Q4 2019 Earnings Call
and provided
Support to the opening comments Michael made shortly following Michael's perspective on a company's results for the quarter and for the full year and a brief Financial update from Vince. We will move to a Q&A session to prepare commentary and discussion during this call may contain forward-looking statements reflecting the company's current view of future events and their potential effect on Thursday reading and financial performance these statements involve uncertainties and risk which may cause actual results to differ the companies under no obligation to provide subsequent updates to these forward-looking statements with this presentation also contains certain non-GAAP Financial measures. The company has provided in the appendix of the presentation slides which are available on our website reconciliations to these Gap non-GAAP Financial measures to the most directly comparable gaap measures for additional information. Please refer to ppg's filings with the SEC now, let me introduce TV chairman and CEO Michael dead.
Thank you, John and good afternoon everyone. We appreciate you joining us on our call today.
We reported fourth-quarter and full-year 2019 results before you review the results. I mean just make a few additional comments. We are very pleased with our financial performance for the quarter and the full year as we delivered strong year-over-year results in the face of weakening Global manufacturing activity. We delivered record fourth-quarter and full-year adjusts GPS and our full-year results were in the middle of the financial guidance. We gave last January despite softer global economy.
Additionally we continue to execute our long-term strategic and cash deployment initiatives focus on shareholder value creation. These initiatives included the completion of several Acquisitions, which expand our technology reach and customer enters intimacy and our Legacy rewarding our shareholders, including the 48th year of annual per share dividend increases
we continue to invest about 3% of sales and research and development and progress the commercialization a new products and Technologies allowing us to deliver above market growth and several of our businesses. We will continue to communicate our progress on these initiatives and any new key products for 20 20 more. Tactically. We begin twenty-twenty continuing to benefit our aggressive operational management including achievement of our self Health commitments from our cost savings programs as we delivered by eighty-five million for the full year higher than previously committed Target wage in addition. We delivery record cash from operations and of 2019 of about 2.1 billion including further reductions in working capital loan.
Are strong 2009?
Team performance was possible due to our broad business portfolio supplying both the OEM and aftermarket along with individual consumers and individual industrial customers and all major Regions Bank also want to thank the dedicated that remains focused on delivering value-added services and Technologies for these customers all around the world and let me summarize the financial details We're Alone earlier today for the fourth quarter. Our net sales were nearly three point seven billion dollars of about 1% in constant currencies are adjusted earnings per diluted share from continuing operations for $1.31 which represents a 14% increase versus last year's fourth-quarter. This is our second consecutive quarter of adjusted earnings per share growth and wage 10% with EPS up 14% this quarter and 15% in the prior quarters.
For the quarter our segment margins improved by 160 basis points versus last year and her up a hundred twenty basis points of the full year despite broad contraction and the global manufacturing activities that worsened as a year progressed as one data point actual Global industry-funded Motor bills and 2019 were about 10% lower than projected at the beginning of two thousand wage. Are you segment results benefited from continued selling price realization and strong cost management last we continued our unwavering support of our customers all over the world and continue to advance our sustainability initiatives.
I'm very proud that.
Tpg turn the heat Covetous gold rating for corporate social responsibility progress. Our team will continue to prioritize these programs and will provide a full update when we issue our 2028 ability in the spring. Now, let me ask Vincent provide some additional color on our fourth quarter and full-year results as the guidance we competed. Okay, it's earlier today.
Thank you, Michael. Again. Just your interview of the fourth quarter results are net sales is Michael mentioned were three about three point seven million dollars up about 1% year-over-year that consisted of Faith Evans, which we're down 3% reflecting the weekend Global industrial production environment that Michael mentioned this include a Global Automotive OEM production and many of our general news markets which declined in the quarter and they were most pronounced but declines were most pronounced in the US and European regions.
Are a great selling prices were up nearly 2% marking the 7th consecutive Porter with selling prices of about 2%
Additional selling price increases in several of our businesses heading into twenty-twenty and we will continue to work with our customers to ensure. We are receiving fair value for the products and services office supply.
Summarizing some business trends for the fourth quarter in our performance Coatings reporting segments Aerospace Coatings continue to deliver very strong volume growth outpacing industry performance and both us and Asia regions. This caps off what has been a truly excellent year for this business, which well outperform strong industry gains.
This reflected increased customer demand for our specific Technologies.
Automotive refinish organic sales were higher with solid growth in the US offset partially by weaker volumes and Europe where customers continued to closely manage inventory levels bought our Sam acquisition has delivered strong financial performance and its first year and we are now commercializing various key send products and certain International markets providing us with further growth opportunities.
the soft Trading
Nations in Europe impacted our architectural Coatings emea business as we experienced lower sales volumes partially offset by higher selling prices despite this very challenging economic environment in June during this past year. The business was able to grow organic sales for the full year.
In Latin America or PPG comex business increased organic sales aided by approved selling prices.
Sales sales volumes improved sequentially or the prior quarter but remained generally softer year as consumer demand reflected overall lower Mexican economic activity.
For the year. Did you call him after delivering another strong financial performance growing both sales and earnings in this reduced economic climate. We also added a hundred sixty new stores in 2019 bringing our regional total to about 4,800 concessionaire locations.
Organic sales volumes and Architectural Coatings US and Canada increased modestly with positive sales and most channels during the quarter including our us same store sales. This is Tom Diaz lower corner ceiling.
If I continued strong growth in the Asian region are protective and Marine Coatings business delivered above industry sales volume growth of a mid single-digit percentage during the quarter. We expect sales to remain elevated levels in the first quarter. Although growth rates will be moderated given the strong prior-year comparisons.
In our Industrial Coating segment overall sales volumes or down about 6% in the quarter reflecting the week industrial demand.
In China Automotive Sales fell in December marking 18th consecutive monthly declines and in Europe manufacturing activity contracted for the 11th consecutive month.
We have implemented aggressive cost actions and reflection of his lower demand and despite the lower volume of a year. Our segment earnings were higher for the quarter and for the full year off.
We look at individual business units ppg's Automotive OEM sales volumes or lower by a mid single-digit percentage consistent with the industry rate wage.
Automotive OEM business continued to realize higher selling prices in the quarter and for the year off.
We close.
Industrial production activity impacted most of our general Industrial Coatings business sub-segments and our our packaging coding sales volume is decreased as high or beverage can demand was more upset. I continued weakness in food can demand
I'm an overall perspective. Our fourth quarter adjusted earnings-per-share was a dollar Thirty $0.01 or adjusted effective tax rate was about 24% or 24% for the course similar to our adjusted tax rate for the year.
A results were supported by broad increases in selling price has improved manufacturing performance and costs and excellent progress on cost Savings Program as we delivered more than twenty million dollars against these cost savings programs during the quarter slightly ahead of our our targets.
Acquisitions, we made over the past twelve months also contributed positively to earnings in the quarter.
We recently added the acquisition of techstars a manufacturer of high-performance transparencies and wingtip lenses for Aerospace and Defence Vehicles. We also recently announced the acquisition of I suggest a manufacturer of Automotive refinish products.
now
quickly comment on our full-year results from continuing operations
our full-year sales or fifteen Point 1 billion dollars
our full-year 2019 adjusted earnings per share or $6.22 which was up 5% 1st 2018.
Excluding foreign currency translation. Our adjusted earnings per share are up about 8 % firmly within the 2019 earnings guidance. We provided last January .
Most of the growth in earnings was driven by our strong operating discipline that generated higher segment operating margins each quarter this year.
Specifically our industrial cutting statement achieve 5% earnings growth despite sales being off 175 million dollars for the year.
Additionally each of our major regions improved operating margins.
As Michael mentioned we continue to focus on cash deployment in 2019 and are pleased to announce or completed various Acquisitions over the past twelve months. He's Acquisitions have had a huge revenue of about five hundred million dollars of which one hundred million dollars is an asia-pacific.
We realize.
Just over three hundred million dollars of Acquisitions sales in 2019 and expect the remainder 2020.
In addition to Acquisitions, we repurchased 325 million dollars at PPG stock during the year of which $150 was completed in the fourth quarter.
Before I turn it over to Michael. I'm going to review some of our 2020 Financial guidance.
Let me see, for some of our current economic expectations regionally.
We anticipate overall positive economic growth to continue in the US and Canada has levels generally similar to 2019. This is being aided by, to accommodate of interest rates that remains of of the construction markets and also stability in the region a lot of Market.
Latin America, we anticipate modestly improved economic expansion in Mexico versus a lackluster 2019 and in South America. We also expect modest economic Improvement off.
Automotive in China or expected the phone more than 10% in the first quarter and industrial production demand conditions in India are forecasted to be challenging earlier in 2020. However, we do anticipate growth improving overall in Asia as the year progresses and demand Trends in the region in the latter half of the first quarter following Chinese New Year will be an important measurement off the Region's prospects.
Economic growth in Europe is expected to remain subdued overall and varied by country. We expect the potential for greater volatility and Automotive bills throughout the year due to the onset of new admission standards of the Year progresses.
We have included in today's presentation materials available on our website a summary of specific Financial assumptions. These are included on slide eleven and twelve.
Cuz we included in our earnings press release issued earlier today. We expect full-year 2020 sales growth in local currencies of one to 3% This includes the acquisition discussed earlier. We also expect full-year 2020 EPS growth of 49% excluding the impact of foreign currency translation.
Fully acknowledged the earnings guidance range is wide and this is primarily due to the current high level of uncertainty as the year begins.
embedded in our guidance or the following key elements
We expect continued soft industrial man in Europe in the u.s. In the early portion of the year.
Automotive production globally is expected to remain challenging including week q1 China production forecast, which were revised further down as as as early as this week.
Additionally, we don't have visibility on overall China demand Trends this early in the year with forecasting increasingly difficult given the early Chinese New Year, which is about a week away.
Our guidance also includes updated first-half twenty-twenty Aerospace OEM production forecast, which have tilted lower.
Additionally despite the lethargic economic backdrop or raw material costs have remained stubbornly High relative to overall supply and demand and reflecting recent crude oil volatility.
also included in our guidance are any favorable impact from the recently-approved US China Trade Agreement the pending Trade Agreement or the benefit of reduced uncertainty regarding brexit is simply too early for us to assess what impact if any these noteworthy Regional items will have
also given all the self-help actions the past 18 months any increase in volume. She realizes we expect to translate into strong earnings contributions get strong operating Leverage.
In addition to the the general items. I just mentioned following or a specific assumptions.
First is the carryover impact from Acquisitions that we completed during 2019 and the full year. In fact, I reaching the recently-announced. I see our acquisition we expect about a hundred and seventy million emails from these Acquisitions and your 2020.
That position will typically deliver at or below segment margins as we work to fully integrate their operations in to ppg's we are forecasting continued General inflation including higher wages home medical and Logistics costs.
We are closely monitoring the cost environment for our raw materials with the recent spikes and crude oil prices.
We are working with our customers for targeted additional selling prices in 2020.
It's reference earlier. We are still complaining our 2018 and 2019. We're structuring programs. We anticipate these programs will do deliver an incremental 75 million and combined Savings in 2018.
We expect our annual corporate cost increase including General inflation.
And we expect the increase Studio this generalization and higher management the center, as we grew at targeted bonus levels.
Next we anticipate the companies 2020 tax rates on ongoing earnings from continuing operations to be 20 to 24% The comparable rate for 2019 was 24% off as the year progresses. We will work the Titan the tax rate basis current information, including Geographic earnings forecasts.
We also provided EPS guidance specific to the first court. This guidance was a dollar 32 to a dollar forty two, and this does include a modest unfavorable impact from foreign currency translation.
It's also includes a modest impact from a large Aerospace customers announced production curtailment.
We continue to manage our Capital expenditures based on the basis the current economic climate and a budget for spending to be between 2 1/2 to 3% of sales consistent with our 2019 range.
As I mentioned the summer of these and other Financial assumptions are contained in the present station materials for today's call and now I'll turn the call back over to Michael for some final comments Thank You. Vince took a look at the current year while there continues to be geopolitical concerns and some lingering uncertainty over trade activity. We are optimistic that the global economy will grow in 2028. However, given the heightened uncertainty we will continue to aggressively manage all elements within our control and we continue to Target EPs and cash flow growth supported by achieving aggregate same margins that we maintained prior to this recent inflationary cycle, which we believe this is achievable in the back half of twenty-twenty. We're expecting to have better visibility on demand Trends by the end of the third quarter and we will adjust our guidance as necessary.
Strategically we will continue.
To pursue organic and inorganic growth opportunities. We have a strong track record of creating shareholder value with Acquisitions and we intend to remain active but methodical we have an excellent balance sheet and will remain consistent with what we set in 2019 that we don't intend to let excess cash grow in our balance sheet, but we will remain disciplined and destroying this truck. Finally while our guidance is reflective uncertainty of when the industrial demands will improve I am confident in our 2019 results solidified that PPG remains well strategically and financially to deliver increased value to our shareholders and we're wide customers supported by our outstanding team differentiated industry expertise broad print and product Innovation engine in conclusion and went to recognize our employees around the world for their outstanding contributions. We have a strong engaged and dedicated Global team dead.
every day our employees
Focus on delivering results the PPG Way by partnering with customers agree neutral values. They make it happen and work hard to do better today than yesterday every day. This concludes our prepared remarks. Once again, we appreciate your interest in PPG and now Chad. Would you please open the line for questions? Thank you. We will now begin the question-and-answer session to ask a question. You may press * then one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two months at this time. We will pause momentarily to assemble our roster.
The first question will be from Christopher Parkinson with credit Swiss, please go ahead.
Thank you. Just real quick on the price cost. Can you come in on your just any broad expectations for the resin basket and anything on T or to just and on the former head on home and takes regarding Chinese Supply including winter operates any changes in your views on environmental and safety and just transferred to the new year. Just anything you could add to your expectation would be greatly appreciated. Thank you, Okay, Christopher. I'll try to get all those questions. Let's start with tio2. I don't expect this to be a topic will talk about this years, you know, obviously there's one supplier out there that's cutting rates. The rest of the guys are out there supplying at this point in the cycle. You'd expect to see lower prices. It's been you know, still kind of hanging flat but I think the underlying fundamentals of supply and demand would Echo reduction in that over time, but yep.
Just say that that should be a non-event this year.
Say that propylene and ethylene the things that go into residence continue to be well Supply, you know, I would I wouldn't tell you that cautiously optimistic, they'll be some moderation but it's a little bit too early to tell the crude oil prices or as you know under a lot of you know fluctuation volatility right now with the world. So it's hard to pin that number down right now, uh, China is moderating production rates and it varies by province. And so it's not always easy to predict when they will have a blue sky day, but they do periodically do ask for people to moderate their production in order to help facilitate the environment over there.
Great, and just a quick follow-up on Arrow. Just give him the customer production disruption and noise in the growth rate. Can you just break down just you know commercial any private exposure versus military in particular and then also just anything to add on recent acquisition performance and services. Thank you.
So, you know, we have a very broad Aerospace business, you know, we're into the transparencies adhesives and sealants and and Coatings and now with the acquisition of dexmet dead lightning protection. So, you know, we don't have any one customer that dominates our sales but the recent customer announcement is impactful that's you know, you'll see our Aerospace growth rate still be a very positive and still be in better than industry but not quite at the high single digits that it was earlier in the year off, but I would tell you that we're really pleased with Aerospace business. They had a record year and I anticipate them have another record year in 2020.
I would say.
Thank you.
The next question will come from Bob court with Goldman. I'm sorry. It's crunch from Punjab e was Robert W Baird, please go ahead.
Yeah, thank you. Hi everyone. I guess first off, you know the comment that industrial activity in China began to stabilize in your fourth quarter. Can you just give us more contacts on that specific end markets? And do you think the stability reflected any pull forward from the timing of the Chinese New Year in 2020?
So I would say would pretty broad, you know, we saw some benefits in the appliances. Of course, there was less negative and Automotive it's you know, potentially a possibility that there was a pull forward for Chinese New Year given it's much earlier this year. It's really too early age. Tell that right now we did see November was better than October and December was better than November . So that's a good question to come back to us in March after we returned from the Chinese New Year and have a little more visibility into it.
Okay, then Michael, you know your your comments on margins for 20 20 approaching, you know levels prior to the current the recent inflation cycle, I guess in context of the uncertainties still, you know life and and your early expectations for 1 Q. Anyway, I guess what gives you confidence in being able to approach those levels as year unfolds with this current macroeconomic backdrop wage. Well, we were in this past quarter are volumes were down 3% and our margins improved by more than a hundred fifty basis points. So if you start to put any volume on the bottom line off your you should expect to see the industrial segment margins significantly improved. So you've already seen Us close the gap on the performance coding side and Thursday. You should expect to see us continue to close that gap on the industrial segment site. Yeah. This is Vince to two other elements there one we are doing targeted pricing across the palm.
in the regions and
In addition they mentioned in my opening comments. We do have additional cost savings projected for for 2020 20 that you know, we're comfortable we will real life.
Okay. Thanks so much Michael Events. Thank you.
The next question will be from Bob court with Goldman Sachs, please go ahead.
Thank you. I was wondering you guys talked about 6% volume erosion Industrial in the fourth quarter. Is there any element of that that can be you know destocking or wage? Is there any hope that maybe you should go through 2020 you could get a little restocking or is that not really an element in of your product line? We do similar to the same levels as we ended the year really reflection of the tepid, you know environment out. There. We we do believe our customers are holding low-end stock of their products off. So if there is if there is a a pickup or a recovery, we we do feel they'll be at least a modest inventory rebuild but those those would be the two elements that we're aware of.
invent you guys gave
Some specific quantitative guidance for next year, which is our this year, which is helpful. I guess when I try and get late, well, you talked about Acquisitions and then the carry through of the price efforts you made in nineteen. It suggests no real volume growth. I think Michael you asserted that you've got confidence that the economy will grow. So, can you help me understand that disconnect?
I think it's a big disconnect right now. Bob is two two segments that are important for us are automotive. So you just saw the downgrade on where they're anticipating China being down more than 10 per month that you have Europe that's going through the transmission or the emission change on the engines. So that's a big uncertainty right now. It's too early to call heavy-duty equipment. I think the recent signatures in Washington yesterday will help the farmers, but I don't think they'll immediately start buying equipment. But I do think that will come over time and then I'm certainly have Aerospace there's a significant demand for new planes. They're not being met right now. So hopefully over time they'll get back on track and I do know that the military side of Aerospace is going to continue to be pretty strong.
Got it. Thanks.
Help the next question comes from David begleiter with Deutsche Bank, please go ahead.
Thank you. Michael. Looking at the pipeline the fact that you bought back shares in Q4 signal any change in the m&a pipeline or your expectations in that area. David no change. We have a a very strong pipeline of Acquisitions we're looking at but we also generate a lot of cash. We know that we always generate a whole lot of cash in the fourth quarter. We've committed that we're not going to let that cash it on the balance sheet. So we took some of that cash off the sidelines to plug back stock we can continue to do both right now as you know, we still prefer Acquisitions, but it just seemed like a prudent thing to do given the amount of cash that we knew were coming in in the fourth quarter.
A very good and just on package and Coatings and Slide Five you highlight. It was below market and all four regions in Q4. Did you lose share in that business in Q4?
Say marginally, it's more of a matter of the mix. We are much bigger in what I would call food and m a t which is monoblock Arizona and to so think about deodorants off various other Oddball sides cans. So we're bigger in that segment than beverage. You know, we did have positive growth and beverage but beverage is growing in a much faster rate than the other segments wage was more of a mix but that's a that's a fax.
Thank you very much.
The next question will be from Matthew skowronski with UBS, please go ahead.
Thanks for saving the question and your 2020 guidance. What would be the major businesses expect to be most up and what would be the most down if you could break that down between the performance and Industrial that would be appreciated?
So the most obviously would be Aerospace and PMC those businesses will have another fantastic year in 2020. Probably the one that will be a little more challenge will be automotive and then Industrial.
And then we do expect going to be up as well and in 2020.
Thank you.
And our next question will come from Michelson with Wells Fargo. Hey guys, you know you had good earnings growth in the fourth quarter and sounds like the sales level sales sort of weakness will persist in the first quarter, but just curious of anything going on in the first quarter that your earnings growth. Would it be better than you found? Like the sales levels will be about the same fourth quarter in the first
Yep, my part part of the part of the difference is just comparisons is you know, we have strong pricing throughout 2019 on a year-over-year basis. We're still going to get some pricing you one but not the same year of your level as we did in in the fourth quarter or a prior quarters and 2019 Q4 is a for comex is there is there largest quarter typically seasonally, we're not going to see that same effect in q1. We we talked about Aerospace already. We have strong volumes in Q4 and Aerospace. We know that's going to be tempered off in Asia Q4 is the automotive Market peak in China, even though volumes are down overall Productions up sequentially and two three Q4 years back down as we don't have as much fixed cost coverage in q1. So if you're trying to compare the quarters, I would pull forward those big elements.
Got it. And then
you know, you should have good leverage to the better demand obviously, but is there a way to think about you know, if the trail deal is is a positive and then you know wage I'm going forward what the upside or where where we would see, you know, maybe stronger results in PPG if if things get better this year
I'll start on Michael finish. I think broadly, you know, we'll see it in our Global industrial segment. That's the one that we think has been most impacted by the by the delay thousand in the in the in the agreements. They again as I mentioned just a few minutes ago inventory levels, we think in and and product inventory levels and for our customers know segments are very low so you could see a production break up in a Halo of inventory build and the other thing I'd say is that incrementally, you know, not just Europe , you know, where we say 40% of any incremental dollar drops the bottom line, but we're seeing a guy named for mental benefit in the US and Latin America now, so that's a another positive. So I would say, you know, we see any pickup Thirty Thirty cents on the dollar is going to be fall into the bottom line.
Great. Thank you.
The next question will be from PJ. Juvekar City, please go ahead.
Yes. Hi. Good afternoon.
agent
You know, I'm a little confused about China Automotive comments. You mentioned that auto production was up in 4q year-over-year, but should be down 10% in 1 Q. So, can you just plug that out and talk about things like what are the dealer inventories in China, or what a pricing discounts on Autos in China. Thank you.
Yep, you know we mentioned Auto production was up in Q4. That was a mistake on our behalf. I think we intended to say production was down but not as much as it was in Prior, So we still down in Q4. We expect it to be down again low double-digits in q1. We do feel inventory here and check in China. So they've been matching inventory with lower sales. So sales to pick up that should be a straight straight translation through to production.
Okay, thank you and just secondly interest rates moved down last year. Do you see a pickup in housing activity this year in particular architectural birth and and your experience in terms of past Cycles when the rates go down, you know how long people you begin to see some positive impact on your business. Thank you God. Yeah PJ I would say that right now rates are down. But you know, they've been down for a while and we're expecting another 2 to 3% kind of growth here for architectural us off. I don't expect to see anything significant. Our our trade customers have significant backlog. I still expect
The trade to be better than DIY, you know the do it for me trend is going to continue.
Great. Thank you.
And the next question will be from Frank Mitch with fermium research, please go ahead.
I think
You in good afternoon from Michael. I appreciate the the comments regarding the active Pipeline on m&a and the fact that you didn't want to like cash build up on the balance sheet, which is why you re entered into the money back Market, um, you know, the prior few years certainly you had been doing more on the buyback front this past year 2019 U we did double on the on the m&a front is that is your expectation as we look at twenty twenty that that PPG will be, you know, kind of in the same order of magnitude. We're m&a will be double what BuyBacks are or how should we think about the interplay between between them to use of cash? Well Frank, I think if you look back at the last three or four years, we've consistently done about four or five Acquisitions a year.
I would be disappointed if we don't do four or five this year. We've already announced. I see our we have a very active acquisition Review Committee faith in the company. It is a matter of timing, you know, we are working generally with private owners. They can be you know, temperamental sometimes to get to the Finish Line wage, but I'm still optimistic that will do more Acquisitions in 2020, then we'll do share BuyBacks. Yeah, Frank and that's really if you look at our history, we've done a variety of Acquisitions. We've both really good Returns on those which is why he remains a priority for us. We typically are able to capture synergies and and easily cover our cost of capital. But if those Acquisitions don't materialize is Michael mentioned, we we fully intend not to let cash grow in the balance sheet.
it's a very fair point to wait for a deal was a very good deal in in hindsight as well and
And and just turning back to the interplay between price and Roz and and the fact that you've got a Costco program that you're continuing to execute on your able to deliver better margins through each quarter in 2019 with some acceleration at the end of the year. How should we think about you know, the the the the progression on Improvement in margins in 2020?
Yeah, the first part of the year we're going to continue to be volume challenge as we as we denote it earlier that whole it'll certainly affect our ability to to grow margins in our industrial segment. We do expect performance to call you to perform. Well on a relative basis Frank.
Thank you.
You know next question will come from Kevin host of our with North Coast research, please go ahead. Hey, good afternoon. Everybody wanted to dig into the guidance a little bit of a sales go to 1 to 3 % I think that 1% of that is acquisition. So kind of flat flat is 2 percent volume price. And again, which I think most is priced. So low wanted to dig into the whatever pricing is baked into that. How much would you say is based on carry forward pricing from 2019. I know you have some other actions out there. Uh now I'm from those and how much is from any future price increases you might do throughout the year. I'm Kevin remind you that we we got we gathered most of our price gains in 2019 at the beginning of 2019 the first quarter both industrial performance. So all price gains and twenty20 will be primarily based on actions that we're executing from the beginning of this year. So, yep.
very little carry-over pricing
In every business and we do have against the back out of the Year some volume growth layered into the to the guidance.
Okay. Got you in can you come to stick in with pricing how the competitive response has been to the pricing actions you have out there competitors followed suit or are you flying solo on any of the action?
Well, the answer that question really varies by by sub-segments. So I would tell you in the performance coding side. There's more there's more support than maybe there. Is that the industrial segment?
Okay, gotcha. Thank you very much.
Next question will be from Arun this one Athen with RBC Capital markets, please go ahead.
We're in production line is muted on your end.
All right. Sorry about that. There we go. Good afternoon. Sorry about that. Yes. I was just curious, you know the couple of years ago. There was a a chance to earn your statement that you be focusing on low single-digit volume growth and cost reductions at the same time when Michael took over now, I know volume growth has has been disappointed disappointing Joe's in the macro backdrop, but maybe you can just catch us up on the cost reduction side. You know, what do you see in the future? I guess as far as Cadence and what can we kind of model you are are are estimates for cost reductions from here. Thanks what we achieved in lower-cost in 2019. And I think John mentioned that we were going to do a walk in twenty-twenty and you know, I would say that we're always looking to be better year-over-year. There's no additional program or out there thinking about right now dead.
But we do want to be in a continue.
Mode so you should expect us to continue to push their cost low, especially in such a weak demand environment.
Great. Thanks. And then just on that weak demand environment. Could you characterize kind of the the price discussions with your customers? I'm just curious if there's been a kind of pushback just given that raw materials are are likely, you know, potentially little bit deflationary in Q4 and then maybe even the next couple of quarters. You know, how are you I'm fighting those conversations with the customers. Thanks. Our customers are very sophisticated. Generally. They look at it over a cycle not over eight single point in time and they can tell by looking at our margins that we've not returned yet to our margins that we had in 2016. So they also know we have continued inflation and wages and Logistics things like that. So that's also something that we factored in so the discussions are constructive.
Just lastly just talking about the m&a pipeline. Could you discuss maybe you know some of the verticals that you're looking at, you know, you've done your account in the past and some areas. Ancillary to court Coatings. Is that still an area of interest for you, maybe adhesives or anything like that or or where you're is a focus for permanent.
Well, we always say that you know, we're looking at all acquisitions in our space, you know, so we are beginning he says and ceilings but we won't you know do a commodity one in that space will say, you know, we only do specialty ones. If you look at Aerospace, we do want to continue to grow our presence in that segment. And then the the traditional Court Coatings segments. We're going to continue to look it up. So we're not going to go out and create some new Third Leg though. So we'll stick to the businesses that we know.
Okay. Thanks. The next question will come from Don Carson with Susquehanna Financial, please go ahead a couple of questions on on u.s. Architectural Michael you had another quarter of growth in your dealer Network which certainly versus a long trend of declines. Is this your new strategy helping out with your Premier dealer Network or is it just cuz you had some some easy comps and then on your company stores. What do you think you can get further price increases in 2020?
what will take the
Latter one first, we did announce an increase in our company-owned stores, and we do anticipate being successful in that.
In regards to the dealers, we are making a significant push for our Premier authorized dealer Network and it's way too early to talk about success in that vein. But we do think the program makes a lot of sense where we work work. Jointly together with our dealers to better service our customers. So I'm glad to see the growth in the dealer Network and will continue to push for it.
Thank you.
Our next question is from Jeff Dukakis with JPMorgan. Let's go ahead. Thanks very much. I think your Consolidated prices were up 2.6% in the third quarter and 2% in the fourth quarter. So you notice it fair to say that maybe they'll be up 1.4 1.5 in the first box or is that the progression this is a little more Precision than we typically guide to again. I would say 2019 was on the heels of you know, very mods of 2018. We did have very strong pricing if you recall and the first quarter of 2019, so the comparables much more difficult, but I wouldn't give specific guidance month. We we do expect a positive number but get nothing specific and your tax rate expectation for the year is between 22 and 24, but I think for the first month
order it's between
2 and 23. Does that bring that Europe does that mean that your base case is 22 $23 or is there something unusual about the first quarter tax rate?
We we are expecting a a true-up of one of our major geographies in in the first quarter, which is why we signaled that to be lower. That's a ongoing number. But if it's a it's a true-up off item that will occur during the quarter. Okay, great. Thank you so much. Thank you.
The next question is from Vincent Andrews of Morgan Stanley , please go ahead. Thanks so much Vince on the the cash flow conversion this year. You did a nice job and in in injecting more cash. Should we expect further Improvement in in in cash flow conversion off of Evita in 2020?
Yeah, you must be listening to our internal management meetings. And we we target every year you'll have to full full turn on our working capital. We've been improving that took last several years, but we still have more room to go specifically on inventories. We we do have a very good receivable conversion rate, but there's still more room there. So Our intention is the lower Capital who you're working capital another half turned a full turn in in in 2020.
If I get you sat as quickly on.
The the the refinish inventory levels in the EU are we at the point where you kind of lapped that issue and and we shouldn't see it as much in 2020 or is there another quarter or so left of that?
That's always hard to tell because it's two-step distribution Vincent and we always have a perfect line of sight into that. So I would hope the answer is yes, but I have no real positive knowledge of that.
Okay. Thank you very much. Appreciate it. Thank you. The next question comes from John McNulty with BMO Capital markets. Yeah, thanks for taking my question. So when when we came back in 2019 and oil prices were down, you know ten bucks a barrel 14% And 15% and yet, you know to your comments earlier, the raw is remained sticky I guess is cracked the right parameter for us to be looking at going forward in terms of how your raw materials move. And if so, when should we start to see any relief cuz it's still looks like, you know other than the pricing that you've been able to put through the really you really haven't seen anything on the on the actual raw. Material Leaf side. Well crude does impact of a large chunk of our basket, but it doesn't impact things like tio2 off probably doesn't always impact things like packaging and so there are some other things like let's call it payments. That doesn't impact it. So there are some other
facets of our
Is that or not impacted by crude, but it is the larger driver but just not going to Michael said earlier we feel our our supply is you know, our our supply-demand wage is well supplied and it's just been stubborn in terms of passing down the the the food chain here.
Okay, fair enough and then Vince just a housekeeping question. It looks like your interest expense guide for for 2020 is up 10 to as much as 25% I guess. What's what's that?
Yeah, we a couple of things one. We we did have good cash in the back half of this year. So we were able to retire some debt in the fourth quarter. We we typically be borrowing money in the first quarter as we build inventory for the season. So there's nothing significant about that other than interest rates in some of our key regions off like loud a more coming down where we had interest income in Prior years.
God okay. Thanks.
How much?
The next question is from Sean Gilmartin with Barclays. Hey, this is Daffy on for Sean, Can you walk through what your market? So 2019 a textural? What do you think the market screw in Europe North America and Mexico to the US grew up between two and three per-cent in Europe . We think it declined in the 1% kind of range and Mexico, you know, the volume was probably down 1% net organic growth part because of price increases and the same thing in Europe . We had price increases at offset the the negative volume. So net-net, I would say marginally positive or an organic roadside in both markets.
Okay, and then can you help size be the issue and Aerospace? So if the Slowdown continues all this year, how should we think about this size of that impacting your business? And then when does the the maximum pain happen? I mean obviously there's probably a lead lag as you go through and it's it's slowly kind of working its way through when does the birth of that issue start impacting your p&l?
Maybe I'll tell you what it's not, you know, some people have said it's 1% That's not even remotely close. So if you want to factor up and down off a half a percent somewhere in that area code but it is a really complicated question because as you know, we Supply transparencies sealants and and he says as well as Coatings and some of those things where a tier one supplier and some of them there were tears and some of the suppliers were running faster than than the customer stated line rate and some were matching it so, you know, we're trying to figure out what the inventory and the chain is off and then it'll be even more complicated by the fact that the airlines are going to be running their planes a little harder. So that will lead to some additional opportunities for us, but then they have to find the time to do the job, you know, and it's not as straightforward answer and so that's why it's we've given a larger range than normal for our guidance.
Great. Thank you guys.
The next question is from Kevin McCarthy with vertical research Partners. Good afternoon, Michael. I recognize the ink is still drying on the phase one trade deal, but be curious to hear your initial thoughts as to what effect it might have in losing up some of the supply chains where you had encountered a fair amount of friction over the past month or two any thoughts on and use markets product lines, uh, that could benefit.
For the one that I am optimistic on is Mexico. I think the government is going to start to turn loose of some money. They wanted to know what environment they were dealing with now they have like more certainty. So I anticipate the government spending more money that's going to be a positive for us for our PPG comex business. And then obviously we're looking forward to the farmers having more money in their pocket and the positive but I think that's a longer pot.
Okay.
And then then for 2020, do you have a strong feeling today as to whether the capital budget could be up flat or down and maybe you can talk about some of the Swing factors or or chunky or projects that you're considering for this year?
Yeah, first of all for 2019 or our cap spending matched almost exactly or 2018 number we did start some larger projects in 2019 and given the economy that we we kept those projects running but we feel back off of some smaller projects. We're still expecting Kevin for twenty twenty two and half to three percent of sales as our capex Thursday. We're going to obviously toggle that based on the economic environment.
Okay, so it sounds pretty similar then. Thank you very much.
The next question comes from Steve Byrne with Bank of America Merrill Lynch. You have these online apps. They're meant to help homeowners in property managers identify contractors and and mostly to buy paint from you how much traction are you getting with this initiative? How are you raising awareness level on these apps off and and is it is it effective at driving volume to your dealerships relationships even in areas where you don't have stores Thursday? This is still in a 7c digitization of the retail and trade paint Network. I would say is slow-going not a lack of effort. But traditionally I would say these are a small business people a little bit slow to change but they all recognize the need to do that and Thursday.
We're working with them on trying to help.
Understand how they can improve their own businesses by moving to more digital apps, but I would say it's still in the first couple of innings.
All right, and maybe this one's also in the first couple of innings that you have this this retail refinished. Pardon the mixing technology that you acquired in Europe . Can you provide an update on on how that's rolling out whether you can bring that across the pond and and whether you could drive market share gains with that. Yes, ma'am. That was something we developed ourselves just trademarked moonwalk could say automated mixing system for the refinished Market that allows the painter basically to scan the paint off the car stick the chip basically into a machine and then app remixes the pain so that way the painter can be way more productive. We've already sold to a hundred of these machines in Europe . The interest level is very high. We've gotten a tremendous amount of recognition. Obviously, we're starting with our own paint shops first, and then we'll be pushing it out into
Competitive environment so that we can start the game share we do have.
Outside of Europe that are also asking about it because of the significant press we received what I would say right now. We're focused on Europe and then we'll look at how we can expand that page over time.
Thank you.
The next question will come from Jim Sheehan with SunTrust.
Thank you on the emission standards in Europe that you referenced. How would you compare the disruption this year to what happened in the last go-round for your 06? Is there a single day in which that occurs or is it or is it going to be phased-in I'd say it's way too early to call I you know the wage is so much challenge in Europe with the emissions that will just sit back and wait, so no real insight.
Okay, and then on your your pricing versus raw material, I think I think maybe your general industrial business is the business that's furthest behind in in terms of inflation. Is that correct? And if so, when when would you expect that business to to fully catch up to two raw materials if there's no macro acceleration, it would be in the back half of the year. We obviously need a little volume to help drive that but I would tell you that you may have made significant progress in all three of those businesses, whether it's packaging industrial Automotive. They've all made significant improvements so far and that's German Edition. That's you you really what we're focused a lot of our self-help activities as well. That's helping us, you know, March back to those prior margin levels.
Thank you very much for your information.
Forecast for Europe is -2 percent on cars. So that's the external forecast on the admission packages will impact it.
Much obliged. Next question will come from Kevin Jeffries, please go ahead.
Actually, I'm from Lawrence. Could you just tell me could you hit the lower end of your guidance? If there is no volume re acceleration the second half of the year.
Yeah, we we we have a guidance range for a reason we do if we don't see any pickup in in activity basis, our internal expectations will be more Discerning on costs. So I would certainly expect us to hit our guidance either through our own self-help or or through economic activity. Thank you very much money. And the next question will come from Mike Harrison with Seaport Global Securities.
Good afternoon. Wanted to ask you about sg&a costs looks like they were up more than a hundred basis points year-over-year as a percentage of say you can you walk us through some of the Dynamics on the sg&a front. Is there a reason that we're not seeing better fall through from restructuring actions at the sg&a. Was there a change in incentive, or what's going on there? Might want one. We as we brought these Acquisitions in there typically coming off at a much higher sg&a. Baseload. You will work that down over time as part of our Synergy capture that we do the second is we do have higher higher stock prices here, which resulted in a t s r from a management and set up for spective of those were the two main factors.
All right. Thanks. And and then my other question is on.
The architectural Market in China, you know that that is an area of strength and and said you're growing above Market. Can you talk about what you're doing in China to drive growth? Well some of your other competitors struggled to green gain Traction in that market, I'll start all like Michael finish. We I think we referred to Mike in China was our protective and Marine Market wage. I'm not necessarily architectural. We do see even though China's down in terms of industrial activity. We do see a tremendous amount of infrastructure underway there. We're participating in that we think we're winning my fair share of the business Marines also up slightly in China. So those are the two items. I think we we earmarked not necessarily architectural Michael if you want to add. Yeah. The only thing I found that is our marine business is winning in the shipyards that are winning business in China and China's winning more business than Korea and we're better position in China than we thought
Korea so we're in the places that are growing.
He might be Aaron.
I'm sorry Mike. This is John . Yeah, I see what you're looking at. So do you just as a reminder to everybody? We do have an architectural business in China? It's a small business and you know, it's it's in part of China to region within China and it's performed. Well, so but I just would remind people that it is on a smaller side to Regional it's mostly in the Shanghai in southern China Feast. So it's that's where it's off.
All right. Thanks very much. Thanks Mike.
Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. I'd like to thank everyone for their time. And if you have any further questions, please contact me this concludes our fourth quarter earnings call.
The conference has now concluded thank you for attending today's presentation. You may now disconnect.
I guess I'm looking at slide five and the
Thursday
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