PPG Industries Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 20, 2021

There are 16 speakers on the call.

Operator

Good morning. My name is Jason. I will be your conference operator today. At this time, I would like to welcome everyone to the PPG Third Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer Event 2. I would now like to turn the conference over to John Bruno. You may begin your conference.

Speaker 1

Thank you, Jason, and good morning, everyone. We appreciate your continued interest in PPG and welcome you to our Q3 2021 financial results conference call. Joining me on the call from PPG are Michael McGarry, Chairman and Chief Executive Officer and Vince Morales, Senior Vice President and Chief Financial Officer. Our comments relate to the financial information released after U. S.

Speaker 1

Equity markets closed on Wednesday, October 20, 2021. We have posted detailed commentary and accompanying presentation slides on the Investor Center of our website, ppg.com. The slides are also available on the webcast site for this call and provide additional support to the brief opening comments Michael will make shortly. Following management's perspective on the company's results for the quarter, we will move to a Q and A session. Both the prepared commentary and discussion during this call may contain forward looking statements reflecting the company's current view of future events and their potential effect on PPG's operating and financial performance.

Speaker 1

These statements involve uncertainties and risks, which may cause actual results to differ. The company is under no obligation to provide subsequent updates to these forward looking statements. This presentation also contains certain non GAAP financial measures. The company has provided in the appendix of the presentation materials, which are available on our website, reconciliations of these non GAAP financial measures to the most directly comparable GAAP financial measures. Conference Call.

Speaker 1

For additional information, please refer to PPG's filings with the SEC. Now let me introduce PPG Chairman and CEO, Michael McGarry.

Speaker 2

Thank you, John, and good morning, everyone. I would like to welcome you to our Q3's 2021 earnings call. I will provide some comments to supplement the detailed financial results we released last evening. For the 3rd quarter, We achieved record net sales of nearly $4,400,000,000 and our adjusted earnings per diluted share from continuing operations were $1.69 As we communicated in early September, our sales and adjusted EPS were significantly impacted by worsening supply chain disruptions and increasing raw material cost inflation. Our raw material costs in the quarter inflated by about 25% year over year.

Speaker 2

For context, This is about 3x higher than any previous coatings raw material inflation peak in recent history. We're also experiencing elevated logistics costs and are incurring increased manufacturing costs due to the sporadic nature of these outages. Commercially, we have taken significant mitigation efforts due to the high level inflation through rapid implementation of structural selling price increases. In aggregate, our selling price realization is about 6%, with more than 6% price realization in our Industrial Reporting segment. Our price capture pace is much faster than previous inflationary cycles, and we have further pricing initiatives underway.

Speaker 2

Coming into the quarter, we expect that the supply chain and customer production disruptions would impact our sales by about $150,000,000 However, this actual impact was more than $350,000,000 Additionally, this prevented us from completely fulfilling our strong order books and further depleted retail inventory in many of our end use markets. We expect Much of this demand will be deferred into 2022, and in particular, these current conditions will elongate the global automotive OEM Recovery. To put the automotive OEM situation in perspective, U. S. Dealer inventories at a record historic lows in the mid 20 day range.

Speaker 2

And in 2021, global production in this industry is expected to be about 20% below prior peak levels. Despite the current challenges, several of our businesses, including our automotive refinish, protective and marine and Packaging Coatings delivered strong above market performance driven by our strong service capabilities and advantaged technology. Our PPG Comex business achieved record 3rd quarter sales with year over year organic sales growth of more than 10%. In addition, our U. S.

Speaker 2

Architectural coatings business delivered about 10% same store sales growth as we continued to expand our customer base with many new wins and increase our digital sales as a percentage of our total sales base. More generally, We continue to experience improving trade painter demand globally and architectural DIY coating sales return closer to 2019 levels after notable growth last year, driven by the stay at home impacts. We remain focused on cost management, which is evidenced by our SG and A as a percent of sales being 100 basis points lower than the Q3 2020. This is being supported by our ongoing execution on our structural cost savings programs as we delivered an incremental $35,000,000 of savings and the Q3. We continue to target and on track for a full year 2021 savings of about 135 $1,000,000 In the quarter, we also continued to make good progress integrating our 5 recent acquisitions, contributing to our overall earnings for the quarter.

Speaker 2

Our 2 larger acquisitions, Ticarilla and Ennis Lindt, delivered good top line results despite the challenging supply constraints. We continue to expect them to deliver an aggregate of $25,000,000 of synergies for the full year of 2021. We once again delivered strong operating cash flow during the quarter and had about $1,300,000,000 of cash and cash equivalents at the quarter end, including sequential reduction of our net debt by about $400,000,000 This was supported by our continuing strong working capital management as we maintain our positive step change improvement achieved last year and our multiyear lows on a percentage of sales basis. While we will continue to evaluate accretive deals in our M and A pipeline, We are initiating stock repurchases in the 4th quarter, and we'll continue to focus on debt reduction. As a reminder, based on the seasonality of our businesses, the 4th quarter is typically our strongest cash generation quarter of the year.

Speaker 2

Also during the quarter, in support of further enhancing our ESG program, we were happy to announce an agreement with Constellation Energy to power our Carrollton, Texas manufacturing facility with 100 percent renewable solar energy. We are also working on our very first ever diversity Report and Developing Science Based Climate Targets, both of which we will communicate in 2022. Equally important is PPG's market leading sustainable products continue to enable our customers to meet their respective sustainability goals. We will continue to provide updates on these initiatives from subsequent quarters. In addition, I'm extremely pleased to announce that yesterday, PPG earned 3 R and D 100 Awards for 2021.

Speaker 2

The R and D World Magazine honors the 100 Most Innovative Technologies and Services over the past year with the R and D 100 Awards. Even more importantly, 2 of the 3 innovations that we recognized are growth initiatives in electric vehicles, including VFP SC battery fire protection coating, which protects the vehicle occupants from fire and mitigates thermal runaway events, plus Enviocron extreme protection thermally conductive dielectric powder for battery packs providing dielectric protection and thermal conductivity. Our dielectric powder has already been commercialized by a leading EV maker, and our battery fire protection product will launch in 2022 by one of the world's largest carmakers. Moving to our outlook, we are continuing to evidence solid demand in aggregate. Many of our customers continue to indicate that their order books are at high levels and have lower than normal inventory levels.

Speaker 2

In the near term, we anticipate only modest improvements to the supply disruptions that we've been experiencing. Our estimate is that our sales are and chronic supplier operational capabilities. Recent production curtailments in China may add incremental pressures to availability and inflation, and we expect our inflation to approach 30% compared to the Q4 2020. As a result, All our businesses are securing additional selling price increases, and now we expect to fully offset raw material cost inflation in the early part of 2022. We continue to strongly believe there is sufficient capacity available in our supply chain as operating conditions continue to normalize.

Speaker 2

Absent any further disruption, we expect supply chains to operate more normally by year's end, supported by normal seasonality trends. To provide further assistance and assurance of more consistent supply going forward, we are rapidly qualifying additional regional and global commodity suppliers across a variety of our key raw material procurement groupings. We expect these increases in product availability, coupled with continued improvement in the existing ample supply beginning early in 2022. While the current environment remains difficult to predict, and remain very optimistic about our specific growth catalyst for 2022. Specifically, we expect continued recovery in automotive refinish, OEM and Aerospace Coatings, which collectively account for about 40% of our pre pandemic sales, where we have broad global businesses supported by ADDvantage Technologies.

Speaker 2

We expect a measurable rebuild of inventories in many of our end use markets. Specific to PPG is year over year earnings growth in 2022 due to further synergy capture from our recent acquisitions. In closing, these continue to be dynamic times. But thanks to our more than 50,000 employees around the world, we are well positioned today and in the future. Their dedication and commitment to making it happen are reasons why our customers, our communities and our many stakeholders can count on us to protect and Beautify the World.

Speaker 2

Thank you for your continued confidence in PPG. This concludes our prepared remarks. Now Jason, would you please open the line for questions?

Speaker 3

Thank you.

Operator

Our first question comes from Chris Parkinson from Mizuho. Please go ahead.

Speaker 4

Great. Thank you very much.

Speaker 5

Michael, obviously, there's been a lot going on in

Speaker 4

the stream, both in terms of raw material inflation as well as input shortages. If we start there, particularly on shortages aspect of it. Can you just offer your general views as we approach 2022? What's changing the past 12 months? What offers confidence?

Speaker 4

And then also, are there any differences of how these variables are affecting results at the segment level? So anything would be greatly appreciated. Thank you.

Speaker 2

Well, Chris, I would say starting with the segment levels, The most impacted, of course, our Architectural Traffic Solutions business, our automotive OEM and quite surprisingly our industrial coatings because There are a lot more chips than people realize in some of these things like appliances and other electronic materials. What I see though interest to continue to sort out their supply chains. And seasonally weak Q4 should give them adequate time to do that. Now the flip side is we have an extremely large backlog of demand right now. So anything that they can make in the Q4, we're going to ship.

Speaker 2

So we feel very good about that. As you know, we've been a little bit more Pessimistic and probably right about the supply chain issues. And so we have put in, like we said, Challenges in the 4th quarter.

Speaker 4

That's very helpful. And just kind of staying on the topic. It seems demand is fairly strong and kind of building into 'twenty two and the supply chain disruptions obviously are creating a lot of noise in the second half. When you take a step back, perhaps on the longevity mid-twenty 3 in terms of the volume recovery aspects for Auto Refinish and Aero and then also perhaps touch on the sustainability of momentum in both General Industrial and Packaging. Thank you very much.

Speaker 3

Okay. Well,

Speaker 2

that's a mouthful. Let's look at the inventory in the U. S, 25 day range. So that's 15 days less than they typically have. Europe has not been able to supplement what they need.

Speaker 2

And when you think about fleets, not just rental fleets, but fleets in general. They're short as well. So there's Significant OEM demand out there. I would also tell you from the refinish side, We can always tell when the lockdown's in, in every country because driving comes up and collisions come up and demand comes up, also being a strong positive. And then I guess finally, I would tell you from Aerospace, we see strong Conference.

Speaker 2

Once you start to see some international aircraft, we expect Airbus and Boeing will 2019. J. Rice:] And then, I'll turn it back to building the bigger planes. MRO is improving monthly. And now that Europe is getting a little bit more open, we expect MRO to improve even better.

Speaker 2

So our catalyst 2022 are strong. And if you then start building 787s on top of that, then our catalysts for 2023 get even better.

Operator

The next question comes from Ganshan Panjabi from Baird. Please go ahead.

Speaker 5

Thank you. Good morning,

Speaker 6

everybody. I guess sort of stepping back, China was first in, first out from COVID, also led the global economic recovery over the past year. Subsequently, the macro head, what are you seeing in the region on a real time basis at current. 2nd, how do you see China evolving over the next couple of quarters? And I guess just more broadly, Michael, how are you thinking about the current inflation cycle impacting your expected recovery over the next couple of years given that consumers will ultimately have to bear all these massive cost increases.

Speaker 6

Thank you.

Speaker 2

Well, Ghansham, let's start with China first. So maybe I think you're aware of this, but maybe some of the other folks on the call aren't. Our plants typically in China are running 2 ships a day, most of them. Not all of them run 3. And so the dual control issue that's happening in China where they're trying to reduce the amount of energy consumed as well as the energy per unit.

Speaker 2

We're in a very good position to be able to run off hours and consume the cheaper energy off hours. So that helps us from that standpoint. Industrial demand is down in China right now, but it's as much from lack of raw materials as it is from demand. As you know, We're not very big, in fact, I would say almost negligible in the project market for architectural. So the challenges in that market are really not going to hurt us from that Sam Promotive business, are all in good shape over there, our packaging.

Speaker 2

So I feel good about China on both short term and long term, and I think we have the team that can help us manage through the challenges that are over there. When I think about The higher prices today, I start first with, let's say, $80 historically is not a high number. It would be a what I would say is, if you look at the average, it's only marginally higher. So from a structural cost perspective. I think our consumers are going to be able to get strong demand, so I'm not worried about that.

Operator

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

Speaker 1

Thank you. Because the price increases are so large and happening so quickly, we're getting Companies. Maybe comment a little bit on where the differences you and some of your key peers or is it just timing differences, Michael, that's resulting in these different prices?

Speaker 2

Yes. John, let me just start with the basic way it works. We report peer price and we reported for our all our businesses. And so when you look at the business mix, that's one thing to take into account, mix by geography that has hyperinflation and that's going to impact you. But more importantly for us, we are on our 18th quarter in a row.

Speaker 2

We're seeing increases on top of increases. So one way you might think about this is whether or not somebody might be trying to catch up to where we are. And I think that's probably the most important thing. And the other thing I would say is make sure you look at inflation reported as well as margins. And for us, the ultimate end goal is margins.

Speaker 2

And and I think our procurement team is doing a great job. We have hired people to help us qualify additional raw materials from that standpoint. And so we're in a pretty good shape, I think, from a

Speaker 5

competition wise.

Operator

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

Speaker 7

Thanks, Michael. Curious, you mentioned that the supply chain issues, they could moderate as you go through the quarter, but obviously still some elevation in run rate on the cost side. So are you starting to see some force majeures lessened? What is it that you're seeing that gives you some hope that maybe it improves Through the quarters, there's some tangible anecdotes you're already seeing?

Speaker 2

Well, Bob, the way I would answer that question is, in Q1, we had 95 force majeures. That was all early, right? And then we only had 2 in quarter 2. And then we had 13 new ones added in the quarter 3 due to all the IDA issues. And there's been only one added in the 4th quarter.

Speaker 2

So The pace of force majeures has improved. And at these commodity levels, I know our suppliers, and I've talked to a number of them, are focused on smoothing out the supply chain. And what I would tell you is they know we can sell. They know we're going to continue to consolidate the industry. They know we're going to win.

Speaker 2

And so they've been out there protecting PPG as much as they can within the limits of the force majeures. So I see these force majeures starting to decline in the Q4. And so I think we're going to be in a much, much better place starting early 2022.

Speaker 3

And Bob, Mike, this is Vince. Michael mentioned in the opening comments, seasonally, we see a significant downturn in demand for Commodity Raw Materials. So this will allow them to do some catch up in terms of maintenance, in terms of rebuilding inventory. So we do feel that has a tangible benefit as well entering 2022.

Operator

The next question comes from Michael Sison from Wells Fargo. Please go ahead.

Speaker 8

Hey, guys. When I add up the revenue impacts on supply disruptions, it looks like it's nearing $1,000,000,000 And so just curious how do you think You'll get that back over time. And how long do you think it'll take to sort of get the raw materials in place to do that? And curious how confident you are about Halloween.

Speaker 3

Yes. Mike, it's Vince. I think your math's accurate. 2 big components here. 1, as Michael Mentioned the semiconductor chip really impacting our automotive and to a lesser degree our industrial business.

Speaker 3

We expect that to continue to rectify over the next couple of quarters. So really, we would hope in the back half of improvement now through the first half of twenty twenty two and then more normalcy in the back half of twenty twenty two. The other side of the equation is the supplier commodity supplier force majeurs that Michael just alluded to. We're expecting that to largely record. We will be able to supply our customers and more important piece of the equation that's missing here.

Speaker 3

So that those shortages we're seeing in 2021 will go back into the R of 2022. So we're confident the demand is there and the run ability issues and supply constraints around chips should be resolved in the coming quarters. I

Speaker 2

guess, Mike, I'd finish by saying that it won't surprise us to see you in a black box.

Operator

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

Speaker 9

Yes. Thank you. So about a decade ago, you had a string of 4 or 5 quarters with mid single digit price increases. And here you just put up a Persona. You have some quite a different situation here than you drew on whether something of that same trend might be repeatable with a string of mid single digit price increases or could they 25% year over year hit to 30% in this 4th and you're talking about a 2022.

Speaker 9

Does that

Speaker 2

Stephen, we tried to convey that in the slides that we published last night. We're expecting to have a higher increase in the 4th quarter than we did in the 3rd quarter. And I would say that is essentially already in place. The magnitude of the increases are historic, but so is the amount of inflation. Our teams feel very good about this.

Speaker 2

Our customers are well aware of what's going on. They also need challenges. They're also facing raw material challenges, And they buy a number of the things that we buy, maybe not to the level that we do, but they understand it. And This will be a significant catalyst for continued earnings growth going forward.

Operator

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

Speaker 10

Taking my question. Maybe just another one on the price versus raws dynamic catch up in early 2022. Is that

Speaker 2

all on the premise of pricing or do

Speaker 10

you expect some raw material relief as you start to get into the Q1 or so of 'twenty two? And I guess Somewhat related to that, you've got about $500,000,000 worth of sales tied to M and A in the 3rd quarter. I guess sometimes it takes a little bit of time to get the pricing wheel of an acquired asset working. So I guess can you speak to the businesses that you acquired and if there's maybe a catch up phase of that as we look to 2022? Thanks a lot.

Speaker 3

Yes, John, I'll take the first part of the question. I'll let Michael handle the second part on acquisitions. We're in a position now where we believe that the inflation levels are crusting. We have 30% targeted inflation in Q4. The supply constraints, as we alluded to earlier, we think are going to abate somewhat.

Speaker 3

And so again, our goal is to get pricing up to offset this high level of inflation and some of this will moderate and we are starting to see some signs of moderation. But again, given the tightness of the supply chain right now, it's not coming through in absolute percentages. But we are starting to see in certain raw materials some abating. For us though, I think what's most important is we've gone after structural price increases. The vast majority of the pricing that Michael alluded to, the 6% in Q3, Almost all of that is structural in nature.

Speaker 3

So we're changing unit pricing as opposed to surcharges. We think that's proper to do. So those structural price increases will remain as we head into 2022 and throughout the duration of 2022.

Speaker 2

And John, with regards to the acquisitions, Pennant Flint, the highest they'd ever achieved price prior to our acquisition was 2%. And they did not have a, what I would call, a structured program to analyze what was going on and structured program to get price increases out in a real time basis. We have significantly improved that, and we have a PPG legacy leader running that business now, and we are really excited about what that future holds. Myself and Tim Kanavis were in Europe like within days of when Ticarela closed. That was the first thing on the agenda was pricing.

Speaker 2

We were much further ahead in price increase. We had already done our second price increase in Architectural Europe Prior to us acquiring Ticarilla, they were on their 1st increase. They are now catching up. They have put in place new processes that will allow them to better process not just raw material inflation, but also the value creation that we bring to the market with our new technology. And I feel very comfortable that we are on top of that.

Speaker 2

And we are in a good position not only with the increases we've announced for the Q4 with the legacy Ticarilla products, but also the Q1.

Operator

Our next question comes from Kevin McCarthy from Vertical Research Partners. Please go ahead.

Speaker 11

Good morning. Given all of the dislocations in the external environment that we've been discussing. It struck me that your 4th quarter EPS range was quite narrow at plus or minus $0.03

Speaker 2

And so in that context, I was wondering if

Speaker 11

you could talk about material upside or downside risks if it turns out that you did materially better or worse when we see the results in January. What do you think potential drivers of those variances could be based on what you see today.

Speaker 3

Yes, Kevin, this is Vince. We're typically announcing earnings a week or so earlier, but due to the way the calendar fell this year, we're 20 days, 3 weeks into the quarter. October is a very large month for most coatings companies in the Q4 just due to seasonality. We've got a good read on October. With the ability to supply.

Speaker 3

So just given the size of the 1st month plus as it waits on the quarter, we have some level of confidence. That being said, things that could push it up or down, Conference Call. We are going to manufacture a manufacturing facility for the 4th quarter. 2019. As you alluded to Kevin, there still could be some things out there that could suppress The ability to get raw materials like logistics and that would be a negative, but We think all the other variables we have a fairly good handle on.

Operator

The next question comes from Laurent Favre from Exane BNP. Please go ahead.

Speaker 12

Yes, good morning. I've got a question on capital allocation. Nippon just announced the Chromology deal this week. Mikael, I think you just talked about resuming buybacks in Q4. So I was wondering, should we assume that the M and A pipeline is getting seen?

Speaker 12

And can you give us a sense of the overall envelope for the buyback you've got in mind for the next 12 months?

Speaker 2

Yes. Laurent, so first of all, I would not Say the M and A pipeline has slowed down. In fact, I would tell you that that has picked up because of the high prices That have been paid, so there's more interest out there. What we said about the buyback is, first, we think PPG is undervalued, Conference Call. And we're in a good shape

Speaker 3

for acquisitions.

Speaker 2

So I don't think it's any

Operator

The next question is from Aziza Gazyva from Fermium Research. Please go ahead.

Speaker 13

Hi, guys. So you're calling for 30% inflation in the 4th quarter, but could you put an estimate on your current read for inflation 2021. Vince mentioned that some of the raws are abating, but which products are still

Speaker 3

I'll let Michael talk about some specifics. But again, when we look at the raw material back, we'll have some year over year and the level of inflation in Q1 last year or this year, excuse me. So there'll be some year over year comparisons, but the absolute prices on raws we feel will hold as we go into 2022. And Michael, Can you talk some specifics, please?

Speaker 2

Yes. Aziz, I would tell you that the 3 items that I'm paying particular attention to epoxies, emulsions and isocyanates. Emotions, in particular, the inability of the Conference Call. It was impacted by Ida as well because a couple of raw material suppliers there were expected down more than a month. And so once they're back to normal rates, some of the stress on pricing, I think, will start to come back down.

Speaker 2

And so that's one. The epoxy, See, especially in China, I'm anticipating that they will moderate the pricing demands as we get into the Q4 with seasonality, and that will provide some relief. And from an isocyanates, we did have some force majeures in that area that will be coming off, I think, in the very near term. So those are the ones I'm paying attention to.

Operator

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

Speaker 8

Great. Thanks for taking my question. Just a 2 part question here. So first on margins, just wondering, Obviously, there's a lot of volatility and it's going to depend on price capture versus raws. But how should we think about margin recovery year.

Speaker 8

Is there anything special that you have as far as cost reduction buckets or anything that would be specific that you could call out? And then secondly, I was just curious on your comments on EVs and beverage cans, two areas that have been robust. Have those been impacted? I know that you called out some supply chain disruptions there, but have those been disrupted from a structural standpoint on demand or is it just transitory? Thanks.

Speaker 3

Yes, Reni, I'll end with the margin question and I'll let Michael do the commercial side here. If you look at what we're projecting, we'll give them obviously more numbers out in this call, but we do have active restructuring program, where 2021 savings on that are in the $130,000,000 range. We would expect additional savings in 2022

Operator

against the

Speaker 3

2019 actions that we have previously outlined for that. And again, we'll give a number on that in January. We do have synergy capital expenditures in the 12 to 15 months after an acquisition with the Q3 of fiscal 2020. Again, we'll give a number out in January, Those are two elements to the margin expansion opportunities on the cost base.

Speaker 2

Obviously, you saw how Tesla performed last year, and I would tell you there's virtually all of the global guys are very dead serious about improving their EV at a faster rate than what the current projections are. I don't know if you saw it yesterday, one of the largest EV producers in 25%. This particular company said they expect it to be 35% by 2025. So the momentum in EV continues to build. From the beverages, that is going to continue to be strong.

Speaker 2

We're up double digits in beverage, and there's I've actually lost count of the number of plants. I think there's either 13 or 14 new plants that are in the process of being built. And those new plants will need a lot of coatings and we are winning our more than our fair share in that beverage space. So I anticipate beverage to continue to be strong as people shift away from single use plastic into recyclable beverage containers. So I'm looking for that to be a long term sustainable play.

Operator

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

Speaker 14

Hi, this is David Huang here for Dave. Can you talk about why you're below the IHS auto build forecast in As in Q4 and how much of an EPS impact is from that lower forecast?

Speaker 2

I think we've come out ahead in terms in terms of accuracy.

Speaker 1

We do see things improving. We just don't see The velocity of improvement that IHS is forecasting for the 4th quarter, We see more of a gradual recovery into 2022.

Operator

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

Speaker 15

Hey, good morning, everybody. You mentioned DIY paint demand being back to 2019 type level. So Do you think that the underlying demand is back to 2019 for DIY paint? Do you think that the supply issues are what's holding that back or, I mean, has there been is there just been because things were so robust to pull forward of demand? And yes, I'm curious your thoughts there and how you see it going forward?

Speaker 2

J. Rice:] Back toward 2019, it's still above it. But actually, if you go into a Home Depot, you'll see how bare the share sales are. I mean, there's just not enough paint out there, and that is a challenge for our partners. Menards certainly would like to have a lot more paint There's more upward potential there as the supply chain normalizes.

Operator

Our next question comes from Mike Harrison from Seaport Research Partners. Please go ahead.

Speaker 9

Hi, good morning. I was wondering if you could give us an update on the competitive environment within the auto OEM space. Conference Call. All of you as suppliers are hurting, the customers are hurting. Do you see any share shift going on in this environment and can you maybe talk about industry pricing discipline into that auto OEM coatings market.

Speaker 9

Thanks.

Speaker 2

Yes. So, Mike, I would tell you that the discipline is better in Europe and the U. S. And Latin America. And it's still a little bit challenged in Asia.

Speaker 2

That doesn't surprise China is historically a difficult place, plus there's more than 80 car guys in Asia. So there's all the global plus All the locals and so there is a little bit more competitive attention. But what I would tell you is for us anytime that we might lose quickly as they roll out new programs because they have to put the finest technology out there on the newest programs to compete in that market because it's hyper competitive from an appearance and performance standpoint. I'm not worried too much about that. We've been pushing the team to continue to raise price appropriately, and that's what we're doing.

Operator

The next question comes from Stephen Haynes from Morgan Stanley. Please go ahead. Hey, thanks for taking my question. In the Industrial segment, by end market, it seems like packaging was potentially pretty strong, maybe double digit. So just any additional color there would be helpful.

Speaker 2

Sure. I want to get into that level of detail posted more than 6% in the industrial. Well, as packaging and these conversations with our customers are 1 on 1 and I think that's the way it should.

Operator

Remain. Our next question comes from Duffy Fischer from Barclays. Please go ahead.

Speaker 9

Yes. Good morning, guys. Maybe three questions, I can sneak it in. On your one chart that you showed the acquisitions, you saw the seasonality of the revenue. Can you talk about the seasonality of the margins off that chart and what that would look like?

Speaker 9

Then on your chart 6, where you break out kind of this 60% PPG, 40% PPG that has struggled volumetrically. What is the difference in margins between those two buckets? And the 40% that's been lower on volumes, has it been harder to get price and first question. The well,

Speaker 3

I'll start with the sixtyforty question because I think that's more relevant right now. If you look at the sixtyforty question, The businesses that are down, the 40% of the businesses that are down, let's call it low teens in terms of volume versus 2019. These are very technology rich businesses. They typically command the value for the technology. We've seen good pricing as evidenced by the segment pricing.

Speaker 3

2 of these businesses fall in performance. Performance pricing is up 6%. They're very big businesses, so they're going to have an impact on the segment. The automotive business is our biggest business in industrial, so it's going to have Again, an outsized impact on the aggregate pricing. So again, we're capturing pricing collectively across portfolio, but it's not differential based on the sixty-forty.

Speaker 2

Yes. And I would say Duffy, listen, The fact that they're down has not prevented us from getting price. So as you know, in Refinish, we are historically an annual price. This year, we've had more than one price increase in Refinish. So that has not prevented it.

Speaker 2

Automotive clearly has not prevented it. The automotive guys would like every kilo of coating that we can provide to. They would definitely would like to get more. And then from the aerospace side, as you know, it's a very technology driven business. And so and it's a very spec driven business.

Speaker 2

And so our ability to get price on the MRO side is actually pretty good. So that has not been impacted either. So when I look at the catalyst for 2022, These businesses are certainly going to be a strong contributor to the increase in earnings for next year. In terms of the seasonality from the acquisitions, we did put

Speaker 3

in the appendix of the materials we distributed last evening. The sales seasonality, you would expect and it's accurate that the earnings seasonality is even more pronounced. These are businesses that have a fixed cost base, especially architectural. So you do get more leverage on there's more leverage on the peak sales quarters and there's certainly less leverage on the sales quarters on either end of the peak. So definitely more pronounced earnings impact in Q1 and Q4.

Speaker 3

And we'll see the reciprocal of that Duffy in Q2. Next year, we didn't have Ticarilla for the vast portion of Q2 2021 and in Q2 2022 we'll see that positive leverage.

Operator

The next question comes from JD Panjia from On Field Investment Research. Please go ahead.

Speaker 5

Thanks. I have two questions. Firstly, on growth actually. When you think about the European business in Deco and compare it to some of the other periphery businesses like the adhesives industry or construction, sort of building materials, light building materials industry and think in the context of the green wave and the renovation wave that will kick into Europe as we speak for the next few years. Do you think that paint and sort of adhesives, building materials volume growth is sort of similar in trajectory?

Speaker 5

Or do you think that paint actually will slightly under grow because of The higher penetration for lot of these materials in the sort of increased insulation demand. That's my first question. The second question is really around raw materials. So if you take a step back, I guess, you guys have lost probably 15% to 20% of supply because of AIDA and URI and all the other issues across your basket this year. Fundamentally speaking, do you think your suppliers have invested enough in things like epoxy, acrylic acid, to support the growth that your industry is seeing.

Speaker 5

In other words, do you think that Even if supply normalizes, utilization in these products will remain high and therefore you will always remain a bit susceptible to a storm or 2. Thanks a lot. Hey, J. A.

Speaker 2

Deep, this is Michael. I'll take the first one, which is the suppliers. I think they're clearly hampered this year because I think in the pandemic, they did not do the acquired maintenance. They postponed some things and they got caught short by the recovery. And so as they postpone maintenance or underspent, that has impacted their ability to deliver what we wanted.

Speaker 2

So I would tell you that, that obviously, they're all making very good money right now, and they're all interested in getting their reliability up at or above where they were pre 2019. So I anticipate this to get better. I'll let Vince cover the adhesives and sealants versus paint for Europe question.

Speaker 3

Yes. I think when we just think about ESG, which I think was the heart of your question, typically these and the aftermarkets typically opportunities to reduce the coatings industry, the adhesives industry, 3. Every time there's been a technology change, we're seeing it in EVs. We typically get more and we typically are able to provide the functionality needed in order for them to make technology improvements to cover whatever that technology change is. In this case, it's better environmental performance.

Operator

The next question comes from Elaine Rodriguez from Jefferies. Please go ahead.

Speaker 9

Thank you. Good morning, guys. Just one quick question on raw materials and again apologies if you already addressed that. Like in terms of the raw materials this quarter. Like was it mostly because of the hurricanes or was it Board base in all the different regions.

Speaker 2

Yes. So Edlain, what I'd

Speaker 9

segment. The other thing that we've talked about is that we've talked about the

Speaker 2

impact of the U. S. And the other thing that we've talked about is that we've talked about the impact of the U. S. So that has impacted especially our architectural business over the last year.

Speaker 2

And I think that's the impact that last, but somewhat meaningful was the dual control issue in China in September because there were a lot of government edicts. People were supposed to meet their quarterly goals, and they were not on track to meet the quarterly goals. So starting about mid September, there was a lot of pressure to get The dual control initiatives underway and on target. And in China, when they set targets, you can almost rest assured they're going to hit those targets. So that's a little bit of material challenges in

Operator

The next question is from Eric Petrie from Citi. Please go ahead.

Speaker 2

Hi, good morning, Auto, Aerospace, Construction and Markets. So are you Rory Barendal with China Steel Control and Low Inventory Levels in Europe. Yes. Eric, I would tell you that None of our big aerospace guys have right now put out any concerns about magnesium nor have our EV customers. So right now, that is not currently on the radar screen.

Speaker 2

We're always trying to look around the corner, but that is one that so

Operator

There are no further questions at this time. Call back over to you.

Speaker 1

Thank you, Jason, and we'd like

Speaker 3

to thank everyone for joining

Speaker 1

the call today, for your time and interest in PPG.

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Earnings Conference Call
PPG Industries Q3 2021
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