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spk21: 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 PPG earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press the star followed by number two. To allow everyone an opportunity to ask a question, the company requests that each analyst ask only one question. Thank you. I would now like to turn the conference over to John Bruno, Vice President of Investor Relations. Please go ahead, sir.
spk09: Thank you, Emily, and good morning, everyone. Once again, this is John Bruno.
spk14: We appreciate your continued interest in TVG and welcome you to our fourth quarter of the four-year 2022 Financial Results Conference Call.
spk06: Joining me on the call from PPGR, Tim Knavish, President and Chief Executive Officer, and Vince Morales, Senior Vice President and Chief Financial Officer. Our comments relate to financial information released after U.S. equity markets closed on Thursday, January 19, 2023. We have posted detailed commentary and accompanying presentation slides on the Investor Center of our website, ppg.com.
spk10: The slides are also available on the webcast site for this call to provide additional support to the brief opening comments Tim will make shortly. Following management's perspective on the company's results for the quarter, we will move to a Q&A session.
spk06: Both the prepared commentary and discussion during this call may contain forward-looking statements, reflecting the company's current view of future events and their potential effect on PPP's operating and financial performance.
spk14: These statements involve uncertainty and risk, 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, reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information, please refer to PPG's filings with the SEC. Now, let me introduce PPG President and CEO, Tim Knievich. Thank you, John, and good morning, everyone. I'd like to welcome you to our fourth quarter 2022 earnings call and my first earnings call as CEO. I'll keep my comments brief, provide a few highlights on the recent quarter, the year 2022, and our outlook. Let me start with the fourth quarter. Our fourth quarter sales of $4.2 billion were near the record levels achieved in 2021. despite significant unfavorable foreign currency translation. Sales were aided by our strong U.S. automotive refinish volume growth as supply chain disruptions started to moderate and our order books remained robust. In 2022, our automotive refinish coding business delivered over 2,000 net new body shop wins as customers continue to value the product technology and industry-leading services and capabilities that this business delivers every day, including what we believe is the best-in-class body shop for 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 order of sales and earnings. PPG COMEX sales are now more than $1 billion U.S. 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, a strong global order book, increased military-related growth, and PPG's advanced technology products, we expect this business to continue to grow 2023 and beyond. Our adjusted earnings for diluted share from continuing operations were $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 match. 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 these have continued into the first quarter. In Europe, despite demand remaining soft, earnings were similar to prior year, due to strong selling price realization and cost management. We also continue 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 challenges were many, including unprecedented cost inflation, unexpected geopolitical issues in Europe, disruptive and unpredictable shutdowns in China, strong appreciation of the US dollar, and rapid escalation in interest rates in the United States. Though 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 since early 2021. Given the more difficult macro backdrop, we also announced and are quickly executing new cost savings initiatives with particular focus in 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 spray paint. In addition, we were honored to be awarded Home Depot's 2022 Overall Innovation Award, which was the first time that a paint supplier has achieved this distinction. Our partnership with the Home Depot continues to be a great opportunity for significant growth in the coming years. The BBG team continued the integration of our recent acquisitions including timely execution of acquisition-related synergies. These businesses are all executing well and will provide the company with increased organic growth prospects in the next few years. We've made some smaller but strategically important powder coating acquisitions, which as 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 in restructuring savings in the year. While working capital remains higher than we would like, we made solid progress in the second half of 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 Target Initiative, issuing our first ever diversity report, and finally obtaining shareholder approval declassify our board, and remove super majority voting requirements. In 2023, I expect our team to continue their strong progress by introducing additional sustainable products for our customers and unveiling our new 2030 sustainability goals. In summary for 2022, we did not meet our own earnings expectations. Through the resiliency of the global PPT team, we did deliver record sales of $17.7 billion and set the foundation for many creative growth initiatives. Now, moving to our outlook. As we outlined in our press release, we expect the Q1 demand environment to remain similar to the fourth quarter. However, as the year progresses, we are more confident that we have several catalysts that will enable PPG to drive earnings growth, including improvements in 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 quarter, resulting in higher year-over-year earnings. In the U.S., we will benefit from the continued recovery of the aerospace and automotive refinish businesses and 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 buffer 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. As we said last quarter, we believe our global portfolio mix will prove 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 controllables, 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 team percentage segment margins. At a high level, you can expect me and 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'll 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 for 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 50,000 employees around the world as we continue to partner with our customers to create mutual value. This year marks PPG's 140th 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 PPG. This concludes our prepared remarks, and now, Emily, would you please open the line for questions?
spk21: 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, David.
spk09: Good morning. On Tim, for the full year, consensus is around $7 per share, which will imply a pretty big ramp up from the Q1 levels. Is that number anything that can be achieved or get close to as the year progresses?
spk14: Yeah, right now, David, just because of all the uncertainty in many different avenues of our business, you know, we're focused on Q1, and clearly Q1 has some hangover elements from Q4, particularly around China. We do believe, as I said in my comments, that there is a shopping list of multiple potential earnings growth catalysts for 2023, including China, including Arrow, including refinish, including COMEX, EVs, THD, literally a shopping list of potential earnings catalysts But we'll get through this hangover of Q1 and then reassess and communicate more as we move forward.
spk21: Our next question comes from Michael Sison with Wells Fargo. Michael, please go ahead.
spk01: Hey, guys. Good morning. You know, Tim, I think your outlook for the first quarter is down mid-single digits for volumes. Can you walk us through, you know, what the volume outlook is from your, your less cyclical markets and your more cyclical markets to give us a gauge of kind of where those are at for the first quarter?
spk14: Sure, Mike. I mean, the biggest impact is, again, China. Typically, in China, March is a very big month for us, okay? And our assumption for China in Q1 is that they'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 buildup, but not nearly what we would see in a normal year. And then finally, one of our top performing businesses, PBG COMEX, typically has a very strong Q4, and they had an even stronger than expected Q4 in 2022. So there's a little bit of just timing there, even though we expect another great year from that business. There's a timing issue with Q1. So, those are the three main factors, I would say.
spk13: Mike, this is Vince. Just some of the other businesses. We're not seeing any tone change in the businesses sequentially. Again, good, strong pace of recovery in aerospace. Solid, consistent growth and refinish. Auto EM consistent, generally consistent quarter over quarter, starting to recover in Europe. So, again, we're not seeing any significant changes. and some of the other key businesses either.
spk21: Our next question comes from the line of Christopher Parkinson with Mizuho. Christopher, please go ahead.
spk05: Great. Thank you so much. Just a real quick question on pricing. Can you just comment on the current pricing environments, just given the macro movement in raw materials? And then also several management changes across the sector. Are you still seeing the ability to sustain price throughout the year? Just any commentary will be incredibly helpful. Thank you so much.
spk14: Yeah, sure. Thanks for the question, Chris. You saw in the print that we put up 11% for Q4, 19% on a two-year stack. Sequentially, it was 18% on a two-year stack in Q3. pricing momentum, you know, we will have additional price in Q1 targeted by business. We've got some carryover impact in Q1 as well. You know, as for what's happening out there in the world besides PPG, you know, all the clothing 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 see a continuation of positive pricing as we enter the year. And beyond that, you know, a lot of it depends what happens on the inflationary environment. But that's our view at this point in the year, Chris.
spk21: The next question today comes from Ganshan Punjabi with Baird. Please go ahead.
spk23: Hey, guys. Good morning. Now, as it relates to the U.S. architectural, I mean, obviously there's a bifurcation so far between do-it-yourself and, you know, some of the professional markets. How do you sort of see that evolving over time as the year unfolds? And then for European architectural, you know, just given the extent of the volume weakness in the markets, can you just give us a sense as to how competitive the pricing backdrop is in the industry, just given the volume weakness. Thanks.
spk14: Okay, thanks. Thanks. So let's start with the US environment, you know, I'll start a high level from a macro standpoint, you know, clearly DIY is down, partly because what's happening with, you know, consumer confidence, but also a bit of a holdover from the COVID piece of DIY. And clearly, you know, 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 good demand there. And then as we go forward, we expect to continue to see growth from our Home Depot Pro program moving forward. Now, going over to Europe, you know, the volume started to really deteriorate after the invasion last Q1. And it was down double digits throughout all of 2022. The professional painter business down not nearly as much more than single digits. But as we enter 2022, we'll see particularly for Q1, I'm sorry, 2023. For Q1, you know, we've got a little bit of a comp issue where we're still comping part of the quarter to the pre-war era. But then once we get to Q2, we start to have, frankly, some positive comps because our total business in Q2 Europe was down about, you know, 10%, double digits, low double digits. So, 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.
spk21: Our next question comes from John McNulty with BMO. John, please go ahead.
spk06: Yeah, good morning. Thanks for taking my question. Tim, you spoke in your prepared remarks about, you know, the target of mid to high teens margins for PPG going forward. Is it a function of just raw materials getting back to normal and kind of having that catch-up kind of finally been made? Or do you see a lot of manufacturing efficiency improvements that may have uncovered themselves through, you know, 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?
spk13: Hey, John, this is Vince. I'm going to start out. I'll let Tim add some color here, but really three levers. One we've been chasing, which is the raw material price or total inflation price gap, which, again, we think will be caught up on that in early 2023. You know, we call it weeks, not even months. The second, which I think is important, is you hit on it, John. We haven't had a strong manufacturing couple years here due to disruptions, due to supply disruptions, due to customer disruptions, COVID disruptions, due to churn in the workforce that many companies are seeing. So, we do, that is not a significant number for us from a manufacturing perspective. The third, which is very important, though, is we're still down about 10% versus pre-COVID levels in terms of volumes spread throughout our portfolio. So those are the three big levers, and Tim can talk over here.
spk14: Yeah, you really hit the big three, but particularly to the volume, you know, we've got aero still down significantly. We've got auto. Auto has been at recession levels for three years now. There's pent-up demand across the planet for cars. Refinish is still down, you know, 10%-ish from 2019. You know, in addition to what Vince mentioned, we have done a good bit of cost out during this period as well and restructuring. So, we will get levered from that. We're not completely finished with our acquisition synergy realization. So, as I said, I use the term shopping list. We've got a shopping list of items that are going to contribute
spk21: Our next question comes from Stephen Byrne with Bank of America Merrill Lynch. Please go ahead, Stephen.
spk10: Yes, thank you. Tim, you made a comment a few minutes ago about inflation outside of RAS, and I just wanted to drill into this near-term outlook of yours of low single-digit inflation in the first quarter. Is that a comment on broadly cost of goods, or is it just ROS? And are you also seeing it, you know, in labor and freight and so forth? And maybe just on the ROS side of that, first quarter, when would you say that flowing through cost of goods is based on what month would be the midpoint 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?
spk14: Sure, Steve. I think the numbers you were quoting at the beginning of your question were raw material, okay? In 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 is we're really flowing through inventory that we have on hand now pretty much, and that'll flow through throughout Q1. So we're expecting the positive benefits of that on the P&L to really not show itself significantly until Q2. Okay. And then on the other inflation, that's going to be, at least for now, that's going to be pretty constant as we move from Q1 into Q2 around labor inflation and some of the other inflation.
spk13: Yeah. And Steve, just going back to what Tim said earlier in the call, that's why we're doing targeted pricing. in, you know, across our portfolio to compensate for this other inflation that's going to be higher year over year, primarily labor, not seeing as much freight, as you pointed out. It's not been an inflationary factor the last couple quarters.
spk21: Our next question comes from Duffy Fisher of Goldman Sachs. Please go ahead, Duffy.
spk24: 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 price this year, just from an accounting standpoint as we roll through into I'd imagine you've gone out with a lot of your price increases already. So if you average that across the country across the company, kind of what's the ask on price that you've sent out to customers so far this year?
spk13: Yeah, I'll handle the first part of the question, the carryover pricing. We give every quarter our price off of our sales base so that you can do the math. You can come up with several hundreds of millions of dollars of price carryover in 2023 from our 2022 pricing initiatives. Again, if you just do the math, you can easily come up with that. It's certainly worth the $300 million that will be carried over.
spk14: Yeah, 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 additional price in a couple of businesses. We're having discussions with customers in a few other businesses, and we'll prefer to have those discussions with the customers first. And we'll have more visibility on that as we move forward. But we will have positive price when you net all of that here as it moves through 23.
spk21: Our next question comes from Lauren Favre with Exane BNP Paribas. Please go ahead.
spk20: Yes, good morning. Tim, in your focus areas, you mentioned simplification and optimization of supply chain and manufacturing. I was wondering if you could talk a little bit about this and maybe size the opportunity on cost and working capital and other areas where you think you need to rationalize the footprints based on a structurally lower demand environment, for instance, in Europe. Thank you.
spk14: Yeah, thanks, Ron. You know, if you look at our journey over the last, you know, decade and a half, we've done a lot of acquisitions. We've acquired a lot of manufacturing sets. We've also acquired a lot of product portfolios, and we've 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, of the crisis, we believe there's 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've acquired. So, we do believe that there's some significant upside for us there as we move forward. And as you can imagine, that's not as quick a realization as, say, you know, procurement synergies when you first close the deal. But we feel pretty confident that in the medium and long term that we can deliver value there.
spk21: Our next question comes from Kevin McCarthy with Vertical Research Partners. Please go ahead, Kevin.
spk08: 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, slowing markedly in recent months. On the other hand, you have some company-specific tailwinds 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 frame that out in terms of what you're anticipating maybe volumetrically as 2023 progresses in that vertical?
spk13: Yeah, Jeff, this is Vince. Let me just start on the macro. You know, again, what we're seeing, which I think has been pretty chronicled, is new housing starts and leading indicators are certainly pointing down. We really have to bifurcate that. Single-family housing starts are significantly down. Multi-family, we expect to turn down, and they're starting to turn down, but there's still going to be growth. Multi-family completions, again, paints at the end of the cycle here. There's still completions that will carry us well into the year. Tim mentioned earlier on the commercial side, commercial new build, again, for the first half of the year should be constant, if not longer. And commercial repaint is solid right now, and there's a backlog on that. So those are the macro signs, and we do have some PG-specific items that Tim's going to talk about.
spk14: Yeah, Kevin, the PPG specifics, you know, you know well about the THD 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 in weeks, possibly months here on what that is. That will help. offset some of the other things that Vince mentioned. And then, you know, 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 offer either further. But when you put it all together, Kevin, we are expecting net-net for volumes in that space to be down, but of course, sales to be up with the price offsetting the difference.
spk21: Our next question comes from Frank Mitch with Fermium Research. Please go ahead, Frank.
spk07: Thank you, and good morning, all. First, I want to extend my sympathies to the PPG family on the person of Bill Hernandez. He really was a great, great guy. Hey, Tim, I appreciate your answer on the four 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. And you also mentioned that your folks on the ground in China are expecting China to really pick up come April. And so I'm wondering, is part of your calculus that we will likely see higher year over year EPS in the second quarter?
spk14: Well, Again, Frank, first of all, thanks for the call out to Bill Hernandez, an alum of PPG, a partner here for many years, and just a world-class CFO and great human being in a tragic and sudden loss this past weekend. So thank you for calling that out. You know, Frank, at the end of the day, the uncertainty at this point with what's happening with China and when, and what's happening with Europe and to what degree, and with what's happening to, you know, raw material pricing and 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 a statement on Q2 EPS. That said, as I said earlier, I believe we've got a hangover in Q1, but a number of those, let's call them earnings levers, start to come due in Q2.
spk13: Yeah, Frank, this is Vince. We do give this out, but if you look at our profile countries, China is one of our largest countries for sure. There's still uncertainty there, as we pointed out, and Tim pointed out in the opening remarks about the timing of the opening. Right now, we certainly hope March is a strong month. Definitely too hard to predict April, which is Q2 typically a very big quarter in China, so position at this point to provide any real time on that at this point.
spk21: Our next question comes from Josh Spexer of UBS. Please go ahead, Josh.
spk19: 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 why this might be different versus prior cycles. Thanks.
spk13: Yeah, good Josh. A lot of levers to help us improve earnings. Again, we're not trying to give full year guidance on margins. That's even a harder ask than top line. So we'll defer that until a little bit later into the year. Your question on pricing, I'll let Tim answer.
spk14: Yeah, 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 cycles. So we're confident in that.
spk21: Our next question comes from Vincent Andrews of Morgan Stanley. Please go ahead, Vincent.
spk11: Thank you. I think you commented in the prepared remarks that you've got auto builds flat in one queue, and I think the consultants are still calling for it to be up about two and a quarter. So is that just something you're seeing in your own book, or are you anticipating those consultant numbers to come lower? And just in addition to that, could you talk about how you anticipate the mix of auto builds this year? Is there going to be any difference in last year, and would that be a plus or minus for you?
spk14: Yeah, 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 builds because we've got so many people in the plant every day. We have visibility to operating schedules, and we talk to those folks. So the difference for us in Q1 specifically is kind of because our base case, is that there will be, to some degree, a second wave after Chinese New Year of infections. And we saw what that did on the first wave to assembly plants and other suppliers. So, that's our base case, and that may explain the difference between us and some of the consulting houses out there. But beyond that, you know, we're expecting modest growth for the year, low single digits. And, you know, that's an area where there potentially could be upside, but our base case is low single digits. Yeah, just to give you some examples specifically of what happened on the ground in China and why we are a bit cautious on the post-Chinese New Year. When things opened up in mid-China, I'm sorry, mid-December in China, We've got 19 PPG manufacturing sites across the country. And we went from near zero absenteeism very quickly to above 50% absenteeism across that whole network. And then had it return very rapidly to near zero in a period of about two and a half to three weeks. And we saw that same in some of our other suppliers, assembly plants, you name it. So, we've lived it, we've seen the data, and we believe that as people travel to the families with more travel than the last three years across China for Chinese New Year, if they travel to some of the more remote villages to visit their families in return, we do believe there will be a short but acute second wave. And so, that's why we're a bit more cautious. And as Vince mentioned, March is a huge month, normally, for our China business.
spk21: Our next question comes from Alexey Yefremov with KeyBank. Please go ahead, Alexey.
spk03: 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 step down in the cost. Is that the right way to think about it?
spk13: Yeah, let me provide maybe some clarity here. So we did see, as Tim mentioned, some modest sequential raw material deflation Q3 to Q4. We expect a further incremental deflation Q4 to Q1. We were still up Q4 year over year. And we have to work that 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 were trying to articulate. We do have, you know, as Tim mentioned, we do have efforts underway to optimize our working capital, primarily our inventory. We ended 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 they're still above what 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 crimped raw material purchases in Q1, and likely some crimped raw material purchases in Q2 as well.
spk21: Our next question comes from John Roberts of Credit Suisse. Please go ahead, John.
spk04: Thank you. Good morning, Tim, Vince, and John. Just wanted to ask a question about auto refinish. You won 2,000 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 prior supplies to those shops, or how are you defining that? since you're leading competitors also talking about having productivity higher than the competition.
spk14: Yeah, thanks, John. Your first question, you know, our net wins on body shops are positive in all the major regions. You know, U.S., Canada, Europe, Australia, New Zealand, and China. It's disproportionate to our business. You know, relative to the whole productivity question, you know, the way we look at it is, you know, a chain's only as strong as its weakest link. And 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 that's what they call key-to-key time. From the time you take the vehicle owner's keys until the time you hand those keys back to the vehicle owner. That is the one and only metric that is written. So, if you are incrementally faster in one of those steps, but slower in several others, such that your key-to-key time is 15% slower, then, you know, you're simply not as productive in the eyes of that, in that body shop owner. And so, we focus on that end-to-end with things like the digitized color match, our link digital system that really encompasses the whole body shop, the visualizer, optimized mixing, to improve 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, is you're actually simplifying some of those steps with things like moonwalk and the visualizer so that the constrained labor of the professional painter doesn't always have to be the one to do that. You open it up to other other labor that can do that and that adds additional productivity to the body shop. So, again, the most important thing is that key-to-key time, and that's where we have the 15% advantage.
spk21: Our next question comes from PJ Juvica with Citigroup. Please go ahead, PJ.
spk12: Yes, good morning. You know, Tim, Clearly, the housing market is slowing down, whether you look at new homes or existing home sales. Have you seen a slowdown in the contractor business? You know, the contractor business was robust. Last couple of summers, they had a huge backlog that they were working from COVID. As that backlog is worked down, do you expect some slowing in the contractor business? Thank you.
spk14: Yeah, BJ, we have already seen slowdown in contractors that are primarily focused on new housing. You know, that's a brutal reality that we all have to face. But again, that's a small portion of our business. Our backlogs for where we're strong, which is commercial and maintenance, literally have moved only incrementally from 13 weeks average backlog in Q3 to 12 weeks average backlog in Q4. So that's within, you know, the margin of error of our survey. So that's holding up much better than the new build. You know, 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 while DIY and res repaint was offsetting it. So there's still a lot of pent up demand there. So, you know, as I said earlier, the total volume is still going to be incrementally down. So I don't want to oversell that. But that's why some of our pro businesses holding up better.
spk21: Our next question comes from Michael Lighthead of Barclays. Please go ahead, Michael.
spk15: Great. 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 1Q demand being pretty benign, no restock, volume is down 5-ish percent or so, why do you think input costs aren't coming down faster? And if China does recover in 2Q and beyond pretty quickly, how do you think about what that does to your raw material costs?
spk14: So, Mike, I'll start and let Vince fill in some color. I think there was some actual artificial demand in the second half of 22 that has maybe delayed some of the basic supply and demand economics because you'll recall that for most of 21 in the first half of 22, raw material availability was our number one issue and a lot of our But coatings here is the number one issue. So, as that availability improved, we all stocked up and got safety stock. And at the same time, demand started to collapse. So, things were kind of on, and when I say collapse, I mean particularly on the DIY and get-go side, but big driver to the overall raw material change. So, I think a lot of companies, and you've seen that in what companies have said, ended the year with more inventory than they would like. So, there was a bit of artificial demand that delayed, you know, what would be a normal supply chain curve.
spk13: Yeah, Mike, let me start to 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 are de-stocking. I do think there's this tug of war with the supplier base. Typically, Q1 and Q2 are peak volume orders for coating throughout material purchases. I don't think that's gonna materialize in the same manner this year. So we'll have a lower buy, PPG will have a lower buy in Q1. We have suppliers in virtually every week or every day for the past couple of weeks. indicating to us they have excess supply to give us. And so we're going to maximize that to the benefit of our shareholders. And we'll negotiate our Q1 and Q2 pricing accordingly. We do believe, as we said for the last couple of quarters, there's ample supply in our supply base.
spk21: Our next question comes from Silke Cook with JPMorgan Chase. Please go ahead.
spk18: Good morning. This is Silke for Jeff. I was wondering if you can discuss your volumes and your price in your architectural stores. And secondly, I was wondering whether you can talk about what's happening in the packaging business.
spk14: Sure. So the stores, stores pricing, you know, we've raised price there multiple times, and we've held that price throughout the year. And 2023, it will depend on what happens from an inflation standpoint, but that's one of the businesses where we move fairly quickly to keep up with cost inputs. You know, on packaging, you know, we did have strong margin recovery in that business throughout 2022, and we expect that to continue in 2023. We do see some softness there in pockets around the world driven by, oh, in China, it's the lockdowns. In Europe, it's just, you know, consumer confidence and beverage spending. So, we have seen some softness in volume, but strong margin recovery. And we also continue to convert to our InterVal Pro, you know, and free content material, and we've got some nice wins in that beverage space that will be launched as we move through this year. But overall, at a high level, good market recovery, some softness in demand around the world.
spk21: Our next question comes from Arun Viswanathan with RBC. Please go ahead, Arun.
spk17: Great. Thanks for taking my question. Good morning. I guess my question is about some framework you provided in the past. If we go back maybe a year, year and a half ago, you were discussing maybe $9 of earnings for 2023. Do you see that as still maybe a possibility a couple years out? You know, that would imply another, you know, 400 or 500 million of EBIT on top of where you are. So, what's the framework to get back there? Is it kind of that high team EBIT margin? and maybe the recovery of the 10% volume, or would you need more than that to get back? And is that still, you know, maybe, again, available in a couple years' time? Thanks.
spk14: Yeah. Hi, Arun. I said before, I believe that the $9 EPS is when, not if, and I stand behind that. And that's because the fundamentals are there. portfolio that has earnings power that has yet to be released. And I won't give you my entire, you know, 10-point plan that will get us there. But, you know, you still got recovery in some of our better businesses, aerospace, auto, refinish. Let me just talk about auto for a second, without going too far off topic here. But if you take a six-year run rate of global bills before COVID compared to the 19, I'm sorry, 20, 21, 22, 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 business has a lot of volume retention. 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 recovery. We feel confident that the $9 is a when, not yet.
spk13: Just a couple of comments. It's a little more near term. So if you look at 2022, we have to remind, Tim mentioned this earlier, but it's a good reminder that we really saw Europe fall really the back half of March. So we're going to come up against some recession-type volumes here in a couple 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 of a traditional, even a compressed run rate on GDP growth. So, those two, outside of aerospace, outside of refinish, we think have some opportunities to contribute. And again, as Tim mentioned earlier, we expect very good leverage, historical average leverage as volumes return in any business.
spk21: Our next question comes from Lawrence Alexander with Jefferies. Please go ahead, Lawrence.
spk22: Good morning. It's Dan Rizwan for Lawrence. 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 I think in the comments you said a $200 million backlog in aerospace. Just for comparison purposes, what does that mean versus what, I guess, historically it's been?
spk14: Yes, Dan, historically, that 12, 13 week for US propainters is actually still high. So, that will offset some of the negative volume in some of the other segments. I can tell you that in my short 35 and a half years with PPG, I don't remember the aerospace backlogs ever being this strong. And that, you know, that'll take us that that's that heads up demand for the foreseeable future. refinish our refinish backlogs are still, particularly here in the US, probably five times what they were pre COVID. And it's not only a matter of us getting, you know, getting product out or getting raw materials in our refinish customers. Backlogs are high. I hope you haven't had any minor fender benders lately, but if you have and you're taking a car to a body shop, they're likely to tell you it's six to eight weeks before you're going to get that car serviced and taken care of.
spk13: So, the backlogs across all of those spaces are high, in some cases, historically high. Yeah. I'll add some color, Dan, to the aerospace. So, we said before, the airspace is circa a billion-dollar business for us. This $200 million backlog is typically a small fraction of that. So, this is almost another two months of activity. If we can get it done this year, we're still facing some supply challenges that are governing what we can do in a particular month order, but it is a significant backlog in relative historic terms.
spk14: Yeah, and I'm going to grab that back for one more comment. The demand in aerospace is actually growing as we progress through the months and quarters. So, you've got kind of the underlying demand that's growing, which means that that $200 million backlog is going to be there even longer, and recall that China, international travel only opened on January 8th. So that's going to be another stimulus for aerospace demand.
spk21: Our next question comes from Mike Harrison of Seaport Research Partners. Please go ahead, Mike.
spk02: Hi, good morning. In the auto OEM business, a question on electric vehicles that hit 10% of global car sales last year. Was 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?
spk14: Yeah, Mike, we're really excited about EV because we are winning where the EVs are winning, okay? We're winning where the EVs are gaining the most, and that's China. 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, you know, we're growing significantly with the largest EV 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 beautification products to those customers. So, it's a 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 winners in the market.
spk21: Our final question today comes from Jaydeep Pandya with Onfield Research. Please go ahead.
spk16: partly because of the crazy raw material inflation you've seen. Now as raw materials tail off, you know, are you not getting pushback from your customers when you're trying to do these targeted pricing, especially in a demand environment, which has at least changed and has slowed? That's my first question. And the second question really is on protective. Could you just tell us like what the backlog in marine and protective these days? Thank you.
spk13: I'm sorry, the beginning of your first question cut out. I apologize, but if maybe you could repeat your first question for us, please.
spk16: Yeah, sure, sure. So, my first question is just on pricing.
spk00: Yeah, I got the first question.
spk16: Hello? Yeah, it's just on.
spk14: Yeah. So, Jaydeep, I'll take it, and then, Vince, you can jump in. You've got to remember that the pricing that we've achieved over the last couple of years was to offset what's happened in inflation in the last couple of years. And our customers have visibility to what's happened to our net margins. And so they have optics on where we are on a margin recovery standpoint. And they also know, and 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 and beyond that. You know, so as we move forward, we'll continue to be competitive, and we'll continue to price to offset non-raw material inflation.
spk13: Before Tim answers the protective question, you know, I think we have discussions with our customers in almost every business, and they want us to be a healthy supplier that continues to innovate And they understand that you can get paid a fair price for innovative technology that typically helps them. We're coming into a period of time, given inflation in base salary, where our customers really value functional attributes of our coatings products. And again, they're pushing us not so much on price, they're pushing us to help them with their productivity right now, which is a much bigger cost pool for them. cost opportunity for them than the price on coating. So again, we're having a lot of discussions with our customers about how to improve their productivity, which again is a key attribute for them.
spk14: Yeah, I know your protective question, you know, our 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, because whether it's marine new builds or large petrochemical 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 in protective. You know, there is significant investment in LNG, all aspects of LNG, and that's, that That area uses a lot of our advantage protective products. You know, there's an infrastructure investment certainly coming in the U.S. and other countries that leads to future growth for the protective business. And then, finally, on a PPG-specific protective opportunity, you know, we have a fantastic distribution network in Mexico. that has historically been very heavily architectural deco-focused. 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 US and Canada. So, that's a really great growth opportunity in the protective area that differentiates PPG.
spk21: There are no further questions at this time. I'll turn the call back over to John Bruno.
spk13: Thank you, Emily. We appreciate your interest in PPG. This concludes our fourth quarter earnings call. Have a good day.
spk21: Thank you everyone for joining us today. This concludes our conference call. You may now disconnect.
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