Ladies and gentlemen, thank you for standing by, and welcome to Agelto's 1st Quarter 2020 earnings conference call. All participants will be in a listen only mode. A question and answer session will follow the presentation by management. Today's call is being recorded and replays will be available through May 14th. Those listening after today's call should please note that the information provided in their recording will not be updated and, therefore, may no longer be current.
I will now turn the call over to Mr. Chris McCray. Please go ahead, sir.
Thank you, and good morning. This is Chris McCray, VP of Investor Relations. We appreciate your continued interest in Axalta. And welcome you to our first quarter 2020 financial results conference call. Joining me today are Robert Bryant, CEO and Sean Landon, CFO.
Last night, we released our quarterly financial results and posted a slide presentation along with commentary to the Investor Relations section of our website, ataxalta.com, which we will be referencing during this call. Both our prepared remarks and discussion today may contain forward looking statements, reflecting the company's current view and future events and a potential effect on Axalta's operating and financial performance, including those related to the expected or potential impact of COVID-nineteen. These statements involve uncertainties and risks and actual results may differ materially from those forward looking statements. Please note that the company is under no obligation to provide updates to these forward looking statements. This presentation also contains various non GAAP financial measures.
In the appendix, we've included reconciliations of these non GAAP 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. Now turn the call over to Robert.
Thank you, Chris, and good morning everyone. We appreciate you joining us. Today, we will provide an update on our first quarter results, the impact of COVID 19 on Axalta's operations, and the actions we are taking in response. As well as touch on and I hope that you and your loved ones remain safe. The health of our colleagues and friends around the world always remains top of mind for all of us at Axalta.
We spent significant time and energy taking steps to ensure the continued safe operation of our company while adhering to social distancing guidelines everywhere we operate. We're all very proud of the hard work that has gone into preparing and executing plans for the safe operation and I want to thank all of my Axalta colleagues around the world for this extraordinary effort. We're also proud that a number of our sites have converted production to provide critical needed products such as hand sanitizer and personal protective equipment in many countries as a way to give back to the communities where we live and operate. I'm pleased to report that for the most part, Our facilities globally have remained operational through the coronavirus period, and we have continued to serve customers without interruption where possible. Our first quarter was of course quickly overshadowed by the emergence of the coronavirus pandemic.
We're navigating this challenging business environment with a thoughtful, proactive and aggressive approach as it relates to both safe operation as well as the company's financial health. Our top priority remains the safety and well-being of our employees as we continue to serve those customers with critical requirements. We're not taking a one size fits all operating approach, but rather tailoring our response to each business and region. We're very focused on decision making speed facilitated by Global And Regional COVID 19 task forces, representing all aspects of our business. Finally, we remain in close communication with our suppliers and customers to ensure the safe operation of our entire value chain As we navigate with the COVID 19 crisis, we have 3 priorities that guide our decisions and actions.
The first is maintaining employee safety and well-being. This is paramount, and we have careful plans, programs, and support for all our employees encompassing these elements. To date, Axalta has had very few coronavirus cases globally, and we continue to follow CDC protocols for operational safety and risk mitigation. The second priority is maintaining operating flexibility. We're focused on supporting our customers by maintaining operating capability where necessary and permitted in compliance with regulatory protocols.
To date, we have not had any material supply or delivery disruptions, and we feel confident that we can serve our customers at the highest level today. The 3rd priority is maintaining financial flexibility. We continue to implement an aggressive action plan to mitigate the financial impacts of reduced demand. This is tailored to each business with a particular focus on maximizing cash flow and liquidity, while maintaining a focus on net sales decreased 8.5 percent before foreign exchange and the impact from the second quarter 2019 divestiture of our China joint venture. Price mix increased 1.8%, led by Performance Coatings, while volumes contracted by a negative 10.3%.
We estimate that the impact accounting for most of the organic constant currency net sales decline for the quarter. Adjusted EBIT for the quarter declined 7.8% versus Q1 twenty nineteen, while margins increased 60 basis points to 13.5 percent, benefiting from ongoing price mix improvement continued cost reduction and lower variable costs, which more than overcame the impact of the volume pressure in the period. We estimate the COVID 19 impact on adjusted EBIT was $40,000,000, with an associated impact to earnings per share of $0.13. Free cash flow for the first quarter improved by $55,000,000 from the same period in the first quarter 2019 on improved working capital. We were very pleased to see this continued progress but our global team is adjusting well to customer demand in real time.
In refinish, we continued to see healthy customer orders through mid March with some evidence of slowing activity in the final weeks and by lower orders from distributors. Clearly, reduced miles driven due to stay at home restrictions has impacted refinish demand near term. Market demand indicates a peak decline in miles driven in the U. S. At 45% to 50% from the pre coronavirus normal levels.
Encouragingly, a bottom may have been set in early April as states start to relax or stay at home mandates. US traffic began to recover starting mid April The sources reporting traffic about 30% lower than normal in the last week of April. In Europe, traffic levels have been highly variable by country, depending on the various levels of lockdown. Uniphormally, however, we have seen traffic bottom out around the beginning of April, and begin to rebound steadily since then. Germany, for example, has improved from down 60% to closer to down 30% over the last 3 weeks in April.
In China, once mobility restrictions were lifted during March, traffic resumes to nearly normal levels within weeks. This is a very strong indication that miles driven is likely to be very quick to rebound from current unprecedented lows as lockdowns are lifted. In the month of April, our Body Shop customers in the U S. And Europe have seen reduced activity in the range of 30% to 50% in general. Some customers are closing a portion of their body shops, while concentrating remaining volumes in a select group of regional locations.
It's clear that demand in shops globally is quite variable. And our best estimate is that the majority of shops we serve are seeing demand down over 40%. While some shops remained higher levels through April. In our industrial end market, Our performance in the fourth quarter showed better resilience overall relative to other businesses, given the wide dispersion of global demand and markets served. As well as ongoing new account wins and market share gains.
As we consider the balance of 20.20, we generally would expect volumes to track industrial production gauges in markets we serve, perhaps with an adjustment factor for new product penetration and ongoing share gain. Looking at the current environment and April operating rates in terms of our specific markets served, we have seen a more notable impact in industrial e code where automotive is a key end customer segment. Conversely, in building and construction, as well as agriculture and construction equipment, we have seen operating rates for customers at around 70% to 80% of normal during April. Portions of our Energy Solutions business serving motor manufacturers have retained demand up to 90% of normal through April. Our Transportation segment is directly linked to Global Automotive And Commercial Vehicle OEM Global Production Rates.
Many vehicle OEMs have temporarily halted production in North America and Europe beginning mid March, but we now see most of them seeking to restart production in the coming weeks. We generally expect to track the recovery rate of the global vehicle markets and forecast currently assume a bottom in April with a gradual rebound in the balance of the year. We see commercial vehicle possibly recovering slightly ahead of light vehicle markets based on indications from customers on production timelines. Each region, importantly, is at a different stage in terms of the COVID 19 impact. In China, we've seen significant production recovery across all our end markets as the country has reopened substantially from the mandated lockdowns.
Customer production rates began to reopen in early March and utilization rates are increasing. We anticipate utilization of China light vehicle plants that we serve to approach 80% of normal in Encouragingly, passenger vehicle retail sales in China have rebounded solidly. In fact, for April, The 1st 3 weeks were only 7% below the prior year, with the 3rd week essentially flat from the same week a year ago. This comes after a March where there was a 40% year over year drop in retail sales. This experience could serve as a template for other geographies in terms of recovery pacing once the coronavirus is more under control.
I remain cautious on this, however, given the delayed and weaker response actions taken by Western governments relative to China. As a result, our plans and responses will be in automotive, aggressive incentives that have been rolled out already, coupled with low financing rates may help the recovery process with demand stimulation, bolstering the possibility for an early cycle recovery Exalta is extremely focused on counteracting COVID 19 financial impacts on our business as much as possible. We are proactively adjusting our cost structure in real time, aligned with demand changes. Our action steps initially targeted discretionary costs freezing travel, freezing new hiring, reducing or eliminating the need for contractors and adjusting capital spending plans. As demand impacts became clearer during March, we've taken further actions globally, including furloughs, reduced workweeks, and temporary 20% salary reductions, including both senior management and the Board of Directors.
Our current plans implemented to date are expected to generate cost savings totaling over $100,000,000 during 2020 with initial savings beginning to accrue in late March. We're also taking further actions to maximize cash flow including CapEx reductions of 50% from our prior full year guidance. Curtailments of discretionary capital uses and steps to enable networking capital improvement. Collectively, These steps are expected to provide at least $125,000,000 in incremental cash flow, separate from the cost action cash benefits. The measures I have described thus far fall underplaying defense, which are certainly justified in the current environment.
However, we're also continuing to play offense. Across many aspects of our business. We have not materially reduced our research and development investment and we continue to fund new product development and the industry's best technical service program to ensure ongoing quality and high levels of customer service. Exalta continues to play to its strengths, witnessed in top market share positions in many of the markets we serve, to ensure that we can leverage growth in the recovery phase in wins in our global distribution network. Axalta is well positioned to weather this challenging environment.
We are resilient and our business model and management approach should serve us well during this downturn. We've often noted that the coatings industry in general as a very high variable cost structure. Axalta's costs are over 60% variable at the cost of goods sold level which provides a natural hedge against volume reductions. In combination with targeted fixed cost structure actions and a strong balance sheet, we're confident in our positioning and approach for navigating the pandemic. It also varies reminding but the coating sector is also inherently a vast based and flexible production environment.
With limited large runs, we further minimize the decremental effects of reduced volumes, unlike major chemical producers with large production runs. The coating sector is fairly low in capital intensity. Axalta's maintenance CapEx is approximately $40,000,000 to $50,000,000 per year, which affords flexibility in reducing outlays over temporary periods. Axalta continues to maintain a strong balance sheet and our ample liquidity also serves to bolster our position against current demand headwinds as well as unforeseen challenges we could face as we overcome the pandemic. Lastly, I'd like to briefly comment on Axalta's strategic review, which concluded on March 30.
The decision to end the review was taken by the board in light of the dislocation and global markets caused by COVID 19. The termination came after evaluating a broad range of alternatives. Among other actions, a comprehensive sale process was initiated in pursuit. And the process was thorough. We communicated initially with over 50 interested parties regarding potential transactions.
We signed non disclosure agreements with 18 potential purchasers to facilitate due diligence. We then conducted robust due diligence with multiple parties. The end of March, the board decided that continuing to execute our strategic plan was the best current path for shareholder value creation. We also noted that despite termination of the process, our board will continue to evaluate all opportunities to increase shareholder value. We strongly believe our track record, particularly in areas under our control, demonstrates the continued execution of our strategic plan will deliver significant value for our shareholders.
We are eager to share our perspectives and long term growth plans as well as thoughts around our market positioning, topics such as business portfolio and diversification, and intended plans for capital allocation once we emerge from this pandemic. Right now, we are completely focused on successfully managing Axalta through this health crisis and associated market disruption. Once the path out of the pandemic is clear, we look forward to sharing with you more about our medium, and longer term growth and value creation plans.
Thank you, Robert, and good morning. I'd like to briefly touch on our balance sheet, our first quarter highlights and conclude with a few comments on our financial outlook. Xalta continues to maintain a very solid balance sheet and liquidity profile. Our net leverage ratio was 3.1 times at March 31, versus 3.0 times at year end. The nearest debt maturities on both our term loans and our unsecured notes are 2024.
We have no affirmative financial covenants on our current outstanding indebtedness, and we ended the first quarter with an interest coverage ratio of 5.9 times. In January, as a reminder, we prepaid $300,000,000 of our US dollar term loan, which lowered our full year cash interest expense by over $10,000,000. With $657,000,000 of cash on the balance sheet at March 31st $361,000,000 of available capacity in our undrawn revolver, we had over $1,000,000,000 in total liquidity available at first quarter end. As we mentioned, we also expect to capture incremental cash exceeding 2.25 cost action plans we have already instituted. Our final decisions on any capital decisions will be updated at least monthly based on the pacing of recovery of end markets.
In terms of first quarter results, I highlight just a few things. As Robert noted, organic constant currency net sales decreased 8.5% overall for the quarter and most of that was by our estimation due to the coatings. The COVID-nineteen impact on 1st quarter results to net sales and adjusted EBIT were estimated at $90,000,000 $40,000,000 respectively. The correlating impact to earnings per share was $0.13. The largest contributor of this shortfall was China.
Where light vehicle production was essentially halted from late January through February, with March seeing partial recovery. Overall, China sales dropped 65% from the December 2019 run rate to the trough in February prior to recovery beginning in early March. Notably, the China industrial business was only moderately impacted during the period, which speaks to the nature of certain customers within critical need sectors, that continue to operate during the period, including our Energy Solutions business. Beginning in March, we began to see COVID-nineteen impacts in Western economies. As such, the relative impact from Asia Pacific and the rest of the world were equally balanced for the quarter, with transportation and specifically light vehicle was the most impacted end market globally.
Refinish is the 2nd most impacted and Industrial was the relatively more stable component of our business. 1st quarter adjusted EBIT of $133,000,000 was a 7.8% decrease versus the prior year, but adjusted EBIT margins increased sixty basis points to 13.5% as cost reductions, price improvement, and lower variable input costs outweighed the notable volume drag in margin terms. Free cash flow for the quarter, although use, which is seasonal and as expected, improved $55,000,000 versus the prior year first quarter reflecting a substantial working capital improvement versus the prior year. In the first quarter, we also took an $18,500,000 restructuring charge This charge will enable further structural cost savings aligned with our Axalt Way program and goals. We also completed our Belgium site closure during the quarter and productivity benefits of this project are beginning to be realized.
For Performance Coatings, Q1 net sales decreased 5% excluding FX and M and A impacts. Refinish reported a 7% net sales decline, excluding FX. We estimate that net 2.4% year over year excluding FX and also excluding the China JV Divestiture. Industrial sales were largely flat in China by COVID-nineteen impacts to the Chinese economy, and the overall result benefited from year over year growth in sub businesses, including wood, coil and energy solutions. We believe the industrial business was essentially flat top line, excluding the impacts of COVID-nineteen in the quarter.
First quarter segment adjusted EBIT increased 1% from the prior year and segment margins of 12.3% increased 130 basis points. Lower volume and FX pressure were more than offset by positive price mix, lower operating expenses and some tailwinds in variable input costs. Transportation Coatings net sales decreased 14.7 percent ex FX. Light Vehicle 1st quarter net sales decreased 14.9 excluding FX as volume decreased relatively in line with global automotive production shutdowns for the customers we serve. Average price mix increased slightly in the period.
Sales would have declined in the mid single digits. For the quarter, global light vehicle production declined 23%, including a 30% decrease and Asia Pacific and a 47% decrease in China. Current IHS forecast call for a 47% drop in global builds in 2nd quarter, followed by recovery to negative 9% in each of the back half quarters, respectively. For the full year, current forecasts call for a 22% global bill drop with April as the trough month. For the full year, current forecast call for a 22% global bill drop with April as the trough month.
Exalta outperformed global builds in the first quarter, despite actually seeing a worse outcome in China versus market, due to specific customer exposures in other regions. Commercial vehicle 1st quarter net sales decreased 14% excluding FX. This reduction was driven by lower global truck production, again, due in part to COVID 19 impacts, which came in addition to slowing production rates going into the quarter. Price mix was slightly positive in the period. Overall truck production decreased 30% in the quarter.
And current global forecast for Class 4 through 8 truck production suggest a similar 29% decline for the year, with 2nd quarter down 37%. Exalta's outperformance relative to the truck market decline came from non truck customers, which saw less decline in the period as we do not see complete shutdowns of production in these markets. We would expect this dichotomy to continue this year with non truck customers. With heavy duty truck production completely shut down in April, but recovering faster than light vehicle, partly given fewer plants to restart. Despite net sales headwinds in the quarter, Transportation Coatings generated 1st quarter adjusted EBIT of $25,800,000.
Relatively in line with Q4 results, but 24.6% lower than the prior year given lower volume, offset partly by lower operating costs. Adjusted EBIT margins of 7.7% compared with 8.4% in the prior year, driven primarily by the lower volume decremental impacts. As you know, we withdrew our full year guidance in March and, hence, are not providing updates to each line item we noted in our January earnings release. Regarding near term performance, April saw net sales down approximately 60% with a more severe volume impact in Transportation Coatings than Performance Coatings in the period due to a prevalence of vehicle plant shutdowns during the month. As we look to May, it appears that we'll see some rebound in overall net sales levels.
Our vehicle OEM customers have stated that they plan to resume production in many locations this month and some states in the U. S. Have announced that the stay at home restrictions will gradually be reduced. One point that I can make about recovery, based partly on the China experience in the first quarter, is that populations appear to resume driving very quickly once restrictions are lifted. This appears to also be true in other regions given the recent rebound in data before most travel restrictions have officially been lifted.
It's possible that the automotive related supply could therefore be more of an early cycle recovery group. Based on what we know today, Our current best estimate of volume impact on net sales is around a 40% decrease in May, following approximately 60% down in April, as I noted. And we currently expect further recovery in June from the May levels. As we expect, the cost opportunities to phase in through the course of the year and given that we believe the most difficult year over year sales comparison will be in the 2nd quarter, our expectation currently is the 2nd quarter will end slightly positive at the adjusted EBITDA level. Where we to see a further delay in recovery in May June, we would move to pull additional cost levers to continue to reduce our cost position.
I'll now turn the call
time for our markets and our business. You can see that in our immediate actions around reduced discretionary spending and capital investments are shift to focus on balance sheet liquidity and cash flow. Are immediate adjustments at an operating level to ensure plant and operating health in the COVID 19 climate. And certainly in our double down focus on employees, customers, and communities. We're proud to be supporting our communities with both hand sanitizer and personal protective equipment across many countries in which we operate as a way to give back.
To conclude, I'd like to thank each and every one of our global employees for their dedication and hard work particularly over recent weeks as we have had to rapidly pivot to address a global health and economic crisis. We're very proud that our employees were able to transform some of our manufacturing capacity to support our communities. Our team has stepped up even beyond our high expectations. And this gives me confidence in saying that Axalta will not only get through this period, but will become stronger because of it. Our strength comes from our passion to serve our customers, our passion to innovate and create some of the world's best coatings and our passion to execute every day and be considered the best of what we do.
To see our global team exhibiting these qualities, even in the face of today's unprecedented challenges, and even while working remotely for many, is truly amazing.
Certainly. You. Our first question comes from Ghansham Panjabi with Baird. Please go ahead.
Hey, guys. Good morning. Hope everybody's doing well. Morning. I guess first off, what sort of lag is there typically between any inflection in miles driven and let's call it demand variability for auto refinish.
Are there any sort of historical parallels that you can share with us? And maybe take us through on that sort of same vantage point in terms of what you saw in China throughout the first quarter and so far in auto refinance specifically in April as well.
Models driven is a is a pretty good indicator for our, you know, for our business consortium as well as well as, as well as accident rates. There's typically not that much, of a lag as we as we see people get out and drive more, we would expect to see, body shop activity pick up pretty quickly. In China, we saw our Refinish business down about 46% in the first quarter. The good news is in April, it was up 14% in in constant currency. So that business has recovered pretty quickly and is now trending to the positive.
If we look at overall kind of some of the some of the elements here in particular just for refinish globally. Obviously, if there are fewer, fewer cars on the road, there's fewer miles being driven, fewer accidents. So body shops, you know, will need to sort of refill their demand, pipe to speak, but we, we expect that to occur pretty quickly. Once it's filled, we expect demand, should recover gradually to normal. And I think we're actually cautiously optimistic about the Refinish business.
We've seen U. S. Gasoline consumption, declined about 50% in the last 2 weeks of March, but it's already up slightly in 1st week of April. The CCC claims that they report appear to have bottomed at about 49% down in April. And then we also have an additional perspective, which is our body shop management system software, where we could actually measure how frequently the scales are being used to weigh and mix paint And that was down about 48% in the U.
S. And Europe in April, but has since been rising. So we have data from a multitude perspectives to give insight into our view.
Okay, that's helpful. And then just one second question on, in terms of decremental margins by segment, how should we think about that? I know Sean made some comments on EBITDA specific to the second quarter, but just by segment, how should we think about incremental margins?
By and large, it's, I mean, fairly similar cost structures. Obviously, it's a higher margin business on the performance side. But I think the guidance, Robert gave in his opening comments and we think about gross margin specifically COGS, roughly 60% is variable. So you can think about the drop through from that perspective. Clearly, looking at what we've quantified around the COVID impact, $90,000,000 in sales $40,000,000 EBIT impacts.
It's about slightly over a 40% EBIT margin. Clearly, we didn't have the opportunity to start taking costs out. Similar to what we're actually doing in the second quarter and what we've implemented. So I think that margin construct as far as decremental is sort of a worst case. Just for perspective there.
Our next question comes from Vincent Andrews with Morgan Stanley. Please go ahead.
Hi, guys. This is actually Steve on for Vincent. Just curious if you could talk a little bit more about some of the discussions you're having with with your, refinish customers and, regards to inventory levels and, appreciate the color and the answer to the previous question. But maybe a little bit more color on the discussions there.
Customers. Our our goal is to make sure that we have, that that we have paint available, available for them as they restart as they restart operations So we've been focusing on as they've looked at, concentrating and have concentrated some of their, body shops regionally into fewer shops during the Corona period. Making sure that we have product available for them. And as we toggle and manage, our supply chain and raw materials and inventory management overall that we're making sure that we've got product availability for them. I think that's that's one key element.
The other element is we have been working virtually
with a
number of our refinish customers to the extent that they've encountered any daily, just kind of run at the mill technical issues. So we haven't let the coronavirus, get in our way, in terms of providing top notch, service to our customers. So I think all in all, we've been doing a good job, in making sure that they get what they need.
And just one incremental point on certainly, we don't have perfect line of sight into distribution, but inventories, by and large, are pretty thin. I think similar to what we're doing as manufacturer and focusing on liquidity and working capital efficiencies. I think you're also seeing that in the middle of the channel. To the extent we are to see a rebound, you could expect a slight restocking, just given how thin the inventory layers are sitting in distribution today.
Okay. Thanks guys. Appreciate it.
Our next question comes from Mike Harrison with Seaport Global Securities. Please go ahead.
Good morning.
Looking at the Refinish business, this downturn, it's potentially going to be harder on some of the smaller body shops than on MSOs. Can you comment on maybe how much of your business could be a credit risk And, if the potential share gain by MSOs, could be a positive for you guys in the long run?
Yeah. So much of our actual credit exposure is actually with distribution, just giving the, the sales model. And risk a title that's actually borne by distribution. So just I guess one point as far as the credit risk perspective. I guess, there could be an expectation that you could see some of the mom and pop body shops go under, which would be a net benefit if that hypothetical situation wants to occur, just given our broader exposure to the MSO space.
So if you were to see those body shops be sold down the road or just that inventory as far as cars coming from insurers going to the MSOs versus that bankrupt Body Shop. Again, it's a net benefit for adult overall.
All right. And then in terms of the strategic review, I was just curious at any point have you been exploring selling a part of the company In other words, are there are there pieces of the portfolio as you look at it now, that maybe you view as noncore or less core or more valuable in, another owner's hands?
Over the course of the 9 month review, the board explored a full you know, explored a full range of alternatives to increase shareholder value. And that included, of course, a comprehensive sale process, looking at ideas like you're talking about now in terms of the sale of specific assets or businesses change in capital allocation, along with a full evaluation of Axalta's operating strategies core underlying business and standalone value creation potential. And at the end of that concluded that the execution of our strategic plan was what had the opportunity to create the most value. That being said, versus all opportunities to increase shareholder value.
Our next question comes from Steve Byrne with Bank of America. Please go ahead.
Yes. Thank you. And thank you for the monthly data you provided in the slide deck given the magnitude of the swings right now. It's really helpful to have that. And I might suggest an update in another month with April and May data would would be very helpful just just given how significant these moves are.
I wanted to ask you about that.
We appreciate that feedback. And that's actually one of the reasons that we pushed out when we would normally report earnings by a week. So that we could have that April sales data and be able to provide our investors as well as the analyst community with the most up to date view of what we're seeing in the markets. And we do plan on doing a mid quarter, update sometime, sometime in June for the trends that we're seeing in May as we also think that would be beneficial.
Glad to hear that. And the general comments made about you know, 60% volume in down in April 40% in in May. Can you differentiate that by end market which are the ones that you think might do better versus worse?
Well, I'll give you a broad brush response to that. I think what you're seeing in April, light vehicle is clearly an outlier. I think what you're seeing in the press is indicative kind of what we're seeing. You are seeing a nice recovery with most of the OEMs actually signaling they'll be up in the middle of May. And as far as the utilization from that point forward, I think that's still a question.
But I do see kind of that that catalyst for a jump from a light vehicle perspective. Robert's comments on Refinish are obviously helpful. We're starting to see really nice trends in Refinish. China is a great example where we're back to normal and actually slightly above April as far as normal levels. But industrial wasn't hit that hard in the first quarter.
We are seeing a little bit of slowing as far as some
of the end markets as
it relates to wood. We're seeing new housing starts to be a little slow. But by and large, the other end markets, the trajectory is heading in the right direction. But again, calling out kind of light vehicle is the single biggest jump from March to April to May as far as the OEMs coming up.
And the, the 100,000,000 of cost cuts is a is a a fairly significant percentage of SG And A, it seems to be relatively large compared to some actions of your peers. It's not like we would have thought of Axalta as being one with lots of fat to cut. So it's it's certainly commendable. Anything in there that's more than just discretionary and temporary, anything that is in there that is potentially a learnings that could continue, post the pandemic?
Yes, I think one of the misconceptions that's been out there for a long time is related to the overall cost structure of the company and that significant cost has been taken out of the company. And while that's true, over the last many years, there's also been a fair amount of costs put back into the company, particularly in the 2015 to 2017 time period. So as we go forward, the cost opportunity for us in terms of getting to competitive levels in our cost structure, both to enable greater profitability of the business, but also to permit growing, in lower margin segments which could become higher margin if we adjusted our cost structure, that opportunity is actually quite large and continues to be, continues to be quite large.
And Steve, just as far as SG And A, it's not entirely coming out of SG And A. We've sort of looked under every rock, but operations as a contributor as well. So we looked across operations, we looked across the commercial teams as well as all the commercial areas for reducing discretionary spend as well as the temporary labor reductions that we commented on in our opening remarks.
Very good. Thank you.
Our next question comes from Don Roberts with UBS. Please go ahead.
Thank you. This is John Roberts on for Josh Spector this morning. Are you seeing a wide version in your raw material decline given the rapid drop in oil prices. Maybe you could comment on what's down the most and what's down the least in the raw material basket?
So if we think about, on a category basis, John, and then I'll give you some comments where we see headwinds and where we see tailwinds. 1 would expect the overall raw material basket to be down as the COVID-nineteen situation has eroded demand across various markets, lower oil prices will also aid in pushing feedstocks down. Unfortunately, we actually expect to realize very little of that potential benefit, given how little we are buying currently at the moment. So I think In terms of seeing savings, kind of the earliest that we would expect to see savings could be in the 3rd quarter and those savings we would expect to actually be fairly modest. In terms of headwinds, just to call out a few epoxy resins would be an area where we continue to see headwinds just because of the tightness of certain feedstocks due to outages white and black pigments.
So if you think about TiO2 and also carbon black, just lower capacity in some cases as well as, you know, IMO increases in black. And then in certain pigments, red, yellow, and blue in particular, some of the Chinese regulation has limited feedstock capacity. It hasn't been an issue, but could become more of an as we go forward. And then in terms of tailwinds in isocyanates, we are seeing pricing for HD and I come down some of the specialty monomers that we buy, we expect, to also continue to come down solvents of course being so closely correlated and linked. We will see those come down and then additives, just given the drop in the overall demand environment, have also come down.
And then general industrial finishes is one of the most fragmented markets. Is the ability there related to share gain or is the mix of your customers tilted towards things that were okay like personal computers or tilted away from large ticket items? You mentioned wood, but maybe give us a little more color on the mix within that general industrial.
So in industrial, we have such a diversity of end markets and many of those end markets essentially our products went into industries that were considered critical products and continued operating. Kind of the star you might say at the moment amongst our various businesses is our Energy Solutions business. It appears to be the most resilient of all of our industrial end markets We're seeing strong demand there from motor manufacturers and we're also gaining share with innovation in all our energy solutions products, be it wire enamels and pregating resins or corsheet varnishes. And I'm sure you've seen the many innovation awards, our products in this business segment in particular of 1 over the last couple of years. In coil, we are seeing, slowdown in commercial construction projects.
There are some projects that are on hold for now. But we remain optimistic, for the potential further direction of that business. And then in wood, where of course we sell into furniture cabinetry building products and then also distribution return to work in in low interest rates should put this business on a good trajectory, once the crisis passes. But as Sean mentioned, the business is largely based on, new housing starts, repair remodel spend. So consumer sentiment there is, is quite important.
And then lastly, Powder, router is more of a technology that's supposed to an end customer segment. There we are seeing the cultural construction equipment market down, architectural market down, oil and gas obviously, down for the moment. But in infrastructure related demand for end products like rebar and some other powder products, we're seeing those much less affected, at least in Q1 and in April. Than in other parts of the business.
Our next question comes from Jeff Zekauskas with JP Morgan. Please go ahead.
Good morning. It's Silke Koopa, Jeff. How are you?
Good morning, Silke. You're great. How are you?
Good. Thank you. I have two questions. I was wondering, given the currency headwinds, I was wondering whether you can discuss what level of currency type pricing you might be able to push through in the coming quarter? And my second question is on cost savings.
I was wondering if the $100,000,000 cost savings you're targeting is in addition to, like, the 15,000,000 from the Exalta, from the Exalta way to cost savings. And if you had to guess, I was wondering if you can quantify what the headwinds could be next year, given that one of the cost savings since you are onetime in nature? Thanks very much.
I'll take your first question. I think on FX related pricing, It does depend on which segment of the business performance versus transportation coatings to some extent. However, in general, we follow the print of trying to recuperate any FX exposure or material devaluation or in country inflation that we see through through our pricing mechanisms?
Yes. And as far as the cost savings question, we are still committed to the Axalta Way targets So the $50,000,000, the $18,500,000 severance charge that we took in the quarter, that's a continuation of the Axalta WAY progress. And that's unrelated to the $100,000,000 that we called out in the opening remarks. The $100,000,000, I mean, most of that is more temporary in nature, given its short weeks, giving its its furlough, given its 20% pay reductions. The hope is that we'll actually be able to hold on to some of that discretionary.
Change on kind of how we go to market. But as far as incremental $50,000,000 as we get into 2021, we aren't necessarily seeing any headwinds. I think coming out of the strategic review, I think we actually have better line of sight into some of the opportunities. And again, when we come out of this pandemic, we are going to be delighted to share some of that information.
Thanks.
Our next question comes from Chris Parkinson with Credit Suisse.
Just adding an extension of the $125,000,000 cash flow improvement efforts. Can you just remind us of your general long term projected cash flow conversion metric targets, working capital targets, once we're out of this mess, just how should we be thinking about kind of the normalized environment fully in 'twenty one and 'twenty two? Thank you very much.
Yes, Chris, you know, cash flow conversion has historically, been in a sort of 45, 50% of the EBITDA range. And, you know, that that that's something that a couple years old now in terms of the way we used to talk about that. I think, you know, there are there are a number of elements there. One is, normalizing and whatever period that's going to take. But once we get through that and we do normalize, we are continuously working towards, working capital improvement overall.
And we do expect to see structural working capital improvement across the business over a 2 to 3 year period. It's probably a little premature to put out definitive targets, but but we've always said that from a low teens, working capital to sales type of metric that that we thought there was opportunity to be in the high single digits. And we have trended in an improving trend through 2019 over recent years. So we have made progress But, I think it's clear that there is more opportunity there, over time. And that's one of the things that Sean referred to that that we'd like to talk more about once we get through the current period and once those numbers kind of become more relevant again.
Great. Thank you. And then just a very quick question, just in terms of refinished inventories, I mean, it seems though the industry over the last several years in terms of the larger distributors of really taking down inventories. Going back to, I guess, 2017, Can you just comment on your confidence level that your businesses should basically track miles driven and there's nothing else really in the channel? And if you could extend that question to Body Shop as well, I'd be curious on your thoughts.
Thank you very much.
Chris, with regard to the end consumer, we believe that the drivers continue to be the same. Miles driven accident rates and the size of the car park, the data and the trends out for that is pretty, you know, pretty clear. So we have pretty good visibility into what's happening at the end body shop level, also just given our body shop management software. And how that's used and so forth that throughout the operation of the body shop gives us pretty good, you know, pretty good insight. Then in in between with distribution, As you mentioned, there has been consolidation within the distribution channel, which has had the impact the impact of bringing down overall industry level inventory inventory levels in the channel.
So in terms of the sales into distribution, it'll be a function of how distribution continues to evolve in the ensuing quarters in the next couple of years.
Thank you. Stay safe.
Our next question
comes from Alex Yefremov with KeyBanc. Please go ahead.
I I just wanted to clarify something Sean had said in prepared remarks. Do do you expect your total EBITDA to be slightly positive in in the second quarter?
Comment, I made Alex.
Okay. Got it. Thank you. And then the second question. In rear finish, you have a lot of small customers.
Do you have an inside how they're coping financially with the current crisis? And and for that segment of of your Refinish business for for smaller customers, to a degree, the credit risk is born by Axalta versus third party distributors?
So in terms of the activity that we're seeing, in, in particular, the smaller, the mom and pop, body shop segment, of course, many of those shops have been closed. We won't really have, full more recovery and and things come and things come back online. So it's it's a little early for us to give you, to give you much of a read at at at this point. And then in terms of the credit risk, Sean, a shop model. So everything that eventually ends up in the hands a body shop goes through distribution.
So with the exception of MSO customers where we have a direct credit risk exposure for all the other body shops, that credit risk is borne entirely by the distributor.
And outside of the U. S, if I may follow-up?
Yes. In Europe, in some countries, we do have a direct distribution and a direct sales relationship. It varies a little bit by country, but it is not the majority of our sales.
Thanks a lot.
Thanks a lot. Our
next question comes from Kevin McCarthy with Vertical Research Partners. Please go ahead.
My question relates to decremental margins in the 2nd quarter. If I think about the notion that your EBITDA could be slightly positive and kind of marry that to the sales guidance that you gave It seems to imply a detrimental margin maybe close to 40%, which is a lot larger, obviously, than the March quarter. Is that consistent with what you're meaning to convey?
I think, I mean, what we're trying to get across is just an appreciation for ultimately the cash flow use. I think we are we've only signaled April, May. This is obviously a very dynamic environment, but the current expectation is June should be better than May as long as there's not any big surprises. And what we wanted to do is provide a little comfort that we're still expected to be positive at the EBITDA line. Certainly, when you think about decremental margins, of the $100,000,000 cash benefit as it relates to cost actions, or as it relates to the actual cost actions themselves, roughly 50% of that benefit is actually going to accrue in the 2nd quarter.
With a lot of the temporary reductions going into effect.
I see. That's helpful. And second question, if I may, is on the subject of CapEx, 50% reduction is obviously quite substantial and yet the new level of $80,000,000 is still somewhat materially above the maintenance CapEx level that you indicated. Can you speak to that as well as, you know, which growth projects, if any, survive this this haircut to the capital budget and any early thoughts on what the trajectory could look like into next year? Thank you.
So the big project that relates to growth above and beyond the maintenance CapEx actually relates to our S4HANA SAP project that we had communicated back in January. So we're keeping that project on track. And that's making up essentially, the vast majority of the difference between the maintenance and the total CapEx now expected for 2020. As we think about longer term, think we've historically spent anywhere from $140,000,000 to $160,000,000. We've not provided any forward looking information as it relates to CapEx, but generally the historical level should be somewhat indicative of going forward.
Okay. Thank you so much. Be well.
Our next question comes from Bob Koort with Goldman Sachs. Please go ahead.
Thanks guys. This is Anthony Walker on for Bob. Just had a quick follow-up on the free cash flow. So you've obviously taken a number of actions to improve working capital. Can you help us through the other bridge items to getting to cash from ops.
I think historically you've had some decently sized rebates to refinished customers. Can you just help us think through what those look like relative to prior years in 20 20? Yes. So historically outside of the 2018 year, we've spent $80,000,000 to $90,000,000 annually. That certainly is one of the cash levers that we're executing on.
So when you think about the $125,000,000 we quoted, $80,000,000 coming from CapEx and roughly $40,000,000 coming from these business incentive payments. When we think about cash levers, we set a minimum of $125,000,000. We're going after and looking at everything from a working capital perspective. To drive even further improvement. The target is well beyond $125,000,000, but where we sit today, we are comfortable at the $125,000,000 level as far as incremental levers that we've already executed on.
Great. And then just one follow-up reducing the cash incentives, does that have any implication for the likelihood of winning that business on a forward basis or getting the volumes from those customers once volumes recover or, is that simply to take into account the lower volumes that you're expecting in the 1st 2 quarters? Thanks.
Yes, it's largely a function of what we're seeing in the market. Obviously, in this type of environment, body shops, which typically bought a shops that are using to looking to acquire other body shops or upgrade their spray booths or make material investments. That's typically where you see this type of customer investment utilized. So because of the demand environment, there's simply less demand for that type of customer investment from our customers. So it's just following from a normal flow of what we're seeing in the market as opposed to being any type of a deliberate action by the company.
We will continue to invest alongside of our customers in strategic ways where it makes sense.
Our next question comes from P. J. Dukevar with Citigroup. Please go ahead.
Yes. Good morning. Robert, Sean and Chris. Good to hear from you. Hey, Robert.
I have a question on the refinish. You know, that's 2 schools of thought. 1, you know, one of your competitors was saying that, you know, Refinish will lag because you need more traffic and morning rush hour and congestion. And so that will lag the recovery. The other school of Tari is, consumers will rather drive than take mass transit.
And so maybe auto demand will go up as a result of that. How do you think about those 2 things?
Well, I think the argument that you may see some people prefer to drive as opposed to take public transport you know, there could be, you know, some, you know, I think some validity in that perspective. And and we may see that. However, I think you know, for the majority of people that take mass transit, it it's more of an economic or personal financial decision as opposed to being necessarily a choice you know, having one option or the other that's part of the population and then the part of the population are people that actually have the choice, take public transport or or drive through own vehicles. So when you when you start to slice it up into the different, kind of types of person and situation, it feels like yes, that could be a tailwind, but it's nowhere near as large, as the impact that we could see from the resumption, the resumption of driving. I think different than the 'eight, 'nine crisis where, people, you know, we're still driving and we're still getting into accidents.
This crisis is different. So because people haven't been driving, we're less likely to see, you know, a lot of pent up demand that's suddenly going to be released into the market. But I think as people do, be to resume driving, we will see the market snap back. And we have seen that as we talked about as we talked about in China, where we've gone from being down quite a bit in Q1 to kind of a snapback, to a snapback here in April. So I think the trajectory, will be upward and and strong, but not quite as strong as perhaps what we're seeing in 0 809 just because you haven't had a build up and pent up demand of people driving during the crisis, getting in accidents, but not getting their vehicles repaired because there wasn't consumer confidence to do so.
Great. Thank you.
Our next question comes from Lawrence Alexander with Jefferies. Please go ahead.
Just a quick one. Can as you look at what you've seen in Europe and Asia, How important is the recovery in congestion relative to the improvement in miles driven? For driving, refinished rates?
Lawrence, I think we'll be able to, discern perhaps discern some of those variables and be able to comment some on that in the future at the moment since we haven't seen a recovery with the exception of of China and even there, it's only kind of 1 month, really. We just don't have enough data to be able to give your question the answer that it deserves
Our next question comes from Arun Viswanathan with RBC Capital Markets. Please go ahead.
Got that. Good morning. Hope you're all well.
I just wanted to go
back to the raw material question. When you look at price cost, you'd been making some a headway on the OEM side, I guess, recently. How does that look like in this current environment, especially with the the decline in RAS as well. And then maybe you can just comment on, refinish price mix as well. Thanks.
From a pricing perspective, we fully expect to capture price in 2020. We still have price that we need to capture to make up for the dramatic increase in raw material costs that we experienced during 20172018. We've captured some of that price to offset this, but we still have a long way to go. And then in terms of refinish, in overall I wouldn't expect to see any material changes in terms of how we think about how we approach that market and the value that we continue to deliver for our customers there. Again, we don't really see any changes in that equation.
Thanks.
This concludes the question and answer session. I would like to turn the conference back over to the presenters for any closing remarks.
Yeah, it's Chris. Thanks everybody for joining and hope you have a great day and good luck with all your other earnings calls today. Thank you.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.