a way I would describe that. We opened 7 new stores in the first quarter, and, that was despite, as you know, weather in the north continued to be exceptionally challenging as we closed the month of March. So, I was quite pleased with our store performance
Okay. And I guess, second question as
it relates to your comments on raw materials, I think you said mid single digit increase in the first quarter. And some level of moderation, as your unfolds, but crude oil prices are up quite a bit. The curtailments in China have been in place I guess what's giving you confidence that you will start to see that moderation as the year unfolds on the cost side? Thanks so much.
We still anticipate mid single digit increases. We will have increases in the 2nd quarter and continuing. I think what we see, 1st of all, you know, certainly oil is up significantly year over year. So that's not gonna change propylene is up in all the three regions and it's up sequentially as well. Ethylene is the one thing that is down So, I guess, I'm trying to put it in perspective that Q4 was a very large number.
Q1 was a very large number, and we're going to continue to see significant numbers, but maybe not to the exact same significant increase that we saw in Q4 and Q1.
Our next question comes from Christopher Parkinson from Credit Suisse.
When we think about the industrial coating segment, specifically volumes, can you just take us a quick walk through to your comments on general industrial packaging versus your expectation for auto, not in the first quarter, but how you see 2018 evolving into 2019? And then also just what's the best way for all to think about your ability to achieve price in the segment, once again, by end market versus last year? Thank you.
Let's start with price because I think that's a really positive story. You know, we have price in every single of our businesses without exception. We also see price coming in the second quarter as well in every single one of our businesses. So The traction has improved significantly. As we have said, we're prioritizing price over volume and that message is clearly received by the entire team in PPG.
When you break it down into the various subsegments of industrial, so I'll take the industrial coatings first. You know, heavy duty equipment continues to perform well. Electronic materials, is a positive. Coil is a positive. Transportation is a positive.
Our coating services business, because of all the wins they had in Mexico, they're doing well. So the one area negative, of course, is wood China is shifting, from people painting, in the houses to, you know, painting in the factories, and that has a a change and, where it's happening in the marketplace as far as the channel that the product's being sold. So that's the one, negative when you look at packaging, you know, that's been a continued success story for us. You know, our new Inneville technology has been positively saved. And we're really pleased about that.
OEM coatings, you know, again, you know, you have to break that down into region. So the U. S, we went into the year thinking the U. S. Volumes would be slightly down.
As you saw March SAR was very strong at about 17,500,000. The one caveat would be Europe, even though we see Europe being up registrations in Europe were modestly down year to date. They're flat, but we still are very optimistic. We think it'll be up probably 3% in Europe. And Latin America will be strong, as you know, plus our share gain in in Mexico.
And then, I was pleased when I looked at, China for March. Inventories are in very good shape there. Dealer, inventory and the lots are in good shape. The OEM inventories are in good shape. And March sales were actually up 3%.
So I think that's going to be good. Of course, India had a outstanding month.
And if I could add, Chris, the, expectations in China for the first quarter were modest as, as Michael mentioned in the prepared remarks, we were coming off a tax incentive that we believe pulled some business into 2017. So we were again pleased with March stepping up after, again, a brief pause.
That's helpful. Can you also do a quick walk through of your EMEA Architectural Business specifically walk through in Europe. I'm assuming France is still weak, but what about the Benelux UK and Central Eastern Europe on a sequential basis? Just any comments on growth in the competitive landscape would be helpful. Thank you.
Yes. So the Benelux did pretty well. Gotta remember Benelux is a a market that has a lot of exterior painting. So, the fact that we had such tough weather in in March as part of what dragged that down. But when you look at the underlying backlog of our customers, it's still quite good.
Retail Europe is by far the biggest concern. Retail Europe is down high single digits. I'm sure you've seen some of the reports from some of the folks in that space. We did get a little cautious on the UK. We saw some early signs of Brexit.
But it's hard to parse out the Brexit versus the fact that they had snow in in England, which, you know, never happened. So I think that's, part of our concern. When you look at some of the Eastern European countries, doing pretty But I would I'd say hanging in there, you know, they were more impacted by weather than anybody else. And then when you come back to France and the country, Our trade business did very well, actually, in the first quarter, but it was, offset by the weakness in retail. So no recovery yet for France as a country.
But, we are in pretty good shape as far as
Our
next question comes from John McNulty from BMO Capital Markets. Please go ahead with your question.
Great. Thanks for taking my question. With regard to the volumes, you had indicated there was some pressure around pricing where you were walking away when they weren't taking the pricing. I guess, could you articulate how much of the volume impact that was in the quarter?
Yeah, John, this is Vince. Again, in several of our businesses, we saw marginal volume that we had thought we thought we've had booked or had booked that, with a lower price, went to somebody else it's not quantifiable, but we definitely anecdotally and qualitatively saw that happen in in several of our businesses.
Got it. And then just as a follow-up, your corporate and legacy line, I think the original guide had been for 220 to 240 of kind of a of an expense this year. And it and I guess you've revised it to a 175 to 190. I guess, what are the what are the major takeaways on that that are that it's getting it as low as it is. I know you, you know, you had been working on cost cutting all along.
So that was, I would imagine, that was partially in the small guide. So I guess what's the what's the big change there?
The 2 biggest things that that have lowered that number since, since we provided guidance, Number 1, we did receive a revised actuarial information from our pension plan. I think as you know, John, we've done a lot of work over the past 3 or 4 years, to help unionize our pension plan. And those actual area inform information, which we do receive periodically, but we received it after our original guidance was a big factor. And also, we made some structural changes to our pro or our retiree, health care, OPEB programs that are rolling through. That's a pay as you go process.
Thanks very much for the color.
Our next question comes from John Roberts from UBS. Please go ahead with your question.
Thank you. Could you talk about the range of price increases that you achieved sequentially? I'm guessing packaging coatings was up the most given the situation and perhaps the increases were minimal in weaker areas like European Deco or US DIY?
Yes, John, we typically don't get into details by business. We did provide in the prepared materials the information, by segment, which is our traditional reporting protocol. So I'd ask you to just refer to that.
And then I thought last quarter was a record quarterly repurchase rate for the company and now this quarter is 50% higher. Do we think about the pace of buyback as you complete the cash deployment targets?
Well, I think as we've said in the past, You know, we don't provide our our pace or type of cash deployment from quarter to quarter. We use a multitude of factors to determine what we're gonna do with our cash, and, those include, you know, our, our acquisition pipeline, And so we still are committed to the $2,400,000,000 for this year on both acquisition share repurchases and we'll honor that, but we won't give the cadence by quarter or type.
And our next question comes from P. J. Juvekar from Citi.
Hey, guys. It's Dan Jester on for P. J. So if I look at the heat map in your slide deck, it seems like there's a couple more end markets which you're you you logged below market growth in this quarter, packaging in Asia Pacific and a couple of businesses in EMEA. So is that related to some of the business that you walked away from because of of margins, or is there something else going on with market that we should be aware of?
Oh, you hit the nail right on the head. As you can imagine, Oxy prices were up significantly. And, we were raising price and we wanted to get value for the market leading technology we provide. And, if we didn't get it, We were aggressive in saying, then see if you can find your coatings needs from somewhere else.
Okay. And then, you know, logistics cost is something that's come up a a bit, not just for yourself, but for for other players in the industry. I'm wondering is there anything that you can do with regards to your own production plan to help, you know, optimize or limit your logistics costs, or is that just another line item that eventually you need to pass on to their customers and and get them to pay for? Thank
you. We are always looking at our manufacturing footprint. That's a, constant item. And so we are looking how we can continue to optimize that. But, as you know, especially here in the U.
S, and it's not just the U. S. Problem, but there is a less trucking availability and, availability of of trucks on a short notice is also challenged. I hope you need something short than you either pay more or you don't get it. So that's the challenge for us.
But as you know, that's not nearly as big a problem as to what we have with epoxy emulsions, TiO2 and some others. So
But we are working with our customers on both of these categories with respect to selling price.
Great. Thank you very much.
Our next question comes from Kevin Carthy from VRP. Please go ahead with your question.
Yes, good afternoon. Thank you. Could you comment on, the timing of the rollout, of Olympic staying across the 2000 stores at Home Depot and perhaps, characterize the size of that win as you work to backfill the foreground sales at Lowe's.
Yes. So, Kevin, I think it's up to Home Depot to tell you when it gets in their stores. What we what we did put in the release is that we are shipping and it will be a second quarter event. So that's a real positive. The other thing is how quickly they responded, within 2 days of the, announcement from the other, big box retailer We were in Atlanta, mapping out plans jointly.
And that was you know, a brand that they valued for a long time. And, jointly, we're gonna work very hard to make this a success So I think the way to think about the overall sales dollars, though, is is when you think about any big box, pain is always bigger than stain, And Home Depot is always bigger than Lowe's. So I'll let you kinda do that. Now what you have to remember is there was product already in Home Depot, and so they'll have to work their way through that product and work their way into ours. So there is some of that, timing issue that you'll have to factor in.
So our sales in 2008, 19 will be significantly bigger than 2018.
Okay. Thank you for that. And then as a second question, want to come back to your price contributions. You've seen some nice acceleration there over the last couple of quarters. Michael, as you look at the balance of the year, do you think you can sustain this level of price contribution for the overall company?
Accelerate from here? Does it, you know, tail off at some point because you get to harder comps? How should we think about the cadence of those contributions, this year?
The traction is getting better. And we will have more to come. You have to remember, you know, we're we typically like to be 6 to 9 months behind the raw materials we're a little bit later than that now. So we have more to catch up. So we're still, even with the nice traction, we still have to do a better job in this area.
And, so you can expect to hear us, talk more about price, gains in the next quarter as well.
Kevin, you're right. Back half of the year of 2017, we did see some modest price traction that will impact the year over year numbers, but on absolute basis, we're continuing to pursue higher pricing. Thank you very
much.
Our next question comes from Frank Mitsch from Wells Fargo Securities. Please go ahead with your question.
Hey. Good good afternoon, gentlemen. Let me ask, let me ask Kevin's question a different way. Where where do we stand right now, second quarter to date in terms of, price increases that you've been able to achieve relative to Q1.
Frank, our expectation is that's going to be higher year over year than we saw in Q1. So we, again, we saw in Q1 a 1.6%. Selling price increase. Again, every one of our businesses, we're we're we think we'll be tracking higher in Q2. We're not going to quantify that.
But but again, it should be higher than we saw in Q1 on a year over year basis.
Alright. Terrific. That's helpful. And then, I did notice, your your net debt to EBITDA went to one and a half, times, at the end of q 1. Where's your comfort level?
Where should we be thinking about your targeted, leverage ratios?
Yes, Frank, Vince, again. Yeah, we did borrow $1,000,000,000 in Q1. It's, we we like to hit the interest rate at the time when we borrowed that all in, It was about a 3.6% interest rate. We we are, we we certainly have a lot of financial flexibility and a and a lot of balance sheet capacity. We as a as an industry and as a company, the coatings industry can support a much higher leverage ratio than we have today.
I put a quantification on that, but if we find opportunities, we will certainly exercise the balance sheet within reason and our only biggest criteria would be to remain investment grade.
Our next question comes from David Begleiter from Deutsche Bank. Please go ahead with your question.
Michael and Vince, when will selling price increases fully catch up to, these higher raw material costs? Which quarter? Is it Q2? Is it Q3? I I think the back half of the year, David, is probably the the most likely scenario.
As you know, this is not a perfect science every day, every sales rep in the world for PPG is talking about price and has their own deliverables on that. But I would definitely say the second half of the last half of the year is there. Very good. And Michael, just on volume after the soft numbers in Q1 for a variety of reasons, can we get back to, let's say, 2% volume growth Q2 year over year, do
you think?
So, you know, as I told you on the 4th quarter call, you know, the 3%, we don't want to draw a line using one data point. We saw the the one less selling day in the first quarter. So we were trying to be a little cautious. We always did not predict the tough weather. April hasn't started out very well from a weather standpoint, in the US.
So that that will have some moderation on it, but the customers all have strong backlogs. When we talk to our big contracting customers, they really are bullish on the year. So I would say that, we should be closer to your number than our first quarter number.
Our next question comes from Bob Court from Goldman Sachs. Please go ahead with your question.
Good afternoon. This is Chris Evans on for Bob.
Just wanted to check-in and see if you're seeing in the different product categories that your peers are as committed as PPG has been to, pricing any specific product categories or maybe you're you're not seeing the same, discipline that you guys are expressing?
Well, I think the only way to answer that question is our comment where we said that we've walked away from some business. So every company has to make their own independent decisions And so PPG has made their decisions and you probably are better off asking our peers about their own independent decision.
Great. And then maybe just talk
a little bit about the product line rearrangement that happened earlier in the year. Maybe just if you could deconstruct maybe what happened there? It seems like that came as a bit of a surprise. And then I'd be curious to hear opportunities where you might be able to shift those architects actual gallons, that we haven't seen yet. And then maybe lastly, as part of that, do you expect the Home Depot new product launch to be EPS positive in this year or is there any additional costs associated with that?
Yes, Chris, Vince. I'll try to take at least the first part of that question. With respect to the customer assortment change, you know, I'd simply classify that as a as a customer prep, the customer made a decision that we we we certainly were disappointed with, but it's certainly in any customer's decision to select our product or somebody else's product And if you need any more information, you know, you certainly would need to to inquire, you know, with that customer I think your last question, Michael's going to answer the middle one. I think your last question on Home Depot is, certainly our intention is for that to be accretive in Q2 and in succeeding quarters. As you know, Q4 is a light quarter especially for stain.
So that one, we'll have to see what the customer pull through is as we will in Q2 and Q3, but given the volumes in Q, we expect, hopefully, to achieve in Q2 and Q3, we'd expect that to be accretive.
Yes. And I think as far as the volume I think I covered that earlier. Home Depot is a 100% behind this. And you'll see, when they start to put in the store, the type of assortment and type of highlighting of the product. But again, that's really for them to, to comment on.
Thanks guys.
Our next question comes from Jeff Zekauskas from JP Morgan. Please go ahead with your question.
Thanks very much. It was a $15,000,000 other income that benefit in the quarter at Wolkstock.
Jeff, we had about a $7,000,000 charge last year. For one of our legacy items for a plant we no longer operated and have been operated for quite some time. And we had a, We had an equity, investment that started in Q2 of last year, may have been early Q3, that had equity income. Those two items combined comprise the the delta.
K.
2nd, you've been trying to raise prices in the industrial area, you know, for roughly a year, and you're now up 1% and you have rising raw material costs that are they're rising much faster than 1%. Can you diagnose what happened in industrial coatings that's really led to this slowness and successful price realization.
No, Jeff, I think that really boils down to several factors. The first one is, you know, people have got to see that it's sustainable raw materials and maybe last year and they weren't thinking that it was quite as sustainable. So that may have affected how some people are thinking about that. The second thing I would say is we had some of our peers who had publicly stated they were going after volume So that naturally impacts the ability to get, price. And then the 3rd, our industrial customers are very large and very sophisticated, and it is historically works this way every time we get price and industrial after we get price in the Performance Coatings segment.
The good news is we're starting to get it in every business. That includes automotive. And that also includes a very large OEM industrial customers. Well, so I'm disappointed it's taken this long, but, the pace of which it's coming is, apparent and, the teams are doing a much better job.
Thanks very much.
Thank you, Jeff.
And our next question comes from Dmitry Silverstein from Longbow Research. Please go ahead with your question.
Good afternoon. Thank you for taking my question. Just revisiting the European situation, particularly with respect to paint, if you sort of exclude the impact of weather, and obviously, it's been a big problem for the region in the first quarter. How would you sort of characterize the overall market fundamentals with respect to construction spending, remodeling activity anything going on there that, that the weather elements have hit in the first quarter that should become more apparent as we get into the meat of the painting season.
Hey, Dimitry, Vince. Again, I think you classified it properly. Our visibility on a lot of that's fairly opaque given the weather situations. I think the one trend Michael called out, which was visible throughout the quarter, you know, was lower their lower retail sales and and and especially in the home centers throughout the region. So that's the one item we we we can say we we have some comfort is a, is a trend.
And we also did see just some generally lower in the UK, not paint specific, we saw some generally lower retail overall sales, which again, may be the early or middle effects of Brexit. But beyond that, it's it's really hard to decipher, you know, what, what's, what's gonna occur throughout the the paint season.
Okay. In terms of the Olympic product that you're getting into Lowe's, into Home Depot, it's good to see that you guys are able to benefit that quickly from a fill in in the second quarter. One of the businesses that Home Depot lost obviously was interior paint interior stains as well. Is there a sort of future announcements possibly coming from you and Home Depot on that? Do you have a drop in product or is that something that you're working on?
Can you give us some visibility or perhaps something that we can look forward to?
Well, I can't give any visibility on that. Obviously, Home Depot is very interested in having competitive products They were and continued to be the largest seller of interior stain. And they fully expect to be in the future, the largest seller of interior stains. So they've sent that objective, and how
then final question, just on the overall automotive OEM market, it sounds like we're getting a little bit better, results out of China and the U. S. SARs, as you mentioned, were perhaps a little bit stronger than expected. Europe is expected to grow. As you look at the business right now, the balance of the year versus how you looked at it at the beginning of the year.
Would you say that your overall sort of impression of what the industry growth would be as gotten a little bit better or is it still fairly kind of low to no growth environment?
No, I would say I'm marginally more positive, but, you know, the whether you're going to be able to pick that up, whether that can be material or not, is not known. But I would tell you, it's put a nice solid floor on anything that may happen. So I would say I'm marginally more positive.
Dmitry, just as Michael mentioned earlier, we're pleased with the inventory positions in the U. S, the industry inventory positions in the U. S. And China. Coming into what is typically the highest selling season in the U.
S.
Our next question comes from Duffy Fischer from Barclays. Please go ahead with your question.
First one is, can
you just shed a little bit of light on the accounting issue in your comfort level at kind of ring fencing it at that small $5,000,000 level?
Okay, Duffy. So first of all, I'm so thankful that this was brought forward as we are finalizing our earnings report as you know, at PPG, we hold ourselves to a very high standard of business and professional conduct. Our reputation for being ethical and respectful company is a competitive advantage. We believe it's our responsibility and commitment to ensure the long term success of our company, and that benefits all our stakeholders whether it's customers, shareholders, employees, suppliers, or neighbors. You know, we take this matter very seriously.
We're conducting a investigation concerning these potential violations The audit committee is comprised of independent directors of the company's board of directors and they're overseeing it with the assistance of outside counsel you know, we're not able to predict the timing or the outcome. All I'm saying is that the investigation is ongoing. I'm sorry I can't provide any additional information at this time.
No, fair enough. Okay. Thanks. And then, second one, the Foard City judgment that hit a couple of papers yesterday. Is that meaningful?
And if it is, what's kind of the the timeline of how that will play out?
Well, first of all, the, the judge said that the other party was not responsible. So that's the first thing So that was what the court case is about. 2nd, we have been working with the Pennsylvania Department of Environmental Protection on this issue for 10 plus years. We are in very good shape with them. We have a very good remediation, and we have, I would say, As far as you and as an investor we're concerned, this will not be a meaningful, issue.
Okay. Perfect. Thank you, guys.
And the other thing I'd say, just our current actions are protective of the human health and environment, just to be so everybody's clear.
Terrific. Thanks guys.
Our next question comes from Laurence Alexander from Jefferies. Please go ahead with your question.
Good afternoon. 2 quick ones. First, on the general industrial and packaging outlook comments, where you say it's similar to Q1, in terms of the, year over year volume growth. If Q1 had the, the, the tough comparisons in Asia, what is the comparable offset that makes Q2 similar to Q1? And secondly, in terms of productivity, where do you still see areas for significant productivity gains, given how many years you've been pushing the staff on that.
Yeah. Yeah, Lauren. I'll take the first one. I think Michael will probably take the second one. I think I heard your question was with China, with the hard comp in China in Q1.
I think it was actually Coming out of Q4, we expected softness because of a a buy ahead, you know, as the tax incentive expired. I would say Q2 last year, was a traditional quarter. Q4 of 2017 was the one we thought there would be a buy ahead. So again, I would say the comps for Q2 in automotive, China would be normal.
And Lawrence, in regards to your question about cost, as you know, this is a never ending quest for PPGs to get more efficient. And, so we're always looking at our manufacturing footprint. As you know, we have got other acquisitions in the past 12 months. And so that means that there's other labs that are overlapping other plants that are overlapping. So we'll be working hard to get those things out.
So, I don't think that we're ever going to stop in this area. So and plus I think we'll be looking at how we reposition our architectural U. S. Business with the announcement of the customer assortment change that was detailed earlier in the quarter.
Our next question comes from Vincent Andrews from Morgan Stanley. Please go ahead with your question.
Maybe you could just give us an update on what you're seeing out there
in the M and A environment. I know you guys have your
eyes on a variety of things over the year. Is anything changing about the conversations with those targets? I'm going to assume based on the size of your repo in the first quarter that you're not close on anything material. So just thoughts on where all that sits would be helpful.
Yes. So the biggest challenge we have right now, Vincent, is the fact that you know, when you're trying to buy somebody whose earnings are going down, they wanna look backwards to what they were doing 12 months ago, and we wanna look at either what they're doing today or what they're gonna do the next quarter. And, they wanna get paid on what their business used to be. And, of course, we're gonna be the ones that will be improving it. So I would say the conversations right now are a little bit more challenging.
We have a very healthy number of people we're talking to. In fact, we had a new one fly in last week. So I would tell you that the pipeline is still there. But as you can see by our Q1 response, we're going to moderate our I mean, our purchases of shares based with our pipeline and we've always preferred acquisitions over share repurchases So we're gonna continue to look hard at acquisitions, but if we can't do them, then we'll buy back stock.
Okay. And just to follow-up on the logistics cost comments from earlier. I might have missed this if you commented on it before, but is trucking part of the issue or what's going on with driver hours and things like that? Or is that not is it just fuel expense?
No, it's trucking, A, it's availability and B, you know, when they don't show up, then sometimes you have to ship the LTL to keep your customer going, because we have so many of our customers that run just in time. So then that rat ratchets up the cost to serve that customer, and during that period of time because of lack of availability. So you have 2 factors going on. Okay.
Thank you very much guys. Our next question comes from Michael Sison from KeyBanc. Please go ahead with your question.
Hey, guys. You know, EPS growth was up in the first quarter and and it sounds like you're general economic outlook is positive. You know, pricing is starting to it's starting to takes some place. So when you think about EPS growth going forward, is it does it get better in 2Q and to what degree and and try to gauge your confidence in generating, you know, better EPS growth this year versus last year in total?
Yes, Mike, as you know, we don't give guidance as long standing practice of ours. I tell you that the elements to look out for as we go into Q2, we try to try to give you some anecdotal information on, which is we're still seeing raw material inflation. It'll offset a little more of that with price. The volumes in architectural, as Michael mentioned, at least early in April, are more reminiscent of March. Then they would be of a better weather season.
And other than that, emerging region growth looks good. So I think we're we're hoping a higher volume number as said earlier, higher price number, but we're still battling with inflation.
Got it. And then it sounds like that you may still have to walk away from some volume in 2Q to get some of the pricing. And is that the case? And what what would the impact be on volumes if, if, you do have to continue to do that.
Well, yeah, I'll reiterate what Michael said that our priority is margin recovery. I would say there'd be no more incremental impact than we saw in Q1 in in the second quarter as we continue to work with our customers on pricing. And and, again, I think we'll see the same situation where certain customers will will move to a lower price with without us.
Great. Thank you.
Thanks Mike. Our next question comes from Arun Viswanathan from RBC Capital Markets. Please go ahead with your question.
Just a question, if I could, on that same question,
it will ask a little differently.
Do you expect to be kind of caught up margins in industrial, maybe Q3 or Q4, or are you still gonna be lagging year over year?
I think it'll be hard to get there in Q4, but that's currently our target. Okay.
And then you know, in the past,
I guess you had you
had mentioned that, you know, potential inflection point could be improvements in Europe, and that would be, you know, maybe the the best opportunity for you guys to start growing again. Maybe you can just help us understand if that's still the case, and any any other kind of signpost that we should be looking for as to, see an improvement or anticipating improvement in your businesses?
Well, I think when I walked around the world with some of my commentary, you know, Mexico, even with the challenges with the election, is still going to be a good market for us. We saw Brazil getting better. That's So Latin America is going to continue to grow. You saw that China GDP number was 6.8% if I remember right. That was a good solid number.
So that's a positive. I talked about India being up, basically double digits. And so another positive, obviously, would be if we could get this weather behind us and look at our industrial businesses as well in Europe. I mean, we drop 35% or 40% of any sales growth in Europe down to the bottom line. So, you know, I would say that Europe still has a very positive outlook and we're well positioned with our customers.
And the team is performing well in a difficult environment.
I'll just, I'll just append to that, Arun, that we did see we did continue to see in Q1, even despite, again, some harsh harsh weather conditions, very solid growth in the in our industrial segment in Europe. As we said many times in the past, it's typically the segment that leads a region into growth. So we still remain optimistic that that's a potential outcome in the near future.
Great. Thanks. And just last one,
if I could. Just on
the M and A side, understanding that, the businesses want to get full value for, potentially depressed earnings. I mean, do you think that could change And, and if not, why not get more aggressive with price on some of these deals? I mean, if M and A is reference because, it would seem that from a long term perspective, M and A still probably is a higher return on capital use of that. Than than buybacks?
Yeah. You're exactly right, Arun. We we will be as aggressive on price as the re the outcome of the return dictates. You know, we we we wanna be prudent with our acquisitions. We are preferential on them when they have a good return.
We're not preferential on them when they don't. So, again, I think we're gonna be provenant, but I do think you hit the nail on the head with respect to what we're looking at, which is what's the return on the potential acquisition itself, which would certainly be dictated by the purchase price.
Our next question comes from Don Carson from Sid. Please go ahead with your question.
Yes, thank you. A question on architectural. Last year, TiO2 was your raw material that went up the most this year, it shifted more to the industrial side, but '80s still see TiO2 going up this year, as much as your mid single digit overall raw material basket increased projection. And 2, if you look at TiO2 and emulsions, is there a need for third price increase in your U. S.
Company stores to, to keep margins, growing.
So let's take the TiO2 question first. You know, supply and demand is what drives TiO2 pricing. And, you know, I would say that clearly when people report all their earnings across Europe and other places, you'll see that demand will be a a week in our opinion. And so, you know, we're gonna be fighting for you know, rollover type pricing and TiO2 because we think that's reflective of supply and demand. So we'll wait and see exactly how that all Turns out because as you know, we fight for the last day on any price, taking any price increase.
But as far as, emotions, you know, that that's driven by a number of factors, hopefully, being the biggest one. And, sequentially, you know, we see that it's likely to be, you know, heading south in this regard, which should lead us to an opportunity to try to get some lower pricing in that regard. It's too early to to speak that way, but that's certainly our expectations. As far as needing more price, I will tell you that we're aggressively capturing price within that segment now. And, we haven't gotten everything we want today.
So let me focus on getting that done first.
And Vince, a housekeeping follow-up. You mentioned an accounting change last on the last call that would hurt gross margins by 50 to 100 basis points. Did that turn out to be the case? And would you expect that to, to be recurring for the full year?
Yeah. We adapted we adapted the new guidelines with respect to revenue recognition. Those numbers are still valid, Dawn. And then again, I it's an adapting, you know, the new gap guidelines.
Thank you.
Thank you.
And our next question comes from Steve Byrne from Bank of America. Please go ahead with your question.
Thanks. This is Ian Bennett on for Steve.
Do you expect SG and
A expense to decline or increase in 2018?
Well, again, our our first quarter, we were down a 140 basis points in SG And A. We continue to be very active in controlling our costs. As Michael alluded to earlier, you know, we're assessing situation with the customer assortment loss, and and we'll react to that as well. So I I think our our projection would be for that to continue to be lower. Won't give you a specific number, but we're definitely working on productivity initiatives as Michael alluded to earlier.
Okay. And just a follow-up on the gross margin. Did I hear that correctly that gross margins, the expectation is for not positive year over year growth until the 4th quarter or 2019?
I think the question that Michael answered was around the industrial segment margins. And those are the ones that would be challenged until the, certainly, the latter part of the year. If you look on the gross margin basis, I think we were off around 300 basis points. Our our our goal is to get that up closer to to neutral as we go into the earlier part of the back half of the year, the Performance Coatings business where we were able to achieve pricing earlier would help prop that up faster than the industrial coating segment.
Thank you very much. Thank you.
Our next question comes from Mike Harrison from Seaport Global Securities. Please go ahead with your question.
Mike, you saw you saw really, pretty good growth in, company owned stores in North America during the first quarter. Can you give a little bit of color on what's been driving that, and maybe address if company owned stores become a little greater focus in light of the change that you've seen in the customer base, with the big box retailers?
So this continued improvement in our company owned stores is, you know, multiple factors. The biggest one though is the fact that, there are more do it for me people, you know, the baby boomers are aging. And therefore, you know, they're asking people to do the work, and then you have a lot of the younger folks who never learned how to do it. So they're getting it done for them. So that's the biggest trend.
So the company owned stores are winning in that space. Second one, of course, is we've got a lot of improvement in our stores. So when you think about the rebranding initiatives, the customer initiatives, those have all been a positive. Our ability to deliver more timely basis, that's been a positive. So there's a lot of underlying activities.
In that regard. And we did open up 7 new stores in the Q1. So it will continue to be a focus area for us.
And then you announced a price increase for auto OEM customers in the Americas in mid March. Was wondering if you can just give us some color on on how those negotiations are progressing with customers and how you guys are seeing the competitive environment in auto OEM, right now?
Well, I've never seen a time where the competitive environment in auto 8 OEM was anything but fierce. You have super sophisticated customers. And, you know, the benefit is they clearly see the inflation There's no denying the inflation is there. You know, we've worked ourselves through a number of gates if you will, with these folks. And so we are getting traction.
And, so what I'll tell you is, It's been good for us to get additional price increases out there in the marketplace and we are getting price. So you should expect to see more in the future.
And our last question today comes from James Sheehan from SunTrust Robinson Humphrey. Please go ahead with your question.
Mike, could you evaluate your efforts to reaccelerate organic growth? How effective have your rebranding and other initiatives been?
Well, the rebranding has been a very positive. As you can see, again, this quarter was the best quarter we've had in our stores in more than 4 years. That's been doing really well. Also the branding that we've done overall in PPG has helped us in a number of areas. So I'm I'm pleased with that and the clarity on which brands in which market has helped as well.
So overall, I would say I'm pleased.
And on raw materials, you gave some color on several of the different raw materials just wondering on epoxy resins in particular, do you think those prices have peaked yet?
Well, I'd like to say the answer is yes. You know, a lot of that will depend upon, some of the plants that were forced down in China in Q1, how quickly can they get up and running? You know, are they able to run, you know, the rest of the year or will China be diligent? I think China will continue to be diligent, and their enforcement actions And so, I think we're gonna have a period here where we're in pretty good shape, but then I think on as we move into winter, you'll see, China again continue to, very aggressively enforce the environmental
Great. And what's your read on the US paint season thus far?
Oh, well. Disappointing, you know, I wish I had a magic one that could get rid of all the snow. I mean, even in Pittsburgh, we've had 22 snow days this weekend. April 19. So, but our customers' underlying book of business is strong.
Every painter I talk to would like to have 3 more people painting for them. So, you know, the housing market is good. All the underlying demand is good. They wanna be painting. So it should be a good a good year.
And you could see the stores, even in spite of this weather, did quite well. So I would tell you, I'm still optimistic.
Thank you. And ladies and gentlemen at this time, that will conclude our question and answer session. I'd like to turn the conference call back over to management for any closing remarks.
Thanks, Jamie. This is John Bruno again. I'd like to thank everyone for their time and interest in PPG. If you have any further questions, please contact us at any Investor Relations department. This concludes our 1st quarter earnings call.
Ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.