Transportation, feedstock outages led to PPG miss on Q2 earnings

Author: Al Greenwood

2021/07/20

HOUSTON (ICIS)--Persistent outages for raw materials and transportation as well as higher feedstock costs had caused PPG to miss its earlier estimate for second-quarter adjusted earnings, executives for the US-based paints and coatings producer said on Tuesday.

Back in April PPG had expected second-quarter adjusted earnings/share to be $2.15-2.20. Instead, the company reported $1.94 in adjusted earnings/share.

When PPG made that initial forecast, two months had passed since several of the company's feedstock suppliers had shut down operations because of Winter storm Uri.

"At that point in time, we were hearing from our suppliers that this would be a multi-week restart," said Vince Morales, chief financial officer of PPG. He made his comments during an earnings conference call.

Instead, force majeure declarations remained in effect for several weeks after PPG released its Q2 estimate, according to ICIS. Some companies did not lift their force majeures until July.

"As we progressed through the quarter and especially in June, we continued to see outages and escalations of raw materials," Morales said. In particular, PPG saw outages in transportation.

There were times that PPG had to buy material on the spot market and it was challenging getting trucks to make the deliveries, said Michael McGarry, CEO. The company had a hard time getting emulsions and resins from suppliers.

Inflation for raw materials was in the mid to high teens versus PPG's April forecast of the high single digits, McGarry said. "Clearly, this inflation cycle is much higher than anyone anticipated."

The gap between costs and prices was most pronounced in the automotive industry, he said. It can be difficult to pass through cost increases to auto customers, but McGarry noted that PPG has made progress in every region in the world.

Industrial coatings had the second largest gap, he said. These use a large amount of epoxy resins and isocyanates.

In all, supply-side disruptions led to a shortage of some of PPG's raw materials, resulting a $100m hit, McGarry said. Back in April, PPG expected that blow would be $30m-50m.

Meanwhile, the shortage in semiconductor chips had continued to curtail output among automobile producers, which make up a big customer base for PPG.

As a result, PPG's estimate for Q2 automobile production was off by more than 2m vehicles, McGarry said said. That led to a $100m hit in sales, $40m higher than what PPG had anticipated in its April forecast.

In addition, Morales said PPG customers who had scheduled downtime for the third quarter moved it up to the second quarter.

OUTLOOK
Looking ahead, PPG expects disruptions will continue in the third quarter. PPG expects Q3 automobile production will be 1m less than the company's earlier forecast.

PPG quoted third-party forecasts that pointed to a 5% decline in automobile production when compared with the third quarter of 2019. Those third-party forecasts, however, are not likely factoring in the recent curtailment announcements by automobile makers.

For architectural coatings, Morales said, "We are still in the third quarter expecting to experience shortfalls for coatings raw material supplies.

"It is moderating our ability to supply some of our key products, especially on the US side, so that is one of the limiters we do have in terms of our sales outlook," Morales said.

Largely because of supply disruptions, PPG expects third quarter sales volumes to be up by the low single digits when compared with the third quarter of 2020.

Total net sales in the third quarter should rise 21-23%. Organic sales should rise by the low single digits.

Raw material inflation should be 20% in the third quarter, Morales said.

For the fourth quarter, while Q4 inflation should remain high, PPG should remove some of its purchases of spot material, Morales said. Those purchases come at a large premium over traditional pricing.

By the end of 2021, selling prices should have caught up with inflation, PPG said.

For automobiles, inventories across car dealerships are low in the US and China.

In general, inventories in all of PPG's businesses are exceptionally low, McGarry said.

Morales expects customers will restock just to get to normal inventory levels.

"Our order book is very strong," he said. "We just have to be able to fulfil that with product availability."

Paints and coatings are important end markets for titanium dioxide (TiO2) and several solvents such as glycol ethers, butyl acetate (butac), methyl ethyl ketone (MEK) and isopropanol (IPA).

Automobiles, one of the major end markets for paints, also consume a lot of plastics and chemicals, including polypropylene (PP), polyurethanes, nylon, acrylonitrile butadiene styrene (ABS), styrene acrylonitrile (SAN), polycarbonate (PC) and styrene butadiene rubber (SBR).

Focus article by Al Greenwood