Last month, several coatings manufacturers released their earnings reports for the second quarter of 2022. Of those were Strategic Partner of the Commercial Painting Industry Association, The Sherwin-Williams Company, and CPIA Gold Sponsor, PPG.
Both companies reported having positive earnings in the second quarter, however, not all numbers were positive regarding other elements of the report, such as diluted net income or sales volumes. A full scope of both company’s financial reports can be viewed below:
The Sherwin-Williams Company 2022 Q2 Results
Global coatings firm The Sherwin-Williams Company announced its 2022 second-quarter financial results on July 27, reporting a 9.2% net sales increase year-over-year to $5.87 billion.
However, the company noted that diluted net income per share decreased to $2.21 per share from the $2.42 per share recorded in the second quarter of 2021.
“Demand remained strong during the second quarter in The Americas Group and the Performance Coatings Group, as both groups delivered sales within our guidance,” said Chairman and Chief Executive Officer, John G. Morikis.
“Internationally, demand deteriorated faster than anticipated in Europe, and no meaningful recovery occurred in China following the lifting of COVID lockdowns, both of which meaningfully impacted Consumer Brands Group and Performance Coatings Group sales.”
Results by Segment
In the Americas Group, net sales increased to $3.3 billion from $3.09 billion in Q2 of last year. The company attributes this primarily to selling price increases and higher professional architectural sales volume in North America paint stores, partially offset by lower sales volumes in protective and marine and DIY end markets.
Segment profit, however, decreased by 3.7%, reporting $700.4 million compared to $727.3 million reported in 2021. The decrease was noted to be due primarily to higher sales volumes and selling price increases, which were partially offset by increased raw material costs.
“Speaking to trends in the business since our June 8th investor day, pro architectural demand in The Americas Group accelerated as the quarter progressed and has meaningfully strengthened further in July,” Morikis said. “Similarly, Performance Coatings Group demand remained strong through the quarter in North America, the Group's largest region, and this strong demand has also continued into July.”
In the Performance Coatings Group, net sales increased by 15.2%—from $1.55 billion to $1.79 billion, due to higher sales in most end markets, primarily attributable to selling price increases and sales volume growth in the company’s packaging and coil businesses, according to Sherwin.
Segment profit also increased by 35.9%, from $144.8 million to $196.8 million, primarily due to selling price increases, partially offset by increased raw material costs.
Acquisitions reportedly increased sales by 2.9%, while currency translation rate changes decreased the Group’s net sales by 3.7%.
“Conversely, the slower North America DIY demand trend we previously described in Consumer Brands Group did not improve and we experienced tight supply in certain resins, in particular alkyd resins, which significantly impacted our North America non-paint sales,” Morikis commented.
Net sales in the Consumer Brands Group also increased—from $731.5 million in 2021 to $737.9 million in the second quarter of 2022. This uptick in sales was primarily due to selling price increases in all regions, partially offset by lower sales volume outside of North America.
However, segment profit for the Group decreased by 48.3%, primarily due to lower sales volume, increased raw material costs and higher supply chain costs, partially offset by selling price increases.
To note Sherwin’s liquidity and cash flow, the company reported having generated $639.7 million in net operating cash during the first six months of 2022, a decrease from the $1.20 billion reported in the same period last year. This cash generation, along with an increase in the company’s short-term borrowings, allowed Sherwin-Williams to return cash of approximately $1.01 billion to its shareholders in the form of dividends and share repurchases, as well as repay $260.2 million in long-term debt, and close an acquisition in the second quarter.
It was also reported that Sherwin-Williams closed two additional acquisitions on July 1, which will be reported in the company’s third-quarter results.
“Consolidated gross margin improved sequentially, but at a slower pace than anticipated. Segment profit improved sequentially in The Americas Group as well as in the Performance Coatings Group, where margin also improved on a year-over-year basis,” Morikis said.
“At the same time, we are disappointed in our weaker than expected earnings results in the quarter, which were primarily related to the lower-than-expected sales in the Consumer Brands Group and the Europe and Asia Pacific regions in the Performance Coatings Group, raw material costs that have not yet moderated despite sequential deflation of feedstock costs and supply chain inefficiencies incurred in serving our customers. We are taking aggressive actions throughout the second half of the year in response to these challenges.”
Looking ahead, Morikis noted that the company is expecting to see an increase in consolidated net sales by a high-single- to low-double-digit percentage, thanks to strong demands witnessed in the company’s pro architectural business and industrial markets.
“We expect third-quarter 2022 consolidated net sales to increase by a low- to mid-teens percentage compared to the same period a year ago,” said Morikis. “We are maintaining our full-year consolidated net sales guidance to be up by a high-single- to low-double-digit percentage based on the strong momentum we are seeing in our pro architectural business in The Americas Group and continued strength in North American industrial demand in the Performance Coatings Group.”
In closing, Morikis added, “We are responding aggressively to inflationary pressures by implementing a 10% price increase in The Americas Group, effective September 6, with significant additional pricing actions being taken in our other two operating segments. We will manage our expenses tightly in the second half with the slowdown in market demand in certain regions and businesses; however, we will continue to invest in growth, including stores, sales representatives and innovative products. We remain highly confident in our strategy, our people, and our ability to emerge as an even stronger company following the current near-term pressures.”
PPG Q2 Results in 2022
Global coatings company PPG released its second-quarter earnings report late July 21, reporting $4.7 billion in net sales—approximately 8% higher than this time last year. Net income for the second quarter came in at $443 million with adjusted net income landed at $430 million.
PPG also notes that, compared to Q2 2020, selling prices increased by 12%, but sales volumes were down by about 4%.
The company points to COVID-19 restrictions in China, as well as cost inflation leading to higher sequential operation margins, as impacting the results. However, raw materials and logistics availability was noted to improve during this quarter, with PPG expecting it to improve even further in the third quarter.
“For the seventh consecutive quarter, we delivered record quarterly sales driven by our continued implementation of real-time selling price increases to fully counter inflation and we benefitted from our recent acquisitions. Our sales growth was achieved despite softening consumer demand in Europe, significant COVID-19-related demand disruptions in China and unfavorable currency translation,” said Michael H. McGarry, PPG Chairman and Chief Executive Officer.
“Our organic sales grew 8% as we continued to deliver above-market volume performance in several end-use markets, including all-time quarterly sales records in the automotive refinish coatings, PPG-Comex and traffic solutions businesses. In addition, our aerospace coatings business sales volumes grew by a double-digit percentage with strengthening momentum each month, although overall industry demand remains well below pre-pandemic levels.”
By Segment
In the Performance Coatings segment, PPG reported $2.93 billion in net sales compared to $2.75 billion in the same period last year for a 7% increase. Income came in at $446 million, compared to $454 million in 2021.
Within the Performance Coatings segment the company noted that while net sales increased due to price increases across all business and acquisition-related sales, certain raw material availably and bottlenecks constrained coatings manufacturing in the United States, impacting sales volumes.
Sales volumes in the protective and marine coatings business were heavily impacted by the COVID-19 restrictions in China. Aerospace sales volumes were up by about 10% compared to second quarter 2021, as after-market demand continued to recover. Sales volumes for automotive refinish coatings were also up by a low-teen percentage, with traffic solutions delivering organic sales growth of about 15% compared to the year prior.
The Industrial Coatings segment’s net sales increased by about 9% coming in at $1.76 billion compared to $1.6 billion year-over-year. Segment income landed at $156 million, 18% lower compared to $190 million this time last year.
This was primarily driven by raw material and energy cost inflation, currency translation impact, elevated operating costs in China due to restrictions and lower sales volumes. However, these were partially offset by higher selling prices and restructuring cost savings.
OEM coatings were impacted by OEM customer component shortages and China production curtailments. Industrial coatings organic sales were up about 10%, driven by strong selling price realization and solid sales volumes growth in the Americas, but partially offset by lower demand due to pandemic-related restrictions in China and lower activity in Europe.
“Adjusted earnings per share were in-line with our April guidance, despite longer-than-expected COVID-19 restrictions in China and the unfavorable currency effects, which together impacted earnings by about 10 cents per share, as favorable business mix and strong cost management offset these headwinds versus our initial guidance,” wrote McGarry.
“Our strong selling price realization fully offset persistent cost inflation during the second quarter, leading to higher sequential operating margins compared to the first quarter. Although still somewhat challenging, raw material and logistics availability improved throughout the quarter, and we are already experiencing further improvement in the third quarter. We finished the second quarter with order backlogs totaling more than $200 million, primarily in automotive refinish and aerospace coatings, significantly higher than historical trends.”
Other Numbers, Q3 Outlook
The company had cash and short-term investments totaling approximately $1 billion at the end of the quarter and net debt of $6.1 billion. The company notes that acquisition-related synergies and business restructuring programs delivered about $30 million of cost savings.
“Looking ahead, in most major regions and end-use markets underlying demand for PPG products is expected to remain solid. We anticipate strong sequential growth in Asia due to higher industrial production compared to the second quarter. Positive growth trends are generally expected to continue in North America. In Europe, we expect economic conditions to remain soft, including normal seasonal demand trends,” said McGarry.
“We have already begun to implement cost mitigation actions in Europe and have contingency plans ready to deploy in the event of a broader economic slowdown. In the second half of the year, we expect several of our larger businesses, including automotive original equipment manufacturer (OEM) and aerospace coatings, to deliver strong growth due to large current supply deficits and low inventories in these end-use markets.
“Importantly, we expect that our sequential quarterly momentum on operating margin improvement will continue in the third quarter as we work back to our historical margins, and our adjusted earnings will increase on a year-over-year basis.”
Lastly, the company delivered the following projections for Q3:
Aggregate sales volumes flat to down a low-single-digit percentage year-over-year;
Corporate expenses of $60 million to $70 million;
Net interest expense of $32 million to $35 million;
Effective tax rate of about 23%;
Reported EPS of $1.60 to $1.85; and
Adjusted EPS $1.75 to $2.00, excluding amortization expense of $0.13 and costs related to previously approved and communicated business restructuring of $0.02.
