Good afternoon, and welcome to the PPG Industries First Quarter 2019 Earnings Conference Call. My name is Andrea, and I will be your conference specialist today. Please note this event is being recorded. I would now like turn the conference over to John Bruno, Director of Investor Relations. Please go ahead.
Thank you, Andrea. 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 first quarter 2019 financial results conference call. Joining me on the call from PPG are Michael Met 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, April 18th, 2019. I will remind everyone that we have posted detailed commentary and accompanying presentation slides on the Investors 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 a Q and A session. Both the prepared commentary and discussion during this 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.
Now, let me introduce PPG Chairman and CEO, Michael MacEri. Thank
you, John, and good afternoon, everyone. Today we reported first quarter 2019 financial results. For the first quarter, our net sales were approximately $3,600,000,000 and our adjusted earnings per diluted share from continuing operations for $1.38. 2 primary factors that impacted our adjusted EPS were lower global industrial production, and significant foreign currency translation headwinds. On a constant currency basis, our adjusted EPS was modestly higher than the prior year.
We're in the early stages of a margin recovery and delivered higher year over year operating margins for the first time in 2 years. This achievement is 1 quarter ahead of our internal target as we benefited from continued and further progress in selling price realization and strong cost management during the quarter. Sales volumes were down about 3% impacted by weaker global industrial production, most evident in the automotive OEM end market. And geographically in Asia. Also, half our sales volume decline related to prior year customer assortment changes in our U.
S. Architectural DIY business We will anniversary this assortment change after the second quarter. Our selling prices were 2.6% higher, marking the 8th consecutive quarter as we prioritized margin recovery. Finally, net sales were negatively impacted by significant unfavorable currency translation up more than 4% or about $160,000,000. We expect unfavorable currency translation to continue into the 2nd quarter be in the range of $130,000,000 our Performance Coatings reporting segment, Aerospace Coatings had its 4th consecutive quarter, a double digit percentage sales volume growth, led by above industry performance in all major regions.
In see flat industry demand in developed regions. As an example, in the U. S. Automotive collision claims were down 1% in the quarter. Our refinish business began the integration of the SEM acquisition, which is off to a great start in delivering above segment margins.
And we are beginning the process of expanding their geographic commercial scope. We were pleased that the architectural coatings EMEA sales volumes increased the second consecutive quarter. Combination of positive sales volumes and higher selling prices, supported by mid single digit percentage net sales growth in the quarter. Importantly, all major sub regions were higher. As we discussed in the past, this business and this region deliver high incremental margins on increased volumes as we do not need to add any additional costs to support the growth.
Our sales volumes in the Mexican quarter. Paint sales in Latin America are historically higher in the weeks leading up to this holiday. We expect stronger sales volumes in the second quarter. During the quarter, we opened 25 new stores in Mexico and Central America. Sales volumes in for Coding Americas and Asia Pacific decreased due to lower net DIY sales of about $60,000,000 stemming from the prior year quarter.
Same store company owned sales growth in the U. S. And Canada was up a low single digit percentage. Impacted by soft market demand growth of more than 10% adversely impacted by lower in China and Europe. In aggregate, our automotive sales volumes were lower by half or by high single digit percentage.
Consistent with global industry build rates. The automotive OEM business made good progress in implementing selling price increases, realizing activity also impacted our general industrial coatings business, most notably in the coil and general finishes segment. As expected, Our Packaging Coatings sales volume decreased modestly in comparison to strong above market growth in the prior year, driven by at earnings per diluted share of $1.38 was slightly below the prior year quarter. Our earnings were negatively impacted by about $20,000,000 excluding this impact, our adjusted earnings per diluted share were modestly higher than prior year. During the quarter, we continue to be impacted by raw material inflation, which was nearly all carryforward inflation from 2018.
This was our 10th consecutive quarter of raw material inflation. In addition, we encourage logistics and wage inflation in the quarter. Recent increases in crude oil prices and some supply disruptions in China and Texas could affect our input costs unfavorably quarter. Selling price increases 2.6 percent with comparable contributions from both of our operating business reporting segments. In addition, we made excellent progress on our business restructuring actions, delivering more than $20,000,000 in cost savings during the quarter.
Pacing with our targeted savings. Our effective tax rate was about 24 the first quarter items in the prior year first quarter. We are still anticipating a full year 2019 tax rate between 23% to 25%. As we look ahead, we expect global economic activity to remain subdued in We anticipate improvement as the year progresses. Global Automotive production is expected to decline in 2nd quarter compared to the second quarter of 2018.
And general industrial demand is likely to be modest and uneven by end market and region in the second quarter. Positive developments around regional and country trade disputes could spark a return to higher industrial activity in the second half 2018. Specific to our business, we believe that more stable interest rates in the U. S. Will help drive modest growth in the U.
S. Housing market and also favorably impact automotive OEM sales. For the second quarter, we expect U. S. Industry automotive builds to be flat.
Our U. S. Architectural business sales volumes will be down about $60,000,000 due to the unfavorable customer assortment change. This will be the final quarter for this impact. In Latin America, Growth rates in Asia are expected to remain soft with some modest improvement compared to the first quarter.
In the second half of the year based on recently implemented stimulus and easier comparisons to the prior year. Overall, to be lower than prior The delay of Brexit will probably continue to lead to higher levels of uncertainties and could impact consumer confidence and overall demand. We expect our regional architectural coatings business to produce favorable sales volumes in the second quarter. We will continue to In addition, the execution of our restructuring programs will carry on and we expect about $20,000,000 of additional incremental savings to be realized in the second quarter. As mentioned in our earnings press release, we continue to closely monitor the macroeconomic environment and we will be prepared to implement guidance specific to the second quarter of 2019.
Includes an unfavorable impact from foreign currency translation of $0.05 to 0 point 0 $7 per share. Remain fully committed to delivering on the full year targets we announced in January for 2019 3% to 5% sales growth and 7% to 10% of adjusted EPS growth, both excluding foreign currency translation. Our focus on cash generation continues. In the first quarter, our cash flow from operations This is consistent with our In addition, this year we intentionally built inventories due to our preparation around Brexit and anticipation of a 2nd quarter ERP conversion our U. S.
Automotive refinish business. This ERP conversion is the last major conversion for all of our U. S. Canadian businesses, with all the previous U. S.
Coating businesses successfully converting over the past 2 years. In addition, the recent SEM and Whitford acquisitions added to our working capital. Our goal for to reduce working capital as a percentage of sales compared to 2018. We completed a Whitford acquisition in the first quarter, and just recently announced the completion of the Hemmelrath acquisition. The 3 recently announced and completed acquisitions, including Sem will add about $400,000,000 of annualized revenue and provide us with a broader range of products and technology to grow our business.
Accretive earnings acquisitions continue to be our cash deployed preference and our acquisition pipeline remains active. In addition, acquisitions we continue to invest organically in our business. Capital expenditure expenditures are expected to be about 3% of sales in 2019. We continue to invest in research and development at similar levels as we have done historically. We ended the 1st quarter with more than $800,000,000 of cash and short term investments, and we continue to have significant financial flexibility.
Finally, as I stated in our annual meeting this morning, In our 135th year of business, PPG 47,000 employees around the world are focused on strengthening our position as a world's leading paint coatings and specialty materials company. We remain steadfast in our commitment to drive innovative solutions for our customers' most pressing challenges. Deliver consistent growth, empower our people to grow and succeed, create value for our customers, operate our businesses safely, sustainably and effectively, while delivering value to our shareholders. I'd like to thank and recognize the outstanding employees of PPG who help us deliver these each and every day. This concludes our prepared remarks.
Once again, we appreciate your interest in PPG. And now, Andrea, would you please open the line for questions?
We will now Our first question will come from Kevin McCarthy of Vertical Research Partners. Please go ahead.
Yes, good morning. Michael, I was wondering if you could expand upon your outlook for China in the release you indicated, that you are cautiously optimistic and expect a better back half of the year. Just wondering, you know, how much of that is predicated on a trade deal or are you starting to see stimulus related benefits? Any color there would be helpful.
Kevin, as you know, the 13 National People's Conference took place in the first quarter. The VAT for coatings was dropped from 16% 13%. The VAT for cars was dropped from 10% to 9%. Social insurance contributions were reduced. So there's a lot of what I would say, I don't know, total stimulus is the right word, but there's a lot of influence in the marketplace to lead to better, performance As you know, we do see, automotive numbers in real time.
And so we're optimistic that the second half of the year is going to be, better than the first half. And, you know, we do have insight into like I said previously, 90 days, we have a fair amount of confidence, 60 days, 30 days, we have high confidence. So, you know, we we're starting to see the early signs of that Okay.
That's helpful. And then, stateside, what is your outlook for U. S. Architectural and perhaps you could touch on the subjects of whether, weather was an impact at all in your first quarter. And what you're seeing, in terms of the macro indicators, for architectural coatings demand in the U.
S? Well, okay, NOAA, as you know, reported the wettest January February around but as we always tell our operating teams, we have to be able to function because somewhere else in the world, you get good weather, always have a different put and take on that. So we're not going to point to that. We do see our customers have good backlogs You know, we do have a slightly different mix and maybe some of our competitors, as far as, our stores. But overall, you know, we still think this is a very good market and, you know, we're anticipating, you know, favorable comps going forward.
Our next question comes from Michael Sison of KeyBanc. Please go ahead.
Hey guys, nice quarter. Thanks, Mike. In terms of the half of the year, you've, you've talked about, you know, maintaining your outlook for, for sales growth ex currency. So Can you maybe walk us through, by some of the sub businesses? What type of growth you're going to see in the second half to sort of hit that full year number?
Well, Mike, if you look at the various pieces, let's start with aerospace. We're going to continue to see very very good growth in that business. The underlying trends are, very nice. So whether it's the, the build rates, whether it's the military, however you want to frame it, you know, aerospace is going to have a very solid, quarter and back half of the year. Refinish, you know, we had a lighter, comp numbers in the 3rd fourth quarter last year.
So we're going to be comping against a little bit easier. PMC, as you saw from the first quarter, up, you know, double digits. You know, we continue to see a recovery in that segment, you know, marine bouncing off the bottom, strong protective sales in that segment. So I would tell you that, we have a lot of confidence in that. And probably the most encouraging one is, architectural Europe.
We tried to kind of, you know, lead you to this conclusion in prior calls, we were the first one to raise price in Europe. We raised it significantly. So last year, we were given up share preferentially to get prices up Now our competitors are out there raising price. So that business that has historically been ours has been flowing back to us. We had a very good quarter.
The first quarter. We anticipate that trend line continuing the second quarter as well as the back half the year. Comex, and our team is just doing a phenomenal job in Mexico, Central America. So I would tell you that you know, that's, you know, we're getting price there. We're having customers trade up, you know, ever since we've owned COMEC We've brought higher value added products in there.
And that's been a positive. Automotive OEM is a little bit of a wildcard. You know, we see the U. S. Is relatively stable, you know, 16, 7, 16, 8, somewhere in that range.
Europe, kind of ticking down marginally, but eventually they're going to have all these things behind them, and it's a solid market. So we anticipate it back in the second half of the year. And then when you think about Asia, similar to what I said earlier, we have we'll have very soft comps to compare against in the 3rd fourth quarter. So that, that'll be better. General industrial more the same.
We see the stimulus, having a little more positive impact. So I think there's a lot of things we would point to that gives us this confidence.
Great. And then just a quick follow-up on 2Q, earnings outlook. The year over year decline, EPS is larger than basically flattish in the first quarter. So are some of the headwinds more daunting in 2Q than they were in in 1Q because it seems like maybe it should be less, but, just curious on your thoughts there.
Mike, this is Vince. Just a couple of key items to put forward. 1, the customer assortment change that Michael talked about earlier, That actually was announced last year, March 1. Once that was announced in 2018, we took out most of the support costs before we got to Q2, but we had a full sale in Q2. We would take or pay with that customer in Q2 today.
They took a full allotment without the support costs. So that assortment is a bit more penal in 2019. We did have obviously a strong automotive market last year in Q2, We didn't see erosion in the auto market until Q3. Q2 is typically a higher seasonal quarter, so bigger impact in Q1. And finally, in Q2 of last year, if you look at our corporate line, we started to make adjustments to our incentive compensation on our corporate line.
I think our corporate line was in the mid-20s, $20,000,000 range last year. And we gave out a projection, in the release, it'll be almost double that in Q2 of this year. So those are 3 of the primary factors. That put this a little bit different than Q1.
Our next question comes from Ghansham Panjabi of Robert W. Baird. Please go ahead.
Good afternoon.
I guess first off on auto refinish in Europe and some of the weakness you called out, Michael, in your prepared comments, I know you touched on a pre buy in Europe that benefited 4Q, but you know, how would you characterize overall market conditions in the region specific to auto refinish?
The market over there is not that much different than the U. S. You have a slightly softer less collisions down 1% or 2%, slightly more, totals. But overall, you know, we're still gaining shops over there. So that's a positive.
Prices, you know, we've been able to successfully raise price over there. So I don't see the trends in Europe any different than I do, anywhere else. Now obviously sequentially second quarter will be better than 1st quarter. For refinish Europe because of the, the timing of the price increase. But, you know, I'm not concerned at all about, refinish, sales volumes.
Okay.
And then just sticking with Europe and architectural EMEA, last couple of quarters have been positive. They are smaller quarters on a relative basis. I know you mentioned the pricing dynamics and some just some reversion from a market, regain perspective. But, you know, taking that in context with what you said, Michael, in terms of European macro and Brexit, what do you think that is reasonable to expect for the market itself to grow in 2019 there?
Well, we still have the same kind of perspective as that it's going to be a low growth market, let's call it 0 to 2%. But I think what's what we're most excited about is the share that's flowing back to us And I think the fact that we do see a number of countries, especially Eastern Europe, which we always view as a good sign when Eastern Europe doing well. That's a very good market for us. They're having some strong, numbers. And probably a little bit of a surprise to us is, UK and Ireland, they've outperformed our expectations.
We thought with Brexit, it would be a much slower market, but surprisingly, we continue to grow nicely in that market.
Perfect. Thank you so much.
Our next question comes from John Roberts of UBS. Please go ahead.
Thanks. First, a short one. And then I have a question on raw materials. But do you think you'll have the portfolio review by the outside consultants done in time for your Investor Day early June or do
you think it's going to
take until the end of the quarter?
John, we're looking to have something by the end of the quarter.
Okay. And then, is the potential raw material disruption in Texas related to the tank farm fire occurred in the shipping terminals or is it something else? And how do we think about the volatility in oil prices some of your raw materials like solvents follow oil quickly, some a lot more slowly, so they probably didn't change much in the quarter. And then customers often look at oil is kind of
a leading indicator of price.
So I don't know if you had maybe more pushback on price early in the quarter. And now you might have some tailwind here with the oil coming back up.
And John, the fire in Texas didn't impact anything we buy, but what it does impact the access to the other products that are in that terminal. So that's been the challenge. So we regard that as you know, 1 quarter disruption. As far as oil, remember, we we have a, I always like to say we have, like, 9 different buckets of raw material drills. You got half of them up and half of them down, one of them flat.
You know, oil will impact solvents, but, most of our other raw materials are impacted by supply and demand of the derivative. So, obviously, we're encouraged to see that propylene remains, weak, ethylene is, you know, we view ethylene as a long term oversupplied. Market, which will help us. So I would tell you that, we, we still remain, firm our raw material projection, which is low single digits. And, that the back half of the year, comps will be much easier.
On raw materials.
Our next question comes from David Begleiter of Deutsche Bank. Please go ahead.
Thank you. Michael, just on raws again really TiO2, do you expect to see higher TiO2 prices in 2019 versus last year?
So, David, our response is the same one we gave in the fourth quarter that we don't think we need to be talking about TiO2 this year. You know, you had some pluses and minuses, but overall, it's a, it's a non event in our market basket. So that would be the way we would describe that.
Understood. And just on auto OEM, Michael, very good job on pricing, but obviously weak volumes, are the weak volumes jeopardizing at all your price initiatives or your price traction in OEM?
David, I don't think so. I'm I'm viewing this the same way we saw with architecture. We were the first ones out with price. We're the most aggressive in trying to hold our customers accountable for us to recover our margins. We provide a lot of value to our customers, a lot of new technology, And, you know, obviously, we're getting price across the world in that.
So when our competitors are getting as aggressive as we are. If they do that, then we would expect to see some of that volume flow back Right now, it's more important for us to get price. And that's our number one objective.
And David, this is Vince. I think our customers clearly understand for calendar year 'seventeen and calendar year 'eighteen, we got little to no price. So we're still well in arrears in terms of value capture for what we deliver to them.
Thank you very much.
Our next question comes from Bob Koort of Goldman Sachs. Please go
ahead. Chris Evans on for Bob. So on pricing, eight quarters in a row of improvements, recognizing your industrial coatings margins are still pretty depressed. How much more price is needed there to recover the lost profitability? And then maybe more specifically, does the consolidated 1Q pricing you printed quarter represent a high watermark for the year as comps get harder throughout?
Chris, this is Vince. I'll take the second part of your question. We're still on pricing. In in Q2. We're still doing surgical and targeted pricing in in not only industrial segment but in other businesses.
I would definitely not consider that high watermark. And I think you alluded to it properly. We're starting to stack price on top of price. We still got some need to recover in certain businesses or regions. And we're going to continue to push to try to fully recover this over the course or balance of this year.
Hey, Chris, this is John. Maybe on your cumulative question, if you look at the past 10 quarters raws are up a cubicle to the amount of low single digits. And pricings may be up 3, a little bit more than 3%. We typically say we need to get half of the raw material inflation to be even. So that's the delta we're looking at.
Very helpful. And then just sort of stacking that on top of the raw material commentary, you put up a pretty good, the best margin performance year over year in quite a while. So how does the cadence of your margin sort of trend as the comps in your raw material basket gets lighter and you continue to push price?
Well, I think the way I would answer that, Chris, is that Vince said that, we're all recognizing that, when you compare margins of 'seventeen and 'eighteen, they're below our sixteen levels, we need to get back to those levels. The sales teams are well aware of the gap that still exists And, the marching orders have not changed. So we're going to continue to, work hard to capture that gap. Our customers know that gaps still exist And it's up to us to, to get the additional price, but also provide additional value to our customers. So it's a win win.
Very clear. Thank you.
Thanks, Chris.
Our next question comes from Christopher Parkinson of Credit Suisse. Please go ahead.
Great. Thank you very much. So it appears you guys were successful in getting regional OEM pricing, all synchronized positively. Which I'm sure your team is pleased with. Can you just comment on whether or not this is simply a functionality of just prior price initiatives and obviously everything you've been fighting for for a while?
Or any additional pricing actions for 1Q. So just basically asking on what assurances the investment community has, that the trend is sustainable, moving forward? Thank you.
Yes, Chris, it's, and for us, we've worked extremely diligently the past twelve to 18 months to secure the pricing that you're seeing here in Q1. We fully expect that to carry forward for the balance of the year. And again, we do have additional targeted pricing coming in, not only in auto OEM, but other businesses. So again, our emphasis is to recover our margins fully But to Michael's point, we got to make sure we're demonstrating to our customers the value we bring.
Got it. And then also just on the capital allocation front, given your socks that had a bit of a run here and where you see leverage, just how are you assessing share repurchases on a go forward basis versus mid and potentially large size M and A? Thank you.
Yes. As we said coming into the year, it's a pretty active acquisition pipeline. As we and our preference right now remains to vet those acquisitions before we make any considerable decisions regarding share repo, but our active pipeline will keep us busy for a little bit of time. And we'll determine whether those are value creating or not or whether we're, considering them, for our portfolio. If that doesn't work out, we'll reassess, how we're gonna deploy our cash.
Our next question comes from PJ Juvekar of Citi. Please go ahead.
Yeah, hi, good morning.
Hey, Jake.
Michael, the China stimulus, automotive us went into effect, I think, on April 1. Is that why you feel more positive on second half? And, you know, I think a lot of companies are talking about second half recovery. I mean, do you see any momentum in second half or second quarter now that you think could last into second half?
P. J, we do see how our customers are pre planning, we saw we have insight into that. So that's one item that gives us a little more confidence. You know, clearly we see the current production levels that we see in a rule, but that's 15 days. You know, remember, China's had, if I remember right, 9 or 10 consecutive monthly declines and 10 monthly declines in a row.
So I'm not going to jump out in front of a of this right now. Let's wait until we see how the actual numbers turn out.
Okay. And then on architectural business, it seems like your store business is growing at or better than the market. So my I guess my question is, why not accelerate the store growth by opening more stores? Because, you know, the the National retail stores and, independent stores seem to be lagging here. So why not grow your own store base?
Thank you.
Fifty, Dave, Vince. Yeah, I don't know that we're growing better than the market. We didn't say that. We do have a definitional differences with some of our competitors. We, include industrial coatings in our industrial segment.
Other folks, include those differently. And, you know, our industrial business as Michael mentioned, lighter this quarter in Q1. So again, I would not say we're outpacing the market. You know, for us, we go market with a multi channel approach. We've always done that.
We do well certainly with the Home Depot and other major, merchandisers, our dealer channel, albeit at a lower growth channel is a good channel for us, with a low cost to serve. And we we support our trade network as much as possible. And we're doing selective additions. We're doing selective pruning in all those channels. Thank you.
Thanks, P. J. Thanks, P. J.
Our next question comes from Frank Mitsch of Fermium Research. Please go ahead.
Yes, hi. Good afternoon. This is Levion Bell sitting in for Frank. Michael, in a difficult macro environment, in the first quarter here, you're able to post a nice result, especially relative to the guidance that you guys had issued. So I mean, just curious as to what were the key factors for PPG to be able to outperform those expectations?
Hey, Frank. This is Vince. A couple of things that differ from the beginning of the year. 1, we certainly secured pricing at a level that we had hoped a little bit better than that. The second, issue as we were very aggressive on our cost management, given the, the uncertainty in the economic, backdrop And we also see currency coming a little better than we anticipated at the beginning of the year, but still negative year over year.
So Those are the 3 primary factors that deviated favorably from our guidance.
All right. So, so we might wanna dialing all three of those factors in for Q2 relative to the 176, 186. Just kidding. On the restructuring side, you posted you said $20,000,000 or I think better than $20,000,000 in savings during Q1. And you said that you'd get that again.
In 2Q or at least I think you said that. Where do you stand on 2019? I think I heard you guys talk about $80,000,000 savings in 2018 and around 70 in 2019. What sort of expectations should we expect out of, out of the cost cutting actions that you guys have underway?
Yes, Frank, this is John. So our number one priority is to complete the restructuring initiatives we've identified those alone will probably get us close to 70,000,000. And we have additional initiatives that are not necessarily train that are, other cost, areas throughout the business, throughout the world that will get us to the 80,000,000. So we still feel very comfortable with that number.
Thank you so much.
Thanks, Ryan. Thanks, Levien.
Our next question comes from Don Carson of Susquehanna Financial Group. Please go ahead.
Yes, thank you. A question, a couple of questions on architectural. You mentioned that obviously you allow the Lowe's loss in Q3. But how about your Home Depot business and some of the new brands you have there? What kind of year over year growth can we expect as we get second half of the year.
And then on EMEA, can you remind us where you are in terms of volumes relative to your 2007 peak and what we should think of as incremental margins to that business as you load more volume?
Yes. So, Don, I'll take the first half and I'll let Vince take the second half. We started shipping Home Depot early May, So we'll have 3 months of Home Depot versus 2 months in the second quarter. Obviously, there was a lot of confusion in the marketplace Olympic was at both Lowe's and Home Depot. This year, it's only at Home Depot.
So there'll still be some, you know, people looking around to make sure they find the world's greatest thing at Olympic, But I would envision that, we will continue to have positive comps. I won't speculate about how much because I think that's Home Depot's business. But, you know, the relationship is very good. They're the best, retailer in that space. And, we're very, privileged to be a partner with Home Depot.
So maybe Vince, you wanna tackle. Yes, in terms
of your question, Don, around where we are versus the 2007 peak. We were down still almost 20% in volume. For the whole architectural Europe region. So we, we still have not seen, this is the, really, the first signs of recovery, we've seen since the recession in our volumes. That's a holistic comment.
We've certainly seen differences by countries. As Michael mentioned, the UK has been a good country for us for the past couple of years, but we've seen other markets that have continued to wane. But holistically, we're down just under 20% cumulative since 2007. We are, we are recording very high, incremental margins, as Michael mentioned in his prepared remarks, These are coming in somewhere in a vicinity of 35% to 40%. So that, that volume is extremely lucrative to us when it does occur.
Thank you.
Our next question comes from Arun Viswanathan of RBC Capital Markets.
Hi guys.
Sorry about that. Good morning.
Good afternoon. Just a quick question for you guys on the margin. So obviously, you know, a little bit than what we had thought. How would you characterize them versus your own expectations? And you, you mentioned three things as far as slightly better FX, price and cost.
Could you could you kind of bucket that out for us on Q1 And, how those 3 would potentially progress through the year?
Well, I think, Arun, the cost cost management is something we're, you're watching our order book every day where we're taking necessary actions business by business, region by region, based on the order book. And Q1 was very choppy in terms of the macro. So some of our businesses took immediate and swift action to minimize any costs. If we see the volume come back, I think we'll have a more traditional cost structure. From a pricing perspective, The only thing we did was get priced a little earlier than we anticipated.
We thought some of this would drag on into Q2, but the level of pricing that we achieved, is what we are targeting. We just had it a little earlier than what we anticipated in our guidance. With respect to currency, I'll let you guys you guys are the experts on currency. We just make paint. We don't predict the currency markets.
I'll let you guys, apply on that.
Okay. Thanks. And as a follow-up, your discussions are on margin recovery. I mean, do you guys have targets as to where you want get back to as far as, you know, percent margins. If I went back to the, the 'eight to 2010 period, it looks like, they suffered by 500 basis points and they recovered within a year or 2.
Is it fair to assume that something like that could happen in industrial? Because we've seen that kind of deterioration over the last couple of years? Thanks.
Yes. Just generically speaking, we're targeting 2016 as a marker. There's a lot happening in the world from 2016 to 2019. So it's not going to be a straight, straight linear comparison. 2016 is the point in time where we're using as a marker, from our margin perspective.
We have work to do, as you pointed out. We were targeting to get a margin parity by the middle of the year. We were glad to get there in Q1. And then we're open to improve on our margins year over year in the back half of the year.
And lastly on that point, would you need incremental volume growth? To, to, to get back to full parity, or continue that, that trend, or, or could you potentially, continue to see, margin recovery even in a kind of sluggish volume environment? Thanks.
Well, there's 2 sides to that equation. We certainly welcome volume. That makes the story a lot easier. In a nascent volume environment, we would expect supply demand to work in our favor on the raw material side.
Thanks. Thank you.
Our next question comes from Steven Haynes of Morgan Stanley. Please go ahead.
Hi, guys. Thanks for taking my question. I just wanted to quickly clarify. So you're talking margin recovery came in ahead in 1Q 'nineteen. And you're commenting that it'll be up in 2Q 2019 as are in the second half of twenty nineteen.
Can you just comment on whether or not the first quarter was an inflection for margins and how we should be thinking about that for 2Q?
Again, just as Vince, again, just to reiterate, I think, we were anticipating getting the margin parity in the first half of the year. So by the end of the second quarter, again, got there a little earlier. Let's be clear, we're still several 100 basis points below our targets. So we still have a lot of recovery underway and we're going to start working our way back there for the balance of this year.
Quick follow-up too. So the press release talked about
you guys passing on some business. Could you just maybe talk a little bit about what categories you are foregoing business in?
Well, automotive is clearly 1. Industrial is another So those are the 2 biggest areas. And China, in Asia, in general, what we've said getting price in China is not easy. You have to do it, a lot of times by backing up your request for price by saying that you won't meet the need that we have. We're happy if you take your business somewhere else and then, you know, if they could service at a I would say at a lower level, then they're happy to come back and pay the higher price.
And, or if they're missing the technology, which is generally the biggest thing they miss, So they come back to us and say, we really need that better technology, whether it's the waterborne, whether it's the products that help their productivity and their plans or whatever it is, that generally is important because once it's showing up in their manufacturing line. And once they're manufacturing, people have to account for it, that's when the purchasing people have less power.
Thank you.
Our next question comes from Patrick Fisher of Barclays. Please go ahead.
Hey, guys. This isn't Patrick. This is Mike. We've had on for Duffy. Hey, I guess circling back to volumes, volume seems have decelerated the last three quarters, even if we exclude some of the customer assortment changes, maybe just talk about how we should think about volume trending into 2Q in the back half?
And then maybe I was hoping you could quantify how much volume or the volume impact from the businesses you passed on in the quarter?
So I think I'll pass on saying how much we pass on. I think that's it varies by business and it varies by region. But what I will tell you is that, in the second quarter, we're still anticipating, a little bit softer on the volumes. But when you look at the 3rd fourth quarter, you're seeing us comping against a different environment from the 3rd fourth quarter of 'eighteen, plus we see the stimulus impact, going to be a positive. We see, the U.
S. Continue to be a good market. Mexico continuing to be a good market, and some slight recovery in architectural in Europe. So I think there's enough things out there that give us a good confidence level that our predictions are going to be, relatively accurate
And Mike, I'm not going to add. I think the volume erosion, if you look over the past 4 quarters or 3 quarters, as you mentioned, has really come in the industrial segment. That segment had been producing 3%, 4% volume growth up until really the third quarter last year. And everything we've seen in that particular segment's really been macro driven. Obviously, with China auto coming off, European auto coming off, the halo effect of that around the general industrial businesses that get affected by kind of Tier 1, Tier 2 suppliers.
So then that's all macro. And again, we're, we're going to anniversary some of that as we go into the back half of the, of the year here.
And, Mike, just to put that in perspective, we had 13 quarters in a row, a positive volume in our industrial coatings business. So, I'm not going to, I don't like this quarter, But, we're still, you know, looking at our sales teams doing a very good job out in the marketplace.
That's helpful. And then if I could drill into aerospace, strong, solid green. And when I look at your slide and above market, growth in every region. I was hoping maybe you could talk a little bit more about what's driving that growth, whether it's product mix or new share gains or other factors that's, driving the above market growth there?
Well, it's actually a factor of everything. Sealants business continues to gain share. Our coatings business continues to gain share. And, certainly our Transparency's business, has done a phenomenal job of winning new programs, left and right. So, you know, every one of those is a positive.
You have commercial errors, you know, commercial is doing very well. Military is doing very well. And the only semisoft would be the general aviation, but our biggest customer, who is very large in that general aviation market, is winning share So we're also affiliated with the right customer. So, you know, we did factor into our 2nd quarter guidance some of the most recent commentary from one of the large OEM plane makers. But overall, you know, we're going to have a very solid, second quarter in a record full year in aerospace.
Great.
Thanks, guys.
Thanks, Mike.
Our next question comes from Gary Chamoy of Longbow. Please go ahead.
Hi, thanks. Now that margins have recovered year over year and pricing is, it looks like a set the outpaces. If there's any lessons over the last couple of years that you could take forward, if inflation does again start to ramp, so that you can offset inflation maybe, faster than expected?
Yeah, I'll let Mike answer the question, but I want to make sure for our sales people on the phone, our margins are not recovered. So, we'll be very clear on that. We still have room to go. Go ahead, Michael.
So clearly, as I tried to explain the last time, there were two vents that clearly impacted the rate of initial early recovery. And the first one is, you know, our friends in Cleveland bought Valspar. I think, the Valspar team, without speaking for one of my peers, they were a little slow off the block. That was a challenge. We were trying to buy our friends in the Netherlands, At that time, they immediately went into a mode of saying
they were going to grow 4% volume.
And that does work in an environment where raw materials are going up, you need to be focused on getting prices up. So the competitive environment is a challenge at that point. Of us got off the dime and we're moving quicker than the others. Now every, not everybody, but most everybody is on looking at their margins and getting a lot of pressure from their shareholders and they're trying to recover margins. So I think that's one lesson learned.
And maybe the other lesson learned is, we need to stick to it and we should have walked away from some volume a little bit earlier. And so maybe that's a lesson learned.
This is just going down, I think $10,000,000 from $55,000,000 to $60,000,000 previously now to $45,000,000 to $50,000,000. Is that part of the cost savings program? Is there something else going on?
Hey, Garik. That's our normal seasonal trend. Our corporate costs are historically higher in the first quarter for some different reasons. And then the 2nd through 4th quarter normally are at a lower level, but similar.
Our next question comes from Jeff Zekauskas of JP Morgan. Please go ahead.
Nippon Paint, seems to have agreed to buy Dulux in Australia. Was that, a property that you were interested in and you didn't wanna pay as much they paid or was that just not a property that interested you at all?
Jeff, this is Michael. What we always tell everybody is on every acquisition in the coatings paint and specialty product space that we have, we're always interested in looking at everything. And Just because we don't get something doesn't mean that we aren't interested. But what I will tell you is that, you know, if we were, always winning, then people would be concerned. But at the same time, every company makes their own decisions about what is the right, price to pay and how does that, impact their shareholders?
And so I would say different people have different answers, for the exact same acquisition. So all I will tell you is that we try to be active. We try to look at everything But, for PPG, right now, we're very comfortable where we are.
Jeff, that's Vince. I'll just add that, you know, I think you know this, of course, but we have a very good architectural business in Australia and growing business there. So, we are, on the continent.
And we're number 2, on the continent.
Okay. Can you talk about what your operating cash flow was in the quarter? And and are you having a very different experience in your raw materials in your raw material price changes in the United States versus your raw material price changes in the offshore markets. And that It seems that, you know, propylene's pretty weak in the US, but the oil price is really lifted in the offshore market. So Are we seeing inflation in the offshore markets and deflation in the domestic markets?
And again, what was your operating cash flow in the quarter?
Yes, Jeff, I'll take the first one and then I'll jump on the second one. So the operating cash flow, was a use of cash, I believe, was $66,000,000 use, which is less of a use of cash than we had in the first quarter of last year. We'll have a full cash flow statement released here shortly when our Q is filed. Yeah, Jeff, I'm going to I do want to mention something we were pleased with the results in the quarter, but one of the metrics we were not pleased with was our we had a little bit of growth, in working capital. A couple of the causation factors there.
We, along with most other companies, build a lot of inventory around Brexit. And now that that's been extended out, we'll be able to work that down. Michael mentioned, we went we're going live with a new ERP system in our refinish business in the U. S. We built inventory ahead of that.
As a contingency. And, both the Sem acquisition and the recently closed Woodford acquisition obviously have to step up that inventory as part of acquisition accounting until that inventory flows through cost of sales. And that's a high level of inventory at a retail price. All that being said, we got to get our working capital down to prior year levels. We had the teams in last week talking about that specifically.
So we're focused on that. So again, better working, better cash flow than last year, but still more room to go. With respect to raw material inflation, We don't see any differences really at this point, by geography. We think it'll be more driven by supply demand as opposed to the things you mentioned. The supplydemand situation is different in each of the major regions.
And that typically, especially in a light volume environment, that's typically more of a predictor of which way the raw materials may go by region, but we haven't seen anything to date.
Jeff, the only thing I'd add is, Latin America South. So if you go all the way down to the southern part, that's more U. S. Dollar base. So the weakness in the currency can have impact.
So, but no real material. And when you think about our total sales and Latin America South, that's, not a material number. So you should not assume that there's a material difference between the regions.
Okay, great. Thank you so much.
Thanks, Jeff.
Our next question comes from John McNulty of BMO. Please go ahead.
Yes, thanks for taking my question. Michael, you had indicated, I believe, not only were there supply disruptions in Texas, but it looked like there may have been some in China. Can you articulate what products are affected and what's necessarily disrupting that supply and also the timing on when you think it'll be remedied?
Well, let's start with the original issue going back a year ago as the Blue Skies initiative for China in 20 team led to a lot of disruption. And we saw coming into 2019 that they had delegated from Beijing to the provinces, the enforcement of environmental actions. And so, they were much more focused on employment. And so supply was much more readily available, but once they had the explosion in Jiangsu province, this has led that province to get much more aggressive on some of the underperformers. And so the impact of things that you probably can't see in your numbers, but think about the, antibacterial products that you might buy to make sure the pain in the cans are, healthy.
That would be one There are some unique epoxies that would be coming out of there. That would be another one. But overall, what we see is that it'll take a little while for them to resort themselves out. What we're paying most attention to is what the enforcement level is gonna be post, the next, say, quarter 2, quarter 3, whether it's just going to be contained in the Jiangshu province or whether they're going to re get much more aggressive, if you will, and re institute the controls out of Beijing, that's what we're paying attention to.
It. Thanks very much for the color.
Yes. Thanks, John.
Our next question comes from Stephen Byrne of Bank of America Merrill Lynch. Please go ahead.
Yes, thank you. We've seen PPG sales reps in the Home Depot paint aisle. I just wanted to ask you, what's the scale of that initiative? And is it getting any traction with respect to either driving more paint in Home Depot or specifically PPG brands versus bear?
All major suppliers to all the major home centers have sales reps that are covering their stores. Depending upon the agreement with the various vendors, you get x amount of sales rep per x amount of stores. So, the good news is I think the Home Depot team has a very solid approach where everybody's focus on the customer and driving conversions in the store. And that's the metric that they hold us and our, competitors are com, accountable for. And I think our teams have been doing a very good job in, Home Depot plus some of our other retail partners, as I said on my opening remarks, you know, we had positive comps, at the other, you know, large DIY change, which is, good, but it's it's we're not doing anything different than what our, peers are doing.
And Vince, you mentioned that active acquisition pipeline given your commitment in Home Depot. Is that pie line that you're looking at include any potential shelf space expansion within Home Depot to branch out into different products within the retail DIY channel?
Yes, I wouldn't call that acquisition, a possibility. Again, we work with Home Depot on what products and what value we could bring to them on a product by product basis. So again, I wouldn't consider that to be any type of an acquisition relationship.
Our next question comes from Mike Harrison of Seaport Global Securities. Please go ahead.
Hi, good afternoon. Michael, I was wondering if you could comment in a little more detail on the weakness that you saw in the Latin America architectural market during the quarter. I know you mentioned that the timing of the Easter holiday was a factor. Can you maybe talk about other factors there and whether you've seen those trends improve?
The only other factor that is relevant is really the fact that we have, done a lot of value, selling up the chain. So when we bought Comex, there's been some additional technology brought in. So there's a lot more premium products being sold to the the coverage of the premium products is better than the, what I would call, the value, products. So that leads to a little bit on a share or I would say not share, but the volume numbers being negative. But when you look at the overall impact to the, EBIT, it's very positive.
So we actually, even though our volume was marginally down, we actually had a record, quarter for the PPG, Latin America team and we're anticipating the same. Overall, though, the timing of Easter, there's 2 major holidays in Mexico, Easter and Christmas. And Christmas doesn't move, but Easter does. And that's the impact. So we're we kicked off our Easter promotions, you know, a couple of weeks ago.
And so all that falls in the second quarter instead of the first quarter.
Got it. And then in the protective and marine business, it looks like that marine piece is growing faster than the protective piece. Wondering if you could just comment specifically on marine and the growth rate that you're seeing in those key markets, I I I feel like you've said in the past, you've said you have pretty good visibility, on, on what's going on in the marine business. So is the strength there going to be sustainable?
Yes. So we started picking up orders in the the second half of twenty eighteen, they're generally painted ships 12 to 18 months after the order comes in. But this is off a very low base. So the marine business is probably down 60% from its peak. So we're coming off a very low bottom overall, the business though, you know, is positive both in protective and marine that lead that double digits and, we anticipate that trend line continuing.
Our next question comes from Dmitry Silversteyn of Buckingham Research. Please go ahead.
Good afternoon. Thanks for taking my call. A quick question on the sort of the construction market. And I know you've sort of pushed off the question on weather and how big of an impact it had on construction, but other companies were not so, shy about, citing weather as a delaying factor in getting the construction team in North America ramped up. Have you seen anything, improving in terms of March 1st couple of weeks of April here, that can give us confidence that that market is coming back and whatever built up demand and backlog, your contractor customers and stores.
Are experiencing will be fulfilled over the next couple of quarters?
Yes, Dimitry, this is Vince. One of the issues we had with the comparison in early April is the Easter timing. Easter fell very early in April last year. So really the proxy is diluted. In order for us to compare.
You normally can get a good compare by now, but it's a bit diluted. I would say we're not displeased with what we've seen in April, but it's too early to call and whether we're seeing, some pickup from March.
Okay. All right. That's it. Thanks, prevents. Second question, in the 3 acquisitions that you've done, that you're carrying into 2019, what kind of revenue contribution should we be thinking about, for these businesses.
Are we talking about 1% to 2% incremental growth to your organic growth or is there going to be something lower than that?
Tometri, this is John. I'll take that. So annualized these 3 acquisitions total about $400,000,000 of annual revenue. The majority of that is going to be in Industrial Coatings, Whitford and Hellrath, both sitting in the Industrial Coatings segment. In our initial guidance, we provided in January, we said about $250,000,000 benefit this year.
That could be a hair higher because we have been able to complete both acquisitions a little bit faster than we originally thought.
Okay. Okay. That's helpful. And then finally, on the Refinish side of the business, you talked about the overall market being flat, a little bit of about 1% decline or so in collision rates in Europe and, U. S.
Your business was down volume wise, you know, you talked about low single digits, so let's say 1% to 2% Is that in line with sort of what the market declines you saw? Or are you still, kind of suffering from, from, being the price leaders and therefore, we should see that that performance improve as the unfolds and you recapture some of this business?
I think, last year, we were a scotch below the market, you know, 1%, maybe. But, overall, when I look at our customer base, and what I see in the market, and the fact that we're still having a number of shop wins, I feel comfortable that we're, relatively close to the market.
Got you. Okay. Thank you very much. Thanks, Dimitry.
Our next question comes from Lawrence Alexander of Jefferies. Please go ahead.
Good afternoon. 2 quick ones then. First, for the share gains above the market in the aerospace, is your spread against the market getting wider as you look at the wins that you have in the pipeline, or should we think of it as roughly steady state? And Secondly, on raw materials, can you give us a little bit of a, longer term kind of perspective on how you're thinking about your raw material chain? Because several parts the channels, suppliers appear to be talking a lot more than they used to about higher hurdle rates for reinvestment.
And so are you worried about, or are you seeing any risk of capacity in your raw materials lagging your expectations for demand growth over the next, say, 3, 5 years?
Well, I'm not worried about, them investing right now because their incremental margins are very high. So if you look at most of our suppliers, won't name names, you can do it yourself, but, they've had a very good run the last 3 years. So I'm not, I'm not worried about them from that standpoint. I think our, short term perspective you know, we said it would be low single digits on the low side of low single digits. We still see that.
We're still holding to that. And so, I think we're in the right spot. Lawrence?
Yes. And Lawrence, your first question on aerospace. Again, I think what we've this is an industry that values technology. So it really, really plays into our sweet spot. I think we've been able to work with our customers wouldn't say gaining share, but we're gaining more than our share of new products or new entrants into the new products that are they're putting into the marketplace.
So that's really where we're winning in aerospace.
Our next question comes from Jim Sheehan of SunTrust Robinson Humphrey. Please go ahead.
It correct to say that the Woodford and Hemmelrath acquisitions are, those businesses are below average PPG margins? And if so, how long you think it would take for you to expand those margins to average levels?
Jim, it's as Michael said in his prepared remarks, Sem is performing at above their segment margins. That was a highly highly accretive acquisition for us. Good array of products, very well recognized brand in the marketplace, and that's performing above segment. Woodford and Hemmelrath will come in as traditional acquisitions below segment margins. And it'll take us 12 to 18 months to scale those up as we work through the synergy capture.
Perfect. And regarding M And A And Global Coatings, how would you characterize deal multiples in the sector Do you think they're mostly frothy or are you seeing some reasonable numbers today?
Well, Jim, it really differs, based on geography, based on market end market. So it's hard to call, singular answer to that question. There are certainly things that we looked at as we probably won't act on or didn't act on. And there's other things, based on synergies and post multiples that we have an interest in. So it really just depends, it's episodic by what's out there today.
And again, I'll just reiterate, there's a, there's certainly activity in the marketplace.
Yes. And Jim, the other thing I would add is, We bought some, Whitford and Hemmelrath, and each one of them had a different multiple. But the way we look at it is post synergy, what does that multiple look like? And they were all in the single digit range. So, you know, you have to really parse these things into the acquisition, what you're paying, what your synergies are, what your growth is.
And so there's a lot of other factors So you just can't look at just the multiple.
Our next question comes from Kevin Hasavar of Northcoast Research. Please go ahead.
Hey, good afternoon, everybody. Vince, you mentioned, pricing that you realized pricing a little bit quicker than you thought here in the first quarter. And you also that it might not be the high watermark for the year. So does that suggest that in the second quarter you'll see a bit of a higher year over year growth rate in pricing? And then I think on last quarters call, you mentioned about 2% of the 3% to 5% constant currency sales growth would be from price Do you view that as having a little bit of upside based on how the year started?
Well, two things. We do expect the higher absolute dollar pricing Q2 versus Q1. But I'll remind you, last year, we started to get price throughout the year. So again, we're stacking on top of a harder comp. So the percentage remains to be seen, Kevin, but on a pure, stack dollar basis, we definitely expect higher Q2 pricing, than in the prior Okay.
Got you. And then on the, you mentioned in the press release, ready to take action if need be on the cost savings front. Is that just simple blocking and tackling in areas where there might be weakness? Or is there PPG has done $800,000,000 type cost savings programs a couple of those over the last couple of years? Or is that something bigger, like that?
No, I think those comments are primarily focused on what you would call traditional blocking and tackling. We can't hide from the fact that the economies out there is choppy. There's a lot of things that aren't within our control. And we we if we see something going sideways or down, even in a more draconian, way, we'll take whatever decisive actions we need to take, and that could be deeper than blocking and tackling. But, I think the, the mention we had in, in the prepared remarks is really around blocking and tackling.
This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
Thank you, Andrea. This is John Bruno again. I'd like to thank everyone for their time and interest in PPG. If you have any further questions, please contact our Investor Relations department. This concludes our 1st quarter earnings call.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.