PPG Industries, Inc.

Good morning and welcome to the CPG Industries first quarter 2020 earnings conference call. My name is Alyssa and I will be your conference specialist today. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to John Bruno, Director of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Once again, this is John Bruno. We appreciate your continued interest in PPG and welcome you to our first quarter 2020 Financial Results Conference call. Joining me on the call from PPG are Michael McGarry, Chairman and Chief Executive Officer of and Vince Morales, Senior Vice President and Chief Financial Officer. Our comments relate to the financial information released after U.S. equity markets closed on Monday, April 27, 2020. I will remind everyone that we have posted detailed commentary and accompanying presentation slides on the Investor Center of our website, pbg.com. The slides are also available on the webcast site for this call and provide additional support to the opening comments Michael and Vince 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 a company's current view of future events and their potential effect on PPG's operating and financial performance. These statements involve uncertainties and risk 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, reconciliations 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 McCary.

Thank you, John, and good morning, everyone. I'd like to welcome everyone to our first quarter 2020 earnings call. First and most importantly, though, I hope you and your loved ones are safe and healthy. Never before have we experienced a crisis as broad as the COVID-19 pandemic. PPG operates in more than 70 countries around the world, and every community where we operate has been affected by this virus. We have 12 factories in China, with one located in Wuhan, so our PPG people have been managing through this challenge since January, working around the clock to protect our people and our customers. Throughout this crisis, we frequently hear about PPG employees going the extra mile at work and in their communities. I could not be more proud of our employees around the world who work tirelessly to keep each other safe and healthy throughout this unprecedented time. At our locations that have remained operational, we have and will continue to employ stringent health and safety measures, which are at a minimum, in alignment with the local health and government guidelines. From a business perspective, we will not know the full impact of the pandemic on PPG for some time, But we are working with urgency and have taken proactive actions to limit the impact as much as possible to employees, customers, and shareholders, while also continuing to support the communities and support agencies in need. Given the breadth and urgent community needs resulting from the COVID crisis, PPG has increased and accelerated our charitable contributions around the world. Last week, PPG and the PPG Foundation announced plans to contribute more than $1.5 million to organizations supporting the immediate community relief efforts and emerging recovery needs amid the pandemic. We're also donating personal protective equipment, antibacterial coatings, and other resources where help is needed. Our contributions will touch each major region we serve. We believe that even as we respond to difficult market and business conditions, It is vital to remain an active partner in our communities and help our most vulnerable neighbors at this critical time. Now let me turn to our financial results. Last evening, we reported first quarter 2020 financial results. For the first quarter, our net sales were approximately $3.4 billion, and our adjusted earnings for diluted share from continuing operations were $1.19. These results include a significant impact on the business interruption caused by the COVID pandemic. We estimate that our sales and earnings per diluted share were unfavorably impacted from the effects of the pandemic by approximately $225 million and 35 cents respectively. For the first 10 weeks of the quarter, excluding our business in China, most of our businesses and major regions were performing at least at the financial expectations we set in January. During the second half of March, we saw a rapid and wide-ranging deterioration in global demand. Many of our large OEM customers were forced to shut down. A number of architectural paint stores were mandated closed or materially altered the way they service customers. And miles driven and a number of commercial flights fell sharply with many countries and states imposing stay-at-home orders. This materially impacted demand of our customers' products and services, and in a matter of days, led to a quick and steep decline in sales for our automotive OEM, automotive refinish, aerospace, and certain parts of our global architectural business. These lower demand levels have continued well into April. We took immediate, decisive actions to help mitigate the lower sales activity, which included across the board salary reductions with our senior leaders impacted the most, temporary shutdowns of various manufacturing and distribution operations, temporary employee furloughs, reduced spending across all businesses and functions, We also deferred many non-essential capital expenditures. While many of these actions were difficult, they are necessary basis of breadth and uncertain duration of the crisis. Many of these mitigation actions were implemented during March, so only had a modest impact in the first quarter. We expect these mitigation actions to have more meaningful impact in the second quarter. From a liquidity perspective, record-level operating cash flow in 2019, and historical discipline approach to capital allocation has our balance sheet properly positioned to weather the crisis. We will review more details on our forward-looking expectations in a few minutes, but let me quickly summarize the results for the first quarter. In aggregate, our net sales and constant currency were down 5% compared to the prior year. Sales volumes were down 8%, with about 6% of that decline estimated to be associated with the pandemic. Our selling prices were 1.4% higher, with broader increases in our performance codings reporting segments and more targeted activity in industrial codings. Last, net sales were negatively impacted by unfavorable currency translation of more than 2%, or about $75 million, as the U.S. dollar generally strengthened versus other emerging and major currencies. We expect unfavorable currency translation to continue into the second quarter and be in the range of $130 to $150 million based on recent exchange rates. Looking at some of the business trends in the first quarter, in China, sales were down about 30%. Most of our end-use markets experienced significantly lower demand, including automotive OEM, where regional bills were down about 50% in the first quarter. Since early March in China, we have seen a measured recovery in demand patterns. Our factories in China have been running at 70% to 80% of capacity utilization for several weeks, moving closer to our 2019 levels and mirroring the needs of our customers' demand. We've also learned a lot from the restart in China, which we'll be able to leverage and optimize as other countries are beginning to restart their economies over the coming weeks. In other parts of Asia, our business performed solidly in the first 10 weeks of the quarter until the pandemic spread, which impacted several countries including Australia, India, and South Korea. In aggregate, sales volumes in the Asia-Pacific region were down 20% in the first quarter. In aggregate, the EMEA's region sales volumes declined by a high single-digit percentage compared to the previous year, driven by lower demand in most end-use markets due to the pandemic. The automotive OEM, automotive refinish, and industrial coatings business experienced the steepest declines due to customer shutdowns. Through mid-March, organic sales were slightly higher compared to prior year in the architectural EMEA coatings business, but then fell sharply as many countries in Southern Europe, including France, mandated closures of retail paint stores. Our architectural business in Northern Europe performed solidly for the entire quarter, and our protective and marine coatings business had modest sales volumes growth. reflecting that a portion of these businesses are late-cycle in nature. In the U.S. and Canada region, sales volumes were down a mid-single-digit percentage, including the unfavorable impact from the pandemic. Sales volumes were strong in certain end-use markets, including our packaging and architectural DIY coatings businesses, which we believe both will be more resilient through this crisis. In the U.S., the automotive OEM and refinish businesses were most impacted by the pandemic in the first quarter, with the vast majority of this unfavorable impact occurring in March. Finally, in our Latin America region, sales volumes were modestly lower, down a single-digit percentage, as the pandemic had less impact on this region during the quarter. We saw positive sales volume growth in both packaging coatings and Mexican PPG COMEX businesses during the first quarter. During the quarter, about 25 new concessionaire stores opened in Mexico, bringing the total to approximately 4,800 stores, which I would remind you has a much higher variable cost structure. From an earnings perspective, our first quarter adjusted earnings per diluted share of $1.19 is lower by 19 cents compared to the prior first quarter. As I said earlier, the estimated impact from COVID-19 reduced our adjusted EPS by 35 cents. Despite our sales volumes being lowered by 8%, our gross profit margin rose to 43.5%, or 70 basis points higher on a year-over-year basis. This was supported by higher selling prices and continued excellent progress on cost statements from our previously announced restructuring programs. Unfavorable foreign currency translation during the quarter lowered earnings by more than $10 million, which is impacted by a broad number of currencies devaluing against the dollar, including the Mexican peso that fell by about 20% in the quarter. Now let me ask Vince to provide some commentary on our liquidity position and some thoughts on the second quarter.