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Why PPG’s Performance Coatings Net Income Margin Contracted

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Performance coatings in 1Q18

Among the two reporting segments for PPG Industries (PPG), PPG’s Performance Coatings segment contributed the larger share of the company’s overall revenue in 1Q18. In the quarter, the segment’s contribution to PPG Industries’ overall revenue stood at 57.2%, compared to 57.9% in 1Q17. The segment reported revenue of $2.17 billion, a rise of 7.3% on a YoY (year-over-year) basis.

The Performance Coatings segment’s revenue growth mainly resulted from favorable foreign currency and better pricing. The segment’s volume remained flat. Among the different business levels within this segment, automotive refinish coatings and aerospace coatings saw good volume growth. The architectural coatings business in the Americas and Asia-Pacific increased in low single-digit percentages year-over-year. Volumes also grew in Latin America, Mexico, Central America, and Brazil. However, architectural EMEA segment sales declined by a mid-single-digit percentage.

Volumes in the Americas and Asia rose on a YoY basis. Still recovering from the Mexican earthquakes, Latin American volumes remained flat. EMEA (Europe, the Middle East, and Africa) sales also remained flat. The company’s marine business, which had seen a falling trend, also remained flat.

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Net income and margin

The segment reported net income of $285 million in 1Q18—the same as 1Q17. The net income was mainly helped by favorable foreign currency, better cost management, and improved selling prices.

On the other hand, a rise in the cost of raw materials had an adverse effect on the segment’s net income. However, with net income remaining flat and the increase in revenue, we saw net income margin contraction on a year-over-year basis. In 1Q18, the segment reported a margin of 13.2%, compared to 14.1% in 1Q17—a decline of 90 basis points YoY.

Outlook

Foreign currency is expected to continue its positive impact on the segment’s revenue and income. The cost of raw materials is expected to continue to rise, which could affect the segment’s earnings margin. However, If PPG manages to pass these costs on through price hikes to its customers, its margins may remain flat or see a slight expansion.

Investors can access PPG Industries indirectly by investing in the Guggenheim S&P 500 Equal Weight Materials ETF (RTM), which has invested 3.9% of its portfolio in PPG Industries. The fund’s other holdings include Albemarle (ALB), Sherwin-Williams (SHW), and LyondellBasell (LYB) with weights of 3.9%, 3.9%, and 3.9%, respectively, as of April 19.

In the next part of this series, we’ll look into PPG’s Industrial Coatings segment’s performance in 1Q18.

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