Last month, several coatings manufacturers released their earnings reports for the third quarter of 2022. Of those were Strategic Partner of the Commercial Painting Industry Association, The Sherwin-Williams Company, and CPIA Gold Sponsor, PPG.
For Sherwin-Williams, the 2022 third quarter officially ended on Sept. 30.
The company reported a year-over-year consolidated net sales increase of 17.5% to a record $6.05 billion. Diluted net income per share, in addition to earnings before interest, taxes, depreciation and amortization also witnessed increases for the quarter.
The Sherwin-Williams Company 2022 Q3 Results
“Our team delivered record net sales results in the third quarter as we continued to focus on serving our customers with innovative solutions,” said Chairman and Chief Executive Officer, John G. Morikis. “Sales grew to $6.05 billion, a 17.5% increase against a softer quarter comparison last year when raw material availability was highly challenged.
“Consolidated gross margin expanded 110 basis points sequentially and 120 basis points year-over-year to 42.8%. Our margins improved as a result of pricing actions across all businesses and volume increases in all architectural paint end markets in The Americas Group. We generated strong cash flow in the quarter, which enabled us to continue making strategic long-term investments across the business and pursue strategic, bolt-on acquisitions in the Performance Coatings Group, having closed three acquisitions since the beginning of the third quarter.”
More specifically, the Americas Group increased 21.4% to $3.60 billion in the quarter, which the company noted was primarily due to higher architectural sales volume across all end markets and selling price increases. Segment profit increased $132.6 million to $764.1 million in the quarter.
Sherwin-Williams said in its report that segment profit gains were primarily due to higher paint sales volume and selling price increases, and were partially offset by increased raw material costs and higher SG&A costs related to continued investments in its long-term growth initiatives.
“In The Americas Group, we continued to capture strong demand across all professional architectural markets, as same-store sales increased 20.7% in the third quarter, and we are seeing strong realization from our September 6th 10% price increase. In the Consumer Brands Group, double-digit growth in North America was partially offset by continued tightness in supply of alkyd resins and headwinds in Europe and Asia, while segment margin improved significantly sequentially and year-over-year,” Morikis explained.
“Momentum continues in the Pros Who Paint category with our North American retail partners. In the Performance Coatings Group, sales grew in every division as a result of pricing actions across all divisions and contributions from acquisitions. Regionally, sales were up strong double-digits in North America and Latin America, and high-single-digits in Asia, partially offset by a mid-single-digit decline in Europe. Segment margin in this group also meaningfully expanded sequentially and year-over-year.”
Net sales increased 8.5% to $701.9 million in the Consumer Brands Group for the third quarter, which the company attributes to selling price increases in all regions, partially offset by lower sales volume primarily outside of North America. Segment profit also increased to $94.9 million in the quarter from $75.8 million reported last year.
Profit increases within the segment were reportedly due to selling price increases and cost control. These increases, however, were partially offset by lower sales volume, increased raw material costs and higher supply chain costs.
Acquisition-related amortization expense reduced segment profit as a percent of net external sales by 270 basis points compared to 300 basis points in the third quarter of 2021.
The Performance Coatings Group increased with a 13.7% bump to $1.74 billion in the quarter. The increase was due to higher sales volume in most end markets, primarily attributable to selling price increases, and acquisitions, partially offset by lower sales volume outside of North America, the company noted. Segment profit also increased in the third quarter to $236.3 million from $110.4 million a year ago.
Sherwin-Williams went on to note that acquisitions increased profit increased due primarily to selling price increases, partially offset by increased raw material costs. In all, the company reports that it generated $1.28 billion in net operating cash during the first nine months of the year, down from the $2.1 billion reported in the third quarter of 2021.
“We expect the strong positive results we experienced in the third quarter to continue into the fourth quarter, driven by continued momentum in both The Americas Group and North American industrial end markets, continued price realization, good cost control, and softer year-over-year comparisons,” said Morikis.
“We expect fourth quarter consolidated net sales to increase by a high-single to low-double-digit percentage and full year consolidated net sales to increase by a low-double digit percentage. Full-year adjusted diluted net income per share guidance remains in the range of $8.50 - $8.80 per share, which represents mid-single-digit percentage growth from 2021 at the mid-point. This implies a 35% increase in the second half of 2022 compared to the same period in 2021 as we have been expecting, in what continues to be a challenging macro environment.”
In a statement, Morikis continued, “Beginning in the fourth quarter, we will take actions to simplify our operating model and portfolio of products sold in the Consumer Brands Group and weigh various options to implement appropriate cost reduction plans in all regions in the Performance Coatings Group, the Consumer Brands Group, and the Administrative segments due to the continued uncertain demand outlook. The trajectory of raw material costs is trending favorably as we exit the year, although the pace and level of potential relief next year is difficult to project.
“Our long-term outlook remains bright. We will continue to invest in long-term growth initiatives, including stores, sales representatives, innovative products and acquisitions that fit our strategy. We remain confident in our strategy, our capabilities and solutions, and most importantly, our people, who have demonstrated a consistent ability to execute and outperform the market regardless of the economic environment.”
Plans to Acquire ICA
Also announced last month, Sherwin-Williams announced plans to acquire Italian designer, manufacturer and distributor of industrial wood coatings, Industria Chimica Adriatica S.p.A. (ICA).
“This wonderful company brings us innovative waterborne and solvent liquid coatings technology, including an award-winning range of ultra-matt protective coatings and a growing portfolio of BIO water-based coatings products, which are made with recycled raw materials,” said Morikis.
“In addition to this strong technical expertise, ICA has excellent relationships with multi-national and local customers, multiple product specification and approval positions, strategically located manufacturing and distribution, and an outstanding commercial team focused on delivering innovative and value-added solutions.”
According to the company, ICA’s products are used for kitchen cabinets, furniture and décor, building products, flooring and other specialty applications. ICA currently employs approximately 600 workers and in 2021, reported annual sales of more than 150 million euros ($147.1 million).
The company conducts global sales and operations, with production facilities in Italy and Poland. However, in recent months ICA has been noted to have an interest in the India-based joint venture, ICA Pidilite.
In a statement, Morikis continued, “The combination of our businesses provides numerous opportunities to accelerate profitable growth in the region and beyond. The outstanding leadership and talented employees of ICA have built an admirable track record of success over the last 50 years, and we look forward to welcoming them to the Sherwin-Williams family upon the close of the transaction.”
The acquisition is expected to reach completion by the end of 2022. Upon finalization, ICA will become part of the Sherwin-Williams Performance Coatings Group operating segment.
PPG 2022 Q3 Financial Report
Global coatings company PPG (Pittsburgh) released its third quarter 2022 earnings report on Oct. 19, announcing record net sales of $4.5 billion, or 2% higher than Q3 in 2021.
However, third quarter 2022 reported net income from continuing operations was $329 million, down from $344 million last year, and adjusted net income from continuing operations was $393 million, down from $406 million last year.
“We achieved record sales in the third quarter driven by continued selling price realization, resulting in more than a 12% increase in selling prices versus the third quarter 2021 and an 18% increase on a two-year stacked basis,” commented Michael H. McGarry, PPG Chairman and Chief Executive Officer.
“However, as we previously communicated, sales volumes were impacted by further softening demand in Europe and less sequential quarterly demand recovery in China than was expected due to a resumption of certain pandemic-related restrictions. These factors, along with worsening foreign currency translation impacts, caused our sales growth to be lower than anticipated at the beginning of the quarter.”
Performance Coatings
The Performance Coatings segment third-quarter net sales were about $2.7 billion, roughly 2% lower than the year prior.
Segment income for the quarter was $362 billion, down about 11% from $408 billion, year-over-year. PPG noted segment income was lower due to raw material, logistics, and labor cost inflation, the impact of lower sales volumes, unfavorable currency translation and increased manufacturing costs, which were partially offset by higher selling prices coupled with restructuring cost savings.
Within that segment, aerospace coatings sales were up more than 10% compared to third quarter 2021, while net sales for the automotive refinish coatings grew by a mid-single-digit percentage.
Year-over-year sales in architectural coatings DIY products in Europe reported remained soft due to decreased consumer confidence and customer inventory destocking stemming from current geopolitical issues. In the U.S., this business was also impacted by weaker DIY demand, offset by positive trends related to the recent expansion with The Home Depot in the professional paint channel.
“The higher year-over-year sales were aided by record sales in our PPG Comex and global automotive refinish businesses. In addition, both the aerospace and automotive original equipment manufacturer (OEM) coatings businesses delivered double-digit percentage sales volume gains, though demand in both industries remains well below pre-pandemic levels,” wrote McGarry.
“Overall supply chain disruptions continued to broadly ease throughout the quarter; however, a few lingering short-supplied raw materials had impacts across several businesses. At quarter-end, the automotive refinish and aerospace coatings businesses continued to have much larger than traditional order backlogs totaling about $200 million.”
Industrial Coatings
The Industrial Coatings segment third-quarter net sales were $1.8 billion, up 9% from the prior year period’s $1.6 billion. Segment income was about $192 million, up 37% from $140 million year-over-year.
Within the segment, automotive OEM coatings organic sales were up more than 20% due to higher selling prices and sales volumes, including record sales in Asia Pacific, according to PPG. This business was impacted in the U.S. and Europe due to production outages due to component shortages, but reportedly moderated year-over-year.
PPG reports that industrial coatings organic sales were also up a high-single-digit percentage, and packaging coatings grew by about 10%. Segment income was higher than the prior year by $52 million mainly due to higher selling prices and improving sales volumes, partially offset by increased raw material and energy costs and foreign currency translation.
Looking Ahead
The company ended the third quarter with net debt of $5.7 billion, approximately $400 million lower than the end of the second quarter. The company’s corporate expenses were $60 million, with acquisition-related synergies and business restructuring programs delivering about $25 million of cost savings.
For fourth quarter 2022, based on current global economic activity and uncertain associated with the impact of geopolitical issues in Europe and the continuing pandemic, PPG anticipates aggregate sales volumes down a mid-single-digit percentage year over year, corporate expenses between $55 million and $60 million, and net interest expenses of between $35 million and $40 million.
“Looking ahead, normal seasonal demand trends are anticipated in the fourth quarter. In addition, economic activity is forecasted to remain soft in Europe and China, and demand for architectural do-it-for-yourself (DIY) paint products is likely to continue to weaken on a global basis,” said McGarry.
“Due to the reduced economic activity, an additional cost restructuring program is now underway focused on fast payback actions targeting $70 million of annualized savings upon full implementation. We continue to expect our business portfolio to prove more resilient in the coming quarters as several of our larger businesses, including automotive OEM and aerospace coatings, are anticipated to deliver growth due to large supply deficits and low inventories in these end-use markets.
“Finally, we expect that our year-over-year operating margins will improve in the fourth quarter and into 2023 as we work to restore our historical margin profile through our actions to fully offset inflation and manage our costs.
“Lastly, I want to thank our global employees who demonstrate The PPG Way every day by continuing to overcome unexpected challenges to provide our customers across the world with the products and excellent service they rely on.”
