Good morning. My name is Jason, and I will be your conference operator today. I would like to welcome everyone to the PPG Third Quarter 2021 Earnings Conference Call. All lines have been muted to avoid background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the conference over to John Bruno. You may begin your conference.

Thank you, Jason, and good morning, everyone. We appreciate your continued interest in PPG and welcome you to our third quarter 2021 financial results conference call. Joining me on the call from PPG are Michael McGarry, Chairman 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 Wednesday, October 21, 2021. 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 brief opening comments Michael 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 risk, 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 Chairman and CEO, Michael McGarry.

Thank you, John, and good morning, everyone. I would like to welcome you to our third quarter 2021 earnings call. I will provide some comments to supplement the detailed financial results we released last evening. For the third quarter, we achieved record net sales of nearly $4.4 billion and our adjusted earnings per diluted share from continuing operations were $1.69. As we communicated in early September, our sales and adjusted EPS were significantly impacted by worsening supply chain disruptions and increasing raw material cost inflation. Our raw material costs in the quarter inflated by about 25% year-over-year. For context, this is about three times higher than any previous coatings raw material inflation peak in recent history. We're also experiencing elevated logistics costs and are incurring increased manufacturing costs due to the sporadic nature of these outages. Commercially, we have taken significant mitigation efforts due to the high level of inflation through rapid implementation of structural selling price increases. In aggregate, our selling price realization is about 6%, with more than 6% price realization in our Industrial reporting segment. Our price capture pace is much faster than previous inflationary cycles and we have further pricing initiatives underway. Coming into the quarter, we expected that the supply chain and customer production disruptions would impact our sales by about $150 million. However, this actual impact was more than $350 million. Additionally, this prevented us from completely fulfilling our strong order books and further depleted retail inventory in many of our end-use markets. We expect much of this demand will be deferred into 2022. In particular, these current conditions will elongate the global automotive OEM recovery. To put the automotive OEM situation in perspective, U.S. dealer inventories reached record historic lows in the mid-20-day range. In 2021, global production in this industry is expected to be about 20% below prior peak levels. Despite the current challenges, several of our businesses, including our automotive refinish, protective and marine, and packaging coatings delivered strong above-market performance, driven by our strong service capabilities and advantaged technology. Our PPG Comex business achieved record third quarter sales with year-over-year organic sales growth of more than 10%. In addition, our U.S. architectural coatings business delivered about 10% same-store sales growth as we continue to expand our customer base with many new wins and increase our digital sales as a percentage of our total sales base. More generally, we continue to experience improving trade painter demand globally and architectural DIY coatings sales returned closer to 2019 levels after notable growth last year was driven by the stay-at-home impacts. We remain focused on cost management, which is evidenced by our SG&A as a percent of sales being 100 basis points lower than the third quarter 2020. This is being supported by our ongoing execution on our structural cost savings programs as we delivered an incremental $35 million of savings in the third quarter. We continue to target and are on track for our full year 2021 savings of about $135 million. In the quarter, we also continued to make good progress integrating our five recent acquisitions contributing to our overall earnings for the quarter. Our two larger acquisitions, Tikkurila and Ennis-Flint delivered good top line results, despite the challenging supply constraints. We continue to expect them to deliver an aggregate of $25 million of synergies for the full year of 2021. We once again delivered strong operating cash flow during the quarter and had about $1.3 billion of cash and cash equivalents at the quarter-end, including sequential reduction of our net debt by about $400 million. This was supported by our continuing strong working capital management as we maintain our positive step change improvement achieved last year and are at multiyear lows on a percentage of sales basis. While we will continue to evaluate accretive deals in our M&A pipeline, we are initiating stock repurchases in the fourth quarter and will continue to focus on debt reduction. As a reminder, based on the seasonality of our businesses, the fourth quarter is typically our strongest cash generation quarter of the year. Also during the quarter, in support of further enhancing our ESG program, we were happy to announce an agreement with Constellation Energy to power our Carrollton, Texas manufacturing facility with 100% renewable solar energy. We are also working on our very first-ever diversity report and developing science-based climate targets, both of which we will communicate in 2022. Equally important is PPG's market-leading sustainable products continue to enable our customers to meet their respective sustainability goals. We will continue to provide updates on these initiatives in subsequent quarters. Additionally, I am extremely pleased to announce that yesterday, PPG earned three R&D 100 awards for 2021. The R&D World Magazine honors the 100 most innovative technologies and services over the past year with the R&D 100 awards. Even more importantly, two of the three innovations that we were recognized for are growth initiatives in electric vehicles, including BFP SC battery fire protection coating, which protects the vehicle occupants from fire and mitigates thermal runaway events, plus Envirocron Extreme Protection thermally conductive dielectric powder for battery packs, providing dielectric protection and thermal conductivity. Our dielectric powder has already been commercialized by a leading EV maker, and our battery fire protection product will launch in 2022 by one of the world's largest car makers. Moving to our outlook, we are continuing to evidence solid demand in aggregate. Many of our customers continue to indicate that their order books are at high levels and have lower than normal inventory levels. In the near term, we anticipate only modest improvements to the supply disruptions that we've been experiencing. Our estimate is that our sales are expected to be unfavorably impacted by about $250 million to $300 million in the fourth quarter, both for the semiconductor chip shortage issue and chronic supplier operational capabilities. Recent production curtailments in China may add incremental pressures to availability and inflation, and we expect our inflation to approach 30% compared to the fourth quarter of 2020. As a result, all our businesses are securing additional selling price increases, and now we expect to fully offset raw material cost inflation in the early part of 2022. We continue to strongly believe there is sufficient capacity available in our supply chain as operating conditions continue to normalize. Absent any further disruption, we expect supply chains to operate more normally by year's end, supported by normal seasonality trends. To provide further assistance and assurance of a more consistent supply going forward, we are rapidly qualifying additional regional and global commodity suppliers across a variety of our key raw material procurement groupings. We expect these increases in product availability, coupled with continued improvement in the existing supply chain, will provide ample supply beginning early in 2022. While the current environment remains difficult to predict, I remain very optimistic about our specific growth catalysts for 2022. Specifically, we expect continued recovery in automotive refinish, OEM and aerospace coatings, which collectively account for about 40% of our pre-pandemic sales where we have broad global businesses supported by Advantage Technologies. We expect a measurable rebuild of inventories in many of our end-use markets. Specific to PPG is year-over-year earnings growth in 2022 due to further synergy capture from our recent acquisitions. In closing, these continue to be dynamic times, but thanks to our more than 50,000 employees around the world, we are well positioned today and in the future. Their dedication and commitment to make it happen are reasons why our customers, our communities and our many stakeholders can count on us to protect and beautify the world. Thank you for your continued confidence in PPG. This concludes our prepared remarks. Now Jason, would you please open the line for questions?

Thank you. Our first question comes from Chris Parkinson from Mizuho. Please go ahead.

Great. Thank you very much. Michael, obviously, there's been a lot going on in the industry, but in terms of raw material inflation as well as input shortages. If we start there, particularly on the shortages aspect of it, can you just offer your general views as we approach 2022? What's changed in the past 12 months, what offers confidence? And then also, are there any differences of how these variables are affecting results at the segment level? So anything would be greatly appreciated. Thank you.

Well, Chris, I would say, starting with the segment levels, the most impacted, of course, are architectural, our traffic solutions business, our automotive OEM and, quite surprisingly, our Industrial Coatings because there are a lot more chips than people realize in some of these things like appliances and other electronic materials, heavy-duty equipment, and things like that. So those were the businesses most impacted. What I see, though, is, obviously, it's in our suppliers' best interest to continue to sort out their supply chains, and seasonally weak fourth quarter should give them adequate time to do that. Now the flip side is we have an extremely large backlog of demand right now, so anything that they can make in the fourth quarter, we're going to ship. So we feel very good about that. As you know, we've been a little bit more pessimistic and probably right about the supply chain issues. And so we have put in, like we said on the call, an expectation of further challenges in the fourth quarter.

That's very helpful. And just kind of staying on the topic, it seems demand is fairly strong and kind of building into 2022 and the supply chain disruptions, obviously, are creating a lot of noise in the second half. When you take a step back, look at your own order books, your own customers' outlook, can you just quickly touch on just how you're thinking about 2022 and maybe even perhaps on the one job within the 2023 in terms of the volume recovery aspects for auto, refinish and aero? And then also perhaps touch on the sustainability of momentum in both general industrial and packaging. Thank you very much.

Okay. Well, that's a mouthful. Let's start with auto OEM. Clearly, if you look at the inventory in the U.S., we're down about 1.5 million cars from where typical is. Inventories in China are less than one month as well. They're probably in the 25-day range. So that's 15 days less than they typically have. Europe has not been able to supplement what they need. And when you think about fleets, not just rental fleets, but fleets in general, they're short as well. So there's significant OEM demand out there. I would also tell you, from the refinish side, we can always tell when the lockdowns are in, in every country, because driving increases and collisions increase and demand increases. There's very little inventory in the chain from that standpoint. So we see that also being a strong positive. And then, lastly, I would tell you from aerospace, we see strong order books on the small plane. So A320s and 737 builds are going to ramp up. Once you start to see some international travel, then I expect Airbus and Boeing will get back to building the bigger planes. MRO is improving monthly. And now that Europe is getting a little bit more open, we expect MRO to improve even better. So our catalysts for 2022 are strong. If you start building 787s on top of that, then our catalysts for 2023 get even better.

The next question comes from Ghansham Panjabi from Baird. Please go ahead.

Thank you. Good morning, everybody. I guess sort of stepping back, China was first in, first out from COVID, also led the global economic recovery over the past year. Subsequently, the macro headlines and some of the recent data out of China are confirming quite a bit of a slowdown. So, first off, what are you seeing in the region on a real-time basis? Second, how do you see China evolving over the next couple of quarters? And I guess, just more broadly, Michael, how are you thinking about the current inflation cycle impacting your expected recovery over the next couple of years given that consumers will ultimately have to bear all these massive cost increases? Thank you.

Let's start with China first. Our plants in China are currently operating on two shifts, with most running three. Due to the dual control issue aimed at reducing energy consumption, we are well-positioned to leverage lower energy costs during off-peak hours. While industrial demand in China has decreased, this is largely due to a shortage of raw materials rather than a drop in demand. We have minimal exposure to the architectural project market, so the difficulties there won't significantly affect us. However, our Kitchen and Industrial Bakeware, Electronic Materials, and Automotive businesses are performing well. Demand in our Packaging sector is showing double-digit growth. Overall, I am optimistic about China in both the short and long term, and I believe our team can navigate the challenges present. Regarding rising prices, with oil at $80, which historically isn't high, I think our consumers will maintain strong demand despite the structural cost issues. Therefore, I am not concerned about that.

Our next question comes from John Roberts from UBS. Please go ahead.

Thank you. Because the price increases are so large and happening so quickly, we're getting a bigger divergence than normal between the year-over-year price changes reported by the different companies. Maybe comment a little bit on where the differences are, maybe between you and some of your key peers by region or application or is it just timing differences, Michael, that's resulting in these different prices?

Yes. John, let me just start with the basic way it works. We report peer pricing, and we report for all our businesses. So, when you look at the business mix, that's one thing to take into account. The other thing is the mix by geography. So, if you have a large percentage in a geography that has hyperinflation, that's going to impact you. But more importantly for us, we are on our 18th quarter in a row of price increases. So, we're stacking increases on top of increases. So, one way you might think about this is whether or not somebody might be trying to catch up to where we are, and I think that's probably the most important thing. The other thing I would say is make sure you look at inflation reported as well as margins. For us, the ultimate end goal is margins, and I think our procurement team is doing a great job. We have hired people to help us qualify additional raw materials from that standpoint. So, we're in a pretty good shape, I think, from a competitive standpoint.

The next question comes from Bob Koort from Goldman Sachs. Please go ahead.

Thanks, Michael. I’m curious, you mentioned that the supply chain issues could moderate as you go through the quarter, but obviously, still some elevation in run rate on the cost side. So, are you starting to see some force majeures lessen, or what is it that you're seeing that gives you some hope that maybe it improves through the quarters? Is there some tangible anecdotes you're already seeing?

Well, Bob, the way I would answer that question is, in Q1, we had 95 force majeures. That was all early, right? Then we only had two in quarter two. Then we have 13 new ones added in the quarter three due to all the IDA issues. There’s been only one added in the fourth quarter. So the pace of force majeures has improved. At these commodity levels, I know our suppliers and I've talked to a number of them, they are focused on smoothing out the supply chain. I would tell you they know we can sell, they know we're going to continue to consolidate the industry; they know we're going to win. So, they've been out there protecting PPG as much as they can within the limits of the force majeures. So, I see these force majeures starting to decline in the fourth quarter. I think we're going to be in a much, much better place starting early 2022.

And Bob, Mike this is Vince. Michael mentioned in the opening comments. Seasonally, we see a significant downturn in demand for commodity raw materials. So this will allow them to do some catch-up in terms of maintenance and in terms of rebuilding inventory. So we do feel that has a tangible benefit as well entering 2022.

The next question comes from Michael Sison from Wells Fargo. Please go ahead.

Hey guys. When I add up the revenue impact on supply disruptions, it looks like it's nearing $1 billion, and so just curious, how do you think you'll get that back over time? And how long do you think it will take to get the raw materials in place to do that, and curious how confident you are about Halloween?

Was that a Cleveland Browns reference? Is that what you're…

Mike, it's Vince. I believe your calculations are correct. There are two major factors at play here. First, as Michael pointed out, the semiconductor chip shortage is significantly affecting our automotive sector and to a lesser extent, our industrial business. We anticipate this situation will improve over the next few quarters, ideally showing progress through the first half of 2022 and returning to more normal levels in the latter half of the year. The second issue involves the supplier force majeures that Michael mentioned. We expect these challenges to mostly resolve early in 2022. This will enable us to meet customer demands and importantly, replenish inventories, which are currently lacking. The shortages experienced in 2021 should be addressed as we rebuild customer inventories throughout 2022. We are confident that demand is strong, and we expect the supply issues related to chips will be sorted out in the upcoming quarters.

And I guess, Mike, I'd finish by saying that it won't surprise us to see you in a black and gold jersey once again after Halloween.

Our next question comes from Stephen Byrne from Bank of America. Please go ahead.

Thank you. About ten years ago, there was a period of four or five quarters with mid-single-digit price increases. Currently, you reported a 6% increase, which indicates a different situation than a decade ago. I'm curious if you think a similar trend of mid-single-digit price increases could happen again, or if they might be even higher considering the raw material costs you mentioned, which have increased by 25% year-over-year and 30% this quarter. You also indicated that you expect to offset these costs in early 2022. Is it reasonable for us to assume that the price increases might go even higher?

Stephen, we tried to convey that in the slides that we published last night. We're expecting to have a higher increase in the fourth quarter than we did in the third quarter, and I would say that is essentially already in place. It's just a matter of what it rounds to, but it's going to be higher than the 6% that we posted in 3Q. In the first quarter, there will be additional price increases as well. So the magnitude of the increases are historic, but so is the amount of inflation. Our teams feel very good about this. Our customers are well aware of what's going on. They also need product. They're also facing logistics challenges. They're also facing raw material challenges, and they buy a number of the things that we buy, maybe not to the level that we do, but they understand. I feel very confident that we're going to continue to post historical price increase numbers that will help us when raw materials moderate. This will be a significant catalyst for continued earnings growth going forward.

Our next question comes from John McNulty from BMO. Please go ahead.

Taking my question. Maybe just another one on the price versus raws dynamics. So you're looking to catch up in early 2022. Is that all on the premise of pricing, or do you expect some raw material relief as you start to get into the first quarter or so of 2022? I guess somewhat related to that, you've got about $500 million worth of sales tied to M&A in the third quarter. Sometimes it takes a little bit of time to get the pricing wheel of an acquired asset working. So I guess, can you speak to the pricing that you're seeing in the businesses that you acquired and if there's maybe a catch-up phase of that as we look to 2022? Thanks a lot.

Yes. John, I'll take the first part of the question; I'll let Michael handle the second part on acquisitions. We're in a position now where we believe the inflation levels are crusting. We have 30% targeted inflation in Q4; the supply constraints, as we alluded to earlier, we think are going to abate somewhat. Our goal is to get pricing up to offset this high level of inflation. Some of this will moderate, and we are starting to see some signs of moderation. But again, given the tightness of the supply chain right now, it's not coming through in absolute percentages, but we are starting to see, in certain raw materials, some abatement. For us, though, I think what's most important is we've gone after structural price increases. The vast majority of the pricing that Michael alluded to in Q3. Almost all of that is structural in nature. So we're changing unit pricing as opposed to surcharges. We think that's proper to do, and that will maintain as we head into 2022 and throughout the duration of 2022. And John, with regard to the acquisitions, Ennis-Flint, the highest they'd ever achieved price prior to our acquisition was 2%. They did not have, what I would call, a structured program to analyze what was going on and a structured program to get price increases out in a real-time basis. We have significantly improved that, and we have a PPG legacy leader running that business now, and we are really excited about what that future holds. Myself and Tim Knavish were in Europe, like within days when Tikkurila closed. That was the first thing on the agenda, was pricing. We were much further ahead in the price increase. We've already done our second price increase in architectural Europe prior to us acquiring Tikkurila. They were on their first increase. They are now catching up. They have put in place new processes that will allow them to better process not just raw material inflation, but also the value creation that we bring to the market with our new technology. I feel very comfortable that we're on top of that, and we are in a good position with the increases we've announced for the fourth quarter with the legacy Tikkurila products, but also the first quarter increases that are to come.

Our next question comes from Kevin McCarthy from Vertical Research Partners. Please go ahead.

Good morning. Given all of the dislocations in the external environment that we've been discussing, it struck me that your fourth quarter EPS range was quite narrow at plus or minus $0.03. In that context, I was wondering if you could talk about material upside or downside risks if it turns out that you did materially better or worse when we see the results in January. What do you think the potential drivers of those variances could be, based on what you see today?

Hey, Kevin, this is Vince. We're typically announcing earnings a week or so earlier, but due to the way the calendar fell this year, we're 20 days, three weeks into the quarter. October is a very large month for most coatings companies in the fourth quarter just due to seasonality. We've got a good read on October. We've got a good read on the next couple of weeks, at least, of demand and our ability to supply. So just given the size of the first month plus as it waits on the quarter, we have some level of confidence. That being said, things that could push it up or down, again, as Michael alluded to earlier, everything we can make today we could sell. So, if we do get more raw materials to manufacture more, that would be a positive for the fourth quarter. As you alluded to, Kevin, there still could be some things that could suppress the ability to get raw materials like logistics, and that would be a negative. But we think all the other variables, we have a fairly good handle on.

The next question comes from Laurent Favre from Exane BNP. Please go ahead.

Yes, good morning. I've got a question on capital allocation. Nippon just announced the Cromology deal this week. I think you just talked about resuming buybacks in Q4. So, I was wondering can you assume that the M&A pipeline is getting thin? And can you give us a sense of the overall envelope for the buyback you've got in mind for the next 12 months?

Yes, Laurent. So, first of all, I would not say the M&A pipeline has slowed down. In fact, I would tell you that it has picked up because of the high prices that have been paid, so there's more interest out there. What we said about the buyback is, first, we think PPG is a structurally sound company. We think the current price on PPG is undervalued and so we're going to buy some shares back. That’s the first thing. The second thing is we also generated a lot of cash in the fourth quarter. That's our strongest quarter for cash. So, we're going to pay down debt as well as buy back stock. We're in good shape as we look at the pipeline for acquisitions. So, I don't think it's any more complicated than that.

Next question comes from Aziza Gazieva from Fermium Research. Please go ahead.

Hi guys. So, you're calling for 30% inflation in the fourth quarter. But could you put an estimate on your current read for inflation for 2022 versus 2021? Vince mentioned that some of the raws are abating, but which products are still a particular concern into 2022? Thank you.

Yes. I'll handle the macro, and I'll let Michael talk about some specifics. But again, when we look at the raw material basket in aggregate, we do feel it's crusting. We will have some year-over-year inflation in Q1 just because we didn't have a strong comparison last year. So there'll be some year-over-year comparisons. But the absolute prices on raws, we feel, will hold as we go into 2022. Michael, can you talk about some specifics, please?

Yes. Aziza, I would tell you that the three items that I'm paying particular attention to are epoxies, emulsions, and isocyanates. Emulsions, in particular, have been elevated purely due to the inability of the suppliers to run their plants. It was impacted by Ida as well because a couple of raw material suppliers there were impacted down for more than a month due to that. Once they're back to normal rates, some of the stress on pricing, I think, will start to come back down, and so that's one. The epoxy, especially in China, I'm anticipating that they will moderate the pricing demand as we get into the fourth quarter with seasonality, and that will provide some relief. From an isocyanates perspective, we did have some force majeures in that area. That will be coming off, I think, in the very near-term. So, those are the ones I'm paying attention to.

The next question is from Arun Viswanathan from RBC Capital Markets. Please go ahead.

Great. Thanks for taking my question. Just a two-part question here. So first on margins. Just wondering, obviously, there's a lot of volatility, and it's going to depend on price capture versus raws. But how should we think about margin recovery next year? Is there anything special that you have in mind as far as cost reduction buckets or anything that would be specific that you could call out? And then secondly, I was just curious about your comments on EVs and beverage cans, two areas that have been robust. Have those been impacted? I know that you called out some supply chain disruptions there, but have those been disrupted from a structural standpoint on demand, or is it just transitory? Thanks.

I will address the margin question while Michael will cover the commercial aspects. We're currently in the midst of an active restructuring program, and we anticipate providing additional details during our fourth quarter earnings call in January. The savings from this initiative for 2021 are expected to be around $130 million, with further savings anticipated in 2022 as we continue to implement our previously outlined actions. We'll share specific numbers in January. Additionally, specific to PPG, we expect to capture synergies next year, generally 12 to 15 months after an acquisition, which will contribute to further structural synergies. Once again, we'll provide more details in January. These are key factors contributing to our margin expansion opportunities related to our cost base.

Arun, in regard to electric vehicles, it's clear from Tesla's performance last night that global manufacturers are seriously committed to accelerating their EV advancements beyond current forecasts. One of the major EV producers in China has stated that they anticipate reaching 35% EV production by 2025, despite the government's target of 20%. The momentum for EVs is definitely increasing. In the beverage sector, we are experiencing strong growth with double-digit increases; I believe there are about 13 or 14 new plants being constructed. These facilities will require a significant amount of coatings, and we are capturing more than our fair share of the market in beverages. I expect this growth to persist as consumers transition from single-use plastics to recyclable beverage containers, which I see as a sustainable long-term trend.

Our next question comes from David Begleiter from Deutsche Bank. Please go ahead.

Hi. This is David Horn here for Dave. Can you talk about why you're below the IHS auto build forecast in Q4? And how much of an EPS impact is from that lower forecast? Thanks.

Yes, thanks. This is John Bruno. So I remind everybody, going into 2Q and 3Q, PPG has been below the IHS forecast, and I think we've come out ahead in terms of accuracy. We do see things improving. We just don't see the velocity of improvement that IHS is forecasting for the fourth quarter. We see more of a gradual recovery into 2022.

The next question comes from Kevin Hocevar from Northcoast Research. Please go ahead.

Good morning, everyone. You've mentioned that DIY paint demand has returned to levels seen in 2019. Do you believe that the fundamental demand for DIY paint has truly recovered to those 2019 levels? Are supply chain challenges the primary factors holding it back? Or has there been a significant pull forward in demand due to previous robust conditions? I'd like to hear your thoughts on this and your outlook moving forward.

Yes, Kevin, it's moving back toward 2019; it's still above it. But actually, if you go into a Home Depot, you'll see how bare the shelves are. I mean, there's just not enough paint out there and that is a challenge for our partners. Certainly, we would like to have a lot more paint than they're getting right now. We're working hard to try to meet our big box customer needs. So, I actually do think that there's more upward potential there as the supply chain normalizes.

Our next question comes from Mike Harrison from Seaport Research Partners. Please go ahead.

Hi, good morning. I was wondering if you could give us an update on the competitive environment within the auto OEM space. All of you and suppliers are hurting, the customers are hurting. Do you see any share shift going on in this environment? And can you maybe talk about industry pricing discipline into that auto OEM coatings market? Thanks.

Yes. So, Mike, I would tell you that the discipline is better in Europe and the U.S. and Latin America, and it's still a little bit challenged in Asia. That doesn't surprise us. China is historically a difficult place, plus there's more than 80 car manufacturers in Asia. So, there's all the global plus all the locals, and so there's a little bit more competitive attention. What I would tell you is, for us, any time that we might lose some share or get punished for raising price, we get it back very quickly as they roll out new programs because they have to put the finest technology out there on the newest programs to compete in that market due to the hyper-competitive nature from both an appearance and performance standpoint. So, I'm not worried too much about that. We've been pushing the team to continue to raise price appropriately, and that's what we're doing.

The next question comes from Steven Haynes from Morgan Stanley. Please go ahead.

Hey thanks for taking my question. I was wondering if you could go into a bit more detail on your pricing in the Industrial segment by end market. It seems like packaging was potentially pretty strong, maybe double-digits. So, just any additional color there would be helpful.

I'm not sure I want to get into that level of detail, Steven. What I would tell you is we've posted more than 6% in the Industrial segment. We had strong positive pricing in Automotive, Industrial as well as Packaging. These conversations with our customers are one-on-one, and I think that's the way it should remain.

Our next question comes from Duffy Fischer from Barclays. Please go ahead.

Hey, good morning, guys. Maybe three questions, if I can sneak it in. On your one chart that you showed the acquisitions, you saw the seasonality of the revenue. Can you talk about the seasonality of the margins off that chart and what that would look like? Then on your Chart 6, where you break out the 60% PPG, 40% PPG that has struggled volumetrically. What is the difference in margins between those two buckets? The 40% that's been lower on volumes, has it been harder to get price in those businesses because of the lower volumes?

Let me start with the first question. I'll address the 60-40 question first because it's more relevant right now. If we examine the 60-40 question, the 40% of the businesses that are down, which we could say is in the low teens in terms of volume compared to 2019, are very technology-focused. These businesses typically hold significant value for their technology. We've seen positive pricing, as shown by the segment pricing. Two of these businesses fall under performance, where performance pricing has risen by 6%. These are sizable businesses, so they will influence the segment considerably. The automotive sector is our largest business within industrial, and it will again have a significant impact on the overall pricing. We are collectively capturing pricing across the portfolio, but it is not differentiated based on the 60-40 split.

Yes. And I would say, Duffy, listen, the fact that they're down has not prevented us from getting price. As you know, in Refinish, we were historically an annual price; this year, we've had more than one price increase in Refinish. So that has not prevented it. Automotive clearly has not prevented it. The automotive guys would like every Hilo of coating that we can provide, so they would definitely like to get more. From the aerospace side, as you know, it's a very technology-driven business, and it's a very spec-driven business, so our ability to get price on the MRO side is actually pretty good. So that has not been impacted either. When I look at the catalysts for 2022, these businesses are certainly going to be strong contributors to the increase in earnings for next year.

Regarding the seasonality from the acquisitions, we included the sales seasonality in the materials we shared last evening. It is expected, and accurate, that the earnings seasonality is even more significant. These businesses have a fixed cost base, particularly in architecture. You gain more leverage during the peak sales quarters, while there is less leverage during the sales quarters outside of the peak. Therefore, the earnings impact is much more pronounced in the first and fourth quarters. We will observe the opposite effect in the second quarter of next year. We did not have Tikkurila for most of the second quarter of 2021. In the second quarter of 2022, we will experience that positive leverage.

The next question comes from Jaideep Pandya from On Field Investment Research. Please go ahead.

Thanks. I have two questions. Firstly, on growth, when you think about the European business in deco and compare it to some of the other peripheral businesses like the adhesives industry or construction sort of building materials, and think in the context of the green wave and the renovation wave that will kick into Europe, as we speak for the next few years. Do you think that paint and sort of adhesives building materials volume growth is sort of similar in trajectory? Or do you think that paint actually will slightly undergrow because of the higher penetration for a lot of these materials in the increased insulation demand? That's my first question. And the second question is really around raw materials. So if you take a step back, I guess, you guys have lost probably 15% to 20% of supply because of Ida and Uri and all the other issues across your basket this year. Fundamentally speaking, do you think your suppliers have invested enough in things like epoxy, acrylic acid to support the growth that your industry is seeing? In other words, do you think that even if supply normalizes, utilization in these products will remain high and therefore, you will always remain a bit susceptible to a storm or two? Thanks a lot.

Hey Jaideep, this is Michael. I'll take the first one, which is the suppliers. I think they're clearly hampered this year because I think in the pandemic, they did not do the required maintenance. They postponed some things, and they got caught short by the recovery. They did not do enough maintenance, and so they got caught short. As they are now making very good money, they're all interested in getting their reliability up at or above where they were pre-2019. So I anticipate this is going to get better. I'll let Vince cover the adhesives and sealants versus paints for the European questions.

Yes, I think when we just think about ESG, which I think was the heart of your question, typically, these products like adhesive, sealants, coatings, act as an enabler to provide better ESG capabilities, longer term, longer-lasting. The aftermarkets typically provide the same opportunities to reduce people's environmental footprint. So, the coatings industry, the adhesives industry, every time there's been a technology change, we're seeing it in EVs. We typically get more content and we typically are able to provide the functionality needed in order for them to make technology improvements to cover whatever that technology change is. In this case, it's better environmental performance.

The next question comes from Edlain Rodriguez from Jefferies. Please go ahead.

Thank you. Good morning guys. Just one quick question on raw materials and, again, apologies if you already addressed that. In terms of the raw materials availability issues you've seen this quarter, was it mostly concentrated in the U.S. because of the hurricanes, or was it broad-based in all the different regions?

Yes. So, Edlain, what I'd tell you is the worst was in the U.S., okay? That was obviously challenged with Hurricane Ida. The next most impacted over the quarter was Europe because they do buy some things from the U.S. So that has impacted especially our architectural business over there. The one that got impacted last, but somewhat meaningful was the dual control issue in China that started late in September because there were a lot of government edicts. People were supposed to meet their quarterly goals, and they were not on track to meet the quarterly goals. Starting about mid-September, there was a lot of pressure to get the dual control initiatives underway and on target. In China, when they set targets, you can almost rest assured they're going to hit those targets. So that's the way—there were no real material challenges in Latin America. They came out of the U.S., but we were able to manage through most of those.

Thank you. The next question is from Eric Petrie from Citi. Please go ahead.

Hi, good morning, guys. Been reading about potential for magnesium shortages, which goes into producing aluminum alloys for auto, aerospace, construction end markets. So are you worried there at all with China still in control and low inventory levels in Europe?

Yes. Eric, I would tell you that none of our big aerospace clients have currently raised concerns about magnesium, nor have our EV customers. Right now, that is not currently on the radar screen. We're always trying to look around the corner, but that is one that so far has not raised its head.

There are no further questions at this time. Mr. John Bruno, I turn the call back over to you.

Thank you, Jason, and we'd like to thank everyone for joining the call today, for your time and interest in PPG. This concludes our third quarter earnings call.

This concludes today's conference call. You may now disconnect.