Good afternoon, and welcome to the PPG Industries Third Quarter 2019 Earnings Conference Call. My name is Carrie and I will be your conference specialist today. 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, Carrie, and good afternoon, everyone. Once again, this is John Bruno. We appreciate your continued interest in DPG and welcome you to our third quarter 2019 financial results conference call. Joining me on the call from PPG are Michael McGarry, Chairman and Chief Executive Office and Vince Morales, Senior Vice President And Chief Financial Officer. Our comments relate to the financial information released on Thursday, October 17th, 2019.
I will not remind everyone that we have posted detailed commentary and accompanying presentation slides on the Investor Center of our website, p dotcom. The slides are also available on the webcast site for this call and provide additional support to the the opening comments Michael will make shortly. Following Michael'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 of PPG's operating and financial performance. These statements involve uncertainties and risks, which may cause actual results to differ The company is under no obligation to provide subsequent updates to these forward looking statements.
This presentation also contains certain non GAAP financial measures. The company has provided in the appendix of the presentation materials, which are available on our website, reconciliations of these non GAAP financial measures to the most directly comparable GAAP financial measures. For additional information, please refer to PPG's filings with the SEC. Now, let me introduce PPG Chairman and CEO, Michael McGarry.
Thank you, John, and good afternoon, everyone. We appreciate you joining our 3rd quarter earnings call. Today, we've reported third quarter 2019 financial results. For the quarter, our net sales were Earnings were a record growth per share growth of 15%. Our earnings growth was driven by continued selling price realization and strong cost management.
This quarter, we accelerated our momentum in margin recovery with segment margins up about 220 basis points versus last year. As we stated in the past, our overall objective is to return to the aggregated segment margins that we maintained prior to this recent inflationary cycle and we believe this objective is achievable in 2020. Now, let me provide some additional color on our third quarter results. Our net sales in constant currency were higher than the prior year by about 2%. Sales volumes were down nearly 3% and were notably impacted by weak global industrial production that continued to affect global automotive production and most of our general industrial end use markets.
This weakness was also broad based geographically. Aggregate selling prices were 2.6% higher, marking the 10th consecutive quarter of improved selling year over year selling prices and our 6th consecutive quarter with selling price increases of at least 2%. Fair value for our products and services and expect price gains of about 2% in the 4th quarter despite a more difficult pricing comparison in the prior year fourth quarter. Finally, our net sales were affected by significant unfavorable currency translation about 2% or nearly $80,000,000. We expect unfavorable currency translation to continue at a similar rate in the 4th quarter.
Moving to some business trends in the third quarter. In our Performance Coatings Reporting segment, Aerospace Coatings continued to deliver very strong In automotive refinish, sales were higher as strong selling price gains and acquisition sales from SEEM outpaced lower sales volumes, reflecting lower demand in most regions as many of our customers focus on inventory manager. Year over year organic sales were again higher in our Architectural Cody EMEA business, driven by higher selling prices. Aggregate sales volumes were slightly lower as we saw a mixed demand trend by country during the quarter. In Mexico, our PPG Comex business increased organic sales, added aided by higher selling prices.
Sales volumes remained soft as consumer demand reflected the overall lower economic activity in Mexico's economy. The PPG Comex business continued its growth by adding nearly 100 concessionaires stores through September of 2019. Organic sales volumes in Architectural Coatings Americas And Asia Pacific modestly increased during the quarter as sales volume growth in the DIY and independent dealer channels offset lower sales volumes at our company owned stores, including a difficult comparison period last year where we delivered strong high single digit percentage growth. Led by strong growth in the Asia region, Our protective marine coatings business continued to deliver above industry sales volume growth, a mid single digit percentage during the quarter. We expect sales to remain at elevated levels in the fourth quarter, albeit with lower year over year growth due to the significant growth we have experienced in the past year.
In our Industrial Coatings reporting segment, sales volumes continue to be adversely impacted by weak industrial demand in most major regions of the world. Global Automotive OEM Industry bills declined, including the impact of unexpected or unintended and extended customer shutdowns in multiple regions during digit percentage, consistent with the reduction of global builds. As a partial sales offset, our automotive OEM business realized higher selling prices in each major region impacted most of our general industrial coatings business subsegments, including wood, general finishes, and transportation end markets. Also, our packaging coating sales volumes decreased modestly as solid beverage can demand was offset by weakness in other packaging end market segments. Expect this diluted share was $1.67.
Our earnings were negatively impacted by about $10,000,000 on unfavorable foreign currency translation, or about $0.04 per share. Our effective tax rate was about 23% in the 3rd quarter, which is higher than the approximately 21% rate the third quarter of 2018. The increase relates to realizing lower non recurring favorable discrete tax items in the third quarter of 2019. We're anticipating a tax rate of about 24 percent for the full year 2019. Our EPS results were supported by increasing our selling prices, improved manufacturing performance, excellent progress on our cost savings programs, which delivered about $20,000,000 in cost savings during the quarter and remained in line with our objectives.
In addition, as we
to the third quarter
2017 before our customer assortment changes. The 4 acquisitions that we made in the past year also contributed positively to earnings, although at overall lower than company average margins. As we look ahead, demand to remain unfavorable year over year and roughly comparable to what we experienced in third quarter. Year over year sales comparisons will ease in the automotive OEM business, but we still forecast aggregate global automotive bills to decline in the 4th quarter. Compared to prior year.
Positive developments around regional and country trade disputes could provide a spark to industrial demand as inventory levels in many of our end use markets remain low. Specific to our businesses, we believe that lower U. S. Interest rates could add growth in the U. S.
Housing market and also favorably impact automotive OEM and U. S. Architectural sales. There will be continuing impact to our sales related to customer shutdowns in the automotive OEM business in the U. S.
In Latin America, we anticipate economic activity to be similar to that experience in the third quarter, and we'll continue to add new PPG Comex concessionaire locations to expand our customer reach. In Asia, demand rates are expected to remain consistent in comparison to the 3rd quarter. In the fourth quarter, sales comparisons last year will be easier given the weakness in Asian demand that occurred late last year. We expect demand growth its forecast to remain at low levels. Our automotive OEM business comps are also easing year over year and we should experience a lower sales volume detriment in the fourth quarter.
We expect our Architectural business to continue to grow driven by higher selling prices and strong cost management. Brexit remains an overhang and is getting to modestly impact our business trends. We continue to closely monitor the situation of our ability to prepare for unknown to ensure that our input costs are reflective of current industry demand conditions, including the ongoing uncertainty and weak global industrial production. We'll continue to focus on reducing our cost structure, and we target to reduce $20,000,000 of costs in the fourth quarter related to our cost savings program. Including the newest program we announced in the 2nd quarter, which will have a full year run rate savings of about $125,000,000 upon completion of the program.
Earlier today, we provided EPS guidance specific to the full year of 2019. The guidance is $6.17 to $6.27, which includes an unfavorable impact from foreign currency translation of $0.18 to $0.20 per share. This puts us at the low to mid range of our original full year 2019 adjusted earnings per share growth of 7% to 10% excluding currency translation impacts. While we would like to be closer to the upper end of the range, our earnings performance has been very solid when considering the severity of the downturn in the global industrial activity. We have generated strong cash flow through the 1st 9 months of 2019.
Cash generation of nearly $1,300,000,000. This is an increase of about $600,000,000 when compared to the same period last year. And has been driven sales compared to 2018 levels. We completed the Dexmed acquisition early in the third quarter, I continue to be pleased with Sem and Whitford, which collectively will add about $400,000,000 in annualized revenue. Acquisition remain one of our preferred cash deployment options given the value that these have created for our shareholders continue to remain solid.
In addition, acquisitions, we progressed our key capital expenditures during the third quarter, and we still expect total spending to to be up to 3% of sales in 2019. In the third quarter, we increased our dividend to $0.51 per share, or roughly a 6% increase. To prioritize our dividend increases. We ended the 3rd quarter with more than $1,500,000,000 of cash and short term investments which continues to provide us with our customers. Every day, our dedicated employees are focused on driving the PPG way and delivering value to all our stakeholders and shareholders.
This concludes our prepared remarks. Once again, we appreciate your interest in PPG. And now, Carrie, would you please open the line for questions?
Sure. We will now begin the question and The first question will come from gansham Panjabi with Robert W. Baird.
Hey guys, good afternoon. I guess first off, you've obviously given us a really good detail on how to think about volumes for the fourth quarter. I understand it's early, but what is your initial view as it relates to the volume I'd 2020 at this point as it relates to your major end markets. And on your margin recovery comment by 2020, Michael, are you referring to the run rate at the end of the year or margins on an absolute basis? Thanks.
Yes. I do expect margins to continue to improve. As you can see, our margins in, our Performance Coatings segment are essentially back to peak, and we think there's still more upside there. So we're gonna you to work hard on that. We also have made, as you saw, significant more than 200 basis point improvement in the Industrial segment.
And, we still have more runway to go there. As we said, we had a positive price coming in the fourth quarter. And I would expect that we would continue to push price as we move forward as we still have an environment where we have inflation and, think about salaries, warehouses, freight and distribution, things like that. So
And then Ghansham, on your question, with respect to 2020, Again, a little early to answer that question, but what we can say confidently is a lot of our customers are carrying very low inventory levels. Typically, they achieve their inventory levels at the end of the year, not by the end of Q3, as they've done this year. So heading into 2020, we do think There could be some inventory upside. It's too early to make a call on the economy and the other geopolitical issues. But, a couple of our key industries, we know auto, we a little bit better about auto next year, specifically in Asia, the biggest market.
And a couple other markets in general industrial are down this year. We're hopeful that they'll have at least a modest rebound next year, not counting the inventory rebuild.
Okay. And just as a follow-up, that, Vince, you know, for the industrial segment specifically, how should we think about operating leverage for that segment as volumes start to recover? I mean, obviously, you're adjusting the cost footprint. And I assume some of the costs will reverse as demand picks, but just wanted to get your sense as to, operating leverage during the initial phase of improvement. Thanks.
Gautam, this is Michael. That's going to be a strong positive for us. When you think about, the past quarter, you know, earnings in that Industrial segment were up despite volumes being down. And, we anticipate to continue to, drive costs out And so, you should expect to see a nice, operating leverage, should volumes come back. And right now, we're certainly planning on, you know, our outlook for 2020 would include some modest recovery.
The next question will come from Christopher Parkinson with Credit Suisse.
Great, thank you. Regarding your volume outlook, can you kindly walk us through the key end market verticals for which you believe PPG is poised to benefit from, let's say, secular themes, regulatory changes under new products, you know, non BPA and the move towards aluminum cans will be 1, I guess, in packaging, you know, low cure products and EV battery protective and auto, just if there are few others just generally based on what's inside of your control, what are the key verticals for which we can expect you to outperform and why? Thank you.
So, Christopher, you covered, automotive pretty well. So, I'll pass on that one. You know, we have on in the industrial business as part of the industrial segment. That one, I would point to like high edge powder as one of them. And if you think about, moving into, packaging itself, you know, the sustainability that can is number 1, so you could see the ship away from plastic.
That's going to be a long term secular win. For us, housing is continuing to, we got low interest rates around the world. So I think the housing has continued to be a nice little market for us Aerospace is clearly going to be a continued winter for us. We're going to continue to outgrow the industry there within launches that we have had, whether it's new transparencies or new coatings. And then, you know, talk about, you know, we talked about in our press release, Moonwalk for refinish This is a new technology that allows people in Europe to be able to mix refinish paints more precisely allows the technician to spend more time painting the car as opposed to mixing paint, drives higher productivity in the paint shop.
I think net net, you know, we're in a pretty good shape, long term wise.
And, just regards to your margin outlook, can you simply outline in order which variables will be the most material to achieving and surpassing prior peak margins just between price, input cost deflation, mix, acquisition integrations and just broader volume improvement. Just any, you know, key thoughts on how this street should be thinking about that as we head into 2020? Thank you.
Chris, I'll start and Michael could certainly add to what I say, but The the you know, we're still sitting on a significant amount of inflation that's, multi year inflation. We have seen very little of that unwind to this point. We alluded in our call about the economy, the weakness in industrial activity. So we're still, working to get priced to offset this accumulated inflation, but there is a significant amount of inflation we would not expect with the supplydemand environment where it is in our in our supplier base. We still have self help.
We announced a self help program in May. We still have a variety of actions due against that program. We're expecting significant savings from that program. That'll be primarily in next year. And then the last one is we don't know the volume outlook.
So the things within our control we're managing, but as Michael just mentioned, on the prior question, if we do get any volume, especially in some of our industrial businesses, we should have a significant amount of leverage. So those would be the
way I prioritize them. And Chris, I would the one thing I would add is that with, couple of the acquisitions we've made there, below company average. They're fairly decent sized ones. I'm excited because I get a monthly report on the integration as well as the performance. And we are seeing month over month improvement.
In fact, when I looked at the MRAS numbers for the month of September, it was the best month they've had ever. And obviously, they are benefiting from some of our abilities to integrate them, but I see even more positives coming they have relationships with customers, that are slightly different customers than we have from a standpoint of mix And, you know, so we're able to take the best of both worlds. They're great relationships in our great technology and put the 2 together. And we've already won, substantial number of new, program wins since we bought, Hemorath.
Great color. Thank you.
The next question will come from Bob Koort of Goldman Sachs.
Thanks very much. Good afternoon. Michael, you guys gave some commentary about your U. S. Architectural business.
I guess it seems like going on a few years now. There's puts and takes and maybe not complete uniform consistency by channel. Can you talk a little bit about the DIY market? It sounds like maybe that's starting to percolate a little bit. Certainly, we're seeing some of these housing stocks rally dramatically.
Are there some signs that maybe we're going to get lift off in DIY. And then in your store base, I guess I would have thought maybe some of those contractors that were hiding from the rainy weather in June quarter would have come back out in the September quarter. So is there anything idiosyncratic to your store base either regionally or and market wise that would have preclude you from having a little bit better volume there?
Yes. So, Bob, let me first start with the DIY. So, we're gaining share in the DIY segment. Our customers are doing pretty well. And inside our customers, we have continued to launch new products, And that that's been a real positive.
So, if you think about the PPG timeless at Home Depot, as well as the Olympic staying at Home Depot, both those guys are, growing above company average. So we're really pleased with that. I think the one thing that doesn't really come through when you think about our company store average is if you remember in some of the prior calls, we kind of talked about doing a little bit of everything in that segment. So some of its delivery some of it's the stores and some of it is what we call our premier authorized dealer network or where we're trying to make it simple for the customer to say, I can pick up in a dealer location or I can pick up in a PPG store location. And obviously, we have, let's call it, a little bit less than 9 hundred stores between U.
S. And Canada. Well, if you include that, plus the nearly 5000 dealers that we have, that gives our customers a lot more opportunities to pick up paint And so if you look at our dealers, if you notice in our commentary in our press release, we said dealers were positive. And, historically, as you know, this has been a long term secular minus one kind of trend line as dealers age out move on. But with this new strategy, we are picking up additional business through the dealers.
We added 50 new, dealer locations in, the third quarter. We're up to about 100 and 40 locations, in the third quarter, a total of 4.27 new locations where they can pick up paint. And we expect that to continue to accelerate as other dealers see this work they're going to want to jump on that bandwagon as well. So, I think that's a little bit of nuance that maybe doesn't come out in the overall numbers.
Can I ask you on the balance sheet? You've been accruing cash nicely through the year and haven't been doing any share repurchase. Should that be a reflection of the acquisition activity or is there some other reason you want to put more of that capital back to use through repurchase?
Yes, Bob. As Michael pointed out in the opening remarks, we've had a very good cash generation year to date. We got about $1,500,000,000 on the balance sheet. We do have some term debt coming due in, in Q4. So some of that cash will be applied to the term debt coming due.
But besides that, we do have a strong balance sheet. And we're, we're still looking at a variety of acquisitions, acquisition pipeline. It's still, rich. We are not immune to doing share repo. We haven't done any to date basis the acquisition pipeline, but if, if the acquisition pipeline, lessons or we think there's a need to do share repo for different reasons, we'll do so.
Got
it. Thanks guys.
Thank you.
The next question will come from Michael Sison of Wells Fargo.
Hey guys, nice quarter. The question on the just quickly on the stores, you said you're a little bit less than $900,000,000. Can you maybe walk us through what your strategy is there going forward? Are you looking to continue to expand the stores or is kind of this dealer network really the the area where you can have a combined growth for your business there. But just kind of curious where you think the store strategy and growth potential is going forward?
Yes. So, Michael, what I would tell you is, it our strategy hasn't changed we're going to add stores where it makes sense in those markets that are growing. So think, the Southeast and the Southwest, we're not going to be adding stores in the Northeast or in the west, or the upper Midwest. Those aren't folks areas for us for stores, what they are, the focus areas for us for this premier authorized dealer network, because we think there's plenty enough between our stores and our dealers to adequately service our customers. So we're going to continue to do that.
Compare and contrast that to Mexico, you know, where we've added nearly 100 stores year to date and we're going to finish the year at nearly 200 new stores. Same thing where we've added stores in the UK. We've added stores in Australia. So we're going to take what we call the micro market strategy. We're going to look at each of the different markets make the best decision for our shareholders in that regard.
Great. And then just quick follow-up When you think about volume growth whenever, I mean, whether it comes next year or sooner than later, you know, what do you think your leverage is going to be? Meaning, you know, if you grow your your your sales to 1%, does that leverage a 2% EPS growth, 3% EPS growth, and just kind of want to feel for the for the upside potential as, you know, we all hope that demand picks up at some point.
Yes, Mike, it's Vince. In the past, we've said pretty regularly that our leverage on a normal increase in sales is somewhere in the mid-twenty percent range. And in Europe, it's higher because of the latent opportunity we have there. So we said in Europe, it's in the mid-thirty percent range. I'd actually say that if you look at the costs we've taken out globally, we're inching up to 30% on average for the Globe.
In terms of a leverage factor. Now it's always going to be based on which business, etcetera. But on average, I think we're closer to 30% now than the 25% we were previously.
Great. Thank you.
Thank you.
The next question will come from Frank Mitsch of Fermium Research.
Okay. Hey, good morning, guys. Good afternoon, guys. You know, looking at the Refinish business, following the second quarter, you know, there was an expectation that the volumes would improve in the third quarter given the easy year ago comp cause of inventory destock that occurred and, and, that didn't come to the volumes were down in 3Q. Any called out inventory management, as well lower collision claim activity.
Is there any reason for us to anticipate that we're going to see a a rebound in this business. Obviously, you, you, you highlighted moonwalk, so maybe from a technology perspective, but just from an overall macro perspective, with new safety features on the cars, etcetera. How should we be thinking about automotive or finished down the line?
Frank, this is Michael. I think this is still a great business. So I don't want anybody to walk away, think anything differently. I mean, you know, certainly, claims were down, 1.2 sent a little bit more than that in Europe. But we had a couple of large customers CEO changes who came in and take even a more aggressive approach on inventory.
I mean, we've continued to have net body shop wins in all regions of the world. So that is a positive. When you look at, our integration of SIM That is primarily a U. S.-based business. We've launched those products in Canada.
The first set of products went to Australia and that's a September. So we'll start to see some sales there. You know, we're doing better in sundries, but I think overall the one message I want to leave you is our earnings and refinish will be up year over year at the end of the year. So, we're able to price effectively in this business and this remains a great business
just in, just in general, as I thought, I look at the 3rd quarter, you hit the high end of the guidance that you put out following the 2nd quarter and clear that the macros were mostly running against you, during the quarter, particularly, you know, in European activity and autos, etcetera. So just curious. What what what on the other side really went right for you, in order to, again, hit the high end?
Yes, Frank, it's Vince. I'll let Michael get to add here, but we are pacing ahead of our cost targets. So we did have additional cost benefit in Q3. That we thought may have come in Q4, but we got after a little bit earlier. That's one item that was helpful to us.
The other one I would tell you is the automotive team. We've been challenged in the automotive team to get ahead of this, volume decline. And, they really have worked exceptionally hard to do that in the the second and third quarter. And I think that what we saw in the back half of the third quarter was that, accelerating. So I think that would be the other one I would point to.
Very interesting. So the automotive side, and I I presume you're talking about the OEM side.
Yeah.
Was able to outpace, you know, kind of your initial expectations, even though builds were down, you faced strikes, etcetera, that that, that's very interesting that, that that would be the area that you would point out to.
Yes. So the automotive team has done a good job this year. OEM.
Thank you. Thank you so much.
Thanks, Frank.
The next question will come from David Begleiter of Deutsche Bank.
Thank you. Michael, were raws up year over year in Q3? And what are you thinking about for Q4 on raws?
Well, you know, of course, we think about our costs as more than raw as David. So, you know, in the third quarter, they were moderating. We had a couple up we had some down, but net net they were moderating. As I tried to point out in my opening comments, we still have freight and distribution. If you think about dangerous good warehouse costs, especially in Asia, they have significantly increased And so that's when we continue to invest in our business, we continue to invest in our people.
So that's obviously a cost on the rising side. But net net, I would say raw materials were moderating.
Perfect. And just on the impact of the GM strike in Q3 and Q4, do you have an estimate on that impact?
Well, we're not going to talk about any individual customers. What I would tell you is that, we have a very diverse customer mix in automotive. And so no one particular customer is going to have a significant impact on our overall business. And, our team, you know, when it was announced, immediately took aggressive cost action to ensure that the impact was, was minor. So think, you know, overall like I said to Frank's question, you know, the automotive team did a good job.
Thank you very much.
The next question will come from P. J. Juvekar of Citi.
Hi, good morning. This is Eric Petrie on for P.
J. Eric.
So electronics vehicles represents a market opportunity for you. How much coatings could you sell into EVs compared to other light vehicles?
Well, Eric, what we've always said is that the, EV vehicles are be anywhere from 2 to 3 times more coatings on them than a standard vehicle. Right now, I don't have the latest number in my figure, but I think it's point 7% of all cars are electric vehicles. So it's still a very small number. And what's interesting is that everybody does that differently. So, you know, the one guy might do their batteries might need, you know, protective coatings, another guy might just need industrial coatings another guy might use all 3, some are using powder, some are using liquid, some use third parties, some do it in house, right now, unlike when you look at a traditional car, you can use kind of broad guidelines.
Right now, this is still in its see, and there's still a lot of unknowns about how this is going to shake out. But clearly, what we see in every case is more paint on an EV vehicle than on a traditional vehicle.
Thank you. For my follow-up in packaging, can you discuss the market opportunity to continue gaining share in non BPA coatings? And then as the industry shifts from plastic bottles to cans, is this a tailwind for the business?
Certainly, the plastic to cans will be a tailwind. It's too early in that process to know what that curve will look like, but it's certainly a long term positive. Our BPA and I has we significantly outpaced the market in 2016, 20172018. We've been slightly less in the market in 2019. We expect to be back on that track of at or above market in 2020.
We have some new technology that's coming out right now. Probably, you know, I would say food has been, you know, probably, let's call it, 70% converted beverages, you know, less than 50% and it varies considerably by region with Europe much farther ahead in Asia, much further behind. But there's still more work to be done there.
And, Eric, just back on your first question, I mean, the statistics we've seen, these aren't our statistics, but, you know, 1% drop in, plastic bottles it converts to aluminum cans as a 6% increase in cans. We are seeing also, efforts in the industry to replace, single use, serving cups as well. So I think the industry, the overall packaging, aluminum packaging industry does have some positive, traits for it as we head into next year.
Helpful. Thank you.
Thanks, Eric.
The next question will come from Kevin McCarthy of VRP.
Yes, good afternoon. I think you've been very clear that your contribution margins are higher regionally in Europe relative to the U. S, for example. I was wondering if you'd be willing to comment on which product lines are your highest and your lowest contribution margins in a given region?
Not something we typically comment on Kevin.
Okay. Secondly, I had a small question on the financial side. Your, slide 9 indicates net interest expense of $27,000,000 to $28,000,000. And I believe the 3Q number was $23,000,000. And so I'm wondering why your net interest would increase $4,000,000 or $5,000,000 sequentially when you're leverage seems to be down roughly $450,000,000.
Does that have to do with capital structure or deployment plans?
Well, a couple things on that, Kevin. First of all, we are paying off some, some term debt, but that term debt has very little interest associated with it. One of them was close to a 0% interest. So even though we're paying debt off, it doesn't have an effect on lowering the interest cost. We have been carrying extra cash and earning some money on that cash.
In Q3, that'll go away in Q4 as we pay down that term debt. And, we do have, as is traditional in our business, seasonally a much higher CapEx spending, the fourth quarter, we typically spend 30% to 40% of our capital between October 1 the end of the year. So we'll have additional capital outlays versus what we did earlier in the year. So those would be the biggest factors.
The next question will come from John Roberts of UBS.
Thank you. Michael, there have been some press reports that PPG has been working as part of a joint bid for Axalta. Could we assume antitrust issues for both auto OEM and refinish would be really high so that your interest is primarily in the industrial non auto?
Well, John, 1st of all, we're always flattered when people, associate ourselves in the rumen market. But as you can imagine, we're not in a position to comment about another public company. We are going to continue to drive the consolidation of coating space. And as we mentioned earlier, our pipeline remains active. But as far as any particular company, would be inappropriate for us to comment.
Okay. And maybe based on the IHS auto builds outlook for the fourth quarter, Could you just based on their assumptions, can you give us maybe a range for your auto OEM coatings volumes in the fourth quarter by region and what it would roll up to in aggregate?
So, John, we're going to benefit from easing of comps as we look at prior year. So I would look at IHS's revision. It just came out this week and we would be looking at our performance being somewhere in line with that with those build forecast.
Okay. Thank you.
And John, the only other thing I would add is that from a very, very small minor green shoot area, we did see build start to pick up in the last 2 weeks of September in China. So we'll wait and see whether this is a trend line. Some of the local Chinese guys were behind the curve on meeting the emission standards. So maybe they're just catching up, but we'll continue to keep an eye on it.
The next question will come from Don Carson of Susquehanna.
First question on the sustainability of the price increases. Michael, you mentioned that it was probably price increases will moderate in the fourth quarter, but you've had six quarters now of over 2% how much longer do you think you can sustain that and particularly as you get pushback from customers in the industrial sector?
Well, first of all, John, hi, Don. We have not had a pushback yet from customers. I mean, you get your normal pushback, but, you know, at the end of the day, they know full well that we've had more inflation than what we've recovered. They can read the finance statements just as well as you can. So they know we're behind.
They also know that we're if you look at some of our regions, we're, we're below the curb line, if you will, on, volume. And some of that is because we've said we're gonna need to continue to get price. And, we're going to take price. And if they want to move volume away, that's perfectly acceptable to us. And so right now, you know, we know we're going to get price in the fourth quarter.
I'm pretty optimistic. We'll still have a positive price number in Q1. And we're going to continue to push because at the end of the day, we should be asking for value with the value that we create for our shareholders or our customers. And, so we're going to continue to ask for it.
And a follow-up on U. S. Architectural. How do you see the industry growing given some fairly good housing data both you know, maintenance and and new homes. And now that you've got the, you know, the law, the customer mix issues behind you, do you think PPG can grow in line with the market or greater than the overall market?
Well, for the industry, next year, we have budgeted between 2% 3 percent growth. We think that's a realistic number. Our architectural team is, on the optimistic side, but I think, this is a point where we have to show and not, you know, it kind of like to show me state. Let's see what happens you know, I think, our goal would be to start with continuing to meet the industry numbers and we'll see how well the team does.
Thank you.
Thanks Todd.
The next question will come from Arun Viswanathan of RBC Capital Markets.
Good morning, guys, or good afternoon. Just a question here, a little bit higher level and looking into 2020, if I could just ask this a a different way. Yeah, you guys had referenced kind of 2% plus price now for a little while. Volumes have been kind of flat to down. Next year, if I think about some of your end markets, aerospace faces some pretty tough comps.
Architectural could be up slightly on your comments here. Automotive, it doesn't really appear that it's getting better, although you you you cited, maybe slightly better than your expectations. So when I put all that together, it it sounds like next year, volumes could be also flat to down slightly. And then I don't know if you're necessarily gonna have the price, So just kind of trying to understand, how you're thinking about sales growth from here. Appear that, next year would likely be lower than this year, just given the lack of pricing actions.
Well, Arun, I think it might be a little bit early to call that. When I think about some of the innovations that we have out there, I think if you think about the low temperature cure, that's still an opportunity for us. You know, for, aerospace, we have a number of customers who are qualifying, e coat for airlines. So that's still an opportunity growth. We still have more share to gain back in Europe.
Because we have been leading the price charge over there on that. So, I'm not, where you are right now. A little early to say that. So, I will, I will say that we should be, more on the positive side.
Yes, Arun, I just reiterate what I said earlier, we we we think most of our customers in many channels are carrying very low inventory levels. So, so with any, any modest economic recovery, we we think there's going to be a dual effect recovery itself plus kind of inventory replenishment level. So it's, again, it's still early to make that call, but, as we talk to our customers, they're, they're, they're very low in terms of their inventory. In inventory on the balance sheet.
Okay. That's helpful. And just as a follow-up, it looks like you've taken some very lift action on the cost front. Those are coming through nicely. Your price cost is heading in the in the right direction.
I guess I'm just curious and then you have the new product pipeline. What else could you do, from a standpoint you you've you've completed 4 deals. Are you also open to something a little bit more transformative? You know, the strategic review kind of unveiled that, you know, breaking the company up isn't really advantageous. But, is there anything larger or more strategic that you could pursue, to to shift the focus a little bit, you know, forward, I guess?
Well, Arun,
I would tell you that nothing is off the table. We're always going to be looking to do what's in the best interest of our shareholders. We're going to be disciplined, though. We're not going to be, do anything that doesn't create value. We still have more opportunities when I think about the EV market, that is still a wonderful opportunity for us.
And, you know, we're obviously anxious support to play out sooner rather than later. We can't control that. There's still a challenge where the EV cars cost significantly more than a traditional car. And they have to figure out a way to get those cost more in line so they can sell more cars.
The next question will come from John McNulty of BMO Capital Markets.
Yes, thanks for taking my question. Just going back to the architectural stores business that you have. Last quarter, you had expected for this quarter, at least in the guidance, you had kind of indicated you were looking for low single digit growth. And I guess given some of the pent up demand around the wet season, we would have thought it would be even better than that. I guess relative to those expectations, what what changed or what was off?
Is it just that it went more and more quickly to the independent dealers or is there something else in the mix that we should be thinking about?
Well, John, first of all, I'm not sure where that in your inference came from. We grew third quarter of 'eighteen at high single digits. And, you know, jumping over that comp was going to be a challenge. And given the way we struck sure the stores and the dealers, we thought it would be a challenge. So, overall, I would tell you that, we're pleased with the rollout of this premier authorized dealer network.
So Vince, I
don't have to say anything.
No, I I'm going to say
the same thing, but maybe a different way is we look at the stores in our dealer network as we're, we're kind of merging that into a singular channel. We try to, we're trying to optimize we do on a micro market basis, as Michael mentioned earlier, so we're not, overlapping as much. And, what whether the whether the sale goes to a dealer or to our store is inconsequential to us. So, so we have to look at these combined. And if you again, if you look at the dealer, results this quarter and year to date, they're up nicely.
And that's a lower cost to serve for us. So I think we're it's probably more semantics than anything.
Got it. Got it. No, that's helpful. And then on the unexpected customer shutdowns, is this something that you typically recapture as the volumes come back on? I mean, do you see the customers your customers essentially try to run harder to catch back up?
Or is it something where it looked at business it's come and gone and it's kind of something we kind of have to just get past?
No, I would suspect that if you take the case of our friends up in Detroit, you know, they're going to be short of trucks. So they're going to be trying to catch up that volume. Now on the car side, probably not as worried about that. But net net, I think they'll be trying to, you know, optimize their, inventories and, it may be different at one plant versus is another on how hard they're going to ramp up. But, some of that volume will come back, but definitely not all of it.
Yeah. We've seen customers curtailments on both sides of the quarter. We saw, you know, July shutdowns are normally traditional annual prime time period to do shutdown. Some of those were extended. We saw, obviously, different shutdowns in September.
If you look but again, if you look at the inventories as a microcosm in the automotive OEM business, the inventory levels are very low. Almost every region relative to historical levels. And, and so, again, I think that's another, good, good news story at some point. They're they're running below below historical inventory levels.
The next question will come from Jeff Zekauskas of JPMorgan.
Thanks very much. Earlier in the call, Michael, you talked about raw materials moderating Were they down about 2% in the quarter? And can you comment on raw materials in the United States? And that propylene is I don't know, $0.38 a pound. And last year, at this time, it was $0.58 a pound.
So maybe it's down 35%. So Is there much more raw material, depreciation in the United States than there is in other regions?
Mean, let me take the total question, Jeff, and Michael. Sure. In total, our cost buckets were not down 2% anywhere near that. We did, as Michael mentioned, have a variety of other costs that are elevated or still elevating. We aggregate that.
And when you aggregate that, We had very modest moderation of raw material costs in the quarter and year over year. And again, that's after several years of accumulation of inflation.
And, Jeff, I know you sound like one of our customers was selectively picking up propylene in North America, but you forgot to mention ethylene in North America is at $0.27 and this time last year is at $0.20. So, and I always tell people, we don't buy ethylene, we don't by propylene, we buy the derivatives. So the supply and demand of the derivatives is also important. So, where you might have propylene down fifteen percent, you have ethylene up 30%. So there are some puts and takes.
Well, contract ethylene was 33¢. But, but, so secondly, when you, when you, contemplate your acquisition strategy, are you, do you have a bolt on strategy, or is it a something larger than a bolt on for the next year?
Well, I think as we've always mentioned, we're active looking at the pipeline. We're going to take the best use of our shareholders' money, and we're going to be, you know, disciplined in that approach. So it could be either or, but right now, the opportunities are historically have been on the bolt ons.
The next question will come from Duffy Fischer with Barclays.
Yeah, good afternoon. You've mentioned a number of times kind of the cumulative impact of the inflation you've seen over the last couple of years, how much price do you need from here if you hold those costs constant do you need to get back to par?
That's a great question, though, because we still need more price. And that's what we tell our sales guys and ladies every day that we're still not a cumulative basis recovered. It's different obviously by region, by business. But we still need we're not going to give an exact number, but it's more than we have today. And, cumulatively, our prices that we've given out the past couple of years were up, just shy of mid single digits and we need to be just north of midsingledigit.
All right. And then historically, when you've built cash, sometimes you've put parameters around that cash flow, you'll give us a timeframe where either via acquisitions or buybacks you'll consume that cash. Is that worked in your mind historically when you've done that? And if it has or hasn't, how would that impact what you might do going into 2020 with the cash you've built?
Well, again, I'll remind you that we have about $600,000,000 or 6 $50,000,000 of the cash on the balance sheet today is slated for term debt pay down. And we we did some term debt issuance in Q3. We liked the interest rates we're going to swap that out for payment payment in Q4. We'll look at our we look, on a recurring basis, on a monthly basis at a minimum. At our cash and our cash uses and potential cash uses for the next couple of quarters.
We'll do that again, certainly through the fourth quarter. And if we want to give guidance on that, we'll do we'll do so in January. Right right now, as Michael said, the acquisition pipelines are active, and we'd still like to to to keep, some dry powder until some of the things that are out there. But, we're not immune to giving it or not immune to not giving it. Just depends on what we see going forward and what we feel shareholders want to hear from us.
The next question comes from Lawrence Alexander of Jefferies.
Hi guys, it's Dan Rizzo on for Lawrence. How are you? Hey, you mentioned before the Brexit is kind of cropping up as a headwind. I was just wondering if it would have no deal means or what a deal would mean or it doesn't, if it doesn't matter as long as it's like just, removal of the uncertainty?
Well, the best thing would be the removal of the uncertain be without having a a border crisis. Right now, we're not able to predict that as you can get. We are prepared for either way. What we do see is our, our architectural business has hung in there pretty good. But then if you look at our little business up in Northern Ireland, that is, there's way more consternation and churn up there, then there might be in, say, Southern Europe, or Southern England.
So I'd say it varies, but at this point in time, it's still a huge watch out for us.
Okay. Thanks for that. And then my second question, you mentioned, I think adding 50 new distributors, this quarter. I was wondering if we should think about as kind of a general run rate going forward, like 50 a quarter and 200 a year. Am I thinking about that right?
Well, this is a new program this year, so we do have some earlier sign ups. That's probably a good number we should probably look at for or Q4 call to try to give you guys some parameters. It's too early to make that call right now.
All right. Thank you very much.
The next question will come from Vincent Andrews of Morgan Stanley.
Thank you, and good afternoon everyone. Just trying to think through the comments earlier about the potential for customers to rebuild inventory next year. And I guess what I'm trying to square in my head is that we've had as you say, six quarters of a very solid 2% price increases going through and yet the customer base seems to be running at lower than average or normal levels of inventory despite the fact that, it's very clear you're going to look to continue to take pricing. So other than some economic fly ups, what is it that's going to, or could cause customers to rebuild inventory levels versus, if they've been at low levels for a long period of time and they're generating, create a cash flow for that reason. Why wouldn't they just stay where they are?
So what are the pros and cons on that?
Well, the first reason why they grew building, if they had confidence their end use demand is going to pick up. So think about the heavy duty equipment guys, right? They're, wondering what heck is going on in the farming business and whether or not they're going to be selling more combines. Right now, there's a lot of churn in that segment, so they're trying to figure that out. If they had more clarity on what the future looked like.
You know, the farmers would be more willing to spend their money if they had, better idea about the crops, they'd have a better chance of spending it. So I think that would be one. The other one is consumer confidence in China. Right now consumer confidence in China is down PMI and China is down. And so if they thought that the trade churn was behind them.
I think, people in China would, get behind that and start of making major purchases right now. They have, deferred on major purchases.
Okay. Thanks very much. I'll leave it there since we're at the top of the hour.
Thanks, Anthony.
The next question will come from Stephen Byrne of Bank of America.
Yes. Thank you. You mentioned just
a few moments ago about your volumes in OEM auto to be roughly in line with IHS expectations, it seems your 3rd quarter volumes underperformed or were more challenged than than the global auto build rate, contracted. Is there something in there that you can attribute that to?
Well, part of it, Steven was in China. So we have a pretty good, split of the local Chinese OEMs. And these guys were behind on, the emission changeovers. And so, you know, they were, suffering from that standpoint. So they underperformed significantly the, China as well as the Asian standard.
So that's probably the single biggest thing.
And then just a quick one on your, on your store, your architectural stores. If you have a loyal paint contractor to your own stores, if they were to shift to a dealer location, are are you is that particular mix of of paint that they're buying and the composition and the menu and all of that? Is that transferred to that dealer? And how is your margin on that gallon of paint that's shifted from your store to a dealer?
Yes. So think about it this way, without getting into the specifics, we're agnostic to whether he picks up in the store or picks up at the dealer. The key is that he can pick up at his price at the location that's most conducive for him winning the business.
Okay. Thank you.
Thanks Steve.
The next question will come from Mike Harrison of Seaport Global Securities.
Hi, good afternoon. Just wondering if I can maybe build on this idea of the premium a dealer channel or dealer network. Can you help us understand exactly what is changing in the model and maybe if there are any costs associated with it, and what stage you're in in this process?
Mike, I think we heard your question about trying to understand the differences in the business model you were coming through pretty lightly. But, if I understood your question right, we'll just give you one example. We have a city in the Northeast, in the Midwest, We had 8 or 10 stores in that city. We sold those stores to the dealer in that area. We're selling through that dealer, and, we're no longer competing with them.
It's lowered everybody's cost to serve. The paint, the paint contractor has the same opportunities they had before so again, what we're trying to do is optimize our, distribution points to the, to the customer. That's really the focus of this, the strategy. I hope that was your question.
Yeah. I guess the question
I was really trying to get to is, is what stage are we at in that process of shifting, to different strategy with the dealers and other costs associated with it?
Yes, Mike, we're in, I would say, a little bit more than a year. The first, early on, it was a trial stage. We saw some real good positives with that. Now we've accelerated it. There's no real additional costs.
There is some, you know, we need to make sure when they pick up in our dealer stores that they are getting the PPP price. So, you know, there is some transfer data that has to happen, but that's electronic. And so I would not regard this as any material costs. And as Vince said earlier, typically, it's a lower cost to serve channel to support our dealers.
All right. And then, the other question I had was within the, industrial business, were there pockets within that business that were stronger or weaker, and just in terms of the trends across all four regions, it looks like volumes were down during the quarter, were were the trends stable or were the trends worsening? In industrial?
Yeah. So I would say that the trends were somewhat, moderately lower. And it really varied by region. So Europe was a little bit lighter, Asia Pacific, a little bit lighter, U. S.
Relatively the same Latin America, relatively the same. The segments that outperformed were like extrusion, electronic materials, Those kind of things were on the upper end of the curve. You know, the clear, the ones that were weak where general finishes, would and parts or transportation equipment under the end of the hood parts that typically show up in our industrial segment.
But based on our costs, it's not look, Mike. And we, I'd say, industrial activity modestly weakened throughout the quarter.
All right. Thanks very much.
Thanks, Mike.
The next question will come from Dimitri Silverstein of Buckingham Research.
Good morning, or good afternoon, I should say thank you for squeezing me in. Couple of questions, kind of regional, I guess. Vince, you talked about sort of in your expectation 2020 that you would expect China to recover a little bit from a macroeconomic perspective. Trying to understand besides the easy comps in automotive, what gives you the confidence that the Chinese economy and the continuous consumer is going to come back in 2020.
Well, we've been talking about this all year, Dimitri. The Chinese consumer is still accruing buying power. Employment right there is no different than it was 3 or 4 years ago. They've moved to more of a saving economy. I think they're feeling, they're apprehensive about the geopolitical environment.
And our expectation and our hope is that gets somewhat resolved or some of that breaks free because they are they've moved to more of a consumption model. And, they've saved for, I'd say, well, over 9 months to a year now. And, and I think that there'll be more comfortable spending next year. That's the biggest single item. Look at the service economy there, it's doing well.
So, again, I think there's still some good traits in that economy that would bode well for increased consumer spending.
Got it. Thanks. And then just to follow-up on your comments on Colmex about the growth there being on same store basis, at least in the low single digit range. It was a much faster business when you bought it. I think you grew it very nicely in the 1st few years of ownership.
You talked about some sort of political headwind and economic headwind. Looking in your, at your tea leaves, when can we or when do you expect whatever the situation there that's going on to resolve itself, or is there something that's going to drag on to, through 2020? In other words, is there a particular data point or an event that you're looking for, or is it just a matter of anniversarying whatever headwinds are being faced by that business?
So, Dimitry, I'd say there are 2 factors that we're watching closely. The first one is government spending. So with the transition to the new government run by AMLO as they call them. They are, cautious and they have not cranked out the government spending that we typically see We think that will loosen up. So that should be up year over year.
And then the other one that we're watching cautiously is major project. So a lot of the folks that have the money were nervous when, AMLO was, elected. And so they let their major projects wind down. They haven't restarted new major projects. But what's interesting is that, the, president has the highest approval ratings ever.
And so I think, I think over time, people are going to start to, loosen up and start to, go back to, restarting major projects. So Those are the two factors that we're watching. The good news is our mix continues to improve significantly and our, earnings are going to be an all time record from Mexico. And we're projecting another record year for them next year. The business feels very good about themselves.
We're moving into the major paint season. As you know, the holidays, you know, Thanksgiving through Christmas in Mexico, huge, family time And this is going to be a period of time when, we see our highest volumes in the 4th quarter.
Thanks, Richard.
The next question will come from Garik Shmois of Longbow Research.
Thank you. Thanks for squeezing me in. I just wanted to follow-up just on the dealer network, on the evolution there. Will that end up changing your end market exposure in architectural, particularly in the U. S.
Does it make you more exposed to new construction versus repaying or not really? No. No material change, Gary. Thanks. And then just lastly, just on Aerospace.
You talked about in the outlook for the fourth quarter moderating growth, but I think it's really just a function of a tough comp from a year ago. So I just want to be clear on that. And then just wondering if you could maybe provide an outlook into 2020, you know, how you view arrow just because the comp will be tough throughout the balance of next year?
Yes, we still expect, you know, clearly the comps that we've put in place this year, you know, high single digits and even in Q1, Q2 when we had low double digits, it's going to be tough to jump over, but I, you know, when I look at the new technology, we've rolled out, the new wins you've had, I'm still optimistic that they're going to have a very, very good year in aerospace.
The next question will come from Jim Sheehan of SunTrust Robinson Humphrey.
Thank you. In Packaging, you talked about some customers were trialing some things. You had some pack tests Could you give some more detail on that, were these food packages or beverage packages? And how did the tests turn out?
Well, that's mostly on the beverage side. As I'd mentioned earlier, Jim, the, the food guys are much, much further along. In these conversions. So on the, beverage side, you know, basically, we don't get pack test results for quite some period of time. Depends upon the severity of it, whether they're moving them all around the world, them to hot spots like Saudis and coal places like Norway or, you know, how extensive the changes.
So, you know, we basically have pack tests going on all the time in this business. What I would tell you is that, we fared pretty well in these things. And as these tests come in, typically that then leads to a new business.
Got it. And then in European Automotive OEM, I think that, you know, you had some, difficult comps with, with last year, due to some emissions changes, which had pulled forward demand. And you would think that might lead to an easier comp in the fourth quarter, but it looks like the IHS numbers are still not that optimistic. Is there something else or is the export demand trend from Europe offsetting the benefit you might get from change in the WLTP implementations?
Yes, Jim, I think you hit the nail right on the head. We do see fewer exports out of Europe to Asia. That's one of the drags, year over year, no difference in the Asian, sales in the indigenous and the region. So that, that's a factor obviously, the industrial activity and the lack of industrial activity in Europe is another factor.
And this concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
Thank you, Carrie. I'd like
to thank everybody on the call today for your time and interest in PPG. If you have any further questions, please contact our Investor Relations department. Concludes our third quarter earnings call.
The conference is now concluded. Thank you for attending today's presentation. You may now