Q2 2019 Earnings Call
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Sure Pacific.
Excluding our JV disposition impacts.
Overall volumes were down mid single digits, while average price mix increased low to mid single digits.
The contraction correlates broadly to global industrial production indicators, which remains slow and appear to accelerate negatively somewhat in the period.
Looking ahead, we have somewhat reduced our volume assumption for the balance of the year, though offset largely by better than expected price mix outcomes and additional cost control across the company.
We also continue to invest in business and introduced many new products as per our plan.
Light vehicle net sales declined 4.3% ex FX for the second quarter.
Reflecting lower production rates for our OEM customers in most regions and more severe ongoing demand weakness persisting in China.
Hi, just production forecast for 2019 have been further reduced several times in recent months now calling for a 3.7 global production decline versus a 1% lower assumption as of March end.
The updated global production guidance now includes a 4.7% reduction from EMEA.
A 2% decline in North America.
And a 4.1% decrease for Asia Pacific, including a negative 6.9% in China.
Commercial vehicle net sales increased 4.5% ex FX in Q2, including ongoing strong production of commercial trucks in the Americas and continued solid demand for non truck customers across our business.
Price mix was down slightly in the period, but margins for commercial vehicle have seen continued improvements due to volume contribution.
Regarding our balance sheet and cash flows second quarter free cash flow was solid and we reconfirmed our full year free cash flow targets of $430 million to $470 million.
We finished the quarter at 3.5 times net leverage versus 3.6 times net leverage at March quarter end.
We repurchased 1.6 million shares.
For a total consideration of $39.5 million in the second quarter at an average price of $24.90.
In terms of innovation investment highlights in refinish, we continued the launch of several new products in EMEA, including a new ultra high productivity primer sealer and a new waterborne base coat performance additives.
We also launched our new premium Refinished Standex product line in China.
In our industrial market, we have partnered with a robotics company to introduce a real time inline monitoring solution to optimize the process related to coding electrical motors, which enhances customer quality and productivity.
Finally in transportation coatings Axalta continued its focused on harmonized coating technologies with the first commercial launch of a direct to plastic low bake based co clear coat system, which significantly reduces overall cycle times for customers.
Regarding our 2019 execution priorities, we remain firmly focused on meeting our objective of generating profitable growth.
The back half of 2019 is expected to be moderately challenging given ongoing lower automotive OEM production rates in key markets, we serve as well as somewhat subdued industrial coatings demand in North America in Europe .
Further we remain committed to actively managing our cost structure to ensure broad margin stability, regardless of the volume backdrop in our adult away planning remains highly engaged and an integral part of our goal achievement.
I'll now turn the call over to Sean for further review of our financial results. Thanks, Robert and good morning.
Turning to slide four consolidated constant currency net sales decreased 1% year over year, including a flat result in performance coatings and a decrease of 2.4% in transportation coatings.
Excluding M&A impacts, which incorporate the sale the interest in the consolidated JV in China consolidated net sales would have been flat with performance codes codings posting a 1.2% increase.
The topline result was driven principally by solid ongoing price mix outcomes offset by volume pressure across most end markets and regions.
On the pricing side exulted posted ongoing strong or capture within performance coatings and acceleration within transportation coatings, driven by sequential uptick in light vehicle, which is our third sequential quarter with positive price recapture.
FX translation was a 3.5% headwind for the period.
And the drop through impact of this was largely consistent with our overall corporate margins.
Key sources of pressure included the euro or an MD and Brazilian real.
Q2, adjusted EBIT of $197 million was a 9% increase from the prior year and margins improved 210 basis points to 17.1%.
This result was driven by strong price mix drop through as well as continued productivity benefits, including a benefit from stock based compensation forfeitures in the quarter.
Our bottom line growth was delivered despite volume headwinds across most end markets the ongoing FX impact and raw material inflation at mid single digit percent increases at the adjusted EBIT level.
Albeit at moderating rates against prior year comparisons as anticipated.
Turning to slide five performance coatings second quarter net sales were flat year over year, excluding a 3.5% negative FX impact and up 1.2%, excluding the JV salary related impacts previously noted.
Organic growth drivers included a 4.7% increase in average price mix offset partially by a 3.5% decrease in volume.
Refinish produce second quarter constant currency net sales growth of 3.6% versus the prior year quarter, which was slightly faster growth sequentially relative to the first quarter driven by improved price mix contribution.
Net sales growth ex FX was led by solid increase in North America and EMEA, while other regions were more subdued in the period.
Volumes in the period included somewhat weaker Asia Pacific and Latin America results, along with a moderate impact from distributor channel inventory management in North America.
Exalted channel checks within customer body shops continue to suggest steady demand, including steady purchase patterns from distribution.
Total refinished net sales ex FX also continued to grow positively despite the volume related headwinds as the benefit of improved product mix and continued pricing benefits accrue to positive net sales growth.
Industrial end market net sales ex FX decreased 5.3% year over year and in second quarter, but decreased 1.1%, excluding the impact of the China JV sale.
The modest decline was driven by volume pressure most regions offset by solid gains in average price mix from all regions.
Volume pressure is fairly broad based and global industrial production in the period appeared to be the primary underlying factor.
Performance coatings second quarter, adjusted EBIT of $128 million increased 17.2% year over year with strong continued price mix traction and benefits from productivity initiatives, partially offset by volume drop through impact continued variable cost inflation and negative FX impacts.
Adjusted EBIT margin of 16.9% increased 300 basis points year over year, including both price mix tailwinds as well as cost reduction benefits against the prior year quarter.
Turning to slide six transportation coatings net sales decreased 2.4% year over year in the second quarter before FX headwinds of 3.6%.
Segment volumes decreased 5.1% slightly offset by favorable price impacts from light vehicle.
Light vehicle second quarter net sales decreased 4.3%, excluding a 3.9% FX headwinds.
Volumes decreased mid single digits overall, driven by lower production rates globally, and light vehicle and most notably from China.
Average price mix accelerated sequentially from the first quarter, reflecting the realization of initiatives noted in our last quarterly call and ongoing discussions with customers regarding the need to offset persistent inflation across the business for the last several years.
Commercial vehicle Q2, net sales increased 4.5% before FX headwinds of 2.6%.
This growth reflects continued solid global vehicle markets as well as non truck submarkets, such as bus rail and recreational vehicles.
Global forecast updates for heavy duty truck production remained steady for 2019, despite more moderate order rates seen in North America heavy truck. This past spring as backlogs remain elevated in the region.
Transportation coatings generated Q2, adjusted EBIT of $40 million versus 38 million in the second quarter of 2018 and associated margins of 10.1% in Q2 compared to 9% in the year ago period.
The margin uptick included the benefit of price mix drop through as well as the tailwind from moderate productivity benefits offset in large part by volume declines and ongoing input cost inflation.
Turning to slide seven second quarter free cash flow totaled $104 million versus $107 million in the second quarter of 2008 team.
The similar free cash flow outcome was driven by moderately greater working capital uses in the current period offset by lower capital expenditures compared to the second quarter 2018, which are largely timing related.
We ended the quarter with cash and cash equivalents of $577 million and a net debt balance of $3.3 billion versus $3.4 billion at March 30, Onest end.
Our net leverage ratio at quarter end was 3.5 times compared to 3.6 times at March 31.
Primarily reflecting a $76 million higher cash balance due to sequentially improved working capital performance and after deploying an additional $440 million for share repurchases in the quarter.
Turning to slide eight we are updating our financial guidance for 2019.
For net sales ex FX, we now assume no growth overall, which incorporates our updated view on volume development from the end markets. As we have noted, particularly impacted by lower light vehicle builds but also reduced industrial global production demands.
For reported net sales, we expect to be around 2% lower year over year, including an approximate 2% FX headwinds versus approximately 1% to 2% and our prior assumption.
We have updated our original guidance range for adjusted EBITDA from $950 billion to $1 billion to a range of 950 million to $975 million, reflecting continued volume headwinds, particularly in light vehicle as well as FX headwinds of approximately 2% to net sales and around $20 million at the adjusted EBITDA level.
For adjusted EBIT, and adjusted EPS, We continue to assume low single digit variable cost inflation at the cost of goods sold level and broadly similar sequential guidance constructs, but we anticipate some incremental cost reduction as well as price mix benefits as well as incremental stock based compensation forfeiture benefits, which collectively offset the lower top line assumptions.
DNA is also about $10 million lower principally due to FX translational impacts.
Other line items remain consistent as you can see the incorporation of lower share count from our buybacks in the first half contribute approximately two cents per share which are reflected in the adjusted EPS guidance.
For quarterly phasing of results, we expect third and fourth quarter profit based on the midpoint of our adjusted EBIT guidance range to approximate 25% and 26% respectively of the full year total.
This concludes our prepared remarks, we would now be pleased to answer any questions. Operator, Please open the lines for Q and a.
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Our first question comes from a line of Paretosh Misra with Baron Baird. Please proceed with your question.
Can you elaborate on that this 3.6% price mix contribution in the light vehicle business.
I'm actually curious about the mix spar like how big is the mix component within that 3.6, and what's driving that and is that sustainable.
Good morning, Therakos and thanks for your question.
In terms of the price achievement price mix achievement of 3.6% in the quarter. The majority of that is a is price and only a small amount of that is mix.
Got it and maybe just a follow up on the refinished business. What it can you elaborate a bit more about the what are the volume trends.
That that you're saying it sounds like you saw some weakness in North America and emerging market do you expect that to continue.
Well I think <unk> is your question points out we think about refinish, we have to look at it as a a global market and actually our largest market for refinish is actually is actually in Europe .
And as far as growth markets goes go our emerging markets are a little largest potential growth area as we move forward.
Specifically, if we talk about North America, the volume trends that we've seen there.
As we've explained in prior calls is predominantly driven by the shift from solvent borne to waterborne coatings as well as the growth that we see in the MSO segment of the North America Refinish market. Those shops are just on average more efficient than average shops that are not owned by Msos and therefore.
Did they use slightly less pain from a volume metric perspective, so as we continue to innovate.
Both in terms of the productivity the product as well as the services that we provide.
We capture what is giving up there on a volume metric perspective in price mix.
And then the third element has to do with behavior, we see in the distribution channel and as we've highlighted previously.
Distribution in terms of lowering their cost structure, both at an operating level as well as a working capital level is a trend that we have seen continue.
In the industry, given consolidation as well as distributors his desire to increase their margins.
Got it thanks, and good luck with everything.
Thank you very much.
Our next question comes from the line of Christopher Parkinson with Credit Suisse. Please proceed with your question.
Thank you this is harris sign on for Chris.
I'm just curious how should how should we be thinking about the need for you to implement additional pricing.
Specifically in transportation coatings versus just letting this price increase that you had in two key role through the next few quarters.
If we look at the what's happened over the last over the last couple of years in terms of refinish margins have been negatively impacted by fairly dramatic raw material inflation at a period in time when prices did not go up very much in the overall in the overall market.
We're now seeing traction in terms of having those conversations with our light vehicle customers.
In terms of price increases and we had several those discussions come to fruition and be realized.
Actually in the first quarter, although wasnt an impact of a full quarter. So you see a pickup in the first quarter of what's going on in the second quarter and in addition, what you also see in light vehicle is just the ongoing impact of several other changes that we've made in terms of moving more customers to be on to be on an index.
As well as other other surcharge mechanisms. So the the progress that we've seen there in the second quarter is not a it's not a one time event, we would expect to see that on an ongoing ongoing basis, but perhaps not at exactly the at exactly the same level, specifically with regard to second quarter.
It's approximately roughly half price and roughly half mix effect in the second quarter for light vehicle.
Got it and.
Just as a follow up in terms of the Destocking that you saw in refinish.
During the quarter during the quarter.
Could you just point us any indicators that give you confidence that that doesn't represent any deceleration in demand.
From declining frequency.
And that is just destocking. Thank you.
Given our.
Close relationship with the end customers at the at the body shop level, we have a very good deal.
For what's going on in the in the repair shops, and what we can see there as well.
The amount of activity at the repair shop level as well as.
As well as just the size of the and growth of the car park and accident rates give us confidence that the end market.
It is actually continuing to perform as we had originally expected and what you're just really seeing is the continued push by distribution to become more efficient.
Got it thank you.
Our next question comes from the line of Ghansham Punjabi with Baird. Please proceed with your question.
Hey, guys good morning.
I guess first off going back to auto refinish and sort of looking back at the last couple of years have volumes Robert for the industry. It played out the way you thought they would across your major regions.
Sort of separating out some of the unique destocking element that you've been impacted with a and then going forward what what what do you think it's reasonable for industry volume specific the refinish on an ongoing basis across your major regions.
Ghansham as we look at that I think the important thing to remember is that when you look at the refinish business you really need to look at that at a net sales level just structurally as the as the business operates and in your customer base or trying to push towards higher and higher productivity coating systems, so whether you're in Europe , or whether you're in southeast Asia or North America, everybody is under pressure to to become more efficient. So if you look at just volume trends I think we'll be missing a very important part of the part of the story you really have to look at overall sales.
And I think compared to our expectations, we've actually seen at a net sales level.
The overall end market growth that would that we would have that we would have expected and I think we will continue to see that growth.
In particular in emerging markets.
As you see the car parks and increasing grow and increasing penetration.
Of the middle class and growth of the middle class in those emerging markets.
Understood and so as you disaggregate that comment on net net sales how much do you think price how much do you think mix has impacted that component.
You kind of think about volume mix.
And so on the evolution of higher.
Productive.
Coatings et cetera, what do you think the mix component is if you disaggregate that.
Well, we certainly seen an increase in waterborne coatings.
Much of that in developed markets is really.
Driven by just the natural evolution of the market and then you have some markets where it's more.
Regulatory driven such as China, and then you are seeing as are the other countries really push on the environmental regulatory side of the equation. So therefore, we think that there is going to continue to be a push towards waterborne, but waterborne isn't the right solution necessarily for every situation every body shop. So we do have a high solids Llovio C.
Solvent borne product is the leading product in that category and in the industry that has also experienced strong growth. So I think overall, we would expect to see the refinish industry grow globally.
Andy each market and then we also expect to see some of the shifts that we've talked about in terms of.
More solvent borne or less solvent borne to more waterborne and then even in some jurisdictions that are prime predominantly solvent borne an increase in the use of high solids llovio see solvent borne.
Okay, and just one final one I understand you are very limited in what you can say on the strategic review, but during this period, how should we sort of think about capital allocation as it relates to free cash flow generation for 2019. Thanks, so much.
I think nothing really changes as far as capital priorities I think we remain focus on our M&A efforts.
I think we're going to continue to drive the internal organic projects. Those high return projects that Weve continued to voice over and we will continue to look at opportunistic share buyback and to the extent we're.
Something.
Okay perspective, we'll continue to build cash on the balance sheet heading towards our net leverage target of two and a half times. So that's kind of how we think about capital priorities today, regardless of the digit review.
Thank you very much.
Our next question comes from the line of Mike Tyson with Keybanc. Please proceed with your question.
Hey, guys nice quarter.
Let me think I think I heard you say that your guidance for the second half is 25% third quarter, 26% of the outlook fourth quarter. So you feel that you will have an acceleration into the fourth quarter can you maybe talk about some of the drivers of why the.
The fourth quarter is going to be stronger than the third quarter.
No we do see raw materials moderating as we get into the back half of the year. So thats one big contributor and then from an FX perspective, we also see a little bit of strengthening.
And last thing and not as notable but we do see our comps from an lv perspective, and pollute improving slightly in the fourth quarter.
The last component, Mike would be the usual process of accumulating cost savings to the year, which usually are most impactful and helpful. In the fourth quarter.
Got it and then just a quick one on commercial vehicle it's been.
Sounds like its continues to see good growth for you guys anything in particular driving that.
As the new products market share gains just kind of your thoughts of that segment.
Yeah. The big driver is just the Americas heavy duty truck market continues to do extremely well and given our market penetration there were benefiting from that.
Great. Thank you.
Our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.
Hi, This is David pulling here for David I guess first that's wrong deflating. The second half where are you at risk for pricing pressure and I guess can light vehicles damn price seeing anything from into weak end market demand and lower raw materials.
Yes, I think could you repeat your question I'm, sorry, you came down.
You came through quite softly, we got part of your question, but not all of it.
Yes.
Hi, good how do you think about second half draws are expected to deflate.
Where are you at risk for pricing pressure and when you think about light vehicle can light vehicle. So damn pricing environment, you know weak macro demand and lower raw materials environment.
I think as we look at our as we look at our markets, we do see raw material headwinds easing throughout the second half of the year based on purchases that we've made up till now so barring a wearing a shock here in the in a big uptick in the third quarter in terms of what were buying that would flow through.
In the fourth quarter. There still are there still are headwinds. It's just that there. It's just that they are lower so we still have year over year inflation and as such I think our customer base understands our need to recoup that inflation and with regard to with regard to light vehicle.
The gap in price in price capture to offset the raw the raw material inflation that has occurred there.
Over the last really two and a half years now.
Two years is quite substantial.
And so while there has been good progress on price increase there to offset those costs.
There's still needs to be more.
To offset more of the margin decrement that occurred over the last few years.
Thanks, and then how do you think about your 2020, but.
Relative to your 2019 expectation.
At this point we havent.
Provided any guidance on 2020, our our regular cadence has to do that towards the end of the year. So.
You can you can expect that towards the end of 2019.
Okay. Thanks.
Our next question comes from line of PJ Juvekar with Citi. Please proceed with your question.
Hi, Good morning, this is Eric Petrie on for PJ.
China Auto sales were weaker in the quarter, but do you buy the view that.
Auto dealer inventories in China have declined and are now back to normal and then what is your order book looking like.
Yes, so we don't typically carry an order book.
Or certainly one that we discuss in automotive that's a relative just in time delivery business and automotive.
Manufactures will carry generally a couple of weeks inventory that we're consistently replenishing so our visibility into that.
Short term is about two weeks, we certainly discussed with our customers what their plans are longer term. We are aware that inventories in China are now quite low which should be or at least could be helpful. The outlook for demand there, but we remain relatively cautious in terms of our guidance construct with regard to any acceleration of the China market at this point.
Thank you.
And secondly, could you talk a little bit about the industrial end market demand and what you saw.
Well or better.
Or worse in the regions, especially noted strength in Asia Pacific.
I think as others have as others have seen in broader industrials as wells as well as in coatings in the second quarter, we did see a softening a softening in demand.
And for US we've been experiencing an outsize growth in that in that end market for a while we did see some market softening in the second quarter.
As we go through our markets not too dissimilar from perhaps what others have commented in in the wood business.
Residential starts and Remodels in the market were down about 5%. Fortunately, we've been able through new products, new customer gains and price increases to offset a large portion a large portion of that.
In the coil business, we have been impacted by lower demand in construction.
We're culture and also lower steel imports have also dampened demands. So they're somewhat however, we do have a number of new products that have been launched in that market segment and more.
Throughout the course of the year. So I think we're we're also fairly optimistic about our position within the coil market.
Our energy solutions business.
What we see there is volumes down kind of low single digits, but price mix up mid single digits, we have strength in China.
Given that the growth in that market, there and thats been offsetting the softer demand that we see in Europe .
And then in our powder business.
Volumes have been flatter through the second quarter, but we have had price mix up.
In that in that business. So the global price increases that we've had there in some of the new business gains have really enabled us to offset some of the slowness that we saw in North America, and EMEA and China is also.
A market that in the second quarter performed well for us.
Great. Thank you.
Okay.
Our next question comes from the line of Aleksey Yefremov with Nomura Instinet. Please proceed with your question.
Good morning, Matt ground ski on for Alexia.
In refinish last quarter, you touched on how you saw some sales wins in the Americas.
Where these fully implemented and during Q Q and if they were in.
How should we think about that cadence in the coming quarters.
So we've had very good commercial performance, including some new business.
That is in process of being converted the conversion of that business actually takes time.
Because you go on a shop by shop basis, and convert and converting shop over to a new over to a new paint supplier. So we expect to see that benefit.
Be relatively small this year, but have a much larger impact next year.
Thank you for that and then just touching on something that you commented on earlier in terms of raw materials. You mentioned you are pretty far along in closing the gap.
In light vehicle or at least you made progress will that gap.
With raw materials and price be completely close by the end of the year.
Now so we're still I would say early innings as it relates to light vehicle on just to correct something I said earlier, the pricing you're actually seeing come through this quarter, it's predominantly price versus mix. So I just wanted to correct that point, but we still have.
A fair amount of work to do on the pricing side and you've seen the last three quarters, we've we've gotten price with that accelerating this quarter, but there is still work to be done I'm wondering when you bridge over to performance. We are largely caught up on the performance side.
Thank you.
Our next question comes from the line of low right Bob <unk> with Exane. Please proceed with your question.
Into the second half on HD eyes, and things like that and then the second question on the strategic review I. Appreciate that you don't want to speculate on the outcome, but I was wondering if you could share anything on the process itself. For instance have you hired consultants to you and are you sharing info with them on your business and now you're asking them to look at what you can could improve on your business itself are you, mostly doing it yourself and getting in a bank has to think about the M&A outcomes. Thank you.
Well one on the on your second question, we won't be commenting on any of the details of the of the strategic review.
At this time I think what we've said publicly is pretty much all were going to say about that for now on the on your first question in looking at the looking at the raw material basket just.
A little color by by category.
I think for the for Q3 at least we see resin prices.
Finally, starting to be flat, which is an improvement over our earlier expectation of a slight inflation.
In Isocyanates, we do continue to see.
Price pressure, there and expect them to be up year over year.
Solvents, we expect to be for the most part for the most part flat.
In the third quarter monomers as a category, we do see due to some supply tightness. There. We do continue to expect prices to be to be up.
Pigments.
As is usually the case.
Kind of kind of up.
And then on the additive side, we are seeing some relief there and the additive category with prices flattening out at least at least for the moment.
In particular the entire.
Basket and the overall category is just reflective of where oil price oil price has been so again still headwind overall for us, but a lessening headwind compared to prior quarters.
And just to add two other notables that Weve noted in prior quarters, we're still assuming about $13 million in headwinds as it relates to Paris.
And recall with oil really spiking in October of last year before we started to see the change we're sitting on some high dollar inventory at the end of 2018 that largely turned in the first quarter of 2019.
Great. Thank you.
Our next question comes from the line of Josh Spector with you'd be US. Please proceed with your question.
Hey, guys.
Within performance I was wondering.
Can you break down the volume change.
Year on year for.
The refinish versus industrial.
Yes, Josh.
We haven't typically provided a bridge at that level. So we've noted the.
The 3.5% lower volume offset by a higher price mix for the segment.
We did have some decline in volume.
In refinish offset by improved mid single digit price mix.
And likewise, some declining in volume in industrial.
Offset very well by price mix as well.
Okay, and then on performance I guess when I look at what you did from an EBIT standpoint in the quarter and I look at prior years typically quarter on quarter into the September quarter.
It is around maybe a 10 million dollar decline sequentially. If I look at the guide that you have today.
Theres, maybe closer to a 15 20 million decline and I guess I think with some of the mix efforts and maybe a little bit of price benefit that it might have been more like a normal decline into the quarter curious what would be potentially driving that higher sequential decline versus what we typically see.
It's challenging to look at it on that basis in part because prior years had a lot of moving parts.
Notably, including.
The the distributor Destocking that occurred in 17, and there was some pressure for that in 18.
And the development of price mix in this segment over the last couple of years. So.
Doing that particular.
Type of analysis is a little bit challenging so I prefer to think about it in terms of the current year dynamics.
Predominantly.
But you are correct that it is normal and typically seasonal to see a little bit of a step down.
Twoq to Threeq.
Okay. Thanks.
Our next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your question.
Hi, everyone. This is Dan Rizzo wonderful Lawrence how are you.
Hey, Dan.
Hey, if we think about how shifting we finished customers to the coating systems for higher margin. According systems, how does that process work I mean, what's the length of it is it is the kind of involved or is it something that that the except there was do you have do a lot of like kind of speech.
It varies if someone is switching from from waterborne to solvent borne there is an investment that is required in the in the paint boots. Theres also training that's required of painters because the paint actually sprays actually sprays differently. So if your question is kind of waterborne solvent borne.
It's a fair amount of training and really kind of there's got to be a certain amount of throughput or there is a a breakeven level, where it makes sense for shop to be solvent borne or to be waterborne just based on the overall economics and outlook of the shop now if you're talking about switching from one competitors paint system to another competitor spring paint system.
Even if they are both waterborne or even if they are both solvent borne.
They spray differently. So theres also education and training that's required.
In that scenario.
So so it takes a number of months to use to kind of do the switch over how how's work.
A switch over of a body shop can be done can be done in a weekend.
The training and getting people up to unacceptable unacceptable level of performance can can take a few months.
But again, it's largely a function of the quality of the quality of the painter's you have.
Painters that have been in the business for a while highly skilled the process moves was quite quickly if you're in a shop, where you've had a lot of pain or turnover the process, making may take longer.
Okay and then just one other question and then if we think about auto OEM trends what were seeing in light vehicle do you have any initial thoughts on Q4 and is there any likelihood of an extended winter shutdowns potentially for your customers.
As we think about our updated guidance kind of going back to the January guide, we started off the year expected to be slightly up at the end of the first quarter I adjust was showing down 0.9% and now we're down at 3.7% based on what was recently published so we're not expecting any sort of acceleration.
I think as you look at our new top line guidance is now reflecting further volume declines falling largely the I adjust guidance.
Thank you very much guys.
Your next question comes from the line of Jeff Zekauskas with JP Morgan. Please proceed with your question.
Good morning, Jeff how are you.
Good morning, so okay.
Brent when you look at the restructuring announcement by the by the large auto OEM customers in terms of your geographic coming down it's like a footprint in manufacturing how do you think that might touch chip business and is that something that would be.
Isn't that you feel like in 2020 or something that's like a longer time to issue or what do you think that's something that you'll feel this year.
Okay. Chris are you know, there's actually been a series of announcements in different parts of the world.
Probably the easiest way to answer that is that there is actually some impact in 20 Nike from announcements that were made last year, including in North America at a little bit in Europe , Theres, probably still some incremental impact that could occur in 2020 from announcements that have occurred this year in some cases, we're not affected so it really is plant by plant.
When I looked at it in detail I was relatively please.
At the direct impact to us relative to what I had essentially first feared but when I read those announcements.
Secondly, I was wondering whether you can speak about Europe .
Cash flows net effect of free cash flow was sort of like $60 million for the first six months.
How do you think you'll get to a target for year end and like what working capital changes do you expect to get to those numbers.
Yeah, I mean, we continue to drive working capital improvement I mean year to date, we're we're fairly happy on where we're tracking against before your guide.
But as you bridge June to December the big areas of opportunity that we're driving towards our accounts receivable and inventory on a are just by a function of seasonality that typically comes in but we expect that to tighten even more compared to other prior year, but we're we're on track to hit the guidance and why we're reconfirming the outlook that we provided last April .
So you don't think you'll go from like 32 475 by year end.
Mhm.
Okay for our free cash flow.
The timing of the announcement of the strategic review what prompted it and why now.
So so yeah, we've been asked quite a bit as you can imagine during the second quarter about that and.
Essentially all we can say is that the board made that announcement.
June 19, and and we haven't added a anything specific to the context around that timing.
Okay. Thanks very much.
Thanks, Okay.
Our next question comes from the line of Vincent Andrews with Morgan Stanley . Please proceed with your question.
Hi, guys. This is actually Steve on for Vincent I, just kind of maybe a question on the macro level. It looks like you guys cut your IP assumption from like 2.1 to 1.5, but your sales guidance is coming down quite a bit more so.
Maybe if you could just bridge the delta in those two.
Are those two revisions that'd be helpful.
Can you clarify the 2.1, referring to what.
Industrial production.
Your assumptions there.
Oh, okay.
Yeah, I mean, essentially you have in effect, both on industrial and light vehicle from that reduced industrial production guidance, which is some of the underlying driver.
The high and the outlook for those businesses, but maybe jump in if we miss anything in your question, Yes, I mean, the biggest change. So we did provide the macros in the deck, but the biggest change for the topline guide is really volumes within light vehicle fallen I. Just we are seeing some headwinds as far as industrial but the broad change relates to the light vehicle.
Okay.
That's helpful. Thank you.
Our next question comes from the line of Steve Byrne with Bank of America Merrill Lynch. Please proceed with your question.
It's different it's difficult to say I think the distributors overall are as we said before looking to become more efficient both in their operating cost structure.
As well as in the amount of working capital and where they are exactly on their on their process is something that I think you'd have to you could have you'd have to ask them, but I think at the end market. The end market level again, we're seeing strong we're seeing strong growth and overall globally. We had we had we had good price.
I'm sorry, we had good overall overall growth at 3.6% and I think again, it's important that.
Would that everybody not lose sight of the fact that we're in a global refinish market and within that market Europe is actually our largest market in North America is our second largest market the area of the most amount of growth over the next five to 10 years will be Asia and emerging markets. So I think it's just important to keep that that full that full picture in context.
Sure that's helpful and last question.
You guys did quite well in the margin for your performance coatings, you know 300 Bips.
Yes, so on price mix.
Generally speaking it was about 50 50 as far as actual price versus mix.
We don't actually quantify productivity.
By end market, but we are we are continuing to see the benefits of exalt away.
Great. Thank you very much.
Ladies and gentlemen, we have reached the end of the question and answer session.
And now I'd like to turn the call back to Robert Brian for closing remarks.
Thank you I just wanted to highlight that the second quarter was a very strong quarter for us we executed extremely well, we achieved 4% price mix overall and that includes price realization in both segments and across all four regions and in particular, our efforts to offset raw material inflation with price increases in light vehicle should through clearly in the quarter with price mix of a positive 3.6%.
We're also seeing raw material inflation headwinds finally, starting to ease somewhat so the higher pricing the lower raw material inflation and the continued strong contribution from our adult away cost reduction program.
Adjusted EBIT itself increased 9%.
Year over year, and our adjusted EBIT margin expanded by 210 basis points.
So if you flow that through to net income net income also increased by 9% year over year and our adjusted earnings per share increased 13%, which was further aided by our by our share buyback.
To hit our full year profitability goals.
So just wanted to provide that that overall summary, and perspective on the second quarter here and thank you very much for joining us today and we look forward to updating you again on our progress in October .
This concludes today's conference you may disconnect your lines at this time.
Thank you for your participation.
Okay.