PPG Industries, Inc. (NYSE:PPG) Q4 2022 Earnings Call Transcript

PPG Industries, Inc. (NYSE:PPG) Q4 2022 Earnings Call Transcript January 20, 2023

Operator: 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 speakers’ remarks, there will be a question-and-answer session. 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, Emily, and good morning, everyone. Once again, this is John Bruno. We appreciate your continued interest in PPG and welcome you to our fourth quarter and full year 2022 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, January 19, 2023. We have posted detailed commentary and accompanying presentation slides on the Investor Center of our website at ppg.com. The slides are also available on the webcast site for this call 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 and risks, which may cause actual results to differ. The Company’s 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’s President and CEO, Tim Knavish.

Tim Knavish: 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 to provide a few highlights on the recent quarter, the year 2022 and our outcome. 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 remain robust. In 2022, our automotive refinish coatings 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 product.

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 quarter of sales and earnings. PPG Comex sales are now more than $1 billion 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, strong global order book, increased military related growth and PPG’s advantaged technology products we expect this business to continue to grow in 2023 and beyond. Our adjusted earnings per diluted share from continuing operations were $1.22, above the midpoint of $1.13 from the guidance we provided in October.

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This included more than 20% year-over-year segment earnings improvement driven by selling price realization and strong cost management. 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 U.S. 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 cost inflation incurred since early 2021. Given the more difficult macro backdrop, we also announced, and are quickly executing new cost savings initiatives with particular focus on 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 PPG 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 made some smaller, but strategically important powder coating acquisitions, which aid 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 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 targets initiative, issuing our first-ever diversity report, and finally obtaining shareholder approval to declassify our board and remove supermajority 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. But through the resiliency of the global PPG team, we did deliver record sales of $17.7 billion and set the foundation for many accretive 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 resilience in the coming quarters if we experience a broader global economic decline.

As normal course of business, we 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 it. As I begin my tenure as CEO, and 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-teen percentage segment markets. 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, 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.

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Q&A Session

Operator: Our first question today comes from David Begleiter with Deutsche Bank. Please go ahead, David.

David Begleiter: Tim, for the full year, consensus was around $7 per share, which will imply a pretty big ramp up from the Q1 levels. Is that a number that you think you can — that can be achieved or get close to as year progresses?

Tim Knavish: Yes. Right now, David, just because of all the uncertainty in many different avenues of our business, 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 are the shopping list of multiple potential earnings growth catalyst for 2023, including China, including aero, including refinish, including Comex, EVs, THD, literally a shopping list of potential earnings catalyst, but we’ll get through this hangover of Q1 and then reassess and communicate more as we move forward.

Operator: Our next question comes from Michael Sison with Wells Fargo. Michael, please go ahead.

Michael Sison: Tim, I think your outlook for the first quarter is down mid-single digits for volumes. Can you walk us through what the volume outlook is from 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?

Tim Knavish: 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, PPG Comex, typically has a very strong Q4, and it 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 is timing issue in Q1. So those are the three main factors, I would say.

Vince Morales: Mike, this is Vince. Just it on the other businesses. We’re not seeing any tone change in the businesses sequentially again, good strong pace of recovery in aerospace, a solid, consistent growth in refinish, auto OEM, consistent — generally consistent quarter-over-quarter, starting to recover in Europe. So again, we’re not seeing any significant changes in some of the other key businesses either.

Operator: Our next question comes from the line of Christopher Parkinson with Mizuho. Christopher, please go ahead.

Christopher Parkinson: Just a real quick question on pricing. Can you just comment on the current pricing environment just given the macro movement in, let’s say, 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 would be incredibly helpful.

Tim Knavish: Yes. Sure. Thanks for the question, Chris. You saw on 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. So we still have pricing momentum. We will have additional price in Q1 targeted by business. We’ve got some carryover impact in Q1 as well. As for what’s happening out there in the world besides PPG, all the coatings 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 all experiencing. So, we see a continuation of positive pricing as we enter the year. And beyond that, a lot of it depends what happens on the inflationary environment, but that’s our view at this point in the year, Chris.

Operator: The next question today comes from Ghansham Punjabi with Baird. Please go ahead.