An employee opens a bottle of PPG clearcoat coating liquid ahead of a paintwork demonstration inside PPG Industries Inc.'s automotive coating's technical center in Ingersheim, Germany.
TORONTO — Trian Partners co-founder and chief investment officer Ed Garden said Thursday that PPG Industries needs to replace its "struggling" management to reverse disappointing profit at the global coatings company.
Garden told investors at a conference that current PPG CEO Michael McGarry should be replaced by former chief Chuck Bunch, who "knows how to run this business." Garden also said PPG should consider splitting into two focused companies: a global architectural coating company and an original equipment and industrials company.
Trian, the activist hedge fund Garden founded with billionaire Nelson Peltz, is known for taking stakes in companies and pushing them for change. It recently won a high profile battle to get a seat on the board of Procter & Gamble. Shares of Pittsburgh-based PPG are up 3.9 percent on Thursday.
"At Trian, we're known for working with management teams. ... But this is an extraordinary situation," Garden said from the Capitalize for Kids Investor Conference in Toronto, Canada. "After a decade of realizing attractive returns under the former CEO Chuck Bunch, PPG has underperformed under the current CEO."
Trian disclosed a $690 million position in PPG Industries earlier this month, representing a 2.9 percent stake in the 135-year-old manufacturer. The fund released a white paper detailing its vision for PPG on Thursday.
PPG is one of largest coatings manufacturers in the world, with a market capitalization of about $26 billion. Thanks to PPG's scope and scale, the company is seen as a corporate barometer for the health and direction of the global economy.
On October 8, PPG issued a profit warning, informing investors that the company expects to miss consensus estimates by 10 percent in the third quarter and by 20 percent in the fourth quarter, Garden said. This marks the third consecutive third-quarter profit warning for PPG, the Trian CIO said.
The company also lost its business with home improvement retailer Lowe's in February, a major loss for its paint business. Garden also said that while management is struggling to keep a lid on material and foreign exchange costs, the board has some options left.
"PPG is a company that is pretty much immune from the typical disruptive forces," he said. "There's no Amazon risk, there's no changing consumer risks ... it's a business with a really good moat."
Trian is urging the company to consider separating into an architectural coatings company and an industrial coatings company, allowing the company to create value through two "pure play" businesses. The split could also help its architectural business focus on growth and strategic planning as it loses market and and misses opportunities, according to the Trian thesis.
In a statement on Thursday, PPG said two of its directors have already met with Trian. "We have a long history of listening to our shareholders and we hope that Trian is willing to accept our offer for a continuing, constructive private dialogue," it said. "At the meeting and in subsequent conversations, PPG's directors made clear that the Board of Directors unanimously supports Michael McGarry as Chairman and CEO, but that PPG and the Board are open to listening to Trian on other topics. PPG's Board and management team remain dedicated to creating value for all PPG shareholders."
Garden, who is currently a director of General Electric, has previously served on the boards of Pentair, Wendy's and Family Dollar Stores. Garden and Peltz founded Trian in 2005.
