PPG Industries' (PPG) CEO Michael McGarry on Strategic Business Review Update - Call Transcript

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About: PPG Industries, Inc. (PPG)
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PPG Industries, Inc. (NYSE:PPG) Strategic Business Review Update Call May 21, 2019 9:00 AM ET

Company Participants

John Bruno – Director-Investor Relations

Michael McGarry – Chairman and Chief Executive Officer

Vince Morales – Senior Vice President and Chief Financial Officer

Conference Call Participants

Matthew Krueger – Robert W. Baird

John Roberts – UBS

Frank Mitsch – Fermium Research

Kevin McCarthy – VRP

Michael Sison – KeyBanc

David Begleiter – Deutsche Bank

Christopher Parkinson – Credit Suisse

P.J. Juvekar – Citi

Arun Viswanathan – RBC Capital Markets

Andrew Keches – Barclays

Don Carson – Susquehanna Financial Group

John McNulty – BMO

Jeff Zekauskas – JPMorgan

Steve Byrne – Bank of America

Dmitry Silversteyn – Buckingham Research

Jim Sheehan – SunTrust

Bob Koort – Goldman Sachs

Operator

Welcome to the PPG Industries Strategic Business Review Update Conference Call. My name is Nicole, and I will be your conference specialist today. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] 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.

John Bruno

Thank you, Nicole, and good morning, everyone. Once again, this is John Bruno, Director of Investor Relations. Thank you for joining us this morning to discuss the completion of the strategic review of PPG's business portfolio. If you recall, in January, we communicated that PPG would complete a strategic review of its business portfolio by the end of the second quarter. Today, we will provide the results of that review as well as to cover a few other substantive topics.

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. Michael will walk through a few slides, which are being presented on this webcast and currently available on our website, ppg.com. Following Michael's review of the presentation, 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 the 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.

Michael McGarry

Thank you, John, and good morning everyone. We appreciate your participation on today's call. The focus of today's call is to communicate the details and the results from the assessment of our strategic business portfolio review. As John mentioned, we will also take this opportunity to cover the results of two additional reviews focused on further improving the operational performance of PPG as a whole as well as specifically with respect to our U.S. and Canadian architectural coatings business. These reviews were conducted in addition to the strategic review of our business portfolio as part of our commitment to continuous operational improvement and our focus on shareholder value.

Turning to the presentation slides. First on Slide 3, I'll remind everyone of the commitments and targets we communicated during our fourth quarter earnings call in January 2019. First, from a financial perspective, we are reiterating our full year financial targets, including 3% to 5% sales growth and 7% to 10% EPS growth. Both of these figures exclude foreign currency translation impacts. Embedded in these targets is $70 million in cost savings from our previously announced cost-savings program in 2016 and 2018. Also, we continue to hold management to a very high standard and will maintain a minimum of 10% EPS growth for variable long-term management compensation.

Finally, during 2019, we will recommend to our Board of Directors a per-share dividend increase, continuing PPG's long legacy of rewarding our shareholders with dividend increases. One of our commitments relates to enhancing our governance structure, and along those lines, we included in our proxy statement management proposals to eliminate our supermajority voting and classified Board requirements.

This marks the third and fourth time respectively in last seven years that we have put these proposals forward for shareholder vote. PPG's bylaws require an affirmative vote of 80% of PPG's outstanding shares to approve these proposals. To aid in reaching this threshold, we hired a highly regarded proxy solicitation firm to seek additional shareholder votes by both telephone and mail.

Despite these expansive efforts, the two proposals did not receive sufficient shareholder support as in the past. We will review the outcome of this year's vote and potential future steps later this year.

Now I'd like to move to the principal part of our call. It's important to remind everyone that we have a long history of actively managing our portfolio, and as illustrated on Slide 4, we have completed a number of acquisitions and divestitures over the past five years. In addition, we've taken decisive actions with regard to our cost structure with a focus on business and regions that are facing sluggish demand and opportunities to reduce administrative costs, capturing synergies we commit to for our acquisitions and responding to specific market or business unit conditions.

This slide depicts these actions for only the past five years. If we widen the time frame, you would see that we have consistently completed value-creating acquisitions, divested various noncore businesses or product lines regardless of size and acted aggressively on costs. All these actions over the past several decades are a result of ongoing and well-known PPG strategic review process that is action-biased.

We fully intend to continue reviewing our businesses to ensure each is consistent with our strategy, meeting our expectations and creating appropriate shareholder value. Moving to Slide 5, which details the three recently completed assessments. Two independent third-party financial advisors Goldman Sachs and Morgan Stanley, were engaged in performing independent strategic review under the direction of the Board of Directors. These advisers completed separate and independent evaluations of our business portfolio and balance sheet opportunities with a focus on maximizing shareholder value.

In addition to these two independent strategic reviews, we concluded a separate engagement by another globally recognized and well-regarded consulting firm focused on our U.S. and Canadian architectural coatings business. The primary objective of this engagement was to establish and execute an action plan following the customer assortment changes that occurred in mid-2018 to rapidly return this business to its prior earnings level.

Finally, consistent with PPG's constant focus on operating excellence, we completed a comprehensive internal review and organizational assessment. As these three separate initiatives progress, we have regular process updates with our Board of Directors who are deeply engaged and provided oversight and feedback throughout the process.

A clear focus was on creating the most value for our shareholders, and the Board's instructions were to hold nothing sacred during the reviews. Now let me discuss the details and results of these assessments.

Slide 6 summarizes the scope and key considerations of the strategic reviews conducted by the two independent financial advisers. The scope for the reviews included reviewing various alternatives to separate the architectural and industrial coatings businesses, reviewing other portfolio and strategic options and completing a balance sheet and related cost deployment analysis focused on value-creation opportunities. Key considerations included net value creation for PPG shareholders, pro forma equity market valuation estimates, implication on business competitiveness, customers and ongoing growth potential, value of synergies or dissynergies and other financial impacts resulting from portfolio adjustments, tax implications, balance sheet effects, liability assignment and cash deployment considerations. The reviews were very thorough, and each financial adviser analyzed various scenarios.

Ensuring independence, the advisers utilized external financial estimates as the anchor for their financial analysis, and PPG management wasn't directly involved in their analysis except to answer occasional adviser questions to provide requested company-specific details that are not publicly available and to receive updates as to the timing of the expected completion. Also, the advisers worked completely independently of each other with neither adviser having access to the other adviser's work. Once again, these were thorough and rigorous reviews that took multiple months to complete.

Slide 7 is an assessment summary of this work. Despite running two parallel and independent analyses, both advisers were consistent in their findings and recommended we stay the course with our current strategy and business portfolio as the best opportunity to maintain strategic optionality, minimize risk and maximize shareholder value. The following are the key findings from the financial advisers. A split of the entire global architectural coatings business is not likely to result in value uplift for PPG shareholders. A change in the portfolio would likely create potential meaningful dissynergies, incremental costs and potential tax leakage.

Even excluding any potential dissynergies, a separation is likely to result in a material shareholder uplift. A split or separation will reduce overall strategic flexibility and lower potential synergies available in the future acquisitions. Both advisers recommend that we continue to pursue accretive acquisitions as the primary use of our cash. The assessment took into account PPG's excellent track record of executing accretive acquisitions, including our disciplined process. The measure of a successful acquisition process is shareholder value creation, in our opinion, the ultimate measure of that return on capital.

As illustrated on Slides 18 and 19 in the appendix, our return on capital from acquisition averages about two times our weighted cost of capital. Cumulatively, PPG's adjusted return on capital has been consistently in the mid- to high-teen percentages and remains one of the highest in our sector. This is a measurable proof that we have been successful in deploying capital in a disciplined manner and effectively integrating the over 60 acquisitions that we completed in the past 20 years. We are very cognizant that acquisitions use large shareholder money, and we are very proud to deliver these returns consistently for our shareholders.

As detailed on Slide 8, after reviewing the assessment of the independent financial advisers, our Board concluded that maintaining our current business portfolio supports competitiveness versus all major coatings peers, nearly all of which have mixed business portfolios. Retained investment flexibility via access to a broader M&A pipeline for future value-creation opportunities with neither business being capital constrained; maintained financial flexibility via diversified earning streams, a robust balance sheet and strong cash flow; preserve operational and synergy benefits, including supply chain, R&D, operational footprint and top quartile SG&A.

The company will continue to focus on innovation and operational excellence as primary levers for organic shareholder value creation. In addition, we will continue to deploy capital in a disciplined manner, which you would come to expect from PPG. Finally, consistent with many generation of PPG leaders, we will continue to review our business portfolio and take appropriate action regarding underperforming product lines, businesses or regions. I say to our PPG team all the time, you have to continually earn your way into our portfolio.

Now we'll move to Slide 9, summarizing our second initiative, a consultant engagement we conducted to assess the operational and growth investment opportunities for our U.S.-Canadian architectural coatings business. The focus of this review was centered on identifying and executing on action plans to fully and rapidly recover our earnings following the customer assortment changes we experienced in 2018 and to position the business for success going forward, including implementing leading-edge business analysis tools, world-class management case practices and accelerating development of digital and e-commerce strategies.

Obviously, because much of this review gets to the core of our strategic and commercial direction for this business going forward, we are not going to discuss the actions and recommendations publicly due to competitive reasons. But what I can say is that we had a full and in-depth review, both internally and with our Board, of the business growth strategies and operations.

The most immediate outcome was the establishment of a project management office to provide ongoing real-time measurement and guidance on the opportunities identified to return this business to the prior earnings level. This includes execution of the restructuring program we announced in mid-2018. However, this is only one of the many elements of the project management office. We are continuing to strategically implement the findings from this engagement, and I'm pleased to report that we are on pace to deliver in the upcoming third quarter, in the short period of 12 months, business earnings that are consistent with the pre-customer assortment level change.

Lastly, on Slide 10 is our third initiative, which was an internal in-depth assessment of our business and product array by region across a variety of financial measures, including sales growth, profitability and cash flow. As evidenced by both our business and product line divestitures on Page 3, this has historically been a strong competency for PPG. And at a minimum, we complete annual strategic reviews of our business units, major regions and also of our support functions.

In addition, this year, we completed subregion reviews and product segment reviews. These line-by-line reviews were vetted against our current and future economic expectations. To the degree possible, we also rolled these reviews, our recently completed acquisitions with the obvious limitation that we just closed three acquisitions within the past six months.

The outcome of this detailed review is to set a decisive, strategic action plan to optimize our operating footprint. This includes exiting certain modest business lines of small regional product positions and approaching certain markets with different business models. This also includes rightsizing certain businesses based on the end-use demand where our customers are doing the same thing. It also covers various regional elements given today's demand environment.

While we are taking certain redundancy actions associated with our recent acquisitions to begin to realize the targeted synergies, our strength is that at PPG, we don't consider synergies to be just from the acquired company. Many of our acquisitions have their own best practices, and we will adopt these acquired best practices throughout PPG. As a result of these actions, we expect to take a charge in the second quarter of $185 million to $200 million, although we are still working to finalize the final details. This charge excludes certain noncash items such as accelerated depreciation on certain manufacturing footprint adjustments that we will incur ratably and other associated expenses that will be recognized as incurred based on accounting guidelines.

We expect to provide more detail about these items on our second quarter earnings call as they occur over the next several quarters. We are targeting annual run rate savings from these actions of about $125 million once fully implemented. We expect the majority of these savings to benefit years 2020 and 2021. We will begin to work on many of these structural actions immediately. It will take multiple quarters to implement those results in a more modest impact on 2019.

Slide 11 summarizes the conclusions of these three separate reviews. We believe the conclusions and actions presented today best position the company for continued growth and create additional shareholder value. Finally, I'd like to thank our shareholders and employees for their continued feedback and support.

This concludes our prepared remarks. Once again, we appreciate your interest in PPG. And Nicole, would you please open the line for questions?

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Matthew Krueger of Robert W. Baird. Please go ahead.

Matthew Krueger

Hi, good morning, everyone. How are you doing today?

Vince Morales

Good morning, Matthew.

Matthew Krueger

So my first question is what criteria did the strategic review process prioritize as it relates to analyzing the business under a variety of economic scenarios just given the significant end market diversity across PPG as a company?

Vince Morales

So Matthew, as Michael alluded to in the prepared remarks, the financial estimates that advisers were anchored to were external estimates, IBIS estimates that would include certainly the current year as well as the forward-looking years. And embedded in those would be the equity investor assumptions on the global economy.

Matthew Krueger

Okay. Got you. That makes sense. And then just a second question. So after the strategic review, have you arrived at any different or more focused conclusions on your M&A priorities or future business expansion opportunities as it relates to growing your footprint just given some of the commentary around kind of proving – pruning less profitable businesses and lines and things like that?

Michael McGarry

No. Matthew, this is Michael. I don't think it changes anything. As you can see in the appendix, we've been very successful on acquisitions, whether it's been in Europe or the U.S. or Latin America. And many of the acquisitions we've done recently come with facilities in China, which have allowed us to continue to grow faster than the market. So I think we're pleased with where we are.

Operator

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

John Roberts

Thank you. You've got at least four non-paint businesses: silicas, high-glass resins, OLED materials and airplane windscreens. Did the review evaluate the roles of these businesses in the portfolio?

Michael McGarry

Hey John, this is Michael. The review covered all of PPG. And what I would tell you about those businesses you referenced, they all have returns above the company average.

John Roberts

And then I had the impression that you moved up this announcement from what was originally expected to be the end of the quarter. Was there a reason for the timing shift?

Michael McGarry

No, we wanted to complete it before the end of the quarter. And once the advisers were done, our internal work had already been done. So the timing was – we didn't feel a reason to hold it till the end of the quarter.

Operator

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

Frank Mitsch

Good morning gentlemen and thanks for the comprehensive review this morning. Just curious, have these findings been shared with any shareholders prior to the press release going out this morning?

Michael McGarry

Zero.

Frank Mitsch

Thank you. And I was wondering if you might be able to size some of the buckets or areas where you're expecting the cost-savings program, the $125 million, and the charges of $185 million to $200 million that you're taking. On those charges, are some of the expenses associated with the strategic review, the consultants, et cetera, are buried in that or – it's not buried, included in that? How can you help us kind of bucket what's going on with this latest cost-savings program?

Vince Morales

Hey, Frank this is Vince. All the restructuring charges relate to curtailments of businesses or business activities. There are no charges in that, in those buckets related to work done for this assessment. The three primary buckets we have for restructuring, we're going to continue to optimize our manufacturing footprint, first and foremost. We're also looking at, again, some small product lines or some places around the world we have very small positions or we haven't been proven to grow at levels consistent with our strategies.

And we're also looking at the economic backdrop today and making some decisions around how that looks going forward and starting to evaluate the sizes of certain regions or businesses. So those will be all the work we're doing from a restructuring perspective. As Michael alluded to in the prepared remarks, we're not done with that analysis yet. We will be completed by the end of the second quarter. And in our July conference call, we can provide some more granular details on that in the July earnings call.

Operator

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

Kevin McCarthy

Yes, good morning. Michael with the various strategic alternatives that the Board considered, did any of them receive meaningful support other than the course of action that you've outlined this morning? Just wondering whether the Board is unanimous in its approach or whether there was any alternative opinions put forth.

Michael McGarry

No, the Board was unanimous. I think when you go through the details that the advisers put forward plus the internal review, the conclusions were pretty obvious. So there was zero opinions that we should do anything different beside what we're announcing today.

Kevin McCarthy

And it sounds like some pruning of smaller product lines will be in the cards going forward. Can you address what criteria you'll look at in determining whether to keep or separate business lines or product lines with subpar profitability?

Michael McGarry

Yes. So the first one, of course, is cash flow return. So that would be one. Second is our future outlook on the ability to grow. So if we're looking at a region that we've had two or three years in a row of, what I would call, minimal to no profitability and if we anticipate that the economic conditions in those regions or subregions would continue, then we're looking to trim support in that area.

Operator

Our next question comes from Michael Sison of KeyBanc. Please go ahead.

Michael Sison

Hi, guys. Michael, I think you mentioned that your goal for EPS growth was 10%. Can you maybe walk us through the variables that get you there longer term and if that goal is an all straight-up 10% goal? Or is it ex currency and such?

Michael McGarry

Well, as we said in our prepared remarks, it's ex currency. And the goal for us is to continue to drive growth in the various businesses, capital deployment, the growth from the acquisitions, cost savings are all part of that metric.

Vince Morales

And Mike, the other thing we're obviously working on is recapturing our margins so that price of raw mixture that has been unfavorable in the past couple of years, we're working to get that back in our favor in 2019.

Michael Sison

Okay. Great. And then in terms of your reiterated guidance for this year, any sort of update near term how trends are going in terms of sales growth and where that's so far here in 3Q?

Michael McGarry

So we can confirm our two-quarter guidance.

Vince Morales

Yes. We gave guidance with a range in Q2. The quarter is shaping up as we had envisioned when we gave the guidance about five weeks ago. The guidance a little bit of a range due to some of the geopolitical and economic uncertainty out there. We're comfortable where we stand today. We did have – when we gave that guidance in mid-April, we did have visibility for three or four weeks in most of our businesses that used to grant us that visibility. So again, we're comfortable right now with the guidance we've put forth in Q2.

Operator

Our next question comes from David Begleiter of Deutsche Bank. Please go ahead.

David Begleiter

Thank you, good morning. Michael and Vince, of the $125 million of cost savings, are any going to come from U.S. and Canada architectural?

Michael McGarry

Nothing of materiality.

Vince Morales

David, as you know, we have a separate program that Michael talked about in the opening remarks really focused on that recovery of that business as profitability. There are certainly some smaller items in all of our businesses that we're tackling. But the majority of the restructuring comes from other regions or other businesses.

Michael McGarry

And David, just to add to that. Just as a reminder, when we announced the assortment change, we said that we were going to be taking plants down, and we have closed four plants since that period of time. So all those actions have been taken. That's why we're confident that our earnings in 3Q will be at or better than the prior earnings before the assortment change.

David Begleiter

Very good. And just on the charge for this current program, how much is cash versus non-cash?

Vince Morales

$200 million – $185 million to $200 million is primarily cash. Again, as we said in the prepared remarks, there are non-cash charges that we'll incur ratably as we accelerate depreciation on certain assets. Again, we'll give some of that information out as we hit the 2Q call. There are also certain cash charges beyond $185 million to $200 million that we'll expense as we incur per the accounting guidelines. Again, we'll cite that in 2Q earnings call, but that's not a significant amount.

Operator

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

Christopher Parkinson

Thanks. So as far as the realignment is concerned, to what extent do you believe there are kind of incremental opportunities for the, let's say, the future portfolio, whether that be cross-selling powder and liquid into industrial customers? Any other opportunities, even something on the services fronts for aero and/or industrial? Just could we get an update there? Thank you.

Michael McGarry

Well, we do cross-selling all the time. I think one of the reasons why the advisers continue to recommend the acquisitions as well as the path that we have internally recommended is that if you look at like our protective marine business, when we go into a new market with architectural footprint, we're able to increase the size of our protective marine business. We're able to do some additional cross-selling with industrial – light industrial products. So those are two examples of where that happens. We always look for opportunities in our automotive space to sell other products in our industrial. Obviously, we just bought Whitford with the low-friction coatings they have. We have a very good automotive team that will be trying to sell more of those coatings into the automotive and heavy-duty equipment market. So cross-selling opportunities abound in this coatings space.

Vince Morales

And Chris, if I could just add. The other opportunities we have is really pushing R&D across the portfolio. There are customer demands in different coatings verticals and we try to meet each year. We find either that same year or another point in time those customer demands may pop up somewhere else in our portfolio in another region, in another business. We're able to very quickly redeploy our R&D across, again, our entire portfolio in a similar vein of cross-selling but certainly up to technology scale.

Christopher Parkinson

And you don't miss a little but can you just further break down the $185 million to $200 million 2Q charge, the non-cash items? Just can you help us reconcile that versus the $125 million? Just is there any chance that savings will be materially higher when it's all said and done? Thank you.

Vince Morales

Thanks, Chris. No, again, we're still working through the final details of the charge. Again, our target is $125 million of savings. The cash outlay is going to be between $185 million and $200 million, again, plus some other costs that will be recognized as incurred. That's the information we have today. Again, we'll provide some more granular details on that in the July earnings call.

Operator

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

P.J. Juvekar

Yes. Hi. Good morning, Michael and Vince.

Michael McGarry

Good morning, P.J.

P.J. Juvekar

This architectural study, you value at your channel strategy. What I mean by that is would you de-emphasize your particular channel like the dealer network or maybe open more stores? Was there any finding there that looked at your channel strategy and how to grow organically?

Michael McGarry

Yes. They looked very carefully at all phases whether it's company-owned stores, dealers or the big boxes. And they were very comfortable with our current strategy, and they validated that. Obviously, they have a few tweaks that they suggested that we consider. But by and large, it was consistent with what we're doing.

P.J. Juvekar

And then secondly, eliminating some product lines, are you moving up the price ladder? Meaning, would your price/mix move up in the subsequent quarters?

Michael McGarry

That would be a good assumption, P.J. I think that when you think about finding some of these – these are going to be small products and small countries. So the answer is yes, but it's not going to be something you would probably find quickly.

Vince Morales

Yes. P.J., Vince again. And again, normal process here as we look at profitability by business, by region. There's always a tail of products and customers and regions where you try to work on that tail year in and year out. You should assume these are the lower-profit portions of the tail and we're trying to act on those. Some of those were put in place in the past as potential growth opportunities that didn't materialize, but we're trying to make sure we react based on current environment.

Operator

Our next question comes from Arun Viswanathan of RBC Capital Markets. Please go ahead.

Arun Viswanathan

Great, thanks. Good morning. Just wondering about the volume side of your business. Volumes have been weak, and obviously, there's been macro pressures. But did the review include any new initiatives from a company standpoint that, that would drive extra volume growth? Is there anything that you could do internally to accelerate and potentially recover some of that volume?

Vince Morales

Yes. I'd say two things, Arun. One, our review – our internal review as well as the Ibis estimates had certain assumptions in them, we definitely are focused on our cost-savings programs around our view of the economy in certain regions, et cetera. With respect to the current environment, it is certainly a bit choppy out there. Again, that was assumed in our Q2 guidance and our full year guidance. And so there's no change there. We do have significant amount of work underway in our U.S. architectural business around the consulting feedback to try to increase our volume growth there. And all of our businesses, frankly, have significant actions around volume growth even in an amiable volume environment. So there's nothing out of the study other than the architectural work that's specific to that. But again, we have significant organic R&D efforts underway that have been underway for quite some time, and we're executing against those.

Arun Shankar

And on the cash deployment side, did it also include maybe some consideration of larger-scale M&A? It seems like that's been something that you would have considered before. Where do you stand on whether that be additive to shareholder value? Thanks.

Michael McGarry

Yes. So Arun, they did make specific recommendations. Obviously, I don't think this is the environment which to go through which ones they did do. But let's just say they didn't turn up anybody that we were not fully aware of.

Vince Morales

And I – again, I think what we've been talking about the last year is it's a very active M&A space right now. Michael mentioned we closed three deals in the last six months. There's been another three deals done in, really, in the last six weeks. Those – some of those have been large deals several billions of dollars. We continue to look at our pipeline. We continue to bet opportunities. We still feel that's a very good use of shareholder cash at the right price. We will remain – have remained disciplined, but the pipeline's active now. If we don't have an opportunity to close on certain deals, then we'll look at share repurchase as a lever to return cash to our shareholders.

Operator

Our next question comes from Andrew Keches of Barclays. Please go ahead.

Andrew Keches

Hi, good morning everyone. Just a couple or two questions in balance sheet. I guess, first, leverage has certainly ticked up over the last year and a half. Is there a debt metric or, perhaps, a ratings target that you'd like to maintain through the cycle? And then I think as a follow-up, you clearly highlight preserving financial flexibility for opportunities. Is it possible to frame up maybe how much balance sheet capacity you would have versus the opportunities? Or said differently, I guess, are A- credit ratings sacred to the business?

Michael McGarry

Andrew, we've been pretty consistent in saying we want to be investment – maintain our investment credit rating. We also said we will stretch for the – a really good acquisition, which we did try year and a half ago. So those parameters remain in place. If it's a really good one, we're happy to stretch. But right now, investment grade is where we're comfortable being.

Andrew Keches

Thanks.

Operator

Our next question comes from Don Carson of Susquehanna Financial Group. Please go ahead.

Don Carson

Yes. A question on your consultant work on the U.S. and Canadian architectural. What recommendations they have in terms of your future investment in the business? Is this something where you're just going to not invest capital or you're going to be more aggressive in store openings or branding such – you seem like you're going to be pushing the PPG brands? Can you just talk about your willingness to invest in that business?

Michael McGarry

And we're going to continue to invest to grow that business. But I always remind people; we run a global architectural business. So when we look at store openings, we look at where we're going to have the bang – the best bang for the buck. And obviously, Mexico has been a high-return environment for us. U.K. and France have been high-return environments. So we're going to continue to best selectively in the stores in the U.S. where it makes the most amount of sense.

Don Carson

And then there is a follow-up, how big a factor was the tax leakage from separating architectural and industrial?

Vince Morales

Yes, Don. This is Vince. Again, it depends on your view of what the value of the business is. We don't – we're not going to give out specific numbers on the call here. But in different scenarios, tax leakage comes into effect on any company's portfolio. So again, it wasn't the biggest decision driver. The biggest decision driver was earmarked on one of the slides or were the dissynergies. And that was the bigger, much bigger factor in terms of the analysis.

Operator

Our next question comes from John McNulty of BMO. Please go ahead.

John McNulty

Yes, good morning. Thanks for taking my question. So, with regard to the returns analysis that you did on the M&A, the results coming in at two times your cost of capital is impressive. Does it make you think you should be even more aggressive with M&A going forward considering how high the returns have been on the acquisitions you've done?

Michael McGarry

Well, John, that was a point that was debated by the advisers. Again, we're going to be diligent and make sure we're disciplined in – when we look at all these things. Sometimes, we do have better returns because the raw material synergies pop a little higher, the sales synergies pop a little higher. But I think our approach has been consistent. But I think you raised a valid point and the advisers also raised a valid point.

Vince Morales

Make no mistake anyway; all those decisions are with the backdrop that it's a shareholder money. So I'd rather have a little higher batting average and continue to return value to our shareholders. But by the same token, it's a very valid question.

John McNulty

Fair enough. And then just a follow-up. On the bucket that you have on page, I think, it's 2017 where it shows the technology, geography, scale and the JPG buckets in terms of the types of acquisitions you've done, are there any that stand out any of those buckets that stand out whether the return on noticeably either higher or lower than kind of what you were talking to in the total corporate average?

Michael McGarry

No, not really, John.

Vince Morales

Yes. It's more of the property, John. More the ability for us to strike, obviously, a good acquisition price and then, obviously, synergy level. Those are typically the key parameters that drive the returns.

Operator

Our next question comes from Jeff Zekauskas of JPMorgan. Please go ahead.

Jeff Zekauskas

Thanks very much. Will the Goldman and Morgan Stanley studies be disclosed?

Michael McGarry

Sorry Jeff, no.

Vince Morales

So Jeff, fair to say a lot of proprietary information that's nonpublic from a company perspective.

Jeff Zekauskas

Okay. And second, in the assessment of the value of breaking the company into two pieces, an industrial piece and an architectural piece. Was there also an examination of the strategic possibilities of the two smaller companies, that is if there were merger possibilities or sale possibilities, divestiture possibilities that were weighed against the dissynergies that would come from splitting the company into two pieces? Or was it simply a simpler analysis of looking at the big company versus two smaller companies and their valuation in the public markets with raw material dissynergies? How complex was the analysis?

Vince Morales

Yes. Jeff, the advisers did a thorough analysis, more of the former of what you talked about. Again, there's multiple permutations everybody can go through, but they tried to do the perspective from our shareholders. So the shareholder has a remainco and the spinco, what that means. Again, there certainly a lot of assumptions go into these analyses, but I do believe the advisers tried to do their perspective based on the shareholder value creation, the ultimate shareholder value creation.

Operator

Our next question comes from Steve Byrne of Bank of America. Please go ahead.

Steve Byrne

Yes, thank you. Did your strategic review lead you down the path of reassessing your current structure of your segments? For example, is two optimal? What about three? Or why are five businesses in one and four in the other? Could you have pulled architectural out? those lines also assessed in the review?

Vince Morales

Hi Steve, it's Vince. Our reporting structure was not part of the deliberations here. It's something we control as a company. We had that reporting structure as it really separates distribution-type businesses versus B2B-type businesses. We're comfortable with our reporting structure as it exists, but this analysis was not inclusive of that.

Steve Byrne

And a question on your Home Depot business. Have you increased your commercial investment in that relationship? And are you seeing any traction as of now in the investment?

Michael McGarry

Well, all I would tell you is that we've been very happy with our relationship with Home Depot. We've grown with the various DIY segments better than our underlying customers. I won't get into a specific customer, but we've been very pleased with our growth in that area.

Operator

Our next question comes from Dmitry Silversteyn of Buckingham Research. Please go ahead.

Dmitry Silversteyn

Yes. Good morning. I just wanted to follow up on Arun's question from earlier. Was there anything in this review process that sort of identified the source of the difficulty that you have of growing the business organically, even in line with your markets, let alone exceeding the market growth rate? And if so, what are some of the steps that you're going to be taking in the near and the midterm to speed up your organic growth performance?

Michael McGarry

Dmitry, the primary focus of this was the performance of the company and then the separation of it. Clearly, they had some commentary that they provided. But again, as we'd mentioned on our earlier remarks, it gets into the strategic part of how we're going to run the company. So I think we'll pass on getting into further detail on that.

Dmitry Silversteyn

Okay, thank you.

Operator

Our next question comes from Jim Sheehan of SunTrust. Please go ahead.

Jim Sheehan

Thank you. Good morning. On the $125 million in cost savings, how will you apportion that by segment Performance Coatings versus Industrial Coatings?

Vince Morales

Again, Jim, we'll give some more details on our 2Q call. As Michael alluded to in the opening remarks, the majority of that'll occur in 2020 and 2021. We will have a sliver of that, that we'll recognize as savings out in 2019. But again, all those details are forthcoming.

Jim Sheehan

Thank you.

Operator

Our next question comes from Bob Koort of Goldman Sachs. Please go ahead.

Bob Koort

Thank you, good morning. On Slide 17 where you show your returns on capital. Is that left-to-right time scale? And then secondly, the bars where you'll get a lot more in the post-completion returns, are there any commonalities that have driven that superior return from what you've first estimated?

Michael McGarry

No. They're not by time. They're by just different acquisitions. And a lot of the returns have to do with the price we paid, obviously. So you can see, like acquisition, too, it was a very, what I would say, a very accretive price and some of the other ones were more competitive. So – but they are a variety of end markets and variety of regions and a variety of products.

Vince Morales

Yes. Bob, every acquisition different in the criteria. Every acquisition is different in terms of the synergy capability and opportunity. Obviously, there's execution that we do on each one of these. So it's really hard to overall, have a rule of thumb. There are certain averages that we follow and seem to come through over time, but each one is a different entity. Robert Andrew Koort

Bob Koort

And then I'm curious if the advisers gave you some ideas maybe that you could do around the edges. And you guys are fairly active in your productivity goals. So is there anything uncovered that you didn't expect there that was new to you, that maybe the external view gave you some new perspective?

Vince Morales

Let me start and I'll let Michael finish here. But no, I think in the architectural study, again, I think we – it's always good to get an outside perspective and a refresh on different things, management tools, management cases, different analysis tools. And so that perspective was very helpful in the separation review. Again, the advisers bounced off a lot of different ideas that were informative. As Michael alluded to, they all ran to the same result at the end, but it certainly gave us a different thing to think about as we go through individual strategic reviews of our businesses or regions. But those would be two I'd pinpoint.

Michael McGarry

Yes. The one thing I would point to, Bob, one of the items that they were able to track and, I would say, better real time than we were doing it before was pricing. And that the tools that they brought, I would say, accelerated our viewpoint on pricing by a week or two. So we might know at midmonth or end of month. They would know it more on a real-time basis. And so they complemented what we were doing, but they certainly thought they could accelerate insight.

Bob Koort

God it. Thank you very much.

Vince Morales

Thanks, Bob.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to John Bruno for any closing remarks.

John Bruno

Thank you, Nicole. I'd like to thank everyone for their time and interest in PPG. If you have any further questions, please contact our Investor Relations department. This concludes our call.

Operator

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