Earnings Call Transcript - PPG Q2 2025

Operator, Operator

Good morning, everyone. My name is Carly, and I'll be your conference operator today. I would like to welcome everyone to the Second Quarter PPG Earnings Conference Call. I will now turn the call over to Alex Lopez, Director of Investor Relations. Please go ahead.

Alex Lopez, Director of Investor Relations

Thank you, Carly, and good morning, everyone. This is Alex Lopez. We appreciate your continued interest in PPG and welcome you to our second quarter 2025 earnings conference call. Joining me today from PPG are Tim Knavish, 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, July 29, 2025. We have posted detailed commentary and the accompanying presentation slides, which are being shown on this webcast on the Investor Center of our website, ppg.com. Following management's perspective on the company's results, 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. 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 filings with the SEC. Now let me introduce PPG Chairman and CEO, Tim Knavish.

Timothy M. Knavish, Chairman and CEO

Thank you, Alex, and welcome, everyone. I'll start by providing a few highlights of our second quarter 2025 financial performance, and then I'll move to our outlook. Our results demonstrate the strength of PPG's global business portfolio in an increasingly dynamic macro environment. We delivered net sales of $4.2 billion with an increase in organic sales of 2%. Our momentum in organic sales growth was led by our Aerospace Coatings, Protective & Marine Coatings, and Packaging Coatings businesses. In addition, sales volumes in our Industrial Coatings segment outpaced the industry, reflecting the initial benefits from share gains in our packaging, industrial, and automotive OEM businesses. We expect the benefits from these share gains to accelerate in the second half of 2025. Regionally, we delivered organic growth in both the United States and Latin America with tepid demand in Europe and some softening in Asia. We delivered a quarterly segment EBITDA margin of 20.3% and our adjusted earnings per diluted share was $2.22. Our balance sheet remains strong, and we are committed to using this balance sheet for shareholder value creation. During the quarter, the company repurchased approximately $150 million of stock, bringing our year-to-date total to $540 million. Additionally, in July, we raised our quarterly dividend per share by 4%, demonstrating our confidence in the resiliency of our business and the strength and future growth of our company. Looking at each of our segments in the Global Architectural Coatings segment, positive selling prices in both regions were offset by lower volumes and the impact of a divestiture. In Architectural Coatings EMEA, organic sales growth in the Nordic region and in the United Kingdom were offset by lower demand in Eastern Europe. While volumes remained lower in the quarter, we saw evidence of improvement in certain countries, albeit inconsistent. In Architectural Coatings, Latin America and Asia Pacific, we delivered organic sales growth in Mexico, aided by solid retail sales, while results were impacted by the pause in project-related spending that we discussed in April. It is important to note that while project-related spending was down year-over-year, we did recognize improvement versus the first quarter of 2025, and we expect continued improvement of project-related spending to progress during the second half of 2025. Segment EBITDA margin decreased driven by the business divestiture, lower sales volumes, and unfavorable currency translation, partially offset by strong cost control actions. The Performance Coatings segment delivered record net sales and earnings with a 6% increase in organic sales, driven by both higher selling prices and sales volumes. Within the segment, Aerospace delivered high single-digit percentage organic sales growth with record quarterly sales and earnings. Customer order backlogs were stable at about $300 million, even with growth-related investments that improved our manufacturing output in the quarter. Our unique technology position remains a strong growth engine for PPG. We are investing both OpEx and CapEx in Aerospace to deliver continued solid growth well into the future. In Automotive Refinish, organic sales decreased by a low single-digit percentage versus the prior year. In the U.S., organic sales were flat despite lower industry collision claims as we benefited from both share gains and customer order patterns. Organic sales outside the U.S. were down with modest sales volume declines in Asia and Europe. In the second quarter, the company grew the number of PPG-linked subscriptions as well as Moonwalk installations, and I'm proud to say that in July, we are installing our 3,000th MoonWalk, further supporting customer productivity and partnerships. We do anticipate lower volumes in the third quarter in Refinish due to normalization of customer order patterns. Protective & Marine Coatings delivered double-digit percentage organic sales growth, supported by increasing global demand for our technologies and our recent share gains. This was the ninth consecutive quarter with positive year-over-year sales volume growth in this business, and we are continuing to increase our growth-related investments to support the demand for our leading products. Traffic Solutions delivered mid-single-digit percentage organic growth in the quarter, driven by share gains and strong demand outpacing industry growth rates. Segment EBITDA was up 8% year-over-year, reflecting the organic sales growth as our various growth investments in this segment are yielding initial benefits. In the Industrial Coatings segment, second quarter sales volumes were flat, which is an improvement versus recent quarters and demonstrates the initial benefits of our share gains. Selling prices declined 1% due to the carryover of certain index-based customer contracts. From a business unit standpoint, our automotive OEM business delivered volume growth in Asia and Latin America, which was offset by lower volumes in the U.S. and Europe, reflecting industry production declines in those regions. In the third quarter, we expect to grow above industry levels, driven by the conversion of already awarded customer share gains. Our Industrial Coatings business unit sales volumes were flat as share gains were offset by lower demand in Asia Pacific and the United States. Selling prices declined in Industrial Coatings due to lower index-based pricing. Packaging Coatings organic sales increased by a high single-digit percentage year-over-year, driven by share gains growing significantly above industry rates. We expect additional benefits from customers converting to our technologies due to expanding BPA regulations in Europe. Segment EBITDA margin declined year-over-year due to the Silicas divestiture as well as lower selling prices, which were partially offset by strong cost control and productivity actions. Looking ahead for the segment, growing benefits from share gains are expected to drive low single-digit per sales volume growth in the third and fourth quarter. This, combined with improved manufacturing performance, will drive earnings and margin expansion. Now let me talk about our balance sheet and cash. During the quarter, we completed about $150 million in share repurchases and paid approximately $150 million in dividends. Year-to-date, we have purchased $540 million in stock and paid approximately $310 million in dividends. We retired EUR 300 million of debt during the quarter, and we have another EUR 600 million of debt maturing in the fourth quarter. Our balance sheet remains strong, which continues to provide us with financial flexibility, and we remain committed to driving shareholder value. Looking ahead, I am genuinely excited about our sales and earnings growth momentum for the second half of the year and beyond. Even though the current macro environment remains highly dynamic, we have proven that our well-positioned portfolio navigates well and performs during periods of uncertainty. Of course, we're monitoring the tariff situation and we'll react accordingly with pricing actions and/or further self-help actions in order to mitigate any financial impacts. We have not experienced any significant change to our raw material pricing, and we expect low single-digit inflation for the year as our suppliers continue to favor volume over pricing. We expect growing benefits from our aggressive self-help and discretionary cost management programs as we move forward through 2025 and beyond. We see structural strength in our Performance Coatings segment, driven by our technology advantaged products in Aerospace and Protective & Marine, which will be partially offset by lower automotive Refinish sales volumes in the third quarter, driven by customer order patterns. We expect European Architectural Coatings volumes trends to remain tepid and anticipate project-related spending in Mexico to improve as we move through the second half of the year. We expect increased momentum in the coming quarters for our Industrial Coatings segment. While second half automotive OEM industry demand forecasts are below prior year, our share gains are beginning to yield benefits, and we expect to outperform the market. We sized our annual share gains in the Industrial segment at $100 million, and we are tracking to that annualized figure. Finally, with the acceleration in volume growth, we anticipate driving high single-digit percentage year-over-year earnings growth for the company in the second half of the year. This will accelerate through both quarters, resulting in a mid-single-digit percentage increase in EPS for the third quarter and a low double-digit percentage increase for the fourth quarter. We are reiterating our full year guidance per share range of $7.75 to $8.05, and we have a clear path to achieve it. In closing, we're benefiting from our sharpened portfolio with technology differentiated products and services that will deliver growth above industry levels. Additionally, we are aggressively managing the bottom line, including decisive self-help that combined with our disciplined capital allocation and strong balance sheet will enable us to deliver sustainable top line and bottom line growth and shareholder value creation. Thank you to our PPG team around the world who make it happen and deliver on our purpose every day, and we appreciate your continued confidence in PPG. This concludes our prepared remarks. And now would you please open the line for questions.

Operator, Operator

Our first question comes from John McNulty from BMO.

John Patrick McNulty, Analyst

So Global Architectural, if we can start with that. The volumes were a bit on the soft side. The margins obviously came in a bit worse than that. I guess you gave a little bit of color on that around Europe maybe not being quite as recovering as maybe you had hoped earlier. and Mexico projects still a little bit of a drag. I guess as you look through the rest of the year, it sounds like Mexico is going to get at least marginally better. What are your thoughts on Europe? Where were things maybe a little bit less robust or recovering than what you thought? And then I guess, how should we think about the margin impact there? It seems like the sales were light, but the volume impact really was maybe bigger than what we would have thought. So I guess how should we be thinking about that?

Timothy M. Knavish, Chairman and CEO

Yes. Thanks for the question, John. Yes, I'll start with Europe. So we saw what we thought was the start of momentum at the end of Q1, and we expected that to continue to improve in Q2. And frankly, it didn't largely driven by Eastern Europe. We did see that positive momentum from late Q1 continue into the Nordics, which, of course, is our legacy Tikkurila business, and that's doing well now. We saw positive momentum in U.K. and Ireland. We saw positive momentum in the Benelux. France, I would say, was okay. But the negative that we weren't expecting at the end of Q1 was Eastern Europe. So with Architectural Europe, we're really expecting combined more of the same. But as that happens, John, we continue to take more and more cost out, and we're positioned well. We track the share very closely, and we're confident in our share position and that we're gaining share in our larger markets. So any little stimulus of any kind will bode very well for us in margin and leverage. Moving on to Mexico. We did see retail recover, which was promising. I'll remind you that we were – in Mexico for architectural, we were actually down in sales in Q1, minus low single digits. We're up in Q2, positive low single digits. So we're starting to see that led by retail. Project work is sequentially improving, and we expect that to play out through the rest of the year. Now in – on the margin side, of course, there's some effect by what I just described on volume. A couple of other things that impacted our margin for the Architectural Coatings segment for Q2. First of all, the FX, the imbalance in FX improvement in Europe versus Mexico, led to a net negative for us in margin. The Mexico B2B volume still being down, that's very good margin business for us. We had a – you may have seen in the slide, we talked about a supply chain disruption. That was an internal disruption in Australia that hit us for the quarter. That's transitory and behind us. And then finally, that divestiture was above segment margin. So it's a combination of all those things that led to a lower-than-expected margin for the quarter across Architectural, John.

Operator, Operator

Our next question comes from David Begleiter from Deutsche Bank.

David L. Begleiter, Analyst

Tim, on the volume growth, nice job in Q2. Should we think about volumes being up maybe 1.5% to 2% in Q3 and 2% in Q4? Is that a good cadence for volume growth you're looking at in the back half of the year?

Timothy M. Knavish, Chairman and CEO

David, yes, we're proud of what we did in volume for the first half of this year, particularly as we see a bunch of other reports coming out. And we expect that to accelerate in the second half of the year, let's call it, low single digits and moving up that low single-digit ladder. How is that as we move through the second half of the year. And we feel quite confident on that. And that's why you may hear a little kick in our step this morning is because we finally reached, if you remember back I think we started this at the end of Q3 of last year talking about share wins that we had, and we are expecting the second half of '25 to be much better for us, and it's here. So we feel really good about both volume and frankly, EPS growth as we move through the second half of the year.

Operator, Operator

Our next question comes from Michael Sison from Wells Fargo.

Michael Joseph Sison, Analyst

Nice quarter. For Performance Coatings, the only blemish looks like Refinish is down. All the other segments had a really nice year-over-year improvement. Just curious on the outlook for Refinish for the next couple of quarters for volumes as well into 2026. And then how sustainable is the double-digit growth you saw in Protect & Marine? That seemed to be pretty impressive.

Timothy M. Knavish, Chairman and CEO

Thanks, Mike. Refinish, yes, it was down low single digits, but I think we're flat for the year through the first half of the year. And everybody on the call knows that collision claims have been down high single digits for the first half of the year. So we're pretty proud of being flat at the midway point. Now as we move forward, I did say that we're expecting Q3 to be soft because our strength in the first half of the year was driven by share gain and some distributor order patterns, and we expect the share gains to continue, but we do expect swinging of that distributor order pattern for Q3. So I would expect Q3 to be a bit soft, Q4 to be more normalized. But really, we're not expecting industry recovery of claim rates and body shop work likely until 2026. There's a bunch of factors here on affordability of insurance, people not submitting claims, a number of other factors that we expect to play out through the remainder of and we'll get like a more normalized like down low single digits on volume and claims, up a couple of points on price as the normalized model, and we expect that to return in 2026.

Vincent J. Morales, Senior Vice President and CFO

Yes, Mike, this is Vince. In addition to the core paint volumes Tim is talking about, just a reminder, we do have a subscription model with our out-of-the-can MoonWalk link ecosystem. So that's helping us buffer versus the industry claims. So that subscription model certainly continues to grow, as Tim alluded to in the prepared remarks. So that's a unique item for PPG that benefits us.

Timothy M. Knavish, Chairman and CEO

Yes. Look, at the end of the day, this is a world-class marquee business for PPG for the midterm, long term, and even today in this challenged claims and body shop activity environment, it's still a marquee and outstanding business for us, and we'll continue to grow in it even more so as things normalize next year. Now PMC business, 9 straight quarters of solid growth, super strong in EMEA and Asia Pacific, in particular, not weak in the United States, doing okay here, too. But we see that continuing to do well into the rest of this year and at least through '26. We've got some really advantaged technologies in that business that have really taken hold in the areas of marine aftermarket in the dry dock space, some fire protection, and other technologies that we've been launching over the last couple of years. So we're bullish on that business certainly for the foreseeable future when it comes to PMC.

Operator, Operator

Our next question comes from Duffy Fischer from Goldman Sachs.

Patrick Duffy Fischer, Analyst

When you compare you versus the others that have released already, you look really good across most everything. One area that seems like others are doing a little bit better is on raw materials where you guys are still seeing inflation and others are kind of calling it flat to down in some instances. So can you walk through, is that just a different footprint of what you buy? Is it a different footprint geographically? Why is it that your raw materials seem to be a little bit more inflationary than peers?

Timothy M. Knavish, Chairman and CEO

Yes. Thanks, Duffy. Happy to take that question. I would point to 2 things. Number one is because of the size of our business in Mexico, we buy a lot more there than any of our peers and the FX impact affects the raw material inflation because a lot of that is purchased in dollars, okay? So that's one. The second piece, depending on who you're talking about, if you're largely an architectural coatings company, you don't buy a whole bunch of epoxy. And epoxy is one piece of the basket that's actually gone up, and this was pre-April 2. There were some tariffs already put in on epoxy that affected pricing, and we had that built into our guide from the beginning of the year. So I would say, depending on who you're comparing us to, those would be the 2 big differentiators.

Vincent J. Morales, Senior Vice President and CFO

Yes. And Duffy, on the Mexico situation, similar to other businesses in Latin America, our business is able to price through that inflation. So it's not as impactful on the bottom line. So again, if you're comparing us price and raw materials, we feel we're certainly holding our own.

Operator, Operator

Our next question comes from John Roberts with Mizuho.

John Ezekiel E. Roberts, Analyst

Your buyback activity moderated a bit in the June quarter. What should we be thinking about for the second half? And do you see any M&A competing with buyback?

Timothy M. Knavish, Chairman and CEO

John, regarding the buybacks, I've been consistent since I took this role and I hope that I've established credibility in our approach. We will not allow cash to accumulate on the balance sheet. I mentioned this when I joined, we paid down some debt, and for seven consecutive quarters, we've been executing buybacks. There was a slight decrease in Q2 compared to Q1, primarily due to the divestiture cash affecting our buyback calculations for that quarter. We evaluate our strategy at the end of each month, and unless I find a better way to utilize cash to enhance shareholder value, you can expect me to continue the same approach as in the past seven quarters. As for M&A, the only significant opportunity currently is the one from Germany, which we are only interested in a specific portion of, but that doesn’t align with their plans for the transaction. Beyond that, we are considering only small opportunities that will not impact our cash strategy in the foreseeable future. You can anticipate the same actions from me that you have seen since I took on this position.

Operator, Operator

Our next question comes from Kevin McCarthy of Research Partners.

Kevin William McCarthy, Analyst

Tim, nice to see greater volume traction building here throughout the year. And listening to your comments, I think share gains are a meaningful part of that. So I was wondering if you could talk through the Performance segment and maybe help us conceptualize the gains that you've had in packaging and perhaps also Protective and Marine. I think on the industrial side, you quantified the gains as $100 million. And just trying to level set or benchmark against that figure on the performance side of the house.

Timothy M. Knavish, Chairman and CEO

Most of the $100 million is from automotive OEM, followed by industrial coatings. Packaging falls into the industrial category, placing it in third. We anticipated a share shift in the U.S. packaging sector this year, which we expected would not favor us due to some temporary business we secured last year. However, we've successfully compensated for that with share gains in Europe and some gains in the U.S. through our new BPA NI technology. Overall, we've been net winning despite the expected share shift in the U.S. Regarding Protective & Marine, recent momentum has been driven by a couple of new technologies we've launched over the past few quarters, including SigmaGlide and a copper-free marine dry dock product called Sale Advance, which is starting to gain traction. We've also introduced some excellent fire protection products recently, making this segment more technology-driven and gaining serious momentum. I hope this provides you with enough insight.

Vincent J. Morales, Senior Vice President and CFO

Yes. And I'll pick up the rest of the performance side, Kevin. This is Vince. We're well above traffic, U.S., Canada industry volumes, where we're probably 2x what we're seeing in the industry. It's a very strong industry right now as infrastructure continues to take place. No question in aerospace. We're continuing to serve a very hot market, but our performance there, including some of our debottlenecking is allowing us to outperform that market. And as Tim alluded to earlier, we've outperformed in Refinish very clearly. So if you look at our Performance segment in Q2, all 4 of our businesses outgrew their market. And as we said in the prepared remarks, in Q3, we expect in our Industrial segment, all 3 of those businesses to outperform market.

Operator, Operator

Our next question comes from Ghansham Panjabi from Baird.

Ghansham Panjabi, Analyst

Following up on the last question regarding the Industrial Coatings segment, it's clear that you're gaining market share, which should continue to grow in the latter half of the year across all three major verticals in that segment. Considering the current market conditions for Industrial Coatings, how do you view the outlook for the second half of the year compared to your previous assessment, particularly given the ongoing uncertainties surrounding tariffs and other factors?

Timothy M. Knavish, Chairman and CEO

Yes. Thanks, Ghansham. It's a very uncertain market. That uncertainty likely impacts the Industrial segment the most, particularly outside of Mexico. The confidence you're hearing from us for the second half is driven entirely by share gain. The actual demand in the segment, which varies daily, appears flat to stable in most of our end markets, though some are somewhat depressed, such as auto builds in the U.S. and Europe and certain consumer products in the industrial space coming from Asia to the U.S. Heavy-duty equipment is also experiencing some decline. Overall, I would say demand is flat to slightly down industry-wide, but our share gains, some of which have already launched and others that are launching now, give us confidence across all three segments.

Vincent J. Morales, Senior Vice President and CFO

Yes, Ghansham, if I could... All 3 businesses, I'm sorry. I would like to add that in most of these businesses we are discussing, we do not observe an increase in inventory throughout the supply chain. While we are influenced by the global macroeconomic situation and the tariff discussions, we do not anticipate a significant inventory response either way depending on the outcomes of the tariffs.

Operator, Operator

Our next question comes from Frank Mitsch from Fermium Research, LLC.

Frank Joseph Mitsch, Analyst

Vince, I want to follow up on that. The U.S. GDP numbers released this morning were quite strong, indicating some prebuying. You mentioned that you're not noticing much inventory buildup with your customers. Could you elaborate on the order patterns you observed during the second quarter and what trends you’re seeing so far in the third quarter from your customers that might be unusual or typical? Additionally, what was the foreign exchange impact in the second quarter, and what are your expectations for 2025?

Vincent J. Morales, Senior Vice President and CFO

Yes, Frank, as we assess the situation, the industrial segment remains the most affected by global macro factors in the short term. Back in early April, we noted some customer concerns regarding tariffs, but as the quarter progressed, we observed a return to normal order patterns. There were no irregularities; it seemed that most customers adapted to the impact of the tariffs, and we were able to move forward. Furthermore, throughout the quarter, there were no significant changes in order patterns. Tim mentioned earlier that Europe performed a bit softer than we anticipated, and there was some expected softening in Asia. However, overall, we didn't see any significant impacts. In terms of currency, we experienced negative translation effects in Q1, which improved in Q2. We expect the latter half of the year to compensate for what occurred in Q1. Year-to-date, we are nearing neutral. However, as we concluded the quarter, we noted no pull forward into Q2 regarding volumes.

Operator, Operator

Our next question comes from James Hooper from Bernstein.

James Hooper, Analyst

My question is around the share gains and margins from them. Now clearly, your competitors have acknowledged that you are the coming force and gaining share in the markets, not just you. But I was interested to see whether the share gains you've made have had any impact on the incremental margins from gaining share and whether there's a path to these margins increasing once you've consolidated the share gains going forward?

Timothy M. Knavish, Chairman and CEO

Yes. Thanks, James. I think the way to think about it is the share gains that we've had, you should expect them to be at segment average from a gross margin standpoint, but the volume element of it as we launch them will improve our net margin, obviously, with the fixed cost leverage that we'll get from them, the manufacturing efficiencies. So that share gain launch, as we move through the second half of the year, you'll see not only the top line growth from that, but you'll see the net margin expansion as we move through the next 2 quarters.

Operator, Operator

Our next question comes from Patrick Cunningham from Citigroup.

Patrick David Cunningham, Analyst

Aerospace continues to be quite strong over a 2- or 3-year stack. How should we think about growth levels over the next few years given pricing actions for a longer cycle business, whether that starts to normalize and then the debottlenecking and new capacity you have potentially allowing you to serve more volume there?

Timothy M. Knavish, Chairman and CEO

Yes, Patrick. We are expecting growth in the high single digits to double digits, depending on the quarter. I have spoken with numerous CEOs across military, general aviation, and commercial aviation, and they all report very strong forecasts. When we consider these three sectors together, it creates a significant positive impact for us, as we benefit from both top-line margin and operational leverage across the business. This is why we are heavily investing in both operational and capital expenditures. Recently, we announced the establishment of a new aerospace factory in the United States with a capital expenditure of about $380 million, and we are continually focused on improving our efficiency. Therefore, I do not anticipate any reduction in this growth trajectory of high single digits to low double digits for at least the number of quarters we are projecting.

Operator, Operator

Our next question comes from Vincent Andrews from Morgan Stanley.

Vincent Stephen Andrews, Analyst

I'm wondering if you can provide more details about the Mexico architectural market. Can you hear me?

Timothy M. Knavish, Chairman and CEO

Yes, we can hear you now.

Vincent Stephen Andrews, Analyst

Could you share some insights about the Mexico architectural market, particularly what feedback you’re receiving from customers that supports your belief in an increase in large project volume in the third quarter and even more in the fourth quarter? Additionally, have you factored this into your full-year guidance?

Timothy M. Knavish, Chairman and CEO

Sure. So what we're hearing, and as you would expect, given the reach of our business down there, we're pretty well connected, not only to the key government entities but to the large project owners, the project managers, and the contractors. And as far as the sequential improvement, Vincent, there's a lot of these projects that are already in flight. And so they're kind of dialing back rather than complete stop on the spending. And then as we move forward here, the initial pause from April, they're starting to complete and move forward with completion of some of those projects that were already in flight. Beyond that, there's a high degree of confidence from the folks that we talk to on the ground in Mexico that once our 2 presidents come to some kind of agreement that that will open the floodgates. And there will be some tariff, I'm sure. I don't have no idea any more so than anyone else does of what that end game will be. But the advantage that Mexico has and will always have is proximity. So even if there's some tariff that adds cost to goods coming from Mexico to the United States, relative to all the other alternatives who are also getting tariff, it's still in a significantly advantaged position. It's got a strong workforce, a well-educated workforce, a highly productive workforce and proximity. And tariffs can't put an ocean between us and Mexico. So I guess the combination of projects in flight starting to restart and this pretty high level of confidence that wherever the 2 governments end up, Mexico will still be in an advantaged position.

Vincent J. Morales, Senior Vice President and CFO

Yes, Vincent, just to get to your second question, what's built into our guide. If you look at, again, Q2 organic growth in Mexico was low single digits, again, retail up, our project business down. And we look at the second half holistically we have that business up modestly to mid-single digits. So it's not a significant step-up in terms of total PPG, but again, a step up sequentially from the first half to the second half for the project work and continued growth in retail.

Operator, Operator

Our next question comes from Arun Viswanathan from RBC.

Arun Shankar Viswanathan, Analyst

So I guess you've shown now a few quarters of consistently improving volume growth. As you just answered, aerospace is definitely contributing to that, but you are showing some better growth in some of the industrial verticals. So maybe you can just give us your outlook as you look into specifically auto OEM. I know you've answered a few questions there already. But I mean, I guess, is it really production that you'd expect that would drive you further next year? Is there any other initiatives, whether it be EV growth in China or maybe some European customer mix? What else would you point that would maybe help continue to drive maybe a turnaround in auto OEM?

Timothy M. Knavish, Chairman and CEO

Yes, Arun, you mentioned several important points, and I'll address each of them. We are experiencing momentum in gaining market share. This is one factor. The long-term fundamentals for our industry remain strong. There is still a shortfall in new vehicles and issues like fleet age and vehicle availability per capita in countries like India and China. The fundamentals are solid, especially since global production has been lagging since COVID. Looking ahead, we anticipate short-term share gains, and we expect to see stabilization and growth in production as tariff conditions, inflation, and overall economic factors contribute to increased consumer confidence. However, until we navigate through this uncertain period, there is a general lack of confidence that is impacting auto purchases.

Vincent J. Morales, Senior Vice President and CFO

Yes, this is Vince. As mentioned in our prepared remarks, we are performing in line with the industry regarding volume and demand. We expect to outperform the industry in the second half of the year and into 2026. Some customer-specific challenges we faced in the latter half of last year are expected to turn in our favor in this year's second half. Additionally, we maintain strong positioning in China, where retail sales increased significantly in the second half, although production did not keep pace with that growth.

Operator, Operator

Our next question comes from Matthew Dyer from Bank of America.

Matthew Dyer, Analyst

Can we talk through the puts and takes on price, raw materials, and cost cuts in the second half? Because if I look back to some of the prior calls, I think you said like $75 million of self-help actions and cost savings would hit 3Q. And in a vacuum, that should be able to really get you more than what you're expecting in relation to margin improvements year-over-year. So what's kind of diluting that?

Vincent J. Morales, Senior Vice President and CFO

Yes, Matt, just to clarify, the restructuring benefits we allocated for this year were $75 million for the full year, with growth expected throughout the year. We are currently at about $30 million for the first half. We anticipate further incremental growth in the second half, although it won't reach the full $75 million. Considering the price cost dynamics, we expect the same rate of raw material inflation as before. However, we do foresee some additional pricing benefits in the second half compared to the first half, as we implemented price increases in the second quarter in certain business areas.

Operator, Operator

Our next question comes from Aleksey Yefremov from KeyBanc.

Ryan Christopher Weis, Analyst

This is Ryan on behalf of Aleksey. I wanted to revisit the auto OEM situation, particularly in China. There has been substantial news lately regarding potential inventory levels and the end of price cutting strategies. I’m interested in what insights you have from customers in that market and what the production outlook might be for the next 6 to 12 months.

Timothy M. Knavish, Chairman and CEO

Yes, I believe that our production outlook in China is certainly more positive than in other parts of the world. This situation contributes to a competitive environment, particularly due to the reduced volume elsewhere. Our technologies are focused on enhancing productivity, and we have received positive feedback from our customers in the automotive OEM sector. Electric vehicles are performing well in China, and one company that we collaborate closely with is outpacing the rest of the industry. Approximately one in three cars produced globally comes from China, which means that, when combined, China is actually providing us with some insulation in the auto OEM market compared to the challenges occurring in the U.S. and Europe.

Vincent J. Morales, Senior Vice President and CFO

Yes. The one other thing I would add, Ryan, is if you look at exports from China, they're up about 10% through the first half of the year on a year-over-year basis. So that's another growth element coming out of China, which is driving the auto production.

Operator, Operator

Our next question comes from Josh Spector from UBS.

Joshua David Spector, Analyst

I wanted to follow up just on the conversation around architectural margins. So I think Vince has highlighted earlier, you had almost 100% negative incremental. You talked about some things with FX translation, but the reported for the segment was 0, and you talked about some costs. So if I kind of put this together, if I think about a normal 40% incremental margin, correct me if I'm wrong, there's about $30 million of maybe higher costs that hit you. Can you maybe bucket those up between the supply chain issue versus FX? And then as you look at the second half, should we expect this higher decremental to persist? Or does it go back to normal?

Vincent J. Morales, Senior Vice President and CFO

Yes. As we talked about earlier, Josh, a couple of factors at play here. Most meaningful is the mix difference between Mexico in our non-Mexico business. So with Mexico B2B down, there's a mix impact. As we talked throughout the call today, we expect that to become less of an issue as we progress through the year. The FX impact normalizes in the back half of the year. So both on raw materials as well as there was an FX impact between just Europe and the Mexican peso. We did have a transitory issue in Australia. To put that in order of magnitude, that hurt our volume on a year-over-year basis by half a turn, so 50 basis points. So it was impactful on our bottom line as well. As Tim alluded to earlier, that was primarily contained in Q2. And so those are the big impacts. I think you'll see us return to a normal incremental margin in the back half of the year as some of these FX and one-time events fall by the wayside.

Operator, Operator

Our next question comes from Chris Parkinson from Wolfe Research.

Christopher S. Parkinson, Analyst

Tim, when you sit down with David and you think about the outlook for the company over the next, let's say, 6 to 18 months or so, it seems like aerospace and P&M are kind of the leaders. You have some new products in both, especially P&M. And then within that, I know you have some new things in auto throughout. But where would you have the greatest confidence over the next 1.5 years or perhaps even longer in terms of your ability to significantly outgrow markets to the point where your confidence in the investment community will surely take notice?

Timothy M. Knavish, Chairman and CEO

We're performing well and expect to keep excelling in aerospace. You didn’t mention Refinish, possibly because you were focused on our chemistry innovations. However, we will continue to roll out innovations outside the can, aimed at enhancing shop productivity and digital tools. We anticipate strong performance there. Our traffic business, now streamlined and concentrated in regions where we hold a strong position, will also continue to perform well due to investments in highway projects and infrastructure. In Protective & Marine, as previously mentioned, we see no end to our success, especially in fire protection and the marine aftermarket. The increasing BPA regulations in Europe are advantageous for us and will unfold over the coming years, specifically in 2026 and 2027. For Comex, once we navigate through the temporary challenges with paused project spending, we expect continued strong performance in PPG Mexico. In Industrial Coatings, we recognize our strong offerings across various segments, even though our market share is currently underrepresented. By intensifying our focus on areas where we have the best chance of winning, we anticipate improved performance. Ultimately, our growth strategy is driven by our talented workforce, a sharper and more focused portfolio, and disciplined investment decisions. Our three clearly defined operating segments have distinct missions and value propositions, supported by a three-pronged innovation approach involving chemistry, digital productivity, and AI applications. We remain committed to delivering 2% to 4% organic growth, 8% to 10% EPS growth annually, and $1 billion in adjusted free cash flow, ensuring we meet our commitments to the investment community based on everything discussed across our businesses.

Vincent J. Morales, Senior Vice President and CFO

Yes. And that free cash flow number, again, as everybody recalls, includes the deduction for capital spending.

Operator, Operator

Our next question comes from Jeff Zekauskas from JPMorgan.

Jeffrey John Zekauskas, Analyst

Two-part question. For Vince, cash flow from operations was $370 million or so for the first couple of quarters. And last year, you did $1.4 billion. Do you expect cash flow from operations this year to be the same as last year or higher or lower? And for Tim, the results in Performance Coatings were good. That is volume growth was plus 3% and price was plus 3%. But your operating income was up maybe 9% or $30 million. I can imagine it being up double that with that kind of price and volume. Were you satisfied with the Performance Coatings results? Or was there something that's been holding the margins back? Your incrementals were in the low.

Vincent J. Morales, Senior Vice President and CFO

Sorry, Jeff. Yes this is Vince. We are tracking ahead of prior year in cash from operations. Certainly, as you're well aware, most of our cash flow because of the seasonality of our businesses is back half weighted. We still have that normal blocking and tackling to do as it relates to inventory management as we come out of the peak seasons, collections from our customers. But our expectation is for our cash to grow on a year-over-year basis, our cash from ops to grow on a year-over-year basis.

Timothy M. Knavish, Chairman and CEO

Yes, on the margin question, I would have preferred that the net margin for Performance Coatings contributed more EBIT, EBITDA, and cash to our bottom line. However, we made a deliberate decision at the start of the year. This segment has a 25.7% EBITDA margin and is experiencing strong mid-single-digit growth despite a challenging operating environment. It is performing well, and we aim to maximize value for our shareholders in the future. Therefore, we decided to make significant investments, especially in aerospace and Protective & Marine, as well as in digital initiatives in Refinish, to maintain and enhance its growth. We chose to increase our operational expenditures on growth-focused initiatives, such as improving efficiency in aerospace, pursuing digital opportunities in Refinish, and expanding our presence in Protective & Marine.

Operator, Operator

Our next question comes from Aron Ceccarelli from Berenberg.

Aron Ceccarelli, Analyst

Congrats on the good quarter, you slightly revised down your organic sales growth guidance for both Architectural Paints and Industrial Coatings. I take the point that Q2 perhaps on the volume side was a bit softer than expected in Architectural Paints. But could you please break down the contributing factors in terms of volumes and pricing for the second half for these 2 segments, particularly because from what I see, you are quite positive on the outlook for Industrial Coatings.

Timothy M. Knavish, Chairman and CEO

Yes. So I'll take the first part of it on Architectural. We did adjust down our outlook, particularly for Europe. We were disappointed in Europe that the momentum that we saw in late Q1 didn't continue into Q2. So we thought the prudent thing to do going forward was to assume that it would be kind of current state plus our share gains that would drive and did not count on any market recovery. So the flip side of that, Aron, is that any stimulus, any catalyst, whether it be the impact of a tariff agreement, whether we see some progress in Ukraine, or whether we see some progress in the Middle East, anything that would give a little bit of consumer confidence in Europe would be a positive to what we have guided in our revised guide for Architectural Europe because actually, the household balance sheets are pretty strong, generally speaking. So it's much more about consumer confidence.

Vincent J. Morales, Senior Vice President and CFO

On industrial, very modest decrement to our prior guide, really relating to what we saw in Q2 in China, just carrying forward. Again, I would call it more rounding in terms of percentages.

Operator, Operator

Thank you very much. We currently have no further questions. So I'd like to hand back to Alex Lopez for any further remarks.

Alex Lopez, Director of Investor Relations

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

Operator, Operator

As we conclude today's call, we'd like to thank everyone for joining. You may now disconnect your lines.