Ladies and gentlemen, thank you for standing by and welcome to Axalta's 3rd Quarter 2020 Earnings Conference Call. All participants will be recorded and replays will be available through October 30th. Recording will not be updated and therefore may no longer be current. I will now turn the call over to Chris Macrae. Please go ahead, sir.
Thank you, and good morning. This is Chris McCray, 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 Landon, CFO. Last evening, we released our quarterly financial results and post slide presentation, along with the 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 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
As you've seen, we achieved outstanding financial and operating results the rapid cost structure adjustments we made in response to COVID-nineteen 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 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-nineteen, 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 functions and refining our operations to lower our cost structure globally to unlock additional growth. These changes will allow us to 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 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 6 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 2 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 Exalta'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-nineteen has been a much more severe test case than any of us could have ever imagined, And I think this structure. Flow and liquidity, with an additional $140,000,000 in incremental cash savings expected this year. Both cost and cash actions offer immediate continues to serve our customers at the highest levels of quality, delivery and technical support. These results speak to the strength and resilience 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 On the top line, we were pleased to see significant ongoing recovery during the third quarter, with net sales 57.3% higher than 2nd quarter.
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. Including monthly net sales recovery globally in nearly every geography served. While net sales recovery was a major component of the 3rd quarter, There was clearly more to the story given the robust profit that we reported. We saw a record quarterly consolidated adjusted EBIT of $210,000,000 of EBITDA with margins of 26.5 percent and a record quarterly adjusted earnings per share of $0.59.
Finally, our free cash flow of $223,000,000 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 and A and opportunistic share repurchases, assuming a more stable forward looking demand picture holds. We are actively building an M and 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 two 0.5 times.
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 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% to 15% lower than prior year after rebounding strongly from the lows during the spring, and closing the gap with pre COVID-nineteen 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 95% in Europe and around even in China. This represented a continued recovery from the 2nd 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, homebuilding, 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, 3rd quarter recovery well outpaced expectations, including fairly strong recovery in most regions. In China, we've seen significant production recovery as well. And 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 20182019. China Light Vehicle Net Sales for Axalta decreased mid single digits during the third quarter, reflecting specific customer exposures in the country, slightly lagging to 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 $16,400,000 SAR well above earlier expectations and only moderately below the year ago level appears to be a potential V shaped recovery for US 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 bills for the full year, including a small decrease of 2.7% for fourth quarter. This forecast has increased 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 forecast for Class 4 to 8 truck production suggests a 13.7% decline for the year, revised from a 27% expected decline a month ago with 4th 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 production in 2021 to 5% growth, but with a 15% to 20% rebound seen in North America and Europe.
Will now turn the call over to Sean for some additional comments.
Thanks, Robert and good morning. As noted, We're 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 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 have succeeded in offsetting much of the volume headwinds, while bolstering our balance sheet and liquidity considerably. During third quarter, we made strong ongoing progress on our cost reduction programs.
We exceeded our planned temporary cost actions target in the 3rd quarter with total savings of approximately $50,000,000, and we are reiterating our in year 2020 savings target at least $130,000,000. Likewise, we exceeded our cash flow action targets during the quarter, delivering $60,000,000 of incremental discrete cash flow savings separate from cost actions. We still expect to deliver total incremental cash flow including the temporary cost reduction actions. Regarding structural cost programs, we believe we are on track to deliver the planned 55,000,000 of Axalta WAP savings for the year, as well as the $10,000,000 of the total $50,000,000 incremental restructuring savings we targeted in our July announcement. So including temporary and structural savings, this totals around $195,000,000 of in year 2020 cost savings expected across all active In our balance sheet and cash flows, Robert noted our strong 3rd quarter performance with $223,000,000 in free cash flow, and closing the quarter with total liquidity of over $1,700,000,000.
We also lowered net leverage to 3.7 times from four point zero times to June 30th, a ratio that still reflects the punishing COVID effects on adjusted EBITDA from the first half of twenty twenty. Touching on some of the income statement highlights, Robert noted a rebound in net sales with a 7.2% consolidated decline year over year substantially exceeding our earlier expectations for the period. Performance Coatings 3rd quarter net sales decreased 6.8% from the prior year on a constant currency basis. With refinish decreasing 10% and industrial decreasing 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 $210,000,000.
Coming after 2nd quarter's modest reported loss Performance Coatings adjusted EBIT of $134,000,000 increased 7.2% versus $125,000,000 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, by the impact of lower volumes, despite better than expected sequential volume across both end markets. Transportation Coatings adjusted EBIT of $49,000,000 increased 30.4 percent versus $37,000,000, 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, 14.1% in Transportation Coatings. Adjusted EBITDA margins for the 3rd quarter on a consolidated basis also achieved a record high of 26.5 percent, something we are very proud of as we continue to see progress in both recovery and business transformation. Finally, 3rd quarter adjusted diluted EPS of $0.59, a 13.5% increase versus prior year, represented a new high for Axalta as well.
Regarding our full year fourth quarter 2020 outlook, we expect net sales for the full year This would equate to an approximate 6% to 8% decrease in the fourth quarter from the prior year, with relatively similar outcomes for both segments. Sequentially, the implied 4th quarter net sales guidance is fairly even with the 3rd quarter given the expectation broadly steady demands with normal seasonality impacts in December. For the full year, we expect adjusted EBIT of approximately $495,000,000 to $515,000,000 and adjusted diluted earnings per share of $1.15 to $1.20 per share. The implied lower profits sequentially from the 3rd to 4th quarter is attributable largely to the lower expected amount of total cost savings in the period due to the 2020 interest expense is expected to be approximately 155,000,000 and diluted shares are expected to be about 236,000,000 Finally, free cash flow is expected to be between $280,000,000 $310,000,000, including CapEx of about 90,000,000 With that, we'll be
Thank
Our first question comes from the line of Ghansham Panjabi with Baird. Please proceed with your question.
Hey guys, good morning.
Good morning. Can you just start off by giving us some sense of the volume exit rates on a consolidated basis, kind of cycling into the fourth quarter, like how was September And what are you seeing so far in October? And what are you embedding from a volume expectation standpoint by segment at this point?
So month over month, as we work through the 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 volumetric We continue to expect sequential improvement as we get into October November, again, across the end markets. Typically we do have seasonality, in particular in industrial and light vehicle within December. So that's not that's why you're seeing roughly at the midpoint of the range, flat guidance for 4th quarter versus 3rd quarter.
But we're seeing continued recovery over call 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. And then in terms of the $50,000,000 in temporary savings you called out for the 3rd quarter, how does that breakout by Segment And then related to that, just in terms of your current view for 2021, I mean, how much of a flow through should we expect with all your cost initiatives, 2021 versus 2020? Thanks so much.
So the $50,000,000 really breaks down 2 thirds performance 1 third transportation and 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 in the 2021. The vast majority truly is temporary, but there's certainly going to be some benefits in particular entertainment where I see is more sustainable fixes. But more broadly on cost initiatives, we still have the Exalta Way program out there. And we expect based on the structural savings update that we gave in the July update, the $50,000,000 savings that actually starts to ramp up in the fourth quarter, which we're expecting about $10,000,000 of that structural savings with the vast majority of the difference coming through in 2021.
Agansham will be given more updates when we actually give full year 2021 guidance as far as expectations on the 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 Standra
on for Aleksey. Mitch remains somewhat of a drag and refinished 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 pricemix overall is driven almost entirely by the North America region. And there are 2 factors at play here. First, overall volumes are down or when overall volumes are down, excuse the traditional pricemix cadence that we're all custom to seeing.
2nd, as a reminder, non MSOs pay the highest prices because their discounts off of list are lower than MSOs. So MSO and large shops pay lower prices net due to the largest discounts off of list in general. Non MSO shops has been more impacted volume wise, during the pandemic than MSO and larger shops. Therefore, this mix impact on price has driven reporting pricing lower. So profit margins between traditional shops and MSOs are relatively the same.
We understand that this dynamic is created some unwanted concern, but we can assure you that the health and underlying attractiveness of the refinish business remains intact. And this dynamic should self correct as volumes return to higher levels.
Thank you. Our next question comes from David Begleiter with Deutsche Bank.
This is David Quinn 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. This 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 to be down year over year as the COVID-nineteen situation has eroded demand across various markets. However, we do anticipate seeing a moderate uptick in raw material pricing in the second half of twenty twenty relative to the first half of twenty twenty. 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 to Owens you referenced in your prepared remarks. But thanks for the comment as well.
Yes. And for clarity, when we reference variable costs, we're talking about raw materials. And by March, so Robert's comments addresses that.
Okay. And then I guess on MAA and then you also talked about your focus on emerging markets and transportation coatings. Those kind of the two areas you're looking to gain exposure on through M and A as well?
Well, M and A strategy applies across each one of our each one of our businesses. So we have a number of targets identified in each one of our each one of our end markets. Both bolt on transactions as well as, as well as larger transactions. And we continue to maintain dialogue with a number of parties And from an M and 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. And I think that's an encouraging sign for M and A activity
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 a congestion level still needs to rise a little bit.
Maybe you can just give us your thoughts on that, maybe across different regions in North America and China in Europe as well? Thanks.
Sure. I'd 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. So 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 3 primary variables, miles driven, the size of the car park and accident rates. And 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 3 variables. It's really a combination of the 3. 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 and also the usage of cars more frequently for commuting as people seek to avoid public transportation in this COVID world we're in. And underlying, favorable market factors, like the ones I've mentioned before, of the car park as well as a growing global middle class that will purchase automobile and drive them. And frankly unfortunately, the continuation of distracted driving, we haven't really seen distracted driving change for much. Therefore, we believe the long term fundamentals of what makes refinish such a great business remain intact.
Great.
Thanks, Robert. And also just wanted to ask, just given what said then from a margin standpoint, would you expect continued margin growth in Refinish as volumes recover? In 'twenty one and 'twenty two, maybe just comment on that. Thanks.
Yes, we would expect to see, March 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
Thank you. Our next question comes from Josh Spector with UBS.
Just to dig in a little bit more on the bridge from 3Q to 4Q, specifically at the EBIT level. I was just wondering if you could broad brush stroke, give us some guidance of what the bigger buckets are in terms of I think you're implying about a $30,000,000 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?
Yes, it really is a function of the temporary cost savings dropping off. So we had called out that we're on track to deliver $130,000,000 that came in 75 in the 2nd quarter, 50 in the 3rd quarter and expect for the drop off to about 5 in the 4th quarter. That's partially being offset by the structural savings that we announced back in July where we're expecting to get about $10,000,000. So really it's a net change there. Really driving the margin differential between Q3 and Q4.
And in your prepared remarks, I believe you did that you expect a mix to be negative in, performance in 4th quarter relative to 3rd quarter What's the bigger driver behind that?
Yes, obviously given the weight of the finished 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. So we don't expect that dynamic to materially change until we see volumes move up from current levels from where they are today.
Okay. So, I mean, just to clear by that then. So is it more similar sequentially? Or is it deteriorating or makes a little bit worse sequentially? Which way should we think about
Volumes within Refinish are largely expected to stay static. Sequentially, they will move up a percent or 2. We're still expecting volumes to be down 7% to 8% in fourth quarter for a refinish, which is having the mix impact on Performance Coatings overall.
Got it. Thank you. Thank
you. Our next question comes from Bob Court with Goldman Sachs. Please proceed with your question.
Thank you. Good morning. Robert, I wanted to ask on the M and A side. Your margins are really good now. So how do you think about the dilution of margin as you start to bolt on some other businesses here?
Think as we think about M and A, Bob, we typically think about cash on cash return as well as accretion to earnings as opposed to margin dilution. And you can have 25% EBITDA margin businesses that depending upon what you pay for them could be dilutive. And 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. So I think we are trying to be fairly disciplined from evaluation perspective, but there are a number of areas that are interesting to us that we are actually pursuing.
And you sort of teased us or maybe you explicitly teased us with some plans to implement strategic actions that you maybe were at your hands tied before. Can you give us maybe a little more flavor or color of what you're thinking? Is this outgrowth opportunities, M and A opportunities, would you reach out into different verticals in the paint markets? Can you give us
some help
there? Yes. So as we talked about in our prepared remarks, we'll be conducting we plan to conduct an Investor Day in the spring. But 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 the number of changes and we'll roll those out and communicate those in the coming quarter or 2. So we'll certainly share as much of that as we're able to, but I characterize Bob in a number of areas related to growth of the business.
Ongoing cost structure transformation, I think as we 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. So we'll be talking about that. I think we'd also like to share updated thinking on capital 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 in from an M and 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. Perfect. Thanks for the help. Thank you, Bob. Thank
you. 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 40 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 to put that in context. I think as we as you look at the light vehicle business overall, we saw Q3 builds above 2019 levels in North America is that region really saw a strong recovery and OEMs restocked somewhat depleted inventories from the COVID-nineteen shutdowns. Many OEMs reduced or delayed there's summer shutdowns and that's how historically occurred in the quarter. And summer actually ran over time. Incentives are obviously playing a part here in stimulating demand.
But 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. So we think all of this sets up quite nicely for auto demand for our products. I think in Europe, we believe that auto is starting to see a rebound and is evidenced by recent positive data coming out of many of the European automakers, which I'm sure all you've seen. However, 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. And then 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. Also, solid electric vehicle demand spurred by various government incentives is also aiding our Industrial Solutions Business And Industrial Solutions Energy Solutions Business. So 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.
So I think that sets up pretty nicely overall in particular,
for North America. And the one other data point that's extremely encouraging, from an IHS perspective on global auto belts, back when we reported 2nd quarter earnings, 4th quarter was expected to be down 9.5%. That has dramatically improved and now the expectation of this 4th quarter is going to be down 2.7%. And we continue to see upgrades as it relates to 2021. Now expecting to be up 13.8 percent for 2021 versus 2020.
So certainly encouraging data that's out there bridging Robert's comments.
Yes, definitely. Okay. And then in terms of the Refinish business, wondering if you've seen any change in the pace of customer 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. So I'd say probably the level of activity of switches I would suspect during the pandemic period was static.
Thank
you. Our next question comes from Steve Byrne with Bank of America.
Hi. This is Luke Washer on for Steve. I wanted to ask about your cost savings that you had in your 3rd quarter and looking into the 4th 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?
So on the temporary cost savings, it's a combination of reduced contractor spend as well as travel and entertainment. And we had a number of labor related reductions, so short work weeks, 20% pay reductions as well as furloughs. So all the labor related actions really came to a halt at the end of August with those largely concluding. T and E is probably the one area that we'll extend in the fourth quarter with a limited amount of contractor spend that's going to be reduced. But as we go 3rd quarter to 4th quarter sequentially, really what you're left with is a limited amount of savings on contractor spend in that travel and entertainment component.
And then from a structural perspective, back on the the $50,000,000 we announced back in July. That's where we start to expect that benefit to come through where we're expecting roughly $10,000,000 And that encompasses a host of different areas, back office functional areas as well as back office commercial areas. And then to a certain extent, operations efficiencies as well as technology. Salesforce is a more limited area of focus and we've taken a more surgical approach on that front. And we'll start to see a little bit of that benefit in 2021.
Perfect. And if I could just sneak in one more Talking about the auto body shop industry, is there anything that you've noticed throughout these last few quarters in terms of either MSOs buying smaller auto body shop or anything like that that's changing in the auto body shop industry? And is this at all related to your new price new business gains
No, we haven't seen a significant amount of activity during the pandemic as you're driving and the basic structure, and I think you're referring specifically to North America. But in North America, we have not seen a significant movements 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 Delta.
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, and with that, so 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?
I'd be happy to. I think that's a kind of a great entree 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 in that market or move somewhat in relation to that market. So we've seen continued improvement each month in our industrial end markets. And for the quarter, We saw wood coil and energy solutions, with positive growth year over year and slight declines in general industrial in powder, but it's worth noting that all businesses were up year over year in September. Now specifically related to home building, Our wood business continues to be powered by good growth in U.
S. Homebuilding 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. So pretty much each one of the markets within our wood business. In coil, 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 has coatings for structural steel has increased due to strong demand in the in the construction space. And then 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.
And then I would highlight kind of the star of our portfolio at the moment or our Energy Solutions business. And 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 and stagnating resin in our economy segment wire enamel products. And just as a reminder, our Volt attacks and Prognating resin product won an R and D 100 award last year in a gold Edison award this year for outstanding thermal conductivity, which allows higher motor efficiency and lower motor size and weight. So I think we're excited about the businesses we have that have exposure to the more architectural decorative homebuilding related type markets, but equally, about some of the segments that have exposure to more of the industrial space.
All right. Thank you. Thank
you. Our next question comes from Christopher Parkinson with Credit Suisse. Please proceed with your question.
Hi, this is Harris Simon on for Chris. Thanks for taking my question. So in light vehicle, can you give walk of where you see the most upside and downside to the estimates that are out there from IHS and other sources and you mentioned a focus on broadly growing in China. So can you discuss any opportunities you've taken to increase penetration with some of the underpenetrated OEMs there? Thank you.
Yes. 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 and that was really exclusively because we have a smaller overall penetration in China, and that market's been growing the fastest from the rebound at the lows. That continued a little bit in the quarter.
So 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. And over time, Axalt has been a net winner in the light vehicle business for the last five or 6 years in general. And part of that came from increased penetration in China. We do expect over time, that will 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. So that's not necessarily a 2020 or 2021, significant lever but certainly over time, we're having good success there.
Great. And thinking about the COVID situation in Western Europe and the potential for incremental restrictions. When you've seen other regions reopen and then post 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 mean, 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 That being said, we are also better prepared to navigate a 3rd or a 4th 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. And we've demonstrated our ability to adjust our structure is needed. So I think as we think about the variability around COVID, we just don't really see things ever getting as bad as it did in April.
In the majority of the scenarios that are kind of that are out there just given the grave consequences imposed on the world, on the world economy. And I think that's a kind of a general philosophical perspective that we would apply to each one of our the views on each one of our end markets.
Our next question will come from the line of John McNulty with BMO Capital Markets. Please proceed with your question.
Thanks for taking my question. So I guess a couple of things. 1, 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 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 we from a pricing perspective, more than thinking about what's going on with raw materials, and raw material pass through, our business we think about the business differently. We think about the value that our coatings create for the end customer. And since our coating products themselves are such a small percentage of really the total solution cost for any given customer. And that applies to all of our markets. We're really continuing to focus on innovation and helping our customers be successful and increasing use cases.
And 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. So that's really more fundamentally how we think about pricing strategy across our markets.
Got it. Fair enough. And then Robert, you spoke in some of the prepared remarks and some of the slides you spoke to a lot like a whole host of new maybe more than I guess I've seen you guys highlight or mention in the past. I guess, can you give us your thoughts on kind of where you're your vitality indexes, if you will. And where you're thinking that's going to be over the next few years?
It sounds like it is. It is a focus in terms of some of your growth revitalization growth acceleration strategy. So, but maybe 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?
Yes. So, I mean, 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 sure that to tell whatever story you want, because you could just a minor tweak to a product, do you count that as a new product or not? We actually track that fairly, fairly closely across our product portfolio, as well as making sure that given the new products we're adding, there were also sunsetting older products just to manage complexity across our supply chain and with our customers. From a product innovation product innovation perspective, you've seen us announce a series of new products. And 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 as well as in commercial vehicle. So I think we're that's a steady machine, but I think your question is very perceptive from a strategy and perhaps a slight shift in terms of where Axalt has been historically that we are trying to leapfrog Technologies and leapfrog type of products. And that's probably what you're picking up on a little bit on what we're saying here. So I think as 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.
And we have decoupled in particular in our transportation business, the service side of the business from the product side of the business and we now offer kind of a service offering that is tiered at different levels depending upon the particular amount and type of service and I think that's also unlocked some potential and given us some unique insights in terms of how we manage that business. So more to come
question comes from Kevin McCarthy with Vertical Research Partners.
This is Corey on 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 auto refinish volume trends in every major region of the world?
So we did, 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. So you can see that in the commentary. But 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.
And North America has been on a steady path of rebound, up to the level of kind of 10% to 15%. Below normal at this point. So 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. And do you feel as though you may be gaining or losing market share? Or do you have any sense in any of the regions, if you are, and what may be driving that?
So Axalta has been a net share gainer in refinish essentially every year. For at least 5 or 6 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, is a natural share gain that tends to come to resulted because of the nature of our leading products and services in the market.
So being on the bleeding edge of the crop side in 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. So 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 tech you're going to tend to pick up share over time and that does continue.
Thank you. Our next question comes from P. J. Juvekar with Citi. Please proceed with your question.
Hi, this is Eric Petrie on for P. J. In industrial markets, you noted that all were up year over year or did you see inventory build?
It's a little unique in the case of each individual market. What I'd say is that in 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 verification. And we're very strongly positioned there and really like the outlook for that business.
And then within the general industrial business and the powder business, you have to bifurcate what goes into more industrial architecture should say more architectural decorative type of markets and then what goes into more of an automotive or transportation application. So the part of that that goes into more construction facing in architectural type of markets, that part of the business has been recovered quite nicely and continues to improve. The part that's more facing and that may supply tier 1, I'm sorry, 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 or pre COVID or prior year levels.
Helpful. And then 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?
Think again, just to add to what Chris said, in the prior question, our refinish volumes were down mid to high single digit 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. And for 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-nineteen. 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. Our next question comes from Mike Sison with Wells Fargo. Please proceed with your question.
This is Richard on for Mike. Just to follow-up on the Industrial, I believe in July, you had forecast of the business to be down. 7% in 3Q and then 4% in 4th quarter. It's obviously performed better than that. What's your expectation now for the fourth quarter.
And looking on to 2021, are you expecting growth? And any color on that would be great.
Sorry, you guys have to repeat the last part of your question, but to answer the first part, as it relates to industrial for the fourth quarter, we're expecting roughly similar result to Q3, industrial being down around 1%. But overall, really good performances. We continue that sequential permit. Do you mind repeating that second question?
Okay. The second question is 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?
So I think as we look overall at the industrial market, there could 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. And then just quickly on capital deployment, just wondering in terms of how do you rank order M and A you're building the pipeline, in terms of like debt reduction and share buybacks, how would you think about that?
So given our liquidity position, and we covered this in our opening remarks, we are starting visit to start to build back that pipeline from an M and A perspective. So certainly expect to start to deploy some of that capital for M and A As we think about share buyback, we'll continue to buyback opportunistically, but I think now that we're beyond what we perceive as the worst of COVID impacts, we'll start to pivot on that front as well, but that again will be purely opportunistically. From a debt perspective, we are targeting 2.5 times leverage from a net perspective. Again, given our comfort level and liquidity, we may look to pay down some debt some gross debt marginally. Also we're going to be looking at potential refinancing opportunities here over the next few months.
And then we'll just continue to build cash, quite frankly. You saw a really nice free cash flow conversion and hopefully that will continue now for the foreseeable future.
And just to add to what Sean said, I think philosophically, you have a general sense that we have a good sense of what we want to do from a capital allocation perspective. But 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 at each one of those opportunities.
The factors of cost of goods sold and SG And A And R&D? The first question.
Yes. So we haven't given precise guidance on the 2020 2021 impacts. But broadly, and I mentioned this in an earlier question, it's across a multitude of categories. Being back office commercial areas, operations, technology and back office functional areas. So you're really going to see the benefits throughout our P and L, which 1.
Yes. I was wondering about like this quarter, like the structural savings that you've got like the $50,000,000 you got like this quarter, like if you said, like, that's a rough break I asked to, like, it seems most of it was sort of an SG and A and R and D, but I was just wondering whether you had some What do you know where the pieces are?
So what you're seeing in SG And A in particular this quarter, as a percentage sales dropping down so dramatically. It's really the temporary savings that you're seeing the benefit there. And 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 of that's coming within the operational areas. So particular, to call out an example, with the Meckland Belgium facility closure, we shut that down in the first quarter and stopped operations.
So 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 if you can talk about, like, the, like, the level of C and A, like, I think that your C and A was like 80 $7,000,000 in the first quarter and then it was like $77,000,000 in the second. And now we're back to like $80,000,000. I was wondering what the swings are related to and what you think your your ongoing level at check on a quarterly basis?
Yes, the best way to think about that as a percentage of net sales and targeting 16% to 17%. Certainly, you'll have FX impacts in there as well as the temporary, but targeting around 17% and A levels is the right way to think about it. Certainly, with all the structural opportunity that we have out there, we will continue to drive that down over time, but as a general benchmark, Thanks, 17%.
Yes, that's currency as well, Mike. And, lastly, I was wondering if I can ask one more question on, like, the auto IHS data. So when I look at the data, like the and I look at the sequential light vehicle production forecast, the only region that's modeled down, negatively sequentially really from the 3rd fourth quarter really is North America. That is the build is supposed to go from 4,000,000 units to like 3.8. But really, like, the last five for 6 years, like the bills have been 4,000,000 units or better in the 4th quarter in North America consistently.
So do you think this is conserve the best number? Do you think like you really have overbilled or do you think that number could be better than that? I was just wondering what your own view is?
Specifically, we've you'll see, some of the market forecasters be somewhat conservative or lag, what actually what actually happens. To Axalta is the particular product mix that we have. And our product mix is heavily weighted towards trucks and SUVs.
I just have to keep in mind that August shutdowns didn't occur this year, but the forecasters are still assuming that the December maintenance vacation shutdowns do occur. So if you just look at that alone, it'll account for a split of the lower North American outcome
in the quarter.
Thank you. This concludes our question and answer session. So I'll pass the floor to management for any closing comments.
Thank you everyone for participating, and we look forward to following of 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.