Q2 2020 PPG Industries Inc Earnings Call

Welcome to the PPG industries second quarter 2020, <unk> earnings Conference call.

My name is Rocco and I will be the corporate specialists today.

All participants will be in listen only mode.

So give me the system recently conference specialist for personal the star followed by zero.

After todays presentation or <unk>.

Last question they were starving wonderful smoky.

So we're trying to question. Please press Star then too.

Please note todays is being recorded.

I would not what kind of <unk> director of Investor Relations. Please go ahead Sir.

Thank you Rocco and good morning, everyone. Once again this is job or no. We appreciate your continued interest in PPG and welcome you to our second quarter 2020 financial results Conference call.

Joining me on the call from PPG, our Michael Mac carried chairman and Chief Executive Officer, and Pittsboro, what senior Vice President and Chief Financial Officer.

Our comments relate to the financial information released after U.S. equity markets closed on Thursday July 16th 2020.

We have posted a detailed commentary and accompanying presentation slides on the Investor Center on our website P.P.G. Dot com.

Slides are also available on the webcast site for this call and provide additional support to the opening comments Michael will make shortly following management's perspective on a copies results for the quarter, we will move to accumulate session.

Oh, the prepared commentary and discussion during the call may contain forward looking statements.

I've seen a company's current view a future events and they're potentially fact thought pbds operating and financial performance. These statements involve uncertainties and risks, which may cause actual results to differ the company is under no obligation to provide subsequent updates to these forward looking statements as presentation also contain certain non-GAAP financial measure.

The company has provided in the appendix other presentation materials, which are available on our website reconciliations of these non-GAAP financial measures time, most directly comparable GAAP financial measures for additional information. Please refer to Pete could use filings with the FCC now, let me introduce PPG, chairman and CEO Michael backyard.

Thank you John and good morning, everyone.

I'd like to welcome everyone to our second quarter 2020 earnings call.

John noted we posted a detailed narrative on our website yesterday afternoon, and it's a slight process improvement versus prior calls.

Maybe just a few opening comments on the quarter and they will move into Q1 day.

First and most importantly, I hope that you and your loved ones the remaining safe and healthy.

Throughout this challenging time, we remain encouraged and proud of all the PPG team members for protecting each other meaning the dynamic needs of our customers, helping communities pet insurance the ability for all our stakeholders.

We continue to remain optimistic.

About our business and continued growth prospects.

I also want to comment briefly on the issue is systemic racism and discrimination that has existed for far too long.

As a society read a pivotal moment in history and clearly enough.

No.

That's a global company were focused on doing our part to help advocate for your quality just is that inclusive workplace that is freed discrimination.

Global leadership team has been holding open discussion with employees looking at strengthen our diversity inclusion leadership efforts.

Even our own policies and processes and leveraging the PPG foundation to support nonprofit or making a positive difference and these important areas.

This is and will remain a priority area for me and the entire PPG leadership team.

Now moved to discuss our financial results last evening, we reported second quarter 2020 financial results.

The second quarter, our net sales were $3 billion and our adjusted earnings per diluted share from continued operations were 99 cents.

These results, which were significantly impacted from the business interrupted caused by the cobot pandemic or better than we originally anticipated.

As we communicated and their financial update provided during the quarter April and May volumes in aggregate were down more than 30% due to the pandemic.

But it must the June strong global architectural coatings demand 15, you're.

Our isn't really driven by do it yourself sales and with a couple was sequentially improving auto and general industrial demand resulted in total company sales to be down by a low teen percentage.

I'm pleased to report that our global architectural business delivered a record quarter driven by strong performance in many countries highlighted by a Mexico team.

During the second quarter I recovery advanced further <unk>, China, where several businesses, including automotive OEM general industrial coatings and protect their marine coatings, all had higher year over year sales volumes.

Year over year demand was lower and other major global regions, but our sequential monthly sales volumes improved in each region during the quarter.

Given that we have a large China business. We began a pandemic response in late January So we were able to implement quick already tested and decisive actions to help mitigate the lower sales activity and the virus spread outside of China.

As a result of these actions we delivered about $170 million, an interim cost savings within the second quarter.

In addition to the interim cost savings actions, we achieved more than $20 million a cost savings from our restructuring programs, which are permanent reductions to our cost structure.

There's a couple with good selling price realization or nearly 2% mostly from our distribution type businesses.

Helped us achieve double digit margins in the second quarter, what's a significant improvement versus the depth of the prior recession in 2008 at 2009.

Our operating margin in the second quarter as a strong testimony of the structural cost savings.

We have delivered in the past few years at higher level, a variable cost and our cost structure overall.

Also in the quarter, our cash flow from operations totaled approximately $500 million.

Hey, lateral comparable to the prior year second quarter.

This was supported by rigorous management of our working capital resulted a 400 million dollar reduction and our working capital compared to same period last year.

Looking ahead, we expect economic activity to continue to recover with differences across end use market and drager graphic reach.

We expect our global architectural business to continue to be more resilient and deliver higher organic sales and the third quarter.

Although we anticipate softness in the U.S. commercial making its segment to linger.

And do it yourself demand to remain strong.

It's somewhat less robust than the second quarter.

We're pleased with the advancements with respect to our U.S. architectural coatings delivery model.

Third forthright dealer network, and our global digitalization initiatives and expect continued customer adoption lean to further growth opportunities in the future.

We anticipate demand for our automotive OEM and general industrial products to continue their recovery in the third quarter.

Other businesses, including automotive refinish, and aerospace will take longer to recover until travel and miles driven returned close to 2019 levels.

Result.

Excuse me due to the uncertainty over the economic climate, resulting from the continuation of the Cobot 19 pandemic.

Aggregate sales volumes are projected to be down, 8% to 15% and the third quarter with differences by business and regions.

Decrement to margins of the third quarter expected to be slightly worse than those experience in the second important.

This is related to removing some of the interim cost mitigation actions in the third quarter as demand for our product progressive and no sure we properly service our customers as they continue to resume their operations.

Our liquidity position remains strong and has improved in the first quarter.

We remain committed to our legacy rewarding shareholders and have approved a 6% increase in our quarterly dividend a reflection of the confidence we have over maintaining and growing our cash flow.

Well also continue to be disciplined over our approach to capital allocation.

As a pandemic continues our focus will remain on leveraging the PPG way.

Protecting their employees and providing excellent support to our customers with the essential products and services, they need to resume and ramp up their operations.

In addition, we will continue to support the communities, where we do business.

I'm very proud and pleased with how our global team as they won PPG team is managing through this prolonged and extremely challenging time.

I firmly believe that we will emerge as a stronger company.

Thank you for your continued confidence and PPG. This concludes our prepared remarks and now Rocco would you. Please open the line for questions.

Absolutely Sir we will now begin the question answer session. I was a reminder, ask a question human press Star 100 touched on flow.

Good for using the speaker phone, we ask you placed for her perhaps before passing the keys to withdraw your question. Please press Star then too.

Today's first question comes from David Begleiter were booked for Bank. Please go ahead [noise].

Hey, good morning.

Michael just on raw materials in Q3 in the back half of the or what are your expectations as to how much would tell when they might be.

Neither the first half or what other part year.

Well, David I would look at that in two ways. A the first one is you know we continue to see moderation on a year over year basis.

But you have to be a little bit careful that on a sequential basis things like copper and oil have started to move up so I think that moderation pay some moderation will vary a in the third and fourth quarter were not exactly sure how the pandemics kind of continue to play out.

But I would be looking at it on both a prior year basis as well as this sequential basis.

Very good and just on the idea why strains continue into Q3, how much moderation do you expect and how much do you think was maybe was pulled forward into Q2 from these when these projects.

Well I don't think there was really any pull forward. If you look at a inventory on the shelf you know I would say that most of our big box customers would advocate that they would like to see more inventory on the show.

So I don't see a pull forward from that standpoint.

But I do think there is a limit on how many room is that people will paint in their house. So I do think it will start to slow down overtime. Obviously, that's going to vary by you know how long you. There was a stay at home orders by various states, but we are not expecting the third quarter to be quite as strong as a second quarter.

Thank you.

Hi, David.

Your next question today comes from <unk> with Goldman Sachs. Please go ahead.

Thank you very much and.

I really appreciate the granularity on the slide deck, that's really helpful.

Michael You mentioned that you thought for next quarter I made the aggregate could be down about the same rate as the June month. So is that am I right to read that as an expectation that this year was steady state from the June exit.

Velocity for the farmers or something else under the hood going on there.

No I think that's a reasonable assumption I think that the question. We have is if you look at some of our big markets.

So think about automotive right they have demand out there, but they're having people problems you know getting their plants up and running and making sure everybody's safe.

So I think that's the challenge that we don't understand is you know to what extent will they be able to keep their plan.

Operating at the level they want because they have the demand. It just now it's just a matter whether they can keep it going.

And then you you commented that.

You are able to pull some I guess what period cost out.

During the second quarter, but on the industrial side in particular it seems many of those have to go back into start supporting a covering those in that customer base.

How long do you expect that last and should we then see the flip side of that which is that really healthy incremental margin improvement as those volumes come back.

Yeah, So Bob I, though the way we're looking at it is in the second quarter, we had a number of our plants down freight.

You know substantial period of time, you know settling some of them down four to six weeks right and we did a really really good job team did a fantastic job with our customers coordinating what color as they wanted when they started up and we tried to maybe said such that they took the colors. We had the colors. They wanted right before.

Shut down and so we were able to actually stay down longer than they were because of that coordination with the customer so.

That we can't duplicated in the third quarter, because basically all our plants are running again.

But you know we have learned a lot of things to the pandemic our ability to.

To drive productivity has improved our digital initiatives have continued and so I think a lot of that is a testament to the the resilience of the PPG team.

Great. Thanks, very much [laughter].

Our next question comes from Ghansham, Punjabi with Robert W. Baird. Please go ahead.

Hey, guys. Good morning Hope everybody is doing well I guess, just as a follow up to the last question on the 8% to 15% volume decline you're forecasting for Threeq you just the downside extreme assume any incremental lockdowns in the U.S. or any other regions. You mentioned for example, Michael in your prepared comments that auto Oems should benefits.

Additionally from reduced seasonal shutdowns in Threeq use I would think that would be a positive variance I'm just trying to understand what operating paradigm, you're betting on the downside extreme.

Hey, guys on this is Vince.

No question at the that's a fairly wide range.

We just don't know the the shape of the pandemic and some of the key regions. We're still seeing affects obviously in Latin America, South America, India U.S.. So so the range that we put out tries the bracken best case from worst case with respect to how that pandemic will affect.

The quarter.

Okay, and then in terms of the decremental margin variances for Threeq, you relative to the Twoq to baseline I think you said slightly worse can you just give us some more color on that.

Yes ill go here guys I'm I think one of the one of the issues.

If you look we had a 40% decremental on Q1.

Yeah pandemic, it very quickly and abruptly we weren't able to manage our costs Accordingly, as Michael just mentioned and we were able to be very planful throughout the quarter in Q2.

Managing our not only our operations, but our administrative group. The operations are all started back up some of those cost or binary they're either in or out.

So regardless of the volume these kind of semi variable cost or some of those are back in Q3. So we're not going to be up to 25 for 26% Sacramento, but we're certainly not going to be at the 40% decremental. We had in Q1, so it'll be somewhere in between.

Hopefully closer to 25 and gotten some I would say that you know in the later quarters that have come you know, we're gonna have better incremental margins I mean, I think thats a given.

As that volume returns work, we're more efficient and we can see that's helping us out.

Terrific. Thanks, so much.

Your next question today comes from John Roberts.

Please go ahead.

Thank you China's recovered nicely for you is it no steady state as well, where you're going to continue to grow from this second quarter levels in China and any progress to report on your new coatings for E. These.

So John.

We see continued improvement in China.

But we're not seeing like a massive Joe you know I think the GDP for our customers are probably going to be in that a 3% to 5% kind of range.

We are seeing continued improvement in the automotive demand people are staying away from mass transit. So there are more people driving so that's a positive we do see virtually every province has some kind of a automotive stimulus package to support their own little automotive.

Guys and that province so.

So we do see that continuing.

Our industrial business continues to win share in China. So we expect that to continue so you know I say overall, we're you know we're still very positive on our China team as well as our China business.

And Jonathan.

Thanks, just to piggyback on the last question.

No China, we haven't seen a full volume recovery, we've seen a nice volume recovery, but as we alluded to our per for financial performance. There is above prior year due to those those does the fact of those Incrementals Michael was talking about and John back to your last question, which is TV, a we are getting orders.

On a various aspects of the me battery. So we're getting some obviously painting. The next year. We just recently won a new award for.

I would say de leading E V maker in.

In China, where we're providing protective coatings inside the battery I'm, obviously, that's to eliminate a third what they call thermal events, which you and I called fires.

So we're very pleased with that and we continue to see more trials.

Under way with all the leading battery guys in China, and we think Thats the market that's going to grow the fastest freebies.

And then I may have missed it but I didn't see any additional reserve for bad debt. How are you feeling about general industrial 'cause Big manufacturers. As you mentioned are heavy some problems keeping their credit stuff I would imagine it's even harder for the small manufacturers in the general industrial area.

Yes, John just as a reminder, everybody we took a 30 million dollar bad debt reserve in the first quarter anticipating some effects from the pandemic and we were not anticipating to see a big.

Customer problem in Q2, most most of our customers have enough liquidity, starting to last quarter or longer.

That that $30 million would be something that we would expect a if it's used at all to come through sometime in the latter part of the year. Our collections in Q2 are actually very strong.

We've had some reason some of our best.

Percent currency.

We still have at $30 $30 million reserve.

There again, we do expect that to be.

Well that that as we go through the balance of the year, but we would expect some impact in this in the latter part of the here.

Great. Thank you.

Our next question today comes from Michael Sison with Wells Fargo. Please go ahead.

Hey, guys, a really nice quarter. There <unk> can you maybe talk a little bit about the stores and how the do it for do it for.

Do it for me channel is sort of shaping up for to kill I know there wasn't improvement throughout the quarter. What do you think you're out in July in and how do you think that will play out.

For interior demand in the third quarter.

Well, there's clearly improvement every month in our stores business.

So we're pleased to see that the work that you know is really being done a lot of exterior work right now and now we're starting to see consumers being a little bit more a understanding and their allowing inside work as well. So I think the pace of recovery.

We'll continue that the challenge of course in our architectural business in the U.S. is a commercial side and a that makes it inside so you know the buildings that were.

You know underway are going to get completed and then you know that we think there's going to be a slowdown in new construction and then of course for residential or commercial.

Maintenance, that's going to be the challenging part going forward.

Got it and then it's a follow up you know at slide nine you had a had a nice comparison regarding your margins now versus they were in the last downturn if if.

When volumes returned back to pre called it levels, which I understand it could take some time, where do you think the margins will end up given cost savings and better pricing.

Down the road for each of the segments.

Yeah, Mike on a like for like basis, where several hundred basis points better be a Q1.

Do you want to know nine or two to own on.

Okay. That's a reflection of all of the structural cost savings, we've weve action the past several years. So so as you if you if youve flash forward. It hopefully when the volumes come back we would expect old a couple of hundred March margin basis point improvement first the last cycle.

Great. Thank you.

Our next question today comes from John Mcnulty with BMO capital markets. Please go ahead, yeah. Thanks for taking my question and congrats on the quarter. When we look at the cash that you generated in the quarter and the strength of the balance sheet. It's it's it's obviously, it's huge I guess can you speak to the opportunities to deploy that.

Capital as you look throughout the rest of the year are you seeing any opportunities in terms of M&A or are people a little gun shy trying to no kind of worried about selling at the bottom and that type of thing how should we be thinking about that.

So John we have a number of books in house.

And so we're making progress on some of them.

As always the challenge is a bit in the app.

GAAP now the the benefit is that with a a june that we had in June that we expect that some of these companies had that bidding the ASP should start to narrow.

So we do expect to have some progress in this area.

Area this year.

Obviously, I don't think we're going to close on any of them in 2000, and a 20, but I do expect us to have a progress and a I would say the pace of the the inquiries has not changed now we had a strong order book if you will going into this and we have a good opportunities come out of it so.

I'm pleased with what I.

Got it no that's helpful.

And then I guess, you know PPG runs a pretty lean ship in the first place and then this quarter you announced 160 270 million dollar Big restructuring program I guess can you give us a little color as to where that's actually coming from and your comfort that you can you can hit that I know I know you were speaking earlier too.

This is you're seeing a lot of new opportunities around digital and that type of thing I guess, how is that playing into this as well.

Well in digital is clearly.

A significant one so we are.

Moving much more to a click and collect click and deliver model and that has.

Provided a nice tailwinds and we expect that to accelerate and you know if you think about it.

Traditional trade painter that was not there method of doing business. Prior the pandemic. So we anticipate that's going to continue.

Obviously, we have some opinions on and you saw that in the second quarter results aerospace is going to take a little bit longer the recover and so we took aggressive actions in our aerospace business. We're also getting more productive in our refinished business. So those two businesses are.

There and of course, I would say the last one is.

The service model that we have in automotive and to a small extend and industrial we shifted much more to a pay model.

And so we will either get paid for our technical service people out in the field or we will have less of them and right. Now you know I'm pleased to report that our customers are really paying for them. This is a you know if you notice for OEM, we were above market in all regions and that's because they value the.

Technical service at our people provide and allow them to start up that's really important to them and so they have been willing to pay for that.

That's great. Thanks, very much for the color.

[noise] I don't know questions today comes from PJ Juvekar with Citi. Please go ahead.

Yes, hi, good morning, Michael rents.

Michael you seem to be more positive you want the refinish market compared to a few months ago.

With the trends in Europe, improving China now back to 20, Mike deemed levels.

And so even if your western Europe like my six months, rather go to China.

Do you believe that 2021 should be a robust year for refinish.

Our or would you agree with that logic.

Well I don't know that I would use the word robust, but I think two things I would point to in refinish. One this second quarter is completely wash all the inventory out of the chain.

And so you're not going to have to worry about you know how much is inventories in the chain you know our body shops random down our jobbers random down you know every body wash them out of the system. So going forward, you're going to see hopefully demand matching up with what we're selling.

And I would tell you also you know I was pleasantly surprised by the orders that we saw in June.

Despite congestion in I would say mediocre at best.

There's still a lot of opportunities out there so.

You know body shops are running at 70% to 80% right now and the U.S. in Europe, and so that's actually a little bit better than I would have projected given how little congestion there is out there on the streets.

Okay. Thank you and then secondly, oh sort of a big picture question and hoping you always had a good insights into the economy.

So my question is [noise].

Clearly the OEM auto Oems sought is coming down and there was a view that the auto recovery will be slower than the how's it going to Cody.

No I just doesn't see a peak in autos until 2023.

So you know what are your projections victims of the projected reason goes to a end markets.

Well actually it's ironic because we have the same 2023 for getting back to 17 million, but that's not the way I'm thinking about our automotive business.

I'm thinking about our automotive business will have a.

Better volumes than that sooner because of the growth in Hebei.

So you know I am thinking about this slightly differently, it's going to be built and he be going forward not just builds.

And anything on housing thank you.

I think housing is actually going to be stronger than people anticipate I think people are going to be willing to live outside the bigger cities and so I anticipate housing to get better.

Faster in sooner and when you know interest rates at these kind of levels.

There's really no reason why people can't qualify for for mortgages. So that's the key will be how quickly can we get people back to work.

Right now you've got so many small businesses that I think right permanent damage risk.

That's the thing I worry most about is all these small business people that are out of you know will likely be out of business.

Great. Thank you.

Our next question today comes from jobs costing us with JP Morgan. Please go ahead.

Thanks very much.

Can you compare the trends in the aerospace OEM market with the trends in the aerospace maintenance and repair market exclusive of defense.

Yes, so Jeff as you know the builds for Airbus and Boeing have come down appreciably.

And we anticipate them to stay down for a while I'm. So you know last year.

They were building you know let's call. It 45 737. The month you know now they're building, let's call it 20% of that 30% of that so.

Appreciably different now MRL, though is strictly dependent upon the number of times that playing goes up and comes down.

And you know we peaked at about 64% of the flight.

Our planes being in part and now we're about a only 40% of the planes are part.

And so MRL will start to get better because it's again it doesn't matter, there's one person on the flight or 100.

And so we anticipate that getting better. So we think a leading indicator if you want to try to estimate MRL, a leading indicator is the growth in flight.

Not passengers, so don't pay attention to the passengers, but pay attention to the flights.

Thank you for that and can you compare changes currently in titanium dioxide prices in different regions that is or the price patterns difference in South America, Europe and in the United States.

Yes, they're all four regions are different so you have.

Lower prices and in Asia.

You have higher prices in Latin America due to currency.

I have slight moderation in Europe, and a very little moderation in the U.S.

Great. Thank you so much.

Our next question today comes from Chris Parkinson with Credit Suisse. Please go ahead.

Great. Thank you.

Throughout the oldest Malays, there's been a reasonable amount about debate on market shares in architectural packaging coil and refinished I guess have been extended the primary for just given what you know now just how do you set your on market share movement and then also how would you assess your competitive positioning for the balance of this year.

It also outlook into 2021, thank you.

Hey, Chris has been side I think if theres theres no. There's a lot of Oh pick this out there. So it's really hard to determine market shares will certainly go through this quarter next quarter look at all of our.

Results our competitors are resolved.

Yeah, I think the biggest thing we see obviously theres a share shift right now from do it for me the DIY.

That helps our DIY business or trade business.

Competitively that is different impacts.

In any other businesses you mentioned, there's really a lot of variables by region for example, and packaging a lot of the.

Package or a lot of the can guys in Asia had to shutdown.

For a procurement reasons, so it's really hard to discern what you're asking until we're on a more steady or run rate basis.

We're comfortable with what we're doing we're comfortable and some of the strategic initiatives, we laid out like digital delivery those things are coming into favor. So the work we put in the past couple of years around those are helping us some of our technical items some of our technical things like Michael mentioned earlier with respect to.

These are coming in to favor. So so lot of the long lead items, we put in place.

Our due to this there is a pandemic are coming into favorite which is that helpful for us.

Got it and.

It just wasn't architectural good get dive into this a little bit more just.

Can you just quickly common opposite maybe difficult also did started in the southern environment, but just seems like it's still a lot of momentum at home depot time looking diamonds.

You've had you previously you were talking about some newer initiatives, even the independence and then even some suffer online and digital digital so just how should the market be thinking about your U.S. growth rate outlook versus peers, and just relative competitive position because it it seems like you're doing a lot and boats ready and even Nonresi said you.

Given your comments on that.

Well again, it's hard to without a lot of.

Not a lot of market information at this point, but hard to our digital sales are up triple digits off a very small base, we definitely see Arkansas, Michael alluded to earlier, we definitely see our customer base.

More willing to move to a digital platform, we're certainly holding our own of the DIY market, but that does that all market has been elevated.

We moved to this preferred authorized dealer network really to be more optimal in our full delivery or our dealers are up consistent.

Mostly consistent with a DIY market so again.

We'd like to see more competitive information before we comment, but we feel we're holding our own in this market we feel we're outperforming in Mexico.

Depending on in Europe, depending on the on the country again.

Mark just not performing him and we're well favorite right now Chris I wouldn't want you to Miss My comment in my opening remarks, where we had a global architectural record performance.

Great. Thank you very much.

Thanks, Chris.

Our next question today comes from Kevin Mccarthy Vertical research partners. Please go ahead.

Yes, good morning.

With regard to your architectural business I was wondering if you could elaborate on what you're seeing in Europe in terms of trends by country early UK versus continent, and also by channel there.

So Kevin I'll I'll start with a France as you know, that's our largest market and France. A April we had a lot of challenges in April because of the stores were shut down because the government mandate.

And starting in May they started to loosen up.

And by June you know all the stores were opened and in July we are doing quite well. So you know France was just a.

Steady upward trend.

The UK you know started really strong April may kind of a little bit of a downturn in June as the.

Re spike and numbers came up but in July there back to a really really good numbers.

Poland is doing great. There's no doubt, we're taking share in Poland.

And the rest of our eastern European business is quite strong Benelux a were debt definitely doing exceptionally well there. So you know I've been pleased with our European performance.

And just as my helpful. Just from a channel perspective, Kevin same same phenomenon, we're seeing here.

I was very strong both in the UK and on the continent.

Trade.

As a feeling the same effect this year.

Okay. Thank you for that and then second if I look at your Ah heat map on slide six.

It strikes me if I counted correctly, you've got 11 boxes that show above market growth and zero that show below market I think two quarters ago below market might have been a half dozen boxes or so.

You know I appreciate it's got to be very difficult to gauge what the market is doing when conditions are so dislocated, but I guess my question would be to do you feel as though you've gained share in any of your businesses due to the pandemic, whether its ability to operate or execution or otherwise or am I reading too much.

Answer that.

Well I think vintage tried to cover this previously and these kind of times is always difficult to put your finger on exactly whether you're gaining share losing share.

But I do feel there's no question that we're gaining share in Australia.

I mean, that's that's an easy one the measure I would say the UK pretty easy to to measure there I always say those are the areas that were most.

Double with clearly automotive is easy to measure we know exactly what the build where we know exactly what our sales are so that is a is it Kevin.

I think the rest of them can can be quite tricky to figure that went out.

I'll just add to one and we were comfortable with is in certain regions, our protective business due to our technologies. It again has come into favor as customers are looking for functionality in these times.

I think also in some of our general industrial businesses were were working with our customers the start up.

You were typically one of the favor a coatings companies to help customers start up and have that secure launch process. So but again it is very difficult Kevin until we see a bigger array of results and really over a couple of quarters.

Fair enough I appreciate the color.

Our next question today comes from <unk>, There's one along with RBC capital markets. Please go ahead.

Great. Thanks, good morning.

Congrats on the results just wanted to ask about Q3. So you know your pace of sales decline in June was 12% guidance for Q3, they to 15 so.

At the midpoint your Ah around 11, and a half or so down in Q3.

So that's not much better than June I guess, an aggregate. So is it your assumption that there will be some considerable moderation and.

In architectural as automotive comes back and that's what kind of the drives a similar result in Q3 versus June.

Or is there a possibility that or you know, maybe we see some upside to that.

You know if the architectural doesn't.

Decline as much or how are you thinking about the offset between architectural and automotive in Q3.

Yeah, right as we mentioned earlier.

We have a wide range for Q3.

It's really based on the uncertainty around the pandemic in some of our key regions.

So so we're hopeful to be up though at the low into that range. If you will.

But we maybe on the high end.

14, 15% if ER.

Endemic continues to worsen in certain parts of the world. So that's really the that's really what we're looking at its still very difficult to predict.

On a month by certainly week by week, but on a month by month basis, what our customers going to do what customers can actually run.

We're seeing so we're seeing spot shutdowns from customers due to code, we're seeing spot shutdowns from customers due to parts issues. So that's why there's a there's a wide range there and expect some volatility throughout the quarter.

Okay, and then as a follow up just a on the on the cash issue I'm going back to the you know you have a very strong balance sheet here over 2 billion.

Our cash on the balance sheet as well you've stated in the past that you do not want to build cash, but it does appear that it may be difficult to consummate and close any deals. This year, you said earlier as well so.

Just curious you know what your plans would be if you're not able to deploy that cash in M&A. A would you prefer to keep that as liquidity and reserve for now or or would you be able to put it to work and in capital return.

Yeah.

Only for the near term, we're carrying excess cash again the.

Our sightlines or are limited in terms of how that is going to affect us. We're not health experts were hearing there may certainly be a flare up.

Some of the key countries in the fall so we're going to be conservative as Mike alluded to our acquisition pipeline is refilling those are bolt on in nature.

We we maybe able to execute on some of those out whether we can close or not this year as Mike will probably be difficult given where months out before the end of the year, but we'll certainly manage our our acquisitions and our cash around that we do it we do have the capability to pay down some debt.

If the skies clear here.

We have short term facility that is free to be prepay. So although those are variables. We really just any more visibility on the economy before we start to make some some key decisions. We don't want to grow cash as you mentioned we will.

Look for earnings accretion opportunities, whether it be acquisitions or other but we just need more visibility before we start to pool triggers on some of those.

Yeah. Thanks.

Our next question today comes from Stephen Berman with Bank of America Securities. Please go ahead.

Yes. Thank you.

We reported the some auto body shops switched over to PPG refinish coatings and I was just curious where are you saw that and whether it's due to that.

New keep mixing.

Product that you are rolled out in Europe.

Oh, what is the status of that.

Rollout of you're getting traction from that.

If you have you consider.

Expanding into other regions and.

This is operating at a 70% rate.

Helps you in your process of trying to cause a body shop to flip over to you because they may not be running flat out.

Yes, so Steven just good start talking about moonwalk, we've had.

250 installations put in a 150 of which got put in the second quarter.

And 30 of them were new body shop when so.

It is performing at a good level, obviously, we've been a little bit challenge.

Getting that out into the field because we have to send text service people into the field with the equipment to make sure people are trained on running it.

So we anticipate that that will continue to roll that out we will be looking at moving that into the U.S. as well.

We see it's a most important in a high labor markets in the high markets, where labor is hard to combine so that would say that we're probably not going to roll that out in Asia.

As a as a likely place, but we have been picking up share in refinish, we track that quite closely it's a net win basis because you win some you lose some.

But overall, we feel comfortable now the key with refinished I will be getting the miles driven back as well as a congestion.

Well, thank you for that.

A follow up for you on the.

The trend of shifting from do it for me to to do it yourself do you see that same trend in your own stores, where you're you're picking up more.

Homeowners coming in or ordering online. So by paying 10 was just curious as to your view based on those relationships in discussions to do you think that some of that impact could be lasting.

Hi, egos homeowners.

Well continue to pick their rooms themselves rather than hiring a contractor post pandemic.

Yes, Stephen we we set for multiple years the ship between DIY wind do it for me.

Highly correlated to the unemployment rate.

So certainly last five years as the unemployment rate has come down you've seen nor do it for me you seen obviously a spike in the unemployment rate. During these times you've seen a abrupt shift back back the other way and again I would just look at that unemployment rate on a go forward basis determine how they these channels will react.

Exactly the same in 2008 2009.

And it's a recurring now so that's that's the key we still think long term.

You know do it for me, it's going to continue to grow.

But the certainly for the foreseeable future with unemployment on.

Do it yourself market will remain robust.

Thank you.

[noise] Kinda next question comes from Vincent Andrews with Morgan Stanley. Please go ahead.

Thank you.

Asset clarifying question on the on the cost saving to make sure that we have a model right, we don't doing double counting.

If I assume your volume constant on a go forward basis, and you had 170 million of interim cost savings. They came out in the quarter and then you've got the new restructuring program, which is 160 to 170 million in annual saving.

Or let me try it this way the 170 they came out an interim basis is presumably going to come back overtime and the 160 to 170, that's on the comp should offset that now maybe it won't be one for one because that's what is that the right way to think about it that those two things all play offset each other.

And Sunshot Renaud, that's exactly right the oneseventy because call is a transitional or temporary it'll come back as volume comes back.

And the restructuring savings are intended to be permanent.

And then just one last follow up on that or are you done what the large scale restructuring cost for the year with with the with the charge in the quarter or will there be some trickles out in the third quarter fourth quarter.

Based on there are certain costs are related to restructuring Vincent the we cannot based on GAAP accounting take until their incur so there'll be some modest trickle out in Q3 Q4, even Q1, you again based on the accounting guidelines there very model.

Understood. Thanks, very much guys. Thank you.

Our next question comes from Sean Go Martin of Barclays. Please go ahead.

Can you guys.

Yes.

Vince can you hear me this duffy.

Okay, Great I, just wanted to drilling a little deeper on the de iwai versus trade split so in the two summer quarters, where this effect looks like it's going to be important roughly what is the normal DIY versus trade break out you know just size or the two businesses over those quarters.

And then what would be the influencing that shift kind of on margins is I'm, assuming gross profit margins for DIY is higher than trade and then on the cash flow as well as I imagine there was less credit in DIY. Why then there would be in trade is that big enough to kind of skew the numbers or influence the numbers for the overall company.

So it's driven by more driven by region not be first of all that we will stick to the U.S. market for clarity typically trades, 55% to 60% on a gallons basis.

Of the market, it's less it's 50 50 on a on a dollar basis.

For PPG and we're close to that.

Mix.

We are seeing obviously double digit growth and DIY why.

We've seen a detriment in our trade business part of that's due to the stores this being shutdown in certain parts of the country.

Again, because of double digit growth and yeah. Why Q2, that's been that's been beneficial for that part of the business trade. The pair trade business higher fixed cost we have stores we have leases.

So so volume there when it comes back typically carries a nice incremental.

We don't give out profitability by by channel.

So we're not going on we're not going to go there, but again as long as where.

[noise] producing positive volumes in architectural business and as Mike alluded to we have very strong financial performance in all regions certainly in the U.S.

It's beneficial to us and our shareholders.

Great and then micro question for you I imagine you're getting ready for you know kind of your your meeting with your business leaders planning ahead. The next year.

This fall when you look to the slate of your businesses.

Are there were some of the businesses that you think are just structurally different you know, but the next one to three years because of what's where.

They're gonna have to meaningfully changed their business plans and if so kind of which ones we wouldn't be though the most obvious there.

Well I think definitely to the one that is on a what I think a temporary lag is aerospace.

I am fully convinced.

That when ever it's safe to get on a plane again the planes will fill up I'm you know when I look at the number of cruise ship bookings for next year. Its radically up people want to travel people don't want to be locked in their homes.

So yeah, probably don't have to wait for the vaccine, but a vaccine would certainly be a huge benefit.

But we are aggressively managing our cost structure and aerospace. So I think that's the one that probably be a little bit longer I think refinish. You know we had a you know incrementally every month was better April versus May versus June so I'll be in a bit.

Her position to answer that question.

By the end of the next quarter, but I would say that you know will probably be 90% of the way back at refinish in the back half of the year and then it's a matter of what do we have to do to get that last bit back.

But those are the only to that I think of I mean, I see cars as a long term I'm getting back overtime and for US, we'll be growing faster than the market because of our E V exposure.

And industrial a similar kind of thing so I don't see any structural efficiencies, except aerospace in the short term.

If I could add to that as we alluded to earlier.

We do see the digitization, especially in the architectural space, we see some paradigms being broken now that makes the entire supply chain more efficient.

We see behavior typically in a crisis you see behavioral changes, which is where we're evidencing. Our people are just more willing to adopt.

Delivery more willing to adopt the digital again, we we've been talking about this for certainly more than six months.

And we're seeing a structural modification of behavior in that in that channel not only in the U.S., but we're seeing in Europe, we're seeing in Australia.

So so I do think that'll be something we're going to measure and monitor and try to continue to to promote.

Great. Thanks Fellas.

Our next question today comes from covered most of our were more focused research. Please go ahead.

Hey, good morning, everybody.

Michael I think you mentioned earlier that on the DIY side.

Retail customers would probably like to have more inventory. So does that imply that manufacturing hasn't been able to keep up with the really strong demand.

Does that also imply that we could see a restocked coming at some point and is that a regional comment or or or global.

Well, it's definitely regional I would say were under stocked in Australia, you pay and a little bit in the U.S.

I you know at this point in the paint season, they never want to Miss the paint sales. That's the key and then they typically destock in the third and fourth quarters as I, especially after labor day.

So I would tell you that that skews a little bit different you know how much inventory they were going to carry going into the fourth quarter is a total unknown at this point in time.

And so you know if I had a crystal ball I tell you that there is the potential for some continued strength beyond what you've seen the market, but I think that would be a.

Probably I'm a little too much speculation.

Okay, Great and then pricing was up you know nice nicely for the quarter, 1.7% for the company and particularly out of Oh, the performance coatings setting up 2.7%. So just want to get your stance on how sustainable you think that pricing is I know in your slide deck. You said, you expected pricing to be about 2% year over year forms coatings in that.

Third quarter, so little bit of the.

You ever fade sequentially I don't know if that's just the comp related or any expectation that there's some type of price trade, but just.

Curious with volumes doing what they're doing particularly on the industrial side of the business you know how sustainable you think pricing is it that these types of levels.

So the reason that 2% is a comp over year over year, you know the timing of when these increases come very.

So we feel very comfortable on the performance coatings side that pricing is a there and it's taking it will be there on the industrial side, obviously, that's always a harder place, but right now we're maintaining price we're going to continue to maintain price from <unk> PPG perspective will be willing to walk away from business.

It's a to make sure we get paid for the value. We think we're going to deliver right now I I see a customer's much more focused on helping them get up and running and price hasn't been a discussion or a significant discussion at this point in time to obviously, that's going to change once you're up and running it fully operational.

Things like that but by and large.

You know what I tell people on the industrial side is we didn't get all the price that we needed in the last up cycle and so we should not be giving away any price.

Just immediately when it's a you see raw materials start to moderate so I think there is a given take care and right now I feel comfortable that we should continue to maintain price through the balance of the year.

Great. Thank you very much.

[laughter].

Our next question comes from Jim Sheehan with Suntrust. Please go ahead.

Thanks, Good morning, so on the heat map, Brazil seems to stand out to me as the biggest anomaly growing year over year, and you know PPG, you're growing above the market. It seems like you know corona virus issues worsened there. So could you give some more color on what happened in Brazil.

Yes, so were down in the southern part of for Brazil, There's three states down there that were very strong and so we're not that strong in you know take about Rio and Sao Paolo that's not where our strength is and where we are the pandemic is not as robust as it is up in the major cities.

But we haven't new leadership team down there in Brazil, and there they've done a really outstanding job of a growing with our not just our big box customers down there, but also on our trade side. So.

Been a two factors.

Great and then maybe you could talk a little bit about your raw material inventories I suspect that you know you've moved up through a lot of the high cost raw materials had.

Where are you in that process it seems like with automotive.

Builds wrapping up that that you know you're going to eat through the higher cost raw raw materials in short order is that right.

Yeah, Jim if you look just look at our volumes in the quarter. We came in obviously one quarter with seasonally high inventories.

Well, we work through that more quickly in performance given the volume trends there versus industrial where we were down you know 30, 40% in some businesses, where we're eating into that industrial inventory now so so.

And then we're also.

Tim to Michael's earlier point worth worst seasonal business.

So we're going to be very mindful of what inventory, we build or what raw materials. We buys we could get a further in the year here, we want to obviously manage our inventories down seasonally toward the end of the year typically where we're ratcheting down our coatings manufacturing production beginning this month and carrying through the summer.

Trying to have worked our inventories down in Q4, so very mindful of that come out, but I think your assumptions are accurate.

Thank you.

Our next question comes to Laurence Alexander with Jefferies. Please go ahead.

Good morning, a quick short term one in a long term question on the short term with 170 million the interim cost savings.

That is on talk it for Q3 that would be on top of the 30 to 35 million in the highlighted in the slide deck and then do you expect that to come back in a linear fashion as volumes recover or do you see it as a.

Sort of a lumpy or kind of veer away that it will flow back into the income statement in 2021 longer term question. As you look at your learnings on digitalization distribution should we expect to chunky or investment cycle in the next two to three years I'm in order to shift.

You know to <unk> to help <unk> PBG drives the mark the shift in market behavior and leverage at.

Or how should we think about the investment cycle on that front.

Well a.

Largest spends I'll take the first one of Michael take the second one here. So so yeah. We have 170 million of interim net interim cost savings in the quarter. It was actually grows higher but we had lower manufacturing throughput that took away from some of that that'll come back in a more as we lived through earlier I think that will come back in a more lumpy fashion in Q3.

Some of these cost or semi variable as we start up plants.

And to bring back certain cost pools in their entirety, so would not be linear with volume. We're obviously working aggressively to the managers cost only in Q3, but on a go forward basis.

So it would it wouldnt be it wouldn't be completely ratable with volume and it'll be lumpier around around how we're bringing our operations back.

And then Lawrence on the digital question, there will be some lumpiness on the capital side, but it will vary by business. So once we.

Have a solution in place in architectural will replicate that around the world without a lot of significant capital expenditure, but as we rollout some of the solutions that we have for automotive and industrial those things will need to be replicated and movie a little bit chunky or.

So you know our our capital spend this year is down but not in digital and digital that up.

Wonderful thank you.

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

Hi, good morning.

Well I wanted to ask about the auto OEM business. The heat map is showing you guys were a bulk market across all regions. I think you mentioned, a they're getting customers to pay for technical personnel and their plants. A was part of that but can you talk a little bit more about what was driving that.

And maybe quantify how much above market growth you saw in auto OEM.

Yes, so Mike I would tell you that the number one thing the auto guys want it to get their plants up and running and the paint shop is at the end is a line. So if you end up with a car that may but you can't get it pain is that really expensive for them.

So they wanted our people and the plant before they started up to make sure that they were ready to go and then they want it actually help in the plants to ensure smooth startup and which we've been able to do.

So I would say the amount that we were above market you know varied anywhere from 2% to 10% depending upon market, but that's not sustainable.

It will be probably above market next couple of quarters, but then you know it'll probably be ratably back to a market performance at even today. The customers are very much interested in helping them grow their business. So productivity is another thing that we're focused on sorry.

Tech service people are in the plants to help them.

Drive productivity in the more that we can do that but more than they are willing to pay for those services.

Alright, and then in the Refinished business. The European piece is showing is a yellow and everything else is Rad can you maybe talk about what you were seeing a regionally.

And I guess I'm, a little bit surprised given the recovery in China that Asia Pacific was shows still showing as Radnet heat map.

Can you talk about what's going on regionally in refinish.

So in a refinish actually in China the.

If you take about the big cities there already back I would say at about 90 plus percent of congestion.

Now during the day, but peak rush hour in the morning and in the evening look just like they did a pretty pandemic. The what we're seeing is that people are consolidating their trips and therefore, you don't see that those extra trips during the middle the days of the roads are little bit more open. So that's it that's the only negative in Ah.

China.

In Europe, they did a much better job of handling the pandemic and we've done in the U.S. and so congestion is coming back a little bit quicker in Europe than it is in the U.S.. So we're actually I'm quite pleased and they've done a better job of managing their inventory as well.

There's not as many.

Large super large distributors in Europe like we have here in the U.S.

All right. Thanks, very much thanks, Mike.

And ladies and gentlemen. This concludes the question answer session I'd like to turn the conference back over to the management team pretty far worse.

Thank you Rocco I'd like to thank everyone for your time and interesting TPG. If you have any further questions. Please contact our Investor Relations Department. This concludes our second quarter earnings call.

Thank you Sir This concludes todays conference call you may now disconnect your lines another wonderful day.