Q3 2023 Axalta Coating Systems Ltd Earnings Call
Ladies and gentlemen, thank you for standing by welcome Chuck without this third quarter Duane is when it's very cold.
First call.
Participants will be in a listen only mode. A question and answer session will follow the presentation by management.
Today's call is being recorded replay will be available to them, bringing their age.
Those listening after today's call should please note that the information provided in the recording will not be updated and therefore may not longer be which I will now turn the call over to Chris Stevens. Please go ahead.
Thank you and good morning. This is Chris Evans VP of Investor Relations. We appreciate your continued interest in <unk> and welcome you to our third quarter 2023 financial results Conference call.
Joining me today are Chris Bayle of Orion, CEO, and President and Carl Anderson CFO.
We released our quarterly financial results. This morning, and posted a slide presentation to the Investor Relations section of our website at <unk> Dot com, which we will be referencing during this call.
Our prepared remarks, the slide presentation and our discussion today may contain forward looking statements, reflecting the company's current view of future events and their potential effect on exalt is operating and financial performance.
These statements involve uncertainties and risks and actual results may differ materially from these forward looking statements.
Please note that the company is under no obligation to provide updates to these forward looking statements.
Our remarks and a slide presentation also contains various non-GAAP financial measures.
In the appendix to the slide presentation. We've included reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures.
For additional information regarding forward looking statements and non-GAAP financial measures. Please refer to our filings with the SEC.
I will now turn the call over to Chris.
Thank you Chris Good morning, everyone and welcome to our third quarter 2023 earnings call I'm pleased to report on a great third quarter I want to thank the entire global team for their tremendous efforts in delivering an exceptional result.
I'm proud that <unk> is back on track with the momentum we began earlier this year.
Both commercially and operationally we've made many notable accomplishments this quarter that I will highlight for you.
I'm, particularly pleased that the north American ERP implementation issues, we experienced last quarter are now resolved and production volumes at our refinished facility in Virginia are ahead of pre implementation rate Q.
Q3, net sales increased by 6% year over year to $1 3 billion, a new company record.
Top line improvement was led by a solid quarter from mobility coatings, which delivered double digit organic net sales growth price mix increased by 6% year over year with strong contributions from every end market.
This was a great outcome for the team.
We will maintain our pricing discipline going forward as we face pressure from higher labor costs and strive to recover margin to pre pandemic levels.
Adjusted EBIT of 188 million and adjusted EBITDA of $261 million increased by 27, and 24% respectively year over year and both were near record level.
Mobility coatings drove the majority of the improvement in earnings and the segment is now at a quarterly run rate consistent with 2019 levels.
The team has done a great job prioritizing margin recovery, while also building an attractive book of business wins in high growth areas.
Company adjusted EBIT margins improved by 240 basis points year over year to 14, 3%.
This improvement largely stems from raw material deflation cost discipline and continued pricing effort.
Sustained margin improvement remains a key priority for us going forward and will remain an important target heading into 2020 for free.
Free cash flow increased by $131 million year over year to $182 million.
This positive trend is a direct result of our ongoing focus to reduce working capital.
We believe that we are well positioned to deliver approximately 400 million of free cash flow for the full year 2023.
Given this degree of earnings and cash flow growth our balance sheet has now strengthened considerably exalt is net leverage ratio continues to improve and is significantly lower than Q3 of last year.
Given our strong commercial and operational performance, we have increased our full year financial guidance.
This updated forecast puts us on pace to deliver a record adjusted EBITDA in 2023.
The pieces are coming together at <unk>, but before giving you more color on the quarter I want to briefly discuss leadership update on <unk> board of directors.
Steve Chapman, who has been a director since 2020 has chosen not to seek reelection we.
We extend our gratitude to Steve for his significant contributions to <unk>.
His wealth of experience.
Typically it's global operational insight has played a pivotal role navigating our journey through the pandemic and post pandemic dynamics over the last several years.
Also we are delighted to welcome Mary's upon to our board effective October 25th.
<unk> will serve on the audit and the environment Health safety and sustainability Committee.
<unk> is currently the CEO of sundial, a leader in design and manufacturer of mission critical pumps and compressors for the chemical industrial and energy markets.
Position she has held since 2021.
Mary brings a wealth of experience to our team with more than two decades in senior leadership positions, including C O brace industrial growth and service Champ.
She has a proven record in industries directly relevant to <unk> I'm confident that she will make a meaningful contribution to our board.
Let's now go to slide five with the highlights of several notable accomplishments this quarter.
In October we acquired Andre Coste, our longterm refinish distribution partner. This acquisition is immediately accretive and aligns neatly with our strategy to diversify and expand our refinish offerings. It also increases our presence in Switzerland and attractive region for us.
We're excited to welcome the Andre co team to exalt out.
Next we were recently named the exclusive supplier for BMW group's private label in 15 European countries South Africa based agreement includes BMW network of 730 franchise dealership repair shops and adds to the existing <unk>.
Flyer agreements with BMW growth in other regions. We're thrilled with this expanded relationship it speaks to the strength of our deep customer relationships and the refinish team's dedication to the highest standards of quality efficiency and sustainability.
Innovation is critical to the health of our business long term. This is why I'm excited about our new partnership with Saar to introduce XL as Nextgen and advanced paint application tool that allows for precise paint placement.
This emerging technology enables inline customization of color schemes, including two toning and striping.
Next Gen is being tested with customers today, and we plan to bring it to limited commercial use in 2020 for.
This is an excellent example of how we're working with our customers to understand their requirements and developing technology to meet those needs.
Lastly, I want to highlight the official opening of our new mobility coatings manufacturing facility in Chile and China.
<unk> produces waterborne and solvent borne coatings for the automotive OEM space.
Adding local capacity enables <unk> to meet the growing demands for the China market, where we have continued to expand our position and see sustained long term growth.
Let's move to slide six.
My main focus since joining in Salto has been to drive improved efficiency and performance across the portfolio.
Our financial performance is beginning to reflect the operational initiatives underway that are driving these improvements across the enterprise, including managing price.
We have instituted a more rigorous pricing approach, which is helping margins returned to target levels across all end market pace.
Pockets of opportunity are being pursued as well and we will remain disciplined given the inflationary pressures in labor and select raw materials.
Next we have been focused on cost optimization.
We are initially prioritize this opportunity in procurement given the costs, we have incurred in the past two years and the favorable buying environment.
In the last nine months, we have bid out more than two thirds of our total $2 $5 billion of spend and have driven substantial savings.
This is a direct result of our consulting initiative, we put in place earlier this year.
We have invested in our manufacturing capabilities as I said earlier, our North American operations have made great strides following our ERP implementation.
Production volumes at our Virginia plant are ahead of pre implementation rates and we're making good progress at reducing the backlog.
And finally, we have improved the inventory levels to drive better free cash flow, we have reduced inventory by approximately $80 million year to date. This is yet another consulting initiative that we have seen great return on investment.
I am pleased with our progress, but this will be an ongoing effort with more actions underway I look forward to sharing our strategic plan for the company at our capital markets Day early next year.
Could not be more excited for what the future has in store for <unk> and all our stakeholders I will now turn the call over to Carl for a review of our financial performance.
Thank you, Chris and good morning, everyone.
I am thrilled to have joined <unk> at this opportune moment as we set out to transform the company.
And unlock our full potential.
There is incredible talent at <unk> and I look forward to working with the entire team to drive value for our stakeholders.
Let's turn to slide seven.
In the third quarter net sales increased 6% year over year to $1 3 billion with positive sales contributions from both segments and strong price mix improvement in every end market.
Volumes were 3% lower as growth in mobility coatings was offset by declines in performance coating.
Yeah.
Adjusted EBIT improved to 188 million from $148 million in the prior year period, a 27% increase.
Adjusted EBIT margin improved by 240 basis points to 14, 3% led by a significant step up in price cost recovery.
All end markets are now price cost positive on accumulative basis from 2021.
Raw material deflation was a benefit for the second consecutive quarter as a consequence of a few factors.
First as Chris mentioned, our teams have done a great job negotiating with suppliers.
They have driven significant savings and improved contract terms to help solidify these benefits.
Second.
<unk> demand and adjacent markets alongside improved global arbitrage as move supply demand balances in favor of exalt across many of our input categories.
On a regional basis, we have seen considerable relief across much of Asia Pacific and expect these markets to be balanced going forward.
Trends in EMEA and North America are expected to remain favorable into the fourth quarter.
In addition pricing discipline remains critical as labor inflation persist globally and was again a significant headwind this quarter offsetting a portion of the raws relief.
In the quarter. We also continued to incur costs associated with our productivity investments and ERP implementation, which totaled $15 million in the period.
We expect these costs to start trending down in the fourth quarter and will be mostly behind us as we cross into 2024.
Adjusted diluted earnings per share increased 15% year over year to 45.
Despite an approximate <unk> <unk> headwind from the net change in interest expense and tax rate.
Free cash flow in the quarter totaled $182 million compared to $51 million in the third quarter 2022, an increase of 257%.
Targeted working capital improvements were the primary driver of this result.
Moving to slide eight.
Performance coatings third quarter net sales were $856 million, a 2% improvement year over year.
Refinish organic net sales improved by low single digits year over year.
This was driven by strong price mix growth as well as from modest mixed enrichment given the near term de prioritization of low margin product categories, such as centers this quarter.
Volumes in our core premium and mainstream customer segments were above expectation.
Led by strength in EMEA.
However declines in the economy customer segment, and noncore areas led to lower reported volumes year over year in refinish.
We continue to see a favorable backdrop for our industry, leading products and services.
This is exemplified by the BMW wind mentioned earlier as well as ongoing market share opportunities in mainstream economies segments and adjacent markets.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Exalted 3rd quarter, 2020. Are you conference calls? All participants will be in a listen only mode. A question and intercession will follow the presentation by management. Today's call is being recorded and the would play will be available through the three there eight. Those listening after today's call should please note that information provide in the recording will not be updated.
We remain on pace for record Refinish earnings again in 2023.
Industrial organic net sales were down year over year as better price mix was more than offset by softer volumes as challenges persisted in construction related sectors.
We see signs of stabilization.
But certain areas like our building products business are still facing customer destocking headwinds.
In the meantime, the teams are doing a great job managing costs and increasing profitability despite volume decline.
Operator: And therefore may not longer be correct.
Christopher Evans: I will now turn the call over to Chris Evans, please go ahead. Thank you and good morning. This is Chris Evans, VP of Industrial Relations. We appreciate your continued interest in Exalted and welcome you to our third quarter, 2023 financial results conference call. Joining me today are Chris Villavarayan, CEO and president and Carl Anderson, CFO. We released our quarterly financial results this morning and posted a slide presentation to the investor relations section of our website at exalted.com, which we will be referencing during this call.
Performance coatings third quarter, adjusted EBIT was $135 million versus $122 million in the same period last year.
Both end markets contributed to improved segment earnings is better price cost dynamics more than offset lower volumes higher labor and cost allocations associated with enterprise productivity projects.
Let's move to mobility coatings results on slide nine.
As Chris told you this was a solid quarter for mobility.
Third quarter net sales increased by 13% year over year to $453 million driven by a balance of better volumes and price mix.
Christopher Evans: Our prepared remarks, the slide presentation and our discussion today may contain forward looking statements reflecting the company's current view of future events and their potential effect on exalted operating and financial performance. These statements involve uncertainties and risks and actual results may differ materially from these forward looking statements. Please note that the company is under no obligation to provide updates to these board looking statements. Our remarks and the slide presentation also contain various non gap financial measures. In the appendix of the slide presentation, we've included reconciliation of these non gap financial measures to the most directly comparable gap financial measures.
Light vehicle organic net sales increased by 12%.
Volumes were very strong in the quarter led by above market mid teens percentage growth in China.
In North America organic sales were up 12% as we had a very limited impact in the quarter from the UAW strike.
Price mix improved by 7% year over year inclusive of a modest mix benefit.
The performance was supported by resilient auto builds and continued execution of a multiyear customer strategy to align with the fastest growing Oems.
Our growth in China was noteworthy and should be further enabled by investments we are making in the region.
Christopher Evans: For additional information regarding forward looking statements and non gap financial measures, please refer to our filings with the SEC.
We are closely monitoring the UAW strike in North America, and our fourth quarter guidance reflects a modest impact but it is important to recognize the diversity of our regional and global sales mix, which in 2023 is increasingly being driven by growth in other regions.
Christopher Evans: I will now turn the call over to Chris. Thank you, Chris.
Chrishan Villavarayan: Good morning, everyone, and welcome to our third quarter, 2023 earnings call. I'm pleased to report on a great third quarter. I want to thank the entire global team for their tremendous efforts in delivering an exceptional result. I'm proud that Exelta is back on track with the momentum we began earlier this year, both commercially and operationally. We've made many notable accomplishments this quarter that I will highlight for you. I'm particularly pleased that the North American ERP implementation issues we experienced last quarter are now resolved and production volume that are we finished facility in Virginia are ahead of pre implementation rates.
Commercial vehicle organic net sales increased by 10% versus the prior year period.
The year over year improvement was driven by strong price mix in North America, and a mid single digit improvement in volume.
Mobility coatings, adjusted EBIT improved to $40 million from $4 million, a year ago, driven by higher selling prices and lower variable input costs.
This is a significant improvement and represents a run rate consistent with pre pandemic 2019 levels.
Adjusted EBIT margin also increased by 790 basis points to eight 8%.
Chrishan Villavarayan: 23 net sales increased by 6% year over year to 1.3 billion, a new company record, the top line improvement was led by a solid quarter from mobility coatings, which delivered double digit organic net sales growth price mix increased by 6% year over year with strong contributions from every end market. This was a great outcome for the team. We will maintain our pricing discipline going forward as we pick face pressure from higher labor cost and strive to recover margins to pre pandemic levels.
Turning to slide 10.
We ended the quarter with $1 $1 billion in total liquidity inclusive of a cash balance of $606 million.
Note that the acquisition of Android Coke mentioned earlier by Chris <unk>.
Occurred after the third quarter close and as a result, the closing date cash outlay of approximately $108 million will be reflected in our fourth quarter cash balances.
Our total net leverage ratio is now three two times, reflecting an improvement from three six times last quarter and almost a full turn from a year ago.
Chrishan Villavarayan: Ajusted EBITT of $188 million, and adjusted EBITT of $261 million, increased by 27 and 24 percent, respectively, year-over-year, and both were near record levels Mobility Coating strove the majority of the improvement in earnings, and the segment is now at a quarterly run rate, consistent with 2019 levels. This is a book of business wins in high-growth areas. Company adjusted EBITT margins, improved by 240 basis points, year-over-year to 14.3 percent. This improvement largely stems from raw material deflation, cost discipline, and continued pricing effort.
Additionally, we still expect to finish the year at a three times leverage ratio inclusive of the impact from the acquisition.
Continuing to strengthen our balance sheet is among our highest priorities.
We are targeting a net leverage ratio of two to two five times and a gross leverage ratio of two five to three times from a combination of natural deleveraging and continued cash generation.
This quarter, we also repurchased $50 million worth of <unk> shares.
We see strong value in our equity today and will remain opportunistic as we prioritize capital deployment to drive shareholder value return.
This prioritization includes the need for incremental capex to support operational objectives.
Chrishan Villavarayan: The state margin improvement remains a key priority for us going forward, and will remain an important target heading into 2024. Free cash flow increased by $131 million, year-over-year to $182 million. This positive trend is a direct result of our ongoing focus to reduce working capital. We believe that we are well positioned to deliver approximately $400 million of free cash flow for the full year 2023. Given this degree of earnings and cash flow growth, our balance sheet has stout strengthens considerably.
Going forward, we will accelerate internal investments with a modest step up from our recent annual Capex ranges as ERP related spending begins to wind down.
We are focused on improving return on invested capital across all areas of investment.
I will now turn the call back over to Chris for an update to our fourth quarter and 2023 financial guidance.
Thanks Carl.
In Q4, we expect net sales to be up year over year with an improvement in both segments.
We project volume growth to be muted in Q4 due to the growth in mobility coatings with a slight decline in performance coatings.
Chrishan Villavarayan: Exalted net leverage ratio continues to improve, and is significantly lower than Q3 of last year. Given our strong commercial and operational performance, we have increased our full-year financial guidance. This updated forecast puts us on pace to deliver record-adjusted EBITTT in 2023.
We expect global mobility sales to remain strong with the exception of the forecasted impact from the UAW strike refinish sales are expected to remain stable with a slight sequential decline in fourth quarter driven by typical seasonal cyclicality.
Chrishan Villavarayan: The pieces are coming together at Exalted, but before giving you more color on the quarter, I want to briefly discuss leadership updates on Exalted's Board of Directors. Steve Chapman, who has been a director since 2020, has chosen not to seek reelection. We extend our gratitude to Steve for his significant contributions to Exalted. His wealth of experience, specifically his global operational insight, has played a pivotal role navigating our journey through the pandemic and post-pandemic dynamics over the last several years.
On the cost side, we anticipate that raw material deflation and significant cost initiatives will drive a high single digit benefit in the fourth quarter, partially offset by higher labor expense.
Margins are expected to be greatly improved year over year. However, we expect a typical seasonal mix headwind quarter over quarter, which is likely to drive a modest margin headwind from Q3 to Q4.
Fourth quarter adjusted EBIT is now expected to be approximately $180 million or about $250 million in adjusted EBITDA full year, adjusted EBIT and adjusted EBITDA are projected to be approximately 670 and $950 million respectively were pleased with the.
Chrishan Villavarayan: Also, we are delighted to welcome Mary Zapon to our Board, effective October 25th. Mary will serve on the audit and the Environment, Health, Safety and Sustainability Committees. Mary is currently the CEO of Sundine, a leader in design and manufacture of mission-critical pumps and compressors for the chemical, industrial, and energy markets. A position she has held since 2021. Mary brings a wealth of experience to our team with more than two decades in senior leadership positions, including CEO of Brace Industrial Group and ServiceChamp. She has a proven record in industries directly relevant to Exalted. I'm confident that she will make a meaningful contribution to our Board.
<unk> of our earnings into yearend at these levels, our full year guidance implies 17% year over year growth and a potential record adjusted EBITDA.
As we look ahead to 2024, we see opportunity for yet another year of solid growth and margin expansion.
We expect a supportive environment in a resilient refinish end market and we expect to outpace robust demand in light vehicle, which together should offset potentially lower volumes in industrial and heavy truck market.
Chrishan Villavarayan: Let's now go to slide five with the highlights of several notable accomplishments this quarter. In October, we acquired Andre Coe, a long-term, refinished distribution partner. This acquisition is immediately accreted and aligns neatly with our strategy to diversify and expand our refinish offerings. It also increases our presence in Switzerland and attractive region for us. We're excited to welcome the Andre Coe team to Exalted.
We also see the potential for a weighted benefit in the first half of the year from lower raw material costs slightly offset by select rmi linked contracts.
We are committed to transforming <unk> the actions that we're implementing are already showing results and this is just the beginning of a strategy that we are confident will bring the positive change we want for the company.
This concludes our prepared remarks, operator, please open the lines for Q&A.
Chrishan Villavarayan: Next, we were recently named the exclusive supplier for BMW Group's private paint label in 15 European countries plus South Africa. This agreement includes BMW's network of 730 franchise dealership repair shops and adds to the existing supplier agreements with BMW Group in other regions. We're thrilled with this expanded relationship. It speaks to the strength of our deep customer relationships and the refinished teams, dedication to the high standards of quality, efficiency, and sustainability.
Thank you well now be conducting a question and answer session if you'd like to ask a question. Please press <unk>.
One on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Press Star two if you would like to remove your question from the queue.
For participants yoga.
It may be necessary chip will talk to you a headset.
Okay.
And our first question comes from John Mcnulty with BMO capital markets. Please go ahead.
Chrishan Villavarayan: Innovation is critical to the health of our business long term. This is why I'm excited about our new partnership with ZAR to introduce Axalta's next step, an advanced paint application tool that allows for precise paint placement. This emerging technology enables in-line customization of color schemes including two toning and striping. Next step is being tested with customers today and we plan to bring it to limited commercial use in 2024. This is an excellent example of how we're working with our customers to understand their requirements and developing technology to meet those needs.
Yeah. Thanks for taking my question so.
So I guess the first one would just be on on pricing you've had some really strong pricing continued to flow through if anything in some areas. It looks like it's even gotten better I guess, how can you speak to the pricing environment going forward and how we should think about it excluding the pieces that are on index I think that that's an automatic pass through with a little bit.
Have a lag type thing, but when you think about the rest of the business I guess, how should we be thinking about the pricing dynamic as we go into <unk> and into the say the first half of 'twenty four.
Yeah. Thanks, John I think if you look at.
The last year or certainly the team has done an exceptional job at pricing across all three segments and as I think about Q4 as well as preparing for 2024 again in our mobility business, 40% of that add to your point is on the Rmi, but that said if you look at <unk> as a whole.
Chrishan Villavarayan: Lastly, I want to highlight the official opening of our new mobility coatings manufacturing facility in Chile and China. This site produces waterborne and solvent-borne coatings for the automotive OEM space. Adding local capacity enables Axalta to meet the growing demands for the China market where we have continued to expand our position and see sustained long-term growth.
Rmi indexing it represents about 10%. So as you think about the rest of the basket, we certainly have the opportunity to price and as I see where labor is going as well as let's call. It some relax select raw materials as well as freight that will be the need to continue pricing. So I do believe that.
Chrishan Villavarayan: Let's move to slide six. My main focus since joining Axalta has been to drive improved efficiency and performance across the portfolio. Our financial performance is beginning to reflect the operational initiatives underweights that are driving these improvements across the enterprise, including managing price. We have instituted a more rigorous pricing approach which is helping margins return to target levels across all end markets. Pockets of opportunity are being pursued as well and we will remain disciplined given the inflationary pressures in labor and select raw materials.
We will continue low single digit pricing going into 'twenty for as our base.
Got it and then just as a follow up.
You know your gross margins snapped back nicely I mean, you're kind of back to back to some really strong levels in <unk> I guess, when you think about the cost dynamic and raws at least looking like theyre going to continue to come up a little bit lower pricing. It sounds like you may still have some some price opportunity ahead, I guess can you speak to.
Chrishan Villavarayan: Next, we have been focused on cost optimization. We have initially prioritized this opportunity in procurement, given the cost we have incurred in the past two years and the favorable buying environment. In the last nine months, we have bid out more than two-thirds of our total $2.5 billion of spend and have driven substantial savings. This is a direct result of our consulting initiative we put in place earlier this year.
How youre thinking about the gross margin trajectory and can you get to the 2018 2019 kind of levels, where it was 34% or so or better can you get there without volumes can you get there with the help of some of the cost cuts that youre doing in the productivity activity initiatives or do you need the volume really to get you there.
Well I think it's a question of time, we have certainly seen significant improvement this quarter and I do believe that there is more structural enhancements that are already underway and that there are more to come and we certainly are benefiting from the reversal of let's call. It some cyclical factors up nine quarters of hyperinflation.
Chrishan Villavarayan: We have invested in our manufacturing capabilities. As I said earlier, our North American operations have made great strides following our ERP implementation. Production volumes at our Virginia plant are ahead of pre-implementation rates and we're making good progress at reducing the backlog.
Thats, obviously shifted to some deflation, but as I said in my prepared remarks, if you look at it we're seeing deflation, but we certainly also did some structural initiatives, we've put $2 5 billion of our purchasing spend under bidding and so we have seen I would say single digit benefits in <unk>.
Chrishan Villavarayan: Finally, we have improved inventory levels to drive better free cash flow. We have reduced inventory by approximately 80 million a year-to-date. This is yet another consulting initiative that we have seen great return-on-invents. I'm pleased with our progress, but this will be an ongoing effort with more actions underway.
<unk> performance and I do believe that will continue into 'twenty four so I would say let's call it.
Where we are performing in the last two quarters as the base and I do see that there's more opportunity on and I'll, probably turn it over to Carl to put some more comments on this one yes, John just to add to Chris's commentary as I look at our plans next year, especially on capital expenditures, we think there's opportunity to drive more productivity.
Chrishan Villavarayan: I look forward to sharing our strategic plan for the company at a capital market today early next year. I could not be more excited for what the future has in store for Xalta and all our stakeholders.
Carl Anderson: I will now turn the call over to Carl for our review of our financial performance.
In our network and in our plants as well that will actually help accelerate or increase margin profiles as we move forward.
Carl Anderson: Thank you, Chris, and good morning everyone. I am thrilled to have joined Xalta at this opportune moment as we set out to transform the company and unlock our full potential. There is incredible talent at Xalta, and I look forward to working with the entire team to drive value for our stakeholders.
Got it thanks very much for the color great job guys. Thank you. Thanks John.
Our next question comes from Aleksey <unk> with Keybanc capital markets. Please go ahead.
Carl Anderson: Let's turn to slide seven. In the third quarter, net sales increase 6% year over year to 1.3 billion with positive sales. In the fourth quarter, net sales contributions from both segments and strong price-mix improvement in every end market volumes were 3% lower as growth and mobility coatings was offset by declines in performance coating. Adjusted EBIT improved 188 million from 148 million in the prior year period, a 27% increase. Adjusted EBIT margin improved by 240 basis points to 14.3% led by a significant step up in price cost recovery.
Oh, Thanks, and good morning.
Your acquisition in Switzerland, I believe it's not the first one for European distribution for the company.
Can you discuss.
How does owning distribution their fit into your strategy, what why is it necessary in Europe, and not perhaps in North America or other regions.
Well I think Greg.
Great question, Andrew I think we're.
We're just absolutely thrilled to announce Andre co. It's an exceptional story for us in many sense.
One is.
Switzerland, certainly accretive it's a strong margin profile for the business and it.
Carl Anderson: All end markets are now price cost positive on a cumulative basis from 2021. Raw material depletion was a benefit for the second consecutive quarter as a consequence of a few factors. First, as Chris mentioned, our teams had done a great job negotiating with suppliers. They have driven significant savings and improved contract terms to help solidify these benefits. Second, softening demand in adjacent markets alongside improved global arbitrage has moved supply demand balances in favor of Xalta across many of our input categories.
The business comes in at let's call it refinish margins at $50 million and in terms of investing in the business over the last two quarters I've always talked about investing into our strong.
Refinish business and I know last quarter, we talked about.
The Irish next this quarter distribution gets us closer to our customers and in our sense.
In terms of.
Essentially getting us to the ability to get closer to over 500 customers as an ability that I think.
We can probably do more easily in Europe, just with the distribution dynamics. So that's certainly one of the main reasons were played here. Another reason is <unk>.
Carl Anderson: On a regional basis, we have seen considerable relief across much of Asia Pacific and expect these markets to be balanced going forward. Trends in Amia and North America are expected to remain favorable into the fourth quarter. In addition, pricing discipline remains critical as labor inflation persists globally and was again a significant headwind this quarter, offsetting a portion of the raw's relief. In the quarter, we also continue to incur costs associated with our productivity investments and ERP implementation, which totaled $15 million in the period.
Andre coal has a system called <unk> that close together.
The investor sorry the.
Insurance providers, the body shops, as well as exalt is a coatings provider and we believe that network is something we can expand through Europe and really play on growing in the European market, which is extremely accretive from a margin profile for us overtime.
Thanks, and just to clarify on this one whether this distributor.
Carl Anderson: We expect these costs to start running down in the fourth quarter and will be mostly behind us as we cross into 2024. Adjust the deluded earnings per share increase 15% year over year to 45 cents, despite an approximate 8 cents headwind from the net change in interest expense and tax rate. Free cash on the quarter totaled $182 million compared to 51 million in the third quarter 2022 an increase of 257%. Targeted working capital improvements were the primary driver of this result. No.
Unique to where the judge distributing exalt the paint or was there other are there other suppliers who may fall.
Fall off after the deal.
There are other suppliers that are also in there in the profile. They are distributed Volta for two decades, but they do also cover other paint that provides us an opportunity to obviously grow here.
Thanks, a lot.
Our next question comes from Ghansham Panjabi with Baird. Please go ahead.
Carl Anderson: Moving this slide A, performance coatings third quarter net sales were 856 million, a 2% improvement year over year. Refinish organic net sales improved by low single digits year over year. This was driven by strong price mix growth, as well as from modest mix enrichment given the near term deprioritization of low margin product categories such as centers this quarter. Volumes in our core premium and mainstream customer segments were above expectation led by strength and amea. However, declines in the economy customer segment and non core areas led to lower reported volumes year over year in refinish.
Hi, Good morning, everyone. This is actually Matt Krueger sitting in for Ghansham, Thanks for taking our questions.
Just just to kick things off.
Talked a lot about some of the investments that have been made and some of the groundwork you've laid in 2023 to allow the company to.
Add additional earnings power.
In future years can you detail some of those projects specifically.
Specifically, maybe talk about some of the cash outlays that you've made and then also.
The specific returns that you expect on these types of investments.
Into 'twenty four and then on a multiyear basis would be would be great sure absolutely, Matt So I'm going to kick it off with the investments and the three projects that we kicked off and I'll, let Carl walk you through that.
Carl Anderson: We continue to see a favorable backdrop for our industry leading products and services. This is exemplified by the BMW win mentioned earlier, as well as ongoing markets your opportunities. In mainstream economy segments and adjacent market. We remain on pace for record refinish earnings again in 2023.
And and how we see that going forward into 'twenty four so the three projects we kicked off the first one was on the ERP implementation, which obviously from my prepared remarks.
Progressing well and we're certainly seeing efficiency gains that have helped us reduce the backlog in refinish, which is one of the primary drivers to our performance as I look at Q3 and the second one was on the purchasing initiative and here again.
Carl Anderson: Industrial organic net sales were down year over year as better price mix was more than offset by softer volumes as challenges persisted in construction related sectors. We see signs of stabilization, but certain areas like our building products business are still facing customer destacking headwinds. In the meantime, the teams are doing a great job managing cost and increasing profitability despite volume decline.
<unk> put out a significant portion of our material spend to bed and here, we're seeing single digit improvement on top of what I would call. It mid single digit improvement in deflation, which puts us at high single digit performance in our material performance for the year, which is one of the primary drivers for.
Carl Anderson: Performance coatings third quarter adjusted EBIT was 135 million versus 122 million in the same period last year. Both end markets contributed to improve segment earnings as better price cost dynamics more than offset lower volumes higher labor and cost allocations associated with enterprise productivity project.
Or how do I see Q3, and Q4 'twenty four 'twenty Q4, coming out and obviously, we should see that tailwind feeding into 'twenty four and on top of that the last initiative that we kicked off with focused on inventory as I look coming in one of the things that we wanted to work on with reducing the inventory.
Carl Anderson: Let's move to mobility coatings results on five nine as Chris told you this was a solid quarter for mobility. Third quarter net sales increased by 13% year over year to 453 million driven by a balance of better volumes and price mix. Light vehicle organic net sales increased by 12% volumes were very strong in the quarter led by above market meetings percentage growth in China. In North America, organic sales were up 12% as we had a very limited impact in the quarter from the UAW strike price mix improved by 7% year over year inclusive of a modest mixed benefit.
Buildup that we had seen over the last two quarters coming out of the pandemic and here, we had an initiative focused at taking down.
Close to $100 million of inventory and to date, we have seen $90 million of improvement here. So certainly a significant driver of that is helping us with our free cash flow targets now I'll turn it over to call to give you specifics on the numbers yeah, Matt just to add to it. So if you look at through.
Through nine months of this year in total we had spend about $34 million as far as related consulting as well as S for implementation.
Carl Anderson: The performance was supported by resilient auto builds and continued execution of a multi year customer strategy to align with the fastest growing OEM. Our growth in China was noteworthy and should be further enabled by investments we are making in the region. We are closely monitoring the UAW strike in North America and our fourth quarter guidance reflects the modest impact, but it is important to recognize the diversity of our regional and global sales mix.
Cost and as we look forward in the fourth quarter, we see that stepping down pretty much kind of by half as you kind of compared to the third quarter and as we get into 2024 and most of that will be completely behind us going forward. So as Chris said it was very strategic it really allowed the company.
You have add more horsepower and velocity as it relates to a lot of these activities. So we are setting ourselves up.
Carl Anderson: Which in 2023 has increasingly been driven by growth in other regions. Commercial vehicle organic net sales increased by 10% versus the prior year period. The year-over-year improvement was driven by strong price mix in North America and amid single digit improvement in volume. Mobility coatings adjusted EBIT improved to 40 million, from 4 million a year ago, driven by higher selling prices and lower variable input costs. This is a significant improvement and represents a run rate consistent with pre-pantemic 2019 levels.
For 2024 as we go forward.
Got it that's helpful and just to follow up on profitability would be obviously the improvement in mobility was was very impressive should should we expect to see double digit EBIT margins for that business.
In the <unk> or something close to it and what level of.
What level of profitability should we expect on a run rate into <unk> into 'twenty four can be hold the levels that we're at currently or is there something unique that's going on that we would expect to report.
No I think that you characterized it well the team has done a really really strong job this year as far as on pricing as well as an overall kind of cost discipline for that for that business and obviously the fourth quarter will be a little bit impacted just based off here in North America with the UAW strike, which appears to be moving into <unk>.
Carl Anderson: Adjusted EBIT margin also increased by 790 basis points to 8.8%. Turning to slide 10, we ended the quarter with 1.1 billion in total liquidity, inclusive of a cash balance of $606 million. Note that the acquisition of Andre Koch mentioned earlier by Chris, occurred after the third quarter close and as a result, the closing date cash outlay of approximately $108 million will be reflected in our fourth quarter cash balances. Our total net leverage ratio is now 3.2 times, reflected in improvement from 3.6 times last quarter in almost a full turn from a year ago. Additionally, we still expect to finish the year at a three times leverage ratio, inclusive of the impact from the acquisition.
Action to kind of.
Be behind but again, there will definitely be a.
Smaller impact as we think about job.
What happened in the month of October for Us, but as we go forward that is that mobility margin profile. We do expect to continue to be able to grow that sizes, especially as we get into 2024.
Okay, great. That's it for me thanks. Thank.
Thank you. Thank you.
Our next question comes from Patrick Cunningham.
Please go ahead.
Carl Anderson: Continuing to strengthen our balance sheet is among our highest priorities. We are targeting a net leverage ratio of 2 to 2.5 times and a gross leverage ratio of 2.5 to 3 times from a combination of natural deleveraging and continued cash generation. This quarter we also repurchased $50 million worth of exalted shares. We see strong value in our equity today and will remain opportunistic as we prioritize capital deployment to drive sureholder value return.
Hi, Good morning, just given the magnitude of the guidance range can you maybe quantify or rank order the biggest changes in expectations.
From the previous release, whether it would be backlog normalization price cost or other factors and is there any additional conservatism baked into the forward outlook.
So.
Certainly an exceptional quarter I would say.
Whether it's all regions and all of the three segments, we're hitting on all cylinders, but maybe to break it down for you.
Carl Anderson: This prioritization includes the need for incremental capex to support operational objective. Going forward, we will accelerate internal investments with a modest step-up from a recent annual capex ranges as ERP-related spending begins to wind down. We are focused on improving return on invested capital across all areas of investment.
The improvement in our ERP efficiency really enabled refinished to reduce the sales backlog and then obviously the material performance whether its the tailwind from the material deflation as well as the structural initiatives that we had from our consulting initiative on material and when you.
Chrishan Villavarayan: I will now turn the callback over to Chris for an update to our fourth quarter in 2023 financial guidance. Thanks, Carl. In Q4, we expect net sales to be up year over year with an improvement in both segments.
Put those together as well as the OE production, which was well ahead.
Third quarter projections, and this was globally and we had an extremely strong quarter in China and as I look at Q4.
Chrishan Villavarayan: We project volume growth to be muted in Q4 due to the growth in mobility coatings with a slight decline in performance coatings. We expect global mobility sales to remain strong with the exception of the forecasted impact from the UAW strike. Refinished sales are expected to remain stable with a slight sequential decline in fourth quarter driven by typical seasonal cyclicality. On the cost side, we anticipate that raw material deflation and significant cost initiatives will drive a high single-digit benefit in the fourth quarter partially offset by higher labor expense.
That sentiment and thats strengthening that and.
And mobility.
And to your to the earlier questions. We have seen a 300 basis points jump in mobility year over year, or 200 basis point jump quarter over quarter. So great performance. There all of that said you put let's call. It the pricing initiatives, we have been driving as well as the cost initiatives.
As to Karl's remarks wind pad just.
All four end markets be price cost positive for the first time in.
In nine quarters since 2021.
Got it and then just on the BMW Group partnership you know it looks very promising but can you help help us understand the timing of getting penetration into those body shops, and then maybe this is the volume and earnings potential from that partnership.
Chrishan Villavarayan: Margins are expected to be greatly improved year over year, however we expect a typical seasonal mixed headwind quarter over quarter which is likely to drive a modest margin headwind from Q3 to Q4. 4th quarter adjusted EBIT is now expected to be approximately 180 million or about 250 million in adjusted EBIT. Full year adjusted EBIT and adjusted EBIT are projected to be approximately 670 and 950 million respectively. We're pleased with the trajectory of our earnings into your end. At these levels, our full year guidance implies 17% year over year growth.
Yes, it's certainly going to be sometime in 'twenty four so we have to convert these shops in our as we see it every quarter next year, we're going to work on converting more and more of those shops.
It's certainly a true testament to the group this year as I look at it we're on path to win 2000 net body shops, if I look at the last three years. The team has done an exceptional job winning 10000 body shops. So.
730 is a great step right off the get go and how we're set up for 2024.
Chrishan Villavarayan: And a potential record adjusted EBIT as we look ahead to 2024 we see opportunity for yet another year of solid growth and margin expansion. We expect a supportive environment in our resilient refinish end market and we expect to outpace robust demand in light vehicle which together should offset potentially lower volumes in industrial and heavy truck market. We also see the potential for a weighted benefit in the first half of the year from lower raw material costs slightly offset by select RMI linked contracts.
Great. Thank you Youre.
Youre welcome.
Our next question comes from Sal choice factor, what you'll be at please go ahead.
Hi, Good morning. This is like a stone answer Josh.
To get back to a finish if we could so could you. Please comment on the dice volume growth stay of course by region and just sort of highlight as well what was the impact of the lower margin exits in the quarter and kind of how much of that is like left to go analysis sort of roll into 2020.
Chrishan Villavarayan: We are committed to transforming Xalta the actions that we're implementing are already showing results and this is just the beginning of a strategy that we are confident will bring the positive change we want for the company. This concludes our prepared remarks.
So if I look at it.
Quarter over quarter.
Let's let's call. It what we're seeing is I would call it.
A 5% decline in.
And volumes.
Operator: Operator please open the lines for Q&A. Thank you. We will now be conducting a question in the first session.
All of this obviously related to what we went through with our refinish.
Market, but if I look from this quarter into next quarter, we are essentially flat.
Operator: If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the questioning queue. You may press star two if you would like to remove your question from the queue for participants using a separate clip of it.
Going into next year, I would say from a volume basis, we expect that to remain flat.
Just explaining the dynamics quarter over quarter Q2, Q3, again, primarily driven from our asphalt implementation, we made it our large step up but still theres more opportunity, obviously with us burning more of the backlog as I think about Q4 and prepping us for next year, but Q3 to Q4.
Operator: It may be necessary to pick up your headset before pressing the case.
John Mcnulty: And our first question comes from John McNulty with BMO capital market. Please go ahead. Yes, thanks for taking my question. So I guess the first one would just be on pricing. You've had some really strong pricing. It's continued to flow through if anything it's in some areas that looks like it's even gotten better. I guess how can you speak to the pricing environment going forward and how we should think about excluding the pieces that are on index.
Four we expect volumes to be overall flat and heading into next year to be flat. If you were to break that region by region I would say Europe, and North America somewhat stable and then South America, sorry, China continuing to be soft on the refinished side.
Alright, Thanks, and then.
John Mcnulty: I think that's an automatic pass through with a little bit of a lag type thing. But when you think about the rest of the business, I guess how should we be thinking about the pricing dynamic as we go into 4Q and into the say the first half of 24? Yes, thanks John. I think if you look at the last year, certainly the team's done an exceptional job at pricing across all three segments.
Just sort of wanted to talk about kind of the one on bridge items going into next year.
Just in terms of where we stand now with like what you know so you highlighted sort of 35 million and the consultants spending thats not going to sit or occur.
And then you know we have two other factors like a lot of knowledge product exits changing that availability contract crossing.
Just anything else.
John Mcnulty: And you know, as I think about Q4 as well as preparing for 2024. Again, in our mobility business, 40% of it to your point is on RMI. But that said, if you look at exalted as a whole index RMI indexing represents about 10%. So, you know, as you think about the rest of the basket, we certainly have the opportunity to price and as I see where labor is going as well as let's call it some select raw materials as well as freight.
I'd like to highlight for us Thats known at this time, if you could kind of walk us through that please yes, I think just to add what Chris said earlier in some of his comments as you think about the bridge into 2024, we do expect a little bit more pricing.
Especially we think about what we can do in refinish.
As well as in some of the other verticals as well for US and we think also V guards at least on a year over year basis will continue to trend favorably, especially at least through the first half of 2024. So those would be the the primary areas of.
John Mcnulty: There will be the need to continue pricing. So, I do believe that we will continue low single digit pricing going into 24 as our base. Dave, got it. And then just as a follow-up, you know, your gross margins snap back nicely. I mean, you're kind of back to, back to some really strong levels in 3Q. I guess when you think about the cost dynamic and, and laws at least looking like they're going to continue to come a little bit lower, pricing, it sounds like you may still have some, some price opportunity ahead.
Of the bridge that will help walk you to where we think 'twenty four wind up.
Great. Thank you.
Thank you welcome.
Yeah.
Our next question comes from Kevin Mccarthy, with which Congress search partners. Please go ahead.
Yes, good morning, Chris.
Chris It sounds like you've made a lot of progress with regard to your purchasing initiatives can you provide a little bit more color on the raw material cost outlook heading into 2024 and perhaps.
John Mcnulty: I guess, can you speak to how you're thinking about the gross margin trajectory? And can you get to the, you know, the 2018-2019 kind of levels where it was 34% or so or better? Can you get there without volumes? Can you get there with the help of some of the cost cuts that you're doing in the productivity initiatives? Or do you need the volume really to get you there? Well, I think it's a question of time.
Where are you seeing the most deflation were the most stickiness and your input costs.
Sure Love to so I think.
I would say.
As we look at Q4 and also into 'twenty four I would call it mid single digit opportunity on material.
John Mcnulty: We've certainly seen significant improvement this quarter. And I do believe that there is more structural enhancements that are already underway and that there are more to come. And we certainly are benefiting from the reversal of let's call it some cyclical factors of nine quarters of hyperinflation that's obviously shifted to some deflation. But as I said in my prepared remarks, if you look at it, we're seeing deflation, but we certainly also did some structural initiatives.
This is still going to provide us a tailwind.
And now in terms of there.
There is one a few outlying factors, we are monitoring oil and we but at this point, we're certainly not seeing any impact on our downstream market, but oil does play a key factor in solvents as well is if we think about freight but again no pressure that we're seeing at this time, but.
John Mcnulty: We put two and a half billion dollars of our purchasing spend under bidding. And so we have seen, I would say single digit benefits and material performance. And I do believe that will continue into 24. So I would say let's call it, you know, where we're performing in the last two quarters as the base. And I do see that there's more opportunity. And I'll probably turn it over to Carl to put some more comments on this one.
<unk> sees isocyanide and residents are all trending favorably so as I think about 'twenty four we still from a planning.
Standpoint, where I would say, we see mid single digit opportunity and material performance.
Okay.
Then.
Would you comment Chris on your outlook for auto builds I think hexcel to use to provide some fairly specific.
John Mcnulty: Yeah, John, just to add to Chris's commentary is I look at, you know, our plans next year, especially on capital expenditure. We think there's opportunity to drive more productivity in our network and in our plans as well that will actually help accelerate, you know, our increased margin profiles as we move forward. Got it. Thanks very much for the color. Great job, guys. Thank you. Thanks, John.
Numerical guidance.
See that unless I missed it but maybe you can kind of talk through.
What youre thinking about for the fourth quarter as well as 2024 as it relates to production backdrop.
So fourth quarter.
Obviously going around the world Europe seems to be stable and growing China is just going to gangbuster to say if I look at Q3 and also as we look at our forecast for Q4. The team's just done a stellar job also on top of our wins.
Aleksey Yefremov: Our next question comes from Alexi Efremov with Keith Bank, capital market. Please go ahead. Thanks and good morning. Your acquisition in Switzerland. I believe it's not the first one for European distribution for the company. Can you discuss, you know, how does owning distribution there fit any strategy? What, why is it necessary in Europe and not have some North America or other regions?
If we look back a year ago, we talked about $200 million of new wins.
Running through the P&L at the back end of 'twenty, four and we're certainly seeing our share of not only growth, but also the market rebounding in China.
Chrishan Villavarayan: Well, I think great question. Andre, I think you know, we're just absolutely thrilled to announce Andre co it's an exceptional story for us in many sense, but you know, one is, you know, it's in Switzerland, certainly a creative. It's a strong margin profile for the business. And it's the business comes in at, let's call it, we finish margins, it's $50 million. And in terms of investing in the business, you know, over the last two quarters, I've always talked about investing into our strong.
So so far.
I look at Q3, and Q4 I would say in a globally.
The markets seem to be trending the right way specific to North America, obviously, the step down in with the UAW strike. We certainly saw did we saw minimal impact from the strike in Q3 as you can see from our performance in Q4, I would say, where we're guiding to 1% of our revenue.
Being impacted possibly from from the strike, but if that gets resolved here based on where the discussions are going that we do see some level of opportunity there in our guide as well now looking at 'twenty for all indications to your point.
Chrishan Villavarayan: We finish business and you know, last quarter, we talked about the Irish mix, this quarter distribution gets us closer to our customers. And in our sense, you know, in terms of essentially getting us to the ability to get closer to over 500 customers is an ability that I think we can probably do more easily in Europe, just with the distribution dynamics. So that's certainly one of the main reasons we've played here.
That markets are going to start building up so billed for the global builds we see that going up to $89 million. So certainly a positive trend there.
Adding back to the numbers, we saw let's call it pre pandemic.
One outliers on the commercial vehicle side on the commercial vehicle side, I would say ACTH as markets going down to 275000 barrels obviously, we're running at well north of 300 right now at $3 25, so theres a bit of a risk there, but that said I think the team's doing well with winning new business.
Chrishan Villavarayan: Another reason is Andre co has a system called Raffernet that pulls together the investor, sorry, the insurance providers, the body shops, as well as exalt as a coding provider. And we believe this network is something we can expand through Europe and really play on growing in the European market, which is extremely creative from a margin profile for us over.
And also driving price and cost actions that we should see overall margin continuing to improve into 'twenty four.
Aleksey Yefremov: Time, and thanks and just to clarify on this, was this distributor unique to, were they just distributing exultant or was there other, were there other suppliers who may fall off off of the deal? Yeah, there are other suppliers that are also in, in their, in the profile. They've distributed exultant for two decades, but they do also cover, cover other, paint that provides us an opportunity to obviously grow here. Thanks a lot. You're welcome.
Perfect. Thank you so much you're welcome.
Our next question comes from Chip Barney with Bank of America, well I hope.
Yeah.
Thanks.
Wanted to drill in a little bit on refinish.
Your low single digit organic sales in the third quarter.
Got it.
It seems a little modest given you have these pricing initiatives you have the.
So partner Coops acquiring you got your your your automated mixing technology would you expect.
Matt Krieger: Our next question comes from Dejan Panjabi with Bird, please go ahead. Hi, good morning, everyone. This is actually Matt Krieger sitting in for Ghansham. Thanks for taking our questions. You know, just to kick things off, you know, we've talked a lot about some of the investments that have been made, and some of the groundwork you've laid in 2023 to allow the company to, you know, add additional earnings power in, you know, in future years.
Organic sales in refinish.
Post higher gains in <unk> and 'twenty 'twenty four perhaps.
Bolstered by these.
Chrishan Villavarayan: Can you detail some of those projects specifically, maybe talk about some of the cash outweighs that you've made, and then also the specific returns that you expect on these types of investments with, you know, into 24, and then on a multi-year basis would be, would be great. Sure, absolutely. Matt, so I'm going to kick it off with the investments and the three projects that we kicked off, and I'll let Carl walk you through this pen, and how we see that going forward into 24.
These recent acquisitions with Andre Coke and the and the BMW group, which you are all well 'twenty to 'twenty four yes, let me address it in two ways I think first let me address it from a volume standpoint, and I think.
Going back to the questions, we had last quarter and also this quarter.
One of the primary drivers from a volume perspective, you would notice that we have been taking a bit of a step back, but that's primarily because we have been focused on driving the margin and what we have done is whether it's in containers or in certain businesses in South America architectural business in South America, we decided to let's call it.
Chrishan Villavarayan: So the three projects we kicked off, first one was on the ERP implementation, which obviously from my prepared remarks. You know, it's certainly progressing well, and we're certainly seeing efficiency gains that it's helped us reduce the backlog in refinish, which is one of the primary drivers to our performance as I look at Q3. The second one was on the purchasing initiative, and here again, you know, we put out the significant portion of our material spend to bid, and here we're seeing single digit improvement on top of what I would call is mid single digit improvement in deflation, which puts us at high single digit performance in our material performance for the year.
Made a decision to exit these to ensure that we were driving the margin and ensuring that we have the capacity for higher margin products. So that was a decision we made because the focus was again to make sure that we maintained and grew margins in terms of let's call it sales too.
To your point, yes, we do see opportunity as we continue to win.
That we will continue to drive growth into 'twenty floor, as well, especially with the acquisition, we just announced and on top of that the team has done a great job continuing to win net sales and that'll be the growth trajectory as I looked at 24 as well.
But I would say.
Thinners and ex let's call. It the decision we made in South America, our volumes have been somewhat flat. So its not like were going down and if anything else theres only opportunity from from a growth standpoint.
Chrishan Villavarayan: Which is one of the primary drivers for how I see Q3 and Q4 coming out, and obviously we should see that tailwind feeding into 24. And on top of that, the last initiative that we kicked off was focused on inventory as I, you know, look coming in, one of the things that we wanted to work on was reducing the inventory buildup that we had seen over the last two quarters coming out of the pandemic. And here we had an initiative focused at taking down, you know, close to $100 million of inventory, and to date, we have seen $90 million of improvement here.
Both from the acquisition as well as the net sales wins for 'twenty four.
And then perhaps soon.
In mobility, what would you attribute the the new business wins that you're talking about is this a technology.
Game for you to have better technology that benefits your customer.
How significant is this.
This new technology. This two tone technology or what is that next nexgen, how how significant of an opportunity is that in your view.
Carl Anderson: So it's certainly a significant driver that's helping us with our free cash flow targets, and I'll turn it over to call to give you specifics on the numbers. Yeah, man, just to add to it, so if you look at through nine months of this year, in total, we had spent about $34 million as far as related consulting, as well as S4 implementation costs. And as we look forward, you know, in the fourth quarter, we see that stepping down pretty much kind of by half as you kind of compare it to the third quarter.
Well, let me break it up into two things I think.
If I go back a year ago and talk about the wins that the mobility team has done I would say here, it's a pure focus around service and the relationships that the mobility team has dealt with the customers and it's not specific to a region it's globally the wins.
In North America the winds are.
Carl Anderson: And as we get into 2024, most of that will be completely behind us going forward. So as Chris said, it was very strategic. It really allowed the company to have add more horsepower and velocity as relates to a lot of these activities.
In China <unk>.
<unk> wins in China, and also in Europe, and this has been too.
Our credit credit this to two things certainly technology, but also purely the service and the relationships that the team has done an incredible job building now in terms of.
Carl Anderson: So we are setting ourselves up for 2024. Goflard. Got it. That's helpful.
Matt Krieger: And just to follow up on profitability, obviously, the improvement in mobility was very impressive. Should we expect to see double digit ebit margins for that business into 4Q or something close to it? And what level of profitability should we expect on a run rate into 24? Can we hold the levels that we're at currently? Or is there something unique that's going on that we would expect to do? No, I think that you characterize it well.
The Tsar relationship or the next jet.
Announcement, we made today here it is technology and if you think about.
If you think about.
Our Mustang or where you have a different color of roof.
A two tone roof with the rest of the car what we do with this technology as a war provide the opportunity for our customers to not pull them out of the body shop or the paint line and take them to a separate process to paint the roof separate from the rest of the vehicle. We have we provide the ability for.
Matt Krieger: The team has done a really, really strong job this year, as far as pricing as well as an overall kind of cost discipline for that for that business. Obviously, the fourth quarter will be a little bit impacted just based off here in North America with a UAW strike, which appears to be moving in a direction to kind of be behind, but again, there will definitely be a smaller impact as we think about what happened in the month of October for us. But as we go forward, you know, that is, you know, that mobility margin profile. We do expect to continue to be able to grow the ads, especially as we get into 2024.
Our our OE partners to essentially run it through the paint shop and applied is both applications at the same time that provides enormous opportunity and gets away from an offline process, which we believe will drive enormous levels of productivity and cars that need to tone painting.
And these are custom cars. These are very expensive cars. So I think this is an opportunity that we believe will provide a lot of value for our customers going forward.
Matt Krieger: Okay, great. That's it for me. Thanks. Thank you.
Thank you Youre.
Youre welcome.
Patrick Cunningham: Our next question comes from Patrick Cunningham with CD. Please go ahead. Hi, good morning.
Our next question comes from Michael <unk> with Wells Fargo. Please go ahead.
Hi, This is Ravi Gill on Tonight, Thanks for taking my question.
Chrishan Villavarayan: You know, just given the magnitude of the guidance raised, can you maybe quantify or rank order the biggest changes in expectations, you know, from the previous release, you know, whether it be backlog normalization price, cost or other factors. And is there any additional conservatism baked into the floor? So, you know, certainly an exceptional order, I would say, you know, whether it's all regions and all the three segments were hitting on all cylinders, but maybe to break it down for you.
So I believe this was already touched on them.
But one of your peers have no one else in refinish space.
Share gains and I think mostly in the last quarter.
Do you have a response to that but how do you I mean.
Have you been experiencing any share loss.
And then two fold thinking back here, we finished all of last December.
You mentioned Europe as being a new market for growth for you how.
How has that changed in the last year, given macroeconomic trends in the region.
Chrishan Villavarayan: You know, first are the improvement in our ERP efficiency really enabled refinished to reduce the sales backlog. And then obviously the material performance, whether it's the tailwind from the material deflation as well as the structural initiatives that we had from our consulting initiative on material. And, you know, when you put those together as well as the OE production, which was well ahead of third quarter projections, and this was globally, and we had an extremely strong quarter in China.
So I think great question. Thanks for the question of Abigail.
We certainly when many and we also lose some customers and but what I can say is we're on track this year for 2000 net body shop when so.
Overall, I would say we continue to win.
And looking back at the last three years. This team has done an exceptional one job with 10000 net body shops, and I think the broader perspective of measuring this year over year is in if I look at the refinish team and joining this company. The best thing you can talk about is the.
Chrishan Villavarayan: And as I look at Q4, that sentiment and that strength exists in mobility. And, you know, to the earlier questions, we've seen at 300 basis points jump in mobility or over 200 basis points, jump quarter over quarter. So, great performance there. All that said, you put, let's call it the pricing initiatives. We've been driving as well as the cost initiatives. As to Carl's remarks, we've had, you know, just all four end markets, the price cost positive for the first time in nine quarters since 2021. Got it.
The fact that in 'twenty one this the refinish team had record sales in 'twenty two the refinish team has record sales and 23 at the rates, they're going they're going to hit record sales in 'twenty three so an exceptional team and talking about the BMW win this early in.
The year sets up beautifully as I think about 24 with 730, new body shops, just starting out the year. So I would say the team is.
Chrishan Villavarayan: And then just on the BMW group partnership, you know, it looks very promising, but can you help, you know, help us understand the timing of getting penetration into those body shots. And then maybe the volume and earnings potential from that partnership. Yeah, it's certainly going to be of some time in 24, so, you know, we have to convert these shops and are, you know, as we see it every quarter next year, we're going to work on converting more and more of those shops.
<unk> is well positioned to continue to grow and it all aligns with the strategy that Troy and the team kicked off.
A year ago at Refinished day. It was actually my first day in <unk> actually haven't even been in the role and to your point, we talked about the growth in Europe and the best part is today, we announced two things one is the BMW announcement, which mostly impacts our growth in Europe and the second one.
Chrishan Villavarayan: It's certainly a true testament to the group. This year, as I look at it, you know, we're on path to win 2000 net body shops. If I look at the last three years, the team's done an exceptional job winning 10,000 body shops. So, you know, this 730 is, is a great step right off the get go in how we're set up for their 2024. Okay, thank you. You're welcome.
Joshua Spector: Our next question comes from Joshua Spector, what you'll be at. Please go ahead.
As the acquisition of Andre co, which again shows our focus and our attention to Europe and the growth. There. So net net across both of these I think the refinish team is absolutely positioned to grow up grow in 24 in Europe and are actually taking the right steps.
A quarter ahead.
Got it thanks for the color.
Our next question comes from Vincent Andrews with Morgan Stanley. Please go ahead.
Joshua Spector: Good morning. This is Lucas Sparland on the Josh. So, you're going to get back to your officially good. So, could you please kind of comment on the base volume growth there for us by region. And just for a highlight as well, what was the impact of the low margin exits in the quarter and kind of how much of that is like left to go now as we sort of roll into 2024.
Hey, Good morning, this is Steve Haynes on for Vincent.
Just wanted to maybe ask a quick question on the M&A pipeline.
Kind of how youre thinking about that going forward.
And on the flip side of that maybe you've kind of walked away from some business in refinish, but are there other areas of the portfolio that you'd.
Joshua Spector: So, you know, if I look at it quarter over quarter, let's, let's call it, you know, what we're seeing is I would call it, you know, a 5% decline in in volumes and a lot of this obviously related to what we went through with our refinished market. But if I look from this quarter into next quarter, we were essentially flat. And going into next year, I would say, you know, from a volume basis, we expect that to remain flat.
Think about pruning and yes, any kind of additional thoughts on that would be great. Thank you.
Yes, I think.
This is Carl so yes, just on the M&A.
Pipeline, obviously, Chris talked a lot, but we just accomplished here with Andrea Coke here in <unk>.
October.
But as we look forward here at least in the near term from a capital allocation perspective, we are really focused on our net leverage ratio as you saw in the slide deck, we have an opportunity where we set new targets, especially on net debt leverage to two to two five times.
Joshua Spector: Just explaining, you know, the dynamic quarter over quarter, Q2, 2, Q3 again, you know, primarily driven from our as for implementation, we made a large step up. But still, there's more opportunity obviously with us burning more of the backlog as I think about Q4 and prepping us for next year. But Q3 to Q4, we expect volumes to be overall flat and heading into next year to be flat. If you were to break that region by region, I would say Europe and North America, somewhat stable. And then South America, sorry, China continuing to be soft on the refinished side. Great, thanks.
The company has done a really great job in Delevering this year, and we think that.
We have a lot more that we can do and potentially even achieve that maybe the top end of our objective as we finish out 2024, and our net leverage ratio, but having said that as we look at the overall pipeline on M&A.
We will continue to evaluate those opportunities, but at this point I think the primary focus will be more a little bit more inward looking as we continue to delever and also reinvest back in the business.
Thank you.
Thank you.
Carl Anderson: And then I just sort of wanted to talk about kind of the one time bridge items going into next year. So just in terms of where we stand now with like what you know, so you highlighted the sort of 35 noise and the consultant spending that's not going to sort of occur. And then, you know, we have to have effect of like a lot of large prototypes, it's changing the ability contract pricing just anything else sort of that you'd like to highlight for us.
Our next question comes from Mike Harrison with Seaport Research Partners. Please go ahead.
Hi, good morning, Congrats on a nice quarter.
You noted the opening of the Jilin manufacturing facility in China can you give a little bit more detail on how that's going to help you grow in the mobility business there in China.
What additional capabilities.
Carl Anderson: That's known at this time to get kind of more through that post. Yeah, I think just to add what Chris said earlier in some of his comments is you think about, you know, the bridge in the 2024, we do expect a little bit more pricing. It's especially we think about what we can do and refinished as well as in some of the other verticals as well for us. And we think also decogs, at least on a year over year basis, will continue to trend favorably, especially at least through the first half, of 2024. So, those would be the primary areas of, you know, of the bridge that will help lock you to where we think 24 and up. Right, thank you. Thank you.
Let me provide for you.
Operator: Welcome.
Certainly thanks for the question, Mike and Yeah.
As we think about China, China.
The growth in China for Us if I think about that $200 million of net wins that is skewed a little bit more towards China and the best part of it I was looking at some numbers last night and our growth in.
Not only is our are we growing faster than the market on the ice side, but our growth on the EV side is 5% higher and that is an important it's an incredible market for EV and as you look at that we're certainly positioned for that growth.
And so what the facility provides us the ability to to make both waterborne and solvent borne.
Kevin Mccarthy: Our next question comes from Kevin McCarthy, with Vertkov Research Partners. Please go ahead. Yes, good morning. Chris, it sounds like you've made a lot of progress. With regards to your purchasing initiatives, can you provide a little bit more color on the raw material cost outlook, heading into 2024 and perhaps where you're seeing the most deflation or the most stickiness in your input costs? Sure, love to. So, I think, you know, I would say, you know, as we look at Q4 and also into 24, I would call it, you know, mid single digit opportunity on material.
<unk> it.
Kevin Mccarthy: You know, this is still going to provide us a tailwind. Now, in terms of, you know, there is one, a few outlying factors, we are monitoring oil and we, but at this point, we're certainly not seeing any impact on our downstream market. But, you know, oil does play a key factor in solvents, as well as if we think about freight, but again, no pressure that we are seeing at this time, but apoxys, isocyonites and resins are all trending favorably. So, as I think about 24, we still, you know, from our planning standpoint, where I would say we see mid single digit opportunity in material performance. Okay.
Kevin Mccarthy: And then, would you comment, Chris, on your outlook for auto builds, I think, ex halta used to provide some fairly specific numerical guidance. I didn't see that unless I missed it, but maybe you can kind of talk through what you're thinking about for the fourth quarter, as well as 2024 as it relates to production backdrop. So, fourth quarter, you know, obviously, you know, going around the world, Europe seems to be stable and growing.
The overall productivity improvement across the entire global network.
Alright, thanks very much. Thank you welcome.
Our next question comes from.
He passed away from Berkeley.
Go ahead.
Great. Thank you good morning nurse.
Chris just one higher level questions for me, there's been a number of board refreshments. The past few months in addition to yourself and Carl joining exalt.
Kevin Mccarthy: China is just going to gangbusters, if I look at Q3, and also, you know, as we look at our forecast for Q4, the team's just done a stellar job, also on top of our winds. You know, if we look back a year ago, we talked about $200 million of new wind running through the PNL at the back end of 24, and we're certainly seeing our share of not only growth, but also the market rebounding in China.
Could you maybe just speak to what the new board joiners bring to the table or any sort of specific attributes are qualities.
Board is really looking to refresher or enhance going forward.
Sure I'd Love to Mike I think you know just lucky.
Looking at the last two announcements and starting with Kevin Stein.
Kevin Mccarthy: So, so far, you know, as I look at Q3 and Q4, I would say, you know, globally, the market seemed to be trending the right way. Specific to North America, obviously the step down in with the UAW strike. We certainly saw, we saw minimal impact from the strike in Q3, as you can see from our performance. In Q4, I would say, you know, we're guiding to 1% of our revenue being impacted possibly from the strike, but if that gets resolved here, you know, based on where the discussions are going, that we do see some level of opportunity there in our guide as well.
Even obviously Ah sitting seal out of trance dine and it.
In terms, we we have a great board that that is walk to work. This company through a lot of the pandemic and is looking forward one of the things that we wanted to continue to drive is obviously a value accretion and as I look at you know.
The new board members, what they bring us.
Two one is sitting C E O's, which will provide a base for me to also work with and also the fact of the the value creation story that both of them have done.
<unk> has gone through an amazing journey and as I look at Marianne what she brings and.
Kevin Mccarthy: Now looking at 24, all indications to your point, you know, are that markets are going to start building up. So, you know, bills for the global bills, we see that going up to $89 million. So certainly a positive trend, they're heading back to, you know, the numbers we saw, let's call it pre-pandemic. The one outliers on the commercial vehicle side, on the commercial vehicle side, I would say, ACT has markets going down to 275,000 bills.
Certainly both on the private equity side as well as on public boards.
It just done an incredible job and and driving value and this is just not only with what she's done at sundown or is doing with funding, but also previously with Tyco Exxon and Alcoa and both of them also bring up quite a bit of experience from the standpoint of chemical.
Kevin Mccarthy: Obviously, we're running at a well north of 300 right now at 325. So there's a bit of a risk there, but that said, I think the teams doing well with winning new business and also driving price and cost actions that we should see overall margin continuing to improve into 24. Perfect. Thank you so much. You're welcome.
Background.
Kevin being a Phd in chemistry helps and obviously Mary with a background in chemical engineering. So certainly there the right mix of for our board and.
And certainly you know as I look at the board structure that we have certainly we have an incredible talent.
That we have from all aspects, whether it's operational Ah finance and I think you know this just round it off with folks that have also been that are currently sitting Ceos.
Steve Barney: Our next question comes from Steve Barney with Bank of America. Please go ahead. Thanks. One of the drill in a little bit on refinished your your low single digit organic sales in the third quarter seems a little modest, given you have these pricing initiatives, you have the, you know, MSO partner keeps acquiring you got your, your, your automated mixing technology. Would you expect organic sales and refinished, you know, post higher gains in in 2024 perhaps bolstered by, you know, these recent acquisitions with the Andre Koch and the BMW group. What's your all about in 2024?
Great I think if you can get your margins anywhere near where it transforms our investors would be very very happy.
[laughter]. That's that's the goal there you go [laughter] that's the sad.
Our next question comes from large <unk>. Please go ahead.
Mmm, Thanks, and good morning <unk>.
Took a couple of times a bounce.
Cause I was wondering if you could talk about the the button next he's not on the test and the science team Oh is it something on your site and I guess, what can you do to do some of those thank you yeah.
Yeah, so absolutely so I I would say the bottlenecks the the one place that we have just a bottleneck is just on the refinish business and this is just with our facility in Virginia, we've done an exceptional job, bringing down the backlogs from Q2 Q3, and you know as we met we noted this in our.
Chrishan Villavarayan: Yeah, let me address it in two ways. I think first let me address it from a volume standpoint and I think, you know, going back to the questions we had last quarter and also this quarter. You know, one of the primary drivers from a volume perspective, you would notice that we've been taking a bit of a step back, but that's primarily because we've been focused on driving the margin. And what we have done is, you know, whether it's in thinners or in certain businesses in South America or architectural business in South America, we decided to let's call it make a decision to exit these to ensure that we were driving the margin and ensuring that we had the capacity for higher margin products.
Q to guide, we we did say that we were being conservative and driving too if we reduce the guide we would obviously see better performance with and this is obviously.
Track through as we see in Q3, there is more of a backlog that we can take out and we will be focus to do that and I believe will be back to normal lines backlogs in the refinish business in Q1 of next year. So we still have some backlogs through Q4, and it's just an already finished business.
Chrishan Villavarayan: So that was a decision we made because the focus was again to make sure that we maintained and grew margins in terms of let's call it sales to your point. Yes, we do see opportunity as we continue to win that we will continue to drive growth into 24 as well, especially with the acquisition we just announced. And on top of that, the team has done a great job continuing to win net sales and that'll be the growth trajectory as I look at 24 as well.
And just to answer the question is still you know, there's still opportunities to drive efficiencies.
Chrishan Villavarayan: But I would say ex thinners and ex let's call it the decision we made in South America, volumes have been somewhat flat. So it's not like we're going down and if anything else, you know, there's only opportunity from a growth standpoint, both from the acquisition as well as the net sales wins for 24.
With us for an all that sad as I look into twenty-four operationally I do believe that there are more efficiencies that we can drive through the entire company and this talks to the investments that Karl talked about and productivity investments that we're gonna drive next year.
Thank you and and if we combined backlog the comments on the E. M. P. The fact that <unk> wasn't gray Tom volumes, the pruning on products and easy to send it to assume that you should <unk>.
This whole meaningfully volumes compared to your assumption of this table <unk> cancel refinish next year.
Yeah, I think you know will provide a little bit more commentaries, we think about 2024 coming up here in in the next couple of months, but Ah. So right now the you know the focus is obviously to finish out the year strong and really position exalt all four of 2024, but overall I think ER, what's in front of us, especially not only and we finished.
Chrishan Villavarayan: And then perhaps in mobility, what would you attribute the new business wins that you're talking about, is this a technology game for you to have better technology that benefits your customer. And how significant is this, this new technology, this two-tone technology, what is it next, next jet, how significant of an opportunity is that in your view? Well, let me break it up into two things. I think, you know, if I go back a year ago and talk about the wins that the mobility team has done, I would say here it's a pure focus around service and the relationship that the mobility team has built.
But and some of the other political as as well as we continue to think there are some additional upside as we you know get into 24 and beyond.
Thank you thank.
Thank you.
He's concludes today's conference calls.
Chrishan Villavarayan: With the customers, and it's not specific to a region, it's globally, the wins are in North America, the wins are in China, significant wins in China and also in Europe. And this has been, you know, two credit this to two things, certainly technology but also purely the service and the relationships that the team has done an incredible job building. Now, in terms of the Zaw relationship or the next jet announcement we made today, here it is technology.
<unk> <unk> <unk> <unk> <unk> and have a great day. Thank.
Thank you.
[noise] [music].
Chrishan Villavarayan: And if you think about, you know, if you think about, you know, a Mustang or, you know, where you have a different color roof, you know, a two-tone roof with the rest of the car. What we do with this technology is provide the opportunity for our customers to not pull them out of the body shop or the paint line and take them to a separate process to paint the roof separate from the rest of the vehicle.
Chrishan Villavarayan: We provide the ability for our OE partners to essentially run it through the paint shop and apply these both applications at the same time. That provides enormous opportunity and gets away from an offline process, which we believe will drive enormous levels of productivity in cars that need two-tone painting. And these are custom cars. These are very expensive cars. So I think this is an opportunity that we believe will provide a lot of value for our customers going full. Thank you.
Unknown Executive: You're welcome.
Abigail: Our next question comes from Michael Sison with Wells Fargo. Please go ahead. Hi, this is Abigail on tonight. Thanks for taking my question. So I believe this is already touched on a bit, but some of your peers have noticed in the reconnished days, sharegames, and I think mostly in the last quarter, do you have a response to that? Have you been experiencing any share loss? And then twofold, thinking back to your recent-ish day last December, you mentioned Europe as being a keen new market for growth for you. How has that changed in the last year given macroeconomic trends in the region?
Chrishan Villavarayan: So I think a great question, thanks for the question, Abigail. We certainly win many, and we also lose some customers. But what I can't say is we're on track this year for 2000 net body shop wins. So overall, I would say we continue to win. And looking back at the last three years, this team has done an exceptional job with 10,000 net body shops. And I think the broader perspective of measuring this year over year is if I look at the refinished team and joining this company, the best thing you can talk about is the fact that in 21, the refinished team had record sales in 22.
Chrishan Villavarayan: The refinished team had record sales. And in 23, at the rates they're going, they're going to hit record sales in 23. So an exceptional team, and talking about the BMW and this early in the year sets up beautifully as I think about 24 with 730 new body shops just starting out the year. So I would say the team is well positioned to continue to grow. And it all aligns with the strategy that Troy and the team kicked off a year ago at refinished day.
Chrishan Villavarayan: It was actually my first day in Exalta, and actually hadn't even been in the role. And to your point, we talked about the growth in Europe. And the best part is today we announced two things. One is the BMW announcement, which mostly impacts our growth in Europe. And the second one is the acquisition of Andre Cove, which again shows our focus and our attention to Europe and the growth there. So net net across both of these, I think the refinished team is absolutely positioned to grow in 24 in Europe, and are actually taking the right steps, you know, a quarter ahead. Got it.
Abigail: Thanks to the color.
Operator: You're welcome.
Steve Haines: Our next question comes from V-Pink Andrews with Morgan Sonley. Sweet go ahead. Hey, good morning. This is Steve Haines on For Vincent.
Carl Anderson: I just wanted to maybe ask a quick question on the M&A pipeline, kind of how you're thinking about that going forward and on the flip side of that maybe you've kind of walked away from some business and we finished but you know are there other areas of portfolio that you'd you know think about pruning and yes any kind of additional thought from that would be great thank you. Yeah thank you this is Carl so yeah just on the M&A you know pipeline obviously Chris Takalab but we just accomplished here with Andre Koch here in in October but as we look forward here at least in the near term from a capital allocation perspective we are really focused on our net leverage ratio as you saw on the side deck you know we have an opportunity where we set new targets especially on that that leverage to two to 2.5 times the company's done a really great job in delivering this year and we think that you know we have a lot more that we can do and potentially even achieve the maybe the top end of our objective as we finish out 2024 on a net leverage ratio.
Carl Anderson: But having said that as we look at you know the overall pipeline and M&A you know that we will continue to evaluate those opportunities but at this point I think the primary focus will be more live and more inward looking as we you know continue to deliver and also reinvast back in the business. Thank you.
Michael Harrison: Our next question comes from Mike Harrison with C-Port Research Partners please go ahead. Hi good morning congrats on a nice quarter. You noted the opening of the Gillin manufacturing facility in China. Can you give a little bit more detail on how that's going to help you grow in the mobility business there in China. Maybe what additional capabilities does that facility provide for you. Certainly thanks for the question Mike and yeah you know as we think about China China you know the growth in China for us you know if I think about that $200 million of net winds that is skewed a little bit more towards China.
Michael Harrison: And you know the best part of it you know I was looking at some numbers last night and our growth in you know not only is our are we growing faster than the market on the ice sites but our growth on the EV side is 5% higher and that is an important it's an incredible market for EV. And as you look at that we're certainly positioned for that growth. And so the facility provides us the ability to make both waterborne and solvent born products.
Michael Harrison: It's great in a sense that it protects it gives us capacity both on the refinished side and as the market starts to trend towards more waterborne products. It gives us extra capacity which obviously gets us ready for the growth in region. So across the board I would say as I think about next year and where we're going this facility certainly provides us the capability to continue to grow.
Chrishan Villavarayan: We just had our official opening this last week and again just a great story as the production ramps up through 24.
Carl Anderson: All right, and then also curious, it sounded like you're going to be accelerating some of your capital investments into next year. Can you walk through what some of the key projects might be that you're investing in? Yeah, so as I referenced on the on my prepared remarks, capital expenditures, the one thing you'll see is our investment in S4 and the ERP system will trend down as we get into 2024, but that will be replaced and probably even a little bit more just with overall really primary focus productivity investments in the network and so we believe there's an opportunity for our facilities to get more efficient. And so we're going to be taking a closer look at where we can invest those dollars really just to drive overall productivity improvements across the entire global network. All right, thanks very much. Thank you, welcome.
Michael Leithead: Our next question comes from Michael Leithead with Barclays. Please go ahead. Great, thank you.
Michael Leithead: Good morning, guys. Chris, just want to hire a level question for me. There's been a number of board refreshments say the past few months and additions to yourself and Carl joining.
Chrishan Villavarayan: Can you maybe just speak to what the new board joiners bring to the table or any sort of specific attributes or qualities the board is really looking to refresh or enhance going forward? Sure, I'd love to Mike. I think, you know, just looking at the last two announcements and, you know, starting with Kevin Stein, you know, Kevin, obviously sitting CEO of TransDine. And, you know, in terms, we have a great board that has walked us walk this company through a lot of the pandemic and it's looking forward.
Chrishan Villavarayan: One of the things that we want to continue to drive is obviously value accretion. And as I look at, you know, the new board members, what they bring is, you know, two, one is, you know, sitting CEOs, which will provide a base for me to also work with. And also the fact of the value creation story that both of them have done, you know, TransDine has gone through an amazing journey and as I look at Mary and what she brings in, you know, certainly both on the private equity side as well as on public boards, you know, just done an incredible job in driving value.
Chrishan Villavarayan: And this is just, you know, not only with what she's done at Sundine or is doing with Sundine, but also previously with Tyco, Exxon and Alcoa. And both of them also bring quite a bit of experience from the standpoint of chemical background, you know, Kevin being a PhD in chemistry helps and obviously Mary with a background in chemical engineering. So certainly the right mix of for our board. And certainly, you know, as I look at the board structure that we have certainly we have an incredible talent that we have from all aspects, whether it's operational finance.
Chrishan Villavarayan: And I think, you know, this just rounds it off with, you know, folks that have also been that are currently sitting CEOs. Great, I think if you can get your margins anywhere near where trans times are, investors would be very, very happy. That's a goal. There you go. That's the set.
Lauren Favre: Our next question comes from Lauren Favre, with DMP. Please go ahead. Thanks and good morning. Chris, you've talked a couple of times about backlogs. I was wondering if you could talk about the bots next. Is that on the customer's side still or is it something on your side? And I guess what can you do to some of those? Thank you. Yeah, so absolutely. So I would say the bottlenecks, the one place that we have just the bottlenecks is just on the refinished business.
Lauren Favre: And this is just with our facility in Virginia. We've done an exceptional job bringing down the backlogs from Q2 to Q3. And as we noted this in our Q2 guide, we did say that we were being conservative and driving to, if we reduce the guide, we would obviously see better performance. This is obviously track through as we see in Q3. There is more of the backlog that we can take out and we will be focused to do that.
Chrishan Villavarayan: And I believe we'll be back to normalize backlogs in the refinished business in Q1 of next year. So we still have some backlogs through Q4 and it's just in our refinished business. And just to answer the question, there is still opportunities to drive efficiencies with S4. On all that said, as I look into 24 operationally, I do believe that there are more efficiencies that we can drive through the entire company. And this talks to the investments that Carl talked about in productivity investments that we're going to drive next year.
Chrishan Villavarayan: Thank you. And if we combine the backlog, the comment on the ERP, the fact that this year wasn't great on volumes, the pruning on products, I mean, is it fair to assume that you should perform meaningful volumes compared to your assumption of a stable market for recination next year? Yeah, I think we'll provide a little bit more commentaries. We think about 2024 coming up here in the next couple of months. So right now, the focus is obviously to finish out the year strong in really positioned exulta for 2024.
Chrishan Villavarayan: But overall, I think what's in front of us, especially not only in refinished in some of the other verticals as well, we continue to think there's some additional upside as we get into 24 and beyond. Thank you.
Operator: This concludes today's conference call. You may disconnect your lines at the time. Thank you for your participation and have a great day.
Operator: Thank you.
Operator: [inaudible]