Overview of Financial Performance

PPG, a global manufacturer of paints, coatings, and specialty materials, reported its financial results for the three and nine months ended September 30, 2024. The company’s net sales were approximately $4.6 billion for the third quarter, a decrease of 1.5% compared to the prior year. This was primarily due to the unfavorable impact of foreign currency translation and divestitures. However, income before income taxes increased by $54 million to $611 million, driven by improved manufacturing productivity, reduced overhead costs, and lower depreciation, amortization and net interest expenses, partially offset by wage and benefits inflation.

For the first nine months of 2024, net sales decreased 1.6% to $13.68 billion, again due to lower sales volumes and unfavorable currency impacts. Cost of sales, excluding depreciation and amortization, decreased 4.5% as raw material costs moderated during the first half of the year. Selling, general and administrative expenses increased 3.1%, primarily from wage and benefits inflation and growth-related investments. Overall, earnings per diluted share from continuing operations increased 19.3% to $5.93 for the nine-month period.

Segment Performance

The company reports results in two business segments: Performance Coatings and Industrial Coatings.

Performance Coatings In the third quarter, Performance Coatings net sales increased 1.4% to $2.92 billion, driven by higher sales volumes (+2%) and selling prices (+1%), partially offset by unfavorable currency (-1%) and divestitures (-1%). Segment income rose 13.5% to $513 million, aided by the higher sales and improved manufacturing productivity, which offset wage inflation.

For the first nine months, Performance Coatings net sales were flat, with higher selling prices (+1%) offsetting lower sales volumes and divestitures (-1%). Segment income increased 7.3% to $1.49 billion, benefiting from the price increases, lower manufacturing costs, and moderating raw material prices in the first half of the year.

Looking ahead, the company expects continued strong demand in aerospace coatings and growth in automotive refinish above industry rates. Architectural coatings in the Americas and Asia Pacific are also expected to benefit from growth initiatives with The Home Depot.

Industrial Coatings Industrial Coatings net sales declined 6.2% in the third quarter to $1.65 billion, due to lower selling prices (-3%) and sales volumes (-3%). Segment income decreased 19.1% to $199 million, impacted by the pricing and volume declines as well as wage inflation, partially offset by lower overhead costs.

For the nine-month period, Industrial Coatings net sales fell 4.7% to $5.1 billion, again from lower selling prices (-3%) and volumes (-1%), plus unfavorable currency (-1%). Segment income decreased 3.9% to $707 million, as the pricing declines more than offset moderating raw material costs.

Going forward, the company anticipates continued weak automotive production and industrial demand, especially in the U.S. and Europe. However, the packaging coatings business is expected to see continued strong growth in Asia Pacific.

Financial Position and Liquidity

PPG ended the third quarter with $1.3 billion in cash and short-term investments. Cash from operating activities for the first nine months of 2024 was $1.07 billion, down from $1.51 billion in the prior-year period, primarily due to unfavorable changes in working capital.

The company’s operating working capital as a percentage of sales was 17.4% at the end of the third quarter, up from 15.2% at the end of 2023, reflecting the impact of lower sales. Days sales outstanding increased to 59 days from 55 days at year-end 2023.

PPG continues to have a strong liquidity position, with access to a $2.3 billion revolving credit facility. In 2024, the company entered into a new €500 million term loan and increased the size of an existing term loan by €250 million. Proceeds were used to refinance maturing debt and for general corporate purposes.

The company’s ratio of total indebtedness to total capitalization was 44% at the end of the third quarter, well below the 60% covenant limit in its credit agreements. PPG expects capital spending of $650 million to $700 million in 2024 to support future growth.

Outlook and Strategic Initiatives

Looking ahead, PPG expects continued strong demand in aerospace coatings and growth in automotive refinish above industry rates. However, the company anticipates consumer demand will remain tepid in Europe. The architectural coatings business in the Americas and Asia Pacific is expected to benefit from growth initiatives with The Home Depot.

In the Industrial Coatings segment, PPG foresees continued weak automotive production and industrial demand, especially in the U.S. and Europe. However, the packaging coatings business is expected to see continued strong growth in Asia Pacific.

The company has also announced strategic reviews of its global silicas products business and its architectural coatings business in the U.S. and Canada. In the third quarter, PPG signed an agreement to sell the silicas business for approximately $310 million. In October, the company announced it would sell the U.S. and Canada architectural coatings business to American Industrial Partners for around $550 million.

These portfolio optimization actions are part of PPG’s ongoing efforts to focus on its core coatings and specialty materials businesses and improve its overall profitability and growth profile.

Analysis of Strengths and Weaknesses

Strengths:

• Diversified portfolio of coatings and specialty materials businesses, providing exposure to a range of end markets
• Strong market positions and brands in key product categories like aerospace, automotive refinish, and architectural coatings
• Improving manufacturing productivity and overhead cost management, helping to offset inflationary pressures
• Solid financial position with ample liquidity and a conservative capital structure

Weaknesses:

• Sensitivity to macroeconomic conditions, with softness in automotive, industrial, and European markets impacting performance
• Ongoing challenges with raw material and wage inflation, pressuring margins
• Reliance on foreign currency translation, which has had an unfavorable impact on reported results
• Need to continually invest in R&D and new product development to maintain competitive edge

Conclusion

Overall, PPG delivered a mixed performance in the third quarter and first nine months of 2024. While the company faced headwinds from foreign exchange, divestitures, and softer demand in certain end markets, it was able to improve profitability through operational improvements and cost management.

Looking ahead, PPG’s outlook is cautiously optimistic, with expectations for continued strength in aerospace, automotive refinish, and architectural coatings in the Americas, offset by ongoing challenges in industrial and European markets. The company’s strategic initiatives to optimize its portfolio and focus on higher-growth, higher-margin businesses should position it for improved performance over the long term.

However, PPG will need to navigate persistent macroeconomic uncertainties and inflationary pressures. Maintaining its competitive edge through innovation, productivity enhancements, and prudent capital allocation will be critical to driving sustainable growth and shareholder value creation.