By Jeff Sanford
Toronto, Ontario -- October 23, 2017 -- This week's Tuesday Ticker looks at AkzoNobel's reduces earnings expectations for a second time in two months, PPG reverses the previous years losses, NAPA's parent company misses on earnings and much, much more!
Paint maker AkzoNobel issued a second downgrade on its outlook for earnings. According to the company, operating profit will not grow at all this year. This is the second further downgrade in just two months as the company continues to retreat from the more optimistic estimates issued during the recent takeover battle with PPG. At that time AkzoNobel executives promised much more robust financial performance.
Since then, however, key executives have left the company. The new managers continue to notch down expectations. Specifically management warns that ongoing industry specific headwinds and supply chain disruptions as well as the effects of Hurricane Harvey led to the reduction in estimates of future earnings. The company did restate that it will go ahead with the sale of its Specialty Chemicals Division by early next year. The division could either be sold, or spun off as stand-alone company through an initial public offering. The company will also pay a one-time dividend of $1.18 billion to shareholders on December 7 as promised.
The previous CEO, Ton Buechner, had promised to produce an operating profit margin of 15 percent by the year 2020. The company, now managed by new CEO Thierry Vanlancker, is currently producing an operating profit margin below 12 percent. An analyst with UBS was quoted as saying, "A second profit warning in six weeks calls into question how achievable the ... 2020 [earnings] targets are." Shares in AkzoNobel fell almost two percent in the trading session following the announcement.
The new CEO told reporters that the rising cost of pigment for paints would continue to be a drag on profit margins for another five to six months as the company, “...passes on costs to customers.” The company has also scheduled the extraordinary shareholders meeting demanded by shareholders. That meeting will take place November 30. It is expected that the sale of the chemicals unit will be approved at that meeting and that two new directors will be decided upon.
In terms of third-quarter earnings AkzoNobel announced it had generated earnings of €383 million, which is down from the €442 million registered in the same period a year ago. Earnings were well below the consensus analyst estimate of €432 million euros. Total volume was up two percent, driven by Decorative Paints and Performance Coatings. Revenue was up 1%, mainly due to volume growth and acquisitions, partly offset by unfavourable currencies
In a conference call accompanying the release, Vanlancker was quoted as saying that earnings were, “... adversely impacted by ongoing weakness in the marine and oil and gas industries, as well as increased costs of raw materials in the paints and coatings industry and adverse currency effects. Measures being implemented to mitigate current industry specific headwinds include increased selling prices and additional cost control … “ The direct cost of hurricane Harvest about €25 million. Earning per share came in at €1.07, down from €1.20 generated in the same period in 2016. Akzo also announced that the separation of Specialty Chemicals is on track to be completed by April 2018.
“We have continued to grow our business with higher volumes and increased revenues despite challenging market conditions in selected areas of our business, especially in Marine and Protective Coatings,” said Vanlancker. "We have also initiated phase one of our transformation plan to create a fit for purpose Paints and Coatings organization which will deliver €110 million annual savings in 2018 contributing towards our 2020 financial guidance … There continues to be significant interest in our Specialty Chemicals business and we look forward to the separation process officially kicking off in the coming weeks.”
As the earnings season gets underway, PPG also reported this week. Net earnings from continuing operations came in at $1.52 per share for the third quarter of 2017. This is much better than a net loss from continuing operations of 79 cents registered last year. According to the company, net sales in the quarter increased 3.2 percent year-over-year to approximately $3.8 billion.
The sales number beat the estimates of analysts. Favourable shifts in currency helped the numbers. Overall, the Performance Coatings segment recorded $2.3 billion in sales and income of $365 million. Sales grew 3 percent over the same period last year. Acquisition-related sales added an extra $25 million to the bottom line. Overall, PPG Industries ended the quarter with cash and cash equivalents of $2,287 million, surging 146.2 percent over last year. Long-term debt rose 9 percent year-over-year to $4,089 million according to the press release.
In a conference call accompanying the release of the financial statements, PPG CEO Michael McGarry said the company, “... expects continued moderate global economic growth. Post the mayhem caused by the recent natural disasters, the company doesn't anticipate any further decline in the level of raw material cost inflation for the balance of this year … Our net sales for the third quarter were approximately $3.8 billion, up more than 3 percent year-over-year and our reported earnings per diluted share from continuing operations were $1.52. This quarter was filled with a lot of emotion and many operational challenges due to the number and severity of natural disasters that many experienced. I would first like to thank our employees for their commitment and support they provided and continue to provide. We will continue to support our impacted employees, their families and their communities as they continue to rebuild.”
Turning to specific results in the quarter, “Our US automotive OEM coatings business is expected to return to at market performance in the fourth quarter, coupled with continued PPG outperformance in other major auto producing regions,” said McGarry.
Auto parts company Genuine Parts (parent of NAPA) is not having a good third quarter earnings season. Shares in the company plunged almost 10 percent Thursday of last week following the company’s release of its latest earnings. Earnings of $1.16 per share were “well below analysts' consensus forecast for $1.28,” according to one report.
The plunge in the share price followed the release of the miss on earnings. The company also lowered its guidance for its year-end results, reducing its estimates on earning per share to a range of $4.55 to $4.60, down from a previously stated range between $4.70 and $4.75. In a conference call, the company’s CEO Paul Donahue said he was "disappointed" that cost-cutting measures had not resulted in the savings hoped.
During the call Donahue said that, “On the commercial side of the business, sales remain pressured by slow demand across our customer base with sales to NAPA AutoCare centres and major accounts down just slightly. Our major account business fluctuated by customer and we see a number of major accounts where we performed quite well but we also have a number of other accounts where we are off year-over-year.”
Even so, Donahue expressed confidence in the future, saying that, “Across our US automotive aftermarket, the long-term fundamental drivers for our business remains sound. The size of the vehicle fleet continues to grow, the average age of the fleet is up 11.7 years. Field prices remain favourable for the consumer and miles driven continues to post steady gains. Total miles driven increased 0.8 percent in July and are up 1.5 percent year-to-date. The national average price of gasoline was $2.76 in September, up $0.30 from June and more than $0.40 from last year. We can expect to see further increases in miles driven albeit at a slower rate.”
Summing up the performance Donahue said that, “Despite these sound fundamentals and the benefit of our US automotive acquisitions, which are meeting our expectations and driving sales growth, our organic growth has been below expectations. Cyclical factors such as two consecutive mild winters and vehicle age demographics has created a challenging environment. While we expect these industry conditions to improve in the quarters and year ahead, we are also focused on pulling the levers we do have control over to ensure we are well positioned as market conditions improve.”
Commenting on performance at NAPA Canada, Donahue was quoted as saying, “... both total sales and comparable sales strengthened further in the third quarter increasing in the mid to high single digit range from last year. We achieved this growth was strong execution of our strategy along with the favorable Canadian aftermarket sales climate. Areas of outsized growth continue to be our heavy duty truck parts business, our paint business, and our overall business in Western Canada.”
GPC recently undertook a major European acquisition. Donahue touched on the pending acquisition of Alliance Automotive Group. The deal seems set to significantly transform the company into a much more globally-focused organization. “This acquisition is valued at $2 billion and is expected to generate an estimated annual revenues of US $1.7 billion while also delivering accretive margins and positive net cash flows. We have received all applicable regulatory approvals to proceed with this acquisition and expect to close in November,” said Donahue. GPC also reported that,
Related Market Notes
Tesla is taking a bit of a beating as it continues to miss by a wide margin its promised production of its new Model 3 electric vehicle. Production levels are nowhere near what has been expected. This past week major Wall Street investment bank, JPMorgan cuts price target on Tesla shares. JPMorgan has an ‘underweight’ rating on the stock and has reduced its price target. In the third quarter Tesla delivered just 220 Model 3 cars. The expectation was that the company would produce 1,260.