Q2 2020 Axalta Coating Systems Ltd Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the second quarter 20, <unk> earnings Conference call all participants will be in listen only mode.
A question answer session will follow the presentation by management.
Today's call is being recorded and replays will be available to all these for.
Those listening after today's call should please note that information provided in the quarter will not be updating and therefore may no longer be correct.
I'll now turn the call over to Christmas Great.
Please go ahead Sir.
Thank you and good morning. This is Chris Mecray VP of Investor Relations. We appreciate your continued interest in adulthood and welcome you to our second quarter 2020 financial results Conference call. Joining me today, a lot of bright CEO and Sean Leonard CFO.
Good morning to really start quotas natural results and posted a slide presentation, along with commentary the Investor Relations section of our web site at adult the dot com, which will be referencing during this call.
Our prepared remarks in discussion today may contain forward looking statements reflected the company is currently a teacher that's going to potentially.
In adult is operating and financial performance, including those related to the impact of covered Nike interactions. In response as was our restructuring efforts. These statements involve uncertainties arrest and actual results may differ materially less forward looking statements. Please note that the company's under no obligation to provide updates that's forward looking statements. This presentation also.
<unk> various non-GAAP financial measures in the appendix. We've included reconciliations of these non-GAAP financial measures. The most directly comparable GAAP financial measures for additional information regarding forward looking statements and non-GAAP financial measures. Please refer to our filings with the FCC.
I will now I'll turn the call over the Robin.
Good morning.
Thank you for joining us for our second quarter earnings review today, we will provide an update on our quarterly results.
The impact of Cobot, Nike Golf is operations and the continued actions we're taking in response, including the launch of a global restructuring initiative.
More detailed review of the quarter husband published to our website along with our presentation and we will keep our remarks brief today as a result.
Before we begin I do want to wish everyone. Good health.
It's health and safety remains top of mind for us it exactly.
We continue to focus daily on ensuring that we maintained safe operations globally for the benefit of our employees customers suppliers and the communities in which we operate.
We commented in detail on this during the quarter, but I also want to emphasize that we operate everyday it axalta with a commitment to diversity quality and inclusion in the way, we treat all employees customers and partners.
Shifting now to our second quarter results and highlights we continue to navigate that's challenging pandemic period based on the Threed guiding principles that we shared in our May update which include maintaining employee safety in wellbeing.
Maintaining operating flexibility and maintaining financial flexibility.
I believe you will see that we have been well served by focusing on these three areas.
We were very pleased to see a significant net sales recovery within the quarter. Following the bottom set in April.
In June we saw recovery to down 24% in overall constant currency net sales from prior year levels and 82% higher than the low point, we saw in April.
This came on the heels of gradually resumed automotive production in the back half of the quarter.
That's a quench a recovery miles driven globally.
Some improvement and broader industrial production through the period and improved housing market metrics supporting our industrial wood and coil coatings businesses.
Total net sales for the quarter decreased 39.7% before FX and M&A impacts.
Performance coatings second quarter net sales decreased 32.3% on a constant currency organic basis, with refinished, decreasing 38.7% and industrial decreasing 23.2%.
Transportation coatings sales ex FX decreased 53.7% year over year in the quarter with light vehicle decreasing 54.9% and commercial vehicle decreasing 50.1%.
Consolidated adjusted EBIT for the quarter with a loss of $12 million clearly, reflecting the extreme volume pressure in the period.
Formats coatings, adjusted EBIT of $2 million will significantly pressured by the detrimental effects of lower volume lower average price mix and FX pressures.
Transportation coatings adjusted EBIT loss of $39 billion also included clear volume dropped through effects.
It's office adjusted EBIT results also included the unfavorable impact of accounting charges in the period related the cobot 19.
Primarily associated with underutilized manufacturing sites, which totaled $45 million.
Excluding these charges are adjusted EBIT and our adjusted EBITDA would have been closer to $33 million and $90 million respectively.
With the man sequentially, improving through the quarter, along with utilization picking up at our sites globally. It was encouraging to see results returned to profitability in the month of June after two challenging months to start the quarter.
Deltas balance sheet remains in great shape, notwithstanding the increase in our reported net leverage ratio due to the impact on the profit denominator in the second quarter.
With the execution of 4.75% coupon 500 million senior notes in June along with the actions we've taken to conserve cash our liquidity position remains extremely strong.
In response to the demand impact of the global grown the virus pandemic today, we announced the initiation of a global organizational restructuring.
The initial action as expected to generate annualized savings of approximately $50 million once fully implemented.
Additionally, we are actively planning incremental steps further reduce our cost structure and increase our speed and agility to market.
These may include in the near term further headcount reductions in Europe pending consultations with works councils and other local legal requirements and other potential changes to streamline and improve the business globally.
We're now moving forward to position the Gulf that her profitable growth across our served markets, especially in higher growth segments of the coatings market.
Turning to the overall demand environment exalted benefited from sequential recovery following the volume bottom shut in April.
In refinish total miles driven and accident rate volumes globally continue to be impacted materially might stay at home restrictions, but the magnitude has moderated over the last several months.
The bottom set in April with traffic down 45% to 50% in the U.S., we have seen traffic rebound solidly and close the gap with free cobot levels by early June.
That being said comparisons against prior year traffic remained challenged.
Approximately 15% to 20% below prior year levels on a seasonally adjusted basis as of the end of June.
In Europe traffic levels have remained highly variable between countries, but we've seen broad recovery since april to levels exceeding the pre cobot baseline of traffic levels in mid January.
In China wants mobility strictures were lifted in March traffic resumed to nearly normal levels within weeks.
It appears to be the fastest and most robust level of recovery, we've tracked of the most populous countries.
Axaltas total try not net sales in June were up 4% from the prior year.
Our body shop customers in the U.S. in Europe have seen activity in the range of roughly 80% of prior year toward the end of the quarter.
Substantial recovery from the end of the first quarter, where demand was trending at approximately 60% of the prior year.
And our industrial end market exalted second quarter results continued to show more resilience overall relative to our other businesses given the wide dispersion of global customers and market served as well as ongoing new account additions we've seen this year.
During the second quarter well each of the industrial sub businesses saw significant impact lower volumes. The bulk of that impact occurred during April and May well June saw significant recovery in volumes from Millos.
In some sub businesses, we saw full recovery to around even with prior year net sales levels, including wood and coil coatings.
The end market level, while lower automotive production has impacted E coat customers and general industrial customers that sell into automotive tier suppliers other markets, including building construction.
Agriculture have recovered to operating rates above prior year levels, notably in North America.
And our transportation coatings segment, most global automotive and truck Oems temporarily halted production for a portion of the second quarter.
Impacting April most severely but continuing through the quarter as initial restarts began in mid may.
He is also generally expects to track the recovery rate of the global vehicle markets and this has been the case in recent weeks.
In China, we've seen significant production recovery across all vehicle markets.
Customer production sites began to reopen in early March and second quarter production, even exceeded prior year levels in certain weeks.
Passenger vehicle retail sales in China have rebounded fully from the cobot 19 impacts with total sales up 1.8% June versus the prior year.
China light vehicle sales volumes results increased in June, but healthy double digit levels versus the prior year.
For the U.S. automotive sector.
Passive incentives coupled with low financing rates continue to bolster early recovery with demand stimulation.
Signs of this recovery have been seen in automotive sales during June which recovered to 13.1 million units are up from a 12.3 million level in may.
The quarter.
Global light vehicle production declined 45%, including a 23% decrease in Asia Pacific, but a 9% increase in China.
Current industry forecasts call for a 22% drop global builds for the whole year, including a decrease of 11% for the third quarter.
It's worth noting that forecast of improved in each of the last two months.
Overall global truck production decreased 33% in the second quarter and current forecasts <unk> class four to eight truck production suggested 25% decline for the year with third quarter down 20%.
The overall truck market also appears to be firming slightly.
In recent production estimates by industry forecasters have increased in the last month due to stronger than expected orders, notably in the class eight vehicle segment in North America.
With that I'll turn it over to Sean for some additional details.
Thanks Robert.
As we noted earlier, we reported the second quarter constant currency organic net sales decline of nearly 40% overall the declines for more severely impacted by the 54% decline from the transportation coatings segment as customers curtailed production at unprecedented levels during April and through much of that.
Oh production rates triggered accounting charges in the period related to this reduced demand totaling $45 million.
These charges were primarily associated with fixed cost expensed in the period due to low utilization rates at manufacturing sites that normally would have been absorbed into inventory.
And with higher inventory and accounts receivable reserves as we did see some credit concerns pick up in certain markets. Our reported results clearly would have been substantially different without these charges.
Regarding cobot 19 impacts and our response actions during the second quarter, we exceeded our target of plant cost actions by achieving total savings of $75 million. We've increased our in year 2020 savings target to at least 130 million from the prior target of 100 million with the remaining balance weighted more heavily during the third.
Her.
Likewise, we exceeded our cash flow actions during the quarter, delivering 70 million of incremental discrete cash flow saving separate from the cost actions and have increased our full year target for cash flow actions to at least 140 million versus 125 million plus previously communicated.
In combination, we now expect to deliver incremental cash flow in excess of $270 million, including the cost reduction actions, notably during the quarter. We avoided any cash for cost actions that would have sacrificed our market positions and in fact, we continue to accrue new accounts across many of our business lines.
Regarding the restructuring announced today this action, which is subject to works Council compensations and other legal requirements expect agenda to generate annualized cost savings of approximately $50 million to be achieved over the next 24 month with $40 million by the end the 2021.
It is also now anticipates approximately 195 million of in year 2020 cost savings across all active initiatives.
This includes the restructuring actions announced today combined with previously planned actions, including ongoing exalt weight savings initiatives and the higher 30 million of temporary savings of matters related to covert 19.
Robert noted our solid balance sheet at second quarter end, we closed the quarter with total liquidity of approximately $1.5 billion, including the 500 million senior notes issuance in the period.
Free cash flow for the second quarter total use of $18 million, which was notable given the 44% as reported decline in that Sal.
This outcome benefited from actions taken during the period maximize liquidity.
And we're extremely proud to demonstrate this financial flexibility to our shareholders during extreme case of volume volatility.
Regarding our outlook given the ongoing impact from the pandemic, we expect net sales in third quarter to be down approximately 15% to 20% from the prior year quarter.
We expect the relative decline between two segments to be even given the various trajectory of recovery across our different businesses.
For the full year, we now expect diluted shares of 236 million.
Capital expenditures of 80 million, an interest expense of approximately 150 million, reflecting our new 500 million dollar debt issuance.
Given the expected lower net sales, we would expect the raw material savings, we realized to remain somewhat limited in third quarter, although marginally positive.
Additionally, our net sales in July or expected at approximately 14% below prior year results.
Further improvement from June 24% below prior year results on an organic basis, excluding currency.
I'll now turn it back over to Robert.
In conclusion, the second quarter was a particularly challenging period for many companies, including Axalta due to the global Corona virus pandemic.
Despite the 40% drop in organic constant currency sales, we experienced thanks to exalt is highly flexible business model and actions management undertook we were able to generate near breakeven adjusted EBIT and incur only a modest use of cash I believe this illustrates the strength and resiliency of our business model.
We believe the back half of the year, assuming the benefit of continued recovery may also be an opportunity to underscore this resiliency.
Leading solid free cash flow generation, despite ongoing net sales headwinds from the prior year.
I'd also like to take an opportunity to think each member of the Axaltas great Global team for their continued strong efforts made during this challenging period.
I'm confident that the extra efforts will make exalt, a better and stronger competitor emerging from the pandemic and but our workforce protects the company from near term impacts while also setting us up for longer term value creation with a cost structure fit for global competition in all markets.
I continue to see examples every day of Axalta team numbers going above and beyond to improve our business served their communities and to offer the best products and services to our customers possible.
This passion is the engine because all the success and its inspiring to witness.
With that we'll be pleased to answer any questions. Operator, please open the lines for acuity.
And at this time will be conducting a question and answer session. If you would like to ask your question. Please press star one on your telephone keypad, a confirmation Tony will indicate your line is in the question Keith.
You May press star too if you like to remove your question from the Q for participants using speaker equipment and may be necessary to pick up your hands had before question as Turkey.
One moment, please while he poll for questions.
Our first question is from David Begleiter from Deutsche Bank.
Well see what your question.
Hi, Good morning. This is actually Kathy Griffin on for David. Thanks for taking my question I appreciate that color you've given just on what you see in terms of the cadence that business trends on by month, but just wondering if you can maybe walk around the world here you know here today.
In a in July in terms of what you're seeing.
For the performance again.
This is Robert in our refinish business I think we're seeing miles driven and accident rate volumes come back up we obviously would like to see a higher tropic densities that will likely come when there is up more of a return to work and a return to school.
Not to get back to the pre cobot seasonally adjusted levels.
In the U.S. in Europe, we're still seeing about 15% to 20% below pre cobot seasonally adjusted levels, China, we're seeing a pretty strong rebound there, but still below pre coated.
Seasonally adjusted levels for the moment and then we've seen a Asia, excluding China coming back, but theres, a little bit less specific data there and then of course Latin America is everybody has been reading I'm sure still being heavily heavily impacted by code, but big picture, we're seeing the refinish business yeah come back.
Quite nicely.
The lows of April and coming back strong.
In industrial.
Industrial production is expected to continue to improve if we were down roughly 13% in the second quarter.
Expect to see that according to the forecast down about 7% in Q3 and about 4% in Q4 as as the world continues to to recover.
Some of our business is there a little bit more more color as I'm sure. Many of you will have questions on and our would've business, we're seeing solid demand in our would've business at our core anchor customers.
In particular, our kitchen business remains strong and has a healthy backlog of orders in June that will continue through through July.
One thing starts although there are below prior levels are also improving so I think we're encouraged I'm encouraged and wood business.
Well business is benefiting from stronger demand of construction.
As well as the RV market and the housing market, which is expected to continue through the summer.
Our energy solutions business is perhaps a one of the least impacted industrial sub markets and we're seeing an increase in demand there for electric motors.
And for electric vehicle. So we continue to be excited by the long term prospects of this business.
In general industrial, which goes a little bit more into the automotive tiers, a agriculture construction equipment and distribution that business understandably is a little bit slower to recover given some of the end markets that that that that particular sub segments serves.
In our putter business, we're seeing a better performance in powder.
In the Americas in EMEA in particular.
We move over to transportation.
As you've heard in our commentary.
China was ahead of the rest of the world in the cycle and they are back to close to their normal trajectory.
And we'll talk about here in a minute I'm sure.
The performance of the business compared to the overall compared to the overall market here.
But there are currently showing signs of a strong strong second half a year.
In Europe to ramp up spend a little bit slower than we expected a in Q2.
And we expect to hit kind of our 2020 peak for that business. So sometime during the third quarter.
Pricing in that business remains on track and it's somewhat related to new color in model introductions and we've also had a couple nice wins in the second quarter in our light vehicle business that will benefit us in particular next year.
Commercial vehicle business, obviously, everybody seemed to drop off.
In builds the you know that we've seen there in the marketplace.
We've actually had in the courseware in larger markets and Jeff heavy duty truck business, we're in a multitude of other transportation.
Segments within commercial vehicle, including the RV market, which is where we have seen some demand for our coatings actually be a quite strong.
Thank you very much.
Our next question is from Chris Parkinson from Credit Suisse. Please proceed with your question.
Great. Thank you very much and gloves, no everybody's doing well I'm just very simple question for me just given your cost programs, which are clearly progressing well on just the temporary as well as the more structural and how and as well as the movements and raw materials, just netting those two things out how should the street thinking about the decrementals for three.
Q as well, it's probably more importantly, the incrementals coming back once volume truly returns. Thank you.
Hey, Chris This is Sean good morning.
I guess kind of.
And it reiterate what we saw in March just given that the quick decline, we saw roughly 44% decrementals on the $90 million impact back in March I know, we indicated that just.
Reconfirm that data point, what we saw in the second quarter was closer to 42% and we highlighted these accounting charges. The vast majority of the accounting charges actually related to utilization and our plants. So more of a U.S. GAAP concept.
Once you drop below a certain normal levels as you to find capacity you take those charges immediately to the piano and just given again the dramatic drop off that we saw in April may that really triggered is nuanced accounting charges in the quarter, we're not anticipating those to reoccur. So when you think about that $45 million and essentially profile.
Matt our Decrementals were probably closer to 32% and we would expect decrementals to slightly improved as we head into the third quarter, given our expectations of 15 or 20%, but drop and top line.
And then longer term.
It's really going to be all dependent on how we continue to see recovery. If we continue on the trends.
That is decrementals will continue to improve as we get to the fourth quarter.
Got it.
And then second question can you just give us a broad remarks on your assessment of the refinished business outside of the general miles driven trends. So just yeah, so body shop, a distributor inventories.
Your market share trends within the U.S. as well as Europe. So just any comments on the kind of variables within your control I would be greatly appreciate it. Thank you.
Yes, the body shop activity is.
Across North America, and Europe is at approximately about 80%.
Of kind of pre cobot and activity levels. So the good news is but I think we're we're seeing activity levels pick up and get back up to higher levels in the body on the body shops out of the business I think we will need to see more stability in the cobot situation Chris.
In order to get to a high enough level of miles driven that we see congestion at peak hours.
I think morning commute after commute midday Aaron's and that type of thing ask if key congestion periods will need to get to a higher level of miles driven before those congestion periods kind of take us back to.
The number of kind of total accident volume that we had that we had pre cobot, but as we continue to see miles driven a move up and more activity and congestion pick back up.
We expect to see that we expect to see that return from an inventory perspective, but I think as we said on the on our last call we've seen distributors running with very low levels of inventory.
Just given their business models and effectively today I'd say almost all of our distributors are effectively buying to buying to demand and have brought down buffer inventory levels up to fairly low levels and for me up from a competitive perspective, we haven't seen any any major.
Changes in the and the landscape and we have not let the cobot pandemic affect our ability to service our customers and make sure that were getting our customers around the world what they need and add to the extent that they run into issues and we need to troubleshoot problems and so forth we've been doing a lot of virtual.
Problem solving with our customer base to keep everything moving and then where we can that a social Lee distant and safe way, we've been having our sales in our technical support teams be fully out in the field.
Thank you very much.
Our next question is from P.J. Juvekar from Citigroup. Please proceed with your question.
Good morning.
Robert Good morning, something you just said something interesting about morning traffic was this afternoon traffic and miles driven.
You know are all my to do an equal for you.
Or is it that maybe the morning congestion is better for you than afternoon traffic or vacation traffic.
Can you just sort of.
Go into further detail about what's what's really going in is a one particular type of traffic better than others.
Well I think it has to do PJ with the level of sort of the level of miles driven right. When you see miles driven drop as much as they did for example in April just from a proximity perspective congestion levels get to be get to be so get to be very very low.
But to your point in addition to the miles driven you also you know do a need to see into business congestion at the typical congestion hours and you need to see congestion levels increase.
In order to get back to the full accident volume that we had on a pre cobot basis.
Okay and.
And then my second question is on sort of heavy duty caustic cycle.
People sit at home.
In order from Amazon and more.
More goods are delivered but truck is it possible that maybe clos it comes back faster than passenger vehicles. Thank you.
You know I think.
What we would expect to see just from a a from an incentive perspective is if you look at the I Hfts forecasts.
For the market I think the forecast are actually showing a faster recovery in in the passenger car passenger truck market.
Heavily driven of course by some of the incentives that were seeing in terms of zero interest loans deferred payments.
In other other other options that some of the data in certain regions May show commercial vehicle coming back, but I don't know that the sort of the Amazon effect is necessarily going to be a big driver in terms of having a commercial vehicle or classy heavy duty truck recovery outpace what I think we hope to see.
In the into light vehicle space.
Thank you.
Our next question is from or.
So.
Good from JP Morgan. Please proceed your question.
Good morning, How're you.
Good morning, so okay.
Could you discuss what what led to the and lower price mix in the refinish business like how much was not price and how much was no I'm mix and and what do you expect what a for the next couple of quarters.
Yes, the outcome was driven almost entirely by by mix price was actually a positive in the year over year comparison, and we continue to push our regular cadence of pricing in refinish globally. As we always have the second quarter result was really driven by buying patterns from distribution customers.
And to a lesser extent, we also sold a larger quantity of mainstream and value oriented products in the second quarter.
Regarding the the new restructuring program that that you initiate.
How much of the cash tried yourself the 55 to 65 million do you expect to spend this year versus next year and what's the capex compelling enough those charges.
Well for cash costs.
Yes, so roughly $25 million and the cash costs will be spent in 2020, largely the difference going out in 2020, Twond or is a small piece that will continue in the 2020, so as far as the capex arranging $10 million to $15 million.
We are looking at rationalize rationalizing certain capacity.
And our manufacturing footprint. So there are other components are and that will largely be spent 2021.
And do you have.
In a target for the year I could take it looks at that DNA is coming down quite a came down a bit enough on second quarter versus the first or what do you target for the year.
We're trending towards closer to 320 million, including the step up but certainly with our pull back on the overall capex budget, you're starting to see that benefit coming through from a DNA perspective to watch running down.
The step of the spot like on it and 5 million.
That's right.
Thanks very much.
Yes.
Our next question is from John Mcnulty from BMO capital markets. Please proceed with your question.
Yeah. Thanks for my question I guess I had two of them.
The first one is you've got a lot of cost cutting programs and initiatives now and its admittedly, it's it's a little bit tricky to to kind of keep up with them. So I.
I guess two things can you can you help us to understand sequentially.
How much of a benefit you will get in Threeq versus Twoq you from the cost cutting initiatives that you that you've outlined and then and then also how should we think about the sustainable cost cuts in htwo and the incremental benefit and 21 first 20 as their way that you can kind of help us to understand that.
Yes, we have provided any any sort of incremental for 2021, but as it relates to 2020 just to break down the composite for you John So the exact away savings the $50 million is coming and Ratably. So as you think about third quarter fourth quarter.
Essentially that easy math I'm as it relates to the $130 million and temporary savings. We got 75 in the second quarter roughly two thirds of that difference will come through in the third quarter, but the difference coming through in the fourth quarter and then as it relates to the new 50 million. Our program are anticipating about 10 million.
The vast majority coming through in the fourth quarter.
Got it Okay. That's helpful. And then and then just one clarifying point then that I think Chris ADMET question earlier, so it did I understand right that you're thinking about the decrementals in in Q3 Q at somewhere in kind of the 30% range give or take a little bit I mean, I think you you'd said access.
For the some of the period costs for the accounting costs in Fourq. It would've been 32, and you're thinking it's on the margin maybe a little bit better than that as are we thinking about that right.
Thats exactly right, John if we get to the 15% versus the 20% and that South decline I would expect us to be a little better and 30% on decremental, but at or about 30% as right way to think about their quarter Decrementals.
Got it and then just just so I'm I'm doing the math right. If I, if I understand you're essentially guiding two to 200 million dollar hit on the sales line. So should we be thinking again based on that math that you're you're kind of thinking about a 60 million dollar hit year over year on the EBIT line is that is that writers are we missing something on that.
I'll take your met driving that's that's a rough math.
Thanks, very much of the color.
And our next question is from Steve Byrne from Bank of America. Please proceed with your question.
Yes. Thank you.
The volume slides provided are helpful. Thank you for that.
But if we look at.
The one swore refinish in particular and just try to impute, where your revenues were in business into your low period. It seems like they they're carrying a surge in the quarter March and June were big months since a year ago is that that's the way that business operates where.
It's it's a lot of product moving at the end of quarter or was that an anomaly.
Yeah, that's that's pretty calm and typically after the year end things are slow to open up so you'll see january be a little bit a little bit slower you've got to Chinese new year impact that always occurs in the first quarter as well. So march tends to be March tends to be a big month, and then in the second quarter.
You see somewhat of a similar pattern, where April and may can be a little softer in the June can be a stronger a stronger month and in terms of what we actually saw in the sales pattern for the refinished business. Overall, we saw that exact same pattern June was materially better.
Then may in April.
And just thinking about.
Your comment earlier about market share in refinish.
You have this re spray while wet technology that.
Seemingly would be a differentiation here in your technology that might enable you to gain some share.
We picked up from a couple of your refinished coatings competitors that.
They claim to begin to share in refinish is is this a industry, where there's consolidation and everybody is gaining share or do you do you see your share gains as being real and so you know what kind of of the whole change could that be over the next year.
Well. Thank you have to remember globally, there said 30 to 30% to 40% of the market. That's in the hands of other players that are not one of the one of the top coatings companies and I think what you see overtime is that as environmental regulations get stricter and stricter in all jurisdictions, but especially outside the U.S.
You do see some of the.
Leading coatings companies with their product portfolio continued to take share from some of the second tier second tier players in the market and that's been an aspect of the market for some time and one that we expect.
We expect will continue over time so.
It's possible that everybody is gaining share at the expense of some of the second tier players and then also some of the local and regional players.
And then maybe just a follow up on that one with respect to transportation, which you would you highlight any technological differentiation that you.
Or service.
That you offer that could lead to share gains in the transportation cycle.
You mentioned a couple with.
Do you have to de lever and on that.
Yeah, I think it our transportation business you know, we do have some some unique technology in particular.
And our consolidated systems technologies, where we effectively remove one of the steps in the painting process, thereby lowering the capital investment in the operating cost for some of our light vehicle customers and we have the leading share.
In in consolidated systems, we're also continuously rolling out new products to our light vehicle customers around the world and I think you know our technology. It from a pure technology perspective is some of the best some of the best in the industry, but I think where it's off a really shines is on the service.
And technical side of the business I think our technical service team is truly truly outstanding and we frequently been brought into light vehicle plants, where there has been an issue where problem.
With that competitors paint system might be experiencing that issue for any number of reasons and we kind of have a reputation as being able to go in diagnosed whats wrong and get things back up pretty quickly and I think the service out of our business is a very important.
Competitive differentiator.
Thank you.
And our next question is from God send Punjabi.
Baird. Please proceed with your question.
Hi, Good morning, everyone on this actually back Krieger second to third sitting in for gas Chad. Thanks for taking my questions.
Hey, Matt so.
Hey, good morning.
So first understanding of the lower net sales can impact the flow through of any potential raw material benefits can you provide some added detail.
Your expectations are for the actual underlying raw material basket heading into the second half of the year and that given the recent moving oil are we at risk of starting to see a sequential uptick in inflation just as here just as your best sales kind of start to recover their if you could catch on T.I. or two that would be helpful as well.
Sure I think we've seen price decreases in select raw material.
As a result of Ur Cobot 19, driven by obviously significantly reduced demand.
Our demand was also lower as our plants at ramp down production for the better part of Q2. So we didnt purchase the same the same volumes that we typically do.
But despite the weaker demand in the pandemic, we did see supply and price pressure for some specialties, namely pigments and and monomers of T. Two specifically I think we expect to be slightly slightly up due to some of the chloride gray.
Eight tightness.
Aside from pigments and monomers the remaining categories for the most part have tailwinds, so whether its isocyanates or some of the other specialty monomers that we purchase I'm IBX say for example.
And then on the solvent side, we do see some some tailwinds and therefore, we'd expect the overall raw material basket to be down year over year up given the drop in demand that's occurred for those suppliers from customers due to do to cobot. However, we do as you point out expect to see a moderate.
Uptick in raw material pricing.
Assuming that assuming that demand demand recovers. So I think we'll see potentially some benefits start to appear.
In the back half of the year, but in terms of what happens with with pricing and then how large a benefit that is that's largely a function of how much volume, we buy as well as what happens with overall market demand.
Okay. That's a that's helpful and then kind of switching over to the demand side of the business can you expand on what type of operating backdrop, you had baked into your down 15% to 20% revenue guidance for the third quarter and.
Pardon me if I, if I misunderstood this commentary, but the July sales were down 14% range, which is what I thought I heard does this imply that you expect the operating backdrop to worsen throughout the quarter is that 15% to 20% number just kind of trying to be conservative.
Any detail there would be helpful.
Yes, so the 14% is year over year and I think as as you see in the actual earnings deck, we typically see an uptick and south and the last month of the quarter. So when you're doing year over year comps, that's the 15% to 20% on but clearly we saw the 14% in July.
And there's clearly uncertainty out there. So there is a little conservatism built and just as we don't know how the markets are going to develop over the course of the quarter, but.
If you look at prior year periods 2019 during quarter September was higher sales month after month in July.
No just add to what Sean said I think from an overall recovery.
Perspective, I think we're we're actually quite encouraged by what we're seeing in the marketplace in April as we knew with as we all knew would be the the absolute bottom down 56% topline.
Second quarter overall was down about 44% June was only down 25% and then now we've seen July year over year down 14%. So the overall demand picture does seem to be in improving in a marketable fashion, but as Sean said, we just felt it was for.
And.
Given the uncertainty, particularly in terms of some of the spots in the world, where Corona virus appears to be resurging somewhat to have a little bit more cushion in our sale forecast.
Got it said that that 15% to 20% does that does that incorporate any incremental shutdowns kind of rolling through any specific regions.
We're not anticipating any full shutdown.
Okay. That's helpful. Thanks, that's it for me.
Our next question is from Alex Yefremov from Keybanc capital markets. Please proceed with your question.
Thank you and just coming back to incremental or decremental margins I. Thank you you more or less.
We're comfortable whereas about 180 590 million.
EBITDA.
Arrange for for Threeq, you based on your 60 million year over year declined comment.
If that is true we look forward to the fourth quarter do you think we could do could see a worse or better some 30% decremental margin because there are several moving pieces as as we move for the year.
Yeah, I mean, we're not guiding the Q4, just given the uncertainty on the topline, but I think as a general matter as as.
South continued to increase the decrementals should get a little better and whilst pointing to on earlier question. If we end up hitting that 15% down we could see slightly better than 30%, but clearly a 20% we may be slightly above 30%.
But again, we're not we're not confirming anything around fourth quarter, just given the uncertainty and the demand cycle. We are hopeful given the trends things continue to improve.
But certainly no no assurances at this point in time.
So the reduction in temporary cost savings is not going to to offset the the other benefits that you might see by the fourth quarter I guess, that's what I'm trying to get too.
I think what the absence of the temporary cost savings I think there will be offset by the benefit of via the Incrementals on increase out if that makes sense. So we should continue to see margin improvement as the nets out deterioration continues to improve.
Thank you end up your reported OEM pricing up 3.5% in third quarter do you implement new price increases so was there a mix or base attacks or anything like that.
Yes that was largely related to mix so somewhere to what you saw in refinish. The reason, we're down that was mix on the upside and transportation. That's also driven by mix.
Thanks, a lot.
Our next question is from Mike late head from Barclays. Please proceed with your question.
Great. Thanks, guys.
Question for Robert in your Refinished business can you just talked about what you've seen in terms of your so customers versus say your non MSO business that will go through distributors that I guess I'm just trying to get a sense of if you're seeing any real market share shifts there between the two customer groups and also at distributors are carrying lower.
For a given some of the uncertainty of smaller body shops.
Yeah, it's the.
Good question I'd say overall.
We have not seen.
Any any material shifts there in the market, obviously are up a multi site operator body shops, they buy the richest mix of product because they are buying.
The the highest a productive systems that we have which also you know our highest price.
Products. So as you see the pullback in the refinished business here in the second quarter, given the profitability of that of that business. Obviously, the impact is pretty is pretty dramatic and hence you see the results here in the second quarter. Fortunately, that's improving improving rather quickly and I think we've seen our RMS so customer base.
You know throttled back in terms of how they operate at shops and ran staffing levels during the second quarter and they gradually been adding been adding more and more and more back.
So I think we'll expect to see them kind of come out of that.
And then at the individual independent body shop level I.
I think as we might have talked about on our last call somewhat.
The expectation is there we havent you know, we havent heard from our Salesforce about too many body shops that are kind of closing up shop for good because the recovery. The current of Iris situation here is only been a few months in length now if the current a virus situation lasted for months and months on end than I think you would see potentially a few of them.
A few of them actually close up shop, and then in terms of inventory levels.
Obviously cash is king you know it all steps in the value chain. So everybody has been running inventory levels at a fairly at a fairly lean level.
And really buying buying toward demand and we've even seen in some cases some of the average order size is.
Coming coming down in size in the second quarter as people manage their their working capital we're starting to see those come back up a little bit. So I think overall, we're encouraged we're encouraged by but by what we see in that market and as we get a miles driven back up and as we see.
Congestion increase I think we would expect to see that business continued to only get better.
Got it that's really helpful color and then if we just returned back to the July commentary about the down 14% year over year can you just give some color around the variability.
In that figure between your businesses, just maybe highlighting areas, where it where you're seeing the greatest.
Acceleration and growth versus areas that might be.
A bit flatter in their recovery.
Yes, so when you look at the performance side of the business that was on average down kind of 12%.
Versus light vehicle being down closer to kind of 17, 18% and commercial vehicle being down closer to 30%, but as you think about recovery certainly light vehicle coming out of the lows in April may you continue to see that steady rebound as all plants are up and running I mean going warm are utilized.
That's helpful.
Thank you.
Next question is from Mike.
Thanks, Susan from Wells Fargo. Please proceed with your question.
Hi, This is Richard on for Mike.
Hello, Richard So yes, I saw just first question on the temporary cost savings increased target 130 can you talk about what drove that.
Is that more CNS DNA and how sticky are those temporary cost saving so if we do get a recovery how much of that should we expect to come back on.
So we've characterized all this is temporary but as we continue to learn.
How to work virtually we expect some benefit around.
Travel and entertainment to come down to be more sustainable savings, but we haven't characterize any of this is as permanent.
As it relates to cost programs and increasing from the higher the high 30, it's really across all the categories. As we continue to focus on third party spending as we continued to hold the hiring freeze as well as hold the line as it relates to travel and entertainment events is clearly accruing more benefits than we originally anticipating but it is.
Across the piano as we see those incremental benefits.
Okay, Great and then on the global restructuring.
You had mentioned that potentially additional reductions to come in Europe.
What would make you.
Go forward that decision as it depends on your customers whether demand returns or not how are you thinking about.
Further.
Workforce reductions thank you.
Well any any workforce reductions that that we would do in Europe would require the agreement.
With the works councils and so as we have more more information on those will be able to provide more of an update.
And our next question is from Actos misread from Bamberg. Please proceed with your question.
Hey, good morning crops, Sean and Chris Thanks for taking my questions. So first a quick one on cash flow b $270 million, an incremental cash flow versus earlier in the year.
I see that it's driven by 80 million in Capex and Oh, maybe 40 50 million dollar in.
This incentive payments and the rest. It's just these cost reductions you have announces that is that a good way to think about that.
There are the large buckets, but certainly we're making progress as we continue to extend terms with our vendors as well as looking at incentives offered by local governments in regards to tax payments, but you have the vast majority of the elements.
Got it and then second just trying to understand the refinish market, perhaps a little bit better. So I believe the average repair you finished job. It's about 4000 dollar per car in the U.S. and up I think 48% of that is what really drives your revenue are these numbers ballpark similar indeed.
Europe and also you Max mentioned actually didn't trait.
Couple of time, so just curious what is the typical accident trait and and I guess, how how much does it vary across different regions. Thank you.
So in terms of the cost the cost per per repair costs are a little bit higher in Europe.
Given that labor costs are higher in Europe.
The largest component of the total the total cost of any of any vehicle repair.
In terms of the variability in the accident rate data.
For the U.S. as a total country, there's there's pretty good data and then when you get to Europe, you know it really is on a country.
A country by country basis, So we have to.
Pull that information and supply that separately.
Got it thanks guys.
Our next question is from Vincent Andrews from Morgan Stanley. Please proceed with your question.
Oh.
Hi, this is a bit hands on prevention. Thanks for squeezing me in here at the end.
Just wanted to circle back on cash flow really quick.
Can you help us think about working capital lot of moving pieces this year. So.
Yeah, how should we be thinking about that for 2020 and maybe if there is some favorability. This here you know how you'd be thinking about the reversal of that and 2021.
Probably the easiest way to think about it as working capital as a percentage in that south we continue to target roughly 11%.
Certainly quarter to quarter as we see rebalancing is going to be a lot of pieces moving between our inventory in a day, but I think getting back to the overall percentage is simply that the easiest way.
I do think we'll see incremental benefits as it relates to inventory if raw materials same up.
And I do think we'll have a sustainable benefit coming out of the work that we're doing with vendors on accounts payable on so you could potentially see that 11% declining slightly as we continue to make progress on our working capital initiatives on that front.
Okay. Thank you.
Our next question is from Kevin Mccarthy from vertical Research partners. Please proceed with your question.
Hi, Good morning, this is corey on for Kevin.
But there has been a few questions about decremental margins I was wondering if demand continues to recover sequentially can you talk about contribution margins maybe.
Would they be the same on the way up as the way down and.
How should we think about this and you.
You are two segments.
Thank you.
So as it relates the segments.
Decrementals are a little bit worse on performance side, just given the margin profile of refinish.
But I think as you think about the Incrementals I think it's a similar step function as you get closer to flat from the prior year on those incrementals will become that much more meaningful and certainly on the way down as volumes drop off in part of their those decrementals are clearly getting worse.
Just given the fixed cost absorption.
And the drop through associated with the lower volumes.
Got it thank you and then.
Just a second question relating to the.
Restructuring plan in the work councils in Europe is Europe, a source of upside to the incremental restructuring. If if you get approval from mortgage counselors or are these numbers are sort of including that approval or assuming that would happen.
So in the current in the current number there there are an expectation that we would make a in some jurisdictions as some progress, but there is substantial room to improve.
Our overall, our overall cost structure and so there is upside to the numbers that we have provided.
Gotcha and can you can you give us sort of.
Quantify that in some way or give us some sort of guidance to that what that upside can look like.
No not at this time not until we've had the opportunity to engage in dialogue with the workers Council.
Understood. Thank you very much that was helpful.
And we have recently entered the question in the answer session and I'll now turn the call over to management for closing remarks.
It's Chris Mecray. Thank you all for joining today and we look forward to a your follow up calls and questions will be around.
The day and we've got to dialogue with you. Thank you.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.