Q3 2021 PPG Industries Inc Earnings Call

Good morning, My name is Jason and I'll be your conference operator today.

At this time I would like to welcome everyone to the P. P G third quarter.

2021 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 simply press star followed by the number one on your telephone keypad.

If you would like to withdraw your question. Please press Star then.

Two.

To allow everyone an opportunity to ask questions. The company requests that each analysts ask only one question.

I would now like to turn the conference over to John Bruno You May begin your conference.

Thank you Jason and good morning, everyone. We appreciate your continued interest in PPG and welcome you to our third quarter.

And then 2021 financial results Conference call joining me on the call from PPG are Michael Mcgarry, Chairman and Chief Executive Officer, and Vince morale as senior Vice President and Chief Financial Officer, our comments relate to the financial information released after U S equity markets closed on Wednesday October 20th 2000.

Due to the one we have posted detailed commentary and accompanying presentation slides on the Investor Center of our website PPG Dot com. The slides are also available on the webcast site for this call and provide additional support to the brief opening comments Michael will make shortly following management's perspective on the company's results.

For the quarter, we will move to a Q&A session. Both the prepared commentary and discussion. During this call may contain forward looking statements, reflecting the company's current view of future events and their potential effect on Ppg's operating and financial performance. These statements involve uncertainties and risks, which may cause actual results to differ the companies.

20 under no obligation to provide subsequent of updates to these forward looking statements.

This presentation also contains certain non-GAAP financial measures. The company has provided in the appendix of the presentation materials, which are available on our website reconciliations of these non-GAAP financial measures to the most directly comparable GAAP.

<unk> financial measures for additional information please refer to Ppg's filings with the SEC now, let me introduce PPG, chairman and CEO Michael Mcgarry.

Thank you John and good morning, everyone.

I would like to welcome you to our third quarter 2021 earnings call.

I will provide some comments to supplement the detail.

Our financial results, we released last evening.

For the third quarter, we achieved record net sales of nearly $4 4 billion.

And our adjusted earnings per diluted share from continuing operations were $1 69.

As we communicated in early September our sales and adjusted EPS were significant.

Impacted by worsening supply chain disruptions and increasing raw material cost inflation.

Our raw material costs in the quarter inflated by about 25% year over year for context. This is about three times higher than any previous coatings raw material inflation peak in recent history.

<unk> experienced an elevated logistics costs and are incurring increased manufacturing cost due to the sporadic nature of these outages.

Commercially we have taken significant mitigation efforts due to the high level of inflation through rapid implementation of structural selling price increases and.

In aggregate our selling.

We're also realization is about 6% with more than 6% price realization in our industrial reporting segment.

Our price capture pace is much faster than previous inflationary cycles, and we have further pricing initiatives underway.

Coming into the quarter, we expected the supply chain and customer production.

<unk> prices would impact our sales by about $150 million.

However, the actual impact was more than $350 million.

Additionally, this prevented us from completely fulfilling our strong order books and further depleted retail inventory in many of our end use markets.

We expect much of this.

Disruption will be deferred into 2022 and in particular these current conditions.

Long gate, the global automotive OEM recovery.

To put the automotive OEM situation in perspective U S dealer inventories are at a record historical lows in the mid 20 day range.

And.

And in 2021 global production in this industry is expected to be about 20% below prior peak levels.

Despite the current challenges several of our businesses, including our automotive refinish.

Protective and marine and packaging coatings delivered strong above market performance driven by.

The managed service capabilities and advantaged technology.

Our PPG Comex business achieved record third quarter sales with year over year organic sales growth of more than 10%.

In addition, our U S architectural.

Coatings business delivered about 10% same store sales growth as we continue.

Our strong and our customer base with many new wins and increase our digital sales as a percentage of our total sales base.

More generally we continue to experience improving trade paint demand globally and architectural DIY coatings sales return closer to 2019 levels. After notable growth.

To express here driven by the stay at home impacts.

We remain focused on cost management, which is evidenced by our SG&A as a percent of sales being 100 basis points lower than the third quarter 2020.

This is being supported by our ongoing execution on our structural cost savings programs as we delivered.

Latin incremental $35 million of savings in the third quarter.

We continue to target and on track for our full year 2021 savings of about $135 million.

In the quarter. We also continued to make good progress integrating our five recent acquisitions contributing to our.

Liberty <unk> earnings for the quarter are two larger acquisitions Tequila and Emmis Flint delivered good top line results despite the challenging supply constraints.

We continue to expect them to deliver an aggregate of $25 million of synergies for the full year of 2021.

We once again delivered strong operating.

Overall flow during the quarter and had about $1 $3 billion of cash and cash equivalents at quarter end, including sequential reduction of our net debt by about $400 million.

This was supported by a continuing strong working capital management as we maintain our positive step change improvement.

Cash last year and are at.

Multi year lows on a percentage of sales basis.

While we will continue to evaluate accretive deals and our M&A pipeline, we are initiating stock repurchases in the fourth quarter and we will continue to focus on debt reduction.

As a reminder, based on the.

<unk> of our businesses the fourth quarter is typically our strongest cash generation quarter of the year.

Also during the quarter in support of further enhancing our ESG program.

We were happy to announce an agreement with constellation energy to power, our Carrollton, Texas manufacturing facility with 100% renewable.

Seasonal or imaging.

We're also working on our very first ever diversity report and developing science based climate targets, both of which we will communicate in 2022.

Equally important is ppg's market, leading sustainable products continue to enable our customers to meet their respective sustainability goals.

We will continue to.

Provide updates on these initiatives in subsequent quarters.

In addition, I'm extremely pleased to announce that yesterday PPG earned three R&D 100 awards for 2021.

The R&D World Magazine honors the 100, most innovative technologies and services.

Over the past year with the R&D 100 awards, even more importantly, two of the three innovations that we were recognized our growth initiatives in electric vehicles, including BSP SC battery fire protection coating, which protect the vehicle occupants from fire and mitigates thermal runaway events.

Vince plus in buyer Crown extreme protection thermally conductive dielectric powder for battery packs, providing dielectric protection and thermal conductivity.

Our dielectric powder has already been commercialized by leading EV maker and our battery fire protection product will launch in 2022 by one of the world's largest.

<unk> carmakers.

Moving to our outlook, we are continuing to evidenced solid demand in aggregate many of our customers continue to indicate that their order books are at high levels and have lower than normal inventory levels.

In the near term, we anticipate only modest improvements in the supply disruptions that we've been experiencing.

Our estimate is that our sales are expected to be unfavorably impacted by about $250 million to $300 million in the fourth quarter both.

Both are in the semiconductor chip shortage issue and chronic supplier operational capabilities.

Recent production curtailments in China may add incremental pressures to avail.

Availability and inflation and we expect our inflation to approach, 30% compared to the fourth quarter of 2020.

As a result, all of our businesses are securing additional selling price increases and now we expect to fully offset raw material cost inflation and the early part of 2022.

We continue to strongly believe there is sufficient capacity available in our supply chain as operating conditions continue to normalize.

Absent any further disruption we expect supply chain operate more normally by year's end supported by normal seasonality trends.

To provide further assistance and <unk>.

Assurance, a more consistent supply going forward, we are rapidly qualifying additional regional and global commodity suppliers across a variety of our key raw material procurement groupings.

We expect these increases in product availability, coupled with continued improvement in the existing supply chain will provide ample supply.

Hi, beginning early in 2022.

While the current environment remains difficult to predict I remain very.

Optimistic about our specific growth catalysts for 2022.

Specifically, we expect continued recovery in automotive refinished, OEM and aerospace coatings, which collectively.

We're about 40% of our pre pandemic centers sales, where we have broad global businesses supported by advantaged technologies.

We expect a measurable rebuild of inventories and many of our end use markets.

Specific to PPG is year over year earnings growth in 2022 due to further synergy.

Accounted from our recent acquisitions.

In closing these continue to be dynamic times, but thanks to our more than 50000 employees around the world, we are well positioned today and in the future their dedication and commitment to make it happen or reasons why our customers our communities and our many stakeholders can count on.

Capture tech and beautified the world. Thank.

Thank you for your continued confidence in PPG. This concludes our prepared remarks 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 a question.

Please press Star then the number one on your telephone keypad.

We will pause.

For just a moment to compile the Q&A roster.

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

Great. Thank you very much.

Michael obviously theres been a lot going on in the industry, but it terms of raw material inflation as well as input shortages.

If we start there, particularly in shortages aspects of it can you just offer your general views as we approach 2022 whats changing in the past 12 months what offers confidence.

And then also are there any differences on how these variables are affecting results at the segment level and so anything would be greatly appreciated. Thank you.

Well, Chris I would say starting with the segment levels.

Most impacted of course, our architectural our traffic solutions business, our automotive OEM and quite surprisingly our industrial coatings, because there are a lot more chips than people realize in some of these things like appliances and other.

Electronic materials.

It was a heavy duty equipment things like that so.

Those are the businesses most impacted.

What I see though is obviously its in our suppliers' best interest to continue to sort out their supply chains.

And you know the seasonally weak fourth quarter should give them adequate time to do.

That now the flip side is we have an extremely large backlog of demand right now so anything that they can make in the fourth quarter, we're going to ship. So we feel very good about that.

As you know we've been a little bit more pessimistic than probably right about the supply chain issues and so we.

We have put in like we said on the call you know an expectation of further.

Challenges in the fourth quarter.

That's very helpful and just.

John just staying on the topic. It seems demand is fairly strong and kind of building into 'twenty, two and the supply chain disruptions. Obviously you are creating.

<unk> noise in the second half.

You know when you take a step back look at your own order books your own customers outlooks. He is quickly touch on just how you're thinking about 'twenty, two and maybe even perhaps on the only jeopardy into 'twenty three.

The volume recovery aspects for auto refinish in Aero and then also perhaps.

A lot of I'll touch on the sustainability of momentum in both general industrial and packaging. Thank you very much.

Okay, well, that's a mouthful.

Start with auto OEM clearly if you look at the inventory in the U S were down about a million and a half cars from where typical is.

Perhaps inventories in China are less than one month as well there probably in the 25 day range. So that's 15 days less than they typically have euro.

Europe has not been able to supplement what they need.

And when you think about fleets not just rental fleets, but fleets in general they're short as.

Well, so theres significant OEM demand out there.

I would also tell you from the refinish side, we can always tell when the lockdowns and in every country.

Driving comes up in collisions come up and demand comes up and there's very little inventory in the chain from that standpoint.

And so we see that also being a strong positive.

And then I guess finally, I would tell you from aerospace.

We see strong order books on the small plane, so <unk> hundred Twenty's and 737 builds are going to come up.

Once you start to see some international.

General travel than I expect Airbus and Boeing we will get back to building the bigger planes.

Zero is improving monthly and know that.

Europe is getting a little bit more open we expect MRO to improve even better. So are catalysts for 2022 are strong and if you.

And then start building 780 sevens on top of that then are catalysts for 2023 get even better.

Yeah.

The next question comes from Ken Sean Panjab from Baird. Please go ahead.

Thank you good morning, everybody I guess, you know sort of stepping back.

China was first in first out from Covid also led the global economic recovery over the past year.

Subsequently the macro headlines and some of the recent data out of China are confirming quite a bit of a slowdown. So first off what are you seeing in the region on a real time basis at current.

Second how do you see China evolving over the next couple of quarters and.

It's more broadly Michael how are you thinking about the current inflation cycle impact and you expect a recovery over the next couple of years given that consumers will ultimately have to bear all these massive cost increases. Thank you.

Hello, Ghansham, let's start with China first so maybe you know I think you're aware of this but maybe some of the other folks on the call aren't you know our plant.

Typically in China.

Are running two shifts a day most of them now.

Not all of them run three and so the dual control issue that's happening in China, where they're trying to reduce the amount of energy consumed as well as the energy per unit.

We're in a very good position to be able to run off hours and concern.

And I guess the cheaper energy.

Off hours, so that that helps us from that standpoint industrial.

Demand is down in China, right now, but it's as much from lack of raw materials as it is from demand as you know we're not very big.

In fact, I would say almost negligible in the project.

Soon market for architectural.

So the challenges in that market are really not going to hurt us from that standpoint.

But our kitchen and industrial bakeware business, our electronic materials business, our automotive business are all in good shape over there.

Our packaging business you know.

<unk> kind of demand so I feel good about China, both short term and long term and I think we have the team that can help us manage through the challenges that are over there when I think about the higher prices today, you know I start first with let's say oil is 80 Bucks while 80.

Double-cross historically is not a high <unk>.

Number it would be a what I would say is if you say 70 has been the average it's only marginally higher so from a structural cost perspective, I think our consumers are going to be able to continue to have strong demand. So I'm not worried about that.

But our next question comes from John Roberts from UBS. Please go ahead.

Thank you.

Because of the price increases are so large and happening so quickly we're getting a bigger divergence than normal between the year over year price changes reported by the different companies, maybe comment a little bit on where the differences are.

Maybe.

<unk> you and some of your key peers by region or application or is it just timing differences, Michael it's resulting in these different prices.

Yeah, John Let me just start with the basic way it works.

We report peer price.

And we reported for our all our businesses.

Yes.

And so when you look at the business mix, that's one thing to take into account. The other thing is the.

Mixed by geography, So if you have a large percentage in a geography that has hyperinflation and that's kind of impact you, but more importantly for US we are on our Atms.

<unk> quarter in a row of price increases. So we're stacking increases on top of increases. So one way you might think about this is whether or not somebody might be trying to catch up to where we are and I think that's probably the most important thing and the other thing I would say is make sure you look at inflation reported.

18, as well as margins and for US the ultimate Ingo is margins and I think our procurement team is doing a great job.

We have hired people to help us qualify additional raw materials from that standpoint, and so we're in a pretty good shape.

Thank.

From a competition wise.

The next question comes from Bob <unk> from Goldman Sachs. Please go ahead.

Thanks, Michael I'm curious you mentioned that the supply chain issues that could moderate as you go through the quarter, but obviously still some elevation in.

Run rate on the cost side. So are you starting to see some force majeure is lessened.

Is it that youre seeing that gives you some hope that maybe improves through the quarters, there's some tangible anecdotes you've already seen.

Well, Bob the way I would answer that question is in Q1, we had 95 force matures.

That was all.

Right and then we only had two in quarter two and then we had 13 new ones added in the quarter three due to all the Ida issues.

And there has been only one added in the fourth quarter. So the pace of force Majeure is has improved.

And.

At these commodity levels.

I know, our suppliers and I've talked to a number of them are focus on smooth.

Smoothing out the supply chain.

And what I would tell you is they know we can sell they know we're going to continue to consolidate the industry and they know we're going to win and so they've been.

Out there protecting PPG as much as they can within the limits of the force matures. So I see these force majeure is starting to decline in the fourth quarter.

So I think we're going to be at a much much better place starting early 2022.

And Bob Mike This is Vince Michael mentioned in the opening.

Events seasonally we see a significant downturn in demand for commodity raw materials. So this will allow them to do some catch up.

In terms of maintenance in terms of us.

Rebuilding inventory. So we do feel that has a tangible benefit as well entering 2022.

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

Hey, guys.

When I add up the revenue impacts on supply disruptions. It looks like it's nearing 1 billion and so just curious how.

How do you think you'll get that back over time is it.

And and.

How long do you think it'll take to sort of get the raw materials in place to do that and and curious how confident you are about Halloween.

[laughter].

Was that a Cleveland Browns.

Is that what you're.

Yes, Mike this is Vince.

Well I think your math accurate.

Two two big components here, one as Michael mentioned in the at the semiconductor chip really impacting our automotive and <unk> and to a lesser degree our industrial business.

We expect that to continue to rectify over the next couple of quarters.

So really we would hope in the back half of.

Improvement now through the first half of 2022, and then more normalcy in the back half of 2022.

The other side of the equation is the supplier commodity supplier force matures and Michael just alluded to.

We're expecting that to largely rectify.

In the beginning part of 2022.

We will be able to supply our customers and more importantly, rebuild inventories, which is a piece of the equation. That's missing here. So that the shortages were seeing in 2021.

Go back.

Into the RSR customer inventories throughout the year of 2022, so we're confident the demands there.

And run ability issues in our supply.

Strains around chips should be resolved in the coming quarters.

And I guess my gut.

Finished by saying.

It won't surprise you in a black and gold Jersey once again after Halloween.

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

Yes. Thank you so about a decade ago, you had a string of four or five.

Five quarters.

Mid single digit price increases and here you just put up to 6%.

You have some quite a different situation here than you did a decade ago and just would like to hear your view on weather.

Something of that scene.

<unk> might be.

Repeatable with where the street was mid single digit price increases or could they potentially be higher than that given the.

The raws Youre talking about going from a you know a 25% year over year hit towards 30% and this fourth or and you're talking.

Nevada being able to offset it in early 'twenty two does that seem like a reasonable assumption on our end that those price increases are going to get pushed even higher.

Steven we tried to convey that in the slides that we published last night.

We're expecting to have a higher.

<unk> increase in the fourth quarter than we did in the third quarter and I would say that is essentially already in place. So you know, it's just a matter of you.

What it rounds to but it's going to be higher than the 6% that we posted in Q3 Q and in the first quarter.

<unk>, there will be additional price increases as well.

So the magnitude of the increase is our historic but so is the amount of inflation.

Our teams feel very good about this our customers are well aware of what's going on they also need product. They are also facing logistics challenges there also.

Facing raw material challenges and they buy a number of the things that we buy maybe not to the level that we do.

But they understand it and so I feel very confident that we're going to continue to put up historical price increase numbers that will help us when raw materials moderate.

Moderate.

This will be a significant catalyst for continued earnings growth going forward.

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

Taking my question, maybe just another one on the on the price versus raws dynamic so youre looking.

Looking to kind of catch up in early 2022 is that.

On the on the premise of of pricing or do you expect some raw material relief as you start to get into the first first quarter or so of 'twenty, two and I guess somewhat related to that.

You've got about $500 million worth of sales tied to M&A.

In the third quarter, I guess, sometimes it takes a little bit of time to get the pricing. We all have an acquired asset working so I guess can you speak to the pricing that youre seeing in the businesses that you acquired and if there's maybe a catch up phase of that as we look to 2022. Thanks a lot.

Yes, John I'll take the first.

First part of the question I'll, let Michael handle the second part on acquisitions.

No.

We're in a position now where we believe the inflation levels are cresting.

We have we are 30% targeted inflation in Q4, the supply constraints as we alluded to earlier, we think are going to abate somewhat.

And so again, our goal is to get pricing up to offset this.

High levels of inflation and some of this will moderate and we are starting to see some signs of moderation, but again, given the tightness of supply chain right now.

It is not coming through and absolute percentages.

But we are starting to see in certain raw materials. Some abating for us, though I think what's most important is we've gone after structural price increases.

The vast majority of the pricing that Michael alluded to the 6% in Q <unk> Q3, almost all of that is structural in nature. So we're changing.

Unit pricing as opposed to surcharges, we think that's proper to do that that it won't so the structural price increases will remain as we head into 2022 and throughout the duration of 2022.

And John with regards to the acquisitions.

And it's flint the highest rate ever achieved price prior to our acquisition.

Physician was 2%.

And they did not have a what.

I would call a structured program to analyze what was going on and a structured program to get price increases out in a real time basis.

We have significantly improved that and we have a PPG legacy.

The leader running that business now and we are really excited about what that future holds.

Myself and Tim can Navy issuer in Europe like within days of when take a really close that was the first thing on the agenda was pricing.

We were you know much further ahead in price increases.

Greasy, we'd already done our second price increase in architectural Europe.

Prior to us acquiring ticagrelor they were on their first increase.

They are now catching up.

They have put in place new processes that will allow them to.

Better process, not just raw material.

<unk> inflation, but also the value creation that we bring to the market with our new technology and I feel very comfortable that we're on top of that and we are in a good position not only with the increases we've announced for the fourth quarter with the legacy <unk> products, but also the first quarter increases that are to come.

Our next question comes from Kevin Mccarthy from vertical Research partners. Please go ahead.

Good morning.

Given all the dislocations in the external environment that we've been discussing is struck me that your fourth quarter EPS range was quite narrow at plus or minus <unk> <unk>.

And so in that context I was wondering if you could talk about material upside or downside risks. If it turns out that you did materially better or worse. When we see the results in January what do you think the potential draw.

Drivers of of those variances could be based on what you see today.

Yes, Kevin this is Vince.

We're typically announcing earnings week, or so earlier, but due to the way the calendar fell this year, where 2020 days three weeks into the quarter October is a very large month for most coatings companies in the fourth quarter just due to the seasonality we've got a good read on October.

We've got a good read on the next couple of weeks at least of demand.

And our ability to supply so give just given the size of the first month plus.

As it waits on the quarter, we have some level of confidence that that being said things that could push it up.

Up or down.

As.

As Michael alluded to earlier everything we can make today, we could sell so if we do get more raw materials, we are able to manufacture more that would be a positive for the fourth quarter as you alluded to Kevin there still could be some things out there that could suppress the ability to get raw materials like logistics and that would be that would.

But we think all the other variables we have a fairly good handle on.

The next question comes from Laurent <unk> from Exane BNP. Please go ahead.

Yes, good morning, I've got a question on capital allocation Nippon Jetblue announced ecology deal this week.

Michael I think you just talked about resuming buybacks in Q4. So I was wondering should we assume that the M&A pipeline is getting scene and can you give us a sense of the overall envelope for the buybacks you've got in mind for the next 12 months.

Yeah, all right. So first of all I would not say the M&A pipeline has slowed down in fact.

A negative to you that.

That has picked up because of the high prices that had been paid so theres more interest out there.

What we said about the buyback is first we think PPG has a structurally sound company. We think the current price on PPG is undervalued and so we're going.

I would buy some shares back so.

So that's the first thing the second thing is we also generate a lot of cash in the fourth quarter, that's our strongest quarter for cash so we're going to pay down debt as well as our buy back stock and we're in a good shape.

As we look at the pipeline.

To for acquisitions.

So I don't think it's any more complicated than that so.

The next question is from Aziza Gassy, Eva from Fermium Research. Please go ahead.

Hi, guys, so youre, calling for 30% inflation in the fourth quarter.

But could you put an estimate on your current read for inflation for 2022 versus 2021.

You mentioned that some of the raws are abating by.

Which products are still a particular concern into 2022. Thank you.

And on the macro and I'll, let Michael talk about some specifics, but again when we look at the raw.

Raw material basket and in aggregate, we do feel it's cresting, we'll have some year over year inflation in Q1, just because we didn't have the level of inflation in Q1 last year or this year excuse me, so there'll be some year over year comparisons, but the absolute <unk>.

Rice's on raws.

<unk>.

Todd as we go into 2022.

Michael you talk some specifics please yes.

I would tell you that the three items that I'm paying particular attention to epocrates emotions and isocyanate.

Emotions in particular have been elevated purely due to the.

We will hold of the.

Suppliers to run their plants it was impacted by Ida as well because a couple of raw material suppliers there were impacted.

Down more than a month due to that and so you know once they are back to normal rates some of the stress on pricing I think we will.

Ability to come back down and so that's that's one.

The <unk>, especially in China, I'm anticipating that.

They will moderate the pricing demands as we get into the fourth quarter with the seasonality and that will provide some relief.

And from an isocyanate.

<unk>, we did have some.

Force matures in that area that will be coming off I think in the very near term. So those are the ones I'm paying attention to.

The next question is from a ruined viswanathan from RBC capital markets. Please go ahead.

Okay.

Great. Thanks for taking my question.

Just a two part question here. So first on margins I'm, just wondering obviously, there's a lot of volatility and it's going to depend on price capture versus raws, but.

How should we think about margin recovery next year.

There anything special that you have as far as cost reduction buckets or anything.

Is that that would be specific that you could call out and then secondly, I was just curious on your comments on Evs and beverage cans.

He has that had been robust have those been impacted I know that you've called out some supply chain disruption there, but have those been disrupted from a structural standpoint on demand or is it just transitory.

Yes, Brian I'll handle the margin question and I'll, let Michael do the commercial side here.

If you look at where.

Projecting we'll give obviously more numbers on January on our fourth quarter earnings call, but we do have active restructuring program.

We're part of the way through that program.

2021 savings on that or $130 million range, we would expect additional savings in 2022, as we continue to execute against.

The actions that we have previously outlined for that and again, we'll give a number on that and in January.

More importantly.

<unk>.

Synchronic for PPG, we do have synergy capture next year typically.

12 to 15 months after an acquisition we start to realize additional structural synergies again, we'll give a number out.

In January but those are two elements to the to the margin.

<unk> margin expansion opportunities on the cost base.

And then Arun I would tell you on Evs, obviously saw how Tesla performed last night when they reported.

And I would tell you there is virtually all of the global guys are very dead serious.

It's about improving their EV at a faster rate than <unk>.

What the current projections are I don't know if you saw it yesterday and one of the largest EV producers in China, even though the government says they want a 20% by 2025.

This particular company said they expect it to be 35% by 2025.

So the momentum in the EV continues to build.

From the beverages.

That is going to continue to be strong we're up double digits in beverage and theirs.

I've actually lost count of the number of plants I think theres, either 13 or 14, new plants that.

In the process of being built.

And those new plants will need a lot of coatings and we are winning more than our fair share in that the beverage space. So I anticipate beverage to continue to be strong as people shift away from single use plastic into recyclable beverage containers. So I'm looking for that to be a long term.

Term sustainable play.

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

Hi, This is David Huang here for David can you talk about why Youre below the IHS forecast in Q4, and how much of that EPS impact is from that.

That lower forecast.

Yes. Thanks. This is John Bruno so remind everybody.

Going into <unk> PPG has been below.

The IHS forecast and I think we've come out ahead in terms of accuracy.

We do see things improving we just don't see.

See the velocity of improvement that IHS is forecasting for the fourth quarter, we see more of a gradual recovery into 2022.

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

Hey, good morning, everybody.

You mentioned DIY paint demand being back to 2019 type levels. So do you think the underlying demand.

<unk> is back to 2019 for DIY paint or do you think that the supply chain issues or what's holding that back or yes. I mean has there been is it just been.

Because.

Because these are still robust the pull forward of demand.

And yes, I'm curious your thoughts there and how you see it going forward.

Kevin.

Moving back towards 2019, it's still above it.

But actually if you go into a home depot Youll see how bear the share shelves are I mean, theres just not.

Not enough pain out there.

And that is a challenge for our.

Partner's minority certainly we'd like to have a lot more paint and theyre getting right now so we're working hard to try to meet our.

Big box customer needs. So I actually do think that there is more upward potential there as the supply chain normalizes.

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

Hi, good morning.

Was wondering if you could give us an update on the competitive environment within the auto OEM space. All of you with suppliers are hurting the customers.

Our hurting do you see any share shift going on in this environment and can you maybe talk about industry pricing discipline into that auto OEM coatings market. Thanks.

Yes, so Mike I would tell you that the discipline is better in Europe, and the U S and Latin America.

And it's still a little bit challenged in Asia that doesn't surprise US you know China has historically, it's difficult place plus there's you know more than 80 car guys and eight in Asia. So there's all the global plus all the locals and so there is a little bit more competitive attention, but what I would tell you.

You is you know for us anytime that we might lose some share get punished for raising price.

We get it back very quickly as they rollout new programs because they have to put the finance technology out there on the newest programs to compete.

In that market, because it's hyper competitive from an appearance.

And performance standpoint, so I'm not worried too much about that we've been pushing the teams to continue to.

Raised price appropriately and that's what we're doing.

The next question comes from Steven Haynes from Morgan Stanley. Please.

Okay.

Hey, Thanks for taking my question I was wondering if you could go into a bit more detail on your pricing.

In the industrial segment by end market. It seems like like packaging was potentially pretty strong maybe double digits. So just any additional color there would be helpful.

I'm not sure I want to get into that level of detail.

Stephen what I would tell you is we posted more than 6% in industrial we had positive strong positive price in automotive industrial as well as packaging and these conversations with our customers. Our one on one and I think that's the way it should remain.

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

Hey, good morning, guys maybe.

Maybe three questions if I could sneak it in.

On your one chart that you showed the acquisitions you show the seasonality of the revenue can you talk about the seasonality of the margins.

That chart and what that would look like then on your chart six where you break out kind of the 60% PPG, 40% PPG that has struggled volumetric Lee.

What is the difference in margins between those two buckets and the 40% that's been lower on volumes as.

Has it been harder to get price in those businesses because of the lower volumes.

Let me start just to Duffy with.

The first question.

Well I'll start with the 60 40 questions I think that's more relevant right now if you look at the 60 40 question.

The.

The businesses that are down 40% of the business that are down let's call. It low teens in terms of volume versus 2019. These are very technology rich businesses.

They typically command the value for the technology.

We've seen good pricing as.

And despite the segment pricing.

Two of these business has fallen performance performance pricing is up 6% Theyre very big businesses, so they're going to have an impact on the segment.

The automotive business is our biggest business in industrial so it's going to have.

Again, an outsized impact on the aggregate pricing.

So again, we're capturing pricing.

As evidenced.

Collectively across the portfolio and it's not differential based on the 60 40.

Yeah, and I would say definitely listen.

The fact that Theyre down has not prevented us from getting price. So as you know in refinish, where historically and.

And annual price.

We've had more than one price increase in refinish.

So that has not prevented it automotive clearly has not prevented at the automotive guys would like every kilo of coding that we can provide.

They would definitely we'd like to get more and then from the aerospace side as you know.

This sharing technology driven business.

And so and it's a very spec driven business and so our ability to get price on the MRO side is actually pretty good. So that has not been impacted either so when I look at the catalysts for 2020 to these.

These businesses are certainly going to be a.

It's a strong contributor to the.

Increase in earnings for next year.

In terms of the seasonality from the acquisitions we.

We did put in the appendix of the materials, we distributed last evening the sales seasonality you would expect in <unk>.

Factor at that the earnings seasonality is even more pronounced.

These are businesses that have a fixed cost base.

Actually architectural.

So you do get more leverage.

There's more leverage on the peak sales quarters, and there is certainly less leverage on the sales quarters on either end of the peak so definitely more pronounced earnings impact.

<unk> two one in Q4, and we will see the reciprocal of that Duffy and Q2 next year, we didn't have <unk> four.

The vast portion of Q2 2021 and in Q2 2022, we will see that positive leverage.

Okay.

The next question comes from J D Pangaea from.

On field investment research. Please go ahead.

Thanks.

Two questions firstly on growth actually.

When you think about the European business in Deco and compare it to some of the other periphery businesses like the adhesives industry or construction building.

Materials like building materials industry and think in the context of the Greenway and the renovation wave that will kick into Europe.

As we speak for the next few years do you think that paint.

And sort of adhesives billing materials.

Volume growth is sort of similar in trajectory.

Or do you think that paid actually will slightly under grow because of the higher penetration for none of these materials in the sort of increased installation.

You know demand. That's my first question and the second question is really around raw materials. So do we.

We take a step back I guess.

You know you guys have lost probably 15% to 20% of supply because of iodine Uri and all the other issues.

Fundamentally speaking do you think your suppliers have invested enough in things like epoxy.

Like I said.

To support.

The growth that your industry seeing a.

In other words do you think that even if supply normalizes.

Utilization in these products will remain high and therefore, you will always remain a bit susceptible to a storm or two thanks a lot.

Hey, J D. This is Michael I'll take the first.

First one which is the suppliers.

They're clearly.

Hampered this year, because I think in the pandemic. They did not do the required maintenance they postpone some things and they got caught short by the recovery and so as they postpone.

Wish bone maintenance or Underspent that has impacted their ability to deliver what we wanted so I would tell you that that obviously they are all making very good money right now and they're all interested in getting their reliability up.

At or above where they were pre 2000.

<unk> thousand 19, so I anticipate this to get better I'll, let Vince cover the adhesives and sealants versus paying for Europe question, Yeah, I think when we just think about.

S G, which I think was the heart of your question Tim.

Typically these these products like adhesives sounds like coatings.

As an enabler to provide better ESG capabilities longer term longer lasting.

Act.

The aftermarket is typically provide the same opportunities to reduce.

People's Environmental footprint, so the coatings industry the adhesives industry every time.

Technology change, we're seeing it in the Evs, we typically get more content.

The next question comes from <unk>.

Lane Rodriguez from Jefferies. Please go ahead.

Thank you good morning, guys.

Just one quick question on raw materials, and again apologies if you already addressed that like in terms of the raw materials for availability issues you've seen this quarter like was it mostly.

There has been a trade it in the U S because of the hurricanes or was it broad base and all the different regions.

Yes, so headline what I'd tell you is the worst was in the U S. Okay. So that was obviously a challenge with Hurricane Ida.

The next most impacted over the quarter was.

Europe, because they do buy some things from the U S. So that has impacted especially our architectural business.

Over there and then the one that got impacted last but.

Somewhat meaningful wise, they dual control issue in China that started late.

Late in September because there were a lot.

Constant government edict people, we're supposed to meet their quarterly goals.

And they were not on track to meet the quarterly goals. So starting about mid September there was a lot of pressure to get the dual control.

Initially was.

Underway and on target and in China, when they set targets you can almost rest assured they're going to.

To hit those targets. So that's the way there was no real material challenges in Latin America. They came out of the U S. But we were able to manage through most of those.

Okay. Thank you.

Yes.

Again, if you'd like to ask a question. Please press Star then the number one on your telephone keypad.

Key pad.

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

Hi, good morning, I've been reading about potential for magnesium shortages, which goes into producing aluminum alloys for auto aerospace construction and market. So are you worried.

There at all with China's door control and low inventory levels in Europe.

Yeah, Eric I would tell you that none of our big Aerospace guys have right now put out any concerns about magnesium nor have our EV customers. So right now that is not currently on the radar screen we're always.

Trying to look around the corner, but that is one that so far has not raised its head.

There are no further questions at this time.

Mr. John Bruno I turn the call back over to you.

Thank you, Jason and we'd like to thank everyone for joining our call today for your time and interest.

And PPG. This concludes our third quarter earnings call.

This concludes today's conference call you may now disconnect.

[music].

Thank you.