PPG Industries, Inc. (NYSE:PPG) Q1 2023 Earnings Call Transcript April 21, 2023
PPG Industries, Inc. beats earnings expectations. Reported EPS is $1.82, expectations were $1.53.
Operator Good morning. My name is Elliot, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter PPG Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.I would now like to turn the conference over to John Bruno, Vice President of Investor Relations. Please go ahead, sir.John Bruno 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, ppg.com. The slides are also available on the webcast site for this call, provide additional support for 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 and risks, 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 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 Knavish.Timothy 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 Coatings 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 are 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 with 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 location 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 U.S. 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 3. 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 continue 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.
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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 for multiyear 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 strength of PPG’s legacy.Thank you for your continued confidence in PPG. This concludes our prepared remarks. And Elliott, would you please open the line for questions.
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Question-and-Answer Session Operator [Operator Instructions]
Our first question today comes from Duffy Fischer from Goldman Sachs. Your line is open.Duffy Fischer Yeah.
Good morning, guys and congrats on a nice quarter. My question is mostly around the sequential EPS and how that relates to history. So if you stripped out 2020 and 2021 and looked at the six years before that and last year, Q1 to Q2 has averaged up about $0.48 with all of those years being above $0.40. And at the midpoint of your guide, you’re only up $0.28 this year. So how do you match those two?And then a similar question for first half versus second half, if you just use the midpoint to your guide, your second half is down $0.80 versus the first half. But in those same seven years, if you look historically, it’s averaged down about $0.30. So could be conservatism, could be something different in the seasonality, maybe something around the loading of Walmart.
But can you just kind of walk through why we should expect a lower — or why we shouldn’t expect kind of a higher number of history that to prevail?Timothy Knavish Hey. Sure, Duffy. Good to hear from you. First of all, let me give you a few high-level comments, and I’ll let Vince fill in the gaps. On the Q1 to Q2 step up, we definitely had some one-timers in Q1. Notably, the Walmart load in, we had some insurance settlements related to past storms. We have a promotion for Comex Easter sales every year. More of those sales were pulled into Q1 than normal. And that’s a big piece of the Q1 to Q2, and I’m sure Vince can give you more details.As for the rest of the year, we are cautious on volume for a number of reasons. Slower China opening of manufacturing.
We’re cautious on U.S. housing for the second half of the year. We’re cautious on global industrial. So those are some of the few high levels. And Vince, you want to add a few details?Vincent Morales No. I think we quantified the Walmart business. The load-in for us in Q1 was about $40 million. Again, just a little more color. The Comex business has a very large Easter campaign. The Easter campaign was split last year between Q1 and Q2. This year, most of the load started in Q1. So we’re not going to have that traditional step up. And we did see really good activity in Europe auto. And again, our prediction is, well, that’s still going to be a very strong business. Q1 was a very strong European auto.Operator Our next question comes from Ghansham Panjabi from Baird.
Your line is open.Ghansham Panjabi Yeah. Thanks. Good morning, guys and congrats on all the progress to start the year. I guess, first off, on auto refinish and your outlook for directional improvement in 2Q. Is that just a function of comparability from the year-ago period and the China reopening? And also going back to some of the volume weakness in Europe and North America for auto refinish in the first quarter. Can you just give us some more color on the customer order pattern timing that you called out? Thanks.Timothy Knavish Yeah. Sure. Thanks for the question, Ghansham. Let me start off by saying, I have full confidence, high confidence in our auto refinish business globally going forward as well as over the last several quarters because our key to key value proposition is best-in-class.
What you see in refinish, if you look at Q4 then to Q1, then what we’re saying for Q2, this business, because of the two-step distribution, you really need to look at it over a multi-quarter basis just because it’s hard sometimes to project the order pattern of our independent distribution.So I would look at Q1 in that lights and rather look at instead of an individual quarter, look at it over multiple quarters. But we have strong backlogs across the body shops, and it’s really driven by two things other than paint. It’s driven by parts shortages, and it’s driven by labor shortages. So those backlogs remain. And so, this actual sellout to the collision industry remains strong. There’s just some fluctuation in independent distribution ordering patterns.Operator Our next question comes from Stephen Byrne from Bank of America Merrill Lynch.
Your line is open.Stephen Byrne Yes. Thank you. I’d like to drill in a little bit on your commercial strategy in U.S. architectural. It seems like you have a similar offering now at the independent hardware stores and Walmart with this Glidden platform. And between those in The Home Depot arrangement in your own stores, it seems like it could be nearly 10,000 locations. My question for you is, how would you split your sales in architectural paint in the U.S. between those various buckets? And where do you think that could go in the next few years and could this cannibalize sales in your own stores?Timothy Knavish Thanks, Steve. Great question. So we don’t expect cannibalization. Let me explain a little bit about what we’re doing. Glidden is by far, our strongest and best known DIY brand in the U.S. And historically, despite that strong brand strength, we lacked distribution.
So obviously, we partner with The Home Depot with Glidden. We’re now partnering with Walmart with Glidden. And we’ve always partnered with our independent dealers with Glidden. One of your points, typically, we don’t carry Glidden at our own company stores. So think about it as big box home improvement plus Walmart plus private dealers.The type of customer that buys paint at Walmart Is very different than the type of customer that buys paint at The Home Depot. And so what we’re really doing with these recent moves is expanding distribution and providing access to a strong DIY brand across multiple different types of consumers, multiple different price points of consumers and expanded geography. So that’s really what we’re doing here. And there’s very little conflict between those three pieces and certainly very little cannibalism.Operator Our next question comes from John McNulty from BMO.
