Good morning. My name is Tracy, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2026 PPG earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. To allow everyone the opportunity to ask a question, the company requests that each analyst ask only 1 question. Thank you. I would now like to turn the conference over to Alejandro Lopez, Director of Investor Relations. Please go ahead, sir.
Thank you, Tracy, and good morning, everyone. This is Alejandro 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 close 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 Q&A session. Both the prepared commentary and discussion during this call may contain forward-looking statements reflecting the company's current view of future events and their potential effect on PPG's operating and financial performance.
These statements involve uncertainties and risks which may cause actual results to differ. The company is under no obligation to provide subsequent updates to these forward-looking statements. The presentation also contains certain non-GAAP financial measures. The company has provided in the appendix of the presentation materials, which are available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information, please refer to PPG's filing with the SEC. Let me introduce PPG Chairman and CEO, Tim Knavish.
Thank you, Alex, good morning, everyone, and welcome to our first quarter 2026 earnings call. Before I begin today's call, I wanna take a moment to remember our dear friend and colleague, John Bruno. His passing last week is a tremendous loss. John was not only an exceptional contributor to our company, but a wonderful husband, father, and friend whose leadership, intellect, compassion, and humor touched everyone who knew him. Thank you to the many of you that reached out. It meant a lot to us here at PPG, but more importantly, meant a lot to his family. Now, I'd like to start by providing highlights of our first quarter 2026 financial performance, and then I will share our outlook.
I am pleased to report that PPG delivered solid performance in the first quarter, demonstrating our ability to maintain growth momentum in a challenging macro environment, led by our differentiated aerospace and PPG Comex businesses. We achieved organic sales growth of positive 1%, marking our fifth consecutive quarter of higher year-over-year organic sales. This growth was driven by higher selling prices with further selling prices increased announced, and expected price realization for the remainder of the year targeted to offset any inflationary impact much more quickly than prior inflation cycles. First quarter net sales totaled $3.9 billion, up 7% year-over-year, with adjusted earnings per share of $1.83 and an increase of 6% versus the prior year.
Our segment EBITDA margin was over 19%, reflecting solid execution of our share gains, the benefits of our technology advantage products, strong brand recognition, along with excellent commercial execution. Turning to our segment performance in Global Architectural Coatings, first quarter net sales rose 13% 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. We continue to reduce our overall structural costs in our architectural business in Europe, and we have four manufacturing plants that will be closed in the second half of 2026, resulting in lower fixed costs going forward. Our Performance 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 % 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 3 out of the last 4 months with low single-digit declines year-over-year, reinforcing a normalization trend after the high single-digit to double-digit declines most of last year. Another positive data point, we are seeing our U.S. distributor fulfillment orders sequentially improve as industry levels or 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. The investments that we are making in aerospace to support our customers' demand have resulted in improved productivity and improved output. We are well-positioned to deliver consistent growth in this key end market for the next several years. I would like to again emphasize the important and sizable role that our aerospace business plays as a key growth engine for our company. Demand is expected to remain strong given our highly specialized and qualified products for both the OEM and aftermarket channels. Our backlog remains at about $350 million despite year-over-year output increasing.
The PPG aerospace business provides unique technology advantage 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're 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 are a customized gasket solution that offers superior quality and increased customer productivity solutions. Moving to the Industrial Coatings segment, 1st 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 realized the benefit of 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 2025 was very strong and first quarter of 2026 was tepid. Expectations for China industry comparisons are to improve in the coming quarters. For PPG, due to our strong product portfolio and commercial execution, we expect to continue outgrowing the market in the second quarter and for the full year in 2026. Organic sales for our Industrial Coatings business were down a low single-digit % 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 % 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 am 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 % on 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 and our architectural coatings Mexico business, where demand has been strong. Additionally, industry demand in automotive refinish has been recovering faster than we initially expected. 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. 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 Coatings segments, with all three segments having improved pricing versus the first quarter. This will result in organic sales growth for the second quarter in the range of flat to positive low single digits versus the prior year.
Given our ability to outperform the macro through our commercial momentum, combined with our pricing realization and self-help actions, we expect to deliver adjusted earnings per share growth in the range of flat to a positive low single-digit percentage for the second quarter versus the prior year period. We are confident in our strategy and the strength of our portfolio 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 re-retirement on this, his final PPG earnings call. Thank you, Vince, for more than 40 years with PPG.
Thank you for being a great contributor to our company, a driver of results, a driver of shareholder value, a great mentor to many talents, a great teammate to our operating committee, a great partner to the last three CEOs, and a great friend to me. Thank you, Vince. As PPG makes the CFO transition, we are delighted to welcome Jamie Beggs as our new Chief Financial Officer. With her extensive background in 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. Operator, please open the line for questions.
Thank you. At this time, I would like to remind everyone that in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Ghansham Panjabi with Baird. Your line is open. Please go ahead.
Thank you, operator. Our best to you, Vince, and our best to very best for John's family as well. I guess, Tim, you know, first off, on your comments on price cost recovery will be much faster than prior periods. Can you just outline some of the specific changes you've made to support that? Related to that, you've been very calibrated in the past with pricing and, you know, with previous inflation cycles to kind of maintain your market share, et cetera. Do you expect volumes to hold this go around as well, just given the near 20% increases you've implemented thus far? Thank you.
Yeah, 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, right? We have tremendous tremendous momentum from an organic growth standpoint that will help as we move forward with price increases. If you compare the last couple of cycles, you know, the pre-COVID cycle of 2017, 2018 took us about a year and a half to get to run rate neutrality. The 2021 cycle, which was the, you know, the post-COVID combined with the Texas freeze took us about a year. Now we're talking months. It's a combination of two things, Ghansham. Number one, we've always had a good pricing muscle, with each cycle we refine that.
We learn, we get better, we get faster. From a volume standpoint, we're combining it with, you know, positive momentum on the organic growth muscle that we're, that we've been building and demonstrating results through these last five quarters or so. You know, we're confident that we're gonna be able to strike the right balance between pricing and volume.
Your next question comes from the line of Michael Sison with Wells Fargo. Your line is open. Please go ahead.
Hey, guys. Nice start to the year and congrats to you, Vince, and you know, John will be sorely missed. In terms of your outlook for the second half, Tim, how do you see volumes sort of shaping up sort of at the midpoint? Any effects from, you know, from the Iran conflict on each of the segments? Just give us your thoughts on, you know, the, you know, the type of volume growth that could be that's kind of embedded in your outlook.
Thanks, Mike. You know, in everything, unfortunately, you kind of have to timestamp right now because it's just so fluid out there, right? 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. As you know, we're essentially sold out, so every incremental output that we get is an incremental volume for us. Second, this is a significant one for us, you know, we had said all along that Refinish would have positive volume in the second half.
It's recovering a little earlier than we expected, and we got two really good sets of data points in U.S. collision claims rates as well as improving U.S. distributor order fulfillment orders. On top of that, we've got the Industrial Coatings segment share wins that we will continue to launch as we move through the year. You know, finally, Mexico, you know, has really recovered nicely for us. Retail's doing great, and with each passing quarter, projects get a little better. In some of our other businesses, you know, packaging coatings doing great, up double digits. PMC is doing, you know, is doing well and has been doing well for a couple of quarters. We've got a good order book there.
We have not seen any order book changes with the Iran conflict. Obviously, we've seen change in feedstock pricing, but when it comes to volume and order books, based on today's current environment, we have not seen any negativity in our order books.
Yeah, Michael Sison, this is Vince Morales. Just to peel the onion 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, the patterns hurt us, so we have much easier comps, so we still expect muted volumes in refinish for the year. The comparisons are why Tim Knavish said we expect growth year-over-year in the second half.
Your next question comes from the line of John Roberts with Mizuho. Your line is open. Please go ahead.
Thanks. It was good to see the PPG family come together for John Bruno. Welcome, Jamie and Vince again. Thank you very much for all the good service. Good luck with the Penguins tonight.
Yes.
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? With the dynamic pricing that's going on out there, are there gaps opening up between competitor pricing or is it relatively orderly and competition is generally moving up together?
Hey, John, you know, thanks for your support of Mr. Bruno. It's really hard for me to say what our smaller competitors are seeing. What I will say is, we are, you know, we are getting more favorable deals and contracts and agreements because of our volume, right? Even though prices are going up and we're projecting, you know, 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, you know, the best deals in the market because of our scale. I would imagine that our smaller competitors are likely seeing higher prices than what we're seeing on the input costs.
Your next question comes from the line of Christopher Parkinson with Wolfe Research. Your line is open. Please go ahead.
Great. Thank you so much. Vince, a sincere congratulations, and most importantly, thank you for the life advice going back to 2015 before I was even married. I must disagree with one of my colleagues here, go Flyers. In terms of the second half of the year, sorry, that was in honor of our friend. 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 in terms of those dynamics, which is, you know, helpful in terms of us to contemplate, but also that you could have some positive mix effects, specifically in PC. Can you just kind of go through your thought process in terms of, you know, how you're thinking about margin in the second half, what you want to see, what you need to see, or just overall? Thank you.
Yeah. Hey, 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. That's because of a number of things. Number one, aerospace will continue to grow, good margin contributor. You know, refinish recovery that we've already talked about, a big impact on our net margin. You know, Mexico continuing to grow, that's a good contributor to our net margin. From a mix standpoint, it's really all good news for us, right?
From a kind of a top line and gross margin impacts standpoint, it's all those three things added together, plus the launch of our Industrial segment, share gains. These are ones that are already locked in. 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. We feel good about the playbook and the actions that are in place to drive not only the price cost side of the offsets, but also these other really PPG portfolio differentiators that will drive elevated mix and volume as we move through the second half.
Yeah, 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. That'll help from a cost structure perspective.
Your next question. Comes from the line of David Begleiter with Deutsche Bank. Your line is open.
Good morning. Thank you. Good morning. First, the best to John's family. Vince, congrats and thank you sincerely. Tim, just on the 20%, on the price increases what 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 fees, input costs come down? Thank you.
Thanks, David. Thanks for your support. We announced, I announced to the world price increases up to 20%, and that's because I had to notify our customers around the world that there are some products that will have to go up that much, right? The actual realization will be spread out, dependent on customer size, dependent on what products they actually buy, dependent on the actual cost impact of those products. 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.
Then, you know, we're ready if the situation gets worse, if we have to flex more moving through the year, we will, you know, we'll do more, and we'll drift our price up to mid-single digits. Right now, based on, based on today's operating environment, net-net, we need to get solid low single digits to offset mid-single digit COGS inflation. What happens if and when it comes down the other side? You know, just like there's a lag going up, there'll be a lag coming down. Also, what's yet to be determined, Dave, is, you know, what's the impact of the structural damage to petrochem facilities in the region, that may stretch out, you know, when, how and when things come back down.
Just a reminder to everybody, in the prior cycles, in almost every business, we went out for more than one price increase as the situations developed. 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. Your line is open. Please go ahead.
Thank you. Yes, rest in peace, John. We lost a truly great one. Hey, Vince, I'm roughly calculating that this is your 80th roughly 80th conference call as IR or CFO. I was wondering if you could take a moment or two and recap the highlights of each one of those conference calls. Perhaps they'll put a plaque in the conference room where these conference calls are held. My business question is, you know, free cash flow generation was negative in the first quarter, as is typically the case. I was wondering how you look at the potentials for free cash flow generation in 2026. Feel free to be as bold as possible so you can give Jamie a stretch target. Thank you.
Thank you, Frank. If you look at our cash from ops, 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. Again, our cash forecasts do not change versus what we gave in January. We're expecting a good, strong cash year. You can talk about the priorities.
Yeah. Yeah. Look, you know, first of all, we were thinking about a dartboard rather than a plaque here, Frank. You know, we expect a good proxy walking around number for us is for our cash flow to be about 10% of our sales, right? The prioritization of that, of course, we 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. You know, we've been looking at M&A. It's not our number one priority. It's not the tip of the spear for us. We, you know, we will do deals when they make sense for our shareholders.
You know, in my three and a half years, we've done two small bolt-ons. We'll use that when and if the right asset comes along at the right price. Beyond that, I think we're now at 10 straight quarters of doing repo. You know, you should expect me and Vince and my new CFO to follow that same pattern.
Your next question comes from the line of Jeff Zekauskas with J.P. Morgan. Your line is open. Please go ahead.
Thanks very much. A two-part question. One about the present, one about the future. In the quarter, what was the currency benefit to EBIT year-over-year? You speak about getting ahead of raw material cost inflation, but you know, you do sell to the auto OEM industry. Do you think that that's an industry area where you will be ahead of raw material cost inflation or behind? In your spending for aerospace, you speak about being capacity constrained. At a point in time, should your volume growth rate elevate because you have more capacity available as a base case, or it doesn't work that way?
Yeah. Jeff, we might have lost you at the tail end of your question, but I think I got all three parts of them. I'll take auto. Oh, go ahead, Jeff, please. Yeah, you're very choppy, Jeff. We lost you at the end.
what I try-
Yeah. Go ahead, please.
Just try to answer the questions. We'll go from there.
Okay. Thank you, Jeff. I'm gonna take the two, and I'll let Vince take the currency one. On auto, I mean, look, we all know it's the, you know, the toughest of our businesses to get pricing. We get pricing. If you look at the last cycle, we got pricing coming out of COVID and on the Texas freeze. One thing that helps with this situation actually, Jeff, is it's such an acute and well-known event and driver to inflation and petrochem feedstocks that, you know, you start from a stronger point of not having to demonstrate and explain and convince. That said, as you know, we also have some index contracts that will automatically move, but will automatically move with some time lag.
In our guide, in our, you know, normalization by Q1 run rate normalization by the beginning of 2027, Q1 of 2027, we've got all of that factored in. Okay. 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 over the last year or so, we've put about $150 million into those kind of investments. They're paying off as we go. 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 like the 2028 timeframe. The third category, Jeff, is we've got a lot of engineering work happening right now. We're not done with investments and, you know, I can't get ahead of my board or anything, but we're still working on additional investments. You should, going forward, expect to see, you know, a nice increase in our aerospace revenue. Vince, you wanna take the currency?
Yeah. Yeah, 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, so the remaining 3 quarters, the total's gonna be less than half of that, and most of that in Q2. Again, all included in our original guide back in January.
Your next question. Comes from the line of Kevin McCarthy. With Vertical Research Partners. Your line is open. Please go ahead.
Yes, thank you, and good morning. Vince, congratulations to you. Appreciate all of your help over the last 20 years or so, and you'll be greatly missed, as will Mr. Bruno, of course. My question, maybe for Tim, is on the subject of M&A. I think you made a small acquisition recently in Ozark as part of Traffic Solutions. Curious about that deal, but maybe more importantly, can you put external growth into forward context for us, Tim? I think you've been quite focused on organic growth. Now that you have 5 quarters of expansion under the belt, do you feel like you have a little bit more license to grow externally? Or, should we expect PPG to remain highly disciplined as you have been every single quarter?
Hey, thanks, Kevin. Ozark, you know, I would call that an opportunistic asset. Highly synergistic for us with double underline under highly. You know, we got a good price relative to what it was sold for a number a few years, just a few years ago. You know, walking around number, Kevin, about $100 million in revenue. It's a small bolt-on, what it does because of the highly synergistic nature of it is it actually helps our margin position and cash generation position for that small business for us of Traffic Solutions. 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 stable, it just kind of spits off cash for us year over year. Now with Ozark Materials, it'll deliver great financial returns for us and our shareholders because of the high synergies and the relatively low purchase price. Now, more broadly, I am very pleased with how the teams have grown that organic growth muscle.
You know, Kevin, I remember some of our conversations 4 or 5 years ago and, so we're, you know, we're not done, but we're pleased with 5 straight quarters of organic growth and, by the way, outperforming market over those 5 quarters. I think we've always had a license. We've always had a strong enough balance sheet to do whatever M&A we want. The way I think about it is, first of all, it's got to be the right asset. I'm not interested in just buying something so that I can put another flag somewhere or buying something purely for the sake of raw material synergies. I want to buy something that adds to our future organic growth and margin profile. Second, it's got to be the right time.
The last few years has not been the right time as we've been, you know, first of all, exiting some things in our portfolio and tripling down on organic growth. I think we can handle some deals now, but it still has to be at the right price because I've got some pretty darn good organic investment opportunities that have great financial returns. I'm really, you know, to use your word, disciplined. 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 2 small bolt-ons this year. We actually did a, you know, kind of a productivity outside the can allied products acquisition earlier in the year to help industrial refinish type lines. 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. It's gotta meet the right asset, the right time, and the right price.
Your next question. Comes from the line of Duffy Fischer with Vertical Research Partners. Your line is open. Please go ahead.
Great. Good morning, guys. Two questions on refinish. 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? Second, you know, once we get through the snapback in the second half, should we think about that business structurally being kind of flat volumes and price up 2%-3% going forward?
Yeah. Hey, Duffy. I think you're pretty close there. We don't as far as the go forward, right? The go forward, it's not a, it's not gonna be a high volume growth industry. It's still a good revenue growth and EBITDA growth machine for us because of our ability to capture value for the total value that we deliver because of the work we've been doing to expand our TAM, right? We're selling more into the body shops now than we ever did beyond just the coatings, right? When you think about digital tools, MoonWalk, allied products, we just have a bigger target TAM that's enabling us to grow. We've had a really good run of share gains there.
As the market normalizes, this will be Well, it'll never be our highest growth business, but this will be a nice low single digits growth business for us with really good margin and really good cash. To the first part of your question, you know, we have not had to do massive restructuring with this decreased volume. What you should expect instead is as things normalize in the second half, you should expect outstanding leverage because you've seen some of that negative leverage in the second half of last year, right?
You should expect a really nice snapback in margin leverage. To define snapback though, that's really a bottom line snapback. This industry we expect to return to normal over the last X number of years, and normal being a -1, -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. Your line is open. Please go ahead.
Morning. Thank you very much for taking my question. I'd like to go back to Aerospace, please. We've got Europe running out of jet fuel, flight cancellations and other potential issues if the conflict continues. Can you remind us what your split of OEM and aftermarket is? Can you give a little bit of detail about how Aerospace growth could be affected if flying hours are tearing down throughout this year? Thanks.
Thanks, James. I'll give you the spoiler alert answer first, and then I'll give you a little more details. We see no impact of the potential slowdown in flight miles in some parts of the world in 2026. Now here's why. First of all, the business is balanced roughly 50% OEM, 50% aftermarket. Then it's balanced across commercial aviation, general aviation and military. Kind of one of those sub-segments may be affected from a flight mile standpoint, but it's one of many sub-segments. Then even that sub-segment has learned a very hard lesson coming out of COVID. What the commercial customers did is they radically depleted their inventories of aftermarket products, including a lot of what we sell.
Because of the strength across the breadth of this industry, that has never been able to be rebuilt. I still get phone calls like literally weekly about restocking and our ability to keep aftermarket parts and components in stock and rebuilt. What you should expect if that does happen, I think we would be rebuilding aftermarket inventory for some time period while the, all the other segments that I mentioned remain red hot. You know, I think if anything, it could be an improved mix for us because typically your aftermarket mix is a little richer than your OEM mix. I watch the news like everybody does. I see the impacts, and I see my customer CEOs talking about this on the news.
We see really no impact here because don't forget, because of what's going on in the world here and, you know, the NATO rebuilding their own defenses, the military side of the business growing tremendously on both OE and aftermarket as well. Okay. Thank you.
Your next question comes from the line of John McNulty with BMO. Your line is open. Please go ahead.
Condolences to John's family. Great guy. Vince, it's been a really great ride. Appreciate all the help. Just a quick one on the Protective and Marine Coatings business. I think the expectation was that we were going to see that the growth in that business moderate just given, you know, the huge success you've had over the last year and a half or two in that. Yet you still put up high single digits. I guess, can you help us to think about what drove that presumably stronger than expected volume and how we should think about that throughout the rest of 2026?
We have been stacking like lots of double digit and high single digit quarters for multiple years. So just by the laws of big denominators, we did expect that to come down somewhat. We are very pleased that in Q1 we still put up high single digit growth off of a much bigger denominator. I'd say in the short term, the real strength is Asia, and has been Asia, and both marine new build and marine aftermarket have been stronger. You know, look, there's a lot of protective coatings work going on around the world. There's a lot of data center work going on around the world. We just launched and announced a comprehensive end-to-end offering for data centers.
There's a lot of infrastructure work going on. You know, we see that business continuing to be a growth engine for us for the rest of 2026, and frankly beyond. Because it's got some strength in some segments that are relatively unaffected by some of the macro issues that are affecting other places.
Your next question comes from the line of Vincent Andrews with Morgan Stanley. Your line is open. Please go ahead.
Good morning, and congrats, and thank you to Vince Morales, and my condolences of course to the Bruno family. John Bruno 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 Automotive OEM Coatings side, and I guess there was a little bit of negative price, I think as a function of the index contracts. Can you just help us understand why the margin contraction was so great, and how to think about it through the balance of the year? Thank you.
Vincent, you could've answered the question for me, 'cause you nailed it, right? Let me just give a little more color to it. The biggest impact was China auto. As predicted, it was gonna be down, I think it ended, was down well into the double digits as far as China auto builds for the quarter. That, you know, we outperformed that a bit because of some of our wins, but it was still down significantly. That is, that's a really good operating margin business for us because if you think about it, one out of every three cars in the world is built in China. The scale and the leverage is stronger on the upside when things are being produced in China, but the negative also happens.
That was the biggest. The second was, you know, even though we're all, we're talking, constantly over these last two months about raw material increases, you know, we were still rolling off some index contracts from, you know, the deflationary cycle, mostly in our Automotive and our Packaging businesses, which are both in Industrial Coatings segment. We should be wrapping up the roll-off of those in Q2. We've got a few more that have to roll off, but that's really been the drivers. Number one, Automotive OEM builds in China, and number two, index contracts.
Just to add some more color on China auto builds. Last year, as Tim mentioned, very, very strong quarter for the industry, for PPG. This year was the reverse. On a two-year stack basis, we're almost flat in China. Again, we had the comp issue is really what we're dealing with.
Your next question comes from the line of Joshua Spector with UBS. Your line is open. Please go ahead.
Yeah. Good morning. Echo my congratulations to Vince and Jamie, and of course my condolences to John's family. He'll be sorely missed. I did want to ask on pricing and surcharges specifically, you know, how much are you using surcharges this cycle versus prior years? Then kind of similar again on auto OEM, have contract structures changed to allow that? Or has the cycle of recovery become a lot faster in that part of the business? Thanks.
Josh, you know, we are using surcharges in some of our businesses more this time because freight costs are up, right? Whereas most of our contracts and even non-contractual businesses, you know, we're typically talking about raw materials, but we've got two additional ones that don't get as much attention, but are pretty significant to that MSD contributor, and that's logistics costs 'cause of diesel fuel and European energy costs because of what's going on. I'd say in those two specific areas we're using surcharges more than we typically have. Beyond that, it's largely been our typical price increase, which we prefer. They're stickier.
Again, on the auto question, most of the auto contracts are designed around raw material inflation, less so around, you know, freight and energy. You know, those are discussions that we should have with our customers first, and we've started those discussions, so, more to come there. 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. Your line is open. Please go ahead.
Morning. Yeah, just echo what everybody's been kind of saying. You know, Vince, congrats on a great career, and clearly, you know the sentiment on John. He was just such a core salt of the earth guy. Yeah, it's a huge loss. I wanted to ask on the OEM side in China, there's often discussions in the market around, you know, Chinese competition or China moving downstream. Coatings is one area where I feel like maybe there's, you know, 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? On the refinish side, I mean. Well, I'll just stop there.
Oh
I'll let you go first.
Okay. Thanks. There's no doubt that the China automotive OEM industry has gone through an absolutely radical transformation in the last 2 years with the Western JVs, you know, dramatically shrinking and the China domestics dramatically increasing. There's also no question, Matthew, that those Chinese domestics have worked hard to get Chinese supplier content on the vehicles. I would say thus far, that has all been on what's called hard parts, rigid parts, widgets that the Chinese companies can produce. When it comes to automotive coatings in China, there's already more competition than the rest of the world because you've got the traditional 3, plus you've got 2 Japanese players and 1 Korean player.
You know, the finished film on a vehicle is very hard to duplicate, very hard to reverse engineer all the way back to resin formulation, which is really the backbone of Automotive OEM Coatings. That gives Automotive OEM Coatings some protection. I don't know what my peers do, but I know we produce the secret sauce outside of China and ship it into China. The coatings, by nature of you're buying kind of mixed chemicals, and the end product is a finished film on the vehicles, which, because of the transformation that happens in the application and curing process, is different than the mixed chemicals. It does give a nice buffer of protection for Automotive OEM Coatings versus other automotive parts.
Your next question comes from the line of Laurent Favre with BNP. Your line is open.
Yeah. Good morning.
Please go ahead.
Morning. I'd like to come back to the MSD inflation point, please. I mean, we're seeing energy solvents, lots of spot prices on upstream chemicals at more than 50%, sometimes 100%. I understand you guys don't buy products that are just out of the cracker. Still, I'm wondering how it's only MSD, are those spot numbers not coming through in actual contract negotiations? Are the intermediate guys producing resins and additives being squeezed? Is it that you have contract protection for the rest of the year, but then you will see further inflation into 2027?
Thanks, Laurent. I'd say two comments on that. Of course, you know, our suppliers are seeing that energy impact, you know, mostly in Europe. We've got that built into that blue box of mid-single digits overall cost of goods sold inflation. Then the second piece of energy is logistics cost, and we've got that built in there as well. We have all of that. Everything that's, you know, you gotta timestamp it based on our best estimates of today's operating environment. We've got that all built into our guide.
Yeah, Laurent, as you're fully aware, most large coating companies do not pay anything close to spot, especially when you have commodity inflation spikes. We're contracted, and we are negotiated through most of our raw material supply, not only for the quarter, but for the full year.
One final comment I'll make, really, Laurent, on your question, even more broadly on the whole raw material and total inflation. One big difference between this cycle and the cycle coming out of COVID, which was a combination of post-COVID recovery and the deep Texas freeze. At that time, you'll recall that coatings industry volumes were very high. A lot of coatings companies could not keep up with customer demand. That is a significant difference when it comes to what does a coatings company see, particularly a large coatings company see, versus what is being seen upstream. Supply-demand economics still matter, that's a big differentiator between this cycle and the last cycle.
Your next question comes from the line of Patrick Cunningham with Citi. Your line is open. Please go ahead.
Hi. Good morning. I'd like to echo my deepest condolences to John's family and the PPG family, and thank you to Vince for your partnership over the last 2 years. For Architectural EMEA, I think you mentioned closing 4 manufacturing plants in the second half. Could you quantify the fixed cost savings there and cost to deliver? Then maybe more broadly, you know, how you are thinking of the long-term strategic value for the business?
Yeah. Are you there, Patrick? We lost you a little bit.
Well, I'll just try again. For Architectural EMEA, you mentioned closing plants.
Yep, yep.
And then-
Okay, I got it.
... and then the long-term, long-term strategic value.
Yeah, 4 plants. Here's a good walking around number for you. You'll see this savings in 2027. A good walking around number is about a $25 million reduction in our fixed cost base from the closure of those 4 plants, and that'll go on in, you know, in perpetuity for us. In total, you'll see about a $50 million structural restructuring benefits for our company this year. You'll see another $50 next year, with $25 of that $50 being tied to these 4 plants. That's not the only, you know, kind of fixed cost reduction initiative. We've got some restructuring, some back office people costs being reduced. We've got a lot of formula optimization costs going over there as well.
The value to this business when markets are even flat, this business delivers really good earnings and really good cash to us. That's the value in the portfolio. We have, over the last couple of months, seen a little better volume. We had a good March in Architectural Europe. As you think about this market getting to flat volume, and the mission of this business in our portfolio is to spit off good earnings and good cash so that I can deploy that in some of our higher growth, higher technology businesses. You know, we're constantly evaluating each of our businesses' mission and how they're performing to that mission in our portfolio. That's how we're viewing it today. You know, we're not waiting. We're not sitting around hoping and waiting for a European recovery. We're building a business that can perform well at flat volume.
There are no further questions at this time. I would now like to turn the call back over to Alex for closing remarks.
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.