Good afternoon, and welcome to the PPG Industries Fourth Quarter and Full Year 2019 Earnings Conference Call. My name is Chad and I will be your conference specialist today. All participants will be in a listen only mode. After today's presentation there will be an opportunity to ask questions. Please note this event is being recorded.
I would now like to turn the conference over to John Bruno, Director, Investor Relations. Please go ahead.
Thank you, Chad, and good afternoon, everyone. We appreciate your continued interest in PPG, and welcome you to our fourth quarter 2019 financial results conference call. Joining me on the call from PPG are Michael McDowell, Chairman and Chief Executive Officer and Vince Morales, Senior Vice President And Chief Financial Officer. Our comments relate to the financial information released on Thursday, January 16th, 2020. I will remind everyone that we have posted detailed commentary and presentation slides on the Investors Center of 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 Michael's perspective on the company's results for the quarter and for the full year, and a brief financial update for Vince, 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 PPG's operating and financial performance. These statements involve uncertainties and risks, which may cause actual results to differ. The company's 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 any appendix of the presentation slides, which are available on our website, reconciliations to these GAAP, non GAAP financial measures to the most directly comparable GAAP measures.
For additional information, please refer to PPG's filings with the SEC. Now let me introduce PPG Chairman and CEO, Michael McEra.
Thank you, John, and good afternoon, everyone. We appreciate you joining us on our call. Today, we reported 4th quarter and full year 2019 results. Before we review the results, let me just make a few additional comments. We are very pleased with our financial performance for the quarter and the full year as we delivered strong year over year results in the face of weakening global manufacturing activity.
We delivered record 4th quarter and full year adjusted EPS, and our full year results were in the middle of the financial guidance we gave last January despite softer global economy. Additionally, we continue to execute on our long term strategic and cash deployment initiatives focused on shareholder value creation. These initiatives included the completion of several acquisitions, which expanded our technology reach, and customer intimacy and our legacy re ordinary shareholders, including the 48th year of annual per share dividend increases. We continue to invest about 3 percent of sales in research and development and progress the commercialization of new products and technology allowing us to deliver above market growth in several of our businesses. We will continue to communicate our progress on these initiatives and any new key products for 2020.
More tactically, we begin 2020 continuing to benefit our aggressive and decisive operational management including the achievement of our self help commitments from our cost savings program as we delivered by $85,000,000 for the full year. Higher than previously committed target. In addition, we delivered record cash from operations in 2019 of about $2,100,000,000, including further reductions of working capital. Our strong 2019 performance was possible due to our broad business portfolio, supplying both the OEMs and aftermarket, along with individual consumers and individual investor customers in all major regions. Also wanna thank the dedicated EPG team that remains focused on delivering value added services and technologies for these customers all around the world.
And let me summarize the financial details we released earlier today. For the fourth quarter, our net sales were nearly $3,700,000,000, of about 1% in constant currencies. Our adjusted earnings per diluted share from continuing operations were $1.31, which represents a 14% increase versus last year's 4th quarter. This is our 2nd consecutive quarter of adjusted earnings per share growth of more than 10% with EPS up 14% this quarter and 15% in the prior quarters. For the quarter, our segment margins improved about 160 basis points versus last year and are up 120 basis points the full year despite broad contraction in the global manufactured activity that worsened as the year progressed.
As one data point, actual global industry automotive builds in 2019 were about 10% lower than projected at the beginning of 2019. Our segment results benefited from continued selling price realization and strong cost management. Last, we continued our unwavering support of our customers all over the world and continued to advance our sustainability initiatives. I'm very proud that PPG earned the Ecovadis gold rating for corporate social responsibility progress. Our team will continue to prioritize these programs and will provide a full update when we issue our 2020 sustainability report in the spring.
Now let me ask Vince to provide some additional color on our fourth quarter and full year results as the guidance we commuted today.
Thank you, Michael. Again, just trying to review the 4th quarter results, our net sales, as Michael mentioned, was 3, about $3,700,000,000, up about 1% year over year. That consisted of sales volumes, which were down 3%, reflecting the weakened global industrial production environment, as Michael mentioned. This included a global automotive OEM production and many of our general industrial end use markets, which declined in the quarter. And they were most pronounced, the declines were most pronounced in the U.
S. And European regions. Our aggregate selling prices were up nearly 2% marking the 7th consecutive quarter with selling prices of about 2%. We have announced additional selling price increases and several of our businesses heading into 2020. And we will continue to work with our customers to ensure we are receiving fair value for the products and services we supply.
Summarizing some business trends for the fourth quarter, in our Performance Coatings supporting segment, aerospace Drilling continues to deliver very strong volume growth, outpacing industry performance in both the US and Asia regions.
This caps off would have been
a truly excellent year for this business, which well outperformed strong industry gains. This reflected increased consumer demand for our specific technologies. Automotive refinished organic sales were higher, with solid growth in the US, offset partially by weaker volumes in Europe, where customers continued to closely manage inventory levels. Our Sem acquisition has delivered strong financial performance in its 1st year, and we are now commercializing various keys and products in certain international markets, providing us with further growth opportunities. The soft trading conditions in Europe impacted our Architectural Coatings EMEA business as we experienced lower sales volumes, partially offset by higher selling prices.
Despite this very challenging economic environment in Europe during this past year, the business was able to grow organic sales for the full year. In Latin America, our PPG chromex business increased organic sales, aided by improved selling prices. Sales sales volumes improved sequentially versus the prior quarter, but remain generally soft year over year as consumer demand reflected overall lower Mexican economic activity. For the year, PPG Comex delivered another strong financial performance growing both sales and earnings in this reduced economic climate. We also added 160 new stores in 2019, bringing our regional total to about 4800 concessionaire locations.
Organic sales volumes in our Special Coatings, U. S. And Canada increased modestly with positive sales in most channels during the quarter, including our U. S. Same store sales.
This is traditionally a slower quarter seasonally. Led by continued strong growth in the Asia region, Our protective and re encoding business delivered above industry sales, volume growth of a mid single digit percentage during the quarter. We expect sales to remain at elevated levels in the first quarter, although growth rates will be moderated given the strong prior year comparisons. In our Industrial Coatings segment, overall sales volumes were down about 6% in the quarter, reflecting the weak industrial demand. In China, automotive sales fell in December marking 18th consecutive monthly declines.
And in Europe, manufacturing activity contracted for the 11th consecutive month. We have implemented aggressive cost actions in reflection of this lower demand. And despite the lower volumes year over year, our segment earnings were higher for the quarter and for the full year. We look at individual business units, PPG's automotive OEM sales volumes were lower by a mid single digit percentage, consistent with the industry rate. Our Automotive OEM business continued to realize higher selling prices in the quarter and for the year.
Weak Global Industrial Production Activity impacted most of our general industrial coatings business subsegments, and our our packaging coatings sales volumes decreased as higher beverage can demand was more than offset by continued weakness in food can demand. From an overall PPG perspective, our 4th quarter adjusted earnings per share was a dollar 31¢. Our adjusted effective tax rate was about 24 percent for the quarter, similar to our adjusted tax rate for the year. Our results were supported by broad increases in selling prices, improved manufacturing, performance and cost, and excellent progress on cost savings programs as we delivered more than $20,000,000 against these cost savings programs during the quarter, slightly ahead of our targets. The acquisitions we made over the past 12 months also contributed positively to earnings in the quarter.
Recently added the acquisition of Techstars, a manufacturing of high performance, transparencies, and wing tip lenses for aerospace and defense vehicles. Also recently announced the acquisition of ICR, a manufacturer of automotive refinish products. I'll quickly comment on our full year results from continuing operations. Our full year sales were $15,100,000,000 Our full year 2019 adjusted earnings per share were $6.22, which was up 5% versus 2018. Excluding foreign currency translation, our adjusted earnings per share were up about 8%.
Firmly, within the 2019 earnings guidance, we provided last January. Most of the growth in earnings was driven by our strong operating discipline that generated higher segment operating margins each quarter this year. Specifically, our Industrial Coatings segment achieved 5% earnings growth despite sales being off $175,000,000 for the year. Additionally, each of our major regions improved operating margins. As Michael mentioned, we continue to focus on cash deployment in 2019 and are pleased to announce or completed various acquisitions over the past 12 months.
These acquisitions have had had annualized revenue of about $500,000,000, of which $100,000,000 is in Asia Pacific. We realized just over $300,000,000 of acquisition sales in 2019 and expect the remainder to occur in 2020. In addition to acquisitions, we repurchased $325,000,000 of PPG stock during the year, of which $150,000,000 was completed in the 4th quarter. Before I turn it over to Michael, I'm going to review some of our 2020 financial guidance. Henry briefly, to cover some of our current economic expectations recently.
We anticipate overall positive economic growth to continue in the U. S. And Canada at levels generally similar to 2019. This is being aided by accommodative, accommodative interest rates that remain supportive of the construction markets and also stability in regional auto market. In Latin America, we anticipate modestly improved economic expansion in Mexico, versus a lackluster 2019.
And in South America, we also expect modest economic improvement. Automotive builds in China are expected to fall more than 10% in the first quarter and industrial production demand conditions in India are forecasted to be challenging earlier in 2020. However, we do anticipate growth improving overall in Asia as the year progresses. And demand trends in the region in the latter half of the first quarter, following Chinese New Year will be an important measurement of the region's prospects. Economic growth in Europe is expected to remain subdued overall and vary by country.
We expect the potential for greater volatility in automotive fields throughout the year due to the onset of new emission standards as the year progresses. We have included in today's presentation materials available on our website a summary of specific financial assumptions, either included on slide 1112. As we included in our earnings press release issued earlier today, we expect full year 2020 sales growth in local currencies of 1% to 3% This concludes the acquisition I discussed earlier. We'd also expect full year 2020 EPS growth of 4% to 9% excluding the impact of foreign currency translation. We fully acknowledge the earning guidance range is wide.
This is primarily due to the current high levels uncertainty as the year begins. Embedded in our guidance are the following key elements. We expect continued soft industrial demand in Europe and the U S in the early portion of the year. Automotive production globally is expected to remain challenging, including weak Q1 China production forecast, which were revised further down, as early as this week. Additionally, we don't have visibility on overall China demand trends.
This early in the year with forecasting increasingly difficult given the early Chinese New Year, which is about a week away. Our guidance also includes updated first half 2020 Aerospace OEM production forecast, which have tilted lower. Additionally, despite the lethargic economic backdrop, our raw material costs have remained stubbornly high relative to overall supply and demand, and reflecting recent crude oil volatility. Also included in our guidance are any favorable impacts from the recently approved U. S.-China trade agreement, the pending USMCA trade agreement, or the benefit of reduced uncertainty regarding Brexit.
And it's simply too early for us to assess what impact, if any, these noteworthy regional items will have. Also, given all the self help passions the past 18 months, any increase in volume, PPG realizes We expect to translate into strong earnings, contributions giving our strong operating leverage. In addition to the, to general, items I just mentioned, following our PPG specific assumptions, First is the carryover impact from acquisitions that we completed during 2019 and the full year impact on recent the recently announced ICR acquisition, we expect about $170,000,000 in sales from these acquisitions in year 2020. These acquisitions will typically deliver at or below segment margins as we work to fully integrate their operations into PPGs. We are forecasting continued general inflation, including higher wages, medical and logistics costs.
We are closely monitoring the cost environment for our raw materials with the recent spikes in crude oil prices. We are working with our customers for targeted additional selling prices in 2020. As referenced earlier, we're still completing our 2018 2019 restructuring programs. We anticipate these programs will deliver an incremental $75,000,000 in combined savings in 2020. We expect our annual corporate cost increase, including general inflation, and we expect the, increase due to the generalization and higher management incentive comp as we, crew that targeted bonus levels.
Next, we anticipate the company's 2020 tax rate on ongoing earnings from continuing operations to be 22% to 24%. The comparable rate for 2019 was 24%. As the year progresses, we will work to tighten the tax rate, base this current information, including geographic earnings forecast. We also provided EPS guidance specific to the first quarter This guidance was $1.32 to $1.42, and this does include a modest unfavorable impact from foreign currency translation. This also includes a modest impact from a large aerospace customer's announced production curtailment.
We continue to manage our capital expenditures based on basis to current economic climate and a budgeted for spending to be between 2.5% to 3% of sales, consistent with our 2019 range. As I mentioned, the summary of these and other financial assumptions are contained in the presentation materials for today's call. And now I'll turn the call back over to Michael for some final comments.
Thank you, Vince. As we look at the current year, While there continues to be geopolitical concerns and some lingering uncertainty over trade activity, we are optimistic that the global economy will grow in 20 20. However, given the heightened uncertainty, we will continue to aggressively manage all elements within our control, and we continue to target EPS and cash flow growth, supported by achieving aggregate segment margins that we maintained prior to the Theresa inflationary cycle, which we believe this is achievable in the back half of twenty twenty. We're expecting that better visibility on demand trends by the end of the first quarter we will adjust our guidance as necessary. Strategically, we will continue to pursue organic and inorganic growth opportunities.
Have a strong track record of creating shareholder value with acquisitions and we intend to remain active, but methodical. We have an excellent balance sheet and will remain consistent with what we said in 2019 that we don't intend to let excess cash grow in our balance sheet. But we will remain disciplined in deploying this resource. Finally, while our guidance is reflected by uncertainty of when the industrial demand will improve. I am confident in our 2019 results solidified that PPG remains well positioned to teachically and financially to deliver increased value to our shareholders and worldwide customers, supported by our outstanding team, differentiated industry expertise, broad footprint, and product innovation engine.
In conclusion, wanna recognize our employees around the world for their outstanding contributions. We have a strong, engaged, and dedicated global team. Every day, our employees are focused on delivering results the PPG way by partnering with customers to create mutual value. They make it happen and work hard to do better today than yesterday, every day. This concludes our prepared remarks.
Once again, we appreciate your interest in VPG. And now Chad, would you please open the line for questions?
Thank you. We will now begin the question and answer session. The first question will be from Christopher Parkinson with Credit Suisse. Please go ahead.
Thank you. Just real quick on the price costs. Can you comment on your just any broad expectation for the resin basket and anything on TiO2. And on the former, hit on any puts and takes regarding Chinese supply, including winter operates, any changes in your views on environmental and safety and just trends in the New Year? Just anything you could add to your expectation would be greatly appreciated.
Thank you.
Okay, Christopher. I'll try to get all those questions. Let's start with TiO2. I don't expect this to be a topic we'll talk about this year. You know, obviously, there's one supplier out there that's, cutting rates, the rest of the guys are out there supplying.
At this point of cycle, do you expect to see lower prices? It's been, you know, still kind of hanging flat, but, I think the underlying fundamentals of supply and demand would echo, reduction in that over time, but I would just say that that should be a non event this year. I would say that, propylene and ethylene, the things that go into resins continue to be well supplied. You know, I would, I wouldn't tell you that, cautiously optimistic that there'll be some moderation, but it's a little bit too early to tell. The crude oil prices are, as you know, under a lot of, you know, fluctuation volatility right now with the world.
So it's hard to pin that number down, right now China is moderating, production rates
at a varied by province.
And so it's not always easy to predict when they will have a a blue sky day, but they do periodically do asked for people to moderate their production in order to, help facilitate, the environment over there.
Great. And just a quick follow-up on ARO, just given the customer production disruption and noise in the growth rate, can you just break down just commercial, any private exposure versus military in particular? And then also just anything to add on recent acquisition performance and services? Thank you. So, you know, we have
a very broad aerospace business. You know, we're in the, the transparencies, adhesives, and sealants, and and coatings. And now with the acquisition of Deck Smith, lightning protection. So, you know, we don't have any one customer that, dominates our sales, but, the recent customer announcement is, impactful and that's, you know, you'll see our aerospace growth rates still being very positive and still being better than the industry, but not quite at the high single digit set it was earlier in the year. But, I would tell you that we're, really pleased with our aerospace business, had a record year.
And I anticipate them have another record year in 2020.
The next question will come from Bob Koort with Goldman. I'm sorry. It's Ghansham Punjabi with Robert W. Baird. Please go ahead.
Thank you. Hi, everyone. I guess first off, the comment that industrial activity in China began to stabilize in your 4th order. Can you just give us more context on that? Would specific end market stabilized?
And do you think the stability reflected any pull forward from the timing of the Chinese New Year in 2020?
So I would say it was pretty broad. You know, we saw some benefits in, the appliances. Of course, there was less negative in automotive. It's, you know, potentially, a possibility that there was, a pull forward for Chinese New Year given it's much earlier this year. It's really too early to tell that.
Right now, we did see November was better than October December was better than November. So, that's a good question to come back to us in March, after we return from Chinese New Year and have a little more visibility into it.
Okay. And then, Michael, your comments on margins for 2020 approaching levels prior to the current, the recent inflation cycle. I guess in context of the uncertainty still, you know, obviously demand in 4Q and and your early quarter expectations for 1Q anyway. I guess what gives you confidence in being able to approach those levels as the year unfolds with this current macroeconomic backdrop? Thanks.
Well, we were in this past quarter. Our volumes were down 3% and our margins improved by more than 150 basis points. So if you start to put any volume on the bottom line, you're you should expect to see the industrial segment margins significantly improve. So, you've already seen us close the gap on the Performance Coatings side, and I think you should expect to see us continue to close that gap. On the industrial segment side.
Yeah, this is Vince. 2 other elements there. 1, we are doing targeted pricing across the portfolio and the regions. And in addition, as I mentioned in my opening comments, we do have additional cost savings, projected for 2020 that we're comfortable we will realize.
Okay. Thanks so much, Michael and Vince.
Thank you. Bye.
The next question will be from Bob Court with Goldman Sachs. Please go ahead.
Thank you. I was wondering, you guys talked about 6% volume erosion in Industrial in the 4th quarter.
Is there any element of that that can be
you know, destocking, or is there any hope that maybe you should go through 2020? You could get a little restocking, or is that not really an element in of your product lines?
Yep. Yeah. But we we do know similar to the PPG, if people were working down their inventory levels as we ended the year, really a reflection of the tepid you know, environment out there. We, we do believe our customers are holding low end stock of their products So if there is, if there is a pickup or recovery, we we do feel there'll be at least a modest inventory rebuild. But those those will be the 2 elements that we're aware of.
And Vince, you guys gave some specific quantitative guidance for next year, which is or this year, which
is helpful. I guess when I
triangulate where you talked about acquisitions and then the carry through of the price efforts you made in 'nineteen, it suggests no real volume growth. I think, Michael, you asserted that you got confidence that the economy will grow. So can you help me understand that disconnect?
I think the big disconnect right now, Bob, is 22 segments that are important for us are automotive. So you just saw the downgrade on where they're anticipating China being down more than 10% you have Europe that's going through the transmission or the emission change on the engines. So that's a big uncertainty. Right now, it's too early to call heavy duty equipment. I think the recent, signatures in Washington yesterday will help the farmers, but I don't think they'll immediately start buying equipment.
But I do think that will come over time. And then you certainly have, aerospace. There's a significant demand for new planes. They're not being met right now. So, hopefully, over time, they'll get back on track.
And we do know that the military side of aerospace is continue to be pretty strong.
Got it. Thanks for the help.
The next question comes from David Begleiter with Deutsche Bank. Please go ahead.
Thank you. Michael, looking at the M and A pipeline, does the fact that you bought back shares in Q4 signal any change in the M and A pipeline or your expectations in that area?
David, no no change. We have a a very strong pipeline of acquisitions we're looking at. But we also generated a lot of cash. We know that we always generate a lot of cash in the fourth quarter. We've committed committed that we're not gonna let that cash share on the balance sheet.
So we took some of that cash off the sideline that bought back stock. We could continue to do both. Right now, as you know, we still prefer acquisitions, but, it just seemed like a prudent thing to do given the amount of cash that we knew was coming in in the fourth quarter.
Very good. And just on Packaging Coatings in slide 5, you highlighted it was below market in all four regions in Q4. Did you lose share in that business, in Q4?
I would say marginally. It's more of a matter of the mix We are much bigger in, what I would call food and MAT, which is monoblock aerosol and tube. So think about deodorants and various other oddball sized cans. So we're bigger in that segment than beverage. You know, we did have positive growth in beverage the beverage is growing at a much faster rate than the other segments.
So it was more of a mix. But that's the that's the facts.
Thank you very much.
The next question will be from Matthew Skowronski with UBS. Please go ahead.
Thanks for taking the question. In your 2020 guidance, what would be the major businesses expected to be most up and what would be the most down? If you could break that down between Formance And Industrial, that would be appreciated.
So the most, obviously, with the Aerospace And P And C, those businesses will have another fantastic year in 2020. Probably the one that'll be a little more challenged will be automotive. And then industrial.
And if I could add, we do expect COMEX to be up as well in 2020.
Thank you.
And our next question will come from Michael Sison with Wells Fargo.
Hey, guys. You know, you had good earnings growth in the fourth quarter, and sounds like the sales levels or sales sort of weakness, will persist in the first quarter. But just curious, is there anything going on in the first quarter? That your earnings growth wouldn't be better. Even, you know, sounds like the sales levels will be about the same fourth quarter in the first.
Yeah. My part part of the part of the difference is just comparisons. As you know, we had strong pricing throughout 2019 on a year over year basis. We're still going to get some pricing in Q1, but not the same year over year level as we did in the fourth quarter or all prior quarters in 20 19. Q4, the, for, for Comex, is their, is their largest quarter typically seasonally?
We're not going to see that same effect in Q1. We we talked about aerospace already. We had strong volumes in Q4 And Aerospace. We know that's gonna be tempered. In Asia, Q4, is the automotive market peak in China.
Even though that volumes are down, overall production is up sequentially, Q, Q3, Q4. That drops back down as we don't have as much fixed cost coverage in Q1. So if you're trying to compare the quarters, I would pull forward with those big elements.
Got it. And then,
you know,
you should have good leverage to to better demand, obviously, but is there a way to think about you know, if the trail deal is
is a positive and then, you
know, going forward, what the upside or where where we would see you know, maybe stronger results in PPG if if things get better this year.
I'll start on the Michael finish. I think broadly, you know, our we'll see it in our global industrial segment. That's the one that, we think has been most impacted by the by the delays in in the in the in the agreements. Again, as I mentioned, just a few minutes ago, inventory levels, we think, in in in product inventory levels and for our customers, those segments are very low. So you could see a production pickup in a halo of inventory build.
Yes. And the other thing I'd say is that incrementally, you know, not just Europe, you know, where we say 40% of any incremental dollar drops to the bottom line, but we're seeing that same kind of incremental benefit in the U. S. And Latin America now. So that's another positive.
So I would say, you know, we've seen you pick up $0.30 on the dollars in you fall into the bottom line.
Great. Thank you.
The next question will be from PJ Juvekar with Citi. Please go ahead.
Yes. Hi. Good afternoon. Hello. I'm a
little confused about China automotive comment. You mentioned that auto production was up in 4Q year over year, which should be down 10% in 1Q.
So can you just
first that out and talk about things like what are the bigger inventories in China or what are pricing discounts on autos in China?
Thank you.
Yes, Piyush. If we mentioned auto production was up in Q4. That was a mistake on RBS. I think we intended to say auto production was down, but not as much as it was in prior quarters. It was still down in Q4.
We expect it to be down again, low double digits, in Q1. We do feel that inventories generally are in check-in China. So they've been matching inventory with a lower sales. So sales do pick up, that should be a straight, straight translation through to production.
Okay. Thank you. And just secondly, as interest rates moved down last year, do you see a pickup in housing activity this year particularly your arch architectural business. And in your experience, in terms of past cycles, when rates go down, you know, how long before you begin to see some positive impact on your business?
Thank you. Yeah. P.
J, I
would say that now rates are down, but, you know, they've been down for a while. And, we're expecting another 2 to 3% kind of growth year for architectural US. I don't expect to see anything significant. Our our trade customers have a significant backlog. I still expect to the, trade to be better than DIY.
You know, to do it for me trend is gonna continue.
Great. Thank you.
And the next question will be from Frank Mitsch with Fermium Research. Please go ahead.
Thank you, and good afternoon. Michael, I appreciate the, the comments regarding the active pipeline on M And A and the fact that you didn't want to, like, catch build up on the balance sheet, which is why you reentered into the buyback markets. You know, the prior few years, certainly you had been doing more on the buyback front this past year 2019, you you did double on the, on the M and A front. Is that, is your expectation as we look at 2020 that, that CTG will be, you know, kind of in that same order of 92 where M and A will be double what buybacks are. How should we think about the interplay between between those two, uses of cash?
Well, Frank, I think, if you look back at the last 3 or 4 years, we've consistently done 4 or 5 acquisitions a year. I would be disappointed if we don't do 4 or 5 this year. We've already announced the ITR. We have a very active, acquisition review committee. An accompanying.
It is a matter of timing. You know, we are working generally with the private owners. They can be you know, temperamental sometimes to get to the finish line. But, I'm still optimistic that we'll do more acquisitions in 2020, then we'll do, share buybacks.
Yeah, Frank. And that's really, you know, if you look at our history, we've done, a variety of acquisitions. We've delivered really good returns on those, which is why it remains a priority for us. We typically are able to capture synergies and and easily cover our cost of capital. But if those acquisitions don't materialize, as Michael mentioned, we we fully intend not to let cash grow on the balance sheet.
It's a very fair point that Whitford deal was a very good deal, in hindsight as well. And just turning back to the interplay between price and raws and you've got a cost cut program that you're continuing to execute on. You're able to deliver better margins through each quarter in 2019 with some acceleration at the end of the year. How should we think about the progression on improvement in margins in 2020?
Yes. The 1st part of the year, we're going to continue to be volume challenge as we as we denoted earlier. That'll, that'll certainly affect our ability to, to grow margin in our industrial segment. We do expect performance to continue to, to perform well on a relative basis.
And our next question will come from Kevin Hocevar with Northcoast Research. Please go ahead.
Hey. Good afternoon, everybody. Wanted to dig into the guidance a little bit. So sales growth of 1% to 3%. I think that 1% of that is acquisitions So kind of flat, flattish to 2% volume price.
And again, of which I think most is price. So why don't you dig into the whatever pricing is baked into that, how much would you say is based on carry forward pricing from 2019? I know you had some other actions out there, now is how much is from those and how much is from any future price increases you might do throughout the year?
Yeah. Yeah. Kevin, I'll remind you that we we got we gathered most of our price gains in 2019 at the beginning of 2019 first quarter. Both at industrial and performance. So all price gains in 2020 will be primarily based on actions that we're executing from the beginning of this year.
So very little carryover pricing in every business. And we do have, again, in the back half of the year, some volume growth layered into the to the guidance. Okay, got you.
Can you comment to sticking with pricing? How the competitive response has been to the pricing action you have out there? Competitors followed soon, or,
are
you flying solo on any of those actions? Well, the answer to that question really varies by sub segment. So I would tell you in the performance code side, there's more, there's more support than maybe there is in the, industrial segment.
Okay, got you. Thank you very much.
Next question will be from Arun Viswanathan with RBC Capital Markets. Please go ahead. Arun, perhaps your line is muted on your end.
Alright.
Sorry about that.
Here we go.
Good afternoon. Sorry about that. Yeah. So I was just curious, you know, the, the couple of years ago, there was a, a chance to, or a statement that you'd be focusing on low single digit volume growth. And cost reductions at the same time, when Michael took over.
Now I know volume growth has has been disappointed disappointing just given the macro backdrop. But maybe you can just, catch us up on the cost reduction side. You know, what do you see in the future, I guess, as far as cadence and what can we kind of model through our, our estimates for cost reductions from here?
Well, we achieved $85,000,000 in lower costs in 2019. And I think John mentioned that we were gonna do $80,000,000 in 2020. And, you know, I would say that we're always looking to be better year over year. There's, no additional program we're out there thinking about right now, but we do wanna be in a continuous improvement mode. So you should expect us to continue to push our costs lower, especially in such a weak demand environment.
Great. Thanks. And then, just on that weak demand environment, could you characterize kind of the price discussions with your customers. I'm just curious if there's been any kind of pushback just given that raw materials are or likely, potentially a little bit deflationary in Q4 and then maybe even, the next couple of quarters. How are you finding those conversations with the cross us?
Thanks.
Yeah. Our customers are very sophisticated. Generally, they look at it over a cycle, not over a single point in time. And maybe you can tell by looking at our, margins that we've not returned yet to our margins that we had in 2016. So, they also know we have continued inflation in wages and logistics, things like that.
So that's, also something that we you're in. So the discussions are constructive.
And just lastly, Just talking about the M and A pipeline, could you discuss maybe some of the verticals that you're looking at? You know, you've done Dura Code in the past and some areas and preliminary to to core coatings. Is that still an area of interest for you, maybe in adhesives or anything like that, or or learn there is a focus for earning
that? Thanks.
Well, we always say that, we're looking at all acquisitions in our space. You know, so we are big in adhesives and sealants, but we won't, you know, do a commodity one in that space. We'll let you know, we only do, specialty ones. If you look at aerospace, we do wanna continue to grow our presence in that, segment and then the the traditional core coatings segments we're gonna continue to look in. So we're not gonna go out and create some new third leg, though.
So, we'll stick to the businesses that we know.
Okay thanks.
The next question will come from Don Carson with Susquehanna Financial. Please go ahead.
Just a couple of questions on on US Architecture. Michael, you had another quarter of growth in your dealer network, which certainly reverses along, trend of declines. Is this your new strategy helping out with your Premier dealer network, or is it just because you had some some easy comps And then on your company stores, what do you think you can get further price increases in 2020?
Well, we'll take the latter one first. We did announce an increase in our, company owned stores and, we do anticipate being successful in that. In regards to, the dealers, we are making a, a significant push for our premier authorized dealer network And, it's way too early to talk about, success in that vein, but we do think the program makes a lot of sense where We've worked, we're joining together with our dealers to, better service our customers. So, I'm glad to see the growth in the dealer network, and we'll continue to push forward.
Thank you.
Our next question is from Jeff Zekauskas with JP Morgan. Please go ahead.
Thanks very much. I think your consolidated prices were up 2.6% in the 3rd quarter. And 2% in the 4th quarter. So I don't know. Is it fair to say that maybe they'll be up 1.4or1.5 in the first quarter.
Is that the progression?
Yeah, Jeff. This is Vince.
I have a little more precision, and we typically guide to Again, I would say 2019 was on the heels of, you know, very modest pricing in 2018. We did have very strong pricing, if you recall, and the quarter of 2019 so that the comparable is much more difficult. But I, I, we can give, specific guidance. We do expect a positive number, but Again, nothing specific.
Okay. And your tax rate expectation for the year is between 2224. But I think for the first quarter, it's between 22 2023. Does that mean
that you're Does that mean
that your base case is 22 to 23, or is there something unusual about the first quarter tax rate?
We we are expecting a a a, a true up of one of our major geographies in in the first quarter, which is why we signaled that to be lower. That's a ongoing number, but it's a it's a it's a true up of a street item that will occur during the quarter.
Okay. Great. Thank you so much.
Thank you.
The next question is from Vincent Andrews of Morgan Stanley. Please go ahead.
Thanks so much. Vince, on the cash flow conversion this year, you did a nice job in generating more cash. Should we expect further improvement, in in in cash flow conversion, off of EBITDA in 2020?
Yeah. You must be listening to our internal management meetings. I mean, we we target every year, you know, have to, a full full turn on, on our working capital we've been, improving that for the last several years, but we still have more room to go specifically on inventories. We, we, we do have a very good, receivable conversion rate, but there's still more room there. So our intention is to lower our working capital, full year working capital, another half turn to full turn in 2020.
Okay.
And if
I could just ask
quickly on the, the, the refinish inventory levels in the EU, Are we at the point where you kind of lapped that issue and and you shouldn't see it as much in 2020, or is there another quarter or so left for that?
That's always hard to tell because it's 2 step distribution, Vincent. And, we don't always have perfect line of sight into that. So I would hope the answer is yes, but I have no real, positive knowledge of that. Okay.
Thank you very much. Appreciate it.
Thank you.
The next question comes from John McNulty with BMO Capital Markets.
Yeah. Thanks for taking my question. So when we look back at 2019 and oil prices were down, you know, 10 bucks a barrel, 14%, fifteen percent. And yet, you know, to your comments earlier, the raws remain sticky. I guess, Is crude the right barometer for us to be looking at going forward in terms of how your raw materials move?
And if so, then when should we start see any relief because it still looks like, you know, other than the pricing that you've been able to put through, you really you really haven't seen anything on the on the actual raw material relief side.
Well, crude does impact of, a large chunk of our basket, but it doesn't impact things like TiO2. Probably doesn't always impact, things like, packaging. And so there are some other things like, let's call it the pigments that doesn't impact it. So there are some other facets of our raw material basket that are not impacted by crude, but it is the larger driver.
But just echo and Michael said earlier, we feel our our supply is, you know, our our supply demand is well supplied. And, it's just been stubborn in terms of, passing down the the food chain here.
Okay. Fair enough. And then then just a housekeeping question. It looks like your interest expense guide for for 2020 is up 10 to as much as 25%. I guess what's, what's driving that?
Yeah. Couple of things. 1, we we did have good cash in the back half of this year. So we we were able to retire some debt in the fourth quarter. We we we will typically be borrowing money in the first quarter as we build inventory for the season.
So there's nothing significant about that other than interest rates, in some of our, key regions, like LatAm are coming down where we had interest income in prior years.
Got it. Okay. Thanks very much.
The next question is from Sean Gilmartin with Barclays. Hey.
This is Duffy on for Sean. Can you walk through what your market, so 2019 architectural, what do you think the markets grew in Europe North American, Mexico.
Okay. The US, we
think it grew between 2 3% in, Europe, we think it declined in the 1% kind of range in Mexico. You know, the volume was probably down 1% net organic growth positive because of a price increases. And the same thing in Europe, we had price increases that offset stuff. A negative volume. So net net, I would say marginally positive from an organic growth side in both markets.
Okay. And then can you help size the, the issue in aerospace? So if the slowdown continues all this year, how should we think about the size of that impacting your business? And then when does the the maximum pain happened. I mean, obviously, there's probably a lead lag as you go through, and it it's slowly kinda working its way through.
When does the brunt of that issue start impacting your P and L?
So, Duffy, maybe, I'll tell you what it's not you know, some people said it's 1%, but it's not even remotely close. So if you wanna factor up and down off a half a percent, somewhere in that area code. But it is a really complicated question because, as you know, we supply transparencies, sealants, and adhesive, as well as coatings some of those things were a tier 1 supplier and some of them were a tier 2 supplier. And some of the suppliers were running faster than than the customer stated in line rate and some were maxing it. So, you know, we're trying to figure out what the inventory in the chain is.
And it'll be more complicated by the fact that the airlines are gonna be running their planes a little harder. So that will lead to some additional MRO opportunities for us. Then they have to find the time to do the MRO. So, you know, if it's not a straightforward answer. And so that's why it's, we've given a larger range than normal for our guidance.
The next question is from Kevin McCarthy with Vertical Research Partners.
Good afternoon. Michael, I recognize the ink is still drying on the phase 1 trade deal, but, be curious to hear your initial thoughts as to what effect it might have in, loosening up some of the supply chains where you had encountered a fair amount of friction, over the past year or 2. Any thoughts on end use markets, product lines, that could benefit?
Well, the one that I am optimistic on is Mexico. I think the government is gonna start to turn loose of some money. They wanted to know what environment they were dealing with. Now they have a little more certainty. So I anticipate the government spending more money.
That's gonna be a positive for us for our, PPG Comax business. And then obviously, we're looking forward to the farmers having more money in their pocket as a positive, but I think that's a longer, pot.
Okay. And then, Vince, for 2020, do you have a strong feeling today as to whether the capital budget could be up flat or down, and and maybe you can talk about, some of the swing factors or or chunkier projects that you're considering for this year.
Yeah. First of all, for 2019, our our cap spending matched almost exactly our 2018 number. We did, start some larger projects in 2019 and given the, economy, we, we, we, kept those projects running, but we peeled back off of some smaller projects. We're still expecting that in for 2020. In 2 a half to 3% of sales as our CapEx bogey, we're going to obviously toggle that based on the economic environment.
Okay. So sounds pretty similar then. Thank you very much.
The next question comes from Steve Byrne with Bank of America Merrill Lynch.
Hi. You have these online apps that are meant to help homeowners and property managers identify contractors and and mostly to buy paint from you. How much traction are you getting with this initiative how are you raising awareness level on these apps? And and is it is it effective at driving volume to your dealerships, uh-uh, relationships, even in areas where you don't have stores.
Yeah. So, Steve, I would say this is still in a tendency digitization of the, retail and trade paint network, I would say, is slow going. Not for a lack of effort, but, traditionally, I would say They're small business people, a little bit slow to change, but, they all recognize they need to do that. And so we're working with them on trying to help them understand how they improve their own businesses by moving to more digital apps. But I would say it's still in the first couple of innings.
All right. And maybe this one's also in the first couple of innings. You have this this retail, or refinance partner, mixing technology that you acquired in Europe. Can you provide an update on on how that's rolling out, whether you can bring that across the pond and and whether you could drive market share gains with that.
Yeah. So, Steve, that was that was something we developed ourselves. It's trademark moonwalk. It's a automated, mixing system for the refinished market that allows the, painter basically to scan the paint of the car. Stick, the chip basically into a machine, and then it prefixes the paint.
So that way the painter can be way more productive. We've already sold 100 of these teams in Europe. The interest level is very high. We've gotten a tremendous amount of recognition. Obviously, we're starting with our own, paint shops first And then we'll be, pushing out into a competitive environment so that we can start to gain share.
We do have people outside of Europe that are also at about it because of the significant press we've received. But I would say right now, we're focused on Europe and then we'll look at, how we're going to expand that over time.
The next question will come from Jim Sheehan with SunTrust.
Thank you. On the emission standards in Europe that you referenced, how would you compare the disruption this year to happen in the last go round for Euro 6. Is there a single date in which that occurs, or is it in or is it going to be phased in?
I'd say it's way too early to call. I've, you know, the there's so much challenge in Europe with the emissions that will just sit back and wait. So no real
insight. Okay. And then on, your your pricing versus raw materials, I think I think maybe your general industrial business is the business that's furthest behind in in terms of inflation. Is that correct? And if so, when when would you expect that business to to fully catch up to raw materials if there's no macro acceleration?
Well, we said it would be in the back half the year. We obviously need a little volume to help drive that. But I would tell you that, you know, we've made significant progress in all three of those businesses, whether package and industrial automotive. They've all made significant improvements so far.
And that's, Jim, in addition, that's, you you really were focusing a lot of our self help activities as well. So that's helping us march back to those prior margin levels.
Thank you very much.
Jim, just for your information, the forecast for Europe is minus 2% on cars. So that's the external forecast on the emission packages will impact it.
Next question will come from Kevin Estock with Jefferies. Please go ahead.
This is Dan Rizzo. I'll ask you an awful Lawrence. Could you just tell me, could you hit the lower end of your guidance if there is no volume reacceleration in the second half of the year? Yeah. We we we have a guidance range for a reason.
We do, we don't see any pickup in in activity based as our internal expectations. Will be more discerning on costs. So I would certainly expect us to hit our guidance, either through, our own self help or through economic activity.
And the next question will come from Mike Harrison with Seaport Global Securities.
Hi. Good
afternoon. Wanted to ask you about SG and A costs. Looks like they were up more than 100 basis points year over year as a percentage of sales. Can you walk us through some of the dynamics on the SG and A front? Is there a reason that were not seeing better fall through from restructuring actions, at the SG and A line.
Was there a a change in incentive comp or
or or what's going on there? To to to mate items, Mike, 1, 1, we we as we brought these acquisitions in, they're typically coming in at a much higher SG and A base load. And we'll work that down over time as part of our synergy capture that we do. The second is we did have higher, a higher stock price this year, which resulted in a higher TSR from a management incentive perspective. Those are the 2 main factors.
Alright. Thanks. And then my other question is on the architectural market in China. You noted that as an area of strength and said you're growing above market. Can you talk about what you're doing in China to drive growth while some of your other competitors struggle to gain traction in that market?
I'll start, I'll let Michael finish. I think we've heard to Mike in China was our protective and marine market, not necessarily architectural. We do see, even though China's down in terms of industrial activity, We do see a tremendous amount of infrastructure underway there. We're participating in that. We think we're winning more than our fair share of the business.
Marines also up slightly, in China. So those are the 2 items I think we, we earmarked, not necessarily, architectural. Michael, do you want to add? Yeah.
The only thing I would add is, our marine business, is winning in the shipyards, our winning business in China. And China is winning more business than Korea. We're better positioned in China than we are in Korea. So, we're in the places that are growing.
Yeah. I guess I'm looking at, slide 5 and the the
the heat there and I'm sorry, Mike. This is John. Yeah. I see what you're looking at. So if you just as a reminder, everybody, we do have a our potential business in China.
It's a small business. And, you know, it's it's in part of China. It's a regional business within China, and it's, performed well. So I just would provide people that it is on the smaller side.
It's regional. It's mostly in the Shanghai and Southern China piece. So that's where it's benefiting from.
Alright. Thanks very much.
Thanks, Mike.
Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
I'd like to thank everyone for their time and interest in DPG. If you have any further questions, please contact me. This concludes our 4th quarter earnings call.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.