Good morning. My name is Elliot, 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. 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, Elliot, and good morning, everyone. Once again, this is John Bruno. We appreciate your continued interest in PPG and welcome you to our first quarter 2023 financial results conference call. Joining me on the call from PPG are Tim Knavish, President and Chief Executive Officer; and Vince Morales, Senior Vice President and Chief Financial Officer. Our comments relate to the financial information released after U.S. equity markets closed on Thursday, April 20, 2023. We have posted detailed commentary and accompanying presentation slides on the Investor Center of our website, ppg.com. The slides are also available on the webcast site for this call, providing additional support for 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 President and CEO, Tim Knavish.

Thank you, John, and good morning, everyone. I'd like to welcome you to our first quarter 2023 earnings call. I will keep my comments brief, providing a few highlights on our first quarter financial performance and our outlook. Our first quarter sales were a record $4.4 billion and were achieved despite the backdrop of macro challenges, including soft global industrial activity, elevated cost inflation, continued geopolitical issues and weakening demand in U.S. construction-related end use markets. We delivered adjusted earnings per diluted share from continuing operations of $1.82, which is 33% higher than the first quarter of 2022. Our operating segment margin recovery accelerated, improving 380 basis points compared to the first quarter of 2022 as we work back toward our historical profile. The first quarter was aided by incremental 2023 selling price increases in the Performance Coatings reporting segment and in total company-wide. We have now fully offset all cumulative cost inflation incurred since early 2021. As I highlight some of the key drivers that drove the strong first quarter performance, an overriding theme is around the benefits we are deriving from our diverse portfolio. For example, PPG has the largest and most diversified aerospace business in the coatings industry. We are well-positioned to serve our customers in the aerospace aftermarket and our backlogs expanded once again this quarter, following the reopening in China as customers need to replenish their stock with PPG's technologically advantaged products, including sealants and transparencies. We expect this business to continue to grow for the remainder of 2023 and beyond. Also, PPG has the largest architectural coatings business in Mexico, where current economic conditions remain robust and among the best in the world. The PPG Comex business continued their strong execution and delivered an 11th consecutive quarter of record sales. We are laser-focused on driving organic growth. During the quarter, we benefited from several customer wins that included becoming the primary paint supplier at Walmart's 3,800 locations that carry paint products. The expansion of our well-recognized Glidden DIY brand at Walmart and in our independent dealer channel will support further growth opportunities. The automotive refinish business has now installed 1,400 global MoonWalk machines, recently gaining traction in the U.S. with additional rollouts planned globally. About a third of these installations are new body shop wins. While overall demand conditions in Europe remain difficult, our leading position in automotive OEM in the region allowed us to support our customers during a sharp rise in automotive builds in the region, albeit off a historically low base. Our OEM sales volumes in the region were up mid-teen percentage for the quarter, and we expect additional growth throughout 2023. The first quarter is typically a negative cash generation quarter due to our business seasonality. However, our strong earnings contributed to us generating positive operating cash flow in the first quarter for the first time in seven years, as our operating cash generated was about $400 million higher than the first quarter of 2022. Our financial results were better than our preliminary first quarter update on April 3. This was mostly attributable to stronger sales at the end of the month, a richer sales mix, and lower costs than we predicted. A quick update to our very important ESG initiatives. We are prioritizing and delivering sustainably advantaged products and services to our customers and view this as a key lever for organic growth. Last year, we increased our sales from sustainably advantaged products to 39% of our total sales and continue to better define our product sustainability priorities to enable the sustainability ambitions of our customers. We look forward to sharing our new 2030 targets once our emissions reduction goals are validated by the science-based targets initiative. We will also be launching our 2022 ESG report in late May, which will include our progress against current environmental goals as well as our previously communicated diversity, equity, and inclusion targets. Moving to our outlook. It is evident that challenges remain in the demand environment and in some cases, such as U.S. housing and construction; they're weakening. Despite these anticipated headwinds, we remain confident that our margin recovery momentum will continue. We're executing against a shopping list of opportunities, which we expect to contribute to strong year-over-year earnings growth in the second quarter and for the rest of 2023. This includes supporting our aerospace customers as they fulfill their strong order books, and we expect a second straight quarter of more than 10% sales volume growth year-over-year in this business. Also, as the availability of raw materials returns to pre-pandemic levels, we expect our earnings to start benefiting from moderate deflation from recent historic inflation highs. As a reminder, aggregate raw material inflation since early 2021 remains at historically high levels. Additionally, our manufacturing is beginning to improve for multi-year production disruptions. And we expect this will generate efficiencies that will provide another earnings growth lever in the coming quarters. With respect to Europe, we are seeing coatings demand stabilize, albeit at lower levels, which will enable further year-over-year earnings growth, aided by the actioning against our restructuring program. PPG has leading architectural coatings positions in several countries in Europe. Once the economy begins to improve, this will provide an additional earnings growth lever. I'm also pleased with the growth prospects for our auto refinish, protective coatings, and Traffic Solutions businesses. These end-use markets have proven to be more demand resilient than in prior economic downturns and a couple of these are positioned for further growth to support infrastructure investment in the United States. In China, we expect moderate and continuous sequential quarterly improvement in domestic demand as the year progresses. This will be more evident on a year-over-year basis given the pandemic-related restrictions in China last year during the second and fourth quarters. In summary, for the past few quarters, we have been conveying our strong conviction that various earnings growth catalysts would be activated. I am pleased that we have reached this inflection point and continue to have strong conviction as reflected in our full-year earnings guidance that year-over-year earnings growth will continue in 2023. In addition, in this challenging macroeconomic period, you can also count on PPG's legacy of being highly focused on controlling the controllables, including managing our entire cost structure and optimizing our working capital. As I've begun my new role as CEO, I've challenged our team to focus on our advantages, prioritizing investments that will differentiate us and move the needle for our customers and our business. This includes advancing our digital capabilities throughout our businesses to improve our customers' productivity and further enhance our internal efficiencies. Our team is committed to accelerating earnings growth while preserving the strength of PPG's legacy. Thank you for your continued confidence in PPG. This concludes our prepared remarks. And Elliot, would you please open the line for questions.

Our first question today comes from Duffy Fischer from Goldman Sachs. Your line is open.

Good morning, everyone, and congratulations on a solid quarter. I have a question regarding the sequential EPS and its historical context. If we exclude 2020 and 2021 and examine the six years prior to that, along with last year, Q1 to Q2 has typically increased by about $0.48, with all those years exceeding $0.40. Yet, at the midpoint of your guidance, there's only an increase of $0.28 this year. How do you reconcile these figures? Additionally, for the first half compared to the second half, using your midpoint guidance shows a decline of $0.80 in the second half versus the first half. Historically, during those same seven years, the average decrease has been around $0.30. This could indicate conservatism or possibly some changes in seasonality, perhaps due to Walmart's scheduling. Can you clarify why we should anticipate lower numbers this year compared to historical trends?

Hey. Sure, Duffy. Good to hear from you. First of all, let me give you a few high-level comments, and I'll let Vince fill in the gaps. On the Q1 to Q2 step-up, we definitely had some one-timers in Q1. Notably, the Walmart load-in, we had some insurance settlements related to past storms. We have a promotion for Comex Easter sales every year. More of those sales were pulled into Q1 than normal. And that's a big piece of the Q1 to Q2, and I'm sure Vince can give you more details. As for the rest of the year, we are cautious on volume for a number of reasons: slower China opening of manufacturing, cautious on U.S. housing for the second half of the year, and cautious on global industrial. So those are some of the high-levels. And Vince, do you want to add a few details?

No. I think we quantified the Walmart business. The load-in for us in Q1 was about $40 million. Again, just a little more color. The Comex business has a very large Easter campaign. The Easter campaign was split last year between Q1 and Q2. This year, most of the load started in Q1. So we're not going to have that traditional step-up. And we did see really good activity in European auto. And again, our prediction is, well, that's still going to be a very strong business. Q1 was a very strong European auto.

Our next question comes from Ghansham Panjabi from Baird. Your line is open.

Yeah. Thanks. Good morning, guys, and congratulations on all the progress to start the year. I guess, first off, on auto refinish and your outlook for directional improvement in Q2. Is that just a function of comparability from the year-ago period and the China reopening? And also going back to some of the volume weakness in Europe and North America for auto refinish in the first quarter. Can you just give us some more color on the customer order pattern timing that you called out? Thanks.

Yeah. Sure. Thanks for the question, Ghansham. Let me start off by saying, I have full confidence, high confidence in our auto refinish business globally going forward as well as over the last several quarters because our key to key value proposition is best-in-class. What you see in refinish, if you look at Q4 then to Q1, then what we're saying for Q2, this business, because of the two-step distribution, you really need to look at it over a multi-quarter basis just because it's hard sometimes to project the order pattern of our independent distribution. So I would look at Q1 in that light and rather look at it over multiple quarters. But we have strong backlogs across the body shops, and it’s really driven by two things other than paint. It’s driven by parts shortages, and it’s driven by labor shortages. So those backlogs remain. And so, this actual sellout to the collision industry remains strong. There’s just some fluctuation in independent distribution ordering patterns.

Our next question comes from Stephen Byrne from Bank of America Merrill Lynch. Your line is open.

Yes. Thank you. I'd like to drill in a little bit on your commercial strategy in U.S. architectural. It seems like you have a similar offering now at the independent hardware stores and Walmart with this Glidden platform. And between those in The Home Depot arrangement in your own stores, it seems like it could be nearly 10,000 locations. My question for you is, how would you split your sales in architectural paint in the U.S. between those various buckets? And where do you think that could go in the next few years and could this cannibalize sales in your own stores?

Thanks, Steve. Great question. So we don't expect cannibalization. Let me explain a little bit about what we're doing. Glidden is by far our strongest and best-known DIY brand in the U.S. And historically, despite that strong brand strength, we lacked distribution. So obviously, we partner with The Home Depot with Glidden. We're now partnering with Walmart with Glidden. And we've always partnered with our independent dealers with Glidden. One of your points, typically, we don't carry Glidden at our own company stores. So think about it as big box home improvement plus Walmart plus private dealers. The type of customer that buys paint at Walmart is very different than the type of customer that buys paint at The Home Depot. And so what we’re really doing with these recent moves is expanding distribution and providing access to a strong DIY brand across multiple different types of consumers, multiple different price points of consumers, and expanded geography. So that’s really what we’re doing here. And there’s very little conflict between those three pieces and certainly very little cannibalism.

Our next question comes from John McNulty from BMO. Your line is open.

Yeah. Thanks for taking my question. Tim, your first quarter margins, I don't think we've seen them this high other than maybe twice in the last 15 years, and that's even with adding Traffic Solutions, which I think should be dragging it down in 1Q. So I guess, one, where can we see margins go this year for PPG? And then what are some of the big factors? Is it all price versus raw materials? How should we think about mix and some of the efficiency measures you were speaking to? I guess, can you help us to frame that a bit?

We are on a margin recovery journey. While we are pleased with the 380 basis point improvement, we are not satisfied with our current position as we are not back to historical levels. There is still more work to be done, and we are confident that we will continue to see improvement. This marks our second consecutive quarter of year-over-year margin improvement, and we expect Q2 to also show this trend. However, we recognize that we need to focus on both capturing value and ensuring we are compensated for the products and services we provide. This improvement is mix-driven, and we have started to observe some moderation in costs.

Yeah, John. This is Vince. Just to give some more numeric guidance here. We're down still 150 basis points, 200 basis points versus our prior high-water marks, which we hit several times in the past 10 years in the first quarter. So we have other levers. Tim mentioned one in the opening comments. We're still not back to where we want to be on manufacturing. Our volumes on a multi-year basis are still down. And again, cost control, which is a legacy here; we feel we could do better. So we still have multiple levers to get back to prior high-water marks and then eventually hoping to exceed those.

Our next question comes from Christopher Parkinson from Mizuho. Your line is open.

Great. Thank you so much. Can you just offer a little bit more color about what's embedded in both your aerospace and refinish guidance levels? Just how you're thinking about for the year? Does aerospace include Boeing's further build rates, 737 MAX in China, wide-body, some color on that? And then on the refinish side, just any color about how you think the body shop world, specifically in the U.S., is still dealing with labor constraints and so on and so forth. You have seen pretty optimistic or actually, bullish comments for the second quarter. It'd just be great to know what's underscoring that in particular versus '19 levels. Thank you so much.

Thanks, Chris. Regarding the aerospace segment, the answer is yes to all the points you raised. There are several positive factors at play. The reopening of China has contributed to increased MRO activity, even though international travel to China for wide-body aircraft remains below 2019 levels. Domestic travel is a significant driver for us, and we anticipate continued growth there. You mentioned one of our major OEM customers, and their output for 2023 has been notably better, which is encouraging. Our backlog is also increasing for both OEM and aftermarket, especially in the MRO sector, and we're incorporating that backlog build-up into our planning. The military segment remains robust as well. Overall, we see strong underlying demand and the ability to ramp up output because, at present, we can sell all that we can produce in various parts of our aerospace business. On the refinish side, it’s important to consider the fluctuations from quarter to quarter, but fundamentally, the collision business is thriving. If body shops can process more vehicles due to improved parts supply and labor, we're well-positioned to take advantage of any increase in their throughput, as we have resolved most of our supply challenges. They are highly motivated to increase their output since their backlogs are substantial.

Just to put some numbers to the China aerospace opportunity, international flights to and from China are down about 70% versus pre-pandemic still. Domestic travel in China is down about 20% versus pre-pandemic. Big market for all the aerospace players. And again, for us, that’s all opportunity in both OEM and our aftermarket business.

Our next question comes from David Begleiter from Deutsche Bank. Your line is open.

Thank you. Good morning. Hi, Tim. Just on raw materials. What's embedded in your second half guidance in terms of declines year-over-year? And just on pricing, where are you still implementing price increases?

Sure. Thanks, David. Regarding raw materials, we anticipate a continued moderation throughout the year. In the first quarter, we saw flat results compared to the previous year. For the second quarter, we project a decline of low single digits year-over-year. After that, we expect further moderation, though it's difficult to quantify accurately at this moment due to various factors at play. On the pricing side, we achieved an 8% overall increase in the first quarter, with more than 70% of that coming from carryover. Additionally, we implemented some incremental pricing, mostly in the Performance Coatings segment. As we progress, we will start to see higher price comparisons from last year, leading to smaller increments. However, we are very confident that we will report positive pricing numbers for the second, third, and fourth quarters.

And just a reminder, we're still at a 40 year high inflation rates in our sector, even with this moderation.

Our next question comes from Jeff Zekauskas from JPMorgan. Your line is open.

Thanks very much. Two-part question. So first, when you look at your auto OEM prices in the quarter, were they comparable to the industrial segment in general that is industrial was up, I don't know, maybe 8%? Is that what auto OEM prices did or were they higher or were they lower? Can you calibrate that? And second...

Jeff, they were certainly in line. Sorry, go ahead.

I'm surprised that your raw materials remained unchanged year-over-year, considering that oil was $100 a barrel in the first quarter of 2022 and propylene was $0.60 a pound. It seems that your raw materials might have peaked in the second quarter of 2022 before decreasing. I'm curious about the source of the inflation, as it appears unusual for your raw material costs to be higher than they were in the first quarter of last year from an external viewpoint.

Hey, Jeff. I'm going to take the auto question. So yes, auto OEM was consistent with segment pricing, which was about that 8%. And again, I want to remind you, the vast majority of that is carryover, especially in that business. And the new pricing there, much of that was actually negotiated last year. And part of the process in negotiations with auto OEMs is magnitude and timing of implementation. So that's the answer to your first question. Vince, do you want to take raws?

Yeah, Jeff. When we examine our raw materials, one of the key points we've discussed over the past few quarters is managing our inventory. Towards the end of last year, particularly in Q3 and Q4, we found ourselves with unusually high inventory levels. We were acquiring raw materials whenever possible, so we need to reduce that inventory. In Q1, our inventory balance remains elevated compared to our expectations. It's really about how we are integrating those earlier purchases into our inventory and subsequently into our cost of sales. As we approach the peak season in Q2, we still have some inventory to work through, and we expect to see additional benefits once we manage that inventory more effectively.

Yeah, Jeff. To your basket question, our raw material basket is largely what it’s always been. But there are parts of that raw material basket that we’re still seeing year-over-year inflation in. Pigments, additives, extenders, inorganics, a number of items where we’re still seeing year-over-year increase.

Our next question comes from Vincent Andrews from Morgan Stanley. Your line is open.

Thank you. Thank you very much. I'm wondering if you could just help us better understand how March went. It sounds like, obviously, it was stronger than you expected particularly in the back half of the quarter, in which particular areas of your business did that strength come in? And if there was any particular driving force for it and whether it's continued into April so far to the extent you have data you can?

Sure. Sure, Vincent. The parts of our business that were very strong as we move through March, I would say, our aerospace business, our auto business, particularly Europe auto. And as Vince alluded to earlier, our Comex business was stronger than we had expected as we saw more pull forward of the Easter campaign.

And just a reminder, when we said this in January, March is typically 40%, 50% of the quarter in terms of the size of the quarter, financially. So again, when we have a strong March, it’s very helpful.

Our next question comes from Josh Spector from UBS. Your line is open.

Yeah. Hi. Thanks for taking my question. So I just want to poke on the guidance again for the year. So if I think about some of the one-timers in Q1, if I say they're maybe $0.20 in EPS, seasonally adjusted first half implies the year's kind of at the midpoint of your guidance for the year about 710. No incremental benefit from raw materials. And where the areas where you talk about volume weakness, China housing, and industrial, maybe we're talking about 20%, 25% of your sales, but you're optimistic on auto OEM, refinish, and aero, which more than offsets that. So I mean, is it a fair take to look at this and say, there's really minimal benefit of raw materials in the second half, similar benefit of pricing, and you're just like pushing on where volumes are today or is that an entirely wrong way to look at it?

In our guidance for the second half, I want to highlight that we're still expecting a 10% year-over-year growth in EPS despite a very challenging environment. Much of the concern regarding the second half is centered around volume. We're seeing a continued slowdown in the U.S. housing market, uncertainty in the general industrial sector, and unclear recovery patterns in China's industrial and manufacturing industries. These factors are the primary influences on our outlook for the second half.

Yeah, this is Vince. I'll just add. Again, it's still cloudy when we look at the economy. We do know that those countries are raising interest rates. There's typically a delay between interest rate increases and consumer effect. We're seeing that in different parts of our portfolio around the world. So we just remain somewhat cautious on the delayed effect on that interest rate increase environment. As Tim mentioned, I’ll echo, we’re not sure about the pace of recovery in China. We do feel it’s going to be – our guide includes a moderate recovery continuing, elongated recovery. That’s beneficial from our perspective because we don’t see that creating more commodity inflation, but that – the pace of that recovery is still uncertain at this time.

Our next question comes from Aleksey Yefremov from KeyCorp. Your line is open.

Thanks and good morning, everyone. In architectural in the U.S., can you share any data or sentiment from Pro paint contractors? How is the backlog changing here?

Yeah. Backlogs have remained surprisingly robust despite everything you see in the news and despite what's happening in construction, driven by labor shortages primarily. So the backlogs remain strong. And for our Pro business, the omnichannel of our Pro business was up almost 10% for the quarter. So we are seeing continued good activity in the Pro space in architectural in the United States.

Our next question comes from Michael Sison from Wells Fargo. Your line is open.

Hey, guys. Nice start to the year. Tim, just curious, in terms of the second half with the 10% EPS growth, I apologize I missed this, but what do you expect for volumes? What's sort of the range of outcomes for the company? Is it down, flat, maybe even up on easy comps? Just curious. Thank you.

Hey, Mike. This is John. I’ll take that one. So as Tim pointed, there’s a few factors that we’re considering in the volumes forecast that’s in the guide. I would say that it’s down slightly in our second half guidance, Mike, overall, based on all the feedback that Tim provided.

Our next question comes from Peter Clark from Societe Generale. Your line is open.

Yes. Good morning, everyone. Just looking at your number one priority of getting your margin back and particularly on the Industrial Coatings because obviously, you were picking at over 18%. I know there's been mix changes. You bought in lower margin acquisitions that you're working on. But if I play with your full year guidance, you're sort of inferring this margin recovering to about 14% ex-amortization. So you're still 400 basis points of drift. I understand it's challenging. Volumes are still not great. But is there anything structurally that stops you getting back to that sort of level in the next few years that you were achieving back in '16 and '17 level? Thank you.

Yeah. Thanks for the question. There's nothing structurally preventing us from getting back to those levels. The big driver for us, I would say two things. Number one, volume. Volume is still down significantly from the time periods that you referenced. And so just the leverage from that. And then the other one is operating efficiencies. All of the supply chain disruptions that we've had over the last couple of years, our manufacturing costs have not been at benchmark. And you heard that we did see some improvement in that in Q1 and we're expecting further improvement as we move forward. So there's nothing structurally preventing us from getting back to peak margins in that segment.

Our next question comes from Arun Viswanathan from RBC. Your line is open.

Great. Thanks for taking my question. Just a couple of questions around margins. It looks like your margins were up at around 13% level for EBIT in the first quarter. Do you see continued growth there, and what kind of volume growth would you expect to get that back into the mid-teens to high-teens level? Thanks.

Well, we absolutely expect to see continued margin growth. As I mentioned earlier, we're confident that the next couple of quarters will show continued year-over-year margin improvement. The volume question, as John mentioned, we're going to have volume challenges likely, with potentials for upside, but our base case is that it will be a tougher volume second half.

Yeah, Arun. This is Vince. If you look at some of the nearer-term levers we have, the rich mix we benefited from in Q1, we expect to continue against some of our key technology businesses, aerospace, automotive. Tim mentioned about the strength of the Mexican economy. We have leading positions in Mexico and several of our businesses, including Comex. And as Tim mentioned, we’re starting to see early signs of manufacturing optimization. Still a long – we still have a long way to go there, but that’s something internally we’re managing. And as I mentioned earlier, we have a laser focus on our costs, especially with the volume outlook and the concern around consumer spending that I talked about earlier.

Our next question comes from Kevin McCarthy from VRP. Your line is open.

Thanks. Good morning. A few questions on your auto OEM coatings business. What are you baking in for global builds in terms of your annual EPS guide? And would you also comment on any meaningful share shifts by region and how the EV penetration is playing out for PPG?

Sure. Thanks, Kevin. Our base case on auto OEM for the year on builds is low single digits with potential for upside depending on what happens with a whole number of things around affordability in China. But our base case is low single digits. We have not seen a huge amount of share shift. We did see some in China as we were executing our margin recovery strategy. We did lose some of the lower margin business, but what's historically happened there, Kevin, is they ultimately come back for a number of reasons. And third part of your question was around EVs. What I could say on EVs is, we're extremely pleased with our progress there. We're winning on EVs where EVs are winning, which is China. So we're doing well with the number one China EV player, and they're doing well. If you look at builds now of EVs, they were up over 10% of global builds now are EVs. And in China, which is where we're having most of our success, over 20% now of all vehicles sold in China are EVs. So we like what we're seeing from a penetration standpoint, and we're pleased with our progress, but still a lot more to do there.

Just to add, again, we came into the year with a low to mid-single digit projection on global builds for the year. Q1 was – for the industry was 5%. So Q1 outperformed the initial projections for the industry.

Our next question comes from Michael Leithead with Barclays. Your line is open.

Perfect. Thanks. Good morning, guys. Real briefly, just on North American architectural, there's obviously a few moving pieces with all the wins you flagged. So I guess, high level, what do you assume or you think the industry is growing at this year versus what do you think PPG is going to be able to grow at?

The reality is that the industry as a whole is expected to be soft, influenced by two main factors: the housing market and lingering effects from the DIY surge during the post-COVID period when many people painted their homes. We are observing these trends across the industry. For PPG, we have several initiatives in place, including our recent success with Walmart and the launch of The Home Depot Pro program. Our focus is more on construction and maintenance rather than new builds, which gives us a slightly more favorable outlook compared to the rest of the industry. However, due to the challenges in housing and DIY activities, we anticipate a difficult year ahead for architectural products in the U.S.

Yeah. And Mike, just another reminder here. Paint is typically the last part of the cycle. So as housing starts have come down the past several quarters, we're still working off those backlogs from a paint perspective. If you look at the mixture of housing starts, roughly 60% are single-family. Those have come down already. I’m not sure if they bought them yet or not. There are some positive signs that they at least flattened. If you look at multifamily, multifamily is still a very high record. And those will be delivered late this year or maybe early next year. And we do think there’s an air pocket after that to the credit liquidity, et cetera. Again, 60% single-family, 40% multifamily. So we haven’t seen the negative effects at multifamily.

Our next question comes from Laurence Alexander with Jefferies. Your line is open.

Good morning. Can you provide some details about your outlook for U.S. infrastructure, specifically your expectations for the second half of the year? Additionally, what is your perspective on the opportunities for potential bolt-on mergers and acquisitions, and how do you see the landscape in emerging markets?

Sure, Laurence. We have a positive outlook for infrastructure as spending is beginning and there are numerous projects in progress. We hold several positions in our portfolio that should benefit us, including our Protective Coatings business, parts of our industrial coatings business, and definitely our Traffic Solutions business. We expect this to ramp up not just this year but in the years ahead.

Yeah, Laurence. On the M&A environment, yeah, I'd still say it's somewhat active, not consistent. Historically, it's been more active. There's certainly some deals or some files that are percolating of the small kind of vintage. So there's still an issue if you're a buyer or a seller, coming up with a price based on the past 12-month financials. Again, we said many times, we would expect a few deals to get done in our space each year, and that's our same expectation this year.

Our next question comes from Laurent Favre from Exane BNP Paribas. Your line is open.

Yes. Hi. Good morning. Two very quick questions, please. The first one is, on manufacturing. Can you size that opportunity for us? And is it just about China where you see that COVID issues in the early part of Q1, or do you also see an opportunity in Europe and the U.S.? And the second question was just on marine and protective. It sounds like that was a bit of surprise for you in Q1. You thought it would be down; was up. I'm just wondering, if you can share your thoughts there. Thank you.

Hi, Laurent. This is John. I'll start with the manufacturing one, and Tim will take the second part. So if you go back to January of '22, we talked about significant manufacturing challenges we had due to supply disruptions in the fourth quarter of '21. And we quoted about a $0.20 EPS impact. That was the height of the impacts. And every quarter since, we've had some type of negativity. Now this quarter, the first quarter of 2023, we were close to being breakeven on a year-over-year basis, and we expect that to get better as we go forward. So the objective is for us to claw back all of the inefficiencies that we've had in the last five quarters.

Yeah, I'll take the protective and marine side. The way I think about this business right now is, it's well positioned for infrastructure, near-shoring, energy, a lot of the investments that are happening around those areas. And also, in marine, where we have really pivoted our focus to marine aftermarket, which is doing well. So when you add those all together, we were up high single digits in Q1 and we expect to be up mid-single digits again in Q2. So that’s one of the businesses that we’re pretty bullish on.

Our next question comes from Frank Mitsch from Fermium Research. Your line is open.

Good morning, gentlemen. Congrats on the start to the year. Vince, you took a $144 million charge due to the pension benefit obligation. I'm curious as to what sort of future cost benefit might we expect from that action? And Tim, obviously, very impressive progress on price and your expectation is that you're going to have positive price for the balance of the year. But as we see deflation from record raws, any concerns on potential price givebacks in any of your businesses? Thank you.

Thanks, Frank. This is Vince. Yeah. Just a reminder, we do have a step up in 2023, a non-cash step-up as it relates to pension expense. Fairly significant, $10 million to $15 million a quarter. We did annuitize a portion of our pension plan. The benefit from that from an expense perspective is fairly minimal. It's about $1 million or $2 million a quarter. So nothing sizable relative to step-up we've had coming into the year.

We expect very little, if any, price reductions in our performance segment as we progress through the year. In our industrial segment, approximately 30% of our business relies on pricing based on index arrangements. If there is deflation in raw materials, those indexes will come into play, but there will be a delay of several quarters depending on the contract, making it more of an issue for us in 2024. Generally speaking, we monitor this closely every day, and churn would be our main indicator for any necessary actions. Our competitors are dealing with the same cost structures and inputs that we are, and we keep an eye on our churn. So far, we have observed very little churn, aside from some minor instances in Asia.

Our final question today comes from John Roberts from Credit Suisse. Your line is open.

Thank you. Where within the Performance segment were you able to get additional price or was that mix with the aerospace business just improving in the mix?

Well, there were both factors. The mix element, part of it was our aerospace business, no doubt. As the first part on where we're able to get price, we got incremental price in almost all parts of our performance segment. So architectural, refinish. And I'd just remind that while we are seeing moderation and some raw material inflation, we're still seeing inflation in wages and indirects and some raw material categories. So I'd say that incremental price was largely in response to incremental inflation.

Yeah, John. This is Vince. Just for clarity, as we break out these numbers for you guys externally, we have price separate. We put in business mix, regional mix, product mix. We combine that with volume. And if you look at both our original guide and our updated guide or updated final numbers, we benefited from incremental pricing, stand-alone pricing, so invoice pricing. Secondarily and separately, we benefited from regional mix. Tim mentioned some of our business, including Latin America, were higher than our expectations. We benefited from business mix. Some of our higher technology businesses were higher than our expectations, as we called out in both of our releases. And we benefited within business from product mix. So we hit, I think, three big categories for us.

Our final question comes from Jaideep Pandya from On Field Research. Your line is open.

Thanks. First, I want to go back to the EV point. Could you just give us some color on what is the content per vehicle for ICE versus EV? And in your top EV customers, are they all sort of the top Chinese companies? That's my first question. And then second question is on the Industrial Coatings, where you alluded to weakness in the U.S. Have you seen sort of the destocking coming to an end in Q1 or are you expecting further destocking of weaker volumes from the coil exclusion categories in the U.S., especially in Q2 and Q3? Thank you.

Thank you, Jaideep. I will address your questions differently. Regarding destocking in our Industrial segment, there isn't a large amount of inventory held by our customers, so any considerable destocking, whether in industrial or performance areas, is mostly behind us. However, we have noted a decline in general industrial activity, particularly in the U.S., which affects a few key segments. One of these is coil, closely linked to construction. We've also observed weak performance in some consumer-related sectors, such as electronic materials, kitchen, and bakeware appliances. Unfortunately, there are some positive factors offsetting this, particularly in heavy-duty equipment, transportation, and powder sectors. Overall, those segments have shown some softness. Regarding your question about the content per vehicle for electric vehicles, there isn't a straightforward number as it varies with the different technologies adopted by each of the OEMs. However, I can tell you that the potential content for functional and specialty protective coatings is significant and comparable to conventional layering systems, which can range from $90 to $125 per vehicle. You also asked about our collaborations in China. Generally, we work with all OEMs, both Chinese and non-Chinese, but our most commercial success so far has been with the leading EV manufacturer in China.

Just to add, again, we came into the year with a low to mid-single digit projection on global builds for the year. Q1 was – for the industry was 5%. So Q1 outperformed the initial projections for the industry.

Our next question comes from Michael Leithead with Barclays. Your line is open.

Perfect. Thanks. Good morning, guys. Real briefly, just on North American architectural, there's obviously a few moving pieces with all the wins you flagged. So I guess, high level, what do you assume or you think the industry is growing at this year versus what do you think PPG is going to be able to grow at?

The reality is that the overall industry is expected to be weak, primarily due to two factors: housing and a lingering post-COVID impact on the DIY sector from the increase in home painting during that time. Industry-wide, we are observing these trends. For PPG, we have several initiatives, including our success with Walmart and the launch of The Home Depot Pro program. Our focus leans more towards construction and maintenance rather than new builds, which gives us a more favorable outlook compared to the rest of the industry. However, given the issues in housing and DIY, we anticipate it will be a tough year for architectural products in the U.S.

Yeah. And Mike, just another reminder here. Paint is typically the last part of the cycle. So as housing starts have come down the past several quarters, we're still working off those backlogs from a paint perspective. If you look at the mixture of housing starts, roughly 60% are single-family. Those have come down already. I’m not sure if they bought them yet or not. There are some positive signs that they at least flattened. If you look at multifamily, multifamily is still a very high record. And those will be delivered late this year or maybe early next year. And we do think there’s an air pocket after that to the credit liquidity, et cetera. Again, 60% single-family, 40% multifamily. So we haven’t seen the negative effects at multifamily.

Our next question comes from Laurence Alexander with Jefferies. Your line is open.

Good morning. Could you outline your outlook for U.S. infrastructure, particularly your current perspective and assumptions for the second half of the year, as well as the potential for bolt-on mergers and acquisitions, and your thoughts on opportunities in emerging markets?

Certainly, Laurence. Regarding the outlook for infrastructure, we are optimistic as infrastructure spending is beginning and there are many projects in development. We have several portfolio positions that will assist us in this area, including our Protective Coatings business, some of our industrial coatings, and our Traffic Solutions business. We foresee positive growth as we progress through this year and into the future.

Yeah, Laurence. On the M&A environment, yeah, I'd still say it's somewhat active, not consistent. Historically, it's been more active. There's certainly some deals or some files that are percolating of the small kind of vintage. So there's still an issue if you're a buyer or a seller, coming up with a price based on the past 12-month financials. Again, we said many times, we would expect a few deals to get done in our space each year, and that's our same expectation this year.

Our next question comes from Laurent Favre from Exane BNP Paribas. Your line is open.

Yes. Hi. Good morning. Two very quick questions, please. The first one is, on manufacturing. Can you size that opportunity for us? And is it just about China where you see that COVID issues in the early part of Q1, or do you also see an opportunity in Europe and the U.S.? And the second question was just on marine and protective. It sounds like that was a bit of surprise for you in Q1. You thought it would be down; was up. I'm just wondering, if you can share your thoughts there. Thank you.

Hi, Laurent. This is John. I'll start with the manufacturing one, and Tim will take the second part. So if you go back to January of '22, we talked about significant manufacturing challenges we had due to supply disruptions in the fourth quarter of '21. And we quoted about a $0.20 EPS impact. That was the height of the impacts. And every quarter since, we've had some type of negativity. Now this quarter, the first quarter of 2023, we were close to being breakeven on a year-over-year basis, and we expect that to get better as we go forward. So the objective is for us to claw back all of the inefficiencies that we've had in the last five quarters.

Yeah, I'll take the protective and marine side. The way I think about this business right now is, it's well positioned for infrastructure, near-shoring, energy, a lot of the investments that are happening around those areas. And also, in marine, where we have really pivoted our focus to marine aftermarket, which is doing well. So when you add those all together, we were up high single digits in Q1 and we expect to be up mid-single digits again in Q2. So that’s one of the businesses that we’re pretty bullish on.

Our next question comes from Frank Mitsch from Fermium Research. Your line is open.

Good morning, gentlemen. Congrats on the start to the year. Vince, you took a $144 million charge due to the pension benefit obligation. I'm curious as to what sort of future cost benefit might we expect from that action? And Tim, obviously, very impressive progress on price and your expectation is that you're going to have positive price for the balance of the year. But as we see deflation from record raws, any concerns on potential price givebacks in any of your businesses? Thank you.

Thanks, Frank. This is Vince. Yeah. Just a reminder, we do have a step up in 2023, a non-cash step-up as it relates to pension expense. Fairly significant, $10 million to $15 million a quarter. We did annuitize a portion of our pension plan. The benefit from that from an expense perspective is fairly minimal. It's about $1 million or $2 million a quarter. So nothing sizable relative to step-up we've had coming into the year.

We expect very little, if any, price reduction in our performance segment as we progress through the year. In the industrial segment, approximately 30% of our business pricing is tied to index arrangements. This means that if there is a decrease in raw material costs, those indexes will adjust, but this may take several quarters depending on the contract. Therefore, this will be more relevant in 2024 for us. Generally, we monitor this situation closely daily, and churn would be our main metric for determining if we need to take action. Our competitors are dealing with similar cost structures and inputs, and so far, we've observed very little churn, aside from a small amount in Asia.

Our final question today comes from John Roberts from Credit Suisse. Your line is open.

Thank you. Where within the Performance segment were you able to get additional price or was that mix with the aerospace business just improving in the mix?

Well, there were both factors. The mix element, part of it was our aerospace business, no doubt. As the first part on where we're able to get price, we got incremental price in almost all parts of our performance segment. So architectural, refinish. And I'd just remind that while we are seeing moderation and some raw material inflation, we're still seeing inflation in wages and indirects and some raw material categories. So I'd say that incremental price was largely in response to incremental inflation.

Yeah, John. This is Vince. Just for clarity, as we break out these numbers for you guys externally, we have price separate. We put in business mix, regional mix, product mix. We combine that with volume. And if you look at both our original guide and our updated guide or updated final numbers, we benefited from incremental pricing, stand-alone pricing, so invoice pricing. Secondarily and separately, we benefited from regional mix. Tim mentioned some of our business, including Latin America, were higher than our expectations. We benefited from business mix. Some of our higher technology businesses were higher than our expectations, as we called out in both of our releases. And we benefited within business from product mix. So we hit, I think, three big categories for us.

Our final question comes from Jaideep Pandya from On Field Research. Your line is open.

Thanks. First, I want to go back to the EV point. Could you just give us some color on what is the content per vehicle for ICE versus EV? And in your top EV customers, are they all sort of the top Chinese companies? That's my first question. And then second question is on the Industrial Coatings, where you alluded to weakness in the U.S. Have you seen sort of the destocking coming to an end in Q1 or are you expecting further destocking of weaker volumes from the coil exclusion categories in the U.S., especially in Q2 and Q3? Thank you.