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. Thank you. Now I'd like to turn the conference over to Jonathan Edwards, Director of Investor Relations. Please go ahead, sir.

Thank you, Elliott, 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.

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 body shop 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 the 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 improvement 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 to 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.

Thank you. First question comes from David Begleiter with Deutsche Bank. Your line is open. Please go ahead.

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?

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.

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

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?

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.

Yes. I would just add that fundamentally, upstream of us, the environment remains quite long. There are no issues on our end regarding availability, and I view that as a positive sign for us as we progress through the year.

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

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 the 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 onto the enormity of these price increases, but raw materials doing what they're doing?

Yes, good morning Ghansham. It's not an issue of mix for us. I'm very pleased with how we've managed to maintain prices, finishing the fourth quarter with another 2% increase. I'm confident we'll see positivity in Q1 for a couple of reasons. First, as Vince mentioned earlier, raw material costs remain quite high, coming off extreme peaks, and they are still elevated compared to 2019. Thus, I wouldn't describe this as massive deflation. Looking ahead, especially in our Performance Coatings segment, we tend to achieve pricing power regardless of the raw material situation, due to the unique value we offer. Our products constitute a small portion of our customers' total costs, but the added value we provide greatly impacts their cost structures, creating a different model. On the industrial side, where raw material costs have a more direct correlation, we don't anticipate significant changes in the supply dynamics upstream as we progress through the year. For instance, China's lack of a swift rebound, as it is a major consumer of raw materials, leads us to expect a more moderate environment as we approach 2024.

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

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?

Yes, Duffy, this is Tim. I'll cover the auto segment. Vince will address the cash versus EBITDA topic. The auto sector performed very well for us last year, and we are optimistic about a multi-year recovery. I remain confident about the auto market as we approach 2024. In Q1, we're expecting a modest decline compared to the mid-single digit growth we saw in Q4. It's worth noting that last year, we experienced strong double-digit growth in Q1 of 2023. As I mentioned earlier, we're encountering some rollback in our index pricing which is having an effect, but I’m not overly concerned about auto volumes throughout the year. Last year's total builds were a bit above 89 million, and I think there is potential for growth as we progress through 2024. Our market share is solid, particularly in China, where a substantial portion of the new builds will occur. Overall, I'm optimistic about the auto segment, acknowledging some challenges with year-over-year comparisons and the impact of pricing adjustments in Q1.

Just to add, as we talked several times, Duffy, on auto, the acceleration in China helps us from an EV perspective as well. So we have more content on any traditional EV than we do otherwise. So that's proper for us in PPG in particular. To your cash flow question yes, I think the short answer is typically EBITDA would certainly serve as a proxy for cash flow, plus or minus. We have the last couple of years, expanded answer is we have the last couple of years had working capital movement that has either helped or hurt the cash flow on a transitory basis. We do have, as Tim alluded to in his opening comments, probably a couple of hundred million dollars of excess raw materials in inventory. We're going to work that down in 2024. So that will have a cash flow implication for us in a positive manner. But I think generally, what you're saying in EBITDA and cash flow should be the movement should be consistent.

Yes, and Duffy, this is Tim. I want to add one more point regarding the EV situation that Vince mentioned. While we are seeing headlines about EVs mainly in the U.S. and Europe, it's important to note that two-thirds of the world's EVs are manufactured in China. In terms of PPG content in the EV market for 2023, it increased by 20%. This means our content per EV produced rose by 20% in 2023, which is a positive indicator for us.

Our next question comes from Stephen Byrne with Bank of America/Merrill Lynch. Your line is open. Please go ahead.

Yes. Thank you. You've been involved in this partnership with Home Depot for a long time. I'm curious to hear your view whether it's going better or worse than what you had expected? And any potential for inflection in that relationship in 2024. And if you don't mind, can you just comment on SG&A for 2024? It seemed to really jump in the fourth quarter, were there some unusuals in there like with your strategic actions? Any comments on that, how should we forecast that going forward?

Yes, good morning, Steve. To answer your second question quickly, there were some unusual factors that Vince will address. Regarding your first question, the relationship with Home Depot and the progress on the Pro program is unfolding as anticipated. The main challenge is that, while it's growing from a relatively small base, it is still being impacted by difficulties in the DIY sector. The DIY segment, including Home Depot and our Glyndon and Olympic brands, remains a vital component of our DIY omnichannel strategy moving forward. Unfortunately, the volume declines in this area are balancing out the positive strides we've made with our Pro omnichannel, both with Home Depot and our own network. For perspective, in Q4, despite the external challenges, we achieved low single-digit growth in our Pro omnichannel, and our sales through Home Depot were among our strongest quarters. We are making headway there, but our DIY omnichannel, which also involves our major partner in the Midwest, remains down. That's the situation, but we are seeing continued momentum. As I've mentioned before, we're constructing a future-focused business model that is more agile, and this process is a long-term endeavor rather than a quick fix, and we're steadily making progress.

Yes, Steve, on the overhead, I'm going to just look at the whole year, there's always movement between quarters within a year. But on a full year basis, our overhead was up about $380 million. About a third of that is directly correlated to the increase in sales, whether it be volume, price, or FX. So, on a percentage basis, if you just do the percent's comparison, you get about a third of that directly related to our sales movement. Another third of that on a year-over-year basis, and then Tim alluded to this in his opening remarks, we did have a higher shareholder based and performance-based compensation and the reminder that in the prior year, we had much lower compensation. So, kind of a doubling effect on a year-over-year basis. And the final third roughly $100 million or so of inflation and the remainder of that would be growth initiatives for some of the key programs we won throughout the year and including our Comex growth, et cetera.

Our next question comes from John Roberts with Mizuho. Your line is open, please go ahead.

Morning. Is your China strength primarily China for China? Or is it the strong exports of cars that we're seeing out of China?

Yes, hi John, it's both. But I mean the vast majority of the vehicles that we paint in China stay in China. The exciting part on the export side is the largest producer EVs now in the world, a Chinese producer is beginning to export. So, that will just be incremental upside but the vast majority of the cars that we paint in China stay in China.

Yes. And John, I think for our book of business, again, 2023, especially at the beginning part of 2023, it was a tougher year. We're starting to see industrial and some of our other businesses kind of turn the corner in the fourth quarter and now heading into 2024.

One more John from John Bruno, outside of auto OEM, a very high percentage of the coatings we sell in China or for products that stay in China.

Our next question comes from Josh Spector with UBS. Your line is open, please go ahead.

Yes, hi. Thanks. So, I wanted to follow-up on industrial pricing. So, when you're talking about down modestly for the first quarter year-on-year, maybe it's 50, 100 basis points, I guess, in the frame of that, does that is it stabilized at that level through the year? Or do you expect it to decline? So, kind of, separating the energy give back from maybe some of the index pricing. And I guess when you look at this longer term then, what does this mean for margin potential for the Industrial segment? Are we looking at more normal incrementals from here to price raw still play into that? Or what are the factors that maybe move the margins up from the current level beyond this year? Thanks.

Yes, Josh, let me begin, and then Tim can provide additional insights. I just want to remind everyone, as we mentioned in our opening comments in the prepared remarks released last evening, that last year in Q1, energy costs in Europe were extremely high. Natural gas prices ranged from $30 to $40 per MMBtu depending on the day. Most companies, including PPG, implemented surcharges to offset those costs. We are comparing that to this year’s Q1. This accounts for a third to half of the price decline we observed in the Industrial Coatings segment during the first quarter, with the rest being organic as highlighted by Tim. Tim, would you like to add anything?

Yes, I think the question about margin expansion beyond what Vince described in pricing is the volume leverage will be significant on the industrial segment because that's the segment that really got hit the hardest during COVID and COVID recovery and we've still got significant margin upside driven by volume leverage. The other side, if you go back to our CEO Day in May in New York, we pointed to about $150 million to $200 million of manufacturing productivity gains that we had line of sight to in the coming years, really, not just to get back to where we were pre-COVID, but also as we modernize, automate, and digitize our operations. So those will really be the two levers that get us to the next horizon on margin largely across the industrial segment, but somewhat also in the Performance Coatings side.

Our next question comes from Kevin McCarthy with VRP. Your line is open. Please go ahead.

Thanks and good morning, everyone. Tim, would you elaborate on your volume outlook that's embedded in your 2024 guide? Would you expect volumes to be flat or up a little bit? Part of the reason I ask is we've seen many chemical companies suffer from volumes that are trending well-below real GDP. And so as you look across your portfolio and survey and forecast, do you think we'll see convergence in 2024? Or are there pockets of residual destocking or other headwinds that might make that more ambitious?

Yes. Hi, Kevin. So first of all, we're going to have positive volume in 2024 for the year. I would – our sales, we said, are going to be up low single digits, we might have to start putting a fourth letter there because I think the – I'm sorry, the volume will be a little higher on the low single-digit side and the price will be a little lower on the low single-digit side. But we have volume momentum for really five quarters now, minus three, minus two, a little lighter, minus two, our fourth quarter. We rounded it up to minus one. It was actually less than minus one. We're looking at a zero for Q1. And that includes the impact of the Walmart load in. It includes the shift from of Easter from one quarter to the next. So we have momentum on volume, some of it just because of the diversity of our portfolio and where we participate, but some of it because of the growth initiatives that we've worked on throughout 2023, where we've picked up share that will start to kick in this year. I think about our packaging coatings business, our Industrial Coatings business, our refinish coatings business. So it's really the positivity on volume is one even though they've had negative numbers in front of them for much of 2023, we do have volume momentum. We see it flipping in early 2024. And it's a combination of strength of our portfolio positioning and execution on our growth initiatives.

We expect Europe to stabilize, indicating an end to the destocking we faced, particularly in the first half of 2023. This has negatively impacted us, but we believe the situation has run its course. In China, the first half of 2023 was also slow, and as conditions normalize, we anticipate positive impacts as the pandemic's effects fade. Additionally, we have a backlog in aerospace that we are working to reduce by increasing production at our manufacturing sites, and we expect this trend to continue throughout the year, as we have more than a half-year backlog to address.

Our next question comes from Michael Leithead with Barclays. Your line is open. Please go ahead.

Great. Thanks. Good morning, guys. I wanted to ask around cash deployment. Your net leverage ended the year towards the lower end of where it's historically been. I guess, three very brief questions. One, can you just remind us roughly what target leverage you intend to maintain? Two, how does the M&A market look today, say, relative to returning more cash to shareholders this year? And then third, I think you're guiding to $15 million of interest in 1Q, but about $95 million for the year. So why does that step up so much? I'm assuming that takes into consideration of more cash deployment. Could you just help clarify that? Thank you.

Yes, it's Tim. I'll start. We don't set a target in stone because it can change over time based on our strategic execution. We're working on our portfolio, as you've seen in our recent announcements. Our balance sheet remains strong, but that could change with the market environment. The M&A sector has been somewhat quiet, but we are starting to see some opportunities and are currently evaluating those assets. Overall, consistent with my comments from last year, our top priority remains generating strong cash flow, which provides us with substantial flexibility. I'm proud of the team's efforts in 2023. We will not let cash sit idle on the balance sheet; we will take necessary actions, including dividends. We have solid organic growth investments planned, and we are interested in making accretive acquisitions. If such opportunities don't arise, we will return cash to shareholders through share buybacks, which we recently initiated in Q4. We have a substantial amount of cash right now, but we usually experience high cash outflows in Q1, so we will proceed cautiously to avoid accumulating high interest debt again. Beyond that, you can expect us to actively manage our cash.

Yes, this is Vince. I want to emphasize what Tim mentioned about our preference for a strong balance sheet, as it provides us with various options. Currently, we believe we don't need to let cash grow. We will be using cash until April, which aligns with our typical seasonal business patterns. The $1.5 billion on our balance sheet will be used during this period, reducing our need to enter the debt markets for commercial paper as we usually do at this time of year. Therefore, our interest costs in the first quarter will be lower since we'll utilize our available cash to support the seasonal inventory increase. Later in the year, we usually generate strong cash flow, which will affect our interest income. As we generate that cash in the latter half, we will consider other uses for it.

Our next question comes from Jeff Zekauskas with JPMorgan. Your line is open. Please go ahead.

Thanks very much. I was wondering whether you could comment on the direction of titanium dioxide prices. Secondly, you make a fuss over the difference between or you make a plus over your LIFO inventories. So if you would value things on LIFO instead of FIFO? What might the difference have been at the end of the year? And then finally, in your accounts payable and accrued liabilities line, your year-over-year increase that is a benefit was about $380 million. And sequentially, maybe it was $250 million. Now you guys don't disaggregate accounts payable from accrued liabilities. Can you explain what's going on there and that many, many companies had much lower accounts payable this year, and it seems to have really worked in the other direction for you?

Hi Jeff, it's Tim. I'll take titanium dioxide question. And Vince, you can take the more finance-related questions there. TiO2, we see very good availability. We see a long supply chain upstream of us, it's still quite long. And so we're seeing some modestly lower pricing on TiO2 than what we would have seen last year. It's not down as much as some other parts of our basket, but it's definitely down from where we were last year, Jeff. And on TiO2, in addition to pricing, I do have to mention that a key part of our strategy is to continue the research work that we do to reduce our titanium dioxide content in our formulas every year without sacrificing any performance. And our team has done a great job there. We're down about 1% per formula over the last several years, and we achieved that again in 2023.

Yes, Jeff, on the balance sheet questions, I'm not going to be able to calculate the FIFO, LIFO impact on the fly here. We can just a reminder everybody, we're at 75% or so FIFO, the difference between, again, the invoice cost and what we're realizing on the income statement for raw material moderation that is tens of millions of dollars, if we move that to a FIFO. I can't calculate it precisely. As it relates to payables, for us, we had a couple of items in the fourth quarter. Our tax provisioning is about $100 million higher. We ended the year on a weekend, two-day weekend. So our accounts payable is higher because of that. There's natural FX in that number on a year-over-year basis. And we had, as you saw, an environmental special for about $30 million where we accrued $30 million for future environmental spending. And we talked about the compensation increase in the fourth quarter. So, those are the big elements in our payables on a year-over-year basis.

Our next question comes from Vincent Andrews with Morgan Stanley. Your line is open. Please go ahead.

Thank you. A few quick ones from me. In the first quarter, I get the timing shift of Easter, but February also had an extra day this year. So does that not offset the Easter impact and then also on TiO2, how much Chinese TiO2 are you guys buying these days? And how much of it is in Europe? And have you changed any purchasing patterns as a function of the EU's investigation to Chinese imports? And then lastly, the Pro architectural business has been holding up an awful lot better than the DIY, just in a similar fortunately, far enough away from COVID now that I think we should be able to have a conversation about what's driving the DIY weakness other than just a pull forward of volumes. And what's keeping the Pro business so high or so strong because it just seems like there's a disconnect between sort of pro demand being there, but DIY being so weak. So if you could help with those three things, I'd appreciate it.

Okay, Vincent, this is Tim. Regarding Q1, you are correct that there is an extra day in February. The negativity of Easter has a more significant impact due to varying vacation times in different parts of the world. Historically, Easter tends to be a robust month for us in Mexico, so that makes the one-day difference more substantial. Additionally, in Q1, along with the Easter effect, we also face a customer load-in and energy pricing issues as Vince mentioned earlier. As for the pro DIY segment, it remains down. While I can't pinpoint an exact reason, some of it can be attributed to a post-COVID hangover, as many people engaged in projects earlier than planned. Currently, it seems to be more about general inflation and consumer confidence regarding home remodeling. There’s also a connection to existing home resales, where sellers often make DIY improvements before selling. I believe this reflects a mix of those factors and overall inflation impacting consumers' budgets and decisions. However, the Pro side remains strong, despite some weaknesses in areas like existing home resales, which also involve professionals. We are seeing strength in commercial sectors and maintenance services, which contributes to the overall resilience. This trend is not unique to the U.S.; we observe similar patterns in Europe as well.

We are closely monitoring the TiO2 situation in Europe. We haven't made any major changes and continue to rely on Chinese TiO2 suppliers as a significant part of our supply chain. We anticipate that the process in Europe will take a long time and are actively working on diversifying our TiO2 supply and increasing its flexibility. We have made notable improvements in this area and are exploring the use of TiO2 from various global sources, including China. We are also committed to our long-term goal of reducing our reliance on TiO2 by eliminating it from our formulations without compromising performance. We are keeping a close eye on developments and will adjust as needed. I am confident that, given the long-term nature of supply issues and our diversification efforts, we will be able to manage our business effectively.

Our next question comes from Frank Mitsch with Fermium Research. Your line is open. Please go ahead.

Good morning and congratulations on the new role, Jonathan. I wanted to follow up on the volume questions. Tim, it seemed from your response that we can expect flat volumes in Q1, but that you anticipate seeing positive volume growth as we move into Q2. Could you clarify that? Also, Vince, you mentioned that Europe is stabilizing, which is a good indication. However, considering that Europe was declining in the earlier part of 2023, if it is now stabilizing at these lower levels, it might imply that the net volume for 2024 could be negative. Could you address that? Additionally, I'd appreciate any comments on China, where you expect positive volumes, especially given the weak comparisons. It would also be great to hear what you expect in the Americas.

Okay, hi Frank, I'll start. It's Tim. I think your interpretation of my volume comments are accurate. We had positive volume for the year, it was flat in Q1, and then you should see an uptick soon after. I believe that's correct. I know you asked Vince your question, so I'll provide a brief update on Europe. Despite a very subdued volume environment in Europe in 2023, we had a record year for earnings there. While it does affect the top line, our team executed exceptionally well, resulting in all-time record earnings. Additionally, not all of our businesses in Europe performed the same. Arrow was very strong in Europe, and Automotive had a better-than-expected year there as well. We anticipate this positive trend to continue. The challenges we're facing mainly relate to the decorative market, especially the retail decorative market in Europe, which experienced negative volume. However, PMC had an outstanding year in Europe, driven particularly by both protective and marine aftermarket segments. So, that's my overview of Europe and now I'll hand it over to Vince.

Yes. When we say Europe stabilizing in volumes for 2024, we're looking at it quarter-over-quarter, Frank, and I know as you know, we're a very seasonal business there in our Deco our architectural coatings business. So each quarter, we expect that stabilization respective to the last prior year quarter. So again, on a full-year basis, we expect that to be flat, reflecting that year-over-year comp quarter-by-quarter. Again, our view of China is a bit different, I think, than what most markets are seeing. We always have to remind folks, we do not have a large architectural presence in China. One of the heaviest unfavorable items in China is the construction and housing market, very little exposure for us. Again, we're turning the corner on industrial. Auto is growing. Our refinish business is returning in China, because of higher miles driven and aerospace is starting to come back. So our mix of businesses in China helps us. And again, the fact that we don't have that architectural content. The architectural industry draws a lot of raw materials as well. So the fact that, that's down is supportive of our earnings in China.

And the last part of your question, what are we seeing in the U.S. relative to volume? We've got the PMC business, mostly on the P side, the protective side, doing well in the U.S., driven a lot by energy spending and infrastructure traffic with infrastructure spending will be stronger this year. Refinish doing very well. And auto, the U.S. SAAR is holding up very well. I know inventories have ticked up a bit, but they're still only at about 40 days. So those would be on the – and of course, Aero, we're selling everything we can make. So those would be on the positive side of the U.S. ledger. The negative side, again, we've said DIY multiple times, we do expect at least the first half of this year, to be soft there. The only upside there might be that we do believe destocking in that space is behind us. And then finally, I would say general industrial coatings driven by just industrial activity, and this could be all kinds of widgets that get painted. That's still a bit soft in the U.S. So that's a bit of a positive and negative ledger here at home, Frank.

Our next question comes from Aleksey Yefremov with KeyCorp. Your line is open. Please go ahead.

Thanks. Good morning, everyone. Can you provide an update on your strategic efforts to expand the product lines with Comex, and where you currently stand in relation to your goals? What are your plans for 2024? Additionally, do you have any updates on other strategic organic growth initiatives that you mentioned last year?

Sure, Lexi. In PPG Comex in Mexico, we mentioned in May that one of our key initiatives was to maintain robust performance and growth in the Deco space, and the team achieved that with another record year, showing double-digit sales growth compared to last year. Additionally, we aimed to introduce other parts of our portfolio to our strong concessionaire network, which we successfully accomplished. Protective Coatings experienced high single-digit growth, and traffic sales increased by double digits. I just returned from a meeting with all our concessionaires, and they are optimistic about their ability to sell not only Deco but also protective, traffic, powder, and light industrial coatings. We recently introduced powder brands and refinish brands that are specific and exclusive to the concessionaire network, which received an excellent response. Regarding the initiatives we launched last year as part of our enterprise growth strategy, I'm very satisfied with the first year of execution. As noted in the opening remarks, these initiatives generated about $150 million in incremental sales in just the first year. Some of these initiatives are in longer-term development. The progress on projects like powder films, the Mexico opportunity, and the increase in EV content per vehicle, which is up 20%, is going well, and I'm pleased with our progress so far.

And if I could just add a little broader commentary, we talked in May about being bullish on the Mexico economy. I think that has come through in space for us in the region. We continue to see reshoring of industrial activity into Mexico. We'll support that with our industrial companies. We'll support that certainly with our Comex brand. In addition, one of the things we haven't Tim alluded to it on the opening comments, but we haven't talked about in the Q&A, a second economy for us that's well outpacing most other regional economies is India. And we've got a good position in India as well, and that's supported by I'll call it reshoring into India or shoring in India that is just starting.

Our next question comes from Laurent Favre with BNP Paribas. Your line is open. Please go ahead.

Yes, good morning. In the presentation, in the list of watch out, you've mentioned the Red Sea situation. And Tim, I was wondering if you could talk about, I guess, how you're looking at the risks there in terms of ability to source impacts on costs. Have you seen anything on that side yet? And on the flip side, on the positive or potential positive, there's such a thing? Could it be a reason for a bit of a restocking along the chain in your customers? Or is it just not big enough of the deal right now? Thank you.

Yes, it hasn't been material for us so far. Our direct products, particularly paint and coatings, are mostly local, so there’s minimal impact. Our suppliers have ample capacity and inventory, and even though they are facing some delays, they're managing that in their production and logistics planning. We do not expect any financial impact from this. There have been a few minor surcharges introduced, but they are insignificant at this stage. We're closely monitoring the impact on customers, especially European auto OEMs that source globally, because any missing critical parts could affect their production schedules. So far, we haven't observed any issues in that regard. Regarding restocking, I don't anticipate significant inventory buildup of paints and coatings from this situation. It will likely involve more movement of inventories upstream and how suppliers manage their logistics. Given that they currently have plenty of inventory, we do not foresee any problems.

And Laurent, to provide some numbers, the average delay caused by not going through the Red Sea is typically between 10 to 12 days. We can certainly plan for that regarding our raw material purchases.

And Laurent, one more for me. We have nothing in the guide for the first quarter for this area.

Our next question comes from Patrick Cunningham with Citigroup. Your line is open please go ahead.

Hi. Good morning. Just on auto refinish. It seems like there's maybe some normalization there. So I guess my first question is what's causing lower collision claims in the U.S. Is there anything structural you can point to like balance of total vehicles trending upwards? And how should we think about the outlook for Refinish for the full year by region?

Refinish had a strong year and achieved a record quarter despite challenging comparisons. Claims in the U.S. are still down compared to 2019, but we managed to deliver solid results even with that situation. Body shop activity is robust, with most of our customers experiencing backlogs mainly due to labor shortages. While we monitor claims closely, our performance remains steady. Additionally, our digital tools contributed significantly, resulting in more than 100% year-over-year growth in revenue from these resources. We are optimistic as we head into this year, and our order book looks solid. We are observing the claims and their trends; it appears that driving patterns may have shifted, with more claims emerging from suburban areas rather than crowded downtowns. Overall, we are positive about the business prospects moving forward. I am confident in our productivity and our value proposition, as we continue to win over body shops. Therefore, we anticipate another strong year for our Refinish business.

Yes. And then regionally, we expect the U.S. and Europe to hang around 0 plus or minus for the year. As we said earlier, we expect China to grow as we see kind of a reopening on a full year basis there. So, that's the regional aspects. And just again, to hit on Tim's comment about our digital tools, these are tools we think are best-in-class. We have body shop productivity focus on those tools. And those are a subscription model for us that didn't exist three or four years ago.

Our next question comes from Michael Sison with Wells Fargo. Your line is open. Please go ahead.

Hi guys. Good morning. Tim, could you break down the key drivers for achieving the 10% EPS growth at the midpoint? I know you've discussed volume growth a lot. Is that in low single digits, about half, or a bit more? How much of that is due to deflation and are there any other factors contributing to the 10%? Thank you.

Yes, Mike, I think we'll both have some extra time this weekend. We won't be focused on the TV screen based on last week's results. I wish you the best with that. We will have a number of things. Certainly, we will have positive pricing. We are expecting higher low single-digit volume, which will not only benefit our margins but also improve our manufacturing efficiency by finally achieving positive volume. Our manufacturing productivity will contribute to that. While it's a bit early to predict what will happen with raw materials in the second half of the year, we do anticipate that price net inflation will continue to be advantageous for us. Additionally, I've addressed some of the enterprise growth initiatives we discussed. Some of those have already begun to take effect with the $150 million I previously mentioned, and we expect continued progress on those initiatives. Furthermore, we have cash deployment, which we haven’t discussed much, as we were focused on rebuilding last year and reducing debt. This will also be an important aspect that wasn't a factor last year.

Yes. And Mike, just I think it's important, a midpoint of 10%. Our operating results are going to be better than that. We do have some tax headwinds like most companies will have as some of the tax rates around the world move up. So, we guided to a higher year-over-year tax rate. So, operating results above 10%, offset modestly offset by this tax – a higher tax rate.

Our next question comes from Laurence Alexander with Jefferies. Your line is open. Please go ahead.

Good morning. This is Dan Rizzo on for Laurence. Thank you for squeezing me in. Obviously, the focus is on China for a good reason, but I was just wondering what India in terms of sales versus China? And if there's any time in the coming years where India will be competing in terms of importance versus China?

Hi, Dan, this is John Bruno. I can take this. Most people know India has been one of the best economies in the world in 2023. We have a really good position there. We have a JV with Asia Paints. Our sales growth was circa 10% in 2023, and we expect continued good growth in 2024.

Yes. Our partnership with Asia Paints in India is fantastic and continues to perform very well. And across the same segments that were really strong in the rest of the world, which are doing well over there, automotive OEM, automotive refinish, industrial coatings, protective coatings. So that partnership is really world-class and helps us take our global technology advantage solutions to someone and partner with someone that's best-in-class within India. And so it's a really good story for us, not only in 2023, but going forward.

And again, going forward, as I alluded to earlier, again, there's a multitude of industries that are establishing or expanding their footprint in India, electronics, automotive, some aerospace. So again, a multitude of global industries that are expanding their footprint.

Our next question comes from Arun Viswanathan with RBC. Your line is open. Please go ahead.

Great. Thanks for taking my question. Congrats on the strong results in 2023. So just a question on the guidance. So if I look at the sales guidance, it looks like you are hoping to get to low single-digit organic growth in 2024. Just wanted to confirm that, that would be also including low single-digit volumes, and if so, how do you see that kind of playing out cadence-wise through the quarters, if you're guiding to flat volumes you get to maybe 2% to 3% in Q2 and then mid-single digits in the back half. And similarly, on the earnings growth bridge, your guidance kind of implies 1% growth EPS in Q1. So that would require low double digits in Q2 through Q4, maybe something in the order of 13%, is that the right way to think about it that really some of these one-time items in Q1 holds back your growth and you get more into the low single digits to mid-single digits on sales to Q2 to Q3, Q4 and maybe low double digits to mid-teens Q2 through Q4 EPS growth? Thanks.

I think the math you have, Arun, is definitely accurate. We talked a lot on the call already about factors that affect Q1, some comparable factors last year, et cetera. Again, we're a seasonal business for us, Q2 and Q3 are very large quarters for our Deco architectural businesses. They're very large, even larger for our traffic businesses. So again, we'll see a pickup in those businesses seasonally, but we're also expecting some different volume tenor than we had last year in those businesses. Tim went through, I think, a laundry list of items earlier that included the leverage on those higher volumes. We also would expect improved manufacturing that we've been working on, and we alluded to in our May CEO update that manufacturing should grow throughout the year. So again, I definitely agree that Q1 on a year-over-year basis, up modestly, but the back half of the year, we expect to grow in terms of a size.

Our next question comes from Aron Ceccarelli with Berenberg. Your line is open. Please go ahead.

Thanks and good morning. I would like to go back to the topic of raw materials cost for a second. Your guidance has been improving throughout 2023. You were guiding down high single-digit in Q3 to Q4. When I look at Q1 2023, your raw materials costs were still slightly inflationary. So why are you guiding just for mid-single-digit decline now? What has changed, if anything? Because when I look at gross margin, it expanded 450 basis points year-over-year in Q4. It looks to me this is accelerating. So what is driving this mid-single-digit guidance for Q1, please?

I think as we alluded to earlier, we do expect sequential improvement in the moderation of raw materials Q4 to Q1. And the mix of business for us as we build inventories. And we deplete inventories in Q4. We're building inventories in Q1. So that has a factor. But again, for the full year, we still expect moderation further moderation of raw materials for the full year 2024 versus 2023.

Our final question today comes from Jaideep Pandya with On Field Investment Research. Your line is open. Please go ahead.

Thanks. Maybe it's not relevant, but given how low volumes are across the value chain, could you tell us like what is the spare capacity you have? I'm basically asking this question because a lot of investors are wondering if the margin growth left in the coating sector beyond 2024 and given that it looks like in 2025, 2026, growth will come from volume. Just wondering what is the spare capacity you have in the system these days? That's my first question. The second question is really around raw materials. Do you expect to buy in sync with your volume growth this year? Or would you still destock? And therefore, if your volume growth is, let's say, up 2%, we shouldn't really expect raw material purchasing to be upto should be maybe zero. And the last question really is on Marine protective. You alluded to firefighting protective – one of your competitors is very strong in that area. So have to launched new products and therefore gaining share from that competitor or is that a market is just doing very well? Thanks a lot.

Sure. Let me address those points, Jaideep. This is Tim. First, regarding capacity, we have ample capacity available. Our volumes are still significantly lower than in 2019, and we have not reduced capacity since then. I believe our industry peers and suppliers have capacity as well. Therefore, as volumes increase, we can expect to benefit from that volume, which will improve our margins. For your second question on raw materials and inventories, we currently have a higher Days of Inventory (DOI) than we would prefer, with an excess of around $100 million to $150 million in raw material inventory. Hence, we plan to purchase more raw materials in the first quarter to prepare for the peak paint season, although this will not necessarily align directly with demand due to the surplus we currently hold. Lastly, on the marine and protective side, the answer is yes. We have recently launched new products and technologies in the fire protection sector that have been well-received. One notable product is PITT-CHAR NX for hydrocarbon fire protection, which has garnered positive feedback, and for cellulosic fire protection, there's STEELGUARD 651, which is also performing well. These new technologies are helping us gain market share. Additionally, we have an excellent sustainable and fuel-efficient product in the marine dry dock segment called SIGMAGLIDE that is receiving strong market reception, leading to significant share gains that we expect to realize in 2024 and beyond. So, our advancements in these areas are technology-driven.

There are no further questions at this time. I'll now turn the call back over to Jonathan Edwards.

Thank you, Elliott. Well done today. We appreciate your interest and confidence in PPG and this concludes our fourth quarter earnings call. Have a good day.

This concludes today's conference call. You may now disconnect.