Earnings Call
Ppg Industries Inc (PPG)
Earnings Call Transcript - PPG Q4 2020
Operator, Operator
Good morning. My name is Amy and I will be your conference operator today. At this time, I would like to welcome everyone to the PPG Industries’ Fourth Quarter and Full Year 2020 Earnings Conference Call. Thank you. I would now like to turn the conference over to John Bruno, Director of Investor Relations. Please go ahead.
John Bruno, Director of Investor Relations
Thank you, Amy and good morning, everyone. Once again, this is John Bruno, Director of Investor Relations. We appreciate your continued interest in PPG and welcome you to our fourth quarter and full year 2020 financial results conference call. Joining me on the call from PPG are Michael McGarry, Chairman and Chief Executive Officer and Vince Morales, Senior Vice President and Chief Financial Officer. Our comments relate to the financial information released after U.S. equity markets closed on Thursday, January 21, 2021. We have posted detailed commentary and accompanying presentation slides on the Investor Center of our website, ppg.com. The slides are also available on the webcast site for this call and provide additional support to the brief opening comments Michael will make shortly. Following management’s perspective on the company’s results for the quarter, we will move to a Q&A session. Both prepared commentary and discussion during this call may contain forward-looking statements, reflecting the company’s current view of future events and their potential effect on PPG’s operating and financial performance. These statements involve uncertainties and risks, which may cause actual results to differ. The company is under no obligation to provide subsequent updates to these forward-looking statements. This presentation also contains certain non-GAAP financial measures. The company has provided in the appendix of the presentation materials, which are available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information, please refer to PPG’s filings with the SEC. Now, let me introduce PPG Chairman and CEO, Michael McGarry.
Michael McGarry, Chairman and CEO
Thank you, John, and good morning, everyone. I would like to welcome everyone to our fourth quarter 2020 earnings call. Most importantly, I hope you and your loved ones are remaining safe and healthy. Now let me provide some comments to supplement the detailed financial results we released last evening. For the fourth quarter, our net sales were about $3.8 billion and our adjusted earnings per diluted share from continuing operations were $1.59. Driven by strong year-over-year sales growth in our industrial coatings reporting segment, we delivered record adjusted earnings per diluted share for the second consecutive quarter, increasing by more than 20% from prior year. In addition, our global architectural coatings businesses continue to perform exceptionally well, eclipsing prior fourth quarter sales and earnings records in most countries. We also delivered the second consecutive quarter of double-digit organic growth for our European architectural business. Our global architectural sales were also supported by ongoing advancement of our digital capabilities. In 2020, our global digital sales in the architectural business were up by more than 60%, and we will continue to invest and prioritize these digital initiatives. We coupled these organic growth improvements with strong cost management and delivered PPG aggregate segment margins that were about 160 basis points higher than the prior year fourth quarter. The higher margins were achieved with about 30% of our businesses continued to face significant demand headwinds, most notably the automotive refinish and aerospace coatings businesses as the pandemic continues to impact areas of travel and mobility. During the fourth quarter, sales in our China automotive OEM and general industrial businesses well outpaced industry demand with both businesses growing nearly 20% on a year-over-year basis. In auto OEM, we were significantly above industry production rates. Our strong footprint, advantaged technology, and service capabilities continued to serve us well in China where economic growth is the most robust. In addition, sales in our European and Latin American regions returned to year-over-year growth during the quarter. And in the U.S. region, while still lower than the prior year due to the aerospace coatings business, overall sales improved throughout the quarter. We delivered more cost savings during the quarter with about $40 million of interim cost savings. We also delivered an additional $40 million of structural cost savings. Our interim cost savings were lower than the $90 million we achieved in the third quarter as we incurred certain costs to support the sales improvement in several of our end-use markets. We will maintain about $25 million of these interim cost savings in the first quarter and expect to make at least $80 million of permanent cost savings for the full year 2021. Our team has done an excellent job managing working capital and cash uses in 2020, which allowed us to achieve a record $2.1 billion of operating cash flow for the year. Our businesses reduced operating working capital as a percent of sales by about 100 basis points in 2020. This outstanding performance was one key factor in allowing us to fund the Ennis-Flint acquisition entirely with cash on hand during the month of December. In addition to completing the Ennis-Flint acquisition, we recently announced some other strategic acquisitions. Each of these companies brings incremental benefits to PPG that will lead to further shareholder value creation. Looking ahead to the first quarter, there are few challenges including more restrictive shutdowns in certain countries and supply chain issues in certain end-use markets that will likely cause some short-term coatings demand disruptions. We’re also experiencing elevation of costs, particularly raw materials and logistics costs. While these issues create some uncertainties in the first quarter, we continue to be optimistic about the first half of 2021 as underlying coatings demand and economic activity in several of our end-use markets is expected to remain robust, including the automotive OEM, general industrial, packaging, and architectural businesses. We also remain confident of achieving further selling price increases in the first quarter in the Performance Coatings reporting segment and have started to pursue selling price increases in the Industrial Coatings reporting segment, which will be realized as the year progresses. For the company, aggregate sales volumes are projected to be flat to up a low-single-digit percentage in the first quarter with differences by business and region. As we progress through 2021, we anticipate multiple catalysts that will help drive further sales and earnings growth, including an eventual restock benefit as low inventory levels remain in several of our end-use markets. Second, we are well positioned to benefit from the ultimate recovery in the automotive refinish and aerospace coatings end-use markets as congestion and air travel increases with our world-class product and customer service capabilities. In addition, our acquisitions will start to provide accretive benefit as the year progresses. These incremental benefits will supplement the organic growth that we anticipate in our other core businesses as we continue to support our customers with excellent services and technology-advantaged products. For the quarter, we project adjusted earnings per diluted share to increase by more than 20% on a year-over-year basis, continuing our strong earnings momentum. Our near-term cash deployment priority will be to complete the acquisitions we have announced, which we anticipate to be funded by a combination of cash on hand and debt by the end of the second quarter. We then intend to primarily use our free cash flow generation to pay down debt from these acquisitions and reposition our balance sheet for future industry consolidation. As it relates to our recently announced acquisition agreements, let me make a few comments about Tikkurila. From a strategic perspective, this remains an extremely complementary business to PPG. We don’t expect any significant anti-trust issues and are confident that we will be able to keep the entire business intact. Equally important, we will not need to disrupt PPG’s legacy businesses or our customers in the region. Keeping the Tikkurila team together as one unit is not only the best stakeholder outcome but will ensure a fast start on synergy capture. From an acquisition integration execution perspective, we believe that our offer is compelling for all stakeholders and it has the benefit of the due diligence we’ve already conducted. We conducted the due diligence efficiently and worked closely and cooperatively with Tikkurila to resolve to the satisfaction of both parties some commercial issues that arose in the due diligence process. We believe these commercial issues in addition to the regulatory landscape place PPG in the most favorable situation to acquire Tikkurila from a business continuity and return project perspective. Additionally, we’re expecting substantial cost synergies supplemented by incremental sales synergies, which we were able to fully vet in the due diligence analysis. This includes the fact that our holistic European operations are well established and stable and will result in very little disruption from this transaction. We also have a very well established regional shared service center in Eastern Europe that has been in existence for many years and has integrated many of our prior acquisitions, which will enable us to more seamlessly and more quickly integrate an acquisition of this size. Finally, we will continue to analyze this with our traditional thoughtfulness and historical discipline. On a post-synergy basis, this remains an excellent value creation opportunity for our shareholders. Lastly, as we hear from our customers and investors consistently, there is zero doubt that our sustainability initiatives are far ahead of any coatings company as PPG technology is enabling the conversion from the internal combustion engine to electric and autonomous vehicles in addition to our many other initiatives. Due to where this transaction is from our process perspective, that is we are currently in an open tender offer period and Tikkurila’s Board has received a non-binding competing bid. We will not be able to answer any questions on this matter during the call. In closing, I want to thank and recognize our global PPG team. Our company’s true character has been showcased during these times of adversity. I am proud of how the PPG team has responded with great resiliency and continuing to serve our customers, our communities, and one another and has truly lived the PPG way. Our fourth quarter and full year 2020 results are a true testament of our company’s capabilities and allow us to enter 2021 as an even stronger company. Thank you for your continued confidence in PPG. This concludes our prepared remarks. And Amy, would you please open the line for questions.
Operator, Operator
Your first question comes from Michael Sison with Wells Fargo. Michael, you may proceed.
Michael Sison, Analyst
Hey guys, nice quarter. I guess maybe let's talk about the acquisitions in total, you've had a really good run here in terms of finding opportunities. What's sort of the synergy run rate, if all of them come together over the next 6 months?
Vince Morales, CFO
Yes Mike, this is Vince. Good morning. I hope you're doing well. We will provide more information on these acquisitions as they close, similar to what we do with Ennis-Flint. We need to complete the closing process first. We will share some annualized figures as well as specific numbers for 2021. Each acquisition has a different seasonality profile, so it would be challenging to give you a specific number for that year. As is commonly known, most coatings acquisitions typically aim for mid-single-digit synergies as a starting target. Some may yield more, while others may yield less, depending on factors such as geographic and product overlap. Rest assured, as we finalize these acquisitions, we will offer more detailed information for each one individually.
Michael Sison, Analyst
Got it. Can you discuss the backlogs that your professional painters are experiencing and how those compare to what you've seen in the past? Also, what is the potential momentum in this area, and are orange and brown trending as popular colors right now?
Michael McGarry, Chairman and CEO
I'm not going to address the color trends specifically, but I can tell you that our U.S. business is divided into maintenance, commercial, residential, DIY, and other sectors. Each of these segments saw improved performance in the fourth quarter compared to the third quarter, and we expect further positive growth in the first quarter compared to the fourth. We're enthusiastic about this momentum, although permitting for new homes and construction is not progressing as rapidly as desired, with challenges in multifamily housing as well. However, most of our large painting contractors feel confident heading into 2021. In Europe, we are experiencing strong performance, with double-digit growth in the fourth quarter continuing into January. In Mexico, we had an exceptionally strong quarter, achieving a 10% growth despite the economy facing a GDP decline of 7% to 8%. We anticipate this momentum will continue into January, as our concessionaires are performing well and have solid liquidity. Overall, I am very optimistic about our global architectural business.
Michael Sison, Analyst
Great. Thank you.
Ghansham Panjabi, Analyst
Thank you. Good morning, everybody. I guess, Michael, going back to your comments on pricing and industrial, you referenced some pricing initiatives there to offset higher costs. Looking at the slide deck, you're still expecting kind of stable selling prices for the industrial coatings segment. So just curious as to is there a lag associated with that? Is that what you're referencing? How should we think about that build as the year progresses? Thanks.
Michael McGarry, Chairman and CEO
Historically, there is typically a 3 to 6-month delay in pricing and raw materials because we cannot increase prices until our customers are aware of it. This is particularly challenging in the industrial sector compared to the performance side. Raw materials have been more expensive, especially in China, which operates on a more spot purchasing basis due to tradition. We have already announced price increases in Europe and are beginning to do so in other regions. We are in a stronger position compared to 2017 when many of our peers faced distractions from acquisitions or other concerns. I am confident that you will continue to see positive price increases. We have recorded 15 consecutive quarters of positive pricing, and I anticipate the 16th quarter will occur in Q1. Therefore, I am not concerned about the low single-digit inflation we expect.
Ghansham Panjabi, Analyst
Got it. And then in terms of the supply chain constraints you referenced, can you just give us more color on that dynamic? Which businesses in particular do you see being impacted, the timeline to normalize? I know the world is choppy at this point. But just curious on your thoughts. Thanks so much.
Michael McGarry, Chairman and CEO
Yes, the two biggest businesses, Ghansham, that are impacted right now are automotive and industrial. We finished with backlogs in those businesses by the end of the December. We're still running backlogs in those businesses. Demand is very strong, but it is very choppy. A number of our customers are having significant issues with labor because of the COVID pandemic. In fact, we got an emergency call a couple days ago from one of our large automotive customers that their whole paint shop was shutdown because of COVID and could we bring our people in to run it in the interim. So, we of course, supported them on that. There's the semiconductor issue that's out there in the automotive space, they all want to run. So many of our customers ran over Christmas, which was quite unusual. So demand is there and inventories in many of these spaces are quite low. Whether you're thinking about appliances or coil or automotive, there's low inventories. So we feel very comfortable. But unfortunately, we can't predict with labor when people are going to be having full labor contingent to be able to run their plants.
Ghansham Panjabi, Analyst
Okay. Thank you very much. Stay well.
Frank Mitsch, Analyst
Yes, good morning, and congratulations on the Penguin helmets. That's pretty cool. Looking forward to seeing the game one of these days hopefully in person. We'll see. I wanted to follow-up on the performance coatings margins. Got a bunch of questions regarding this, the very large sequential decline that you saw from the third quarter to the fourth quarter. Typically, you do see a decline with your businesses in the fourth quarter. But this seems to be a bit abnormal. I was wondering if you could take a moment or two and talk through the details there.
Vince Morales, CFO
Yes, Frank, this is Vince. The issue relates to the weightings of our businesses. The two most affected areas, as Michael mentioned earlier, are aerospace and refinish. These have generally been our most stable sectors throughout the year, with demand trends remaining fairly consistent from quarter to quarter. In contrast, other sectors like architecture have more seasonal performance. While we experienced a 30% decline in aerospace and a similar drop in refinish during Q3 and Q4, their traditional significance in Q4 is higher. For instance, the percentages in 2019 and 2018 were much greater for the total segment. Although we saw strong architectural demand and sales in Q4, the heavier weighting of aerospace and refinish during this quarter had a more considerable effect on our Q4 margins.
Frank Mitsch, Analyst
Got you. Thank you. And I understand you cannot talk about Tikkurila. But if for whatever reason that transaction doesn't occur, can you talk about your M&A pipeline? Obviously, you've been very active in the recent past. Should investors expect that there might be other sort of transactions or would share buybacks come back into the fore?
Michael McGarry, Chairman and CEO
Well, Frank, I think you've heard me say this in the fourth quarter back in October, I'll say the same thing now, it’s January. I'll be exceptionally disappointed if we buy back any shares in 2021. Our acquisition pipeline remains robust and remains active and we continue to work in this area. And so I'm feeling confident that we will have further announcements in the back half of the year.
Bob Koort, Analyst
Thank you very much. I would like to know how responses and price increases are impacting the demand environment compared to 2017, which was notably weaker. Will this result in quicker and easier adjustments?
Michael McGarry, Chairman and CEO
Yes. Well, I think it certainly make it easier. I don't know about quicker. The benefit we have right now in these industrial businesses is that customers are backlogged. They're asking for products. They're calling on a daily basis, wondering where their orders are in the queue. So that's one thing. The second thing is they are so desperate for technical help. The last thing they're going to be doing is asking for any price downs, and so they fully recognize that this is a different environment. And so, our salespeople are never happy when we are pushing them out there, tell them they got to go get bright. But in this case, they have a lot more ammunition to go get price. And I feel comfortable that the industry sees the same thing that we're seeing.
Bob Koort, Analyst
Can I ask you on the refinish market? We get occasional questions from our investors wondering about the secular threat of driver assistance versus the growing car park and introducing new drivers that might bang up vehicles. How do you see that playing out over the next several years?
Michael McGarry, Chairman and CEO
I would like to start by mentioning that the number of cars on the road is still increasing. In the U.S. and Europe, it grows slightly, but there is significant growth in Eastern Europe and China. With 25 million new cars added each year in China and a slow scrappage rate there, along with similar trends in Southeast Asia and India, the car park continues to expand. Many autonomous and safety features are mainly available in developed countries, where the costs are higher, so we don’t need to be overly concerned about that in less developed nations. Additionally, in the fourth quarter, we noticed that as the economy began to open up and work-from-home restrictions eased, we saw a rapid increase in congestion, especially in Europe, where smaller living spaces make remote work more challenging. Our refinish business had a downturn of around 10%, while claims dropped by about 20%. We have made significant improvements in that area due to the pandemic, and I believe your clients can feel confident that we have this under control.
Bob Koort, Analyst
Great. Thanks so much.
P.J. Juvekar, Analyst
Yes. Hi, good morning.
Michael McGarry, Chairman and CEO
Good morning, P.J.
P.J. Juvekar, Analyst
Michael, what was behind the strength in architectural coatings, especially in Europe, when I think organic sales were up in low teens? Is that driven by DIY? And does DIY face tougher comps in 2021 starting in second quarter?
Michael McGarry, Chairman and CEO
Well, there is certainly some significant DIY improvement in Europe. But there was also a significant return to our professional network as well. And we have a very strong position as you know in Europe. Number one in a lot of countries, and so we've benefited from that strength. And the improvement in DIY, I think, is sustainable. There's a whole lot of new DIY-ers that weren't there, 2 and 3 and 5 years ago. So I think this is a start of something that's good. And the comps do get tougher, but I would say the comps in Europe do not get tougher until the third and fourth quarter. So the second quarter, as you know, had very significant lockdowns in Europe. And so, Q1, Q2 will still have very positive numbers going into the back half of the year.
Vince Morales, CFO
And P.J., for Europe, specifically, the professional painters, Michael alluded to, doesn't have as much commercial exposure as they do in the U.S. So they are working on residential and some repaint activities. We're seeing the same in the U.S., but there's a commercial downdraft that weakens the comparables, Europe versus the U.S.
P.J. Juvekar, Analyst
That's really helpful. And then secondly, Ennis-Flint, that seems like an interesting acquisition in traffic paints. I think, Michael, you said that autonomous cars need good road markings. And as a result, traffic pain could be a growth industry. Ennis-Flint has, I think, revenues of $600 million. How fast can these sales grow, your traffic solutions business can grow going forward. Thank you.
Vince Morales, CFO
Thank you for the question, P.J. I'll let Michael address the growth aspect. To provide some context on Ennis-Flint, targeting $600 million in annual sales seems reasonable. It's a highly seasonal business, mainly operating in the U.S. and Canada, where we experience winter conditions in certain regions. Consequently, we usually achieve most of our profitability in the second and third quarters due to the business's seasonal nature. Michael, perhaps you can elaborate on this.
Michael McGarry, Chairman and CEO
Yes, P.J, the two significant trends we're closely monitoring are, first, some states are considering widening the stripes, moving from a 6-inch stripe to something broader. Secondly, they are reducing the distance between the stripes. Additionally, they're introducing several pre-formed products, and in thermoplastic products as well. With our network, we believe we can enhance the distribution of these products. We're excited about this opportunity, but I expect the growth won't be linear; it will be a steady progression.
P.J. Juvekar, Analyst
Okay. Thank you.
Laurent Favre, Analyst
Yes. Good morning. I have another question about Ennis and its international expansion. Could you provide some insight on what you have planned? Are we expecting a significant increase in costs as you aim to become a notable competitor outside of the U.S. and Canada?
Michael McGarry, Chairman and CEO
Well, it definitely will not be a material cost increase. You may have heard making traffic paint is not as sophisticated as making our industrial paints. And as you know, in Mexico and Europe, we have a number of plants. So it will not be a cost issue. It will be a focus and distribution issue, making sure we get ourselves aligned with the winners in the contracting space that consistently win government bids and municipality bids and things like that. So that's where our focus will be. So Mexico will be a start because of our strong base with our PPG-Comex team. And then we'll look at it on a country-by-country basis in Europe, and do it in a very methodical and disciplined manner.
Laurent Favre, Analyst
Thank you. And then Michael, I think in the slides you talked about ESG benefits for all four acquisitions? Could you give us a few examples?
Michael McGarry, Chairman and CEO
Yes, I'm happy to and John can chime in as well. So, if you think about the first one, Ennis-Flint, this is going to help the autonomous driving help the mobility. So as I mentioned in my opening remarks, PPG is far ahead of everybody in this space. So that would be the first one. The second one would be VersaFlex. I would tell you that with VersaFlex, the polyurea technology, if you think about flooring systems, food plants, what you want to do is ensure the cleanest environments that you can and reduce the potential for illnesses in those environments. And that's another ESG benefit. Worwag, I would say the number one thing with Worwag is they have some really nifty technology in the area of automotive parts water-based. And so as you know, we've been trying to push the industry to move much faster away from solvent to water. That's one plus. We anticipate with a full suite of products, we'll get more people switching to powder, which as you know, has 100% transfer efficiency. And then I think our remarks on Tikkurila are quite clear. Not only will we bring our technology to that space to continue to drive more bio base, more sustainable raw materials, but also will be more water-based solutions, especially when I think about what they have in Russia and other Eastern European countries.
Laurent Favre, Analyst
Thank you.
David Begleiter, Analyst
Thank you. Michael, just on the Q1 guidance, typically Q1 is about 15% above Q4. I think this year guidance was down about 6% to 9%. What are the key drivers for that divergence from historical patterns?
Vince Morales, CFO
Yes, David. This is Vince. I hope you're doing well. The typical seasonality due to the pandemic is quite challenging to compare to previous years. We experienced a significant shift in activity from Q3 into Q4. As Mike pointed out, there were higher seasonal sales in Q4 for architectural than we usually see in Q1. We're concerned about the availability of customer production lines, which may cause some of the activity to move from Q1 to Q2. To provide some context, David, you usually see a drop of about a million cars in global auto production from Q4 to Q1. We're anticipating a decline of 2 million cars globally, excluding Japan, from Q4 to Q1. A similar pattern can be seen in some industrial sectors. Thus, it's challenging to compare seasonality historically due to the shifts associated with the pandemic.
David Begleiter, Analyst
I have a follow-up question regarding performance coating volumes. Last year, they were down 6%, and it seems you're still expecting them to decline year-over-year. Can you explain why they aren't projected to at least remain flat or even increase compared to last year?
Vince Morales, CFO
Yes, the first quarter last year didn't have virtually no impact from aerospace, in terms of volume decline, and refinish was fairly strong until the tail end of March. And those two businesses, as Michael said, in the opening commentary, are heavily impacted in Q4, and we expect consistent patterns in Q1. So those two businesses are big businesses and that impact.
Jeff Zekauskas, Analyst
Thank you very much. You're not providing financial guidance for 2021, but there must be internal targets for management compensation. Can you share what performance objectives exist for the company and what targets are necessary for individuals to achieve those goals?
Vince Morales, CFO
Yes, Jeff, this is Vince, again. We have the traditional targets established that we would in any given year for management compensation, and also salesperson compensation. Obviously, 2020 was very fluid. 2021, we think will be very fluid. Similar to every other company, our comp committee or Board will look at the fluidness and react accordingly based on their judgment. But we do certainly have internal targets established today for 2021.
Jeff Zekauskas, Analyst
Okay. Propylene settled up $0.12 a pound yesterday. Was that something that was included in your vision of raw materials, or raw material inflation for this year? Or was it larger or smaller than your expectation?
Vince Morales, CFO
You said propylene, right?
Michael McGarry, Chairman and CEO
Yes. So, obviously, we don't buy propylene itself. We buy propylene derivatives, and the way the propylene derivatives work it's also driven by supply and demand of the underlying derivative plus the raw material input. So that would not hit us right away. So that would be the first comment. The second comment is, we have anticipated raw material inflation into 2021. So we were readjusting in a lot of our formula and buying strategies in 2020 to anticipate higher increases and try to position ourselves that minimize the impact of those kind of fluctuations.
Vince Morales, CFO
Yes, Jeff, I'll add that we are seeing this low single-digit inflation coming into the year. Some of our suppliers are dealing with some of the same issues that our customers are, which we feel some of that's transitory they're having workforce restraint due to the pandemic. So we think as the year progresses, some of these limiting items will fall by the wayside. We know there's good supply out there in most of these markets. And as Michael just alluded to the supply-demand characteristics of our supplier base, at some point will be the predominant factor of pricing.
Jeff Zekauskas, Analyst
So you don't think you're going to be squeezed this year? Is that the conclusion that we should draw?
Vince Morales, CFO
We expect low single-digit inflation for the first quarter and likely for the second quarter as well.
Chris Parkinson, Analyst
Thank you very much. We have been managing costs throughout the pandemic, but there seems to be a balancing act between improving volumes, ongoing cost programs, pricing costs, and the mix on an intersegment basis. Can you share your thoughts on the margin framework, not just for 2021, but also looking ahead to 2022? How should investors evaluate these various factors? Should the focus be on controlling the controllable aspects of your cost programs and pricing, or are there additional strategies you could implement to continue your progress? Thank you.
Michael McGarry, Chairman and CEO
Yes, Chris, this is Michael. I believe that PPG is performing better today than we did yesterday, and we strive for continuous improvement as a core value of our company. This is why we mentioned in the first quarter that we would continue with cost initiatives, even as volumes increase. We are holding our teams accountable to enhance productivity. We anticipate ongoing cost savings, particularly in areas like travel management. Additionally, we will be shifting some technical services for our customers to an electronic format as we implement more digital initiatives. Looking at the long term, I believe it will become less expensive for us to manufacture paint compared to today, and we have several productivity initiatives in progress.
Chris Parkinson, Analyst
Got it. And then you mentioned a few times in your prepared remarks just the potential for a robust restock, which could be a solid tailwind in '21. Can you just quickly comment on what you're currently hearing from your various customer channels? And perhaps, also comment on just expected timing. Thank you very much.
Michael McGarry, Chairman and CEO
Yes. The two biggest ones that we will have to restock; the first one is refinish. So they're all running with an exceptionally low inventories. They don't want to get caught with work-from-home and extended work-from-home period where they can't move product. So that's the first one. But more importantly, aerospace. We see our orders dropping. I mean, I won't get into the various sub-segments how much we break it down into sub-segments, but I had one in the fourth quarter that we only got 6% of our normal orders in the fourth quarter. Now clearly the industry is running much higher than that. So continue to destock at a significant rate. That's going to have to build up. So we're thinking about how do we ensure that we're ready for that restock that will be coming in aerospace, and that will be significant. And I'm thinking that people are going to start doing that probably starting in the back half of Q2 and then it will start to accelerate. You probably saw the announcement from Airbus today that they’re increasing their build rate for the A320. That's the first sign. And there will be other signs I think you should anticipate because obviously we're talking to our customers, so we have information that they haven't made public, but that's the first one.
Vince Morales, CFO
Yes, Chris, and if you go over to the Industrial segment, we know the car inventories in the U.S. are at very low levels relative to historic terms. Many of our industrial customers were running hand to mouth with backlogs to their customers. And if you look at our balance sheet as a microcosm, our inventory levels are very low and we do have certain stock outs just because we can't get product in certain places. Again, all pandemic-related. So we do expect there to be a restock across a variety of industries as we progress through 2021. That was another example. Most of our customers had a very strong year last year in 2020, as did we. But again, it depleted inventory that would traditionally be on the shelf.
Michael McGarry, Chairman and CEO
And maybe to put that in perspective, Chris, we ran our stain plant in December. I can never remember in my history of us running a stain plant in December.
John Roberts, Analyst
Thank you. China began shutting down in February of last year. You started to see some benefits in the first quarter, and then the comparisons become easier as we move into the second and third quarters. Looking at the 2-year comparison, if I reference the first quarter of 2019, it appears that you remained relatively flat in the first quarter compared to two years ago, even after accounting for the acquisitions. Is this the correct way to understand it? On a 2-year basis, China is expected to perform reasonably well, but many markets are still down. Therefore, you might experience a flat trend in the first half on a 2-year basis.
Vince Morales, CFO
You're talking China only, John, or are you talking total PPG?
John Roberts, Analyst
No, for the total PPG. So total PPG first quarter of.
Vince Morales, CFO
Yes, for total PPG on a 2-year comparable basis, sales volumes are expected to decline in the low to mid-single digits, consistent with our prior guidance. However, there are positive factors to consider, such as acquisitions and favorable currency conditions. As Michael mentioned, we have experienced 15 consecutive quarters of pricing increases, but on a 2-year stacked basis, sales volumes will still decrease in the low to mid-single digits.
John Roberts, Analyst
Okay. And then you talked about propylene. Maybe a little bit more granularity on the overall raw material inflation. Ethylene derivatives like VAM, urethanes TiO2, they're all different value chains that's there and many of them are not propylene-linked?
Michael McGarry, Chairman and CEO
Yes. I mean, we break down our procurement into about 10 different categories. And in 4Q, I would say that the vast majority of them were slightly negative or flat. When we look at 1Q, we are going to see probably half of them have marginally higher, so inflation. But we are not seeing some significant step up that we are not prepared for. So sequentially, isocyanates are up, epoxies are up, packaging is up, of course solvents are all up. But we are not nervous about this, I guess is what I'm trying to tell you because we anticipated this going into the year and we tried to have our procurement strategy in a manner that we would be able to take advantage of what we had in 2020 and try to carry that forward into 2021.
John Roberts, Analyst
Okay. Thank you.
Vincent Andrews, Analyst
Thank you and good morning, everyone. If I could just ask on the auto production, there may be some other customer areas where there could be some issues in the first quarter. Vince, I think I heard you say that on the auto side you'll see some autos get shifted into 2Q. Are you anticipating that the shortfall in 1Q would be made up entirely in 2Q or to be spread further out into the balance of the year? And is it something that can be fully made up in the calendar year?
Michael McGarry, Chairman and CEO
Vincent, this is Michael. I would say the biggest unknown in that is what have the auto guys decided to do with their own dealers. As you know, dealer inventory is very low. Dealers are happy right now because you come into an auto facility and you don't have a lot of choice, and you have to buy what's on the lot. They're making money on new cars, which is historically something they don't do. So I think the great unknown is due to car companies starting back half of 2Q and 3Q, do they try to rebuild inventories back to the old levels on the dealer lots or do they keep doing what they're doing now. So I think that's a big unknown. So we are anticipating catching up. But there is still more latency there if they decide to go back to the old inventory levels they used to have.
Vince Morales, CFO
The one constant, Vincent, is there is demand out there. There is very strong demand in the U.S., a good demand in Europe. The China numbers I think came out today and car sales are up over 20% for January year-to-date. So we know there's good end market demand out there for automotive.
Vincent Andrews, Analyst
Thank you. That's very helpful. Regarding China aerospace, you mentioned that flights have returned to 90%. When considering this sector as a model for how global aerospace may recover, are you noticing any changes in customer behavior during the recovery in China? Are they purchasing more or less? Are they postponing orders or looking to plan ahead? Is there anything noteworthy that could provide insight into the recovery patterns in the U.S., Europe, and other regions?
Michael McGarry, Chairman and CEO
Yes, Vincent, the first thing to note is that it's a two-stage recovery. Domestic flights are up 90%, but international flights are down 85%. They aren't flying outside of China, and they are very limited in allowing anyone to fly in. This is the biggest challenge right now. The key factor to watch during the recovery is the distribution of vaccines and the opening of borders. I would closely monitor those aspects. Currently, on the domestic side, demand is strong, they are purchasing products, and their inventory levels are normal.
Vince Morales, CFO
And Vincent, if you could just expand out some of the other metrics we watch. We do see online inquiries for airline travel, online inquiries for airline travel are up significantly versus a very depressed level. In Q3 and Q4 they were up. They continue to trend upwards. We did see around the holiday periods, both in the U.S. and Europe, sizable step change in travel, whether that was wise or not is debatable. But we do know there is demand out there for folks who want to travel, and we are welcoming obviously the positive impact from a vaccination.
Arun Viswanathan, Analyst
Great. Thanks. Good morning. I guess, I just wanted to get to the margin question again. In Industrial, obviously, you've had some nice progress here, even in a challenging market. Do you feel like you're fully caught up from prior inflation as well? And do you expect further percent margin growth as we go through '21 and you realize some of these price increases that you've put up there? And maybe you can also comment on performance as it relates to your percent margin trajectory? Thanks.
Michael McGarry, Chairman and CEO
I would say that we have never fully caught up. We always have higher expectations in that area, so there is more work to do. The good news is that demand is strong and raw materials are improving. This should help us get ahead on this issue. Regarding performance, we have already announced price increases in our architectural and refinish segments, and we have advanced technologies in aerospace. When demand returns, it will positively impact us. Overall, we feel optimistic in this area.
Vince Morales, CFO
Yes, Arun, let me just add that throughout 2020, we have discussed our discretionary cost management and the structural cost improvements we've made over the past several years. We anticipated strong leverage with any increase in volume, which was evident in Q4 in the Industrial segment. Volumes increased in the mid-single digits, and you saw the positive effect on our bottom line. As the recovery of pandemic-related volumes continues into the balance of 2021, we expect strong leverage in both segments.
Arun Viswanathan, Analyst
Okay. That's helpful. And then maybe you can just provide either kind of a returns profile for the acquisitions in general. Is that kind of like a mid-teens ROIC? And maybe that's why you don't necessarily think share buyback would be of the same ROIC or what’s kind of the calculus into not necessarily pursuing share buyback and pursuing M&A a little bit more aggressively?
Vince Morales, CFO
If you look, we shared information a couple of years ago about our acquisition record and the returns associated with that, including around a dozen recent examples. I believe we released this in May 2019 or 2018. What you'll discover is that the return on capital for both PPG and the coatings industry exceeds our cost of capital and is certainly higher than the returns from share repurchases. This is largely due to the highly synergistic nature of these transactions, where many synergies can be realized without additional cash expenses for the buyer. This results in a favorable return. Additionally, these acquisitions tend to be low risk because we usually acquire very few assets. As you know, the coatings industry is asset-light, so we typically focus on acquiring minimal assets while maximizing synergy potential. PPG has been effective at realizing those synergies early on, having completed around 50 to 60 acquisitions in the past decade. These acquisition timelines are usually under 24 months, allowing us to capture all synergies with minimal cash outlay. Therefore, these factors generally provide a higher return profile for our acquisitions in the coatings sector compared to share repurchases.
Arun Viswanathan, Analyst
Thanks.
Kevin McCarthy, Analyst
Yes. Good morning, everyone. My question relates to architectural DIY coatings. How would you compare your outlook for 2021 in the U.S. versus Europe? Maybe you can talk through what you are hearing from some of your channel partners in general. Things like, inventory levels, seasonal effects and whether or not you can grow the business directionally versus more challenging comparisons this coming year?
Michael McGarry, Chairman and CEO
Well, Kevin, I would say that DIY in the U.S. will continue to grow. What I'm most excited about is the fact that we have a new generation of DIY-ers that we didn't have. We always kind of bemoan that in the past because people our age seem to let their kids get by without painting every summer. So now they are out there painting their own homes as they work-from-home. So that's a positive. The housing stock will continue to grow. That will be a positive. So I think that's all-important trends that you should be paying attention to in Europe. I think we went through a long period of time where there wasn't as much repair and remodel inside homes that historically has happened in the U.S. that now that people were at home and looking at those same four walls all the time has manifested itself in some very significant numbers. So I think this is going to last longer than a lot of people think. Obviously, we will wait and see. But I know Q1, Q2 will all be positive comps. And let's wait and see how we trend into Q3, Q4, but I think long-term, these are positive trends for the DIY industry.
Vince Morales, CFO
Yes, Kevin, I'll add one positive trend. In the U.S., the de-urbanization that's taking place moving from smaller square footage into a single-family home, typically favors repaint, residential paint, repaint and typically favors a more robust painting cycle with more velocity.
Kevin McCarthy, Analyst
Okay. That’s helpful. And then I wanted to ask about auto OEM. Michael, in your prepared remarks, I think you've pointed out you're growing significantly above industry production rates and your heat map shows above average in Asia and EMEA. Can you elaborate on what is driving that? And how much is related to say share shifts versus some of the dislocations? You mentioned around SMEs labor and low inventory levels.
Michael McGarry, Chairman and CEO
We have noticed significant improvements in our technology, leading to an increase in our net new wins year-over-year, which is a very encouraging trend for us. Additionally, the pandemic has highlighted the value of our tech service team, prompting clients to recognize their necessity and engage us for more discretionary business. Lastly, although we are still in the early stages, we are beginning to see growth in our mobility wins, which we believe will allow us to establish a stronger position in the market as we continue to compete effectively in this area.
Vince Morales, CFO
Just one other I'll add as well, Kevin. If you look at some of our acquisitions in the past couple of years, we did the Hemmelrath acquisition, we've got Worwag acquisition pending. We've solidified many of these customer relationships on ancillary products as well. So that’s been our strategy to expand our technical breadth with customers. The value-add to those customers. And as Michael mentioned, that’s coming through in spades especially in times like this where they need velocity through their plants.
Mike Harrison, Analyst
Hi. Good morning. Wanted to ask about the M&A activity. If you've got four deals brewing, and it sounds like you have some additional deals maybe in the pipeline for the rest of the year, at what point do you start to get a little bit concerned about your ability to integrate several acquisitions at once? How do you think about that?
Michael McGarry, Chairman and CEO
Mike, a couple of years ago, we had six acquisitions happening simultaneously, and it was barely noticeable. Over the past decade, we have completed 50 acquisitions. We have many people at PPG eager to take on the role of integration director, as it's a highly sought-after position within the company. We have a well-established process that we follow, and we’re experienced in this area. Currently, with the acquisitions we're handling, PMC complements VersaFlex, Tikkurila will fit into our architectural segment, and Worwag is geared toward automotive. These are all in different sectors, so I'm not concerned. Ennis-Flint represents a brand new venture for us, but I don't see this as a challenge at this point. I'm quite confident in our ability to manage in this arena.
Vince Morales, CFO
Yes. Mike, that is a great question. It's something we know at some point could be a governor of what we do. But given the diversity of these acquisitions, we are not at all challenged at this point with bandwidth.
Mike Harrison, Analyst
All right. And then on the auto OEM side, you've referred a couple of times the semiconductor shortage issue. And I don't think that you've specifically given some details or some thoughts on whether you think that’s going to be a significant headwind or whether it's a lot of headline risk right now rather than really impacting production rates. Can you give some thoughts on that please?
Vince Morales, CFO
Yes, Mike, this issue is well-known in the industry, particularly in automotive and several industrial markets. Anything that requires a chip, such as refrigerators and washing machines, is experiencing intermittent availability. Production lines are going up and down based on supply. It's challenging for us to passively monitor that supply base to fully grasp the situation or when it may stabilize. We know the supply is extremely tight. We've observed customers shutting down production lines for one, two, or three days due to lack of availability. There are indications that more supply is coming, but we can't predict how long this will last. Currently, the impact on most markets is still in the single digits, meaning it could either grow or shrink. At this moment, it's an evolving situation.
Michael McGarry, Chairman and CEO
Mike, what I would add to that is, they're missing chips on Thursday, Friday and they get them on Saturday, they're running Saturday, Sunday. They're making up any day that they can. So they're running hand to mouth is basically what it is.
Jaideep Pandya, Analyst
Thanks. My first question is about acquisitions. It seems you have been active in acquiring companies over the past few years. There's also a European company that appears to be looking to halt buybacks and pursue acquisitions. Do you believe that as more coatings companies seek inorganic growth in the upcoming quarters and years, the average multiple in the industry will increase, potentially lowering the return profile of your acquisition pipeline? Or do you see this as a situation that varies on a case-by-case basis, thus not causing concern for you?
Michael McGarry, Chairman and CEO
Let me begin by saying that the returns from acquisitions are specific to each individual acquisition, and the competitive landscape is also unique to each situation. There isn't a definitive right or wrong approach. Generally, the principle is that higher risks require higher returns to be justified. Additionally, the greater the uncertainties, the returns must be substantial enough to mitigate those risks. Therefore, it varies significantly, and while there isn’t a correct answer, maintaining discipline is always advisable. Regarding performance, I believe we will benefit from lower structural costs in the future. Also, as Vince mentioned earlier, increased volume will contribute positively to our bottom-line returns, and I anticipate this trend will persist.
Vince Morales, CFO
Yes. I think, Jaideep, as we've talked over.
Jaideep Pandya, Analyst
Thanks a lot.
Daniel Rizzo, Analyst
Hi, guys. I'm on for Laurence. Just a couple of quick ones. You mentioned all the M&A opportunities, I was just wondering if there is an upper limit on the leverage you are willing to go to make these acquisitions?
Vince Morales, CFO
Yes, I think our history has been well chronicled here as well, Dan. Look, we want to be a strong investment-grade company. There are times where we lever up to do a transaction or set of transactions. Our intention would be, as Michael said in the opening comments, to immediately ratchet that back down to poise ourselves for the next acquisition. Given the different sizes and natures of these deals, it's hard to pinpoint a specific number, but again, strong investment grade is where we like to live.
Daniel Rizzo, Analyst
Okay. And then quickly, you mentioned that some of your customers were running over Christmas, which was obviously unusual. I was wondering if that's possible you might see the same thing in China for the Chinese New Year where just, I mean, those trends might continue in the last year the pause you usually see around this time of the year in that region?
John Bruno, Director of Investor Relations
Dan, I fully expect them to take their holidays.
Daniel Rizzo, Analyst
Okay. Thank you very much.
Operator, Operator
This concludes today’s conference call. You may now disconnect.