PPG Industries, Inc.

Good morning. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the PPG Industries Third Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's 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 the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. The company requests that each analyst ask one question with a 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, this is John Bruno. 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, 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, October 19th, 2020. We have posted detailed commentary and accompanying presentation slides on the investor center of our website, ppg.com. The slides are also available on the website's 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 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's 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 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 McGarry.

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 are remaining safe and healthy. Throughout the pandemic, we have focused on our purpose of protecting and beautifying the world. First and foremost, this has meant protecting our employees, our communities, and our customers. This remains our highest priority. Now let me provide some comments to supplement the 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 Our strong operating results were led by improved sales volumes when compared sequentially versus our second quarter results. 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 in our automotive OEM and industrial coatings businesses. We coupled 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 and 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 businesses still facing significant demand headwinds. most notably the automotive refinish and aerospace coating businesses. During the third quarter, our sales recovery continued to robustly advance in China, where volumes grew a 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 in 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 and 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 are going through our annual profit plan process We'll have more details on the additional catalysts in January when we report our full year 2020 results. Our teams have also done an excellent job managing working capital and cash uses during the pandemic. Through September 30th, we have 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 differences by business and region. We do anticipate normal seasonal trends sequentially versus the third quarter, which does result in lower absolute sales for several of our businesses that have been delivering some of the highest growth. We expect our aggregate global architectural business to remain more resilient and, once again, deliver higher year-over-year organic sales in the fourth quarter. Although we anticipate continued softness in the U.S. commercial maintenance 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 coding businesses are expected to continue, including the impact from very low customer-facing product inventory levels in its end-use markets. We continue to manage through heightened level of uncertainty with the ongoing pandemic still impacting several of our key in-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 for diluted share to be about 10% higher than the adjusted earnings for diluted share realized in the fourth quarter of 2019, excluding the lower effective tax rate we expect in this fourth quarter's 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 we continue to manage through the pandemic, we remain 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 an 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?