Akzo Nobel N.V. (AKZA) Earnings Call Transcript & Summary

Welcome, everyone, and thank you all for standing by. [Operator Instructions] Today's conference is being recorded. [Operator Instructions] I'll turn the meeting over to your host, Kenny Chae, you may begin.

Hello, everyone, and welcome to our Q3 updates. Earlier this morning, we published a press release to provide an update on our Q3 outlook based on the heightened macroeconomic uncertainties. Thierry will walk you through a few slides on our Q3 updates, and both Thierry and Maarten are happy to take your questions after the short presentation. The slides are also available on the Investor Relations section on our website. Please note, this call is being recorded, and a replay will be made available on our website. Before we start, I would like to remind you about the disclaimer at the back of this presentation. Please note, this also applies to the conference call and answers to your questions. Now handing over to Thierry to start the presentation on Slide 2.

Thanks very much, Kenny, and good morning to everyone on the call. The world around us is definitely continuing to evolve rapidly. In Q3, the macroeconomic uncertainties have further intensified, especially in Europe and China. Consumer confidence in those regions has fallen to near historical lows resulting in incrementally weaker demand, while customers and channel partners in Europe and China are proactively destocking in anticipation of lower end market demands impacting the paints and coatings industry. In this challenging macroeconomic environment, our Q3 volumes are trending lower than we had anticipated, despite us holding share in our markets, we now expect Q3 volumes, excluding M&A to be down mid-single-digit percent versus prior year. For decorative paint volumes, Latin America and South Asia are strong as expected. The European Deco do-it-yourself channel sell-out continues to be at 2019 levels, but saw further destocking in the quarter, while Deco-China channels are impacted by lower consumer demand. For Performance Coatings, our Marine and Protective and Automotive and Specialty businesses continue to recover sequentially to economic uncertainties are impacting our powder and industrial businesses. The silver lining to the macroeconomic developments in Q3 is that the cumulative raw material market prices are indeed clearly starting to decline. The raw material impact on our P&L is at its highest point in Q3 and will continue to be offset by pricing initiatives. With the decline in raw material prices, we expect a negative impact from inventory revaluation starting this quarter followed by margin benefits in our P&L starting in early 2023. We currently expect our adjusted operating income to land in the range of EUR 195 million to EUR 250 million in Q3 before the impact from hyperinflation accounting in Turkey [Audio Gap] expects current demand trends to continue into Q4. Given the challenging macroeconomic environment, we continue to take proactive actions as outlined by our focus to initiatives to drive improvements in cost and working capital in Q4. On Slide 3, we see the latest demand trends for the current quarter. In Q3, we see heightened macroeconomic uncertainties in Europe and China. In Europe, ongoing geopolitical tension and high energy prices have led to nearly historical low consumer confidence, along with deterioration in economic outlook. This has led to customers and channel partners in both paints and coatings, proactively destocking, anticipating lower demand. In China, COVID lockdowns continue to persist and extreme weather during the third quarter has led to restructures on power usage for industrial activities. Meanwhile, the declining real estate market and significant weakening of consumer confidence has led to lower consumer demand overall during this quarter, which is outweighing the benefits from our geographic expansion for Deco China. In North America, we are still experiencing supply and logistic constraints. While the situation is improving overall, we are still faced with unexpected incidents and force majeures, such as a fire incident at all next a resin supplier, which occurred by July and result in a significantly constraining our -- several of our coatings businesses in North America. The overall demand for paints and coatings in Latin America and South Asia are strong, as expected, while sequential recovery continues in Marine and Protective and Automotive and Specialty. In summary, the macroeconomic uncertainty and outlook in Europe and China have deteriorated more than expected in Q3. While this is a challenge for the entire paint and coatings industry, Akzo Nobel will continue to focus on initiatives to reduce costs and improve working capital while continuing to drive our successful pricing actions. With that, I'll now hand over to Kenny to open the Q&A session.

Thank you, Thierry. This concludes the formal presentation, and we will now be happy to address your questions. Please state your name and company when asking a question and limit the number of questions to 2 per person so others can participate. Operator, please start the Q&A session.

[Operator Instructions] Our first question is from Mubasher Chaudhry from Citi.

Just a couple to start, please. Could you comment on the net positive of the pricing and rules in the third quarter? And if there's any guidance on rules for the fourth quarter -- that would be first question. The second question is just around your comments around how the coatings coming off and ICO coming off. It seems like pilot coating is heading out to kind of 2019 levels, whereas ICO is still significantly above 2019 level. So should I be expecting the ICO decline to carry on back on 2019? Or is there something a bit more stickier in there, which split remains at a high level? And then, sorry, just finally, you mentioned in your opening remarks that the volumes down for the group should be now mid-single digits, which would be -- which is -- I think in the second quarter, you did about minus 8.6%. So I just wanted to confirm what the actual case, 5%, 6% is the volume downgrades volume down year-on-year is what we should be expecting for the quarter.

Yes, Rubash, thank you for your question. The line was extremely bad. So some of it, we may have to guess what you were asking. Let me start with the ICO Powder question. Although, of course, this is not the third quarter call, so probably not good to go to all of the segments here. And then maybe, Matt, you can actually give a view on the pricing versus the roles because I think you listened the question -- so on ICO and Powder, and Again, I want to stress that for, in fact, the whole business. In fact, the consumer confidence is extremely low, as you all know, and what we do see, and that is a bit bizarre, in certain cases, the sellout is not exactly at the end of the channel down, but the whole channel is expecting that markets are going to go down. So we start the continuation and probably a bit of the ending of the destocking in vehicle, but also in powder, and in ICO, we see destocking in the distribution oriented channels in there. And that is actually in the whole channel. It goes in fact, all the way of the person who sells the final posted element to the coil roles that are sometimes distributed in the distribution channels. And then basically, it means that there's less product being bought from us. So it is really a channel dynamic at this moment of time, more than that we've seen really the demand already dropped. There is a significant pessimism in China, and there's a significant pessimism in the European consumer development with us the results that basically people are trying to get their inventories as low as possible, which is, by the way, also something that we are doing to our suppliers who supply to us. So in Powder and ICO, it is mostly driven, Mubasher, by the dynamics of the destocking that's happening. And then you have all the overlays of the very punctual situations that are in there. So hopefully, that gives you some of the answers on ICO and on Powder. Maarten, maybe you can handle then the price versus raw materials.

Yes, on pricing versus raw material, maybe a few comments. First of all, pricing, we continue our pricing initiatives, and we reconfirm what we said when we came out of the second quarter that we will see pricing between 12% and 14% in Q3 versus last year. On the raw material, I think it's important to mention, and Thierry mentioned it earlier, we see raw material at its peak. In fact, in July, and we see no raw material from an incoming pricing to go down. Overall, what does that mean that likely in the range we gave, the EUR 260 million to EUR 290 million, we will sit at the top of that range. And I think it's also good to mention that we will start to see kind of dynamics of negative stock revaluation, which probably gives some timing issues in terms of how our margin will develop. And that depends, of course, on the steepness, how the input prices, how it comes into our stock will decline in the months to come. Overall, I think it's also important to mention that what we said at the end of Q2, and it's still true that we get a positive offset in the third quarter is significantly lower compared to how it looked like in the second quarter. But the good news is it's a positive offset. And the good news is that we are looking at kind of a significant pricing over the 7 quarters take since early 2021.

Does that answer your question, sir, Mubasher?

Yes. Just on the final one in terms of a clarification around the mid-single-digit guide -- a mid-single-digit volume down versus last year in the third quarter. Did I hear that correct?

Yes, you're correct, correct. Yes.

Our next question is from Gunther Zechmann from Bernstein.

A couple of questions mainly on the revenue line, please. Firstly, was it coming a particularly weak month year-over-year? I know it's seasonally very important. But did trends deteriorate during the quarter quite significantly. And what are you seeing in your order books into October? And secondly, just following on the top line then. With Q2, we were still talking about order backlogs as we were for most of the year. I think the number was EUR 120 million. Is that still there? Or have these orders got canceled? What should we expect there going forward, please?

Yes. Gunther, thank you for your question. Effect when did you see it in the quarter is a little bit dependent from business to business, to be honest. In decorative paint to the destock. And again, I want to stress that for Decorative Paint, the trade business is doing -- continues to do very well. in what Europe is concerned and that the do-it-yourself business, the sellout is firmly at 2019 level. So I don't want to create here all sorts of negative speculation. So it has been mostly been destocking. We talked about destocking already in the second quarter that seemed to be alleviated in the countries that were destocking. And in fact, it was, to a large extent, the U.K., went a little bit on until the beginning of -- of July. But frankly, other countries in Europe, where there was LSOs, et cetera, have basically been correcting their inventory, and that happened basically through June, July and August. For what Dec was concerned, you would say that, in fact, it looks a bit more normal right now. But okay, well, we had to absorb it during the quarter. So on the revenue line, the sell-out lines, we are not actually not that concerned for the time being on what the sellout is. For the other businesses, it's been a bit all over, to be honest, what we have seen in certain cases is customers who were typically operating in July closing because they probably were destocking didn't have enough orders or whatever or their customers were destocking. So that has been a bit depending on the businesses. And again, this is mostly Powder and Industrial Coatings, not that to other parts of the business, they're doing quite well. We've seen, in fact, depending on the segment, it has been sprinkled a bit throughout the quarter. September is actually an okay-ish month, but okay, that can't make up for the things that happened in the first 2 months of the quarter. So hopefully, it's clear, Gunther, I want to stress that it is actually more the destocking, so people anticipating that markets may be weak and probably also anticipating that the inflationary cycle is a bit at its maximum, that actually has basically triggered quite some destocking in the channel. And everywhere where we look at final demand for the time being or our share in that, the final demand is actually okay, and our share is definitely okay. So it's really the destocking element that is overwhelming in the channel. Does that answer your question?

Yes, and on the order backlog, please?

And the order backlog. The order backlog is still there. Again, the order backlog was mostly sitting in, for example, our marine protective business. We're sitting in North America, less so, I would say, in China and less so in some of the businesses in Europe. So ironically, the backlog is still very much there. I was not helped by the fire and explosion at a major resin supply for us in North America that have to declare a force majeure, which impacted us badly during the third quarter and still probably in the part of the fourth quarter, specifically in North America, but the backlog is still there.

Our next question is from Matthew Yates of Bank of America.

Perhaps a question for Maarten around cash flow, the Q2 results, correct me if I'm wrong, I think you mentioned EUR 300 million or so of working capital relief in the second half. In light of the update today, is it taking longer to work through that inventory you have or the proactiveness in reducing your own orders from the supply chain, is that compensating, but just any indication on that second half working capital evolution would be helpful? And then maybe one for Thierry. Just around the process of forecasting, you've put a lot of emphasis on the segmentation and the systems you put in place in the company over the last couple of years. yet with the benefit of hindsight, it seems like your volume assumptions were some way off. And the reason I mentioned this is PPG seemed to give a much more prudent outlook for European Deco when they reported talking about volumes being down, I guess, closer to 10%. Was there something that when you look back, you've learned in the forecasting process? Or is it just the viciousness of destocking just makes it very difficult to moment size this?

Thank you, Matthew. Maarten, do you want to start?

Yes, Matthew, on the working capital, and it's a good point. So yes, we are aggressively bringing our inventories down. But if you look at the cash flow, most of that will be visible in the fourth quarter. Of course, the current environment and what we've seen in Q3 doesn't help. But again, we are focused to bring our inventory down because we have to also to make sure that doesn't become a kind of a liability for us in '23, given the fact that prices are starting to come down. But again, the visibility will be more in the fourth quarter because also whatever we do initially, it is, of course, communicating vessels with payables and then it will start to be structurally showing up in our cash flow.

Yes. And then on the forecasting, Matthew, in fact, this is going to sound a bit strange, but our forecasting actually was doing pretty well. If you look at the biggest disruptions here in volume, to a large extent is the China market that frankly got hit with new lockdowns and that is a bit difficult to forecast. And then the reaction that happens in the market in consumer confidence, et cetera. So those are relatively big volumes, all of a sudden were out of the system and that was difficult to foresee. If you go to the differences within Europe, I would say if you talk about PPG, they do have a bigger exposure to Poland and to France, which were markets that were down significantly, which are not such big markets, in fact, for us. What happened is that when the Russian announcements were made around shutting down gas to Europe, then, in fact, that triggered almost on the spot destocking, where actually people went into cash management pretty quickly. Again, there's a destocking in the channel because frankly, the selling out from those channels into the -- either the trade business or in the consumers actually was not changed. So those were, in fact, very difficult to foresee. I can assure you, we're taking all the learnings we can for that, but frankly, punctual, I would say, macroeconomic announcements that are happening are a bit difficult to foresee going into a quarter, and those are actually in volume, the biggest disruptions that have happened there. The same has happened a bit in powder coating, powder coating, although we have low temperature coatings, do use some energy. And in those areas, we saw some people really getting very cautious about how much they wanted to have in inventory and how they were opening or closing their plan. So we've done, as you might expect, a very deep dive on where what happened, what can we run from that. But frankly, it goes back to very much punctual things which are linked to geopolitics or macroeconomic decisions.

Our next question is from Charlie Webb of Morgan Stanley.

Maybe just in terms of the volumes for Q4 will look somewhat similar. Maybe you could just provide a little bit more color how you're kind of seeing Q4 shape up from a demand perspective? How long do these destock cycles typically last for? Obviously, as you say, we sort of started to see some of the destocking effects take place in Q2 continued in Q3, and obviously, it varies by region and product. But how do we kind of see that panning out into Q4? First question. Second question, in terms of the self-help, how should we think about that on a net basis? And will we see any of that this year? It feels like it probably wasn't very present in Q3. So just wondering if any of those self-help measures and how much we should really anticipate to start to materialize in the fourth quarter? And are we still on track heading into 2023 based on your expectations there? And then final one, maybe a bit more of a kind of industry one, but how does pricing look? How disciplined are yourself and peers being in this weaker volume environment when it comes to pricing? Are you seeing any signs of anyone giving up pricing taking volume?

Yes. Good question, Charlie. Maybe I handle the first and the last question then, Maarten, you can maybe do the self-home situations. On the reason why we talked about the demand trends probably being similar in the fourth quarter, what Deco is concerned, the destocking is actually -- it looks like it's over. I think it's interesting that stock levels in the channel seem to have gone back to 2019 levels. And in fact, that is corresponding in Europe with the 2019 sellout that they have. So it's back to 2019, I would say. And that seems to be pretty steady now for a while already in the quarter. China is a big question mark. I think China has a lot of elements to have the heat. They have the COVID lockdowns, they have the -- everybody is waiting for what's going to happen, what the direction of the economy is. So China is a bit difficult to foresee on how they react because they really go really from 1 high to 1 low, I mean, and back again. But that's why we actually think it's prudent to say it's probably going to be about the same demand trend for those 2 regions again. Latin America and Southeast Asia are going strong, and we don't expect that to change anytime soon either. If you then go to the coatings businesses, we do expect Marine and Protective and Automotive Specialty Coatings to continue on a strong as they are, by the way. And then with Industrial Coatings and with Powder, we believe there is still probably in the channel, and this is not even the people who buy the powder-coating from us, it's often at their customers or their customers, customers that there may still be that is stocking happening and such. So we do believe that, that is actually the basis to say why we believe it's going to be similar demand trends as we saw in the third quarter. If you go on pricing, Charlie, the answer is no. I think the pricing, as we can see it, we're really holding to the pricing. It's been very successful. We may actually go for additional pricing given the fact that the energy cost is hitting as also we are a small energy consumer, but besides that, even the direct cost is a significant uptick. So we may want to offset that. We have relatively good data on share in all sorts of segments. And frankly, there, we're doing very well. And we don't see anybody breaking rank would also be somewhat bizarre because everybody sees the same energy cost sees the same raw material costs still in their numbers. And in addition, dropping your price and more share is in very short-term victory because then a couple of weeks later, competitors drop their price, too, and it's also back to the same point. So in that sense, we see no signs that, that is actually changing at this moment of time. Maarten on the self-help.

Yes, on the self-help, and that talks also to our Focus 2 initiatives as we have outlined that in our Q2 communication. But Thierry talked about pricing. I earlier talked about what we do in working capital and the inventory reduction of the EUR 300 million by the end of this year. And the third pillar is really on the cost, the OpEx, the EUR 50 million reduction, that will be mostly visible in Q4. And the focus is really on a run rate basis that we are in a strong position to enter 2023. And as we have said already earlier, it's a continuous challenging environment to better some of the inflation coming into our costs and offset that. But again, to your question, but mostly will start to be visible in the fourth quarter.

Our next question is from Laurent Favre of BNP.

Two questions for Thierry, actually. The first one, I was wondering, as you've clearly said that against your own forecast, the main issue was destocking. I was wondering if there was any area left where you hadn't seen destocking to this point, and we could still see destocking as it seems that -- this is really what you have gone for Q3? And then the second question, Thierry, I think your success will start next week, and you'll have a handover period. I was just wondering if you could talk about what are the key priorities for this handover and where you will point your successor to in terms of what you need to focus on first?

Yes. Now your first question, Laurent, that was interrupted. So we heard you introducing it and then we heard you at the end. But could you repeat your first question?

So are there any areas left where we could see destocking and where you haven't seen destocking so far?

No. But there may be segments where the destocking continues, and I alluded to that in the Powder and in Industrial Coatings. Because again, those are businesses that have a distribution part to it. And in fact, most of that was actually what we saw was in, of course, in the distribution part of things. So I think in areas like powder and industrial coatings, coil parts, et cetera, you might expect. And that's why we say we think that dynamics will be the same as the Q3 dynamics, but there you might see some destocking ongoing. And again, don't forget that the fourth quarter for Deco for us is a small quarter. So I think that might actually be more on normal course. But of course, it becomes in the fourth quarter, a pretty smaller part of it. Does that answer your first question, Laurent?

Yes, yes.

Yes. The second thing is around where am I going to point to success on why am I not going to point them towards? I think there's a lot of things to be done. But there's a couple of elements here. I think fundamentally, I think the company is doing quite well. This is a big dislocation in the end markets. And I want to stress that it's in the end market. It has nothing to do with our share, nothing to do with our pricing has nothing to do with what we do internally. Now of course, it's a very long supply chain to get the stuff in. So on the working capital, Maarten has explained that. We often have to order a material 2, 3 months ahead of time. Sometimes it's a month on the road to our plants. If then you have a significant dislocation that we have, it is all hands on deck to keep our working capital under control as our sell-out, in fact, is impacted by destocking at customers. So it's on the working capital. I think on the costing, obviously, that is still in the whole industry, by the way, is things to come around energy cost, indirect cost. If I look in euros, our costs are up and, of course, there's an enormous impact from currency that if you turned everything to Europe -- to European currencies. But last but not least, I would say, Laurent, given that Greg comes out of a different industry, I will definitely point to the point not to be confused between pricing and volumes because, in fact, our volumes are in many of our markets that we talked about before are relatively insensitive to price and definitely to hold on price. That is the margin expansion that's happening next year. We get impacted in all the numbers we just mentioned by stock revaluations because of the raw materials starting to trend down. That has to flush out of the system and that might still be flushing out in the fourth quarter. But in fact, this is, in fact, a good news for the third quarter. And then I think the discipline on pricing is extremely important to finally benefit of this horrendous 18-month cycle we went through with in the industry. Does that answer your question, Laurent?

Yes, it does. Maybe if I can sneak in 1 last one. On the -- you mentioned trades being still strong in European Deco. I was wondering if you had a view on backlog of the printers. So do you have a sense that this is also going to be holding up? Or are you actually seeing a deterioration there?

We definitely see no deterioration. Typically, in the industry, there is about 2, if you're lucky, 3-month view on what projects are, and there is no sign that, that will be changing anytime soon. But that's about as far as we can see, in fact, with some confidence the order book of painters.

Our next question is from Jaideep Pandya, On Field Research.

The first question really is around price versus raw material dynamics. If I go back to 2019 and assume that ballpark-ish volumes are roughly these days at 2019 levels, you guys had like EUR 300-ish million benefit from pushing prices versus sort of a benign is raw material environment. Now most of the raw materials are roughly around 2019 levels now. So do you think that a thumb rule EUR 300 million, maybe even more than EUR 300 million is a good starting point to think about in terms of the raw material price benefit for '23 versus '22? The second question is really around Marine and Protective. Could you give us some information around the backlog quite a few LNG carriers up for delivery in '23 and 1 of your key competitors is actually giving you credit that you've won some share in China as well. It starts with the P, the competitor that Thierry loves so much. So any information around price versus raw materials -- sorry, on Marine would be great? And then final question really to Thierry and maybe also, Maarten, I guess you guys have done a lot internally to improve your systems. It sort of relates to Matthew's question actually. But the raw material cycle or even the demand cycle, last year, you sort of thought everything of this is fundamental. And now things have just sort of been a bit abrupt and you're even seeing inventory devaluation. So how can you improve your forecasting better in the sense? Because clearly, you bought a lot of raw materials at the peak of the cycle. And I appreciate it's difficult to do these things or manage these things. But what could your successes Thierry do in this regard? Or what would you have done had you stayed longer to achieve the EUR 2 billion target that you love so much?

All right. So Jaideep, I think I'm looking at Maarten here because we're not sure if we can follow your mathematics around the price and the rolls, I mean. So by the way, the rolls are not at all back in 2019, neither in supply consistency and definitely not in pricing, I think we are at EUR 1.7-ish billion...

I mean if you look at the raw materials, since early Q1 '21 raw material, and it's including freight inflation, were up with EUR 1.7 billion cumulative, and meanwhile, we have compensated that with EUR 1.7 billion in pricing. So I don't get exactly your math versus '19 because if you take Q3 versus '19 raw material in the Q3 '21 versus '19 was up EUR 280 million. And we are now talking about another -- close to 2019 for Q3 '22. So we're talking in total, that what is it, EUR 570 million on a quarter Q3 versus '19. So I don't get your math exactly on that point.

Sorry. Let me rephrase the question. My apologies. What I was basically referring to is that '23 is sort of expected to be a similar year where you're supposed to see a pretty big positive delta on price versus raw material. The last year that you saw this positive delta was 2019 as a reference point. So -- and that was roughly EUR 300 million. Is that a good starting point for us to think for '23? That's what I was trying to ask, sorry.

I would actually prefer to talk around '23 more many quarterly calls, but I think that, that would be conservative, I would say. But again, there's geopolitical stuff, et cetera, that actually always throws a range of the whole thing. But that will actually be at the lower end of what should drop to the bottom line, definitely, I mean, but again, with just 1 energy crisis a way of that being reviewed as such. But that would be at a low, low roll limit of what we would expect to happen in 2023. By the way, the inventory revaluation is effective the fact that the raw materials are dropping, and of course, in the accounting-wise, it means you have to revalue whole stock at a lower value. So that is kind of a negative that we'll have accounting-wise until definitely at the end of the year. But that's in fact -- that is actually the beginning of what would happen in 2023. And maybe if I can quickly answer your question on Marine and Protective, Marine and Protective, indeed, the demand signal is actually pretty healthy in that. Now the raw materials that go in there are often a bit of the issue to follow. We are, of course, as you know, our big strength is indeed into complicated vessels and oil and gas installations, and of course, the LNG pickup and the acceleration of those projects is helping us. There, there's actually more a question not of the demand is the question, can we actually get all the supply then to actually fulfill those orders. But Marine and Protective is actually pretty positive environment where we're in. On the systems and the forecasting, Jaideep, I take the criticism. But also we have to, it's a little bit unfair if you would look at data until March, all our customers, they're forecasting and the forecasting of their customers was spot on what it is. after an infamous announcement and events that were happening in March and April, all of a sudden things went down a lot, which in fact -- just want to point out specifically Decorative Paint the whole channel had stocked up very helpfully for what was going to be a fantastic season and then made a turnaround after the geopolitical situations happen. By the way, if you then want to look at another inflection point, it is, in fact, when the announcements came around shutting down gas for Europe, it was another significant destocking wave that happened people proactively taking that into account. Now I'm not sure if there's any forecasting system that has to look 3 months out, that actually can foresee those things. The only thing we can do is actually take quick reactions on it. I think we did this to fast enough, but I do believe that we are quite many, in fact, were surprised by some of these events and what impact it had throughout the channel. So we are self-ethical and we will be looking at what can we do better. And in fact, we had sessions in the last 2 days around okay, what do we have to put in our internal -- integrated business planning. But I do ask for some forgiveness around the dislocation that happened there. Again, the consumer demand is not necessarily down yet is the reaction of all the channel between us and the final consumer, both in coatings and Deco that actually and the destocking of that entailed is the biggest impact and linked to 2 regions that are geopolitically and economically a bit more challenged at this moment of time.

Just one follow-up on the inventory revalue, sorry, devaluations. Is that like north of EUR 100 million for the second half this year?

I don't think we're going to give a number at this moment of time, Jaideep, because whatever we say now may be wrong, it really depends on what the inventory -- what the incoming prices are. What is obviously happening quite clearly is as our customers are destocking the paints and industry -- the paints and coatings companies are destocking. So there's some of our suppliers that see significantly lower demand because we also want to work to an inventory that was built up in times and it was difficult to get the stuff. So that is happening. That, of course, has an impact on an accelerated drop of raw material pricing when the demand goes down and you start to see that happening already. So at this moment of time, I don't know as I would be careful to put a number on it. But it will be significant as we go to the next months because that is the reset that indeed to have this margin expansion in 2023.

And again, I think it's very much how the curve will look like of the raw material decrease, and then it is more -- these are more timing effects ultimately.

Our next question is from Chetan Udeshi, JPMorgan.

A couple of quick questions. Just on this inventory revaluation topic. Is it fair to assume that when the raw material prices were rising, there was clearly a substantial inventory valuation gain at that time, which is now sort of to some extent, step-by-step reversing? And if that's the case, are you able to give us any sense of how much that revaluation gain could have been in the last 4, 5 quarters of inflationary trend, I mean just to do the underlying numbers then? And the second question, given all the key moving parts, et cetera, I think 1 place where clearly, we've seen in the earnings bridge, quite a bit -- sorry, quite a big negative number has been the OpEx inflation. And it seems at least the wage inflation is strengthening in parts of Europe. How do you see that OpEx inflation in general before any mitigation measures that you will take next year? Is that going to be still a substantial, at least starting point negative number in terms of inflation, which, of course, you try to mitigate from all of the actions that have been previously announced?

Chetan, I mean the second question was also interruption, so we didn't hear fully of it, but I think I got the gest of what you were asking. First of all, on the inventory revaluation, I think don't forget that this was built up gradually over almost a 2-year period and now this comes out. So it was, in fact, month-per-month, not such a big thing, but it now comes really losing out in a relatively short period of time. So -- and I don't think we are ready to give the exact numbers, I mean, because in the middle of the quarter, but it is affect the balloon was inflated gradually. And now basically, the air comes out of it pretty fast. So that's probably the best picture to keep in mind. But that's probably more for the later results. On the OpEx, indeed, we do see wage inflation. We say specifically nonproduct-related and other pocket expenses, which we actually curtailed quite a lot. We already started doing that. because, in fact, not only is the -- if people travel, it's not only the amount of travel, but actually, the prices of the ticket have gone up quite significantly. So it's compound. Wage bill is the same. There are all sorts of measures we have to do for our employees. We are -- with focus too. We have launched initiatives to offset that and actually to get back on where we need to be. But of course, we are obviously I'm stating the obvious within a highly inflationary environment. If you then look in euros, it looks even more spectacular because we have a lot of cost in the U.S., et cetera, that then basically translate back in euro in our P&L and looks, of course, pretty strong. I'm not sure if I answered your question because you were interrupted. But on the OpEx, we are not waiting until next year. We actually have put a message in 2, 3 months ago already, that was not only focused too, but actually kind of a hiring freeze and then basically the real clamping down on any other pocket expense to curtail the inflationary environment in our own costs.

Our next question is from Alex Stewart of Barclays.

I think somebody asked about the inventory devaluation in the second half. Can you just confirm whether there's any of that in the third quarter guidance? I assume it's in your adjusted EBIT. But if you could just quantify the impact in Q3, no need to talk about Q4 yet, that would be really helpful? And then you talk about your customers' destocking and the sellout volumes being okay. But if your customers are destocking an expectation of lower demand, then surely the next stage in this cycle is that the sellout volumes fall. So I'm surprised about your confidence that volumes will improve once the destocking is over. It seems like the destocking is just the opening chapter to this cycle. Could you possibly tell me why that theory is wrong would be an interesting thing?

No, Alex, in an uncertain environment, any theory holds merit, I would say. So we can only tell you what our channel partners are indicating and what we are seeing in the market. So maybe tackling the second question, if I look at decorative paint, for example, in EMEA, our seller we do that by subregion number we review every week the sell out is in line with 2019. Certain places slightly above, some places is slightly below. But if I take a bellwether market, it has been pretty consistent on 2019 numbers now on sellout for a number of months. Now you and I, over beer can discuss what the Brexit is going to do, the new government initiatives, what the impact is going to be. I can only tell you what we see and the fact that our channel partners are having their inventory right sized in line with 2019 because they also have sales in 2019, and then we'll take it as it comes on the economy. So that's a bit where we are. On the inventory valuation, I just want to make sure that everybody realizes this is not a Q3. We actually don't have all the results yet. Anyway, it's not a Q3 results call. So there, I think we probably would rather do that in a quarterly call than giving some estimated numbers. But I think it's fair to say, Maarten, that what the outlook we gave has some estimation of what an inventory evaluation would be as such. A downward revaluation by the way. So there's a negative impact in our numbers that should include in the number we gave.

That's included in the range. Yes.

Okay. So there is some impact from devaluation in the new guidance range, but you can't say how much it is?

Yes, correct.

Well, because we don't -- we not at the end of...

Is there any way you can tell us whether it's closer to EUR 10 million or EUR 40 million, any sort of sense because obviously, it makes quite a bit difference?

I think it best to deal with the detailed questions on the Q3 results in the Q3 call.

Our next question is from Geoff Haire of UBS.

Just a quick question. I think you mentioned in the statement something around the adjustment for hyperinflation in Turkey. I was wondering if you could talk a little bit about that and give a sense of how big that is? And I was also wondering, you've mentioned that the group level volumes will be down mid-single digit. Would you be willing to sort of give some guidance as to what you think that will be for coatings and paints, please?

Yes. On your hyperinflation question, I mean this is per the accounting rules. And in fact, if the vision over a 3-year period, the cumulative inflation is higher than 100%, which is it. Which is the case in Turkey, that triggers hyperinflation accounting. And in fact, only year-on-year, the inflation is roughly 80%. And that means that we have to look at the purchasing power at the end of the period and that makes this a retroactive correction of between EUR 15 million and EUR 20 million, which will be visible in the Q3 results.

And your second question was to try to get a volume split between paints versus coatings? Is that what your question is? I have to...

Sorry, I think you said that the group -- at the group level, volumes will be down mid-single digit year-on-year. I was just wondering, is there any difference in what you're seeing in the coatings and paints business?

Yes, it's about the same. Of course, it's different than between regions and between and sub businesses, but it's about the same, I would say, for paint and for Coatings. And maybe one element on that on the coating side, I think we have a sizable business also for using in China. So it is actually part of the whole China and Europe story, which is this story, frankly, that was developing not very well during the third quarter, and that also has the impact on our coatings business.

Our last question is from Adrien Tamagno of Berenberg.

Just coming back to the inventory situation for which yourself. In your view, what is the floor for these inventories? That's the first one. And secondly, if you can remind us how to think about your electricity cost headwind for this year? And if you have any long-term supply agreement that would protect you from any increases in electricity prices?

Yes. Let me maybe handle the inventory question, and Maarten, you can do the energy cost question. On the inventory floor, in fact, what happened, and I'll take some of the big LSOs because that's frankly where the bigger impact was. In fact, I just want to stress that all of them in Western Europe went pretty enthusiastic into inventory for the year. In fact, if we look at the inventory in the channel until about March, it was significantly higher in liters than what it was in 2019. And that was based on everybody expecting a very strong season -- and by the way, probably also a little bit of coating because materials were not always easy to achieve. So there was -- I want to be on the safe side, I have enough material, and it's probably going to be a good season. Then stuff happened geopolitically, and then you saw the unraveling of the inventories happening, which basically has been there at the end of the second quarter and in the third quarter seems to have now been absorbed by the system. But frankly, what is -- if you look at the graphs, the inventory in the channel is almost exactly tracking now the 2019 numbers. Of course, the inventory goes down because we go out of the vision for paint, so people don't hold less. But the current inventory line is almost exactly simple last couple of months now overlapping with the 2019 numbers. So that is the floor, it very much looks like there is an inventory level that people want to have that corresponds to the sell-out that we have, which is also the 2019 types of seller. So I do believe that we've seen what Deco is concerned, most of it coating is a bit more difficult because it's often our inventory is often the coated part or the object that has the coated parts of it that comes -- there's 3 or 4 steps of that separation there you really go to consumer demand, which is a bit more difficult to grasp how much over different 3, 4 steps in the channel is in there, but that we'll have to see in the fourth quarter of what's happening. Maarten, on the...

Yes, Adrien, on your energy question, for us, total energy is just less than 1% of sales, energy costs for ourselves. So just less than EUR 100 million in total. What we've seen this year is, first of all, we have 100% renewable energy in Europe. And we have also kind of term contracts. So the impact this year in terms of energy inflation, we see some, but it's still limited. So you talk about and year-to-date impact of probably EUR 5 million to EUR 10 million. But the impact will be more visible next year as, of course, these -- the contracts we have, they will be renewed. And that is then the action for ourselves. And earlier, Thierry was talking about the price increases, which we still will deploy, and that will be part of the price increases to compensate for the energy inflation for next year is more the early next year pricing initiative. Does it answer your question?

Yes.

At this time, we don't have any questions from queue. Speakers, you may proceed.

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