PPG
#So <UNK>, let me give you a couple of things to think about here.
And I'll start with the automotive side because there seems to be a lot of concern about the automotive pieces.
You know they've reduced the tax on small engines in China and they announced that tax late in September and that took effect October 1.
And so it would not be inconceivable that people deferred purchases of small cars because you know that the tax rate was going to drop from 10% to 5% on October 1.
So we saw September sales in China were actually up about I think 3% if I remember right and in October we have a pretty good view of what's happening with our customers.
Our order book we're pretty much just in time delivery and we're seeing moderately improved deliveries to our customers.
Of course we're performing better than the industry so we are still expecting automotive sales in China to be up modestly in that 1% to 3% range.
If you look at our other businesses there was some initial destocking after the Tianjin explosion port explosion.
Most of that has worked its way through the system now because of what happened people were concerned about holding inventory for things like marine coatings, some of our refinish coatings.
All that has been moderated and we see those order books continuing to get better.
So I would tell you that starting mid-September we started to see that improvement.
And it has continued in the early part of October.
Well, <UNK>, let me clarify.
I said yet the day the acquisitions hadn't yet reflected that.
So let's be clear on that.
Secondly we've always said that acquisitions are always preferred.
They are more accretive than buying back our stock so that's always our first preference.
But we're going to protect the shareholders' value and if we don't see the acquisitions coming through then we will take that money and buy back the stock.
So we want to continue to do both and our first preference is always acquisitions.
And <UNK> I think it's it safe to assume that as we go through the fourth quarter you can expect that we will continue to deploy cash in the quarter to either one or both of those initiatives as we did 900 through the third quarter.
So we're already on pace to exceed half the midpoint by the end of this year.
So all the more reason to raise that range but we will continue to deploy cash in the quarter.
I would tell you that we're expecting continued organic growth.
Let me give you some reasons why we believe that.
First of all as you know we sold our one glass facility and that was in the end of the third quarter last year, so you'll start to see that as a positive.
Comex will then flip from an acquisition to organic growth in the fourth quarter.
We close on that in November.
We continue to see positive growth in our automotive business.
Packaging continues to do well.
Our refinish business with the water-based technology continues to grow.
That's a slower growth given the fact that it's a volume challenged market with the new technology out there.
But we're continuing to grow in that regard.
And the one area that I would say is still a question mark is where we are in the cycle is heavy-duty equipment.
It's been down.
I would expect that to at some point reach a bottom.
And then that will start to turn.
And we talked about packaging be very good as well.
So I think overall you're going to see a return to more organic growth.
And the other thing going in our favor quite honestly is the fact that inventories in the system are at very reasonable levels, whether it's the US automotive business well under 60 days at current sales rates, packaging as <UNK> said we continue to pick up new business from our technology-based offerings there.
And then in China because the recent production rates have been below recent sales rates those inventories are coming back in line in the field too.
So we don't really have to go through any more rationalization of inventories if things stay reasonably healthy in the end markets and that includes US architectural.
Yes, so we'll start first of all with the automotive business.
As you know sales have been better than builds and that's obviously a good thing going forward.
We're also seeing a pickup in a number of the countries.
Southern Europe is obviously coming off a very low base but it's getting better as well.
And then we saw a pickup in our architectural business in the Benelux.
And of course we've always seen good growth in Germany as well as the UK and although the Eastern European region has been a little choppy mostly up, that's been good.
The only one that's really down of course is Russia.
Russia continues to be down nearly 30% in a number of segments, so that economy is clearly challenged and then we have been gaining share in the protected market in Europe as well.
So that's been a positive force all along.
And then the last thing I would say is that we're building a new silica plant in Europe.
And that facility will be starting up and we have a very good demand for the new products industry leading new technology coming out of that facility.
And the one area we haven't talked about previously on the call is South America.
For us it's about 3% of our sales.
We do see challenges in South America as <UNK> alluded to in his prepared remarks.
We don't see that returning to growth certainly in the near term.
Again I'd say South America about 3% of our sales.
We've framed architectural Canada for you at about $500 million.
Those would be the two very sensitive.
If you combined Russia, Ukraine, Africa you maybe get another 2% or 3% max.
And of course the Comex business is doing extremely well and that will all translate into organic growth for 2016.
They continue to open stores at a very healthy pace, so that will also help us out in the organic growth rate.
And I guess, <UNK> this is <UNK>, the one thing I'd add at the end is France.
France is still a challenged market for us.
But at some point we do feel confident that's going to have to turn around and so I would tell you that's probably why we're more optimistic when you put all these things together.
Yes, same-store sales were modestly negative.
We've come off of I don't know seven or eight positive comps in a row including Q1 and Q2 of this year.
Most of that was Canada.
We talked about the modest paint season.
And then I would remind you that our PMC, most of our PMC in North America runs through our stores.
As you know the oil business has been certainly under a lot of pressure and so that's the way I would characterize that.
And PMC, just for everybody, is protective memory and coatings.
Slightly more because the stores were just slightly negative.
No, we've said for many, many years that architectural typically tracks closer to GDP than anything and there is a house build market and a house repaint market.
The repaint market is typically five to six times larger than the house build markets, so the repaint market is not tracked I guess in new home sales and that's the one that drives the volume at the end of the day.
We would say the paint in Canada is 80% repaint.
I think it's a little early to answer that question.
I think the way to think about it is we have major shared service facility in Europe and Asia, now with the Comex one we will be able to add additional one in Latin America.
We are starting up we've put in a new present facility in Brazil.
We have a new facility that we expanded actually in China.
So that will drive the lower cost in our automotive and industrial businesses there.
And then we are also moving more of our production in Europe from west to east, so that will add additional benefits.
So I think that's the way I would get you to frame your question.
Okay.
North American architectural I would say that we're probably going to have the same opinion we had this year which is low single-digits growth for that business.
So we're going to continue to stay there.
Automotive, it continues to be a very strong market for us.
That's been a good one.
Our refinish business in North America we're gaining share with our water-based technology.
That's a positive.
Aerospace has been moderating growth but continues ---+ we continue to get new content on the planes and with the acquisitions that we've added, that Cumings Microwave would be one.
That would be another positive.
When you move to Europe I would tell you that again I would say that it's probably going to be modest in that low single-digits range.
We continue to do well in our automotive space there.
Our packaging space continues to pick up business, so that's good for us.
When you look at some of the other businesses probably the bright spot is our protective business.
We have a new industry-leading technology on fire protection that has really done very well.
On the negative side obviously you are still going to have the challenges in Russia.
We don't see that going away moving to South America.
As <UNK> mentioned earlier, we see that probably bottoming out.
So we're not real excited about what we see down in Brazil but we are aggressively taking cost out in Brazil, so it's not going to be a negative from that kind of standpoint.
And then moving over to Asia, Southeast Asia has performed okay.
India has been really solid.
I would say they are in that 6%, so if you ask what has the highest growth in Asia right now it's India.
And we still remain because our business in China is predominantly for consumer-oriented stuff what we make in China stays in China.
It's not for the export market.
So we're optimistic that China will continue to resume its growth.
We know the Chinese government is very interested in the economy growing.
They are taking a lot of right moves to have the economy grow.
And we have benefited, that has been one of our best markets and we expect that to continue to do well going forward.
Well, the BPA non-intent win started in Europe.
They've continued into the US.
As you know or you may know California has this Proposition 65 out there.
They've not taken a firm position yet.
But our guess is that our folks in the US will be much more interested in the BPA non-intent coatings going forward so that trend will accelerate.
And as you know we only had 3% marketshare inside the can.
And so since this is a once in a generation or multi-generation for some of these things opportunity we're going to be at a higher presence inside the can than we've ever been in the past.
So that will be a positive for us overall.
Our goal on working capital obviously is to bring that down by 100 basis points a year.
We've seen a little bit of slow pay recently but we'll get that back down by the end of the year and we do have some relatively aggressive inventory goals for the teams.
We're making great progress on that.
But that would be our overall goal is to keep bringing that down by about 100 basis points and probably the largest opportunity in inventory followed by people working on the receivables.
Payables are in pretty decent shape.
I was just going to add one more thing to what <UNK> was saying on the growth prospects for 2016.
Remember a lot of the acquisitions that we have done this year, that $400 million worth of cash deployed acquisitions, the revenue associated with that is only a small portion of what the full-year impact is or will be for 2016.
So between $400 million and $500 million of revenue associated with acquisitions excluding the base Comex business.
That's over and above the base Comex business will hit in full stride next year.
And you can make any estimates you'd like in terms of the profitability of those businesses but that's also going to be accretive to our top line along with the EBITDA that goes with that.
On a month-by-month basis I would tell you that we started to see the destocking start in August and by the middle to the end of September it was over.
So that's the way I would think about that.
Actually in the dedicated paint stores it was pretty I would say consistent through the quarter, although near the end of September our comps were marginally better than what they were early in the quarter.
And then they have started to be in October as I mentioned virtually identical to what we had in 4Q of last year.
No, it's low single digits positive.
<UNK>, I would tell you that we're going to continue to work with our suppliers and pull through the savings and so I would say it's going to be modest.
Our goal here is to continue to pull those through.
We still see weakness in the TiO2 market.
We still think it's oversupplied.
And then clearly we haven't talked about Henan Billions yet.
Surprisingly we've made it 55 minutes in the call and not one question about it.
So I'll go ahead since everybody's interested and tell you that the first set of samples we got from them the particle size was too large.
The second set of samples we got from them were too small, so now they are dialing it in.
We expect to be buying the commercial quantities of TiO2 from Henan Billions sometime late in the fourth quarter.
So overall I would tell you we're still feeling like there's more savings to come.
Plus as you know we will have incremental restructuring savings in predominantly Europe but also Brazil and Australia from our restructuring program.
That incrementally throughout the year will add up to about $60 million to $75 million.
Obviously it accelerates as it goes throughout the year of 2016.
But that will be another positive.
Yes commercial construction is obviously more important to our glass business than it is to our coatings business.
Commercial construction has been steady and getting slightly better but the challenge there is actually the fabricators who make the fabricated glass window units are I would call them full.
Their backlog on fabricated units continues to be six, eight, 10 weeks so that's been a challenge for the market.
I would tell you that our glass business as you can see has done pretty well.
We've gotten price.
We've already had two price increases in that business this year, so that's been a positive.
And we continue to expect improvement again next year.
Architectural coatings were flat in Europe and of course that varied, so up in the UK, up in the Benelux, down in France.
Mostly up in Eastern Europe but not every Eastern European country was up.
So net-net flat because France is our largest architectural coatings market.
As <UNK> said the pace of share repurchase obviously depends upon not only the pipeline of M&A but also the timing at which you deploy and close the deals.
I guess what we're saying is that we're confident enough in the cash-generating capability of the business that we're very comfortable upping the midpoint of that range so that we're now at $2 billion to $2.5 billion, and the fact that we've already exceeded the pace of the prior range by the end of the third quarter and expect to continue to deploy cash in the fourth quarter.
But as we look out in 2016 we've got a good pipeline of M&A, so chances are we'll be doing more deals next year and be supplementing it with share repurchases because we're starting out the year where we ended the third quarter with $1.4 billion of cash.
Q4 is generally a good quarter for cash generation, so we have the confidence that we'll continue to deploy and earn value for the shareholders and we'll just continue that into next year and see where it goes.
But we could do more share repurchase.
Our preference is to do M&A, that will be the first priority.
But you'll see both of that as we go through the fourth quarter and more primarily M&A in the 2016 timeframe.
<UNK>, I do believe that's going to happen.
We closed LJF on October 1.
We have four acquisitions that basically closed in the third quarter, plus we'll have Comex that flips into the organic side.
So I think that's all positive.
Well the sales to the customer declined in June, July, August and then turned back positive in September.
They were 3%.
Builds inventories were coming down in that same period.
Right now inventory is basically at the same level it was last year, so they're in very good shape from that standpoint.
We think they're a little bit over 40 days which is typical for them.
And then right now as I mentioned earlier on the call the October sales are trending up.
We basically supply in real time.
We get orders let's call them 28 days in advance of what I'd call a pre-look and then they are firmed up 14 days in advance.
So right now we have a pretty good feel for how October is going to turn out.
And I think overall we would tell you that it should be marginally up.
No, <UNK>, we're very closely aligned because they did take inventory down.
Had they not taken inventory down I think you would see that lag effect but the industry took inventory down commensurate with the sales decline in real time.
Well as we said we expected modest benefit with the benefit to grow throughout the year.
We are seeing that in our numbers.
As we said in the past the benefit is muted in non-US region simply because oil is traded in dollars around the world.
So when you go to Europe or you go to some of these emerging markets the currency deltas have eaten into most of the raw material impacts.
So again we're pulling this through our value chain.
We feel we're doing a good job at it.
We do have another quarter here to go and we're certainly talking to our suppliers on a daily basis.
So as <UNK> is saying here as you see the raw material benefits come through the pace of that may not change significantly going from Q3 to Q4 to Q1 but it will be more evident to the bottom line because there will not be so much offset from the currency headwind as that mitigates starting in Q4 versus what we've seen at very high levels recently.
The other thing that we would mention though is that where you see a bit of a headwind on raw materials because of the exchange rate in places like Brazil or really a small percentage of our revenue in Canada because the exchange does cause some of those US dollar-based inputs to be a little bit higher.
<UNK> I really don't want to get into parsing each of the different businesses because we roll out new products and we have older products.
What we've been consistent in saying is that the pricing environment is flat and we expect that to continue.
Correct.
I want to just once again thank everybody for their time and interest in PPG.
Both Scott Minder and myself will be available to take questions after the call.
Thank you.
