Q2 2023 Axalta Coating Systems Ltd Earnings Call
With center the next available comfort specialist will be with you momentarily.
Oh.
Okay.
No.
Okay.
[music].
Thank you.
Okay.
[music].
Conference I'm, Andy your first and last name please.
Hey, Matt a name of the company with as well.
Thank you.
And which Scott will be dialing in for today.
Okay easy enough.
South Dakota right how generated.
Pay down an additional $75 million in principal of our term loan.
Given the improved visibility heading into the second half of the year, we have provided a 2023 guidance framework.
This guide reflects an expected improvement in second half earnings versus the first half and puts us on a full run rate to exceed pre COVID-19 earnings levels.
My main focus since joining <unk> has been to drive improved efficiency and performance across the portfolio of businesses.
This past quarter, we kicked off the launch of a significant upgrade to our ERP system, which sets the foundation for supply chain and pricing intelligence. Among other attributes second the further acceleration of our purchasing optimization program meant to address recent cost inflation.
Derisk the supply base and reduce variable cost volatility. We expect this to provide substantial benefits, which will start to be realized in the fourth quarter.
Third our supply chain enhancement program to improve planning throughput and working capital utilization.
This work enabled us to drive down inventory and increase our free cash flow for this quarter and finally, we also have a group looking at areas, where we can optimize the structure of the company to enable us to be more responsive resilient and profitable. We will begin to give you more detail about these programs as we X.
Acute our plans and begin to see tangible benefits later this year.
As we indicated last quarter. These programs will require considerable investment the ERP related costs will step down in the third quarter.
Others like the consulting spend will continue through the year end, but much more muted than the second quarter as initial fixed cost investments begin to be offset with the realization of the benefits.
This dynamic is reflected in our Q3 in 2023 guidance frameworks I believe these initiatives are attractive investments in that they have short term payback and accelerate our strategic goals. Please turn to slide five for more detail on our ERP implementation.
And ERP upgrade was needed to replace an inefficient 25 year old legacy system. This implementation has been planned for years globally, we have been evolving from six ERP systems to one and in doing so we will be eliminating hundreds of applications improving data redundancy and many.
<unk> the need for costly manual interventions. We believe this system will significantly reduce our complexity and provide real time insights into supply chain and pricing management.
We went live in May with our North America launch that included 11 plants and several distribution centers. Despite comprehensive preparation the scope and complexity of this launch led to some operational issues primarily centered in our large refinish manufacturing site.
Yet we ended the quarter on a very strong note operationally and commercially June was one of the strongest sales month in history for North America as such we believe the operational issues are now substantially behind us.
Despite the near record month, we had in June the operational issues limited our ability to fully deliver on customer demand in may which resulted in sales shortfall for the quarter.
We're now working to normalize the elevated backlog in the second half of the year.
Given the magnitude I consider the implementation of success, we needed to launch the system and begin operationalized the tool in doing so we gained valuable learnings, including insight into effective change management that gives me greater confidence for our remaining global implementations I want.
To thank the team for their tireless work to stand up the system and manage the myriad of new processes to deliver a solid quarterly result, moving.
Moving back to the results on slide six let me elaborate on our second quarter volume performance globally volumes declined by 4% year over year as growth in mobility coatings was offset by declines in performance coatings, we estimate that the operational issues, we encountered had an estimated 200.
The 3% negative impact on consolidated volumes predominantly impacting our performance coatings segment mobility coatings volume increased 13% supported by improved light vehicle and commercial vehicle production rates as well as previously discussed customer wins performance coating volume.
<unk> declined by 11% due to weak industrial markets and a lower refinish volume primarily related to our ERP launch China was the bright spot in the quarter as volumes increased 26% driven by light vehicle and the reopening of the local economy.
Let's move to slide seven for more detail on our refinish end market.
Refinish net sales improved by 6% in the quarter price mix was very strong and improved by 10% year over year supported by a blend of carryover and new pricing refinish volumes declined by 8% year over year, largely due to operational delays in North America as we saw stable.
Underlying demand.
Refinish market activity was largely consistent with the prior period, we see opportunity to grow market share and expand into adjacent markets in premium customer segment. We have over 850, new premium body shop wins year to date in mainstream and economy growth has been solid.
With over 200, new distribution points.
This quarter, we launched the Iris mix.
Fast efficient fully automated and completely hands free mixing machine for the automotive refinish industry Iris mix is a great addition to our productive single visit base coat and industry, leading digital color Matt instrument process. It is built on decades of innovation from.
Award, winning spectrophotometer, and AI based color Matt software.
With Iris mix customers benefit from high speed mixing and enhanced body shop productivity that completely eliminates the need for manual mixing.
Accurate color matching every time.
Simple to use automated operation, which frees up painters to do other jobs, while paint as being mixed and finally, an environmentally thoughtful design that utilizes 50% recycled plastic and reduces waste by delivering every last drop of paint.
In June we launched Iris mixed commercially in Europe , and we expect to serve the rest of the world beginning 2024 early customer feedback has been incredibly encouraging.
The order book is exceeding our projections with first deliveries beginning in August .
Our success is predicated on remaining the most innovative solution provider in the industry.
Iris mix expands our competitive differentiation and deepening our customer centric ecosystem.
When exalt Iris is paired with our single visit applications system. No. One has a faster more productive end to end processes.
This is why we believe we will continue to win and grow in refinish.
Moving to slide eight I will now cover the industrial business.
Constant currency net sales decreased modestly in the quarter as very strong price mix growth of 7% year over year was more than offset by 15% volume decline.
Volumes were better in Asia Pacific, but this was more than offset by double digit declines in EMEA and North America due largely to the construction market slowdown yet there is encouraging signs of stabilization as bookings in the second half appear modestly stronger than the first half rates.
In our building products category, we're seeing big investments from customers as they anticipate favorable long term market growth beyond 2023, several markets appear to be bouncing off historic lows, such as architectural extrusion and coil, which is forecasting improving into 2024.
The industrial team executed very well again on price and cost management, which helped to offset the volume decline.
Moving to slide nine we continue to build momentum in mobility coatings volume improved 13%, reflecting a step up in global auto and truck production versus the prior year as well as previously discussed new business wins.
Growth was broad based but especially strong in China, and EMEA light vehicle price mix contributed 3%, which included a 2% customer mix headwind.
In light vehicle 2023 auto production forecasts have modestly, but steadily improved year to date industry forecasters now project $86 7 million global bills, representing more than 5% growth over 2022.
This incremental volume growth is driving improved fixed cost performance in our business given the elevated age of the global out of fleet, we expect to see sustained global production for the near and medium term in commercial vehicle our customers remain bullish and the production outlook is strong for 2023.
For class eight Oems black logs remained elevated especially in North America.
We are monitoring demand into 2024 at some forecasters believe there could be a soft pocket, but as of yet we see limited signs of a slowdown with that let me turn the call over to Shaun for a review of our financial performance.
Thank you, Chris and good morning.
Second quarter constant currency net sales increased 5% year over year to $1 3 billion.
Adjusted EBIT improved to $155 million from $151 million in the prior year period inclusive of $15 million and headwinds associated with consulting and ERP related costs in the quarter underlying earnings growth was driven by better price mix. In addition to the lower raw material energy and transportation unit rates.
This quarter marks the first deflationary benefit we've recognized since incurring nearly $650 million of variable cost inflation through 2021, and 2022, representing an approximate 40% increase over this period.
Variable cost declined 5% year over year in the second quarter with <unk> and <unk> being the largest categories of drivers of the improvement.
Market prices for most import categories are now trending favorably from historically high levels at year end. We are also encouraged by early success in accelerating our cost recovery efforts due to the launch of our purchasing optimization program earlier this year, which we are clearly now seeing and what we are procuring today.
But better variable cost environment in the quarter was offset by $9 million and realized foreign exchange losses in the quarter as well as higher compensation expense driven by variable incentive compensation labor inflation and stock based compensation expense due to the expected profit improvements in 2023, we.
We are thoughtfully managing these increased costs and expect to largely offset the impacts over time through our ongoing productivity enhancement programs.
The cost of our productivity programs and the expenses related to the North American European implementation. As noted earlier also drove $15 million of temporary spending in the period in line with our second quarter guidance provided back in May I.
I will now cover our performance coatings results on slide 11.
Performance coatings second quarter net sales were flat year over year at $856 million, 9% better price mix and a 2% benefit from the absence of a customer contract restructuring charge impacting net sales in the second quarter of 2022 was offset by lower volume.
As Chris told you operational constraints in the quarter drove a sales shortfall in North America, which disproportionately impacted refinish volumes and the associated profitability.
Performance coatings second quarter, adjusted EBIT was $118 million versus $125 million in the same period last year improved price cost dynamics drove a significant benefit to segment earnings in this quarter, but the impact of lower volumes and the allocation of roughly $10 million and costs associated with the enterprise projects led to the <unk>.
Year over year decline.
Industrial earnings were relatively stable year over year, as proactive cost management and favorable price cost, mostly offset lower volumes.
Moving to Q2 mobility coatings results on slide 12.
Mobility coatings net sales increased 16% year over year to $438 million.
Mobility coatings, adjusted EBIT improved to $24 million from $2 million in the second quarter of 2022, despite the allocation of $5 million and costs associated with enterprise projects in the quarter.
Growth was supported by strong volumes and a favorable year over year price cost benefit.
Notably, our China business made considerable contributions to year over year improvement given an attractive mix of high growth customers at healthy contribution margins.
There is clear improvement in the underlying earnings power of this segment.
Momentum is building into the second half of the year, where I expect us to show further earnings and margin improvement in addition to volume growth.
Now turning to our debt and liquidity summary on slide 13 <unk>.
<unk> balance sheet continues to improve and our liquidity profile remains strong.
We ended the quarter with just over $1 billion in total liquidity, including a cash balance of $518 million free.
Free cash flow in the quarter totaled $99 million compared to a cash use of $14 million in the second quarter of 2022. This is an excellent result that we expect to continue as we prioritize working capital.
And realized profitability improvements for the second consecutive quarter, we voluntarily paid down $75 million in principal on our term loan, which now brings the year to date voluntary paydowns to $150 million.
Gross debt reduction remains a high priority as we look to offset the impact of higher interest rates and strengthen our balance sheet.
Note that we are also well positioned to explore other opportunities to reduce our interest expense given the recent exploration of the soft call penalty on our term loan and following a favorable turn in capital markets over the last few weeks.
Our net leverage ratio was three six times, reflecting a slight improvement from three seven times at March 31, and.
And we expect operating performance improvements to drive meaningful deleveraging on both a net and gross basis throughout the remainder of the year.
Before concluding I would like to extend my gratitude to the exceptional exalt the team and the board of directors with whom I've had the pleasure of working with for the past decade.
Being part of this journey over the last 10 years and being part of such a talented organization has been an immense privilege.
My best wishes go out to each one of you, including our analysts and shareholders. Your partnership Trust and support have been greatly appreciated during my tenure here at <unk>.
Now I'll hand, the call back to Chris for an update on guidance and concluding remarks.
Thanks, again, Sean for a decade of commitment to <unk>.
Moving to slide 14 to review, our Q3 and 2023 guidance.
Third quarter, adjusted EBIT is expected to be between $160 million to $175 million or $230 million to $245 million in adjusted EBITDA for the full year 2023, we expect adjusted EBIT to be approximately $6 30 to 650 million corresponding to adjust.
<unk> EBITDA of $910 million to $930 million inclusive of $15 million in consulting costs incurred in Q2, which will amount to 13% increase over the 2022 at the midpoint. This reflects an EBITDA level, we have not seen since 2019 and an improved earnings run.
Rate entering 2024.
Our full year guidance framework assumes a mid single digit price mix benefit for the full year, which implies a low single digit exit rate in Q4 typical seasonal demand patterns are expected in the second half, but volume for the year is fairly flat with mobility recovery offsetting.
Real softness.
<unk> does not currently contemplate fully addressing elevated backlogs and raw material procurement is trending favorably we expect to realize a mid to high single digit percent benefit in our variable cost for the second half of the year, which should provide a boost to margins and how.
Mitigate elevated operating expenses, we are increasing our full year 2023 free cash flow guide to $385 million to $425 million from 350 million following a stronger pace of working capital release than was previously expected as well as a slight.
Lower capex forecast as we focus on capital allocation prioritization.
Im encouraged on how 2023 is shaping up we are well on our way to returning to pre pandemic levels with a path to unlock even more earnings power in the quarters to come I am proud of our global team for their focused execution and commitment they have demonstrated through the first half <unk>.
Potential is robust given our market leadership positions growth platform talent and technology, all of which I believe will not only support but drive long term growth and profitability.
Sean and I will be pleased to answer your questions. Operator, Please open the lines for Q&A.
Thank you we will now be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Okay.
Thank you. Our first question comes from Christopher Parkinson with Mizuho Securities. Please proceed with your question.
Thank you so much.
Just given everything that's going on the <unk> guide and with FX <unk>.
Some carryover pricing trends in the marketplace. It obviously implies a fairly.
Decent hit on volumes and can you help us just kind of think about it.
What we should be seen on a segment level in the third quarter, what actually flows into that presumably some of that is the ERP and probably just as importantly, how to bridge that with your <unk> expectations, just given the annual guide any color on that would be very helpful. Thank you.
Hey, Chris with Sean maybe I'll start here.
From a volume perspective, we're actually expecting third quarter to be somewhat similar to the second quarter.
We're not baking in any sort of broad recovery as far as bringing the backlogs down we're not expecting them to get any worse and certainly that could provide a little bit of upside if we're able to close that gap, but when you think about volume and pricing. It should look relatively stable since the second quarter, we will certainly start to see a little bit more of that benefit from a <unk> perspective.
Again, we're probably a little bit conservative just given some of the priorities around bringing down working capital. We're certainly not maturing as much from a raw material perspective, as we have historically given the prioritization there in there than just the lower dollar inventory actually working its way through the balance sheet.
That's part of the reason why youre not seeing bigger margin uptick in the third quarter and then it's a similar cadence into the fourth quarter again, there's probably a little bit of upside if we're able to close the gap internally, we're certainly focused on closing that backlog gap.
And again that would probably get us to the higher end of the range that we provided on the guidance slide.
Maybe just picking up from Sean and al breaking down into each of the individual III businesses. So obviously mobility with the seasonality of the year.
Europe , and North American shutdowns for two weeks in July plus.
What what is there anything else you know going on there because I think obviously, presumably it seems like everything's going very well it seems like you're gaining shares with the Msos Ah top tens as well as a lot of the tail is there anything else that you know you think investors should be paying attention to it I mean, it seems things are going pretty well with iris in the lunch there in Europe , but just anything else we should be monitored.
Ring into 2024 would be very very helpful. Thank you, Sir sure, Chris and maybe I'll I'll.
Absolutely the stories very very strong and.
If you look at it purely from a volume perspective, and look at that 8% a portion of that is some volume compared to last year that we exited at some low low margin business in lantana. The rest of it is all associated with our ERP launch a specific to the north American impact and so any.
<unk> that we have there over the next two quarters essentially show stable growth stable and growth in that business and to your point Iris will do nothing but help us to enhance and grow the business going forward. So yes with the exception in Q2 and Q3 of our decision to exit some low low margin.
Business in Latin everything else is just the impact from the ERP launch.
Just just add on I mean, we're still expecting record profitability in 2023 for refinish, we still have a lot of the underlying tailwinds as we think about market recovery, both in North America as well as Europe .
Still see with at the body shop level of all time highs.
As well as occupancy rates essentially stone at roughly 50 per cent in North America. So we continue to see upside.
But we're gonna bring down this backlog over time and I think what we saw in the second quarter was stability around demand. So we're really happy with all that businesses performing and the expectations are extremely high as we move forward.
Thank you.
You're welcome.
Thank you and next question comes from John Mcnulty with BMO capital markets. Please proceed with your question.
Yeah. Good morning, Thanks for taking my question and Sean Thanks for all the help over over all the years.
Just wanted to dig a little bit more Christian you spoke to when you first came in I guess on the last quarter call you spoke to price recovery Ross productivity supply chain optimization et cetera, I I guess now that you've been there for you know call at six seven months or so I guess can you help us to frame a little bit in terms of how.
Oh, you're thinking about the upside or margin opportunity. Maybe you know how you are thinking about 2024, if you're comfortable giving that kind of color at this point as to how you're thinking about some of the improvements that you can you can see coming out over the next 12 months or so.
Yeah. Good morning, John that's a great question I mean, I think if you look at our queue to we had good performance in the quarter, which was just unfavorably impacted by our ERP launch. It that was primarily around one planned and if you take that out our guidance puts us on record earnings level, Despite our investments and enterprise programs and <unk>.
Basically some elevated compensation has been compared comparing this year to last year and if you talk about all those positive catalyst half price makes that we talk about this quarter is up seven per cent price cost improvements continues to attract well and again, we do see us as we head into Q3 and Q4 price.
<unk> will be a little bit more muted as you know.
As we started the year, we had about $120 million of kume price cost gap across two of our businesses. We have about 60% of that resolved across the mobility in industrial business and we expect to have that solved through the air and then talking about additional speck of positive cats catalysts specialty.
<unk> with the exception of specialty rods like T. I O two the raw material.
And if it is Shawn talked about continues to attract well for the second half and we do see that being a positive tailwind into into Q4.
And so when you take all of that and I think if you take a look at our queue for guide.
At two what we have built even with the guide we had without the upside of solving the backlog in the refinish side it puts us at a midpoint.
At 243 and at the high point, what you will get is the second best quarter in the history that 10 year history of exalt up in terms of a Q for performance usually we thank you for coming down and if you take the top half the top end of that guide it essentially puts you at the best best.
Mormons.
<unk> with the exception of 2020, where we have obviously had to take some actions to get there. So just talks to the underlying performance that.
And the company obviously once we get past these operational issues that I do believe we will have more than salt over the next two quarters.
Got it but that's helpful call and thank you and then maybe just the second one I. You know you you mentioned some mixed issues in the Ottawa area in the middle of the the price mix was it was a little bit lower than I guess, what we were looking for it sounds like the pricing is actually pretty solid and it was really just a mix issue can you just give us a little bit of color on on.
Such that out a little bit.
John I wouldn't characterize it as an issue it just happened that we sort of a little bit more volume in a particular aware that it has a lower price point.
It's not anything structural as far as changes from a mix perspective, but it was about a 2% headwinds when you're thinking about price mix.
Nothing to be worried about an upfront.
Got it thanks very much for the caller.
Thank you. Our next question comes from Joshua Spector with UBS. Please proceed with your question.
Good morning. This is a link as stolen or congestion I just wanted to get back to the sequential assumptions and your three too. Thank God, it's from the bridge there.
We have the help from the law raw materials, we got the impact of the opinion that consult investments rolling off and then the impact of the loss volumes catching up so each of those three buckets snobby about $15 million H 745 million sequential improvement on parole. So.
Normally your seasonality is a sort of 15 to 20 million sat down.
So that's like a $25 million to $30 million sequential benefit. So I bet. Your garden says only up kind of 10 to 15. So I'm just sort of wondering what are the other offsets there that I'm kind of missing missing in the bridge.
Lucas, we're not currently contemplating bringing down the backlog in the third quarter. This where I had one earlier and that's potentially upside, but right now that's not baked into our guidance. So.
So when you think about pricing is going to be stable from the second quarter of third quarter from volume perspective, we're expecting stability across all the end markets light vehicles, just the one call out and you'll see in some of the industry forecast Europe is just typically down and we're expecting China just had a fantastic June and.
Industry forecasters are expecting a little bit of a pullback.
Seasonally and then yes to your point there will be a benefit from the consulting cost. They don't entirely go away, but the majority will go away and then we'll see a little bit more of a V hawks them up and that's essentially a bridge.
Great. Thanks, and then just on my ability. So I was just wondering there if he could help us understand why turning student kind of sequentially improve into the second quarter. So it shouldn't there have been some benefit flowing through from low enrolls in the corner and what are you thinking in terms of margins implied in the third quarter God Yeah.
So again, we tried to converse in the underlying or the overview remarks, but there was about a 5 million dollar headwinds as far as the consulting engineers ERP spending from enterprise perspective, they got allocated to mobility 2000 for any of it becomes 29 and certainly year over year, we are seeing some incentive variable incentive comp headwinds as well.
Stock based compensation, which is impacting margins from a year over year perspective.
And maybe Lucas just staying on the ability for a bed and just.
I view this as a great story.
As we look heading into 24 and I just want to jump off maybe shots.
<unk> comments here, if you look at a 24 million dollar EBIT for the quarter and you'd tack on to $5 million.
Pretty much have it run right you can essentially annualize that and it puts you in north of $100 million as we look at the full year for 2002.
And if you would take that in perspective and look at a very good year of 2019, we were about 140.
$40 million of Ebert with $89 million bills. So we are about $3 million bills lower and as we see that strengthen the auto market driven by let's call. It demand forecasts not only from our customers, but where I have chest is going for.
Provides a good potential fraud prolonged upside cases, as we head into 24 and also on the heavy side, we're seeing about seven months a backlog so.
Certainly something that you can see that the businesses really well on track to double digit EBITDA here are the teams are doing a great job outpacing the market as well as our peers here.
Thank you.
Next question is from <unk> free mouse with Keybanc capital markets. Please proceed with your question.
Alright, Thank you and good morning, everyone. So you're implied fourth quarter EBITDA guidance is about 242 million.
How should we think about this as a as a base for 2024, so that business for Q include the majority of your price cost benefit and where do you think there is additional margin opportunity in 2024 and also.
Volume opportunity next year.
Yeah, Alexi I mean at the high end it would apply about 250 to you know even a contribution in the fourth quarter.
When you think about the price cost dynamics, regardless of inflation or deflation environment will continue to push price within refinish I mean, that's an area, where we continue to innovate and provide value to customers and we look to push through price you know some of the other businesses as Chris mentioned young we are.
Largely catching up unexpectedly caught up by the end of the year there.
There could be some marginal pricing it just depends on the pace of deflation the bigger benefit really is expected from a run rate perspective around deflation. So.
<unk>, we're we're procuring inventories were probably down low double digits.
As far as the back half of the year, we're expecting mid to high single digits as far as the benefit and the P&L. So that will continued on lines and provide potential margin upside as we round the corner in the 2024.
And maybe you know, we we have talked about consulting and obviously there are three elements of the consulting spend the one obviously with the specific to the ERP project.
And the support that it provided a I S folks, but on top of that we have efficiency projects, one focused on reducing our inventory, which is how we were able to increase our working capital guide for the the year as well as you know drive about $90 million in reduced inventory, but.
The next one year out I like C. As a purchasing initiative that will favorably in fact, our materials performance beyond just.
The indexing, which we expect to see a better.
Drop through after the inventory flow through to hit the P&L somewhere in Q4 and prepare us for.
2024 as well.
Yeah. Thanks for the caller related to this I guess by my estimate that you'd be spending somewhere around 45 million was here are ERP and it's not a consulting costs 15 million.
In the second quarter, and perhaps $10 million per quarter in the <unk> in the back half.
How how long do you think all these costs are all in.
Here in 2024 versus 2023.
Well I I think if you'd told us what we have it's about $30 million and what we are saying $15 million is obviously associated with our ERP launch any alexi.
Alexi simply put this with that 25 year old old system legacy system that we needed changed this essentially takes six ERP systems globally and puts it into one it's four years in the making and it's certainly something that we need to be able to manage our systems and and essentially have the ability not only.
To have pricing, but also operational and supply chain intelligence. So again. This was a project that had over 300 folks working on it impacted 1100.
Employees.
And impacted 11 plants and a multitude of distribution centers and we went through this obviously had the impact at one plant, but I had a banner launch at all the other sites.
So obviously very little in terms of payback from that however on the $15 million of.
Additional expense on consulting this was really to prepare ourselves for the back end of this year and really get us ready for 24 and all of these have less than a two year payback.
Thanks, a lot.
You're welcome.
Thank you. Our next question comes from Cafe Fisher with Goldman Sachs. Please proceed with your question.
Yeah. Good morning, if we could I mean I'm just looking at your margins both what you've done this year. So 16 six and this is EBITDA margin 16, six in Q1 17 five in queue to the mid point of your guide for Q3 is 18, four so basically you're <unk>.
Being up almost a per cent per quarter sequentially within the implied guide when you get to queue for is for a 17, eight EBITDA margin and with raw materials kind of falling throughout the year and they are trending down as we speak why wouldn't Q4 with its increased <unk>.
Revenue sequentially from Q3 continue that trend of improving margin.
You are seeing the dynamic in the fourth quarter, just seasonally with some of our end markets dropping off with the the holiday month in December .
But I guess I pushed back on that because your sales are up $100 million at the mid point from Q3 to queue for so some things may be falling off but what you're saying is actually the company is still growing nicely, 5% sequentially. So <unk>.
Something in there doesn't triangulate.
Okay.
Point too you know there are certainly opportunity from a margin perspective, you know focused on the procurement as valid as well as closing the backlog and if you look at upper end of the fourth quarter, being 252 million and EBITDA and potentially providing upside of some of the other aspects coming to fruition. There are certainly could be outside from a margin person.
<unk>.
Okay.
And then just cause I'm getting paying quite a bit you know I'm I'm Bloomberg, they're they're still seems to be some confusion around the sequential revenue build and maybe we can attack it kind of Europe yourself in your guide Europe zero to 2%.
Year over year in Q2 on revenue excluding effects.
And price.
Price mix should still be a pretty significant benefit I would think so that would imply year over year Q3 volumes may be down two ish percent. So one could you help with that and then if that's the case kind of where we see it.
But then it seems like again with a bigger revenue number in queue for we start growing volume kind of low single digits in queue for what improves in that number from Q3 Q4 in your mind.
Q2, Q3 guide.
I think we covered this but it's industrial and refinish are largely flat.
[noise] mobility, you're seeing a slight fullbacks, just given the European and China dynamic.
And then from Q3 Q for.
Seeing a slight uptick as it relates to industrial volumes and a little bit more mobility, just as easily recover from Q3 and Q4.
Okay. Thank you guys.
Thank you next question comes from Vincent Andrews with Morgan Stanley . Please proceed with your question.
Thank you and good morning, just wondering with the issues with the European implementation in the second quarter, you have to provide any terms or or make holes or anything for customers in order to maintain that backlog in the north American market and and or are you.
Making any conservative.
Conservatism into the back half of the year for for any further European implementation issues yeah.
Yeah, So I'll take that and good morning, and thanks for the call. Vincent. So yes, we are in terms of having some cushion and let me just walk through it again the primary impact of our ERP launch was it specific to our refinish business and what we did here.
Obviously, we we launched on May 1st.
And may was a tough months across.
I already finished business associated with our plant in Virginia. However, you know just to put it in perspective that teams across the globe rallied in June and we had if you put exalt into perspective exalts has been around for 10 years just over.
10 years, and 123 months, we had the second best month in the history of the company from a sales EBITDA and a margin performance. So it just talks to the the foundation and what the teams were able to rally back and accomplish in the month of June coming out of our issues and may.
And so as we built our forecast for Q3 and Q4, we did have a backlog obviously as you know there is a pickup in Q3 four we finish so on top of that we have the backlog and what we have done in our forecast is provide the ability for us over two quarters to be able to to bring down.
Normal lives that backlog, but the benefit of that is not in our forecast so.
So all that sad in terms of the loss of customers. As you are aware of this is that we finish business and we we we believe we can all of these customers. We don't have the issue of Destocking that you might've heard from others, what we have here.
What we have done is obviously reduce our inventory levels at our distributors and R. At R.
The channel and what we're doing is replenishing that as well as making sure that we deliver to our customers what they need so that's exactly what we're focused on over the next two quarters.
Just as a follow up the SG&A is up $30 million can you just helped me understand.
The components of that ours, the consultant spending in there.
As some of that investment spending or just sort of what's the bridge there and how should it play out into the balance of the the the year.
Yeah. The vast majority of the increase relates to incentive compensation last year, we tracked well below our target from a bunch of perspective.
Global internal comp.
Ranged around 70% of the payout we're tracking above.
Incentive comps this year. So that's really the vast majority of a headwind from an SG&A perspective.
Okay. Thanks, guys. Good luck Sean.
Thank you.
Thank you. Our next question comes from David and later with Bleach a bank. Please proceed with your question.
Good morning. This is Anthony Mirken Dirty on for for David just back on the ERP can you quantify the benefits that you're expecting to realize by Q4 and then.
We should think about this floating through the piano in 2024.
Yeah, So we'll be providing the benefits with the RP launch as part of the 2024 Guide you know, we're expecting limited benefit other than the absence of the cost of we incurred in the second quarter as it relates to third quarter in fourth quarter right. Now. It's it's the focus on you know continued stability of their plants, but you know there are more.
Quickly turned to value realisation as part of this European implementation, we redid, our integrated business planning, we put a new pricing tools and obviously, we got a lot more visibility into transactions and working capital that we expect to benefit in 2000 2000 for it but again, we'll we'll provide you know more guidance when we're out with the 2024 guidance contract.
Understood.
And then there's other geographies rolled out.
Their own European implementations do you expect similar I guess operational hurdles and cost that we saw in North America or is this process more more streamlined since it's been done uhm already.
That's a great question one of the things that we are doing is going to take a bit of a pause for about a year and get.
Launched with other regions, such as Asia, and last time, and then start with Europe , which would be the next launch large region. So we're gonna probably take this over the next two to three years and obviously you know obviously.
A big lessons learned that we have from here as well for us, but again as I said when you consider the scope scale and magnitude of the project I am pleased with the implementation.
And so there are some lessons learned on warehouse management and shipping management that we will take antibiotics. We go forward in future launches.
Got it and just to be clear so Europe would be the next large launch when that time does come followed by Asia and let them know know note. The next two launches would be Asia, and Latin Europe will be left understood. Thank you.
Thank you. Our next question comes from God Chammah Punjabi with Barron. Please proceed with your question.
Hi, Good morning, everyone. This is this is actually Matt krieger, sending it pronounced them.
So.
Given the major shifts in pricing over the last couple of years now transitioning to a more favorable raw material sourcing environment.
Can you talk a bit about what you're seeing from a competitive backdrop for perspective, you know, maybe highlighting any key gains by and market a region as well as where you may be facing some comparatively stiffer competition.
Sure, maybe I'll start and I'll turn this over to Shawn, but you know as I look at price mix at as the company as we said in our prepared remarks, we were able to do 7% and I think that teams have done a stellar job, 10% and refinish, 7% in industrial Eva.
With the volume is going down 15% in in both mobility, even with the 2% headwind we did 3%. So overall as a company we waive accomplish seven per cent and shows that the continued to focus on on driving both price and cost.
It is becoming more muted in the back half and let me talk to it in this sense. We started the year with about $120 million of kume price cause negative specifically in two out of our four and markets slight vehicle and industrial and the teams have done a stellar job with.
More than half of that being resolved as we sit here today and my expectation is by the end of the year and starting into 2020 foremost all of that will get resolved. So we will pricing will become more muted as we have stabilized Dennis especially ones. We also started seeing the benefits of the raw materials inflation so far.
Far we have we have obviously had some pushback with customers, but again the performance of the business indicates how well this has been sticking.
Great. That's that's very helpful. And then you know your your earnings release in your presentation.
It's fairly unique in that it doesn't reference destocking at all it may be the first release that that I've seen like this throughout the reporting period.
Can you provide some details on any potential impact from supply chain destocking across the business during the quarter.
And if there wasn't an impact why is exalted business Ah so uniquely immune at this point.
So Matt I mean, we just don't go through distribution and most of our customers are just not holding as much refinish keeping that aside we actually destocked in North America within distributions is because of the European moment. So that certainly provides some upside for.
Where we saw some marginal destocking was really within building products in North America, and so you saw the 15% pullback within industrial you know building products.
Was really a core driver to that certainly building products market weakness, but there was some element of Destocking again, it's just not as pervasive or an issue for us and why we're not calling you know.
Okay that that makes that makes a lotta sense across the mobility businesses. Okay. Thanks, that's it for me.
Thank you and next question comes from John Roberts, which credit Suisse. Please proceed with your question.
Mm. Thank you best wishes, Sean and welcome Carlin.
I believe exalt it sounds coatings for auto parts.
Painted offline and then shipped to Oems.
Does that part of the business serves a leading indicator it for the OEM business and what are you seeing in the parts business.
Well overall, John we're seeing.
Very very strong demand across.
The light vehicle business.
I mean, we're exceeding initial demand forecasts as you can see I adjusted keeps ratcheting it up a bit a bit a bit we're up at 86.7 million bills right now and on top of that all of the preparing for this all the initial checks that we have done with the customers also shows.
Very strong underlying demand and on top of the fact that the aged auto fleet and the fact that we had for years of under building.
It's creating what I would call it a med too.
Sharp two midterm.
Upside case, and then on the heavy side truck backlogs will remain incredibly strong again doing some customer checks. We have what we're seeing is that our customers even with record outputs are sitting with almost seven months in backlog. So both businesses do look very strong on the light on the.
Heavy side there is some concern in 2004 of a possible softness from something some folks, but certainly what we're not seeing it at this point.
Mmm. Thank you.
You're welcome.
Thank you. Our next question comes from Kevin Mccarthy, We've been vertical research partners. Please proceed with your question.
It's good morning in your mobility segment, you you've talked in the past about commercial courage and an effort to restore margins. So my question would be at this juncture the cycle, where we have raw material costs coming down sharply in some cases.
Do you think you can continue to move price higher on a sequential basis and mobility exclusive of mix or or does that become impractical. You know based on your recent customer experiences.
What we're seeing right now so I I would say the pricing on mobility.
Especially I believe on their light vehicles dark side started off pretty slow and.
As you as we rewound the clock a year year and a half ago.
The most significant let's call it price costs kume negative was sitting in our mobility business as we sit today, we still have the largest price cost kume gap sitting in mobility, but the teams are doing a great job trying to resolve that working with our customers.
And as I look at the second half of the year, we do see that becoming more muted we are starting to essentially get to a point that as the as the costs come down the price cause Kim gap is also starting to level out. So we do believe that it'll get more muted.
But overall, our customers understand that we need to invest in this business there is absolutely.
Or at least significant amounts of investment, especially on the on the light vehicle mobility side that we have to keep doing to keep her head in terms of the product requirements for our customers.
So certainly it hasn't been a a long discussion, but I believe we're in the right spot and as prices come down here, we are starting to mute those discussions going forward.
Maybe to add you know roughly 40 per cent of those contracts or an indexation. So you'll see some price give back but you should you know contingency variable margin improvement as we're seeing the deflationary benefits. The team is very focused still we're still a 40 to 50 behind at the end of the queue to run price Costco So the T.
<unk> is continuing to drive it's just a lot more selective looking OEM by OEM region by region. So I do think there's continued opportunity as a team continues to execute on margin recovery.
Okay. Thank you for that and then.
Currently.
How would you compare iris to your your existing Daisy wheel product and also your competitors moonwalk product is it essentially.
Daisy wheel 2.0, or or something that's more of a step function.
<unk> and and are their financial implications, we should be thinking about as you ramp up in Europe and elsewhere in terms of providing the equipment and those sorts of considerations on you know margins for example, I absolutely loved that question. So you know I I.
It's 2.03 0.0 I look at it as just an absolute game changer. It's.
Iris is next level technology, it's a fully automated Max and merge it makes system that I believe sets us apart from our peers as you are aware.
Refinish Spayed. This is an absolute necessity and and a table state as you play into space and I believe this process advancement really differentiates us from there.
Differentiates that refinish business, and orange sprawling or a team of people that work here, it's really special because it's the only fully automated machine that I believe it's faster than anything in the market and I'll give you a couple of data points here in terms of a benefit to our customer site.
Obviously, even starting with our existing customers. This is less than a year's payback on this product for them.
And if we moved from that to sustainability users.
Users exalt his own bottles.
Which is made from 50% recycled plastic and in this sense on just our customers within a year. We we reduce about 400 tons of plastic that goes into landfills and that on top of that.
In just our launch in Europe to what you mentioned.
Our customer feedback has just been incredibly tremendous.
My.
Seven months, and just spending time with the team and and spending time in Europe listening to customers. This has just been absolutely great feedback and see this as as as our next evolution on how we grow this business going into next year.
Thank you very much.
Thank you there are no further questions at this time.
Thank you so much for your participation. This concludes Sydney's teleconference. You may disconnect your lines at this time.
Mmm.
Yeah.
[music].