PPG Releases First Quarter 2022 Financial Results

● Record first-quarter net sales of approximately $4.
3 billion, up approximately 11% from the same period last year

● Organic sales up nearly 7%, driven by higher product prices

● Diluted EPS of $0.
08 and adjusted diluted EPS of $1.
37

● Net income included approximately $290 million in charges related to the closure of the Russian operations, mostly non-cash charges

● Raw material costs climbed 25% YoY, energy and transportation costs also rose

● Supply chain disruptions eased in Q1

● Completion of the acquisition of Arsonsisi's powder coatings production business on April 1, balance sheet still flexible

PPG (NYSE: PPG) has reported first-quarter 2022 earnings
.

Message from the Chairman of the Board and Chief Executive Officer

Commenting on the first quarter results, PPG Chairman and Chief Executive Officer Michael H.
McGarry said:

In the first quarter of this year, the problem of supply chain disruption was still severe, the impact of European geopolitics was gradually emerging, and China's epidemic prevention measures were becoming increasingly strict
.
Nonetheless, our sales reached new highs, with organic growth of 7% compared to the same period last year
.
This was mainly attributable to our continued price increases in several end markets, including automotive refinish coatings and PPG-Comex architectural coatings, and better-than-market sales performance
.
In an environment of persistent and generally rising costs for the past two years, our selling prices were up approximately 12% from the first quarter of 2020
.
In addition, sales growth was also driven by recent acquisitions, with strong market performances in both Tikkurila and the Traffic Road Solutions Strategic business unit
.

In addition to further price increases, adjusted EPS for the first quarter exceeded our financial guidance in January, primarily due to higher-than-expected sales volumes, improved operating leverage, and stabilizing raw material supplies, resulting in improved production efficiency sequentially
.
As of the end of the first quarter, the company's total order book on hand reached 180 million US dollars, again significantly exceeding the level of previous years, mainly concentrated in the two major businesses of automotive refinish coatings and aerospace coatings, so we expect these two major businesses to grow further in the next few quarters
.

Going forward, overall demand for PPG products is expected to remain stable, with certain end markets expected to recover gradually from the COVID-19 pandemic
.
While supply chain disruptions are likely to persist, raw material availability is expected to gradually improve as U.
S.
suppliers recover their manufacturing capacity and labor supply and European demand slumps
.
In light of rising global energy prices, we are implementing further price adjustments across all of our businesses, and our sales processes are also helping to respond to cost increases in a timely manner
.
In addition, PPG is also developing further cost control measures to address wider economic downward pressures
.
The geopolitical crisis in Europe and the tightening control of the outbreak in China have created near-term global economic uncertainty, so we also considered multiple possibilities for the future earnings outlook in our financial guidance for the second quarter
.

Nonetheless, I remain optimistic about PPG's organic sales growth prospects
.
Sales volumes are expected to continue to increase as most end markets return to normal historical inventory levels, coupled with a gradual recovery in our globally leading automotive original equipment manufacturer (OEM) and aerospace coatings markets
.
Finally, I would also like to thank all of PPG's employees around the world who continue to provide exceptional service to our customers during these challenging times and support the communities in which we operate, helping PPG achieve "Unleash Your Potential"
.

Performance of each business unit in the first quarter of 2022

● Functional Coatings Business Unit

The increase in net sales in the Performance Coatings business segment was primarily driven by price increases in each business and acquisition-related sales
.
While demand in most end markets remained strong, raw material supply bottlenecks weighed on sales across all businesses, with the Americas and Asia Pacific Architectural Coatings, Traffic Road Solutions and Automotive Refinish businesses being particularly affected
.
As previously expected, demand for architectural coatings professional channels and national retail (DIY) products in all major regions continued to decline from a high base year-over-year
.
U.
S.
architectural coatings sales have benefited in part from our recent expanded partnership with The Home Depot® in the specialty paint channel, but channel inventory remains limited due to raw material supply issues
.
Automotive refinish sales achieved high-single-digit growth, driven by higher selling prices and continued above-industry growth in volume
.
As aftermarket demand picks up, aerospace coatings sales achieved mid-double-digit growth year-over-year, but were still around 20% below pre-pandemic levels in the fourth quarter of 2019
.
The traffic and road solutions business achieved strong organic growth, with sales volumes increasing by around 25% year-on-year
.
The recently acquired Tikkurila contributed most of the acquisition-related sales
.

Net profit in the Performance Coatings segment was lower than a year earlier due to higher raw material, logistics and energy costs, higher production costs and lower sales volumes, but this was partly offset by price increases and cost savings from business restructuring
.
Margins in the Performance Coatings business improved in the first quarter compared to the fourth quarter of 2021
.

● Industrial Coatings Business Unit

The increase in net sales in the Industrial Coatings business unit was mainly due to acquisition-related sales and higher selling prices in all businesses, but due to the high sales base in the first quarter of 2021 during the epidemic recovery period, sales in the first quarter of this year declined.
To a certain extent dragged down sales
.
In addition, the slowdown in economic activity in China during the Winter Olympics and the escalation of anti-epidemic measures at the end of March had a certain impact on most businesses
.
The organic sales of the automotive original equipment manufacturer (OEM) coatings business increased year-on-year, mainly due to higher selling prices, but due to factors such as customer parts shortages, geopolitical risks in Europe, and plant shutdowns in China, sales declined.
To a certain extent dragged down sales
.
The Industrial Coatings business achieved high-single-digit organic growth in the first quarter, benefiting from price hikes and solid sales growth in the Americas.
However, the performance of the business was partially affected by a decline in demand due to the upgrade of China's epidemic prevention measures
.
The Packaging Coatings business delivered strong organic sales growth, mainly due to higher selling prices and strong sales of canned beverages in the United States
.
Acquisition-related sales were mainly from the Wörwag, Tikkurila and Cetelon businesses
.

Net profit for the Industrial Coatings business unit was lower than the same period last year, mainly due to higher raw material costs, higher operating costs due to production interruptions at the beginning of the quarter, and lower product sales, but the impact was partially offset by price increases, restructuring cost savings and acquisition-related earnings.
offset
.
The segment's margins recovered sequentially from the fourth quarter of 2021
.

other financial information

● At the end of the first quarter, the company had total cash and short-term investments of approximately $1 billion and net debt of $6.
1 billion, an increase of approximately $600 million from the end of the fourth quarter of 2021
.
Working capital increased, reflecting seasonal trends and higher raw material costs
.

● Operating expenses in the first quarter were $52 million, lower than expected, mainly due to lower management incentive compensation expenses
.

● The business restructuring plan achieved approximately $12 million in cost savings
.

● First-quarter net profit included about $290 million in pretax charges related to the closure of operations in Russia, most of which were non-cash charges
.
The Russian business accounts for about 1% of the group's net sales for the full year 2021 and the first quarter of this year
.

● The effective tax rate for the first quarter was approximately 70%, and the adjusted effective tax rate was approximately 23%
.
The higher tax rate was mainly due to the approximately 9% tax impact from the closure of the Russian business
.

Performance Outlook

Based on the current global economic situation, geopolitical risks in Europe and the recent economic uncertainty caused by the new crown epidemic, the company has made the following forecasts for the second quarter of 2022:

● Cumulative net sales declined year-over-year in low to mid-single digits

● Operating expenses around $60-70 million

● Net interest expense of approximately US$26-30 million

● Effective tax rate is about 23-24%

● Diluted earnings per share between $1.
44 and $1.
74

● Adjusted earnings per diluted share of $1.
60 to $1.
90, excluding amortization charges of $0.
14 and costs related to previously approved and disclosed business restructuring of $0.
02
.