Q2 2022 Axalta Coating Systems Ltd Earnings Call
This quarter.
And are building momentum into the second half of the year setting up exalt or for significant earnings upside.
In the quarter.
We achieved adjusted EBIT of $151 million and adjusted earnings per share of <unk> 41.
Both of which were above the midpoint of our expectations. We set out in our Q1 earnings call despite incremental headwinds of $8 million.
Associated with foreign currency, and China, Lockdowns, both of which were higher than our original expectations.
When excluding the impact from foreign currency, we reported constant currency net sales growth of 15% with double digit contributions from every end market.
We benefited from a broadly constructive demand environment and yielded higher growth versus most of our markets. We also delivered a record of 10% higher price mix in the second quarter, which nearly offset the raw material and logistics inflation costs in the same period.
Im encouraged by the signs of stabilization, we're beginning to see across many input categories, which supports our prior expectation of recovering the majority of the cumulative cost inflation by yearend.
Moving on to slide four I'll give some more color on our second quarter performance globally.
Globally volumes improved 3% year over year, driven by solid demand trends and market share gains across the portfolio.
Growth was uneven across the regions with 10% growth in the Americas, leading all geographies.
This growth more than offset softness in EMEA and China stemming from the Russia, Ukraine conflict and extended China, COVID-19, Lockdowns, respectively. In total we believe these two impacts alone account for a 4% net sales headwind in the quarter.
We continue to expect a favorable demand environment in the Americas broadly and should see recovery play out in China in coming quarters.
Volumes improved in three of our four end markets.
Performance coatings segment volume was flat as solid refinish growth was offset by modest declines in industrial <unk>.
Mobility segment volume was very strong with 9% higher light vehicle and 13% better in commercial vehicle.
Mobility end markets as well as refinish greatly exceeded relevant industry growth rates.
<unk> differentiated technologies and superior service remain a powerful driver of our above market volume performance in refinish, we continue to sign new exclusive agreements with large multi shop operators and continue to make progress on our new business pipeline.
In mobility, we're beginning to feel the benefits from business wins made over the past six quarters, which in total we expect to contribute more than $200 million of annualized revenue.
And then industrial we book New wins this quarter in the battery protection space, where we see great long term potential with electric vehicles as we gained traction beyond just electric motor coatings, where we have a strong position today.
Operationally, the second quarter with our highest production volume quarter since the beginning of the pandemic.
With 7% sequential production growth yet the backlog of open orders across both end markets and performance coatings continues to be a challenge given supply chain constraints impacting our business.
Customer constraints remain prevalent in the quarter and continued to be a significant drag on growth.
These are most apparent in light vehicle and refinish, where both markets are operating well below normalized levels, given severe parts and labor shortages, creating more pent up consumer demand that should benefit our business and supply chain loosen.
Now, let's move to slide five for a discussion of key refinish market trends and highlights from the quarter.
In refinish, our industry, leading aftermarket auto coatings business, we had a strong quarter with volumes up 3% year over year and 13% sequentially. Despite the aforementioned geopolitical headwinds in EMEA and Covid Lockdowns in China.
We are winning new customers at a record pace year to date, we added nearly 1000 net body shops globally and over 500 stock points through distribution customers.
Our partners continue to recognize that we just have a better way of doing business centered around the most productive paint system in the industry with a significant technological lead over our competition in fact since 2019, while the market has contracted approximately 8% due to COVID-19, our refinish business.
Grown volumes by 5%.
We believe that we have gained several percentage points of share and expect this trend to continue going forward based on recent and expected wins.
During the quarter, we noted marginal improvement in body shop activity quarter over quarter, but activity remains in the high 80% and North America and low 90% in EMEA.
We see activity normalizing over time, driven by relief of body shop constraints and also returned to office dynamics, which we expect will lead to a step up in congestion rates towards pre COVID-19 levels overtime.
Moving onto industrial.
In industrial coatings volumes declined 4% year over year as strong demand in the Americas, namely from building products and general industrial was more than offset by declines in EMEA are general industrial and Asia Pacific Energy solutions.
Given the previously mentioned geopolitical and Covid headwinds.
Supply and production constraints, where again a drag on overall performance and industrial coatings by as much as a mid single digit percentage.
Earlier I highlighted a few wins in battery component coatings with several electric vehicle manufacturers.
This is an important milestone for us as we see a long pipeline of opportunity in this space with a long dated and market opportunity.
Moving on to mobility coatings.
And mobility coatings and industry leader in light vehicle and commercial vehicle exterior OEM coatings volume growth outpaced relevant industry production rates as we continue to drive share specifically light vehicle volumes improved 9% year over year considerably outpacing the flat global auto growth rates.
In commercial vehicle volume grew 13%, which far exceeded class eight truck production.
Which declined by approximately 1%.
New light vehicle and commercial vehicle customer wins are driving above market growth and setting us up with the right customer mix for wind global production returns to normalized levels.
Automotive OEM customers are increasingly confident about second half production rate improvements given the post lockdown ramp up of Chinese auto production and improve supply sentiment, we expect sequential market growth through year end with Q4 production nearly at $22 million bills, 17%.
Above second quarter rates and an annualized run rate in the high 80 million builds which was last achieved in 2019.
As we discussed on our Q1 earnings call, we see normalization of light vehicle production rates as roughly one half of the path to recovering the approximate $140 million earnings gap between our trailing 12 month mobility coatings, adjusted EBIT and our pre pandemic 2019 profitability levels.
The other half of the recovery will be from offsetting significant variable cost inflation, where we're making great progress and we will discuss further on the following slide.
It's our intent to fully offset the impact of raw material energy and logistics inflation on our businesses in every market, we're working with customers to implement the necessary degree of price increases to operate at more attractive levels of profitability and.
In refinish the team has done a remarkable job increasing price quarter after quarter and has been able to fully neutralize the impact of inflation in real time.
Further pricing actions were executed beginning in July in certain regions to address modest sequential inflationary impacts.
In industrial second quarter price mix improved by 15% year over year or 20% on a two year stacked basis.
Which for the first time in this inflationary period is fully offsetting the impact of inflation industrial.
Industrial however remains behind on price cost given the rapid rise of inflation that began in the third quarter of 2021.
As a result profitability is below target levels, but should improve throughout the year.
In the second quarter pricing stepped up considerably in both light vehicle and commercial vehicle, resulting in 12% higher year over year mobility price mix. This.
This is a great outcome, but the scale was insufficient to fully offset run rate inflationary impacts and hence the cumulative price cost gap widened in the quarter, but it was as we expected when we provided guidance in April we are optimistic that the highly inflationary environment is finally, beginning to stabilize the raw material availability.
Still remains tight and variable costs are likely to continue to rise modestly in the third quarter.
There are pockets of softening in some base chemicals, isocyanate as well as plastic and metal packaging, but we continue to face bottlenecks in certain pigments additives logistics and resins. Following recent force matures.
This will continue to be a dynamic environment Nonetheless, with the visibility we have today. We believe we will recover the majority of the cumulative price cost gap by year end.
Now I will turn the call over to Shaun to discuss our financial results beginning with slide nine.
Thanks, Robert and good morning.
Before I discuss our results I'd like to thank Robert for his leadership, which was critical in helping us drive our strategy and build a strong foundation for future growth.
He has been a terrific colleague mentor and friend and the team and I wish him well.
Moving onto our second quarter results net sales of $1 2 billion, an increase of 10% year over year for the second quarter, while constant currency net sales increased 15% driven by pricing actions demand strength across most of our businesses and benefits from two acquisitions, which were completed in 2021.
Constant currency net sales growth in quarter of a 12% increase from performance coatings, and 21% growth from mobility coatings, reflecting light vehicle up 20%, while commercial vehicles was up an impressive 27%.
Second quarter volume improved 3% year over year with positive contribution from three or four end markets offset by a mid single digit percent decline in industrial volumes, which was hindered by supply chain constraints as well as the macro and geopolitical headwinds within our EMEA and China regions.
<unk> also increased from our elevated Q1 levels as we are again unable to fully meet demand in the quarter.
Price mix contribution increased 10% up from a reported 9% last quarter with improvement across all end markets led by double digit improvement in industrial and mobility coatings, notably we are now lapping the 5% price realization we had in the second quarter of 2021 within both refinish and industrial.
During the quarter, we incurred a 25 million onetime noncash charge, which included a $20 million negative impact to net sales related to the restructuring of an existing customer sales agreement. This impact is excluded from our adjusted earnings during the quarter.
The restructuring was triggered as a result of a large refinished customer realigning their capital structure, whereby we gave some concessions.
We originally made a large upfront investment in 2018 as part of our long term sales commitment, which has provided us with very good returns.
With our customer exiting their situation with a very sustainable capital structure and balance sheet. We continue to expect this to be a valuable relationship and provide good returns for us going forward.
Foreign currency translation was a headwind of 5% on that sales for the second quarter, driven by the weaker euro and Turkish lira.
Second quarter, adjusted EBIT was $151 million versus $173 million in the prior year quarter.
The year over year comparison included approximately $23 million of EBIT headwinds associated with the impacts of the Russia, Ukraine complex, China, Lockdowns and foreign exchange, implying a nearly flat year over year earnings comparison, while excluding these effects.
Turning to slide 10 performance coating second quarter net sales increased 6% year over year, and 12% ex FX driven by a 9% increase in average price mix and a 5% increase from acquisitions with volumes remaining largely flat.
Finished reported a 6% net sales increase or 12% ex FX driven by mid single digit price mix benefit.
High single digit contribution from the <unk> acquisition, an above market volume growth, partly offset by the onetime noncash charge.
Volumes increased in every region, despite raw material supply impacting our ability to meet all of our demand with the exceptions of EMEA and China, where the geopolitical headwinds drove modest volume declines.
Industrial second quarter, net sales increased 6% or 11% ex FX driven largely by mid teens percent improvement in average price mix as well as low single digit acquisition contribution partly offset by modest volume declines.
Strong demand trends in most of the industrial end businesses were fully offset by supply chain constraints and geopolitical headwinds.
Performance coatings reported second quarter, adjusted EBIT of $125 million versus $140 million in the second quarter of 2021, driven by drop through benefits of price mix and acquisition contribution which were more than offset by headwinds from FX as well as higher variable and fixed costs.
The adjusted EBIT margin for the segment decreased to 15% from 17% in the prior year period.
Moving to slide 11.
Mobility coatings constant currency net sales increased 21% in the second quarter, including a record high 12% price mix benefit up from 5% last quarter.
Volumes increased by 10% it is great to see the team building pricing momentum, while also growing our footprint with strategic customers.
Light vehicle net sales increased 20% ex FX in the quarter, including a 9% volume increase easily outperforming global auto production, which was flat for the quarter price mix increased by double digits as the team continues to negotiate with auto Oems to recover lost profitability.
Commercial vehicles second quarter net sales increased 27% ex FX driven by customer wins and recovery from constrained production rates price mix also increased mid double digits mobility coatings reported second quarter, adjusted EBIT of $2 million versus 6 million in the prior year quarter.
Adjusted EBIT and associated margins in the second quarter were impacted by variable cost inflation with partial offset some positive pricing.
Overall price cost dynamics continue to improve as we saw our strongest performance in mobility coatings since the first quarter of 2021.
Moving to our debt and liquidity summary on slide 12, <unk> second quarter balance sheet and liquidity profile remains solid we ended the quarter with slightly over $1 billion in total liquidity.
Our net leverage ratio ended the quarter at four two times, reflecting a slight increase from four one times at March 31.
Net leverage remained somewhat elevated due to the seasonal phasing of free cash flow as well as incremental pressures associated with inflation and pricing within working capital and share repurchases totaling $200 million year to date, we expect net leverage to drop as we move to the back end of the year on an anticipated stronger full year operating results and the.
Expected free cash flow generation in the back half of the year.
On Slide 13, we will review, our third quarter guidance framework and full year commentary.
Our third quarter net sales, we expect between 15, and 17% year over year growth, including a 6% FX headwind and a 2% positive M&A contribution.
Topline guide also assumes high single digit growth for both volume and pricing continuing the momentum we have shown in the recent quarters we.
We expect to generate adjusted EBIT of $140 million to $165 million in the third quarter with DNA of $78 million inclusive of $23 million of step up DNA <unk>.
Currency translation is expected to be a nearly $10 million year over year, EBIT headwind driven largely by a stronger U S dollar versus the euro.
Interest expense for the quarter is anticipated to be approximately $35 million.
For adjusted earnings per share, we anticipate a range of <unk> 37 45.
For the third quarter inclusive of headwinds.
Our share basis from FX, and the Russia, Ukraine dynamic totaling five pennies.
Within our third quarter forecast, we further assume raw material inflation in the high teens percent versus the third quarter of 2021.
Our mobility global auto build rates are expected to be at 80% to $81 million for the full year.
At these levels, we expect to see annual volume uplift for market growth plus upside from new customer wins Likewise heavy duty truck build rates are projected to increase 5% in 2022 ex Asia Pacific and Eastern Europe , with our commercial vehicle volumes expecting exceed market growth rates, given our strong and growing position.
Regarding cost factors, we see stabilization in the raw material environment, but still expect a modest quarter over quarter increase into the third quarter with low 20% total inflation projected for the year.
We continue to make great progress on pricing. Therefore, we expect to cover the majority of the cumulative price cost gap. This year with some lag in mobility coatings being offset by strength in performance coatings.
Lastly, our typical second half weighted distribution of operating cash flow and a favorable outlook for sequential earnings growth should reduce our net debt leverage considerably by year end.
The macroeconomic outlook remains unclear and difficult to forecast. However, there are a number of constructive factors that should support sustained performance, including a resilient refinish industry and the ongoing post pandemic recovery 10.
Pent up demand is projected to drive resilience in our light vehicle and commercial vehicle end markets and low inventory levels throughout our sales channels.
Meanwhile, in the near term, we should benefit from continued share gains across most of our product categories are sequential demand recovery in China. Following severe second quarter COVID-19, Lockdowns. However, we do remain somewhat cautious in our third quarter outlook and favorable price cost recovery trends as variable cost stabilize and pricing momentum builds.
<unk> <unk>.
<unk> is well positioned to drive growth and generate cash across a range of economic scenarios given how our business is currently positioned with that I will now turn the call over to our cash.
Thank you Shaun and Hello, everyone.
And behalf of the board I Wonder first.
By thanking Robert for his nearly 10 years of service and contributions to this organization.
He has played a huge role in building this great company since joining in 2013.
And <unk> has accomplished a great deal as Daniela.
In particular, we are very grateful for his leadership and successful navigation during the unprecedented challenges these past few years.
With the accomplished leadership team Robert has put in place combined with our industry leading businesses. He leaves the company well positioned to accelerate the execution of our strategic plan to drive value creation.
Since joining the board in August 2020, I have gained a full appreciation of the potential of our businesses and I'm looking forward to stepping in as the interim CEO to continue to accelerate growth execute our strategic initiatives and unlock value for our shareholders.
Our senior leadership team is incredibly strong and the board and I have full confidence that it'd be bench of talent will continue to execute while I quickly ramp up in my new role.
With regards to the new CEO search and the entire board is working with urgency to identify the best possible candidate for the job.
And we will let you know as soon as we have made a decision.
I am looking forward to engaging with our global teams and investors customers and suppliers as we work through Robert's transition over the coming weeks.
And I'm sure you can appreciate it would be premature for me to answer many of the questions. You may have at this time.
But now that I look forward to getting to know many of you over the coming weeks and months and sharing with you our vision and progress as behind US many of the opportunities that lie in front of us.
Operator, please open the line for Q&A. Thank you.
Thank you I think I would like to ask a question. Please press star one on your telephone keypad.
<unk> will indicate your line is in the question queue. You May Press Star two if you would like to.
Sir you move your questions from the queue.
For participants using speaker equipment may be necessary to pick up your handset.
Pressing nektar team. Our first question is from Christopher Parkinson with Mizuho. Please proceed.
Great. Thank you so much for taking my question.
You've made a lot of strides.
Towards ultimately improving the cost structure across the businesses and in the second quarter, despite volumes coming back and your very impressive price realization on mobility margins were still a little bit lighter than the most of this were anticipating can you just add a little bit further color on to what's going on there.
How that result rolls into your <unk> guidance and anything else you think is especially pertinent. Thank you.
Chris as we expected and communicated on our first quarter call the price cost gap got bigger in the second quarter, given the timing of the raw material inflation and the cadence of the new price increases that we've negotiated.
We continue to expect market growth and our incremental volumes will continue to drive profitability from this point forward.
If you step back and you look at it I think it is important to note that.
Light vehicles really hit the lowest of the lows over the past few years given the pandemic.
Some of the downstream impacts of the supply chain and it's important to remember that the global production builds from 2020 through the current year are not part of the normal cycle, but more so driven by the previously unforeseen conditions within the industry and we believe a low point of the cycle that global production builds will sit in.
The high <unk> to low Ninety's production range.
But from 2020 to 2022, they've been in the mid 70 to low <unk> range, just highlighting how much of an outlier.
Few years event okay.
Yes, I think the important 0.2nd quarter Global auto builds was at $18, eight which equates to an annualized 75 million car builds so even though we had outperformance from a market perspective, and we're still at the sort of low lows from a global build perspective, but sequentially into the third quarter were actually expecting total exalt.
Cost gap will start to close but mobility will start to build a little further of a gap, even though we're picking up on price.
But certainly the volume impacts going from second quarter third quarter are going to help overall profitability. So you see should see sequential improvement, although marginal you should see profitability climb in the third quarter.
Okay. That's helpful and just Robert obviously its been on.
A pleasure working with you and I know you accomplished a lot of CFO .
Essentially some incremental cost efforts in navigating a very difficult environment during COVID-19.
If I may ask what are the one or two things.
If you were to say on that you wish you could have accomplished I mean, you've got a great team and Johnson, a fantastic job as well just what else are you kind of leaving on the table that you Hope you had the team continues to pursue thank you.
There are really two items one is one of the things that the team and I made a priority in 2018 was innovation. The company has always been very innovative, but we really stepped up our efforts around around innovation.
So we've deployed a larger percentage of our R&D technology and innovation budget to more step change innovation and not just innovations and products, but innovations in application and business model and frankly, and how we interact with our customers and we've got a couple of things that we're working on.
One in particular that I think could just fundamentally changed the game of one of the one of the industries in which we participate and certainly would have liked to see that to fruition, but I'll watch that from the outside and I'm really excited about that.
The second area that I think we've begun is really making people the top priority of the company.
We have always been the top priority of the company, but I think in today's world really focusing on developing talent and capabilities, giving every employee at the company a clear view to their career path and how exalt or can play a role in helping them fully develop and creating an environment where people can make a career.
At exalted as something that we really strive to do I think early on.
Kind of in that 2013 to 2018 periods, we had a lot of potential M&A transactions and there was a lot of uncertainty, but kind of 2018 forward. We really tried to establish a culture in an organization where people could see themselves working at the company for a long time and getting all of the development and career opportunities that they need here at <unk>.
Okay. Thank you so much.
Our next question is from John Mcnulty with BMO capital markets. Please proceed.
Yes, thanks for taking my questions and good luck in your next endeavors.
Tools.
Putting salt.
All growth trajectory, which you saw which I know is small group initiatives. So.
I appreciate that as well.
Thanks Jay.
Dig into I guess two areas, both somewhat related on the raw material front.
The $114 million.
Rice cost gap that we've got right now I guess, how much of that you see.
Getting back in the third quarter as part of as part of the guidance, we put out there how should we be thinking about that.
Yes, John that $1 14 is going to come down.
Modestly fourth quarter, Youre going to see a bigger decline.
Like we said in our opening remarks, when you look at the two year cumulative stack, we're expecting about $600 million in cumulative inflation across both raw materials and variable freight.
Are largely expected to make up that entire amount, but we don't fully expect to offset the entire $1 14 that you'd see there, but you will see a step up from third quarter to the fourth quarter as far as the progress goes.
Okay Fair.
Fair enough.
Also on the raw material front.
Robert I think you had mentioned.
Couple of course materials out there or are there kind of new.
For the industry.
I guess when you think about Q on the supply chain.
Where we feel like you can get all of it.
This quarter or is it something where youre still likely in the third quarter with backlog.
Youre going to have to work through as the supply chain continue to core up I guess, how should we.
Sure.
I think overall I would characterize it as we're seeing from an availability perspective, we're starting to see things get better and overall from a cost perspective, we're starting to see things get better.
The primary pain points at the moment are really pigments and alkyd resins, but there are a.
A few spots where there were there are still challenges in getting raw materials. So I think it's something that that will still be an issue for us is I imagine for other companies in the third quarter, but I think overall, we see the situation getting better and that's just on the raw materials side on the logistics side, obviously, there is still some still.
Some areas that are that are challenging but as it was one example, we are starting to see trucking have some additional capacity and driver availability as well. So I think we see some easing starting there.
Got it thanks very much for the color.
Our next question is from Ghansham Panjabi from Baird. Please proceed.
Hi, Good morning, everyone. Robert first off we wish you well in the future and of course, thanks for all the help over the years Rakesh.
<unk>, we look forward to working with you as well going forward.
On the <unk>.
Outlook for <unk>.
I guess your narrative seems very positive overall as it relates to price cost auto OEM and auto refinish.
Can you help us understand why EBIT would not be up more significantly in the third quarter relative to the second I mean, clearly, there's some headwinds with FX and macro uncertainty, but is there anything else, we should keep in mind as it relates to operating leverage.
Got you probably the biggest thing is really just the mix of business results typically we just see a seasonality pullback in refinish in Europe .
Think about sequential volumes in refinish, we're going to be down about 6%.
Year over year, we're going to be up about 2%. So we're still growing but thats really where youre seeing the mix of of the businesses impact the bottom line and then offsetting that clearly is mobility sticking starting to step up even further off the $18 8 million builds in the second quarter going to roughly 21 million builds and again the expectations, we're going to outperform the market on the mobility side, but the <unk>.
<unk> margin of mobility is clearly less than what we get in refinish.
And then FX as you know and there is a marginal impact on operating expenses as we continue to support the volume growth.
Great. Thanks, Sean and then for my second question just can you give us more color on what exactly is happening in light vehicle production globally, what's better versus maybe initial expectations and then on the new business wins that you've picked up can you give us a sense as to what is that being driven by and how this incremental business is impacting margins at this point. Thanks.
So overall I think we're seeing conditions in in China because of the business that we've that we've won there we're seeing that pick up we're also seeing favorable conditions in North America, given some of the business wins as well as some of the some of the build numbers.
We have seen some softening in the build numbers in EMEA. However.
We are making good commercial progress there and then lastly in terms of Latin America, we've seen surprisingly strong demand there higher than what our expert our expectations were and Thats. Both on the light vehicle as well as the commercial vehicle side, so thats quite encouraging.
And we should see about a third of that business actually impact the results for 2020, so roughly speaking and certainly it is going to continue to help operating leverage.
As well as variable margins, but certainly things are being camouflaged, just given the $18 8 million builds in the quarter.
Got it thanks, so much.
Our next question is from Kevin Mccarthy with vertical research partners. Please proceed.
Yes, good morning.
Our mobility segment price mix contribution accelerated quite a bit to 11, 6%.
Can you talk about your expectation for price mix in the third quarter and beyond my recollection is you have some prospective formulaic.
Benefits related to certain contracts and your.
Your auto OEM business, so any color there would be helpful for modeling the back half of the year.
Yes, just as far as what's implied in the third quarter guidance mid to high single digits coming through in mobility, but sequentially youre going to see continue to see growth.
As we progress through the year and certainly the indexing just given what we've seen on the raw materials side throughout the first six months, you're going to see part of those start to reset effective July one.
Okay, and then secondly, Sean can you update us on your latest thoughts for cash flow items, such as Capex and working capital in this extraordinary.
<unk> environment.
Yes, so I mean, we've spent roughly $70 million year to date.
The way to think about that slightly higher than the <unk> of the first six months, but that's certainly a lever that we could pull to the extent we start to see signs of a recession, but part of that capex is as to support future growth as well as productivity projects. So until we actually start to see those recession impacts.
We're going to hold on that lever, but slightly higher than the run rate year to date and I would add.
Add to what Sean said in terms of that step up and they are you see there that's really reflective of the higher selling prices and in terms of inventory, it's a combination of higher raw material prices.
As well as higher levels of inventory that we're carrying.
Where were able to opportunistically buy key raw materials that are in short supply. So that also is reflective of a little bit of operational hedging.
Okay. Thanks. Thank you both Robert it's been a pleasure and I wish you all the best.
Thank you Kevin really appreciate it.
Our next question is from PJ <unk> with Citi. Please proceed.
Yes, hi, good morning, and Robert Good luck Rakesh good to hear from you.
My question is on the OEM share gains.
What's driving the share gains in China does it are these with ice vehicles with Evs any of the new E&P product, helping there.
Secondly.
On the margin side on this new contract.
Do you do you expect higher or lower margins on these new contracts.
Because in last five or six quarters as you gain share.
And that's coincided with lower margins in the business. So I was wondering if any comment on the margins on these new contracts.
So I just would reiterate overall that margin recovery is the highest priority across the company and in the mobility business, specifically, we're successfully raising price and we're also growing volumes in the way that we're that we're getting that pjs technology customer in EMEA.
See in relationships and frankly, our service, but there is another another element and that's also just the quality of execution of our mobility team in particular on the commercial side, where they have made greater penetration of China domestics, both in ice as well as electric vehicles a top priority.
And so we've had a bit of a Swat team working there for the last year.
And they've had really really good results and thats not only confined to to China, but thats also reflective of efforts that have been going on in North America, as well as as well as in EMEA.
In terms of the overall profitability of the business actually the margins of the businesses that we've been winning are at or better than our I should say better.
And then some of the margins of the historical business because they are being quoted at current pricing levels. Therefore, you don't have the lag impact of inflation.
Great and for my second question.
Yes.
Can you talk about you said that OEM.
What are you sort of have more confidence in second half you talked about class eight production growing as well.
Something we're suffering from chip shortages can you give us an update on where chip shortages.
What's driving the confidence in higher growth.
And second half thank you.
So our confidence is really based on two elements. The first is what we're seeing in the data obviously from the industry industry sources in terms of what their projections are for the remainder of the for the remainder of the year.
The second element is what we're seeing in terms of what our customers are telling us. The other the other element is on electrification, it's become such a such a push by customers and that's really creating additional demand at the consumer at the consumer level. So I think all those things together.
Are giving our customers more confidence that as we go through the remainder of the year that they will see a step up in production obviously its not to the.
$95 million ish builds that we think they are eventually going to get back to you, but it's certainly moving in the right direction.
Thank you.
Our next question is from OFC.
<unk> is a febrile with Keybanc. Please proceed.
Thanks, Good morning, all Robert Best of luck with your new projects. It was a pleasure working with you always appreciated straightforward style and openness.
It seems like we're just in front of those positive inflection in the business later this year I think.
A lot of people would agree with that.
But I guess, it's sort of.
Maybe confidence was the timing of new stepping down so can you say anything to reassure people that.
Trends are as positive.
Yes.
As many expect them to be.
Well I think on the on the first part in terms of.
In terms of the inflection point its difficult because of this series of one macro event of after another macro event. After another macro event that has pushed out the inflection, but I think in terms of when we look at the business overall.
We're confident that there will be an inflection refinish of course, our most profitable business, just even a little bit of higher volume in the refinish business has a dramatic drop through effect from a profitability perspective, and as we start to see people, we hope to get back into the office here into the fall congestion periods pick up in the early morning and late afternoon.
Leading to hopefully.
More low impact type of collisions and repairs, we think that that will be very positive for the refinish business. We've also frankly been winning.
A lot of business in refinish and frankly, we've won more business than we're able to convert given some of the parts shortages out there. So it really set up nicely.
When we look at our industrial business, our industrial team has just been doing a fantastic job.
In terms of landing new accounts growing that business expanding into new into new areas.
Also on the come and then in terms of light vehicle, we've really stripped out the cost structure.
Down to the to the bare bones and are operating with a very lean.
A very lean cost structure with that business most needs at the moment is just volume and then of course, we have all the catch up on price. So that will also drop through so I think many of our investors have said to US look we don't know exactly when the pivot or the inflection point in exalt is going to be whether it's Q3 or Q4 Q1 occurrence, but we know that it's going to come.
Alright, Thanks Robert.
Questions here on cash.
So if you can say staying at Walter in the permanent CEO role as an option or when you roll. This out at this point for yourself.
Yes, hi.
Let me just again reiterate how great a leader of it has been.
It's really been passionate.
Dean.
And I firmly believe along with the board that has a great future for this company.
And I just wanted to make sure that no other hidden messages, Peter we're going to be focused on execution, we're going to be focused on delivering.
I think I agree that inflection point is going to come youre going to be.
Very focused on margins.
And really building great teams and focus on innovation that Robert and the team they've already started.
We are starting a comprehensive search for a permanent CEO .
And I don't want to comment it's too early and premature to comment on that but clearly it's something that's important for the investment community.
And I promise to be as transparent as Robert has been with all of you and you'll hear from me on the way diamond basis on that.
Great. Thanks, a lot.
Yes.
Our next question is from David Begleiter with Deutsche Bank. Please proceed.
Thank you and Robert again, Congrats and best of luck going forward in your future endeavors.
Thanks, David.
Just on the El Al killed resins is that just more of a U S issue or was it also European issue.
And what are you gonna allocation for those products and sell at what level.
It's predominantly a U S issue driven by our recent <unk>.
<unk> mature. Unfortunately, we do have other other sources of supply and we are working rapidly to try and.
Makeup for that volume as soon as possible.
Very good and just on the Q3 guidance at the low end it would imply it is down quarter over quarter. If it does occur at that low end, what what's driving that.
Sequentially lower EBIT in Q3 versus Q2.
Its assumptions around inflation as well as just China rebounding.
I covered in my prepared remarks, but we're somewhat cautious on China.
We are seeing a pullback and you can see sort of incremental impacts would bring us down to lower and I think we're pretty bullish on the mobility rebalance as far as refinish and industrial I think there's still some question marks on how quickly this rebound in the third quarter.
Thank you Sean I appreciate it.
Yeah.
Our next question is from Mike Harrison with Seaport.
Research partners. Please proceed.
Hi, good.
Turning and best wishes to Robert.
Was wondering if you could talk a little bit about the battery protection wins that you talked about it industrial what exactly is this offering and at this point.
Is it fair to expect that you could get additional commercial traction following the announcement of these wins.
Well first and foremost, let me say that probably one of the vectors that we're most excited about at <unk> is our effort around around electrification and within that.
Battery coatings, so we book new wins this quarter in the battery protection space.
And that's really where we see long term potential within electric vehicles as we gained traction beyond just our current electric motor coatings, and we see growth amidst the short the chip shortage is the emphasis on product development shifts to enable more electric vehicles, and we really have a robust a robust pipe.
<unk> of powder in E coat products for battery protection in all regions and we've been adding resources focused on product development and testing to support these opportunities and our application labs. We've also recently hired a leader to spearhead our electrification efforts globally.
<unk> at the company, who started this week and very excited about about what he is going to do but I think when we think about electrification. We've got a much broader perspective, obviously, we're one of the top companies in electric motor coatings, but our energy solutions coatings for which as you already know we've won multiple technology awards Theyre not.
Only used on electric motors, but they are used in all kinds of industrial applications wind turbine Gen readers transmission towers electric co conduits.
Fuel cell storage containers battery trees closures and covers.
So we're really very strongly positioned in that business already but theres also an opportunity around sustainability and sustainable energy generation, whether thats transmission and generation storage conversion.
Just goes on and on in terms of the opportunity we have there. So we'll be talking a lot more about these in the future.
Alright, and then I was curious.
Sure.
The refinish business.
When you guys see consolidation within so customers. Sometimes this can lead to a change in suppliers. I think you benefited from that if I went back. Several years are you concerned that there are situations, where you can lose some business as.
The result of a merger.
Ever happened in the past.
No on the on the contrary.
<unk> customers, obviously are some of the most sophisticated customers within within refinish and they tend to run trials.
They'll give each refinished supplier.
Certain number of shops, and they will run a test and when we go head to head and we're looking at productivity and we're looking at cost per labor per labor hour.
We rarely if ever lose and those types of head heads up competitions.
So actually as we see that we think that will bring even more business our way. So in terms of some of the recent activity that's transpired within the <unk> and even in the independent space.
We're excited about what those opportunities could bring for refinish and we expect to gain even more share.
Alright, thanks very much.
Our next question is from Steve Byrne with Bank of America. Please proceed.
Good morning, everyone.
It's Matt on for Steve.
Robert.
The comments you made about ripping out or I should say is lowering the cost structure in light vehicles in all these business wins right. So.
If we return to 2019 auto build rates.
Mobility EBIT return to that mid 30 number or would it be meaningfully higher.
Sure.
I mean hypothetically it could be meaningfully higher I mean, we still have the price cost gap to close so I think that's the one caveat to what you called out mobility volumes I mean, that's roughly half of the gap, we say the other half is going to be sort of the price side of the equation.
Yes.
That kind of gets to the root of my question.
Is the pricing structure different now in mobility coatings or do you still have confidence that this is a business that you can recover off.
Raw mat headwinds because I know everybody.
<unk> has been the hardest place for price for a long time. So I think we're just looking for.
Yes to answer your question I think we're very confident.
In the business and we've been through the cycle, we've been through this cycle before.
And we came back to <unk>.
Previous levels of profitability and as we go forward as we look at the again the cost structure adjustments. We've made the quality of the team we have running that business in the amount of market share I think we're even more positive on the business and the profitability potential than we were through the last cycle.
Alright, thank you.
Our next question is from Mike Sison with Wells Fargo. Please proceed.
Hey, good morning.
And good luck to you Robert I assume you just want to move to Cleveland.
All right.
Thanks, Mike.
In terms of the fourth quarter, and and look I understand it's difficult to forecast anything beyond one quarter. These days, but it typically.
Seasonally declined in the fourth quarter versus the third.
But you are you should get some more price price raws should turn more favorable in and add maybe mobility gets a little bit better, but what would you think about.
The challenges from third to fourth what do you think.
What do you think drives upside.
Versus the third and what drives sort of down the normal seasonal decline in the fourth versus the third.
So I guess, a couple of things Mike I mean, the price raw equation is going to continue to improve and theres going to be a fairly nice step down as far as the gap down from third quarter to fourth quarter, that's probably the biggest call out you see at the IHS industry forecasters gone from 20 million barrels up to 22 million barrels in the fourth quarter.
Just as supply chain and semiconductor.
Aspects start to get resolved, we continue to see that traction.
The other aspect is just as COVID-19 stays behind US we will have more confidence in China, and then more broadly within refinish, just as we continue to see congestion levels pick up.
They are really the biggest building blocks certainly the euro sitting at 100. So if currency was the move in our favor and you could also see a nice help there, but they are really the building blocks.
Got it and then I guess one question for a cash good to hear from me again, you had a lot of auto experienced partner Sigma Aldrich.
Thank you and the board are looking for for the next.
What characteristics you're looking for for the next CEO .
Yeah, Hey, Mike good to hear from you again.
Listen I think we have got a great foundation in the business.
It's all about continuing to execute that is going to be recovery in our markets.
I think refinish is a great business as Robert said, we are winning shares mobility.
We are also winning share, but we want to make sure we get it done to the margin levels and perhaps even enhance the margins from where we were historically that's going to be an area of great focus and on the industrial business. We've got a lot of Adjacencies, we're getting into the EV trend.
We're going to win new business. So we have lots of pockets of opportunity we want to make sure that.
With a strong bench that Robert has created in the company that.
The CEO is going to continue this journey.
As I said, it's all about execution and not changing strategy. We are on point in terms of delivering the commitments.
We and the board and Robert I've made and Thats. The singular focus of this business and it is going to be for the for the CEO .
Thank you.
Our next question is from Mike <unk>.
With Barclays. Please proceed.
Great. Thanks, Good morning, and Robert Best wishes on your future endeavors, and where cash I look forward to working with you once again.
Maybe this question for Shawn I, just wanted to ask on the $25 million hit from a customer recapitalization of some forgiveness, there I guess $25 million feels a bit lumpy. So can you just help us if there is any other similarly sized upfronts and our balance sheet and have you changed at all how you think about doing some of these upfront investments on the back of us.
Yes. This was certainly an outsized investment that we had done with a very large MSL back in 2018, there's nothing similar to.
So the situation that is currently sitting on the balance sheet.
This certainly was a big investment back in 18, but it adds provided really nice returns and just given the restructuring of their capital structure. I mean, there is a very nice sustainable future here and the partnership is going to bode very well for example.
Got it and then secondly, John just on leverage can you give us a sense of where you would expect net leverage to roughly in the year.
Yes, close to three five times.
Yes, maybe slightly better.
If we're able to really bring working capital down part of that will be dependent on if we see a little bit of deflation in the fourth quarter as far as some benefits from an inventory perspective.
But working capital as a percentage of net sales at the end of the second quarter were up around 14% and we expect that to get down closer to 2011% by the end of the year.
Great. Thank you.
Our final question will be from Josh Spector with UBS. Please proceed.
Yeah.
Yeah, Hey, Thanks for taking my question Heiko.
Thanks to Robertson welcome to cash.
On the industrial side can you provide a little bit more color about what you guys are expecting volume wise in <unk>, and perhaps what changes to <unk> versus <unk>. There was some temporary weakness or where things are worsening.
So second quarter, the third quarter, we are expecting volumes up slightly.
But I guess, where we're seeing a little bit of slowing as in <unk>.
Europe .
We hinted at that in the first quarter, we saw a little bit more of that in the second quarter and just given where we are through July we are fully expecting that in the third quarter as well and then the other aspect is just around China and I alluded to Thats, just as far as how quickly we're going to rebound from the COVID-19 Lockdowns.
And just to add to what Sean said and complement Theres also been supply chain constraints that have hit industrial a little bit harder than some than some of the other businesses, but those those three elements of the softness in China from Lockdown some of the pressure in architectural coatings in EMEA in the supply chain constraints those are three trends.
And elements that we do expect to get better. So essentially you can think of the industrial businesses being in a state of under earning currently.
Okay. Thanks, and just a quick follow up just in terms of the noncash adjustment that impacted refinished does that recur over the next three quarters M&A seemed a bit light in the guidance versus what we thought.
It will not reoccur it was it was a onetime event.
Shouldn't expect anything going forward here.
Okay. Thank you.
And that will conclude today's conference. We thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Okay.
Sure.
Okay.
Thanks.
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