The conference call for PPG's third quarter 2023 financial results is being led by Emily, the operator, and John Bruno, Vice President of Investor Relations. Tim Knavish, Chairman and CEO, and Vince Morales, CFO, will provide commentary and answer questions. Detailed commentary and presentation slides are available on the company's website and the call may contain forward-looking statements.

In the third quarter of 2023, PPG had a record financial performance with sales of $4.6 billion and adjusted earnings per diluted share of $2.07, both higher than the previous year. The company also had a record cash generation of over $1.5 billion. The strong results were driven by non-recurring favorable discrete income tax items, as well as good growth and strong execution in leading and technology advantaged businesses, resulting in record sales in several divisions. PPG is on track to finish the year with all-time record adjusted earnings per share.

The company's third quarter sales were impacted by global industrial production and cautious consumer buying patterns, but selling prices increased by 3%. The company has been focused on restoring its margin profile and saw a 260 basis point improvement in operating segment margins. Both operating segments saw at least 25% earnings growth and strong cash generation, with $1.5 billion in operating cash generated in the first three quarters. The company also reduced working capital and used some of the cash to pay off debt. Going into the fourth quarter, the company is focused on achieving top line sales and earnings growth in 2024.

PPG is actively pursuing various commercial growth opportunities, such as supporting the production of electric vehicles in China and expanding the product offerings through their distribution network in Mexico. These initiatives, along with prudent investments in powder coatings, are expected to drive sales growth in the coming years. Additionally, PPG's strong cash generation and strategic capital deployment are expected to contribute to future earnings growth.

The company plans to continue managing its balance sheet and cash flow effectively, using it to repay debt and potentially repurchase shares. They have also been divesting some smaller assets and focusing on areas where they have a competitive advantage. In the fourth quarter, they expect growth in some of their Performance Coatings businesses, but anticipate a slowdown in demand for architectural coatings due to high interest rates and lower housing turnover.

The company expects growth in its automotive OEM business in the fourth quarter, but other areas of the Industrial Coatings segment may be impacted by slow global industrial production. They have included an estimated financial impact from the UAW strikes in their fourth quarter guidance. However, the strikes only affect a small portion of their total sales and any lost volume is expected to be made up in subsequent quarters. Other sales volume challenges are starting to improve, and they do not anticipate significant destocking in their packaging coating market in 2024. Commodity raw material supply has normalized and they will continue to manage costs and make progress on restructuring initiatives. Despite the challenging environment, they have raised full year earnings guidance and expect higher segment margins in the fourth quarter. The company thanks its team members for their hard work and remains confident in their ability to support customers and overcome challenges.

The speaker thanks the audience for their support and concludes their prepared remarks. They then open the line for questions and the first question is about the raw material environment. The speaker explains that while there has been a jump in oil prices, their raw material basket is more dependent on supply and demand. They expect high-single digit deflation in Q4 and further deflation in 2024. The supply and demand environment is a bigger driver of their input costs and they expect this trend to continue into the seasonally lower fourth quarter.

In the paragraph, Vince Morales and Tim Knavish discuss the impact of rising oil prices on the company's fourth quarter and negotiations with suppliers. They also address the difference in margins between the Industrial and Performance segments, attributing it to the timing of price increases and productivity improvements. They expect both segments to see continued margin improvement in the future. The next question comes from Ghansham Panjabi with Baird.

Ghansham asks about the sustainability of high-margin verticals in the coming years and the expected volumes for each segment. Tim Knavish mentions that aerospace will continue to perform well due to their unique technology and strong backlog, while PPG Comex has had record performance for 13 consecutive quarters and is expected to continue gaining share in the architectural business. He also mentions that they are focused on accelerating growth in other areas. Overall, they are confident that there will be positive volume growth in 2024, supported by several positive indicators throughout their portfolio.

The speaker discusses the company's performance in different regions and predicts growth in China and Mexico, while also mentioning their focus on innovation and outgrowing certain end markets in the future.

The speaker discusses progress in various areas, such as sustainable products and digital innovations, which are expected to lead to growth in the future. They also mention winning share with EV producers and increasing content per vehicle. The speaker expresses confidence in these investments and their potential to positively impact the company's performance. A question is then asked about the strong cash flow and potential deployment opportunities in the fourth quarter.

The speaker discusses the company's strong cash flow in the third quarter and plans to use it to pay off debt and potentially buy back shares. They also mention expectations for continued strong cash flow in 2024 and plans to work down excess inventory. In addition, they mention some negative volume in the U.S. refinish sector due to customer issues.

Tim Knavish, responding to a question from Vincent Morales, discusses the company's growth in the U.S. refinish market, driven by their digital technology. He notes that sales are made through distributors, who may fluctuate their inventories based on interest rates. However, the company remains confident in their growth based on their net body shop wins. Vince Morales adds that the body shop business is still strong, with a backlog and solid metrics. In response to a question from Stephen V. Byrne, Tim discusses the potential for cross-selling among their businesses, using Comex as an example. He notes that there is also potential for geographic share gain in other regions.

PPG's protective coatings business has strong cross-selling opportunities with its architectural and light industrial coatings. The company leverages these opportunities globally, with a particularly strong distribution network in Mexico. They also have multiple angles to serve customers in the battery factory construction industry, including with protective coatings, architectural coatings, and industrial coatings. When asked about the impact of FIFO on raw materials, PPG did not provide a specific percentage, but stated that they would be down more if they were on LIFO.

In response to a question about inventory and volume growth in the third quarter, the company's executives discussed the complexity of the issue and provided a detailed explanation. They also addressed the potential for increased volumes in the fourth quarter. The discussion then shifted to margins, with the executives mentioning the potential for improved margins in the Industrial sector and the potential impact of seasonality on Performance.

The speaker discusses the current margins in the Industrial segment, which are in the high 13% range and have improved by 300 basis points from last year. They attribute this improvement to volume recovery and operational improvements. They also mention that they have not seen any significant price givebacks in this segment. When asked about Q4 guidance, the speaker says they have assumed a $0.03 impact from the UAW strike and do not provide further details on professional contracted backlogs.

The company has experienced negligible impact from the UAW strikes in Q3, but they have factored in a $0.03 impact for Q4. The backlogs for the Pro business in the U.S. architectural side are holding up well, with only a slight decrease in average backlog time. The company has been pruning their portfolio and recently sold the Australia, New Zealand portion of Traffic Solutions. The speaker, Tim, is asked to provide context and details on this pruning process and if there is more to come.

The speaker discusses their company's strategy for pruning underperforming businesses and focusing on organic growth. They also mention their continued interest in value-creating acquisitions in the coatings industry.

The company has experienced slower growth in acquiring new businesses due to high financing costs and the current macroeconomic environment. However, they still have a strong pipeline of potential acquisitions and view it as a preferred method for deploying their surplus cash. In the architectural segment, the company has performed well in Mexico and Europe, with flat volumes being seen as a positive sign in Europe. In the U.S., the company is focused on building a business model for the future.

The company is in the early stages of building a brick-and-mortar omni-channel model and converting paint customers. They aim for high-single digit, low-double digit growth every quarter, but in Q3, they only saw low-single digit growth due to housing market conditions. They are focused on long-term success and see their U.S. architectural business as a marathon, not a sprint. For the fourth quarter, they expect low-single digit sales growth to minus, with positive volume in the Performance segment and lower volumes in the Industrial segment due to the UAW impact.

The speaker discusses the potential for flat volume in the Industrial Coatings segment without the impact of the UAW strike. They also mention positive factors for the Architectural Coatings U.S. segment, such as growth in omni-channel and backlogs. However, there is uncertainty about the DIY market and potential destocking by retailers. The speaker also congratulates John on his promotion and mentions wage inflation and higher accruals at PPG. Finally, they note that fourth quarter volumes may have been positive if not for the UAW strike.

Tim Knavish, PPG's Executive Vice President, is confident that the company will see positive volume growth in 2024 after nine consecutive quarters of negative volumes. He acknowledges that the UAW strike and customer mix may affect this, but believes that China and Europe will show improvement and the aerospace backlog will continue to drive growth. He also expects productivity and a sequential increase in automotive builds to contribute to positive volume in 2024.

Tim Knavish, responding to a question about the company's ability to stay ahead of wage inflation, states that they will use a combination of price and productivity to offset any increases. He also mentions that the company's mix of businesses has a low human capital intensity, except for company-owned stores. In response to a question about pricing initiatives, Knavish states that the company will see incremental targeted pricing in the Performance segment in 2024 due to the value add they provide to customers.

The growth in powder coatings for PPG is mainly due to share gain, not conversion of existing customers. The company has a low market position in powder and the margin profile for powder coatings is not significantly different from liquid coatings.

In this paragraph, the speaker discusses their company's strategy for increasing market share and converting customers from liquid to powder paint. They mention targeting higher-end segments for increased margins and the long-term sustainability of powder paint. They also state that they are confident in reaching a $9 EPS level in the future.

The speaker expresses full confidence in their company's new growth strategy and believes they will hit their target of 8-12% EPS growth by 2024. They attribute this growth to positive volume, capital deployment, and innovation initiatives. The speaker thanks the participants and ends the call.

This summary was generated with AI and may contain some inaccuracies.