Good morning, and welcome to the PPG Industries second quarter 2020 earnings conference call. My name is Rocco, and I will be your conference specialist today. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to John Bruno, Director of Investor Relations. Please go ahead, sir.
Thank you, Rocco, and good morning, everyone. Once again, this is John Bruno. We appreciate your continued interest in PPG and welcome you to our second quarter 2020 financial results conference call. Joining me on the call from PPG are Michael McGarry, Chairman and Chief Executive Officer, and Vince Morales, Senior Vice President and Chief Financial Officer. Our comments relate to the financial information released after U.S. equity markets closed on Thursday, July 16, 2020. We have posted detailed commentary and accompanying presentation slides on the investor center on our website, ppg.com. The slides are also available on the webcast site for this call and provide additional support to the opening comments Michael will make shortly. Following management's perspective on the company's results for the quarter, we will move to a Q&A session.
Both the prepared commentary and discussion during the call may contain forward-looking statements reflecting the company's current view of future events and their potential effect on PPG's operating and financial performance. These statements involve uncertainties and risks which may cause actual results to differ. The company is under no obligation to provide subsequent updates to these forward-looking statements. This presentation also contains certain non-GAAP financial measures. The company has provided in the appendix of the presentation materials, which are available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information, please refer to PPG's filings with the SEC. Let me introduce PPG Chairman and CEO, Michael McGarry.
Thank you, John. Good morning, everyone. I'd like to welcome everyone to our second quarter 2020 earnings call. As John noted, we posted a detailed narrative on our website yesterday afternoon, and as a slight process improvement versus prior calls, I will make just a few opening comments on the quarter, and then we'll move into Q&A. First, and most importantly, I hope that you and your loved ones are remaining safe and healthy. Throughout this challenging time, we remain encouraged and proud of all the PPG team members for protecting each other, meeting the dynamic needs of our customers, helping communities, and ensuring stability for all our stakeholders. We continue to remain optimistic about our business and continued growth prospects. Also want to comment briefly on the issue of systemic racism and discrimination that has existed for far too long.
As a society, we're at a pivotal moment in history, and clearly enough is enough. As a global company, we're focused on doing our part to help advocate for equality, justice, and inclusive workplace that is free of discrimination. Our global leadership team has been holding open discussions with employees, looking at strengthening our diversity inclusion leadership efforts, reviewing our own policies and processes, and leveraging the PPG Foundation to support nonprofits who are making a positive difference in these important areas. This is and will remain a priority area for me and the entire PPG leadership team. Now I'll move to discuss our financial results. Last evening, we reported second quarter 2020 financial results. For the second quarter, our net sales were $3 billion, and our adjusted earnings per diluted share from continued operations were $0.99.
These results, which were significantly impacted from the business interruption caused by the COVID pandemic, were better than we originally anticipated. As we communicated in our financial update provided during the quarter, April and May volumes in aggregate were down more than 30% due to the pandemic. For the month of June, strong global architectural coatings demand continued, largely driven by do-it-yourself sales and was coupled with sequentially improving auto and general industrial demand, resulting in total company sales to be down by a low teen percentage. I'm pleased to report that our global architectural business delivered a record quarter driven by strong performance in many countries, highlighted by our Mexico team. During the second quarter, our recovery advanced furthest in China, where several businesses, including automotive OEMs, general industrial coatings, and protective marine coatings, all had higher year-over-year sales volumes.
Year-over-year demand was lower in other major global regions, but our sequential monthly sales volumes improved in each region during the quarter. Given that we have a large China business, we began our pandemic response in late January, so we were able to implement quick, already tested, and decisive actions to help mitigate the lower sales activity and the virus spread outside of China. As a result of these actions, we delivered about $170 million of interim cost savings within the second quarter. In addition to the interim cost savings actions, we achieved more than $20 million of cost savings from our restructuring programs, which are permanent reductions to our cost structure.
This, coupled with good selling price realization of nearly 2%, mostly from our distribution type businesses helped us achieve double-digit margins in the second quarter, which is significant improvement versus the depth of the prior recession in 2008 and 2009. Our operating margin in the second quarter is a strong testimony of the structural cost savings we have delivered in the past few years and higher level of variable costs in our cost structure overall. Also in the quarter, our cash flow from operations totaled approximately $500 million, a level comparable to the prior year second quarter. This was supported by rigorous management of our working capital, resulting in a $400 million reduction in our working capital compared to the same period last year. Looking ahead, we expect economic activity to continue to recover with differences across end-use markets and geographic regions.
We expect our global architectural business to continue to be more resilient and deliver higher organic sales in the third quarter. We anticipate softness in the U.S. commercial maintenance segment to linger and do-it-yourself demand to remain strong, but somewhat less robust than the second quarter. We are pleased with the advancements with respect to our U.S. architectural coatings delivery model, preferred authorized dealer network, and our global digitalization initiatives and expect continued customer adoption, leading to further growth opportunities in the future. We anticipate demand for our automotive OEM and general industrial products to continue their recovery in the third quarter. Other businesses, including automotive refinish and aerospace, will take longer to recover until travel and miles driven return close to 2019 levels. Excuse me.
Due to the uncertainty over the economic climate resulting from the continuation of the COVID-19 pandemic, aggregate sales volumes are projected to be down 8%-15% in the third quarter, with differences by business and regions. Decrements to margins in the third quarter are expected to be slightly worse than those experienced in the second quarter. This is related to removing some of the interim cost mitigation actions in the third quarter as demand for our products progresses and to ensure we properly service our customers as they continue to resume their operations. Our liquidity position remains strong and has improved from the first quarter. We remain committed to our legacy of rewarding shareholders and have approved a 6% increase in our quarterly dividend, a reflection of the confidence we have over maintaining and growing our cash flow.
We will also continue to be disciplined over our approach to capital allocation. As the pandemic continues, our focus will remain on leveraging The PPG Way, protecting our employees, and providing excellent support to our customers with the essential products and services they need to resume and ramp up their operations. In addition, we will continue to support the communities where we do business. I'm very proud and pleased with how our global team, as a one PPG team, is managing through this prolonged and extremely challenging time. I firmly believe that we will emerge as a stronger company. Thank you for your continued confidence in PPG. This concludes our prepared remarks. Now, Rocco, would you please open the line for questions?
Absolutely, sir. We will now begin the question and answer session. As a reminder, to ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from David Begleiter with Deutsche Bank. Please go ahead.
Thank you. Good morning. Michael, just on raw materials in Q3 in the back half of the year, what are your expectations as to how much of a tailwind they might be versus either the first half or the prior year?
Well, David, I would look at that in two ways. The first one is, we continue to see moderation on a year-over-year basis, but you have to be a little bit careful that on a sequential basis, things like copper and oil have started to move up. I think that pace of moderation will vary in the third and fourth quarter. We're not exactly sure how the pandemic is going to continue to play out, but I would be looking at it on both a prior year basis as well as a sequential basis.
Very good. Just on the DIY strength continuing into Q3, how much moderation do you expect, and how much do you think maybe was pulled forward into Q2 from these projects?
Well, I don't think there was really any pull forward. If you look at inventory on the shelves, I would say that most of our big box customers would advocate that they would like to see more inventory on the shelf. I don't see a pull forward from that standpoint. I do think there is a limit on how many rooms that people will paint in their house. I do think it will start to slow down over time. Obviously, that's going to vary by how long there's a stay-at-home orders by various states. We are not expecting the third quarter to be quite as strong as the second quarter.
Thank you.
Thanks, David.
Our next question today comes from Bob Koort with Goldman Sachs. Please go ahead.
Thank you very much. Really appreciate the granularity on the slide deck. It's really helpful. Michael, you mentioned that you thought the next quarter, maybe aggregate would be down about the same rate as the June month. Am I right to read that as an expectation of just sort of a steady state from the June exit velocity for the firm, or is there something else under the hood going on there?
No, I think that's a reasonable assumption. I think that the question we have is if you look at some of our big markets, think about automotive, right? They have demand out there, they're having people problems, getting their plants up and running, making sure everybody's safe. I think that's the challenge that we don't understand is, to what extent will they be able to keep their plants operating at the level they want? Because they have the demand. Now it's just a matter of whether they can keep it going.
You commented that you're able to pull some, I guess, period costs out during the second quarter. On the industrial side in particular, it seems many of those have to go back in to start supporting a recovery in that customer base. How long do you expect that to last? Should we then see the flip side of that, which is a really healthy incremental margin improvement as those volumes come back?
Yeah. Bob, the way we're looking at it is in the second quarter, we had a number of our plants down for a substantial period of time. Some of them down four to six weeks, right? We did a really, really good job. Our team did a fantastic job with our customers coordinating what colors they wanted when they started up. We tried to manage that such that they took the colors we had, the colors they wanted right before they shut down. We were able to actually stay down longer than they were because of that coordination with the customer. That we can't duplicate in the third quarter because basically all our plants are running again. We have learned a lot of things through this pandemic. Our ability to drive productivity has improved. Our digital initiatives have continued.
I think a lot of that is a testament to the resilience of the PPG team.
Great. Thanks very much.
Our next question comes from Ghansham Panjabi with RW Baird. Please go ahead.
Hey, guys. Good morning. Hope everybody's doing well. I guess just as a follow-up to the last question on the 8%-15% volume decline you're forecasting for 3Q, does the downside extreme assume any incremental lockdowns in the U.S. or any other regions? You mentioned, for example, Michael, in your prepared comments that auto OEM should benefit sequentially from reduced seasonal shutdowns in 3Q. I would think that would be a positive variance. I'm just trying to understand what operating paradigm you're embedding on the downside extreme.
Hey, Ghansham. This is Vince. No question, that's a fairly wide range. We just don't know the shape of the pandemic in some of the key regions. We're still seeing effects, obviously, in Latin America, South America, India, U.S. The range that we put out tries to bracket the best case and worst case with respect to how that pandemic will affect the quarter.
Okay. In terms of the decremental margin variances for 3Q relative to the 2Q baseline, I think you said slightly worse. Can you just give us some more color on that?
Yeah. Again, I'll go here, Ghansham. I think one of the issues, if you look, we had a 40% decremental in Q1. The pandemic hit very quickly and abruptly, we weren't able to manage our costs accordingly. As Michael just mentioned, we were able to be very planful throughout the quarter in Q2, managing not only our operations, but our administrative group. The operations are all started back up. Some of those costs are binary. They're either in or out. Regardless of the volume, these kind of semi-variable costs, some of those are back in in Q3. We're not going to be at the 25% or 26% decremental, we're certainly not going to be at the 40% decremental we had in Q1. It'll be somewhere in between. Hopefully closer to the 25.
Ghansham, I would say that in the later quarters that have come, we're going to have better incremental margins. I think that's a given. As that volume returns, we're more efficient, and we can see that helping us out.
Terrific. Thanks so much.
Our next question today comes from John Roberts at UBS. Please go ahead.
Thank you. China's recovered nicely for you. Is it now steady state as well? Are you going to continue to grow from this second quarter level in China? Any progress to report on your new coatings for EVs?
John, we see continued improvement in China, but we're not seeing, like, a massive jump. I think the GDP for our customers are probably going to be in that 3%-5% kind of range. We are seeing continued improvement in the automotive demand. People are staying away from mass transit, so there are more people driving. That's positive. We do see virtually every province has some kind of automotive stimulus package to support their own little automotive guys in that province. We do see that continuing. Our industrial business continues to win share in China, so we expect that to continue. I'd say overall, we're still very positive on our China team as well as our China business.
John, I can add, I do think, just to piggyback on the last question, China, we haven't seen a full volume recovery. We've seen a nice volume recovery, but as we alluded to, our financial performance there is above prior year due to the effect of those incrementals Michael was talking about.
John, back to your last question, which is EV. We are getting orders on various aspects of the EV battery. We're getting some obviously painting the exterior. We just recently won a new award for, I would say, the leading EV maker in China, where we're providing protective coatings inside the battery. Obviously, that's to eliminate what they call thermal events, which you and I call fires. We're very pleased with that, and we continue to see more trials underway with all the leading battery guys in China. We think that's the market that's going to grow the fastest for EVs.
I may have missed it, but I didn't see any additional reserve for bad debt. How are you feeling about general industrial? Big manufacturers, as you mentioned, are having some problems keeping their plants up. I would imagine it's even harder for the small manufacturers in the general industrial area.
John, just as a reminder to everybody, we took a $30 million bad debt reserve in the first quarter, anticipating some effects from the pandemic. We were not anticipating to see a big customer problem in Q2. Most of our customers have enough liquidity, certainly to last a quarter or longer. That $30 million would be something that we would expect, if it's used at all, to come through sometime in the latter part of the year. Our collections in Q2 are actually very strong. We've had, in some regions, some of our best percent currents. We still have that $30 million reserve there. Again, we'll vet that as we go through the balance of the year, but we would expect some impact in the latter part of the year.
Great. Thank you.
Our next question today comes from Michael Sison with Wells Fargo. Please go ahead.
Hey, guys. Really nice quarter there. Can you maybe talk a little bit about the stores and how the do-it-for-me channel is sort of shaping up for 2Q? I know there was improvement throughout the quarter. Where do you think you're at in July, and how do you think that will play out for interior demand in the third quarter?
Well, there's clearly improvement every month in our stores business. We're pleased to see that. The work that is really being done a lot of is the exterior work right now. Now we're starting to see consumers be a little bit more understanding, and they're allowing inside work as well. I think the pace of recovery will continue. The challenge, of course, in our architectural business in the U.S. is the commercial side and the maintenance side. The buildings that were underway are going to get completed. We think there's going to be a slowdown in new construction. Of course, for commercial maintenance, that's going to be the challenging part going forward.
Got it. As a follow-up, at slide nine, you had a nice comparison regarding your margins now versus they were in the last downturn. When volumes return back to pre-COVID levels, which understandably could take some time, where do you think margins will end up given cost savings and better pricing down the road for each of the segments?
Yeah, Michael, on a like-for-like basis, we're several hundred basis points better, be it Q1 2009 or Q2 2009. That's a reflection of all the structural cost savings we've actioned the past several years. If you flash forward, hopefully when the volumes come back, we would expect to hold that couple of hundred margin basis point improvement versus the last cycle.
Great. Thank you.
Our next question today comes from John McNulty with BMO Capital Markets. Please go ahead.
Yeah, thanks for taking my question, and congrats on the quarter. When we look at the cash that you generated in the quarter and the strength of the balance sheet, obviously it's huge. I guess, can you speak to the opportunities to deploy that capital as you look throughout the rest of the year? Are you seeing any opportunities in terms of M&A or are people a little gun-shy, kind of worried about selling at the bottom and that type of thing? How should we be thinking about that?
John, we have a number of books in house, and we're making progress on some of them. As always, the challenge is the bid and the ask gap. The benefit is that with a June that we had and a June that we expect that some of these companies had, that bid and the ask should start to narrow. We do expect to have some progress in this area this year. Obviously, I don't think we're going to close on any of them in 2020. I do expect us to have progress. I would say the pace of the inquiries has not changed. We had a strong order book, if you will, going into this, and we have good opportunities coming out of this. I'm pleased with what I see.
Got it. No, that's helpful. I guess PPG runs a pretty lean ship in the first place. This quarter you announced a $160 million-$170 million big restructuring program. I guess, can you give us a little color as to where that's actually coming from and your comfort that you can hit that. I know you were speaking earlier too, you're seeing a lot of new opportunities around digital and that type of thing. How is that playing into this as well?
Well, digital is clearly a significant one. We are moving much more to a click and collect and click and deliver model, and that has provided nice tailwinds, and we expect that to accelerate. If you think about the traditional trade painter, that was not their method of doing business prior to the pandemic. We anticipate that's going to continue. Obviously, we have some opinions on, and you saw that in the second quarter results, aerospace is going to take a little bit longer to recover, we took aggressive actions in our aerospace business. We're also getting more productive in our refinish business. Those two businesses are there. Of course, I would say the last one is the service model that we have in automotive and to a small extent, in industrial.
We've shifted much more to a pay model. We will either get paid for our technical service people out in the field, or we will have less of them. Right now, I'm pleased to report that our customers are really paying for them. If you notice for OEM, we were above market in all regions. That's because they value the technical service that our people provide and allow them to start up. That's really important to them. They have been willing to pay for that.
That's great. Thanks very much for the color.
Our next question today comes from P.J. Juvekar with Citi. Please go ahead.
Yes. Hi, good morning, Michael, Vince. Michael, you seem to be more positive on the refinish market compared to a few months ago. With the trends in Europe improving, China now back to 2019 levels. Even if U.S. and Europe lag by six months relative to China, do you believe that 2021 should be a robust year for refinish? Would you agree with that logic?
Well, I don't know that I would use the word robust, but I think two things I would point to in refinish. One, this second quarter has completely washed all the inventory out of the chain. You're not going to have to worry about how much inventory is in the chain. Our body shops ran them down, our jobbers ran them down. Everybody washed them out of the system. Going forward, you're going to see, hopefully, demand matching up with what we're selling. I would tell you also, I was pleasantly surprised by the orders that we saw in June. Despite congestion being, I would say, mediocre at best, there's still a lot of opportunities out there. Body shops are running at 70%-80% right now in the U.S. and Europe.
That's actually a little bit better than I would have projected given how little congestion there is out there on the streets.
Okay. Thank you. Secondly, sort of a big picture question. PPG always had good insights into the economy. My question is clearly the auto OEM stock has come down, and there is a view that the auto recovery will be slower than the housing recovery. IHS doesn't see a peak in autos until 2023. What are your projections in terms of the trajectories in those two end markets?
Well, actually, it's ironic because we have the same 2023 for getting back to 17 million. That's not the way I'm thinking about our automotive business. I'm thinking about our automotive business will have better volumes than that sooner because of the growth in EV. I am thinking about this slightly differently. It's going to be builds and EV going forward, not just builds.
Anything on housing? Thank you.
I think housing is actually going to be stronger than people anticipate. I think people are going to be willing to live outside the bigger cities, and so I anticipate housing to get better, faster, and sooner. With interest rates at these kind of levels, there's really no reason why people can't qualify for mortgages. The key will be how quickly can we get people back to work. Right now, you got so many small businesses that I think are at permanent damage risk that that's the thing I worry most about, is all these small business people that will likely be out of business.
Great. Thank you.
Our next question today comes from Jeff Zekauskas with JPMorgan. Please go ahead.
Thanks very much. Can you compare the trends in the aerospace OEM market with the trends in the aerospace maintenance and repair market exclusive of defense?
Yes. Jeff, as you know, the builds for Airbus and Boeing have come down appreciably, and we anticipate them to stay down for a while. Last year, they were building, let's call it 45 737s a month. Now they're building, let's call it 20% of that, 30% of that. Appreciably different. Now MRO though is strictly dependent upon the number of times that plane goes up and comes down. We peaked at about 64% of the flights or planes being parked, and now we're about only 40% of the planes are parked. MRO will start to get better because, again, it doesn't matter if there's one person on the flight or 100. We anticipate that getting better. We think a leading indicator, if you want to try to estimate MRO, a leading indicator is the growth in flights. Not passengers.
Don't pay attention to the passengers, but pay attention to the flights.
Thank you for that. Can you compare changes currently in titanium dioxide prices in different regions? That is, are the price patterns different in South America, Europe, and in the United States?
Yes. All four regions are different. You have lower prices in Asia. You have higher prices in Latin America due to currency. You have slight moderation in Europe and very little moderation in the U.S.
Great. Thank you so much.
Our next question today comes from Chris Parkinson with Credit Suisse. Please go ahead.
Great. Thank you. Just throughout all this malaise, there's been a reasonable amount of debate on market shares in architectural, packaging, coil and refinish, I guess, have been kind of the primary four. Just given what you know now, just how do you assess your own market share movements? How would you assess your competitive positioning for the balance of this year? Outlook into 2021. Thank you.
Hey, Chris, it's Vince. I think there's a lot of opaqueness out there, so it's really hard to determine market shares. We'll certainly go through this quarter, next quarter, look at all of our results, our competitors' results. I think the biggest thing we see, obviously, is there's a share shift right now from do-it-for-me to DIY. That helps our DIY business, our trade business. Competitively, that has different impacts. In the other businesses you mentioned, there's really a lot of variables by region. For example, in packaging, a lot of the packager or a lot of the can guys in Asia had to shut down for COVID reasons. It's really hard to discern what you're asking till we're on a more steadier run rate basis. We're comfortable with what we're doing. We're comfortable in some of the strategic initiatives we laid out, like digital delivery.
Those things are coming into favor. The work we've put in the past couple of years around those are helping us. Some of our technical items, some of our technical things, like Michael mentioned earlier, with respect to EVs are coming into favor. A lot of the long lead items we put in place due to this pandemic are coming into favor, which is helpful for us.
Got it. Just within architectural, could you please dive into this a little bit more? Can you just quickly comment, obviously it's maybe difficult also to discern in this type of environment, but just it seems like you still have a lot of momentum at The Home Depot with TIMELESS and Diamond. Previously, you were talking about some newer initiatives that even at independents and then even some stuff on online and digital. Just how should the market be thinking about your U.S. growth rate outlook versus peers and just relative competitive positioning? Because it seems like you're doing a lot in both resi and even non-resi. Do you have any comments on that?
Again, it's hard without a lot of market information at this point. Our digital sales are up triple digits off of a very small base. As Michael alluded to earlier, we definitely see our customer base more willing to move to a digital platform. We're certainly holding our own in the DIY market, but that whole market has been elevated. We moved to this preferred authorized dealer network really to be more optimal in our full delivery. Our dealers are up mostly consistent with the DIY market. Again, we'd like to see more competitive information before we comment, but we feel we're holding our own in this market. We feel we're outperforming in Mexico. In Europe, depending on the country. Again, the DIY market's just outperforming, and we're well favored right now.
Chris, I wouldn't want you to miss my comment in my opening remarks where we had a global architectural record performance.
Great. Thank you very much.
Thanks, Chris.
Our next question today comes from Kevin McCarthy at Vertical Research Partners. Please go ahead.
Yes, good morning. With regard to your architectural business, I was wondering if you could elaborate on what you're seeing in Europe in terms of trends by country, or at least U.K. versus continent, and also by channel there?
Kevin, I'll start with France. As you know, that's our largest market. France, we had a lot of challenges in April because the stores were shut down because of government mandates. Starting in May, they started to loosen up, by June, all the stores were open, in July, we're doing quite well. France was just a steady upward trend. The U.K. started really strong April, May. Kind of a little bit of a downturn in June as a spike in numbers came up. In July, they're back to really good numbers. Poland's doing great. There's no doubt we're taking a share in Poland, the rest of our Eastern European business is quite strong. The Benelux, we're definitely doing exceptionally well there. I've been pleased with our European performance.
That's helpful.
Just from a channel perspective, Kevin, same phenomenon we're seeing here. DIY is very strong, both in the U.K. and on the continent. Trade is feeling the same effects that it is here.
Okay. Thank you for that. Second, if I look at your heat map on slide six, it strikes me, if I counted correctly, you've got 11 boxes that show above-market growth and zero that show below market. I think two quarters ago, below market might have been a half dozen boxes or so. I appreciate it's got to be very difficult to gauge what the market is doing when conditions are so dislocated. I guess my question would be, did you feel as though you've gained share in any of your businesses due to the pandemic, whether it's ability to operate or execution or otherwise, or am I reading too much into that?
Well, I think Vince tried to cover this previously. In these kind of times, it's always difficult to put your finger on exactly whether you're gaining share or losing share. I do feel there's no question that we're gaining share in Australia. That's an easy one to measure. I would say the U.K., pretty easy to measure there. I would say those are the areas that we're most comfortable with. Clearly, automotive is easy to measure. We know exactly what the builds were, and we know exactly what our sales are. That is a given. I think the rest of them can be quite tricky to figure that one out.
Yeah, I would just add the one we're comfortable with is, in certain regions, our Protective business, due to our technologies, again, has come into favor as customers are looking for functionality in these times. I think also in some of our general industrial businesses, where we're working with our customers to start up. We're typically one of the favored coatings companies to help customers start up and have that secure launch process. Again, it is very difficult, Kevin, until we see a bigger array of results, and really over a couple of quarters.
Fair enough. I appreciate the color.
Our next question today comes from Arun Viswanathan with RBC Capital Markets. Please go ahead.
Great. Thanks. Good morning. Congrats on the results. Just wanted to ask about Q3. Your pace of sales decline in June was 12%. The guidance for Q3 is 8%-15%. At the midpoint, you're around 11.5% or so down in Q3. That's not much better than June, I guess, in aggregate. Is it your assumption that there will be some considerable moderation in architectural as automotive comes back, and that's what kind of drives a similar result in Q3 versus June? Is there a possibility that maybe we could see some upside to that if architectural doesn't decline as much? How are you thinking about the offset between architectural and automotive in Q3?
Yeah, Arun, as we mentioned earlier, we have a wide range for Q3. It's really based on the uncertainty around the pandemic in some of our key regions. We're hopeful to be at the low end of that range, if you will. We may be on the high end, 14%-15%, if the pandemic continues to worsen in certain parts of the world. That's really what we're looking at. It's still very difficult to predict certainly week by week, but on a month-by-month basis, what our customers are going to do, what customers can actually run. We're seeing spot shutdowns from customers due to COVID. We're seeing spot shutdowns from customers due to parts issues. That's why there's a wide range there, and expect some volatility throughout the quarter.
Okay. As a follow-up, just on the cash issue, you have a very strong balance sheet here, over $2 billion of cash on the balance sheet as well. You've stated in the past that you do not want to build cash. It does appear that it may be difficult to consummate and close any deals this year, as you said earlier as well. Just curious what your plans would be if you're not able to deploy that cash in M&A. Would you prefer to keep that as liquidity and reserve for now, or would you be able to put it to work in capital return?
Yeah, Arun. Certainly for the near term, we're carrying excess cash. Again, our sight lines are limited in terms of how this is going to affect us, but we're not health experts. We're hearing there may certainly be a flare up in some of the key countries in the fall. We're going to be conservative. As Michael alluded to, our acquisition pipeline is refilling. Those are bolt-on in nature. We may be able to execute on some of those. Whether we can close or not this year, I agree with Michael, probably be difficult given we're months out before the end of the year. We'll certainly manage our acquisitions and our cash around that. We do have the capability to pay down some debt. If the sky's clear here, we have a short-term facility that is free to prepay. All those are variables.
We really just need more visibility on the economy before we start to make some key decisions. We don't want to grow cash, as you mentioned. We will look for earnings accretion opportunities, whether it be acquisitions or other, but we just need more visibility before we start to pull triggers on some of those.
Yeah. Thanks.
Our next question today comes from Steve Byrne with Bank of America Securities Inc. Please go ahead.
Yes, thank you. You reported that some auto body shops switched over to PPG refinish coatings, and I was just curious where you saw that and whether it's due to that new paint mixing product that you rolled out in Europe. What is the status of that rollout? Are you getting traction from it? Have you considered expanding it into other regions? Is operating at a 70% rate help you in your process of trying to cause a body shop to flip over to you because they may not be running flat out?
Steven, just to start talking about MoonWalk. We've had 250 installations put in, 150 of which got put in in the second quarter, and 30 of them were new body shop wins. It is performing at a good level. Obviously, we've been a little bit challenged, getting that out into the field because we have to send tech service people into the field with the equipment to make sure people are trained on running it. We anticipate that we'll continue to roll that out. We will be looking at moving that into the U.S. as well. Obviously, it's most important in the high labor markets and the high markets where labor is hard to come by. That would say that we're probably not going to roll that out in Asia, as a likely place. We have been picking up share in refinish.
We track that quite closely. It's a net win basis because you win some, you lose some. Overall, we feel comfortable. The key with refinish, though, will be getting the miles driven back as well as congestion.
Well, thank you for that. I had a follow-up for you on the trend of shifting from do-it-for-me to do-it-yourself. Do you see that same trend in your own stores where you're picking up more homeowners coming in or ordering online to buy paint? I was just curious as to your view based on those relationships and discussions, do you think that some of that impact could be lasting? I.e., those homeowners continue to paint their rooms themselves rather than hiring a contractor post-pandemic.
Steven, we said for multiple years, the shift between DIY and do-it-for-me is highly correlated to the unemployment rate. Certainly the last five years as the unemployment rate has come down, you've seen more do-it-for-me. You've seen, obviously, a spike in the unemployment rate during these times. You've seen an abrupt shift back the other way. Again, I would just look at that unemployment rate on a go-forward basis to determine how these channels will react. It acted the same in 2008, 2009, and it's recurring now. That's the key. We still think long term, do-it-for-me is going to continue to grow. Certainly for the foreseeable future, with unemployment high, the do-it-yourself market will remain robust.
Thank you.
Our next question comes from Vincent Andrews with Morgan Stanley. Please go ahead.
Thank you. Just want to ask a clarifying question on the cost savings to make sure that we have our model right and we don't do any double counting. If I assume your volume constant on a go-forward basis, and you have the $170 million of interim cost savings that came out in the quarter, and then you've got the new restructuring program, which is $160 million to $170 million in annual saving. Let me try it this way. The $170 million that came out on an interim basis is presumably going to come back over time, and the $160 million to $170 million that's on the come should offset that. Now, maybe it won't be one for one, but is that the right way to think about it, that those two things will hopefully offset each other?
Hey, Vincent, John Bruno. That's exactly right. The $170, we could call it, is a transitional or temporary. The restructuring savings are intended to be permanent.
Okay. Just one last follow-up on that. Are you done with the large-scale restructuring costs for the year with the charge in the quarter, or will there be some trickles out in the third quarter and fourth quarter?
Well, based on it, there are certain costs that are related to restructuring, Vincent, that we cannot, based on GAAP accounting, take until they're incurred. There'll be some modest trickle-outs in Q3, Q4, and even Q1. Again, based on the accounting guidelines. They're very modest.
Understood. Thanks very much, guys.
Thank you.
Our next question comes from Sean Gilmartin at Barclays. Please go ahead.
Can you guys hear me?
Yes.
Vince, can you hear me? This is Duffy.
Hey, Duffy, we can hear you.
Okay, great. I just wanted to drill in a little deeper on the DIY versus trade split. In the two summer quarters, where this effect looks like it's going to be important, roughly what is the normal DIY versus trade breakout? Just size of the two businesses over those quarters. What would be the influence in that shift on margins, as I'm assuming gross profit margins for DIY is higher than trade, and then on the cash flow as well, as I imagine there's less credit in DIY than there would be in trade. Is that big enough to kind of skew the numbers or influence the numbers for the overall company?
It's different by region, Duffy, first of all, but we'll stick to the U.S. market for clarity. Typically, trade's 55%-60% on a gallons basis of the market. It's less, it's 50/50 on a dollar basis. For PPG, we're close to that mix. We are seeing, obviously, double-digit growth in DIY. We've seen a decrement in our trade business. Part of that's due to the stores just being shut down in certain parts of the country. Again, because of double-digit growth in DIY in Q2, that's been beneficial for that part of the business. Trade business is a higher fixed cost. We have stores, we have leases. Volume there, when it comes back, typically carries a nice incremental. We don't give out profitability by channel. We're not going to go there.
Again, as long as we're producing positive volumes in our architectural business, and as Michael alluded to, we have very strong financial performance in all regions, certainly in the U.S., it's beneficial to us and our shareholders.
Great. Michael, question for you. I imagine you're getting ready for your meeting with your business leaders, planning ahead to next year, this fall. When you look through the slate of your businesses, are there some of the businesses that you think are just structurally different over the next one to three years because of what's happening, where they're going to have to meaningfully change their business plans? If so, which ones would be the most obvious there?
Well, I think, Duffy, the one that is on a, what I think a temporary lag, is aerospace. I am fully convinced that whenever it's safe to get on a plane again, the planes will fill up. When I look at the number of cruise ship bookings for next year, it's radically up. People want to travel. People don't want to be locked in their homes. Probably don't have to wait for the vaccine, but a vaccine would certainly be a huge benefit. We are aggressively managing our cost structure in aerospace. I think that's the one that will probably be a little bit longer. I think Refinish, incrementally every month was better, April versus May versus June. I'll be in a better position to answer that question by the end of the next quarter.
I would say that we'll probably be 90% of the way back at refinish in the back half of the year. Then it's a matter of what do we have to do to get that last bit back? Those are the only two that I think of. I see cars as a long-term getting back over time. For us, we'll be growing faster than the market because of our EV exposure, and industrial similar kind of thing. I don't see any structural deficiencies except aerospace in the short term.
Duffy, if I could add to that. As we alluded to earlier, we do see this digitization, especially in the architectural space. We see some paradigms being broken now that makes the entire supply chain more efficient. Typically in a crisis, you see behavioral changes, which is we're evidencing. People are just more willing to adopt to delivery, more willing to adopt to digital. We've been talking about this for certainly more than six months, and we're seeing a structural modification of behavior in that channel, not only in the U.S., but we're seeing it in Europe, we're seeing it in Australia. I do think that'll be something we're going to measure and monitor and try to continue to promote.
Great. Thanks, fellas.
Our next question today comes from Kevin Hocevar with Northcoast Research. Please go ahead.
Hey, good morning, everybody. Michael, I think you mentioned earlier that on the DIY side, you thought your retailer customers would probably like to have more inventory. Does that imply that manufacturing hasn't been able to keep up with the really strong demand? Does that also imply that we could see a restock coming at some point? Is that a regional comment or global?
Well, it's definitely regional. I would say we're understocked in Australia, the U.K., and a little bit in the U.S. At this point in the paint season, they never want to miss a paint sale. That's the key. They typically destock in the third and fourth quarters, especially after Labor Day. I would tell you that this year's a little bit different. How much inventory they're going to carry going into the fourth quarter is a total unknown at this point in time. If I had a crystal ball, I'd tell you that there is a potential for some continued strength beyond what you see in the market, but I think that would be probably a little too much speculation.
Okay, great. Pricing was up nicely for the quarter, 1.7% for the company, and particularly out of the Performance Coatings segment, up 2.7%. Just want to get your sense on how sustainable you think that pricing is. I know in your slide deck, you said you expected pricing to be up about 2% year-over-year in Performance Coatings in the third quarter. A little bit of a year over fade sequential. I don't know if that's just a comp related, or any expectation that there's some type of price fade, but just curious with volumes doing what they're doing, particularly on the industrial side of the business, how sustainable you think pricing is at these types of levels?
Yeah. The reason that 2% is a comp over year-over-year, the timing of when these increases come vary. We feel very comfortable on the Performance Coatings side that pricing is there, and it's sticking, and will be there. On the industrial side, obviously, that's always a harder place, but right now we're maintaining price. We're gonna continue to maintain price from a PPG perspective. We'll be willing to walk away from business to make sure we get paid for the value we think we're gonna deliver. Right now, I see customers much more focused on us helping them get up and running, and price hasn't been a significant discussion at this point in time. Now, obviously, that's gonna change once you're up and running and fully operational and things like that.
By and large, what I tell people on the industrial side is we didn't get all the price that we needed in the last upcycle, we should not be giving away any price just immediately when you see raw materials start to moderate. I think there is a give and take here, and right now, I feel comfortable that we should continue to maintain price through the balance of the year.
Okay, great. Thank you very much.
Our next question today comes from Jim Sheehan with SunTrust. Please go ahead.
Thanks. Good morning. On the heat map, Brazil seems to stand out to me as the biggest anomaly, growing year-over-year, and PPG, you're growing above the market. It seemed like coronavirus issues worsened there. Could you give some more color on what happened in Brazil?
Yeah. We're down in the southern part of Brazil. There's three states down there that we're very strong in. We're not that strong in, think about Rio and São Paulo. That's not where our strength is. Where we are, the pandemic is not as robust as it is up in the major cities. Plus, we have a new leadership team down there in Brazil, and they've done a really outstanding job of growing with not just our big box customers down there, but also on our trade side. It's been two factors.
Great. Maybe you could talk a little bit about your raw material inventories. I suspect that you moved through a lot of the high-cost raw materials, but where are you in that process? It seems like with automotive builds ramping up, that you're gonna eat through the higher cost raw materials in short order. Is that right?
Yeah, Jim, if you just look at our volumes in the quarter, we came in, obviously, the quarter with seasonally high inventories. We worked through that more quickly in Performance, given the volume trends there versus Industrial, where we were down 30, 40% in some businesses. We're eating into that industrial inventory now. We're also, to Michael's earlier point, we're a seasonal business. We're gonna be very mindful of what inventory we build or what raw materials we buy as we get further in the year here. We wanna obviously manage our inventories down seasonally toward the end of the year. Typically, we're ratcheting down our coatings manufacturing production beginning this month and carrying through the summer and trying to obviously work our inventories down in Q4. Very mindful of that, but I think your assumptions are accurate.
Thank you.
Our next question comes from Laurence Alexander with Jefferies. Please go ahead.
Good morning. A quick short-term one and a long-term question. On the short term, with $170 million, the interim cost savings, for Q3, that would be on top of the $30 million-$35 million highlighted in the slide deck? Do you expect that to come back in a linear fashion as volumes recover, or do you see it as sort of a lumpier kind of way that it will flow back into the income statement in 2021? The longer-term question is, you look at your learnings on digitalization distribution. Should we expect a chunkier investment cycle in the next two to three years in order to help PPG drive the shift in market behavior and leverage it, or how should we think about the investment cycle on that front?
Laurence, this is Vince. I'll take the first one, and Michael will take the second one here. Yeah, we had $170 million of interim net cost savings in the quarter. It was actually gross higher, but we had lower manufacturing throughput that took away from some of that. As we alluded to earlier, I think that'll come back in a more lumpy fashion in Q3. Some of these costs are semi-variable. As we start up plants, we do have to bring back certain cost pools in their entirety, so it would not be linear with volume. We're obviously working aggressively to manage those costs, not only in Q3, but on a go-forward basis. It wouldn't be completely ratable with volume. It'll be lumpier around how we're bringing our operations back.
Laurence, on the digital question, there will be some lumpiness on the capital side, but it will vary by business. Once we have a solution in place, an architectural, we'll replicate that around the world, without a lot of significant capital expenditure. As we roll out some of the solutions that we have for automotive and industrial, those things will need to be replicated and will be a little bit chunkier. Our capital spend this year is down, but not in digital. In digital, it's up.
Wonderful. Thank you.
Our next question comes from Mike Harrison at Seaport Global Securities. Please go ahead.
Hi, good morning. I wanted to ask about the auto OEM business. The heat map is showing that you guys were above market across all regions. I think you mentioned that getting customers to pay for technical personnel in their plants was part of that. Can you talk a little bit more about what was driving that, and maybe quantify how much above market growth you saw in auto OEM?
Yeah. Mike, I would tell you that the number one thing the auto guys want is to get their plants up and running, and the paint shop is at the end of the line. If you end up with a car that's made, but you can't get it painted, that's really expensive for them. They wanted our people in the plant before they started up to make sure that they were ready to go, and then they wanted extra help in the plant to ensure a smooth startup, which we've been able to do. I would say the amount that we were above market varied anywhere from 2% to 10%, depending upon market. That's not sustainable. We'll be probably above market the next couple of quarters, but then it'll probably be ratably back to market performance.
At the end of the day, the customers are very much interested in helping them grow their business. Productivity is another thing that we're focused on. Our tech service people are in the plant to help them drive productivity, and the more that we can do that, the more that they're willing to pay for those services.
All right. In the refinish business, the European piece is showing as yellow and everything else is red. Can you maybe talk about what you were seeing regionally? I guess I'm a little bit surprised that given the recovery in China, that Asia Pacific was still showing as red in that heat map. Can you talk about what's going on regionally in refinish?
In refinish, actually in China, if you think about the big cities, they're already back, I would say, at about 90-plus % of congestion. Not during the day, but peak rush hour in the morning and in the evenings look just like they did pre-pandemic. What we're seeing is that people are consolidating their trips and therefore you don't see those extra trips during the middle of the day, the roads are a little bit more open. That's the only negative in China. In Europe, they did a much better job of handling the pandemic than we've done in the U.S., congestion is coming back a little bit quicker in Europe than it is in the U.S. We're actually quite pleased. They've done a better job of managing their inventory as well.
There's not as many large, super large distributors in Europe like we have here in the U.S.
All right. Thanks very much.
Thanks, Mike.
Ladies and gentlemen, this concludes the question and answer session. I’d like to turn the conference back over to the management team for any final remarks.
Thank you, Rocco. I'd like to thank everyone for your time and interest in PPG. If you have any further questions, please contact our investor relations department. This concludes our second quarter earnings call.
Thank you, sir. This concludes today's conference call. You may now disconnect your lines and have a wonderful day.