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. [Operator Instructions] 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 McGarry, 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 16, 2020. I will remind everyone that we have posted detailed commentary and presentation slides on the investor center of our website ppg.com.

The slides are also available on the webcast site for this call and provide additional support to the 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 from Vince, we will move to a Q&A session.

Both the prepared commentary and discussion during this call may contain forward-looking statements, reflecting the company's current view of future events and their potential effect on PPG's operating and financial performance. These statements involve uncertainties and 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 slides, which are available on our website, reconciliations to these 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's, Chairman and CEO, Michael McGarry..

Thank you, John, and good afternoon everyone. We appreciate you joining us on our call. Today, we reported fourth 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 fourth 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 rewarding our shareholders, including the 48th year of annual per share dividend increases.

We continue to invest about 3% of our sales in research and development and progress the commercialization of new products and technologies allowing us to deliver above market growth in several of our businesses. We will continue to communicate our progress on these initiatives and in new key products for 2020.

More tactically, we begin 2020 continuing to benefit our aggressive and decisive operational management, including achievement of our self-help commitments from our cost savings program as we delivered by 85 million for the full year higher than previously committed target.

In addition, we delivered record cash from operations in 2019 of about 2.1 billion including further reductions in 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 industrial customers in all major regions.

I also want to thank the dedicated PPG 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 $3.7 billion, up 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 fourth quarter. This is our second consecutive quarter of adjusted earnings per share growth of more than 10% with EPS up 14% this quarter and 15% in the prior quarter.

For the quarter, our segment margins improved about 160 basis points versus last year and are up 120 basis points for the full-year despite broad contraction in the global manufacturing 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 and 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 communicated earlier today..

Thank you, Michael. Again, just to renew the fourth quarter results, our net sales as Michael mentioned were about $3.7 billion, up about 1% year-over-year. That consisted of sales volumes, which were down 3%, reflecting the weakened global industrial production environment that Michael mentioned.

This include 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 seventh consecutive quarter with selling prices of about 2%.

We have announced additional selling price increases in 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, our Performance Coatings reporting segment, Aerospace coatings continued to deliver very strong volume growth, outpacing industry performance in both the U.S. and Asia regions. This caps off what has been a truly excellent year for this business, which well outperformed strong industry gains.

This reflected increased customer demand for our specific technologies. Automotive refinish organic sales were higher with solid growth in the U.S. 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 first year and we are now commercializing various keys SEM products in certain international markets providing us with further growth opportunities.

The soft trading conditions in Europe impacted our architectural coatings, the 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 Comex business increased organic sales aided by improved selling prices. Sales volumes improved sequentially versus the prior quarter, but remained 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 4,800 concessionaire locations. Organic sales volumes in architectural 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 marine coatings 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 eleventh 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. As we look at individual business units, PPG’s automotive OEM sales volumes were lower by mid-single digit percentage, consistent with the industry rate.

Our automotive OEM business continued to realized 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 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 fourth quarter adjusted earnings per share was $1.31, our adjusted effective tax rate was about 24% 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 in cost, and excellent progress on cost savings programs as we delivered more than $20 million against these cost savings programs during the quarter, slightly ahead of our targets.

The acquisitions we made over the over the past 12 months also contributed positively the earnings in the quarter. We recently added the acquisition of Texstars, a manufacturing of higher performance transparencies and wing tip lenses for aerospace and defense vehicles.

We also recently announced the acquisition of ICR, a manufacturer of automotive refinished products. Now, I’ll quickly comment on our full-year results from continuing operations. Our full-year sales were $15.1 billion. 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 and earnings was driven by our strong operating discipline and generated higher segment operating margins each quarter this year.

Specifically, our industrial coatings segment achieved 5% earnings growth despite sales being up $175 million 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 aggregate annualized revenue of about $500 million of which $100 million is in Asia Pacific. We realized just over $300 million of acquisition sales in 2019 and expect the remainder to occur in 2020.

In addition to acquisitions, we repurchased $325 million of PPG stock during the year of which $150 million was completed in the fourth quarter. Before I turn it over the Michael, I’m going to review some of our 2020 financial guidance. Let me briefly cover some of our current economic expectations regionally.

We anticipate overall positive economic growth to continue in the U.S. and Canada as levels generally similar to 2019. This is being aided by accommodative interest rates that remain supportive of the construction markets and also stability in the regional auto market.

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 later 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 varied by country.

We expect the potential for greater volatility and automotive builds 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. These are included on Slide 11 and 12.

As we included on our earnings press release issued earlier today, we expect full-year 2020 sales growth in local currencies of 1% to 3%. This includes the acquisitions I discussed earlier. We also expect full-year 2020 EPS growth of 4% to 9%, excluding the impact of foreign currency translation.

We fully acknowledge the earnings guidance range is wide and this is primarily due to the current high level of uncertainty as the year begins. Imbedded 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 has tilted lower.

Additionally, despite the lethargic economic backdrop, our raw material costs have remained stubbornly high relative to overall supply and demand in 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 U.S.

MCA trade agreement over the benefit of reduced uncertainty regarding Brexit. It is certainly too early for us to access what impact, if any, these noteworthy regional items will have.

Also, given all the self-help actions 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 general items I just mentioned, following our PPG’s specific assumptions.

First is a carryover impact from acquisitions that we completed during 2019 and the full-year impact of the recently announced ICR acquisition we expect about 170 million in sales from the acquisitions in year 2020. These acquisitions will typically deliver at or below segment margins as we work to fully integrate their operations in the PPG.

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 are still completing our 2018 and 2019 restructuring programs. We anticipate these programs will deliver an incremental 75 million in combined savings in 2020.

We expect our annual corporate cost to increase, including general inflation and we expect the increase to this general inflation and higher management incentive comp as we accrue at 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 based 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 large aerospace customers announced production curtailment. We continue to manage our capital expenditures based on the basis to current economic climate and a budget of our spending to be [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 material 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 were optimistic that the global economy will grow in 2020.

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 maintain prior to this recent inflationary cycle, which we believe this is achievable in the back half of 2020.

We’re expecting that better visibility on demand trends by the end of the first quarter and we will adjust our guidance as necessary. Strategically, we will continue to pursue organic and inorganic growth opportunities. We have a strong track record of creating shareholder value and 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 growing our balance sheet, but we will remain disciplined in deploying this resource.

Finally, while our guidance is reflected by uncertainty of when the industrial demands will improve, I am confident and our 2019 results solidified that PPG remains well positioned strategically and financially to deliver increased value to our shareholders and worldwide customers supported by our outstanding team differentiated industry expertise, broad foot print and product innovation engine.

In conclusion, I want to 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 of PPG and now Chad would you please open the line for questions..

Thank you. [Operator Instructions] The first question will be from Christopher Parkinson with Credit Suisse. Please go ahead..

Thank you.

Just real quick on the price cost, can you comment on your just any broad expectations for the resin basket, and anything on TiO2 just – and on the former and 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, obviously there is one supplier out there that's cutting rates. The rest of the guys are out there supplying. At this point in the cycle, you need to expect to see lower prices.

It's been 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.

I would tell you that I'm 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 fluctuation volatility right now with the world. So, it's hard to pin that number down right now. China is moderating production rates and varied by province.

And so, it's not always easy to predict when they will have a blue-sky day, but they do periodically do ask for people to moderate their production in order to help facilitate the environment over there..

Great and just a quick follow-up on aero. Just given the customer production disruption and noise in the growth rate, can you just break down just, you know commercial any private exposure versus military in particular? And then also just anything to add on recent acquisition performance and services? Thank you..

So, we have a very broad aerospace business. We're into the transparencies, adhesives and sealants and coatings and now with the acquisition of Dexmet lightning protection.

So, we don't have any one customer that dominates our sales, but the recent customer announcement is impactful and that 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 digits, I said it was earlier in the year.

But I would tell you that we're really pleased with aerospace business, they had a record year. And I anticipate them having another record year in 2020..

Thank you..

The next question will come from Bob Koort with Goldman – I'm sorry, it's Ghansham Panjabi with Robert W. Baird. Please go ahead..

Yes, thank you. Hi, everyone.

I guess, first off, the comment that industrial activity in China began to stabilize in your fourth quarter, can you just give us more context on that, which 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. We saw some benefits in the appliances. Of course, it was less negative in automotive. It's potentially a possibility that there was a pull forward for Chinese New Year, given it's much earlier this year and it's really too early to tell that.

Right now, we did see November was better than October and December was better than November. So, that's a good question to come back to us in March after we return from the 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 obviously demand in 4Q 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..

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 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..

Yes, this is Vince. Two other elements there. One, we are doing targeted pricing across the portfolio in 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..

Yes. Thank you so much Michael and Vince..

Thank you..

Thanks..

The next question will be from Bob Koort with Goldman Sachs. Please go ahead..

Thank you.

I was wondering, you guys talked about 6% volume erosion in industrial in the fourth quarter, is there any element of that that can be destocking or is there any hope that maybe if you go through 2020 you could get a little restocking or is that not really an element of your product lines?.

Yes, Bob, we do know similar to PPG, people who are working down their inventory levels as we ended the year really reflection of the tepid environment out there. We do believe our customers are holding low [end] [ph] stock of their products.

So, if there is a pickup or recovery, we do feel there'll be at least a modest inventory rebuild, but those will be the two elements that we're aware of..

And Vince, you guys gave some specific quantitative guidance for next year, which is, – which is helpful. I guess when I triangulate when you talked about acquisitions and then the carry through the price efforts you made in 2019, it suggests no real volume growth. I think, Michael, you asserted that you've got confidence that the economy will grow.

So, can you help me understand that disconnect?.

I think the big disconnect right now Bob is, two 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 is a significant demand for new planes. They're not being met right now.

So, hopefully over time that will get back on track. And we do know that the military side of aerospace is going to continue to be pretty strong..

Got it. Thanks for the help..

Thanks, Bob..

Thanks, Bob..

The next question comes from David Begleiter with Deutsche Bank. Please go ahead..

Thank you.

Michael, looking at the M&A pipeline, does the fact we bought back shares in Q4, signal any change in the M&A pipeline or your expectations in that area?.

David, no change. We have 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 that we're not going to let that cash sit on the balance sheet. So, we took some of that cash off the sidelines and bought back stock.

We can 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 into 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 monobloc aerosol vent and tubes. So, think about deodorants and various other odd ball sides cans. So, we're bigger in that segment than beverage.

We did have positive growth in beverage, but beverage is growing at a much faster rate than the other segments. So, it was more of a mix, but that's the fact..

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 the performance and industrial that would be appreciated..

So, the most up obviously would be aerospace and PMC, those businesses will have another fantastic year in 2020. Probably the one that will 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..

Hi, guys.

You had good earnings growth in the fourth quarter, and it 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 is going to be better driven, it sounds like the sales levels will be about the same fourth quarter than in the first?.

Yes, part of the difference is just comparisons as you know, we have strong pricing throughout 2019 on a year-over-year basis. We're still going to get some price in Q1, but not the same year-over-year level, as we did in the fourth quarter or prior quarters in 2019.

Q4 for Comex is their largest quarter, typically seasonally, but we're not going to see that same effect in Q1. We talked about Aerospace already. We had strong volumes in Q4 in aerospace. We know that's going to be tempered.

In Asia, Q4 is the automotive market peak in China, even though the volumes were down, overall production is up sequentially, Q3 and Q4 that drops back down, as we will have as much fixed cost coverage in Q1. So, if you're trying to compare the quarters, I would pull forward of those big elements..

Got it.

And then, you should have good leverage to better demand, obviously, but is there a way to think about, if the trade deal is a positive and then going forward, what the upside or where we would see maybe stronger results in PPG if things get better this year?.

I'll start with it and Mike will finish. I think broadly, we'll see it in our global industrial segment. That's the one that we think has been most impacted by the delays in the agreements. Again, as I mentioned just a few minutes ago, inventory levels, we think and end product inventory levels for our customers in those segments are very low.

So, you could see a production pick up in a halo of inventory build..

Yes. And the other thing I'd say is that incrementally, not just Europe, 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 we see any pickup $0.30 on the dollar is going to befall into bottom line..

Great, thank you..

The next question will be from P.J. Juvekar of Citi. Please go ahead..

Yes, hi, good afternoon..

Hi, P.J..

I am a little confused about China automotive comment. You mentioned that auto production was up in 4Q year-over-year, but should be down 10% in 1Q. So, can you just flush that out and talk about things like what are the dealer inventories in China or what are pricing discounts on autos in China? Thank you..

Yes, P.J., as we mentioned auto production was up in Q4, that was a mistake on our behalf. I think, we intended to say auto production was down, but not as much as it was in prior quarters. So, it's still down in Q4. We expect it to be down again low double-digits in Q1. We do feel that inventory is generally are in check in China.

So, they've been matching inventory with lower sales. So, sales do pick up that should be a 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, in particular your architectural business? And in your experience in terms of past cycles when the rates go down, how long before you begin to see some positive impact on your business? Thank you..

Yes, P.J., I would say that right now, rates are down, but they've been down for a while and we're expecting another 2% to 3% kind of growth year for architectural U.S. I don't expect to see anything significant. Our trade customers have a significant backlog.

I still expect to see, trade to be better than DIY, the do-it-for-me trend is going to 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 comments regarding the active pipeline on M&A and the fact that you didn't want to let cash build up on the balance sheet, which is why you reentered into the buyback markets.

The prior few years certainly, you had been doing more on the buyback front, this past year 2019, you did double on the M&A front.

Is that – is your expectation as we look at 2020 that that PPG will be kind of in that same order of magnitude, where M&A will be double of what buybacks are or how should we think about the interplay between those two uses of cash?.

Well, Frank, I think if you look back the last three or four years, we've consistently done about four or five acquisitions a year. I would be disappointed if we don't do four or five this year. We've already announced ICR. We have a very active acquisition review committee in the company. It is a matter of timing.

We are working generally with the private owners. They can be temperamental sometimes to get to the finish line, but I'm still optimistic that we'll do more acquisitions in 2020 than we'll do share buybacks..

Yes, Frank and that's really, and 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 were able to capture synergies and easily cover our cost of capital, but if those acquisitions don't materialize, as Michael mentioned, we fully intend not to let cash grow in the balance sheet..

That's a very fair point, the Whitford deal was a very good deal in hindsight as well.

And just turning back to the interplay between price and raws and the fact that you've got a cost cut program that you're continuing to execute on, you were 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 first part of the year, we're going to continue to be volume challenge as we denoted earlier. That will certainly affect our ability to grow margins in our Industrial segment. We do expect Performance to continue to perform well on a relative basis, Frank..

Thank you..

And our next question will come from Kevin Hocevar with Northcoast Research. Please go ahead..

Hi, 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, wanted to 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 have some other actions out there, now, so how much is from those and how much is from any future price increases you might do throughout the year?.

Yes, Kevin, I'll remind you that we gathered most of our price gains in 2019 at the beginning of 2019 in the first quarter, both in 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 guidance..

Okay, got you.

And can you comment too, sticking with pricing, how the competitive response has been to the pricing action you have out there? Competitors followed suit 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 Coatings side, there is more – there is 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. Good afternoon. Sorry about that. Yes, so I was just curious, couple of years ago there was a chance to or it's or a statement that you'll 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 been disappointing just given the macro backdrop, but maybe you can just catch us up on the cost reduction side. What do you see in the future, I guess, as far as cadence and what can we kind of model through our estimates for cost reductions from here? Thanks..

Well, we achieved $85 million in lower costs in 2019. And I think John mentioned that we were going to do $80 million in 2020 and I would say that we're always looking to be better year-over-year. There is no additional program we're out there thinking about right now, but we do want to be in a continuous improvement mode.

So, you should expect us to continue to push our cost 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 has been any kind of push back just given that raw materials are likely potentially a little bit deflationary in Q4 and then maybe even the next couple of quarters, how are you fighting those conversations with the customers? Thanks..

Our customers are very sophisticated, generally, they look at it over a cycle not over a single point in time and they can tell by looking at our margins, that we have 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 factor in. So, the discussions are constructive..

And just lastly, just talking about the M&A pipeline, could you discuss maybe some of the verticals that you're looking at? You have done [dura coat] in the past in some areas, ancillary to core coatings, is that still an area of interest for you, maybe in adhesives or anything like that or what are your areas of focus for M&A? Thanks..

Well, we always say that we're looking at all acquisitions in our space. So, we are big in adhesives and sealants, but we won't do a commodity one in that space. We only do specialty ones. If you look at aerospace, we do want to continue to grow our presence in that segment.

And then the traditional core coatings segments, we're going to continue to look in. So, we're not going to 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 U.S. architectural. Michael, you had another quarter of growth in your dealer network, which certainly versus a long trend of declines.

Is this your new strategy helping out with your premium dealer network? Or is it just because you had some easy comps? And then on your company stores, do you think you can get further price increases in 2020?.

I will take the latter one first. So, 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 significant push for our premier authorized dealer network and it's way too early to talk about success in that name, but we do think the program makes a lot of sense, where we work jointly 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 third quarter and 2% in the fourth quarter.

So, is it fair to say that maybe they'll be up 1.4, or 1.5 in the first quarter, is that the progression?.

Yes, Jeff, this is Vince. A little more precision than we typically guide to, again I would say 2019 was on the heels of very modest pricing in 2018. We did have very strong pricing, if you recall in the first quarter of 2019. So, the comparable is much more difficult, but I wouldn't give specific guidance.

We do expect a positive number, but again nothing specific..

Okay.

And your tax rate expectation for the year is between 22% and 24%, but I think for the first quarter it's between 22% and 23%, does that mean that your base case is 22% to 23%, or is there something unusual about the first quarter tax rate?.

We are expecting a true-up of one of our major geographies in the first quarter, which is why we signaled that to be lower. That's an ongoing number, but it's a true-up of a discrete 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 cash flow conversion off of EBITDA in 2020?.

Yes, you must be listening to our internal management meetings. We target every year half to a full turn 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 do have a very good receivable conversion rate, but there is 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 as quickly on the refinish inventory levels in the EU, are we at the point where you've kind of lapped that issue and we shouldn't see it as much in 2020? Or is there another quarter or so left of that?.

That's always hard to tell because it's two-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..

Yes, thanks for taking my question. So, when we look back at 2019, oil prices were down $10 a barrel, 14%, 15% and yet 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 material is moving? If so then when should we start to see any relief because it still looks like other than the pricing that you've been able to put through, you really haven't seen anything on the actual raw material relief side..

Well, crude does impact 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 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 echoing on what Michael said earlier, we feel our suppliers – our supply demand is well supplied. And it's just been stubborn in terms of passing down the food chain here..

Okay, fair enough. And then, Vince, just a housekeeping question, it looks like your interest expense guide for 2020 is up 10% to as much as 25%.

I guess, what's driving that?.

Yes, a couple of things. One, we did have good cash in the back half of this year. So, we were able to retire some debt in the fourth quarter. We will typically be borrowing money in the first quarter as we build inventory for the season.

So, there is 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..

Hi, this is Duffy for Sean.

Can you walk through what your market, so 2019 architectural, what do you think the markets grew in Europe, North America, and Mexico?.

Okay. The U.S., we think it grew between 2% and 3%. In Europe, we think it declined in the 1% kind of range, and in Mexico, the volume was probably down 1% net organic growth positive because of price increases, and the same thing in Europe we had price increases that offset the 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 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 maximum pain happen? I mean, obviously there's probably a lead lag as you go through, and it's slowly kind of working its way through, when does the brunt of that issue start impacting your P&L?.

So, Duffy, maybe, I'll tell you what it is not, some people have said it's 1%, that's not even remotely close.

So, if you want to factor up and down off a 0.5%, somewhere in that area code, but it is a really complicated question, because as you know we supply transparencies, sealants and adhesives, as well as coatings and some of those things we are a Tier 1 suppliers, some of them were Tier 2 supplier.

And some of the suppliers were running faster than the customer stated line rate and some were matching it. So, we're trying to figure out what the inventory in the chain is, and then it will be more complicated by the fact that the airlines are going to be running their planes a little harder.

So, that will lead to some additional MRO opportunities for us, but then they have to find the time to do the MRO. So, it's not a straightforward answer. And so that's why it's – we've given a larger than normal for our guidance..

Great. Thank you, guys..

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 I'd be curious to hear your initial thoughts as to what effect it might have in losing up some of the supply chains, where you had encountered a fair amount of friction over the past year or two, any thoughts on end use markets product lines that could benefit?.

So, the one that I am optimistic on is Mexico. I think the government is going to start to turn loose 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 going to be a positive for us, for our PPG-Comex business.

And then obviously, we're looking forward to the farmers having more money in their pockets as a positive, but that I think that's a long-term putt..

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 maybe you can talk about some of the swing factors or chunkier projects that you are considering for this year?.

Yes, first of all for 2019 our cap spending matched almost exactly our 2018 number. We did start some larger projects in 2019 and given the economy, we kept those projects running, but we feel back off of some smaller projects.

We're still expecting, Kevin, for 2020 in 2.5% to 3% of sales as our CapEx bogey, we're going to obviously topple that based on the economic environment..

Okay. So, it 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, they are meant to help homeowners and property managers identify contractors 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 has it affected the driving volume to your dealership’s relationships even in areas where you don't have stores?.

Yes, so Steve, I would say this is still in [indiscernible] 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 these are small business people a little bit slow to change, but they all recognize the need to do that, and so we're working with them on trying to help them understand how they can improve their own businesses by moving to more digital apps, but I would say it's still in the first couple of innings..

Alright.

And maybe this one is also in the first couple of innings, or do you have this this this retail refinish, pardon me, mixing technology that you acquired in Europe? Can you provide an update on how that's rolling out whether you can bring that across the pond and whether you could drive market share gains with that?.

Yes, so Steve that was something we developed ourselves, it's a trademark Moonwalk, it's an automated mixing system for the refinish market that allows the painter basically to scan the paint of the car, stick the chip basically into a machine and it premixes the paint, so that way the painter can be way more productive.

We've already sold 100 of these machines in Europe. The interest level is very high. We've got a tremendous amount of recognition. Obviously, we're starting with our own paint shops first, and then we'll be pushing it out into a competitive environment, so that we can start to gain share.

We do have people outside of Europe that are also asking about it, because of the significant press we 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..

Thank you..

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 what happened in the last go around for Euro VI.

Is there a single date in which that occurs? Or is it or is it going to be phased in?.

I'd say it's way too early to call. There is so much challenge in Europe with the emissions, that we'll just sit back and wait. So, no real insight..

Okay. And then on your pricing versus raw materials, I think maybe your general industrial business is the business that's furthest behind in terms of inflation, is that correct.

And if so when would you expect that business to fully catch up to raw materials, if there is no macro acceleration?.

Well, we said it would be in the back half of the year, we obviously need a little volume to help drive that, but I would tell you that, we've made significant progress in all three of those businesses, whether it's packaging, industrial, automotive. They've all made significant improvement so far..

And that's Jim, an addition, that's really, we're focusing a lot of our self-help activities as well. 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 how the emission packages were impacted..

Much obliged..

The next question will come from Kevin Estok with Jefferies. Please go ahead..

This is Dan Russo, actually on for Laurence.

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?.

Yes. We have a guidance range for a reason. We do, we don't see any pickup in activity basis, our internal expectations we 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..

Okay. Thank you very much..

Thanks Dan..

And the next question will come from Mike Harrison with Seaport Global Securities..

Hi, good afternoon. Wanted to ask you about SG&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&A front? Is there a reason that we're not seeing better fall through from restructuring actions at the SG&A line? Was there a change in incentive comp? Or what's going on there?.

Two main items, Mike. One, as we brought these acquisitions in, they're typically coming in at a much higher SG&A baseload. And we'll work that down over time that’s 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 and incentive perspective.

Those were the two 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 struggled to gain traction in that market?.

I'll start, I'll let Michael finish. I think we referred to Mike in China was our protective and marine market, not necessarily architectural. We do see even though China is down in terms of industrial activity, we do see a tremendous amount of infrastructure under way there. We're participating in that.

We think we're winning more than our fair share of the business. Marine is also up slightly in China. So, those were the two items I think we earmarked not necessarily architectural.

Michael, if you want to add?.

Yes, the only thing I would add is, our marine business is winning in the shipyards that are winning business in China. And China is winning more business than Korea and we're better positioned in China than we are in Korea. So, we're in the places that are growing..

Yes, I guess I'm looking at Slide 5 in the....

Mike, Mike. I'm sorry, Mike, this is John. Yes, I see what you're looking at. So, just as a reminder everybody, we do have architectural business in China. It's a small business, and it's in part of China as a regional business within China and it's performed well. So, I just would remind 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 been 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 would like to thank everyone for their time and interest in PPG. If you have any further questions please contact me. This concludes our fourth quarter earnings call..

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..