Q3 2019 Earnings Call
Good afternoon, and welcome to the PPG Industries third quarter 2019 earnings Conference call. My name is scary and I will be your conference specialist today.
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I'd now like to turn the conference over to John Bruno Director Investor Relations. Please go ahead.
Thank you carry a good afternoon, everyone. Once again this is John Bruno we appreciate your continued interesting TPG and welcome you to our third quarter 2019 financial results Conference call.
Joining me on the copper PPG, our Michael Mcgarry, Chairman and Chief Executive Officer, and Vince Morales, Senior Vice President and Chief Financial Officer.
Comments relate to the financial information released on Thursday October 17th 2019.
I must remind everyone that we have posted detailed commentary on a company presentation slides on the Investor Center of our website PPG Dot com.
Slides are also available on the web cast like for this call and provide additional support for the up to the topic I'm sorry, the opening comments Michael will make shortly following Michaels perspective on the company's results for the quarter, we will move to acuity session. Both the prepared commentary and discussion. We're in this call may contain forward looking statements reflect.
In the company's card view of future events and their potential effect pump PPG is operating and financial performance. These statements involve uncertainties and risks, which may cause actual results could differ the company is under no obligation to provide subsequent updates to these forward looking statements. This presentation also contain certain non-GAAP financial measures.
The company has provided in the appendix other 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 it pbds filings with the FCC now, let me introduce PPG chairman and CEO Michael.
Back here.
Thank you John and good afternoon, everyone.
We appreciate you joining <unk> third quarter earnings call.
Today, we reported third quarter 2019 financial results.
For the quarter or net sales were about $3.8 billion and our adjusted earnings per diluted share from continuing operations were $1.67 cents.
Earnings were a record for any third quarter.
Consistent with our improvement targets, we delivered strong year over year adjusted earnings for growth.
Our share growth up 15%.
Our earnings growth was driven by continued selling price realization and strong cost management.
This quarter, we accelerate our momentum and margin recovery with segment margins up about 220 basis points versus last year.
As we stay in the past our overall objective is to return to the aggregated segment margins.
We maintain prior to this recent inflationary cycle and we believe this objective it's favorable and 2020.
Now let me provide some additional color on our third quarter results. Our net sales in constant currency were higher than the prior year by about 2%.
Yeah, what volumes were down nearly 3% and were notably impacted by weak global industrial production that continue to affect global automotive production.
And most of our general industrial end use markets.
This weakness was also a broad based geographically.
Aggregate selling prices were 2.6% higher.
Marking the 10th consecutive quarter of improved selling year over year, selling prices and our sixth consecutive quarter with selling price increases of at least 2%.
We continue to work with our customers to ensure that we are receiving fair value for our products and services and expect price gains of about 2% in the fourth quarter. Despite a more difficult pricing comparison and the prior year fourth quarter.
Finally, our net sales were affected by significant unfavorable currency translation of about 2% or nearly $80 million.
We expect unfavorable currency translation to continue at a similar rate in the fourth quarter.
Moving to some business trends in the third quarter.
And our performance coatings reporting segment.
Aerospace coatings continued to deliver very strong volume growth.
Outpacing industry performance and most major regions.
And automotive refinish sales were higher as strong selling price game and acquisition sales from Sam.
Page slower sales volumes, reflecting lower demand in most regions as many of our customers focused on inventory manager.
Year over year organic sales were again higher in architectural coating any a business driven by higher selling prices.
Aggregate sales volumes were slightly lower as we saw a mixed demand trends by country during the quarter.
In Mexico, our PPG Comex business increased organic sales, adding aided by higher selling prices.
Sales volumes remain soft at the consumer demand reflected the overall lower economic activity and Mexico's economy.
The PPG Comex business continued its growth by adding nearly 100 concessionaire stores through September of 2019.
Organic sales volumes and architectural coatings, Americas, and Asia Pacific modestly increased during the quarter as sales volume growth and the D. I like an independent dealer channels.
Offset lower sales volumes at our company owned stores, including a difficult comparison periods last year, where we delivered strong high single digit percentage growth.
Led by strong growth in the Asia region, our protective and marine coatings business continued to deliver above industry sales volume growth a mid single digit percentage during the quarter.
We expect sales remain at elevated levels in the fourth quarter.
Albeit with lower year over year growth due to the significant growth we've experienced in the past year.
In our industrial coatings reporting segment.
Sales volumes continue to be adversely impacted by weak industrial demand and most major regions of the world.
Global automotive OEM industry builds declined including the impact of unexpected or unintended.
And extended customer shutdowns in multiple regions during the quarter.
In aggregate PPG automotive sales volumes were lower by mid to high single digit percentage consistent with the reduction of global builds.
As a partial sales offset our automotive OEM business realize higher selling prices in each major region for the third consecutive quarter.
We global industrial production activity impact that most of our general industrial coatings business sub segments, including would.
General finishes and transportation end markets.
Also our packaging coatings sales volumes decreased modestly as solid beverage can demand was offset by weakness and other packaging end market segments.
We expect this business or return to growth in 2020.
From an earnings perspective, as I mentioned earlier, our third quarter adjusted earnings per diluted share was $1.67 cents. Our earnings were negatively impacted by about $10 million, an unfavorable foreign currency translation or about four cents per share.
Our effective tax rate was about 23% in a third quarter.
Which is higher than the approximately 21% rate and a third quarter 2018.
The increase relates a realizing lower nonrecurring favorable discrete tax items and the third quarter 2019.
We anticipate a tax rate of about 24% for the full year 2019.
Our EPS results were supported by increasing.
Our selling prices improve manufacturing performance excellent progress on our cost savings programs, which delivered about $20 million and cost savings during the quarter and remain inline with our objectives.
In addition, as we targeted we benefited from achieving comparable margins and are you asking Canadian architectural business to the third quarter 2017, before our customer assortment changes.
Before acquisitions that we have made in the past year also contributed positively to earnings although.
Overall lower than company average margins.
As we look ahead, we expect global economic activity to remain weak in the fourth quarter.
We expect global general industrial demand to remain unfavorable year over year.
And roughly comparable to what we experienced in the third quarter.
Year over year sales comparisons will ease in the automotive OEM business, but we still forecast aggregate global automotive bills the decline in the fourth quarter compared to prior year.
Positive developments around regional and country trade disputes could provide a spark to industrial demand as inventory levels and many of our end use markets remain low.
Thanks to our businesses, we believe that lower U.S. interest rate.
Could add growth in the us housing market and also favourably impact automotive OEM and U.S. architectural sales.
We continue to impact to our sales related to customer shutdowns and the automotive OEM business in the U.S.
In Latin America, we anticipate economic activity be similar to that experience on a third quarter and we'll continue to add new PPG comex concessionaire locations to expand our customer reach.
In Asia demand rates are expected to remain consistent in comparison to third quarter.
In the fourth quarter sales comparisons to last year will be easier given the weakness in Asian demand that occurred late last year.
Spec demand growth will return in China next year.
Economic demand in Europe is expected to remain soft as industrial production is forecast to remain at low levels.
Automotive OEM business comps are also easing year over year, and we should experienced a lower sales volume decrement in the fourth quarter.
We expect our architectural business to continue to grow driven by higher selling prices and strong cost management.
Brexit remains and an overhang and is beginning to modestly impact our business trends.
We continue to closely monitor the situation and prepare contingency plans to the best.
Of our ability to prepare for unknown impacts.
As we said last quarter, we continue to work with our supplier base to ensure that our input costs are reflective of current industry demand conditions.
Including the ongoing uncertainty and weak global industrial production.
We will continue to focus on reducing our cost structure.
And we target to reduce $20 million at cost in the fourth quarter relate to our cost savings program.
Including the newest program, we announced in the second quarter, which will have a full year run rate savings of about $125 million upon completion of the program.
Earlier today, we provide EPS guidance specific to the full year 2019.
The guidance at $6 in 17 cents to 6027 cents.
This includes an unfavorable impact from foreign currency translation of 18 cents to 20 cents per share.
This puts us at the low to mid range of our original full year 2019, adjusted earnings per share growth of 7% to 10%.
Excluding currency translation impacts.
While we would like to be closer to the upper end of the range. Our earnings performance has been very solid when considering the severity of the downturn and the global industrial activity.
We have generated strong cash flow through the first nine months of 2019.
With cash generation of nearly $1.3 billion.
This is an increase of about $600 million when compared to the same period last year and has been driven by strong working capital management.
Our focus on cash flow generation will continue and our goal remains to reduce working capital as a percent of sales compared to 2018 levels.
We completed the deck, Matt acquisition early in the third quarter.
Continued to be pleased with the early performance of all four recently completed acquisitions, including MRAP, Sam and whispered, which collectively will add about $400 million an annualized revenue.
Acquisition remain one of our preferred cash deployment options given the value that these have created for our shareholders over the year and currently our pipeline continues to remain solid.
In addition acquisitions, we progress our key capital expenditures during the third quarter and we still expect total spending to be up 3% of sales in 2019.
And a third quarter, we increased our dividend to 51 cents per share are roughly a 6% increase we have paid uninterrupted annual dividends as 18 99.
We're pleased to continue to prioritize our dividend increases.
We ended the third quarter with more than $1.5 billion, the cash and short term investments, which continues to provide us with significant financial flexibility.
Finally, I'd like to recognize and thank our employees around the world for their continued commitment to serve our customers.
Every day, our dedicated employees, our focus on driving the PPG way and delivering value to all our stakeholders and shareholders.
This concludes our prepared remarks once again, we appreciate your interest in PPG and now carry would you. Please open the line for questions.
Sure. We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to at this time, we'll pause momentarily to assemble our roster.
The first question will come from Ghansham Panjabi with Robert W. Baird.
Hey, guys good afternoon.
I guess.
Hi, I guess first off you know you've obviously given it's a really good detailing how to think about volumes for the fourth quarter.
You know I understand it certainly but what is your initial view as it relates to the volume outlook for 2020 at this point as it relates to your major end markets and on your margin recovery comment by 2020, Michael are you referring to the run rate at the end of your margins of an absolute basis. Thanks.
Yes.
I do expect margins to continue to improve as you can see our margins in.
Our performance coatings segment or essentially back to peak.
And we think theres still more upside there. So we're going to continue to to work hard on that.
We also have made as you saw significant more than 200 basis point improvement and.
The industrial segment and we still have more runway to go there as we said we had.
Positive price coming in the fourth quarter and I would expect that we would continue to.
Push price as we move forward as we still have up.
An environment, where we have inflation in thinking about salaries warehouses.
Freight and distribution things like that so.
And then kind of on your question with respect to 2020.
Yes, I don't know Laurel and answer to answer that question, but what we can say, commonly as a lot of our customers are carrying very low inventory levels.
Typically they achieve their inventory levels at the end of the year not by the end of Q3 as they've done this year. So heading into 2020, we do think there could be some inventory upside at Sterling and makes calling the economy and the other geopolitical issues, but a couple of arc industries, We know auto we feel a little bit better about auto next year, specifically in Asia the big.
This market.
And a couple other markets and general industrial were down this year.
We are hopeful we'll have at least a modest rebound next year not counting the inventory rebuild.
Okay, and just as a follow up to that Vince for industrial segments, specifically, how should we think about operating leverage for that segment at volumes start to recover I mean, obviously adjusting the cost footprint and I assume some the cost will reverse as demand picks up but just wanted to get your sense as to a operating leverage joined the initial phase of improvement. Thanks.
Gotten Sam this is Michael.
It's going to be.
Strong positive force when you think about this past quarter in our earnings in that industrial segment were up despite volumes being down and we anticipate to continue to drive costs out and so you should expect to see nice operating leverage.
Good volumes come back and right now we're certainly playing on.
Our outlook for 2020 would include some modest recovery.
Thanks, so much thank you.
The next question will come from Christopher Parkinson with credit Suisse.
Great. Thank you.
Regarding your volume outlook can you currently walk us through the key end market verticals for which you believe PPG is poised to benefit from let's say secular themes regulatory changes under new products, new non BPA and the move towards aluminum cans will be one I guess a packaging.
Looks your products and EDI battery protective and auto just you know if there are fewer there's just generally based on what's inside of your control what are the key verticals for which we could expect you to outperform and why thank you.
So Chris are you covered automotive pretty well so I'll pass on that when we have on in the industrial.
Business as far the industrial segment that one I would point to like high edge powder as one of them.
And if you think about moving into <unk>.
Packaging itself.
Sustainability that can is number one so you could see the shift away from plastic that's going to be a long term secular win.
For Us a you know housing is continuing to.
You know, we've got low interest rates around the world. So I think a housing is continuing to be a nice little market for us.
Aerospace is clearly going to be a continued winner for us we're going to continue to outgrow the industry. There with an launches that we have had whether it's new transparencies, our new coatings.
And then.
Talk about you know we talked about in our press release Moonwalk for Refinish. This is a.
New technology that allows people in Europe to be able to mix refinished paints more precisely allows a technician spend more time painting the car as opposed to mixing paying drives higher productivity in the paint shop. So I think net net the you know we're in a pretty good shape long term.
Wise.
And just regards to your margin outlook can you simply outlined in order, which is variables will be the most material to achieving in surpassing prior peak margins just between price input cost deflation mix acquisition integrations and just broader bone improvement just any thoughts on how the street should be thinking about that.
As we head into 2020, thank you.
I'll start Michael Michael can certainly add to what I say, but the we're still sitting on a significant amount of inflation thats multiyear inflation, we have seen very little that unwind to this point.
We alluded in our call about the economy.
Weakness in industrial activity.
So we're still working to get priced offset this accumulated inflation, but there is a significant amount inflation we would.
Not expected to supply demand environment, where it is an arm.
Our supplier base.
We always to all self help we amounts to self help program in may.
We still have a variety of actions do against that program.
We're expecting significant savings from that program that will be primarily in next year and then the last one is we don't know the volume outlook. So the things within our control, we're managing but as Michael just mentioned in the prior question. If we do get any volume, especially in some of our.
Industrial businesses, we should have a significant amount leverage so those were those will be the way I prioritizing.
And Chris I, what the one thing I would add is that with.
Couple of the acquisitions, we made their below company average, they're fairly decent sized ones.
I'm excited because I I get a monthly report on the integration as well as the performance.
And so we're seeing month over month improvement in fact, when I looked at the MRF numbers for the.
Month of September it was a best month they've had ever.
And obviously, they're benefiting from some of our ability to integrate them, but I see even more positives coming they have relationships with customers.
That are slightly different customers and we have from a standpoint a mix.
And.
So we're able to take the best of both worlds there they are great relationships and our great technology and put the two together and we've already one substantial a number of new.
Program wins since we bought hemorrhage.
That's great color. Thank you.
Yeah.
The next question will come from Bob Court of Goldman Sachs.
Thanks, very much good afternoon.
Michael You you guys gave some commentary about your U.S. architectural business I guess it seems like going on a few years now there's puts and takes and maybe not complete uniform consistency by channel.
Can you talk a little bit about the DIY market. It sounds like maybe that's starting to percolate a little bit certainly we're seeing some of these housing stocks rally dramatically are there some signs that maybe we are going to get lift off in DIY and then in your store base I guess I would've thought maybe some of those contractors that we are hiding from the rainy weather in the June quarter would have come back out in the September .
Quarter. So is there anything idiosyncratic to your store base, either regionally or end market wise that would have preclude you from having a little bit better volume there.
Yes about let me first start with the DIY so.
We're gaining share in the DIY segment, our our customers.
Our doing pretty well and inside our customers we have continue to launch new products.
And that Thats been a real positive so think about the PPG timeless.
At home depot as well as the Olympics staying at home depot. Both those guys are growing above company average. So we're really pleased with that I think the one thing that doesn't really come through when you think about our company store average is if you remember some of the prior calls we we kind of talked about doing a little bit of everything.
In that segment. So some of its delivery some of its the stores and some of it is what we call our premier authorized dealer network or where we're trying to make it a simple for the customer to say I can pick up in a dealer location or I can pick up in a PPG store location and obviously.
We have let's call it a little bit less than 900 stores between us and Canada. Whether you include that plus nearly 5000 dealers that we have that gives our customers a lot more opportunities to pick up paint and so if you look at our dealers. If you notice in our commentary in our press release, we set dealers were Pos.
Additive and historically as you know this has been a long term.
Secular minus one kind of trend line as dealers age out move on but with this new strategy, we are picking up additional business through the dealers.
We added 50 new.
Dealer locations and the third quarter, we're up to about 140 locations.
In the third quarter, a total of 427, new locations, where they can pick up paint and we expect that to continue to accelerate as other dealers see this work, they're going to want to jump on that bandwagon as well so.
I think thats, a little bit nuance that maybe doesn't come out in the and the overall numbers.
Bob Bob.
Asking on the balance sheet, you've been accruing cash nicely through the year and have been doing any share repurchase that'd be a reflection of the acquisition activity or is there. Some other reason you wouldn't have put more of that capital.
Back to used to repurchase.
Yes.
As Michael pointed out on the opening remarks, we've had a very good cash generation year to date.
We've got about a billion five on the balance sheet, we do have some term debt coming due and in Q4. So some of that cash will be applied to the term debt coming due.
Upsides that we do have strong balance sheet and were up we're still looking out a variety of acquisitions acquisition pipeline.
It's still a rich.
We're not immune to doing share repo, we haven't done any to date basis, the acquisition pipeline, but if.
The acquisition pipeline.
Lessons or we think there's a need to do share repo for different reasons, we'll do so.
Got it thanks guys good.
The next question will come from Michael Sison of Wells Fargo.
Hey, guys nice quarter.
Question on the just quickly on the stores you said, you're a little bit less than 900 can you can you maybe walk us through what's your strategy is there going forward are you looking to continue to expand the stores or it's kind of this dealer network related but that's an area where you can have a combined growth for for your business, there, but just kind of curious where.
Do you think the store strategy and growth potential is going forward.
That's a Michael.
What I would tell you is it our strategy hasn't changed we're going to add stores, where it make sense in those markets that are growing so think the southeast in the southwest.
We're not going to be adding stores in the northeast or on the west.
For the upper Midwest those aren't focus area for us for stores, what they are a focus areas for us for this premier authorized dealer network, because we think there's plenty enough.
Between our stores in our dealers to adequately service our customers. So we're going to continue to do that and I compare and contrast that to Mexico, where we've added nearly 100 stores year to date and we're going to finish the year at nearly 200 new stores.
Same thing, where we've added stores in the UK, we've added stores in Australia. So we're going to take what we call. The micro market strategy, we're going to look at the each of the different markets and make the best decision for our shareholders in that regard.
Right and then just a quick follow up.
When you think about volume growth.
Whenever I mean, whether it comes next year or or sooner than later you know what do you think your leverage is gonna be meaning if you grow your your sales to 1%.
That lever to 2% EPS growth, 3% Dps growth and just kind of want to feel for the so the upside potential as.
We all hope that demand picks up at some point.
Yeah, Mike has been shot in the past Weve said pretty regularly that our leverage on a normal.
The increase in sales is somewhere in the mid 20% range and in Europe is higher because of the late into opportunity. We have there. So we said in Europe . It's in the mid 30% range I'd actually say that if you look at the cost we've taken out globally, you were inching up to 30% on average for the globe terms on leverage factor now Paul is going to.
Based on which business et cetera, but on average I think we're closer to 30% now than the 25% we were previously.
Great. Thank you. Thank you.
The next question will come from Frank Mitsch Permiam research.
Okay.
Oh, Okay, Hey, good morning, guys. Good afternoon guys.
Looking at the Refinished business following the second quarter. There was an expectation of the volumes would improve in the third quarter, given the easy year ago comp because of inventory.
Stock that occurred in.
And you know that Didnt come to the volumes were down in Threeq, you anyway, and you called out inventory management as well lower question claim activity.
Is there any reason for us to anticipate that we're going to see a a rebound in this business. Obviously you highlighted moonwalk, so maybe from a technology perspective, but just from an overall macro perspective.
With new safety features on the cards et cetera, how should we be thinking about automotive are finished in line.
Frank This is Michael I think this is still a great business I don't want anybody to walk away.
Think anything differently Cummings, you know certainly claims were down a 1.2%.
Little bit more in that in Europe , but we had a couple of.
Large customers CEO changes, who came in at take even a more aggressive approach on inventory from a we've continued to have net body shop wins.
In all regions of the World. So that is a positive when you look at.
Our integration as Sam.
You know as primarily a U.S. based business, we launch those products in Canada.
The first subset of products went to Australia and that September So we'll start to see some sales.
There.
We are doing better and sundries, but I think overall the one methods I want to leave you with our earnings in refinish will be up year over year at the end of year. So you know, we're able to price effectively in this business and this remains a great business for us.
All right very very helpful. Thank you for that and you.
Justin I just in general as I thought I look at the third quarter you hit the high end of the guidance that you put out following the second quarter, it's clear that the macros were mostly running against you.
During the quarter, particularly you know in European activity in autos et cetera. So I'm just curious what what what on the other side really went right for you in order to again hit high end.
Frank dispense I'll, let Mike Hogan and here, but we are pacing ahead of our cost targets. So we did have additional cost benefit in Q3. It that we thought may come in Q4, we got after a little bit earlier on that's one item that was helpful to us Michael if you want yet the other one I would tell you is the automotive team.
You know we've been challenging automotive team to get ahead of this volume decline and they really have worked exceptionally hard to do that in the in the second and third quarter and I think the what we saw in the back half of the third quarter was that are accelerating so I think that would be the the other one I would.
At that point too.
Very interesting so the automotive side and I I presume you're talking about the OEM side, Jim was able to outpace kind of your initial expectations, even though builds were down you stay strikes et cetera that that that's very interesting that.
But that would be the area that you would that you would point out so yes see automotive team has.
Done a good job this year.
OEM. Thank you. Thank you so much thanks Frank.
The next question will come from David Begleiter of Deutsche Bank.
Thank you Michael were was up year over year in Q3, and what are you thinking about for Q4 on Ross.
Well you know of course, we think about our costs as more than raws David.
So in the third quarter. They are moderating we had a couple up we had some down but net net they were moderating you know as I try to point out in my opening comments, we still have freight and distribution. If you dig about dangerous good warehouse costs, especially in Asia. They have significantly increased.
And so that's that's why don't we continue to invest in our business, we continue to invest in our people so that.
We see it cost on the rising side, but net net you know I would say raw materials are moderating.
Perfect and just on the impact from the GM striking Q3 in Q4 do you have a that's been on that impact.
Well, we're not going to talk about any individual customers what I would tell you is that.
We have a very diverse customer mix in automotive and so no one particular customers going to have a significant impact on our overall business and our team you know when it was announced immediately took aggressive cost actions to ensure that the impact was.
Well as minor so.
I think overall I get set to Franks question, you know the automotive team did a good job.
Thank you very much.
Your next question will come from P.J. Juvekar of Citi.
Hi, Good morning, and this is Eric Petrie on for petered out.
Eric.
So what kind of vehicles represents a market opportunity for you how much coatings could you sell into use compared to other light vehicles.
Well, Eric what we've always said is that the TV vehicles can be anywhere from two to three times more coatings on them that a standard vehicle.
Right now.
I don't have the latest number my figure, but I think its 0.7% of all cars our electric vehicles. So it's still a very small number.
And what's interesting is that everybody does that differently. So one guy Mike do their batteries might need to you know protective coatings. Another guy Mike just Nene industrial coatings, another guy might use all three some are using powder semi using liquid some use third party some do it in house.
Right now unlike when you look at him a traditional car you can use a kind of broad guidelines.
Right now this is still in its infancy, and there's still a lot of unknowns about how this is going to shake out, but clearly what we see in every case is more pain on a navy vehicle than our traditional vehicle.
Thank you for my follow up packaging can you discuss the.
Market opportunity to continue gaining share in non BPA coatings, and then the industry shift from plastic bottles to cancer is this a tailwind for the business.
Certainly the plastic that can will be a tailwind you know it's.
No it's too early in that process to no.
What that curve will look like but it's certainly a long term positive.
You know our be PPA Eni has the you know we significantly outpaced the market in 16, 17, and 18, we've been slightly less than the market in 19, we expect to be back on that track of at or above market. In 2020, we have some new technology, that's coming out right now you know proud.
Probably you know.
I would say food has been probably let's call it 70% converted beverage is less than 50%.
And it varies considerably by region with Europe much farther ahead in Asia.
Much further behind but there is there's still more work to be done there.
Just back on your first question I mean, the statistics, we've seen he's on our statistics, but.
1% drop and plastic bottles, whose converts to aluminum cans of 6% increase in cans. We are seeing also.
Efforts in the industry to replace.
Single use serving cups as well so I think the industry overall packaging aluminum packaging industry does have some positive traits for it as we head into next year.
Helpful. Thank you.
Thanks or.
The next question will come from Kevin Mccarthy of the RP.
Yes. Good afternoon, I think you've been very clear that your contribution margins are higher regionally in Europe .
Relative to the U.S. for example, I was wondering if you'd be willing to comment on.
Which product lines are your highest and your lowest contribution margins in a given region.
Not something we typically comment on Kevin.
Okay.
Secondly, I had a small question on the financial side.
Your.
Slide nine indicates net interest expense of 27 to 28 million, then and I believe the three Q number was 23 million.
And so I'm wondering why your net interest would increase four or 5 million sequentially. When your leverage seems to be down roughly 450 million is that have to do with capital structure or deployment plans.
Well a couple of things on that Kevin first of all.
We are paying off some some term debt, but that term debt has very little interest associated with it and one of them was close to zero percent interest.
So even though we're paying that off it doesn't have enough effect on lowering the interest cost we have been carrying extra cash and earnings money on that cash in Q3 that will go away in Q4, as we pay down that term debt and we do have has its traditional in our business seasonally a much higher capex spending in the fourth.
Quarter, we typically spend 30% to 40% of our capital.
Between October one and ended the year swell additional capital outlays personal we did a earlier in the year. So those would be to the biggest factors.
Thank you very much and Kim.
The next question will come from John Roberts of <unk>.
Thank you Michael There've been some press reports that Ppt has been working is part of a joint bid for exalt.
Could we assume any trust issues for both auto OEM in refinish would be really high so that your interest is primarily in the industrial non auto.
Well John first of all were always flatter in people the associate ourselves in the room and market, but as you can imagine.
We're not in a position a comment about another public company.
We are going to continue to drive the consolidation of coking space.
And you know as we mentioned earlier our pipeline remains.
Active.
But as far as any particular company it would be inappropriate for us to comment. Okay. Then maybe based on the high Hs auto builds outlook for the fourth quarter could you just based on their assumptions can you give us maybe a range for your auto OEM coatings volumes in the fourth quarter by region and what it would roll up to an AG.
<unk>.
So John .
We're going to benefit from some easing of comps as we look at prior year. So <unk> I would look at I. Hs. This revision that just came out this week and we would be looking at our performance being somewhere in line with that with those build forecast.
Okay. Thank you John the only other thing I would add is that.
From a very very small minor green shoot area, we did see build start to pick up in the last two weeks of.
September in China.
Well wait and see whether this is a.
You know trend line some of that local Chinese guys were behind the curve on a meeting the emission standards. So maybe there just catching up but we'll we'll we'll continue to keep an eye on it it's very good. Thank you.
The next question will come from Don Carson of Susquehanna.
Yes first a question on the sustainability of the price increases Michael you mentioned that what's probably price increase will moderate in the fourth quarter, which you've had six quarters now over 2% how much longer do you think you can sustain that in particularly as you get push back from from customers in the industrial sector.
Well first of all John Hi, Don we have not had any push back yet from customers I mean, you get your normal.
Push back button.
One of the day, they know full well that we've had more inflation than what we've recovered they can read the financial statements just as well as you can.
So they know where behind they also know that where you know if you look at some of our regions were were below than the curb line. If you will on volume and some of that as because we've said we're going to can need to continue get price and we're going to take price and that they want to move.
I am away, that's perfectly acceptable to us.
And so right now we know we're going to get price in the fourth quarter.
Pretty optimistic we'll still have a positive.
Price number in Q1, and we're going to continue to push because you know at the end of the day you know we should be asking for value commensurate with the value that we could create for our shareholder or our customers and so we're going to continue to ask for it.
Then a follow up on us architectural how do you see the industry growing given some fairly good housing data Bose.
You know maintenance and new homes and now that you've got the law the customer mix issues behind you do you think PPG can grow in line with the market or greater than the overall market.
Well for the industry next year, we have we have budgeted between two and 3% growth, we think thats a realistic number.
Our architectural team as a on the optimistic side, but I think a you know this is a point, where we have to show and not a you know it kinda like to show me stayed let's see what happens.
No I think our goal would be to start with continuing to meet the industry numbers and we'll see how well it team does.
Thank you.
Thanks, Don.
The next question will come from Aaron just Wanna fan of RBC capital markets.
Morning, guys are good afternoon.
Just a question here <unk> higher level and looking into 2020, if I could just asked this is a different way yeah, you guys had referenced kinda, 2% plus price now for little while.
Volumes have been kind of you know flat to down.
You know next year, if I think about some of your end markets you know aerospace faces some pretty tough comps.
You know architectural could be up slightly you know in your comments here automotive it doesn't really appear that it's getting better. Although you cited maybe slightly better than your expectation. So when I put all that together it sounds like next year volumes could be also flat to down slightly and then yeah I don't know if your necessary.
Certainly going to have the price. So just kind of trying to understand how you're thinking about sales growth from here. It would appear that next year would likely be lower than this year, just given the lack of pricing actions. Thanks.
Well a road I think it might be a little bit early to call that when I think about some of the innovations that we have out there.
I think a you know if you think about a low temperature care, that's still an opportunity for us.
For aerospace we have a number of customers who are qualifying.
E coat for airlines, so that's still an opportunity for growth.
We still have.
More share to gain back in Europe .
Because we have been leaving the price charge over there on that so you know I'm I'm not aware you are right now it's little early to say that so.
I will I will say that we should be a more in the positive side. Yeah. Just reiterate when I said earlier, we think most of our customers on many channels or tiering very low inventory levels. So soon.
Any.
Any modest economic recovery, we think theres going to be a dual fact recovery itself plus some kind of inventory replenishment level. So it's against sterling to make that call but.
As we've talked to our customers. There there are very low in there in terms of their inventory.
And inventory on the balance sheet.
Okay. That's helpful and just as a as a follow up a you know it looks like you've taken some I'm very swift action on the cost front.
Those are coming through nicely I'm your price cost is heading in the in the right direction.
[noise] I guess I'm just curious and then you have in the new product pipeline what else could you do a you know you know from a from a standpoint, you you've completed four deals.
Are you also open to something a little bit more transformative I'm you know the strategic review kind of unveiled at that you know breaking the company up isn't really advantageous but is there anything larger or more strategic that you could pursue to to shift a the focus a little bit.
You know you know forward I guess.
Well Road I would tell you that you know nothing is off the table you know, we're always going to be looking to do what's in the best interests of our shareholders.
We're going to be disciplined no, we're not going to be a.
Doing anything that doesn't create value.
We still have more opportunities when I think about the TV market that is still a wonderful opportunity for us and you know, we're obviously anxious support to play out sooner rather than later, we can't control that.
There's still a challenge where the TV cars cost significantly more than a traditional car and they have to figure out a way to get those.
Cost more in line second some more cars.
Okay. Thanks, a lot. Thank you.
The next question will come from John Mcnulty of BMO capital markets.
Thanks for taking my question I'm, just going back to the architectural stores business that you have.
Last quarter, you had expected for this quarter or at least in the guidance you'd kind of indicated you were looking for low single digit demand growth and I guess, given some of the pent up demand around the wet season, we would've thought it would be even better than that I guess relative to those expectations. What what change what was off is it just that it went more and more quickly to the independent.
Dealers or is there something else in the mix that we should be thinking about.
Well, John first of all Im not sure where that in your infringe came from we group third quarter of 18 at a high single digits and jumping over that comp was going to be a challenge.
Given the way we structured the stores in the dealers, we thought it would be a a challenge so.
Overall I would tell you that you know we're pleased with the rollout at this premier authorized dealer network. So Vince.
Well, let's say the same thing that maybe a different way as we look at the stores in our dealer network.
Is it kind of emerging that into a single or channel.
We try not we're trying to optimize what we do on Micromarket bases as Michael mentioned earlier, so work so we're not overlapping.
As much and whether this whether the sale goes to dealer to our store.
As inconsequential to us.
So so we have to look at these combined if you can if you look at the dealer results this quarter and year to date, they're up nicely.
And that's to lower cost to serve for us. So thats all I think we're.
It's probably more semantics than anything.
Got it got another that's helpful and then on the on the unexpected customer shutdowns is this something that you typically recapture as the volumes come back on I mean, do you see the customers that your customers essentially try to run harder to catch back up or is it something were look the business, it's come and gone in and it and it's kind of something we gonna have to just get.
Past.
No I would suspect that if you take the case of our friends up in Detroit.
So there can be short at trucks.
So they're going to be trying to catch up that volume now in the car side, they're probably not as worried about that but.
Net net.
I think.
It will be trying to.
Optimize their inventories and a it may be different at one plant versus another on how our they're going to.
Ramp up but.
Some of that volume will come back, but definitely not all of it and we've seen customers curtailments on both sides of the quarter.
You know July shutdowns are normally.
Traditional annual time time periods do shutdown some of those were extended.
We saw obviously different shutdowns in September so you look but again, if you look at the inventories as a microcosm in the automotive OEM business inventory levels are very low in almost every region relative to historical levels and so again I think thats another.
Good Good news story at some point, there, they're running below well below historical inventory levels.
Great. Thanks, very much for the color.
The next question will come from Jeff The caucus of JP Morgan.
Hi, Thanks very much.
Earlier in the coal Michael you talked about raw materials, moderating, where they down about 2% in the quarter.
And can you comment on raw materials in the United States that propylene is I don't know 38 cents pound than last year. At this time. It was 58 cents pounds. So maybe it's down 35%.
So is there much more raw material.
Appreciation in the United States than the risks and other regions. Let me let me take the total question, Jeff and Michael sure.
And in total our cost buckets were not down 2% anywhere near that.
We did as Michael mentioned have a variety of other cost at our elevated are still elevating.
We aggregate that when you aggregate that we had very modest moderation raw material cost in the quarter on year over year and again, that's after a soft several years of accumulation ourselves inflation.
And Jeff I know you sound like one of our customers with selectively picking up propylene in North America, but you forgot to mention ethylene and north North America's at 27 cents and this time last year is at 20 cents.
So you know and I always tell people, we don't buy ethylene we don't buy propylene, we buy the derivatives, so they supply and demand of the derivatives.
It's also important so where you might have a propylene down 15% you have a ethylene up 30%. So there are some puts and takes.
Well well contract ethylene was 33 cents, but I'm. So secondly, when you when you.
Contemplate your acquisition strategy are you do you have a bolt on strategy or is it up something larger than a bolt on for the next year.
Well I think as we've always mentioned, we're active and looking at the pipeline.
Or we're going to take the best use of our shareholders' money and we're going to be.
You know a disciplined and that approach so it could be either or but right. Now you know the opportunities are historically have been on the bolt ons.
Okay, great. Thank you so much.
Thanks, Jeff.
The next question will come from Duffy Fisher with Barclays.
Yeah good afternoon.
You mentioned, a number of times kind of the cumulative impact of the inflation you've seen over the last couple of years, how much price do you need from here. If you hold those costs constant do you need to get back to par.
That's great question now because we still need more price and that's when we tell our sales guys and ladies everyday then we're still not on a cumulative basis recovered it's different obviously by region by business.
But we still need a I'm wondering to give an exact number but it's it's a more than we have today and ER cumulatively. Our prices are we've given at the past couple of years were up and just shy of mid single digits and then we need to be just north of mid single digits.
Alright, and then historically when you've built cash sometimes you put parameters around that cash for you'll give us a timeframe where either via acquisitions or buybacks you will consume that cash.
Is that worked in your mind historically, when you've done that and if it has or hasn't how would that impact what you might do going into 2020 with the cash you built.
Well I'll remind you that we have about 600 million or 659 of the cash balance sheet today slated for term debt pay down and we did some term debt issuance in Q3, we like the interest rates and we're going to swap that out for payment payment in Q4.
Well look at heart, we look on a recurring basis on monthly basis at a minimum.
And our cash on our cash uses and potential cash is for the next couple of quarters I will do it again certainly through the fourth quarter and if we want to give guidance on that will do we'll do so January right right now as Michael said the acquisition pipelines.
Active and we still like two to keep up some dry powder till some of the things went out there but.
We're not we're not immune to given had it not immune hot giving it just depends on what we see going forward and what we feel shareholders want to hear from us.
Great. Thank you guys.
The next question comes from Laurence Alexander of Jefferies.
Hi, guys just stand Rizwan Florence how are you.
Hi, Dan.
You mentioned before on the Brexit is kind of cropping up as a headwind I'm just wondering if a note would have no deal Brexit means or would it would have deal would mean or does it doesn't matter as long as it was like just a removal the uncertainty.
Well the best thing would be the removal the uncertainty without having a.
Border crisis, right now, we're not able to predict that as you're going to get we are prepared for either way.
Well, we do see is are you know architectural business has hung in there pretty good but then if you look at you know our little business up in Northern Ireland that that is so there is way more consternation.
And in turn up there than there might be in a say southern Europe , alright, Southern England. So I'd say it varies but at this point in time, you know, it's still a huge watch out for us.
Okay.
Thanks for that and then my second question you mentioned.
I think getting 50, new distributors like this quarter I was wondering we should think about as kind of a general run rate going forward like 50, a quarter and 200 year, what am I thinking about the right well. This important new program. This year. So we do have some earlier sign ups.
That's probably a good number we should probably look at four for.
Q4 call. It trying to give you got some parameters, it's too early to make that call right now.
All right. Thank you very much.
The next question will come from Vincent Andrews of Morgan Stanley .
Thank you and good afternoon, everyone just trying to think through the the comments earlier about the potential for customers to rebuild inventory next year and I guess I'm trying to square in my head is that we've had you say six quarters of very solid 2% price increases going through and get the customer base seems to be running it lower than than.
Average or normal levels of inventory. Despite the fact that you know, it's very clear you're going to want to continue to take pricing. So.
Then you know some some economic fly up what is it that's going to or could caused customers to rebuild inventory levels versus you know if if they've done a low levels for a long period of time and they're generating greater cash flow for that reason why when they just stay where they are so what are the what are the pros and cons on that.
For the first reason why they agree build and they had confidence that they're a end use demand is going to pick up so think about the heavy duty equipment guys right there.
You know a wondering what tech is going on the farming business and whether or not they're going to be selling more combined.
Right now there's a lot of churn in that segment. So they're trying to figure that out if they had more clarity on what the future look like.
The farmers would be more willing to spend their money. They had a better idea about the crops they'd have a better chance of spending it. So I think that would be one the other one is consumer confidence in China.
All right now consumer confidence in China's down pay am I in China down.
And so if they thought that the a trade churn was behind them.
I think people in China would get behind that and start Oh, making major purchases right now they're about deferred on major purchases.
Okay. Thanks, very much so I'll leave it there is where the top of the our thanks.
The next question will come from Stephen Burn of Bank of America.
Yes. Thank you you mentioned just few moments ago about.
Your volumes in OEM auto to be roughly in line with.
Just expectations. It seems your third quarter volumes underperformed or were two more challenge them then the global auto build rate.
Contracted is there something in there that you can attribute that to.
Well part of it Stephen was in China. So we have a pretty good split of the local Chinese Oems.
And these guys were behind on the mission changeovers and so they were.
Suffering from that standpoint, so they underperformed.
Significantly the China as well as the Asian.
Standards. So that's probably the single biggest thing.
And then just a quick one on your on your storage architectural stores.
Yeah, if you have a loyal pink contractor to to your own stores. If they were to shift to a dealer location or is that particular mix of paint that they're buying in the composition and menu and all of that is that transferred to that dealer and how is.
Your margin on that go on a pain, that's shifted from your store to a dealer.
Yeah, so thinking about it this way without getting into the specifics.
We're agnostic whether he picked up in the store or picks up at the dealer. The key is that he can pick up at is price at the location. That's most conducive for him winning the business.
Okay. Thank you.
Thanks, Steve.
The next question will come from Mike Harrison of Seaport Global Securities.
Hi, Good afternoon, I'm, just wondering if I can can maybe build on this ah. This idea of the premium on dealer channel or dealer network.
Can you help us understand exactly what is changing in the model and and maybe if there are any costs associated with it.
And what stage or in this process.
Mike I think we're at your question about trying to understand the differences in.
Business volume what is your view were coming through pretty lightly.
But.
If I understood. Your question right now I will just give you. One example, it we have a city in the northeast.
Midwest.
We had eight or 10 stores in that city, we sold those tours of the dealer in that area, we're selling through that dealer.
And we're no longer competing with them slower and everybody's cost to serve.
The pain in the pain contractor has the same opportunities than before.
So again, what we're trying to do is optimize our distribution points to the to the customer.
Really the focus of this so the strategy.
I hope that was your question.
Yeah, I guess the the question I was really trying to get to is is what stage or we have in that process of of shifting to a different strategy with the dealers.
Mike over at another cost associated with it yeah, Mike were in I would say a little bit more than a year. You know the first early on it was a trial stage, we saw some real good positive that now we've accelerated it.
There's no real additional costs there is some.
We need to make sure when they pick up and our dealer stores that they are getting the PPG price.
So you know there is some transfer data that has to happen, but that's electronic and so I would not regardless as any material costs and has been set earlier typically it's a lower cost to serve channel to support our dealers.
Alright, and then the other question I had was within the industrial business.
Were there are pockets within that business that were stronger or weaker.
And just in terms of the trends across all four regions that looks like volumes were down during the quarter, where the trends stable or where the trends worsening in industrial.
Yeah, So I would say that the trends were somewhat a moderately lower.
And it really varied by region. So Europe was a little bit lighter Asia Pacific a little bit lighter U.S. relatively the same.
Latin America relatively the same.
The segment that outperform were like a extrusion electronic materials.
Those kind of things were on the upper end of the that curve.
Clear the ones that were work week or general finishes wood and parts or transportation.
Equipment, a until the end of the Hood parts. It typically show up in our industrial segment.
Based on our cost just on look Mike and I'd say, though.
Industrial activity modestly weakened throughout the quarter.
Hi, Thanks, very much thanks, Mike.
The next question will come from Dimitri Silverstein of Buckingham Research.
Good morning think or good afternoon, I should say thank you for squeezing me in a couple of questions. A the kind of regional I guess, Vince you talked about sort of in your expectations for 2020 that you would expect a china to recover lower but from a macro economic perspective I'm.
Trying to understand besides easy comps in automotive what gives you the confidence that the Chinese economy continues consumer is going to come back.
In 2020.
Well, we've been talking about this all year Dimitri the Chinese consumers still accruing buying power unemployment rate. There is no different than it was three or four years ago, they've moved to more of a saving economy, I think they're feeling and other apprehensive about the geopolitical environment.
And and our expectation our hope is that get somewhat resolved and or some of that breaks free because they know they are they moved to more of a consumption model.
And our they've saved for I'd say well over nine months to a year now and I think that they'll be more comfortable spending next year. That's the biggest single item. If you look at the service economy. There, it's doing well so again I think theres tools. So some good traits amount economy that would bode well for increased consumer spending.
Got it thanks and M to follow up on the on your comments on pullbacks about the growth there being on same store basis at least them in the low single digit range.
You know as it was a much faster business when you bought it but I think you grew a very nicely in the first a few years of ownership.
You talked about some so kind of political headwinds and economic had when.
You know looking in your that's your tea leaves when can we were when do you expect the whatever the situation. There that's going on to resolve itself or is there something that's going to drag on to through 2020. In other words is there any particular data point the war or an event that you're looking for or is it just a matter of anniversary.
And what other headwinds are being faced but that business. So Dimitri I'd say there two factors that we're watching closely the first one is government spending so with the transition to the new government.
Run by and low as they call them. They are cautious and they have not a cranked out the government spending that we typically see a we think that will loosen up so that should be up year over year.
And then the other one that we're watching cautiously as major project. So a lot of the folks that have the money were nervous when ammo was a you know elected and so they let their major projects wind downs, they havent restarted new major projects.
But what's interesting is that the president has the highest approval ratings ever and so I think I think over time people are going to start to loosen up and start to go back to restarting a major project. So those are the two factors that we're watching the good news is our mix.
Continues to improve significantly and our earnings are going to be an all time record for Mexico.
And we're projecting another record year for them next year the business feels very good about themselves, we're moving into the major paint season as you know a holidays.
Thanks, Thanksgiving through Christmas in Mexico huge.
Family time, and this is gonna be a period of time when a you know we see our highest volumes and.
Fourth quarter.
Got it okay. Thanks for that granularity appreciate it.
Sure.
The next question will come from <unk> of Longbow Research.
Thank you. Thanks for squeezing me in I'm, just wanted to follow up to some of the dealer network.
In addition, there will that end up changing your end market exposure.
Architectural particularly in the U.S. doesn't make you more exposed to new construction versus repaid or not really.
No no material change Garrett.
Okay. Thanks, and then just lastly, just landed on aerospace you know you talked about in the outlook for the fourth quarter moderating growth, but I think it's really just.
Thanks on the talk hall from a year ago. So I just wanted to be clear on that and then just wondering if you can maybe provide outlook into 2020, you know how you view Aero just because the cost will be tough throughout the balance of next year.
Yeah, we still expect you know clearly the comps that we've put in place. This year you know.
High single digits, and even in Q1, Q2, and we had low double digits, it's going to be tough to jump over but I you know when I look at the new technology, we rolled out.
The new wins.
Had.
I'm still optimistic that they're going to have a very very good year in aerospace.
[noise].
The next question will come from Jim Sheehan of Suntrust Robinson Humphrey.
Thank you in packaging you talked about some customers. We're trialing. Some things you had some pack tests that could you give some more detail on that where these food packages or or beverage packages and how did the test turnout.
Well, that's mostly on the beverage side as I'd mentioned earlier, Jim the the food guys a much much further along and these conversions. So on the M. Beverage side, you know basically you know we don't get access results for quite some period of time, you know it depends upon the sale.
Verity of it you know whether they're moving them all around the world you know send them to a hot spots like Saudis and coal places like Norway or you know how extensive the changes. So you know, we basically AF Pak tests going on.
All the time in this business what I would tell you is that you know we fared pretty well in these things and as these that's come in you know typically that then leads to a new business.
Got it and then in European automotive OEM.
I think that you know you had such a difficult comps with a with last year.
Due to some emissions changes, which had pulled forward demand you would think that might lead to an easier comp in the fourth quarter, but you know it looks like the I Trust numbers are still yes, not that optimistic.
Is there something else there is the export demand trend from Europe offsetting the benefit you might get from that the change in the W. Ell T P.
Implementations.
Yeah, Jim I think you get to know right on and we do see fewer exports out of Europe to Asia, That's one of the drags year over year.
No different than the Asian sales and the indigenous in the region. So that's a factor and obviously the industrial activity and a lack of industrial activity and Europe's another fact.
Thank you very much action.
And this concludes our question and answer session I would like to turn the conference back over to management for any closing remarks. Thank you carry I'd like to thank everybody on the call today for your time, an interesting PPG. If you have any further questions. Please contact our Investor Relations Department. This concludes our third quarter earnings call.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines have a great day.