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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by and welcome to Axalta Coating Systems Second Quarter 2018 Earnings Conference Call. All participants will be in a listen-only mode. A question-and-answer session will follow the management’s presentation. Today’s call is being recorded, and replays will be available through August 2. Those listening after today’s call should please take note that the information provided in the recording will not be updated, and therefore may no longer be current.
I would now like to turn the call over to Chris Mecray for a few introductory remarks. Please go ahead, sir.
Thank you and good morning. This is Chris Mecray, Axalta’s VP of Investor Relations. We appreciate your continued interest in Axalta and welcome you to our second quarter 2018 financial results conference call.
Joining us today are Charlie Shaver, Chairman, CEO and President; and Robert Bryant, EVP and CFO; as well as Terrence Hahn, who as you saw in our press release yesterday, will become our new CEO in September. Yesterday after the close, we also released our quarterly financial results and posted a slide presentation to the Investor Relations section of our website at Axalta.com, which we’ll be referencing during this call.
Both our prepared remarks and discussion today may contain forward-looking statements, reflecting the company’s current view of future events and their potential effect on Axalta’s operating and financial performance. These statements involve uncertainties and risks, and actual results may differ materially from those forward-looking statements. Please note that the company is under no obligation to provide updates to these forward-looking statements.
This presentation also contains various non-GAAP financial measures. In the appendix, we have included reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information regarding forward-looking statements and non-GAAP financial measures, please refer to our filings with the SEC.
I will now turn the call over to Charlie.
Good morning and thank you all for joining us today as we review our second quarter performance. However, before I begin the review, I’d like to address yesterday’s announcement regarding our CEO transition. Terrence Hahn, who is most recently President and CEO of Honeywell’s Home and Building Technologies Group, who joins us on this call, will be succeeding me as CEO and President effective September 4.
Terrence will also be joining our Board, which will be expanded from 8 to 9 Directors. Following my comments, I’ll ask Terrence to say a few words. I am very proud of Axalta achievements over the past several years, as well as our excellent prospects for the future. While it was an extremely difficult decision to step away from the CEO role of Axalta, I was recently approached with a unique professional opportunity and ultimately concluded I just couldn’t pass up.
When I notified the Board that I was considering stepping out of the CEO role, consistent with our long-term succession planning, the Board commenced a search for potential CEO, who can build on our successes, while I serve as the Non-Executive Chairman.
Moving into a Chairman role reflects my strong belief in Axalta and continued deep interest in its success. I’ll only be stepping away from my operational role and expect to remain actively involved as the Chairman of the Board.
With that said, I’m very pleased to be handing the baton to Terrence as the CEO, and to be working closely with him from the Board. Our company knows Terrence quite well. Seeing the range, and skills, and experience he brings to bear, I’m highly confident that Axalta’s future is in extremely capable hands. And I look forward to an excellent partnership with him, as I assist with the transition.
Serving as the CEO of Axalta over the past 5-plus-years has been both an honor and a privilege. I’m also thankful to the Board, our management team and our entire Axalta family for their encouragement and support. And I’m truly excited about Axalta’s future under Terrence’s leadership.
Regarding the CEO search process and Terrence specifically, the Board conducted a robust search process with the assistance of a leading executive search firm. Terrence was our first choice and we’re confident that he’s the right person to lead Axalta. He brings a clear vision and passion for the industry, as well as an extensive domestic and international business leadership experience.
Terrence’s resume and track record are demonstrable and impressive. And he’s clearly an established and well-known leader in the industrials and materials community. Prior to serving as President and CEO of Honeywell’s Home and Building Technologies Group, Terrence led the Transportation Systems Group at Honeywell, where he helped to oversee a substantial and well-known turnaround in their fundamental performance.
In essence, Terrence developed an extensive track record of both improving and growing multi-billion-dollar businesses in one of America’s best multi-industry companies. Prior to his work at Honeywell, Terrence held numerous and diverse leadership positions over 20 years at Air Products and Chemicals. He also holds both a bachelor and master degree in Material Science Engineering at Lehigh University and an MBA from Wharton.
As a Board, we’re confident that Terrence will hit the ground running on September 4 and even more confident that we’ll build on Axalta’s success, and he will lead us to new heights of growth and value creation.
With that, I’m delighted to turn the call over to Terrence for a few brief remarks.
Thank you, Charlie. And I’m honored and excited to take on the leadership role for this strong company. I value getting to know you, Charlie, and the Board, during the process and appreciate the confidence that everyone has placed in me. Simply stated, I plan to continue the tradition of value creation for our shareholders.
No doubt, this is a dynamic and exciting time for our company and the coatings industry. I was attracted to Axalta, due to its competitive position, talented executive team, and the strength of its 14,000 Axalta team members who deliver every day for customers.
I look forward to delivering new and innovative offerings, deepening customer relationships, and playing a positive role in the coatings industry. It would be premature for me to answer questions at this time, as I have not yet formerly started at Axalta, and I’m not yet an employee. But know that I look forward to getting to know many of you over the coming months.
Thanks again. And now, back to Charlie.
Thanks, Terrence. For the balance of this call, we’ll now shift and review our second quarter performance, and update our 2018 full year outlook based on current market conditions. Axalta’s performance in the quarter demonstrated solid execution, stable market demand and overall strong progress towards our communicated full-year financial goals.
This was achieved against a fairly unforgiving backdrop of significant cost inflation, including raw materials, freight, logistics and packaging, as well as several one-time events during the quarter. One of our primary objectives in the current year is to offset these inflationary headwinds, which we’re doing with the combination of price increases as well as ongoing structural cost reductions across our businesses.
Overall, our quarterly financial results met our guidance expectation we provided in April and featured continued strong organic industrial end-market growth, solid price pass-through in both Refinish and Industrial, and the ongoing benefit from cost reduction and productivity initiatives.
Raw material inflation of low-double-digits compared to second quarter 2017 has posed a real challenge for our commercial teams, where we’ve seen solid success in most business lines with price pass-through, while we continue to discuss this critical need with our Light Vehicle automotive customers, with whom we’ve been having regular dialog.
Turning to Page 3 of our slide deck, I’d like to review some of the highlights. First of all, we grew our second quarter net sales by 10.8% year-over-year, which included a positive contribution of 5.6% from acquisitions, largely completed 2017 as well as foreign currency tailwinds of 2.4%.
Organic volume and price contributed an incremental 2.8% in net sales growth, representing a sequential acceleration in the year-over-year comparison from our first quarter’s 1% growth level. This net sales growth result met our expectations and it was delivering as a backdrop with stable global demand during the quarter. But now without certain challenges, which included some incremental weakness in Latin American economies, a reduction in foreign exchange tailwinds to more modest levels and impacts to Light Vehicle production from a couple of plant specific customer factors stemming from their suppliers largely in North America.
We’re also pleased that realized average pricing accelerate in the second quarter with almost 2% increased average price on a consolidated basis comparing to 1% in the first quarter. We also note that continued growth from Industrial end-market demonstrating the impressive results and expanding this business via both inorganic and substantial organic investment.
Consolidated Axalta organic volume in the quarter increased by 1%, which include a substantial Industrial organic volume growth of 10%, somewhat muted by flat volumes in transportation. Axalta’s second quarter adjusted EBITDA of $248 million, increased 9% from $227 million last year, driven by both acquisition contribution and organic growth.
Margins declined modestly to 20.5% from 20.9% mostly due to the ongoing raw material inflation and modest business mix changes, offset partly by higher average prices, lower operating costs, foreign currency translation benefits.
Taking a look at Axalta’s end-market performance, our Refinish net sales growth of 6.1% included mid-single-digit positive price mix in ongoing moderate FX tailwinds. Business conditions in Refinish markets remain solid and we continue to expect meaningfully stronger net sales growth for the remainder of 2018 aided by clearly less challenging year-over-year comparisons for the second half of 2018.
Our Industrial end-markets posted substantial 40% net sales growth in the second quarter, including 24% contribution from acquisitions, driven mostly by the Wood and Spencer Coatings businesses that were completed on June 1 of last year and now fully lapped our year-over-year comparisons. These deals have been great success to date for Axalta and are both meeting our targets and expectations.
Organic growth is also robust in Industrial was about 10% organic volume contribution for the quarter, underscoring the results for several years of active investment in the business. The broad industrial demand landscape still appears supportive and robust today.
Light Vehicle net sales decreased by 1.5% in the period, with ongoing lower average pricing associated with customer price concessions given mostly in 2017 offset somewhat by low-single-digit FX tailwinds. Volumes were broadly stable with ongoing modest growth in EMEA and Asia Pacific offset by slightly lower volumes in the Americas due largely the Axalta customer exposures and some temporary impacts from plant specific issues. These included a supplier fire and separate supplier strike impacting several OEM plants in the U.S. And general strike in Brazil impacting logistics there for several weeks in the quarter, but we have a large presence.
Auto production globally was largely steady sequentially including stable demand in North America to the second quarter. However, build forecast globally have been trimmed recently by automotive forecasters. As demand appears to be moderating somewhat in Asia Pacific and Latin America, while in EMEA there has been an increasing impact from the timing uncertainty around the need to adapt certain engine technologies and new emission standards, which is expected to be a transitory issues, it relates to regulation as opposed to fundamental market demand. Axalta expects to broadly match this build outcome for the year, adjusted for our specific customer mix.
Commercial Vehicle net sales increased 1.4% in the quarter and we’re modestly up in constant currency terms. Global heavy duty truck demand remains firm, and production rates in regions including North America have now lapped strong prior year period. Axalta continues to see ongoing growth in Commercial Vehicle from all of our regions except EMEA during Q2.
Price mix was flat for the period and overall market conditions across truck – across both truck and non-truck, commercial customers remain supportive. And we do expect this business to perform well in the second half.
Regarding price mix in transportation, we continue to discuss with our customers they need to achieve offset the substantial cost inflation across our businesses, including low-double-digit raw material inflation. Market conditions thus far 2018 have prevented significant agreements on this topic today. Our discussions continue and we remain optimistic that structional [ph] inflation will be recognized over time with offset, as we’ve discussed previously. That said, we’re working with purpose to reduce our cost structuring areas required to maintain the long-term margin and competitiveness of this important business line for Axalta.
Turning to our balance sheet and cash flows. Free cash flow in the second quarter was $107 million compared with $74 million last year. The improvement was driven largely by improved earnings comparisons coupled with modest improvement in operating assets and liabilities.
We ended the quarter with net debt to trailing 12-month adjusted EBITDA of 3.6 times versus 3.7 times at March 31. As increased operating profits on the slightly weaker euro were offset somewhat by lower cash balances resulting in part from our share repurchases in the quarter.
As for our capital allocation strategy, we’ve now spent $140 – $104 million year-to-date on share repurchases. Most of this was completed during the second quarter, and we finally continue to be opportunistic with share repurchases for the remainder of the year.
Regarding operating highlights, we continue to execute on our Axalta Way program with substantial cost reductions in process both in the long-term to drive operational structural efficiency and in the near-term to offset broad cost inflation headwinds.
One of our key Axalta Way initiatives relates to manufacturing footprint adjustments. As we seek all means of increasing our cost competitiveness globally. We are seeking the closure of our significant production site in Mechelen, Belgium, and transferring the production to other sites within Europe. This is a perfect example of hub and spoke operations model we discussed with our investors in February at our Capital Markets Day.
Then the final Broad approval, we would expect to finalize this footprint decision soon and we’ll communicate an incremental restructuring charge along with associated substantial annual savings once finalized. Also, related to footprint changes, we started up by new Wood and Refinish site in Minneapolis, Minnesota, and also further invested in the land associated with further manufacturing site in Nanjing, China.
In other operating highlights, our Axalta Operating Excellence program continues to ramp and we’ve now deployed to a total of eight sites with four done this past quarter. As this progress continues and as our AOE program matures at deployed sites. This initiative will continue to contribute at an increased rate over time from broad productivity and production quality improvement.
In terms of innovation highlights, we’re on track to introduce at least 250 new products this year, as we noted last quarter. Through June year-to-date, we’ve introduced over 120 new products with some notable examples including new advanced primers and clearcoat, and transportation in EMEA, in the Americas, a new fast sand primer in North America Refinish, and our metal-ox [ph] value Refinish product line launched in Mexico.
In summary, Axalta’s second quarter results were solid and on plan and demonstrated our continued progress in both price recapture in ongoing realization of growth from significant innovation investment notably in Industrial. Our end-markets remain largely stable, we are also carefully monitoring areas of pressure most notably related to global growth, the potential impact of trade materials, automotive production in some regions and ongoing cost inflation.
We’re taking immediate and proactive steps to offset these variety of headwinds. We believe our peers are doing the same and the broader stability in the coatings market should serve Axalta well as we seek to achieve strong shareholder returns this year and beyond.
Regarding the topic of tariffs and any perspective impact from escalating trade tensions. This is a challenging topic to forecast but we note that the majority of our sales and income are generated by product source and manufactured in the regions were end products are consumed.
Axalta does not shift inputs or finished goods globally in amounts that are significant in the context of our consolidated businesses. But in case, as what we do this to meet customer demand or requirements, we plan to take actions to minimize any tariff exposure over time. Based on what we know today, we believe that any impact to our reported financial results would be less than 1% of adjusted EBITDA based on current contemplated tariffs on a gross basis, and this amount could be reduced by actions taking the resource product in different regions.
Of course, the greater concern from tariffs and broader trade wars comes from the impact to global consumer behavior and demand. And this is something we will continue to monitor actively.
With that, I’ll now turn the call over to Robert, who will share some further detail on our results.
Thank you, Charlie, and good morning, everybody. As you can see on Slide 4, second quarter net sales excluding FX tailwinds, increased 8.4% year-over-year. This included 15.4% growth in Performance Coatings, while Transportation Coatings net sales declined 2.4%.
Second quarter growth was driven by 5.6% acquisition contribution, coupled with modest increases on organic volume as well as accelerating and positive price mix effects. Organic volume included strong growth in industrial, offset by a moderate as expected decline in Refinish volume largely in North America, as well as a modest decline in North America Light Vehicle, largely due to several one-off customer events in the period that Charlie mentioned earlier.
Overall price and product mix realization remained positive in the quarter. Most of the pricing progress to date has continued to be in Performance Coatings across both the Refinish and Industrial end-markets. Price mix in Refinish increased mid-single-digits, while industrial was also up low to mid single-digits, underscoring solid progress in the segment to offset real inflation. Price mix in Transportation Coatings remains slightly negative for the period.
FX translation benefits decelerated sequentially, given dollar strengthening of late, down to 2.4% benefit from a 6.3% benefit in Q1, principally driven in this quarter by a weaker euro and Chinese yuan. Adjusted EBITDA of $248 million in Q2 increased 9% versus the prior year. Adjusted EBITDA margins declined very modestly by 40 basis points in the second quarter, reflecting the impact of higher variable costs, including raw material, freight and packaging cost inflation.
These cost factors were partly offset by lower operating expenses through Axalta Way savings and pricing within our Performance Coatings segment, which contributed to sequential improvement in margin in the second quarter of 160 basis points.
The onetime impact to EBITDA of the OEM plant issues, related to supplier interruptions, the trucking strike in Brazil and costs related to our potential Belgium plant closure with approximately $5 million. Absent these costs, our second quarter adjusted EBITDA would have been slightly above our expectations. We do however expect most of this as timing and could be made up during the second half of the year.
Turning to Slide 5, Performance Coatings’ Q2 net sales increased 18.3% year-over-year, including an FX benefit of 2.9%. Constant currency growth was driven by 9.2% acquisition contribution and 4.8% higher average selling prices, while organic volumes increased 1.4% for the segment.
For Refinish, Q2 net sales increased by 6.1%, including a 2.7% FX tailwind, driven by robust net sales growth. During the quarter, we made strong progress in adding new body shops in North America, Europe and Asia, and in increasing the penetration of both our premium and mainstream product lines. Average pricing in all four regions was strong with mid-single-digit positive contribution globally for the period.
Industrial net sales increased 39.6% year-over-year, including acquisition contribution of 24% and 3.3% FX benefit. Organic net sales growth in the low-double-digits was very encouraging, including positive contribution from all regions as well as positive volume growth in all regions, except Latin America, which witnessed a modest pullback overall.
Average price and mix was accretive in the quarter in the low-single-digits, benefiting from pricing actions across the businesses as required to offset inflation. Performance Coatings delivered Q2 adjusted EBITDA of $177 million, a 20.2% year-over-year increase. Drivers included volume dropdown benefit, improved price mix, and completed acquisitions, offset partly by higher raw material input inflation.
Q2 adjusted EBITDA margins of 22.5% were slightly better than the 22.1% reported margin last year, reflecting our ability to offset raw material inflation with price increases in Performance Coatings.
Turning to Slide 6, Transportation Coatings net sales decreased 0.8% year-over-year in the second quarter, including a currency benefit of 1.6%, with steady constant currency net sales in Commercial Vehicle, offset by a slight decline in Light Vehicle. Segment volumes increased low-single-digits in Q2, more than offset by ongoing favorable price mix similar to last quarter.
Light Vehicle Q2 net sales decreased 1.5%, including a 1.6% FX tailwind. Volumes increased slightly, with growth in EMEA and Asia Pacific offset by decline in the Americas, including the effect of several customer specific impacts that reduced production in the period.
Q2 average price and mix was down low-single-digits, reflecting residual pressure from mid-2017 customer price agreements. We remain in active discussions with numerous OEM customers, regarding price increases to offset raw material inflation. We’ve made some progress and expect to make more as our customers recognized the structural cost pressures we continue to face. At the same time, we have increased our focus on lowering our cost structure in the Transportation business to maintain our long-term margin profile.
Second quarter Commercial Vehicle net sales increased 1.4%, including an FX benefit of 1.2%. This relatively flat net sales result reflects the annualization of strong prior year production rate for heavy duty truck and other Commercial Vehicle end-market.
Commercial Vehicle production for the industry remains robust, increasing 7% global growth during the quarter, including contribution and growth from all regions, albeit slowing somewhat in Europe in the period. Forecast for Commercial Vehicle currently assume demand stability for the remainder of the year in most regions, albeit with some slowing anticipated in China.
Non-truck commercial customers also continue to enjoy strong demand, supporting end-market growth broadly for Axalta across products, as we generate around half of Commercial Vehicle sales from non-truck products.
Transportation Coatings generated second quarter adjusted EBITDA of $71 million versus $80 million last year with associated margins of 16.8% and 18.9% respectively. The lower margin comparison was driven by headwinds from unfavorable price mix and raw material inflation, offset to some degree by higher segment volumes and lower operating costs.
Turning to Slide 7. Cash and equivalents totaled $551 million at June 30. Total reported debt was $3.9 billion resulting in a net debt balance of $3.3 billion versus $3.1 billion at year-end, and $3.4 billion at March quarter end. Our net leverage ratio was 3.6 times at quarter end versus 3.7 times at first quarter end, a slight decrease was driven by stronger operating results and the weaker euro in the sequential period offset partially by a lower cash balance in part due to share repurchases made in the period.
Q2 free cash flow, defined as cash flow from operations plus capital expenditures, was the source of $107 million compared to $74 million in the same quarter a year-ago. The improvement year-over-year was due to overall adjusted EBITDA growth and improved working capital.
Our working capital to net sales ratio at quarter end was 13.4% compared with 14.4% a year-ago and similar to Q1 levels. This included the effect of normal seasonal working capital fluctuations. We reiterate our expectation for the year of modest working capital use driven largely by adjusted EBITDA growth, which would imply an improved working capital to sales ratio by year-end.
In April, we completed a refinancing transaction that included amending our term loans, executing cross-currency swaps, which resulted in $475 million of debt being converted to euros and swapping to fixed rate debt while improving overall pricing. As a result, our fixed rate debt now totaled 72% of our total debt.
Turning to Slide 8. We have revised our previously provided financial guidance for 2018 as shown. For net sales, we still expect growth of 6% to 7% excluding FX, but based on updated consensus currency forecast, we now see a 2% tailwind from FX for the year, down from the 3% we’ve highlighted in our April call. As reported growth therefore is expected to be 8% to 9%. This continues to incorporate 3% growth from acquisitions completed in the last year.
Regarding end market conditions, Charlie noted earlier that our markets remain steady and appear healthy. But we have seen some moderation in economic forecasts and most importantly in automotive production expectations looking forward, which we have incorporated into our outlook within the Transportation Coatings segment.
Based on our current view of Refinish markets globally, we believe we are on track to meet our expectations for the year in this end-market. Finally, industrial markets we serve remain robust based on broader macro level data.
Our adjusted EBITDA outlook has been maintained at $950 million to $980 million. But we now expect to see our results more likely reported within the bottom-half of this guidance range, given pricing dynamics within Light Vehicle, volume pressure notably in Europe from emissions regulation transition, raw material inflation and a slightly revised consensus FX outlook.
Regarding phasing of adjusted EBITDA in 2018, we expect third quarter to approximate 24% of full-year adjusted EBITDA at the midpoint of the range, with Q4 implied at somewhat stronger than Q3. Guidance for interest expense remains at $165 million.
Regarding taxes, we are maintaining our adjusted effective income tax rate in the range of 19% to 21% for the full year. Our free cash flow guidance remains $420 million to $460 million, reflecting consistent overall assumptions since our last update, though the drop-through to cash flow would be commensurate with adjusted EBITDA results within the range.
Our capital expenditure and D&A guidance remains unchanged, while share-count guidance is now at $244 million, given recent share repurchases.
This concludes our prepared remarks. We would now be pleased to answer any of your questions. Operator, please open the lines for Q&A.
Thank you. [Operator Instructions] Our first question comes from the line of Christopher Parkinson with Credit Suisse. Please proceed with your question.
Great, thank you. So you recently launched a lot of new products in Light Vehicle. And I believe it’s Aqua e-coat and some stuff in clearcoats. Can you just comment on any mix benefits whatsoever on a relative basis, just the timeline for the ramps here and just any broad and if you want to make them non-quantitative thoughts on how we should think about the Light Vehicle price mix into the second half and into 2019? Just anything that could be helpful would be appreciated.
Yeah, Chris, we’ve got a number of products. You highlighted the e-coat. We have a number of clearcoats as well that come in during the course of the year. We do expect volume in Light Vehicle to increase in the back-half of the year. However, on balance, that’s probably not helpful to the overall mix, given the type of products that are being introduced.
Okay, great. And just can you just talk a little bit more about the ongoing cost cutting efforts. Obviously, that’s something you highlighted at your Analyst Day and how we should think about this into the – as you said into 2019. And then, also just as a corollary of that, any progress at improving working capital as well? Thank you.
Chris, this is Robert. On the question regarding the cost reduction initiatives, those continue progressing well. And we’re actually right on our management budget in terms of how much we have forecast it to be in savings through the first half of the year. And we’re projecting still to hit the $50 million cost savings number that we had projected for the full year.
Given some of the pressures that we’re seeing in the Transportation segment, we are ramping up our cost savings initiatives to compensate of that as much as we possibly can. And then regarding working capital, year over year, we did have some improvement, second quarter of last year to the second quarter of this year. We did however, versus our own internal expectation, have a little bit of a headwind in terms of some of the inventory build that we did in preparation for entering into the consultation with the Belgian works council.
And we also from an accounts receivable perspective, we’re slightly higher than we had budgeted internally simply for the reason that we generated a higher level of sales than we have forecasted.
Thank you.
Thank you. Our next question comes from the line of Ghansham Panjabi with Baird. Please proceed with your question.
Hey, guys, good morning. Want to, I guess, Charlie, first off, congrats. You will be missed, and congrats to you also Terrence. But just to clarify on Chris’ question, does guidance assume price realization for auto OEM in the back-half of 2018? If so, is this specific to a region more broadly speaking? And how should we think about the timeline of pricing realization in that segment as we tighten up the model for the last two quarters?
So in terms of the year, I think we’ve been fairly conservative on our price outlook, Ghansham, for the second half of the year. Unfortunately, market conditions have not been such that we have been able to increase price yet in that market. But as we mentioned, we will continue our efforts there. And we’ve also ramped up our cost reduction effort in particular in the Transportation segment itself.
Okay, that’s helpful. And then, for my second question, just in terms of auto refinish, clearly, you’re executing on pricing for this segment broadly speaking. But did volumes come in line with your internal expectation for the second quarter? And just sort of related can you update us on your volume forecast for the back-half of 2018 in context of one of your competitors making some cautious comments near-term for North American auto refinish? Thank you so much.
Regarding North America refinish, in terms of what we expected to see in the quarter, it was consistent with what we expected to see as we lapped the distributor working capital adjustments. And as you know, in Q3 and Q4 of last year, we had a pretty significant volume drop due that change. So the comparisons in North America refinish volume should be sequentially much easier in Q3 and Q4.
And then, in terms of overall market conditions in that end-market, we have not seen over the last quarter any material change that affects our thinking for the full year.
Got it. Thank you so much.
Thank you. Our next question comes from the line of Jeff Zekauskas with J.P. Morgan. Please proceed with your question.
Thanks very much. In your introductory remarks, Charlie, you said that you plan to stay on as Chairman. Historically, Axalta, the Chairman and the CEO were the same person. Is that a different stance that the Board has? And by staying on, do you mean that you intend to stay on at the pleasure of the Board for a longer period of time or for a year or so?
Yeah, thanks, Jeff. I think it in no way is reflective of a long-term change in stance by the Board. But a couple of comments, I think, one, we want to make sure we have a smooth transition. Obviously, as Chairman you always stay on at the pleasure of the Board. But I plan to stay on long-term. I think we have a great team, not only with myself, but our lead Director Mark Garrett, who for many of you knows, very active in the chemical industry at Nova and Borealis, and then Terrence coming in from Honeywell.
So I actually feel like we probably got the strongest Executive Team and Board that’s out there, of course, I’m biased. But, no, Jeff, I think it should also signal consistency in our strategy, our views on M&A, bolt-ons, long-term industry consolidation, all the things that I think people would naturally have questions about.
So I think we’re going to have a lot of fun with it. It also gives Terrence the time, a good smooth transition, time to get around, meet with lot of our customers, analysts, investor base. And I think it’s been well received by, as you would guess, some of our top investors on the team that we have at the top.
Okay. And then, I guess, for Robert, the SG&A really dropped nicely year over year, and even sequentially in spite of sequential sales growth. What were the largest factors behind the year-over-year decrease in SG&A, and also, the sequential decrease in SG&A?
Jeff, the decrease in SG&A was due to the absence of the Venezuela deconsolidation impact, also the reclassification of technical sales from SG&A to cost of goods sold, and the absence of acquisition related costs, as well as the impact of cost savings. And in terms of the magnitude of that reclassification of technical sales from SG&A, the cost of goods sold, that was about $15 million for the quarter and should be roughly $60 million for the full year.
Thank you so much.
Thank you. Our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.
Thank you. Good morning. And, Charlie, best of luck in your new opportunity.
Thank you, David.
Just looking at the guidance cut, maybe about $10 million to $15 million, could you break it out between two segments? Was it two-thirds in Transportation and one-third in Performance, something like that?
David, in terms of the guide for the full year, I’d say that big picture and macro, certainly there is a lot of rhetoric at the moment on trade and tariffs. And I think everybody is still trying to understand what the global impact of that is going to be in terms of any potential impact on demand. We didn’t see much on that in the second quarter, as we commented in our prepared remarks in terms of sourcing products and the impacts there, it’s not a material number. But it’s uncertain and unclear, what the impact of trade and tariffs could be to overall global demand.
And in terms of the overall guidance for the full year, did not really related to Industrial, it’s more related to Transportation. And we’ve seen IHS lower builds from 2.4% for the full year to 2.1%, we’ve seen builds come down in China and Europe and most notably in NAFTA. Now they’ve raised their forecast for 2019, but for the remainder of the year there is that impact.
And just for Refinish volumes, you had an easy comp in Q2, something happened in the underlying market that cause a number to be – volumes to be negative in the second quarter?
No. We implemented the changes that we previously discussed in our Refinish business at the end of Q2 last year. So we had some impact last year. But it wasn’t an overly material amount, so really that’s the easier compare begins in Q3.
Thank you.
Thank you. Our next question comes from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question.
Yes, good morning. Question on Light Vehicles in Europe, I think you indicated a transitory issue there. I was wondering, if you could speak to the phase out of diesel engine vehicles in that market and how that would affect Axalta over the near-term and the longer-term?
Yeah, thanks, Kevin. It’s Charlie. I think that still to be determine what models, how it’s manufacturers going to do that. Clearly, the shift is going on and then the whole balance is, what’s going to be hybrid, what’s electric versus just gasoline. I think, we have pretty good views from our Individual customers on how that’s going to work out. We actually feel like longer-term, while there is some short-term issues as you know, some of the models they’re restricting purchases on some models you can’t order. And I think that that’s reflected and Robert’s kind of comments about a little concern to the second half of the year, because we just don’t really know some of those production forecast, although today that come in a little better than we thought.
But I think long-term we feel pretty good about the OEMs that we’re aligned with, and the models they’re going to producing in this, they phase out some of the diesels. We actually think on a couple – with a couple of OEMs will pick up some business that today we don’t have.
And second, if I may on the tariff issue, recognizing that it’s early and there are still a lot of uncertainty. I am curious as to how you approached the calculation of the EBITDA impact of less than 1%, Coatings tend not to be traded in large volumes across border. So maybe you could help us out with how you’re thinking about the impact on raw materials and inflation and so forth?
Kevin, it’s Chris. We did a calculation based on what we know about existing tariffs and potentially announced tariffs. And we included any potential impact of the already announced and proposed tariffs through July. Using that, we then calculated any direct impact that we have in terms of tariffs paid and any indirect tariffs that we would experience through our suppliers, and on that basis we came up with that result. That was the methodology we used.
Very good, Charlie, Terrence, I’d like to add my congratulations to you both as well. Best of luck.
Yeah, great. Thank you.
Thank you. Our next question comes from the line of PJ Juvekar with Citi. Please proceed with your question.
Thank you. Charlie, Terrence, congratulations to both of you.
Yeah, thank you, PJ.
Charlie, you had several marginal discussions in the last couple of years, with your retirement announcement. Does that change – is there a change in strategy or at least maybe change in timing of any potential M&A?
No. I don’t think so. I think, as you’ve always heard me say in conferences and on these calls. I think, that the industry continues to be very poised for consolidation. We certainly, we see that going on quite a bit at the lower levels with the M&A activity that if you look across the major players we’re all engaged in. And in fact, if anything those pipelines have even gotten more robust just given some of the pressures, some of these smaller companies are coming under.
Now, that all said, I think there is a couple of them have highlighted some of the valuation expectations from these players. But, again, I think we’re also pretty good about that. But I remain – believe that the industry consolidation will continue. It’s certainly been on a little bit of a pause the past year, as people have been focused on other activities.
For example, specifically, no, I think as I highlighted earlier, I don’t think it’s any change in strategy for us. We feel good about the company we have. We see potential things that can be done out there. But I think me remaining as Chairman – if you at Terrence’s background, not only in driving business excellence, but also change in businesses he’s been involved in. I think discussions, Terrance, myself that the Board have had, I think we’re all likeminded on the opportunities that exist out there for shareholders.
Okay, thank you for that. And then, I want to go back to the Refinish segment. I seems like you are having some volume issues almost for a year. I think second half of last year, you had some distributor de-stocking. First half of this year, including this quarter, you had negative volume growth. So wondering if there is any structural issue here, are you losing share or is it because of MSO consolidation? Can you talk about that?
PJ, in terms of the overall market, obviously, there’s been consolidation at the shop level. There is been a consolidation at the distribution level. We’ve adjusted our business model to reflect that and have grown nicely. We’re adding shops as we had in our prepared remarks in North America, in Europe and in Asia quite nicely. We’re also building out our mainstream product portfolio in addition to our – in addition to our premium product portfolio.
So at this time, in terms of any long-term structural changes in the refinish market, we haven’t really seen any.
What I would add there, PJ, is if you look at third and fourth quarter, I think it will be obvious some of the changes have started to shift through from the standpoint that – what we’re doing there. Now, we are seeing in some regions, where when you look at EBITDA growth being up and margins being up for the business, some it’s a direct reflection of conversion from solvent-borne to waterborne. And I think we’ve highlighted for some regions like China, we’re doing lot of conversions to waterborne and that particular part of our business grows.
And volumes do drop, but margins go up as a result of it. But I think I would step back and look at – as we look at full year, as Robert highlighted earlier in the comments, we’re right exactly where we thought we will be, and very happy with what we got coming up the next couple of quarters, in a couple of regions like North America and EMEA.
I would add to that as well that in the second half of the year, we will fully expect to see significant revenue acceleration. In Refinish, it wouldn’t surprise us to see double-digit revenue growth in the second half of the year that would include significant volume growth. Clearly, there is an easier comparison in the third quarter. We expect that however to continue in the fourth quarter. So I think you’ll see somewhat different profile from third quarter on.
Okay, great. Thank you very much.
Thank you. Our next question comes from the line of Aleksey Yefremov with Nomura Instinet. Please proceed with your question.
Thank you. Good morning, everyone. In Industrial, 10% organic volume growth, could you elaborate on what drives that and also how sustainable that type of growth is?
Well, Aleksey, as you know, we’ve invested quite a bit in that business over the last few years, including feet on the street and putting in place the right people with the right profile and knowledge in the different segments. But if you look at the segments within industrial, coil volume for us and price increases were strong. General industrial growth from new wins was good. And we also have price increases. Powder showed strong growth from price increases, as well as some volume gains. Our energy solutions business increased as well.
And then, wood market demand remained strong, as building products and the kitchen market are – continue to expect to grow mid-single-digits. So really it’s I think a reflection of the strength of the leadership in the business that we have, as well as the investment that we made over the last several years, because if you look at overall industrial production, for the year, the forecast has been lowered from 3.7% to 3.4%, consistent with the lowering last quarter. Yet, our team continues to exceed. And I think that’s also a function of the lower market share that we have in many of those verticals.
Thank you. And in China, you mentioned lower Light Vehicle prices could you discussed that situation and some OEMs were talking about more challenging environment in China, in general. What’s your outlook there in Light Vehicle and Commercial OEM markets?
So in terms of the LV market in China, we have not seen market conditions conducive to capturing price thus far in that market. And with some of the volume pressure that’s been in China as well that may also be somewhat hindering the ability to capture price. But again, that’s a keen area focus and continues to be for us. So we will adjust our cost model accordingly to deal with that.
Thank you.
Thank you. Our next question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.
Thank you. And I’ll offer my congratulations as well. Just another question sort of around the tariff issue, and I guess from sort of more second derivative effect. Some of your customers are going to see higher raw material cost is a function of steel tariffs, and what have you?
How does that impact your conversation with them about pricing, does it kind of make the conversion more sympathetic and if everybody needs to kind of deal with raws, does it make it easier or does that make it more challenging or does it just depend?
So far, we haven’t seen any of that pressure from a standpoint, they talk a lot about volumes and where they’re going to shift steel production from. But we certainly haven’t seen them coming back, asking us to contribute to that. I think, in many cases over the past year or two years, the Coatings industry has absorbed more on the raw material pricing side that we’ve passed on, we continue to be very data driven on that not only in the coal business with some of our other markets.
So right now, we continue to do highlight to our customers that we bore way more pain than they have so far. But again, no conversations yet, but we are kind of watching to see, how they think about sourcing and what they think it does to their end demand. My belief is still though that a lot of it depends on the relative acceleration of these tariffs. How fast they come about, because in many cases, if they have to pass, if they have to pass on the consumers, more they can know about it more time they have, but less impact it’s going to be overall. But so far, the conversations have been positive.
Okay. And then just a follow-up on Light Vehicle pricing. There obviously were some contract pricing adjustments, you said largely in 2017. But can you just give us a sense of, I mean, presumably, it just start lapping those decreases, which should make the price line, if nothing else start to move in the right direction notwithstanding any process you may can increases. Can you just give us a sense and sort of the cadence of the lapping as we kind of go to the balance of this year and next year?
So for the remainder of the year and also for this quarter, I think, it’s important to highlight some of the comments that Chris made around mix in the price category in our bridges, it’s price and mix together in that category therefore you’re seeing some mix effects. So with the conditions overall, we are aggressively working on a number of initiatives, cost reductions, price increases, we’ve implemented indexing at some customers, we’ve implemented surcharges with others, as new products come online and new colors are launched, those are obviously launched at prices that reflect the current environment for raw materials.
And then we are also working on reformulation of products in order to deal with the raw material inflation that we’re seeing. But for the remainder of the year, I think we still expect it to be a challenging environment from our price mix perspective.
Okay. So you should think about 2019 as one sort of comparisons become easier on the negative – on the pricing effects.
Yeah, they do start to get easier as you go through the year. Robert’s point is just that mix becomes incremental headwind. So there is some balancing effect there.
Okay. Understood. Thank you very much.
Thank you. Our next question comes from the line of Don Carson with Susquehanna Financial Group. Please proceed with your question.
Yes, thank you. Just a question on what you are expecting for overall consolidated price progression in the second half, 1% year-over-year in Q1, almost 2% in Q2. Just at the price increases that you have in place now with customers. How do you see price progression for the balance of the year?
In Performance Coatings, our expectation is that we would continue to achieve price commensurate with what we’re seeing there in the environment from a cost perspective. And in the Transportation side, I think, our expectation is that, it will continue to be a flattish to challenging environment from a price mix perspective.
So overall, you expect kind of a 2% price progression in the second half similar to what you had in Q2?
Yeah, we don’t provide guidance on the specific elements of sales, I think, it’s captured in our 8% to 9% guide for the full year, or 6% to 7% ex-FX. But I think, we provided some of the drivers just from a conceptual perspective.
And then from a raw material standpoint, you think it peaks now in Q3, as you look at your raw material basket or do you still something that you’re looking at double-digit raw material inflation for the balance of the year?
Yeah, again as we talked about on the last earnings call our expectation, which at the time may have seemed overly conservative, is actually proven out in the numbers. We continue to still expect to see low-double-digit inflation as we move through the back half of the year. When exactly that inflection point will occur, it’s difficult to predict, because it depends on number of supplying demand factors within each commodity as well as the overall price as well. So we really – it’s difficult for us to call that out.
Thank you.
Yeah, Don, this is Charlie. Just a couple of points on that, I think some of the uncertainty you’ve seen in the past month. People starting to highlight maybe a rollover some lower TiO2 prices, oil, where it is, say I where it is. So I think that some of the uncertainties in the back half of the year, I’m like Robert, I agree low-double-digit is still a pretty fair number, it could be a little better, it could be a little worse, we just kind of this changing economic situation in the second half of the year. It’s just uncertainty around it, certainly on some of the some of the bigger pigments.
And the other thing that I would add just a final thought. We are seeing packaging costs, and logistics and transportation costs also increase. So from a price capture perspective will also be going after price to offset as much of that cost increase as we possibly can.
Thank you.
Thank you. Our next question comes from the line of John Roberts with UBS. Please proceed with your question.
Thank you. Charlie, good luck going forward. You’re anniversarying the Wood Coatings bolt-on, is it fair to say that you don’t have any meaningful inbound bolt-on deals in the pipeline you’re going to drop on Terrence soon after he starts?
No. I think, our pipeline always stays pretty full. So, clearly, I wouldn’t highlight any significant things that we are close to otherwise it would be disclosure. But no, I think we remain committed to looking at small and larger bolt-ons, as I highlighted earlier. I think the pipeline for most coatings companies right now is pretty full. We would not pass any deal with Terrence coming on board, he is already getting up to speed on everything. And I think, we’ll be supportive as I would expect if anything is in the pipeline that we decide to do.
And then, I don’t know if Terrence is there to take a question, but congratulations. I’m just curious, whether you’re experiencing your products included any time in the coatings related chemical businesses that they had?
John, it’s Chris, because Terrence isn’t an employee. He is not any longer on an active line. So please direct your questions to the team here.
Okay. Thank you.
Thank you. Our next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your question.
Good morning. Two quick ones. One, could we revisit the topic of the pricing versus raw materials more from the perspective of the spreads, and when you think gross margins will hit sort of flat year-over-year comparisons for each segment?
And then secondly with comments around the improving traction for the pricing, the changes in the contracts, the indexing, the efforts to catch up to the cost inflation? And then the comment around the transitory headwinds in Q3? Should we think about a second half to first half of 2019 bridge, it is a bit more aggressive than you’ve had historically, because some of the effects in the back half of 2018 are transitory?
In terms of the inflection point from a margin perspective, if you look at EBITDA margin in the performance side of the business, we are actually executing quite well in terms of price capture to offset the cost inflation that we’ve seen, and you see that in margin profile. And if you look at Q4 to Q1 to Q2, you see that steady improvement in the EBITDA margin, so we’re very pleased with that. The area that is challenging due again to some of the market conditions in Light Vehicle is really getting price in that segment that’s – in that end-market that’s important to really changing that. And that’s difficult to predict when those market conditions will change.
And in terms of the second half versus first half, I think, it’s too early for us to provide a guide on first half of next year. But as we get towards the back end of the year, when we have our December outlook call, we can provide more insight at that time.
Thank you.
Thank you. Our next question comes from the line of Mike Sison with Keybanc Capital Markets. Please proceed with your question.
Hey, congrats, Charlie and Terrence. When you think about Transportation Coatings, EBITDA looks like it will be down 2017, 2018. What do you think broadly these to happen to get that business back on track and growing EBITDA again?
Yeah, thanks. This is Charlie. I think what happens – always happens in the market is all about innovation, it’s about controlling cost and it’s about adjusting with each OEM. So as you know, this market is made up of many, many players, going many different directions. So certain parts of our business, I think, we are very happy with, and I wouldn’t touch. In other parts, we’re going to focus on changing demand patterns, changing models.
So I think, what you’ll see is, as Robert highlighted earlier, when he talked about some of our Axalta Way initiatives. We will continue to innovative with new products to take value and get price as part of that, where the customer understands the value proposition and it make sense for both parties. We’re already doing that as we speak and you will start to – you will continue to see that despite some of our older lines.
But then I think also we – like our competitors, I would guess are doing, we will adjust the cost structures for to maintain long-term healthy margins in the business. Some of those cost actions we’re already doing today. They were already plan, so it’s not anything new. But I think, we’ll continue to adjust. As many of you know, we invest our 4% of sales in total R&D process and support. So we’ve got room to make some changes there and make adjustments.
I think you’ll see as Robert highlighted and accelerated some of those efforts, because we are committed to maintaining long-term healthy margins in the business and growing volumes over time. But I think, we are at the point were when you look at China demand and shifting from some multinationals to the Chinese OEMs to all these car companies with electric vehicles, not self-driving, but certainly more active driving technology, changing strategies. For example, at Ford and FCA, so I think those are opportunities for us that we look at and say long-term we feel pretty good about to help a business. But it’s going to take a different cost structures, it’s going to take a different set of products.
You continue to see as launch products like ambient flash, quicker drying, less overspray, more efficient. For example, we had one supplier last year, while it cut consumption by over 50% on a particular line, we now enjoy that business long-term 100%. So I think, like any business, we’re just going to adapt our strategy, but we’re committed to maintaining healthy margins and price recovery in that business. We have a lot – again, we don’t want to look any different, then we have on the performance side of our business and that’s what we’re committed to do.
So I think over the next couple of sequential quarters, you will see us take and continue to take actions on all fronts.
Great. Thank you.
Thank you. Our next question comes from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your question.
Great. Thanks. Good morning.
Good morning.
Just a question on Transportation Coatings, price versus volume going back to couple of years, it looks like volumes were positive in the first part of 2016 on Transportation Coatings, sorry, [ph] volumes are negative and you’re able to get price. I mean, is that kind of what is the tradeoff that goes on here as well that times when you are seeing difficulty on the volumes side, it’s tougher to get price as well? You can just discuss that.
I think in general, the two were not necessarily correlated, I think, if you go back to 2014, 2015. We had a lot of new wins related to the carve-out out of DuPont and kind of the re-equilibration [ph] of market share in the industry. We had a number of launches in a number of regions, and a number of new product introductions that took place at that time. So you saw a greater amount of – a greater amount of volume.
Now, that we’ve achieved a little bit more of a parity between the major players, it’s all based on innovation and service, as well as overall market conditions. But when you look specifically at Q2, I think it’s important not to take Q2 and gross that up for the full year, because there were onetime events there.
One of our major OEM customers had a supplier issue and another one of our major customers had another supplier issue that basically they brought down their bills, which brought down our volumes in North American in particular. And then, we also had the trucking strike in Brazil. So I think really Q2 is been affected by those onetime events. And we tried to estimate what the impact with some of those onetime events were in our prepared remarks.
Right, thanks for that, Robert. And, just another question on M&A, is there – it seems like you are hiding your focus internally on cost reductions and so on. Does that make it more difficult to consummate deals this year or actually think about the likelihood that we’ll see some deals from you guys this year itself?
No, I don’t think it affects our capability at all to continue to execute on M&A. What you saw in the last couple of quarters, we took a little bit of a breather, because we had such high activity last year. And one of the things we’re committed – we’ve done 16 acquisitions over the past two-and-a-half years. And we felt like last year we did 5 just within about a 4-month period. We felt like we wanted to make sure we had good integration on those.
One was a carve-out. One had an SAP conversion. And I think from an operations standpoint, we’re going to take time to digest all those. We’ve now done that. I don’t think that to take the cost-outs in any way affects the team and the people who do the – or the business teams that actually do the acquisitions and then the operations team who do the integration.
Thanks.
Thank you. Ladies and gentlemen, our final question for today comes from the line of Bob Koort with Goldman Sachs. Please proceed with your question.
Good morning, guys. Thanks for squeezing me in. This is Chris Evans on for Bob. Sticking with the Transportation segment, EBITDA margins there are now well below the 20%-plus level you reported a year or so ago. With the implementation of cost programs and the potential for maybe price recovery at some point, where do you expect profitability for that segment could be over the longer term?
Well, I think it’s important when you look at that business. Obviously, it’s not only Light Vehicle, but it’s also Commercial Vehicle. And Commercial Vehicle is also a very attractive business. And in Light Vehicle as we have – at some point, we’ll get the price through introduction of new products, through indexing, as well as potentially from price increases with some of the OEMs. So we would expect over the medium term to see in margin improvement in that business, not only from some of the cost reduction measures that you mentioned, Chris, but also from some of the top-line adjustments that we would expect to occur in the next several quarters.
Maybe just more specifically though, I just, I mean, is there – was the 20%, 21%, is that an attainable target again going forward or is that sort of enhanced by the maybe deflationary factors in that time period? It’s just kind of on levels that what the expectations might be, on…
Yeah, we haven’t provided forward guidance from an EBITDA perspective at the segment level. We provided that at the total company level. But I think our comments, our comments around what some of the drivers could be, give you a directional sense of what’s making [ph] in there.
Right, and maybe, I can just squeeze the last one in on. You pined a little bit on the raws in the quarter and your guidance for the year. I mean, can you give specific color on any precise raw material that you’re seeing in the quarter? Any just trends, they might give you confidence or directionality on how those might trend sequentially for you in the back-half?
I think if you look at our various baskets – or major categories of raw materials, solvents continue to move up due to the higher cost of feedstocks. On monomers, we have significant supply-side constraints. In some of the resins, we have pretty good demand, but also fairly constricted supply. Other resins, again, we have some supply constraints that are still there. In isocyanates, there is tightness due to outages and we continue to see not only in isocyanates, but other categories force majeures that occurred during Q2.
Pigments, we still see TiO2 at relatively high prices, as well as some of the other pigments. And then, from an additive, a lot of which – additives, a lot of which come from China, there have been supply reductions due to the enforcement of a lot of the Chinese environmental policy. So you put all that together and I think that for the moment, at least, we continue to believe that we’ll see the overall raw material basket inflate in low single – low-double-digits. And then as we’ve mentioned, there is additional inflation in packaging and in logistics and transportation that we’re also going to have to go out and get price to offset.
Thanks for the color.
Thank you. Ladies and gentlemen, that is the end of our time allotted for questions. I’ll turn the floor back to Mr. Shaver for any final comments.
Yeah, thanks. And I’ll be real brief. I think as we come through the first half of the year, I couldn’t be happier with our team on our execution. I think we said as far back at our Investor Day that this was a year all about execution, given the raw material – or given the inflation we’ve seen not only in raw materials, but as Robert highlighted, in the freight logistics.
I’m really proud of the team. They were delivering on that. I think it’s always, say, for exactly like you think you’re going to get there, but we’re getting there. And I do think we got plenty of actions on the transportation side that overtime we feel good about that business to recovering.
So, I’m even more pleased, we got good solid demand in our markets. But I think as we look at the second half of the year, it’s all about execution, continuing to get price, continuing to deliver on some of the margin recovery, taking cost out, accelerating some of our cost efforts. And then last, but not least, I look forward over the next couple months to introducing Terrence out to our customers, our employees, and to some of you on the call who haven’t met him yet. And we’ll be doing that and working on that over the next couple of months here in the quarter.
So, again, thanks for all of you, for your support, for your questions. And we’re looking forward to the second half of the year. Thanks, everyone.
Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.