PPG Industries, Inc. (PPG) Q2 2018 Earnings Report, Transcript and Summary

Good afternoon, everyone, and welcome to the PPG Industries Second Quarter 2018 Earnings Conference Call. My name is Jamie, and I will be your conference specialist today. [Operator Instructions] Please also note today’s event is being recorded. At this time, I’d like to turn the conference call over to John Bruno, Director of Investor Relations. Sir, please go ahead.

Thank you, Jamie, and good afternoon, everyone. Once again, this is John Bruno, Director of Investor Relations. We appreciate your continued interest in PPG and welcome you to our second quarter 2018 financial results conference call. Joining me on 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 19, 2018. I will remind everyone that we have posted detailed commentary and associated presentation slides on the Investors center of our website, ppg.com. The slides are also available on the webcast site for this call and provide additional support to the opening comments Michael will make shortly. Following Michael’s perspective on the company’s results for the quarter, we will move 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 risk, which may cause actual results to differ. The company is under no obligation to provide subsequent updates to these forward-looking statements. This presentation also contains certain non-GAAP financial measures. The company has provided in the appendix of the presentation materials, which are available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information, please refer to PPG’s filings with the SEC. Now, let me introduce PPG Chairman and CEO, Michael McGarry.

Thank you, John, and good afternoon, everyone. Let me start by reminding everyone that we communicated on June 28 that PPG's Audit Committee had completed its investigation in the allegations of violations of PPG's accounting policies and procedures. We have filed restated financial statements for the fiscal years 2016 and 2017 and certain quarterly periods within those fiscal years in order to correct PPG's previously issued financial statements. The restated financial statements, additional details regarding these restatements and the findings of the investigation are contained in PPG's Form 10-KA and Form 10-Q that were filed on June 28, 2018. As you all know, PPG has been in existence for 135 years and has earned a reputation as a highly ethical and credible organization. I am disappointed that there was a need to restate our financial statements. Our Audit Committee and I are participating in the oversight of the remediation plan. As I said in our press release, we are 100% committed to take actions that are consistent with our ethics and values and fully meet the expectations of both internal and external stakeholders. Unwavering adherence to our core standards of financial integrity and honesty remains a top priority and a focus for all PPG employees. To date, we have made good progress addressing the corrective actions identified during the Audit Committee investigation. I am personally committed to ensuring that PPG will have a robust control environment and look forward to reinstating our reputation. As we have disclosed, we have proactively communicated with the SEC on this matter. It is PPG's policy not to discuss matters that are being reviewed by regulatory bodies. Finally, I want to share my appreciation with all our stakeholders for your patience as we have worked our way through this investigation. Now I will move on to our second quarter results. Today, we reported second quarter 2018 financial results. For the second quarter, our net sales were approximately $4.1 billion and our adjusted earnings per diluted share from continuing operations were $1.90. This represents an adjusted EPS growth rate of nearly 6% for the quarter which included benefits from a lower tax rate year-over-year. The earnings growth we achieved was despite elevated raw material inflation and higher logistic cost during the quarter which we partially offset with selling price improvements and strong cost management. In addition, we continue to benefit from our ongoing cash deployment focused on earnings accretion. For the second quarter, our reported net sales were up almost 9%, while our sales in local currencies increased by about 6%. Supporting the higher local currency sales were volume growth of more than 3% with balanced contribution from both of our reporting segments. For the first half in aggregate volumes grew nearly 2%. Selling prices increased more than 2% in the second quarter marking the fifth consecutive quarter of improvement over the previous sequential quarter. While modest in overall magnitude in certain business units, we continue to decline some volume as we pursue higher selling prices and prioritize margin recovery. Foreign currency translation was still favorable year-over-year, but by a lower amount in comparison to the first quarter, as the U.S. dollar strengthened during the quarter against several key currencies. Sales were favorably impacted by approximately $90 million from currency translation and pretax income favorably impacted by about $15 million. We expect foreign currency translation to turn to a headwind in the third quarter based on current exchange rates. Looking at some of our business trends in the second quarter. In the Performance Coatings segment, aerospace coatings delivered an excellent quarter with slightly more than 10% volume growth led by above industry performance in the U.S. and Asia Pacific. Automotive refinish continue to grow organic sales by mid single-digit percentage supported by above market performance in all regions. Architectural coatings EMEA sales volumes were down slightly in the quarter, as consumer demands due and we are prioritizing selling price initiatives. Sales volumes in architectural coatings Americas and Asia Pacific grew at low single-digit percentage aided by continued strong organic sales growth in the U.S. and Canada Company owned stores. Volume in our DIY business in U.S. and Canada were slightly higher as sales to Lowe's continued albeit at a lower rate than the prior year. Also we benefited from a successful launch of our award winning PPG Olympic stain products at the Home Depot. Sales volumes also grew at our Mexican PPG Comex business including the benefit of opening an additional 52 stores in the second quarter. Protective and marine coatings sales volume increased with continued strong protective coatings sales in Asia. The marine business has stabilized at a low base and is expected to gain more traction in 2019. Our Industrial Coatings segment delivered solid organic sales growth of approximately 3%, which included continuing improvement in selling price from the previous quarter. Sales volume in packaging coatings were up mid single digit percentage as the adoption to our INNOVEL interior can coatings products continued. Selling price increases were also achieved. Automotive OEM coatings sales volumes increased at low single digit percentage and were similar to global industry automotive builds. This business outperformed the market in Europe and Latin America. As expected in China our sales volume increased by high single digit percentage, matching the improved industry bill rates for the quarter. We also continue to grow sales volume in general industrial business with above market growth rates in Europe and Latin American regions. In addition, our general industrial selling prices continue to gain traction in the quarter. From a regional perspective, for the company overall sales volume growth was the highest in the emerging regions. Sales in the Asia Pacific region were driven by strong growth in our aerospace, automotive refinish, and protective coatings business. Sales in both China and India grew at low teen percentage. Our China business met our expectation of a strong quarter after softer first quarter. Going forward, we anticipate sales growth in China could be more uneven as the recent uncertainties around trade policies and tariffs potentially impact economic activity in the country. Sales grew at a high single digit percentage in Latin America, supported by continuing outperformance by the businesses in Industrial Coatings segment and strong automotive refinish and architectural coatings sales volumes growth. Sales volumes were higher year-over-year in Europe. A mid single digit percentage increase in the Industrial Coatings segment was offset by slightly lower sales in architectural coatings EMEA. We anticipate that the Industrial Coatings business continue to deliver growth in third quarter as the regional industrial production remains favorable for a broader continued economic recovery. Sales volumes were also higher in the U.S. and Canada in the second quarter supported by strong sales volumes in our packaging and aerospace coatings business along with solid sales growth in automotive refinish business. From an earnings perspective, our second quarter adjusted earnings per diluted share of $1.90 was nearly 6% improvement versus the prior year quarter. Our earnings were impacted by elevated raw material and logistics cost inflation in the quarter including the impacts from elevated oil prices. In aggregate, raw material inflation was about a mid single digit percentage increase year-over-year and – cost and availability to transportation equipment were also higher the second quarter 2017. We expect both these costs to remain elevated during the third quarter. In the second quarter, we continue to make progress at our selling price initiatives. Prices increased by more than 2% on a year-over-year basis as both of our reporting segments realized higher selling prices. We have secured further price increases for the third quarter and will continue to prioritize collaborating with our customers on further selling price initiatives. In addition to selling price initiatives, we are making good progress with our efforts on raw material efficiency. As one example, we now expect to further reduce our TiO2 requirements by more than 1% this year. We also remain focused on aggressive cost management. Our December 2016 restructuring program is tracking to our targeted savings and in the second quarter we initiated a new restructuring program to help mitigate the previously-announced architectural customer assortment change and to further offset the inflation we're experiencing. This new program will result annualized savings of about $85 billion upon full implementation. In aggregate we expect these restructuring efforts to deliver between $45 million and $50 million of savings in the second half of 2018. In addition, earnings per share benefited from our ongoing cash deployment actions. This includes the impact of our repurchase of more than $450 million of PPG stock in the second quarter. In the quarter, average diluted shares outstanding were 5% lower versus the second quarter 2017. Our effective tax rate was 22% in the second quarter, which is lower than the 24% rate from the second quarter 2017. The reduction is related to recognizing certain discrete tax items in the second quarter and the tax reform legislation that was implemented at the start of 2018. We still anticipate a full year tax rate between 23% and 24%. As we look ahead, we still expect continued positive momentum and overall global economic growth. Our third quarter sales are typically lower than second quarter due to traditional seasonal trends and we anticipate normal seasonal patterns this year. The heightened uncertainty around certain recent trade policies could create uneven growth by region and industries in the second half of 2018. In particular, we are closely monitoring our business in China for any possible impacts. Currently the new tariffs are starting to add some modest cost to our raw materials. Based on the strength in the U.S. dollar in the second quarter, we expect foreign currency exchange rates to have an unfavorable impact to our sales in the third quarter. Based on current rates the unfavorable impact is expected to be between $60 million to $80 million for the third quarter. Specific to our businesses, we expect housing starts in the U.S. to continue to improve in the second half of 2018. We believe that U.S. regional automotive industry builds in the second half of 2018 should be higher than 2017 due to the natural disasters that last year impacted automotive production. In Latin America, we anticipate similar economic expansion as we experienced in the first half of 2018. Growth rates in Asia are expected to modestly decline in the second half mostly driven by uncertainties in China. We expect automotive build growth rates in China to grow in the third quarter but at lower levels than those realized in the second quarter. We expect economic expansion to continue in India after a very strong first half. Economic growth in Europe is expected to continue in the second half at a similar rate that we saw in the second quarter. Favorable in use market trends are expected to continue driven by positive growth in industrial production and automotive builds. For PPG this regional growth will be tempered by subdued architectural coatings demand. We will continue to manage all elements of our business within our control to ensure that we remain competitive regardless of economic conditions. Based on the current cost environment, we anticipate that our selling price and cost management initiatives will drive improvement in our Industrial Coatings segment margins by the fourth quarter 2018. As previously communicated our sales of PPG Olympic products into Lowe's have stopped at the end of the second quarter. As I mentioned earlier our launch of PPG Olympic stain products into The Home Depot has met our early targets and we are pleased to be working more closely with the outstanding team at Home Depot. We expect that the net impact of these customer assortment changes will result in reduced third quarter Performance Coatings segment sales of between 200 and 250 basis points and thus PPG's total sales of between 100 and 150 basis points for the remainder of 2018. With the actions we have already taken and plan to take in the coming months we fully expect to offset the margin impact of this net sales loss in the year 2019. We are continuing to invest in growth initiatives including targeting certain growth spending in the third quarter with plans to spend up to an additional $5 million similar to the second quarter. Finally, we ended the second quarter with about $1.1 billion of cash and short term investments which continues to provide us with significant financial flexibility. We remain committed to deploy a minimum of $2.4 billion of cash in 2018 on acquisitions and share repurchases as part of our previously communicated target to deploy a minimum of $3.5 billion in 2017 and 2018 combined. The acquisition pipeline in our industry remains active. We continue to be highly interested in participating in our industry's consolidation but will remain disciplined in our approach. We plan to continue to repurchase shares in the third quarter. This concludes our prepared remarks. Once again we appreciate your interest at PPG. And now Jamie would you please open the line for questions.

[Operator Instructions] And our first question today comes from Christopher Parkinson from Credit Suisse. Please go ahead with your question.

Can you just give us a little color on the breakdown of the raw material basket and what you're currently leasing as well as your general outlook for the second half into 2019? And also just how you're assessing the potential to further raise prices in order to recover your margins? Thank you.

Well let's start with the easy one first. We have price increases announced in the second quarter and we are evaluating and will be announcing further increases as we speak. So that's the easy one. The pressure on raw materials think about propylene as a significant driver of that. So you have emulsions up. That's a significant one. Of course you got the fact relates up then you have the pressure coming from the higher oil prices that's impacting solvents. And then we have packaging cost are also up. And then my favorite of course is epoxy. So those are all ones that we're feeling pressure. The good news is for a number of these things we're taking actions. So whether it's a TiO2 or we're trying to optimize the formulas and I mentioned earlier 1% lower consumption packaging where we're looking at how do we optimize our packages, that one as well. So I would say those are the primary pinch points Christopher.

And then also I think we all understand why the focus remains on architectural volumes given recent developments. But can you talk about what you're seeing on a sequential basis in your general outlook for general industrial coil packaging? Just how should we should think about the growth there and also the margin contribution in the short and long term? Thank you.

Let me see if I can get all the business as you mentioned. Let's start with aerospace. Fantastic business. Terrific performance. I mentioned on the call that we're going to be up 10%, and we were up 10% in the second quarter. Strong performance across all the different platforms whether it's sealants packaging, transparencies, coatings, all of them doing well. Military is strong. Commercial is strong. And we see General Aviation coming back. So a very solid team performing at a very high level in that regard. General industrial the places that are I would say on the upper end of the range, so automotive parts are continuing to do well. Electronic Materials probably low-single digits, wood kind of flattish, coil doing well as you can imagine that's a strong commercial market, transco doing well. Appliance we started to see a little slowdown in appliance. You have the trade uncertainty the tariffs. So I think our appliance guys are going to be looking at this a little cautiously. I don't see demand change. But I do see inventory in the system working progress change. And of course, heavy duty equipment remains very, very strong. So Christopher did I catch?

And about last one is packaging. Christopher, I'll tell you this is Vince. Packaging business for us as I know you know has been a increase good performer as we introduce our BPA-NI technologies further. We continue to outperform the market up mid-single digits this quarter, market that's low-single digits. We expect that to continue. We're in the middle innings of a BPA conversion process. So we still feel there's good runway left.

Our next question comes from David Begleiter from Deutsche Bank. Please go ahead with your question.

Michael on the U.S. and Canada Company owned stores, strong performance in Q2 also strong performance in Q1. What do the market grow either in Q2 or Q1 or combined? And how are you growing the market as it appears you are?

First of all, I don't know that we are growing anything, but at the market rate. I think if you look in our presentation where we have the heat chart you will see that where we color coded ourselves at market for U.S. So that would be my first comment. I think this trend of strong performance in the stores. As you know, this has been a multiyear effort to close the gap in that area. And the team has worked really hard to close that gap and we're getting price. The market is strong. And of course, the shift from DIY to do it for me is what's really driving why the trade business is outperforming the DIY business.

And Michael and Vince just on the $85 million of cost. Can you break down between how much was allocated to Lowe's and how much is in this designed to offset the other cost inflation you highlighted?

David this is Vince. Walking around numbers certainly more than half close to two-thirds would have been allocated to support what I would call our not only our customer assortment change, but look at geographically our U.S. business. And the remainder would be rest of world. We won't break it any finer than that. But we are battling, as you know David, raw material inflation everywhere. So rest of world we're trying to offset that with pricing and the lever obviously is with efficiency and cost. And then again, the portion for the U.S. would be split between our architecture business and other businesses.

Our next question comes from John Roberts from UBS. Please go ahead with your question.

Solvents usually follow oil more closely than other raws. You mentioned propylene as well. In the industrial segment I think probably has more exposure to petroleum based raws. Is that the biggest difference of the different margin performance we have between the two segments this quarter?

I would say that is certainly one significant factor. You got to be epoxies that are in there as well, and so when you look at the raw material basket. And of course, the other factor is, it's much more difficult to get price with our global large OEM customers. And although, we are starting to get it, it lags the other businesses. So we’re -- you can see how we in Performance Coatings side that gap has closed much quicker than the gap on the Industrial Coatings segment.

That said, John I'll just reiterate what Michael said. We're out with customer increases -- or excuse me, selling price increases to our customers in Q3. Certainly, a portion of those are pointed at our Industrial segment and the businesses within that segment. And then we're comfortable, we'll get traction with some of those certainly increases.

And then Michael I think you mentioned the new tariffs were having a modest impact on your Chinese raw material cost. What would be the raw material most sensitive to the tariffs that have gone in?

John for us probably the more sensitive and direct one is what we call tinplate. So you can imagine a lot of tin goes into paint cans. And so that's the one that we're watching most closely with respect to the tariffs that are announced.

And our next question comes from Ghansham Panjabi from R.W. Baird. Please go ahead with your question.

First off, on auto refinish and your expectation of moderating growth in North America. I think you called out lower collision claims and miles driven in the second quarter. Do you view that as part of the normal shift in the market during the course of a year? Or is there something more secular that concerns you?

Well, the miles driven is only up like 0.2%. And typically miles driven is more driven by the economy and employment. So this is a clear sign that people Ubering around and taking shared vehicles and public transportation and that as having a slightly, I would say, very modest impact on miles driven. Collision claims, I would say, is much more cyclical. So you should have less accidents during the summer than you will have during the winter. And, of course, we will start to see the impact to some of my favorite activity, which is hail, which doesn't hurt anybody but yet leads to a lot of opportunities for our refinish business. So that would be something that you'll have some offsetting that's a positive during the August/September timeframe.

And then on packaging in Asia and the share loss that you experienced as part of your price increase initiatives. This business, in theory, has high switching costs. I guess, were you surprised at the share loss? Or was it sort of the coatings on the outside of the cans? Thank you.

Well, I would tell you that the - our Asian customers are willing to send messages much more frequently than our U.S. and European customers. So even though they are switching costs, sometimes they'll want to punish you. As you know, we've had five quarters in a row of price increases. So one of the reasons why our volume was up this quarter is people have stopped punishing in us. But in Asia that – some of that behavior still exists.

Our next question comes from Bob Koort from Goldman Sachs. Please go ahead with your question.

Maybe extending from that a bit, Michael, you had obviously very good volumes this quarter, two out of the last three. And I think you had suggested, maybe in the past, that the underlying demand was better but there was some blowback from the price hikes. It seems like your competitors now are playing ball or at least talking of the same more aggressive moves on pricing. So should we expect that we can see this in more GDP type volume growth in the future? Or it is - it's still too early to call?

Well, first, I think it's too early to call because we're going to continue to prioritize margin recovery. Second, I think, we're going to be a little bit hampered as we tried to explain in the prepared commentary that the impact of the customer assortment change at Lowe’s. But by and large, we do see more customers taking price. We see more of our – more of the market talking the same need, have margin recovery. So there should be less opportunity for people to shift volumes around to take advantage of, what I would call, salespeople who aren't paying attention.

And could I ask on Europe. It seems like architectural trends there have been pretty uninspired for quite a long time. And I guess I always envision the paint market has been fairly constant, maybe low growth, but reasonably sustained growth. Why can't you guys get better volumes out of the European markets in architectural?

Well, again, I would say that's a little bit choppy. So we've done exceptionally well. If you go back the last three, four, five years in the U.K., we had a little bit of a setback in the Benelux when the people that were not maintaining the – there's a large rental market in the Benelux and they've kind of prioritize cash recovery for a while. Now they're back painting. So we do see fairly decent growth there. The Eastern Europe, I would say, is slightly better. The big challenge is, France is our biggest market by far, Bob. And retail is soft. And the one thing I would tell you is, I was just over there a month or so ago and I saw more cranes over in Paris than I've seen in a long time. Consumer sentiment is up. I've been joking with my friends over there, the French one, the World Cup, hopefully that will take them to spend a little more money. But we do have to recognize that there is some portion of our business that people have a choice at where to spend their discretionary dollars. And right now they're much more focus on experiences than they are in home improvement, unlike in the U.S. where you're getting a pretty significant return on your investment when you put your money in your house. So I don't - I haven't given up. So if your question is, have I given up? The answer is absolutely not. And the good news is we're doing pretty well earnings wise. We just need to continue to capture our fair share.

Our next question comes from Frank Mitsch from Wells Fargo. Please go ahead with your question.

And Michael that World Cup cuts both ways. I'd imagine that productivity was probably a little bit lighter over there over the past several weeks. I wanted to….

But I don't accept that excuse for my team.

I certainly I could understand that it would not be applicable to a company based in Pittsburgh. I want to come at the pricing question just a little bit differently. You've got a string of positive year-over-year prices. I think it was like 0.1% 3Q, 2017, 1% in 4Q, 1.6% in 1Q, 2.2% in 2Q. Is this something that we -- and you've got pricing initiatives in place, so should we think about the order of magnitude of price is kind of accelerating here and we're going to be approaching that 3% mark? How do we think about the overall magnitude of price?

Well I do think price is accelerating. And I think that's a reasonable assumption to make. And I do think that there's more to be asked for and gotten in this marketplace. When we think about the logistics now we stack logistics cost on top of raw material cost. So our sales teams are heavily focused on that capture.

And then also going back on looking at the lovely heat map, seems to be a fair amount more green on the screen now relative to last few quarters and a little bit less red. And I think you were saying that you're expecting end use market activity comparable to the second quarter. So understanding that seasonality takes it down from 2Q. But on a year-over-year basis, it seems like absent the issue with Lowe's that you're still calling for a pretty good volume quarter. Is that correct?

Well I certainly would like to see that. I'm confident that team recognizes the importance of getting price first. So I would say your conclusions are probably accurate.

And Frank I think our - as Michael said in our prepared remarks, we generally feel the economies around the world are pretty healthy. And we think there will be so in Q3, obviously depending upon global trade discussions. So right now, we're running at a fairly good clip in most of our end-use markets.

And our next question comes from Jeff Zekauskas from JPMorgan. Please go ahead with your question.

It looks like your cash flow from operations was down by about $250 million year-over-year for the first half. Is that roughly right? And are you going to be able to generate the same amount of cash you did last year in 2018? Or because of higher raw material costs that's too high a bar to reach?

Yes, Jeff I think your numbers are fair. The biggest cash use we have is the first six months of the year, even though our working capital as a percentage of sales is even with last year, our sales are up, so we actually have more working capital in terms of dollars. And that's by far that's the biggest use of cash year-over-year but your numbers are accurate.

So, PPG use to generate much more cash than it did net income. And do your cash conversion over time this really come down where it's more or less equal to your net income. Do you have any targets or plans as to what your cash conversion should look like over a longer period of time?

As I think you're aware, Jeff the last three years we've shaved roughly 100 basis points off of our working capital as a percent of sales. And some of those years we were growing sales. So that was – the big contributor was the 100 basis point reduction. That's still our target this year. And again I think that will be a – that will allow us to grow our operating cash flow higher than our earnings to your point.

Our next question comes from Kevin McCarthy from VRP. Please go ahead with your question.

Your corporate line, under operating profit looks like expense decline materially in the second quarter on a year-over-year basis and that was the case in the first quarter as well. Would you comment on what's driving that and what your outlook is for future quarters there?

Yes, I'll comment on the difference and then John is probably going to comment on the outlook. So, Kevin we made a significant amount of effort over the past couple of years in some of our cost post such as pension and OPEC cost. Those have driven that corporate expense line down. In addition the past - this year and past year the incentive comp number for the corporation is also bit lower. And finally we did have in the first half of the year, positive intercompany foreign currency. This will be assets and liabilities between our foreign affiliates, obviously, our headquarter parent company when currencies move we have to take those intercompany balances and through them up $2. And in the first half the year for both quarters that was a positive. We do expect some of that to reverse as the currencies have flipped. And John do you have the forecast?

Yes, Kevin this is John. So for the second half of the year we'd be looking at between 75 million and 90 million for both quarters. Yeah, I think as you go into next year, I think the run rate will come down from 2016. So I think a lot of people have been looking at 2016 run rate. And through a lot of efforts but different actions whether it's benefits and pensions or through workforce reductions we have a lower base now. So I expect our run rate going forward to be lower as well.

And just for clarity the 75 million to 90 million is total for both quarters.

And then second question if I may relates to your new restructuring program of $85 million. What are the sources of those savings? And then I think you made a comment that you expect 45 million to 50 million in the back half of 2018 but I think that included year old program from December 2016. So maybe you can help us understand the flow through on the new 85 million and how much will be this year versus next?

Kevin, John again. So let's talk about the 2016 program. We have most of those actions are done. So now we're realizing the benefits. And that's working out to be a $13 million to $15 million quarter benefit. Per quarter that should sustain itself into Q1 of next year. The new program has started. We're going as fast as we can with the program. Probably be at a full run rate early 2019, but really a significant contribution as we get into Q4 on that program as well.

Our next question comes from Patrick Lambert from Raymond James. Please go ahead with your question.

Is the reception okay?

We can hear you Patrick.

It's just the French, Patrick.

Yes, it's pretty far away from you guys. A few questions. The first one, I think your comments on EMEA did curve volumes but you somehow let go. If I heard correctly during the year, where do you think these volumes have gone if I may ask? First question. Maybe I'll ask the other question later following your answers.

Patrick this is Vince. As Michael said, we're prioritizing selling prices in the region over volume. There is a marginal volume that are going to folks who are not following the same philosophy as us and as you know, particular because you live in the region, that there are several much smaller players in the region than you'd find versus the U.S. market, so there are folks who are willing to take substandard profitability business.

So mostly lower…

Correct.

The second question regards again sorry, I could not understand completely the Lowe's impact how to model the topline of the lack of contract there in H2 '18?

Right, Patrick so this is John, so the 120 to 150 range represents the net impact so it would be the loss at Lowe's and the gains at Home Depot and it would be off of our expected revenue, total revenue for the company.

And the last one, last question on industrial margin. I think it was a good 400 basis points year-on-year difference of EBIT margin. Is OEM as I heard the OEM is likely to be the largest contributor to that, but is there any big discrepancies between the other sub-segment of industrial that can explain that big gap?

We typically don't provide our business unit details below the reporting segment. Again as Michael alluded to, we have very large customers in that segment, global customers. They're typically good at deferring price increases. We're starting to get traction as you see in the numbers now. We expect that to continue.

And so we expect the prices acceleration also industrial actually maybe more pronounced industrial?

We expect further pricing in both reporting segments, correct.

Our next question comes from Don Carson from Susquehanna. Please go ahead with your question.

Michael you mentioned that you saw industrial margins could be better year-over-year by Q4. Are you expecting gross margins for the overall company to be better year-over-year by Q4 or is part of that improvement in industrial also some of your cost cutting?

Don I'm going to take this. For us we're looking at the reported segment margin which Michael has alluded to. That would include pricing actions but also the cost actions that John mentioned. So it will be accumulative of both of those to get us on a reported segment business on a flat year-over-year.

So said another way overall you don't think you're going to get improvement in gross margin year over year until you get into calendar 2019 for the overall company?

It's too early to call 2019 Don. We're tracking the Q4 reported segment margins flat and that would include some benefit from items below gross margin.

Okay.

We are totally focused on the second half of the year and getting this margin recovery.

And a follow-up on U.S. architectural. Two questions. One do you need more price there given the emulsions continue to go up and solvents and packaging costs are going up as well. So you have a third price increase in the table? And then secondly you've been getting such good volume growth in your company stores is there any side to accelerate your expansion plans on the company storefront in the U.S.?

So there's no question that there's raw material pressure in architectural U.S. And the other one is logistics cost. And that's not just from our D.C. our customers but also for our plans starting D.C. So you've got two levels of logistics cost in there. So we are actively evaluating the appropriate timing for that. We're not in a position that we can talk about that. But that is under active evaluation. As far as the store expansions we are selective in that. So we've added in the markets that we're best in. So I think about the Texas market that's an area that we've continuing to invest in. But we're selective on where we're doing that. And we will do that on an as needed basis. Obviously we're more aggressive in Canada where we're the market leader. And we're less aggressive in certain segments where we're far away from the market leader.

Our next question comes from Duffy Fischer from Barclays. Please go ahead with your question.

First one just on Michael's comment on FX being negative $60 million to $80 million in Q3. Was that a sequential or a year-over-year number?

Duffy this is John. That's a year-over-year number.

That's a sales number. Sales number Duffy.

And then could you parse out the big buckets of raw materials. We've talked a lot around the different pieces and parts. But epoxy solvents TiO2 which do you see moderating in the back half and which do you see continued pressure operates and did get any relief in the next year in any of those buckets?

Well I think we've talked about TiO2 moderating. So I think that one we see supply increasing in TiO2. So I think that's -- we're pretty consistent on that. The propylene one though is a bit of a concern for us. If you look at propylene in the U.S. it's up 28% year-over-year in the U.S. and 30% year over year in Asia. So there are still more pricing pressure likely to come through in anything that touches propylene.

And oil solvent derivative – the oil derivatives solvent your guess is as good as ours Duffy.

But WTI is up 40% year-over-year and Brent is up like 50% year-over-year.

Our next question comes from Stephen Byrne from Bank of America Merrill Lynch. Please go ahead with your question.

Is there anything that kept you from being a little more aggressive about share repurchases in the second quarter just looking at the share price? I thought you might have been more aggressive. But perhaps it's a reflection of what you're looking at in your M&A pipeline?

Yes. I think you answered your own question. So we're always trying to keep our powder dry so that we can do acquisitions. And we're always looking at the pipeline we would prefer to do acquisitions. That's number one in our target list. But if we can't do it we're not going to let the cash sit on the balance sheet. So we're going to put it to work. So I think that's how we're looking at it.

And Steve we said all quarter the very active pipeline in the coatings space. There's certainly in our mind going to be deals done this year whether we're the one who tracks the deals are not or remains to be seen. We're going to be remain disciplined but it's an active pipeline right now.

And on the inflationary cost pressures you've talked a fair bit about the ROS. But on the logistics side would you say that shift between those two is becoming a little more problematic on the logistics and transportation side? And does that, do you have the power to push price because of an awareness of logistics costs? Is it as challenging as it is with higher raw material cost? Or does this give you a little more support on pushing price?

Well, it's certainly not the magnitude of the raw material increases, right? But it's an adder. So if you think about high jumping let's add another foot to the high jump bar and all our customers are impacted by that. Some of them can argue, well, we don't oil we don't buy this and you should offset the raw materials. Well, I can assure there's no customer that isn't impacted by logistics increases. So that makes some of the selling argument that we have out there easier to sell because they can't deny that.

Our next question comes from John McNulty from BMO Capital Markets. Please go ahead with your question.

With regard to the logistics, can you give us a rough idea of what that actual that nougat is for you in terms of percent of your either cost or sales just so we have a clue? And then how to think about how much it's up year-over-year?

Well, yes, again, a number we typically don't like to give out John. It certainly in the single-digits, call it mid-single digits as a percent of sales. We kind of give you some kind of guardrails. Right now, it's up a double-digit percent as most companies are seeing.

And then, I guess, if I think about the costs or the raw materials, I guess, and price, I understand it doesn't necessarily work on the margin percentages. But if I'm doing the math right on mid-single-digit cost inflation and 2% plus price, it looks like the 2 kind of net each other out. Are we thinking about that right? And then if that's the case, I guess, when you think about bucketing where some of the other headwinds are, how should we think about the bigger buckets and what the real pressures were this quarter?

If the two net it out, I think we'd be having a different dialog right now John. We're still climbing the hill to get the raw materials back with price. As you pointed out, we made good progress, good traction, but we still got more work to do. And then as Michael mentioned, we're stacking down on top of that freight. Some of that freight goes into the growth profit line so that might be another element for you to consider, but we have more work to do.

Our next question comes from P.J. Juvekar from Citi. Please go ahead with your question.

So Michael, I think you mentioned that your reduced your TiO2 requirement by 1%, is that correct? And if it's true then, is that permanent? And just tell us how did you achieve that? And how much savings can you get from that?

So the first question is, it is permanent and it is how you formulate the paint. So unless you're a paint chemist, I'm not sure you fully understand the way we're doing it. But it is the spacing of the TiO2 within the formulation. So if you want more chemistry lesson I'll get you in here with our Chief Technology Officer. But the bottom line is, it is permanent and this is something that we're working on. We have a number of suppliers that supply us other raw material ingredients that are dedicated to helping us work on the TiO2 spacing, and you have the hiding as well. And so they are also working on the hiding. So these are all things that the team is working actively on.

I would like to talk to your scientist to understand that better. And then secondly, one of your competitors started TiO2 pass-throughs. Have you thought about doing either pass-throughs of TiO2 or any other raw material, which would reduce volatility in your business and maybe allow you to focus more on innovation?

So I guess, P.J., we have not seen that initiative. Any of these single raw material initiatives have not really been successful. What's more successful is if you tie a basket, where all the basket goes up, where all the basket goes down and then netting of that basket. And so we have a number of different pricing mechanisms with our customers. And they're all unique to the marketplace so that we try to work collaboratively with our customers to get the price. And some customers wanted in fashion A and some wanted in fashion B. and some wanted in C and D. So we try to be unique with our customers, but this single thing of like a single TiO2 doesn't typically work, whereas a freight surcharge might be something that would take some -- might be beneficial, but that's generally not the way we do it.

And I just have a clarification question of the comment earlier. You mentioned that you expect uneven growth in China. Is that more of a slowdown in China? And have you seen that so far? Or is that an expectation? Thank you.

No. We've not seen it and it's all going to be the tariff related. Right now through the first to whatever it is, 18 days, the sales reports that I’ve seen for China. They're having July very similar to the second quarter. And so we're just on the lookout for that.

Our next question comes from Vincent Andrews from Morgan Stanley. Please go ahead with your question.

So just two quick ones. Could you help quantify the extra shipping day from a volume perspective? How much did that help in the quarter?

Vincent it was - this is John. It was mostly related to Mexico and the U.S. And so specific to those businesses and probably total revenue 50 basis points or less.

And just as a clarifying question, in the comment earlier was that you expect TiO2 to moderate in the second half? I just want to make sure you – are you saying that the pace of the increase is going to be less year-over-year or are you actually expecting the price to go down? Thanks.

I would say that it should be every moderate increases if at all.

Our next question comes from Laurence Alexander from Jefferies. Please go ahead with your question.

One quick clarification and one larger picture question. Can you just clarify, when you commented on the sequential trends will reflect normal seasonality, does that supposed to – is that remark about the segment trends intended to be before or after the Lowe's adjustment that you then break out. And secondly, a bigger picture question about the balance between pricing and productivity and innovation as ways to offset raw material pressure. Are there other opportunities to do a similar kind of blitz as what you've done on TiO2 at - on some of the other raw materials that you use to sort of materially change your input? And can we expect those same split between productivity and price as a way to get margin back to be sustainable over time? Or is it going to get tougher to keep finding new sources of restructuring opportunities?

So Laurence, I'll answer the first one and Mike will take the second one. The numbers we gave you with respect to the customer assortment change in seasonality, you should take the seasonality effect first and then take the map on the customer assortment change after that.

And just to make sure you're clear on that. So the second quarter, you have the big box of building inventory and independent of paint season. And now they had their inventory, they're going to go work through the inventory to see how the year goes as they’re – so they’re ordering less as the quarter goes on. In regards to the formulations, every year one of our scientists that's working on our formulations are encouraged to look at the total cost of the formulation. And so whether that's optimizing the TiO2, the solvent blend, the resin or how do they get more solid in a coating versus the alternative. All those things, packaging, how can they deliver more active ingredients in a package versus less? So there's multiple different ways to look at it. And we don't mandate only TiO2 where – looking at the total cost of the formulation.

And Laurence, just to your question on overall innovation. I think it dovetails -- the -- we have formulators who do this. That's cannibalization of an existing product. We preferred to be in certainly a much more raw material environment and we can their resources to creating new-to-world-type products. So this is cannibalizing from our ability to spend as much R&D as we would on innovation. We also have process or process innovation teams who try to allow us to produce this in a more efficient manner. So from a manufacturing perspective they work on that as well.

Our next question comes from Arun Viswanathan from RBC Capital Markets. Please go ahead with your question.

A quick question on volume. What would you say are the buckets that give you the most concern as to why you wouldn't keep this 3%-plus clip going? Would it be Europe, Asia or Latin America or -- and then maybe by business line, any areas that you're specifically worried about?

Well the first one is retail Europe will be the highest one. The next one would be Brexit. The next one would probably be, I would say the uncertainty around China. We're not seeing that yet. So it's probably a guesstimate at this point in time. But when I look at the other businesses I mean PMC is at a cyclical low. And so that's probably not going to get anything but better from this point on. Aerospace continue to perform well. Refinish continues to perform well. Surprisingly, the OEM automotive had a good first half of the year, slightly better than expectations. And we see no reason why the second half will continue. The only negative there of course is whether or not people were trying to buy ahead of the tariffs right, so we won't know that just yet. But we still see more transitions to our packaging of INNOVEL products, so there's still more gains we have there and our industrial business continues to perform well. I guess the main ones are China retail and Brexit.

And then I just had a question on price versus ROS. I mean, if we look back, this industry has done a pretty good job of recapturing raw material inflation and sometimes even pricing over ROS. It looks like now there was maybe an exacerbated lag maybe due to the M&A activity last year. But is there anything else that has changed structurally as to why it's either taking longer for you guys to achieve price or to offset inflation? Or is it that the volume picture is just weaker that your customers are pushing back more? Any thoughts on if there's been any larger-scale changes here?

No industry change. Clearly there's probably more people focused on cash right now. And because of that they're making certain decisions. For us, we're going to be in this business for a long, long time. And so we're prioritizing the margin recovery. I don't think there's been any change though.

And then lastly, on M&A. You discussed that there was likely to be activity this year. I mean, is there any heightened kind of aggressiveness on your part to be involved in that? With their private equity folks, are they dropping their return requirements and valuations? I mean, what would it take for us to see some more deals from you guys this year?

Well, private equity is really not a factor in this space. They can't match synergies that the strategics can bring to the table. So we do get outdated at times and that's a fact of life. We're going to remain disciplined. But we do know what's in our pipeline and we are certainly actively engaged with a number of people. The biggest challenge is what I talked about on the first quarter were the bid and ask had widened because of raw material inflation. So they're not getting their margins back and they want to get paid on let's call it their best 12 months in the last 36 as opposed we want to pay on the current performance. So that's what the bid and ask differential is.

And our next question comes from James Sheehan from SunTrust Robinson Humphrey. Please go ahead with your question.

On your auto OEM performance, looks like in most regions you were performing at/or above the market or in Asia Pacific you're below the market. And I'm not used to seeing that. What can you provide some more color on Asia Pacific auto OEM?

Yes there's two primary factor that drove that. One is we still having our numbers in Australia where there was still an operating plant a year ago. And then the other one is our share in Korea. As you know the Korean business is significantly impacted. And so that's it. If we drew our box around India and China we're doing very, very well and I have absolutely no concerns. So it's really those two factors that are driving that.

And on the accounting investigation. You wrapped up your own Pro but then I think there's also an SEC probe. Can you talk about the expected timing of that investigation?

We have absolutely no idea what the SEC timing will be and we won't be able to share anything until it was finalized anyway. So we'll be totally transparent whenever we can be. But right now we have no insight into what they're thinking.

And at this time, I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

Thanks, Jamie. I'd like to thank everyone for your time and interest in PPG. If you have any further questions please contact Investor Relations. 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.