Earnings Call Transcript - PPG Q3 2023

Operator, Operator

Good morning. My name is Emily, and I will be your conference operator for today. I’d like to welcome everyone to the Third Quarter PPG Earnings Conference Call. All lines have been muted to prevent background noise. After the speaker's remarks, there will be a question-and-answer session. Thank you. I would now like to turn the conference over to John Bruno, Vice President of Investor Relations. Please go ahead.

John Bruno, Vice President of Investor Relations

Thank you, Emily, and good morning, everyone. We appreciate your continued interest in PPG and welcome you for our third quarter 2023 financial results conference call. Joining me on the call from PPG are Tim Knavish, Chairman and Chief Executive Officer, and Vince Morales, Senior Vice President and Chief Financial Officer. Our comments relate to the financial information released after U.S. equity markets closed on Wednesday, October 18, 2023. 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 opening comments Tim 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. The presentation also contains certain non-GAAP financial measures. The company has provided in the appendix of the presentation materials, which are available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information, please refer to PPG's filings with the SEC. Now, let me introduce PPG Chairman and CEO, Tim Knavish.

Tim Knavish, Chairman and CEO

Thank you, John, and good morning, everyone. Welcome to our third quarter 2023 earnings call. I'd like to start by providing a few highlights on our third quarter record financial performance, and then I'll move to our outlook. In the third quarter, the PPG team continued to deliver strong financial results, including sales of $4.6 billion and adjusted earnings per diluted share of $2.07, both records for our third quarter. Our year-to-date cash generation is over $1.5 billion, which is also a record on a year-to-date basis. Our adjusted EPS of $2.07 was 25% higher year-over-year. We benefited from several non-recurring favorable discrete income tax items, which added $0.10 versus our beginning of quarter guidance. Excluding this favorable tax benefit this year, our EPS was still about 20% higher than the third quarter of 2022. We're on pace to finish 2023 with all-time record adjusted earnings per share. As we communicated at the beginning of the year, we had a high degree of conviction that our global business portfolio mix would prove resilient this year, and as we anticipated, a challenging economic environment. That has clearly played out through the first nine months of the year. Our results were supported by good growth trends and strong execution in several of our leading and technology-advantaged businesses, resulting in record third quarter sales in the aerospace, automotive OEM, automotive refinish, and PPG Comex Coatings businesses. Our third quarter sales volumes were impacted by soft global industrial production, which worsened in many countries during the quarter, and also by cautious consumer buying patterns in Europe, China, and other parts of the world. The selling price increases we implemented earlier this year, primarily in the Performance Coatings segment, drove a solid 3% increase for the quarter. We expect selling prices to remain positive in the fourth quarter of 2023, albeit a little lower sequentially as we continue to see prior price increases reach their anniversaries. Throughout 2023, a key priority for our team has been restoring our margin profile. The third quarter marked the fourth consecutive quarter of year-over-year operating segment margin improvement, with aggregate segment margins up 260 basis points. This led to both of our operating segments delivering at least 25% earnings growth in the third quarter, with the Industrial Coatings segment also delivering higher sequential margins. Another key focus remains strong cash generation. Throughout the first three quarters of the year, the $1.5 billion operating cash generation that we delivered is up more than $1.1 billion on a year-over-year basis. In addition to our strong earnings performance, we significantly reduced working capital in total by about $300 million, mainly driven by lower inventories, contributing to the robust operating cash flow generation. We used part of this cash to reduce our higher variable cost debt during the quarter, and despite significant increases in market interest rates, our net interest expense declined year-over-year. As we look to continue our momentum into the fourth quarter, we are laser-focused on achieving top-line sales and earnings growth in 2024 and beyond. I'd like to highlight a few items that we expect will support growth in 2024. First, as I communicated at our CEO investor briefing in May, we are working on a number of commercial growth opportunities, and several of these initiatives have been launched and are now gaining momentum. For example, we are pleased with the progress being made supporting our customers' rapid growth in electric vehicles in China with PPG technology advantage products and services. We are well positioned with the leading electric vehicle producers and continue to gain share as the production rate increases each quarter, including strong EV export activity out of China. In the past few years, we've invested to enhance our manufacturing and technology capabilities around powder coating products with prudent capacity additions. This year, we're realizing the benefit of these investments as our powder coating-related sales have increased about 15% compared to last year. We're winning new business every quarter and supporting our customers' sustainability and productivity objectives, and we expect powder to outgrow the market for a number of years to come. Another commercial growth initiative supporting our growth in 2024 and beyond involves expanding the breadth of products being sold through the PPG Comex distribution network. Our world-class network of over 5,100 concessionaire locations in Mexico has consistently outgrown the regional architectural market and provides customers with their preferred paint brand and products in Mexico. We are very excited about the opportunity to now leverage this distribution network to support customer needs for protective, refinish, traffic, and light industrial products. So these focus areas are part of a larger basket of commercial initiatives that will support our previously communicated organic sales growth targets. I will provide periodic updates on these initiatives in subsequent quarters. On the legacy of PPG and another catalyst for earnings growth going forward is strong cash generation and value-creating capital deployment. I plan to continue to abide by our hallmark of prudent balance sheet management and financial flexibility, supported by strong free cash flow of our business portfolio. Year-to-date, we have delivered record cash flow from operations, and we have utilized this to deliver on our prior commitment to repay some variable rate debt, driving down our interest expense. In the fourth quarter, we will likely incorporate some additional debt repayment, but will also likely complete some share repurchases, reflecting our strong cash position and seasonality of our cash flows. In addition to the sales and earnings growth initiatives, one other strategic initiative that we've been actioning relates to some selective pruning of our business portfolio. As a reminder, we've recently divested a number of smaller assets, including most of our coatings businesses in Africa, a non-core business that we acquired with the Ennis-Flint acquisition, and have exited certain product categories in some businesses. In addition, this week, we announced the divestiture of certain international operations in our Traffic Solutions business. These actions allow us to channel our growth bandwidth in areas that are meaningful and where we have winning advantages, including technology, brands, and customer relationships. We will continue to actively assess each of our businesses and product lines to ensure they're consistent with our growth objectives and that they meet our financial objectives, and they earn the right to remain in the portfolio. Now I'll comment on our fourth quarter outlook. We expect several of the businesses in our Performance Coatings segment to deliver organic growth, including continued solid growth in our PPG Comex and aerospace businesses. We do expect slowing in U.S. architectural coatings demand stemming from multi-decade highs in interest rates and lowering housing turnover. While we expect our automotive OEM business to grow in the fourth quarter in most regions, other portions of our Industrial Coatings segment will be challenged due to sluggish overall global industrial production. While there are many variables in uncertain timing, we have prudently included an estimated financial impact of the UAW strikes of a few cents of EPS in our fourth quarter financial guidance. As we have communicated in the past, our regional sales to the OEMs impacted by the strike are low-single digit percentage of our total company sales. Also, we sell to other OEM customers in the region not impacted by the strikes, and given the historically low dealer inventory levels, we expect any lost volume will be made up in subsequent quarters. Certain other sales volume headwinds are beginning to abate, as we expect China is at or approaching trough levels. Also, we do not expect destocking to be a significant issue in our packaging coating end-use market in 2024. With regard to commodity raw materials, supply has normalized to pre-pandemic levels, and we expect to continue to realize benefits from moderating input costs. We will maintain an emphasis on diligently managing our costs and expect to make more progress on our previously announced restructuring initiatives. In addition, we are beginning to deliver manufacturing productivity gains, which are supported by a more stable supply chain and customer order pattern. Despite the challenging environment, we've raised full-year earnings guidance and expect fourth quarter aggregate segment margins will be higher on a year-over-year basis for the fifth consecutive quarter. Lastly, I'd like to thank our team members around the world who live our purpose every day to protect and beautify the world. Thanks to their hard work and dedication, we're able to support our customers and help them solve their biggest challenges. I remain confident in our team's ability to make it happen. Thank you for your continued confidence in PPG. This concludes our prepared remarks and now would you please open the line for questions.

Operator, Operator

Thank you. Your first question today comes from John McNulty with BMO. John, please go ahead. Your line is now open.

John McNulty, Analyst

Yeah. Good morning. Thanks for taking my call and congrats on a solid set of results. Wanted to ask on the raw material environment, we've seen a decent jump up in oil recently. I guess, can you speak to how we should be thinking about raws moving from 3Q to 4Q and if you expect those to be down and how much on a sequential basis, do you expect them to be down? And then, I guess, how should we be thinking about that as it rolls through into 2024?

Tim Knavish, Chairman and CEO

Hey, John. Thanks for the question. So let me talk about oil first. Obviously, oil is going to produce some impact on solvents for us. But really, our raw material basket is much more dependent upon supply and demand, where several steps removed from oil, with the exception of solvents, so that's a much bigger impact for us. And then, the total impact for Q4, we saw high-single digit deflation in Q3. We expect high-single digits in Q4, and we expect further deflation as we move into 2024 on a broader basis.

Vince Morales, Senior Vice President and CFO

Hey, John. This is Vince. I wanted to add to what Tim mentioned. In terms of the supply-demand environment, as we've indicated in our prepared remarks and press release, we've observed more than enough supply, which typically influences our input costs more than just the feedstocks. Currently, as we approach a seasonally weaker fourth quarter, we anticipate this trend will persist. Therefore, I believe the rise in oil prices will only affect solvents in our fourth quarter, and as we look ahead to next year, we plan to start negotiations with our suppliers in late Q4. The feedback from our suppliers has focused more on increasing volume rather than on price.

Operator, Operator

Your next question comes from the line of Duffy Fischer with Goldman Sachs. Duffy, please go ahead. Your line is now open.

Duffy Fischer, Analyst

Yeah. Good morning, guys. Just a question around the delta between Industrial and Performance. So Industrial margins were up 300 bps year-over-year and Performance was up a little under 2.5%. But Industrial trailed on volumes by 4% and trailed on dollar pricing by 3%. So it doesn't look like there were any leverage from price and volume on the margin spread. So what's underlying that gap and why was Industrial able to do better than Performance even though it didn't on price or volume?

Vince Morales, Senior Vice President and CFO

Yeah, Duffy. This is Vince. Let me just start. I’ll let Tim add some color, obviously. But if you look at Q3 alone, the improvement year-over-year in Industrial is larger, but the Performance segment improved quicker. So we got pricing; we typically have pricing and performance quicker. So we had price injected into our businesses quicker in Performance. We lagged that with Industrial, and we were still getting price in Industrial, and certainly in 2022 in the back half. So on a year-over-year delta, you're correct, the Industrial segment looks better, but Performance just recovered earlier. Tim, do you want to add?

Tim Knavish, Chairman and CEO

Yeah. I think it's spot on, and I think both segments will see continued year-over-year margin improvement, depending upon the addition of manufacturing productivity improvements that I mentioned in my opening comments. And of course, as we get into seasonality, more volume will help that step change in margins as well.

Operator, Operator

Your next question comes from the line of Ghansham Panjabi with Baird. Ghansham, please go ahead. Your line is now open.

Ghansham Panjabi, Analyst

Thank you, operator. Good morning, everybody. As we think about 2023, two of your higher margin verticals, including aerospace and Comex had delivered outsized growth and obviously, margin conversion as well. How should we think about the sustainability of these growth verticals into 2024 and just more broadly, what is your base case for volumes for each of the two operating segments next year?

Tim Knavish, Chairman and CEO

Yeah, Ghansham. Thanks for the question. Aerospace, you should expect that to continue not only for '24, but multiple years going forward. We have just such a unique technology-advantaged position in that industry across commercial new build, commercial aftermarket, general aviation, military, and all of those are strong and projected to be strong for the foreseeable future. We've got a tremendous backlog. Everything we make, we can sell. So you should feel very good about we do for coming quarters and years. Likewise, with PPG Comex, I think this was the 13th quarter in a row of record performance. There's nothing to say, we won't have 14th, 15th, and beyond. In my opening comments, I mentioned and back in May at the CEO briefing, I mentioned that while we will continue to gain share in the conventional architectural business, we're now focused on kind of our next chapter of accelerated growth in PPG Comex and that's using our world-class distribution network to sell refinish coatings, traffic, industrial protective, and those are all up and running. So you should feel really good about those two businesses continuing record-breaking performance, and we certainly do. On an overall volume basis, I'm confident that we're going to swing to overall positive volume in 2024 based on a number of green shoots that we're seeing throughout our portfolio.

Vince Morales, Senior Vice President and CFO

We believe that the situation in Europe is improving, particularly concerning our business mix. In the third quarter, our volumes in Europe remained stable. We anticipate growth to return in China, although at a reduced rate. These are two major markets for us. Additionally, as Tim highlighted, we expect Mexico to experience significant growth compared to other regions. I concur with Tim regarding the other business sectors, and I would like to add that we are gaining market share in our refinish segment due to the technologies we discussed in May.

Operator, Operator

Your next question comes from the line of Christopher Parkinson with Mizuho. Christopher, please go ahead. Your line is now open.

Christopher Parkinson, Analyst

Thank you so much. Good morning. Tim, you've spoken a lot about kind of refocusing on R&D and just further positioning PPG to outgrow some of its respect to end markets, new products, new technologies have been literally just mentioned one. Once we're through this macro mayhem or however you want to characterize it, what's your level and degree of confidence that you will, in fact, be able to outgrow certain end markets and where are you ultimately the most enthusiastic? Thank you.

Tim Knavish, Chairman and CEO

Thank you for the question, Chris. I appreciate how you described the macro situation. Looking ahead, our primary focus for most of 2023 has been on recovering margins, and we've made good progress there. The next phase will concentrate on growth recovery in some of our stronger portfolio segments. During this time, we have also been shifting our investment focus towards innovation, which includes both traditional R&D and new innovations inside and outside our existing products. We're beginning to see positive results in several of these areas, which boosts my confidence moving forward. From a sustainability perspective, our marine M&R business has seen a 20% growth this year, largely driven by sustainable products that reduce hull friction on ships, and we anticipate significant growth in this area in 2024 and beyond. Additionally, as Vince mentioned regarding Chancey Hagerty’s business, our digital innovations are gaining momentum not just with our current customers but also in capturing market share. By the end of this year, we expect to have about 2,000 moonwalks in place, with roughly a third representing market share gains. In May, Chancey and his team showcased the broader PPG Link digital ecosystem, which is designed to enhance body shop productivity. Even though we are only nine months in, there are already 7,000 shops subscribed to PPG Link, and they are beginning to see improvements. The momentum for share gains with PPG Link is increasing. In terms of electric vehicles, 25% of all cars produced in China are now EVs, and we are successfully capturing market share with EV manufacturers while increasing our content per vehicle. Many of the initiatives we've discussed are transitioning from the incubation phase to active implementation and execution. I am highly confident that the strategic investments we've made will indeed move the needle positively for our future.

Operator, Operator

Your next question comes from the line of Michael Leithead of Barclays. Michael, please go ahead. Your line is now open.

Michael Leithead, Analyst

Great. Thanks. Good morning, guys. Questions for Vince on the cash flow. It's been quite strong this year. Tim talked a bit about 4Q deployment opportunities. But just what's the early read for the best opportunities to deploy cash in '24 and just how should we think about a pick-up potentially in buyback sort of factoring into the EPS growth algorithm next year? Thanks.

Vince Morales, Senior Vice President and CFO

Yeah. Thanks, Mike. Good morning. Yeah, again, just to reiterate, again, record Q3 year-to-date cash flow about $1.5 billion. If you look at our net debt, we're down $700 million, $800 million year-over-year or versus the end of the year. Tim mentioned that we have some more debt coming due in 2024. We're going to pay some of that early to get the interest rate carry into our EPS. But we have $600 million of debt coming due over the next 12 months, excuse me. And again, some of that we can prepay early, which we'll take advantage of. And we are going to do some level of share repo in Q4. And we're not going to itemize that in terms of size, but we'll look at our cash position, and we'll look at the cash flow and typically our strongest quarter of the year. We'll give more guidance on 2024 in January. Again, we do expect to continue strong cash flow in 2024, our earnings growth supporting that as well as we're still carrying several hundred million dollars of excess inventory as we continue to make good progress in working that down in Q2 and Q3. That will help our cash flow next year, but we'll get more cash and financial guidance in January.

Operator, Operator

Your next question comes from the line of Vincent Andrews with Morgan Stanley. Vincent, please go ahead. Your line is now open.

Vincent Andrews, Analyst

Thank you. Good morning, everyone. I believe there were some comments in the prepared remarks in U.S. refinish about some negative volume. It's a function of some customer issues. Could you just give a little more detail on those and whether they're going to persist into the fourth quarter or it was just unique to the third quarter?

Tim Knavish, Chairman and CEO

Thank you for the question, Vincent. We are gaining market share in U.S. refinish, largely due to our digital ecosystem technology. Our primary focus is on the body shop level, as that is where our products are ultimately used. Since we sell to distributors, which can adjust their inventories, we analyze our performance over several quarters. However, we are confident that our net wins in body shops will lead to positive volume and growth in this business.

Vince Morales, Senior Vice President and CFO

At the market level, the body shops remain very active and continue to have a backlog that they are working through. While our sales to distributors are important, the real indicators of business performance are the metrics and operations of the body shops, which are currently solid. We do not anticipate any changes in this in the near term.

Operator, Operator

Your next question comes from the line of Stephen V. Byrne with Bank of America Merrill Lynch. Stephen, please go ahead. Your line is open.

Stephen V. Byrne, Analyst

Thank you, Tim. I would like to get your perspective on where you would rank cross-selling among your growth opportunities. You mentioned potential for growth in your businesses, and you pointed out Comex as a way to enhance a few other areas. Do you believe there is similar potential in other regions, and which of your businesses do you feel has the greatest opportunity for gaining market share geographically?

Tim Knavish, Chairman and CEO

Yeah. Hey, Steve. Thanks for the question. Comex is one example. Two areas that are top of mind, we talk about often as far as cross-selling, if you look at protective coatings, we are as part of our PMC business, we sell protective coatings today across the distribution networks that are kind of owned and operated by our architectural business. We look at from a customer standpoint, the near-shoring, the construction of battery plants, for example, or the near-shoring of factories into Mexico, Vietnam, and other places, those are cross-business selling opportunities, where we would be selling protective coatings, architectural coatings, and light industrial coatings. So we have those cross-selling opportunities around the world, and we leverage those and see good opportunities for further growth going forward. PPG Mexico, I point out because I would argue it’s the strongest distribution network in the coating space globally, but we have similar opportunities to different scales around the world.

Vince Morales, Senior Vice President and CFO

Yeah. And Steve, I just want to expand on the battery factory comment Tim made. So if you look at the battery factory construction, we typically have multiple angles to prosecute that. We may go in first with protective coatings as they’re building the infrastructure for the factory. We certainly could do architectural coatings. We then have an entry into the actual products being made in those factories, both on a light industrial or heavy industrial coatings as well as an OEM basis. So that I think battery factories are prime examples of where we are able to cross-pollinate with the customers.

Operator, Operator

Your next question comes from the line of Jeff Zekauskas with JPMorgan. Jeff, please go ahead. Your line is now open.

Jeffrey Zekauskas, Analyst

Hi. Thanks very much. You said that you're on FIFO and that your raw materials on that basis were down at a high-single digit rate. If you were on LIFO, how much would they be down? I know that they would be down more, but my question is by what percentage? And secondly, it seems that your volumes in your domestic architectural paint stores business increased in the third quarter, is that true and do you think they're capable of increasing in the fourth quarter?

Vince Morales, Senior Vice President and CFO

Jeff, this is Vince. Great to hear from you. Let me take the first question on inventory, and Tim will take the architectural question. I think the best way we could describe that, it's a complicated question, as you pointed out, but a great question. I think the best way we've been describing that is, if you look on a realized basis, we're realizing mid to high-single digit deflation in our financials in Q2, Q3. We think that would be high-single digit or even low-double digit depending on the commodity if we were able to move to a LIFO for the 80% of our business that's on FIFO. So that gap is probably 200 basis points to 300 basis points of deflation capture. So hope that's understood. Tim?

Tim Knavish, Chairman and CEO

Hey, Jeff. On your architectural U.S. question, the way we look at it with our new business model is our stores are part of our professional omni-channel, which is company-owned stores plus the Pro at Home Depot plus our independent dealers. That business, despite all the challenges macro-wise, that omni-channel delivered low-single digit growth in Q3. And we would expect that or better as we move forward. So yeah, I think the omni-channel is delivering what we've expected, and some help from macros would make that even better.

John Bruno, Vice President of Investor Relations

And Jeff, this is John. Just one other point to Tim's feedback that growth was driven more by volume than price in the third quarter.

Operator, Operator

Your next question comes from the line of Josh Spector with UBS. Josh, please go ahead. Your line is now open.

Josh Spector, Analyst

Yeah. Hi. Thanks for taking my question. So I wanted to ask on margins, and I'll ask it on Industrial, but I think the same market should apply on performance to remove some of the seasonality. So if we look at where margins are now in Industrial, you're in the high 13% range. You were there in the first quarter of this year, when you weren't getting benefits on raw materials; you're there now where you are getting benefits, and sales are roughly similar. So I guess, first, is why aren't we seeing the flow-through on margin? Is there something on cost or any price hitting back impacting that? And then second, when we look at next year, if volumes are, say, flattish or maybe slightly up, is there anything in your control to get margins up higher than where they are today, be it cost or otherwise, or is this the level we kind of normalize at and it's more volume growth? Thanks.

Tim Knavish, Chairman and CEO

Hey, Josh. The Industrial segment is up 300 basis points from last year in Q3. The main factor is not pricing; we haven't seen significant price reductions impacting Industrial. The key impact comes from volume recovery, which will lead to improved margins in Industrial Coatings. We are also seeing operational improvements that we've mentioned in our prepared remarks, and these are starting to show positive effects on productivity. This is another important factor contributing to the ongoing improvement in Industrial segment margins.

Operator, Operator

Your next question comes from the line of David Begleiter with Deutsche Bank. David, please go ahead. Your line is now open.

David Begleiter, Analyst

Thank you. Good morning. Tim and Vince, just on the Q4 guidance, can you give a little more color on your assumptions for the auto strike, how long it continues, and does it expand? And also, what are you seeing in terms of professional contracted backlogs heading into Q4 here? Thank you.

Tim Knavish, Chairman and CEO

Yeah. Hey, David. On UAW, I said in my prepared remarks a few cents, I'll be a little more specific. We've assumed $0.03 for Q4. It was much less than that in Q3, almost negligible because just the mix of where the strikes hit from UAW, but we have made some assumptions that this will go on and will likely spread to a couple of plants. But as you know, David, we're trying to guess as much as anybody to what tactics are going to be deployed. But we've got about $0.03 built into our Q4 guide. And the second question again was...

John Bruno, Vice President of Investor Relations

The backlogs in the U.S. architectural side.

Tim Knavish, Chairman and CEO

Yeah. Thanks. Sorry, I forgot the second question. Backlogs in architectural from a DIY standpoint, of course, no backlogs down low from an overall sales and volume standpoint, but the Pro backlogs are actually holding up pretty well despite everything that's happening out there on housing. You'll recall that a lot of our Pro business is commercial and maintenance, and that's holding up well despite the macros. And some of it is based on a backlog of jobs still coming out of prior quarters and prior years. And some of that backlog is holding up because of skilled labor availability that our customers are seeing. So backlogs remain strong. I think the average backlog for us and our customers only dropped by about a week from an average of 14 weeks to 13 weeks, so still pretty solid there.

Operator, Operator

Your next question comes from the line of Kevin McCarthy with VRP. Kevin, please go ahead. Your line is now open.

Kevin McCarthy, Analyst

Yes. Good morning. Portfolio question for you, Tim. You've done a fair amount of pruning, including most recently, the Australia, New Zealand portion of Traffic Solutions. Can you just put that into context, where are you in that process? How much more might there be to go? And then on the flip side of the coin, I'd appreciate any updated thoughts on potential for an increase in bolt-on acquisitions; with interest rates having increased, are you starting to see asking prices come down in the private market, and how would you characterize that versus say, repurchases or just ongoing deleveraging for next year?

Tim Knavish, Chairman and CEO

Yeah. Hey, Kevin. Good morning. To your pruning question, I would say, we're in early innings, frankly. What we've done so far is, I'd say some of the more obvious ones around the edges. But businesses are on notice. My team knows that every business has to earn their right to stay in the portfolio, and that's small, medium, or large even. But we did the obvious ones first, and we're working through a number of other things. It's a bit early to give any specifics, but early days there.

Vince Morales, Senior Vice President and CFO

And Kevin, let me just add there. I think this goes back to the May, CEO briefing, the focus for us is to make sure that we're spending our energies, our bandwidth on organic growth. And if a business is not performing or too small to contribute meaningfully, then we're going to shift that bandwidth to organic growth initiatives. So that's, again, one of the critical focuses here as well as the financial returns, obviously.

Tim Knavish, Chairman and CEO

Yeah. And the word is focus. I said that many times back in May, and I'd say, it's daily within the company. We're going to focus on the areas that we have the best right to win for the future and that are going to drive the best financial and growth performance for the future. To your second question, we are still a core part of our strategy is value creation, shareholder value-accretive acquisitions because we still see many opportunities out there in the coatings space. But it's been a little slower than historical just given the financing costs and also performance of some companies during this macro-challenged environment; sellers, of course, sellers want to sell it to peak EBITDA. So I think there's a little bit of a pause in closing deals, but we have a number in our pipeline. We’re talking to potential sellers daily, weekly, monthly. So it’s still a core part of our strategy. And frankly, because these acquisitions add long-term earnings and long-term cash generation, it remains one of our preferred deployment opportunities. But as you heard us in our opening remarks, if those don’t happen, we will put that surplus cash to work in other ways, including repurchases.

Operator, Operator

Your next question comes from Aleksey Yefremov with KeyBanc. Aleksey, please go ahead. Your line is now open.

Aleksey Yefremov, Analyst

Thanks and good morning, everyone. Did you outperform in the Pro paint market in the U.S. this year and if so, by what magnitude, and how do you think you could do relative to the market in the segment next year?

Tim Knavish, Chairman and CEO

We're operating three distinct architectural businesses depending on the region. For instance, we have a strong presence in Mexico, and in Europe, we hold the number one position in ten countries, showing resilience in our existing business model despite the current challenges in Europe. We've observed stable volumes, which we see as a positive sign of potential stabilization. In the U.S., we are developing a new business model that is still in its early stages, focusing on a brick-and-mortar omni-channel approach across our three channels and converting paint customers gradually. For this model to succeed, it needs to achieve high-single to low-double-digit growth each quarter, and it will take time to reach significant scale. In Q3, we experienced low-single-digit growth in both volume and sales, which was lower than I would have preferred but was expected given the current housing market conditions. We'll have a clearer picture of our performance compared to competitors once their results are out, but we're committed to building our U.S. architectural business for the long term, recognizing that it's a marathon, not a sprint.

Operator, Operator

Your next question comes from the line of Michael Sison with Wells Fargo. Michael, please go ahead. Your line is now open.

Michael Sison, Analyst

Hey, guys. Nice quarter. In terms of the fourth quarter, your outlook is for plus low-single digit sales growth to minus. I guess that implies some pricing, right? So the outlook for volume would be kind of like flattish to down mid-single digits. So can you maybe talk about what drives sort of the flattish or drive sort of the down? And then given where the interest rate environment is, do you think U.S. architectural demand next year could be up, down, flat? Thank you.

John Bruno, Vice President of Investor Relations

Yes, Mike, this is John. I'll begin, and then Tim and Vince can provide additional insights. For our fourth quarter outlook regarding volume in the Performance segment, we anticipate positive growth driven primarily by aerospace and Comex. In contrast, we expect lower volumes in the Industrial segment, which takes into account the earlier mentioned UAW impact. Without the UAW effect, we would be much closer to flat volume in the Industrial Coatings segment.

Tim Knavish, Chairman and CEO

Yeah. For Architectural Coatings U.S. next year, I feel good about the Pro based on two things, Mike. The continued growth and acceleration of the omni-channel that we're building plus the backlogs that our customers continue to experience. DIY, it's a big part of the business and if it stays at the current low level, that would actually be a positive for us as opposed to declining further. If there is just a little uptick in consumer spending and consumer remodeling, and I will remind everybody that a paint remodeling is the lowest cost home remodeling project you can do. So it will be the first one to start to recover. A little bit of volume recovery there would really help the total business in aggregate. So net-net, I'm positive on the Pro. I'm still questioning what's going to happen on DIY for next year.

Vince Morales, Senior Vice President and CFO

And Mike, just one more thing on the DIY. We do know many of the large DIY retailers have destocked in 2023. So we certainly haven't had detailed conversations about their plans for 2024, but there was a pretty aggressive destock in 2023. So the sellout was much greater than the sell-in in 2023. And if that just normalizes on a year-over-year basis, that will assist the paint producers.

Operator, Operator

Your next question comes from the line of Frank Mitsch with Fermium Research. Frank, please go ahead. Your line is open.

Frank Mitsch, Analyst

Thank you and congrats, John on the promotion of VP, Finance reading a lot about wage inflation and higher accruals at PPG. So I assume it's because you've been doing double duty for the last 2.5 months, so congrats on that. You commented that volumes in the fourth quarter, it seemed like we might finally get that to be positive if it wasn't for the UAW strike. I'm curious as to given the nine quarters in a row of negative volumes, Tim, what your expectations are as you have an early read into 2024 in terms of volume growth at PPG?

Tim Knavish, Chairman and CEO

Yes. Hey, Frank. I do appreciate you congratulating John on his promotion. Very easy decision for us, well-deserved, but it didn't affect our wage inflation because John loves his job so much, he does it for free. But going into next year, I'm confident based on what we know today, based on what we see today, that we will swing to positive volume as a total enterprise in 2024. Q4 will be close, but again, UAW is a big unknown, what it will have on how that goes and which plants and which ones we supply, customer mix-wise, it's still a bit of an unknown. But I do feel positive that we will swing to positive volume in 2024. We've got Europe and China, two of our biggest regions that sequentially – sequentially, we believe China is going to recover to a slower speed than historical, to a slower speed than what we thought a couple of quarters ago, but sequentially, we will see improvement in China. Europe, as I said earlier, we're actually pleased to see flat volume across some of our larger businesses like deco in Europe because we really believe it is bouncing off the bottom. So we've got demand stability, and any incremental increases in Europe will drive really good leverage for us. I mentioned the aerospace backlog; the more we make, the more we sell, and that will go on for many quarters. And we're focused very heavily on productivity and getting more out the door, which will drive growth for us. Automotive, I believe, will have sequential improvement, sequential build increases moving into 2024, so when exactly, which month? We will have some macro dependency. But overall, I'm confident in the swing to positive volume in 2024.

Operator, Operator

Your next question comes from the line of Laurence Alexander with Jefferies. Please go ahead. Your line is now open.

Laurence Alexander, Analyst

Good morning. Congrats on strong quarters. I just want to pin down one point. With respect to the incremental price actions and productivity, do you think you'll be able to keep that ahead of wage inflation in Q4 and next year, or how should we think about the bridge there?

Tim Knavish, Chairman and CEO

Yes. Hey, Laurence. Thanks for the question. The short answer is, yes. We'll stay ahead of wage inflation with a combination of price and productivity. We do expect, if you look at salary inflation in the established markets a little higher than normal, call it, 3%, frontline workers is very country-specific. So it will be higher than that in some countries. But we're also confident, given our pricing track record that through a combination of price and productivity, we'll be able to offset the wage inflation that we'll see. And I'll also point out, remember that with our mix of businesses, with the exception of company-owned stores, we have a very low people intensity structure because most of our businesses are direct or direct to somebody else's distribution channel. So with the exception of company-owned stores, we have a pretty low human capital intensity frontline business.

Operator, Operator

Your next question comes from the line of Aron Ceccarelli with Berenberg. Please go ahead. Aron, your line is now open.

Aron Ceccarelli, Analyst

Hi. Good morning. Thanks for taking my question. I have one on pricing. With the heavy lift on pricing initiatives now behind us and the supply of raw materials back to normal condition, how should we be thinking about pricing across the two segments for 2024? And how do you feel about the potential scenario where pricing could turn negative next year? Thank you.

Tim Knavish, Chairman and CEO

Thank you for the question, Aron. In the Performance segment, we expect to implement additional targeted pricing as we enter 2024, due to the structure and value we provide relative to our customers' total production costs. In simpler terms, the minimal paint consumption and slight price increase are significantly outweighed by the overall production costs we influence and the productivity benefits we offer our customers. Therefore, we anticipate achieving more targeted pricing in Performance next year. In the Industrial segment, we haven't experienced any price reductions so far. Approximately 30% of our Industrial segment operates under structural contracts linked to various index contracts. This means that any adjustments in raw material costs will take time to reflect in pricing changes, but this represents less than half of our business. Additionally, let's keep in mind the broader inflationary pressures out there. We will continue to engage our customers in discussions regarding how this broader inflation impacts the pricing of our products and services.

Operator, Operator

Your next question comes from the line of Mike Harrison with Seaport Research Partners. Mike, please go ahead. Your line is now open.

Michael Harrison, Analyst

Hi. Good morning. I wanted to ask a question about the growth that you're seeing in powder coatings. Is this mostly share gain where you're seeing the growth or is there a lot of conversion happening with existing customers such that we should view it more as cannibalization? And I guess what does the margin profile look like for powder coatings compared to liquid for a similar application? Thank you.

Tim Knavish, Chairman and CEO

Yeah, Mike. Great question. Thank you. What you see in powder growth for PPG is share gain, okay? Very little, if any, conversion of existing PPG customers from liquid to powder because there's two factors there. One, frankly, we're starting at a fairly low market position in powder. So we're specifically targeting share gain, and conversion of an existing customer from liquid to powder takes a capital investment by that customer in their paint job. So it's not an overnight flip. So what you're seeing is share gain. Now from a margin standpoint, if you look at our U.S. powder business, for example, on a net margin standpoint, it's one of our more profitable segments across general industrial. And the reason is we target specifically the higher end of the powder portfolio, there's liquid-like appearance, there's metallic powders, those types of things that command a higher margin because they're more technology advanced from a formulation standpoint. So we're specifically targeting the higher end of the segment. Longer term, one of the reasons we are investing in powder for the future is, it is a more sustainable solution for our customers. So you've got the short-term focus that where we're driving share gain by targeting the higher end segments of margin for powder. Longer term, you will see more and more customers converting from liquid to powder because of the sustainable solution that it provides.

Operator, Operator

Our final question today comes from the line of Arun Viswanathan with RBC. Arun, please go ahead. Your line is open.

Arun Viswanathan, Analyst

Great. Thanks for taking my questions. So I just wanted to understand, it sounds like you may be looking at consolidated positive volume growth for '24? Given that scenario and the operating leverage and the incremental margins that you kind of envision, do you expect to get to that $9 EPS level or what's the path to getting back to that level that you put out a couple of years ago? Thanks.

Tim Knavish, Chairman and CEO

Yes. Thanks, Arun, for the question. I've said many times, and I'll continue to say it that $9 for PPG is a question of when not if. Okay? We will get there. I'm just fully confident in our new enterprise growth strategy and leveraging the portfolio that we've got, as well as some selected pruning and some selected, targeting certain geographies and segments, and being a lot more focused. So $9 is a when not if. What I'm confident in 2024 is that we will hit the 8% to 12% EPS growth that we stated in when we were together in May. And frankly, that 10% average EPS growth has been a target for our company for many years. And so I'm confident that as we move through 2024, a combination of the swing to positive volume, plus the capital deployment that we've talked about a few times here this morning, plus some of the key innovation initiatives that we're launching now and will gain momentum in 2024. I'm confident that, that combination will get us to what we've committed to.

John Bruno, Vice President of Investor Relations

Those are all the questions we have. So I’ll turn the call back over to Mr. John Bruno. Thank you, Emily. Great job. Appreciate that. We appreciate all your interest and confidence in PPG, and this concludes our third quarter earnings call.

Operator, Operator

This concludes today's conference call. You may now disconnect your lines.