Ladies and gentlemen, thank you for standing by, and welcome to the Axaltor Coating Systems Second Quarter 2018 Earnings Conference Call. All participants will be in a listen only mode. A question and answer session will follow the management presentation. Today's call is being recorded and replays will be available through August 2nd. Will not be updated and therefore may no longer be current.
I would now like to turn the call over to Chris McCray for a few introductory remarks. Please go ahead,
Thank you, and good morning. This is Chris McCran, Exalta's VP of Investor Relations. We appreciate your continued interest in Exalta and welcome you to our 2nd quarter 2018 Financial Results Conference Call. Joining us today are Charley Shaver, Chairman, CEO and President and Robert Bryant, EVP and CFO. Well as Tara Tom, who, as you saw in our press release yesterday, will become our new CEO in September.
Yesterday, after the close, we also released quarterly financial results and posted a slide presentation to the Investor Relations section of our website at axalta.com, which will be seen during this call. Both our prepared remarks and discussion today may contain forward looking statements, reflecting the company's current view of share events and the potential effect in the results of operating and financial performance. These statements involve uncertainties and risks and actual results may differ materially those forward looking statements. Please note that the company is under no obligation to provide updates to these forward looking statements. This presentation also contains various non GAAP financial measures.
In the appendix, we've included reconciliations of these non GAAP financial measures to the most directly comparable GAAP financial measures. For additional information regarding forward looking statements and non GAAP financial measures, please refer to our filings with the SEC. I'll now turn the call over to Charlie. Good morning, and thank you all for joining us today as we review our 2nd quarter performance. However, before I begin to review, I'd like to address yesterday's announcement regarding our CEO trends session.
Terenceon, who is most recently President and CEO of Honeywell's Home And Building Technologies Group, and who joins us on this call, will be succeeding me as CEO and President effective September 4. Tariffs will also be joining our board, which will be expanded from 8 to 9 Director Following my comments, I'll ask Terrance to say a few words. I am very proud of Axalta's achievements over the past several years, as well as our excellent prospects for the future While it was an extremely difficult decision to step away from the CEO role of Axalta, I was recently approached with a unique professional opportunity I've ultimately concluded I just couldn't pass up. When I notified the board that I was considering stepping out of the CEO role, consistent with our long term succession planning, The Ward commences search for potential CEO who can build on our successes, while I serve as the Non Executive Chairman. Moving into a Chairman role reflects my strong belief in Axalta and continued deep interest in its success.
I'll only be stepping away from my operation to roll and expect to remain actively involved as the chairman of the board. With that said, I'm very pleased to be handling the baton to Terrence as the CEO and to be working closely with him from the board. I've come to know Terrence quite well, seeing the range and skills and experience he brings to bear I'm highly confident that Axalta's future is an extremely capable hands, and I look forward to an excellent partnership with him as I assist with the transition. Serving as the CEO of adults over the past 5 plus years has been both an honor and a privilege I'm also thankful to the board, our management team, and our entire Axalta family for their encouragement and support and I'm truly excited about Axalta's future under Terence's leadership. Regarding the CEO search process and Terence was specifically, the board conducted a robust search process with the assistance of a leading executive search firm.
Terence was our first choice, and we're confident that he's the right person to lead Axalta. He brings a clear vision and passion for the industry, as well as extensive domestic and international business leadership experience. Terrence's resume and track record are demonstrable and impressive and is clearly an established and well known leader in the industrials And Materials Community. Prior serving as President and CEO of Honeywell's Home And Buildings Technologies Group, Karen fled the Transportation to strip at Honeywell, where he helped oversee a substantial and well known turnaround in their fundamental performance. In essence, Terrance developed an extensive track record of both improving and growing multibillion dollar businesses and one of America's best multi industry companies.
Prior to his work at Honeywell, Tarrant's held numerous and diverse leadership positions over 20 years at Air Products And Chemicals. He also holds both a Bachelor Master Degree And Materials Science Engineering, Lehigh University, and an MBA from Wharton. As a board, we're confident that Terrence will hit the ground running on September 4th and even more confident that we'll build on itself to success, and he'll lead us to new heights of growth and value creation. With that, I'm delighted to turn the call over to Terrence for a few brief remarks.
Thank you, Charlie, and I'm honored and excited to take on the leadership role for this strong company. I valued getting to know you, Charlie, and the board during the process and appreciate the confidence that everyone has placed in me. Simply stated, I plan to continue the tradition of value creation for our shareholders. I was attracted to Axalta due to its competitive position, talented executive team, and the strength of its 14,000 Axalta team members who deliver every day for customers. And playing a positive role and I'm not yet an employee.
But know that I look forward to getting to know many of you over the coming months. Thanks again, and now back to Charlie.
Thanks, Terrance. So the balance of this call will now shift and review our second quarter performance and update our 2018 full year outlook based on current market conditions. The Gulf's performance in the quarter demonstrated solid execution, stable market demand and overall strong progress towards our communicated full year financial goals. This was achieved against a fairly unforgiving backdrop of significant cost inflation, including raw materials, freight, logistics the packaging, as well as several one time events during the quarter. 1 of our primary objectives in the current years to offset these inflationary headwinds which we're doing with a combination of price increases as well as ongoing structural cost reductions across our businesses.
Overall, our quarterly financial results met our guidance expectation we provided in April and featured continued strong organic industrial end market growth. Solid price pass in both refinish and industrial and the ongoing benefit from cost reduction and productivity initiatives. Raw material inflation of low double digits compared to second quarter 2017, as posed a real challenge for our commercial teams, but we've seen solid success in most business lines with price pass through, while we continue to discuss this critical need with our light vehicle automotive customers with whom we've been having regular dialogue. Turning to page 3 of our slide deck, I'd like to review some of the highlights. First of all, we grew our 2nd quarter net sales by 10.8 percent year over year, which included a positive contribution of 5.6 percent from acquisitions, largely completed 2017, as well as foreign currency tailwind of 2.4%.
Organic volume and price contributed an incremental 2.8% to net sales growth, representing a sequential acceleration in the result met our expectations and was delivered against the backdrop of stable global demand during the quarter, but not without certain challenges, which included some incremental weakness in Latin American economies, a reduction in foreign exchange tailwinds to more modest levels, and impacts light vehicle production from a couple of plant specific customer factors stemming from their suppliers, largely in North America. We're also pleased that realized average pricing accelerated in the 2nd quarter with almost 2% increased average price on a consolidated basis, comparing to 1% in the first quarter. We also note that the continued growth from industrial end markets, demonstrating the impressive results and expanding this business via both inorganic and substantial organic investments. Consolidated Axalta organic volume in the quarter increased by 1 percent, which include a substantial industrial organic volume growth of 10%, somewhat muted by flat volumes and transportation Exalta's 2nd quarter adjusted EBITDA of $248,000,000 increased 9% from $227,000,000 last year, driven by both acquisition contribution and organic growth. Margins declined modestly to 20 mostly due to the ongoing raw material inflation, benefits.
Taking a positive pricemix and ongoing moderate FX tailwinds. Business conditions in refinish markets remain solid and we continue to expect meaningfully stronger net sales growth for the remainder of 2018 aided by clearly less challenging year over year comparisons the second half of twenty eighteen. Quarter, including a 24% contribution from acquisitions, driven mostly by the wood and spenser coatings businesses that were completed on June 1st of last year and now fully lapped our year over year comparisons. These deals have been great success to date for Axalta, and are both meeting our targets and expectations. Organic growth is also robust in Industrial with about 10% organic volume contribution for the quarter.
Underscoring the results of several years of active investment in the business. The broader industrial demand landscape still appears supportive and robust to date. Light vehicle net sales decreased by 1.5% in the period with ongoing lower average pricing associated with customer price concessions, given mostly in 2017, offset somewhat by low single digit FX tailwinds. Volumes were broadly stable with ongoing modest growth in EMEA and Asia Pacific, offset by slightly lower volumes in the Americas, largely at Axalta customer exposures and some temporary impacts from plan specific issues. These included a supplier fire and separate supplier strike impacting several OEM plants in the U.
S, and the general strike in Brazil impacting logistics there for for several weeks in the quarter where we have a large presence. Auto production globally was largely steady sequentially, including stable demand in North America through the and quarter. However, build forecast globally have been trimmed recently by automotive forecasters as demand appears to be moderating somewhat in Asia Pacific and Latin America. While in EMEA, there's been an increasing impact from the timing uncertainty around the need to adapt certain engine technologies to new emission standard which is expected to be to broadly max this build outcome for the year adjusted for our specific customer mix. Commercial vehicle net sales in increased 1.4% in the quarter and were modestly up in constant currency terms.
Global heavy duty truck demand remains firm and production rates in regions in in North America have now lapped strong prior year periods. Axalta continues to see ongoing growth in commercial vehicle from all of our regions except EMEA during Q2. Price mix was flat for the period, and overall market conditions across truck, across both truck and non truck. Commercial customers remain supportive. And we do expect this business to perform well in the second half.
Regarding price mix and transportation, we continue to discuss with our customers the need to achieve offsets to substantial cost inflation across our business including low double and agreements on this topic to date. Our discussions continue, and we remain optimistic that structural inflation will be recognized over time with offsets as we've us previously. That said, we're working with purpose to reduce our cost structure in areas required to maintain the long term margin and competitive of this important business line for Xulta. Turning to our balance sheet and cash flows. Free cash flow in the 2nd quarter was $107,000,000, compared with $74,000,000 last year.
Improvement was driven largely by improved earnings comparisons, coupled with modest improvement in operating assets and liabilities. We ended the quarter with net debt to trailing 12 month adjusted EBITDA of 3.6 times versus 3.7 times in March 30 As increased operating profits in the slightly weaker euro were offset somewhat by lower cash balances resulting in part from our share repurchase in in the quarter. As per our capital allocation strategy, we've now spent $140,000,000 year to date on share repurchases. Most of this was completed during the second quarter, and we plan to continue to be opportunistic with share repurchase is for the remainder of the year. Regarding operating highlights, we continue to execute on our Axalta WAF program with substantial cost reductions in process, both in the long term to drive operational structural efficiency and in the near term to offset broad cost inflation wins.
1 of our key zalta initiatives relates to manufacturing footprint adjustments. As we seek all means of increasing our profitability, and other sites within Europe. This is a perfect example of the hub and spoke operations model we discussed with our investors in February, our Capital Markets Day. Pending final board approval, we would expect to finalize this footprint decision soon and we'll communicate an incremental restructuring charge along with associated substantial annual savings once finalized. Also related to footprint changes, we site in Minneapolis, Minnesota, and also further invested in the land associated with a further manufacturing site in Nanjing, China.
In other operating highlights, our Axalta operating excellence program continues to ramp, and we now deploy to a total of 8 site with 4 done this past quarter. As this progress continues and as our AOE program matures, deployed sites. This initiative will continue to contribute at an increased rate over time from broad productivity production quality improvement. In terms of innovation highlights, we're on track to introduce at least 250 new products this year as we noted last quarter. Through June year to date, we've introduced over 120 new products with some notable, well, examples, including new advanced primers and clear cut in Transportation in EMEA in the Americas, a new FASTAN Primer in North America Refinish, and our Meta Luxe value Refinish product line launched in ago.
In summary, Exela's 2nd quarter results were solid and unplanned and demonstrated our continued progress in price recapture and ongoing realization of growth from significant innovation investment, notably in Industrial. While our end markets remain largely stable, we're also carefully monitoring areas of pressure, most notably related to global growth, the potential impact of trade and tariffs automotive production in some regions and ongoing cost inflation. We're taking immediate and proactive steps to offset these variety of headwinds We believe our peers are doing the same, and the broader stability of the coatings market should serve Exelted Well as we seek to achieve strong shareholder returns this year and beyond. Regarding the topic of tariffs and any prospective impact from escalating trade tensions, this is a challenging up topic to forecast but we note that the majority of our sales and income are generated by product sourced and manufactured in the regions for end product are consumed. Axalta does not ship inputs or finished goods globally in amounts that are significant in the context of consolidated businesses.
But in cases where we do this, to meet customer demand or requirements, we plan to take actions to minimize any tariff exposure over time. Based on what we know today, we believe that any impact to our reported financial results will be less than 1% of adjusted EBITDA based on current contemplated tariffs on a gross basis, and this amount could be reduced by actions taken to resource product in different regions. Of course, the greater concern from tariffs and broader trade wars comes from the impact to global consumer behavior and demand, and this is something we will continue to monitor actively With that, I'll now turn the call over to Robert who will share some further detail on our results. Thank you, Charlie, and good morning, everybody. As you can see on Slide 4, 2nd quarter net sales, excluding FX tailwinds, increased 8.4% year over year.
This included 15.4% growth in Performance Coatings, while Transportation Coatings net sales declined 2.4%. 2nd quarter growth was driven by 5.6 percent acquisition contribution, coupled with modest increases in organic volume, as well as accelerating and positive pricemix effects. Organic volume included strong growth in industrial, offset by a moderate as expected decline and refinish volume, largely in North America, as well as a modest decline in North America light vehicle, largely due to several one off customer events in the period that Charlie mentioned earlier. Overall, price and product mix realization remained positive in the quarter. Most of the pricing progress to date has continued to be in Performance Coatings increased mid single digits, while Industrial was also up low to mid single digits, underscoring solid progress in the segment to offset real inflation.
Price mix and Transportation Coatings remained slightly negative for the period. FX translation benefits decelerated sequentially, given dollar strengthening of late, down from a 6.3% benefit in Q1, principally driven in this quarter by a weaker euro in Chinese yuan. Adjusted EBITDA of $248,000,000 in Q2 increased 9% versus the prior year. Adjusted EBITDA mark declined very modestly by 40 basis points in the second quarter, reflecting the impact of higher variable costs, including raw material freight and packaging cost inflation. These cost factors were partly offset by lower operator operating expenses through Axaltaway savings, and pricing within our Performance Coatings segment, which contributed to sequential improvement in margin in the second quarter of 160 basis points.
The one time impact to EBITDA of the OEM plant issues related to supplier interruptions the trucking strike in Brazil and costs related to our potential Belgian plant closure was approximately $5,000,000, Absent these costs, our 2nd quarter adjusted EBITDA would have been slightly above our expectations. We do, however, expect most of this timing and could be made up during the second half of the year. Turning to Slide 5, Performance Coatings Q2 net sales increased 18.3% year over year, including an FX benefit of 2.9 percent. Constant currency growth was driven by 9.2 percent acquisition contribution and 4.8% higher average selling prices, while organic volumes increased 1.4% for the segment. For refinish, Q2 net sales increased by 6.1%, including a 2.7% FX tailwind, driven by robust net sales growth.
During the quarter, we made strong and mainstream product lines. Average pricing in all four regions was strong with mid single digit positive contribution globally for of 24% and 3.3% FX benefit. Organic net sales growth in the low double digits was very encouraging in including positive contribution from all regions as well as positive volume growth in all regions, except Latin America, which witnessed a modest pullback overall. Average price and mix was accretive in the quarter in the low single digits, benefiting from pricing actions across the businesses as required to offset inflation. Performance Coatings delivered Q2 adjusted EBITDA of $177,000,000 a 20.2% year over year increase.
Drivers included volume dropdown benefit, improved price mix and completed acquisitions, offset partly by higher raw material input inflation. CT adjusted EBITDA margins up 22.5% slightly better than the 22.1 percent reported margin last year, reflecting our ability to offset raw material inflation with price increases, in Performance Coatings. Turning to Slide 6, Transportation Coatings net sales decreased 0 point percent year over year in the second quarter, including a currency benefit of 1.6%. With steady constant currency net sales in commercial vehicle, offset by a slight decline in light vehicle. Segment volumes increased low single digits in Q2, more than offset by ongoing favorable pricemix similar to last quarter.
Light Vehicle Q2 net sales decreased 1.5% including a 1.6% FX tailwind. Volumes increased slightly with growth in EMEA and Asia Pacific, offset by decline in the Americas, including the effect of several customer specific impacts that reduced production in the period. Q2 average price and mix was down low single digits, reflecting residual pressure from mid-twenty 17 customer price agreements. We remain in active discussions with numerous OEM customers regarding price increases to offset raw material inflation. We've made some progress and expect to make more as our customers recognize the structural cost pressures we continue to face At the same time, we have increased our focus on lowering our cost structure 2nd quarter commercial vehicle net sales increased 2%.
This relatively flat net sales result reflects the annualization of strong prior year production rates for heavy duty truck, and other commercial vehicle end markets. Commercial vehicle production for the industry remains robust, increasing 7% level growth during the quarter including contribution and growth from all regions, albeit slowing somewhat in Europe in the period. Forecast for commercial vehicle currently assume demand stability the remainder of the year in most regions, albeit with some slowing anticipated in China. Non truck commercial customers also continue to enjoy strong half of commercial vehicle sales from non truck products. Transportation Coatings generated 2nd quarter adjusted EBITDA of 71,000,000 versus $80,000,000 last year with associated margins of 16.8% and 18.9%, respectively.
The lower margin comparison was driven by headwinds from unfavorable price mix and raw material inflation, offset to some degree by high segment volumes and lower operating costs. Turning to Slide 7. Cash and equivalents totaled $551,000,000 June 30. Total reported debt was $3,900,000,000, resulting in a net debt balance of $3,300,000,000 versus $3,100,000,000 at year end and $3,400,000,000 at March quarter end. Our net leverage ratio was 3.6x@quarterendversus3.7x at first quarter end.
The slight decrease was driven by stronger operating results and the weaker euro in the sequential period, offset partially by a lower cash balance in part due to share repurchases made in the period. Q2 free cash flow defined as cash flow from operations less capital expenditures was a source of $107,000,000 compared to $74,000,000 in the same quarter a year ago. The improvement year over year capital to net sales ratio at quarter end was 13.4% compared with 14.4% a year ago and similar to Q1 levels. This included the effect of normal seasonal working capital fluctuations. We reiterate our expectations for the year of modest working capital driven largely by adjusted EBITDA growth, which would imply an improved working capital to sales ratio by year end.
In April, we completed a refinancing transaction that included amending our term loans, executing cross currency swaps, which resulted in $475,000,000 of debt being converted to euros, and swapping to fixed rate debt, while improving overall pricing. As a result, our fixed rate debt now totals 72% of our total debt. Turning to Slide 8, we have revised our previously provided financial guidance for 2018 as shown. For net sales, we still expect growth of 6% to 7% excluding FX. So based on updated consensus currency forecasts, we now see a 2% tailwind from FX for the year down from the 3% This continues to incorporate 3 remained steady and appear healthy, but we have seen some moderation in economic forecasts and most importantly in automotive production expectation looking forward, which we have incorporated into our outlook within the Transportation Coatings segment.
Based on our current view of recent markets globally, we believe we are on track to meet our expectations for the year in this end market. Finally, industrial markets serve remained robust based on broader macro level data. Our adjusted EBITDA outlook has been maintained and $950,000,000 to $980,000,000, but we now expect to see our results more likely reported within the bottom half of this guidance range. Given pricing dynamics within light vehicle, volume pressure notably in Europe from emissions regulation transition raw material inflation and a slightly revised consensus FX outlook. Regarding phasing of adjusted EBITDA in 2018, We expect third quarter to approximate 24 percent of full year adjusted EBITDA at the midpoint of the range.
With Q4 implied at somewhat stronger than Q3. Guidance for interest expense remained at $165,000,000. Regarding taxes, we are maintaining our adjusted Our free cash flow guidance remains $420,000,000 to $460,000,000, reflecting consistent overall assumptions since our last update Though the drop through to cash flow would be commensurate with adjusted EBITDA results within the range. Our capital expenditure and D and A guidance remains unchanged. While share count guidance is now $244,000,000, given recent share repurchases.
This concludes our prepared remarks. We would now be pleased to answer Thank
Our first question comes from the line of Christopher Parkinson with Credit Suisse. Please proceed with your question.
Great. Thank you. So you've recently launched a lot of new products in light vehicle. I believe it's Aqua Econ, some stuff in ClearCO Can you just comment on
any mix benefits whatsoever on a relative basis, just the timeline for
the ramps here and just any broad info to make them non quantitative thoughts on how we should think about the light vehicle price mix into the second half into 2019. Just anything that could be helpful would be appreciated.
Yes, Chris, we've got a number of products up. You highlight the E code. We have a number of clear codes as well that come in during the course that's probably not helpful for the overall mix given the type of products that are being introduced. Okay, great. And just, can
you just talk a little bit more about the ongoing cost cutting efforts. Obviously, that's something you highlighted at your Analyst Day and how we should think about those into the, as you said, into 20 18? And then also just as a corollary of that, any progress on improving working capital as well? Thank you.
Chris, this is Robert on the question regarding the cost reduction initiatives. Those continue progressing well and we're actually, write on our management budget in terms of how much we have forecasted to be in savings through the first, through the first half of the year. And we're projecting still to hit the $50,000,000 cost savings number that we had projected for the full year. Given some of the pressures that we're seeing in the transportation segment, we are ramping up, our cost savings initiatives, compensate for that as much as we possibly can. And then regarding working capital, year over year, we did have some improvement in the second quarter of last year to 2nd quarter of this year.
We did, however, versus our own internal expectation, have a little bit of a headwind in terms of some of the inventory build that we did in preparation for entering into the consultation with the Belgian Works Council. And we also, from an accounts receivable perspective, were slightly higher we had budgeted internally simply for the reason that we generated a higher level of sales that we had forecasted. Thank you. Thank
you. Our next question comes from the line of Ghansham Panjabi with Please proceed with your question.
Hey, guys. Good morning.
I guess, Charlie, first off, congrats. You will be missed and congrats to you also, Terrence. But just to clarify, on Chris's question, is the guidance assume price realization for auto OEM in the back half of twenty eighteen? If so, is this specific to a regional, more broadly speaking, And how should we think about the timeline of pricing realization in that segment as we tightened up the model for the last two quarters?
So in terms of the in terms of the year, I think we've been fairly conservative, on our price outlook garnishment for the second half the year. Unfortunately, market conditions have not been such that we have been able to increase price yet in that market. But as we mentioned, you know, we will continue, our efforts there. And we've also ramped up, our cost, our cost reduction effort in particular in the transportation segment itself.
Okay, that's helpful. And then for my second question, just in terms of auto refinish, clearly executing on pricing for the segment, broadly speaking, did volumes come in line with your internal expectations for the second quarter? And just sort of related, can you update us on your volume forecast for the back half of twenty eighteen in context of when are you competitors making feel cautious comments near term for North American auto refinish? Thank you so much.
Regarding North America Refinish, in terms of what we expected to see in the quarter, it was consistent with what we expected to see as we lapped the distributor working capital adjustments. And as you know, in Q3 and Q4 of last year, we had a pretty significant volume drop due that change. So the comparisons in North America refinished volume should be sequentially much easier, in Q3 and Q4. And then in terms of overall market conditions in that end market, we have not seen over the last quarter, any material change that affects our thinking
comes from the line of Jeff Zekauskas with JP Morgan. Please proceed with your question.
In your introductory remarks, Charlie, you said that you plan to stay on as Chairman. Historically, a result of Chairman and the CEO, we're the same person. Is that a different stance that the board has? And by staying on, do you mean that you intend to stay on at the pleasure of the board for a longer period of time or for a year or so.
Yes. Thanks, Jeff. I think it in no way it's reflected in the long term change in stance by the board. But a couple of comments. I think, 1, we want to make sure we have a smooth transition.
Obviously, as chairman, you always stay on the pleasure of the board. But I plan to stay on long term. I think we have a great team that owned with myself, but our lead director, Mark Garrett, who for many of you know, is very active the chemical industry at Novo Borealis and then Terence coming in from Honeywell. So I actually feel like we've probably got the strongest executive team and board that's out there, of course, I'm biased. But no, Jeff, I think it should also signal consistency in our strategy, our views on M And A, bolt ons, long term industry consolidation, all the things that I think people who naturally have questions about.
So I think I think we're going to have a lot of fun with it. It also gives Terrence time a good smooth transition. To get around meeting a lot of our customers, analysts, investor base. And I think it's been well received by, as you would get, some of our top on the team that we have at the top.
Okay. And then, I guess for Robert, the SG and A really dropped nicely, year over year. And even sequentially, in spite of sequential sales growth. What were the largest factors behind the year over year decrease in SG And A? And also the sequential decrease in SG and A?
Jeff, the decrease in SG and A was due to the absence of the Venezuela deconsolidation impact. Also, the reclassification of technical sales from SG and A to cost of goods sold and the absence of acquisition related costs, as well as the impact of cost savings And in terms of the magnitude of that reclassification of technical sales from SG and A to cost of goods sold, that was about $15,000,000 for the quarter and should be roughly $50,000,000 for the full year.
Our next question comes from the line of David Begleiter with Deutsche Bank.
Thank you, Dave. Just looking
at the guidance cut maybe about $10,000,000 to $15,000,000. Could you break it out between two segments with a two thirds and presentation and one third in performance, something like that?
David, in terms of the guide for the full year, I'd say that big picture grow. Certainly, there's a lot of rhetoric at the moment on trade and tariffs. And I think everybody is still trying to understand what the global what the global impact of that is going to be in terms of any potential impact on demand. We didn't see much on that in the second quarter, as we commented in our prepared remarks, in terms of sourcing product and the impact there, It's not a material number, but it's uncertain and unclear what the impact of trade tariffs could be to overall, to overall global demand. And in terms of the overall guidance for the full year, it's not really related to industrial.
It's more related to transportation. And we've seen IHS lower bills from 2.4% for the full year to 2.1%. We've seen bills come down in China and Europe and most notably in NAFTA. Now they've raised their forecast for 20 team, but for the remainder of the year, there is that impact.
And just how we finish, volumes, you
had an easy comp in Q2. Was something happening in the underlying market that caused a number to
be, you volumes to be negative in the 2nd quarter No, we implemented the changes that we've previously discussed in our Refinish business. At the end Q2 last year. So we had some impact last year, but it wasn't an overly material amount. So really the easier compare begins in Q3.
Our next question comes from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question.
Yes, good morning. A question on light vehicles in Europe. I think you indicated a transitory issue there.
I was wondering if
you could speak to the phase out of diesel engine vehicles in that market and how that would affect tax also over the near term and the longer term?
Yes, thanks, Kevin. This is Charlie. I think that that's still to be determined what models, how each manufacturer is going to do that. Clearly, the shift is going on. And then the whole balance is what's going to be hybrid with electric versus just, gasoline.
So I think we have pretty good views from our individual customers on how that's going to work out. We actually feel like longer term, while while there's some short term issues, as you know, some of the models they're restricting purchases on some models you can't order. And I and I think that that's reflected in Robert's kind of comments about a little concern in the second half of the year because we just don't really know some of those production forecasts, although to date, they come in a little better than we thought. But I think long term, we feel pretty good about the OEMs that we're aligned with, and the models they're going to be producing. And as they phase out of some of the diesels, we actually think on a couple couple of OEMs will pick up some business that, today we don't have.
And second, if I may, on the tariff issue, you know, recognizing that it's early in, and there's still a lot of uncertainty. I'm curious as to how you approached the calculation of the EBITDA impact of less than 1%. Coatings tend not to be traded in large volumes across borders. So maybe you could help us out with, how are you thinking about the impact on raw materials and inflation and so forth?
Kevin, it's Chris. We did a calculation based on what we know about existing tariffs and potentially announced tariffs. And we included any potential impact that we already announced and proposed tariffs, through July. Using that, we then calculated any direct impact that we have in terms of tariff paid
and any indirect tariffs that
we would experience through our suppliers. And on that basis, we came up with that result. That was a methodology.
Very good. Charlie, Terrance, I'd like to add my congratulations to you both as well. Best of luck.
Yes, great. Thank you.
Thank you. Our next question comes from the line of P. J. Juvekar with Citi. Please proceed with your questions.
Thank you. Charlie Terrence, congratulations to both of you. Tell me, you had several merger discussions in the last couple of years. With your retirement announcement, does that change, does that change, does that change in strategy or at least maybe changing timing of any potential M and A?
No, I don't think so. I think, you know, as you've always heard me say, conferences and on these calls, I think that the industry continues to be very poised for consolidation. We're certainly we see that going on quite a bit at the lower levels with the M and A activity that, if you look across the major players, we'll all engage in. In fact, if anything, those pipelines will even, gotten more robust just given some of the freshers, some of these smaller companies are coming in Now that offsets, I think, a couple of them have highlighted some of the valuation expectations from these players. But again, I think I think we all feel pretty good about that.
But I I believe, belief that the industry consolidation will continue. It's certainly been a little bit of a positive past years. People have been focused on other activities. For example, specifically, no, I think as I highlighted earlier, I don't think it if any change in strategy for us, we feel good about the company we have. We see potential things that can be done out there.
But I think me remaining as chairman you look at Terence's background, not only in driving business excellence, but also change in business as he's been involved in, I think, discussions, Terrance, myself and the Board have had, I think we're all like minded on the opportunity to exist out there for shareholders.
Okay. Thank you for that. And then I want to go back to the Refinish segment. It seems like you're having some volume issues almost for a year. I think second half of last year, you had some distributor destocking first half of this year, including this quarter, you had negative volume growth.
So wondering if there's any structural issue here. Are you losing share or is it because of MSO consolidation Can you talk about that?
E. J, in terms of the overall market, obviously, been consolidation at the shop level. There's been consolidation, at the distribution level. We've adjusted our business model to reflect that and have grown nicely. We're adding shops as we had in our prepared remarks in North America, in Europe, and in Asia quite nicely.
We're also building out our mainstream product portfolio in addition to our, in addition to our premium product portfolio. So at this time, in terms of any long term structural changes,
in the
Refinish market and haven't really seen any. What I would add to, Dave, if you look at Third And Fourth Quarter, I think it'll be obvious some of the changes start to shift through, from the standpoint, that's what we're doing there. We are seeing in some regions where when you look at EBITDA growth being up, margins being up in the business, some of that's a direct reflection of conversion from Solidborne to Waterborne. And I think we've highlighted before. Some regions like China, we're doing a lot of conversions of waterborne in that particular part of our business grows.
And volumes do drop the margins go up as a result of that. But I think I would step back and look at as we look at full year, as Robert highlighted earlier in the comments, we're right exactly what we thought we'd be and very happy with what we've got coming up the next couple of quarters in a couple of regions like North America and the 1,000,000. Would add to that as well that in the second half of the year, we will fully expect to see significant revenue acceleration and re finish. So it wouldn't surprised to see double digit revenue growth in the second half of the year. That would include a significant volume growth.
Clearly, there is an easier comparison in the 3rd quarter we expect that however to continue in the fourth quarter. So I think you'll see somewhat different profile, from 3rd quarter on.
Okay, great. Thank you very much.
Thank you. Our next question comes from the line of Alexia Yefremov with Nomura Instinet. Please proceed with your question.
Thank you. Good morning, everyone. In Industrial, 10% of organic volume growth, could you elaborate on what drives that and also how payable, that type of, growth there?
Well, as you know, we've invested quite a bit in that, in that business over the last, over the last few years in putting feet on the street, in putting in place the right people with the right profile and knowledge in the different segments. But if you look at the segments within, within industrial, coil volume for us and price increases were strong. General industrial growth from new wins was good. And we also had price increases. Powder showed strong growth from price increases as well as some volume gains, our energy solutions business, increased as well.
And then wood market demand remains strong. It's building products in the kitchen market. Our continue to expect grow mid single digits. So really it's a I think a reflection of the strength of the leadership in the business that we have, as well as the investment that we've made over the couple of years. Because if you look at overall overall industrial production, for the year, the forecast is going to lower 3.7percentto3.4percent, consistent with the below range last quarter, yet our team continues to continues to exceed.
And I think that's also a function of the lower market share that we have in many of its verticals.
Thank you. In China, you mentioned lower light legal prices. Could you discuss that situation from some we're talking about more challenging environment in China in general, what's your outlook there in the light vehicle and commercial OEM market?
So in terms of the LV market in China, we have not seen market conditions conducive to capturing, to capturing price thus far in that, in that market. And with some of the volume pressure that's been in China as well, that may also be somewhat hindering the ability to capture price. But again, that's a key area of focus and continues to be for us. We will adjust our cost model accordingly to deal with that.
Our next question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed with your questions.
Thank you, and I'll offer my congratulations as well. Just another question sort of around the tariff issue. And I guess from a sort of more second derivative effect, some of your customers are going to see higher raw material costs as a function of the steel tariffs. And what have you How does that impact your conversation with them about pricing? Does it kind of make the conversation more sympathetic and if everybody needs to kind of deal with raws.
Does that make it easier or does it make it more challenging or does it just depend?
So far, we haven't seen any of that pressure. From the standpoint of they talk a lot about volumes and where they're going to have to shift steel production from, but they haven't we certainly haven't seen them coming back and asking us to contribute to that. I think in many cases over the past year or 2 years, the coatings industry has absorbed more on the raw material pricing side than we've passed on. We continue to be very data driven on that, not only in the the coal business with some of the other markets. So right now, we continue to highlight to our customers that we bore way more pain than they have so far.
But again, no conversation, Jeff, But we are kind of watching to see how they think about sourcing and what they think it does to their end demand. I remain my belief is still though that a lot of it depends on the relative acceleration of these tariffs and how fast they come about because in many cases, as they have
to pass it on to
their consumer, the more they can know about it, more time they have, the less impact it's going to be overall. So far, you know, conversations have been positive
Okay. And then
just a follow-up on light vehicle pricing. There obviously were some contract pricing adjustments, you said largely in 2017. But can you just give us a sense of, I mean, presumably, if you start lapping those decreases, which should make the price line, if nothing else, start to move in the right direction, notwithstanding any progress you make on increasing. So can you just give us a sense on sort of the cadence of the lapping as we kind of go through the balance this year and into next year?
So for the remainder of the year and also for this quarter, I think it's important to highlight some of comments that Chris made around, around mix in the price category in our bridges. It's price and mix. Together in that category. Therefore, you are seeing some mix effects. So with the conditions overall, we are aggressively, aggressively working on a number of initiatives, cost reductions, price increases.
We've implemented indexing at some customers. We've implemented surcharges with others as new products come online and new colors are launched, those are obviously launched at prices that reflect the current environment for raw materials. And then we are also working on, reformulations of, of products in order to deal with the raw material inflation that we're, that we're seeing. But for the remainder of the year, I think we still expect it to be a challenging environment from a price mix perspective. Okay.
So we should think about 2019 is when the sort of comparisons become easier on the negative on the price givebacks?
Yes, they do start to get easier as you go through the year. Robert's point is just that mix becomes incremental headwind. So there's some housing effect there. Okay. Understood.
Thank you very much. Thank
you. Our next question comes from the line of John Carson with Susquehanna Financial Please proceed with your question.
Yes, thank you. Just a question on what you're expecting for overall consolidated price progression in the second half. You were 1 percent year over year in Q1, almost 2% in Q2. If you look just at the price increases that you have in place now with customers, how do you see price progressing for the balance of the year?
In Performance Coatings, our expectation is that we would, but we would continue to achieve price, commensurate with, what we're seeing there in the environment from a cost perspective and expectation side. I think our expectation is that it will continue to be a flattish to challenge the environment from a price mix perspective.
So overall, you that kind of a 2% price progression in the second half, similar to what you had in Q2?
Yes, we don't provide guidance on specific elements of sales. I think it's captured in our 8% to 9% guide for the full year or 6% to 7% FX effects. But I think we provided some of the drivers just from a conceptual perspective.
And from a raw material standpoint, do you think it peaks now in Q3 this your raw material basket, or do you still think that you're looking at double digit raw material inflation for the balance of the year?
Yes, again, as we talked about on the last earnings call, our expectation, which at the time may have seemed overly conservative it is actually proven out in the numbers. We continue to still expect to see low double digits in inflation as we move through the back half of the year, when exactly that inflection point will occur, it's difficult to predict because it depends on a number of client demand factors within each commodity as well as the overall, as well as the overall price of oil. So we really, it's difficult for us to call it out. Thanks. Yes, John.
This is a Charlie. Just a couple of points on that. I think some of the uncertainty you've seen in the past month starting to highlight maybe a rollover, some lower TFS, you know, oil where it is in the state where it is So I think that's some of the uncertainty that in the back half of the year, I'd say I'm like Robert Agreed, low double digit is still a pretty fair number. It could be a little better, could be a little worse. We just kind of in this changing economic situation the second half of the year, there's just uncertainty around it, certainly on some of the bigger pigments.
And the other thing that I'd add, just a final thought, we are seeing, packaging costs and logistics and transportation costs also increase. So from a price capture perspective, we'll also, be going after price to offset as if that cost increases as we possibly can. Thank you. Our next
comes from the line of John Roberts with UBS.
You're anniversarying the wood coatings bolt on. Is it fair to say that you don't have any meaningful inbound bolt on deals in the pipeline that you're going to drop carriage soon after he starts? No, I think our pipeline always stays pretty full. So said, I wouldn't highlight any significant, thing that we're close to otherwise, it'd be disclosure, but But no, I think we remain committed to looking at small and larger bolt ons. And as I highlighted earlier, I think the pipeline for most Cody's companies right now is pretty full.
We won't we will not pause any deal with Aaron's coming on board. He's already getting up to speed on everything, and I think will be supportive as I would expect of anything that's in the pipeline that we decide to do. And then I don't know if Terrence is there to take a question, but congratulations and Just curious whether, your experience at Air Products included any time in the coatings related chemical businesses that they had there. John, it's Chris. So, because Tariffs is an employee, he's not any longer on an active line.
So, please direct your questions to the team there. Thank you. Thank
you. Our next question comes from the line of Lawrence Alexander with Jefferies. Please proceed with your question.
Good morning. 2 quick ones. 1, could you could we revisit the topic of the price versus raw materials, more from the perspective of the spreads? And when you think, gross margins will get sort of flat year year comparisons for each segment? And then secondly, with the comments around the improving traction for the pricing, the changes in the contracts, the indexing, the efforts to catch up to the cost inflation.
And then the comment around the transitory headwinds in Q3 should we think about a second half to first half of twenty nineteen bridge that is a bit more aggressive than you've had historically cause some of the effects in the back half of twenty eighteen were transitory?
In terms of the inflection points, from a margin perspective, if you look at EBITDA, EBITDA margin and the performance side of the business, we're actually executing quite well in terms of price capture to offset the cost inflation, that we've seen. And you can see that in the margin profile. And if you look at Q3 forward to Q1 to Q2, you see that steady improvement in the EBITDA margin. So we're very pleased at the area that is challenging due again to some of the market conditions in light vehicle, it's really, getting price in that segment that or in that end market that's important to really, to really changing that. And that's difficult to predict when those market conditions will change.
And in terms of the second half versus first half, I think it's too early for us to provide a guide on first half of next year. But as we get towards the back end of the year, we have our December outlook call, we can provide more insight at that time. Our next
question comes from the line of Mike Fison with KeyBanc Capital Markets. Please proceed with your question.
When you think about Transportation Coatings, your EBITDA looks like it'll be down 17, 18. What do you think broadly needs to happen to get that business back on track and growing EBITDA again?
Yes, thanks. This is Charlie. I think what happens always happens in that market is it's all about innovation. It's about controlling costs, and it's about adjusting with each OEM. So as you know, this market is made up of many, many players going many different directions.
So certain parts of our business, I think we're very happy with, and I wouldn't touch In other parts, we're going to focus on changing demand patterns, changing models. So I think what you'll see is, as Robert highlighted earlier, when he talked about some of our Delta Way initiatives. We will continue to innovate with new products to take value and get price as part of that where the customer understands the value proposition and it makes sense for both parties. We're already doing that as we speak and you'll start to you'll continue to see that. Displace some of our older, our older lines.
But then I think also we, like our competitors, I would guess, are doing, we will adjust the cost structures. For, to maintain long term healthy margins in the business. Some of those cost actions we're already doing today, they were already planned So it's not anything new. But I think we'll continue to adjust as many of you know, we invest over 4% of sales in total R and D process support. So we've got room to make some changes there and make adjustments.
I think you'll see as Robert highlighted, accelerate some of those efforts because we are committed to maintaining long term healthy margins in the business and growing volumes over time. But I think we are at a point where when you look at China demand and the shifting from some multinationals to the Chinese OEMs, to all these car companies with electric vehicles, self, not self driving, but certainly more active driving technology, changing strategies. For example, at Ford And FCA. So I think those are opportunities for us that we look and say, you know, long term, we feel pretty good about the health of business. It's going to take a different cost structure.
It's going to take a different set of products. You continue to see us launch products like ambient flash, quicker drying, less over spray, more efficient. For example, we worked with 1 supplier last year, while it cut consumption, we're 50% on a particular line. We now enjoy that business long term 100%. So I think like any business, we're just going to adapt our strategy, but we are committed to maintaining healthy margins and price recovery in that business.
We have a lot of again, we don't want it to look any different than what we have on the performance side of our business. And that's what we're committed to do. So I think over the next couple of sequential quarters, you'll see us take and continue to take actions on all fronts.
Thank you. Our next question comes from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your question.
Great, thanks. Good morning. Just a question on Transportation Coatings, Grights versus volume. Going back a couple of years, it looks like volumes were positive. In the 1st part of 2016 on traffic security sorry, volumes and entry, but you're able to get price.
I mean, is that kind of what is, the trade off that goes on here as well that at times when, when you are seeing difficulty on the volume side, it's tougher to get price as well. I think we discussed that.
I think in general, the 2 are not necessarily correlated. I think if you go back, to 2014, 20 team. We had a lot of new wins related to the carve out out of DuPont and kind of the re, the cool authorization of market share in the industry. We had a number of launches and a number of regions a number of a number of new product introductions that took place at that time. So you saw a greater amount of a greater amount of volume.
Now that we've achieved a little bit more of a parity between the major players, it's all based on innovation and service. As well as overall as well as overall market conditions. But when you look specifically at Q2, I think it's important not to take Q2 and grow that up for the full year because there were one time events there. One of our major OEM customers had a supplier, had a supplier issue, and another one of our major customers had another, supplier you that basically they brought down their bills, which brought down our volumes in North America in particular. And then we also had truck is strike, in Brazil.
So I think really Q2 has been affected by, by those one time events, and we try to, estimate the impact from some of those fund events were in our prepared remarks.
Right. Thanks for that, Robert. And just another question on M And A. Is there, it seems like you are hiding your focus internally on cost reductions and so on. Does that make it more difficult to consummate deals this year or actually think about, the likelihood that see some deals from you guys this year itself?
No, I don't think it affects our capability at all. To continue to execute on M And A. What you saw the last couple of quarters, we took a little bit of a breather because we had such high activity last year and One of the things we've committed, you know, we've done 16 acquisitions over the past two and a half years. And we felt like last year, we did 5 just within about a full month period. Felt like we wanted to make sure we had good integration on those.
You know, one was a carve out, one had an SAP conversion. And I think from an operation standpoint, it won't take time to digest all those. We've now done that. I don't think it takes the cost out in any way affects the team. The people who do the other business teams that actually do the acquisitions and then the operations team who do the integration.
Thanks.
Thank you. Ladies and gentlemen, our final question for today comes from the line of Bob Koort with Goldman Sachs. Please proceed with your
Good
morning guys. Thanks for squeezing me in. This is Chris Evans on for Bob. I'm sticking with the Transportation segment. EBITDA margins there are now well below the 20 percent level you reported a year or so ago, with the implementation of cost programs and the potential for maybe price recovery at some point, where do you, if spec profitability for that segment could be over the longer term?
Well, I think it's important when you when you look at that at that business. Obviously, it's not only light vehicle, but it's also a commercial vehicle. And commercial vehicle is, you know, is also a very attractive, a very attractive business. And in light vehicle, as we, at some point, we'll get price through introduction of new products, through indexing, as well as potential from price increases with, with some of the OEMs. So we would expect over, you know, over the medium term to see, in margin in that business, not only from some of the cost reduction measures that you mentioned, Chris, but also, from some of the, some of the top line estimates that we would expect to occur in the next several quarters.
Just specifically though, just I mean, is that was the 20% 21% is that an attainable target again going forward? Or is that sort of enhanced by the maybe deflationary factors in that time period? Just kind of want level set, what the expectations might be.
Yes, we haven't provided order forward guidance from an EBITDA perspective, segment level, we provided that at the total company level. But I think our comments, our comments around what some of the drivers could be to give you a directional sense about making Great. And maybe I can just squeeze the
last one in on. You'll find a little bit on the raws in the quarter and your guidance for the year. I mean, can you specific color on any precise raw materials that you're seeing in the quarter, any just trends that might get confidence or directionality on how those might trend sequentially for you in the back half?
I think if you look at our various baskets of or major or major categories of raw materials, solvents continue to move up due to the higher cost of feedstocks. On monomers. We have significant supply side constraints. In some of the resins, we have pretty good pretty good demand, but also fairly constricted supply. Other resins, again, we have, you know, some supply constraints that are still there.
United to cyanate there's, you know, tightness, due to outages, and we continue to see not only in isocyanates with other categories, force majeures, that occurred during Q2. Pigments, we still see TiO2 at relatively high prices as well as some of the other some of the other pigments. And then from an additive, a lot of which additives, a lot of which come from China, there have been, supply reductions due to the enforcement of a lot of it, Chinese environmental So, you put all that together. And I think that with the moment at least, we continue to believe that we'll see the overall raw material basket in late and low single, low double digits. As we've mentioned, there's additional inflation in packaging and logistics and transportation that we're also going to have to go out and get price to offset.
Thanks Vikar.
Time, I'm not for questions. I'll turn the floor back to Mr. Schiefer Furney, final comments.
Yes, thanks. And I'll be real brief. I think as we come through the first half of the year, I couldn't be happier with our team on our execution. I think we said as far back as our investor day that this was a year, all that execution given the raw material or given the inflation we see not only raw materials as Robert highlighted in the freight logistics. So I'm really proud of the team we're delivering on that.
I think it's always never exactly like you think you're going to get there, but we're getting there. And I do think we can funny actions on the transportation side that over time we feel good about that business to the covering. So, I'm even more pleased. We've got good solid demand in our markets. But I think as we look at the second half of the year, it's all about execution, continuing to get price, continuing to deliver on some of the margin recovery, taking costs out, accelerating some of our cost efforts.
And then last but not least, so I look forward over the next couple of months to introducing parents, out to our customers, our employees, into some of you on the call who haven't met him yet. We'll be doing that and working on that, over the next couple of months during the quarter. So again, thanks to all of you for your support, your questions. And, we'll look forward to the second half of the year. Thanks, everyone.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.