Tuesday Ticker: July 24, 2018

By Jeff Sanford 
Toronto, Ontario – July 24, 2018 – In this week’s Tuesday Ticker, Akzo misses on Q2 earnings, PPG posts profit, NAPA’s parent company continues to grow, and much, much more.
Second quarter earnings season is underway. Companies are reporting results for the last quarter. Executives are hosting conference calls to explain the numbers. This past week both Akzo Nobel and PPG reported results, less than a year after the two were locked in a heated takeover battle.
Akzo Nobel
On Wednesday the Dutch paint and coatings maker said its operating income fell 23 percent to 225 million Euros. Sales were also down, slipping 3 percent in the second quarter. The results missed analyst’s estimates for performance in the second quarter. Akzo is being closely watched after a proposed acquisition by PPG was turned down by the board and management last year. Although the company reported results below the expectations of analysts, investors seem to like the potential of the company. Over the last week shares of Akzo have risen from roughly five euros, from 73 euros per share to 78 euros per share. In a conference call Thierry Vanlancker, Akzo, CEO, discussed the results. According to Vanlancker, “We are making continued progress with our transformation, including disciplined execution of what we announced last year, the first phase of our creating a fit-for-purpose organization, which delivered EUR 25 million of savings in the second quarter.” Vanlancker went on to note that revenue in constant currencies increased in all performance coatings segments, except the marine and protective coatings sectors. As well, “Raw material inflation is projected to continue for the remainder of 2018, although at a slower rate than during the start of the year. Robust pricing initiatives and cost-saving programs are in place to mitigate the current challenges.” The company has announced it is increasing the price of some product as the rising cost of crude oil pushes up the cost of production. On the rising costs Vanlancker said in the conference call that, “As expected, higher raw material cost continued to impact us in the second quarter 2018. This was due to the year-on-year effect of continued inflation through 2017. Raw material inflation is projected to continue for the remainder of 2018, although at a slower rate than during the start of the year. Robust pricing initiatives are in place, as you’ve seen, to compensate for higher raw material cost. This remains our key focus for the commercial organization.” Overall, selling prices were up 3 percent for performance coatings. In other business, the company bought up Fabryo in Romania and opened a new powder coatings plant in Changzhou, China. Vanlancker also discussed progress concerning the company’s plan for boosting the share price. The plan was introduced during the takeover battle as a way of offering an alternative strategy to shareholders in the heat of the PPG takeover battle last spring. “We are on track to achieve the announced EUR 110 million savings for 2018… We also continue to develop a more high-performance culture. Our incentives are now completely aligned to the achievement of 15 by 20, meaning 15 percent return on sales in 2020, following the approval at our AGM in April. This is also the case for senior executives and other colleagues with a variable incentive program. So we are delivering towards our Winning together: 15 by 20 strategy,” said Vanlancker. As part of that plan Akzo agreed in March to sell its specialty chemicals unit for 10.1 billion euros to a group of buyers led by Carlyle Group.
PPG recently marked their 135th year in business. Michael H. McGarry, PPG chairman and chief executive officer, rang the bell to signal the close of business on the New York Stock Exchange. “Ringing the NYSE closing bell puts an exclamation point on our 135th anniversary. This is a milestone that few manufacturing companies reach,” said McGarry. According to a press release distributed at the time, over its 135-year history, the company has strategically transformed from a plate glass manufacturer based in Pittsburgh to a leading paint, coatings and specialty materials manufacturer, with more than 47,000 employees and 160 manufacturing facilities in 70-plus countries. PPG has paid uninterrupted annual dividends since 1899 and has raised its annual dividend payout for 46 consecutive years. PPG continued that solid performance in the most recent quarter. Last week, the company reported second quarter 2018 net sales of about $4.1 billion, up nearly 9 percent versus the prior year. Second quarter 2018 adjusted net income from continuing operations was $468 million, or $1.90 per diluted share. Revenue rose 8.6 percent to $4.13 billion. That number was higher than analysts expected, a result driven by higher selling prices, volume growth and acquisition-related sales. The good results have failed to reverse a decline in the company’s stock price, which is down almost nine percent on the year. For the quarter ahead PPG expects its third-quarter sales volume-growth rate to be 1.2 percentage points to 1.5 percentage points lower. According to a press release, the company expects raw material and logistics costs to continue to increase in the quarter, as a result of higher oil prices and transportation challenges. PPG said it was raising prices and starting its restructuring program as a result. PPG said it expects cost inflation to continue in the current quarter. “During the quarter, we delivered strong net sales growth in local currencies of about 6 percent,” said McGarry. “This advancement was achieved through solid volume growth and higher selling prices. Our sales volumes grew more than 3 percent with solid contributions from both of our reporting segments including higher activity in emerging regions. In Performance Coatings, sales volumes grew nearly 4 percent year-over-year as above-market growth was achieved in aerospace and automotive refinish… In Industrial Coatings, sales volumes increased nearly 3 percent, led by above-market growth in packaging coatings and continued growth in the automotive OEM and general industrial coatings businesses.” According to McGarry, “In the quarter, raw material and logistics costs continued to increase, including the impacts of higher oil prices and the availability of transportation. We are working diligently to offset these cost pressures by collaborating with our customers on selling price initiatives, with our pricing in the quarter increasing more than 2 percent year-over-year… As we look ahead, we currently do not anticipate any relief from inflationary cost pressures in the third quarter. We expect aggregate global economic growth to remain positive with end-use market activity comparable to the second quarter, adjusted for traditionally lower seasonal demand. However, uncertainties exist regarding global trade policies, which may create uneven demand by region and in certain industries.” PPG repurchased shares totaling nearly $1.1 billion during the first half of 2018 including approximately $460 million in the second quarter. “Our acquisition pipeline remains active and we expect to continue our earnings-accretive cash deployment in the second half of 2018. We are committed to deploying a total of $2.4 billion in 2018 on acquisitions and share repurchases as we remain focused on shareholder value creation,” said McGarry. PPG also announced the appointment of Diane Kappas as vice president of, Americas, automotive original equipment manufacturer (OEM) coatings, effective Sept. 1. Juanjo Ardid, currently general manager, global adhesives and sealants, will become vice president, PMC, U.S. and Canada, effective Aug. 1. Kappas joined PPG in 1986 as a resin process engineer in PPG’s industrial and packaging coatings businesses at the Springdale, Pennsylvania, and Oak Creek, Wisconsin, facilities.
For the second quarter of 2017 the parent company of NAPA stores announced profit of $227 million. Second-quarter sales for GPC’s Automotive Group were up 27.7 percent. In a conference call the CEO, Paul Donahue, commented on recent performance. “As we look to our global automotive group, total sales were 27.7% in the second quarter… We were encouraged by the positive shift in the underlying sales environment for this business, which we believe reflects the continuing favorable effect of this winter’s more normalized weather as well as the summer heat across most of the U.S. in both May and June… After a slow start out of the gate, largely due to the cold and wet conditions at the start of spring, our sales were much improved in both May and June. By market segment, sales to our retail customers continue to outpace sales to the commercial segment, although our commercial comps were improved from the first quarter and reflect our strongest results over the past 9 quarters. By customer segment, we were encouraged to see stronger results in both NAPA, AutoCare and Major Accounts sales. NAPA AutoCare sales were plus 3 percent for the quarter while Major Accounts sales were up slightly for their first positive comp in several quarters,” said Donahue. “Looking ahead, we believe the improving conditions for underlying sales demand, combined with our ongoing initiatives, continue to enhance our value-added services for both existing and new commercial customers. This should drive further sales growth in the upcoming quarters… In summary, we are encouraged by the improvement in our U.S. Automotive comp sales in the second quarter, and we expect to see demand across the aftermarket continue to strengthen. As we head into the second half of 2018, we are seeing the positive shift in demand for failure and maintenance parts due to the continuing impact of more normalized winter weather patterns and the record heat across much of the U.S. thus far this summer. We expect the number of vehicles in the aftermarket sweet spot to further stabilize and ultimately become a tailwind in 2019 and into 2020… In Canada, sales were driven by low single-digit comp sales growth and acquisitions, including the addition of Universal Supply Group on December 31, as we discussed last quarter. The NAPA Canada team remains focused on their sales initiatives and with positive industry fundamentals and a stable economy at their back, we expect continued growth at our Canadian operations over the balance of 2018.”

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