管理層發言
Good morning. My name is Tracy, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2026 PPG Earnings Conference Call. I would now like to turn the conference over to Alex Lopez, Director of Investor Relations. Please go ahead, sir.
Thank you, Tracy, and good morning, everyone. This is Alex Lopez. We appreciate your continued interest in PPG and welcome you to our first quarter 2026 earnings conference call. Joining me today from PPG are Tim 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, April 28, 2026. We have posted detailed commentary and the accompanying presentation slides 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, Timothy Knavish.
Thank you, Alex, and good morning, everyone, and welcome to our first quarter 2026 earnings call. Before we begin today's call, I want to take a moment to remember our dear friend and colleague, John Bruno. His passing last week is a tremendous loss. John was not only an exceptional contributor to our company, but a wonderful husband, father and friend whose leadership, intellect, compassion and humanity touched everyone who knew him. Thank you to the many of you that reached out. It meant a lot to us here at PPG, but more importantly, meant a lot to his family. Now I'd like to start by providing highlights of our first quarter 2026 financial performance, and then I will share our outlook. I am pleased to report that PPG delivered solid performance in the first quarter demonstrating our ability to maintain growth momentum in a challenging macro environment, led by our differentiated aerospace and PPG-Comex businesses. We achieved organic sales growth of positive 1%, marking our fifth consecutive quarter of higher year-over-year organic sales. This growth was driven by higher selling prices with further selling price increases announced and expected; price realization for the remainder of the year is targeted to offset any inflationary impact much more quickly than prior inflation cycles. First quarter net sales totaled $3.9 billion, up 7% year-over-year with adjusted earnings per share of $1.83 and an increase of 6% versus the prior year. Our segment EBITDA margin was over 19%, reflecting solid execution of our share gains, the benefits of our technology-advantaged products, strong brand recognition, along with excellent commercial execution. Turning to our segment performance. In Global Architectural Coatings, first quarter net sales rose 13% to $965 million with positive 2% organic growth. Organic sales for Architectural Coatings, Latin America and Asia Pacific increased by a mid-single-digit percentage compared to the first quarter of 2025 with equal contributions from selling price and sales volumes. In Mexico, retail sales were especially strong, and project-related sales continued their recovery. Architectural coatings sales in Europe remain mixed by country with a low single-digit percentage decline in total, which was partially offset by favorable pricing. Segment income increased more than 30%, supported by pricing and execution of self-help actions, which drove EBITDA margins up 230 basis points above prior year levels. We expect organic sales and margin momentum to continue into the second quarter of 2026. Also, we continue to reduce our overall structural cost in our architectural business in Europe, and we have four manufacturing plants that will be closed in the second half of 2026, resulting in lower fixed costs going forward. Our Performance Coatings segment delivered 5% positive net sales growth to $1.3 billion, led by double-digit organic growth in aerospace and high single-digit growth in traffic solutions and protective and marine coatings. PMC has now delivered 12 consecutive quarters of positive volume growth. As expected, automotive refinish organic sales decreased by double-digit percentage as sales volumes were lower, reflecting customer order patterns stemming from our U.S. distributors during the first half of 2025. On a positive note, we are seeing improvements in the U.S. industry accident claims. February and March industry claims were down 1% year-over-year which now makes three out of the last four months with low single-digit declines year-over-year, reinforcing a normalization trend after the high single-digit to double-digit declines most of last year. Another positive data point we are seeing is our U.S. distributor fulfillment orders sequentially improving as industry-level inventory levels normalize. In refinish, as we previously communicated, we expect year-over-year organic sales volume declines in the second quarter as we lap strong prior year first half order patterns. We anticipate volume growth during the second half of 2026. Segment EBITDA was strong at 24%, driven by the strength of our aerospace business despite the unfavorable year-over-year refinish volume comparisons. In fact, the investments that we are making in aerospace to support our customers' demand have resulted in improved productivity and improved output. And we are well positioned to deliver consistent growth in this key end market for the next several years. I would like to again emphasize the important and sizable role that our aerospace business plays as a key growth engine for our company. Demand is expected to remain strong given our highly specialized and qualified products for both the OEM and aftermarket channels. Our backlog remains at about $350 million despite year-over-year output increases. The PPG aerospace business provides unique technology-advantaged products in various subsegments: transparencies, sealants and adhesives, coatings, services and engineered materials. In each one of these verticals, we have a strong presence that allows us to provide a superior customer offering, including excellent distribution capabilities, creating a truly unique value driver for our company and for our shareholders. Another differentiator of PPG aerospace business is the balance is not only between OEM and aftermarket, but also we are not overly dependent on any subsegment as we are well balanced across commercial, general aviation and military. I'd like to highlight just two examples of the proprietary technology-advantaged aerospace products that are designed to provide customized chemistry solutions inside the can and improve productivity for our customers outside the can. PPG's PRC Seal Caps deliver lightning strike protection for aircraft while significantly improving application time and material usage for our customers. ARE 3D Printed Sealants, our customized gasket solution, offers superior quality and increased customer productivity solutions. Now moving to the Industrial Coatings segment. First quarter net sales grew 4% to $1.6 billion. Organic sales were flat, including share gains that led to 1% sales volume growth, well outpacing industry demand as we realize the benefit of the share gains with strength in automotive OEM coatings and packaging coatings. We expect to launch additional share gains in the industrial segment throughout this year and into 2027. From a business unit standpoint, our automotive OEM business delivered flat sales volume which outpaced the decline in global automotive industry production by about 300 basis points. The industry decline was largely due to year-over-year comparisons in China as the first quarter of 2025 was very strong and the first quarter of 2026 was tepid. Expectations for China industry comparisons are to improve in the coming quarters. For PPG, due to our strong product portfolio and commercial execution, we expect to continue outgrowing the market in the second quarter and for the full year in 2026. Organic sales for our Industrial Coatings business were down a low single-digit percentage as lower volumes due to inconsistent demand were partially offset by positive pricing actions in this business. Packaging coatings organic sales increased by a double-digit percentage year-over-year, growing significantly above industry rates. Sales volumes for PPG are up over 20% on a two-year stack basis, driven by share gains as customers continue to select our leading technologies. Segment EBITDA margin was negatively impacted by regional mix as China automotive production dropped in comparison to a particularly high level in the first quarter last year. Looking ahead, we expect sequential margin improvement driven by incremental industry and PPG sales volume growth, selling price realization and aggressive cost management. With the impact of the Iran war, costs have risen for raw materials, energy, logistics and packaging across the coatings value chain. In this rapidly evolving macro environment, we are focused on our ability to supply our technology-differentiated products and services to our customers, which will allow us to maintain our organic growth momentum. I'm expecting the actions we are taking, combined with PPG's portfolio strengths to offset geopolitical-driven impacts. To date, we have had limited impact from supply shortages and we have the ability to leverage our unique broad and global supply chain footprint to securely source raw materials and drive competitive pricing for those raw materials. Additionally, we are leveraging our years of expertise in product formulation technology and our ability to maximize the use of AI to optimize products to drive reductions in our raw material costs. Considering our procurement capabilities, our global footprint, our formula flexibility, our portfolio strengths and the current macro environment, the impact of PPG is expected to be a mid-single-digit percentage in the cost of goods sold for the remainder of the year. We expect to fully offset these costs and we are proactively raising prices to secure raw materials for our customers. Given the distribution models and price mechanisms we have in place, we expect to deliver price-cost realization much more rapidly than we did in previous inflation cycles. This realization will impact our Global Architectural Coatings and Performance Coatings segments first, and then flow through our Industrial Coatings segment. Importantly, there are areas where we anticipate potential upside to the second half of 2026, such as our growing aerospace business, our architectural coatings Mexico business where demand has been strong. Additionally, industry demand in automotive refinish has been recovering faster than we initially expected. As a result, we are reaffirming our full year 2026 EPS guidance range of $7.70 to $8.10. Again, let me reemphasize, our top priority is supporting our customers' needs through technical expertise, products with consistent quality and continuity of supply even as market conditions remain highly dynamic. Now let me talk about our balance sheet and cash. Our strong balance sheet continues to provide financial flexibility. We ended the quarter with cash and short-term investments of about $1.6 billion. We repaid $700 million of debt that matured in the first quarter and returned approximately $260 million to shareholders through dividends and share repurchases. Our cash deployment remains focused on maximizing shareholder value creation. Looking ahead, our accelerating organic growth momentum and proactive pricing actions position us well for the year. For the second quarter of 2026, we expect strong growth in aerospace, Architectural Coatings, Latin America, protective and marine coatings, automotive OEM coatings and packaging coatings, while demand in Architectural Coatings Europe, automotive refinish coatings and in global industrial end-use markets will remain below prior year. We expect overall pricing for the company to be positive, with the strength from our Performance and Architectural Coatings segments and flat year-over-year price in the Industrial Coating segment, with all three segments having improved pricing versus the first quarter. This will result in organic sales growth for the second quarter in the range of flat to positive low single digits versus the prior year. Given our ability to outperform the macro through our commercial momentum, combined with our pricing realization and self-help actions, we expect to deliver adjusted earnings per share growth in the range of flat to a positive low single-digit percentage for the second quarter versus the prior year period. We are confident in our strategy and the strength of our portfolio; we're delivering higher growth and earnings despite challenging market conditions. Thank you to our PPG team around the world who make it happen and deliver on our purpose every day. We appreciate your continued confidence in PPG. Now before we open the line for questions, I would like to congratulate Vince on his upcoming retirement; this is his final PPG earnings call. Thank you, Vince, for more than 40 years with PPG. Thank you for being a great contributor to our company, a driver of results, a driver of shareholder value, a great mentor to many talents, a great teammate to our operating committee, a great partner to the last three CEOs and a great friend to me. Thank you, Vince. As PPG makes the CFO transition, we are delighted to welcome Jamie Beggs as our new Chief Financial Officer. With her extensive background and financial leadership, Jamie brings a wealth of experience that will be instrumental in driving our continued growth and success. Please join us in extending a warm welcome to Jamie as we work together to achieve new milestones and create lasting value for our stakeholders. We are thrilled that Jamie is joining our team. Now operator, please open the line for questions.
分析師問答
Your first question comes from the line of Ghansham Panjabi with Baird.
Our best to you, Vince, and our very best for John's family as well. I guess, Tim, first off, on your comments on price-cost recovery being much faster than the prior period. Can you just outline some of the specific changes you've made to support that? And then related to that, you've been very calibrated in the past with pricing in previous inflation cycles to kind of maintain your market share, et cetera. Do you expect volumes to hold this go-around as well, just given the near 20% increases you've implemented thus far?
Yes. Thanks, Ghansham. Look, the difference this cycle from a volume standpoint is, as you know well, for the last three years, we've been building our organic growth muscle. So we have tremendous momentum from an organic growth standpoint that will help as we move forward with price increases. If you compare it to a couple of cycles, the pre-COVID cycle of 2017 and 2018 took us about 1.5 years to get to run rate neutrality. The 2021 cycle, which was post-COVID combined with the Texas freeze, took us about a year. Now we're talking months. So it's a combination of two things, Ghansham. Number one, we've always had a good pricing muscle. And with each cycle, we refine that. We learn, we get better, we get faster. Now from a volume standpoint, we're combining it with positive momentum on the organic growth muscle that we've been building and demonstrating results for these last five quarters or so. So we're confident that we're going to be able to strike the right balance between pricing and volume.
Your next question comes from the line of Michael Sison with Wells Fargo.
Nice start to the year. And congrats to you, Vince, and John will be sorely missed. In terms of your outlook for the second half, Tim, how do you see volumes sort of shaping up at the midpoint? Any effects from the Iran conflict on each of the segments? And just give us your thoughts on the type of volume growth that's kind of embedded in your outlook?
Yes. Thanks, Mike. And everything, unfortunately, you kind of have the time stamp right now because it's just so fluid out there. But based on today's environment, we feel good about the second half volume. A couple of things. First of all, aerospace beat our own expectations in Q1, and we continue to see improving output there. And as you know, we're essentially sold out. So every incremental output that we get is an incremental volume for us. Second, and this is a significant one for us. We had said all along that Refinish would have positive volume in the second half; it's recovering a little earlier than we expected, and we got two really good sets of data points in U.S. collision claims rates as well as improving U.S. distributor fulfillment orders. Then on top of that, we've got the industrial segment share wins that we will continue to launch as we move through the year. And finally, Mexico, it's really recovered nicely for us. Retail is doing great. And with each passing quarter, projects get a little better. In some of our other businesses, packaging is doing great up double digits; PMC is doing well and has been doing well for a couple of quarters. We've got a good order book there. We have not seen any order book changes with the Iran conflict. Obviously, we've seen changes in feedstock pricing, but when it comes to volume and order books based on today's current environment, we have not seen any negativity in our order books.
Yes, Mike, this is Vince. Just to peel back a little on the refinish comments. Just as a reminder for everybody, in the base load we had very strong refinish activity in the first half of 2025; distributors stocked up inventory. We were well above market. The second half patterns hurt us. So we have much easier comps. We still expect muted volumes in refinish for the year, but the comparisons are why Tim said we expect growth year-over-year in the second half.
Your next question comes from the line of John Roberts with Mizuho.
And it was good to see the PPG family come together for John Bruno. And welcome, Jamie, and Vince again, thank you very much for all the good service. And good luck with the Penguins tonight. Tim, on your guidance on Slide 9, raw materials, how much higher do you think costs are going up for the smaller competitors who maybe buy raw materials through distributors? And with the dynamic pricing that's going on out there, are there gaps opening up between competitor pricing? Or is it relatively orderly and competition is generally moving up together?
John, thanks for your support of Mr. Bruno. It's really hard for me to say what our smaller competitors are seeing. But what I will say is we are getting more favorable deals and contracts and agreements because of our volume. So even though prices are going up and we're projecting basically mid-single digits here based on today's knowledge, that's on the back of our volume, our global footprint and our ability to get the best deals in the market because of our scale. So I would imagine that our smaller competitors are likely seeing higher prices on their input costs than what we're seeing on average.
Your next question comes from the line of Chris Parkinson with Wolfe Research.
Vince, a sincere congratulations. And most importantly, thank you for the life advice going back to 2015 before I was even married. And I must disagree with one of my colleagues here, go Flyers. In terms of the second half of the year, Tim, perhaps you could just give us kind of the puts and takes. Obviously, you've been very proactive in pricing, which is helpful to contemplate, but also that you could have some positive mix effects, specifically in Performance Coatings. So could you just kind of go through your thought process in terms of how you're thinking about margin in the second half, what you want to take, what you need to see or just overall?
Yes. Thanks, Chris, and thanks for your support here recently with the passing of John as well. First of all, I'm confident that we'll have positive volume in the second half. I'm confident that our net EBITDA margin will improve in the second half. And that's because of a number of things. Number one, aerospace will continue to grow, a good margin contributor. The refinish recovery that we've already talked about will have a big impact on our net margin. Mexico continuing to grow is a good contributor to our net margin. So from a mix standpoint, it's really all good news for us. And then from kind of a top line and gross margin impact standpoint, it's all those things added together, plus the launch of our Industrial segment share gains as we progress through the year — these are ones that are already locked in. So we've got a favorable mix. We've got pricing actions underway. Yes, raws will be higher, energy costs will be higher and logistics costs will be higher. But we feel good about the playbook and the actions that are in place to drive not only the price-cost offsets, but also these other PPG portfolio differentiators that will drive elevated mix and volume as we move through the second half.
And baked into our guidance, Chris, if you recall, we still have cost actions we're taking. We have several plants coming out in Europe in the second half of the year. And so that will help from a cost structure perspective.
Your next question comes from the line of David Begleiter with Deutsche Bank.
First, the best to John's family. And Vince congrats and thank you, sincerely. Tim, just on the 20% — on the price increases you've announced, how should we think about the realizations that you will realize and beyond the current spike in raws, the sustainability of these increases when and if oil prices and other input costs come down?
Yes. So thanks, David. Thanks for your support. So we announced — I announced to the world price increases up to 20% and that's because I had to notify our customers around the world that there are some products that will have to go up that much. The actual realization will be spread out depending on customer size, depending on what products they actually buy, depending on the actual cost impact of those products. So in order to offset the mid-single-digit cost of goods sold increase that we're expecting for the remainder of the year, we need to realize low single digits to offset that as a total company. And then we're ready if the situation gets worse, if we have to flex more moving through the year, we'll do more, and we'll drift our price up to mid-single digits. But right now, based on today's operating environment, net-net, we need to get solid low single digits to offset mid-single-digit COGS inflation. Now what happens if and when it comes down the other side, just like there's a lag going up, there will be a lag coming down. And also, what's yet to be determined is the impact of structural damage to petrochemical facilities in the region that may stretch out how and when things back down.
And just a reminder to everybody, in the prior cycles, in almost every business we went out for more than one price increase as the situation has developed. So again, this is not uncommon that we price for what we know today, and then we adjust as necessary.
Your next question comes from the line of Frank Mitsch with Fermium Research.
Yes, rest in peace, John. We lost a truly great one. Vince, I'm roughly calculating that this is your 80th conference call as I was wondering if you could take a moment or two and recap the highlights of each one of those conference calls and perhaps they'll put a plaque in the conference room where these conference calls are held. But my business question is free cash flow generation was negative in the first quarter as is typically the case. I was wondering how you look at the potential for free cash flow generation in 2026? And feel free to be as bold as possible so you can give Jamie a stretch target.
Frank, if you look at our cash from operations, we were up about $50 million versus the prior year. We did have elevated capital spending lower than the prior year, which was our target. So again, our cash forecast did not change versus what we gave in January. We're expecting good strong cash. We continue to focus on priorities.
Yes. Look, first of all, we were thinking about a dartboard rather than a plaque here. We expect a good proxy walking-around number for us is for our cash flow to be about 10% of our sales. And then the prioritization of that, of course, we've got a dividend that not everybody has. We'll keep that going. We've got some really good organic investments like what we're doing in aerospace, for example. We've been looking at M&A. It's not our number one priority. It's not the tip of the spear for us, but we will do deals when they make sense for our shareholders. In my 3.5 years, we've done two small bolt-ons. So we'll use that if and when the right asset comes along at the right price. But beyond that, I think we're now at 10 straight quarters of doing repurchases, and you should expect me and Vince and my new CFO to follow that same pattern.
Your next question comes from the line of Jeff Zekauskas with JPMorgan.
A two-part question. What about the present, what about the future? In the quarter, what was the currency benefit to EBIT year-over-year? You speak about getting ahead of raw material cost inflation, but you do sell to the auto OEM industry. Do you think that industry is one where you will be ahead of raw material inflation or behind it? And in your spending for aerospace that you speak about being capacity and cost constrained, at a point in time are you late a little bit because you have more capacity to be available as demand increases, or it doesn't work that way?
Yes. Jeff, we might have lost you at the tail end of your question, but I think I've got all three parts. I'll take the auto and aerospace pieces and let Vince take the currency. On auto, we all know it's the toughest of our businesses to get pricing, but we get pricing. If you look at the last cycle, we got pricing coming out of COVID and on the Texas freeze. One thing that helps with this situation is it's such an acute and well-known event and driver to inflation and petrochemical feedstock that you start from a stronger point of not having to demonstrate and explain and convince. Now that said, we also have some index contracts that will automatically move but will automatically move with some time lag. So in our guide, with run-rate normalization by the beginning of 2027, Q1 of 2027, we've got all of that factored in. Now aero, absolutely, you will see increases in output volume and therefore revenue for our aerospace business going forward. I would put it in a couple of different buckets. One, we're continuously improving output with some of these incremental debottlenecking kinds of investments that we've been making; round numbers, we've put about $150 million into those kinds of investments over the last year. And they're paying off; you'll see some improvement in late 2026 into 2027 coming out of those investments. Second, we announced a new plant to the tune of about $380 million that will be more of a step change in volume output as we get out into the 2028 time frame. The third category is we've got a lot of engineering work happening right now. We're not done with investments, and I can't get ahead of my board, but we're still working on additional investments. So you should, going forward, expect to see a nice increase in our aerospace revenue.
Yes. Jeff, the currency impact for Q1 was less than $0.10 year-over-year positive. That was included in our guide for the year and for the quarter. If you look at the balance of the year, the remaining three quarters, the total is going to be less than half of that and most of that in Q2. So again, all included in our original guide back in January.
Your next question comes from the line of Kevin McCarthy with Vertical Research Partners.
Vince, congratulations to you. Appreciate all of your help over the last 20 years or so, and you'll be greatly missed, as well Mr. Bruno, of course. My question maybe for Tim, is on the subject of M&A. I think you made a small acquisition recently in Ozark as part of Traffic Solutions. Curious about that deal. But maybe more importantly, can you put external growth into forward context for us, Tim? I think you've been quite focused on organic growth now that you have five quarters of expansion under the belt. Do you feel like you have a little bit more license to grow through M&A? Or should we expect PPG to remain highly disciplined as you have been?
Yes. Thanks, Kevin. So Ozark, I would call that an opportunistic asset. Highly synergistic for us with underlying high synergies — we paid a good price relative to what it was sold for a few years ago. Walking-around number, Kevin, about $100 million in revenue. So it's a small bolt-on, but because of the highly synergistic nature of it, it actually helps our margin position and cash generation position for that small business force of traffic solutions. So it raises its margin profile a little bit. The reason we have that in our portfolio is it's a really consistent cash generator for us that we can use to then deploy that cash on things like new aerospace plants. It's steady because it's safety and infrastructure; it's very, very stable. And so it just kind of spits off cash for us year-over-year. Those will deliver strong financial returns because of the high synergies and the relatively low purchase price. More broadly, I am very pleased with how the teams have grown that organic growth muscle. We're not done. We're pleased with five straight quarters of organic growth, and by the way, outperforming market over those five quarters. So I think we've always had a license. We've always had a strong enough balance sheet to do whatever M&A we want. But the way I think about it is, first of all, it's got to be the right asset. I'm not interested in just buying something so that I can put another plaque somewhere or paying something purely for the sake of raw material synergies. I want to buy something that adds to our future organic growth and margin profile. Second, it's got to be the right time. The last few years have not been the right time as we've been exiting some things in our portfolio and tripling down on organic growth. I think we can handle some deals now, but it still has to be at the right price because I've got some pretty good organic investment opportunities that have great financial returns. So to use your word discipline, we will continue to be disciplined, but I do think we have the right license to do selective M&A. You've seen us with two small bolt-ons this year. We actually did a productivity-related acquisition earlier in the year to help industrial refinish pipeline. So it's still not the tip of the spear for us. We will still be extremely disciplined. We will look at every asset that comes available, but it's got to be the right asset, the right time and the right price.
Your next question comes from the line of Duffie Fischer with Vertical Research Partners.
Two questions on refinish. So first, when you anniversary Q2 revenue will be down about 10%, has that done anything structurally to the margin there? Do you need to do any restructuring to reset that on a profitability basis? And then second, once we get through the snapback in the second half, should we think about that business structurally being kind of flat volumes and price of 2% to 3% going forward?
Yes. Duffie, I think you're pretty close there. As far as the go forward, it's not going to be a high-volume growth industry. But it's still a good revenue growth and EBITDA growth machine for us because of our ability to capture value for the total value that we deliver, because of the work we've been doing to expand our TAM — we're selling more into the body shops now than we ever did beyond just the coatings. When you think about digital tools, Moonwalk, Allied Products, we just have a bigger total addressable market. That's enabling us to grow. And then we've had a really good run of share gains there. As the market normalizes, this will never be our highest growth business but it will be a nice low single-digit growth business for us with really good margin and really good cash. On the first part of your question, we have not had to do massive restructuring with this decreased volume. So what you should expect instead is as things normalize in the second half, you should expect outstanding leverage because you've seen some of that negative leverage in the second half of last year. So you should expect a really nice snapback in leverage. Define snapback though: that's really a bottom-line snapback. We'll reach industry normalization; we expect to return to normal over the last several years, and normal being around a minus 1 to minus 2 industry volume. We'll do better than that because of our expanded TAM and then a really nice EBITDA machine for us.
Your next question comes from the line of James Hooper with Bernstein.
I'd like to go back to aerospace, please. We've got Europe running out of jet fuel, flight cancellations and other potential issues if the conflict continues. Can you remind us what your split of OEM and aftermarket is? And can you give a little bit of detail about how aerospace growth could be affected in flying miles or flying patterns?
Thanks, James. I'll give you the spoiler alert answer first, and then a little more detail. We see no impact of the potential slowdown in flight miles in some parts of the world in 2026. Here's why. First of all, the business is balanced roughly 50% OEM and 50% aftermarket. And then it's balanced across commercial aviation, general aviation and military. So one of those subsegments may be affected from a flight-mile standpoint, but it's one of many subsegments. Even that subsegment learned a very hard lesson coming out of COVID. The commercial customers radically depleted their inventories of aftermarket products, including a lot of what we sell, and because of the strength across the breadth of this industry, that inventory has not been rebuilt. I still get phone calls weekly about restocking and our ability to keep aftermarket parts and components in stock and rebuild. So what you should expect, if that does happen, is we would be rebuilding aftermarket inventory for some period while the other segments remain strong. I think, if anything, it could be an improved mix for us because typically aftermarket mix is a little richer than OEM mix. I watch the news like everybody, but we see really no impact here because, given what's going on in the world and NATO rebuilding defenses, the military side of the business is growing tremendously on both OEM and aftermarket as well.
Your next question comes from the line of John McNulty with BMO.
Give condolences to John's family, a great guy. And Vince, it's been a really, really great ride. So appreciate all the help. Just a quick one on the protective and marine business. I think the expectation was that we were going to see that the growth in that business moderate given the huge success you've had over the last 1.5 to 2 years, and yet you still put up high single digits. I guess, can you help us just think about what drove that stronger-than-expected volume and how we should think about that throughout the rest of 2026?
So we have been stacking lots of double-digit and high single-digit quarters for multiple years. So just by the laws of big denominators, we did expect that to come down somewhat, but we are very pleased that in Q1, we still put up high single-digit growth off a much bigger denominator. I'd say in the short term, the real strength is Asia and has been Asia, in both marine newbuild and marine aftermarket. There's a lot of protective coatings work going on around the world. There's a lot of data center work going on. We just launched and announced a comprehensive end-to-end offering for data centers. There's a lot of infrastructure work going on. So we see that business continuing to be a growth engine for us for the rest of the year and beyond because it's got strength in segments relatively unaffected by some of the macro issues affecting other places.
Your next question comes from the line of Vincent Andrews with Morgan Stanley.
Thank you Vince and my condolences for the Bruno family. John was a wonderful man. Could I ask you to talk a little bit about the Industrial Coatings margins? They came in a little bit softer than expected. You did call out Chinese mix on the auto OEM side, and I guess there was a little bit of negative price, I think, as a function of the index contracts. But can you just help us understand why the margin contraction was so great and how to think about it through the balance of the year?
So Vincent, you nailed it. The biggest impact was China auto. As predicted, it was down significantly. I think it was down well into the double digits as far as China auto builds for the quarter. We outperformed that a bit because of some of our wins, but it was still down significantly. That business is a very good operating margin contributor for us. Because if you think about it, one out of every three cars in the world is built in China, so the scale and the leverage is stronger on the upside when production is high, but the negative also happened. The second factor is that even though we've been talking about raw material increases recently, we were still rolling off some index contracts from the deflationary cycle, mostly in our automotive and our packaging businesses, which are both in the Industrial segment. We should be wrapping up the roll-off of those in Q2. Those are really the drivers: number one, automotive OEM builds in China; and number two, index contracts.
And just to add some more color on China auto builds: last year was a very, very strong quarter for the industry and for PPG. This year, the reverse. On a two-year stack basis, we're almost flat in China. So again, the comp issue is really what we're dealing with.
Your next question comes from the line of Josh Spector with UBS.
My congratulations to Jamie and condolences to John's family. He'll be sorely missed. I did want to ask on pricing and surcharges specifically. How much are you using surcharges this cycle versus prior years? And then similarly, on auto OEM, have contract structures changed to allow that? Or has the cycle of recovery become a lot faster in that part of the business?
Yes, Josh. We are using surcharges in some of our businesses more this time because freight costs are up, right? Most of our contracts and even non-contractual businesses we're typically talking about raw materials, but we've got two additional ones that don't get as much attention but are significant contributors: logistics cost because of diesel fuel, and European energy costs because of what's going on. So in those two specific areas, we're using surcharges more than we typically have. Beyond that, it's largely been our typical price increase, which we prefer because they're stickier. On the auto question, most of the auto contracts are designed around raw material inflation, less so around freight and energy. But those are discussions that we should have with our customers, and we've started those discussions. More to come there. But most of the index contracts that we have in auto and packaging are pretty much limited to raw materials.
Your next question comes from the line of Matthew DeYoe with Bank of America.
Yes, just echo what everybody has been saying, Vince, congrats on a great career. And clearly, the sentiment on John — he was such a core salt-of-the-earth guy. I wanted to ask on the OEM side in China. There's often discussions in the market about Chinese competition or China moving downstream — coatings is one area where I feel like maybe there's roadblocks to how far China can compete globally. In that market, are you seeing better competition? Are there pushes to adopt local suppliers for the auto companies?
There's no doubt that the China automotive OEM industry has gone through an absolutely radical transformation in the last couple of years with Western joint ventures dramatically shrinking and domestic Chinese OEMs dramatically increasing. There's also no question that those Chinese domestics have worked hard to get Chinese supplier content on the vehicles. But thus far that has largely been on hard parts and rigid parts that the Chinese companies can produce. When it comes to automotive coatings in China, there is already more competition than in the past because you've got the traditional global players plus the Japanese and Korean players. But the finished film on a vehicle is very hard to duplicate and reverse engineer all the way back to resin formulation, which is really the backbone of automotive OEM coatings. So that gives automotive OEM coatings some protection. We produce the secret sauce outside of China and ship it into China. The coatings and the final film on the vehicle, because of the transformation that happens in application and curing, is different than the mixed chemicals. It gives a buffer of protection for automotive OEM coatings versus other automotive parts.
Your next question comes from the line of Laurent Favre with BNP.
I'd like to come back to the mid-single-digit inflation point, please. We're seeing energy, solvent and lots of spot prices on upstream chemicals that are more than 50%, sometimes 100%. I understand you don't buy products that are just out of the cracker, but still, I'm wondering how it's only mid-single-digits. Are those spot numbers not coming through in actual contract negotiations? Or are the resin and additives producers being squeezed? Or is it that you have contract protection for the rest of the year, but then you will see further inflation into 2027?
Thanks, Laurent. A couple of comments on that. Of course, our suppliers are seeing that energy impact, mostly in Europe. We've got that built into our mid-single-digit overall COGS inflation estimate. The second piece of energy is logistics costs, and we've got that built in there as well. So we've accounted for what you're describing based on our best estimate of today's operating environment. We're absolutely seeing the spot moves you described, but we have contracts and negotiated agreements that moderate the direct impact to us in the near term.
Laurent, as you're fully aware, most large coating companies do not pay anything close to spot, especially when you have commodity inflation spikes. So we're contracted and negotiated for most of our raw material supply, not only for the quarter but for the full year.
One final comment on that question and more broadly on raw material inflation: one big difference between this cycle and the cycle coming out of COVID, which was a combination of post-COVID recovery and the deep Texas freeze, is that at that time coatings industry volumes were very high and many coating companies could not keep up with customer demand. That is a significant difference when it comes to what a large coatings company sees versus what's happening upstream. Supply-demand economics still matter, and that's a big differentiator between this cycle and the last cycle.
Your next question comes from the line of Patrick Cunningham with Citi.
I'd like to echo my deepest condolences to John's family and the PPG family and thank you to Vince for your partnership over the last few years. For Architectural EMEA, you mentioned closing four manufacturing plants in the second half. Could you quantify the fixed cost savings there and the cost to deliver? And then more broadly, how are you thinking about the long-term strategic value for the business?
Yes. Four plants — a good walking-around number for you is that you'll see the savings in 2027, but a good round number is about a $25 million reduction in our fixed cost base from the closure of those four plants, and that will go on in perpetuity for us. In total, you'll see about $50 million of structural restructuring benefits for our company this year and another $50 million next year, with $25 million of that $50 million being tied to these four plants. That's not the only fixed cost reduction initiative. We've got some restructuring and some back-office people costs being reduced. We've got a lot of formula optimization work as well. The value of this business is that even when markets are flat, this business delivers really good earnings and really good cash to us. That's the role of the business in the portfolio. We're constantly evaluating each of our businesses' mission and how they're performing relative to that mission. We're not waiting for a European recovery; we're building a business that can perform well at flat volumes.
There are no further questions at this time. I would now like to turn the call back over to Alex for closing remarks.
Thank you, Tracy. We appreciate your interest and confidence in PPG. This concludes our first quarter earnings call.
This does conclude today's call. Thank you all for attending. You may now disconnect.