Good afternoon, and welcome to the PPG Industries First Quarter 2018 Earnings Conference Call. My name is Jamie, and I will be your conference specialist today. [Operator Instructions]. Please also note, today's event is being recorded. At this time, I'd like to turn the conference call over to John Bruno, Director of Investor Relations. Sir, please go ahead.

Thank you, Jamie. Good afternoon, everyone. We appreciate your continued interest in PPG and welcome you to our first quarter 2018 financial results conference call. Joining me on the call from PPG are Michael McGarry, Chairman and Chief Executive Officer; and Vince Morales, Senior Vice President and Chief Financial Officer. Our comments relate to the financial information released on Thursday, April 19, 2018. I will remind everyone that we have posted detailed commentary and accompanying presentation slides on the Investors center of our website, ppg.com. The slides are also available on the webcast site for this call and provide additional support to the opening comments Michael will make shortly. Following Michael's perspective on the company's results for the quarter, we will move to a Q&A session. Both the prepared commentary and discussion during this call may contain forward-looking statements, reflecting the company's current view of future events and their potential effect on PPG's operating and financial performance These statements involve uncertainties and risk, which may cause actual results to differ. The company is under no obligation to provide subsequent updates of 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 the most directly comparable GAAP financial measures. For additional information, please refer to PPG's filings with the SEC. Now let me introduce PPG Chairman and CEO, Michael McGarry.

Thank you, John, and good afternoon, everyone. Today, we reported first quarter 2018 financial results. For the first quarter, our net sales were approximately $3.8 billion and our adjusted earnings per diluted share from continuing operations were $1.39. This represents an EPS growth rate of nearly 4% for the quarter. The earnings growth we achieved was despite continuing an elevated raw material inflation during the quarter, which we partially countered with selling price improvements and strong cost management. In addition, we continue to benefit from our ongoing cash deployment focus on earnings accretion. For the first quarter, our reported net sales were up almost 9% while our sales in local currencies increased about 3%. Supporting the higher local currency sales were increased selling prices of nearly 2%, marking the fourth straight quarter of improvement over the prior sequential quarter. Total sales volume increased modestly, but were negatively impacted by fewer shipping days in the first quarter 2017, lower European architectural coatings volumes due to harsh winter weather that caused several days of store closures during the quarter and lower U.S. architectural DIY coatings sales volumes. In addition, we passed on some business this quarter as we pursued higher selling prices and have prioritized margin recovery. Foreign currency translation was favorable as several key currencies strengthened against the dollar, with sales favorably impacted by approximately $200 million and pretax income favorably impacted by about $25 million. We expect a slightly less favorable impact in the second quarter. Looking at some of the business trends in the first quarter, our Industrial Coatings segment delivered solid organic sales growth of about 2%, which included a 200 basis point improvement in selling price from the previous quarter. Organic sales volumes at packaging coatings were up mid-single digit percentage as the adoption of our INNOVEL…

[Operator Instructions]. And our first question today comes from Ghansham Panjabi from R.W. Baird.

I guess, first question on North American pain stores and the mid-single-digit increase during the first quarter. How does that parse out between volumes and price? And just given the ongoing weakness in independent dealer channel in the share shift in the home improvement channel, how are you thinking about your store footprint, I guess, more broadly in terms of incremental investments there?

Well, we had nice volumes and we had positive price, is the way I would describe that. We opened seven new stores in the first quarter, and that was despite, as you know, weather in the north continue to be exceptionally challenging as we closed the month of March. So I was quite pleased with our store performance.

Okay. And I guess, second question as it relates to your comments on raw materials. I think you said mid-single-digit increase in the first quarter and some level of moderation as the year unfolds. But crude oil prices are up quite a bit. The curtailments in China have been in place. I guess, what's giving you confidence that you will start to see that moderation as the year unfolds on the cost side?

We still anticipate mid-single-digit increases. We will have increases in the second quarter and continuing. I think what we see, first of all, certainly, oil is up significantly year-over-year. So that's not going to change. Propylene is up in all the three regions, and that's up sequentially as well. Ethylene is the one thing that is down. So I guess, I'm trying to put it in perspective that Q4 was a very large number, Q1 was a very large number and we're going to continue to see significant numbers, but maybe not to the exact same significant increase that we saw in Q4 and Q1.

Our next question comes from Christopher Parkinson from Credit Suisse.

When we think about the Industrial Coatings segment specifically volumes, can you just take us for a quick walk-through to your comments on general industrial packaging versus your expectation for auto, not in the first quarter, but how you see '18 evolving and into '19? And then also just what's the best way for all of us to think about your ability to achieve price in the segment, once again, by end market versus last year?

Well, let's start with price because I think that's a really positive story. We had price in every single of our businesses without exception. We also see price coming in the second quarter as well in every single one of our businesses. So the traction has improved significantly because. As we have said, we're prioritizing price over volume. And that message is clearly received by the entire team in PPG. When you break it down into the various sub segments of industrials, so I'll take the Industrial Coatings first. Heavy-duty equipment continues to perform well. Electronic materials is a positive. Coil is a positive. Transportation is a positive. Our coating services business, because of all the wins they had in Mexico, they're doing well. So the one area of negative, of course, is wood. China is shifting from people painting in the houses to painting in the factories, and that has as a change in -- where it's happening in the marketplace as far as the channel that the product is being sold. So that's the one negative. When you look at packaging, that's been a continued success story for us. Our new INNOVEL technology has been positively received and we're really pleased about that. OEM coatings, again, you have to break that down into regions. So the U.S., we went into the year thinking the U.S. volumes would be slightly down. As you saw, March SAAR was very strong at about $17.5 million. The one caveat would be Europe even though we see Europe being up, registration in Europe were more modestly down. Year-to-date, they're flat. But we still are very optimistic. We think it'll be up probably 3% in Europe. And Latin America will be strong, as you know, plus our share gain in Mexico. And then I was pleased when I looked at China. For March, inventories are in very good shape there. Dealer inventory and the lots are in good shape. The OEM inventories are in good shape. And March sales were actually up about 3%. So I think that's going to be good. Of course, India had an outstanding month.

And if I could add, Chris, the expectations in China for the first quarter were modest, as Michael mentioned in the prepared remarks. We were coming off a tax incentive that we believe pulled some business in the 2017. So we were again pleased with March stepping up after, again, a brief pause.

That's helpful. Can you also do a quick walk-through of your EMEA architectural business, specifically walk through in Europe. I'm assuming France is still weak. But what about the Benelux, U.K. and Central Eastern Europe on a sequential basis? Just any comments on growth and the competitive landscape would be helpful.

Yes, so the Benelux did pretty well. Got to remember, Benelux is a market that has a lot of exterior painting. So the fact that we had such tough weather in March is part of what dragged that down. But when you look at the underlying backlog of our customers, it's still quite good. Retail Europe is by far the biggest concern. Retail Europe is down high single digits. I'm sure you've seen some of the reports from some of the folks in that space. We did get a little cautious on the U.K. We saw some early signs of Brexit, but it's hard to parse out the Brexit versus the fact that they had snow in England, which never happened. So I think that's part of our concern. When you look at some of the Eastern European countries doing pretty, what I would -- I'd say hanging in there, they were more impacted by weather than anybody else. And then you come back to France as a country, our trade business did very well, actually, in the first quarter, but it was offset by the weakness in retail. So no recovery yet for France as a country, but we are in pretty good shape as far as the business.

Our next question comes from John McNulty from BMO Capital Markets.

With regard to the volumes, you had indicated there was some pressure around pricing where you were walking away when they weren't taking the pricing. I guess, could you articulate how much of the volume impact that was in the quarter?

Yes, John, this is Vince. Again, in several of our businesses, we saw marginal volume that we had, we thought we've had booked or had booked that with a lower price, went to somebody else. It's not quantifiable, but we definitely anecdotally and qualitatively saw that happen in several of our businesses.

Got it. And then just as a follow-up. Your corporate and legacy line. I think their original guide had been for $220 million to $240 million of kind of an expense this year. And I guess, you've revised it to a $175 million to $190 million. I guess, what are the major takeaways on that, that are -- that it's getting it as low as it is? I know you had been working on cost cutting all along. So that was -- I would imagine, that was partially in the original guide. So, I guess, what's the big change there?

The two biggest things that have lowered that number since we can provide any guidance. Number one, we did receive a revised actuarial information from our pension plan. I think, as you know, John, we've done a lot of work over the past three or four years to help immunize our pension plan and as actuarial information, which we do received periodically, but we received it after our original guidance. And it was a big factor. And also, we made some structural changes to our retiree health care, OPEB programs, that are rolling through. That's a pay-as-you-go process.

Our next question comes from John Roberts from UBS.

Could you talk about the range of price increases that you achieved sequentially? I'm guessing packaging coatings was up the most given the epoxy situation and perhaps the increases were minimal in weaker areas like European Deco or U.S. DIY?

John, we typically don't get into details by business. We did provide in the prepared materials the information by segment, which is our traditional reporting protocol. So I'd ask you to just refer to that.

And then I thought last quarter was a record quarterly repurchase rate for the company and now this quarter is 50% higher. How do we think about the pace of buyback as you complete the cash deployment targets?

Well, I think as we've said many times in the past, we don't provide our pace or type of cash deployment from quarter-to-quarter. We use a multitude of factors to determine what we're going to do with our cash, and those include our acquisition pipeline. And so we still are committed to the $2.4 billion for this year on both acquisitions and share repurchases and we'll honor that, but we won't give the cadence by quarter or type.

And our next question comes from P.J. Juvekar from Citi.

It's Dan Jester on for P.J. So if I look at the heat map in your slide deck, it seems like there's a couple more end markets which you logged below market growth in this quarter, packaging in Asia Pacific and a couple of businesses in EMEA. So is that related to some of the business that you walked away from because of margins? Or there's something else going on those markets that we should be aware of?

No, you hit the nail right on the head. As you can imagine, epoxy prices were up significantly. And we were raising price, and we wanted to get value for the market-leading technology we provide. And if we didn't get it, we were aggressive in saying then see if you can find your coatings needs from somewhere else.

Okay. And then logistics cost is something that's come up a bit, not just for yourself, but for other players in the industry. I'm wondering, is there anything that you can do with regards to your own production plan to help optimize or limit your logistics cost? Or is that just another line item data that eventually you need to pass longer customers and get them to pay for?

Well, we are always looking at our manufacturing footprint. That's a constant item. And so we are looking how we can continue to optimize that. But as you know, especially here in the U.S. and it's not just the U.S. had problem, but there is less trucking availability and availability of trucks on a short notice is also a challenge. So if you need something short then you need to pay more or you don't get it. So that's a challenge for us. But as you know, that's not nearly as big a promise to what we have with epoxies, emulsions, TiO2 and some others.

But we are working on our customers on both of these categories with respect to selling price.

Our next question comes from Kevin McCarthy from VRP.

Would you comment on the timing of the rollout of Olympic stain across the 2,000 stores at Home Depot and perhaps characterize the size of that when as you work to backfill the foregone sales at Lowe's?

Yes, Kevin, I think it's up to Home Depot to tell you when it gets in their stores. What we did put in the release is that we are shipping and it will be a second quarter event. So that's a real positive. The other thing is how quickly they responded within two days of the announcement from the other big box retailer. We were in Atlanta mapping out plans jointly. And that was a brand that they valued for a long time. And jointly, we're going to work very hard to make this a success. So I think the way to think about the overall sales dollars, though, is when you think about any big box, pain is always bigger than stain and Home Depot is always bigger than Lowe's. So I'll let you kind of do that. Now what you have to remember is there was product already in Home Depot, and so they'll have to work their way through that product and work their way into ours. So there is some of that timing issue that you'll have to factor in. So our sales in 2019 will be significantly bigger than 2018.

And then as a second question, I wanted to come back to your price contributions. You've seen some nice acceleration there over the last couple of quarters. Michael, as you look at the balance of the year, do you think you can sustain this level of price contribution for the overall company, accelerate from here? Does it tail off at some point because you get to harder comps? How should we think about the cadence of those contributions this year?

No, the traction is getting better and we will have more to come. You have to remember, we typically like to be 6 to 9 months behind the raw materials. We're a little bit later than that now. So we have more to catch up. So we're still, even with the nice traction, we still have to do a better job in this area. And so you're going to expect to hear us talk more about price gains in the next quarter as well.

Kevin, you're right. Back half of the year of 2017, we did see some modest price traction. That went back to year-over-year numbers. But on absolute basis, we're continuing to pursue higher pricing.

Our next question comes from Frank Mitsch from Wells Fargo Securities.

Let me ask Kevin's question a different way. Where do we stand right now second quarter to date in terms of price increases that you've been able to achieve relative to Q1?

Frank, our expectation is that's going to be higher year-over-year than we saw in Q1. So we again, we saw in Q1 1.6% selling price increase. Again, everyone of our businesses where we think we'll be tracking higher in Q2, we're not going to quantify that. But again, it should be higher than we saw in Q1 on a year-over-year basis.

All right, terrific. That's helpful. And then I did notice your net debt-to-EBITDA went up to 1.5x at the end of Q1. Where is your comfort level? Where should we be thinking about your targeted leverage ratios?

Yes, Frank, Vince again. Yes, we did borrow approximately $1 billion in Q1. We like the interest rate at the time when we borrow that all in. It's about a 3.6% interest rate. We certainly have a lot of financial flexibility and a lot of balance sheet capacity. As an industry and as a company, the coatings industry can support a much higher leverage ratio than we have today and we're not going to put a quantification of that. But if we find the opportunities, we will certainly exercise the balance sheet within reason and our only biggest criteria would be to remain investment-grade.

Our next question comes from David Begleiter from Deutsche Bank.

Michael and Vince, when will selling price increases fully catch up to these higher raw material costs, which quarter, is it Q2, is it Q3?

I think the back half of the year, David, is probably the most likely scenario. As you know, this is not a perfect science. Every day, every sales rep in the world for PPG is talking about price and has their own deliverables on that. But I would definitely say the second half, the last half of the year is it.

Very good. And Michael, just on volume after the soft numbers in Q1 for variety of reasons. Can we get back to, let's say, 2% volume growth in Q2 year-over-year do you think?

So as I told you on the fourth quarter call, the 3%, we don't want to draw a line, use the one data point. We saw the one less selling day in the first quarter, so we were trying to be a little cautious. We obviously did not predict the tough weather. April hasn't started out very well from a weather standpoint in the U.S. So that will have some moderation on it. But the customers all have strong backlogs. When we talked to our big contracting customers, they really are bullish on the year. So I would say that we should be closer to your number than our first quarter number.

Our next question comes from Bob Koort from Goldman Sachs.

This is Chris Evans on for Bob. Just wanted to check in and see if you're seeing in different product categories that your peers are as committed as PPG has been to pricing. Any specific product categories or maybe you're not seeing the same disappointment that you guys are expressing.

Well, I think the only way to answer that question is our comment where we said that we'd walk away from some business. So every company has to make their own independent decisions. And so PPG has made their decisions. And you probably are better off asking our peers about their own independent decision.

Great. And then maybe just talk a little bit about the product line rearrangement that happened earlier in the year. Maybe just if you could deconstruct maybe what happened there, it seems like that came as a bit of a surprise. And then I'd be curious to hear opportunities where you might be able to shift those architectural gallons that we haven't seen yet. And then maybe lastly as part of that, do you expect the Home Depot new product launch to be EPS positive in this year? Or is there any additional costs associated with that?

Yes, Chris, Vince. I'll try to take at least the first part of that question. With respect to the customer assortment change, I'd simply classify that as a customer -- the customer made the decision that we certainly were disappointed with. But certainly, any customer's decision to select our product or somebody else's product and if you need any more information, you certainly would need to inquire with that customer. I think your last question, Michael is going to answer the middle one. I think your last question on Home Depot is certainly, our intention is for that to be accretive in Q2 and in succeeding quarters. As you know, Q4 is a light quarter, especially for stain. So that one, we'll have to see what the customer pull through is as we will in Q2 and Q3. But given the volumes in Q, we expect hopefully to achieve in Q2 and Q3, we'd expect that to be accretive.

Yes. I think as far as the volume, I think, I covered that earlier. Home Depot is 100% behind this. And you'll see when they start to put in the store the type of assortment and type of highlighting of the product. But again, that's really for them to comment on.

Our next question comes from Jeff Zekauskas from JPMorgan.

There was $15 million other income net benefit in the quarter. What was that?

Jeff, we had about a $7 million charge last year for one of our legacy items for a plant we no longer operate and haven't operated for quite some time. And we had a -- we had an equity investment that started in Q2 of last year. It may have been early Q3 that had equity income. Those 2 items combined comprise the delta.

Okay. Second, you've been trying to raise prices in the industrial area for roughly a year and you're now up 1% and you have rising raw material cost. They're rising much faster than 1%. Can you diagnose what happened in Industrial Coatings that's really led to the slowness and successful price realization?

Jeff, I think that really boils down to several factors. The first one is people have got to see that it's sustainable raw materials and maybe last year-end, they weren't thinking that it was quite as sustainable. So that may have affected how some people are thinking about that. The second thing I would say is we had some of our peers who had publicly stated they were going after volume. So that naturally impacts the ability to get price. And then, third, our industrial customers are very large and very sophisticated and it has historically worked this way every time. We get price in industrial after we get price in the Performance Coatings segment. The good news is we're starting to get it in every business, that includes automotive. And that also includes the very large OEM industrial customers as well. So I'm disappointed it's taking this long, but the pace of which is coming is apparent and the teams are doing a much better job.

And our next question comes from Dmitry Silversteyn from Longbow Research.

Just revisiting the European situation particular with respect to paint. If you sort of exclude the impact of weather, and obviously, it's been a big problem for the region in the first quarter. How would you sort of characterize the overall market fundamentals with respect to construction spending, remodeling activity? Anything going on there that the weather elements have hit in the first quarter that should become more apparent as we get into the mid of the painting season?

Hey, Dmitry, Vince. Again, I think you classified it properly. Our visibility on a lot of that is fairly opaque given the weather situations. I think the one trend Michael called out which was visible throughout the quarter was lower -- the lower retail sales and especially in the home centers throughout the region. So that's the one item we can say we have some comfort is the trend. And we also did see just some generally lower in the U.K., not paint specific, we saw some generally lower retail overall sales, which again maybe the early or middle effects of Brexit. But beyond that, it's really hard to decipher what's going to occur throughout the paint season.

Okay. In terms of the Olympic product that you're getting into Lowe's, I mean, into Home Depot. It's good to see that you guys are able to benefit that quickly from the fill-in in the second quarter. One of the businesses that Home Depot lost obviously was interior paint -- interior stains as well. Is there a kind of -- sort of future announcements possibly coming from you in Home Depot on that? Do you have a drop-in product? Or is that something that you're working on? Can you give us some visibility or perhaps something that we can look forward to?

Well, I can't give you any visibility on that. Obviously, Home Depot is very interested in having competitive products. They were and continue to be the largest seller of interior stain and they fully expect to be, in the future, the largest seller of interior stains. So they've set that objective and how that plays out in the future when we have that clarity, we will be happy to share it with you.

Got it. And then final question, just on the overall automotive OEM market. It sounds like we're getting a little bit better results out of China and the U.S. SAAR as you mentioned, were perhaps a little bit stronger than expected. Europe is expected to grow. As you look at the business right now for the balance of the year versus how you look at it at the beginning of the year, would you say that your overall sort of impression of what the industry growth would be has gotten a little bit better? Or is it still fairly kind of low to no growth environment?

No, I would say I'm marginally more positive. But whether you're going to be able to pick that up is -- whether that's going to be material or not is not known. But I would tell you, it's put a nice, solid floor on anything that may happen. So I would say I'm marginally more positive.

And Dmitry, just as Michael mentioned earlier, we're pleased with the inventory positions in the U.S. The industry inventory positions in the U.S. and China coming into what is typically the highest selling seasons in the U.S.

Our next question comes from Duffy Fischer from Barclays.

First one is, can you just shed a little bit of light on the accounting issue in your comfort level that kind ring-fencing it at that small $5 million level?

Okay, Duffy. So first of all, I'm so thankful that this was brought forward as we are finalizing our earnings report. As you know, at PPG, we hold ourselves to a very high standard of business and professional conduct. Our reputation for being ethical and respectful company is a competitive advantage. We believe it's our responsibility and commitment to ensure the long-term success of our company. And that benefits all our stakeholders, whether it's customers, shareholders, employees, suppliers or neighbors. We take this matter very seriously. We're conducting an investigation concerning these potential violations. The Audit Committee is comprised of independent directors of the company's Board of Directors, and they're overseeing it with the assistance of outside counsel. We're not able to predict the timing of the outcome. All I'm saying is that the investigation is ongoing. I'm sorry, I can't provide any additional information at this time.

No, fair enough. And then second one, the Ford City judgment that hit a couple of papers yesterday. Is that meaningful? And if it is, what's kind of the timeline of how that will play out?

Well, first of all, the judge said that the other party was not responsible. So that's the first thing. So that was what the court case is about. Second, we have been working with the Pennsylvania Department of Environmental Protection on this issue for 10 plus years. We are in very good shape with them. We have a very good remediation. And we have, I would say, as far as you and as an investor were concerned, this will not be a meaningful issue.

Okay, perfect.

And the other thing I'd say is our current actions are protected with the Human Health and Environment, just to be -- so everybody is clear.

Our next question comes from Laurence Alexander from Jefferies.

Two quick ones. First on the general industrial and packaging outlook comments, where you say it's similar to Q1 in terms of the year-over-year volume growth. If Q1 had the tough comparisons in Asia, what is the comparable offset that makes Q2 similar to Q1? And secondly, in terms of productivity, where do you still see areas for significant products [indiscernible] gains given how many years you've been pushing staff on that?

Yes, Laurence, I'll take the first one and I think Michael will probably take the second one. I think i heard you your question was with China -- hard comp in China in Q1. I think it was actually coming out of Q4, we expected softness because of a buy ahead, as the tax incentive expired, I would say Q2 last year was a traditional quarter. Q4 of 2017 was the one we thought there will be a buy ahead. So again, I would say the comps for Q2 in automotive China would be normal.

And Laurence, in regards to your question about cost. As you know, this is a never ending quest for PPG to get more efficient. And so we're always looking at our manufacturing footprint. As you know, we have gotten other acquisitions in the past 12 months. And so that means that there's other labs that are overlapping, other plants that are overlapping. So we'll be working hard to get those things out. So I don't think that we're ever going to stop in this area. So and plus I think we will be looking at how we reposition our architectural U.S. business with the announcement of the customer assortment change that was detailed earlier in the quarter.

Our next question comes from Vincent Andrews from Morgan Stanley.

Maybe you could just give us an update on what you're seeing out there in the M&A environment. I know you guys have your eyes on a variety of things over the years. Is there anything changing about those conversations with those targets? I'm going to assume based on the size of your repo in the first quarter, that you're not close on anything material. So just thoughts on where all that sits would be helpful.

Yes. So the biggest challenge we have right now, Vincent, is the fact that when you're trying to buy somebody who's earnings are going down, they want to look backwards to what they were doing 12 months ago and we want to look at either what they're doing today or what they're going to do in the next quarter. And they want to get paid on what their business used to be. And of course, we're going to be the ones that will be improving it. So I would say the conversations right now are a little bit more challenging. We have a very healthy number of people we're talking to. In fact, we had a new one flying in last week. So I would tell you that the pipeline is still there. But as you can see by our Q1 response, we're going to moderate our, I mean, our purchases of shares basis our pipeline. And we've always preferred acquisitions over share repurchases. So we're going to continue to look hard at acquisition. But if we can't do them, then we'll buy back stock.

Okay. And just a follow-up on the logistics cost comments from earlier. I might have missed this if you commented on it before. But is trucking a part of the issue of what's going on with driver hours and things like that or is that not -- is it just fuel expense?

No, it's trucking. A, it's availability. And B, when they don't show up then sometimes you have to ship LTL to keep your customer going. Because we have so many customers that run just in time. So then that ratchets up the cost to serve that customer and during that period of time because of the lack of availability. So you have two factors going on.

Our next question comes from Michael Sison from KeyBanc.

EPS growth was up in the first quarter, and it sounds like your general economic outlook is positive. Pricing is starting to take some place. So when you think about EPS growth going forward, does it get better in 2Q? And to what degree? And trying to gauge your confidence in generating better EPS growth this year versus last year in total.

Yes, Mike, as you know, we don't give guidance, long-standing practice of ours. And I'd tell you that the elements to look out for as we go into Q2, we try to give you some anecdotal information on which is we're still seeing raw material inflation. We hope to offset a little more of that with price. The volumes in architectural, as Michael mentioned, leased early in April are more reminiscent of March than they would be off a better weather season. And other than that, emerging region growth looks good. So I think we're hoping a higher volume number, as we said earlier, higher price number, but we're still battling with inflation.

Got it. And then it sounds like that you may still have to walk away from some volume in 2Q to get some of the pricing. And is that the case? And what would the impact be on volumes if you do have to continue to do that?

Again, I'll reiterate what Michael says that our priority is margin recovery. I would say there will be no more incremental impact than we saw in Q1 in the second quarter as we continue to work with our customers on pricing. And again, I think we'll see the same situation where certain customers will move to a lower price without us.

Our next question comes from Arun Viswanathan from RBC Capital Markets.

Just a question, if I could, on that same question I'll ask a little differently. Do you expect to be kind of caught up margins in industrial maybe Q3 or Q4? Or are you still going to be lagging year-over-year?

I think it'll be hard to get there in Q4, but that's currently our target.

Okay. And then in the past, I guess, you had mentioned that potential inflection point could be improvements in Europe, and that will be maybe the best opportunity for you guys to start growing again. Maybe you can just help us understand if that's still the case and any other kind of signpost that we should be looking for as to see an improvement or anticipated improvement in your businesses?

Well, I think when I walk around the world with some of my commentary, Mexico, even with the challenges with the election, is still going to be a good market for us. We saw Brazil getting better. That's -- so Latin America is going to continue to grow. You saw that China GDP number was 6.8%, if I remember right. It was a good, solid number. So that's a positive. I talked about India being up basically double digits. And so another positive, obviously, would be if we could get this whether behind us and look at our industrial businesses as well in Europe. I mean, we dropped 35% or 40% of any sales growth in Europe down to the bottom line. So I would say that Europe still has a very positive outlook and we're well-positioned with our customers, and the team is performing well in a difficult environment.

And I'll just append to that, Arun, that we did see -- we did continue to see in Q1, even despite again some harsh weather conditions, very solid growth in our industrial segment in Europe. And as we said many times in the past, typically, the segment that leads a region into growth. So we still remain optimistic, but that's a potential outcome in the near future.

Great. And then just last one, if I could. Just on the M&A side. Understanding that the businesses want to get full value for potentially depressed earnings. I mean, do you think that could change? And if not, why not get more aggressive with price on some of these deals? I mean, if M&A is the preference because it would seem that from a long-term perspective, the M&A still probably is a higher return on capital use of that than buybacks?

You're exactly right, Arun. We will be as aggressive on price as the outcome of the return dictates. We want to be prudent with our acquisitions. We are preferential on them when they have a good return and we're not preferential on them when they don't. So again, I think we're going to be prudent, but I do think you hit the nail on the head with respect to what we're looking at, which is what's the return on the potential acquisition itself, which would certainly be dictated by the purchase price.

Our next question comes from Don Carson from SIG.

Question on architectural. Last year, TiO2 was your raw material that went up the most. This year, it shifted more to industrial side. But, A, do you still see TiO2 growing up of this year as much as your mid-single-digit overall raw material basket increase projection? And two, if you look at TiO2 and emulsions, is there a need for a third price increase in your U.S. company stores to keep margins growing?

So let's take the TiO2 question first. Supply and demand is what drives TiO2 pricing. And I would say that, clearly, when people report all their earnings across Europe and other place, you'll see that demand will be weak, in our opinion. And so we're going to be fighting for rollover type pricing in TiO2 because we think that's reflective of supply and demand. So we'll wait and see exactly how that all turns out because, as you know, we fight the last day on any price -- taken any price increase. But as far as emulsions, that's driven by a number of factors, propylene being the biggest one. And sequentially, we see that it's likely to be heading south in this regard, which should lead us to an opportunity to try to get some lower pricing in that regard. It's too early to speak that way, but that's certainly our expectations. As far as needing more price, I will tell you that we're aggressively capturing price within that segment now and we haven't gotten everything we want to date. So let me focus on getting that done first.

Then, Vince, a housekeeping follow-up. You mentioned an accounting change the last -- on the last call that would hurt gross margins by 50 to 100 basis points. Did that turn out to be the case? And would you expect that to be recurring for the full year?

Yes, we adapted the new guidelines with respect to revenue recognition. Those numbers are still valid, Don. And again, that's adapting the new GAAP guidelines.

And our next question comes from Steve Byrne from Bank of America.

This is Ian Bennett on for Steve. Do you expect SG&A expense to decline or increase in 2018?

Well, again, our first quarter, we were down 140 basis points in SG&A. We continue to be very active in controlling our costs. As Michael alluded to earlier, we're assessing situation with the customer assortment loss and we'll react to that as well. So I think our projection would be for that to continue to be lower. I won't give you a specific number, but we're definitely working on productivity initiatives, as Mike alluded to earlier.

Okay. And just a follow-up on the gross margin. Did I hear that correctly that gross margin, the expectation is for not positive year-over-year growth until the fourth quarter or 2019?

I think the question that Michael answered was around the industrial segment margins. And those are the ones that would be challenged until certainly the latter part of the year. If you look on the gross margin basis, I think we are off around 300 basis points. Our goal is to get that up closer to neutral. As we go into the earlier part of the back half of the year, the Performance Coatings business, where we were able to achieve pricing earlier, would help prop that up faster than the Industrial Coatings segment.

Our next question comes from Mike Harrison from Seaport Global Securities.

You saw a really pretty good growth in company-owned stores in North America during the first quarter. Can you give a little bit of color on what's been driving that? And maybe address if company-owned stores become a little greater focus in light of the change that you've seen in the customer base with the big box retailers?

So this continued improvement in our company-owned stores is multiple factors. The biggest one, though, is the fact that they're are more do-it-for-me people. The baby boomers are aging. And therefore, they're asking people to do their work and then you have a lot of the younger folks who never learned how to do it. So they're getting it done for them. So that's the biggest trend. So the company-owned stores are winning in that space. The second one, of course, is we've done a lot of improvement in our stores. So when you think about the rebranding initiatives, the customer initiatives, those have all been a positive, our ability to deliver more timely basis. That's been a positive. So there's a lot of underlying activities in that regard, and we did open up seven new stores in the Q1. So it will continue to be a focus area for us.

And then you announced the -- a price increase for auto OEM customers in the Americas in mid-March. I was wondering if you can just give us some color on how those negotiations are progressing with customers and how you guys are seeing the competitive environment in auto OEM right now?

Well, I've never seen a time where the competitive environment in auto OEM was anything but fierce. You have super sophisticated customers and the benefit is they clearly see the inflation. There's no denying the inflation is there. We've worked ourselves through a number of gates, if you will, with these folks. And so we are getting traction. And so what I'll tell you is it's been good for us to get additional price increases out there in the marketplace and we are getting price. So you should expect to see more in the future.

And our last question today comes from James Sheehan from SunTrust Robinson Humphrey.

Mike, could you evaluate your efforts to reaccelerate organic growth? How effective has your rebranding and other initiatives been?

Well, the rebranding has been very positive. You can see -- again, this quarter was the best quarter we've had in our stores in more than 4 years. That's been doing really well. Also, the branding that we've done overall in PPG has helped us in a number of areas. So I'm pleased with that. The clarity on which brands and which markets has helped as well. So overall, I would say I'm pleased.

And on raw materials, you gave some color on several of the different raw materials. Just wondering on epoxy resins in particular, do you think those prices have peaked yet?

Well, I'd like to say the answer is yes. A lot of that will depend upon some of the plants that were forced down in China in Q1, how quickly can they get up and running, are they able to run the rest of the year or will China be diligent? I think China will continue to be diligent in their enforcement actions. And so I think we're going to have a period here where we're in pretty good shape. But then I think on, as we move into winter, you will see China again continue to very aggressively enforce the environmental regulations.

Great. And what's your read on the U.S. paint season thus far?

Well, disappointing. I wish I had a magic wand that could get rid of all the snow. I mean, even in Pittsburgh, we've had 2 snow days this weekend and April 19. So -- but our customer's underlying book of business is strong. Every painter I talked to would like to have three more people painting for them. So the housing market is good, all the underlying demand is good. They want to be painting. So it should be a good year. And you can see the stores, even in spite of this weather, did quite well. So I would tell you, I'm still optimistic.

And ladies and gentlemen, at this time, that will conclude our question-and-answer session. I would like to turn the conference call back over to management for any closing remarks.

Thanks, Jamie. This is John Bruno again. I'd like to thank everyone for their time and interest in PPG. If you have any further questions, please contact us at the Investor Relations department. This concludes our first quarter earnings call.

Ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.