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 4th Quarter and Full Year 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Followed by the number 1 on your telephone keypad. We expect there's 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 I would now like to turn the conference over to John Bruno, Director, 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 4th 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 and 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 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 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 Now let me introduce PPG Chairman and CEO, Michael MacKery.
Thank you, John, and good morning, everyone. I'd like to welcome everyone to our Q4 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 4th quarter, our Our net sales were about $3,800,000,000 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 a 2nd consecutive quarter, increasing by more than 20% from prior year.
In addition, our Global Architectural Coatings continue to perform exceptionally well, eclipsing prior 4th quarter sales and earnings records in most countries. We also delivered the 2nd 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 Q4.
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 Q4, 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, advantaged 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 return to 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 $40,000,000 of interim cost savings, And we also delivered an additional $40,000,000 of structural cost savings. Our interim cost savings were lower than the $90,000,000 we achieved in the Q3 as we incurred certain costs to support the sales improvement in several of our end use markets.
We will maintain about $25,000,000 of these interim cost savings in the Q1 and expect to make at least $80,000,000 of permanent cost savings for the full year 2021. Our teams did an excellent job managing working capital and cash uses in 2020, which allowed us to achieve a record $2,100,000,000 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 Point 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 Q1, there are a few challenges, including more restrictive shutdowns in certain countries and supply chain issues in certain end 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 Q1, We continue to see the continued demand and economic activity in several of our end 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 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 Q1, with differences by business and region. As we progress through 2021, we anticipate multiple catalyst that will help drive further sales and earnings growth, including an eventual restock benefit as low inventory levels remain in several of our end use markets. 2nd, we are well positioned to benefit from the ultimate recovery in the automotive refinish and aerospace coatings end 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 as we continue to support our customers with excellent services and technology advantage products.
For the quarter, we project adjusted earnings per 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 Ticarilla. 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 Ticarilla team together as one unit It's 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 Ticarilla 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 Ticarilla from a business continuity and return 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 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 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 a 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 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 Q4 and full year 2020 results for a true testimony of our company's capabilities and allow us to enter 2021 as an even stronger 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, Your first question comes from the line of Michael Sison with Wells Fargo. Michael, your line is open.
Hey, guys. Nice quarter. I guess maybe let's talk about the acquisitions. In total, you've had a really good run here in In terms of finding opportunities, what's sort of the synergy run rate if all of them come together over the next 6 months.
Yes. Mike, this is Vince. Good morning. Hope you're doing well. We'll give some more information on these acquisitions as they close, similar to what we did with NSFluent.
We got to get them through closing. We have We'll give you some annualized as well as specific 2021 numbers. All of them have a different seasonality profile. So again, it would be hard to give you a specific number as it relates to 2021. As I think it's well chronicled, Most coatings acquisitions have kind of mid single digit synergies as a starting target.
Some have more, some have less depending upon their overlap, geographic overlap, product overlap. So again, as we close them, be rest assured that we'll provide more detail individually per acquisition.
Got it. And then maybe shifting to Architectural Coatings, when you can you maybe talk about Some of the backlogs that your pro painters are seeing and how big those are relative to what you've seen in the past and maybe the potential momentum and whether orange and brown is kind of the hot color that people are asking for these days.
Well, I'm not going to go into the orange But what I will tell you is we sub segment our business here in the U. S. In the maintenance, commercial, residential, DIY, etcetera. And if you look at that momentum by each of those segments, every one of them was significantly more positive in 4Q than 3Q. And each one of them are anticipating being more positive in 1Q versus 4Q.
So from that standpoint, We're excited. Obviously, permitting for new homes construction is not going quite as fast as they wanted, challenges on The multifamily side as well. So most of our large painters are feeling very comfortable coming into 2021. And then when we flip over into Europe, without a doubt, we're still having very strong you saw we had double digit growth in the 4th quarter. Through the 1st 21 days of January, it's a continuation of that trend as well.
And then when you flip Down into Mexico, we had an exceptionally strong quarter. The economy in Mexico, GDP is minus 7% to 8%, and yet we performed at plus 10%. And we see that same momentum carrying into January, the sellout from our concessionaires is strong. Their liquidity is very good. And so I'm very positive about what we're seeing in our Global Architectural business.
Great. Thank you.
Your next question comes from the line of Ghansham Panjabi with Baird. Ghansham, your line is open.
I guess, Michael, going back to your comments on pricing in industrial, you referenced some pricing initiatives there to offset higher costs. Looking at the slide deck, you're still expecting kind of stable selling prices for the industrial coating segment. So just curious as to is there a lag associated with that? Is that what you're referencing? How should we think about that build as the year progresses?
Thanks.
Well, Gansham, as you know, historically, there's always a 3 to 6 month lag in pricing in raw And so raw materials were higher, especially when you think about China, that's a much more spot kind of purchasing environment over there because that's their tradition. So we saw we have already announced price increases in Europe. We've started to announce price increases in other regions in the world. We are well ahead 2017. If you remember, 2017, some of our peers were distracted because of either acquisitions or fears.
And so We are well ahead of that, and so I'm very comfortable that you're going to continue to see price Positive price. We've had 15 quarters in a row of positive price. You're going to see the 16th quarter of positive price for the company in Q1. And so I'm not worried about the low single digit inflation that we're anticipating.
Got it. And then in terms of the supply chain constraints you referenced, can you just give us more color on that dynamic, which businesses in particular The timeline to normalize, I know the world is choppy at this point, but just curious on your thoughts. Thanks so much.
Yes. The 2 biggest businesses, Gunshan, that are impacted Right now, our automotive and industrial, we finished with backlogs in those businesses by the end of the December, we're still running backlogs in those businesses. Demand is very strong, but it is very choppy. A number of our customers are having Significant issues with labor because of the COVID pandemic. In fact, we got an emergency call a couple of days ago from One of our large automotive customers that their whole paint shop was shut down because of COVID and could we bring our people in to run it In the interim, so we, of course, supported them all in that.
There is the semiconductor issue that's out there in the automotive space. They all want to run. Many of our customers ran over Christmas, which was quite unusual. So demand Is there and inventories in many of these spaces are quite low, whether you're thinking about appliances or coil or Automotive, there's low inventories. So we feel very comfortable.
But unfortunately, we Can't predict with labor when people are going to be having full labor contingents to be able to run their plants.
Thank you very much. Stay well.
Your next question comes from the line of Frank Mitsch with Fermium Research. Frank, your line is open.
Yes, good morning and congratulations on the Penguin helmets. That's pretty cool. Looking forward to seeing a game one of these days, hopefully in I wanted to follow-up on the Performance Coatings margins. Got a bunch Questions regarding the very large sequential decline that you saw from the Q3 to the Q4. Typically, you do see a decline with Your business is in the Q4, but this seemed to be a bit abnormal.
I was wondering if you could take a moment or 2 and talk through the details there.
Yes, Frank, this is Vince. It really relates to the weightings of the businesses that are in there. The 2 most impacted businesses as Michael referenced in the opening comments that we're seeing from a volume perspective are aerospace and refinish. Those are typically our most stable businesses Throughout the year, quarter to quarter, their demand trends don't significantly change by quarter. The other businesses in Performance Coatings such as architecture are very seasonal.
So while we were down 30% in Aerospace in Q3 and A similar amount in Q4, same with Refinish. They're waiting in traditional Q4 is much higher. So in 2019, it would have been much higher, 2018 would have been much higher as a percent of the total segment. So even though we had good Actual demand and sales in Q4, the fact that that weighting of Aerospace and Refinish is Heavier in Q4 had a bigger impact on the Q4 margins.
Got you. Thank you. And I understand you cannot talk about Ticarilla, but if for whatever reason that transaction doesn't occur, can you talk about your M and A pipeline? Obviously, you've been very active in the recent past. Should investors expect that there might be Other sort of transactions or would share buybacks come back into the 4?
Well, Frank, I think you heard me say this in the Q4 back in October. I'll say the same thing now. It's January. I'll be exceptionally disappointed if we buy back any shares In 2021, our acquisition pipeline remains robust and remains active and we continue to work in this area. And so I'm feeling confident that we will have further announcements in the back half of the year.
Very helpful. Thanks so much.
Your next question comes from the line of Bob Curt with Goldman Sachs. Bob, your line is open.
Thank you very much. Good morning. Michael, I think you characterized maybe
the industry is more prepared for raw material response
with some price hikes. Wondering if you
could tell me what difference it makes, if any, to the demand environment relative to maybe 'seventeen, which is quite weaker. Is that going
to make it quicker, easier,
maybe some sense there?
Yes. Well, I think it'd certainly make it easier. I don't know about quicker. The benefit we have right now, why I think is sustainable. Again, let's frame in
a split out. I think $600,000,000 in annual sales is a good target. It is a very seasonal business as you can imagine. It's predominantly U. S, Canada.
So we are we do serve parts of the U. S. That have So certainly a winter effect. So we typically see the majority of profitability in Q2 and Q3 given the seasonal nature The nature of the business and Michael maybe you can
Yes. P. J, what I would tell you is the 2 secular trends that we're paying close Attention to is, 1, some of the states are looking to make the strikes wider, so from 4 inches strikes to 6 inches strikes. And the other thing they're doing is they're reducing the distance between the strikes. So that's one.
Plus, the other thing that's interesting They have a number of preformed products and I think and thermoplastic products as well. And I think with our We're going to be able to help them get better distribution of that product. So we're excited about this. I would anticipate this is not going to be a straight up kind of growth. It's going to be a continuation of a continuous growth.
Thanks, Kevin. Great. Thank you.
Your next question comes from the line of Laurent Farr, Physixain. Laurent, your line is open.
Yes. Good morning. I was I've got another On the international expansion, I was just wondering if you could frame for us what you have in mind. Are we talking about significant cost increase to try and become a, I guess, material competitor outside of the U. S.
And Canada.
Well, it definitely will not be a material cost increase. As you may have heard, making traffic paint is not as sophisticated as making our industrial And as you know, in Mexico and Europe, we have a number of plants. So it will not be a cost issue. It will be a focus and distribution issue, making sure we get ourselves aligned with the winners in the contracting space that Consistently win government bids and municipality bids and things like that. So That's where our focus will be.
So Mexico will be a start because of our strong base with our PPG Comex team, And then we'll look at it on country by country basis in Europe and do it in a very methodical and disciplined manner.
Thank you. And then Michael, I think in the slides you talked about ESG benefits for all four acquisitions. Could you give us a few examples?
Yes. I'm happy to, and John can chime in as well. So if you think about The first one, and it's Flint. This is going to help the autonomous driving, help the mobility. So as I mentioned in my opening remarks, PPG is Far ahead of everybody in this space.
So that would be the first one. The second one would be Versaflex. I would tell you that With Versaflex, the polyurea technology, if you think about flooring systems, food plants, what you want to do is ensure the cleanest environment that And reduce the potential for illnesses in those environments and that's another ESG benefit. Borvog, I would say the number one thing with Borvog is they have some really nifty technology in the area of automotive parts water based. And so as you know, we've been trying to push the industry to move much faster away from solvent The water, that's 1.
Plus, we anticipate with a full suite of products, we'll get more people switching to powder, which as you know, has 100% Transfer Efficiency. And then I think our remarks on Ticarilla are quite clear. Not only will we bring our technology to that space To continue to drive more bio base, more sustainable raw materials, but also will be more water based solutions, especially when I think about what they have in Russia and other Eastern European countries.
Thank you.
Your next question comes from the line of David Begleiter with Deutsche Bank. David, your line is open.
Thank you. Michael, just on the Q1 guidance, typically Q1 is about 15% above Q4. I think this year, you're guiding to down about 6% to 9%. What are the key drivers for that divergence from historical patterns?
Yes, David, this is Vince. Hope you're doing well. I think the typical seasonality due to the pandemic is very hard to match prior years. We had a strong push from activity from Q3 into Q4. As Michael alluded to, architectural had a higher seasonal sales in Q4 than we would traditionally see.
In Q1, we do see some concern about availability of customer production lines. So we do feel some of the activity will flip from Q1 into Q2. Just to give you a point of reference, David, You typically see about a 1,000,000 car drop off in global auto production from Q4 to Q1. We're expecting 2,000,000 cars globally excluding Japan, 2,000,000 cars globally drop off from Q4 to Q1. And that same type of pattern in some industrial businesses.
So I think it's difficult from a seasonality perspective to compare historically due to just shifting around
Got it. And the same kind of same question, just looking at Performance Coatings volumes, you do have an easy comp. It was down 6% last year. I think you're still guiding it to be down year over year. Why would it not be at least flat or even up year over year for in performance coating volumes.
Yes, the Q1 last year didn't have had virtually no impact From Aerospace in terms of volume decline and Refinish was fairly strong until the tail end of March. Those two businesses, as Michael said in the opening commentary, are heavily impacted in Q4 and we expect consistent patterns in Q1. So those two businesses are big businesses in that performance segment, David.
Thank you. Very helpful. Your next question comes from the line of Jeff Zetakos with JPMorgan. Jeff, your line is open.
Thanks very much. You're not providing financial guidance for 2021, but surely there must be internal targets for management compensation. Can you give us an idea of what performance objectives there are for the company? And What targets you have in order for people to reach those goals?
Yes, Jeff, this is Vince again. We have the Traditional targets established that we would in any given year for management compensation And also salesperson compensation. Obviously, 2020 was very fluid. 2021, we think will be very fluid. Similar to every other company, our comp committee, our Board will look at fluidness and React accordingly based on their judgment, but we do certainly have internal targets established today for 20 21.
Okay. I'm hoping you settled up $0.12 a pound yesterday. Was that something that was included in your of raw materials
or raw material inflation for this year or was it larger or smaller than your expectation?
You said propylene, right?
Yes, I did. Propylene, Jim.
Yes. So obviously, we don't buy propylene We buy propylene derivatives and the way the propylene derivatives work, it's also driven by supply demand of the underlying derivative plus the raw material input. So that would not hit us right away. So that would be the first comment. The second comment is we have anticipated raw material inflation into 2021.
So we were readjusting a lot of our formula and buying strategies in 2020 to anticipate higher increases and try to position ourselves that to minimize the impact of those kind of fluctuations.
Yes, Jeff, I'll add that we are seeing this low single digit inflation coming into the year. Some of our suppliers are dealing with The same issues that our customers are, which we feel some of that's transitory. They're having workforce restraint Due to the pandemic, so we think as the year progresses, some of these limiting items will fall by the wayside. We know there's good supply out there in most of these markets. And as Michael just alluded to the supply demand characteristics of our supplier base At some point, we'll be the predominant factor of pricing.
So you don't think you're going to be squeezed this year. Is that the conclusion that we should draw?
We think low single digit is Low single digit inflation is our forecast for Q1 and likely Q2.
Okay, great. Thank you so much.
Your next question comes from the line of Chris Parkinson with Credit Suisse. Chris, your line is open.
Great. Thank you very much.
And we've done a solid job managing costs throughout the pandemic. But in 'twenty one, they're just even on this Q and A, there just appears to be this balancing Between improving volumes, your ongoing cost programs, price cost and even mix on an intra segment basis, can you discuss Your own thought processes on the margin framework, not only in 'twenty one, but in the kind of 'twenty two and how investors should be weighing each of these variables? Is it basically just Control the controllable on your cost programs and price.
If
there is there any
are there any other things you could do to continue your progression? Thank you.
Yes, Chris, this is Michael. I would tell you that the PPG way is we do better today than yesterday, every day. And that's how we're managing our that's historically been a continuous improvement mentality that we have for the company. And so that's why we said in the Q1 we would still have cost initiatives even though volumes continue to go up. We're holding our teams accountable, continue to drive productivity.
We know that there's going to be continued cost savings from a, Let's call it travel. That will be 1. How we manage internally, technical services that we're providing to some of our customers. We're going to be providing that electronically. We have more digital initiatives.
So I think there is when I think about Long term, I think it's going to be less expensive for us to make paint long term than it is today. And we have More productivity initiatives underway.
Got it. And then, you mentioned a
few times in your prepared remarks just the potential for a robust restock, which could be a solid tailwind in 'twenty one. Can you just quickly comment on what you're currently hearing from your various customer channels And perhaps also comment on just expected timing? Thank you very much.
Yes. The 2 biggest ones that will have to restock. First one is refinish. So they're all running with exceptionally low inventories. They don't want to Get caught with work from home and extended work from home period where they can't move products.
So that's the first one. But more importantly, aerospace. We see our orders dropping. I mean, I won't get into the various sub segments how We break it down into sub segments, but I had one in the Q4 that we only got 6% of our normal orders in the Q4. Now clearly, the industry is running much higher than that.
So they continue to destock at a Significant rate. That's going to have to build up. So we're thinking about how do we ensure that we're ready for that Doing that probably starting in the back half of Q2 and then it will start to accelerate. You probably saw the announcement from Airbus today That they are increasing the bill rate for the A320. That's the first sign.
And there will be other signs I think you should anticipate as Obviously, we're talking to our customers, so we have information that they haven't made public, but that's the first one.
Yes, Chris. And if you go over to the Industrial segment, we know that car inventories in the U. S. Are at very low levels Relative to historic terms, many of our industrial customers are running hand to mouth with backlogs to their customers. And
if you
look at our balance sheet as a microcosm, our inventory levels are very low. So again, all pandemic related. So Sales volumes will be down low to mid single digits still with the guide we gave. Now there's other positives such as acquisition currencies favorable. As Michael alluded to, we have 15 straight quarters of pricing, But the sales volumes on a 2 year stacked basis will be down low to mid single digits.
Okay. And then you talked about propylene, Maybe a little bit more granularity on the overall raw material inflation, ethylene derivatives like VAM, urethanes, KIO2, they're all different value chains that's there and many of them are not propylene linked.
Yes. I mean, we break down our procurement into about in different categories. And in 4Q, I would say that the vast majority of them were slightly negative or flat. When we look at 1Q, we're going to see probably half of them have marginally higher, so Cyanates are up, epoxies are up, packaging is up, of course, solvents are all up. But we're not nervous about this, I guess, is what I'm trying to tell you because we anticipated this going into And we tried to have our procurement strategy in a manner that would be able to take advantage of what we had in 2020 and try
Next question comes from the line of Vincent Andrews with Morgan Stanley. Vincent, your line is open.
Thank you and good morning everyone. If I could just ask on the auto production and maybe some other customer areas where there could be some issues in the Q1. Vince, I think
I heard you say that on
the auto side, you'll see some autos get shifted into 2Q. Are you anticipating that The shortfall in 1Q would be made up entirely in 2Q or to be spread further out into the balance of the year? And is it something that can be Fully made up in the calendar year.
Vincent, this is Michael. I'd say the biggest unknown in that is what are the auto guys decide to With their own dealers, as you know, dealer inventory is very low. Dealers are happy right now because you come into an auto facility and you don't have a lot of choice and you have to buy what's on the lot and you're making money on new cars, which is historically something they don't do. So I think the great unknown is, do the car companies starting back half of 2Q and 3Q, do they try to Rebuild inventories back to the old levels on the dealer lots or do they keep doing what they're doing So I think that's a big unknown. So we're anticipating catching up, but there's still more latency there If they decide to go back to the old inventory levels they
used to have. The one constant, Vincent, is there is demand out there. There's very strong demand in the U. S, good demand in Europe. The China numbers, I think, come out today and car sales are up Over 20% for January year to date.
So we know there's good end market demand out there for automotive. Thank you. That's very helpful. And just maybe on China Aerospace, you noted that it's back to I guess flights are back to 90%. So So when you look at if we take that business as sort of a case study of how the rest of the world aerospace might come back, are you seeing anything different in customer behavior as the aerospace recovers in China.
Are they buying more? Are they buying less? Anything that's interesting that might help us sort of frame how the U. S. And Europe and so forth will come back.
Yes. Vincent, what I would
tell you, the first thing to remember is a 2 stage recovery. So domestic flights are up 90%, but international flights are down 85%. So they're not flying outside of China. So and they're really limiting anybody flying in. So that's the biggest challenge right now.
So I'd say The number one factor to look for in the recovery is the vaccine distribution and people opening up their borders. So I would pay real close attention to those. Right now, their demand on domestic side, they are buying product and they're happy And their inventory levels are, I would call, normal.
Hey, Vincent, if you just expand out some of the other metrics we watch, we do see online inquiries for airline travel. Online inquiries for airline travel were up significantly versus a very depressed level. In Q3, Q4 they were up. They continue to trend upwards. We did see around the holiday periods both in the U.
S. And Europe A sizable step change in travel, whether that was wise or not is debatable. But we do know there's demand out there for folks who want to travel and We are welcoming obviously the positive impact from a vaccination. Thanks very much, guys.
Your next question comes from the line of Arun Viswanathan with RBC Capital Markets. Arun, your line is open.
Great, thanks. Good morning. I guess I just wanted to get to the margin question again. In Industrial, Obviously, you've had some nice progress here even in a challenging market. Do you feel like you're fully caught up from prior inflation as well?
And do you expect further percent margin growth as we go through 'twenty one and you realize some of these price increases that you've put up there? Maybe you can also comment on performance as it relates to your percent margin trajectory.
I would say that my answer to that is always we have never caught up. We always have a higher expectation in that area. And so we have more work to do. The good news is demand is strong and People can see raw materials are coming up. So we should be able to get ahead of the curve on this one.
As far as performance, we As you know, we've already announced price increases in architectural. We've announced price increases in refinish. And we have advantaged technologies in Aerospace so that whenever demand comes back, it will be a positive for us. So I think we're feeling pretty good in this area.
Yes, Arun, let me just add. I think as you've heard us talk throughout all of 2020, due to our discretionary cost management Due to our structural cost improvements that we've made the past several years, we expected very strong leverage on any volume improvement. I think that You witnessed that in Q4 in the Industrial segment. Volumes are up mid single digits and you saw the impact it had on the bottom line. So as this volume as the pandemic volume recovery occurs throughout, we hope the balance of 2021, you should expect very strong leverage in both segments.
Okay, that's helpful. And then maybe
you can just provide either kind of a return profile For the acquisitions in general, is that kind of like a mid teens ROIC and maybe that's why you don't necessarily think Share buyback would be of the same ROIC or what's kind of the calculus into Not necessarily pursuing share buyback and pursuing M and A a little bit more aggressively.
If you look and I think we put something out a couple of years ago with regards to our acquisition record and the returns around that. I think We had a dozen or so recent examples. I think it was May of 2019, we put that or 2018. What you'll find is the return on capital for not only PPG, but the coatings industry and the IRR for these transactions is Typically well in excess of our cost of capital and certainly in excess of a share repurchase and it's really driven by the fact That these are typically very highly synergistic transactions. A lot of those synergies come with no cash out the door on behalf of the buyer.
So you get a very good return and these are typically low risk because we're typically not acquiring A lot of assets. As you're well aware Arun, the coatings industry is asset light. So we're typically acquiring very few assets with a lot of synergy potential. And we've at PPG have been very good at extracting those synergies very early. And We've done 50 or 60 acquisitions in the past 10 years and those acquisition timelines are typically less than 24 months.
We were able to extract all those synergies again very, very with very, very few cash out the door. So those dynamics typically lend themselves to higher return profile in our space, in the coding space for acquisitions versus ShareRepub. Thanks.
Your next question comes from the line of Kevin McCarthy with Vertical Research Group. Kevin, your line is open.
Yes. Good morning, everyone. My question relates to architectural DIY coatings. How would you compare your outlook for 2021 in the U. S.
Versus Europe? Maybe you can talk through what you're hearing from Some of your channel partners in general, things like inventory levels, seasonal effects, And whether or not you can grow the business directionally versus more challenging comparisons this coming year.
Well, Kevin, I would say that DIY in the U. S. Will continue to grow. What I'm most excited about is the fact that we have a new generation of DIYers that we We always kind of bemoan that in the past because people our age seem to let their kids get by without painting every summer. So now they're out there painting their own homes as they work from home.
So that's a positive. The I think we went through a long period of time where there wasn't as much repair and remodel inside homes that Historically, it's happened in the U. S. That now that people were at home and looking at those same four walls all the time has manifested itself in some very significant numbers. So I think this is going to last longer than a lot of people think.
Obviously, we'll wait and see. But I know Q1, Q2 will all be positive comps. And let's wait and see how we trend in the Q3, Q4, but I think long term these are positive trends for the DIY industry.
Kevin, I'll add one positive trend in the The de urbanization that's taking place, moving from smaller square footage into a single family home typically favors repaint, residential paint, repaint, and typically favors a more robust painting cycle with more velocity.
Okay. That's helpful. And then, I wanted to ask about auto OEM. Michael, in your prepared remarks, I think you Pointed out you're growing significantly above industry production rates and your heat map shows above average in Asia and EMEA. Can you elaborate on what is driving that and how much is related to say share shifts versus Some of the dislocations you mentioned around semis, labor and low inventory levels?
Well, the first one that we have is better technology. So if you look at our new wins year over year, our net new wins, that has been a very positive number for us. The second one Has been because of the pandemic, now the value of our tech service team is being paid out in space. I mean, people are just saying, wow, this is really important. I need you guys in here.
And so we're getting that discretionary piece of business. And the third one is we're very, very early stages, but we're starting to see the mobility wins start to pickup and that's long term where I think we're going to divorce ourselves from the build rates is because we're going to continue to win in this space.
Just one other I'll add as well, Kevin. If you look at some of our acquisitions the past couple of years, we did a Hemmelrath acquisition. We've Got a Worlag acquisition pending. We've solidified many of these customer relationships on ancillary products as well. So that's been our strategy to expand our technical breadth with customers, the value add to those customers.
And as Michael mentioned, that's coming through in spades, especially in times like this where they need velocity through their plants.
Perfect. Thanks very much.
Your next question comes from the line of Mike Harrison with Seaport Global Securities. Mike, your line is open.
Hi, good morning. Wanted to ask about the M and A activity. If you've got 4 deals brewing and it sounds like you have some No deals may be in the pipeline for the rest of the year. At what point do you start to get a little bit concerned about your ability to integrate several acquisitions at once. How do you think about that?
Mike, let me just tell you that about 2 or 3 years ago, we had 6 going at once, and it was not even a blip on the radar. We have done 50 acquisitions in the last 10 years. We have so many people in PPG that clamor To be the Integration Director, it's a highly prized job in the company. We have a well worn playbook, dog eared pages left and right, And this is something we do. And if you think about what we have going on right now with these acquisitions, PMC is a Versaflex.
You got Ticarello will be in architectural. You have Borvog, which is will be in automotive. I mean, so they're in different businesses. So I'm not worried about Ennis Flint is a completely new business. So for us, this is not a challenge yet.
So I'm very comfortable in this space.
Yes, Michael, that is a great question. It's something we know at some point could be the governor of what we do. But given the diversity of these acquisitions, we're not at all challenged at this point with bandwidth.
All right. And then on the auto OEM side, you've referred a couple of times to the semiconductor shortage issue, and I don't think that you've Typically, given some details or some thoughts on whether you think that's going to be A significant headwind or whether it's a lot of headline risk right now rather than really impacting production rates.
Not only in automotive, but So my question is on the acquisitions topic. I guess you guys have been doing a lot of acquisitions in the last few years. Now this company from Europe apparently also wants to stop buybacks and do some acquisitions or they're planning to at least. So do you feel that in the next sort of coming quarters and year, as more coatings companies You know, are looking for inorganic growth, multiple of the average multiple in the industry is going to sort of e gap And therefore, return profile on the acquisition pipeline may actually go down. Or do you think this is on a case by case basis and therefore It doesn't concern you.
And then the second question really is around your Performance Coatings business. From my point of view, it was a phenomenal year. Has structural profitability in DIY, Europe, U. S. And Mexico improved and you can keep it there?
Or was it a bit inflated because of these interim cost savings that you had and therefore I shouldn't get carried away? Thanks.
Well, let me first start with the I think you might have exceeded our 2 question limit. The returns in acquisitions are really unique to that acquisition and Who you compete with is really unique in that space as well. So there's no right or wrong answer. The general theme is that For the higher the risk, the higher the return needs to be. And so the more unknowns, The higher the returns need to be to cover that.
So I would say it just varies considerably and there's no right or wrong Sure. Except we know that discipline is always the right answer. From a performance standpoint. I do think we have lower structural costs going forward. And I do think, like Vince mentioned earlier, the ability This additional volume when it comes in really leverages itself to a nice return on the bottom line and I think that's going
Yes. And I think, Zeep, as
we talked over the years, the coatings model is a variable cost model. So even though volumes are down, we are able to ratchet down a variety of cost factors that's been proven once again in 2020, especially in Q2 and Q3. So we could ratchet down variable cost and then we've maintained some of that as Michael alluded to in the opening comments carrying into 2021 that we hope to make permanent.
Great. Thanks a lot and good luck on Tigrillah.
Gentlemen, your final question comes from the line of Daniel Rizzo with Jefferies. Daniel, your line is open.
Hi, guys. I'm for Laurence. Just a couple of quick ones then. You mentioned all the M and A opportunities. I was just wondering if there's an upper limit on the leverage you're willing to go to Make these acquisitions.
Yes, I think our history has been well chronicled here as well, Dan. Look, we want to be a strong investment grade company. There are times where we lever up to do a transaction or a set of transactions. Our intention would be, as Michael said in the opening comment, To immediately ratchet that back down to deploy ourselves for the next acquisition. Given the different sizes It's hard to pinpoint a specific number, but again strong investment grade is where we like to live.
Okay. And then Quickly, you mentioned that some of your customers were running over Christmas, which was obviously unusual. I was wondering if it's possible you might see the same thing in China for the Chinese New Year, We're just I mean for trends might continue and then not see the pause you usually see around this time of the year in that region.
We'll let John Bruno answer that because he spent 4 years in China. So John, what's your view? Dan, I fully expect them to take their holidays.
Thank you very much. You're welcome.
There are no further questions at this time. Mr. Bruno, I turn the call back over to you.
Thank you, Amy. I'd like to thank everyone for their time and interest in PPG. If you have any further questions, please contact our IR department. This concludes our Q4 earnings call. Have a good day.
This concludes today's conference call. You may now disconnect.