Q2 2021 PPG Industries Inc Earnings Call
At this time I would like to welcome everyone to the P. P. G second quarter 'twenty 'twenty, 1 earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session if you'd like to ask a question. During this time.
The press Star followed by the number 1 on your telephone keypad, if you'd like to withdraw your question. Please.
Please press Star then 2.2.
To allow everyone an opportunity to ask questions.
The company requests that each analyst ask only 1 question. Thank you.
Now I'd like to turn the conference over to John Bruno Vice President of Investor Relations You May begin your conference.
Thank you Jason and good morning, everyone. Once again this is John Bruno we appreciate your continued interest in PPG and welcome you to our second quarter 2021 financial results Conference call. Joining me on the call from PPG are Michael Mcgarry, Chairman and Chief Executive Officer, and Vince morale of senior Vice President of.
Chief Financial Officer, our comments relate to the financial information released after U S equity markets close on Monday July 19, 2021, we have posted detailed commentary and accompanying presentation slides on the Investor Center of our website PPG Dot com.
Slides are also available on the webcast site for this call and provide additional support to the brief opening comments Michael will make shortly following management's perspective on the company's results for the quarter, we will move to a Q&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 the potential effect on <unk>.
<unk> operating in the financial performance. These statements involve uncertainties and risks, which may cause actual results to differ the company is under no obligation to provide subsequent updates. These forward looking statements. This presentation also contains certain non-GAAP financial measures. The company has provided in the appendix of the presentation materials, which are available on our website.
Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures from additional information. Please refer to <unk> filings with the SEC now, let me introduce PPG, chairman and CEO Michael Mcgarry. Thank.
Thank you John and good morning, everyone I would like to welcome everyone to our second quarter 2021 earnings call.
Most importantly, I hope you and your loved ones, the remaining safe and healthy.
Now let me provide some comments of supplement the detail financial results. We released last evening for the second quarter. Our net sales were a record and nearly $4.4 billion and our adjusted earnings per diluted share from continuing operations were $1.94.
Our adjusted EPS was significantly higher than the second quarter of 2020, partially due to last year's second quarter, including various pandemic related impacts.
Looking back the pre pandemic result, our adjusted EPS was similar to the second quarter of 2019, despite sales volume is being 6% lower than that period.
And we are dealing with historical high levels of raw material inflation in the current period.
Our strong year over year sales reflect a partial recovery from the unfavorable pandemic effects of last year, but also include a better than market performance across many of our businesses for this quarter.
We achieved these higher sales levels, despite significant supply and component of disruptions, including ones that reduce the overall manufacturing capability of our customers.
Coming on in the quarter. We expected. These disruptions would have an estimated impact of $70 million to $90 million.
But the actual impact was much more severe and closer to $200 million.
Our adjusted EPS in the second quarter.
The near all time record levels was below our April forecast 3 main factors impacted the difference.
Due to supply disruptions, we experienced unprecedented levels of raw material and transportation costs that continually elevated as the quarter progressed.
This drove raw material inflation to be up a mid to high teen percentage on a year over year basis versus our original estimate of of high single digit percentage increase.
Our automotive OEM business was impacted most significantly from supply disruptions as we estimate that more than 2 million less cars were built than initially expected during the quarter.
This impacted our sales by about $100 million are higher than 40 million more than we expected in April.
Finally, as we expected the supply disruptions like the shortages of certain raw materials, we had anticipated an impact of $30 million to $50 million, but the actual impact was closer to $100 million.
We are highly confident that the sales related to the production disruptions will be deferred to later quarters and this will elongate the global automotive OEM recovery.
As I mentioned in April coming into the year, we were expecting an inflationary environment and had prioritized selling price increases across all our businesses.
This helped us achieve solid price increases year to date and the pace of price realization is well ahead of the most recent raw material inflation cycle in 2017 and 2018.
Clearly this inflation cycle is much higher than anyone anticipated and were continuing on a business by business basis working to secure further selling price increases.
This includes executing additional pricing actions during the third quarter.
As a reminder, the second quarter of 2021, whereas our 17th consecutive quarter of higher selling prices.
We're also continuing our strong cost management evidenced by our SG&A as a percentage of sales being 130 basis points lower than the second quarter 2019.
This is being supported by our ongoing execution on our structural cost savings programs, realizing an incremental $40 million of savings in the second quarter.
We have increased our targeted full year 2021 savings by about 10% to of 135 million.
In the second quarter, we finalized 3 acquisitions take Kurilla Borg and settle on.
We funded the acquisition through a combination of cash and external financing, which came in at a very attractive borrowing rate we.
We had yet another strong operating cash performance during the quarter and ended the quarter with about $1.3 billion of cash and cash equivalents, giving us continued flexibility to do additional accretive cash deployment in the upcoming quarters.
In regards to our other 2 recently completed acquisitions, our new traffic solutions business.
Which is comprised of the N S. Flint acquisition performed to our expectations in the quarter. Despite significant challenges with raw material availability and its order book is at historical highs entering the third quarter.
Diverse of a flex acquisition, while smaller is performing well and it's already helped us win significant protective coatings project in Central America due to the advantage of technologies that we acquired.
Another notable accomplishment during the second quarter was the appointment of our Companys first ever Vice President of global sustainability.
PPG has been a clear ESG leader in the coatings industry through our market, leading sustainable products and we have plans to further improve our overall ESG program.
We will provide updates on these initiatives in subsequent quarters.
Moving to our current outlook. Most important is that we're continuing to see very robust and broad based demand globally.
Including in many industrial and OEM end use markets and strong architectural coatings trade activity in the U S.
Many of our customers have indicated that their order books were of high levels exiting the second quarter.
We anticipate the strong global demand pattern to continue.
In addition, we expect the eventual restocking of inventory to occur in many of our selling channels.
Either later this year or in 2022.
In the near term, we expect some of our customers. We will continue to be challenged with input or component shortages. So their production capabilities and schedule is likely to remain choppy throughout the third quarter.
PPG has also experienced and the continuation of spot outages of direct coatings raw materials.
As a result, we expect some unfavorable sales impact from both our direct supply chain disruptions and the production curtailments of some of our customers in the third quarter.
Our current best estimate is that our sales are expected to be unfavorably impacted by about $150 million in the third quarter due to these issues.
We expect these sales will be largely deferred to subsequent quarters.
We also expect raw material cost to remain at elevated levels in the third quarter. Our current best estimate is that they will be inflated by much says 20 per cent compared to the third quarter of 'twenty 'twenty with businesses in our industrial coatings segment experiencing the largest increase is due to the raw material mix of those types of coatings.
As a result, all of our businesses are securing additional selling price increases.
Due to the significant increases we experienced in the second quarter and anticipate in the third quarter. We now fully expect to offset raw material cost inflation in the fourth quarter on 2021 on a run rate basis.
As I've said previously these current disruptions are temporary and we strongly believe there is sufficient capacity available on our supply chain once the operating conditions normalize.
I am very pleased that we've completed by recent acquisitions since December 2020.
In the third quarter. These acquisitions will add about $500 million of incremental sales of our company.
As we continue to integrate these acquisitions will start to realize meaningful synergies that will be a strong earnings catalyst.
We're also witnessing domestic flight activity picking up all over the world. This will begin to benefit our commercial aftermarket business in aerospace in the second half of 2021.
And the information we posted on our website yesterday evening.
We're projecting the aggregate sales volumes to be up a low single digit percentage in the third quarter compared to the prior year quarter.
With differences by business and region.
Including our acquisitions, we expect overall sales growth to be over 20 per cent compared to the third quarter of 2020.
In addition, full year 2021 adjusted earnings excluding the amortization expense and other nonrecurring items is expected to be $7.40 to $7.60, which at the midpoint would be about 13% higher than the adjusted EPS, we realized in 2019.
Despite the significant raw material inflationary pressures, we are dealing with this year and.
And the fact that sales volumes are still not fully recovered from the pandemic when compared to 2019.
Finally, I'm very pleased that our board recently approved a dividend increase of about 10%.
Our September payment, coupled with the anticipated payment of a similar quarterly dividend in December will Mark 50 consecutive years annual per share increases and the company's dividend.
This is another testament of our company's legacy of consistently rewarding our shareholders and the confidence that the board and I have and our ability to continue to generate and grow our operating cash flow.
In closing I could not be more proud of our now 50000 employees around the world who serve our customers our communities and our many stakeholders the.
Dedication and commitment to doing better today than yesterday every day helps assure that PPG continues to protect and beautify the world.
Thank you for your continued confidence in PPG. This concludes our prepared remarks and now Jason would you. Please open the line for questions.
Thank you at this time I would like to remind everyone in order to ask the question Press Star then the number 1 on your telephone keypad and to allow everyone an opportunity to ask a question the company requests that each analyst to ask only 1 question.
Pause just for a moment to compile the Q&A roster.
Our first question comes from Ghansham Panjabi from Baird. Please go ahead.
Hey, guys good morning.
Good morning.
So I guess you know Michael what do you think that's a realistic timeline for the recovery in auto OEM production I mean between 2 Q3 Q that looks to be about 200 million in total.
The deferral of a couple of quarters or is the longer longer than that.
Based on what you see at this point and then just ultimate broadly you know theres been some concern of the market about slow down in China can you just sort of give us the real time pulse as to what you're saying of the region. Thanks. So much.
Well of Ghansham first of all I would say that the auto industry continues to have significant demand in all places around the world, except for Europe, and we do anticipate Europe recovering, but probably had a little bit slower rate because of the pace of vaccines over there but.
But I would tell you overall you know we're anticipating that there's going to be a about a million cars less built in the third quarter than we had originally anticipated because of the chip shortage.
And the right now if you look at the overall pace of car builds.
They're still below peak levels, but demand is recovering so I anticipate that we're gonna have a very strong back half of 2021.
And of very good 'twenty 'twenty 2 so from that standpoint, you know inventories across a lot whether they're in the U S or China are still at quite low levels and so I'm can you know still remain very optimistic from a China standpoint, specifically inventories are.
Probably in that 40 to 45 day range, which is below average slightly.
Demand remained strong and what's most encouraging to me is that the pace of Evs continues to pick up and as you know our our positioning on Evs are very strong and so we anticipate continuing to be above industry build rates and the content.
And Ghansham. This is Vince just to dovetail on Michaels comments, if you look at the automotive OEM, particularly in the U S. You know 1 other benefit we expect to occur later this year early next year as chips become available as the rental car fleets. The rental car fleets are theres, a sparse inventory in those in those fleets.
And so we know those typically account for 10% to 15% of auto builds annually and we know that 10% to 15% of.
It will be higher going forward until they replenish those fleets.
More broadly of China.
You know, we're seeing well, we're seeing a lower growth rate, we're still seeing good growth across many of our end markets. So I think the of the anecdotal information you referenced is accurate the growth has come off what was very high rates, but it's still a solid growth rate going forward.
The next question comes from John Mcnulty from BMO. Please go ahead, yeah. Thanks for taking my question with regard to the raw material catch up in and where you where you catch up with price and I think Youre looking forward I think you said in the in the fourth quarter of toward the end of the year is that exclusively on price.
Getting high enough to catch up rate do you have any assumptions baked in for raw material is actually coming off from these levels and then I guess tied to that anything about the raw material environment right. Now that's making you think about possible changes to your supply chain and how you might be how you might be thinking about that going forward.
Yeah. John This is Michael first I'd say, there's no change on how we're approaching the raw material. We think this is a temporary dislocation we've actually been very surprised at the recovery rate in this period typically even if you go back and look at the most severe hurricanes IRA.
Liars of being able to get online and get back up to full rates pretty quickly. This time, they've been significantly challenged and it's been compounded by the lack of transportation equipment, not just equipment, but more importantly drivers. So we've had a number of situations, where we had to go out and buy spot material.
Oh, and there was challenging to get trucks to be able to deliver that because of the inability of some of our suppliers. So if you asked me if there's any change where you might do there could be some additional suppliers brought into the mix to you know provide us some additional flexibility, but other than that I don't think there'll be any.
Major changing changes, but overall I would say raw materials. The only 1 that were currently forecasting to be of moderating is the oil.
And as you saw oil in the past week has started to decline. So the solvents would parallel the oil price changes are so that's the only 1 we have right now on our model.
Yeah.
And John it.
Your first question on our assumptions on raws in the fourth quarter, we would be assuming the from the on a sequential basis, the third quarter of the fourth quarter of the raws would stay in a similar at a similar level that's our current assumption.
The next question comes from David Begleiter from Deutsche Bank. Please go ahead.
Thank you good morning, Michael.
Michael Vince can you quantify how much worse price versus raws of being Q3 versus Q2, and how much better you think there'll be Inc. Q4 versus Q3.
Thank you.
Yeah. David This is Vince I think it's similar to the question. John just asked again, we we gave guidance out a 20% raw material inflation give or take in Q3, we.
We did include in the slide packet that was posted last night our website.
Our our initial views of pricing of those views will be somewhere between 4 and 5% in terms of our price capture that's still well short of what we need we typically need.
You know of 40 to 50 per cent of the inflation to recover fully.
So we're still looking at additional pricing actions throughout the <unk> across all of our businesses all of our regions.
And the <unk> to John's comment the John Bruno's comment a minute ago, what we expect inflation to remain high we do expect to remove some of the spot buys.
We're doing currently those are typically coming at a large premium to traditional pricing our list pricing.
And we're still of looking at additional price capture or a full realization of the 3 key price capture in <unk>. So again on a run rate basis, our targets to get of a fully offset in <unk>.
The next question comes from John Roberts from UBS. Please go ahead.
Thanks.
On the raw material and logistics comments, all seem to be North American centric could you give us maybe a more global view on what youre seeing in the raw material outlook in Europe and Asia.
Yeah. John This is Michael I would actually say that the Chinese of raw material inflation was actually higher AR that was driven primarily by of Poxes isocyanate.
And so those were the most challenging thing in China. The the rapidity of the significant increases we saw on China have kind of leveled off at this point in time I would say in Europe. They are also coming up but not quite the same rate as China.
The availability in Europe, it is better than availability in the U S, but still not great.
Our availability in China is there if you're willing to pay for it.
So for spot so we've been really pushing our customers hard if they want to buy more than contract that they need to pay extra for that additional volume and so from that standpoint, we've been working closely with our customers on this additional raw material inflation and I would say per Latin America, it kind of mirrors the.
The us market.
John if I could just add we are seeing with oceangoing freight some of that has been significantly delayed so even though if there's availability and it's a product that's being ported around.
It's not showing up in time.
So again, that's exasperating some of the issues. We expect again a lot of these logistical issues to twos begin to self correct in the third quarter of <unk>.
Q2, we have to remind everybody Q2's, typically the peak quarter for a lot of companies a lot of industries Q3 things start to moderate in terms of overall global economic demand.
From a seasonal perspective, so again, we expect some of this the self correct.
Thank you.
The next question comes from Stephen Byrne from Bank of America. Please go ahead.
Yes. Thank you 1 of the drill in a little bit about the moonwalk rollout in Europe. You mentioned 750 installations can you put that into perspective.
So many auto body shops are there in Europe.
The 50, just scratching the surface or is this meaningful and with respect to the 20th per se.
The new customers are you, primarily targeting new accounts and share gains with this technology and <unk>.
The comments on the you know the hour.
Outlook for share gains would be helpful. Here.
Yeah. Steve. This is this is Vince if you look across Europe, and the U S. Theres thousands upon thousands of body shops.
So this is a small percent relative to the to the total universe I think for US. What's most exciting is every 1 of these we can make and give the market is immediately soldiers with the backorder.
The significant back orders in Europe.
This is now we're moving this now to the U S. We are certainly providing our existing customers.
Who value the speed that this provides for their for their for their paint shops.
All of that productivity, where we're providing them with the opportunity to purchase this first but we do have an allotment of these that are really focused on new customer wins.
And I think as we roll out the kind of this 80.20 strategy and we're going to continue to see a customer wins around the body shop productivity, which which the premium shops. The msos prefer that's their business model.
So still early innings here.
But we're exceptionally pleased with the traction this is getting and we'll continue to update you and continue the rollout more moonwalk devices as we go forward.
The next question comes from Mike Sison from Wells Fargo. Please go ahead.
Hey, guys. Good morning in terms of the.
The raw material pricing GAAP, but any thoughts between each of the segments are there are some segments of little bit better off then.
And then again in terms of getting pricing on closing that gap of the other segments of.
That of doing.
The book well it might take a little bit more time to get to close the gap.
Yeah, Mike This is Michael so I mean, it's the traditional PPG model here. So the the GAAP is the largest in automotive for 2 reasons..1 they had the biggest inflationary GAAP and the second is it's the most difficult to get price increases with the automotive guidance, but I'm very pleased to announce that we have gotten positive.
Price in every automotive a region of the world. So we are making good progress there and well ahead of.
Where we were in 2017.2018, I would say the next inflationary would be on our industrial coatings of business. They also buy a lot of Epocrates isocyanate. So they would have been hit a second most difficult the business that are impacted the least is aerospace due to the.
The raw material mix, we have there the place that we'd probably have closed the gap. The most is architectural were working also hard on traffic solutions. This is a business that historically the price was a secondary thought we the elevated that in this business and we've been very pleased at the pace of recovery and our traffic Solutia.
The business. So I don't think it's any different than what we've seen in years past and I think we're going to.
Continue to push hard to close that gap with our automotive customers and that's I'm really pleased when you think about where we are in this cycle versus where we were in the last cycle. It's it's a light years apart.
The next question comes from Jeff Zekauskas from J P. Morgan. Please go ahead.
Thanks very much.
I think at the end of the last quarter, you thought that you would earn between $2.15 to 20 of share.
When did you realize that you wouldn't be able to do that.
Was it something that happened at the very end of the quarter or in the middle of the quarter.
And in your.
In the Mississippi estimate of how much you might earn in the second quarter.
What was the real sources of that was the information.
Or did it turn out the raw materials really rose very very quickly and true can you can you talk about the history of the way you assessed the.
Quarter on.
Okay.
Over the past couple of months.
Yeah, Jeff This is Vince so if you if you look as you know we came out early in April we were 1 of the early reporters in April.
The directly after the weather event in Texas at the.
That point in time, we were hearing from our suppliers and as Michael alluded to earlier that this would be a multi week startup of <unk>.
Restart up as we progressed through the quarter on especially in June we continued to see outages and escalation of of raw materials.
Specifically in the June time period.
Which is why we're seeing Q3 higher than Q2 in terms of our raw material estimates.
We continued to see outages, particularly around transportation those outages.
Continue to worsen, especially in June and our customers continued to have a spot production curtailments on their from their perspective.
So as we were in June we continue to see the automotive market be heavily impacted by chip shortages and a lot of customers and of particular industry.
Who had earmarked Q3 for some downtime actually took it in Q2, so as we went through the quarter. We saw the the difficulties continue to grow so that that really was the timeline and again as you look at our.
Guidance for Q3, you could see some of these things are going on certainly carry forward into the third quarter that we were not anticipating we were anticipating them being rectified. Some point mid Q2, certainly not even before late Q2.
And Jeff This is Michael I would say, we're disappointed that the raw material inflation continue on it so it's a high level throughout the quarter and.
It just seemed to get worse and when you bank on your suppliers, saying, they're going to get to 20 trucks and they get you 10.
That doesn't help you. So we you know we we own up to this the raw material inflation missing you know, that's our kind of ability.
The next question comes from Chris Shanxi the car from Citi. Please go ahead.
Yes, hi, good morning.
No.
Michael given the shortage of raw materials are you able to make enough paint products and where do paint inventories stand in the supply chain in your stores for example, or in the Msos in refinish.
And if paint and windows of below normal.
Could there be sort of paint restocking cycle.
Sometime in second half of next year can you talk about that.
So P. J I tried to cover that in our opening remarks of inventory levels in all our businesses are at exceptionally low levels you saw that in our working capital numbers I've actually asked our businesses too.
You know of share with me the amount of product. They made in April may June and versus how much of that went out the door on virtually everything we made went out the door. So inventories are you know have gone backwards for us we.
We see very low inventories in the chain and many of our customers as well. So if you look at R.
Our architectural guys are they typically don't carry a lot, but they have even less if you look at our industrial customers I've had more calls from customers directly to me in the past quarter than I've had in the past probably 3 or 4 years, so customers have low inventories as well.
<unk> I do think they will be of restocking of course as you know in aerospace of inventories I would say were at rock bottom because they couldn't afford to buy anything previously and so theyre trying to stock up now are ahead of what they anticipate as increased demand.
So I can't really think of a single 1 of our businesses that have any kind of material inventory either on the shelf or at our customers.
On the P. P. J. This is Vince if you look ahead of you know we do think again theres very good underlying demand in many of the markets that we supply automotive being a proxy as we as we talked about earlier there are several steps, where we see automotive sales continuing for multiple quarters.
There isn't a restock that will take place just to get back to normal.
Safety stock levels, and our and our customers' inventory. So so we feel good for the next several quarters.
About the ability to sell product.
In the ore or our customers' ability to sell product more so than we have for quite some time because of this very strong underlying demand around the world.
The next question comes from Frank Mitsch from Fermium Research. Please go ahead.
Hey, good morning folks.
Michael You mentioned during this call that are you maintaining enough flexibility to do accretive cash deployment and so as I am on.
The thing there's a number of comments in the release in the transcript on this call. Today that says you know you guys are very constructive on your outlook. So I was just curious as to.
What extent might you be able to be opportunistic.
On on buybacks.
Well Frank as you know, we always prefer the acquisitions over the buybacks clearly we take a look at this on a monthly basis and you saw that we finished the quarter with about 1.2 to $1.3 billion of cash we're coming into our very strong cash period, where we generate a lot of cash in the back half.
Half of the year.
I think our current a ratio of 2.1, so you know from that standpoint, and with cash coming in we're in a good position there have been a number of the top 30 coatings company had been taken off the board in the last couple of let's call of last 3 or 4 quarters.
So the availability of targets is probably not as good as it was 6 months ago.
So you know right now we're going to keep an open mind for that and we're going to remain balanced and how we deploy cash you saw that we increased our dividend we think that was important.
Certainly 50 years of dividend increases the significant milestone.
And right now I would say that I like our acquisition.
You know you know order log book, if you owe where we stand but the pipeline, but overall I would say we're going to remain balanced on this viewpoint.
Yeah.
The next question comes from Laurent <unk> from Exane BNP. Please go ahead.
Yes. Good morning, all on my question is on architectural and the guidance on Q3 with volumes down in both the Americas and Europe.
I was wondering if you could talk about some I guess the of the different buckets of what's driving that she and the non demand cheesy share loss due to pricing as they hit the detail from the channels DIY comps destocking et cetera. Thank you.
Laura on so I would say from an architectural standpoint, there's certainly been no share loss, we've been really pleased with the how we're performing in architectural.
You saw the numbers, we reported in both Europe and the U S are strong numbers. So from that standpoint, you know what we're looking at is of shift as we anticipated would eventually happen of people moving from DIY.
To trade as people start to go on vacation and start to spend their money.
They're going to hire professionals that come in and do that we see our trade order book, increasing the offset the.
Weakness in DIY.
But what I would point out is DIY is still well above 2019 levels and so when you combine the 2 you know we're pleased with the outlook on where we stand I think the outlook. We gave for the third quarter for architectural is is quite strong and we are pleased with the performance of the business.
Yeah.
The other on I would add this is Vince I would add we are still in.
In the third quarter expecting to experience the shortfalls for raw material supply from coatings raw material supply. So it is moderating our ability to supply some of our key products, especially on on the <unk>.
U S side, so trade in DIY.
So that is 1 of the Limiters, we do have in terms of our sales outlook.
Yeah.
The next question comes from Vincent Andrews from Morgan Stanley. Please go ahead.
Pretty much just wondering you.
We're halfway through 2021, or maybe you could give us an assessment of the cost that came out with with Covid did you on the cost that youre able to avoid.
You know as we're now halfway through the year do you have a sense of any better sense of how much of that is going to come back.
Yeah.
Yeah. Vincent this is John So we think we're kind of at parity now there might be some travel and entertainment just some modest stuff that comes back is as things continue to open up but we felt that on an annualized basis that we could bank.
We set up you know on a quarterly basis $25 million to $30 million of the temp savings we had in our $30 million of benefit in the in the second quarter. So I think this is something we probably won't talk much more about because at this stage you know I think we've we've made some of these cost of permanent.
<unk> and a novel just ebb and flow more with our all of them and demand activity.
Thanks very much of it.
Vince I do think of when you look at our multi year selling general administrative cost as a percent of sales you can not only see the the interim savings as we call. These are dropping to the bottom line, but you can also see more importantly, the structural savings.
We've introduced for a couple of years now.
And those are also benefiting us and then on top of that just to dovetail from Michael on the acquisitions, we do have the.
The significant amount of synergy savings targeted for the 5 acquisitions, we gave on a target earlier in the year. We're on target for that although some of these of just closed so a lot of those savings will be of visible on we're more visible in 2022.
Our next question comes from Kevin Mccarthy from vertical Research partners. Please go ahead.
Yes, good morning.
Michael there's been a lot of focus on automotive.
As a source of the negative variances on I'm curious if we put automotive on the side for the moment would you care to call out other businesses that would have disappointed relative to your prior expectations and.
If so was that more driven by the demand variance or or price cost spread the that was.
Spread across many of your businesses.
Yeah, Kevin So the 2 businesses that were impacted besides automotive the most of us architectural due to the emotions and traffic solutions on the same thing. So we had a hard time getting the emotions and resins from our suppliers you can't make paint without that and so we were you know a hand to mouth on.
And those kind of things despite having significant demand.
If you go into any of our stores of go anything in the big boxes or asking the D. O teaser of what I'll tell you that all of the suppliers of struggling to put.
Put paint on the shelves. So I think that was the most.
<unk> things, but it is interesting you know we didnt track it because I didn't think it would become a material number but the number of other places that chip show up you know, whether it's appliances or other you know of heavy duty equipment. So everybody is being impacted somewhat but it didn't it really didn't turn out to be enough of a.
Number to call out, but I would say the 2 biggest ones or architectural and traffic solutions.
Yeah, Kevin I'll, just add that in many of our businesses automotive obviously, the 2 Michael mentioned traffic solutions architectural.
We could even get into the aerospace.
Some of our industrial businesses Refinish, we have a higher order book exiting Q2 that we just could not fulfill so our order book is as we alluded to earlier.
Strong, we just kind of be able to fulfill that with product availability.
Yeah.
The next question comes from Arun Viswanathan from RBC capital markets. Please go ahead.
Great. Thanks for taking my question.
So I guess I just wanted to go back to the the last question a little bit in the understand I guess potentially some of the the bridge items for 'twenty 2 versus 21, so you'll have a full year of the accretion on many of the deals you'll have kind of a normalization in some of your volumes and hopefully you will have caught up on on <unk>.
<unk> costs. So I think you made the comment that your ninth your 'twenty, 1 EPS, it's going to be a day.
Double digit growth from 19 levels.
Is that a fair starting point when you think about 'twenty 2 and is there just given what you've seen on the cost side is there are opportunities to continue to grow margins.
You recover of that price cost spread in 'twenty, 2 as well thanks.
Yeah, Yeah, Arun this is Vince a little bit longer looked and we want to do at this point in time, there's still a lot of fluidity just in the economies out there.
I think we tried to lay out today some of the positive things. We think are our in store not only for us, but the industry. Good demand, we do think PPG specific.
These acquisitions, along with the synergies that come with them.
We hope we get to a normal price cost environment, but.
But it's a little too early to make that call for what what the supply chain looks like going into 2022 right now we think it will normalize.
But it's just too early to make all of these calls at this point in time of the year, we certainly feel very optimistic about.
Next year, just given the overall demand outlook typically when you have strong demand.
On the parlays into the positive.
Results better cost spread on a on a bigger sales base et cetera.
The next question comes from Duffy Fischer from Barclays. Please go ahead.
Yeah. Good morning, I was.
Just wanted to drill down on volume, particularly in Q3, if we can you know Vince you talked about 445% price rolling through and relative to your low single digit growth I mean, that's kind of all of the gross then that would be in both segments as price, which would mean the volumes kind of flat to maybe down.
And Michael called out of 150 million of kind of a foregone sales because of issues, which might add another 4% to that so what that would say is kind of the run rate volume growth. It looks like it's 3 ish percent in Q3, which feels pretty light given how early we are in the cycle. So can you just talk about what you think the on.
Underlying volume growth is in your businesses kind of Q3, and then how is that set the table then for continued volume growth. The rest of this year into next year.
Yeah, Duffy I'll try to give us a shot of lot of members of their look when you look by business. You know, we're still constrained as Michael alluded to on our ability to fully satisfy our order book, we expect that to continue well into Q3, if not fully through Q3 the.
Some of our customers are still well constrained on the ability to produce so again, we gave out the guidance of low single digit organic growth.
And we think Theres a lot of moving pieces in there.
What again I'll just pass the pass through to use our confidence level that.
We're not gonna be able as an industry to supply the demand that's out there even by the end of Q3. So you know how all these pieces come together Q3 versus Q4.
Still see how that's determined but strong very strong underlying demand recovery demand occurring in the aerospace starting to occur on aerospace some.
Some demand in refinish as does traffic miles pick up.
So we're just confident there is underlying demand there and we just kind of be able to fulfill it.
The next question comes from Bob <unk> from Goldman Sachs. Please go ahead.
Thank you good morning.
Michael Vince I think you guys talked about having to go on to the spot market for procurement.
Hum tolerant on your customer is going to be Oh that is the basis of price hikes and sustaining price. So ex that into next year on some of the spot markets.
Part of normalize a bit into the confidence you can retain those price hikes and is there any scope for you to use the force majeure or impacts that you suffered from somehow pass those along on your own.
In terms of your customers or is that just something that that doesn't happen. Thank.
Thank you.
No. Bob This is Michael we have been aggressive in trying to get our customers pay for the additional freight charges that are you know if they want to move up orders if they want to.
You know us to buy from spot people in order to keep them running we have gone to them and ask them to pay for that but that's a portion of the overall raw material increase.
Even without the spot where there's still been you know you know 15% to 17%. So these are real increases they're seeing them in their own cost structure as well, so they're not able to debate whether or not we're having these things so as Vince alluded to earlier, you know we need to get about 50% of the overall increase.
And so we've been out there with some very significant increases and I think we're making a lot of progress in that regard and clearly you know we'd like to have moved faster, but when I look back on 2000, and 2017.2018 were well ahead of that so I.
I think the customers are very understanding of this and you know what it takes is the whole market to move to capture it and we've been out early and often and we'll have to continue to do that in <unk> and <unk>.
And Bob I'll, just add that you know most of our customers are facing similar issues beyond just coatings.
And they're trying to supply their customers and their shorter product as well. So so this is a pervasive issue, that's well known across the materials and industrial spaces.
And our customers are seeing inflationary.
The pressures from a variety of different industries.
We're 1 of those industries of course.
So again that the acceptance level of as Michael alluded to is higher today than it certainly was in past cycles.
Yeah.
The next question comes from Mike Harrison from Seaport Research Partners. Please go ahead.
Hi, good morning.
Had a question on the aerospace business with within the aftermarket business do you have situations, where some of these aircraft have been mothballed for several months and they need significant maintenance or even repainting before they return to service, maybe just talk a little bit about how that aftermarket business.
It's recovery is playing out.
Yeah. So the easy 1 is on the repaint side, they don't need repainting per se, but if any if a customer had returned planes to the less lease lease or the always planes they'd be returned in a white format. So we have been painting of lot of planes white.
During the pandemic now we're not paying any white right now because they're gonna be returned to service.
So there will be a pick up of that.
Also what we historically fine is after events like this you will see some rebranding being done. So we're anticipating that will also happen maybe in 'twenty 2 'twenty 3 'twenty 'twenty 4.
But overall right now when you take of playing out of out of storage.
If it was properly stored there is some maintenance they need to do on it before it goes back in the service, but then they don't have to do the big heavy checks that they do it at the big maintenance cycles, but overall inventories are exceptionally low our order book and or I should say our book to Bill ratio has improved significantly.
In aerospace our backlog has increased and so right now the biggest challenge we have in our aerospace business is a labor, making sure we get enough qualified labor to work on the plants to be able to get the product out the door.
So we're feeling very very good about aerospace on the MRO.
MRO side, we're not there yet obviously on the OEM side. You know builds are are picking up slightly on the 737 theyre picking up slightly on the <unk> hundred 21.
But for the bigger birds theyre not picking up at all of them, we don't anticipate seeing that range pick up until.
'twenty 2 'twenty 3 time period, because of a lack of international flights.
Again, if you'd like to ask the question Press Star then the number 1 on your telephone keypad.
The next question comes from J D Pangaea from on field investment Research. Please go ahead.
Thanks, a lot.
Just the question really around the.
Around the the logistics.
So obviously theres a significant increase in container rates out of China, So as and when the container rate or rather the logistics situation sort of normalizes do you expect a sharp reversal in some of your of raw material basket, because if I think about oil. It has only gone up let's say call. It circa 12.
The per cent in the last quarter, but some of your of raw materials have more than doubled and literally volumes that are coming out of China into Europe and U S are gone down a lot in all of the raw materials. So.
Once the container rate situation normalizes juicy of sharp reversal of the pull through raw material dynamic. Thanks a lot.
A J D. This is Michael I would say the container rate is only a portion of the overall raw material spend the bigger challenge overall has been the supply demand.
The issue for the base raw materials.
Certainly we're not happy with the container prices it has escalated significantly.
But if we could get the overall base supply demand balance back in.
In balance if you will in our supply chain I think prices would start to normalize somewhat we don't see that happening in 2021. So right now we're still anticipating significant inflation. When we said, it's 20% in Q3, and we will have a significant inflation in Q4, So you know for us.
Far as we can currently look out we're still look on at a pretty inflationary cycle.
Yeah again this is Vince if I could just add so so what we've seen as of compounding of events here..1 was the the obviously the shock in March to the chemical supply chain.
That was then compounded by.
The logistics.
Logistics system has gone out of sequence.
Which was then compounded by some of the international logistics and the only out of sequence, but were higher priced.
So these these kind of chain of events as we really push these raw materials up some of that.
Some of that will unwind as we get out of the season as I said earlier Q2 is the peak season, but.
But we do expect these raw material cost to remain elevated for the balance of the year.
The next question comes from <unk> Rodriguez from Jefferies. Please go ahead.
Good morning, guys.
Michael quick question, 1 quick 1 on board medium term volume. So when you look at the couple of businesses that although still below pre pandemic level.
Do you have a sense of when the capture of essentially given the pace of activity you're seeing do you get there into 2022 or is it more like 2023 or so.
Well the only business that will not be recovered by 2022 of my opinion is aerospace OEM.
So aerospace MRO will probably be 90%.
Certainly the military is already back.
The refinish, we saw last year win.
When Europe opened up we saw the refinish miles in Europe come back very strongly.
So we're anticipating the same thing as they get the vaccines out that we anticipate the back half of 'twenty 'twenty 1 will.
Recover significantly and by hopefully all of the 'twenty 'twenty 2 Europe will be back to normal we see in the U S already.
We're at 90 plus percent recovered in refinish and actually what you're seeing is a little shift from traffic from the cities into the suburbs.
So you know collisions are actually are improving every month here in the U S.
And of course in China, It's all the way back to normal.
And we see a snapback in India whenever we see the folks get allowed to travel again. So most places it is the vaccine related and so we're pretty confident if you go through the rest of our business as you know we're already back in industrial were mostly backend automotive of our packaging businesses.
Well ahead of the demand in the aluminum packaging is very strong share packaging business is going to have another record year this year and next year.
If you look at our PMC business.
No of protective you know now that oil prices have recovered I expect protective to continue to recover as well as they start to protect these are high value assets in the oil fields. So I'm very comfortable that we're gonna have a strong back half of the demand for 2021 and it continued demand recover.
In 2022.
Okay.
There are no further questions at this time, Mr. John Bruno I turn the call back over to you.
Yes, Thank you, Jason and I'd like to thank everyone for their time and interest in PPG. This concludes our second quarter earnings call.
This concludes today's conference call you may now disconnect.
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