Akzo Nobel NV

AEX:AKZA

Earnings Call Transcript 2021-Q3

[Operator]

Welcome, and thank you for standing by. [Operator Instructions] This call is being recorded. [Operator Instructions]I'll hand it over to your host, Mr. Kenny Chae. Please go ahead.

[Kenny Chae]

Thank you. Hello, and welcome to AkzoNobel's Investor Update for the Third Quarter of 2021. I'm Kenny Chae, Head of Investor Relations team. Today, our CEO, Thierry Vanlancker; and CFO, Maarten de Vries, will guide you through our results.We'll refer to the presentation, which you can follow on screen and download from our website at akzonobel.com. A replay of this webcast will also be available. There will be an opportunity to ask questions after the presentation. For additional information, please contact our Investor Relations team.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.I will now hand over to Thierry, who will start on Slide 4 of the presentation.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Thank you very much, Kenny. Hello, and a very warm welcome to everyone on the call, and I hope you're all enjoying the gradual return to normal around the world at this phase of COVID containment is among us.Our Q3 results demonstrates our strong pricing momentum, with pricing up 9% overall and on track to offset the extraordinary raw material cost inflation by year-end. Revenue for the third quarter was up 6% compared to 2020 and 5% higher versus 2019 in constant currencies, with revenue up both for Paints and Coatings.Adjusted operating income decreased 32% to EUR 240 million as a result of the significant raw material cost inflation and supply constraints.By the end of the third quarter, we completed EUR 557 million out of our current EUR 1 billion share buyback program, and we announced an interim dividend of EUR 0.44 per share, a modest increase, balancing the current challenging operating environment with our continued confidence in our Grow & Deliver strategy.Let's turn to Slide #5. Our strong pricing and growth segment performance underpin our confidence in the Grow & Deliver strategy. We demonstrated growth for the fifth consecutive quarter with revenue up 5% versus 2019 in constant currencies.During the third quarter, Decorative Paints in EMEA and South America showed strong growth versus 2019. South America volumes were up 13% above 2019 levels, driven by strong market growth, but also as well as profitable share growth in Brazil and Argentina.Within the Coatings business, revenue growth was 9% overall, supported by growth in all businesses compared to the same quarter last year.Our strong focus on margin management means we're continuing our pricing initiatives to address the significant and ongoing industry-wide raw material cost inflation. We delivered, on average, 9% higher pricing in Q3, a clear testimony to the agility of our organization.During all these supply chain disruptions, I'm very encouraged that we were able to keep focusing on our essential Grow & Deliver strategy, including innovation, sustainability.During this quarter, we announced the winners of our regional Paint the Future challenge in China, and we have picked 13 finalists out of 216 participants -- participating start-ups for our global Paint the Future challenge starting in November.We also announced a milestone carbon reduction target for the company, signing the science-based target initiative and committing to a 50% carbon reduction throughout our value chain by 2030, as detailed on Slide 6.We are very proud of our carbon reduction targets that we announced last month, which will help tackle climate change, but also transform our business. We are the first paints and coatings company to have announced the carbon reduction target for the value chain.Our target is to reduce carbon emissions for our whole value chain, so Scope 1, 2 and 3 by 50% by 2030 with 2018 as a baseline. This means our target is aligned with the Paris Agreement, which aims to limit global warming to a maximum of 1.5 degrees Celsius above preindustrial levels.As you know, at AkzoNobel, we have a clearly defined approach to sustainability with our People. Planet. Paint. Strategy. As part of this, we are already reducing our Scope 1 and 2 emissions through energy efficiency and moving to 100% renewable electricity, the target we will already attain in EMEA next year.At the same time, the majority of our emissions sits in our value chain. Lowering our Scope 3 emissions means we have to work with all our value chain partners to transition to lower carbon alternatives. This is not only the right thing to do, but it would also be a driver for innovation and business results, and this can be achieved only through fundamental supply chain redesigns and by working on our product portfolio to deliver more than 50% of the revenue from sustainable solutions by 2030.I would also hereby encourage our value chain partners to commit to the SBTi targets as well by announcing their on plans, so we can work together to provide sustainable solutions for our customers going forward.Let's now turn to Slide 7, which summarizes how we view current demand trends in the markets where we operate. In North America and EMEA, the backlog for our supply to our customers due to raw material supply constraints is still clouding the picture while South Asia continue to be impacted by lockdowns. The underlying demand for paints is strong in most regions -- positive regions. Positive momentum continues for EMEA and South America. In EMEA, demand from the do-it-yourself segment is normalizing at a higher level than 2019 as expected while professional demand is returning to pre-pandemic levels.Compared to the previous quarter, South Asia continued to be impacted by renewed lockdowns in various countries, especially Vietnam, Malaysia and Indonesia. As a result, the business did not materially recover. However, at the start of Q4, we saw lockdowns beginning to be lifted.Demand for industrial coatings remains strong, especially the packaging and the wood segment, although impacted by lockdowns in South Asia as well as raw material availability and pricing.Growth trends for Powder Coatings are particularly strong and driven by both demand and market share growth, including sizable adoptions in the electrical vehicle industry. Although underlying demand is strong, supply constraints and continued lockdowns impacted the growth within this segment for the third quarter.Automotive and Specialty Coatings trends are also positive. Both vehicle refinishes and aerospace coatings show further signs of sequential recovery while demand for consumer electronics, which was high in 2020, continues to normalize.While demand for Marine and Protective Coatings is weaker than other segments, we're seeing further signs of recovery, especially for the protective segment. Demand for yacht coatings continues to be very strong.As usual, we will zoom in on two of our businesses -- business units in a bit more detail. This time, we'll be zooming in on our Decorative Paints business in China, in our Automotive and Specialty Coatings business. So let's turn to Slide 8 for our Decorative Paints business in China.The growth for this business is supported by our sustainable offering in wider and widening distribution. In this EUR 5 billion market, we are the #1 player in the premium segments with profitability above global Decorative Paints average. We are the clear leader in sustainability, and Dulux is recognized in China as a super brand.Year-to-date, our revenue is up 3% in constant currencies compared to the same period in 2019. The revenue growth in emulsion paints, roll paints is significantly higher than that and in line with GDP -- compounded GDP growth. At the same time, adjusted operating income increased 18% year-to-date in 2021 compared to the same period in 2019.Our strategy for Deco China is focused on expanding our positions now to Tier 3 and Tier 4 cities, broadening our traditional strongholds in Tier 1 and Tier 2 cities. As we started this strategy about 18 months ago, we have expanded to 90, 9-0, new cities and increased our reach by around 11,000 stores.The project market exposure in our China deco business is less than 20% of our Decorative Paint China sales. As we've indicated before, we have been very selective with regards to what projects we wanted to participate in over the past years and, as such, have stepped away from some growth opportunities in the past. We did so because we took into account for that project market that historically higher risk on receivables as well as the lower margins in this segment of the industry and our doubts about the longevity of some of the trajectories. And within the project segment, which is the lower margin segments, our direct exposure to nationwide property developments is immaterial. That means less than 2%. We are very much focusing on retail since a number of years.We're also focused on mitigating current energy challenges and have sufficient manufacturing capacity to meet current demand. Our energy use is around 1% of sales for our Paints business in China.Turning to Slide 9, highlighting our Automotive and Specialty Coatings business. This segment continues its trajectory of profitable sequential recovery. As you know, the vehicle refinish business makes up around about half of this segment for us, and the other half is made up of 3 different businesses: aerospace, consumer electronics and specialty plastics, with the latter indirectly serving the automotive industry.As pictured on the revenue chart in the middle, consumer electronics saw high demand during the first half of this year, whereas specialty plastics remain relatively subdued. Aerospace is showing continued strong recovery, and vehicle refinishes is normalizing post the pandemic.Within our Refinish business, we have a global #3 position in this EUR 6 billion market segment. We have shown clear margin management discipline over the years. We also renewed our business partnerships with several premium OEMs including Mercedes and McLaren. We're expanding our end user digital and service offering with digital orders, now making up more than 50% of our revenue. Customer collaboration is also focused here around decarbonization and reduced energy usage.In the EUR 600 million aerospace market, we have a #1 position. We are seeing a faster global market recovery than originally anticipated at the start of the pandemic. This is supported by solid growth rates in the MRO segment and growth in our aerospace-related film business. We're also realizing commercial synergies with Mapaero customers and products following the acquisition earlier.I will now hand over to Maarten, who will share more about the financial details and the results from Slide 11 onwards. Maarten?

[Maarten Jan de Vries, CFO & Member of Management Board]

Yes. Thank you, Thierry, and good morning, everybody, on the call. During the third quarter, revenue was up 6% versus prior year and 5% higher versus the third quarter of 2019 in constant currencies. The volumes were 6% lower and acquisitions added 1%. We focused on implementing pricing initiatives, resulting in price up 9% with mix 2% positive. The normalization of the deco EMEA DIY channel led to positive mix and lower volumes.Adjusted operating income decreased with 32% to EUR 241 million as a result of the significant raw material inflation and supply constraints, partly offset by 9% pricing and cost discipline. This resulted in a return on sales of 10% versus 15.5% in the third quarter of last year. Adjusted operating income excludes the impact of identified items, which had a net negative impact of EUR 50 million for the third quarter, mainly related to transformation initiatives. And last but not least, adjusted EBITDA was at EUR 325 million, 26% lower versus the third quarter of 2020.Then in Slide 12, the development of adjusted operating income during the third quarter. We delivered significant pricing in the third quarter, although not fully compensating for the impact of raw material cost inflation and lower volumes.Lower volumes, mainly due to supply constraints and lockdowns, represented a EUR 64 million headwind while significant pricing delivered EUR 210 million and mix contributed EUR 37 million. Currencies had a minor effect of negative EUR 4 million.Raw material and other variable cost inflation, including freight costs, resulted in a net negative impact of EUR 278 million compared with the third quarter of 2020.Operating expenses and other one-offs were EUR 30 million higher than the third quarter of 2020. As a reminder, we had EUR 22 million temporary savings in the third quarter of last year. The majority of these temporary cost savings returned in 2021, as expected. Unfortunately, due to civil unrest in South Africa, a EUR 5 million negative impact is included in adjusted EBIT for the third quarter, of which the majority is in the one-offs and other category.The end of September, Deco was virtually at par between pricing and raw material impact while coatings, where the challenge is steep, are still catching up.Turning now to Decorative Paints for the third quarter. Revenue for Paints was 11% higher in constant currencies versus 2019 and 1% versus the same period of last year. Pricing was up 7%, driven by strong pricing initiatives in all regions and mix of 3% positive, driven by Deco EMEA.For Deco EMEA, positive mix effects and lower volumes were driven by normalization in the DIY segment. As expected, we see DIY normalizing above 2019 levels and demand from the professional segment returning, which is usually lower volumes but at higher average selling prices. Decorative Paints EMEA was impacted by supply constraints in the third quarter.Revenue for South America was up 25% in constant currencies, driven by both pricing initiatives and market share gains in Brazil and Argentina.For Asia, China showed a strong growth in the premium segment. Pricing initiatives were offset by lower volumes as Vietnam, Malaysia and Indonesia were still materially impacted by lockdown measures in the third quarter of 2021, while India showed signs of recovery.Despite the strong revenue performance in most regions, along with underlying demand being robust, the combination of supply constraints, lockdowns and raw material costs resulted in an adjusted operating income, 27% lower at EUR 151 million and a return on sales of 14.9%.So moving now to the third quarter results of Performance Coatings. Revenue for coatings was up 9% year-on-year and 3% versus the third quarter of 2019 in constant currencies. Growth was driven by price increase -- price initiatives of 11% while mix was flat. Growth was also supported by strong demand for industrial coatings and continued sequential recovery in Marine and Protective Coatings.Revenue growth in Powder Coatings was driven by pricing initiatives, mainly in the automotive as well as the industrial and consumer segments. Powder Coatings showed strong underlying demand, although still impacted by supply constraints, especially in North America.[ Deco ] grew with 12% for Marine and Protective Coatings, mainly driven by the protective and yacht segments.Revenue for Automotive and Specialty Coatings was 6% higher, mainly due to pricing initiatives offsetting slightly lower volumes. Aerospace is showing continued recovery, whereas demand for consumer electronics continues to normalize.Growth in Industrial Coatings was driven by pricing initiatives, and wood and packaging coatings were particularly strong. The significant raw material inflation combined with ongoing supply constraints resulted in adjusted operating income, 30% lower at EUR 136 million and a return on sales at 9.7%.Now turning to the next slide, Slide 15. We continue to maintain a strong focus on cash and working capital management. This resulted in operating working capital as a percentage of revenue at 13.6% versus 13.5% in the same period last year and 13.9% in the third quarter of 2019. The slight increase is driven by raw material cost inflation, which caused inventories as well as payables to increase.Free cash flow, excluding pension prefunding and top-up payments, was EUR 198 million for the third quarter of '21, mainly due to lower profit for the period. Year-to-date, we were at EUR 225 million, mainly due to higher profit for a period, offset by the increase in the absolute level of working capital.Capital expenditures for the quarter were at EUR 7 million -- EUR 70 million. We are investing in growth, the optimization of our asset footprint and ongoing integration of our ERP systems. As mentioned earlier this year, for the full year '21, we expect capital expenditures to be around EUR 275 million.The net debt-to-EBITDA leverage ratio was at 1.3x at the end of the third quarter of '21, in line with our target leverage ratio of net debt to EBITDA of in between 1 to 2x. We remain committed to retain a strong investment-grade credit rating.Moving now to Slide 16. Year-to-date, our adjusted EPS was at 19%. It was up 19% to EUR 3.32 per share. Adjusted EBITDA increased 7% year-to-date, although 26% lower for the third quarter due to significant raw material cost inflation.Delivering on our capital allocation priorities, we've completed EUR 557 million of our current EUR 1 billion share buyback by the end of the third quarter and increased our interim dividend to EUR 0.44 per share.Moving now to Slide 17. As expected, we are seeing significant raw material headwinds continue. We currently expect more than 20% raw material cost inflation for the full year 2021 versus prior year. For the fourth quarter, we expect between EUR 310 million and EUR 340 million impact from raw material cost inflation. At the same time, we are delivering significant price increases to offset this, with Q3 pricing at 9% and September pricing at a 10% run rate. For the fourth quarter, we expect pricing to be between 12% and 14% and are on track to offset the raw material cost inflation on a run-rate basis by the end of this year.And now back to Thierry for the concluding remarks on the next slides.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Thank you, Maarten. To summarize, we delivered significant pricing of 9% with, as Maarten indicated, the Q3 exit run rate of our pricing of plus 10%. We delivered 6% higher revenues in the third quarter while delivering on our capital allocation priorities. The trends differ strongly per region and per segment, although we expect significant raw material inflation and supply disruption to continue through mid-2022.Margin management and cost discipline are in place to deliver an average annual 50 basis points increase in return on sales over the period 2021 to 2023. As mentioned with our Grow & Deliver strategy, we target to grow at least in line with our relevant markets, building on our strong foundation. In addition, we are confident in our EUR 2 billion adjusted EBITDA target for 2023, in line with our strategy.And I'll now hand it over to Kenny for information about upcoming events and the Q&A session on Slide 20.

[Kenny Chae]

Thank you, Thierry. Before we start the Q&A session, I would like to draw your attention to some of the upcoming events shown on Slide 20.With ex-dividend date of our 2021 interim dividend is on October 22, and the record date is on October 25, followed by the payment on November 4. We'll announce our results for the fourth quarter of 2021 on February 9, 2022.This concludes the formal presentation, and we would be happy to address your questions. [Operator Instructions].Operator, please start the Q&A session.

[Operator]

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

[Mubasher Ahmed Chaudhry, Research Analyst]

Two things. The first one is around the headline on Cromology. Could you just provide [ involvement ] process for that asset? And just some comments on -- if you would have wanted to go for the asset. And if not, then why not? Just some thoughts on that, please.And a couple of questions [indiscernible] side of things. I think in EMEA, the 11% decline is split between the impact from Southeast Asia COVID, the [ parts ] in EMEA and then kind of the DIY slowdown. Could you help us break that down between negative works from the South Asia COVID and the parts within EMEA? Just trying to figure out the impact of the DIY slowdown.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Yes. Okay. Mubasher, the line wasn't super good. So I think we are guessing for some percentages what you asked. I mean, just -- we'll try to go there and then you tell us whether we're answering the right question.I think your first question was around the Cromology headline and whether we had an interest or not an interest in the asset. We are always interested to look at an asset, and there's also then a valuation that we put on those assets. So yes, we did indeed look at the assets. I think we looked at the valuation for it. There is a certain top line that we felt was actually going to help us. The French market is a complicated one, and we have a position there. So then adding to that position adds to the complication. And then basically, the current owner is making their choice on who goes in there.So it was an interest, but it is what it is. And I think it is in line with us being disciplined buyers in the market out there and being realistic on how much we can get out of our capital allocation. There's one business in the industry we know extremely well, and that is our own business. So therefore, the share buyback is always a very strong contender for assets that may be add-on in that. So that's on the first question on that, and then we'll see where this goes.Now let me just take, Mubasher, when I answered your question because your signal interrupted a couple of times. Does that answer the Cromology question?

[Mubasher Ahmed Chaudhry, Research Analyst]

Yes, it does. I guess the valuation from my number looks relatively compelling. So just one [indiscernible] around, just in general, when you're thinking about acquisitions. What kind of valuation is something that you would look at?

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Yes. But I think, Mubasher, there, we've been pretty consistent, I think, that we are okay to -- for any assets to pay a multiple as needed. But we do have to see then with the realistic synergies and with the market dynamic, whether that actually starts to get in line with -- even for an attractive asset, it starts getting in line with our own valuation.Now don't forget that if for those players who were pretty active in specifically here, the French market, you also have to take into account potentially the synergies, which also is something you have to [indiscernible] the whole element. So again, I think we stay consistent, and Maarten is, I think, the broader in arms in this one not to have our testosterone get the better of us and keep focusing on what is the value creation mid- and long term for the company. So -- and then that drives the valuation for any asset, by the way, that we go after. So the attractiveness is probably more if you look on any valuation. I think we do pretty serious work on what is real and what can be delivered on that. So -- but let me get on the second question, which I think was mostly focused on the volume part, I think, for Deco EMEA or for Deco in general.It's probably good to give a bit more detail here for the 4 regions around the world. China is doing very well. Specifically, our retail business there is doing extremely well. If I look at our growth in the premium segments, it's actually up almost 29% to 30% versus 2019, and our geographic expansion to Tier 3 to 4 cities is really very successful. It also has been a fantastic way to shelter us from the current turbulences there in the project market where we really don't have any exposure.Southeast Asia is down quite significantly still because of the lockdowns. So again, for us, yes, in the year reopened, but that is not necessarily a big change versus quarter-over-quarter with last year because there were intermittent times when the market was opened there. The bigger impact for us is the fact that Indonesia and Malaysia and Vietnam, 3 big countries for us who are still close to business and only opened up, I think, as of the last week of September, the first week of October. So -- and then still trying to get back to something that resembles normally. So that -- if you look at the volume element, and I think it's in the deck somewhere on Page 24, I think from memory, that gives you some of the parts in there. So that's a significant part of that delta.The second part is -- and let me then go to another region is Latin America. Latin America is doing very well. I mean both the market is doing very well, but also a pretty significant share growth in the markets that we're operating there in Brazil and Argentina. That's a very good margin. So that's a success story overall for us.If you then zoom in, and that's probably more of interest, is on the Deco EMEA market, we do see now very consistently the do-it-yourself market in Europe normalizing to what it was in 2019 plus mid-single digits. So in fact -- and that proves what I think the people in the industry, including ourselves, have been saying that there is a new set of customers that has appeared. So on do-it-yourself, it's 2019 plus mid-single digits. So that's actually pretty positive. But there is a significant down in volume from 2020 in do-it-yourself.At the other side of the spectrum, the professional trade business is, in fact, back at 2019 levels, and that was significantly down in 2020. So that makes, if you look in our target that looks the top line for Deco EMEA is actually pretty good. There's 2 volume effects for Deco EMEA that you have to take into account. One is the fact that the swing from do-it-yourself to the professional trade is net negative in volume, so -- and definitely versus 2020.Again, we said it before, the mix is different in the trade business. It's typically a higher average selling price products, also different segments, a lot of exterior painting, a lot of wood, metal, whereas do-it-yourself is to -- has a higher element of wall paint in there, which is at a different pricing point and different volumes that go along. So that effect alone, I would say, the normalizing do-it-yourself in getting back of trade. Even though on the top line, you wouldn't see that, it actually results in a 3% to 4% drop in volume by that alone.I also want to point out that last year, we had a lot of conversation after the third quarter on what happened with our volumes and our mix at the same time because we had the opening up of the Middle East, African markets, which was an enormous peak of lower-priced material that came in. And of course, that effect was not there right now. So I would say, really the difference is there, the percentages for Deco. We have to see that year-over-year with the bizarre pattern in 2020 and the patterns that we have in 2021. But overall, the deco volume-wise, we're actually very encouraged. Share-wise, we're very encouraged. And actually, the markets are holding up pretty well.One element that I want to point out is that, yes, there is probably 1% or 2% also still there in those businesses of not being able to supply, which I would call backlog on the volume, which we call the backlog orders in place, which we cannot supply because either metal packaging is still an issue or some of the necessary additives in some countries or [indiscernible] that are difficult to obtain still through the supply chain situation. Mubasher, does that answer your question?

[Mubasher Ahmed Chaudhry, Research Analyst]

That's very helpful.

[Operator]

Our next question is from Mr. Charlie Webb from Morgan Stanley.

[Charles L. Webb, Equity Analyst]

Maybe just a couple from me. First off, just on expectations around volumes. Thank you for the price and the raw material headwinds. You clearly set those out for the fourth quarter. Just wondering if you could give us a better sense on the demand outlook for the fourth quarter, how that compares to Q3. As you said, some of the lockdowns in Southeast Asia perhaps being lifted, but presumably, raw material constraints still a bit of an issue. So just one around how you see the fourth quarter. And then also just kind of costing a line to 2022, how should we think about the volume backdrop for Akzo? When you look across your end markets, perhaps more in Performance Coatings, but just thinking about how those markets looking into 2022, do you expect a continued recovery? Or do you think we're somewhat there now? That would be helpful.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Yes. All right, Charlie. So let me try, and then Maarten chip in. I think for the fourth quarter, it would probably be a normal quarter and then you have to take into account the backlog. So the part of the answer is, in fact, the raw material. In fact, we're selling everything that can get our hands on. So the backlog is probably continuing to be there in the fourth quarter. You see in some of the charts, we also show the pricing that actually we traded the fact, I would say, that the -- or shows the fact that the raw material situation is somewhat stabilizing, but it's stabilizing at a very brittle level, I would say. The force majeures that at one point were 500 in our network in the beginning of the year, big material -- big volume material groups that has actually been pretty stubbornly sitting around this 50 to 55 force majeure. Typically, smaller volume products additives, nevertheless for a paint manufacturer that's equally annoying because if you miss an ingredient, frankly, you can't supply the product. So I think that backlog is going to continue to be there in the fourth quarter and would probably be the only deviation from having a "normal fourth quarter". I do want to point out the fourth quarter Deco has a seasonality, and that will be a more normal seasonality than we've seen in the fourth quarter of 2020. But in the rest, I don't think there would be wild swings in there. I don't know, Maarten, if you want to add something to the first question.

[Maarten Jan de Vries, CFO & Member of Management Board]

Yes. I think you -- I mean, a normal quarter that means that we are very much looking at a 2019 situation in that sense and then the uncertainty is indeed with the supply situation and the supply disruptions. And as we indicated, the raw material situation, which is now to peak at -- in Q4. So where we originally thought kind of the peak in Q3, it looks now peaking in Q4.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Yes. Charlie, let me move to the second question around the outlook for demand in 2022. First of all, we do expect the raw material situation in 2022 to be less hectic. That means stabilizing at this brittle level going into 2022. And that's also why we say, look, I mean, the raw materials will probably still be very much top of mind to the first half of the year. Hopefully, we see in the second quarter. Hopefully, we get a little bit more of a breathing room, but we're not betting on that and our whole pricing plan. And that whole market plan is based on current situation, but we don't expect it necessarily deteriorate further from where we are either. You see that in some of the graphs that are standing there. If you look at demand, Deco, well, let me go maybe bullet point to the 4 regions. China for 2022, we remain pretty bullish. Again, our business is predominantly a retail business. You may remember that, over the last 2, 3 years, we had to explain why we weren't showing the growth as some others, and we explained that we walked away from low-margin products that also, by the way, sometimes a year to 2 years receivables associated with that. So as a result, we basically focused very much on the retail and the upper side, the premium and the mid-tier of the retail business. And that effect, given what's happening currently in China, the reset that is happening in the development market, that was obviously a good move. So we are somewhat sheltered, to be honest, and it doesn't really impact us directly at all. There might be some indirect effects to distributors and other retail partners that may have something to do there. But we are pretty positive effect for the continued development of our business. In China, for Deco, mostly, however, share gains in Tier 3, Tier 4 cities, We talked about this 11,000 stores volumes for our premium product line are up almost 30% versus 2019. So it's actually going very well. Southeast Asia is only up from here because they were close to business. So there's no reason to expect that, that would be different in 2022. It's going to be interesting in quarter 4, how it ramps up because a lot of the painters in the big cities in Vietnam have to come from the country side, and we do see that a bit slower, actually having people getting back to normal. But I'm sure that is a relatively short-term transitional situation there. We saw similar thing in countries like India for a number of weeks also. Latin America, total success story, gained significant market share in Brazil. Actually, gained, expanded our market lead in Argentina with very good pricing. It's actually also marked share store capturing, et cetera. So that's actually very positive. Then on Deco EMEA, we do believe that the trend that we see right now on the normalization of the trade business, so that will be ongoing. And that, in fact, do-it-yourself, we see no reason why that wouldn't settle or continue to settle at this mid-single digits above 2019. So pretty positive. Also, some very nice market share gains in key countries for us. Now that goes off the glacial speed, but all the signals are actually very positive there. So very encouraged. So that's on Deco. If you go to the industrial markets, the demand for Powder Coatings is extremely strong. That is a business, however, that is really held back on raw material supply, which is a real constraint. Specifically, I would say North America is the region where that is impacting the most, but that business is, first of all, extremely efficient in getting its prices up, and they have to do a lot, but they are doing a lot. Underlying demand continues to grow for that business and extremely encouraged by really visible, tangible and increasing adoptions around electrical vehicles for powder coatings, which is actually pretty positive. Added segment, in fact, already in 2021. But definitely, if we see new adoptions in 2022 happening there.If we go to Automotive and Specialty Coatings, we are pretty sheltered from the automotive market. So the chip situation only impacts us gradually. These 2 elements, I think, that are a bit balancing each other in Automotive Specialty Coatings. On the one hand, Aerospace is -- and you see that also in the chart that we show in the deck, is in fact back at 2018 levels for us, not 2019, but 2018 levels. And actually, the MRO, so the maintenance and repair is actually very quickly coming back to the -- to what it was in 2019. That is then somewhat, in volume, offset with consumer electronics. Consumer electronics, where we were a big player in Asia, had somewhat of a COVID upside as people were working from home on equipment. That is also normalizing. It's normalizing pretty much in line with 2019, but those are somewhat offsetting elements there. And we finish that it's virtually back at 2019 levels already, and that will continue, I think, in 2022. Marine and Protective is still a very brittle business. I would say the protective business is indeed showing a pause, and I think that's going to be improving for 2020 -- continuing to improve in 2022. Again, we are at the end of these projects. Whether it's a capital investment, those projects started to happen more in the latter part of the oil prices and gas prices. We're getting back up there. So that is probably more in the latter half of 2022. Whereas the Marine business, what we see is that the dry docking is a bit lower mostly because any ship that is out there is being used right now in the supply chain disruption. So that gives dry docking a little bit of a backseat. But for new builds, and for C-stores, that business is actually pretty positive right now.And if you then go to Industrial Coatings, that is also the business that significantly impacted backlog. That is our high volume business. Again, we said that before, if you would put all our Performance Coatings in one big bucket, half of that bucket would be our Industrial Coatings business in volume. And that's where, in fact, there's quite some backlogs are also there, and that gives them an over-dimensional impact in volume. But on the underlying segments, I would say metal coatings is probably a bit normalizing to 2019 levels. That was up in 2020. But packaging and wood coatings, on the other hand, are gaining, the demand is very strong. So long story short, Charlie, on the questions, all of our markets, actually, the underlying demand is pretty positive. There are minor exception that is actually trending up. The big issue continues to be to get the raw materials and to supply.

[Operator]

Our next question is from Alex Stewart from Barclays.

[James Alexander Stewart, Chemicals Analyst]

Can I just clarify a couple of points you made, I think, from Mubasher's question? So I think you said that the shift in Europe from DIY to Pro is about 3 percentage points on volume. Is that the Decorative Paint and if I got that number right? And did I also catch that you thought that availability issues were 2 percentage points of the 11% reduction of [ orders ] to Deco? And then if you wouldn't mind giving the equivalent number for the volume disruption in coatings, it would really help us understand what's temporary and what's permanent.

[Maarten Jan de Vries, CFO & Member of Management Board]

Yes.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Yes. Let me...

[James Alexander Stewart, Chemicals Analyst]

I've got another question as well, but I'll get back to once you're done with this.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Yes. All right. Okay. Well, let's handle the first one, Alex, because I think the Deco one is obviously top of mind. So let me then walk through the steps, what is it in this program. Just listen carefully, I'm only going to say this once, but [indiscernible]. If you look at the volume development in Deco EMEA, first of all, and that's on Chart #24 in the deck. It would also be good to look at the third quarter of 2020, where we then had to explain why it was so exceptionally up, and that was mostly because Middle East Africa was up for business, which is a high-volume business, lower average selling price because it's an important market in most countries, et cetera, good value business, but that was different. That effect is much more gradual right now. So that effect is not there. So that is a big part of the volume impact on the Deco EMEA. As such, it's a normal sequential disruption of the normal sequences between regions here. It's also, by the way, while last year we had to explain why our mix was so negative and then we explained why the volume is up, it's related to the mix. And that's also why the mix is positive this year because that effect wasn't really there. So that's one part, that's one element of the volume plate and a big element of it. The second part is that do-it-yourself is, and we said it before, is actually -- let me go back on what we also covered in the second quarter. The do-it-yourself business in Europe is a about the same size in revenue as the professional business, but it is significantly higher volume because it is the higher volume wall paints that go in there, whereas the professional trade has different -- has also wall paints of course, but has facade materials, has wood coatings, metal trims, et cetera, which are in different volumes. It's a different mix, and it's also a higher pricing mix, by the way. So what we now see is by do-it-yourself normalizing versus 2020 that actually has an over-dimensional volume impact, whereas the trade comes back up. And in fact, that's why on the revenue side, it actually is more or less awash, if you go between the quarter 3 in 2020, which was one of those COVID boom quarters and the quarter we have right now. So that does -- indeed this 3%, 4%, if you calculate it, that effect alone is almost 3%, 4% volume that is happening there.I do want to point out though, and that is probably more relevant that if we look at our volumes that we sold in Deco EMEA for the third quarter, it is 7% up versus the third quarter of 2019. And if you extract it apples-for-apples with some acquisitions and how they came in, et cetera, it is in fact -- it is up about 5% versus 2019. And that is both including the normalization of do-it-yourself and the up of the trade. And it shows dynamic of the market, but also I think the share development that we've seen in the region as such.

[Maarten Jan de Vries, CFO & Member of Management Board]

Maybe to add here because the proxy is basically that versus '19, Deco EMEA is up from a revenue perspective, 10% is in constant currencies. And that is the key explanation of how that is, how the volume and pricing come through from a total revenue perspective versus 2019. And that is easier to take it from that perspective than look for it last year.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

So hopefully, that answers the question on Deco EMEA because there's a significant positive feelings already and optimism on the future for our Deco EMEA business if you look at the underlying trends. And in fact, that includes revenue share, et cetera, and then the volume picture is always much more complicated given the differences between the different segments in there.On the coatings side, it's a bit more difficult to look at that because there's enormous difference in the amount of volume between the 4 factors on that. There's definitely volume growth in powder, but frankly, there is the question, when will the backlog and raw materials actually come back? The demand is definitely there. So there is a lot of turmoil on how to serve the customers and how to prioritize the customers over there.The reason that the most impacted is North America. I mean, there -- actually, there is a significant issue on how to get the raw materials we need for the growth in that market. So the volume for powder and the same is for Industrial Coatings is actually artificially, I would almost say, capped by the raw material situation and it doesn't reflect anything, which is actually healthy from the market demand and underlying market demand. Just finishing that off on Automotive and Specialty Coatings. In this effect, in volume, a relatively small business. If you actually would put the amount of volume, it's dwarfed by, for example, industrial coating, which are the big bulk products. But there's the volume would actually continue to be trending up in that market, specifically versus 2020. Not sure, Alex, if I answered your question there because it's a pretty complicated picture with different dynamics by segment.

[James Alexander Stewart, Chemicals Analyst]

Can I just speak on the second question? Your closing prices, very aggressively more so than you did in '17, '18, I think. If you look at your individual markets, do you feel like your competitors are matching you on a like-for-like basis? So there was [indiscernible] prices to the same extent that you are. And if not, are you concerned that maybe your being a little bit aggressive, it might see some market share losses as consumers to the margin, so it's a cheap brand. But any thoughts on that would be really helpful.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

To be honest, Alex, in almost any segment we look in over the last 12 months, we have held share or increased share. So -- and that is more because if I look at Deco, it really has to do on good work around the distribution channels, good works on product innovations, product improvements, et cetera. So in that sense, we can go to the list of countries where we actually gained market share and sometimes where we were already the market leader, which is very encouraging. It is true that on pricing, we have a feeling we were earlier than the others to try to put prices up. So that is indeed correct. But I think customers don't like it, but they understand it. They understand what the dynamic is behind it. We do see, and you see that also in the curves that we published this morning that the momentum in getting our prices accepted is, in fact, accelerating, which is a sign that obviously -- or that we interpreted as a sign that others also have stepped up the momentum for getting their own prices because the necessity is there.I think the usual suspects, the big players, I presume, are all pushing for the same -- in the same direction because the headwinds are all the same for everybody with some nuances.Asia is probably the more difficult market to get it through. But even there in Southeast Asia, but also in China, where we were probably the long range for a while getting the prices up. That's almost across the segments. We have seen in the third quarter some local competitors starting to put their prices up at least to double digits, et cetera, because they probably were awaken to the fact that there was no share gain that it could get. On the contrary, there we saw the margins disappear. And since they were working already on lower margins to start with, actually, we're dropping probably in the red territory. So I do not believe that this creates any market share risk for us. I also don't think that there's any demand destruction because, again, in most of the projects, the paint work is kind of unavoidable and is a smaller part of the total cost of this -- of the substrate or the object that's being sold. So there, in fact, the dynamic continues to be very positive.

[Operator]

Our next question is from Peter Clark from Societe Generale.

[Peter Clark, Equity Analyst]

I've been listening to all these comments. I just want to check, I presume you've got some momentum for price increases in the first quarter as well. And then following on that, you were pretty bullish really about the demand outlook for '22 as you saw it today. I'm just wondering about any concerns here what the inflation is going to do because, obviously, in the press, it's constantly about things like renovation costs going through the roof. Obviously, we've got this big inflation hitting all the manufactured goods. Just your thoughts on the risk of demand destruction as 2022 progresses with this inflation coming through.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Yes. The first part of your question, you were blanked out, so we didn't hear it. So we heard about the demand structure, but we didn't hear the first part of your question.

[Peter Clark, Equity Analyst]

The price increases in the first quarter, I presume that momentum for some price increases still in the first quarter of 2022 from your side.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Yes, yes. Okay, fine. Okay. So first of all, on the pricing momentum. So we exited the third quarter at an average of 10% price increase year-over-year for our products. And frankly, we are very much on track and also very determined by year-end to offset the price increases. So that's the -- and if you do the math on the back of an envelope, that's where you see the 14%, 15% range that we need to achieve to actually get to that point. And we're monitoring that pretty obsessively, I would say, as we go through the weeks and the months here. You are right, Peter, that that's, in fact, a will probably then because that is offsetting, I would say, the absolute impact. We do want to go for a margin clawback in -- because the percentages have been depressed. So yes, there is definitely still price increases we're seeing in the first quarter, definitely selling coatings, but very likely also in Deco because we want to go back to the normal pricing rhythms because this is an exorbitant situation we go through with the raw materials right now. So the answer to that one is definitely, yes. The second one is around inflation and demand destruction. Again, the demand destruction piece, I'm not sure if I believe in that because, in fact, people don't paint because it's fun. We think it's fun. But actually, they use it because they want to sell a substrate there. So nobody wants to buy a car with no paint on it, nobody. If they move and specifically if there's a renovation happening more, I think, than new construction because I think new construction may be impacted given the inflationary pressures. I'm not sure if that would have an impact on renovation of existing buildings and spaces, which, in fact, is the bigger part of our Deco portfolio.Having said that, the inflationary prices, definitely pressures will be there, in my opinion, because, well, we increase our prices because the raw materials are getting an increase. If I put myself in the shoes of one of our customers, their metal prices went up, their paint prices went up, there are all sorts of other logistic costs went up. So I think that's going to get back into the final consumer already or definitely much so in 2022. So that is more a macroeconomic situation, I think. I'm not sure this is an AkzoNobel or necessarily paint and coatings situation on what is the inflationary environment. But I'm really not sure that specifically in our neck of the woods that, that would lead to any specific demand destruction at all.

[Peter Clark, Equity Analyst]

No, I think it's a macro situation as well, but it's quite serious.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Absolutely, yes.

[Operator]

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

[Jaideep Mukesh Pandya, Analyst]

First question here is on the Scope 1, 2, 3 that you've committed to and discussed. And you obviously want the supply chain and your partners to step in here. Obviously, a lot of your suppliers are talking about this as well and basically saying that if you have to go down the road of reduction of CO2, process cost pricing will go up, which means more raw material pressure for you. So are you confident that you can push all of this extra, let's say, cost, if I may use that word, to reduce emissions to your customers be it in Deco, be it in Performance Coatings? That's my first question.The second question is really around your 2023 EUR 2 billion target. So if I make life simple thing that you guys are around EUR 1.4 billion EBITDA these days, and you're losing about EUR 200-ish million from price versus loss this year, which I assume you will get back with all of this pricing that you're pushing through, that leaves EUR 400 million as a gap. I mean are you basically banking on sharp recovery on volumes or cost savings, or actually banking on a significant drop in ROS and keeping the prices stable to sort of bridge that EUR 400 million gap? Because, obviously, 2023 is not very far away. Sorry to put you on a spot here, but just curious to know what's your thinking.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Yes. If it's 15 by 20, all over again, but I think we don't have to deal with that. But let me answer your first question. I do reject that the pieces that subscribed to Scope 1 to Scope 3 is actually a cost pressure, I mean, because that is really not correct. And in fact, the supply chain partners we have who are a bit more advanced on that would probably agree that, that is not a trade-off. I could argue that in our People. Planet. Paint., in fact, it has been at the most negative view. It was neutral. In most cases, it was positive. And I gave some examples on that. If you look at renewable energy, frankly, it is -- it turns out to be a pretty nice hedge for us on energy cost right now. As you know, next year, we will be at 100% renewable energy. We had a very high percentage already in Europe. And frankly, we have a combination of what we buy in as renewable, but also what we have on site. So in fact, it shelters us in a pretty nice way from some of the energy costs. The second thing is, if you look at work we have been doing, that comes out of our Paint the Future activities on reducing over spray for our materials in some of our industrial coatings or our Performance Coatings segment. A big chunk of what we actually sell to the customer gets freight or next -- or not Netherlands on the substrate is intended to do. The technology that we run out, in fact, it's good for the environment, but it's also -- in fact, it allows us to get a higher margin and for the customer, frankly, to reduce the consumption with us to get a higher margin on the product. And in fact, the more advanced suppliers would actually totally agree with that. I go to the other element, a big part of the footprint that we have sits into the logistics, the shipping of material. Well, if you look at the leasing costs for vehicles that are electrical powered, actually, the leasing cost is lower than for a combustion engine vehicle right now in Europe. So I do not -- I think as a philosophy in the company, we do not accept the premise that more sustainable will be more costly. It also goes to different products you can use, how you deliver your products to go to high concentrated forms on that, do you do late time differentiation, et cetera. So to me, the exciting part is that in the -- we know what is doing the normal pathway, we can get to about 60% of it. The rest is really has to come from innovating, collaboration and effective collaborative innovation. That's why we started it about 2 years ago, 3 years ago with Paint the Future where there is a significant amount of pretty nice ideas that come out that are -- and in fact, the underlying ideas, it shouldn't cost more money. It should just be a different way on how to get it. So I think, Jaideep, don't worry. We always said that People. Planet. Paint. has to be a support for the business model and not that we don't do it. The business model should not be despite or in contrast to that. Secondly, on the gap that you talked about, and I think Maarten may talk a little bit. First of all, on the pricing versus ROS, we do expect indeed that this is -- and it has all the similarities of it. There's a bit of a replay from the 2018 -- well, '17 '18, '19 situation. We said that before, in our distribution businesses. The chain, including ourselves, will hold on to a significant part of the price, although one would expect that the raw material prices will settle sometime in 2022 to something normal. So that is the margin expansion. We talked about it that the margin compression we see right now on the way up will be a margin expansion in 2022, and I'm very, very convinced about it.On the other hand, you probably see that our costs are pretty much under control, but I'll leave that more to Maarten. I would actually indicate that behind the scenes, we are doing an exorbitant amount of work on complexity reduction. In fact, a little bit propelled also by the raw material situation. So we were doing it, but this accelerated. And why is complexity reduction important? Because that gives us a much more cleaner procurement baskets because it is extremely expensive right now, and therefore, not always the easiest position to negotiate with suppliers. But secondly, it allows us to really go on alignment of recipes and, therefore, make sure that we align where we make which products. Most of our plants right now make a bit everything and, therefore, also allows really the major steps for the network optimization because we have to rationalize our product portfolio.I guess one example in Deco EMEA, for example, if you look at the amount of articles we sell, it's over 8,000. A lot of work has happened that we should do this with something that is less than 2,000 larger runs, recipe alignments, packaging alignments, late and differentiation, and therefore, allow them basically to have specialized plants. Less plants, probably more specialized longer runs and with this fundamentally low-cost raw material basket.So we said it before that the expansion of the margin that we need is actually going to be in a variable marginal contribution margin, much less so than in the traditional SG&A OpEx, which we want to be stay disciplined onto. So we know what the challenge is. We repeated it, and everything is give despite this bump in raw material is actually geared to get to the EUR 2 billion. I don't know, Maarten, if you want to comment?

[Maarten Jan de Vries, CFO & Member of Management Board]

Yes, Jaideep, I think it's more -- the trajectory which we have set out is still the same. It's just a matter of timing because, overall, under the umbrella of Grow & Deliver, we have, as we said earlier, kind of 30% of the portfolio where we really believe we can drive growth above the market level. So that is one of the elements.Secondly, the margin management is indeed a timing-wise, getting on the other side of the month and leveraging then the possibility of margin expansion. And then behind the scenes, all the continuation of all the programs, which we are running, as Thierry mentioned, around our product management and simplification of our product portfolio and formulations, but also the other initiatives, which we are running on our asset footprint, our warehousing distribution footprint and the whole ERP consolidation, which is running the further leveraging of our global business services, et cetera, et cetera. So for me, this is more a timing thing than anything else as we are still -- as we are consistently running our initiatives, which we have laid out.

[Jaideep Mukesh Pandya, Analyst]

Great. Keep buying the shares, and let's wait for Ohio to wake up.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Yes. Thank you. Thanks, Jaideep.

[Operator]

Our next question is from Geoff Haire from UBS.

[Geoffrey Robert Haire, Managing Director and Equity Research Analyst]

Most of my questions have been answered actually. I just had one more. Of the 12% to 14% price increase that you're targeting for Q4, how much of that is already in the bag in terms that you've already pushed through up for this quarter already?

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Okay. Well, so the exit rate was 10%, and I think you'll see that's pretty much -- by the way, if we want to get to the 14%, 15%, we obviously have to have announced already that. So I would say, half of that, I would say, but I'm guessing here because now you really have to go to the details by business and have we announced when, et cetera.

[Maarten Jan de Vries, CFO & Member of Management Board]

But just to be specific, I mean all the plans have been laid out and underpinned. So it is very much now in the execution phase, I would say.Yes, we have, I mean, we have trained our muscles now already quite some time also during the '18/'19 period, and we have further sophisticated our way of managing this. So the transparency has only gone up.

[Operator]

Our next question is from Georgina Fraser from Goldman Sachs.

[Georgina Iwamoto, Associate]

Just a first kind of shorter-term one. Your comments that you'll be offsetting costs with price exiting the year, are you kind of planning for price to be kind of -- or price cost to be neutral to slightly positive impact heading into the first half of next year? And then my second question is looking at the science-based targets for reducing carbon emissions, you said that you think there needs to be a big supply chain redesign. I was just wondering if you could say a little bit more about that and maybe a comment on whether those trends are more favorable for larger players with larger balance sheets.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Yes, Maarten, you want to...

[Maarten Jan de Vries, CFO & Member of Management Board]

Yes. On the first one, Georgina. So the exit rate or how we enter 2022, it is really from an absolute amount to be indeed neutral price versus raw material. But as we commented earlier, we are preparing for further price increases early on in '22 because we feel that -- I mean, as we said, it's not only offsetting the absolute, but also looking at the percentage margin, obviously. But to your question, yes, going into '22, it will be a neutral situation.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

So Georgina, let me then tackle your -- the size-based target question. Yes, it will require significant conversations on both central, so both forward-looking to our customers but also to our suppliers.If you go on the raw materials, it is a redesign on, first of all, where do our raw materials come from because we saw them from all over the world and how can we actually readjust that, that footprint is less. Secondly, how are they produced and what is the energy -- the type of energy than the energy balance of how these raw materials are being made. So that's a specific one, which would be more a supply chain change, I would say, and that impacts our suppliers.Then the second element is indeed where do we make more products. I think we have a number of global product supply chains where you could argue. It may actually be -- we could actually redesign it so that we make it more local to where our customers are. And last but not least, and that's actually the exciting part is a whole variety on how do we get our products to our customers. I'm not only talking about the transportation, but what's the distance, what is the volume, what is the late differentiation we can do, so basically that we have a much smaller footprint.But in addition, it goes then with our own footprint, but also with the product category where we've been putting a lot of emphasis on already over the past years. That means the sustainable solutions, which are often higher concentrated products, higher density products, less over spray, et cetera, and then basically go to the footprint of the materials themselves. So this is a significant redesign. And in fact, it's interesting for our global, and I'll just give the external innovation. As you know, for our Paint the Future, we have had -- in fact, I said the second one that comes up with our suppliers. So open innovation, collaborative innovation with our suppliers under the flag Paint the Future. There are significantly actually creative ideas on how we can do things differently. They are not rocket science, but in fact, just help each other to help reduce the footprint. And again, that often comes back with resource productivity and, therefore, is not a cost element. And if I go on the more customer-oriented Paint the Future challenge, which had 216 start-ups involved, a significant amount of that is looking at how to deliver the product in a more efficient way. So for us, it's -- again, it's the moral impact but, in fact, it also has to do with how do we get our innovation ahead of things. But it will indeed, and that's already ongoing. It will indeed be a very close collaboration with both our customers and our suppliers and how they get their material to get there. And that makes it, in fact, exciting and also makes it a more robust business model. And by the way, a fantastic way to attract new talent because that's why young talent from universities comes to a paint company. We are mesmerized by paint, but young people want to have more of a purpose behind it. So it all goes hand in hand to doing the right thing also. Does that answer your question, Georgina?

[Georgina Iwamoto, Associate]

Yes, it does.

[Operator]

Our next question is from Tony Jones from Redburn.

[Tony Jones, Partner of Chemicals Research]

I've just got 2 left. How confident are you securing all your raw material volumes for next year? Just during the call, the way you've been talking about it might sort of got in states that you're sort of more prepared to almost lock-in peak prices as you get into that seasonal point where you build inventory for next year and then offset by price rather than losing volumes. So maybe could you talk about whether that's right or maybe the opposite.And then secondly, on the pro channel, could you remind us how much of that pose via your retail partners relative to your own stores? And maybe you could talk about whether you see that as a growth option by new store openings.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

I'm not sure I understood the second question, Tony. So what...

[Tony Jones, Partner of Chemicals Research]

Sorry, yes. And for Deco, you've got the sales through to the professional market. How much of that -- is any of that going by your own stores, for example, like in the U.K.? Or is some of it goes by your own stores or retail partners? And do you think you might look to expand your store network?

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Yes. Well, let me take the second question because it's a real patchwork from country to country where the professional goes either to our own stores. The U.K., we have a significant store set upfront. We have a significant store setup, and then others where we actually go to retail partners. It would actually be hard to push to get the percentage, I would actually have to look at it because it's so different from country to country.But honestly, I think we are, to a large extent, in a model that we feel comfortable with. There may be adjustments in a country left to right because it makes sense. I mean in that specific setup. But to be honest, there's no big intent to either go all stores or go all retail. I think we are pretty comfortable with the model that we have. So on the first question. The second thing on the locking in on prices, et cetera. As you might expect, here and there, there are the rare elements where supply is normalizing. We are extremely careful to lock in into any prices because it would be not very smart to lock in at still something at peak or near peak, given where we are. So we have a significant list of materials that we keep an eye on not to overstock and, in fact, buy what we need and not much more than that because that would be -- and if we didn't do that, that would be a mortgage on 2022, which we definitely don't want to do.At the same time, for most of the raw materials, Tony, it's not a question of wanting to buy a peak or not wanting to buy a peak or contract. A lot of the -- where we used to have 3, 6 months contract, given the volatility that our own suppliers see in their raw materials because often the problem is 1 or 2 steps further behind in the supply chain from where we are sitting. They actually are very reluctant to sign contracts. In fact, the volatility that the paints and coatings companies have been indicating in market updates during the third quarter is that many of the contracts are at monthly, biweekly contracts, et cetera, because the suppliers does know themselves what their costing is going to be. So there's very little locked in pricing going into 2022.

[Operator]

Thank you. Our next question is from Chetan Udeshi from JPMorgan.

[Chetan Udeshi, Research Analyst]

Just 2 questions first. There have been a lot of comments on volume demand, et cetera. But put it simply, in Q4, just looking on a year-on-year basis, can you give us a sense of you seeing the year-on-year volume change in Q4? Is it going to be similar to Q3 minus 6? Is it going to be better? Is it going to be worse? I think just directionally, how you think about the volume development on a year-on-year basis, that would be useful.And then the second question was just a follow-up on a comment around the science-based target. And I'm curious, especially on Scope 3, do you today get any reliable data on the product carbon footprint of your own materials from your suppliers? Because clearly, without that starting point -- quantify the reduction. And I think a related question there is, are you doing anything to incentivize any of the suppliers, the key suppliers to maybe start looking at reducing their carbon footprint [indiscernible] in terms of their own reduction?

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Yes. Thank you, Chetan. Maybe for the first one, Maarten, you want to...

[Maarten Jan de Vries, CFO & Member of Management Board]

Yes, I commented somebody earlier on the volumes for Q4 because I think it's better to look at 2019, and we will see them roughly in line with 2019 Q4 with a few comments. First of all, it's always important to comment that Q4 is always in a seasonal lower quarter for Deco. That is one. And secondly, we remain uncertain around the whole supply availability in the fourth quarter. So that remains a topic throughout the fourth quarter as we look at it right now, as the backlogs are still roughly at EUR 100 million as we indicated as well. But that is how you need to look at the fourth quarter plus all the other things we've indicated on raw material versus our pricing actions.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Yes. Thank you. On the second question on SBTi. I said, there's a couple of elements on there. Yes, we increasingly get into asking the carbon footprint. To be fair, I think the big suppliers -- and in fact, it's what we have, they have already reports out there with the annual reports going into -- with limited assurance from an auditor, so at least you can trace it. There's lots of work ongoing in all sorts of trade associations to get to something that is uniformed, specifically on the suppliers. There are benchmark companies, namely one, EcoVadis was actually pretty much out there to try to get a better picture on it. But to be honest, I think with what we have in the bucket right now, I think we can definitely, for the next couple of years, keep optimizing in that sense. But yes, it will require then indeed a clear carbon footprint and it's in general, the energy consumption, the carbon footprint, et cetera, what type of energy is being used to get more clarity to get there. To be honest, we're not alone in that. If you look at the -- I would say, a lot of European chemical and specialty chemical companies are very quickly aligning on driving that, and that in itself will be a driver, I think, and on the supplier base into our industry, but other specialty chemical industries and other industries to get there. So yes, that becomes an important part of getting there.Second, and by the way, I think if we don't do it, you can smell it that it's going to be -- if it doesn't become EU legislation soon, I think it's moving in that direction. I think Maarten, you're in a number of CFO networks where that is already on the agenda because you can see it coming from a mile away, and that would be a good thing, by the way, to get the transparency. On the incentivizing, Chetan, I think we would definitely incentivize suppliers by working strongly with them and awarding them definitely more business. So that goes back to your question, Georgina. I think, yes, it is probably a little bit more to those companies who have the means to act and to react. That doesn't mean big versus small. But obviously, those who are going in that direction, I'm not sure that we necessarily -- and it goes back to our business model, that we are thinking of paying more over there because that actually goes a little bit against what the philosophy is that we have on People. Planet. Paint. This is a resource productivity play, and therefore, it shouldn't be more cost. But we definitely are willing to shift supplier base towards those who actually do that who actually are complying or moving in that same direction.The last point I would like to bring forward is the work we do pretty substantially. We're very active since many years, by the way, in a number of consortia who look at different sources for the raw material all together. That is here, amongst other things, quite intense here with a number of universities in the Netherlands and look at the waste from the agro industry on what you can do with that. It's not so sci-fi or far off. Specifically for an industry like paints and coatings, that doesn't need always very big volumes of certain products. There are actually some neat developments that would be competitive, by the way, with the current. And there, it's going to be an incentivizing working with those suppliers who are willing to adjust their production processes to incorporate that. Does that answer your question, Chetan?

[Chetan Udeshi, Research Analyst]

Yes, yes, very clear.

[Operator]

Our next question is from Martin Evans from HSBC.

[Martin John Evans, Analyst of Global Chemicals]

Apologies, I'm on mute. Just one simple question on the margin and your hopes and the timing of the margin recovery from the current sort of 10% in the third quarter that we see down from 15%. And there's obviously a lot of moving parts on raw materials and pricing initiatives and so on. We see your comments about hopefully raw mats peaking out by the middle of next year. But is it therefore the case that you're hinting that the first quarter or even the first half next year will continue to see this sort of level of return in the margin because benefits of price initiatives will really be seen until the second half. And therefore, we could be looking at sort of barely double-digit return on the sales in the first half of next year until your initiatives and raw materials are falling, begin to come through.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Well, not really. So in fact, if we catch up with the -- if you look at the Maarten's infamous bridges that he keeps producing, you see that we actually are having a delta between what we do on our own pricing, what it brings. And then the raw material impact, which is the 278 is the -- I'm trying to [indiscernible] the 278 is the raw material variable cost impact, and in fact, our pricing is 210. So that gives you 68 negative impact in our margin in this quarter.As we catch up, so the goal is to catch up, in fact, have our pricing impact be at par with our raw material impact by the end of the year. So that would definitely be a margin recovery going into 2022. So in that sense, no, it is not waiting until the raw material prices go down. That would be then the -- if the raw material goes down and as we hold on to price in the latter part of 2022, that would be a margin expansion because we would want to have the pricing impact then starting to run ahead of the raw material impact. Maarten, if you want to comment.

[Maarten Jan de Vries, CFO & Member of Management Board]

Yes. So as I said earlier, the first step is really to neutralize from an absolute perspective, pricing versus raw material. We've also indicated that we're looking at price increases early next year because we need to start also from a percentage perspective to start to recover some of the margin. And then the next step is, indeed, the opportunity for margin expansion on the other side of the hill when, at a certain moment, raw material starts to ease again.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Yes. I just want to point out that also means for quarter 4. I mean we're still chasing up the mountain, and that is always a bit of a time lag. So the effect that you see in the third quarter, yes, sure that effect is going to be with us in the fourth quarter as we're chasing the raw material pricing, but we do want to be at that plateau at the stabilized situation by the end of the quarter, and therefore, moving into 2022. Does that answer your question?

[Martin John Evans, Analyst of Global Chemicals]

Yes, indeed.

[Kenny Chae]

Thank you. And I think with that, we're out of time. And so we now conclude our quarter #3 earnings call. For further questions, please contact our Investor Relations team. And with that, we wish everyone a pleasant day. Goodbye.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Thank you.

[Kenny Chae]

Thank you.

[Thierry F. J. Vanlancker, Chairman of the Board of Management & CEO]

Bye-bye.

[Operator]

Thank you. And that concludes today's conference call, and thank you all for joining. You may now disconnect. Thank you very much.