Ladies and gentlemen, thank you for standing by, and welcome to the Axalta Second Quarter 2020 Earnings Conference Call. 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 McGray.
Please go ahead, sir.
Thank you, investor relations. We appreciate your continued interest in Axalta, and welcome you to our Cizalts 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, the Investor Relations section of our website at axalta.com. Which we will 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-nineteen and our actions in response as well as our restructuring efforts.
These statements involve uncertainties and risks and actual results may differ materially from those forward looking statements. Please note that the company is under no obligation to provide updates to those forward looking statements. This presentation also contains various non GAAP financial measures. In the appendix, we've included reconciliations of these non GAAP financial measures. To the most directly comparable GAAP financial measures.
For additional information regarding forward looking statements and non GAAP financial measures, please refer to our filings with the SEC. I will now turn the call over to Robin.
Good morning. Thank you for joining us for our 2nd quarter earnings review. The impact of COVID-nineteen on Axalta's operations and the continued actions we're taking in response, including the launch of a global restructuring initiative. A more detailed review of the quarter has been published to our website, along with our presentation, and we will keep our remarks brief today as a result. Before we begin, I do wanna wish everyone good health.
As health and safety remains top of mind for us at Axalta. We continue to focus daily on ensuring that customers, suppliers and the communities in which we operate. We commented in detail on this during the quarter, but I also want to emphasize that we operate every day at Axalta with a commitment to diversity, equality and inclusion and the way we treat all employees, customers, and partners. Shifting now to our second quarter results and highlights. We continue to navigate this challenging pandemic period based on the 3 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 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 some improvement in broader industrial production through the period and improved housing market metrics, porting our industrial wood and coil coatings businesses. Total net sales for the quarter decreased 39.7 percent before FX and M and A impacts. Performance Coatings 2nd quarter end on a constant currency organic basis, with refinishing an 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 $12,000,000, clearly reflecting the extreme volume pressure in the period. Performance Coatings adjusted EBIT of $2,000,000 was significantly pressured by the detrimental effects of lower volume, lower average price mix, and FX pressures. Transportation Coatings adjusted EBIT loss of $39,000,000 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 $45,000,000. Excluding these charges, our adjusted EBIT and our adjusted EBITDA would have been closer to $33,000,000 $90,000,000 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 June after 2 challenging months to start the quarter. Xalta'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 second quarter. And 75 percent coupon 500,000,000 senior notes in June, along with the actions we've taken to conserve cash, our liquidity position remains extremely strong.
In response to the demand impact of the global coronavirus pandemic, Today, we announced the initiation of a global organizational restructuring. The initial action is expected to generate annualized savings of approximately $50,000,000 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% to 50% in the U. S, We have seen traffic rebounded solidly and closed the gap with free COVID levels by early June.
That being said, comparisons against prior year traffic remained challenged. Approximately 15% to 20% below prior year levels on a seasonally adjusted basis as of the end of June. In Europe, traffic levels have remained highly variable between countries, but we've seen broad recovery since April to levels exceeding the pre COVID baseline of traffic levels in mid January. In China, once mobility restrictions were lifted in March, traffic resumed to nearly normal levels within weeks. This appears to be the fastest and most robust level of recovery we've tracked of the most populous countries.
Exalta'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 In our industrial end market, Axalta's 2nd 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 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 ecoat 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. Exalta generally expects to track the recovery rate of the global vehicle markets, and this has been the case in recent weeks. In China, we've seen significant production recovery across all vehicle markets. Customer production sites began to reopen in early March, and 2nd quarter production even exceeded prior year levels in certain weeks.
Passenger vehicle retail sales in China have rebounded fully from the COVID 19 impacts, with total sales up 1.8% in June versus the prior year. China light vehicle net sales volumes for Axalta increased in June by healthy double digit levels versus the prior year. For the U. S. Automotive sector, aggressive incentives, coupled with low financing rates, continued to bolster early recovery with demand stimulation.
Signs of this recovery have been seen in automotive sales during June, which recovered to 13,100,000 units are up from a $12,300,000 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 3rd quarter. It's worth noting that decreased 33% in the 2nd quarter and current forecasts for Class 4 to 8 truck production suggest a 25% decline for the year, with 3rd quarter down 20.80 Brent. 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 2nd 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 $45,000,000. 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-nineteen impacts and our response actions, During the second quarter, we exceeded our target of planned cost actions by achieving total savings $75,000,000. And 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 $70,000,000 of incremental discrete cash flow savings separate from the cost actions and have increased our full year target for cash flow actions versus $125,000,000 plus previously communicated. In combination, we now expect to deliver incremental cash flow in excess of $270,000,000, including the cost reduction actions.
Notably, during the quarter, we avoided any cash or cost actions that would have sacrificed our market positions. And in fact, we continue to accrue new accounts across many of our business lines, which is subject to worse council consultations and other legal requirements that expect to generate annualized cost savings of approximately $50,000,000 to be achieved over the next 24 months with $40,000,000 by the end of 2021, approximately $195,000,000 of in year 2020 cost savings across all active initiatives and announced today, combined with previously planned actions, including ongoing Axalta Way savings initiatives and the $130,000,000 of temporary savings measures, related to COVID-nineteen. Robert noted our solid balance sheet at second quarter end. We closed the quarter with total liquidity of approximately $1,500,000,000, including the 500,000,000 senior notes issuance in the period. Free cash flow for the 2nd quarter totaled a use of $18,000,000 which was notable given the 44% as reported decline in net sales.
This outcome benefited from actions taken during the period to maximize to demonstrate this financial flexibility to our shareholders during an extreme case of volume volatility. Regarding our outlook, given the ongoing impacts from the pandemic, we expect net sales in the third quarter, 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 reflecting our new $500,000,000 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 to positive Additionally, our net sales in July are expected at approximately 14 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 a mintemic. 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 Kamalta, a better and stronger competitor, emerging from the pandemic and that our work both protects the comp also setting us up for longer term value. Please open the lines for Q and
Our first question is from David Begleiter from Deutsche Bank. We'll see with your question.
Hi, good morning. This is actually Kathleen Griffin on for David. Thanks for taking my question. I appreciate all 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 on the adjusted levels. In the U. S. And Europe, we're still seeing about 15% to 20% below pre COVID seasonally adjusted levels.
China, we're seeing seasonally adjusted levels for the moment. And then we've seen Asia excluding China coming back, but there's a little bit less specific data there. And then, of course, Latin America, as everybody has been reading, I'm sure. The big picture we're seeing the Refinish business, come back quite nicely, from the lows of April and coming back strong. In industrial, industrial production is expected to continue to improve.
I think we were down roughly 13% in the 2nd quarter. Expect to see that according to the forecast down about 7% in Q3 and about 4% in Q4, as as the world continues to, to recover. And some of our businesses there, a little bit more, more colors. 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, through July. Housing starts, although they're below prior levels, are also improving. So I think we're encouraged, encouraged in the wood business. Oil business is benefiting from stronger demand and 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 submarkets and we're seeing an increase in demand there, and for electric vehicles.
So we continue to be excited by the long term prospects of this business. In general industrial, which goes a little bit more into, you know, 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. And in our powder business, we're seeing better performance in as you heard in our our commentary, China was ahead of the rest of the world in the cycle, and they're back to close to their normal trajectory. And and and we'll talk about here in a minute.
I'm sure that they're currently showing signs of a of a strong, a strong second half of the year. In Europe, the ramp up's been a little bit slower than we expected in Q2, and we expect to hit our 2020 peak for that business sometime during third quarter. Pricing in that business remains on track and it's somewhat related to, new color and model introductions. And we've also had a couple of nice wins in the second quarter in our light vehicle commercial vehicle business, obviously everybody's seen the drop off in builds that we've seen there in the marketplace. But 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 is doing well. Just a very simple question for me. Just given your cost programs, which are clearly progressing well on, just both temporary as well as the more structural ones. How and as well as the movements in raw materials, just netting those 2 things out, how should the street think about the decrementals for 3Q as well as probably more importantly the incrementals coming back once volume truly returns.
Thank you.
Hey, Chris. This is Sean. Good morning. I guess to kind of reiterate what we saw in March just given the quick decline, we saw roughly 44 percent decrementals on the $90,000,000 impact back in March. I know we communicated that, but just reconfirm that data point.
What we saw in the 2nd quarter was closer to 42% and we highlighted these accounting charges, the vast majority of the accounting charges 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 and L. And just given, again, the dramatic drop off that all in April, May, you know, that really triggered these nuanced accounting charges in the quarter.
We're not anticipating those to reoccur. You think about that that $45,000,000 in essentially pro form a, you know, our decrementals were probably closer to 32%. And we would expect the decrementals drop in top line. And then longer term, it's really going to be all dependent on how we continue to see recovery. If we continue on the trends, that those decrementals will continue to improve it.
Yes. So body shop activity is, across North America and Europe is at approximately about 80%
of kind of
pre COVID activity levels So the good news is, and I think we're, you know, we're seeing activity levels pick up and get back up to higher levels, in in the body 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. We think morning commute after commute midday errands and that type of thing, as key congestion periods, we'll need to get to a higher level of miles driven before those congestion periods kind of take us back to, the number of, kind of total accident volume that we had that we had pre COVID. But as we continue to see miles driven, move up and more activity and congestion to see that, we expect to see that return. From an inventory perspective, I think as we said on our last call, we've seen distributors running with very low levels of inventory just given their business models and effectively today, I'd say almost all of our distributors are effectively, you know, buying to demand and have brought down buffer inventory levels to fairly low levels.
And from a competitive perspective, We haven't seen any, any, the, COVID pandemic affect our ability to service our customers and make sure that we're getting our customers around the world. What they need. And to the extent that they run into issues and we need to troubleshoot problems and so forth, we've been doing a lot of virtual, problem solving with our customer base to keep everything moving and then where we can in a socially distant and safe way we've been having our sales and our technical support teams be fully out in the field.
Thank you very much.
Our next question is from P. J. Juvekar from Citigroup Please proceed with your question.
Good morning. Robert, you just said something interesting about morning traffic versus known 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 a level of the level of miles driven, right? When you see miles driven drop as much as the affinity perspective, congestion levels get to be so get to be very, very low. But to your point, in addition to the miles driven, you also do need to see in the business congestion at the typical congestion hours and you need to see congestion levels increase, in order to get back to the full accident volume that we had on a pre
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.
You know, I think what we would expect to see just from an incentive perspective is, you know, if you look at the IHS forecasts For the market, I think the forecasts are actually showing a faster recovery in in in the passenger car and passenger truck market. Heavily driven, of course, by some of the incentives that we're seeing in terms of 0 interest loans, deferred payments, and other, you know, other heavy duty truck, recovery outpace, what I think we hope to see in the light vehicle space.
Our next question is from from JP Morgan. Please proceed with your question.
Good morning. How are you?
Good morning. It's okay.
Could you discuss what led to the the lower price mix in the Refinish business? Like how much was lower price and how much was lower mix? And what do you expect for the next couple of quarters?
Yes, the outcome was driven almost entirely by mix. Price was actually positive year over year comparison. The 2nd quarter result was really driven by buying patterns, from distribution customers. And to a lesser extent, we also sold a larger quantity of mainstream and value oriented products in the 2nd quarter.
Regarding the, the new restructuring program that initiated How much of the cash charges of the $55,000,000 to $65,000,000 you expect to spend this year versus next year? And what's the CapEx component of those terms of the cash costs?
Yes, so roughly $25,000,000 and the cash costs will be spent in 2020, but largely the difference going out in 2021, there is a small piece that will continue in the 2022. As far as the CapEx, ranging $10,000,000 to $15,000,000, we are looking at rationalizing, rationalizing certain capacity. In our manufacturing footprint. So there are the components there and that will largely be spent in 2021.
And do you have a D and A target for the year? Like I said, it looks like the D and A is coming down or it came down a bit in the 2nd quarter versus the 1st? Or what do you target for the year?
We're trending towards closer to 320,000,000 including the step up, you know, but certainly with our pullback on the overall CapEx budget, you're starting to see, you know, that benefit come through from the back to the lights running down.
The step of the spot like $105,000,000?
That's right.
Thanks very much.
Our next
question is from John McNulty from BMO Capital Markets. Please proceed with your question.
Yes, thanks for my question. I guess I had 2 of them. The first one is you've got a lot of cost cutting programs and initiatives now. And admittedly, it's a little bit tricky to kind of keep up with them. So I guess 2 things.
Can you help us to understand sequentially how much of a benefit you will get in 3Q versus 2Q from the cost cutting initiatives that you've outlined. And then also how should we think about the sustainable cost cuts in and the incremental benefit in 'twenty one versus 'twenty. Is there a way that you can kind of help us to understand that?
Yes. So we haven't provided any any sort of incremental for 2021, but as it relates to 2020, just to break down the components for you, John, So the Exalta weight savings, the $50,000,000 is coming in ratably. So as you think about 3rd quarter, 4th quarter, essentially that that easy math As it relates to the $130,000,000 in temporary savings, we got 75 in the 2nd quarter. Roughly, and then as it relates to the new $1,000,000 program we're anticipating about $10,000,000 with the vast majority coming through in the 4th quarter.
Got it. Okay. Helpful. And then just one clarifying point that I'm thinking about the decrementals in 3Q at somewhere in kind of the 30% range, give or take a little bit. I mean, at the back, you'd you'd send X some of the some of the period costs or the accounting costs in 4Q, it would have been 32 and you're thinking it's on the margin maybe a little bit better than that.
Are we thinking about that right?
That's exactly right, John. If we get to the 15 percent versus the 20% net sales decline. You know, I would expect this to be a little better than 30% on the decremental, but at or about 30% is the right way to think about third quarter decrementals.
Got it. And then just just so I'm I'm doing the math, right? If I if I understand, you're essentially guiding to a to a $200,000,000 hit on the sales line. So should we be thinking again based on that math that you're kind of thinking about a $60,000,000 year over year on the EBIT line. Is that right or is that are we missing something on that?
I don't think you missed anything. That's a rough math.
Thanks very much for the color.
And our next question is from Steve Byrne from Bank of America. Please proceed with your
question. Yes, thank you. The volume slides are provided are helpful. So thank you for that.
But if we look at
the 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, they kind of, surge in the quarter of March June. We're 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.
Yes, that's pretty common. Typically after the year end, things are slow to open up. So you'll see January be a little bit, a little bit slower. You've got a Chinese New Year impact, that always occurs in the first quarter as well. So March tends to be March tends to be a a big month.
And then in the second quarter, you know, you see somewhat of a similar pattern where April in May can be a little softer and then June can be a stronger a stronger month. And in terms of what we actually saw in the sales pattern, for the Refinish business overall. We saw that exact same pattern. June was materially better, than May April.
And just thinking about your comment earlier about market share and refinish, you have this respray while wet technology that humanly would be a differentiation in your in your technology that might enable you to gain some share. We 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 change? Could that be over the next year?
Well, I think you have
to remember globally there's 30 to, you know, 30 to 40% of the market that's, you know, in in the hands of other players that are not especially outside the US. You do see some of the leading coatings companies with their product portfolio continue to take share from some of the 2nd tier 2nd tier players in the market. And that's been an aspect of the market, for some time, and and one that we expect we expect will continue over time. So it's possible that everybody is gaining share at the expense of some of those 2nd tier players and then also some of the local and regional players.
And then maybe just a follow-up, Sean, would you would you highlight any, technological differentiation that you have or or service that you offer that could lead to share gains in the transportation segment. You mentioned a couple of wins and maybe if the day lebering on that.
I think in our transportation business, we do have some, 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. And I think, you know, our technology from a pure technology perspective is, you know, some of the best some of the best in the industry. But I think where it's also really shines is on the service and technical side of the business I think our technical service team is truly, you know, truly outstanding. And we've frequently been brought into, light vehicle plants where there has been an issue or a problem, with the competitors, paint system might be experiencing that issue for, you know, 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. And I think the service out of our business is a very important competitive differentiator.
And our next question is from Thompson Punjabi from Baird. Please proceed with your question.
Hi, good morning, everyone. This is actually Matt Krueger sitting in for Ghansham. Thanks for taking my questions. Hey, good morning. So 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?
And then Given the recent move in oil, are we at risk of starting to see a sequential uptick in inflation just as your net sales kind of start to recover there? 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-nineteen driven by obviously significantly reduced demand. Our demand was also lower as our plants had ramped down production for the better part of Q2. So, we didn't purchase the same volumes that we typically do. But despite the weaker demand in the pandemic, we did see supply and price pressure for some specialties namely, pigments and, in monomers.
Ti2 specifically, I think we expect to be slightly slightly up due to some of the chloride grade tightness. Aside from pigments and monomers, the remaining categories for the most part, have tailwinds. So whether it's, isosunamers that we purchase, IBXA, for example, And then on the solvent side, we do see some tailwinds. And therefore, we'd expect the overall raw material basket to be down year over year given the drop in demand that's occurred for those suppliers, from customers due to due to COVID. However, we do, as you point out, material pricing, assuming that, assuming that demand recovers So I think we'll see potentially some benefits start to appear in the back half of the year.
But in terms of what happens with 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, that's helpful. And then kind of switching over to the demand side of the business. Can you expand on what type of operating backdrop you have baked into your down 15% to 20% revenue guidance for the 3rd quarter and Part me if I if I misunderstood this commentary, but if 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% to 20% number just kind of trying to be conservative?
Any detail there would be helpful.
Yes. So the 14% is year over year. And I think as you see in the actual earnings deck, you know, we typically see an uptick in sales in the last month of the quarter. So when you're doing year over year comp, that's the 15% to 20%. But clearly, we saw the 14% in July.
And there's clearly uncertainty out there. So there is a little conservatism built in just as we don't know how the markets are going to develop over the course of the quarter. But as you look at prior year periods 2019 third quarter, September was a higher sales month than the month of July.
Now just to add to what Sean said, I think from an overall recovery, perspective, I think we're, you know, we're actually quite encouraged by what we're seeing in the marketplace. In April, as we knew with, you know, as we all knew, would be the the absolute bottom down 56% top line. 2nd quarter overall was down about 44%. June was only down 25% and then now we've seen July year over year, down 14%. So the overall demand picture does seem to be, improving, you know, in a marketable fashion, but as Sean said, we just felt it was prudent given the uncertainties, particularly in terms of some of the spots in the world where coronavirus appears to be, resurging somewhat to have a little bit more cushion in sales forecast.
Got it. So that 15% to 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 Alex Yefremo from KeyBanc Capital Markets. Please proceed with your question.
Thank you. And just coming back to incremental margins, I think you more or less you know, we're comfortable with about 185,000,000 dollars, $190,000,000 EBITDA, range for for 3Q based on your $60,000,000 year over year decline comment. If that is true and if we look forward to the 4th quarter, do you think we could, we could see, worse or better than 30% incremental margin? Because there are several moving pieces as we move through the year?
Yes, I mean, we're not guiding the Q4 just given the uncertainty. On the top line. But I think as a general matter is, as sales continue to increase, the decrementals should get a little better. And while I was pointing to on the earlier question, if we end up hitting that 15% down, we could see slightly better than 30%. But clearly at 20%, we may be slightly above 30%.
But again, we're not, we're not confirming anything around fourth quarter just given the uncertainty in the demand cycle. We are hopeful given the trends that things continue to improve. But certainly no assurances at this point in time.
So the reduction in temporary cost savings is not going to offset the other benefits that you might see by the fourth quarter. I guess that's what I'm trying to get to.
Since of the temporary cost savings, I I think they'll be all set by the the benefit of the the incrementals on increased sales, if that makes sense. So we should continue to see margin improvement as the net sales deterioration continues to improve.
Thank you. And, you reported OEM pricing up 3.5% in third quarter. Do you implement new price increases or was there a mix or base effects or anything like that?
Yes, that was largely related to mix. So similar to what you saw and refinish the reason we were down, that was mix on the upside in transportation. That's also driven by mix.
Thanks a lot.
Our next question from 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 sensitive if you're just given some of the uncertainty of smaller body shops.
Yeah, it's a good question. I'd say overall, we have not seen, you know, any material shifts there in the market. Obviously are, multi the richest mix of product because they're buying, the highest have, which also are our highest price products. So as you see the pullback in the Refinish business here in the second quarter, given the profitability of that business, obviously the impact is pretty, you know, is pretty dramatic and hence, you know, you see the results here in the second quarter. Fortunately, that's improving, you know, improving rather quickly.
And I think we've seen our, you know, our MSO customer base, you know, you know, throttle back in terms of how they, operated shops and ran staffing levels during the second quarter. And they've gradually been adding, you know, been adding, you know, more and more and more back. So I think, you know, we'll expect to see them, you know, kind of come out of that. And then at the individual independent body shop level, I think as we might have talked about on our on our last call somewhat, you know, the expectation is there, we haven't we haven't heard from our sales force about too many body shops that are kind of closing up shop for good because, you know, the recovery, you know, the coronavirus situation here has only been a few months in length. Now, if the coronavirus situation lasted for, you know, months months on end, then I think you would see potentially a few of them a few of them actually close-up shop.
And then in terms of inventory levels, obviously cash is king at all steps in the value chain. So, everybody has been running inventory levels at a fairly, at a fairly lean level, and and really, you know, buying, you know, buying toward demand. And we've even seen in some cases, you know, some of the average order sizes, you know, coming coming down in size, in the second quarter as people manage their, you know, their working capital. We're starting to see those come back up a little bit. So I think overall, we're encouraged we're encouraged by, 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. And then 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? Yeah. So when you look at the performance side of the business, you know, that was, you know, on average, down 10 to 12%.
Versus light vehicle, you know, being down closer to kind of the 17% to 18% and commercial vehicle being down closer to 30%. But as you think about recovery, you know, certainly light vehicle coming out of the lows in April, May, you continue to see that that steady rebound as all the plants are up and running. And becoming more and more utilized. But hopefully that's helpful.
All right. Next question is from Mike Sison, Assistant from Wells Fargo. Please proceed with your question.
This is Richard on for Mike.
Hello, Richard.
So, yes, so I just, first question on the temporary cost savings increased, target to 130. Can you talk about what drove that? Was that mostly an SG and A? And and how sticky are those temporary cost savings? So if we do get a recovery how much that should we expect to come back on?
So we've characterized all this as temporary, but as we continue to learn, how to work virtually. We expect some benefit around travel and entertainment to come down to be more sustainable savings, but we haven't characterized any of this as permanent. As it relates to cost programs and increasing from 130. It's really across all the categories that we continue to focus on 3rd party spending as we've continued to hold, you know, the hiring freeze as well as, you know, hold the line as it relates to travel and entertainment. It's it's clearly accruing, you know, more benefits than we originally stating.
But it is across the P and L as we see those incremental benefits.
Okay, great. And then on the global restructuring, you'd mentioned that potentially additional reductions could come in Europe. What would make you go forward with that decision? Is it depending on your customers, whether demand returns or not? How are you thinking about further workforce reductions?
Thank you.
Well, any workforce reductions that we would do in Europe would require the agreement with the works councils. And so as we have more more information on those, we'll be able to provide more of an update.
And our next question is from Paretosh Misra from Berenberg. Please proceed with your question.
Hey, good morning. Robert Sean and Chris. Thanks for taking my questions. So, first a quick one on cash flow, the $270,000,000 in incremental cash flow versus earlier in the year. So I see a status driven by $80,000,000 in CapEx and maybe $40,000,000, $50,000,000 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, but you have the vast majority of the elements.
Got it. And then second, just trying to understand the Refinish market, perhaps a little bit better. So I believe the average repair refinish job is about $4000 per car in the U. S. And I think 4% to 8% of that is what really drives your revenue.
Are these numbers ballpark similar in Europe? And also you mentioned accident rate a couple of times. I'm just curious what is the typical accident rate? And I guess how much does it vary across different regions? Thank you.
So in terms of the costs,
the costs per repair costs are a little bit higher in Europe. Given that that labor costs are higher in Europe, and that's the largest component of the total the total cost of any of any vehicle repair. And in terms of the variability and accident rate data, you know, for the US as a total country, there's pretty good data. And then when you get to Europe, it really is on a country by country basis. So we have to pull that information and supply that separately.
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 capability this year, how you'd be thinking about 'twenty one? Probably the easiest way to think about Genet 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 It's simply the easiest way.
I do think we'll see incremental benefits as it relates to inventory. If raw materials stay low, And I do think we'll have a sustainable benefit coming out of, you know, the work that we're doing with vendors on accounts payable. So you could potentially see that 11%, you know, 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.
That's the way down and how should we think about this in your 2 segments? Thank you.
So as it relates to the segments, the decrementals are a little bit worse on performance side just given the margin profile of refinish. But I think as you think about the incrementals I think it's a similar step function. You know, as you get closer to, flat from the prior year, those incrementals will become that much more meaningful. And certainly on the way down as volumes drop off even further, those decrementals are clearly getting worse. Just given the fixed cost absorption, and the drop through associated with the lower volumes.
Got it. Thank you. And then just a second question, relating to the restructuring plan and the work councils in Europe. Is Europe a source upside to the incremental restructuring if you get approval from the Works Councils or are these numbers, sort of including that approval or assuming that would happen?
So in the current 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 our overall cost structure. And so there's upside to the numbers that we have provided.
Got you. And can you give us sort of a quantify that in some way or give us some sort of guidance to that, what that upside could look like?
No, not at this time, not until we've had the opportunity to engage in dialogue with the Workers Council.
Understood. Thank you very much. That was helpful.
And we have reached the end of the question and answer session. And I will now turn the call over to management for closing remarks.
It's Chris McCray. Thank you all for joining today. And we look forward to, your follow-up calls and questions, will 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.