Good afternoon, everyone, and welcome to the PPG Industries Second Quarter 2019 Earnings Conference Call. My name is Jamie and I will be your conference specialist today. All participants will be in a listen only mode. After today's presentation, there will be an opportunity Please also note today's event is being recorded. And I would like to turn the conference call over to John Bruno, Director of Investor Relations.
Please go ahead.
Thank you, Jamie, and good afternoon, everyone. Once again, this is John Bruno, Director of Investor Relations. We appreciate your continued interest in PPG, and welcome you to our second quarter 2019 financial results conference call. Joining me on the call from PPGR, Michael Mac Gary, Chairman and Chief Executive Officer and Vince Morales, Senior Vice President And Chief Financial Officer. Our comments relate to the financial information released on Thursday, July 18, 2019.
I will remind everyone that we have posted detailed commentary and accompanying presentation slides on the Investor Center of 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 Michael's perspective on the company's results for the quarter, we will move to a Q and A session. Both the prepared commentary and discussion during the call may contain forward looking statements, reflecting a 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 the website, reconciliations of these non GAAP financial measures to the most directly comparable GAAP financial measures. For additional information, please refer to PG's filings with the SEC. Now, let me introduce PPG Chairman and CEO, Michael McErie.
Thank you, John, and good afternoon, everyone. I want to thank you for your continued interest in PPG. Today, we reported second quarter 2019 financial results. For the quarter, our net sales were slightly more than $4,000,000,000, and our adjusted earnings per diluted Consistent with our improvement targets, we delivered higher year over year operating margins for the 2nd consecutive quarter as both gross profit and segment margins improved versus the prior year. Our margins benefited from continuing selling price realization and strong cost management across all our businesses and regions.
We were still in the early phase of margin recovery And while we are building some momentum, we still have more work to do. Our overall objective is to return to the aggregated segment margins that we have maintained prior to this recent inflationary cycle. Provide some additional color on our second quarter results our net sales in constant currency were higher than the prior year by about 1%. Sales volumes were down nearly 4%. Impacted by weaker global industrial production that significantly affected global automotive production and many of our general industrial end use markets.
And was evident in all major reasons. Also about 1 third of the total sales volume decline, relates to the prior year customer assortment changes in our U. S. Architectural coatings DIY business. We have now reached the 1 year anniversary of these changes and it will no longer be a comparison deviation.
We remain committed and are on track to fully offset the earnings impact of this assortment change in the third quarter. Selling prices were 2.3% higher, marking the 9th consecutive quarter of higher selling prices. We continue to work with our customers to ensure we are receiving fair value for our products and services and expect selling prices to increase at a similar rate in the third quarter despite comping against improving gains in the prior year third quarter. Finally, our net sales were affected by significant unfavorable currency translation of more than 3 percent or about $130,000,000. Going forward, We expect unfavorable currency translation to continue, albeit at more modest levels with our current estimate for the third quarter of an unfavorable sales impact of between $30,000,000 $50,000,000.
Moving to some business trends in the 2nd quarter. In our Performance Coatings Reporting segment, Aerospace Coatings continue to deliver very strong volume growth, outpacing industry performance in most major regions. In the automotive refinish, sales volumes were lower year over year, reflecting lower collision claims in the U. S. Which were down 2% for We expect refinish volume comparisons to improve on a year over year basis in the third quarter as our prior year included an unfavorable impact of PPG specific customer inventory destocking.
Year over year organic sales were higher in our Architectural Coatings EMEA business, driven by higher selling prices. Aggregate sales volumes were slightly lower as weather than normal weather patterns impacted overall regional demand during the quarter. In Mexico, our PPG Comex business increased organic sales, aided by higher selling prices. Sales volumes were tepid as consumer demand reflected increased uncertainty around Mexico's economy and economic policies. The PPG continues to perform very well and continues to grow by adding nearly 70 concession air locations in the first half of twenty nineteen.
Sales volumes at Architectural Coatings, Americas and Asia Pacific decreased due to a lower net DIY sales of about 60,000,000 stemming from the prior year customer assortment changes. Same store company owned sales growth in the U. S. And Canada was relatively flat including impacts from fewer shipping days year over year and wet weather that impacted most of this region during the quarter. Met by strong growth in the Asia region, our protective marine coatings business continued to deliver above industry organic sales volume excuse me, organic growth, a high single digit percentage during the quarter.
We are very excited that this business was recently awarded a 5 year contract with the U. S. Navy to supply coatings and technical services to the military sealift command, which includes about 125 ships. In our Industrial Coatings reporting segment, sales volumes were adversely impacted by soft industrial demand in most regions of the world. Most acute were automotive OEM industry build rates, which declined by nearly 20% in China and remained soft in Europe.
In aggregate, PPG's automotive sales volumes are lower by high single digit percentage consistent with reduction of global builds One statistic we tracked as automotive OEM dealer inventories, which decreased as the quarter proceeded, which may help demand in in each major region for the 2nd consecutive quarter with similar expectations for Doctor Global Industrial Production activity impacted many of our general industrial coating business subsegments, most notably oil, general finishes, appliances, and transportation end markets. Also, our packaging coating sales volumes decreased modestly in comparison to above market growth in the prior year, driven by customer adoption to our INNOEL interior can coatings products. Our Packaging business has achieved above market growth in the past 5 years of above 20% compounded. We expect this business to return to growth by the end of the year. From an earnings perspective, as I mentioned earlier, our 2nd quarter adjusted earnings per diluted Our earnings were negatively impacted by about $20,000,000 our adjusted EPS was modestly higher which is higher than the 22% rate in the second quarter of 2018.
The increase mostly relates to recognizing non recurring favorable discrete items in the second quarter of 2018. We're still anticipating a tax rate between 23% and 25% for the full year 2019. Our EPS results were supported by the increase in our selling prices improved manufacturing performance, aggressive cost management, and excellent progress on our cost savings program which delivered about $20,000,000 in cost savings during the quarter in line with our targets. We expect global economic activity to remain sluggish in the third quarter. We expect global automotive production and general industrial demand to remain unfavorable year over year and roughly comparable to what we experienced in the second quarter.
Positive developments around regional and country trade disputes could provide a spark to industrial demand as inventory levels in many of our end use markets remain low. Specific to our businesses, we believe that the potential for lower U. S. Interest rates could aid growth in the U. S.
Housing market, and also favorably impact Automotive OEM and U. S. Architectural sales. In Latin America, we anticipate economic activity be similar to that experience in the second quarter, and we'll continue to add new PPG Comex concession error locations to expand our customer Also, we have a new manufacturing facility under construction in Panama to localize production and support our sales growth in Central America. In Asia, demand rates are expected to remain consistent in comparison to the second quarter.
As we move back into the back half of twenty nineteen, Sales comparisons to last year will become easier given the weakness in Asian demand that began to occur late last year. This will result in easier comparisons and relative performance improvement year over year. We intend to remain laser focused on our cost structure. We remain confident And our automotive OEM business year over year growth will be difficult in the third quarter as last year benefited from inflated sales from purchases brought forward ahead of the WLTP implementation. Later in the year, the year over year comparison should improve into positive territory.
We expect our architectural business to continue to grow, driven by higher selling prices and strong cost management. Brexit uncertainty is not yet impacting our business trends. However, we expect to closely monitor the situation and prepare contingency plan to best address the potential impacts to overall demand and relating inventory needs. With ongoing uncertainty over global industrial production, we have intensified our cost management of costs. Including working with our supplier base to ensure Our focus on our cost structure remains elevated as evidenced by our recently announced approval of a new cost savings program, which is a result of a comprehensive internal operational assessment to identify further opportunities to improve our profitability.
We have begun implementation of this program, which we expect to have a full year run rate savings of $125,000,000 upon completion of the program. In addition, we are in the final stages of the execution of the cost savings programs announced in 2016 2018. We expect the total benefit from all of these programs to be about $20,000,000 of additional incremental savings to be realized in the third quarter. Earlier today, we provided EPS guidance specific to the third quarter of 2019. This guidance is $1.57 to $1.67 and includes an unfavorable impact from foreign currency translation.
Of $0.01 to $0.02 per share. We were also reaffirming our full year 2019 adjusted earnings per share growth, of 7% to 10%, excluding currency translation impacts. In the second quarter, we generated operating cash flow of about $550,000,000, nearly $200,000,000 more than last year. And through the 1st 6 months of the year, have generated about $350,000,000 more operating cash flow than the same period last year. Our focus on cash flow generation will continue, and our goal remains to reduce working capital as a percent of sales compared to 2018.
We completed the Hemorath acquisition early in the second quarter. I'm happy with the and Whitford, which will add about $400,000,000 in annual revenue, of which approximately $100,000,000 is in the Asia Pacific region. Acquisition remained one of our preferred cash deployment options given the value that these had driven for our shareholders over the years. And currently, our pipeline remains solid. In addition to acquisitions, we have progressed our key capital expenditures during the second quarter and we expect total spending to be about 3% of sales in 2019.
Also earlier today, our Board of Directors approved a $0.03 per share dividend increase. We have paid uninterrupted annual dividends since 18.99 and 2019 will mark 48 years of increased dividend payout, and we are pleased to continue to reward our shareholders in this manner. We ended the 2nd quarter with more than $1,000,000,000 of cash and short term investments, which continues to provide us with significant financial flexibility. Finally, I'd like to thank and recognize PPG's 47,000 employees all over the world for their continued support and strengthening our position as a leading paint coatings and specialty materials company. Every day, our employees are driving our cultural initiative a PPG way to provide innovative solutions for our customers' most pressing challenges and to deliver value to all our stakeholders.
This concludes our prepared remarks. Once again, we appreciate your interest in PPG. And now, Jamie, would you please open the line for questions?
Ladies and gentlemen, we'll now In addition, we do ask that you please limit yourself to one question and a single follow-up for the interest of time. And our first question today comes from David Begleiter from Deutsche Bank. Please go ahead with your question.
Michael, just on raws, how are you looking at raws in the back half of the year? And what do you expect to happen with TiO2 prices in the back half of the year? Thank you. David, you know, there's been a lot of focus on raw materials in house. But when you think about it, we have some of our commodities.
Most of our commodities, they're flat. Maybe one of them is still up. And we have a couple that are trending down. But overall, between that and overall inflation with salaries and everything else, we're still in a marginally inflationary environment. And, you know, we still not recovered all the margin from our pre inflationary peak.
So as you heard in my opening comments, we are still progressing with price increases. And we anticipate having further price, moving forward. In regards to TiO2, what I would say is same answer I gave at the very beginning of the year is that TiO2 is really a non event this year. And, we're going to continue to focus on using TiO2, very efficiently. And our program, as you know, has been to optimize our formulations to minimize TiO2 usage.
And, this year, we're on track again to take an additional 1% out of our TiO2 consumption. So, I don't see the trends really changing. You know, there's excess capacity on the sulfate side. And, later in the back half of the year, you have a chloride plant coming on. So that's why we remain confident that, TiO2 will be a a non event.
And Vince, just on buybacks, what were buybacks in Q2 and how should we think about buybacks in the back half of the year? Thank you.
Thanks, David, for the question. In Q2, our share count was relatively neutral year over year. We did minimal if any buybacks through the 1st 6 months of the year except to offset some dilution we did with an acquisition. The full year, our focus remains on not building our cash position. We have, on a year over year basis, we have an active acquisition pipeline, which Michael alluded to in the opening remarks, that remains an important part of our cash deployment strategy.
For properties at the right price, free value for our shareholders, absent that. If we can't execute on those, we would look to share repurchase. Thank you.
Our next question comes from John Roberts from UBS. Please go ahead with your question.
Thank you. There's a Bloomberg report about PPG being among others looking at Axalta. I don't expect you to comment on the speculation, but could you just remind us how concentrated the auto OEM and auto refinish markets are maybe just in general terms?
Well, I think, the way to think about that is that the different numbers vary by region and by, automaker. So you know, it's probably inappropriate for us to comment on not just the speculation, but actually market share because, you know, we could overestimate or underestimate the various people's shares and I wouldn't want to, put incorrect information out there. So I I probably would, prefer to pass them
Okay, all right.
Sorry, I didn't mean to put you on the spot. In the U. S. DIY retail channels, we've had some share shifts first at Lowe's then at Home Depot now Ace. If you looked in aggregate at the U.
S. DIY retail channels, have market shares in aggregate changed much over the past year or it's just been a lot of shuffling around between different channels?
Well, if you go
back and look at this space over 20 years, you'll always see some movement as the various retailers try different strategies. By and large, I would say that, market shares have stayed relatively, constant by and large, there's been a little bit of shift here and there, but, you know, not that much more of a rounding error is what I would call it.
Our
next question comes from Bob Koort from Goldman Sachs. Please go ahead with your question.
Thank you. Michael, I noticed in your heat map that refinish seem to be at the marketplace a little bit weaker. Is that you mentioned accident rates, but is there any function of price hikes and buying patterns of your customer base or the market that has shifted from 1 year to the next? And then secondly, you mentioned I guess you're lapping some very robust trends in the packaging market that sort of stalled out, but you indicated getting back to growth later in the year. Could you give us some more specifics on why that happens?
Thanks.
Sure, Bob. So let's start with refinish. You had a very strong 2Q last year with refinish. There's a couple of very large, what we call multi line or people who buy refinish from multiple suppliers. We had a pretty robust 2Q last year with those guys And then, they elected to, not purchase in the third quarter.
A lot of this is what I would call trying to take advantage of the pricing cycle and refinish. So, from a demand standpoint, though, we're still picking up share. Our net gains on shops is a nice positive And, pricing has been very good in that sector. You know, claims are down about 2% and, totals
are up 1% to 2%.
So that puts that negative overall at about minus 3%. So, our team has just rolled out new technology in Europe, on precision metering refinished products. It's gotten an ex excellent, traction so far. So we're looking forward to seeing how that, since we're very early, we just rolled it out a month ago. We're very early in that, but we anticipate that we'll continue to gain share and refinished given our strong water based technology and the fact that we've converted more shops to water than anybody else everybody else in the industry combined, For the packaging side, we still have very good technology and, We are trialing some additional new technology for the packaging space.
That those PAC tests are going on right now. Once those pack tests are completed, we anticipate that the customers will be, shifting some additional business our way, which will be a net positive for it. So that's what we're looking at. Obviously, we have to wait till the conclusion of the PAC test, but, we're feeling pretty good so far.
Great. Thank you, Rafael.
Our next question comes from John McNulty from BMO Capital Markets. Please go ahead with your question.
Yes, thanks for taking my question. Look, there's a lot of noise between the weather and home sales and I guess the contract that you lost last year. Can you give us your thoughts going forward now that you've anniversary that, how we should be thinking about the architectural the health of the U. S. Architectural market and how you're thinking about kind of the next 12 months, the overall volume growth in that market?
Yes. John, we see that market is growing, this year. We would have said 2% to 3%, given the challenging whether that we've had, they'll try to pick up as much of that as they can. So we might finish 1% to 2% for the year. But overall, our customers still have very good backlogs.
And they feel very confident. They still are challenged to find enough labor. To get all their projects done. But, they've been able to successfully continue to win businesses that trend again from DIY to do it for me. That's going to continue.
So overall, we're we feel like we're in a good position plus as you heard in my opening remarks, we have committed and we are on pace to, out earn in the third quarter what we were making pre customer assortment loss. So, the business has been focused on that, and, they're going to be in a position to start delivering that in the third quarter.
Great. Thanks. And then just a question on the architectural EMEA market. It sounds like you're expecting kind of the usual seasonal dip it did sound like the second quarter was a little bit washed with, I mean, with a bad weather. Is there a way if we have a normal seasonal weather pattern, if there is such a thing these days, but that you could sequentially see kind of a stable to maybe even up scenario for EMEA architectural, is that too aggressive?
Well, 1st of all, we have we're going to have positive, sales growth because of pricing And right now, through the first, whatever you want to call it, 17 days, volumes have been more consistent with prior patterns. But as you know, Europe takes August off. And so we're always hesitant to predict the third quarter until we see how much vacation time all our big painters take, and then how they come back. So, So I would be if I were sitting in front of your model right now, I would use the same predictions you've used for years past. But knowing that we are getting nice price gains in that business in Europe.
And our next question comes from Ghansham Panjabi. Please go ahead with your question.
In your slide deck, you basically commented on additional pricing actions for the Performance Coatings segment for the 3rd quarter. Is that specific to any region or business and I didn't really see the same comment as it relates to industrial coatings. I guess, are you where you need to be in that business at this point as it relates to pricing?
We have positive price in every business and every region in the world. And, it's been a positive story now. We've had positive price for 9 2nd quarters. We're still not where we want to be. We've had 11 quarters in a row of inflation.
So we still have some catch up to do. But, when I look at our Industrial Coatings segment and our Industrial business within that, they're doing pretty well And so I'm not concerned. Obviously, the biggest gap is in the automotive piece, and that's where we're working the hardest to get prices up. But we still have more traction in, all our industrial businesses.
That's helpful. And then just in terms of the outlook, you commented on 3Q volume is basically bearing 2Q. How should we think, Michael, about the fourth quarter? Your comparisons are quite a bit easier. You commented on auto dealer inventories in China, for example, the potential positive, just as we cycle into 2020, how are you sort of thinking about the world at this point?
Thank you, Ann, Jim, Vince. A little early
to call Q4, we got to make our way through Q3. But in the back half of really in the back half of twenty eighteen, We had several key issues that make the 2019 period, make it a little easier from a comparable basis We did have a refinish destocking Michael alluded to earlier. We did just to start the customer assortment changes. We will anniversary very shortly the China automotive downturn. And just from a top line perspective, currency has been a negative the 1st part of this year and it mutes out in the back half of the year.
So we have several things specific to PPG that we think give us some comfort in our forecast.
And our next question comes from Michael Sison from KeyBanc Capital Markets. Please go ahead with your question. Hey guys, nice quarter there.
In terms of the outlook for the second half of the year, it certainly seems that demand is weaker. Volumes are going to come in a little bit weaker. I guess, in prior expectations. When you think about what has been what you've been able to offset that, can you maybe frame up, was it mostly the cost savings, the new cost savings program? Are you getting a little bit better price raws?
And any other factors that might help you stay on track with your earnings guidance?
Yes. So, Mike, I'd say it's everything. We've 2.3% price, $20,000,000 of cost down, better manufacturing, we've we pretty much have hit on all cylinders. Everything within our control, the team has executed, very well on So we're going to continue to look at that. Volume in a lot of our businesses have been pretty good.
Aerospace has had a very good volume quarter. PMC is at a good volume quarter. So there are pockets of, success. Unfortunately, when you look at, OEM type businesses, they've been a little struggling.
Okay. And then quick follow-up on Architectural Americas And Asia Pacific, your outlooks low single digits for 3rd quarter. Are you seeing do you need to see that now? And is it kind of a fluid on a month to month basis as the year unfolds? Or is there any lumpiness in that outlook for the third quarter?
Just picking up on Michael said earlier, there's growth in this market in the U. S. It's been tempered by the weather patterns. Anytime we see decent weather, we see good pickup in sales. So we think there's some pent up demand there.
And we do expect growth in Q3 and a seasonally lighter quarter in Q4, but continued growth. So there's definitely a backlog of demand here.
Our next question comes from Frank Mitsch from Fermium Research.
Yes. Good afternoon, guys. Hey, you had a difficult comp on order to finish in 2Q, you're suggesting that 3Q is going to be an easier comp due to the vagaries of the year ago period. So I'm just curious how should we think about the underlying volume growth and sales growth that you can get in the refinish business?
Frank, I still see refinish as a flat long term market. We're going to get positive price we're going to work, you know, through our water, more people are going to convert to water, which uses less product than solvent. At some point in time, China will start to put in regulations. We're the number one guy in China. So When you factor in the solvent to water conversions, you will see some negative volume over a longer period of time.
But, we don't see collisions, changing materially in the near term, collision rates in Asia continue to happen. So, and of course, there's still a growing car park around the world. So This is a great business for us, as you know. And, we're one of the global leaders and we're still very excited about this business.
And just to expand on that, Frank, our customers pay for technology we're part of the leadership in terms of technology in the industry. So if Michael refers to price, we really talk about price mix the whole mix of the industry moving up, reflective of the technology that everybody's bringing to the table. So even though the absolute volume might be down a little bit the cost per unit or cost per liter is up because of the mix component.
That's very helpful. And I guess my follow-up would be, it's been about 2 months since you did your strategic review and decided keep the portfolio as is. I'm just curious in terms of the feedback that you received from your shareholder base, is there any color you can provide in terms of the positive or negative a feedback that resulted from that decision?
Yes, Frank, we talked obviously a lot of shareholders. Those are conversations we have individually with them. The feedback we look at is what happens to the stock every day in the marketplace. That's what I would reference you to.
Yes. And Frank, one of the things I might add back on the refinish question I should have pointed out, we do have a light industrial piece of that business and a commercial transport. And both of those segments are growing. Of course, they're much smaller than the base refinish business, but those are help offsetting some of the trends we talked about earlier.
Our next question comes from Jeff Zukakis from JP Morgan.
Please go ahead with your
question. Thanks very much. I was looking at your corporate expense. I think for the first half, it's $90,000,000 versus $66,000,000 in the year ago. And I think for the third quarter, you said your corporate expense would be 45 and maybe last year it was 26,000,000 So it looks like that through the 1st 3 quarters, your corporate expense will be up, I don't know, $40,000,000 or $45,000,000 What's going on there?
What's behind that? Or is it a timing issue when the corporate expense in the fourth quarter comes down a lot?
Hey, Jeff, this is John. I think there's 2 key drivers. 1 is last year we made some adjustments to our incentive compensation accruals in the second and third quarter. And, last year, we had a little bit more favorable pension expense, but based on different items like the discount rate and consensus data that we have, So the former is the bigger driver, but a couple of things there, Jeff, that are driving the upswing this year. Okay.
And then for my follow-up, the, your SG and A costs year over year were down
a little bit, both in
first quarter in second quarter. But last year, your SG and A really fell pretty sharply in the third quarter. It went from I think something like $9.41 to $8.67 from the second to the third quarter. Is your SG and A going
to be lower year over year or roughly lower year over year in third quarter, or does it rise maybe because of
the compensation expenses you're talking about? How does the SG and A look year over year in third quarter?
Yes, Geoff. Those two questions, I think your first and second question are interlinked are some of the numbers that John mentioned are located in our SG and A cost pool. So there's variability there. Currencies if you're looking on an absolute number basis, currency is a big impact to just absolute numbers. So we did have weaker foreign currencies last year.
So that has an impact as well. We're run our steady run rate, we're adding Q2 of 'nineteen. We expect to be comparable as a percent of sales in Q3. We do have lighter seasonality in Q3 versus Q2 as well. So that's not
a factor. Yes. Okay, great. Thank you so much.
Thanks Jeff.
And our next question comes from P. J. Juvekar from Citi.
So, Michael, you talked about China auto inventories coming down, and that's a good thing. When you talk to your customers in the OEM market, what signals do you get when you look at their production schedules for 2020? Do you think market can go come back to growth again in 2020 for Chinese auto OEM?
Well, I do believe it will be up in 2020. I think it's a little early to call that though. I don't think the trends that we're seeing right now are going to continue, but the single biggest factor in this is trade war, if that's what you want to call it. People have money in their pocket in China. People are employed.
It's a lack of consumer confidence. These are Chinese employees themselves they're also looking at the same thing. I was just over there 6 weeks ago and the fact of the matter is for major purchases, they're sitting on sidelines to see how this turns out. So the first thing that I'm looking for is a settlement where everybody can move on from the current positions that they everybody has take out. Consumer confidence will flow very quickly because it's not like they have to get people reemployed over there.
They are already employed, and they are saving money right now, in this environment. And so they have a lot of firepower to put to work. So I think whenever this does settle, we will see a pop, not too much different than we saw what quarter was it? It was the 3rd quarter last year when the, I think, change the tariffs or the VAT. So I think that'll be a pretty good, movement in that.
Okay. Thank you. And for my second question, recently there was a market share change at Ace Hardware and you talked about that a little bit. Was CPG involved in any of those discussions? And then when you lost some volumes at one of your retail customers, Are those volumes still available if you get an order or do you shut that capacity down?
P. J, I don't think it's appropriate for us to discuss specific customers, you should assume that any place there's somebody buying paint that we're actively talking to those customers. To the customer assortment change. But we still have capacity in the marketplace. And as you know, ramping up a paint plant.
Sometimes it's as simple as adding another shift or running over time. So, we are definitely flexible enough to respond to the market.
Great. Thank you. Thanks, P. J.
Our next question comes from Arun Viswanathan from RBC Capital Markets. Please go ahead with your question.
Good afternoon. Just a question on the guidance. Last quarter, you had mentioned that embedded within your guidance, there was a
little bit of a recovery
in China. And obviously production rates have continued to lag on the auto side. Essentially seeing some continued slowing due to the trade share machine. So I guess where do you stand on China? Is that part of
the what would push you
to the 7 the upper end of the 7% to 10% recovery there? Maybe you can just give us your comments there. Thanks.
Yes, Arun, if you noticed, we did talk about the sales guidance being low single digits. I'd see a stretch to get to the bottom end of our prior range on sales. So that's really where we saw the down take. We didn't or the drop we didn't experience during Q2. And we do have, as we walk into every quarter, 3, 4, 5, 6 weeks of order book in hand for most of our OEM customers, not just our auto customers.
So we typically have at least an early read on what each quarter is going to look like. We don't, as Michael mentioned, opening comments. We don't see a significant uptick in Q3 in Asia and China specifically. So again, we lowered our sales guidance for the year. Or as you would expect from us, we're compensating on the cost side to account for the lower sales.
And just as another follow-up. On the raw material side, obviously there was some deflation in Q2. When do you see that kind of flowing through your system? And maybe you can just relate that to the inventories of raws that you have. Thanks.
Yes. Couple of points are in. 1, we're still seeing pockets of inflation. And secondly, we have to we have to recognize there's still 2 years of inflation we absorbed. So we still have some a lot of catch up to do on the pricing side.
We're going to work through that. Furthermore, if we do see changes in our raw material basket, they have to flow through inventory. And we're getting to a period of the year where we're obviously sales seasonally are going to be lower. So we typically have a hold on our inventory a little longer.
Thanks.
Our next question comes from Christopher Parkinson from Credit Suisse. Please go ahead with your question.
Great. Thanks guys. When you think about your progression back towards prior peak margins, generally. How should we think about your expectations for industrial and performance just towards the end of this year in 2020 just very broadly? I mean, what additional levers can you even pull now given the volume environment or could you even just pull in harder to get back
to those levels? Just any key moving parts would be appreciated. Thank you.
Chris, this is Michael. The levers are going to still be the same. We talked about having more than 2% price in Q3. So that's going to be a positive moderation in the inflation, that's going to be a positive. We're going to have additional cost savings.
That's going to be a positive. The teams are working really hard on the manufacturing side. So that's going to be a positive. So I think the trend lines that you've seen will continue in that regard. The big challenge we have is obviously we need a lot more price in our automotive business and a little bit more price in our industrial business to get back to where we need to be.
And so that's, front and
center. Got
it. And can
you just talk a little bit
more about your performance in ARO and how sustainable that is just in the intermediate to long term. I understand you're obviously doing a lot more than pain in the end market. Including obviously growing presence in services. So, how should we just generally think about your long term strategy versus, let's say, the core growth on the coating side? Thank you.
Well, we expect to outperform industry for quite a number of years in this business. If you look at the segments that we're in, we're leading in coatings So we're going to be slightly better than the market there. If you look at our transparencies, we've been our customer pull on new programs has been quite significant. And so, you know, we're we have customers that are asking us to bring them new technology, which they're more than willing to pay for. And that's been a significant win.
And then, of course, on the sealant side, our new technology on lighter weight sealants and cure on demand is going to be trend lines that our customers all value highly and it drives tremendous productivity in their businesses. So they're going to stay on top of that. And then for a lot of our customers because we're so important to them, we provide a chemical management services or unique packaging to help their productivity on their lines. And so we have consistently so if you look at this past quarter, the industry grew about 5% And we almost grew double digits. We grew double digits the prior quarter, and we're gonna grow, somewhere in that double digit range in the 3rd quarter.
So even though this has historically been a lumpy, capital intensive business, this is a market that we're super excited about and we continue to outperform in all the major segments.
Thanks Chris. Our next question comes from Kevin McCarthy from VRP. Please go ahead with your question.
Good afternoon. Vince, on slide 9, I think you indicate anticipated cost savings of $17,000,000 to 20,000,000 in the third quarter from your restructuring efforts. My question is, what does the glide path look like in 4Q and beyond as the new program ramps and the older ones are executed upon. Is that a relatively steady pace we can extrapolate?
Yes. We said $80,000,000 to $80,000,000 for the year, Kevin, for 2019. We're pacing slightly ahead of that right now and that's basis of the old programs we have. We'll pick up a few $1,000,000 in the fourth quarter on our new program. But the new program won't really kick in earnest until early 2020.
And there are some longer lead items in there. So by the end of 2021, we'll be at the $125,000,000 run rate. So I'd assume a linear progression as we go through 2020 into 2021.
Great. And then shifting gears, the text of your prepared remarks indicated that you had some customer wins in Latin America. Can you comment on which businesses those were in and how large they are? I'm not sure if they're material or not.
Yes. These are mostly in our industrial segment, Kevin. We have some benefit in our auto business. We it's fairly customer mix. We underperformed in the U.
S. We overperformed in Latin America. Really serving the same market. But given we give regional outlooks in addition to business outlooks, we had a flip between those two regions. And Kevin, just on top of that, this is John.
Packaging has been doing very well in South America.
Did you win business and packaging there?
Correct. South America Packaging has been winning business.
And of course, Comex continues to win on a daily basis.
Our next question comes from Steven Byrne from Bank of America Securities. Please go ahead with your question.
That sealant and adhesive technology that you have in your aerospace business, is that suitable to one of your other businesses, such as autos and markets or construction?
So we have, sealants and adhesive businesses in our aerospace, our automotive, our architectural and a teeny tiny bit in our industrial business. We share technology across segments. So when we've launched the most recent liquid nails product. It used some of the technology that we had in our aerospace business. And that was a win We currently have also launched some new products for the U.
S. Military. And, that technology can also be shared across the, various platforms. So we routinely share technology across our various business segments.
And then on this
most recent cost management program, this $125,000,000 program, it reads basically 3 buckets, some manufacturing consolidation, some trimming of low margin businesses and then headcount cuts. Can you allocate that program into those 3 buckets? And were these readily identifiable? Do you see another round after this one?
Steve, this is John. So we're not going to get to that specific level of detail. But these are opportunities we've identified both in continuing to improve our cost structure. And flexion of the demand environment that we have today.
Our next question comes from Michael Harrison from Seaport Global. Please go ahead with your question.
Michael. Just a question on the regional pricing dynamics in auto OEM and on the sustainability of pricing there. You said that pricing had increased in all regions. I believe that was the comment last quarter as well. So how much was pricing up And if there were any differences from region to region, what was driving it?
No, Mike, we had pretty much similar pricing across the regions. As you can well imagine, we deal with global customers and you're dealing with people that are very sophisticated and how they deal with you. So we're getting it across the regions and across the platforms. And we are getting it with the local Chinese in case that was your next question as well.
Okay. And then my other question is related to the Refinish business and these lower collision claims in the U. S. I mean, is that accident rates coming down? Are we starting to see the impact of collision avoidance systems?
Any thoughts on one what's behind that?
Well, really what you have is a plateauing. Collision is driven by ingestion, which is driven by employment, which is driven by miles driven. And right now, unemployment has plateaued it, let's call it, 38, 37, whatever you want to call it. And so, that leads to, less collisions when it plateaus. And there has been some impact from lane departure and smart cruise control, but you have the negative impact of distracted driving, which I hope you're not doing, Michael.
But overall, you know, I would say you should assume a minus minus 1 is kind of what you should probably think about, in the long term.
And again, as we said earlier, Michael, that's total volume. There's a value uplift in this business as there's been for many years as all the participants add new technology and the technology is definitely desired by the body shops for productivity purposes.
Alright. Thank you very much.
And our next question comes from Duffy Fischer from Barclays. Please go ahead with your question.
Yes, good afternoon. First question is just around the delta between inventory or not inventory between volume being down 4% and GDP being positive 1 or 2, a
pretty big gap anecdotally when
you talk to your customers, are they destocking where maybe their real consumption is running at higher levels in that and so we'll get a bounce back sometime in the next couple of quarters?
Yes. I mean, we really look at industrial production, not GDP. GDP includes services. So industrial production is certainly not been strong in the first half of the year. But more like to the heart of your question, We see most of our customers running lean on inventory, leaner than we've seen in the past.
Michael again alluded to that in the opening comments. If there is any surge in demand, there might be a little bit of a 2 stack here, not only the demand surge, but also inventory replenishment So
that's certainly plausible. Yes. And Duffy,
I would say, think about the volume more at a two level, not a four level because of the customer assortment changes.
That's fair. Okay. And then just last quick one. Vince, the $1,000,000,000 in cash you have now, if you found a place to use that, how much cash do you need to run the business? How low can you take that cash balance?
That's a seasonal question.
We obviously are building inventory and beginning of the year. We run that down in the back half of the year, so we need a little less cash on a daily basis. Somewhere between $700,000,000 $700,000,000 depending on the season.
Our next question comes from Derek Schmois from Longbow Research. Please go ahead with your question.
Hi, thank you. I know it's early before looking out to 2020 thinking about pricing and you've been very committed to getting price over the last several years, but in a slower volume environment, just wondering how long can you keep pushing this 2% or so price cadence?
Well, I'll start. Michael can finish the question here, but we saw our suppliers push price for 2.5 years. And we had an amiable demand environment when that occurred. Again, we're just trying to catch up. Maintain the value chain.
So that that's again, we saw it on our coming into our front door for two and
a half years. Yes. And I would add innovation. Our customers are always very willing to pay for innovation. If you think about the cost of the paint versus the cost of their final product.
We can get one more car through the body shop or one more, heavy duty equipment out. We can make the packaging line run a little quicker. Anything like that, they are more than willing to pay for that's why we're so focused on innovation. And sometimes innovation leads to slightly lower volumes, but it leads to a richer mix with higher pricing. So that's also something you should factor in.
And if
I could just pick up on that because what we typically do see when demand is a little choppy like it is today. Customers are looking for ways for cost savings and that plays right into that kind of innovation center that we have.
Okay, thanks. I just wanted if you could update us just on pay store openings in the U. S. How that's tracked year to date and what the outlook is for the second half.
Yes. I try to always get people off this question. It's for the U. S, it's not the not the key driver for our business. We're, focus on servicing our customer needs.
We have an authorized dealer network. We have our own paint, stores. We have our own DIY customers. So for us, we're doing different things in different markets. So we add stores in, places that are growing like Texas and Florida, and we might be subtracting stores from contracting markets.
So for us, our store count was relatively flat overall. And that's not a metric that we're a driver of in the U. S. If you want to look at Mexico where we have a 50% market more than a significant share down there, we are driving additional store growth down there and we are continuing to take share.
Our next question comes from Jim Sheehan from SunTrust Robinson Humphrey.
Thanks. Regarding China, you mentioned the unexpected early implementation of China 6 emission standards in large cities. Did you see that impact retail buying patterns at all? Or was that just an impact on OEM production schedules?
Well, you do see a little bit of it, because the dealers are trying to get those vehicles off their mark, off their lots and in Shanghai so they don't have to then move them to a Tier 3 type city. So he did have sales were up, I think, 6% in June. And sales in July appeared to be trending positively as well. But I would tell you that it's hard to parse between how much of that is, the change in emission standards versus the actual demand.
Terrific. And then on there's some deals in the coating space announced recently, including aerospace coatings are you seeing a lot of competition for M and A given the attractiveness of the aerospace market?
Well, what I would say is that, any asset that comes up for sale in the coating space always attracts interest. There are some natural buyers. There are people who are consolidators on a continuous basis. And, you should assume that, when any asset comes up for sale, that unless there's an issue with it, it's going to trade it up pretty, reasonable multiple.
And our last question today comes from Dimitri Silverstein from Buckingham Research. Please go ahead with your question.
Good morning. Thanks for squeezing me in there. A lot of my questions have been answered, but I'd just like to go back to Vincent's response to, Gary's question on pricing. You mentioned that you've taken price for 11 quarters when the demand conditions were amenable and we've had strong economic conditions. We're seeing pretty meaningful slowdown across the globe when it comes to industrial economy.
And if you kind of read the early signs, it may actually get worse before it gets better. How does this environment, given that yes, you are adding technology, but you're competing against other very competent players out there with technologies of their own. Are you am I fair in saying that you may be sacrificing a little bit of volume growth to make sure you get the pricing? And that is the most important part of your strategy in the short term is to restore your margins through price and then worry about volumes later.
Dmitry, that's 100% accurate. We are, expecting to get paid appropriately for the technology we deliver. If we haven't been able to get that, we've been willing to walk away from volume. We, as you saw, our volumes in 2008 team in architectural Europe were down as we were the only ones out there leading price. Now that, the other parties are up there leaving price along with this.
Volume is flowing back our way. We've always said that We might get short term penalized for raising the price, but ultimately, most of our customers want to do business with PPG And, as soon as our other friendly competitors, if they decide to raise price independently, some of that volume could flow back to us and we do see that happening sometimes.
Okay. That's very helpful. And as a follow-up, just a couple of bookkeeping items, In your drill industrial business, you talked about your revenue being down. What was there's got to be a price component in there. So what were the volumes in GI down And then a similar question on European paint.
What was the foreign exchanging back on the European paint business?
Those are granularities we typically wouldn't give Dimitry. We did say that the segment volumes, I think we're down about 5% and general industrial. Auto is more than that excuse me, in our industrial segment. Auto is more than that. General Industrial was less than that.
The proxy for currency in our architectural M and A business would be just euro of a dollar.
It'll be pretty close.
Got you. Thank you.
That's all I have.
And ladies and gentlemen, that will conclude today's question and answer session. Like to turn the conference call back over to management for any closing remarks.
Thanks, Jamie. I'd like to thank everyone for their time and interest in VPG. If you have any further questions, please contact our Investor Relations department. This concludes our 2nd quarter earnings call.
Ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.