Q3 2022 PPG Industries Inc Earnings Call
Continue to make good progress executing on our acquisition related synergies and other cost savings initiatives from previously announced restructuring program, which delivered about $25 million of incremental benefit in the third quarter.
During the quarter, we continue to progress our launch of the expanded pro paint initiative with the home depot.
Each week, our team is calling on thousands of prospective new customers and delivering new business wins.
In the third quarter. We also started joint work with HD supply team to hunt for new paint customers, including in the commercial maintenance area and while early this collaboration is yielding results and we expect will be another catalyst for future growth in the U S architectural coatings business.
Overall paint contractors are providing us with ongoing positive feedback on the convenience of buying well recognized TPG pro products at the home depot.
Collectively we continue to see opportunities for significant growth in the coming years.
While working capital remains higher than we would like we.
We made solid progress in the third quarter, and the gain and lower our inventories on a sequential basis.
<unk> been carrying higher than historic levels of inventory given supply chain constraints over the past year.
But given the broadening elongation of supply globally.
Now enabled a destock.
Including reducing or canceling raw material orders and reducing safety stock closer to historic levels.
We are prioritizing further inventory reduction in the fourth quarter, which will benefit our cash generation.
We made modest repurchases of our stock during the quarter and repaid $100 million of debt.
We continue to evaluate potential strategic bolt on acquisitions.
Consistent with our past practices, we will deploy cash in the most accretive manner for our shareholders, including some continued debt reduction.
On the ESG front I want to highlight yet. Another example of PPG, leading the way.
The acquisition of Tequila has proved to be very valuable on several fronts, including enhancing <unk> ESG program through the addition of advantaged sustainable solutions that contribute to the circular economy.
These include bio based products and packaging made from $50 to 75% recycled plastic that is also 100% recyclable.
Currently nearly 90% of <unk> products, our waterborne and 48% of the portfolio equal level, we are leveraging <unk> sustainability approach in our architectural business beginning in Europe .
Looking ahead to the fourth quarter normal seasonal demand trends are expected, including lower sequential sales and most of our architectural businesses and also in our traffic solutions business with sales historically fall about 50% due to wetter weather considerations.
In Europe , we expect economic conditions to remain weak due to the softening consumer confidence and lower industrial activity related to the significantly higher energy costs and geopolitical issues.
In China, we anticipate weaker than normal economic activity for the fourth quarter due to continued pandemic related disruptions and slowing exports to Europe .
<unk> largest factory in China was required to close for the first 10 days of October and further restrictions could curtail production and commercial activity.
One offset important PPG, we expect automotive OEM builds in China to remain solid and consumer spending to improve into 2023.
In general demand in the U S. In use markets remain solid and we expect several of our businesses to continue to deliver positive year over year sales volume growth.
Demand for architectural DIY and residential new home Tonys products in the U S is beginning to slow and industry demand as anticipated weakened further in the fourth quarter and into next year's basis, leading economic indicators.
<unk> exposure to the U S. New home market is relatively small at a low single digit percentage of company sales and our overall exposure to the residential housing market is less than 10% of company revenue.
We expect some of the industry weakness to be offset by our growth initiatives with the home depot and other customer gains.
Raw materials are expected to remain inflationary with a mid single digit higher than the prior year.
But Bob modestly on a sequential quarterly basis.
We expect supply chain conditions to continue to broadly improved.
Including better raw material and transportation availability as our suppliers are nearing their 2019 manufacturing and supply capability.
As a reminder, we've absorbed about $1 $9 billion of raw material inflation since the beginning of 2021.
In the fourth quarter, we expect further increases in energy costs, especially in Europe and to some degree in the U S.
We will continue to prioritize implementing further real time targeted selling price increases to mitigate these higher costs.
Due to the heightened level of economic uncertainty, we have implemented an additional restructuring program focus on cash payback actions targeting $70 million of annualized savings upon full implementation.
The program includes several initiatives in Europe is mostly concentrated on matching our staffing levels with lower demand.
As we enter a period of heightened economic uncertainty.
We expect our business portfolio.
Through more resilient in the coming quarters.
With continued recovery in the automotive OEM and aerospace coatings businesses.
Along with demand stable businesses like automotive refinish and traffic solutions.
We believe that more than 50% of Ppg's portfolio will remain resilient, even if we experience a broader global economic decline.
This is noteworthy and positive step change from the prior recession.
Also importantly, we expect that our sequential quarterly momentum on operating margin improvement will continue into the fourth quarter as we work back towards our historical margin profile.
This will be supported by maintaining our selling prices to reflect the value of the products and services we provide.
While economic conditions are challenging in the near term I remain confident about the future earnings capability to PPG as the earnings catalysts that I referenced in the past remain fully intact and.
And we certainly see a path to return to prior peak operating margins.
With opportunities to exceed them.
In closing as we look to finish the year managing intensifying challenges I want to thank our team of 50000 employees around the world for making it happen by supporting our customers and the communities where we operate.
Their dedication even during the most challenging times is inspiring and drives our purpose to protect and beautify the world.
Thank you for your continued confidence in PPG. This concludes our prepared remarks and <unk>.
Now Elliott would you. Please open the line for questions.
Okay.
Thank you at this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
Okay.
Our first question comes from Christopher Parkinson from Mizuho. Your line is open. Please go ahead.
Great. Thank you so much and good macros, changing and not necessarily for the better but.
Per your comments it doesn't seem like it's set up for this a recessionary environment aligns with history.
Which has consequences across fixed asset leverage.
End market mix when Youre discussing refinish narrow just the overall margin outlook versus past downturns can you just give us an overall update you where your thoughts here and potentially anything on price cost as well. Thank you.
Thanks, Christopher first of all I think.
The most encouraging thing about what we see is that we see continued price increases coming so fourth quarter, we're still looking at.
High single digits low double digit price increases so that's going to be a significant.
We have seen raw materials, they have loosened up in China. They are starting to loosen up in Europe . We are arbitraging, what we see in China into Europe , and we expect to arbitrage Europe elsewhere. So these are things that are a little bit different than the last one I'll remind everybody by the end of the year, we'll have about two.
$2 billion of raw material inflation, and we still have other inflation and for the second quarter and third quarter. We covered all total inflation that includes MRO freight logistics labor you name. It we covered it okay. So we feel very confident going into the fourth quarter that we're going to continue to recover that gap.
By the end of the year, we will recover all raw material inflation and before the end of the first quarter. We will cover our total inflation. So we're really in good shape from that standpoint, so I'm pleased with what I see and.
This is going to be a little bit different recession than last time, because we have a strong OEM business and a strong refinish business.
Our next question comes from Ghansham Panjabi.
Your line is open. Please go ahead.
Yes, Thank you and congrats first off Michael and Tim.
Can you just give us a sense Michael on how you see architectural volumes evolving in your three major reasons of the U S Europe and Mexico as we cycle into 2023, I mean, obviously the DIY has been impacted in the U S and Europe .
But just given the extent of mortgage rate increases in some of the fundamental shifts in housing as well for markets such as the U S. How are you planning for the evolution of volumes there.
Ghansham I'm going to let Tim take this one.
Thanks, Ghansham and first I wanted to.
Michael in the PPG Board for their trust and confidence as we continue to drive the company forward I also want to thank Michael personally for his leadership his personal Mentorship of me in and frankly for setting up PPG with a global portfolio that is well positioned for future growth and also well positioned to navigate through.
Today's economic challenges excited for this opportunity are really looking forward to the future and working working continuing to work with our 50000 people around the world now specifically to your question so around the world for architectural.
PPG Comex, our Mexican business.
<unk> continues to shine first.
GDP are holding up better than most parts of the world in Latin America, and second just the strength of our position the strength of our services the strength of our brand the strength of our network, we will continue to put up.
Strong results down there as you know Asia Pacific for US is a fairly small business in architectural and given given some of the things happening in China.
That's actually a positive at this point.
Europe .
We continue to see soft.
<unk> soft DIY as we said in Q1 and Q2 and we expect it to continue at the at the depressed levels that it is today.
Raid trade in Europe is actually a bit stronger it's down mid single digits.
Pro Pro backlogs are still they're driven largely by labor shortages more than more than anything, but we do see that moderating we do see the trade business moderating as well in Europe as you would expect some variability by country.
Mostly you get to the war zone.
The more depressed it gets U K you know what's happening there and then a bit a bit stronger in the south.
Holding up better over here in the U S. Canada market, we are seeing.
Why softness here nothing like Europe , more down like low single digits in DIY.
Canada, but the pro business is holding up well backlogs remained strong backlogs are quarterly survey.
Paint contractors averaged about 12 weeks of backlog pretty consistent with the prior quarter.
And our Omnichannel business for the pro we were actually up this quarter, so holding up holding up better here in the U S Canada region.
Our next question comes from Josh Spector from UBS. Your line is open.
Great.
Sure.
Yeah, Hey, guys. Thanks for taking my question.
Curious if you can comment on the pricing progression in two segments I mean, clearly you have momentum.
And performance with that increase on a two year stack, but industrial maybe a little bit less obvious 20% two year stack or slightly above that isn't much of an improvement Q on Q. So I'm wondering if you can comment on why pricing there or would it be move into higher, especially since you are talking about margins accelerating.
And it is energy prices and that being a new inflationary factor, perhaps a higher inflationary factor impacts the ability to get pricing in any of the segments. Thanks.
Josh This is Michael first of all what I would tell you is that.
Art of what Youre seeing of the slowing of the price increases in the.
Performance coatings segment is because of the drop in architectural sales. Okay. So you have a little bit of a mix issue going on in there.
So that's one the other thing you have to remember is we got pricing much earlier and performance coatings segment.
And we always lag a little bit in the industrial side. So the other pieces. Besides mix is timing. So what you see which is most important is that on our industrial side.
It does lag, but now it's catching back up and the industrial side was above company average and we expect that to continue in the fourth quarter as well and most importantly in our automotive segment a number of our customers have provided us retroactive pricing as well.
And so that that helps that margin as well so we're still anticipating some significant price improvement.
In the fourth quarter and again, we'll be ready to talk about the first quarter later, but we will have positive significant positive price in Q1 as well.
Hey, Josh this is Vince.
I think the key thing to remember for us.
Is the margin recovery, we promised in the industrials underway.
We're seeing we expect that margin recovery to continue in Q4 and expand into Q1 on your question on energy in Europe .
Did put in select energy surcharges as most companies have done to accommodate that we're not a big energy consumer in Europe .
We're downstream.
We're reacting as much as we can too.
What's being with what's a tough energy environment in Europe .
Our next question comes from John Mcnulty from BMO capital markets. Your line is open.
Hey, good morning, Thanks for taking my question and congratulations again to Michael and Tim both.
So when we think about the raw material basket. It sounds like a lot of things have improved but theres still some challenges I guess can you can you help us to understand what portion of the raw material basket is still currently challenged and then as the supply chain continue to improve and it looks like they have a lot I guess, how should we be thinking about what that might mean for raw material relief.
As we look to 2023.
Yes, John This is Vince let me start real quickly and then I think Tim is going to chime in here. If you look again, we have cumulative about 40% inflation.
Levels, we do see inflation year over year in Q4, but it's down sequentially.
And that's I think the key is we're starting to see that the fever break its different as Michael mentioned by region.
We're seeing arbitrage opportunities and I think Tim you have some specifics.
So from the availability situation John is much better.
We're now two isolated examples.
You've got the singular example, here in the U S with a fire at a particular resin supplier that has caused.
Transient disruption, we've put some alternatives to deal with that and if you look at like cut.
Cut across the aerospace transparencies <unk>.
<unk> got some things not related to coatings, but components machined parts acrylic parts that go into the manufacturing and assembly of a windshield, but now we're down two handfuls of items. Some minor additives as opposed to what we had a quarter or certainly two quarters ago.
Yes, and just one other comment here is if you think about the inflation that we've absorbed the past almost two years now.
A part of it started as a supply chain issue, but we then we're saddled with inflation that included Covid absenteeism.
Freight issues port issues, a lot of those other issues have fallen by the wayside.
But we do feel given those other issues have been resolved.
The supply demand economics will start to play a bigger factor.
Yes.
Our next question comes from Stephen Byrne from Bank of America Merrill Lynch. Your line is open.
Yes.
Yes, I was curious to hear your view on the ability for you to expand geographically in your various businesses.
Which of them do you think you have the most potential to expand for.
For example took real or does that give you a footprint in a region, where you think you can meaningfully expand either refinish or traffic.
Working as well.
What's the outlook for you in that region.
Well Stephen This is Michael let me let me just give you. Some examples that all play into the positives of what we do with the acquisition. So you can think about traffic solutions and that was primarily a U S business. They had a teeny tiny piece of Mexico.
Take our PPG comex team and they are a powerhouse in Mexico. So what do we do we take those formulations that they have in the U S. Retrans from down to Mexico, a localized them for the local market.
Let me start settlement and our traffic solutions business is growing 20 plus percent every quarter since we've had it and we've had it now five quarters. So it's moving along same thing with <unk>. So you got to kick the rollout and they had a strong customer relationships up in Scandinavia, it's not that that we werent.
Selling in Scandinavia, but they had some tremendous relationships. So we're able to take our industrial products and bring them up there we're able to expand our refinished products up there and I think we highlighted that when we took you to see burst they're up in Scandinavia for the <unk>.
Investor Day.
And the same thing when you think about China. So.
So when we bought <unk> and <unk>.
Set of law and we took those formulations, we moved them over to China, and we've been able to grow our <unk>, our automotive parts and accessories business in China, and that's been a nice workforce, we have new waterborne technology for automotive parts, where we're growing significantly faster than market. So I think we have a number of these examples where we do acquisitions and.
We move them around the world and it turns out to be a strong positive for us. So thank you very much for the question.
Our next question comes from Kevin Mccarthy from <unk>. Your line is open.
Yes, good morning.
I would like to ask how much Destocking do you anticipate.
Internally and externally.
For example.
Do you expect to run your assets at a rate that's below underlying consumption in the next several quarters, perhaps outside of auto OEM and aerospace where those markets have been more dislocated are depressed.
While we are certainly.
Kevin going to do that for some of our businesses, where the raw materials. We built up so so that's going to that's going to happen, but you did highlight a number that are going to be well north of that so automotive refinished travel solutions things like that are all going to be well above company average, but the thing you have to remember.
<unk> were also down.
Take advantage of the arbitrage in raw materials. So if it makes sense for us.
We're moving Tio too right now from China, we're moving it into Europe .
So we're going to take advantage of things like that.
And net net I would tell you that.
We're probably going to be pretty close.
We took down inventories of $100 million in Q3, where <unk> taken it down another couple of hundred million dollars in Q4, and I think we're in pretty good shape.
Okay, Let me add just Atlanta onto what Michael said here I think if you think about the coatings industry more broadly.
And we're a batch process. So we typically can start and stop as we please.
We're not a continuous process.
Where we are this cycle versus prior cycles as we don't have a lot of inventory are in customers with a few exceptions.
So not have a lot of inventory in the chain, we're seeing that in for example, automotive refinish as Michael alluded to we're certainly seeing that in aerospace so theres not Kevin a big a big destock coming in many of our industries automotive another one where were inventory light all the way through the chain. So we were going to run at or slightly below where we.
C S.
Our customer's consumption.
To draw down our inventories with a couple of small exceptions.
Including in some of our big box.
DIY customers, if there's not a lot of inventory in channels, where.
But we do have a huge focus.
On drawing down our raw material inventories in the fourth quarter.
Our next question comes from Lauren <unk> from Exane BNP Powerbar. Your line is open. Please go ahead.
Yes, good morning, all congrats again to Mike Glenn and team.
My question is again on this inventory Collins and Destocking on the volume.
Guidance for Q4 I was wondering if you made a specific assumption on destocking itself on our customer side.
Alright, good thanks for the question this is Tim.
To Vince's point really the only segment where were seeing destocking on the customer side is.
Architectural DIY Big box and we are seeing that.
In Europe , predominantly but also here in the United States.
So we do expect that to continue.
For the remainder of the year until they reach their their targeted levels, but beyond that.
Many of our customer channels are still fairly light are very light in some cases on inventory. So so that's the only destocking, we expect to see.
Yeah, and if I could just add this is Vince again, if you go to Europe .
We're seeing that we started to see that really in Q2.
Q1 early Q2 of this year, so we're going to lap.
A couple of months here, we're going to lap.
Those declines.
So we do have a different comparison base in 2023 for Europe .
Our next question comes from Michael Sison from Wells Fargo. Your line is open.
Hey, good morning, Congrats Tim and Great working with you Michael I sitting here moving to Cleveland post retirement, but I guess the first question Michael when you think about your outlook for the fourth quarter.
Five to $1 20 seems sort of low on a quarterly run rate and just curious what.
These to happen to see sequential improvement heading into the first half of 'twenty three and then maybe for Tim maybe you can comment on what you believe Ppg's earnings potential is at some point in time, there was a $9 number out there for a while and I just didn't know if that was still the one that you that you think is the right number. Thank you.
Okay. Mike This is Michael So I will take the first question and I'll, let Tim answer. The second question look at at the end of the day when.
When we put together our original let's call it a pre announcement guidance.
We our Chinese team.
Very confident that post president cheese election for a third term that the COVID-19 policies in China would be relax and would take a more normalized approach.
Clearly with this speech.
Last week.
That is not going to be the case, so we've adjusted basis that.
Our Tianjin plant, which is actually the iron largest coatings plant in the world in China.
It was down the last 10 days of September It was down the first 10 days of October running at reduced rates.
And so consumer confidence obviously is something we're watching very closely in China, but the good news is when you look at the rest of China.
Automotive business had a very strong third quarter. They had a very we are projecting a pretty good.
Fourth quarter, that's historically, the best quarter for automotive in China, and I am very encouraged by the fact that the automotive guys in China are exporting their electric vehicles and as you know the electric vehicles are good for us.
<unk> is not only exporting to.
Europe , but they're also exploring into southeast Asia. So we feel very confident about that so I think.
Overall.
You May view that guide is a little weaker but theres a lot of things out there that are quite uncertain, we don't know how much destocking.
Hi, guys will do in the fourth quarter.
We don't know how much they're going to typically they start buying in December .
Get ready for the new season, we have not put any of that in there. So.
Sure.
A bit cautious given what we see.
And so I think our guide is reasonable.
Certainly.
Ben and keep you updated through the quarter as we go.
I'll end with that and I'll, let Tim talk about.
How he sees the $9.
The $9.
The answer is it's a question of when not if the fundamentals for $9 are absolutely absolutely there.
If you look at the.
The pluses and minuses on the ledger for that you've got Arrow recovery, you've got auto recovery, you've got more refinish recovery that that great business is still down 10% versus versus pre COVID-19. We've got the inflection of the price cost cost curve.
You know about our restructuring and the footprint work we've done.
China is still closed acquisition synergies technology et cetera, et cetera, so that side of the ledger is a lot stronger than the other the other side of ledger is really only about macroeconomic driven volume.
And we only need some of that to come back to get to get to that $9. So it's absolutely absolutely in our future and thanks. Thanks for the question.
Okay.
We now turn to Noah <unk> from Goldman Sachs. Your line is open.
Hello can you hear me okay.
Yes, Duffy good morning.
Good morning.
So first thanks, and congrats to Michael and Tim.
Second one too.
Two questions around kind of the price cost. So the first one is to get to your first half goal of offsetting all the raw material inflation, we've seen to date, how much sequential price do you need between Q3, and whether that ends up being Q1 or Q2 next year and then the second one is.
The $1 billion nine you referenced.
Is it realistically you think we're playing for let's say over a three year period I mean, obviously, there's some true inflation in there that we probably would never get back.
You've got stuff like the all next plant again theoretically as soon as that is back up and running Youll see some relief there, but you can do a lot better job kind of analyzing the supply demand teams for each of the particular lines.
Is it half or three quarters, what is like a realistic bogey that we think we can get back on the raw material side over a couple of years.
Duffy this is Vince I'll take the first part of that question and I'll, let Michael take the second part.
To fully recover our total inflation as we said early late late late Q4 early Q1.
Very modest targeted pricing actions, we're going to take in Q4, and we're going to take some targeted actions in Q1. So again, we're not this is not.
Relying on exceptionally.
Exceedingly high pricing going forward.
So Duffy let me just.
Just reiterate we're going to have covered all inflation recovered at all in the second quarter Thats total inflation not just Ross we've covered it all in the third quarter unencumbered all in the fourth quarter. So now we are.
We're eating into some of that gap that we had built up and will be totally caught up in Q1 and thats what the price increases we know that's not.
With anything that May come up in the next 30 to 60 days that we May also talk tag on as Vince says from a targeted standpoint, okay. So what is it that we're probably not going to see relief on we're clearly not going to see relief on labor.
That's not going to happen, but we are going to see we already have started to see relief on transportation.
We think warehousing costs are going to moderate a little bit it's not going to be significant but thats going to moderate some and raw materials, we've already seen it in starting in Tio too we've seen it start in our proxy we're going to continue to see it in some of the basic isocyanate Theres No question in Q1, we're going to get.
Lower emotions costs. So we can see these things coming now or are we going to get all the way back to 2019 levels on some of these <unk>.
Maybe maybe not a little bit too early to make that call.
But what I am confident enough is that.
Our team has done a really good job of pricing effectively our customers are well aware of what's going on in that space.
And.
I think.
We're going to continue to close this gap and it will be completely closed by the end of Q1 and Thats. Why we are confident that margins will continue to expand in 2023.
Our next question comes from Frank Mitsch from Fermium Research Your line is open.
Thank you and first we've got a changing of the garden in Pittsburgh quarterback and now this Michael it's been a pleasure working with you best wishes for the future and RBC Congratulations Tim.
I wanted to drill down a bit more into the volume trends third quarter volumes were down 3% I was wondering if you could let us know what that was by month to see if there was some degradation as we as we exited the quarter and as I think about the fourth quarter is when you think about the fourth quarter. You mentioned that you anticipate volumes down mid single digits.
In the prepared remarks.
Said that Asia was expected to be down 10% I was wondering if you could offer some comments on expectations Europe U S Canada and.
In Asia.
Frank.
This is Michael Thank you very much for you.
Comments, it's been a pleasure working with you and.
Obviously, we'll continue to follow that gets regardless of.
Where I ended up playing golf in the future so let's.
Let's talk a little bit about the third quarter look.
The thing about the third quarter was September and China was weaker than we expected that we certainly do not expect.
The impact from them.
And as to reduce rates, 50% in our Tianjin plant.
We certainly saw the decreases coming in the Destocking in the architectural channel in Europe , they have been very aggressive with that.
<unk> made that even more aggressive.
September timeframe, we started to see that in the U S as well.
That touches a consumer whether it's the appliance area or think about things that look like a peloton.
It continues to be.
Weaker so we're tracking that closely.
Right now I would say for the fourth quarter volumes.
We're not projecting any major surprises in that area I mean cautiously optimistic that the OEM space in Europe has reached a bottom.
I think thats one area that we'll be looking for.
See if that levels out where it is now.
Certainly we're worried about and watching the interest rates here in the U S and how thats going to impact automotive, but look this year, we're probably going to finish with automotive builds around 81 plus million cards.
And we're looking at next year's to be about $85 million. So for some of these things that are weakening we do see some things that are strengthening and.
It should China ever move away from or at least move partially away from the zero Covid policy, we know that flights in China will significantly increase they've been pent up.
Want to move around but they just haven't been allowed to by the government. So from that standpoint, I feel pretty confident.
Our next question comes from Iron Fish, one of Toms from RBC capital markets. Your line is open.
Great. Thanks for taking my question apologize for that.
And Michael Congratulations on your next endeavors, there good working with you.
I'm just curious on the volume side. So when we think about it it looks like there's been some real structural damage in Europe .
Volumes may not necessarily recover to where they were pre pandemic levels I don't know if you'd agree with that but maybe you can just comment on that and then secondarily.
If we do see some continued weakness in Europe .
Is there a risk that volumes also could deteriorate in North America and if that's the case then are we kind of thinking about Q4 earnings run rate as likelihood starting point for for Q1 and most of next year. Thanks.
Yes, so Aaron this is Tim thanks.
Thanks for the question I'll go first and then maybe hand, it and hand it over to Vince.
Four.
Europe .
I think the guidance that we've put out.
We're comfortable with with what we projected from a from an architectural standpoint industrial auto we feel pretty much like like we bottom on the volume standpoint.
From a European situation and then the carryover into the U S.
We really haven't we haven't seen that yet.
U S volumes are holding up pretty well for us with the exception of again anything consumer related on the industrial side.
And architectural DIY, so we haven't really seen.
The contagion cross the ocean into the United States market yet.
Yes, Arun this is Vince on the your question about structural demand I think it's too early to make that call.
As we look into 2023 again, we're going to lap some easier comparisons beginning in March.
We do feel there is a.
<unk>.
Consumer there typically is a spend our money.
We were obviously seeing some impact from that due to higher energy prices be the length of that energy price issue will drive some some of the answers to your question, but we just don't have.
Okay.
If activity or production shifts to other parts of the world from Europe due to those energy prices, we are already have positions.
To China shifts to Mexico.
We'll supply the customers there.
Our next question comes from John Roberts from Credit Suisse. Your line is open.
Thanks, and best wishes, Michael and congrats Tim.
The theme theme in auto OEM is that in Europe and in the U S. We're already a recession levels. So that we don't decline further now that Europe is actually probably in a recession do you still think that European auto OEM is going to be flat to up next year.
Yes, John this is Michael.
Think that European auto demand is going to remain at the level. It's at for the next two to three quarters.
I don't see any catalysts for that turnaround.
At the end of the day.
Europe .
Rarely gets below that eight or 9 million cars in western Europe , that's about where we are now.
And.
Overall, we have a lot of cars that are driven by corporate buying and fleet buying and behaviors have not every change because they are ingrained in the habits.
Of the companies that do those things.
So.
We're pretty confident we're at that level in the U S look.
We've been constrained right now Theres only 32 days of inventory on the lot.
And many of the most popular colors are very hard to find and so people are still buying if you think about the truck market.
Can't find a truck out there so that remains a very solid market and thats always a good indicator because our demand in the band kind of stuff those guys need trucks, and so thats going to continue we do see some continued momentum.
Momentum on Evs, but we're really excited about the EV momentum in China I didn't talk about this earlier, but China has a goal of having 25% of all cars by 2025, EV, while they exiting last quarter. They hit that target and the fact that these guys are starting to export E. Visa is an encouraging.
Active for us in the <unk>.
Largest maker of visa.
In China in BYD, and we just happened to be the largest supplier to BYD. So we feel like we're in good shape.
Yes, I think John expense I think holistically, when we look at the Globe Global auto market next year.
Our our forecast.
Six months ago was we'd be up 5% to 10% year over year.
Our current forecast, we're going to be up 5% to 8%.
So there might be some cropping off at the top of that.
But we still feel very good about global auto growth next year.
We now turn to Mike Harrison from Seaport Research Partners. Your line is open. Please go ahead.
Hi, Good morning, and let me add my congratulations.
Mike It's Michael again.
Wanted to ask maybe for a little bit more color on the actions that you guys are taking to reduce costs by another $70 million.
You had mentioned that a lot of those are going to be taken in Europe , but can you talk about some of the different buckets in terms of whether it's supply chain procurement.
Manufacturing optimization head count reduction.
Maybe talk about the timing and also should we assume that it's split pretty radically between the two segments. Thank you.
Hey, Mike. This is this is Tim I'll start with <unk>.
For the question.
The vast majority of the new cost out program.
Our people reductions, we anticipate globally will reduce our head count by about 2%.
And most of those will be fairly fast moving.
Any any facility discussions of course, we would we would work with the appropriate works councils, but but the majority by far of this new program are fairly fast reductions in staffing and Mike. This is Michael It is ratably the same between the performance side and the industrial side.
And I'll, let John talk a little bit about the $70 million yeah. Mike. So we are targeting $70 million and that that will start benefiting the company as early as the fourth quarter.
Along with other open programs, we've had from prior years at this time, we expect next year that savings will be a total of about $70 million.
Our next question comes from David Begleiter from Deutsche Bank. Your line is open.
Hey, Good morning. This is Anthony <unk> on for David Begleiter.
Can you discuss the benefit in U S architectural coatings from the home depot relationship and maybe <unk>.
Quantify the additional wins that were mentioned in the prepared commentary.
Sure Anthony this is Tim Thanks for the question.
The home Depot Pro program is progressing well.
Thousands of new customers from the program and we've actually as you heard in the prepared comments. We've activated the next phase, which is engaging with with HD supply and the beauty of HD supply.
They're largely MRO focused.
Hospitality healthcare government multifamily maintenance repair.
<unk> delivered on site and previously.
It did not do a lot of paint. So this is a lot of upside opportunity for us to put some scale on some of the some of the comments earlier.
We're focused heavily on lead lead indicators and we're averaging over 6000, new customer engagements every week.
And that is enabled by the linkage of our CRM systems between the home depot and PPG. So these are new customer opportunities.
For us that are already buying paint from somewhere else and buying other other products from the home depot.
We've got about a 40% win rate that.
That compares to historical levels of about a 20% win rates. So we're very satisfied with that lead indicator and then on the HD supply and we're very early days here, but we've also started to engage in the first month 12000, new customers.
Just through just through that next stage of the program. So.
Big picture. This is a $10 billion addressable market for the pro painter.
It's a marathon not a sprint as you convert each one of these contractors, but we're pleased with the results so far and we're expecting double digit growth in this category for us for many quarters to come.
Our next question comes from Alexia <unk> from Keycorp. Your line is open.
Thanks.
Sure Michael Kim.
In the U S, Canada, DIY Mark that you mentioned.
That it's down low single digit how does this compare to prior downturns.
And also in the short term if you can comment if there is.
Low single digit.
Whats getting worse in September October or was stable.
This is Michael of legacy I would tell you the architectural business in September was a little bit lighter on the destocking in the big boxes. So that is not demand related they just decided that they would.
Moving to a little bit lower inventory position as Tim has said on multiple occasions.
Our business with the home depot continues to grow we're really pleased with that we will have some further announcements about some other wins in the big box segment, when it's appropriate to put it out there, but we're going to have a <unk>.
Substantial nicely when in the Big box segment starting in.
In the first quarter and so we'll be starting to ship that in Q1, and what I would tell you is that this is probably.
The slight downturn into higher than historical.
It's still too early to call, obviously interest rates when I think about interest rates of 6% to 7% is still low compared to my first house that I got at 11%. So of course, my kids don't understand that.
But I would tell you that we still have a positive outlook on the housing market. We know that there is a labor shortage and more of this is being driven by the fact that both our probe.
Painters don't have enough labor, there's not enough labor in the new home construction market. So.
Net net I would tell you that we're optimistic.
Yes, I'd just like to add one other thing on U S housing.
With all the numbers everybody has seen and really we're talking about new housing here, we're going to be honest with ourselves and how we plan for that based on what's really happening in that space.
And the way we're looking at it is we do see.
Pocket in the new housing space or or some number of quarters. The positive from PPG standpoint, it only represents about 1% to 2% of our total enterprise sales and we're also frankly significantly stronger in commercial maintenance repair. So we are accounting for.
Or what's happening in new housing in our in our guidance and the other positive. It was Michael alluded to the housing fundamentals are still strong for the mid to long term.
There is a housing shortage in the United States as well as many other countries. So while there is maybe an air pocket in the short term the fundamentals for the mid and long term remains strong.
Okay.
Our next question comes from PHH of call from Citigroup. Your line is open.
Hi, Good morning. This is Patrick Cunningham on for P. J.
Ticker Elo holding up relative to your expectations, especially given the energy crunch in Europe , and the consumer slowdown.
Yes, Patrick Tim again here, we are very pleased with with ticket as a result in our first year of ownership it has given us.
Technology has given us ESG, it's given us a great wood care offering that we can spread throughout the rest of the PPG starting with the rest of Europe .
US market access.
Strong number one position in a number of countries.
And so and a great management team by the way, which was a very pleasant.
Okay.
<unk>, but the strength in depth.
The management team was.
It was better than we had anticipated. So we are absolutely thrilled with ticagrelor and the path forward of course from a DIY standpoint. They are seeing some of the same issues that I mentioned earlier four out of the Pan European.
Situation, but between what we acquired with <unk> and what we're able to.
Bring in <unk> and their position from other businesses like light and such like.
Like protective coatings.
We really are just thrilled with how that acquisition is doing and Patrick I would add one thing that the skill set that we brought in particular that they were starting to learn how to do but we've accelerated as pricing and this is an area where they have a market leading position in Finland and market leading position.
Sweden market, leading position in the Baltics.
Pricing muscle hadn't been exercised previously and we're showing them how to exercise it so it's a win win.
From that standpoint.
Patrick This is Vince I don't want to.
We're away from your question, but the other acquisition. We did was in its plan Michael alluded to it earlier.
Had double digit sales growth in that business.
Look for that business continues to look promising and the 2023, especially with the infrastructure activities in the U S et cetera. So so again very promising situation with emmis plant as well.
Okay.
Our next question comes from Laurence Alexander from Jefferies. Your line is open.
Yeah.
Hey, Good morning. This is Kevin Estok on for Laurence. Thank you for taking my question.
I was just wondering if you could discuss how you guys think about incremental margins between the different regions you operate in in particular, if there was a difference between EU and U S incremental margins, let's say every.
Additional doors at.
Customers.
Yes.
Yes.
Kevin This is Vince we're still in that 30% to 40% range for incremental margins.
Certainly around the fringes as activity in the in Europe when activity in Europe comes back it'll be a little higher just because of our utilization rates that are a little lower but I would certainly pencil in 30% to 40% incremental margins and then we have to.
You talked about several times on this call there'll be some.
Benefit from price raws.
As that normalizes, so that'll be above those incremental margins.
Our next question comes from Steven Haynes from Morgan Stanley . Your line is open.
Sure.
Hi, Thanks for squeezing me in.
Working capital frees up a little bit as inventories come down can you just provide a bit of an update on your M&A pipeline and how you are thinking about.
Doing deals versus share buyback going forward. Thank you.
Stephen This is Michael.
Listen our inventory in the pipeline of deals is still solid.
The most important thing is we're going to remain disciplined on how it affects.
Total shareholder return so.
We're going to decide whether its better to paydown debt versus book to acquisitions versus buying back stock on whatever is the most accretive to our shareholders. So.
We're actively engaged in this space.
There are still a number of deals to be had I always tell people that.
Earnings are following.
It's always harder to get deals done because people want to be paid on what their old earnings look like and not with the current earnings and looking like that.
It does.
Make it a little bit more of a challenge.
Talk about normalized earnings versus where they currently are but we're going to remain disciplined in this area and I don't think you should expect anything different than what youre seeing from PPG in the past.
Last question today comes from Adrian to Magner from Paring back. Your line is open. Please go ahead.
Yeah.
Hello, Good morning, gentlemen, and congratulations to Michael.
A question for Tim.
Given your extensive experience in all of the.
Areas of PPG, whether you see the greatest potential fall sort of pace and margin recovery in the current environment.
Thank you Jim for the question and let me just first say I am very excited about the opportunity we have with PPG and I can assure you that we will continue to execute on our margin recovery and we will continue to execute on the optimization.
<unk> is shareholder return first and foremost.
Beyond that second as Michael indicated the change becomes effective on January one and at the appropriate time after that I look forward to engaging all of our key stakeholders, including this group to.
To communicate further about my priorities my vision for the next phase of evolution for PPG, So thrilled with the opportunity.
Encouraged on our path to margin recovery are encouraged on the opportunities to deliver shareholder return and look forward to.
2023 for both.
Organic growth and continued opportunities on the inorganic side.
There are no further questions at this time, Mr. John Bruno I'd like to turn the call back over to you.
Thank you Elliot.
Thank you everyone for your interest and your attention today. This concludes our third quarter earnings call have a good day.
This concludes today's conference call you may now disconnect.
Yeah.
Okay.