Michael McGarry - President and CEO Scott Minder - Director, IR Vince Morales - VP, Finance Frank Sklarsky - EVP & CFO.

John Roberts - UBS Frank Mitsch - Wells Fargo Christopher Parkinson - Credit Suisse Ghansham Panjabi - Robert W.

Baird & Co Arun Viswanathan - RBC Capital Markets Jeff Zekauskas - JPMorgan David Begleiter - Deutsche Bank Kevin McCarthy - Vertical Research Partners Don Carson - SIG Ivan Marcuse - KeyBanc Dmitry Silversteyn - Longbow Research Nils Wallin - CLSA Mike Harrison - Seaport Global Securities Jim Sheehan - SunTrust Robinson Humphrey.

Welcome to the PPG Third Quarter 2016 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Scott Minder, Director of Investor Relations. Please go ahead. .

Thanks, Gary. Good afternoon. This is Scott Minder, Director of Investor Relations. We appreciate your interest in PPG Industries and welcome you to this teleconference to review PPG's third quarter, 2016 financial results.

Joining me on the call from PPG, are, Michael McGarry, Chairman and Chief Executive Officer, Frank Sklarsky, Executive Vice President and Chief Financial Officer and Vince Morales, Vice President of Finance. Our comments relate to the financial information released on Thursday, October 20, 2016.

I will remind everyone that we posted detailed commentary and accompanying presentation slides, on the investor center of our website, PPG.com. The slides are also available on the webcast site for this call and provide additional support to the opening comments Michael will make momentarily.

Following Michael's perspective on the company's results for the quarter, we will move to a Q&A session. Both the commentary and discussion during the call may contain forward-looking statements, reflecting the company's current view of future events and the potential effect on PPG's operating and financial performance.

These statements involve uncertainties and risks which may cause actual results to differ. The company is under no obligation to provide subsequent updates to these forward-looking statements. This presentation also contains certain non-GAAP financial measures.

The company has provided, in the appendix of the presentation materials which are available on our website, reconciliations of these non-GAAP financial measures to most directly comparable GAAP financial measures. For additional information, please refer to PPG's filings with the SEC. Now, let me introduce PPG Chairman and CEO, Michael McGarry. .

Thank you, Scott. And good afternoon, everyone. I want to thank you for your continued interest in PPG. Today, we reported our third quarter 2016 financial results. We achieved third quarter net sales of $3.8 billion and adjusted earnings-per-share from continued operations of $1.56.

Third quarter net sales in local currencies grew by more than 3%, including year-over-year buy-in growth of 1.6%. We achieved this growth, despite a broad-based deceleration of buy-in growth rates in Europe this quarter, in comparison to the previous several quarters.

Acquisition related sales contributed about 2% in the quarter due to our MetoKote, IVC Industrial Coatings and Le Joint Francais acquisitions. Unfavorable foreign currencies reduced sales by about 2%, due to primarily, the significant year-over-year declines in the Mexican Peso and the British Pound.

The British Pound was down about 15% versus the prior-year period and the Mexican Peso was down about 12%. With respect to the Peso, as we've discussed in the past, the PPG Comex architectural coatings business is seasonally strongest in the back-half of the year. Therefore, a weakened Peso is more impactful to us at this time of the year.

From an earnings perspective, our adjusted earnings per share grew 1% versus the prior year. We had positive earnings contribution from the higher overall sales volumes, offset by unfavorable foreign currency translation and higher growth related spending. What I just discussed, were all year-over-year comparisons.

As all of you know, we provided earnings guidance during the first week of October, as our EPS was short of our expectations leaning into the third quarter. We haven't had to provide pre-guidance on earnings for quite some time, so let me quickly discuss what we experienced during the quarter.

The largest shortfall that we experienced during the third quarter, was slower than expected volume growth in Europe. This region has been one of our strongest growth engines over the past year plus. Our year-over-year European volumes which have been growing by low-to-mid, single digit percentages, came in essentially flat for the quarter.

While we have experienced some regional volume growth in certain businesses, such as Automotive OEM and General Industrial Coatings. The rate of growth contracted in these businesses. In addition, we experienced a similar, several hundred basis point decline, in most of our other regional business.

This broad decline was also evidenced across many countries within the region. This lack of volume growth, coupled with the fact that Europe currently has our highest regional incremental operating margins, these incremental margins reflect the significant cost rationalization we have done over the past five years.

While there were other factors in the quarter, the absence of the European volume growth and the related benefits from higher incremental margins, were the major factors in our below expectation performance. Looking at the other regions, we basically performed as expected.

The Asia-Pacific region delivered solid mid-to-high single digit percentage buy-in growth, on a year-over-year basis, including strong gains in Automotive OEM and Refinish Coatings. These increases were partially offset by continued declines in Marine Coatings, due to exceptionally weak and continuing declines in ship building activity.

The Automotive OEM strength in the Asia-Pacific region, was in comparison to a weak prior year period, when regional Automotive OEM industry production was down. In the fourth quarter, we will face significantly stronger comparison period, as the industry production was up nearly 20% in the prior year. Coating sales volumes were flat in the U.S.

and Canada, compared to the prior year. We experienced volume growth in our U.S. and Canadian Architectural Coatings business, versus a volume decline in the prior-year period.

Leading our growth, were higher volumes at our company-owned stores, coupled with increased sales through the DIY channel, supported by our new products and the associated higher launch related promotional spending.

Also in the region, year-over-year sales volumes, continued to expand in Refinish and Packaging Coatings, but were offset by a lower Automotive OEM sales and declines in General Industrial Coatings which mirrored the weak industrial production in the region.

Latin American sales volumes expanded, primarily due to growth in the Mexican Architectural Coatings and OEM Coatings markets, while most South American markets remain challenging. Overall, I am pleased we were able to grow sales volumes and we did deliver a modest earnings-per-share growth, versus the prior year.

However, I am disappointed by our earnings progression versus the prior two quarters of 2016 and our 1% year-over-year earnings-per-share growth is well below our expectations. Looking ahead to the fourth quarter, we currently do not see any near term evidence of improvement in global demand.

We now have a strong sense of our October book and as many of you know, for business seasonality reasons, the month of October is typically the largest sales month within the fourth quarter. As a result of this continued, tepid demand, we're reviewing various potential restructuring actions, to reduce our structural operating and functional costs.

With these actions, we will place increased focus on regions and end-use markets that are the weakest. We're still vetting these potential actions and will provide an update, once we're finalized.

We plan on maintaining an appropriate level of investment and growth related initiatives, including research and development, sales, technical support and product branding initiatives. Also worth mentioning, during the quarter, we continue to execute on our strategic objectives, including a continuation of our portfolio actions.

On July 1, 2016, we completed the MetoKote acquisition, a coating services business, with approximately $200 million in annual revenue. Also, in the third quarter, we announced that sale of our ownership interest in our two fiberglass joint ventures in Asia. The sale of these two joint ventures, is expected to close by year-end, 2016.

Lastly, we completed the sales of our Flat Glass and European Fiberglass businesses, with both transactions closing on October 1, 2016. In addition to these portfolio actions, we completed $250 million in share repurchases during the third quarter. Finally, we ended the third quarter with about $1 billion of cash and short term investments.

This figure excludes about $1 billion of gross proceeds from two recently divested businesses and the pending sale of our ownership interest in the two Asian fiberglass joint ventures. We expect only modest tax leakage from these business divestments. We have ample flexibility and we will continue to deploy cash in an earnings-accretive manner.

While we remain price disciplined, our acquisition pipeline remains active. Additionally, our Board of Directors recently authorized an additional $2 billion repurchase program which gave us at that time of approval, about 2.5 billion, of share repurchase capacity.

We expect to deploy at least $650 million to cash in the fourth quarter, on acquisitions and share repurchases, to reach the top-end our previously-communicated cash deployment range of $2 billion - $2.5 billion, in the combined 2015-2016 calendar years. We have deployed $1.5 billion toward the target to date.

To summarize, we grew our year-over-year earnings in the third quarter, but at a rate that was below my expectations. We're working on a variety of actions to improve our earnings growth rate, including an acceleration of cash deployment and further reductions in our overall cost structure, while preserving prudent growth-related investments.

This concludes our prepared remarks. Once again, we appreciate your interest in PPG. .

[Operator Instructions]. The first question comes from Robert Koort with Goldman Sachs. Please go ahead..

This is Chris Evans [ph] on for Bob.

On the negative pricing, you guys showed -- could you breakout exactly which end markets you saw this pricing or kind of what the dynamic was across your portfolio?.

We're not going to get into the specifics by business unit, but what I will tell you is that typically in our coatings portfolio what you will find a larger sophisticated customers understand the law material environment and we always work with them in a collaborative and constructive manner whether it's an upper price environment or down raw material environment.

And so the way to think about this is our largest customers might have seen a slight price reduction whereas our smaller customers that goes through distribution would be an overall flat environment or slightly up.

Overall for the year we had told you that we would be in a flat pricing environment and for the full year we still expect that to be overall flat. .

And I guess as raw materials move, inflate, what are your expectations and how you think pricing -- your ability to get pricing next year [indiscernible] derivatives and a few others might work against you?.

So, right now, Chris, the tailwinds have certainly diminished. However, we have not really seen any real inflation yet it except for a small pickup in TiO2.

Certainly, a lot of the feed stocks are up since January 1 but again we don't price in real-time, so we don't always get all the benefits on the way down and we don't always get all the prices on the way up. So, again, we will work with our customers.

We typically lag on the way down and lag on the way up and I don't expect that this next cycle will be any different than what we have seen in the past. .

This is Vince, I'm going to add one comment if you look at our supply chain, many of our suppliers have expanded their margins over the past couple of years. So, if we do see inflation in oil or oil derivatives we would expect first cut to come out of their pocket. .

The next question comes from John Roberts with UBS. Please go ahead..

Were there any significant deals that you had hoped to close in the quarter but maybe they had fallen into the fourth quarter?.

John, we don't provide speculation on deals or potential deals. I think Michael said we have an active M&A pipeline, we think for the industry it's very active. Hopefully we can continue to use our cash in a constructive manner with reference to acquisitions but if not, [indiscernible] share buybacks..

And then we come to think of cost cutting at PPG and productivity sort of evergreen here, do you think after so many years of being so successful in your cost cutting and productivity are just so lean at this point that we're kind of reaching the end of the ability to bring additional cost cuts to the earnings bottom line?.

John, this is Frank.

It's a good question but the way we look at it there are always opportunities for rationalization of our cost structure as we continue to move more administrative cost into shared service environments as we look at our overall supply chain footprint, as we continue to integrate both recent and legacy acquisitions and look at our total administrative cost structure.

We think there's still additional opportunities for the broad-based and significant cost actions which we would like to embark on over the next year and while we don't have a specific number for you right now, we're looking at that very carefully analyzing all the details and we'll get back to you in the near future in terms of what the exact numbers are and the benefits associated with any rationalization actions but we still think there are ample opportunities for continual rationalize costs.

.

As you know, having productivity initiative is a DNA of PPG and every bit is seen as expected every year to come forward with productivity initiatives so this isn't anything new but we're certainly ratcheting up the attention in this area. .

The next question comes from Frank Mitsch with Wells Fargo. Please go ahead..

Michael you referenced that this is the first time in a long time that folks have to reannounce that it was 2008 was the last time and obviously we were in for a really big rough patch in 2009 as well and given your results in Q3 and given the outlook for 1% or 2% growth in Q4, do you have confidence in 2017 being materially better year? And if so, why?.

Frank, as you know this is something that we haven't had to do in a long time, I appreciate you actually picking up on the exact year, 2008 but I feel confident, when I look around the global economy, I don't see anything ready to fall off the table.

I mean we still see some of the same weaknesses that we've seen in the past, Brazil continues to be challenged, Russia continues to be challenged, there are continued weaknesses in other economies certainly Korea remains challenged but, when I look across the big industries like automotive we're still expecting automotive next year to be marginally up certainly the U.S.

is moving into the ninth inning but Europe still has room to go on that. So, no, I don't see anything like what we experienced in the back half of 2008. So, I'm confident that we will see improvement in 2017. .

This is the other Frank, there are three major actors at is what truly going to drive the earnings growth going forward. Is some level of organic growth and we've mention the fact that it was a very modest macro environment recently.

And it may continue but to the extent we have some level of organic growth similar to what we've seen, roughly a little better is Michael mentioned, GDP at least, because cost rationalization that we just referred to as well as the accretive deployment whether that be M&A or share purchase accommodation of those, some combination of those, gives us confidence that we will continue to grow earnings at a reasonable level.

.

I think you were referring to something like a 60 million incremental additional costs for growth spending in the quarter. Something of that order of magnitude.

How long do you anticipate that incrementally higher growth spending to occur? And at what point do you anticipate realizing a return on that added investment?.

So Frank, I don't think I'd be plugging 60 million into your model. These spending initiatives are directly tied to product launches. As you know, our product at Home Depot was first put out -- it was fully set in Fourth of July weekend. So, we're certainly behind that product. It started out very well.

The Menards product as well being super premium price point there was percent. That is our Pittsburgh paint paramount. Those spendings are directly tied to the new product launches. So, you won't have that in the fourth quarter. We're working with our partners on the launches for 2017.

And we'll be back to you if we expect to see those kind of spending going forward but we're going to continue to invest in growth related initiatives. .

Should we factor something like $0.20 incremental benefit by the absence of those added costs something about order of magnitude?.

Well again, Frank, that's on a full year basis and we only have this cost in Q3 so I think if you're analyzing that as Michael said this is only one quarter's worth which was probably $0.04. .

The next question comes from Christopher Parkinson with Credit Suisse. Please go ahead..

Just digging down a little more on what you're seeing in the global auto OEM businesses, can you just comment on your expectations for geographic growth between Mexico and the U.S.

as well as any regional trends intra-Europe that you've seen ? And also given some uncertainty regarding the Chinese auto market reaction to any changes in consumer incentives can you just quickly comment on what you are seeing in small vehicle versus small SUVs in your relative exposure there?.

Chris, let's start with Mexico. As you know there are a number of new automotive plants in Mexico coming up in the next -- starting now through 2018. And those plans will obviously drive higher growth rate in Mexico then historically. That would -- that may or may not necessarily detract from the U.S. but the overall U.S.

market to be relatively flat next year. We're watching closely the incidence of the automotive manufacturers are putting out there. And I think we'll just continue to watch the closely. Europe at 14 million builds still has room to run. Southern Europe continues to perform very well. So, if you look at what has gone on in Spain, it was up double digits.

Italy was up double digits. Germany was still up 5%. And we're starting to see trends on the automotive side, unfortunately not in the architectural side, but the automotive side. So that's all good. I think that's going to be a positive number next year in Europe.

Then, back to your question about China, rest of all, China is the reduced tax out there through the end of 2016. There's no indication on whether or not they're going to make a change on that..

From a personal perspective that China, once their -- once automotive business to be a champion, they are just now starting to export a very small amount of cars out of China. We would expect them to continue to support them. So, I'm not looking for a material change in the China automotive growth rate.

In fact, I would say it's going to grow again next year and I won't be surprised if it has many, many years to run because if you look at the number of cars per person in China it's still very, very low. It's a big status symbol when you buy a car in China. So, that's going to continue. .

And just a very quick follow-up. You mentioned $35 million in sales at the low average segment margins in industrial.

So can you very quickly comment about the cadence of your efforts pertaining to these businesses getting up towards your targets as well as any broad comments you have on how we should think about the M&A pipeline going forward in the context of margins? Thank you very much..

As it's typical when we acquire especially a smaller bolt-on type transactions they're not at our segment margin levels whether it be performance or industrial coating segments. It typically takes us a minimum of a year to start to extract the full synergies from those transactions and so that's a normal cadence on a traditional transaction.

With respect to the acquisition pipeline I think Michael mentioned it earlier we do have a very active pipeline in the industry. I think Michael said a quarter ago one of the most active we've seen which is I think helpful for us as we look into late 2016 early 2017 for potential confirmation. .

The next question comes from Ghansham Panjabi with Robert W. Baird. Please go ahead..

First off on auto refinish and the decline in 3Q volumes in Europe, Michael, do you sort of view this as an entry correction in the supply chain and did you see it in any particular subregion within Europe?.

I think that overall by and large seven Europe is outperforming northern Europe. Obviously Russia remains weak. Eastern Europe is not as strong as we like to see. But overall I think as I said earlier on the call that the -- this 14 million builds rate that they are at can grow significantly other people in Europe U.S.

there's no reason why it can't find to a substantially higher number and they have historically been in a higher number if you go back to the 2006 and 2007 timeframe. .

Just one other point on refinish related back to the China discussion we just had, we saw very nice growth and to upper digits we finish in Asia primarily China.

And that goes back to the dynamic of the car park the relatively low per capita that Michael referred to and that both very well for the future growth of refinish in China as that car park continues to grow so we’re seeing nice uptick there despite some of the slight softness we saw over in the European market.

As a follow-up on the protective coating I know it's a week across the board particularly in Asia but you called point improvement in North America can you expand on that.

Sure. The volume improvement is in the protective area and what's interesting is that we've seen in moderation in the decline. Now in oil and gas. We haven't seen any significant pickup but I think they've done significant amount of capital project cutting and so I think over the next couple of quarters. Turn. So, on the protective side quite good.

We're also seeing people doing the dry docking -- they are going to try to make the ships last little longer so dry docking is up. .

If I could add, we had based on our estimates above market growth in the U.S. and Canada and protective. This is a business two years ago we started to talking about trying to build additional growth actions on and I think you're seeing today some of those benefits from those growth actions. .

The next question comes from Arun Viswanathan with RBC Capital Markets. Please go ahead..

Just had a question, I guess, on volume growth. You know, you did 1.5%, 1.6% here in Q3 on a relatively easy comp minus 0.7% last year.

You're coming up on a tougher comp, here in Q4 so what's your expectation on volume growth in Q4?.

Well, Arun I think the volume growth continues to remain muted. We're not seeing any changes in the environment out there. As I mentioned on my remarks in the beginning, we've already seen most of our October order book. Fourth quarter is typically a seasonally weak quarter.

So, I would tell you it's just going to be more of the same that we saw the third quarter and earlier this year. .

And looking into 2017 I remember last year at this point you push volume growth up to the low to mid single digits for 2016.

Is there any possibility that we could get there in 2017? Despite the market -- or will it still be dependent on your individual end markets?.

Well, we try to grow GDP or GDP plus. We haven't done that this year which is disappointing to us. But as we look at next year we're going to need good performance execution was internally. We also need a little bit of growth uptick in the different verticals we play in.

So, I think we're still operationally striving to get to what you are talking about. I will have to see how the environment plays out. .

Just a last quick follow-up, the OEM performance in the Americas was slightly characterized as below-market, what would you say led to that and is that unusual? Or do you see a change in that going forward?.

No Arun, I think we covered this in the prior two conference calls. At that time, if you go into 2016 we had opportunities to try to take business in certain parts of the world versus others.

We preferentially wanted to gain share in Asia and obviously we gained share any significantly higher rate than the rest of the industry for the 2013 , 2014, 2015 and so the customers were getting uncomfortable so we preferentially gave up share in the U.S. where we saw that growth rate slowing and continued to grow in Asia.

And so overall despite the decline in U.S. we're performing at market and then we expect to be outperforming the market starting first quarter of next year..

The next question comes from Jeff Zekauskas with JPMorgan. Please go ahead..

When I look at your industrial business, your revenues were basically flat from the second through the third quarter. But your operating profits were down 43 million. And your margin contracted about 300 basis points.

What, exactly, is going on there? Is it lower prices? Is it mix? This degree of margin change doesn't seem to be accounted for by volume..

Jeff, if you go sequentially from 2Q to 2Q we have a dramatically different business mix by industrial segment such as automotive of versus general industrial. As you know a lot of auto companies take outages -- in July or August whether it is U.S. or Europe as opposed to Q2 where they are running a peak production.

So, the business mix differs tremendously and we see a similar margin, erosion, each year sequentially 2Q to 3Q in that particular segment. .

I think last year the margin deterioration sequentially was about 60 basis points and that was on much lower sequential sales? Did it turn out that -- were there any management compensation changes either for the third quarter or the fourth quarter prospectively? Because you're probably not on the planet you originally were guiding toward. .

Jeff, this is Vince again. We readjust our management competition each quarter based on our quarterly employee outlook. As well as stop based comp is impacted by the stock price itself. There were no significant -- in Q2 were no significant noteworthy changes on those two line items so that hopefully that answers your question if addressed it properly.

.

How does it benefit you in Q4, is there a meaningful change or there isn't?.

Well unfortunately the stock price is down, the stock price fell along with our preannouncement. So that will affect stock-based compensation. We'll evaluate the business as we do every year at the end of the year on the various metrics that we have for each of them. .

The next question comes from David Begleiter with Deutsche Bank. Please go ahead..

Michael, looking at M&A and consolidation coatings, is there a potential for large scale M&A still left in the coatings industry globally?.

David, definitely. I think you saw that with the fact that sure when made their announcement earlier this year. There are still a number of fair sized acquisition opportunities out there.

I don't want you to walk away thinking there's anything different, I think if you parse the global data really finally will that there's been about 20 companies added or been listed in over one have billion dollars in the past three or four years so there is continued global growth in coatings companies and of course you know the Top 10 are out there, too.

So there's still more opportunity, so I would encourage you to be patient. .

And just on that point, in Q4, Michael, the 650 of cash deployment -- is that likely to be more buybacks or more M&A?.

David, this is Frank. As we've always said the preference would be to do accretive acquisitions that any quarter where there were not necessarily acquisition closed or completed we would still be short to reach our goals for cash deployment.

So, I think it's premature to say except for Q4 are committed to reach the top and our previous guidance of $2 billion, $2.5 billion dollars and at least 650 is a good number whether it is share repurchase or acquisition. .

The next question comes from Kevin McCarthy with Vertical Research Partners. Please go ahead..

I was wondering if you would comment on how you see your capital expenditures trending through 2017 in light of your updated macro outlook and also recognizing the glass business removing from the portfolio. .

We have said that in the recent past that our capital expenditures as a percent of revenue will be in the 3%-3.5% range. With the flat glass business coming out and fiberglass coming out those we typically more capital intensive businesses I'll be on a periodic basis.

At this gives us confidence that the trend going forward will be more in the circa 3% range. Looking at the macro environment that you referred to, we're being very disciplined in terms of the deployment. The actual individual projects whether they be for cost savings to growth or whatever.

So, the CapEx in a careful way so we do not get ahead of the market. So you might interpret that I meaning the fact that our previous outlook in terms of percent of revenue for CapEx in 2016 -- we’re hoping to come in the low end of that percentage range. And be very efficient how we deploy that just in time basis. .

Second question if I may. I wanted to clarify what might be going on with regard to your corporate expense. There's a fairly large sequential drop last year when that happened I think variable comp was part of that. I'm wondering if you can elaborate on what happened in the quarter you just reported and but the outlook might be for Q3.

That's probably a little more normalized this quarter than it was last year in Q3. You were right in saying it was unusually low last year and some of that was driven by the share price last year. We do the measurement on the stock-based compensation including the share price at the end of the quarter.

So, we had an uptick in that stock-based compensation expense Q3 versus Q3 and of course we look out to Q4 that will depend upon how that particular factor plays out.

The remainder of the corporate expense bucket forward would be one area along with other areas of cost looked at that will be assessing as we go forward in terms of our rationalization programs, but the goal is to structurally be as efficient as we possibly can and then the stock-based compensation and another performance based compensation will be based upon the share price as well as our financial results.

.

The next question comes from Don Carson with SIG. Please go ahead..

A question on architectural coatings both your performance in the overall market, Q3 you had some easy comes. I'm wondering if you look at volumes that went out the door talents to customers was that actually up year over year or what impact of this inventory destocking by customer have on a year-over-year comparison.

And then in your outlook you talk about architectural coatings in the U.S. and Canada. The in use demand remains modest. Coming into the year you thought there would be a demand step back because of top whether comments last year. I wonder where your latest assessment of the overall U.S. architectural market is. .

Let's just start with the assumption, we all here we've been saying that it would in the 2% to 4% range. So, I think our assessment been relatively accurate. And so this past quarter over while we were up low single digits and that was over, obviously the quarter year weaker than expected.

Price was certainly the home centers did very well from that standpoint. So we had all of our retail partners had a good quarter. From that standpoint as far as paint sales were. Our trade business was up also. So, our Company owned stores to better. So we think we're closing the gap in that regard and we're seeing a modest improvement in Canada as well.

So, I would tell you that the industry has been about where we expected in the 2% to 4% range and we expect to see next you're in a similar type fashion. .

The next question comes from Ivan Marcuse with KeyBanc. Please go ahead..

Real quick and the refinished if you comment as I apologize but in Europe it contracted a little bit and tend to be pretty historically, pretty consistent business was there any sort of pre-buying that maybe benefited the second quarter and [indiscernible] third quarter or is there something else going on there?.

For refinish in Europe the only thing that we really notice was that the insurance companies in the UK have been getting tighter and tighter on claim management, other than that I would say that there's nothing significant.

Certainly, our waterborne product continue to take share over there and we did have a nice win that we will be talking about I'm sure in the first quarter call when it starts to add to the bottom line..

In terms of cash flow, a couple par question I guess what was your cash flow from operations for the first nine months? And when you look out in 2017 what do you expect your environmental, how much lower do you expect your environmental spending and pension spending outflow when you look out to 2017?.

I will take the cash flow question and Frank is going to address the other two. We're going to put out our 10-Q in the next few days. The cash flow is a little bit murky simply because we have a significant amount of interrelated specials. We had some asbestos payments that are reflected as liability reductions.

So, the numbers -- you only see the pieces which will be very well articulated in the Q. We're up about on an apple to apple basis excluding some of the specials we're up just below 10% year-over-year on a cash flow basis but you'll need to see the specials to fully understand that. .

The environmental spending, we're planning to spend about half this year always been a total environmental cash versus last year. Last year spent about $100 million and it will be about how that this year.

Obviously the environmental spending and has some level of profitability any additional work that we find been an ongoing journey for a few decades generally we think that the run rate of Cass spending this year is more representative of what we see going forward and hopefully over time it will continue to modestly diminished.

And in terms of pension spending, we did say that we would have about $175 million of top up of some of the plans that resulted from annuitization that we did on both the U.S. and Canadian side.

We put about 50 million of that into the plans in Q3, we have got another 125 million to do between Q4 and 2017 so that will occur over to that period of time, aside from that there is some very modest I will say high single low double digit millions of dollars that we put toward the international plans on an annual basis. .

Okay.

And then last question in terms of -- and thanks for detailed working capital with raw materials I guess probably turning higher for [indiscernible] going into 2017, are you still going to be able to continue to work this 100 basis point type of improvement goal?.

I would say that working capital has been a real bright spot particularly in the elements of capital -- receivables and payables and inventory has approved and in fact we took mid-single digits in Q3 and we need to continue to make progress because we still think there's a gap our peers in that respect.

That will come from a combination process and also complexity reduction and we do continue to think that there will be additional 100 basis points or so on an annual basis of improvement working capital but we've been pleased with the progress so far but more work to do..

The next question comes from Laurence Alexander with Jefferies. Please go ahead..

This is [indiscernible] for Laurence.

You guys mentioned before sometimes takes a year to get the synergistic gains because of lower margins of the bolt-ons that you guys are doing, I was just wondering in light of like what M&A activity, increased M&A activity and the higher valuations that we're seeing if that's getting harder and harder to do and if it's taking longer now as we -- looking to take more as we look forward..

There's been no change. We're very experienced in acquisitions -- done more than the past 10 years. We have a very dynamic playbook that we consistently apply we expect anybody that we belied our below system averaged to get them up to our system average and a relatively simple. Time.

We could the raw materials quickly -- we move on to the best practices and we do the office we bring in a product so, we expect to be there. We're not at all concerned. We just did MetoKote and was always picked $1 million of those synergies in the first 90 days so we're going to be okay in that area. .

Then, you also indicated on another question there are a lot of -- still large number of acquisitions out there in a few hundred million dollars range.

I wonder if expectations again are too high just given some of the larger purchases we've seen and what people are expecting going forward so that while the are there it's just not even, it's a non-starter in terms of what people are expecting at that level. .

Well I think it's a fair question and I would tell you that everybody starts with their own idea about what a fair price is. I would tell you that we're not paying 15 times. We're going to remain disciplined. But, I don't expect the current elevation of a couple of specific unique transactions drive the entire market.

So, we didn't pay anywhere near that for MetoKote and we have others that we're working on right now that aren't in that stratosphere. Certainly, we're going to have to react to the marketplace. I don't know whether some of our competitors are thinking that the euro rate interest environment is good to be here forever.

But, we certainly recognize that there are different expectations when you do an acquisition. .

And just following up very quickly on Michael's comment around discipline, that’s a very important point at the end of the day we benchmark against the return that we get by returning cash to shareholders and given at a risk adjusted basis, if we can have an acquisition that returns in excess of weighted average cost to capital that's really the benchmark.

Not necessarily comparing it to any other reason deals. That includes any synergies that we can get either on the revenue or cost side. .

The next question comes from Dmitry Silversteyn with Longbow Research. Please go ahead..

Just a quick question. Looking at the margins of both performance and industrial coatings businesses, they were down year-over-year I think for the first time since the fourth quarter of 2014.

Can you talk about -- you talk about the raw materials are still being a benefit I understand you didn't get the incremental margin on the volumes growth the you are expecting. But, still trying to understand why the margins come down on a year-over-year basis. .

You look at the performance coatings business we did have additional growth related spending that crimped our margins this quarter. In that particular segment. Certainly the margin growth was contracting as you noted due to the benefit around materials.

$15 million of additional growth related spending wasn't trash was impactful in that particular segment. If you look to the industrial segment as Michael alluded to earlier we did see -- we're working with our customers in that segment on our selling prices to them. And that's the one factor I would point to in that particular segment.

In both these segments there are always puts and takes outside of those particular items but those will be the two key items..

Question on the general industrial business which was very strong in this quarter I think you were up about 6% including the specialty materials.

I question is, was it was the specialty materials left over from optics for your industrial is in terms of things did see the road and if it's the latter markets the geographies where you this much better than the market?.

Actually, Dmitry especially coatings materials was actually the weakest before that were in there. Automotive had a very good quarter as we talked about and the industrial very good quarter.

When you look at our automotive parts and accessories was up high single digits, our coil business was up high single digits, wood was up, transportation coatings were up, heavy duty equipment was up for the first time in a long time. I'd have to guess but at least two years. So or packaging business continued year-over-year growth.

We’re in the beginning of a secular growth rate for this -- so they were up high single digits. The move to BPA and A&I so really when you look at especially coatings materials had a -- they were the weakest of the four. So, it was everybody contributing though. .

The heavy duty equipment is particularly noteworthy as you point out -- it's been a while since we've saw stream in the business and the certainly nothing from the caterpillars and other equipment suppliers of the world that would lead us to believe that this is a recovery market.

So, was this a share gain? Was this a one-time test was behind this? Can we look forward to this growth or at least none decline in this troubled industry continuing for you?.

Yes, it was definitely share growth in the industry. We worked hard to increase our share in that area. The customers are very comfortable with our ability to deliver more productivity in their shops, that's what they're looking for and we been able to deliver that productivity through value-added products and that's what's driving us.

The industry itself, as you know, continues to be quite weak but we're very pleased with our team's performance. .

The next question comes from Vincent Andrews with Morgan Stanley. Please go ahead..

This is Matt in for Vincent. I was hoping that you could clarify the progress on your current and ongoing cost programs as well as the Comex cost synergy targets. .

The Comex cost synergy targets we’ve completed fully by the end of last year, actually. We do have some sales synergy targets for Comex that were primarily related to PPG products going into Mexico as well as the Central America. Those are on track, they are slightly above track.

The other restructuring program that we announced last year again diminishing benefits as we approach the fourth quarter so very modest benefits in the fourth quarter and will be fully captured at that point. .

The next question comes from Nils Wallin with CLSA. Please go ahead. .

When you talk about the M&A pipeline a lot of opportunities in there, could you help us understand that a little bit better? Is that because there are more -- there are fewer folks competing with you? There are more assets coming to market? Or in general companies that you've been looking at over the last couple of years are getting close to the finish line?.

No, I think Nils, the way I would think about it is there are several properties out there that are coming to the market because they see the prices that are out there and so that makes more people think about whether or not the time to get out of some of their investments.

I would also tell you that we have historically worked with a number of these family owned companies for many, many years and it takes a long time on the sometimes, to build that relationship to get into the point where they feel comfortable ready to pull the trigger whether it's generational change or whether it's been a dynamic where they are looking at reducing the focus on the coatings business or whatever the dynamic might be.

So, we're going to continue to work with our potential acquisitions whether it is a family-owned Company or some of these private activity owned ones. So, I think the pipe line looks solid. .

And just on Europe, you've long said that you get some volume growth in Europe, you get very, very attractive incremental margins.

When you have this sort of flat volume growth environment does that mean you have zero incremental margins or there might actually be detrimental?.

In general, Nils, what you said is correct. No growth it doesn't matter what your margins are if you are not growing but we do have some business mix differences in Europe so we could have pluses or minuses just around business mix but generally what you said is accurate. .

Just to follow up quickly you have detrimental margins at the profit contribution line but that's another reason why we're looking at our total cost structure so we can minimize any downside if the volume becomes muted in the near future and the team over there has done a very good job thus far but there are some additional opportunities we're going to be looking at in conjunction with this next set of initiatives we're talking about.

.

The next question comes from Mike Harrison with Seaport Global Securities. Please go ahead..

Michael, you mentioned that your larger customers tend to get some of the more attractive pricing and the smaller customers would get better pricing from your standpoint.

I was wondering if your comment on heavy equipment manufacturers being stronger in the quarter, could that be another component of negative mix affecting the margin performance of the industrial coatings segment?.

I would say that the very, very small factor. When you think about heavy duty equipment has reduced its size and scope overall of our industrial coatings because of their decline, so it has no real material impact. .

And then just looking at the decline of the Mexican peso and the impact on the Comex business, are all of the cost that you incur in that business peso denominated or are you seeing some transactional impact because you are paying dollars for some of your raw materials or other costs?.

Most of the costs are peso denominated there is some transaction exposure from price and materials outside of Mexico but we do have the ability to hedge a portion of that.

We don't get a detail as to how much we do but the limited transactional exposure there is, we do have the ability to mitigate that plus there is also pricing opportunity when you see these kinds of movements on currency.

So that's another mitigating factor which is the reason that this continues to perform very, very well on both topline and bottom line. .

Mike, let me add to that. From the Comex perspective they continue to outpace our original target which is two times the GDP. We've opened up 67 new stores in the quarter. We're at 168 new stores through the first three months so we're going to exceed our target. So we're getting close to 4200 stores in Mexico. So we're going to have probably 190 stores.

We also opened up new stores which were not counting in low, so we have a store in-store concept down there as well. So overall even with the challenges to the peso, the PPG Comex team has been doing a phenomenal job. .

The next question comes from Duffy Fischer with Barclays. Please go ahead..

This is [indiscernible] on for Duffy. Just one quick one following up on the restructuring actions you guys talked about today.

Is it too early to try to think about the size of the potential program there? I mean as we start thinking about our 2017 forecast, should we bake in kind of more than negligible amount of restructuring benefit or how should we think about that?.

We don't want to go into the specifics right now and the exact amount because we're still assessing all of the potential actions we're looking at, what we can say is it's going to be broad-based and significant and we will address all elements of the cost structure and when we have the things nailed down as part of our planning process we'll update the market at appropriate time.

.

As we have said in the past generally you take a couple of quarters to phase it in and then you start to get more benefits at the back half..

And if I could squeeze one more in on packaging, could you talk about the technology you guys have their and the transition to non-BPA coating and just kind of what inning we’re are in that phase?.

I think we're in inning three. So, BPA non-intent coatings really started in France. They have factored their way over to U.S. and some of the food applications. Now California, in fact their [indiscernible] and the way they are going to force to people talk about it kicked in actually October 18.

So, that will be more pressure in the marketplace to shift to the BPA [indiscernible] coatings and of course once that starts to happen I always use tunafish as an example -- you pack cans in Thailand, those cans show up in Europe, they show up in the U.S.

and they are not going to run into two and three different formulations for some of those tunafish. So you are going to certain markets following later just because of where they export to. So we are in the early innings and we’re really pleased with the acceptance of our new technology..

If I could add, this is one of the businesses again we’re stacking year-on-year growth rates at very high levels, so we were up mid-single digits this quarter that’s on a very good comp last year so that stacking effect is very helpful for us..

We have time for just one more question and that will come from Jim Sheehan with SunTrust Robinson Humphrey. Please go ahead..

Michael, of your nine core raw material about how many are rising? How many are still falling at this point?.

Well, we only have one that's falling and seven are flat, and I talked about TiO2 being up. So it's right now, it's relatively benign environment going into the fourth quarter and we have to see -- have to wait to see how it looks with the first quarter but that’s how we stack them up. .

We do think a, Jim, we do have a benign global economy here so the push for raw material inflation shouldn’t -- there's not a demand supported push for that. .

Can you tell us what is your base of earnings per share from continuing operations in the fourth quarter last year adjusted for the European fiber glass business?.

Jim, we put out a 8K in mid-September that provided by quarter the last several years of our EPS from continuing excluding flat glass in mid-September. I think for the fourth quarter that was $1.16 ,that European fiberglass business will remain and continuing, it wasn’t a sale of entire business so based on GAAP guidance it remains and continuing. .

This concludes our question-and-answer session. I would like to turn the conference back over to Scott Minder for any closing remarks..

Once again I would like to thank everyone for their time and interest in PPG. If you have any further questions, please contact investor relations. This concludes our third quarter earnings call..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..