Good morning. My name is Elliot, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter PPG Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press Star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. To allow everyone an opportunity to ask a question, the company requests that each analyst ask only one question. Thank you. I would now like to turn the conference over to John Bruno, Vice President of Investor Relations. Please go ahead, sir.
Thank you, Elliot, and good morning, everyone. Once again, this is John Bruno. We appreciate your continued interest in PPG and welcome you to our third quarter 2022 financial results conference call. Joining me on the call from PPG are Michael McGarry, Chairman and Chief Executive Officer, Tim Knavish, Chief Executive Officer-Elect, 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 Wednesday, October 19, 2022. We have posted detailed commentary and accompanying presentation slides on the Investor Center of our website, ppg.com. The slides are also available on the webcast site for this call and provide additional support to the brief opening comments Michael will make shortly. Following management's perspective on the company's results for the quarter, we will move to a Q&A session.
Both 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 appendix of the presentation materials which are available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information, please refer to PPG's filings with the SEC. Now let me introduce PPG Chairman and CEO, Michael McGarry.
Thank you, John, and good morning, everyone. I would like to welcome you to our third quarter 2022 earnings call. I hope you and your loved ones are remaining safe and healthy. Before I go into my comments regarding the third quarter, I would like to congratulate Tim Knavish for being appointed President and Chief Executive Officer of PPG, effective January 1, 2023, and immediately joining the company's board of directors. Tim has an outstanding track record having served the company for more than 35 years and leading nearly every PPG business during his career. The board and I have full confidence that Tim will guide PPG to future growth and additional shareholder value. With Tim's appointment, I will become Executive Chairman on January 1, 2023. Now let me turn to our financial results.
Last evening, we reported third quarter 2022 financial results. For the third quarter, we delivered net sales up $4.5 billion, and our adjusted earnings per diluted share from continuing operations were $1.66. To quickly summarize the quarter, our sales performance was a record driven by continued realization of real-time price increases that fully offset total cost inflation for the second consecutive quarter. On a two year stack, selling prices are up about 18%. As we communicated earlier this month, these sales and earnings results were lower than our guidance for the quarter as we were impacted by further softening of demand in Europe and less of a sequential economic improvement than expected in China due to pandemic restrictions in September.
In addition, the strengthening of the U.S. dollar lowered sales by about 6% or $265 million worse than it was originally forecasted. Despite these lower than forecasted sales, we did deliver strong performances in several of our businesses, including PPG Comex, which delivered another record quarter. Also, our global Automotive Refinish, Traffic Solutions, and U.S. Packaging Coatings businesses each set all-time quarterly sales records in the quarter. Year to date, our Automotive Refinish coatings business has delivered about 1,500 net new body shop wins as customers continue to value the product technology and industry-leading services and capabilities that this business delivers every day. In addition, our Aerospace business delivered strong double-digit percentage sales growth, volume growth aided by recovering airline travel that is now about 85% of pre-pandemic levels.
With additional industry recovery, a strong order book, and PPG's advanced technology products, we expect this business to continue to grow into 2023 and beyond. We continue to experience improvement in commodity raw material availability. However, certain short supply of raw materials impacted our automotive refinish and aerospace coatings businesses, constraining their ability to meet their respective strong order books. Together, these two businesses entered the quarter with a $200 million backlog, similar to the end of the second quarter. Importantly, our year-over-year segment operating margin recovery has begun. This reflects the progress we have made in implementing selling price increases. The third quarter marked the 22nd consecutive quarter of higher selling prices.
We expect our margin recovery to accelerate into 2023 and anticipate by the first quarter of 2023, we will fully recover all cumulative inflation from 2021 and 2022. We continue to make good progress executing on our acquisition-related strategies and other cost-savings initiatives from previously announced restructuring programs, which delivered about $25 million of incremental benefit in the third quarter. During the quarter, we continued to progress our launch of the expanded Pro Painter 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 the HD Supply team to hunt for new paint customers, including in the commercial maintenance area. While early, this collaboration is yielding results, and we expect will be another catalyst for future growth in the US architectural coatings business.
Overall, paint contractors are providing us with ongoing positive feedback on the convenience of buying well-recognized PPG 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 made solid progress in the third quarter in beginning to lower our inventories on a sequential basis. We had been carrying higher than historic levels of inventory given supply chain constraints over the past year. Given the broadening elongation of supply globally, we are now able to 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 Tikkurila has proved to be very valuable on several fronts, including enhancing PPG's ESG program through the addition of advanced sustainable solutions that contribute to the circular economy. These include bio-based products and packaging made from 50%-75% recycled plastic that is also 100% recyclable. Currently, nearly 90% of Tikkurila's products are waterborne and 48% of the portfolio is eco-label. We are leveraging Tikkurila's 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 in most of our architectural businesses and also in our Traffic Solutions business, whose sales historically fall about 50% due to 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. PPG's 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 in store for PPG, we expect Automotive OEM builds in China to remain solid and consumer spending to improve into 2023.
In general, demand in the US end-use markets remains 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 coatings products in the U.S. is beginning to slow, and industry demand is anticipated to weaken further in the fourth quarter and into next year based on leading economic indicators. PPG's exposure to the US new home market is relatively small and 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 fall modestly on a sequential quarterly basis.
We expect supply chain conditions to continue to broadly improve, including better raw material and transportation availability as our suppliers are nearing their 2019 manufacturing and supply capabilities. 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 focused on fast payback actions, targeting $70 million of annualized savings upon full implementation. The program includes several initiatives in Europe and mostly concentrated on matching our staffing levels with lower demand.
As we enter a period of heightened economic uncertainty, we expect our business portfolio to prove 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 increment 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 capabilities of PPG as the earnings catalysts that I'd referenced in the past remain fully intact, 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 wanna thank our team of 50,000 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. Now, Elliot, would you please open the line for questions?
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 a Q&A roster. Our first question comes from Christopher Parkinson from Mizuho. Your line is open. Please go ahead.
Great. Thank you so much. The macro is, you know, changing and not necessarily for the better, but, you know, per your comments, it doesn't seem like the setup for this in a recessionary environment aligns with history, which has consequences across fixed asset leverage, and market mix when you're discussing, you know, Refinish narrow, just the overall margin outlook, versus past downturns. Can you just give us an overall update of your thoughts here and potentially anything on price cost as well? Thank you.
Thanks, Christopher. First of all, I think you know the most encouraging thing about what we see is that we see continued price increases coming. Fourth quarter, we're still looking at you know a high single digits, low double-digit price increases. That's gonna 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. You know these are things that are a little bit different than the last ones. I'll remind everybody you know by the end of the year, we'll have about $2 billion of raw material inflation, and we still have other inflation. 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? We feel very confident going into the fourth quarter that we're gonna continue to recover that gap. By the end of the year, we will have recovered all raw material inflation, and before the end of the first quarter, we will cover all total inflation. We're really in good shape from that standpoint. I'm pleased with what I see. You know, I think this is gonna 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 from Baird. Your line is open. Please go ahead.
Yeah, thank you, and congrats first off, Michael and Tim. You know, can you just give us a sense, Michael, on how you see architectural volumes evolving in your three major regions of, you know, the U.S., Europe, and Mexico as we cycle into 2023? I mean, obviously, DIY has been impacted in the U.S. and Europe. Just given the extent of mortgage rate increases and some of the fundamental shifts in housing as well, you know, for markets such as the U.S., how are you planning for that evolution of volumes there?
Ghansham, I'm gonna let Tim take this one.
Yeah, thanks. Thanks, Ghansham. First I wanna thank Michael and the PPG board for their trust and confidence as we continue to drive the company forward. I also wanna thank Michael personally for his leadership, his personal mentorship of me 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. Really looking forward to the future and continuing to work with our 50,000 people around the world. Now, specifically to your question. Around the world for architectural, PPG Comex, our Mexican business, continues to shine. First, GDPs are holding up better than most parts of the world in Latin America.
Second, just the strength of our position, the strength of our services, the strength of our brand, the strength of our network, we'll continue to put up strong results down there. As you know, Asia Pacific for us is a fairly small business in architectural. Given some of the things happening in China, that's actually a positive at this point. You know, Europe, we continue to see quite soft DIY, as we said in Q1 and Q2, and we expect it to continue at the depressed levels that it is today. Trade in Europe is actually a bit stronger. It's down, you know, mid-single digits. The pro backlogs are still there, driven largely by labor shortages 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. You know, the closer you get to the war zone, the more depressed it gets. U.K., you know what's happening there, and then a bit stronger in the South. Holding up better over here in the US-Canada market. We are seeing DIY softness here. Nothing like Europe. More down like low single digits in DIY, U.S., Canada. You know, the pro business is holding up well, backlogs remain strong. Backlogs, our quarterly survey of paint contractors averaged about 12 weeks of backlog, pretty consistent with the prior quarter.
You know, our omnichannel business for the pro, we were actually up this quarter, so holding up better here in the US-Canada region.
Our next question comes from Josh Spector from UBS. Your line is open.
Yeah. Hey, guys. Thanks for taking my question. I'm just curious if you can comment on the pricing progression in the two segments. I mean, clearly you have momentum in performance with that increasing on a two-year stack, but industrial may be a little bit less obvious. You know, 20% two-year stack or slightly above that isn't much of an improvement quarter-over-quarter. I'm wondering if you can comment on why pricing there wouldn't be moving up higher, especially since you're talking about margins accelerating. Does energy prices, and that being a new inflationary factor, perhaps a higher inflationary factor, impact the ability to get pricing in any of the segments? Thanks.
Josh, this is Michael. You know, first of all, what I would tell you is that, part of what you're seeing of the slowing of the price increases in the performance coatings segment is because of the drop in architectural sales, okay? You have a little bit of a mix issue going on in there. That's one. The other thing you have to remember is we got pricing much earlier in performance coatings segment, and we always lag a little bit in the industrial side. The other piece besides mix is timing. What you see, which is most important, is that on our industrial side, you know, it does lag, but now it's catching back up. You know, the industrial side was above company average, and we expect that to continue in the fourth quarter as well.
Most importantly, in our automotive segment, you know, a number of our customers have provided us retroactive pricing as well. That helps that margin as well. We're, you know, still anticipating some significant price improvement in the fourth quarter. Again, we'll be ready to talk about the first quarter later. It, you know, we will have significant positive price in Q1 as well.
Yeah, Josh, this is Vince. I think the key things to remember for us is the margin recovery we promised in industrial is underway. We expect that margin recovery to continue into Q4 and expand into Q1. Your question on energy in Europe, yeah, we 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, and we're reacting as much as we can to what's a tough energy environment in Europe.
Our next question comes from John McNulty from BMO Capital Markets. Your line is open.
Yeah. 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 there's still some challenges. I guess, can you help us to understand what portion of the raw material basket is still currently challenged? Then as the supply chains 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? Thanks.
Yeah. Yeah, John, this is Vince. Let me start real quickly, and then I think Tim's gonna 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. That's, I think, the key is we're starting to see the fever break. It's different, as Michael mentioned, by region, but we're seeing arbitrage opportunities, and I think Tim has some specifics.
Yeah. From the availability situation, John, is much better. We're down to isolated examples. You know, you've got the singular example here in the U.S. with a fire at a particular resin supplier that has caused a transient disruption. We put some alternatives in place to deal with that. If you look at, like, across to Aerospace Transparencies, you've got some things not related to coatings, but components, machined parts, acrylic parts that go into the manufacture and assembly of a windshield. Now we're down to handfuls of items, some minor additives, as opposed to what we had a quarter or certainly two quarters ago.
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 were saddled with inflation that included COVID absenteeism, freight issues, port issues. A lot of those other issues have fallen by the wayside. We do feel, given those other issues have been resolved, you know, the supply/demand economics will start to play a bigger factor.
Our next question comes from Steven Byrne from Bank of America Merrill Lynch. Your line is open.
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? You know, for example, Tikkurila, did that give you a footprint in a region where you think you can meaningfully expand either refinish or traffic markings? What's the outlook for you in that region?
Well, Steven, this is Michael. Let me just give you some examples that all play into the positives of what we do with the acquisition. If you think about Traffic Solutions, you know, that was primarily a US business. They had a teeny tiny piece in Mexico. You take our PPG Comex team, and they're a powerhouse in Mexico. What do we do? We take those formulations that they have in the U.S., we transfer them down to Mexico, we localize them for the local market, and we start selling them. You know, our Traffic Solutions business is growing 20%+ every quarter since we've had it, and we've had it now five quarters. You know, it's moving along. Same thing with Tikkurila.
You go to Tikkurila, and they had a strong customer relationship up in Scandinavia. It's not that we weren't selling in Scandinavia, but they had some tremendous relationships. We're able to take our industrial products and bring them up there. We're able to expand some of our refinish products up there. I think we highlighted that when we took you to see Bergström up in Scandinavia for the Investor Day. The same thing when you think about China. When we bought Wörwag and Cetelon, we took those formulations, we moved them over to China, and we've been able to grow our automotive parts and accessories business in China, and that's been a nice win for us. We have new waterborne technology for automotive parts where we're growing significantly faster than market.
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. Thank you very much for the question.
Our next question comes from Kevin McCarthy from VRP. Your line is open.
Yes, good morning. I'd 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, you know, those markets have been more dislocated or depressed?
Well, we're certainly, Kevin, gonna do that for some of our businesses where the raw materials we built up. That's gonna happen. You did highlight a number that are gonna be well north of that. Automotive Refinish, Traffic Solutions, things like that are all gonna be well above company average. The thing you have to remember is we're also gonna take advantage of the arbitrage in raw materials. If it makes sense for us, you know, we're moving TiO2 right now from China. We're moving it into Europe. We're gonna take advantage of things like that. Net, I would tell you that we're probably gonna be pretty close. You know, we've took down inventories $100 million in Q3.
We're probably gonna take them down another $200 million in Q4, and I think we're in pretty good shape.
Yeah. Let me add on to what Michael said here. I think if you think about the coatings industry more broadly, we're a batch process, we typically can start and stop as we please. We're not a continuous process. Where we are this cycle versus prior cycles is we don't have a lot of inventory. Our end customers, with a few exceptions, do 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. There's not, Kevin, a big destock coming in many of our industries. Automotive, another one where we're inventory light all the way through the chain.
We're gonna run at or slightly below what we see as our end customers' consumption to draw down our inventories. With a couple of small exceptions, including in some of our big box DIY customers, there's not a lot of inventory in our end channels. We do have a huge focus on drawing down our raw material inventories in the fourth quarter.
Our next question comes from Laurent Favre from Exane BNP Paribas. Your line is open. Please go ahead.
Morning all. Congrats again to Michael and team. My question is, again, on this inventory point and destocking on the volume guidance for Q4. I was wondering if you had made a specific assumption on destocking itself on the customer side.
Yeah, Laurent. Good. Thanks for the question. This is Tim. To Vince's point, really the only segment where we're seeing destocking on the customer side is architectural DIY big box. We are seeing that in Europe predominantly, but also here in the United States. You know, we do expect that to continue really for the remainder of the year until they reach their targeted levels. But beyond that.
Many of our customer channels are still fairly light or very light in some cases on inventory. That's the only destocking we expect to see.
Yeah. If I could just add, this is Vince again. If you go to Europe, where we're seeing that, we started to see that really in Q2, late Q1, early Q2 of this year. So we're gonna lap. You know, in a couple of months here, we're gonna lap those declines. So we do have a different comparison base in 2023 for Europe.
Our next question comes from Michael Sisson from Wells Fargo. Your line is open.
Hey, good morning. Congrats to you, Tim, and it's been great working with you, Michael. I assume you're moving to Cleveland post-retirement. I guess the first question for you, Michael, when you think about your outlook for the fourth quarter, you know, the $5-$20, you know, seems sort of low on a quarterly run rate. Just curious what you think needs to happen to see sequential improvement heading into the first half of 2023. 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. I will take the first question, and I'll let Tim answer the second question. Look, at the end of the day, you know, when we put together our original, let's call it our pre-announcement guidance, you know, our Chinese team was very confident that post President Xi's election for his third term, that the COVID policies in China would be relaxed and would take a more normalized approach. Clearly, with his speech last week, that is not going to be the case, so we've adjusted based on that. You know, our Tianjin plant, which is actually our largest coatings plant in the world in China, you know, it was down the last 10 days of September. It was down the first 10 days of October, running at reduced rates.
You know, consumer confidence, obviously, is something we're gonna be watching very closely in China. The good news is, when you look at the rest of China, the automotive business had a very strong third quarter. We're projecting a pretty good fourth quarter. That's historically the best quarter for automotive in China. I'm very encouraged by the fact that the automotive guys in China are exporting their electric vehicles. As you know, the electric vehicles are good for us. BYD is not only exporting to Europe, but they're also exporting to Southeast Asia. We feel very confident about that. You know, I think overall, you know, you may view that guide as a little weak, but there's a lot of things out there that are quite uncertain.
We don't know how much destocking the DIY guys will do in the fourth quarter. Typically, they start buying in December to, you know, get ready for the new season. We have not put any of that in there. We're being a bit cautious given what we see. I think our guide is reasonable and we're certainly gonna 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.
Right. The $9, the answer is it's a question of when, not if. The fundamentals for $9 are absolutely there. If you look at the pluses and minuses on the ledger for that, you've got aero recovery, you've got auto recovery, you've got more refinish recovery. That great business is still down 10% versus pre-COVID. We've got the inflection of the price cost curve, you know about our restructuring and the footprint work we've done. You know, China's still closed. Acquisition synergies, technology, et cetera. That side of the ledger is a lot stronger than the other. The other side of the ledger is really only about macroeconomic-driven volume.
We only need some of that to come back to get to that $9. It's absolutely in our future. Thanks for the question.
We now turn to Noah Poponak from Goldman Sachs. Your line is open.
Hello, this is Duffy. Can you hear me okay?
Yes, Duffy, good morning.
Good morning. Sorry, guys. First, thanks and congrats to Michael and Tim. Second one, two questions around kind of the price cost. 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, you know, whether that ends up being Q1 or Q2 next year? Then the second one is, the $1.9 billion you referenced, what 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 never get back. You know, you've got stuff like the Allnex plant that, you know, again, theoretically, as soon as that's back up and running, you'll see some relief there.
You can do a lot better job kind of analyzing the supply-demand chains for each of the particular items. Is it half? Is it 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. You know, to fully recover our total inflation, as we said earlier, you know, late Q4, early Q1, we have very modest targeted pricing actions we're gonna take in Q4, and we're gonna take some targeted actions in Q1. Again, we're not, this is not relying on exceptionally, exceedingly high pricing going forward.
Duffy, let me just reiterate. Look, we're gonna have covered all inflation. We covered it all in the second quarter. That's total inflation, not just raws. We've covered it all in the third quarter. We're gonna cover it all in the fourth quarter. Now we're eating into some of that gap that we had built up, and we'll be totally caught up in Q1. That's with the price increases we know. That's not, you know, with anything that may come up in the next thirty to sixty days that we may also tag on, as Vince says, from a targeted standpoint. Okay. What is it that we're probably not gonna see relief on? We're clearly not gonna see relief on labor. Okay. That's not gonna happen. We are gonna see, we already have started to see relief on transportation.
We think warehousing costs are gonna moderate a little bit. You know, it's not gonna be significant, but that's gonna moderate some. Raw materials, you know, we've already seen it starting in TiO2. We've seen it start in Epoxy. We're gonna continue to see it in some of the basic isocyanates. There's no question in Q1, we're gonna get lower emulsions costs. You know, we can see these things coming. Now, are we gonna get all the way back to 2019 levels on some of these? Maybe, maybe not. You know, it's a little bit too early to make that call. What I am confident of 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.
I think, you know, we're gonna continue to close this gap, and it will be completely closed by the end of Q1. That's why we're confident that margins will continue to expand in 2023.
Our next question comes from Frank Mitsch from Fermium Research. Your line is open.
Yes, thank you. First we get a changing of the guard in Pittsburgh at the quarterback and now this. Michael, it's been a pleasure working with you. Best wishes for the future, and obviously, 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 exited the quarter. As you think about the fourth quarter, you mentioned that you anticipate volumes down mid-single digits. In the prepared remarks, you 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 Asia?
Frank, this is Michael. Thank you very much for your kind comments. It's been a pleasure working with you, and obviously, we'll continue to follow the Jets regardless of, you know, where I end up playing golf in the future. Let's talk a little bit about the third quarter. Look, you know, the thing about the third quarter was September in China was weaker than we expected, that we certainly did not expect the impact from them, you know, asking us to reduce rates 50%+ in our Tianjin plant. We certainly saw the decreases coming in the destocking in the architectural channel in Europe. You know, they've been very aggressive with that, and they, you know, made that even more aggressive in the September timeframe.
We started to see that in the U.S. as well. Anything that touches a consumer, whether it's the appliance area or think about things that look like a Peloton, you know, that continues to be weaker. You know, we're tracking that closely. Right now, I would say for the fourth quarter volumes, you know, we're not projecting any major surprises in that area. I mean, cautiously optimistic that the OEM space in Europe has reached a bottom. You know, I think that's one area that we'll be looking for to 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 that's gonna impact automotive.
Look, this year, we're probably gonna finish with automotive builds around 81+ million cars, and we're looking at next year's to be about 85 million. You know, for some of these things that are weakening, we do see some things that are strengthening. You know, should China ever move away from or at least move partially away from their zero COVID policy, we know that flights in China will just significantly increase. They've been pent up. They wanna move around, but they just haven't been allowed to by the government. From that standpoint, I feel pretty confident.
Our next question comes from Arun Viswanathan from RBC Capital Markets. Your line is open.
Great. Thanks for taking my question. Apologies for that. Michael, congratulations on your next endeavors there. Good working with you. I'm just curious on the volume side. When we think about it, there looks like there's been some real structural damage in Europe. You know, 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. Then secondarily, you know, if we do see some, you know, continued weakness in Europe, you know, is there a risk that volumes also could deteriorate in North America? If that's the case, then are we kind of thinking about Q4 earnings run rate as likely a starting point for Q1 and most of next year? Thanks.
This is Tim. Thanks for the question. I'll go first and then maybe hand it over to Vince. You know, for Europe, you know, I think the guidance that we put out, you know, we're comfortable with what we projected from an architectural standpoint, industrial, auto. We feel pretty much like we've bottomed on the volume standpoint from a European situation. The carryover to the U.S., you know, we really haven't seen that yet. The US volumes are holding up pretty well for us, with the exception of, again, anything consumer related on the industrial side and architectural DIY. We haven't really seen the contagion cross the ocean into the United States market yet.
Yeah. Arun, this is Vince. On your question about structural demand, I think it's too early to make that call. I think, you know, as we look into 2023, again, we're gonna lap some easier comparisons beginning in March. We do feel there's a consumer there that typically has spent money. We are obviously seeing some impact from that due to higher energy prices. The length of that energy price issue will drive some of the answers to your question that we just don't have. If activity or production shifts to other parts of the world from Europe due to those energy prices, we already have positions. If it shifts to China or shifts to Mexico, you know, 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 in auto OEM is that in Europe and the U.S., we're already at recession levels, so that we don't decline further. Now that Europe's actually probably in a recession, do you still think that European auto OEM is gonna be flat to up next year?
John, this is Michael. I think that European auto demand is gonna remain at the levels for the next two to three quarters. I don't see any catalyst for it to turn around. At the end of the day, you know, Europe rarely gets below that 8 or 9 million cars in Western Europe. That's about where we are now. Overall, they have a lot of cars that are driven by corporate buying and fleet buying, and those behaviors have not ever changed because they're ingrained in the habits of the companies that do those things, you know? We're pretty confident we're at that level. In the U.S., look, I mean, we've been constrained. I mean, right now there's only 32 days of inventory on the lots.
Many of the most popular colors are very hard to find. People are still buying. If you think about the truck market, you can't find a truck out there, you know? You know, that remains a very solid market. That's always a good indicator because our, you know, the man in the van kind of stuff, those guys need trucks. That's gonna continue. We do see some continued momentum on EVs, but we're really excited about the EV momentum in China. I didn't talk about this earlier, but you know, China had a goal of having 25% of all cars by 2025 EV. Well, they actually last quarter, they hit that target. The fact that these guys are starting to export EVs is an encouraging factor for us.
You know, the largest maker of EVs in China is BYD, and we just happen to be the largest supplier to BYD. We feel like we're in good shape.
Yeah. I think John, it's Vince. I think holistically, when we look at the global auto market next year, you know, our forecast six months ago was we'd be up 5%-10% year-over-year. You know, our current forecast is we're gonna be up 5%-8%. 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, Michael and Tim. 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've mentioned that a lot of those are gonna 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, headcount 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 Tim. I'll start with thanks for the question. The vast majority of the new cost out program are people reductions. We anticipate, you know, globally we'll reduce our headcount by about 2%. Most of those will be fairly fast-moving. You know, any facility discussions, of course, we would work with the appropriate works councils. The majority, by far, of this new program are fairly fast reductions in staffing.
Mike, this is Michael. It is ratably the same between the performance side and the industrial side. I'll let John talk a little about the $70 million.
Yeah, yeah, Mike. We are targeting $70 million, and 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 Mercandetti on for David Begleiter. Can you discuss the benefit in U.S. architectural coatings from the Home Depot relationship and maybe 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. We've got 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 HD Supply. The beauty of HD Supply, you know, they're largely MRO-focused, hospitality, healthcare, government, multifamily, maintenance, repair, and you know, delivered on-site, and previously 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 comments earlier, you know, we're focused heavily on leading indicators, and we're averaging over 6,000 new customer engagements every week.
That is enabled by the linkage of our CRM systems between the Home Depot and PPG. These are new customer opportunities for us that are already buying paint from somewhere else and buying other products from the Home Depot. We've got about a 40% win rate that compares to historical levels of about a 20% win rate, so we're very satisfied with that lead indicator. On the HD Supply, we're very early days here, but we've also started to engage in the first month, 12,000 new customers just through that next stage of the program. You know, big picture, this is a $10 billion US addressable market for Pro Painter. It's a marathon, not a sprint, as you convert each one of these contractors.
We're pleased with the results so far, and we're expecting, you know, double-digit growth in this category for us for many quarters to come.
Our next question comes from Aleksey Yefremov from KeyCorp. Your line is open.
Thanks and congratulations, Michael and Tim. In the U.S., Canada DIY market, you mentioned that it's down low single digit. How does this compare to prior downturns? How bad do you think this could get? Also, in the short term, can you comment if this down low single digit was getting worse in September, October or was stable?
This is Michael, Aleksey. 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 move into a little bit lower inventory position. As Tim has said on multiple occasions, you know, our business with the Home Depot continues to grow. We're really pleased with that. We'll 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 gonna have a substantial nice little win in the big box segment starting in the first quarter. We'll be starting to ship that in Q1.
What I would tell you is that this is probably the slight downturn is lighter than historical. It's still too early to call. Obviously, interest rates. You know, when I think about interest rates as 6% and 7%, it's still low compared to my first house that I got at 11%. Of course, my kids don't understand that. I would tell you that we still have a positive outlook on the housing market. We know that there's a labor shortage, and more of this is being driven by the fact that both our pro painters don't have enough labor. There's not enough labor in the new home construction market. You know, net-net, I would still tell you that we're optimistic.
Yeah. I'd just like to add one other thing on US housing. You know, with all the numbers everybody's seeing, and really we're talking about new housing here. We've got to be, you know, honest with ourselves in how we plan for that based on what's really happening in that space. The way we're looking at it is we do see an air pocket in the new housing space for some number of quarters. The positive from PPG standpoint, it only represents about, you know, 1%-2% of our total enterprise sales. We're also, frankly, significantly stronger in commercial maintenance repair. We are accounting for what's happening in new housing in our guidance.
The other positive, you know, as 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. While there is, maybe an air pocket in the short term, the fundamentals for the mid and long term remain strong.
Our next question comes from P.J. Juvekar from Citigroup. Your line is open.
Hi, good morning. This is Patrick Cunningham on for P.J. How is Tikkurila holding up relative to your expectations? You know, especially given the energy crunch in Europe and the consumer slowdown.
Yeah. Patrick, Tim again here. We are very pleased with Tikkurila, the results in our first year of ownership. It has given us technology, it's given us ESG, it's given us a great wood care offering that we can spread throughout the rest of PPG, starting with the rest of Europe. It's given us market access, strong number one position in a number of countries. And a great management team, by the way, which was a very pleasant, I'm not gonna say surprise, but the strength and depth of the management team was better than we had anticipated. We are absolutely thrilled with Tikkurila and the path forward.
Of course, from a DIY standpoint, they're seeing some of the same issues that I mentioned earlier for kind of the pan-European situation. Between what we acquired with Tikkurila and what we're able to bring into Tikkurila and their position from other businesses like Light Industrial, like Refinish, like Protective Coatings, we really are just thrilled with how that acquisition is doing.
Patrick, I would add the one thing that the skill set that we brought to Tikkurila that they were starting to learn how to do, but we've accelerated, is pricing. This is an area, you know, where they have a market-leading position in Finland, a market-leading position in Sweden, market-leading position in the Baltics. You know, that 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 sway away from your question, but the other acquisition we did was Ennis-Flint. Michael alluded to it earlier. We've had double-digit sales growth in that business. The outlook for that business continues to look promising into 2023, especially with the infrastructure activities in the U.S., et cetera. Again, very promising situation with Ennis-Flint as well.
Our next question comes from Laurence Alexander from Jefferies. Your line is open.
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 US incremental margins, let's say, every, you know, additional dollar that's spent by customers.
Yeah. Kevin, this is Vince. You know, we're still in that 30%-40% range for incremental margins. Certainly around the fringes as activity in Europe comes back, it'll be a little higher just because our utilization rates there are a little lower. I would certainly pencil in 30%-40% incremental margins. Then we have to, you know, as we've 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 Byrne from Morgan Stanley. Your line is open.
Hi. Thanks for squeezing me in. As 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're thinking about doing deals versus share buyback going forward? Thank you.
Steven, this is Michael. Listen, our inventory on the pipeline of deals is still solid, but the most important thing is we're gonna remain disciplined on how it affects, you know, total shareholder returns. You know, we're gonna decide whether it's better to pay down debt versus do acquisitions versus buying back stock on whatever is the most accretive to our shareholders. You know, we're actively engaged in this space. There are still a number of deals to be had. I always tell people that, you know, when earnings are falling, you know, it's always harder to get deals done because, you know, people wanna be paid on what their old earnings look like and not what their current earnings are looking like.
You know, that always does make it a little bit more of a challenge, you know, talk about normalized earnings versus where they currently are. We're gonna remain disciplined in this area, and I don't think you should expect anything different than what you've seen from PPG in the past.
Our last question today comes from Adrien Tamagno from Berenberg. Your line is open. Please go ahead.
Hello, good morning, gentlemen, and congratulations to Tim and Michael. A question for Tim. I mean, given your extensive experience in all of the areas of PPG, where do you see the greatest potential for self-help and margin recovery in the current environment?
Thank you, Adrien, for the question. Let me just first say, I am very excited about the opportunity we have at 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 of shareholder return, first and foremost. Beyond that, second, you know, 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 communicate further about, you know, my priorities, my vision for the next phase of evolution for PPG.
Thrilled with the opportunity, encouraged on our path to margin recovery, are encouraged on the opportunity 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 turn the call back over to you.
Thank you, Elliot. Wanna thank 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.