Refinish sales at record levels as U.S. body shop activity robust. PPG names Tim Knavish president and chief executive officer. Michael H. McGarry to retire next year.
PPG (NYSE:PPG) reported record third quarter net sales of $4.5 billion, up about 8% on a constant currency basis. Overall company sales volumes decreased by about 3% versus last year’s third quarter reflecting softer demand conditions in Europe and China. Customer order backlogs in both the automotive refinish and aerospace coatings businesses remained elevated, totaling about $200 million. These backlogs are expected to benefit volume results in future quarters.
The company reported inflationary cost pressures persisted with raw material cost inflation of nearly 40% on two-year stack and energy costs continued to rise.
Michael H. McGarry, PPG chairman and chief executive officer, commented on the quarter, “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. 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.”
“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. 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,” McGarry continued. “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. 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,” McGarry concluded.
In remarks prepared for its conference call with investors, the company detailed results for its automotive refinish business unit.
Automotive refinish coatings year-over-year net sales, excluding the impact of currency, divestitures and the Russia wind down (organic sales) improved by a mid-single-digit percentage and were an all-time record. Body shop demand remained about 10% below pre-pandemic levels, depending on the region. Demand was mixed by country and sales volumes were negatively impacted by COVID-19-related restrictions in China and certain U.S. supply chain disruptions.
The company reported body shop activity in the U.S. continued to be robust and, similar to the second quarter, demand was positively impacted by the continuing return to office work along with higher year-over-year collision claims of about 1%. Compared to the third quarter 2019, collision claims remain about 10% lower. Raw material availability and logistics bottlenecks continued to impact the company’s production output and manufacturing efficiencies in the U.S., including a fire at a supplier factory in July that impacted a key raw material for automotive refinish coatings production.
In Europe, the overall slowdown of economic activity increasingly impacted the business as the quarter progressed and certain distributors began to destock inventories. In China, the noted restrictions constrained demand which led to sharply lower sales volumes. Globally, the business continued to convert new body shops to PPG products with about 1,500 new body shop wins year-to-date through the third quarter. Entering the fourth quarter, order books remain strong and inventories remain relatively low in the U.S.; however, demand is expected to remain soft in Europe and China. Despite a high backlog of orders, current supply disruptions in the U.S. are expected to continue to constrain the company’s production capabilities.
Tim Knavish Named President and CEO
PPG also announced that Tim Knavish, chief operating officer, has been named president and chief executive officer (CEO), effective Jan. 1, 2023. Knavish joins the company’s Board of Directors, effective today.
Knavish, 57, who has served as PPG’s chief operating officer since March, will succeed Chairman and CEO Michael McGarry, 64, in the role of CEO. McGarry, who has served as CEO since September 2015, will become Executive Chairman, effective Jan. 1, 2023. McGarry also has announced to the PPG Board of Directors his intention to retire as Executive Chairman and as a director of the Company, effective October 1, 2023.
“I want to thank Michael and the PPG Board of Directors for their trust and confidence as we continue to drive PPG forward. Our global business portfolio remains well positioned for future growth and to successfully navigate through the current global economic challenges,” said Knavish. “I look forward to continuing to work with the more than 50,000 PPG people across the world to support our customers, deliver excellent business performance and create additional shareholder value.”
“Tim is a highly respected business leader who has played an instrumental role in PPG’s growth across the markets we serve,” McGarry said. “His leadership has been invaluable as PPG has executed several important strategic actions, including PPG’s recent acquisitions and successful integrations of Tikkurila and Ennis-Flint, now PPG’s Traffic Solutions business. Tim’s proven ability to lead the implementation of our global business strategies, and his focus on continuously strengthening our operations and energizing our diverse workforce will be important in delivering on our growth strategy.”
“On behalf of the PPG Board of Directors, we want to congratulate Tim and also recognize Michael’s outstanding leadership and strategic vision in guiding PPG through some of the most challenging periods in its nearly 140-year history,” said Hugh Grant, PPG independent lead director and retired chairman and chief executive officer, Monsanto Company. “Michael’s leadership in completing several of PPG’s largest acquisitions has made a significant impact on expanding the company’s portfolio and reach in key growth markets. We thank him for his many contributions and look forward to benefiting from his continued leadership as executive chairman of PPG’s Board of Directors. As we look ahead, the board fully supports Tim and the entire PPG team as they work to achieve future growth and increased value for our shareholders.”
McGarry has served as chairman and CEO of PPG since September 2016. During his more than 40 years with PPG, he has served in a variety of key business and functional leadership roles in the U.S., Europe and Asia, and led several strategic actions that transformed PPG’s business portfolio. McGarry currently serves on the board of directors of United States Steel Corporation (NYSE: X), Shin-Etsu Chemical Co., Ltd., and the National Association of Manufacturers. He is a former member of the board of Axiall Corporation, and former chairman of the board of directors of The American Coatings Association (ACA).
Knavish joined PPG in 1987 at PPG’s global headquarters in Pittsburgh. He advanced through roles of increasing responsibility in several key businesses and functions, including serving as plant manager for the East Point, Georgia, architectural coatings manufacturing facility. In 2005, Knavish moved to Australia as managing director, Australia and New Zealand coatings, and general manager, automotive refinish. In 2007, Knavish returned to the U.S. where he assumed responsibility for automotive coatings, Americas, and in early 2010, he was named a vice president. In 2012, he was appointed global vice president, protective and marine coatings and in 2016 became senior vice president, automotive coatings.
Knavish was named senior vice president, industrial coatings in 2017. In addition to global leadership of PPG’s industrial coatings, packaging coatings and coatings services businesses, Knavish was responsible for the global procurement function and for PPG’s Asia Pacific region. In January 2019, he was appointed senior vice president, architectural coatings and president, PPG Europe, Middle East and Africa.
Prior to being named chief operating officer, Knavish served as executive vice president beginning in October 2019, where he was responsible for PPG’s global architectural coatings businesses; the global automotive refinish business; the Latin America region; and the digital and information technology functions.
A native of Pittsburgh, Knavish earned both a bachelor’s degree in mechanical engineering and an M.B.A. from the University of Pittsburgh. He currently serves on the board of directors of the United Way of Southwestern Pennsylvania.