PPG Industries, Inc.

Good morning. My name is Warren and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter and full-year 2025 PPG earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. To allow everyone an opportunity to ask a question, the company requests that each analyst ask only one question. Thank you. I would now like to turn the conference over to Alex Lopez, Director of Investor Relations. Please go ahead, sir.

Thank you, Warren, and good morning, everyone. This is Alex Lopez. We appreciate your continued interest in PPG and welcome you to our Four Quarter 2025 Earnings Conference Call. Joining me today from PPG are Tim Kanevich, Chairman and Chief Executive Officer, and Vince Morales, Senior Vice President and Chief Financial Officer. Our comments relate to the financial information released after U.S. equity markets closed on Tuesday, January 27, 2026. We have posted detailed commentary and the accompanying presentation slides on the investor center of our website, ppg.com. Following management's perspective on the company's results, we will move to a Q&A session. Both the prepared commentary and discussions during this call may contain forward-looking statements reflecting the company's current view of future events and their potential effect on PPE'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. Now, let me introduce PPG Chairman and CEO, Tim Kanavich.

Thanks, Alex. Good morning, everyone. Welcome to our fourth quarter and full year 2025 earnings call. I'll start off by providing some highlights on Q4 and full year 2025, and then I'll move on to our 2026 guidance. I'm pleased to report that 2025 was a year of solid commercial, operational, innovation, and financial performance for PPG. The year also demonstrated the strength and resilience of our diversified portfolio, as well as the dedication of our PPG global team. Despite a very mixed and dynamic macroeconomic environment throughout the year, we delivered consistent organic growth, both volume and price, capping the year off with our strongest organic growth of over 3% in the quarter. We also continued our legacy of driving structural cost improvements for our self-help actions and maintained our heritage of strong cash flow generation and disciplined cash deployment including returning cash to our shareholders. For the full year, net sales totaled $15.9 billion with 2% organic growth, which was driven by a combination of higher selling prices and volume gains across our segments. Our adjusted earnings per share came in at $7.58, underscoring our ability to maintain solid profitability in a dynamic environment. Our cash from operations totaled $1.9 billion, up about half a billion dollars year over year, supporting a robust free cash flow yield of 5%. This strong cash performance enabled us to return 1.4 billion to shareholders through dividends and share repurchases. Our segment EBITDA margin for the year was a healthy 19%, reflecting ongoing operational efficiency and cost discipline. I'm pleased that we have delivered on our organic growth commitment. with sales volume and selling price growth resulting in a full year increase of 2% in organic sales, which outpaced the estimated market decline of negative 0.2%. This is the result of our productivity solutions for our customers, as well as the share gains in our core technologies. Turning to the fourth quarter, we further accelerated our growth momentum. Net sales were 3.9 billion, up 5% year-over-year with 3% organic growth driven by positive sales volume growth across all regions. We achieved record aerospace coding sales and earnings led by strong demand for our technology-advanced products. Out of OEM, net sales increased 6%, well outpacing the industry driven by share gains and customer mix. Architectural coatings in Latin America delivered high single-digit organic sales growth aided by the sequential quarterly recovery of project-related sales and continued strong retail performance. We delivered positive sales volume growth in all regions, with Asia Pacific leading the pack, achieving mid single-digit percentage, followed by low single-digit percentage in US, Latin America, and Europe. Our segment EBITDA margin for the quarter was 18%, reflecting solid execution, despite some macro headwinds that impacted certain end markets. Adjusted EPS for the quarter was $1.51, as the improved organic growth and improved operational performance were more than offset by higher interest costs and increased corporate expenses. Now, looking at each of our segments, in the global architectural coding segment, fourth quarter net sales rose 8% to 951 million with 2% organic growth. This was driven by Mexico's strong retail performance and sequential improvement in project-related spending, as well as for favorable foreign currency translation. Project related spending was weak in the first half of 2025, driven by uncertainties related to tariffs. However, the second half of 2025, we experienced consistent recovery and expect this to extend into 2026 based on leading indicators and discussions with our customers. Architectural coatings demand in Europe was mixed, low single digit percentage decline, which was partially offset by favorable pricing. We have now delivered positive pricing for 39 consecutive quarters in this business. Segment income increased 16% driven by improved pricing and cost management, and EBITDA margins improved nearly 100 basis points. We expect positive organic sales and margin momentum to continue in the first quarter of 2026 in this business. The performance coating segment delivered 5% net sales growth to $1.3 billion, led by double-digit organic growth in aerospace and consistent gains in our protective and marine coatings business, which now has delivered 11 consecutive quarters of volume growth. As expected, automotive refinish organic sales decreased by a high single-digit percentage as sales volumes were lower reflecting customer order patterns stemming from distributors more heavily weighting their purchases to the first half of 2025. However, one closely watched data point in the industry is U.S. accident claims. In December, year-over-year claims were down only 2% compared to high single-digit or low double-digit declines throughout the year. As we communicated in our third quarter earnings call, the industry claims normalization and our 2025 distributor order patterns will result in a difficult sales comparison for pbg in the first half of 26 but incremental volume growth during the second half of 2026. segment ebitda margin decrease driven by the lower automotive or finished coding sales and higher growth related investment spending in aerospace and protective and marine coatings partly offset by higher selling prices, and we expect margin contraction for the segment during the first half of 2026 with margin growth during the second half of the year. As you know, our aerospace business is an important growth engine for the company, and I want to take a moment to talk about the momentum in industry growth and the demand for our highly specialized, qualified products. The business is equally weighted to OEM and aftermarket customers with margins that are accretive to the overall reporting segment and has a strong presence in commercial, military, and general aviation. During our second quarter earnings call, we presented a significant expected aerospace OEM growth given the increased builds forecast for the next several years. In addition to the OEM growth, the forecast for higher aftermarket demand translates into sales growth CAGR of high single digit percentage growth for the foreseeable future. For PPG, this is a business that is more than just coatings with the majority of the portfolio being represented by transparencies, sealants and adhesives, and service and materials. For each one of these verticals, we compete with peers that do not have a strong presence in overlapping technologies. This makes our business very unique with a much stronger segment presence than any traditional competitor in our space. Moving to the industrial coding segment, fourth quarter net sales grew 3% to 1.6 billion with organic growth fueled by share gains that led to 5% sales volume growth, well outpacing industry demand. as we realize the full run rate benefit of share gains with strength in automotive OEM coatings and packaging coatings. From a business unit perspective, our automotive OEM business delivered 6% increase in net sales with growth above market as a result of our share gains. We expect to outgrow the market in the first quarter and for the full year in 2026 in this business. Organic sales for our industrial coatings business were flat as sales volumes growth in Europe and the Asia-Pacific region offset lower index-based pricing. Packaging coatings organic sales increased by a double-digit percentage year-over-year, growing significantly above industry rates. These results reflect the positive momentum in share gains led by Europe and the U.S. as a result of the technology shift favoring our sustainable product portfolio. Segment EBITDA was up 6% year-over-year and EBITDA margin improved by 30 basis points to 15.1%, reflecting the leverage from the organic sales growth along with our manufacturing productivity and strong cost control actions. Now looking ahead, we expect some softness in global industrial and automotive demand to impact organic sales and margins in the first quarter of 2026. Now let me talk about our balance sheet and cash. Strong cash flow generation remains a key pillar of our strategy. As I said, our operating cash flow increased by over half a billion dollars year over year to 1.9 billion in 2025. We returned 1.4 billion to shareholders through dividends of 630 million and share repurchases of 790 million, which represents about 3% of our outstanding shares. We ended the year with a strong cash balance of $2.2 billion and a net debt position of 5.1 billion with 700 million of debt maturing in the first quarter of 2026, which we intend to pay from our current cash position. Our balance sheet is strong, which continues to provide us with financial flexibility. And we remain committed to using this strength and flexibility to drive shareholder value. Capital expenditures for the year total approximately $780 million, reflecting our investment and growth initiatives, including expansions in aerospace in Mexico and our digital and AI capabilities. 2025 will represent the high-water mark of these growth investments, and we expect to sequentially pace back to our historical levels of approximately 3% of sales by 2027. Looking ahead, I'm encouraged by our organic growth momentum and what we will achieve in 2026. We anticipate that demand in Europe and global industrial end-use markets will remain challenged. However, despite the macroeconomic environment, we expect sales volume growth will be driven by aerospace, architectural coatings in mexico and about 100 million of share gains in the industrial coding segment that will be realized in 2026 including 50 million of carryover share gains announced last year we expect overall price for the company to be positive with strength from our performance and architectural coding segments which will partially offset by modest contraction in the industrial coding segment this will result in organic sales growth in the range of flat to positive low single digit percentage. Raw material basket remains favorable to coatings producers, and we are consolidating our supplier base, which will help us offset the impacts of already enacted tariffs, resulting in expected overall flat raw material costs for the year. Finally, during 2026, we expect growing benefits from operational and excellence programs, reducing our costs by another $50 million. This combined with the leverage from acceleration and volume growth is expected to drive earnings per share growth that at the midpoint of our guidance represents a mid single digit percentage increase. We expect earnings per share to be flat to growth of low single digit percentage during the first half of the year and increasing the high single digit percentage in the second half of the year. In closing, I'm excited about the increasing momentum we have demonstrating during fourth quarter that allows us to start 2026 on strong footing. We are laser focused on executing our enterprise growth strategy, which emphasizes high margin business growth, strong cash flow generation, disciplined capital allocation, and operational excellence. Our portfolio pruning completed in 2024 enables us to more effectively win with our customers and drive shareholder value additionally we are investing in customer innovation including digital and ai capabilities to maintain our technology leadership and coding sealants specialty materials and productivity solutions for our customers as always we remain disciplined with our cash deployment to drive shareholder value We're confident in our strategy and the strength of our business model to deliver sustainable long-term growth. Thank you to our PPG team around the world who make it happen and deliver on our purpose every day. We appreciate your continued confidence in PPG. I look forward to discussing our results and outlook in more detail during today's call.