Axalta Coating Systems Ltd. (NYSE:AXTA) Q2 2024 Earnings Call Transcript

Axalta Coating Systems Ltd. (NYSE:AXTA) Q2 2024 Earnings Call Transcript August 1, 2024

Axalta Coating Systems Ltd. misses on earnings expectations. Reported EPS is $ EPS, expectations were $0.51.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Axalta Coating Systems Q2 2024 Earnings Call. [Operator Instructions] Today’s call is being recorded, and a replay will be available through August 8. 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 Colleen Lubic, Vice President of Investor Relations. Please go ahead.

Colleen Lubic: Thank you and good morning. This is Colleen Lubic, Vice President of Investor Relations. I am excited to join you today for my first earnings call. We appreciate your continued interest and welcome you to our second quarter 2024 financial results conference call. Joining me today are Chris Villavarayan, CEO and President; and Carl Anderson, Senior Vice President and Chief Financial Officer. We released our quarterly financial results this morning and posted a slide presentation to the Investor Relations section of our website at axalta.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 Axalta’s operating and financial performance.

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 these forward-looking statements. Our remarks and this slide presentation also contain various non-GAAP financial measures. In the appendix to the slide presentation, we have 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.

Chris Villavarayan: Thank you, and good morning, everyone. Before we get started, I’m pleased to announce that Chris Evans, formerly Axalta’s Vice President of Investor Relations, has joined our global strategy group, where he will play an important role in driving our 2026 A plan. Colleen Lubic has taken the lead for us in Investor Relations. I congratulate both of them in their new positions. The Axalta team has done an amazing job of working together to achieve and exceed our targets as demonstrated by the beat and raise this quarter. I want to recognize the entire organization for executing flawlessly in a soft macro environment. In the second quarter, we had the highest recorded quarterly net sales and adjusted EBITDA in the company’s history.

Adjusted EBITDA margins increased to 21.5% and our balance sheet continues to strengthen with net leverage declining for the eighth consecutive quarter to another record low for Axalta at quarter end. Around the world, we demonstrated our ability to execute well. I believe our success over the last 18 months has been a result of the priority we have placed on improving productivity, making smart commercial decisions and tightly managing capital returns. Momentum is building throughout the organization and I am absolutely proud of the team’s accomplishment in the first half of 2024. For the quarter, net sales increased by 4% to $1.35 billion. Volumes increased by 5% year-over-year, with positive contributions from all 4 end markets. Adjusted EBITDA for the second quarter was $291 million, representing a $64 million increase year-over-year.

Adjusted EBITDA margin improved by 400 basis points to 21.5%, largely driven by our material and cost focus. Both segments showed improved profitability year-over-year. I am confident in our trajectory which has led us to again increase our guidance for 2024 adjusted EBITDA, adjusted diluted earnings per share and free cash flow. As I’ve shared with you, I believe we are just beginning to transform the company and unlock the tremendous potential of our products, technology and organizational capabilities. Refinish had an excellent quarter, with net sales growing 5% year-over-year, making this the 14th straight quarter of improved top line performance. In North America, net sales were up 13% as we continue to grow and win new business. We also benefited from favorable comparison to the second quarter of last year in connection with production constraints associated with our North American ERP implementation.

Strategically, a key focus for us remains growth in the premium segment where we believe we can win based on three key factors: first, the productivity of our single-visit application waterborne system; second, our end-to-end fully automated color match that now includes hands-free mixing following the launch of Irus Mix; and finally, through a host of digital tools, which is optimizing customer support and real-time productivity monitoring for our body shop customers. Year-to-date, we have already delivered over 1,200 net body shop wins and we expect this to be another great year. Expansion in the economy segment is another important pillar for our Refinish growth strategy that we outlined in our A plan. In July, we completed the acquisition of the CoverFlexx group, which manufactures coatings for automotive refinish and aftermarket applications focused on economy customers in North America.

The business offers a wide range of coatings as well as aerosols, fillers and paint shop accessories. This acquisition also provides us with the brand’s commercial access and manufacturing capabilities to serve the economy segment, where we believe we have great potential for growth. I’m excited to welcome the entire CoverFlexx group to the Axalta team. Industrial net sales increased by 2% year-over-year, driven by increased volume in North American building products. The second quarter marked the first year-over-year improvement in net sales for industrial in six quarters, which we believe is a signal that market activity has bottomed out and is positioned for recovery when global construction improves. Although global industrial demand remains relatively muted, our team has done a stellar job of driving significant year-over-year margin improvement through cost management and portfolio optimization.

Innovative new products such as the cabinet coatings are gaining traction and are part of a clear commercial strategy to prioritize segments and regions where we have strong value proposition and can generate an attractive return. Light vehicle had another strong quarter. Volume growth of 7% year-over-year significantly outpaced global auto builds with better growth rates versus regional production rates. China was a bright spot for us again with nearly 30% volume growth. Globally, the team is building lasting partnerships with the fastest-growing OEMs at attractive margin levels. Based on this, we expect above-market growth to continue. Following a flat light vehicle build environment in the first half of the year, industry forecasts are now projecting the second half of the year to be approximately 3% to 4% lower year-over-year, with most of the declines in Europe.

Commercial vehicle net sales increased by 3% year-over-year. Volumes benefited from stronger-than-anticipated Class 8 production in North America and LatAm. We still expect a modest production slowdown in the second half of 2024 before it ramps up in 2025, leading to a strong 2026. Let’s move to Slide 5. In May, we introduced our 2026A plan, a multiyear strategy to accelerate performance and transform the company. I expect the five unique elements of the plan will differentiate Axalta in the industry and allow us to achieve new levels of exceptional performance. First, driven by our One Axalta mindset, we are creating a culture that is faster, more effective and more responsive. Second is operational excellence. We will continue the journey we have started to control the controllable and drive more efficiencies in corporate, operations and supply chain.

We expect these actions to yield approximately $125 million in annualized run rate savings in 2026. Next, it’s driving growth through portfolio optimization with a focus on our core strengths and profitable businesses. Fourth is sustainable innovation, which is creating the world’s best products for sustainability, efficiency and color. Examples of this are NextJet and the Irus Mix and finally, capital allocation where we plan to focus on investing in the business and returning value to our shareholders. As you can see with our performance in 2023 and the first half of this year, we’re well on our way of achieving our targets. I will now turn the call to Carl for a more detailed view of our second quarter financial performance.

Carl Anderson: Thank you, Chris and good morning everyone. Let’s turn to Slide 6. Second quarter net sales increased by 4% year-over-year to $1.35 billion primarily driven by volume growth of 5%, with contributions from all four end markets. Price/mix was flat in the second quarter as positive price actions were offset by contractual raw material pass-through impacts. Gross margin improved by 390 basis points year-over-year to 34%. This improvement was supported by 8% lower variable costs, strong cost management and ERP costs that did not repeat from the second quarter last year. Our procurement team delivered another great quarter with raw materials, energy costs and freight expenses all lower versus the prior year period.

We continue to benefit from our productivity programs executed last year, which have generated an attractive return. Regarding raws, we remain well supplied except for specialty pigments where we continue to experience tight supply and long lead times. More broadly, we view most markets as balanced at this time with the only pockets of inflation in our commodity basket stemming from transitory supply issues, namely in solvents. Our forecast of a mid-single-digit full year benefit from raw material deflation remains unchanged, and we anticipate a stable cost environment in the second half. Operating expenses were roughly flat compared to the second quarter of last year and modestly lower as a percentage of sales, underscoring our effective cost management efforts aligned with the transformation initiative introduced earlier this year.

We still expect to achieve annualized savings of $75 million from these actions by 2026 with $10 million that should be realized this year. Adjusted EBITDA in the quarter was $291 million, 28% above second quarter of last year. Adjusted diluted earnings per share increased 63% to $0.57, driven by improved earnings and lower interest expense, which more than offset a modest headwind from a higher effective tax rate. A key component of our A plan is a heightened emphasis on return on invested capital for which we are targeting 15% by 2026. On a trailing 12-month basis, return on invested capital was 12.7%, representing a 140 basis point improvement compared to last year and highlights good progress towards our goal. Overall, we delivered exceptional results across all of our businesses, which is due to the incredible talent and dedication of our One Axalta team.

Moving to Slide 7. Performance Coatings second quarter net sales increased 4% year-over-year to $887 million. Refinish net sales were up 5% year-over-year to $546 million supported by strong volume growth in North America and a solid contribution from the André Koch acquisition. Industrial net sales increased 2% year-over-year to $341 million. The team continues to improve margins despite a softer macroeconomic environment through accretive new wins and the deprioritization of lower-margin business. In fact, we expect to be on track to expand industrial margins by over 300 basis points from last year. Overall, we believe this strategy positions us for considerable upside when global demand improves. Performance Coatings adjusted EBITDA increased 22% year-over-year to $223 million.

Adjusted EBITDA margin increased by 380 basis points, primarily driven by lower variable costs, increased volume and strong cost control. Let’s move to Mobility Coatings results on Slide 8. Mobility Coatings net sales increased 6% year-over-year to $464 million, with growth in both end markets. Light vehicle volumes were strong in the quarter, outpacing auto production growth rates in all regions, particularly in China. Commercial vehicle volume showed improvement due to better-than-expected Class 8 production in North America and Latin America. Mobility Coatings adjusted EBITDA improved by 50% year-over-year to $68 million. Adjusted EBITDA margin expanded by 440 basis points to 14.8% with strong improvement in light vehicle, primarily driven by lower variable costs, growth in the China market and strong cost management initiatives.

Turning to Slide 9. We ended the second quarter with over $1.4 billion in total liquidity. Our cash balance of $840 million at quarter end includes a $185 million draw on our revolving credit facility to finance the acquisition of CoverFlexx, which closed in early July. From a capital allocation standpoint, we intend to prioritize repayment of the revolver as we generate free cash flow for the remainder of the year. And to that fact, we have already repaid $50 million to date. During the quarter, we increased our capacity on our revolving credit facility from $550 million to $800 million and extended the maturity date to 2029. Additionally, we repurchased $50 million of Axalta shares in the quarter. We see strong value in our equity and expect to remain a programmatic buyer going forward.

Total net leverage at quarter end was a company record of 2.6x and a full turn below the second quarter of last year. We expect to end the year at or better than 2.5x, inclusive of the recent acquisition. During the next 3 years, we believe we can drive over $2 billion of cumulative operating cash flow. This will provide us with an opportunity to supplement value creation through share repurchases and accretive M&A. We also expect to further reduce our gross debt balance as we target interest expense savings of $30 million by 2026. I will now turn the call back to Chris for an update on our third quarter and full year 2024 financial guidance.

Chris Villavarayan: Thanks, Carl. Let’s turn to Slide 10. We expect net sales in the third quarter to be flat to up low single-digit percentage compared to last year. Refinish should have another good quarter, and we expect share gains, pricing and contribution from our acquisition to mitigate impacts from market, mix and distributor consolidation. In Industrial, net sales are expected to be up modestly. Margin growth in Industrial will remain our highest priority in the current soft macro environment. Light Vehicle net sales are expected to be flat, as solid volume growth globally will be partially offset by contractual raw material pass-throughs. We continue to price in both our Industrial and Mobility business to ensure we are receiving the appropriate value for our products.

Lastly, in Commercial Vehicle, we anticipate lower sales influenced by the forecasted decline in Class 8 production in North America. Our full year net sales forecast is to grow low single-digits compared to last year. Third quarter adjusted EBITDA is projected to increase 5% year-over-year to $275 million. Third quarter adjusted diluted earnings per share is estimated to increase by roughly 12% to approximately $0.50. Following another solid quarter for Axalta, we have increased our full year guide. Full year 2024 adjusted EBITDA is expected to be approximately $1.09 billion to $1.1 billion, a $30 million increase versus the midpoint of our prior guidance. This translates to an adjusted diluted EPS of $2.05 per share, which is a 30% increase compared to our last year.

We have also raised our 2024 free cash flow guidance to a range of $475 million to $500 million, representing a $37 million increase at the midpoint. Overall, 2024 is shaping up to be the highest revenue and the most profitable year Axalta has ever had. While we are pleased with our performance we believe that we are at the early stages of capturing our full potential. Thank you for joining us today. This concludes our prepared remarks. Operator, please open the lines for Q&A.

Q&A Session

Operator: Thank you. [Operator Instructions] We will take our first question from Aleksey Yefremov with KeyBanc Capital Markets. Please go ahead.

Aleksey Yefremov: Thanks and good morning everyone. I just wanted to ask you for any color on refinish market volumes and demand in the second quarter and expectations for the second half. And as sort of a follow-up to that, you mentioned distributor consolidation, if you could elaborate on that as well?

Chris Villavarayan: Sure. Good morning, Aleksey. Starting off, maybe stepping back into Q2, we feel really good about the 4% top line growth, but specifically in Refinish, that went up about 5%, really driven by the four elements of the plan. It was focusing on driving more growth in gaining more body shops. So we gained 1,200 body shops to date, 600 in economy and 600 in premium. And then on top of that, we really expanded into the adjacency space. So really expanding our share of wallet. And then on top of that, we focused primarily also on driving and executing and closing the acquisition with CoverFlexx. But beyond that, the André Koch acquisition that we closed last year has been really providing a tailwind. We’re ahead of our deal model.

And finally, our retail stores in Europe have been doing great in terms of a growth strategy. So, all four elements of the plan have been really driving the growth story. The market, I would say, has been flat, as you can – as I’m sure you’ve heard, but the team has just done a stellar job of driving the growth elements. If I look at Q3, I would say what we’re seeing is a market that is a little bit more stable or soft. We see a little bit of softness in Europe, more a stable market in North America. North America has been driven by some distributor consolidation, as I’ve said. In Europe, we see a little bit of destocking. But all in all, we still believe that we’re going to have continued growth even in Q3 because all the elements of the plan are driving what we see as low single-digit growth in – even in Q3 with the softer market.

And the overall dynamics for the business still show, I would say, long-term growth. So from our perspective, we’re seeing that 2% to 3% organic growth story still sticking strong for us as we look at the full year.

Aleksey Yefremov: Thank you, Chris. And the second question, could you try to bridge EBITDA sequentially? Based on your guidance, you’re looking at about $50 million EBITDA decline. So what are the components in terms of seasonality, price indexing, auto OEM, etcetera?

Carl Anderson: Yes. Aleksey, this is Carl. As we look at the Q3 guide compared to Q2, it’s really I would just focus on the top line. So if you think about revenue, we expect it to be down sequentially probably around $30 million to $35 million, and it would really just be essentially a little of the downside conversion that you would normally expect that would explain most of that, and there’s a little bit of mix as well that kind of gets you down to that $275 million EBITDA guide for Q3.

Chris Villavarayan: Maybe just adding on Carl’s point, the one thing is, if you look at our second half, you noticed that commercial vehicle is actually down about – what we’re forecasting is down 20%, and that is one of our strongest businesses. And it kind of shows you that the margin stabilization that we’ve built into the business which essentially means that our – across the other three businesses, we’re really performing strong as we look at the back half.

Aleksey Yefremov: Thanks a lot.

Chris Villavarayan: Thank you.

Operator: Our next question comes from John McNulty with BMO Capital Markets. Please go ahead.

John McNulty: Yes. Good morning, thanks for taking my question. So Light Vehicle, it sounds like you’re going to be able to hold in pretty well against what at least the consultants are looking at as down about mid-single digits. I guess, can you speak to how much pricing pressure you’re having and how that kind of offsets some of the wins that you’re seeing and the volumes attributable to that?

Chris Villavarayan: Well, maybe I’ll start off, and I’ll hand it over to Carl. But as I look at it, starting off at the beginning of the year, John, what we did was we provided a forecast of 89 million bills. I would say that’s trended up and right now it’s come back down. But overall, it’s in the line with what we forecasted for the full year in terms of builds. But our story in terms of, again, even in Mobility, is really about growth, and it’s about profitable growth. If you look at the last quarter, we’re running at about – we’ve just gotten to almost 15 points of margin. And it’s – I truly credit the team in terms of what we’ve accomplished. It’s actually eight quarters of growth. If I go back to last quarter, I would say the market was about flat to slightly down, and we were able to show 7% growth in the quarter and it’s really around two regions that were really driving significant incremental growth, one being China and the second one being LatAm. Again, in LatAm, we were up double digits.

And in China, we were up almost 30% and the incremental growth is coming in at accretive pricing, and that’s really offsetting a lot of the weakness that you see in the marketplace. And for us, at this point, all the new business is coming in at great pricing. And contractually, I would say we feel that we’re in a good place. There is a bit of pricing pressure specific to Europe, but the teams are managing that as we go forward.

John McNulty: Got it. Okay. No, that’s really helpful color. And then just a question on the cost initiatives, I think of the $75 million initiative about $10 million of it’s supposed to hit this year, I believe. I assume that’s mostly back-end loaded or back half loaded. Is that fair? Can you help us to think about how that flows through throughout the year?

Carl Anderson: Yes, John, it’s been flowing through about – pretty equally since we announced the initiative back in the beginning of the first quarter. So that’s kind of the expectation. It’s been embedded in our guide really all along for this year. And as we think forward into 2025 even, we should probably be somewhere in between the $10 million and the $75 million, as you think from a modeling perspective and then when we get into ‘26, we would get the full run rate of that $75 million.

John McNulty: Got it. Thanks very much for the color.

Carl Anderson: Thanks, John.

Operator: Our next question comes from Chris Parkinson with Wolfe Research. Please go ahead.

Chris Parkinson: Great. Thanks so much. You did pretty well in Industrial in the quarter despite a choppy macro environment. It’s also our understanding that you’ve been divesting some of the lower-margin businesses in terms of your rationalization plans. Could you just give us a quick update on where you stand with those initiatives and how we should begin to think about them for ‘25 onwards? Thank you.

Chris Villavarayan: Yes. Thanks, Chris. Really proud of what the team has been able to accomplish. If I looked at a Q1 to Q2 flow, the largest improvement in margin across our four businesses were actually in our Industrial business. The team has not only done a great job of improving margin, but they’ve also essentially grown sales, if I look at what they’ve done in as to your point, about a soft macro environment, we’re seeing market – our sales volume pick up by 2%. So the team is just doing a stellar job. And it’s primarily, as we started this whole process, over 1.5 years ago, the focus was really earning the right to grow. I think that Shelly, who leads the team had a focus around let shrink to get to the right spot and earn the right to grow and I would say we’re certainly executing down that plan.

And so what did we do? We certainly – we got out of certain customer agreements as well as certain businesses, low profitable powder businesses that just didn’t make sense in the portfolio and we were able to consolidate and come to a point that we believe that we are in the markets that we can get value from our customer. We provide value for our customers and obviously get the right level of pricing to equate with that. The thing that I’m very proud of the team with is at the levels of margin that we’re getting at this business, any sign that we see an improvement in, let’s call it, construction or residential in the future because if you look at our performance last quarter, as I mentioned, one of the areas that we really grew in is in the Building Products business.

I believe we’ve gotten the conversion margin at a good point in our SG&A at a great point that we can really convert on the upside of the sales when we do see some change or some upside on the residential markets or the construction markets going forward.

Chris Parkinson: Got it. And just a quick follow-up. Just going back to your remarks about the organic growth in Refinish. There have been a lot of interesting dynamics. On the one hand, we can all track claims. On the other hand, when you look at reimbursement rates from insurance companies, a national tech shortage in terms of what your customers are facing, is this – are those narratives coming up in your negotiations on a kind of a day-to-day basis in terms of potential Irus penetration and the value-added of your product portfolio or is that more like a sell-side hypothetical argument? I’m just trying to understand how much potential benefit you’ve already had or what you will have from what’s going on in the ultimate industry you’re selling into. Thank you.

Chris Villavarayan: That’s absolutely a great question, Chris. It is Axalta’s strength, if you really put it in perspective in the Refinish business, is we lead in the premium segment. In the premium segment, it’s all about efficiency and cost. And to your point with where costs are going from a perspective of labor and the cost in a paint shop, this is a huge impact as well as the impact on the insurance claim. So anything that we can provide in productivity and cost efficiency certainly provides a positive, and that’s the best part of the Irus Mix. I mean, right now, we have requests for over 700 Irus Mix. We have 300 that will install this year. Our objective is to get about 1,000 by the end of next year. And the efficiency it provides between 8 to 12 hours a week in a body shop, depending on the number of cars going through the paint shop, it certainly provides a benefit.

But it’s just not only that. It’s whether it’s our waterborne solution that provides a single coat application or it’s our digital tools or it’s the Irus Mix. There is a whole host of tools that provides that efficiency, and that’s certainly what’s helping us win. As I said, if I look at the first half of the year, half of the wins are in the premium segment. And if you think about the fact that we already have 40% market share there, it just tells you about the strength of the portfolio of the products that we provide our customers.

Chris Parkinson: Thank you for the color.

Chris Villavarayan: You are welcome.

Operator: Our next question comes from Mike Leithead with Barclays. Please go ahead.

Mike Leithead: Great. Thanks. Good morning, guys. I wanted to ask around CoverFlexx. A couple of things there. Can you just help us understand how much you’re assuming it contributes in the back half of this year just in terms of revenue and EBITDA? And then I know you’ve given us how the business is done in 2023, but just directionally, can you talk about how it’s done so far year-to-date?

Chris Villavarayan: Yes, Mike, as you look at what’s embedded in the forecast for us, we’re assuming around $40 million of revenue that would come in the second half from CoverFlexx. And while we don’t give exact kind of margin details on it, I would say, if you look at the Performance Coatings overall margin for the quarter, it’s probably a pretty good proxy about how to think of that the impact for us for the second half. And as we look forward with that business, I think we’re very excited with really even in the first month as far as the ownership and some of the opportunities that we’re seeing not only commercially, but as well as with – on the cost side as well. So I think we’re off to a very good start. The expectation is this is really going to help jump start a lot of our activities is really growing that economy space here as we go forward.

Mike Leithead: Great. Thank you so much.

Chris Villavarayan: Thanks, Mike.

Operator: Our next question comes from David Begleiter with Deutsche Bank. Please go ahead.

Unidentified Analyst: Hey, this is David here for Dave. I guess, first, maybe just a follow-up on industrial. What’s the scope of deprioritization of low-margin businesses, I guess, as a percentage of your total sales? And then if I look at the portfolio today, what’s the margin gap between these businesses you’re trying to walk away from versus your highest margin business?

Carl Anderson: Yes. As we looked at the Industrial business, and as we outlined in our strategy today, there is about maybe 10% of the overall business that we were looking at where we could potentially make some changes, whether that was to exit certain some of those customers as well as price for it. So that’s the journey that the team has been on. I think to date, as Chris alluded to, the execution has gone extremely well. And you can overall – this is the first quarter that we are actually inflecting positively on the top line in Industrial. And you’re seeing – you’re getting a benefit from that, but you’re also getting that benefit from some of this deprioritization. And as I referenced in my prepared remarks, we’re expecting the industrial margin profile and performance to increase over 300 basis points from last year.

So a really good start from the team. We believe there’s definitely more to go, and we’ll continue to execute on that as we get into ‘25 and beyond.

Unidentified Analyst: And then just on Performance Coatings Q3 EBITDA margin. I guess given the momentum refinishing improvement in Industrial, do you expect EBITDA margin to be up sequentially versus Q2?

Carl Anderson: Well, I would say, again, I mean, if you look at it in totality from a margin perspective in total, when you kind of run the quick math, the margins will be down a little bit from a consolidated basis sequentially from Q2 to Q3. There’s some seasonality kind of components that drive that. There’s some mix kind of considerations as well. And that type of differences also would be attributable to the Performance Coatings’ segment as well as we get into Q3.

Unidentified Analyst: Okay, thanks.

Carl Anderson: Thank you.

Operator: Our next question comes from Ghansham Panjabi with Baird. Please go ahead.

Matt Krueger: Hi, good morning, everyone. This is Matt Krueger sitting in for Ghansham. So given that you cited lower variable costs in the release and the presentation, and you’re doing a nice job of offsetting labor and other inflation with self-help initiatives. What are your expectations for price costs as we move through the remainder of the year? What has the benefit been through 2Q or on a year-to-date basis? And then how does that compare to what we should expect for the second half?

Carl Anderson: Yes. I mean, thanks for the question. As we look at just kind of that price kind of cost differential, I think we’ve done a lot of work if you kind of look at by business, so obviously, within the Refinish business for us, that’s kind of something that we’re pricing, generally comes in – it’s pretty steady every single year. There’s always some mix components that can kind of move around as you kind of get into the quarter-by-quarter look as well. As Chris also outlined, the Industrial team has done a very good job as far as also managing that environment and some of the offsets to that, of course, are what we’re seeing with – it’s a mix of higher inflation kind of coming in and some labor. So overall, I think we feel it’s pretty neutral as I think about some of that, I suppose in the Performance Coatings business, at least what we’re seeing on that.

And I think Mobility across the board, the team has done a very good job as far as continuing to get increase prices where we think it’s appropriate as well as that’s helping to mitigate some of the impact that we’re seeing from the RMI indices that we have in place. And so I think there will be a little bit of movement as we kind of get in the third quarter, but overall, we are looking at this business across the board just from a margin perspective. And as you can see, not only in the results this quarter, but what we expect for the full year overall, we’re going to be having a very solid year as it relates to increasing margins 200 basis points for the full year across the company.

Chris Villavarayan: Maybe just to add a little bit to Carl, our focus really was about margin stabilization and hitting our – getting to our 2026 targets in our A plan. And as you can see, we have accomplished it in Q2. And if you look at the full year, as we work in this macro environment that seems to be soft and somewhat volatile, what we are ensuring is that we protect the margin and we drive stability in the margins through – even with the changes that we see in raw material through what we are doing either in pricing or our cost actions. And that’s what you will see – you can see that in our back half guide, and that’s what you will see from us going forward.

Matt Krueger: Got it. That’s helpful. And then just digging into the cost savings initiatives a little bit deeper, can you talk about which businesses you expect to benefit most from the cost savings initiatives through 2026? And then where is the greatest opportunity remaining at this point? Have you – as you have gained momentum in the initiative, have the teams uncovered any further opportunity for future initiatives or iterations?

Carl Anderson: Yes. I mean as we look at in total, as we outlined about $125 million of total savings that we expect to drive as we get through 2026, a very significant amount of that was as it relates to what we are doing with kind of some of the corporate-related roles as well. So, I think you are going to see that kind of spread across all of the BUs as far as that impact. And then the other two big categories for us as we think about productivity in our network, again, you will see that benefit in all of our BUs as well because that is a very important strategic priority that we have as far as driving that type of productivity savings that we kind of model out about $25 million. And we believe that’s just the start. I think you should start seeing that increase even more as we kind of get out in 2027 and beyond.

And then the other big category for us is just the optimization as we think about how we move freight around the network, some opportunities with some consolidation of warehouses. Again, that really kind of affects all of the business units. So, I wouldn’t say there s one that’s more outsized than others as we think about them.

Matt Krueger: Okay. Great. That’s helpful. That’s it for me. Thank you.

Carl Anderson: Thank you.

Operator: Our next question comes from Vincent Andrews with Morgan Stanley. Please go ahead.

Steve Haynes: Hey. Good morning. This is Steve Haynes on for Vincent. Thanks for taking my question. I wanted to ask a question on the guide, on the EBITDA side of things. I think once you kind of flow through the deep in the second quarter and maybe $10 million or so from CoverFlexx based on your prior comments, it doesn’t really leave a ton of upside for the back half. So, I guess why not – why isn’t back half coming up as well? Is there some offset there that might be missing in that bridge or is it just kind of positioned conservatively at this point? Thank you.

Carl Anderson: Well, yes, I mean if you look at what we have kind of put forth, maybe I would start with the quarter that we just have in really the first six months of the year. So, we delivered about $550 million of EBITDA first six months of 2024. If I can compare it to last year, that same number was $440 million, so a $110 million step-up, and we are kind of running, especially in this type of environment around that $275 million EBITDA, which is kind of what you are seeing is in the guide. And so I think actually, we are very excited about this type of performance. You could see at the top end of our range, we kind of have it penciled in at $1.1 billion, which year-on-year would be about $150 million increase in overall EBITDA.

And so – and then importantly, if I think about just kind of what we are doing with earnings per share, a great quarter, up 63% this year. And then for the full year, based off of $2.05, we are going to be up over 30% year-on-year. So, I wouldn’t say necessarily conservative. I think it just speaks to the execution that we continue to focus on, and we are excited about where we are at.

Chris Villavarayan: And maybe just to add to that, Steve, from a sales standpoint. As you know, the back half of the year, most of the forecast in most of our segments has volumes coming down and coming down 3% to 4%. We are actually showing sales growth of mid to low-single digits. So, we are essentially offsetting that and growing some. So, to drive that level of growth in the back half is what we need to do to be and we are maintaining margins, as Carl pointed out, through the back half. So, we are actually quite comfortable with the guide that we have out there.

Steve Haynes: Good. Thank you.

Chris Villavarayan: Thank you.

Operator: Our next question comes from Josh Spector with UBS. Please go ahead.

Josh Spector: Yes. Hi. Good morning. Maybe a similar question on kind of the EBITDA cadence here, but maybe more focused on fourth quarter. So, I mean typically, seasonally, that’s down a little bit more than I think implied in your guide. I guess is that the cost savings stepping up or is there some other assumption you would say that drives that?

Carl Anderson: I think as we look at it, there is a little bit of piece of some cost savings that we kind of expect to kind of continue on as well as when – as you saw in the – what we are kind of guiding to implicitly for Q3 that does imply that fourth quarter revenue steps up a little bit from where that was. So, we have that conversion on the incremental revenue that also we are assuming in the overall guide. But yes, I think it’s – you also have to remember with kind of – we are also having with CoverFlexx kind of coming in, that’s also helping the overall top line as well as we think about the rest of this year.

Josh Spector: Thanks. And if I could just ask a quick follow-up just on buybacks, where you talk about being programmatic, that $50 million you did in 2Q, is that the programmatic level or can you talk about what’s programmatic versus opportunistic and what level we should be expecting? Thanks.

Carl Anderson: Yes. I think we are going to execute on the authority that we have from the Board, which we did announce last quarter of $700 million. So, I think we did $50 million, we are kind of right out of the gate. As I said in my prepared remarks, I would say short-term, we are also looking at paying back the revolver draw that we did to help fund and finance the CoverFlexx acquisition. We paid $50 million of that already. But as we kind of go forward, we will, without putting a dollar amount on it, our expectation is to continue to be a buyer of our stock as we kind of go forward and be able to exercise and really use up the $700 million here over the next several years.

Josh Spector: Thank you.

Operator: Our next question comes from Mike Harrison with Seaport Research Partners. Please go ahead.

Mike Harrison: Hi. Good morning. A couple of questions on the commercial vehicle business, first of all, it sounds like this quarter was a little bit stronger than you expected, but it sounds like you are expecting that to weaken in the second half and then start to improve again in ‘25 ahead of the big pre-buy in ‘26. So, I just want to make sure I understand that correctly. And then can you also comment on the opportunity that you see in Asia in the heavy truck business? I think that a lot of production takes place there, but I believe you have been historically pretty focused on North America, is that an opportunity?

Chris Villavarayan: Yes. So, maybe I will start. Thanks for the question. First, you are right in your forecast. So, I think what came in stronger than we forecasted was really Class 8 production in North America that – in Q2, we saw that come in strong. Most – a lot of our customers continue to pull at strong rates as we looked at Q2 in North America. And I think the fleets were still pulling trucks. You do see the backlog getting – going down a bit. But overall, the market was stronger. And again, we are forecasting that market aligned with where our customers are and where the forecasters are to drop down about 20% as we think about the next two quarters. And as you know, with the pre-buy and emissions change in ‘27, we do believe that a part of ‘25 and certainly ‘26 will be much higher than where we are at this point.

Another strong market for us was really LatAm. LatAm, especially on the commercial vehicle side, we are doing a great job there, and I see the team continuing to win new agreements. I look forward to announcing some here in the future. So, I think the teams are doing a stellar job here. Specific to the China market, probably one of the reasons you haven’t heard us talk much about it is from a margin perspective, it is a little bit tougher to work in that environment. There are certain customers that we are working with, but overall, it’s a market that, as I have always said, our goal is to ensure that we drive margin stability and we get value for the products that we provide our customers and in that environment, it’s just a little bit harder.

Mike Harrison: Alright. And then on the light vehicle business, you mentioned that the market forecast is for a little bit of a decline in the second half. I am curious what you have been hearing specifically from your customers about any additional summer downtime or throttling back on production in the second half relative to levels in the first half as maybe some of those customers look to rationalize where some of the inventory levels are?

Chris Villavarayan: So, specific to North America, I would say our customers are – there is a bit of, let’s call it, inventory building on lots. But specific to our customers, I would say we have not – I would say three quarters of them are – don’t show a significant decline. And we actually show a pretty stable market as I think about the customers we deal with in North America. We are seeing weakness in Europe. And as I think everybody is and specific to that, the interesting thing for us is if I look across the globe in Q3, what is really helping us is the business is winning across pretty much all the three business – all the four regions and the volume that’s coming up that’s driving our growth. The volume that’s offsetting that is really our growth, the growth story across, I would call it, all the regions is really being driven by the growth.

Operator: Thank you. Our next question comes from Steve Byrne with Bank of America. Please go ahead.

Rock Hoffman: Hi. Rock Hoffman on for Steve Byrne. My first question is given the easier year-over-year volume comparison in 2Q from ERP implementation-related production constraints, could you give any indications of how volume growth was sequentially in your business versus normal seasonality? And how should we think about that year-over-year volume growth as this beneficial comparison goes away in 3Q?

Chris Villavarayan: Well, I would say that the comp percentage is about 2%. There is one element of this that I think I want to make sure that we – there is an understanding is if you look at the sales that we – that was impacted in North America, we said North America grew by 13%, and that revenue that we lost because of the ERP implementation in Q2 of last year was about $20 million to $30 million. And what I am really impressed with the team is that, revenue just doesn’t sit there and wait for us to show back up and get the teams drove a strong initiative to work with our customers and drive and get back those sales. And I am really proud of the refinish team for accomplishing that target, it just shows the strength of the products that we provide, the resiliency of the team and really our customers are driving back to come back and working with us. So, overall, just really pleased with how that turned out.

Rock Hoffman: Great. Thanks. And wonder if you could provide any updates to the Irus mixing rollout in refinish?

Chris Villavarayan: Yes. Thanks Rock. That’s a great question. I mean it’s going great. We have got 300-plus out there this year. If you talk to Troy, who runs the business, he would say he wishes he could get 1,000 out there. Our target is to get about 1,000 by the end of next year. The rollout is going good. The customers are – I have had the opportunity to talk to some customers in Europe last – in the quarter. And you can really see the interest in the product. And so we have started the rollout in – mostly in Europe, and we are starting to get transition also into North America, and the objective is to get about 1,000 out by the end of next year.

Rock Hoffman: Great. Thank you.

Operator: Our next question comes from John Roberts with Mizuho Securities. Please go ahead.

Edlain Rodriguez: Thank you. Good morning. This is Edlain Rodriguez for John. Chris, just a quick one for me on M&A, I mean you have done a couple of bolt-ons recently. Can you talk about the pipeline for new acquisitions? And are you still seeing opportunities in there?

Chris Villavarayan: Yes. Thanks for the question. We absolutely are – as we laid out in our A plan a quarter ago, the idea across the entire business, as we pivot, especially since we have seen margin stabilization here, and we are certainly going to prove that out through the back half of the year, we are going to pivot to obviously focus on growth and we have a $500 million target for growth. As I look at this year, we have already accomplished about $130 million to $150 million of that. So, we still have $350 million to get over the next 2 years. And to do that, as we positioned in the A plan, half of it was through M&A and the other half was through organic growth. And as I look at the bolt-ons that we were able to do in accretive parts of the business refinish, and we have also highlighted that we want to do something in commercial vehicle, I do believe that there are opportunities here and you will hear more from the teams as we go forward over the next year.

But those are the areas that we are highlighting and we want to keep focused on as we go forward.

Edlain Rodriguez: Okay. Thank you. That’s all I have. Thanks.

Chris Villavarayan: Thank you.

Operator: Our next question comes from Kevin McCarthy with Vertical Research Partners. Please go ahead.

Matthew Hettwer: Hi. This is Matthew Hettwer on for Kevin McCarthy. Just one question for me, I wanted to touch on interest rates given the recent FOMC meeting and looking like a cut become increasingly likely in September. How do you see lower rates impacting your businesses? And do you have the impact of lower rates built into your guide at all?

Carl Anderson: So, today, we do not have the impact from lower rates in the guide. I think expectations, our consensus is moving around a 25 basis point cut in September. I think more importantly, longer term, I think that will be very helpful if rate cuts continue as you kind of get into next year, where that will be helping the consumer and the consumer across different categories that would affect our business, whether that’s in purchasing vehicles, whether that’s in our industrial business on housing, I think those would be a little bit of a tailwind that could be potentially there if rate cuts come in 2025, that would be material overall. I think for us, on our balance sheet from an interest expense perspective, I like how we are positioned with about 50% of our debt, which would be floating rate debt. So, we wouldn’t actually get a little bit of pickup with when or if rates do begin to decline.

Matthew Hettwer: Thank you.

Operator: Your next question comes from Mike Sison with Wells Fargo. Please go ahead.

Mike Sison: Hey. Good morning. Nice quarter and raise there. Chris, when you think about volume growth, this year you are tracking low-single digits, not a great year overall on demand. If demand picks up in ‘25 and the markets improve, how do you think each of the businesses would do in that environment? And in total, do you think you have a pretty good improvement in volume growth next year?

Chris Villavarayan: We absolutely expect that, I would say. What I am really, really proud of what we have been able to accomplish, Mike, is really building the foundation from a margin perspective and making sure the underlying business is at a good point so that if we see any growth, it converts well. So, I believe our gross margin and our SG&A is at a good point that anything that we get incrementally across all the businesses will be accretive. We have struggled in two businesses going back. If I look back 500 days ago, and I believe overall, the portfolio is at a good spot that we can start really driving growth through all elements of the portfolio and that’s what I am really proud of what we have gotten accomplished here over the last six quarters.

So, anything that happens in terms of even from a perspective of industrial markets improving because of construction or mobility as to Carl’s point on where we see interest rates and any decline in interest rates that drives more automotive business or even from our refinish business, the acquisition that we just did with CoverFlexx gets us into the economy segment, where we only have 11% share, the opportunity to grow here is just great. So, as I think about all the segments, I see great opportunity with any upside in sales. And that’s what the teams are all focused on is they are pivoting towards growth and driving the growth engine. Thank you.

Mike Sison: Thank you.

Chris Villavarayan: You’re welcome.

Operator: Thank you. And this will conclude our Q&A session as well as our conference call. Thank you all for your participation and you may disconnect at any time.