Good morning. My name is Carla, and I will be your conference operator for today. Welcome to the Second Quarter PPG Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. I would now like to turn the conference over to John Bruno, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Carla, and good morning, everyone. Once again, this is John Bruno, and we appreciate your continued interest in PPG and welcome you for our second quarter 2023 financial results conference call. Joining me on the call from PPG are Tim Knavish, President and Chief Executive Officer, and Vince Morales, Senior Vice President and Chief Financial Officer. Our comments relate to the financial information released after US equity markets closed on Thursday, July 20, 2023. We have posted detailed commentary and accompanying presentation slides on the Investor Center of our website, ppg.com. The slides are also available on the webcast site for this call and provide additional support to the opening comments Tim will make shortly. Following management's perspective on the company's results for the quarter, we will move to a Q&A session. Both the prepared commentary and discussion during this call may contain forward-looking statements, reflecting the company's current view of future events and their potential effect on PPG's operating and financial performance. These statements involve uncertainties and risks which may cause actual results to differ. The company is under no obligation to provide subsequent updates to these forward-looking statements. The presentation also contains certain non-GAAP financial measures. The company has provided in the appendix of the presentation materials, which are available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information, please refer to PPG's filings with the SEC. Now, let me introduce PPG President and CEO, Tim Knavish.

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

Your first question comes from the line of Christopher Parkinson. Your line is now open.

Great. Thank you so much. Tim, can we perhaps just dissect the outlook for the Industrial Coatings segment margins a little bit? Just based on what you're seeing for price cost for the second half of the year and market mix, given the dichotomy of certain things moving in various directions per your 3Q outlook in your slide deck, comp accruals, just anything else you think is worthwhile discussing as you progress back towards prior peak? Thank you so much.

Hey, Chris. Thanks. I'll let Vince answer the comp accruals, but I'll take segment margins and outlook for some of the businesses. Segment margins in Industrial are still on the recovery journey. So we have continued...

Are we there? Hello?

Carla, can you please open up the secondary line?

Hey guys, we can still hear you for what it's worth.

Okay. Thanks, Chris. So as I started to say, segment margins in industrial certainly have more room to grow, and we expect that to continue, both from the price cost standpoint. But the other piece of recovery that is really not happened yet that will continue to improve the segment margins on Industrial are volume. Of course, right now auto OEM is strong, but still below 2019. And then we've got some pockets of weakness in industrial and certainly pockets of weakness in packaging. So we will get segment margins as those volumes stabilize. The other thing is the operational challenge that we mentioned at our May event have largely been in the industrial segment. So as we make progress on those initiatives, those two pieces will add to the improvements that will be realized from the continuing price versus cost recovery. And then end markets, to your question for the Industrial segment, automotive has been very resilient, sometimes surprisingly so despite everything that's happening in the world with interest rates and inflation and affordability. All of our major regions for automotive were up double digits for Q2. And we expect continued strong recovery as we move forward here. We'll be lapping a stronger Q3 for auto based on China, which had a strong Q3 last year. But overall, we'll continue to see good volume recovery in auto.

We'll move to the next question, Carla.

Okay. Hey, guys. Good morning. Can you hear me?

Yes, Ghansham.

Okay. Terrific. I guess just given all the moving parts on a macro basis and just kind of building on your last few comments, Tim, can you just give us a sense as to how your volume outlook for 2023 has changed since the last time you reported and which of the businesses are seeing the greatest variability relative to your previous view? And then separately, apart from packaging, are there still any businesses being impacted by inventory destocking in any material way?

I'll answer your last question first. Destocking is largely behind us. On the industrial side, there isn't much inventory since it's mostly just in time. Regarding our performance, any destocking that has happened is primarily in the past. Looking at the company's outlook, the recovery in China is slower than we expected, but we anticipate gradual improvement in industrial activity there, though at a slower pace than before. It's improving sequentially, but not with the V-shaped recovery we had hoped for. Architectural Europe saw lower volume than we anticipated in Q2, largely due to one-off social and political events in France, a major market for us. We believe that architectural Europe is starting to recover, and we will soon be comparing against weaker results from last year. In the US, the architectural DIY sector remains soft, and it's a similar situation globally. However, over half our portfolio remains resilient with a positive outlook. Auto, refinish, aero, and PMC all exceeded our expectations, and Mexico is performing exceptionally well. There are many positive aspects, although some areas differ from our previous guidance.

Yeah, hi. Thanks for taking my question and congrats on a solid second quarter here. I just wanted to ask some questions on your 3Q assumptions. So specifically, SG&A as a percent of sales and gross margin, I guess my math indicates that midpoint of your guide, gross margins are maybe 40% or lower. You just printed about 41% in the second quarter and similarly in the first quarter. So what would drive gross margins to go down, especially when you're expecting some raw material benefit? Can you just walk through some of the moving pieces in your assumptions there? Thanks.

Yeah, Josh, this is Vince. On SG&A, let me take that one first. We did have a little bit of higher SG&A in Q2 than the prior year. Really a couple of elements to that. We talked about higher performance-based incentive comp including total shareholder return compensation. We did have, as we communicated in Q1, higher non-cash pension expense for the balance of 2023. That falls in the SG&A bucket on a year-over-year basis. You could see that. And just a reminder, a lot of our China business was shut down in Q2 of 2022 and some of the increased sales create increased SG&A. So those three elements pushed our SG&A cost up year-over-year. And the incentive comp item was a catch-up for both Q1 and Q2. So again, that's SG&A component. On the gross profit percent, we did, as you pointed out, we're averaging about 41% year-to-date. Q3 typically is a lower volume quarter for us. We don't have as much operational pull-through as we would on a higher volume quarter, specifically in Europe. So it's really the only delta I would point to. We do expect, as we said in our prepared remarks, a higher or improved deflation capture. But again, the lower volumes are going to affect our manufacturing efficiency.

Thank you. Good morning. Tim and Vince, you mentioned potential weakness in Pro. Where are the backlogs today and are you seeing that weakness materialize yet?

Hey, David, thanks for the question. I would describe the weakness in Pro to be sequentially down a bit, but not a tremendous amount. A lot of that Pro work is commercial and maintenance, that still remains pretty resilient. But we have seen some reduction in backlog. But honestly, the painters are still in some cases having difficulty getting labor. So there are cases where they're passing on jobs because of that. So while we've seen DIY down fairly significantly, I would just say we're seeing just a bit of softness in the PRO backlogs.

Thanks very much. Two-part question. Can you talk about the state of the Chinese TiO2 industry? Can you use that product in China and in other regions or China chloride-based material? And is it the case that tariffs are just too high to use it in the United States? And secondly, in your script, you say that 80% of your inventories are on FIFO. I thought most of your inventories in the United States were on LIFO. So does that mean that the inventory adjustments that you really need to make are in the offshore markets and your inventory control is pretty good in the US and it's tougher abroad?

Yeah, Jeff, this is Vince. We had a little break-up on your question, but I think you asked about TiO2 oversupply in China. And we do — we are able to take Chinese TiO2 and have been for quite some time, utilizing that certainly in Europe, Latin America, South America, and obviously in Asia. And there are tariffs that make it less cost-effective today to do so in the US. But we are fully utilizing our capabilities to move that TiO2 to other markets or other regions of the world outside of Asia and capitalizing on those lower prices.

Jeff, this is John. I'll take the FIFO question. So, first start with the sales we have, our profile in the US. We're now about 35% sales in the US. And in the past five, six years as we've made acquisitions in the US, the companies we've acquired have been on FIFO. So we have not moved them to the LIFO accounting. So over time, the percentage of inventory that we have on the FIFO method has just incrementally increased due to those factors.

To just add on there… Sorry.

Sorry.

Sorry, Carla. Just — I apologize. Just to add on, my apologies. Just to add on, as John mentioned, we do excess inventory, specifically in raw materials. If you look at our inventory historically, we've trimmed about 50% of the excess raw material inventory that we came into the year with in the first six months, so we'll be working the balance of the year to trim the other portion to get back to our historical level.

Yeah, thank you. If I understood you correctly, Tim, you talked about raws, and I believe it was in COGS, still being 20% above pre-pandemic. And, Vince, you just highlighted, you're still sitting on excess inventory of raws. My question would be, for raws purchased today, what would be the cost relative to pre-pandemic? And how long do you think that it will take for that to flow through COGS?

Yeah, Steve. I'll take the first stab at that, and Tim will add some color here. So what we're seeing today on invoice cost, as we said last quarter, invoice-to-invoice year-over-year, mid to high single-digit and maybe in some cases low double-digit deflation on certain raw materials. I would remind everybody as raw materials went up 20%, 30%, 40%. So when you do it on a multi-year stack, we're still much higher. But we're seeing on a year-over-year basis on invoices mid to high single to low double-digit declines that typically would flow through in 30 to 60 days or even 90 days depending on the raw material. And again, that's extended right now.

Yeah. And bottom line, Steve, when you combine that with the additional $100 million or so of inventory that we've got to work through that we're sitting on now, you've got sequentially more raw material deflation combined with that additional inventory flow-through. That's why I'm so confident that our margin recovery journey will continue.

Yeah, thanks for taking my question. So, Tim, in your prepared remarks, you spoke to pricing continuing through the second half of the year. I guess just because the comps are kind of pretty dramatic year-over-year, I guess can you help us to think about whether you're going to see pricing sequentially from 2Q to 3Q and how we should be thinking about that?

Most of what we will observe going forward is a carryover impact. There will be some targeted pricing adjustments in Performance Coatings. However, much of what will be seen for the remainder of 2023 will be carryover. As you mentioned, we are comparing against some strong pricing quarters from last year, with reported figures of 8% for Q1 and 6% for Q2. Therefore, it's likely we will see low single-digit pricing in Q3, and while it’s still early to predict Q4, we are confident it will remain positive. We will assess what other actions may be necessary as we move forward.

We still expect the raw material costs to increase as we mentioned earlier, and we anticipate realizing more deflation as we reduce our inventories.

The other thing, I mean, the pricing has been holding up very nicely, proud of how our teams are executing to that regard. And so our price story, someone earlier asked about what's different in our guide versus earlier. Our price story is stronger than what our prior guides were.

Thank you and good morning, everyone. Just a question on the wage inflation and you said it will remain elevated the next few quarters. Is that just because you have to lap the flow-through of some wage increases from prior quarters or is there more going in? And if you can size it a little bit, just to help us understand how much of a headwind that is versus the raw materials benefits that you're getting.

Yeah, Vincent, we do have — no surprise, higher than normal wage inflation. I'd say in a mature market average, you could call that about 3%, but higher than that on frontline workers like store workers, but 3% would be a good average. Emerging markets, higher than that. And then from a raw material inflation standpoint, we're still at that 20%-ish number versus pre-pandemic. And we're expecting Q3 to see mid to high single-digits down. So we expect the combination of those two to still keep us at elevated cost versus pre-pandemic, but improving sequentially as we move through the rest of the year.

And as we look at the trend lines, we're not seeing out of the trends, a change in terms of increase or decrease of wages. We provided our merit process or our wage increase process earlier in the year, and we typically would do that once a year for most of our employees. So that trend should hold for the balance of the year.

Yeah. Good morning, guys. Just a question around the EPS and the guide for Q3 and the implied for Q4. So in Q1 and Q2, your year-over-year number was up $0.45 and $0.44. The guide midpoint for Q3 and then the implied for Q4 is up $0.24 and $0.19 year-on-year. With raw material deflation accelerating for you guys and price still up in the back half as you were commenting, why would the year-over-year EPS improvement decline in the back half versus the first half?

Hey, Duffy. The biggest driver to that would just be the quarter-over-quarter price actions. Most of the larger price increases for us started to kick in like Q3 of last year. So as we lap those and less new pricing if you will adding to the top, that's really the biggest difference.

Hi. Good morning. Thanks for taking my question. So increasing interest rates are clearly showing up in existing home sales and you cited softness in resi repaint. And I want to talk a little bit about non-resi. While it appears to be strong or maybe hanging in there, how should we think about the risk to commercial volumes in the back half and in 2024 given a higher interest rate environment and starting to see some deceleration in commercial construction and remodeling indices?

Well, I'd say in the short term, that's not—frankly for the rest of ‘23, not something we're particularly concerned about because there was such a backlog in those areas. If you think about the—really bifurcation of painting activity that happened during COVID, you had a tremendous amount of residential painting happening, but you had virtually no commercial and maintenance painting happening. So there's still a tremendous amount of pent-up demand in that space. Now eventually, we'll see what happens with interest rates and macros in the longer term. But that's—we're just not seeing that right now being a major concern for us.

Great. Thanks. Good morning, guys. Just one question from me on traffic solution. I think you expected sales to be up high single digits in 2Q, and they were down low single digits. So just can you talk through what drove the delta versus what you thought in April?

Yeah. So part of it was—part of it was comp related. We had a really strong Q2, Q3 last year in that business. And secondly, it's still a new business for us, and we're still learning the market a bit. And this is an area where we did see some—I’d say temporary shift in paint volumes as activities picked up. And so we expect that—we expect to get that back as we move forward through the rest of the year and certainly into next year. We have been focused very heavily on margin over volume in that business, and the team has done a great job there. And the last thing I'll say to that is, while the volumes did come in a bit lower than we expected for the quarter, this business is generating good cash for us, really good cash and a good contributor to the enterprise from that standpoint.

Good morning and nice results. Obviously, you guys generated some strong cash flow in the first half of the year, begs the question on the use cash. Debt paydown is part of it. But how do you think about buybacks versus M&A? I know, Tim, you've talked about the right property, right price, right time? Is this the right time? Are you seeing the right price? Any thoughts there would be greatly appreciated.

Yeah. Thanks, Frank. You're proud of the team, great effort. And as you noted, our number one priority is to pay down some debt. We said earlier this year, we would pay somewhere between $500 million and $600 million down. We paid about $200 million of that down so far this year. So we've got a bit more of that to do. But I'll tell you, we're going to have a really good cash year. We're going to have a really good cash year, which gives us a lot of optionality. Probably not time to talk about specific actions on the M&A side, but that clearly remains a priority for us. And we are seeing properties come across our desks there. But bottom line, we're going to have a really good cash generation year. We're going to pay down some more debt. And then we're going to make decisions on how best to use that cash to deliver shareholder value based on what we see at the time.

And just to reiterate what we said in May in New York, we're not going—after we pay down this debt, we're not going to let cash grow on the balance sheet.

Thanks. Good morning, everyone. We've recently seen somewhat better deed on new residential construction in the US. What do you see in your business in this market? Have your expectations here improved at all in the last three months? And then separately, are you seeing any meaningful pickup in the US infrastructure spending?

So on the new builds, we are starting to see a little bit better activity there on new home construction. We've said in prior calls, it's a fairly small part of our overall business, but it's not zero. And we've had a couple of nice wins recently with some new home builders. So bottom line, any walls—any additional walls that get painted in the US, Mexico, Europe, Australia is good for us. That's upside to us. So that would be the first one. Second part of your question?

Infrastructure.

Infrastructure. All right. Thank you. Thank you. US infrastructure, we are starting to see, I would call it, upstream project activity, and we're very active in the specification side of ensuring that our products are well specified, whether it's traffic or protective coatings or architectural coatings or industrial coatings. Typically, paint and coatings are late stage in those projects, sometimes last stage in those projects. So this is more of a ‘24 and beyond growth opportunity for us, but we're certainly seeing that upstream activity happening now. We're excited about it, and we're very active with it.

And if I could add, it's not US comment, but it's a Mexico comment. We are seeing a significant amount of near-shoring occur in Mexico; several hundreds of building permits for manufacturing facilities have been requested. Those will yield benefits for us certainly in ‘24 and ‘25 as that manufacturing is put in place. And then, as Tim mentioned earlier, we have a full-fledged array of PPG businesses in Mexico to facilitate further painting once that industrial activity picks up as well as our strong Comex brand.

Yeah, just to put some metrics around that Mexico nearshoring. In Q1 of this year, there's about $48 billion of nearshoring investments in Mexico. That's three times Q1 of 2022. So we are really seeing that pickup and were involved in the specification side of that business as well.

Hi. Good morning. Wanted to ask about auto OEM and the price realization that you're seeing there. Is there more still to come on pricing in auto OEM? And are there any instances where you're starting to see some customer pushback related to raw material declines either in auto OEM or any other subsegments?

Yeah, Mike. This is Vince. Let me start, and I'm sure Tim will have some color here. But it's taken us a while, as it typically does, at doing an inflation cycle to negotiate with our customers, get paid for the value we provide. So we had a lag on the way up in terms of the inflation versus price to our OEM customers. We're in a steady state environment now. We're not seeing any pushback. We're still trying to capture—as the volume grows, we're still trying to capture our margins back in that business, but we're not seeing any pushback at this point from the customers. Again, that's a traditional lag effect that we would see in any inflation cycle.

And to your broader question about other segment, I would say normal market dynamics, nothing significant, nothing material. There's been some intense competitive pressure just around the edges. But at the core, we haven't really seen anything that was unexpected or out of the normal.

Thank you. Refinish organic sales were up mid-single digits. I don't know what pricing was up, but the Performance segment was up 6%. Refinish volumes globally flat, and when you talk about it being better than expected, was price better than expected or was volume better than expected?

Yeah. Hey, John. Volume was positive here in the US, which of course is our largest and most critical market. And that was better than we expected. Volume in Europe, I would say, was worse than we expected. Volume down there a bit more than we thought. And then volume in China, a little bit muted because of the slower recovery, but we see that as sequentially improving as time goes on. But overall, great quarter for that business, really bullish on particularly the US side, and we're watching closely what happens on the Europe side.

And the Europe side, we talked about a destock earlier in the call here. And we think in Q2, there was some destocking with certain refinish customers. We think that's concluded by the end of Q2. So again, as we get to the back half of the year, we would expect the demand and the volumes to be more in sync.

Hey, guys. Nice quarter. In terms of the half of your portfolio that's in decline or weak, do you think those markets are bottoming or potentially bottom here in the third quarter? And then, when I take a look at your volume outlook, third quarter seems to be down year-over-year again. And I just wanted to get your thoughts on the fourth and how you see that sort of unfolding.

Yeah. So I'll take a few of the markets that were lower volume than what we expected for Q2 and how we're thinking about them going forward. First one, architectural Europe was clearly down more than we expected, but some of that was isolated to France as I mentioned earlier. I do expect that to start comping pretty close, maybe even a little upside from where we were at Q3 of last year. So I've used the term bouncing off the bottom. I do believe that Europe architectural is bouncing off the bottom and maybe a little bit of upside there. The China recovery, slower than we expected in Q2, no doubt, but the way we're thinking about that is, that just stretches out the recovery; positive stimulus that the government does in the industrial space will be a real positive for PPG, and we do expect China to sequentially improve. So those would be the two main ones I would point out as far as what we saw in Q2 and potentially improving in Q3 and beyond.

Yeah, Mike. And I think there is a comparable—year-over-year comparable issue as you look at volume. So we do have improving volumes as Tim mentioned in China sequentially in Q3. But that was compared to a recovery from COVID shutdown last year in Q3. So again, when you look at—you mentioned year-over-year volume challenges. That's—again, China is improving as we look Q2 to Q3, but it's against a tough comp.

Yes. Good. Thank you. Good morning. Tim, a two-part question for you on auto OEM volumes. First, could you speak to the outlook for the back half of the year? Some of the consultants are to be believed. It looks like there's quite divergent trends in Asia versus Europe, for example. So curious to understand what you're baking in there. And then longer term, you referenced the supply deficit of 40 million units. Is the implication that that is the amount that needs to be recovered over some period of time? How do you view the medium to longer-term outlook for global production?

Hey, Kevin, this is Vince. I'll start, and I'll let Tim add here. But just a reminder, again, just the same question we had—the last question. China had a recovery in Q3 last year in auto production. So again, the numbers when you look on a year-over-year basis are a bit skewed.

We're optimistic about the auto market despite some concerns regarding affordability and interest rates. For instance, we're seeing unexpectedly strong performance in Europe, even though the economic conditions there are challenging. The USR came in at 15.8, which was a pleasant surprise, although it's still below historical averages. In China, we're witnessing double-digit growth in builds for Q2. While there may be some unusual comparisons in Q3, we anticipate a recovery. We're confident in the auto sector for both the short and medium term. The $40 million figure is derived from the six-year average of annual builds before COVID along with the impact of the pandemic. It's uncertain how long it will take to bridge that gap, but it won't be negligible. This deficit will need to be addressed because many countries are still experiencing population growth, and car ownership per capita is lower than in developed regions. Additionally, the average age of vehicles on the road in mature markets like the US and Europe is around 11 to 12 years, indicating a need for renewal. Therefore, fundamentals suggest that a portion of that $40 million deficit will need to be resolved, though the timeline for this is unclear.

Hi, guys. Thanks for the question. I have one on segment margin. So your sector margins expanded 300 basis—330 basis points in Q2, and they were expanded 370 basis points in Q1. I understand we are past the peak in terms pricing initiatives, but we start to see really the widening gap of raw materials going down. And some of the volumes we are talking in the weak markets are bottoming. So what could prevent margins in Q2 and Q3 from expanding—to accelerate in terms of expansion again?

Yeah, I think we talked about this a little earlier in the call. We do expect, again, incremental deflation to flow through to our P&L. We're starting to lap some pricing. We do, especially in the industrial businesses, we do see volume as the biggest catalyst in the back half of the year or in 2024 to help improve the margins as well as, Tim mentioned earlier, manufacturing—PPG manufacturing as a key element, and we laid that out in our May New York meeting. So those would be the four key elements that I would point to that would impact our margins in the back half of the year.

Good morning. Just a quick one. What's the net drag for earnings and margins from the destocking you're doing this year? Just trying to think about kind of how that translates into the bridge for next year?

Interesting question, Laurence. I'm doing the math in my head as we speak. But again, what we're seeing is, it's called mid to high single-digit deflation on our invoices. We're realizing mid-single-digit inflation through our P&L. So I'm going to guess that that's $0.05 to $0.10 a quarter. Looking at John here to make sure my math is proper. But that would be the delay. That's not coming through on a real-time basis into our P&L.

Great. Thanks for taking my question. Just wanted to understand kind of the volume outlook overall. It sounds like, obviously, aerospace and automotive OEM volumes have been trending positively and you expect that to continue. Now you're calling out some weakness in packaging and some of the other markets. So is there a path to maybe overall positive volume by the first half of next year given some easier comps in some of these industrial businesses and maybe a persistence of volume growth in auto and aerospace? So I'm probably thinking about how kind of volume growth overall trends for the next couple periods. Thanks.

Yeah, Arun. Great question, and one we talk about a lot. And I'll first qualify it by saying it's still pretty early given all the macro stuff that's happening around the world to really nail in our 2024 volume assumptions. But I will tell you that I'm optimistic based on a few things. We've talked a lot about auto and aerospace and Mexico and refinish, and we fully expect those businesses to continue to perform. In addition to that, I've talked about a few businesses that we think are bouncing off the bottom, and they're not small businesses for us. So eventually, bouncing off the bottom will turn to positive. China, we have a really strong presence in China. China ramp-up in recovery has been slower than expected. But if you think about that for 2024, that's a positive, particularly with any government stimulus. And the last one I would point out is Europe. And while Europe volume has been very muted for the first half of the year, we still printed all-time record earnings in Q1 and all-time record earnings in Q2. So the team has done a great job of positioning from both a margin and cost base standpoint. So any incremental uptick in volume across any of those businesses in Europe will be a real positive for us. So still a little early. We'll talk more about that in the next earnings call, but there are a lot of indicators that could point to positive volume for us for 2024.

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

Thank you, Carla. This ends our second quarter earnings call. We appreciate everybody's interest and confidence in PPG. Have a good day.

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