Ladies and gentlemen, thank you for standing by, and welcome to the Axalta's Second Quarter 2020 Earnings Conference Call. A question and answer session will follow the presentation by management. Today's call is being recorded and replays will be available through August 4th. Those listening after today's call should please note that the information provided, therefore may no longer be current. I will now turn the call over to Chris Mecray. Please go ahead, sir.
Thank you, Investor Relations. We appreciate your continued interest in Axalta and welcome you to our second Axalta conference call. Joining me today are Robert Bryant, CEO, and Sean Lannon, CFO. This morning we released our quarterly financial results and posted a slide presentation along with commentary in the investor relations section of our website at axalta.com, which we'll be referencing during this call. Both our prepared remarks and discussions within the company's current view of future events and the potential effect on Axalta's operating as related to the impact of COVID-19 and our actions in response, as well as our restructuring efforts. These statements involve uncertainties and risks. Actual results may differ materially from those forward-looking statements. Please note that the company is under no obligation to provide updates to those forward-looking statements. This presentation also contains various non-GAAP financial measures.
In the appendix, we've included reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information regarding forward-looking statements and non-GAAP financial measures, please refer to our filings with the SEC. I will now turn the call over to Robert.
Good morning. Thank you for joining us for our second quarter earnings review. Today the impact of COVID-19 on Axalta's operations and the continued actions we're taking in response, including the launch of a global restructuring initiative. A more detailed review of the quarter has been published to our website along with our presentation. We will keep our remarks brief today as a result. Before we begin, I do want to wish everyone good health, as health and safety remain top of mind for us at Axalta. We continue to focus daily on ensuring that we maintain safe operations globally for the benefit of our employees, customers, suppliers, and the communities in which we operate.
We commented in detail on this during the quarter, but I also want to emphasize that we operate every day at Axalta with a commitment to diversity, equality, and inclusion in the way we treat all employees, customers, and partners. Shifting now to our second quarter results and highlights, we continue to navigate this challenging pandemic period based on the three guiding principles that we shared in our May update, which include maintaining employee safety and well-being, maintaining operating flexibility, and maintaining financial flexibility. I believe you will see that we have been well-served by focusing on these three areas. We were very pleased to see a significant net sales recovery within the quarter, following the bottom set in April.
In June, we saw a recovery to down 24% in overall constant currency net sales from prior year levels, and 82% higher than the low point we saw in April. This came on the heels of gradually resumed automotive production in the back half of the quarter, a sequential recovery in miles driven globally, some improvement in broader industrial production through the period, and improved housing market metrics supporting our industrial wood and coil coatings businesses. Total net sales for the quarter decreased 39.7% before FX and M&A impacts. Performance Coatings second quarter done on a constant currency organic basis, with refinish and industrial decreasing 23.2%. Transportation Coatings net sales ex FX decreased 53.7% year-over-year in the quarter, with light vehicle decreasing 54.9% and commercial vehicle decreasing 50.1%.
Consolidated adjusted EBIT for the quarter was a loss of $12 million, clearly reflecting the extreme volume pressure in the period. Performance Coatings adjusted EBIT of $2 million was significantly pressured by the detrimental effects of lower volume, lower average price mix, and FX pressures. Transportation Coatings adjusted EBIT loss of $39 million also included clear volume drop-through effects. Axalta's adjusted EBIT results also included the unfavorable impact of accounting charges in the period related to COVID-19, primarily associated with underutilized manufacturing sites, which totaled $45 million. Excluding these charges, our adjusted EBIT and our adjusted EBITDA would have been closer to $33 million and $90 million, respectively.
With demand sequentially improving through the quarter, along with utilization picking up at our sites globally, it was encouraging to see results return to profitability in the month of June after two challenging months to start the quarter. Axalta's balance sheet remains in great shape, notwithstanding the increase in our reported net leverage ratio due to the impact on the profit denominator in the second quarter, and 75% coupon $500 million senior notes in June, along with the actions we've taken to conserve cash, our liquidity position remains extremely strong. In response to the demand impact of the global coronavirus pandemic, today we announce the initiation of a global organizational restructuring. The initial action is expected to generate annualized savings of approximately $50 million once fully implemented. Additionally, we're actively planning incremental steps to further reduce our cost structure and increase our speed and agility to market.
These may include in the near -term. Further headcount reductions in Europe, pending consultations with work councils and other local legal requirements, and other potential changes to streamline and improve the business globally. We're now moving forward to position Axalta for profitable growth across our served markets, especially in higher growth segments of the coatings market. Turning to the overall demand environment, Axalta benefited from sequential recovery following the volume bottom set in April. In Refinish, total miles driven and accident rate volumes globally continue to be impacted materially by stay-at-home restrictions, but the magnitude has moderated over the last several months. From the bottom set in April, with traffic down 45%-50% in the U.S., we have seen traffic rebound solidly and close the gap with pre-COVID-19 levels by early June.
That being said, comparisons against prior year traffic remain challenged, approximately 15%-20% below prior year levels on a seasonally adjusted basis as of the end of June. In Europe, traffic levels have remained highly variable between countries, but we've seen broad recovery since April to levels exceeding the pre-COVID baseline of traffic levels in mid-January. In China, once mobility restrictions were lifted in March, traffic resumed to nearly normal levels within weeks. This appears to be the fastest and most robust level of recovery we've tracked of the most populous countries. Axalta's total China net sales in June were up 4% from the prior year.
Our body shop customers in the U.S. and Europe have seen activity in the range of roughly 80% of prior year toward the end of the quarter, a substantial recovery from the end of the first quarter, where demand was trending at approximately 60% of the prior year. In our industrial end market, Axalta's second quarter results continued to show more resilience overall relative to our other businesses, given the wide dispersion of global customers and markets served, as well as ongoing new account additions we've seen this year. During the second quarter, while each of the industrial sub-businesses saw significant impact from lower volumes, the bulk of that impact occurred during April and May, while June saw significant recovery in volumes from the lows. In some sub-businesses, we saw full recovery to around even with prior year net sales levels, including wood and coil coatings.
At the end market level, while lower automotive production has impacted E-Coat customers and general industrial customers that sell into automotive tier suppliers, other markets, including building and construction and agriculture, have recovered to operating rates above prior year levels, notably in North America. In our Transportation Coatings segment, most global automotive and truck OEMs temporarily halted production for a portion of the second quarter, impacting April most severely, but continuing through the quarter as initial restarts began in mid-May. Axalta generally expects to track the recovery rate of the global vehicle markets. This has been the case in recent weeks. In China, we've seen significant production recovery across all vehicle markets. Customer production sites began to re-open in early March. Second quarter production even exceeded prior year levels in certain weeks.
Passenger vehicle retail sales in China have rebounded fully from the COVID-19 impacts, with total sales up 1.8% in June versus the prior year. China light vehicle net sales volumes for Axalta increased in June by healthy double-digit levels versus the prior year. For the U.S. automotive sector, aggressive incentives coupled with low financing rates continue to bolster early recovery with demand stimulation. Signs of this recovery have been seen in automotive sales during June, which recovered to 13.1 million units SAAR, up from a 12.3 million level in May. For the quarter, global light vehicle production declined 45%, including a 23% decrease in Asia Pacific, but a 9% increase in China. Current industry forecasts call for a 22% drop in global builds for the full year, including a decrease of 11% for the third quarter. It's worth noting that forecasts have improved in each of the last two months.
Overall, global truck production decreased 33% in the second quarter, and current forecasts for Class 4 - 8 truck production suggest a 25% decline for the year, with third quarter down 20%. The overall truck market also appears to be firming slightly, and recent production estimates by industry forecasters have increased in the last month due to stronger than expected orders, notably in the Class 8 vehicle segment in North America. With that, I'll turn it over to Sean for some additional details.
Thanks, Robert. As we noted earlier, we reported a second quarter constant currency organic net sales decline of nearly 40% overall. The declines were more severely impacted by the 54% decline from the Transportation Coating segment, as customers curtailed production at unprecedented levels during April and through much of May. The low production rates triggered accounting charges in the period related to this reduced demand totaling $45 million. These charges were primarily associated with fixed costs expensed in the period due to low utilization rates at manufacturing sites that normally would have been absorbed into inventory, coupled with higher inventory and accounts receivable reserves, as we did see some credit concerns pick up in certain markets.
Our reported results clearly would have been substantially different without these charges. Regarding COVID-19 impacts and our response actions, during the second quarter, we exceeded our target of planned cost actions by achieving total savings, $75 million. We've increased our in-year 2020 savings target to at least a quarter. Likewise, we exceeded our cash flow actions during the quarter, delivering $70 million of incremental discrete cash flow savings separate from the cost actions, and have increased our full year target for cash flow actions versus $125 million plus previously communicated. In combination, we now expect to deliver incremental cash flow in excess of $270 million, including the cost reduction actions. Notably, during the quarter, we avoided any cash or cost actions that would have sacrificed our market positions. In fact, we continue to accrue new accounts across many of our business lines.
Ribbon, which is subject to works council consultations and other legal requirements, is expected to generate annualized cost savings of approximately $50 million to be achieved over the next 24 months, with $40 million by the end of 2021. Approximately $195 million of in-year 2020 cost savings across all active initiatives announced today, combined with previously planned actions, including ongoing Axalta Way savings initiatives and the $130 million of temporary savings measures related to COVID-19. Robert noted our solid balance sheet at second quarter end. We closed the quarter with total liquidity of approximately $1.5 billion, including the $500 million senior notes issuance in the period. Free cash flow for the second quarter totaled a use of $18 million, which was notable given the 44% as reported decline in net sales.
This outcome benefited from actions taken during the period to maximize liquidity to help demonstrate this financial flexibility to our shareholders during an extreme case of volume volatility. Regarding our outlook, given the ongoing impacts from the pandemic, we expect net sales in the third quarter 20% from the prior year quarter. We expect the relative decline between the two segments to be even, given the various trajectories of recovery across our different businesses. For the full year, we now expect diluted shares of 236 million, CapEx of approximately $150 million, reflecting our new $500 million debt issuance. We would also note that raw material savings, which began to accrue in smaller amounts last fall, have remained somewhat constrained by low net sales volumes year-to-date. Given the expected lower net sales, we would like to remain somewhat limited positive.
Additionally, our net sales in July are expected at approximately 14% below prior year results, a further improvement from June's 24% below prior year results on an organic basis excluding currency. I'll now turn it back over to Robert.
In conclusion, the second quarter was a particularly challenging period for pandemic. Despite the 40% drop in organic constant currency sales we experienced, thanks to Axalta's highly flexible business model and actions management undertook, we were able to generate near breakeven adjusted EBIT and incur only a modest use of cash. I believe this illustrates the strength and resiliency of our business model. We believe the back half of the year, assuming the benefit of continued recovery, may also be an opportunity to underscore this resiliency, including solid free cash flow generation, despite ongoing net sales headwinds from the prior year. I'd also like to take an opportunity to thank each member of Axalta's great global team for the continued strong efforts made during this challenging period.
I'm confident Axalta, a better and stronger competitor emerging from the pandemic, and that our work both protects the company also setting us up for longer- term value. Please open the lines for Q&A.
At this time, we'll be conducting a question and question. Please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before. Our first question is from David Begleiter from Deutsche Bank. Proceed with your question.
Hi. Good morning. This is actually Katherine Griffin `on for David. Thanks for taking my question. I appreciate a lot of the color you've given just on what you've seen in terms of the cadence in July in terms of what you're seeing for the Performance business.
This is Robert. In our refinish business, I think we're seeing miles driven and accident rate volumes come back up adjusted levels. In the U.S. and Europe, we're still seeing about 15%-20% below pre-COVID seasonally adjusted levels. China, we're seeing seasonally adjusted levels for the moment. We've seen Asia, excluding China, coming back, but there's a little bit less specific data there. Of course, Latin America, as everybody has been reading, I'm sure. The big picture, we're seeing the refinish business come back quite nicely from the lows of April and coming back strong. In industrial production is expected to continue to improve. I think we were down roughly 13% in the second quarter. Expect to see that according to the forecast down about 7% in Q3 and about 4% in Q4 as the world continues to recover.
In some of our businesses there, a little bit more color, as I'm sure many of you will have questions on that. In our wood business, we're seeing solid demand in our wood business at our core anchor customers. In particular, our kitchen business remains strong and has a healthy backlog of orders in June that will continue through July. Housing starts, although they're below prior levels, are also improving. I think we're encouraged in the wood business. Coil business is benefiting from stronger demand in construction, as well as the RV market and the housing market, which is expected to continue through the summer. Our energy solutions business is perhaps one of the least impacted industrial sub-markets, and we're seeing an increase in demand there and for electric vehicles. We continue to be excited by the long-term prospects of this business.
In general industrial, which goes a little bit more into the automotive tiers distribution, that business understandably is a little bit slower to recover, given some of the end markets that that particular sub-segment serves. In our powder business, we're seeing better performance. As you heard in our commentary, China was ahead of the rest of the world in the cycle, and they're back to close to their normal trajectory. We'll talk about here in a minute, I'm sure, that they're currently showing signs of a strong second half of the year. In Europe, the ramp-up's been a little bit slower than we expected in Q2. We expect to hit our 2020 peak for that business sometime during the third quarter. Pricing in that business remains on track and is somewhat related to new color and model introductions.
We've also had a couple nice wins in the second quarter in our light vehicle, commercial vehicle business. Obviously, everybody's seen the drop-off in builds that we've seen there in the marketplace. We've actually had in the business, we're in a multitude of other transportation segments within commercial vehicle, including the RV market, which is where we have seen some demand for our coatings actually be quite strong.
Thank you very much.
Our next question is from Chris Parkinson from Credit Suisse. Please proceed with your question.
Great. Thank you very much, and glad to know everybody's doing well. Just a very simple question from me. Just given your cost programs, which you're clearly progressing well on, just both temporary as well as the more structural ones, and as well as the movements in raw materials, just netting those two things out, how should The Street think about the decrementals for three Q, as well as probably more importantly, the incrementals coming back once volume truly returns? Thank you.
Hey, Chris. This is Sean. Good morning. I guess to kind of reiterate what we saw in March, just given the quick decline, we saw roughly 44% decrementals on the $90 million impact back in March. I know we indicated that, but just to reconfirm that data point. What we saw in the second quarter was closer to 42%, and we highlighted these accounting charges. The vast majority of the accounting charges are actually related to utilization in our plants. So more of a U.S. GAAP concept, that once you drop below certain normal levels, as you define capacity, you take those charges immediately to the P&L. Just given, again, the dramatic drop-off that we saw in April and May, that really triggered these nuanced accounting charges in the quarter. We're not anticipating those to reoccur.
When you think about that $45 million in essentially pro forma, our decrementals were probably closer to 32%. We would expect the decrementals to drop in top line. Longer- term, it's really gonna be all dependent on how we continue to see recovery. If we continue on the trends, those decrementals will continue to improve. Yes, the body shop activity across North America and Europe is at approximately 80% of kind of pre-COVID activity levels. The good news is that I think we're seeing activity levels pick up and get back up to higher levels on the body shops side of the business. I think we will need to see more stability in the COVID situation, Chris, in order to get to a high enough level of miles driven that we see congestion at peak hours.
Think morning commute, after commute, midday errands, and that type of thing, as key congestion periods. We'll need to get to a higher level of miles driven before those congestion periods kind of take us back to the number of total accident volume that we had pre-COVID. As we continue to see miles driven move up and more activity and congestion, we expect to see that return. From an inventory perspective, I think as we said on our last call, we've seen distributors running with very low levels of inventory, just given their business models. Effectively today, I'd say, almost all of our distributors are effectively buying to demand and have brought down buffer inventory levels to fairly low levels.
From a competitive perspective, we haven't seen any of the COVID pandemic affect our ability to service our customers and make sure that we're getting our customers around the world what they need. To the extent that they run into issues and we need to troubleshoot problems and so forth, we've been doing a lot of virtual problem-solving with our customer base to keep everything moving. Where we can, in a socially distant and safe way, we've been having our sales and our technical support teams be fully out in the field.
Thank you very much.
Our next question is from PJ Juvekar from Citigroup. Please proceed with your question.
Good morning.
Morning, PJ.
Robert, you just said something interesting about morning traffic versus afternoon traffic and miles driven. Are all miles driven equal for you? Or is it that maybe the morning congestion is better for you than afternoon traffic or vacation traffic? Can you just sort of go into further detail about what's really good, and is one particular type of traffic better than other?
Well, I think it has to do, PJ, with the level of miles driven, right? When you see miles driven drop as much as the affinity perspective, congestion levels get to be very, very low. To your point, in addition to the miles driven, you also do need to see in the business congestion at the typical congestion hours, and you need to see congestion levels increase in order to get back to the full accident volume that we had on a pre-COVID basis.
Okay. My second question is on sort of heavy-duty Class 8 cycle. As people sit at home and order from Amazon and more goods are delivered by truck, is it possible that maybe Class 8 comes back faster than passenger vehicles? Thank you.
I think what we would expect to see just from an incentive perspective is, if you look at the IHS forecasts for the market, I think the forecasts are actually showing a faster recovery in the passenger car and passenger truck market. Heavily driven, of course, by some of the incentives that we're seeing in terms of zero-interest loans, deferred payments, and other heavy-duty truck recovery outpace, what I think we hope to see in the light vehicle space.
Thank you.
Our next question is from Silke Kueck from JPMorgan. Please proceed with your question.
Good morning. How are you?
Morning, Silke.
Could you discuss what led to the lower price mix in the refinish business? How much was lower price and how much was lower mix, and what do you expect for the next couple of quarters?
The outcome was driven almost entirely by mix. Price was actually positive in the year-over-year comparison. The second quarter result was really driven by buying patterns from distribution customers. To a lesser extent, we also sold a larger quantity of mainstream and value-oriented products in the second quarter.
Regarding the new restructuring program that you initiate, how much of the cash charges of the $55 million-$65 million do you expect to spend this year versus next year, and what's the CapEx component of the cash cost?
Yeah. Roughly $25 million in the cash costs will be spent in 2020, with largely the difference going out in 2021. There is a small piece that'll continue into 2022. As far as the CapEx, ranging $10 million-$15 million, we are looking at rationalizing certain capacity in our manufacturing footprint. They're the components there, and that'll largely be spent in 2021.
Do you have a D&A target for the year? It looks like the D&A is coming down or it came down a bit in the second quarter versus the first. What do you target for the year?
We're trending towards closer to $320 million, including the step-up. Certainly, with our pullback on the overall CapEx budget, you're starting to see that benefit come through from a D&A perspective and why it's trending down.
The step-up is about $105 million?
That's right.
Thanks very much.
Our next question is from John McNulty from BMO Capital Markets. Please proceed with your question.
Yeah, thanks for my question. I guess I had two of them. The first one is, you've got a lot of cost-cutting programs and initiatives now, and admittedly, it's a little bit tricky to kind of keep up with them. I guess two things. Can you help us to understand sequentially how much of a benefit you will get in 3Q versus 2Q from the cost-cutting initiatives that you've outlined? Then also, how should we think about the sustainable cost cuts and the incremental benefit in 2021 versus 2020? Is there a way that you can kind of help us to understand that?
Yes, we haven't provided any sort of incremental for 2021. As it relates to 2020, just to break down the components for you, John. The Axalta Way savings, the $50 million, is coming in ratably. As you think about third quarter, fourth quarter, essentially that easy math. As it relates to the $130 million in temporary savings, we got $75 million in the second quarter. As it relates to the new $50 million program, we're anticipating about $10 million, with the vast majority coming through in the fourth quarter.
Got it. Okay, that's helpful. Just one clarifying point. Thinking about the decrementals in 3Q at somewhere in kind of the 30% range, give or take a little bit. If you'd ex some of the period costs or the accounting costs in 4Q, it would've been 32, and you're thinking it's on the margin maybe a little bit better than that. Are we thinking about that right?
That's exactly right, John. If we get to the 15% versus the 20% net sales decline, I would expect us to be a little better than 30% on the decremental, but at or about 30% is the right way to think about third quarter decrementals.
Got it. Just so I'm doing the math right, if I understand, you're essentially guiding to a $200 million hit on the sales line. Should we be thinking, again, based on that math, that you're kind of thinking about a $60 million hit year-over-year on the EBIT line? Is that right, or are we missing something on that?
I don't think you're missing anything. That's the rough math.
Great. Thanks very much for the color.
Our next question is from Steve Byrne from Bank of America. Please proceed with your question.
Yes, thank you. The volume slides you provided are helpful, so thank you for that. If we look at the one for refinish in particular, and just try to impute what your revenues were in that business in the year-ago period, it seems like they kind of surge at the end of the quarter. March and June were big months in the year-ago. Is that the way that business operates, where it's a lot of product moving at the end of the quarter, or was that an anomaly?
Yeah, that's pretty common. Typically, after the year end, things are slow to open up. You'll see January be a little bit slower. You've got a Chinese New Year impact that always occurs in the first quarter as well. March tends to be a big month. In the second quarter, you see somewhat of a similar pattern, where April and May can be a little softer, and then June can be a stronger month. In terms of what we actually saw in the sales pattern for the refinish business overall, we saw that exact same pattern. June was materially better than May and April.
Just thinking about your comment earlier about market share in refinish. You have this respray while wet technology that seemingly would be a differentiation in your technology that might enable you to gain some share. We've picked up from a couple of your refinish coatings competitors that they claim to be gaining share in refinish. Is this an industry where there's consolidation, and everybody's gaining share? What change could that be over the next year?
Well, I think you have to remember, globally, there's 30%-40% of the market that's in the hands of other players that are not, especially outside the U.S. You do see some of the leading coatings companies with their product portfolio continue to take share from some of the second-Tier players in the market. That's been an aspect of the market for some time, and one that we expect will continue over time. It's possible that everybody is gaining share at the expense of some of those second-tier players, and then also some of the local and regional players.
Maybe just a follow-up question. Would you highlight any technological differentiation that you have or service that you offer that could lead to share gains in the Transportation segment? You mentioned a couple of wins, maybe could you elaborate on that?
I think in our Transportation Coatings business, we do have some unique technology-validated systems technologies where we effectively remove one of the steps in the painting process, thereby lowering the capital investment and the operating costs for some of our light vehicle customers. We have the leading share in consolidated systems. We're also continuously rolling out new products to our light vehicle customers around the world. I think our technology, from a pure technology perspective, is some of the best in the industry. I think where it also really shines is on the service and technical side of the business. I think our technical service team is truly outstanding, and we've frequently been brought into light vehicle plants where there has been an issue or a problem with a competitor's paint system. Might be experiencing that issue for any number of reasons.
We kind of have a reputation as being able to go in, diagnose what's wrong, and get things back up pretty quickly. I think the service side of our business is a very important competitive differentiator.
Thank you.
Our next question is from Ghansham Panjabi from Baird. Please proceed with your question.
Hi. Good morning, everyone. This is actually Matthew Krueger sitting in for Ghansham. Thanks for taking my questions.
Good morning, Matt.
Hey, good morning. First, understanding that the lower net sales can impact the flow-through of any potential raw material benefits, can you provide some added detail on what your expectations are for the actual underlying raw material basket heading into the second half of the year? Given the recent move in oil, are we at risk of starting to see a sequential uptick in inflation just as your net sales kind of start to recover there? If you could touch on TiO2, that would be helpful as well.
Sure. I think, we've seen price decreases in select raw material categories as a result of COVID-19, driven by obviously significantly reduced demand. Our demand was also lower, as our plants had ramped down production for the better part of Q2, so we didn't purchase the same volumes that we typically do. Despite the weaker demand in the pandemic, we did see supply and price pressure for some specialties, namely pigments and monomers. TiO2 specifically, I think we expect to be slightly up due to some of the chloride grade tightness. Aside from pigments and monomers, the remaining categories for the most part, have tailwinds. Whether it's isocyanates that we purchase, IPDA, for example.
On the solvent side, we do see some tailwinds, therefore, we'd expect the overall raw material basket to be down year-over-year, given the drop in demand that's occurred for those suppliers from customers due to COVID. However, we do, as you point out, material pricing, assuming that demand recovers. I think we'll see potentially some benefits start to appear in the back half of the year. In terms of what happens with pricing and then how large a benefit that is, that's largely a function of how much volume we buy, as well as what happens with overall market demand.
Okay. That's helpful. Switching over to the demand side of the business, can you expand on what type of operating backdrop you have baked into your down 15%-20% revenue guidance for the third quarter? Pardon me if I misunderstood this commentary, but if July sales were down in the 14% range, which is what I thought I heard, does this imply that you expect the operating backdrop to worsen throughout the quarter? Is that 15%-20% number just that kind of trying to be conservative? Any detail there would be helpful.
The 14% is year-over-year, I think as you see in the actual earnings deck, we typically see an uptick in sales in the last month of the quarter. When you're doing year-over-year comps, that's the 15%-20%. Clearly we saw the 14% in July. There's clearly uncertainty out there, so there is a little conservatism built in, just as we don't know how the markets are going to develop over the course of the quarter. As you look at prior year periods, 2019 third quarter, September was a higher sales month than the month of July.
I would just add to what Sean said, I think from an overall recovery perspective, I think we're actually quite encouraged by what we're seeing in the marketplace. In April, as we all knew would be the absolute bottom, down 56% top line. Second quarter overall was down about 44%. June was only down 25%, now we've seen July year-over-year, down 14%. The overall demand picture does seem to be improving in a marketable fashion. As Sean said, we just felt it was prudent, given the uncertainties, particularly in terms of some of the spots in the world where coronavirus appears to be resurging somewhat to have a little bit more cushion in our sales forecast.
Got it. That 15%-20%, does that incorporate any incremental shutdowns kind of rolling through any specific regions?
We're not anticipating any full shutdowns.
Okay. That's helpful. Thanks. That's it for me.
Our next question is from Aleksey Yefremov from KeyBanc Capital Markets. Please proceed with your question.
Thank you. Just coming back to incremental margins, I think you more or less were comfortable with about $185 million to $190 million EBITDA range for 3Q based on your $60 million year-over-year decline comment. If that is true, and if we look forward to the fourth quarter, do you think we could see worse or better than 30% incremental margin? There are several moving pieces as we move through the year.
We're not guiding the Q4 just given the uncertainty on the top line. I think as a general matter as sales continue to increase, the decrementals should get a little better. Lyle was pointing to on the earlier question, if we end up hitting that 15% down, we could see slightly better than 30%, but clearly at 20%, we may be slightly above 30%. Again, we're not confirming anything around fourth quarter just given the uncertainty in the demand cycle. We are hopeful given the trends that things continue to improve. Certainly no assurances at this point in time.
The reduction in temporary cost savings is not going to offset the other benefits that you might see by the fourth quarter, I guess that's what I'm trying to get to.
Since of the temporary cost savings, I think they'll be offset by the benefit of the.
The incrementals on increased sales, if that makes sense. We should continue to see margin improvement as the net sales deterioration continues to improve.
Thank you. Your reported OEM pricing of 3.5% in the third quarter, did you implement new price increases, or was there a mix, or base effects, or anything like that?
Yeah. That was largely related to mix. Similar to what you saw on Refinish, the reason we were down. That was mix on the upside, and Transportation, that's also driven by mix.
Thanks a lot.
Our next question, Ed from Barclays. Please proceed with your question.
Question for Robert. In your Refinish business, can you just talk about what you've seen in terms of your MSO customers versus, say, your non-MSO business that'll go through distributors? I guess I'm just trying to get a sense of if you're given some of the uncertainty of smaller body shops.
It's a good question. I'd say overall, we have not seen any material shifts there in the market. Obviously, the richest mix of product, because they're buying the highest end, which also are our highest price products. As you see the pullback in the Refinish business here in the second quarter, given the profitability of that business, obviously, the impact is pretty dramatic, and hence, you see the results here in the second quarter. Fortunately, that's improving rather quickly. I think we've seen our MSO customer base throttle back in terms of how they operated shops and ran staffing levels during the second quarter, and they've gradually been adding more and more back. I think, we'll expect to see them kind of come out of that.
At the individual independent body shop level, I think as we might have talked about on our last call somewhat, the expectation is there. We haven't heard from our sales force about too many body shops that are kind of closing up shop for good because the recovery, the coronavirus situation here has only been a few months in length. If the coronavirus situation lasted for months and months on end, then I think you would see potentially a few of them actually close up shop. In terms of inventory levels, obviously, cash is king at all steps in the value chain. Everybody has been running inventory levels at a fairly lean level, and really buying toward demand.
We've even seen, in some cases, some of the average order sizes coming down in size in the second quarter as people manage their working capital. We're starting to see those come back up a little bit. I think overall, we're encouraged by what we see in that market. Miles driven back up, and as we see congestion increase, continue to only get better.
Got it. That's really helpful color. If we just return back to the July commentary about down 14% year-over-year, can you just give some color around the variability in that figure between your businesses, just maybe highlighting areas where you're seeing the greatest acceleration in growth versus areas that might be a bit flatter in their recovery?
When you look at the performance side of the business, that was on average, down 10%-12%, versus light vehicle being down closer to kind of the 17%-18%, and commercial vehicle being down closer to 30%. As you think about recovery, certainly light vehicle coming out of the lows in April and May, you continue to see that steady rebound as all the plants are up and running and becoming more and more utilized. Hopefully that's helpful.
Thank you.
All right. Next question is from Mike Sison, analyst from Wells Fargo. Please proceed with your question.
Hi, this is Richard on for Mike.
Hello, Richard.
Yeah, hi. Just, first question. On the temporary cost savings increase target to $130, can you talk about what drove that? Was that mostly in SG&A? How sticky are those temporary cost savings? If we do get a recovery, how much of that should we expect to come back on?
We've characterized all this as temporary, but as we continue to learn how to work virtually, we expect some benefit around travel and entertainment to come down to be more sustainable savings. We haven't characterized any of this as permanent. As it relates to cost programs and increasing from the $100-$130, it's really across all the categories. As we continue to focus on third-party spending, as we've continued to hold the hiring freeze, as well as hold the line as it relates to travel and entertainment, it's clearly accruing more benefits than we were originally anticipating. It is across the P&L as we see those incremental benefits.
Okay, great. On the global restructuring, you'd mentioned that potentially additional reductions could come in Europe. What would make you go forward with that decision? Does it depend on your customers, whether demand returns or not? How are you thinking about further workforce reductions? Thank you.
Well, any workforce reductions that we would do in Europe would require the agreement with the works councils. As we have more information on those, we'll be able to provide more of an update.
Our next question is from Paretosh Misra from Berenberg. Please proceed with your question.
Oh, hey, good morning, Robert, Sean, and Chris. Thanks for taking my questions. First, a quick one on cash flow. The $270 million in incremental cash flow versus earlier in the year. I see that it's driven by $80 million in CapEx and maybe $40 million, $50 million in business incentive payments and the rest is just these cost reductions you have announced. Is that a good way to think about that?
They're the large buckets, but certainly we're making progress as we continue to extend terms with our vendors, as well as looking at incentives offered by local governments in regards to tax payments. You have the vast majority of the elements.
Got it. Second, just trying to understand the refinish market perhaps a little bit better. I believe the average repair refinish job is about $4,000 per car in the U.S., and I think 4%-8% of that is what really drives your revenue. Are these numbers ballpark similar in Europe? Also you mentioned accident rate a couple of times. Just curious, what is a typical accident rate and, I guess, how much does it vary across different regions? Thank you.
In terms of the costs per repair, costs are a little bit higher in Europe, given that labor costs are higher in Europe, and that's the largest component of the total cost of any vehicle repair. In terms of the variability in the accident rate data for the U.S. as a total country, there's pretty good data. When you get to Europe, it really is on a country by country basis. We'd have to pull that information and supply that separately.
Got it. Thanks, guys.
Our next question is from Vincent Andrews from Morgan Stanley. Please proceed with your question.
Hi, this is Steve Haynes on for Vincent. Thanks for squeezing me in here at the end. Wanted to circle back on cash flow really quick. Can you help us think about working capital, a lot of moving pieces this year, so for 2020, and maybe if there is some favorability this year, how you'd be thinking about 2021.
Probably the easiest way to think about it, net sales. We continue to target roughly 11%, and certainly quarter to quarter as we see rebounds, there's going to be a lot of pieces moving between AR, inventory, and AP, but I think getting back to the overall percentage is simply the easiest way. I do think we'll see incremental benefits as it relates to inventory if raw materials stay low. I do think we'll have a sustainable benefit coming out of the work that we're doing with vendors on accounts payable. You could potentially see that 11% declining slightly as we continue to make progress on our working capital initiatives on that front.
Okay. Thank you.
Our next question is from Kevin McCarthy from Vertical Research Partners. Please proceed with your question.
As the way down and how should we think about this in your two segments? Thank you.
As it relates to the segments, the decrementals are a little bit worse on the Performance side, just given the margin profile of refinish. I think as you think about the incrementals, I think it's a similar step function. As you get closer to flat from the prior year, those incrementals will become that much more meaningful. Certainly on the way down as volumes drop off even further, those decrementals are clearly getting worse, just given the fixed cost absorption, and the drop-through associated with the lower volumes.
Got it. Thank you. Just a second question relating to the restructuring plan and the work councils in Europe. Is Europe a source of upside to the incremental restructuring if you get approval from the work councils or are these numbers sort of including that approval or assuming that would happen?
In the current number, there are an expectation that we would make in some jurisdictions some progress, but there is substantial room to improve our overall cost structure. There's upside to the numbers that we have provided.
Got you. Can you give us sort of a quantify that in some way or give us some sort of guidance to that, what that upside could look like?
No, not at this time. Not until we've had.
Okay
the opportunity to engage in dialogue with the workers' council.
Understood. Thank you very much. That was helpful.
We have reached the end of the question and answer session. I will now turn the call over to management for closing remarks.
It's Chris Mecray. Thank you all for joining today, and we look forward to your follow-up calls and questions. We'll be around for the rest of the day and week to dialogue with you. Thank you.
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.