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spk09: Ladies and gentlemen, thank you for standing by. Welcome to Exalta's second quarter 2021 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 a replay will be available through August 3rd. 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 Mr. Chris McRae. Please go ahead, sir. Thank you and good morning.
spk02: This is Chris McRae, VP of Investor Relations and Treasury. We appreciate your continued interest in Exalta and welcome you to our second quarter 2021 financial results conference call. Joining me today are Robert Bryant, CEO, and Sean Lennon, CFO. Last evening, we released our quarterly financial results and posted a slide presentation, along with commentary to the investor relations section of our website at Exalta.com, which we will be referencing during this call. Both the prepared remarks and discussion today may contain forward-looking statements reflecting the company's current view of future events and the potential effect on Exalta's operating and financial performance.
spk01: These statements involve uncertainties and risks, and actual results may differ materially from those forward-looking statements. Please note that the company is under no obligation to provide updates to those forward-looking statements. This presentation also contains various non-GAAP financial measures. In the appendix, we've included reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information regarding forward-looking statements and non-GAAP financial measures, please refer to our filings with the SEC. I'll now turn the call over to Robert.
spk02: Good morning. Thank you for joining us to review Exalt's second quarter earnings and our updated 2021 full-year financial outlook. The second quarter showed continued strong operating and financial performance, marking the fourth straight quarter of earnings exceeding our expectations since the pandemic impacted second quarter of last year. Ongoing demand tailwinds for global industrial wind markets, coupled with supportive recovery with an Exalt's refinished business, combined to offset headwinds above our original forecasts for the second quarter, including ramping raw material cost inflation, supply constraints with key raw materials, and semiconductor chip shortages from mobility coatings customers. While these headwinds are expected to continue during the second half of 2021 and run higher than prior forecasts, Exalta has begun to implement additional mitigation measures that will provide effective offsets over the coming quarters and into 2022. Net sales in the second quarter increased 72.6% year over year, including a 5.3% FX tailwind, driven by broad-based recovery from all end markets globally. Though underlying strong auto demand was masked by the supply shortages impacting the ability of our mobility customers to meet end consumer demand. Price mix contribution in the quarter was a record 9.3%. Performance coatings price mix increased 14%, including a positive 21% move in refinish, of which approximately 5% represented pure price improvement, and a mid-single-digit price mix increase in industrial, with most of that coming from price. Refinish volumes showed strong sequential recovery, which is tracking well with continued traffic rebound, and remain below pre-pandemic levels as expected, but now only down mid-single digits versus the comparable quarter in 2019. Exalted second quarter adjusted EBIT of $173 million was a dramatic improvement from the prior year quarter in moderately below first quarter levels, given the anticipated impacts from higher cost inflation in mobility customer supply chain shortages, both of which came in higher than originally projected and higher than we had assumed in our second quarter guidance provided in April. Adjusted EBITDA for the quarter was $230 million, reflecting a 20.4% margin. This solid result contributed to a record level last 12-month adjusted EBITDA of $992 million as of June 30, given the lapping of the pandemic-impacted second quarter of 2020 and including excellent second half 2020 performance. Adjusted EPS of $0.48 compared with a loss of 15 cents in the second quarter of 2020, while just shy of 50 cents reported in the first quarter of 2021. Second quarter free cash flow of $83 million compared to an essentially break-even cash flow in the prior year quarter also showed solid sequential improvement from $11 million in the first quarter, which is also a seasonally typical improvement. We were pleased to close the quarter with total net debt the last 12 months adjusted EBITDA of 2.6 times, dropping below 3.0 times for the first time in the history of Exalta. We repurchased $60 million worth of shares during the second quarter, bringing the total repurchases through the second quarter to $124 million. Share repurchases remain a priority for capital allocation. On July 7th, we were pleased to announce a definitive agreement to purchase UPOL, our second M&A transaction in 2021, and the largest transaction in Exalta's history. We're very excited about the UPOL transaction for many reasons. The acquisition is a very strong fit strategically as a growth accelerator within the refinish business. adding a complimentary product set to the existing business and representing a strong return opportunity given a combination of operational synergies as well as compelling commercial synergies over time. We're also excited to be bringing on board a terrific management team that has proven an ability to grow the business substantially during its tenure. A prototypical Codings M&A consolidation story, This smaller business will benefit from Exalta's global distribution and innovation capability to take an already successful story to the next level of growth potential. UPOL is expected to generate approximately $145 million in annual sales in 2021, with an adjusted EBITDA margin of about 26%. We expect about $10 million of operating synergies to be realized over the next 18 to 24 months, and we expect a mid-teens five-year IRR from the transaction. UPOL is expected to grow at rates faster than the core Exalta business over the period due to a strong pipeline of new products, as well as benefiting from Exalta's global commercial infrastructure. The transaction is expected to close around the end of the third quarter or early in the fourth quarter. Exalta continues to drive improvement within all aspects of ESG, and we made solid ongoing progress in each aspect of sustainability during the second quarter. We continue to be a leader in the coding space in our ESG scores, including strong ratings from IFS, as well as receiving a AA leader rating from MSCI. We recently completed an ESG materiality assessment across all our key stakeholders working to set new ESG goals that we look forward to sharing around the end of 2021. In the meantime, we continue to focus on our industry-leading waterborne coating systems, which improve sustainability where adopted by customers globally as compared with traditional paint systems. Moving on to business conditions. Second quarter demand conditions remained robust across most global industrial coatings markets, and the refinish recovery also continued as anticipated. Refinish demand benefited from reduced COVID-19 restrictions in many countries where those restrictions were in place through the first quarter, as well as the global increase in vaccinations, translating to improved mobility and vehicle traffic. Refinish net sales increased 16% sequentially versus the first quarter, with net sales 3.5% higher than 2019 despite business volumes still below 2019 levels by roughly mid-single digits, with more room for upside before we return to normal conditions in that market. Industrial and market demand remained robust across nearly all end businesses and geographies. Industrial saw net sales growth increase by double digits sequentially from both the first quarter as well as the comparable quarter in 2019. underscoring strong underlying demand coupled with ongoing organic growth initiatives playing out positively for the business. Despite demand in excess of our original budget forecasts, further upside near-term to sales forecasts could be hindered by constrained raw material availability in some areas and consistent with the dynamic in the second quarter. Light vehicle demand conditions are also solid at an underlying level, with strong retail vehicle sales in most regions, though auto production has been aggressively throttled back due to the ongoing semiconductor chip shortage. Vehicle production forecasts have continued to ramp down as the full realization of the magnitude and potential duration of the semiconductor supply situation has become apparent. There were approximately 5 million vehicles removed from the global full-year forecast recently, including 2 million vehicles removed from the forecast during the quarter itself. This compares to the 1 million we had assumed in our original outlook for second quarter provided back in April. For the full year, we're now assuming production delays totaling around 7 million units versus our original assumption in April of approximately 2.4 million units. Looking forward, our assumptions have been reduced to assume no appreciable improvement in the supply situation through year end, and which could potentially continue into 2022, according to some forecasters. This revised assumption is now included in our updated full-year 2021 earnings outlook. Commercial vehicle underlying demand remained robust through the quarter, with notable strength in North America, particularly with heavy-duty truck orders remaining firm in recent months. The strength in commercial vehicle reflects the broader global industrial recovery and is expected to continue near term. Exalted net sales were strong, though moderately impacted in the quarter by a customer strike. China remains the exception, with lower production expectations, though Exalted does not have significant sales in the China truck market currently. Regarding cost structure, the second quarter witnessed substantial variable cost inflation coming from oil and propylene benchmark materials, as well as inflation in packaging, freight, and logistics. The magnitude of this inflation, as well as a lack of any previously expected relief, has exceeded prior forecasts, and we now expect full-year 2021 inflation headwinds around mid-teens versus the prior year at the variable cost of goods sold level, compared to our previous assumption of high single digits. We're working actively to offset inflationary cost pressures via a combination of incremental pricing actions, as well as a focus on additional cost and productivity actions. On pricing, Exalta announced additional global price increases across all business lines on July 15th as part of our efforts to close the price-cost gap that widened during the second quarter, representing a second round of such actions taken this year. Incremental pricing actions are necessary and critical to counter the broad and structural inflation that has transpired since 2020 at the market level for goods integral to its office products. We expect that the price-cost gap that opened during the second quarter will be partially covered by pricing actions during the second half, including our mobility business. but that the full coverage of the inflation will take place during 2022 in large part based on actions implemented during 2021. We will implement a third round of price increases as the situation merits. We've also enacted additional structural cost reduction initiatives The $22.5 million restructuring charge focused on our EMEA operations and taken in the second quarter is anticipated to provide approximately $15 million in annual savings once fully implemented over the coming 12 to 24 months, with most savings to begin to accrue in 2022. Regarding light vehicle, we reported negative price mix in the second quarter due to mix differences year over year against the volatile comparison of vehicle mix. Overall pricing was largely stable in the period. Given index pricing and other planned actions, we do anticipate narrowing the price-cost gap over the coming quarters, with positive progress expected to be evident starting in the third quarter. I'll now turn the call over to Sean for some additional comments. Thanks, Robert, and good morning. Second quarter saw strong overall financial performance given ongoing robust demand conditions and continued to refinish recovery globally. And our team executed well to exceed our quarterly net sales and adjusted EBIT targets again. The reported net sales increase of 72.6% was ahead of our prior expectations as recovery and refinish, as well as strong industrial demand, more than offset the persistent production headwinds with our mobility customers. The performance coding second quarter net sales increase of 67.1% was notably above our expectation, as refinish results sold better than expected volumes in North America as well as globally. Exalted did not realize an appreciable benefit from customer restocking in the period, though most distributor orders reflected improved demand conditions. We did see a benefit from increased volumes in premium refinish brands, as seen in the unusual lift in price mix. In industrial, demand was very strong throughout our businesses, with the sole exception of the auto end market for tier suppliers. Net sales would also have been even better absent some volume impact from tight raw material supply for specific products, largely in North America and EMEA. Mobility coatings net sales increased 88.2% for the quarter, which is a strong rebound from the prior year period where production shutdowns were pervasive. The result was moderately below expectations due to repeated production halts relating to the semiconductor chip shortages. Positive product price mix of 9.3% was a record level due to effects previously noted, including positive mix and refinish, as well as strong absolute price progress in industrial around mid-single digits during the quarter. This was partly offset by 4.1% negative price mix in mobility, which stemmed from negative mix in both light and commercial vehicle. As Robert alluded to, we do expect mobility to revert to positive price mix due to strong price movement and more neutral mix effects starting in the third quarter. Second quarter adjusted EBIT was $173 million versus a loss of $12 million in the prior year quarter and compared to $197 million in the second quarter of 2019. This was as expected given strong demand and volume trends, as well as prior year period charges for underutilized manufacturing assets, all set in part by variable input cost inflation. Total operating costs were fairly stable versus the prior year and a benefit over the two-year comparative period, given structural cost actions we have taken. Second quarter adjusted EBIT excludes the 71.8 million benefit recorded in the period related to the operational matter in our North American mobility business. The benefit resulted from the changes in estimates and inclusion of anticipated insurance recoveries, which were confirmed in the quarter, which was a very positive development. Adjusted EBIT also excludes the incremental restructuring charges of $22.5 million we recorded in the period. The performance coding segment reported Q2 adjusted EBIT of $140 million versus $2 million in the second quarter of 2020, driven by volume recovery and drop-through benefits of stronger average price mix, offset partly by headwinds from higher variable costs. adjusted EBIT margin for the segment increased to 17.3%, a further increase versus the 16.6% margin seen in the first quarter of 2021, driven by increased volumes and improved average price mix in the period. Mobility Coatings reported second quarter adjusted EBIT of $6 million versus a loss of $39 million in the second quarter of 2020. Profit and associated margins in the second quarter were impacted by the volume loss during the quarter due to the semiconductor chip shortage, which dramatically impacted production at the customer level and sales volumes for Exalta. The quarter was also substantially impacted by raw material inflation versus the prior year. Exalta's balance sheet and liquidity profile improved significantly in the second quarter, benefiting from improved operating performance, including record levels of latest 12-month adjusted EBITDA at $992 million and enhanced liquidity totaling over $1.7 billion, following the upsize of our undrawn revolver by $150 million during the quarter. Exalta's net leverage ratio improved from 3.2 times at March 31st to 2.6 times at June 30th. driven by solid free cash flow and record LTN adjusted EBITDA given improved operating earnings and the lapping of the week second quarter 2020 COVID-19 impacted results. This is also inclusive of $124 million in share repurchases made year to date. Given the planned acquisition for UPOL expected to close in the late third quarter or early fourth quarter, we would expect leverage to increase to approximately 3.4 times on a pro forma basis upon the deal closing. and then come back down to around 3.2 times by year end, assuming the current cash flow forecast and earnings contribution from the acquisition. Pre-cash flow for the quarter totaled $82.6 million versus a use of $17.8 million in the second quarter of 2020, driven by improved operating profit and inclusive of $8.8 million in higher CapEx versus the comparable year-ago period. Regarding our financial outlook for the full year 2021, we continue to see a supportive baseline of strong global underlying demand for most markets that we serve, and our execution focus continues to drive organic share gains via innovation-led product introductions. That said, we have adjusted our forecast to include somewhat greater near-term headwinds related to the mobility supply shortages, as well as higher assumed levels of raw material cost inflation, offset partly by additional pricing actions. We are assuming baseline oil prices in the low 70s for the full year, including mid-70s for the second half, but we have not assumed the current constrained raw material supply situation gets worse going forward. For full-year net sales, we continue to expect an increase of approximately 20% to 22%, including 3% positive FX translation and 1% benefit from acquisitions, which excludes any contributions from the UPOL transactions. continue to anticipate strong net sales contribution from both segments that we have boosted the performance coatings contribution and trend mobility given higher supply shortage impacts we are using a third-party forecast which calls for three million vehicles to be deferred in the second half production schedules versus the minimal impact assumed in our april full year guidance in dollar terms the mobility net sales effect from the semiconductor and other material supply shortages is approximately $60 million in the second half of 2021 versus $55 million estimated during the second quarter and $20 million during the first quarter. For mobility volumes, we continue to expect to moderately outperform the current global market forecast for the full year, given our overweighting to trucks and SUVs, and expect mobility net sales growth in the mid-teens versus 2020. For refinish, we've seen somewhat better than previously expected recovery through the second quarter, but we continue to assume that market recovery will progress at a gradual pace globally, ending the year with volumes still below 2019 levels by at least mid-single digits, despite net sales exceeding 2019 totals. We expect to generate adjusted EBIT of $685 to $725 million and adjusted EBIT diluted earnings per share of $1.85 to $2 for the full year, with other key income statement metrics noted on our guidance slide. For adjusted EBIT, we expect that the third quarter will represent approximately 20% of the full-year adjusted EBIT, including ongoing impacts from headwinds that we previously noted. Our current expectation is that raw material inflation during the third quarter will be approximately 23% versus the prior year for variable cost of goods sold versus 17% during the second quarter. This is expected to moderate somewhat during the fourth quarter. We expect free cash flow of between $445 to $485 million, excluding any outflows related to the mobility operational matter. And we expect uses of capital to include further M&A transactions as well as ongoing share repurchases. With that, we'll be pleased to answer any questions. Operator? Please open the lines for Q&A.
spk09: Thank you. At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad a confirmation tone will indicate your line is in the question queue you may press star two if you would like to remove your question from the queue for participants using speaker equipment it may be necessary to pick up your handset before pressing the star keys one moment please while we poll for questions Your first question comes from line of Gansham Punjabi with Baird. Please proceed with your question.
spk05: Thank you. Hey, good morning, guys. On the lowering of EBIT for 2021 relative to previous guidance, can you just give us a bridge of the differential of roughly, you know, the $30 million? How much of it is from higher costs versus the deferral in auto OEM versus any other bucket on the downside? And how much are you embedding for UPOL at this point?
spk02: So as far as you pull, nothing is factored in to the guidance construct. But as you think about bridging for your guidance back provided back in April, really the first big impact is the semi impact on light vehicle. We did quantify the sales. You can have to make the drop through, but that 60 million in the second half was not forecasted and the impact we actually saw in the second quarter itself. We have to make about half of what we actually realized of that 55. And then the raw materials, you know, we had assumed originally in our guide there was about an $80 million headwind. We're a little over double that now for the full year, so almost $100 million incremental impact from raws. And then that's partly being offset by the pricing actions that we noticed.
spk05: That's helpful. And then can you give us some more color on the 4% decline for, you know, mobility from a price mix standpoint? I know you called out And then just separately, on you, Paul, you know, you called out that it serves the mainstream economy subsegment. What percentage of the overall auto refinance market do you think is mainstream in economy, and how big is it for you at current, and will the brands be standalone or merged with existing brands in your portfolio?
spk02: Okay, Gautam, we'll take those three questions. In terms of the mobility price mix being down 4%, The negative mix really came from just a combination of customer and regional impacts associated with the chip shortage on volumes, as well as differences from the prior year quarter across the segment. I would highlight that we have been able to increase prices in light vehicle. And just as a reminder, roughly 25% of our mobility contracts, especially in light vehicle, are covered by raw material indexing. And we have about 40% of the contracts that have contractual language that allow us to discuss pricing. So we'll see more price show up in the third quarter, given that most of our index contracts have a six-month lag. And then as far as you, Paul, I don't think we can express enough how excited we are to bring the business into Exalta. As you know, it's a leading manufacturer of repair and refinish products used primarily for automotive refinish and aftermarket protective applications. About two-thirds of the company's sales are aerosols, fillers, and coatings, and those are primers, topcoats, and clearcoats for the refinish market but more focused on mainstream and economy. And then about a third of the business are protective coatings that include spray-on pickup truck bed liners, and they're marketed under the Raptor brand name. And many are kind of consumer do-it-yourself products sold through retail automotive aftermarket stores, and they're also sold online. The protective products are used in camper vans, boats, and a plethora of other industrial applications. So we're really excited about what the product portfolio brings, and certainly we'll be able to sell their products through our sales and distribution channels, and we'll also be able to sell our products through their sales and distribution channels. And as far as integration, we think of it more as a value creation plan, and how we bring the two companies together and leverage both of the assets. Not so much on the cost side. There are some minor cost synergies, but really on the commercial side, there are a number of expected commercial synergies. Thanks so much.
spk09: Your next question comes from the line of Steve Byrne with Bank of America. Please proceed with your question.
spk06: Yes, thank you. So earlier this year, Robert, you removed the matrix organization structure and just wanting to hear whether you're seeing any signs of it enabling your segment leaders to drive maybe either some cross-selling opportunities or more productivity initiatives, anything that you're seeing that is constructive from that action?
spk02: I think we're seeing a number of benefits, and it's not only across the businesses, but even within the businesses themselves. For example, if we look at our mobility business, I'm really excited and confident about the future of the mobility business for many reasons, and some of them are directly related to the organizational pivot. If you look at our new business launches that are projected, we expect them to be more than double in the second half of this year compared to the first half. A lot of that has to do with the focus that the team now has and how that business is organized. We've also achieved some pretty nice wins over the last two quarters at key customers in Asia, EMEA, and the Americas. And the revenue from those wins will come in over the next one to two years. Also, if you look at our year-to-date win ratio, Our win ratio has actually been higher than our current market share as we've won key new business based on our technology, our service, and our relationships. So I think if we look at light vehicle, it's going really well. In the industrial side, it's been really interesting, you know, of all the many achievements that that business has, Perhaps one of the most exciting changes has really been the pivot from focusing on product technologies to focusing on end markets and providing customers with integrated solutions that include liquid, powder, and e-coat. And so that total solutions approach that we've taken in industrial has resulted in some new wins that are nascent but a growing portion of our industrial portfolio. And then in our refinish business, in terms of running that as a truly global business, the efforts that we've seen there in standardization of marketing, as well as product development platforms, we're actually getting products to market faster. And you can see that in some of the press releases that we've made around some of the launches we've had. They're global launches as opposed to region-specific launches. So I think overall... in terms of how the organizational pivot has worked, it's worked extremely well.
spk06: And maybe just an extension on that, Robert. You talked about a few products that are focused from innovation, this daisy wheel color match system and then refinish and then the waterborne clear coat. You also mentioned this e-coat in mobility. Can you just comment on those as to whether they are more likely to lead to market share gains or is this really to drive a mix shift up in price? Can you rank those various initiatives?
spk02: So on your first question around the mixing, excuse me, around the daisy wheel, our daisy wheel system has been in the market for years and years and years. And we've launched the third generation of that product. Now, I think when you step back and you look at, you know, the overall refinish business, you have to remember our waterborne refinish system is 55% faster than our next closest competitor and uses 30% less materials than our next closest competitor. So we're already starting from a pretty nice advantage from a product technology perspective. And the Daisy Wheel 3.0 is just an upgrade to what was the industry's first fully automated color dosing system. And what that does is it enables the fastest and most accurate color mixing in the marketplace. That being said, got to remember, paint mixing is only three to seven minutes of a typical process time of, 45 to, say, 120 minutes. And that's why you don't see greater adoption of these automated dosing systems in the marketplace, because the capital investment that you have to make offset by the productivity improvement that you get, you know, it's just not that large. But we want to make sure that we're meeting the needs of all of our customers so we continue to innovate on that platform. Um, and then in terms of some of the, uh, ECOTE developments that we have, our technology team, both on the mobility side, as well as on the industrial side of ECOTE has just done an outstanding job in moving up our ECOTE technology, not an incremental step, but a couple of steps, uh, up compared to where we were. So net, net in terms of, um, innovation overall and product development, I think we expect that to continue to power. our organic growth as we go forward and allow us to gain additional market share.
spk10: Thank you.
spk09: Your next question comes from the line of P.J. Jubicar with Citi. Please proceed with your question.
spk00: Yes. Hi. Good morning. You know, it seems like that in performance coatings, you have said that you know, majority of your raw materials, if not all of them, with price mix. I guess my question is on the mix impact, especially in the refinish. It's a little hard to understand from outside. What is the mix impact? Are you selling better quality paint that you can charge more, or are you painting more SUVs over cars that get some mix impact? Can you elaborate that and just sort of talk to us about what is the mix impact this quarter?
spk02: Sure. Good morning, PJ. Yeah, and you would have noticed the last few quarters we've actually had a negative price dynamic, and this really started back in the second quarter of 2020. Sorry, on the price side, or on the mix side. Yeah, back in the second quarter, when we saw the volume declines, we really saw a thinning out of inventory within the distribution channel. And you can imagine, as the focus of distributor partners, taking out the heavier-priced inventory. So we saw that thinning out. So it's not necessarily moving away from mainstream and more in the premium. It's just things are more normalizing. as volumes come back. So what you're seeing now is a heavier mix coming through as we get back to more normal volume levels as far as what we're selling through distribution. But fundamentally, you know, we haven't seen any sort of bigger changes in how we think about premium versus mainstream as to how we sell our products today. I would just add to what Sean said, PJ, is that this was a dynamic at the time when we, you know, when we saw volumes down and refinish. that we know was an area of concern for people with price mix being down, but we explained that it was heavily driven by the mix factors that Sean outlined, and that that trend would reverse itself once we saw volumes come back up to more normal levels. And so as we move forward and we continue to see the refinish market recover, we expect that we'll see price mix trend return to what is more normally expected.
spk00: Okay, great. And, you know, what is your position or market share in EVs especially in battery coatings. Do you have a battery coating product out today? And if yes, what kind of ramp up do you see? And if no, then what sort of timeline to get that commercial?
spk02: We have a very strong position in the electric vehicle market overall, given our strong position in electric motor coatings. We are working to build out our platform across the entire electric vehicle skateboard, and we do have commercially available products for part of the battery coating solution, and we're working to develop additional products so that we can more broadly participate in that market. Today, it's a very nascent position.
spk00: Thank you.
spk09: Your next question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.
spk10: uh thank you and and good morning um robert if i can ask you a new poll um and the press release sort of talked about it setting you up for sort of uh you know further bolt-ons and then in your comments uh a few minutes ago i sensed some optimism some some enthusiasm enthusiasm about the diy part of the acquisition and and it seemed like it also served some of the retail orientation of it so just wondering Is that going to be an incremental area of focus for bolt-ons from here, sort of the DIY angle or the retail angle?
spk02: I just want to be careful that we don't put the cart before the horse. I think we have to wait until we actually own the business. But, you know, assuming that all goes well between, you know, obviously between signing and closing, which I think we expect it will, as we go forward, certainly with you, Paul, there are a number of platforms and directions that we can take that business. And although the businesses, you know, think of it as predominantly a refinish accessories business in aerosols, fillers, and coatings, they do have a very attractive technology portfolio. And as you pointed out, not only do they go into the traditional B2B channel, they also are in the B2C channel in retail automotive aftermarket as well as online. And that was one of the or two of the aspects that we found particularly attractive about that business. and certainly gives us some strategic optionality as we go forward. As we, you know, move forward and hopefully close on that transaction, you know, we'll be able to provide a little bit more color just around some of the strategic directions that we can go with the business.
spk10: Okay. And then I also noticed in the release of the slides there was a comment that you're not assuming any buybacks over the balance of the year. Is that just sort of a simplifying assumption, or is that an indication that the M&A pipeline is robust?
spk02: Yeah, you shouldn't take it. I mean, we're expecting to – you know, generate at the midpoint almost, you know, $455 million. So we have adequate liquidity to both do M&A as well as share buyback. But it's just simplicity for our assumptions for the four-year guide. You shouldn't take that as we're not doing any buybacks for the remainder of the year.
spk10: Okay, great. Thanks very much, Chris.
spk09: Your next question is from the line of David Begleiter with Deutsche Bank. Please proceed with your question.
spk07: Thank you. Good morning. Robert, just in performance codings, it looks like in Q2 you were able to off-start RAS with price actions. In Q3, do you think that can be the same dynamic pricing off-start RAS, or do you expect some negative raw price mix in the quarter for performance codings?
spk02: I think we've taken actions in both our refinish end market as well as our industrial end market pretty real-time in terms of cost inflation. and additional pricing actions that we need to take. As you saw in our prepared remarks, as well as our commentary, we are forecasting additional raw material inflation in the third quarter in terms of what will actually flow through. flow through our financial statements. So, in general, we are expecting to continue to be able to offset it on that side of the business, as we have seen in previous cycles. And then on the mobility side of the business, of course, there's a little bit of a lag, given the difficult conversations with that customer set, as well as the timing of how the index contracts work.
spk07: Got it. And just to finish, Rob, you mentioned that body shop activities below miles driven in both the U.S. and Europe. Why is that occurring?
spk02: Well, we've seen, you know, if you look at the data, you know, I think in June, North America miles driven are projected to be up about 105% of pre-COVID levels. In EMEA, about 112% of pre-COVID levels projected. looking at pre-COVID seasonally adjusted levels. But we do still see collisions and thus body shop activity in terms of actual collision data, as well as through our point of sale and customer support systems in the body shops. We've got a good read on the amount of paint that's being made on a sort of unified basis. And when you look at that, it has everything to do with traffic congestion levels returning to normal levels. So I'd say that we expect to see that trend continue until we get to September when we expect that back to school and back to work will result in greater traffic congestion at more typical times of the day and thus cause collision activity to return to more normal levels. That's our expectation at this time. And Dave, just to add, we've seen somewhat of a lag between miles driven and collision rates, but as Robert pointed out, The congestion factor is also an element. But, you know, when we noted for your guidance, we had expected volumes to be down opposite 2019, high single digits. You know, we've seen the pace of recovery in the second quarter come back much faster than anticipated. And we're now expecting volumes to be down, you know, mid-single digits. So it's certainly a nice development that we've seen over the last few months.
spk07: Very helpful. Thank you.
spk09: Your next question comes from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question.
spk02: Yes, good morning. Several other coatings companies have pointed not only to the level of raw material cost inflation, but also the availability of certain raw materials as being a constraint on their own production. Have you been able to navigate through this period without availability constraints? And if so, would you expect that to be the case in the third quarter as well? We've navigated actually quite well. While we haven't had shortages, we certainly have had tightness in various materials due to supply chain disruptions. Specifically, just isocyanates, acrylic emulsions, and certain polyester resins have been most challenging. But despite the market situation, we've secured supply and have largely been able to keep pace with the strong demand for our products. But there still have been some impacts on sales volumes as well as impacts at our customer level. which has left certainly some sales that we could have made if we'd had the availability of raw materials to make them. So I think the results that you're seeing here in the second quarter are constrained results. So when you put that constraint plus the semiconductor impact, I think you're stepping back, Kevin. We really couldn't be happier with the beat that we achieved this quarter. We delivered on what we said we would, despite all of the constraints that were imposed. So I'm really proud of our performance. Chris, I just wanted to add on to that. I think the real effect of that tightness is showing up in pricing for raw materials that we've been buying. So for those of you who have noted, not only ourselves but others have seen higher than previously forecast raw material inflation, a lot of that is directly the result of the tightness that you're seeing and which persisted through the quarter longer than was previously expected. So that's really the biggest effect. More than missed sales, it's the levels of inflation that you see as a result of this very, very tight supply. Yeah, I think Chris makes a very important point, and our focus has been keeping our customers running. and helping them deal with the issues that they've had to deal with. So where we've had to step out and buy at the spot market at significantly higher prices because of how low the supply has been in certain materials, we've done so. But you certainly have seen the impact of that from a cost perspective. Thank you for that. Secondly, I wanted to follow up on the prior thread of discussion regarding price mix. Looks like you ran up 14% in the quarter in performance. How would you characterize the underlying price trend exclusive of mix and refinish as well as industrial? Yeah, so on the refinish side, we realized about 21% in price mix, roughly 5% of that 21 was pure price. and we were closer to 6% non-industrial, and I would say the vast majority was actual price realization.
spk08: Okay, perfect. Thank you so much.
spk09: Your next question comes from the line of Bob Court with Goldman Sachs. Please proceed with your question.
spk08: Thanks very much. Robert, I was wondering if you could help me on the raw materials, the source of the tightness there. Is your analysis suggest there's just not enough of those raw materials capacity in the world, or was it a product of the supplier disruptions, force majeures? In other words, what's your comfort level as we get some of that production normalized that you could see some relief versus remaining in a very tight and constrained environment for the foreseeable future?
spk02: Well, the actual pricing, I mean, there's a price component and then there's an availability component that's driving price. And I think everybody can get a pretty good bead just looking at some of the input costs on what the actual inflation is just on pure kind of underlying oil price. But as it pertains to availability, supply constraints across the supply base have certainly been a driving factor, including myriad force majeures across pretty much you know, all of the coding, not all the categories of purchase, but certainly the majority of the categories. That's really been combined with a pretty significant demand recovery that we've all seen globally. And then we've had several global logistics bottlenecks, whether it's containers coming out of China or just mismatch of supply and demand from a logistics perspective in different points around the world. And, you know, Winterstorm winter storm, you know, URI that occurred earlier in the year in Texas, you know, you might say, well, why are we sitting here in July talking about that? And the reason for that is it created a pretty significant backlog of product that had to be made. And, you know, given the length and the severity of that outage, outages in suppliers there certainly did create a backlog that they're still working through in some cases and are not totally back up. So I think we've taken a relatively conservative estimate of both the underlying price inflation as well as what availability could be like in the third and fourth quarter based upon what we're seeing in the marketplace currently. Things could be a little bit better than we're expecting. We'll just have to wait and see.
spk08: And maybe related to that, some conservatism, your light vehicle build rate, you acknowledge, is quite a bit below the consensus expectations or maybe the consultant expectations. Is that just a function of you think they're inevitably going towards your numbers, so let's get there quicker and not see a thousand paper cuts as the consultants keep lowering their numbers? Or what's the basis for your differential there?
spk02: Well, I think as you described it, Bob, that's certainly one aspect that ran through our minds. But we really spent a fair amount of time this quarter doing some homework, speaking with actual semiconductor experts from various different consulting firms and from industry to try and triangulate, as well as with some customer feedback around what we think the assumptions could be. And so we believe that the 7 million units globally that are not going to get made this year based on semiconductor shortages is actually a reasonable expectation. And we think that the assumptions we have around materiality and expected duration of the headwind are reasonable. We certainly hope that the situation is better than that, but we certainly didn't want to have that perspective go out with a more conservative number and then report Q3 earnings and say, no, actually, it ended up being worse than we thought. So I think we've tried to take the approach of being somewhat conservative in our view here and going out with what we think the full year number is based on. And that's not based on automotive forecaster input. That's based on actually speaking with consultants who actually work directly in the semiconductor industry and have put together a supply-demand buildup by industry across all industry, whether it's consumer, industrial, et cetera, and looking at when you start to see supply exceed demand.
spk08: Great. Thanks for the help.
spk09: Your next question comes from the line of Mike Harrison with Seaport Research Partners. Please proceed with your question.
spk03: Hi. Good morning. You had kind of suggested that you didn't think that much of the refinish strength was driven by restocking. But you also commented that there was some normalization in the mix that may have been driven by some inventory normalization. So can you just maybe give a little bit more color on what you're seeing in terms of refinish distributor inventory levels and kind of buying patterns as we get into the second half?
spk02: As we said before, and I think continues to be the case today, we have not seen a large distributor restocking. At this point, I think everybody is still waiting to see what happens in that September-October time period in terms of return to work and return to school before we're going to see distributors really stock back up on inventory. They continue to run at relatively thin levels, but what you are seeing is due to the increase in in accident rates and activity at the body shop, you're starting to see them buy more. So that's really where the volume normalization is coming from. That's yielding the price mix that you see this quarter. It's not because of a bigger stocking.
spk03: All right. And then a lot of the supply disruption impact conversation has been focused on the chip shortage. But in your slide deck, you also mentioned some constraints in America's building products and in global general industrial. Can you give a little more color on what you're seeing there in terms of raw material availability or supply chain disruption, and is that fixed at this point, or do you still expect some additional challenges in that industrial market in Q3?
spk02: We continue to see tightness in acrylic resins, which is one of the major components of our wood coatings business, and that's At an industry-wide level, it's not specific to Exalta. We have seen some additional capacity come into the system and certainly a broadening of suppliers in the marketplace that are producing acrylic resins. And so we think it could be a little bit better. But if we look at the underlying demand that we have in that business, it's quite strong. So the way that we think about it is although we expect the business to continue to perform well, it could be performing much better, you know, if we weren't limited on the supply in particular of acrylic resins.
spk03: All right. Thanks very much.
spk09: The next question comes from a line of, Arun Viswanathan with RBC Capital Markets. Please proceed with your question. Arun Viswanathan, RBC Capital Markets. Please proceed with your question. Arun Viswanathan, RBC Capital Markets. Please proceed with your question.
spk04: Arun Viswanathan, RBC Capital Markets. Please proceed with your question. Arun Viswanathan, RBC Capital Markets. Please proceed with your question. Arun Viswanathan, RBC Capital Markets. Please proceed with your question. Arun Viswanathan, RBC Capital Markets. Please proceed with your question. Arun Viswanathan, RBC Capital Markets. Please proceed with your question. Arun Viswanathan, RBC Capital Markets. Please proceed with your question. Arun Viswanathan, RBC Capital Markets. Please proceed with your question. Arun Viswanathan, RBC Capital Markets. Please proceed with your question. Arun Viswanathan, RBC Capital Markets. Please proceed with your question. Arun Viswanathan, RBC yet your EBIT guidance is only down, say, $25 million. So, you know, at the midpoint, it does appear that there's, you know, price actions that are successful. And if you look at the Q3, Q4 guidance, it looks like you're expecting a lot of those to be successful in Q4. So I guess, is that the right read? And so if we think about price costs for the rest of this year and into next year, when do you expect that, you know, say $160 million raw material headwind to abate? You know, is that kind of a four-quarter dynamic? And maybe just give us your thoughts on, or is it sooner, just giving the Q4 guidance? Thanks.
spk02: Yeah, it's hard to judge exactly when it'll abate. We do expect fourth quarter to moderate slightly versus Q3 highs. But I think what you can take away as far as the price-cost dynamic, we will continue to take action on the pricing side. We would expect by the end of the fourth quarter, from a run rate perspective, we'll be largely caught up in the price-cost gap. And we're also consciously looking at our cost structure. So you did see we did take a charge this quarter, which will really start to accrue those benefits in 2022. But we're also being extremely mindful of discretionary spend until we actually see that moderation in oil prices.
spk04: Okay, great. That's helpful. And then maybe just a medium to longer-term question. If I just go back to some of the targets you laid out at Investor Day, You noted 9% to 10% total sales growth, including acquisitions, 4% to 5%, X, and levels of EPS around $3 by 2024. So I guess obviously this one quarter isn't going to make a big difference, but maybe I can just get your thoughts on how you see those longer-term targets, if they're still intact, and what it would need, you know, from an M&A standpoint to get there. Is it more deals similar to you, Cole? You know, I guess my impression was that you'd be focusing a little bit more on the industrial side. So maybe you can also just address how this came about so quickly. Thanks.
spk02: In terms of our longer-term goals, we're very excited about the direction of the company. I think nobody could have foreseen the semiconductor situation or kind of the dramatic increase in raw materials that we've seen here in the short term. But in terms of the longer-term goals of the company, if you look at what we're doing commercially, what we're doing organizationally, what we're doing strategically, I think we feel very confident in our ability to achieve those goals. And as we've said, it's not going to be a linear ride upwards. There'll be some variability to it. So I think it's just normal in this type of business, in the type of world that we're in today. So I think we're very confident in our forward-looking members.
spk09: Thanks. Your next question comes from the line of Josh Spector with UBS. Please proceed with your question.
spk01: Hey, guys. Thanks for taking my question. Just around the guidance and specifically fourth quarter, if I look at what you're implying for the EBIT and performance codings, it looks like to be a fourth quarter record and a significant improvement sequentially. Is that a sustainable level that we should bridge off of as we look into 2022? And I guess, is there anything one-timish that we should be considering as we look at that quarter?
spk02: I mean, your rate drill in the fourth quarter, yes. I mean, at the midpoint of the range, we're going to be up around $280 million from an EBITDA perspective. It's hard to say if it's sustainable. I mean, it really depends on what happens with raw materials and ultimately what happens from a a pricing perspective um but you know as we get further into the second half of the year we are expecting you know the pricing actions really start to showing up as well as we'll continue to get momentum on the uh the cost structure side of the house the other aspect that i would add to what sean said is that you know we have taken uh during covet a number of actions uh to our cost structure and our cost structure is in a fundamentally different place So the drop through that we expect to see moving forward is different than the drop through that we've seen historically. So as we see a rebound in the refinish business, the continued performance of the industrial business, as well as if refinish, not refinish, if mobility surprises to the upside there, the profitability of the drop through that would occur is pretty substantial.
spk01: Thanks. That's helpful. Appreciate that. And just on you, Paul, you know, I appreciate the 2021 estimates that you provided. How does that compare versus the performance of that business a couple of years ago? You know, is it similar to what you guys are seeing in refinish, or is there anything notable to point out there?
spk09: Yeah. You know, we've certainly seen that business grow over recent years, and it's doing very well.
spk02: We don't have a report out that we can provide on prior performance, but it has been a successfully growing business over time.
spk01: Okay. I guess, can you frame that relative to 2019 at all? So if you're thinking refinish this year for you guys is down 5%, is that a kind of similar performance for you, Paul, or meaningfully different?
spk02: I think we'll – Given we haven't actually closed on the transaction, we're being a little careful about sharing too much on the UPOL acquisition. We'll be in a better place once we actually have it closed to provide a little bit more insight into the historical financials. Okay, thank you.
spk09: Your next question comes from one of Jeff Zekowskis with J.P. Morgan. Please proceed with your question. Thanks very much. In the refinish area, sometimes your mix is negative and this quarter it was positive, and then there's the reverse in mobility.
spk10: What's the average mix? That is, did you over-earn in the refinish business and you under-earned in the mobility business? And can you size that? What's the impact either for the quarter or for the year?
spk02: Jeff, I wouldn't characterize it that we over-earned on the performance side of the business and under-earned on the mobility side of the business. When we did see the volumes in the refinish business during the COVID period in particular, and as we were first coming out of COVID, of course, we saw volumes drop pretty dramatically, in particular at the premium end of the market. And we saw distribution essentially take inventories down to extremely, extremely low levels. And in particular, premium, high-moving, high-margin products. And so that volume impact also has a – there's a mix impact, but there's also an average price impact. And so what we had said before was that as volumes come back in the refinished business, we'll see price mix really start to normalize. I also think that looking at second quarter of this year compared to second quarter of last year, it's a really tough compare to draw too many conclusions from because last year's second quarter, you know, really the depth of COVID in terms of impact on financial performance just really creates some aberrations. I do think that the encouraging thing to look at is just pure price capture in refinish and industrial, which were 5% and 6% respectively. In terms of the mobility business, it really has a lot to do with customer as well as regional mix. And some customers were more impacted by the semiconductor outage than others. And that certainly played into average price mix in the mobility business, as well as we saw some regional differences in terms of some regions performing better than other regions in the second quarter as it relates to the semiconductor shortage directly that has an impact on price mix.
spk10: So if I could just re-ask the question, did you have a normal mix in refinish and a normal mix in mobility, or was it below average, or was it above average?
spk02: So refinish is getting back to a more normal mix as our volumes are getting back to more normal levels. Light vehicle, as Robert pointed out, it was just such an anomaly last year that you're ending up with an odd result. But I wouldn't say we're at normal levels yet for light vehicle, given the impacts from a semiconductor perspective.
spk10: So you think your mix is below average in both segments? Is that the conclusion we should take?
spk02: That is a fair read-through. Okay, great.
spk09: Thank you so much. Ladies and gentlemen, we have reached the end of the question and answer session, and I'd like to turn the call back to management for closing remarks. Thank you, everybody, for participating this morning.
spk01: As always, we look forward to any follow-up conversations you'd like to have. I would appreciate your interest in Exalta, and have a great day.
spk09: This concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.
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