Fourth Quarter Consolidated Results

Chairman and CEO Comments

Tim Knavish, PPG Chairman and Chief Executive Officer, commented on the quarter and 2023:

Capping off a record year, the PPG team delivered solid year-over-year sales growth, strong adjusted earnings growth and record operating cash flow. The breadth and diversity of our business portfolio was a key driver to our record fourth quarter performance, as we benefited from solid volume growth in China, demand stabilization in Europe and continued growth in several key end-use markets such as aerospace, automotive original equipment manufacturer (OEM) and protective coatings.

We made strong progress on returning to our historic segment margin profile while delivering segment earnings growth of 30% and an aggregate segment margin improvement of 260 basis points, marking the fifth consecutive quarter of year-over-year margin improvement. Additionally, our earnings growth and working capital management resulted in strong cash generation in the quarter and record operating cash flow of over $2.4 billion for the year. We ended the year with a strong balance sheet that, coupled with our legacy of solid cash flow, provides us with shareholder value creation opportunities going forward.

Looking at the full year, in addition to our record financial performance, we successfully implemented various strategic initiatives to strengthen the company, including key actions to position PPG for higher organic growth. We also executed on our ongoing portfolio review leading to the divestitures of both our European and Australian Traffic Solutions businesses and the recently announced strategic alternatives review of the silicas products business. Finally, we have continued our heritage of rewarding our shareholders with our 124th consecutive year of dividend payments, including 52 consecutive years of dividend increases.

Looking ahead, while global industrial production remains at low absolute levels, we expect that demand for our businesses in China will continue to improve. In Europe, we believe that economic activity will stabilize in 2024 at current levels. In the U.S., we anticipate that economic conditions will remain subdued during the first half of 2024, and in Mexico, which is now our second largest country in terms of total net sales, we expect strong momentum to continue. From a PPG perspective, we plan to deliver volume growth in 2024 by executing on our key strategic growth initiatives and fully capitalizing on continued demand in several areas, including aerospace and Mexico, which will also benefit from cross-selling initiatives through our concessionaire network.

We are laser focused on maintaining the unwavering support of our customers as we leverage our strong brands and provide technology-advantaged products and solutions that enhance their productivity and sustainability. We aim to build on our strong 2023 financial performance by continuing our growth and value creation in 2024 for the benefit of all stakeholders. Finally, I want to thank our more than 50,000 employees around the world for “making it happen” in 2023 and positioning us for growth in 2024.

Fourth Quarter 2023 Reportable Segment Financial Results

Performance Coatings Segment

Performance Coatings net sales increased 5%, led by higher selling prices and favorable foreign currency translation.

Sales of PPG’s technology-advantaged aerospace products remained strong, as the business delivered mid-teen percentage organic sales growth year over year. Protective and marine coatings delivered mid-single-digit percentage organic sales growth driven by strong volume growth in the U.S. and Europe. Automotive refinish coatings organic sales grew by a low single-digit percentage, aided by growth in Europe and Asia. In the architectural coatings Americas and Asia-Pacific business, organic sales decreased a low single-digit percentage. Architectural coatings in Mexico delivered another strong quarter, as we continue to benefit from a growing Mexican economy and our excellent Comex brand. U.S. and Canada architectural coatings sales were lower, as growth in the professional contractor channel was more than offset by continuing softness in do-it-yourself demand. Organic sales for architectural coatings in the EMEA region were down by a low single-digit percentage, as the benefit of higher prices was more than offset by lower but moderating volumes.

Segment income increased by 19% versus the prior year primarily due to higher selling prices and moderating input costs. Segment operating margins improved by 150 basis points year over year.

Industrial Coatings Segment

Industrial Coatings segment net sales were higher compared to the fourth quarter 2022 aided by favorable foreign currency translation.

Automotive OEM coatings organic sales increased by a mid-single-digit percentage with higher selling prices in all regions and higher aggregate sales volumes led by our market share gains in the Asia-Pacific region and Mexico. Offsetting this sales volume growth was lower global industrial activity which resulted in softer demand in all other businesses in the segment. Industrial coatings organic sales declined by a mid-single-digit percentage with lower volumes in most sub-segments. As expected, packaging coatings organic sales were down a low single-digit percentage driven by softer customer demand in Europe and Latin America partially offset by strong growth in the U.S. and the Asia-Pacific region.

Segment income was higher than the prior year by $75 million, or 48%, primarily due to input costs moderating from historically high levels and improving manufacturing performance. Segment margins improved by 420 basis points compared to the fourth quarter 2022.

Full-Year 2023 Financial Results

Record full-year 2023 net sales were approximately $18.2 billion, up about 3% versus the prior year. Organic sales were higher by 3% driven by higher selling prices. Adjusted EPS was also a record, increasing 27% due to higher selling prices, moderating input costs, structural cost savings and favorable foreign-currency translation, partially offset by lower sales volumes. Ending the year, input costs and inventory levels remain above historical levels.

In 2023, the company paid approximately $600 million in dividends. Capital expenditures totaled about $550 million. The company repurchased $100 million of stock in the fourth quarter and had about $1 billion remaining on its current share repurchase authorization at the end of 2023.

Additional Financial Information

Fourth quarter reported EPS included a non-cash charge of $0.67 reflecting goodwill impairment for the Traffic Solutions business. The fair value of the Traffic Solutions business decreased primarily due to an increase in the weighted cost of capital (discount rate) assumption reflecting the current interest rate environment.

• Corporate expenses were $100 million in the fourth quarter, higher than the prior year primarily due to increased performance and shareholder return-based incentive compensation along with non-cash pension expense.
• The reported and adjusted effective tax rates were 46.4% and 22.0%, respectively, in the fourth quarter. The reported rate was impacted by the fourth quarter non-cash charge for impairment and certain other charges, for which there was not a tax benefit.
• Net interest expense of $13 million was below the company’s expectation at the outset of the quarter due to the early repayment of a term loan and stronger than expected cash generation.
• At quarter end, the company had cash and short-term investments totaling nearly $1.6 billion. Net debt was $4.5 billion, which is about $1.2 billion lower compared to the prior-year fourth quarter.

Outlook

The company today reported the following projections for the first quarter and full year 2024 based on current global economic activity, soft industrial production, demand stabilization in Europe, continued growth in Mexico and demand improvement in China.

The effective tax rate for the first quarter 2024 is expected to be between 24.0% to 25.0%, higher than prior year including the impact of several regional tax rate increases and the expected mix of country-specific earnings.

Additional information related to 2024 financial projections are available in the detailed commentary and associated presentation slides related to the fourth quarter financial information which are posted within the investors section of PPG.com.

The term organic sales as used in this press release is defined as net sales excluding the impact of currency, acquisitions, divestitures and the wind down of Russia operations.