Q4 2022 PPG Industries Inc Earnings Call
Good morning, My name is Emily and I'll be your conference operator today at this time I would like to welcome everyone to the fourth quarter of P. P. G earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll 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. Please press the star followed by number two.
Hello, everyone else units each asked a question the company requests that each analyst ask only one question.
I would now like to turn the conference over to John Bruno Vice President of Investor Relations. Please go ahead Sir.
Thank you Emily and good morning, everyone. Once again this is John Bruno.
<unk> continued interest in PPG and welcome you to our fourth quarter full year 2020 financial results Conference call. Joining me on the call from PPG Art Davis, President and Chief Executive Officer, and this Brown senior Vice President and Chief Financial Officer, our comments relate to financial information released after you.
Equity markets closed on Thursday.
Conference call.
In 2023.
TCR T Davis, President and Chief Executive Officer and.
On the Investor Center.
<unk> Vice President.
Enter <unk> dot com.
Our comments relate to financial information.
Three.
Following management's perspective on the company's results in the quarter, we will move to a Q&A session.
Metro Center.
Prepared commentary and discussion during this call may contain forward looking statements.
And are available on the webcast site for this call and provide additional support to the brief opening province, 10 will make shortly.
<unk>.
Following management's perspective on the company's results for the quarter, we will move to a Q&A session.
The company is under no obligation to provide subsequent updates since forward looking statements.
Yes.
This presentation also contains certain non-GAAP financial measures.
These operating and financial performance.
<unk> of the presentation, which are available on our website reconciliations of these non-GAAP financial measures to most directly comparable GAAP financial measures for additional information. Please refer to <unk> filings with the SEC now, let me introduce TPG President and CEO Tim continues.
Thank you John and good luck.
Morning, everyone.
I'd like to welcome you to our fourth quarter 2022 earnings call and my first earnings call as CEO .
Keep my comments brief to provide a few highlights on our recent quarter year 2022, and our outlook.
Let me start with our fourth quarter.
Our fourth quarter sales of $4 2 billion.
Near the record levels achieved achieved in 2021, despite significant unfavorable foreign currency translation.
Sales were aided by our strong U S automotive refinish volume growth and supply chain disruptions started to moderate and our order books remain robust.
2022, our automotive refinished coatings business delivered over 2000, net new body shop wins as customers continue to value the product technology and industry, leading services and capabilities. This business delivers every day.
<unk>, what we believe is the best in class body shop, all repair productivity.
Also aiding our sales were record results in our PPG Comex business in Mexico as our team continued their strong execution and delivered another record quarter of sales and earnings DVT.
PPG Comex sales are now more than $1 billion on annual sales basis.
Another record year for this business.
Our aerospace business continued to recover delivering organic sales growth of more than 20% on a year over year basis, even with continued supply chain challenges.
With an initial reopening in China strong global order book increased military related growth and Ppg's advantaged technology products. We expect this business to continue to grow in 2023 and beyond.
Our adjusted earnings per diluted share from continuing operations of $1 22.
Above the midpoint of $1 13 from the guidance we provided in October .
This included more than 20% year over year segment earnings improvement driven by selling price realizations and strong cost management.
On a two year stack selling prices were up about 19%.
We achieved this segment earnings improvement despite the significant and unpredictable shutdowns in China from COVID-19 that were worse than what we had anticipated going into the quarter and.
And these have continued into the first.
In Europe , despite demand remaining soft earnings were similar to prior year due to strong selling price realization and cost management.
We also continued to execute our previously announced restructuring programs and realization of acquisition synergies and delivered about $20 million of savings in the quarter.
Now a few comments on the full year 2022.
The challenge is where many including unprecedented cost inflation unexpected geopolitical issues in Europe .
Disruptive and unpredictable shutdowns in China strong appreciation of the U S dollar and rapid escalation and interest rates in the United States.
So all of these factors impacted our sales and margin performance. The PPG team responded to these challenges including rapidly implementing real time selling price increases that by early 2023 will offset all cumulative cost inflation incurred since early two.
'twenty one.
Given the more difficult macro backdrop, we also announced and are quickly executed new cost savings initiatives with particular focus Europe .
In 2022, we also made good progress on key strategic initiatives, including.
Strengthening our relationship with the home depot as evidenced by the launch of our New U S architectural pro program.
And winning more shelf space with our Glidden Max Flex breakdown.
In addition, we were honored to be awarded home Depot's 2022 overall Innovation Award.
Which was the first time the paint supplier has achieved this distinction.
Our partnership with the home depot continues to be a great opportunity for more significant growth in the coming years.
So PPG team continued the integration of our recent acquisitions, including timely execution of acquisition related synergies.
These businesses are all executing well and provide the company with increased organic growth prospects in the next few years.
We made some smaller but strategically important powder coating acquisitions, which add needed manufacturing capacity and greatly AIDS our technological capabilities in this fast growing product category.
In 2022, we once again lowered our SG&A as a percent of sales decreasing by about 100 basis points, including the delivery of about $65 million and restructuring savings in the year.
While working capital remains higher than we would like we made solid progress in the second half 2022 to lower our inventories on a sequential basis.
We expect cash conversion to return to our historical levels in 2023 and have exited 2022 with a strong and flexible balance sheet.
Throughout 2022, we took actions to bolster our ESG program, including announcing our commitment to the science based targets initiative issuing our first ever diversity report and finally, obtaining shareholder approval to declassify, our board and removes Super majority.
Voting requirements.
In 2023, I expect our team to continue their strong progress by introducing additional sustainable products for our customers and on VAT unveiling, our new 2030 sustainability goals.
In summary for 2022, we did not meet our own earnings expectations, but through the resiliency of the global PBT team, we did deliver record sales of $17 $7 billion and set the.
Foundation for many accretive growth initiatives.
Now moving to our outlook as we outlined in our press release, we expect Q1 demand environment to remain similar to the fourth quarter. However.
However, as the year progresses, we are more confident that we have several catalysts that will enable PPG to drive earnings growth, including.
<unk> and the supply chain, which will further moderate raw material costs and we expect to see this flow through our P&L more prominently starting in the second quarter.
Also our strong position in China that will benefit us as the Covid reopening progresses.
With respect to Europe , we expect coatings demand stabilization beginning in the second.
Resulting in higher year over year earnings.
In the U S. We will benefit from the continued recovery of the aerospace and automotive refinished businesses.
The current strength of our order books in both of those businesses.
Also in the U S. Our recent share gains in the architectural business will help upper lower demand from a softer U S housing market.
As a reminder, our overall exposure to the U S. New home construction market is relatively small.
Only about 1% of our global revenues.
Yes.
As we said last quarter, we believe our global portfolio mix.
Proved more resilient in the coming quarters, if we experience a broader global economic decline.
As normal course of business will be highly focused on controlling the controllable, including managing our costs and optimizing working capital.
In summary, while economic conditions are challenging in the near term.
I expect segment margin recovery to continue in the first quarter and remain confident about the future earnings capabilities of PPG and we certainly see a path to return to prior peak operating margins with opportunities to exceed.
As I begin my tenure as CEO . The PPG team is laser focused on delivering improved financial results, including recovering our historical margin profile and executing on all levers to return our portfolio to mid to high teen percentage segment.
Margins.
At a high level you can expect me in the PPG team.
To elevate our collaboration with our customers, bringing them innovative sustainable and differentiated products and solutions, which will enable our customers to improve their productivity and growth and allow us to improve our own organic growth performance.
We will simplify and optimize our manufacturing and supply chain efficiencies to reduce complexity and deliver productivity for both PPG and our customers.
And we will preserve our legacy of prudent management of our balance sheet, continuing to prioritize cash deployment, our shareholder value creation.
I plan to share more details on our key initiatives as the year progresses.
In closing I am looking forward to leading this great team of 50000 employees around the world as we continue to partner with our customers to create mutual value.
This year marks PPG is 140, <unk> year anniversary and I strongly believe that our best days are ahead, thanks to our people industry, leading products innovative technologies and great customers.
Thank you for your continued confidence in PBT.
This concludes our prepared remarks and now Emily would you. Please open the line for questions.
Thank you at this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Our first question today comes from David Begleiter with Deutsche Bank. Please go ahead.
Good morning, Tim for the full year consensus is around $7 per share, which would imply a pretty big ramp up from the Q1 levels is that number that you think you can that can be achieved.
Or get close to as Youre progressive.
Yes right.
Now David just because of all the uncertainty in many different avenues of our business.
Focus on Q1, and clearly Q1 had some.
Hangover elements from Q4, particularly around China.
We do believe as I said in my comments that there are the <unk>.
Shopping list of multiple potential earnings growth catalysts for 2023.
Including China, including Arrow, including Refinish.
<unk> Comex.
CHD literally a shopping list a potential earnings catalyst, but we will get through this hangover of Q1, and then reassess and communicate more as we move forward.
Okay.
Our next question comes from Michael <unk> with Wells Fargo. Michael. Please go ahead.
Hey, guys good morning.
Yes, Tim I think your outlook for the first quarter is down mid single digits for volumes can you can you walk us through.
What what the volume outlook is from.
From the are less cyclical markets and your more cyclical markets to give us a gauge of kind of where those are at for the first quarter.
Sure Mike I mean, the biggest impact is again China.
Typically in China March is a very big month for us and our assumption for.
For China in Q1 is that.
You'll see a second wave to some degree after Chinese new year and so our base case is that we won't really see significant China recovery until starting in Q2.
Additionally, on the architectural side, particularly in Europe .
We would normally in Q1 see a fairly robust.
Stock up ahead of paint season and.
Because of everything that's happening in Europe that we see some some buildup, but not nearly what we could see in.
In a normal year and then finally, one of our top performing businesses PPG Comex typically has a very strong Q4 and that had an even stronger than expected Q4 and 2022.
So theres a little bit of just timing timing there, even though we expect another great year from that business. This timing issue with Q1. So those are the three three main factors I would say.
And Mike This is Vince.
Some of the other businesses, we're not seeing any any tone change in the businesses sequentially again, good strong pace of recovery in aerospace.
Solid consistent growth in refinish.
On OEM, consistent generally consistent quarter over quarter, starting to recover in Europe . So again, we're not seeing any significant changes with some of the other key businesses.
Our next question comes from the line of Christopher Parkinson with Marine Hi, Christopher Please go ahead.
Great. Thank you so much just a real quick question on pricing can you just comment on the current pricing environment.
Given the macro movement in.
Raw materials and then also several management changes across the sector are you still seeing the ability to sustained price throughout the year just any commentary will be incredibly helpful. Thank you so much.
Yes sure. Thanks, Thanks for the question Chris.
You saw in the print that we put up 11% for Q4 of 19% on a two year stack.
<unk> was 18% two year stack in Q3, so we still have pricing momentum.
We will have additional price in Q1 Todd.
Targeted by by business, we've got some carryover impact in Q1 as well.
As for whats happening out there in the world Besides PPG.
All of the coatings companies are facing the same.
Inflation inputs that we are be it raw materials, which we focus a lot on but there's also significant inflation outside of raw materials that we are also.
All experiencing so we.
We see a continuation of positive pricing as we entered the year and beyond that a lot of it depends what happens on the inflationary environment.
Got.
That's that.
Our view at this point in the year Chris.
The next question today comes from Ghansham Panjabi with Baird. Please go ahead.
Hey, guys good morning.
Yeah as it relates to the U S. Architectural I mean, obviously there is a bifurcation so far between yourself and some of the professional markets. How do you sort of see that evolving over time as the year unfolds and then for you for European architectural.
Just given the extent of the volume weakness in the market.
Can you just give us a sense as to how competitive the pricing backdrop is the industry just given the volume weakness. Thanks.
Okay. Thanks, Thanks Ghansham.
So let me start with <unk>.
The U S environment.
I'll start at a high level from a macro standpoint, clearly DIY is down.
Partly because what's happening with consumer confidence, but also a bit of a holdover from the COVID-19.
ZIP DIY and clearly new housing construction going down again, only 1% of our sales, but those two segments are down.
Fortunately for us, we're much stronger in commercial and maintenance.
And there we still see backlogs with our customers I think you know we do a survey every quarter with our professional customers here in the United States and their backlogs are still floating in that 12 to 13.
Week range, so we still see some Bob.
Some good demand there and then as we as we move forward, we expect to continue to see growth from our home Depot Pro program.
Moving forward now going over to Europe .
The volume started to really deteriorate after after the innovation last Q1, and it was down double digits throughout all of 2022.
Professional painter business down not nearly as much more of the single digits, but as we entered 2022, we'll see particularly for Q1 I'm.
I am sorry, 2023 for Q1.
We've got a little bit of a comp issue where were still comping part of the quarter to the pre war era, but then once we get to Q2, we start to have.
Thankfully some positive comps because our total business in Q2 Europe was down about.
10% double digits low double digits. So we.
We do see it more or less kind of bouncing off the bottom if you will.
As we end Q1, and then Comping better as we get into Q2.
Okay.
Our next question comes from John Mcnulty with BMI John Please go ahead.
Yes. Good morning, Thanks for taking my question, Tim you spoke in your in your prepared remarks about.
The target of mid to high teens margins for PPG going forward.
Is it is it a function of just raw materials getting back to normal and kind of having that catch up kind of finally finally been made or or do you see a lot of manufacturing efficiency improvements that may have uncovered themselves through through some of the supply chain problems. What have you and if so if it's the latter can you help us to understand what some of those levers might be.
Hey, John This is Ben so I'm going to start on that and I'll, let Tim add some color here, but really three levers one we have been chasing which is the raw material price. Our total inflation price cap, which we think will be caught up on that in early 2023, we call it weeks not even months.
The second which I think is important.
As you hit on it John we haven't had a strong manufacturing.
<unk> years here due to disruptions due to supply disruptions due to customer disruptions COVID-19 disruptions due to the churn in the workforce and many companies are seeing so we do that is not in it's again significant number for us.
And factoring perspective.
Third which is very important to us we're still down about 10% versus pre COVID-19 levels in terms of volumes spread throughout our portfolio. So those are the three big levers and timken.
Yes, you really hit the big three, but but particularly to the volume.
We've got arrow still down significantly we've got auto auto has been at recession levels for three years now.
There is pent up demand across the planet for cars.
Refinished is still down 10% ish for 2019.
In addition to what Vince mentioned, we have done.
A good bit of cost out during this period well in restructuring. So we will we will get leverage from that we're not completely finished with our.
Acquisition synergy realization so as I said I used the term shopping list. We've got a shopping list of items that are going to contribute to our margin recovery.
Okay.
Our next question comes from Stephen Byrne with Bank of America Merrill Lynch. Please go ahead Steven.
Yes. Thank you Tim you made a comment a few minutes ago about inflation outside of raws and I just wanted to drill into the.
Near term outlook of yours.
Low single digits.
Inflation in the first quarter is that a comment on broadly cost of goods or is it just raws.
Also seeing it.
And labor and freight and so forth and maybe just on the wrong side of that.
For first quarter when would you say.
Flowing through cost of goods is based on what month would be the mid point of your purchases that would flow through cost of goods in the first quarter.
Versus your purchases of those raws today.
What would you say that would reflect in terms of maybe second quarter raw material costs.
Sure Steve I think the.
The numbers you are quoting at the beginning of your question, where raw materials. So that you can.
Q4, we were up mid single digits year over year down low single digits sequentially.
Q1, we expect to see modest down year over year and another sequential step down.
The reality of flow through as well.
We're really flowing through inventory that we have on hand, now pretty much and that'll flow throughs throughout Q1, So we're expecting a positive benefits of that on the P&L too.
Really not not not show itself significantly until Q2, Okay and then on the the other the other inflation that's going to be at least for now thats going to be pretty constant as we move from Q1 into Q2 around labor inflation and in some of the other inflation.
Yes, Steve just going back to what Tim said earlier in the call. That's why we're doing targeted pricing.
Across our portfolio to compensate for this other inflation, that's going to be higher year over year, primarily labor.
I'm not seeing as much freight as you.
Pointed out it has not been an inflationary factor the last couple of quarters.
Our next question comes from Duffy Fischer of Goldman Sachs. Please go ahead Duffy.
Yeah, Good morning, guys.
Question just around price. So as you ended last year. If you just anniversary the price that you had at that point, how much would that move up twice. This year just from an accounting standpoint, as we roll through into I imagine you've gone out with a lot of your price increases already so if you average that occur.
Ross the country across the company kind of what's the ask on price that you've sent out to customers. So far this year.
Yes, Duffy I'll handle the first part of the question the carryover pricing.
We do have every quarter, our price off of our sales base. So you can do the math and you can come up with several hundreds of millions of dollars.
Price carryover in 2023 from our 2022 pricing initiatives again, it's if you just do the math you could easily come up with that.
Certainly north of three $300 million.
That will be carried over.
Yes, Duffy thanks for the question, it's Tim here.
On the new pricing, if you will it'll be more targeted just based on where each of the segments are on their catch up and on offsetting total inflation and new inflation, we've already gone out for four additional price in a couple of businesses, we're having discussions with customers and a few other businesses.
Uh huh.
We would prefer to have those discussions with the customers first and but we'll have more visibility on that as we move forward, but we will have positive price when you net all of that.
There has been moves through 'twenty three.
Our next question comes from Laurent <unk> with Exane BNP Paribas. Please go ahead.
Yes, good morning.
In your focus areas, you mentioned simplification and optimization of subtraction in manufacturing.
Was wondering if you could talk a little bit about this and maybe size your opportunity on the coast and lacking capital in all the areas.
Areas, where you think you need to rationalize the footprint based on a <unk> demand environment for instance in Europe . Thank you.
Yes, Thanks Ron.
If you look at our journey over the last.
A decade and a half.
Done a lot of acquisitions and acquired a lot of manufacturing assets. We've also acquired a lot of product portfolios with <unk>.
Captured a lot of synergies along the way.
As we look at where we are today and some of the things we've learned through some of the supply shortages et cetera.
The crisis.
We believe there is fairly significant opportunities for us to really simplify.
Not only our footprint, but our processes simplify and standardize some of what we've acquired.
Simplify some of the portfolios that we acquired are required. So we do believe that there is some significant upside for us there as we move forward and as you can imagine that's.
That's not as quick a realization as say procurement synergies when you first closed the deal.
But we feel pretty confident that in the medium and long term that we can deliver.
Are you there.
Our next question comes from Kevin Mccarthy with vertical Research partners. Please go ahead Kevin.
Yes, good morning.
Tim a question on your U S architectural business, if we look at most of the macro indicators for housing and construction there.
Slowing markedly in recent months on the other hand.
You have some company specific tailwind in the form of a ramp of your propane program at home Depot. I think you also referenced increased shelf space at Glidden. So can you can you frame that out in terms of what you're anticipating maybe volume metrically as 2023.
<unk> progresses in that vertical.
Yes, Kevin This is Vince let me, let me just start with the macro and what we're seeing.
I think it's been pretty chronicled is.
New housing starts leading indicators certainly pointing down.
We really have to bifurcate that a single family housing starts are significant significantly now.
Multifamily, we expect to turn now and they're starting to turn out, but theres still going to be growth multi.
Multifamily completions again paints at the end of the cycle here Theres still completions that will carry us well into the year Tim.
Tim mentioned earlier on the commercial side, the commercial new build.
Again for the certainly for the first half of the year Shouldnt.
It should be should be constant if not longer.
And then commercial repaint is solid right now.
There is a backlog on that so those are the macro signs and we do have some PPG specific items and Tim can talk about.
Yes, Kevin the PPG specifics.
Well about the Phd home Depot Pro program, and we expect double digits from that program again this year after strong double digits last year.
The other one.
We've got a nice.
Additional retail win.
Our customer is going to announce it first but you should hear it.
And weeks, possibly months here on what that is that will help offset some of the other other things that Vince mentioned and then.
The spray paint win for us with that.
Innovation Award at the home Depot is we're excited about opportunity to not only leverage that specific product.
But expand that offering either further but when you put it all together.
And we are expecting net net for volumes in that space to be down, but a core sales to be up.
With the price offsetting the difference.
Our next question comes from Frank Mitsch with Fermium Research. Please go ahead Frank.
Thank you and good morning all.
First I want to extend my sympathies to the family on the personal Bill Hernandez.
It really was.
Great Great Guy.
Hey, Tim.
Appreciate your answer on our full year EPS question for sure given all the uncertainties, but you already indicated that you expect European earnings will be up year over year in the second quarter.
You also mentioned that your folks on the ground in China are expecting China to really pick up.
And so I'm wondering as part of your calculus that we will likely see higher year over year EPS in the second quarter.
Well again, Frank first of all thanks, Thanks for the call out to Bill Hernandez.
Our love of PPG partnered here for many years and that's just a world class CFO and great human being in that business.
<unk> and sudden loss this past weekend. So thank you.
We're calling that out Frank at the end of day.
The uncertainty at this point with what's what's happening with China and win.
What's happening with.
Europe and to what degree.
And what's happening to raw material pricing.
The specificity of that raw material pricing as you know can change our earnings profile fairly significantly.
We're just not in a position right now to put out.
Statement on Q2, Etfs that said.
As I said earlier I believe we've got a a hangover in Q1, but a number of those.
Let's call them earnings levers start to come due in Q2.
Yes, Frank this is Vince we do give it.
If you look at our profile countries, China is one of our largest countries for sure. So there's still uncertainty there is as we pointed out it's a pointed out in your opening remarks about the timing of the opening right now we certainly hope March was a strong month.
Definitely too hard to predict April which is Q2 is typically a very good quarter in China.
So we were just not positioned at this point to provide any up or opine on that at this point.
Okay.
Our next question comes from Josh Spector of UBS. Please go ahead Josh.
Yeah, Hi, Thanks for taking my question I just have a couple of follow ups here first.
Do you think you can achieve the low end of your margin targets. This year in 2023 on average and second if you could comment on your ability to hold prices across the businesses as we move through this year and any comments there versus the wise might be different versus prior cycles.
Yes, Josh one levers to help us improve earnings again, we're not we're not trying to give full year guidance on margins, let's say, even a harder ask in topline. So so.
Defer that until a little bit later into the year.
Your question on pricing I'm going to let Tim answer Josh.
I'm confident in our team's ability to hold price similar to prior cycles.
And with this cycle.
Possibly even more because of other inflation that is more persistent than we've had in other segments.
We're confident in that.
Yes.
Our next question comes from Vincent Andrews of Morgan Stanley . Please go ahead Vincent.
Thank you.
You've commented in the prepared remarks that you've got auto builds flat in <unk> and I think the consultants are still calling for it to be up about two in a quarter.
So is that just something youre seeing in your own.
Book or <unk>.
Spain is consultant numbers to come lower in gist.
In addition to that could you talk about how you anticipate the mix of auto builds this year is it going any different than last year.
And would that be the plus or minus for you.
Yes, Thanks Vincent.
Well first of all historically.
I don't want to brag, but historically, we've actually nailed it pretty well compared to some of the external consultants on the bills because we got so many people in the plants every day, we have visibility to operating schedules and we can we talk to those folks so.
After the difference for us in Q1, specifically is Jonathan.
Because our base case is that there will be to some degree of second wave after Chinese new year of infections, and we saw what that did on the first wave two assembly plants and other other suppliers. So that's our base case and that May may explain the difference between the bus.
And some of the consulting houses out there but beyond that.
We're expecting we're expecting modest growth for the year low single digits, and that's an area, where there potentially could be upside.
But our base case is low single digits.
Just to give you some <unk>.
Examples specifically on what happened on the ground in China.
And what why we are a bit cautious on the post Chinese new year.
When things open up in mid China, I'm, sorry in mid December in China, We've got 19, PPG manufacturing sites across the country and.
And we went from near Zero absenteeism.
Very quickly to above 50% absenteeism across that whole network.
And then had it returned very rapidly to near zero at a period of about two account for three weeks.
And we saw that same as some of our other suppliers assembly plants you name it.
So we've lifted we've seen the data and we.
We believe that as people travel to the families that more travel than the last three years across China for Chinese new year as they travel to some of the more remote villages to visit their families. In return. We do believe there will be a short blip acute second wave and so that's why we're a bit more cautious and as Vince mentioned China.
March is a huge months normally for our China business.
Okay.
Our next question comes from Alexia <unk> with Keybanc. Please go ahead and let's see.
Thank you good morning, everyone I just wanted to clarify your raw materials commentary from earlier. It sounds like you are currently destocking sort of earlier raw materials purchases and will begin to purchase more.
Perhaps in the second quarter, so there could be.
More of a stair step down and the cost is that the right way to think about it.
Okay.
Yes, yes.
To provide some maybe some clarity here.
So we did see as Tim mentioned.
Some modest sequential.
Raw material deflation in the.
Q3 to Q4, we expect.
We expect further incremental deflation Q4 to Q1, we were still up Q4 year over year.
And we have to work that.
Deflation through our inventory, which will take us likely through the first quarter before we see that impact on our P&L.
And so that's I think what we're trying to articulate we.
We do have.
As Tim mentioned, we do have efforts underway to optimize our working capital primarily inventory.
We ended we.
And it's July or June with exceedingly high inventory levels.
We worked in the second half of the year to work those down.
And we're still working those down as we get into the first quarter of 2023, So there's still above where we want to be our target range. So we're still going through.
Various destocking, depending on the region, depending on the product. So we will have print raw material purchases in Q1 and likely some print material purchase in Q2.
Our next question comes from John Roberts of Credit Suisse. Please go ahead John .
Thank you good morning, Tim Vince and John just wanted to ask a question about auto Refinish, you want 2000, new body shops in 2022 was that concentrated anywhere regionally or was there something else common to those shops that switched and when you talk about 15% higher productivity is that relative to the <unk>.
Prior supplier to those shops or how are you defining that since your leading competitors also talking about having productivity productivity higher than the competition.
Yeah. Thanks, John for your first question.
Our net wins on body shops.
Our positive in <unk>.
All the major regions U.
U S Canada.
Europe , Australia, New Zealand and <unk>.
China is just proportionate to our business the size of the vast majority of those are in the U S and Europe .
Relative to the whole productivity question.
The way we look at it is.
Change the only as strong as it is.
Weakest link so every link on the.
Refinish body shop throughput.
Has to be strong in order to really drive what's most important to the body shop owner and Thats, what they call key to key time from the time you take the vehicle owners keys until the time, you hand, those keys back to the vehicles.
That is the one and only metric that script.
If you are incrementally faster and one of those steps, but slower and several others such that your T to key time is 15% slower than then.
Not as productive in the eyes of that in that body shop owner.
And so we focus on that end to end with <unk>.
Things like the digitized color match.
Lake digital system that really encompasses the whole body shop to visualize her.
<unk> optimized mixing.
So it improves speed eliminate waste and another thing that's really important to the body shop owners right now that ppg's value proposition delivers and some of our competitors don't if youre actually simplifying some of those steps with things like moonwalk in the visualized or so that the consumer.
Drained the flavor of the professional painter doesn't always have to be the ones to do that you open it up to other other labor that can do that and that adds additional productivity. The audit shops. So so again the most important thing is that key to key time, and Thats, where we have the 15% advantage.
Our next question comes from PJ <unk> with Citi. Please go ahead PJ.
Yes, good morning.
You know Tim clearly the housing market is slowing down whether you look at the new homes or existing home sales.
Have you seen a slowdown in the contractor business. Another contractor business was robust last couple of summers they had a huge backlog that they were working from COVID-19.
Backlog is worked down do you expect some slowing in the contractor business. Thank you.
Yeah Jay.
We are already seeing slowdown in contractors that are primarily focused on new housing.
That's a brutal reality that we all have to pace, but again.
That's a small portion of our business, our backlogs or where we're strong which is commercial and maintenance.
Literally have moved only incrementally 17 weeks average backlog in Q3 to 12 weeks average backlog in Q4. So that's what's been the margin of error of our survey so that that's holding up much better than the new built I believe part of that if you think about.
A lot of commercial work and maintenance work.
And light industrial work a lot of that work was near zero during COVID-19, while DIY in res repaint was offsetting it so theres still a lot of pent up demand there so.
As I said earlier, the total volume is still going to be incrementally down so I don't want to over oversell that but that's why some of our pro business is holding up better.
Okay.
Our next question comes from Michael <unk> of Barclays. Please go ahead Michael.
Perfect. Thanks, Good morning, guys I, just had a bit of a follow up on the raw material basket can you just help us with how you think about that evolving broadly over the course of this year I guess with <unk> demand being pretty benign, though restocked volume was down five ish percent or so why do you think input costs arent coming down faster and it's China.
It does recover and tucuman beyond pretty quickly how do you think about what that does to your raw material costs.
So Mike I'll start and then bill can fill in some modest some color I think there were some actual artificial demand.
In the second half of 'twenty two.
Be delayed some of the basic supply demand economics, because youll recall that for most of 'twenty, one and the first half of 'twenty two raw material availability was our number one issue and a lot of our.
Coatings peers number one issue so as that availability improves.
Paul.
Stocked up in and it got safety stock in and at the same time demand starting to collapse things were kind of going in that when I say collapsed I mean, particularly on the DIY and deco side, but big driver to the overall raw material chain. So I think a lot of companies and you've seen that in what companies have said ended the year with more.
More inventory than they would like so there was a bit of artificial demand that delay.
It would be a normal supply demand curve.
Yes, Michael Let me, let me just add some color here so.
As we enter 2023 again, we're destocking.
We know from public commentary a lot of our peers.
Have excess inventory and our Destocking I do think there is a tug of war.
With the supplier base typically in Q1, and Q2 are peak volume orders for coatings raw material purchases.
I don't think that's going to materialize in the same manner. This year.
So we'll have a lower by TPG why were lower by Q1, we.
We have suppliers in virtually every week every day for the past couple of weeks.
Indicating to us to have excess supply to give to us and so we're going to we're going to maximize that.
The benefit of our shareholders.
We'll negotiate our Q1 and Q2 pricing accordingly.
We do believe as we've said for the last couple of quarters. There is ample supply in our supply base.
Our next question comes from Silke Kueck with Jpmorgan Chase. Please go ahead.
Good morning. This is.
Welcome Jeff.
I was wondering whether you can discuss.
Your volumes and your price.
<unk> and.
And secondly, I was wondering whether you can talk about what's happening in the packaging business.
Sure.
So good stores scores pricing, we've raised price there multiple times and we felt that price throughout the year.
In 2023 will depend on what happens.
From an inflation standpoint, but that's that's one of the businesses, where we moved fairly quickly to keep up with that with cost cost inputs.
Packaging.
We tend to have.
Strong margin recovery in that business throughout 'twenty, two and we expect that to continue in 2023.
We do see some softness there in pockets around the world driven by.
In China, it's the Lockdowns in Europe , it's just.
Consumer confidence in beverage spending.
So we have seen some softness in volume, but strong strong margin recovery and we also continue to convert to our NFL pro.
BPA.
And free content material and we've had some nice wins in that beverage space. It will be launched as we move through this year, but overall at a high level margin recovery some softness in demand around the world.
Okay.
Our next question comes from Irene <unk> with RBC. Please go ahead Irene.
Great. Thanks for taking my question good morning.
I guess my question is about some framework you've provided in the past if we go back maybe a year year and a half ago.
We're discussing maybe $9 of earnings for 2023.
Yeah.
Do you see that is still maybe a possibility a couple of years out.
That would imply another.
$500 million of EBIT on top of where you are so what's the framework to get back there or is it kind of that high teens EBIT margin and maybe the recovery of the 10% volume or would you would you need more than that to get back and is that still maybe again available in a couple of years' time.
Yeah.
Yeah, Hi, Arun.
I've said before I believe the $9 EPS is when not if and I.
Stand behind that and that's because the fundamentals are there we have a portfolio that has.
Earnings power that has yet to be released in the.
I won't give you my entire.
10 point plan that will get us there, but you still got.
Recovery in some of our.
Some of our better businesses aerospace.
Auto Refinish, let me just talk about Michael for a second without going too far off off topic here.
But if you take a six year run rate of global builds before COVID-19.
Compared to the nine I'm, sorry, 2021 'twenty two there's.
40 million fewer cars that were built during that three year period compared to the six year before.
So everybody has their guess as to how much of that $40 million will be made up over time, but it's not zero.
And so that that business has a lot of volume recovery to go we've got the price cost momentum you've heard about our restructuring acquisition synergies.
Some of the technology innovation productivity sustainable products that will drive share growth.
And then just broader volume coverage or recover what we feel confident that the $9 is a when not yet.
Yes.
Just a couple of comments as it relates to a little more near term. So if you look at 2022, and we have to remind Tim Tim mentioned this earlier, but it's a good reminder, we really saw Europe fall really the back half of March. So so we're going to come up against some.
Recession type volumes.
Here.
A couple of weeks.
We remind everybody that in Q2, China was shut down industrial wise for almost two months.
So again, we don't think 2022 was representative in China on the traditional <unk>.
Ah compressed run rate on on GDP GDP.
So those two outside of aerospace outside of refinish.
We think have some opportunities to contribute again as Tim mentioned earlier, we expect very good leverage.
Above historical average leverage.
As volumes return in any business.
Our next question comes from Laurence Alexander with Jefferies. Please go ahead.
Good morning, it's Dan Rizzo on for Laurence Thanks for fitting me in just in terms of the backlog you mentioned I think you said commercial backlog was 13% to 14 weeks and then I think in the comments, you said $200 million backlog in aerospace.
For comparison purposes to make comparison purposes.
Does that mean like versus what I guess historically it has been.
Yes, Dan.
Historically that 12 13 week four U S propane or is actually still high.
So that's that will offset some of the negative volume in some of the other segments I can tell you that.
In my.
In my short 35, and a half years with PPG I don't remember the aerospace backlogs.
Ever being strong and you know that.
That'll take us that that's that's pent up demand for the foreseeable future.
Refinish, our refinish backlogs are still.
Particularly here in the U S probably five times, what they were re COVID-19 and it's not only a matter of robust getting.
Getting product out or getting raw materials in our refinish customers backlogs are high if I hope you haven't had any minor Fender benders lately, but if you have and you've taken a car to a body shop.
There are likely to tell you it's six to eight weeks before youre going to get that car service and taken taken.
<unk> taken care of so.
The backlogs across all of those spaces are.
Our high and in some cases historically.
Yes.
I'll add some color.
Into the aerospace.
Figures here, so and so we said before youll aerospace of circa $1 billion business for us.
$200 million backlog is typically.
Small fraction of that so this is almost another two months of activity. If we can get it done this year, we're still we're still facing some.
Some supply challenges.
Governing and what we can do in particular quarter, but it is a significant backlog relative to historic terms, yes, and I'm going to grab that back one more for one more comment.
The demand in aerospace is actually growth.
As we progressed through the months and quarters. So you've got kind of the underlying demand is growing.
Which means that $200 million backlog.
Going to be there.
Even longer.
And recall that China.
International travel only opened on January eight.
So that's going to be another stimulus or aerospace demand.
Our next question comes from Mike Harrison of Seaport Research Partners. Please go ahead Mike.
Hi, good morning.
Hi.
The auto OEM business a question on electric vehicles hit 10% of global car sales last year.
Hoping that you could give us an update on some of the key products that you're providing for electric vehicles any recent wins or other metrics you can share on that portion of the auto OEM business.
Okay.
Yeah, Mike.
We're really excited about.
About <unk>, because we are winning where the visa winning we're.
We're winning where the evs are gaining the most and nextgen.
You probably saw the journal article here not that long ago, it's something like 65% or so of the Evs sold last year were in China, and that's where we're having the most success.
In fact.
We're growing significantly with the largest E.
Producer in China.
The way we're approaching it it's not only about new technologies, it's about picking the winners on the Evs and selling let's say more conventional corrosion protection and beautiful patient Prada.
Products to those customers. So it's combined effort of selling our new and differentiated products like our battery fire protection and our dielectric coatings products to those customers, but also targeting and winning with the EV winters.
In the market.
Our final question today comes from J D <unk> with <unk> Research. Please go ahead.
Partly because of the crazy raw material inflation, you've seen now is raw materials.
Taylor.
Are you not getting pushback from your customers when.
When you are trying to do these targeted pricing, especially in a demand environment, which has at least changed and has slowed.
So my first question and the second question really is on protective could you just tell us like what is the backlog in marine and protective these days. Thank you.
Hey, John I'm sorry.
At the beginning your first question kind of out of Q I apologize, but if maybe you could repeat your first question for us. Please.
Okay.
Yes sure pillars. So my first question is yet on pricing.
The first question is just on.
Yeah.
Okay, So J D power uptake.
I'll take it and it fits you can jump in on pricing.
You got to remember that the pricing that we've achieved over the last couple of years.
Was to offset what's happening in inflation in the last couple of years and our customers.
Has visibility to what's happened to our net margins and so there they have optics on where we are on a margin recovery standpoint, and they also know when we have these discussions with them that we're not back to peak margins and so it's not like we're going in most cases above above and.
Beyond that so.
As we move forward, we will continue to be competitive and.
And we will continue to.
Our price to offset non raw material inflation.
Before Tim answers the protective question Janine I think when we have discussions with our customers in almost every business.
They want us to be a healthy supplier that continues to innovate.
And I understand that if you can get paid a fair price.
For innovative technology that typically helps them, we're coming into a period of time.
Given the inflation in base salary, where our customers really value functional attributes of our coatings products.
And again they are pushing us.
Not so much on price or pushing us to help them with their productivity right now, which is a much bigger hospital for them.
Opportunity for them and the price him coding. So again, we're in a lot of discussions with customers about how to improve their productivity with which again is a key attribute for them.
Yes, I know Youre protective question.
Protective and marine business actually had a very strong year last year, even though.
There was volume degradation in Q4 that volume degradation was China.
Whether its marine new builds or large.
Petrochemical project protective projects a lot of those are done in China. So you know that will some of that will follow the China closing and then reopening curve, but beyond that a couple of things are happening and protect them. You know there is significant investment in <unk> and <unk>.
LNG.
All aspects of LNG and Thats that that area uses a lot of our advantaged protective products.
There is an infrastructure investment certainly coming into the U S and other countries that leads to future growth for the protective business and then finally on our PPG specific protective opportunity we have.
A fantastic distribution network in Mexico.
Over 5000 store locations that historically been very heavily architectural deco focus well, we're now leveraging more and more of that network to grow our protective business, which is how we're successful in that business in other countries like the U S and Canada. So.
It's a really great growth opportunity in the protective area that differentiates IPG.
Yeah.
There are no further questions at this time I will turn the call back over to John Bruno.
Thank you Emily we appreciate your interest in PPG. This concludes our fourth quarter earnings call have a good day.
Thank you everyone for joining US today. This concludes our conference call you may now disconnect.
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