PPG CEO Paints Inflation Picture
According to a recent interview with global coatings manufacturer PPG CEO and Chairman, Michael McGarry, inflation experienced by the industry is starting to level off.
On Thursday (May 12), McGarry joined CNBC’s “Squawk Box” for in interview with Co-Anchor Becky Quick.
In hosting McGarry on CNBC, Quick inquired about the price increases on raw materials, what other effects of inflation have been felt by PPG and how the company is handling it.
According to McGarry, the issue with raw materials has mostly been with those made in the United States, highlighting the 2021 freeze in Texas and Hurricane Ida. In addition to those hurdles, he also touched on trucking and port issues, and strong demands.
Late last month, The American Institute of Architects released its Architectural Billings Index score for March, revealing a rapid increase in demand for design services. The ABI score rose 6.7 points in March, rising to 58 from its score of 51.3 reported in February. The latest score for March marks the fourteenth consecutive month of positive readings for the index and is one of the highest scores seen since the economic recovery began just over a year ago.
New inquiries were also reported to have increased modestly from 62.5 to 63.9. Numbers for design contracts also rapidly expanded, revealing an increase of 5.3 points to 60.5.
While PPG has reportedly received better supplies in China and Europe, the company is still experiencing issues in the U.S., where 25% overall inflation was experienced in the first quarter—including labor costs, energy, transportation, raw materials and more.
“There’s not a lot of places where we’re not seeing inflation right now,” said McGarry.
To mitigate the issue, Quick inquired about if the company had increased the prices of its products. Not uncommon, many paint manufacturers have been reported to increase its selling prices as early as last year, including PPG. In the company’s second-quarter financial earnings report in 2021, PPG announced that its selling prices increased by 3.5%.
“We actively implemented additional selling price increases during the quarter and our pace of price realization is well ahead of the most recent raw material inflation cycle in 2017-2018,” said McGarry in a statement. “In addition to further selling price increases, we delivered about $40 million of structural cost savings from business restructuring programs and have increased our targeted, full-year 2021 savings by about 10%, to $135 million. We also continued our outstanding cash flow generation which year to date is about $600 million, or about $250 million higher than 2020.”
In his recent interview, however, McGarry went on to explain that historically, PPG uses a three-to-six-month lag, noting that over the last quarter, the company raised prices by about 10%. In real-time, the company will have to reach about 50% if inflation is continuing to stay at 25%.
“This quarter we’re going to get about 12% price increases, and we’ll get more inflation in the third quarter as well,” McGarry said. “We’re pricing faster than we ever had, at the highest rate we’ve ever had.”
While PPG customers are having a hard time debating the cost increases, many of them are seeing it in their own shops and with other materials as well, which is why the company is pricing so quickly.
In looking at Producer Price Indexes from month to month, Quick noted that May is already showing a PPI of 8.3%, down 0.2% from April. In March the Consumer Price Index (CPI) rose by 1.2% for the month and 8.5% from one year ago. The monthly increase was reported to be the largest in nearly two decades and was primarily driven by higher energy prices (largely due to the war in Ukraine) and continued increases in the prices of groceries/food at home.
When asked if this slight reduction was an indication that inflation was peaking or slowing down, McGarry said, “We are certainly seeing is start to level off. Not today, but we are seeing that the increases are coming fewer. We’ve had less forced measures in the products that we buy; we’ve seen it slowdown in China; we’ve seen it slow down in Europe.
“We’re optimistic that if we’re not at a peak, we’re very close to it. But for us, we have a lot of underlying, good demand. Our automotive business is very strong, strong backlog in our aerospace business, and our aftermarket automotive business also very strong background.”
In concluding the interview, McGarry ended by saying, “We still see raw material inflation, but it’s moderating. We still see underlying good demand.”
Ongoing Price Increases
In a report earlier this year, the Associated General Contractors of America found that increased prices of construction materials were outpacing the rate at which contractors are raising their bid prices.
Upon analyzing government data back in January, producer price index for inputs to new nonresidential construction—the prices charged by goods producers and service providers such as distributors and transportation firms—were found to have jumped 0.9% in November and 22.1% over 12 months.
These increases were noted to stunt the rise in the index for new nonresidential construction—a measure of what contractors say they would charge to erect five types of nonresidential buildings—climbing just 0.3% for the month and 12.4% from a year ago.
“Prices for nearly every type of construction material are rising at runaway rates,” said Ken Simonson, the association’s Chief Economist, at the time. “These costs are compounding the difficulties contractors are experiencing from long lead times for production, gridlocked supply chains, and record numbers of job openings.”
As a result of the ongoing inflation, ever before the report was created by AGC, many coatings companies were reported to increase its selling prices as a result. In addition to PPG, other companies included Sherwin-Williams and RPM International Inc., the parent company of specialty coatings and sealants brands including Carboline and Tremco. In January, chemical company BASF also announced that it would be increasing prices for its paint and coatings additives globally, with increases of up to 35%.
In the latest Price Producer Index by the U.S. Bureau of Labor Statistics, construction input prices rose 2.9% in March, and 24.4% higher from a year ago. In nonresidential construction, input prices also witnessed an increase of 2.8%.
The steadily increasing numbers haven’t been much a surprise, however, as March was the eighteenth-straight month in which the cost index rose more than the bid-price index on a year-over-year basis, according to Simonson.