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PPG Industries (NYSE:PPG)

Q1 2014 Results Earnings Conference Call

April 17, 2014 02:00 PM ET

Executives

Vince Morales - VP, Investor Relations

Chuck Bunch - Chairman and CEO

Frank Sklarsky - Executive Vice President and CFO

Analysts

Neal Sangani - Goldman Sachs

Ghansham Panjabi - Robert W. Baird

David Begleiter - Deutsche Bank

John McNulty - Credit Suisse

Kevin McCarthy - Bank of America

Don Carson - Susquehanna Financial

Frank Mitsch - Wells Fargo Securities

John Roberts - UBS

Vincent Andrews - Morgan Stanley

Dan Jester - Citi

Laurence Alexander - Jefferies

Nils Wallin - CLSA

Dmitry Silversteyn - Longbow Research

Duffy Fischer - Barclays

Ivan Marcuse - KeyBanc Capital Markets

Robert Reitzes - BroadArch Capital

Kevin Hocevar - Northcoast Research

Jeff Zekauskas - JP Morgan

Rich O'Reilly - Revere Associates

Operator

Good day, ladies and gentlemen. And welcome to the First Quarter 2014 PPG Industries Earnings Conference Call. My name is Philip, and I’ll be your operator for today. At this time, all participants are now in a listen-only mode. Later, we will be conducting a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Vince Morales, Vice President of Investor Relations. Please proceed sir.

Vince Morales

Thank you, Philip and good afternoon, everybody. Again, this is Vince Morales, I am the Vice President of Investor Relations for PPG. Welcome to PPG’s first quarter 2014 financial teleconference.

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

Our comments relate to the financial information we released today, April 17, 2014. I will remind everybody that we posted detailed commentary and accompanying presentation slides on our Investor Center at our website www.ppg.com. These slides are available on the webcast site as well and provide additional support to the opening comments Chuck will make in a few moments. Following Chuck’s perspectives on the company’s results for the quarter, we’ll move directly to the Q&A session.

Both the prepared commentary and discussion during the Q&A may contain forward-looking statements, reflecting the company’s current view about future events and their potential effect on PPG’s operating and financial performance. These statements involve uncertainties and risks, which may cause actual results to differ. The company is under no obligation to provide subsequent updates to these forward-looking statements.

Today’s presentation also contains certain non-GAAP financial measures. The company has provided in the appendix of the presentation materials which again are available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information, please refer to PPG’s filings with the SEC.

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

Chuck Bunch

Thank you, Vince. And welcome, everyone. We appreciate your continued interest in PPG Industries.

Today, we reported record first quarter 2014 financial results from continuing operations including records in sales and adjusted earnings per diluted share. This strong performance occurred despite continued mixed global economic conditions and inclement weather that postponed demand in some of our U.S. businesses and emerging region currency headwinds.

Even with these challenges, we delivered record first quarter sales of $3.6 billion, eclipsing last year’s figure by 17%. Our global volumes grew 5%, representing our largest gain in three years. Each region also posted solid volume growth led by the U.S. and Canada as our coatings volumes here improved by 7%. Volume improvements were achieved in most businesses as overall economic conditions in this region remain solid.

Year-over-year European volumes advanced 5%. This represents our first volume increase in that region in 10 quarters, reflecting the early stages of an economic recovery there. Emerging region volume performance also improved year-over-year and sequentially versus the fourth quarter, although results remained mixed by country and industry.

Each of our major regions benefited from improved demand in automotive OEM, aerospace and automotive refinish as we continue to outpace the industry growth rates in these end use markets due to our leading technologies and focus on customer service. Also our architectural coatings EMEA business delivered mid-single digit volume growth, including some benefits from favorable weather.

Supplementing our organic growth were acquisition related sales gains of about $360 million which represents over 11% sales growth. From an earnings perspective, each region delivered higher pretax earnings led by Europe, where our earnings growth was nearly 40%.

We realized excellent earnings leverage on the improved demand as a result of the actions we have taken in the past several years to significantly lower our cost structure.

In addition, our ongoing cash deployment contributed to the earnings growth. This includes higher earnings from additional acquisition related cost synergy achievement and continued implementation of our restructuring program announced last year. We also repurchased $200 million or 1.1 million shares of PPG stock in the quarter.

As a result of all these actions, our adjusted earnings per diluted share from continuing operations were $1.98, up more than 40% versus last year’s comparable figure and a record for the company. And we more than fully replaced these earnings from the businesses divested in the quarter. As we previously communicated, we finalized the sale of our interest in the Transitions Optical joint venture in our sun lens business at the end of March. Results for the divested businesses are now reported in discontinued operations and prior year results have been recast accordingly. We also introduced a new reportable business segment structure.

Lastly, we received gross proceeds of more than $1.7 billion from the divestitures, which added to our already strong cash position. We ended the quarter with $3 billion of cash and short-term investments including strong first quarter cash from operations aided by the higher earnings and continued improvements in working capital.

Looking ahead, we anticipate solid global growth to continue, but it will not be uniformed across geographies or industries. We remain well positioned with the balance coatings portfolio both regionally and by end used market providing broad growth opportunities, while minimizing the impact of any individual fluctuations.

We anticipate further earnings accretion from our internal actions including additional synergy capture from the ongoing integration of our acquisitions and further implementation of our restructuring program.

Finally, we intend to deploy our cash balance in a timely yet disciplined manner with a continued emphasis on earnings accretive cash uses including additional acquisitions and share repurchases. We are still targeting earnings accretive cash deployment of $3 billion to $4 billion through the end of next year.

Also, we remain focused on returning cash to shareholders. Today, our Board of Directors approved a $2 million of share repurchase program and they also approved a 10% per share dividend increase.

In summary, I am pleased we were able to begin 2014 by delivering record first quarter financial results. We remain focused on aggressively managing our business to deliver continued top and bottom-line growth this year and on creating additional value for our shareholders.

Once again, we appreciate your interest in PPG. And this concludes our prepared remarks. Now operator would you please open the line for questions.

Question-and-Answer Session

Operator

Of course. (Operator Instructions). And your first question comes from line of Robert Koort with Goldman Sachs. Please proceed.

Neal Sangani - Goldman Sachs

Good morning. This is actually Neal Sangani on for Bob. A question on the industrial business in addition to the Akzo acquisition it looks like you’re annualizing point last year where you really started to outpace the industry growth rates. Does that suggest maybe a deceleration in the last three quarters of the year or are you going to see something similar going forward?

Chuck Bunch

Neal, could you repeat the question please?

Neal Sangani - Goldman Sachs

Looking at the industrial business it looks like you’re lapping some of that outperformance over the, specifically in auto OEM over last year when you started outperforming the industry rates. Does that suggest a deceleration going forward or are you going to see a similar pace of outperformance going forward?

Chuck Bunch

I would say that yes, we continue to feel optimistic about the automotive OEM business both the underlying market, where we are seeing good growth rates, as well as our positions in the various geographies and with our customers. So, we can’t be sure we’ll continue to have growth in excess of let’s call it these global averages. But we think we’re doing quite well and have good momentum in the business. And so we would say we remain optimistic overall in the industrial segments and in auto OEM, in the auto OEM business in particular.

Neal Sangani - Goldman Sachs

And you also didn’t specifically call out raw materials much in the prepared remarks, is that something you are seeing or is it some type of lag that we should see in next coming quarters?

Chuck Bunch

I would say raw materials for us have been relatively benign. We have had a few commodities, actually slightly below our last year’s average, a few slightly above. We are projecting for the year low single-digit inflation in raw materials and we have some other inflationary costs, labor, transportation, natural gas. But right now overall I would say raw materials it’s a relatively benign story for us early in the year.

Neal Sangani - Goldman Sachs

Okay. Thank you.

Vince Morales

Thanks Neal.

Operator

All right, your next question comes from the line of Ghansham Panjabi with Robert W. Baird. Please proceed.

Ghansham Panjabi - Robert W. Baird

Hey guys, good afternoon. First off just on the macro outlook for Europe, Chuck, how much of the improvement do you think is purely from just easier comparisons over the last couple of years versus any sort of structural improvement. And of the various end markets that you are exposed to in the region, which particular one are you most optimistic for specific to this year?

Chuck Bunch

Well, I would say the end of 2012 and almost all of 2013 Europe was very weak. So we do have let's call that easier comparables compared to last year. But we saw what we thought was some pretty solid volume growth, some improvement in economic industries. So we're more optimistic that this is the early days or early stages of a modest improvement.

We talked about some of the sectors more broadly; automotive has been a nice bright spot in terms of improving volumes for the European region. Aerospace, although smaller in Europe, is still a solid business for us. We finished the first signs of volume improvement and the construction markets, they have been a little slower to recover, but we saw some of that recovery in that. We have signaled the last quarter especially in the Northern; let's say the Northern geographies, the UK, Benelux were areas where the construction markets were also showing some early signs of improvement. So, those are all I think encouraging for us.

Ghansham Panjabi - Robert W. Baird

Okay. And then a commentary on packaging being a little bit weaker in Europe, which particular end market did you see the weakness in, because one of your, presumably one of your bigger customers reported this morning the beverage can side and Europe was actually up for them, so just curious why the difference there?

Chuck Bunch

Well, we have a big exposure in Europe on both the food and the beverage side; there is also a lot of activity in terms of BPA, non-intent or BPA free coatings so a lot of trialing going on there. There is heightened, also heightened competitive activity in the European packaging coatings right now. So there are a few moving pieces on the European side, although the business for us grew nicely in the Asia Pacific region, but there was more competitive activity in Europe during this quarter.

Ghansham Panjabi - Robert W. Baird

Okay. Thanks so much.

Vince Morales

Thanks Ghansham.

Operator

Alright your next question comes from the line of David Begleiter with Deutsche Bank. Please proceed.

David Begleiter - Deutsche Bank

Thank you. Chuck just on Comex I know you can’t say too much, but obviously bid the first time. Is there still interest from institutional standpoint towards that asset and beyond Comex can you discuss the M&A pipeline globally for coatings?

Chuck Bunch

Well, we continue to be interested in making acquisitions both in the coatings space and in the near adjacencies of specialty chemicals. We look at almost all potential acquisitions both small and large; we made just a couple of what I would call smaller this year in the first quarter. So we continue to be interested and look at all of the acquisitions.

I would say the pipeline I find somewhat encouraging at this point. These are not all big deals as we announced with high (inaudible) supply, but I think there is a good level of dialog, I’m little more optimistic today than I was six months ago as we proceed with some of these conversations. So I would say I am encouraged.

David Begleiter - Deutsche Bank

And so just on auto OEM you have done a fantastic job and this business is growing well above the market. How long can it continue? Can you grow 8%, 9% for the full year or will grow slow back half of the year in auto OEM?

Chuck Bunch

I think auto OEM in terms of the general market if you look at the [overly], we’re seeing here in the North American market we’re still seeing good growth, we’ll be at little or maybe slightly lower than where we were last year, but we’re just looking 4%, 5% growth. We saw the sales come back here in North America in March. So we feel pretty good about market conditions here in Europe as we discussed it is finally showing some volume improvement and some strength and China has continued as our largest market in Asia, it’s continued fairly soft.

So we have again a good mix of technological innovations all layers in the automotive coatings profile. And so we think that we have a good opportunity with the technologies and we do business with almost all of the major automotive OEMs both the global ones and it looks very strong national domestic players around the world. So we think that we’re well positioned, we’ll continue the slower momentum and the overall market on a global basis, we think is pretty good.

Frank Sklarsky

And David, this is Frank. Recall that we continued to do well when the Japanese and European makers locate new manufacturing facilities outside their home markets because of our product consistency service level or whatever. So the transplant facilities, we’re getting plants, we’re getting layer. So to the extent we’re able to continue to do that when we may not have the incremental several digits percentage above the market growth rates as we have in the past we think we have ways to continue to enhance our share position.

David Begleiter - Deutsche Bank

Thank you very much.

Chuck Bunch

Thanks Dave.

Operator

All right. And our next question comes from the line of John McNulty with Credit Suisse.

John McNulty - Credit Suisse

Good afternoon. Thanks for taking my question. So now that you have gotten a lot of the transactions done, transitions done, access being integrated in, when we start thinking about your SG&A line and its ratio to sales, how should we be thinking about that going forward. Where can you get that overtime like order where you’ve been in the kind of low 20s in the past. Is that an area that we can think about going forward should it be lower than that like how should we think about that?

Vince Morales

John, this is Vince. I think the first quarter would be approximately the first quarter doesn’t include any of the divested businesses all of the results [both] last year with commodity chemicals and this year with Transitions has been moved to discontinued operations. So the first quarter would give you a proxy for that particular quarter’s return on sales.

We did restate the entire 2013 year that’s available via in 8-K filing. And you could see again in those numbers for 2013 by quarter what our sales, what our SG&A as a percent of sales was last year. And that would include some seasonality to it; you really have to look at it on a quarterly basis, buts that’s what I would point to you o John.

John McNulty - Credit Suisse

Okay. I mean maybe taking it from a slightly different angle, when we think about some of your businesses are really just starting to recover now, you also have Akzo really kind of early in this integration stages. So I guess as we think about how the SG&A launch progressed over the next few years versus your sales, how should we be thinking about the leverage that you should be getting off of the SG&A line going forward?

Frank Sklarsky

Yes. And we don’t want to necessarily pull whether it’s going to be 50 basis points or 100 basis points. There will definitely be operating leverage. So when we characterize the incremental profitability of 30% to 40% plus going to the bottom line from incremental revenue dollar, some of that comes from the fixed base in the cogs line and some of that comes from the operating leverage from the SG&A line, because the only part of SG&A where we have to add traditional revenue dollars is sales resources. The back office as we continue to move toward shared services environments in the regions, will definitely give us leverage and SG&A.

So, that’s got a specific percentage, but there will clearly be the opportunity to gradually reduce that as a percent of revenue as the markets recover. Particularly in Europe, where we have an infrastructure there, we’re accelerating, moving things into shared services center in Czech Republic and so we don’t have to add incremental resources on that pure G&A line as the revenue line creates.

John McNulty - Credit Suisse

Great. Thanks very much.

Vince Morales

Thanks John.

Operator

And your next question comes from the line of Kevin McCarthy with Bank of America. Please proceed.

Kevin McCarthy - Bank of America

Yes, good afternoon. If I look at your volume growth at the company level of nearly 5%. It’s double or more than double that of your principal global competitor that reported this morning. And I guess, I’m tempted to ask you about market share trends in that context. Obviously there is a mix differential and I saw your plus 10 on auto OEMs volume. But if I put auto OEM on the side, are there other categories where you feel you’re gaining significant market share versus your competitors these days?

Chuck Bunch

Well, I would say first of all Kevin that we -- today is a busy day for us. We had our Board Meeting, our Annual Shareholders Meeting. So we haven’t had an opportunity to look at our competitor’s, either their earnings reports or their slides or Q&A. But I would say that we don’t have the same, even if you look at the global business profile, we don’t have quite the same mix of businesses. And I think you indicated we did well in automotive OEM as that market continues to recover. They don’t have as much exposure with the acquisition that we made of their business here in North America. So some of our strongest volume growth as you know was here in North America as the economy despite the weather continues to improve, they don’t have as much exposure here.

So those would be some things that I would point to but it’s really too early and it’s only one quarter to comment that there would be any change in share, it may be do as much to just regional mix for the company.

Kevin McCarthy - Bank of America

And then I guess second quarter on returning capital to shareholders, is the timeline are likely pace of execution on your $2 billion share repurchase program meant to be coincident with the end of 2015 bracket on your 3 billion to 4 billion goal or is that not necessarily the case, perhaps you can just comment on what your strategy will be there?

Frank Sklarsky

Yes. So, this Frank. We have left no timeframe specifically on a $2 billion. What we have said is we are going to deploy the $3 billion to $4 billion over the next 12 to 18 months as shareholder friendly manner. What we would say about the share purchase is we are committed to returning that cash to shareholders but the pace and the timing will be dependent upon market and economic conditions but it will also be dependent upon the magnitude and the timing of acquisition activity. And we’ve said consistently that acquisitions, accretive acquisitions would take priority. But the message here is that we will deliver that value to shareholders by acquisitions when available and then also making sure that we maintain that commitment to return that cash to shareholders or deploy that cash I would say in accretive manner to the extent that we don’t execute all of that $3 billion to $4 billion acquisition activity over the next 12 to 18 months. We will continue to have share repurchases be an integral part of the capital allocation philosophy.

Kevin McCarthy - Bank of America

Okay. And then last question if I may. Can you speak to your U.S. architectural coating sales by channel please?

Chuck Bunch

Well, I would say that we had some mix effects and I would say different strength by channel, Kevin. Overall, I would say that we had good strength in U.S. stores channel. We’re saying mid single-digit improvement there, again we have some moving parts because of some of the store closures after as part of the integration. We saw also volume increases in our home center channel, although weakest of the few channels. And we think it’s more related to weather here with kind of the geographic mix. But the dealer channel was weaker from a volume standpoint in the first quarter here in North America.

Kevin McCarthy - Bank of America

Thank you very much.

Chuck Bunch

Thanks Kevin.

Operator

All right. Next question comes from line of Don Carson with Susquehanna Financial. Please proceed.

Don Carson - Susquehanna Financial

Chuck, a question on your outlook, does this stronger start to the year and perhaps better than expected operating leverage make you more optimistic on your earnings growth potential for calendar 2014?

Chuck Bunch

Yes, I do feel a little better, Don. And Europe was encouraging. Here I think, we did well despite what I think was some poor weather conditions that affected some of the end use markets as well as just sort of supply chain transportation. In China, there has been a lot of discussion around China, the automotive related businesses in China continue to do well. This is automotive OEM, automotive parts, automotive refinish, some of the mixed and some of the other end use markets in Asia, like consumer electronics. But as I mentioned packaging, coatings, some of the construction related markets in China held up. So I would say here in April, as we look back on the quarter, I would say I’m more encouraged for 2014. We have some geopolitical events, we’re monitoring currencies in emerging regions, there are few watch-outs I guess as you say, but in general especially based on the first quarter, we’re encouraged.

Don Carson - Susquehanna Financial

And I want to go back to issue of how you are outgrowing the industry on autos and not just the mix of say transplants; is it a technology issue or your better technology for example in e-coat and things like that and are there other opportunities to grow through technology transfer amongst your various businesses?

Chuck Bunch

I would say yes, we were introducing and I think we sort of talked about this last year, the introduction of the new generation side of e-coat. And I think that has continued to build momentum for us. We’ve taken that product global with our global customer base. And so, I'd say from an echo perspective, we feel technology, innovation and development backed up by our service and globalization in all regions of the world. So, I would say that's an example.

And then we are also working with new contact processes that would be in the top coat layer. This is primers to base and clear coats and some compression of these layers; we've had good waterborne technology introductions. And I think the advantages of some of our new technologies are most evident when you have this new Greenfield plants sort of starting around the world especially in the emerging regions, but also here in places like Mexico or the Southern part of the U.S. So I would say we are very pleased with the technology that we've been developing and the receptivity on the part of our customers. And I would say this is probably the biggest story around the growth that we’ve had in auto OEM.

Don Carson - Susquehanna Financial

Thank you.

Vince Morales

Thanks Don.

Operator

All right, our next question comes from the line of Frank Mitsch from Wells Fargo Securities. Please proceed.

Frank Mitsch - Wells Fargo Securities

Good afternoon gentlemen.

Chuck Bunch

Hi Frank.

Frank Mitsch - Wells Fargo Securities

Obviously you had some positive volumes overall in Southern Europe and you were able to translate that into fantastic earnings improvement. What role is our cost reduction is playing? And what [inning] are we in some of the cost reduction efforts Frank had outlined in the past?

Frank Sklarsky

Yes, that’s right. This is Frank. So we had announced of course that 2013 our restructuring program in the third quarter, which had a lot to do with completing of synergies for the North American Akzo business that we acquired, but also where we had identified some rationalization opportunities in other markets which were perhaps weak up to that point. And so that is playing a role and once we take that cost out obviously that the teams have been dedicate to making sure that as revenue grows we do not add that cost back and so that leverage is taking place.

And as we go through 2014, we are expecting somewhere between $75 million and $90 million of incremental savings from these restructuring and synergy programs. So that will continue to benefit the bottom-line and the leverage that you spoke about.

Frank Mitsch - Wells Fargo Securities

All right, terrific. And you mentioned I guess mid single-digit margins on the Akzo North American business and I guess with all (inaudible) headed to the mid-teens what sort of timing are you thinking up there?

Vince Morales

Frank, it’s Vince. One thing we did in the first quarter, which I’ll remind due to seasonally slower quarter for everybody in the architectural business in this country, our projections will be in the above 10% by the end of this year on a run rate basis and that our targeted level by the middle to end of ‘15 which is 12.5%, 13%.

Frank Mitsch - Wells Fargo Securities

Terrific. And then lastly, you referenced some of the positive benefits from weather in Europe, is there a case that there might have been some pull forward from Q2 to Q1 or not necessarily?

Chuck Bunch

I think it’s always a good indicator when you get better weather in the first quarter and it tends to lengthen the season. Did we pull some things forward? I wouldn’t necessarily say that, it depends on how the weather shapes up. But I would say we are encouraged because even in market that’s been weaker in Europe Frank, Eastern Europe now they did have better weather, but we saw them finally bounce back and we have some nice shares in markets like Poland where we had struggled a little bit during the latter half of 2012 and 2013.

So I think the weather is helping, but I don’t think it’s going to produce here in the second quarter some snap back in terms of the volume momentum. I think we feel pretty good that we have some strength here that the weather just will make the season longer and then hopefully better if it holds out for the year.

Frank Sklarsky

Yes. And then if you look at the global insights projections as Chuck said in his remarks, the recovery still hasn’t been totally even by countries. There are still some countries in Western Europe that haven’t recovered as fast as others so that still represents upside for us in particularly in some of the architectural markets.

Frank Mitsch - Wells Fargo Securities

Terrific. Thank you so much.

Vince Morales

Thanks Frank.

Operator

All right, our next question comes from line of John Roberts from UBS. Please proceed.

John Roberts - UBS

Good afternoon. Chuck when you talk about adjacencies in terms of your acquisition strategies is it anything in surface chemistry related or how broad would you define adjacency areas?

Chuck Bunch

Well, when we talk about adjacencies we are talking about businesses that we are already in the end used markets that we were already in. So if you look at some of the best examples adhesives, ceilings, pretreatment these are three examples of adjacent chemistries that build on our strength we’re already in these businesses in automotive, in aerospace in industrial and this would be what I would call near adjacencies with good synergies and similar end used markets surface chemistries would be obviously one of those.

John Roberts - UBS

And could you talk about anything in the silicas area?

Chuck Bunch

We have now reconstituted the business of specially coatings and materials that includes our precipitated silicas business along with OLED, dyes, Teslin and some of our research capabilities in optical in to the monomer business. So we had not excluded silicas as a possible area of growth. You saw the comments that we made around that business unit for the first quarter, they have a very good growth across the spectrum of the end use markets and products there in specialty coatings in materials. So we would not exclude growth in the silicas business and margins and growth performance quite good, not only in the first quarter that we just finished but over the last year and half to two years, we see good growth in that business. And we’re looking forward to a very solid year for the businesses.

John Roberts - UBS

Okay. Thank you.

Vince Morales

Thanks John.

Operator

All right. Our next question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed.

Vincent Andrews - Morgan Stanley

Sure, thanks very much. Just looking at your 5% volume growth and some of the markets for your outperforming the balance of the industry. Could you talk a little bit about how you’re thinking about price here, are you happy with your price level particularly in Europe, is that something that you think there could be, maybe the high level, just some focus on going forward and are you premium priced as it relates to your business in autos or what’s the outlook here?

Chuck Bunch

Are you talking now about the automotive business or more broadly for PPG’s coatings business?

Vincent Andrews - Morgan Stanley

Well, I was talking more broadly about the European business, which is about the pickup, I was just wondering if you’re happy where the price points sold out? And then sort of separately to autos, broadly where you are from the pricing perspective just given your market share performance relative to the peers?

Chuck Bunch

As we talked about, we see a relatively benign raw material inflation environment at least here early in the year. That’s always been one of the drivers of the inflationary environment for our pricing strategies. We typically don’t price off a narrow, a more narrowly focused spot pricing opportunistic. We tend to be longer term in our approach.

So, at this point, I would say that even though there maybe some tactical opportunities in products or specific markets, I would say the pricing environment today in Europe is relatively flat. And that’s consistent with the major inflationary factors, although we are watching. So that there has been some discussion that even though there has been a lot of inflation in Europe over the last few quarters, that could pick up later this year if we see continued volume growth. So we’re watching carefully, but right at this point, I would say there are no major initiatives.

Vincent Andrews - Morgan Stanley

Okay, thanks very much. That’s very helpful. I’ll pass along.

Chuck Bunch

Thanks Vince.

Operator

Alright. Our next question comes from the line of P.J. Juvekar from Citi. Please proceed.

Dan Jester - Citi

Good afternoon, it’s Dan Jester on for P.J. Circling back to the architectural business in North America. One of your competitors is rolling out a premium branded product through the one of the bigger independent dealer channels. And I was just wondering if you are seeing any changes in that competitive landscape or maybe promotions ahead of the spring painting season?

Chuck Bunch

I think I know what you are referring to and at this point I would say, it is very, it’s early in the season to see what if any impact, any rollout would have in the independent dealer or hardware store channel. I think we have all been encouraged by what we are seeing in terms of a market potential. I think you are going to see a lot of new product line extensions, we’ve seen new campaigns supporting some of these rollouts and introductions. So I think it’s going to be a competitive space here in 2014. But I think the opportunities will be there for all of the suppliers if the current momentum around the construction markets is maintained.

Dan Jester - Citi

Okay. And then secondly and I apologize if I missed this from earlier. Have you completed all of the Akzo related store closings and can you sort of update us on what your expectation is for sort of the net change in your company own stores will be in 2014 versus 2013?

Vince Morales

Yes. This is Vince. We have completed the store closures that we earmarked for the acquisition on a net basis, it was just around 100 stores and we move to a growth mode from a store perspective. On a short to mid to long-term basis, we are going to add 25 to 40 stores a year, and a lot of these differ each year so that’s we’re starting with that growth expectation beginning this year.

Dan Jester - Citi

Great. Thank you very much.

Operator

All right. Our next question comes from line of Laurence Alexander with Jefferies. Please proceed.

Laurence Alexander - Jefferies

Good afternoon. Two quick questions on incremental margins, first for Europe. How far do you think you can expand volumes before incremental margins start to deteriorate? When do you see there is a 10% or 15% kind of leeway before you see a step down? And secondly on the emerging markets, do you think that you need to see a [sergeant] level of volume growth, underlying volume growth to start to see higher incremental margins there?

Chuck Bunch

We’ll take the European one first. We still think there is a good amount of headroom. You mentioned 10% to 15% that’s only a possibility because when you look at capacity utilization levels as where they are and with volumes still as of the end of the year about 20% below peak there is ample headroom to continue to accrete the bottom-line at that 30% to 40% for a while.

When you talk about emerging markets, it depends on the emerging market; Latin America where our profitability is a little linear than it is in some of the markets like China for instance, we have a lot of opportunity in Latin America for instance by changing the mix of our inputs so as we’re putting capital into -- putting resin capacity in Brazil for instance that will give us some kind of a step function improvement in raw material costs which will go right to the bottom-line avoiding duties on incoming raw materials.

For China for instance in some cases we will be building new capacity so while you might not get the same leverage to the bottom line on the incremental revenue we will clearly be accreting margin to the bottom line in a way that still creates shareholder value because we’re getting good IRRs on our new capacity investments. And so we make those decisions on a case by case basis. We have plans over the next couple of years to enhance our capacity of shipping the automotive industrial space and that tends to be very accretive from a value creation standpoint. But also -- and while it may not substantially enhance margin percentage it will substantially enhance margin dollars per unit, per dollar invested.

Vince Morales

And Laurence this is Vince. One other comment I will make on Q1 in particular with respect to emerging regions is, we did see higher earnings in emerging regions in Q1. Those earnings were on higher volumes, but those earnings were tempered a bit by foreign currency, negative foreign currency translation. And so on a non-U.S. denominator local currency perspective our margins were higher than they were and we brought them back to the U.S.

Laurence Alexander - Jefferies

Okay. That’s very helpful. And just [going to tease out] one nuance on the emerging market side. Are there any regions where a small acquisition could have a material change in market structure and therefore help margins that way?

Chuck Bunch

I would -- I’m trying to think of but I would say that, it’s somewhat theoretical as a question, in some cases that can happen but at this point I wouldn’t say that that’s a significant factor or something that we see as likely.

Laurence Alexander - Jefferies

Thank you.

Vince Morales

Thanks Laurence.

Operator

Our next question comes from line of Nils Wallin from CLSA. Please proceed.

Nils Wallin - CLSA

Thanks and good afternoon gentlemen. On marine, I know that it stabilized over the last couple of quarters, but it’s still trending down. When do you guys think that you will see at least a flat comp or a positive comp in that business?

Chuck Bunch

I would say in the, we should see stability through the course of 2014. And we're looking for growth returning on a volume basis in marine OEM in 2015.

Nils Wallin - CLSA

Okay. The independent channel in North American architectural is, it's consistently been called out as weak. Is there any reason that this needs to be a channel that PPG needs to be in or even if you don't need to be in it, there is a significant loss of synergy, if you try to exit that channel?

Chuck Bunch

Well, we have a long-term commitment to the inter channel, it's been one of PPG's strength. So over the years in the North American market, we intend to continue to support our independent dealer base, the channel has not grown as much over the last decade or more, largely due to the growth of some of the national home centers and the company owned stores.

But it’s still an important channel for the industry and an important channel for PPG. And we continue to support it and we work to ensure that it can be as successful as possible and it should be well positioned with the improvements that we see in the underlying markets over the next couple years wasn’t as evident in the first quarter and the dealers do tend to watch their inventories a little more closely, our dealer profile is skewed more to the, let’s call it colder weather regions. So we think they were impacted a little more than the other channels, but we think there will be growth there as well during the course of this year.

Nils Wallin - CLSA

Understood, thanks. And just finally in the last two years obviously there has been a dramatic change in the portfolio. Is there any reason to expect that there are going to be dramatic changes going forward or have you strategically looked now more towards just intensifying your coatings division?

Chuck Bunch

We think that we have largely completed the transformation. There are continued consolidation and growth opportunities in the coating space and some of the new adjacencies that we talked about on this call. So I think you have seen largely complete now the PPG transformation. Although there are couple of business units that aren’t in the coatings or adjacent space but these are very small now for PPG’s total portfolio.

Nils Wallin - CLSA

Thanks for your help.

Vince Morales

Thanks, Nils.

Operator

Our next question comes from the line of Dmitry Silversteyn from Longbow Research. Please proceed.

Dmitry Silversteyn - Longbow Research

Good afternoon guys and congratulations on a good start to the year.

Vince Morales

Thanks Dmitry.

Dmitry Silversteyn - Longbow Research

Question on we touched on the weather impact in architectural and it didn’t sound like it was all that material for you although you did called it out in the press release, but was there a weather related factor in your collision repair business on the automotive aftermarket side or may be not in this quarter but do you expect maybe a little bit of a pickup in that business in the second quarter as people get around to repairing their things and reruns?

Chuck Bunch

We think so. The weather, the inclement weather actually helps the automotive refinish business, Dmitry as you know. So, we had more than our share of it here in the northern part of the U.S. although in many cases, one it was either -- we saw a lot of accidents, so a lot of let’s call it, built up demand that didn’t get completed in the first quarter and we also had some supply chain issues. We’re shipping a lot of order base automotive refinish coatings now. So those supply lines were disrupted at several times during the quarter. So we think that the next few quarters for our North American business are going to be good, because there will be a back -- and there is a backlog of work now in the collision shops. And so we think that the next couple of quarters here in North America should be good ones.

Dmitry Silversteyn - Longbow Research

Switching gears a little bit, if you talk about your Asian paint business and how that’s doing if I would recall for much of 2013, it was under pressure and delivered some lower volumes from time to time. Are you seeing that business turnaround or at least stabilize and sort of what’s your expectations for that in 2014?

Chuck Bunch

This is Asia Pacific in general for the region or Asian Paints, our joint venture in India Dmitry, what -- we were cutting out there as you were asking the question?

Dmitry Silversteyn - Longbow Research

Okay. I am talking about the general Asian paint business as architectural coatings that you report in the performance materials. Well, now that you are reporting all your coatings, but -- all your paint, but when you used to report paint being basically North America and Asia, talking about the Asian piece of that?

Chuck Bunch

Okay. Well, we have, in this case, if we look at architectural coatings businesses in Asia for us, those are two principal markets Australia, New Zealand and China. Australia, New Zealand, the market is positive. We saw some growth here in as we -- in the second half of 2013 and the first quarter, so our position in Australia continues to improve. We have seen volume growth and improved profitability.

China, likewise, so it’s a smaller business, so we have a smaller regional business in China focused in the East Coast major cities. And we saw an improvement there as well, again smaller volume growth for our business than what you have seen in some of the other western Tier II and Tier III cities. But we saw a nice improvement for the business despite let’s call it the smaller size of our business in China that did grow there in terms of volume and profit.

Vince Morales

Yes. The only thing I would add to that is the fact that we did have good volume growth in those architectural markets in Asia, fortunately in the first quarter versus the prior year we were subject to currency changes on the translation side, principally in Australia and a significant change ever since Q1 ‘13.

Dmitry Silversteyn - Longbow Research

And then finally, I’d just like to follow-up on a question asked earlier around your strategy in the U.S. or North American independent dealer channel. You’ve increased your exposure there obviously, with the Akzo acquisition and then recently you have announced a closer tie with the group of stores in the Northeast.

There has been some disruptions in the business and one of the largest suppliers into that market and they are under 3rd or 4th CEO and losing track already. Is that an opportunity for you even though this is a market that maybe trailing sort of the growth rate that you would expect from company on stores or from big box DIY? Is it still a market that given maybe a little bit easier competitive environment, where you can gain some share and actually become a more meaningful supplier into that channel?

Chuck Bunch

Well, we feel that we have been -- we’ve had a commitment to the independent dealer channel here for many years. And we’ve reaffirmed that Dmitry, even with the acquisition that we made last year where we did pick up additional exposure to the independent dealer channel here in Canada but also got additional stores and home center sales as well.

So, we think it’s been a -- it’s an opportunity for us to bring more value to the independent dealers, so many of them are committed to staying in the market and growing despite the competitive environment. So, we think it’s a good opportunity for us. Yes, it’s not as fast growing as the other channels, but we think there is a good role for us. We can support these dealers and we’re going to continue to do that.

Dmitry Silversteyn - Longbow Research

Thanks very much.

Vince Morales

Thanks Dmitry.

Operator

All right. And our next question comes from the line of Duffy Fischer from Barclays. Please proceed.

Duffy Fischer - Barclays

Hey guys.

Vince Morales

Hey Duffy.

Duffy Fischer - Barclays

Just quick question or maybe not quick. Talk about the puts and takes and the difference for your business and architectural in the recovery that’s left in Europe versus the recovery that’s left in the U.S. kind of where do you see the most upside in those two architectural markets say over the next three to four years?

Chuck Bunch

Well, let me think about that for a moment. I think we are in the early innings of the recovery in Europe. This has been -- and we have seen negative volumes for the last three or four years in the market. We saw the biggest drops in the Southern Mediterranean regions in Europe. So, I would say that as we look at the markets now of UK and Benelux starting to come out and we are encouraged there. Our biggest market in Europe is France. We didn’t see as much an improvement overall in the construction indices in France. So, I would say that’s our biggest opportunity. We don’t have much exposure in Southern Europe. There is soft recovery there, we have a smaller exposure. So I don’t think we have as much to benefit in Spain or in Italy at this point. And Eastern Europe has also been bettered. And the first quarter you saw that for the first time we saw some nice improvement in markets I told.

So I would say that biggest opportunity -- I think we are still in the early innings of the regions or countries that the growth has restarted. And I think for our biggest engine in Europe which is France, if we can get them moving; and you have seen recent elections and more of a commitment around returning to growth in the French markets and as that works its way through to the construction markets, I would say that’s our greatest opportunity. So still early days in Europe on the construction side, I think automotive is actually probably a little bit ahead of construction because they have a large export base in Europe.

Here I would say that we’re couple of years into the recovery. And although it has been slower in coming than we thought, so I do think that we’re going to see several more years Duffy of growth in architectural coatings here in this market. We haven’t seen the commercial construction or non-residential side come back as strong, most of the improvement we’ve seen in residential. And that’s coming and helping us. DIY was probably a little more affected here in the first quarter with weather, but I think we have more to go on residential. And non-residential which we were getting more optimistic about in back half of last year, things slowed down a little bit we think more due to weather. So I think that’s going to provide the impetus for the next couple of years, completing this kind of residential recovery and with non-residential stuff coming through on an extended basis.

Duffy Fischer - Barclays

Great. Thanks guys.

Vince Morales

Thanks Duffy.

Operator

All right. Next question comes from the line of Ivan Marcuse from KeyBanc Capital Markets. Please proceed.

Ivan Marcuse - KeyBanc Capital Markets

Thanks. A couple of quick questions, on top, the European question that was just asked. What would your volumes be, how much are they pre-downturn levels, so if you compare them where they are today versus I guess 2011 when they started to tail off?

Vince Morales

We typically go back Ivan to 2008, that’s kind of a point in time we started to see volumes fall in Europe. The volumes today versus 2008 levels are still down, high teens percentages even with the early recovery we saw in first quarter.

Ivan Marcuse - KeyBanc Capital Markets

Got you. And then where are we and how much in synergies were -- it helped I guess performance chemicals, or maybe performance coatings on -- from Akzo and how much more is there to go, how much should you see going to the year?

Vince Morales

We expect out of the 200 synergies that we said will be our ultimate goal by early 2015, our run rate by the end of this year should be around 170 or so out of that 200, with about 30 left to go remainder of the year. We closed 2013 at a run rate of 100, so about 70 incremental kind of ramped up through 2014 from that 100 run rate to 170 run rate this year.

Ivan Marcuse - KeyBanc Capital Markets

Great, thanks for taking my questions.

Vince Morales

Sure. Thanks Ivan.

Operator

All right. Our next question comes from the line of Robert Reitzes from BroadArch Capital.

Robert Reitzes - BroadArch Capital

Hi. Most of questions I had have been answered. The one I would ask is that when you look at all the damage that was done by the storms in the first part of the year, have you guys seen a pick up or do you anticipate pick up in the sale of paint et cetera during the second and third quarters as repair and modeling?

Chuck Bunch

Yes, we do. [Weather] like we have takes its toll. We saw pick up last year after hurricane Sandy hit the East Coast. I think we’ll -- we should be in a position in the second and third quarter for this year to, I think capture more opportunities both from the [storms] and from the people that weren't able to get out and shop for some of their painting needs during January and February. And I think we talked about the automotive refinish business, lot of accidents here in the first quarter that lot of those didn't get repaired. So those are two examples both on the architectural side and the automotive refinish side where we think over the next couple of quarters it should get some help here from some of this demand.

Robert Reitzes - BroadArch Capital

Thanks.

Vince Morales

Thanks Bob.

Operator

Alright, our next question comes from the line of Kevin Hocevar from Northcoast Research.

Kevin Hocevar - Northcoast Research

Hey, good afternoon everybody. I was wondering if you could give us an update on the level of success you had and the price increases you had at the Paint Stores in the U.S. and if you expect that to spill over in any other channels?

Chuck Bunch

We were able to capture a low single-digit increase, price increase in the Paint Stores during the first quarter.

Kevin Hocevar - Northcoast Research

Okay.

Chuck Bunch

Have those and carry through for the remainder of 2014.

Kevin Hocevar - Northcoast Research

Okay. And then just another quick one when you parsed out the pieces in the performance of this coating segment, could you give us an idea of how much the architectural EMEA business margins improved in the quarter?

Vince Morales

Hey Kevin, this is Vince. That was the business as Frank mentioned earlier that had the most leverage potential. Volumes were up 5% and the business sales last year were separate segments. So you can easily do the math, 5% volume increase and again I would tell that as we said coming into this year we expected incrementals somewhere between 30% to 50% and again that was the one business we certainly year marked is having highest potential given the largest drop in volume over the last couple of years.

Kevin Hocevar - Northcoast Research

Okay, great. Thank you very much.

Vince Morales

Thanks Kevin.

Operator

Our next question comes from the line of Jeff Zekauskas from JP Morgan. Please proceed.

Jeff Zekauskas - JP Morgan

Thanks. What was cash flow from operations in the quarter?

Frank Sklarsky

Cash flow from ops in the quarter I think Jeff, give me one second I will find it. You could ask if you’ve another question Jeff.

Jeff Zekauskas - JP Morgan

Sure. On a pro forma basis the Akzo, both the acquired Akzo sales in the United States grow versus what they were when they were run by Akzo in the first quarter of last year?

Chuck Bunch

Jeff they were very comparable with last year, slightly ahead, but very comparable. We shuttered about 100 stores as part of the synergy capture.

Jeff Zekauskas - JP Morgan

And into the cost reduction that you are doing there since the sales aren’t growing very fast, what’s left. I mean what is the cost that will come out for you to hit your synergy targets? Are there more plants to close or how do you conceptualize that?

Chuck Bunch

Well, we still have -- we are working through the operations and supply chain portion, some of those changes take quite sometime as we are moving production obtained around the different plants, different distribution centers, we still have back office opportunities that we are working through as we integrate the two organizations those would be two of the bigger buckets left.

Jeff Zekauskas - JP Morgan

And now that we will annualize the Akzo business, what’s the normalized SG&A growth going forward? Is it a couple of percent or is it [cashed] in that?

Frank Sklarsky

Looking for the company in total?

Jeff Zekauskas - JP Morgan

Yes.

Frank Sklarsky

We should be I mean if you look at the run rate where we are today, we will be going up from our current run rate in the first quarter. We should be continuing a downward trend, gradual downward trend in terms of SG&A as a percent of revenue.

Jeff Zekauskas - JP Morgan

All right, okay.

Chuck Bunch

And you asked the cash flow, the cash and I want to make sure you hit the right terminology here, you’ll see the Q coming out in very near future obviously. But cash from operating activities from continuing operations, a $130 million of course that one and then you have some from [discops] and continuing ops about $160 million that’s before CapEx obviously. And we’ll spend between $500 million to $600 million this year in CapEx probably ramping up a little bit more (inaudible) a little less earlier in the year.

Jeff Zekauskas - JP Morgan

And then lastly, you bought back about $200 million from stock this quarter, how did you pick that number, why wasn’t it zero or $500 million, where did $200 million come from?

Frank Sklarsky

We’ve said that we will continue to have share purchase the integral part of our capital cash deployment strategy. Obviously we look at the entire landscape between dividends, organic CapEx, share repurchase and acquisition activity, we get a little bit of acquisition in the first quarter [high-temp] coatings that was announced, a couple other very small ones that we announced. And we had a remaining offer on our existing share repurchase authorization when we close the year and that was enough that we felt prudent about for the quarter.

Jeff Zekauskas - JP Morgan

Okay, great. Thanks very much.

Chuck Bunch

Thank you, Jeff.

Operator

All right then. We have one more question coming from line of Rich O'Reilly from Revere Associates. Please proceed.

Rich O'Reilly - Revere Associates

Hi. Thank you all. Jeff, beat me to the question about Akzo. Okay thanks a lot guys.

Chuck Bunch

Thank you.

Vince Morales

Thank you.

Operator

At this time we have no further questions and I would now like to turn the call back over to Vince Morales for closing remarks.

Vince Morales

Okay. And I’d like to thank everybody for their time and interest in PPG today. If there are further questions please contact me in the Investor Relations section. Thank you.

Operator

Ladies and gentlemen, conclude today’s conference. Thank you all for your participation. And you may now disconnect. Have a wonderful day.

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