PPG Industries Q2 2022 Earnings Call Transcript

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Provided by Quartr
July 21, 2022

Key Takeaways

  • We delivered record net sales of $4.7 billion and adjusted EPS of $1.81 in Q2, driven by real-time price increases fully offsetting inflation and strong performance in our traffic solutions and PPG Comex businesses.
  • Our selling prices were up 12% year-over-year (15% on a two-year stacked basis), marking the 21st consecutive quarter of increases and contributing to a 200 bps sequential improvement in operating margins.
  • Softening consumer demand in Europe (volumes down ~10%), extended COVID disruptions in China and unfavorable currency translation collectively trimmed EPS by about $0.10 versus April guidance.
  • Supply chain conditions continued to improve with easing commodity constraints, higher supplier inventories and better logistics, supporting further cost inflation moderation and manufacturing efficiency gains in the second half.
  • For Q3 we expect year-over-year EPS growth despite a ~$0.10 FX headwind, backed by additional price realization, ~$30 million of acquisition synergies and positive volume mix in automotive OEM, aerospace and Asia.
AI Generated. May Contain Errors.
Earnings Conference Call
PPG Industries Q2 2022
00:00 / 00:00

There are 20 speakers on the call.

Operator

Good morning. My name is Lauren, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second 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.

Operator

I would now like to turn the conference over to John Bruno, Vice President of Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, Lauren, and good morning, everyone. Once again, this is John Bruno. We appreciate your continued interest in PPG and welcome you to our Q2 2022 financial results conference call. Joining me on the call from PPG are Michael McGarry, Chairman and Chief Executive Officer Tim Kanabish, Chief Operating Officer And Vince Morales, Senior Vice President and Chief Financial Officer. Our comments relate to the financial information released after U.

Speaker 1

S. Equity Markets closed on Thursday, July 21, 2022. 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 website for this call and provide additional support The brief opening comments Michael will make shortly. Following management's perspective on the company's results for the quarter, we will move to a Q and A session.

Speaker 1

Both the prepared commentary and discussion during the call may contain forward looking statements reflecting the company's current view of future events and their potential effect on PPG's operating and financial performance. These statements involve uncertainties and risks, 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.

Speaker 1

For additional information, please refer to PPG's filings with the SEC. Now let me introduce PPG Chairman and CEO, Michael McGarry.

Speaker 2

Thank you, John, and good morning, everyone. I would like to welcome you to our Q2 2022 earnings call. I hope you and your loved ones are remaining safe and healthy. I will provide some comments to supplement the detailed financial results we released last evening. For the 2nd quarter, We delivered record net sales of $4,700,000,000 and our adjusted earnings per diluted share from continuing operations were $1.81 To quickly summarize the quarter, our sales performance was an all time record, driven by continued realization of real time price increases That are now fully offsetting total cost inflation.

Speaker 2

Total cost inflation includes generational high commodity cost inflation, Energy, logistics and other employee related cost inflation. In addition to pricing, Our top and bottom lines continue to benefit from recent strategic acquisitions, including our traffic solutions business, which delivered a record quarter. We achieved strong sales results despite softening consumer demand in Europe, longer than anticipated COVID related disruptions in China And unfavorable currency translation. While we included the European demand realities in our financial guidance we issued in April, The impact of the extended China restrictions and the currency translation was negative by about $0.10 per share versus our original guidance. Our sales were aided by above market volumes in several of our end use markets, including our PPG Comex business, which delivered another record quarter as In addition, our Global Automotive Refinish, Trafig Solutions Example of PPG, technologically advanced products.

Speaker 2

That is our packaging business Where we have won positions on about 75% of the new metal can packaging lines in North America over the past 2 years. Also, our Aerospace business continues to benefit from year over year improvements in domestic travel in various countries, Resulted in higher aftermarket demand, and we expect further aftermarket and OEM growth as the industry demand remains well below pre pandemic levels. Although still challenging commodity supply disruptions continue to ease in the quarter, and we expect further improvements as we Progress through the second half of twenty twenty two. This includes much better raw material availability as inventories at most of our suppliers have vastly improved. We achieved adjusted earnings that were toward the upper end of our April financial guidance and would have been in line with the Q2 of 2021, If not for the negative impact of foreign currency translation, this reflects the benefits of our strong commercial discipline regarding pricing and continued focus on cost management.

Speaker 2

Our earnings performance was aided by higher selling prices of about 12% year over year, marking the 21st consecutive quarter of higher selling prices. Our selling prices are now up over 15% on a 2 year stack basis, reflecting our continued actions to offset persistent cost inflation. We anticipate by the end of 2022, we will Fully offset all cumulative total inflation from 2021 2022. More importantly, We are converting higher prices to improve margins. During the quarter, our operating earnings improved each month.

Speaker 2

This strong progress is being reflected in the positive momentum of our operating margin recovery as we improve sequentially Sequential quarterly margins by 200 basis points and anticipate further improvement in the 3rd quarter. Also aiding our 2nd quarter earnings performance was continued realization of acquisition related synergies and cost savings from previously announced programs, which together totaled about $30,000,000 of incremental benefit. During the Q2, we also implemented cost mitigation initiatives in Europe, Reflecting the slower demand in the region and have additional contingency plans ready in the event of a broader economic slowdown. The efforts around cost management resulted in a reduction of our overall of our selling and general imaging Cost by 100 basis points as a percent of sales compared to the prior year's Q2. Our acquisitions are also performing well, including the Traffic Solutions business, which achieved 15% sales growth in the 2nd quarter.

Speaker 2

We remain excited about future growth opportunities for this business As in the next few years, we anticipate increased infrastructure spending and expect further U. S. Adoption of mandatory expansion of traffic markings for safety purposes. During the quarter, we continued to progress our launch of the expanded propaneer initiative with The Home Depot. I'll be at later than we wanted in the paint season and despite continuing raw material constraints, we were able to fully load PPG products At all U.

Speaker 2

S. Locations with our full probe product assortment by the end of the quarter. We have already had some Meaningful early wins of some large pro contractors and our near term target list includes more than 1,000 pro contractors that expressed interest in buying our products at The Home Depot. We're excited about teaming up with The Home Depot and collectively we In the second quarter, our net debt was consistent with the 1st quarter And our working capital is sequentially higher mainly due to the higher dollar value of inventories reflecting inflationary effects and higher receivables given our As the supply chain disruptions continue to improve in the coming quarters, we expect our working capital to return to more normal seasonal patterns And cash flow generation improved as we progress through the end of the year. We repurchased $135,000,000 of our stock at attractive prices during And continue to manage our acquisition pipeline.

Speaker 2

In addition, we have progressed our key capital expenditures during the 2nd quarter focused on productivity And growth, and now expect total spending to be about $450,000,000 for the full year. Consistent with our past practices, We'll deploy cash in most accretive manner for our shareholders, including some debt reduction. In the Q2, we further enhanced our company's corporate governance As we received the necessary shareholder vote threshold for Board declassification and elimination of super majority voting requirements. We had worked on soliciting our shareholders for years to pass these proxy votes, and we're pleased to see our efforts pay off to further solidify our corporate governance. In addition, we continue to advance our sustainability strategy and proudly announce PPG's commitment to setting near term company wide emission Reductions in line with climate science through the science based target initiative.

Speaker 2

We plan to communicate new 2,030 goals that will define our decarbonization Looking ahead, in most major regions and end use markets, underlying demand for PPG products is expected to remain solid. We anticipate strong sequential growth in Asia due to higher industrial production compared to the Q2 that was heavily impacted by COVID restrictions. We're closely monitoring the current COVID situation in China. And at this time, we only expect minimal impact to our sales and operations In Europe, we expect economic conditions to remain soft, including normal seasonal demand trends versus the 2nd quarter. Also positive demand trends are generally expected to continue in North America, Aided by stronger sequential automotive OEM production, further aerospace recovery and continuation of recent trends in auto refinish sales as we work to fulfill strong back orders.

Speaker 2

In the second half, year over year comparisons will be aided by the sharp declines we experienced last year during the height of the Supply disruptions that impacted several industries, particularly in the U. S. Outside of a few commodities, We expect supply chain conditions to continue to improve, including better raw material and transportation availability, As our suppliers production capabilities are returning to a more normal condition. Also in the second half And specific to PPG, we expect several businesses, including automotive OEMs and aerospace to deliver strong growth Due to large supply deficits and low inventories in these end use markets. Other PPG specific Positive to the second half are continuing acquisition synergy realization and additional cost savings from previously announced restructuring actions.

Speaker 2

In the Q3, our 2 year stacked raw material inflation is expected to be about 40%, Up a low single digit percentage sequentially versus the 2nd quarter. We'll continue to prioritize implementing further Real time selling price increases and we expect a quicker offset versus historical lag similar to what we delivered in the second quarter. Importantly, we expect that our sequential quarterly momentum on operating margin improvement will continue in the Q3 as we work back towards our historical margins. And also even with significant unfavorable currency impacts expected to continue resulting in about a $0.10 EPS impact in the 3rd quarter, We are forecasting our adjusted earnings to increase on a year over year basis. While near term challenges exist, I remain confident about the future earnings capabilities of PPG as the earnings catalysts that I referenced in the past remain fully intact, And we certainly see a path to return to prior peak operating margins with opportunities to exceed them.

Speaker 2

As a reminder, This includes continued recovery in the automotive refinish, OEM and Aerospace Coatings businesses Continued sequential momentum of positive price versus cost as commodity raw material costs moderate. In the event of an economic downturn, they should moderate a more rapid manner, a lower cost structure resulted in strong operating leverage on any sales volume growth, Accretive earnings and further growth from our recent acquisition. In closing, as we look ahead, our team of 50,000 employees remain focused on serving our customers And supporting our stakeholders. Every day, I'm inspired by our teams around the world who are making it happen, are providing products that are helping to protect and beautify the world. Thank you for your continued confidence in PPG.

Speaker 2

This concludes our prepared remarks. Now Lauren, would you please open the line for questions?

Operator

Our first question comes from David Begleiter from Deutsche Bank. David, please go ahead.

Speaker 3

Thank you. Good morning. Michael, you discussed a path to $9 of EPS in 2023. Has that now been pushed out given the current economic backdrop and weakening we're seeing in Europe?

Speaker 2

Well, David, it's certainly going to make it a little bit more challenging, but all the conditions are still there, right? You have refinish, that's going to have an improved outlook. Miles driven are closing in on 2019 levels. Automotive OEM is still light. I mean, we got 24,500,000 builds in China.

Speaker 2

We have a supply deficit in the U. S. The fleets haven't been rebuilt. So that's still there. Aerospace is coming back At a very strong level, and I'm sure you saw the Farnborough announcements about the new planes.

Speaker 2

So you're going to have not only aftermarket doing better, but OEM doing better. Yes, the synergies we've talked about, we have $30,000,000 in synergies just in the quarter alone, productivity and manufacturing And then price raws, even though we haven't built that in, I'm sure somebody is going to ask later on the call about that. We see certainly raw material pricing Getting a little weaker in China. We know it's going to get weaker in Europe and that's going to free up additional. And then we still have Ability to have cash deployment.

Speaker 2

So I think all options are on the table, and I think we're still pretty confident that the outlook

Operator

Thank you. Our next question comes from Ghansham Panjorbi from BARD. Please go ahead.

Speaker 4

Yes, good morning. Thank you for the time. On the weakness in Europe that you saw in 2Q and market concerns over a recession in the region, Michael, how do you think this particular business cycle could be different in a continued slowdown scenario given that some of your end markets never fully recovered to begin with? And then related to that, can you also comment on the current raw material supply situation in Europe, just given concerns over not just the supply of natural gas, but also Issues with logistics and the water levels and so on and so forth in the rivers. Thanks.

Speaker 2

Sure, Ghansham. Let's start with The fact that what's going to be different this time is, look, in the U. S, we have full employment, and you have people with a lot of money in their pockets. And so even if the Fed overtightens, I'm still looking for people to maybe partially slow down, but it's not going to be anything I would say that right now, there's a strong likelihood that people are going to continue to spend money in the U. S.

Speaker 2

Certainly, we see a slowdown coming in Europe. I got to be honest, I'm not as worried as other people are about gas Rationing in Europe. And the reason for that is when you think about the size of the automotive business, the size of the chemical business, These are hugely important to people in Europe. And if you got into a significant gas rationing over there, You would have an economic event that would not be pleasant. So I'm anticipating the government is going to ask people to turn their thermostats up Substantially during the summer, they're going to turn them down in the winter.

Speaker 2

People are going to start conserving. So I'm not worried about raw material supply from that standpoint. The other thing I would tell you is, I'm already starting to see some rotation of raw materials out of China to Europe in anticipation of this. So that's going to provide additional supply, and that additional supply will help ease some of the projected challenges. So I'm obviously paying attention, but I'm not nearly as worried as some people are.

Speaker 5

Specific to the European demand consummate that you asked, we are seeing obviously slowness. We were down About 10% in Q2. We're projecting to be down in Q3. And we have some markets that are improving on a go forward basis. As Michael alluded to, Our auto OEM business, we expect to improve certainly over the next call 12 months.

Speaker 5

And we know aerospace is Improving in that particular region as well as globally. So we have some offsets to what's already a weak environment. And so again, on a go forward basis, We expect some puts and takes.

Operator

Thank you. Our next question comes from Christopher Parkinson from Mizuho Securities. Christopher, please go ahead.

Speaker 6

Great. Thank you. Just back to a corollary of Beggs' question, there have been 3 variables affecting your margin outlook, including end market mix with Refinish and Aero improving, but Still below or maybe just at 2019 levels, some manufacturing inefficiencies, especially in the second half due to auto OE and then of course price cost. When we take a step back and just think about these for this not only for the second half, but into 2023, going back to that $9 question, Can you just give us the key highlights and how you're thinking about these right here, right now and perhaps just highlight how you're thinking about them a little bit differently versus The past 3 to 6 months. Thank you so much.

Speaker 2

Yes, Christopher, I mean, obviously, the mix is improving every single day. So that's a positive for us. As you know, Refinish and Aerospace are very good businesses for us. And you have improved pricing in automotive, which is improving that mix So I think from that standpoint, that's going to be good. The second one, if you think about our manufacturing situation, we've had to adjust manufacturing Schedules on very short notice or no notice in some cases because of supply disruptions force measures.

Speaker 2

And as supply gets better, We're able to plan better, scheduling is better. Obviously, COVID is not a challenge anymore. We don't have as many call offs. So from that standpoint, our manufacturing is going to improve. And as you see, our price is dropping to the bottom line.

Speaker 2

So margins improved 200 Basis points in Q2, you're going to see a significant improvement in Q3, you're going to see an improvement in Q4. So from that standpoint, That is going to continue to be positive momentum, and we're expecting raw materials on a sequential basis only be like Up low single digits in the Q3. So I think there's a lot of positive momentum here, and I'm feeling pretty good about that.

Speaker 5

And Christopher, I just want to this is Vince again. I just want to add that we are still down 10% in volume You know, versus 2019. So, again, you said we were close to parity and I think just huge incremental margins on that volume recovery, Again, in auto and aerospace are 2 of the biggest declines versus 2019 or pre pandemic.

Operator

Thank you. Our next question comes from John Magnulty from BMO Capital Markets. John, please go ahead.

Speaker 1

Yes. Thanks for taking my question.

Speaker 7

So I guess what I'd like to focus on is the price versus raws dynamic. I guess can you Help us to understand what portion of the portfolio still has more pricing that it needs to get to catch up. It seems like you did really well In 2Q, I guess, I'm curious what else you need to kind of hit on. And then equally important, it looks like you're on track for raws to be up about $2,000,000,000 or so over the last couple of years. I guess when we start to see raws coming off, I guess how much of the pricing associated with that do you think you Hold on to, versus having to give back.

Speaker 7

Is there a way to think about that? Because it just seems like it's a really big number.

Speaker 5

Yes, John, this is Vince. I'll start and then Michael could add some color. We still have targeted pricing that we will inject in Q3. Some businesses, we have perennial pricing that typically occurs toward the end of the season. So you'll see that both in performance.

Speaker 5

We still have some catch up pricing in some of our industrial and auto businesses that will take place in the quarter. And so there will be higher we expect higher Pricing on a percentage basis and certainly on a 2 year stack for Q3. With respect To the inflation, I think your numbers are directionally correct in terms of the inflation we've absorbed over the past, call it, 2018 and soon to be 24 months. We anticipate offsetting that fully with price, but not just that. As Michael mentioned in the opening remarks, We're offsetting logistics.

Speaker 5

We're offsetting employee related inflation and packaging inflation. So again, our pricing will overcome that by the end of the year. And we typically have sticky pricing as we progress through the economic cycle.

Speaker 2

So maybe John to add a little bit to that, your premise that you're trying to understand is how much of this 2 +1000000000 are we going to keep? The thing that we're talking to our customers about is raw material inflation is just one piece of this. And so when you add the things that Vince talked about logistics, labor, energy, packaging costs, We need to continue to recover that. So I fully expect and I will be fully engaged and Tim will Fully engaged with the businesses to ensure that we're going to be keeping a large percentage of this in our pocket. And that is a key deliverable for our business Unit leaders, everybody is well aware of it and it's been signaled well ahead of time.

Speaker 2

So this will not be a surprise to our customers. So I'm feeling pretty good.

Operator

Thank you. Our next question comes from Kevin McCarthy from Vertical Research Partners. Kevin, please go ahead.

Speaker 8

Yes, good morning. In your guidance for the Q3 on Slide 10, you're baking in Volume assumptions of flat to down a low single digit percentage. I was wondering if you could just speak to the buildup To that assumption, maybe in terms of geography, assumptions around China lockdowns or lack thereof, European macro, But also in terms of your individual businesses and which ones you expect highest or weakest volume growth in the 3rd quarter? Thank you.

Speaker 5

Yes, Kevin. Good morning. This is Vince again. So on a year over year basis, Probably a couple of big movers. We again, we expect Europe to be down double digits, close to double digits versus the prior year.

Speaker 5

Well, we do expect, if you recall, we did have the peak of the chip shortage in our automotive OEM business last year, And that's recovering, not fully recovering, but it's recovering this year Q3. We also have improvement In Aerospace, as we've talked about several times already on the call, those are 3 of the bigger movers. And then we have a variety of puts and takes by business. On a sequential basis, what's important is we do expect for us, China was down for essentially 2 months in Q2. We do expect China to be fully up and running with just modest, very modest impact from COVID in Q3.

Speaker 5

So that's the bigger biggest mover sequentially.

Operator

Thank you. Our next question comes from Josh Spector from UBS. Josh, please go ahead.

Speaker 9

Yes. Hi. Thanks for taking my question. I was wondering within Architectural Coatings, could you discuss some of the volume differences in DIY versus trade markets? I guess specifically looking at North America and Europe, and I guess given some of the commentary about Europe where you're still seeing declines on Technically easier comps from last year.

Speaker 9

What does that say about your thoughts about DIY and how that holds up in a recession this cycle potentially. Thanks.

Speaker 10

Yes, I'll take that one, Josh. This is Tim Knabish. Thanks for the question. The biggest driver of the volume issue in DIY is clearly Europe. We've seen a double digit decline in DIY volumes in Europe.

Speaker 10

And frankly, we expect We called it at the end of the last quarter. That was accurate, and we expect that same phenomenon to continue. The trade volumes in Europe are a bit stronger. It depends on some by country. We're seeing some softness in some countries of trade.

Speaker 10

In Other countries like France, we continue to do very well on the trade side of the business. So that's more mixed. And when you come over to this side, to the United States, we've also seen DIY, I would call it more normalizing, Where Europe was down because of a number of issues, whether it was coming out of COVID or consumer confidence because of The war. Here in the United States, it's more normalizing in a post COVID environment, Whereas in the trade side of the business here in Architectural U. S, we still see very good backlogs.

Speaker 10

We do a survey of our professional painters every quarter and about 80% of the professional painters that we surveyed here in the U. S. This quarter have as much or larger backlogs than they did last quarter. So DIY normalizing here, but still good trade backlogs.

Speaker 5

This is Vince. A couple of other color points here. In the U. S, we were still impacted early in the quarter In our U. S.

Speaker 5

Architectural business by supply challenges, April, May are still in the heart of the paint season. And in Europe, based on what we've seen to date, we're very comfortable with our share position.

Operator

Thank you. Our next question comes from Frank Mitsch from Fermium Research. Frank, please go ahead.

Speaker 11

Thank you and good morning folks. Appreciate the level of details. Coming to the use Cash, Ticarilla is rolling off as a driver as part of the M and A increase. And I know that M and A is important to PPG. You did mention that you stepped up buybacks in the quarter at attractive prices.

Speaker 11

But I'm just curious as What the outlook is on the M and A front that's out there?

Speaker 2

Frank, this is Michael. The M and A front continues to be what I would call steady. You saw there were some deals done in the past 90 to 120 days. We've obviously looked at those and We saw value creating from a PPG shareholder perspective. And we continue to look at our portfolio.

Speaker 2

You probably noticed that we sold a couple of Businesses, you saw we sold Beverly and another small one. And so we're always looking at our portfolio. So but we're going to do what's best. So this quarter, Paying down debt and buying back a little stock made the most amount of sense. We're going to continue to look at our portfolio and decide what we're going to do.

Speaker 2

The pipeline remains what I would call steady and we're continuing to talk to the Board about the options that are out there.

Operator

Thank you. Our next question comes from Laurent Favre from BNP Paribas. Laurent, please go ahead.

Speaker 12

Yes, good morning, all. I have a question regarding this contingency plan on the European side. I mean, I hope you're right on, I guess, the lack of big curtailments of chemical production and all the mess That would be related to that. But I was wondering if you could talk about 2 things. 1 is how you're thinking about raw materials Inventories and stocking up perhaps into a more turbulent time, but also in terms of Areas where you may have single sourcing.

Speaker 12

I know that there was a big surprise last year in the U. S. I'm wondering if you've learned from the U. S. Side and that now all of your European Operations can run on dual sourcing, for instance, so that you can indeed import all those raw materials from elsewhere.

Speaker 12

Thank you.

Speaker 2

So Laurent, this is Michael. First of all, it's virtually impossible to be dual source on everything Because we make some unique chemistries on those that we are single source, we have a contractual relationship with our suppliers to provide that Protection that we need. But we have been in a mode of Being conservative on inventories right now, in Europe though, we are going to be moving toward a mode of destocking over the next few Months, we've already started to see availability of raw materials get better. We anticipate that prices we've seen some prices already soften In China, we anticipate some softening coming up in Europe. And so the plants have already Put in place contingency plans.

Speaker 2

They've enacted some to lower costs. And so from that standpoint, I think we feel very comfortable. We have some additional plans in place As well.

Operator

Thank you. Our next question comes from Arun Viswanathan from RBC Capital Markets. Arun, please go ahead.

Speaker 13

Great. Thanks for taking my question. Yes, I just wanted to go back to the bridge potentially to maybe $9 or something close to that in 'twenty 23 or 'twenty 24. If you think about that, that seems to be likely that it would have to be composed of something around $2.50 for Q2, Q3 and $2 for Q1, Q4, I guess. Is that correct?

Speaker 13

I mean, that would imply kind of like a 20% improvement on a quarterly run rate basis. And if you think about that 20%, Is that maybe a third volume improvement and 2 thirds kind of margin recovery from price cost? Or How should we think about that path to getting back to that kind of earnings power?

Speaker 5

We'll try to take another stab at this Arun, this event. So look, we're down 10% in volume versus 2019. We expect the vast majority of that to return Again, because of some of these decremental items are in very large businesses for us and businesses that are showing today and we expect on a go forward basis Good recovery momentum. Again, we talked about auto, we talked about aerospace. There are a couple more that are smaller.

Speaker 5

We do expect positive business mix as part of that equation as well. To your point on price, raws recovery, we've talked about a couple of times. We're still down in Q3. On a cumulative basis, we expect to be at least at parity by the end of the year on price raw, so that will pick up Several points. And then I don't want to underemphasize what Michael talked about with respect to manufacturing.

Speaker 5

We typically have productivity improvements year over year from our manufacturing operations. If you look at the past 12 months, We've had decrements in manufacturing. So we expect to fully recover those decrements and move back to our legacy of producing productivity. So those three things coupled with synergy capture and coupled with some cash deployment gets us To the $9 plus of earnings power we've talked about.

Operator

Thank you. Our next question comes from Prashant Juvekar from Citi. Prashant, please go ahead.

Speaker 14

Yes. Hi, good morning. You talked about European DIY being slow. You've talked about that for a while. How did European Industrial Business do throughout the quarter?

Speaker 14

Did it slow down as the quarter progressed? And then related question to that is, are you seeing a rebound in industrial activity in China? And do you think that China activity or industrial activity can grow if U. S. And Europe are slowing down?

Speaker 5

Thank you. Yes, PJ, we saw declines in architectural in Europe, obviously, as Tim talked about, Automotive on a year over year basis and our industrial business on a year over year basis were also down, it's called mid single digits due to some of the same issues That caused economic slowing in the region. On a go forward basis, Auto, we expect to recover at some point. It's still going to be choppy in the back half of the year in Europe. It's going to certainly recover in the U.

Speaker 5

S. And in China. Industrial activity, we expect at least a parity. We are seeing a very rapid recovery in China from the COVID shutdowns and expect growth On a year over year basis in Q3, with respect to with Europe slowing, would China grow? Again, we think China is becoming more of an internally consumption market, and we still feel good about the U.

Speaker 5

S. Economy. So there are some offsets to European slowing that would allow China to produce good industrial activity results.

Speaker 2

P. J, this is Michael. I think if you think about this from a China macro standpoint, China government is under significant pressure right now because of And they're injecting money, reducing the amount of bank restrictions And they're putting pressure on the building industry as well. So they are showing every sign to make sure that the local economies in China Continue to recover. So I feel pretty good about the fact that China is committed To having a better second half of the year than they had the first half of the year.

Operator

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

Speaker 15

Hey, guys. Nice quarter. Yes, it does feel like a recession is the consensus view pending these days and your portfolio has changed. So Just curious overall, how do you think the current portfolio would in terms of volumes would hold up in the recession? And Given you've got $2,000,000,000 worth of inflation, is it possible that you could potentially offset That entire volume declined because you get a lot of this inflation back and maybe PPG's earnings look a little bit more resilient than maybe in the past.

Speaker 2

Well, Mike, I think we certainly have built a more resilient company, just start with that as a basic premise. 2nd, I do think that we're going to keep a lot more raw materials in our pocket. So if you do see a Raw material decline, I think that's going to flow through the P and L a lot quicker than you think. And I think that's a little bit of what People are missing in this analysis. And quite honestly, this recession, if there is one, which I still don't think there's going to be a significant one if there is one.

Speaker 2

We have a different portfolio right now. So think about traffic solutions. I mean, that business runs no matter what happens, and they are behind on that, plus you have demographics Where they're going to have thicker lines, more the lines are going to be longer. So those things are going to be positives. You also have the fact that we have a supply significant deficit here in the U.

Speaker 2

S. Of cars. That's going to be different. And we have a significant deficit of planes, and that's going to be different. And the new planes that are coming out are much more fuel efficient In the old planes, so it's not a matter of whether they're going to keep the old planes in the air, they're not going to do that.

Speaker 2

They're going to replace these because of the fuel efficiency. And so if you believe that $100 oil is here for a long a moderate period of time, The plane guys, those are economics they cannot afford to miss. So that's why they're going to be replacing these planes. So I think that's all good. And what's interesting about this work from home stuff is that The dynamics are people are driving in the suburbs more and less on the highway, which leads to more lower speed collisions.

Speaker 2

So So totals were down 2%, and I anticipate totals continuing to decline, And that's good for our Refinish business. And by the way, if you get in an accident right now, you better be prepared to wait because there's about a 6 week The average backlog to get a car repaired is about 6 weeks right now. That's assuming they get the parts. So I'm feeling pretty good about that.

Speaker 5

Yes. And Mike, this is Vince again. Just your comparison, we'll just compare to the last recession. Obviously, there was a housing overhang globally in the last recession. There was an auto overhang in the last recession.

Speaker 5

We're not seeing those. Michael talked about aerospace. We expect that to be in recovery mode, Auto in a recovery mode. As it relates to PPG's portfolio in a different in the disposition of traffic solutions versus the last recession, we have PPG Comex, Which is a very steady business for us. We also have some other businesses in other parts of the world that are more steady.

Speaker 5

So again, I think Michael's Comments at the outset that we've built a better portfolio, more resilient portfolio takes into account some of those things.

Speaker 10

Hey, Mike, it's Tim. Just to pile on here, even one more business from a recession or potential recession resiliency standpoint. The military part of our Aerospace business given what's happening in geopolitically, tremendous backlog there too.

Operator

Thank you. Our next question comes from Jeff Zekauskas from JPMorgan. Jeff, please go ahead.

Speaker 16

Thanks very much. Your volume expectation in Performance Coatings for the Q3 is Flat to down a low single digit percentage. Isn't that too low? And that I understand that European Deco is weak, But isn't aerospace better and auto refinish? And last year, there were very there were Shortages in raw materials in the North American architectural market, shouldn't volumes be up in the Q3?

Speaker 16

And then for Vince, Inventories and receivables are going up at maybe about a 10% rate and payables are maybe going up at half that. Is that a trend that's going to continue and why the difference?

Speaker 5

Yes, Jeff. I'll take the second question first. Again, on inventory, we came into the quarter we came into the year With a focus on having excess inventory where possible in order to have supply to our customers. So we're certainly looking at that as we go to the back half of the year. We'll ratably work that down As supply conditions have improved and continue to improve, receivables are up simply because our pricing is up and we have a bigger book of business.

Speaker 5

Perceivables are up $600,000,000 or $700,000,000 on a year over year basis. We'll collect those. We're not seeing Any significant deterioration on collections, so that the high receivable balance, Jeff, will turn to Cash in the 3rd and fourth quarter. Payables, again, we're timely with our suppliers. So nothing to speak of there.

Speaker 5

As it relates to the Performance Coatings volumes, there's a variety of different moving pieces. Aerospace up, as you mentioned, we do see DIY down both in Europe, U. S, also in other mature regions like Australia. We do have a slowing we do have some challenges in our protective business when you go into Q3, really a residual hangover From Q2 in China. So with a reporting segment, you always have puts and takes.

Speaker 5

It's our best guess at this time. Hopefully, we're being conservative, but that's our best guess at this time.

Operator

Thank you. Our next question comes from Duffy Fischer from Goldman Sachs. Duffy, please go ahead.

Speaker 17

Yes, good morning. Question just around raw materials. If you could talk about the different buckets, solvents, resins, pigments, maybe packaging, What's your view what's happening with price and availability going into the back half of the year? And then maybe kind of what do you think The 2 year outlook is for some of these raw materials that have been quite tight.

Speaker 2

Well, let's start with the negative first is that emulsions continue to be a bit of a challenge for us, and there have been a few Force majeure, as you probably saw the 1 and all next recently. So it's not we're not out of the woods Not yet, but we've seen TiO2 and China get weaker. We're seeing TiO2 from Kind of being shipped into Europe. I certainly see epoxies in Asia getting weaker as well. I think that there's a number of our solvents that are now flattening out.

Speaker 2

Availability is much improved, but the pricing is flattening out. And I think the same thing with packaging. Packaging is flattening out. And so I think when I look at our overall, we bucket our raw materials into about 12 different buckets. Last quarter, I had 11 out of 12 were red.

Speaker 2

Coming into this quarter, we have 4 or 5 of them that are yellow. That means the prices have moderated and we actually have one green on the chart. So And I when we look ahead to the Q4, we see improvement in a number of those as well. So I think we're coming to the end of that raw material inflation, And that's good for us. Sequentially, we see low single digits in the 3rd quarter, and I think you should expect Sequential improvement in the Q4.

Speaker 10

Duffy, it's Tim. Just to add to what Michael said, while Supply is significantly better than it was at the beginning of Q2 and certainly better than last year. We still have spot supply issues, I would call it, in refinish, in auto, in architectural. So we're not quite back to what you would call completely normal supply pre COVID kind of supply situations, although sequentially much better and we expect that Sequentially continued to improve.

Speaker 5

NW, you asked about this event just about 2 years. That's beyond our Forecasting horizon, we're typically 3 to 6 month window is the best forecasting visibility we have. We certainly can't go out 2 years. There is structural commodity supply being built in China, which is we expect to fully exploit, But that's the best we could give on a 2 year loan.

Operator

Thank you. Our next question comes from Vincent Andrews from Morgan Stanley. Vincent, please go ahead.

Speaker 18

Yes. Thank you. Just wondering if you can talk a little bit about The cost work you're doing in Europe and whether that's sort of structural or just sort of temporal and along those same lines, given sort of the Normalization in DIY, has there been an opportunity to reduce maybe promotional spending and maybe that was already being reduced During the hot demand period, our ad spending, was there anything changing on how you're allocating investment spending into that business?

Speaker 2

Well, certainly on the ad spending, as you see the decline, you're also getting near the end of the paint season by the time the quarter It's going to be over. So that is on a decline. That's typical though, so that's not really that much of a difference. We do bucket our cost reductions in Europe into 2 things. 1 is structural and 1 is short term.

Speaker 2

The structural ones, you see that flowing through. We have Plants that we have targeted to be closed, we have headcount that were taken out. We have productivity initiatives Through dispense cells and other high volume packaging equipment that is driving productivity in the plant, all those things are underway. And then, of course, we are on a temporary basis. You are reducing headcount as You're seeing that lower demand in the Architectural segment.

Speaker 2

So I'm feeling comfortable that we're going to continue to Grow margins, if you look at our history in Europe, we have consistently grown our earnings in Europe year over year regularly. So I don't think this should be any different this year.

Speaker 10

Hey, Vincent, Tim here. Tim Tanavish. We also have continuation of the Ticarilla Synergies, which of course are structural, we've captured a lot of those, but footprint wise and back office wise, we Continue to make progress there. And just to put some perspective, margin improvement progression has continued In our AC Europe business despite the volume challenges and we expect that to continue as well.

Operator

Thank you. Our next question comes from Mike Leithead from Barclays. Mike, please go ahead.

Speaker 18

Great. Thanks. Good morning, guys. Just on auto OE, I was hoping you could give some context about your volume levels Today versus maybe say pre pandemic, I'm just trying to figure out if we get back to say a 2019 type build rate, what sort of upside does that offer? And maybe just remind us what type of incremental margin levels we should think about broadly for your Industrial Coatings business today after all the restructuring and whatnot?

Speaker 2

Well, Mike, if I remember right, last year, there was about 78,000,000 cars built. We're on a Pat, to have a little bit over 80,000,000 cars built. At the peak, it was 95,000,000 cars. And there's Substantial backlog of vehicles that need to be built. And plus, I think what you're going to be seeing, You're already starting to see some of these electric vehicles being made in China that are being exported to Europe.

Speaker 2

So you're going to start to see a better mix in our automotive business because of mobility. And right now, Our margins in automotive are improving on a sequential basis. So what I would do is I'd look back at the historical margins in our Industrial segment and you know automotive is the biggest business in that, so they're going to be somewhat close to that margin And that's the way I would do the math.

Speaker 5

Yes. And Mike, if I could just elaborate a little bit on what we call the latent demand in auto here. We talked about this last quarter, but U. S. Dealer inventory somewhere below just below 30 days.

Speaker 5

Typically, that's 60 plus, 70 plus. So the inventories need rebuilt. There's a big fleet rebuild process that has to take place in the U. S. That includes just company owned cars as well as other fleet vehicles.

Speaker 5

That's a significant impact. There is a European fleet that also at some point will be rebuilt. There's a significant amount of employees that have company cars in Europe. So that's another adder. And that those latent things in addition to the demand where most cars are on back order.

Speaker 5

So again, we have comfort the next 12 plus, 15 plus months for a solid recovery back toward that, It was called high 80s, low 90s level. So we're still down about almost 20% in the industry versus pre pandemic.

Operator

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

Speaker 19

Hi, good morning. I was wondering if we could go back to some of the raw material availability issues and And specifically dig in on what's going on in the Refinish business. It sounds like some of the raw material and logistics bottlenecks That you've been seeing are going to continue into Q3. So maybe just a little more detail on what you're seeing there. What It's happened to get some resolution to those supply issues.

Speaker 19

And I guess, is your expectation that that improvement is going to happen sometime this year? Or is that an early 'twenty three thing? What's the timing look like? Thank you.

Speaker 10

Hey, Mike, it's Tim. We despite having a record quarter in Refinish and we expect that kind of performance to continue, We do have persistent, I would call them one off shortages from a raw material standpoint That have led to some of the backlogs in addition to the backlog of works that our customers have, we've got a backlog Just to catch up and refill the channel because of these one offs. That won't get fixed overnight. It continues also to sequentially improve. And I expect us to continue to work our way through that through the rest of this year, which frankly is some pent up upside for us Because in addition to the high body shop activity levels that we have notably here in the U.

Speaker 10

S, we've got this

Operator

Thank you. That is the end of the Q and A session. So I'll now hand you back over to John Bruno for closing remarks.

Speaker 1

Thank you, Lauren, and everyone for listening for your interest in PPG. I look forward to talking and seeing many of you in the coming weeks. This concludes our Q2 earnings call. Have a good day.

Operator

This concludes today's call. Thank you for joining. You may now disconnect your lines.

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