PPG Industries(PPG) - 2023 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - PPG Industries reported record financial results for Q2 2023, with sales of $4.9 billion and adjusted earnings per diluted share of $2.25, representing a 24% increase compared to Q2 2022 [26] - The company achieved an aggregate segment margin of approximately 16%, which is 330 basis points higher than Q2 2022 [7][34] - Year-to-date cash generation reached about $620 million, with a significant increase of $750 million year-over-year [28] Business Line Data and Key Metrics Changes - Record second quarter sales were achieved in five of the nine business segments, including aerospace, automotive, automotive refinish, PPG Comex, and protective and marine coatings [27] - The Performance Coatings segment delivered margins near 18%, the highest since 2016 [7] - The architectural business in Europe is expected to stabilize, while DIY demand in the US remains low, with a modest decline anticipated in pro-contractor residential repaint activity [12] Market Data and Key Metrics Changes - Demand for aerospace and auto OEM coatings products is expected to remain robust, as both are still below 2019 demand levels [29] - The company noted that international flights remain 10% below pre-pandemic levels, and there is an estimated supply deficit of about 40 million cars in the automotive sector [29] - Economic conditions in Mexico are robust, with significant nearshoring-related growth expected to benefit the company [10][30] Company Strategy and Development Direction - PPG's enterprise growth strategy focuses on partnering with customers to enhance productivity and sustainability [31] - The company is actively working on restructuring initiatives, expecting an incremental $15 million year-over-year earnings benefit in Q3 [13] - PPG aims to reduce greenhouse gas emissions by 50% by 2030 for scope 1 and 2, and by 30% for scope 3 emissions [11] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in margin recovery as input costs are expected to moderate, with a significant reduction in supply chain disruptions [33] - The outlook for global industrial production remains cautious, with expectations of lower levels in Q3, but certain industries like aerospace and automotive are anticipated to remain resilient [32] - The company raised its full-year earnings guidance, expecting segment margins to be higher year-over-year for the fourth consecutive quarter [34] Other Important Information - PPG has trimmed about 50% of the excess raw material inventory that it started the year with, with plans to continue reducing inventory levels [66] - The company is seeing a significant amount of nearshoring activity in Mexico, with $48 billion in nearshoring investments in Q1 2023, three times the amount from Q1 2022 [121] Q&A Session Summary Question: Outlook for Industrial Coatings segment margins - Management indicated that segment margins in Industrial are on a recovery journey, with expectations for continued improvement as price versus cost recovery progresses [16][18] Question: Volume outlook for 2023 - Management noted that the recovery in China is slower than anticipated, but they expect continued improvement in industrial activity [54] Question: SG&A as a percent of sales and gross margin - Higher SG&A costs were attributed to performance-based incentives and increased sales leading to higher SG&A expenses [58] Question: Weakness in Pro contractor volumes - Management described a slight sequential decline in Pro contractor volumes, but noted that commercial and maintenance work remains resilient [59] Question: State of the Chinese TiO2 industry - Management confirmed that they are utilizing Chinese TiO2 in various markets, although tariffs make it less cost-effective in the US [61] Question: EPS guidance for Q3 and Q4 - Management explained that the year-over-year EPS improvement is expected to decline in the back half of the year due to lapping strong price quarters from the previous year [82] Question: Impact of wage inflation - Management indicated that wage inflation remains elevated, with an average of about 3% in mature markets and higher in emerging markets [100]