Q3 2020 PPG Industries Inc Earnings Call
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Industries third quarter 2020 earnings conference call.
All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star followed by then what number one on your telephone keypad. If you would like to withdraw your question. Please press the pound key the company request that each and.
He wants to ask one question Mr related follow up if necessary. Thank you I would now like to turn the conference over to John Bruno Director of Investor Relations. Please go ahead.
Thank you Michelle and good morning, everyone once again.
We appreciate your continued interest in PPG and welcome you to our third quarter 2020 financial results Conference call. Joining me on the call from PPG are Michael Mcgarry, Chairman and Chief Executive Officer, Vince Morales, Senior Vice President and Chief Financial Officer, our comments relate to the financial information.
At least for US equity markets closed on Monday October 19, 2020.
Posted detailed commentary and accompanying presentation slides on the Investor Center of our website.
Dot Com slides are also available on the web sites site for this call and provide additional support for the brief opening comments Michael will make shortly.
Following management's perspective on the Companys results for the quarter, we will move to accumulate session. Both prepared commentary and discussion. During this call may contain forward looking statements, reflecting the company's current view of future events and their potential effect on ppgs operating and financial performance.
These statements involve uncertainties and risks, which may cause actual results to differ the company is under no obligation to provide subsequent updates to these forward looking statements. This presentation also contains certain non-GAAP financial measures. The company has provided in the appendix other presentation materials, which are available on our website Reg.
Solutions of these non-GAAP financial measures to the most directly comparable GAAP financial measures for additional information. Please refer to these filings with the SEC now, let me introduce PPG, Chairman and CEO, Michael Matt Garrett.
Thank you John and good morning, everyone I'd like to welcome everyone to our third quarter 2020 earnings call.
Most importantly, I hope you and your loved ones, the remaining safe and healthy.
The pandemic, we're focused on our purpose of protecting and beautiful in the world first.
First and foremost this event protect our employees our communities and our customers this room.
This remains our highest priority.
Now let me provide some comments to supplement that detailed third quarter 2020 financial results we released.
Last evening for the third quarter, our net sales were about $3.7 billion and our adjusted earnings per diluted share from continuing operations were a record $1.93 cents per se.
Our strong operating results were led by improved sales volumes when compared sequentially versus our second quarter results the goal.
The global architectural coatings business performed exceptionally well led by double digit organic growth in our European business.
In addition, our global positioning and advanced product technologies drove significant improvement in quarter over quarter sales volumes, and our automotive OEM and industrial coatings businesses.
We couple these sales volumes improvements with strong cost management.
And delivered segment margins that were about 300 basis points higher than the prior year third quarter or more than 18% in aggregate.
This clearly demonstrates the strong operating leverage we have on incremental volumes.
On a tribute to the structural cost savings we have achieved in the past few years.
The higher margins were achieved with about 30% of our business is still facing significant demand headwinds, most notably the automotive refinish and aerospace coatings businesses.
During the third quarter, our sales recovery continue to robustly advance in China, where volumes very low teen percentage compared to the prior year third quarter.
This was driven by above market performance in several of our businesses, including automotive OEM.
General industrial coatings.
Automotive refinish and protective coatings.
While year over year demand was still lower and other major global regions. It was vastly improved compared to the second quarter of 2020.
Specifically on our cost management, we delivered about $90 million of interim cost savings, a little more than $35 million of structural cost savings.
We are working diligently to ensure that a portion of the interim cost savings will be made permanent.
We're going through our annual profit planning process, we'll have more details on the additional catalyst and January when we report our full year 2020 results.
Our teams have also done an excellent job managing working capital and cash usage during the pandemic.
Through September Thirtyth, we had reduced our working capital as a percent of sales by about 150 basis points on a year over year comparison.
Coupled with the strong operating results of our third quarter, we generated more than $800 million of operating cash flow higher than what we achieved in the third quarter of 2019.
Looking ahead, we expect economic activity to continue to recover with differences across end use markets and geographic regions.
For the company aggregate sales volumes are projected to be down a low to mid single digit percentage in the fourth quarter with dish.
With differences by business and region.
We do anticipate normal seasonal trend sequentially versus the third quarter.
Which doesn't result in lower absolute sales for several of our businesses that have been delivered some of the highest growth.
We expect our aggregate global architectural business remained more resilient and once again deliver higher year over year organic sales in the fourth quarter.
Although we anticipate continued softness in the US commercial maintained its segment and for the do it yourself demand to begin to moderate somewhat from the elevated levels.
We're continuing to invest in our digital capabilities and expect more activity to be digitalized in the coming quarters.
The most recent demand increases experienced in the global automotive OEM and general industrial coating businesses are expected to continue.
Including the impact from very low customer facing product inventory levels and its end use markets.
We continue to manage through heightened level of uncertainty with the ongoing pandemic still impacting several of our key end use markets and other geopolitical matters.
The more challenged sectors, including automotive refinish and aerospace coatings will provide further margin expansion opportunities once demand begins to improve.
We project adjusted earnings per diluted share to be about 10% higher than the adjusted earnings per diluted share realized in the fourth quarter 2019, excluding the lower effective tax rate. We expect in this fourth quarter is projected results.
Our liquidity position remains strong and we are evaluating earnings accretive cash deployment alternatives, most notably bolt on acquisitions.
Our teams around the world have been providing essential products and services that our customers rely on for their businesses as.
As we continue to manage through the pandemic remained committed to partnering with our customers to create mutual value.
Finally, I want to thank our global team as one PPG, we are effectively managing through this prolonged and extremely challenging time and clearly winning in several of our key end use markets.
Our third quarter results are further testimony to my confidence that we will emerge as any even stronger company.
Thank you for your continued confidence in PPG. This concludes our prepared remarks and now Michelle would you. Please open the line for questions.
Yes at this time, if anybody would like to ask a question. Please press star one on your telephone keypad and that will be star one on your telephone keypad your fresh.
Your first question comes from Bob Koort from Goldman Sachs. Your line is open good move.
Good morning. This is Tom Kominsky on for Bob. So first question just how would you frame. The low end of your Fourq was 20 EPS range does this speak in another round of Lockdowns and then how do you get to the top end of year end. Thank you.
Well I would tell you that.
We are not assuming any significant lockdowns, we're watching it closely.
Clearly the one area that is most important to us would be up France.
The architectural business. There is number one and is one of our larger businesses in Europe.
But I would tell you that right now we have a pretty balanced view of that.
Got it. Thank you and then just as a follow up how are you thinking about the price and raws formula going into next year, I know, you're calling for a sequential increase in raw material costs, but how long do you expect to raws to remain moderated on a year over year basis, and then secondly on.
Price side on the second quarter 2019 call you called out that you hadnt yet caught up on the most recent round of raw material inflation from 2016 to 2018. So could this help buffer your pricing power, especially on the industrial side going into next year. Thank you.
Well, we've had multiple quarters of two plus percent price increases, we anticipate continuing to be successful in raising price and our performance coatings side, we expect price to be relatively flat in our industrial side, although with all the new products that we're rolling out they will come with improved margins.
So I think you'll need to be paying attention to that you know raw materials.
Sequentially will be modestly higher you know you have to look a little bit at a at oil you have to look a little bit about propylene you'd have the force matures that come through the hurricanes. So we're paying attention all that right now we're anticipating this moderate very slight moderate sequential.
Sequential inflation in raw materials.
Great. Thank you.
And your next question will come from John Mcnulty BMO. Your line is open.
Thanks for taking my question and congratulations so.
So I guess can you give us a little bit of color around the temporary cost cuts versus the restructuring ones and in particular, how to think about the cadence of each one flowing through for Q went into 2021.
Well John I would tell you is some of the temporary cost cuts that were going to make permanent or think about travel and expense.
We're learning how to deal with that on a regular basis, so thats internal and external costs.
Think about digital experiences. So we're trying to convert more things digitally to so that over time, we'll continue to drive a more structural cost savings.
When you think about the restructuring cost savings those are more people related as we get more.
Productivity initiatives completed and we've closed a few plants.
Thats, a will turn into permanent cost savings as well so I feel good about the pace that we are doing I think we're a meeting or exceeding.
Or exceeding all our internal targets in that respect John.
Hey, John I think we gave out in our guidance $30 million to $35 million of structural or restructuring related cost.
Cost improvements in Q4, so thats sizes that element for you.
Got it that's helpful and then I guess, just as a follow up.
As a follow up question. So your cash flows are coming in pretty solidly and normally as you get kind of into the back half of the year at least historically, if if the M&A hasn't really caught on it we tend to see more buybacks and we didnt really see that this time around so I guess I'm curious is that a reflection of just what do you see as a as a chunky or kind of M&A pipeline at this point.
Maybe if you can give a little bit of color as to the types of things that you might be looking at.
Yeah, John we're obviously not going to get into what we're looking at but you know the act we have a very active pipeline you probably saw somebody make an announcement in Europe. That's a sign of things are loosening up I anticipate there'll be further announcements in the fourth quarter and obviously more in the first quarter second.
Quarter, So we're anticipating that the pipeline because of its activity that we're going to.
We're going to continue to look for that to be in our number one priority just like it always has been.
Yes, let me just just one comment I think it's important given our global Xpress, though.
Our.
Participation in all the all the end markets we serve.
We typically have at least similar if not more synergies than most of our competitors as we look at these deals so going.
Going forward with the with the pipeline Michael talked about the robust pipeline hopefully we can participate assuming these are at the right price for for our shareholders.
Got it thanks very much for the color guys.
And your next question will come from caution Panjabi from Baird. Your line is open.
Hey, guys good morning.
Morning.
So Michael on the 30% the portfolio that you referenced that includes commercial aerospace auto refinish et cetera, how did the volumes sort of shake out in Threeq you in aggregate for that 30%. How do you see that rebound building off of three key levels going forward and then on the other 70% should we anticipate moderation in volumes for any sub segments.
As we cycle into 2021.
Well I think we gave pretty clear guidance that aerospace was down 35%.
And I anticipate a similar kind of number for Q.
What's happening in aerospace right now is they are de stocking as fast as they can so.
So assuming they get to a new level at say the end of the year. What you should have as a double catalyst going forward not only as improving demand, but also a restocking back to more appropriate levels. So what I see right now.
Talking to a number of people is cobot fatigue right. So people I anticipate people are going to be traveling at the holidays and so on the back half of the quarter, we're going to start to see our MRL activity starting to pick up now they may not buying anything in the fourth quarter, but I anticipate that they will re look.
At their inventory levels and their relook at how they're thinking about that in the first half of next year. So you know I'm not as pessimistic as some of the folks are out there on aerospace.
You get a a vaccine I think theres, a pent up demand we had the highest theyll say.
Flow through of people last week, and I anticipate a gradual recovery until there is a.
Vaccine now refinish, you know I think what you saw you know our chief.
Our China business is doing very well better than prior so people are back in the office and people to work and we saw the same thing in Europe. You know as people started to return the office congestion levels started to get back right now, they're bloomin again with Covance. So we anticipate and we factored into our guidance a slight amount of moderation in.
In our refinish volumes, but.
But then you know as we get a better handle on this we anticipate refinish volumes will continue plus we have a very good light industrial coatings business within refinish.
We have our Sem acquisition in there. So you know we're benefiting.
By our good mix within refinish, so I anticipate.
Gradual recovery that all.
All of 2021.
Okay and then second question you know at the onset of the pandemic you were very focused along with others on maximizing free cash flow and I think you made the comment that you were going to work through.
Good inventory et cetera can you just update us more broadly in terms of a dynamic where are you on your inventory levels at PPG, specifically and then as you rebuild inventories that is that part of the reason that you've seen the sort of ferocious operating leverage in Threeq, you just kind of trying to get a sense as to how sustainable that is thanks.
Yes, yes, the contract was actually our inventory is down year over year as one of our reasons for strong operating cash flow, it's actually working against us on the cost side, we're not running our factories as hard as our demand are apparent demand when would indicate we hope to hold that inventory discipline through but certainly the <unk>.
Balance of this year and into next year. So we're not we're not intending to rebuild our inventories if you look more broadly.
Inventories most of our coated.
Coated products through our customers all the way to consumer are very lean inventories in the automotive auto.
Auto OEM business, a very lean appliances, very lean electronics very lean as Mike alluded to we think an aerospace it's getting leaned out.
So so we do feel there is an opportunity if we do see a spike in or some spike in demand for not only the demand to improve but also inventory levels.
Second catalyst.
Thanks, so much events.
In Q.
Your next question comes from John Roberts from your business. Your line is open.
Thank you and nice bounce back in earnings.
Get Wall Street Journal that his story this morning on the need for more fire protection in lithium ion battery powered cars. It was disappointing that it didn't mentioned PPG coatings, but is it a problem that car companies might not want to discuss our protection, including your coatings since that just highlights the risk that it maybe something that car buyers don't want to think about.
Well John the way I think about this is every car companies that make an electric batteries are coming at it in a slightly different fashion and.
And every company has a different solution.
The good news is in a lot of these batteries. We are part of the passive fire protection system that helps them eliminate that so.
So I would tell you the opportunity going forward are going to just be really good.
I think I shared with you in a prior call and so for the broader group.
China is trying to come out what they extend.
A standard so far PPG is the only one that has passed that standard which is to allow the vehicle occupancy five minutes to exit the vehicle in the event of a fire. So I'm feeling very good about that we have great technology.
Weve already solved this problem and other companies. So we feel confident we can solve it again, you know clearly we'd love to see a government mandated.
Fire safety Hazard standard if you will and we think we can certainly participate in that but we have so many opportunities in batteries right now and electric vehicles that we're super excited about it every hardly a week goes by that we don't have a win in that space somewhere.
Or whether it's in Europe, you EPS or Asia, and we're really.
We're really I think we're doing an excellent job there.
And then moonwalk seems to be getting some good traction yet to be economics to PPG change with moonwalk adoption or is it just a share gain.
Well, it's both right. So you know we have a subscription model out there on moonwalk. So we're going to you know think about software as a service. So we're going to be collecting revenue on moonwalk. As you go Weve I would say about 25% of all Moonwalked said have been installed have been share.
Again, and the only thing that's holding US back is making them you know, we're making these things in southern Europe, and Thats, where it was hardest hit by the pandemic, we're getting over that right now, but there is a lot more opportunities that the people that have them. We have nearly 500 of them installed in Europe.
Our exceptionally pleased with the performance and the the ability to drive better productivity in their body shops, and that's what this is all about is improving the productivity as well as allowing their painters to spend more time painting. So those are the two big wins and our team has done an excellent job highlighting both.
Benefits.
Thanks.
Your next question comes from Frank Mitsch from from Me I'm Research. Your line is open.
Good morning, gentlemen, nice job on a quarter I guess things are going better in Pittsburgh in more ways than one.
Thanks.
Michael if I could follow up on that on the moonwalk given if given the fact that you are gaining share.
I just thought it was interesting in the in the color heat map that you provide.
European Auto Refinish your volumes year over year were a little bit lower than they were in the second quarter and you work for you you indicated that you only gave you were only growing at market I would have thought that that would start showing up that you would be garment growing faster than market when can we anticipate.
That we will be flipping that.
That heat map indicator to above market.
Well, Frank you know as you know on a quarter to quarter basis, it's really hard to.
Justify a market gain and so we tend to be conservative in that area.
Maybe we should be a little bit more aggressive trumpeting, our win but I would tell you from what we've seen we're doing very well there I do see.
Our results as being very good now we see I'll have a better feel for that after all the companies report in the next 10 days and I'll be able to give you a little bit more.
A better feeling for that but I feel very comfortable that we are doing better than average in Europe, and especially from a profitability standpoint, our team has done an excellent job our IC our acquisition over there we could have clearly take that is above market through the acquisition, but thats not how we do that but that's allowed us.
To get mid tier and some value opportunities, we've expanded that out of southern Europe also to eastern Europe, and we feel very confident that we're going to continue to grow share in.
Share in refinish in Europe, all right.
All right that's that's very helpful.
And I guess, the kind of the biggest eye opener or that I saw in the quarter was the industrial coatings margins can you talk about this.
The sustainability of that.
How much of it may have been driven by these by the 90 million of.
Temporary cost savings.
So just give us a flavor for where you where do you see that.
That heading down the line.
Well the biggest thing about the industrial segment margins was really so the recovery the volume and our productivity and our pain plant approach.
Productivity has been outstanding.
The team has done an excellent job you know.
When things were Super light in the second quarter. They got a lot of people they've got to think about how can we do different task more efficiently and so they've been able to drive that productivity throughout the paint plant and.
Thats been the number one thing so any further recovery in automotive is just going to lead to more enhanced.
Profit to the bottom line. So I would tell you that part is where I'm feeling most comfortable going forward and it's all being driven by our lean six Sigma initiatives.
Thanks, so much.
Your next question comes from Michael Sanction from Wells Fargo. Your line is open.
Hey, guys nice a nice quarter Lucky went on Sunday, but Thats a quick question on we just barely covered the spread Mike barely.
Barely but a nice win but in terms of your sales trends it looks like September looks flattish in and Youre guiding for down in the fourth quarter.
Yeah. It is october trending down and and it just curious why the sales.
Sales trend couldn't have been a little bit better.
Given September looks pretty decent.
Well I would tell you, Mike we were minus 5% for the quarter and we guided minus five.
Five to low single digit so I I don't regard that is trending negatively AG regard that is trending positively.
You know when I look at our OCTG.
Tobar results to date, and obviously, we don't have a profit number all we have is a volume number you know were.
Were well within our guidance so I feel so confident.
Confident that we're going to be at or above where we are in the guidance. So I'm not concerned about that and I am I would not characterize it as the way you did it.
Mike a couple of anomalies with with August September Labor day fell early last year. So for the architectural businesses, we actually had some some labor day paint spill into the August in.
2019 year most of that was in September in 2020 Hurricane Laura.
South southeast part of the U.S. hit late in August there were certainly some conservatism around inventory build.
Some inability to get to some projects and we did have a strong European holiday season.
That we saw some snap back in September so I'd call those anomalies month to month, but it all worked out in the quarter. So the quarter. We think was a more representative number for two.
For 2020.
Great and then yeah. If you think about your EPS growth in the third quarter double digits fourth quarter looks like double digits again.
Yeah.
Yeah, how do you think EPS growth looks when your volumes actually turn positive should be stronger or just some of the interim costs come back and just kind of get a feel for how.
How how earnings go should be when volumes, Yeah look turn turn up.
Yes, we're still guiding to negative volumes in Q4, we haven't given 2021 guidance Bill too early to do that Mike, but I think Michael's last comment was we are still expecting very strong incrementals for the foreseeable future on any volume growth, we're holding costs in check.
Our operations are running very well.
And again, we expect pricing raws to be neutralized.
Had a minimal so again, we're still expecting very good incrementally we can't sell to the volume trajectory in the first part of next year. It's just too early yeah, Mike. So the other thing I would add to that is don't forget two of our best businesses Refinish and aerospace are the ones that are going to be the tailwind no pun intended the tailwinds going forward when they are buying.
Recover that will be very positive for our margins.
Our margins.
Great. Thank you.
Your next question comes from Chris Parkinson from Credit Suisse. Your line is open.
Thank you very much.
So can you just break down your current thoughts heading in 21 on the U.S. and EMEA architectural businesses. I mean, there are lot of trends that we're monitoring it read the first is commercial interior exterior paint stain ceiling on trade versus DIY, just what are the biggest trends in the context of reverse organization that your team's monitoring thank you.
Well I would tell you that you know in Europe, you're not going to have the reverse urbanization that you have here in the U.S. right. They don't build.
<unk> million 1.4 million houses.
In Europe like they do here.
But I would tell you.
There they tend to maintain their homes in a better shape than the U.S. So.
During the pandemic.
They have been when the stores have been opened they have been very aggressive and maintaining their properties and I think we're anticipating that that trend for the next few key.
For the next few quarters is going to continue.
This has been a market Europe that has been no.
You know a slight to minus volume on for the last several years. So this uptick does not surprise us in the least the big.
The big concern in the U.S. the courses they the new construction for buildings. Once these buildings are completed there doesn't appear to be a lot in the pipeline for new ones coming up so thats the bigger issue for us.
Great. Thank you and you've done a solid job at a minimum or holding price in industrial and then you're up low single digits, the performance, which I think its overall well be surprised.
But just given volumes in most of the industrial end markets. There is still a bit sluggish, albeit recovering.
How should we think about your ability to raise prices in the current environment and we see some positive moves in mixed in terms of like east but.
But are there any other new product launches, we should be considering that drives up.
Hello, Thank you.
Well, obviously mobility will come with some attractive margins going forward anytime we launch a new product, we're always trying to cap.
Capture some of the you know share 50, 50, or so with the customers on the value creation, so thatll be a an opportunity going forward.
Overall right now our customers are most focused on ensuring their plants are running at.
And so our tech service teams are in high demand. So if you look at automotive we outperformed the market in three of the four regions.
And the reason for that is our tech service people are so highly valued they wanted to make sure. They captured our tech service people to help them start up and now to keep them running and because run uptime is so highly critical we have a number of projects that our customers have asked us to look at where they're trying to drive more productivity in there.
Paint shop so.
Would tell you right now their primary focus is on uptime and.
And new products, and that's where they're going going forward.
And we do think deposit pricing Q4 for the company in aggregate certainly positive price in 2021 for the company in aggregate both segments are exploring targeted pricing as we get to a negotiations toward to the 21 2021 calendar year. So again these opportunities to price and service.
Technology based permeate both both of our operating segments.
That's very helpful. Thank you very much.
Your next question comes from Kevin Mccarthy from vertical research your line is open.
Good morning wanted to come back to the auto Refinish business. My question relates to some of the differences in trends by region in the U.S.I. I think you indicated collision claims were down 20% or so in EMEA. I think you said your sales are down mid single digits. So wondering if you could kind of talk through that this.
Parity is wider than you would've expected three months or six months ago, and how do you think those trends progressed. So over the next few quarters.
Yes, Kevin I would tell you that the trend lines are pretty consistent with what we expected.
You know take about the U.S. work from home you lot of people have big homes.
And it's easy for people to work from home.
In Europe. The homes are much smaller you know I would say people were claustrophobic they wanted to get back to the office and so they move back to the office at the first opportunity they could here in the US there tends to be more conservatism I mean, it's somewhat amazing there's 100 million people.
Go into work every single day in the U.S., but theres not a lot of people going downtown to various cities to go to work because they're able to work from home.
And so you know.
Lean sales were only down like five or 6%. So people are out there driving but we don't have that congestion that we normally have it a rush hour. So you know you get.
You get a vaccine and that will be a catalyst for more people getting back into the office.
Clearly some companies have people back in the office other companies don't it's really.
Pretty disparate how people are approaching this.
But you know you got higher speeds in the U.S. So.
Totals are up 2%.
So right now what we see is a lot of traffic in the suburbs and not as much traffic downtown areas.
But.
I know our refinish team has done a really good job of.
Driving share gain and that's what we're focused on right now Kevin the one other thing we're seeing in Europe is theres less utilization of public transportation Thats been historically more utilized in Europe versus here. So there is there is still a fear factor of folks getting on public transportation. So the driving trend there even if there is.
Not as many people going to work as there were in the past more people are driving.
As opposed to taking public transport were seeing the same effect in China, as well and again, our China refinish volumes were off we think largely due to that effect.
That's helpful color and then second for Vince I wanted to ask about your tax rate with regard to the 18% to 21% range in the fourth quarter. I think you mentioned some discrete items in the prepared remarks.
My question is is there any component that is.
Perhaps more sustainable just thinking about how you might expect the rate to trend into 2021.
So the couple of items or look looking at the four for Q4, and we hope to achieve through tax planning, Kevin I wouldn't call the structural at this point.
We're certainly interested to see what happens here with us.
View us elections to determine what our tax rate will be next year. So we'll give some more guidance in January but the but the items that were referred to for Q4 were tax planning and we hope to achieve those in the quarter and must not carry forward items. Okay. Thank you very much.
Thank you. Our next question will come from David Begleiter from Deutsche Bank. Your line is open.
Thank you good morning, Michael to find your heat map a U.S. architectural you highlight that trade was below market.
He had some weather issues in that segment and anything else you can highlight as to why you were below market in that business in a in September in the September quarter.
Yeah, I would say David that our two biggest markets, our Texas, and Florida, and a you know given the hurricanes.
We underperformed because we couldn't keep our stores opened or we had limited ability to do that.
And of course, we're a little bit over index on maintenance think about the.
In hospitality industry things like that so that that hurts us a little bit when you consider where we are in red repaint, we're under index on resin repaint and read the repaint, obviously doing better people are much more comfortable we're doing very well in exterior are over indexing exterior. So we're winning there.
You know we did outperform we don't break duska up into Us and Canada, We did outperformance in Canada. So we gained share in Canada.
And we gained share in some minor markets like Puerto Rico, but.
But I would say overall net net are we.
We felt like we were a slightly below market.
And just going back to these that temporary interim cost savings Michael should we think about those as a as a headwind to 2021 earnings we're thinking about a bridge.
2020, 2021, well so we should we think about those as temporary cost savings year over year.
Hey, David its Vince again, we're not getting those costs back unless we see a at least travel volume.
So I wouldn't I wouldn't assume those are headwind going.
Going into 2021 it.
And David This is John just to add on that we had 80 million less of those temporary cost savings in Q3 versus Q2, and our margins were significantly higher so I think we'll be able to manage it effectively.
Thank you.
Your next question will come from PJ Juvekar from Citi. Your line is open.
Yes, good morning.
Oh sure today Mike.
Michael do you expect the DIY business was slow down as the weather turns cooler Oh.
Or is it there's still pent up demand from the lost business and in the summer months and can you also talk about <unk> TDO versus exterior paint pain trends.
Yeah, So clearly exterior antares easy one you know you can't paint.
In bad weather, you can't paint when it's really cold.
So you know at some point that is going to slow down.
But we have not seen through the first whatever it is today 20 days of October any change in the demand pattern. So interiors picking up people are more comfortable with having contractors in their home.
Hi, why remains solid and steady and thats across the board. So I look at that number it in China and I look at in Australia look good in Europe.
Of course, you saw our numbers in Mexico.
Our Mexican team is clearly winning share you know we were up mid single digits in an economy, that's down minus EUR eight or 9%. So in Latin America, we are doing in Central America, Brazil. So I would tell you overall I don't see any change yet we are anticipating.
In that it will slow down at some point, we don't think it's sustainable at this rate forever, but right now our fourth quarter, we're anticipating a continuation of what we see so far.
Great. Thank you and a question for Vince means getting to take a minute and talk about your digital strategy and what does it mean.
Is it mostly customer facing platforms or is it you know did you guys isn't over and got to PPG, including you know a job in my role as the supply chains can you just what are you exactly investing in what kind of platforms.
Yes, PJ I would tell you the most exciting platform for US is our customer facing platforms. We're really trying to say the customer experience to fulfillment and digitize that process. We've talked many times with investors about we're not going in starting in the middle of a supply chain, we're starting with customer decision.
That's what we think theres the biggest pain point, we've seen in other retail industries. Those end to end digital platforms, starting with the customer most effective over over a longer period of time as opposed to trying to optimize somewhere middle of the supply chain. So so that's that's where our biggest investments or we're able to again because of our globe.
Culbreath rebel it takes investment and not only use it and in the U.S., Canada, Europe, Australia, Latin America, South America, Mexico, So we're able to get a bigger.
No.
A bigger breadth of business activity on digital simply due to our geographic spread.
Great. Thank you.
Your next question comes from Lauren <unk> from your line is open.
Hi, good morning, and thanks for taking the question.
He is on the TV side thinking this slight thank you Neely last month, you talked about.
Can you please queue execute school.
He I was just wondering if you could perhaps Dennis.
Your line of sight on this for the next couple of years on new product launches and eat the $100 plus.
Value EPS he's actually this year, both for those new products from seasonally thats duration, probably don't get 10.
Yes, Michael I'll, let Michael answer the question, but just the base load for everybody on the call. So so we did provide a little bit of a foretelling of what we see coming from a coatings perspective in the TV electric vehicle market. We do believe that at some point in time it will be two to four times the coatings content.
On our traditionally the versa.
Gas combustion engine and so that's the background that we want to make sure everybody as you know the.
The timing of that Michael for the question, Yes. So long run we are clearly seeing wins on like I mentioned early on a weekly basis, you know China has said that 25% of their cars by 2025 will be.
As you've seen Europe make an aspiration old.
Targeted the same 25% and then of course you saw California's announcement, so everybody is working feverously in this space.
I would tell you we have.
Initiatives with every single company out there we are the number one guy and automotive OEM.
Were also very strong on automotive parts were very strong in protective and marine. So we are the people that can bring all this together and.
You know, we're we're selling gap fillers right now so we are on that we have a number of electric battery trials going on as well.
He says in sealants. So you know we have a very broad product offering and as people try to come.
Come forward with solutions, our team has come forward with a solutions based approach that minimizes the number of people they have to deal with and I think thats also exciting to the car companies because there.
They are being inundated with all these new ideas and what they want is to be able to get to market faster and our teams helped them get to market faster.
In terms of adoption Rhonda.
China has a target that gives us somewhat percent of there.
Newfleet by 20, 2025, Europe, as you're probably fully aware of different targets by country. We're seeing an uptick this year and easy sales. So really the adoption of by the consumer is what's going to drive.
The the additional sales in the market buying my PPG.
Thank you and maybe at this point I'll, let Paul Levine.
On the last call. This Q2, you talked about how some of the temporary savings.
Binary and they went out.
Out.
I was wondering if in the number you disclosed last night now all those binary caused banking so to speak.
Well again, we're bringing those in by by region by business as volume comes back.
And so for those costs that are buying are of that nature.
They've come back in Q3, but to Jon's point earlier, they've come back when we had mark when we have volumes come back so still very margin accretive even if we brought back some of those cost in from Q2 to Q3.
Sure. Thank you.
And your next question will come from Jim Sheehan from Trust Securities. Your line is open.
Good morning. Thank you Oh, you raised the Capex guidance for 2020 degree some in additional projects being initiated.
Talk about you know what types of CODI end markets. These projects are focused on.
Yeah, I'll take that one Jim when you think about what we slowed down in the second quarter. It was mostly in our industrial space, So automotive and industrial coating.
That is no longer the case, obviously with the automotive guys back you know we're ramping all those costs back up but more importantly, what I will tell you what we did not slow down as we did not slow down any investments in China, we did not slow down any investments in electric vehicles, and we did not slow down any investments in our.
Packaging business that we knew would be a doing exceptionally well so from that state.
From that standpoint, we feel.
We feel very comfortable that.
That our run rate coming out of the fourth quarter third and fourth quarter will be very similar to what we had last year.
Great and in auto OEM, you talked about outperforming auto builds and your technical service teams.
Is that a feature really of the rapid ramp up that's happening at 2020 or do you see that is sustainable into 2021 and also you know you could relate that they you can relate that to your pricing discussions.
You are critical to the.
The the customer.
Do you expect to get more pricing leverage as we get into next year.
Well I think the way to think about that Jim is that our when we have discussions on price.
There are a lot lower.
Less aggressive on asking for things if they need it in the in the paint shop and right now they needed and one is in the paint shop. So that makes it a much more forward facing discussion instead of a you know whats the raw material environment and so you know they are looking for value creation as well and they're looking for.
Productivity and they're looking for new product ideas and so when you can have those kind of discussions that's way more productive than what I would call a how do you split the pie.
Thank you.
And your next question will come from Jeff It's Scott.
Katz from JP Morgan Your line is open.
Thanks very much.
If there were a large infrastructure bill passed next year would that make an appreciable difference to P.P. cheese domestic volumes.
Well I do think there will be an infrastructure bill passed from our.
Our standpoint, I think it.
I think it'll come either shortly after the election or Jane first or early June.
Early January.
It will be a positive for us, but you have to remember those things take a while ago. They use that term shovel ready, but nothing is really shovel ready because of the environmental due diligence. They do on some of these projects. So it will be a net positive for us, but I would tell you that it might not be noticeable in the first.
[music] months that after the bill is passed.
Okay.
Can you.
Can you describe how much your incentive compensation is likely to change this year versus 2019 and on the $90 million in interim spending cuts how does that split between SGN nag in cost of goods sold.
I'll, let Vince take the back half.
Yes, if you look Jeff the biggest change in our incentive comp really is around this is our TSR.
Total shareholder return our stock price.
It's going to be up probably a high single digit millions really reflective of the higher stock price this year than last year in terms of the 90 million split.
Two thirds of that would be in our ours Genie bucket and.
And one third would be in cost of goods sold those are round numbers of course.
Okay. Good. Thank you so much.
And your next question will come from Iran. This follows on from RBC capital markets. Your line is open.
Great. Thanks, Good morning, Tim Thanks for taking my question I guess I'm just curious on the margins.
Usually you have a anywhere from 100 to 250 basis point sequential decline in margins Q3 to Q4.
This year it looks like you know your your guidance implies something maybe you know in the two to 300 basis point sequential deterioration.
Deterioration in margins, obviously Q3 was very strong aided by probably continued a robust production and a lot of the cost actions you described.
Could you just a I guess frame your thought on margins in Q4 do you think that you've kind of now maybe entered a a structurally higher level of margins that we should see that persist kind of through the next couple of years and again it seems to me that maybe that the typical deterioration is.
Too much this time and maybe there's a chance that margins would be better in Q4, maybe what are some of the headwinds that you're seeing on that side.
Yeah, I think there's a couple there's lot of moving pieces, obviously this year from quarter to quarter. So looking back at historical trends and provide some guidance, but I wouldn't say that it provides a bible to how we look at things is what we're seeing in the industrial segment Q3 to Q4 as much less seasonality.
The automakers are not going to we don't think you ought to make I'm going to go down as much around the holidays as they did in Q4 prior year.
On the other side of the corn and one of our best as Mike alluded to it.
Opening comments.
Some of our best performing business is a higher level seasonality so.
So in aggregate for the companies are going to be more impactful. So the architectural businesses are performing well are they typically would have seasonality. In Q4 were think 30 have traditional seasonality. So so again in aggregate for the company that that has.
As a.
Favorable impact on the on a quarter to quarter comments, you're talking about so just a lot of moving pieces.
I don't think there's anything abnormal in those the room.
Okay. Thanks sense, and then I guess just on the on the portfolio in General you know you do have relatively low leverage I know that there's still a lot of uncertainty out there but.
But you know and I imagine that the pipeline is it is it mainly still more more tilted towards bolt ons and what is it going to take maybe to take to get a larger you know opportunity on the M&A side did you see any of those kind of coming to fruition in the next little while.
Well one of the bigger ones. It takes a meeting of the minds to make that happen. So I would say you can't predict those so I would just say sit tight.
So the vast majority of things we're looking at in the portfolio are bolt ons, but theres, some pretty meaningful bolt ons out. There are you know the pandemic again and illustrate a people that this is twice in the past 12 years.
It has been a meaningful downturn in the economy.
And people are looking at okay, what's the best way for them to manage.
Managed their private wealth and maybe only know coatings company, where their ability to flex it not as robust as ours is so if you think about how quickly.
This is a two times in a row, we've had record earnings of second quarter coming out of the.
You know downturn in the economy and a lot of these private companies are not able to do that.
So I would tell you there.
They are looking at that as an opportunity maybe to.
You know put some of the earnings from the.
Selling their business and in their pocket and diversified.
Okay. Thanks.
Your next question comes from Vincent Andrews from Morgan Stanley. Your line is open.
Thank you and good morning, everyone.
Just wanted to follow up on an OEM auto on the last second quarter call. Michael you mentioned that.
Some of the outgrowth coming from the Tech service, you expected that to normalize in future quarters, and just from sort of the some of the conversation on this call. It sounds like maybe you're thinking that's going to be a little bit stickier and I'm. Just wondering you know is that is that the case and are you finding ways to make.
You know that that that market share growth be a little bit more structural.
Well I do think it is going to continue to grow we have turned our tech service teams into a hi tech business and so we're charging protect service where in many cases, we used to give it away for free App.
And you know people you know in the beginning we're kind of like Missouri that show me state, but during the start ups. They see the value creation that our tech service teams were allowed them to get up faster run more consistently and think about the you know right now a lot of these folks are running weekends and things.
Like that so there have been some unusual.
Period of times were controlling the environment in the paint shop, when it's running more frequently is a hyper critical and I wouldn't tell you right now they've been willing to pay for those services and we're pleased that provide them. So I think there is going to be more stickiness on that going forward.
Okay, great and as a follow up I just wanted to ask on the architectural side of the equation, maybe more into the into the retailers rather than your own stores.
Clearly the do it yourself trend can't stay at this pace forever, but I'm just wondering as things decelerate. It seems like customer inventory levels are probably not that high so do we still need to have a pretty big.
Our build up into the next spring season in order just to manage to you know sort of a regular season I'm just trying to bridge sort of that the downturn and take away versus what you have to actually ship into the customer.
But I would say clearly inventory levels at our customers are below what our customers would normally have.
But I'm not going to try to predict how they're going to think about inventories in Q1.
So I will just tell you that inventories are low and we'll wait to see how they decide to manage them next year.
Thank you very much.
Your next question will come from Duffy Fischer from Barclays. Your line is open.
Yeah good morning.
Just after you release last night, it was talking with our aerospace Guy and he thought your volumes were much stronger than what he was going to see from the average input provider into aerospace. He was thinking things would be down kind of 50, 55%. So can you comment on.
Are you are you are the business Youre in is it doing better than the average input supplier into aerospace or is there a chance that maybe customers are building a little bit inventory of your product and we will see a double dip there where that will come in a little bit closer to what.
What peers are doing later down the line.
Yes, Duffy I don't see a double dip.
I see I know a very specific customers that are clearly taking inventories down.
And we are on a number of winning platforms.
So as those winning platforms continue to roll out that helps our volumes.
But overall I would tell you, we're anticipating mean down 35% in the next quarter as well in aerospace and then from that point on I think it's going to start to trend up. So you know we have a good mix in our business. Obviously military is helping you know military.
Military has been a space where not only are we strong there, but our business with the F. 35 is getting bigger and bigger every year, because we're winning more content on that plane. So it's not just the build rate for the F. 35. It's also the additional content that we're winning.
So I think thats really important for people to understand and if you look at our mix of business were about 30% military.
70% conventional aerospace, Okay, and then I'll take another cut at it just because it's been the biggest incoming question.
I've forgotten since you guys put out your pre announcement the people kind of back in the margins, but if you look at Q3 last 10 years your margins kind of bounced around between 16% to 19%. So this quarter was several based there were several hundred basis points higher than the average of that period clearly 150.
Basis points higher than the best third quarter, you've ever had when we get out a couple of years from now and turn around and look at this quarter is this going to be an anomaly as far as the margin goes or do you think this really kind of resets the bar and you know this higher margin level is something more structural.
But definitely the way I would answer that is we launched something called the PPG way two years ago.
And one of the tenants of the PPG ways that we do better today than yesterday.
Every day.
So you're not going to look back at this in a less nominally in two years because our team is fully committed to the PPG way and that's doing better today than yesterday, so that's going to carry forward.
I would just add Duffy if you.
You look at Q3, and Michael alluded to this earlier some of our most technical businesses aerospace and refinish, where a rig.
Remained in a recession.
So hopefully two years from now those businesses have recovered not fully recovered and that those should help.
The metrics you are talking about.
Terrific. Thank you guys.
The next question will come from Stephen Byrne from Bank of America Securities. Your line is open.
Yes. Thank you so that she may was down sharply, but so was R&D.
So, presumably a lot of loans or or lower costs are part of this interim costs reduction.
Kids <unk> other than less travel what are the big buckets that are in the interim cost savings that enabled those two cost line items to be down so much and.
And do you need to bring them back up.
When volumes recover in order to.
To drive sustainable growth or could they stay down.
So Stephen I'll take the question when you think about R&D. The first thing if you remember as part of that cost is currency and so we haven't been helped with the currency from that regard.
Second you know what we.
We have our run rate on R&D in the third quarter is back to normal we had some in the second quarter. We did some things like four day work weeks and we had to salary temporary salary reduction. So all those are gone so.
So right now the spending on R&D is at the same level as what we had last year, so, but we are continuing to.
Optimize our lab footprint. So we'll have less lab, so that drives permanent cost savings.
We also are.
Using digital to drive more productivity. So that's a permanent cost savings. So I would tell you that you know the spending on big projects is that same level, but the efficiency is better.
I don't know.
You know that 170 million restructuring program, how would you allocate that between call goes she DNA in <unk> and R&D and how long do you think it'll take to roll that through.
Yeah again don't have those numbers right in front of me, but I, but I'm most of those were not.
Most of those were optimization of our workforce are seen a workforce. We did have some facility and supply chain optimization in there, but the vast majority of that was not supply chain or manufacturing, yes, Steve circa 85% 80, 590% is does today.
Thank you.
Your next question comes from Kevin has fallen from Northcoast Research. Your line is open.
Hey, good morning, everybody.
Kevin.
Maybe one other stebic the some of the interim.
Cost savings.
So it sounds like those coming back then are going to be volume dependent or at least some portion of them coming back or lead volume dependent and with the fourth quarter. It looks like volumes are expected to be down low to mid single digits, which is you know a little bit better similar to slightly better than what you saw in the third quarter. So is it fair to say that.
90 ish million dollars will still be what they were in the fourth quarter is that what's baked into guidance just kind of curious what do you have baked into the guidance for the interim savings in the fourth quarter.
Yeah, Kevin if you look sequentially Q2 to Q3, we think we brought back cost Ratably with volume we do some volume. If you look Q3 Q4, we hope volumes on the low.
Higher and I guess in that range.
So so we'll manage our costs back accordingly.
But I think 90 million, probably too large of a number but we're not providing that we did embed that in our guidance. What we thought we could we could retain in Q4 and heading into next year.
Good and you talked about.
You know mix being a headwind with aerospace and refinish being.
Below the company average in terms of volumes how much is that holding back margin. So if you were to normalize that and you know how those businesses are performing more in line with the company average I guess, how much room is there for margins to improve as those businesses recover.
Yes, we don't give margins by business.
But as we alluded to earlier those are some of our most technical based coatings businesses and those those typically customers can see the value in those businesses.
Great. Thank you.
And your next question will come from Mike Harrison from Seaport Global Your line is open.
Hi, good morning.
Was wondering if you can talk a little bit about the protective and marine business, what you're hearing from customers. There you mentioned some project delays in.
In Europe, and the United States are those significant and lasting kind of through a.
The fourth quarter can you maybe talk about a when you see the protective and marine business getting back to growth.
Well, let me let me first start talking about it from the marine side Marine build to continue to be on the very low end of the spectrum.
So new ship builds are down 55%.
On the positive side, our mix, we're very advantaged care were much stronger in China than we are in Korea and.
And so you know our protective business in Marine business is actually I think doing better than the industry from that regard clearly you saw a lot of infrastructure projects that were delayed because it co then they got to figure out how to have.
I have a co that a safe working environment when their work on on these infrastructure projects. So we we think they have been delayed but we think they are coming back now of course now you get in the winter. So a lot of those projects are going to be put on hold again, but.
But I would say you know oil and gas is a week nothing significant.
Change there, but we're launching some new products should we launched some new poly urea price product for the food.
So we think thats going to be a nice win for us.
And overall, you know the economy will get better and so I'm anticipating that our wins.
On the refinery side will start to blossom into the maintenance side of that as well and and Asia is a big place for us.
Alright, and then speaking of Asia, the packaging business.
[noise] impact shows up is growing below market Uh huh.
How big is that piece of business easier packaging and what's driving the weakness there.
Well I would say, it's not a huge piece of the company what's driving it is a transition from a what I would call the older generation to a new regeneration, we focus on the newer generation of.
In what they call easy opening as well as the two piece cans and so from that standpoint, we're focused highly on the next generation of cans and so right now as that transition hasn't moved as fast as it has in the U.S. and in Europe.
We are losing a little bit of share I don't regard that to be a permanent I think we will get that share back, especially because there are a number of global products think about Tonight and other things that are made in Asia that are exported so as those global standards or take hold and in Asia, then we will get our share back.
All right thanks very much.
Hi, Dan if anybody would like to ask a question. Please press star one on your telephone keypad.
Your next question comes from Laurence Alexander from Jefferies. Your line is open.
Good morning, So just to follow up on that.
In the North American architectural trade in the Asia packaging as you think about the 2021 growth rates.
Well PPG be back to growing in line with the market or will the share loss continue.
I would definitely say per package in Asia will be back to market because those technologies will roll out and in the U.S. I see no reason why we wouldn't be growing at market and 2021.
Okay, great. So soon 2021 should really be a at market or above market year.
Cross Board.
Yeah, I mean right now we haven't done our 2021 planning process, but you know our initial assumption going into that we'll be at market.
Thank you.
We have no further questions in queue I turn the call back over to Mr. Bruno for closing remarks.
Thank you Michelle I'd like to thank everyone for your time this morning, and your interest in PPG. If you have any further questions. Please contact our Investor Relations Department. This concludes our third quarter earnings call. Thank you.
You can't say when this will conclude today's conference call you may now disconnect.
[music].