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Why PPG’s Industrial Coatings Segment Margin Declined in Q2

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Jul. 23 2018, Updated 7:32 a.m. ET

Industrial Coatings in Q2 2018

PPG Industries’ (PPG) Industrial Coatings segment is its second reporting segment. It represented 39.5% of the company’s total revenue in Q2 2018 compared to 39.6% in Q2 2017. It reported revenue of $1.63 billion, an increase of 8.5% over Q2 2017 when it reported revenue of $1.5 billion.

The segment’s revenue increase was primarily driven by the 3% rise in sales volume and a favorable foreign currency, which helped revenue grow ~2.5%. It was also driven by higher selling prices, which added 1%, and acquisitions, which contributed 2% to growth. Among the various businesses within the segment, growth was seen in automotive OEM[1. original equipment manufacturers] coatings, general industrial coatings, and packaging coatings due to the continued adoption of the new technology by customers.

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Net income and margin

In Q2 2018, the Industrial Coatings segment reported net income of $223 million, a fall of 15.5% YoY. The decline was mainly due to the increase in raw material costs, increased logistical costs due to increased crude oil prices, and the inability to pass raw material cost increases on to its customers. As a result, the segment’s net income margin witnessed a sharp contraction of 380 basis points YoY, from 17.5% in Q2 2017 to 13.7% in Q2 2018.

Outlook

The segment’s revenue is expected to grow, driven by acquisitions, higher selling prices, and volume growth. The increase in raw material prices and the logistics cost is expected to continue, which will add pressure to the segment’s net income and margins.

The Invesco DWA Basic Materials Momentum ETF (PYZ) has invested 2.1% of its portfolio in PPG Industries. The fund’s other holdings include Ashland (ASH), Chemours (CC), and FMC (FMC) with weights of 4%, 3.8%, and 3.7%, respectively, as of July 19.

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