PPG Industries, Inc.

Good morning. My name is Jerome and I will be your conference operator today. At this time, I would like to welcome everyone to the PPG Industries first quarter 2021 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 questions 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 count key. To allow everyone an opportunity to ask questions, the company requested each analyst ask only one question, and if necessary, a specific follow-up to that question. Thank you. I would now like to turn the conference over to John Bruno. Investor Relations, please go ahead.

Thank you, Jerome, and good morning, everyone. Once again, this is John Bruno. We appreciate your continued interest in PPG and welcome you to our first quarter 2021 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, April 15, 2021. We post detailed commentary and accompanying presentation slides on the Investor Center of our website, ppg.com. The slides are also available on the website 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'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 first quarter 2021 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 first quarter, our net sales were a record. and were about $3.9 billion, and our adjusted earnings for diluted share from continuing operations were also a record at $1.88. Our adjusted EPS was significantly higher than the first quarter of 2020, partially due to last year's first quarter being impacted by various pandemic-related impacts. We'll also be comparing various financial metrics versus pre-pandemic results, and this comparison was nearly equally impressive with adjusted EPS 27% higher than the pre-COVID first quarter results of 2019. This excellent operating performance was driven by strong year-over-year sales growth in our industrial coatings reporting segment, with the automotive OEM, general industrial, and packaging coatings businesses all delivering double-digit percentage year-over-year sales growth. Global architectural coatings business continued their strong sales growth trends, and automotive refinance had a strong quarter as activity in that end-use market is beginning to recover, and we were partially aided by some customer restocking in the U.S. First quarter segment margins were at a multi-year high as we benefited from strong operating margin leverage on higher year-over-year net sales growth. The significant amount of cost savings we have achieved in the past two years from our restructuring programs is a primary factor contributing to us realizing this increased leverage. We delivered these outstanding results despite sales volumes not fully returning to pre-pandemic levels, including in several key PPG businesses such as aerospace. In addition, we experienced a significant acceleration of raw material and logistics cost inflation during the quarter. Coming into the year, we were expecting an inflationary environment, and had prioritized selling price increases across all of our businesses. This has helped us achieve solid price increases year-to-date. With the higher inflation backdrop, we have already secured further selling price increases and are in the process of executing additional ones during the second quarter. As a reminder, the first quarter of 2021 was our 16th consecutive quarter of higher selling prices. We also continue to execute on our cost savings programs realizing an incremental $35 million of structural savings and maintain our target of $125 million of total savings for the full year 2021. In addition, we retained about $30 million of interim cost savings during the quarter and remain confident that we'll be able to make at least $80 million of these interim cost savings permanent for the full year 2021. We ended the first quarter with about $1.9 billion in cash and cash equivalents. This is a grossed-up cash balance as we were preparing for the closing of the Ticarilla and Borbog acquisitions. Contributing to this strong cash balance is a 200 basis point Euro year improvement in our operating working capital in the first quarter, which drove better operating cash generation than a typical first quarter. Our new traffic solutions business, which is the Ennis-Flint acquisition, formed our expectations in the quarter, despite significant challenges with weather and raw material availability. The business has a strong order book heading into the second quarter. In the first quarter, we also completed the Versaflex acquisition, and the Ticarilla and Vorbach acquisitions are expected to be completed in the second quarter. In the accompanying presentation to our earnings material, we included several slides to provide further information and perspective on our four recent acquisitions, and our performance for a number of acquisitions, some items that I'd like to highlight. Each of the four acquisitions bring incremental strategic benefits to PPG, such as product line extensions and geographic expansions. We've continued to deliver strong synergy capture from our past acquisitions and believe our global breadth, regional participation in all coding verticals, best-in-class procurement, and mature back-office centers of excellence in low-cost areas allow us to deliver higher synergy capabilities than our competitors. For our recently announced acquisitions, we expect to realize synergies of high single-digit of sales higher than historical industry synergy capture. We also provide an update to our acquisition performance we last shared in May 2019. We included our 10 most recent acquisitions that have been closed for at least 24 months. In most acquisitions, and in aggregate, we've achieved higher synergy capture than our initial estimates, averaging about 50 basis points higher. All of these acquisitions will help drive shareholder value creation. The post-synergy multiples for each of these acquisitions is below PPG's five-year average multiple, and for eight of the acquisitions, the post-synergy multiple is below 10. All four of the recently announced acquisitions provide earnings accretion from their historical-based business and synergy realizations. By the end of 2022, we expect cumulative synergies to total about $75 million and will be at an annual run rate of $135 million once they are all fully integrated. As with many of our initial synergy projections, these initial targets only include a modest benefit from sales synergies, although these acquisitions are well-suited for us to drive further top-line growth. We expect the Tickerilla acquisition to be completed in the second quarter, We recently extended the tender offer period until May 11th to finalize customary regulatory approvals. Ticket Carrillo is a highly strategic acquisition with leading architecture coding positions across various countries. As I said in January, I see many similar characteristics to our previous COMEX acquisition. We'll have significant opportunities to cross-sell complementary products through our legacy channels to further grow sales and earnings. Our COMEX acquisition has well exceeded our initial acquisition economics. Moving to our current outlook, we are continuing to see very robust and broad-based demand globally, including in many industrial and OEM in-use markets, and continued architectural coatings activity. Many of our customers have indicated they have strong order books, and we anticipate this strong global demand pattern to continue well into the second half of 2021 at a minimum. In addition, we expect an eventual restocking of inventory to occur in many of our selling channels as the year progresses. One important item of note is some of our customers are experiencing input or component shortages, so their production capabilities and schedules remain choppy, and we are experiencing a few spot outages of direct coatings raw materials. As a result, we expect some unfavorable sales impacts from both our direct supply chain disruptions and these production curtailments at some of our customers. Our best current estimate is that sales are expected to be impacted by about $70 to $90 million in the second quarter due to these issues. We expect these sales to be deferred in the second half of 2021, and thus this impact is already included in our second quarter of 2021 financial guidance. Also, as I mentioned previously, we're experiencing commodity inflation that occurred quickly due to the weather event named Erie, As a result of this rapid inflation increase in both raw materials and logistics, we have fully mobilized our commercial teams and are successfully securing additional selling price increases. We have a very good head start on this inflation cycle, and we expect to fully offset raw material cost inflation in the second half of 2021. Finally, as you've come to expect from PPG, remain committed to strong and real-time cost management, which will provide continued strong operating leverage on sales growth. These current disruptions are temporary, and we maintain a positive view on the overall global coatings demand growth, which continues to be robust and broad-based across most of the end-use markets that we supply. This is expected to continue throughout 2021. The strong demand conditions, along with our leading technology-advantaged products, provides us with many organic growth opportunities in 2021 and beyond. For the company, aggregate sales volumes are projected to be up by a low teen percentage in the second quarter on a sequential basis compared to the first quarter of 2021, with differences by business and region. Adjusted earnings excluding amortization expense is expected to be between $2.15 to $2.20, continuing a strong earnings momentum. As a reminder, this guidance does not include any EPS impact from either the Tickerilla or Borbaugh acquisitions. 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. In closing, I want to thank and recognize our global PPG team. The character of our employees has never shone brighter than it has during these times of adversity. Our people have shown great resiliency continuing to serve our customers, our communities, and drive a common purpose to protect and beautify the world. Thank you for your continued confidence in PPG. This concludes our prepared remarks. And now, Jerome, would you please open the line for questions? Thank you.