PPG Industries, Inc.

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 Alex Lopez, Director of Investor Relations. Please go ahead, sir.

Thank you, Elliot. And good morning, everyone. This is Alex Lopez, Director of Investor Relations. We appreciate your continued interest in PPG and welcome you to our second quarter 2024 financial results conference call. Joining me on the call from PPG are Tim Kanavich, Chairman 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, July 18, 2024. We have posted detailed commentary and accompanying presentation slides on the investor center of our website, ppg.com. These slides are also available on the webcast site for this call and provide additional support to the opening comments Tim will make shortly. Following management's perspective on the company's results for the quarter, we will move to 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 effects on PPG's operating and financial performance. These statements involve uncertainties and risks, which may cause actual results to differ. The company is under no obligation to provide subsequent updates to these forward-looking statements. The 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, reconsiderations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information, please refer to PPE's filings with the SEC. Now, let me introduce PPE Chairman and CEO, Tim Konevich.

Thank you, Alex, and good morning, everyone. Welcome to our second quarter 2024 earnings call. I'd like to start by providing a few highlights on our second quarter 2024 financial performance, and then I'll move to our outlook. The PPG team delivered sales of 4.8 billion in our seventh consecutive quarter of year over year segment margin improvement. This culminated in second quarter adjusted earnings per diluted share of $2.50, which is an all time record for the company and represents 11% year-over-year growth. Despite increasingly challenging macroeconomic conditions, we are building top-line momentum as our underlying year-over-year volume progression improved for the sixth consecutive quarter. In the second quarter, six of our 10 business units delivered positive volume growth versus prior year, aided by our enterprise growth strategy initiatives. These initiatives include delivering new products and technologies to our customers, such as our innovative packaging interior can and exterior end coatings technologies, as well as our new Sigma Glide technology in our marine business. Each of these technologies has allowed us to gain share in their respective businesses. Our actions also include upgrading and modernizing our manufacturing capabilities to drive increased output, such as in aerospace where demand has outpaced industry supply. One additional example of our enterprise growth strategy is where we're driving changes to the ecosystem of the business models. This includes in architectural coatings U.S. and Canada with our Home Depot initiative, in our refinish business with our digital tools such as Moonwalk and Link, and in our traffic solutions business as we further optimize our service and supply capabilities, which are critical value drivers in this business. Additionally, our volume performance in the quarter benefited from our well-established business portfolio in Mexico, China, and India. Overall, however, our aggregate volumes in the quarter were flat year over year, falling shy of our initial expectations as overall demand in Europe and global auto OEM production were below what we assumed in our second quarter guidance. It is important to note that our European volumes, while still negative, improved sequentially year over year versus the first quarter. Also, global industrial activity remained subdued in the quarter. Consistent with our financial guidance in April, our second quarter automotive refinish sales were down year over year, reflecting a strong prior year comparison and lower insurance claims. However, we remain confident that this business will have a strong second half of 2024. In the quarter, we drove further margin enhancement and we marked our seventh consecutive quarter of year over year segment margin improvement. Our aggregate gross margin was 43% for the quarter, a 180 basis point improvement year over year. Our performance coatings segment achieved all-time record segment margin of 18.7%. And our industrial coatings segment also improved its margin profile by 120 basis points versus the prior year. During the second quarter, we benefited from stable upstream and downstream supply chains, and the vast majority of our suppliers have sufficient or excess capacity, which is noteworthy as this occurred during the peak season for raw material consumption. Consistent with our guidance, we experienced mid-single-digit percentage raw material deflation that we expect will normalize into flat to low single-digit deflation for the third quarter as we anniversary prior year impacts. This benefit was partially offset in our results by general inflation, including higher year-over-year wages and employee benefits. We are proud to have published our 2023 ESG report in the quarter, which highlighted progress against our 2030 targets, including increasing sales from sustainably advantaged products and reducing greenhouse gas emissions throughout our own operations and our value chain. I want to take this opportunity to provide you with an update on our previously announced strategic reviews of the architectural coatings U.S. and Canada business and the global silicas product business. We made good progress with these processes and are pleased to have a number of engaged and interested parties. We're working through the traditional bidding, management presentation, and data provision stages and remain on our original schedule to determine a path forward for each of these assessments. We have also made further progress in driving improvement in working capital, including lowering our year-over-year inventories during the quarter. As a result, our operating working capital was down 90 basis points year-over-year. We have more work to do over the balance of the year as we move towards seasonally slower sales quarters, but we have already returned to near pre-pandemic inventory levels. We ended the quarter with a strong balance sheet and remain committed to deploy excess cash for shareholder value creation. During the quarter, we repurchased $150 million of PPG shares, bringing our year-to-date total to about $300 million. This is on top of our fourth quarter 2023 repurchases. Also yesterday, consistent with our long heritage, our board authorized a $0.03 dividend increase from $0.65 to $0.68 per share. Now, looking ahead to the third quarter, we expect overall organic sales of flat to low single-digit percentage growth. In Mexico, we expect to again deliver excellent financial results. We also believe that demand in China will deliver organic growth as a result of our technology-advantaged products, but albeit at a lower growth rate than achieved in the first half of the year. In Europe, demand remains uneven by country and end use, but we expect modest sequential year-over-year improvement. In addition to those businesses that grew in the second quarter, we expect organic growth in automotive refinish coatings and protective and marine coatings. And also, while slightly unfavorable year-over-year, we are projecting modest sequential quarterly improvement in general industrial demand. We expect to deliver adjusted third quarter EPS between $2.10 and $2.20 per share, aided by solid operating performance. Our guidance midpoint is 4% higher than our record third quarter 2023. However, the midpoint of our guidance is 10% higher than the third quarter of 23, excluding the impact of a higher year-over-year tax rate, as the prior year included several non-recurring favorable discrete tax items. The difference in the tax rate is reducing our year-over-year EPS comparison by approximately 12 cents at the midpoint. We anticipate overall company selling prices to be flat in the third quarter, as the impact of certain index-based customer contracts in our industrial coding segment will be offset by selling price increases in our performance coding segment, including some additional incremental pricing that will be realized in the third quarter. With regard to commodity raw materials, supply remains ample, and we continue to realize benefits for moderating input costs. In the third quarter, we expect flat to low single-digit percentage raw material deflation, lower than the second quarter as we anniversary some decrease realized in 2023. As we have consistently demonstrated, we will drive further improvement of our operating margins aided by sales volume growth leverage as a result of the execution of our enterprise growth strategy and self-help in manufacturing productivity and cost control initiatives, which includes continued execution of our previously approved restructuring actions. Our more than 50,000 employees are committed to delivering best-in-class solutions to our customers that will drive growth for PPG. Our results this quarter were made possible by our highly dedicated team around the world who make it happen and deliver on our purpose to protect and beautify the world every day. Thank you for your continued confidence in PPG. This concludes our prepared remarks. And now, would you please open the line for questions?