By Nina Trentmann
Managing inventory levels during the coronavirus pandemic has been a priority for finance executives across industries. At PPG Industries Inc., a buildup in inventory is helping and hurting.
The Pittsburgh-based company makes paint, coatings and specialty materials, demand for which has dropped during the pandemic. As a result, the inventory of raw materials used for its products -- such as propylene, ethylene and epoxy -- isn't being tapped as quickly.
"That will help us with cash flow," said Vince Morales, PPG's chief financial officer, adding that PPG will buy fewer base materials until its stock of finished products has gone down.
A stocked inventory is usually considered a good thing for a company trying to preserve cash during a downturn. But many of the chemicals PPG purchases are linked to global prices of crude oil and gas, which have plummeted in recent weeks.
The company bought a large portion of its raw materials in the first quarter, it said, before the latest crash in oil prices. The timing of a recovery in demand for its products will dictate whether PPG can use up existing inventory, allowing it to restock materials at lower prices and profit later in the year.
The scenario highlights the challenges finance chiefs -- particularly those in industries that depend on the oil and gas markets -- have faced when timing purchases during the pandemic.
"Everyone is focusing on maximizing cash positions and liquidity," said Ghansham Panjabi, a senior research analyst at investment bank Robert W. Baird & Co. Inc. "That means destocking and reducing inventories to match up with reduced production."
PPG forecasts a sales decline of more than 30% in the second quarter compared with the previous-year period because of the weaker economic climate and lower demand, the company said in an earnings statement this week. The company's total inventory as a percentage of sales increased to 55% in the first quarter, up from 47% in the fourth quarter of 2019. If demand for PPG's products returns quicker than demand for oil, the company might be able to take advantage of depressed oil and gas prices, analysts said.
Prices for West Texas Intermediate -- the main U.S. benchmark for oil -- have fallen more than two-thirds since the start of the year, down from over $60 a barrel to around $15 for deliveries in June in trading Wednesday. Prices for May futures contracts fell below zero earlier this month amid concerns about storage capacity, a first for WTI. Prices for Brent crude, the global benchmark, are also down for the year.
Oil prices are expected to remain low for the remainder of the year, with ratings company Moody's Investors Service predicting prices of $30 a barrel of WTI and $35 a barrel of Brent.
"Even if you won't see the full reduction in price that you see in crude, we would expect a pretty material price relief for a coating company," said Charles Gross, a senior equity analyst at investment research company Morningstar Inc. PPG declined to comment on this point. Costs for materials such as ethylene and propylene respond to the changes in oil and gas prices within 90 to 120 days, Mr. Gross said.
Meanwhile, PPG is cutting discretionary spending and reducing production levels to respond to lower demand, Mr. Morales said. The company is accelerating an existing cost-cutting program set to generate $90 million in savings this year, compared with $75 million expected previously. It took out additional loans and entered into a new credit facility.
"Managing your cash and your liquidity -- that's the primary objective for CFOs these days," he said.
Write to Nina Trentmann at Nina.Trentmann@wsj.com