Good afternoon, everyone, and welcome to the PPG Industries Second Quarter 2018 Earnings Conference Call. My name is Jamie and I will be your conference specialist today. After today's presentation, there will be opportunity to ask Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to John Bruno, Director of Investor Relations. Sir, 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 2018 financial results conference call. Joining me on a call from PPG are Michael McGarry, Chairman and Chief Executive Officer and Vince Morales, Senior Vice President And Chief Financial Officer. Our comments relate to the financial information released on Thursday, July 19, 2018.
I will remind everyone that we have posted sales commentary and associated 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 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 update 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 Becker.
Thank you, John, and good afternoon, everyone. Let me start by reminding everyone that we communicated on June 28th that PPG's audit committee had completed its investigation into allegations of violations of PPG's accounting policies and procedures. We have filed restated certain quarterly periods within those fiscal years in order to correct PPG's previously issued financial statements. The restated financial statements, additional details regarding these restatements, and the findings of the investigation are contained in PPG's Form 10 KA, and Form 10 Q that were filed on June 28, 2018. As you all know, PPG has been in existence for 135 years and has earned a reputation as a highly ethical and credible organization.
I am disappointed that there was a need to restate our financial statements. Our audit committee and I are participating in the oversight of the remediation plan. As I said in our press release, we are 100% committed to take actions that are consistent with our ethics and values and fully meet the expectations of both internal and external shareholders. Unwavering adherence to our core standards of financial integrity and honesty remains a top priority and a focus for all PPG employees. To date, we have made good progress addressing the corrective actions identified during the audit committee investigation.
I am personally committed to ensuring that PPG will have a robust control environment and look forward to reinstating our reputation. As we have disclosed, we have proactively communicated with the SEC on this matter. It is PPG's policy not to discuss matters that are being reviewed by regulatory bodies. Finally, I want to share my appreciation with all our stakeholders for your patience as we have worked our way through this investigation. Now I will move on to our 2nd quarter results.
Today, we reported 2nd quarter 2018 financial results. For the second quarter, our net sales were approximately $4,100,000,000 and our adjusted earnings per diluted share from continuing operations were $1.90. This represents an adjusted EPS growth rate of nearly 6% for the quarter, which included benefits from a lower tax rate year over year. And higher logistic costs during the quarter, which we partially offset with selling price improvements and strong cost management. In addition, we continue to For the second quarter, our reported net sales were up almost 9% while our sales in local currencies increased by about 6%.
Supporting the higher local currency sales were volume growth of more than 3%, with balanced contributions from both of our reporting segments. For the first half in aggregate, volumes grew nearly 2%. Selling prices increased more than 2% in the 2nd quarter, marking the 5th consecutive quarter of improvement over the previous sequential quarter. While modest and overall magnitude, in certain business units, we continue to decline some volume as we pursue higher selling prices and prioritize margin recovery. Foreign currency translation was still favorable year over year, but by a lower amount in comparison to the first quarter, as the US dollar strengthened during the quarter against several key currencies.
Sales were favorably impacted by approximately $90,000,000 from current translation and pretax income favorably impacted by about $15,000,000. We expect foreign currency translation to turn to a headwind in the 3rd quarter based on current exchange rates. Looking at some of our business trends in the 2nd quarter. The Performance Coatings segment, Aerospace Coatings delivered an excellent quarter with slightly more than 10% volume growth led by above 3 performance in the US and Asia Pacific. Automotive Refinish continue to grow organic sales by mid single digit percentage supported by above market performance in all regions.
Architectural coatings EMEA sales volumes were down slightly in the quarter at consumer demand is due, and we're prioritizing selling price initiatives. Sales volumes in Architectural Coatings, Americas And Asia Civic grew at low single digit percentage, aided by continued strong organic sales growth in the U S. And Canada company owned stores. Volume in our DIY business in U. S.
And Canada were slightly higher as sales to lows continued, albeit at a lower rate than the prior year. Also, we benefited from a successful launch of our award winning PPG Olympics Steyn products at the Home Depot. Sales volumes also grew at our Mexican PPG Comex business, including the benefit of opening an additional 52 stores. In the second quarter. Protective and Marine coating sales volumes increased with continued strong protective coating sales in Asia.
The Marine business has stabilized at a low base and is expected to gain more traction in 2019. Our Industrial Coatings segment delivered solid organic sales growth of approximately 3%, which included continuing improvement in selling price from the previous quarter. Sales volume and packaging coatings were up mid single digit percentage as the adoption to our Inteville interior can coatings products continued. Selling price increases were also achieved. Automotive OEM coatings sales volumes increased at low single digit percentage and were similar to Global Industry Automotive Bills.
This business outperformed the market in Europe and Latin America, as expected in China, our sales volumes increased by high single digit percentage, matching the improved industry build rates for the quarter. We also continue to grow sales volumes in our general industrial business went above market growth rates in Europe and Latin American regions. In addition, our general industrial selling prices continue to gain traction in the quarter. From a regional perspective For the company overall, sales volume growth was the highest in the emerging regions. Sales in the Asia Pacific region were driven by strong growth in our aerospace, automotive refinished and protective coatings business.
Sales in both China and India grew at low teen percentage. Our China business met our expectations of a strong quarter after a softer first quarter. Going forward, We anticipate sales growth in China could be more uneven as recent uncertainties around trade policies and tariffs potentially impact economic activity the country. Sales grew at a high single digit percentage in Latin America, supported by continuing out performance by the businesses and industrial coatings segment and strong automotive refinish and architectural coating sales volumes growth. Sales volumes were higher year over year in Europe, a mid single digit percentage increase in the Industrial Coatings segment was offset by slightly lower sales in architectural coatings EMEA.
We anticipate that the industrial coatings business will continue to deliver growth in the 3rd quarter as regional industrial production remains favorable for a broader continued economic recovery. Sales volumes were also higher in the US and Canada in the second quarter, supported by strong sales volumes in our packaging and aerospace coatings business, along with solid sales growth in automotive refinish business. From an earnings perspective, our 2nd quarter adjusted earnings per diluted share of $1.90 was nearly 6% improvement versus the prior year quarter. Our earnings were impacted by elevated raw material and logistics costs in place in the quarter. Including the impact from elevated oil prices.
In aggregate, raw material inflation was about a mid single digit percentage increase year over year and in play similar to what we experienced in the aircraft and availability of transportation equipment, were also higher in the second quarter 2017. We expect both these costs to remain elevated during the third quarter. In the second quarter, we continue to make progress on our selling price initiatives. Prices increased by more as both of our reporting segments realized higher selling prices. We have secured further price increases for the third quarter and will continue to prioritize collaborating with our customers on further selling price initiatives.
In addition, to selling price initiatives, we are making good progress with our efforts on raw material efficiency. As one example, we now expect to further reduce our TiO2 requirements by more than program is tracking to our targeted savings. And in the second quarter, we initiated a new restructuring program to help mitigate the previously announced architectural customer assortment change and to further offset the inflation we are experiencing. This new program will result annualized savings of about $85,000,000,000 upon full implementation. In aggregate, we expect these restructuring efforts to deliver in the second half of twenty eighteen.
In addition, earnings per share benefited from our ongoing cash deployment actions This includes the impact of our repurchase of more than $450,000,000 of PPG stock in the 2nd quarter. In the quarter, average diluted shares outstanding were Our effective tax rate was 22% in the 2nd quarter, which is lower than the 24% rate from the second quarter 2017. The reduction is related to recognizing reform legislation that was implemented at the start of 2018. We still anticipate a full year tax rate between 23% 24%. As we look ahead, we still expect continued positive momentum in overall global economic growth.
Our third quarter sales are typically lower than the 2nd quarter due to traditional seasonal trends, and we anticipate normal seasonal patterns this year. The heightened uncertainty around certain recent trade policies could create uneven growth by region and industries in the second half of twenty eighteen. In particular, we are closely monitoring our business in China for any possible impacts. Currently the new tariffs are starting to add some modest cost to exchange rates to have an unfavorable impact to our sales in the third quarter. Based on current rates, the unfavorable impact is expected to be between 60 to $80,000,000 for the third quarter.
Specific to our businesses, we expect housing starts in the U. S. To continue to improve in the second half of twenty eighteen. We believe that U. S.
Regional Automotive Industry bills in the second half of twenty eighteen should be higher than 2017 due to the natural disasters that last year impacted automotive production. In Latin America, we anticipate similar economic expansion as we experienced in the first half of twenty eighteen. Growth rates in Asia are expected to modestly decline in the second half, mostly driven by uncertainties in China. We expect automotive build growth rates in China to grow in the 3rd quarter, but at lower levels than those realized in the 2nd quarter. We expect economic expansion to continue in India after a very strong first half.
Economic Growth in Europe is expected in use market trends are expected to continue driven by positive growth in industrial production and automotive bills. For PPG, this regional growth will tempered by subdued architectural coatings demand. We will continue to manage all elements of our business within our control to ensure that we remain competitive regardless of economic conditions. Based on the current cost environment, we anticipate that our selling price and cost management initiatives will drive improvement in our Industrial Coatings segment margins by the fourth quarter of 2018. As previously communicated, our sales of PPG Olympic products in to lows have stopped at the end of the second quarter.
As I mentioned earlier, our launch of PPG Olympic Staying products into the Home Depot has met our early targets and we are pleased to be working more closely with the outstanding team at Home Depot. We expect that the net impact of these customer assortment changes will result in reduced 3rd quarter Performance Coatings segment sales of between 202.50 basis points, and thus PPG's total sales between 100 to 150 basis points for the remainder of 2018. With the actions we have already taken, plan to take in the coming months, we fully expect to offset the margin impact to this net sales loss in the year 2019. We are continuing to invest in growth initiatives, including targeting certain growth spending in the third quarter with plans to spend up to an additional $5,000,000 similar to the second quarter. Finally, we ended the 2nd quarter with about $1,100,000,000 of cash and short term investments which continues to provide us with significant financial flexibility.
We remain committed cash in 2018 on acquisitions and share repurchases as part of our previously communicated target to deploy a minimum of $3,500,000,000 in 20172018 combined. The acquisition pipeline in our industry remains active We continue to be highly interested in participating in our industry's consolidation, but will remain disciplined in our approach. We plan to continue and now Jamie, would you please open the line for questions?
To ask a question, questions. And our first question today comes from Christopher Parkinson from Credit Suisse. Please go ahead with your question.
Thank you.
Can you just give us a little color on the breakdown of the raw material basket and what you're currently seeing as well as your general outlook for the second half of into 'nineteen? And also just how you're assessing the potential to further raise prices in order to recover your margins? Thank you.
Well, let's start with the easy one first. We have, price increases announced in the second quarter and we'll we are evaluating and we'll be announcing further. Increases, as we speak. So, that's the easy one. The pressure on raw materials, think about propylene as a significant, driver of that.
So you have, emotions up. That's a significant one. Of course, you got, that relates up, then you have the pressure coming from the higher oil prices that's impacting solvents And then, you have packaging costs are also up. And then, my favorite, of course, is epoxy. So those are all, ones that we're feeling pressure on.
The good news is for a number of these things, we're taking actions. So whether it's a TiO2 or we're trying to optimize the formulas, and I mentioned earlier, 1% lower consumption packaging where we're looking at how do we optimize our packages, that one as well. So I would say those are the primary pinch points, Christopher.
Thank you. And then also
I think we all understand why focus remains on architectural volumes given recent developments. But can you talk about what you're seeing on a sequential basis in your general outlook for general industrial coil packaging and aero, just how should we think about the growth there and also the margin contribution in the short and long term? Thank you.
Okay. Let me see if I get all the businesses you mentioned. We'll start with aerospace. Fantastic business, terrific performance, I mentioned on the call that, we're going to be up, 10% and we were up 10% in the 2nd quarter. Strong performance across all the different platforms, whether it's sealants, packaging, transparency, coatings, all of them doing well.
Military is strong. Commercial strong and we see, general aviation coming back. So, you know, a, a very solid team performing at a very high level in that regard. General Industrial, the places that are, I would say, on the upper end of the range, you know, so automotive parts are continuing to do well. Electronic materials, probably low single digits, wood kind of flattish, coil doing well, as you can imagine, that's a strong commercial market, Transco doing well, appliance we started to see a little slowdown in appliance.
You know, you had the trade uncertainty, the tariffs. So I think our our appliance guys are are going to be looking at this, a little cautiously. I don't see demand change. But I do see, inventory, in the system work in progress change. Of course, heavy duty equipment remains, a very, very strong.
So, Christopher did I catch you?
And about last one is packaging, Christopher. I'll tell you this is Vince. The packaging business for us is I know you know, has been a good performer as we introduce our, PPA and I Technologies further. We continue to outperform the market of mid single digits this quarter, a market that's low single digits, We expect that to continue where we're in the middle innings of the BPA conversion process. So we still, we still feel there's a good runway left.
Thank you.
Our next question comes from David Begleiter from Deutsche Bank. Please go ahead with your question.
Thank you. Michael, on the U. S. And Canada company owned stores, strong performance in Q2, also strong performance in Q1. What did the market grow either in Q2 or Q1 and or combined?
And how are you outgrowing the market as it appears you are?
First of all, I don't know that we are growing, anything, but at the market rate, I think if you look in our presentation where we have the heat chart, you'll see that we're we've color coded ourselves at market for US. So that would be my first comment. I think, you know, this trend of, you know, strong performance in stores, as you know, this has been a multi year effort to close the gap in that area. And, the team has worked really hard to close that gap. And, you know, we're getting price.
The market is strong. And, of course, the shift from DIY to do it for me is what's really driving why the trade business is outperforming the DIY business.
Very good. And, Michael, and Vince, just on the $85,000,000 of costs, can you break down between how much was allocated to Lowe's and how much is this designed to offset the the other cost inflation you highlighted.
Yeah, David. This is Vince. You know, walking around numbers, certainly more than half or close to 2 thirds would have been allocated to to support, you know, what I would call our not only not only our customer assortment change, but
our I'll look at it geographically, our U.
S. Business. And the remainder was would be rest of world. And we won't break it any finer than that. But we we are battling, as you know, David, raw material inflation everywhere.
So rest of world, we're trying to offset that with pricing. And the other lever, obviously, is with, efficiency and cost. And then again, portion for the U. S. Would be split between our, architectural business and other businesses.
Our next question comes from John Roberts from UBS.
Solvent usually follow oil more closely than other raws. And you mentioned propylene as well. In the industrial segment, I think, probably has more exposure to petroleum based raws. Is that the biggest difference of the different margin performance we have between the two segments this quarter?
I would say that is certainly one significant factor. You know, you got us the epoxies that are in there as well. And, so when you when you look at the raw material basket. And of course, the other factor is, you know, it's much more difficult to get price with our global large OEM customers. And although we are starting to get it, it lags on the other businesses.
So we're, you know, you could see how we, you know, in Performance Coatings side, that gap, you know, has close much quicker than the gap on the industrial coatings segment.
That's John. I'll just reiterate what Michael said. We're out with customer increases. Or excuse me, selling price increases to our customers in Q3. Certainly, a portion of those are pointed at our industrial segment and and the businesses within that segment.
And then we we've we're comfortable we'll get traction with some of those, certainly increases.
Then, Michael, I think you mentioned the new tariffs were having a modest impact on your Chinese raw material costs. What would be the raw material most sensitive to the tariffs, that have gone in.
John, for us, probably the most sensitive and direct one is what we call tinplate. So you can imagine A lot of tin goes into paint cans. And so that's the one that, you know, we're watching most closely, with respect to the, to the tariffs that are announced.
Great. Thank you.
And our next question comes from Ghansham Panjabi from RWB. Please go ahead with your question.
Thank you. Good afternoon, guys.
First off, on auto refinish and your of moderating growth in North America. I think you called out lower collision claims and miles driven in
the second quarter. Do you view that as part
of the normal shifts in the market during per year or is there something more secular that concerns you?
Well, the miles driven is only up like 0.2% And typically miles driven is, more driven by the, you know, economy and employment. So, you know, this is a clear sign that, people Ubering around and, taking shared vehicles and public transportation and that as having a slightly, I would say, very modest impact on miles driven. Collision claims, I would say is much more cyclical. So you're gonna you should have less accidents during the summer. Than you will have during the winter.
And, of course, you know, we will start to see the impact to some of you know, my favorite activity, which is hail, which doesn't hurt anybody, but yet leads to a lot of opportunities for our refinish business. So, That will be something that, you'll have some offsetting that's a positive during the August, September timeframe.
Got it. And then on Packaging in Asia and the share loss that you experienced as part of your price increase initiatives, this business theory has high switching costs, guess were you surprised at the share loss or was it sort of the coatings on the outside of the cans? Thank you.
Well, I would tell you that the our Asian customers are willing to send messages much more frequently than our, U. S. And European customers. So even there are there are switching costs, sometimes they'll want to punish you. As you know, we've had, five quarters in a row of price increases.
So one of the reasons why our volume was up, the quarters, people have, you know, stopped punishing in us, but in Asia, that, some of that behavior still exists.
Got it.
Thank you, Michael.
Thank you.
Our next question comes from Bob Koort from Goldman Sachs. Please go ahead with your question.
Thank you very much. Maybe extending from that a bit, Michael, you had obviously very good volumes this quarter, 2 out of the last 3. And I think you'd suggested maybe in the past that the underlying demand was better, but there was some blowback from the price hikes. It seems like your competitors now are playing ball or at least talking of the same more aggressive moves on pricing. So should we expect that we can see this and more GDP type volume growth in the future or is it still too early to call?
Well, first, I think it's too early to call because we're going to continue to prioritize margin recovery. 2nd, I think we're going to be a little bit hampered as we try to explain in the prepared commentary with the impact of the customer assortment change at Lowe's. But by and large, we do see, more customers taking price, we see, more of our, more of the market talking the same need to have margin recovery So there should be less opportunity for people to shift volumes around to take advantage of, you know, what I would call salespeople who aren't paying attention.
And can I ask on Europe? It seems like architectural trends there have been pretty uninspired for quite a long time. And I guess I always envision paint market is being fairly constant, maybe low growth, but reasonably sustained growth. Why can't you guys get better volumes out of the European markets in architectural?
Well, again, I would say that's a bit choppy. You know, so we've done exceptionally well. If you go back the last 3, 4, 5 years in the UK, had a little bit of a setback in the Benelux when the people that were not, you know, maintaining the house. There's a large rental market in the Benelux. And they kind of prioritize cash recovery for a while.
Now they're back painting. So we do see fairly decent growth there. The Eastern Europe, I would say, is slightly better. The big challenge is France is our biggest market by far, Bob, and, retail is soft. And, you know, the one thing I would tell you is I was just over there, you know, a month or so ago, And I saw more cranes over in Paris than I've seen in a long time.
Consumer sentiment is up, I've been joking with my friends over there. The French 1, the World Cup. Hopefully, that'll take them to spend a little more money, but we do have to recognize that there is some portion of our business that people have a choice of where to spend their discretionary dollars. And right now, they're much focused on experiences than they are in home improvement. Unlike in the U.
S, where you're getting a pretty significant return on your investment when you put money in your house. Absolutely not. And, you know, the good news is, you know, we're doing pretty well, earnings wise. We just need to continue to capture our fair share.
Our next question comes from Frank Mitsch from Wells Fargo. Please go ahead with your question.
Hey, good afternoon gentlemen. And Michael, that World Cup cuts both ways. I'd imagine that productivity was probably a little bit lighter, over there over the past several weeks. I wanted to
But I don't accept that excuse from my team.
I, I, I, certainly, I could understand that it would not be applicable to, to a company based in Pittsburgh. Want to come at the pricing question just a little bit differently. You've got a string of positive year over year prices. I think it was like 0.1% 3Q, 17, 1% in 4Q, 1.6% in 1Q, 2.2% in 2Q, Is this something that we, you know, and you've got pricing initiatives in place? So should we think about the, the order of magnitude of price as is kind of accelerating here, and and we're going to be approaching that that 3% mark.
How do we think about the overall magnitude of of price?
Well, I do think price is accelerating. And I think that's a reasonable assumption to make And I do think that there's more to be, asked for and gotten in this marketplace When we think about the logistics, now we stack logistics costs on top of raw material costs. So our sales teams are heavily focused on that, capture.
Gotcha. Gotcha. And, and then also going back on, looking at the, the lovely heat map seems to be, a fair amount more green on the screen, now, relative to last few quarters and a little bit less red. And I think you were saying you're expecting end use market activity comparable to the second quarter. So understanding that, you know, seasonality takes it down from 2Q, but on a year over year basis, it seems like, it seems like absent the issue with with Lowe's, that you're still calling for a pretty good volume quarter.
Is that correct?
Well, I certainly would like to see that confident the team recognizes the importance of getting price first. So, I would say your conclusion are probably, accurate.
And Frank, I think our, as Michael said in the prepared remarks, we generally feel the economies around the world are pretty healthy. And we think there'll be so in Q3, obviously, depending upon global trade discussions. So right now, we're running at a fairly good clip in most of our end use markets.
Thanks, Frank.
And our next question comes from Jeff Zekauskas from JP Morgan. Please go ahead with your question.
Thanks very much. It looks like your cash flow from operations was down by about $250,000,000 year over year for the first half. Is that roughly right? And are you going to be able to generate the same amount of cash you did last year, in 2018 or because of higher raw material costs that's too high of BARDA reach?
Yes, Jeff, I think your numbers are fair. The biggest, cash use we have for the 1st 6 months of the year, even though our working capital as a percentage of sales, is even with last year, our sales are up. Do we exit more working capital in terms of dollars? And that's the by far, that's the biggest use of cash year over year. But your numbers are accurate.
PPG used to generate much more cash than it did net income. And your cash conversion over time has really come down where you know, it's more or less equal to your net income. Do you have any targets or plans as to what your cash conversion should look like over a longer period of time?
Yes. As I think you're aware, Jeff, the last 3 years, we've shaved roughly 100 basis points off of our working capital as a percent of sales. And in some of those years, we were growing sales. So that was a the big contributor was the 100 basis point reduction. That's still our target this year.
And, again, I think, that will be will allow us to grow our operating cash flow higher than our earnings to your point.
Okay, great. Thank you so much.
Our next question comes from Kevin McCarthy from VRP. Please go ahead with your question.
Yes, good afternoon. Your corporate, line under operating profit, looks like expense declined materially in the second quarter on a year over year basis. And that was the case in the first quarter as well. Would you comment on what's driving that and what your outlook is for future quarters there?
Yes, I'll comment on the difference in John's going to probably comment on the outlook. So Kevin, we made a significant amount of effort over the past couple of years. In some of our, cost pull, such as pension and OPEB costs. Those have driven, that corporate expense line down. In addition, the past, this year and past year, the incentive comp number for the Corporation has also been lower.
And finally, we did have in the first half of the year positive, intercompany foreign currency. This would be assets and liabilities between our foreign affiliates in our domestic obviously, our our our our headquarter parent company. When when currencies move, we have to take those intercompany balances and true them up to dollars. And in the first half of the year, for both quarters, that that was a positive. We do expect some of that to reverse as currencies have flipped John, do you have the forecast for that?
Yes, Kevin, this is John. So for the second half of the year, we would be looking at between $75,000,000 $90,000,000 for both quarters. I think as you go into next year, I think the run rate will come down from 'sixteen. So I think a lot of people have been looking at the 'sixteen run rate And, through a lot of efforts, a lot of different actions, whether it's benefits and pensions or through workforce reductions, we have a lower base now. So I expect our run rate going forward to be lower as well.
And just for clarity, the $75,000,000 to $90,000,000 is total for both quarters.
Understood. That that's helpful color. And then second question, if I may, relates to your new restructuring program of $85,000,000. What are the sources of those savings? And then I think you made a comment that you expect $45,000,000 to $50,000,000 in the back half of 'eighteen, but I think that included your old program from December 16.
So maybe you can help us understand the flow through on the new $85,000,000 and how much will be this year versus next?
Yes, Kevin, John, again. So, let's talk about the 16 program. We have most of those actions are done. So now we're realizing the benefits, and that's working out to be a 13% to $15,000,000 quarter benefit, per quarter that should sustain itself into Q1 of next year. The new program has started.
We're going as fast as we can with the program. Probably be at a full run rate early 'nineteen, but really a significant contribution as we get into Q4 on that program as well.
Our next question comes from Patrick Lambert from Raymond James. Please go ahead with your question.
Hi, good afternoon. Is the reception okay?
I can hear you, Patrick. It's just a French, Patrick.
Yeah. It's it's pretty far away from from you guys. A few questions. The first one, concern. I think your comments on EMEA Deco volumes that you somehow let go if I if I heard correctly during the the the comments, where do you think these volumes have gone?
If I may ask. First question, maybe I'll ask you a question later, following your answers.
Yeah, Patrick, this is Vince. You know, as Michael said, you know, we're, we're prioritizing selling prices in the region over over volume. There is a marginal volume that are going to folks who are not following the same philosophy as us. And as you know, particular, because you live in the in the region that, there are several much smaller players in the region than you would find, versus the U. S.
Market. So there are folks who are willing to, take substandard, substandard profitability business.
Yeah.
So mostly lower players, smaller players, you know, picking up volumes. Yeah. The second question regards the, again, sorry, I could not understand completely the low impact in H2, how to model the top line of of the the lack of of contracts there.
Yes. So, It's 218. Right. Patrick, this is John. So the 120 to 150 range represents the net impact.
In revenue, total revenue for the company.
Okay. And the last one last question on industrial margin. I think the I think there's about a good 400 basis points year on year difference have a EBIT margin. Is OEM the as you as I heard, the the OEM is likely to be the largest contributor to that. But is there any any big discrepancies between the other, subsegment of industrial, that can explain that, that big gap?
Yes, Patrick, we typically don't buy our business unit. Business unit details below the reporting segment. And my again, as Michael alluded to, you know, we we have very large customers in that segment. Global customers. They're typically good at deferring price increases.
We're starting to get traction as you see in the numbers now, and we expect that to continue.
And so we expect the prices, acceleration also in industrial, actually maybe more pronounced in industrial
We expect further pricing in both reporting segments, correct.
Our next question comes from Don Carson from Carson. Please go ahead with your question.
Thank you. Michael, you mentioned that you said in fuel margins could be better year over year by Q4. Are you expecting gross margins for the overall company to be better? Year over year by Q4 or as part of that improvement in industrial, also some of your, your cost cutting?
Hey, Don, I'm going to take this. For us, we're looking at the reporting segment margins, which is what Michael was alluding to. That would include, pricing actions, but also the cost actions that John mentioned. So it'd be a cumulative of both of those to get us on a reporting segment basis, on a year, flat year over year.
So said another way overall, you're going to get improvement in gross margin year over year till you get into calendar 'nineteen for the overall company?
Too early to call 'nineteen, Don. We're tracking the get to Q4 reporting segment margins flat, and that would include some benefit from items below gross margin.
Okay. And then a follow-up from USA.
We are totally focused on the second half of the year and getting this margin recovery.
And a follow-up on U. S. Architectural. 2 questions. 1, do you need more price there given that, you know, emulsions continue to go up and and solvents and packaging costs are going up as well.
So do you have a third price increase on the table? And then secondly, you've been getting such good volume growth in in your company stores. Is there any thought to accelerate your expansion plans on on the company storefront in the US?
So, there's no question that there's a raw material price pressure in the architectural U. S. And it's, the other one, is logistics costs. And that's not just from, you know, our DCs to our our customers, but also from our plants to our DC. So you got 2 levels of, logistics costs in there.
So we are actively evaluating the appropriate timing for that. We're not in a position that we can talk about that. But that is under active, evaluation. As far as the store expansions are selective in that, you know, so we've added in the markets that we're best in. So, think about the Texas market that an area that we've continued to invest in.
But we're selective on where we're doing that. And, we will do that on an as needed basis. You know, obviously, we're more aggressive in Canada where we're the market leader and we're less aggressive in certain segments where we're, far away from the market leader.
Our next question comes from Duffy Fischer from Barclays. Please go ahead with your question.
Yeah, good morning, good afternoon. First one, just Michael's comment on FX being negative $60,000,000 to $80,000,000 in Q3, was that a sequential or a year over year number?
Copy, this is John. That's a year over year number. That's a
sales number. Sales number, Doug.
Yes, okay. And then, Could you parse out the big buckets of raw materials? We've talked around a lot of different pieces and parts, but, you know, epoxy, solvents, TiO2, which do you see moderating in the back half and which do you see continued pressure upwards and, you know, do you get any relief in the next year in any of those buckets?
Well, I think we've talked about TiO2 moderating. So I think that one, we see supply increasing in TiO2. So, I think that's, we're pretty consistent on that. The propylene one, you know, though, is a bit of concern for us. If you look at it propylene in the U.
S. Is up 28% year over year in the U. S. And 30% year over year, in Asia. So there's still more pricing pressure likely to come through anything that touches, propylene.
In oil, the solvent derivative, the oil derivative of solvent, your guess is good as our stuffy.
Yeah. But, but WTI is up 40% year over year and Brent's up like 50% year over year. Thanks, Duffy. Thanks, Duffy.
Our next question comes from Steven Byrne from Bank of America Merrill Lynch. Please go ahead with your question.
Yeah, was there anything that kept you from being a little more aggressive about share repurchases in the 2nd quarter just looking at the share price, thought you might have been more aggressive, but perhaps it's a reflection of what you're looking at in your, M and A pipeline.
Yes. I think you answered your own question. So, we are always trying to keep our powder dry so that we can do, acquisitions. And, we're always looking at the pipeline that we would prefer to do acquisitions. That's number 1 in our target list.
But if we can't do it, we're not going to let the cash sit on the balance sheet, so we're going to put it to work. So, I think, that's how we're looking at.
Yeah. And, Steve, we set all quarter, the very active pipeline in the coating space. There's certainly in our mind going to be deals done this year, whether we're the, one who, who, who, who, who tracks the deals or not. Remains to be seen. We're going to remain disciplined, but it's an active pipeline right now.
Very, very good. And on the inflationary cost pressures, we've you've talked a fair bit about the raws. But on the logistics side, would you say that that shift between those 2 is becoming a little more problematic on the logistics and transportation side. And does that do you have the power to push price costs? Is it is is it as challenging as it is with, higher raw material costs, or does it give you a little more you know, support on pushing price?
Well, it's certainly not the magnitude of the raw material increases, right? But it's, it's an adder. You know, so, you know, if you think about high jumping, it's and another foot to the high jump bar, and all our customers are impacted by that. Some of them can argue, well, we don't buy oil, we don't buy this, and you should offset the raw materials. I can assure there's no customer that isn't impacted by logistics increases.
So that makes some of the selling argument that we have out there easier to sell because they can't deny that.
Very good. Thank you.
Thank you, Steve.
Our next question comes from John McNulty from BMO Capital Markets. Please go ahead with your question.
Thanks for taking my question. With regard to the logistics, can you give us a rough idea of what that actual nugget is for you in terms of percent of your either costs or sales, just so we have a clue and then how to think about how much it's up year over year?
Well, again, a number we typically don't like to give out, John. It's certainly in the sing single digits called mid single digits as a percent of sales. Kind of give you some kind of guardrails. Right now, it's up, a double digit percent as most companies are seeing.
Okay. Fair enough. And then I guess if I think about, if I think about the costs or the raw materials, I guess, and price, I understand it doesn't necessarily work on the margin percentages, but if I'm doing the math right on mid single digit cost inflation and 2% plus price, looks like the 2 kind of net each other out. Are we thinking about that right? And then if that's the case, I guess, when you think about bucketing, where some of the other headwinds are, how should we think about the bigger buckets and what the real pressures were this quarter?
The 2 netted out, I think we'd be having a different dialogue right now, John. We're still climbing the hill to get our raw materials back with price. As you pointed out, we've made good, good progress, good traction. But we, we still got more to do. And then as Michael mentioned, we're stacking now on top of that freight.
Some of that freight goes in the gross profit line. So that might be another element for you to consider. But we're we're we we have more work to do.
Okay, great. Thanks for the color.
Our next question comes from P. J. Juvekar from Citi. Please go ahead with your question.
Yes. Thank you. So, Michael, I think you mentioned that you have reduced your TiO2 requirement by 1%. Is that correct? And if it's true, then is that permanent?
And just tell us how did you achieve that? And how much savings can you get from that?
Yes. So the first question is, it is permanent and it is how you formulate the paint. So unless you're a paint chemist, I'm not sure you'd fully understand the way we're doing it, but it is the spacing of the TiO2 within the, the formulations. If you want more chemistry lesson, I'll get you in here with our Chief Technology Officer. But the bottom line is it is permanent and, this is something that we're working on.
We have a number of suppliers at early ingredients that, are dedicated to helping us work on the TiO2 spacing and you know, you had the hiding as well. And so they're also working on the hiding. So, these are all things that the team is working actively on.
So that's good. Yeah, I would like to talk to your scientists to understand that better. And then secondly, one of your competitors started TiO2 pass throughs. Have you thought about doing either pass throughs of TiO2 or any other raw material, which would reduce volatility in your business and maybe allow you focus more on innovation? Yes.
So I guess, P. J, we have not seen that initiative any of these single raw material initiatives have not really been, successful. What's more successful is if you tie a basket where all the basket goes up or all the basket goes down and the and the netting of that basket, And so we have a number of different pricing mechanisms with our customers, and they're all unique to the marketplace. So that, we try to work collaboratively with our customers, to get the price and some customers want it in fashion A and some want it in fashion B and someone in C And D. So we are we try to be unique with our customers, but this single thing of, like a single TiO2 doesn't typically work you know, whereas a freight surcharge might be something that would take some, you know, might be beneficial, but that's generally not the way we do it.
Okay. And I just have a clarification question on your comment earlier. You mentioned that you expect uneven growth in China. Is that more of a slowdown in China? And have you seen that so far or is that an expectation?
Thank you.
No. We have not seen it. And it's all going to be, you know, the tariff related. Right now, through the first, whatever it is, 18 days, I, you know, of the sales reports that I've seen for, China, they're having July, very similar to the second quarter. And, so we're just on the lookout for that.
Okay. Thank you. Thanks, P. J.
Our next question comes from Vincent Andrews from Morgan Stanley. Please go ahead with your question.
Thanks. Just 2 quick ones. Could you help quantify the extra shipping day from a volume perspective? How much did that help in the quarter?
Yes. Vincent, it was, this is John. It was mostly related to Mexico and the U. S. And, so specific to those businesses and, probably total revenue 50 basis points or less.
Okay. And just as a clarifying question, I think the comment earlier was that you expect TiO2 to moderate in the second half. I just want to make sure you are you saying that the pace of the increase is going to be less year over year or you're actually the price to go down? Thanks.
I would say the, the, it should be very moderate increases, if at all.
Our next question comes from Lawrence Alexander from Jefferies. Please go ahead with your question.
One clarification and one, your larger picture question. Can you just clarify when you commented on the the sequential trends will reflect normal seasonality. Is that supposed to, is that remark about the segment trends attended to be before or after the lows adjustment that you then break out? And secondly, a bigger picture question about the balance between pricing and productivity, and innovation as ways to offset the raw material pressure. Are there other opportunities to do a similar kind of blitz as what you've done on TiO2 at, you know, on some of the raw materials that you use to sort of materially change your input.
And can we expect the same split between productivity and price as a way to get margin back to be sustainable over time or, or is it going to get tougher to keep, finding new sources of restructuring opportunities?
So, Lawrence, I'll answer the first one and Michael will take the second one. The the, I numbers we gave you with respect to the the customer assortment change and seasonality. You should take the seasonality effect first and then take the math on the customer assortment change after that.
Yes. And just to make sure you're clear on that, so the second quarter, you have the big boxes building inventory in inventive of paint season. So now they have their inventory. They're going to work through their inventory to see how the year goes as they're so they're ordering less as the quarter goes on. In regards to the formulations, every one of our scientists to work on formulations are, encouraged to look at the total cost of the formulation And so whether that's optimizing the TiO2, the solvent blend, the resin, or, you know, how do they get more solids in a coating versus, the alternative, all those things, you know, packaging, how can they deliver more active ingredient in a package versus less.
So there's multiple different ways to look at And we we don't mandate only TiO2. We're toe looking at the total cost of the formulation.
And Laura, just your question on overall innovation, I think it dovetails, the we have formulators who do this. That's cannibalization of an existing product. We prefer to be in a certainly a much more amiable raw material environment, and we could shift their their resources to to creating new to world type products. So this is cannibalizing from our ability, to spend as much R and D as we would on innovation. We we also have process or, process innovation teams who try to allow us to, to produce this in a more efficient manner.
So from a manufacturing perspective, they work on that as well.
Our next question comes from Arun Viswanathan from RBC Capital Markets. Please go ahead with your question.
Great. Thanks. Good afternoon. Quick question on volume. What would you say are the buckets that you're that give you the most concern, as to why you wouldn't keep this, this 3% plus Crip clip going, would it be Europe, you know, you know, some Asia or Latin America or And then maybe by business line, you know, any areas that you're specifically worried about?
Well, the first one is retail, Europe would be the highest one. Next one would be Brexit. The next one would probably be, I would say the uncertainty around China, you know, we're not seeing that yet. So it's probably a a guesstimate at this point in time. But when I look at the other businesses, I mean, you know, PMC is at a cyclical low.
And so, you know, that's probably not gonna get anything but better from this point on. Aerospace continues to perform well. Refinish continues to perform well. Surprisingly, the OEM Automotive had a a good first half of the year, slightly better than expectations. And, we see no reason why the second half won't continue.
The only negative there, of course, is, whether or not people were trying to buy ahead of the tariffs, right? So we won't know that. Just yet. But, you know, we still see more transitions to our packaging of Innovell products. So there's still more gains we had there.
And our industrial business, continues to perform well. So, I guess, the main ones are China, retail, and Brexit.
Great. That's helpful. And then, Just had a question on price versus raws. I mean, if we look back, this industry has done a pretty good job of, of, you know, recapturing raw material inflation, and and sometimes even pricing over raws. You know, it looks like now there was, you know, maybe an exacerbated lag, you know, maybe due to, the M and A activity last year.
But, is there anything else that has changed structurally as to why it's either taking longer for you guys to, achieve price or, to to offset inflation, or is it, you know, that the volume picture is just weaker that your customers are pushing back more? Any thoughts on, if there's been any larger scale changes here?
There's been no industry change clearly, there's probably more people, focused on cash right now. And because of that, they're making certain decisions. You know, for us, you know, we're, you know, we're gonna be in this business for a long, long time. And so, were prioritizing the margin recovery. I don't think there's been any change, though.
And then lastly, on M and A, you discussed that there was likely to be, you know, high activity this year. I mean, you know, is there any heightened kind of aggressiveness on your part to to be involved in that? You know, with their, you know, private equity folks, are they dropping their return requirements, you know, in valuations? I mean, what would it take for us to to see some more deals from you guys this year?
Well, the private equity is really not a factor in this space. You know, they can't match the synergies that, the strategics can bring to the table. So, you know, we do get outbid at times. That's a fact of life. You know, we're going to remain disciplined.
But, you know, we do know what's in our pipeline. And we are certainly actively engaged with the number of people. The biggest challenge is what I talked about on the first quarter where the bid and the ask had widened because of raw material inflation. So they're not getting their margins back, and they want to get paid on I'll have to call it their best 12 months in the last 36 as opposed to that we want to pay on the current performance. So that's what the bid and the ask differential is.
And our next question comes from James Sheehan from SunTrust Robinson Humphrey. Please go ahead with your question.
Thank you. On your auto OEM performance, looks like in most regions, you were performing at or above the but in Asia Pacific, you're below the market. And I'm not used to seeing that. What can you provide some more color on Asia Pacific auto OEM?
Yes. There's 2 primary factors that drove that. 1 is we still have in our numbers, Australia, where the were still an operating plant a year ago. And then the other one is our share in Korea. As you know, the Korean business is significantly impacted.
And so that's it. If you if we drew our box around, India and, China, we're doing very, very well, and I have absolutely no concerns to, so it's really, those two factors that are driving that.
Thank you. And on the accounting investigation, you wrapped up your own probe, but then I think there's also an SEC probe. Can you talk about the expected timing of that investigation?
We have absolutely no idea what the SEC timing will be. And we won't be able to share anything with it until it was finalized anyway. So, We'll be totally transparent, whenever we can be. But right now, we have no, insight into what they're thinking.
Thank you.
Thank you. Thanks James.
No additional questions. I'd like to turn the conference call back over to management for any closing remarks.
Thanks, Jamie. I'd like to thank everyone for your time and interest in VPG. You have any further questions, please contact Investor Relations. 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.