PPG Industries, Inc. (NYSE:PPG) Q2 2023 Earnings Call Transcript July 21, 2023
Operator: Good morning. My name is Carla, and I will be your conference operator for today. Welcome to the Second Quarter 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. [Operator Instructions] 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, Carla, and good morning, everyone. Once again, this is John Bruno, and we appreciate your continued interest in PPG and welcome you for our second 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 US equity markets closed on Thursday, July 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 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 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. 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, 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.
Tim Knavish: Thank you, John, and good morning, everyone. And welcome to our second quarter 2023 earnings call. I would like to start by providing a few highlights on our second quarter record financial performance and then I’ll move to our outlook. The PPG team delivered all-time record financial results in the second quarter, including sales of $4.9 billion, adjusted earnings per diluted share from continuing operations of $2.25 and year-to-date cash generation of about $620 million. Our adjusted EPS is about 24% higher than the second quarter of 2022 and cash generation of $750 million higher year-over-year. These strong financial results were achieved despite operating in an environment of variable global economic demand.
Industrial production was muted, reflecting cautious consumer buying behavior in Europe and slower-than-expected recovery in China and softening demand in certain end use markets in the US. Overall, our results were supported by good growth trends in several of our technology, advantaged businesses and leading brands. PPG’s strong positioning in these end use markets led to record second quarter sales in five of our nine businesses. Aerospace, automotive, automotive refinish, PPG Comex and our protective and marine coatings business. We implemented incremental price increases in the first half of the year, primarily in the Performance Coatings segment and our aggregate two-year stack pricing for the company is now about 20%, which is offsetting historically high cost inflation.
We expect selling prices to remain positive in the second half 2023, recognizing prior year price increases will reach anniversaries as the year progresses. As I said at my CEO investor briefing in May, margin recovery is the top near-term priority. And we have made great progress this year in improving our segment margins toward our historical profile. Our aggregate segment margins in Q2 were about 16%, which is 330 basis points higher than the second quarter of 2022. This included the Performance Coatings segment delivering margins of near 18%, the highest since 2016. Another key priority for our team has been to return to our legacy of strong cash generation. And through the first half of the year, we delivered record operating cash generation of about $620 million.
This was supported by our record net earnings, but we also lowered our inventory levels by about $100 million on a sequential quarterly basis. Despite this reduction, our raw material inventories remain elevated and we are executing various actions, plans to further reduce these inventory levels over the next several quarters as commodity supply availability has improved significantly this year. Now I’d like to spend a few minutes on three key drivers that are contributing to our excellent financial results in 2023. First, while overall global industrial production is challenging, including in a number of industrial end use markets that are already in recessionary type demand conditions, our portfolio of business mix is providing great resilience.
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Two of the best performing global industries in the second quarter were aerospace and auto OEM. We have established leading global positions in each of these end markets by facilitating our customer success through innovative and sustainably advantaged products and much relied upon services. We expect demand for our aerospace and auto OEM coatings products to remain robust as they are both still below 2019 demand levels. Two data points are, international flights remain 10% below 2019 pre-pandemic levels and over the past several years, lower automotive OEM global builds have resulted in an estimated supply deficit of about 40 million cars versus historical build rates. The second key driver is that we continue to deliver strong earnings performance in Europe as we achieved consecutive quarterly earnings records despite lackluster regional industrial production activity and weak aggregate — architectural demand.
This has been accomplished by our team’s strong execution of cost and margin management. When this region begins to recover to any degree, PPG will be well positioned for solid topline and additional bottom line growth. The third key drivers are strong positioning in Mexico where current economic conditions remain robust including expansive nearshoring related growth, solid consumer wealth growth and an appreciating local currency. We expect the nearshoring benefits to continue for a number of years, first with capital investment and then through increased regional employment. PPG remains the clear leader in Mexico for architectural and automotive OEM and we have actions underway to capture further growth in our other businesses where we will leverage our core strengths, including the best-in-class PPG Comex concessionaire distribution network.
I’d also like to comment on our enterprise growth strategy. A key pillar of this strategy is to partner with our customers to deliver superior service and products with a focus on enhancing their productivity and sustainability. In the second quarter, we continued to make advancements and earned several new customer wins. I’m excited about the opportunities we have ahead of us to win more customer value driven business and grow our organic sales. Now some quick updates about our important ESG initiatives. As we communicated in our 2022 ESG report, we’ve introduced 2030 greenhouse gas emissions reduction targets that have now been validated according to climate science through the science-based targets initiative. We plan to reduce our scope 1 and scope 2 absolute greenhouse gas emissions by 50% by 2030 and our scope 3 greenhouse gas emissions by 30% within the same timeframe.
Moving to our outlook. We expect global industrial production to remain at lower levels in the third quarter, including similar demand activity in Europe, some further slowing in the US and modest sequential improvement in China. We do expect certain pockets of industry activity to remain more resilient, including aerospace and automotive industries, where we are well positioned on a global basis. In addition, we expect economic activity in Mexico to remain solid. In our architectural businesses, we expect demand conditions to be mixed by geography. In Europe, we anticipate demand will stabilize at current levels, resulting in year-over-year sales volume being much closer to the prior year. In the US, we anticipate DIY demand to remain at lower levels and pro-contractor residential repaint activity to begin to modestly decline sequentially with the backdrop of lower existing home sales.
Finally, in Mexico, we expect our PPG Comex business to continue to post solid organic growth. In the third quarter, we expect to realize additional benefits from moderating cost inputs. At the peak of our supply disruptions, we had more than 160 force majeures in our global supply chain. That is now about 10, which is in line with our historical norms. To date, we have not yet recognized the full financial benefit of our commodity supply chain normalizing. From a financial realization perspective, through the end of June, our input costs were still 20% higher than the pre-pandemic levels. As we further reduce our inventories, we will realize additional earnings benefit. We continue to work on our previously announced restructuring initiatives and expect an incremental $15 million year-over-year earnings benefit in the third quarter.
Additionally, we will benefit from the recent paint film acquisition that we made in the second quarter. This business is uniquely positioned in the premium end of this new emerging market and has good customer pull and future growth prospects. Annual sales of this business are about $100 million. Despite the challenging environment, we have raised our full year earnings guidance and expect third quarter aggregated segment margins will be higher on a year-over-year basis for the fourth consecutive quarter. Finally, I want to thank our team members around the world who support our customers, serve our communities and continually look for ways to do better today than yesterday every day. It is their dedication and commitment to helping make our customers successful that gives me continued confidence in our future.
As we mark PPG’s 140th anniversary in August, I firmly believe that our best days still remain ahead of us. Thank you for your continued confidence in PPG. This concludes our prepared remarks and now would you please open the line for questions.
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