PPG Industries, Inc.’s (PPG) CEO Michael McGarry on Q1 2022 Results – Earnings Call Transcript

PPG Industries, Inc. (NYSE:PPG) Q1 2022 Earnings Conference Call April 22, 2022 8:00 AM ET

Company Participants

John Bruno – Investor Relations

Michael McGarry – Chairman and Chief Executive Officer

Tim Knavish – Chief Operating Officer

Vince Morales – Senior Vice President and Chief Financial Officer

Conference Call Participants

Christopher Parkinson – Mizuho

Ghansham Panjabi – Baird

David Begleiter – Deutsche Bank

John McNulty – BMO

Stephen Byrne – Bank of America

Vincent Andrews – Morgan Stanley

Josh Spector – UBS

Michael Sison – Wells Fargo

Frank Mitsch – Fermium Research

Arun Viswanathan – RBC

Jeff Zekauskas – JPMorgan

Kevin McCarthy – Vertical Research Partners

PJ Juvekar – Citi

Mike Harrison – Seaport Research Partners

Jaideep Pandya – On Field Research


Good morning. My title is Sam and I might be your convention operator at the moment. At this time, I wish to welcome everybody to the First Quarter PPG Earnings Conference Call. [Operator Instructions] Thank you.

I might now like to show the convention over to John Bruno. Please go forward, sir.

John Bruno

Thank you, Sam, and good morning, everybody. Once once more, that is John Bruno. We respect your continued curiosity in PPG and welcome you to our first quarter 2022 monetary outcomes convention name.

Joining me on the decision from PPG are Michael McGarry, Chairman and Chief Executive Officer; Tim Knavish, Chief Operating Officer; and Vince Morales, Senior Vice President and Chief Financial Officer.

Our feedback relate to the monetary info launched after U.S. fairness markets closed on Thursday, April 21, 2022. We have posted detailed commentary and accompanying presentation slides on the investor slide of our web site, The slides are additionally out there on the webcast website for this name and supply further assist to the temporary opening feedback Michael will make shortly. Following administration’s perspective on the corporate’s outcomes for the quarter, we will transfer to a Q&A session.

Both the ready commentary and dialogue throughout the name could comprise forward-looking statements reflecting the corporate’s present view of future occasions and their potential impact on PPG’s working and monetary efficiency. These statements contain uncertainties and dangers which can trigger precise outcomes to vary. The firm is below no obligation to offer subsequent updates to those forward-looking statements. This presentation additionally comprises sure non-GAAP monetary measures. The firm has supplied within the appendix of the presentation supplies, which can be found on our web site, reconciliations of those non-GAAP monetary measures to probably the most instantly comparable GAAP monetary measures. For extra info, please consult with PPG’s filings with the SEC.

Now, let me introduce PPG Chairman and CEO, Michael McGarry.

Michael McGarry

Thank you, John, and good morning, everybody. I’d prefer to welcome everybody to our first quarter 2022 earnings name. I hope you and your family members are remaining secure and wholesome. To say that these have been troublesome and difficult occasions for therefore many can be a large understatement. Since the start of the conflict in Ukraine, we’ve got been centered on defending the well being and security of our staff and their households from Ukraine in addition to our staff in Russia. PPG and the PPG Foundation have additionally dedicated greater than $800,000 to humanitarian reduction in addition to longer-term restoration assist.

In addition, PPG staff have additionally been offering direct assist to these in want, together with taking refugee households into their houses. The conflict has additionally made it essential to reduce and now wind down our operations in Russia. As a end result, we’ve got recorded a pre-tax cost of $290 million for impairment of considerably all of our firm property associated to our Russian operations. For context, web gross sales in Russia represented roughly 1% of whole PPG web gross sales for the yr ending December 31, 2021. We will proceed to carefully monitor developments within the area.

Before I present the common quarterly evaluate of our outcomes, I’d like to offer a concise abstract of the important thing points impacting our enterprise within the quarter as we glance forward.

During the primary quarter, we had two main occasions: the Ukraine-Russia disaster and elevated COVID-19 restrictions in China, which have created some new uncertainties about general regional demand and doable international carry-on results. You will see resulting from these elevated uncertainties, we’ve got widened our earnings steering vary we supplied for the second quarter.

Notwithstanding these two main occasions are different longer standing international impacts which have affected our monetary outcomes for a number of quarters and that are abating or ratably enhancing. Specifically, we proceed to expertise enhancements in our provide chain and our uncooked materials availability. Additionally, outdoors of China, COVID restrictions have continued to lower in lots of components of the world.

As an organization, we’ve got continued to enhance our pricing realization in each tempo and cadence. This has been essential to battle the persistence and breadth of inflation. Our value seize this cycle is far sooner and we at the moment are pricing within the second quarter for second quarter inflation impacts, so we’re mainly pricing in actual time.

We proceed to ship good earnings leverage when we’ve got enhancing volumes. While lots of our companies and areas haven’t totally recovered from the pandemic, as a matter of reality, we’re nonetheless down about 5% in mixture. However, when a enterprise does ship quantity enchancment, we’re realizing good backside line features. This displays the exhausting work from our groups on managing our working prices and SG&A.

Finally, we had a really stable month of March from a monetary returns perspective. We have acknowledged many occasions that March is an important month within the first quarter given the seasonality of our companies. Our month of March monetary returns are the very best return because the second quarter of 2021. I’ll now transfer to offer some feedback to complement the detailed monetary outcomes we launched final night. For the primary quarter, we delivered file web gross sales of $4.3 billion and our adjusted earnings per diluted share from persevering with operations have been $1.37.

To rapidly summarize the quarter, our gross sales efficiency was higher than our January steering regardless of surprising impacts from the disaster in Europe, COVID-related disruption in China and persevering with logistics bottlenecks. More than offsetting these surprising macro points was stronger than anticipated demand throughout lots of our companies as regional economies and end-use markets proceed to get well from the pandemic impacts. Above market gross sales volumes have been achieved in a number of of our end-use markets, together with our PPG-Comex enterprise, which throughout the quarter, opened their 5,000th concessionaire location in Mexico.

First quarter gross sales in Latin America have been a file. In addition, our automotive refinish enterprise carried out properly with sturdy gross sales volumes within the U.S. and Europe. Also, our aerospace enterprise benefited from year-over-year preliminary enhancements out there and we count on additional trade demand development as we’re nonetheless properly under pre-pandemic ranges.

Our adjusted earnings have been considerably above the higher finish of our January monetary information as we delivered sturdy earnings leverage on the higher-than-expected gross sales volumes. This leverage was a results of enhancing manufacturing efficiency as COVID-related absenteeism subsided considerably as we progressed by the quarter and we skilled growing uncooked materials availability.

In addition, our promoting value will increase elevated 10% year-over-year, marking the twentieth consecutive quarter of upper promoting costs. Our promoting costs are up over 12% on a 2-year stack foundation versus the primary quarter of 2020, reflecting our continued actions to offset generationally excessive inflation. Our latest acquisitions additionally carried out properly, together with the conclusion of focused synergies. The Tikkurila enterprise delivered year-over-year gross sales development of greater than 10%, excluding our Russian operations.

Our Traffic Solutions enterprise additionally achieved higher than 10% gross sales development and our first quarter gross sales have been a file and the enterprise continued to have a big order backlog as we entered the second quarter.

During the quarter, we additionally launched a major expanded Pro Painter initiative with The Home Depot. And regardless of persevering with uncooked materials constraints proscribing our capability to totally load stock, we now have our full Pro Paint assortment out there in about 60% of their shops. We count on to have all The Home Depot shops loaded within the coming months. We are excited in regards to the development alternatives that this initiative gives and have already acknowledged some important new skilled painter enterprise features.

Our earnings and margins proceed to be impacted by elevated ranges of inflation and provide disruptions. In the primary quarter, our promoting costs did offset year-over-year uncooked materials inflation, however didn’t offset inflation from different sources, together with logistics, power and labor and we didn’t totally get well prior yr inflation. Sequentially, versus the fourth quarter 2021, our general margins improved by greater than 200 foundation factors. We are concentrating on continued quarterly sequential margin enchancment within the second quarter as properly regardless of additional will increase in uncooked materials and logistics inflation.

We have continued to optimize our industrial processes the final 2 years and as talked about at the moment are nearer to real-time pricing relative to inflation. Due to increased crude oil and power costs, we’re implementing incremental promoting value will increase within the second quarter and count on that we are going to exit the second quarter offsetting all inflation classes on a run price foundation. This drives our expectations for working margins to sequentially enhance additional because the yr progresses.

In a number of companies, we proceed to face sure uncooked materials shortages leading to our general gross sales backlog rising to about $180 million exiting the quarter. The order backlogs are the best in our aerospace and automotive refinish companies. Additionally, these are two of our many industries we provide the place stock ranges are extraordinarily low all the way in which to the tip shopper.

We have continued to regulate our controllables and as soon as once more lowered our SG&A as a share of gross sales, lowering by about 40 foundation factors in comparison with the primary quarter 2021. This included supply of an extra $15 million in price financial savings from latest restructuring packages and acquisition synergies. This can be regardless of increasing our multiyear funding in our superior digital capabilities. And we’re experiencing rising digital adoption from our prospects, most notably within the architectural coatings enterprise.

In the primary quarter, our web debt elevated primarily as a result of increased greenback worth of stock reflecting inflationary results. The seasonal working capital enhance within the quarter was in line with pre-pandemic years. We count on our money circulation era to match prior yr finish traits, which is to eat money early within the yr and generate sturdy money circulation as we progress by the tip of the yr. Strategically, on April 1, we accomplished the acquisition of Arsonsisi’s Powder Coatings enterprise, persevering with our give attention to rising our powder coatings manufacturing capabilities. In addition, we divested some architectural coatings companies in Africa as we proceed with our legacy evaluating all regional companies and product strains to make sure that they proceed to have strategic worth and meet our monetary hurdles.

In the primary quarter, we continued to take further measurable steps to additional advance our ESG program by issuing our inaugural DE&I report. While I’m happy with what we’ve got achieved, we all know that there’s extra work to do and extra areas of alternative to give attention to. If you haven’t already carried out so, I might encourage you to learn our report and be taught extra about what we’ve got carried out and our aspirational targets for the long run that are outlined in our presentation supplies.

Looking forward, whereas our underlying demand continues to be stable in most of our end-use markets and areas, second quarter financial exercise, particularly in Europe, has began to melt as customers stay cautious primarily based on the present geopolitical points within the area. In addition, manufacturing provide chains have been just lately impacted in China resulting from extreme restrictions from rising COVID circumstances. In the previous few weeks, as much as 5 of our smaller manufacturing websites have been mandated to shutdown resulting from restrictions plus our principal Protective & Marine Coatings manufacturing facility. We are working in each of those areas to handle our operations and prices are reflective of those present macro challenges. We are additionally assessing impacts each constructive and unfavorable these challenges could have on uncooked materials provide and prices.

As talked about earlier, we count on additional sequential inflationary pressures on uncooked supplies, logistics and power. Our 2-year stacked uncooked supplies inflation anticipated to exceed 35%, however solely up low to mid single-digit sequentially versus the primary quarter. We are implementing additional promoting value will increase in all of our companies and count on a faster offset versus historic lags. Due to the heightened ranges of uncertainty, our earnings steering considers a wider vary of outcomes for the second quarter. More typically, our steering assumes that restrictions in China ease considerably in May and that geopolitical points don’t increase past the present Russia-Ukraine boundaries.

While the present setting stays troublesome to foretell, I count on that as 2022 progresses, we’ll start to expertise an easing in provide chain disruptions, basic stock rebuilding throughout many finish use markets and nonetheless a wholesome shopper prepared to spend, particularly in North America. The future PPG earnings catalysts that I referenced on the January earnings name stay intact and we actually see a path to return to prior peak working margins with alternatives to exceed them. This consists of continued restoration within the automotive refinish, OEM and aerospace coatings companies; normalization of commodity uncooked materials prices, which ought to reasonable over time given provide dislocations are enhancing and there’s a softening in sure regional economies. As demonstrated this previous quarter and supported by our decrease price construction, sturdy working leverage on any gross sales volumes development, accretive earnings development from our latest acquisitions from each their historic base earnings and additional synergy seize; above market natural development pushed by our benefit and main manufacturers, applied sciences and providers.

In closing, as we glance forward, I stay assured in regards to the firm’s future. I strongly imagine in our crew of fifty,000 staff as we work to do higher at the moment than yesterday on a regular basis. The means our staff have handled the pandemic and our serving to throughout the Ukraine humanitarian disaster and are navigating by a really difficult enterprise setting are a major instance of how the crew is making it occur. Thank you to your continued confidence in PPG. This concludes our ready remarks.

And now, Sam, would you please open the road for questions?

Question-and-Answer Session


Absolutely. [Operator Instructions] Your first query comes from the road of Christopher Parkinson with Mizuho. Christopher, you may proceed along with your query.

Christopher Parkinson

Great. Thank you a lot. Can you rapidly give us extra granular replace on the assorted inputs because it pertains to, I might say 2Q and the second half inflation outlooks and in addition to the persistence – excuse me, of sure enter shortages on a quarter-to-quarter foundation? Thank you.

Michael McGarry

Chris, what I might let you know is that our enter shortages stay in line with what we’ve got seen beforehand. Motions are usually on the prime of the listing. We have had some intermittent, due to manufacturing points with TiO2, these points have all been resolved. Force majeures, once we had the final name, they have been over 100. We are right down to about 50 now. We have seen improved reliability in Europe. We have seen improved reliability, unique of the Shanghai space, for Asia. And we’re nonetheless seeing some difficult with trucking right here within the U.S. But sequentially, we do see the tempo of inflation coming down. And what’s most necessary is that our pricing is accelerating and is in a way more real-time foundation.


Your subsequent query comes from the road of Ghansham Panjabi of Baird. Ghansham, please proceed.

Ghansham Panjabi

Thank you. Good morning, everyone. Could you simply give us a bit extra shade on a real-time foundation by way of what you might be seeing each in Europe and China each from a requirement and provide chain standpoint and particularly, which companies are being most impacted? And then associated to that, simply given all of the complexity on the earth and your sturdy capital place, how are you now interested by share buybacks at this level in context of, clearly, the strikes within the inventory and your friends this yr, any adjustments to that versus acquisitions? Thanks.

Michael McGarry

Okay. Ghansham, let’s begin with the share buyback query first. We are at all times going to look to optimize shareholder worth. Our pipeline of acquisitions stays energetic. But clearly, on the share value, we’re going to stability what’s most accretive to the shareholders. And so we’re taking a look at each.

And with reference to China and Europe, what I might let you know is the automobile state of affairs in China is being impacted in all probability a bit of bit greater than among the different markets. We do regard that as transitory. We are totally anticipating as we’ve seen in different situations. People are going to be far more inquisitive about driving themselves taking mass transit. So we do count on automobile restoration in Europe and is the biggest automobile market on the earth. And they’re additionally shifting from inside combustion engines to electrical automobiles sooner than among the different markets. And after all, as you already know, we’ve got extra content material on electrical automobiles and we do inside combustion engines.

So we really feel optimistic about that. So clearly, we’re involved in regards to the rising variety of COVID circumstances. It has plateaued within the final 2 or 3 days. We have gotten all, however two of our vegetation again up and working. And we count on to get the opposite two vegetation up and working within the subsequent 3 to five days, I might say, if we’re being a bit of bit optimistic right here. But general demand in China stays good. I don’t assume the Chinese economic system can afford to have GDP within the low single digits. That’s not good for them. And I do count on the federal government to be aggressive in offering a business-friendly setting popping out of this most up-to-date COVID state of affairs.

And then in regard to Europe, clearly, probably the most regarding space for Europe is DIY. We predicted this. This is in line with what we’ve got advised. We proceed to have a powerful Pro Painter backlog. But DIY and visitors by the big-box shops in Europe is the one indicator that we’re watching out.

Vince Morales

Ghansham, that is Vince. I believe if we expect extra broadly as we put collectively our Q2 forecast, we do count on China to – among the COVID restrictions to ease within the early a part of May and proceed to ease by the stability of the quarter, however they’re actually restrictive proper now. We know there’ll be some carry-on results with respect to logistics and transportation import availability properly into May. So that’s baked into our steering.

In Europe, once more, we’re involved about – possibly overly involved, however we’re involved in regards to the impact on shopper of power costs and simply the general setting. So our forecast has baked a few of that passiveness – shopper passiveness into Q2. We hope we’re being a bit bearish, however that’s what we’ve forecasted and we’ll see how the playing cards fall as we undergo the quarter.


Thank you, Ghansham. The subsequent query is from the road of David Begleiter of Deutsche Bank. David, please proceed.

David Begleiter

Thank you. Good morning, Michael and Vince. Guys, simply on U.S. architectural, are you seeing any discounting by your opponents? And if that’s the case, how are you responding to this extra aggressive pricing setting doubtlessly? Thank you.

Michael McGarry

Okay. David, I’m going to – we’ve got Tim right here. I’m going to let Tim deal with that query.

Tim Knavish

Hi, David, Tim Knavish right here. Look, in our architectural U.S. enterprise, in reality, our architectural enterprise is around the globe. We proceed to get growing sequential pricing. And that pricing, whereas by no means simple to get, is being accepted by our prospects. And we – our prospects have to stay aggressive every single day. So we will assume that we’re seeing that very same type of habits from others out there. So we’ve got not seen what you name discounting out there. I believe the trade realizes what’s happening upstream of us and appearing accordingly.


Thank you, David. The subsequent query is from John McNulty of BMO. John, please proceed.

John McNulty

Yes. Thanks for taking my query. So on the pricing entrance, Michael, you type of indicated you’re virtually at some extent the place it’s real-time pricing. I suppose what are the mechanisms in place that you just’ve put in order that we will truly see that real-time pricing? And I suppose to that additionally, when the uncooked supplies finally or hopefully subside, do you give again a few of that pricing in actual time? Or is that one thing the place we may even see the extra conventional lag and even stability with regards to value? I suppose, how ought to we be interested by that?

Michael McGarry

Well, John, initially, we’re not going to be giving this pricing again. As you already know, we’re nonetheless lagging. If you take a look at this on a 2.5-year stack, so there’s loads of restoration. And the explanation that we’re capable of get extra real-time pricing than ever earlier than is it’s unimaginable for our prospects to argue with what’s happening, proper? They totally see the identical issues that we’re seeing. They are seeing power costs go up. They see uncooked supplies that we purchase, they will see it in their very own programs going up. They can see transportation going up, they’re paying for transportation. And additionally they can not argue that our opponents aren’t pricing.

So from that standpoint, many of the bullets that they normally attempt to fireplace at us, that our salespeople attempt to keep away from, that’s not taking place. And now it’s not a matter of can we take a value enhance? Now it’s about how a lot of a value enhance are you going to take. And the opposite factor that we’ve carried out far more aggressively than we ever have is withhold shipments. So we’re telling individuals, that is the brand new value. And in the event you don’t prefer it, please don’t place buy orders. And if the acquisition orders are available in with out the brand new value on it, we’re sending these buy orders again. And that has gotten the eye of our prospects and so they perceive that we want reduction and we want reduction now. And so you could possibly see that there’s a palpable power within the air to get value will increase as we’re doing it. So whenever you see oil at $107, our prospects are getting priced like that. So I’m actually happy our gross sales groups have gotten significantly better at pricing than ever within the historical past of the corporate.


Thank you, John. The subsequent query is with Stephen Byrne of Bank of America. Stephen, please proceed.

Stephen Byrne

Yes. Thanks. Michael, I’d prefer to drill in a bit of extra on this relationship with Home Depot. Michael, you talked about the 60% stage of a specific metric. I didn’t catch what that was. But I’m positive there’s many, many steps concerned within the rollout of that relationship. And a pair I needed to ask you about was what number of of these 2,300 Home Depot shops does PPG even have a distribution middle out there within the neighborhood to satisfy orders? And then possibly one other one can be what number of of these shops have your reps already began to achieve out to contractors which are shopping for supplies in The Home Depot, however not paint, as recognized by these respective professional desks at these respective Home Depots?

Michael McGarry

Okay. Stephen, I’m going to only let you know the 60% referred to, we’ve solely been capable of inventory 60% of their 2,300 shops, and I’ll let Tim add further shade to it.

Tim Knavish

Yes, Stephen. Look, this system is – whereas it’s in 60% of the shops will proceed to ramp up as we transfer all through the subsequent a number of months as provide state of affairs improves and we proceed to construct stock. We’ve bought our full professional commerce workforce engaged throughout what’s now an omni-channel between our personal community and the THD community. And we’re starting to see buyer conversions already. That will proceed to develop as we be taught, as The Home Depot associates be taught and because the provide continues to construct, and we’ll pivot as mandatory. But we count on this to proceed to develop all year long by a mix of load-in and conversion of contractors. And then we count on this to be a long-term, multiyear development initiative for each us and The Home Depot within the Pro class.

Vince Morales

And Steve, once more, simply extra broadly, and we talked about this on our January earnings name. We assume this relationship and this prolonged partnership actually provides us a significantly increased market entry. And once more, we’re actually concentrating on availability for the skilled painter every day. And as Tim talked about, that omni-channel strategy that may come to our shops, they will go to our sellers or they will go to Home Depot, and that’s all inside a detailed proximity of their job website.

Michael McGarry

And Stephen, that is Michael. The final thing I might add is, look, firstly of the day, each time we go into a brand new market with Home Depot, we get substantial new wins proper out the gate. And what that does is it builds pleasure amongst The Home Depot crew and their confidence stage grows as a result of what they do is they begin creating these profitable tales throughout every of the completely different markets. And that’s probably the most thrilling factor about it.


Thank you for the query, Stephen. Your subsequent query is from Vincent Andrews of Morgan Stanley. Vincent, please proceed.

Vincent Andrews

Thank you very a lot. Michael, I’d be curious to get your up to date ideas on kind of the house enchancment market simply given since our final name there’s been a giant transfer in rates of interest and housing market appears tight nonetheless. So how do you – do you assume the rising rates of interest issues in any respect by way of architectural paint demand and renovation? Or how ought to we be interested by the evolving housing market?

Michael McGarry

Okay, Vincent, I’ll let Tim touch upon this.

Tim Knavish

Yes. Look, there’s – proper now, there’s such a powerful backlog, significantly on the residential facet. There is so many partitions to be painted but, however actually not any near-term concern for ours. And even, clearly, rising rates of interest, there’s going to be some mortgage and affordability affect there, however there’s such a scarcity of general housing in multiunit housing. Multiunit housing continues to climb regardless of the rate of interest rises. Residential permits proceed to climb right here within the U.S. regardless of the rate of interest rises. So completely, it’s one thing that we’re watching. But we’re actually bullish on that for no less than the remainder of this yr, and we’ll see past that.

Michael McGarry

And Vincent, that is Michael. The one factor I might add to that’s that we do a Pro Painter survey, and that Pro Painter survey continues to indicate a really sturdy backlog of our skilled painters. So we’re very involved about affordability greater than rates of interest. But on the finish of the day, our Pro Painters nonetheless present fairly good backlog.

Tim Knavish

Yes, in reality, our final Pro Painter survey which we simply wrapped up, 75% of the painters had a backlog that was no less than as large or increased than what that they had 90 days and a yr in the past, so actually no affect on the quick to medium time period.


Thank you, Vincent. Your subsequent query is with Josh Spector of UBS. Josh, please proceed.

Josh Spector

Yes. Hi, guys. Thanks for taking my query. Lots of traders are centered in your remark final name about EPS in 2023 maybe higher than $9 per share. You didn’t essentially reiterate that at the moment. Just curious, primarily based on what you’re seeing from a value price dynamic but in addition a requirement setting, is that one thing that’s nonetheless achievable? And is that achievable in a state of affairs that you just lay out the place China lockdown affect maybe keep over the subsequent couple of quarters, however Europe maybe enters right into a minor recession.

Michael McGarry

Yes. Josh, I might let you know that the dynamics for $9 stay legitimate, proper? So we’re going to have an enhancing refinish market. That’s an excellent enterprise for us. Miles pushed, we’re truly virtually again to 2019 ranges within the U.S. We see miles pushed enchancment in Europe as properly. So from that dynamic, refinishes in stable form. You see the numbers for aerospace. TSA bookings are all up. Aerospaces proceed to get stronger. You in all probability seen yesterday, Boeing stated they have been going to start out rebuilding or constructing 787s once more. That’s a constructive. There is a powerful backlog of planes. Our share with Airbus has continued to develop. So I believe that’s glorious. We are solely producing in all probability about 80 million vehicles this yr. And so when you consider what the run price of automobile must be, we’re nonetheless very bullish that automobile builds within the U.S. have been muted due to lack of chips, lack of components. And so that is going to get higher. So general, I might let you know that we’re in fine condition. Our synergies are going to be persevering with to come back in, productiveness is constant to enhance. So I really feel excellent, I really feel very comfy round $9. And the value raws, we’re going to be previous that within the second quarter. We’re going to be pricing previous all of it. And then we’re going to be catching up on the early 2021 type of inflation. So we’re heading in the right direction.


Thank you. Next query is from Michael Sison of Wells Fargo. Michael, please proceed.

Michael Sison

Hi, guys. Nice begin to the yr. Historically, third quarter tends to kind of seasonally decline from 2Q, nevertheless it sounds just like the pricing rise goes to get higher as you famous. So is that this yr going to be a bit of bit completely different the place it’s best to proceed to see EPS enchancment? I perceive it’s type of robust to information past one quarter, however type of given so the potential for enhancing volumes and your kind of pricing mechanism, is that one thing that seemingly occurs this yr versus historic patterns?

Vince Morales

Yes, Mike, that is Vince. Probably some of the necessary metrics we’re watching is sequential margin enchancment. And I believe from This fall to Q1, you noticed our margins transfer up 200 to 300 foundation factors, relying on the section. We assume that’s the true indicator of how properly we’re doing, how properly the trade is doing. It’s actually exhausting year-over-year at this level to match. So once more, we’re trying sequentially. And once more, we’re very proud with our efficiency This fall to Q1. We do count on – once more, there’s numerous noise in 2021. There’ll be further noise this yr. So we do count on, as you’ve heard Michael within the opening, some enchancment in demand, as we undergo the yr, particularly as China comes again. We are seeing refinish, aerospace, etcetera. But it’s actually going to be exhausting to match versus historic patterns. And once more, we’re simply trying sequentially. Our margin’s getting higher This fall to Q1, Q1 to Q2 versus historic patterns, and that’s actually our marker.


The subsequent query is with Frank Mitsch of Fermium Research. Frank, please proceed with.

Frank Mitsch

Yes. Good morning. I want to provide props to John on Slide 5. It tells a really useful story as to what you’re dealing with. Obviously, numerous questions already on value. Michael, I used to be simply curious what absolutely the quantity you’re anticipating in 2Q can be versus that 10% in 1Q. And then famous within the feedback that your Tikkurila gross sales have been up low teenagers, excluding Russia. I’m curious how a lot of that was quantity?

Michael McGarry

Yes. So Frank, initially, we attempt to provide you with a information on that second quarter. So in the event you take John’s little dotted line on that chart, you’re going to dot a line as much as round 12%. So that’s in all probability a reasonably good quantity. We actually are internally pushing the crew for greater than that, however I believe that’s a practical final result. I believe the Tikkurila quantity was in that low single-digits if I bear in mind appropriately. But the wonder about what we’re seeing with the Tikkurila crew is that we’re educating them methods to value. And that’s one thing that they traditionally haven’t carried out numerous. And so this has been a beautiful factor for us. And we – as we’ve got talked about earlier than, we expect Tikkurila can look similar to what Comex is. So, we get extra development within the native markets and we get higher worth for what we’re promoting and that results in an ever-improving return on our funding that we invested in shopping for Tikkurila.

Vince Morales

Since we introduced Tikkurila, one of many different companies that carried out rather well in Q1 was our Traffic Solutions enterprise, the prior Ennis-Flint acquisition. We noticed round 25% natural development year-over-year in that enterprise and with a seasonally mild quarter. But once more, we nonetheless ended that – ended the quarter with a really sturdy backlog and now we’re going into a really sturdy quarter.

Tim Knavish

Yes. Hey Frank, it’s Tim. Just so as to add yet another factor on that different massive acquisition for us. Vince talked about 25% prime line development, all-time file quarter for that enterprise. And very similar to what Michael described with Tikkurila, the prior Ennis-Flint enterprise pricing self-discipline was very completely different than what we – how we executed PPG. And we additionally achieved double-digit value enhance in that enterprise for Q1. So actually, actually happy with each of the big acquisitions and the way they carry out for us.


Thank you, Frank. The subsequent query is from Arun Viswanathan of RBC. Arun, please proceed.

Arun Viswanathan

Hi. Thanks for taking my questions. I simply needed to, once more, drill into among the drivers of possibly Q3 and This fall, understanding that your visibility is comparatively dynamic. But when you consider the uncooked materials inflation that you just noticed in Q1 and Q2 or seeing now, are your present value will increase enough to hold you into Q3, or will you be elevating costs much more? And in the event you do have to boost costs much more, may you additionally touch upon the supply of raws and if that has improved tremendously from final yr? Thanks.

Vince Morales

Yes, Arun, that is Vince. Honestly, our visibilities by way of all of the dynamics that play into inflation might be 60 days to 90 days. So, going out to Q3 or This fall is troublesome. And what we may let you know is we’re seeing higher provide in Europe, actually. Better provide within the U.S. China is clearly, we’re going by a transitory interval as a result of restrictions. But we do count on provide to normalize for the stability of the yr. And as we stated many occasions, we do really feel there’s sufficient structural provider capability to simply fulfill international coatings demand. So, we’ve got numerous different noise happening proper now. But sooner or later, we’ll normalize throughout provide/demand primarily based on historic patterns, simply too exhausting to foretell Q3, This fall proper now. We do have sufficient – we do have good pricing entering into, as Michael stated, in Q2, which is sufficient to compensate for the sequential enhance in uncooked supplies. If we see extra uncooked supplies within the again half of the yr, we’ll put in that real-time pricing engine once more.


Thank you, Arun. Next query is with Jeff Zekauskas of JPMorgan. Jeff, please proceed.

Jeff Zekauskas

Thanks very a lot. It appears that your packaging coatings enterprise has slowed down. When we take a look at beverage can demand globally, it appears fairly sturdy. What’s the dynamic that’s happening there? And in auto refinish, what have been the volumes within the quarter year-over-year?

Michael McGarry

Yes. First of all, let me contact on the packaging. Look, we’ve got picked up new share at, I might say, 70% of the brand new beverage can vegetation. So, we’re in excellent form from that going ahead. Second, whenever you take a look at the packaging numbers, you need to bear in mind we had phenomenal comps final yr, and that may make it harder. But our packaging general development this yr goes to be fairly good. So, I really feel excellent about our place in our packaging coatings enterprise. I might additionally let you know that once I take into consideration that enterprise, it’s not simply the quantity, it’s additionally the value that we’re realizing as properly.

John Bruno

Jeff, that is John. I’ll simply touch upon refinish. If you take a look at the U.S. and Europe, on a year-over-year foundation, volumes have been up about mid-single digit, and that’s off of a tricky comp from final first quarter. It was a very good quarter, particularly within the U.S. Asia was off a bit of bit, primarily pushed by once we talked in regards to the Winter Olympics slowed exercise down and there was clearly some restrictions in March.


Thank you, Jeff. Your subsequent query is from Kevin McCarthy with Vertical Research Partners. Kevin, please proceed.

Kevin McCarthy

Good morning everybody. Two questions on manufacturing variance and CapEx. First, on the manufacturing facet, again in January, I believe you talked a few $0.20 EPS drag within the fourth quarter. And I wish to know if that quantity declined within the first quarter, and if that’s the case, how a lot? And what your crystal ball may say for the second quarter? And then on the CapEx facet, if I learn the numbers proper, it appeared like your first quarter spend was $194 million versus $80 million final yr. And simply was questioning if there’s something uncommon in that by way of cadence or any change in your annual vary of $475 million to $525 million for CapEx this yr?

Michael McGarry

Yes. So, we’ll take the simple one first, CapEx. We had CapEx spending in December that we don’t pay for till January. So, the January quantity was in all probability a bit of bit inflated, however our general spend for the yr isn’t going to alter. And we’re nonetheless taking a look at that 3%, $500 million type of vary. So, we be ok with that. As you already know, some – a bit of little bit of that’s catch-up from the under-spending in ‘20 and a little bit of early 2021. So, from a manufacturing standpoint, we had about $0.20 in Q4. We probably had about half of that in Q1. And the problem is it’s not that we’re having challenges making issues, it’s we’re having challenges scheduling issues due to uncooked supplies predictability, what is available in. And if you’re lacking one merchandise, you may’t make the paint. So, that’s a much bigger subject. And after all, a few of it’s also power on the plant. So, as you may think about, going into Q1, we had a sure pure gasoline quantity for Europe. And we’re properly in extra of that after the conflict broke out. So, I might let you know, general, the manufacturing is getting higher. And I might say for Q2, it’s best to anticipate one other 50% enchancment in that quantity.


Thank you, Kevin. Next query PJ Juvekar of Citi. PJ, please proceed.

PJ Juvekar

Yes. Good morning. Michael, I do know you could have been again integrating into resin capability up to now. Just type of how did that aid you throughout this loopy interval of power inflation and all that? And then second query for Vince. Vince, you talked about sequential margin enchancment. But given your kind of first quarter that you just reported, the second quarter steering, first half goes to be down year-over-year. If you proceed to enhance margins sequentially, do you assume you may develop earnings this yr? Thank you.

Michael McGarry

Okay. So PJ, I’ll take the emulsions query. We, as a part of our Traffic Solutions or Ennis-Flint acquisition, it got here with a small resin plant. So, we’re making extra emulsions there. We assume we will enhance the dimensions of that facility. So, the crew is working to try this as properly. So, not solely we’re going to use the asset, it was operating 5 days per week, one shift, now it’s operating 24 hours a day, seven days per week. And we’re going to enhance the dimensions of that. So, we’re capable of get Ba and a few of these different uncooked supplies that go into making the emulsion. So, the supply is best there. And so we really feel comfy that we’re going to proceed to enhance the utilization of that facility.

Vince Morales

Yes. And PJ, on the margins, I’m glad you introduced that subject again up, as a result of I do really feel it’s actually the measurement stick due to all of the noise final yr. Our first quarter final yr was very sturdy, benefited by – the primary quarter of 2021 benefited by some pandemic restoration. And then as we bought by the stability of the yr, our second half of ‘21 was very, very weak. We are not going to give full year guidance on the call here today. But again, the trajectory of margins sequentially for each of these quarters, I think is the true marker for our industry. We do expect, again, from some of the reasons Michael mentioned, abating supply shortages, improvement in our manufacturing and catch-up on pricing, we do expect our margins to improve sequentially versus historical patterns for the foreseeable future.


Thank you. Your next question, Laurence Alexander with Jefferies. Laurence, please go ahead.

Unidentified Analyst

Hi. Good morning. This is Kevin Asberg on for Laurence Alexander. I just had a quick question about the credit market. So, I guess given the moves and also the Fed’s tightening cycle, I suppose I used to be questioning if there was any shift in how you consider monetary leverage and I suppose how a lot you intend or count on that you could possibly flex your stability sheet going ahead?

Vince Morales

Yes. We are – our monetary – our long-term monetary self-discipline hasn’t modified. We are type of within the mid-2s by way of debt to EBITDA. We do have – we do count on to pay down some debt this yr. If we see something strategically, we wish to execute on, we’ll act accordingly. But we aren’t going to shift our methods. Again, in the event you take a look at our rate of interest and blended rate of interest, it’s the best-in-class of our house or near the best-in-class, so once more, no change in our technique or outlook within the close to time period.


Thank you. Next query, Mike Harrison of Seaport Research Partners. Mike, please go forward.

Mike Harrison

Hi. Good morning. A few questions on the auto OEM enterprise. First of all, you could have been coping with some operational inefficiencies there. Has that improved both by way of buyer habits or your capability to handle what’s happening in that house? And then possibly an replace on electrical automobile software wins with a few of your revolutionary choices. Have you seen some wins come by? And are you involved in any respect about battery shortages impacting EV development this yr?

Michael McGarry

Okay. Let’s begin with manufacturing. I might say the– the auto guys have gotten higher at realizing what chips are coming in and when they’re coming in. So, they’re much higher. They are having a lot much less scheduled or unscheduled downtime, it must be phrased. So, our manufacturing has gotten higher as a result of their predictability of operating has gotten higher. And the one query no person requested, so I’m going to throw the reply on the market and be sure to know it’s our automotive crew has priced increased than firm common. So, I really feel actually good about that, the place we’re in that house. And then from an EV standpoint, we don’t see battery shortages this yr. It’s actually a long term development that we’re going to be paying shut consideration to. But proper now, once I take into consideration the place we’re profitable in that house, our protecting coatings that go into the battery has been an enormous win for us. We simply picked up two world-class prospects this quarter. Dielectric powders, is one other space that we’re profitable in. And so I really feel very comfy about that. So, one of many prime 5 guys, we’re additionally operating a long-term cathode binder examine with, that’s extra like a 3-year to 5-year program, however the truth that they got here to us to try this can be a good signal about how they see us taking part in on this house long run. So, I’m very comfy with the tempo that EVs are rising and our capability to service that market.

Vince Morales

And Mike, I simply wish to – I’m glad you introduced the query up once more as a result of I do wish to discuss a bit of bit extra broadly about auto construct. Michael talked about, targets from third-party consultants this yr is round 80 million builds. Again, we expect the market, on a run price foundation, is usually over 90. So, there’s no less than, let’s name it, 10% to 12%, 15% catch-up that may happen within the subsequent, you decide the variety of quarters or months, 12 months to 18 months. On prime of that, we expect there’s a fleet rebuild that has to happen for issues like automobile rental fleets. We peg that as one other 3% to 4% of the market. On prime of that, there’s a list replenishment cycle for – within the U.S., for instance, vendor heaps, so, a really lengthy runway. They are actually getting higher chip availability and extra consistency. And there’s extra chips to come back within the again half of the yr and early 2023. So, very instrumental in our restoration, and we really feel very sturdy in regards to the underlying demand that helps that.


Thanks Mike. Next query is from Jaideep Pandya of On Field Research. Jaideep, please go forward.

Jaideep Pandya

Thanks. The first query actually is round your protecting and marine enterprise. Appreciate you guys are greater in China nowadays, however how do you see your backlogs evolving now that oil costs are excessive, gasoline costs are excessive and likewise among the marine finish markets are doing extraordinarily properly by way of money era? So, do you assume that subsequent 2 years we should always see a fabric enchancment on this space? And then the second query actually is round auto – the auto enterprise of yours. Appreciate, Vince, what you simply stated. But like if we go by the speculation that there’s cannibalization the place EVs are consuming into the ICEs, simply wish to perceive your mounted price construction. So, within the sense, within the subsequent 5 years, if we’ve got 90 million vehicles, however 25 million or 20 million of them are EVs, are you able to truly scale back your mounted prices in your conventional ICE-based auto OEMs? And alternatively, clearly, win in EVs? And then are you taking a look at any bolt-on acquisitions, as an example in EV-related coatings for batteries, or do you could have already publicity there? Thanks so much.

Michael McGarry

Okay. Jaideep, we’ll begin with the brand new builds. Our marine enterprise is up considerably and it’s going to proceed to develop. New builds are up 20% year-over-year, and it’s up strongest in China, which is the place we’re strongest. So, this can be a good marketplace for us. The oil and gasoline property which are going to be constructed due to the Russia conflict on Ukraine are additionally going to extend. So, that’s actually good for us. LNG tankers are actually good for us. This is an space the place pool fires result in a product that we promote which are best-in-class. So, I’ve excessive hopes for our groups, our Protective/Marine enterprise over time that’s persevering with to do properly. When you discuss in regards to the auto enterprise, mounted prices, we truly paint EV vehicles similar to you paint an inside combustion vehicles. So, we’re going to nonetheless have all that enterprise and thankfully you promote further paint for the battery field. So, truly, your mounted – your price construction improves as the quantity goes by. So, the transition from inside combustion engines to batteries is definitely a very good development for us. And we’re main within the house on this space. So, we’re doing – I might say, we’re doing higher than our typical market share on inside combustion engines. Now, will we take a look at acquisitions in that house, we’re at all times searching for issues that add shareholder worth. So, I might let you know that we’re at all times . It is a extremely aggressive house proper now. There is quite a lot of individuals taking part in in it, whether or not it’s the protecting coatings, whether or not it’s movies, whether or not it’s powders, whether or not it’s thermal hole fillers, there’s a wide range of completely different functions on the way you win in that house, however we really feel excellent about this.


Thank you, Jaideep. There are not any additional questions ready at the moment. So, I wish to hand the decision again over to John Bruno.

John Bruno

Thank you, Sam. Before we wrap up the decision at the moment, I needed to let everybody know that Mary Anne Bendzsuk might be retiring within the second quarter and this might be her final quarterly earnings name. I believe lots of people on the decision had handled Mary Anne and she or he has been a valued crew member right here at PPG for a few years and supplied glorious assist to the funding group, supporting Investor Relations for greater than 20 years. We wish to thank Mary Anne and want her and her household all the very best in retirement. That concludes at the moment’s name. If anyone has some other questions, please give us a name. Thank you very a lot.


That concludes the PPG Q1 2022 earnings name. Thank you all to your participation. You could now disconnect your strains.

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