Q2 2022 PPG Industries Inc Earnings Call
Tom.
Slides are also available on the website 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 the 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 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 additional information. Please refer to <unk> filings with the SEC now, let me introduce PPG, chairman and CEO Michael Mcgarry.
Thank you John and good morning, everyone I.
I would like to welcome you to our second quarter of 2022 earnings call.
I Hope you and your loved ones are remaining safe and healthy.
I will provide some comments supplement the detailed financial results will be released last evening.
For the second quarter, we delivered record net sales of $4 7 billion and our adjusted earnings per diluted share from continuing operations were $1 81.
To quickly summarize the quarter. Our sales performance was an all time record driven by continued realization of real time price increases that are now fully offsetting total cost inflation.
Total cost inflation includes generational high commodity cost inflation energy logistics and other employee related cost inflation.
In addition to pricing our top and bottom lines continue to benefit from recent strategic acquisitions, including our traffic solutions business, which delivered a record quarter.
We achieved strong sales results despite softening consumer demand in Europe .
Longer than anticipated COVID-19 related disruptions in China and unfavorable currency translation.
While we included the European demand realities in our financial guidance, we issued in April the impact of the extended China restrictions and the currency translation was negative by about <unk> <unk> per share versus our original guidance.
Our sales were aided by above market volumes in several of our end use markets, including our PPG Comex business, which delivered another record quarter as Concessionaires continue to add new locations.
In addition, our global automotive refinish traffic solutions and U S packaging coatings businesses. Each set all time quarterly sales record in the second quarter.
This highlights one specific example, PPG technologically advanced products.
That is our packaging business, where we have won positions on about 75% of the new metal can packaging lines in North America over the past two years.
Also our aerospace business continues to benefit from year over year improvements in domestic travel in various countries resulted in higher aftermarket demand and we expect further aftermarket and OEM growth as the industry demand remains well below pre pandemic levels.
Although still challenging commodity supply disruptions continue to ease in the quarter.
And we expect further improvements there was progress through the second half of 2022.
This includes much better raw material availability as inventories at most of our suppliers have vastly improved.
We achieved adjusted earnings that were toward the upper end of our April financial guidance and would have been in line with the second quarter of 2021.
If not for the negative impact of foreign currency translation.
This reflects the benefits of our strong commercial discipline regarding pricing and continued focus on cost management.
Our earnings performance was aided by higher selling prices of about 12% year over year, marking the 20 <unk> consecutive quarter of higher selling prices, our selling prices are now up over 15% on a two year stack basis, reflecting our continued actions to offset persistent cost inflation.
We anticipate by the end of 2022, we will fully offset all cumulative total inflation from 2021 and 'twenty two.
More importantly, we are converting higher prices to improve margins.
During the quarter, our operating earnings improved each month.
This strong progress is being reflected in the positive momentum of our operating margin recovery as we improved sequentially.
<unk> quarterly margins by 200 basis points and anticipate further improvement in the third quarter.
Also aiding our second quarter earnings performance was continued realization of acquisition related synergies and cost savings from previously announced programs, which together totaled about $30 million of incremental benefit.
During the second quarter, we also implemented cost mitigation initiatives in Europe , reflecting the slower demand in the region and have additional contingency plans ready in the event of a broader economic slowdown.
The efforts around cost management resulted in a reduction of our overall of our selling and general Michigan cost by 100 basis points as a percent of sales compared to the prior year second quarter.
Our acquisitions are also performing well, including the traffic solutions business, which achieved 15% sales growth in the second quarter.
We remain excited about future growth opportunities for this business and then the next few years, we anticipate increased infrastructure spending and expect further U S adoption of mandatory expansion of traffic marketing for safety purposes.
During the quarter, we continue to progress our launch of the expanded propane or initiative with the home depot.
Albeit later than we wanted in the paint season, and despite continuing raw material constraints.
We were able to fully load PPG products at all U S locations with our full probe.
<unk> assortment by the end of the quarter.
We have already had some meaningful early wins of some large pro contractors, our near term target list includes more than a thousand probe contractors that have expressed interest in buying our products at the home depot.
We're excited about teaming up with the home depot and collectively we see opportunities for significant growth in the coming years.
In the second quarter, our net debt was consistent with the first quarter and our working capital was sequentially higher mainly due to the higher dollar value of inventories, reflecting inflationary effects and higher receivables given our selling price increases as.
As the supply chain disruptions continue to improve in the coming quarters, we expect our working capital to return to more normal seasonal patterns and cash flow generation to improve as we progress through the end of the year.
We repurchased $135 million of our stock at attractive prices during the quarter and continue to manage our acquisition pipeline. In addition, we have progress our key capital expenditures during the second quarter focus on productivity and growth and now expect total spending to be about $450 million for the full year.
Consistent with our past practices, we will deploy cash and most accretive manner for our shareholders, including some debt reduction.
In the second quarter, we further enhance our company's corporate governance as we received the necessary shareholder vote threshold for board declassification and elimination of supermajority voting requirements.
We'd worked on soliciting our shareholders for years surpass these proxy votes and we're pleased to see our efforts pay off to further solidify our corporate governance.
In addition.
<unk>, we continue to advance our sustainability strategy and proudly announced ppg's commitment to setting near term companywide emission reductions in line with climate science through the science based target initiative.
We plan to communicate new 2030 goals that will define our de carbonization strategy over the coming months.
Looking ahead in most major regions and end use markets underlying demand for PPG products is expected to remain solid we.
We anticipate strong sequential growth in Asia due to higher industrial production compared to the second quarter that was heavily impacted by COVID-19 restrictions.
We're closely monitoring the current COVID-19 situation in China.
And at this time, we only expect minimal impact to our sales and operations from any further restrictions.
In Europe , we expect economic conditions to remain soft, including normal seasonal demand trends versus the second quarter.
Also positive demand trends are generally expected to continue in North America aided by stronger sequential automotive OEM production.
Further aerospace recovery and continuation of recent trends in auto refinish sales as we work to fulfill strong back orders.
In the second half year over year comparisons will be aided by the sharp declines we experienced last year during the height of the supply disruptions.
That impacted several industries, particularly in the U S.
Outside of a few commodities, we expect supply chain conditions that continue to improve including better raw material and transportation availability.
As our suppliers production capabilities are returning to a more normal condition.
Also in the second half and specific to PPG, we expect several businesses, including automotive OEM and aerospace to deliver strong growth due to large supply deficits and low inventories and these end use markets.
Other PPG specific positive for the second half our continued acquisition synergy realization and additional cost savings from previously announced restructuring actions.
In the third quarter.
Our two year stacked raw material inflation is expected to be about 40% up.
Up a low single digit percentage sequentially versus the second quarter.
We'll continue to prioritize implementing further real time selling price increases and we expect a quicker offset versus historical lag similar to what we delivered in the second quarter.
Importantly, we expect that our sequential quarterly momentum on operating margin improvement will continue in the third quarter.
We work back towards our historical margins.
Also even with significant unfavorable currency impacts are expected to continue resulting in about a <unk> <unk> EPS impact in the third quarter.
We are forecasting our adjusted earnings to increase on a year over year basis.
While near term challenges exist I remain confident about the future earnings capabilities of PPG as the earnings catalysts that I referenced in the past remain fully intact.
And we certainly see a path to return to prior peak operating margins with opportunities to exceed them.
As a reminder, this includes continued recovery in the automotive refinish.
AUM and aerospace coatings businesses.
Continued sequential momentum of positive price versus cost as commodity raw material cost moderate in the event of an economic downturn they should moderate in a more rapid manner.
A lower cost structure resulted in strong operating leverage on any sales volume growth accretive.
Accretive earnings and further growth from our recent acquisition.
In closing as we look ahead, our team of 50000 employees remains focused on serving our customers and supporting our stakeholders.
Every day I'm inspired by our teams around the world, who are making it happen or providing products that are helping to protect and beautify the world.
Thank you for your continued confidence in PPG. This concludes our prepared remarks now Lauren would you. Please open the line for questions.
Of course.
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.
As a reminder, just to allow everyone an opportunity to ask a question the company requests that economists off any one question.
Of course for just a moment to compile the Q&A we'll stack.
Okay.
Our first question comes from David Begleiter from Deutsche Bank, David. Please go ahead.
Thank you good morning.
Michael you discussed a path to $9 of EPS in 2023.
Has that now been pushed out given the current economic backdrop and weakening we are seeing in Europe .
Well, David it's certainly going to make it a little bit more challenging but all the conditions are still there right you have refinish, that's going to have an improved outlook miles driven are closing in on 2019 levels automotive OEM is still light I mean, we got $24 5 million builds in China, we have supplied.
<unk> in the U S. The fleets have been rebuilt so thats still there aerospace is coming back at a very strong level and I'm sure you saw the Farnborough announcements about the new planes, so you're going to have not only aftermarket doing better, but OEM doing better you have the synergies we've talked about we have $30 million.
And synergies just in the quarter alone productivity manufacturing and then price raws, even though we haven't built that in.
Sure Somebody's going to ask later on the call about that we see certainly raw material pricing getting a little weaker in China. We know, it's going to get weaker in Europe , and that's going to free up additional and then we still have.
Our ability to have cash deployment. So I think all options are on the table and I think we're still pretty confident that the outlook remains good for PPG.
Okay.
Thank you.
Next question comes from Ghansham Panjabi.
Please go ahead.
Yes. Good morning, Thank you for the for the time on the weakness in Europe that you saw in <unk> and market concerns of a recession in the region. Michael How do you think this particular business cycle could be different in a continued slowdown scenario given that some of your end markets never fully recovered to begin with and then related to that can you also comment on the current raw material supply situation in Europe .
Just given concerns over not just the supply of natural gas, but also issues with logistics and the water levels and so on and so forth and the reverse.
Sure Ghansham, let's start with the the.
The fact that the what's going to be different. This time is look in the U S. We have full employment.
And yet people with a lot of money in their pockets.
And so even if the fed over Titans I'm still looking for people to maybe partially slow down, but it's not going to be anything significant I would say that right now.
There is a strong likelihood that people are going to continue to spend money in the U S.
Certainly, we see a slowdown coming in Europe , I I got to be honest I'm not as worried as other people are about gas rationing in Europe .
And the reason for that is when you think about the size of the automotive business. The size of the chemical business. These are hugely important to people in Europe , and if you got into a significant gas rationing over there you would have an economic.
Event that would not be pleasant, so I'm anticipating the government's going to ask people to turn their thermostats up substantially during the summer then going to turn them down in the winter people are going to start conserving so I'm not worried about raw material supply from that standpoint. The other thing I would tell you is I'm already starting to see some.
Rotation of raw materials out of China to Europe .
In anticipation of this so that's going to provide additional supply and that additional supply will help ease some of the projected challenges so I'm.
We're obviously paying attention, but not nearly as worried as some people are.
Specific to the European demand Ghansham as you asked.
We are seeing obviously slows we were down about 10% in Q2 were projected to be down in Q3.
And we have some markets that are improving on a go forward basis as Michael alluded to.
Our auto OEM business, we expect to improve.
Certainly over the next call.
12 months.
Aerospace is improving in that in that particular region as well as globally. So we have some offsets to what's already a weak environment.
So again on a go forward basis, we would expect some.
Puts and takes.
Okay.
Thank you. Our next question comes from Christopher Parkinson from Mizuho Securities. Christopher Please go ahead.
Great. Thank you I am just back to a corollary of Abaxis question There've been three variables affecting your margin outlook.
Including end market mix with refinish narrow improving but still.
Below or maybe just at 19 levels.
Manufacturing inefficiencies, especially in the second half due to auto and then of course price cost when we take a step back and just think about these for not only for the second half, but into 2023 going back to that $9 question.
Can you just give us the key highlights and how youre thinking about these right here right now and perhaps just highlight how youre thinking about them a little bit differently versus the past three to six months. Thank you so much.
Yes, Christopher I mean, obviously the mix is improving every single day. So that's a positive for us as you know our refinish and aerospace are very good businesses for us.
And you have improved pricing in automotive, which is improving that mix as well. So I think from that standpoint, that's going to be good the.
A second one if you think about our manufacturing situation, we've had to adjust manufacturing schedules on very short notice or no notice in some cases.
Because of the supply disruptions forced matures and as supply gets better we're able to plan better scheduling better obviously COVID-19 is not a challenge anymore. We don't have as many call off.
So from that standpoint, our manufacturing is going to improve and as you see our price is dropping to the bottom line. So margins improved 200 basis points in Q2, Youre going to see significant improvement in Q3, youre going to see an improvement in Q4. So from that standpoint that is going to continue to be.
Positive momentum and we're expecting raw materials on a sequential basis only be like.
Up low single digits in the third quarter. So I think there's a lot of positive momentum here and I'm feeling pretty good about that.
Just one I just wanted to this is Vince again, I just want to add that we are still down 10, 2% and volume.
<unk> 2019 so.
Again, you said, we were close to parity.
Huge incremental margins on that volume recovery again in auto and aerospace are two of the biggest declines versus 2019 or pre pandemic.
Okay.
Thank you.
<unk> comes from John Mcnulty from BMO capital markets. John Please go ahead.
Yes, thanks for taking my question.
So I guess, what I'd like to focus on is the price versus raws dynamic I guess can you help us to understand what portion of the portfolio still has more pricing that it needs to get to catch up. It seems like you did really well in <unk> I guess I'm curious what else you need to kind of hit on it and then equally important it looks like you are.
We're on track for raws to be up about $2 billion or so over the last couple of years I guess, when we start to see raws coming off I guess, how much of the pricing associated with that do you think you hold onto.
Versus versus having to give back is there a way to think about that because it just seems like it's a really big number.
Yes, John This is Vince I'll start and then Michael can add some color.
We still have targeted pricing.
Will inject in Q3.
Some businesses, we have premium pricing that you typically occurs towards the end of the season.
So youll see that both in performance, we still have some catch up pricing in some of our industrial and auto businesses that will take place in the quarter.
So there'll be higher we expect higher pricing on a percentage basis and certainly on a two year stack.
For Q3.
With respect to.
The inflation I think your numbers are directionally correct in terms of the inflation, we've absorbed over the past call. It 18 and soon to be 24 months.
We anticipate offsetting that fully with price, but not just that as Michael mentioned in the opening remarks, we're offsetting.
Logistics were offsetting.
Employee related inflation.
So and packaging inflation, so again all of our pricing will overcome that by the end of the year.
And.
Typically you have to we typically have sticky pricing.
As we progress through the economic cycle.
So maybe John to add a little bit to that premise.
Premise of trying to understand is how much of this two plus billion or we're going to keep the thing that we're talking to our customers about as raw material inflation is just one piece of this.
So when you add the things that Vince talked about logistics labor energy packaging costs.
We need to continue to recover that so I fully expect and I will be fully engaged and Tim will be fully engaged with the businesses to ensure that we're going to be keeping a large percentage of this in our pocket and that is a key deliverable for our business unit leaders everybody is well aware of it and it is.
<unk> signaled well ahead of time, so this will not be a surprise our customers.
So.
I'm feeling pretty good.
Thank you. Our next question comes from Kevin Mccarthy from <unk> Research Partners. Kevin. Please go ahead.
Yes, good morning.
Your guidance for the third quarter on slide 10, you're baking in.
Volume assumptions are flat to down.
Low single digit percentage. So I was wondering if you could just speak to the buildup.
To that assumption.
Maybe in terms of geography assumptions around China, lockdowns or lack thereof European macro but also in terms of your individual businesses, and which ones you expect highest or weakest volume growth in the third quarter. Thank you.
Yeah, Kevin Good morning, Vince again.
On a year over year basis.
A couple of Big Movers weekend, we expect Europe to be down.
Digits close to double digits.
Versus the prior year, but we do expect if you recall, we did have a.
The peak of the chip shortage in our automotive OEM business last year.
And thats recovering not fully recovering, but it's recovering this year Q3, we also have improvement in aerospace as we've talked about several times already on the call.
Those are three of the bigger movers and then we have a variety of puts and takes.
By business on a sequential basis whats important is we do expect.
For US China was was down for essentially two months in Q2.
Do expect China to be fully up and running with just modest very modest impact from Covid in Q3, So that's the bigger biggest mover sequentially.
Yeah.
Thank you. Our next question comes from Josh Spector from UBS, Josh. Please go ahead.
Okay.
Yes, hi, Thanks for taking my question I was wondering within architectural coatings could you discuss some of the volume differences in DIY versus trade markets I guess, specifically looking at North America, and Europe , and I guess, given some of the commentary about Europe , where youre still seeing declines on technically easier comps from last year.
What does that say about your thoughts about DIY and how that holds up in a recession this cycle potentially.
Yes.
Yeah.
Yeah, I'll take that one Josh this is Tim <unk>.
Thanks for the question.
The biggest driver of the volume issue.
And DIY is clearly Europe , we've seen we've seen a double digit.
Klein in DIY volumes Europe .
And frankly, we expect that to expect that to continue we called it at the end of the last corner that was accurate and we expect that.
Same phenomenon to continue that.
Trade volumes in Europe are a bit stronger and depends on some by country. We're seeing some softness in some countries in trade and other other countries like France, we continue to do very well on the trade side of the business. So that's that's more mixed and.
And when you come over to this to the United States. We've also seen DIY I would call it more normalizing.
Where Europe was down because of a number of issues, whether it was coming out of Covid.
Consumer confidence because of the war here in the United States, It's more normalizing in a post COVID-19 environment, whereas in the trade side of the business year in architectural U S. We still see we still see very good backlogs.
We do a survey of our professional painters every quarter.
And about 80% of the professional painters that we surveyed here in the U S. This quarter have as much or larger backlogs than they did last quarter. So DIY normalizing here, but it's still it's still good trade backlogs.
This is Vince a couple of other color points here in the U S. We were still impacted early in the quarter.
Our U S architectural business by supply challenges.
April may are still in the heart of the paint season.
And in Europe based on what we've seen to date, we're very comfortable with our share position.
Thank you. Our next question comes from Frank Mitsch Fermium Research Frank. Please go ahead.
Thank you and good morning folks I appreciate the level of details are coming to the to the use of cash in particular is rolling off.
As a driver as part of the M&A.
Increase in I know that M&A is important too to PPG. You did mentioned that you stepped up buybacks in the quarter at attractive prices, but I'm just curious as to what the outlook is on the M&A front.
<unk> that's out there.
Brian This is Michael.
The M&A front continues to be what I would call steady.
You saw there were some deals done in the past 90 to 120 days, we will have.
He looked at those and decided that we arent value, creating from our PPG shareholder perspective.
And we continue to look at our portfolio you probably noticed that we sold a couple of the businesses you saw we sold I believe.
Another small and so we're always looking at our portfolio.
But we're going to do what's best so this quarter.
Paying down debt and buying back stock made the most amount of sense, we're going to continue to look at our portfolio and decide what we're going to do the pipeline remains of what I would cost.
Steady and we're continuing to talk to the board about the options that are out there.
Thank you. Our next question comes from the Ryan Safra from BNP power back Hey, Brian . Please go ahead.
Yes. Good morning, I have a question regarding these contingency plan on the European side.
I hope you're right.
The lack of.
<unk> 10 minutes of chemical production in order to Miss.
Would you related to that but I was wondering if you could talk about.
Two things one is how youre thinking about raw materials inventories and cooking, perhaps into a more tempered in time, but also in terms of areas by using a single sourcing I know that there was a big surprise last year in the U S. I'm wondering if you blend from the U S side and that's now one of your European.
Operations can run on dual sourcing <unk> sensor that you can indeed important raw materials from elsewhere. Thank you.
So Lauren this is Michael first of all it's virtually impossible to be dual sourced on everything because we make some unique chemistries on those that we are single source, we have a contractual relationship with our suppliers to provide that protection that we need.
But.
No we have.
Been in a mode of.
<unk> been conservative on inventories right now.
In Europe , though we are going to be moving toward a mode of destocking over the next two.
We've already started to see availability of raw materials get better we anticipate that prices, we've seen some prices already softening in China, we anticipate some softening coming up in Europe .
And so the plants have already put in place contingency plans they have enacted some too.
<unk> costs.
Costs, and so from that standpoint, I think.
We feel very comfortable we have some additional plans in place as well.
Thank you our next question comes from.
This is Martin from RBC capital markets. Please go ahead.
Great. Thanks for taking my question.
I guess I just wanted to go back to the bridge potentially too.
Maybe $9 or something close to that 23 or 24, if you think about that that seems to be.
Likely that it would have to be composed of something around $2 50 for Q2, Q3 and $2 for Q1 Q4 I guess.
Is that correct I mean that would imply kind of like a 20% improvement on a quarterly run rate basis, and if you think about that 20% is that maybe a third volume improvement and two thirds kind of margin recovery from price cost or how should we think about that path to getting back to that kind of earnings power.
We will try to take another stab at this room this events.
So look we're down 10% in volume versus 2019, we expect.
Majority of that to return.
And then because of some of these.
Decremental items on very large businesses for us and businesses that are showing today, we expect on a go forward basis.
Good move good recovery momentum again, we talked about auto we've talked about aerospace a couple more.
Moller we.
We do expect positive business mix as part of that equation as well.
To your point on price Raws recovery, we've talked about a couple of times, we're still down in Q3.
On a cumulative basis, we expect to be at least at parity by the end of the year on price raws, so that'll pick up.
Several several points.
I don't want to Underemphasize with Michael talked about with respect to manufacturing.
We would typically have productivity improvements year over year from our manufacturing operations. If you look at the past 12 months, we've had decremental manufacturing. So we expect to fully recover those decrements and move back to our legacy of producing productivity.
So those three things coupled with synergy capture and coupled with some cash deployment.
Us too.
Two to $9 $9 plus of earnings power and we've talked about.
Thank you. Our next question comes from Sean Chief of coffee.
Please go ahead.
Yes, hi, good morning.
You talked about European DIY being slow you've talked about that for a while.
How did European industrial business throughout the quarter.
It slowed down as the quarter progress and then a related question to that is are you seeing a rebound in industrial activity in China and do you think that China activity, our industrial activity can grow in the U S and Europe are slowing down thank.
Thank you.
Yes P J we saw.
Declines in architectural in Europe , obviously, as Tim talked about.
Automotive on a year over year basis, and our industrial business on a year over year basis, what were also down call. It mid single digits.
Due to some of the same issues.
Caused.
Code economic slowing in the region.
On a go forward basis.
So we expect to recover at some point still going to be choppy in the back half of the year in Europe , it's going to certainly recover in the U S and in China.
Deal activity, we expect at least at parity.
We are seeing a very rapid recovery in China from the Covid shutdowns and expect growth on a year over year basis in Q3.
With respect to with Europe slowing with China grow.
Again, we think China is becoming more of an internally consumption market.
And we still feel good about the U S economy. So there are some offsets to the European slowing.
That.
Would allow China to produce good industrial activity and results.
Hey, Jay This is Michael I think if you think about this from a China macro standpoint.
China government is under significant pressure right now because of some of these COVID-19 lockdowns and theyre injecting money, reducing the amount of work.
Bank restrictions and Theyre, putting pressure on the building industry as well. So they are showing every sign to make sure that the local economies in China.
<unk> to recover so.
I feel feel pretty good about the fact that China is committed to having a better second half of the year than they had the first half of the year.
Thank you. Our next question comes from Michael Sison from Wells Fargo. Michael. Please go ahead.
Hey, guys nice quarter.
Yes. It does feel like a recession is is the consensus view pending these days and your portfolio has changed so just curious overall, how do you think the current portfolio in terms of volume.
Would hold up in a recession and given you've got $2 billion worth of inflation is it possible that you.
You could potentially offset that entire volume.
Declines because you get a lot of this inflation back in and maybe Ppg's earnings look a little bit more resilient than maybe in the past.
Well, Mike I think we certainly have built a more resilient company to start with that is the basic premise.
I do think that.
We're going to keep a lot more raw materials in our pocket. So if you do.
See a raw material decline I think that's going to flow through the P&L a lot quicker than you think and I think thats a little bit of what people are missing in this analysis.
And quite honestly this recession, if there is one which.
I still don't think there's going to be a significant one if there is one we have a different portfolio right now so think about traffic solutions.
That business runs no matter, what happens and they are behind on that plus you have demographics, where theyre going to have thicker in lines more lines are going to be longer.
So those things are going to be positives. You also have the fact that we have a supply significant deficit here in the U S of cars, that's going to be different and we have a significant deficit of planes.
And that's going to be different in the new planes that are coming out are much more fuel efficient than the old plane. So it's not a matter of whether theyre going to keep the old planes in the air Theyre not going to do that they're going to replace these because of the fuel efficiency and so if you believe that one.
$100 oil is here for.
<unk>.
Moderate period of time.
Playing guys those are economics, they cannot afford to miss so that's why they're going to be replacing these claims. So I think that's all good and what's interesting about this work from home stuff is it.
The dynamics are people are driving in the suburbs more and less on the highway which leads to more lower speed collision. So totals are actually down right now so.
So totals were down 2% and I anticipate total is continuing to decline.
And that's good for our refinished business and Oh by the way you're getting an accident right now you better be prepared to wait because there's about a six week the average backlog to get a car repair there's about six weeks right now that's assuming they get the parts. So I'm feeling pretty good about that.
Mike This is Vince again.
Your comparison will just compare to the last recession.
Obviously, there was a housing overhang globally in the last recession, there was an auto overhang in the last recession, we were not seeing those.
Michael talked about aerospace, we expect that to be in recovery mode.
In a recovery mode as it relates to <unk> portfolio in a different position of traffic solutions versus the last recession, we have PPG comex, which is a very steady steady business for us. We also have some other businesses and other parts of the world that are more study.
So again I think Michael's comments at the outset that we build a better.
Portfolio more resilient portfolio it takes into account some of those things.
Hey, Mike, It's Tim just to pile on here, even one more business from a recession or a potential recession resiliency standpoint.
The military part of our aerospace business, given what's happening geopolitically tremendous backlog there too.
Thank you. Our next question comes from Jeff Secaucus with J P. Morgan Jeff. Please go ahead.
Thanks very much.
Your volume expectation and performance coatings for the third quarter is flat to down a low single digit percentage.
Isn't that too low.
I understand that European Deco is weak.
But as an aerospace better at auto refinish and last year they were very.
Shortages in raw materials in North American architectural market.
Shouldnt volumes to be up in the third quarter.
Then for events.
Inventories and receivables are going up.
Maybe about a 10% rate payables or maybe going off that have that.
Is that a trend thats going to continue and why the difference.
Yeah, Jeff I'll take the second question first again on inventory, we came into the quarter when we came into the year.
With a focus on having excess excess inventory where possible in order to have supply to our customers. So we're.
Are you looking at that as we go into the back half of the year, we will ratably work that down.
Supply conditions have improved and continue to improve.
Receivables are up simply because our pricing is up and we have a bigger book of business and placebo balls are up six or $700 million on a year over year basis.
Collect those we're not seeing any.
Significant deterioration on collections.
Hi receivable balance Jeff will turn to.
Cash in the third and fourth quarter.
Payables.
Again were timely with our with our suppliers so nothing to speak of there.
As it relates to the performance coatings volumes.
A variety of different moving pieces.
Aerospace up as you mentioned, we do see DIY down both in Europe .
Also in the other mature regions like Australia.
We do have a slowing we do have some challenges in our protective business. When you go into Q3 really a residual hangover from Q2 in China So with.
Reporting segment, you always have puts and takes it's our best guess at this time, hopefully we're being conservative.
But that's our best guess at this time.
Thank you. Our next question comes from Duffy Fisher from Goldman Sachs Duffey. Please go ahead.
Yes, good morning.
Question, just around raw materials, if you could talk about the different buckets solvents resins pigments, maybe packaging whats your view whats happening with price and availability going into the back half of the year and then maybe kind of what do you think.
The two year outlook is for some of these raw materials that have been quite tight.
Well, let's start with the negative first is that emotions continue to be a bit of a challenge for us.
And there have been a few.
Ah.
Force Majeure as you probably saw that one and I'll next recently so so it's not we're not out of the woods on that yet.
But we've seen tio too.
And China get weaker we've seen tio too from China being shipped into Europe .
I certainly see a park sees.
In Asia getting weaker as well.
I think that.
There is a number of our.
Solvents that are now flattening out availability is much improved but the.
The pricing is flattening out and I think the same thing with packaging packaging.
<unk> out and.
So I think when I look at our overall, we bucket our raw materials into about 12 different buckets.
Last quarter I had 11 out of 12 were red.
Coming into this quarter, we have four or five of them matter yellow that means the prices have moderated and we.
We actually have one green on the chart so.
And when I when we look ahead into the fourth quarter, we see improvement in a number of those as well so I think.
We're coming to the end of that raw material inflation and that's good for US sequentially, we see low single digits in the third quarter and I think you should expect.
Sequential improvement in the fourth quarter.
Duffy, it's Tim just to add to what Michael said Wow.
Supply is significantly better than it was at the beginning of Q2 and certainly better than last year, we still have spot supply issues I would call. It in refinish and auto and architectural so we're not quite back to what you would call completely normal supply pre COVID-19 kind of.
Supply situations, although sequentially much better and we expect that to sequentially continue to improve.
And then W. Asked about this isn't just about two years, that's beyond our forecasting horizon, where we're typically three to six month windows the best forecasting.
Visibility, we have and we certainly cant go out two years or there is structural.
There are structural commodity supply being built in China.
Which is we expect to fully exploit.
That's the best we can give on the two year Mark.
Yeah.
Our next question comes from Vincent Andrews.
<unk> from Morgan Stanley . Please go ahead.
Yes. Thank you just wondering if you could talk a little bit about the cost work, you're doing in Europe , and whether that's sort of structural or just sort of temporal and along those same lines given sort of the normalization in DIY has there been an opportunity to reduce maybe promotional.
<unk>, maybe that was already being reduced during the hot demand period, our AD spending or is anything changing on how you are allocating.
<unk> spending into that business.
Certainly on the AD spending as you see the decline Youre also getting near the end of the paint season and by the time the quarter is going to be over so that that is on a decline that typical though so that's not really that much of a difference.
We do bucket out cost reductions in Europe , and the two things one is structural and want a short term the structural ones you see that flowing through we have.
Plants that we have targeted to be close we have.
Head count that were taken out we have productivity initiatives.
Through dispense cells and other high volume packaging equipment that is driving productivity in the plant all of those things are underway and then of course, we are on a temporary basis.
You are reducing head count as <unk>.
Are you seeing that lower demand in the architectural segment. So.
I'm feeling comfortable that we're going to continue to grow margins. If you look at our history in Europe , we have consistently grown.
Earnings in Europe year over year regularly so I don't think it should be any different this year.
Hey, Vincent Tim Tim here at <unk>, We also have continuation of the ticker <unk> synergies, which of course are structural we've captured a lot of those but footprint wise and back office wise. We continue continue to make progress there and just to put some perspective.
Margin.
Margin improvement progression has continued in our AC Europe business. Despite the volume challenges and we expect that to continue as well.
Okay.
Thank you. Our next question comes from Mike can you touch from Barclays. Mike. Please go ahead.
Great. Thanks, Good morning, guys.
Just on auto OE, hoping you could give some context about your volume levels today versus maybe say pre pandemic I'm just trying to figure out if we get back to you.
2019 type build rate what sort of upside does that offer maybe just remind us what type of incremental margin levels. We should think about broadly for your industrial coatings business today.
Today after all the restructuring and whatnot.
Well, Mike if I remember right last year, there was about 78 million cars built we're on a path to have a little bit over 80 million cars built at the peak it was 95 million cars.
And there is a substantial backlog of vehicles that need to be built.
And plus I think what youre going to be seeing.
Or are you starting to see some of these electric vehicles being made in China that are being exported to Europe . So youre going to start to see a better mix in our automotive business because of mobility.
And.
Right now our margins in automotive are improving on a sequential basis.
So what I would do is I'd look back at the historical margins in our industrial segment and you know automotive is the biggest business and that theyre going to be somewhat close to that margin and that's the way I would do the math.
Mike if I could just elaborate a little bit on what we call. The latent demand in auto here, we've talked about this last quarter, but U S. U S U S dealer inventories.
We're below just below 30 days typically that's.
60, plus 70, plus so the inventories need rebuilt.
Theres, a big fleet rebuild process that has to take place in the U S that includes just.
He owned cars as well as other.
Fleet vehicles.
So significant.
The impact there is a European fleet that also at some point will be rebuilt and theres a significant amount of employees that have company cars in Europe .
So thats another adder.
And.
That those those late and things in addition to the demand most cars were on Backorder.
So again, we have comfort the next.
12, plus 15 plus months.
For a solid recovery back toward that.
Call It high <unk> low 90% level, so we're still down about.
Almost 20% in the industry.
Pre pandemic.
Thank you. Our next question comes from Mike Harrison from Seaport Research Partners. Mike. Please go ahead.
Hi, good morning.
I was wondering if we could go back to some of the raw material availability issues and specifically dig in on what's going on in the refinish business.
Sounds like some of the raw material and logistics bottlenecks that you have been seen are going to continue into Q3. So maybe just a little more detail on what youre seeing there what needs to happen to get some resolution to those supply issues and I guess.
Is your expectation that that improvement is going to happen sometime this year or is that an early 'twenty three thing what's the timing look like thank you.
Hey, Mike its Tim.
We.
We despite having a record quarter in refinish and we expect that kind of performance to continue we do have persistent I would call them one off.
<unk> from a raw material standpoint.
That have led to some of the backlogs. In addition to the backlog of work that our customers have we've got a backlog just to catch up and refill the channel because of these one offs.
It won't get fixed overnight continues also to sequentially improve.
And I expect us to continue to work our way through that through the rest of this year, which frankly is <unk>.
The upside for us because in addition to the high body shop activity levels that we have notably here in the U S.
We've got this kind of inventory replenishment to catch up on and throughout the rest of this year as well.
Okay.
Thank you that's just the end of the Q&A session front I'll hand, you back to John <unk> for closing remarks.
Thank you Lauren and everyone for listening for your interest in PPG I look forward to talking and seeing many of you in the coming weeks. This concludes our second quarter earnings call have a good day.
This concludes today's call. Thank you for joining you may now disconnect your lines.
Yeah.