Ladies and gentlemen, thank you for standing by and welcome to the Axalta's Second Quarter 2020 Earnings Conference Call. All 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 and replay will be available through August 4th.

Those listening after today's call should please note that the information provided in the recording will not be updated and therefore, may no longer be current. I will now turn the call over to Chris Mecray. Please go ahead sir. .

Thank you and good morning. This is Chris Mecray VP of Investor Relations. We appreciate your continued interest in Axalta and welcome you to our second quarter 2020 financial results conference call. Joining me today are Robert Bryant, CEO; and Sean Lannon CFO.

This morning, we released our quarterly financial results and posted a slide presentation along with commentary on the Investor Relations section of our website at axalta.com, which we'll be referencing during this call.

Both our prepared remarks and discussions today may contain forward-looking statements reflecting the company's current view of future events and a potential effect on Axalta's operating and financial performance, including those related to the impact of COVID-19 and our actions in response as well as our restructuring efforts.

These statements involve uncertainties and risks and actual results may differ materially from those forward-looking statements. Please note that the company is under no obligation to provide updates to those forward-looking statements. This presentation also contains various non-GAAP financial measures.

In the appendix, we've included reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information regarding forward-looking statements and non-GAAP financial measures, please refer to our filings with the SEC. I will now turn the call over to Robert..

Good morning. Thank you for joining us for our second quarter earnings review. Today, we will provide an update on our quarterly results, the impact of COVID-19 on Axalta's operations, and the continued actions we're taking in response, including the launch of a global restructuring initiative.

A more detailed review of the quarter has been published to our website along with our presentation and we will keep our remarks brief today as a result. Before we begin, I do want to wish everyone good health, as health and safety remain top of mind for us at Axalta.

We continue to focus daily on ensuring that we maintain safe operations globally for the benefit of our employees, customers, suppliers, and the communities in which we operate.

We commented in detail on this during the quarter but I also want to emphasize that we operate every day at Axalta with a commitment to diversity, equality, and inclusion and the way we treat all employees, customers, and partners.

Shifting now to our second quarter results and highlights, we continue to navigate this challenging pandemic period based on the three guiding principles that we shared in our May update, which include maintaining employees safety and well-being, maintaining operating flexibility, and maintaining financial flexibility.

I believe you will see that we have been well-served by focusing on these three areas. We were very pleased to see a significant net sales recoveries within the quarter, following the bottom set in April.

In June, we saw a recovery to down 24% in overall constant currency net sales from prior year levels and 82% higher than the low point we saw in April.

This came on the heels of gradually resumed automotive production in the back half of the quarter, a sequential recovery in miles driven globally, some improvement in broader industrial production through the period, and improved housing market metrics supporting our industrial wood and coil coatings businesses.

Total net sales for the quarter decreased 39.7% before FX and M&A impacts. Performance Coatings second quarter net sales decreased 32.3% on a constant currency organic basis with Refinish decreasing 38.7% and industrial decreasing 23.2%.

Transportation Coatings net sales ex-FX decreased 53.7% year-over-year in the quarter with light vehicle decreasing 54.9% and commercial vehicle decreasing 50.1%. Consolidated adjusted EBIT for the quarter was a loss of $12 million clearly reflecting the extreme volume pressure in the period.

Performance Coatings adjusted EBIT of $2 million was significantly pressured by the decremental effects of lower volume lower average price/mix and FX pressures. Transportation Coatings adjusted EBIT loss of $39 million also included clear volume drop-through effects.

Axalta's adjusted EBIT results also included the unfavorable impact of accounting charges in the period related to COVID-19, primarily associated with underutilized manufacturing sites, which totaled $45 million. Excluding these charges, our adjusted EBIT and our adjusted EBITDA would have been closer to $33 million and $90 million respectively.

With demand sequentially improving through the quarter along with utilization picking up in our sites globally, it was encouraging to see results return to profitability in the month of June after two challenging months to start the quarter.

Axalta's balance sheet remains in great shape notwithstanding the increase in our reported net leverage ratio due to the impact on the profit denominator in the second quarter. With the execution of the 4.75% coupon $500 million senior notes in June along with the actions we've taken to conserve cash, our liquidity position remains extremely strong.

In response to the demand impact of the global coronavirus pandemic, today we announced the initiation of a global organizational restructuring. The initial action is expected to generate annualized savings of approximately $50 million once fully implemented.

Additionally, we're actively planning incremental steps to further reduce our cost structure and increase our speed and agility to market.

These may include in the near-term further headcount reductions in Europe pending consultations with works councils and other local legal requirements and other potential changes to streamline and improve the business globally.

We're now moving forward to position Axalta for profitable growth across our served markets, especially, in higher growth segments of the coatings market. Turning to the overall demand environment, Axalta benefited from sequential recovery following the volume bottom set in April.

In Refinish, total miles driven and accident rate volumes globally continue to be impacted materially by stay-at-home restrictions, but the magnitude has moderated over the last several months. From the bottom set in April with traffic down 45% to 50% in the U.S.

we have seen traffic rebound solidly and closed the gap with pre-COVID levels by early June. That being said comparisons against prior year traffic remain challenged approximately 15% to 20% below prior year levels on a seasonally adjusted basis as of the end of June.

In Europe, traffic levels have remained highly variable between countries, but we've seen broad recovery since April to levels exceeding the pre-COVID baseline of traffic levels in mid-January. In China, once mobility restrictions were lifted in March, traffic resumed to nearly normal levels within weeks.

This appears to be the fastest and most robust level of recovery we've tracked of the most populous countries. Axalta's total China net sales in June were up 4% from the prior year. Our body shop customers in the U.S.

and Europe have seen activity in the range of roughly 80% of prior year toward the end of the quarter, a substantial recovery from the end of the first quarter where demand was trending at approximately 60% of the prior year.

In our industrial end market, Axalta's second quarter results continue to show more resilience overall relative to our other businesses given the wide dispersion of global customers and markets served as well as ongoing new account additions we've seen this year.

During the second quarter, while each of the industrial sub-businesses saw a significant impact from lower volumes, the bulk of that impact occurred during April and May, while June saw a significant recovery in volumes from the lows.

In some sub-businesses we saw full recovery to around even with prior year net sales levels, including wood and coil coatings.

At the end market level, while lower automotive production has impacted e-coat customers and general industrial customers that sell into automotive tier suppliers, other markets including building and construction and agriculture have recovered to operating rates above prior year levels notably in North America.

In our Transportation Coatings segment, most global automotive and truck OEMs temporarily halted production for a portion of the second quarter, impacting April most severely, but continuing through the quarter as initial restarts began in mid-May.

Axalta generally expects to track the recovery rate of the global vehicle markets and this has been the case in recent weeks. In China, we've seen significant production recovery across all vehicle markets. Customer production sites began to reopen in early March and second quarter production even exceeded prior year levels in certain weeks.

Passenger vehicle retail sales in China have rebounded fully from the COVID-19 impacts with total sales up 1.8% in June versus the prior year. China light vehicle net sales volumes for Axalta increased in June by healthy double-digit levels versus the prior year. For the U.S.

automotive sector, aggressive incentives coupled with low financing rates continued to bolster early recovery with demand stimulation. Signs of this recovery have been seen in automotive sales during June, which recovered to 13.1 million units sold up from a 12.3 million level in May.

For the quarter, global light vehicle production declined 45% including a 23% decrease in Asia-Pacific, but a 9% increase in China. Current industry forecasts call for a 22% drop in global builds for the full year including a decrease of 11% for the third quarter. It's worth noting that forecasts have improved in each of the last two months.

Overall global truck production decreased 33% in the second quarter and current forecast for Class four to eight truck production suggests a 25% decline for the year with third quarter down 28%. The overall truck market also appears to be firming slightly.

In recent production estimates by industry forecasters have increased in the last month due to stronger-than-expected orders notably in the Class 8 vehicle segment in North America With that I'll turn it over to Sean for some additional details. .

Thanks, Robert. As we noted earlier, we reported a second quarter constant currency organic net sales decline of nearly 40% overall. The declines were more severely impacted by the 54% decline from the Transportation Coatings segment as customers curtailed production at unprecedented levels during April and through much of May.

The low production rates triggered accounting charges in the period related to this reduced demand totaling $45 million.

These charges were primarily associated with fixed costs expensed in the period due to low utilization rates at manufacturing sites that normally would have been absorbed into inventory, coupled with higher inventory and accounts receivable reserves, as we did see some credit concerns pick up in certain markets.

Our reported results clearly would have been substantially different without these charges. Regarding COVID-19 impacts and our response actions, during the second quarter we exceeded our target of planned cost actions by achieving total savings of $75 million.

And we've increased our in-year 2020 savings target to at least $130 million from the prior target of $100 million with the remaining balance weighted more heavily during the third quarter.

Likewise, we exceeded our cash flow actions during the quarter, delivering $70 million of incremental discrete cash flow savings separate from the cost actions and have increased our full year target for cash flow actions for at least $140 million versus $125 million plus previously communicated.

In combination, we now expect to deliver incremental cash flow in excess of $270 million, including the cost reduction actions. Notably, during the quarter, we avoided any cash or cost actions that would have sacrificed our market positions. And in fact, we continue to accrue new accounts across many of our business lines.

Regarding the restructuring announced today, this action which is subject to works council consultations and other legal requirements is expected to generate annualized cost savings of approximately $50 million to be achieved over the next 24 months with $40 million by the end of 2021.

Axalta now anticipates approximately $195 million of in-year 2020 cost savings across all active initiatives. This includes the restructuring actions announced today combined with previously planned actions including ongoing Axalta Way savings initiatives and the $130 million of temporary savings measures related to COVID-19.

Robert noted our solid balance sheet at second quarter end. We closed the quarter with total liquidity of approximately $1.5 billion including the $500 million senior notes issuance in the period. Free cash flow for the second quarter totaled a use of $18 million, which was notable given the 44% as reported decline in net sales.

This outcome benefited from actions taken during the period to maximize liquidity and we're extremely proud to demonstrate this financial flexibility to our shareholders during an extreme case of volume volatility.

Regarding our outlook, given the ongoing impacts from the pandemic, we expect net sales in the third quarter to be down approximately 15% to 20% from the prior year quarter. We expect the relative decline between the two segments to be even given the various trajectories of recovery across our different businesses.

For the full year, we now expect diluted shares of $236 million, capital expenditures of $80 million and interest expense of approximately $150 million reflecting our new $500 million debt issuance.

We would also note that raw material savings which began to accrue in small amount last fall have remained somewhat constrained by low net sales volumes and limited inventory purchases year-to-date.

Given the expected lower net sales, we would expect the raw material savings we realized to remain somewhat limited in the third quarter, although marginally a positive.

Additionally, our net sales in July are expected at approximately 14% below prior year results, a further improvement from June's 24% below prior year results on an organic basis excluding currency. I'll now turn it back over to Robert..

In conclusion, the second quarter was a particularly challenging period for many companies, including Axalta, due to the global coronavirus pandemic.

Despite the 40% drop in organic constant currency sales we experienced, thanks to Axalta's highly flexible business model and actions management undertook, we were able to generate near breakeven adjusted EBIT and incur only a modest use of cash. I believe this illustrates the strength and resiliency of our business model.

We believe the back half of the year assuming the benefit of continued recovery may also be an opportunity to underscore this resiliency, including solid free cash flow generation, despite ongoing net sales headwinds from the prior year.

I'd also like to take an opportunity to thank each member of Axalta's great global team for the continued strong efforts made during this challenging period.

I'm confident that the extra efforts will make Axalta a better and stronger competitor emerging from the pandemic and that our work both protects the company from near-term impacts, while also setting us up for longer-term value creation with a cost structure fit for global competition in all markets.

I continue to see examples every day of Axalta team members going above and beyond to improve our business, serve their communities and to offer the best products and services to our customers possible. This passion is the engine of Axalta's success and it's inspiring to witness. With that, we'll be pleased to answer any questions.

Operator, please open the lines for Q&A..

And at this time, we will be conducting a question-and-answer session [Operator Instructions] Our first question is from David Begleiter from Deutsche Bank. Proceed with your question..

Hi. Good morning. This is actually Katherine Griffin on for David. Thanks for taking my question. I appreciate all the color you've given, just on what you've seen in terms of the cadence of business trends by month.

But just wondering, if you can maybe walk around the world here today in July in terms of what you're seeing for the performance business?.

This is Robert. In our Refinish business, I think we're seeing miles driven and accident rate volumes come back up. We obviously would like to see higher traffic densities that will likely come, when there's more of a return to work and a return to school to get back to the pre-COVID seasonally adjusted levels. In the U.S.

and Europe, we're still seeing about 15% to 20% below pre-COVID seasonally adjusted levels. China, we're seeing a pretty strong rebound there, but still below pre-COVID seasonally adjusted levels for the moment. And then, we've seen Asia excluding China coming back but there's a little bit less specific data there.

And then of course Latin America, as everybody has been reading, I'm sure still being heavily impacted by COVID. But big picture, we're seeing the Refinish business come back quite nicely from the lows of April and coming back strong. In industrial, industrial production is expected to continue to improve.

I think we were down roughly 13% in the second quarter expect to see that according to the forecast down about 7% in Q3 and about 4% in Q4 as the world continues to recover. And some of our businesses there, a little bit more color, I am sure maybe you'll have questions on that.

In our wood business, we're seeing solid demand in our wood business in our core anchor customers in particular our kitchen business remains strong and has a healthy backlog of orders in June that will continue through July. Housing starts, although they're below prior levels are also improving. So I think we're encouraged in the wood business.

Oil business is benefiting from stronger demand in construction as well as the RV market and the housing market, which is expected to continue through the summer. Our Energy Solutions business is perhaps one of the least impacted industrial submarket and we're seeing an increase in demand there for electric motors and for electric vehicles.

So we continue to be excited by the long-term prospects of this business. In general industrial, which goes a little bit more into the automotive tiers agriculture and structural equipment and distribution that business understandably is a little bit slower to recover given some of the end markets that particular sub-segment serves.

And then our powder business we're seeing better performance in powder in the Americas and EMEA in particular. If we move over to Transportation, as you heard in our commentary China was ahead of the rest of the world in the cycle and they're back to close to their normal trajectory.

And we'll talk about here in a minute, I'm sure the performance of the business compared to the overall market here. But they're currently showing signs of a strong second half of the year. In Europe, the ramp-up has been a little bit slow than we expected in Q2.

And we expect to hit kind of our 2020 peak for that business sometime during the third quarter. Pricing in that business remains on track and it's somewhat related to new color and model introductions. And we've also had a couple of nice wins in the second quarter in our light vehicle business that will benefit us in particular next year.

Commercial vehicle business, obviously everybody is seeing the drop off in builds that we've seen there in the marketplace. But we've actually had in the – of course we're in larger markets than just the heavy-duty truck business.

We're in a multitude of other transportation segments within commercial vehicle, including the RV market which is where we have seen some demand for our coatings actually be quite strong..

Thank you very much..

Our next question is from Chris Parkinson from Credit Suisse. Please proceed with your question..

Great. Thank you very much and glad to know everybody is doing well. Just a very simple question for me.

Just given your cost programs which are clearly progressing well on just both temporary as well as the more structural ones how – and as well as the movements in raw materials just netting those two things out, how should the street think about the decrementals for 3Q, as well as probably more importantly the incrementals coming back once volume truly returns? Thank you..

Hey, Chris, this is Sean. Good morning. I guess, the kind of reiterate what we saw in March just given the quick decline we saw roughly 44% decrementals on the $90 million impact back in March. I know we communicated that, but just to reconfirm that data point.

What we saw in the second quarter was closer to 42% and we highlighted these accounting charges. The vast majority of the accounting charge is actually related to utilization in our plants. So, more of a U.S. GAAP concept. Once you drop below certain normal levels as you define capacity, you take those charges immediately to the P&L.

And just given, again, the dramatic drop-off that we saw in April and May that really triggered these nuanced accounting charges in the quarter. We're not anticipating those to reoccur. When you think about that $45 million and essentially pro forma it, our decrementals were probably closer to 32%.

And we would expect the decrementals to slightly improve as we head into the third quarter, given our expectations of 15% to 20% of the drop in top line. And then longer-term, it's really going to be all dependent on how we continue to see recovery.

If we continue on the trends, those decrementals will continue to improve as we get to the fourth quarter..

Got it. And then, just second question, can you just give us some broad remarks on your assessment of the Refinish business, outside of general miles driven trends? So, just so body shop and distributor inventories, your market share trends within the U.S. as well as Europe.

So, just any comments on the kind of variables which in your control, would be greatly appreciated. Thank you..

So, body shop activity is, across North America and Europe, is at approximately about 80% of kind of pre-COVID activity levels. So, the good news is that I think we're seeing activity levels pick up and get back up to higher levels on the body shop side of the business.

I think we will need to see more stability in the COVID situation Chris, in order to get to a high enough level of miles driven that we see congestion at peak hours. We think morning commute, after commute midday errands, and that type of thing as key congestion periods.

We'll need to get to a higher level of miles driven before those congestion periods kind of take us back to the number of kind of total accident volume that we had pre-COVID. But as we continue to see miles driven move up and more activity and congestion pick back up, we expect to see that return.

From an inventory perspective, I think as we said on our last call, we've seen distributors running with very low levels of inventory just given their business models. And effectively today, I'd say, almost all of our distributors are effectively buying to demand and have brought down buffer inventory levels to fairly low levels.

And from a competitive perspective, we haven't seen any major changes in the landscape, and we have not let the COVID pandemic affect our ability to service our customers and make sure that we're getting our customers around the world what they need.

And to the extent that they run into issues and we need to troubleshoot problems and so forth, we've been doing a lot of virtual problem solving with our customer base to keep everything moving. And then, where we can in a socially distant and safe way, we've been having our sales and our technical support teams be fully out in the field..

Thank you very much..

Our next question is from P.J. Juvekar from Citigroup. Please proceed with your question..

Good morning..

Good morning, P.J..

Robert, did you said something -- you just said something interesting about morning traffic versus afternoon traffic and miles driven.

Are all miles driven equal for you, or is it that maybe the morning congestion is better for you than afternoon traffic or vacation traffic? Can you just sort of go into further detail about what's really good? And is one particular type of traffic better than other?.

Well, I think it has to do P.J., with the level of -- sort of the level of miles driven, right? When you see miles driven drop as much as they did, for example, in April just from a proximity perspective congestion levels get to be, so -- get to be very, very low.

But to your point, in addition to the miles driven, you also do need to see in the business congestion at the typical congestion hours and you need to see digestion levels increase in order to get back to the full accident volume that we had on a pre-COVID basis..

Okay. And then my second question is on sort of heavy-duty Class 8 cycle. As people sit at home, and order from Amazon and more goods are delivered by truck. Is it possible that maybe Class 8 comes back faster than passenger vehicles? Thank you..

I think what we would expect to see, just from an incentive perspective is, if you look at the IHS forecasts for the market, I think the forecasts are actually showing a faster recovery in the passenger car and passenger truck market, heavily driven, of course, by some of the incentives that we're seeing in terms of zero interest loans, deferred payments and other options.

Now some of the data in certain regions may show commercial vehicle coming back. But, I don't know that the, sort of the Amazon effect is necessarily going to be a big driver in terms of having a commercial vehicle or Class 8 heavy-duty truck recovery outpace, what I think we hope to see in the light vehicle space..

Thank you..

Our next question is from Silke Kueck from JPMorgan. Please proceed with your question..

Good morning.

How are you?.

Good morning, Silke..

Can you discuss what led to the lower price/mix in the Refinish business? Like how much was lower price and how much was lower mix? And what do you expect for the next couple of quarters?.

Yes. The outcome was driven almost entirely by mix. Price was actually positive in the year-over-year comparison. And we continue to push our regular cadence of pricing in Refinish globally as we always have. The second quarter result was really driven by buying patterns from distribution customers.

And to a lesser extent, we also sold a larger quantity of mainstream and value-oriented products in the second quarter. .

Regarding the new restructuring program that you initiated, how much of the cash charges of the $55 million to $65 million do you expect to spend this year versus next year? And what's the CapEx component of those charges of the cash costs?.

Yes. So roughly $25 million and the cash cost will be spent in 2020 with largely the difference going out in 2021. There's a small piece that will continue in the 2022. As far as the CapEx ranging $10 million to $15 million. We are looking at rationalizing certain capacity in our manufacturing footprint.

So they are the components there and that will largely be spent in 2021. .

And do you have a D&A target for the year? I can say it looks like the D&A is coming down, it came down a bit in the second quarter versus the first and what are your target for the year?.

We're trending towards closer to $320 million including the step-up. But certainly, with our pullback on the overall CapEx budget you're starting to see that benefit come through from the D&A effective lines trending down. .

The step up is about like $105 million?.

That's right. .

And thanks very much..

Our next question is from John McNulty from BMO Capital Markets. Please proceed with your question..

Thanks for taking my question. I guess I had two of them. The first one is you've got a lot of cost-cutting programs and initiatives now and admittedly it's a little bit tricky to kind of keep up with them. So I guess two things.

Can you help us to understand sequentially how much of a benefit you will get in 3Q versus 2Q from the cost cutting initiatives that you've outlined? And then also how should we think about the sustainable cost cuts and the incremental benefit in '21 versus '20? Is there a way that you can kind of help us to understand that?.

Yes. So we haven't provided any sort of incremental for 2021. But as it relates to 2020 just to break down the components for you, John. So the Axalta Way savings the $50 million is coming in rateably. So as you think about third quarter, fourth quarter essentially that easy math.

As it relates to the $130 million in temporary savings, we got $75 million in the second quarter. Roughly two-thirds of that difference will come through in the third quarter with the difference coming through in the fourth quarter.

And then as it relates to the new $50 million program, we are anticipating about $10 million with the vast majority coming through in the fourth quarter. .

Got it. Okay. That's helpful. And then just one clarifying point that I think Chris had questioned earlier. So did I understand right that you're thinking about the decrementals in 3Q at somewhere in kind of the 30% range give or take a little bit? I mean you'd said ex some of the period costs or the accounting costs in 4Q it would have been 32%.

And you're thinking it's on the margin maybe a little bit better than that.

Are we thinking about that right?.

That's exactly right John. If we get to the 15% versus the 20% net sales decline. I would expect us to be a little better than 30% on the decremental, but at or about 30% is the right way to think about third quarter decrementals. .

Got it. And then just -- so I'm doing the math right. If I understand you're essentially guiding to $200 million hit on the sales line.

So should we be thinking again based on that math that you're kind of thinking about a $60 million hit year-over-year on the EBIT line, is that right, or are we missing something on that?.

I don't think you're missing anything. That's a rough math. .

Great. Thanks very much for the color..

And our next question is from Steve Byrne from Bank of America. Please proceed with your question..

Yes. Thank you. The volume slides you provided are helpful. So thank you for that. But if we look at the one for Refinish in particular and just try to impute what your revenues were in that business in the year ago period and it seems like they kind of surge at the end of the quarter March and June were big months than a year ago.

Is that the way that business operates where it's a lot of product moving at the end of the quarter, or was that an anomaly?.

Yes. That's pretty common. Typically, after the year-end things are slow to open up, so you'll January be a little bit slower. You've got a Chinese New Year impact that always occurs in the first quarter as well. So March tends to be a big month.

And then in the second quarter you see somewhat of a similar pattern where April and May can be a little softer and then June can be a stronger month. And in terms of what we actually saw in the sales pattern for the Refinish business overall we saw that exact same pattern. June was materially better than May and April..

And just thinking about your comment earlier about market share in Refinish. You have this respray while wet technology that seemingly would be a differentiation in your technology that might enable you to gain some share. We picked up from a couple of your refinished coatings competitors that they claim to be gaining share in Refinish.

Is this an industry where there's consolidation and everybody is gaining share, or do you see your share being real? And if so what kind of a meaningful change could that be over the next year?.

Well, I think you have to remember globally there is a 30% to 40% of the market that's in the hands of other players that are not one of the top coatings companies.

And I think what you see over time is that as environmental regulations get stricter and stricter in all jurisdictions but especially outside the U.S., you do see some of the leading coatings companies with their product portfolio continue to take share from some of the second-tier players in the market.

And that's been an aspect of the market for some time and one that we expect will continue over time. So, it's possible that everybody is gaining share at the expenses of some of those second tier players and then also some of the local and regional players. .

And then maybe just a follow-up on that with respect to transportation, would you highlight any technological differentiation that you have or service that you offer that could lead to share gains in the transportation segment? You mentioned a couple of wins and maybe if you could elaborate on that..

I think in our transportation business we do have some unique technology in particular and our consolidated systems technologies where we effectively remove one of the steps in the painting process thereby lowering the capital investment and the operating costs for some of our light vehicle customers and we have the leading share in consolidated systems.

We're also continuously rolling out new products to our light vehicle customers around the world. And I think our technology from a pure technology perspective is some of the best in the industry. But I think where Axalta really shines is on the service and technical side of the business. I think our technical service team is truly outstanding.

And we've frequently been brought into light vehicle plants where there has been an issue or a problem with the competitors paint system might be experiencing that issue for any number of reasons. And we kind of have a reputation as being able to go in diagnose what's wrong and get things back up pretty quickly.

And I think the service side of our business is very important competitive differentiator. .

Thank you..

And our next question is from Ghansham Panjabi from Baird. Please proceed with your question..

Hi, good morning everyone. This is actually Matt Krueger sitting in for Ghansham. Thanks for taking my questions..

Good morning Matt..

Hey good morning. So, first understanding the lower net sales can impact the flow-through of any potential raw material benefits.

Can you provide some added detail on what your expectations are for the actual underlying raw material basket heading into the second half of the year? And then given the recent move in oil, are we at risk of starting to see a sequential uptick in inflation just as your net sales kind of start to recover there, and if you can touch on TiO2 that would be helpful as well..

Sure. I think we've seen price decreases in select raw material categories as a result of COVID-19 driven by obviously significantly reduced demand. Our demand was also lower as our plants had ramped down production for the better part of Q2. So, we didn't purchase the same volumes that we typically do.

But despite the weaker demand in the pandemic we did see supply and price pressure for some specialties namely pigments and monomers. TiO2 specifically I think we expect to be slightly up due to some of the chloride grade tightness. Aside from pigments and monomers, the remaining categories for the most part have tailwinds.

So, whether it's isocyanates or some of the other specialty monomers that we purchase IBXA for example. And then on the solvent side we do see some tailwinds. And therefore, we'd expect the overall raw material basket to be down year-over-year given the drop in demand that's occurred for those suppliers from customers due to COVID.

However, we do as you point out I'd expect to see a moderate uptick in raw material pricing, assuming that demand recovers. So I think we'll see potentially some benefits to appear, in the back half of the year. But in terms of what happens with the pricing.

And then, how large a benefit that is that's largely a function of how much volume we buy, as well as what happens with overall market demand..

Okay. That's helpful. And then, kind of switching over to the demand side of the business, can you expand on what type of operating backdrop you have baked into your down 15% to 20% revenue guidance, for the third quarter? And pardon me, if I misunderstood this commentary, but the July sales were down in the 14% range, which is what I thought I heard.

Does this imply that you expect the operating backdrop to worsen throughout the quarter? Is that 15% to 20% number just that kind of trying to be conservative? Any detail there would be helpful..

Yeah. So the 14% is year-over-year. And I think as you see in the actual earnings deck. We typically see an uptick in sales, in the last month of the quarter. So when you're doing year-over-year comp, that's the 15% to 20%. But clearly we saw the 14% in July. And there's clearly uncertainty out there.

So there is a little conservatism built in, just as we don't know how the markets are going to develop over the course of the quarter. But as you look at prior year periods 2019 third quarter and then September was a higher sales month, than the month of July..

And I'd just add to what Sean said. I think from an overall recovery perspective, I think we're actually quite encouraged by what we're seeing in the marketplace. In April, as we all knew would be the absolute bottom, down 56% top line, second quarter overall was down about 44%. June was only down 25%.

And then, now we've seen July, year-over-year down 14%. So the overall demand picture does seem to be improving in a marketable fashion.

But as Sean said, we just felt it was prudent, given the uncertainties particularly, in terms of some of the spots in the world where coronavirus appears to be resurging somewhat to have a little bit more cushion in our sales forecast. .

Got it.

So that 15% to 20%, does that incorporate any incremental shutdowns, kind of running through any specific regions?.

We're not anticipating any full shutdowns..

Okay. That's helpful. Thanks. That's it for me..

Our next question is from Alex Yefremov with KeyBanc Capital Markets. Please proceed with your question..

Thank you. And just coming back to decremental margins, I think you more or less -- we're comfortable with about $185 million $190 million EBITDA range for 3Q, based on your $60 million year-over-year decline comment.

If that is true, and if we look forward to the fourth quarter, do you think we could see worse or better than 30%, decremental margin because there are several moving pieces, as we move through the year?.

Yeah. I mean, we're not guiding the Q4 just given the uncertainty on the top line. But I think as a general matter is as sales continue to increase the decrementals should get a little better. And while, I was pointing to on the earlier question if we end up hitting that 15% down we could see slightly better than 30%.

But clearly at 20%, we may be slightly above 30%. But again we're not confirming anything around fourth quarter just given the uncertainty in the demand cycle. We are hopeful given the trends that things continue to improve, but certainly no assurances at this point in time..

So the reduction in temporary cost savings is not going to offset the other benefits that you might see by the fourth quarter? I guess that's what I'm trying to get to..

I think with the absence of the temporary cost savings, I think they'll be offset by the benefit of the incremental on increased sales, if that makes sense. Though we should continue to see margin improvement, as the net sales deterioration continues to improve..

Thank you. And you reported OEM pricing up 3.5%, in the third quarter.

Did you implement new price increases, or was there a mix or base effects or anything like that?.

Yeah. That was largely related to mix. So similar to what you saw in Refinish the reason we were down. That was mix on the upside in transportation. That's also driven by mix..

Thanks a lot..

Our next question is from Mike Leithead from Barclays. Please proceed with your question..

Great. Thanks guys.

A question for Robert, in your Refinish business, can you just talk about what you've seen in terms of your MSO customers versus say your non-MSO business that will go through distributors? I guess, I'm just trying to get a sense of if you're seeing any real market share shifts there, between the two customer groups, and also if distributors are carrying a lower level of inventory given some of the uncertainty of smaller body shops..

Yeah. It's a good question. I'd say overall, we have not seen any material shifts there in the market. Obviously our multi-site operator body shops, they buy the richest mix of product because they're buying the highest productive systems that we have, which also are our highest priced products.

So as you see the pullback in the Refinish business here in the second quarter, given the profitability of that business, obviously, the impact is pretty dramatic and hence you see the results here in the second quarter. Fortunately that's improving rather quickly.

And I think we've seen our MSO customer base throttle back in terms of how they operated shops and ran staffing levels during the second quarter and they've gradually been adding more and more back, so I think we'll expect to see them come out of that.

And then at the individual independent body shop level, I think as we might have talked about on our last call somewhat the expectation is there. We haven't heard from our sales force about too many body shops that are kind of closing up shop for good, because the recovery -- the coronavirus situation here has only been a few months in length.

Now if the coronavirus situation lasted for months and months on end then I think you would see potentially a few of them actually close up shop. And then in terms of inventory levels, obviously, cash is king at all steps in the value chain. So everybody has been running inventory levels at a fairly lean level and really buying toward demand.

And we've even seen in some cases, some of the average order sizes coming down in size in the second quarter as people manage their working capital. We're starting to see those come back up a little bit. So I think overall, we're encouraged by what we see in that market.

And as we get miles driven back up and as we see congestion increase I think we would expect to see that business continue to only get better..

Got it. That's really helpful color. And then if we just return back to the July commentary about the down 14% year-over-year.

Can you just give some color around the variability in that figure between your businesses just maybe highlighting areas where you're seeing the greatest acceleration in growth versus areas that might be a bit flatter in their recovery?.

Yeah. So when you look at the performance side of the business that was on average down 10% to 12% versus light vehicle being down closer to the 17% to 18%. And commercial vehicle being down closer to 30%. But as you think about recovery, certainly light vehicle coming out of the lows in April and May.

You continue to see that steady rebound as all the plants are up and running and becoming more and more utilized. But hopefully that's helpful..

Thank you..

And our next question is from Mike Sison from Wells Fargo. Please proceed with your question..

Hi, this is Richard [ph] on for Mike..

Hello, Richard..

So just first question on the temporary cost savings increased target to $130 million.

Can you talk about what drove that? Was that mostly in SG&A? And how sticky are those temporary cost savings? So if we do get a recovery, how much of that should we expect to come back on?.

So we've characterized all this as temporary. But as we continue to learn how to work virtually, we expect some benefit around travel and entertainment to come down to be more sustainable savings, but we haven't characterized any of this as permanent.

As it relates to cost programs and increasing from $100 million to $130 million, it's really across all the categories.

As we continue to focus on third-party spending as we continue to hold on the hiring freeze, as well as hold the line as it relates to travel and entertainment, it's clearly accruing more benefits than we originally anticipating but it is across the P&L as we see those incremental benefits..

Okay, great. And then on the global restructuring, you had mentioned that potentially additional reductions to come in Europe. What would make you go forward with that decision? Is it depending on your customers whether demand returns or not? How are you thinking about further workforce reductions? Thank you..

Well, any workforce reductions that we were doing in Europe would require the agreement with the works councils and so as we have more information on those we'll be able to provide more of an update..

And our next question is from Paretosh Misra from Berenberg. Please proceed with your question..

Hey good morning, Rob, Sean and Chris. Thanks for taking my questions. So first a quick one on cash flow. The $270 million in incremental cash flow versus earlier in the year. I see that is driven by $80 million in CapEx and maybe $40 million, $50 million if there's incentive payments and the rest is just these cost reductions you have announced.

Is that a good way to think about that?.

They are the large buckets. But certainly, we're making progress as we continue to extend terms with our vendors as well as looking at incentives offered by local governments in regards to tax payments. But you have the vast majority of the elements..

Got it. And then second just trying to understand the Refinish market perhaps a little bit better. So I believe the average repair refinish job is about $4,000 per car in the U.S. and I think 4% to 8% of that is what really drives your revenue. Are these numbers ballpark similar in Europe? And also you mentioned accident rate a couple of times.

So just curious what is the typical accident rate? And I guess how much does it vary across different regions? Thank you..

So in terms of the cost per repair costs are a little bit higher in Europe given that labor costs are higher in Europe and that's the largest component of the total cost of any vehicle repair. And in terms of the variability in the accident rate data for the U.S. as a total country there's pretty good data.

And then when you get to Europe, it really is on a country-by-country basis. So we have to pull that information and supply that separately..

Got it. Thanks guys..

Next question is from Vincent Andrews from Morgan Stanley. Please proceed with your question..

Hi. This is Steve Haynes on for Vincent. Thanks for squeezing me in here at the end. Just wanted to circle back on cash flow really quick. Can you help us think about working capital a lot of moving pieces this year.

So how should we be thinking about that for 2020? And maybe if there is some favorability this year, how you'd be thinking about the reversal of that in 2021?.

Probably the easiest way to think about it is working capital as a percentage of net sales. We continue to target roughly 11%. And certainly, quarter-to-quarter as we see rebounds there's going to be a lot of pieces moving between AR inventory and AP, but I think getting back to the overall percentage is simply the easiest way.

I do think we'll see incremental benefits as it relates to inventory if raw materials stay low. And I do think we'll have a sustainable benefit coming out of the work that we're doing with vendors on accounts payable.

So you could potentially see that 11% declining slightly as we continue to make progress on our working capital initiatives on that front..

Okay. Thank you..

Our next question is from Kevin McCarthy from Vertical Research Partners. Please proceed with your question..

Hi, good morning. This is Cory on for Kevin. There's been a few questions about decremental margins. I was wondering if demand continues to recover sequentially, can you talk about contribution margins maybe, would they be the same on the way up as the way down? And how should we think about this in your two segments? Thank you..

So as it relates to the segments, the decrementals are a little bit worse on the performance side just given the margin profile of Refinish. But I think as you think about the incrementals, I think it's a similar step function. As you get closer to flat from the prior year, those incrementals will become that much more meaningful.

And certainly, on the way down as volumes drop off even further those decrementals are clearly getting worse just given the fixed cost absorption and the drop-through associated with the lower volumes..

Got it. Thank you. And then just a second question relating to the restructuring plan and the works councils in Europe.

Is Europe a source of upside to the incremental restructuring, if you get approval from works councils, or are these numbers sort of including that approval or assuming that would happen?.

So in the current number there are an expectation that we would make in some jurisdictions some progress, but there is substantial room to improve our overall cost structure. And so there's upside to the numbers that we have provided..

Got you.

And can you give us sort of a -- quantify that in some way or give us some sort of guidance to that what that upside could look like?.

No, not at this time, not until we've had….

Okay..

…the opportunity to engage in dialogue with the workers council..

Understood. Thank you very much. That was helpful..

And we have reached the end of the question and the answer session. And I will now turn the call over to management for closing remarks..

It's Chris Mecray. Thank you all for joining today and we look forward to your follow-up calls and questions. We'll be around for the rest of the day and week to dialogue with you. Thank you..

This concludes today's conference and you may disconnect your line at this time. Thank you for your participation..