Good morning. My name is Jerome and I will be your conference operator today. At this time, I would like to welcome everyone to the PPG Industries First Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I would now like to turn the conference over to John Bruno, Investor Relations. Please go ahead.

Thank you, Jerome, and good morning, everyone. Once again, this is John Bruno. We appreciate your continued interest in PPG and welcome you to our first quarter 2021 financial results conference call. Joining me on the call from PPG are Michael McGarry, Chairman and Chief Executive Officer; and Vince Morales, Senior Vice President and Chief Financial Officer. Our comments relate to the financial information released after U.S. equity markets closed on Thursday, April 15, 2021. We posted detailed commentary and accompanying presentation slides on the investor center of our website, ppg.com. The slides are also available on the website for this call and provide additional support to the brief opening comments Michael will make shortly. Following management's perspective on the company's results for the quarter, we will move to a Q&A session. Both the prepared commentary and discussion during this call may contain forward-looking statements, reflecting the company's current view of future events and their potential effect on PPG's operating and financial performance. These statements involve uncertainties and risks, which may cause actual results to differ. The company is under no obligation to provide subsequent updates to these forward-looking statements. This presentation also contains certain non-GAAP financial measures. The company has provided in the appendix of the presentation materials, which are available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information, please refer to PPG's filings with the SEC. Now, let me introduce PPG Chairman and CEO, Michael McGarry.

Thank you, John. Good morning, everyone. I would like to welcome everyone to our first quarter 2021 earnings call. But most importantly, I hope you and your loved ones are remaining safe and healthy. Now, let me provide some comments to supplement the detailed financial results we released last evening. For the first quarter, our net sales were a record and were about $3.9 billion. Our adjusted earnings per diluted share from continuing operations were also a record at $1.88. Our adjusted EPS was significantly higher than the first quarter of 2020, partially due to last year's first quarter being impacted by various pandemic-related impacts. We will also be comparing various financial metrics versus pre-pandemic results, and this comparison was nearly equally impressive with adjusted EPS 27% higher than the pre-COVID first quarter results of 2019. This excellent operating performance was driven by strong year-over-year sales growth in our Industrial Coatings reporting segment with the automotive OEM, general industrial, and packaging coatings businesses all delivering double-digit percentage year-over-year sales growth. Our global architectural coatings business continued their strong sales growth trends. Automotive refinish had a strong quarter as activity in that end-use market is beginning to recover, and we were partially aided by some customer restocking in the U.S. First quarter segment margins were at a multiyear high as we benefited from strong operating margin leverage on higher year-over-year net sales growth. The significant amount of cost savings we have achieved in the past two years from our restructuring programs is a primary factor contributing to us realizing this increased leverage. We delivered these outstanding results despite sales volumes not fully returning to pre-pandemic levels, including in several key PPG businesses such as aerospace. In addition, we experienced a significant acceleration of raw material and logistics cost inflation during the quarter. Coming into the year, we were expecting an inflationary environment and had prioritized selling price increases across all of our businesses. This has helped us achieve solid price increases year-to-date. With a higher inflation backdrop, we have already secured further selling price increases and are in the process of executing additional ones during the second quarter. As a reminder, the first quarter of 2021 was our 16th consecutive quarter of higher selling prices. We also continue to execute on our cost-savings programs, realizing an incremental $35 million of structural savings and maintain our target of $125 million of total savings for the full year 2021. In addition, we retained about $30 million of interim cost savings during the quarter and remain confident that we'll be able to make at least $80 million of these interim cost savings permanent for the full year 2021. We ended the first quarter with about $1.9 billion of cash and cash equivalents. This is a strong cash balance as we are preparing for the closing of the Tikkurila and Worwag acquisitions. Contributing to this strong cash balance is a 200-basis point year-over-year improvement in our operating working capital in the first quarter, which drove better operating cash generation than a typical first quarter. Our new Traffic Solutions business, which is the Ennis-Flint acquisition, performed to our expectations in the quarter despite significant challenges with weather and raw material availability. The business has a strong order book heading into the second quarter. In the first quarter, we also completed the VersaFlex acquisition, and the Tikkurila and Worwag acquisitions are expected to be completed in the second quarter. In the accompanying presentation to our earnings material, we included several slides to provide further information and perspective on our four recent acquisitions and our performance for a number of acquisitions. Some items that I'd like to highlight. Each of the four acquisitions brings incremental strategic benefits to PPG, such as product line extensions and geographic expansions. We've continued to deliver strong synergy capture from our past acquisitions and believe our global breadth, regional participation in all coating verticals, best-in-class procurement, and mature back-office centers of excellence in low-cost areas allow us to deliver higher synergy capabilities than our competitors. For our recently announced acquisitions, we expect to realize synergies of high single digits of sales, higher than historical industry synergy capture. We also provided an update to our acquisition performance we last shared in May 2019. We included our 10 most recent acquisitions that have been closed for at least 24 months. In most acquisitions and in aggregate, we have achieved higher synergy capture than our initial estimates, averaging about 50 basis points higher. All of these acquisitions will help drive shareholder value creation. The post-synergy multiples for each of these acquisitions are below PPG's five-year average multiple. For eight of the acquisitions, the post-synergy multiple is below 10. All four of the recently announced acquisitions provide earnings accretion from their historical base business and synergy realization. By the end of 2022, we expect cumulative synergies to total about $75 million and will be at an annual run rate of $135 million once they are fully integrated. As with many of our initial synergy projections, these initial targets only include a modest benefit from sales synergies, although these acquisitions are well suited for us to drive further top-line growth. We expect the Tikkurila acquisition to be completed in the second quarter. We recently extended the tender offer period until May 11 to finalize customary regulatory approvals. Tikkurila is a highly strategic acquisition with leading architectural coatings positions across various countries. As I said in January, I see many similar characteristics to our previous Comex acquisition. We'll have significant opportunities to cross-sell complementary products through our legacy channels to further grow sales and earnings. Our Comex acquisition has well exceeded our initial acquisition economics. Moving to our current outlook. We are continuing to see very robust and broad-based demand globally, including in many industrial and OEM end-use markets and continued architectural coatings activity. Many of our customers have indicated they have strong order books, and we anticipate this strong global demand pattern to continue well into the second half of 2021 at a minimum. In addition, we expect an eventual restocking of inventory to occur in many of our selling channels as the year progresses. One important item to note is that some of our customers are experiencing input or component shortages, so their production capabilities and schedules remain choppy, and we are experiencing a few spot outages of direct coatings raw materials. As a result, we expect some unfavorable sales impacts from both our direct supply chain disruptions and these production curtailments at some of our customers. Our best current estimate is that sales are expected to be impacted by about $70 million to $90 million in the second quarter due to these issues. We expect these sales to be deferred in the second half of 2021, and thus, this impact is already included in our second quarter 2021 financial guidance. Also, as I mentioned previously, we're experiencing commodity inflation that occurred quickly due to the weather event named Uri. As a result of this rapid inflation increase in both raw materials and logistics, we have fully mobilized our commercial teams and are successfully securing additional selling price increases. We have a very good head start on this inflation cycle, and we expect to fully offset raw material cost inflation in the second half of 2021. Finally, as you've come to expect from PPG, we remain committed to strong and real-time cost management, which will provide continued strong operating leverage on sales growth. These current disruptions are temporary. We maintain a positive view on the overall global coatings demand growth, which continues to be robust and broad-based across most of the end-use markets that we supply. This is expected to continue throughout 2021. The strong demand conditions, along with our leading technology advantaged products, provides us with many organic growth opportunities in 2021 and beyond. For the company, aggregate sales volumes are projected to be up by low teen percentages in the second quarter on a sequential basis compared to the first quarter of 2021 with differences by business and region. Adjusted earnings, excluding amortization expense, is expected to be between $2.15 and $2.20, continuing a strong earnings momentum. As a reminder, this guidance does not include any EPS impact from either the Tikkurila or Worwag acquisitions. Our near-term cash deployment priority will be to complete the acquisitions we have announced, which we anticipate to be funded by a combination of cash on hand and debt by the end of the second quarter. In closing, I want to thank and recognize our global PPG team. The character of our employees has never shone brighter than it has during these times of adversity. Our people have shown great resiliency, continuing to serve our customers, our communities, and drive a common purpose to protect and beautify the world. Thank you for your continued confidence in PPG. This concludes our prepared remarks. And now, Jerome, would you please open the line for questions?

Your first question comes from the line of Caleb Billy with BMO. Your line is open.

Hi, this is John McNulty. I have a question on the raw material front. It seems like there's still a little bit of supply chain issues. Have you seen raw material pricing peak yet, or are there still some pockets where you're continuing to see that rising pressure? And then can you speak to the level of price increases that you need to offset some of that raw material pressure that you've been speaking about?

John, this is Michael. I would tell you that most prices have peaked. There probably could be a few minor issues here that could increase further. But what we see is that raw material availability is getting better. It's not great, but it's getting better on a daily basis. Our teams are working hard on that. We had 1.7% positive price in Q1, and we expect to have more positive price in Q2. So it's probably a little bit early to say how much we need to get, but we're working hard at it. What I'm most encouraged by is that every coatings business in PPG had positive price, including our automotive business, and we're on track for every coatings business to have positive price in Q2.

Your next question comes from the line of Ghansham Panjabi with Baird. Your line is open.

Thank you. Good morning, everybody. I guess on the strong second quarter guidance despite massive raw material cost inflation, can you just take us through the mechanics of how you're approaching pricing now versus previous cost inflation cycles? And related to that, I read about a new paradigm for the coatings industry, whereby pricing will align more quickly with raw material cost volatility, including when costs start to decline at some point. I guess I'm asking because historically, the industry has been very good about maintaining pricing even as raw material costs have moderated post previous peaks. Thanks so much.

Ghansham, what I would tell you is that we anticipated raw material inflation coming into the year. So we had put our teams on high alert to get pricing early in the year. The second thing is we're trying to do a better job of surgical price increases as well as value selling, so as we roll out new products to capture that additional value. We're doing a better job, I think, on services. During the pandemic, it was clear how much our customers valued our ability to help them get their lines up and running. I think we're doing a better job of capturing value for those services. So I think each of those things is important. Clearly, as the freeze happened, it wasn’t any shock to anybody at PPG that this was going to lead to additional raw material inflation. As we saw Texas going into a deep freeze, we put all our sales teams on high alert that they needed to start talking to their customers immediately about raw material inflation. I think one of the things that's different, if you remember 2017 and '18, some of our competitors were distracted. You had the Valspar acquisition being completed. Valspar wasn't raising price. Akzo was under a lot of pressure. They were not doing anything to go after value. This is so clear and obvious that I think everybody is more on top of this. Hopefully, this will be a trend to be on top of raw material inflation as a regular ongoing business practice. I'm confident that our teams are proactively addressing this.

Your next question comes from the line of Bob Koort with Goldman Sachs. Your line is open.

Thank you. Good morning. I appreciate the increased transparency around all the deals and the segment trends. That was very helpful in the slide deck. I wanted to ask on Tikkurila, when is the peak paint season in Northern Europe? Is there some risk of maybe missing the best part of the year if you can't close that more efficiently? And then secondly on Ennis-Flint, I noticed that you didn't check off that geographic expansion. It was one of the opportunities or key attributes there. Did I misunderSand that in the past? Thanks.

No, Bob, Ennis-Flint does have some regional aspects. It has a little bit of share in Mexico, has a little bit of share in Argentina, has a little bit in Australia, and a little bit in Europe. We are digesting all that information right now, looking at a strategy that will help us accelerate that. It will be a prime focus for us. We have already made some headway, as you can imagine, in Mexico. Our strong PPG-Comex team is all over this, and that's the area that will leverage the quickest. Probably the next area, that will be Europe. So I think these are all positives. So it's a small piece of it. But it will get bigger over time.

And before Michael answers, Bob, the Tikkurila question, the geographic expansion on that slide was really for PPG, not necessarily for the acquired company. So Tikkurila definitely gives us significant geographic expansion in Scandinavia, where we have very minor presence. So that line item on that chart was really around PPG's benefit.

And then, the paint season in Nordic and Russia, as you can imagine, is more compressed than a typical one. The best months are April through August and September. It definitely slows down in the fourth quarter. So clearly, we'd like to get this thing closed sooner rather than later.

Your next question comes from the line of Stephen Byrne with Bank of America Securities. Your line is open.

You have these EBITDA synergy percentages for these four acquisitions. Just curious to know whether in those metrics and on the slide where you show pre- and post-synergy multiple impacts, do you include in there the revenue benefit from either cross-selling into your other businesses or your ability to accelerate the sales growth? If you do, could you comment on the relative split between them? I would assume that it would depend on the business. Like Ennis-Flint, I would imagine your ability to cut costs with your supply chain could be meaningful. But this VersaFlex, I'm glad you made that comment, Vince, to Bob's question, I would assume that technology is one that you could really expand globally.

Yes. Steve, this is Vince. Typically, in most of these deals, the ones we've completed as well as the ones that we have here as pending, most of these deals have, as Michael said in his opening comments, a very minor top-line synergies included. So our metrics on a traditional acquisition project are typically based on cost synergies primarily. There are a few in the ones completed, like Comex, where we do have further top-line synergies than traditional. But I think for us and most people in the space, most of the synergies come from the cost side. What's also important is some of these come day one. Those day one synergies certainly help us in terms of the project economics. And you're spot on again, as we look at this chart, all of these acquisitions provide expansion of the acquired companies' products across PPG's footprint. But again, that's typically not the big driver in these synergy buckets.

Your next question comes from the line of Frank Mitsch with Fermium Research. Your line is open.

Thank you and good morning. I'd be remiss if I didn't pass along that a client told me that your result was excellent on Saturday; so congrats on that. Michael, you indicated that the first quarter volumes were 2% below 2019 levels. I'm curious what is embedded relative to 2Q 2019 in your $2.15 to $2.20 guidance, where you stand relative to the pre-pandemic period? And if you could give a discussion as to how much of that volume is related to restock? Because I believe you mentioned in a couple of areas that you are seeing some restock take place versus underlying demand.

Yes. Frank, I would say that there's very little anticipated restock in 2Q. The restock that we saw in the U.S. refinish market really had more to do with the fact that we had a more normal winter. They didn't want to get caught if we had a return-to-work situation. So they've done, I think, whatever restocking they're going to do. From that standpoint, I would say the volumes that we're projecting for 2Q are still at or slightly below the 2Q of 2019, and that's primarily driven by aerospace. So what I'm encouraged about, Frank, to be honest, is that January and February for aerospace was still pretty mediocre. But March was pretty encouraging. We know that the aerospace guys have completely depleted inventory. I mean they have virtually nothing in the chain. So at some point, as things get better, they're going to start ordering, and that will start to be a positive. We haven't seen that yet. We do track it on a very regular basis, as you can imagine. But I was encouraged by March, and the MRO sales have continued to tick up in April here. We expect OEM aerospace to be flat because that's not going to change anytime soon, but the MRO side will be better. So you should regard that as a real positive.

A couple of other channels are light inventory. We know that the automotive market globally is exceptionally light in terms of their historical inventory trends. We think the U.S., for example, is somewhere in the mid-40s days of inventory, which is typically 70 or 80. We know the U.S. car rental agencies are very light in inventory. They didn't buy much in the past 12 months. Again, we think auto production, once it's available to run full out, will be a good tailwind. Other industries and many industrial markets are light in inventory, some of those due to the chip shortages. We, as a company, are also light in inventory; we weren't able to produce as much inventory in Q1 as we wanted for the 2Q architectural season. We feel there's inventory replenishment across many of the end markets that we supply.

Your next question comes from the line of John Roberts with UBS. Your line is open.

Thank you. Versus the 2019 pre-pandemic, overall volumes are down 1%, and it looks like the second quarter will be maybe up a couple percent. Can you talk about some of the businesses that are well above pre-pandemic levels like DIY architectural? How far above 2019 is that? And are we above or below pre-pandemic in refinish? It's kind of hard to tell since it's been moving around a lot.

Yes, we are still below in refinish. We are below in every area except for China. Australia is low, Europe is definitely low, and the U.S. will continue to be down. Claims were reported down 8%, and that trend is likely to continue. Aerospace is particularly concerning. On a more positive note, automotive OEMs should be slightly down due to chip shortages, while industrial and packaging sectors should see an increase. The rest will be down.

Yes. But John, I just want to mention that we are expecting volumes in Q2 to be slightly below the 2019 levels. There is still a recovery that needs to happen in most of these end markets.

In architectural, we don't see a slowdown yet. Even April continues to be very strong. The architectural side globally in every market we participate in around the world continues to be quite strong.

Your next question comes from the line of Laurent Favre with Exane BNP. Your line is open.

Hi. Good morning, all. It's actually a follow-up to that question on DIY versus do it for me. I was wondering if you could give us a little bit of at least directional color on what you're seeing in North America and in Europe, especially on do it for me. Thank you.

The DIY segment continues to show strong growth, exceeding double digits. We saw similar increases in Europe, the U.S., and Australia. Although Mexico has a limited DIY market, it remains robust, and we expect this trend to persist. With ongoing lockdowns in Europe, we anticipate this strength will carry on into the summer.

Your next question comes from the line of Vincent Andrews with Morgan Stanley. Your line is open.

Thank you very much. I just wanted to make sure I understood your comments on raw materials for the back half of the year. I believe you said that you expect pricing to offset raws in 2H. I just want to clarify whether that means by the end of 2H or for the entirety of 2H?

Hey, Vincent, this is Vince. Our view of raw materials is that we hope they’re at the high watermark at this point. That will carry somewhat into Q3. We are seeing some spot outages that we expect will continue through part of April and into May. Seasonally, we expect these raw materials to have normal seasonal patterns. Our pricing in different businesses by segment will differ. But certainly, in the second half and its entirety, we expect to offset raw materials is our expectation.

Your next question comes from the line of David Begleiter with Deutsche Bank. You may now ask your question.

Thank you. Michael, just on the cost savings. On the temporary costs that are becoming permanent, can you give a little more color as to what they are and where they are and how you accomplish that? And just on Tikkurila, I believe you need Russian approval. If that approval was delayed, could you still close on the rest of the company without that approval in hand? Thank you.

So the Tikkurila one is easy. We're going to wait for Russian approval and close all at once. That's what we're expecting to do. As far as your first question, I would tell you that I feel confident that the businesses are well prepared. Vince, I don't know if you want to add anything?

Yes. I think on the cost, David, we've got a couple of things. Obviously, travel is down considerably. We have other discrete cost items that we expect to stay out. We've had headcount freezes in certain parts of the world in certain businesses. We've learned to operate without some of the headcount. We have done some work in terms of consolidation of warehouses given our lower inventory levels. Given our lower inventory level overall, we don't expect to bring back some of those warehouses that we've exited. The other piece that we've talked about is in terms of digital; we're finding different ways of working that are reducing our cost footprint in different parts of the world. In Europe, for example, which is our highest architectural digital portion, we are looking at our overall footprint in terms of architectural bricks and mortar. Every business is on high alert with respect to these costs. You could see the benefit in our leverage of earnings. Our volumes were up 7%. That came at around a 40% leverage. Every business sees the value of that and we're being very mindful of every cost line item on our income statement.

Your next question comes from the line of Michael Sison with Wells Fargo. Your line is open.

Hey, guys. Nice start to the year. In terms of your outlook for sales growth in 2Q versus 1Q, I think you said low double digits. How much of that increase sequentially is going to be price and volume? And I'm just curious what exactly is the inflation delta that you have to uncover maybe either in dollars or gross margin percentages for the year?

Mike, thanks. I'll start and then Michael can certainly add some more color. But we do expect pricing to be higher than Q1 on a percentage basis year-over-year. The volumes are still a bit mixed by business and segment, again due to the shortages, both in our inventory as well as customer ability to run. But again, we gave you the composite number. Hopefully, you can vet out what you expect to be from a volume perspective.

I would say, Michael, just to be consistent, the primary drivers of the higher volume are going to be on the industrial segment side. As you remember, April and May last year, the automotive companies were completely shut down. Packaging remains strong, and many segments in our industrial business are doing quite well.

And Mike, maybe just to add one more thing. We would have probably had a little bit more sales in Q2 if it wasn't for the supply disruptions that we noted of $70 million to $90 million in his opening comments.

Your next question comes from the line of Jeff Zekauskas with JPMorgan. Your line is open.

Thanks very much. Your EBITDA margins were 17% in 2020. In the first quarter, they were about 18%. You've got all kinds of raw material inflation. Your volumes are not really back to where you want them to be. You've made some acquisitions. Once you get your price increases and businesses back to normal, what's the EBITDA margin? Should it be roughly 20%? Can you do better than that? What's your long-term goal? And what is the profitability of PPG look like on a normal basis?

Well, I think, Jeff, one of PPG's tenets is that we do better today than yesterday every day. Right now, our current target is to well exceed our 2016 peak margin. If you want to go back and look at that, you'll see one data point. We're well above that in our Performance Coatings segment. We're not there on our industrial side, so we have more work to do. Overall, I think what you should do is anticipate that we're going to continue to drive these margins higher. I think you hit on all the right aspects. We have better leverage. We're going to be able to retain pricing once we get it in place. We have new products that are coming out. We're excited that we had a record quarter. We're forecasting a record second quarter. That's three quarters in a row of record adjusted EBIT. So we're happy about that.

Yes. I would like to add that part of the equation here is the elimination of fixed costs that we've implemented over several years. This has significantly contributed to our margin profile. As you pointed out, we still have more restructuring activities planned for this year and early next year. Additionally, I want to mention that the acquisitions we are bringing in usually have margins below our company's, which will moderate some of the average margin improvements until we can realize the synergies from these acquisitions.

Your next question comes from the line of Kevin McCarthy with VRS. Your line is open.

Michael, I was wondering if you might expand on some of the supply chain disruption issues that you're seeing from both an internal and external perspective? What is it that PPG buys that is in short supply? Has it impacted your production rates? Then externally, we hear a lot about the semi chip shortages. Is that the lion's share of the issue for PPG? Or are you seeing customers that are impacted in other industries as well?

On the internal side, Kevin, proxies, VAM, butyl acrylate, MMA, and specialty isocyanates are all challenged supply chains right now, and we're operating hand-to-mouth. There are some minor chemicals needed to make certain batches of paint, especially in our packaging business. We are shuffling raw materials around between the plants to make sure everybody has everything they need. I would say that the primary issue is on our side, except for the automotive guys; they do have the chip shortages. The automotive guys also had plastic shortages. They had seat shortages. They are really struggling right now. But we expect it to loosen up and get better. We see that every day we're getting more emulsions. Epoxy isn't great, but it's getting better. We're anticipating that, as we get raw materials, we'll be able to better service our customers. The good news is we're pretty sure we're doing better than our competitors in many of these spaces, especially our smaller competitors, who are struggling to get raw materials. So we're taking good care of our customers, and our suppliers are doing a good job of taking care of us.

And I'll just add one comment. From our internal shortages, it's primarily in our architectural businesses. We do have some internal shortages that may affect Traffic Solutions, and we expect these to be transitory. They're baked into our guidance for Q2. That's where we're seeing the shortages.

Your next question comes from the line of P.J. Juvekar with Citi. Your line is open.

Yes. Hi. Good morning, Michael and Vince. In your chart on M&A, which was quite helpful, you showed that Tikkurila's multiple was at the high end of the historical range. Can you talk about Tikkurila's exposure in Eastern Europe and Russia? How do margins compare in those regions and returns compared to Western Europe? What are the risks in Russia? You already have operations there in industrial. Can you talk about any risks in Russia with respect to FX and all that? Thank you.

Well, we're certainly looking at the FX much like any of our foreign currencies. We do have a fairly sizable presence in Russia right now. We're number one in automotive and premium refinish. We're number one in packaging and aerospace. We have a pretty sizable presence. We're used to doing business in Russia. We can't talk about what their specific margins are until we close, but I would tell you is if you look at their overall margins, they're below our margins in Europe. So that's an opportunity for us to bring those up to PPG levels. We also think that in some countries, there's an opportunity to go beyond that because of the synergies with the warehousing and raw materials. They're struggling right now with raw materials, so I anticipate that we'll be able to improve their business pretty quickly once we close.

Your next question comes from the line of Arun Viswanathan with RBC Capital Markets. Your line is open.

Thanks. Good morning. Congrats on the great results. Just wanted to get your thoughts on the margin. So, obviously, some pretty strong performances. Is there a way you could help us understand what portion of the upside came from, say, volume leverage versus some of the selling price increases versus the cost reductions in the quarter? And maybe looking ahead, if you expect those buckets to remain similar? How should we characterize that? Thanks.

Yes. Arun, great to hear from you. Look, the majority of our benefit year-over-year and versus 2019 came from the volume leverage. We had 7% volume leverage. We've been talking for quite some time about all the costs we've taken out. That had a significant 40-plus percent dropping to the bottom line. If you do the math just on that, you can see the remainder of the gap was modest. We continue to have volume recovery, especially in some key businesses like aerospace. We expect consistent performance in subsequent quarters. I would profess that our teams are doing well in terms of discrete cost management. But we also have structural cost management, the multiyear stack I talked about earlier, that's going to provide us benefit here into the future, and we still have more of that to execute against.

Your next question comes from the line of Duffy Fisher with Barclays. Your line is open.

Good morning, folks. If you go back and look at 2013 through 2019, each first half versus second half was either 50% or 51% of your revenue for that year. This year, with that $70 million, $90 million hole you talked about in Q2, just kind of the rebound, it looks like the second half should be meaningfully better than the first half maybe for the first time in that period. Can you kind of help us walk through, excluding the acquisitions, what might the second half look like with your view on things today versus the first half on a top line basis?

We are confident that our momentum will continue. Looking at some of our businesses, automotive inventories are very low, which Vince discussed earlier. We expect a stronger second half for automotive compared to what is typical. Our industrial segment, including coil and heavy-duty equipment, is performing well. There is no sign of slowdown in packaging; the number of new packaging plants coming online in the second half should be positive. In architectural, DIY demand remains strong, and while we haven't seen much improvement yet, we expect the professional side, particularly in commercial and industrial, to improve as well. Aerospace is also set to improve; it's just a question of timing. I'm encouraged to see some of the major oil companies beginning to invest in capital. If they continue on this path, our protective business will start to improve. Overall, I believe we are set for a strong second half of the year in terms of volume.

Your next question comes from the line of Jaideep Pandya with On Field Research. Your line is open.

Thank you. Just on aerospace, could you just tell us, so much of the fleet has been grounded. When this fleet goes back up flying, can you explain to us what you expect in terms of a pickup in MRO because so much of the fleet has been grounded? What do you expect in terms of recovery in 2022, 2023 with regards to new builds on the military side? On a related note, what do you expect the impact on the protective side from infrastructure spending in the U.S.? What is PPG's exposure on the infrastructure, and how would that benefit the protective business? Thanks a lot.

I'll address all these questions. First, regarding the military, we are not seeing any slowdown in that area, which makes up about 35% of our aerospace business. Our key program, the F-35, is progressing well. We are gaining more market share, particularly in transparency and winglet transparencies, which we feel optimistic about. On the commercial side, our visibility is limited since we've never experienced planes being grounded for an entire year. The manner in which MRO (Maintenance, Repair, and Overhaul) assets were stored and the process for them to return from storage remains uncertain, including the checks that will be conducted before they are put into storage. However, MRO activity in our aerospace business is increasing. As some planes come back to lessors, they need to be repainted white, and we are acquiring some of those white paint sales. Upon returning to the lease market, they will be rebranded and repainted, which should be beneficial for us. Regarding infrastructure, we are involved in many aspects, such as road markings and painting bridges. Support for the building and trades industry, including the need for protective coatings, is essential. Any infrastructure development will be a positive for PPG.

If you think about the drivers of volume, we expect it to return in waves. The first wave, I think Michael alluded to in his prepared remarks, which is the domestic flights. We're seeing that certainly in the U.S. We're seeing significant upticks, still below pre-pandemic levels. But we care about takeoffs and landings; that's what drives the aftermarket. The more takeoffs and landings in the U.S. and other countries, the better it is for us. The second wave we see is a return of business travel. The third wave, which we don't expect until later this year at the earliest, would be international travel. We do feel there's a couple of opportunities for step-ups in the aerospace industry on the MRO side.

Your next question comes from the line of Laurence Alexander with Jefferies. Your line is open.

Good morning. What's your expectation for labor cost inflation for this year? How do you expect pressure to build into next year? In previous inflationary environments, there was a lot of thrifting driven by a shift in the innovation cycle. What can you do this time? What are you seeing from customers, and will that translate into share gains in 2022 and 2023?

Well, let's talk about the labor piece first. Labor for PPG is not a huge part of our business. I would put into your model a traditional 2% to 3% kind of number; that’s typical of what we're seeing. But our goal always is to offset that through productivity. Our manufacturing teams are always challenged to drive additional productivity year-over-year. They have to come forward in their plan to offset that. That would be the first thing I would think about from a productivity standpoint.

Your next question comes from the line of Mike Harrison with Seaport Global Securities. Your line is open.

Hi, good morning. Within the industrial business, if we look at that sequentially, sales were down $30 million, operating income was down more like $35 million. What caused that sequential decline in operating income? Is this discretionary costs that are coming back? Is this the impact of disruption? Maybe just some thoughts on how we should think about industrial margin trajectory over the rest of the year as demand recovers and you get some pricing against raw materials? Thanks.

Yes. Mike, this is John. I would highlight two things. We saw the chip issue in the auto OEM side; still robust demand. But that was an impact on the top line. Then we also saw raw material inflation sequentially. That would be the other part that I would call out.

Yes, I would like to add a quick point. We experienced rapid inflation in raw materials due to the weather events mentioned earlier. Usually, such inflation does not occur mid-quarter, but we observed significant spikes, particularly in oil-related items, during this period. We implemented price adjustments, as Michael mentioned earlier, but we were unable to fully compensate for this in Q1. I also want to return to Laurence’s question; we didn't address the second part about thrifting. Currently, in our architectural business across the globe, we are not noticing any major impacts from thrifting. We believe our inventory levels are low, and it seems our customers are also experiencing low inventory. Everyone is selling what they currently have available. We do not anticipate this being a significant issue in Q2 due to product availability.

All right. There are no further questions at this time. Mr. Bruno, I'll turn the call back over to you.

Thank you, Jerome. I'd like to thank everyone who participated in our call today and for your continued interest in PPG. If you have any further questions, please contact me in the Investor Relations department. This concludes our first quarter earnings call.

This concludes today's conference call. You may now disconnect.