Q4 2020 PPG Industries Inc Earnings Call
Okay.
Good morning, My name is Amy and I will be your conference operator today.
At this time I would like to welcome everyone. The PPG industries fourth quarter and full year 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After.
After the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question press. The pound key we expected 20 analysts on the call today and to allow everyone an opportunity to ask a question the company requests that each analyst to ask.
Only one question with one related follow up. Thank you I would now like to turn the conference over to jump in on dress Your Investor Relations. Please go ahead.
Thank you Amy and good morning, everyone. Once again this is John Bruno Director of Investor Relations. We appreciate your continued interest in PPG and welcome you to our fourth quarter and full year 2020 financial results Conference call. Joining me on the call from PPG are Michael Mcgarry, Chairman and Chief Executive Officer, and Vince morality Senior Vice.
And Chief Financial Officer, our comments relate to the financial information released after U S equity markets closed on Thursday January 21, 2021, we have posted detailed commentary and accompanying presentation slides on the Investor Center of our website PPG Dot com. The slides are also available on the webcast.
Site for this call and provide additional support to the brief opening comments Michael will make shortly following management's perspective on the company's results for the quarter, we will move to a Q&A session. Both the 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 PPG is operating in.
Financial performance. These statements involve uncertainties and risks, which may cause actual results to differ the company is under no obligation to provide subsequent updates to these forward looking statements. This presentation also contains certain non-GAAP financial measures. The company has provided in the appendix of the presentation materials, which are available on our website.
Filiation of these non-GAAP financial measures to the most directly comparable GAAP financial measures for additional information. Please refer to Ppg's filings with the SEC now, let me introduce PPG, chairman and CEO Michael Mcgarry.
Thank you John and good morning, everyone I would like to welcome everyone to our fourth quarter 2020 earnings call.
Most importantly, I hope you and your loved ones are remaining safe and healthy.
Now let me provide some comments to supplement the detailed financial results, we released last evening.
For the fourth quarter, our net sales were about $3 8 billion on our adjusted earnings per diluted share from continuing operations were $1.59.
Driven by strong year over year sales growth in our industrial coatings reporting segment, we delivered record adjusted earnings per diluted share for our second consecutive quarter, increasing by more than 20% from prior year.
In addition, our global architectural coatings businesses continue to perform exceptionally well eclipsing prior fourth quarter sales and earnings records in most countries.
We also delivered the second consecutive quarter of double digit organic growth for our European architectural business.
Our global architectural sales were also supported by ongoing advancement of our digital capabilities.
And 'twenty 'twenty, our global digital sales in the architectural business were up by more than 60% and we will continue to invest in prioritizing these digital initiatives.
We couple these organic growth improvements with strong cost management.
And delivered PPG aggregate segment margins that were about 160 basis points higher than the prior year fourth quarter.
The higher margins were achieved with about 30% of our businesses continue to face significant demand headwinds.
Most notably the automotive refinish and aerospace coatings businesses as the pandemic continues to impact areas of travel and mobility.
During the fourth quarter sales on our China, automotive OEM and general industrial businesses, well outpace industry demand with both businesses growing nearly 20% on a year over year basis.
In auto OEM.
We were significantly above industry production rates, our strong footprint.
Advantage technology and service capabilities continued to service well in China, where economic growth is the most robust.
In addition sales on our European and Latin American regions return to year over year growth during the quarter.
And in the U S region, while still lower than the prior year due to the aerospace coatings business overall sales improved throughout the quarter.
We delivered more cost savings during the quarter with about $40 million of interim cost savings and we also delivered an additional $40 million of structural cost savings.
Our interim cost savings were lower than the 90 million, we achieved in the third quarter as we incurred certain cost to support the sales improvement in several of our end use markets.
We will maintain about 25 million on these interim cost savings in the first quarter and expect to make at least $80 million of permanent cost savings for the full year 2021.
Our teams did an excellent job managing working capital and cash uses in 2020, which allowed us to achieve a record $2 1 billion of operating cash flow for the year.
Our businesses reduced operating working capital as a percentage of sales by about 100 basis points in 2020.
This outstanding performance was one key factor in allowing us to fund the N of split acquisition entirely with cash on hand during the month of December.
In addition to completing the <unk> acquisition, we recently announced some other strategic acquisitions.
Each of these companies brings incremental benefits to PPG that will lead to further shareholder value creation.
Looking ahead to the first quarter, there are few challenges, including more restrictive shutdowns in certain countries and supply chain issues in certain end use markets that will likely cause some short term coatings demand disruptions.
We're also experiencing elevation of costs, particularly raw materials and logistics costs.
While these issues create some uncertainties on the first quarter, we continue to be optimistic about the first half of 'twenty 'twenty, one as underlying coatings demand and economic activity in several of our end use markets is expected to remain robust, including the automotive OEM and general industrial packaging and architectural businesses.
We also remain confident of achieving further selling price increases in the first quarter and the performance coatings reporting segment and have started to pursue selling price increases and the industrial coatings reporting segment, which will be realized as the year progresses.
For the company aggregate sales volumes are projected to be flat to up a low single digit percentage in the first quarter with differences by business and region.
As we progress through 2021, we anticipate multiple catalysts that will help drive further sales and earnings growth, including an eventual restocked benefit as low inventory levels remain in several of our end use markets.
We are well positioned to benefit from the ultimate recovery and the old automotive refinish and aerospace coatings end use markets as congestion and air travel increases with our world class product and customer service capabilities.
In addition, our acquisitions will start to provide accretive benefit as the year progresses. These.
These are incremental benefits will supplement the organic growth that we anticipate in our other core businesses as we continue to support our customers with excellent services and technology advantaged products.
For the quarter, we project adjusted earnings per diluted share to increase by more than 20% on a year over year basis, continuing our strong earnings momentum.
Our near term cash deployment priority will be to complete the acquisitions, we have announced which we anticipate to be funded by a combination of cash on hand and debt.
By the end of the second quarter. We then intend to primarily use our free cash flow generation to pay down debt from these acquisitions and reposition our balance sheet for future industry consolidation.
As it relates to our recently announced acquisition agreement, let me make a few comments about tick a ruler.
From a strategic perspective, this remains an extremely complementary business to PPG.
We don't expect any significant antitrust issues and are confident that we will be able to keep the entire business intact and equally important we will not need to disrupt PPG legacy businesses or our customers in the region.
Keeping the ticker Ela team together as one unit is not only the best stakeholder outcome, but will ensure a fast start on synergy capture.
From a strict acquisition integration execution perspective, we believe that our offer is compelling for all stakeholders and it has the benefit of the due diligence we've already conducted.
We conducted a due diligence efficiently and work closely and cooperatively with tequila to resolved to the satisfaction of both parties some commercial issues that arose in the due diligence process.
We believe that these commercial issues. In addition to the regulatory landscape place PPG in the most favorable situations require ticker relative from a business continuity and return project return perspective.
Additionally, we are expecting substantial cost synergies supplemented by incremental sales synergies, which we're able to fully vet in the due diligence analysis.
This includes the fact that our holistic European operations are well established and stable and where does result in very little disruption from this transaction.
We also have a very well established regional shared service center in Eastern Europe that has been in existence for many years and has integrated many of our prior acquisitions, which will enable us to more seamlessly and more quickly integrate an acquisition of this size.
Finally, we will continue to analyze this with our traditional thoughtfulness and historical discipline on a post synergy basis. This remains an excellent value creation opportunity for our shareholders.
Lastly, as we hear from our customers and investors consistently there is zero doubt that our sustainability initiatives are far ahead of any coatings company as PPG technology is enabling the conversion from the internal combustion engine to electric and autonomous vehicles.
In addition to our many other initiatives.
Due to wear this trans net transaction is from a process perspective.
That is we are currently in an open tender offer period and take a real has board has received a non binding competing bid we will not be able to answer any questions on this matter during the call.
In closing I want to thank and recognize our global PPG team.
Our company's true character has been showcased during these times of adversity.
I am proud of how the PPG team has responded with great resiliency and continuing to serve our customers our communities and one another and it has truly live the PPG way.
Our fourth quarter and full year 2020 results are a true testimony of our company's capabilities and allow us to enter 2021 as an even stronger company. Thank.
Thank you for your continued confidence in PPG. This concludes our prepared remarks and now Amy would you. Please open the line for questions.
Thank you at this time, we will be conducting a question and answer session. As a reminder to allow for as many questions as possible. We ask that you. Please limit your questions to one question with one related to follow on your first question comes from the line of Michael Sison with Wells Fargo. Michael Your line is open.
Hey, guys nice quarter.
Hmm.
I guess, maybe let's talk about the acquisitions in total you had a really good run here in terms of you know.
Finding opportunities.
Well, what's what's sort of the synergy run rate if if all of them come together over the next over the next six months.
Yeah, Mike This is Vince good morning, hope you're doing well.
We'll give some more information on these acquisitions is a close similar to what we did with Emmis Flint.
We got to get them through closing we have to we'll give you some annualized as well as specific 'twenty 'twenty one numbers all of them have a different seasonality profile.
So so again it would be hard to give you a specific number as it relates to 2021 as I think it's well chronicled most coatings acquisitions have kind of mid single digit.
On synergies as a starting target some have more some have less depending upon.
They are overlapped geographic overlap product overlap. So so again as we close them.
Be rest assured it will provide more detail individually per acquisition.
Got it and then maybe shifting to architectural coatings.
When when you are can you maybe talk about some of the backlogs that that your pro painters are seeing and how big those on a relative to what you've seen in the past and maybe the potential momentum there and whether you know orange and brown as kind of the hot color that people are asking for these days.
Well I'm not going to go into the Orange and Brown, Michael but what I will tell you is we sub segment our business here in the U S.
Maintenance commercial residential DIY et cetera, and if you look at that momentum by each of those segments. Every one of them was significantly more positive in <unk> than <unk>.
And each one of them are anticipating being more positive in <unk> versus <unk>. So you know from that standpoint. We're excited obviously you know permitting for new homes construction is not going quite as fast as they wanted our challenges on the multifamily side as well so most of our large painters are feeling very.
Comfortable coming into 'twenty 'twenty one.
And then when we flip over into Europe without a doubt we're still having very strong you saw we had double digit growth in the fourth quarter through the first.
21 days of January it's a continuation of that trend as well.
And then when you flip down into Mexico.
Had an exceptionally strong quarter you know the economy in Mexico, GDP is minus 7% to 8% and yet we performed at plus 10.
And we see that same momentum carrying into January the the sellout from our Concessionaires is strong their liquidity is very good and so I'm you know I'm very positive about what we're seeing on our global architectural business.
Great. Thank you.
Your next question comes from the line of Ghansham Panjabi with Baird Ghansham. Your line is open.
Thank you good morning, everybody.
I guess, Michael you know going back to your comments on pricing and industrial.
You referenced on pricing initiatives, there to offset higher costs.
Looking at the slide deck, you're still expecting kind of stable selling prices for the industrial coating segment. So just curious as to is there a lag associated with that is that what you're referencing how should we think about that build as the year progresses. Thanks.
Ghansham as you know historically theres always a three to six month lag in pricing and raw materials, because we can't raise price until our customers can see it and it's you know as you know more challenge it on the industrial side than the performance side.
And so raw materials.
We're a higher especially when you think about China, that's a much more a spot kind of purchasing environment over there because that's their tradition.
So we saw we have already announced.
Price increases in Europe, we've started to announce price increases in other regions in the world. We are well ahead of 2017. If you remember 2017, some of our peers were distracted because of either acquisitions or our fears and so we were we are well ahead of that and so.
Im very comfortable that youre going to continue to see price.
Positive price, we've had 15 quarters in a row of positive price you're going to see the 16th quarter of positive price for the company in Q1, and so I'm not worried about the low single digit inflation that we're anticipating.
Got it and then in terms of the supply chain constraints you referenced can you just give us more color on that dynamic you know which businesses in particular do you see being impacted the timeline to normalize I know the world is choppy at this point, but just curious on your thoughts. Thanks. So much yeah. The two biggest businesses ghansham that are impacted right now are automotive and industrial.
We finished with backlogs in those businesses.
By the end of the December we're still running backlogs in those businesses.
<unk> is very strong, but it is a very choppy a number of our customers are having significant issues with labor.
Labor because of the Covid pandemic in fact, we got on emergency call. A couple of days ago from one of our large automotive customers that their whole paint shop was shut down because of Covid and could we bring on our people and to run it in the interim so we of course supported him on that.
As the semiconductor issue that's out there in the automotive space.
I'll want to run so many of our customers ran over Christmas, which was quite unusual. So demand is there and you know inventories in many of these spaces are quite low whether youre thinking about appliances or coil or automotive if there's a low inventories. So we feel very comfortable.
<unk>.
But unfortunately, we can't predict with labor.
When people are going to be having full labor continues to be able to run their plants.
Okay. Thank you very much stay well.
Your next question comes from the line of Frank Mitsch with Fermium Research Frank Your line is open.
Yes, good morning, and congratulations on the Penguin helmets, that's pretty cool looking forward to looking forward to seeing a game one of these days hopefully in person we'll see.
I wanted to follow up on the performance coatings margins got a bunch of questions regarding the very large sequential decline that you saw from the third quarter to the fourth quarter. Typically you do see a decline with your businesses in the fourth quarter, but this seemed to be a bit abnormal I was wondering if you could take a moment or two when and talk to.
The details there.
Yeah, Frank this is Vince.
It really relates to the weightings of the businesses that are in there.
Two most impacted businesses as Michael referenced in the opening comments that we're seeing from a volume perspective, our aerospace on refinish. Those are typically our most stable businesses throughout the year from quarter to quarter.
The demand trends don't don't.
Significantly change by quarter.
Other businesses in performance coatings, such as architecture, we're very seasonal.
So while we were down 30% in aerospace in Q3, and a similar amount in Q4 same with refinish.
They are waiting on a traditional Q4 is much higher.
So in 2019, it would have been much higher 2018 would have been much higher.
As a percentage of the total segment, so even though we had good architectural demand and sales in Q4, the fact that that weighting of aerospace and refinish.
Heavier in Q4 had a bigger impact on the Q4 margins.
Yeah.
Got you got you thank you and.
I understand you cannot talk about take a real but if the if for whatever reason that transaction doesn't occur can you talk about your M&A pipeline.
Obviously, you've been very active.
In the recent past should investors expect that there might be other sort of transactions.
Or oh with share buybacks come back into the four.
Well, Frank as I think you've heard me say this in the fourth quarter.
Back in October I'll say, the same thing now in January I'll be exceptionally disappointed if we buy back any shares in 2021, our acquisition pipeline remains robust and remains active.
And we continue to work in this area.
So I'm feeling confident that we will have further announcements in the back half of the year.
Very helpful. Thanks, so much.
Your next question comes from the line of Bob <unk> with Goldman Sachs. Bob Your line is open.
Thank you very much good morning.
Michael I think you characterize maybe the industries more prepared for raw material response with some price hikes.
I'm wondering if you could tell me what difference it makes if any to the demand environment relative to maybe 17, which was quite weaker.
Is that going to make it quicker easier and maybe some sense there.
Yeah, well I think it certainly make it.
Easier I don't know about quicker.
On the benefit we have right now in these industrial businesses is that.
Customers are backlogged, there are asking for product, they're calling on a daily basis wondering where their orders are in the queue.
So that's one thing the second thing is.
They are so desperate for technical help the last thing they're going to be doing is asking for any price downs and so they fully recognize that this is a different environment and so you know our you know our salespeople are never happy when we are pushing them out there telling them. They got to go get price, but in this case they have a lot more ammunition.
To go get price and I feel comfortable that the industry sees the same thing that we're seeing.
And can I ask you on the refinished market we get.
Occasional questions from our investors wondering about the secular threat of driver assistance versus the <unk>.
A growing car park and introducing new drivers that Mike Bang up vehicles, how do you see that playing out over the next several years.
Well, Bob I would just first start with the fact that the car park continues to grow.
It grows marginally in the U S and Europe, but it grows in eastern Europe. It grows in.
China can I mean think about 25 million new cars every year in China.
Low scrappage rate right now in China.
Same thing in eastern.
Excuse me Southeast Asia, and India. So the car park is continuing to growth and as you know any kind of autonomous.
These safety features they're mostly in the developed countries those things are too expensive to put on cars and a lot of these other countries.
So we don't have to worry about that as much.
The other thing I would tell you is that you know in the fourth quarter. We every time, we saw you know the economy loosen up and the work from home restrictions loosen, we saw especially in Europe.
Congestion come up rather quickly because you know as you know the houses are much smaller in Europe and people, it's much more difficult to work from home there.
So congestion rebounded very quickly.
R R.
Refinish in the fourth quarter was minus let's call. It minus 10 ish, but claims were down minus 20. So we've made some significant improvements in that business because of the pandemic and so I think you should feel come from your clients should feel comfortable that we have this are well in hand.
Great. Thanks, a bunch.
Your next question comes from the line of P. J <unk> with Citi P. J. Your line is open.
Yes, hi, good morning.
Good morning P J, Michael what was behind the strength in architectural coatings, especially in Europe, where I think organic sales were up in low teens is that driven by DIY and does DIY face tougher comps in 2021, starting in second quarter.
Well there is certainly some significant DIY improvement in Europe, but there was also a significant return to our professional network as well and we have a very strong position as you know in Europe number one in a lot of countries and so we benefited from that strength.
And you know the.
The improvement in DIY I think is sustainable theres, a whole lot of new DIY errors that werent, there two and three and five years ago.
So I think this is a start of something that's good.
And the comps do get tougher, but I would say the comps in Europe do not get tougher until the third and fourth quarter. So the second quarter. As you know had very significant lockdowns in Europe, and so you know Q1 Q2 will still have very positive.
Numbers are going into the back half of the year.
P J for Europe, specifically, the professional painters Michael alluded to doesn't have as much commercial exposure as they do in the U S.
So they are working on residential and from repaying activities. We're seeing the same in the U S. But there is a commercial downdraft.
Weakens the comparable Europe versus the U S.
That's really helpful. And then secondly in is flint that seems like an interesting acquisition.
In traffic pains, I think Michael you said that autonomous cars need good road markings and as a result of traffic paint could be a growth industry.
And as Clint has I think revenues of 600 million.
How fast can these sales grow.
Your traffic solutions business can grow going forward. Thank you yeah. Thanks for asking the question P. J I'll, let Michael answer the growth question, but I can let let's.
Let's frame units went up I think 600 million on an annual sales is a good target. It is a very seasonal business as you can imagine.
It's predominantly U S Canada.
So we are.
We do serve parts of the U S that have or.
Certainly a winter effect. So we typically see the majority of profitability in Q2 and Q3, given the seasonal nature the nature of the business and Michael maybe you can.
Yeah P. J, what I would tell you is the two secular trends that we're paying close attention to is one.
Some of the states are looking to.
To make this strikes are wider so from foreign stripes, a six inch strikes and the other thing they're doing is they're reducing the distance between the strikes.
So that's one plus the other thing that's interesting this is that they have a number of.
Preformed products.
And I think.
Thermoplastic products as well and I think with our network, we're gonna be able to help them get better distribution of that products. So we're excited about this but I would I would anticipate this is not going to be a.
Straight up kind of growth that's going to be a continuation of a continuous growth as revenue from it.
Alright, thank you.
Your next question comes from the line of <unk>.
With Exane your line is open.
Yes.
I was Oh I've got another question on any on the international expansion I was just wondering if you could frame for us what you have in <unk> are we talking about see if he can cost increase to try and become a material competitor outside of the U S and Canada.
Well it definitely will not be a material cost increases you may have heard making traffic paint is not as sophisticated as making our industrial paints and as you know in Mexico and Europe, we have a number of plants. So it will not be a cost issue.
Be a focus and distribution issue, making sure we get ourselves aligned with the winners in the contracting space that consistently win government bids and municipality bids and things like that so that's where our focus will be so Mexico will be a start because of our strong base with our.
The PPG Comex team.
And then we will look at it on a country by country basis in Europe.
And do it in a very methodical and disciplined manner.
Thank you and then Michael I think in your slides you talk about ESG benefits on full acquisitions could you give us a few examples.
Yes.
I'm happy to.
John chime in as well. So if you think about the first one and it's Flint. This is going to help the autonomous driving helped them mobility.
So as I mentioned in my opening remarks, PPG is far ahead of everybody in this space.
So that would be the first one the second one would be our versa flex I would tell you that with versa flex the poly urea technology. If you think about flooring systems, a food plant. What you want to do is ensure the cleanest environment that you can and reduce the potential for.
Illnesses in those environments and that's another ESG benefit.
<unk> I would say the number one thing with <unk> is.
They have some really nifty technology in the area of automotive parts water based and so as you know we've been trying to push the industry to move much faster away from solvent to water.
That's one plus we anticipate with a full suite of products, we will get more people switching to powder, which as you know is it has 100%.
Transfer efficiency and then I think our remarks on pick a really are quite clear not only would we bring our technology to that space to continue to drive more.
Bio base, a more sustainable raw materials, but also.
We will be more water based solutions, especially when I think about what they have in Russia and other eastern European countries.
Thank you.
Your next question comes from the line of David Begleiter with Deutsche Bank, David Your line is open.
Thank you Michael just on the Q1 guidance typically Q1 is about 15% above Q4.
I think this is you're guiding to down about 6% to 9% what are the key drivers for that diverges from historical patterns.
Hey, David This is Vince hope you're doing well.
I think the typical seasonality due to the pandemic is very hard to match prior year's.
We had a strong push from activity from Q3 into Q4 as Michael alluded to architectural had a high higher seasonal sales in Q4 than we would traditionally see in.
In Q1, we do see some concern about the availability of customer production lines. So we do feel some of the activity on slipped from Q1 into Q2 just.
Just to give you a point of reference David you typically see about a million car drop off in global auto production from Q4 to Q1, we're expecting 2 million cars globally, excluding Japan 2 million cars globally drop off from Q4 to Q1 and that same type of pattern exists in some industrial businesses.
So I think it's difficult from a seasonality perspective to compare historically due to just shifting around associated with the pandemic.
Got it and in the same kind of same question just looking at performance coatings volumes I do have an easy comp. It was down 6% last year, I think you're still guiding it to be down year over year, why would it not be at least flat or even up year over year from performance coatings volumes.
The first quarter last year didn't have had virtually no impact from aerospace.
In terms of volume decline and refinish was fairly strong until the tail end of March.
Those two businesses as Michael said on the opening commentary are heavily impacted.
In Q4, and we expect.
Consistent patterns in Q1.
So on those two businesses are big businesses on that performance segment David.
Thank you very helpful.
Okay.
Your next question comes from the line of Jeff Zekauskas with J P. Morgan Jeff Your line is open.
Thanks very much.
Thank you.
You are not providing financial guidance for 2021.
But surely there must be internal targets for management compensation.
Can you give us an idea of what performance objectives, there are for the company and.
What targets you have in order for people to reach those goals.
Yes, Jeff This is Vince again, we have the traditional targets.
Established that we would in any given year for from management compensation.
And also sales person compensation, obviously 2020 was very fluid 2021, we think will be very fluid.
Similar to every other company.
Our our comp Committee, our board will look at the fluid mis and react accordingly based on their judgment, but we do certainly have internal targets established today for 2021.
Okay.
Propylene settled up 12 cents a pound yesterday.
Was that something that was included in your addition of raw materials or raw material inflation for this year or was it larger or smaller than your expectation.
You said propylene right, yes, I did propylene.
So you know obviously, we don't buy propylene itself, we buy propylene derivatives.
The way the propylene derivatives work, it's also driven by supply demand on the underlying derivative plus the raw material input so that would not hit us.
Right away.
So that would be the first comment the second come in as you know.
We have anticipated raw material inflation into 2021. So we were re adjusting on a lot of our formula and buying strategies in 'twenty 'twenty.
To anticipate higher increases and try to position ourselves that to minimize the impact of those kind of fluctuations.
Yes, Jeff I'll add that we are seeing this low single digit inflation coming into the year.
Some of our suppliers are dealing with some of the same issues that our customers are which we feel some of that is transitory, they're having worked workforce restraint due to the pandemic. So so we think as the year progresses some of these.
Limiting items will fall by the wayside and we know there's good supply out there and most of these markets and as Michael just alluded to the supply demand characteristics of our.
Our supplier base at some point will be the predominant factor of pricing.
Yeah.
So you don't think youre going to be squeezed. This year does that is that the conclusion that we should draw.
We think low single digit is.
Low single digit inflation as our forecast for Q1 and likely Q2.
Okay, great. Thank you so much.
Your next question comes from the line of Chris Parkinson with Credit Suisse. Chris Your line is open.
Great. Thank you very much and you just saw.
Good job managing costs throughout the pandemic, but in 'twenty, one day or just even on the Q&A. There just appears to be this balancing act between improving.
Improving volumes your ongoing cost programs price cost and even mix on on interested with basis can you just discuss your own thought processes on the margin framework not only in 'twenty, one but on.
On the 22 and how investors should be weighing each of these variables is it basically just control the controllable on your cost programs in price.
Or is there any are there any other things you could do to.
Continue your progression. Thank you.
Yes, Chris This is Michael I would tell you that the PPG way as we do better today than yesterday every day and that's how we're managing.
That's historically been a continuous improvement mentality that we have for the company.
And so that's why we said in the first quarter, we would still have cost initiatives.
Even though volumes continuing to go up.
We're holding our teams accountable continue to drive productivity we.
We know that there is going to be continued cost savings from a.
Let's call it travel that'll be one how we manage internally technical services that we're providing to some of our customers we're going to be providing that electronically. We have more digital initiatives. So I think there is you know when I think about long term I think it's going to be less expensive for us to make paint.
Long term than it is today and we have more productivity initiatives underway.
Got it and then you mentioned a few times in your prepared remarks, just the potential for a robust restock.
It could be a solid talent on 'twenty. One can you just quickly comment on what Youre currently hearing from your various customer channels on.
And perhaps also comment on just expected timing. Thank you very much.
The two biggest ones that are that will have to restock. The first one is refinish. So they're all running with an exceptionally low inventories. They don't want to get caught with the work from home and extended work from home period, where they can't move.
Mood products. So that's the first one but more importantly aerospace.
We see our orders dropping I mean, I won't get into the various sub segments.
Much we break it down into sub segments, but I had one in the fourth quarter that we only got 6% of our normal orders in the fourth quarter now clearly the industry is running much higher than that so they continue to destock at a significant rate that's going to have to build up so we're thinking about how do we ensure that we're ready.
For that restock.
That will become an in aerospace and that will be significant and on.
I'm thinking that people are going to start doing that probably the starting in the back half of Q2, and then it will start to accelerate you probably saw the announcement from Airbus today that they are increasing their build rate for the <unk> hundred 20.
That's the first sign and there'll be other signs I think you should anticipate is because obviously, we're talking to our customers. So we have.
Information that they haven't made public but.
That's the first one Chris.
Chris If you go over to the industrial segment, we know the car inventories in the U S are at very low levels relative to historic terms.
Many of our industrial customers are running hand to mouth with backlogs to their customers.
And if you look at our balance sheet as a microcosm or inventory levels are very low.
And we do have certain stock option, because we can't get product in certain places again, all pandemic related. So we do expect there to be a restock across a variety of industries as we progress through 2021 architectural. Another example, most of our customers had a very strong year last year on 'twenty.
20th did we but again it depleted inventory that would traditionally be on the shelf and maybe to put that in perspective, Chris We ran our stained plant in December I can never remember in my history of us rent on a same plant in December.
That's great color as always thank you very much.
Your next question comes from the line of John Roberts with UBS, John Your line is open.
Thank you.
China began shutting down in February of last year. So you start to see some benefit here on the first quarter and then your comps get pretty easy as we go into the second and third if I look at the two year comp instead, and I look back to first quarter of 19. It looks like you are relatively flat and.
In the first quarter versus two years ago, even with the acquisitions is that kind of the right way to think about it that we still on a two year basis, China is going to be okay. On a two year basis, but a lot of markets are still down that's there and so youre going to be maybe in the first half year. It can be kind of flattish on a two year basis.
China only John are you talking totaled.
Total PPG so total PPG.
It'll PPG.
Fears.
For total PPG on a two year comp basis.
Vault sales volumes will be down low to mid single digits still.
The guide we gave.
Now there's other positives such as acquisition currency is favorable.
As Michael alluded to we had 15 straight quarters of pricing, but sales volumes on a two year stacked basis will be down low to mid single digits.
Okay, and then you talked about propylene, maybe a little bit more granularity on the overall raw material inflation.
Ethylene derivatives like van Urethane T O two they're all different value chains, that's there and many of them are not propylene linked.
Yeah, I mean, you know we breakdown on procurement into about 10 different categories and for cube.
I would say that the vast majority of them were slightly negative.
Our flat.
When we look at one Q.
See probably half of them have marginally higher.
So inflation.
But we're not seeing some significant.
Step up that we're not prepared for.
So sequentially you know isocyanate tear up the proxies are up.
Packaging is up.
Of course solvents are all up.
But we're not we're not a we're not nervous about this I guess is what I'm trying to tell you because we.
Anticipated this going into the year and we tried to have our procurement strategy on them in a manner that would.
Would be able to take advantage of what we had in 2020 and try to carry that forward into 2021.
Okay. Thank you.
Next question comes from the line of Vincent Andrews with Morgan Stanley Vince Vince Your line is open.
Thank you and good morning, everyone. If I could just ask on the on the auto production and maybe some other customer areas, where there could be some some issues in the first quarter.
Vince I think I heard you say that debt on the auto side Youll see youll see some some some autos gets shifted into <unk> are you anticipating that the shortfall on <unk> would be made up entirely in <unk> or would it be spread further out into the balance of the year and is it something that can be.
Fully made up in the calendar year.
Vincent This is Michael I would say the biggest unknown and that is what are the auto guys decide to do with their own dealers as you know dealer inventories very low.
Dealers are happy right now because you've come into an auto facility and you don't have a lot of choice and you have to buy what's on a lot and they're making money on new cars, which is historically something they don't do so.
So I think the great unknown is due to the car companies starting back half of <unk> and <unk> do they try to rebuild inventories back to the old levels.
On the dealer lots or do they keep doing what they're doing now.
So I think thats the big unknown, so we're anticipating catching up.
But there is still more latency there if they decide to go back to the old inventory levels. They used to have the one the one constant Vincent is there is there is demand out there there's very strong demand in the U S. Good demand in Europe, China numbers, I think come out today and car sales are up.
Over 20% for January year to date. So we know there's good end market demand out there for automotive.
Thank you that's very helpful and just maybe on China Aerospace you noted that it back to Greg.
Flights you're back to 90%. So when you look at if we take that business is sort of a case study of how the rest of the world Aerospace might come back are you seeing anything different in customer behavior.
As those.
As the aerospace recovers in China are they buying more are they buying less pushing anything out pulling anything forward on anything that's interesting that might help us sort of frame.
The U S and Europe, and so forth will come back.
Yeah, Vincent what I would tell you the first thing to remember its a two stage recovery. So domestic flights are up 90%, but on international flights are down 85%.
So they're not flying outside of China.
So and they're really eliminate anybody flying in so thats. The biggest challenge right now so I would say that the number one factor to look for in the recovery as the vaccine distribution and people opening up their borders.
I would pay it pay real close attention to those right now their demand on domestic side, they are buying product and they're happy and their inventory levels are I would call normal.
Yes, Vincent just expand out some of the other metrics. We watch we do see online inquiries for airline travel online inquiries for airline travel up significant significantly versus a very depressed level in Q3 and Q4. They were up they continue to trend upwards, we did see around the holiday periods.
Both in the U S and Europe.
Sizeable step change in travel.
That was wise or not is debatable, but we do know there is demand out there for folks who want to travel and we we are welcoming obviously the positive impact from a vaccination.
Thanks, very much guys.
Your next question comes from the line of Arun Viswanathan with RBC capital markets. Your line is open.
Great. Thanks, good morning.
I guess I just wanted to get to the margin question again.
In industrial obviously, you've had some nice progress here even in a challenging market do you feel like you're fully caught up.
From from prior inflation as well.
And do you expect further further percent margin growth as we go through 'twenty, one and you realized from these price increases that you've put up there and maybe you can also comment on on performance as it relates to you.
On your percent margin trajectory. Thanks.
I would say that.
My answer that as always and we've never caught up.
We always have a higher expectation in that area.
And so we have more work to do the good news is demand is strong and people can see raw materials are coming up so we should be able to get ahead of the curve on this one.
As far as performance, we as you know we've already announced price increases in architectural we've announced price increases on refinish.
And we have advantaged technologies and aerospace so that whenever demand comes back it will be.
There'll be a positive force so I think we're well.
Feeling pretty good in this area.
Yeah, Arun and let me just add I think as you've heard us talk throughout all of 2020 due to our discretionary cost management due to our structural cost improvements that we've made the past several years, we expected very strong leverage on any volume improvement I think that you witnessed that in Q4 in the industrial.
<unk>.
Volumes were up mid single digits and you saw the impact that had on the bottom line. So as this volume as the pandemic volume recovery occurs throughout we hope the balance of 2021, you should expect very strong leverage in both segments.
Okay. That's helpful. And then I mean, maybe you can just provide.
Either kind of a returns profile.
The acquisitions in general is that is that kind of like a mid teens ROIC and maybe that's why you don't necessarily think a share buyback would be.
Of the same.
ROIC C or or what.
What's kind of the calculus into.
Not necessarily pursuing share buyback and pursuing M&A, a little bit more aggressively.
If you look and I think we put something on a couple of years ago with regards to our acquisition record and the returns around that I think we had a dozen or so recent examples I think it was may of 2019, we put out our 2018.
What you'll find is the return on capital for not only PPG, but the coatings industry.
And the IRR for these transactions is typically well in access.
Our cost of capital and certainly in excess of a share repurchase and it's really driven by the fact that these are typically very highly synergistic transactions.
A lot of those synergies come with no cash out the door on behalf of the buyer.
So you get a very good return and these are typically low risk because we're typically not acquiring a lot of assets.
As youre, well aware ruin the coatings industries asset light. So we're typically acquiring very few assets with a lot of synergy potential and we that PPG has been very good at extracting those synergies very early.
And we've done 50 or 60 acquisitions, the past 10 years.
Those acquisition timelines are typically less than 24 months, where we're able to extract all of those synergies again very very with very very few cash out the door. So those dynamics typically lend themselves to a higher return profile in our space in the coatings space for acquisitions versus share repo.
Thanks.
Your next question comes from the line of Kevin Mccarthy with vertical Research day, Kevin Your line is open.
Hi, Yes, good morning, everyone.
My question relates to architectural DIY coatings, how would you compare your outlook for 2021 in the U S versus Europe, maybe you can talk through what you're hearing from some of your channel partners in general.
Things like inventory levels.
Seasonal effects.
And.
Whether or not you can grow the business directionally versus a more challenging comparisons this coming year.
Well, Kevin I would say that.
DIY in the U S will continue to grow.
What I'm most excited about is the fact that we have a new generation of DIY or is that we didn't have we always kind of be mone net in the past because of.
People, our age seem to let their kids get by without painting every summer.
Now.
They are out there painting their own homes as they work from home. So that's a positive.
The housing stocks will continue to grow that'll be a positive.
So I think that's all important.
Trends that you should be paying attention to in Europe.
We went through a long period of time, where there wasn't as much.
Repair and remodel inside homes that historically has happened in the U S debt now that people were at home and looking at those same four walls. All the time has manifested itself in some very significant.
Numbers. So I think this is going to last longer than a lot of people think.
Obviously, we'll wait and see but I know Q1, Q2, we will all be positive comps.
And let's wait and see how we trend into Q3 Q4, but I think long term. These are positive trends for the DIY industry.
Kevin I'll add one positive trend in the U S. The.
The day urbanization, that's taking place.
Moving from smaller square footage into a single family home typically favors repaint residential paint repaint on it.
Typically favors more.
More robust painting cycle with more velocity.
Okay. That's helpful and then.
Wanted to ask about auto OEM, Michael on your prepared remarks, I think you pointed out you're growing significantly above industry production rates and your heat map shows you know above average in Asia and EMEA.
Can you elaborate on on what is driving that and how much is related to say share shifts versus some of the dislocations. You mentioned around you know semi is labor and low inventory levels.
Well the first one that we have is better technology. So we're winning so if you look at our new wins year over year, our net new wins that hasnt been a very positive.
Force the second one has been because of the pandemic.
Now the value of our Tech service team is being paid out in spades. I mean people are just saying Wow. This is really important I need you guys in here and so we're getting net.
Discretionary piece of business.
And the third one is we're very very early stages, but we're starting to see the mobility wins start to pick up and that long term, where I think we're going to divorce ourselves from the build rates is because we're going to continue to win in this space.
Just one other I'll add as well Kevin if you look at some of our acquisitions in the past couple of years, we did on Hemlo RAF acquisition, We got war Wag acquisition pending we solidified many of these customer relationships on an.
Hillary products as well so that's been our strategy to expand our technical breadth.
With customers the value add to those customers.
And as Michael mentioned Thats coming through in Spades, especially in times like this where they need velocity through their plants.
Perfect. Thanks very much.
Your next question comes from the line of Mike Harrison with Seaport Global Securities. Your line is open.
Hi, good morning.
Wanted to ask about the M&A activity, if you've got four deals brewing and it sounds like you have some additional.
Deals maybe in the pipeline for the rest of the year.
What point do you start to get a little bit concerned about your ability to integrate.
Several acquisitions at once how do you think about that.
Mike Let me just tell you that about two or three years ago. We had six go on at once and it was not even a blip on the radar we have done 50 acquisitions on the last 10 years.
We have so many people on PPG that clamor to be the integration director, it's so highly price job in the company.
We have a well worn playbook dog ear pages left and right and.
This is something we do and if you think about what we have going on right now with these acquisitions.
<unk> is a verse of flex.
You got to take a really will be an architectural you have <unk>, which is there'll be an automotive I mean, so there is there are different businesses. So I'm not worried about it in its plants are completely new business. So for US. This is not a challenge yet so.
Im very comfortable in this space.
Well Michael that is a great question. It's something we are we know at some point could be a governor of what we do but given the diversity of these acquisitions.
We're not at all challenged at this point with bandwidth.
Alright.
On the OEM side.
Referred a couple of times to the semiconductor shortage issue and I don't think that <unk> specifically.
Given.
Some details or some thoughts on whether you think that's going to be.
A significant headwind or whether it's a lot of headline risk right now rather than really impacting production rates can you give.
Give some thoughts on that please.
Yeah, Michael I think this issue is well known in the industry not only in automotive, but several industrial markets anything that requires a chip like refrigerators washing machines.
And it's intermittent now there's there's production lines that are up and down based on availability.
It's too hard for us being passive to that supply base to understand the depths.
Or when it may resolve itself and we know it's extremely tight we do see customers, taking down lines, one or two or three days just because they don't have availability there is reportedly.
More supply coming or more ability to supply com.
But we don't know how prolonged this will be.
It's not it's still on a single digits in terms of its impact on most of these markets single digit percentages.
That can grow or shrink, but at this point, it's a developing story, but Mike what I would add to that is if they are missing chips on Thursday, Friday, and they get them on Saturday They were running Saturday Sunday, there, they're making up.
Any day that they can so they run in hand to mouth is basically what it is.
Alright, that's helpful color. Thanks.
Your next question comes from the line of J D. <unk> with on field Research J D. Your line is open.
Thanks.
First question is on the acquisitions topic I guess you guys have been doing a lot of acquisitions in the last few years now this company from Europe, apparently also wants to stop buybacks and do some acquisitions or they are planning to at least so do you feel debt in the next sort of coming quarters and years.
As more coatings companies are looking for inorganic growth to multiple of.
The average multiple industries going on sort of Eke up and therefore, our return profile on the acquisition pipeline may actually go down on.
Or do you think this is on a case by case basis and therefore it doesn't concern you and then the second question really is around your performance coatings business.
My point of view it was a phenomenal year 2020, given arrow and refinish was down that you guys. Almost ended the year flat. So just curious has structural profitability in DIY Europe U S and Mexico improve and you can keep a debt or was it a bit in <unk>.
Because of these.
Interim cost savings that you had and therefore I shouldn't get carried away.
Alright, well, let me let me first start with the.
I think you might have exceeded our two question limit.
Are the returns.
Acquisitions.
Our really unique to that acquisition and who you compete with is really unique in that space as well. So you know there's no right or wrong answer you know the general theme is that.
For.
The higher the risk the higher the return needs to be.
And so and the more unknowns the higher the returns need to be to cover that so I would say it just varies considerably and there's no right or wrong answer, except we know that discipline as always the right answer.
<unk>.
From a performance standpoint, I do think we have lower structural costs going forward and I do think like Vince mentioned earlier the ability to.
This additional volume when it comes in really Leverages itself to a nice return on the bottom line.
That's going to continue.
Yeah, and I think Judy Thanks, a lot.
<unk> talked over the years.
The coatings models, a variable cost model. So even though volumes are down we are able to ratchet down a variety of cost factors. That's been proven once again in 2020, especially in Q2 and Q3.
So we could ratchet down variable variable cost and then we have maintained some of that as Michael alluded to in the opening comments carrying into 2021 that we hope to make permanent.
Great. Thanks, a lot and good luck on the gorilla.
Okay.
Gentlemen, your final question comes from the line of Daniel Rizzo with Jefferies. Daniel Your line is open.
Hey, guys I'm on for Laurence.
Just a couple quick ones you mentioned all the M&A opportunities I was just wondering if there's an upper limit on the leverage youre willing to go to to make these acquisitions.
Yeah, I think our history has been well chronicled here as well Dan on look we want to be a strong investment grade company and there are times, where we lever up to do a transaction or a set of transactions.
Our intention would be as Michael said on the opening comments to immediately ratchet that back down to poise ourself for the NASDAQ next acquisition.
Given the different sizes of natures of these deals it's hard to pinpoint a specific number but again strong investment grade is where we'd like to live.
And then quickly.
Quickly you mentioned that some of your customers were running over Christmas, which was obviously unusual I was wondering if it's possible you might see the same thing in China for the Chinese new year, where just for tourist trends might continue and then not to pause you usually see around this time of the year in that region, but we'll let John Bruno to answer that because he spent four years.
In China, So John What's your view, then I fully expect them to take their holidays.
Okay. Thank you very much.
Youre welcome Scott.
There are no further questions at this time, Mr. Paranoid to turn the call back over to you.
Thank you Amy I'd like to thank everyone for their time and interest in PPG. If you have any further questions. Please contact our IR Department. This concludes our fourth quarter earnings call have a good day.
This concludes today's conference call you may now disconnect.
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