Ppg Industries Inc Q1 FY2026 Earnings Call

good morning my name is tracy and i will be your conference operator today at this time i would like to welcome everyone to the first quarter 2026 ppg earnings conference call all lines have been placed on mute to prevent any background noise after the speaker's remarks there will be a question and answer session if you would like to ask a question during this time simply press star followed by the number one on your telephone keypad if you would like to withdraw your question press star one again to allow everyone the opportunity to ask a question the company requests that each analyst ask only one question thank you i would now like to turn

the conference over to alex lopez director of investor relations please go ahead sir thank you tracy and good morning everyone this is alex lopez we appreciate your continued interest in PPG and welcome you to our first quarter 2026 earnings conference call. Joining me today from PPG are Tim Kanavish, 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 Tuesday, April 28, 2026. We have posted detailed commentary and the the accompanying presentation slides on the Investor Center of our website, ppd.com. Following management's perspective on the company's results, we will move to 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. The 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 filing with the SEC. Now, let me introduce PPE Chairman and CEO, Tim Kanavich.

Thank you, Alex, and good morning, everyone, and welcome to our first quarter 2026 earnings call. Before we begin today's call, I want to take a moment to remember our dear friend and colleague, John Bruno. His passing last week is a tremendous loss. John was not only an exceptional contributor to our company, but a wonderful husband, father, and friend whose leadership, intellect, compassion and humor touched everyone who knew him thank you to the many of you that reached out it meant a lot to us here at ppg but more importantly meant a lot to his family now i'd like to start by providing highlights of our first quarter 2026 financial performance and then i will share our outlook i am pleased to report that ppg delivered solid performance in the first quarter, demonstrating our ability to maintain growth momentum in a challenging macro environment, led by our differentiated aerospace and PPG COMEX businesses. We achieved organic sales growth of positive 1%, marking our fifth consecutive quarter of higher year-over-year organic sales. This growth was driven by higher selling prices, with further selling prices increased, announced. and expected price realization for the remainder of the year targeted to offset any inflationary impact much more quickly than prior inflation cycles. First quarter net sales totaled $3.9 billion, up 7% year over year, with adjusted earnings per share of $1.83 and an increase of 6% versus the prior year. Our segment EBITDA margin was over 19%, reflecting solid execution of our share gains, the benefits of our technology advantage products, strong brand recognition, along with excellent commercial execution. Turning to our segment performance in global architectural coatings first quarter net sales rose 13 percent to 965 million dollars with positive two percent organic growth organic sales for architectural coatings latin america and asia pacific increased by a mid single digit percentage compared to the first quarter of 2025 with equal contributions from selling price and sales volumes in mexico retail sales were especially strong and project-related sales continued their recovery. Architectural coding sales in Europe remain mixed by country with a low single-digit percentage decline in total which was partially offset by favorable pricing. Segment income increased more than 30 percent supported by pricing and execution of self-help actions, which drove EBITDA margins up 230 basis points above prior year levels. We expect organic sales and margin momentum to continue into the second quarter of 2026. Also, we continue to reduce our overall structural costs in our architectural business in Europe, and we have four manufacturing plants that will be closed in the second half of 2026 resulting in lower fixed costs going forward our performance coding segment delivered five percent positive net sales growth to 1.3 billion dollars led by double digit organic growth in aerospace and high single digit growth in traffic solutions and protective and marine coatings pmc has now delivered 12 consecutive quarters of positive volume growth as expected automotive refinish organic sales decreased by double digit percentage as sales volumes were lower reflecting customer order patterns stemming from our u.s distributors during the first half of 2025. on a positive note we are seeing improvements in the u.s industry accident claims february and march industry claims were down one percent year over year which now makes three out of the last four months with low single digit declines year over year reinforcing a normalization trend after the high single-digit to double-digit declines most of last year. Another positive data point, we are seeing our U.S. distributor fulfillment orders sequentially improve as inventory levels normalize. In refinish, as we previously communicated, we expect year-over-year organic sales volume declines in the second quarter as we lap strong prior-year first-half order patterns. We anticipate volume growth during the second half of 2026. Segment EBITDA was strong at 24%, driven by the strength of our aerospace business, despite the unfavorable year-over-year refinish volume comparisons. In fact, the investments that we are making in aerospace to support our customers' demand have resulted in improved productivity and improved output. We are well positioned to deliver consistent growth in this key end market for the next several years. I would like to again emphasize the important and sizable role that our aerospace business plays as a key growth engine for our company. Demand is expected to remain strong given our highly specialized and qualified products for both the OEM and aftermarket channels. Our backlog remains at about $350 million, despite year-over-year output increasing. The PPG Aerospace business provides unique technology-advantaged products in various sub-segments, transparencies, sealants and adhesives, coatings, services, and engineered materials. In each one of these verticals, we have a strong presence that allows us to provide a superior customer offering including excellent distribution capabilities creating a truly unique value driver for our company and for our shareholders another differentiator of ppg aerospace business is the balance is not only between oem and aftermarket but also we are not overly dependent on any sub segment as we are well balanced across commercial general aviation I'd like to highlight just two examples of the proprietary technology advantaged aerospace products that are designed to provide customized chemistry solutions inside the can and improve productivity for our customers outside the can. PPG's PRC seal caps deliver lightning strike protection for aircraft while significantly improving application time and material usage for our customers. A.R.E. 3D printed sealants are a customized gasket solution that offers superior quality and increased customer productivity solutions. Now, moving to the industrial coding segment, first quarter net sales grew 4% to 1.6 billion. Organic sales were flat, including share gains that led to 1% sales volume growth, well outpacing industry demand. as we realize the benefit of share games with strength in automotive OEM coatings and packaging coatings. We expect to launch additional share games in the industrial segment throughout this year and into 2027. From a business unit standpoint, our automotive OEM business delivered flat sales volume, which outpaced the decline in global automotive industry production by about 300 basis points. The industry decline was largely due to year-over-year comparisons in China as the first quarter of 2025 was very strong and first quarter of 2026 was tepid. Expectations for China industry comparisons are to improve in the coming quarters. For PPG, due to our strong product portfolio and commercial execution, we expect to continue outgrowing the market in the second quarter and for the full year in 2026. Organic sales for our industrial coatings business were down a low single-digit percentage as lower volumes due to inconsistent demand were partially offset by positive pricing actions in this business. Packaging coatings organic sales increased by a double-digit percentage year-over-year, growing significantly above industry rates. Sales volumes for PPG are up over 20% on a two-year stack basis driven by share games as customers continue to select our leading technologies. Segment EBITDA margin was negatively impacted by regional mix as China automotive production dropped in comparison to a particularly high level in the first quarter of last year. Looking ahead, we expect sequential margin improvement driven by incremental industry and ppg sales volume growth selling price realization and aggressive cost management with the impact of the iran war costs have risen for raw materials energy logistics packaging across the coatings value chain in this rapidly evolving macro environment we are focused on our ability to supply our technology differentiated products services to our customers which will allow us to maintain our organic growth momentum i'm expecting the actions we are taking combined with ppg's portfolio strengths to offset geopolitical driven impacts to date we have had limited impact from supply shortages and we have the ability to leverage our unique broad and global supply chain footprint to securely source raw materials and drive competitive pricing for those raw materials additionally we are leveraging our years of expertise in product formulation technology and our ability to maximize the use of ai to optimize products to drive reductions in our raw material costs considering our procurement capabilities our global footprint our formula flexibility our portfolio strengths and the current macro environment, the impact of PPG is expected to be a mid-single-digit percentage and the cost of goods sold for the remainder of the year. We expect to fully offset these costs and we are proactively raising prices to secure raw materials for our customers. Given the distribution models and price mechanisms we have in place, we expect to deliver price cost realization much more rapidly than we did in previous inflation cycles this realization will impact our global architectural coatings performance coding segments first and then flow through our industrial coding segment importantly there are areas where we anticipate potential upside to the second half of 2026 such as our growing aerospace business and our architectural coatings mexico business where demand has been strong additionally industry demand and automotive refinish has been recovering faster than we initially expected as a result we are reaffirming our full year 2026 eps guidance range of seven dollars and seventy cents to eight dollars and ten cents again let me re-emphasize our top priority is supporting our customers' needs through technical expertise, products with consistent quality, and continuity of supply, even as market conditions remain highly dynamic. Now let me talk about our balance sheet and cash. Our strong balance sheet continues to provide financial flexibility. We ended the quarter with cash and short-term investments of about $1.6 billion. We repaid 700 millions of debt that matured in the first quarter and returned approximately 260 million to shareholders from dividends and share repurchases our cash deployment remains focused on maximizing shareholder value creation looking ahead our accelerating organic growth momentum and proactive pricing actions position us well for the year for the second quarter of 2026 we expect strong growth in aerospace architectural coatings latin america protective and marine coatings, automotive OEM coatings, and packaging coatings. While demand in architectural coatings Europe, automotive refinish coatings, and in global industrial end-use markets will remain below prior year. We expect overall pricing for the company to be positive, with the strength from our performance and architectural coating segments in flat year-over-year price in the industrial coating segments, with all three segments having improved pricing versus the first quarter. This will result in organic sales growth for the second quarter in the range of flat to positive low single digits versus the prior year. Given our ability to outperform the macro through our commercial momentum, combined with our pricing realization and self-help actions, we expect to deliver adjusted earnings per share growth in the range of flat to a positive low single digit percentage for the second quarter versus the prior year period. We are confident in our strategy and the strength of our portfolio that are delivering higher growth and earnings despite challenging market conditions. Thank you to our PPG team around the world who make it happen and deliver on our purpose every day. We appreciate your continued confidence in PPG. now before we open the line for questions i would like to congratulate vince on his upcoming retirement on this his final ppg earnings call thank you vince for more than 40 years with ppg thank you for being a great contributor to our company a driver of results a driver of shareholder value a great mentor to many talents a great teammate to our operating committee a great partner to the last three CEOs and a great friend to me. Thank you, Vince. As PPG makes the CFO transition, we are delighted to welcome Jamie Beggs as our new chief financial officer. With her extensive background and financial leadership, Jamie brings a wealth of experience that will be instrumental in driving our continued growth and success. Please join us in extending a warm welcome to Jamie as we work together to achieve new milestones and create lasting value for our stakeholders. We are thrilled that Jamie is joining our team. Now operator, please open the line for questions.

Thank you. At this time I would like to remind everyone that in order to ask a question press star then the number one on your key on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Gansham Panjabi with Baird. Your line is open. Please go ahead.

Thank you, Operator, and our best to you, Vince, and our best to very best for John's family as well. I guess, Tim, you know, first off, on your comments on price-cost recovery will be much faster than prior periods, can you just outline some of the specific changes you've made to support that? And then related to that, you've been very calibrated in the past with pricing and, you know, with previous inflation cycles to kind of maintain your market share, etc. Do you expect volumes to hold this go around as well, just given the near 20% increases you've implemented thus far?

Yeah, thanks, Dodgsham. Look, the difference this cycle from a volume standpoint is, as you know well, for the last three years, we've been building our organic growth muscle, right? So we have tremendous momentum from an organic growth standpoint that will help as we move forward with price increases. And if you compare the last couple of cycles, you know, the pre-COVID cycle of 2017-18 took us about a year and a half to get to run rate neutrality. The 2021 cycle, which was the post-COVID combined with the Texas freeze, took us about a year. Now we're talking months. So it's a combination of two things, Ganshin. Number one, we've always had a good pricing muscle. And with each cycle, we refine that. We learn. We get better. We get faster. Now, from a volume standpoint, we're combining it with positive momentum on the organic growth muscle that we've been building and demonstrating results through these last five quarters or so. So we're confident that we're going to be able to strike the right balance between pricing and volume.

Your next question comes from the line of Michael Sisson with Wells Fargo. Your line is open. Please go ahead.

Hey, guys. Nice start to the year. And congrats to you, Vince. And, you know, John will be sorely missed. In terms of your outlook for the second half, Tim, how do you see volumes sort of shaping up sort of at the midpoint? Any effects from, you know, from the Ironman conflict on each of the segments? And just give us your thoughts on, you know, the type of volume growth that could be, that's kind of embedded in your outlook.

Yeah, thanks, Mike. You know, in everything, unfortunately, you kind of have to timestamp right now because it's just so fluid out there, right? But based on today's environment, we feel good about the second half volume. A couple of things. First of all, aerospace beat our own expectations in Q1. And we continue to see improving output there. And as you know, we're essentially sold out. So every incremental output that we get is an incremental volume for us. Second, and this is a significant one for us, you know, we had said all along that refinish would have positive volume in the second half. It's recovering a little earlier than we expected. And we got two really good sets of data points in U.S. collision claims rates, as well as improving U.S. distributor fulfillment orders. Then on top of that, we've got we've got the industrial segment share wins that we will continue to launch as we move through the year. You know, and finally, Mexico, you know, is really recovered nicely for us. Retail is doing great. And with each passing quarter, projects get projects get a little better. And in some of our other businesses, you know, packaging is doing great, up double digits. PMC is doing well and has been doing well for a couple of quarters. We've got a good order book there. We have not seen any order book changes with the Iran conflict.

Obviously, we've seen change in feedstock pricing. but when it comes to volume and order books based on today's current environment we have not seen any negativity in our order books yeah mike this is vince just just to peel the onion back a little on the refinish comments just as a reminder for everybody in the baseload we had very strong refinish activity in the first half of 25 distributors stopped up inventory we were well above market the second half the patterns hurt us so we have much easier comps so we still expect muted volumes in refinish for the year but the comparisons are why tim said we expect growth

year every year in the second half your next question comes from the line of john roberts with mizuho your line is open please go ahead thanks it was good to see the ppg family come together for John Bruno.

And welcome, Jamie and Vince, again. Thank you very much for all the good service. And good luck with the penguins tonight. Tim, on your guidance on slide nine, raw materials, how much higher do you think costs are going up for the smaller competitors who maybe buy raw materials through distributors? And with the dynamic pricing that's going on out there. Are there gaps opening up between competitor pricing, or is it relatively orderly and competition is generally moving up together?

Hey, John, you know, thanks for your support of Mr. Bruno. It's really hard for me to say what our smaller competitors are seeing, but what I will say is uh we are you know we are getting um more favorable deals and contracts and agreements because of our volume right so even though prices are going up and we're projecting you know basically mid single digits here based on today's knowledge but um i and that's on the back of of our volume, our global footprint, and our ability to get the best deals in the market because of our scale. So I would imagine that our smaller competitors are likely seeing higher prices than what we're seeing on the input costs.

Your next question comes from the line of Chris Parkinson with Wolf Research. Your line is open, please go ahead.

Great, thank you so much. Vince a sincere congratulations and most importantly thank you for the life advice going back to 2015 before I was even married and I must disagree with one of my colleagues here go Flyers okay in terms of the second half of the year sorry that was an honor of our friend in terms of the second half of the year Tim perhaps you can just give us kind of the puts and takes obviously been very proactive in pricing in terms of those dynamics which is you know helpful in terms of to contemplate but also that you could have some positive mix effects specifically in pc so could you just kind of go through your thought process in terms of you know how you're thinking about margin in the second half what you want to see what you need to see um or just overall thank you thank you yeah hey thanks chris and thanks for your support here

recently with uh the passing of john as well the um um first of all i'm confident that we'll have positive volume in the second half i'm confident that our net ebitda margin will improve in the second half um and that's because of a number of things number one aerospace will continue to grow good margin contributor uh the the you know refinish recovery that we've already talked about a big impact on our on our net net margin um you know mexico continuing to grow that's a good contributed to our net margin. So from a mixed standpoint, it's really all good news for us, right? And then from kind of a top line and gross margin impacts standpoint, it's all those three things added together, plus the launch of our industrial segment share gains as we progress through the way. And these are ones that are already locked in. So we've got a favorable mix. We've got pricing actions underway. Yes, ROS will be higher, energy costs will be higher, and logistics costs will be higher. But we feel good about the playbook and the actions that are in place to drive not only the price cost side of the offsets, but also these other really PPG portfolio differentiators that will drive elevated mix and volume as we move through the second half.

And baked into our guidance, Chris, if you recall, we still have cost actions we're taking. We have several plants coming out in Europe in the second half of the year. And so that'll help from a cost structure perspective.

Your next question comes from the line of David Begleiter with Deutsche Bank.

Your line is open. And first, the best of John's family. And Vince, congrats and thank you sincerely. Tim, just on the 20% on the price increases that you've announced, how do you think about the realizations that you will realize? And beyond the current spike in raws, the sustainability of these increases, when and if oil prices and other input costs come down. Thank you.

Yeah, so thanks, David. Thanks for your support. So we announced, I announced to the world price increases up to 20%, And that's because I had to notify our customers around the world that there are some products that will have to go up that much, right? It will be, you know, we'll have the actual realization will be spread out dependent on customer size, dependent on what products they actually buy, depending on the actual, you know, cost impact of those products. So in order to offset the mid single digit cost of goods sold increase that we're expecting for the remainder of the year, we need we need to realize low single digits to offset that as a total company. And then, you know, we're ready if if the situation gets worse, if we have to flex more moving through the year, we will we'll do more and we'll drift our price up to mid single digits. But right now, based on based on today's operating environment, net net, we need to get solid low single digits to offset mid single digit COGS inflation. Now, what happens if and when it comes down the other side, you know, just like there's a lag going up, there'll be a lag coming down. And also what's yet to be determined, Dave, is, you know, what's the impact of the structural damage to petrochem facilities in the region that may stretch out, you know, when, how and when things come back down? and just a reminder to everybody in the prior cycles in almost every business we went out for more than one price increase as the situation has developed uh so so again this is not uncommon that we price for what we know today and then we adjust as necessary your next question comes from

the line of frank mitch with fermium research your line is open please go ahead thank you and uh yes Rest in peace, John.

We lost a truly great one. Hey, Vince, I'm roughly calculating that this is your 80th conference call as IR or CF. I was wondering if you could take a moment or two and recap the highlights of each one of those conference calls, and perhaps they'll put a plaque in the conference room where these conference calls are held. But my business question is, you know, free cash flow generation was negative in the first quarter, as is typically the case. I was wondering how you look at the potentials for free cash flow generation in 2026 and feel free to be as bold as possible so you can give Jamie a stretch target.

Thank you, Frank. If you look at our cash from Ops, we were up about $50 million the prior year. We did have elevated capital spending lower than the prior year, which was our target. So, again, our cash forecasts do not change versus what we gave in January. We're expecting a good, strong cash year. Can you talk about the priorities?

Yeah, yeah. Look, you know, first of all, we were thinking about a dartboard rather than a plaque here. But we expect a good proxy walking around number four is for our cash flow to be about 10% of our sales. Right? Right. And then the prioritization of that, of course, of course, we got a we got a dividend that not everybody has. We'll keep that going. We've got some really good organic investments like like like what we're doing in aerospace, for example. You know, we've been looking at M&A. It's not our number one priority. It's not the tip of the spear for us, but we, you know, we will do deals when they make sense for our shareholders. You know, in my three and a half years, we've done two small bull dons. So we'll use that if and when the right asset comes along at the right price. But beyond that, I think we're now at 10 straight quarters of doing repo. And, you know, you should expect me and Vince and my new CFO to follow that same pattern.

Your next question comes from the line of Jeff Zekakis with J.P. Morgan. Your line is open. Please go ahead.

Thanks very much. A two-part question, one about the present, one about the future. In the quarter, what was the currency benefit to EBIT year over year? And you speak about getting ahead of raw material cost inflation, but you, you know, you do sell to the auto OEM industry. Do you think that that's an industry area where you will be ahead of raw material cost inflation or behind? And in your spending for aerospace, you speak about being capacity constrained at a point in time should your volume growth rate elevate because you have more capacity available as the case, or it doesn't work that way.

Yeah. Jeff, we might have lost you at the tail end of your questions, but I think I got all three parts of them. So I'll take auto. Okay, Jeff, please. Yeah, you're very choppy, Jeff. We lost you at the end.

Go ahead, please. Just try to answer the questions. We'll go from there. We'll go from there.

Okay, thank you, Jeff. I'm going to take the two, and I'll let Vince take the currency one. On auto, I mean, look, we all know it's the toughest of our businesses to get pricing, but we get pricing. If you look at the last cycle, we got pricing coming out of COVID and on the Texas freeze. One thing that helps with this situation, actually, Jeff, is it's such an acute and well-known event and driver to inflation and petrochem feedstocks that, you know, you start from a stronger point of not having to demonstrate and explain and convince. Now, that said, as you know, we also have some index contracts that will automatically move, but will automatically move with some time lag. So, in our guide, in our normalization by Q, run rate normalization by the beginning of 27, Q1 to 27, we've got all of that factored in. Now, aero, absolutely, you will see increases in output volume and therefore revenue for our aerospace business going forward. I would put it in a couple of different buckets. One, we're continuously improving output with some of these incremental de-bottlenecking kinds of investments that we've been making. Round numbers over the last year or so, we've put about $150 million into those kind of investments. And they're paying off as we go. You'll see some improvement in late 26 into 27 coming out of those investments. Second, we announced a new plant to the tune of about $380 million that will be more of a step change in volume output as we get out into like the 28 timeframe. The third category, Jeff, is we've got a lot of engineering work happening right now. We're not done with with investments and I can't get ahead of my board or anything, but we're still working on additional investment. So you should going forward expect to see, you know, a nice increase in our in our aerospace revenue. Vince, you want to take the currency?

Yeah, Jeff, the currency impact for Q1 was less than 10 cents year over year. Positive. That was included in our guide for the year and for the quarter. if you look at the balance of the year so the remaining three quarters the total is going to be less than half of that uh and most of that in q2 so again all included in our original guide back in january your next question comes from the line of kevin mccarthy mccarthy with vertical research partners your line is open line is go ahead please go ahead yes thank you and good Good morning.

Vince, congratulations to you. Appreciate all of your help over the last 20 years or so, and you'll be greatly missed, as will Mr. Bruno, of course. My question maybe for Tim is on the subject of M&A. I think you made a small acquisition recently in Ozark as part of Traffic Solutions. Curious about that deal, but maybe more importantly, Can you put external growth into forward context for us, Tim? I think you've been quite focused on organic growth now that you have five quarters of expansion under the belt. Do you feel like you have a little bit more license to grow externally, or should we expect PPC to remain highly disciplined as you have been every season?

Yeah. Hey, thanks, Kevin. um so ozark you know that i would call that an opportunistic asset um highly synergistic for us with double underline under highly um you know we paid we got a good price relative to what it was sold for a number a few years just a few years ago um you know walking around number kevin about 100 million in revenue uh so it's a small bolt-on but what it does because of the highly synergistic nature of it is it actually helps our margin position and cash generation position for that that that small business force of traffic solutions so it raises its margin profile a little bit but the reason we have that in our portfolio is it's a really consistent cash generator for us that we can use to then deploy that cash on things like new aerospace plants and it's steady because it's safety and infrastructure it's very very very stable and so it just kind of spits off cash for us year over year and now with ozark it'll deliver financial great financial returns for us and our shareholders because of the high synergies and the relatively low purchase price now more broadly i am very pleased with how the teams have grown that organic growth muscle and you know kevin i remember some of our conversations four or five years ago and uh so we're you know we're not done but we're pleased with five straight quarters of organic growth and by the way i'll perform in market over those five quarters so i think we've always had a license we've always had a strong enough balance sheet to do whatever m a we want but the way i think about it is first of all it's got to be the right asset. I'm not interested in just buying something so that I can put another flag somewhere or buying something purely for the sake of raw material synergies. I want to buy something that adds to our future organic growth and margin profile. Second, it's got to be the right time. The last few years has not been the right time as we've been, first of all, exiting some things in our portfolio and tripling down on organic growth i think we can handle some deals now but it still has to be at the right price because i've got some pretty darn good um organic investment opportunities that that have great financial returns and so i'm really you know to use your word discipline we will continue to be disciplined but i do think we have the right the license to do selective M&A. And you've seen us with two small bolt-ons this year. We actually did a, you know, kind of a productivity outside the can, allied products acquisition earlier in the year to help industrial refinish type lines. So it's still not the tip of the spear for us. We will still be extremely disciplined.

We will look at every asset that comes available, but it's got to it's got to meet the right asset the right time and the right price your next question comes from the line of duffy fisher with vertical research partners your line is open please go ahead great good morning guys um two questions on refinish so first when you anniversary q2 revenue will be down about 10 has that done anything structurally to the margin there do you need to do any restructuring to reset that on a profitability basis? And then second, you know, once we get through the snapback in the second half, should we think about that business structurally being kind of flat volumes and price up two to 3% going forward?

Yeah, Aduppy. I think you're pretty close there. We don't, as far as the go forward, right? The go forward it's not it's not gonna be a high volume growth industry but it's still a good revenue growth and EBITDA growth machine for us because of our ability to capture value for the total value that we deliver because of the work we've been doing to expand our TAM right we're selling more into the body shops now than we ever did beyond just the coatings right um so when you think about digital tools uh moonwalks uh allied products we just have a bigger target tam that's enabling us us to grow and then we've had a really good run of share gains there and so as the market uh normalizes this this will be it'll never be our highest growth business but this will be a nice low single digits growth business for us with really good margin and really good cash now to the first part of your question you know we have not had to do massive restructuring with this decreased volume so what you should expect instead is as things normalize in the second half you should expect outstanding leverage because you've seen some of that negative leverage in the second half of last year right so you should expect a really nice snapback in in margin leverage now to find snapback though that's really a bottom line snapback uh what we will reach this industry we expect to return to normal over the last x number of years and normal being a minus one minus two industry volume will do better than that because of our expanded TAM and then a really nice EBITDA machine for us.

Your next question comes from the line of James Hooper with Bernstein. Your line is open. Please go ahead.

Thank you very much for taking my question. I'd like to go back to aerospace, please. We've got Europe running out of jet fuel, flight cancellations, and other potential issues if the conflict continues. Can you remind us what your split of OEM and aftermarket is? And can you give a little bit of detail about how aerospace growth could be affected if flying hours are tearing down the realm of defuse? Thanks.

Thanks, James. I'll give you the spoiler alert answer first, and I'll give you a little more details. We see no impact of the potential slowdown in flight miles in some parts of the world in 2026. And now here's why. First of all, the business is balanced roughly 50 percent OEM, 50 percent aftermarket. And then it's balanced across commercial aviation, general aviation and military. So kind of one of those sub-segments may be affected from a flight mile standpoint, but it's one of many sub-segments. And then even that sub-segment has learned a very hard lesson coming out of COVID. What the commercial customers did is they radically depleted their inventories of aftermarket products, including a lot of what we sell. and because of the strength across the breadth of this industry that has never been able to be rebuilt and i still get phone calls like literally weekly about restocking and our ability to keep aftermarket parts and components in stock and rebuilt so what you should expect if that does happen i think we would be rebuilding uh aftermarket inventory for some time period while the all the other segments that i mentioned remain remain red hot and um you know i think if anything it could be an improved mix for us because typically your aftermarket mix is a little richer than your oem mix so um i watch the news like everybody does i see the impacts and i see my customer CEOs talking about this on the news, but we see really no impact here because don't forget, because of what's going on in the world here and the NATO rebuilding their own defenses, the military side of the business growing tremendously on both OE and aftermarket

as well okay thank you your next question comes from the line of john mcnulty with bemo your line is open please go ahead and uh and condolences to uh to john's family great guy and vince it's been a really really great ride um so appreciate all the help um just a quick one on the protective and marine business i think the expectation was that we were going to see that the growth in that business moderate just given you know the huge success you've had over the last year and a half or two in that and and yet you still put up high single digits I guess can you help us to think about about what

drove that presumably stronger than expected volume and how we should think about that throughout the rest of the 2026 yeah so we did we have been stacking like lots of double-digit and high single-digit quarters for multiple years so just by the laws of big denominators we did expect that to come down somewhat but we were very pleased that in Q1 we still put up high single digit I single-digit growth off of a much bigger denominator I'd say in in the short term the real strength is is asia and has been asia and um both both marine new build and marine aftermarket have been stronger but we look there's a lot of protective coatings work going on around the world uh there's a lot of data center work going on around the world we we just launched and announced a comprehensive end-to-end offering for for data centers uh there's a lot of infrastructure work going on. So, you know, we see that business continuing to be a growth engine for us for the rest of 26. And frankly, frankly, beyond because it's, it's got some strength in some segments that are relatively unaffected by some of the macro issues that are affecting other places.

Your next question comes from the line of Vincent Andrews with Morgan Stanley. The line is open? Please go ahead.

And good morning and congrats and thank you to Vince and my condolences of course to the Bruno family.

John was a wonderful man.

Could I ask you to talk a little bit about the industrial coatings margins? They came in a little bit softer than expected. You did call out Chinese mix on the auto OEM side and I guess there was a little bit of of negative price, I think, as a function of the index contract. But can you just help us understand why the margin contraction was so great and how to think about it through the balance of the year? Thank you.

So, Vincent, you could answer the question for me because you nailed it, right? So, let me just give a little more color to it. See, the biggest impact was China Auto. As predicted, it was going to be down, I think it was down well into the double digits as far as china auto builds for the quarter and that we outperformed that a bit because of uh some of our wins but it was still down significantly and that is um you could that's a a really good operating margin business for us because if you think about it one out of every three cars in the world is built in china so the scale and the leverage is stronger on the upside when things are being produced in China, but the negative also happened. So that was the biggest. The second was, you know, even though we're talking constantly over these last two months about raw material increases, you know, we were still rolling off some index contracts from, you know, the deflationary cycle, mostly in our automotive and our packaging businesses, which are both in industrial segment. We should be wrapping up the roll-off of those in Q2. We've got a few more that have to roll off, but that's really been the drivers. Number one, automotive OEM builds in China, and number two, index contracts.

And just to add some more color on China auto builds, so last year, as Tim mentioned, very, very strong quarter for the industry, for PPG. this year the reverse on a two-year stack basis we're almost flat in china so again we had the comp issue is really what we're dealing with your next question next question comes from the line of josh specter with ubs bs your line is open please go ahead go ahead yeah good morning and uh my congratulations to jimmy and of course my condolences to john and family he'll be sorely missed.

I did want to ask on pricing and surcharges specifically, how much are you using surcharges this cycle versus prior years? And then kind of similar again on auto OEM, have contract structures changed to allow that or has the cycle of recovery become a lot faster in that part of the business? Thanks.

Yeah, Josh, we are using surcharges in some of our businesses more than time because freight costs are up right whereas most of our contracts and even non-contractual businesses you know we're typically talking about raw materials but we've got it we've got two additional ones that don't get as much attention but are pretty significant to that MSD contributor and that's that's logistics cost because of diesel fuel and European energy costs because of what's going on. So I'd say in those two specific areas, we're using surcharges more than we typically have. Beyond that, it's largely been our typical price increase, which we prefer. They're stickier. And again, on the auto question, most of the auto contracts are designed around raw material inflation less so around you know freight and energy but you know those are discussions that we should have with our customers first and we've started those discussions so uh more more to come there but most just most of the index contracts that we have in auto and packaging are pretty much limited to raw materials your next question comes from the line of matthew de Yeo with Bank of America.

Your line is open. Please go ahead.

Morning. Yeah, just echo what everybody's been kind of saying. You know, Vince, congrats on a great career. And clearly, you know, the sentiment on John, he was just such a core salt of the earth guy. So yeah, it's a huge loss. I wanted to ask on the OEM side in China, there's often discussions in the market around you know chinese competition or china moving downstream and coatings is one area where i feel like maybe there's you know roadblocks to how far china can compete globally but in that market are you seeing better competition are there pushes to adopt local suppliers for the auto companies uh and then on the refinish side i mean well i'll just stop there i'll let you guys in first okay thanks um so there's no doubt that the china automotive oem industry has gone through an absolutely radical transformation the last couple years with the

the western jvs dramatically shrinking and the china domestics dramatically increasing And there's also no question, Matt, that those Chinese domestics have worked hard to get Chinese supplier content on the vehicles. But I would say thus far that has all been on what's called hard parts, rigid parts, widgets that the Chinese companies can produce. When it comes to automotive coatings in China, there's already more competition than the rest of the world, because you've got the traditional three, plus you've got two Japanese players and one Korean player. but you know the the finished film on a vehicle it's very hard to duplicate very hard to reverse engineer all the way back to resin formulation which is really the backbone of automotive oem coatings and so that gives automotive oem coatings some some protection uh i don't know what my peers do but i know we we produce the secret sauce outside of china and ship it into china so the coatings by nature of you're buying uh kind of mixed chemicals and the end product is a finished film on the vehicles which because of the transformation that happens in the application and curing process is different than the mixed chemicals it it does give a nice buffer of protection for automotive oem coatings versus other automotive parts your next question comes from the line of laurent pav with bnp your line is open please go ahead morning i'd like to come back to the msd inflation point please and we're seeing energy solvents lots of spot prices on

upstream chemicals that more than 50 percent sometimes 100 and i understand you guys don't buy products uh that are just out of the cracker but still i'm wondering how it's only msd and are those spot numbers not coming through in actual contract negotiations or are the intermittent guys producing resins and additives being squeezed or is it that you have contract protection for the rest of the year but then you will see further inflation into 2027. thanks ron i'd say two two comments on that um of course you know our suppliers are seeing that energy impact uh you know most mostly in europe um and we've got that built into that blue box of mid single digits uh

overall cost of goods sales inflation and then the second piece of energy is is logistics cost And we've got that built in there as well. And so we have all of that, everything that's got to timestamp it based on our best estimates of today's operating environment. But we've got that all built in. We're absolutely seeing what you described, but we've got that all built into our guide. Yeah, Ron, as you're fully aware, most large coding companies do not pay anything close to spot, especially when you have commodity inflation spikes. so we're contracted uh and we are negotiated most of our raw material supply not only for the quarter but for the full year and one final comment i'll make really laurent on your question and even more broadly on the whole raw material and total inflation one big difference between this cycle and the cycle coming out of covid which was a combination of post-covid recovery and the deep Texas freeze. At that time, you'll recall that coatings industry volumes were very high. A lot of coatings companies could not keep up with customer demand. So that is a significant difference when it comes to what does a coatings company see, particularly a large coatings company see, versus what is being seen upstream. Supply demand, economics still matter. And that's a big differentiator between this cycle and the last cycle.

Your next question comes from the line of Patrick Cunningham with Citi. Your line is open. Please go ahead.

Hi, good morning. I'd like to echo my deepest condolences to John's family and the PPG family and thank you to Vince for your partnership over the last few years. For architectural EMEA, I think you mentioned closing four manufacturing plants in the second half could you quantify the fixed cost savings there and cost to deliver and then maybe more broadly you know how you are thinking of the long-term strategic value for the business yeah are you there patrick we lost you a little bit uh well i'll just try again for architectural maya you mentioned yep yep and then okay i got it and the long-term strategic value.

Right. So yeah, four plants, here's a good walking around number for you. You'll see this savings in 2027, but a good walking around number is about a $25 million reduction in our fixed cost base from the closure of those four plants. And that'll go on in you know, in perpetuity for us. Now, in total, you'll see about a $50 million structural restructuring benefits for our company this year. You'll see another 50 next year with 25 of that 50 being tied to these four plants. Now, that's not the only, you know, kind of fixed cost reduction initiative. We've got some restructuring, some back office people costs being reduced we've got a lot of formula optimization costs going over there as well so the value to this business when when markets are even flat uh this business delivers really good earnings and really good cash to us that's the value in the portfolio we have over the last couple of months seen a little better volume uh we had a we had a good march in architectural Europe. So as you think about this market getting to flat volume and the mission of this business in our portfolio is to spit off good earnings and good cash so that I can deploy that in some of our higher growth, higher technology businesses. And, you know, every we're constantly evaluating each of our businesses mission and how they're performing to that mission in our portfolio. But that's that's how we're viewing viewing it today. And, you know, we've got, you know, we're not waiting. We're not sitting around hoping, hoping and waiting for a European recovery. We're building a business that can perform well at flat volume.

There are no further questions at this time. I would now like to turn the call back over to Alex for closing remarks. closing remarks.

Thank you, Tracy. We appreciate your interest and confidence in PPG. This concludes our first quarter earnings call.

This does conclude today's call. Thank you all for attending. You may now disconnect.