PPG Pricing Spineometer: 3 of 5 Vertebrae
PPG, a paints, coatings, and specialty materials company, had a positive Q2 2023. Revenue rose 3.9% to $4.9 billion and earnings before interest and taxes rose 39% to $694 million over the same period last year.
A review of PPG’s July 21th earnings call and financial report provided insight regarding the importance of pricing on performance.
Price performance heavily influenced financial performance.
Early in the slide presentation, Tim Knavish, CEO of PPG, provided a profit bridge demonstrating how price increases impacted revenue greater than volume losses in a year over year comparison. (Missing in this PPG diagram is a separation of the impacts of product mix, foreign exchange rates, and costs.)
Tim Knavish went on to state: “We implemented incremental price increases in the first half of the year, primarily in the Performance Coatings segment and our aggregate two-year stack pricing for the company is now about 20%, which is offsetting historically high cost inflation.”
In setting future expectations, Tim Knavish stated: “There’ll be some targeted pricing that we do in Performance Coatings, but a lot of what you’ll see going forward here for the remainder of 2023 will be carryover.”
Importantly, Tim Knavish indicated pricing was a team effort, not simply the result of a single decision in declaring, “The pricing has been holding up very nicely. I’m proud of how our teams are executing to that regard.”
These statement by Tim Knavish imply PPG should have a strong pricing team and the business challenges facing PPG would indicate a need for a robust pricing team. (1) PPG has significant sales in many geographies such as the US, Mexico, Europe, and China. (2) PPG operates in widely varying sectors ranging from household paint to automotive and aerospace coatings. Each sector and geography is facing its own independent macroeconomic and industrial pricing dynamics. (3) From a pure revenue-based best-practice metric, we would expect PPG to have a team of 35 to 150 professionals ranging in title from analyst to vice president.
Research into the investment by PPG in pricing yielded underwhelming results. Many professionals appeared to be focused on pricing, but the number was, at best, at the lower end of best-practice expectations. Their titles ranged from analyst and manager to director, leaving out the role of vice president and effectively making pricing subordinate to other functional areas. In terms of breadth of responsibilities, pricing professionals were engaged more with administrative (deal pricing) and analytic reporting responsibility over price-decision making or macroeconomic insights at the more strategic end of pricing. It might be frustrating to be a pricing professional at PPG, which might explain why many of the commercial and finance leaders at PPG left pricing to assume their current role.
Given the importance and capability of pricing at PPG as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of September ‘23.
PPG Pricing Spineometer: 3 out of 5 Vertebrae.
PPG (PPG Industries, Inc.) fell from 149 the day prior to their earnings call to 145 one week later. FY 2022 revenue of $17.7 billion with a 9.7% operating margin and P/E ratio near 24.
For FY 2022, a 1% improvement in price would yield 10.3% improvement in operating profits holding all else constant at PPG.