Transportation and raw material breakdowns led PPG to miss second quarter results
HOUSTON (ICIS) – Persistent raw material and transportation blackouts along with higher raw material costs caused PPG to miss its previous estimate for adjusted second-quarter earnings, executives at the U.S. producer said on Tuesday paints and coatings.
In April, PPG expected second quarter adjusted earnings / share to be between $ 2.15 and $ 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 raw material suppliers had gone out of business due to winter storm Uri.
“At that point, our suppliers told us it would be a restart of several weeks,” said Vince Morales, chief financial officer of PPG. He made his comments on a results conference call.
Instead, the force majeure claims remained in effect for several weeks after PPG released its second quarter estimate, according to ICIS. Some companies only lifted their force majeure cases in July.
“As we progressed through the quarter and particularly into June, we continued to see commodity outages and escalations,” said Morales. In particular, PPG has experienced transportation breakdowns.
At times, PPG had to buy equipment in the cash market and it was difficult to get trucks to make deliveries, said Michael McGarry, CEO. The company had difficulty obtaining emulsions and resins from its suppliers.
Commodity inflation was in the teenage-average range compared to PPG’s April forecast of a high figure, McGarry said. “Obviously, this inflation cycle is much higher than anyone expected.”
The gap between costs and prices was most pronounced in the auto industry, he said. Passing cost increases on to automotive customers can be difficult, but McGarry noted that PPG has made progress in all regions of the world.
Industrial coatings had the second biggest gap, he said. These use a large amount of epoxy resins and isocyanates.
Overall, the disruptions on the supply side resulted in a shortage of some of PPG’s raw materials, resulting in an impact of $ 100 million, McGarry said. In April, PPG expected the hit to be $ 30-50 million.
Meanwhile, the shortage of semiconductor chips has continued to curtail production for automakers, which are important customers for PPG.
As a result, PPG’s estimate for second-quarter auto production was more than 2 million vehicles lower, McGarry said. This led to $ 100 million in revenue, $ 40 million more than what PPG had forecast in its April forecast.
In addition, Morales said PPG customers who had planned a downtime for the third quarter carried it over to the second quarter.
Looking ahead, PPG expects the disruption to continue into the third quarter. PPG expects third-quarter auto production to be $ 1 million lower than the company’s previous forecast.
PPG cited third-party forecasts that pointed to a 5% drop in auto production from the third quarter of 2019. These third-party forecasts, however, likely ignore recent announcements of cuts by automakers.
For architectural coatings, Morales said, “We are still in the third quarter and expect to experience shortages in the raw material supply for coatings.
“It moderates our ability to deliver some of our key products, particularly on the US side, so it’s one of the limiters we have in terms of sales prospects,” Morales said.
Largely due to supply disruptions, PPG expects third quarter sales volumes to be up a few digits from the third quarter of 2020.
Total third quarter net sales are expected to increase 21-23%. Organic sales are expected to increase to single digits.
Commodity inflation is expected to be 20% in the third quarter, Morales said.
For the fourth quarter, while fourth-quarter inflation is expected to remain high, PPG is expected to cut some of its spot hardware purchases, Morales said. These purchases cost more than traditional prices.
By the end of 2021, selling prices are expected to have caught up with inflation, PPG said.
For automobiles, auto dealer inventories are low in the United States and China.
In general, inventories across all of PPG’s businesses are exceptionally low, McGarry said.
Morales expects customers to restock just to achieve normal inventory levels.
“Our order book is very strong,” he said. “We just need to be able to fill 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 main 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).
Flagship article of Al Greenwood