Good morning and welcome to the PPG Industries First Quarter 2020 Earnings Conference Call. My name is Elisa and I will be your conference specialist today. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to John Bruno, Director of Investor Relations. Please go ahead.

Thank you and good morning everyone. Once again this is John Bruno. We appreciate your continued interest in PPG and welcome you to our first 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, April 27th, 2020. I will remind everyone that we have posted detailed commentary and a company presentation on the investor center of our website ppg.com. Following management's perspective on the company's results for the quarter, 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 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's Chairman and CEO, Michael McGarry.

Thank you, John, and good morning everyone. I'd like to welcome everyone to our first quarter 2020 earnings call. First and most importantly though, I hope you and your loved ones are safe and healthy; never before have we experienced a crisis as broad as the COVID-19 pandemic. PPG operates in more than 70 countries around the world, and every community where we operate has been affected by this virus. We have 12 factories in China, with one located in Wuhan, so our PPG people have been managing through this challenge since January, working around the clock to protect our people and our customers. Throughout this crisis, we frequently hear about PPG employees going the extra mile at work and in their communities. I could not be more proud of our employees around the world who work tirelessly to keep each other safe and healthy throughout this unprecedented time. At our locations that have remained operational, we have employed stringent health and safety measures, which are at a minimum in alignment with local health and government guidelines. From a business perspective, we will not know the full impact of the pandemic on PPG for some time, but we are working with urgency and have taken proactive actions to limit the impact as much as possible to our employees, customers, and shareholders, while also continuing to support the communities and support agencies in need. Given the breadth and urgent community needs resulting from the COVID crisis, PPG has increased and accelerated our charitable contributions around the world. Last week, PPG and the PPG Foundation announced plans to contribute more than $1.5 million to organizations supporting immediate community relief efforts and emerging recovery needs amid the pandemic. We're also donating personal protective equipment, antibacterial coatings, and other resources where help is needed. Our contributions will touch each major region we serve. We believe that even as we respond to difficult markets and business conditions, it is vital to remain an active partner in our communities and help our most vulnerable neighbors at this critical time. Now, let me turn to our financial results. Last evening, we reported first quarter 2020 financial results. For the first quarter, our net sales were approximately $3.4 billion and our adjusted earnings per diluted share from continuing operations were $1.19. These results include a significant impact on business interruption caused by the COVID pandemic. We estimate that our sales and earnings per diluted share were unfavorably impacted from the effects of the pandemic by approximately $225 million and $0.35 respectively. For the first 10 weeks of the quarter, excluding our business in China, most of our businesses in major regions were performing at least at the financial expectations we set in January. During the second half of March, we saw a rapid and wide-ranging deterioration in global demand. Many of our large OEM customers were forced to shut down. A number of architectural paint stores were mandated to close or materially alter the way they service customers. Miles driven and the number of commercial flights fell sharply with many countries and states imposing stay-at-home orders. This materially impacted demand for our customers’ products and services, and in a matter of days led to a quick and steep decline in sales for our automotive OEM, automotive refinish, aerospace, and certain parts of our global architectural business. These lower demand levels have continued well into April. We took immediate decisive actions to help mitigate the lower sales activity, which included across-the-board salary reductions, with our senior leaders impacted the most, temporary shutdowns of various manufacturing and distribution operations, temporary employee furloughs, and reduced spending across all businesses and functions. We also deferred many non-essential capital expenditures. While many of these actions were difficult, they were necessary in light of the unprecedented and uncertain duration of the crisis. Many of these mitigation actions were implemented during March, so they only had a modest impact in the first quarter. We expect these mitigation actions to have a more meaningful impact in the second quarter. From a liquidity perspective, our record level operating cash flow in 2019 and historical disciplined approach to capital allocation has our balance sheet properly positioned to weather the crisis. We will review more details on our forward-looking expectations in a few minutes. But let me quickly summarize the results for the first quarter. In aggregate, our net sales in constant currency were down 5% compared to the prior year. Sales volumes were down 8% with about 6% of that decline estimated to be associated with the pandemic. Our selling prices were 1.4% higher with broader increases in our Performance Coatings reporting segment and more targeted activity in Industrial Coatings. Last, net sales were negatively impacted by unfavorable currency translation of more than 2% or about $75 million, as the U.S. dollar generally strengthened versus other emerging and major currencies. We expect unfavorable currency translation to continue into the second quarter and be in the range of $130 million to $150 million based on recent exchange rates. Looking at some of the business trends in the first quarter, in China, sales were down about 30%. Most of our end-use markets experienced significantly lower demand, including automotive OEM where regional builds were down about 50% in the first quarter. Since early March, in China, we've seen a measured recovery in demand patterns. Our factories in China have been running at 70% to 80% of capacity utilization for several weeks, moving closer to our 2019 levels and mirroring our customers' demand. We've also learned a lot from the restart in China, which we'll be able to leverage and optimize as other countries begin to restart their economies over the coming weeks. In other parts of Asia, our business performed solidly in the first 10 weeks of the quarter until the pandemic spread, which impacted several countries including Australia, India, and South Korea. In aggregate, sales volumes in the Asia Pacific region were down 20% in the first quarter. The EMEA region's sales volumes declined by high single-digit percentages compared to the previous year, driven by lower demand in most end-use markets through the pandemic. The automotive OEM, automotive refinish, and industrial coatings business experienced the steepest declines due to customer shutdowns. Through mid-March, organic sales were slightly higher compared to prior year in the architectural EMEA coatings business, but this fell sharply as many countries in Southern Europe, including France, mandated closures of retail paint stores. Our architectural business in Northern Europe performed solidly for the entire quarter, and our protective and marine coatings business had modest sales volume growth reflecting that a portion of these businesses are late-cycle in nature. In the U.S. and Canada region, sales volumes were down in mid-single-digit percentages, including the unfavorable impact from the pandemic. Sales volumes were strong in certain end-use markets, including packaging, and architectural DIY coatings businesses which we believe will be more resilient through this crisis. In the U.S., the automotive OEM and refinish businesses were most impacted by the pandemic in the first quarter, with the vast majority of the unfavorable impact occurring in March. Finally, in our Latin America region, sales volumes were modestly lower, down a single-digit percentage, as the pandemic had less impact on this region during the quarter. We saw positive sales volume growth in both packaging coatings and Mexican PPG Comex businesses during the first quarter. During the quarter, about 25 new concessionaire stores opened in Mexico, bringing the total to approximately 4,800 stores. From an earnings perspective, our first quarter adjusted earnings per diluted share of $1.19 is lower by $0.19 compared to the prior first quarter. The estimated impact from COVID-19 reduced our adjusted EPS by $0.35. Despite our sales volumes being lower by 8%, our gross profit margin rose to 43.5%, or 70 basis points higher on a year-over-year basis. This was supported by higher selling prices and continued excellent progress on cost savings from our previously announced restructuring programs. Unfavorable foreign currency translation during the quarter lowered earnings by more than $10 million, impacted by a broad number of currencies that devalued against the dollar, including the Mexican Peso that fell by about 20% in the quarter. Now let me ask Vince to provide some commentary on our liquidity position and some thoughts on the second quarter.

Thank you, Michael. I also want to echo Michael's comments; I hope everybody is healthy and remaining safe. With regards to our financials, first, let me discuss our balance sheet. As we've discussed many times on these calls, we have a conservative approach to managing our balance sheet which is especially important during these times. As a quick reconciliation, I'll remind everyone that we ended 2019 with approximately $1.3 billion of cash and short-term investments on hand. We supplemented our beginning-of-the-year cash balance with an $800 million mid-March borrowing from our revolving credit facility. This borrowing was completed out of an abundance of caution given our expectation of uncertainty in the debt capital markets. We subsequently ended March with an elevated cash and short-term investment balance of about $1.9 billion including the $800 million revolver proceeds. As we recently reported in mid-April, the company entered into a $1.5 billion, 364-day term loan and utilized a portion of the proceeds to fully repay the revolving borrowing, with remaining $700 million in proceeds further supplementing our quarter end cash balance. The company's $2.2 billion revolving credit facility is currently undrawn. These strategic actions provide ample liquidity to weather this crisis for an extended period. Also during the first quarter, our commercial teams heightened their focus on cash. As a result, we lowered our working capital as a percent of sales by 120 basis points versus the first quarter of 2019. This included strong quarter-ended accounts receivable collections in a rapid response to lowering demand through the minimization of our seasonal inventory build. We did increase our bad debt reserve during the first quarter reflecting uncertainty regarding the breadth of the crisis and eventual customers' liquidity, especially for many small customers globally. To date through April, near the end of April, we haven't experienced any unusual bad debt trends, and we will monitor this reserve accordingly. In the second quarter, we plan to continue to optimize our cash and overall liquidity. With respect to working capital, we expect to draw down our finished goods inventory and dramatically minimize the purchases of raw materials based on our reduced manufacturing operating rates. This reflects the current lower coatings demand we're experiencing. With respect to cash uses, as Michael mentioned, versus capital spending, we are deferring all non-essential capital spending and currently anticipate full-year CapEx in a range of $200 million to $250 million. Second, we remain committed to rewarding our shareholders through dividend payments. And on April 16, our board approved a $0.51 per share dividend to be paid in the second quarter. Next, we will continue to look to optimize our short and long-term debt portfolio based on capital debt markets and we've created flexibility to access these markets at the time of our choosing. Finally, given the low level of commercial visibility, we are currently prioritizing maintaining ample liquidity over acquisitions and share repurchases. We'll continue to monitor the external environment here. Before I turn back to Michael, I'll provide an update on what we're expecting commercially for the second quarter. As we look ahead overall, we are currently experiencing and continue to expect global economic activity to significantly contract in the second quarter. We then anticipate moderate demand improvement from this lower base level of demand as the year progresses and as economies begin the process of getting restarted. We have provided in today's presentation materials, our expected qualitative second quarter and pace of recovery expectations for each of our coatings businesses. Overall, we expect our aggregate coating volumes to decline 30% to 35% in the second quarter with shutdowns continuing throughout April and a large portion of May, and a measured start-up of activity later in the quarter. These estimates are based on what we know today and will likely change as the quarter progresses. However, we wanted to provide as much real-time information as reasonably possible to the investment community. Highest rates of demand decline will be in the U.S. and Europe followed by Latin America and partially offset by the early recovery underway in China. The detail on the presentation slide indicates we're expecting the packaging coatings, architectural DIY, protective and marine coatings businesses to be more resilient. Some sub-segments in the general industrial business are expected to be resilient or even possibly grow. However, this will be more than offset by weak demand in other general industrial sub-segments, activity declines in trade or professional painting, and very weak demand in automotive refinish and automotive OEM. Aerospace new build and aftermarket sub-segments are also very weak, but partially offset by growth in military, which represents about 30% of PPG's aerospace business. Global industry auto builds are expected to be down about 50% year-over-year in the second quarter. We do expect global auto builds to begin to recover from this very depressed level much more quickly than other end markets and are evidencing this currently in China. We are seeing triple-digit percentage increases in digital use by consumers. And our strategic move to more of a delivery model for architectural painting is being validated as most in the industry are now touting this as the primary fulfillment option. Finally, we provided further reference to our aggregate coating segment earnings trajectory during the Great Recession. During the depth of that recession, which was the first quarter of 2009, our coatings earnings declined about 66% on a volume decline of just over 20%. The current shape of this pandemic-related economic crisis is broader given the abrupt near-full stop of certain economic activity. We continue to closely monitor the macroeconomic environment and will be fully prepared to implement further cost reduction actions if necessary. Our target is similar to the 2009 time period where we exited the Great Recession as a much stronger company. Finally, due to the heightened level of uncertainty and lack of mid-term visibility, we have suspended all financial guidance previously provided. Now, I'll turn it back over to Michael for some final thoughts.

Thank you, Vince. As we look ahead in the coming quarters, we will be faced with an evolving and uncertain economic environment. It's too early to predict the full picture and impact of the Coronavirus. In light of this uncertainty, we continue to carefully reduce and manage costs, focus on cash generation, identify additional ways to simplify and streamline the business processes, and work with our customers to meet their needs. As the environment begins to stabilize, we will have opportunities to create more value and fully leverage our scale for the benefit of our shareholders, customers, and employees. While we will be prudent and defer some capital expenditures, we're continuing others that will help us support future organic growth. We remain committed to research and development investments in new technologies and digitization, which have proven to be effective with our customers as we exit this crisis. Most importantly, however, is that PPG people are committed to operating safely and providing the products and services that our customers count on. That is what inspires us and we call it the PPG way. We will continue to prioritize the safety and well-being of our employees and support the communities where we do business. Finally, as I recently stated during our annual meeting at the center of our company's purpose statementis a commitment to protect and beautify the world. Today, the word 'protect' has taken on even greater significance to all of us. We're focused on protecting our people, our customers, and all of our stakeholders. I'm confident that with the continued efforts of our people around the world, we will get through this unprecedented time together. Thank you for your continued confidence in PPG. This concludes our prepared remarks. And now, Elisa, would you please open the line for questions?

We will now begin the question-and-answer session. The first question today comes from David Begleiter of Deutsche Bank. Please go ahead.

Thank you. Good morning. Michael and Vince, how should we think about decremental margins both in Q2 and in the back half of the year? They were quite high in Q1. I suspect they'll be high in Q2 but perhaps lower in the back half of the year?

Good morning, David. How are you? This is Vince. I think one of the markers I’d look at is what we provided in the earnings information relative to Q1. We had about $90 million lower segment earnings on $225 million lower sales for the segments. So, the decremental margins there were a bit more than we're accustomed to, but they reflected a somewhat non-traditional rapid decline in demand. We do have, as I mentioned, a high variable cost model in many of our businesses. As we look at Q2 though, just due to the nature of this crisis, we did pay our employees for those who have been furloughed for their first two weeks. So, it's going to temper somewhat our ability to react to the lower demand on a cost basis. Also, given the staggered timeline of recovery by each of the regions, some of our businesses aren't able to as aggressively manage some of the cost falls because we need global support as China is starting back up. With all that being said, I think we're hoping to do better than what we did in Q1 relative to the decrements, David. So, we're targeting a better or an improved decremental in Q2 than we had in Q1.

Very helpful. And Michael just in the back half of the year, if the cadence recovery occurs as you expect, would you expect the 30% plus volume decline in Q2 to be cut in half in Q3, perhaps down 10% to 15% year-over-year?

David, I think it's a little early to predict that. We see a lot of positive signs in China. Now, of course, China has a lot more ability to control their environment than we do here in the States. They have apps that allow people to say that they're good to go into restaurants. Whether or not we develop anything like that here in the States, we'll be open to further discussion. But I would tell you everything I see in China: miles driven are up; flights in China are fuller every day. There are more intra-China flights. So I see a lot of positives, but I think it's just too early to predict that.

The next question today comes from Ghansham Panjabi of R.W. Baird. Please go ahead.

Yes, good morning. Thank you and I hope everyone's doing well.

We are indeed. Thank you, Ghansham.

Good to hear. So I guess first-off on your outlook for 2Q volumes down 30% to 35%. Michael, just give us a sense as to how much of that decline is due to customers being flat out, just shut down for parts of the quarter. And related to that, how do you expect volumes to kind of play out by the month? I guess I'm asking because it looks like you're baking in some level of improvement?

Sure. And really, if you think about it by the major segments, our OEM guys are down in Europe and the U.S., and they won't be restarting until May 18. And even when they do come up, they have told us that they're going to run at slower rates as they try to figure out how to maintain social distancing. So we factored that in. The second one of course is our large OEM Airbus and Boeing customers. Boeing has taken an extended period of downtime; Airbus is back up and running, but they each have cut their production rates. So that has an impact. And of course, MRO for the airline business is still unknown, right? So, we're going to wait and see. The good news is there are planes flying even if they're flying empty; they will need MRO. So, we'll be watching that carefully. If you look at refinish, I've noticed, and if you look at the gasoline sales of last week, gasoline sales have improved, so people are starting to drive more. What we will be really looking for is congestion to improve, so get back to a normal rush hour in the morning, rush hour in the afternoon; that'll be important to our business. I think those are the most important things. If you look at the rest of our customers, they're not really shut down. They're just having to moderate their production rates for the time being, so their ability to come back quicker will probably be likely.

Hey Ghansham, we're seeing staggered start-ups by region, different parts of our business, very public in the periodicals. So that we're making our best guess of what that's going to look like as we get further into the quarter here.

Okay. And I guess for my second question on Slide 11, you basically have the financial crisis playbook. And so, looking specifically at 4Q 2008 and the first quarter of 2009, it looks like EBIT declined between three to four times the rate of volume declines. Obviously, the business portfolio has changed meaningfully since then. Can you just give us some insight on how the changes may impact the magnitude of these declines?

Yes. We included on Slide 11, Ghansham, is the coating segments only. So, while we have different regional splits and businesses are a little different in size than they were then. And this is the coatings business only. As you can see volumes were down again, as I mentioned in my prepared remarks, about 20% the first quarter of 2009, segment earnings were off over 60%. There hasn't been, I'd say, a significant shift. We have lowered our breakeven points in many of our businesses with the restructurings we've done in the past couple of years, but this crisis is broader than what we saw in 2009. The 2009 crisis was centered on housing and auto. This obviously affects some of our aftermarket businesses, but not to the degree they are. So it's really hard to draw complete comparisons. But the point I'd make is we did lower our break-evens in many of these businesses, so we're trying to manage around that.

The next question today comes from Christopher Parkinson of Credit Suisse. Please go ahead.

Thank you. Hopefully, everybody's doing well. Just very quickly on the raw material fronts, you discussed depleting inventory due to the weaker demand environment. Can you discuss roughly on your implied raw material savings and whether or not you'll actually see the benefits in Q2 or if this is more of a second half and potentially in the 1Q 2021 story? So just any color on what you expect raw baskets would be incredibly helpful. Thank you.

Yes. So Christopher, the lower raw materials will not have a material impact on Q2; we're going to be buying very few raw materials. We were coming into our busy point of the season and the plants were gearing up for regular paint season. So inventories were moving up as they always do at that period of time. So now with lower demand rates, we have plenty of inventory. The plants that will be starting up will be running at a lower rate. Plus, when you think about it from a LIFO and FIFO standpoint, a lot of those raw materials don't flow through for 50 or 60 days. So there would be minimal impact in Q2. You should expect to see much more impact in Q3 in the back half of the year.

Thank you. And just a quick follow-up just on packaging. It does appear you're trending fairly well in the U.S. and EMEA. But you're still experiencing, I should say, a little bit of noise in Asia, and China is improving one would assume that's now Southeast Asia. Can you just quickly run through just globally food versus beverage and then just highlight what's going on in Asia on a go-forward basis, please? Thank you very much.

Yes, so beverage is continuing to be strong. You probably saw the beverage can numbers in the U.S., they were up 8% in the first quarter. Food was up 3%. Beverage up in Europe is low single-digits. Food is recovering. They had a bad year last year because of a weak harvest. So we expect them to be up low to mid-single digits as well. We're seeing recovery in China, so that's providing some good tailwinds. The other thing that you probably don't put a lot of recognition in but aerosols are a good segment for us. With aerosol cleaning products and things like that, that should also be positive. So all the demand trends in packaging are moving up.

We are seeing in the second quarter, though, that Thailand is a big food pack region, and we're seeing that down due to the virus.

Your next question comes from Kevin McCarthy of VRP. Please go ahead.

Yes, good morning. I think you made a comment that two-thirds of your costs were either variable or semi-variable. Would you speak to the outliers in your portfolio in terms of businesses that would be materially above that level or materially below?

Yes, Kevin, it's Vince. The businesses that have the highest variable cost structure, highest fixed cost structure are businesses where we have leases and employees like our architectural business; regardless of the demand up or down in a given day, it's hard to flex those businesses. The businesses that are strictly OEM have a higher variable cost structure. We are able to reduce our staff at those facilities based on demand. We're able to ratchet down production; there's typically less distribution involved, it's usually straight from our factory to their factory. So I bucket into the categories of lower, lower fixed cost those OEM businesses in our industrial segment.

Okay, that's helpful. And then on Slide 9, at the bottom, I think you provided a useful framework for the expected sequence of recovery in your various businesses. Can you speak to the OEM and refinish blocks there? Why is it that you would expect OEM to recover quicker than refinish? Is that based on the credit crisis experience or what you're seeing here today?

Yes, I think a lot of it has to do with the fact that the current aging of the fleet is almost 12 years. We expect people to continue to want to buy new cars. We also see that happening right now in China. If you think about China car sales, they've incrementally improved each of the last half a dozen weeks. Last week, they were almost flat with prior year. Our experience has been that people still need vehicles. A likely positive out of this is that people are going to shun public transportation for some period of time, which means they're going to want to either buy a new car or continue to maintain the car they have. I think those are going to be positive for us coming out of this.

One other consideration, Kevin, is because the refinish business is a distribution business, we do know there's inventory in the chain. People were expecting as Michael alluded to earlier normal season. Typically, the distribution channels stock up ahead of spring; that stock-up did occur. But then again, we have a rapid decline of demand. So we do know we'll have to work through inventory in the entire channel as well.

The next question comes from John Roberts of UBS. Please go ahead.

Thanks, and you guys all sound well, so that's good to hear. In the trade architectural paint or pro applied, you indicated that completion of in-progress construction would provide some help in the current quarter, is it possible that the September quarter will be very depressed as well because once that rolls off, it'll offset recovery in some of the maintenance paying that might come back?

Hey John, if you look at the normal commercial projects, they are typically nine to 24 months or even longer. So we expect those to carry forward for the most part, certainly through Q3. They haven't been stopped; they'll be restarted and carry through Q3 if not into 2021. On the residential side, homebuilding occurs in weeks instead of months. We do think after the current slate of homes are completed, we'll see a little bit of a void there. But that's again-after-probably the summer at a minimum.

Thank you. Do you expect trade paint to be sequentially up in the September quarter, I guess a different way to phrase it?

To Michael's comment earlier, the visibility is just not there for us to make those comments that far.

Okay. And then in the bad debt reserve, is that concentrated in any area? What kind of assumptions are you making there? Is it more dealers or auto body shops? Or what are you assuming in your bad debt?

Yes, we went through the mix of customers we have. Globally, we did certainly look at it from a business and size of customer and their liquidity. So it's really a mix of all of our businesses and our expectations algorithmically against their metrics. Now, I'll point out, John, in 2008 and 2009, we didn't see a significant uplift in bad debt in that crisis. We did take this reserve because this crisis affects it's just broader and affects a lot of smaller customers differently than 2008/2009.

Next question comes from Michael Sison of Wells Fargo. Please go ahead.

Hey guys, glad you all are safe. It sounds, in terms of your stores, can you maybe talk about how many of your stores are shut down and what maybe what percent and maybe just run through what they've changed in terms of their ability to do business during this social distancing shutdown type of environment?

Yes, so, Mike, you have to go by various regions around the world. So if you look in Italy, all our stores are closed, and they're doing delivery. In France, we had gone through a period of time, the last two weeks of March, and say the first two-and-a-half weeks of April where they were all closed. But now we've gotten permission to open up a few of them, and we have latent demand as soon as we open a store you can immediately see a pop in sales. So right now we have about, I would say about 40 stores open in France. When you move over into the UK, they were mostly running all the way through to near the end of March. Now we got probably about 40% of the stores back open again. Again, you see a significant demand pull as soon as you can get a store open. That helps us. We did not have to close any stores in Denmark; they had a record quarter. We had no store closures in the BENELUX, so that was also very solid performance. In the U.S. right now, we have about 250 stores closed. But that is really more trying to comply with local regulations, but also because we moved to a delivery model. It doesn't really matter whether the store is open or closed; we've moved to delivery. So the painters just want to know you get the product at the right place at the right time. We'll continue to manage in that kind of environment.

I have a quick follow-up on that. I understand that you won't experience the raw material impact or low raw materials in the second half of the year. However, can you discuss the direction you anticipate given the current oil prices and what you see in the overall cost structure as you move into the second half? Will it likely be a double-digit decrease, and could you elaborate on each of the paint categories in terms of their direction?

Well, I think right now, I think directionally it's all we're going to say right now is it's down. It will depend upon July 1 type pricing because solvents are immediately passed through; we'll start to see some of the resins benefit. But at this point, I think, I would, given that it's going to be so little and we'll have another chance to talk again at the end of the second quarter, I think I'd rather defer when we have more visibility into that number.

The next question is from Bob Koort of Goldman Sachs. Please go ahead.

Thank you very much. I was wondering, if you guys look back at architectural to the financial crisis, I guess it was, at least for a period a shift towards DIY, maybe gaining some share. Sounds like maybe you think that's going to happen again; and I guess curious what kind of duration or impact you think that might have?

What we're seeing right now, Bob, the DIY numbers across our business are up significantly. People have free time on their hands; they want to get projects done. They're out there getting them done. We expect that to continue probably the whole summer. So I would say there's no likelihood that's going to stop anytime soon. I think this has been consistent with when people, nobody wants to be unemployed but when they're unemployed, it gives them free time and that has been a positive force. Our DIY in Australia is up, our DIY in Europe is up, our DIY in Mexico is not much of a market but it's positive and certainly in the U.S., it's positive.

And can I ask you on refinish? If we look back to the last financial crisis, you mentioned density is improving, but still not high enough on roads for collision rates. But is there some level of drifting by consumers such that when the collision rates climb, they still don't actually get their car fixed because they're trying to save that money or pocket that insurance money? Is there going to be any delay in pick up there or did you not see that in the last economic crisis?

We did see that in the last economic crisis, Bob. It's probably too early to tell you right now what that's going to look like. Nobody is getting in an accident right now. But we'll be paying close attention to that. It's easy to tell because when you're driving down the road, you'll be able to see one and two panel accidents that aren't getting repaired, but we'll be paying a lot of attention to it.

I think the duration of the last crisis was a contributor to that. People weren't unemployed for long periods of time. We're certainly hopeful; we don't know, but we're certainly hopeful the duration of this crisis is shorter.

Next question comes from Frank Mitsch of Fermium Research. Please go ahead.

Good morning, gentlemen, and kudos on your charity efforts. I appreciate the commentary on the raw materials and the outlook. I just wanted to see the other side of that calculation on your ability to raise pricing. You've done a really good job over the last couple of years with price increases each quarter, etc. Must be a very difficult environment right now; how should we think about that side of the equation?

Michael here. First, I hope you enjoy the draft. Regarding pricing, I believe it will remain stable. The production rates for most of our clients are expected to decrease, which limits their leverage on production rates. Raw materials began increasing from the fourth quarter of 2016 through the first quarter of 2019, and we haven't completely regained all that pricing yet. However, I'm optimistic about our position. I do not expect pricing to decline. We have additional price increases planned for later this year. With weaker currencies, we will have opportunities in Latin America and in our refinish business later this year. Therefore, I believe pricing will continue to be a strong aspect of our business.

That's very interesting. I would like to ask a question about the allowance for doubtful accounts; typically, this isn’t something you manage at such a large scale. Are there specific industries that concern you the most in this area? How should we approach this? It may be too soon to predict if there will be additional charges in the second quarter, but based on what you've reported in the first quarter, which industries are you most worried about?

Yes, Frank, we alluded to earlier. We're most concerned about small businesses that have less levers of liquidity. That goes across many of our regions. So we took a more detailed approach to understanding those small businesses and their capability to withstand a crisis like this.

All right. So we can exclude auto OEM and aerospace, etc. and focus on some of the smaller customers?

Well, we took some reserve in every one of our businesses and every one of our regions, but if you ask where we were heightened in terms of our concern, it would be in small businesses.

Your next question comes from P.J. Juvekar of Citi. Please go ahead.

Yes, hi, good morning. Some of the painting projects for this point you've said could be delayed into the fall. They may slip into next year or get cancelled. How do you think about those three buckets? And given that you slowed down utilization for your plants what is the inventory level in the channel for the spring? Thank you.

P.J., I just tell you a little hard to hear you there. I think you asked about deferral or cancellation of projects into the spring or fall. Again we're getting information from our customers on a real-time basis. We do think as mandates are lifted, we'll see a surge of activity, projects that have been started will be completed. There is certainly some pent-up demand as Michael alluded to; we're seeing in Europe as stores open there. But the reality is some of these hardest hit markets, especially on the commercial side, we expect to have a prolonged recovery. In terms of their size of their business and also in terms of their balance sheet repair, those maintenance works in any new commercial projects are ones we expect to be either delayed or postponed or canceled.

Thank you. And then what about inventory levels? Have you sold paint into the channel for the spring? Did you have to slow down your plant as a result and can you just update us on sort of inventories in the channel? Thanks.

P.J., I would say the only one that had significant inventory build would have been refinish. They had anticipated a spring rebuild of the accidents that they had in the backlog. So now they're just working off the backlog. I would say that's the biggest one.

As we mentioned in our prepared remarks, our finished goods inventory was elevated, which it normally is at that point in the season. So we're working that down as we go through Q2 into Q3 as well.

Okay. I just wanted to clarify something you said about raw materials. You said you will give more comments on second quarter, Michael. But does that mean given that your volumes are down, does it take longer for raw materials to flow through? Is that what you meant because you want to give guidance on second quarter? Thank you.

Yes, we won't get a lot of benefit in Q2. But when we talk to you again in July after the second quarter earnings are released, we can give more clarity on how it will flow through in Q3. I mean, typically raw materials flow through in that 50- to 60-day time period, but since we're going to be buying a lot less, we don't anticipate much benefit in Q2.

The next question is from Jeff Zekauskas with JPMorgan. Please go ahead.

Thanks very much. In the 2009 recession, you were really able to move your SG&A expenses down pretty rapidly. But you're a leaner company than you are now or than you were then. So order of magnitude is your goal to try to knock your SG&A costs down maybe 15% year-over-year for the next three quarters, or do you have a different goal?

Yes, Jeff, we're certainly looking today at all our discretionary cost items. The one thing that we don't know is the duration of this crisis. As I mentioned, I think with the first question, we are seeing staggered start-ups. In 2008/2009 everything was down for an extended period of time, and we've worked our cost accordingly. Here it's a little more dynamic. We're certainly trying to manage our costs aggressively. Our break-even points are lower. It's going to be a little more difficult until we understand the duration of the crisis.

Okay. I guess for my follow-up, can you tell me what were the volumes like in your domestic store network in April?

Yes, there, if you look at that segment right now, they're probably down 15% through the first 27 days. I would tell you that it's a different mix than what we typically see. A lot of that also has to do with like repaint; people are not able to get into homes to do that type of work. You're seeing a lot less maintenance type work because of obviously the hotels. So I think that this trend will continue.

The next question comes from Vincent Andrews of Morgan Stanley. Please go ahead.

Thank you and nice to hear everyone's voice this morning. If I could just ask you on two specific raw materials, TiO2 and propylene. The TiO2 looks like it itself flat for the second quarter in most regions, despite obviously very challenging development conditions. And propylene holding up quite well despite the decline in oil prices. Some suggest that's a function of slower refinery runs and therefore less refinery-grade propylene. So just any thoughts on whether you think those dynamics will break down over time as the sort of the lower volume demand works its way into the S&D balance or if these are going to be a little stickier this time around?

Well, let's start with TiO2. We're convinced that this is a supply-demand-driven market. I'm sure we're hearing a lot about costs on their side about ore. Frankly, that's kind of a red herring. We are seeing lower TiO2 prices for Q2, not as much as it should be, but we're still working the system there. Demand obviously in the second quarter is going to be down considerably on the paint side, which is their largest end-use market. So we'll be shifting suppliers around to be able to make sure we get the lowest TiO2 price. From a propylene standpoint, it's not just propylene; it's the downstream derivatives of the resins. So on that side, that will be long as well. We're anticipating that we'll continue to see some price relief in that area, although that won't be a significant purchase in the second quarter like it normally is.

As a follow-up, Vince, on working capital, impressive that you took 120 basis points of sales out so quickly given the unprecedented nature of what took place late in the quarter. Can you just level set us on how we should expect that to progress through the balance of the year? Have you already fully implemented your plan or is there more to come in the second quarter or just how should we be modeling that?

Yes, again the visibility here, Winslow, and our operations teams deserve a lot of credit. They reacted and are reacting exceptionally quickly to the environment. As Michael mentioned, we're measuring the start-up of our facilities around customer demand. It's just too early to predict what the drawdown will be of our finished goods. We have to see the demand patterns more fully in order to understand the working capital impacts. It's certainly a high focus for the company as it is at every company.

The next question is from Kevin Hocevar of Northcoast Research. Please go ahead.

Hey, good morning, everybody. Glad to hear everybody's safe. On Slide 9, curious on how you select the mix of product line performance to impact your margins here because on Slide 9, you show that aerospace and refinish are likely to be the slowest to recover, which I believe are two of your higher margin businesses. So curious if you could comment on the mixed impact to your margins?

Yes, Kevin, if you look at the segments, obviously there are several businesses on this slide that we say a higher volume impact in our performance coating segment, which does have higher margins. That is a negative mix impact, as you alluded to. The businesses we expect to recover quicker have been in the industrial segment; that segment got hit hard in Q1. We do expect, again, some progression as we get to late Q2 and early Q3 in terms of the margins in that segment. I think your analysis is accurate.

I'm curious about the corporate expense guidance, which is projected to be between $40 million and $50 million for the second quarter. It seems like the first half of this year is significantly higher compared to the same period last year, where it was $90 million, and now it's on track for $105 million to $110 million. Why has it increased so much? Is that where the bad debt expense is reflected? I also thought that with the reversals in incentive compensation and some stock-based compensation, that should lower the amount. I'm just wondering why it's higher than expected.

Hey, Kevin, this is John. So I would remind everybody, it's slower than what we guided to in January. In the first quarter of last year was a lower historical first quarter. This first quarter came in more in line with where we are typically in Q1. I'd say Q2 is forecasted to be a little bit lower than a normal Q2. So we do have some initiatives. We're still funding digitalization, which Michael talked about in his opening remarks, is a new program that we're funding out of corporate. So we have some examples like that that also impacted.

The next question is from Arun Viswanathan of RBC Capital Markets. Please go ahead.

Good morning and thanks for taking the question. Happy to hear everyone is safe and sound for now. I guess I just wanted to ask about the 30% to 35% volume decline in Q2. Is there a way you could potentially size your business maybe into three buckets: automotive, architectural, and industrial? And what's the typical lead time that you have in those areas? And maybe automotive you'd have to switch into refinish and OEM but what's a typical lead time? I'm trying to gauge your confidence level in that 30% to 35%. Would you consider that kind of a conservative estimate? Or could it end up being better or worse than that? And then again, maybe just to help us with the verticals? Thanks.

Yes. That number is our current best estimate. If you think about automotive, we're just a delivery business. Now we do have some inventory on hand that we were going to be delivering in late March when they abruptly shut down. So we'll be asking our auto guys to take that inventory first, so automotive paint has aging requirement to it. We try to make sure that we give them the fresher stuff. But otherwise, they're placed in orders. I always tell people in the automotive segment. They give us a 60-day outlook, which is probably 80% accurate, a 30-day outlook, which is 90%, and then a week or two before, it's 100% accurate. Right now, we're still sitting upwards of 21 days before they're starting up. So what they have given us a start-up number, we've factored that into the estimate we gave you. We've looked at demand. We anticipate that they will ramp-up rates throughout the back half of the second quarter, so that's how we factored that in for automotive. For refinish, we think the orders will be light given the fact that there's no density, no congestion, no miles driven. We anticipate that we won't see significant inventory in the refinish side until the back half of the quarter. We've obviously commercial transport and light industrial coatings; we're going to continue to see those. On the architectural side, those orders are placed the day before. They don't give you a lot of notice. You do know when the big projects are coming. You're geared up for the big projects. But the day-to-day kind of stuff, they show up and tell you what they need, place their orders by noon, and pick up at 7 A.M. We expect that to continue; that order pattern, we don't expect to get a lot of visibility differently than we're getting now.

Okay, that's helpful. Then just on the margin front. When you look at the Q1 margins they held relatively well, all things considered. When you consider the cost actions that you're accelerating, how should we think about the decremental margins in Q2? Is there an opportunity for those to be slightly better than what you've experienced from the COVID losses in Q1? Thanks.

Yes. Again, as we mentioned, that's certainly our target. There are some things working against that. But we're certainly targeting to improve versus the $90 million segment earnings decline on the $225 million sales decline that we experienced in Q1.

Anyway to potentially quantify that or help us figure out how to do that?

Again, only I tell you, Arun, as I said at the outset of the question-and-answer session, there are things working for us and against us. We have more time to be planful and have implemented discretionary cost controls that we didn't have at our benefit in March. We have some costs that are global in nature that we need now in China and hopefully need them in Europe in the next coming weeks.

The next question is from Duffy Fischer of Barclays. Please go ahead.

Hey good morning, folks. Question just around a couple of your end markets and your customers there. You talked about maybe the potential on the debt side for those small contractors. But if you look at auto refinish, if you look at contract or architectural, how do you judge the health of those customers of yours? Were they able to get some of the money from the government? Are you setting up funding plans for them? And if you use 2009 as an example, did you see significant consolidation and customers going away in a reset of that model?

So from the architectural side, no we are not funding our painters. We're certainly more than happy to work with them. Right now, there still is a fair amount of commercial; there is backlog out there that they're going to work out. The question is, when does that backlog go away? They also have variable cost structures. So they hire painters during the busy season and then let them go as the season winds down. So they have the opportunity to manage their cost structure from that regard. So we'll be watching it. We do think that this could lead to more MSO type activities from the body shops. Clearly that's a benefit for us if that happens, and when that happens. We'll be watching out for that. But the small body shops, I would say, they also have somewhat of a variable cost structure as well. I would anticipate that they would be applying for the PPP money to support them in this regard.

Okay. And then, if we could just focus on the Comex business in Mexico, with the fallen Peso and they seem to be a little bit slower on the COVID response, how would you judge the health of the Mexican business? And then what are the costs down there that are somewhat dollar-based versus the cost structure that's Peso-based down there?

So from a raw material standpoint, Duffy, about now call it 60% of the raw materials are dollar-based. So hence that's why we'll be able to pass through a price increase down there to offset that here in the near-term. When you think about the rest of the business, our concessionaire network is not owned by us; it's owned by our partners. We don't have that big fixed-cost structure hanging over our heads down there. What I can tell you right now is that the sellout in April is actually pretty good. We have about 1,200 stores that are operating what we call curtain down. You can't physically walk in the store. But only 250 of those 1,200 are actually not delivering. The vast majority of them are still delivering products. That is continuing to progress. I would tell you our overall Mexican team is somewhat cautious though because the current government is not as pro-business as the prior government. We think that the back half of the year will be a little bit more challenging. Construction projects that are underway will probably be completed. But there's not a whole lot of new big stuff being started. That does give us a little pause for concern as we'll be watching that very carefully.

The next question is from Laurence Alexander of Jefferies. Please go ahead.

Hi there. Two quick questions. Can you talk to us about incremental margins on the recovery if you expect any significant difference between Europe and the U.S.? Secondly, with the successes or the learnings that you've had from the shift to the delivery model, how should we think about this longer term? Do those volumes switch back to the stores on the restart or is the goal to grow that? Is the cost to the consumer similar or lower than purchasing through the stores?

Laurence, I would say that the incremental margins on the way up in Europe and the U.S. will be somewhat similar; they should be on the higher end of the spectrum. That will be a positive. From the delivery aspect, as you know, we've been a proponent of the delivery model for some time now; we're working with our premier authorized dealer network. We had a good quarter from that standpoint in the first quarter. We think the delivery model will continue. Right now, once our customers get used to it, I think that trend line will continue. We've tried to convince the owners of the businesses that when their painters come into our stores, they're not painting; they're not getting paid. The more we can keep them out on the job site, the better it is for the owners. I think they're going to start to see that become more evident in their business, so I think this is a long-term trend that's going to continue.

The next question is from Mike Harrison of Seaport Global Securities. Please go ahead.

Hi, good morning. The increase in restructuring number to me implies a structural cut that isn't including areas like reduced travel and entertainment, furloughs, other discretionary cutbacks that you're temporarily reducing. So can you verify that those temporary reductions are not included in that restructuring number and how much could we be talking about in terms of SG&A savings from these furloughs and other temporary cutbacks?

Yes, Mike, the restructuring savings that we cited do not include these other discretionary costs. We haven't itemized or sized that level. Again, it's going to be part of the tempering we're going to try to do on the decremental margins that I alluded to several times.

Hey, Mike, this is John. Just to remind folks that in the financial assumptions slide, we did provide a range of 28% to 29% for SG&A for Q2. So we did want to give you some help in modeling. So that might be a number you can take a look at.

The next question is from Arun Viswanathan of RBC Capital Markets. Please go ahead.

Good morning and thanks for taking the question. Happy to hear everyone is safe and sound for now. I guess I just wanted to ask about the 30% to 35% volume decline in Q2. Is there a way you could potentially size your business maybe into three buckets: automotive, architectural, and industrial? And what's the typical lead time that you have in those areas? And maybe automotive you'd have to switch into refinish and OEM but what's a typical lead time? I'm trying to gauge your confidence level in that 30% to 35%. Would you consider that kind of a conservative estimate? Or could it end up being better or worse than that? And then again, maybe just to help us with the verticals? Thanks.

Yes. That number is our current best estimate. If you think about automotive, we're just a delivery business. Now we do have some inventory on hand that we were going to be delivering in late March when they abruptly shut down. So we'll be asking our auto guys to take that inventory first, so automotive paint has aging requirement to it. We try to make sure that we give them the fresher stuff. But otherwise, they're placed in orders. I always tell people in the automotive segment, they give us a 60-day outlook, which is probably 80% accurate, a 30-day outlook, which is 90%, and then a week or two before, it's 100% accurate. Right now, we're still sitting upwards of 21 days before they're starting up. So what they have given us a start-up number, we've factored that into the estimate we gave you. We've looked at demand. We anticipate that they will ramp-up rates throughout the back half of the second quarter, so that's how we factored that in for automotive. For refinish, we think the orders will be light given the fact that there's no density, no congestion, no miles driven. We anticipate that we won't see significant inventory in the refinish side until the back half of the quarter. We've obviously commercial transport and light industrial coatings, we're going to continue to see those. On the architectural side, those orders are placed the day before. They don't give you a lot of notice. You do know when the big projects are coming. You're geared up for the big projects. But the day-to-day kind of stuff, they show up and tell you what they need, place their orders by noon, and pick up at 7 A.M. We expect that to continue; that order pattern, we don't expect to get a lot of visibility differently than we're getting now.

Okay, that's helpful. Then just on the margin front. When you look at the Q1 margins they held relatively well, all things considered. When you consider the cost actions that you're accelerating, how should we think about the decremental margins in Q2? Is there an opportunity for those to be slightly better than what you've experienced from the COVID losses in Q1? Thanks.

Yes. Again, as we mentioned, that's certainly our target. There are some things working against that. But we're certainly targeting to improve versus the $90 million segment earnings decline on the $225 million sales decline that we experienced in Q1.

Anyway to potentially quantify that or help us figure out how to do that?

Again, only I tell you, Arun, as I said at the outset of the question-and-answer session, there are things working for us and against us. We have more time to be planful and have implemented discretionary cost controls that we didn't have at our benefit in March. We have some costs that are global in nature that we need now in China and hopefully need them in Europe in the next coming weeks.