Q2 2021 Axalta Coating Systems Ltd Earnings Call
Ladies and gentlemen, thank you for standing by welcome to Exalt is second quarter 2021 the earnings.
The conference call.
All participants will be in a listen only mode.
A question and answer session will follow the presentation by management.
This call is being recorded and the replay will be available through August 3rd.
Those listening after today's call should please note that the information.
Provided in the recording of will not be updated and therefore may no longer be current.
I'll now turn the call over to Mr. Christian Macrae. Please go ahead Sir.
Thank you and good morning. This is Chris Mcrae V P of Investor Relations and Treasury. We appreciate your continued interest in exalted and welcome you to our second quarter of 2000.
'twenty 1 financial results conference call. Joining me today are Robert Bryant, CEO, and Sean Lannon CFO last evening, we released our quarterly financial results of posted the slide presentation, along with commentary to the Investor Relations section of our website and exalt, the dotcom, which we'll be referencing during this call both of the prepared remarks and discussion today may.
Contain forward looking statements, reflecting the company's current view of future events and the potential effect on exalt is operating and financial performance ease.
Statements involve uncertainties and risks and actual results may differ materially from those forward looking statements. Please note that the company is under no obligation to provide updates to those forward looking statements. This presentation also contains various non-GAAP.
Some 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 of non-GAAP financial measures. Please refer to our filings with the SEC.
I'll now turn the call over to Robert.
Good morning, Thank you for joining us to review its off the second.
GAAP net earnings and our updated 2021 full year financial outlook.
The second quarter showed continued strong operating and financial performance, marking the fourth straight quarter of earnings exceeding our expectations since the pandemic impacted second quarter of last year on.
Ongoing demand tailwind for global industrial end markets.
Coupled with supportive recovery within exalt is refinish business combined the offset headwinds.
Above our original forecast for the second quarter, including ramping raw material cost inflation supply constraints with key raw materials and semiconductor chip shortages for mobility coatings customers.
While these headwinds.
The quarters are expected to continue during the second half of 2021 and run higher than prior forecasts exalt. The has begun to implement additional mitigation measures that will provide effective offsets over the coming quarters and into 2022.
Net sales in the second quarter increased 72, 6% year over year.
Headwind booting of 5.3% FX tailwind driven by broad based recovery from all end markets globally.
The underlying strong auto demand was masked by the supply shortages impacting the ability of our mobility customers to meet and consumer demand.
Price mix contribution on the quarter was a record 9.
And of <unk>, 3%.
Performance coatings price mix increased 14%, including a positive 21% moving refinish of which approximately 5% represented pure price improvement in the mid single digit price mix increase in industrial with most of that coming from price.
<unk> refinish volumes showed strong sequential recovery, which is tracking well with continued traffic rebound and remain below pre pandemic levels as expected, but now only down mid single digits versus the comparable quarter in 2019.
Exalt is second quarter adjusted EBIT of 170.
The million dollars was the dramatic improvement from the prior year quarter and moderately below first quarter levels, given the anticipated impacts from higher cost inflation in mobility customer supply chain shortages, both of which came in higher than originally projected and higher than we had assumed in our second quarter guidance.
Through the April.
Adjusted EBITDA for the quarter was $230 million, reflecting a 24% margin.
The solid result contributed to a record level last 12 months of adjusted EBITDA of 992 million as of June 30th given the lapping of the pandemic impacted.
The second quarter of 2020, and including excellent second half 'twenty 'twenty performance.
Adjusted EPS of <unk> 48 cents compared with the loss of 15 times in the second quarter of 2020, while just shy of 50 reported in the first quarter 2021.
Second quarter free cash flow.
Provide $83 million compared to an essentially breakeven cash flow in the prior year quarter on.
Also showed solid sequential improvement from $11 million in the first quarter.
Which is also of seasonally typical improvement.
We were pleased to close the quarter with total net debt. The last 12 months adjusted EBITDA of.
On a 0.6 times dropped.
Dropping below 3.0 times for the first time in the history of exalt.
We repurchased $60 million worth of shares during the second quarter, bringing the total repurchases through the second quarter 2 of $124 million.
Share repurchases remain a priority for cash.
For the allocation.
On July 7 we were pleased to announce the definitive agreement to purchase <unk>.
Our second M&A transaction of 2021.
On the largest transaction in exalt is history.
We're very excited about the U haul transaction for many reasons.
The acquisition is of very strong fit.
Strategically that's the growth accelerator within the refinish business, adding a complementary product set for the existing business and representing a strong return opportunity given the combination of operational synergies as well as compelling commercial synergies over time.
We're also excited to be bringing on board.
On a terrific management team that has proven an ability to grow the business substantially during the tenure.
A prototypical coatings M&A consolidation story, the smaller business will benefit from exalt is global distribution and innovation capability.
<unk> already successful story to the next level of growth potential.
You poll is expected to generate approximately $145 million in annual sales in 2021.
With an adjusted EBITDA margin of about 26%.
We expect about $10 million of operating synergies to be realized over the next 18 to 24 months and.
And we expect the mid teens 5 year IRR.
Some of the transaction.
You coal is expected to grow at rates faster than the core results of business over the period due to a strong pipeline of new products as well as benefiting from exalt is global commercial infrastructure.
The transaction is expected to close around the end of the third quarter or early in the.
The fourth quarter.
<unk> also continues to drive improvement within all aspects of ESG and we made solid ongoing progress on each aspect of sustainability during the second quarter.
We continue to be a leader in the coatings space and our ESG scores, including strong ratings for.
From ISS as well as receiving of double a leader rating from MSCI.
We recently completed an ESG materiality assessment across all our key stakeholders of <unk>.
Looking to set new ESG goals that we look forward to sharing around the end of 2021.
In the meantime, we.
We continue to focus on our industry, leading waterborne coating systems, which improves sustainability were adopted by customers globally.
Compared with traditional paint systems.
Moving on to business conditions.
Second quarter demand conditions remains robust across most global industrial coatings markets.
And the refinish recovery also continued as anticipated.
Refinish demand benefited from reduced COVID-19 restrictions in many countries, where those restrictions were in place through the first quarter as well as the global increase in vaccinations translating to improve mobility and vehicle traffic.
Refinish net sales increased.
<unk>, 16% sequentially versus the first quarter with net sales of 3.5% higher than 2019 does.
Despite business volumes still below 2019 levels by roughly mid single digits with more room for upside before we return to normal conditions in that market.
Industrial.
Real end market demand remained robust across nearly all end businesses and geographies.
Industrial saw net sales growth increased by double digits sequentially for both the first quarter as well as the comparable quarter in 2019, underscoring strong underlying demand coupled with ongoing organic growth initiatives playing.
The <unk> positively for the business.
Despite demand in excess of our original budget forecasts further upside near term sales forecasts.
Could be hindered by constrained raw material availability in some areas and consistent with the dynamic in the second quarter.
Light vehicle demand conditions are on.
Also solid at an underlying level with strong retail vehicle sales in most regions the auto.
<unk> has been aggressively throttled back due to the ongoing semiconductor chip shortage.
Vehicle production forecasts have continued to ramp down as the full realization of the magnitude and potential duration of the.
The semiconductor supply situation has become apparent.
There were approximately 5 million vehicles removed from the global full year forecast recently, including 2 million vehicles removed from the forecast during the quarter itself.
This compares to the 1 million, we had assumed in our original outlook for second quarter provided back in April.
For the full year, we're now assuming production delays totaling around 7 million units versus our original assumption. The April of approximately $2.4 million units.
Looking forward, our assumptions have been reduced to assume no appreciable improvement in the supply situation through year end and which could potentially continue.
Into 2022, according to some forecasters.
This revised assumption is now included in our updated full year 2021 earnings outlook.
Commercial vehicle underlying demand remained robust through the quarter with notable strength in North America, particularly with heavy duty truck orders remaining firm in recent months.
The strength in commercial vehicle reflects the broader global industrial recovery and is expected to continue near term.
<unk> net sales were strong for them.
Moderately impacted in the quarter by a customer strike.
China remains of the exception with lower production expectations.
So exalt the does not have significant.
Sales in the China truck market currently.
Regarding cost structure, the second quarter witnessed substantial variable cost inflation coming from oil and propylene benchmark materials as well as inflation in packaging freight and logistics.
The magnitude of this inflation as.
As well as the lack of any previously expected relief has exceeded prior forecasts and we now expect full year 2021 inflation headwinds around mid teens versus the prior year at the variable cost of goods sold level compared to our previous assumption of high single digits.
We are working actively to offset.
Inflationary cost pressures via a combination of incremental pricing actions as well as the focus on additional cost and productivity actions.
On pricing exhaust the announced the additional global price increases across all business lines on July 15th as part of our efforts to close the price cost gap that widened during the.
Offset border.
Representing the second round of such actions taken this year.
Incremental pricing actions are necessary and critical to counter the broad and structural inflation that has transpired since 2020 at the market level for goods integral to its office products.
We expect that the price cost.
GAAP that opened during the second quarter will be partially covered by pricing actions during the second half, including our mobility business.
That the full coverage of the inflation will take place during 2022 in large part based on actions implemented during 2021.
We will implement the third round of price increases.
Second with the situation merits.
We have also enacted additional structural cost reduction initiatives.
The $22.5 million restructuring charge focussed on our EMEA operations and taken in the second quarter is anticipated to provide approximately $15 million in annual savings once fully implemented over the coming.
After 24 months with most savings to begin to accrue in 2022.
Regarding light vehicle, we reported negative price mix in the second quarter due to mixed differences year over year against the volatile comparison of vehicle mix.
Overall pricing was largely stable in the period.
The <unk> 12 of an index pricing and other planned actions, we do anticipate narrowing the price cost gap over the coming quarters with positive progress expect it to be evident starting in the third quarter.
I'll now turn the call over to Sean for some additional comments.
Thanks, Robert and good morning.
Second.
The quarter saw strong overall financial performance given ongoing robust demand conditions and continued refinish recovery globally, and our team executed well to exceed our quarterly net sales and adjusted EBIT targets again.
The reported net sales increase of 72, 6% was ahead of our prior expectations as recovery in refinish as.
Strong industrial demand more than offset the persistent production headwinds with our mobility customers.
The performance coatings second quarter net sales increase of 67, 1% was notably above our expectation as refinish results saw better than expected volumes in North America as well as globally.
<unk> did not.
As well as an appreciable benefit from customer restocking in the period.
The most distributor orders reflected improved demand conditions, we did see of benefit from increased volumes and premium refinish brands as seen in the unusual lift in price mix.
And industrial demand was very strong throughout our businesses with the sole exception.
<unk> of the auto end market for tier suppliers net.
Net sales would also have been even better absent some volume impact from tight raw material supply for specific products largely in North America and EMEA.
<unk> coatings net sales increased 88, 2% for the quarter, which is a strong rebound from the prior year period.
The realized where production shutdowns were pervasive.
The result was moderately below expectations due to repeated production hubs for late into the semiconductor chip shortages.
Positive product price mix of 9.3% was a record level due to effects previously noted including positive mix in refinish as well as strong absolute.
The price progress in industrial around mid single digits during the quarter.
This was partly offset by 4.1% negative price mix of mobility, which stemmed from negative mix in both light and commercial vehicle.
As Robert alluded to we do expect mobility to revert to positive price mix did of strong price movement and more neutral mix.
<unk> starting in the third quarter.
Second quarter, adjusted EBIT was $173 million versus the loss of $12 million on the prior year quarter and compared to $197 million in the second quarter of 2019.
This was as expected given strong demand in volume trends as well as prior year period charges for.
Under utilized manufacturing assets offset in part by variable input cost inflation.
Total operating costs were fairly stable versus the prior year and a benefit over the 2 year comparative period, given structural cost actions we have taken.
Second quarter adjusted EBIT excludes the $71.8 million benefit recorded.
Accorded in the period related to the operational matter in our North American mobility business.
The benefit resulted from the changes in estimates and inclusion of anticipated insurance recoveries, which were confirmed in the quarter, which was a very positive development.
Adjusted EBIT also excludes the incremental restructuring charges of $22.
We recorded in the period.
The performance coating segment reported Q2, adjusted EBIT of $140 million versus 2 million in the second quarter of 2020, driven by volume recovery and drop through benefits of stronger average price mix offset partly by headwinds from higher variable costs.
The adjusted EBIT.
<unk> for the segment increased to 17, 3% of.
Further increase versus the 16, 6% margin seen in the first quarter of 2021, driven by increased volumes and improved average price mix in the period.
Mobility coatings reported second quarter, adjusted EBIT of $6 million versus the loss of $39 million in the second.
5 years of 2020 <unk>.
Profit and associated margins in the second quarter were impacted by the volume loss during the quarter due to the semiconductor chip shortage, which dramatically impacted production of the customer level and sales volumes for <unk>. The.
For the quarter was also substantially impacted by raw material inflation versus the prior year.
<unk> balance sheet and liquidity profile improved significantly in the second quarter benefiting from improved operating performance, including record levels of latest 12 months adjusted EBITDA at $992 million and enhanced liquidity totaling over $1.7 billion. Following the upsize of our undrawn revolver by $150 million during.
During the quarter.
<unk> net leverage ratio improved from 3.2 times at March 31 to 2.6 times at June 30, driven by solid free cash flow and record LTM adjusted EBITDA, given improved operating earnings and the lapping of the weak second quarter 2020, COVID-19 impacted results.
This is also inclusive of a $124 million on share repurchases made year to date.
Given the planned acquisition for you poll expected to close in the late third quarter early fourth quarter, we would expect leverage to increase to approximately 3.4 times on a pro forma basis. Upon the deal closing and then come back down to around 3.
<unk> 2 times by year end, assuming the current cash flow forecast and earnings contribution from the acquisition.
Free cash flow for the quarter totaled $82.6 million versus the use of $17.8 million in the second quarter of 2020.
Driven by improved operating profit and inclusive of $8.8 million on higher Capex.
Opex versus the comparable year ago period.
Regarding our financial outlook for the full year 2021, we continue to see of supportive baseline of strong global underlying demand for most markets that we serve and our execution focus continues to drive organic share gains via innovation led product introductions.
That said, we have adjusted our forecast to include somewhat greater near term headwinds related to the mobility supply shortages as well as higher assumed levels of raw material cost inflation offset partly by additional pricing actions.
We are assuming baseline oil prices in the low <unk> for the full year, including mid Seventy's.
For the second half, but we have not assumed the current constraint raw material supply situation gets worse going forward.
For full year net sales, we continue to expect an increase of approximately 20% to 22%, including 3% positive FX translation and 1% benefit from acquisitions, which.
Woods' any contributions from the <unk> transaction.
We continue to anticipate strong net sales contribution for both segments that we have boosted the performance coatings contribution and trim mobility, given higher supply shortage impacts.
We are using of third party forecast, which calls for 3 million vehicles to.
Expert in the second half production schedules versus the minimal impact assumed in our April full year guidance.
In dollar terms the mobility net sales effect from the semiconductor and other materials supply shortages as approximately $60 million in the second half of 2021 versus 55 million estimated during the second.
<unk> quarter and $20 million during the first quarter.
For mobility volumes, we continue to expect to moderately outperformed the current global market forecast for the full year, given our over waiting to trucks and Suvs and I expect mobility net sales growth in the mid teens versus 2020.
For for Refinish.
We've seen somewhat better than previously expected recovery through the second quarter, but we continue to assume that market recovery will progress at a gradual pace globally ending the year with volume still below 2019 levels by at least mid single digits. Despite net sales exceeding 2019 totals.
We expect to generate adjusted.
<unk> EBIT of $685 million to $725 million and adjusted diluted earnings per share of $1.85 to $2 for the full year with other key income statement metrics noted on our guidance slide.
For adjusted EBIT, we expect that the third quarter will represent approximately 20% of the full year adjusted.
Including ongoing impacts from headwinds that we previously noted.
Our current expectation is that raw material inflation during the third quarter will be approximately 23% versus the prior year for variable cost of goods sold versus 17%. During the second quarter. This is expected to moderate somewhat during the fourth quarter.
We expect.
EBIT cash flow of between $445 million to $485 million, excluding any outflows related to the mobility operational matter and we expect uses of capital to include further M&A transactions as well as ongoing share repurchases.
With that we'll be pleased to answer any questions. Operator, please open the lines.
<unk> frequently.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask the question. Please press star 1 on your telephone keypad, a confirmation tone will indicate your line is on the question queue. You May press star 2 if you'd like to remove your question.
For Q on Q for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, 1 moment, please while we poll for questions.
Okay.
Your first question comes from the.
The line of Ghansham Panjabi with Baird. Please proceed with your question.
Thank you Hey, good morning, guys.
On the lowering of EBIT for 2021 relative to your previous guidance can you just give us a bridge of the differential of roughly the $30 million how much of it is from higher cost versus the deferral in auto OEM versus any of the.
For the downside and how much of embedding for you Paul at this point.
Okay.
So as far as you Paul nothing is factored in to the guidance construct but as you think about bridging for your guidance back provided back in April.
Really the first big impact is the SMA impact on light vehicle, we did quantify.
The bucket on the sales on you can estimate the drop through but that $60 million in the second half was not forecasted and the impact we actually saw in the second quarter itself, we estimate of about half of what we actually realized of that.
55.
And then the raw materials, we had assumed originally in our guide there was about an $80 million headwinds were little.
Defy the double of that now for the full year, so almost of $100 million incremental impact from Ralph and then that's partly being offset by the pricing actions that we noted.
Got it that's helpful. And then can you give us some characterize some more color on the 4% decline for.
For.
Ability from a price mix standpoint, I know you called out on <unk>.
Mix.
A little over just separately on you Paul you called out of serves the mainstream economy subsegment, what what percentage of the overall auto refinish market do you think of it means mainstreaming of economy and how big is it for you had current and.
And will the brands be standalone or merged with existing brands in your portfolio.
Okay got you and we'll take those will take the 3 questions.
And then in terms of the mobility price mix being down 4%. The negative mix really came from just the combination of customer and regional impacts associated with the chip shortage on on volumes as well as differences from the prior year quarter across the segment.
Would highlight that we have been.
The increase prices of light vehicle and just as a reminder, roughly 25% of our mobility contracts, especially in light vehicle or covered by raw material indexing.
And we have about 40% of the contracts that have contractual language that allow us to discuss to discuss pricing. So we'll.
Unable to share price show up in the third quarter.
Given the most of our of our index contracts have a 6 month lag.
And then as far as you Paul I don't think we can express enough. How excited we are to bring the business into.
<unk> alter as you know it's of a leading manufacturer of repair in refinish.
We'll see much used primarily for automotive refinish and aftermarket protective applications about 2 thirds of the Companys sales of our aerosol fillers in coatings and those are primers top codes and clear coats for the refinish market, but more focused on mainstream on economy, and then about a third of the business are protected.
<unk> product coatings that include spray spray on pickup truck bed liners and their marketed under the Raptor brand name and many are kind of consumer or do it yourself products sold through retail automotive aftermarket stores and Theyre also sold online.
The protective products are used in camp for vans boats.
<unk> of plethora of other industrial applications. So we're really excited about what the product portfolio of rings, and certainly we'll be able to sell their products through our sales and distribution channels and we will also be able to sell our products through their sales and distribution channels.
And as far as as far as integration we think.
Puts and there is a value creation plan.
And how we bring the 2 companies together and leverage both of the assets.
Not so much on the cost side, there are some minor cost synergies, but really on the commercial side. There are number of expected commercial synergies.
Thanks, so much.
Of it more.
Your next question comes from the line of the Steve Byrne with Bank of America. Please proceed with your question.
Yes. Thank you. So earlier this year, Robert Hugh you remove the matrix organization structure, and just wanting to hear whether youre seeing any signs.
Oh, it enabling your segment leaders to to drive maybe either some cross selling opportunities or more productivity initiatives.
<unk> that youre seeing that debt is constructed from that action.
Okay.
I think we're seeing a number of.
The group benefits and it's not only across the businesses, but even within within the businesses themselves and for example, if we look at our mobility business.
I'm really excited and confident about the future of the mobility business for for many reasons and some of them are directly related to the organizational pivot if you.
Our new business launches that are projected.
We expect them to be more than double in the second half of this year compared for the first half of lot of that has to do with the focus that the team now has and how that business is organized we've also achieved some pretty nice wins over the last 2 quarters at key customers in Asia EMEA.
Look at our in the Americas and the revenue from those wins will come in over the next 1 to 2 years.
If you look at our our year to date win ratio.
Our win ratio has actually been higher than our current market share as we've won key new business based on our technology, our service and our relationships.
And so I think if we look at light vehicle, it's going it's going really well.
In the industrial side, it's been really interesting of all of the of all the many achievements of that business has perhaps 1 of the most exciting changes has really been the pivot from focusing on product technologies to focusing.
<unk> on end markets and providing customers with integrated solutions that include liquid powder in E coat and so that total solutions approach that we've taken and industrial has resulted in some new wins that are nascent, but a growing portion of our industrial portfolio and then in our.
<unk> on this business in terms of running that as a truly global business the <unk>.
For its that we've seen there and standardization of marketing marketing as well as product development platforms, we're actually getting products to market faster.
And you can see that in some of the press releases that we've made around some of the.
The launches we've had the global launches as opposed to region specific launches. So I think overall in terms of how the organizational pivot has worked it's worked extremely well.
And maybe just an extension on the Robert.
You talked about a few products.
Our focus.
Innovation.
The Daisy wheel.
Color match system in refinish and the.
And then the the waterborne clear quote you also mentioned the.
The C code in mobility can you just comment on those as to whether they are more.
We're likely to to lead the market share gains or is this really the drive a mix shift up in price.
Can you can you rank those those various initiatives.
So on your first part of on your first question around the mixing excuse me around the data the wheel or <unk> systems.
System has been in the market for years and years and years and we've launched the third the third generation of.
That product now I think when you step back and you look at the overall refinish business you have to remember our waterborne refinish system is 55% faster than our next closest competitor and uses 30% less.
The materials on our next closest competitor so we're already starting from.
Pretty nice advantaged from a product technology product technology perspective, and the data the wheel 3 point O is just an upgrade to what was the industry's first fully automated color dosing system and what that does is it enables the fastest and most accurate.
Accurate color mixing in the marketplace.
That being said <unk> got to remember of paint mixing is only 3% to 7 minutes of of typical process time of $45 to say 120 minutes and Thats why you don't see greater adoption of these automated dosing systems in the marketplace because of the capital investment that you.
You have to make offset by the productivity improvement that you get.
Just not it's just not that large.
But we want to make sure that we're meeting the needs of all of our customers. So we continue to innovate on that on that platform.
And then in terms of some of the E coat developments that we have our technology team.
Both on the mobility side as well as on the industrial side of the code is just on an outstanding job and moving up our eco technology, not an incremental step, but a couple of steps up compared to where we were so net net in terms of innovation overall in product development I think we expect that to continue the power.
Sure.
Organic growth as we go forward and allow us to gain additional market share.
Thank you.
Your next question comes from the line of of P. J <unk> with Citi. Please proceed with your question.
Yes.
Yes, hi, good morning.
It seems like that in performance coatings, you offset.
The majority of your raw materials, if not all of them with price mix I guess my question is on the mix impact, especially on the refinish, it's a little hard to understand from outside.
What.
<unk> makes impact are you selling better quality of paint that you can charge more or are you painting more suvs over of cars that get somebody makes impact can you elaborate that on just sort of talk to us about what for what is the mix impact this quarter.
Good morning P. J, Yeah, and you you would've noticed the last few quarters we've.
Actually had a negative price dynamic and that's really started back in the second quarter of 2020 I'm.
Sorry on the price side or on the mix side back.
Back in the second quarter, when we saw the volume declines we really saw a thinning out of inventory within the distribution channel and you can imagine as the focus of the distributor partners on taking out the heavier price.
<unk> inventory, so we saw that sending out so it's not necessarily we're moving away from mainstream and more on the premium. It's just things are more normalizing as value volumes come back. So what youre seeing now is a heavier mix coming through as we get back to more normal volume levels as far as what we're selling through the distribution.
But fundamentally.
The mentally we haven't seen any sort of bigger changes in how we think about premium versus mainstream.
How we sell our products today.
I would just add to what to what Sean said P. J as debt. This was the dynamic at the time when we when we saw volumes down in refinish that we know was an area of concern for people with price mix being down.
But we explained that it was heavily driven by the mix factors as Sean outlined.
On that that trend would reverse itself. Once we saw volumes come back up to more normal levels and so as we move forward and we continue to see the refinish market recover we expect that we will see price mix trend returned to what is more normally expected.
Okay, great and what is your position or market share in Evs, especially in battery coatings do you have of battery coating product out today.
And if yes, what kind of ramp ramp up do you see on if now then what sort of time timeline to get the commercials.
We are of very strong position in the electric vehicle market overall, given our strong position in electric motor and electric motor coatings.
We're working to build out our platform across the entire electric vehicle skateboard.
And we do have commercially available.
For part of.
Of the battery coating solution and we're working to develop additional products. So that we can more broadly participate in that market today, it's a very nascent position.
Thank you.
Your next question.
The problem line of Vincent Andrews with Morgan Stanley. Please proceed with your question.
Thank you and good morning.
Robert if I could ask you on a new poll.
On the press release of sort of talked about it's setting you up for sort of further bolt ons and then in your comments a few minutes ago.
I sense, some optimism on some some enthusiasm for significant through the eyes on about the DIY part of the acquisition and it seemed like can also serve some of the retail orientation of it. So I'm. Just wondering is that kind of an incremental area of focus for us.
Bolt ons for here of sort of the DIY angle of the retail angle.
I just want to be careful that we don't we don't put the cart the cart before the horse I think we have to wait until we actually until we actually own the business but.
Assuming that that all goes well between obviously between signing and closing, which I think we expect it will as we go forward. There's certainly with you Paul there are.
A number of platforms and directions that we can take that debt, we can take that business and although the business is think of it as predominantly a refinish accessories business in aerosols fillers in coatings. They do have a very attractive technology portfolio and as you pointed out not only do they go into the traditional <unk> channel.
They also.
Our in the BDC channel in retail automotive aftermarket as well as online and that was 1 of the 2 of the aspects that we found particularly attractive about that.
That business.
And certainly gives us strategic optionality as we as we go forward, but as we.
The forward and hopefully close on that transaction, we'll be able to provide a little bit of little bit more color just around some of the strategic directions that we can go with the business.
Okay, and then I also notice on the either on the at least for the slides of the comment that the youre.
Youre not assuming any buybacks over the balance of the year or is that just sort of a simplifying assumption.
<unk>.
Or is that the indication that the M&A pipeline is robust.
You Shouldnt take it I mean, we have I mean, we're expecting to.
Generate at the midpoint of almost $455 million. So we have adequate liquidity to both through M&A as well on share buyback.
It was just simplicity for our assumptions.
<unk> for the full year guide you shouldn't take that as we're not doing any buybacks for the remainder of the year.
Okay, great. Thanks, very much guys.
Your next question is from the line of David Begleiter with Deutsche Bank. Please proceed with your question.
Thank you good morning.
Robert just on performance coatings looks like in Q2, we were able to offset raws with price actions in.
In Q3 do you think that can be the same dynamic pricing all of that Rajiv do you expect some negative raw price mix in the quarter for performance coatings.
I think we've taken actions.
In both our our refinish end market as well as our industrial end market pretty real time in terms of in terms of cost inflation and additional pricing actions that we need to take as you saw on our prepared remarks as well as our commentary we are forecasting additional raw material inflation.
<unk> in the third quarter in terms of what will actually flow through.
Flow through our financial statements. So in general we are expecting to continue to be able to offset it on that side of the business as we have seen in previous cycles.
And then on the mobility side of the business of course, there is a little bit of the lag.
Given the typical conversation.
<unk> with that customer set as well as the timing of how the index contracts work.
Got it and interest in our refinish, Robert you mentioned that a body shop activity is below miles driven in both the U S and Europe why is that occurring.
When we've seen if you look at the.
The data I think of June North America miles driven are projected to be up about 105% of pre COVID-19 levels in the EMEA.
About 112% of pre COVID-19 levels projected.
Looking at pre Covid seasonally adjusted levels, but we do still see collisions.
The body shop activity in <unk>.
Terms of actual collision data as well as through our point of point of sale of customer support systems in the body shops, we've got a good read on the amount of paint that's being made on.
On a on a sort of the unified basis and when you look at that it has everything to do with.
Traffic congestion levels returning to returning.
To normal levels. So I would say that we expect to see that that trend continue until we get to September when do we expect that back to school and back to work we.
We will result in greater traffic congestion at more typical times of the day and thus cause of collision activity to return to more normal levels, that's our expectation.
At this time and Dave just to add we've seen somewhat of a lag between miles driven and the collision rates, but as Robert pointed out the <unk>.
Ingestion factor is also on element, but when we noted full year guidance, we had expected volumes to be down opposite 2019 high single digits, we've seen the pace of recovery in the second quarter come back.
Station on much faster than anticipated and we're now expecting volumes to be down mid single digits. So it's certainly a nice development that we've seen over the last few months.
Very helpful. Thank you.
Yeah.
Yeah.
Your next question comes from the line of Kevin Mccarthy with the vertical.
Back on research partners. Please proceed with your question.
Yes, good morning.
Several other coatings companies have point to not only to the level of raw material cost inflation, but also the availability of certain raw materials as being a constraint on.
Nickel in your own production.
Have you been able to navigate through this period without.
The availability constraints and if so would you expect that to be the case in the third quarter as well.
We've navigated actually quite well.
While we haven't had shortages, we certainly have had.
On tightness in various materials due to supply chain disruptions.
Specifically just isocyanate.
Acrylic emulsions and certain polyester resins have been have been most challenging but despite the market situation, we've secured supply and have largely been able to keep pace.
On there with the strong demand for our for our products, but they are still have been some impact on sales volumes as well as impacts at our customer level, which has left.
Less certainly some sales that we that we could have made if we'd had the availability of raw materials to make them. So I think the results of that Youre seeing here in the second quarter.
Our our constrained results. So when you put that constraint plus the semiconductor impact I think just stepping back Kevin we really couldnt be happier with the beat that we achieved this quarter.
We delivered on what we said we would despite all of the constraints that were imposed.
I'm really proud of our performance.
And Kevin.
I just wanted to add onto that debt.
I think the real effect of that tightness is showing up in pricing for raw materials that we've been buying so for those of you have noted not only ourselves, but others have seen higher than previously forecast of raw material inflation.
A lot of that is directly the result of the tightness that youre seeing at which persisted through the quarter losses previously expected. So that's really the biggest effect.
More than Miss sales as the.
The levels of inflation that you see users as a result of his very very tight supply.
Yes, I think Chris makes on a.
Of the important point and our focus has been keeping our customers keeping our customers running.
In helping them deal with the issues that they've had to deal with so where we've had to step out and buy the spot market at significantly higher prices because of how low the supply has been in certain materials, we've done so.
A very light and you certainly have seen the impact of that from a from a cost perspective.
Thank you for that and the secondly, I wanted to follow up on the prior thread of discussion regarding price mix. It looks like you ran up 14% in the quarter and performance.
How would you characterize.
The underlying price trend exclusive of mix and refinish as well as the industrial.
Yes, so on the refinish side, we realized about 21% on price mix roughly 5% of that 'twenty, 1 was pure price.
And we are closer to 6% and non industrial and.
And I would say the vast majority was actual price realization.
Okay perfect. Thank you so much.
Your next question comes from the line of Bob Court with.
Goldman Sachs. Please proceed with your question.
Thanks very much.
Robert I was wonder if you could help me on the raw materials the source of.
Of the tightness there.
Is your analysis suggest theres, just not enough of those raw materials capacity in the world or was it a product of the supplier disruptions force majeure is in other words, what's your comfort level as we get some of that debt.
Net production normalized debt you could see some relief versus remaining in a very tight and constrained environment for the foreseeable future.
Well the actual pricing there is a price component and then there is an availability component that's driving price and I think everybody can get a pretty good bead.
Just looking at some of the input costs on what the actual.
Inflation is just on pure kind of underlying underlying oil price, but as it pertains to availability.
The supply constraints across the supply base has certainly been a driving factor, including a myriad of force matures across pretty much.
All of the all of the coating.
Not all of the categories of purchase but certainly the majority of the categories. That's really been combined with a pretty significant demand recovery.
We've all seen globally and then we've had several global logistics bottlenecks, whether it's containers coming out of China, or just mismatch of supply and demand from a.
On the index perspective in different points around the world and winter storm, which of storm early that occurred earlier in the year on Texas.
You might say well why are we sitting here in July of talking about that and the reason for that is it created a pretty significant backlog.
Of product that had to be made and given the length.
Listen the severity of that outage is certainly our outages and suppliers. There. It certainly did create a backlog that they're still working through in some cases and are not are not totally totally back up. So I think we've taken a relatively conservative estimate of both the underlying price inflation as.
<unk>, what availability could be like in the third and fourth quarter based upon what we're seeing in the marketplace and the marketplace currently.
Things could be a little bit better than we're expecting we'll just have to wait and see.
And maybe related to that some conservatism your light vehicle build rate <unk>.
There's quite a bit below the consensus expectations for maybe the consultant expectations is that just a function of you think they are inevitably going towards your numbers. So let's get there quicker and not see of thousand paper cuts as the consultants keep lowering their numbers of what's what's the basis for your differential there.
Well I think as we I think as you.
As well they bought that certainly were going on.
1 aspect of that ran through our minds, but we really spend a fair amount of time this quarter doing some homework.
Speaking with actual semiconductor experts from various different consulting firms and from industry to try and triangulate.
As well as with some customer feedback around what we think the assumption.
<unk> could be and so we believe that the 7 million units globally that are not going to get made this year based on semiconductor shortages is actually a reasonable expectation and we think that the assumptions, we have around materiality and expected duration of the headwind.
Our reasonable.
You described we certainly hope that the situation is better than that but we certainly.
Didn't want to have that perspective.
Go out with a more conservative number and then report Q3 earnings and say no actually it was ended up being worse than we thought so I think we've tried to take the approach of being somewhat conservative in our view here on going out with what we think the full year numbers.
It was based on and Thats not based on automotive forecaster input that's based on actually speaking with consultants, who actually work directly in the semiconductor industry and have put together a supply demand buildup by industry across all industry, whether it's consumer or industrial et cetera on looking at when.
When you start to see.
The supply exceeds demand.
Great. Thanks for the help.
Okay.
Your next question comes from the line of Mike Harrison with Seaport Research Partners. Please proceed with your question.
Hi, good morning.
You had kind of suggested that you didnt think that much of the refinish strength was driven by restocking.
But you also commented that there was some normalization in the in the mix that may have been.
There may have been driven by some inventory normalization. So can you just maybe give a little bit more color.
Brian on what Youre seeing in terms of refinish distributor inventory level.
The levels and kind of buying patterns as we get into the second half.
As we had as we said before and I think continues to be continues to be the case today, we have not seen a.
Large distributor restocking.
Color at this point I think everybody is still waiting to see what happens in that September October time period in terms of of returned to work and return to school before we're going to see distributors really start back up on inventory.
They continue to run at relatively thin levels, but what you are seeing is due to the increase.
In accident rates and activity of the body shop, Youre, starting to see them buy more so thats really where the volume normalization is coming from debt yielding the the price mix that you see this quarter, it's not because of the big restocking.
Alright, and then a lot of the supply.
<unk> option impact conversation, that's been focused on the chip shortage, but in your slide deck. You also mentioned some constraints in the Americas building products and global General Industrial can you give a little more color on what youre seeing there in terms of.
Raw material availability of supply chain disruption.
Of this right and is that.
Fixed at this point or do you still expect some additional challenges in that industrial market in Q3.
We continue to see tightness in acrylic resins, which is 1 of the major components of our wood coatings business and Thats.
At an industry wide level it.
It's not it's not specific to 2 <unk>.
We have seen some additional capacity come into the system.
And certainly a broadening of suppliers in the marketplace that are producing acrylic resins and so we think it could be a little bit better, but if we look at the underlying demand.
We have on that business, it's quite strong so the way that we think about it is although we expect the business to continue to perform well it could be performing much better if we Werent Ltd on the supply in particular of acrylic resins.
Alright, thanks very much.
<unk>.
Your next question comes from the line of.
I run this 1 <unk> with RBC capital markets. Please proceed with your with your question.
Great. Thanks for taking my question.
I guess my question is on the back onto the raw materials on the price cost dynamics. So if I heard of that correctly. It sounded like you were looking for an $80 million headwind on.
On raws and it turns out to be on $160 million headwind or so for the year.
Yet your EBIT guidance is only down say 25.
And so it.
At the midpoint of it does appear that there is.
This actions that are successful and if you look at the Q3 Q4 guidance it looks like you're expecting a lot of those to be successful in Q4. So I guess is that the right read and so if we think about price cost for the rest of this year on into next year.
When do you expect.
5 million of that I'll say, the $160 million of raw material headwinds to abate.
Is that kind of a 4 quarter dynamic and maybe you can just give us your thoughts on on or is it sooner just given the Q4 guidance.
Yes, sorry, the judge exactly exactly when it'll abate, we do expect.
<unk> fourth quarter to moderate slightly versus Q3 high volume, but I think what you can take away as far as the price cost dynamic.
We'll we'll continue to take action on the pricing side, we would expect by the end of the fourth quarter from a run rate perspective will be largely caught up and the price cost gap.
Spectrum, we're also constantly looking at our cost structure. So you did see.
We did take a charge this quarter of which will really start to accrue those benefits in 2022, but we're also being extremely mindful of discretionary spend.
Until we actually see that moderation in oil prices.
Okay, Great that's helpful.
Maybe just the medium to longer term question. If I just go back here some of the targets you laid out at Investor day.
You noted the 9% to 10% total sales growth, including acquisitions for years to 5%.
Ex and.
Levels of EPS.
And then $3 by 2020 for so I guess.
Obviously, this 1 quarter isn't going to make a big difference but.
Maybe I can just get your thoughts on how you see those longer term targets if they are still intact.
And what they would need.
From an M&A standpoint to.
Around there.
Is it more deals similar to you Paul.
I guess my impression was that you'd be focusing a little bit more on the industrial side. So maybe you can also just address.
How this came about so quickly thanks.
Okay.
In terms of our longer term goals.
We're very excited about.
To get.
The direction of the company I think nobody could have foreseen the semiconductor situation or the kind of the dramatic increase in raw materials that we've seen here in the short term, but in terms of the longer term goals of the company. If you look at what we're doing commercially what we are doing organizationally, what we're doing strategically.
The directly we feel very confident.
And our ability to achieve those goals and as we've said, it's not going to be of linear a linear right upwards there'll be some variability to it. So I think it's just normal.
In this type of business and the type of world that we're in today. So I think we're.
Very confident in our forward.
At the numbers.
Thanks.
The next question comes from the line of the G.
Josh Spector with UBS. Please proceed with your question.
Okay.
Hey, guys. Thanks for taking my question just around.
Forward, specifically fourth quarter.
If I look at what you're implying for the EBIT and performance coatings. It looks like the B of fourth quarter record and the significant improvement sequentially is that of sustainable level that we should bridge off of as we look into 2022 and I guess is there anything onetime ish that we should be considering.
<unk> as we look at that quarter.
Yes.
Yeah.
I mean, you are starting to read through on the fourth quarter, Yes, I mean at the midpoint of the range, we're going to be up around $280 million from an EBITDA perspective.
It's hard to say, if it's sustainable I mean, it really depends on what happens with raw materials.
And ultimately what happens from a of.
Pricing perspective, but as we get further into the second half of the year, we are expecting the pricing actions really start the showing up as well as we'll continue to get momentum on the cost structure side of the house the.
The other aspect that I would add to what Sean said is that we have taken.
During COVID-19 a number of actions.
Our cost structure and our cost structure is in a fundamentally different place. So the drop through that we expect to see moving forward is different than the drop through that we've seen that we've seen historically, so as we see a rebound in the refinish business the.
The continued performance.
Take industrial business.
As well as if refinish.
Net refinish of mobility surprises to the surprises to the upside there.
The profitability of the drop through that would occur is pretty substantial.
Thanks, No that's helpful. I appreciate that.
And just on <unk> I appreciate the 2021 estimates that you provided how does that compare versus the performance of that business. A couple of years ago is it similar to what you guys are seeing in refinish or is there anything notable to the point out there.
Yes.
We have we've certainly seen that business growth over recent years.
And it's doing very well.
Don't have a report out that we can provide on on prior outperformance, but it has been successfully growing business over time.
Okay, I guess can you frame that relative to 2019 at all so if youre thinking of refinish. This year for you guys is down 5%.
Is that kind of similar performance for you pull the meaningfully different.
I think we will.
Given we haven't actually closed on the transaction, we're being a little careful about sharing too much on the <unk> acquisition will be in a better place on once we actually have the closed to provide a little bit more.
Insight into the historical financial.
Okay. Thank you.
Okay.
Your next question comes from the line of Jeff Zekauskas with Jpmorgan. Please proceed with your question.
Thanks very much on.
In the refinish area sometimes.
So your mix is negative in this quarter was positive and then there's the reverse and mobility.
Yes.
What's the average mix that is did you over earned in the refinish business and you under earned in the mobility business.
Can you size that whats the the impact.
Either for the quarter for the year.
Jeff I wouldn't characterize it that we over earned on the performance side of the business and under earned on the mobility side of the business.
When we did see the volumes in the refinish business during the Covid period in particular and as we were first coming out of <unk>.
Covid of course, we saw volumes drop pretty dramatically in particular at the premium end of the market and we saw distribution essentially take inventories down to extremely extremely low levels and in particular of premium high moving high margin high margin products and so that net debt.
<unk> net volume impact also has a there's a mix impact but theres also on average an average price impact and so what we've said before it was that as volumes come back on the refinish business, we'll see price mix really start to normalize I also think that looking at second quarter of this year compared to second quarter of last year, It's a really.
Compare to draw too many conclusions from because last year's second quarter.
Really the depth of Covid in terms of impact on financial performance, just really create cement some aberrations.
Do think that the encouraging thing to look at is just pure price capture in refinish, and industrial which were at 5% to 6%.
Tough to Lee in terms of the in terms of the mobility business. It really has a lot to do with customer as well as regional regional mix and some customers were more impacted by the semiconductor outage than others and that certainly played in 2 average price mix.
And the.
In the mobility business as well as we saw some regional differences in terms of some regions performing better than other regions in the second quarter as it relates to the semiconductor shortage directly that has an impact on price mix.
So if I could just re ask the question.
In the normal mix in refinish and of normal mix and mobility or was it below average or was it above average.
So of refinish is getting back to a more normal mix as our volume is getting are getting back to more normal levels.
8 vehicle as Robert pointed out it was just.
Did you of anomaly last year that you are ending up with an on result, but I Wouldnt say were at normal levels, yet for light vehicle given the impacts from on semiconductor perspective.
Thank you.
Your mix is below average in both segments, but the conclusion, we should take.
That is a fair read through.
Okay.
Such on Q so much.
Ladies and gentlemen, we have reached the end of the question and answer session and I'd like to turn the call back to management for closing remarks.
Thank you everybody for participating this morning, and as always we look forward to any follow up conversations you'd like.
Like to have other I appreciate your interest in exalt, the and have a great day.
This.
Today's conference you may disconnect your lines at this time. Thank you all for your participation.
Okay.
Sure.
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Uh huh.
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