Axalta Coating Systems Ltd. Q2 FY2025 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to Axalta Coating Systems Q2 2025 Earnings Call. Today's call is being recorded, and a replay will be available through August 6. Those listening after today's call should please note that the information provided in the recording will not be updated and therefore, may no longer be current. I will now turn the call over to Colleen Lubic, Vice President of Investor Relations. Please go ahead.

Good morning, everyone and thank you for joining us to discuss Axalta's Second Quarter 2025 Financial Results. I'm Colleen Lubic, Vice President of Investor Relations. With me today are Chris Villavarayan, our CEO and President; and Carl Anderson, our Chief Financial Officer. We posted our second quarter 2025 financial results and earnings release this morning. You can find today's presentation and supporting materials on the Investor Relations section of our website at axalta.com, which we will be referring to on this call. Our remarks today in the slide presentation may include forward-looking statements reflecting our current views of future events and their potential impact on Axalta's performance. These statements involve risks and uncertainties and actual results may differ materially. We are under no obligation to update these statements. Our remarks and the slide presentation also contain various non-GAAP financial measures. We've included reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. Refer to our filings with the SEC for more information. I would like to now turn the call over to Chris.

Thanks, Colleen, and good morning, everyone. Let's move to Slide 3. We're proud to announce that we delivered a record quarter for adjusted EBITDA and adjusted diluted earnings per share in a challenging global market. I would like to personally thank our almost 13,000 employees for their dedication and outstanding performance this quarter. By all measures, we have done a tremendous job navigating the current landscape and managing the business. Net sales came in just over $1.3 billion in line with our guidance. Adjusted EBITDA was $292 million with margins exceeding 22%. This marks the fifth consecutive quarter that adjusted EBITDA margins have been at or above the 21% target outlined in our A Plan. This was a noteworthy achievement given the significant volume pressures underscoring Axalta's disciplined execution and sustained cost management. We remain focused on creating shareholder value and plan to accelerate our capital deployment going forward. This quarter, we executed $65 million in share repurchases and expect to continue this pace throughout the remainder of the year. Our Mobility segment continues to perform exceptionally well. We delivered 2% organic growth fueled by sustained strength in China and Latin America in addition to new business wins and favorable price-mix. Adjusted EBITDA margins were nearly 20%, a strong validation of the team's strategic and operational prowess and our ability to sustain profitable growth. Cash flow from operations increased 25% year-over-year, which helped drive free cash flow to $101 million, a great result. With that, let's turn to Slide 4. We continue to navigate what we believe to be temporary challenges affecting Refinish in North America. Claims reported through Q1 remain meaningfully lower in the United States and slightly down in Europe. Although collision statistics are pending for 2024, early insights from various states in the U.S. and independent agencies indicate that collision frequency declined by only low single digits. This collision statistic is in line with our expectations. We believe that factors such as elevated repair costs, rising insurance premiums and broader inflationary pressures have discouraged consumers from seeking repairs resulting in fewer claims despite steady or just slightly declining pollution rates. In the second quarter, Refinish volumes were impacted by expected headwinds including consumer pullback on repairs and elevated North American distributor inventories. Despite these pressures, we continue to gain share with 1,600 net new body shops year-to-date building on the more than 2,800 net wins in 2024. Net sales in the second quarter declined 6% year-over-year. But we saw nearly 2% growth from adjacencies and retail, supported by strong momentum in DIY channels and accessories. As we examine external data, we see signs of industry stabilization. Inflationary pressures are beginning to moderate, particularly in the areas like repair expenses and insurance premiums. Insurance premium inflation in the U.S. appears to be abating and total repair costs only increased 1% in Q1 year-over-year. One additional recent data point that is encouraging came from LexisNexis and indicates that nearly half of consumers are actively seeking lower insurance options by switching carriers, many successfully updating significant reductions in their premiums. We have been through cycles before and have a strong track record of outperforming industry trends over the long term. We remain confident in our A Plan strategy to strengthen our leadership in Refinish and expand into adjacencies. We believe that consumer confidence will increase, leading to a more favorable repair environment. Our expansion into economy and customer-centric innovation such as the Fast Cure low-energy system that reduces energy usage and boost time by 50%, combined with our customer relationships and advanced digital tools position us to win in today's environment and drive growth in 2026 and beyond. Let's turn to Slide 5. We remain focused on our A Plan with excellent execution in the first 6 months of the year. Our operational excellence is now a strategic advantage, enabling us to manage with discipline, speed, and agility. In the second quarter, we reinforced our commitment to achieving zero incidents by improving our safety record by an amazing 55% year-over-year. Our commitment to achieving zero incidents has never been greater and I'm very proud of the progress we're making towards this goal. Our disciplined focus on cost management drove a 6% year-over-year reduction in operating expenses. Since we announced our transformation initiative, it has driven approximately $40 million in cost savings. We've also taken decisive action to optimize our industrial footprints by closing 3 manufacturing plants in the last year. These actions have streamlined our operation and positioned us to convert on the upside once industry volumes rebound. I believe our results speak for themselves. Our dedication to customer-focused innovation was again acknowledged this quarter. Axalta's NextJet was recognized as a 2025 Automotive News PACE Pilot Innovation to Watch, and we were honored with Daimler Truck North America's Masters of Quality Supplier Award. These accolades validate our innovative approach to delivering differentiated customer outcomes. Finally, we're consistently strengthening our financial position by maintaining total net leverage in line with our A Plan targets while also capitalizing on opportunities to repurchase what we believe is undervalued Axalta stock. These actions position us for sustained long-term value creation. I will now turn the call over to Carl for a financial update.

Thank you, Chris, and good morning everyone. Let's turn to Slide 6. In the second quarter net sales totaled $1.3 billion, down approximately 3% year-over-year primarily due to lower volumes in Performance Coatings. This was partially offset by positive foreign currency translation and contributions from CoverFlexx. Gross margin improved by 100 basis points to 35%, driven by favorable cost dynamics and operational efficiency. While income from operations declined by $12 million, this was largely due to restructuring-related costs, actions all aligned with our long-term strategy. We delivered adjusted EBITDA of $292 million, a company quarterly record and up slightly versus the prior year. Adjusted EBITDA margin expanded by 90 basis points to 22.4%, underscoring our ability to manage costs and drive profitability in a dynamic environment. Variable costs declined 2% year-over-year, slightly better than expectations. For the full year 2025, the raw material cost outlook remains unchanged and we expect variable costs to remain approximately flat. SG&A expenses declined 2%, and when excluding acquisitions and FX, the reduction year-on-year was nearly 6%, reflecting our focus on cost discipline. Adjusted diluted earnings per share rose 5% to $0.64, primarily driven by lower interest expense and lower shares outstanding as a result of our share repurchases during the quarter. Finally, cash provided by operating activities was $142 million, up 25% from a year ago, and free cash flow totaled $101 million, reinforcing our ability to consistently generate meaningful cash flow. Moving to Slide 7. Net sales for Performance Coatings declined 6% year-over-year to $836 million, driven primarily by lower volumes and unfavorable price-mix, primarily in North America. These declines were partially offset by contributions from CoverFlexx and foreign currency translation benefits, primarily related to the appreciation of the euro. Refinish net sales decreased 6% to $514 million with organic sales down high single digits due to volume declines related to industry softness and distributor inventory corrections impacting price-mix year-over-year. The incremental contributions from CoverFlexx and foreign currency translation partially mitigated this decline. Price-mix was down mid-single digits in the quarter as unfavorable mix in North America offset price benefits. Industrial net sales declined 6% year-over-year to $322 million primarily due to lower volume resulting from continued macro softness predominately in North America. Positive price-mix and favorable foreign currency translations partially offset the impact from lower volumes. In the second quarter, Performance Coatings delivered adjusted EBITDA of $200 million, yielding a margin of 23.8%. While results were impacted by lower North America volumes, one of our more profitable regions, cost discipline and operational efficiencies helped mitigate the challenges. The team's ability to manage variable and operating costs effectively demonstrates why we expect to see improved earnings conversion when revenue inflects positively, which we anticipate to occur in the fourth quarter and into next year. Let's move to Slide 8. Mobility Coatings second quarter net sales were $469 million, an increase of 1% from the prior year, with organic sales contributing approximately 2 percentage points of growth. Light Vehicle net sales were up 2% in the second quarter, driven by organic net sales growth in 3 out of the 4 regions, which more than offset anticipated declines in North America due to a decline in auto production and plant shutdowns within the region. Price-mix was a low single-digit tailwind in the quarter, driven by selective pricing and favorable mix, primarily in Latin America. Commercial Vehicle net sales declined 4%, primarily due to volume headwinds related to expected declines in Class 8 production, which were down 17% in the second quarter from a year ago, partially offset by momentum in our Commercial Transportation Solutions. Positive price-mix was primarily driven by favorable product mix and pricing adjustments to offset foreign currency headwinds. During the quarter, Mobility Coatings reported a 35% increase in adjusted EBITDA year-over-year, reaching $92 million. Adjusted EBITDA margin expanded by 500 basis points compared to the prior year, nearing 20%. While the results had some one-time benefits relating to pricing true-ups, this is truly a fantastic result driven by the disciplined effort of the team helping to drive 11 consecutive quarters of year-on-year adjusted EBITDA margin expansion. Margin growth across both segments was primarily attributable to positive price-mix, lower variable costs and reduced operating expenses. Turning to Slide 9. We continue to execute against our capital allocation priorities with discipline and focus. We generated $142 million in cash from operations in the second quarter. Notably, we repurchased $65 million of our shares and invested $45 million in capital expenditures aimed at boosting productivity and efficiency. Our 2024 debt refinancing initiatives are already paying off. We reduced $5 million operating interest expense this quarter, a 10% improvement year-on-year. We are also on track to achieve the A Plan 2026 interest expense target of $180 million for the full year 2025, one year ahead of plan. Our total net leverage ratio remains at 2.5x consistent with our A Plan target range providing us with the flexibility to accelerate capital deployment, while maintaining a strong balance sheet. And we also expanded return on invested capital by 110 basis points from last year to 14.3%. Let's turn to Slide 10 for our view on the third quarter and 2025 guidance. Based on the latest industry indicators and consumer sentiment data, we now believe that the softer demand environment observed in the first half of the year will persist longer than anticipated. Our prior guidance that assumed a gradual easing of tariff-related uncertainty and a rebound in consumer confidence heading into the back half, particularly in North America, is being revised. However, recent trends suggest that these improvements are not materializing at the pace we had anticipated. For the third quarter, we expect net sales to decline low single digits compared to last year in line with the second quarter. This outlook reflects a positive price-mix year-over-year in 3 of our 4 end markets, which will help offset expected volume softness, largely concentrated in Performance Coatings. We are assuming a sequential decline in light vehicle and Class 8 production levels consistent with third-party forecasts, partially offset by our new business wins in Brazil. Further, Europe will step back similar to past seasonal trends with slight offset stemming from price-mix benefits. We project adjusted EBITDA between $290 million and $300 million and adjusted diluted earnings per share in the range of $0.63 to $0.67. For the full year, net sales are now expected to be between $5.2 billion and $5.275 billion, representing approximately a 1% decline at the midpoint versus a year ago. With this updated view, we are revising our full-year earnings expectations. We expect adjusted EBITDA margins to remain around 22% or above, an expansion of approximately 80 basis points year-over-year at the midpoint. Our full-year adjusted EBITDA is now expected to be in the range of $1.14 billion and $1.165 billion, and adjusted diluted earnings per share will be in the range of $2.45 to $2.55, which is a 6% increase at the midpoint compared to last year. While we believe it's prudent to slightly adjust our guidance, 2025 financial performance to date reflects disciplined execution, pricing resilience, strength of our commercial strategy, and importantly, record results in both adjusted EBITDA and adjusted earnings per share. We remain fully committed to our A Plan objectives and our focus on creating value for our shareholders. I will now turn the call back over to Chris.

Thanks, Carl. Let's look at Slide 11. We have great products, technologies, and strong brands. We're executing our growth strategy by launching products our customers want, expanding in key geographies, and growing our Refinish footprint. Our performance over the last 2 years that extended into this quarter reflects the strength of our diversified portfolio and strategic progress we are making across all end markets. In light and commercial vehicles, we're continuing to gain traction in key growth regions while delivering meaningful innovation for our customers. In 2025, we're set to launch our next-generation waterborne basecoat, a breakthrough technology that is designed to enhance efficiency and expand color capability, particularly for high-chroma finishes that are increasing in demand. Our NexJet digital paint technology developed in collaboration with best-in-class partners like Dürr and Xaar is another standout innovation. This maskless tutone application system is already being piloted with a top global OEM and is expected to deliver significant benefits to our customers. These are just 2 examples of how we are creating tailored high-impact solutions that deepen customer partnerships and differentiate Axalta in the marketplace. In Commercial Vehicles, we remain focused on winning new business with buses and trailers while also expanding into underrepresented geographies within Asia and Latin America, helping to further diversify and strengthen our mobility segment. In Refinish, as I mentioned earlier, we have added nearly 1,600 net new body shops year-to-date in 2025 building on the momentum of over 2,800 wins in 2024. This growth reflects the strength of our commercial execution and the value of our offerings in the industry. Looking ahead, we're expecting to roll out our Nimbus digital platform to 40,000 body shops in 2026. Nimbus connects all Axalta products and services into a cloud-based solution that empowers customers with data-driven insights designed to improve profitability and performance and it connects seamlessly with Axalta Irus, allowing it to offer a suite of best-in-class solutions to our MSO customers. We believe in the strength of our Refinish business and intend to grow into adjacencies through strategic bolt-on M&A. Outside of collision repair, we're also making meaningful progress in retail and DIY channels supported by our accessories portfolio and other business segments. We believe this will open new avenues for customer engagement and revenue diversification. In 2025, we have seen over 500 basis points of growth from execution of our strategy and we expect a strong growth trajectory in 2026 and beyond. In Industrial, we're on track to deliver some of Axalta's highest margins on record, driven by the targeted product and cost actions. This performance reflects the strength of the financial foundation we've built, one that aligns with our A Plan strategy and gives us flexibility to pursue selective organic growth opportunities as they arise. We believe our broad portfolio and differentiated technologies are well-positioned to benefit from the future rebound in industrial activity and the shift towards electrification. We're seeing strong momentum in key platforms such as wire enamels, impregnating resins, and powder coatings for high-efficiency motors, battery enclosures, and energy systems. These solutions position us to deliver organic growth and reinforce Axalta's role as a trusted partner in delivering high-performance coatings across a wide range of industrial applications. Within each of our businesses, we feel our results demonstrate our ability to execute well in any environment and pave the path to growth through excellent technology and long-standing customer relationships. This concludes our prepared remarks. Thank you for joining us today. Operator, please open the line for questions.

We'll take our first question from Chris Parkinson from Wolfe Research.

So the U.S. Refinish market has been facing challenges for the last several quarters and there's a clear divergence between collision claims versus collision rates. Can you just give us kind of your current assessment, to the best of your ability, in terms of what you're hearing from the MSOs? What you're hearing from the distribution channel, including their own rationalization actions? And just how we should be thinking about the setup for, let's say, into year-end and into 2026, just given we've already been in this scenario for the last 3 or so quarters.

Good morning, Chris. I'll address this. As mentioned in my prepared remarks, we're still seeing accidents happen. Our extensive research, along with insights from our peers and distribution partners, indicates that accident rates have dropped by about 1% to 2% across nearly all states. However, there's a noticeable disconnect when it comes to claims, primarily due to the rising cost of insurance and repair expenses. This trend was anticipated; looking back over the last three quarters and even the past two years, we've experienced inflation in both insurance rates and repair costs. The positive aspect is that these costs are beginning to stabilize. As we move into this quarter and beyond, we're seeing signs that insurance rates are leveling off. Additionally, backlogs from our MSO partners are decreasing from pre-COVID levels, suggesting a potential reduction in repair shop costs as well. I believe the market will evolve positively, likely around 2026. Regarding our distribution partners, they have faced similar challenges, entering the quarter with excess inventory. Our strategy differs in the U.S. compared to Europe, where we face fewer challenges. In North America, our distributors, who are excellent partners, are adjusting their inventory to meet current market conditions, which typically takes a couple of quarters to resolve. Looking into Q3, the encouraging news is that we see signs of stabilization, which is reflected in our guidance predicting a record Q3, indicating a potential stabilization in the marketplace moving forward.

Got it. Just as a quick follow-up. Chris, there's always been this undertone of cost improvement given Axalta's story, essentially dating back to the IPO. You seem fairly optimistic and your execution in fairness showed it this quarter, especially in Mobility, but you seem fairly optimistic that the margin story and the productivity story and the manufacturing rationalizations are still in the early innings. Can you just give us an update on your own thought process in terms of that cadence and how we should be thinking about that intermediate to long-term? And whether or not your own presumption about long-term margins is better or worse than when you began to be CEO?

That's a great question, Chris. I'd be happy to address it. When we consider our A Plan, keep in mind that we are only two years into it, not six years. In just these two years, the accomplishments of our team have been impressive, particularly in terms of cost reductions, amounting to about $300 million. This is a significant achievement. We have made progress in several areas, including operational excellence, footprint optimization, productivity enhancements, and improvements in material performance for both direct and indirect materials, along with our transformation initiative. Kudos to the team for exceeding expectations across all fronts. For the past six quarters, we have outperformed in material performance, and we are ahead of plan with our transformation efforts. We're just beginning our operational excellence plan, having completed some plant optimizations and are currently investing in capital to enhance productivity, which presents further opportunities. It's important to mention that Axalta still faces $3.5 billion to $4 billion in costs, consisting of $1 billion in labor and burden, and around $3 billion in direct and indirect materials. This indicates that there remains significant cost-saving potential. I believe this is particularly true given the current market dynamics, where excess capacity exists and new supply capabilities are emerging in Asia. I see additional potential for improved material performance moving forward. Furthermore, advancements in AI and technology can greatly enhance our service offerings. For example, we will be deploying 40,000 Nimbus platforms in body shops next year, which will enable us to collect data on efficiency and productivity from our MSO customers while allowing them to place online orders for our full product range. This will lead to considerable improvements in supply chain and sales efficiency. Additionally, there is more we can achieve with AI on the back-office and customer service fronts. I believe we have an exciting story ahead, and we are still in the early stages of enhancing our operational and cost performance, with further upside potential for our margin story. I look forward to sharing developments on this in the next A Plan.

Our next question comes from Ghansham Panjabi with Baird.

This is actually Josh Lesley on for Ghansham. I just wanted to go back. You guys gave a good chart in 1Q, just focusing on your organic net sales performance relative to the industry volume performance. I wonder if you could just go through that specific to 2Q. Just talk about how Axalta performed amongst your business units relative to broader end market performance?

Yes. From an organic standpoint, our top line was down about 3% across all markets. Breaking it down by business, mobility is performing exceptionally well, with growth in 3 out of 4 markets, which primarily focuses on light vehicles. The commercial vehicle sector remains a strong point for Axalta, despite the Class 8 market declining about 17% year-over-year. We experienced only a slight decline in commercial vehicles, thanks to strong performance in our CTS business and even within commercial trucks. Overall, our mobility team is executing very effectively. In the industrial segment, we saw a year-over-year decrease of about 6%, which aligns with the markets we operate in. Regarding Refinish, we've maintained strong performance, notably outperforming markets in Europe and globally. We're excited about our quarterly performance, which set records for EBITDA and EPS despite a challenging macro environment. We're optimistic that when revenue begins to grow positively, we will see significant outperformance.

Okay. Great. That was super helpful. Maybe one more for me just focusing in on guidance. If I look at the implied adjusted EBITDA 4Q guidance for the remainder of the year, it implies a pretty healthy step-up on a year-over-year basis in 4Q. So just wondering if for modeling purposes, if there's anything we should keep in mind that's driving that step-up or just any puts and takes there.

Yes. No. I mean, as we evaluate things from a company perspective, we are continuing to execute. There are ongoing opportunities we're identifying in cost actions. We expect that in the fourth quarter, Mobility revenue will increase compared to the third quarter. Additionally, we anticipate that Refinish will also start to show positive growth, which will contribute to improving our overall margins and EBITDA. As noted in our guidance, we made a slight adjustment downwards of about $10 million for the year, specifically at the midpoint or low end of the range. However, considering our strong performance in the first half of the year, we are clearly committed to delivering the guidance we have set for ourselves.

We will move next with John Roberts from Mizuho Securities.

The U.S. had a pull forward in auto sales in April into May and then sales cooled in June. How is that affecting new car production? And in the non-USMCA compliant cars, are you seeing any positioning yet in Canada and Mexico in anticipation of kind of the tariff changes?

Thank you for the question, John. Looking back at last quarter, the U.S. market was slightly weaker due to some of our customers undergoing shutdowns. Our strength really came from China and Latin America. The market in China was relatively stable, but we continue to grow and surpass the market rate. In Latin America, our new business wins have been a fantastic success. Additionally, as Carl mentioned, three out of the four regions showed growth for us, and Europe also performed well with stable market conditions, slightly outperforming the market here as well. For North America specifically, we did see some of our customers down for a time, so we anticipate a bit of a rise beyond the usual shutdowns we experience in the third quarter. Our goal is to achieve consistent volumes. Regarding light vehicles, builds have increased slightly from 89 to approximately 89.2 to 89.4. We expect about a 1% to 2% increase based on our current performance, much of which is attributed to growth in China and Latin America. I know you didn't ask about this, but regarding commercial vehicles, while we anticipate the market to decline by about 25% to 30% for the full year, we expect to be up by about 1% or 2%. This is primarily due to our team's outstanding efforts in selling within the commercial transportation sector, effectively adapting to the reduced volume from Class 8 and succeeding in the commercial transportation space.

Our next question comes from Duffy Fischer from Goldman Sachs.

I was wondering if you could help size the 1,600 new body shop wins year-to-date. How does that compare to last year? What does that mean for your incremental revenue this year? Is there any consideration of anniversaries in that? And how long do you think you can maintain this pace? It seems like a significant number relative to the total number of body shops in the U.S. So is there a limit on this where you can sustain it for another year or two?

Well, that's a great question. We've actually done 10,000 body shops over the last 4 years, Duffy. And if you look at it, I mean, we have normally averaged about 2,400 to 2600 a year, and that was what we had last year. So it's a great new story for the first half of the year and what we've accomplished to your point. And the really cool part about that is a significant amount of that, we had a record number of mainstream and economy body shops in that, which was a great story because it aligns with the strategy. We wanted to get into mainstream and economy because it's only about 10% to 11% market share that we have here versus the premium space where we have over 40% market share. So it's actually been a great story for us because we've been able to pivot and grow into this area. And it aligns with the CoverFlexx acquisition. So it's been good. I truly believe, especially with the market share that we have in mainstream and economy. We have a pretty good runway ahead of us. So we can continue at this space as I think about the back half of the year. And certainly, it's a step-up from where we have been but we've consistently delivered about 2,500 net body shops or 10,000 over the last 4 years.

Great. And then just a second one, how can you get investors comfortable? Because obviously, your Refinish numbers on the top line look a little bit weaker than your 2 U.S. peers that have given us data, they're down low single digits and you're down high. How can you get people comfortable that there's not something structural happening there, that it is just a customer mix issue and that should mean revert?

Yes, Duffy, as we examine this, the quarter unfolded as we anticipated and communicated to you and the investor community last quarter. Chris mentioned that one of our large customers is undergoing destocking, which is likely to continue through Q3 and possibly towards the end of the year. However, we are still experiencing success in Refinish. We are making gains in North America, EMEA, and globally. Our outlook for the Refinish business remains very positive moving forward. I believe this situation is temporary, and all indicators we are reviewing, as Chris noted regarding recent trends in costs and repairs, support this. Additionally, we are observing notable increases in activity from reconditioning companies, which often signals future market trends. Overall, this remains the primary question we receive. I want to emphasize that in the recently reported quarter, Axalta achieved its highest EBITDA and earnings per share in the company's history.

Maybe just adding to what Carl said. And I think we're referring to CarMax and Carvana, and in reality, if you think about leased cars coming off 2 years ago, it was about 16%, I think, in 2022. In '24, it's 24% of cars are being leased. And the good news there is when leased cars get traded in, even if a consumer doesn't want to fix a ding, a dealer wants to fix that ding before that car is sold. And so we do believe that this market will inflect and change here in the future.

Our next question comes from Matthew DeYoe with Bank of America.

Question for you, so Plan A has obviously gone really well. Earnings are up, margins are up, end markets aren't cooperating. But generally, people agree that the Axalta house looks increasingly in order. I know you kind of addressed Parkinson's question about needing more work on the cost side. I'm just thinking about how it's a rare opportunity since one of your larger peers is finally looking inward. I'm wondering why now isn't a better time to make a move and do something more structural with your portfolio here? I'll leave it there.

Thank you for the question. Our first goal was to enhance margins across all three businesses, ensuring a strong foundation over the past two years. We've achieved significant margin improvements, totaling 1,500 basis points, particularly in mobility and over 1,000 basis points in Industrial. We initially set a target of 400 basis points improvement in Industrial, and we expect to exceed that as we conclude the year. Our main objective was to establish a solid foundation and identify potential opportunities. There is still some work to be done on both cost and margins, but I am confident we will meet all our financial metrics this year, aside from market and sales performance. We aim to achieve $1.2 billion of EBITDA, which represents a 21% to 22% increase, and I am determined that we will reach this goal next year. Looking ahead, we plan to present a new A Plan by February or spring of next year, outlining our strategy for 2029 and the next three years, including potential changes to our portfolio and growth opportunities. Axalta has strong margins in the coatings industry, and we believe we can build on this to drive both growth and margin improvement. I look forward to sharing further insights in the next six to nine months.

Okay. If I could follow up, the pricing in auto OEM was quite positive this quarter, and you mentioned a one-time adjustment. How were you able to achieve that when one of your competitors is discussing lower index pricing? Should we expect this trend to continue over the next 12 months, or is this just a one-time occurrence? Could we explore this further?

Yes, I wouldn't categorize this as just a one-quarter issue. We did highlight some benefits that we referred to as one-time. However, there were about eight distinct actions that the team implemented across all regions, and these actions will not be repeated. That's why we mentioned they are somewhat one-time in nature. This isn't solely due to one factor; rather, it's part of the overall execution story, particularly in Mobility and what we're observing in the light vehicle sector. Looking ahead, even if we exclude some of these benefits, the margin profile of the Mobility business remains strong, with over 18% EBITDA margins this quarter. Compared to last year, we're projecting to exceed 17% for the full year in Mobility. Overall, performance has been impressive, and we expect price-mix to remain positive throughout the year. This reflects what Axalta is capable of achieving, and we've demonstrated our ability to execute effectively every single quarter for the past two years, a trend that will continue as we advance.

Our next question comes from Josh Spector with UBS.

I just had 2 quick follow-ups. First related to kind of what you just talked about. When you talk about the pricing true-up in Mobility, it sounds like from your comments, there's a little bit of a one-time nature of that in the quarter. I guess, was there a point or 2 of pricing that's unique that may be helped by $5 million plus in the quarter that doesn't repeat? Or is that not correct? And then the other question was more around 4Q. I think Carl, in your remarks, you talked about performance sales up year-over-year in the fourth quarter. Just given some of the commentary around Refinish, maybe not improving until 2026, how do you have visibility on that?

Yes, regarding the Mobility pricing, as I mentioned, there have been specific actions taken across all regions by the team. Some of these actions were one-time occurrences, while others have a more lasting impact. Additionally, we are expanding our business in Brazil, which is positively influencing our price mix. In the light vehicle segment, we have seen some businesses shift within other areas of Latin America, which is also beneficial for the price mix and will continue going forward. Therefore, we are very confident in our ability to achieve margins well above 17% for the entire year. Looking at the fourth quarter, we sometimes focus too much on year-on-year comparisons for Refinish. However, if we consider the sequential performance from Q1 to Q2 and our projections for Q3, the revenue has remained relatively stable. While the year-on-year comparisons may not appear strong, the sequential stability is present. We anticipate that this trend will carry into Q4, particularly in EMEA, which gives us a high level of confidence that this improvement will happen and will help us meet our annual guidance.

We will move next with Vincent Andrews with Morgan Stanley.

I wanted to ask about price in Performance Coatings or price-mix, I should say, at least versus our forecast and I think what you said at 1Q, I think it came in a little bit lower than I think we're kind of talking about flattish maybe around 1Q, and it came in down 2%. So if you could talk about that a little bit. And then I have a follow-up.

Sure, I'll address this. There are two primary reasons. First, North America is our strongest region in terms of margins. When performance in North America declines, as it did last quarter, it negatively affects our overall mix because of the region's size. This decline cannot be fully countered by our performance in Europe, Latin America, or Asia, especially given the year-over-year drop specific to North America. The second reason relates to our strategic focus on growth. We aimed to expand in the mainstream and economy segments, and we achieved a record number of wins in these areas during Q2, the highest in Axalta's recent history. While these wins will contribute positively in Q3 and Q4, they do come with lower price points that negatively influence our mix. From a Refinish margin perspective, this mix is unfavorable. However, for Axalta overall or within Performance Coatings, this mix is beneficial due to the scale at which it affects us.

I would like to ask about the value chain of Refinish in light of three topics we discussed today. First, there are fewer claims from consumers. You mentioned that body shops still have backlogs, but your distributor customers are reducing their inventory. I'm trying to understand this situation because it seems that while body shops are experiencing backlogs, it shouldn't negatively affect your volumes. Additionally, there seems to be some inconsistency between having fewer claims and distributors destocking. Could you clarify that for me?

Sure. What I meant was backlogs are coming down. Backlogs were at a very high peak in front of body shops previously, and that's been coming down. And so with backlogs coming down, it essentially means that body shops are having to find are being more cost-competitive because backlogs are starting to come down from where they were 2, 3 years ago coming out of the pandemic. So the reduction in backlog, as you could imagine, even if it's in auto or in commercial vehicle, essentially means that the body shops are becoming more cost competitive. So that's why we are starting to see more abatement in, let's call it, repair costs. So all of these 3 things are actually working in our favor for, let's call it, stabilization in what I believe the future cost will be and why Refinish will pick back up.

Our next question comes from Michael Sison with Wells Fargo.

Just a quick question regarding the total repair costs stabilizing. What is the current average cost, and how does it compare to several years ago? Does it need to reach a certain point for affordability and cost analysis? Also, could you discuss the car park? I understand it's quite old, so how might that affect Refinish growth moving forward?

Sure. So I think on average would be something around $4,700. I think it's incredibly varied and all over the place depending on the type of accident. But I would say in terms of what we drive on, drive for, if you think through that cost is coatings or what we provide happens to be about 4% of that cost. About 40% of that cost happens to be labor. And that is truly what is Axalta's value proposition for our customers. Everything that we do to save that 40% in a body shop is enormously important and drives, I think, why we've consistently been able to perform even under these challenging conditions, winning in this marketplace and winning 1,600 body shops at a higher ratio than what we have done through the last 3 to 4 years is primarily because we provide that efficiency and that ability to provide products that essentially whether it's reducing time in the body shop by 50%, the amount of coatings by 50% or the labor input by about 10% to 20% makes a huge difference. So those are what we drive. My expectation is that even though costs will be flatlining, everything that we can do to drive that performance and that efficiency will certainly help the body shop and keep us winning as I think about '26 and beyond.

We will move next to John McNulty with BMO Capital Markets.

So when you think about the 40,000 body shops that are going to have Nimbus and Irus technologies next year, how much does that add to the growth rate when you think about '26 versus '25?

That's a great question, John. Let me share our performance without those tools from this year. What Nimbus provides is access not only to efficiency tools to lock in customers but also to sell adjacent products. This helps us increase our share of wallet with those customers. A perfect example is that, without that tool this year, we managed to achieve around 200 basis points, or 2% of our growth from adjacent products just in the last quarter, despite challenging market conditions. The success of our acquisitions and efforts, including with U-POL, has certainly contributed to this. Nimbus will enable us to provide faster access to customers without having to wait for sales teams or phone calls, allowing us to reach body shops directly and assist them with efficiency tools and quicker product delivery, along with driving promotions. We see this as a significant opportunity for next year. Reflecting on the four key strategies we established for Refinish fillers, the first was M&A, where our acquisitions like André Koch and CoverFlexx have been very successful. André Koch has brought us 600 premium body shops in Switzerland, allowing us to sell additional accessories alongside our coatings. The second was adjacencies, where U-POL has been successful in the U.S., enhanced by tools like Irus and Irus Mix, which help promote adjacent products. Our third strategy focused on the economy segment, which has been fruitful with numerous body shop wins, including record orders for mainstream and economy products. Lastly, our pricing strategy has also unfolded as expected.

Got it. Okay. And then question, you highlighted on the Building the Future slide about opportunities for M&A in both the Refinish and the industrial markets. I guess given the weakness that we've seen in those markets, are you seeing more opportunities coming to the market at this point in terms of a pipeline? Or are you seeing companies maybe holding back saying, look, we're not selling on this level of earnings, we'd rather wait it out? I guess, how would you characterize the M&A market and pipeline?

That's a great question. I see it in two ways. Firstly, with Axalta, we want to ensure we earn the right to grow. Even during this downturn, we aim to ensure that our previous acquisitions remain solid and our core business performs optimally, which our margins indicate we are achieving. Therefore, I believe we are prepared for growth. However, given our current stock performance, it seems more prudent to focus on share buybacks at this moment. From our viewpoint, we are considering our strategy regarding share buybacks internally. Nevertheless, there are opportunities for smaller acquisitions even in the current market, which seems to have opened more avenues for us. As I look ahead to the rest of the year, unless a particularly advantageous opportunity arises that significantly enhances our core strengths, we will likely continue prioritizing share buybacks at our current rate.

And we will take our last question from Aleksey Yefremov with KeyBanc.

Could you just comment on productivity expectations around this year. Next year, do you think it's about the same amount, a little higher, a little lower? What's your initial thought on '26?

Yes, thanks, Alex. From a productivity perspective, we're expecting to generate around $20 million this year. Looking ahead to 2026, we anticipate at least maintaining that level, though we hope to surpass it. As Chris mentioned earlier, we are just beginning to enhance productivity in our plants, which is not only sustainable but will also continue to grow year after year. Currently, we have good visibility on this, and at a minimum, we expect next year's productivity to exceed $20 million.

And on the Refinish, early performance segment, pricing side, you had a low single-digit negative number this quarter. I presume that's all mix. Can you just confirm that? And when do you think that number could go breakeven or positive?

Yes. So yes, I think the pricing is still positive for Refinish. We're probably running about 2% increases on average for the year. And as we kind of look forward, we would expect kind of that price mix in Refinish probably will definitely be inflecting positively into next year. And there's a chance that we may even see that a little bit here in the fourth quarter.

Thank you, ladies and gentlemen. And this concludes our Q&A session as well as our conference call. Thank you for your participation, and you may now disconnect.