Good morning. Thank you for joining The Sherwin-Williams Company's review of second quarter 2018 results and expectations for the full fiscal year of 2018. With us on today's call are John Morikis, President and CEO, Al Mistysyn, CFO, Jane Cronin, Senior Vice President Corporate Controller, and Bob Wells, Senior Vice President Corporate Communications. This conference call is being webcast simultaneously in listen-only mode by Issuer Direct via the internet at www.sherwin.com. An archived replay of this webcast will be available at www.sherwin.com beginning approximately two hours after this conference call concludes and will be available until Monday, August 13th, 2018 at 5:00 P.M. Eastern Time. This conference call will include certain forward-looking statements as defined under U.S. federal securities laws with respect to sales, earnings, and other matters.
Thanks, Jesse. Good morning, everyone. We've provided a supplemental slide deck with a breakdown of our results by reportable segment on our website, sherwin.com, under Investor Relations July 24th Press Release. Consolidated sales in the second quarter 2018 increased $1.04 billion or 27.8% to $4.77 billion. Compared to pro forma combined results from second quarter 2017, consolidated sales for the quarter increased 7.5%. Consolidated gross profit dollars in the second quarter increased $304 million or 17.5% to $2.04 billion. Consolidated gross margin in the second quarter was 42.7%, compared to 46.4% in the same period last year. Selling, general, and administrative expenses increased $154.1 million or 13.4% to $1.31 billion in the second quarter, decreased as a % of sales to 27.4% from 30.9% last year
The decreases in both gross margin and SG&A as a % of sales is primarily the result of a mix effect from the inclusion of Valspar. As a reminder, second quarter 2017 included only one month of Valspar results. Interest expense for the quarter increased $36.8 million to $93.5 million. The increase was entirely due to the acquisition-related interest expense. Consolidated profit before tax in the second quarter increased $29.1 million or 5.7% to $538.1 million. Our effective income tax rate for the second quarter was 25%. We expect our core effective tax rate for the full year 2018 to be in the low 20s. Second quarter diluted net income per common share increased 26.5% to $4.25 per share from $3.36 in the same period last year.
The $4.25 includes a $1.23 per share in acquisition-related expenses, including purchase accounting and amortization, and a $0.25 per share charge from environmental expense provisions. Valspar operations contributed income of $0.91 per share in the quarter, net of incremental interest expense. We've summarized the second quarter earnings per share comparison in a Regulation G reconciliation table at the end of our second quarter 2018 press release. Let me take a few moments to break down our performance by segment. Sales for The Americas Group in the second quarter increased $187.4 million or 7.7% to $2.63 billion. Comparable store sales in the U.S., Canada, and the Caribbean increased 6.8% in the quarter. Regionally in the second quarter, our Canada Division led all divisions, followed by Southwest Division, Southeast Division, Eastern Division, and Midwestern Division. Sales and volumes were positive in every division.
Currency translation reduced net sales in U.S. dollars by 50 basis points in the quarter. Second quarter segment profit increased $37.2 million or 7% to $569.9 million. Second quarter segment operating margin increased 20 basis points to 21.7% from 21.5% last year. We realized an $8 million unfavorable swing in other income for The Americas Group compared to second quarter last year. Turning now to Consumer Brands Group. Second quarter external net sales increased $241.3 million or 45% to $777.7 million. Incremental Valspar sales from April and May 2018 increased group net sales 42.7% in the quarter. Revenue reclassification related to the newly adopted ASC 606 reduced net sales by 5.1%. Segment profit for the Consumer Brands Group in the second quarter increased $14.8 million, or 19.5%, to $90.9 million. Segment profit for the quarter includes a $28.5 million charge for purchase accounting-related items.
Segment profit as a percent of sales for the quarter decreased to 11.7% from 14.2% last year. For our Performance Coatings Group, second quarter net sales increased $608.2 million or 79.9% to $1.37 billion. Incremental Valspar sales from April and May 2018 increased group net sales 72.9% in the quarter. Currency translation rate changes increased segment sales $5.1 million, or 67 basis points, in the quarter. Segment profit for the Performance Coatings Group in the second quarter increased $81.8 million, or 131.3%, to $144.2 million. Currency translation rate changes decreased segment profit $2.5 million in the quarter. Segment profit for the quarter includes a $47.6 million charge for purchase accounting-related items. Segment profit margin increased to 10.5% from 8.2% last year. I'll conclude my remarks on the quarter with a brief update on the status of our lead pigment litigation.
In our Santa Clara County, California lawsuit, we expect the trial court judge to issue a preliminary decision in August regarding the amount of the abatement fund. This preliminary decision will be in advance of a hearing on this topic currently scheduled for August 17th. We have the right to appeal if we disagree with the judge's ruling on the abatement fund amount. In addition, on July 16, we filed a petition for cert with the U.S. Supreme Court seeking discretionary review. We expect to hear whether the Supreme Court accepts the case during the fourth quarter of 2018. In the interim, we have filed a motion to stay the Santa Clara County, California proceeding while the Supreme Court petition is pending. We continue to believe that the judgment of the California court conflicts with established principles of law and is unsupported by the evidence.
That concludes our review of our operating results for the second quarter. Let me turn the call over to John Morikis, who will make some general comments and highlight our expectations for the remainder of 2018. John?
Thank you, Bob. Good morning, everyone. Thanks for joining us. I'll offer my comments on our second quarter results in just a few minutes. I'd like to begin by focusing on our outlook for the full year. As you read in our press release this morning, we're raising our full-year outlook for diluted net income per common share. This increase in our guidance is based on several factors that give us confidence in the second half of the year and beyond. First, our teams delivered a solid performance in the first half. We exited the quarter with strong sales momentum, which is usually a reliable leading indicator. Second, the positive demand trends we see are broad-based across most businesses and geographies, which should support our growth expectations over the balance of the year.
Third, we have great confidence in the ability of our operating teams to execute on growth initiatives, manage expenses, and implement sufficient pricing to offset lingering raw material inflation. Finally, we feel good about our progress on the integration plans and synergy targets we laid out at the beginning of the year. As for our specific guidance, we expect third quarter consolidated sales to increase at a mid to high single-digit % rate compared to the third quarter of 2017. Keep in mind, June 1st marked the one-year anniversary of the Valspar acquisition, which makes third quarter 2018 the first quarter in which our results will be fully comparable to last year. For the full year 2018, we continue to expect core net sales to increase mid to high single-digit % compared to full year 2017.
In addition, the incremental sales from Valspar in the first five months of 2018 added approximately $1.85 billion to consolidated revenues. As we've described on previous calls, the many moving parts in last year's results and this year's guidance can make it challenging to understand our underlying earnings per share performance. We believe the most meaningful way to view guidance is to back out the Valspar acquisition-related costs and other one-time items. On this basis, we are updating our expectation for our full year 2018 adjusted diluted net income per common share to be in the range of $19.05-$19.35 per share, a 27% increase at the midpoint compared to the $15.07 we reported last year on a comparable basis.
This adjusted EPS range excludes $3.80-$3.90 per share in transaction, integration, and purchase accounting expenses, and the $0.25 per share charge we took in the second quarter for environmental provisions. Compared to the full year earnings guidance we provided three months ago, this revised range reflects our confidence that we will more than offset the earnings dilution from the rollout of the Lowe's partnership we discussed on our first quarter call. We've included a Regulation G reconciliation table with this morning's press release to better illustrate all the moving parts. Our adjusted results in the second quarter were records for any quarter in our history in terms of net sales, gross profit, and profit before taxes. Underlying demand remained solid across most of our end markets, and the Valspar business continued to add to our momentum.
At the same time, year-over-year raw material inflation was slightly higher than we anticipated at the beginning of the quarter. This was primarily the result of higher than expected propylene pricing in May and June, which affected the cost of many petrochemical components in our raw material basket and resulted in a LIFO charge in the quarter. The LIFO charge, combined with a modest increase in raw material costs versus plan, pressured operating margins in all three reportable segments. At this point, it's unclear whether these factors will significantly alter our full-year outlook for average raw material inflation. What is clear is that we will continue to work to offset these escalating costs by controlling spending and implementing price increases where necessary. Given that we now pass the one-year anniversary of Valspar, this will be the last quarter that we break out core Sherwin-Williams results versus Valspar results.
Today, we are operating as a single integrated company, and from an accounting perspective, the divisions between the legacy businesses are becoming more blurred and less instructive. At this point, measuring operating profit across the legacy Sherwin-Williams and Valspar businesses is both difficult and somewhat arbitrary. All three of our reportable segments made progress in the second quarter in driving revenue growth and profit improvement. The Americas Group continued to focus on growing share of wallet among existing customers, opening new accounts, and driving higher trial across our premium product lines and our e-commerce platform. Same-store sales in the quarter were fairly robust despite continuing market constraints in some regions, which likely pushed some projects into the back half of the year. Sales to residential repaint contractors in the U.S. and Canada grew at a double-digit pace for the 17th time in the last 19 quarters.
Protective and marine coatings in the U.S. and Canada also grew by double digits. In property management, new residential, commercial, DIY, and healthcare segments all contributed to TAG's growth in the quarter. Latin America sales increased 4.4%. It appears that the fundamental demand trends remain strong across the business. The group opened 18 net new stores in the quarter, bringing our total store count to 4,642 at the end of the quarter. Our full-year plan calls for this team to add between 90 to 100 net new stores in the Americas by year-end. TAG segment operating margin increased 20 basis points compared to the second quarter last year, despite the impact of slightly higher than expected raw material costs and the LIFO expense taken in the quarter. Operating margin on incremental sales in the quarter was in the mid 20% range.
Our Latin America business operating margin was negative low single digits, which was a drag on segment profit in the quarter. Gross margin for the segment was down modestly compared to 2017, but SG&A improved as a percent of sales compared to last year. Bob provided results for the Consumer Brands and Performance Coatings Group compared to last year's second quarter as reported. I'd like to look at our results for this quarter compared to pro forma combined results for second quarter 2017 to give you a clearer picture of the underlying performance of these segments. Consumer Brands Group sales increased 1.5% on a year-over-year basis compared to pro forma sales from second quarter last year. As Bob mentioned, the adoption of a new revenue recognition standard reduced revenues by a little over 5% in the second quarter this year.
It was a pretty solid sales quarter on a comparable basis. From a margin perspective, if you back out the impact of purchase accounting items in both years, adjusted operating margin in the quarter was 15.4% this year versus 16.2% on a comparable basis a year ago. The year-over-year decrease in adjusted operating margin was primarily a result of increased costs associated with the inventory build and load in to support the expanded Lowe's partnership, higher year-over-year raw material costs, and a LIFO charge. The Lowe's program is proceeding as planned and gaining momentum. Selected product category resets have been completed nationally, with the remainder expected to be completed this summer. We remain confident in achieving our shared goal of accelerating top growth in the Lowe's paint aisle. Performance Coatings Group revenues increased 11% compared to pro forma combined sales in second quarter 2017.
Sales were up in every product category, most by double digits, led by packaging coatings, general industrial, coil, and industrial wood coatings. If you add back the purchase accounting items, adjusted operating margin in the quarter was flat to last year at 14% on a comparable basis and well above the 12.1% recorded last quarter. This sequential improvement in operating margin is a function of sales volume leverage, successful pricing initiatives, spending control, and integration progress, all of which more than offset higher year-over-year raw material costs and a LIFO charge taken in the quarter. EBITDA, or earnings before interest, taxes, depreciation, and amortization, increased 29% to $1.33 billion in the first six months compared to the same period last year. EBITDA margin for the first six months was 15.2% versus 15.8% in the same period a year ago.
Six-month adjusted EBITDA, which excludes one-time transaction and integration expenses, was $1.40 billion, or 16% of sales. Net operating cash year to date was $579 million, compared to $586 million a year ago. As a reminder, net operating cash in the first six months last year included a benefit of approximately $88 million from settlement of a treasury lock hedge. On June 30, the company had $155 million of cash on hand that will be utilized to reduce debt and fund operations. During the quarter, we declared a dividend of $0.86 per share, paying $81 million in cash dividends. The balance sheet reflects total debt of approximately $10.4 billion. We intend to reduce our net debt to EBITDA ratio to approximately 3 to 1 by the end of 2018. We remain committed to reducing debt by $1 billion by the end of this year.
Our capital expenditures year to date totaled $101.8 million. Depreciation was $144.1 million, and amortization of intangibles was $158.9 million. For the full year, we continue to expect capital expenditures to be approximately $330 million, which is about 1.9% of anticipated sales. As we continue to invest in productivity improvements, systems, and new stores, depreciation should be between $280 million-$290 million, and amortization will be about $325 million, including purchase accounting depreciation of $44 million and amortization of $300 million. We continued opportunistic open market purchases of company stock in 2018 at a level sufficient to offset dilution from option exercises. In the first six months, we purchased 850,000 shares at an average price of $393.12 per share. On June 30, we had remaining authorization to acquire approximately 10.8 million shares.
Finally, we continue to make good progress towards integrating Sherwin-Williams and Valspar into one streamlined, high-performance company, and I believe this progress is beginning to show in our results. Much of the heavy lifting involved in creating a fully integrated North American supply chain is behind us, and a wide range of opportunities to improve our productivity and operating efficiency outside of the Americas has been identified and are in process. We're on track to achieve our 2018 synergy targets and have booked a little more than half of the anticipated annual benefit to our P&L in the first half. Most importantly, our associates across all disciplines, sales and marketing, technical and operations, are embracing the vision and promise of this new organization. I'd like to close by thanking all of our employees who have worked so hard since we completed the Valspar acquisition on June 1st of last year.
I'm extremely proud of the progress we've made, and my enthusiasm for the prospects of our combined organization has only increased over the past year. I'm confident that we'll continue to deliver superior value to our customers and reward our shareholders over the long term. With that, I'd like to thank you for joining us this morning, and we'll be happy to take your questions.
Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is coming from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your question.
Great. Thanks. Good morning, guys.
Good morning, Arun.
Yeah. Thanks, John. Just a question on the raw material outlook. I guess I'm just trying to understand what's embedded in your guidance raise of about $0.55 at the midpoint. Does that assume raw materials are stable from here or decline modestly or increase a little bit as well? Thanks.
Yeah, Arun, this is Bob. As we indicated in our prepared remarks, the raw material inflation for the industry in second quarter was slightly above our expectation, and that puts it just above the high end of our 5%-6% inflation range for the full year. We originally said we expected raw material inflation to peak in the second quarter and moderate in the back half. And based on the recent move in propylene and some of the crude oil derivatives, we now believe that year-over-year raw material inflation will be higher than we originally expected in the third quarter, and we expect to see pricing stabilizing in the fourth quarter, probably as opposed to declining meaningfully. Our raw material outlook has changed somewhat, and that's embedded in the full year guidance.
Thanks, Bob. On the tax rate, you're now guiding to the low 20s. When we look at that, you'd previously guided at 20%-25%. You're basically saying that you expect a 1%-2% average lower tax rate for the year? If so, does that equate to about $0.20-$0.30 of EPS? Maybe you can just talk about that.
Yeah, Arun. I do believe we're going to be in that low 20% mark. I think based on a lower first quarter and where the year estimate was, I think that equates, it's closer to your $0.20-$0.25 a share. We did have goodness in our second quarter. We are consistently looking at lowering our tax rate. One way to do that is by consolidating foreign entities, and we have a large number of foreign entities today with Valspar. It's just hard to predict timing and sometimes magnitude of those changes. We did have a consolidation in our second quarter that lowered the tax rate to that 20.5% core. That helped drive the full-year tax rate to the low 20s.
Great, thanks. Just last thing on the comp store sales. Do you notice an acceleration? We noted acceleration from 5.2%-6.8% in the quarter. Does that break out at, say, 4% volume, 3% price, or 2.8% price? Both of those accelerated sequentially, or was it a slightly different makeup? Maybe you can just talk about your outlook for the rest of the year on comp stores. Thanks.
Yeah. The price mix effect, Arun, in the quarter was approximately 2.5%. I would say our outlook for the comp stores going forward is very strong. We're feeling the momentum that we have here is terrific. Mentioned the res repaint business, the protective and marine, all growing very strong. Every segment's moving in the right direction. We're feeling quite positive about our stores, and we think that's only going to continue.
Great, thanks.
Thanks, Arun.
Thank you. Our next question is coming from the line of Gunjan Pradhan with Baird. Please proceed with your question.
Hey, guys. Good morning. Just as a follow-up to the last question on the 6.8% same-store sales growth, do you think that it was weighed upon in any material way from the weather early in the quarter that seems to have tripped up a lot of your peer group as well?
Well, I'd say that what it did do is create some pressure in the sense that first quarter was tough, the construction industry got off to a slow start, not just painting. It's pushed some volume, we believe, into the third quarter. The momentum that we have here, we think is terrific. We think we're growing share, we're growing momentum. I think 6.8% comp is a good number, we believe we're going to continue to grow.
What I would add to that, Gunjan, with [inaudible], is that as we even talked about on our first quarter call, we started off with a wet April. As we progressed through the quarter, sales strength improved, which gives us that confidence going forward in the third quarter and the rest of the year.
Yeah, coming out of the quarter, we're gaining speed coming out of the quarter.
Can you share with us on exactly what that was coming out of the quarter?
No.
We don't want to get that granular by month, but we did see an improvement as the quarter went on.
Just as my follow-up question on the organic volume growth by segment, Performance in Consumer, there's a lot of moving pieces with FX and pricing, et cetera. Can you just kind of break out the volume aspect? Thanks so much.
In the second quarter, we had price across all the segments, and we don't comment about each of the segments in price, but you can bet that it's close in that little over 2% range. FX was fairly mild in the quarter. For the consolidated, it was only up plus 0.1%, and even within the segments are all below 1%. If you just look at the sales of those segments, the rest has to be volume and mix. Performance Coatings was very strong with the double-digit gains on the pro forma. Consumer group had a nice quarter if you back out the Revenue Recognition adjustment that we took, which was almost 5% in the quarter. I would say volumes are up across the board, and we're getting price.
Got it. Thanks so much.
Thanks, Gunjan.
Thank you. The next question is coming from the line of Don Carson, Susquehanna Financial Group. Please proceed.
Good morning. This is Emily Wagner on for Don. Just going back to raw materials, given your higher outlook for the year, at what point would you expect your year-over-year gross margin to recover as well as segment margin recovery?
With our guidance at the midpoint of 19-20, we do expect our gross margins to improve sequentially through the rest of the year. When we'll be able to get over the top of that? We're looking at early next year, assuming raw materials moderate some, as Bob talked about, in the back half. Sequential improvement in gross margin through the rest of this year, and we'll be looking to get on top of the year-over-year margin going into next year.
Great. As the follow-up in terms of the volume growth. It seems like same-store sales, about 4% of it was volume growth. Does that imply that the U.S. market is growing at around 2% for the full year? What's your outlook for underlying U.S. demand growth?
Emily, I think it's safe to say that the DIY business has been a lot slower than the contractor side of the business. That's been true certainly in our own stores. We measure DIY sales through our stores. It was the slowest performing market segment in the quarter. While clearly the contractor business is growing well above that 2% range, I think it's safe to assume that the market's probably growing between 2% and 3%. Our stores volume was a little ahead of 4%.
Great. Thank you.
Thank you.
Thank you. The next question is coming from the line of Scott Mushkin with Wolfe Research. Please proceed with your question.
Hey, guys. Thanks for taking my questions. I guess I had two things I wanted to ask you about. Number one is, obviously everything is going really well for the company. Even, I think, Performance Coatings had a great quarter. As we look out with the Fed raising interest rates, how do you guys think about, as we look beyond this year, just the general part of the business and the fact it's probably a little bit more exposed to the industrial economy?
Yeah. Good question, Scott. Obviously, rising interest rates would potentially have an impact on both the architectural side of the business and the industrial. If you look at the manufacturing sector in June, the PMI increased for the 22nd consecutive month, and the market's expanding in all regions, and production and inventories are growing at a faster pace than they did last year. It's hard to point to any effect that the Fed raising has had on the industrial economy thus far. On the construction and residential side of the economy, we believe the slower residential starts and resales in June are more indicative of supply constraint than they are weakening demand. There may be constraints out there in the market, but they don't seem to be interest rate related at this stage.
Okay. That's helpful. I guess my second question, I think on the last conference call, you guys talked about maybe jumping back into the M&A market. I did want to think about that in context of where we are from a macro perspective and maybe just get an update on your thoughts, how much are assets getting more expensive? Kind of just give us an update on that. That would be great. I'll yield.
Well, it's hard to generalize on the question of, are they increasing the value and the perceived value of the owners or not? I think that varies. I will say this. Most likely these deals in the shorter term will be smaller bolt on that will help us expand technology and maybe add or enhance our footprint geographically. We're out there, we're having good discussions, and we're engaged, looking for the right opportunities. We're not just out looking for anything to put us anywhere. We're very disciplined in our approach, and we're excited about some of the discussions we're having.
Okay. Perfect, guys. Thanks for taking my call.
Thank you, Scott.
Thank you. The next question is coming from the line of Duffy Fischer with Barclays. Please proceed with your question.
Yes. Good morning, fellas.
Morning, Duffy.
Just around the big box business right now, obviously with DIY struggling, big shifts in the DIY aisle. Are you guys seeing any difference in behavior, either marketing programs or discounts from a normal year?
Duffy, if anything, we're seeing a more rational retail pricing environment than a year ago, so we're feeling pretty good about the environment as it exists.
Okay, fair enough. Could you give us some help with the mix shift on the SG&A line? That 27%, is that what we should kind of use to run forward? Or how will that line look over kind of the rest of this year and going into next year?
Yeah. Duffy, the way I look at it, let me say it this way, our SG&A as a % of sales should be down in the second half versus the first half.
Terrific. Okay, thank you, guys.
Thanks, Duffy.
Thank you. Our next question is coming from the line of P.J. Juvekar with Citigroup. Please proceed with your question.
Yes. Hi, good morning.
Morning, PJ.
Couple of questions on your Lowe's business. First, at Lowe's, you wanted to reduce number of combined SKUs and simplify the offering. Can you talk about that? Then you also mentioned the initial fill and loading at Lowe's. Was there any benefit in the quarter from initial fill?
Let me take the simplified product offering, and I'll ask Al to comment on your second part of your question, PJ. We're not going to get into any of the specifics, but I will share with you the overall direction we are taking with Lowe's is to in fact simplify the offering, and part of that comes with less suppliers. Another portion of that comes with the recognition that by simplifying the offering, we can make it easier for both sales associates and the consumer to understand. We feel we have a terrific lineup that's going to be rolling out. We're really excited about our relationship with Lowe's and in the future here, and we think it's going to be an opportunity for us to continue to add shareholder value.
On the rollout, PJ, we're ahead of schedule with aerosols, interior and exterior paints set nationally, and paint rolling out as we speak. The adjusted sales over 6% on the pro forma basis, excluding RevRec, was solid. However, the costs were higher in the quarter for the Lowe's expenses than we had planned, including the raw material increase, higher than we thought, our margin declined. We're not going to break out how much is related to Lowe's going forward. We just want to be sensitive to our customer, and we also want to be sensitive to. They're driving the rollout, and we feel good about where we're at there. That all being said, if you look at our year-to-date margins along with price and good cost control and the volumes we're seeing, our operating margin's up, and I think the team has turned in a solid performance.
Great. Hey, Al, question for you on LATAM. Your sales were up 4.4%, but just in the last few months, currencies have come down significantly. They're down double digits year-over-year. Economy has slowed down, particularly in Brazil. I'm just wondering if you have any comments, given your negative margins in second quarter. Do you see that getting worse before it gets better?
Yeah, because as you know, PJ, the majority of the raw material costs are dollar-denominated. As we see the devaluations, our costs go up. Raw materials are a similar percent to cost goods sold as in the U.S. We're going to be chasing price with the significant devaluations we saw in Argentina, Brazil, and even a little bit in Mexico. That is built into our full-year guidance.
Thank you.
Thank you.
Thank you. Our next question is coming from the line of Bob Koort with Goldman Sachs. Please proceed with your questions.
Thank you very much. I wanted to ask you in the Performance Coatings area, you guys have acknowledged there was some lag in pricing there, but obviously have made up some pretty significant margin improvement. Can you talk a little bit about how much that came from synergies, how much came from price, and then what there may be still on the horizon from latent price hikes that are still working their way through?
Bob, we have pricing that has taken effect. We have more pricing that is rolling in. We're really proud of the team's ability to retain these customers, grow our business while getting the price in. It's a challenging market when you think about what's happening from a raw standpoint. We think we're really teaming up with the right customers. We have great relationships with customers that are trying to grow their business. We're finding opportunities for new business as well. We have good pricing in, more is rolling in, and good momentum. The team's doing a terrific job.
What I'd comment, Bob, on the raw material synergies is, we haven't broke out synergies by segment. What I would say is we are still on track for the $140 million-$160 million in synergies for the year. We booked a little bit more than in half of those in the quarter. Those are really broken out between, I'm sorry, in the first half. Those are really broken out primarily Consumer performance coatings. Then you get some in corporate.
Got it. One of your bigger buys is TiO2. It looks like there may be some conclusion on some consolidation in that industry. I'm wondering, how could that affect you at all? Is there any more desire on your part to engage in some of these longer-term fixed price contracts there?
Yeah. The TiO2 market is kind of in flux right now. You've probably read a lot about the supply-demand balance evolving in Europe. We don't think that that is going to materially affect the market in North America this year. We've commented in the past that we are going to negotiate raw materials in a way that will benefit our shareholders. If that means locking in longer term agreements to ensure supply, to achieve stable pricing, that's a benefit to our shareholders, we would do that. We're cautious about the timing of these longer-term contracts relative to market pricing when the suppliers are
Our teams are very well aware of where we are in the cycle and are adjusting accordingly. We're going in with our eyes wide open, Bob.
Got it. Thank you both.
Thanks, Bob.
Thank you. The next question is coming from the line of John Roberts with UBS. Please proceed with your question.
Thank you. In the supplemental slide, since this is the last quarter we're going to get the breakout between Valspar and legacy Sherwin, could you just comment on the consumer and performance segment on the different growth rates we see between the Valspar and Sherwin contributions there? Is that just the easier comps in the Valspar numbers?
John, I think that we saw 5% growth on the Valspar on a pro forma basis down. On the core Sherwin, if you back out the impact of the RevRec, we're still up low single digits. I'd say that's kind of where we expect it to be. Yes, we're going against a softer quarter, but I think the team is going well. As we looked at the different segments, national accounts other than Lowe's, commercial, Europe, all positive. Like we've talked about in the past, we do have headwinds in that retail segment.
John, to be clear, the teams aren't as concerned with are we selling Thompson's or Cabot. We're just trying to sell. The lines quickly blurred when we consolidated those teams together and gave them one sales goal. We're reporting a number that we're not managing the business that way. We're reporting a comp number, but we're focused on growing sales. We're not concerned with which brand the team sells.
Okay. As a follow-up, now that we're in the third quarter, when we seasonally go into the fourth quarter later this year, should we expect a similar seasonal sales drop to the second half last year? You had Valspar in both third and fourth quarter last year, but maybe seasonally, the EBITDA might decline a little bit more sequentially fourth versus third because you're further along in the cost savings. You had more sequential progress going on last year.
I agree with what your first statement, John, is. That's our typical flow. I would say even though with Valspar and the bigger industrial business, we're less seasonal than we used to be, we still do have a seasonal impact in that third going to fourth quarter. Also, John, to add to that, we are going to achieve more year-over-year synergy benefits in the first half than we will in the second half.
Thank you.
Thanks, John.
Thank you. Our next question is coming from the line of Vincent Andrews from Morgan Stanley. Please proceed with your question.
Thank you very much, guys. Could you just quantify the LIFO charges by segment? Should we be anticipating any further LIFO charges in the third quarter or even the fourth quarter?
Vincent, we're not going to call out the individual LIFO charge by segment. It's a function of increasing raw materials. With the raw costs being up more than what we had thought coming into the quarter, we had to true that up in our second quarter. You estimate what the full year LIFO is, you have to take half of it through your first half, that's what we did, I don't want to be quantifying what those are by segment. It's all part of the raw material increase in my mind.
Yeah, to that point, Vincent, Al's point about the raw material cost increases, that's what drives our thinking about our price to our customers. As we've talked on numerous occasions, we stay very close to what's happened to the total basket of raw materials. When we see that basket move, we've historically demonstrated the ability and our effective pricing through our stores and other businesses here to put that pricing in. No one should question our conviction or our determination to continue to manage those margins. When we see pricing move, we move. As we have historically approached this, our practice is to communicate the price increase to our customers first and then to the investment community. We'll be talking to you about our activities likely in the near future.
Okay. Just as a follow-up. At Lowe's, now that you're the sole paint supplier, has anything changed about the mechanism by which you can sort of adjust prices versus raws in that line of your business?
Yeah. We have a good agreement with Lowe's. We're not going to get into the details of any mechanisms, but suffice it to say, we've got a program that's going to keep us both focused on growing sales and not arguing about price.
Excellent. Thank you very much. I appreciate it.
Thanks, Vincent.
Thank you. The next question is coming from the line of David Begleiter with Deutsche Bank. Please proceed with your question.
Thank you, John. On Valspar, looked like you did better than you expected in the quarter. I think you were expecting $600 million worth of sales. You did close to $800 million. When did that really pick up, and what drove that expected performance?
Well, you have to look at our performance coatings business up 11%. As we talked about in the prepared comments, nearly every one of those segments up double digits. This is a wonderful team that we've inherited with great products, great relationships with customers, and combined, we're finding that it's an even stronger value proposition to our customers. The performance coatings business, as I mentioned before, growing well, and we're implementing the price that we need. We're feeling really good about that and the future. I think there's really a sustainable growth pattern here. Then on the consumer architectural side, again, a wonderful leadership team, great products, and great relationships with customers that we're trying to really leverage to the fullest. We're really happy.
I've often said how thrilled we are with the Valspar acquisition, and I know it sounds a bit repetitive, but I'm happier right now with Valspar than ever, and the future is only stronger for us. We're feeling this has been a terrific move for us.
John, in that business amongst packaging, GI, coil, and wood, had Valspar lost some share that you are now gaining back? Is that helping to drive some of the heightened sales growth here?
No, I don't think so. We've been open about that they've not been out with pricing, but I don't think that they'd lost share. In fact, I think we'd be hard-pressed to point to any single customer that we've lost. We've been very successful in retaining customers and the employees. It's going very well.
Thank you.
Thanks, David.
Thank you. Our next question is coming from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question.
Yes, good morning. Given the raw material backdrop as it stands, at least one of your competitors has pointed to opportunities to reformulate. Do you see any opportunity at Sherwin to reformulate in terms of pigment content, resin systems, or other inputs?
Yeah, Kevin. Reformulating for TiO2 efficiency truly has been something that we've been doing for many years. There are a number of products that are commercially available to help formulators with that. We also have our own proprietary technology that we've developed internally. Our approach to this is very unique. You have to keep in mind that our customers have very high expectations for consistency. When you have the mix of business that we have with a professional painter, close isn't close enough for our customers. We go through an extensive commercialization process. We've got a number of checks and balances. It's in our repertoire of tools that we use, but we're also very cautious in how we approach this to ensure that it, in most cases, ends up with an increased or improved attribute for our customers.
A second question, if I may, on capital deployment. I think you articulated some specific goals for leverage. Just wondering if you could comment on repurchase activity in that context. Looks like you, if my math is correct, you would have purchased a quarter of a million shares in the second quarter, down a bit from 1Q. What sort of pace might we anticipate the back half?
Yeah, Kevin, you are correct. We did purchase a quarter million shares, bringing our full year to date total to 550,000 shares of [inaudible] million. I think if you look over the last three years, our option dilution has been approximately a million shares. We're running a little behind that so far year to date, we'll watch that. We'll continue to look at buying shares opportunistically. We'll look at the options and adjust from there in the second half.
Thank you so much.
Thanks, Kevin.
Thank you. The next question is coming from the line of Mike Harrison with Seaport Global Securities. Please proceed with your question.
Hi. Good morning.
Morning, Mike.
Just looking at the consumer business and the differences in the performance between Valspar and Sherwin, did both pieces have the revenue reclassification, or was it just Sherwin that had the headwind?
Both had the headwind, and it was split 50/50, roughly.
Okay. Was wondering if within that consumer business, you can talk a little bit about what you're seeing in the Valspar China architectural business. How did that do in the quarter, and are you seeing any reason for caution going forward in China?
I would say for both Europe and China, the architectural businesses were positive. We see continued opportunity for profit improvement in both of those regions. We're staying close. We're learning a lot as we go, and we'll be making appropriate investments as we see the opportunity for discipline grow.
All right. Last one, if I could, is regarding the environmental item this quarter. I feel like in the past, you guys haven't backed those out, this one seemed a little bigger and maybe more significant. Can you give us some detail on what that entailed?
Sure, Mike. Historically, we have backed out significant adjustments to the environmental provision. This is one, as you can expect, the timing and magnitude of some of these adjustments are hard to predict. This one in particular relates to one of the large sites that we've been investigating and remediating on an ongoing basis. Quite honestly, there's more to come related to that site. It's just, again, it's hard to predict timing and amounts. As soon as we know it, we adjust the provision and then we call it out.
All right. Thanks very much.
Thanks, Mike.
Thank you. The next question is coming from the line of Ghansham Panjabi with MoffettNathanson. Please proceed with your question.
Hi, thanks. I had a follow-up on sort of looking at the back half and the guidance and how SG&A flows through. If gross margins are going to be under some pressure just given raws to get there, it looks like SG&A will still be under some pretty good control. You keep it around where it is, maybe growing 2% year-over-year. Does that fit with where you're guiding and what you're thinking?
I think we don't walk down the P&L in detail, but I think you're going to see leverage on our SG&A. As our volumes continue to grow, you would expect to see our leverage there. We still have more synergies rolling in in the second half. Yeah, you should expect to see a sequential, like I said, a second half being lower than our first half as a percent.
Rick, to your point, price rolling in as well.
Yeah.
Sure. The price that we have right now, price mix coming in at like 2.5%. It sounds like that's still rolling in, so that might move up to sort of like 3% and then plateau into the fourth quarter. Is that a fair way to think about it?
Yeah, I think, we have prices rolling in. Across the different segments, it doesn't roll in as uniformly as our stores group. Yeah, there's still pricing going in.
Got it. Then I had a follow-up. I'm surprised we haven't gotten there yet. I know it's probably not big for you guys, yet with all the tariff talk around the world and different things, strictly China, is there anything that you're bringing in that's material that we should be aware of in terms of what's sourced overseas that could be subject?
Specifically, we look at the tariff impact on our raw material basket first and foremost. Frankly, at this point, we don't believe the impact of at least the proposed tariffs at this point will impact our raw material basket substantially. Right now, steel and tin plate is where we're seeing most of the effect. It's not material to the raw material basket, certainly relative to the petrochemical portion of the basket and TiO2. As you know, it's an evolving story, and future impacts are not entirely clear. We're keeping an eye on it.
Great. Thanks, guys. Good luck.
Thanks, Ghansham.
Thank you. The next question is coming from the line of Christopher Parkinson with Credit Suisse. Please proceed with your question.
Great. Thank you. I understand it's relatively new, but can you give any broader updates on your Americas e-commerce efforts and how you feel these will evolve over time? It seems like you're in the process of building on the substantive foundation to boost pro-growth and reduce op costs. Just how should we think about this across your relative customer groups, and what inning would you characterize this in? Thank you.
Chris, I'd say we're in the very early innings of what we consider to be a very exciting opportunity. The opportunity here to build on existing relationships and leverage the distribution points that we have in our store are really exciting. When you look at the opportunity to capture additional share of wallet and grow our customer base through these platforms of distribution, this e-commerce initiative is just a natural. The ability for customers to do business with us 24 hours with the ability to understand their projects, and we've got a lot of features that we're building into this to increase the loyalty of our customers to our brand and to our stores. We're in the process of developing more and more features. We're rolling out in different areas, different testing, different areas geographically.
When it all comes together, we're really believing this can help us in quite a dramatic way. It's an exciting initiative for us.
Just a quick follow-up. Can you just talk a little bit more about the recent reduction in some regional housing inventories? Just how should we think about this or interpret this on a relative basis versus the home appreciation that we're seeing? Just what do you think about those two various drivers and how it should drive revenues in Americas? Just any quick comment on residential versus commercial labor constraints would also be appreciated. Thank you.
Yeah, Chris, this is Bob. Let me handle the inventory effect on resales, and then I'll ask John to talk about commercial labor constraints and the like. I mentioned earlier that the slower residential starts and resales are more indicative of supply constraints than weakening demand. That's true both in the new home market and the resale market. If you saw the June print, inventory was at 4.3 months supply. That's very tight. It's up a little bit from the May print, but it's still really tight relative to what's normal. Home prices jumped 5.2% year-over-year, which is a pretty big move, and we kind of consider it to be a trade-off.
While existing home turnover, which has been relatively weak, drives repaint activity, the rising home values and rising equity values amongst stay-in-place homeowners seems to be driving kind of a historic rate of remodeling activity by stay-in-place homeowners. We think baby boomers are kind of leading that parade. If you watch the Harvard Joint Center for Housing Studies leading indicator of remodeling activity for second quarter 2018, it reached an all-time peak of $324.1 billion, which is up more than 7% year-over-year. They expect that rate to remain above 7% for the foreseeable future, even into 2019. It's certainly a mixed bag. We'd like to see more existing home turnover, but it doesn't appear to be harming the repaint and remodel market. As John mentioned earlier, 17 of the last 19 quarters, we've seen double-digit growth in residential repaint. Could that be stronger?
Probably, but we're not complaining. Yeah. To Bob's point, just in traveling with our team, I do hear it from residential repaint customers. More so from new residential, commercial, and industrial customers as it relates to labor. Making a comment that's pretty commonly heard, which is that they could do more work if they had more labor.
The net effect of that, if there's a positive, is that they are able to get more pricing in the market, and it's likely prolonging the cycle here. We continue to hear from our customers the issue of labor.
That's very helpful detail. Thank you.
Thanks, Chris.
Thank you. The next question is coming from the line of Chuck Cerankosky with Northcoast Research. Please proceed with your question.
Good morning, everyone. Related to the last question with regard to the strength in housing values and interest in remodel activity, how does that affect commercial architectural markets that support increasing household formation?
I'm not sure I get the question, Chuck. Do you mean how does that support multifamily development?
Well, that as well, because there's less homes for sale, but also commercial establishments that might be benefiting from increased household formation in particular areas.
Got you. One of the constraints in addition to labor that we're seeing in the market, and it's becoming more and more of an issue, is the scarcity of buildable land. It's extremely expensive to develop raw land into buildable land today, which means, to your point, we're not seeing these communities push out into undeveloped regions of the suburban markets, and hence, there's not as much of the commercial development that springs up around these new communities. Everything from grocery stores to gas stations, movie theaters, schools, hospitals, et cetera. New land development drives development in those projects. What we are seeing, though, that's kind of an offset, is more urban core development. Downtown high-rise development is really strong, and in fact, our people tell us that the published data around non-residential starts, non-residential square footage is probably understating what they are seeing in the market now.
There's a number of small and medium-sized projects that may not be hitting the radar that our people are tracking.
All right. Thank you. Good luck for the rest of the year.
Thanks, Chuck.
Thank you. The next question is coming from the line of Michael Sison with KeyBanc Capital Markets. Please proceed with your question.
Hey, guys. Nice quarter. I think you mentioned adjusted EBITDA for the first half was $1.4 billion. If you think about that on a margin basis, it's about 16%. You think that EBITDA margin improves in the second half of the year versus the first half?
The EBITDA margin should be, yes. The answer is yes. I believe we should see a slightly better EBITDA margin in the second half versus the first half.
Great. If you think about getting to your 2020 goal of 19%-21%, you still got a way to go there, right? Can you maybe remind us of how you ramp that up in 2019 and into 2020 from this year?
Yeah. Well, first you got to start with the demand and the continued above-market demand and sales that we're generating. The price increases that are going in, we'll continue to pursue price increases working with our customers until we can see some relief in the raw material basket. We're going to still have incremental synergies next year. We had talked about we earned $60 million in 2017 at the midpoint of $150 million, we'll get $210 million, and we have a $320 million run rate synergy number coming out of 2018 that we reaffirmed in May at the investor community presentation. I'm reaffirming today. I would add the Lowe's business that we talked about being accretive going forward from a top-line and bottom-line standpoint. Those are the levers that we're going to continue to push to get to that 2020 goal.
Great. Thank you.
Thanks, Mike.
Thank you. The next question is coming from the line of Steve Byrne with Bank of America Merrill Lynch. Please proceed with your question.
Yes. Thank you. What fraction of your sales in your paint stores group would you characterize as being from customers that are very loyal, buy a large percentage of their paint from Sherwin stores versus another bucket that spread their purchases around and aren't terribly loyal? How would you characterize that split? Of that doubling of the market growth at an over 4% volume in the quarter, how would you allocate that between those two buckets?
Steve, I would say that maybe half, slightly below half would be what we would call those primary or true loyal customers. We have a terrific opportunity, we think, to grow share of wallet here. We've got quite a bit of runway there, and the other piece is through the opportunities with new accounts. We're working every one of those angles.
Yeah. Steve, I would just add, I think you can see those initiatives paying off in our comp store results in our second quarter being up 6.8%.
What do you do for those customers that just over half of your sales are from customers that aren't very loyal? How do you change that and change their purchasing behavior?
Well, there's a very detailed program that we probably don't want to share on a public call of activities that we do see. Rest assured of this, we don't open our stores and hope people come in. We're very aggressive in pursuit of customers, in trial, and having discussions about increasing value proposition and helping our customers to be more successful in achieving their goals. We align our people, our products, and our services to help our customers reach their goals. That's how we do it.
Okay, thank you.
Thank you, Steve.
Thank you. The next question is coming from the line of Dmitry Silversteyn with Longbow Research. Please proceed with your question.
Thanks for keeping the conference here going so I can ask the question. Just a quick sort of clarification on the Performance Coatings Group. Or I'm sorry, not the Performance Coatings Group, the Performance Coatings Group. It looked like you've closed some branches. I'm assuming that's part of your kind of a longer-term program to streamline your operations, I just want to make sure that there's nothing more to it than just a rationalization of sites.
No, there's no structural changes. We're looking at making investments in areas that allow us to serve our customers better.
Okay, that's great. On the store additions for The Americas Group, were there any store reductions in Latin America, or is it just net additions in the U.S., Canada portion of the business?
Dmitry, we did have some reductions early in the year, we should be on pace for additions.
Okay. I'm talking about this particular quarter. Last quarter, you reduced the store network by seven, looks like in Latin America, increased a little bit in Americas.
Yeah. One store came out of Latin America in the quarter.
You opened up 19 in the U.S. Okay. That's what I needed to know. Finally, you've talked about pricing, obviously ad nauseam, and I don't want to be the dead horse here, but given that your raw material inflation is a little bit higher, maybe at the higher end of your original expectations, is there a need to get another round of price increases in your company-owned stores? I understand that the DIY channel is its own animal. Just thinking company-owned stores or the price increase you got at the end of last year, beginning of this year, even with a little bit higher raw material inflation, do you think you're okay on margin, until you get to 2019?
Dmitry, I made this comment earlier, it's a terrific question. I'm going to just repeat a portion of this, then I'll expand on it, which is that our historic practice has always been to talk with our customers first and then the investment community. I do really want to be very clear about the comment I made about our conviction and determination to protect our margins. We just do not want to get in front of the conversations with our customers by having a conversation here today first. I'll just leave it as, we are going to protect our margins, and we're going to talk to our customers first, and you can connect the dots from there.
Got you. Just final question on bookkeeping. The Latin American business foreign exchange hit in terms of revenue. You talked about The Americas overall, but in terms of Latin America, how much was foreign exchange a headwind for you, in terms of revenue numbers?
It was almost 12% headwind in the quarter, which was a significant change from the first quarter.
Yeah. Okay. Because last quarter wasn't that bad. Okay. Almost 12%. Okay, thank you. That's all I had.
Thanks, Dmitry.
Thank you. Our next question is coming from the line of Justin Speer with Zelman & Associates. Please proceed with your question.
Thank you. Just wanted to go back to the discussion on the intermediate term revenue growth and the EBITDA margin goals that you guys laid out, the roughly 19%-21%. I just want maybe some help putting context around the midpoint upside of that band and I guess the confidence in achieving the midpoints behind of that band at this point. Maybe the current price cost or currency dynamics change or alter your view of achieving the midpoint or the high end of your intermediate term objectives as we look out.
No, I think we're not ready to say we're not going to be able to hit that midpoint. I think the pricing actions that we have in and rolling in across some of the other businesses and looking forward. Historically, we've been able to catch up on raw material costs. We take a short-term hit in our margins as pricing rolls in and raws roll over, along with the other good cost controls and things we do. We're able to expand our operating margins. We still feel like we are going to be at the midpoint of that range.
Yeah, I think Al's comment in the last call of reconfirming our position here. We've got work to do. We clearly see the path and we're working our plan and expect to be able to reach our goal.
The Valspar numbers were the big thing, or at least relative to our model, with regards to the upside on the revenue profile. Was that, I guess, a mapping of the synergies coming in maybe sooner than expected, or is it seasonality? What led to that? Is it going to change potentially the revenue synergy portion of the Valspar synergy targets that you've laid out?
I just want to make sure we understand the question. Are you talking about the mapping of the synergies?
For example, for the first two months of the non-organic piece, the first two months stub that's not organic was much better. It's, I think, roughly 30-plus % better than what you were anticipating. I know that the underlying core business sounded really good, at your Investor Day, you talked up the potential for revenue synergies in this business. I'm just curious if it's changing your view of the potential of the combined business as you look out over the intermediate term, now you've had it for a year in the portfolio.
I think the revenue synergies that David outlined on PCG at the Investor Day were right on. Every month, we have a management meeting, every quarter, we review their progress in making those revenue synergies. As the teams continue to get together, I think more ideas are coming out, it's just now prioritizing those to make sure we're putting the resources behind the ones we think will have the most impact. I'd say we're making good progress there.
Okay. Last question from me. The incremental drag from the accounting change, I don't know if you walked through the impact to all the segments. I know it was in Consumer Brands, what were the impacts to the other segments from the accounting change? Relative to the full year guide that you put out, what kind of drag are you looking for for the year incrementally from the accounting change?
It's predominantly the Consumer Brands Group. There's no material impact to the other groups. The year-to-date impact that we called out, it would be close to that number.
About a point hit to the full year, kind of all else equal from the accounting change?
Maybe a little less than that.
Okay.
That's in the ballpark.
Thank you very much, guys. I appreciate it.
Thanks, Justin.
Thank you. The next question is coming from the line of Nishu Sood with Deutsche Bank. Please proceed with your question.
Thank you. Wanted to ask first about the increase in the guidance for the acquisition related costs, $340 million to $350 million to the $380 million to $390 million range. I think you laid out in the amortization discussion that it's not there. Just wanted to get a sense of what was driving that.
Yes, Nishu. We finalized the acquisition valuation in this quarter, and it resulted in a reversal of tax benefit that impacted EPS $0.29 a share that was previously recorded in our fourth quarter. This increased our income taxes, and it was included in transaction integration costs, as you mentioned, because we wanted to keep the purchase accounting items to incremental D&A only. To put that in perspective, the transaction integration costs impacting PBT for the quarter were $39 million, $0.33 a share. With the deferred tax adjustment, an additional $0.29. That's how we got to the $0.62 that we reported in the quarter. That $0.29 is what's driving that year-to-date or that full year guidance number up. Our core integration costs are about the same.
For the year, just to close the loop on that, our transaction and integration costs impacting PBT were approximately $70 million year-to-date or $0.57 a share, plus the $0.29 per share deferred tax adjustment, you get to $0.86 a share. We do not expect that $0.29 to repeat, but it does raise the full year guidance.
Got it. Thanks for that. Going back to strong sales performance in Performance Coatings. I think about 60, 70 basis points of that was currency related. Very strong performance there. Wanted to understand that a little bit better. I know the average pricing gains you mentioned were that 2.5% range. Was it a bit stronger as there was the catch up in Performance Coatings? Or if not, the volume mix, what was particularly strong or what led to the acceleration off of what was already a difficult comp for last year?
We touched on this just briefly, but we're seeing strong volume demand across virtually every product category and nearly every geography. We mentioned that it's led by our Packaging Business, which is really performing very well and our General Industrial Business right behind that. I think it's partly a function of the fact that we're maintaining really strong supply relationships, as I said, with the right customers, and they're growing their business and we're growing our business with them. We're really focused, as I mentioned, on bringing value to our customers, and we're experiencing the reward as a result of that. The teams, as I mentioned earlier, from Valspar, were very strong. The teams at Sherwin-Williams are, we believe, very strong, and combined, they're even stronger. We're really excited about the momentum that we have there.
Okay. Thank you.
Thanks, Nishu.
Thank you. Our next question is coming from the line of Pat Rizzuto with Bloomberg. Please proceed with your question.
Good day. It's Pat Rizzuto with Bloomberg Environment. I had a question about one of Valspar's product lines that you've acquired. It's the Valspar valPure can coatings line, and I'm wondering how it's performing, and I'm also wondering how much of the potential can lining market it has acquired.
We're not going to get into any of the specific shares of any product line, but I will tell you that the packaging business, as we referenced, is the leading performer in a very strong business. That business is growing in total, the group, 11%. Packaging is exceeding that growth. The performance that we have right now, we expect it only to continue.
Great. Thank you very much.
Thank you, Pat.
Thank you. The next question is coming from the line of Eric Bosshard with Cleveland Research. Please proceed with your question.
Good morning.
Morning.
Or good afternoon, as the case may be.
Yes.
Two things. The Lowe's, you commented the expenses were ahead of what you thought in the quarter. Is that timing or a change in the amount that's going to be spent to invest in that program?
No, it's just purely timing. The full year amount has not changed.
Okay. Secondly, the upside Performance Coatings Group performance in the second quarter, I know you don't guide by segment, but is it unreasonable to assume you can sustain similar growth as we work through the back half of the year and into 2019? How should we frame our expectations?
Yeah, Eric, I would say we would expect that to continue. What we even talked about in our Performance Coatings Group is that we, at the end of the first quarter call, we thought we'd see sequential margin improvement as the year went on. Clearly, we're ahead of that with our operating margin flat year-over-year now. We're ahead of plan, but we do still expect to see sequential improvement in that group.
Okay. That's helpful. Thank you.
Thanks, Eric.
Thank you. Our next question is coming from the line of Patrick Lambert with Raymond James. Please proceed with your question.
Hi. Congratulations for this quarter. Just one remaining, and I think it's basically also answered. It's just the $0.40 of Lowe's dilution in 2018 is still valid, if I understand correctly?
Yes. The $0.40 is still the same.
Could you comment a bit more on 2019, how you see the equation developing in 2019?
We're really not going to comment on the Lowe's program going forward, both from a top line or a bottom line, just in respect for our customer.
Distributed. Thanks.
Thank you.
Thank you. Our next question is coming from the line of Jeff Zekauskas with J.P. Morgan. Please proceed with your question.
Thanks very much. There were two charges in the quarter, the $0.62 in transition and integration costs and the $0.25 in environmental charges. What was the pre-tax amount of those two charges combined?
The environmental was around $32 million. The $0.62, Jeff, is $39 million PBT impact in the quarter, which is $0.33. Then the reversal of the deferred tax adjustment of $0.29. That gets you to the $0.62 in the quarter.
Okay. How would you allocate those costs to cost of goods sold or to SG&A?
Our cost of goods sold would have been $17 million. SG&A would have been $22 million. That makes up the $39 million I mentioned, then the $0.29 is all in the income taxes.
Okay, great. Thanks so much.
Thanks, Jeff.
Thank you. Our next question is coming from the line of Rosemarie Morbelli with Gabelli & Company. Please proceed with your question.
Thank you very much for moving way beyond the 12 o'clock. Congratulations on the great quarter. Just looking, going back to the Performance Coatings for a second. Valspar initially had substantially higher margins than Sherwin-Williams. Is this more or less the benefit from the improvement in margin, or did you see some improvement on the Sherwin piece as well?
Rosemarie, it's hard to break them out, because again, they have gone down the path pretty far of integration. I would say it's the combined business and showing the improvement, which tells you both have to be going forward.
Okay. Lastly, on the tariff impact on Valspar. I am referring to wood coatings, which is applied on, let's say, kitchen cabinets, which then come back into the U.S. What are you seeing in that particular area?
Well, we're staying close to the situation and our customers. It's going to be interesting to see exactly how this plays out. As you know, we've got customers and assets on both sides of the water. We're working with our customers closely to be responsive to whatever happens from a demand standpoint on their side. We're staying close, and we're going to be adjusting accordingly. I think it's a play that's not been called or completely played out yet. We'll respond accordingly.
Okay, thanks. If I may, actually, I do have one more. Regarding the amount of work that you may have already done on the Valspar stores in Australia.
Well, we are bringing some of our best practice, or we're using our stores as a platform to share information. There's a number of attributes that we think are successful, that help us in our success here in North America that we're transferring down there, as well as some products. We're learning a few things from them as well. The teams are collaborating very well, and we hope that'll allow us to continue to drive that business forward as well.
Okay. Thank you very much, and good luck.
Thanks, Rosemarie.
Thank you. It appears we have no additional questions at this time, I'd like to pass the floor back over to Mr. Wells for any additional concluding comments.
Thanks again, Jesse. As always, I, along with Jim Jaye, our Vice President of IR, will be available over the next few days to handle any additional questions that arise as you digest this morning's call. If you'd like to be placed in the queue for a follow-up call, please call Christy Johnson at 216-566-3001, and she will add you to the callback schedule. I also want to point out that since our original posting online this morning, we've added a slide to include adjusted EBITDA by quarter. You might want to visit our website again and pull down that revised slide or that new slide. I'd like to thank you all again for joining us today and thank you for your continued interest in Sherwin-Williams.
Ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation, and you may disconnect your lines at this time.