uploads///PPG Performance Coating Q  Post

Why PPG’s Performance Coatings Segment Margins Declined

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

Performance Coatings in Q3 2018

PPG Industries (PPG) has two reporting segments: Performance Coatings and Industrial Coatings. The Performance Coatings segment was the most significant contributor to the company’s overall revenue in Q3 2018. Its contribution to total revenue was 60% compared to 60.6% in Q3 2017. It reported revenue of $2.29 billion and remained flat year-over-year.

The segment’s revenue was adversely impacted by the weakness in its architectural coatings segment. However, the most significant impact for this segment was affected by the strong dollar. An unfavorable foreign currency impacted the segment’ s revenue by ~$45 million. The automotive refinish coatings business also declined in volumes due to a lower end-user demand. As a result, the inventory levels are high.

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Net income and margin

The Performance Coatings segment reported net income of $331 million in Q3 2018, a decline of 9% YoY. Its net income was mainly impacted by lower sales volumes, higher raw material prices, an increase in logistical costs, and unfavorable foreign currency. With the segment’s revenue remaining constant and a decline in net margins, its net income margin contracted 150 basis points year-over-year.

Outlook

The Performance Coatings segment’s revenue is expected to continue to face pressure from the strong dollar. Unfavorable foreign currency is expected to have an adverse impact of $35 million–$40 million. PPG needs to continue its effort to increase product prices in order to overcome the challenges of an increase in raw material prices. That could also help improve its margins.

Investors can access PPG Industries indirectly by investing in the Invesco DWA Basic Materials Momentum ETF (PYZ), which has invested 2.3% of its portfolio in PPG Industries. The fund’s other holdings include FMC (FMC), LyondellBasell (LYB), and Chemours (CC) with weights of 4.1%, 3.8%, and 3.5%, respectively, as of October 19.

In the next part of this series, we’ll look at PPG’s Industrial Coatings segment’s performance in Q2 2018.

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