Collision repairers hoping for pricing relief on paint might be out of luck for a while, based on a PPG assessment of raw materials and logistics expenses that seem likely to challenge other manufacturers as well.
PPG CEO Michael McGarry told analysts that the company had experienced its highest quarter of cost inflation since the trend began two years ago. In addition to elevated raw materials costs, logistics expenses were up “north of 20 percent” over July-September 2017, he said.
The company has made “significant progress on increasing selling prices” and “we have secured further price increases for the fourth quarter.” He added the company will prioritise working with customers next quarter on further price initiatives.
Vincent Morales, CFO said that about 75 percent of the cost of goods sold was raw materials, while freight costs were mid-to-high-single-digit percentages of sales depending on the business unit.
McGarry said he thought the year-on-year inflation on raw materials would “moderate” because of the spike seen in the prior year’s quarter. Logistics cost inflation would “remain elevated” and tariffs had begun to add “modest” costs to raw materials.
Asked when pricing would catch up with raw materials, McGarry said “I would say the gap is closing,” but it depends on inflation in the first quarter of 2019. He noted that PPG was slower to start pricing increases than competitors and it would have to raise prices “all through 2019.”
PPG’s price increase efforts really took off in the fourth quarter of 2017.
“We are targeting more pricing across our whole portfolio and our expectation is to “close the gap” between raw materials prices and what PPG was charging for them.” He felt that this would be possible in the fourth quarter of 2018.
However, McGarry said oil was on PPG’s “watch-list” and solvents and other materials affected by oil prices would be a concern. He said oil was $48 a barrel last year and $70 this year, xylene rose 30 percent and propylene rose between 23-45 percent depending on the region.
Morales said that while the year-on-year comparisons look bad, raw materials costs were flattening and PPG felt that in 2019, commodities would only trade based upon supply and demand, which is important.
The increase in logistics costs was a “global issue” – there weren’t enough truckers anywhere, according to McGarry. “I don’t think this is going to go away,” he said.
Other macro-economic trends look good for PPG, and body shops, by extension. McGarry said U.S. economic activity was expected at a similar pace this quarter, and automakers’ production ought to be similar as well to the prior year’s October-December.
This article courtesy of John Huetter of Repairer Driven Education (RDE). Check out their website at; http://www.repairerdrivennews.com/ for this and many other informative and educational articles on the collision repair.