Q1 2021 PPG Industries Inc Earnings Call
Good morning, My name is Jerome and I will be your conference operator today at this.
This time I would like to welcome everyone to the P. P. G industries first quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simple.
And part followed by the number one on your telephone keypad. If you would like to withdraw your question press the pound key.
Allow everyone an opportunity to ask a question the company requested each analyst ask only one question and if necessary and specific follow up to that question. Thank you I would like to turn the conference over to John Bruno Investor Relations. Please go head.
Thank you Jerome and good morning, everyone. Once again this is John Bruno we appreciate your continued interest in PPG and welcome you to our first quarter 2021 financial results Conference call. Joining me on the call from PPG are Michael Mcgarry, Chairman and Chief Executive Officer, and Vince Morales, Senior Vice President and Chief Financial Officer.
Our comments relate to the financial information released after U S equity markets closed on Thursday April 15th 2021, we posted detailed commentary and accompanying presentation slides on the Investor Center of our website PPG dotcom and <unk>.
Slides are also available on the website for this call and provide additional support to the brief opening comments Michael will make shortly following management's perspective on the company's results for the quarter, we will move to a Q&A session. Both 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. This presentation also contains certain non-GAAP financial measures. The company has provided in the <unk>.
<unk> of the presentation materials, which are available on our website reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures for additional information. Please refer to Ppg's filings with the SEC now, let me introduce PPG, chairman and CEO Michael Mcgarry.
Thank you John and good morning, everyone.
I would like to welcome everyone to our first quarter 2021 earnings call.
But most importantly, I hope you and your loved ones are remaining safe and healthy.
Now let me provide some comments to supplement the detailed financial results, we released last evening.
For the first quarter, our net sales were a record and were about $3 $9 billion and our adjusted earnings per diluted share from continuing operations were also a record at $1 and 88.
Our adjusted EPS was significantly higher than the first quarter of 2020, partially due to last year's first quarter being impacted by various pandemic related impacts.
We will also be comparing various financial metrics versus pre pandemic results and this comparison and whereas nearly equally impressive with adjusted EPS of 27% higher than the pre Covid first quarter results of 2019.
This excellent operating performance was driven by strong year over year sales growth and our industrial coatings reporting segment with the automotive OEM and general industrial and packaging and coatings businesses, all delivering double digit percentage year over year sales growth.
Global architectural coatings business continued their strong sales growth trends.
And automotive refinish had a strong quarter as activity and that end use market is beginning to recover and we were partially aided by some customer restocking and the U S.
First quarter segment margins were at a multiyear high as we benefited from strong operating margin leverage on higher year over year net sales growth the significant amount of cost savings. We have achieved in the past two years from our restructuring programs and as a primary factor contributing to us realizing this increased leverage.
We delivered these outstanding results despite sales volumes not fully returning to pre pandemic levels.
And including in several key PPG businesses, such as aerospace.
In addition, we experience a significant acceleration and raw material and logistics cost inflation during the quarter.
Coming into the year, we were expected and inflationary environment and had prioritized selling price increases across all of our businesses.
This has helped us achieve solid price increases year to date.
And with the higher inflation backdrop, we have already secured further selling price increases and our and the process of executing additional ones during the second quarter.
As a reminder, the first quarter of 2021, whereas our 16th consecutive quarter of higher selling prices.
We also continue to execute on our cost savings programs, realizing an incremental $35 million of structural savings and maintain our target of $125 million of total savings for the full year 2021.
In addition, we retained about $30 million of interim cost savings during the quarter and remain confident that we'll be able to make at least $80 million of these interim cost savings and permanent for the full year 2021.
We ended the first quarter with about $1 $9 billion and cash and cash equivalents.
This is a gross step cash balance as we were preparing for the closing of the tequila and <unk> acquisitions.
Contributing to and this strong cash balance is a 200 basis point year over year improvement and our operating working capital and the first quarter.
Which drove better operating cash generation than a typical first quarter.
Our new traffic solutions business, which is the N S. Flint acquisition performed to our expectations and the quarter, despite significant challenges with weather and raw material availability.
The business has a strong order book heading into the second quarter and the first quarter. We also completed the versa flex acquisition and the ticker of <unk> and <unk> acquisitions are expected to be completed and the second quarter.
And the accompanying presentation to our earnings material. We included several slides to provide further information and perspective on our recent acquisitions and.
And our performance for a number of acquisitions some items that I'd like to highlight.
Each of the four acquisitions bring incremental strategic benefits to PPG, such as product line and extensive and geographic expansions.
We continue to deliver strong synergy capture from our past acquisitions and believe our global breadth regional participation and all coatings verticals best in class procurement and mature back office centers of excellence and low cost areas allow us to deliver higher synergy capabilities than our competitors.
For our recently announced acquisitions, we expect to realize synergies of high single digit of sales.
Higher than historical industries synergy capture.
We also provided an update to our acquisition performance, we last shared and May 2019.
We included our 10, most recent acquisitions that have been closed for at least 24 months.
And most acquisitions and in aggregate, we've achieved higher synergy capture than our initial estimates average and about 50 basis points higher.
All of these acquisitions will help drive shareholder value creation, the post synergy multiples for each of these acquisitions is below PPG five year.
Average multiple and for eight of the acquisition the post synergy multiple it's below 10.
All four of the recently announced acquisition and provide earnings accretion from the historical base business and synergy realization.
By the end of 2020 to expect cumulative synergies to total about $75 million and will be and an annual run rate of 135 million. Once they were all fully integrated.
As with many of our initial synergy projections. These initial targets only include a modest benefit from sales synergies. Although these acquisitions are well suited for us to drive further top line growth.
We expect to pick a rail or acquisition to be completed and in the second quarter. We recently extended the tender offer period until May 11.
Your line customary regulatory approvals.
<unk> is a highly strategic acquisition and with leading architectural coatings and positions across various countries.
As I said in January I see many similar characteristics to our previous Comex acquisition.
We will have significant opportunities to cross sell complementary products through our legacy channels to further gross sales and earnings.
Comex acquisition has well exceeded our initial acquisition economics.
Moving to our current outlook, we are continuing to see very robust and broad based demand globally, including in many industrial and OEM end use markets and continued architectural coatings activity.
And many of our customers have indicated they have strong order books and we anticipate this global strong global demand pattern to continue well into the second half of 2021 at a minimum.
In addition, we expect and eventual restocking of inventory to occur and many of our selling channels as the year progresses.
One important item of note as some of our customers are experiencing and input a component shortages.
So their production capabilities and schedules remain choppy.
And we're experiencing a few spot outages and direct coatings raw materials.
As a result, we expect some and favorable sales impacts from both our direct supply chain disruptions and these projections from curtailments at some of our customers.
Our best current estimate is that sales are expect to be impacted by about $70 million to $90 million and the second quarter to these issues.
We expect these sales will be deferred and the second half of 2021 and thus this impact is already included in our second quarter 2021 financial guidance.
Also as I mentioned previously we're experiencing commodity inflation that occurred quickly due to the weather event named <unk>.
As a result of this rapid inflation increase and both raw materials or logistics, we are fully mobilized our commercial teams and are successfully securing additional selling price increases.
We have a very good head start on this inflation cycle, and we expect to fully offset raw material cost inflation and the second half of 2021.
Finally, as you've come to expect from PPG remain committed to strong and real time and cost management, which will provide continued strong operating leverage of sales growth.
These current disruptions are temporary and we maintain a positive view on the overall global coatings demand growth, which continues to be robust and broad based across most of the end used markets that we supply.
This is expected to continue throughout 2021.
The strong demand conditions, along with our leading technology advantage products provides us with many organic growth opportunities and 2021 and beyond.
For the company aggregate sales volumes are projected to be up by a low teen percentage and the second quarter on a sequential basis compared to the first quarter 2021 with differences by business and region adjusted.
Adjusted earnings excluding <unk>.
Amortization expense is expected to be between $2 15 to $2 20.
Continuing our strong earnings momentum.
As a reminder, this guidance does not include any EPS impact from either that particular or by acquisitions.
Our near term cash deployment priority will be to complete the acquisitions, we've announced which we anticipate to be funded by a combination of cash on hand and debt by the end of the second quarter.
In closing I want to thank and recognize our global PPG team. The character of our employees has never shown brighter than it has during these times of adversity. Our people have shown great resiliency continuing to serve our customers our communities and drive a common purpose to protect and beautify the world.
Thank you for your continued confidence and PPG. This concludes our prepared remarks and now Jerome would you. Please open the line for questions.
At this time I would like to remind everyone in order to ask a question and France par 10 day number one on your telephone keypad, we'll pause for just a moment to compile the cana and fast track.
Your first question comes from the line of Caleb.
Your line with BMO Your line is open.
Yeah, Hi. This is this is John Mcnulty.
So a question on the on the raw material front. It seems like there is still a little bit of supply chain issues are you are you have you seen raw material.
Pricing have you seen a peak yet or theres still some pockets, where we're still continuing to see that debt rising pressure and then can you speak to the level of price increases that you need to offset some of that raw material pressure that you've been speaking about.
Hi, John This is Michael I would tell you that our most prices.
And I have peaked there probably.
Probably it could be a few and nits and nats here that could increase further.
But what we see is that raw material availability is getting better its not great, but it's getting better on a daily basis. Our teams are working hard on that.
And you know we had one 7% positive price in Q1 and.
And we expect to have.
More positive price and Q2, so it's probably a little bit early to say how much do we need to get but we're working hard at it and I'm. What I'm. Most encouraged by is that every coatings business and PPG had positive price, including our automotive business and we're on track for every coatings business to have.
Positive price and Q2.
Your next question comes from the line of Ghansham Panjabi.
With Baird. Your line is open.
Thank you and good morning, everybody I guess, you know on the on the strong second quarter guidance. Despite what we're obviously seeing with massive from dual cost inflation.
Can you just take us through the mechanics of how you're approaching pricing now versus previous cost inflation cycles and related to that are we and a new paradigm for the coatings industry, whereby pricing will more quickly in line with raw material cost volatility, including when costs start to decline at some point I guess I'm asking because historically the industry has been very good about maintaining pricing, even as raw material costs of mod.
Great and post previous speaks thanks, so much.
Ghansham, what I would tell you is that we anticipated raw material inflation coming into the year and so we had put our teams on high alert to get pricing early in the year and then.
The second thing is we're trying to do a better job of search and surgical price increases as well as value selling and so as we rollout new products to capture that additional value.
And we're doing a better job I think on services.
During the pandemic it was clear how much our customers valued our ability to help them get their lines up and running.
And I think we're doing a better job of capturing value for those services. So I think each of those things is important and clearly.
As the freeze happened and there wasn't any shock to anybody at PPG that this was going to lead to additional raw material inflation and so we immediately as we saw Texas going into a deep freeze put all our sales teams on high alert that they need to start talking and their customers immediately about.
Raw material inflation I think one of the things that's different if you remember 2017 and 18.
And there are some of our competitors were.
And are distracted you had the Valspar acquisition being completed Valspar wasn't and raising price and you know axa was under a lot of pressure they were not doing anything that we're going after value. This is so clear and obvious that I think everybody is more on top of this you know hopefully this will be.
Trend to be on top of raw material inflation as a regular ongoing business practice.
So I would just tell you I'm confident that our teams are proactively addressing this.
Your next question comes from day line as Bob Court.
And with Goldman Sachs. Your line is open.
Thank you good morning and.
Appreciate the increased transparency around all the deals and and sub segment trends and that was very helpful and the slide deck I wanted to ask and took a real and when is the peak the paint season and northern Europe. So.
Or is there some risk of maybe missing the best part of the year, if you can't close that.
More efficiently and then secondly on units Flint and I noticed that you didn't get.
And that geographic expansion was one of the opportunities are key attributes there and I guess I thought I recall, you guys talking about maybe getting more aggressive internationally there.
And I misunderstand that and the past thanks.
No Bob and as fluent does have some regional aspects. It is you know.
Got a little bit of share and Mexico has a little bit of share and Argentina has a little bit and Australia, and a little bit and Europe.
Are you now digesting all of that information right now looking at a strategy that will help us accelerate debt. It will be a prime focus for us we have already made some headway as you can imagine and Mexico are strong PPG Comex team is all over this and that's the area that will will leverage the quickest and pride and the next area.
That will be will be Europe. So I think these are all positives.
So it's a small piece of it but it will get bigger over time and before Michael answers, Bob The Tequila question and geographic expansion on that slide was really for PPG.
Necessarily for the acquired company. So pickerill are definitely gives us significant geographic expansion and Scandinavia, and where we have very very minor presence. So that that line item on that chart was really around ppg's benefit.
And then the paint season, and Nordic and Russia, as you could imagine as more compressed than a typical one and the.
And the best months or April through August.
August and September.
It definitely slows down and the fourth quarter and so you know clearly we'd like to get this thing closed sooner rather than later.
Your next question comes from the line of Steven Robert.
Bank of America Securities. Your line is open.
Hello, Please EBITDA synergy.
And the percentages for these four acquisitions, just curious as to whether and those metrics and then also on the slide where you show.
Pre and post synergy.
Multiple impacts do you include in there.
The revenue benefits from either cross selling into your other businesses or your ability to to accelerate the sales growth do you include that in and these.
Post synergy metrics and perhaps if you do could you could you.
Comment on say the relative split between I would assume that it would depend on zone.
And the business.
And explain to I would imagine your ability to cut cost and with your supply chain could be meaningful book. This <unk>.
Worse of flex.
And I'm glad you made that comment Vince to Bob's question, I would assume debt versus a flat since the technology is one that you could really expand globally.
Yeah, Steve This is Vince.
And typically in most of these deals the ones, we've completed as well as the ones that we have here is pending most of these deals are very as Michael said in his opening comments a very minor top line synergies included.
And so our metrics on a traditional.
Project acquisition project.
Typically based on cost synergies, primarily there are a few and the and the ones completed.
Michael mentioned Comex, where we do have.
Further top line synergies and traditional but I think for us and most people in the space most of the synergies come from the cost side I think what's also important is some of these come day one so the day one synergies certainly help us in terms of the project economics and.
And you're spot on again, we as we look at this chart all of these acquisitions provide.
Expansion of the acquired company's products.
Ross PPG footprint.
But again, that's typically not the big driver and these synergy buckets.
Yeah.
Your next question comes from the line of Frank pitch with Fermium Research. Your line is open.
Thank you and good morning.
Be remiss, if I didn't pass along that a client told me that your result was like Matsuyama on Saturday. So so congrats on that.
Michael you indicated that the first quarter volumes were 2% below 2019 levels and I'm curious what what is embedded relative to <unk> 2019, and your $2 15 to two 'twenty guidance, you know where you stand relative to.
To.
And the pre pandemic period, and if you could give a discussion as to how much of that volume.
Is related to restock, because I believe you mentioned and a couple of areas that you are seeing some restocking take place versus underlying demand.
Yeah, Frank I would say that theres very little anticipated restock into Q.
The restock debt, we saw in the U S. Refinish market really had more to do with the fact that we had a more normal winter.
And so the guys didn't want to get caught if we had a return to work situations. So they've done I think whatever restocking theyre going to do so from that standpoint, I would say the volumes that we're projecting for two Q are still at or slightly below the.
And the <unk> of 2019, and Thats, primarily driven by aerospace. So you know what I'm encouraged about Frank to be honest is that.
January and February for aerospace was still pretty mediocre.
But march was pretty encouraging and we know that the aerospace guys have completely depleted inventory I mean they have.
Virtually nothing and the chain so at some point as things get better and they're gonna start ordering and that will start to be a positive we haven't seen that yet and we do track it on a very regular basis as you can imagine.
But I was encouraged by March and the MRO sales.
And just continue to tick up and April here now, we expect OEM aerospace to be flat, because that's not going to change anytime soon but the MRO side.
We will be better so we have military still doing well MRO starting to improve so you should you should and regard that as a real positive and.
A couple of other channels that are light inventory, we know the automotive market globally.
It is exceptionally light in terms of their historical inventory trends, we think.
And the U S. For example is somewhere in the mid Forty's days of inventory, which is typically 70 or 80, we know the U S car rental agencies are very light inventory they didn't buy much and the past 12 months. So again, we think auto production once it's available to run full out will be will be a good tailwind.
The other industries and many industrial markets are light inventory some of those due to the chip shortages and we are as a company light inventory, we weren't able to produce as much inventory in Q1 as we wanted for the for the two <unk> architectural season. So we do feel there's and inventory replenishment across many of the end market.
So we supply.
Your next question comes from the line of John Roberts with UBS. Your line is open.
Thank you versus the 2019 pre pandemic overall volume is down a percent and it looks like second quarter will be maybe up a couple percent.
Could you talk about some of the businesses that are well above pre pandemic levels like.
<unk> and architectural how far above 2019 is that and are we above or below pre pandemic and refinish and kind of hard to tell since it's been moving around a lot.
Yes, we're still below and refinish.
We're below and every place but.
China.
So Australia is low and Europe is definitely low U S will remain down I mean claims even last last reported one was down.
8%, so that's going to continue to be under I think we've put a slide in there as far as by each of the businesses.
I hope that while we'll get into it. So I think the ones that are most negative to think about is aerospace.
But then the rest of them should be automotive OEM should be marginally down and that's really due to chips and.
Industrial should be up packaging should be up and.
And although other ones will be down here, but John I, just want to we are expecting volume slightly below and Q2 slightly below 2019 levels. So we do again theres still there is still recovery outstanding and.
Most of these end markets and architectural we don't see a slowdown yet even April continued to be very strong so the.
Architectural side globally, and every market, we participate in and around the world continues to be quite strong.
Your next question comes from the line of Laurent foray with Exane BNP.
Your line is open.
Hi, Yes, good morning all.
Hello, and to that question on and.
DIY and this is do you eat me and was wondering if you could give us a little bit of a keystone directional color on what you're seeing in North America and in Europe, especially on do it for me. Thank you.
Well the DIY Laurent continues to be quite strong double digits, plus we were up more than double digits plus in Europe same thing and the U S same thing and Australia.
For us this is and.
And Mexico has been you know there's not much of a DIY market, but it continues to be strong.
No.
Not seen any change and that trend and of course with the continued locked down as you are well aware and Europe. We anticipate this will continue throughout the summer.
Yeah.
Your next question comes from the line and Vincent Andrews with Morgan Stanley. Your line is open.
Thank you very much I just wanted to make sure I understood. Your comments on raw materials for the back half of the year. I believe you said that you expect pricing to offset raws and two H, but I just wanted to clarify whether that means by the end of <unk> or for the entirety of two H.
Hey, Vincent this is Vince.
Our view of raw materials as they are we hope.
And at the high watermark at this point it'll carry somewhat into Q3, we are seeing.
And in some spot outages that we expect will continue through part of April and into May.
And then seasonally these two do we expect these raw materials to have normal seasonal patterns and our pricing and.
Different businesses and by segment will differ but certainly in the second half and in its entirety, we will definitely offset raw materials is our expectation.
Your next question comes from the line and David Begleiter with Deutsche Bank, You May now ask your question.
Thank you Michael and Vince just on the cost savings on the temporary costs that are becoming permanent can.
Can you give a little more color as to what they are and where they are and how you accomplish that and.
And just on Tequila, I believe you need rush and approval.
And if that approval was delayed could you still close on the rest of the company without that approval and hand. Thank you.
So the ticker and no one is easy and we're going to wait for Russia and approval and close all at once and that's what we're expecting to do.
As far as your second question. Your first question I would tell you.
That I feel confident that the businesses are well prepared.
And.
And Vince I don't know if you want to.
Yeah, I think on the cost David.
We have a couple of things obviously travels down considerably.
We have other.
Discrete cost items that.
We expect to stay out we've had headcount freezes on and certain parts of the world and certain businesses. We've learned to operate without some of the head count we have done some work in terms of consolidation of warehouses.
Given our lower inventory levels and given our lower inventory level overall, we don't expect to bring back some of those.
Warehouses that we've exited and.
And the other piece and were talked we've talked about is in terms of digital we're finding different ways of working that are reducing our cost footprint and different parts of the world and Europe for example.
Which is our highest architectural digital portion.
We are looking at our overall footprint in terms of architectural.
Our bricks and mortar so it's really spread out every business has and Ohio alert with respect to these cost and you can see the benefit and our leverage of earnings are a volume.
And we're up 7% that came at a around a 40% leverage. So every business sees the value of that and we're being very mindful.
And if every cost line item on our income statement.
Your next question comes from the line of Michael <unk> with Wells Fargo. Your line is open.
Hey, guys and I start to the year.
In terms of your outlook for sales growth and <unk> versus why don't you I think you said low double digits, how much of that.
Sequentially, it's going to be price.
And and volume and then and I'm just curious how much what exactly is the inflation.
Delta that you have to uncover maybe either in dollars or gross margin percentages for the year.
Hey, Mike Thanks Al.
I'll start and and Michael can certainly add some more color, but we do expect pricing to be higher than Q1.
Senator basis year over year the.
The volumes are still a bit mixed by business and segment again due to the shortages both in our inventory as well as customers and ability to run but.
Again, we gave you the we gave you the composite number.
So hopefully you can and you can vet out would you expect to be from a from a volume perspective, and I would say Michael just to be consistent.
The primary drivers of the higher volume, we're going to be on the industrial segment side.
And you remember April and May last year, the automotive companies were completely shut down.
Packaging remains strong and many segments and our industrial businesses are doing quite well.
And Mike maybe just add one more thing we would have probably had a little bit more sales and to Q. If it wasn't for the supply disruptions that we noted that Michael noted of $70 million to $90 million and his opening comments.
Your next question comes from the line and Jeff as at Calix, Chris with JP Morgan Your line is open.
Thanks very much.
EBITDA margins were 17% and 2020, and I think and the first quarter. They were about 18.
You've got all kinds of raw material inflation and your volumes are not really back to where you want them to be you've made some acquisitions.
Once you get your price increases and business is back to normal what's the EBITDA margin should it be roughly 20% can you do better than that.
And what's your long term goal and what is the profitability of PPG and look like on a normal basis.
Well I think Jeff you know one of the PPG way tenants is that we do better today than yesterday every day.
So right now our current target is to well exceed our 2016 peak margins. So if you want to go back and look at that you'll see one data point, we're well above that and our performance coatings segment, we're not there on our industrial side. So we have more work to do.
But overall I think what you should do is anticipate that we're going to continue to drive these margins higher and I think you hit on all the right aspects, we have better leverage.
Going to be able to retain pricing once we get it in place and we have new products that are coming out so I think we're.
And we're doing quite well and we're excited that we had a record quarter, we're forecasting a record second quarter and.
That that's three quarters in a row of record adjusted EBIT.
So we're happy about that and.
And then if I could just add I think part of the equation here and and <unk>.
Jeff you've hit on this a couple of times and our prior.
Conference calls as part of the equation is the fixed cost elimination and we've done on a multiyear stack that's a significant contributor.
Our margin profile, we still have as you asked I think and the fourth quarter, we still have more.
Restructuring activities to go specifically this year and early next year.
And then the last thing I'd say on this is we are bringing.
These acquisitions and they typically come in and below our company margin.
So that will temper some of the.
Our average margin benefits until we're able to extract the synergies from these from these acquisitions.
Yeah.
Your next question comes from the line and Kevin Mccarty.
Your line is open.
Good morning, Michael I was wondering if you might expand on some of the supply chain disruption issues that youre seeing from <unk>.
Both an internal and an external perspective and other words.
On the internal side, what is it that PPG buys that is in short supply and has it impacted your production rates and externally we hear a lot about the semi chip shortages.
Is that really the lion's share of the issue for PPG or are you seeing customers that are impacted and other industries as well.
So on the internal side, Kevin I mean, our proxies.
Sam.
Butyl S acrylate, MMA, especially isocyanate and says are all challenged supply chains, right now and we're operating hand to mouth.
There is some real minor nits and gnats and chemicals you wouldn't.
You know really understand why and maybe I shouldn't use the word to understand but very small things that we need to make certain batches of paint, especially in our packaging business. So we're we are shoveling raw materials around between the plants and make sure everybody has everything they need so I would say that the primary issue is on our side except for the automotive.
Guys.
And they do have the chip shortages. The automotive guys also had plastic shortages add seats shortages.
So they are really struggling right now, but we expect it to loosen up and get better we do see every day, we're getting more and motions every day, a proxy is not great, but it's getting better.
And so we're anticipating that as we get raw materials will be able to better service our customers, but the good news is.
We're pretty sure we're doing better than our competitors and many of these spaces, especially our smaller competitors.
They are struggling to get raw materials. So we're taking good care of our customers and our suppliers are doing a good job and taken care of us.
And I'll just add one comment from our internal.
And internal shortages, it's primarily and our architectural businesses.
We do have some internal shortages and may affect traffic solutions can we expect these to be transitory, they're baked into our guidance.
For Q2, but that's where we're seeing from a business perspective the shortages.
Your next question comes from the line of P. J <unk> with Citi. Your line is open.
Yes, hi, good morning, Michael and Vince.
You know in your and your chart on M&A, which was quite helpful. You showed that gorilla is multiple awards at the high end of the historical range can you talk about gorilla is exposure and eastern Europe, and Russia, and how do margins compare and those regions and returns company and those regions to Western Europe, and what are the risks.
And the Russia, and you already have operations, there and industrial can you just talk about any risks and Russia with respect to FX and all that thank you.
Well, we're certainly we'll look at the FX much like any of our foreign currencies, we do have a fairly sizable presence and Russia right. Now we're number one and automotive were number one and the premium refinish, where number one and packaging.
Number one and aerospace so we have a pretty sizable presence we're used to doing business in Russia.
You know.
Because we're still competitors, we can't talk about what their specific margins are.
And until such time, as we close but what I would tell you is if you look at their overall margins they are below our margins in Europe.
So that's going to be and opportunity for us to bring those up to PPG levels and we also think that and some other countries. There is an opportunity to go beyond that because of the synergies with the warehousing and the raw materials.
They are struggling right now with raw materials, and so I anticipate that we will be able to improve their business pretty quickly.
And we close.
And.
Your next question comes from the line of Arun <unk>.
And often with RBC capital markets. Your line is open.
Alright. Thanks.
Morning.
And Thats on the great results and just wanted to again get and.
And get your thoughts on the margin. So obviously some pretty strong performance is there a way you could kind of help us understand.
What portion of the upside came from sales volume leverage.
Versus.
The selling price increases.
Yeah versus type cost reductions and the quarter and and maybe looking ahead. If you expect those buckets to kind of remain similar or how would you kind of characterize that thanks.
And everyone great to hear from you.
Look the majority of our benefit year over year and versus 2019 came from the volume leverage and we had 7% volume leverage we've been talking for quite some time about all the cost we've taken out.
So that had a significant and I say 40, 40 plus percent dropping to the bottom line.
You do the math just on that you could see the remainder of the GAAP was modest.
So again as we continue to have these volume recovery, especially and some of our key businesses like aerospace we do expect.
Insistent performance and subsequent quarters.
Again, I would profess that our teams are doing very well in terms of discrete cost management, but we also have the structural cost management and multiyear stack I talked about earlier.
Thats providers can provide us benefit here and into the future and we still have more of that to execute against.
Okay.
Your next question comes from the line of Duffy Fischer with Barclays. Your line is open.
Yeah, Good morning Fellows.
If you go back and look 2014 through 2019, each first half versus second half was either 50% or 51% of your revenue for that year.
This year with that 70 and $90 million hole, you talked about and Q2.
Just kind of a rebound it looks like second half should be meaningfully better than the first half maybe for the first time in that period. So can you kind of help us walk through excluding the acquisitions and what might the second half look like with your view on things today versus the first half on a top line basis.
And so Duffy I would tell you that we're confident that our momentum is going to continue. So if you think about and if you walked through some of the businesses right. So automotive.
Inventory is exceptionally low I think Vince covered that and detail earlier on the call. So.
And have a better second half than normal for automotive or industrial segment. So you think whether that's coil or heavy duty equipment or any of these other segments and there they continue to do very well.
And also packaging, we see no slowdown and the packaging and momentum in fact, if you look at the number of.
Packages and new packaging plants can plants that come on and the second half of the year.
And that should be all good as well.
And again I talked about earlier architectural we've seen no slowdown in the DIY and we do anticipate we don't we're not really seeing a lot of it yet, but we do anticipate the professional side will get better certainly commercial and industrial and.
And that market is still.
Light, but that should get better aerospace will get better it's not a matter of if it's just a matter of wind.
And then.
And are excited by the fact that I see a little bit of the big oil guys starting to spend some capital.
So if that if they get serious about spending capital our protective business will start to get better so quite honestly when I look at them.
The various segments that we have I think we should have a good back half of the year from a volume perspective.
Your next question comes from the line and J D. Pandya with Unfilled Research your line is open.
Thank you.
Just on the aerospace could you just tell us so much so much of the fleet has been and sort of ground debt. So you know when.
This fleet goes back up flying can you just explain us what do you expect in terms of a pickup in MRO. Because this probably has never happened for a long long time that such so much percentage of fleet has been grounded and then what do you expect in terms of recovery in 2020 to 2020 three with regards to our.
And sort of new build and and on the on the on the on the military side and then just sort of.
On a similar note protective and marine.
On the infra battle in the U S.
What do you expect and impact on the protective side. If you could just remind us what is ppg's exposure on the infra and.
And how would that benefit our protective business. Thanks a lot.
Okay I'll try to capture all of these questions here. So let's do the easy one first military we see no slowdown and the military side.
And let's call it 35% of our aerospace business.
And most important program as the F 35, the builds continue along we're gaining more share we have more share and the transparency, we have more share and the winglet transparencies. So we feel good about debt.
From the commercial side to be quite honest, our visibility is quite limited because we've never had playing and sit on the ground for a year and so the MRO.
They were put into storage and how they come out of storage is still somewhat of an unknown.
What checks, they're going to do before they put them into storage is still somewhat of an unknown. So what we do see is that the MRO activity for our aerospace business is picking up we are getting.
What's interesting is when they put when some of the planes are giving back to the lease source they have to paint and white. So we have been getting some of those white paint sales and of course, when they come back out of the lease or is there going to be rebranded again, so there'll be repaint it again.
No.
And that happens that'll be a positive for us.
Your question on infrastructure I would tell you that we touch a lot of things and the infrastructure, whether thats. The road markings that will be needed whether that's the bridges that will need to be painted.
And if they support the building and trades industry that will require protective coatings. So I would say for PPG any.
Any infrastructure Bill will be regarded as a positive.
I'll just add some color on the aerospace.
If you think about the drivers of volume, we expect it to return and waves.
First wave I think Michael alluded to in his prepared remarks, which is the domestic flights. We're seeing that certainly in the U S. We're seeing significant uptick still below pre pandemic levels, but we care about takeoffs and landings, that's what drives the aftermarket.
And so the more takeoff and landings and the U S and.
And other countries and.
And internal takeoff and landings is very important to us.
Second wave, we see as a return of business travel and and the third wave, which we don't expect till later this year at the earliest would be international travel. So we do feel there is a couple of opportunities for step ups and.
And the and the aerospace industry on the on the MRO side.
Your next question comes from the line of Laurence Alexander with Jefferies. Your line is open.
Good morning, Whats your expectation for labor cost inflation.
For this year and how do you expect pressure to be building into next year.
And secondly.
And prior kind of inflationary environments, there was a lot of.
Drifting driven by a shift and the innovation cycle.
What can you do this time or what are you seeing from the customers and will that translate into share gains in 2022 2023.
Well, let's talk about the labor piece versus labor from PPG is not a huge piece of our business what I would put into your model is.
Traditional 2% to 3% kind of number that's.
Typical of what we're seeing but our goal always is to offset that through productivity.
Manufacturing teams are always a challenge to drive additional productivity year over year, they have to come forward and their plan to offset that so that would be the first thing I would think about from a productivity standpoint.
Your next question comes from the line is and Mike Harrison with Seaport Global Securities. Your line is open.
Hi, good morning.
Within the industrial business, if we look at that sequentially.
Sales were down $30 million operating income was down more like $35 million what caused that sequential decline.
And operating income as this discretionary costs that are coming back and just the impact of disruption maybe just some thoughts on how we should think about industrial margin trajectory.
Over the rest of the year as demand recovers and and you get some pricing against Ross. Thanks.
Yeah. Michael This is John I would highlight two things yeah, we saw the chip issue and the auto OEM side really still robust demand, but but that was and impact on the top line and then we saw raw material inflation sequentially. So that would be the other part that I would call out.
Yeah, and if I could just add just a tidbit there and we did see raw material inflation and is very rapid obviously following the weather events, we we chronicled earlier.
Typically we don't see that much inflation mid quarter, but we did see some items, especially around the oil side spike up.
Mid quarter, so and so again, we started to put and pricing as Michael alluded to earlier, but we weren't able to offset that fully in Q1 I do want to go back to the Lawrence.
Laurence asked two questions, we didn't get to the second one which was thrifty.
Right now, we're not seeing and and and.
And our architectural business anywhere in the world and any significant impacts from thrift and we're really again, we're really we're really light inventory. We think some of our customers are light inventory. So so most of our customers as well as customers buying from us are selling what they have on the shelves.
So we don't expect.
For that to be a big event in Q2, just because of product availability.
Alright, there are no further questions at this time, Mr. Bruno I'll turn the call back over to you.
Thank you Jerome and I'd like to thank everyone, who participated on our call today and for your continued interest and PPG. If you have any further questions. Please contact me and the Investor Relations Department. This concludes our first quarter earnings call.
This concludes today's conference call you may now disconnect.
And.
[music].
Okay.
[music].