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PPG Industries Inc
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Good afternoon everyone, and welcome to the PPG Industries Second Quarter 2019 Earnings Conference Call. My name is Jamie, and I will be your conference specialist today. All participants will be in listen-only mode. [Operator Instructions] Please also today’s event is being recorded.
I would now like to turn the conference call over to John Bruno, Director of Investor Relations. Please go ahead.
Thank you, Jamie, and good afternoon, everyone. Once again, this is John Bruno, Director of Investor Relations. We appreciate your continued interest in PPG and welcome you to our second quarter 2019 financial results conference call. Joining me on the call from 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 18, 2019. I will remind everyone that we have posted detailed commentary and accompanying presentation slides on the Investor Center of our website, ppg.com. The slides are also available on the webcast site for this call, and provide additional support to the opening comments Michael will make shortly. Following Michael’s perspective on the company’s results for the quarter, we will move to a Q&A session.
Both the prepared commentary and discussion during this call may contain forward-looking statements, reflecting the company’s current view of future events and their potential effect on PPG’s operating and financial performance. These statements involve uncertainties and risks, which may cause actual results to differ. The company is under no obligation to provide subsequent updates to these forward-looking statements.
This presentation also contains certain non-GAAP financial measures. The company has provided in the Appendix of the presentation materials, which are available on the 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 McGarry.
Thank you, John, and good afternoon everyone. I want to thank you for your continued interest in PPG. Today, we reported second quarter 2019 financial results. For the quarter, our net sales were slightly more than $4 billion and our adjusted earnings per diluted share from continuing operations were $1.85.
Consistent with our improvement targets, we delivered higher year-over-year operating margins for the second consecutive quarter as both gross profit and segment margins improved versus the prior year. Our margins benefited from continuing selling price realization and strong cost management across all our businesses and regions. We were still in the early days of margin recovery, and while we are building some momentum we still have more work to do. Our overall objective is to return to the aggregated segment margins that we have maintained prior to this recent inflationary cycle.
To provide some additional color on our second quarter results, our net sales in constant currency were higher than in the prior year by about 1%. Sales volumes were down nearly 4% impacted by weaker global industrial production that significantly affected global automotive production in many of our general industrial end-use markets, and was evident in all major regions.
Also, about one-third of the total sales volume decline relates to the prior year customer assortment changes in our U.S. architectural coatings DIY business. We have now reached the one-year anniversary of these changes and it will no longer be a comparison deviation. We remain committed and are on track to fully offset the earnings impact of this assortment change in the third quarter.
Selling prices were 2.3% higher marking the ninth consecutive quarter of higher selling prices. We're continuing to work with our customers to ensure we are receiving fair value for our products and services and expect selling prices to increase at a similar rate in the third quarter despite comping against improving gains in the prior year third quarter.
Finally, our net sales were affected by significant unfavorable currency translation of more than 3% or about $130 million. Going forward, we expect unfavorable currency translation to continue albeit at more modest levels with our current estimate for the third quarter of on unfavorable sales impact of between $30 million and $50 million.
Moving to some business trends in the second quarter. In our Performance Coatings reporting segment, aerospace coatings continued to deliver very strong volume growth, outpacing industry performance in most major regions.
In automotive refinish, sales volumes were lower year-over-year reflecting lower collision claims in the U.S. which were down 2% for the industry in the second quarter and in comparison to strong sales volumes in the prior quarter. We expect refinish volume comparisons to improve on a year-over-year basis in the third quarter as our prior year included an unfavorable impact of PPG-specific customer inventory destocking.
Year-over-year organic sales were higher in our architectural coatings EMEA business driven by higher selling prices. Aggregate sales volumes were slightly lower as wetter-than-normal weather patterns impacted overall regional demand during the quarter.
In Mexico, our PPG-Comex business increased organic sales aided by higher selling prices. Sales volumes were tepid as consumer demand reflected increased uncertainty around Mexico's economy and economic policies. PPG-Comex business continues to perform very well and continues its growth by adding nearly 70 concessionary locations in the first half of 2019.
Sales volumes in architectural coatings Americas in Asia-Pacific decreased due to lower net DIY sales of about 60 million stemming from the prior year customer assortment changes. Same-store company-owned sales growth in the U.S. and Canada were relatively flat including impacts from fewer shipping days year-over-year and wet weather that impacted most of this region during the quarter.
Led by strong growth in the Asia region, our protective marine coatings business continued to deliver above-industry organic sales volume -- excuse me, organic growth of high single-digit percentage during the quarter. We are very excited that this business was recently awarded a five-year contract with the U.S. Navy to supply coatings and technical services to the military Sealift command which includes about 125 ships.
In our Industrial Coatings reporting segment, sales volumes were adversely impacted by soft industrial demand in most regions of the world. Most acute were automotive OEM industry build break which declined by nearly 20% in China and remained soft in Europe.
In aggregate, PPG's automotive sales volumes were lower by high single-digit percentage consistent with reduction of global builds. One statistics we track is automotive OEM dealer inventories, which decreased as the quarter proceeded, which may help demand in the second half of the year. As a partial offsets our automotive OEM business realize higher selling prices in each major region for the second consecutive quarter with similar expectations for Q3.
Softer global industrial production activity impacted many of our general industrial coatings business sub-segments, most notably coil, general finishes, appliances and transportation and markets. Also our packaging coatings sales volumes decreased modestly in comparison to above-market growth in the prior year, driven by customer adoption to our INNOVEL interior can coatings products. Our packaging business has achieved above-market growth in the past five years of about 20% compounded. We expect this business to return to growth by the end of the year.
From an earnings perspective, as I mentioned earlier, our second quarter adjusted earnings per diluted share was $1.85. Our earnings were negatively impacted by about $20 million of unfavorable foreign currency translation.
On a constant currency basis, our adjusted EPS is modestly higher than the prior year. Our effective tax rate was about 24% in the second quarter, which is higher than the 22% rate in the second quarter of 2018. The increase mostly relates to recognizing nonrecurring favorable discrete items in the second quarter of 2018. We are still anticipating a tax rate between 23% and 25% for the full year 2019.
Our EPS results were supported by the increase in our selling prices, improved manufacturing performance, aggressive cost management and excellent progress in our cost savings programs, which delivered about $20 million in cost savings during the quarter in line with our targets.
As we look ahead, we expect global economic activity to remain sluggish in the third quarter. We expect global automotive production in general industrial demand to remain unfavorable year-over-year and roughly comparable to what we experienced in the second quarter. Positive developments around regional and country trade disputes could provide a spark to industrial demand as inventory levels in many of our end-use market remain low.
Specific to our businesses, we believe that the potential for lower U.S. interest rates could aid growth in the U.S. housing market and also favorably impact automotive OEMs and U.S. architectural sales.
In Latin America, we anticipate economic activity to be similar to that experienced in the second quarter and we'll continue to add new PPG-Comex concessionary locations to expand our customer reach. Also we have a new manufacturing facility under construction in Panama to localize production and support our sales growth in Central America.
In Asia, demand rates are expected to remain consistent in comparison to the second quarter as we move back into the back half of 2019, sales comparisons to last year will become easier given the weakness in Asian demand that began to occur late last year. This will result in easier comparison and relative performance improvements year-over-year.
We intend to remain laser focused on our cost structure. We remain confident that demand growth will eventually return in China. Economic growth in Europe is expected to remain tepid. And our automotive OEM business year-over-year growth will be difficult in the third quarter as last year benefited from inflated sales from purchases brought forward ahead of the WLTP implementation.
Later in the year, the year-over-year comparison should improve into positive territory. We expect our architectural business to continue to grow, driven by higher selling prices and strong cost management.
Brexit uncertainty is not yet impacting our business trends. However, we expect to closely monitor the situation and prepare contingency plans to best address the potential impacts to overall demand and relating inventory needs. With ongoing uncertainty over global industrial production, we have intensified our cost management and costs, including working with our supplier base to ensure that our input costs are reflective of current industry demand conditions.
In addition, our focus on our cost structure remains elevated as evidenced by our recently announced approval of a new cost savings program, which is a result of a comprehensive internal operational assessment to identify further opportunities to improve our profitability. We have begun implementation of this program, which we expect to have a full year run rate savings of $125 million upon completion of the program.
In addition, we are on the final stages of the execution of the cost savings programs announced in 2016 and 2018. We expect the total benefit from all of these programs to be about $20 million of additional incremental savings to be realized in the third quarter.
Earlier today, we provided EPS guidance specific to the third quarter of 2019. This guidance is $1.57 to $1.67 and includes an unfavorable impact from foreign currency translation of $0.01 to $0.02 per share. We are also reaffirming our full year 2019 adjusted earnings per share growth of 7% to 10%, excluding currency translation impacts.
In the second quarter, we generated operating cash flow of about $550 million, nearly $200 million more than last year and through the first six months of the year have generated about $350 million more operating cash flow than the same period last year. Our focus on cash flow generation will continue and our goal remains to reduce working capital as a percent of sales compared to 2018.
We completed the Hemmelrath acquisition earlier in the second quarter. I'm happy with the early progress and performance of these three recently completed acquisitions Hemmelrath, SEM and Whitford, which will add about $400 million in annual revenue, of which approximately $100 million is in the Asia-Pacific region.
Acquisition remains one of our preferred cash deployment options, given the value that these have driven for our shareholders over the years. And currently, our pipeline remains solid. In addition to acquisitions, we have progressed our key capital expenditures during the second quarter and we expect total spending to be about 3% of sales in 2019.
Also, earlier today, our Board of Directors approved a $0.03 per share dividend increase. We have paid uninterrupted annual dividend since 1899 and 2019 will mark 48 years of increased dividend payout. And we are pleased to continue to reward our shareholders in this manner. We ended the second quarter with more than $1 billion of cash and short-term investments, which continues to provide us with significant financial flexibility.
Finally, I'd like to thank and recognize PPG's 47000 employees, all over the world, for their continued support and strengthening our position as a leading paint, coatings and specialty materials company. Every day our employees are driving our cultural initiative the PPG way to provide innovative solutions for our customers' most pressing challenges and to deliver value to all our stakeholders.
This concludes our prepared remarks. Once again, we appreciate your interest in PPG. And now Jamie, I would you please open the line for questions.
Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And our first question today comes from David Begleiter from Deutsche Bank. Please go ahead with your question.
Thank you. Michael just on raws, how are you looking at raws in the back half of the year? And what do you expect to happen with the TiO2 prices in the back half of the year? Thank you.
David, you know there's been a lot of focus on raw materials in-house. But when you think about it, we have some of our commodities. Most of our commodities are near flat. Maybe one of them is still up, and we have a couple that are trending down. But overall, between that and overall inflation with salaries and everything else, we are still in a marginally inflationary environment. And we still not recovered all the margin from our pre-inflationary peak. So as you heard in my opening comments, we are still progressing with price increases, and we anticipate having further price moving forward.
In regard to TiO2, what I would say is the same answer I gave at the very beginning of the year is that TiO2 is really a non-event this year. And we are going to continue to focus on using TiO2 very efficiently. And our program, as you know has been to optimize our formulation to minimize TiO2 usage. And this year, we are on track again to take an additional 1% out of our TiO2 consumption. So I don't see the trends really changing, you know, there's excess capacity on the sulfate side. And later in the back half of the year you have the chloride plant coming on. So that's why we remain confident that TiO2 will be a non-event.
And Vince just on buybacks, what were buybacks in Q2? How should we think about buybacks in the back half of the year? Thank you.
Thanks, David for the question. In Q2, our share count was relatively neutral year-over-year. We did minimal if any buybacks in the first six months of the year except to offset some dilution we did with an acquisition. The – for the full year, our focus remained on not building our cash position. We have on a year-over-year basis we have an active acquisition pipeline, which Michael alluded to in the opening remarks. That remains an important part of our cash deployment strategy for properties at the right price, create value for our shareholders. Absent that, if we can't execute on those we would look to share repurchase.
Thank you.
Thank you, David.
Our next question comes from John Roberts from UBS. Please go ahead with your question.
Thank you. There's a Bloomberg report about PPG being among others looking at Axalta. I don't expect you to comment on the speculation, but could you just remind us how concentrated the auto OEM and auto refinish markets are maybe just in general terms?
Well, I think the way to think about that is that – the different numbers vary by region and by automakers. So, it's probably inappropriate for us to comment on not just the speculation but actually market share because we could overestimate or underestimate the various people shares. And I wouldn't want to put incorrect information out there, so I probably would prefer to pass it.
It's all right. Sorry, I didn't mean to put you on the spot. In the U.S. DIY retail channels we've had some share shifts first at Lowe's then at Home Depot now Ace. If you look in aggregate at the U.S. DIY retail channels, have market shares in aggregate changed much over the past year? Or just been a lot of shuffling around between different channels?
Well, if you go back and look at the space over 20 years, you'll always see some movement as the various retailers try different strategies. By and large I would say that market shares have stayed relatively constant by and large. There's been a little bit of shift here in there, but not that much. More of a rounding there what I would call it.
Okay. Thank you.
Our next question comes from Bob Koort from Goldman Sachs. Please go ahead with your question.
Thank you. Mike I noticed in your heat map that refinish seemed to be in the marketplace a little bit weaker. Is that -- you mentioned accident rates, but is there any function of price hikes and volume patterns of your customer base of the market that has shifted from one year to the next?
And then secondly you mentioned I guess you're lapping some very robust trends in the packaging market that sort of stalled out but you indicated getting back to growth later in the year. Could you give us some more specifics on why that happens? Thanks.
Sure Bob. So let's start with refinish. We had a very strong 2Q last year with refinish. There's a couple of very large what we call multiline or people who buy refinish from multiple suppliers. We had a pretty robust 2Q last year with those guys. Then they elected to not purchase in the third quarter. A lot of this is what I call trying to take advantage of the pricing cycle in refinish.
So, from a demand standpoint though we're still picking up share. Our net gains on shops is a nice positive and pricing has been very good in that sector. Claims are down about 2% and totals are up 1% to 2%. So, that puts that negative overall at about minus 3%.
So, our team has just rolled out new technology in Europe on precision metering of refinish products. It's got an excellent traction so far. So, we are looking forward to seeing how that -- since we're very early we just rolled out a month ago we are very, very early in that. But we anticipate that we'll continue to gain share in refinish given our strong water-based technology and the fact that we've converted more shops at water than anybody else -- everybody else in the industry combined.
As for the packaging side, we still have very good technology and we are trialing some additional new technology for the packaging space. That goes -- pack tests are going on right now. Once those pack tests are completed we anticipate that the customers will be shifting some additional business our way, which will be a net positive for us. So that's what we are looking at. Obviously we have to wait till the conclusion of pack tests, but we’re feeling pretty good so far.
Great. Thank you, Michael.
Our next question comes from John McNulty from BMO Capital Markets. Please go ahead with your question.
Yeah, thanks for taking my question. Look there's a lot of noise between the weather and home sales and I guess the contract that you lost last year. Can you give us your thoughts going forward now that you've anniversaried that, how we should be thinking about the architectural -- the health of the U.S. architectural market and how you're thinking about the next 12 months the overall volume growth in that market?
Yeah, John we see that market is growing. This year we would have said 2% to 3%. Given in the challenging whether that we've had, they'll try to pick up as much of that as they can. So we might finish 1% to 2% for the year. But overall our customer still have very good backlogs and they feel very confident. They still are challenged to find enough labor to get all their projects done. But they've been able to successfully continue to win business that trend again from DIY to do it for me. That's going to continue.
So overall we feel like we’re in a good position. Plus as you heard in my opening remarks, we have committed and we are on pace to out-earn in the third quarter what we are making pre-customer assortment loss. So business has been focused on that and they're going to be in a position to start delivering that in the third quarter.
Great, thanks. And then just a question on the architectural EMEA market. It sounds like you're expecting the usual seasonal dip. It did sound like the second quarter was a little bit washed with bad weather. Is there a way if we have a normal seasonal weather pattern if there is such a thing these days that that you could sequentially see stable to maybe even up scenario for EMEA architectural? Or is that too aggressive?
Well, first of all we have -- we're going to have positive sales growth because of pricing. Right now through the first whatever you want to call it 17 days, volumes have been more consistent to the prior patterns. But as you know Europe takes August off. And so we’re always hesitant to predict the third quarter until we see how much vacation time all our big painters take and then how they come back. So I would be -- if I were sitting in front of your model right now, I would use the same prediction you've used for years past, but knowing that we are getting nice price gains in that business in Europe.
Got it. Thanks very much for the color.
Thank you.
And our next question comes from Ghansham Panjabi. Please go ahead with your question.
Thank you. Good afternoon, everyone. In your slide deck, you basically commented on additional pricing actions for the Performance Coatings segment in the third quarter. Is that specific to any region or business? And I didn't really see same comment as it relates to Industrial Coatings. I guess, are you where you need to be in that business at this point as it relates to pricing?
We have positive price in every business in every region of the world. And it's been a positive story now. We've had positive price for nine consecutive quarters. We're still not where we want to be. We've had 11 quarters in a row of inflation, so we still have some catch-up to do. But when I look at our Industrial Coatings segment and our industrial business within that, they're doing pretty well. And so, I'm not concerned. Obviously, the biggest gap is in the automotive piece and that's where we're working the hardest to get prices up. But we still have more traction in all our industrial businesses.
Got it. That's helpful. And then, just in terms of the outlook, you commented on 3Q volumes basically mirroring 2Q. How should we think, Michael, about the fourth quarter? Your comparisons are quite a bit easier. You commented on auto dealer inventories in China, for example, as a potential positive. Just as we cycle into 2020, how are you sort of thinking about the world at this point?
Ghansham, Vince here. Little early to call Q4, we got to make our way through Q3. But in the back half of -- really in the back half of 2018 we had several key issues that make the 2019 period, make it a little easier from a comparable basis. We did have refinished destocking, Michael alluded to earlier.
We did have just started the customer assortment changes. We will anniversary very shortly the China automotive downturn. And just from a top line perspective, currency has been a negative in the first part of this year and it mutes out in the back half of the year. So we have several things specific to PPG that we think give us some comfort in our forecast.
Thanks so much, Vince.
Thanks.
And our next question comes from Michael Sison from KeyBanc Capital Markets. Please go ahead with your question.
Hey, guys. Nice quarter there. In terms of the outlook for the second half of the year, it certainly seems that demand is weaker. Volumes are going to come in a little bit weaker, I guess, than prior expectations. When you think about what has been -- what you've been able to do to offset to that, can you may be frame up, was it mostly the cost savings, the new cost savings program? Are you getting a little bit of price raws? And any other factors that might help you stay on track with your earnings guidance.
Yes. So Mike, I'd say, it's everything. With 2.3% price $20 million of costs down, better manufacturing, we pretty much have hit on all cylinders, everything within our control. The team has executed very well on. So we're going to continue to look at that. Volume in a lot of our businesses has been pretty good. Aerospace has had a very good volume quarter. PMC has had good volume quarter. So there are pockets of success. Unfortunately, when you look at OEM-type businesses, they've been a little struggling.
Okay. And then, a quick follow-up on architecture Americas and Asia Pacific. Your outlook's low single digits for third quarter. Are you seeing -- do you need to see that now? And is it kind of a fluid on a month-to-month basis as the year unfolds? Or is there any lumpiness in that outlook for the third quarter?
No just picking up what Michael said earlier, we -- there's growth in this market in the U.S. It's been tempered by the weather patterns. Anytime we see decent whether we see a good pickup in sales. So we think there's some pent-up demand there. And we do expect growth in Q3 and a seasonally lighter quarter in Q4, but continued growth. So there's definitely a backlog of demand here.
Great. Thank you.
Thanks, Mike.
Our next question comes from Frank Mitsch from Fermium Research. Please go ahead with your question.
Yes. Good afternoon, guys. Hey. You had a difficult comp on auto refinish in 2Q. You're suggesting that 3Q is going to be an easier comp due to the vagaries of the year-ago period. So I was just curious so. How should we think about the underlying volume growth and sales growth that you can get in the refinish business?
Frank, I still see refinish as a flat long-term market. We are going to get positive price. We are going to work through our water. More people are going to convert to water, which uses less products than solvent. At some point in time China will start to put in regulations. We are the number one guy in China. So when you factor in the solvent to water conversions, you will see some negative volume over a longer period of time. But we don't see collisions changing materially in the near-term. Collision rates in Asia continue to happen. So – and of course, there's still a growing car park around the world. So this is a great business for us as you know, and we are one of the global leaders. And we are still very excited about this business.
And just to expand on that Frank, our customers pay for technology. We're part of the leadership in terms of technology in the industry. So as Michael refers to price, we really talk about price/mix. The whole mix of the industry is moving up reflective of the technology that everybody is bringing to the table. So even though the absolute volume might be down a little bit, the costs per unit or cost per liter is up, because of the mix component.
That's very helpful. And I guess my follow-up will be it's been about two months since you did your strategic review and decided to keep the portfolio as is. I'm just curious in terms of the feedback that you've received from your shareholder base. Is there any color you can provide in terms of the positive or negative feedback that resulted from that decision?
Yeah. Frank, we talk obviously to a lot of shareholders. Those are conversations we have individually with them. The feedback we look at is what happens in the stock every day in the marketplace. That's what I would reference you to.
Yeah. And Frank one other thing I might add back on the refinish question, I should have pointed out. We do have a light industrial piece of that business and a commercial transport. And both of those segments are growing. Of course, they're much smaller than the base refinish business, but those were help offsetting some of the trends we talked about earlier.
Great. Thanks so much.
Our next question comes from Jeff Zekauskas from JPMorgan. Please go ahead with your question.
Thanks very much. I was looking at your corporate expense. I think for the first half, its $90 million versus $66 million than a year ago. And I think for the third quarter you said, your corporate expense will be $45 million and maybe last year it was $26 million. So it looks like that through the first three quarters your corporate expense will be up I don't know $40 million or $45 million. What's going on there? What's behind that? Or is it a timing issue and corporate expense in the fourth quarter comes down a lot?
Hey, Jeff. This is John. I think there is two key drivers. One is last year we made some adjustments to our incentive compensation accruals in the second and third quarter. And last year, we had a little bit more favorable pension expense, but based on the different items like the discount rate and consensus data that we have. So, the former is the bigger driver but a couple of things there Jeff that are driving the upswing this year.
Okay. And then for my follow-up the -- your SG&A costs year-over-year were down a little bit both in first quarter and the second quarter. But last year your SG&A really fell pretty sharply in the third quarter. It went from I think something like 9.41 to 8.67 from the second to the third quarter. Is your SG&A going to be lower year-over-year or roughly lower year-over-year in the third quarter? Or does it rise maybe because of the compensation expenses you're talking about? How does the SG&A look year-over-year in the third quarter?
Yes Jeff, those two questions I think your first questions are interlinked. Some of the numbers John mentioned are located in our SG&A cost pool, so there's variability in there. Currencies if you look at it on an absolute number basis currency is a big impact to just absolute numbers. So we did have a weaker foreign currency last year so that has an impact as well. We're -- our steady run rate we're adding Q2 of 2019. We expect to be comparable as a percent of sales in Q3. We do have lighter seasonality in Q3 versus Q2 as well so that's not--
Sure. Okay, great. Thank you so much.
Thanks Jeff.
And our next question comes from P.J. Juvekar from Citi. Please go ahead with your question.
Yes. Thank you. So, Michael you talked about China auto inventories coming down and that's a good thing. When you talk to your customers in the OEM market what signals do you get when you look at their production schedules for 2020? Do you think market can grow come back to growth again in 2020 for Chinese auto OEM?
Well, I do believe it will be up in 2020. I think it's a little early to call that though. I don't think the trends that we're seeing right now are going to continue. But the single biggest factor in this is the trade war if that's what you want to call it.
People have money in their pocket in China. People are employed. It's a lack of consumer confidence. These -- our Chinese employees themselves they're also looking at the same thing. I was just over there six weeks ago. And the fact of the matter is for major purchases, they are sitting on the sidelines to see how this turns out.
So, the first thing that I'm looking for is a settlement where everybody can move on from the current positions that everybody has staked out. Consumer confidence will flow very quickly because it's not like they have to get people reemployed over there. They are already employed and they are saving money right now in this environment. And so they have a lot of firepower to put to work.
So, I think whenever this dust settle, we will see a pop not too much different than we saw what quarter was it? It was third quarter last year when they changed the tariffs or the VAT. So, I think there'll be a pretty good movement in that.
Okay. Thank you. And for my second question recently there was a market share change at Ace Hardware and you talked about that a little bit. Was PPG involved in any of those discussions? And then when you lost some volumes at one of your retail customers, are those volumes still available if you get an order? Or do you shut that capacity down?
P.J., I don't think it's appropriate for us to discuss specific customers. You should assume that any place there's somebody buying paint that we're actively talking to those customers. From a paint plant standpoint, we did shut down some plants in response to the customer assortment change, but we still have capacity in the marketplace. And as you know ramping up a paint plant sometimes is as simple as adding as another shift running over time. So we are definitely flexible enough to respond to the market.
Great. Thank you.
Thanks, P.J.
Our next question comes from Arun Viswanathan from RBC Capital Markets. Please go ahead with your question.
Thanks a lot. Good afternoon. Just a question on the guidance. Last quarter you had mentioned that embedded within your guidance there was a little bit of recovery in China. And, obviously, production rates have continued to lag on the auto side, potentially seeing some continued slowing due to the trade scrimmages. So I guess where do you stand on China? Is that part of the -- what would push you to the seven -- to the upper end of the 7% to 10% of recovery there? Maybe you can just give us your comments there? Thanks.
Yeah, Arun if you noticed we did talk about the sales guidance being low single digits. I'd see a stretch to get to the bottom end of our prior range on sales. So that's really where we saw the down take. We didn't -- they're up, we didn't experience during Q2.
We do have as we walk into every quarter three, four, five, six weeks of order book in hand for most of our OEM customers not just our auto customers. So we typically have at least early read on what each quarter is going to look like.
We don't -- as Michael mentioned in the opening comments, we don't see a significant uptick in Q3 in Asia or China specifically. So again we lowered our sales guidance for the year. As you would expect from us we're compensating on the cost side to account for the lower sales.
And just as another follow-up on the raw material side, obviously, there was some deflation in Q2. When you see that flowing through your system? And maybe you could just relate that to the inventories of raws that you have? Thanks.
Yeah, couple of points therein. One, we're still seeing pockets of inflation. And, secondly, we have to recognize there's still two years of inflation we absorbed. So we still have a lot of catch-up to do on the pricing side and we're going to work through that. Furthermore, if we do see changes in our raw material basket, they have to flow through inventory. We’re getting to a period of the year where, obviously, sales seasonally are going to be lower. So we typically hold on to our inventory a little longer.
Thanks.
Our next question comes from Christopher Parkinson from Credit Suisse. Please go ahead with your question.
Great. Thanks guys. When you think about your progression back towards prior peak margins just generally, how should we think about your expectations for industrial and performance just towards the end of this year and 2020 just very broadly? I mean what additional levers can you even pull now given the volume environment? Or could you even just pull them harder to get back to this level? Just any key moving parts will be appreciated. Thank you.
Chris this is Michael. The levers are going to still be the same. We talked about having more than 2% price in Q3, so that's going to be a positive moderation, and the inflation that's going to be a positive. We're going to have additional cost savings. That's going to be positive.
The teams are working really hard on the manufacturing side. So that's going to be a positive. So, I think, the trend lines that you've seen will continue in that regard. The big challenge we have is, obviously, we needed a lot more price in our automotive business and a little bit more price in our industrial business, to get back to where we need to be. And so, that's front and center.
Got it. Hey, can you just talk a little bit about more of your performance in aero and how sustainable that is, just in the intermediate to long term? I understand you're obviously doing a lot more than paint in the end market, including, obviously, a growing presence in services. So how should we just generally think about your long-term strategy, versus, let's say, the core growth on the coatings side? Thank you.
Well, we expect to outperform industry for quite a number of years in this business. If you look at the segments that we're in, we're leading in coatings. So we're going to be slightly better than the market there. If you look at our transparencies, we've been -- our customer pull on new programs has been quite significant.
And so, we have customers that are asking us to bring them new technology, which they're more than willing to pay for it and that's been a significant win. And then, of course, on the sealant side, our new technology on lighter weight sealants and cure on-demand is going to be trend lines that our customers all value highly and it drives tremendous productivity in their businesses. So they're going to stay on top of that.
And then, for a lot of our customers, because we're so important to them, we provide chemical management services or unique packaging to help their productivity on their lines. And so, we have consistently -- so you look at in this past quarter, the industry grew about 5%.
And we almost grew double digits. We grew double digits to prior quarter and we're going to go somewhere in that double-digit range in the third quarter. So even though this has historically been a lumpy capital-intensive business, this is a market that we're super excited about and we continue to outperform in all the major segments.
Thank you.
Thanks, Chris.
Our next question comes from Kevin McCarthy from VRP. Please go ahead with your question.
Good afternoon. Vince on slide 9, I think, you indicate anticipated cost savings of $17 million to $20 million in the third quarter from your restructuring efforts. My question is, what does the glide path look like in 4Q and beyond as the new program ramps and the older ones are executed upon? Is that a relatively steady pace we can extrapolate?
Yes. We said 80 -- 70 to 80 for the year, Kevin, for 2019. We're pacing slightly ahead of that right now and that's basis of the old programs we have. We'll pick up a few million dollars in the fourth quarter on our new program. But the new program won't really kick in earnest until early 2020 and there are some longer lead items in there. So by the end of 2021 we'll be at $125 million run rate. So I would assume a linear progression, as we go through 2020 into 2021.
Great. And then, shifting gears, the text of your prepared remarks indicated that you had some customer wins in Latin America. Can you comment on which businesses those were in and how large they are? I'm not sure if they're material or not.
Yeah. These are mostly in our industrial segment, Kevin. We have some benefit in our auto business. We – it's really customer mix. We underperformed in the U.S. We over-performed in Latin America, really serving the same market. But given we give regional outlooks in addition to business outlooks we had to flip between those two regions.
And Kevin just on top of that, this is John. Packaging has been doing very well in South America.
Did you win business in packaging there?
Correct. South America packaging has been winning business.
Okay. Thank you very much.
And of course Comex continues to win on a daily basis.
Our next question comes from Stephen Byrne from Banc of America Securities. Please go ahead with your question.
Yes. Thank you. That sealants and adhesive technology that you have in your aerospace business is that suitable to be transferred to one of your other businesses such as autos end markets or construction?
So we have sealants and adhesive business in our aerospace, our automotive, our architectural and a teeny tiny bit in our industrial business. We share technology across segments. So when we launched the most recent liquid nails product, it use some of the technology that we had in our aerospace business. And that was a win. We currently have also launched some new products for the U.S. military. And that technology can also be shared across the various platforms. So we routinely share technology across our various business segments.
And then on this most recent cost management program this $125 million program it reads basically three buckets so manufacturing consolidation some trimming of low-margin businesses and then headcount cuts. Can you allocate that program into those three buckets? And were these readily identifiable? Do you see another round after this one?
Steve, this is John. So we are not going to get to that specific level of detail. But these are opportunities we've identified both in continuing to improve our cost structure and inflection of the demand environment that we have today.
Thank you.
Our next question comes from Michael Harrison from Seaport Global. Please go ahead with your question.
All right. Good afternoon.
Hi, Michael.
Just a question on the regional pricing dynamics in auto OEM and on the sustainability of pricing there. You had said that pricing has increased in all regions. I believe that was the comment last quarter as well. So how much was pricing up? And if there were any differences from region to region what was driving it?
No, Mike. We have pretty much similar pricing across the regions. You can well imagine, we deal with global customers. And you're dealing with people that are very sophisticated in how they deal with you. So we are getting it across the regions, and across the platforms. And we are getting it with the local Chinese in case that was your next question as well.
Okay. And then my other question is related to the refinish business and these lower collision claims in the U.S. I mean is that accident rates coming down? Are we starting to see the impact of collision avoidance system? Any thoughts on what's behind that?
Well, really what you have is a plateauing. Collision is driven by congestion which is driven by implement which is driven by miles driven. And right now unemployment has plateaued at let's call it 3.8, 3.7 whatever you want to call it and so that leads to less collisions when it plateaus. And there has been some impact from lane departure and smart cruise control. But you have the negative impact of distracted driving which I hope you're not doing Michael. But overall I would say you should assume a minus one is kind of what you should probably think about in the long-term.
I mean again as we said earlier Michael there's a value uplift in this business as it there been for many years as all the participants add new technology. And the technology is definitely desired by the body shops for productivity purposes.
All right. Thank you very much.
And our next question comes from Duffy Fischer from Barclays. Please go ahead with your question.
Yes, good afternoon. First question is just around the delta between inventory -- or not inventory between volume being down 4% and GDP being positive 1% or 2% a pretty big gap. Anecdotally when you talk to our customers are they destocking? Or maybe they're real consumption is running at higher levels in that and so we'll get a bounce back sometime in the next couple of quarters.
Yes. Duffy we really look at industrial production not GDP. GDP includes services. So, industrial production is one -- has certainly not been strong in the first half of the year. But more like to the heart of your question we see most of our customers running lean on inventory, leaner than we've seen in the past. Michael again alluded to that in the opening comments. If there is any surge in demand, there might be a little bit of a two stack here not only in the demand surge, but also inventory replenishment. So, that certainly possible.
Yes. And Duffy I would say think about the volume more at a two level not a four level because of the customer assortment changes.
That's fair okay. And then just last one quick one Vince. The $1 billion in cash you have now if you found a place to use now how much cash do you need to run the business? How low can you take that cash balance?
Well, that's a seasonal question. We obviously are building inventory at the beginning of the year. We run that down in the back half of the year so we need a little less cash on a daily basis. Somewhere between $400 million and $700 million depending on the season.
Great. Thanks guys.
Thanks Duffy.
Our next question comes from Gary Shmois from Longbow Research. Please go ahead with your question.
Hi thank you. I know it's early to be looking out to 2020 and thinking about pricing. And you've been very committed to getting price over the last several years. But in slower volume environment, just wondering how long can you keep pushing this 2% or so price cadence?
Well I'll start Michael can finish the question here. But we saw our suppliers push price for two and a half years. And we had an amiable demand environment when that occurred. Again we're just trying to catch up maintain the value chain. So, that's -- again we saw it on our -- coming into our front door for 2.5 years.
And I would add innovation, our customers are always very willing to pay for innovation. And if you think about the cost of the paint versus the cost to their final product, if we can get one more car to the body shop or one more heavy duty equipment out, we can make the packaging line run a little quicker. Anything like that they are more than willing to pay for it. So that's why we’re so focused on innovation. And sometimes innovation leads to slightly lower volumes but at least a richer mix with higher pricing. So that's also something you should factor in.
And if could just speak up one, because what we typically do see when demand is a little choppy like it is today, customers are looking for ways for cost savings. And it plays right into the innovation center that we have.
I just want to get an update just on paint store openings in the U.S. how that's tracking year-to-date? And what the outlook is for the second half?
Yeah, I tried to always get people up this question. For the U.S. it's not the key driver for our business. We’re focused on servicing our customer needs. We have an authorized dealer network. We have our own paint stores. We have our own DIY customers. So for us, we’re doing different things in different markets.
So we add stores in place that are growing like Texas and Florida. And we might be subtracting stores from contracting markets. So for us our store count was relatively flat overall. And that's not a metric that we're a driver of in the U.S. If you want to look at Mexico where we have a 50% market more than a significant share down there, we are driving additional store growth down there. And we are continuing to take share.
Thank you.
Our next question comes from Jim Sheehan from SunTrust Robinson Humphrey. Please go ahead with your question.
Thanks. Regarding China, you mentioned the unexpected early implementation of China 6 emission standards in large cities. Did you see that impact retail buying patterns at all? Or was that just an impact on OEM production schedule?
Well, you do see a little bit of it, because the dealers are trying to get those vehicles off their mark -- off their lots in Shanghai so they don't have to move it to tier three type city. So you did have sales were up I think 6% in June. And sales in July appear to be trending positively as well. But I would tell you that it's hard to parse between how much of that is the change in emission standards versus the actual demand.
Terrific. And then there's some deals in the coatings space announced recently including aerospace coatings. Are you seeing a lot of competition for M&A given the attractiveness of the aerospace market?
Well, what I would say is that any asset that comes up for sale in the coatings space always attracts interest. There are some natural buyers. There are people who are consolidators on a continuous basis. And you should assume that when any asset comes up for sale that unless there's an issue with it that's going to trade at a pretty reasonable multiple.
Thank you.
And our last question today comes from Dmitry Silversteyn from Buckingham Research. Please go ahead with your question.
Good morning. Thanks for squeezing me in there. A lot of my questions have been answered, but I'd just like to go back to Vince's response to Gary's question on pricing. You mentioned that you've taken price for 11 quarters, when the demand conditions were amenable and we've had strong economic conditions. We're seeing a pretty meaningful slowdown across the globe, when it comes to industrial economy. And if you kind of read the early signs, it may actually gets worse before it gets better.
How does this environment, given that, yes, you are aiding technology, but you're competing against other very competent players out there with technologies of their own, are you -- am I fair in citing that you may be sacrificing a little bit of volume growth to make sure you get the pricing? And that is to the most important part of your strategy in the short term, is to restore your margins through price and then worry about volumes later?
Dmitry, that's 100% accurate. We are expecting to get paid appropriately for the technology we deliver. If we haven't been able to get that, we've been willing to walk away from volume. We -- as you saw our volumes in 2018 in architectural Europe were down as we were the only ones out there leading price.
Now that the other parties are up there leading price along with us, volume is flowing back our way. We've always said that, we might get short term penalized for raising the price. But ultimately most of our customers want to do business with PPG. And as soon as our other friendly competitors, if they decide to raise price independently, some of that volume cloud flow back to us and we do see that happening sometimes.
Okay. That's very helpful. And just a follow-up, just a couple of housekeeping items. In your drill industrial business, you talked about your revenue being down. What was -- there's got to be a price component in there. So what where the volumes in GI down? And then, a similar question on European paint, what was the foreign exchange impact on the European paint business?
Those are granularities we typically wouldn't give Dmitry. We did say that the segment volumes, I think, were down about 5%, general industrial. Auto is more than that. Excuse me, in our industrial segment auto is more than that. General industrial was less than that. I think, the proxy for currency in our architecture EMEA business would be just euro to the dollar, to get you pretty close.
Got you. Thank you. That’s all I have.
Thank you. Great. Appreciate it.
And ladies and gentlemen, that will conclude today's question-and-answer session. 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 their time and interest in PPG. If you have any further questions, please contact our mix relations department. This concludes our second 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.