Timothy Knavish
Chairman and Chief Executive Officer at PPG Industries
Thank you, John, and good morning, everyone. Welcome to our third quarter 2023 earnings call. I'd like to start by providing a few highlights on our third quarter record financial performance, and then I'll move to our outlook.
In the third quarter, the PPG team continued to deliver strong financial results including sales of $4.6 billion, and adjusted earnings per diluted share of $2.07, both records for our third quarter. Our year-to-date cash generation is over $1.5 billion, which is also a record on a year-to-date basis. Our adjusted EPS of $2.07 was 25% higher year-over-year. We benefited from several non-recurring favorable discrete income tax items, which added $0.10 versus our beginning of quarter guidance. Excluding this favorable tax benefit this year, our EPS was still about 20% higher than the third quarter of 2022. We're on pace to finish 2023 with all-time record adjusted earnings per share.
As we communicated at the beginning of the year, we had a high degree of conviction that our global business portfolio mix would prove resilient this year. And as we had anticipated a challenging economic environment, that has clearly played out through the first nine months of the year. Our results were supported by good growth trends and strong execution in several of our leading and technology advantaged businesses which resulted in record third quarter sales in the Aerospace, Automotive OEM, Automotive Refinish and PPG Comex Coatings businesses.
Our third quarter sales volumes were impacted by soft global industrial production, which worsened in many countries during the quarter, and also by cautious consumer buying patterns in Europe, China and other parts of the world. The selling price increases we implemented earlier this year, primarily in the Performance Coatings segment drove a solid 3% increase for the quarter. We expect selling prices to remain positive in the fourth quarter of 2023, albeit a little lower sequentially as we continue to see prior price increases reach their anniversaries.
Throughout 2023, a key priority for our team has been restoring our margin profile. The third quarter marked the fourth consecutive quarter of year-over-year operating segment margin improvement with Aggregate segment margins up 260 basis points. This led to both of our operating segments delivering at least 25% earnings growth in the third quarter, with the Industrial Coatings segment also delivering higher sequential margins.
Another key focus remains strong cash generation. Throughout the first three quarters of the year, the $1.5 billion operating cash generation that we delivered is up more than $1.1 billion over a year to -- on a year-over-year basis. In addition to our strong earnings performance, we significantly reduce working capital in total by about $300 million, mainly driven by lower inventories, contributing to the robust operating cash flow generation.
We used part of this cash to reduce our higher variable cost debt during the quarter and despite significant increases in market interest rates, our net interest expense declined year-over-year. As we look to continue our momentum into the fourth quarter, we are laser-focused on achieving top line sales and earnings growth in 2024 and beyond.
I'd like to highlight a few items that we expect will support growth in 2024. First, as I communicated at our CEO Investor Briefing in May, we are working on a number of commercial growth opportunities and several of these initiatives have been launched and are now gaining momentum. For example, we are pleased with the progress being made supporting our customers' rapid growth of electric vehicles in China with PPG technology advantage products and services. We're well positioned with the leading electric vehicle producers and continue to gain share as the production rate increases each quarter including strong EV export activity out of China.
In the past few years, we've invested to enhance our manufacturing and technology capabilities around powder coatings products with prudent capacity additions. This year we're realizing the benefit of these investments as our powder coating related sales have increased about 15% compared to last year. We're winning new business every quarter, and supporting our customers' sustainability and productivity objectives and we expect powder to outgrow the market for a number of years to come.
Another commercial growth initiatives supporting our growth in 2024 and beyond, involves expanding the breadth of products being sold through the PPG Comex distribution network. Our world class network of over 5,100 concessionaire locations in Mexico has consistently outgrown the regional architectural market and provides customers with their preferred paint brand and products in Mexico. We are very excited about the opportunity to now leverage this distribution network to support customer needs for protective, refinish, traffic and light industrial products. So these focus areas are part of a larger basket of commercial initiatives that will support our previously communicated organic sales growth targets. I will provide periodic updates on these initiatives in subsequent quarters.
Our legacy of PPG and another catalyst for earnings growth going forward is strong cash generation and value creating capital deployment. I plan to continue to abide by our hallmark of prudent balance sheet management and financial flexibility supported by strong free cash flow of our business portfolio. Year-to-date, we have delivered record cash flow from operations and we have utilized this to deliver on our prior commitment to repay some variable rate debt, driving down our interest expense.
In the fourth quarter, we will likely incorporate some additional debt repayment, but we'll also likely complete some share repurchases reflecting our strong cash position and seasonality of our cash flows. In addition to the sales and earnings growth initiatives, one other strategic initiative that we've been actioning relates to some selective pruning of our business portfolio. As a reminder, we've recently divested a number of smaller assets, including most of our coatings businesses in Africa, a non-core business that we acquired with the Ennis-Flint acquisition and have exited certain product categories in some businesses.
In addition, this week, we announced the divestiture of certain international operations in our Traffic Solutions business. These actions allow us to channel our growth bandwidth in areas that are meaningful, and where we have winning advantages, including technology, brands and customer relationships. We will continue to actively assess each of our businesses, and product lines to ensure are consistent with our growth objectives and that they meet our financial objectives, and they earn the right to remain in the portfolio.
Now I'll comment on our fourth quarter outlook. We expect several of the businesses in our Performance Coatings segment to deliver organic growth, including continued solid growth in our PPG Comex and Aerospace businesses. We do expect slowing in U.S. Architectural Coatings demand stemming from multi-decade highs in interest rates and lowering housing turnover.
While we expect our automotive OEM business to grow in the fourth quarter in most regions, other portions of our Industrial Coatings segment will be challenged due to sluggish overall global industrial production. While there are many variables in uncertain timing, we have prudently included an estimated financial impact of the UAW strike of a few cents of EPS in our fourth quarter financial guidance.
As we have communicated in the past, our regional sales to the OEMs impacted by the strike are low single-digit percentage of our total company sales. Also, we sell to other OEM customers in the region not impacted by the strikes. And given the historically low dealer inventory levels, we expect any loss volume will be made-up in subsequent quarters.
Certain other sales volume headwinds are beginning to abate as we expect China is at or approaching trough levels, also, we do not expect destocking to be a significant issue in our packaging coatings end-use market in 2024. With regard to commodity raw material supply has normalized to pre-pandemic levels and we expect to continue to realize benefits from moderating input costs. We will maintain emphasis on diligently managing our costs and expect to make more progress on our previously announced restructuring initiatives.
In addition, we are beginning to deliver manufacturing and productivity gains, which are supported by a more stable supply chain and customer order pattern. Despite the challenging environment, we've raised our full year earnings guidance and expect fourth quarter Aggregate segment margins will be higher on a year-over-year basis for the fifth consecutive quarter.
Lastly, I would like to thank our team members around the world, who live our purpose every day to protect and beautify the world. Thanks to their hard work and dedication, we were able to support our customers and help them solve their biggest challenges. I remain confident in our team's ability to make it happen.
Thank you for your continued confidence in PPG, this concludes our prepared remarks and now would you please open the line for questions.
