Good morning. My name is Sam 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. Thank you. I would now like to turn the conference over to John Bruno. Please go ahead, sir.

Thank you, Sam, and good morning, everyone. Once again, this is John Bruno. We appreciate your continued interest in PPG and welcome you to our first quarter 2022 financial results conference call. Joining me on the call from PPG are Michael McGarry, Chairman and Chief Executive Officer; Tim Knavish, Chief Operating 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 21, 2022. We have posted detailed commentary and accompanying presentation slides on the investor section 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 the 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 that 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 more 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’d like to welcome everyone to our first quarter 2022 earnings call. I hope you and your loved ones are remaining safe and healthy. To say that these have been difficult and challenging times for so many would be a massive understatement. Since the beginning of the war in Ukraine, we have been focused on protecting the health and safety of our employees and their families from Ukraine as well as our employees in Russia. PPG and the PPG Foundation have also committed more than $800,000 to humanitarian relief as well as longer-term recovery support. In addition, PPG employees have also been providing direct support to those in need, including taking refugee families into their homes. The war has also made it necessary to scale back and now wind down our operations in Russia. As a result, we have recorded a pre-tax charge of $290 million for impairment of substantially all of our company assets related to our Russian operations. For context, net sales in Russia represented approximately 1% of total PPG net sales for the year ending December 31, 2021. We will continue to closely monitor developments in the region. Before I provide the regular quarterly review of our results, I’d like to provide a concise summary of the key issues impacting our business in the quarter as we look ahead. During the first quarter, we had two major events: the Ukraine-Russia crisis and increased COVID-19 restrictions in China, which have created some new uncertainties about overall regional demand and possible global carry-on effects. You will see that due to these increased uncertainties, we have widened our earnings guidance range we provided for the second quarter. Notwithstanding these two major events, there are other longer-standing global impacts that have affected our financial results for several quarters and which are abating or gradually improving. Specifically, we continue to experience improvements in our supply chain and our raw material availability. Additionally, outside of China, COVID restrictions have continued to decrease in many parts of the world. As a company, we have continued to improve our pricing realization in both pace and cadence. This has been necessary to battle the persistence and breadth of inflation. Our price capture during this cycle is much faster and we are now pricing in the second quarter for second quarter inflation impacts, so we are basically pricing in real-time. We continue to deliver good earnings leverage when we have improving volumes. While many of our businesses and regions have not fully recovered from the pandemic, we are still down about 5% on aggregate. However, when a business does deliver volume improvement, we are realizing good bottom-line gains. This reflects the hard work from our teams on managing our operating costs and SG&A. Finally, we had a very solid month of March from a financial returns perspective. We have stated many times that March is the most important month in the first quarter given the seasonality of our businesses. Our month of March financial returns are the best since the second quarter of 2021. I will now provide some comments to supplement the detailed financial results we released last evening. For the first quarter, we delivered record net sales of $4.3 billion and our adjusted earnings per diluted share from continuing operations were $1.37. To summarize the quarter, our sales performance was better than our January guidance despite unexpected impacts from the crisis in Europe, COVID-related disruptions in China, and continuing logistics bottlenecks. More than offsetting these unexpected macro issues was stronger-than-expected demand across many of our businesses as regional economies and end-use markets continue to recover from the pandemic impacts. Above-market sales volumes were achieved in several of our end-use markets, including our PPG-Comex business, which during the quarter opened their 5,000th concessionaire location in Mexico. First quarter sales in Latin America were a record. Additionally, our automotive refinish business performed well with strong sales volumes in the U.S. and Europe. Our aerospace business benefited from year-over-year initial improvements in the market and we expect further industry demand growth as we are still well below pre-pandemic levels. Our adjusted earnings were significantly above the upper end of our January financial guidance as we delivered strong earnings leverage on the higher-than-expected sales volumes. This leverage was a result of improving manufacturing performance as COVID-related absenteeism subsided significantly as we progressed through the quarter and we experienced increasing raw material availability. Moreover, our selling price increases increased by 10% year-over-year, marking the 20th consecutive quarter of higher selling prices. Our selling prices are up over 12% on a 2-year stack basis versus the first quarter of 2020, reflecting our continued actions to offset generationally high inflation. Our recent acquisitions also performed well, including the realization of targeted synergies. The Tikkurila business delivered year-over-year sales growth of more than 10%, excluding our Russian operations. Our Traffic Solutions business also achieved greater than 10% sales growth, and our first quarter sales were a record as the business continued to have a large order backlog as we entered the second quarter. During the quarter, we also launched a significant expanded Pro Painter initiative with The Home Depot. Despite continuing raw material constraints restricting our ability to fully load inventory, we now have our full Pro Paint assortment available in about 60% of their stores. We expect to have all The Home Depot stores loaded in the coming months. We are excited about the growth opportunities this initiative provides and have already recognized some significant new professional painter business gains. Our earnings and margins continue to be impacted by elevated levels of inflation and supply disruptions. In the first quarter, our selling prices did offset year-over-year raw material inflation but did not recover inflation from other sources, including logistics, energy, and labor, and we did not fully recover prior year inflation. Sequentially, versus the fourth quarter of 2021, our overall margins improved by more than 200 basis points. We are targeting continued quarterly sequential margin improvement in the second quarter despite further increases in raw material and logistics inflation. We have continued to optimize our commercial processes over the last two years and, as mentioned, are now closer to real-time pricing relative to inflation. Due to higher crude oil and energy prices, we are implementing incremental selling price increases in the second quarter and expect that we will exit the second quarter offsetting all inflation categories on a run-rate basis. This drives our expectations for operating margins to improve further as the year progresses. In several businesses, we continue to face certain raw material shortages, resulting in our overall sales backlog growing to about $180 million exiting the quarter. The order backlogs are highest in our aerospace and automotive refinish businesses. Additionally, these are two of many industries we supply where inventory levels are extremely low all the way to the end consumer. We have continued to control our controllables and once again lowered our SG&A as a percentage of sales, decreasing by about 40 basis points compared to the first quarter of 2021. This included delivery of an additional $15 million in cost savings from recent restructuring programs and acquisition synergies. This is also despite expanding our multiyear investment in our advanced digital capabilities. We are experiencing growing digital adoption from our customers, most notably in the architectural coatings business. In the first quarter, our net debt increased mainly due to the higher dollar value of inventory reflecting inflationary effects. The seasonal working capital increase in the quarter was consistent with pre-pandemic years. We expect our cash flow generation to match prior year-end trends, which typically involve cash consumption early in the year followed by strong cash flow generation as we progress toward year-end. Strategically, on April 1, we completed the acquisition of Arsonsisi’s Powder Coatings business, continuing our focus on growing our powder coatings manufacturing capabilities. In addition, we divested some architectural coatings businesses in Africa as we continue to evaluate all regional businesses and product lines to ensure that they continue to hold strategic value and meet our financial hurdles. In the first quarter, we continued to take measurable steps to advance our ESG program by issuing our inaugural DE&I report. While I am proud of what we have achieved, we know there is more work to do and additional areas of opportunity to focus on. If you have not already done so, I would encourage you to read our report and learn more about what we have done and our aspirational goals for the future which are outlined in our presentation materials. Looking ahead, while our underlying demand remains solid in most of our end-use markets and regions, second quarter economic activity, in particular in Europe, has started to soften as consumers remain cautious based on the current geopolitical issues in the region. Additionally, manufacturing supply chains have been recently impacted in China due to severe restrictions from rising COVID cases. In the last few weeks, up to five of our smaller manufacturing sites have been mandated to shut down due to these restrictions as well as our principal Protective & Marine Coatings production facility. We are working in both of these regions to manage our operations and costs reflective of these current macro challenges. We are also assessing the impacts—both positive and negative—that these challenges may have on raw material supply and costs. As mentioned earlier, we expect further sequential inflationary pressures on raw materials, logistics, and energy. Our 2-year stacked raw material inflation is expected to exceed 35% but only increase low to mid-single digits sequentially versus the first quarter. We are implementing further selling price increases across all our businesses and expect a quicker offset versus historical lags. Due to the heightened levels of uncertainty, our earnings guidance considers a wider range of outcomes for the second quarter. More generally, our guidance assumes that restrictions in China ease somewhat in May and that geopolitical issues do not expand beyond the current Russia-Ukraine boundaries. While the current environment remains difficult to predict, I expect that as 2022 progresses, we will begin to experience an easing in supply chain disruptions, general inventory rebuilding across many end-use markets, and still a healthy consumer willing to spend, especially in North America. The future PPG earnings catalysts I referenced on the January earnings call remain intact and we certainly see a path to return to prior peak operating margins with opportunities to exceed them. This includes continued recovery in the automotive refinish, OEM, and aerospace coatings businesses; normalization of commodity raw material costs, which should moderate over time given improving supply dislocations; and a softening in certain regional economies. We also experience strong operating leverage on any sales volumes growth and accretive earnings growth from our recent acquisitions. In closing, as we look ahead, I remain confident about the company’s future. I strongly believe in our team of 50,000 employees as we work to do better today than yesterday, every day. The way our employees have dealt with the pandemic, helping during the Ukraine humanitarian crisis, and navigating through a very challenging business environment are prime examples of how the team is making it happen. Thank you for your continued confidence in PPG. This concludes our prepared remarks. And now, Sam, would you please open the line for questions?

Absolutely. Your first question comes from the line of Christopher Parkinson with Mizuho. Christopher, you can proceed with your question.

Great. Thank you so much. Can you quickly give us a more granular update on the various inputs as it pertains to the second quarter and the second half inflation outlooks and also the persistence of certain input shortages on a quarter-to-quarter basis? Thank you.

Chris, what I would tell you is that our input shortages remain consistent with what we have seen previously. Motions tend to be at the top of the list. We have had some intermittent issues with TiO2, but those have all been resolved. Force majeures, when we had the last call, were over 100; we are down to about 50 now. We have seen improved reliability in Europe and also improved reliability, exclusive of the Shanghai area, for Asia. We are still seeing some challenges with trucking here in the U.S. Sequentially, we do see the pace of inflation coming down. Importantly, our pricing is accelerating and is more real-time than it has ever been.

Your next question comes from the line of Ghansham Panjabi of Baird. Ghansham, please proceed.

Thank you. Good morning, everybody. Could you just give us a bit more context about what you are seeing both in Europe and China from a demand and supply chain standpoint and particularly, which businesses are being most impacted? Additionally, given the complexity in the world and your strong capital position, how are you now thinking about share buybacks versus acquisitions? Thanks.

Okay. Ghansham, let’s start with the share buyback question first. We will always look to optimize shareholder value. Our pipeline of acquisitions remains active. But at the current share price, we are balancing what’s most accretive to the shareholders. In regard to China and Europe, what I would tell you is the auto situation in China is being impacted a little bit more than some of the other markets. We regard that as transitory. We expect, as we’ve seen in other instances, people will be much more interested in driving themselves rather than taking mass transit. We do expect car recovery in Europe, which is the largest car market in the world. They are also shifting from internal combustion engines to electric vehicles faster than some of the other markets. We have more content on electric vehicles than we do on internal combustion engines, so we feel optimistic about that. We are concerned about the rising number of COVID cases. It has plateaued in the last 2 or 3 days. We have gotten almost all but two of our plants back up and operating. We expect to get those other two plants running in the next 3 to 5 days, if we’re being a little optimistic here. But overall, demand in China remains good. I do not think the Chinese economy can afford to have GDP in the low single digits; that’s not good for them. I expect the government to be aggressive in providing a business-friendly environment coming out of this most recent COVID situation. In Europe, the most concerning area is DIY. We predicted this, as has been consistent in what we have told you. We continue to have a strong professional painter backlog, but DIY and traffic through the big-box stores in Europe are the indicators we are watching closely.

Ghansham, this is Vince. If we think more broadly as we put together our Q2 forecast, we do expect China to ease some of the COVID restrictions in early May and continue to ease through the balance of the quarter, but they are certainly restrictive right now. We know there will be some carry-on effects regarding logistics and transportation import availability well into May, and that’s baked into our guidance. In Europe, again, we are concerned about, maybe overly concerned, about the effect on consumers of energy prices and the overall environment. Thus, our forecast has incorporated some of that consumer passiveness into Q2. We hope we’re being a bit bearish, but that’s what we’ve forecasted, and we will see how the cards fall as we go through the quarter.

Thank you, Ghansham. The next question is from David Begleiter of Deutsche Bank. David, please proceed.

Thank you. Good morning, Michael and Vince. On U.S. architectural, are you seeing any discounting by your competitors? If so, how are you responding to this more competitive pricing environment potentially? Thank you.

David, I’m going to – we have Tim here. I’m going to let Tim handle that question.

Hi, David, Tim Knavish here. Look, in our architectural U.S. business, or actually our architectural business around the world, we continue to see increasing sequential pricing. That pricing, while never easy to secure, is being accepted by our customers. Our customers have to remain competitive every day. So we can assume that we’re seeing the same behavior from others in the market. We have not seen what you refer to as discounting in the market. I believe the industry realizes what’s going on upstream of us and is acting accordingly.

Thank you, David. The next question is from John McNulty of BMO. John, please proceed.

Yes. Thanks for taking my question. On the pricing front, Michael, you indicated you’re almost at a point where it’s real-time pricing. What are the mechanisms in place that you’ve implemented to achieve this? Also, when raw materials eventually or hopefully subside, do you plan to give back some of that pricing in real-time? Or will there be a more traditional lag to return to stability? How should we think about this?

John, first of all, we’re not going to be giving this pricing back. As you know, we are still lagging. If you look at this on a 2.5-year stack, there is plenty of recovery. The reason we’re able to get more real-time pricing than ever before is that it’s difficult for our customers to dispute what’s happening; they fully see the same things we are seeing. They are seeing energy prices go up, they see the prices of raw materials we buy increasing. They see transportation costs rising, which they are paying for too. They also cannot argue that our competitors are not pricing. From that standpoint, it’s no longer a matter of can we take a price increase; now it’s about how much of a price increase are you going to take. We have also become much more aggressive about withholding shipments; we are telling people this is the new price. If you don’t like it, please don’t place purchase orders. If purchase orders come in without the new price, we are sending them back. This has gotten the attention of our customers, and they understand that we need relief, and we need it now. Our sales teams have become much more adept at pricing than ever in the history of the company.

Thank you, John. The next question is with Stephen Byrne of Bank of America. Stephen, please proceed.

Yes. Thanks. Michael, could you drill down a little more on this relationship with Home Depot? You mentioned the 60% level of a metric. I didn’t catch what that was. Also, I’m aware that there are many steps in the rollout of that relationship. How many of the 2,300 Home Depot stores does PPG actually have a distribution center available nearby to fulfill orders? Additionally, how many of those stores have your reps started reaching out to contractors that are purchasing materials in The Home Depot but not paint, as identified by those respective pro desks?

Okay. Stephen, the 60% referenced means we have only been able to stock 60% of their 2,300 stores. I’ll let Tim provide additional detail.

Yes, Stephen. The program is in 60% of the stores, and we will continue to ramp up as we progress through the next several months as the supply situation improves and we continue to build inventory. We’ve got our full pro trade workforce engaged across what’s now an omni-channel between our own network and The Home Depot network. We are beginning to see customer conversions already. That will continue to grow as we learn, as The Home Depot associates learn, and as supply continues to build. We expect this to be a long-term, multiyear growth initiative for both us and The Home Depot in the Pro category.

And Steve, just more broadly, and we talked about this on our January earnings call, we believe this relationship with Home Depot gives us considerably higher market access. We are targeting availability for the professional painter daily. As Tim mentioned, that omni-channel approach allows them to visit our stores, our dealers, or Home Depot—all within close proximity to their job site.

At the beginning of the day, every time we enter a new market with Home Depot, we see substantial new wins immediately. This builds excitement among The Home Depot team and increases their confidence level, as they start to create winning stories across the different markets. That’s the most exciting part.

Thank you for the question, Stephen. Your next question is from Vincent Andrews of Morgan Stanley. Vincent, please proceed.

Thank you very much. Michael, I’d be curious to get your updated thoughts on the home improvement market. Given the move in interest rates and the housing market still seems tight, does the rising interest rate environment matter for architectural paint demand and renovation? How should we think about the evolving housing market?

Vincent, I’ll let Tim comment on this.

Right now, there is a strong backlog, particularly on the residential side. There are many walls yet to be painted, but there is no near-term concern on our end. Rising interest rates will influence mortgage affordability, but there is a significant shortage of overall housing, and multi-unit housing continues to rise despite higher interest rates. Residential permits remain strong here in the U.S. despite increasing rates. We are bullish on this for at least the rest of this year, and we will evaluate beyond that.

Additionally, we conduct a Pro Painter survey, which shows a strong backlog among professional painters. We are certainly more concerned about affordability than interest rates. The Pro Painters still demonstrate good backlog.

In fact, in our last Pro Painter survey completed recently, 75% of the painters reported a backlog that was at least as large or larger than what they had 90 days or a year ago. So, we don't see an impact in the short to medium term.

Thank you, Vincent. Your next question is with Josh Spector of UBS. Josh, please proceed.

Yes. Hi, guys. Thanks for taking my question. Many investors are focused on your comment during the last call about EPS potentially exceeding $9 per share in 2023. You didn’t necessarily reiterate that today. Is that still achievable based on what you’re seeing from price-cost dynamics and the demand environment, especially in a scenario where China lock-down impacts persist for the next couple of quarters and Europe enters a minor recession?

Yes. Josh, I would tell you that the dynamics for $9 per share remain valid. We are seeing an improving refinish market, which is a crucial business for us. Miles driven are almost back to 2019 levels in the U.S., and we also see miles driven improvements in Europe. The numbers for aerospace are strong, with TSA bookings on the rise. The aerospace sector continues to strengthen. Boeing announced plans to start rebuilding or building 787s again, which is encouraging. There remains a strong backlog of planes, and our market share with Airbus continues to grow. We anticipate only about 80 million cars will be produced this year, given the history of car production. However, we remain bullish that car production in the U.S. will improve as issues related to chips and parts subside. Overall, I am optimistic about our position. Our synergies will keep coming in, and productivity continues to rise. Therefore, I feel confident about achieving the $9 mark. We’ll be pricing higher as we move into the second quarter, effectively overcoming all inflation impacts.

Thank you. The next question is from Michael Sison of Wells Fargo. Michael, please proceed.

Hi, guys. Nice start to the year. Historically, the third quarter tends to decline seasonally from Q2, but it sounds like the pricing rise is going to improve. Will this year be different, and should we see continued EPS improvement? I understand that guiding beyond one quarter is tough, but considering the potential for improving volumes and your pricing mechanism, might that occur this year versus historical patterns?

Mike, this is Vince. One of the most important metrics we are monitoring is sequential margin improvement. From Q4 to Q1, you witnessed a movement of 200 to 300 basis points in our margins, depending on the segment. This is a true representation of how well we perform and how well the overall industry is doing. Comparing year-over-year performance is challenging now due to numerous factors. So, we’re focusing on sequential comparisons. We expect to see continuous improvement in demand as the year unfolds, especially as China comes back. We’re seeing good momentum in the aerospace and refinish segments, among others. However, it's tough to compare against historical patterns, hence, our focus on sequential improvements.

The next question is with Frank Mitsch of Fermium Research. Frank, please proceed.

Yes. Good morning. I need to give props to John on Slide 5. It tells a very helpful story about what you’re facing. Obviously, many questions have arisen about price. Michael, I was curious what absolute numbers you expect in Q2 versus that 10% in Q1. Additionally, I noted your Tikkurila sales were up low teens, excluding Russia; how much of that was volume?

Frank, regarding Q2 guidance, you’re likely looking at something around 12%. That’s a reasonable expectation. For Tikkurila, volume growth was in the low single-digits, if I recall. What’s encouraging is our efforts in training them on pricing, which historically has not been their strong suit. As mentioned before, we believe Tikkurila can replicate the growth we've seen with Comex. This will yield more local market growth and better value for what we sell, leading to improved returns on our investment in Tikkurila.

Since we brought Tikkurila on board, another business that performed remarkably well in Q1 was our Traffic Solutions segment, the former Ennis-Flint acquisition. We experienced around 25% organic growth year-over-year in that business, with seasonal light quarters. Yet we concluded the quarter with a robust backlog, heading into what is expected to be a strong quarter.

Hey Frank, it’s Tim. To add one more detail on that significant acquisition, Vince mentioned 25% top-line growth; it was an all-time record quarter for that business. Much like what Michael described with Tikkurila, the previous pricing discipline within the Ennis-Flint business was considerably different from our established practices. We also achieved double-digit price increases in that business for Q1. We are very pleased with the performance of both of these acquisitions.

Thank you, Frank. The next question is from Arun Viswanathan of RBC. Arun, please proceed.

Hi. Thanks for taking my questions. I wanted to delve deeper into the drivers for Q3 and Q4, understanding that visibility is relatively dynamic. In terms of raw material inflation from Q1 and Q2 or what you’re seeing now, are your current price increases sufficient to carry you into Q3? Will you need to raise prices even more? If additional increases are needed, could you comment on raw material availability going forward?

Yes, Arun, this is Vince. Our visibility on the dynamics affecting inflation is approximately 60 to 90 days. Predicting for Q3 or Q4 is complex. What we can inform you is that we are observing better supply in Europe and the U.S. China is currently in a transition period due to existing restrictions. However, we expect that supply will normalize for the rest of the year. As we've previously mentioned, we believe there is enough structural supplier capacity to meet global coatings demand easily. Much noise is present in today's market, but we anticipate normalizing supply and demand patterns in due course. We do have sufficient pricing strategies implemented for Q2 to counteract any sequential raw material increases. If more raw materials arise in the latter part of the year, we’ll invoke that real-time pricing again.

Thank you, Arun. The next question is with Jeff Zekauskas of JPMorgan. Jeff, please proceed.

Thanks very much. It seems that your packaging coatings business has slowed down. The demand appears strong for beverage cans globally. What’s the dynamic there? Also, in auto refinish, what were the volumes in the quarter year-over-year?

First, let me comment on packaging. We have gained new share at around 70% of the new beverage can plants, so we are in a good position moving forward. Secondly, when looking at packaging numbers, note that we had exceptional comps last year, making it more challenging to compare. Overall, we expect our packaging growth this year to remain solid. I’m very optimistic about our position in the packaging coatings business. Regarding auto refinish, for U.S. and Europe, volumes increased by about mid-single digits year-over-year, and we faced tough comps from last first quarter—an especially strong quarter in the U.S. Asia was down slightly, largely due to the Winter Olympics reducing activity and existing restrictions in March.

Jeff, this is John. To elaborate on refinish, in the U.S. and Europe, we saw mid-single-digit yearly volume growth, albeit off a strong previous first quarter. Overall, it was a positive quarter, especially in the U.S. Meanwhile, Asia faced minor declines due to the Winter Olympics and restrictions in March.

Thank you, Jeff. Your next question comes from Kevin McCarthy with Vertical Research Partners. Kevin, please proceed.

Good morning everyone. Two questions on manufacturing variance and CapEx. First, about manufacturing, back in January, you discussed a $0.20 EPS drag in Q4. Has that number declined in Q1, and if so, how much? What’s your outlook for Q2? On the CapEx side, it seems your first-quarter spend was $194 million versus $80 million last year. Is there anything unusual in that in terms of cadence, or have you changed your annual CapEx range of $475 million to $525 million for this year?

Yes. We’ll start with the easier question, CapEx. Our CapEx spending in December was reflected in January, inflating the January figure. Nevertheless, our overall yearly spend target remains unchanged at $500 million. Some of this includes catch-up from under-spending in 2020 and early 2021. In terms of manufacturing, we had approximately $0.20 in Q4, but that likely dropped to about half in Q1. Our challenges are less about production and more about scheduling due to raw material predictability. If one component is delayed, we cannot complete our paint production. Energy prices also play a part; our natural gas pricing prediction for Europe changed significantly after the war initiated. Overall, manufacturing is improving, and for Q2, expect about a 50% improvement in those figures.

Thank you, Kevin. The next question is from PJ Juvekar of Citi. PJ, please proceed.

Yes, good morning. Michael, you have been back-integrating into resin capacity in the past. How did that help you navigate through this period of energy inflation? Also, Vince, you mentioned sequential margin improvement. Given your strong first quarter and second-quarter guidance, while the first half of the year seems down y-o-y, can you still achieve earnings growth this year?

Okay. PJ, regarding our emulsions, part of our Traffic Solutions or Ennis-Flint acquisition included a smaller resin plant. We’re maximizing output and intend to boost that facility's capacity. We're operating it 24/7 now compared to before. This is improving our availability of basic raw materials. We’re confident in our ability to increase the utilization of that facility in the future.

Yes, PJ, I’m glad you brought this back up because I think it’s crucial given the noise we experienced last year. Q1 last year was notably strong, benefiting from pandemic recovery. The latter half of ‘21 was significantly weaker. While we’re not providing full-year guidance during this call, we believe the sequential trajectory we've set will be the true measure in the industry. Hence, we expect improvements in margins for each upcoming quarter due to various factors mentioned previously.

Thank you, PJ. Your next question is from Laurence Alexander with Jefferies. Laurence, please go ahead.

Hi, good morning. This is Kevin Asberg on for Laurence Alexander. I had a brief question about the credit market. Given the recent moves and the Fed’s tightening cycle, has there been a shift in your perspective regarding financial leverage and how much you anticipate that you could flex your balance sheet moving forward?

Our long-term financial discipline remains unchanged. We currently hold mid-2s in terms of debt to EBITDA. We expect to pay down some debt this year. If any strategic opportunities arise, we will act as appropriate, but we will not deviate from our defined strategies. Looking at our interest rate and blended interest rate profile, we are performing at best-in-class levels within our sector, so, no major changes to our strategy or outlook in the near term.

Thank you. The next question comes from Mike Harrison of Seaport Research Partners. Mike, please go ahead.

Hi, good morning. A couple of questions regarding the auto OEM business. First, have you observed improvements in operational efficiencies there either in terms of customer behavior or your ability to manage the situation? Additionally, could you provide an update on electric vehicle application wins with some of your innovative offerings? Are you concerned about battery shortages impeding EV growth this year?

Regarding manufacturing, auto manufacturers have become more adept in predicting what chips are coming in and when those will arrive, reducing unscheduled downtimes significantly. Consequently, our manufacturing is also improving. I also want to highlight that our automotive division has seen higher pricing than the company average, which is promising. As for EVs, we do not anticipate battery shortages this year. While this is a long-term trend that we need to monitor, our current outlook shows solid growth opportunities in the EV sector. We’re capturing market share with our protective coatings used in the batteries and other innovative applications. We are engaged in a long-term cathode binder study with a top-five customer, a positive indication of how they see our future collaboration.

Moreover, regarding auto builds, external consultants suggest around 80 million vehicles will be produced this year, reflecting a historical average above 90 million. This denotes a catch-up of about 10% to 15%, which should take place over the next quarters or months. Additionally, a necessary fleet rebuild is expected to occur, affecting rental car fleets. The projected impact is another 3% to 4% of the market. Lastly, inventory replenishment for dealer lots will also contribute to demand. They are witnessing improved chip availability, especially in the second half of this year and early 2023, a key factor for recovery.

Thank you, Mike. The next question is from Jaideep Pandya of On Field Research. Jaideep, please go ahead.

Thanks. First question is about your protective and marine business. I understand you are more significant in China these days, but how do you foresee your backlogs evolving now that oil and gas prices are elevated, and the marine end markets are generating cash effectively? Should we expect a material improvement in the next couple of years? Secondly, in the auto industry, given that EVs may cannibalize ICEs, can you reduce fixed costs in traditional ICE-based auto OEMs while still winning new business in EVs? Are you considering bolt-on acquisitions in EV-related coatings?

Starting with new builds, our marine business is performing well, up by 20% year-over-year, notably in China, where we are also strong. New builds and The demand for oil and gas assets will further boost our growth. The LNG tankers are particularly favorable for us, and we sell products known for being best-in-class. I am hopeful regarding our Protective/Marine business continuing on this trajectory. Regarding the auto business, we paint EV cars in a manner similar to ICE vehicles. Therefore, while we still maintain all that business, we also sell extra paint for the battery box. Consequently, the overall cost structure improves with increased volume. The shift from ICE to EV is actually advantageous for us. We always keep an eye out for opportunities that add shareholder value. Though it's a competitive space, we remain interested in relevant acquisitions.

Thank you, Jaideep. There are no further questions waiting at this time. I would like to hand the call back over to John Bruno.

Thank you, Sam. Before we conclude today, I wanted to inform everyone that Mary Anne Bendzsuk will be retiring in the second quarter. This will be her last quarterly earnings call. Many on this call have engaged with Mary Anne as she has been a valued team member at PPG for many years and has provided excellent support to the investment community while serving in Investor Relations for over 20 years. We extend our gratitude to Mary Anne and wish her and her family all the best in retirement. That concludes today’s call. If you have additional questions, please reach out to us. Thank you very much.

That concludes the PPG Q1 2022 earnings call. Thank you all for your participation. You may now disconnect your lines.