Q3 2020 Axalta Coating Systems Ltd Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to Exalt <unk> third quarter 2020 earnings Conference call all participants will be in a listen only mode.
Shouldn't answer session will follow the presentation by management today's call is being recorded and replays will be available through October 30, yes.
Those listening after today's call should please note that the information provided in the recording will not be updated and therefore may no longer be correct.
I will now turn the call over to Chris Mecray. Please go ahead Sir.
Thank you and good morning. This is Chris Mecray VP of Investor Relations. We appreciate your continued interest and it's all to welcome you to our third quarter 2020 financial results Conference call. Joining me today are Robert Bryant, CEO, and Sean Lavin CFO Steve.
Evening, we released our quarterly financial results and posted a slide presentation, along with the commentary the Investor Relations section of our web site <unk> Dot com, which we'll be referencing during this call. Both our prepared remarks and discussion may contain forward looking statements reflect the company's current future events and their potential effect on adult is operating if an EPS performance.
These statements involve uncertainties and risks and actual results may differ differ materially such forward looking statements. Please note that the company is under no obligation to provide updates to these forward looking statements.
Presentation also contains various non-GAAP financial measures in the appendix. We've included reconciliations of these non-GAAP financial measures to 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 well now.
I'll now turn the call over to Robert.
Good morning, everyone.
As you've seen we achieved outstanding financial and operating results in the third quarter. Thanks to the snap back in demand in our end markets rapid cost structure adjustments. We made in response to cope in 19, and the unbelievable effort and commitment of our employees around the world.
First and foremost I'd like to thank all the employees of Axalta around the world for the strong financial and operating results, which were the product of hard work and focus during a challenging time for many of our colleagues continue to work remotely with a myriad of restrictions both business and personal.
Despite these in the third quarter, we delivered record quarterly adjusted EBIT.
Adjusted EBITDA and adjusted EPS.
Before we discuss our third quarter results in more detail I'd like to step back and provide some perspective about the journey exalted has been on.
Now that we've completed our strategic review and appear to be through the worst of the COVID-19.
We're finally in a position to be able to pursue the many opportunities I want it to go after since I first became CEO in late 2018 and also those we identified during our strategic review.
We're now actively making changes that include aspects of our strategy, our organization functions and refining our operations to lower our cost structure globally to unlock additional growth.
These changes will allow us to accelerate growth.
The more nimble and create more value for our shareholders. While also increasing our focus on our people.
Our customers and the communities in which we operate.
We plan to hold the capital markets day in the spring, where we will provide more detail about our vision strategy and specific value creation opportunities.
In the meantime, you will hear more about certain changes in the coming months as you have in the past few months.
The corporate governance perspective, we've strengthened our board by adding two outstanding Board members with specific expertise in two areas that are important for its also growing.
Growing businesses in China, and emerging markets, and leveraging innovation to grow and transportation related markets.
Over the past six months. We've also added key talent at all levels of the organization that will help drive innovation and a focus on people development.
These are two of my highest priority to CEO and I'm confident they will take exalted to the next level of performance.
Regarding our operating model and cost structure. Despite the great financial results in the third quarter, we need to continue to drive down our costs in certain market segments, and geographies, where we operate to enable a higher level of revenue growth.
We've begun this journey that have much more to accomplish we.
We can and will do this without sacrificing capabilities market positions or impacting the organizations ability to innovate.
Since exalted IPO, we've been asked how the company would perform in a downturn like we saw back in 2008 to 2009.
What levers could be pulled and how quickly management could react.
COVID-19 has been a much more severe test case than any of us could have ever imagined and I think this question has been answered.
Since the start of the COVID-19, pandemic weve substantially reduced our cost structure with the.
With $195 million and expected savings during 2020 alone.
We've taken further actions to maximize our cash flow and liquidity with an additional $140 million and incremental cash savings expected this year.
Both cost and cash action offer immediate and real offsets to the unprecedented volume impacts all while our global team continues to serve our customers at the highest levels of quality delivery and technical support.
These results speak to the strength and resiliency of the Gulf This business model still.
The speed at which management took action and the truly unbelievable support and dedication of the company's employees around the world.
I could not be prouder of our global team.
Now I will discuss a few highlights from our third quarter financial results on the top line. We were pleased to see significant ongoing recovery during the third quarter with net sales of 57.3% higher than second quarter, a major achievement as we saw rapid recovery all end markets the seven.
The 7.2% net sales decreased from the prior year also beat our expectation going into the quarter.
The improvement was driven by broad based economic and business recovery, including monthly net sales recovery globally in nearly every geography served.
Well net sales recovery was a major component of the third quarter. There was clearly more to the story given the robust profit that we reported we saw record quarterly consolidated adjusted EBIT of $210 million coming on the heels of a loss during the second quarter.
We also reported record adjusted EBITDA with margins of 26.5% and a record quarterly adjusted earnings per share of 59 cents.
Finally, our free cash flow of $223 million was also a stellar outcome.
Given substantial excess cash at this point and the broader recovery in the business, we expect to begin to shift back to a more normal capital allocation approach. Although we're mindful that we could see further COVID-19 impacts in certain businesses or regions.
We expect capital deployment across the combination of return accretive usage.
Including M&A and opportunistic share repurchases, assuming a more stable forward looking demand picture hopes.
We are actively building an M&A pipeline at this time.
Sell side activity clearly picking up in recent months.
Overtime, we would expect to deploy the majority of free cash flow between these uses but we would also expect to reduce our net leverage to our target of 2.5 times, which.
Which could happen from a combination of normalized adjusted EBITDA as well as executing on strong cash flow conversion, which you saw during the quarter.
Regarding the overall demand environment were pleased to see ongoing business recovery through the third quarter.
In refinish total miles driven globally continues to improve aligned overall with pandemic related locked down in each country we serve in.
In the U.S.
Profit during the third quarter recovered to roughly 10% to 15% lower than prior year. After rebounding strongly from the lows during the spring and closing the gap with pre COVID-19 baseline levels by mid June.
In Europe traffic levels improved even earlier than the U.S. The renewed lockdowns do suggest caution is warranted on the pace of the recovery.
In China Tropic appears to be continuing to recover and body shop activity in refinish volumes have recovered to prior year levels.
In the third quarter body shop customers saw activity in the range of 85% to 90% in the U.S. versus the prior year toward the end of the period, 95% in Europe and around even in China.
This represented a continued recovery in the second quarter and is an encouraging trend for our global refinish business.
But the industrial end market net sales trends continue to demonstrate the resilience of our business.
With some businesses showing year over year increases for the quarter and all end business is up in September.
The market segment level homebuilding construction, agriculture, and construction equipment have recovered to operating rates above prior year levels, notably in North America.
In Europe, our business has seen strong recovery to date in both hotter and energy solutions.
In China, all industrial businesses have fully recovered with notable strength in powder and energy solutions tied to wind energy customers.
Transportation coatings third quarter recovery, well outpaced expectations, including fairly strong recovery in most regions.
In China, we've seen significant production recovery as well and so.
In China automotive retail sales have increased from the prior year and each of the last three months, including 8% in September.
Possibly indicating a measure of pent up demand after the Chinese automotive pull back in 2018 and 2019.
China Light vehicle net sales were exalt decreased mid single digits during the third quarter, reflecting specific customer exposures in the country slightly lagging the broader market.
And the U.S. progressive auto sector incentives, coupled with low financing rates continue to help the recovery.
Auto sales during the third quarter increased in sequential months.
September as expected 16.4 million Saar, well above earlier expectations and only moderately below the year ago level of 17 17.2 million to solidify what appears to be a potential V shaped recovery for U.S. car sales.
For the quarter Global light vehicle production declined 3.5%, including a 1.4% decrease in Asia Pacific and the 10.7% increase in China.
North America production increased 2.5% on the heels of 66.2% drop suffered during the second quarter.
Current industry forecast call for a 17.9% drop in global built for the full year, including a small decrease of 2.7% for the fourth quarter.
His forecast has increased in each of the last several months and appears to show that automotive could be experiencing a form a V shape recovery presently.
The commercial vehicle end market overall global truck production increased 0.8% in the third quarter in a dramatic and unprecedented sequential rebound.
Driven principally by strong growth from China, but also better production in other regions.
Current forecast for class four to eight truck production suggests a 13.7% decline for the year revised from a 27% expected decline a month ago with.
Fourth quarter down 11.3%.
Stronger new truck order rates have continued.
Suction estimates by industry forecasters have increased now calling for a positive rebound in production 20, 21% to 5% growth, but with a 15% to 20% rebound seen in North America and Europe.
I will now turn the call over to Sean for some additional comments.
Thanks, Robert and good morning.
As noted we're very pleased with the record operating profit results, we posted for the third quarter, including excellent volume recovery versus our original expectations and fantastic execution by our team to deliver significant margin expansion across both segments in this period.
We're also very happy to report strong cash flow and showcase our ability to flex the business to meet the volume challenges of a recessionary environment over.
Overall, the mitigation actions, we have undertaken to respond to co that have succeeded in offsetting much of the volume headwinds, while bolstering our balance sheet and liquidity considerably.
During third quarter, we made strong ongoing progress on our cost reduction programs, we exceeded our planned temporary cost actions target in the third quarter with total savings of approximately $50 million. We are reiterating our in year 2020 savings target of at least 130 million.
Likewise, we exceeded our cash flow action targets during the quarter, delivering 60 million of incremental discrete cash flow savings separate from cost actions, we still expect to deliver total incremental cash flow for 2020 in excess of 270 million, including the temporary cost reduction actions.
Regarding structural cost programs. We believe we are on track to deliver the plant 55 million of exalt away savings for the year as well as the $10 million of the total 50 million incremental restructuring savings we targeted in our July announcement, so including temporary and structural savings this totals around $195 million in.
Year 2020 cost savings expected across all active initiatives.
Regarding our balance sheet and cash flows Robert noted our strong third quarter performance with 223 million in free cash flow and closing the quarter with total liquidity of over $1.7 billion. We also.
We also lowered net leverage to 3.7 times from 4.0 times at June Thirtyth, a ratio that still reflects the punishing coagulant effects on adjusted EBITDA for the first half the 2020.
Touching on some of the income statement highlights Robert noted the rebound in net sales with a 7.2% consolidated decline year over year substantially exceeding our earlier expectations for the period before.
Performance coatings third quarter net sales decreased 6.8% from the prior year on a constant currency basis, with refinished decreasing 10% industrial decreasing 1.8%.
Transportation coatings that sales decreased 8.6% on a constant currency basis with light vehicle decreasing 5% and commercial vehicle decreasing 20.8%.
Consolidated adjusted EBIT for the quarter was a record setting 210 million coming after second quarters modest reported loss.
Performance coatings, adjusted EBIT of 134 million increased 7.2% versus $125 million in the prior year quarter and benefited from click or tailwinds from cost actions and variable input cost offset partly by moderately lower average price next I by the impact of lower volumes despite better than.
Expected sequential volume across both end markets.
Transportation coatings, adjusted EBIT of 49 million increased 30.4% versus $37 million driven by cost actions.
Moderate variable cost Tailwinds and modestly increased average price mix offset in part by lower volumes decremental impacts compared to the prior year.
Adjusted EBIT margins increased significantly in both segments, reaching new highs on a segment basis of 19.6% and performance coatings and 14.1% in transportation coatings.
Adjusted EBITDA margins for the third quarter on a consolidated basis also achieved a record high of 26.5% something we're very proud of as we continue to see progress in both recovery and business transformation.
Finally third quarter adjusted diluted EPS of 59 cents at 13.5% increase versus prior year represented a new high for exalt as well.
Regarding our full year and fourth quarter 2020 outlook, we expect net sales for the full year to decline approximately 18% from the prior year inclusive of a negative 2% related to FX and M&A impacts this what.
This would equate to an approximate 6% to 8% decrease in the fourth quarter from the prior year with relatively similar outcomes for both segments.
Quench like the implied fourth quarter net sales guidance, it's fairly even with the third quarter, given an expectation of broadly steady demands with normal seasonality impacts in December.
For the full year, we expect adjusted EBIT of approximately 495 million to 515 million and adjusted diluted earnings per share of $1.15 to $1.20 per share.
The implied lower profit sequentially from the third to fourth quarter is attributable largely to the lower expected amount of total cost savings in the period due to the roll off of temporary cost actions offset partly by increased structural cost savings.
2020 interest expense is expected to be approximately 155 million and diluted shares are expected to be about 236 million.
Finally free cash flow is expected to be between 280, and 310 million, including Capex of about 90 million.
With that we'll be pleased to answer any questions. Operator, please open the lines for today.
Thank you at this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad a confirmation kindly indicate your line is my question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment, it may be necessary to pick up.
Your handset before pressing the star keys.
Our first question comes from the line of Ghansham Panjabi with Baird. Please proceed with your question.
Hey, guys good morning, everyone.
Everybody got oil.
Morning, <unk> can you just start off by on giving us some sense of the volume exit rates on a consolidated basis, you know kind of cycling into the fourth quarter like what our September.
And what are you seeing so far in October and what are you embedding from a volume expectation standpoint by segment at this point.
So yeah month over month, you know as we work through the third quarter, we actually saw a nice improvement as we saw continued recovery across all the end markets as well as the region's.
Exiting September you know extremely optimistic industrial across all the end markets were actually up Volumetrically and we continue to expect sequential improvement as we get into October and November again across all the end markets. Yeah. Typically we do have seasonality I'm in particular and industrial and light vehicle within December so.
That's all that's why you're saying roughly at the midpoint of the range.
Guidance for fourth quarter versus third quarter, but were seeing continued recovery overall and yeah, we're happy with the progress, especially coming out of Q2 with the headlines there.
7% increase versus Q2 and Q3.
Great and then in terms of the 50 million in temporary savings you called out for the third quarter, how does that breakout by segment.
And then you know related to that just in terms of your current view for 2021, I mean, how much of how much of a flow through should we expect with all your cost initiatives 2021 versus 2020. Thanks so much.
So the 50 million really breaks down two thirds performance, one third transportation and rough estimate as we think about all the temporary savings yeah, we haven't given any guidance as to what exactly what exactly will be able to retain and the 2021 on the vast majority truly is temporary but they are certainly going to be some benefits.
Particulate around travel and entertainment, where I see is more sustainable, Texas a bit more broadly.
But more broadly on cost initiatives.
Yeah, we still have the exact way program out there.
And we expect based on the structural.
Savings update that we gave on them the July update the $50 million savings that actually starts to ramp up in the fourth quarter, which we're expecting about 10 million that's structural savings, but the vast majority of difference coming through in 2021, Oh gosh, we'll be giving you more updates young we actually give full year 2021 guidance as far as expectations on the structure.
Savings falling to the bottom line.
Okay awesome. Thanks, so much on.
Thank you. Our next question comes from the line of Aleksey Yefremov of Keybanc capital markets. Please proceed with your question.
Hi, This is Paul still enjoying for let's see mixed remains somewhat of a drag in refinish what does your outlook for this going forward.
Mhm.
Well, if we had if we look at refinish our pricing approach has remained relatively unchanged during the pandemic or we have not lowered prices or increase gross to net deductions like discounts the negative price mix overall, it's driven almost entirely by the North America region.
And there are two factors at play here first overall volumes are down her when overall volumes are down it skews the traditional price mix cadence that we're all accustomed to seeing SEC.
Second as a reminder, non M.S. those pay the highest prices because their discounts off of list are lower than M. S. O's. So.
So and missile and large shops pay lower prices net due to the largest discounts off of list in general non MSR shops have been more impacted volume wise during the pandemic, then M.S., though and larger shops. Therefore, this mix impact on price.
It's driven reporting pricing lower keep in mind, though that our cost to serve to M. assos and some large shops is much lower than traditional body shops. So profit margins between traditional shops in EMEA shows are relatively the same.
We understand that this dynamic has created some unwanted a concern but we can tell.
But we can assure you that the health an underlying attractiveness of the refinish business remains intact.
And this dynamic should self correct as volumes return to higher levels.
Great. Thanks, so much.
Thank you. Our next question comes from David Begleiter with Deutsche Bank. Please proceed with your question.
Hi, This is David on your part that I guess first one you referenced some variable cost tailwinds anticipated cost savings here in Q3 can talk about what the SAR.
As we look at raw materials or raw material pricing really bottomed out in the second in the second quarter is demand was relatively weak across end markets and our plants at ramp down production just like everyone else with the demand pick up that we're seeing in Q3, we saw prices move up for.
Oil based raw materials in particular, we've seen oil prices recover from mid teens to the low fortys per barrel we.
We expect the overall raw material basket to be down year over year as the cobot 19th situation has eroded demand across various markets. However, we do anticipate seeing a moderate uptick in raw material pricing in the second half of 2020 relative to the first half of 2020, we look.
Got it by category, we expect resins solvents, and monomers to be up pigments and additives to be roughly flat and isocyanates to be slightly down.
Oh, Thank you I was actually referencing to the variable cost tailwind you reference here in your prepared remarks.
Thanks for that.
ER coming down so.
Yeah and for clarity when we referenced variable costs were actually talking about raw materials.
Arch, so robert's comments addresses that.
Okay, and then I guess on M&A and then you also talked about you are focused on in Metro markets and transportation coatings are those kind of that you areas here looking to your gas exposure out through M&A as well.
Well, our M&A strategy applies across each one of our each one of our businesses. So we have a number of targets identified in each one of our each one of our end markets, both bolt on transactions as well as as well as larger transactions and we continue to maintain dialogue with.
A number of parties and from an M&A activity perspective, we've actually seen the number of assets available either through traditional processes or through non traditional kind of one on one proprietary situations start to pick up in the last few months and I think that's a an encouraging sign.
For M&A activity overall in the sector.
Thank you very much.
Thank you. Our next question comes from Iran, Viswanathan with RBC capital markets. Please proceed with your question.
Great. Thanks. Good morning, Thanks for taking my question I guess I wanted to get your thoughts on the refinish market you know, there's a little bit of a debate out there you know that a a congestion levels still need to rise a little bit maybe you can just give us your thoughts on that <unk>, maybe across different regions in North America, and China and your.
As well thanks.
Sure be happy too you know I think when you look at some of the data that's put out there for the refinish market. There. There are a few things you really have to keep in mind.
First of all Refinish is a is a global market. So what happens in one region or country does not set the tone for the entire global market second it's important to remember that refinished demand is really a function of three primary variables miles driven the size of the car park and accident rates.
And just because one of these variables moves up or down more than the other doesn't bring down total refinished demand to the lowest common denominator of these three variables. It's really a combination of the of the three we.
We expect to see miles driven continue to trend upward and we also expect the size of the global car Park to continue to trend upward like.
Likewise accident rates will increase further as traffic congestion returns. In addition, a few idiosyncratic. These we do see favorable trends in the usage of cars instead of planes for travel and vacations and also the usage of cars more frequently for commuting.
As people seek to avoid public transportation in this cobot world we're in.
An underlying favorable market factors like the ones I mentioned before in terms of the car park as well as you know a growing global middle class that will purchase automobiles and drive them and frankly, Unfortunately, the continuation of of distracted driving we haven't really seen distracted driving change very much.
Therefore, we believe the long term fundamentals of what makes refinish, such a great business.
Remain intact.
Great. Thanks, Robert and I'm also just wanted to ask just given what you said then from a margin standpoint.
Would you expect continued margin growth area as volumes recover.
And in 21, and 22 and just comment on that.
Yes, we would expect to see margins continued to move upward as we see volume increase in that business just from the drop through effect of that incremental volume as well as the number of growth initiatives that we have going on around the world.
Thanks.
Thank you. Our next question comes from Josh Spector with <unk>. Please proceed with your question.
Yeah, Hi, Thanks for taking my question just to dig in a little bit more on the bridge from Threeq to Fourq you specifically at the EBIT level.
Just wondering if you could probably breaststroke give us some guidance of what the bigger buckets are in terms of you know I think you're you're implying about a 30 million EBIT decline on flat sales how much of that is temporary cost roll off how much of that is higher structural cost are higher raw materials any way you could provide anymore.
Color around that.
Yes, it really is a function of the temporary cost savings dropping off so we had called out that we're on track to deliver $130 million that.
I came in 75 in the second quarter, I'm 50, and the third quarter and expect for the drop off to about five and the fourth quarter, that's partially being offset by the structural savings that we announced back in July where we're expecting to get about $10 million. So really it's it's the net change there that's really driving the mark margin differential between.
Q3 and Q4.
Thanks, that's helpful and in your prepared remarks, I believe you commented that you expect didn't mix to be negative and performance and fourth quarter relative to third quarter, what's the bigger driver behind that.
[noise], Yeah, obviously, given the weight of the a of the refinish business and the volume dynamics that I described that would be.
That would be the primary driver of the comp of the combination of price and mix together a in the fourth quarter. So we don't expect that dynamic to materially change until we see volumes move up from current from current levels from where they are today.
Okay. So let me just to clarify that then so is it more similar sequentially or is it is it deteriorating or mix a little bit worse sequentially, which way should we think about it.
Volumes within refinish are largely expected to stay static yeah sequentially. They will move up a percent or two but we're still expecting volumes to be down seven 8% and fourth quarter for refinish, which is having the mix impact on performance coatings overall.
Got it thank you.
Thank you. Our next question comes from Bob Koort with Goldman Sachs. Please proceed with your question.
Thank you good morning, Robert I wanted to ask on the M&A side.
Yeah. Your margins are awfully good now so how do you think about the dilution of margin as you start to bolt on some other businesses here.
I think as we as we as we think about M&A, Bob We typically think about a cash on cash return as well as accretion accretion to earnings as opposed to margin dilution and you can have 25.
25% EBITDA margin businesses that depending upon what you pay for them could be dilutive. Likewise, you could have 15% EBITDA margin businesses, depending upon what you pay for them and how much you grow them could actually could actually be accretive. So I think we are you know trying to be fairly disciplined from a valuation perspective, but there are a number of error.
He is a that are interesting to us that we are actually pursuing.
And you sort of teased us or maybe you explicitly teased us with some plans to implement strategic actions and maybe where you are.
Your hands tied before can you give us maybe a little more flavor or color what you're thinking is this outgrowth opportunities M&A opportunities would you reach out into different verticals in the paint markets can you give us some help there.
Yes, so as we talked about in our prepared remarks, we will be conducting we plan to conduct and Investor day in the spring, but you know in the interim as we're able to discuss and release additional insight into some of the things that we have planned now that the strategic review is over.
We've been able to implement a number of changes and we'll roll those out and communicate those in in the coming quarter a quarter or two so we'll certainly share as much of that is where I'm as we're able to but I characterize it Bob in a number a number of areas related to growth of the business ongoing.
Cost structure transformation, I think as Weve highlighted before and reiterated many times the opportunity to right size, our cost structure in certain markets and in certain geographies in order to enable additional growth is substantial and I think you've seen that based on some of the actions that we've been.
Now just a and have been able to take and further actions that will that will take in the future. So we'll be we'll be talking about that I think we'd also like to share updated thinking on capital on capital allocation strategy.
As well as growth factors for the company that being said I think you'll continue to see axalta as we think about where to grow and putting capital to use whether it's from an internal investment perspective in capex and R&D or an external perspective and from an M&A point of view continue to stay focused.
On the businesses that we're currently in.
And on core competencies that the company has and can be leveraged in very close Adjacencies you wouldn't expect to see something out of left field.
Terrific. Thanks for the help.
Thank you Bob.
Thank you. Our next question comes from Mike Harrison with Seaport Global Securities. Please proceed with your question.
Hi, good morning.
Good morning, I was wondering if you can give us a little bit of color on what you're seeing in terms of customer inventory levels.
If you if you could touch on all your businesses that would be great but.
That would be great, but I think I'm, particularly interested in the light vehicle business.
Are you seeing that dealers are particularly in the U.S. are continuing to restock or Ah was was that come to more of a onetime benefit that you got.
I think overall when you when you think about inventory levels, we really have to look at the overall business to put that to put that in context I think as we you know as you look at the light vehicle business. Overall, we saw Q3 builds above a 2019 levels.
In in North America is that region really saw a strong recovery and Oems restocked somewhat depleted inventories from the COVID-19 shutdowns.
Many oems reduced or delayed their summer shutdowns and you know how that have historically occurred in the quarter.
And some are actually ran over time incentives are obviously, playing a part here and stimulating demand, but I think all that being said, we could see an increase in base demand as consumers may be willing to spend more on vehicles and use them more in lieu of public transportation on trips where they might have otherwise traveled.
On on that airplane. So we think all of this sets up.
Quite nicely for auto demand for our for our products you know I think in Europe.
We believe that auto is starting to see a rebound and as evidenced by recent positive data coming out of many of the European automakers, which I'm sure. All of you have seen however, we do expect the rebound there may not be quite as strong as were seeing in the U.S. just given to a lower level of a lower level of incentives.
And then for China, we've seen sales continue to rebound nicely and expect positive year over year growth in the fourth quarter.
We witnessed demand increases from multinational brands domestic brands and also in our automotive plastic parts business.
Also solid <unk> electric vehicle demand spurred by various government incentives is also aiding our industrial solutions business in industrial solutions energy solutions business. So.
So you put all that together and from an inventory level I think you see.
In particular in North America people running you know pretty strongly and not really fully able to meet demand as we've witnessed in what's going on in the used car market, where there is really a very high demand for used cars and prices have also have also been going up so I think that sets up pretty nicely overall in particular for north.
For North America.
And then one other data point, that's extremely encouraging from an IDH EPS perspective on global auto builds back when we reported second quarter earnings fourth quarter was expected to be down 9.5% that has dramatically improved and now the expectations fourth quarter is going to be down 2.7% and we continue to see upgrades as.
It relates to 2021.
Now expected to be up 13.8% for 2021 versus 2020, so certainly encouraging data that's out there bridging on Robert's comments.
Yeah definitely okay, and then in terms of the refinish business wondering if you've seen any change in the pace of customers switching to waterborne 10.
Technologies are any of those investments I guess.
I guess on hold because of the pandemic.
I don't think we've seen a or have a lot of data that would support an opinion there one way one way or the other in terms of the pace of of conversion from solvent borne to waterborne that's fairly mature at this stage, so I'd say, probably the level of activity.
Which is I would.
I would suspect during the pandemic period was static.
All right thanks very much.
Thank you. Our next question comes from Steve Byrne with Bank of America. Please proceed with your question.
Hi, This is Luke washer on for Steve I wanted to ask about your cost savings that you had in the third quarter and look into the fourth quarter. What specific actions did you take both on the structural a temporary basis and how much of that has already reversed so far and for Q.
So on the temporary cost savings, it's a combination of reduced contractor spend as well as travel and entertainment and we had a number of labor related reduction so short work weeks, 20% pay reductions as well as furloughs. So all the labor related actions.
Really came to a halt at the end of August what that is largely concluding.
DNA is probably the one area that will extend into the fourth quarter with a limited amount of Conor.
Contractor spend that's going to be reduced but as we go third quarter to fourth quarter sequentially really what you're left with is a limited amount of savings on contractor spend that travel and entertainment component.
And then from a structural perspective back on the on the 50 million, we announced back in July that's where we start to expect that benefits come through where we're expecting roughly $10 million and that in comps is a host of different areas. Our back office functional areas as well as back office commercial areas and then to a certain extent operations at fish.
Conceived as well as technology Salesforce as a more limited area of focus and we're taking a more surgical approach on that front and we'll start to see a little bit of that benefit in 2021.
Perfect and I could just sneak in one more talking about the auto body shop industry is there anything you've noticed throughout the last few quarters in terms of either I missed those buying smaller auto body shops or anything like that that's changing in the auto body shop industry. This at all related to your new price.
New business gains.
No we haven't seen a significant amount of activity during during the pandemic azure as you're describing and the basic structure.
And I think you're referring specifically to North America, but in North America, we have not seen a significant movement in that regard we continue to execute however on our refinished strategy of supporting all customer types in the market, including our MSR customers and that continues to be.
A very good business for example.
Perfect. Thank you.
Thank you. Our next question comes from Vincent Andrews with Morgan Stanley. Please proceed with your question.
Hi, This is Steve on for Vincent just wanted to ask a quick question, we don't usually talk about homebuilding and remodeling activity.
And that's a false I could so could you just maybe talk a little bit more about some of the market trends, you're seeing there and how much runway you see for the growth in that end market.
Be happy to I think that's a you know kind of a great entre just to talk a little bit about our about our industrial business because a multitude of the of the sub segments, we have an industrial and up one way or another in that market or move somewhat in relation to that market. So.
We've seen continued improvement each month in our industrial end markets and for the quarter, we saw wood coil and energy solutions with positive growth year over year and slight declines in general industrial and powder, but it's worth noting that all businesses were up year over year in September now.
Specifically related to homebuilding, our wood business continues to be powered by good growth in U.S. homebuilding and remodeling activity.
And contribution from new customers and products that we've launched which you probably have seen a string of press releases over the last 12 months of strong demand.
The strong demand in coatings for kitchen, cabinetry furniture flooring and distribution so pretty much each one of the of the the markets within our wood business.
In coil coil continues to to increase thanks to again strong construction fundamentals and interestingly good growth in the recreational vehicle market as well.
In general industrial what we've seen is demand for structural steel has coatings for structural steel has increased due to strong demand in the in the construction space and then demand for industrial coatings that go into more automotive tiers has been increasing steadily during the quarter and we expect that to.
To continue.
Hotter coatings, we saw strong demand for powder coatings through the quarter and we have a nice order book in place for the for the fourth quarter.
We see strong demand signals in powder in North America, and positive, but not quite as strong demand signals in Europe.
And then I would highlight kind of the star of our portfolio at the moment is our in our energy solutions business and our energy solutions business has grown nicely as electric motor growth continues in automotive and in wind energy. We're also starting to see really good adoption of our mainstream impregnating resin and our economy.
He segment wire enamel products and just as a reminder, our voltus hex impregnating resin product one in R&D 100 Award last year and a gold Edison Award this year for outstanding thermal conductivity, which allows higher motor efficiency and lower motor size and weight. So I think we're excited.
At about the businesses, we have that have exposure to.
To the more architectural decorative homebuilding related type markets, but equally about some of the segments that have exposure to more of the industrial space.
All right. Thank you.
Thank you. Our next question comes from Christopher Parkinson with Credit Suisse. Please proceed with your question.
Hi, This is harriss sign on for Chris Thanks for taking my question.
So in light vehicle can you give a walk of where you see the most upside and downside to the estimates that are out there for majesco saddened and other sources and you mentioned the focus on broadly growing in China. So can you discuss any opportunities you've taken to increase penetration with some of the Underpenetrated Oems there. Thank you.
Yes, Harris, it's Chris enjoy.
In general the I. chess or forecasts.
Forecast serves as a decent bench for the light vehicle business given.
Given our significant global penetration and diversification globally in that market.
You did observe that in the second quarter, we slightly underperform the global market that was really exclusively because we have a smaller overall penetration in China and that market's been.
And growing the fastest from the rebound at the lows that continued a little bit in the third quarter, So a little bit underperformance relative to the overall, China market, just because of our customer exposures in that country.
Going forward as trying to normalize and other markets will continue to evolve you'd expect to see our our overall performance closely match.
Chess outlook adjusted for wins and losses in the business and over time. The result has been a net winner in the light vehicle business for the last five or six years.
In general and part of that came from increased penetration in China. We do expect overtime that will continue to grow in the Chinese market. We had a good relationships with some of the local Oems and there's a good opportunity for us to extend that overtime. So that's.
So that's not necessarily a 2020 or 2021.
Significant lever, but certainly over time, we're having good success there.
Great and and thinking about the covance situation in Western Europe, and the potential for incremental restrictions when you've seen other regions reopened and then imposed curfews and things like that can you just help us frame on how meaningful of an impact that's actually had an underlying miles driven thanks.
Well. This is we approach it I mean, I think if we think about more waves of Kobe.
Our belief is that if we were to see a resurgence in coated we wouldn't see a complete economic shut down like we did in the second quarter, just given how much more we know about we know about the virus.
That being said we are also better prepared to navigate a third or fourth wave as we've aligned with our customers and how to operate with them in that type of environment. I think we also have a better sense of kind of market indicators and signals more insight into our second customer supply chains and.
And we have demonstrated our ability to to adjust our cost structure as needed. So I think as we think about the variability around co bid. We just don't really see things ever getting as bad as it did in April in the majority of the scenarios that are kind of there that are out there just given the grave consequences imposed on board.
So you know on the World economy, and I think Thats, just a kind of a general philosophical perspective that we would apply to each one of our views on each one of our end markets.
Thank you. Our next question will come from the line of John Mcnulty with BMO capital markets. Please proceed with your question.
Yes. Thanks for taking my question. So I guess, a couple of things one on the on the raw material front. It does sound like things are at least starting to creep up I guess can you speak to if you think this is a decent enough environment given the volume recovery that you can pass through pricing either real pricing or through some of the newer products that you have so that you can cover that raw.
Rail inflation can you speak to that for us.
But I think as we think about the business you know we from a from a pricing perspective more than thinking about what's going on with raw materials and raw.
Material pass through our business, we think about the business differently, we think about the value that our coatings create for.
For the end customer and since our coating products themselves are such a small percentage of really the total the total solution cost for any given customer and that applies to all of our to all of our end markets.
We're really continuing to focus on innovation and helping our customers be successful and increasing the productivity in their manufacturing plants and in their particular and their particular use cases and as we have.
And as we've gone through the pandemic you know we have not pulled back on R&D spending and we have not pulled back on technical on technical support we've been extremely committed to making sure that we're supporting our customers and finding alternative ways to do that during that during the pandemic. So that's really more fundamentally how we think about.
Pricing strategy across our markets.
Got it fair enough and then Robert you spoke in some of the prepared remarks on some of the slides you spoke to a lot of like a whole host of new new products, maybe more than than I guess I've seen you guys highlight or mentioned in the past I guess can you give us your thoughts on kind of where your <unk>.
Your vitality index, if you will and where are your thinking that's going to be over the next few years. It sounds like it is it is a focus in terms of some of your growth revitalization or growth acceleration strategy. So, but maybe you can give us a little bit of color as to what the baseline is and maybe where you're thinking things can go.
Yeah. So I mean, if you think about it numerically when you think about the vitality index or what you count as a you know as a new product you can kind of you can kind of structure that to tell whatever story you want because you get just a minor tweak to a product you know do you count that as a new product or not we actually track that fair.
Early up fairly closely across our product portfolio as well as making sure that given the new products. We're adding that were also sunsetting older products just to manage complexity across our supply chain and with our and with our customers from a a product innovation a product innovation perspective, you've seen us.
Announced a series of new products and you know that's all in our refinish business in particular in mainstream and an economy in our industrial business, you've seen a series of products across our wood business, our coil business, our energy solutions business in our light vehicle business.
We also launched some new products as well as in as well as in commercial commercial vehicle. So I think were that's a steady machine, but I think your questions very perceptive from a strategy and perhaps a slight shift in terms of where exalt has been historically that we are trying to.
Encourage more innovation.
More experimentation.
And more thinking around leapfrog technologies, and leap frog type of type of products and that's probably what you're picking up on a little bit on on on what we're seeing here. So I think I said as you know is just as we go forward I think you'll hear and see from a press release perspective, as well as what you secured seeing in the market.
Much more innovation not <unk> not only on the product side of the business, but really also on on the service side of our business and we have decoupled in particular in our transportation business. The service side of the business from the product side of the business and we now offer kind of a service offering.
That is tiered at different levels, depending upon the particular amount and type of service that customers desire and I think thats also unlocked some potential and given us some unique insights in terms of how we manage that business so more to come on that.
Got it thanks very much for the color.
Thank you. The next question comes from Kevin Mccarthy with vertical Research partners. Please proceed with your question.
Good morning, this is corey on for Kevin.
You spoke earlier about this.
The strength of trends in terms of the car park and miles driven.
How would you compare and contrast, your auto refinish volume trends in every major region of the world.
So we did have we did actually put out in the commentary a little bit of a guide on on the relative.
Strength as a market using miles driven relative to free cash of it by region. So you can you can see that in the commentary but.
In general the.
Refinish market recover.
Globally across the markets that we serve there is a little bit of variability you see the best strength in Asia with China rebounding most strongly.
Hi, Europe come back earlier and stronger than you did in North America with Lockdowns easing over the mid and late summer in North America has has been on a steady path that rebound.
Up to the level of kind of 10% to 15%.
Below normal at at this point, so there is a little bit variability, but the theme as you did see steady rebound globally across the businesses.
Got it thank you and.
Do you feel as though you may be gaining or losing market share.
Or do you have any sense in any of the regions. If you are and what may be driving that.
The result has been a net share gainer in refinish essentially every year for at least five or six years in a row here. There are a lot of reasons for that frankly, and they tend to continue on each year, although we would say that competitively across nearly every business that we serve the overall.
Environment has been more calm in 2020, which is not surprising when you are in somewhat of a crisis environment or recessionary environment to see a little bit less competitive activity out there that said there is a natural share gain that tends to come to is also because of the nature of our leading products and services in the market.
So being on the bleeding edge of the product side and chemistry, and then couple that with the strong service that we provide to customers around the globe and the fact that we're introducing new products and new chemistries in multiple markets not just in North America or in Europe, but across the chain from premium to mainstream and economy.
So when you're growing up by introducing new products. When you are providing leading service and.
And when you're naturally going to be.
Going to be an industry leader in terms of technology, you are going to tend to pick up share overtime and that that does continue.
Got it thank you very much.
Thank you. Our next question comes from PJ Juvekar with Citi. Please proceed with your question.
Hi, This is Eric Petrie on for PJ.
And then industrial markets you noted that all were up year over year in September so was that due to just improving macro or did you see inventory build.
It's a little unique in the case of each individual market. What I'd say is that in if you look at markets that are directly linked to construction and home spending.
Like wood in coil and parts of the powder market, that's really been a source of the of the outperformance there and we expect that to continue as we as we go forward.
The performance energy solutions is really just part of a larger macro trend around electrification and we're very strongly positioned there and really like the outlook for that for that business and then within the general industrial business and the powder business you have to bifurcate.
What goes into more industrial architecture for should see more architectural decorative type of markets and then what goes into more of an automotive or transportation application. So the part of that that goes into more construction facing.
In architectural type of markets that part of the of the business has recovered quite nicely and continues to continues to improve the part that's more facing and that may supply a tier one I'm, sorry tier two tier three automotive companies or have more of a pure industrial facing nature volumes are.
Our up there, but not quite yet it pre or pre cobot or prior year levels.
Helpful. And then secondly in the refinish business, how do you see that volumes and pricing trends closing the gap compared to prior year, including an outlook on the recovery in non msos.
Well I think again just to add to what to what Chris said and the prior question. Our refinish volumes were down mid to high single digits in Q3 on a year over year basis.
Price mix as we highlighted was down low single digits in the quarter with a higher amount in North America and positive price mix in certain geographies and for Q4, we expect a similar result overall based on current demand conditions I think we'd expect to see volume increases compared to third quarter, but still expect to see.
All yumes below prior year due to the ongoing impact of a COVID-19 at the.
At the point in time that we see some type of a vaccine solution for it for co bid and we see congestion levels get back up to more normal levels. I think we would expect to see a full recovery of the market.
Thank you.
Thank you. Our next question comes from Mike Sison with Wells Fargo. Please proceed with your question.
Hi, This is Richard on for Mike.
Just follow up on the industrial I believe in July had forecast.
Had forecast of up the business to be down.
7% in Threeq, you and then for the fourth quarter, It's obviously performed better than that what's your expectation now for the.
For the fourth quarter and looking on to 2021.
Expecting growth and any color on that would hit.
Sorry.
You guys have to repeat the last part of the question, but to answer the first part as it relates to industrial for the fourth quarter, we're expecting roughly similar results to Q3 industrial being down.
Down rounds.
Around 1%, but overall really good performance as we continue to see that sequential per month do you mind repeating that second question.
Okay. Second question, just I know you haven't given guidance for 2021, but in terms of what you are seeing visibility wise.
How should we think about that moving forward.
So I think as we as we look overall at the end at the industrial markets. There could be some volatility given resurgence is of a of coated. However, certainly the portion of the business that is more home and construction facing as we've seen that business during cobot be quite strong that would serve to kinda.
Our acting counter balance the more industrial side of the exposure within the industrial business.
Great and then just quickly on capital deployment, just wondering in terms of.
How do you rank order EMV.
M&A or building the pipeline in terms of like debt reduction and capture share buybacks.
Would you think about that.
So given our liquidity position and we covered this in our opening remarks, we own we are starting to pivot to start to build back that pipeline from an M&A perspective, So certainly expect to start to deploy some of that capital for M&A as we think about share buyback, yes, we will continue to buy back opportunistically, but I.
I think now that were beyond what we perceive as the worst of the cobot impacts will start to pivot on that front as well, but that again will be purely opportunistically.
From a debt perspective, we are targeting two and a half times leverage from a net perspective.
Again, given our comfort level of liquidity, we may look to pay down some debt some gross that marginally.
I'm also going to be looking at potential refinancing opportunities here over the next few months and then we'll just continue to build cash quite frankly, you solve really nice free cash flow conversion and hopefully that will continue now for the foreseeable future.
And just to add to what Sean said I think philosophically you have a general sense of it we have a good sense of what we want to do from a capital allocation perspective, but at any given point in time, we're always assessing what is going to be the most accretive and create the most value for shareholders as we look at each one of those.
At each one of those opportunities.
Thank you.
Thank you. Our final question comes from the line of circa quick with JP Morgan. Please proceed with your question.
Hi, good morning, Thanks for taking the question.
Good morning <unk>.
Good morning, I was wondering if you can talk about like where we see the 60 million and structural cost savings that you saw this quarter. If you look at the buckets of costs that sold in SG nine R&D.
My first question.
Yes, so we haven't given precise guidance on the 2020 2021 impacts, but broadly and I mentioned this in an earlier question, it's across a multitude of categories band back office commercial areas operations technology and back office functional areas, So you're really going to see the benefits.
Throughout our being out for 2021.
Yes, I was wondering about like this quarter I'd like a structural savings that you've got like a 50 million you got like this quarter that if you. If you said I guess, a rough breakout asked to like it seems most of Atlas It doesn't sinead R&D, but I was just wondering whether you had some.
What are you doing.
So what you're seeing in EPS, she and I am, particularly this quarter.
As a percentage of sales dropping down so dramatically its really the temporary savings that you are seeing the benefit there and when you think about the structure of the structural savings from exalt away that we had originally.
Communicated back in January when we gave guidance for 2020 more.
More than half thats coming within the operational areas. So particular to call out. An example, now what the mequon, Belgium facility closure, we shut that down in the first quarter and stopped operations. So you are seeing a big uptick as far as cost reduction and cost of goods sold for that particular project.
Okay. That's helpful.
Secondly, I was wondering if you can talk about that based on the level of DNA.
I think I can see and I was like 87 million in the first quarter and then it was like 77 and the second one I went back to like 80 I was wondering what the swings are related to what you think youre on.
Selling level on a quarterly basis.
Yes, the best way to think about that as a as a percentage in that south and targeting 16% to 17% certainly you'll have FX impacts in there as well as the temporary.
Yes targeting around 17% as Jenny levels is the right way to think about it certainly with all the structural opportunity that we have out there. We will continue to drive that down over time, but as a general benchmark I think 17% yeah.
Yeah, I guess currency swap might end.
Lastly, I was wondering I can ask one last question on the on like the auto Digest data. So when I look at the data like the <unk> and I look at the sequential on light vehicle production forecast the only region. That's modeled down negativity sequentially really you definitely starting the fourth quarter really is on what.
America that is built as opposed to go from.
4 million units to negative 3.8.
Really like the last five or six years like the bills have been 4 million units a bet on the four square in Latin America consistently. So do you think this is a concern for the best about do you think that you really have to hope that both of you think that that number could be better than that I guess I was just wondering what your own view it.
So typically weve you will see some of the.
Some of the market forecasters b.
Be somewhat conservative or lag what actually what actually happens.
I think the other the other element that we have to that we have to keep in mind.
In particular as it relates to Axalta is the particular product mix that we.
That we have and our product mix is heavily weighted towards trucks and s. movies.
Look I think the other you just have to keep in mind that August shutdowns didnt occur this year, but the forecasters are still assuming that the December maintenance a vacation shutdowns do occur. So if you just look at that alone. It will account for slightly lower North America outcome in the quarter.
Okay. That's helpful. Thank you very much appreciate it.
Thank you. This concludes our question and answer session. So I'll pass the floor to management for any closing comments.
Thank you everyone for participating and we look forward to following up with you have a good day.
Ladies and gentlemen, this does conclude today's teleconference. Once again, we thank you for your participation and you may disconnect your lines at this time.