Apr 19, 2012
Executives
Vincent J. Morales - Vice President of Investor Relations Charles E.
Bunch - Chairman of the Board, Chief Executive Officer and Member of Operating Committee David B. Navikas - Chief Financial Officer, Principal Accounting Officer, Senior Vice President of Finance and Member of Operating Committee
Analysts
John P. McNulty - Crédit Suisse AG, Research Division Frank J.
Mitsch - Wells Fargo Securities, LLC, Research Division Donald Carson - Susquehanna Financial Group, LLLP, Research Division Kevin W. McCarthy - BofA Merrill Lynch, Research Division P.J.
Juvekar - Citigroup Inc, Research Division Robert Koort - Goldman Sachs Group Inc., Research Division Ivan M. Marcuse - KeyBanc Capital Markets Inc., Research Division Duffy Fischer - Barclays Capital, Research Division David L.
Begleiter - Deutsche Bank AG, Research Division Saul Ludwig - Northcoast Research Dmitry Silversteyn - Longbow Research LLC Gregg A. Goodnight - UBS Investment Bank, Research Division Robert Walker - Jefferies & Company, Inc., Research Division Nils-Bertil Wallin - Credit Agricole Securities (USA) Inc., Research Division Gaji Balakaneshan - The Buckingham Research Group Incorporated
Operator
Good day, ladies and gentlemen, and welcome to the First Quarter 2012 PPG Industries Earnings Conference Call. My name is Jasmine, and I'll be your coordinator for today.
[Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference to Mr.
Vince Morales, Vice President, Investor Relations. You may proceed.
Vincent J. Morales
Thank you. Good afternoon, everybody.
This is Vince Morales, Vice President of Investor Relations for PPG Industries. Welcome to PPG's first quarter 2012 financial teleconference.
Joining me on the call today from PPG are Chuck Bunch, Chairman of the Board and Chief Executive Officer; and Dave Navikas, Senior Vice President of Finance and Chief Financial Officer. Our comments relate to the financial information released on Thursday, April 19, 2012.
As a reminder, based on our modified quarterly earnings call process, approximately 1 hour ago, we posted detailed commentary and accompanying presentation slides on our Investor Center at ppg.com. The slides are also available on the webcast site for this call.
We do not read those prepared remarks during this call. During the call, Chuck will share his perspectives on the company's results for the quarter, and then we will move directly to Q&A.
Both the prepared commentary and discussion during this call may contain forward-looking statements, reflecting the company's current view about future events and their potential effect on PPG's operating and financial performance. These statements involve uncertainties and risks, which may cause actual results to differ.
The company is under no obligation to provide subsequent updates to these forward-looking statements. This presentation also contains certain non-GAAP financial measures.
The company has provided in the appendix of the presentation materials, which are 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.
And now let me introduce PPG's Chairman and CEO, Chuck Bunch.
Charles E. Bunch
Thank you, Vince, and welcome, everyone. PPG continued our earnings growth momentum during the first quarter, posting record adjusted earnings of $1.81 per share.
This marks the seventh consecutive quarterly record for the company. This 30% increase in our earnings was driven by strengthening sales in the combined Coatings and Optical and Specialty Materials segments, with earnings growth in these segments averaging about 25% versus the prior year.
In addition, the Commodity Chemicals segment matched its excellent 2011 performance. Excluding acquisition and currency impacts, Coatings and Optical sales improved by more than $200 million versus the prior year's first quarter.
The primary region of improvement was the United States, where all of our Coatings businesses delivered higher volumes. Growth continued in the emerging regions, but was at lower rates and with less consistency throughout the quarter than in the recent past.
European activity levels were weaker in most end-use markets. Our improved sales also reflected higher selling prices in each Coatings business as we continued efforts to recover inflation absorbed during 2011 and additional, more modest inflation in the first quarter.
Our strong focus on cost management also continued during the quarter. And operating margins in all segments, except Glass, improved versus the prior year, aided by our sales performance and our continued operational discipline.
Lastly, we purchased 1 million shares of stock during the quarter and ended the quarter with about $1 billion of cash, well above our historical first quarter cash balance. In summary, our record results in the quarter and excellent performance over the past 2 years reflect the benefits from our broad and global business portfolio and effective deployment of cash.
Looking ahead, we have further growth opportunities as demand in some of our larger end-use markets such as Automotive OEM and Architectural Coatings continues to recover. The second quarter is typically our best quarter seasonally, and we expect year-over-year growth in the United States to be similar with the first quarter, coupled with lower regional natural gas input costs.
We anticipate that growth in emerging regions will accelerate, supported by higher Chinese industrial activity. We expect European demand to remain muted.
However, we remain proactive in dealing with these mixed market conditions and are implementing restructuring actions focused mainly in Europe with anticipated cost savings of $0.20 to $0.25 per share in the second half of this year and larger cost savings in 2013. Finally, we already have a strong cash position.
And based on the seasonality of our businesses, our strongest cash generation quarters are later in the year. We expect to continue to deploy cash throughout the year with earnings accretion remaining the focus.
That concludes our prepared remarks. Now operator, would you please give instructions and open the phone lines for questions?
Operator
[Operator Instructions] And your first question comes from the line of John McNulty with Credit Suisse.
John P. McNulty - Crédit Suisse AG, Research Division
A quick question. With regard to TiO2, I know you started the year expecting to be able to reduce your consumption by 4% to 6%, and I guess I'd love an update as to where you stand on that right now.
And then as a follow-up, you had mentioned -- I guess you had put out a release recently with a venture with Argex, and was curious as to -- I know in the release, you said it was going to be limited capital intensity for you guys. But can you -- if you can quantify that a bit, that would be great.
Charles E. Bunch
Well, the first question on the metrics around our targets for reducing TiO2 consumption on a per-gallon basis, we said 4% to 6% for this year. If you looked at the first quarter, John, we're between 1% and 2%, so on target with what we're looking for, for a full year reduction or productivity improvement in TiO2 usage.
But we're where we said we would be, we obviously have focus teams, a big commitment from our R&D organization and all of our Coatings businesses to accomplish this. So we're on track there.
And yes, we did make a announcement with our collaboration with Argex. At this point, we have not made a decision on what will be the full extent of our participation with them.
And that could include, among other things, an investment on our part. But we're working closely with them now as they continue to advance the opportunity that they see in TiO2 production.
Operator
Your next question comes from the line of Frank Mitsch with Wells Fargo Securities.
Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division
Chuck, you made the comment that you're expecting the pace of business in the U.S. to show a similar type of increase in the second quarter as it did in the first quarter.
And I guess there's a fair amount of speculation out there that the first quarter saw a material benefit from the warm weather, and that was one of the reasons why you saw Architectural Coatings being as strong as it was. And so then that begs the question, was there some move from the second quarter into the first quarter because of weather?
But your commentary that -- about pace of growth would indicate that you don't think so. Can you elaborate on that?
Charles E. Bunch
We still feel optimistic, Frank, about the recovery here in the United States. It's a little bit uneven, and I think we continue to receive a collection of data points and not all of which are kind of straight positive.
But if you look at some of our markets, our important end-use markets like Aerospace or Automotive OEM, these markets have been very strong here in the U.S., and they continue that way. And I'm looking for a very good year in automotive production here in North America in 2012.
On the architectural side, I think we've been open about the fact that we had a very mild winter; that, that probably contributed to some of the improvement that we saw in our architectural or construction-related businesses. I would say that I think there is underlying strength, though, in the market.
We've seen the new home, on average, continue to tick-up over 10% from arguably a very low level. The home improvement area, apartments and some of those other end-use markets for Architectural Coatings continue to show, I would say, improvement.
So I don't think it's just weather-related. We've argued here about what we think the pull-forward may have been.
Most of our guys say, "Hey, it's probably about 2/3 or 3/4 of actual improvement, and the rest is weather." I can tell you as we look at the first few weeks of April, weather has continued to be pretty good, and I said we -- I would say we're off to a good start, continuing what I talked about in Automotive or Aerospace or Heavy-Duty Equipment, but also I think we're seeing more, more consistent strength on the architectural side.
Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division
All right. Terrific.
And you mentioned in the release the fact that you've got lower natural gas pricing, that it's been helping parts of the company. I was wondering if there was a way that you might be able to quantify what your expectations are there in terms of this gift of lower natural gas pricing.
Charles E. Bunch
This has been the gift that keeps on giving. Normally, we say with our usage that $1 of natural gas cost will benefit us anywhere from $50 million to $60 million, and we have as now burned off all of the hedges after the first quarter of this year where we had a very low couple of percent of the older hedges, the $6 to $8.
We're virtually unhedged now, and so we have full exposure here in our North American Commodity Chemicals and Glass businesses to these lower natural gas costs. Now we're not sure that they can continue indefinitely at this.
I saw it touching $1.90 today -- an MCF. So those are -- that's a great value for us.
It's still in the kind of the middle of the month. So it doesn't -- it's not the final numbers for May or June, but certainly these are attractive, and that's kind of upside earnings potential we see.
Vince, did you want to add something?
Vincent J. Morales
Yes, just for everybody's benchmark number, we paid just over $3 in the first quarter all-in for our natural gas. And again, as Chuck mentioned, that included a couple percent of some aged hedges, and those hedges have burned off so that we're naked at this point.
Operator
Your next question comes from the line of Don Carson with Susquehanna Financial.
Donald Carson - Susquehanna Financial Group, LLLP, Research Division
Actually, just a follow-on on that natural gas, Chuck. With the $1.90, have you thought of hedging again or you've had your fill of hedging given the recent history?
Charles E. Bunch
Well, we still talk a lot about it, Don. But yes, we've had mixed results in hedging, certainly.
And over the last 3 years, since all the shale gas came on the market, we've -- I think, we've been burned a little bit. Earlier in the last decade, we did benefit when the hedges or the prices ran up.
So I think we think about it. We look at the forward months.
So it makes some sense in the next 3 to 6 months if you wanted to lock it in. But you do start paying a premium if you go out 4 quarters or more.
And I think to some extent, the market still seems to be -- have a high supply-demand ratio. There's talk of the inventories are full.
There's not any more storage. But we did benefit, obviously, this year from a very mild winter.
So we didn't get much of a drawdown. So I think as we get through the second into the third quarter, we're going to probably talk about this some more and look at it.
Now, in the past, as you remember, Don, you'd also try to hedge around the hurricane season because most of that natural gas production came out of the Gulf. That's not the case as much now, but we still have to be sensitive around the winter usage, I think.
And longer term, I think you will probably see some gas getting shut in. So we're not sure $1.90 is a going-forward assumption for the next 3 to 5 years.
So I think your question is a good one, and we're going to continue to look at it.
Donald Carson - Susquehanna Financial Group, LLLP, Research Division
On Chlor-alkali pricing, do you think it's peaked here? We've seen a few initiatives on the caustic side.
They haven't gotten much traction. I guess even the chlorine one didn't.
And rates are below where they were a year ago with soft Chlorovinyls exports. Is your sense that the next move in ECU pricing could be down here?
Charles E. Bunch
Well, right now, yes, we're seeing the same things that you just talked about. There have been pricing initiatives on both the caustic and chlorine here over the last month up, but I would say that here in the near term, it looks like pricing is stable.
We are attempting to get the increases that have been announced, but I would say going into the second quarter here, we're looking at stable prices. If you look at what's going to be happening later this year, I think there are a few variables.
So right now, it's a little too early in the year to say how the second half's going to shape up. But certainly, I would say your comments are accurate around stable pricing here in the second quarter, although, I think ourselves and maybe other producers are trying to get some of those increased.
Operator
Your next question comes from the line of Kevin McCarthy with Bank of America Merrill Lynch.
Kevin W. McCarthy - BofA Merrill Lynch, Research Division
Just wanted to talk a little bit about Optical. Obviously, you had a meaningful disruption in Thailand in 4Q.
You've bounced back strongly from that episode. How much, if any, restocking benefit was there in the first quarter?
And maybe you can elaborate on your expectations for how the year could play out there from a penetration -- market penetration and a profit perspective, please?
Charles E. Bunch
For us, I think there was at the end of 2011, both with some of the uncertainty in the market in the fourth quarter, as well as some of the Thailand situation, I think there was some de-stocking. So in the first quarter of this year, we have benefited, I think, from a return to more normal inventory levels.
But as we look especially here in the U.S. and the European markets where we get better and faster market data, I would say there's been a nice recovery.
I think the consumer is healthier here in the U.S. market, which is our strongest for Transitions.
But we saw good at-market sales improvement in Transitions, and that was encouraging. So it certainly wasn't a case of just a restocking after the fourth quarter.
We think that the second quarter is going to be another good one. We think that the consumer is getting healthier here in the U.S., and we're continuing to support the brand and the business at the same level.
So we're looking for a good year this year.
Kevin W. McCarthy - BofA Merrill Lynch, Research Division
Okay. And then on Coatings, Chuck, you touched upon TiO2 briefly earlier.
But if I look at the broader basket of raw materials for Coatings, what would be your updated outlook for cost inflation in 2012 versus 2011?
Charles E. Bunch
Well, we've been saying that we've thought that we may see raw material, full basket, 3% to 5% kind of increases, and that would have included TiO2. And we came in for the year or we finished 2011, I would say, with a little more muted inflation on some of the organic raw materials.
We've seen those -- some of those prices move up here in the first quarter on the spot side. Now you look at propylene pricing, ethylene, which we're not quite as sensitive to in some of our Coatings businesses, but you've seen some of the run-up in those costs here in the first quarter on the spot side.
So that could lead to some pressure, continuing pressure on the organic side as we go through the year. Right now, I don't know that it's going to get any worse than I told you in terms of our forecast in the second quarter.
But the second half, we'll have to see. You see oil prices coming down, but you do have some spot costs here on some of these building block chemicals moving up at least in this market.
Now Asia and China, a little different story. Some of these raw materials have come down, including TiO2 in China is lower now.
So I think we have -- you're going to have to look at the broad geographic picture here, and you're going to have some puts and takes. But certainly, Asia, with the growth rates a little lower than they have been and prices coming down, Europe with some of the weakness there, you're not seeing as much pressure.
So it just depends on the geographic area, but I think overall, the percentages that I gave you are probably in the range.
Operator
Your next question comes from the line of P.J. Juvekar with Citi.
P.J. Juvekar - Citigroup Inc, Research Division
Now housing starts were pulled forward in 1Q. So 6 months later when that house is ready, you're going to need to paint again, right?
So if that's the case, what are your expectations for spring and summer selling season for this year? And last year, Chuck, you've gained some share with your Olympic ONE paint.
I mean, do you expect that momentum to continue this year?
Charles E. Bunch
Well, I would say what we're seeing, I think, we're all concerned that maybe how much did we pull-forward into the first quarter. I've described here in the U.S., anyway, that we're off to a decent start here in April.
And I'm optimistic that we're going to see some continuing strength here in the housing market in the -- and in the home improvement area as well. I think that's been a pretty consistent story for us.
As far as our share gains, we had good volume across all channels and combined with the pricing. We felt pretty good about all of the markets here in the U.S.
Commercial construction, at least, the new commercial construction, hasn't been as strong, and that's been impacting our flat glass business. But we feel pretty good through the balance of the year.
The new home construction is not the biggest part of the residential market, as you know. It's more tied to home improvement, anyway, both at the DIY and at the contractor level.
So we feel pretty good about that, and we're pleased with what we've been able to accomplish with the new product introductions. You mentioned Olympic ONE.
We had a very nice start for that product launch in 2011 in the middle of the year. That success appears to be carrying through here in 2012.
So we're quite pleased with that introduction and where we are generally in the market and in the channels.
P.J. Juvekar - Citigroup Inc, Research Division
Chuck, you've been vocal about potentially selling the remaining part of your Glass business. Now I was wondering if you have -- if you were to expect any actions in 2012.
Charles E. Bunch
Well, if you look at the first quarter results, they were, I think, for us disappointing in the Glass segment. We have -- I felt, at least, in the case of the flat glass business, here have been fairly patient with the recovery that we're looking for eventually in the broader construction markets here in the U.S.
and in the commercial construction market. So absent a really attractive offer that creates value, we're going to be patient and wait for what we think is good timing.
We don't need the cash right now, but we are open to listen to opportunities if there are really interested parties in the business -- in either of the businesses in our Glass segment.
Operator
Your next question comes from the line of Bob Koort with Goldman Sachs.
Robert Koort - Goldman Sachs Group Inc., Research Division
Chuck, I guess -- the Street normally has a pretty high regard for your ability to keep costs in check. I was a little surprised by the scale of your restructuring savings that you've lined out.
Can you give us a little more granularity on where those savings specifically come from? And then also the high component that's in the SigmaKalon Architectural business, I would have thought that was pretty scrubbed down.
So maybe a little bit more detail there as well?
Charles E. Bunch
Well, I would say, Bob, that as we've looked at all our businesses in Europe, especially with the weakening conditions -- if you were to go back in time a few years, we bought SigmaKalon at the beginning of 2008. And at that time, the markets were, I would say, relatively stronger at that time, and certainly stronger than what we were seeing in the U.S.
They didn't go into the recession as deeply. They didn't have some of the banking problems.
And so we felt that we were well-positioned. Yes, we did take some costs out in those restructuring announcements at the -- in the third quarter of '08 or the beginning of '09.
They weren't necessarily focused on SigmaKalon. Now with what we see overall in the market, I would say that that's -- there's an opportunity there in that business, in particular, to consolidate further in many of the functional areas to integrate further with the rest of our PPG businesses in Europe.
And with the outlook in the market being as weak as it is, we thought it was better to move forward now and do the restructuring that we can do now in -- I wouldn't say in advance of the downturn because we're experiencing that now, but try to get our cost position even better to withstand and hopefully improve on the earnings that you're seeing in this weak market. But if things do deteriorate further, which we're not seeing -- I mean, we're seeing weakness, but we're not seeing a free fall in the businesses there.
We felt that we would be better positioned going forward.
Robert Koort - Goldman Sachs Group Inc., Research Division
For my follow-up, Chuck, you -- I'm just curious from a board level how you guys think about the stock price and valuation. I mean, it seems like your margins in paint are superior to your paint rivals, yet your multiple's substantially lower.
And I recognize there's a commodity chemical element in there, but frankly, your multiples' not much higher than some of those commodity chemical guys. So do you think about this?
Do you worry about this at all? And if you do, what's the path to rectifying the problem?
Charles E. Bunch
Well, I've talked about this over the years, and I think that was one of the goals as we focused the portfolio more over the last 4 or 5 years to make sure that we were getting recognized as a coatings and specialty company. And I think by and large, if you looked at the years after the SigmaKalon acquisition and the divestiture of half the Glass business that was at the -- in 2008, I thought that we made significant progress.
And we're being, I think, viewed more closely aligned, let's say, to coatings and specialty peers. That gap's opened up a little bit again.
We're aware of that. Is it the Commodity Chemicals?
I'm not sure because the business is performing quite well. We do have more European exposure than some of our peers.
So I would say that we're aware of it. We tried not to look at this thing on a short-term basis and react.
I try to let the analyst community, you and your peers, kind of try to educate and guide the market in terms of our company and what we're doing, and -- but we're not unaware, I would say. And I think if it persists, we have opportunities, whether it's share buybacks or further focusing on the portfolio, which we are prepared to do.
We've shown we will make acquisitions. We will pursue organic growth in Coatings and specialties, and we are willing to make divestitures when we feel that we have a good opportunity to create shareholder value.
But I note -- duly noted, I'm not going to go on a value rant, Bob, but we're aware of the opportunity for us and maybe it's that we have to do a better job here for making sure people understand our company and what we're doing. And I think our performance has been very strong, and we're going to just try to keep delivering and hopefully, that will be recognized.
Operator
Your next question comes from the line of Ivan Marcuse with KeyBanc.
Ivan M. Marcuse - KeyBanc Capital Markets Inc., Research Division
When you look at your architectural business and you compare your DIY to the stores -- to your stores, was either one of those groups stronger than the other? Significantly, that gives you some sort of optimism towards housing or just the construction markets in general?
Or was it just -- were they equal, I guess, in their year-over-year growth?
Charles E. Bunch
I would say we had, as I mentioned earlier, we had good growth, both overall sales growth and volume growth in all 3 of the channels. That's the DIY, the -- our store network and our independent dealer channel.
I would say DIY may have been slightly stronger. But it's hard for us to say this early in the season if that -- what was happening out the door versus some elements of de-stocking and the like.
But I would say that foot traffic on all the stores and including the ones that I visit both on our own or our local Lowe's stores, foot traffic's been up consistently, and so we're encouraged that it's broader-based.
Ivan M. Marcuse - KeyBanc Capital Markets Inc., Research Division
Great, and then on the acquisition front, I saw that your -- I mean, you know that your cash position is about as high as it's ever been in the first quarter and your share buybacks were lower at least on a year-over-year basis. So does this imply that you have some acquisitions that you expect to complete over the next 6 to 9 months?
And if not, would you see a pretty substantial acceleration in your buyback?
Charles E. Bunch
Well, at this point, we are -- we're continuing to look at acquisitions as we historically have. I really can't comment if anything is imminent, but we continue to work the pipeline that we have.
We've tried to remain a disciplined buyer and find the right valuations. And I would say obviously, as I have in the past, if we can't find those acquisitions with the cash that we have on the balance sheet, we would accelerate share buybacks through the course of the year.
If you look last year, we were around $900 million in terms of share buybacks. We were certainly well below that rate in the first quarter, and so we have some dry powder if, in fact, acquisitions don't materialize.
And our organic capital spending, we're not seeing anything out of the ordinary here. So I think we're prudently funding the businesses.
Our biggest projects, which were 2 that we did in China last year, the Zhangjiagang resin plant plus the Tianjin automotive coatings and industrial coatings plant in China. Those were our biggest projects last year.
They're -- the resin plant up and running, successful. So we think that it's -- we're going to have what I would call a modest organic capital spending profile this year.
So we will have some flexibility if we can't find the acquisitions.
Operator
Your next question comes from the line of Duffy Fischer with Barclays.
Duffy Fischer - Barclays Capital, Research Division
In Performance Coatings, 2 of the SBUs there, one auto refinish and the other marine. Marine, just because of what's happening in the boat business itself, was down.
Can you kind of comment? Do you think we're at the trough as far as your inputs go into Marine with where shipbuilding is?
And then in auto refinish, when your competitors was talking about auto refinish being a little bit weaker, are you seeing that as well? And are you seeing kind of any degradation, I guess, in the quality of that very good business?
Charles E. Bunch
Well, if you looked at the components of -- or the SBU components of the Performance Coatings, I would say for us, the biggest SBU in there, automotive refinish, had a good -- it had a solid first quarter. It wasn't a shoot-the-lights-out quarter.
We had pretty good growth here in North America, actually, in Asia-Pacific also quite well. Europe, on the auto refinish side, was a little weaker.
But overall, it was -- there was volume growth, and it was a fairly solid quarter, I would say. And on the protective and Marine side, Marine has been one of the businesses we've talked a lot about, especially the Chinese OEM marine building.
The first quarter actually wasn't quite as weak as it had been here in the second half. Korea was a little better.
The protective side for us here in North America and actually in Europe kind of took up some of the slack. So I would say the protective and marine market was okay.
But the real strength in our Performance Coatings, Aerospace had a really excellent quarter, and they are doing very well across all their product lines. And with our inroads into -- with some of these new products in the commercial aviation and the strength of some of our customers like Boeing and Airbus, those guys are doing really well, and doing really well in terms of an operational excellence strategy.
So we're really pleased with that business. And also the architectural business in North America is in that Performance Coatings segment.
And as we've been describing, they had a very solid first quarter. So it's kind of -- it was kind of mixed, but I would say, overall, there weren't any really weak stories, but some certainly a little stronger than others.
Duffy Fischer - Barclays Capital, Research Division
Right. And then if you just think about kind of the seasonal or normal seasonal progression, January to February to March to April and you look across all your businesses and geographies, are there any that weren't following kind of the normal progression of getting better as each month gets towards summer?
Charles E. Bunch
Well, are you talking about architectural or more broadly?
Duffy Fischer - Barclays Capital, Research Division
No, across the whole business. So across all your businesses, all your geographies, is there just anywhere that's not following kind of the seasonal pattern of improving as we go along into the summer?
Charles E. Bunch
Well, let's just talk about the regions. I think you've heard from my comments, we're optimistic on the North American market and the U.S.
across all of the end-use markets. We're not seeing anything here in the U.S.
that's particularly weak. Yes, some are stronger, like Aerospace or Automotive OEM, but Architectural's been good, and a lot of the other industrial activity is also good here.
In Europe, there's a couple of markets that are a little better. Aerospace there is quite good.
The packaging business has been good, but Europe is weaker in auto OEM, slightly weaker in auto refinish. And our volumes were down slightly in European architectural.
They were offset with productivity and some pricing action. So overall, you saw our architectural earnings grow, and the margins were up slightly in kind of an off -- in this first quarter, which is the off season.
So Europe was weaker with a couple of segments that weren't quite as bad. In China, a slightly different story.
And usually, what we've seen, Duffy, is you come out of January and February, depending on where Chinese New Year falls, then you really see -- you things roar back in after Chinese New Year and in -- certainly in March. In China today, I would say the construction markets are weaker than they've been, so we didn't see that pick up.
We thought that consumer electronics, which affects our -- both our fiberglass and our Industrial Coatings segment, those were weaker through the first quarter even given that Chinese New Year effect. Now there's some other segments that we think are okay, Packaging.
Automotive refinish was a good business in China, and now we have a little more optimism on China here in the second quarter. We don't think that -- we think that the -- the Automotive OEM market is going to be a little better.
We're not looking for a pick-up on the construction side. But we're starting to see some improvement also in consumer electronics.
So it's a little out of the seasonal patterns over there. But we do have a leadership change in China later this year.
Usually, the government has an impact on economic activity over there, whether it's trying to provide incentives around the infrastructure building or incentives for buying more fuel-efficient cars and the like. And we think we'll see some of that as we go through the year.
They're trying to manage this inflationary pressure that they're feeling. You saw some of the movements on the currency as well.
So I think China, we're going to continue to watch, but we didn't see anything that was really alarming in the first quarter. Out of season, yes.
Second quarter, actually, we're thinking things are going to be a little better, although, the growth rates aren't as high as they have been in the last few years.
Operator
Your next question comes from the line of David Begleiter with Deutsche Bank.
David L. Begleiter - Deutsche Bank AG, Research Division
Chuck, a couple of things. First, on European architectural, do you expect volumes to be down year-over-year in Q2 and Q3?
Or should it be more flattish?
Charles E. Bunch
I think the overall market will be down slightly. If you look at -- and then it's going to just depend on the country or the market.
But right now, I would say there's probably more countries that are weaker than stronger. So you still have the problems in the Mediterranean countries, where we don't have a lot of participation.
Eastern Europe, with the exception of Poland, has been weak. You see markets like France and Germany and the Benelux, which have held up relatively well, I would say, over the first quarter.
And we're not seeing anything that's dramatically different as we go into the second quarter.
David L. Begleiter - Deutsche Bank AG, Research Division
And just on your European restructuring for Coatings, are you walking away from any lower margin business in that process?
Charles E. Bunch
Lower margin business in any of our Coatings businesses or...
David L. Begleiter - Deutsche Bank AG, Research Division
Well, it's tied to the restructuring announcement.
Charles E. Bunch
No, we're not closing. There are no plant closings in Coatings in Europe with this restructuring.
And so at this point, we are using this as productivity improvements. We're not trying to shed unprofitable business.
If you remember last year, we did lose one customer; not to something that we did, but they -- this was in the U.K. where we had a large customer declare bankruptcy in the second quarter.
So that volume went away, and we had a charge in the second quarter of last year, which we don't expect to repeat here in 2012.
David L. Begleiter - Deutsche Bank AG, Research Division
And just lastly, Chuck, on this Argex collaboration, can you -- what percent of your U.S. TiO2 needs will it satisfy?
And can you just frame a potential savings versus current market prices you might realize?
Charles E. Bunch
David, it's really too early in our collaboration. And they're in the early stages.
They have ore -- access to ore supplies. They have the beginnings of a process, but I would say we're some time away from having a good assessment on what the volumes or what our relationship is going to be.
You're probably, at this point, better asking those questions at the Argex team rather than us at this point.
David L. Begleiter - Deutsche Bank AG, Research Division
And lastly, do you expect any impact on auto builds from this Nylon 12 disruption?
Charles E. Bunch
This is an emerging issue for us. We're just starting to talk about it this week with some of the publicity and with some of the things that the auto companies are doing.
We had this experience last year around with the Japanese earthquake and tsunami. So it's -- and this is a -- it's not part of our supply chain.
So we're not fully aware of all the impacts that this is going to have. I'm a little -- I think I'm learning about it as many of you are and I'm concerned.
But at this point, we have no information on what the impact would be and we're following events closely.
Operator
Your next question comes from the line of Saul Ludwig with North Coast Research.
Saul Ludwig - Northcoast Research
In the Coatings businesses, what was the net price versus raw material less spread in the first quarter? Did you get 100%?
Where were you? And if you were short, how many dollars short were you?
And then how do you see the price ROS ratio looking ahead?
Vincent J. Morales
Saul, this is Vince. For the first quarter, we were very close to parity.
Price ROS, I'd tell you, we still absorbed a tremendous amount of inflation last year. And although we were parity for the company, some of our businesses still have some room in order to get pricing to match raw inflation.
As we look ahead, as Chuck mentioned, we expect moderate inflation. We are getting select pricing in a few of our businesses in Q2.
So I expect we'll again be close to parity, and in some businesses, offsetting some of that absorbed inflation from last year.
Saul Ludwig - Northcoast Research
And so just to clarify what you said earlier about ROS, you think for the full year, ROS are going to be up by 3% to 5%?
Vincent J. Morales
That was our first half, and it's probably little too early to predict the second half at this point.
Saul Ludwig - Northcoast Research
And then finally, on the cost savings that you're going to be achieving in Europe, will we see the lion's share of that flow into the EMEA segment?
Vincent J. Morales
Saul, in the presentation we had on our website today, it had a detail by segment for the second half of 2012, as well as all of 2013. So we broke our projected savings down by segment for you and your peers.
Operator
Your next question comes from the line of Dmitry Silversteyn with Longbow Research.
Dmitry Silversteyn - Longbow Research LLC
Couple of questions; a lot of them have been answered. But on the Optical business and -- the Optical and Specialty, I should say, business, the strong margin you've delivered, I mean, it's been a strong margin business all along.
But I think this is the first time you've seen north of 30% margin there. Was it largely a sort of a clawback from the fourth quarter on the Optical side?
Or did you see better demand from automotive and better pricing in volumes on the silicate side? Can you take us through sort of what drove that business performance in the first quarter?
And also what -- how should we be thinking about margins in that business, is 30% plus sustainable?
Charles E. Bunch
Well, we would say if you looked within the segment, the Optical business was stronger than precipitated silica business and the Teslin business. Precipitated silica and Teslin had very good quarters.
But I would say that if you looked at the improvement, it was driven more by the recovery in the improvement in Optical. And those margins, I would say, have been fairly consistent over the last few years.
We had a couple of quarters last year where they weren't quite as strong in Optical, but they were picked up by Silica. So I think in general, we're going to see margins around what we've talked about here.
Going forward, I think I described that the second quarter looks solid for both segments. And so I would say we're looking to sustain margins around that 30% level over time, which -- and I think we've been fairly consistent these last few years.
Dmitry Silversteyn - Longbow Research LLC
Okay, very good. To follow-up on the comment that you made on packaging Coatings business, I thought -- if I remember correctly, you said that it was a pretty strong business in the quarter.
Can you update us on what's going on with Bisphenol-A-free coatings? I know there's been some rulings or postponement of rulings in the U.S.
Is there a customer pull developing for this technology? Or customers are still holding off until they get the official ruling from the regulatory bodies?
Charles E. Bunch
I think what we're seeing -- we've been actively developing these products for a number of years. In fact, this is a trend that we've been preparing for, for some time.
The regulatory environment is, I think, still favorable for changes, but I think what we're seeing now is more of a pull from the consumers. And the consumer packaged goods companies are more aware of this.
I think they view it as an opportunity to engage with their consumers and drive value and positioning in the market. So some of the -- what I would say some of the inertia in supply chain or the value chain over the years has now, I think, changed.
And you see the end users -- or in packaging parlance, the fillers -- actively engaged in the qualification and -- of these new BPA-free or BPA non-intend products. And I think it'll be an opportunity for all of the packaging coatings companies to provide solutions, create additional value that will have benefits for the consumer.
So I think right now, this is actually a more favorable environment than over the years when we've been developing the products, but really didn't know when or where they were going to be introduced or qualified.
Dmitry Silversteyn - Longbow Research LLC
Do you expect any sales this year from this product or not?
Charles E. Bunch
Oh, yes, we have sales right now. In fact, we had sales last year of these initial sales.
Obviously, still modest, but we see that picking up. So this is -- these are not just future potentials.
We're seeing it right now. And, in fact, many of the exporters in Asia or some of the food producers that bring food into the developed markets as well or -- whether it's in tuna fish or whatever, they're also actively working on programs here.
So it is, I would say, it's more broad-based and yes, the sales are there right now.
Operator
Your next question comes from the line of Gregg Goodnight with UBS.
Gregg A. Goodnight - UBS Investment Bank, Research Division
The -- you mentioned titanium dioxide price increases have slowed down. Presumably, you meant the implementation of the increases, because the announcements sure have not slowed down.
Could you comment on the -- how you see the trajectory of that market? I mean, we're hearing that January, February's a bit slow.
March has picked up. I mean, Coating volumes are certainly up.
Is -- are prices for TiO2 going to reaccelerate?
Charles E. Bunch
Well, that's hard for me to comment on, I think, fully. You'd -- I think the better source is the TiO2 producers.
I think earlier in the Q&A, I commented that, obviously, the market here in North America is stronger, including the architectural market. But Europe, as I've been talking about, is actually a bigger TiO2 market and that's been weaker, and the volumes have been lower.
And also in Asia and particularly in China, where the volumes are lower we have the Chinese -- albeit sulfate producers for TiO2, quite active. So I would say the pricing dynamics for TiO2 are -- appear to be different depending on the region of the world, and there have been a lot of announcements.
We have said that there are probably some increases that we will have to accept in certain regions from certain suppliers. But we are actively in discussions now to try and minimize the impact to our company of what's going on in the TiO2 market.
Gregg A. Goodnight - UBS Investment Bank, Research Division
Okay. You mentioned your cash balance and your interest in deploying your cash in accretive efforts.
I would assume you consider share buybacks sufficiently accretive at these prices that you would support that. Could you comment on the level of share buyback you're looking at this year?
I mean, last year, $1 billion was effectively 100% of your free cash flow. Is it going to be to those sort of levels?
Or do you see substantially lower share buyback this year?
David B. Navikas
Gregg, this is Dave Navikas. At the latter part of last year, in December, we had indicated an expectation of cash deployment for share buyback in 2012 in the range of $250 million to $500 million, and that was putting some focus on the acquisitions that we're hoping will develop.
And we also indicated that we would see that may be more back-end loaded in 2012 than in the first part of the year. So we're still evaluating acquisition possibilities.
And I would still say that, that $250 million to $500 million kind of figure is a good one relative to our expected share buyback activity.
Gregg A. Goodnight - UBS Investment Bank, Research Division
Okay, great. That shapes it.
Could you comment just generally on the environment for M&A? Are the evaluations reasonable?
Are there sufficient targets out there that seem interesting enough to pursue?
Charles E. Bunch
Well, I would characterize it as there are -- if you look at the 2 acquisitions that we made in Coatings that we closed on in January, one in Europe and a smaller company in South America, now, I would say those are more typical of the opportunities that we see right now. I think there is still more consolidation to take place in Europe.
So I think there's potentially more opportunities. But again, as we've been talking about on the call, growth rates are not as good.
It's a very weak economic environment over there. So if you do make acquisitions in Europe, you're going to have to extract synergies and the like to justify the acquisition.
So again, opportunities over there, but I think you have to be selective because the overall economic environment is so weak. In Asia, I think that things are changing a little bit.
Growth rates are coming down overall for the economy and some of these end-use markets, but I'm not sure yet that the kind of the expectations of the companies that could be for sale have changed in view of the lower growth assumption. So I think there may be some give-and-take here if we're going to see completed acquisitions in Asia that we're all going to have to come together on what we think the expected future growth rates are going to be and what that's going to do in earnings.
We haven't seen as much activity here in North America. There's not as many available properties, so it's difficult for to me to say.
But I'd say Europe because it's weak and Asia because it has been strong, and the people may be a little -- still trying to get some of those values, are going to be where you see more activity.
Operator
Your next question comes from the line of Laurence Alexander with Jefferies.
Robert Walker - Jefferies & Company, Inc., Research Division
This is Rob Walker, on for Laurence. I guess, first -- most of my questions have been answered.
But just a quick question on what's your expectations for the tax rate going forward?
David B. Navikas
Tax rate is held at 25% in the first quarter as we look out for the year. And I would say that, that continues to be a good value to use as you think about the remainder of 2012.
Robert Walker - Jefferies & Company, Inc., Research Division
And then just on your raw material expectation, I think you said 3% to 5% for the first half of the year year-over-year including TiO2. I mean, with TiO2 prices coming up pretty dramatically, depending on what you guys are seeing, it's somewhere in the range of 20%, 30% or so, I'd imagine -- and with a large portion of your ROS coming from TiO2.
I guess what portion of -- what are you seeing falling year-over-year to get to that 3% to 5%?
Vincent J. Morales
Rob, just a quick -- because our architectural business is about 30% of our total Coatings business, architectural is where majority of our TiO2 is consumed. So a smaller profile there helps us relative to some of the peers.
We've seen some of the organics come down year-over-year. Inflation, as Chuck mentioned earlier, has been spotty in those organics with oil.
That would be the biggest decline.
Operator
Your next question comes from the line of Nils Wallin with CLSA.
Nils-Bertil Wallin - Credit Agricole Securities (USA) Inc., Research Division
I had a question. On Protective and Marine, was that a drag on earnings or was it flat?
Vincent J. Morales
It was a 0. As Chuck mentioned, our activity was a little better than we expected in the quarter.
So it wasn't a drag or it wasn't a benefit either.
Nils-Bertil Wallin - Credit Agricole Securities (USA) Inc., Research Division
Okay. So from what I take from the comments, it sounds like Protective offset Marine a little bit.
And when you think of Protective, it seems like a kind of a lumpy business. So do you expect that ability to offset Marine to continue?
Or is it -- or maybe I'm wrong, maybe it's not lumpy.
Charles E. Bunch
Well, the way we look at the global market, it's about half Protective, which is big infrastructure projects or maintenance spending and manufacturing locations, and about half Marine. But that half of Marine is split between the OEM or new builds and the aftermarket.
And I would say that the longer-term trends on the Protective side, I wouldn't describe as lumpy. Typically, the most cyclicality that you would get on these segments would be the Marine new build segment, and this is the one that we probably highlighted more over the last 1.5 years because we have -- we were working off a very big backlog.
And then after the big recession and some of the declines in global trade and what was happening in the shipping industry, you saw them working through that backlog, and that will -- that's still coming down. And we've seen some of that -- some of those freight, the freighters or -- being replaced by, let's call it, the drillships and things that are more tied to oil and gas exploration and the like.
So I would say that protective should have an opportunity if there's a global upturn in infrastructure spending. And certainly, some of the governments like China are spending a lot as is Brazil, as is the recovery here, this whole manufacturing and industrial recovery in the U.S.
So all these, I think, are positive signs on the Protective side. And that's going to be a positive and stable growth as opposed to what we still see as some continuing weakness on the Marine new build.
Nils-Bertil Wallin - Credit Agricole Securities (USA) Inc., Research Division
Okay. That's helpful.
In your Architectural Coatings in Europe now, you don't have much exposure to Spain and Portugal, which I'm sure you're probably glad about. But I'm just curious if -- and clearly you -- Chuck, you spoke of earlier that you had to have very compelling reasons to look at a property there.
But I'm wondering if things have turned there yet to make distressed properties or any properties get so distressed that they are compelling.
Charles E. Bunch
Well, I guess -- I think we're starting to see prices come down in Europe for some of the properties. But again, it's -- you have to make some assumptions about when you're going to see an upturn.
Even our Dyrup acquisition, which we think will be a positive one, our expectations for top line growth are limited in that business, and we are trying to develop good plans for synergies and integration with the rest of the business. So we're -- there's a lot of maybe, and could be especially in these Mediterranean markets, distressed properties.
And yes, I think we talked earlier on the call about even though -- we think we've demonstrated that our European business is, even in this weaker economic environment, is fine. I mean, we have our earnings growth in our EMEA architectural business, albeit modest, but -- so we think we're going to be fine.
But I think some people have been waiting to see how we will perform with the European business that we have. So we're not afraid of Europe.
We'll make additional acquisitions if we think any fit. But right now, we are also focused on executing and getting our cost lower.
So we'll be fine, regardless of whether things continue weaker or yes, we see an eventual upturn.
Operator
Your next question will come from the line of Gaji Balakaneshan with Buckingham Research Group.
Gaji Balakaneshan - The Buckingham Research Group Incorporated
First off, I was just wondering if your thinking has changed at all regarding the chemical business. So is that something that you would consider possibly monetizing or either expanding?
Vincent J. Morales
I think, Gaji, we've said all along that our core business is our Coating and Optical. That hasn't changed in certainly the 7 years Chuck's been CEO, and that's been our strategy: to grow in Coating and Optical.
Gaji Balakaneshan - The Buckingham Research Group Incorporated
Okay. And then secondly, kind of an open-ending question, but from the prepared remarks, it sounds like the emerging regions were a little bit uneven in Performance and Industrial Coatings?
Can you just elaborate on what you're seeing there?
Charles E. Bunch
Well, I think we've seen some variability in the numbers of the markets. We've talked -- I think we talked about some of the end-use markets in China, and some were pretty good.
Others, we saw some more weakness. So I think I commented that Poland was pretty good in Eastern Europe, but some of the other Eastern European countries were weaker.
South Africa, not a really big market for us, but we do we have a decent-sized business there. That's been weaker.
So it is, I guess, spotty in terms of how the -- these emerging markets or even what you describe as emerging markets. And arguably one of the situations we're watching, although, we don't again have a huge exposure, is Argentina where there's a lot of interaction now going on at the government level with economic policy, and it's one where we do have some concerns as an example.
So these would be 4 or 5 examples of yes, things are in general good, but we can find markets, either countries or end-use markets, that have some stress in them or not as consistent growth as we've seen in the past.
Operator
Ladies and gentlemen, at this time, the Q&A session has ended. And I would like to turn the call back to Mr.
Vince Morales for closing remarks.
Vincent J. Morales
Thank you. I'd like to thank everybody for their time today.
If you have any further questions, please feel free to contact our Investor Relations group. I appreciate your interest in PPG.
Thank you.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation.
You may now disconnect. Have a wonderful day.