PPG Industries Management Discusses Q3 2012 Results - Earnings Call Transcript

Oct.18.12 | About: PPG Industries, (PPG)

PPG Industries (NYSE:PPG)

Q3 2012 Earnings Call

October 18, 2012 2:00 pm ET

Executives

Vincent J. Morales - Vice President of Investor Relations

Charles E. Bunch - Chairman, Chief Executive Officer and Member of Operating Committe

David B. Navikas - Chief Financial Officer, Principal Accounting Officer, Senior Vice President of Finance and Member of Operating Committee

Analysts

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

David L. Begleiter - Deutsche Bank AG, Research Division

Abhiram Rajendran - Crédit Suisse AG, Research Division

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Robert Koort - Goldman Sachs Group Inc., Research Division

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

Laurence Alexander - Jefferies & Company, Inc., Research Division

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Ivan M. Marcuse - KeyBanc Capital Markets Inc., Research Division

Dmitry Silversteyn - Longbow Research LLC

Daniel Jester - Citigroup Inc, Research Division

Duffy Fischer - Barclays Capital, Research Division

Kevin Hocevar - Northcoast Research

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 PPG Industries Earnings Conference Call. My name is Shaquana, and I will be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Vince Morales, Vice President, Investor Relations. Please proceed, sir.

Vincent J. Morales

Thank you, Shaquana. Good afternoon. This is Vince Morales, Vice President of Investor Relations for PPG Industries. Welcome to PPG's third quarter 2012 financial teleconference.

Joining me from PPG on the call today is Chuck Bunch, Chairman of the Board, Chief Executive Officer; and Dave Navikas, Senior Vice President, Finance and Chief Financial Officer.

Our comments relate to the financial information released on Thursday, October 18, 2012. I will remind everyone that approximately one hour ago we posted detailed commentary and accompanying presentation slides on the Investor Center at our website, ppg.com. Those slides are also available on the webcast site for this call. They provide additional support to the opening comments Chuck will make momentarily. Following Chuck's perspective on the company's results for the quarter, we will move directly to Q&A.

Both the prepared commentary and discussion during this call 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.

This presentation also contains certain non-GAAP financial measures the company has provided in the Appendix of the presentation materials, which are also available on our website, reconciliations of these non-GAAP financial measures to the mostly -- 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, Chuck Bunch.

Charles E. Bunch

Thank you, Vince, and welcome, everyone. Our earnings growth continued during the third quarter as we posted our ninth consecutive quarterly earnings record. Our adjusted earnings per share of $2.24 were up 14% versus last year and were up despite continued variation in regional economic performance. North America remained our strongest region with improved demand in most businesses, led by automotive OEM coatings gains. European volumes declined versus the prior year. However, the trend improved in comparison with the second quarter year-over-year results due to less customer inventory destocking. Emerging region demand was mixed by end-use market, ending flat in the aggregate. Currency translation remained a negative to sales and earnings.

We were pleased to deliver higher earnings in each region for the quarter and year-to-date despite the mixed regional economic performance and negative currency translation impact. This was aided by our total coatings segment earnings, which grew by 20% versus the prior year as local currency sales growth was supplemented by continued operational execution. Earnings in our remaining segments were lower year-over-year, including the impact from lower optical product sales due to customer inventory management initiatives, stemming from the upcoming introduction of our new Transitions Generation VII product and lower optical consumer end-market growth rates.

We also delivered strong cash performance, with year-to-date cash generation up over 33% and cash and short-term investments totaled $2 billion at the end of the quarter.

Our excellent financial performance in the quarter and year-to-date is a direct result of our aggressive operational execution and further illustrates the benefits of our broad global business portfolio and the effectiveness of our ongoing cash deployment.

Looking to the fourth quarter, we are heading into a seasonally slower period in most end-use markets and expect little change in the inconsistent performance of economies outside North America. We also anticipate measured economic growth in North America and expect we will continue to benefit from some of the highest growth sectors this year such as automotive OEM and aerospace. We will remain focused on aggressive management within the regions to maximize our financial performance and we expect to benefit further from the continued implementation of restructuring actions. In addition, we have considerable financial flexibility, and we continue to pursue acquisitions in a disciplined manner as a primary means of deploying our strong cash position for earnings accretion.

Finally, we remain on schedule to complete the separation of our Commodity Chemicals business and the merger of that business with Georgia Gulf, with closing expected to occur by early next year.

That concludes our prepared remarks. Now, operator, would you please give instructions and open the phone lines for questions?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Kevin McCarthy, representing Bank of America Merrill Lynch.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

I was wondering if you could provide us with an update on both the timing of the transaction with Georgia Gulf as well as your latest thoughts on the relative merits of split-off versus spinoff?

Charles E. Bunch

Yes, I can, Kevin. It's good to have you on the line. Right now, as I'd described in my notes, we anticipate a closing by the first quarter of 2013. We have several items that are still in process. And we have completed one antitrust review here in the U.S. We're waiting for final SEC filings to be completed by both companies. We're waiting for an IRS tax ruling and similarly in Canada. We have also the Georgia Gulf shareholder vote, which we anticipate later in the fourth quarter, November or December. So we're still on pace, we think. We haven't had any surprises so far and -- as we've moved through these items, so I would say we're still on schedule. Our thinking is still in favor of the split and that would be our recommendation today. We are obviously monitoring the financial markets as we go through and we continue to be, I think, buoyed by the strength overall in the response to the potential transaction, the performance of ours, as well as Georgia Gulf shares. So at this point, we are still pointing towards a split and believe that is the best avenue for PPG and our shareholders.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Great. As a second and final question, would you provide an update on your outlook for raw material costs and perhaps touch on TiO2 pigment, as well as acrylics where it looks like there could be some nascent upward pressure following an outage in Japan? Just would appreciate your updated thoughts on that for the end of the year here.

Charles E. Bunch

TiO2 costs, as we look at them in the third quarter of 2012, we're still up versus the third quarter of 2011, although the trend here in 2012 as we've moved through the years, has been for lower prices for TiO2 in all the regions. Pricing for the fourth quarter is still under discussion. But the overall inflationary trends for raw materials, I'd say, have been very moderate here this year. And I would say that in the acrylic chain, although there was a lot of publicity around the explosion in Japan and the plant outage, we've been watching the acrylic chain. Propylene pricing, that has been, I would say, moderate. We haven't returned to some of the higher prices in propylene that we've seen earlier this year. So I would say that, right now, we are not seeing any price spikes in the acrylic chain at this point here for the second half of 2012.

Operator

Your next question comes from the line of David Begleiter, representing Deutsche Bank.

David L. Begleiter - Deutsche Bank AG, Research Division

Chuck, on the same track, can you talk about your pricing discipline in the face of some lower raw material costs? Have you been forced to lower any prices? And can you actually quantify the gap that expanded -- that occurred or benefited you guys in Q3, as well as the drop in your selling prices that did not?

Charles E. Bunch

Well, I would say that we're still facing raw material inflationary pressure over certainly the last 18 months or a little longer. We haven't fully recaptured that. So as I described in TiO2, we've seen a moderation of the increases; in fact, some modest decreases here this year. But overall, we've seen more stability in terms of our raw material input costs, and pricing has remained stable during the course of this year. Vince, did you want...

Vincent J. Morales

Yes, Dave, I just wanted to add, that in several of our businesses in 2011, we absorbed a lot of inflation without the ability to push through price until this year. So over the last 18 or 20 months, as Chuck has mentioned, we're still in a recapture mode and that recapture continues into the fourth quarter.

David L. Begleiter - Deutsche Bank AG, Research Division

That's helpful. And Chuck, can you discuss your efforts to reduce your usage of TiO2? I believe you had a 4% to 6% target for this year.

Charles E. Bunch

Yes, and we're still on track. Through the first 3 quarters of this year, we were tracking at a little over 3%. So we feel that for the full year, we will be into certainly the 4% to 6% range. Probably as we roll up all the numbers, it'll be kind of on the low end of that range or a little over 4%, but certainly within our target. And we feel we still have opportunities as we go into 2013 and beyond to continue the more productive use of TiO2 in our formulation.

David L. Begleiter - Deutsche Bank AG, Research Division

And lastly, can you discuss potential share buybacks with the $2 billion of cash on the balance sheet? How much of that cash is trapped overseas, Chuck? How much do you need to run the company, something on that track?

Charles E. Bunch

Well, we anticipate, as you see, the -- our cash balance was around $2 billion here at the end of the third quarter. Fourth quarter is usually a cash generator for us plus we have the $900 million that will be coming over the next few months from the split off of the Commodity Chemicals business. So if you think that we need $400 million to $500 million to run the company, we are probably sitting on in excess of $2 billion in terms of opportunity to either engage in share buybacks or also M&A activity. We're currently out of the share buyback market because of this Reverse Morris Trust transaction. We would intend to initiate modest share buybacks at the conclusion of the transaction. But we are keeping some of our balance sheet strength, let's call it, as we look at the acquisition opportunities. We announced one yesterday, as you saw, in our Industrial Coatings space, Spraylat. But as we go through 2013 and beyond, if we cannot find attractive acquisition candidates to deploy this, let's say, excess cash, we will become more aggressive in share buybacks. And we have a good portion of this $2.5 billion in cash here in North America. We have -- all of the cash from the Georgia Gulf transaction will be here. And so we think that, I think, 3/4 of the cash balance that we have is here in North America and available for any of our uses, not only share buybacks and M&A, but also dividend payments or other payments here to any of our constituencies in North America.

Operator

And your next question comes from the line of John Nulty (sic) [McNulty], representing Credit Suisse.

Abhiram Rajendran - Crédit Suisse AG, Research Division

This is Abhi Rajendran calling in for John. A couple of quick questions. So auto has been a relative bright spot for you guys. How should we think about trends in the auto OEM business on a regional basis looking to 4Q, and are there any customer shutdowns or any other factors that we need to consider?

Charles E. Bunch

The global trends for automotive OEM production are still good. And I think you will see, I think, a continuation of the trends that we've outlined here in the first 3 quarters of this year. One is continued strength in North America. We have good sales momentum. Inventory levels are moderate. And even the numbers in September, good sales levels, more production coming to North America from outside, so less imports into the North American market. So I would expect the North American market to stay positive, especially on the production side. Although I think you will see over the next year or more as the effects of the Japanese tsunami are moderated, you're not going to see this 20% necessarily growth rate during 2013 that we've seen this year. Europe remains quite weak. The first 9 months in 2012, we've had high single-digit declines in production in Europe. We had, I think, a similar, if not quite as negative production in the third quarter, but it's usually a difficult quarter in Europe to determine actual trends because of the vacation period. But right now, we haven't seen a turnaround in Europe and we're not expecting one as we move into 2013. Chinese market, a big one for us, has remained quite positive, 7% kinds of growth rates, still healthy. And India, which has struggled over the last few quarters with growth rates, now in the low single digits. We think there, we -- there's more time needed to turn the -- some of those economic headwinds in India. So at this point, as we look to the first half of next year, I would say a continuation of some of the same trends overall. Despite the weakness in Europe, this is a very positive story. I think we're doing quite well in our business and I think you're also seeing from PPG here is well positioned in leadership positions with all of the major car manufacturers, good regional strength, benefiting from some of the restructuring that we announced earlier this year. And also, I think a story that we haven't emphasized as much is what I would call improved localization of our production. We have -- the coatings businesses, as you know, are not highly capital intensive. Our capital expenditures have actually been modest over the last few years, but they've been pointed at positioning us, especially in automotive and in our Industrial Coatings market to localize our production capacity. So the investments that we've made over the last couple of years in China, in South Korea, in Mexico, which are still strong markets, we are really benefiting from the investments that we've made where we've localized resin production or waterborne coatings as examples. So we're benefiting there as well from I would call some of these strategic capital expenditures of the last couple of years and that's driving very good performance in our Industrial Coatings segment even though, overall, growth rates are moderate.

Abhiram Rajendran - Crédit Suisse AG, Research Division

Got it. And then a quick follow-up on the Spraylat acquisition. How should we think about the margins of the addition versus your Industrial Coatings segment margins, and then how should we think about potential incremental earnings looking out to 2013?

Charles E. Bunch

Well, we would hope certainly the business today that we acquired does not have -- that it is a positive in terms of earnings and cash flow. But margins, return on sales are not at our overall average for our Industrial Coatings segment. So we feel with -- it will be an accretive acquisition in 2013. We expect to close by the end of 2012. So we are looking for accretion in 2013, but I would say we probably need 18 months or so to get the full benefit and to see those margins being comparable to what we have in our Industrial Coatings segment.

Abhiram Rajendran - Crédit Suisse AG, Research Division

Okay, got it. And then last quick one, if I may. In the optical parts, so there's several moving parts in the business in the fourth quarter, including the year-ago flooding effect, some continued inventory management and maybe some new product pipeline fill. I guess after the last few quarters of decline in this business, can we expect some growth on a year-over-year basis in the fourth quarter?

Charles E. Bunch

What we're going to see in the fourth quarter is, I would say, a modest growth in our Optical business. If we -- when we looked at our retail sales out the door, this is not our direct sales to customers but the sales of Transitions at the retail level, they were still positive in the third quarter at, let's call it, lower single-digit growth. So we did have at-market growth for Transitions. There was, as we discussed in our note, inventory management and destocking on the part of our customers. We think that this will be the quarter with the largest impact from that, but I'm not sure that it is entirely finished because there's still inventory of our current generation product that's out there and we'll start to see it -- towards the end of this quarter and certainly in the first quarter of next year some -- the start of shipments for our Generation VII product.

Operator

And your next question comes from the line of Frank Mitsch, representing Wells Fargo Securities.

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

I wanted to follow up on the whole auto thing because I think even more importantly than what the market's doing is you seem to be articulating a viewpoint that you're gaining a fair amount of market share here. And Chuck, I heard you talk about localization of production. You mentioned technology. I was wondering what exactly are you attributing that market share gains to? And to some extent, could it be a side benefit, if you will, of the DuPont performance coatings sales process that may have driven a bit more into your arms?

Charles E. Bunch

Well, I would attribute our performance to, I think, good work over the last few years. We do have a new-generation electrocoat product, which has been very well received by our customers. We've been well positioned with what our -- some of our new waterborne basecoats and some of our new, more efficient total coatings systems. So in China, as an example, we're doing very well. We've been fortunate to be positioned with some of the strongest customers here in North America. And so I would attribute it to good strong execution. Obviously, the earnings are benefiting from the localization and some of the restructuring. And I think some of these decisions, especially on the OEM side, are longer-term, but I think we've been consistent. We’ve -- this is our core business. We're committed to it and I think our customers are giving us, I think, a strong sense of commitment in return. So we feel pretty good about our current position and certainly the results speak for themselves. They've been great.

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

Okay, great. And if I could just ask on the restructuring charge -- I'm sorry, the savings that you're seeing. You indicated that in the back half of the year, you anticipate $40 million to $50 million in savings, the back half. Half of the back half of the year is over with the third quarter. So where do you think we -- where do you think you stand with respect to expectations on Q4? And I believe we're going to get the whole $140 million by the -- or at least beyond that run rate by the middle of next year. Where do you stand on that? Could there be upside? Could there be downside, et cetera? If you could just expand upon that, that'd be great.

David B. Navikas

Yes, Frank, this is Dave. I would tell you that in the third quarter, we got maybe 35% to 40% of the back-half savings, so the rest we would be anticipating coming in the fourth quarter.

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

All right. And then...

David B. Navikas

And then in next year, the $70 million to $80 million that we had indicated previously, we're still good with that forecast. Our actions are generally on schedule. The things that we need to get done are being accomplished and we expect to see those savings next year as well.

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

All right, terrific. So you're talking about a delta of about $15 million sequentially, Q3 to Q4, in terms of savings strictly due to that. And then given the aforementioned comments with respect to raw materials versus selling prices, it looks like we're going to see 10 in a row.

David B. Navikas

We hope. We don't give guidance, Frank.

Operator

And your next question comes from the line of Don Carson, representing Susquehanna Financial.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Chuck, a couple of questions on U.S. architectural. You talked about the overall volumes being up, but particular strength in your company stores and is that reflecting a shift away from big boxes back to the contractor channel in general, or is that just dynamics related to your own sort of store location areas?

Charles E. Bunch

I would say the third quarter sales growth was moderate and I would say the volumes were up slightly, lower single digits. Again, stronger in the stores -- in our stores network. But I would say that we did see on what I would call the national account or big box side, they're watching inventories closely. We don't know exactly how that is -- that's going to be positioned here for the fourth quarter or into 2013. But certainly, our customers there are mindful of inventory conditions. We've been tracking -- or it's a little less clear on the out-the-door sales. We get a – we have a better visibility with our own stores. But I would say there seems to be some inventory management going on with some of our customers there. But I would say that at this point, the volume trends are positive and we would say that for all the channels, but it may be more on the inventory side that you're seeing the differences.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Okay. And speaking of inventory, we've seen about a $0.13 per pound price drop in TiO2. Are you -- admittedly, it's a slow seasonal quarter for architectural paint, but are you drawing down your TiO2 inventories further in anticipation of more price reductions next year? And then a just clarification on your TiO2 reduction comment of 4% to 6%. Is that total TiO2 or is that high-quality chloride product and part of what you're doing is substituting the low-grade Chinese TiO2 into your formulation?

Charles E. Bunch

No, that’s -- that would be total TiO2. That's not substitution of sulfate for chloride. That's not in that calculation. And as I mentioned in an earlier question, we still are going to hit at least the low end of that target, which is a 4% productivity improvement in the usage for our overall TiO2, our formulations. And on the inventory destocking, we probably had more inventory relative to sales early in the year. But as we've seen supply loosen up and the pricing stabilized, we've worked down that inventory. So I would say now heading into this fourth quarter and into 2013, we have what I would call normal inventory levels for TiO2, so we're not trying to further destock from this level.

Operator

Your next question comes from the line of Bob Koort, representing Goldman Sachs.

Robert Koort - Goldman Sachs Group Inc., Research Division

Chuck, I seem to recall in the past on Transition rollouts, they were more staggered globally. Is that the same plan this time, or is the whole world moving over to the next-gen at the same time?

Charles E. Bunch

No, we're -- this is still going to be staggered. We're beginning in Europe. And so this one is not a -- your recollection is correct in that we're still going to stage this regionally beginning in Europe in the first quarter.

Robert Koort - Goldman Sachs Group Inc., Research Division

And then if you could hazard a guess, what do you think in Asia or in China, specifically, industrial growth has been in the last 6 months and what might it be the next 6 months?

Charles E. Bunch

Industrial growth, I would -- if you look at the overall GDP, they're talking about 7% to 8%, probably in industrial production, 5% or so. And I would say that we're looking for a similar trend going forward. There was concern as we looked at some of the end-use markets in the second quarter and even beginning in the third quarter. But here at the end of the third quarter, September, was a more solid quarter for us in China. And we think that some of the end-use markets like consumer electronics haven't been that strong. Most of the construction businesses in China have been weaker than those overall averages. But in general, I would say we saw some pretty solid growth, automotive, automotive parts, automotive aftermarket, those were all still quite solid. And so we think that as you go through this transition at the government level and they get their decisions made on -- the economic stimulus packages and the fact that they've had a little less inflation over some of these latest measuring periods. So that's going to give them, we think, a little more flexibility. So I would say that we're looking for a more of the same. So solid growth, but certainly not at the levels that we saw in 2010 or 2011.

Operator

Your next question comes from the line of Ghansham Panjabi, representing Robert W. Baird.

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

On the Architectural Coatings-EMEA business, volumes down 3% during the quarter, quite a bit of an improvement versus 2Q and I guess in line with your guidance, but your competitor in the Netherlands has really shown the reverse of that profile with 3Q much worse, particularly in Europe and it doesn't look like the trend line has changed into the fourth quarter as well. Can you help us understand the deviation? Is it a geographic distribution or something else?

Charles E. Bunch

I'm not sure. I know Akzo was reporting this morning and we have our board meeting today, so I haven't been able to analyze completely what they have been saying. There is, obviously, a difference in terms of -- in growth rates or growth declines, depending on what regions that you are -- you're competing in. And we have very little exposure in the South, which has been -- that Mediterranean region has been the weakest. So that I would say that their profile, a little bit different than ours and maybe that is what's causing their volume declines to be greater than ours, although, certainly, you know, we feel good about the results in light of the volume declines, but there is not a lot of strength in the European market anywhere at this time and -- but certainly in the South, much weaker.

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then just going on -- back to the European auto production on Slide 8 where you have the forecast by region, et cetera, I think it was down 11% forecasted for the fourth quarter, basically in line with the trend line for 3Q on a year-over-year basis. But over the last couple of months, we have seen weakness out of Germany in auto sales, et cetera, that seems to be spreading across Europe. Chuck, just based on your conversations with customers, how should we think about the first part of 2013?

Charles E. Bunch

Well, right now, we're starting to come up here. You saw it in the third quarter, this third quarter, and again, now in the fourth quarter of 2012, we're starting to come up against some weaker comparables from 2011. And the market started weakening in the third quarter of last year. Fourth quarter was quite weak. So kind of the year-over-year comparisons, although still negative, are somewhat easier to make. The Germans were quite strong, at least the export-oriented German luxury manufacturers were still strong through the first quarter. We haven't seen -- they haven't fallen off a cliff. The biggest weakness we've seen is in kind of that middle market, the middle market manufacturers. We haven't seen a turnaround yet. I think the beginning of 2013 is going to be -- in the first half looks to be still weak. We're going to see if there are government actions that could try to, let's say, try to make that trend a little less negative. But we're hunkered down and you've seen our results. And despite the weakness there, we continue to do well and we're hunkered down. We're watching everything, every expense, every discretionary item. We're hitting on all the restructuring targets that -- and automotive was a big part of that. So we're aware of the conditions and we're responding appropriately.

Operator

Your next question comes from the line of Laurence Alexander, representing Jefferies.

Laurence Alexander - Jefferies & Company, Inc., Research Division

Two quick questions. First, could you give an update on your thinking about alternative TiO2 supplies in the sense of either encouraging technology distribution in China or the projects up in Canada with, I believe, it was Argex?

Charles E. Bunch

Yes, we're continuing to pursue these initiatives and opportunities. As I mentioned earlier, the TiO2 pricing, although moderating now, is still up year-over-year if you look at the third quarter of 2011 and not insignificantly. So that I think that the trends would say that we're not going to back off our initiatives either on productivity or expanding our supply base or in trying to use our history in manufacturing in the TiO2 business to enable current TiO2 suppliers to improve their capabilities. We're not backing off any of those initiatives because we've had a few months of stable to slightly lower pricing. So those are continuing and we feel that they will help to position ourselves and hopefully the entire industry to be in a better supply-demand balance going forward.

Laurence Alexander - Jefferies & Company, Inc., Research Division

And secondly, could you give a update on whether you're seeing any share shifts in the BPA -- due to the shift to BPA-free coatings inside cans? And if share is starting to shift, do you have a sense for what timeframe it might be material?

Charles E. Bunch

Right now, all of the – the major suppliers are all trying to qualify BPA-free coatings. We have seen a lot of activity over the last 18 months, more so than -- we've been preparing for this for quite some time. You're starting to see approvals for PPG and some of the other participants in the market. We've seen a little bit of a slowdown in terms of our end-use customer schedules for when they would convert to BPA-free coatings. And I think we're trying to gauge right now when they would be ready to really launch more products into the metal packaging industries. So right now, I would say, looks like everyone's -- is ready from a coatings supplier standpoint, lots of approvals. We're saying we're ready to go. And we're waiting now for confirmation on when these products will actually be used in the marketplace.

Operator

And your next question comes from the line of Jeff Zekauskas, representing JPMorgan.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

When I look at your Industrial Coatings operating income year-over-year, it's up a little bit more than $50 million, and that's what your sales are up. So can you sort of help us understand why the incremental margins are so high and why the incremental performance is so much better in Industrial Coatings than it is in any of your other divisions?

Charles E. Bunch

Well, Jeff, it's good to hear from you. I think what I indicated in some of my earlier comments, one, we have focused many of our restructuring actions on our Industrial Coatings businesses, so you're seeing the benefit there of our restructuring actions and higher volumes as we've seen them in most of the regions. So our efficiency is improved. But I think if you recall these comments around localization, the single biggest capital spending project last year for PPG was the construction of an electrical resin facility in Zhangjiagang, China. This benefited our Industrial Coatings businesses, both automotive and industrial and potentially packaging. And this really localized resin supply in China. That helps us to not only meet local demand, but avoid tariffs, duties, freight, all of these incidental costs. The plant came up beautifully. It's been performing. We're at capacity there. And so we are seeing more, let's say, financial benefits from that investment. So that's in the emerging markets. And I think I mentioned that we've done similar things in South Korea, in Mexico. So we have, I think, positioned our assets in these emerging regions where we've been driving a lot of our growth over the last few years to now be self-sufficient at a lower cost basis. And it's timely because the U.S. business, as an example, was supporting many of these other emerging regions. So now as the U.S. and North American growth are coming back, our assets here are able to support those businesses and we're more efficient and lower cost in supporting the businesses around the world. So if you take the effects of restructuring, localization and productivity and overall expense controls, that's why you're seeing such a nice improvement in terms of earnings going to the bottom line from the sales growth.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Okay. And then lastly, is it fair to say that going into the fourth quarter, there's no business of yours that will have higher sequential pricing?

Charles E. Bunch

From the third quarter?

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

From the third to the fourth.

David B. Navikas

There's pockets, Jeff, where we try to get different price at different times of the year. I would say, in general, you're accurate. I wouldn't say exclusively that's correct.

Charles E. Bunch

Yes, overall, I would say that probably is the case.

Operator

Your next question comes from the line of Ivan Marcuse, representing KeyBanc Capital Markets.

Ivan M. Marcuse - KeyBanc Capital Markets Inc., Research Division

Most of them have been answered. I just have a couple quick ones. In the -- once the commodity business is divested, where would you expect your tax rate to be going forward in 2013?

David B. Navikas

The tax rate is going to be in the range of, I would say, 23% to 24%.

Ivan M. Marcuse - KeyBanc Capital Markets Inc., Research Division

Got you. And then if raw materials sort of stay where they're at today and then going forward into next year, would your raw material total basket be still up on pricing year-over-year or would it be -- or would it essentially be flat to down?

David B. Navikas

2013 if they stay where they at -- where they were at, it'd be close to flat, Ivan. Little bit up to close to flat. And we did see inflation through the first 6 months of this year.

Ivan M. Marcuse - KeyBanc Capital Markets Inc., Research Division

Great. And then the last question I have is you've mentioned that, and I understand there's a big seasonality in your European business, but then you also called out Europe being a little bit worse. Is there going to be a significant impact on the year-over-year or on profitability, or would you still sort of eke out a little bit of a profit like you typically do, like a 1% or 2% type of margin?

David B. Navikas

Ivan, if you look at the Dura business, it is more seasonal than the architectural business because of the product array. So we'll see -- that part of our earnings growth in that segment year-to-date have been this business. So we'll see some of that benefit. Some of that benefit will be absent in the fourth quarter. So we'll see a more decided seasonality impact.

Operator

The next question comes from the line of Dmitry Silversteyn, representing Longbow Research.

Dmitry Silversteyn - Longbow Research LLC

A couple of questions and a lot of them have been answered. Just revisiting the Optical for a second. After you get the customers drawing down the inventory and then relaunching with the Generation VII, what's your sense of the sort of the underlying market strength, particularly since you're starting out in Europe where customers don't have as much a disposable income as they did a couple of years ago. Should we expect sort of a single-digit ramp-up or something stronger as you get through at least the first couple of quarters of channel sales?

Charles E. Bunch

Well, I would say because of the European market is positive but not strong, that certainly a single-digit ramp-up is probably a more appropriate growth rate.

Dmitry Silversteyn - Longbow Research LLC

Okay. And then on the other part of the specialty part of the Optical and Specialty, can you just talk a little bit about these other businesses, the silanes businesses, the stuff that's going into the tire market and the automotive market? What's going on there in terms of demand and pricing and any raw material pressures or lack thereof?

Charles E. Bunch

The silicas business continues to perform well. We've seen this year a few regional differences by quarter. So Europe, as we've discussed, in the automotive market has been weaker. North America, a little bit better. But you have in the tire business probably more of an aftermarket. That's bigger than the OEM side. So we've seen some differences. But overall, we're -- there's a solid growth. There's not a lot of raw material pressure in the precipitated silica business. This is sand, soda ash, natural gas. And we have been adding capacity both in Europe and here in North America. And so we think the business is well positioned in North America. The OEM business has a lot of momentum. The aftermarket, not quite as strong with miles driven or not quite as strong and the aftermarket has probably not been quite as robust here. But we think the business is well positioned and poised for continuation of moderate growth if you look at the combination of Europe and North America.

Dmitry Silversteyn - Longbow Research LLC

No raw material shocks for us to watch out for; everything is more or less stable in that area.

David B. Navikas

No raw material shocks. We think natural gas is going to be stable. And if you look at the value that -- the biggest value that precipitated silicas bring to the automotive tires is improved rolling resistance and therefore improved mileage or miles per gallon for the vehicles. And that's still a longer-term trend. So we think that's very positive with the CAFE standards for the automotive industry here or similar trends in Europe. So we think there is solid fundamentals for continued improvement in the precipitated silica business. And right now, no, we don't see any raw material spikes that would threaten kind of the short-term margins on the business.

Dmitry Silversteyn - Longbow Research LLC

Very good. And switching gears to your Performance Coatings business, particularly the 2 sort of longer-cycle businesses that you have there, the aerospace business and the marine business. From the marine business point of view, I know you have an order book to look forward to and we knew that this year was not going to be a good year for that business. As you look out into 2013 and maybe even the second half of 2013, is there sort of a light at the end of the tunnel there? Are we starting to see some positive comps coming our way?

Charles E. Bunch

Certainly, in the first half of 2013, we think the current trends of these double-digit declines in marine OEM builds are going to continue. In the second half of 2013, we start to see some moderation of that possibly. We are trying to fill the order book with what I would say would be more of the drilling ships and the natural resource vessels that are under construction in South Korea more than the kind of the ocean-going containerships that are lower value in China. That's been the more effective sector. And we're trying to push for what we would call the protective side of protective and marine coatings. And we think with all the infrastructure spend that's going on around the world, the protective markets offer some good opportunities to kind of mitigate the negatives that we see continuing for a while here in the marine business.

Dmitry Silversteyn - Longbow Research LLC

Very good. And then final question on aerospace, can you give us an idea of what your lead times are relative to aircraft deliverables? Obviously, 787 is now starting to ramp up production and I know you have a big component of -- per plane of your products going in there from window coatings to structural adhesive and coatings on the body. The carbon market has, from what I remember, about an 18-month lead time, but obviously yours is a little bit more downstream and close to the completion. So are we looking at 6 to 9 months or sort of a 12-month lead time for your product sales going into the Airbus and Boeing-type markets?

Charles E. Bunch

Right now, we feel that certainly, over the next 12 months, there's good visibility in terms of commercial aviation completion or construction. It's a longer lead item. They don't like to change production schedules in the short term. So I would say that we still feel good on the commercial aviation side, with Boeing and Airbus, that the current trends will continue into 2013. If you start to see declines in the order book going forward, you tend to see them making adjustments later in the cycle. So I would say that if there is more weakness, you may see that in 2014, but certainly not in the near term. There has been -- in some of the other markets, they tend to react maybe a little more quickly, in some cases, general or business aviation. But we, again, haven't seen any strong trends there. Military, which is not a big component of -- or market segment for us, has been already declining. But both the OEM and the aftermarket on the commercial side have stayed what we would say is strong.

Operator

Your next question comes from the line of P.J. Juvekar, representing Citi.

Daniel Jester - Citigroup Inc, Research Division

This is Dan Jester sitting in for P.J. Just one quick question. Now that we’re seeing better construction and housing data, how should we be thinking about new U.S. paint store openings over the next couple of years?

Charles E. Bunch

For us, we feel that going forward, our store count will increase. So we are now trying to do our planning for 2013 and beyond. And I think as you know, we've stabilized over the last couple of years in this recessionary environment at around 400 stores. So I would -- I view that as now a floor for us, and you will see a higher store count going forward as we continue to see improvement. And I think that the improvement that we've seen so far has been certainly encouraging, but I wouldn't say it's going to be a rocket ride up here. I think this year, certainly the first quarter, was very strong with some of the improved weather. It stayed positive and I think that trend will continue, although we don't see the growth rates just gearing up and really requiring an acceleration of our plans for store openings at this point.

Operator

Your next question comes from the line of Duffy Fischer, representing Barclays.

Duffy Fischer - Barclays Capital, Research Division

When I read through the press release on your use of cash, the sentence, primary means of deploying our strong cash is going to acquisitions, which seems like a more aggressive way you guys are talking about acquisitions now than 3 or 4 years ago. 1, is that true? And then 2, if it is, what are you seeing differently now that you would be more aggressive with acquisitions? Are more people raising their hand and willing to sell businesses today? Have multiples come down? Can you kind of just talk about what you're seeing in the acquisition front and maybe across your businesses where you see more fertile ground?

Charles E. Bunch

Duffy, well, if you go back 3 or 4 years ago, you're talking about 2009 or end of 2008 and we were just starting the Great Recession and we were focused on pretty much hunkering down and getting through this. So since that time, probably as we've come out in 2010 and beyond, we've been more optimistic about and also talking more about acquisitions. We haven't made as many. We did in the fourth quarter of 2010, we bought Bairun in China. We closed on 2 earlier this year, Dyrup and Colpisa. And now we've announced this acquisition at Spraylat. So I would say that -- I think we've been talking about it probably for last 1.5 years or so. We haven't executed as many, but I think now is what you're seeing, and especially in some parts of the world where the growth rates aren't as attractive as they were a few years ago and I think probably in many regions whether it was in the emerging regions where, for a while, they thought these growth rates were going to continue for years or maybe in Europe where they thought the growth declines would be short term and then they'd return to growth, and I think you can tell from our comments that it's a more challenging environment. If you're well positioned, you can do well as we're doing. But I think there's a little more realism on the part of many of these coatings companies or maybe companies more broadly that this reality may be with us for another year or 2 where it's not so easy to be successful. And I think we've seen a little more realism in terms of what their expectations are on the selling prices. So I think you're seeing better dialogue between potential buyers and sellers.

Operator

We have time for one final question. Your question comes from the line of Kevin Hovar (sic) [Hocevar], representing Northcoast Research.

Kevin Hocevar - Northcoast Research

I wanted to -- with the split option, I know -- I think the initial goal was to get 12.5 million to 13 million share count reduction using the split option. And based on the current dynamics of the market, the stock price of PPG and Georgia Gulf, is that still the goal? Is that still the -- attainable or would it might be a little less than that?

David B. Navikas

Yes, I would say that it's a little bit less than that. I would put more in the 11 million, 11.5 million share kind of range. But obviously, that's a function of the price of the 2 companies' stock.

Kevin Hocevar - Northcoast Research

Sure. And then just another real quick one. What -- in terms of the packaging coatings, it sounds like the emerging markets was strong, developed markets were a little weak, could you put -- give a little bit color on that and what's driving the emerging markets strength? And then also, how does that – how does kind of the volume compare to the developed markets?

David B. Navikas

Yes, Kevin, I'll add some color there. The growth in the emerging markets really is driven on a move to more recyclables in those markets away from items such as glass containers, which are heavy in energy intensity and there's a shift again to those recyclable cans and a growing middle class in those emerging markets, so the consumer requirements and consumer desires for more recyclables. If you look at our delta in terms of volume, we were up very solidly in the emerging markets, Latin America and Asia, and we were down modestly in U.S. and Europe, similar to Q2.

Vincent J. Morales

I would like to conclude the call. Thank you for everybody's time, and we appreciate your interest in PPG. And also if there's any further questions, please get in contact with Investor Relations. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.

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