PPG Industries, Inc.

Good morning. My name is Amy and I will be your conference operator today. At this time, I would like to welcome everyone to 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 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, press the pound key. We expect to have 20 analysts on the call today, and to allow everyone an opportunity to ask a question, the company requests that each analyst ask only one question with one related follow-up. Thank you. I would now like to turn the conference over to John Bruno, Director of 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 Morales, Senior Vice President 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.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 PPE'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 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, and 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 its 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. In 2020, our global digital sales in the architectural business were up by more than 60%, and we will continue to invest and prioritize in these digital initiatives. We coupled 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 continued 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 in our China automotive OEM and general industrial businesses well outpaced 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, advanced technology, and service capabilities continue to service well in China, where economic growth is the most robust. In addition, sales in our European and Latin American regions returned a 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 costs to support the sales improvement in several of our end-use markets. We will maintain about $25 million of 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 team's done 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 percent of sales by about 100 basis points in 2020. This outstanding performance was one key factor in allowing us to fund the Ennis Flint acquisition entirely with cash on hand during the month of December. In addition to completing the Ennis Flint 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 a few challenges, including more restrictive shutdowns in certain countries and supply chain issues in certain in-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 in the first quarter, we continue to be optimistic about the first half of 2021 as underlying coatings demand and economic activity in several of our in-use markets is expected to remain robust, including the automotive OEM, general industrial, packaging, and architectural businesses. We also remain confident of achieving further selling price increases in the first quarter in the performance coatings reporting segment and have started to pursue selling price increases in 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 in-use markets. Second, we are well positioned to benefit from the ultimate recovery in the automotive refinish and aerospace coatings in-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 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 advantage products. For the quarter, we project adjusted earnings for 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 agreements, let me make a few comments about Tickerilla. 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's legacy businesses or our customers in the region. Keeping the Tickerilla 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 the due diligence efficiently and worked closely and cooperatively with Tickerilla to resolve 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 situation to acquire Tickerilla from a business continuity and project return perspective. Additionally, we are expecting substantial cost synergies supplemented by incremental sales synergies, which we are able to fully vet in the due diligence analysis. This includes the fact that our holistic European operations are well established and stable and will 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 autonomous vehicles in addition to our many other initiatives. Due to where this transaction is from our process perspective, that is, we are currently in an open tender offer period, and Ticarilla's 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 in continuing to serve our customers, our communities, and one another, and it has truly lived 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 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 our 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 follow up. Your first question comes from the line of Michael Sisson with Wells Fargo. Michael, your line is open.