PPG may separate its paint segments
Activist investor calls for the action
Facing pressure from activist investor Nelson Peltz to improve its performance, PPG on Thursday said it is taking a close look at whether to separate its architectural and industrial coatings businesses.
The Downtown-based paints giant said it will complete a strategic review by the end of the second quarter on the value of combining or separating the units.
Splitting the businesses was among the changes Mr. Peltz’s Trian Fund Management called for last year when it disclosed it had taken a 3 percent stake in PPG.
Trian also called for the ouster of Michael McGarry, chairman and chief executive, and the return of former PPG chair Charles Bunch.
After PPG announced it was analyzing a possible separation of the paint segments, Reuters reported Thursday that Trian won’t challenge PPG’s directors at its annual meeting.
The deadline for nominating directors is the end of this week. Trian declined comment. PPG’s board has stood behind Mr. McGarry.
In a conference call with Wall Street analysts Thursday, Mr. McGarry said that by reviewing a possible separation PPG isn’t “signaling one way or another” what it will ultimately decide about its paint segments.
“I can’t predict what the outcome will be,” he said. “We wanted to be transparent that this work is underway.”
Performance coatings comprise about 60 percent of PPG’s revenues and include residential and commercial building paints; and coatings for
airplanes, ships and automotive refinish products.
Industrial coatings include original automotive paints and coatings used in packaging and industrial applications such as appliances and heavy machinery.
Mr. McGarry said PPG’s board of directors is helping assess whether to separate the units and “it will be a pretty exhaustive review.”
“We wanted to let people know we take all feedback from our investors seriously,” he said.
“We don’t always have the best ideas internally and there could be external ideas we can consider.”
Trian has criticized PPG for a series of stumbles at the coatings company, including the loss of business from home improvement retailer Lowe’s, an accounting scandal that resulted in the company firing its controller and PPG’s failure to close on a bid to buy Dutch paints maker AkzoNobel.
The company expects to take a hit of $110 million in sales in the first half of 2019 as a result of Lowe’s selecting rival Sherwin-Williams as an exclusive supplier.
Mr. McGarry said the company implemented all remediations associated with the accounting issues by the end of 2018.
PPG continues to cooperate with ongoing probes into the accounting discrepancies by the U.S. Securities and Exchange Commission and the U.S Attorney for the Western District of Pennsylvania, he said.
As part of its guidance, PPG also said executive compensation would be tied to achieving 10 percent growth in earnings per share.
While net income improved in the fourth quarter, PPG warned growth could slow in the first half of 2019 because of price inflation, negative foreign currency exchange rates and lower sales volumes carried over from 2018.
The company projects first-quarter earnings will range between $1.18 and $1.23 per share, well below Wall Street analysts’ estimates of $1.42 per share.
For the full year, PPG projects sales growth of between 3 percent and 5 percent and adjusted earnings per share growth of 7 percent to 10 percent, excluding negative impacts from foreign exchange rates.
It expects to close on two acquisitions in the first half of the year and continues to look for more opportunities to add other coatings businesses to its portfolio, Mr. McGarry said.
In the fourth quarter, net income was $256 million, or $1.07 per share, up from $148 million, or 58 cents per share in the fourth quarter of 2017.
Adjusted income, not including certain charges such as environmental remediation and costs for the accounting scandal investigation, totaled $271 million, or $1.15 per share, beating analysts’ estimates of $1.10 per share.
Fourth-quarter sales, hurt by foreign exchange rates, slipped by 1 percent to $3.6 billion but were in line with analysts’ projections.
Sales in local currencies grew by 2 percent, boosted by higher prices, PPG said.
The loss of business through Lowe’s reduced fourth-quarter sales by about 2 percent, or $40 million year over year, PPG said.
In the industrial coatings segment, sales took a hit because of a decline in global auto industry production and decreased demand in China and Europe.
For all of 2018, sales totaled $15.4 billion, up about 4 percent from 2017.
Net income for the year from continuing operations was $1.3 billion, or $5.40 per share, down from $1.4 billion, or $5.31 per share the prior year.
Despite the forecast for lower earnings, PPG’s stock jumped by nearly 5 percent to close at $107.36, up $4.82.
PPG has about 2,400 employees in the Pittsburgh region.