Good morning. My name is Emily, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter PPG Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. I would now like to turn the conference over to John Bruno, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Emily, and good morning, everyone. Once again, this is John Bruno. We appreciate your continued interest in PPG and welcome you to our fourth quarter and full year 2022 financial results conference call. Joining me on the call from PPG are Tim Knavish, President and Chief Executive Officer; and Vince Morales, Senior Vice President and Chief Financial Officer. Our comments relate to the financial information released after U.S. equity markets closed on Thursday, January 19, 2023. We have posted detailed commentary and accompanying presentation slides on the Investor Center of our website. The slides are also available on the webcast site for this call to provide additional support to the brief opening comments Tim will make shortly. Following management's perspective on the Company's results for the quarter, we will move to a Q&A session. Both the prepared commentary and discussion during this call may contain forward-looking statements, reflecting the Company's current view of future events and their potential effect on PPG’s operating and financial performance. These statements involve uncertainties and risks, which may cause actual results to differ. The Company is under no obligation to provide subsequent updates to these forward-looking statements. This presentation also contains certain non-GAAP financial measures. The Company has provided, in the appendix of the presentation materials, which are available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information, please refer to PPG's filings with the SEC. Now, let me introduce PPG's President and CEO, Tim Knavish.

Thank you, John, and good morning, everyone. I'd like to welcome you to our fourth quarter 2022 earnings call and my first earnings call as CEO. I'll keep my comments brief to provide a few highlights on the recent quarter, the year 2022 and our outlook. Let me start with the fourth quarter. Our fourth quarter sales of $4.2 billion were near the record levels achieved in 2021 despite significant unfavorable foreign currency translation. Sales were aided by our strong U.S. automotive refinish volume growth as supply chain disruptions started to moderate, and our order books remain robust. In 2022, our automotive refinish coatings business delivered over 2,000 net new body shop wins as customers continued to value the product technology and industry-leading services and capabilities that this business delivers every day, including what we believe is the best-in-class body shop full repair product line. Also aiding our sales were record results in our PPG Comex business in Mexico as our team continued their strong execution and delivered another record quarter of sales and earnings. PPG Comex sales are now more than $1 billion on an annual sales basis, another record year for this business. Our aerospace business continued to recover, delivering organic sales growth of more than 20% on a year-over-year basis, even with continued supply chain challenges. With an initial reopening in China, strong global order book, increased military-related growth and PPG's advantaged technology products we expect this business to continue to grow in 2023 and beyond. Our adjusted earnings per diluted share from continuing operations were $1.22, above the midpoint of $1.13 from the guidance we provided in October. This included more than 20% year-over-year segment earnings improvement driven by selling price realization and strong cost management. On a two-year stack, selling prices were up about 19%. We achieved this segment earnings improvement despite the significant and unpredictable shutdowns in China from COVID-19 that were worse than what we had anticipated going into the quarter and these have continued into the first quarter. In Europe, despite demand remaining soft, earnings were similar to the prior year due to strong selling price realization and cost management. We also continue to execute our previously announced restructuring programs and realization of acquisition synergies and delivered about $20 million of savings in the quarter. Now a few comments on the full year 2022. The challenges were many, including unprecedented cost inflation, unexpected geopolitical issues in Europe, disruptive and unpredictable shutdowns in China, strong appreciation of the U.S. dollar and rapid escalation in interest rates in the United States. Though all of these factors impacted our sales and margin performance, the PPG team responded to these challenges, including rapidly implementing real-time selling price increases that, by early 2023, will offset all cumulative cost inflation incurred since early 2021. Given the more difficult macro backdrop, we also announced, and are quickly executing new cost savings initiatives with particular focus on Europe. In 2022, we also made good progress on key strategic initiatives, including strengthening our relationship with Home Depot, as evidenced by the launch of our new U.S. architectural Pro program, and winning more shelf space with our Glidden Max-Flex spray paint. In addition, we were honored to be awarded Home Depot's 2022 Overall Innovation Award, which was the first time that a paint supplier has achieved this distinction. Our partnership with Home Depot continues to be a great opportunity for significant growth in the coming years. The PPG team continued the integration of our recent acquisitions, including timely execution of acquisition-related synergies. These businesses are all executing well and will provide the Company with increased organic growth prospects in the next few years. We made some smaller, but strategically important powder coating acquisitions, which adds needed manufacturing capacity and greatly aids our technological capabilities in this fast-growing product category. In 2022, we once again lowered our SG&A as a percent of sales, decreasing by about 100 basis points, including the delivery of about $65 million in restructuring savings in the year. While working capital remains higher than we would like, we made solid progress in the second half of 2022 to lower our inventories on a sequential basis. We expect cash conversion to return to our historical levels in 2023 and have exited 2022 with a strong and flexible balance sheet. Throughout 2022, we took actions to bolster our ESG program, including announcing our commitment to the science-based targets initiative, issuing our first-ever diversity report, and finally obtaining shareholder approval to declassify our Board and remove supermajority voting requirements. In 2023, I expect our team to continue their strong progress by introducing additional sustainable products for our customers and unveiling our new 2030 sustainability goals. In summary, for 2022, we did not meet our own earnings expectations. But through the resiliency of the global PPG team, we did deliver record sales of $17.7 billion and set the foundation for many accretive growth initiatives. Now moving to our outlook. As we outlined in our press release, we expect the Q1 demand environment to remain similar to the fourth quarter. However, as the year progresses, we are more confident that we have several catalysts that will enable PPG to drive earnings growth, including improvements in the supply chain, which will further moderate raw material costs, and we expect to see this flow through our P&L more prominently starting in the second quarter. Also, our strong position in China that will benefit us as the COVID reopening progresses. With respect to Europe, we expect coatings demand stabilization beginning in the second quarter, resulting in higher year-over-year earnings. In the U.S., we will benefit from the continued recovery of the aerospace and automotive refinish businesses and the current strength of our order books in both of those businesses. Also in the U.S., our recent share gains in the architectural business will help buffer lower demand from a softer U.S. housing market. As a reminder, our overall exposure to the U.S. new home construction market is relatively small, only about 1% of our global revenues. As we said last quarter, we believe our global portfolio mix will prove more resilient in the coming quarters if we experience a broader global economic decline. As normal course of business, we will be highly focused on controlling the controllables, including managing our costs and optimizing working capital. In summary, while economic conditions are challenging in the near term, I expect segment margin recovery to continue in the first quarter and remain confident about the future earnings capabilities of PPG, and we certainly see a path to return to prior peak operating margins with opportunities to exceed it. As I begin my tenure as CEO, the PPG team is laser focused on delivering improved financial results, including recovering our historical margin profile, and executing on all levers to return our portfolio to mid- to high-teen percentage segment margins. At a high level, you can expect me and the PPG team to elevate our collaboration with our customers, bringing them innovative, sustainable and differentiated products and solutions, which will enable our customers to improve their productivity and growth and allow us to improve our own organic growth performance. We'll simplify and optimize our manufacturing and supply chain efficiencies to reduce complexity and deliver productivity for both PPG and our customers. And we will preserve our legacy of prudent management of our balance sheet, continuing to prioritize cash deployment for shareholder value creation. I plan to share more details on our key initiatives as the year progresses. In closing, I am looking forward to leading this great team, 50,000 employees around the world, as we continue to partner with our customers to create mutual value. This year marks PPG's 140th anniversary, and I strongly believe that our best days are ahead thanks to our people, industry-leading products, innovative technologies and great customers. Thank you for your continued confidence in PPG. This concludes our prepared remarks. And now, Emily, would you please open the line for questions.

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

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

Yes. Right now, David, just because of all the uncertainty in many different avenues of our business, we're focused on Q1. And clearly, Q1 has some hangover elements from Q4, particularly around China. We do believe, as I said in my comments, that there are a number of potential earnings growth catalysts for 2023, including China, aerospace, refinish, Comex, electric vehicles, and Home Depot, literally a shopping list of potential earnings catalysts. But we'll get through this hangover of Q1 and then reassess and communicate more as we move forward.

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

Tim, I think your outlook for the first quarter is down mid-single digits for volumes. Can you walk us through what the volume outlook is from your less cyclical markets and your more cyclical markets to give us a gauge of kind of where those are at for the first quarter?

Sure, Mike. I mean the biggest impact is again China. Typically, in China, March is a very big month for us. Our assumption for China in Q1 is that they'll see a second wave to some degree after Chinese New Year. So our base case is that we won't really see significant China recovery until starting in Q2. Additionally, on the architectural side, particularly in Europe, we would normally, in Q1, see a fairly robust stock up ahead of paint season. And because of everything that's happening in Europe, we see some buildup but not nearly what we would see in a normal year. Finally, one of our top-performing businesses, PPG Comex, had a very strong Q4, and it had an even stronger-than-expected Q4 in 2022. So there's just a timing issue there, even though we expect another great year from that business.

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

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

Just a real quick question on pricing. Can you just comment on the current pricing environment just given the macro movement in, let's say, raw materials and then also several management changes across the sector? Are you still seeing the ability to sustain price throughout the year? Just any commentary would be incredibly helpful.

Yes. Sure. Thanks for the question, Chris. You saw on the print that we put up 11% for Q4, 19% on a two-year stack, sequentially it was 18% on a two-year stack in Q3. So we still have pricing momentum. We will have additional price increases in Q1 targeted by business. We've got some carryover impact in Q1 as well. As for what's happening out there in the world besides PPG, all the coatings companies are facing the same inflation inputs that we are, be it raw materials, which we focus a lot on, but there's also significant inflation outside of raw materials that we are all experiencing. So, we see a continuation of positive pricing as we enter the year. Beyond that, a lot of it depends on what happens in the inflationary environment, but that's our view at this point in the year, Chris.

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

Hi, guys, good morning. As it relates to the U.S. architectural, I mean, obviously, there's bifurcation so far between yourself and some of the professional markets. How do you sort of see that evolving over time as the year unfolds? And then for European architectural, just given the extent of the volume weakness in the markets, can you just give us a sense as to how competitive the pricing backdrop is in the industry, just given the volume weakness?

Sure. Thanks, Ghansham. So let me start with the U.S. environment. I'll start at a high level from a macro standpoint. Clearly, DIY is down partly because of what's happening with consumer confidence but also a bit holdover from the COVID piece of DIY. And clearly, new housing construction is going down, again, only 1% of our sales, but those two segments are down. Fortunately, for us, we're much stronger in commercial and maintenance. There, we still see backlogs with our customers. I think you know we do a survey every quarter with our professional customers here in the United States. And their backlogs are still floating in that 12- to 13-week range. So we still see some good demand there. And then as we move forward, we expect to continue to see growth from our Home Depot Pro program moving forward. Now going over to Europe, the volume started to really deteriorate after the invasion in the first quarter of 2022 and was down double digits throughout all of 2022. The professional painter business is down not nearly as much, more in the single digits, but as we enter 2023 for Q1, we've got a bit of a comp issue where we're still comping part of the quarter to the pre-war era. But once we get to Q2, we start to have frankly some positive comps because our total business in Q2 in Europe was down about 10% double digits, low double digits. So we do see it more or less kind of bouncing off the bottom, if you will, as we end Q1 and then comping better as we get into Q2.

Our next question comes from John McNulty with BMO. John, please go ahead.

Tim, you spoke in your prepared remarks about the target of mid- to high-teens margins for PPG going forward. Is it a function of just raw materials getting back to normal and kind of having that catch-up finally be made? Or do you see a lot of manufacturing efficiency improvements that may have uncovered themselves through some of the supply chain problems? What have you and if so, if it's the latter, can you help us to understand what some of those levers might be?

John, this is Vince. I'm going to start, and I'll let Tim add some color here, but really three levers. One, we've been chasing, which is the raw material price, or total inflation price gap, which, again, we think will be closing early in 2023. We call it weeks not uneven months. The second, which I think is important, is, and you hit on it, John, we haven't had a strong manufacturing couple of years here due to disruptions, due to supply disruptions, customer disruptions, and COVID disruptions. So we expect that there will be improved manufacturing efficiency coming out of that period. But the third, which is very important, is we're still down about 10% versus pre-COVID levels in terms of volumes spread throughout our portfolio.

Yes, you really hit on Phase 3, but particularly to the volume, we've got aerospace still down significantly. We've got auto; auto has been at recession levels for three years now. There's pent-up demand across the planet for cars and refinish is still down approximately 10% from 2019. In addition to what Vince mentioned, we have done a good bit of cost reduction during this period as well and restructuring. So we'll get leverage from that. We're not completely finished with our acquisition synergy realization. As I said, I used the term shopping list. We've got a shopping list of items that are contributing to our margin improvement.

Our next question comes from Stephen Byrne with Bank of America Merrill Lynch. Please go ahead, Stephen.

Yes. Thank you. Tim, you made a comment a few minutes ago about inflation outside of raw materials. And I just wanted to drill into this near-term outlook of yours of low-single-digit inflation in the first quarter. Is that a comment on broadly cost of goods? Or is it just raw materials? And are you also seeing it in labor and freight and so forth? And maybe just on the raw side of that, for the first quarter, when would you say that flowing through cost of goods is based on? What month would be the midpoint of your purchases that would flow through cost of goods in the first quarter versus your purchases of those raw materials today, what would you say that would reflect in terms of maybe second quarter raw material costs?

Sure, Steve. I think the numbers you were quoting at the beginning of your question were for raw material. In Q4, we were up mid-single digits year-over-year, down low single digits sequentially. In Q1, we expect to see modest downward movement year-over-year and another sequential step down. The reality of flow-through is we're really flowing through inventory that we have on hand now pretty much, and that will flow through throughout Q1. So, we're expecting the positive benefits of that on the P&L to really not show itself significantly until Q2. And on the other inflation, that's going to be, at least for now, that's going to be constant as we move from Q1 into Q2 around labor inflation and some of the other installations.

Our next question comes from Duffy Fischer of Goldman Sachs. Please go ahead, Duffy.

Question just around price. So, as you ended last year, if you just anniversary the price that you had at that point, how much would that move up price this year just from an accounting standpoint as we roll through? And two, I'd imagine you've gone out with a lot of your price increases already. So if you average that across the Company, kind of what's the ask on price that you've sent out to customers so far this year?

Yes. I'll address the first part of the question. We do have pricing carryover every quarter based on our sales data, which allows you to calculate it. You would find that there are several hundreds of millions of dollars in price carryover for 2023 from our 2022 pricing initiatives, certainly exceeding $300 million that will be carried over.

Yes, thanks for the question. It's Tim here. Regarding the new pricing, it will be more focused on the specific stages of catch-up for each segment as well as addressing both total and new inflation. We have already implemented additional price increases in a few businesses and are in discussions with customers in several others. We prefer to talk to customers first, and we'll have more visibility on this as we progress. However, we will see positive pricing overall as we move through 2023.

Our next question comes from Laurent Favre with Exane BNP Pariba. Please go ahead.

Tim, in your focus areas, you mentioned simplification and optimization of supply chain and manufacturing. I was wondering if you could talk a little bit about this and maybe size the opportunity on costs and working capital, and other areas where you think you need to rationalize the footprint based on a structurally lower demand environment for instance in Europe?

Yes. Thanks, Laurent. If you look at our journey over the last decade and we've got a lot of acquisitions, we've acquired a lot of manufacturing sites and product portfolios, and we've captured a lot of synergies along the way. As we look at where we are today and some of the things we've learned through this crisis, we believe there's fairly significant opportunities for us to really simplify, not only our footprint but our processes, simplify and standardize some of what we've acquired, simplify some of the portfolios that we've required. We do believe that there are some significant upside for us there as we move forward.

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

Tim, a question on your U.S. architectural business. If we look at most of the macro indicators for housing and construction, they're slowing markedly in recent months. On the other hand, you have some company-specific tailwinds in the form of a ramp of your Pro paint program at Home Depot. I think you also referenced increased shelf space at Glidden. So can you frame that out in terms of what you're anticipating maybe volumetrically as 2023 progresses in that vertical?

Yes, Kevin, this is Vince. Let me just start on the macro. Again, what we're seeing, which I think has been pretty chronicled, is new housing starts and leading indicators are certainly pointing down. We really have to bifurcate that. Single-family housing starts are significantly down. Multifamily, we expect to turn down, and they are starting to turn down, but there's still going to be growth. Multifamily completions, again, paints at the end of the cycle here; there's still completions that will carry us well into the year. Tim mentioned earlier on the commercial side that commercial new build for the first half of the year should be some constant, if not longer. And then commercial repaint is solid right now, and there's a backlog on that.

Yes. Yes, the PPG specifics, you know well about the Home Depot Pro program, and we expect double digits from that program again this year after strong double digits last year. The other one, we've got a nice additional retail win. Our customer is going to announce it first, but you should hear in weeks, possibly months here of what that is, that will help offset some of the other things that Vince mentioned. The spray paint win for us with that innovation award at Home Depot is something we're excited about. It presents an opportunity to not only leverage that specific product but expand that offering further. When you put it all together, Kevin, we are expecting net-net for volumes in that space to be down but of course sales to be up with the price offsetting the difference.

Our next question comes from Frank Mitsch with Fermium Research. Please go ahead, Frank.

First, I want to extend my sympathies to the PPG family on the passing of Bill Hernandez. He really was a great guy. Tim, I appreciate your answer on the full year EPS question, given all the uncertainties. But you already indicated that you expect European earnings will be up year-over-year in the second quarter. And you also mentioned that your folks on the ground in China are expecting China to really pick up come April. So I'm wondering, is part of your calculus that we will likely see higher year-over-year EPS in the second quarter?

Well, again, Frank, first of all, thanks for the call out to Bill Hernandez, a loved PPG partner here for many years. Just a world-class CFO, a great human being, and a tragic sudden loss this past weekend. So, thank you for calling that out. At the end of the day, the uncertainty at this point with what's happening with China and when and what's happening with Europe and to what degree, and what's happening to raw material pricing can change our earnings profile fairly significantly. We're just not in a position right now to put out a statement on Q2 EPS. That said, as I said earlier, I believe we've got a hangover in Q1, but a number of those earning levers start to come due in Q2. Yes, Frank, this is Vince. We do give this up. If you look at our profile of countries, China is one of our largest countries for sure. So there's still uncertainty there as we pointed out, and Tim pointed out in the opening remarks about the timing of the opening. Right now, we certainly hope March aerospace is a strong month. Definitely April too hard to predict. April, which is Q2, is typically a very good quarter in China. So, we're not in a position at this point to provide any real line on that.

Our next question comes from Josh Spector of UBS. Please go ahead, Josh.

I just have a couple of follow-ups here. First, do you think you can achieve the low end of your margin targets this year in 2023 on average? And second, if you could comment on your ability to hold prices across the businesses as we move through this year? Any comments there versus why this might be different versus prior cycles?

Yes. Josh, one lever to help us improve earnings, again, we're not trying to give full year guidance on margins, and that's even harder pass than top line. So, we'll defer that until a little bit later into the year. Your question on pricing, I'm going to let Tim answer it.

Yes, Josh, I am confident in our team's ability to maintain pricing similar to previous cycles. In this cycle, it might even be stronger due to persistent inflation that we've not seen in earlier cycles. We are confident in that.

Our next question comes from Vincent Andrews of Morgan Stanley. Please go ahead, Vincent.

I think you commented in the prepared remarks that you've got auto builds flat in Q1, and I think the consultants are still calling for it to be up about 2.25%. So is that just something you're seeing in your own book? Or are you anticipating those consultant numbers to come lower? And just, in addition to that, could you talk about how you anticipate the mix of auto builds this year? Is there going to be any different than last year, and would that be a plus or minus for you?

Yes. Thanks, Vincent. Well, first of all, historically, I don't want to brag, but we've nailed it pretty well compared to some of the external consultants on the builds because we have so many people in the plants every day. We have visibility to operating schedules and talk to those folks. The difference for us in Q1 specifically is China. Because our base case is that there will be a degree of a second wave after Chinese New Year of infections, and we saw what that did on the first wave to assembly plants and other suppliers. So that's our base case. That may explain the difference between us and some of the consulting houses out there. But beyond that, we're expecting modest growth for the year, low single digits. And that's an area where there potentially could be upside, but our base case is low single digits. Just to give you some examples specifically of what happened on the ground in China, we went from near zero absenteeism very quickly to above 50% absenteeism across our network within a short period of time. That has returned rapidly to near zero in about 2.5 to 3 weeks. We believe as people travel over the Chinese New Year, there will be a short but acute second wave. That's why we're a bit more cautious. March is a huge month normally for our China business.

Our next question comes from Aleksey Yefremov with KeyBanc. Please go ahead, Aleksey.

I just wanted to clarify your raw materials commentary from earlier. It sounds like you are currently destocking sort of earlier raw materials purchases and will begin to purchase more perhaps in the second quarter. So, there could be more of a step down in the cost. Is that the right way to think about it?

Yes. Aleksey, let me provide some clarity here. We did see, as Tim mentioned, some modest sequential raw material deflation from Q3 to Q4. We expect a further incremental deflation from Q4 to Q1. We were still up year-over-year in Q4. And we have to work that deflation through our inventory, which will take us likely through the first quarter before we see that impact on our P&L. So that's what we were trying to articulate. We do have efforts underway to optimize our working capital, primarily our inventory.

Our next question comes from John Roberts of Credit Suisse. Please go ahead, John.

Good morning, Tim, Vince, and John. I just wanted to ask a question about auto refinish. You won 2,000 new body shops in 2022. Was that concentrated anywhere regionally? Or was there something else common to those shops that switched? And when you talk about 15% higher productivity, is that relative to the prior supplier to those shops? Or how are you defining that since you're leading competitors also talking about having productivity higher than the competition?

Yes. Thanks, John. To your first question, our net wins on body shops are positive in all the major regions: U.S., Canada, Europe, Australia, New Zealand, and China. It's just proportionate to our business that the vast majority of those are in the U.S. and Europe. Relative to the whole productivity question, the way we look at it is change is only as strong as its weakest link. Every link on the refinish body shop throughput has to be strong in order to drive what's most important to the body shop owner, which is key-to-key time. That is the most important metric that is present. If you are incrementally faster in one of those steps but slower in several others, your key-to-key time isn't as productive in the eyes of that body shop owner. We focus on that end-to-end with things like the digitized color match, our linked digital system that encompasses the whole body shop, visualizer, and optimized mixing to improve speed and eliminate waste. Additionally, we're simplifying some of these steps, allowing even less constrained labor to complete their tasks, which adds additional productivity for the body shops. Again, the most important metric is key-to-key time, and that's where we have a 15% advantage.

Our next question comes from P.J. Juvekar with Citigroup. Please go ahead, P.J.

Yes, good morning. Tim, clearly, the housing market is slowing down, whether you look at new homes or existing home sales. Have you seen a slowdown in the contractor business? The contractor business was robust the last couple of summers; they had a huge backlog that they were working from COVID. As that backlog is worked down, do you expect some slowing in the contractor business?

Yes, P.J. Yes, we have already seen a slowdown in contractors that are primarily focused on new housing. That's a brutal reality that we all have to face. But again, that's a small portion of our business. Our backlogs for where we're strong, which is commercial and maintenance, have moved only incrementally, 13 weeks average backlog in Q3 to 12 weeks average backlog in Q4. So, that's what's been the margin of error of our survey. It's holding up better than new build. I believe part of that, if you think about a lot of commercial work and maintenance work, that work was near zero during COVID while the DIY and repaint offset it. There is still pent-up demand there. I don't want to oversell that, but some of our Pro business is holding up better.

Our next question comes from Michael Leithead of Barclays. Please go ahead, Michael.

I just had a bit of a follow-up on the raw material basket. Can you just help us with how you think about that evolving broadly over the course of this year? I guess, with Q1 demand being pretty benign or restock volume, down five-ish percent or so, why do you think input costs aren't coming down faster? And if China does recover in Q2 and beyond quickly, how do you think about what that does to your raw material cost?

So, Mike, I'll start and let Vince add some details. I believe there were some artificial demand factors in the latter half of 2022 that might have postponed the basic supply and demand dynamics. You'll remember that for most of 2021 and the early part of 2022, the availability of raw materials was our top concern, as well as for many of our coatings peers. As availability improved, we all increased our safety stock, but at the same time, demand began to decline. When I say decline, I mean particularly in the DIY and eco segments, which has significantly impacted the overall changes in raw materials. Many companies finished the year with more inventory than desired. So, there was some artificial demand that interrupted what would typically be a normal supply-demand relationship.

Yes, Mike, let me just add some color here. So as we enter 2023, again, we're destocking. We know from public commentary that a lot of our peers have excess inventory and are destocking. I don't think that's going to materialize in the same manner this year. We will have lower purchasing in Q1. We have suppliers indicating to us to have excess supply to give, and we are going to maximize that to benefit our shareholders. We'll negotiate our Q1 and Q2 pricing accordingly. We do believe that there is ample supply in our supplier base.

Our next question comes from Silke Kueck with JPMorgan Chase. Please go ahead.

This is Silke for Jeff. I was wondering whether you can discuss your volumes and your price and your U.S. architectural stores. And secondly, I was wondering whether you can talk about what's happening in the packaging business?

Sure. So, the stores pricing, we've raised price there multiple times, and we've held that price throughout the year. And 2023, it will depend on what happens from an inflation standpoint, but that's one of the businesses where we moved fairly quickly to keep up with cost inputs. On packaging, we did have strong margin recovery in that business throughout '22, and we expect that to continue in 2023. We do see some softness there in pockets around the world driven by consumer confidence in beverage spending. So, we have seen some softness in volume, but strong margin recovery. We also continue to convert to our Innovel Pro BPA-free content material, and we've had some nice wins in that beverage space that will be launched as we move through this year. Overall, at a high level, good margin recovery, with some softness in demand around the world.

Our next question comes from Arun Viswanathan with RBC. Please go ahead, Arun.

I guess my question is about some framework you've provided in the past. If we go back maybe a year, 1.5 years ago, you were discussing maybe $9 of earnings for 2023. Do you see that as still maybe a possibility a couple of years out? That would imply another $400 million, $500 million of EBIT on top of where you are. So, what's the framework to get back there? Is it kind of that high teens EBIT margin and maybe the recovery of volume? Or would you need more than that to get back? Is that still maybe again available in a couple of years' time?

Yes. Arun, I've said before, I believe that the $9 EPS is a matter of when, not if, and I stand behind that. The fundamentals are there. We have a portfolio that has earnings power that has yet to be released. I won't give you my entire 10-point plan to get us there, but we've still got recovery in some of our better businesses: aerospace, auto, refinish. If you take a six-year run rate of global builds before COVID, compared to 2021 and 2022, there are 40 million fewer cars built during that three-year period compared to the six years before. So, everybody has their guess as to how much of that 40 million will be made up over time, but it's not zero. That business has a lot of volume recovery to go. We've got the price/cost momentum you've heard about: our restructuring, acquisition synergies, technology innovation, productivity, and sustainable products that will drive share growth. Just broader volume recovery, we feel confident that the $9 EPS is a matter of when.

I want to make a few comments about the near future. Looking at 2022, it's important to note, as Tim pointed out earlier, that Europe saw a decline after March. We expect to face some recession-like volumes in the coming weeks. In the second quarter, China was closed for nearly two months, and we don’t believe 2022 accurately represents China's typical performance or GDP growth. Excluding aerospace and refinish, we see some opportunities for growth in those areas.

Our next question comes from Laurence Alexander with Jefferies. Please go ahead, Laurence.

It's Dan Razon filling in for Lawrence. Regarding the backlog you mentioned, you stated that the commercial backlog is between 13 to 14 weeks. Additionally, you noted a $200 million backlog in aerospace. I just wanted to understand how that compares to historical figures.

Yes. Dan, the backlog for U.S. PRO paint in the 12- to 13-week range is still quite high. This will help offset some declines in other segments. In my 35.5 years with PPG, I don’t recall aerospace backlogs being this strong. This indicates pent-up demand for the foreseeable future. In the refinish sector, backlogs remain high, especially in the U.S., where they are likely five times what they were before COVID. If you've experienced any minor accidents recently, body shops will typically tell you it’s six to eight weeks before your car can be serviced. Overall, backlogs in all these areas are historically high.

Yes. I'll add some color in the aerospace figures. This $200 million backlog is typically a small fraction of a business that is circa $1 billion for us. This is almost another two months of activity. If we can execute, we're still facing some supply challenges governing what we can do in a particular month or quarter, but it is a significant backlog relative to historic terms.

And one more comment: the demand in aerospace is actually growing as we progress through the months and quarters. The underlying demand is growing, which means that $200 million backlog is going to be there longer. Recall that China, international travel only opened on January 8, so that's going to be another stimulus for aerospace demand.

Our final question today comes from Mike Harrison of Seaport Research Partners. Please go ahead, Mike.

In the auto OEM business, a question on electric vehicles that hit 10% of global car sales last year. I was hoping that you could give us an update on some of the key products that you're providing for electric vehicles. Any recent wins or other metrics you can share on that portion of the auto OEM business?

Yes, Mike, we're really excited about EV because we are winning where the EVs are gaining the most. You probably saw the journal article not that long ago. It's something like 65% or so of the EVs sold last year were in China, and that's where we're having the most success. In fact, we're growing significantly with the largest EV producer in China. The way we're approaching is, it's not only about new technologies but about picking the winners on the EVs and selling, let's say, more conventional corrosion protection and beautification products to those customers. So it's a combined effort of selling our new and differentiated products like our battery fire protection and our dielectric coatings products to those customers while targeting and winning with the EV winners in the market.

Our final question today comes from Jaideep Pandya with Enfield Research. Please go ahead.

Partly because of the crazy raw material inflation you've seen. Now as raw materials tail off, are you not getting pushed back from your customers when you're trying to do these targeted pricing, especially in a demand environment, which has at least changed and has slowed? That's my first question. And the second question really is on protective. Could you just tell us like what's the backlog in marine and protective these days?

Jaideep, I apologize, but could you please repeat your first question for us?

Yes, sure. It’s just on pricing.

I get the first question. So, Jaideep, I'll take it and then Vince, you can jump in. On pricing, you need to remember that the pricing we've achieved over the last couple of years was to offset what's happened in inflation in the last few years. Our customers have visibility to what's happened to our net margins. They have optics on where we are on a margin recovery standpoint, and they also know when we have these discussions with them that we're not back to peak margins. So, as we move forward, we'll continue to be competitive, and we'll continue to price to offset non-raw material inflation.

Before Tim answers the protective question, Jaideep, I think we have discussions with our customers in almost every business. They want us to be a healthy supplier that continues to innovate, and they understand that they need to pay a fair price for innovative technology that typically helps them. We're in many discussions with our customers about how to improve their productivity, which is a much bigger cost pull for them than the price on coatings. So again, we're in discussions with our customers about helping them with their productivity, which is a key to their cost opportunities.

Yes. On your protective question, our protective and marine business actually had a very strong year last year. Even though there was volume degradation in Q4, that volume degradation was mainly in China because whether it's marine new builds or large petrochemical protective projects, a lot of those are done in China. Some of that will follow the China closing and reopening curve. Beyond that, there is significant investment in LNG, and that area uses a lot of our protected products. There's also upcoming infrastructure investment that leads to future growth for protective business. Finally, we had a fantastic distribution network in Mexico, over 5,000 store locations that has historically been very heavily architectural and deco focused. We're now leveraging more and more of that network to grow our protective business. That's how we're successful in that business in other countries like the U.S. and Canada. That's a really great growth opportunity in the protective area that differentiates PPG.

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

Thank you, Emily. We appreciate your interest in PPG. This concludes our fourth quarter earnings call. Have a good day.

Thank you, everyone, for joining us today. This concludes our conference call. You may now disconnect.