Q1 2022 PPG Industries Inc Earnings Call

Yes.

Right.

Good morning, My name is Sam and I will be your conference operator today at this time I would like to welcome everyone to the first quarter PPG earnings Conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer 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'd like to withdraw your question press the pound key.

Everyone an opportunity to ask a question the company will request the each analyst ask only one question. Thank you.

I would now like to turn the conference over to John Bruno. Please go ahead Sir.

Thank you Sam and good morning, everyone. Once again this is John Bruno we appreciate your continued interest in PPG and welcome you to our first quarter 2022 financial results Conference call. Joining me on the call from PPG are Michael Mcgarry, Chairman and Chief Executive Officer, Tim can Avis, Chief operating officer, and Vince morale as senior Vice.

This president and Chief Financial Officer, our comments relate to the financial information released after U S equity markets closed on Thursday April 21, 2022, we have posted detailed commentary and accompanying presentation slides on the investor Slide of our web site P. P. G. Dot com. The slides are also available on the webcast.

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 unknown certainties and risks which may cause.

<unk> actual results to differ the company is under no obligation to provide subsequent updates to these forward looking statements. This presentation also contains certain non-GAAP financial measures. The company has provided in the appendix of the presentation materials, which are available on our website reconciliations of these non-GAAP financial measures to the most directly comparable.

GAAP financial measures for more 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'd like to welcome everyone to our first quarter 2022 earnings call I Hope you and your loved ones are remaining safe and healthy.

To say that these are a difficult and challenging times for so many would be a massive understatement since the beginning of the war in Ukraine, we've been focus on protecting the health and safety of our employees and their families from Ukraine as well as our employees in Russia.

P B G and the PPG Foundation at all so committed more than $800000 to humanitarian relief as well as longer term.

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In addition, PPG employees have also been providing direct support to those in need including taking refugee families into their homes.

The war has also made it necessary to scale back and now wind down our operations in Russia. As a result, we recorded a pretax charge of $290 million for impairment of substantially all of our company assets related to our Russian operations for context net sales in Russia represented approximately 1%.

Total PPG net sales for the year ending December 31 2021.

We will continue to closely monitor developments in the region.

Before I provide the regular quarterly review of our results I'd like to provide a concise summary of the key issues impacting our business in the quarter as we look ahead.

During the first quarter, we had two major events, the Ukraine, Russia of crisis and increased COVID-19 restrictions in China, which have created some new uncertainties about overall regional demand and possible.

We'll carry on effects.

You'll see due to these increase in certainties, we have widened our earnings guidance range, we provided for the second quarter.

Notwithstanding these two major events that rather longer long.

Longer standing global impacts, which have affected our financial results for several quarters, and which are abating, a ratably improving specifically, we continue to experience improvements in our supply chain and our raw material availability.

Additionally, outside of China, Covid restrictions have continued to decrease in many parts of the world.

As a company we have continued to improve our pricing realization in both pace and cadence. This has been necessary to battle, the persistence and breath of inflation.

Our price capture this cycle is much faster and we are now pricing in the second quarter for second quarter inflation impacts. So we are basically pricing in real time.

We continue to deliver good earnings leverage when we have improving volumes.

While many of our businesses and regions.

Have not fully recovered from the pandemic as a matter of fact, we are still are down about 5% in aggregate.

When our business does deliver volume improvement, we're realizing good bottomline games.

This reflects the hard work from our teams on managing our operating costs and SG&A.

Finally, we had a very solid month of March from a financial returns perspective.

Its stated many times that March is the most important month in the first quarter given the seasonality of our businesses.

I met the March financial returns or the best return since the second quarter of 2021.

I will now move to provide some comments or supplement the detailed financial results, we released last evening.

The first quarter, we delivered record net sales of $4 3 billion and our adjusted earnings per diluted share from continuing operations were one dollar and 37 cents.

To quickly summarize the quarter, our sales performance was better than our January guidance, despite unexpected impacts from the crisis in Europe .

Covid related disruptions in China, and continuing logistics bottlenecks.

More than offsetting these unexpected macro issues was stronger than expected demand across many of our businesses as regional economies and end use markets continue to recover from the pandemic impacts.

Above market sales volumes were achieved in several of our end use markets, including our PPG comex business, which during the quarter opened their 5000 concessionaire locations in Mexico.

First quarter sales in Latin America were a record. In addition, our automotive refinish business performed well with strong sales volumes in the U S and Europe .

Also our aerospace business benefited from year over year.

Initial improvements in the market and we expect further industry demand growth as we are still well below pre pandemic levels.

Our adjusted earnings.

We're significantly above the upper end of our January financial guide as we delivered strong earnings leverage on the higher than expected sales volumes.

This leverage was a result of improving manufacturing performance as Covid related absenteeism subsided significantly as we progressed through the quarter and we experienced increasing raw material availability.

In addition, our selling price increases increased 10% year over year, marking the 20th consecutive quarter of higher selling prices.

Our selling prices are up over 12% on a two year stacked basis versus the first quarter of 2020, reflecting our continued actions to offset generationally high inflation.

Our recent acquisitions also performed well, including the realization of targeted synergies they take care of the business delivered year over year sales growth of more than 10%, excluding our Russian operations.

Our traffic solutions business also achieved greater than 10% sales growth at our first quarter sales were a record and the business continued to have a large order backlog as we enter the second quarter.

During the quarter. We also launched a significant expanded pro painter initiative with the home depot and despite continuing raw material constraint restricting our ability to fully load inventory.

We now have our full pro paint assortment available in about 60% of their stores.

We expect to have all the home depot stores loaded in the coming months.

We're excited about the growth opportunities that this initiative provides and have already recognized some significant new professional painter business gains.

Our earnings and margins continue to be impacted by elevated levels of inflation and supply disruptions.

In the first quarter, our selling prices did offset year over year raw material inflation.

But did not offset inflation from other sources, including logistics energy and labor and we did not fully recover prior year inflation.

Sequentially versus the fourth quarter of 2021, our overall margins improved by more than 200 basis points. We're targeting continued quarterly sequential margin improvement in the second quarter as well despite further increases in raw material and logistics inflation.

We have continued to optimize our commercial processes. The last few years and as mentioned are now closer to real time pricing relative to inflation.

Due to higher crude oil and energy prices, we're implementing incremental selling price increases in the second quarter and expect that we will exit the second quarter offsetting all inflation categories on a run rate basis.

This drives our expectations for operating margins to sequentially improve further as the year progresses.

In several businesses, we continue to face certain raw material shortages resulted in our overall sales backlog growing to about $180 million exiting the quarter.

The order backlog to the highest in our aerospace and automotive refinished businesses.

Additionally, these are two of our many industries are we supply where inventory levels are extremely low all the way to the end consumer.

We've continued to control our controllable and once again lowered our SG&A as a percentage of sales decreasing by about 40 basis points compared to the first quarter of 2021.

This included delivery of an additional $15 million in cost savings from recent restructuring programs and acquisition synergies.

This was also despite expanding our multi year investment in our advanced digital capabilities.

We are experiencing growing digital adoption from our customers most notably in the architectural coatings business.

In the first quarter, our net debt increased mainly due to the higher dollar value of inventory, reflecting inflationary effects there.

Our seasonal working capital increase in the quarter was consistent with pre pandemic years we.

We expect our cash flow generation to match prior year end trends, which is consumed cash early in the year and generate strong cash flow as we progress through the end of the year.

Strategically on April one we completed the acquisition of Argenta <unk> powder coatings business, continuing our focus on growing our powder coatings manufacturing capabilities.

In addition, we divested some architectural coatings businesses in Africa, as we continue with our legacy evaluating all regional businesses and product lines to ensure that they continue to add strategic value and meet our financial hurdles.

In the first quarter, we continue to take additional measurable steps to further advance our ESG program.

Issuing nor girl D Eni report.

While I'm proud of what we've achieved we know that there is more work to do and additional areas of opportunity to focus on.

<unk> not already done so.

I would encourage you to read our report and learn more about what we have done and our aspirational goals for the future.

Which are outlined in our presentation materials.

Looking ahead, while our underlying demand continues to be solid in most of our end use markets and regions second quarter economic activity in particular in Europe has started to soften as consumers remain cautious based on the current geopolitical issues in the region.

In addition manufacturing supply chain had been recently impacted in China due to severe restrictions for rising Covid cases.

In the last few weeks up to five of our smaller manufacturing sites have been mandated shutdown.

Due to restrictions plus our principal protective and marine coatings production facility.

We're working in both of these regions to manage our operations and costs are reflective of these current macro challenges.

We're also assessing the impacts both positive and negative these challenges may have on raw material supply and costs.

As mentioned earlier, we expect further sequential inflationary pressures on raw materials logistics and energy.

Our two year stack raw materials inflation expected to exceed 35%.

But only up low to mid single digit sequentially versus the first quarter.

We're implementing further selling price increases in all of our businesses and expect a quicker offset versus historical legs.

Due to the heightened levels of uncertainty our earnings guidance considers a wider range of outcomes for the second quarter.

More generally our guidance assumes that restrictions in China E somewhat in may and that geopolitical issues do not expand but beyond the carrot current Russia, Ukraine boundaries.

While the current environment remains difficult to predict I expect that its 2022 progresses, we will begin to experience an easing of supply chain disruptions.

General inventory rebuilding.

Ross many end use markets and still a healthy consumer willing to spend especially in North America.

The future PPG earnings catalysts that I referenced on the January earnings call remain intact, and we certainly see a path to return to prior peak operating margins with opportunities exceed them.

This includes continued recovery in the automotive refinish.

OEM and aerospace coatings businesses.

Normalization of commodity raw material cost, which should moderate over time, giving supply dislocations are improving.

And there is a softening in certain regional economies.

As demonstrated this past quarter and supported by our lower cost structure strong operating leverage on any sales volumes growth.

Accretive earnings growth from our recent acquisitions from both their historical base earnings and further synergy capture.

Bob market organic growth driven by our advantaged and leading brands technologies and services.

In closing as we look ahead I remain confident about the company's future I strongly believe in our team of 50000 employees as we work to do better today than yesterday everyday.

The way our employees have dealt with the pandemic and are helping during the Ukraine humanitarian crisis and are navigating through a very challenging business environment are a prime example of how the team is making it happen. Thank.

Thank you for your continued confidence in PPG. This concludes our prepared remarks and now Sam would you. Please open the line for questions.

Absolutely at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.

Pause for just a moment to compile the Q&A roster.

Okay.

Your first question comes from the line of Christopher Parkinson with Mizuho Christy.

Christopher you can proceed with your question.

Great. Thank you so much and Keith quickly give us a more granular update on the various inputs as it pertains to I would say to you and the second half inflation outlooks, the persist and as well as the persistent persistence excuse me a certain input shortages on a quarter to quarter basis. Thank you.

Chris what I would tell you that our input shortages remain consistent with what we've seen previously promotions tend to be at the top of the list. We've had some intermittent because of manufacturing issues with T. I O. Two those issues have all been resolved.

Force Majeure as you know when we had the last call. They were over 100, we're down to about 50 now we've seen improved reliability in Europe , we've seen improved reliability exclusive of the Shanghai area for.

Our Asia and.

And we're still seeing some challenging with trucking here in the U S. But sequentially you know we do see the pace of inflation are coming down and what's most important is that our pricing is accelerating and is in much more real time basis.

Your next question comes from the line of Ghansham Panjabi Baird Ghansham.

Ghansham. Please proceed.

Thank you good morning, everybody could you just give us a bit more color on a real time basis in terms of what you're seeing both in Europe , and China, both from a demand and supply chain standpoint in particular, which businesses are being most impacted and then related to that you know just given all the complexity in the world and your strong capital position. How are you thinking about share buybacks at this point in context of you know.

Obviously, the moves in the stock and your peers this year any any.

Changes to that.

As you know acquisitions. Thanks.

Hey, Ghansham, let's start with the share buyback question first you know.

We're always going to look to optimize shareholder value and.

Our pipeline of acquisitions remains active.

But obviously the share price, where we're going to balance what's most accretive to the shareholders and so we're looking at both.

And in regards to China, and Europe , what I would tell you is is you know the car situation in China is being impacted probably a little bit more than some of the other markets. We do regard that as transitory.

We are fully expecting as we've seen in other instances.

People are going to be much more interested in driving themselves versus taking mass transit. So we do expect a car recovery in Europe and is the largest car market in the world and they are also shifting from internal combustion engines to electric vehicles faster than some of the other market.

And of course as you know we have more content on electric vehicles, and we do internal combustion engine. So we feel optimistic about that so clearly we are concerned about the rising number of Covid cases. It has plateaued in the last two or three days, we have gotten all but two of our plant back up and operating and we.

We expect to get the other two plants up and operating in the next three to five days I would say it for a for a you know being a little bit optimistic here, but overall demand in China remains good I don't think the Chinese economy can afford to have GDP in the low single digits are that's not good for them and I do.

We expect the government to be aggressive and providing a business friendly environment coming out of this most recent COVID-19 situation.

And then in regards to Europe clearly the most concerning area for Europe is DIY. We predicted. This this is consistent with what we are told we continue to have a strong propane or backlog, but DIY and traffic through there the big box stores in Europe is the.

One indicator that we're watching out.

And Ghansham. This is Vince I think I'd be thinking more broadly as we put together our Q2 forecast.

We do expect China too.

Some of the Covid restrictions to ease in the early part of May.

And continue to ease through the balance of the quarter, but theres certainly restrictive right now we know that we know there'll be some carry on effects with respect to logistics and transportation and.

Import availability well into may so that that's baked into our guidance.

In Europe .

Again, we're concerned about.

Maybe overly concerned but were concerned about the effect on consumer of energy prices and just the overall environment.

So our forecast has baked some of that Passiveness consumer passiveness into into Q2, we hope we hope we're being a bit bearish, but that's what we've forecasted and we'll see how the how the cards fall as we go through the quarter.

Thank you Ghansham. The next question is from the line of David Begleiter of Deutsche Bank. David. Please proceed.

Thank you good morning, Michael.

I've got is just on U S. Architectural are you seeing any discounting by your competitors and if so how are you responding to this more competitive pricing environment potentially.

Thank you.

Okay, David I'm going to we have Tim here I'm going to let Tim handle that question Hi, David to Navy shared looking architectural U S business in fact, our architectural businesses around the world.

We continue to get increasing sequential pricing and you know that pricing, while never easy to get is being accepted by our customers and.

And you know we our customers have.

I have to remain competitive every day. So we you know we.

We can assume that we're seeing that same kind of behavior from others others in the market. So we have not seen what what.

You called discounting in the market I think the the.

<unk> realizes a whats going on upstream of us and and acting accordingly.

Okay.

Thank you David The next question is from John Mcnulty of BMO. John . Please proceed.

Yeah. Thanks for taking my question. So on the on the pricing front. Michael you you kind of indicated you were almost at a point, where it's it's real time pricing I guess what are the mechanisms in place that you've that you've put so that we can actually see that that real time pricing and and I guess to that also when there.

We're all materials eventually or hopefully subside do you give back some of that pricing in real time or is that something where we may see the more traditional lag or even at even stability. When it comes to price I guess, how should we be thinking about that.

Yes.

Well John first of all we're not going to be given this pricing back as you know we are still a lot.

<unk> if you look at this on a two and a half year stack. So there's plenty of recovery.

And the reason that we're able to get more real time pricing than ever before is it's impossible for our customers to argue with what's going on right. They fully see the same things that we're seeing they're seeing energy prices go up they see.

Raw materials that we buy they can see it in their own systems going up they can see transportation going up they're paying for transportation and are they also cannot argue that our competitors are not pricing so from that standpoint are.

Most of the bullets that they usually try to fire at is that our salespeople to try to.

Avoid.

That's not happening and now it's not a matter of can we take a price increase now it's about how much of a price increase are you going to take and the other thing that we've done a much more aggressively than we ever have is withheld shipments. So I. We're telling people. This is the new price and if you don't like it please don't place purchase.

Orders and if the purchase orders come in without the new price on it we're sending those purchase orders back and that has gotten the attention of our customers and they understand that we need relief and we need relief now.

So you can see that our you know there is a palpable energy.

Energy in the air to get price increases as we're doing it. So when you see oil at $107. You know our customers are getting price like that so I'm really pleased our sales teams have gotten much better pricing than ever in the history of the company.

Thanks, John The next question is with Steven Byrne of Bank of America. Stephen. Please proceed.

Yes, thanks, I'd like to drill in a little more on this relationship with home Depot, Michael you mentioned the 60%.

Level of a particular metric I didnt catch what that was but I'm sure. There's you know many many steps involved in the rollout of that relationship in a couple of I wanted to ask you about was you know how many of those 20.

'twenty three 'twenty 300 home depot stores do does PPG, you actually have a distribution center available in the vicinity to fulfill orders and then maybe another one would be how many of those stores have your reps already started to reach out.

Two contractors that are buying materials in the home depot, but not paid.

As identified by those respective.

Pro desks those respective home depots.

Okay, Stephen let I'm going to just say the 60% referred to we've only been able to stock 60% of their 'twenty 300 stores and I'll let him.

Add additional color to it.

Yes, David look the the the program is a while it's in 60% of the stores will continue to ramp up as we move throughout the next several months as as supply situation improves and we continue to build inventory we've got our full pro trade.

Workforce engaged across what is now an omni channel between our own network and the Th D network and we're beginning to see customer conversions already you know that will continue to grow as as we learn as the home depot associates learn.

And as the supply continues to build and we'll pivot as necessary, but we expect this to continue to grow throughout the year through a combination of loading and conversion of contractors and then we expect this to be a long term multiyear growth initiative for for both us and the home depot in the pro.

Laurie.

Yeah, Steve getting just more broadly and we talked about this on our January earnings call and we think this relationship in this extended partnership really gives us considerably higher market access.

And again, we're really targeting.

Availability for the professional painter on a daily basis, and as Tim mentioned that Omnichannel approach. They can come to our stores. They can go to our dealers where they can go to home depot and that's all within a close proximity of their job I'll jump job site.

And Stephen This is Michael the last thing I would add is look at the end of the day every time, we go into a new market with home depot, we get substantial new wins right out the gate and what that does is it builds excitement among the home depot team and their confidence level grows because what they do is they start trading these winning.

Stories across each of the different markets and that's the most exciting thing about it.

Thank you for the question Steven Your next question is from Vincent Andrews of Morgan Stanley Vincent. Please proceed.

Thank you very much Michael I'd be curious to get your updated thoughts on sort of the home improvement market. Just given you know since our last call Theres been a big move in interest rates and the housing market seems tight.

So how do you do you think the rising interest rates matters at all in terms of.

Architectural paint demand in renovation or how should we be thinking about the evolving housing market.

Okay, Vincent I'll, let Tim comment on this yeah, you know look there's right now there's such a strong backlog, particularly on the residential side. There's so many so many walls to be painted yet certainly not any near term concern for hours.

And even you know, obviously rising interest rates theres going to be some some mortgage and affordability impact there, but there's such a shortage of overall housing and multi unit housing.

And you know multi unit housing continues to climb despite despite the interest rate rises residential permits continue to climb here in U S. Despite the interest rate rises so absolutely it's something that we're watching but are you know we're certainly bullish on the on that for the at least the rest of this year.

And we will see beyond that.

And Vincent this is Michael the one thing I would add to that is that we do a pro painter survey and that pro painter Survey continues to show a very strong backlog.

Our professional painters so.

We're very concerned about affordability.

More than interest rates are but at the end of the day, our propane are still show a pretty good backlog.

Our last propane or survey, which we just wrapped up.

75% of the painters had a backlog that that was at least as big or higher than what they had 90 days in a year ago. So certainly certainly no impact on the short to medium term.

Yeah.

Thank you Vincent your next question, Josh Spector of UBS, Josh. Please proceed.

Yeah, Hey, guys. Thanks for taking my question.

A lot of investors are focused on your comments last call about EPS in 2023, perhaps greater than $9 per share you didn't necessarily reiterate that today just curious based on what you're seeing from a price cost dynamic, but also a demand environment is that something that's still achievable and is that achievable in a scenario that you lay out.

Where China lockdown impacts, perhaps fade over the next couple of quarters.

But Europe , perhaps enters into a minor recession.

Yeah.

Yeah, Josh I would tell you that the dynamics for $9 remain valid right. So we're going to have an improving refinished market, that's a great business for us.

Miles driven were actually almost back to 2019 levels are in the U S. We see miles driven improving in Europe as well so from that dynamic refinish is in solid shape you see the the numbers for aerospace a TSA bookings are all up.

Aerospace has continued to get stronger you probably noticed yesterday Boeing said they were going to start rebuilding or building 780 Sevens again, that's a positive there's a strong backlog of planes or share with Airbus is continue to grow. So you know I think that's excellent you know we're only produced.

Probably about 80 million cars this year and so you know when you think about what the run rate of cars should be we're still very bullish that a car builds in the U S have been muted because of a.

Lack of chips, a lack of parts and so this is going to get better. So overall I would tell you that we're in good shape you know our synergies are going to be a continuing to come in productivity is continuing to improve so I feel very good I feel very comfortable around $9 and the price raws.

You know, we're gonna be past that in the second quarter, you know, we're gonna be pricing pass all of it and they were gonna be catching up on the early 2021 .

Kind of inflation. So we're on the right track.

Yeah.

Thank you next.

Next question is from Michael Sison of Wells Fargo. Michael. Please proceed.

Hey, guys nice start to the year.

You know historically third quarter tends to sort of seasonally declined from two Q, but it sounds like the pricing raws is going to get better as you noted. So is this year going to be a little bit different where you should continue to see E. P. S improvement I understand it's kind of tough to guide beyond one quarter, but.

But you know kind of given sort of the potential for improving volumes in and you're probably your your sort of pricing mechanism is that something that likely happens this year versus.

The historical pattern.

Yeah, Mike This is Vince.

Probably one of the most important metrics we're watching is sequential.

Margin improvement and I think from Q4 to Q1, you Saar margins move up two to 300 basis points, depending on the segment.

We think that's the true indicator of how well we're doing well the industry is doing it's really hard year over year at this point to compare.

So again, we're looking sequentially and again, we're very proud with our performance Q4 to Q1, we do expect Theres a lot of noise.

And in 2021 to be additional noise. This year. So we do expect as you.

You heard Michael and the opening some improvement in demand as we go through the year, especially as.

China comes back we are seeing refinish aerospace et cetera, but it's really going to be hard to compare versus historical patterns and again were just looking sequentially our margins getting better Q Q4 to Q1 Q1 to Q2 versus historical patterns and that's really our marker.

Okay.

The next question is with Frank Mitsch Fermium Research Frank Please proceed.

Yeah, good morning, I need to give props to John on slide five it tells a very helpful story as to what you're facing.

A lot of questions already on price Michael I was just curious.

You know what the absolute number you're expecting in two Q would be versus that 10% in <unk> and then noted in the AR in the comments that your ticket sales were up low teens, excluding Russia I'm curious how much of that was volume.

Yeah. So Frank first of all we tried to give you a guide on that second quarter. So if you take John's little dotted line on that chart, you're gonna dotted line up to around 12%.

So that's probably a pretty good number we certainly.

Our internally pushing the team for more than that but I think that's a realistic outcome.

The ticker really volume was in that low single digits, if I remember correctly.

But the beauty about what we're seeing with the <unk> team is that we're teaching them how to price and that is something that they historically have not done a lot of.

And so this has been a wonderful thing for us and we as we've talked about before we think Ticagrelor can look just like what comex has so we get we get more growth in the local markets and we get better value for what we're selling and that leads to an ever improving return on our investment that we invested in client.

Tequila.

Yes, Thanks, Greg since you brought up since you brought up took a real one of the other businesses that perform really well in Q1 was our traffic solutions business. The prior indiscipline acquisition, we saw around 25% organic growth year over year in that business and what's a seasonally light quarter.

But again, we still ended that core ended the quarter with a very strong backlog and now we're going into a very strong quarter.

Yeah, Hey, Frank it's Tim just to add one more thing on that other a large acquisition for us.

Vince mentioned, 25% topline growth all time record quarter for that business and much like what Mike will describe would take a really you know the prior and it's Flint business.

Pricing discipline was very different than what we how we execute at PPG and we also achieved double digit price increase in that business for Q1, So really really pleased with both of the large acquisitions and how they perform for us.

Thank you Frank.

The next question is from Arun Viswanathan of RBC Arun. Please proceed.

Great. Thanks for taking my question I, just wanted to again drill into some of the drivers of maybe three Q3 Q4 understanding that your visibility is a relatively dynamic but.

When you think about the raw material inflation that you saw in Q1 and Q2 or are seeing now.

Are your current price increases.

Sufficient to carry us into Q3 or are we.

Raising prices, even more and if you if you do have to raise prices even more could you also comment on the availability abroad.

And if that has improved greatly from last year.

Yeah Arun this is Vince.

Honestly our visibility.

In terms of all.

All the dynamics at play into inflation is probably 60 to 90 days, so going out to Q3 and Q4 is difficult.

Well, we can tell you is we are seeing better supply.

Well in Europe , certainly better supply in the U S.

China's obviously, we're going through a transitory period due to the restrictions, but we do expect supply to normalize for the balance of the year and as we said many times, we do feel there is enough structural supplier capacity to easily satisfy global coatings demand.

We have a lot of other noise going on right now, but at some point will normalize across supply demand.

Based on historical patterns, just too hard to predict Q3 Q4 right now we do have enough. We do have good pricing go in and as Michael said in Q2, which is enough to compensate for the sequential increase in raw materials.

If we see more raw materials in the back half of the year, we will put in a real time pricing engine again.

Yeah.

Thank you Arun.

Next question is with Jeff Zekauskas of JP Morgan Jeff. Please proceed.

Thanks very much.

It seems that your packaging coatings business has slowed down.

When we look at beverage can demand globally, it seems pretty strong.

What's the dynamic that's going on there.

And in auto refinish.

What were the volumes in the quarter year over year.

Yeah.

Yeah first of all let me.

Touch on the packaging look we've picked up new share and I would say, 70% of the new beverage can plant. So we're in very good shape from that going forward.

You know when you look at the packaging numbers you have to remember we had phenomenal comps last year and that will make it more difficult, but our packaging overall growth. This year is going to be quite a quite good. So I feel very good about our.

And our packaging coatings business.

I would also tell you that you know when I think about that business. It's not just the volume. It's also the price that we're realizing as well.

Jeff This is John I'll, just comment on refinish, if you look at the U S and Europe on a year over year basis volumes were up about a mid single digit and that's off of a tough comp from last last first quarter was a good quarter, especially in the U S. Asia was off a little bit mainly driven by what we talked about the winter.

<unk> slowed activity down and there was obviously some restrictions in March.

Thank you Jeff.

Your next question is from Kevin Mccarthy with vertical research partners. Kevin. Please proceed.

Good morning, everyone two questions on manufacturing variance and Capex first on the manufacturing side back in January I think you talked about a 20 cents EPS drag in the fourth quarter and I'd like to know if that number.

Climbed in the first quarter and if so how much and what your crystal ball might say for the second quarter and then on the Capex side.

You know if I read read the numbers right. It looks like your first quarter spend was $194 million versus $80 million last year and just was wondering if there's anything unusual in that and in terms of cadence or any change in your annual range of $4 75 to $5 25 for Capex This year.

Yes.

We'll take the easy one first capex.

We had capex spending in December is that we don't pay for until January .

January .

So the January number was probably a little bit inflated, but our overall spend for the year is not going to change it and we're still looking at that 3% 500 million kind of range. So.

We feel good about that as you know some a little bit of that is catch up from the underspending in 'twenty and a little bit of early 2021.

From a manufacturing standpoint, we had about 20 cents in Q4, we probably had about half that in Q1 and you know the problem is it's not that we are having challenges, making things as we're having challenges scheduling things because of raw materials predictability what comes in and if you're missing one.

Item you can't make the pain. So that's a bigger issue and of course some of it is also unexpected additional inflation on energy at the plant. So as you can imagine going into Q1, we had a certain natural gas number for Europe , and we are well in excess of that once the the war broke up.

So I would tell you overall, the manufacturing is getting better and I'd say for Q2, you should anticipate another 50% improvement in that number.

Thank you Kevin.

Next question P. J do you have a car a city PJ. Please proceed.

Yes, good morning.

Michael I know you've been back integrating into resin capacity in the past.

No just kind of how did that help you during this crazy period of inflation and all that.

And then second question for Vince Vince you mentioned sequential margin improvement.

But given your sort of first quarter that you reported the second quarter guidance. You know first half is going to be down year over year. If you continue to improve margins sequentially. Do you think you can grow earnings this year.

Thank you.

Okay.

Okay. So P. J I'll take the emotions question, we as part of our traffic solutions, our Enniskillen acquisition. It came with a small resin plant. So we're making more emotions there.

We think we can increase the size of that facility. So the team is working to do that as well. So not only are we going to use the asset. It was running five days a week one shift you know now it's running 24 hours a day seven days a week.

And you know we're going to improve the size of that so we are able to get a b a and some of these other raw materials that go into making the emotions or the availability is better there and so we feel comfortable that we're going to continue to improve the utilization of that facility.

Yes P. J on the margins I'm glad you brought that issue back up because I do feel.

It's really the measurement stick because of all the noise last year, our first quarter last year was very strong benefited by.

The first quarter of 2021 benefited by some pandemic recovery.

And then as we got through the balance of the year or second half of 'twenty, one was very very weak.

We're not going to give full year guidance on the call here today, but again the trajectory of margins.

Sequentially for each of these quarters I think the true marker for our industry.

We do expect again from some of the reasons Michael mentioned abating.

Abating, so supply shortages.

Improvement in our manufacturing.

Catch up on pricing, we do expect our margins to improve sequentially.

Versus historical patterns.

For the foreseeable future.

Thank you next question Laurence Alexander with Jefferies. Laurence. Please go ahead.

Hi, everyone. This is Kevin Estok on for Laurence Alexander.

I just had a quick question about the credit market. So I guess, given the moves and also the.

So its tightening cycle I guess I was wondering if theres been any shift in how you think about potential leverage and I guess, how much you plan or expect that you could flex your balance sheet going forward.

Yeah.

Where are our financial or long term.

Financial discipline Hasnt changed to where you were.

We're in kind of the mid twos in terms of debt to EBITDA.

We do have we.

We do expect to pay down some debt this year.

If we see anything strategically we want to execute on.

We will act accordingly.

But we're not going to shift our are.

Our strategies again, if you look at our.

And in interest rate.

Blended interest rate, it's the best in class of our space or close to the best in class.

So again no change in our strategy our outlook in the near term.

Okay.

Thank you next question, Mike Harrison of Seaport Research Partners, Mike. Please go ahead.

Hi, Good morning, a couple of questions on the auto OEM business first of all you've been dealing with some operational inefficiencies. There has that improved either in terms of customer behavior or your ability to manage what's going on in that space and then maybe in.

Updating on electric vehicle application wins with some of your innovative offerings.

Have you seen some wins come through and are you concerned at all about batteries shortages impacting EBIT growth this year.

Okay, let's start with the manufacturing I would say the bet. The auto guys have gotten better at knowing what chips are coming in and when they're coming in so they're much better they are having much less scheduled or unscheduled downtime, that's the way it should be phrased.

You know our manufacturing has gotten better because they're a predictability of running has gotten better and the one question nobody asked so I'm going to throw the answer out there make sure you know it is our automotive team is priced higher than company average so I feel really good about that where we are in that space and then from an EV.

Standpoint, we don't see a battery shortages. This year, it's certainly a longer term trend that we're going to be paying close attention to but right. Now you know when I think about where we're winning in that space you know our.

Protective coatings that go into the battery has been a huge win for US we just picked up to world class customers this quarter.

Dielectric powders is another area that we're winning in and so I feel very comfortable.

About that one of the top five guys. We are also running a long term cathode binder study with that's more like a three to five year program, but the fact that they came to us to do that is a really good sign about how they see us playing in this space long term, so I'm very comfortable with.

The pace of that Evs are growing and our ability to service that market.

Mike I just want to I'm glad you brought that question up again, because I do want to talk a little bit more broadly about auto builds Michael mentioned tar.

<unk> targets from third party concerns as yours around 80 million builds.

Again, we think the market on a run rate basis is typically over 90.

So there's a at least let's call. It 10 to 12, 15% catch up that will occur in the next year.

Pick the number of quarters or months 12 months 12 to 18 months.

On top of that we think Theres a fleet rebuild that has to occur for things like car rental fleets.

You know, we pegged that at another 3% to 4% of the market.

And then on top of that there is an inventory replenishment cycle for in the U S. For example dealer lots.

So very long runway there.

There are certainly getting better chip availability and more consistency and theres more chips to come in the back half of the year in early 2023, so very instrumental in our recovery.

And we feel very strong about the underlying demand that.

That supports that.

Thanks, Mike.

Next question's from J D on diet of on field Research. Please go ahead.

Thanks.

First question really is around your your protective and marine business.

Appreciate you guys are a bigger in China. These days, but you know how do you see your backlog evolving now.

Now that oil prices are high gas prices are high and also some of the marine end markets are doing extremely well in terms of cash generation. So.

Do you think that next two years, we should see a material improvement.

In this in this area and then the second question really is around auto.

Auto business of yours.

Bruce you had wins, what you just said, but like you know if we if we go by the theory that there is cannibalization E vs are eating into the Ice's just want to understand your fixed cost structure. So in the sense in the next five years, if we have 90 million cars, but $25 million or 20 million of them are evs.

Can you actually reduce your fixed costs.

In your traditional IC E based auto Oems.

On the other hand, obviously you win in <unk>.

And then are you looking at any bolt on acquisitions for instance.

EV related coatings for batteries or do you have already exposure there. Thanks a lot.

Okay, Jenny will start with the new builds our marine business is up substantially and it's going to continue to grow new builds are up 20% year over year.

It's up strongest in China, which is where we're strongest.

This is a good market for us are the oil and gas assets that are going to be built because of the Russia.

The war on Ukraine are also going to increase so that's really good for us LNG tankers are really good for US. This is an area where a pool fires a lead to a product that we sell that are best in class. So you know I have high hopes for R. P.

<unk>, our protective <unk> marine business overtime that is continuing to do well when you talk about the auto business. The fixed cost we actually paint EV cars, just like you're paying out internal combustion cars. So we're gonna still have all of that a bit.

Business and pleasure you sell additional paint for the battery box. So actually your fixed cost structure improves as the volume goes through so the transition from internal combustion engines to batteries or is actually a good trend for us and we are leading in the space in this area. So we.

We're doing a I'd say, we're doing better than our typical market share on internal combustion engines now when we look at acquisitions in that space, We're always looking for things that add shareholder value.

So I would tell you that we're always interested in it is a highly competitive space right now there's a number of people playing in it whether it's the protective coatings, whether its films whether it's powders.

Whether it's a thermo gap fillers, there's a variety of different applications on how you win in that space, but we feel very good about this.

Yes.

Thank you J D.

There are no further questions waiting at this time, so I'd like to hand, the call back over to John Bruno.

Thank you see I mean before we wrap up the call today I wanted to let everyone know that maryann benzoic will be retiring in the second quarter and this will be her last quarterly earnings call.

I think a lot of people on the call have dealt with Marianne and she's been a valued team member here at PPG for many years and providing excellent support to the investment community supporting Investor Relations for more than 20 years, we want to thank maryann and wish her and her family all the best in retirement.

That concludes today's call if anybody has any other questions. Please.

Our area of call. Thank you very much.

That concludes.

The PPG Q1 2022 earnings call. Thank you all for your participation you may now disconnect your lines.

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