Good morning. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the PPG Industries’ Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the conference over to John Bruno, Director of Investor Relations. Please go ahead.

Thank you, Michelle and good morning everyone. Once again, this is John Bruno. We appreciate your continued interest in PPG and welcome you to our third quarter 2020 financial results conference call. Joining me on the call from PPG are Michael McGarry, Chairman and Chief Executive Officer and Vince Morales, Senior Vice President and Chief Financial Officer. Our comments relate to the financial information released after U.S. equity markets closed on Monday, October 19, 2020. We have posted detailed commentary and accompanying presentation slides on the Investor Center of our website, ppg.com. The slides are also available on the webcast site for this call and provide additional support to the brief opening comments Michael will make shortly. Following management’s perspective on the company’s results for the quarter, we will move to a Q&A session. Both 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 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 morning everyone. I would like to welcome everyone to our third quarter 2020 earnings call. Most importantly, I hope you and your loved ones are remaining safe and healthy. Throughout the pandemic, we have focused on our purpose of protecting and beautifying the world. First and foremost, this is meant to protect our employees, our communities and our customers. This remains our highest priority. Now, let me provide some comments to supplement the detailed third quarter of 2020 financial results we released last evening. For the third quarter, our net sales were about $3.7 billion and our adjusted earnings per diluted share from continuing operations were a record $1.93. Our strong operating results were led by improved sales volumes when compared sequentially versus our second quarter results. The global architectural coatings business performed exceptionally well led by double-digit organic growth in our European business. In addition, our global positioning and advanced product technologies drove significant improvement in quarter-over-quarter sales volumes in our automotive OEM and industrial coatings businesses. We coupled these sales volumes improvements with strong cost management and delivered segment margins that were about 300 basis points higher than the prior year third quarter or more than 18% in aggregate. This clearly demonstrates the strong operating leverage we have on incremental volumes and attribute to the structural cost savings we have achieved in the past 2 years. The higher margins were achieved with about 30% of our businesses still facing significant demand headwinds, most notably in the automotive refinish and aerospace coatings businesses. During the third quarter, our sales recovery continue to robustly advance in China, where volumes grew a low-teen percentage compared to the prior year third quarter. This was driven by above market performance in several of our businesses, including automotive OEM,…

Yes. [Operator Instructions] Your first question comes from Bob Koort from Goldman Sachs. Your line is open.

Good morning. This is Tom Glinski on for Bob. So first question, just how would you frame the low end of your 4Q ‘20 EPS range? Does this take in another round of lockdowns and then how do you get to the top end of your range? Thank you.

Well, I would tell you that we are not assuming any significant lockdowns. We are watching it closely. Clearly, the one area that is most important to us would be France as our architectural business there is number one and it’s one of our largest businesses in Europe. But I would tell you that right now we have a pretty balanced view of that.

Got it. Thank you. And then just as a follow-up, how are you thinking about the price in raws formula going into next year? I know you’re calling for a sequential increase in raw material costs, but how long do you expect raws to remain – moderated on a year-over-year basis? And then secondly on the price side, on the second quarter 2019 call, you called out that you hadn’t yet caught up on the most recent round of raw material inflation from 2016 to 2018. So, could this help buffer your pricing power, especially on the industrial side going into next year? Thank you.

Well, we have had multiple quarters of 2% plus price increases. We anticipate continuing to be successful in raising price on performance coating side. We expect price to be relatively flat in our industrial side, although with all the new products that we are rolling out, they will come with improved margins. So, I think you will need to be paying attention to that. Raw materials sequentially will be modestly higher, you have to look a little bit at oil, you have to look a little bit of propylene you have the force majeures that come through the hurricanes. So we are paying attention to all that. Right now, we are anticipating just moderate, very slight moderate sequential inflation on raw materials.

Great. Thank you.

And your next question will come from John McNulty, BMO. Your line is open.

Yes, thanks for taking my question. Congratulations. So, I guess can you give us a little bit of color around the temporary cost cuts versus the restructuring ones and in particular how to think about the cadence of each one flowing through 4Q and into 2021?

Well, John, I would say some of the temporary cost cuts that we are going to make permanent are think about travel and expense. We are learning how to deal with that on a regular basis. So, that’s internal and external costs. Think about digital experiences, so we are trying to convert more things digitally, so that over time will continue to drive more structural cost savings. When you think about the restructuring cost savings, those are more people related as we get more productivity initiatives completed and we have closed a few plants that will turn into permanent cost savings as well. So, I feel good about the pace that we are doing, I think we are meeting or exceeding all our internal targets in that respect, John.

And John, I think we gave out in our guidance $30 million to $35 million of structural or restructuring-related cost improvements in Q4, so that sizes that element for you.

Got it. That’s helpful. And then, I guess, just as a follow-up question. So your cash flows are coming in pretty solidly and normally as you get kind of into the back half of the year, at least historically if the M&A hasn’t really caught on we tend to see more buybacks and we didn’t really see that this time around. So, I guess, I’m curious, is that a reflection of just what you see as a chunkier kind of M&A pipeline at this point and maybe if you can give a little bit of color as to the types of things that you might be looking at?

Yes, John, we’re obviously not going to get into what we are looking at. But the act – we have a very active pipeline. You probably saw somebody make an announcement in Europe, that’s a sign of things loosening up. I anticipate there’ll be further announcements in the fourth quarter and obviously more in the first quarter, second quarter. So, we’re anticipating that the pipeline because of its activity that we are going to continue to look for that to be in our number one priority, just like it always has been.

Maybe just John one comment, I think it’s important given our global breadth, our participation in all the end markets, we typically have at least similar, if not more synergies in most of our competitors as we look at these deals. So, going forward with the pipeline, Michael talked about robust pipeline, hopefully, we can participate assuming these are at the right price for our shareholders.

Got it. Thanks very much for the color guys.

And your next question will come from Ghansham Panjabi from Baird. Your line is open.

Hey, guys. Good morning.

Good morning.

So, Michael, on the 30% of the portfolio that you referenced that includes commercial aerospace, auto refinish, etcetera, how did the volumes sort of shakeout in 3Q in aggregate for that 30%, how do you see that rebound building off of 3Q levels going forward? And then on the other 70%, should we anticipate moderation in volumes for any sub-segments as we cycle into 2021?

Well, I think we gave pretty clear guidance that aerospace is down 35% and I anticipate a similar kind of number in 4Q. But what’s happening in aerospace right now is they are destocking as fast as they can. So, assuming they get to a new level at say the end of the year, what you should have is a double catalyst going forward, not only as improving demand, but also restocking back to more appropriate levels. So, what I see right now from talking to a number of people is, COVID fatigue, right. So, people – I anticipate people are going to be traveling at the holidays. And so on the back half of the quarter we are going to start to see our MRO activity starting to pick up. Now, they may not buy anything in the fourth quarter but I anticipate that they will re-look at their inventory levels and they re-look at how they are thinking about that in first half of next year. So, I’m not as pessimistic as some of the folks are out there on aerospace, you get a vaccine, I think there is a pent-up demand. We had the highest TSA flow-through of people last week and I anticipate a gradual recovery until there is a vaccine. Now, refinish, I think what you saw, our China business is doing very well, better than prior. So, people are back in the office, and people are working. We saw the same thing in Europe as people start to return to the office, the congestion level starting to get back. Right now, they’re blooming again with COVID, so we anticipate and we have factored into our guidance a slight amount of moderation in our refinish volumes. But then as we get a better handle on this, we anticipate refinish volumes will continue, plus we have a very good light industrial coatings business within refinish, we have our SEM acquisition in there. So, we are benefiting by our good mix within refinish. So I anticipate a gradual recovery of that all of 2021.

Okay. And then a second question, at the onset of the pandemic, you were very focused along with others on maximizing free cash flow and I think you made the comment that you are going to work through finished good inventory, etcetera. Can you just update us more broadly in terms of that dynamic? Where you are in your inventory levels at PPG specifically? And then as you rebuild inventory, is that part of the reason that you have seen the sort of ferocious operating leverage in 3Q? Just kind of trying to get a sense as to how sustainable that is? Thanks.

Yes, yes. Ghansham, actually our inventory is down year-over-year, it’s one of our reasons for strong operating cash flow. It’s actually working against us on the cost side, we’re not running our factories as hard as our demand – our current demand would indicate. We hope to hold that inventory discipline through – certainly the balance of this year and in the next year. So we’re not intending to rebuild our inventories. If you look more broadly, inventories, most of our coated products through our customers all the way to the consumer, are very lean inventories in the automotive – auto OEM business is very lean, appliance is very lean, electronics very lean. As Mike alluded to, we think an aerospace it’s getting leaned out. So, we do feel there is an opportunity if we do see a spike in or some spike in demand for, not only the demand to improve, but also inventory levels to have that second catalysts.

Thanks so much, Vince.

Thank you.

Your next question comes from John Roberts from UBS. Your line is open.

Thank you and nice bounce back in earnings. Wall Street Journal had a story this morning on the need for more fire protection in lithium-ion battery-powered cars. It was disappointing that it didn’t mentioned PPG coatings. But is it a problem that car companies might not want to discuss fire protection, including your coatings since that just highlights the risk that it’s something that car buyers don’t want to think about?

Well, John, the way I think about this is, every car companies that make can electric batteries are come and add it in a slightly different fashion. And every company has a different solution. The good news is, in a lot of batteries, we are part of the passive fire protection system that helps them eliminate that. So, I would tell you, the opportunities going forward are going to just be really good. I think I shared with you in a prior call, and so for the broader group, China is trying to come out with a standard. So far PPG is the only one that has passed that standard, which is to allow the vehicle occupant five minutes to exit the vehicle in the event of a fire. So, I’m feeling very good about that. We have great technology. We’ve already solved this problem in other company. So we feel confident we can solve it again. Clearly, we would love to see a government mandated fire safety hazard standard, if you will, and we think we can certainly participate in that. But we have so many opportunities in batteries right now and electric vehicles that we’re super excited about it. Every hardly a week goes by that we don’t have a win in that space, somewhere, whether it’s in Europe, U.S. or Asia and we are really – I think we are doing an excellent job there.

And then MoonWalk seems to be getting some good traction. Do the economics to PPG change with MoonWalk adoption or is it just a share gain?

Well, it’s both, right? So, we have a subscription model out there on MoonWalk. So we are going to – think about software-as-a-service, so we’re going to be collecting revenue on MoonWalk as you go. We’ve – I would say, about 25% of all MoonWalks that have been installed have been share gained. And the only thing that’s holding us back to is making them. We’re making these things in Southern Europe, and that’s where it was hardest hit by the pandemic. We’re getting over that right now. But there is a lot more opportunities – the people that have them, we have nearly 500 of them installed in Europe are exceptionally pleased with the performance and the ability to drive better productivity in their body shops, and that’s what this is all about is improving the productivity, as well as allowing their painters to spend more time painting. So, those are the two big wins and our team has done an excellent job highlighting both benefits.

Okay, thank you.

Your next question comes from Frank Mitsch from Fermium Research. Your line is open.

Good morning, gentlemen. Nice job on the quarter. I guess, things are going better in Pittsburgh in more ways than one.

Thanks, Frank.

Michael, if I could follow-up on that MoonWalk given the fact that you are gaining share, I just thought it was interesting in the color heat map that you provide that European auto refinish, your volumes year-over-year were a little bit lower than they were in the second quarter and you indicated that you’re only gaining – you were only growing at market. I would have thought that that would start showing up that you would be growing faster than market. When can we anticipate that we will be flipping that heat map indicator to above market?

Well, Frank, as you know, on a quarter-to-quarter basis it’s really hard to justify a market gain. And so, we tend to be conservative in that area. Maybe we should be a little bit more aggressive trumping our wins. But I would tell you from what we have seen we are doing very well there. I do see our results as being very good. Now, obviously, I have a better feel for that after all the company’s report. In the next 10 days, and I’ll be able to give you a little bit more – a better feeling for that. But I feel very comfortable that we’re doing better than average in Europe and especially from a profitability standpoint, our team has done an excellent job. Our ICR acquisition over there, we could have clearly tick that as above market through the acquisition, but that’s not how we do that. But that’s allowed us to get mid-tier and some value opportunities. We’ve expanded that out of Southern Europe off to the Eastern Europe. And we feel very confident that we’re going to continue to grow share in refinish in Europe.

Alright. That’s very helpful. And, I guess, the – kind of the biggest eye opener that I saw in the quarter was the industrial coatings margins. Can you talk about the sustainability of that, how much of it may have been driven by these – by the $90 million of temporary cost savings? So just give us a flavor for where you see that heading down the line?

Well, the biggest thing about the industrial segment margins was really the recovery of the volume and our productivity and our paint plants. The productivity has been outstanding. The team has done an excellent job when things were super light in the second quarter they got a lot of people together to think about how can we do different tasks more efficiently. And so, they have been able to drive that productivity throughout the paint plants and that’s been the number one thing. So, any further recovery in automotive is just going to lead to more enhanced profit to the bottom line. So, I would tell you, that part is where I am feeling most comfortable going forward and it’s all being driven by our Lean Six Sigma initiatives.

Thanks so much.

Your next question comes from Michael Sison from Wells Fargo. Your line is open.

Hey, guys. Nice quarter. Lucky win on Sunday. But just a quick question on…

So we just barely covered the spread, Mike.

Barely, but nice win. But in terms of sales trends, it looks like September look flattish and you are guiding for down in the fourth quarter. Is October trending down? And just curious why the sales trend couldn’t have been a little bit better, given September looks pretty decent.

Well, I would tell you, Mike, we were minus 5% for the quarter and we guided minus 5 to low-single-digit. So, I don’t regard that as trending negatively. I would regard that as trending positively. When I look at our October results to date and obviously, we don’t have a profit number, all we have is a volume number, we are well within our guidance. So, I feel confident that we are going to be at or above where we are in the guidance. So, I am not concerned about that and I would not characterize it the way you did.

Mike, a couple of anomalies with August, September, Labor Day fell early last year. So, for the architectural businesses we actually had some Labor Day paint spill into August in the 2019 year. Most of that was in September in 2020. Hurricane Laura in Southeast part of the U.S. hit late in August. There were certainly some conservatism around inventory build and some inability to get to some projects. We did have a strong European holiday season that we saw some snapback in September. So I would call those anomalies month-to-month, but it all worked out in the quarter. So the quarter we think was a more representative number for 2020.

Great. And then if you think about your EPS growth in the third quarter double digits, fourth quarter looks like double digits again. How do you think EPS growth looks when your volumes actually turn positive? Should it be stronger or just some of the interim cost come back and just kind of get a feel for how earnings go should be when volumes look turn up?

Yes. Again, we are still guiding to negative volumes in Q4. We haven’t given 2021 guidance, little too early to do that, Mike. But I think Michael’s last comment was, we are still expecting very strong incrementals for the foreseeable future on any volume growth. We are holding costs in check. Our operations are running very well. And again, we expect price and raws to be neutralized at a minimum. So, again, we are still expecting very good incrementals. We can’t tell the volume trajectory in the first part of next year. It’s too early.

Yes. Mike, the other thing I would add to that is, don’t forget, two of our best businesses, refinish and aerospace, are the ones that are going to be the tailwind, no pun intended, the tailwinds going forward. When their volumes recover, that will be very positive for our margins.

Great. Thank you.

Your next question comes from Chris Parkinson from Credit Suisse. Your line is open.

Great. Thank you very much. So, can you just break down your current offsetting the ‘21 on the U.S. and EMEA architectural businesses? I mean, there are a lot of trends that we are monitoring, resi versus commercial, interior/exterior paint on trade versus DIY. Just what are the biggest trends in the context of reverse urbanization that your team is monitoring? Thank you.

Well, I would tell you that in Europe you are not going to have the reverse urbanization that you have here in the U.S., right? They don’t build million – 1.4 million houses in Europe like they do here. But I would tell you, there – they tend to maintain their homes in a better shape than the U.S. does. So, during the pandemic, they have been – when the stores have been open they have been very aggressive in maintaining their properties. And I think we are anticipating that that trend for the next few quarters is going to continue. This has been a market – Europe that has been slight to minus volume on for the last several years. So this uptick does not surprise us in the least. The big concern in the U.S., of course, is the new construction for buildings, once these buildings are completed, there doesn’t to be – appear to be a lot in the pipeline for new ones coming up. So that’s the bigger issue for us.

Okay. Thank you. And you have done a solid job at a minimum holding price and industrial and then you were up low-single digits in the performance, which I think is overall pleasant surprise. But given volumes in most of the industrial markets, there is still a bit sluggish, albeit recovering. How should we think about your ability to raise price in the current environment? And we see some positive moves in mix in terms of like EVs. But are there any other new product launches we should be considering to drive uplift? Thank you.

Well, obviously, mobility will come with some attractive margins going forward. Anytime we launched a new product, we are always trying to capture some of the share 50-50 or so with the customers on the value creation, so that will be an opportunity going forward. Overall, right now, our customers are most focused on ensuring their plants are running. And so, our tech service teams are in high demand. So, if you look at automotive, we outperformed the market in three of the four regions. And the reason for that is, our tech service people are so highly valued, they wanted to make sure they captured our tech service people to help them start up and now to keep them running and because run – uptime is so highly critical, we have a number of projects that our customers have asked us to look at where they are trying to drive more productivity in their paint shops. So, I would tell you, right now, their primary focus is on uptime and new products and that’s where they are going forward.

Thank you.

We do expect positive price in Q4, for the company in aggregate, certainly, positive price in 2021. For the company in aggregate, both segments are exploring targeted pricing as we get to negotiations toward the 2021 calendar year. So, again, these opportunities to price in service, in technology based both of our operating segments.

That’s very helpful. Thank you very much.

Your next question comes from Kevin McCarthy from Vertical Research. Your line is open.

Good morning. I wanted to come back to the auto refinish business. My question relates to some of the differences in trends by region. In the U.S., I think you indicated collision claims were down 20% or so and EMEA I think you said your sales were down mid-single digits. I was wondering if you could kind of talk through that disparity, is it wider than you would have expected 3 months or 6 months ago. And how do you think those trends progress over the next few quarters?

No. Kevin, I would tell you that the trend lines are pretty consistent with what we expected. Think about the U.S., work-from-home, you – a lot of people have big homes and it’s easy for people to work-from-home. In Europe, the homes are much smaller. I would say, people were claustrophobic. They wanted to get back to the office. And so, they move back to the office as the first opportunity they could. Here in the U.S., there tends to be more conservatism. I mean, it’s somewhat amazing, there’s 100 million people going to work every single day in the U.S., but there is not a lot of people going downtown to various cities to go to work because they are able to work from home. And so, gasoline sales were only down like 5% or 6%. So people are out there driving, but we don’t have that congestion that we normally have as to rush hour. So, you get a vaccine and that will be a catalyst for more people getting back into the office. Clearly, some companies have people back in the office, other companies don’t. It’s really pretty disparate how people are approaching this. But you have got hire speeds in the U.S., so totals are up 2%. So right now, what we see is a lot of traffic in the suburbs and not as much traffic downtown areas. But I know our refinish team has done a really good job of driving share gain and that’s what we are focused on right now.

Kevin, the one other thing we are seeing in Europe is, there is less utilization of public transportation, that’s been historically more utilized in Europe versus here. So there is still a fear factor of folks getting on public transportation. So, the driving trend there – even if there’s not as many people going to work as they were in the past, more people are driving as opposed to taking public transport. We are seeing the same effect in China as well. And again, our China, we finished volumes were up. We think largely due to that effect.

That’s helpful color. And then second for Vince, I wanted to ask about your tax rate with regard to the 18% to 20% range in the fourth quarter, I think you mentioned some discrete items in the prepared remarks. My question is, is there any component that is perhaps more sustainable? Just thinking about how you might expect the rate to trend into 2021?

So, couple of items we are looking at for Q4 and we hope to achieve through tax planning, Kevin, I wouldn’t call those structural at this point. And we are certainly interested to see what happens here with the U.S. elections to determine what our tax rate will be next year. So, we will give some more guidance in January. But the items that were referred to for Q4 for tax planning and we hope to achieve those in the quarter. And not carry forward items.

Okay. Thank you very much.

And your next question will come from David Begleiter from Deutsche Bank. Your line is open.

Thank you. Good morning. Michael just on your heat map, U.S. architectural, you highlighted that trade was below market. I know you had some weather issues in that segment. Anything else you can highlight as to why you were below market in that business in September – in the September quarter?

Yes. I would say, David, our two biggest markets are Texas and Florida, and given the hurricanes, we underperformed because we couldn’t keep our stores open or we had limited ability to do that. And, of course, we are a little bit over index on maintenance, think about the hospitality industry, things like that, so that hurts us a little bit when you consider where we are in res repaint – we are under index on res repaint and res repaint obviously doing better, people are much more comfortable. We are doing very well in exterior we are over index in exterior, so we are winning there. We did outperform. We don’t break up in the U.S. and Canada. We did outperform in Canada. So we gained share in Canada and we gained share in some minor markets like Puerto Rico. But I would say, overall, net-net, we felt like we were slightly below market.

And just going back to these temporary interim cost savings, Michael, should we think about those as a headwind to 2021 earnings, we are thinking about a bridge between 2020 and 2021 or how should we think about those as a temporary cost savings year-over-year?

Hey, David, this is Vince. Again, we are not having those costs back unless we see at least ratable volume. So I wouldn’t assume those are a headwind going into 2021.

David, this is John. Just to add on that. We had $80 million less of those temporary cost savings in Q3 versus Q2 and our margins were significantly higher. So, I think we will be able to manage it effectively.

Thank you.

Your next question will come from P.J. Juvekar from Citi. Your line is open.

Yes, good morning.

Good morning, P.J.

Michael, do you expect the DIY business to slow down as the weather turns cooler? Or is it – there is still pent up demand from the loss business in the summer months? And can you also talk about the interior versus exterior paint trends?

Yes. So, clearly, exterior/interior is a easy one, you can’t paint in bad weather. You can’t paint when it’s really cold. So, at some point that is going to slow down, but we have not seen through the first, whatever it is today, 20 days of October, any change in the demand pattern. So interior is picking up, people are more comfortable with having contractors in their home. DIY remains solid and steady and that’s across the board. So, I look at that number in China, I look at it in Australia, I look at it in Europe. And, of course, you saw our numbers in Mexico, our Mexican team is clearly winning share, we were up mid-single digits in an economy that down minus 8% or 9%. So, in Latin America, we are doing Central America, Brazil. So, I would tell you overall, I don’t see any change yet. We are anticipating that it will slow down at some point. We don’t think it’s sustainable at this rate forever. But right now our fourth quarter we are anticipating a continuation of what we see so far.

Great. Thank you. And a question for, Vince, Vince, can you take a minute and talk about your digital strategy and what does it mean? Is it mostly customer-facing platforms or is it digitization of entire PPG, including HR, MROs supply chains, can you just – what – where are you exactly investing and what kind of platforms?

Yes. P.J., I would tell you the most exciting platform for us is our customer-facing platforms, where we are really trying to take the customer experience to fulfillment and digitize that process. We have talked many times with investors about, we are not going into – starting in the middle of a supply chain, we are starting with the customer decision, that’s what we think there is the biggest pain point. We have seen in other retail industries those – in the end digital platforms starting with the customer most effective over a longer period of time as opposed to trying to optimize somewhere middle of the supply chain. So that’s where our biggest investments are. We are able to – again because of our global breadth, we are able to take this investment and not only use it in the U.S., Canada, but Europe, Australia, Latin America, South America, Mexico, so we are able to get a bigger – we hope a bigger breadth of business activity on digital simply due to our geographic cost spread.

Great. Thank you.

Your next question comes from Laurent Favre. Your line is open.

Hi, yes. Good morning and thanks for taking the question. The first one is on the EV side. I think in the slide pack you released last month you talked about the value at least of 2x to 4x per EV. I was just wondering if you could perhaps tell us your line of sight on this for the next couple of years on new product launches. Is the $100 plus value-add pleased actually foreseeable for those new product launches or is it an aspiration for the longer term?

Yes. Michael – I will let Michael answer the question, Laurent, but just a baseload for everybody on the call. So, we did provide a little bit of foretelling of what we see coming from a coatings perspective in the EV, electric vehicle market. We do believe, at some point in time, there will be 2x to 4x the coatings content on our traditional EV versus the gas combustion engine. And so, that’s the background that we are going to make sure everybody has. And the timing of that, Michael, is the question.

Yes. So, Laurent, we are clearly seeing wins on like I had mentioned early on a weekly basis. You know, China has said that 25% of their cars by 2025 will be EV. You have seen Europe make an aspirational target at the same 25%. And then, of course, you saw California’s announcement. So, everybody is working feverishly in this space. I would tell you, we have initiatives with every single company out there. We are the number one guy in automotive OEM. We are also very strong on automotive parts. We are very strong in protective and marine. So, we are the people that can bring all this together, and we are selling gas fillers right now. So we are on that. We have a number of electric battery trials going on as well, adhesives and sealant. So, we have a very broad product offering. And as people try to come forward with solutions, our team has come forward with a solutions-based approach that minimizes the number of people they have to deal with. And I think that’s also exciting to the car companies because they would be inundated with all these new ideas and what they want is to be able to get to market faster, and our teams help them get to market faster.

In terms of adoption, Laurent, we are trying to have a target to get this by so much percent of their new fleet by 2025. Europe, as you are probably fully aware, different targets by country, we are seeing an uptick this year in EV sales. So, really the adoption of – by the consumer is what’s going to drive the additional sales in the EV market by PPG.

Thank you. And maybe as a follow-up for Vince, in the last call, with Q2, you talked about how some of the temporary savings that were binary and they were either in or out. I was wondering if, in the number you disclosed last night, now all those binary cost back in, so to speak.

Okay. We are bringing those in by region, by business as volume comes back. And so, for those costs that are binary of that nature they have come back in Q3. To John’s point earlier, they have come back when we had margins – when we have volumes come back. So, still very margin accretive, even though we brought back some of those cost from Q2 to Q3.

Sure. Thank you.

And your next question will come from Jim Sheehan from Truist Securities. Your line is open.

Good morning. Thank you. You raised the CapEx guidance for 2020 due to some additional projects being initiated. Can you talk about what types of coating end markets these projects are focused on?

Yes. I will take that one, Jim. When you think about what we slowed down in the second quarter, it was mostly in our industrial space, so automotive and industrial coatings. That is no longer the case, obviously, with the automotive guys back, we are ramping all those cost back up. More importantly what I will tell you what we did not slow down is, we did not slow down any investments in China. We did not slow down any investments in electric vehicles, and we did not slow down any investments in our packaging business that we knew would be doing exceptionally well. So, from that standpoint, we feel very comfortable that our run rate is coming out of the fourth quarter – third and fourth quarter will be very similar to what we had last year.

Great. And in auto OEM you talked about outperforming auto builds and your technical service teams. Is that a feature really of the rapid ramp-up that’s happening in 2020 or do you see that as sustainable into 2021? And also, if you could relate that to your pricing discussions, if you are critical to the customer, do you expect to get more pricing leverage as we get into next year?

Well, I think the way to think about that, Jim, is that, when we have discussions on price there are a lot less aggressive on asking for things if they need us in the paint shop. And right now they need us and want us in the paint shop. So that makes it a much more forward-facing discussion, instead of a what’s the raw material environment. And so, they are looking for value creation as well and they’re looking for productivity and they are looking for new product ideas. And so, when you can have those kind of discussions that’s way more productive than what I would call, how do you split the pie.

Thank you.

And your next question will come from Jeff Zekauskas from JPMorgan. Your line is open.

Thanks very much. If there were a large infrastructure bill passed next year, would that make an appreciable difference to PPG’s domestic volumes?

Well, I do think there will be an infrastructure bill passed from our standpoint. I think it will come either shortly after the election or Jan 1st – early January. It will be a positive for us, but you have to remember those things take a while. They use the term shovel ready, but nothing is really shovel ready because the environmental due diligence have to do want some of these projects. So it will be a net positive for us. But I would tell you, it might not be noticeable in the first few months that after the bill is passed.

Okay. And can you describe how much your incentive compensation is likely to change this year versus 2019? And of the $90 million in interim spending cuts, how does that split between SG&A and cost of goods sold?

I will let Vince take the back half.

Sure.

Yes. If you look, Jeff, the biggest change in our incentive comp really is around TSR, our total shareholder return, on our stock price. It’s going to be up probably high-single-digit millions, really reflective of the higher stock price this year than last year. In terms of the $90 million split, two-thirds of that would be in our SG&A bucket and one-third would be in cost of goods sold. Those are round numbers, of course.

Okay, good. Thank you so much.

And your next question will come from Arun Viswanathan from RBC Capital Markets. Your line is open.

Great. Thanks. Good morning. Thanks for taking my question. I guess, I was just curious on the margins. Usually you have anywhere from a 100 basis points to 250 basis points sequential decline in margins, Q3 to Q4. This year, it looks like your guidance implies something maybe in the 200 basis point to 300 basis point sequential deterioration in margins. Obviously, Q3 was very strong, aided by probably continued robust production and a lot of the cost actions you described. Could you just, I guess, frame your thought on margins in Q4? Do you think that you have kind of now maybe entered a structurally higher level of margins that we should see that persist kind of through the next couple of years? And again, it seems to me that may be the typical deterioration is too much at this time and maybe there is chance that margins would be better in Q4. Maybe what are some of the headwinds that you are seeing on that side?

Yes. I think a couple there is a lot of moving pieces. Obviously, this year from quarter-to-quarter, so looking back at historical trends, provide some guidance, but I wouldn’t say it provides a viable to how we look at things. What we are seeing in the industrial segment, Q3 to Q4 is much less seasonality. The automakers are not going to – we don’t think the automakers are going to go down as much around the holidays as they did in Q4 prior year. On the other side of the coin, one of our best, as Michael alluded in his opening comments some of our best performing businesses have higher level of seasonality. So, in aggregate for the company, they are going to be more impactful. So, the architectural businesses have been performing well. They typically would have seasonality in Q4. We think there are any off traditional seasonality. So it is again an aggregate for the company, that has a bit of a unfavorable impact on the quarter-to-quarter comments you are talking about, so, just a lot of moving pieces. I don’t think there’s anything abnormal in those, Arun.

Okay. Thanks, Vince. And then, I guess just on the portfolio in general, you do have relatively low leverage. I know that there is still a lot of uncertainty out there, but – and I imagine that the pipeline, is it mainly still more tilted towards bolt-ons? And what is it going to take maybe to get a larger opportunity on the M&A side? Do you see any of those kind of coming to fruition in the next little while?

Well, for the bigger ones it takes a meeting of the minds to make that happen. So, I would say, we cannot predict those. So, I would just say sit tight. So the vast majority of the things we are looking at in the portfolio are bolt-ons. But there are some pretty meaningful bolt-ons that are out there, the pandemic, again, has illustrated to people this is twice in the past 12 years that there has been a meaningful downturn in the economy. And people are looking at, okay, what is the best way for them to manage their private wealth and maybe owning a coatings company where their ability to flex is not as robust as ours is. So, if you think about how quickly this is two times in a row, we have had record earnings of second quarter coming out of the downturn in the economy, and a lot of these private companies that are not able to do that. So, I would tell you, they are looking at that as an opportunity maybe to put some of the earnings from the – selling their business into their pocket in diversifying.

Okay. Thanks.

Your next question comes from Vincent Andrews from Morgan Stanley. Your line is open.

Thank you, and good morning, everyone. I just wanted to follow-up on OEM auto. On the last – on the second quarter call, Michael, you mentioned that some of the outgrowth coming from the tech service, you expect that to normalize in future quarters. And just from sort of the some of the conversation, on this call, it sounds like maybe you are thinking that is going to be a little bit stickier. And I am just wondering, is that the case. And I know you are finding ways to make that market share growth feel a bit more structural?

Well, I do think it is going to continue to grow. We have turned our tech service teams into high business. And so, we’re charging for tech service where in many cases we usually give it away for free. And people in the beginning were kind of like Missouri, the Show-Me state, but during the start-ups, they could see the value creation that our tech service teams were allows them to get up faster, run more consistently and think about the – right now, a lot of these folks are running weekends and things like that, so they’re having some unusual period of times where controlling the environment in the paint shop when it’s running more frequently is hypercritical. And I would tell you, right now, they have been willing to pay for those services and we are pleased to provide them. So, I think there is going to be more stickiness on that going forward.

Okay, great. As a follow-up, I just want to ask on the architectural side of the equation, may be more into the retailers rather than your own stores. Clearly, the do-it-yourself trends can’t say at this pace forever, but I am just wondering if things decelerate, it seems like customer inventory levels are probably not that high. So, do we still need to have a pretty big build up into the next spring season in order to just to manage sort of a regular season? I’m just trying to bridge sort of the downturn and take away versus what you have to actually ship into the customer.

Well, I would say, clearly inventory levels that our customers are below what our customers would normally have. But I am not going to try to predict how they are going to think about inventories in Q1. So, I will just tell you that inventories are low and we’ll wait to see how they decide to manage them next year.

Okay. Thank you very much.

Your next question will come from Duffy Fischer from Barclays. Your line is open.

Yes. Good morning. Just after you released last night I was talking with our aerospace guy and he thought your volumes were much stronger than what he was going to see from the average input provider into aerospace. He was thinking things would be down kind of 50%, 55%. So, can you comment on, are your – the business you’re in, is it doing better than the average input supplier into aerospace? Or is there a chance that maybe customers are building a little bit of inventory of your product and we will see a double-dip there where that will come in a little bit closer to what peers are doing later down the line?

Yes. Duffy, I don’t see a double-dip. I see – I know a very specific customers that have clearly taken inventories down. And we are on a number of winning platforms. So as those winning platforms continue to rollout, that helps our volumes. But overall, I would tell you, we’re anticipating being down 35% in the next quarter as well in aerospace. And then from that point on, I think it’s going to start to trend up. So, we have a good mix in our business. Obviously, military is helping. Military has been a space where, not only are we strong there, but our business with the F-35 is getting bigger and bigger every year because we are winning more content on that plane. So, it’s not just the build rate for the F-35, it’s also the additional content that we’re winning. So, I think that’s really important for people to understand.

And Duffy, if you look at our mix of business, we’re about 30% military, 70% conventional aerospace.

Okay. And then I’ll take another cut at this because it’s been the biggest incoming question I have gotten since you guys put out your pre-announcement to people have kind of backed into margins. But if you look at Q3, last 10 years, your margins kind of bounced around between 16% and 19%. So, this quarter was several basis – or several hundred basis points higher than the average of that period. Clearly, 150 basis points higher than the best third quarter you’ve ever had. When we get out a couple of years from now and turn around and look at this quarter, is this going to be an anomaly as far as the margin goes or do you think this really kind of resets the bar and this higher margin level is something more structural?

But Duffy, the way I would answer that is, we launched something called The PPG Way two years ago. And one of the tenets of The PPG Way, is that, we do better today than yesterday, every day. So you’re not going to look back at this anomaly in two years because our team is fully committed to The PPG Way and that’s doing better today than yesterday. So that’s going to carry forward.

Yes. I would just add, Duffy that, if you look at Q3 and Mike alluded to this earlier, some of our most technical business in aerospace and refinish were remain in a recession. So, hopefully, two years from now those businesses have recovered, not fully recovered, and those should help the metrics you are talking about.

Terrific. Thank you, guys.

Your next question will come from Stephen Byrne from Bank of America Securities. Your line is open.

Yes, thank you. So, SG&A was down sharply, but so was R&D. So, presumably a lot of those are lower costs are part of this interim cost reduction bucket. Other than less travel, what are the big buckets that are in this interim cost savings that enable those two cost line items to be down so much? And do you need to bring them back up when volumes recover in order to drive sustainable growth or could they stay down?

So, Stephen, I will take the question. When you think about R&D, the first thing you have to remember is part of that cost is currency. And so, we have not been helped with the currency from that regard. Second, what we – we have our run rate on R&D in the third quarter is back to normal. We had some in the second quarter, we did some things like four-day work weeks and we had the salary – temporary salary reduction. So all those are gone. So, right now the spending on R&D is at the same level as what we had last year. So – but we are continuing to optimize our lab footprint. So we’ll have less labs so that drives permanent cost savings. We also are using digital to drive more productivity. So that’s a permanent cost savings. So, I would tell you that the spending on big projects is at the same level, but the efficiency is better.

And on the $170 million restructuring program, how would you allocate that between COGS, SG&A and R&D? And how long do you think it will take to roll that through?

Yes. Again, I don’t have those numbers are in front of me, Steve. but I – most of those were not – most of those were optimization of our workforce – our SG&A workforce. We did have some facility and supply chain optimization in there, but the vast majority of that was not supply chain or manufacturing.

Yes. Steve, circa 85%, 90% is SG&A.

Thank you.

Your next question comes from Kevin Hocevar from Northcoast Research. Your line is open.

Hey. Good morning, everybody.

Good morning, Kevin.

Maybe one other stab at some of the interim cost savings. So, it sounds like those coming back going to be volume-dependent early – some portion of them coming back are to be volume-dependent. And with the fourth quarter, it looks like volumes are expected to be down low- to mid-single-digit, which is a little bit better – similar to slightly better than what you saw in the third quarter. So, is it fair to say that $90-ish million will still be what saved in the fourth quarter? Is that what’s baked in the guidance? Just kind of curious what you have baked into the guidance for the interim savings in the fourth quarter.

Yes. Kevin, if you look sequentially, Q2 to Q3, we think we brought back cost ratably with volume. We do some volume – if you look, Q3 and Q4, we hope volumes on the low – on the higher end, I guess, that range. So we’ll manage our cost back accordingly. But I think $90 million is probably too large of a number, but we’re not providing that. We had embedded that in our guidance where we thought we could retain in Q4 and heading into next year.

And you talked about mix being a headwind with aerospace and refinish being below the company average in terms of volumes. How much is that holding back margin? So if you were to normalize that and have those businesses performing more in line with the company average, I guess, how much room is there for margins to improve as those businesses recover?

W don’t give margins by business. But as we alluded to earlier, those are some of our most technical-based coatings business and those typically customers can see the value in those businesses.

Great. Thank you.

And your next question will come from Mike Harrison from Seaport Global. Your line is open.

Hi. Good morning. I was wondering if you can talk a little bit about the protective and marine business. What you’re hearing from customers there? You mentioned some project delays in Europe and the United States. Are those significant and lasting kind of through the fourth quarter? Can you maybe talk about when you see the protective and marine business getting back to growth?

Well, let me first start talking about it from the marine side. Marine builds continue to be on the very low end of the spectrum. So new ship builds are down 55%. On the positive side, our mix, we are very advantaged here. We are much stronger in China than we are in Korea. And so, our protective business and marine business is actually, I think doing better than the industry from that regard. Clearly, we saw a lot of infrastructure projects that were delayed because of COVID. They got to figure out how to have a COVID save working environment when they are working on these infrastructure projects. So we think they have been delayed but we think they are coming back now. Of course, now you get into the winter. So a lot of those projects are going to be put on hold again. But I would say, oil and gas is weak, nothing significant change there. But we’re launching some new products. We launched some new polyurea product for the food business. So, we think that’s going to be a nice win for us. And overall, the economy will get better. And so, I’m anticipating that our wins in the refinery side will start to blossom into the maintenance side of that as well. And Asia is the big for us.

Alright. And then speaking of Asia, the packaging business, APAC shows up as growing below market, how big is that piece of business Asia packaging and what is driving the weakness there?

Well, I would say, it’s not a huge piece of the company. What’s driving it is they transition from what I would call it older generation to a newer generation. We focused on the newer generation of to what they call easy open ends –, as well as a two-piece cans. And so, from that standpoint, we’re focused highly on the next-generation of cans. And so, right now as that transition hasn’t moved as fast as it has in the U.S. and in Europe, we are losing a little bit of share. I don’t regard that to be a permanent. I think we will get that share back, especially because there are a number of global products think about tuna and other things that are made in Asia, that are exported. So, as those global standards take hold in Asia, then we’ll get our share back.

Alright. Thanks very much.

[Operator Instructions] Your next question comes from Laurence Alexander from Jefferies. Your line is open.

Good morning, guys. So, just a follow-up on that. In the North America architectural trade and the Asia packaging as you think about the 2021 growth rates, will PPG be back to growing in line with the market or will the share loss continue?

I would definitely say for package in Asia will be back to market because those technologies will rollout. And in the U.S., I see no reason why we wouldn’t be growing at market in 2021.

Okay, great. So, 2021 should really be at market or above market year across the board?

Yes. I mean, right now, we haven’t done our 2021 planning process, but our initial assumption going into that will be at market.

Okay. Thank you.

We have no further questions in queue. I turn the call back over to Mr. Bruno for closing remarks.

Thank you, Michelle. I’d like to thank everyone for your time this morning and your interest in PPG. If you have any further questions, please contact our Investor Relations department. This concludes our third quarter earnings call. Thank you.

Thank you everyone. This will conclude today’s conference call. You may now disconnect.