PPG has reported Q3 2020 net sales of about US$3.7bn, down approximately 4% yr-on-yr. Selling prices increased by 1.3%. Sales volumes were down about 5% yr-on-yr, which reflect ongoing negative economic impacts of the COVID-19 pandemic. Acquisition-related sales added less than 1% to sales growth, and the yr-on-yr impact from foreign currency translation was minimal.
Q3 2020 reported net income from continuing operations was US$442M, or US$1.86 per diluted share. Adjusted net income from continuing operations was US$458M, or US$1.93 per diluted share. Adjusted figures exclude after-tax items of US$16M for hurricane-related expenses and restructuring-related costs. Q3 2019 net income from continuing operations was US$366M, or US$1.54 per diluted share, and adjusted net income from continuing operations was US$396M, or US$1.67 per diluted share. The Q3 2020 reported and adjusted effective tax rates were approximately 22%, compared to the Q3 2019 reported and adjusted effective tax rates of 23%. Detailed reconciliations of the reported to adjusted figures are included below.
“As reported earlier this month, we delivered record operating results in the third quarter, with both of our reportable business segments delivering higher segment income than the prior year, despite continued, negative pandemic-related economic effects,” said Michael H McGarry, PPG Chairman and CEO. “Strong year-over-year organic sales growth in global architectural coatings and continued cost management drove earnings growth in our Performance Coatings reporting segment. In addition, our leading technology and service capabilities benefited us as demand for automotive OEM coatings and general industrial coatings began recovering in the quarter, generating strong PPG operating leverage and boosting earnings in our Industrial Coatings reporting segment.
“In aggregate, we delivered operating margins that were about 300 basis points higher than the prior year. Our continued execution of both interim and structural cost-savings initiatives is driving higher incremental earnings on improving sales volumes. In the quarter, we delivered about US$90M of cost savings from various interim initiatives and about US$35M of incremental structural savings from business restructuring programs, including the execution of some manufacturing footprint optimisation initiatives. In addition to our earnings performance, we generated more than US$800M of cash from operations in the quarter, including the benefit of a 150-basis-point reduction in working capital as a percent of sales versus the third quarter 2019.
“Looking ahead, we are likely to experience normal seasonal trends in the fourth quarter, especially in our European and North American architectural coatings businesses,” McGarry added. “Even with the continued uncertainty from the pandemic we expect overall economic activity to continue to recover, but in an uneven manner. The pandemic is still significantly impacting the demand for certain coatings products – most notably, global commercial aerospace, marine, and protective coatings that support the oil and gas industry. In addition, we expect that automotive refinish coatings demand in the US and Europe will remain below 2019 levels until there is a return to more normal commuting patterns. We remain well positioned to capture additional incremental earnings growth once these sectors, that represent about 30% of our business portfolio, begin to recover. Similar to the past several quarters, we will continue to focus on execution against all elements within our control. Also, the company’s balance sheet remains strong, and we are evaluating earnings-accretive cash deployment alternatives.
“We will continue to prioritise the health and safety of our employees, while providing excellent support to our customers with our technology-advantaged products. I am very proud of the entire global PPG team, and I want to thank everyone for their continued focus and diligence during these challenging times. As I said last quarter, I remain confident that we are on the path to emerge from this crisis as an even stronger company, and these record quarterly results lay the foundation for delivering on this commitment,” McGarry concluded.
Q3 2020 Reportable Segment Financial Results
Performance Coatings segment Q3 net sales were about US$2.3bn, down approximately US$60M, or about 3%, yr-on-yr. Selling prices increased by 2%, and acquisition-related sales added nearly 1%, or about US$20M, primarily from the Texstars and ICR acquisitions. These gains were more than offset by lower sales volumes of about 5%, or about US$125M, primarily related to the COVID-19 pandemic. There was no material impact from foreign currency translation during the quarter as the strengthening Euro was offset by weaker Latin American currencies. Architectural coatings – Europe, Middle East and Africa (EMEA) yr-on-yr net sales, excluding the impact of currency and acquisitions (organic sales), increased by about 10%, driven by increased consumer demand after many countries permitted retail store re-openings following mandated closures during Q2. Yr-on-yr organic sales, in architectural coatings – Americas and Asia Pacific were up a low-single-digit percentage, with differences by channel and region. Despite challenging economic conditions in Mexico, the PPG-Comex architectural coatings business grew organic sales by a mid-single-digit percentage. Sales volumes in protective and marine coatings were down a mid-single-digit percentage, driven by lower demand in all major regions except Asia Pacific. Aerospace coatings sales volumes were down about 35% impacted by lower commercial OEM and aftermarket demand, while sales for aerospace military applications were similar to the prior year driven by growing demand for PPG’s technology-advantaged products. Sales volumes for automotive refinish coatings improved significantly compared with the prior sequential quarter, but still declined about 10% yr-on-yr. Automotive refinish coatings sales volumes in China were higher than the prior year as automotive miles driven and traffic congestion have returned to pre-pandemic levels. Segment income for Q3was $426 million, up about US$45M, or about 12%, yr-on-yr. Segment income was aided by higher selling prices, cost-mitigation efforts and restructuring initiatives, partially offset by the unfavourable earnings impact from lower sales volumes stemming from the pandemic.
Industrial Coatings segment Q3 net sales were about US$1.4bn, down about US$80M, or about 5%, yr-on-yr. As a result of the continued decline in global economic demand stemming from the COVID-19 pandemic, sales volumes decreased by 5% yr-on-yr; however, this was a dramatic improvement versus the near 40% yr-on-yr volume decline experienced in Q2. There was no material impact from foreign currency translation during the quarter. PPG automotive original equipment manufacturer (OEM) coatings sales volumes differed by region but in aggregate were relatively flat compared to the prior year and above global industry auto production rates, supported by our leading technology and customer service capabilities. This includes robust yr-on-yr growth in China aided by higher regional industry retail sales, along with significant sequential quarterly improvement in industry build rates in the US and Europe. PPG sales volumes for automotive OEM coatings in China were higher than the prior-year quarter by a low-teen percentage. Sales volumes for the industrial coatings business also improved significantly from Q2 2020; although demand varied by sub-segment and was down a mid-single-digit percentage in aggregate yr-on-yr. Packaging coatings sales volumes decreased a low-single-digit percentage yr-on-yr, as growing demand in the US and Latin America was offset by softer aggregate demand in Asia and Europe. Segment income for Q3 was US$253M, up about US$45M, or approximately 23% yr-on-yr. Segment income was aided by aggressive cost-mitigation actions, restructuring cost savings and modestly higher selling prices, partially offset by the unfavourable earnings impact from the lower sales volumes.
The company ended Q3 with net debt of US$3.5bn, approximately US$600M lower than Q2. The company prepaid US$1bn of a US$1.5bn term loan maturing in April 2021. The company’s US$2.2bn revolving credit facility is currently undrawn.
In addition, the company has reported the following projections for Q4 2020 based on current global economic activity:
- Aggregate sales volumes are anticipated to be down a low-to-mid-single digit percentage, differing by business and region
- Total incremental structural cost benefits from restructuring savings are expected to be between US$30M and US$35M
- Corporate expenses are expected to be between US$55M and US$60M compared to US$55M in Q3 2020
- Net interest expense is anticipated to be between US$28M and US$30M.
- The company’s global ongoing effective tax rate is expected to be in the range of 18% to 21%. The rate is lower sequentially versus Q3 driven by potential discrete items to be realised in Q4
- Adjusted earnings per diluted share are expected to be between US$1.50 and US$1.57.