Raw material relief boosts coatings results

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In a generally difficult second quarter for chemical makers, earnings for paints and coatings firms were a bright spot, largely due to significant relief from raw material cost inflation. PPG Industries, Inc. and The Sherwin-Williams Company (SW) beat analyst expectations, and AkzoNobel NV upgraded its full-year guidance. Nippon Paint Holdings Co., Ltd., Kansai Paint Co., Ltd. and Asian Paints Ltd. also reported solid results.

Raw materials were a major tailwind for PPG and SW — one that is expected to continue in the second half. SW expects raw material costs to be down by a mid- to high single-digit percentage year over year, according to chairman and CEO John Morikis. "Compared to the guidance we laid out in January, full-year sales growth and raw material costs are trending better than we anticipated," Morikis said. "With this first half outperformance, we expect considerable year-over-year operating margin expansion and earnings growth for the year."

SW has increased its earnings guidance for the year. The company now expects full-year 2023 net sales to be up by a low single-digit percentage from 2022. They were expected to be flat to down by a mid-single-digit percentage previously. SW also now expects full-year adjusted earnings to total $9.30-$9.70/share, compared with $7.95-$8.65/share previously and $8.73/share in 2022.

AkzoNobel also upgraded its earnings outlook and now anticipates adjusted EBITDA to be between €1.40 billion and €1.55 billion. The company’s previously communicated guidance was €1.20 billion-€1.50 billion. It expects declining raw material costs to have a favorable impact on profitability for the rest of 2023. "We have seen raw material deflation in some of our businesses and we expect increasing raw material deflation in the second half of the year," said Greg Poux-Guillaume, CEO of AkzoNobel, during a July 25 earnings call.

However, some of the cost inflation seen since 2021 will stick. "What we're seeing today…[is] mid- to high single-digit and maybe in some cases low double-digit deflation on certain raw materials," said Vincent Morales, senior vice president and CFO of PPG, during the company’s earnings call last month. "I would remind everybody, these raw materials went up 20%, 30%, 40%. So, when you do it on a multiyear stack, we're still much higher."

PPG is also drawing down its raw material inventories, which were built up during the surging demand and supply chain crises in 2021 and early 2022. "Our raw material inventories remain elevated, and we are executing various action plans to further reduce these inventory levels over the next several quarters as commodity supply availability has improved significantly this year," PPG president and CEO Tim Knavish said.

Axalta Coating Systems Ltd. also expects to see margins improving as the year progresses. The company "expects mid- to high single-digit variable cost deflation for the second half of the year to mitigate higher operating expenses," it said.

Demand trends

Meanwhile, demand is soft in some coatings end markets but has held up surprisingly well in others. Demand for architectural coatings has softened as interest rates have hit the construction market, but it appears to be stabilizing in much of the world. "In our architectural businesses, we expect demand conditions to be mixed by geography," PPG’s Knavish said. "In Europe, we anticipate demand will stabilize at current levels, resulting in year-over-year sales volume being much closer to the prior year. In the US, we anticipate DIY [do-it-yourself] demand to remain at lower levels and pro-contractor residential repaint activity to begin to modestly decline sequentially with the backdrop of lower existing home sales."

Automotive OEM demand remains solid as vehicle builds continue to recover from the pandemic and semiconductor chip shortages. Axalta’s mobility coatings business saw a 13% year-over-year increase in volumes, with broad growth and especially strong gains in China and EMEA light vehicles, CEO Chris Villavarayan said.

The picture is more mixed for industrial coatings, as weaker industrial activity generally is a drag. Protective and marine coatings were a bright spot for many firms, including Sherwin-Williams and AkzoNobel, but general industrial demand is weak. "Overall global industrial production is challenging, including in a number of industrial end-use markets that are already in recessionary tight demand conditions," Knavish said.

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