PPG Industries, Inc. (NYSE:PPG) Q4 2023 Earnings Call Transcript

PPG Industries, Inc. (NYSE:PPG) Q4 2023 Earnings Call Transcript January 19, 2024

PPG Industries, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Elliott, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter PPG Earnings Conference Call. [Operator Instructions] Thank you. Now I’d like to turn the conference over to Jonathan Edwards, Director of Investor Relations. Please go ahead, sir.

Jonathan Edwards: Thank you, Elliot, and good morning, everyone. This is Jonathan Edwards. We appreciate your continued interest in PPG and welcome you to our fourth quarter 2023 financial results conference call. Joining me on the call from PPG are Tim Knavish, Chairman and Chief Executive Officer; Vince Morales, Senior Vice President and Chief Financial Officer; and John Bruno, Vice President of Finance. Our comments relate to the financial information released after U.S. equity markets closed on Thursday, January 18, 2024. 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 of the company’s results, 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. And now let me introduce PPG’s Chairman and CEO, Tim Knavish.

Tim Knavish: Thank you, Jonathan, and congratulations on your new role, and good morning, everyone. Welcome to our fourth quarter and full year 2023 earnings call. I’d like to start by providing a few highlights on our fourth quarter and full year 2023 financial performance, and then I will move to our outlook. In the fourth quarter, the PPG team delivered strong financial results, including record fourth quarter sales of $4.4 billion and adjusted earnings per diluted share of $1.53. This is our fourth consecutive quarter of delivering record sales as we continue to benefit from organic sales growth. Our fourth quarter adjusted EPS was 25% higher year-over-year driven by aggregated segment margin improvement of 260 basis points compared to the fourth quarter of 2022 as we continue to be laser-focused on driving margin improvement.

Our results reflect our continuing growth trends and strong execution in several of our leading and technology advantage businesses, which culminated in record fourth quarter sales in the aerospace, automotive OEM and automotive refinish businesses with strong performance in the Protective & Marine and PPG Mexico Architectural Coatings businesses. Our year-over-year sales volume trend improved compared to recent quarters, decreasing less than 1% year-over-year. We continue to experience lower global industrial production along with soft U.S. and European architectural demand, especially for DIY-related products. Notable for us during the quarter was China, where despite a lethargic general economy we achieved high single-digit percentage volume growth, reflecting our strong mix of businesses in the country.

In addition, we delivered flat year-over-year volumes in Europe as we see economic stabilization in the region, albeit at lower absolute demand levels. Our selling prices were about 2% higher with both segments delivering positive price led by the Performance Coatings segment. We expect total company selling prices to remain modestly positive in the first quarter of 2024 as new selling price increases have been implemented in several of our businesses. We also benefited from further normalization of our operations as we experienced stabilization of both upstream and downstream supply chains and order patterns. From a supply perspective, the vast majority of our suppliers have more than sufficient capacity heading into 2024. We started the year laser-focused on margin recovery and the fourth quarter marked our fifth consecutive quarter of year-over-year operating segment margin improvement.

And as I mentioned, fourth quarter aggregate segment operating margins increased 260 basis points year-over-year and full year increased 310 basis points. We also achieved our second key priority for the year by delivering excellent cash generation of nearly $900 million during the fourth quarter, which was up over $300 million on a year-over-year basis, leading to record full year cash generation of over $2.4 billion. We significantly reduced working capital by a total of about $600 million on a sequential quarterly basis and this includes the benefit from a partial reduction of our inventory levels. However, we still ended the year with higher inventory levels from a historical perspective, primarily in raw materials and will continue to reduce inventory in the first half of 2024.

The strong cash generated drove a reduction in net interest expense by about $20 million compared to the fourth quarter of 2022 as we repaid some high variable cost debt during the quarter. Additionally, we repurchased $100 million of stock in the fourth quarter, which essentially offset dilution. Now a few comments on the full year 2023. As we communicated at the beginning of 2023, my priorities included margin recovery, strong cash generation and further strengthening of our capabilities to support our customers’ productivity and sustainability needs, which will result in higher PPG organic growth. Coming into 2023, we had a high degree of conviction that our global business portfolio would prove resilient while anticipating a challenging economic environment, and these clearly played out during the year.

For the full year, I’m proud of our team’s execution against our strategic objectives as it resulted in delivery of record sales, record adjusted EPS and record operating cash flow. Our sales performance was led by continued selling price execution to offset significant multi-year cost inflation. Our year-over-year earnings growth was driven by these improved selling prices coupled with moderating input costs and cost structure reductions stemming from our cost management and restructuring initiatives. This resulted in improved margins in both segments. Our businesses delivered innovative and value-added products and solutions to our customers, and this enabled several of our businesses to set all-time annual sales records, including our aerospace, auto OEM, automotive refinish, architectural Mexico and the Protective & Marine coatings businesses.

Our enterprise growth initiatives delivered about $150 million of incremental sales in the first year, including strong growth from selling our innovative products for electric vehicles, as well as our share gains in powder coatings. In automotive refinish, customer adoption of our industry-leading digital tools accelerated yielding nearly 2,000 net body shop wins. These digital tools include our Link Services and moonwalk mixing machines, both of which are best-in-class and are focused on improving bodyshop productivity. In Mexico, we further advanced cross-selling of our valued products, including protective coatings and certain light industrial coatings through the best-in-class distribution network of nearly 5,200 concessionaire locations.

Finally, our strong focus on the customer drove share gains across several businesses including expansion of our architectural coatings products at Walmart. Strategically, we conducted an ongoing review of both our product and business portfolios leading to the divestiture of several non-core assets including our European and Australian Traffic Solutions businesses, along with the recently announced strategic alternatives review of the silicas product business. In a variety of cases, we also simplified and improved our product offering, allowing us to reduce complexity and drive down working capital. Finally, these actions plus strong balance sheet management resulted in record full year 2023 cash generation of $2.4 billion. So overall, we achieved excellent financial results in 2023 and are anticipating improving from this higher base in 2024.

We remain confident that we will deliver positive sales volume in 2024, including benefits from China, India and Mexico. We’ve delivered share gains in several businesses, including auto refinish, packaging and the protective and marine coatings businesses. We will also execute on our more than $250 million order backlog in Aerospace drive further growth in our well-positioned businesses in Mexico and further expand the benefits of our key growth initiatives, including powder coatings, electric vehicle products and digital solutions. We will drive further improvement of our operating margins aided by the sales volume growth leverage and our initiatives that drive manufacturing productivity following several years of supply chain and other disruptions.

Lastly, we entered 2024 with a strong balance sheet, which provides us with the flexibility for further shareholder value creation going forward, including funding organic growth initiatives, appropriate acquisitions, debt repayment and share repurchases. Now, I’ll comment on our first quarter outlook. We expect to deliver sequential adjusted EPS growth from $1.53 per share in Q4 2023 to a range of $1.80 to $1.87 per share in Q1 of 2024, an increase of 20% at the midpoint of the range. We anticipate global industrial production to remain soft, and our year-over-year sales volume performance will be unfavorably impacted by the approximate $40 million non-recurring Walmart customer load-in that occurred in the first quarter of 2023. Also, the timing of the Easter holiday will shift some sales into the second quarter.

Despite these difficult year-over-year comparison items, we expect our first quarter sales volume will be flat overall, aided by positive sales volume growth in our aerospace, Protective & Marine and packaging, coatings businesses. We project solid growth in our Auto OEM business in Asia Pacific, where we expect to drive solid volume growth in China, led by our strong positioning with the electric vehicle OEM producers. Additionally, we expect to deliver organic sales growth through our best-in-class Mexico distribution platform. We anticipate overall company selling prices to remain positive, as some modest declines in our industrial reporting segment related to a small portion of customer-based index contracts will be more than offset by targeted selling price increases in our Performance Coatings segment.

First quarter comparisons also include declines in certain transitory European and energy-related pricing indices, that were put in place during the period of extremely high energy prices in the region. These particular price declines are offset by lower purchased energy costs for our facility. The net selling price increases, along with various productivity initiatives will serve to offset somewhat higher expected wage inflation in 2024, especially in emerging regions. With regard to commodity raw materials, supply remains ample, and we will continue to realize benefits from moderating input costs including further recognition of savings stemming from working down, our higher inventories as we progress through 2024. We will diligently manage our costs and expect to deliver manufacturing and productivity gains supported by a more stable supply chain and customer order patterns.

We anticipate more moderate year-over-year earnings growth in the first quarter associated with some of the transitory items, I mentioned earlier. However, we are confident that we will deliver our commitment for full year earnings growth of around 10% at our forecast guidance midpoint. Finally, I want to thank our more than 50,000 employees for making it happen by delivering excellent 2023 financial results and positioning the company for growth and value creation in 2024 and beyond for the benefit of all stakeholders. Thank you for your continued confidence in PPG. And this concludes our prepared remarks. And now would you please open the line for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] First question comes from David Begleiter with Deutsche Bank. Your line is open. Please go ahead.

David Begleiter: Thank you. Good morning. Tim and Vince, do you expect total company pricing to be up in 2024? And I presume that if it is, it’s a positive performance than Industrial. Within performance, are you seeing pressure from big box retailers to lower your paint prices?

TimKnavish: Hi. Good morning Dave. Thanks for the question. We will have positive company price for full year 2024. Again, to your point, largely from Performance Coatings and more targeted beyond that. As far as big box pricing, most of the big box pricing is contractual and so I wouldn’t say that you’ll see a significant movement in that pricing throughout the year.

Operator: Our next question comes from John McNulty with BMO. Your line is open. Please go ahead.

John McNulty: Yes. Thanks for taking my question. So, maybe a little bit more color on the raw material front. Can you speak to relative to what you reported in the fourth quarter, how much lower our raw materials that you’re buying right now? Because it does look like things are held up a little bit because of FIFO and also some of your destocking. Is it just the mid-single-digit dip that you guided to for 1Q? Or is there more to it than that? And how should we be thinking about that?

Vince Morales: Yes, John, this is Vince. If you look throughout all of last year, we continued to accrue larger benefits from the moderation of raw materials. We will remind everybody raw material costs are still higher on a multiyear basis by a significant amount. As Tim mentioned, most of our suppliers have more than ample capacity, and it’s certainly a focus for them to pick up more volume. We expect some incrementally better invoice benefits from raw materials, and then that will eventually flow through our P&L as we go through the year. But year-over-year, we expect some incrementally beneficial invoice pricing.

TimKnavish: Yes. And I would just add — this is Tim, John. Thanks for the question. I would just add that fundamentally, upstream of us, it’s still a pretty long environment. No issues on our end from availability and I think that’s a good indicator for us as we move through the year as well.

Operator: Our next question comes from Ghansham Panjabi with Baird. Your line is open. Please go ahead.

Ghansham Panjabi: Thanks, operator. Good morning, everybody. Tim, I want to go back to the question that was asked earlier about pricing. As you kind of zoom out a bit, price for PPG as a whole has been up over 20% since 2021, and a lot of that is just enormity of the raw material cycle and so on and so forth, which seems to have changed significantly. Your confidence on pricing holding or being up in 2024 and maybe even beyond that. Is that based partly on the mix change in the portfolio with aerospace and so on and so forth? Or is there something unique about the industry structure now that’s going to allow you to hold on to the enormity of these price increases, but raw materials doing what they’re doing?

TimKnavish: Yes. Hi, good morning Ghansham. It’s not a mix issue for us, Ghansham. It’s more – first of all, I’m very pleased with how we’ve continued to hold price, even just closing out fourth quarter with another 2% increment. Again, we’ll be positive in Q1, the confidence level is more because of a couple of things. One, to Vince’s point earlier, raws are still quite elevated. We’re talking about coming off of extremely high peaks. And so — but they’re still quite elevated from, say, 2019. So we don’t see what I would characterize as massive deflation by any means. And the confidence level as we move through the year, I’ll talk Performance Coatings. We — as you know well, we get price almost irrespective there of the raw material environment, because of the unique value proposition that we deliver in performance where we’re such a small part of the cost structure of our customers from a pure paint standpoint, but the value add outside of the can that we deliver is such a big significant impact on their cost structure.

So that’s a very different model there. And on industrial side, where maybe it is more proportionate to raw material increases or decreases, we just don’t see the long supply dynamic upstream of us changing dramatically as we move through the year. When you think about, for example, China, just not having a V-shaped rebound in China is a big consumer of raws. So we expect a more moderate environment as we move through 2024.

Operator: Our next question comes from Duffy Fischer with Goldman Sachs. Your line is open. Please go ahead.

Duffy Fischer: Good morning, guys. Two questions. First is cash flow as a percent of EBITDA. If you hit the midpoint of your guide this year, EBITDA should be up about $250 million. Should we expect a commensurate move in cash flow would be one, and then two, in the auto OE business, you guided to down low single-digits coming into Q4. You did mid-single digits up, again, guiding down in Q1, is that just conservatism? Because when you look at the auto numbers, it seems like auto OE should be better than that unless there’s some pricing in there. So can you just talk about what you’re seeing in auto OE for Q1 price versus volume?

TimKnavish: Yes. Duffy, this is Tim. I’ll do the auto one. I’ll let Vince do the cash versus EBITDA one. Auto had a really good year for us last year, and we are well positioned for what we view as a multiyear recovery. So I personally continue to be bullish on auto as we look into the full year 2024, when you look at our Q1, and we went from up mid-single digits in Q4, and we’re projecting low single-digits down in Q1, a lot of that, if you go back to last year, we were a strong double-digit up in Q1 of 2023. And also, yes, there is some, as I mentioned in my opening remarks, we do have some of our index pricing rolling back and that has some impact. But I would not — personally, I’m not overconcerned about auto volumes as we move through the year.

I think total builds were 89-point-something last year. I believe there is some incremental upside to that as we move through 2024. Our share position is good. Our China auto position is really good. And as you know, out of the 90 million new builds, about 30 million will come out of China. So overall, feeling good about auto. There’s a little bit of a year-over-year comp soft point and a little bit of index pricing rolling off in Q1.