Ladies and gentlemen, thank you for standing by, and welcome to Axalta's Third 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 replays will be available through October 30th. 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 Christopher Mecray. Please go ahead, sir.
Thank you and good morning. This is Christopher Mecray, VP of Investor Relations. We appreciate your continued interest in Axalta and welcome you to our third quarter 2020 financial results conference call. Joining me today are Robert Bryant, CEO, and Sean Lannon, CFO. Last evening, we released our quarterly financial results and posted a slide presentation along with commentary to the investor relations section of our website at axalta.com, which we'll be referencing during this call. Both our prepared remarks and discussion may contain forward-looking statements reflecting the company's current view of future events and the 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. 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'll now turn the call over to Robert.
Good morning, everyone. As you've seen, we achieved outstanding financial and operating results in the third quarter thanks to the snapback in demand in our end markets, the rapid cost structure adjustments we made in response to COVID-19, and the unbelievable effort and commitment of our employees around the world. First and foremost, I'd like to thank all the employees of Axalta around the world for the strong financial and operating results, which were the product of hard work and focus during a challenging time while many of our colleagues continued to work remotely with a myriad of restrictions, both business and personal. Despite these, in the third quarter, we delivered record quarterly adjusted EBIT, adjusted EBITDA, and adjusted EPS. Before we discuss our third quarter results in more detail, I'd like to step back and provide some perspective about the journey Axalta has been on.
Now that we've completed our strategic review and appear to be through the worst of COVID-19, we're finally in a position to be able to pursue the many opportunities I've wanted to go after since I first became CEO in late 2018, and also those we identified during our strategic review. We're now actively making changes that include aspects of our strategy, how our organization functions, and refining our operations to lower our cost structure globally to unlock additional growth. These changes will allow us to accelerate growth, be more nimble, and create more value for our shareholders while also increasing our focus on our people, our customers, and the communities in which we operate. We plan to hold a Capital Markets Day in the spring, where we will provide more detail about our vision, strategy, and specific value creation opportunities.
In the meantime, you will hear more about certain changes in the coming months, as you have in the past few months. From a corporate governance perspective, we've strengthened our board by adding two outstanding board members with specific expertise in two areas that are important for Axalta: growing businesses in China and emerging markets, and leveraging innovation to grow in transportation-related markets. Over the past six months, we've also added key talent at all levels of the organization that will help drive innovation and a focus on people development. These are two of my highest priorities as CEO, and I'm confident they will take Axalta to the next level of performance.
Regarding our operating model and cost structure, despite the great financial results in the third quarter, we need to continue to drive down our costs in certain market segments and geographies where we operate to enable a higher level of revenue growth. We've begun this journey but have much more to accomplish. We can and will do this without sacrificing capabilities, market positions, or impacting the organization's ability to innovate. Since Axalta's IPO, we've been asked how the company would perform in a downturn like we saw back in 2008 to 2009, what levers could be pulled, and how quickly management could react. COVID-19 has been a much more severe test case than any of us could have ever imagined, and I think this question has been answered.
Since the start of the COVID-19 pandemic, we have substantially reduced our cost structure with $195 million in expected savings during 2020 alone. We've taken further actions to maximize our cash flow and liquidity with an additional $140 million in incremental cash savings expected this year. Both cost and cash actions offer immediate and real offsets to the unprecedented volume impacts, all while our global team continues to serve our customers at the highest levels of quality, delivery, and technical support. These results speak to the strength and resiliency of Axalta's business model, the speed at which management took action, and the truly unbelievable support and dedication of the company's employees around the world. I could not be prouder of our global team. Now I will discuss a few highlights from our third quarter financial results.
On the top line, we were pleased to see significant ongoing recovery during the third quarter, with net sales 57.3% higher than the second quarter, a major achievement as we saw rapid recovery in all end markets. The 7.2% net sales decrease from the prior year also beat our expectation going into the quarter. The improvement was driven by broad-based economic and business recovery, including monthly net sales recovery globally in nearly every geography served. While net sales recovery was a major component of the third quarter, there was clearly more to the story, given the robust profit that we reported. We saw a record quarterly consolidated Adjusted EBIT of $210 million, coming on the heels of a loss during the second quarter. We also reported record adjusted EBITDA with margins of 26.5% and a record quarterly adjusted earnings per share of $0.59.
Finally, our free cash flow of $223 million was also a stellar outcome. Given substantial excess cash at this point and the broader recovery in the business, we expect to begin to shift back to a more normal capital allocation approach, although we're mindful that we could see further COVID-19 impacts in certain businesses or regions. We expect capital deployment across a combination of return accretive uses, including M&A and opportunistic share repurchases, assuming a more stable forward-looking demand picture holds. We are actively building an M&A pipeline at this time, with sell-side activity clearly picking up in recent months.
Over time, we would expect to deploy the majority of free cash flow between these uses, but we would also expect to reduce our net leverage to our target of 2.5 x, which could happen from a combination of normalized adjusted EBITDA, as well as executing on strong cash flow conversion, which you saw during the quarter. Regarding the overall demand environment, we're pleased to see ongoing business recovery through the third quarter. In Refinish, total miles driven globally continues to improve, aligned overall with pandemic-related lockdowns in each country we serve. In the U.S., traffic during the third quarter recovered to roughly 10%-15% lower than prior year after rebounding strongly from the lows during the spring and closing the gap with pre-COVID-19 baseline levels by mid-June.
In Europe, traffic levels improved even earlier than the U.S., though renewed lockdowns do suggest caution is warranted on the pace of the recovery. In China, traffic appears to be continuing to recover, and body shop activity and Refinish volumes have recovered to prior year levels. In the third quarter, body shop customers saw activity in the range of 85%-90% in the U.S. versus the prior year toward the end of the period, 95% in Europe, and around even in China. This represented a continued recovery from the second quarter and is an encouraging trend for our global Refinish business. For the Industrial end market, net sales trends continue to demonstrate the resilience of our business, with some businesses showing year-over-year increases for the quarter and all end businesses up in September.
At the market segment level, home building, construction, agriculture, and construction equipment have recovered to operating rates above prior year levels, notably in North America. In Europe, our business has seen strong recovery to date in both powder and Energy Solutions. In China, all industrial businesses have fully recovered, with notable strength in powder and Energy Solutions tied to wind energy customers. In Transportation Coatings, third quarter recovery well outpaced expectations, including fairly strong recovery in most regions. In China, we've seen significant production recovery as well. In China, automotive retail sales have increased from the prior year in each of the last three months, including 8% in September, possibly indicating a measure of pent-up demand after the Chinese automotive pullback in 2018 and 2019.
China Light Vehicle net sales for Axalta decreased mid-single digits during the third quarter, reflecting specific customer exposures in the country, slightly lagging the broader market. In the U.S., aggressive auto sector incentives, coupled with low financing rates, continue to help the recovery. Auto sales during the third quarter increased in sequential months, with September's expected 16.4 million SAR well above earlier expectations and only moderately below the year-ago level of $17.2 million to solidify what appears to be a potential V-shaped recovery for U.S. car sales. For the quarter, global Light Vehicle production declined 3.5%, including a 1.4% decrease in Asia Pacific and a 10.7% increase in China. North America production increased 2.5% on the heels of a 66.2% drop suffered during the second quarter.
Current industry forecasts call for a 17.9% drop in global builds for the full year, including a small decrease of 2.7% for the fourth quarter. This forecast has increased in each of the last several months and appears to show that automotive could be experiencing a form of V-shaped recovery presently. For the Commercial Vehicle end market, overall global truck production increased 0.8% in the third quarter in a dramatic and unprecedented sequential rebound, driven principally by strong growth from China, but also better production in other regions. Current forecasts for Class 4 to 8 truck production suggest a 13.7% decline for the year, revised from a 27% expected decline a month ago, with fourth quarter down 11.3%.
Stronger new truck order rates have continued, and production estimates by industry forecasters have increased, now calling for a positive rebound in production in 2021 to 5% growth. With a 15%-20% rebound seen in North America and Europe. I will now turn the call over to Sean for some additional comments.
Thanks, Robert, and good morning. As noted, we are very pleased with the record operating profit results we posted for the third quarter, including excellent volume recovery versus our original expectations and fantastic execution by our team to deliver significant margin expansion across both segments in this period. We're also very happy to report strong cash flow and showcase our ability to flex the business to meet the buying challenges of a recessionary environment. Overall, the mitigation actions we have undertaken to respond to COVID-19 have succeeded in offsetting much of the volume headwinds while bolstering our balance sheet and liquidity considerably. During the third quarter, we made strong ongoing progress on our cost reduction programs. We exceeded our planned temporary cost actions target in the third quarter with total savings of approximately $50 million. We are reiterating our in-year 2020 savings target of at least $130 million.
Likewise, we exceeded our cash flow action targets during the quarter, delivering $60 million of incremental discrete cash flow savings separate from cost actions. We still expect to deliver total incremental cash flow for 2020 in excess of $270 million, including the temporary cost reduction actions. Regarding structural cost programs, we believe we are on track to deliver the planned $55 million of Axalta-wide savings for the year. As well as the $10 million of the total $50 million incremental restructuring savings we targeted in our July announcement. Including temporary and structural savings, this totals around $195 million of in-year 2020 cost savings expected across all active initiatives. Regarding our balance sheet and cash flows, Robert noted our strong third quarter performance, with $223 million in free cash flow and closing the quarter with total liquidity of over $1.7 billion.
We also lowered net leverage to 3.7 x from 4.0 x at June 30th, a ratio that still reflects the punishing COVID-19 effects on adjusted EBITDA from the first half of 2020. Touching on some of the income statement highlights, Robert noted the rebound in net sales with a 7.2% consolidated decline year-over-year, substantially exceeding our earlier expectations for the period. Performance Coatings' third quarter net sales decreased 6.8% from the prior year on a constant currency basis, with Refinish decreasing 10% and Industrial decreasing 1.8%. Transportation Coatings net sales decreased 8.6% on a constant currency basis, with Light Vehicle decreasing 5% and Commercial Vehicle decreasing 20.8%. Consolidated Adjusted EBIT for the quarter was a record-setting $210 million, coming after the second quarter's modest reported loss.
Performance Coatings' Adjusted EBIT of $134 million increased 7.2% versus $125 million in the prior year quarter and benefited from clear tailwinds from cost actions and variable input costs, offset partly by moderately lower average price mix and by the impact of lower volumes, despite better-than-expected sequential volume across both end markets. Transportation Coatings' adjusted EBIT of $49 million increased 30.4% versus $37 million, driven by cost actions, moderate variable cost tailwinds, and modestly increased average price mix, offset in part by lower volume decremental impacts compared to the prior year. Adjusted EBIT margins increased significantly in both segments, reaching new highs on a segment basis of 19.6% in Performance Coatings and 14.1% in Transportation Coatings.
Adjusted EBITDA margins for the third quarter on a consolidated basis also achieved a record high of 26.5%, something we are very proud of as we continue to see progress in both recovery and business transformation. Finally, third quarter adjusted diluted EPS of $0.59, a 13.5% increase versus the prior year, represented a new high for Axalta as well. Regarding our full year and fourth quarter 2020 outlook, we expect net sales for the full year to decline approximately 18% from the prior year, inclusive of a negative 2% related to FX and M&A impacts. This would equate to an approximate 6%-8% decrease in the fourth quarter from the prior year, with relatively similar outcomes for both segments. Sequentially, the implied fourth quarter net sales guidance is fairly even with the third quarter, given an expectation of broadly steady demand with normal seasonality impacts in December.
For the full year, we expect adjusted EBIT of approximately $495 million-$515 million and adjusted diluted earnings per share of $1.15-$1.20 per share. The implied lower profits sequentially from the third to fourth quarter is attributable largely to the lower expected amount of total cost savings in the period due to the roll-off of temporary cost actions, offset partly by increased structural cost savings. 2020 interest expense is expected to be approximately $155 million, and diluted shares are expected to be about $236 million. Finally, free cash flow is expected to be between $280 million and $310 million, including CapEx of about $90 million. With that, we'll be pleased to answer any questions. Operator, please open the lines for Q&A.
Thank you. Our first question comes from the line of Ghansham Panjabi with Baird. Please proceed with your question.
Hey, guys. Good morning. Hope everybody is doing well.
Good morning, Ghansham.
Morning. Can you just start off by giving us some sense of the volume exit rates on a consolidated basis, cycling into the fourth quarter, like how was September? What are you seeing so far in October, and what are you embedding from a volume expectation standpoint by segment at this point?
Month-over-month, as we work through third quarter, we actually saw a nice improvement as we saw continued recovery across all the end markets as well as the regions. Exiting September, extremely optimistic Industrial across all the end markets. We're actually up volumetrically. We continue to expect sequential improvement as we get into October and November, again, across all the end markets. Typically, we do have seasonality, in particular in Industrial and Light Vehicle within December. That's why you're seeing roughly at the midpoint of the range, flat guidance for fourth quarter versus third quarter. We're seeing continued recovery overall, and we're happy with the progress, especially coming out of Q2 with the headlines there of 57% increase versus that Q2 and Q3.
Great. In terms of the $50 million in temporary savings you called out for the third quarter, how does that break out by segment? Related to that, just in terms of your current view for 2021, how much of a flow-through should we expect with all your cost initiatives, 2021 versus 2020? Thanks so much.
The $50 million really breaks down 2/3 Performance, 1/3 Transportation, a rough estimate. As we think about all the temporary savings, we haven't given any guidance as to what exactly we'll be able to retain into 2021. The vast majority truly is temporary, but there's certainly going to be some benefits, in particular around travel and entertainment, where I see as more sustainable fixes. More broadly on cost initiatives, we still have the Axalta Way program out there. We expect, based on the structural savings update that we gave in the July update, the $50 million savings, that actually starts to ramp up in the fourth quarter, which we're expecting about $10 million of that structural savings, with the vast majority of the difference coming through in 2021.
Ghansham, we'll be giving more updates when we actually give full year 2021 guidance as far as expectations on those structural savings falling to the bottom line.
Okay, awesome. Thanks so much, Sean.
Thank you. Our next question comes from the line of Aleksey Yefremov of KeyBanc Capital Markets. Please proceed with your question.
Hi, this is Paul Staudinger on for Aleksey. Mix remains somewhat of a drag in Refinish. What is your outlook for this going forward?
Well, if we look at Refinish, our pricing approach has remained relatively unchanged during the pandemic. We've not lowered prices or increased gross to net deductions like discounts. The negative price mix overall is driven almost entirely by the North America region, and there are two factors at play here. First, when overall volumes are down, it skews the traditional price mix cadence that we're all accustomed to seeing. Second, as a reminder, non-MSOs pay the highest prices because their discounts off of list are lower than MSOs. MSO and large shops pay lower prices net due to the largest discounts off of list, in general. Non-MSO shops have been more impacted volume-wise during the pandemic than MSO and larger shops. Therefore, this mix impact on price has driven reporting pricing lower.
Keep in mind, though, that our cost to serve to MSOs and some large shops is much lower than traditional body shops. Profit margins between traditional shops and MSOs are relatively the same. We understand that this dynamic has created some unwanted concern. We can assure you that the health and underlying attractiveness of the Refinish business remains intact. This dynamic should self-correct as volumes return to higher levels.
Great. Thanks so much.
Thank you. Our next question comes from David Begleiter with Deutsche Bank. Please proceed with your question.
Hi, this is David calling here for Dave. I guess first one, you referenced some variable cost tailwinds in addition to your cost savings here in Q3. Can you talk about what those are?
As we look at raw materials, raw material pricing really bottomed out in the second quarter as demand was relatively weak across end markets, and our plants had ramped down production just like everyone else. With the demand pickup that we're seeing in Q3, we saw prices move up for oil-based raw materials in particular. We've seen oil prices recover from the teens to the low $40s per barrel. We expect the overall raw material basket to be down year-over-year as the COVID-19 situation has eroded demand across various markets. However, we do anticipate seeing a moderate uptick in raw material pricing in the second half of 2020 relative to the first half of 2020. If we look at it by category, we expect resins, solvents, and monomers to be up, pigments and additives to be roughly flat, and isocyanates to be slightly down.
Thank you. I was actually referencing to the variable cost tailwinds you referenced in your prepared remarks. Thanks for the comment as well.
Yeah. For clarity, when we reference variable cost, we're actually talking about raw materials, by and large. Robert's comments addresses that.
Okay. I guess on M&A, and then you also talked about your focus on emerging markets and Transportation Coatings. Are those kind of the two areas you're looking to gain exposure on through M&A as well?
Well, our M&A strategy applies across each one of our businesses. We have a number of targets identified in each one of our end markets, both bolt-on transactions as well as larger transactions. We continue to maintain dialogue with a number of parties. From an M&A activity perspective, we've actually seen the number of assets available, either through traditional processes or through non-traditional kind of one-on-one proprietary situations, start to pick up in the last few months. I think that's an encouraging sign for M&A activity overall in the sector.
Thank you very much.
Thank you. Our next question comes from Arun Viswanathan with RBC Capital Markets. Please proceed with your question.
Great, thanks. Good morning. Thanks for taking my question. I guess I just wanted to get your thoughts on the Refinish market. There's a little bit of debate out there that congestion levels still need to rise a little bit. Maybe you can just give us your thoughts on that, maybe across different regions in North America and China and Europe as well. Thanks.
Sure. Be happy to. I think when you look at some of the data that's put out there for the refinish market, there are a few things you really have to keep in mind. First of all, refinish is a global market. What happens in one region or country does not set the tone for the entire global market. Second, it's important to remember that refinish demand is really a function of three primary variables: miles driven, the size of the car park, and accident rates. Just because one of these variables moves up or down more than the other doesn't bring down total refinish demand to the lowest common denominator of these three variables. It's really a combination of the three. We expect to see miles driven continue to trend upward, and we also expect the size of the global car park to continue to trend upward.
Likewise, accident rates will increase further as traffic congestion returns. In addition, a few idiosyncrasies. We do see favorable trends in the usage of cars instead of planes for travel and vacations, also the usage of cars more frequently for commuting as people seek to avoid public transportation in this COVID-19 world we're in. Underlying favorable market factors, like the ones I've mentioned before in terms of the car park, as well as a growing global middle class that will purchase automobiles and drive them. Frankly, unfortunately, the continuation of distracted driving. We haven't really seen distracted driving change very much. Therefore, we believe the long-term fundamentals of what makes Refinish such a great business remain intact.
Great. Thanks, Robert. Also just wanted to ask, just given what you said then, from a margin standpoint, would you expect continued margin growth in Refinish as volumes recover in 2021 and 2022? Maybe just comment on that. Thanks.
We would expect to see margins continue to move upward as we see volume increase in that business, just from the drop-through effect of that incremental volume, as well as the number of growth initiatives that we have going on around the world.
Thanks.
Thank you. Our next question comes from Josh Spector with UBS. Please proceed with your question.
Yeah. Hi. Thanks for taking my question. Just to dig in a little bit more on the bridge from Q3 to Q4, specifically at the EBIT level. I was just wondering if you could broad brushstroke give us some guidance of what the bigger buckets are in terms of, I think you're implying about a $30 million EBIT decline on flat sales. How much of that is temporary cost roll-off? How much of that is higher structural cost or higher raw materials? Any way you could provide any more color around that?
Yeah. It really is a function of the temporary cost savings dropping off. We had called out that we're on track to deliver $130 million. That came in $75 in the second quarter, $50 in the third quarter, and expected to drop off to about $5 in the fourth quarter. That's partially being offset by the structural savings that we announced back in July, where we're expecting to get about $10 million. Really, it's the net change there that's really driving the margin differential between Q3 and Q4.
Thanks. That's helpful. In your prepared remarks, I believe you commented that you expected mix to be negative in Performance Coatings in fourth quarter relative to third quarter. What's the bigger driver behind that?
Yeah. Obviously, given the weight of the Refinish business and the volume dynamics that I described, that would be the primary driver of the combination of price mix together in the fourth quarter. We don't expect that dynamic to materially change until we see volumes move up from current levels from where they are today.
Okay. Just to clarify that then, so is it more similar sequentially, or is it deteriorating or mixed a little bit worse sequentially? Which way should we think about it?
Volumes within Refinish are largely expected to stay static. Sequentially they will move up a percent or two, but we're still expecting volumes to be down 7%-8% in the fourth quarter for Refinish, which is having the mix impact on Performance Coatings overall.
Got it. Thank you.
Thank you. Our next question comes from Bob Koort with Goldman Sachs. Please proceed with your question.
Thank you. Good morning.
Good morning.
Robert, I wanted to ask on the M&A side. Your margins are awfully good now, so how do you think about the dilution of margin as you start to bolt on some other businesses here?
I think as we think about M&A, Bob, we typically think about cash on cash return as well as accretion to earnings, as opposed to margin dilution. You can have 25% EBITDA margin businesses that, depending upon what you pay for them, could be dilutive. Likewise, you could have 15% EBITDA margin businesses, depending upon what you pay for them and how much you grow them, could actually be accretive. I think we are trying to be fairly disciplined from a valuation perspective, but there are a number of areas that are interesting to us that we are actually pursuing.
You sort of teased us, or maybe you explicitly teased us with some plans to implement strategic actions that maybe had your hands tied before. Can you give us maybe a little more flavor or color on what you're thinking? Is this outgrowth opportunities, M&A opportunities? Would you reach out into different verticals in the paint markets? Can you give us some help there?
Yeah. As we talked about in our prepared remarks, we plan to conduct an Investor Day in the spring. In the interim, as we're able to discuss and release additional insight into some of the things that we have planned now that the strategic review is over, we've been able to implement a number of changes, and we'll roll those out, and communicate those in the coming quarter or two. We'll certainly share as much of that as we're able to. I characterize it, Bob, in a number of areas related to growth of the business, ongoing cost structure transformation.
I think as we've highlighted before, and reiterated many times, the opportunity to right size our cost structure in certain markets and in certain geographies in order to enable additional growth is substantial, and I think you've seen that based on some of the actions that we've announced, and have been able to take, and further actions that we'll take in the future. We'll be talking about that. I think we'd also like to share updated thinking on capital allocation strategy, as well as growth vectors for the company.
That being said, I think you'll continue to see Axalta, as we think about where to grow and putting capital to use, whether it's from an internal investment perspective in CapEx and R&D or an external perspective from an M&A point of view, continue to stay focused on the businesses that we're currently in and on core competencies that the company has and can be leveraged in very close adjacencies. You wouldn't expect to see something out of left field.
Terrific. Thanks for the help.
Thank you, Bob.
Thank you. Our next question comes from Mike Harrison with Seaport Global Securities. Please proceed with your question.
Hi. Good morning.
Good morning.
I was wondering if you can give us a little bit of color on what you're seeing in terms of customer inventory levels. If you could touch on all your businesses, that would be great, but I think I'm particularly interested in the Light Vehicle business. Are you seeing that dealers, particularly in the U.S., are continuing to restock, or was that kind of more of a one-time benefit that you got?
I think overall, when you think about inventory levels, we really have to look at the overall business to put that in context. I think as you look at the Light Vehicle business overall, we saw Q3 builds above 2019 levels in North America. That region really saw a strong recovery, and OEMs restocked somewhat depleted inventories from the COVID-19 shutdowns. Many OEMs reduced or delayed their summer shutdowns that have historically occurred in the quarter, and some were actually ran overtime. Incentives are obviously playing a part here in stimulating demand. I think all that being said, we could see an increase in base demand as consumers may be willing to spend more on vehicles and use them more in lieu of public transportation on trips where they might have otherwise traveled on an airplane.
We think all this sets up quite nicely for auto demand for our products. In Europe, we believe that auto is starting to see a rebound, as evidenced by recent positive data coming out of many of the European automakers, which I'm sure all of you have seen. We do expect the rebound there may not be quite as strong as we're seeing in the U.S., just given a lower level of incentives. For China, we've seen sales continue to rebound nicely and expect positive year-over-year growth in the fourth quarter. We witnessed demand increases from multinational brands, domestic brands, and also in our automotive plastic parts business. Solid electric vehicle demand, spurred by various government incentives, is also aiding our Industrial Solutions Energy Solutions business.
You put all that together, and from an inventory level, I think you see, in particular in North America, people running pretty strongly, and not really fully able to meet demand as we've witnessed in what's going on in the used car market, where there's really a very high demand for used cars and prices have also been going up. I think that sets up pretty nicely overall, in particular, for North America.
The one other data point that's extremely encouraging, from an IHS perspective on global auto builds, back when we reported second quarter earnings, fourth quarter was expected to be down 9.5%. That has dramatically improved, now the expectation is fourth quarter's going to be down 2.7%. We continue to see upgrades as it relates to 2021. Now expecting to be up to 13.8% for 2021 versus 2020. Certainly encouraging data that's out there, bridging off of Robert's comments.
Yeah, definitely. Okay. Then in terms of the Refinish business, wondering if you've seen any change in the pace of customers switching to waterborne technologies. Are any of those investments, I guess, on hold because of the pandemic?
I don't think we've seen or have a lot of data that would support an opinion there one way or the other. In terms of the pace of conversion from solventborne to waterborne, that's fairly mature at this stage. I'd say probably the level of activity of switches, I would suspect during the pandemic period was static.
All right. Thanks very much.
Thank you. Our next question comes from Steve Byrne with Bank of America. Please proceed with your question.
Hi, this is Luke Washer on for Steve. I wanted to ask about your cost savings that you've had in the third quarter and looking into the fourth quarter. What specific actions did you take, both on a structural and a temporary basis, and how much of that has already reversed so far in 4Q?
On the temporary cost savings, it's a combination of reduced contractor spend as well as travel and entertainment. We had a number of labor-related reductions, short work weeks, 20% pay reductions, as well as furloughs. All the labor-related actions really came to a halt at the end of August. That is largely concluding. T&E is probably the one area that will extend into the fourth quarter with a limited amount of contractor spend that's going to be reduced. As we go third quarter to fourth quarter sequentially, really what you're left with is a limited amount of savings on contractor spend and that travel and entertainment component. From a structural perspective, back on the $50 million we announced back in July, that's where we start to expect that benefit to come through, where we're expecting roughly $10 million.
That encompasses a host of different areas, back office functional areas as well as back office commercial areas. To a certain extent, operations efficiencies as well as technology. sales force is a more limited area of the focus, we're taking a more surgical approach on that front. We'll start to see a little bit of that benefit in 2021.
Perfect. If I could just sneak in one more. Talking about the auto body shop industry, is there anything you've noticed throughout these last few quarters in terms of either MSOs buying smaller auto body shops or anything like that's changing in the auto body shop industry? Is this at all related to your new business gains?
No, we haven't seen a significant amount of activity during the pandemic, as you're describing, and the basic structure, and I think you're referring specifically to North America. In North America, we have not seen significant movement in that regard. We continue to execute, however, on our Refinish strategy of supporting all customer types in the market, including our MSO customers, and that continues to be a very good business for Axalta.
Perfect. Thank you.
Thank you. Our next question comes from Vincent Andrews with Morgan Stanley. Please proceed with your question.
Hi, this is Steve on for Vincent. Just wanted to ask a quick question. We don't usually talk about home building and remodeling activity in regards to Axalta. Could you just maybe talk a little bit more about some of the market trends you're seeing there and how much runway you see for growth in that end market?
Be happy to. I think that's kind of a great entrée just to talk a little bit about our Industrial business, because a multitude of the sub-segments we have in Industrial end up one way or another in that market or move somewhat in relation to that market. We've seen continued improvement each month in our Industrial end markets. For the quarter, we saw wood coil and Energy Solutions with positive growth year-over-year and slight declines in General Industrial and in powder. It's worth noting that all businesses were up year-over-year in September. Specifically related to home building, our wood business continues to be powered by good growth in U.S. home building and remodeling activity and contribution from new customers and products that we've launched, which you probably have seen in a string of press releases over the last 12 months.
Strong demand in coatings for kitchen cabinetry, furniture, flooring, and distribution. Pretty much each one of the markets within our wood business. In coil continues to increase thanks to, again, strong construction fundamentals, and interestingly, good growth in the recreational vehicle market as well. In General Industrial, what we've seen is demand for structural steel, coatings for structural steel, has increased due to strong demand in the construction space. Demand for industrial coatings that go into more automotive tiers have been increasing steadily during the quarter, and we expect that to continue. Powder coatings, we saw strong demand for powder coatings through the quarter, and we have a nice order book in place for the fourth quarter. We see strong demand signals in powder in North America, and positive, but not quite as strong demand signals in Europe.
I would highlight kind of the star of our portfolio at the moment is our Energy Solutions business. Our Energy Solutions business has grown nicely as electric motor growth continues in automotive and in wind energy. We're also starting to see really good adoption of our mainstream impregnating resin and our economy segment wire enamel products. Just as a reminder, our Voltatex impregnating resin product won an R&D 100 award last year and a Gold Edison Award this year for outstanding thermal conductivity, which allows higher motor efficiency and lower motor size and weight. I think we're excited about the businesses we have that have exposure to the more architectural, decorative, home building related type markets, but equally about some of the segments that have exposure to more of the Industrial space.
Very nice. Thank you.
Thank you. Our next question comes from Christopher Parkinson with Credit Suisse. Please proceed with your question.
Hi, this is Harris Simon in for Chris. Thanks for taking my question. In Light Vehicle, can you give a walk of where you see the most upside and downside to the estimates that are out there from IHS and other sources? You mentioned a focus on broadly growing in China, can you discuss any opportunities you've taken to increase penetration with some of the under-penetrated OEMs there? Thank you.
Yeah, Harris, it's Chris. In general, the IHS forecast serves as a decent bench for the Light Vehicle business, given our significant global penetration and diversification globally in that market. You did observe that in the second quarter, we slightly underperformed the global market. That was really exclusively because we have a smaller overall penetration in China. That market's been growing the fastest from the rebound at the lows. That continued a little bit in the third quarter, a little bit underperformance relative to the overall China market, just because of our customer exposures in that country. Going forward, as China will normalize and other markets will continue to evolve, you'd expect to see our overall performance closely match the IHS outlook, adjusted for wins and losses in the business.
Over time, Axalta's been a net winner in the Light Vehicle business for the last five or six years in general, and part of that came from increased penetration in China. We do expect over time that we'll continue to grow in the Chinese market. We have good relationships with some of the local OEMs, and there's a good opportunity for us to extend that over time. That's not necessarily a 2020 or 2021 significant lever. Certainly over time, we're having good success there.
Great. Thinking about the COVID situation in Western Europe and the potential for incremental restrictions, when you've seen other regions reopen and then impose curfews and things like that, can you just help us frame on how meaningful of an impact that's actually had on underlying miles driven? Thanks.
Well, as we approach it, I think if we think about more waves of COVID, our belief is that if we were to see a resurgence in COVID, we wouldn't see a complete economic shutdown like we did in the second quarter, just given how much more we know about the virus. That being said, we are also better prepared to navigate a third or a fourth wave, as we've aligned with our customers and how to operate with them in that type of environment. I think we also have a better sense of kind of market indicators and signals, more insight into our customer supply chains. We've demonstrated our ability to adjust our cost structure as needed.
I think as we think about the variability around COVID-19, we just don't really see things ever getting as bad as it did in April in the majority of the scenarios that are out there, just given the grave consequences it imposed on the world economy. I think that's just a kind of a general philosophical perspective that we would apply to the views on each one of our end markets.
Thank you. Our next question will come from the line of John McNulty with BMO Capital Markets. Please proceed with your question.
Yeah, thanks for taking my question. I guess a couple things. One, on the raw material front, it does sound like things are at least starting to creep up. I guess, can you speak to if you think this is a decent enough environment, given the volume recovery, that you can pass through pricing, either real pricing or through some of the newer products that you have, so that you can cover that raw material inflation? Can you speak to that for us?
I think as we think about the business, from a pricing perspective, more than thinking about what's going on with raw materials and raw material pass-through. We think about the business differently. We think about the value that our coatings create for the end customer. Since our coating products themselves are such a small percentage of really the total solution cost for any given customer. That applies to all of our end markets. We're really continuing to focus on innovation and helping our customers be successful and increasing the productivity in their manufacturing plants and in their particular use cases. As we've gone through the pandemic, we have not pulled back on R&D spending, and we have not pulled back on technical support. We've been extremely committed to making sure that we're supporting our customers and finding alternative ways to do that during the pandemic.
That's really more fundamentally how we think about pricing strategy across our markets.
Got it. Fair enough. Robert, in some of the prepared remarks and some of the slides, you spoke to a whole host of new products, maybe more than I guess I've seen you guys highlight or mention in the past. Can you give us your thoughts on kind of where your vitality index is, if you will, and where you're thinking that's going to be over the next few years? It sounds like it is a focus in terms of some of your growth revitalization or growth acceleration strategy. You can give us a little bit of a color as to what the baseline is and maybe where you're thinking things can go.
If you think about it numerically, when you think about the vitality index or what you count as a new product, you can kind of structure that to tell whatever story you want, because just a minor tweak to a product, do you count that as a new product or not? We actually track that fairly closely across our product portfolio, as well as making sure that given the new products we're adding, that we're also sunsetting older products just to manage complexity across our supply chain and with our customers. From a product innovation perspective, you've seen us announce a series of new products. That's in our Refinish business, in particular in mainstream and in economy. In our Industrial business, you've seen a series of products across our wood business, our coil business, our Energy Solutions business.
In our Light Vehicle business, we've also launched some new products, as well as in Commercial Vehicles. I think that's a steady machine. I think your question's very perceptive from a strategy and perhaps a slight shift in terms of where Axalta has been historically, that we are trying to encourage more innovation, more experimentation, and more thinking around leapfrog technologies and leapfrog type of products. That's probably what you're picking up on a little bit on what we're saying here. I think as that is, just as we go forward, I think you'll hear and see from a press release perspective as well as what you see in the market much more innovation, not only on the product side of the business, but really also on the service side of our business.
We have decoupled, in particular in our Transportation Coatings business, the service side of the business from the product side of the business. We now offer kind of a service offering that is tiered at different levels depending upon the particular amount and type of service that customers desire. I think that's also unlocked some potential and given us some unique insights in terms of how we manage that business. More to come on that.
Got it. Thanks very much for the color.
Thank you. The next quest ion comes from Kevin McCarthy with Vertical Research Partners. Please proceed with your question.
Good morning. This is Cory on for Kevin. You spoke earlier about the strength of trends in terms of the car park and miles driven. How would you compare and contrast your Refinish volume trends in every major region of the world?
We did actually put out in the commentary a little bit of a guide on the relative strength of the market using miles driven relative to pre-COVID by region. You can see that in the commentary. In general, the Refinish market recovered globally across the markets that we serve. There's a little bit of variability. You see the best strength in Asia, with China rebounding most strongly. You saw Europe come back earlier and stronger than you did in North America, with lockdowns easing over the mid and late summer. North America has been on a steady path of rebound up to the level of kind of 10%-15% below normal at this point. There's a little bit of variability, but the theme is you did see a steady rebound globally across the businesses.
Got it. Thank you. Do you feel as though you may be gaining or losing market share? Do you have any sense in any of the regions if you are, and what may be driving that?
Axalta's been a net share gainer in Refinish essentially every year for at least five or six years in a row here. There are a lot of reasons for that, frankly, and they tend to continue each year. Although, we would say that competitively across nearly every business that we serve, the overall environment has been more calm in 2020, which is not surprising when you're in somewhat of a crisis environment or a recessionary environment to see a little bit less competitive activity out there.
That said, there's a natural share gain that tends to come to Axalta because of the nature of our leading products and services in the market. Being on the bleeding edge of the product side and the chemistry, and then couple that with the strong service that we provide to customers around the globe, and the fact that we're introducing new products and new chemistries in multiple markets, not just in North America or in Europe, but across the chain from premium to mainstream and economy. When you're growing by introducing new products, when you're providing leading service, and when you're naturally going to be an industry leader in terms of technology, you're going to tend to pick up share over time, and that does continue.
Got it. Thank you very much.
Thank you. Our next question comes from PJ Juvekar with Citi. Please proceed with your question.
Hi, this is Eric Petrie for PJ. In Industrial markets, you noted that all were up year-over-year. Did you see inventory build?
It's a little unique in the case of each individual market. What I'd say is that if you look at markets that are directly linked to construction and home spending, like wood and coil and parts of the Powder market, that's really been a source of the outperformance there, and we expect that to continue as we go forward. The performance Energy Solutions is really just part of a larger macro trend around electrification, and we're very strongly positioned there and really like the outlook for that business. Within the General Industrial business and the Powder business, you have to bifurcate what goes into more architectural decorative type of markets, and then what goes into more of an automotive or transportation application.
The part of that that goes into more construction facing in architectural type of markets, that part of the business has recovered quite nicely and continues to improve. The part that's more facing, and that may supply tier 2, tier 3 automotive companies or have more of a pure Industrial facing nature, volumes are up there, but not quite yet at pre-COVID or prior year levels.
Helpful. Secondly, in the Refinish business, how do you see that volumes and pricing trends closing the gap compared to prior year, including an outlook on the recovery in non-MSOs?
Well, I think, again, just to add to what Chris said in the prior question, our Refinish volumes were down mid to high single digits in Q3 on a year-over-year basis. Price mix, as we highlighted, was down low single digits in the quarter, with a higher amount in North America and positive price mix in certain geographies. For Q4, we expect a similar result overall based on current demand conditions. I think we'd expect to see volume increases compared to third quarter, but still expect to see volumes below prior year due to the ongoing impact of COVID-19. At the point in time that we see some type of a vaccine solution for COVID, and we see congestion levels get back up to more normal levels, I think we would expect to see a full recovery of the market.
Thank you.
Thank you. Our next question comes from Mike Sison with Wells Fargo. Please proceed with your question.
Hi, this is Richard on for Mike. Just to follow up on the Industrial. I believe in July you had forecasts of the business to be down 7% in Q3 and then 4% in fourth quarter. It's obviously performed better than that. What's your expectation now for the fourth quarter? Looking onto 2021, are you expecting growth? Any color on that would be great.
Sorry, you have to repeat the last part of your question. To answer the first part, as it relates to Industrial for the fourth quarter, we're expecting a roughly similar result to Q3, Industrial being down around 1%. Overall, really good performances. We continue to see that sequential improvement. Do you mind repeating that second question?
Okay. The second question was just, I know you haven't given guidance for 2021, but in terms of what you're seeing visibility-wise, how should we think about that moving forward?
I think as we look overall at the industrial markets, there could be some volatility given resurgences of COVID. However, certainly the portion of the business that is more home and construction facing, as we've seen that business during COVID be quite strong, that would serve to counteract and counterbalance the more industrial side of the exposure within the industrial business.
Great. Just quickly on capital deployment, just wondering in terms of how do you rank order M&A or building the pipeline in terms of debt reduction and share buybacks? How would you think about that?
Given our liquidity position, and we covered this in our opening remarks, we are starting to pivot to start to build back that pipeline from an M&A perspective. Certainly expect to start to deploy some of that capital for M&A. As we think about share buyback, we'll continue to buy back opportunistically, but I think now that we're beyond what we perceive as the worst of the COVID impacts, we'll start to pivot on that front as well. That, again, will be purely opportunistically. From a debt perspective, we are targeting two and a half times leverage from a net perspective. Again, given our comfort level in liquidity, we may look to pay down some debt, some gross debt marginally. Also going to be looking at potential refinancing opportunities here over the next few months. We'll just continue to build cash, quite frankly.
You saw really nice free cash flow conversion, and hopefully that will continue now for the foreseeable future.
Just to add to what Sean said, I think philosophically, we have a good sense of what we want to do from a capital allocation perspective. At any given point in time, we are always assessing what is going to be the most accretive and create the most value for shareholders as we look at each one of those opportunities.
Thank you.
The effect of cost of goods sold and SG&A and R&D. First question.
We haven't given precise guidance on the 2021 impacts, but broadly, and I mentioned this in an earlier question, it's across a multitude of categories, be it back office commercial areas, operations technology and back office functional areas. You're really going to see the benefits throughout our P&L for 2021.
Yeah. I was wondering about this quarter, like the structural savings that you've gotten, like the $50 million you got this quarter. As a rough break I ask too, it seems most of it was sort of in SG&A and R&D, but I was just wondering what do you know where the pieces are?
What you're seeing in SG&A in particular this quarter, as a percentage of sales dropping down so dramatically, it's really the temporary savings that you're seeing the benefit there. When we think about the structural savings from Axalta Way that we had originally communicated back in January when we gave guidance for 2020, more than half that's coming within the operational areas. In particular, to call out an example, with the Mechelen Belgium facility closure, we shut that down in the first quarter and stopped operations. You're seeing a big uptick as far as cost reduction and cost of goods sold for that particular project.
Okay. That's helpful. Secondly, I was wondering whether you can talk about the level of D&A. I think the D&A was $87 million the first quarter, and then it was $77 in the second, and now we're back to $80. I was wondering what the swings are related to and what you think your ongoing level is on a quarterly basis.
The best way to think about that is a percentage in net sales and targeting 16%-17%. You'll have FX impacts in there as well as the temporary, targeting around 17% SG&A levels is the right way to think about it. With all the structural opportunity that we have out there, we will continue to drive that down over time. As a general benchmark, I think 17%.
Yeah. That's currency as well. Last thing I was wondering whether I can ask one more question on the auto IHS data. When I look at the data and I look at the sequential Light Vehicle production forecast, the only region that's modeled down negatively sequentially really from the third to fourth quarter really is North America. That is, the builds are supposed to go from 4 million units to 3.8 million units, but really in the last five or six years, the builds have been 4 million units or better on the fourth quarter in North America consistently. Do you think this is a conservative estimate? Do you think we really have overbuilt or do you think that number could be better than that? I was just wondering what your own view is.
Statistically, you'll see some of the market forecasters be somewhat conservative or lag what actually happens. I think the other element that we have to keep in mind as it relates to Axalta is the particular product mix that we have. Our product mix is heavily weighted towards trucks and SUVs.
Silke, you just have to keep in mind that August shutdowns didn't occur this year. The forecasters are still assuming that the December maintenance vacation shutdowns do occur. If you just look at that alone, it'll account for slightly lower North American outcome in the quarter.
That's helpful. Thank you very much. Appreciate it.
Thank you. This concludes our question- and- answer session. I'll pass the floor to management for any closing comments.
Thank you everyone for participating, and we look forward to following up with you. Have a good day.
Ladies and gentlemen, this does conclude today's teleconference. Once again, we thank you for your participation and you may disconnect your lines at this time.