Operator:

Good morning. My name is Elliot, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter PPG Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the conference over to Alex Lopez, Director of Investor Relations. Please go ahead, sir.

Timothy Knavish:

Thank you, Alex, and good morning, everyone. Welcome to our second quarter 2024 earnings call. I'd like to start by providing a few highlights on our second quarter 2024 financial performance, and then I'll move to our outlook. The PPG team delivered sales of $4.8 billion and our seventh consecutive quarter of year-over-year segment margin improvement. This culminated in second quarter adjusted earnings per diluted share of $2.50, which is an all-time record for the company and represents 11% year-over-year growth. Despite increasingly challenging macroeconomic conditions, we are building top-line momentum as our underlying year-over-year volume progression improved for the sixth consecutive quarter. In the second quarter, six of our 10 business units delivered positive volume growth versus prior year, aided by our enterprise growth strategy initiatives. These initiatives included delivering new products and technologies to our customers, such as our innovative packaging interior can and exterior end coatings technologies as well as our new SIGMAGLIDE technology in our Marine business. Each of these technologies has allowed us to gain share in their respective businesses. Our actions also include upgrading and modernizing our manufacturing capabilities to drive increased output such as in aerospace where demand has outpaced industry supply. One additional example of our enterprise growth strategy is where we're driving changes to the ecosystem of the business models. This includes an architectural coatings, U.S. and Canada with our Home Depot initiative in our refinish business with our digital tools such as MoonWalk and LINQ and in our Traffic Solutions business as we further optimize our service and supply capabilities, which are critical value drivers in this business. Additionally, our volume performance in the quarter benefited from our well-established business portfolio in Mexico, China and India. Overall, however, our aggregate volumes in the quarter were flat year-over-year, falling shy of our initial expectations as overall demand in Europe and global auto OEM production were below what we assumed in our second quarter guidance. It is important to note that our European volumes, while still negative, improved sequentially year-over-year versus the first quarter. Also, global industrial activity remained subdued in the quarter. Consistent with our financial guidance in April, our second quarter automotive refinish sales were down year-over-year, reflecting a strong prior year comparison and lower insurance claims. However, we remain confident that this business will have a strong second half of 2024. In the quarter, we drove further margin enhancement, and we marked our seventh consecutive quarter of year-over-year segment margin improvement. Our aggregate gross margin was 43% for the quarter, a 180 basis point improvement year-over-year. Our Performance Coatings segment achieved all-time record segment margin of 18.7%. In our Industrial Coatings segment also improved its margin profile by 120 basis points versus the prior year. During the second quarter, we benefited from stable upstream and downstream supply chains and the vast majority of our suppliers have sufficient or excess capacity which is noteworthy as this occurred during the peak season for raw material consumption. Consistent with our guidance, we experienced mid-single-digit percentage raw material deflation that we expect will normalize into flat to low single-digit deflation for the third quarter as we anniversary prior year impacts. This benefit was partially offset in our results by general inflation, including higher year-over-year wages and employee benefits. We are proud to have published our 2023 ESG report in the quarter, which highlighted progress against our 2030 targets including increasing sales from sustainably advantaged products and reducing greenhouse gas emissions throughout our own operations and our value chain. I want to take this opportunity to provide you with an update on our previously announced strategic reviews of the architectural coatings U.S. and Canada business and the global silicas product business. We made good progress with these processes and are pleased to have a number of engaged and interested parties. We're working through the traditional bidding management presentation and data provision stages and remain on our original schedule to determine a path forward for each of these assessments. We have also made further progress in driving improvement in working capital, including lowering our year-over-year inventories during the quarter. As a result, our operating working capital was down 90 basis points year-over-year. We have more work to do over the balance of the year as we move towards seasonally slower sales quarters, but we have already returned to near pre-pandemic inventory levels. We ended the quarter with a strong balance sheet and remain committed to deploy excess cash for shareholder value creation. During the quarter, we repurchased $150 million of PPG shares, bringing our year-to-date total to about $300 million. This is on top of our fourth quarter 2023 repurchases. Also yesterday, consistent with our long heritage, our board authorized a $0.03 dividend increase from $0.65 to $0.68 per share. Now, looking ahead to the third quarter, we expect overall organic sales of flat to low-single-digit percentage growth. In Mexico, we expect to again deliver excellent financial results. We also believe that demand in China will deliver organic growth, as a result of our technology-advantaged products, but albeit at a lower growth rate than achieved in the first half of the year. In Europe, demand remains uneven by country and end use, but we expect modest sequential year-over-year improvement. In addition to those businesses that grew in the second quarter, we expect organic growth in automotive refinish coatings and protective and marine coatings, and also, while slightly unfavorable year-over-year, we are expecting product projecting, modest sequential quarterly improvement in general industrial demand. We expect to deliver adjusted third quarter EPS between $2.10, and $2.20 per share, aided by solid operating performance. Our guidance midpoint is 4% higher than our record third quarter 2023. However, the midpoint of our guidance is 10% higher than the third quarter of 2023, excluding the impact of a higher year-over-year tax rate, as the prior year included several non-recurring favorable discrete tax items. The difference in the tax rate is reducing our year-over-year EPS comparison by approximately $0.12 at the midpoint. We anticipate overall company selling prices to be flat in the third quarter, as the impact of certain index-based customer contracts in our Industrial Coatings segment will be offset by selling price increases in our Performance Coating segment, including some additional incremental pricing that will be realized in the third quarter. With regard to commodity raw materials, supply remains ample and we continue to realize benefits from moderating input costs. In the third quarter, we expect flat to low-single-digit percentage raw material deflation lower than the second quarter as we anniversary some decreased realized in 2023. As we have consistently demonstrated, we will drive further improvement of our operating margins, aided by sales volume growth leverage as a result of the execution of our enterprise growth strategy and self-help in manufacturing productivity and cost control initiatives, which includes continued execution of our previously approved restructuring actions. Our more than 50,000 employees are committed to delivering best-in-class solutions to our customers that will drive growth for PPG. Our results this quarter were made possible by our highly dedicated team around the world, who make it happen and deliver on our purpose to protect and beautify the world every day. Thank you for your continued confidence in PPG. This concludes our prepared remarks. And now would you please open the line for questions.

John McNulty:

Yes. Good morning. Thanks for taking my question. So I guess maybe the first one would just be on the U.S./Canada architectural review. It sounds like you're getting a reasonable amount of interest. Would you say that, that's increasing the likelihood of a sale versus some of the other avenues, JVs, partnerships, I think you kind of said at the beginning of all this any option is open. But it sounded like a sale was the preference. Would you say there's a high likelihood of this ending up being a sale?

Vincent Morales:

Yes. And John, this is Vince. As we said - as Tim said in the opening remarks, we're in the normal process working with these interested parties, working with our bankers, having traditional management meetings, et cetera. So we remain on our original schedule to determine a path forward.

Duffy Fischer:

Yes, good morning, guys. A question on auto OE. So the numbers you put up were worse - like if we're looking at just the global auto builds, S&P or IHS. So is that a customer footprint issue? Is it a destocking by the customer first? And then do we need to anniversary that? Are there two more quarters after this that are going to kind of be down high single-digits to get to a new level of run rate?

Vincent Morales:

Yes, Duffy, this is Vince, just a point of clarification on our materials, we provide organic sales numbers, which for us includes volume and price, as we've alluded to many times this year in this business and in our industrial segment. We have index-based pricing. So excluding price, we're much closer to the service provider numbers that you alluded to in your question. So you have to bifurcate price first volume.

Ghansham Panjabi:

Yes, good morning. Thank you. Tim, could you give us a bit more color on the volume trend line in Europe during the second quarter. You mentioned it was a bit below your forecast. Which specific business businesses perhaps were a little bit below? I think you call that Auto OEM. And then secondly, in terms of the flattish volumes out of consolidated basis year over year for 2Q and the margin improvement, just quite significant, can you just give us some of the high level drivers of that?

Operator:

Your next question comes from the line of Chris Parkinson with Wolfe Research. Your line is open. Please go ahead.

Timothy Knavish:

Yes. Hi, Chris, thanks for the question. Number one, aerospace. We're really just - as I've said for the last several quarters, everything we can make is sold and shipped. We're adding capacity. We're improving productivity. We've improved output in this past quarter. So we're selling more and we'll continue to outperform. Despite the - I always say that with refinish, you really have to look over a full year basis with this business, because you always have order pattern issues from the distributors around the world. Refinish, we continue to gain share and refinish by execution of our digital systems, which have been widely accepted and embraced and we keep adding to that toolbox of new digital tools, Chris. So feel really good about that. There's packaging outperforming from a volume standpoint, and we still haven't launched everything that we've won in the last few quarters. Traffic, although not our biggest business, that's - I want to point to a business that the first couple of years, I would say, we cleaned up that business. And now we're in a position where it is really starting to perform for us. Other businesses very, very much by specific region, but those will be the four that overall, I would say, we're outperforming. But I do want to point out three other things. Aggregate Mexico, just Mexico across the board, whether it's PPG Comex or our Industrial segment businesses or protective and coatings, protective and marine, we outperformed Mexico. Aggregate China, of course, with excluding deco, where we don't play, aggregate China were outperforming. Aggregate India except for deco, where we don't play, we're outperforming. So that's how I would describe the businesses that I feel most confident about our overperformance going forward, Chris.

David Begleiter:

Thank you. Good morning. Tim, as you go through the review of our U.S. paint business, are you seeing any disruptions to the business, in particular, see any market share losses due to challenges or disruptions in the business? Thank you.

Operator:

Your next question comes from the line of John Roberts with Mizuho. Your line is open. Please go ahead.

Timothy Knavish:

Yes, John, thanks for the question. Silicas, we're very much on track with that, maybe even a little ahead of where we are in architectural U.S., Canada. We've had good interest there as well. And let's just say, we're on our original schedule. The rest of that specialty business, we really like. And here's why because we have a leadership position in those spaces and they're high-technology spaces, which is right in our wheelhouse from a R&D capability standpoint. So, obviously, not the biggest part of our portfolio, but that business was one of the good growth engines for us in Q2, we expect that to continue going forward. So they're good businesses for us.

Stephen Byrne:

Yes. Thank you. And Tim, if you had a clean slate of how to report your financials, you have these 10 businesses. You have some looming divestitures. If you were to report that network of businesses, would you choose two segments, and would you allocate them the way they're currently arranged, or would you consider going down a path of either more segments, or reporting revenue by business, something to drive more transparency?

Operator:

Your next question comes from the line of Vincent Andrews with Morgan Stanley. Your line is open. Please go ahead.

Timothy Knavish:

Yes. Hi Vincent. So what I would say at a very high level is there's sufficient capacity out there across the supply chain, because if you look at the total industry of coatings we're producing less, leaders than we did pre-COVID. And so there's high level, there's still quite a bit of capacity out there. Of course, we do what we can to get ahead of it. And you pointed to in some places where we can get ahead of it. The other businesses, largely the industrial segment it's typically more real-time. And in some cases, as you know, businesses are able to get pricing faster than others. And as we discussed during the last inflationary cycle, auto OEM is typically the slowest, but we eventually get there, just like we did last cycle. So, I would expect it to play out the same in any cycle that may be on the horizon, whether its next year or the following year.

Michael Sison:

Hi, good morning. Can you maybe talk a little bit about the profitability of U.S. architectural paints? Has there been any improvement over the last year? Maybe what type of growth you think that business will generate in the second half? And then finally, Tim, when you think about the full sale JV or partnership, how are you thinking which one would be the best transaction for shareholders?

Vincent Morales:

Yes. And Mike, on current events, look, as Tim just said in an earlier question, business is performing well. Volumes are a key driver to profitability - our volumes were up in Q2, as we said in the prepared remarks. So we're pleased with the progress year-to-date.

Frank Mitsch:

Good morning and congrats, Alex, on your new role. Tim, I want to ask about the expectations for the second half to be lower than you previously thought which resulted in the full year EPS guide down. Just curious, roughly what was the - yes, when you think back three months ago or even six months ago when you first put out the full year projection, what sort of level of volume growth were you expecting in the second half of the year? And where are you now in terms of expectations on volume growth for the second half of the year. And I know that part of the reduction is tied to auto OEM and you said that you've been surprised by the extension of the assembly plant downtime. Just curious, looking back in PPG's history, when you've been surprised in the past by the auto OEMs taking extended assembly plant downtime. Does that serve as any sort of foreshadowing of recessionary environments or anything like that? Any color there would be very helpful. Thank you.

Operator:

Your next question comes from the line of Patrick Cunningham with Citigroup. Your line is open. Please go ahead.

Timothy Knavish:

Yes, Patrick. So I'd say the biggest confidence point for us is really everywhere outside of Europe where we're really still in the very early innings of launching our productivity, digital ecosystem. We started that in Europe, gained tremendous share and customer retention and subscription revenue as we launch that across Europe. And we're still very early days in the U.S., Australia, China, places like that. So good confidence in the share gain as we roll-out those tools around the world. The collision rates or question mark depending on where you are around the world. But we believe our penetration rates of these digital ecosystem is still single-digits of all the body shops out there. So, we've still got a lot of runway. And as I said in my in an earlier answer, we continue to add to that toolbox of digital productivity tools as we go forward. So it is, of course, the chemistry inside the can, which we're best in class at from a color match and speed and all those things. So we feel really good about that. But a lot of our share gain right now is delivered by the productivity tools outside the can.

Operator:

Your next question comes from the line of Jeff Zekauskas with JPMorgan. Your line is open. Please go ahead.

Timothy Knavish:

Okay. Hi, Jeff, on the TiO2, you are correct. We foresee no impact in 2024, not so much because of we're sitting on a whole bunch of inventory there, but more because of we’re contractual coverage. As we look to 2025, here's how we are thinking about it. First of all, at a very high level we continue to reduce TiO2 consumption per batch without sacrificing performance. That's about 1% per year. And even though that doesn't sound like a big number, we've been doing it for a decade and we expect that to continue. Second thing specific to the tariffs and the anti-dumping, we have great flexibility around the world given the formulation work that our S&T teams have done such that we've really increased our sourcing flexibility versus where we were, say, five years ago. And then finally at the end of the day, if those two initiatives are not enough to counter whatever net increase in costs there may be to us, we the biggest consumer of TiO2 is the Deco business by far, and we have demonstrated that, as necessary, we'll offset that cost with price.

Timothy Knavish:

And Jeff, to your second question on automotive U.S. specifically. First of all, the final numbers that just came in the last couple days, the production in the U.S. was actually down, down low single-digits in the quarter and our sales were down mid-single-digits. And so some of that would be, Vince talked earlier, the production number that S&P puts out is volume, and our sales number is volume plus price, and we did have some contractual index price in that business. And then the rest of it would be specific assembly plants, specific customer mix that might vary from the kind of the industry average.

Kevin McCarthy:

Yes, good morning, everyone. Tim, if I look at your second quarter organic sales results versus your forecast from last quarter, it seems to me that PPG did a very good job of forecasting in maybe eight of the 10 verticals where you compete. The two that I see that came in a little bit lower are Architectural EMEA and Protective of Green coatings. And so I was wondering if you could speak to each of those businesses and maybe educate us a little bit as to why they came in a little bit weaker than you would have thought, and whether that was because of sort of transitory or idiosyncratic reasons, or do you think they're on a different growth glide path, say looking into 2025. Any additional color on geographies or product lines that would be super helpful?

Operator:

Your next question comes from the line of Josh Spector with UBS. Your line is open. Please go ahead.

Vincent Morales:

Yes. Hi Josh, this is Vince. With respect to the EU, that's you know, we're not involved in whatever that peers involved with. We're under our normal process in terms of reviewing our salaries, benefits on an annual basis. We did as we alluded to at the beginning of the year, have a little bit of a higher wage and benefit inflation this year versus historical given the macro, but again, we expect that to trend to normal, based on what we know today and in future years. As it relates to corporate costs, as we said in our press release, we did due to the lower guidance, for the full year we have made adjustments lower for some of our incentive compensation and that will - and these are not big, big numbers. We'll give a full year 25 guide, as we typically would do in January. We got to get through the rest of this year, before we look at the year-over-year impacts, especially line-by-line or category-by-category.

Aleksey Yefremov:

Good morning, everyone. I wanted to ask about architectural EMEA pricing. Given these weaker volumes, is pricing holding up in this region? Or is competitive environment perhaps, you know, more aggressive than, than for your coatings portfolio overall?

Operator:

Your next question comes from the line of Michael Leithead with Barclays. Your line is open. Please go ahead.

Timothy Knavish:

Hi, Mike, you know, great shareholder value accretive acquisitions would always be our preferred, use of cash, whether it's from proceeds from these potential transactions or just ongoing business. That said, that pipeline is a bit thin, right now. And so, you know, we continue to look at opportunities, but overall, compared to prior years, I would I would assess it as thin and perhaps that'll change going forward. Perhaps that'll change in 2025. You know with interest rates. But right now it's a bit thin. You've seen, three quarters in a row. We've bought shares back. We're demonstrating that we're going to do what we said, which is we're not going to let excess cash, build on the balance sheet. So, you know, when those transactions are potential client transactions close, we will take, you know, look at our pipeline. And if it's still thin, then we'll deploy cash as we have in the last three quarters.

Mike Harrison:

Hi. Good morning. Was wondering, Tim, if you can, give us a little bit more color on what's going on in the aerospace business. You mentioned that you're selling everything you can make, but how much better could volumes have looked in that business if you didn't have the capacity constraints? And I guess, what specific actions or how much additional capacity do you think you can unlock as we get into the second half and into 2025? Thanks.

Operator:

Your next question comes from the line of Laurent Favre with BNP Paribas. Your line is open. Please go ahead.

Timothy Knavish:

Hi, Laurent, I'm expecting lots of paint sales as the Olympics get going here, and then after the Olympics too as well. So I'm sure France recovery is on the horizon. The pricing in the industrial segment, virtually all of it is index pricing. I don't want to say 100%, because there's always things happening around the edges, but virtually all of it is index pricing. And I don't expect that to change significantly as we look through the rest of this year.

Dan Rizzo:

Hi, this is Dan Rizzo from Jefferies. Thanks for taking my question, thanks for fitting me in. I was just wondering, you mentioned in your prepared remarks about softness in exports from Chinese auto EVs, kind of slowing. I was wondering if there, as of yet, anticipating a change in the environment, if Trump were to take office. Like, what's the lead time between they anticipate higher tariffs and potentially lower sales and that they end and shut down or slow down production.

Operator:

Your next question comes from the line of Arun Viswanathan with RBC. Your line is open. Please go ahead.

Timothy Knavish:

Hi, Arun. Let me answer the North American architectural questions. Again, I think when we announced the strategic review in February, we gave some directional information, and certainly the people who are interested and engaged got the data, books, etc., and we're providing data almost on a daily basis, and we're not going to get into the nuances of the different channels. Again, we're in a process where there's a lot of folks looking at it. They have what they need. And we're not going to certainly get into how this may or may not be split. Again, there's a multitude of different scenarios that we're entertaining and we'll let that process play out over the next 60 or 75 days or whatever. So again, we'll let that process play out. And when we get to a ultimate conclusion, I think we'll be a little more granular to answer some of your questions. And let me take a row, let me take the portfolio question. Mathematically, of course, you're spot on that X this business, we will be a little heavier in industrial coatings and a little lighter in performance coatings. But you've seen the numbers and the guidance we've given on the profitability and margin of the architectural U.S. business. And X that business mathematically and going forward, despite that shift from - that you described from less performance and more industrial, in aggregate, we will be a higher margin and higher growth company. And we wouldn't be doing this otherwise. And just to be clear, that there's also the benefit of us as a management team, as a PPG team, being able to focus all resources, whether it's human resources, R&D resources, capital resources, bandwidth resources on businesses that have higher growth and higher margin profiles. So we are fully confident that this is the right thing to do for not only customers, employees, but absolutely for shareholders going forward, fully confident.

Jaideep Pandya:

Thank you. First question is on packaging. Could you just tell us how confident are you to keep the share that you have gained because one of your competitors had a fire because we are hearing sort of opposite messages and they seem to be confident they'll get the share back. So just wondering how will packaging look in 2025? My second question is, sorry to come back to architectural North America, but looking back 10 years ago when you bought the actual business, it doesn't feel like a lot has changed in terms of either the store footprint or the plant footprint, or even for that matter the profitability. And you alluded to one point, which was a need for investment. So just curious, when you look at JV models, where do you need to invest? And how do you sort of unpack and improve profitability here because you yourself done it with Axel in the last 10 years, and sorry to say this, but it sort of hasn't worked. So what would you and a JV partner do here? Just curious. And sorry to squeeze in one more. Tim, volume growth has been an issue for PPG for the last 11 quarters. How do you incentivize your sales force to go for volume if you at all want to do that? Thanks a lot.

Operator:

Your next question comes from the line of Aron Ceccarelli with Berenberg. Your line is open. Please go ahead.

Timothy Knavish:

Yes. Aron, thanks for the question. So at the end of the quarter, I would say industrial segment automotive was decelerating. As I previously mentioned, we got some, uh, further shutdown news as we move through the month of June. I would say industrial starting to see, you know, pretty flat. But we are starting to see some sequential improvement that we projected into Q3. And I think packaging you know, basis the last question is accelerating from a volume standpoint. So that's how I'd quantify the exit rates for industrial segment.

Alex Lopez:

Thank you. Elliot. We appreciate your continued interest and confidence in PPG. This concludes our second quarter earnings call.

Operator:

Good morning. My name is Angela, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter PPG Earnings Conference Call. All line have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Jonathan Edwards, Director of Investor Relations. Please go ahead, sir.

Timothy Knavish:

Thank you, Jonathan, and good morning, everyone. Welcome to our first quarter 2024 earnings call. I'd like to start by providing a few highlights on our first quarter 2024 financial performance, and then I'll move to our outlook. The PPG team delivered sales of $4.3 billion, a solid sales performance despite a very challenging macroenvironment, and we delivered our sixth consecutive quarter of year-over-year segment margin increases. This culminated in first quarter adjusted earnings per diluted share of $1.86, which is $0.02 above the midpoint of the range that we provided in January. This is also our second best Q1 adjusted EPS in the company's history, falling just $0.02 short of the record achieved during the early COVID surge in house paint sales. Our first quarter adjusted EPS was once again up year-over-year, with moderating input costs and improving manufacturing performance, mitigated by lower sales volumes and higher wage and benefit costs. As we indicated in January, we had a large customer win last year at Walmart and a significant portion of lower volumes year-over-year was driven by this prior year $40 million load in. We're also impacted by lower demand in Europe, including the effect of fewer selling days in March stemming from an early Easter holiday this year. We also experienced ongoing tepid global industrial production. Adjusting for these year-over-year comparison items, volumes were nearly flat, continuing the underlying positive volume trajectory over the last five quarters. As I'll discuss in our outlook, I fully expect positive sales volumes in Q2. A benefit for us during the quarter was China, where despite a challenging general economy, our portfolio delivered double-digit organic sales growth, reflecting our strong mix of well established businesses in the country. For PPG, India also grew by double digits in the quarter. In addition, our commercial teams executed well and drove solid global organic sales growth in our aerospace, specialty coatings and materials, and protective and marine coatings businesses. Our selling prices were flat with positive pricing in the Performance segment offsetting lower pricing in the Industrial segment. First quarter pricing comparisons include a transitory unfavorable impact from European energy related pricing indices that were put in place during a period of extremely high energy prices in that region in the first quarter of 2023. We experienced lower energy input costs in the quarter to offset this lower index-based pricing. We expect total company selling prices to be slightly positive overall in 2024 as targeted structural selling price increases have been implemented in several of our Performance segment businesses, offsetting some index based pricing contracts in the Industrial segment. Our operations have benefited from further improvement as we experienced stable upstream and downstream supply chains and customer order patterns. From a supply perspective, the vast majority of our suppliers have sufficient or excess capacity as we continue to experience moderating input costs. This is noteworthy as we are just entering the peak buying period due to the overall seasonality of the paint industry. We also increased our growth-related investments, supporting initiatives that will deliver volume gains later this year and going forward. Building off of the full year 310 basis point improvement in total segment margins in 2023, further margin improvement remains a priority in 2024. This will be driven by stronger sales volumes as the year progresses, improved manufacturing productivity, and moderating input costs from historical highs. Specifically on manufacturing productivity, our improved operating cadence will be more financially impactful during our peak seasonal quarters as we deliver additional volume growth. In the first quarter, we delivered on our margin improvement commitment with the Industrial segment margins improving by 100 basis points versus prior year and the Performance Coatings businesses margins were also up by about 40 basis points as favorable pricing and moderating input costs were mitigated by lower volumes and higher wage inflation. From a cash perspective, we expect another year of excellent cash flow and our balance sheet remains strong, including lower inventories year over year. We'll continue to follow our legacy of utilizing our strong cash flow and balance sheet to create shareholder value. In the first quarter, we repurchased approximately $150 million of PPG stock, reflecting our commitment to use excess cash to create shareholder value. Additionally, yesterday, our Board of Directors increased our share buyback authorization by an additional $2.5 billion, bringing our total share repurchase authorization to approximately $3.4 billion. I'm pleased with the progress we've made on our enterprise growth initiatives. We executed strong growth from selling our innovative products into the mobility space and continued to further utilize our world-class distribution of 5,200 concessionaire locations in Mexico to drive additional non-architectural coatings products into one of the world's fastest-growing economies. In automotive refinish, customer adoption of our industry-leading digital tools increased, yielding nearly 400 additional net body shop wins. These digital tools include our LINQ services and MoonWalk mixing machines, both of which are best-in-class and are focused on improving body shop productivity. To date, we've sold over 2,000 MoonWalk mixing machines and approximately 2,700 LINQ subscriptions. We announced strategic reviews of the architectural U.S. and Canada business and the global silicas product business in the first quarter. Strategically, we are driving this portfolio optimization with a goal of transforming to a higher-growth, higher-margin company. As an example, excluding the architectural coatings business in the U.S. and Canada, Performance Coating segment margins would be an average of 200 basis points to 300 basis points higher than the last several years. We'll communicate a determination of a path forward on these strategic assessments when appropriate, with our target of no later than the third quarter. Now, I'll comment on our second quarter outlook. We expect to deliver adjusted Q2 EPS between $2.42 and $2.52 per share, which at the midpoint would be 10% higher than our previous record quarterly EPS. While we anticipate global industrial production to remain at low absolute levels and demand to be uneven by geography, we expect our overall second quarter sales volumes to be positive by a low single-digit percentage, aided by organic growth in aerospace, protective and marine, and our share gains in packaging coatings. We project continuing solid growth from our businesses in China, our third largest country for sales, led by our automotive OEM business where our strong positioning with electric vehicle OEM producers will drive further sales. Additionally, we expect to deliver further sales growth in Mexico, our second largest country for sales, leveraging our strong position across many businesses as well as our world-class distribution network. We are confident that PPG's unique geographic profile with strong and growing positions in China, Mexico, and India, along with stabilization and eventually modest growth in Europe, and the continued improvements in the U.S., will support PPG's consistent sales volume growth as we move forward. We anticipate overall company selling prices to be flat to slightly positive in the second quarter as the impact of index-based contracts in our Industrial segment will be offset by selling price increases in our Performance Coating segment. There's still some unfavorable pricing impact and offsetting energy input cost benefits from prior year European energy surcharges, but it's less than the first quarter. With regard to commodity raw materials, supply remains ample, and we will continue to realize benefits from moderating input costs. We expect mid-single-digit percentage raw material deflation in the second quarter following the realization of high-single-digit percentage decreases in Q1. We're watching oil price and feedstock volatility, and we will manage any impact accordingly, although we expect that recent oil price increases will be absorbed upstream. Looking at the remainder of 2024, we remain confident that we will deliver positive sales volumes in each remaining quarter in 2024, including our growth in China and India. We'll also execute on our more than $270 million and growing order backlog in aerospace, driving further growth in our well-positioned businesses in Mexico and driving expanded benefits of our key growth initiatives across electric vehicle, auto parts, powder coatings, and various digital solutions. PPG remains focused on our enterprise growth initiatives to drive higher sales volumes and fully capitalize on our technical and service capabilities. We'll drive further improvement of our operating margins aided by sales volume growth leverage and our initiatives to drive manufacturing productivity following several years of supply chain and other disruptions, and we will diligently manage our costs and continue to execute against previously approved restructuring actions. Lastly, we entered the second quarter of 2024 with a strong balance sheet, which provides us with flexibility for further shareholder value creation. Thank you to our more than 50,000 employees around the world who partner with our customers every day to drive mutual success by providing best-in-class paints, coatings, specialty materials, including productivity enhancing and sustainable solutions. Thank you for your continued confidence in PPG. This concludes our prepared remarks. And now would you please open the lines for questions?

Ghansham Panjabi:

Thank you, operator. Good morning, everybody. Tim, I know you have a lot going on across the portfolio by business and also by geography, but your guidance embeds quite a bit of an earnings improvement during the back half of the year on a year-over-year basis. So I guess just on that, can you just lay out the specifics that underlay your confidence for that dynamic to play out, especially with some of the upstream input costs, such as energy trending higher? Thank you.

Vincent Morales:

Hey, Ghansham, this is Vince. Just as we talked, strong balance sheet in our full year guide. We don't have any further cash deployment baked in at this point, as we alluded to in our press release, we did purchase about $150 million of shares in the first quarter. But our full year guide does not assume additional cash deployment at this point. In the remainder of the year we'll make those decisions on a real-time basis.

John McNulty:

Yes. Good morning. Thanks for taking my question. So maybe on the price versus raws dynamic. I guess can you speak to whether you expect to see your raw material basket down from 1Q to 2Q? And then on the pricing side, if we take out the indexing, which really should be kind of a net neutral, what portion of your business do you expect to see real pricing as we're pushing forward? Because it does sound like you've got a number of initiatives to push further price. So can you help us to think about those things?

Timothy Knavish:

Yes. John, thanks for the question. As far as progression from Q1 to Q2, Q1, we did say they were down high single digits, which was better than our forecast of mid-single digits. Q2, we believe, down the mid-single digits. And we're confident enough now to issue full year guide on raws being down in that low single digits to mid-single digits for full year 2024. So we've got better visibility now into what we believe that price of raws will look like for the rest of the year.

Michael Sison:

Hi, guys. Nice start to the year. You talked about being confident in turning the quarter in volume growth in Q2. Maybe give us a little bit of color on how much market growth you need or macro help? And how much really just comes from your execution and maybe just some areas of growth that you're seeing in your end markets?

Operator:

Thank you. The next question comes from the line of Duffy Fischer with Goldman Sachs. Your line is open.

Vincent Morales:

Duffy, this is Vince. You stated it properly. We obviously purchased $150 million in the first quarter. That will obviously be impactful to the financials. We have nothing further assumed in our full year guide for the balance of the year.

Operator:

Thank you. The next question comes from the line of David Begleiter from Deutsche Bank. Your line is open.

Timothy Knavish:

Good morning, David, it's Tim. We had a very, very detailed and thoughtful communications plan ahead of making the announcement on February 26 that we executed very shortly after that press release went out and have continued to execute. And we've seen very minimal, if any, disruption. There's chatter, but we've got really good talk plans out there. We're engaging our key customers, we're engaging our key -- obviously, our employees, we're engaging our owners, as you know. So a very minimal disruption to the business. The second question, we expected strong interest because of the strength of the brands and the strength of the assets in our architectural U.S. Canada business, I'm pleased to say the interest is even higher than what we expected. So that's -- we feel good right now about where we are. As far as the -- which likely outcome, David, until numbers start coming across the desk and we can start looking at what's best for long-term shareholder value creation, it's a bit early. But we want to be definitive on our path forward in Q3. So we'll have a much better view of what this structure might look like in another quarter or so, David.

Christopher Parkinson:

Great. Thank you so much. Tim, you've obviously been at the company a long time, and you're making some pretty dramatic moves in the first six quarters. When you take a step back away from the North American architecture and the specialty reviews and you look at your remaining businesses across performance and Industrial. Just how confident are you versus even. Let's say, a couple of quarters ago, last year, however you want to characterize it, how confident are you that those remaining businesses are the best-in-class R&D innovators and will ultimately render above-market growth in the respective end markets over the next year or two? I mean -- or perhaps even a little longer, just has your confidence changed in the portfolio positively or negatively?

Vincent Morales:

Yes. Chris, this is Vince. If you think about the remaining portfolio, the businesses, we have the right to win in the businesses, whether it be on a regional basis or on a global basis. As you alluded to in your question, most of these businesses have strong technology associated with them. We've talked earlier in our comments about the margin profile, if absent these businesses that we're doing a strategic review on, which again would be higher on a pro forma basis. So again, the right to win, good margins, good customer pull, those are the things that we're focused on with respect to the portfolio.

John Roberts:

Thank you. Another coatings firm has suggested that you might separate North American architectural into Pro versus DIY and deal with them separately. Could you comment on that?

Operator:

Thank you. The next question comes from the line of Patrick Cunningham with Citigroup. Your line is open.

Vincent Morales:

Yes, Patrick, this is Vince. A couple of things. One, we did have some capital spending spillover from last year into this year, just things we didn't get to at the tail end of last year. So our Q1 capital a little higher. We're also looking at additional growth-related capital spending in Mexico and also in India. But if you look, and we said this on our Q1 call or our year-end call as well, we're going to be somewhere in that 2.5% to 3%. And -- over the midterm. We still have some additional capital last year, this year, and we're catching up from COVID. So again, we're a little bit higher. We recognize that in our January call. But again, over the midterm, you should expect us to return to our normal range.

Frank Mitsch:

The LLC portion is very important. So I appreciate that. Listen, I know that some of the growth you're expecting in the next three quarters for 2024 are tied to higher operating rates, volume improvement, productivity gains. But as you also indicated, you're also spending more money on growth initiatives and so forth. How do we think about the interplay between those two in terms of millions of dollars or EPS, et cetera? Any way that you can kind of frame the interplay between those two?

Vincent Morales:

No. These are -- these investments are things such as digital, as Tim alluded to, with respect to our consumer-facing businesses. Also with respect to Refinish, we're building out digital tools that increase our customer liaisons. We have other investments in COMEX where we're delivering -- we've had multiple quarters of record earnings. Our Protective business, we're adding some capacity, strong protective business. We still have some infrastructure spending that has not yet hit the books, but we're building in anticipation of that. And even in Aerospace, where we have a backlog that we -- that continues to grow, we're adding some capacity there to try to work at that backlog and get to it in a much more expedient manner. So those are examples. If you look at our overheads up, that's something where some of the growth spending is a result of that -- overhead a result of that growth spending.

Vincent Andrews:

Thanks and good morning, everyone. Can we talk a bit about Refinish? And it would be helpful if you just could level set us in terms of where volumes are now versus pre-COVID levels. And I'm just -- what I'm trying to understand on a go-forward basis you're talking about volume declines for 1Q and 2Q against very difficult comps in the year ago period. So is the assessment that we've normalized volumetrically post COVID? And if that's the case, what should the algorithm for Refinish be in terms of volume and price on a go-forward basis from here?

Vincent Morales:

Yes. And Vincent, this is Vince. Just a point of clarification. The claim data, Tim referred to, these are industry claims, which are down again low double digits. The current reading was down low double digits for the month of March. So these are industry collision claims that set the entire industry.

Operator:

Thank you. The next question comes from the line of Stephen Byrne with Bank of America Merrill Lynch. Your line is open.

Timothy Knavish:

Thanks, Steve. So as far as what it's done over the last couple of years, it's been a little ups and downs, but it has been below company average, and we have been investing, particularly in the Home Depot model. But why has it been at the low level of profitability over the last several years? A number of things, the macros aren't great. You've got this post-COVID hangover across the whole industry. As I mentioned, we have been investing -- and through -- you mentioned our own stores, through our own stores, that's a high fixed cost model, and you need velocity through those stores and with all the factors in the macro and in the post-COVID that velocity has decreased. Now the Home Depot Pro initiative is certainly working and gaining momentum and is positively contributing. But at this point, it's not far enough in that ramp-up curve to offset those macros, particularly what's happening on the DIY side. So the reason we're doing this now is we do have momentum in this kind of omnichannel model with the combination of the Home Depot, our stores and our independent dealers. And -- but we need a partner to make that go faster to get this to company average profitability. And so that's why we're open to a number of different scenarios for this business.

Jeff Zekauskas:

Thanks very much. I think in your Performance division, in the first quarter of the six categories that you look at Aerospace, Refinish, Architectural, all of them came in lower than you expected on a sales basis. And my impression is that things weakened in March globally. So if we forget the second half for a moment, is your expectation now that the second quarter is a little bit weaker than you thought it would be before as you began the years? And then secondly, as far as the share repurchase goes, I think over the past five years, your average purchase price is about $130 million. And so how do you evaluate the success? Or what are you trying to achieve in taking $3.4 billion and repurchasing your shares? How will you gauge the success of that allocation of capital?

Vincent Morales:

Jeff, this is Vince. In terms of share repo, obviously, your numbers are accurate, in terms of the last several years. Again, we've gone -- if you look over a longer time horizon, there's been times where we've done minimal share repurchases for consecutive number of years. Typically, when we're more active in M&A, there's been times where we've done a large portion of share repurchases over a couple of series of years when the M&A market is not as robust, and we have excess cash or excess balance sheet capacity. When you look -- we do calculate what we think is our intrinsic value of our stock price. We do feel that with the 10% growth rate we have going forward in our estimates, there are times where it's an imperative for us to look at share repo as an option. As Tim said, we have a prioritized list of cash deployment. And again, dividend, keeping the businesses healthy with CapEx. We look at M&A and then we look at the intrinsic value of the stock based on our assessment and that's how we effectuate the cash deployment.

Kevin McCarthy:

Thank you and good morning. Tim, a few questions for you on the subject of Europe. I think EMEA was 31% of your mix last year if you do wind up divesting some or all of U.S. and Canada architectural, maybe that number will rise a little bit, moving forward. And it sounds like in contrast to China and India, which came in very strong, Europe did come in weaker than you expected. So a few questions would be, A, what is driving the variance versus your prior expectation in Europe exactly? B, maybe you can provide some color on the consumer-facing businesses that you have there versus industrial. And I'm curious to understand whether rationalization of your customers' capacity is playing a role at all. We were hearing more and more about that from various chemical companies anyway. So just a little bit more color on the region there and kind of what glide path of volume you need macro-wise to achieve that positive volume growth overall for the company that you alluded to?

Vincent Morales:

Yes. And Kevin, this is Vince. I'll just add a point on architectural. As Tim mentioned, lower than our expectations in Q1, largely attributed to March. If you look at our performance through the first two months of the year, so Jan, Feb, that business was on our targets. We do feel there was a bigger Easter impact that we're seeing, again, a snapback at least early in April in that business.

Unidentified Analyst:

Thank you and good morning. This is [Ryan] (ph). I'm on for Aleksey. Just wanted to talk a little bit more about the targeted pricing you're doing in Performance Coatings. Wondering if you can discuss some of the areas other than Refinish. And then just wondering if you guys are like having some more success in recent weeks following this uptick in oil. Thanks.

Operator:

Thank you. The next question comes from the line of Michael Leithead with Barclays. Your line is open.

Vincent Morales:

Yes. I'll take the end of that, Michael, because our assumption is we're going to continue to work down. We have excess inventory relative to our history. We're going to continue to work that down, especially as we're in this peak production season that Tim alluded to earlier. We're probably carrying four to five days of excess inventory versus history. All of that's in raw materials. . And we've made progress. We were at 10 days at 1 point last year. So we're about halfway through our journey. We hope to take another bite out of that in Q2, a sizable bite in Q2. And then for the balance of the year, continue to be prudent in our purchases and that should generate a positive working capital on a year-over-year basis -- working capital impact on a year-over-year basis on free cash flow. In terms of our purchases, as I said, the opening -- or as Tim said in the opening remarks, most of our suppliers have excess supply, this is a market that is advantage for us, and we'll continue to push that. But again, our intention is to work down raw materials in concert with the peak season.

Laurent Favre:

Yes. Good morning. I had a question on China. I think you talked about growth in Q1. But presumably, this was still a quarter impacted by COVID. So I was wondering, when you look into Q2, what kind of momentum are you seeing there on the ground? Thank you.

Vincent Morales:

Yes. And just a couple of other data points. Our Aerospace business is doing well there. The Chinese New Year brought about record travel in the country. And again, industrial activity there for our set of products and our set of businesses, we expect to remain strong.

Arun Viswanathan:

Great. Thanks for taking my question. I just wanted to go back to the volume outlook. So it looks like you're guiding organic sales to be up low single digits in the second quarter and for the full year as well. So if you look at that second quarter number, it looks like low single digits, you can have some targeted price initiatives. So should we assume kind of flat volumes for Q2? And then similarly for the full year, how are you thinking about kind of consolidated volume growth? I know you've given out some guidance by segment as well on the slides. But it would look like that you need a kind of ramp to about the low to mid-single digits on volumes in the back half. Am I reading that correctly? Or yes, maybe you can just clarify how you're thinking about volumes, how they should evolve through the year.

Operator:

Thank you. The next question comes from the line of Josh Spector with UBS. Your line is open.

Timothy Knavish:

Yes, Josh, actually, it's a little bit flip flop because Mexico, while it had another great quarter from a kind of sales and earnings standpoint as well as cash, the Easter impact in Mexico was more of an impact than it was up here. It's a really important holiday for our friends in Mexico. And we actually had decent performance in our architectural U.S. business versus last year and versus the kind of market. We're confident that we gained share in 2023 and we saw that momentum continuing into Q1. And all on the pro side, though, Josh, DIY remains soft, but we did see a good performance. The way we look at our Pro business now with what we're doing between our own network, our partner, Home Depot and our many good partners across the private dealer channel, we look at it in totality. And despite all the negative macros, all the negative news as recently as this week on housing, we were up low single digits for the architectural U.S. business. On the Pro -- I'm sorry, that's on the Pro side.

Michael Harrison:

Hi, good morning. I was wondering if you could give a little more color on what you're seeing in India. Obviously, you gave us some comments on what you're seeing in China. But what are some of the key markets that you're serving in India? What's your current position? And I guess maybe what stage or inning are we in, in terms of the growth potential that you see in India?

Vincent Morales:

And Mike, what's fostering that is we are seeing a significant amount of reshoring in Asia to India. The economy there is growing as robustly as Mexico. And again, that's driving that industrial activity.

Laurence Alexander:

Good morning. Just one quick one. On the proposed, possible exit of the silicas North and the restructuring of the North America Coatings. How much would that have changed your volatility across your business? And I guess just going forward, I mean, you talked about M&A sort of leading to mostly focusing on higher growth, higher margin. To what degree does the volatility of the businesses you're acquiring factor in? Or just how are you thinking about that managing that going forward?

Vincent Morales:

Yes, Laurence, Vince, just a reminder, as we said in February, this has a multiple hundred basis point impact on sales volume improvement. If you do a pro forma basis. But again, looking at that for a period of time, it's not significant in terms of cyclicality.

Jonathan Edwards:

Okay. Thank you for your continued confidence in PPG. We want to thank you as well for good operating, so much appreciated. This concludes our prepared remarks and now -- or sorry, we appreciate your interest and confidence in PPG. This concludes our first quarter earnings call.

Operator:

Good morning. My name is Elliott, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter PPG Earnings Conference Call. [Operator Instructions] Thank you. Now I'd like to turn the conference over to Jonathan Edwards, Director of Investor Relations. Please go ahead, sir.

Tim Knavish:

Thank you, Jonathan, and congratulations on your new role, and good morning, everyone. Welcome to our fourth quarter and full year 2023 earnings call. I'd like to start by providing a few highlights on our fourth quarter and full year 2023 financial performance, and then I will move to our outlook. In the fourth quarter, the PPG team delivered strong financial results, including record fourth quarter sales of $4.4 billion and adjusted earnings per diluted share of $1.53. This is our fourth consecutive quarter of delivering record sales as we continue to benefit from organic sales growth. Our fourth quarter adjusted EPS was 25% higher year-over-year driven by aggregated segment margin improvement of 260 basis points compared to the fourth quarter of 2022 as we continue to be laser-focused on driving margin improvement. Our results reflect our continuing growth trends and strong execution in several of our leading and technology advantage businesses, which culminated in record fourth quarter sales in the aerospace, automotive OEM and automotive refinish businesses with strong performance in the Protective & Marine and PPG Mexico Architectural Coatings businesses. Our year-over-year sales volume trend improved compared to recent quarters, decreasing less than 1% year-over-year. We continue to experience lower global industrial production along with soft U.S. and European architectural demand, especially for DIY-related products. Notable for us during the quarter was China, where despite a lethargic general economy we achieved high single-digit percentage volume growth, reflecting our strong mix of businesses in the country. In addition, we delivered flat year-over-year volumes in Europe as we see economic stabilization in the region, albeit at lower absolute demand levels. Our selling prices were about 2% higher with both segments delivering positive price led by the Performance Coatings segment. We expect total company selling prices to remain modestly positive in the first quarter of 2024 as new selling price increases have been implemented in several of our businesses. We also benefited from further normalization of our operations as we experienced stabilization of both upstream and downstream supply chains and order patterns. From a supply perspective, the vast majority of our suppliers have more than sufficient capacity heading into 2024. We started the year laser-focused on margin recovery and the fourth quarter marked our fifth consecutive quarter of year-over-year operating segment margin improvement. And as I mentioned, fourth quarter aggregate segment operating margins increased 260 basis points year-over-year and full year increased 310 basis points. We also achieved our second key priority for the year by delivering excellent cash generation of nearly $900 million during the fourth quarter, which was up over $300 million on a year-over-year basis, leading to record full year cash generation of over $2.4 billion. We significantly reduced working capital by a total of about $600 million on a sequential quarterly basis and this includes the benefit from a partial reduction of our inventory levels. However, we still ended the year with higher inventory levels from a historical perspective, primarily in raw materials and will continue to reduce inventory in the first half of 2024. The strong cash generated drove a reduction in net interest expense by about $20 million compared to the fourth quarter of 2022 as we repaid some high variable cost debt during the quarter. Additionally, we repurchased $100 million of stock in the fourth quarter, which essentially offset dilution. Now a few comments on the full year 2023. As we communicated at the beginning of 2023, my priorities included margin recovery, strong cash generation and further strengthening of our capabilities to support our customers' productivity and sustainability needs, which will result in higher PPG organic growth. Coming into 2023, we had a high degree of conviction that our global business portfolio would prove resilient while anticipating a challenging economic environment, and these clearly played out during the year. For the full year, I'm proud of our team's execution against our strategic objectives as it resulted in delivery of record sales, record adjusted EPS and record operating cash flow. Our sales performance was led by continued selling price execution to offset significant multi-year cost inflation. Our year-over-year earnings growth was driven by these improved selling prices coupled with moderating input costs and cost structure reductions stemming from our cost management and restructuring initiatives. This resulted in improved margins in both segments. Our businesses delivered innovative and value-added products and solutions to our customers, and this enabled several of our businesses to set all-time annual sales records, including our aerospace, auto OEM, automotive refinish, architectural Mexico and the Protective & Marine coatings businesses. Our enterprise growth initiatives delivered about $150 million of incremental sales in the first year, including strong growth from selling our innovative products for electric vehicles, as well as our share gains in powder coatings. In automotive refinish, customer adoption of our industry-leading digital tools accelerated yielding nearly 2,000 net body shop wins. These digital tools include our Link Services and moonwalk mixing machines, both of which are best-in-class and are focused on improving bodyshop productivity. In Mexico, we further advanced cross-selling of our valued products, including protective coatings and certain light industrial coatings through the best-in-class distribution network of nearly 5,200 concessionaire locations. Finally, our strong focus on the customer drove share gains across several businesses including expansion of our architectural coatings products at Walmart. Strategically, we conducted an ongoing review of both our product and business portfolios leading to the divestiture of several non-core assets including our European and Australian Traffic Solutions businesses, along with the recently announced strategic alternatives review of the silicas product business. In a variety of cases, we also simplified and improved our product offering, allowing us to reduce complexity and drive down working capital. Finally, these actions plus strong balance sheet management resulted in record full year 2023 cash generation of $2.4 billion. So overall, we achieved excellent financial results in 2023 and are anticipating improving from this higher base in 2024. We remain confident that we will deliver positive sales volume in 2024, including benefits from China, India and Mexico. We've delivered share gains in several businesses, including auto refinish, packaging and the protective and marine coatings businesses. We will also execute on our more than $250 million order backlog in Aerospace drive further growth in our well-positioned businesses in Mexico and further expand the benefits of our key growth initiatives, including powder coatings, electric vehicle products and digital solutions. We will drive further improvement of our operating margins aided by the sales volume growth leverage and our initiatives that drive manufacturing productivity following several years of supply chain and other disruptions. Lastly, we entered 2024 with a strong balance sheet, which provides us with the flexibility for further shareholder value creation going forward, including funding organic growth initiatives, appropriate acquisitions, debt repayment and share repurchases. Now, I'll comment on our first quarter outlook. We expect to deliver sequential adjusted EPS growth from $1.53 per share in Q4 2023 to a range of $1.80 to $1.87 per share in Q1 of 2024, an increase of 20% at the midpoint of the range. We anticipate global industrial production to remain soft, and our year-over-year sales volume performance will be unfavorably impacted by the approximate $40 million non-recurring Walmart customer load-in that occurred in the first quarter of 2023. Also, the timing of the Easter holiday will shift some sales into the second quarter. Despite these difficult year-over-year comparison items, we expect our first quarter sales volume will be flat overall, aided by positive sales volume growth in our aerospace, Protective & Marine and packaging, coatings businesses. We project solid growth in our Auto OEM business in Asia Pacific, where we expect to drive solid volume growth in China, led by our strong positioning with the electric vehicle OEM producers. Additionally, we expect to deliver organic sales growth through our best-in-class Mexico distribution platform. We anticipate overall company selling prices to remain positive, as some modest declines in our industrial reporting segment related to a small portion of customer-based index contracts will be more than offset by targeted selling price increases in our Performance Coatings segment. First quarter comparisons also include declines in certain transitory European and energy-related pricing indices, that were put in place during the period of extremely high energy prices in the region. These particular price declines are offset by lower purchased energy costs for our facility. The net selling price increases, along with various productivity initiatives will serve to offset somewhat higher expected wage inflation in 2024, especially in emerging regions. With regard to commodity raw materials, supply remains ample, and we will continue to realize benefits from moderating input costs including further recognition of savings stemming from working down, our higher inventories as we progress through 2024. We will diligently manage our costs and expect to deliver manufacturing and productivity gains supported by a more stable supply chain and customer order patterns. We anticipate more moderate year-over-year earnings growth in the first quarter associated with some of the transitory items, I mentioned earlier. However, we are confident that we will deliver our commitment for full year earnings growth of around 10% at our forecast guidance midpoint. Finally, I want to thank our more than 50,000 employees for making it happen by delivering excellent 2023 financial results and positioning the company for growth and value creation in 2024 and beyond for the benefit of all stakeholders. Thank you for your continued confidence in PPG. And this concludes our prepared remarks. And now would you please open the line for questions.

David Begleiter:

Thank you. Good morning. Tim and Vince, do you expect total company pricing to be up in 2024? And I presume that if it is, it's a positive performance than Industrial. Within performance, are you seeing pressure from big box retailers to lower your paint prices?

Operator:

Our next question comes from John McNulty with BMO. Your line is open. Please go ahead.

Vince Morales:

Yes, John, this is Vince. If you look throughout all of last year, we continued to accrue larger benefits from the moderation of raw materials. We will remind everybody raw material costs are still higher on a multiyear basis by a significant amount. As Tim mentioned, most of our suppliers have more than ample capacity, and it's certainly a focus for them to pick up more volume. We expect some incrementally better invoice benefits from raw materials, and then that will eventually flow through our P&L as we go through the year. But year-over-year, we expect some incrementally beneficial invoice pricing.

Operator:

Our next question comes from Ghansham Panjabi with Baird. Your line is open. Please go ahead.

TimKnavish:

Yes. Hi, good morning Ghansham. It's not a mix issue for us, Ghansham. It's more – first of all, I'm very pleased with how we've continued to hold price, even just closing out fourth quarter with another 2% increment. Again, we'll be positive in Q1, the confidence level is more because of a couple of things. One, to Vince's point earlier, raws are still quite elevated. We're talking about coming off of extremely high peaks. And so -- but they're still quite elevated from, say, 2019. So we don't see what I would characterize as massive deflation by any means. And the confidence level as we move through the year, I'll talk Performance Coatings. We -- as you know well, we get price almost irrespective there of the raw material environment, because of the unique value proposition that we deliver in performance where we're such a small part of the cost structure of our customers from a pure paint standpoint, but the value add outside of the can that we deliver is such a big significant impact on their cost structure. So that's a very different model there. And on industrial side, where maybe it is more proportionate to raw material increases or decreases, we just don't see the long supply dynamic upstream of us changing dramatically as we move through the year. When you think about, for example, China, just not having a V-shaped rebound in China is a big consumer of raws. So we expect a more moderate environment as we move through 2024.

Duffy Fischer:

Good morning, guys. Two questions. First is cash flow as a percent of EBITDA. If you hit the midpoint of your guide this year, EBITDA should be up about $250 million. Should we expect a commensurate move in cash flow would be one, and then two, in the auto OE business, you guided to down low single-digits coming into Q4. You did mid-single digits up, again, guiding down in Q1, is that just conservatism? Because when you look at the auto numbers, it seems like auto OE should be better than that unless there's some pricing in there. So can you just talk about what you're seeing in auto OE for Q1 price versus volume?

Vince Morales:

Just to add, as we talked several times, Duffy, on auto, acceleration in China helps us from an EV perspective as well. So we have more content on any traditional EV than we do otherwise. So that's proper for us in PPG in particular. To your cash flow question yes, I think the short answer is typically EBITDA would certainly serve as a proxy for cash flow, plus or minus. We have the last couple of years, expanded answer is we have the last couple of years had working capital movement that has either helped or hurt the cash flow on a transitory basis. We do have, as Tim alluded to in his opening comments, probably a couple of hundred million dollars of excess raw materials in inventory. We're going to work that down in 2024. So that will have a cash flow implication for us in a positive manner. But I think generally, what you're saying in EBITDA and cash flow should be the movement should be consistent.

Operator:

Our next question comes from Stephen Byrne with Bank of America/Merrill Lynch. Your line is open. Please go ahead.

TimKnavish:

Yes. Hi, Good morning, Steve. There was -- the quick answer on your second question is there were some unusuals and Vince will take that. But your first one, the Home Depot relationship and progress on the Pro program is going as expected. Quite frankly, the challenge that we have is that as it's growing off relatively small denominator, as you know, it's still being offset by the challenges on the DIY side. DIY is still the Home Depot and the Glyndon brand and Olympic brands are still a critical part of our DIY omnichannel strategy going forward. And unfortunately, the negatives there from a volume standpoint are offsetting the good progress that we have on our Pro omnichannel between the Home Depot and our own network. If I look at -- just to give some perspective, so Q4, despite the challenges out there, we were up low single digits on our Pro omnichannel. And our sell out with the Home Depot was one of our better quarters yet. So we're making progress there. But our DIY omnichannel, which includes not only what we do with the Home Depot, but also our big partner in the Midwest, our DIY remain down. So that's the issue there, but the momentum continues to grow. It's -- as I've said many times, we are building a business model for the future. That's brick-and-mortar light and it's a marathon, not a sprint, and we continue to tick off miles on the marathon. So good progress.

Operator:

Our next question comes from John Roberts with Mizuho. Your line is open, please go ahead.

TimKnavish:

Yes, hi John, it's both. But I mean the vast majority of the vehicles that we paint in China stay in China. The exciting part on the export side is the largest producer EVs now in the world, a Chinese producer is beginning to export. So, that will just be incremental upside but the vast majority of the cars that we paint in China stay in China.

John Bruno:

One more John from John Bruno, outside of auto OEM, a very high percentage of the coatings we sell in China or for products that stay in China.

Josh Spector:

Yes, hi. Thanks. So, I wanted to follow-up on industrial pricing. So, when you're talking about down modestly for the first quarter year-on-year, maybe it's 50, 100 basis points, I guess, in the frame of that, does that is it stabilized at that level through the year? Or do you expect it to decline? So, kind of, separating the energy give back from maybe some of the index pricing. And I guess when you look at this longer term then, what does this mean for margin potential for the Industrial segment? Are we looking at more normal incrementals from here to price raw still play into that? Or what are the factors that maybe move the margins up from the current level beyond this year? Thanks.

TimKnavish:

Yes, I think the question about margin expansion beyond what Vince described in pricing is the volume leverage will be significant on the industrial segment because that's the segment that really got hit the hardest during COVID and COVID recovery and so we've still got significant margin upside driven by volume leverage. The other side, if you go back to our CEO Day in May in New York, we pointed to about $150 million to $200 million of manufacturing productivity gains that we had line of sight to in the coming years, really, not just to get back to where we were pre-COVID, but also as we modernize, automate, digitize our operations. So those will really be the two levers that get us to the next horizon on margin largely across the industrial segment, but somewhat also in the Performance Coatings side.

Kevin McCarthy:

Thanks and good morning, everyone. Tim, would you elaborate on your volume outlook that's embedded in your 2024 guide? Would you expect volumes to be flat or up a little bit? Part of the reason I ask is we've seen many chemical companies suffer from volumes that are trending well-below real GDP. And so as you look across your portfolio and survey and forecast, do you think we'll see convergence in 2024? Or are there pockets of residual destocking or other headwinds that might make that more ambitious?

Vince Morales:

And just a couple of other items of note, Kevin, we expect Europe to stabilize, which really reflects a lack of a destock. We experienced a destocking, especially in the first half of 2023, and that's -- we feel that's won its course. So stabilization in Europe, which has been a negative for us. And again, China on the 2023, first half basis was light. So again, as that normalizes the pandemic effect of that hopefully is behind us. And as that normalizes, provides us with some uplift. And we are -- we do have this backlog that Tim alluded to in the opening remarks in aerospace. So we continue to produce more products at our manufacturing sites and that we expect that to continue to grow throughout the year to work down that backlog, which is more than a half a year backlog for us.

Michael Leithead:

Great. Thanks. Good morning, guys. I wanted to ask around cash deployment. Your net leverage ended the year towards the lower end of where it's historically been. I guess, three very brief questions. One, can you just remind us roughly what target leverage you intend to maintain? Two, how does the M&A market look today, say, relative to returning more cash to shareholders this year? And then third, I think you're guiding to $15 million of interest in 1Q, but about $95 million for the year. So why does that step up so much? I'm assuming that takes into consideration of more cash deployment. Could you just help clarify that? Thank you.

Vince Morales:

Yes. Let me just add. This is Vince. I just want to reemphasize the key comment Tim said, we prefer a strong balance sheet. Due to the optionality, it gives us on many fronts. We feel where we are today. We don't need to let cash grow. We will consume cash through April. That's our traditional seasonality of our businesses. So the $1.5 billion that sits on the balance sheet, we will consume them through April. That allows us to not enter the debt markets as significantly as we normally would for commercial paper. At this time of the year, we're typically adding commercial paper throughout -- from now through the end of April. So that's why our interest cost in Q1 will be lower, because we're going to use the cash on hand to fund that seasonal inventory build. That cash will then what we typically generate strong cash in the back half of the year, which is we'll deplete our interest income. And then, as we generate that strong cash in the back half of the year, we'll look at other uses.

Jeff Zekauskas:

Thanks very much. I was wondering whether you could comment on the direction of titanium dioxide prices. Secondly, you make a fuss over the difference between or you make a plus over your LIFO inventories. So if you would value things on LIFO instead of FIFO? What might the difference have been at the end of the year? And then finally, in your accounts payable and accrued liabilities line, your year-over-year increase that is a benefit was about $380 million. And sequentially, maybe it was $250 million. Now you guys don't disaggregate accounts payable from accrued liabilities. Can you explain what's going on there and that many, many companies had much lower accounts payable this year, and it seems to have really worked in the other direction for you?

Vince Morales:

Yes, Jeff, on the balance sheet questions, I'm not going to be able to calculate the FIFO, LIFO impact on the fly here. We can just a reminder everybody, we're at 75% or so FIFO, the difference between, again, the invoice cost and what we're realizing on the income statement for raw material moderation that is tens of millions of dollars, if we move that to a FIFO. I can't calculate it precisely. As it relates to payables, for us, we had a couple of items in the fourth quarter. Our tax provisioning is about $100 million higher. We ended the year on a weekend, two-day weekend. So our accounts payable is higher because of that. There's natural FX in that number on a year-over-year basis. And we had, as you saw, an environmental special for about $30 million where we accrued $30 million for future environmental spending. And we talked about the compensation increase in the fourth quarter. So, those are the big elements in our payables on a year-over-year basis.

Vincent Andrews:

Thank you. A few quick ones from me. In the first quarter, I get the timing shift of Easter, but February also had an extra day this year. So does that not offset the Easter impact and then also on TiO2, how much Chinese TiO2 are you guys buying these days? And how much of it is in Europe? And have you changed any purchasing patterns as a function of the EU's investigation to Chinese imports? And then lastly, the Pro architectural business has been holding up an awful lot better than the DIY, just in a similar fortunately, far enough away from COVID now that I think we should be able to have a conversation about what's driving the DIY weakness other than just a pull forward of volumes. And what's keeping the Pro business so high or so strong because it just seems like there's a disconnect between sort of pro demand being there, but DIY being so weak. So if you could help with those three things, I'd appreciate it.

Vincent Andrews:

TiO2?

Vince Morales:

Yes. And just to expand on that diversification capability, we continue to add slurry capabilities around the world, which allows us to mix different TiO2 suppliers products and efficiency, we're at a multiyear, 6%, 7% of efficiency in TiO2 in the last four or five years. And we have very active projects continuing to become more efficient. Some of those could be recognizable in terms of our -- the breadth of our buy.

Frank Mitsch:

Good morning and congrats on the new role, Jonathan. I wanted to come back to the volume questions. Tim, it sounded from your answer that flattish in Q1, basically, but you would expect as we progress through the year Q2, we'd probably see positive volumes. It sounded like that. I was wondering if you could clarify that. And Vince, when you mentioned Europe stabilizing, which is obviously a positive sign. But if I think about math of Europe deteriorating in the earlier parts of 2023, if it's stabilizing at these low levels, it might suggest that 2024, the net would be negative in terms of volume. So I was wondering if you could speak to that. And also any sort of comments you have with respect to -- I know you indicated that China, you anticipate positive volumes there, particularly with the weak comps. But what you're expecting in the Americas as well would be fantastic.

Vince Morales:

Yes. When we say Europe stabilizing in Europe, Europe stabilizing in volumes for 2024, we're looking at it quarter-over-quarter, Frank, and I know as you know, we're a very seasonal business there in our Deco our architectural coatings business. So each quarter, we expect that stabilization respective to the last prior year quarter. So again, on a full year basis, we expect that to be flat, reflecting that year-over-year comp quarter-by-quarter. Again, our view of China is a bit different, I think, than what most markets are seeing. We always have to remind folks, we do not have a large architectural presence in China. One of the heaviest unfavorable items in China is the construction and housing market, very little exposure for us. Again, we're turning the corner on industrial. Auto is growing. Our refinish business is returning in China, because of higher miles driven and aerospace is starting to come back. So our mix of businesses in China helps us. And again, the fact that we don't have that architectural content. The architectural industry draws a lot of raw materials as well. So the fact that, that's down is supportive of our earnings in China.

Operator:

Our next question comes from Aleksey Yefremov with KeyCorp. Your line is open. Please go ahead.

TimKnavish:

Yes, sure, Lexi. So in PPG Comex in Mexico, we said in May, 1 of our key initiatives was to continue our robust performance and growth in the Deco space, and the team did that another record year, double-digit sales up on the year, but also to introduce other parts of our portfolio to that strong concessionaire network. And we've done that. Protective Coatings were up, let's call it, very high single-digits. Adding again adding that fourth letter, but traffic sales were up double-digit. And I just returned, we just had all of our concessionaires together this past weekend and I was down there meeting with them, and they're very bullish on their ability to sell not only Deco, but these protective traffic, powder, light industrial coatings. So we're off and running. We just literally on -- I believe it was Monday of this week, introduced powder brands and refinish brands that are specific and dedicated and exclusive to the concessionaire network and that got a very good reception. Your other question on the initiatives that we kicked off last year as part of our enterprise growth strategy, I'd say, I am very pleased with the first year of execution of that enterprise growth strategy. As we said in the opening remarks, those initiatives, just in the first year, generated about $150 million of incremental sales. And some of those initiatives are longer-term initiatives than others and still in development. So between powder films, the Mexico opportunity that we just talked about, EVs up 20% content per vehicle. They're all up and running and I'm very pleased with the progress that we have seen so far.

Operator:

Our next question comes from Laurent Favre with BNP Paribas. Your line is open. Please go ahead.

TimKnavish:

Yes. Laurent, it's really not been anything near material to us to this point. First of all, from our direct products, paint and coatings don't do very well shipping around the world. We're mostly local for local. So minimal impact on our direct products. Our suppliers, we have -- our suppliers have plenty of capacity. There's plenty of inventory upstream of us. And our suppliers are seeing some delays but they're accounting for that in their production planning and in their logistics planning. So we're not expecting any impact to us there to the financial impact. We've seen a few minor small surcharges being implemented, but frankly, to this point, pretty insignificant. So the piece that we're watching and the reason we listed it on that part of our slide, was we're not certain of the impact on customers particularly if you think about European auto OEMs where they've got sourcing from around the world. And if they're missing any critical parts, it may impact production scheduling, we have seen none of that so far. That's really the piece we're watching more of a customer impact than on any internal impact. To your restocking, maybe I doubt that we'll see any significant inventory build of paints and coatings as a result of this. I think it will be more a movement of inventories upstream of us and how our suppliers deal with deal with their own logistics planning. But again, the fact that they're pretty long right now, we're not expecting any issues.

TimKnavish:

And Laurent, one more for me. We have nothing in the guide for the first quarter for this area

Patrick Cunningham:

Hi. Good morning. Just on auto refinish. It seems like there's maybe some normalization there. So I guess my first question is what's causing lower collision claims in the U.S. Is there anything structural you can point to like balance of total vehicles trending upwards? And how should we think about the outlook for Refinish for the full year by region?

Vince Morales:

Yes. And then regionally, we expect the U.S. and Europe to hang around 0 plus or minus for the year. As we said earlier, we expect China to grow as we see kind of a reopening on a full year basis there. So, that's the regional aspects. And just again, to hit on Tim's comment about our digital tools, these are tools we think are best-in-class. We have body shop productivity focus on those tools. And those are a subscription model for us that didn't exist three or four years ago.

Michael Sison:

Hi guys. Good morning. I guess just one question, Tim, when you think about the -- achieving the 10% EPS growth at the midpoint, can you sort of break down sort of the key drivers? I know you talked about volume growth quite a bit. Is that low single digits, kind of half, a little bit more? Maybe how much is deflation and anything else that sort of gets you to that 10%? Thank you.

Vince Morales:

Yes. And Mike, just I think it's important, a midpoint of 10%. Our operating results are going to be better than that. We do have some tax headwinds like most companies will have as some of the tax rates around the world move up. So, we guided to a higher year-over-year tax rate. So, operating results above 10%, offset modestly offset by this tax – a higher tax rate.

Dan Rizzo:

Good morning. This is Dan Rizzo on for Laurence. Thank you for squeezing me in. Obviously, the focus is on China for a good reason, but I was just wondering what India in terms of sales versus China? And if there's any time in the coming years where India will be competing in terms of importance versus China?

TimKnavish:

Yes. Our partnership with Asian Paints in India is fantastic and continues to perform very well. And across the same segments that were really strong in the rest of the world, which are doing well over there, automotive OEM, automotive refinish, industrial coatings, protective coatings. So that partnership is really world-class and helps us take our global technology advantage solutions to someone and partner with someone that's best-in-class within India. And so it's a really good story for us, not only in 2023, but going forward.

Operator:

Our next question comes from Arun Viswanathan with RBC. Your line is open. Please go ahead.

Vince Morales:

I think the math you have, Arun, is definitely accurate. We talked a lot on the call already about factors that affect Q1, some comparable factors last year, et cetera. Again, we're a seasonal business for us, Q2 and Q3 are very large quarters for our Deco architectural businesses. They're very large, even larger for our traffic businesses. So again, we'll see a pickup in those businesses seasonally, but we're also expecting some different volume tenor than we had last year in those businesses. Tim went through, I think, a laundry list of items earlier that included the leverage on those higher volumes. We also would expect improved manufacturing that we've been working on, and we alluded to in our May CEO update that manufacturing should grow throughout the year. So again, I definitely agree that Q1 on a year-over-year basis, up modestly, but the back half of the year, we expect to grow in terms of a size.

Aron Ceccarelli:

Thanks and good morning. I would like to go back to the topic of raw materials cost for a second. Your guidance has been improving throughout 2023. You were guiding down high single-digit in Q3 to Q4. When I look at Q1 2023, your raw materials costs were still slightly inflationary. So why are you guiding just for mid-single-digit decline now? What has changed, if anything? Because when I look at gross margin, it expanded 450 basis points year-over-year in Q4. It looks to me this is accelerating. So what is driving this mid-single-digit guidance for Q1, please? Thank you.

Operator:

Our final question today comes from Jaideep Pandya with On Field Investment Research. Your line is open. Please go ahead.

Tim Knavish:

Okay. Let me take those on, Jaideep. Its Tim. First of all, capacity. We got plenty of capacity. We have capacity. You know volumes are still down significantly versus 2019. And yes, we haven't taken capacity out since 2019. And frankly I would say our industry peers and certainly our suppliers. There's capacity. So yes, you're exactly right. You should expect that as volume comes up, certainly, we will get leverage from that volume, which will drop as margin improvement. Second question, raw materials and inventories. We do still have probably a few days higher DOI that we would like to have, $100 million, $150 million more raw material inventory than we would like to have. So yes, we will be buying raw materials in Q1 as we get ready for the peak paint season and some of them are more seasonal businesses, but maybe a little bit less than what links directly to demand because of that excess that we're sitting on today. And finally, on marine and protective, the quick answer is yes. We have launched some new products, new technologies recently in the fire protection area. That are quite strong and being well received by the market. For hydrocarbon fire protection is a product called PITT-CHAR NX, which has been very well received and on the cellulosic fire protection side, a product called STEELGUARD 651, which is also being very well received. So those new technologies are delivering share gain for us. But separate from fire protection, we've got really a fantastic product on the marine dry dock side that's very sustainable, very fuel efficient and drives -- it's really getting really good market receptivity and we've got a lot of share gains that will be -- we'll reap the benefits of those share gains in 2024 and beyond, and that's a product called SIGMAGLIDE. So, it is technology-driven in those spaces.

Jonathan Edwards:

Thank you, Elliot. Well done today. We appreciate your interest and confidence in PPG and this concludes our fourth quarter earnings call. Have a good day.

Operator:

Good morning. My name is Emily, and I will be your conference operator for today. At this time, I’d like to welcome everyone to the Third Quarter PPG Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to John Bruno, Vice President of Investor Relations. Please go ahead, sir.

Tim Knavish:

Thank you, John, and good morning, everyone. Welcome to our third quarter 2023 earnings call. I'd like to start by providing a few highlights on our third quarter record financial performance, and then I'll move to our outlook. In the third quarter, the PPG team continued to deliver strong financial results, including sales of $4.6 billion and adjusted earnings per diluted share of $2.07, both records for our third quarter. Our year-to-date cash generation is over $1.5 billion, which is also a record on a year-to-date basis. Our adjusted EPS of $2.07 was 25% higher year-over-year. We benefited from several non-recurring favorable discrete income tax items, which added $0.10 versus our beginning of quarter guidance. Excluding this favorable tax benefit this year, our EPS was still about 20% higher than the third quarter of 2022. We're on pace to finish 2023 with all-time record adjusted earnings per share. As we communicated at the beginning of the year, we had a high degree of conviction that our global business portfolio mix would prove resilient this year and as we had anticipated a challenging economic environment. That has clearly played out through the first nine months of the year. Our results were supported by good growth trends and strong execution in several of our leading and technology advantaged businesses, which resulted in record third quarter sales in the aerospace, automotive OEM, automotive refinish and PPG Comex Coatings businesses. Our third quarter sales volumes were impacted by soft global industrial production, which worsened in many countries during the quarter and also by cautious consumer buying patterns in Europe, China and other parts of the world. The selling price increases we implemented earlier this year, primarily in the Performance Coatings segment drove a solid 3% increase for the quarter. We expect selling prices to remain positive in the fourth quarter of 2023, albeit a little lower sequentially as we continue to see prior price increases reach their anniversaries. Throughout 2023, a key priority for our team has been restoring our margin profile. The third quarter marked the fourth consecutive quarter of year-over-year operating segment margin improvement with aggregate segment margins up 260 basis points. This led to both of our operating segments delivering at least 25% earnings growth in the third quarter with the Industrial Coatings segment also delivering higher sequential margins. Another key focus remains strong cash generation. Throughout the first three quarters of the year, the $1.5 billion operating cash generation that we delivered is up more than $1.1 billion over a year -- on a year-over-year basis. In addition to our strong earnings performance, we significantly reduced working capital in total by about $300 million, mainly driven by lower inventories, contributing to the robust operating cash flow generation. We use part of this cash to reduce our higher variable cost debt during the quarter and despite significant increases in market interest rates, our net interest expense declined year-over-year. As we look to continue our momentum into the fourth quarter, we are laser-focused on achieving top line sales and earnings growth in 2024 and beyond. I'd like to highlight a few items that we expect will support growth in 2024. First, as I communicated at our CEO investor briefing in May, we are working on a number of commercial growth opportunities and several of these initiatives have been launched and are now gaining momentum. For example, we are pleased with the progress being made supporting our customers' rapid growth of electric vehicles in China with PPG technology advantage products and services. We are well positioned with the leading electric vehicle producers and continue to gain share as the production rate increases each quarter, including strong EV export activity out of China. In the past few years, we've invested to enhance our manufacturing and technology capabilities around powder coatings products with prudent capacity additions. This year, we're realizing the benefit of these investments as our powder coating related sales have increased about 15% compared to last year. We're winning new business every quarter and supporting our customers' sustainability and productivity objectives, and we expect powder to outgrow the market for a number of years to come. Another commercial growth initiatives supporting our growth in 2024 and beyond involves expanding the breadth of products being sold through the PPG Comex distribution network. Our world-class network of over 5,100 concessionaire locations in Mexico has consistently outgrown the regional architectural market and provides customers with their preferred paint brand and products in Mexico. We are very excited about the opportunity to now leverage this distribution network to support customer needs for protective, refinish, traffic and light industrial products. So these focus areas are part of a larger basket of commercial initiatives that will support our previously communicated organic sales growth targets. I will provide periodic updates on these initiatives in subsequent quarters. On legacy of PPG and another catalyst for earnings growth going forward is strong cash generation and value-creating capital deployment. I plan to continue to abide by our hallmark of prudent balance sheet management and financial flexibility, supported by strong free cash flow of our business portfolio. Year-to-date, we have delivered record cash flow from operations and we have utilized this to deliver on our prior commitment to repay some variable rate debt, driving down our interest expense. In the fourth quarter, we will likely incorporate some additional debt repayment, but will also likely complete some share repurchases, reflecting our strong cash position and seasonality of our cash flows. In addition to the sales and earnings growth initiatives, one other strategic initiative that we've been actioning relates to some selective pruning of our business portfolio. As a reminder, we've recently divested a number of smaller assets, including most of our coatings businesses in Africa, a non-core business that we acquired with the Ennis-Flint acquisition and have exited certain product categories in some businesses. In addition, this week, we announced the divestiture of certain international operations in our Traffic Solutions business. These actions allow us to channel our growth bandwidth in areas that are meaningful and where we have winning advantages, including technology, brands and customer relationships. We will continue to actively assess each of our businesses and product lines to ensure they're consistent with our growth objectives and that they meet our financial objectives, and they earn the right to remain in the portfolio. Now I'll comment on our fourth quarter outlook. We expect several of the businesses in our Performance Coatings segment to deliver organic growth, including continued solid growth in our PPG Comex and aerospace businesses. We do expect slowing in U.S. architectural coatings demand stemming from multi-decade highs in interest rates and lowering housing turnover. While we expect our automotive OEM business to grow in the fourth quarter in most regions, other portions of our Industrial Coatings segment will be challenged due to sluggish overall global industrial production. While there are many variables in uncertain timing, we have prudently included an estimated financial impact of the UAW strikes of a few cents of EPS in our fourth quarter financial guidance. As we have communicated in the past, our regional sales to the OEMs impacted by the strike are low-single digit percentage of our total company sales. Also, we sell to other OEM customers in the region not impacted by the strikes and given the historically low dealer inventory levels, we expect any lost volume will be made up in subsequent quarters. Certain other sales volume headwinds are beginning to abate, as we expect China is at or approaching trough levels. Also, we do not expect destocking to be a significant issue in our packaging coating end-use market in 2024. With regard to commodity raw materials, supply has normalized to pre-pandemic levels and we expect to continue to realize benefits from moderating input costs. We will maintain emphasis on diligently managing our costs and expect to make more progress on our previously announced restructuring initiatives. In addition, we are beginning to deliver manufacturing productivity gains, which are supported by a more stable supply chain and customer order pattern. Despite the challenging environment, we've raised full year earnings guidance and expect fourth quarter aggregate segment margins will be higher on a year-over-year basis for the fifth consecutive quarter. Lastly, I'd like to thank our team members around the world who live our purpose every day to protect and beautify the world. Thanks to their hard work and dedication, we're able to support our customers and help them solve their biggest challenges. I remain confident in our team's ability to make it happen. Thank you for your continued confidence in PPG. This concludes our prepared remarks and now would you please open the line for questions.

John McNulty:

Yeah. Good morning. Thanks for taking my call and congrats on a solid set of results. Wanted to ask on the raw material environment, we've seen a decent jump up in oil recently. I guess, can you speak to how we should be thinking about raws moving from 3Q to 4Q and if you expect those to be down and how much on a sequential basis, do you expect them to be down? And then, I guess, how should we be thinking about that as it rolls through into 2024?

Vince Morales:

Hey, John. This is Vince. Let me just add a little bit to what Tim was saying. So the supply demand environment, as we pointed out, I think, in our prepared remarks and the press release, we have seen sufficient -- more than sufficient supply, that's typically a bigger driver of our input costs than just the feedstocks. And right now and heading into a seasonally lower fourth quarter, we expect that to continue. So I would expect the increase in rise in oil to have no impact other than solvents on our fourth quarter and as we head into next year, we will start negotiating with our suppliers in Q4 -- late Q4, and the tone from our suppliers has been more volume driven as opposed to price driven.

Duffy Fischer:

Yeah. Good morning, guys. Just a question around the delta between Industrial and Performance. So Industrial margins were up 300 bps year-over-year and Performance was up a little under 2.5%. But Industrial trailed on volumes by 4% and trailed on dollar pricing by 3%. So it doesn't look like there were any leverage from price and volume on the margin spread, so what's underlying that gap and why was Industrial able to do better than Performance even though it didn't on price or volume?

Tim Knavish:

Yeah. I think it's spot on, and I think both segments will see continued year-over-year margin improvement, depending upon with the addition of manufacturing productivity improvements that I mentioned in my opening comments. And of course, as we get into seasonality, more volume will help that step change in margins as well.

Ghansham Panjabi:

Thank you, operator. Good morning, everybody. As we kind of think about 2023, two of your higher margin verticals, including aerospace and Comex had delivered on outsized growth and obviously, margin conversion as well. How should we think about the sustainability of these growth verticals into 2024 and just more broadly, what is your base case for volumes for each of the two operating segments next year?

Vince Morales:

Yeah. And Ghansham, if I could add just to those green shoots. We are seeing Europe, in our opinion is troughing especially for our business mix. We were essentially flat in Q3 in European volume across our portfolio. We do expect growth to resume in China, albeit at a lower level. Those are two pieces of our -- two big pieces of our portfolio geographically. And as Tim mentioned, Mexico, we expect to have outsized growth relative to other regions. And then the other business, as Tim mentioned, I would agree with, but I would also add that we do -- we are picking up share in our refinish business based on some of the technologies that we talked about in May.

Christopher Parkinson:

Thank you so much. Good morning. Tim, you've spoken a lot about kind of refocusing on R&D and just further positioning PPG to outgrow some of its respect to end markets, new products, new technologies has been literally just mentioned one. Once we're through this macro mayhem or however, you want to characterize it, what's your level and degree of confidence that you will, in fact, be able to outgrow certain end markets and where are you ultimately the most enthusiastic? Thank you.

Operator:

Your next question comes from the line of Michael Leithead of Barclays. Michael, please go ahead. Your line is now open.

Vince Morales:

Yeah. Thanks, Mike. Good morning. Yeah, again, just to reiterate, again, record Q3 year-to-date cash flow about $1.5 billion. If you look at our net debt, we're down $700 million, $800 million year-over-year or versus the end of the year. Tim mentioned that we have some more debt coming due in 2024. We're going to pay some of that early to get the interest rate carry into our EPS. But we have $600 million of debt coming due over the next 12 years -- 12 months, excuse me. And again, some of that's -- we have -- we can prepay early, which we'll take advantage of. And we are going to do some level of share repo in Q4. And we're not going to itemize that in terms of size, but we'll look at our cash position and we'll look at the cash flow and typically our strongest quarter of the year. We'll give more guidance on 2024 in January. Again, we do have expect -- again continue strong cash flow in 2024, our earnings growth, supporting that as well as we're still carrying several hundred million dollars of excess inventory as we continue to make good progress in working that down in Q2 and Q3, but we still have a couple hundred million dollars we want to work down over the next six months or so. So that'll help our cash flow next year, but we'll get more cash and financial guidance in January.

Vincent Andrews:

Thank you. Good morning, everyone. I believe there were some comments in the prepared remarks in U.S. refinish about some negative volume. It's a function of some customer issues. Could you just give a little more detail on those and whether they're going to persist into the fourth quarter or it was just unique to the third quarter?

Vince Morales:

Yeah. And Vincent, just -- at the market level, the body shops are still very active. They still have a backlog. They're working through that backlog. So sell-in certainly matters for us, but the ultimate judge of how the business and how the market is performing or the body shop metrics and the body shop business remains very solid as we sit here today, and we don’t see that changing in the near term.

Stephen V. Byrne:

Thanks, Tim. I'd like to ask you about your view on, among all of your growth potential, where would you rank cross-selling, you highlighted growth opportunities in businesses, but -- and you highlighted Comex as an opportunity to drive a few other businesses. But do you see potential to do that in other regions and which of your businesses do you think you have the most potential to drive geographic share gain?

A – Vince Morales:

Yeah. And Steve, I just want to expand on the battery factory comment, Tim made. So if you look at the battery factory construction, we typically have multiple angles to prosecute that. We may go in first with protective coatings as they’re building the infrastructure for the factory. We certainly could do architectural coatings. We then have an I into the actual products being made in those factories, both on a light industrial or heavy industrial coatings as well as an OEM basis. So that I think battery factors are prime examples of where we are able to cross pollinate with the customers.

Jeffrey Zekauskas:

Hi. Thanks very much. You said that you're on FIFO and that your raw materials on that basis were down at a high-single digit rate. If you were on LIFO, how much would they be done? I know that they would be down more, but my question is by what percentage? And secondly, it seems that your volumes in your domestic architectural paint stores business increased in the third quarter, is that true and do you think they're capable of increasing in the fourth quarter?

Tim Knavish:

Hey, Jeff. On your architectural U.S. question, the way we look at it with our new business model is our stores are part of our professional omni-channel, which is company-owned stores plus the Pro at Home Depot plus our independent dealers. That business, despite all the challenges macro-wise that omni-channel delivered low-single digit growth in Q3. And we would expect that or better as we move forward. So yeah, I think the omni-channel is delivering what we've expected some help from macros would make that even better.

Operator:

Your next question comes from the line of Josh Spector with UBS. Josh, please go ahead. Your line is now open.

Tim Knavish:

Hey, Josh. So Industrial segment, 39 as you said, that is 300 basis points up from last year in Q3. And the real driver -- it's not price, we have not seen any significant, if any, price give back to your question on the impact there in Industrial. The big impact is volume that -- as volume recovers moving forward, you'll see margin in Industrial Coatings improve. So within our control, the operational improvements that we've talked about and we said in our prepared remarks that we're starting to see those impacts come through on a productivity basis. That's another big driver to Industrial segment margin continued improvement.

David Begleiter:

Thank you. Good morning. Tim and Vince, just on the Q4 guidance, can you give a little more color on your assumptions for the auto strike, how long it continues and does it expand? And also, what are you seeing in terms of professional contracted backlogs heading into Q4 here? Thank you.

John Bruno:

The backlogs in the U.S. architectural side.

Operator:

Your next question comes from the line of Kevin McCarthy with VRP. Kevin, please go ahead. Your line is now open.

Tim Knavish:

Yeah. Hey, Kevin. Good morning. To your pruning question, I would say, we're in early innings, frankly. What we've done so far is, I'd say some of the more obvious ones around the edge is, but businesses are on notice. My team knows that every business has to earn their right to stay in the portfolio and that's small or medium or large even. But we did the obvious ones first, and we're working through a number of other things. It's a bit early to give any specifics, but early days there.

Tim Knavish:

Yeah. And the word is focus. I said that many times back in May, and I'd say, it's daily within the company. We're going to focus on the areas that we have the best right to win for the future and that are going to drive the best financial and growth performance for the future. To your second question, we are still – still a core part of our strategy is value creation, shareholder value accretive acquisitions because we still see many opportunities out there in the coatings space. But it's been a little slower than historical just given the financing costs and also performance of some companies during these macro challenged environment, sellers, of course, sellers want to sell it to peak EBITDA. So I think there's a little bit of a pause in closing deals, but we have a number in our pipeline. We’re talking to potential sellers daily, weekly, monthly. So it’s still a core part of our strategy. And frankly, because these acquisitions add long-term earnings and long-term cash generation, it’s still our preferred – one of our preferred deployment opportunities. But as you heard us in our opening remarks, if those don’t happen, we will put that surplus cash to work in other ways, including repo.

Aleksey Yefremov:

Thanks and good morning, everyone. Did you outperform in the Pro paint market in the U.S. this year and if so, by what magnitude and how do you think you could do relative to the market in the segment next year?

Operator:

Your next question comes from the line of Michael Sison with Wells Fargo. Michael, please go ahead. Your line is now open.

John Bruno:

Yeah. Mike, this is John. Let me start, and I'll have Tim and Vince add on here. So in terms of fourth quarter outlook and volume, the Performance segment, we expect volume to be positive. We're still going to see good growth in aerospace and Comex as two key drivers there. The Industrial segment, we are expecting volumes to be lower, and that includes the assumption that Tim made earlier about the UAW impact. So if you -- if we didn't have a UAW impact, we must be much closer to being flat in volume in the Industrial Coatings segment.

Vince Morales:

And Mike, just one more thing on the DIY is, we do know many of the large DIY retailers have destocked in 2023. So we certainly haven't had detailed conversations about their plans for 2024, but there was a pretty aggressive destock in 2023. So the sellout was much greater than the sell-in in 2023. And if that just normalizes on a year-over-year basis that will assist the pain producers.

Frank Mitsch:

Thank you and congrats, John on the promotion of VP, Finance reading a lot about wage inflation and higher accruals at PPG. So I assume it's because you've been doing double duty for the last 2.5 months, so congrats on that. You commented that volumes in the fourth quarter, it seemed like we might finally get that to be positive if it wasn't for the UAW strike. I'm curious as to given the nine quarters in a row of negative volumes, Tim, what your expectations are as you have an early read into 2024 in terms of volume growth at PPG?

Operator:

Your next question comes from the line of Laurence Alexander with Jefferies. Please go ahead. Your line is now open.

Tim Knavish:

Yes. Hey, Laurence. Thanks for the question. The short answer is, yes. We'll stay ahead of wage inflation with a combination of price and productivity. We do expect, if you look at, let's call it, salary inflation in the established markets a little higher than normal, call it, 3%, frontline workers is very country specific. So it will be higher than that in some countries. But we're also confident, given our pricing track record that through a combination of price and productivity, we'll be able to offset the wage inflation that we'll see. And I'll also point out, remember that with our mix of businesses, with the exception of company-owned stores, we have a very low people intensity structure because most of our businesses are direct or direct to somebody else's distribution channel. So with the exception of company-owned stores, we have a pretty low human capital intensity frontline business.

Aron Ceccarelli:

Hi. Good morning. Thanks for taking my question. I have one on pricing. With the heavy lift on pricing initiatives now behind us and the supply of raw materials back to normal condition, how should we be thinking about pricing across the two segments for 2024? And how do you feel about the potential scenario where pricing could turn negative next year? Thank you.

Operator:

Your next question comes from the line of Mike Harrison with Seaport Research Partners. Mike, please go ahead. Your line is now open.

Tim Knavish:

Yeah, Mike. Great question. Thank you. What you see in powder growth for PPG is share gain, okay? Very little, if any, conversion of existing PPG customers from liquid to powder because there's two factors there. One, frankly, we're starting at a fairly low market position in powder. So we're specifically targeting share gain and conversion of an existing customer from liquid to powder takes a capital investment by that customer in their paint job. So it's not an overnight flip. So what you're seeing is share gain. Now from a margin standpoint, if you look at our U.S. powder business, for example, on a net margin standpoint, it's one of our more profitable segments across general industrial. And the reason is we target specifically the higher end of the powder portfolio, there's liquid-like appearance, there's metallic powders, those types of things that command a higher margin because they're more technology advanced from a formulation standpoint. So we're specifically targeting the higher end of the segment. Longer term, one of the reasons we are investing in powder for the future is, it is more sustainable solution for our customers. So you've got the short-term focus that where we're driving share gain by targeting the higher end segments of margin for powder. Longer term, you will see more and more customers converting from liquid to powder because of the sustainable solution that it provides.

Arun Viswanathan:

Great. Thanks for taking my questions. So I just wanted to understand, it sounds like you may be looking at consolidated positive volume growth for '24? Given that scenario and the operating leverage and the incremental margins that you kind of envisioned, do you expect to get to that $9 EPS level or what's the path to getting back to that level that you put out a couple of years ago? Thanks.

Operator:

Those are all the questions we have. So I’ll turn the call back over to Mr. John Bruno.

Operator:

This concludes today's conference call. You may now disconnect your lines.

Operator:

Good morning. My name is Carla, and I will be your conference operator for today. Welcome to the Second Quarter PPG Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to John Bruno, Vice President of Investor Relations. Please go ahead, sir.

Tim Knavish:

Thank you, John, and good morning, everyone. And welcome to our second quarter 2023 earnings call. I would like to start by providing a few highlights on our second quarter record financial performance and then I'll move to our outlook. The PPG team delivered all-time record financial results in the second quarter, including sales of $4.9 billion, adjusted earnings per diluted share from continuing operations of $2.25 and year-to-date cash generation of about $620 million. Our adjusted EPS is about 24% higher than the second quarter of 2022 and cash generation of $750 million higher year-over-year. These strong financial results were achieved despite operating in an environment of variable global economic demand. Industrial production was muted, reflecting cautious consumer buying behavior in Europe and slower-than-expected recovery in China and softening demand in certain end use markets in the US. Overall, our results were supported by good growth trends in several of our technology, advantaged businesses and leading brands. PPG's strong positioning in these end use markets led to record second quarter sales in five of our nine businesses. Aerospace, automotive, automotive refinish, PPG Comex and our protective and marine coatings business. We implemented incremental price increases in the first half of the year, primarily in the Performance Coatings segment and our aggregate two-year stack pricing for the company is now about 20%, which is offsetting historically high cost inflation. We expect selling prices to remain positive in the second half 2023, recognizing prior year price increases will reach anniversaries as the year progresses. As I said at my CEO investor briefing in May, margin recovery is the top near-term priority. And we have made great progress this year in improving our segment margins toward our historical profile. Our aggregate segment margins in Q2 were about 16%, which is 330 basis points higher than the second quarter of 2022. This included the Performance Coatings segment delivering margins of near 18%, the highest since 2016. Another key priority for our team has been to return to our legacy of strong cash generation. And through the first half of the year, we delivered record operating cash generation of about $620 million. This was supported by our record net earnings, but we also lowered our inventory levels by about $100 million on a sequential quarterly basis. Despite this reduction, our raw material inventories remain elevated and we are executing various actions, plans to further reduce these inventory levels over the next several quarters as commodity supply availability has improved significantly this year. Now I'd like to spend a few minutes on three key drivers that are contributing to our excellent financial results in 2023. First, while overall global industrial production is challenging, including in a number of industrial end use markets that are already in recessionary type demand conditions, our portfolio of business mix is providing great resilience. Two of the best performing global industries in the second quarter were aerospace and auto OEM. We have established leading global positions in each of these end markets by facilitating our customer success through innovative and sustainably advantaged products and much relied upon services. We expect demand for our aerospace and auto OEM coatings products to remain robust as they are both still below 2019 demand levels. Two data points are, international flights remain 10% below 2019 pre-pandemic levels and over the past several years, lower automotive OEM global builds have resulted in an estimated supply deficit of about 40 million cars versus historical build rates. The second key driver is that we continue to deliver strong earnings performance in Europe as we achieved consecutive quarterly earnings records despite lackluster regional industrial production activity and weak aggregate -- architectural demand. This has been accomplished by our team's strong execution of cost and margin management. When this region begins to recover to any degree, PPG will be well positioned for solid topline and additional bottom line growth. The third key drivers are strong positioning in Mexico where current economic conditions remain robust including expansive nearshoring related growth, solid consumer wealth growth and an appreciating local currency. We expect the nearshoring benefits to continue for a number of years, first with capital investment and then through increased regional employment. PPG remains the clear leader in Mexico for architectural and automotive OEM and we have actions underway to capture further growth in our other businesses where we will leverage our core strengths, including the best-in-class PPG Comex concessionaire distribution network. I'd also like to comment on our enterprise growth strategy. A key pillar of this strategy is to partner with our customers to deliver superior service and products with a focus on enhancing their productivity and sustainability. In the second quarter, we continued to make advancements and earned several new customer wins. I'm excited about the opportunities we have ahead of us to win more customer value driven business and grow our organic sales. Now some quick updates about our important ESG initiatives. As we communicated in our 2022 ESG report, we've introduced 2030 greenhouse gas emissions reduction targets that have now been validated according to climate science through the science-based targets initiative. We plan to reduce our scope 1 and scope 2 absolute greenhouse gas emissions by 50% by 2030 and our scope 3 greenhouse gas emissions by 30% within the same timeframe. Moving to our outlook. We expect global industrial production to remain at lower levels in the third quarter, including similar demand activity in Europe, some further slowing in the US and modest sequential improvement in China. We do expect certain pockets of industry activity to remain more resilient, including aerospace and automotive industries, where we are well positioned on a global basis. In addition, we expect economic activity in Mexico to remain solid. In our architectural businesses, we expect demand conditions to be mixed by geography. In Europe, we anticipate demand will stabilize at current levels, resulting in year-over-year sales volume being much closer to the prior year. In the US, we anticipate DIY demand to remain at lower levels and pro-contractor residential repaint activity to begin to modestly decline sequentially with the backdrop of lower existing home sales. Finally, in Mexico, we expect our PPG Comex business to continue to post solid organic growth. In the third quarter, we expect to realize additional benefits from moderating cost inputs. At the peak of our supply disruptions, we had more than 160 force majeures in our global supply chain. That is now about 10, which is in line with our historical norms. To date, we have not yet recognized the full financial benefit of our commodity supply chain normalizing. From a financial realization perspective, through the end of June, our input costs were still 20% higher than the pre-pandemic levels. As we further reduce our inventories, we will realize additional earnings benefit. We continue to work on our previously announced restructuring initiatives and expect an incremental $15 million year-over-year earnings benefit in the third quarter. Additionally, we will benefit from the recent paint film acquisition that we made in the second quarter. This business is uniquely positioned in the premium end of this new emerging market and has good customer pull and future growth prospects. Annual sales of this business are about $100 million. Despite the challenging environment, we have raised our full year earnings guidance and expect third quarter aggregated segment margins will be higher on a year-over-year basis for the fourth consecutive quarter. Finally, I want to thank our team members around the world who support our customers, serve our communities and continually look for ways to do better today than yesterday every day. It is their dedication and commitment to helping make our customers successful that gives me continued confidence in our future. As we mark PPG's 140th anniversary in August, I firmly believe that our best days still remain ahead of us. Thank you for your continued confidence in PPG. This concludes our prepared remarks and now would you please open the line for questions.

Christopher Parkinson:

Great. Thank you so much. Tim, can we perhaps just dissect the outlook for Industrial Coatings segment margins a little bit. Just based on what you're seeing for price cost for the second half of the year and market mix, given the dichotomy of certain things moving various directions per your 3Q outlook in your slide deck, comp accruals, just anything else you think is worthwhile discussing as you progress back towards prior peak? Thank you so much.

Operator:

[Operator Instructions]

John Bruno:

Carla, can you please open up the secondary line?

Tim Knavish:

Okay.

Tim Knavish:

Thanks, Chris. So as I started to say, segment margins -- okay, good -- segment margins in industrial certainly have more room to grow and we expect that to continue, both from the price cost standpoint. But the other piece of recovery that is really not happened yet that will continue to improve the segment margins on Industrial are volume. Of course, right now auto OEM is strong, but still below 2019. And then we've got some pockets of weakness in industrial and certainly pockets of weakness in packaging. So we will get segment margins as those volumes stabilize. The other thing is the operational challenge that we mentioned at our May event have largely been in the industrial segment. So as we make progress on those initiatives, those two pieces will add to the improvements that will be realized from the continuing price versus cost recovery. And then end markets, to your question for the Industrial segment, automotive has been very resilient, some time surprisingly so despite everything that's happening in the world with interest rates and inflation and affordability. All of our major regions for automotive were up double digits for Q2. And we expect continued strong recovery as we move forward here. We'll be lapping a stronger Q3 for auto based on China which had a strong Q3 last year. But overall, we'll continue to see good volume recovery in auto.

Christopher Parkinson:

We expect that recovery to continue for years to come. Powder is a mix -- I'm sorry.

John Bruno:

Apologies, everybody. We're trying to sort through these issues. We'll continue the call right now.

John Bruno:

We'll move to the next question, Carla.

Ghansham Panjabi:

Okay. Hey, guys. Good morning. Can you hear me?

Ghansham Panjabi:

Okay. Terrific. I guess just given all the moving parts on a macro basis and just kind of building on your last few comments, Tim, can you just give us a sense as to how your volume outlook for 2023 has changed since the last time you reported and which of the businesses are seeing the greatest variability relative to your previous view? And then separately, apart from packaging, are there still any businesses being impacted by inventory destocking in any material way?

Operator:

Your next question comes from the line of Josh Spector. Please go ahead.

Vince Morales:

Yeah, Josh, this is Vince. On SG&A, let me take that one first. We did have a little bit of higher SG&A in Q2 than the prior year. Really a couple of elements to that. We talked about higher performance-based incentive comp including total shareholder return compensation. We did have as we communicated in Q1, higher non-cash pension expense for the balance -- for all of 2023. That falls in the SG&A bucket on a year-over-year basis. You could see that. And just a reminder, a lot of our China business was shut down in Q2 of 2022 and some of the increased sales creates increased SG&A. So those three elements pushed our SG&A cost up year-over-year. And the incentive comp item was a catch up for both Q1 and Q2. So again, that's SG&A component. On the gross profit percent, we did as you pointed out, we're averaging about 41% year-to-date. Q3 typically is a lower volume quarter for us. We don't have as much operational pull-through as we would on a higher volume quarter, specifically in Europe. So it's really the only delta I would point to. We do expect as we said in our prepared remarks, a higher or improved deflation capture. But again, the lower volumes are going to affect our manufacturing efficiency.

David Begleiter:

Thank you. Good morning. Tim and Vince, you mentioned the weakness -- potential weakness in Pro. Where are the backlogs today and are you actually seeing that weakness yet come to fruition?

Operator:

Your next question comes from the line of Jeffrey Zekauskas. Your line is now open.

Vince Morales:

Yeah, Jeff, this is Vince. We had a little break-up on your question, but I think you asked about TiO2 oversupply in China. And we do -- we are able to take Chinese TiO2 and are -- and have been for quite some time, utilizing that certainly in Europe, certainly in Latin America, South America, obviously in Asia. And there are tariffs that make it less cost effective today to do so in the US. But we are fully utilizing our capabilities to move that TiO2 to other markets or other regions of the world outside of Asia and capitalizing on those lower prices.

Vince Morales:

To just add on there…

Vince Morales:

Sorry, Carla. Just -- I apologize. Just to add on, my apologies. Just to add on, as John mentioned, we do excess inventory, specifically in raw materials. If you look at our inventory historically, we've trimmed about 50% of the excess raw material inventory that we came into the year with in the first six months So we'll be working the balance of the year to trim the other portion to get back to our historical level.

Stephen V. Byrne:

Yeah, thank you. If I understood you correctly, Tim, you talked about raws, and I believe it was in COGS, still being 20% above pre-pandemic. And, Vince, you just highlighted, you're still sitting on excess inventory of raws. My question would be, for raws purchased today, what would be the cost relative to pre-pandemic? And how long do you think that it will take for that to flow through COGS?

Tim Knavish:

Yeah. And bottom line, Steve, when you combine that with the additional $100 million or so of inventory that we've got to work through that we're sitting on now, you've got sequentially more raw material deflation combined with that additional inventory flowthrough. That's why I'm so confident that our margin recovery journey will continue.

John McNulty:

Yeah, thanks for taking my question. So, Tim, in your prepared remarks, you spoke to pricing continuing through the second half of the year. I guess just because the comps are kind of pretty dramatic year-over-year, I guess can you help us to think about whether you're going to see pricing sequentially from 2Q to 3Q and how we should be thinking about that?

Vince Morales:

And just to tag along here, we still expect that the price -- the raw material delta to expand as we talked about the prior question, which is we expect more -- to realize more deflation as we pull down our inventories.

Operator:

Your next question comes from the line of Vincent Andrews. Your line is now open.

Tim Knavish:

Yeah, Vincent, we do have -- no surprise, higher than normal wage inflation. I'd say in a mature markets average, you could call that about 3% but higher than that on frontline workers like store workers, but 3% would be a good average. Emerging markets, higher than that. And then from a raw material inflation standpoint, we're still at that 20%-ish number versus pre-pandemic. And we're expecting Q3 to see mid to high single-digits down. So we expect the combination of those two to still keep us at elevated cost versus pre-pandemic, but improving sequentially as we move through the rest of the year.

Operator:

Your next question comes from the line of Duffy Fischer. Your line is now open.

Tim Knavish:

Hey, Duffy. The biggest driver to that would just be the quarter-over-quarter price actions. Most of the larger price increases for us started kick in like Q3 of last year. So as we lap those and less new pricing if you will adding to the top, that's really the biggest difference.

Patrick Cunningham:

Hi. Good morning. Thanks for taking my question. So increasing interest rates and -- are clearly showing up in existing home sales and you cited softness and resi repaint. And I want to talk a little bit about non-resi. While it appears to be strong or maybe hanging in there, how should we think about the risk to commercial volumes in the back half and in 2024 given a higher interest rate environment and, starting to see some deceleration in commercial construction and remodeling indices?

Operator:

Your next question comes from the line of Michael Leithead. Your line is now open.

Tim Knavish:

Yeah. So part of it was -- part of it was comp related. We had a really strong Q2, Q3 last year in that business. And secondly, it's still a new business for us and we're still learning the market a bit. And this is an area where we did see some -- I'd say temporary shift in paint volumes as activities picked up. And so we expect that -- we expect to get that back as we move forward through the rest of the year and certainly into next year. We have been focused very heavily on margin over volume in that business and the team has done a great job there. And the last thing I'll say to that is while the volumes did come in a bit lower than we expected for the quarter, this business is generating good cash for us, really good cash and a good contributor to the enterprise from that standpoint.

Frank Mitsch:

Good morning and nice results. Obviously you guys generated some strong cash flow in the first half of the year, begs the question on the use cash. Debt paydown is part of it. But how do you think about buybacks versus M&A? I know, Tim, you've talked about right property, right price, right time? Is this the right time? Are you seeing the right price? Any thoughts there would be greatly appreciated.

Vince Morales:

And just to reiterate what we said in May in New York, we're not going -- after we pay down this debt, we're not going to let cash grow on the balance sheet.

Aleksey Yefremov:

Thanks. Good morning, everyone. We've recently seen somewhat better deed on new residential construction in the US What do you see in your business in this market? Have your expectations here improved at all in the last three months? And then separately, are you seeing any meaningful pickup in the US infrastructure spending?

Aleksey Yefremov:

Infrastructure.

Aleksey Yefremov:

What you think about US infrastructure.

Vince Morales:

And if I could add, it's not US comment, but it's a Mexico comment. We are seeing a significant amount of near-shoring occur in Mexico, several hundreds of building permits for manufacturing facilities have been requested. Those will yield benefits for us certainly in ‘24 and ‘25 as that manufacturing is put in place. And then as Tim mentioned earlier, we have a full-fledged array of PPG businesses in Mexico to facilitate further painting once that industrial activity picks up as well as our strong Comex brand.

Operator:

Your next question comes from the line of Mike Harrison. Your line is now open.

Vince Morales:

Yeah, Mike. This is Vince. Let me start and I'm sure Tim will have some color here. But it's taken us a while as it typically does, at doing an inflation cycle to negotiate with our customers, get paid for the value we provide. So we had a lag on the way up in terms of the inflation versus price to our OEM customers. We're in a steady state environment now. We're not seeing any pushback We're still trying to capture -- as the volume grows, we're still trying to capture our margins back in that business, but we're not seeing any pushback at this point from the customers. Again, that's a traditional lag effect that we would see in any inflation cycle.

Operator:

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

Tim Knavish:

Yeah. Hey, John. Volume was positive here in the US, which of course is our most -- largest and most critical market. And that was better than we expected. Volume in Europe, I would say, was worse than we expected. Volume down there a bit more than we thought. And then volume in China, a little bit muted because of the slower recovery, but we see that is sequentially improving as time goes on. But overall, great quarter for that business, really bullish on particularly the US side and we're watching closely what happens on the Europe side.

Operator:

Your next question comes from the line of Michael Sison. Your line is now open.

Tim Knavish:

Yeah. So I'll take a few of the markets that were lower volume than what we expected for Q2 and how we're thinking about them going forward. First one, architectural Europe, was -- that was clearly down more than we expected, but some of that isolated to France as I mentioned earlier. I do expect that to start comping pretty close, maybe even a little upside from where we were at Q3 of last year. So I've used the term bouncing off the bottom. I do believe that Europe architectural is bouncing off the bottom and maybe a little bit of upside there. The China recovery, slower than we expected in Q2, no doubt, but the way we're thinking about that is, that just stretches out the recovery positive -- any stimulus that the government does in the industrial space will be a real positive for PPG and we do expect China to sequentially improve. So those would be the two main ones I would point out as far as what we saw in Q2 and potentially improving in Q3 and beyond.

Operator:

Your next question comes from the line of Kevin McCarthy. Your line is now open.

Vince Morales:

Hey, Kevin, this is Vince. I'll start and I'll let Tim add here. But just a reminder, again, just the same question we had -- the last question. China had a recovery in Q3 last year in auto production. So again, the numbers when you look on a year-over-year basis are a bit skewed.

Operator:

Your next question comes from the line of [indiscernible]. Your line is now open.

Vince Morales:

Yeah, I think we talked about this a little earlier in the call. We do expect, again, incremental deflation to flow through to our P&L. We're starting to lap some pricing. We do, especially in the industrial businesses, we do see volume as the biggest catalyst in the back half of the year or in 2024 to help improve the margins as well as, Tim mentioned earlier, manufacturing -- PPG manufacturing as a key element and we laid that out in our May New York meeting. So those would be the four key elements that I would point to that would impact our margins in the back half of the year.

Laurence Alexander:

Good morning. Just a quick one. What's the net drag for earnings and margins from the destocking you're doing this year? Just trying to think about kind of how that translates into the bridge for next year?

Operator:

Your next question comes from the line of Arun Viswanathan. Your line is now open.

Tim Knavish:

Yeah, Arun. Great question, and one we talk about a lot. And I'll first qualify it by saying it's still pretty early given all the macro stuff that's happening around the world to really nail in our 2024 volume assumptions. But I will tell you that I'm optimistic based on a few things. We've talked a lot about auto and aerospace and Mexico and refinish and we fully expect those businesses to continue to perform. In addition to that, I've talked about a few businesses that we think are bouncing off the bottom and they're not small businesses for us. So eventually, bouncing off the bottom will turn to positive. China, we have a really strong presence in China. China ramp up in recovery been slower than expected. But if you think about that for 2024, that's a positive, particularly with any government stimulus. And the last one I would point out is Europe. And while Europe volume has been very muted, for the first half of the year, we still printed all-time record earnings in Q1, all-time record earnings in Q2. So the team has done a great job of positioning from both a margin and cost base standpoint. So any incremental uptick in volume across any of those businesses in Europe will be a real positive for us. So, still a little early. We'll talk more about that in the next earnings call, but there are a lot of indicators that could point to positive volume for us for 2024.

John Bruno:

Thank you, Carla. This ends our second quarter earnings call. We appreciate everybody's interest and confidence in PPG. Have a good day.

Operator:

Good morning. My name is Elliot, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter PPG Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to John Bruno, Vice President of Investor Relations. Please go ahead, sir.

Timothy Knavish:

Thank you, John, and good morning, everyone. I'd like to welcome you to our first quarter 2023 earnings call. I will keep my comments brief, providing a few highlights on our first quarter financial performance and on our outlook. Our first quarter sales were a record $4.4 billion and were achieved despite the backdrop of macro challenges, including soft global industrial activity, elevated cost inflation, continued geopolitical issues and weakening demand in U.S. construction-related end use markets. We delivered adjusted earnings per diluted share from continuing operations of $1.82, which is 33% higher than the first quarter of 2022. Our operating segment margin recovery accelerated, improving 380 basis points compared to the first quarter of 2022 as we work back toward our historical profile. The first quarter was aided by incremental 2023 selling price increases in the Performance Coatings reporting segment and in total company-wide. We have now fully offset all cumulative cost inflation incurred since early 2021. As I highlight some of the key drivers that drove the strong first quarter performance, an overriding theme is around the benefits we are deriving from our diverse portfolio. For example, PPG has the largest and most diversified aerospace business in the coatings industry. We are well positioned to serve our customers in the aerospace aftermarket and our backlogs expanded once again this quarter, following the reopening in China as customers need to replenish their stock with PPG's technologically advantaged products, including sealants and transparencies. We expect this business to continue to grow for the remainder of 2023 and beyond. Also, PPG has the largest architectural coatings business in Mexico, where current economic conditions remain robust and among the best in the world. The PPG Comex business continued their strong execution and delivered an 11th consecutive quarter of record sales. We are laser focused on driving organic growth. During the quarter, we benefited from several customer wins that included becoming the primary paint supplier at Walmart's 3,800 location that carry paint products. The expansion of our well-recognized Glidden DIY brand at Walmart and in our independent dealer channel will support further growth opportunities. The automotive refinish business has now installed 1,400 global MoonWalk machines, recently gaining traction in the U.S. with additional rollouts planned globally. About a third of these installations are new body shop wins. While overall demand conditions in Europe remain difficult, our leading position in automotive OEM in the region allowed us to support our customers during a sharp rise in automotive builds in the region, albeit off a historically low base. Our OEM sales volumes in the region were up mid-teen percentage for the quarter and we expect additional growth throughout 2023. The first quarter is typically a negative cash generation quarter due to our business seasonality. However, our strong earnings contributed to us generating positive operating cash flow in the first quarter for the first-time in seven years, as our operating cash generated was about $400 million higher than the first quarter of 2022. Our financial results were better than our preliminary first quarter update on April 3. This was mostly attributable to, stronger sales at the end of the month, a richer sales mix and lower costs than we predicted. A quick update to our very important ESG initiatives. We are prioritizing and delivering sustainably advantaged products and services to our customers and view this as a key lever for organic growth. Last year, we increased our sales from sustainably advantaged products to 39% of our total sales and continue to better define our product sustainability priorities to enable the sustainability ambitions of our customers. We look forward to sharing our new 2030 targets once our emissions reduction goals are validated by the science-based targets initiative. We will also be launching our 2022 ESG report in late May, which will include our progress against current environmental goals as well as our previously communicated diversity, equity and inclusion targets. Moving to our outlook. It is evident that challenges remain to the demand environment and in some cases, such as U.S. housing and construction, they're weakening. Despite these anticipated headwinds, we remain confident that our margin recovery momentum will continue. We're executing against the shopping list of opportunities, which we expect to contribute to strong year-over-year earnings growth in the second quarter and for the rest of 2023. This includes supporting our aerospace customers as they fulfill their strong order books, and we expect a second straight quarter of more than 10% sales volume growth year-over-year in this business. Also, as availability of raw materials returns to pre-pandemic levels, we expect our earnings to start benefiting from moderate deflation from recent historic inflation highs. As a reminder, aggregate raw material inflation since early 2021 remains at historically high levels. Additionally, our manufacturing is beginning to improve for multiyear production disruptions. And we expect this will generate efficiencies that will provide another earnings growth lever in the coming quarters. With respect to Europe, we are seeing coatings demand stabilize, albeit at lower levels which will enable further year-over-year earnings growth, aided by the actioning against our restructuring program. PPG has leading architectural coatings positions in several countries in Europe. Once the economy begins to improve, this will provide an additional earnings growth lever. I'm also pleased with the growth prospects for our auto refinish, protective coatings and Traffic Solutions businesses. These end-use markets have proven to be more demand resilient than in prior economic downturns and a couple of these are positioned for further growth to support infrastructure investment in the United States. In China, we expect moderate and continuous sequential quarterly improvement in domestic demand as the year progresses. This will be more evident on a year-over-year basis given the pandemic-related restrictions in China last year during the second and fourth quarters. In summary, for the past few quarters, we have been conveying our strong conviction that various earnings growth catalysts would be activated. I am pleased that we have reached this inflection point and continue to have strong conviction as reflected in our full year earnings guidance that year-over-year earnings growth will continue 2023. In addition, in this challenging macroeconomic period, you can also count on PPG's legacy of being highly focused on controlling the controllables, including managing our entire cost structure and optimizing our working capital. As I've begun my new role as CEO, I've challenged our team to focus on our advantages, prioritizing investments that will differentiate us and move the needle for our customers and our business. This includes advancing our digital capabilities throughout our businesses to improve our customers' productivity and further enhance our internal efficiencies. Our team is committed to accelerating earnings growth while preserving the strength of PPG's legacy. Thank you for your continued confidence in PPG. This concludes our prepared remarks. And Elliott, would you please open the line for questions.

Duffy Fischer:

Yeah. Good morning, guys and congrats on a nice quarter. My question is mostly around the sequential EPS and how that relates to history. So if you stripped out 2020 and 2021 and looked at the six years before that and last year, Q1 to Q2 has averaged up about $0.48 with all of those years being above $0.40. And at the midpoint of your guide, you're only up $0.28 this year. So how do you match those two? And then a similar question for first half versus second half, if you just use the midpoint to your guide, your second half is down $0.80 versus the first half. But in those same seven years, if you look historically, it's averaged down about $0.30. So could be conservatism, could be something different in the seasonality, maybe something around the loading of Walmart. But can you just kind of walk through why we should expect a lower -- or why we shouldn't expect kind of a higher number of history that to prevail?

Vincent Morales:

No. I think we quantified the Walmart business. The load-in for us in Q1 was about $40 million. Again, just a little more color. The Comex business has a very large Easter campaign. The Easter campaign was split last year between Q1 and Q2. This year, most of the load started in Q1. So we're not going to have that traditional step up. And we did see really good activity in Europe auto. And again, our prediction is, well, that's still going to be a very strong business. Q1 was a very strong European auto.

Ghansham Panjabi:

Yeah. Thanks. Good morning, guys and congrats on all the progress to start the year. I guess, first off, on auto refinish and your outlook for directional improvement in 2Q. Is that just a function of comparability from the year-ago period and the China reopening? And also going back to some of the volume weakness in Europe and North America for auto refinish in the first quarter. Can you just give us some more color on the customer order pattern timing that you called out? Thanks.

Operator:

Our next question comes from Stephen Byrne from Bank of America Merrill Lynch. Your line is open.

Timothy Knavish:

Thanks, Steve. Great question. So we don't expect cannibalization. Let me explain a little bit about what we're doing. Glidden is by far, our strongest and best known DIY brand in the U.S. And historically, despite that strong brand strength, we lacked distribution. So obviously, we partner with The Home Depot with Glidden. We're now partnering with Walmart with Glidden. And we've always partnered with our independent dealers with Glidden. One of your points, typically, we don't carry Glidden at our own company stores. So think about it as big box home improvement plus Walmart plus private dealers. The type of customer that buys paint at Walmart Is very different than the type of customer that buys paint at The Home Depot. And so what we’re really doing with these recent moves is expanding distribution and providing access to a strong DIY brand across multiple different types of consumers, multiple different price points of consumers and expanded geography. So that’s really what we’re doing here. And there’s very little conflict between those three pieces and certainly very little cannibalism.

John McNulty:

Yeah. Thanks for taking my question. Tim, your first quarter margins, I don't think we've seen them this high other than maybe twice in the last 15 years, and that's even with adding Traffic Solutions, which I think should be dragging it down in 1Q. So I guess, one, where can we see margins go this year for PPG? And then what are some of the big factors? Is it all price versus raws? How should we think about mix, some of the efficiency measures you were speaking to? I guess can you help us to frame that a bit?

Vincent Morales:

Yeah, John. This is Vince. Just to give some more numeric guidance here. We're down still 150 basis points, 200 basis points versus our prior high watermarks, which we hit several times and several times in the past 10 years in the first quarter. So we have other levers. Tim mentioned one in the opening comments. We're still not back to where we want to be on manufacturing. Our volumes on a multiyear basis are still down. And again, cost control, which is a legacy here, we feel we could do better. So we still have multiple levers to get back to prior high watermarks and then eventually hoping to exceed those.

Christopher Parkinson:

Great. Thank you so much. Can you just offer a little bit more color about what's embedded in both your aerospace and refinish guidance levels? Just how you're thinking about for the year? Does aerospace include Boeing's further build rates, 737 MAX in China, wide-body, some color on that. And then on the refinish side, just any color about how you think the body shop world, specifically in the U.S. is still dealing with labor constraints and so on and so forth. You have seen pretty optimistic or actually, bullish comments for the second quarter. It'd just be great to know what's underscoring that in particular versus '19 levels? Thank you so much.

Vincent Morales:

Just to put some numbers to the [indiscernible]. Just to put some numbers to the China aerospace opportunity, international flights to and from China are down about 70% versus pre-pandemic still. Domestic travel in China is down about 20% versus pre-pandemic. Big – obviously big market for all the aerospace players. And again, for us, that’s all opportunity in both OEM and our aftermarket business.

David Begleiter:

Thank you. Good morning. Hi, Tim. Just on raw materials. What's embedded in your second half guidance in terms of declines year-over-year? And just on pricing, where are you still implementing price increases?

Vincent Morales:

And just a reminder, we're still at a 40 year high inflation rates in our sector, even with this moderation.

Jeff Zekauskas:

Thanks very much. Two-part question. So first, when you look at your auto OEM prices in the quarter, were they comparable to the industrial segment in general that is industrial was up, I don't know, maybe 8%? Is that what auto OEM prices did or were they higher or were they lower? Can you calibrate that? And second...

Jeff Zekauskas:

Yeah. I'm puzzled that your raw materials were flat year-over-year in that oil was $100 a barrel in the first quarter of '22, and propylene was $0.60 a pound. And I believe that maybe your raw materials probably peaked in the second quarter of 2022 and then came down. So like where is the inflation coming from or there must be something -- it seems to be unusual about your raw material basket and that it should be lower than where it was in the first quarter of last year, at least from an outside perspective.

Vincent Morales:

Yeah, Jeff. I think when you look at our raw materials, one of the things we've talked about the last several quarters was pulling that through our inventory. And if you look, we ended the year -- we talked about this in the back half of last year, we ended Q3 and Q4 with abnormally high inventory balances. We were buying raw materials when we can get them. So we have to work that inventory down. If you look at our inventory balance actually in Q1, it's still elevated relative to what our expectations are. So it's really a matter of how we're pulling those prior purchases through our inventory and into our cost of sales. We still have some, again, inventory to work down as we get into the peak season here in Q2. And we'll see some more realized benefit once we are able to work through that inventory.

Operator:

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

Timothy Knavish:

Sure. Sure, Vincent. The parts of our business that were very strong as we move through March, I would say, our aerospace business, our auto business, particularly Europe auto. And as Vince alluded to earlier, our Comex business was stronger than we had expected as we saw more pull forward of the Easter campaign.

Operator:

Our next question comes from Josh Spector from UBS. Your line is open.

Timothy Knavish:

Well, on our second half guide, first thing I'll say is, it's still 10% EPS growth Y-o-Y in an extremely challenging environment. And so I just want to lead with that. And most of the concern for second half is more volume focused. We're -- continued slowdown, U.S. housing. We've got uncertainty on the general industrial side. And really, uncertainty on the pace of recovery of industrial/manufacturing in China. So those are really the key drivers to the second half.

Operator:

Our next question comes from Aleksey Yefremov from KeyCorp (ph). Your line is open.

Timothy Knavish:

Yeah. Backlogs have remained surprisingly robust despite everything you see in the news and despite what's happening in construction, driven by labor shortages primarily. So the backlogs remain strong. And for our Pro business, the omnichannel of our Pro business was up almost 10% for the quarter. So we are seeing continued good activity in the Pro space in architectural in United States.

Michael Sison:

Hey, guys. Nice start to the year. Tim, just curious, in terms of the second half with the 10% EPS growth, I apologize I miss this, but what do you expect for volumes? What's sort of the range of outcomes for the company? Is it down, flat, maybe even up on easy comps? Just curious. Thank you.

Operator:

Our next question comes from Peter Clark from Societe Generale. Your line is open.

Timothy Knavish:

Yeah. Thanks for the question. There's nothing structurally preventing us from getting back to those levels. The big driver for us, I would say two things. Number one, volume. Volume is still down significantly from the time periods that you referenced. And so just the leverage from that. And then the other one is, operating efficiencies. All of the supply chain disruptions that we've had over the last couple of years, our manufacturing costs have not been at benchmark. And you heard that we did see some improvement in that in Q1 and we're expecting further improvement as we move forward. So there's nothing structurally preventing us from getting back to peak margins in that segment.

Arun Viswanathan:

Great. Thanks for taking my question. Just a couple of questions around margins. It looks like your margins were up at around 13% level for EBIT in the first quarter. Do you see continued growth there and what kind of volume growth would you expect to get that back into the mid-teens to high-teens level? Thanks.

Vincent Morales:

Yeah, Arun. This is Vince. If you look at some of the nearer term levers we have, the rich mix we benefited from in Q1, we expect to continue against some of our key technology businesses, aerospace, automotive. Tim mentioned about the strength of the Mexican economy. We have leading positions in Mexico and several of our businesses, including Comex. And as Tim mentioned, we’re starting to see early signs of manufacturing optimization. Still a long – we still have a long way to go there, but that’s something internally we’re managing. And as I mentioned earlier, we have laser focus on our costs, especially with the volume outlook and the concern around consumer spending that I talked about earlier.

Kevin McCarthy:

Thanks. Good morning. A few questions on your auto OEM coatings business. What are you baking in for global builds in terms of your annual EPS guide? And would you also comment on any meaningful share shifts by region and how the EV penetration is playing out for PPG?

Vincent Morales:

Just to add, again, we came into the year with a low to mid-single digit projection on global builds for the year. Q1 was – for the industry was 5%. So Q1 outperformed the initial projections for the industry.

Michael Leithead:

Perfect. Thanks. Good morning, guys. Real briefly, just on North American architectural, there's obviously a few moving pieces with all the wins you flagged. So I guess, high level, what do you assume or you think the industry is growing at this year versus what do you think PPG is going to be able to grow at?

Vincent Morales:

Yeah. And Mike, just another reminder here. We're -- paint is typically the last part of the cycle. So as housing starts have come down the past several quarters, we're still working off those backlogs from a paint perspective. If you look at the mixture of housing starts, roughly 60% are single-family. Those have come down already. I’m not sure if they bought them yet or not. There’s some positive signs that they at least flattened. If you look at multifamily, multifamily is a still a very high record. And those will be delivered late this year or maybe early next year. And we do think there’s an air pocket after that to the credit liquidity, et cetera. Again, 60% single-family, 40% multifamily. So we haven’t seen the negative effects at multifamily.

Laurence Alexander:

Good morning. Could you just briefly flesh out how your outlook for U.S. infrastructure and particularly current view, kind of sort of your assumptions for the back half of the year and the landscape for -- or the pipeline for potential bolt-on M&A and particularly like how you're thinking about opportunities in the emerging markets?

Vincent Morales:

Yeah, Laurence. On the M&A environment, yeah, I'd still say it's somewhat active, not consistent. Historically, it's been more active. There's certainly some deals or some files that are percolating of the small kind of vintage. So there's still an issue if you're a buyer or a seller, coming up with a price based on the past 12-month financials. Again, we said many times, we would expect a few deals to get done in our space each year and that's our same expectation this year.

Laurent Favre:

Yes. Hi. Good morning. Two very quick questions, please. The first one is, on manufacturing. Can you size that opportunity for us? And is it just about China where you see that COVID issues in the early part of Q1 or do you also see an opportunity in Europe and U.S.? And the second question was just on marine and protective. It sounds like that was a bit surprise for you in Q1. You thought it would be down, was up. I'm just wondering, if you can share your thoughts there. Thank you.

Timothy Knavish:

Yeah, I'll take the protective and marine side. The way I think about this business right now is, it's well positioned for infrastructure, near-shoring, energy, a lot of the investments that are happening around those areas. And also, in marine, where we have really pivoted our focus to marine aftermarket, which is doing well. So when you add those all together, we were up high-single digits in Q1 and we expect to be up mid-single digits again in Q2. So that’s one of the businesses that we’re pretty bullish on.

Frank Mitsch:

Good morning, gentlemen. Congrats on the start to the year. Vince, you took a $144 million charge due to the pension benefit obligation. I'm curious as to what sort of future cost benefit might we expect from that action? And Tim, obviously, very impressive progress on price and your expectation is that you're going to have positive price for the balance of the year. But as we see deflation from record raws, any concerns on potential price givebacks in any of your businesses? Thank you.

Timothy Knavish:

Yeah. And Frank, on price, so on protective, we expect very little, if any, any price give back as we -- I'm sorry, I said protective, I meant performance. On performance, in total, we expect very little give back as we move through the year. On industrial, I'll remind, about 30% of our industrial segment business, the pricing is based on index arrangements. So if there is raw material deflation, those indexes will kick in, but there's a delay of multiple quarters depending on the contract. So that's more of a '24 issue for us. And beyond that, more generally, I'd say, we -- obviously, we watch this very closely every day and churn would be our primary indicator if there's something we need to act upon. Our competitors are facing the same basic cost structure and cost inputs that we are and we watch our churn. And to-date, we've seen very little churn, as I mentioned earlier, other than a little bit in Asia.

John Roberts:

Thank you. Where within the Performance segment were you able to get additional price or was that mix with the aerospace business just improving in the mix?

Vincent Morales:

Yeah, John. This is Vince. Just for clarity, we -- as we break out these numbers for you guys externally, we have price separate. We put in business mix, regional mix, product mix. We combine that with volume. And if you look at both our original guide and our updated guide or updated final numbers, we benefited from incremental pricing, stand-alone pricing, so invoice pricing. Secondarily and separately, we benefited from regional mix. Tim mentioned some of our business, including Latin America were higher than our expectations. We benefited from business mix. Some of our higher technology businesses were higher than our expectation as we called out in both of our releases. And we benefited within business from product mix. So we hit, I think, three big categories for us.

Jaideep Pandya:

Thanks. First, I want to go back to the EV point. Could you just give us some color on what is the content per vehicle for ICE versus EV? And in your top EV customers, are they all sort of the top Chinese companies? That's my first question. And then second question is on the Industrial Coatings, where you alluded to weakness in the U.S. Have you seen sort of the destocking coming to an end in Q1 or are you expecting further destocking of weaker volumes from the coil exclusion categories in the U.S., especially in Q2 and Q3? Thank you.

Vincent Morales:

Jaideep, this is Vince. I want to go back to your industrial question and maybe broaden it a little bit. If you think about PPG, 2022 was a difficult year. We had significant exposure in Europe, where we saw the geopolitical items really affect our volumes. As everybody is fully aware, China had multiple months of shutdowns in 2022. And the U.S. was one of our most stable businesses. And Mexico and Latin America continued to grow. If you fast forward into 2023, we feel Europe stabilized, and we're able to then put our cost stewardship on that. We feel China and Asia is going to grow. So two big pieces of our portfolio pointing in the right direction as it compared to last year. And we still feel very strong about Latin America and grow, and we're seeing some softness in the U.S. in industrial, certainly in the construction markets, but we're offsetting the majority of that with aerospace and automotive, protective, as Tim mentioned. So again, I think for us, we had a difficult 2022, and we’re lapping some of that in 2023. The only thing we see softening is really those pockets in the U.S.

John Bruno:

Thank you, Elliott. We appreciate everyone's continued interest and confidence in PPG. This concludes our first quarter earnings call.

Operator:

Good morning. My name is Emily, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter PPG Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to John Bruno, Vice President of Investor Relations. Please go ahead, sir.

Tim Knavish:

Thank you, John, and good morning, everyone. I'd like to welcome you to our fourth quarter 2022 earnings call and my first earnings call as CEO. I'll keep my comments brief to provide a few highlights on the recent quarter, the year 2022 and our outlook. Let me start with the fourth quarter. Our fourth quarter sales of $4.2 billion were near the record levels achieved in 2021 despite significant unfavorable foreign currency translation. Sales were aided by our strong U.S. automotive refinish volume growth as supply chain disruptions started to moderate, and our order books remain robust. In 2022, our automotive refinish coatings business delivered over 2,000 net new body shop wins as customers continue to value the product technology and industry-leading services and capabilities that this business delivers every day, including what we believe is the best-in-class body shop full repair product [Indiscernible]. Also aiding our sales were record results in our PPG Comex business in Mexico as our team continued their strong execution and delivered another record quarter of sales and earnings. PPG Comex sales are now more than $1 billion on annual sales basis, another record year for this business. Our aerospace business continued to recover, delivering organic sales growth of more than 20% on a year-over-year basis, even with continued supply chain challenges. With an initial reopening in China, strong global order book, increased military related growth and PPG's advantaged technology products we expect this business to continue to grow in 2023 and beyond. Our adjusted earnings per diluted share from continuing operations were $1.22, above the midpoint of $1.13 from the guidance we provided in October. This included more than 20% year-over-year segment earnings improvement driven by selling price realization and strong cost management. On a two-year stack, selling prices were up about 19%. We achieved this segment earnings improvement despite the significant and unpredictable shutdowns in China from COVID-19 that were worse than what we had anticipated going into the quarter and these have continued into the first quarter. In Europe, despite demand remaining soft, earnings were similar to prior year due to strong selling price realization and cost management. We also continue to execute our previously announced restructuring programs and realization of acquisition synergies and delivered about $20 million of savings in the quarter. Now a few comments on the full year 2022. The challenges were many, including unprecedented cost inflation, unexpected geopolitical issues in Europe, disruptive and unpredictable shutdowns in China, strong appreciation of the U.S. dollar and rapid escalation in interest rates in the United States. Though all of these factors impacted our sales and margin performance, the PPG team responded to these challenges, including rapidly implementing real-time selling price increases that, by early 2023, will offset all cumulative cost inflation incurred since early 2021. Given the more difficult macro backdrop, we also announced, and are quickly executing new cost savings initiatives with particular focus on Europe. In 2022, we also made good progress on key strategic initiatives, including strengthening our relationship with the Home Depot, as evidenced by the launch of our new U.S. architectural Pro program, and winning more shelf space with our Glidden Max-Flex spray paint. In addition, we were honored to be awarded Home Depot's 2022 Overall Innovation Award, which was the first time that a paint supplier has achieved this distinction. Our partnership with the Home Depot continues to be a great opportunity for significant growth in the coming years. The PPG team continued the integration of our recent acquisitions, including timely execution of acquisition-related synergies. These businesses are all executing well and will provide the Company with increased organic growth prospects in the next few years. We made some smaller, but strategically important powder coating acquisitions, which adds needed manufacturing capacity and greatly aids our technological capabilities in this fast-growing product category. In 2022, we once again lowered our SG&A as a percent of sales, decreasing by about 100 basis points, including the delivery of about $65 million in restructuring savings in the year. While working capital remains higher than we would like, we made solid progress in the second half 2022 to lower our inventories on a sequential basis. We expect cash conversion to return to our historical levels in 2023 and have exited 2022 with a strong and flexible balance sheet. Throughout 2022, we took actions to bolster our ESG program, including announcing our commitment to the science-based targets initiative, issuing our first-ever diversity report, and finally obtaining shareholder approval to declassify our Board and remove supermajority voting requirements. In 2023, I expect our team to continue their strong progress by introducing additional sustainable products for our customers and unveiling our new 2030 sustainability goals. In summary, for 2022, we did not meet our own earnings expectations. But through the resiliency of the global PPG team, we did deliver record sales of $17.7 billion and set the foundation for many accretive growth initiatives. Now moving to our outlook. As we outlined in our press release, we expect the Q1 demand environment to remain similar to the fourth quarter. However, as the year progresses, we are more confident that we have several catalysts that will enable PPG to drive earnings growth, including improvements in the supply chain, which will further moderate raw material costs, and we expect to see this flow through our P&L more prominently starting in the second quarter. Also, our strong position in China that will benefit us as the COVID reopening progresses. With respect to Europe, we expect coatings demand stabilization beginning in the second quarter, resulting in higher year-over-year earnings. In the U.S., we will benefit from the continued recovery of the aerospace and automotive refinish businesses and the current strength of our order books in both of those businesses. Also in the U.S., our recent share gains in the architectural business will help buffer lower demand from a softer U.S. housing market. As a reminder, our overall exposure to the U.S. new home construction market is relatively small, only about 1% of our global revenues. As we said last quarter, we believe our global portfolio mix will prove more resilient in the coming quarters if we experience a broader global economic decline. As normal course of business, we will be highly focused on controlling the controllables, including managing our costs and optimizing working capital. In summary, while economic conditions are challenging in the near term, I expect segment margin recovery to continue in the first quarter and remain confident about the future earnings capabilities of PPG, and we certainly see a path to return to prior peak operating margins with opportunities to exceed it. As I begin my tenure as CEO, the PPG team is laser focused on delivering improved financial results, including recovering our historical margin profile, and executing on all levers to return our portfolio to mid- to high-teen percentage segment margins. At a high level, you can expect me and the PPG team to elevate our collaboration with our customers, bringing them innovative, sustainable and differentiated products and solutions, which will enable our customers to improve their productivity and growth and allow us to improve our own organic growth performance. We'll simplify and optimize our manufacturing and supply chain efficiencies to reduce complexity and deliver productivity for both PPG and our customers. And we will preserve our legacy of prudent management of our balance sheet, continuing to prioritize cash deployment for shareholder value creation. I plan to share more details on our key initiatives as the year progresses. In closing, I am looking forward to leading this great team, 50,000 employees around the world, as we continue to partner with our customers to create mutual value. This year marks PPG's 140th year anniversary, and I strongly believe that our best days are ahead thanks to our people, industry-leading products, innovative technologies and great customers. Thank you for your continued confidence in PPG. This concludes our prepared remarks. And now, Emily, would you please open the line for questions.

David Begleiter:

Tim, for the full year, consensus was around $7 per share, which will imply a pretty big ramp up from the Q1 levels. Is that a number that you think you can -- that can be achieved or get close to as year progresses?

Operator:

Our next question comes from Michael Sison with Wells Fargo. Michael, please go ahead.

Tim Knavish:

Sure, Mike. I mean the biggest impact is again China. Typically, in China, March is a very big month for us, okay. And our assumption for China in Q1 is that they'll see a second wave to some degree after Chinese New Year. And so our base case is that we won't really see significant China recovery until starting in Q2. Additionally, on the architectural side, particularly in Europe, we would normally, in Q1, see a fairly robust stock up ahead of paint season. And because of everything that's happening in Europe that we see some buildup, but not nearly what we would see in a normal year. And then finally, one of our top-performing businesses, PPG Comex, typically has a very strong Q4, and it had an even stronger-than-expected Q4 in 2022. So there's a little bit of just timing there, even though we expect another great year from that business, there is timing issue in Q1. So those are the three main factors, I would say.

Operator:

Our next question comes from the line of Christopher Parkinson with Mizuho. Christopher, please go ahead.

Tim Knavish:

Yes. Sure. Thanks for the question, Chris. You saw on the print that we put up 11% for Q4, 19% on a two-year stack, sequentially it was 18% on a two-year stack in Q3. So we still have pricing momentum. We will have additional price in Q1 targeted by business. We've got some carryover impact in Q1 as well. As for what's happening out there in the world besides PPG, all the coatings companies are facing the same inflation inputs that we are, be it raw materials, which we focus a lot on but there's also significant inflation outside of raw materials that we are all experiencing. So, we see a continuation of positive pricing as we enter the year. And beyond that, a lot of it depends what happens on the inflationary environment, but that's our view at this point in the year, Chris.

Ghansham Panjabi:

Hi, guys, good morning. As it relates to the U.S. architectural, I mean, obviously, there's bifurcation so far between yourself and some of the professional markets. How do you sort of see that evolving over time as the year unfolds? And then for European architectural, just given the extent of the volume weakness in the markets, can you just give us a sense as to how competitive the pricing backdrop is in the industry, just given the volume weakness?

Operator:

Our next question comes from John McNulty with BMO. John, please go ahead.

Vince Morales:

John, this is Vince. I'm going to start, and I'll let Tim add some color here, but really three levers. One, we've been chasing, which is the raw material price, or total inflation price gap, which, again, we think will be kind of on that in early 2023. We call it weeks not uneven months. But the second, which I think is important is and you hit on it, John, we haven't had a strong manufacturing couple of years here due to disruptions, due to supply disruptions, due to customer disruptions, COVID disruptions, due to churn in the workforce that many companies are seeing. So we do -- that is not a significant number for us from a manufacturing perspective. But the third, which is very important, though, is we're still down about 10% versus pre-COVID levels in terms of volumes spread throughout our portfolio. So, those are the three big levers and Tim can add color here.

Operator:

Our next question comes from Stephen Byrne with Bank of America Merrill Lynch. Please go ahead, Stephen.

Vince Morales:

Sure, Steve. I think the numbers you were quoting at the beginning of your question were raw material, okay? So Q4, we were up mid-single digits year-over-year, down low single digits sequentially. In Q1, we expect to see modest down year-over-year and another sequential step down. The reality of flow-through is, we're really flowing through inventory that we have on hand now pretty much and that will flow through throughout Q1. So, we're expecting the positive benefits of that on the P&L to really not show itself significantly until Q2. Okay. And then on the other inflation, that's going to be, at least for now, that's going to be pretty constant as we move from Q1 into Q2 around labor inflation and some of the other installations.

Operator:

Our next question comes from Duffy Fischer of Goldman Sachs. Please go ahead, Duffy.

Vince Morales:

Yes. Duffy, I'll handle the first part of the question. The carryover pricing -- we do have every quarter, our price off of our sales base so that you can do the math. You come up with several hundreds of millions of dollars of price carryover in 2023 and from our 2022 pricing initiatives. Again, if you just do the math, you can easily come up with that. It's certainly north of $300 million and will be carried over.

Operator:

Our next question comes from Laurent Favre with Exane BNP Pariba. Please go ahead.

Tim Knavish:

Yes. Thanks, Laurent. If you look at our journey over the last decade and we've got a lot of acquisitions, we've acquired a lot of manufacturing [indiscernible]. We've also acquired a lot of product portfolios, and we've captured a lot of synergies along the way. As we look at where we are today and some of the things we've learned through some of the supply shortages, et cetera, of the crisis, we believe there's fairly significant opportunities for us to really simplify, not only our footprint, but our processes, simplify and standardize some of what we've acquired, simplify some of the portfolios that we've required are. So, we do believe that there's some significant upside for us there as we move forward. And as you can imagine, that's not as quick a realization as, say, procurement synergies when you first close the deal, but we feel pretty confident that in the medium and long term that we can deliver value there.

Kevin McCarthy:

Tim, a question on your U.S. architectural business, if we look at most of the macro indicators for housing and construction, they're slowing markedly in recent months. On the other hand, you have some company-specific tailwinds in the form of a ramp of your Pro paint program at Home Depot. I think you also referenced increased shelf space at Glidden. So can you frame that out in terms of what you're anticipating maybe volumetrically as 2023 progresses in that vertical?

Tim Knavish:

Yes. Yes, the PPG specifics, you know well about the THD Home Depot Pro program, and we expect double digits from that program again this year after strong double digits last year. The other one, we've got a nice additional retail win. Our customer is going to announce it first, but you should hear in weeks, possibly months here of what that is, that will help offset some of the other things that Vince mentioned. And then the spray paint win for us with that innovation award at the Home Depot is -- we're excited about opportunity to not only leverage that specific product, but expand that offering either further. But when you put it all together, Kevin, we are expecting net-net for volumes in that space to be down, but of course sales to be up with the price offsetting the difference.

Frank Mitsch:

First, I want to extend my sympathies to the PPG's family on the passing of Bill Hernandez. He really was a great, great guy. Tim, I appreciate your answer on the full year EPS question, for sure, given all the uncertainties. But you already indicated that you expect European earnings will be up year-over-year in the second quarter. And you also mentioned that your folks on the ground in China are expecting China to really pick up come April. And so I'm wondering, is part of your calculus that we will likely see higher year-over-year EPS in the second quarter?

Vince Morales:

Yes, Frank, this is Vince. We do give this up. If you look at our profile of countries, China is one of our largest countries for sure. So there's still uncertainty there as we pointed out, and Tim pointed out in the opening remarks about the timing of the opening. Right now, we certainly hope March aerospace a strong month. Definitely April too hard to predict April, which is Q2 is typically a very good quarter in China. So, we're not in position at this point to provide any real line on that at this point.

Josh Spector:

I just have a couple of follow-ups here. First, do you think you can achieve the low end of your margin targets this year in 2023 on average? And second, if you could comment on your ability to hold prices across the businesses as we move through this year? And any comments there versus why this might be different versus prior cycles?

Tim Knavish:

Yes, Josh, I'm confident in our team's ability to hold price similar to prior cycles. And with this cycle, possibly even more because of other inflation that is more persistent than we've had in other cycles. So that's -- we're confident in that.

Vincent Andrews:

I think you commented in the prepared remarks that you've got auto builds flat in 1Q, and I think the consultants are still calling for it to be up about 2.25%. So is that just something you're seeing in your own book? Or are you anticipating those consultant numbers to come lower? And just, in addition to that, could you talk about how you anticipate the mix of auto builds this year? Is there going to be any different than last year, and would that be a plus or minus for you?

Operator:

Our next question comes from Aleksey Yefremov with KeyBanc. Please go ahead, Aleksey.

Vince Morales:

Yes. Aleksey, let me provide some -- maybe some clarity here. So we did see, as Tim mentioned, some modest sequential raw material deflation Q3 to Q4. We expect a -- we expect a further incremental deflation in Q4 to Q1. We were still up Q4 year-over-year. And we have to work that deflation through our inventory, which will take us likely through the first quarter before we see that impact on our P&L. And so that's, I think what we were trying to articulate. We do have -- as Tim mentioned, we do have efforts underway to optimize our working capital, primarily our inventory. We ended July or June with exceedingly high inventory levels. We worked in the second half of the year to work those down, and we're still working those down as we get into the first quarter of 2023. So, they're still above what we want to be our target range. So, we're still going through various destocking depending on the region, depending on the product. So, we will have print raw material purchases in Q1 and likely some crimped on material purchases in Q2 as well.

John Roberts:

Good morning, Tim, Vince, and John. I just wanted to ask a question about auto refinish. You won 2,000 new body shops in 2022. Was that concentrated anywhere regionally? Or was there something else common to those shops that switched? And when you talk about 15% higher productivity, is that relative to the prior supplier to those shops? Or how are you defining that since you're leading competitors also talking about having productivity higher than the competition?

Operator:

Our next question comes from P.J. Juvekar with Citigroup. Please go ahead, P.J.

Tim Knavish:

Yes, P.J. Yes, we have already seen a slowdown in contractors that are primarily focused on new housing. That's a brutal reality that we all have to face. But again, that's a small portion of our business. Our backlogs for where we're strong, which is commercial and maintenance, literally have moved only incrementally, 13 weeks average backlog in Q3 to 12 weeks average backlog in Q4. So, that's what's been the margin of error of four survey. So that's holding up much better than the new build. I believe part of that, if you think about a lot of commercial work and maintenance work and light industrial work, a lot of that work was near zero during COVID, while the DIY and res repaint was offsetting it. So there's still a lot of pent-up demand there. So I don't -- as I said earlier, the total volume is still going to be incrementally down. So I don't want to oversell that. But that's why some of our Pro business is holding up better.

Michael Leithead:

I just had a bit of a follow-up on the raw material basket. Can you just help us with how you think about that evolving broadly over the course of this year? I guess, with 1Q demand being pretty benign or restock volume was down five-ish-percent or so, why do you think input costs aren't coming down faster? And if China does recover in 2Q and beyond pretty quickly, how do you think about what that does to your raw material cost?

Vince Morales:

Yes, Mike, let me just add some color here. So as we enter 2023, again, we're destocking. We know from a public commentary, a lot of our peers have excess inventory and are destocking. I do think there is this type of war with the supplier base typically Q1 and Q2 are peak volume orders for coatings raw material purchases. I don't think that's going to materialize in the same manner this year. So, we'll have a lower buy -- PPG will have a lower by in Q1. We have suppliers in virtually every week or every day for the past couple of weeks, indicating to us to have excess supply to give to us. And so, we're going to maximize that to the benefit of our shareholders. And we'll negotiate our Q1 and Q2 pricing accordingly. We do believe, as we said for the last couple of quarters, there's ample supply in our supply base.

Silke Kueck:

This is Silke for Jeff. I was wondering whether you can discuss your volumes and your price and your U.S. architectural stores. And secondly, I was wondering whether you can talk about what's happening in the packaging business?

Operator:

Our next question comes from Arun Viswanathan with RBC. Please go ahead, Arun.

Tim Knavish:

Yes. Arun, I've said before, I believe that the $9 EPS is when, not if, and I stand behind that. And that's because the fundamentals are there. We have portfolio that has earnings power that has yet to be released. And I won't give you my entire 10-point plan that will get us there, but you've still got recovery in some of our better businesses, aerospace, auto, refinish. Let me talk about auto for a second without going too far off topic here. But if you take a six-year run rate of global builds before COVID, compared to the -- I'm sorry, 2021, '22, there's 40 million fewer cars that were built during that three-year period compared to the six year before. So, everybody has their guess as to how much of that 40 million will be made up over time, but it's not zero. And so that business has a lot of volume recovery to go. We've got the price/cost momentum. You've heard about our restructuring, acquisition synergies, some of the technology innovation, productivity, sustainable products that will drive share growth. And then just broader volume recovery, we feel confident that the $9 is a when not yet.

Operator:

Our next question comes from Laurence Alexander with Jefferies. Please go ahead, Laurence.

Tim Knavish:

Yes. Dan, historically, that 12- to 13-week or U.S. PRO paint is actually still high. So that will offset some of the negative volume in some of the other segments. I can tell you that in my short 35.5 years of with PPG, I don't remember the aerospace backlogs ever being this strong. And that will take us -- that's pent-up demand for the foreseeable future. Refinish, our refinish backlogs are still, particularly here in the U.S., probably 5x what they were pre-COVID. And it's not only a matter of us getting product out or getting raw materials in, our refinish customers' backlogs are high. I hope you haven't had any minor fender benders lazy, but if you have and you've taken a car to a body shop, they're likely to tell you it's six to eight weeks before you're going to get that car serviced and taken care of. So the backlogs across all of those spaces are high, and in some cases, historically high.

Tim Knavish:

Yes. And I'm going to grab that back one more or one more comment. The demand in aerospace is actually growing as we progress through the months and quarters. So you've got kind of the underlying demand is growing, which means that $200 million backlog is going to be there even longer. And recall that China, international travel only opened on January 8, so that's going to be another stimulus for aerospace demand.

Mike Harrison:

In the auto OEM business, a question on electric vehicles that hit 10% of global car sales last year, I was hoping that you could give us an update on some of the key products that you're providing for electric vehicles. Any recent wins or other metrics you can share on that portion of the auto OEM business?

Operator:

Our final question today comes from Jaideep Pandya with Enfield Research. Please go ahead.

Tim Knavish:

Jaideep, I'm sorry, the beginning of your first question kind of -- I apologize, but if maybe you could repeat your first question for us, please.

Tim Knavish:

I get the first question.

Tim Knavish:

Yes. So, Jaideep, I'll take it and then Vic, you can jump in. On pricing, you got to remember that the pricing that we've achieved over the last couple of years was to offset what's happened in inflation in the last couple of years. And our customers have visibility to what's happened to our net margins. And so, they have optics on where we are on a margin recovery standpoint and they also know when we have these discussions with them that we're not back to peak margins. And so it's not like we're going, in most cases, above and beyond that. So, as we move forward, we'll continue to be competitive, and we'll continue to price to offset non-raw material inflation.

Tim Knavish:

Yes. On your protective question, our protective and marine business actually had a very strong year last year. Even though there was volume degradation in Q4, that volume degradation was China because whether its marine new builds or large petrochemical protective projects, a lot of those are done in China. So, that will -- some of that will follow the China closing and then reopening curve. But beyond that, a couple of things are happening in protective. There is significant investment in LNG, all aspects of LNG, and that's that area uses a lot of our advantaged protective products. There's an infrastructure investment certainly coming in the U.S. and other countries that leads to future growth for the protective business. And then, finally, on a PPG-specific protective opportunity, we had a fantastic distribution network in Mexico, over 5,000 store locations that has historically been very heavily architectural and deco focused. Well, we're now leveraging more and more of that network to grow our protective business, which is how we're successful in that business in other countries, like the U.S. and Canada. So, that's a really great growth opportunity in the protective area that differentiates PPG.

John Bruno:

Thank you, Emily. We appreciate your interest in PPG. This concludes our fourth quarter earnings call. Have a good day.

Operator:

Good morning. My name is Elliot; I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter PPG Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to John Bruno, Vice President of Investor Relations. Please go ahead, sir.

Michael McGarry:

Thank you, John, and good morning, everyone. I would like to welcome you to our third quarter 2022 earnings call. I hope you and your loved ones are remaining safe and healthy. Before I go into my comments regarding the third quarter, I would like to congratulate Tim Knavish for being appointed President and Chief Executive Officer of PPG effective January 1, 2023, and immediately joining the company's Board of Directors. Tim has an outstanding track record, having served the company for more than 35 years and leading nearly every PPG business during his career. The Board and I have full confidence that Tim will guide PPG to future growth and additional shareholder value. With Tim's appointment, I will become Executive Chairman on January 1, 2023. Now let me turn to our financial results. Last evening, we reported third quarter 2022 financial results. For the third quarter, we delivered net sales of $4.5 billion, and our adjusted earnings per diluted share from continuing operations were $1.66. To quickly summarize the quarter, our sales performance was a record, driven by continued realization of real-time price increases that fully offset total cost inflation for the second consecutive quarter. On a two-year stack, selling prices are up about 18%. As we communicated earlier this month, these sales and earnings results were lower than our guidance for the quarter as we were impacted by further softening of demand in Europe and less of a sequential economic improvement than expected in China due to the pandemic restrictions in September. In addition, the strengthening of the US dollar lowered sales by about 6%, or $265 million worse than it was originally forecasted. Despite these lower-than-forecasted sales, we did deliver strong performances in several of our businesses, including PPG Comex, which delivered another record quarter. Also, our global automotive refinish Traffic Solutions and US Packaging Coatings businesses each set all-time quarterly sales records in the quarter. Year-to-date, our automotive refinish coatings business has delivered about 1,500 net new body shop wins as customers continued to value the product, technology and industry-leading services and capabilities that this business delivers every day. In addition, our aerospace business delivered strong double-digit percentage sales growth, volume growth aided by recovering airline travel that is now about 85% of pre-pandemic levels. With additional industry recovery, a strong order book and PPG's advantaged technology products, we expect this business to continue to grow into 2023 and beyond. We continue to experience improvement in commodity raw material availability. However, certain short supply raw materials impacted our automotive refinish and aerospace coatings businesses constraining their ability to meet their respective strong order books. Together, these two businesses ended the quarter with a $200 million backlog similar to the end of the second quarter. Importantly, our year-over-year segment operating margin recovery has begun. This reflects the progress we have made in implementing selling price increases. The third quarter marked the 22nd consecutive quarter of higher selling prices. We expect our margin recovery to accelerate into 2023 and anticipate by the first quarter of 2023 we will fully recover all cumulative inflation from 2021 and 2022. We continued to make good progress executing on our acquisition-related synergies and other cost savings initiatives from previously announced restructuring program, which delivered about $25 million of incremental benefit in the third quarter. During the quarter, we continued to progress our launch of the expanded pro painter initiative with The Home Depot. Each week, our team is calling on thousands of prospective new customers and delivering new business wins. In the third quarter, we also started joint work with the HD Supply team to hunt for new paint customers, including in the commercial maintenance area. And while early, this collaboration is yielding results and we expect will be another catalyst for future growth in the US architectural coatings business. Overall, paint contractors are providing us with ongoing positive feedback on the convenience of buying well-recognized PPG pro products at The Home Depot. Collectively, we continue to see opportunities for significant growth in the coming years. While working capital remains higher than we would like, we made solid progress in the third quarter and began to lower our inventories on a sequential basis. We had been carrying higher than historic levels of inventory given supply chain constraints over the past year. But given the broadening elongation of supply globally, we are now able to destock, including reducing or canceling raw material orders and reducing safety stock closer to historic levels. We are prioritizing further inventory reductions in the fourth quarter, which will benefit our cash generation. We made modest repurchases of our stock during the quarter and repaid $100 million of debt. We continued to evaluate potential strategic bolt-on acquisitions. Consistent with our past practices, we will deploy cash in the most accretive manner for our shareholders, including some continued debt reduction. On the ESG front, I want to highlight yet another example of PPG leading the way. The acquisition of Tikkurila has proved to be very valuable on several fronts, including enhancing PPG's ESG program through the addition of advantaged, sustainable solutions that contribute to the circular economy. These include bio-based products and packaging made from 50% to 75% recycled plastic that is also 100% recyclable. Currently, nearly 90% of Tikkurila's products are waterborne and 48% of the portfolio is eco-level. We are leveraging Tikkurila's sustainability approach in our architectural business beginning in Europe. Looking ahead to the fourth quarter, normal seasonal demand trends are expected, including lower sequential sales in most of our architectural businesses, and also in our Traffic Solutions business, where sales historically fall about 50% due to the weather considerations. In Europe, we expect economic conditions to remain weak due to the softening consumer confidence and lower industrial activity related to the significantly higher energy costs, and geopolitical issues. In China, we anticipate weaker-than-normal economic activity for the fourth quarter due to continued pandemic-related disruptions and slowing exports to Europe. PPG's largest factory in China was required to close for the first 10 days of October, and further restrictions could curtail production and commercial activity. One offset important to PPG is we expect automotive OEM builds in China to remain solid and consumer spending to improve into 2023. In general, demand in the US in the huge markets remain solid and we expect several of our businesses to continue to deliver positive year-over-year sales volume growth. Demand for architectural DIY and residential new home coatings products in the US is beginning to slow, and industry demand is anticipated to weaken further in the fourth quarter and in the next year's basis leading economic indicators. PPG's exposure to the US new home market is relatively small and a low single-digit percentage of company sales and our overall exposure to the residential housing market is less than 10% of company revenue. We expect some of the industry weakness to be offset by our growth initiatives with The Home Depot, and other customer gains. Raw materials are expected to remain inflationary, with a mid-single digit higher than the prior year, but fall modestly on a sequential quarterly basis. We expect supply chain conditions to continue to broadly improve, including better raw material and transportation availability as our suppliers are nearing their 2019 manufacturing, and supply capability. As a reminder, we've absorbed about $1.9 billion of raw material inflation since beginning of 2021. In the fourth quarter, we expect further increases in energy costs, especially in Europe and to some degree in the US. We will continue to prioritize implementing further real-time targeted selling price increases to mitigate these higher costs. Due to the heightened level of economic uncertainty, we have implemented an additional restructuring program focused on past payback actions targeting $70 million of annualized savings, upon full implementation. The program includes several initiatives in Europe, is mostly concentrated on matching our staffing levels with lower demand. As we enter a period of heightened economic uncertainty, we expect our business portfolio to prove more resilient in the coming quarters, with continued recovery in the automotive OEM and aerospace coatings businesses. Along with demand-stable businesses like automotive refinish and traffic solutions, we believe that more than 50% of PPG's portfolio will remain resilient even if we experience a broader global economic decline. This is noteworthy and positive step-change from the prior recession. Also importantly, we expect that our sequential quarterly momentum on operating margin improvement will continue in the fourth quarter, as we work back towards our historical margin profile. This will be supported by maintaining our selling prices to reflect the value of the products and services we provide. While economic conditions are challenging in the near term, I remain confident about the future earnings capabilities of PPG, as the earnings catalysts that I'd referenced in the past remain fully intact, and we certainly see a path to return to prior peak operating margins, with opportunities to exceed them. In closing, as we look to finish the year managing intensifying challenges, I want to thank our team of 50,000 employees around the world who are making it happen by supporting our customers and the communities where we operate. Their dedication, even during the most challenging times, is inspiring and drives our purpose to protect and beautify the world. Thank you for your continued confidence in PPG. This concludes our prepared remarks. And now, Elliott, would you please open the line for questions.

Christopher Parkinson:

Great. Thank you so much. The macro is changing, not necessarily for the better, but per your comments it doesn't seem like the setup for this recessionary environment aligns with history, which has consequences across fixed asset leverage, end market mix when you're discussing refinish and aero, just the overall margin outlook versus past downturns. Can you just give us sort of overall update of your thoughts here and potentially anything on price cost as well? Thank you.

Operator:

Our next question comes from Ghansham Panjabi from Baird. Your line is open. Please go ahead.

Michael McGarry:

Ghansham , I'm going to let Tim take this one.

Operator:

Our next question comes from Josh Spector from UBS. Your line is open.

Michael McGarry:

Josh, this is Michael. First of all, what I would tell you is that, part of what you're seeing of the slowing of the price increases in the Performance Coatings segment is because of the drop in architectural sales, okay? So you have a little bit of a mix issue going on in there. So, that's one. The other thing you have to remember is we've got pricing much earlier in Performance Coatings segment. And we always lag a little bit in the Industrial side. So the other piece besides mix is timing. So, what you see, which is most important, is that on our Industrial side, it does lag, but now it's catching back up. And the Industrial side was above company average, and we expect that to continue in the fourth quarter as well. And most importantly, in our automotive segment, a number of our customers have provided us retroactive pricing as well. And so that helps that margin as well. So, we're still anticipating some significant price improvement in the fourth quarter. And again, we'll be ready to talk about the first quarter later, but we will have positive -- significant positive price in Q1 as well.

Operator:

Our next question comes from John McNulty from BMO Capital Markets. Your line is open.

Vince Morales:

Yes, John, this is Vince. Let me start real quickly and then I think Tim is going to chime in here. If you look, again, we have cumulative, about 40% inflation levels. We do see inflation year-over-year in Q4, but it's down sequentially. And that's, I think is the key is we're starting to see the fever break. It's different, as Michael mentioned, by region and we're seeing arbitrage opportunities. And I think Tim has some specifics.

Vincent Morales:

Yeah. And just one other comment here is if you think about the inflation that we've absorbed in the past almost two years now, a part of it started as a supply chain issue, but we then were saddled with inflation that included COVID absenteeism, freight issues, port issues. A lot of those other issues have fallen by the wayside. So we do feel, given those other issues have been resolved, the supply/demand economics will start to play a bigger factor.