PPG Industries Q4 2022 Earnings Call Transcript

There are 14 speakers on the 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 4th 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 To allow everyone an opportunity to ask a question, the company requests that each analyst ask only one question.

Operator

Thank you. I would now like to turn the conference over to John Bruno, Vice President of Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, Emily, and good morning, everyone. Once again, this is John Bruno. We appreciate your continued interest in PPG and welcome you to our 4th quarter and full year 2022 financial results conference call. Joining me on the call from PPG are Tim Kanavish, President and Chief Executive Officer and Vince Morales, Senior Vice President and Chief Financial Officer. Our comments relate to financial information release After U.

Speaker 1

S. Equity markets closed on Thursday, January 19, 2023, we have posted detailed commentary and accompanying presentation slides On the Investor Center of our website, ptg.com, the slides are also available on the website This call will provide additional support to the brief opening comments Tim 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 The company is under no obligation to provide subsequent updates to these forward looking statements. This presentation also contains certain non GAAP financial measures.

Speaker 1

The company has provided in the appendix of the presentation materials, which are available on our website, reconciliations of these non GAAP financial measures to the most directly Comparable GAAP financial measures. For additional information, please refer to PPG's filings with the SEC. Now, let me introduce PPG President and CEO, Tim Knausz.

Speaker 2

Thank you, John, and good morning, everyone. I'd like to welcome you to our Q4 2022 earnings call and my first earnings call as CEO. I'll keep my comments brief, provide a few highlights on the recent quarter, the year 2022 And our outlook. Let me start with the 4th quarter. Our 4th quarter sales of 4,200,000,000 We're near the record levels achieved in 2021 despite significant unfavorable foreign currency translation.

Speaker 2

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 This business delivers every day, including what we believe is the best in class body shop full repair productivity. 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.

Speaker 2

PPG Comex sales are now more than US1 $1,000,000,000 on annual sales basis, another record year for this business. Our Aerospace business continued to recover delivering organic sales growth 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 $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 realizations and strong cost management. On a 2 year stack, selling prices were up about 19%.

Speaker 2

We achieved this segment earnings improvement despite the Significant and unpredictable shutdowns in China from COVID-nineteen that were worse than what we had anticipated going into the quarter And these have continued into the Q1. 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 $20,000,000 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.

Speaker 2

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 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.

Speaker 2

Architectural Pro program And winning more shelf space with our Glidden Max Flex spray paint. In addition, we were honored We awarded Home Depot's 2022 Overall Innovation Award, which was the first time that a paint supplier has achieved 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 SG and A as a percent of sales decreasing by about 100 basis points, including the delivery of about $65,000,000 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.

Speaker 2

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 Target's initiative, issuing our first ever diversity report and finally obtaining shareholder approval To declassify our Board and remove super majority 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 $1,000,000,000 has set the foundation for many accretive growth initiatives.

Speaker 2

Now moving to our outlook. As we outlined in our press release, we expect the Q1 demand environment to remain similar to the 4th 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 and 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.

Speaker 2

In the U. S, we will benefit from the continued recovery of the Aerospace and Automotive Refinish businesses and Lower demand from a softer U. S. Housing market. As a reminder, our overall exposure to the U.

Speaker 2

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 resilience in the coming quarters if We experienced a broader global economic decline. As normal course of business, we'll 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 Q1 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.

Speaker 2

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.

Speaker 2

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 100 and 40th 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?

Operator

Thank you. We'll pause for just a moment to compile the Q and A roster. Our first question today comes from David Begleiter with Deutsche Bank. Please go ahead, David.

Speaker 3

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

Speaker 2

Yes. Right now, David, just because of all the uncertainty in many different avenues of our business, We're focused on Q1 and clearly Q1 has some hangover elements from Q4, Particularly around China, we do believe, as I said in my comments, that there are The shopping list of multiple potential earnings growth catalysts for 2023, including China, including aero, Including Ravinish, including Comex, EVs, THD, literally a shopping list of potential earnings catalysts. But we'll get through this hangover of Q1 and then reassess and communicate more as we move forward.

Operator

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

Speaker 3

Hey guys, good morning. Tim, I think your outlook for the Q1 is down mid single digits for volumes. Can you walk us through What the volume outlook is from your less cyclical markets and your more cyclical markets to give us a gauge of kind of where those are at

Speaker 2

for the Q1. 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.

Speaker 2

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 they 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's a timing issue with Q1.

Speaker 2

Those are the 3 main factors, I

Speaker 1

would say.

Speaker 4

Mike, this has been just a

Speaker 2

little bit of

Speaker 4

some of the other businesses. We're not seeing Any tone change in the businesses sequentially, again, good strong pace of recovery in Aerospace, solid consistent growth in Refinish. Auto OEM, consistent generally consistent quarter over quarter, starting to recover in Europe. So again, we're not seeing any significant changes And some of the other key businesses either.

Operator

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

Speaker 3

Great. Thank you so much. Just a real quick question on pricing. Can you just comment on the current pricing environment Just given the macro movement in, let's say, raw materials and then also several management changes across the sector, are you still seeing The ability to sustain price throughout the year, just any commentary will be incredibly helpful. Thank you so much.

Speaker 1

Yes, sure. Thanks for the

Speaker 2

question, Chris. You saw in the print that we put up 11% for Q4, 19% on a 2 year stack. Sequentially, it was 18% on 2 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.

Speaker 2

As for what's 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 Raw materials that we are also 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.

Operator

The next question today comes from Ghansham Punjabi with Baird. Please go ahead.

Speaker 2

Hey guys, good morning.

Speaker 5

Now as

Speaker 2

it relates to the U. S. Architectural, I mean, obviously, there's bifurcation so far between do it 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?

Speaker 2

Thanks. Okay. Thanks, Ghansham. So let me start with the U. S.

Speaker 2

Environment. I'll start at a high level from a macro standpoint. Clearly, DIY is down partly because what's happening with consumer Confidence, but also a bit of a holdover from the COVID piece of DIY. And clearly, new housing construction going down, again, only 1% of our sales, but those two segments are down. Fortunately for us, we're much stronger in commercial and maintenance.

Speaker 2

And there we still see backlogs with our customers. I think we do a survey Every quarter with our professional customers here in the United States and their backlogs are still floating in that 12 to 13 At a weak range. So we still see some good demand there. And then as we go forward, We expect to continue to see growth from our Home Depot Pro program moving forward. Now going over to Europe, The volumes started to really deteriorate after the invasion last Q1 And it was down double digits throughout all of 2022.

Speaker 2

The professional painter business down Not nearly as much more as single digits, but as we enter 2022, we'll see particularly for Q1 I'm sorry, 2023. Q1, we've got a little bit of a comp issue where we're still comping Part of the quarter to the pre war era. But then once we get to Q2, we start to have, Frankly, some positive comps because our total business in Q2 Europe was down about 10%, double digits, low double digits. So We do see it more or less kind of bouncing off the bottom, if you will, as we end Q1 and then comping better as we get into Q2.

Operator

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

Speaker 3

Yes, good morning. Thanks for taking my question. Tim, you spoke in your prepared remarks about The target of mid to high teens margins for PPG going forward, is it a function of just raw materials getting back to normal and kind of Having that catch up kind of finally been made or do you see a lot of manufacturing efficiency improvements that may have Uncovered themselves through some of the supply chain problems, what have you? And if so, if it's the latter, can you help us to understand what some of those levers might be?

Speaker 4

Hey, John, this is Vince. I'm going to start. 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 caught up On that in early 2023, we call it weeks, not even months.

Speaker 4

The second, which I think is important Yes. And you hit on it, John. We haven't had a strong manufacturing couple of years here Due to supply disruptions, due to customer disruptions, COVID disruption, 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. The third, which is very important, though, is we're still down about 10% 1st pre COVID levels in terms of volumes spread throughout our portfolio.

Speaker 4

So those are the 3 big levers that Tim can Oliver here.

Speaker 2

Yes, you really hit the big 3, but particularly to the volume, we've got aero still down significantly. We've got auto. Auto has been at recession levels for 3 years now. There's pent up demand across the planet for cars. Refinish is still down 10% -ish from 2019.

Speaker 2

In addition to what Vince mentioned, we have done A good bit of cost out during this period as well and restructuring. So we will get levered from that. We're not Completely finished with our acquisition synergy realization. So as I said, I use the term shopping list. We've got

Operator

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

Speaker 6

Yes. Thank you. Tim, you made a comment a few minutes ago about inflation outside of raws, and I just wanted to drill into this Near term outlook of yours of low single digit inflation in the Q1, Is that a comment on broadly cost of goods or is it just raws? And are you also seeing it In labor and freight and so forth, and maybe just on the raw side of that, For Q1, when would you say that flowing through cost of goods is based on What month would be the midpoint of your purchases that would flow through cost of goods in the Q1 versus Your purchases of those raws today, what would you say that would reflect in terms of maybe 2nd quarter raw material costs?

Speaker 2

Sure, Steve. I think the numbers you were quoting at the beginning of your question were raw material, Okay. So in Q4, we were up mid single digits year over year, down low single digits sequentially. 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.

Speaker 2

So we're expecting the positive benefits of that on the P and 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 inflation.

Speaker 4

Yes. Steve, just going back to what Tim said earlier in the call, that's why we're doing targeted pricing And across our portfolio to compensate for this other inflation, that's going to be higher year over year, primarily labor. Not seeing as much freight as you pointed out. It's not been an inflationary factor in the last couple of quarters.

Operator

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

Speaker 7

Yes. Good morning, guys. Question just around price. So as you ended last year, if you just anniversary the price That you had at that point, how much would that move up price this year just from an accounting standpoint as we roll through? And 2, I'd imagine you've gone out with a lot of your price increases already.

Speaker 7

So if you average that

Speaker 4

Yes. Duffy, I'll handle the first part of the question, the carryover pricing. We give every quarter our price off of our sales base, So you can do the math. You can come up with several 100 of 1,000,000 of dollars of price carryover in 2023 From our 2022 pricing initiatives, again, if you just do the math, you can easily come up with that. It's certainly north of $300,000,000 It will be carried over.

Speaker 2

Yes, Duffy, thanks for the question. It's Tim here. On the new pricing, if you will, it will be more targeted, just based on where each of the segments are on their catch up and on offsetting total inflation and new We've already gone out for additional price in a couple of businesses. We're having discussions with Customers in a few other businesses, and we'll prefer to have those discussions with the customers first, And we'll have more visibility on that as we move forward, but we will have positive price when you net all of that here as we move through 'twenty three.

Operator

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

Speaker 8

Yes, good morning. Tim, in your focus areas, you mentioned simplification and optimization of supply Manufacturing, I was wondering if you could talk a little bit about this and maybe size the opportunity on cost and working capital and Are there areas where you think you need to rationalize the footprint based on a structurally lower demand environment, for instance, in Europe? Thank you.

Speaker 2

Yes. Thanks, Ron. If you look at our journey over the last decade and a half, We've done a lot of acquisitions. We've acquired a lot of manufacturing sets. We've also acquired a lot of product Portfolios and we've captured a lot of synergies along the way.

Speaker 2

As we look at where we are today and some of the things we've learned through Some of the supply shortages, etcetera, 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 acquired or acquired. So we do believe that there's some significant upside

Speaker 4

And as you can imagine,

Speaker 2

that's not as quick a realization as, say, procurement Synergies when you first close a deal, but we feel pretty confident that in the medium and long term, we can deliver value there.

Operator

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

Speaker 9

Yes, good morning. 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.

Speaker 9

On the other hand, you have some company specific tailwinds In the form of a ramp of your propane 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.

Speaker 4

Yes, Kevin, this is Vince. Let me just start on the macro. Again, what we're seeing, Which I think has been pretty chronicled is new housing starts and leading indicators certainly pointing down. We really have to bifurcate that. Single family housing starts are significantly down.

Speaker 4

Multifamily, we expect to turn down They're starting to turn down, but there's still going to be growth in multifamily completions, again, paints at the end of the cycle here. There's no completions that will carry us well into the year. Tim mentioned earlier on the commercial side, commercial newbuild, Again, certainly for the first half of the year, should be constant, if not longer. Again, commercial repaying is solid right now and there's a backlog on that. So those are the macro signs and we do have some PPG specific Items that Tim is going to talk about.

Speaker 2

Yes, Kevin, the PPG specifics, you know well about the THD Opdivo 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 on 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 offer even further.

Speaker 2

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 based off with the price offsetting the difference.

Operator

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

Speaker 7

Thank you and good morning all. First, I want to extend my sympathies to the PPG family on the passing of Bill Hernandez. He really was a great, great guy. Hey, 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.

Speaker 7

And so I'm wondering is part of your calculus that We will likely see higher year over year EPS in the second quarter?

Speaker 2

Well, again, Frank, first of all, thanks for the call out to Bill Hernandez, a loved PPG partnered here for many years and they're just a world class CFO and great human being and a Tragic and sudden loss this past weekend. So thank you for calling that out. Frank, at the end of the day, The uncertainty at this point with what's happening with China and when And what's happening with Europe and to what degree? And with what's happening to raw Material pricing and the specificity of that raw material pricing, as you know, can change our earnings profile fairly significantly. We're just not in a position right now to put out a statement on Q2 EPS.

Speaker 2

That said, As I said earlier, I believe we've got a hangover in Q1, but a number of those, let's call them earnings levers, Start to come due in Q2.

Speaker 4

Yes, Frank, this is Vince. We do give this up. 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 Tim pointed out the opening remarks about the timing of

Speaker 2

the opening. Right now, we certainly hope March is a strong month, Definitely too hard

Speaker 4

to predict April, which is Q2 is typically a very good quarter in China. So we're not positioned at this point to Providing a real mind on that at this point.

Operator

Our next question comes from Josh Spector of UBS. Please go ahead, Josh.

Speaker 5

Yes. Hi. Thanks for taking my question. I just have a couple of follow ups here. First, Do you think you could achieve the low end of your margin targets this year in 2023 on average?

Speaker 5

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 the wise might be different versus prior cycles? Thanks.

Speaker 4

Yes. Good, Josh. Lot of levers that help us improve earnings. Again, we're not trying to give full year guidance on margins. That's even harder task than top line.

Speaker 4

So we'll defer that until a little bit later into the year. Your question on pricing, I'm going to let Tim answer.

Speaker 2

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 segments. So that's we're confident in that.

Operator

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

Speaker 10

Thank you. 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 it going to be any different than last year?

Speaker 10

And would that be a plus or minus for you?

Speaker 2

Yes. Thanks, Vincent. Well, first of all, historically, I don't want to brag, but historically, we've actually nailed it pretty well compared to some of The external consultants on the build because we got so many people in the plants every day. We have visibility to operating schedules and we can only talk to those folks. So the difference for us in Q1 specifically is China because our base case Is that there will be to some degree a second wave after Chinese New Year of infections.

Speaker 2

And we saw what that did on the first wave To assembly plants and other suppliers. So that's our base case and that may explain the difference between us And some of the consulting houses out there. But beyond that, we're expecting modest Growth for the year low single digits. And that's an area where there potentially could be upside, But our base case is low single digits. Yes, just to give you some examples specifically of what happened on the Brown in China, and why we are a bit cautious on the post Chinese New Year.

Speaker 2

When things opened up in mid China I'm sorry, in mid December in China, we've got 19 PPG manufacturing sites across the country. And we went from near 0 absenteeism very quickly to above 50% absenteeism across that whole network. And then had it returned very rapidly to near 0 in a period of about 2.5 to 3 weeks.

Speaker 3

And we saw that same in some of

Speaker 2

our Other suppliers, assembly plants, you name it. So we've lived it, we've seen the data and We believe that as people travel to the families more travel than the last 3 years across China for Chinese New Year, As they travel to some of the more remote villages to visit their families in return, we do believe there will be a short but acute 2nd wave. And so that's why we're a bit more cautious. And as Vince mentioned, March is a huge month normally for our China business.

Operator

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

Speaker 3

Thank you. Good morning, everyone. I just wanted to clarify your raw materials commentary from earlier. It sounds like you are Currently destocking sort of earlier raw materials purchases and we'll begin to purchase more Perhaps in the Q2, so there could be more of a step down in the cost. Is that the right way to think about it?

Speaker 4

Yes. Yes, Alex, 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 further incremental inflation Q4 to Q1. We were still up Q4 year over year.

Speaker 4

And we have to work that deflation through our inventory, which will take us likely through the Q1 before we see that impact on our P and L. And so that's I think what we're 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 Q1 of 2023.

Speaker 4

So they're still above 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 print raw material purchases in Q2 as well.

Operator

Our next question comes from John Roberts of Credit Suisse. Please go ahead, John.

Speaker 1

Thank you. Good morning, Tim, Vince and John. 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?

Speaker 1

And when you talk about 15% higher productivity, Is that relative to the prior suppliers to those shops or how are you defining that since your leading competitors also talking about having productivity higher than the competition?

Speaker 2

Yes. Thanks, John. To your first question, our net wins on Body Shops Our positive in all the major regions, U. S, Canada, Europe, Australia, New Zealand and China. And just proportionate to our business, the skies, the vast majority of those are in the U.

Speaker 2

S. And Europe. Excuse me, relative to the whole productivity question, the way we look at it is Chain is only as strong as its weakest link. And so every link on the Refinish Body Shop Fruitwood has to be strong in order to really drive What's most important to The Body Shop owner and that's what they call key to key time, from the time you take the vehicle owner's keys Until the time you hand those keys back to the vehicle holder. That is the one and only metric that is driven.

Speaker 2

So if you are incrementally faster in one of those steps, but slower in several others, Such that your key to key time is 15% slower, then you're simply not as productive in the eyes of that body shop forward. And so we focus on that end to end with things like the digitized color match, Our Lake digital system that really encompasses the whole body shop, the visualizer, Optimized mixing to improve speed, eliminate waste. And another thing that's really important to The Body Shop Right now that PPG's value proposition delivers and some of our competitors don't is you're actually simplifying some of those steps With things like Moonwalk and the Visualizer, so that the constrained labor of the professional entertainer Doesn't always have to be the one to do that. You open it up to other labor that can do that

Speaker 1

and that adds additional productivity to

Speaker 2

the body shop. So again, the most important thing is that key to key time and that's where we have the 15% advantage.

Operator

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

Operator

J.

Speaker 2

Juvekar:] Yes. Good morning.

Speaker 11

Tim, clearly the housing market is slowing down whether you look at new homes or existing home sales. Have you seen a slowdown in the contractor business? The contractor business was robust. Last couple of summers, they had a huge backlog That they were working from COVID. As that backlog is worked down, do you expect some slowing in the contractor business?

Speaker 11

Thank

Speaker 2

you. Yes, Vijay, we have already seen Slow down 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.

Speaker 2

So that's within the margin of error of our 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 0 During COVID, while DIY and res repaint was offsetting it, so there's still a lot of pent up demand there. I don't want as I said earlier, the total volume is still going to be incrementally down. So I don't want to oversell that.

Speaker 2

But that's why some of our pro business is holding up better.

Operator

Our next question comes from Michael Leithead of Barclays. Please go ahead, Michael.

Speaker 4

Great. Thanks. Good morning, guys. I just had a bit of a follow-up on

Speaker 2

the raw material basket.

Speaker 1

Can you just help us with

Speaker 2

how you think about that evolving broadly over the course of this year? I guess With 1Q demand being pretty benign, no restock, volume is down 5 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 costs? So Mike, I'll start and let Vance fill in some color. I think there was some actual Artificial demand in the second half of twenty twenty two that has maybe delayed some of the Basic supply demand economics because you'll recall that for most of 'twenty one and the first half of 'twenty two, Raw material availability was our number one issue and a lot of our coatings peers' number one issue.

Speaker 2

So as that availability improves, we all stocked up and got safety stock. And at the same time, demand started to collapse. So things were kind of going in the when I say collapse, I mean, particularly on the DIY and Deco side, But big driver to the overall raw material change. So I think a lot of companies, and you've seen that in what companies have said, ended the year with more inventory Then they would like. So there was a bit of artificial demand that delayed what would be a normal supply chain curve.

Speaker 4

Yes, Mike, let me just add some color here. So as we enter 2023, again, we're destocking. We know from public commentary a lot of our peers have excess inventory and are destocking. I do think there is this tug 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.

Speaker 4

So we'll have a lower buy PPG will have a lower buy in Q1. We have suppliers in virtually every week or every day for the past couple of weeks indicating to us they 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.

Operator

Our next question comes from Silke Cook with JPMorgan Chase. Please go ahead.

Speaker 12

Good morning. This is Silke for Jeff. I was wondering if you can discuss your volumes And secondly, I was wondering whether you can talk about what's happening in the packaging business?

Speaker 2

Sure. So for the stores pricing, we've raised price there multiple And we've held that price throughout the year. And 2023 will depend on what happens From an inflation standpoint, that's one of the businesses where we move fairly quickly to keep up With cost inputs. On Packaging, we did have Strong margin recovery in that business throughout 2022 and we expect that to continue in 2023. We do see some softness there in pockets around the world driven by in China, it's The lockdowns in Europe, it's just consumer confidence and beverage spending.

Speaker 2

So we have seen some softness in volume, but strong margin recovery. And we also continue to convert to our INNOBL Pro, BPA free content material and we've got some nice wins In that beverage space, it will be launched as we move through this year. But overall, at a high level, good margin recovery, some softness in demand around the world.

Operator

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

Speaker 3

Great. Thanks for taking my question. Good morning. I guess my question is about some framework you've provided in the past. If we go back maybe a year, year and a half ago, you were discussing maybe $9 of earnings for 2023.

Speaker 3

Do you see that as still maybe a possibility a couple of years out? That would imply another $400,000,000 $500,000,000 of EBIT on top of So what's the framework to get back there? Is it kind of that high teens EBIT margin and maybe the recovery of the 10% Volume or would you need more than that to get back? And is that still maybe again available in a couple of years' time? Thanks.

Speaker 2

Yes. Hi, Arun. I've said before, I believe that the $9 EPS It's when not if, and I stand behind that. And that's because the fundamentals are there. We have a portfolio that has Earnings power that has yet to be released.

Speaker 2

And I won't give you my entire 10 point plan that will get us there, but you still got recovery in Some of our better businesses, Aerospace, Auto, Refinish, let me just talk about auto for a second without going too far Off topic here, but if you take a 6 year run rate of global builds before COVID, Compared to the 20, 2021, 2022, there's 40,000,000 fewer cars that were built during that 3 year period compared to the 6 year before. So everybody has their guess How much of that $40,000,000 will be made up over time, but it's not 0. 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 or recover, We feel confident that the $9 is a when, not if.

Speaker 4

Yes. And just, Arun, just a couple Comments. It relates to a little more near term. So if you look at 2022, we have to remind Tim mentioned this earlier, but it's a good reminder. We really saw Europe fall really the back half of March.

Speaker 4

So we're going to come up against some recession type volumes Here in a couple of weeks, we remind everybody that in Q2, China was shut down industrial wise For almost 2 months. So again, we don't think 2022 was representative in China of a traditional, Even a compressed run rate on GDP growth. So those 2 outside of Aerospace, outside of Refinish, We think have some opportunities to contribute. And again, as Tim mentioned earlier, we expect very good leverage, About historical average leverage as volumes return in any business.

Operator

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

Speaker 4

Good morning. It's Dan Rizzo on for Laurence. Thanks for fitting me in. Just in terms of the backlog you mentioned, I think you said commercial backlog was 13 to 14 weeks. And then I think in the comments you said A $200,000,000 backlog in Aerospace.

Speaker 4

Just for comparison purposes, what does that mean like Versus what, I guess, historically it's been?

Speaker 2

Yes. Dan, Historically, the 12, 13 week for U. S. Propaneers is actually still high. So that will offset some of the negative volume in some of the other segments.

Speaker 2

I can tell you that In my short 35.5 years in the 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 Five times what they were pre COVID. And it's not only a matter of us Getting product out or getting raw materials in, our Refish customers' Backlogs are high. I hope you haven't had any minor fender vendors lately, but if you have And you've taken the car to a body shop.

Speaker 2

They're likely to tell you it's 6 to 8 weeks before you're going to get that car serviced and Taken care of. So the backlogs across all of those spaces are high, in some cases historically high.

Speaker 4

Yes. I'll add some color, Dan, to the Aerospace figures here. So we said before, Aerospace is circa $1,000,000,000 business for us. This $200,000,000 backlog is typically a small fraction of that. So this is almost another 2 months of activity.

Speaker 4

If we can get it done this year, we're still facing Some supply challenges that are governing what we can do in particular month quarter, but it is a significant backlog relative to the short terms.

Speaker 2

Yes. And I'm going to grab that back for 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 that's growing, which means that $200,000,000 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.

Operator

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

Speaker 10

Hi, good morning. 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?

Speaker 2

Yes, Mike, we're really excited about EP because we are winning where the EVs are winning, Okay. We're winning where the EVs are gaining the most and that's China. You probably saw the journal article here not that long ago, it's Something like 65% or so of the EVs sold last year were in China, and that's where we're having the most success. In fact, we're growing significantly with the largest EV producer in China. The way we're approaching it is, it's not only about new technologies, it's about picking the winners on the EVs and selling, Let's say more conventional corrosion protection and beautification products to those Customers, so it's a combined effort of selling our new and differentiated products like our battery fire protection And our dielectric coatings products to those customers, but also targeting and winning with

Operator

Our final question today comes from Jaydeep Pandya with On Field Research. Please go ahead.

Speaker 13

Finally, because of the Crazy raw material inflation you've seen. Now as raw materials tail off, are you not getting pushback from your customers When you are trying to do these targeted pricing, especially in a demand environment, which has at least changed and has slowed? That's my first question. And the second question really is on protective. Could you just tell us like what the backlog in marine and protective these days?

Speaker 13

Thank you.

Speaker 4

Hey, Jadeep. I'm sorry. The beginning of your first question cut out, if you I apologize, but maybe you could repeat your first question for us, please.

Speaker 13

Yes, sure. So my

Speaker 4

first question is just on the pricing.

Speaker 2

Yes, I got the first question. Hello?

Speaker 13

Yes. It's just on yes.

Speaker 2

So Jai Deep, I'll take it and then Vince 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 You 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, and we have these discussions with them, that we're not back to 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.

Speaker 4

Before Tim answers the protective question, Janip, I think we have discussions with our customers in almost every business. They want us to be a healthy supplier that continues To innovate, and I understand that, and again, get paid a fair price, for innovative technology that typically helps them. We're coming into a period of time, given inflation in base and salary where our customers really value Functional attributes of our coatings products. And again, they're pushing us not so much on price, they're pushing us to help them with their productivity Right now, which is a much bigger cost pool for them, cost opportunity for them than the price on coating. So again, we're having a lot of discussion with our customers about how to improve their productivity, which again is a key attribute for them.

Speaker 4

Which again is a key attribute for that.

Speaker 2

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 it's 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 Kirk, but beyond that, a couple of things are happening in Protective.

Speaker 2

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 have a fantastic distribution network In Mexico, over 5,000 store locations.

Speaker 2

That has historically been Very heavily architectural 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.

Operator

There are no further questions at this time. I'll turn the call back over to John Bruno.

Speaker 1

Thank you, Emily. We appreciate your interest in PPG. This concludes our Q4 earnings call. Have a good day.

Operator

Thank you everyone for joining us today. This concludes our conference call. You may now disconnect.

Earnings Conference Call
PPG Industries Q4 2022
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