PPG Industries, Inc.

Good morning. My name is Elliot and I'll be your conference operators today. At this time, I would like to welcome everyone to the first quarter of 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 would 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 pound key. 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.

Thank you, Elliot, and good morning, everyone. Once again, this is John Bruno. We appreciate your continued interest in PPG and welcome you to our first quarter 2023 Financial Results Conference call. Joining me on the call from PPG are Tim Knavish, President and Chief Executive Officer, and Vince Morales, Senior Vice President and Chief Financial Officer. Our comments relate to the financial information released after U.S. equity markets closed on Thursday, April 20, 2023. We have posted detailed commentary and accompanying presentation slides on the Investor Center of our website, ptg.com. The slides are also available on the webcast site for this call and 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. Both the prepared commentary and discussion during this call may contain forward-looking statements, reflecting the company's current view of future events and their potential effect on PPG's operating and financial performance. These statements involve uncertainties of 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, reconciliations of these non-GAAP financial measures for 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 Knavish.

Thank you, John, and good morning, everyone. I'd like to welcome you to our first quarter 2023 earnings call. I will keep my comments brief, providing a few highlights on our first quarter financial performance and on our outlook. Our first quarter sales were a record $4.4 billion and were achieved despite the backdrop of macro challenges, including soft global industrial activity, elevated cost inflation, continued geopolitical issues, and weakening demand in U.S. construction-related end-use markets. We delivered adjusted earnings per diluted share from continuing operations of $1.82, which is 33% higher than the first quarter of 2022. Our operating segment margin recovery accelerated, improving 380 basis points compared to the first quarter of 2022, as we work back toward our historical profile. The first quarter was aided by incremental 2023 selling price increases in the performance coding reporting segment and in total company-wide. We have now fully offset all cumulative cost inflation incurred since early 2021. As I highlight some of the key drivers that drove the strong first quarter performance, An overriding theme is around the benefits we are deriving from our diverse portfolio. For example, PPG has the largest and most diversified aerospace business in the coatings industry. We're well positioned to serve our customers in the aerospace aftermarket, and our backlogs expanded once again this quarter following the reopening in China as customers need to replenish their stock of PPG's technologically advantaged products, including sealants and transparencies. We expect this business to continue to grow for the remainder of 2023 and beyond. Also, PPG has the largest architectural coatings business in Mexico, where current economic conditions remain robust and among the best in the world. The PPG COMEX business continued their strong execution and delivered an 11th consecutive quarter of record sales. We are laser focused on driving organic growth. During the quarter, we benefited from several customer wins that included becoming the primary paint supplier at Walmart's 3,800 locations that carry paint products. The expansion of our well-recognized Glidden DIY brand at Walmart and in our independent dealer channel will support further growth opportunities. The automotive refinish business has now installed 1,400 global moonwalk machines recently gaining traction in the US with additional rollouts planned globally. About a third of these installations are new body shop wins. While overall demand conditions in Europe remain difficult, our leading position in automotive OEM in the region allowed us to support our customers during a sharp rise in automotive builds in the region, albeit off a historically low base. Our OEM sales volumes in the region were up mid-teen percentage for the quarter, and we expect additional growth throughout 2023. The first quarter is typically a negative cash generation quarter due to our business seasonality. However, our strong earnings contributed to us generating positive operating cash flow in the first quarter for the first time in seven years, as our operating cash generated was about $400 million higher than the first quarter of 2022. Our financial results were better than our preliminary first quarter update on April 3rd. This was mostly attributable to stronger sales at the end of the month, a richer sales mix, and lower costs than we predicted. A quick update to our very important ESG initiatives. We are prioritizing and delivering sustainably advantaged products and services to our customers and view this as a key lever for organic growth. Last year, we increased our sales from sustainably advantaged products to 39% of our total sales and continued to better define our product sustainability priorities to enable the sustainability ambitions of our customers. We look forward to sharing our new 2030 targets once our emissions reduction goals are validated by the science-based targets initiative. We will also be launching our 2022 ESG report in late May, which will include our progress against current environmental goals as well as our previously communicated diversity, equity, and inclusion targets. Moving to our outlook, it is evident that challenges remain to the demand environment, and in some cases, such as U.S. housing and construction, they're weakening. Despite these anticipated headwinds, we remain confident that our margin recovery momentum will continue. We're executing against the shopping list of opportunities, which we expect to contribute to strong year-over-year earnings growth in the second quarter and for the rest of 2023. This includes supporting our aerospace customers as they fulfill their strong order books. And we expect a second straight quarter of more than 10% sales volume growth year-over-year in this business. Also, as availability of raw materials returns to pre-pandemic levels, we expect our earnings to start benefiting from moderate deflation from recent historic inflation highs. As a reminder, aggregate raw material inflation since early 2021 remains at historically high levels. Additionally, our manufacturing is beginning to improve from multi-year production disruptions, and we expect this will generate efficiencies that will provide another earnings growth lever in the coming quarters. With respect to Europe, we are seeing coatings demand stabilize, albeit at lower levels, which will enable further year-over-year earnings growth, aided by the actioning against our restructuring program. PPG has leading architectural coatings positions in several countries in Europe. Once the economy begins to improve, this will provide an additional earnings growth lever. I'm also pleased with the growth prospects for our auto refinish, protective coatings, and traffic solutions businesses. These end-use markets have proven to be more demand resilient than in prior economic downturns, and a couple of these are positioned for further growth to support infrastructure investment in the United States. In China, we expect moderate and continuous sequential quarterly improvement in domestic demand as the year progresses. This will be more evident on a year over year basis given the pandemic related restrictions in China last year during the second and fourth quarters. In summary, for the past few quarters, we have been conveying our strong conviction that various earnings growth catalysts would be activated. I am pleased that we have reached this inflection point and continue to have strong conviction as reflected in our full year earnings guidance that year over year earnings growth will continue 2023. In addition, in this challenging macroeconomic period, you can also count on PPG's legacy of being highly focused on controlling the controllables, including managing our entire cost structure and optimizing our working capital. As I've begun my new role as CEO, I've challenged our team to focus on our advantages, prioritizing investments that will differentiate us and move the needle for our customers and our business. This includes advancing our digital capabilities throughout our businesses to improve our customers' productivity and further enhance our internal efficiencies. Our team is committed to accelerating earnings growth while preserving the strengths of PPG's legacy. Thank you for your continued confidence in PPG. This concludes our prepared remarks, and Elliot, would you please open the line for questions?