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PPG Reports Modest Growth in Q2

Friday, July 22, 2016

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Despite dips in its Architectural Coatings sales volumes, global paint and coatings manufacturer PPG reported consistent performance and modest growth, comparable to the previous year, in its second quarter earnings report, released Thursday (July 21).

Noting that the company was able to deliver strong financial results and implement its strategic initiatives in the quarter, PPG President and CEO Michael H. McGarry highlighted continued double-digit growth in adjusted earnings per diluted share.

PPG President, Matthew McGarry
Images: PPG

For the Q2 2016 reporting period, PPG President and CEO Michael H. McGarry said “overall sales volumes were consistent with the prior year, reflecting modest growth rates in major economies.”

“We achieved 11 percent adjusted-earnings-per-share growth, marking 14 consecutive quarters of double-digit percentage growth,” despite unfavorable currency translation, he said.

“This consistent performance over an extended period of time is attributable to several factors, including our successful commercialization of innovative new products, aggressive management of our businesses and cost structure, and earnings-accretive cash deployment,” McGarry explained.

McGarry noted an increased sales volumes in the company’s Industrial Coatings segment, driven by above-market growth in general industrial and packaging coatings.

A dip in global architectural coatings volumes contributed to a decline in Performance Coatings segment sales volumes, he said. This decline, however, was reportedly partially offset by gains in automotive refinish and renewed growth in the aerospace business.

McGarry also called out a number of strategic objectives the company was able to implement in the second quarter.

These actions included the:

“Also during the quarter, we fully funded our portion of the Pittsburgh Corning Asbestos Settlement Trust and announced the annuitization of a sizable portion of our pension obligations, both significant actions to mitigate risk and reduce future earnings volatility,” McGarry added.

Year-over-Year Consistency

“In the quarter, overall sales volumes were consistent with the prior year, reflecting modest growth rates in major economies,” according to McGarry.

Q2 Infographic

PPG indicated this was the 14th consecutive quarter that it saw double-digit percentage growth in adjusted earnings per diluted share.

PPG reported net sales of $4.1 billion in the second quarter, down less than 1 percent from the previous year. Net sales in local currencies grew by more than 1 percent year over year, while acquisition-related sales added more than 1 percent.

Sales volumes and selling prices were flat compared to this time last year, and unfavorable foreign currency translation was credited for negatively impacting net sales by more than 2 percent, or about $95 million.

Net income for the quarter was $370 million ($1.37 per diluted share), compared to $337 million ($1.23 per diluted share) in Q2 2015.

Adjusted net income for Q2 2016 was $498 million ($1.85 per diluted share), compared to $458 million ($1.67 per diluted share) for the same period in 2015.

The adjusted net income figure excludes net after-tax charges related to asbestos settlement funding-related taxes, asset write-downs, transaction-related costs, and a gain on the sale of the company’s minority ownership interest in Pittsburgh Glass Works, PPG said.

The effective tax rate for the quarter was reported as 44.1 percent, compared to 24.3 percent in Q2 2015.

“In total, local-currency sales grew year-over-year in the vast majority of our businesses, and in several businesses we outpaced end-use market demand,” McGarry said.

Performance Coatings

Net sales of $2.34 billion for the Performance Coatings division represented a decline of 3 percent year over year, McGarry said.

Sales in local currencies dipped less than 1 percent from the previous year. Acquisition-related sales were reported at $25 million; these and improved selling prices, however, were said to have been affected by a 2 percent decline in sales volumes.

Net sales for this segment felt an impact of more than 2 percent ($60 million) from unfavorable foreign currency translation.

The automotive refinish coatings line continued to register local-currency sales growth at a mid-single-digit percentage rate; this reflects PPG market outperformance and higher industry demand, according to the company.

Aerospace signaled a return to sales volume growth, increasing by a low-single-digit percentage versus the prior year.

PPG architectural

Although the Architectural Coatings segment saw a decline in most markets, it highlighted improvements in Mexico and Central America, as well as an increase in sales volume at company-owned stores in North America.

A decline in sales volumes for protective and marine coatings was attributed to continued weakness in the marine new-build end-use markets.

After showing improvement over the past three quarters, architectural coatings - EMEA (Europe, Middle East and Africa) saw a dip in sales volumes resulting from unfavorable weather patterns and flooding across Western Europe.

Architectural coatings - Americas and Asia Pacific sales volumes fell by a mid-single-digit percentage, including declines in both China and Brazil of more than 20 percent.

U.S. and Canada also witnessed declines in architectural coatings volumes as the independent dealer channel contracts, national retailers show lower aggregate volumes versus past-year results, and customer initiatives are underway to permanently reduce inventory levels. Sales volumes in company-owned stores in the U.S. and Canada were up modestly versus the prior year, it added.

In Central America, strong architectural coatings volume growth came from continued efforts to establish a presence in the region.

The company credited its improved market penetration and robust store-count for the architectural coatings local-currency sales growth in Mexico, which was more than double the country’s GDP growth rate.

Income for the overall segment in Q2 was reported at $428 million, up 4 percent from the prior-year period.

PPG attributes strong cost management, with additional business-restructuring benefits, and acquisition-related income for growth in this area. These were, however, partially offset by lower sales volumes.

Foreign currency translation negatively impacted segment income by about $10 million.

Industrial Coatings

Net sales for Industrial Coatings grew 2 percent to $1.44 billion year over year.  

Sales in local currencies increased more than 4 percent as a result of a 3 percent growth in sales volume a 3 percent increase (or $40 million) in acquisition-related sales.

Unfavorable foreign currency translation impacted net sales by 2 percent, or about $30 million.

Automotive original equipment manufacturer (OEM) coatings sales volumes increased by a low-single-digit percentage, in line with continued modest global automotive industry production growth rates.

Industrial coatings and specialty coatings and materials both delivered solid low- to mid-single-digit percentage sales volume growth year-over-year, outpacing global industrial production particularly in Europe and Asia.

PPG protective and marine

The protective and marine coatings business continues to feel the impact of continued weakness in the marine new-build and end-use markets.

Packaging coatings continued to deliver above-industry growth rates, as sales volumes increased by a high-single-digit percentage driven primarily by new-technology-related customer conversions.

For the segment, Q2 income saw a 12 percent increase year over year, reported at $292 million. PPG credited the boost to increased income leverage from higher sales volumes, lower total costs that included manufacturing cost efficiencies and increased benefits from business restructuring, and acquisition-related income.

Foreign currency translation negatively impacted income for this division by about $5 million.

Glass

Higher selling prices, partially offset by unfavorable foreign currency translation, led to net sales of $282 million for the Glass segment, a bump of 1 percent over the prior year. Aggregate segment sales volumes were flat year-over-year, PPG said.

Flat glass sales volumes declined slightly, mainly early in the quarter, due to the impact of a facility that returned to production in April following a scheduled maintenance outage in the first quarter. Flat glass industry demand remained solid. Fiber glass sales volumes grew slightly, with modest variation by region.

Income for the Glass division grew to $43 million, up $6 million from the prior year, because of higher net sales and cost improvements; these were partially offset by $3 million of flat glass facility repair-related and startup-related expenses and lower equity earnings from Asian joint ventures.

Global Market Activity

According to McGarry, the company’s European volume growth continued to surpass regional gross domestic product growth, showing higher year-over-year results across most end-use markets.

aerospace coating facility

The aerospace business line returned to sales volume growth, PPG said, increasing by a low-single-digit percentage compared to the prior year, which helped offset some of the decline in architectural coatings.

The company saw accelerating sales volumes in Asia, which it attributed to growth in China and India that aids both coatings segments.

In the U.S. and Canada, net sales declined in comparison to the prior year, primarily as a result of lower architectural coatings volumes, PPG said.

However, volumes in Latin America grew based on architectural coatings growth in Mexico and expansion into Central America, McGarry noted.

The Year Ahead

“Looking ahead, we anticipate an acceleration of volume growth in the third quarter, as several of our recent growth initiatives begin to provide benefit,” McGarry said.

“We will maintain discipline regarding our cost structure, including continued focus on realizing targeted benefits from our previously announced business restructuring.”

He added that the company expects accelerated cash deployment in the second half of the year. Total deployment for 2015 and 2016 combined would be near the upper end of its previously announced earnings-accretive cash deployment targets—between $2 billion to $2.5 billion of cash—for acquisitions and share repurchases.

The company has spent $1.6 billion toward that target to date, including for the MetoKote Corporation acquisition that closed July 1.

During the quarter, the company utilized more than $800 million to fully fund its portion of the Pittsburgh Corning Asbestos Settlement Trust.

PPG indicated cash and short-term investments totaled approximately $1.7 billion at the end of the second quarter, versus about $1.2 billion for the prior-year period.

   

Tagged categories: Aerospace; Architectural coatings; Automotive coatings; Business matters; Coatings manufacturers; Earnings reports; Finance; Marine Coatings; OEM (Original Equipment Manufacturers); PPG

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