PPG Industries, Inc.

Good morning, and welcome to the PPG Industries second quarter 2020 earnings conference call. My name is Rocco, 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 today's event is being recorded. I would now like to turn the conference over to John Bruno, Director of Investor Relations. Please go ahead, sir.

Thank you, Rocco, and good morning, everyone. Once again, this is John Bruno. We appreciate your continued interest in PPG and welcome you to our second quarter 2020 Financial Results Conference call. Joining me on the call from PPG are Michael McCary, Chairman and Chief Executive Officer, 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 Thursday, July 16, 2020. We have posted detailed commentary and accompanying presentation slides on the Investor Center on our website, ppg.com. The slides are also available on the webcast site for this call and provide additional support to the opening comments Michael will make shortly. Following management's perspective on the company's results for the quarter, we will move to a Q&A session. Both the prepared commentary and discussion during the call may contain forward-looking statements reflecting the company's current view of future events and their potential effect on PPE's operating and financial performance. These statements involve uncertainties of 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.

Michael McCary Thank you, John, and good morning, everyone. I'd like to welcome everyone to our second quarter 2020 earnings call. As John noted, we posted a detailed narrative on our website yesterday afternoon, and as a slight process improvement versus prior calls, I will make just a few opening comments on the quarter, and then we'll move into Q&A. First and most importantly, I hope that you and your loved ones are remaining safe and healthy. Throughout this challenging time, we remain encouraged and proud of all the PPG team members for protecting each other, meeting the dynamic needs of our customers, helping communities, and ensuring stability for all our stakeholders. We continue to remain optimistic about our business and continued growth prospects. Also want to comment briefly on the issue of systemic racism and discrimination that has existed for far too long. As a society, we're at a pivotal moment in history, and clearly enough is enough. As a global company, we're focused on doing our part to help advocate for equality, justice, and an inclusive workplace that is free of discrimination. Our global leadership team has been holding open discussions with employees, looking at strengthening our diversity inclusion leadership efforts, reviewing our own policies and processes, and leveraging the PPG Foundation to support nonprofits who are making a positive difference in these important areas. This is and will remain a priority area for me and the entire PPG leadership team. Now I'll move to discuss our financial results. Last evening, we reported second quarter 2020 financial results. For the second quarter, our net sales were $3 billion, and our adjusted earnings for diluted share from continuing operations were 99 cents. These results, which were significantly impacted from the business interrupted caused by the COVID pandemic, were better than we originally anticipated. As we communicated in our financial update provided during the quarter, April and May volumes in aggregate were down more than 30% due to the pandemic. For the month of June, strong global architectural coatings demand continued, largely driven by do-it-yourself sales and was coupled with sequentially improving auto and general industrial demand, resulting in total company sales to be down by a low teen percentage. I'm pleased to report that our global architectural business delivered a record quarter, driven by strong performance in many countries, highlighted by our Mexico team. During the second quarter, our recovery advanced further than China, where several businesses, including automotive OEMs, general industrial coatings, and protective marine coatings all had higher year-over-year sales volumes. Year-over-year demand was lower in other major global regions, but our sequential monthly sales volumes improved in each region during the quarter. Given that we have a large China business, we began our pandemic response in late January, so we were able to implement quick, already tested, and decisive actions to help mitigate the lower sales activity and the virus spread outside of China. As a result of these actions, we delivered about $170 million of interim cost savings within the second quarter. In addition to the interim cost savings actions, we achieved more than $20 million of cost savings from our restructuring programs, which are permanent reductions to our cost structure. This, coupled with good sailing price realization of nearly 2%, mostly from our distribution-type businesses, helped us achieve double-digit margins in the second quarter, which is significant improvement versus the depth of the prior recession in 2008 and 2009. Our operating margin in the second quarter is a strong testimony of the structural cost savings we have delivered in the past few years and higher level of variable costs in our cost structure overall. Also in the quarter, our cash flow from operations totaled approximately $500 million, a level comparable to the prior year second quarter. This was supported by rigorous management of our working capital resulting in a $400 million reduction in our working capital compared to the same period last year. Looking ahead, we expect economic activity to continue to recover with differences across end-use markets and geographic regions. We expect our global architectural business to continue to be more resilient and deliver higher organic sales in the third quarter. Although we anticipate softness in the U.S. commercial maintenance segment to linger, and do-it-yourself demand to remain strong but somewhat less robust in the second quarter. We are pleased with the advancements with respect to our U.S. architectural coatings delivery model, preferred authorized dealer network, and our global digitalization initiatives and expect continued customer adoption leading to further growth opportunities in the future. We anticipate demand for our automotive OEM and general industrial products to continue their recovery in the third quarter. Other businesses, including automotive refinish and aerospace, will take longer to recover until travel and miles-driven return close to 2019 levels. Results, I mean, excuse me, due to the uncertainty over the economic climate resulting from the continuation of the COVID-19 pandemic, aggregate sales volumes are projected to be down 8% to 15% in the third quarter, with differences by business and regions. Decrements to margins in the third quarter are expected to be slightly worse than those experienced in the second quarter. This is related to removing some of the interim cost mitigation actions in the third quarter as demand for our products progresses and to ensure we properly service our customers as they continue to resume their operations. Our liquidity position remains strong and has improved from the first quarter. We remain committed to our legacy of rewarding shareholders and have approved a 6% increase in our quarterly dividends, a reflection of the confidence we have over maintaining and growing our cash flow. We will also continue to be disciplined over our approach to capital allocation. As the pandemic continues, our focus will remain on leveraging the PPG way, protecting our employees, and providing excellent support to our customers with the essential products and services they need to resume and ramp up their operations. In addition, we will continue to support the communities where we do business. I'm very proud and pleased with how our global team, as a one PPG team, is managing through this prolonged and extremely challenging time. I firmly believe that we will emerge as a stronger company. Thank you for your continued confidence in PPG. This concludes our prepared remarks. And now, Rocco, would you please open the line for questions?