PPG Industries will maintain its current business portfolio following a strategic review taken after activist investor Trian Partners (New York) advocated that the company consider separating its architectural coatings business.
The review, which included “separate and independent” assessments by investment banks Goldman Sachs and Morgan Stanley, found that found that separating architectural coatings was unlikely to improve value for PPG shareholders, would reduce the company’s strategic flexibility, and result in higher operating costs.
“By maintaining our current portfolio, we avoid negative commercial, operational and procurement impacts and preserve full strategic flexibility for the future,” said Michael McGarry, PPG chairman and CEO.
A separate review of PPG’s architectural coatings business in the US and Canada helped develop an initiative to recover earnings lost when the company lost a major customer in 2018. While many details of the initiative have not been disclosed, PPG says it is establishing a project management office to oversee the earnings improvement program, and that it expects to recover the lost earnings by the third quarter.
“The independent findings made clear, and after its own review of these findings the board concluded that, the current business portfolio provides the best opportunity to drive long-term shareholder value,” said Hugh Grant, PPG’s lead independent director. “The board and management team remain strongly aligned and accountable for delivering on the company’s current year commitments and future growth potential.”
The review noted that there were no observations of other coatings producers—including AkzoNobel, Sherwin-Williams, and Nippon Paint—separating architectural coatings. There is “only evidence of increasing participation in both,” PPG said. Sherwin-Williams acquired Valspar in 2017 with an eye towards increasing exposure to industrial coatings, and Nippon Paint announced the acquisition of DuluxGroup last month, enhancing its presence in the architectural market.
PPG is also not planning to exit its remaining non-coatings businesses, including silicas, optical monomers, organic light-emitting diode (OLED) materials, and airplane windshields. “Those businesses all have returns [on capital] above the company average,” McGarry said during an investor call this morning.
The company will, however, exit certain small low-profit product lines or geographies where it does not have a major presence as part of a cost-cutting initiative. Details of these moves are still being worked out, executives said during this morning’s call. Decision criteria will include “cash flow return and outlook on ability to grow,” McGarry says.
The cost-cutting program will also entail manufacturing consolidation and some redundancies from recent acquisitions. “We will look at our manufacturing footprint first and foremost,” says PPG senior vice president and CFO Vincent Morales. The company plans to adjust its cost structure to fit the “current economic climate,” it says. PPG forecasts cost reductions of $125 million/year to result from the cuts, and a one-time charge of $185-$200 million in the second-quarter to implement the program.
PPG executives did open the door to being more aggressive on M&A, noting that the company has averaged a 2 times (x) return on capital from acquisitions since 2014. “That was a point debated by the advisors…I think they raised a valid point,” McGarry says. The company has made three acquisitions in the past six months.
Meanwhile, PPG reaffirmed its’ earnings guidance, targeting 3-5% growth in full-year sales and 7-10% growth in full-year earnings per share. The company also said it plans dividend, although it did not disclose the size of the increase.
By Vincent Valk
Source: Chemical Week
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