Axalta Coating Systems Ltd.

Please stand by, your program is about to begin. Ladies and gentlemen, thank you for standing by. Welcome to Accelta Coding Systems Q2 2025 earnings 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 our replay will be available through August 6th. 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 Lubick, Vice President of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us to discuss Exalta's second quarter 2025 financial results. I'm Colleen Lubick, Vice President of Investor Relations. With me today are Chris Villaroyan, our CEO and President, and Coral 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 Exalta.com, which we will be referring to on this call. Our remarks today in this slide presentation may include forward-looking statements reflecting our current views of future events and their potential impact on Excel'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 this 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 three. 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 Exalta'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 deliver 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 pre-cash flow to 101 million, a great result. With that, let's turn to slide four. 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 US 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 collision 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 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 obtaining 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 more favorable repair environments. Our expansion into economy and customer-centric innovation such as the fast, pure, low-energy system that reduces energy usage and boots 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 five. We remain focused on our aid plan with excellent execution in the first six 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 discipline focus on cost management drove a 6% year-over-year reduction in operating expenses. Since announced, our transformation initiative has driven approximately $40 million in cost savings. We've also taken decisive action to optimize our industrial footprint by closing three manufacturing plants in the last year. These actions have streamlined our operations 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. Exalta's NextJet was recognized as a 2025 automotive news-paced 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 Exalta 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 six.

In the second quarter, net sales totaled $1.3 billion, down approximately 3% year-over-year, primarily due to lower volumes in performance codings. This was partially offset by positive foreign currency translation. and contributions from CoverFlex. Gross margin improved by 100 basis points, 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, our 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 seven, 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 Coverflex and foreign currency translation benefits, primarily related to the appreciation of the euro. Refinished 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 CoverFlex and foreign currency translation partially mitigated these declines. 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, predominantly in North America. Positive price mix and favorable foreign currency translation partially offset the impact from lower volumes. In the second quarter, performance codings 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 effect. The team's ability to manage variable and operating costs effectively demonstrates why we expect to see improved earnings conversion when revenue influx positively, which we anticipate to occur in the fourth quarter and into next year.

Let's move to slide eight.

Mobility coding second quarter net sales were $469 million, an increase of 1% from the prior year, with organic sales contributing approximately two percentage points of growth. Light vehicle net sales were up 2% in the second quarter, driven by organic net sales growth in three out of the four 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 A 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 were 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 off our interest expense this quarter, a 10% improvement year on year. We are also on track to achieve the APLAN 2026 interest expense target of $180 million for the full year 2025, one year ahead of plan. Our total net leverage ratio remains at 2.5 times, consistent with our APLAN 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 had assumed a gradual easing of tariff-related uncertainty and a rebound in consumer confidence heading into the back half, particularly in North America. 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 positive price mix year-over-year in three of our four 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 winds in Brazil. Further, Europe will step back similar to past seasonal trends, with slight offset stemming from price-based benefits. We project adjusted EBITDA between $290 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 and $5.275 billion, representing an approximately 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 a 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 discipline 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 two years that extended into this quarter reflects the strength of our diversified portfolio and strategic progress we're 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 base coat, a breakthrough technology that is designed to enhance efficiency and expand color capability, particularly for high chroma finishes that are increasing in demand. Our NextJet digital paint technology, developed in collaboration with best-in-class partners like Durer and Saar, is another standout innovation. This massless two-tone application system is already being piloted with a top global OEM and is expected to deliver significant benefits to our customers. These are just two examples of how we are creating tailored, high-impact solutions that deepen customer partnerships and differentiate Exalta in the marketplace. In commercial Waco, 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 NetView 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 Xalta 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 Xalta Iris, 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 UPOL business. 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 strong growth trajectory in 2026 and beyond. In industrial, we're on track to deliver some of Exalta'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 aid 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 Exalta'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 longstanding customer relationships. This concludes our prepared remarks. Thank you for joining us today. Operator, please open the line for questions.

Thank you. And at this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may withdraw your question by pressing star 2. Once again, to ask a question, please press the star and 1 on your telephone keypad. We'll take our first question from Chris Parkinson from Wolf Research. Please go ahead. Your line is open.

Awesome. Good morning, everyone. So the U.S. refinance 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, you know, three or so quarters. Thank you so much. Sure.

Good morning, Chris. Sure, I'll take this one. So, you know, as I said in my prepared remarks, what we're seeing is accidents are still occurring. So, you know, and from what we did was we did a ton of research also, you know, if you listen to our peers as well as our distribution partners. What we can see is accidents are down probably about 1 to 2%, you know, in terms of looking at pretty much all the states. But where you are seeing the disconnect obviously is in claims. And this is really coming from, you know, as I said in the remarks, where cost of insurance is and certainly where repair costs have gone. And certainly, you know, I think this is something that is, you know, we knew was coming. I would say, you know, if you looked at the last, to your point, three quarters, but beyond that, if I looked at the last two years, we certainly have seen inflation, both in insurance rates and certainly in the cost of repairs. The good news is that we are seeing that abate. And I think, you know, as we looked at data as coming into this quarter, as well as if you look forward, even in terms of how we're driving our guide for Q3, you're certainly seeing that what we're seeing is that this is starting to abate or at least stabilize. I'm starting to see insurance rates starting to flatline. And certainly because backlogs are also starting to come down from the time in terms of our MSO partners, what you can see is with backlogs starting to come down from the pre-COVID levels, what we see is the opportunity for cost here at the repair shops also to abate. So I do believe that this marketplace will change. I do believe this is probably sometime in 26. So that's the perspective we have. In terms of our distribution partners, They're facing some of the similar challenges we did. So coming into the quarter, as well as I would say coming into the year, they were sitting on excess inventory. And if you look at how we approach the market in the U.S. versus Europe, in Europe, we go to market with retail as well as distribution. And we're certainly seeing less challenges there. In North America, obviously, our distributors are doing the right thing and they're great partners and they're essentially adjusting their inventory to reflect the current market conditions. I believe that usually takes a couple of quarters to sort out. So, again, I believe that will also sort out into probably the early part of next year. But at this point, you know, the good news from our perspective is as we look at Q3, we see stabilization. And you can see that in our guide. We're essentially guiding for a record Q3, which essentially states that we believe there's some level of stabilization in the marketplace going forward.

Got it. Just as a quick follow-up, you know, Chris, there's always been this undertone of cost improvement, you know, given the Exalta story, essentially dating back to the IPO. You seem fairly optimistic, and your execution, in fairness, showed at this quarter, especially mobility, but you seem fairly optimistic that the margin story and the productivity story and the manufacturing actualizations are still in the early innings. Can you just give us an update in 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 from when you began to be CEO? Thank you.

That's a great question, Chris. I'd love to answer that. So, you know, if you think about our A plan, we're just two years into an A plan. So this is not, you know, two sessions of an A plan. You know, we haven't done six years of this. We've done just two years of it. And just looking at what the team has been able to accomplish in two years, you've got to put in perspective that from a cost standpoint, with all that we've driven, it's about $300 million. So it's just an enormous accomplishment. And I look at it as the multitude of buckets, what we've done in operational excellence in terms of footprint and what we've done in productivity, what we've done with material performance across direct and indirect materials. as well as then what we did with the transformation initiative. And across all of those, I mean, just true kudos to the team, we're well ahead of plan across all of them. Material performance has been well ahead of plan for now six quarters. I look at transformation, we're ahead of plan. And then finally, I think we're in the early innings of our operational excellence plan because we've just done some plant optimization and we're just installing the capital to really get the productivity in place. So I see that as incremental opportunity. That said, Chris, I think the one thing is Exalta still has $3.5 to $4 billion of cost. We have $1 billion of labor and burden costs, and we have $3 billion between direct and indirect materials. So there's still a large portion of cost that I believe that provides an opportunity. And why I believe that is in the current marketplace, there is now excess capacity. I also see new capacity coming in for supply from a supply standpoint in Asia. So I do believe that there is still upside on material performance in the future. On top of that, everything that I see with AI and technology, what we can do to provide services will vastly improve. And the simplicity of that is even the Nimbus tool, how we access our customers in the refinish space. Next year, we're going to put 40,000 Nimbus platforms across our body shops. That'll provide us data on efficiency and productivity across our MSO customers, as well as give them the ability to order online on our full suite of products, that drives enormous levels of supply chain efficiency and sales efficiency. And then I think there's even more we could do with AI on our, let's call it, back office and customer service side. So I do believe there's still a true story, and we're still in the early innings, of our, let's call it our operational performance story or our cost story. And I do believe there is still upside on our margin story. And I look forward to telling you about that in the next state plan.

Thank you for the detail.

Thank you.

Our next question comes from Gansham Punjabi with BERT. Please go ahead. Your line is open.

Hey, guys. This is actually Josh Thessaly on Fagansh. And thanks for taking the question. You know, I just wanted to go back. You guys gave a good chart in one queue, just focusing on your organic net sales performance relative to, you know, industry volume performance. I wonder if you could, you know, just go through that specific two queue, just talk about how Exalta performed amongst your business units relative to broader end market performance. Thanks.

Good morning, Josh. Yeah, so from an organic perspective, you can see top line, we were down about 3%, obviously, from a consolidated basis across all of our markets. If I break it down by business, I would say mobility continues to perform extremely well. So we were up in three of the four markets. When I kind of look at just across mobility, which is more of a light vehicle story, I think commercial vehicle, that continues to be really A great story for Exalta. So if you look at Class 8, that market was down about 17% in the quarter year on year. And you can see we were down very low single digits in commercial vehicle. And that was really driven by just continued outperformance in our CTS business, as well as outperformance even within commercial. execute extremely well. And the industrial business, we're down about 6% on a year-over-year basis. I think we're seeing that kind of in line with the markets that we participate in. And then the last one, if I look at really, is what's happening in refinish. Chris kind of articulated what's happening here in North America. But if I look at, you know, we continue to perform and outperform markets in Europe as well as in the rest of the world as well. So, again, I think we're very excited for the performance in the quarter. And just as a continued reminder, this is a record EBITDA and record EPS quarter for Exalta. in a pretty tough macro. And I think we're more excited about when revenue does inflect positively that we will outperform quite dramatically.

Okay, great. Thanks. That was super helpful. You know, maybe one more for me, just focusing in on guidance. You know, if I look at, you know, the implied Justin Ivita 4Q guidance for the remainder of the year, you know, implies a pretty healthy step up on a year-over-year basis. And, you know, So just wondering if, you know, 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.

Yeah, no, I mean, again, as we look at overall from a company perspective, we continue to execute. So we have, you know, there's continued opportunities we're seeing in cost actions. We are anticipating that, you know, don't forget in the fourth quarter, mobility revenue will step up from where it's kind of running at in the third quarter. We're also seeing refinish will begin to inflect a little positively as well, which will actually help overall margin story and the EBITDA story for us. So, as you can see in the guide, we did take it down slightly, about $10 million for the year, kind of at the midpoint or at the low end of the range. But I would say, given the performance that we just did in the first half of the year, we obviously are very committed to ensuring we deliver the guidance we set forth.

Okay, great. Thank you very much. Thank you.

Thank you. We will move next with John Roberts from Mizuho Securities. Please go ahead. Your line is open.

Yeah, thank you. 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-US MSCA compliant cars, are you seeing any positioning yet in Canada and Mexico in anticipation of kind of the tariff changes?

Actually, for us, John, thanks for the question. When I look at last quarter, U.S. was actually a bit weaker because some of the customers that we had took some shutdowns. For us, the strength really came, as it continues to, from China and LATAM. China, the market was somewhat stable, but we continued to grow and outpace the market. And LATAM, obviously, with our new business wins, was just a great, great story for us. Another good story, and Carl hit on this, three out of the four quarters, sorry, regions were up for us. And Europe was also good in terms of the market was stable and we also outperformed the market slightly here. So those were three good news stories for us. Specific to North America in terms of pull forwards, we actually saw some of our customers down for a period in North America. So we do expect actually a little bit of a step up Beyond just the normal shutdowns that we have in Q3. So, my objective, our objective is actually to see probably consistent volumes. And to the point that Carl made, I think, on top of what we're seeing in light vehicle, I would say light vehicle is up. Bills are up slightly to from 89 to let's call this 89.2 to 89.4. We expect, I think, probably about a 1% to 2% increase based on our performance to the back end. A lot of it is which is coming from China and LACAM. On top of that, and I know you didn't ask about this, but the commercial vehicle story, Carl gave you a perspective of Q3, but when we look at the full year, we're expecting the market to be down probably about 25% to 30%, but we will be up probably 1% or 2%. That's really driven by the fact that the team has just done an incredible job of really selling into the commercial transportation space. space and just taking the downtrend volume from Class 8 and being able to quickly pivot and really do a great story selling into the CTS space.

Great. Thank you.

Thank you.

Our next question comes from Duffy Fisher from Goldman Sachs. Please go ahead. Your line is open.

Yeah, good morning. I was wondering if you could help size, you know, you talk about 1,600 new body shop wins year to date. How does that compare to last year? What does that mean as far as kind of incremental revenue, you know, for you guys this year? You know, is there a load into that that's in anniversaries? And then roughly how long do you think you can keep this pace? It seems like a very big number relative to the number of body shops in the U.S. So is there a half-life on this where you can do it for another year or two years?

Well, that's a great question. We've actually done 10,000 body shops over the last four years, Duffy. And if you look at it, I mean, we've normally averaged about 2,400 to 2,600 a year, and that was what we had last year. So it's a great news 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 CoverFlex 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, you know, we can continue at this pace as I think about the back half of the year. And certainly, you know, 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 four years.

Great. Thanks. 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 two U.S. peers that have given us data. You know, 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 that should mean revert?

Yeah, Duffy, as we look at this, the quarter played out exactly as we were planning and what we shared with you and the investor community last quarter. So Chris talked, there is destocking going on with one of our large customers. That will continue to play out probably through Q3 and maybe towards the end of the year. But overall, we continue to win in refinish. We are winning in North America. in EMEA and across the world. We are extremely bullish about our refinish business as we move forward. I think this is temporary. And every measure that we look at, Chris kind of articulated some of the recent trends on costs and repair. One interesting perspective as well, as we think about some of the reconditioning companies out there as well, we're seeing pretty significant increases. in activity. And I think that usually tends to be a precursor for where the market's going to go in the future. So overall, I mean, this is the number one question we get. I would just keep pointing out that even in the quarter that we just announced, Exalta had its best EBITDA and best earnings per share in the history of the company.

Maybe just adding to what Carl said, And I think we're referring to CarMax and Carvana. And in reality, if we think about lease cars coming off, two 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 lease cars get traded in, even if a consumer doesn't want to fix a ding, A dealer wants to fix that thing before that car is sold. And so we do believe that this market will inflate and change here in the future.

Terrific. Thank you, guys. Thank you.

Thank you. Our next question comes from Matthew Dio with Bank of America. Please go ahead. Your line is open.

Thanks. Question for you, I guess. So Plan A obviously gone wrong. going really well, earnings are up, margins are up, and markets aren't cooperating. But I think generally people agree the exalt the house looks increasingly in order. I know you kind of answered Parkinson's question a bit on more to do on the cost front, but I'm just thinking about it's kind of a rare opportunity where one of your larger peers is kind of finally looking inward. And so wondering why right now Is it a better time to make a play and do something a bit more structural with your portfolio here? Yeah, I'll just leave it there.

Yeah, so I think, thanks for the question. First, coming in, one thing that we wanted to do was certainly drive the margins to a point that we believed that we could get the businesses to. I think the first objective was to you know, looking in the past two years, we wanted to make sure the foundation was at a strong point. And that was not in terms of one business, but it was across all three businesses. And if I look at, you know, where margins have come, you know, we've done, you know, 1,500 basis points of margin improvement, even if we look at mobility, and certainly, you know, over 1,000, if I look at where we've come in terms of industrials. And the targets, to your point, that we set on industrial, we set a target of 400 basis points improvement just less than two years ago, and they're going to be well north of that as we finish the year. But primarily the objective was to set the foundation at a good place and then to make choices on if there were opportunities. I still think there is still a little bit more to be done on the cost side and the margin side. Even with the current marketplace, I would tell you that for us, if I looked at the four metrics on the financial metrics that we had, with the exception of obviously where we are with markets and sales, we will hit all the other four A-Plan metrics a year ahead of plan or by the end of this year. And one of those other metrics that we have to hit is then $1.2 billion of EBITDA, which comes off 21% or 22%. And my plan is to make sure that we certainly hit that next year. And even with the current markets, I'm absolutely confident this team will certainly get there. So then to your question, what do we do next? And what we want to do is probably by February, spring of next year, we'll give you a plan, which will essentially walk us through where we're going through A2029 or the next three years. And that'll give you a perspective of what we want to do, maybe with some of the portfolio, as well as where we believe there's opportunities for growth. Because we want to pivot. Exalta has one of the strongest margins in the coatings industry, and we believe we can take this platform and build on it and drive growth and also drive a little bit more margin. And I look forward to giving you that perspective in about six to nine months from now.

Okay. And if I can follow up, price in auto OEM was nicely positive on the quarter. You mentioned kind of the one-time true up. How are you able to do that in a world where I guess one of your peers is talking about index pricing lower, and should this carry through the next 12 months, or is this just – I mean I assume versus just like a one-quarter thing? Can we flesh this out a little bit?

Yeah, I wouldn't say it's a one-quarter issue or one, Matt, as I look at it. There was, we did call out there was some benefits. We called it one time. But there, if you look a little closer, there's about eight discrete actions that the team executed across every single region. And so, yes, these will not repeat. That's why we kind of referenced, you know, that they're kind of one time in nature. But this isn't just, you know, one item. This is, again, this was just a part of the execution. in mobility, especially in what we're seeing in light vehicles. So I think as we look forward, that the margin profile of the mobility business, even if I was to strip out some of this benefit, we still did well over 18% EBITDA margins in the quarter. And as I look forward, from where we did last year, we're going to be well north of 17% for the full year for mobility. So Great performance, price mix will be positive for the entire year. And again, it just speaks to what we can do from Exalta, and that's what we can execute. I think that's been proven every single quarter over the last two years, and that will continue as we move forward.

All right. Thank you. Thank you.

Thank you. Our next question comes from Josh Spector with UBS. Please go ahead.

Yeah, hi, good morning. I just had two 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 pointer to a 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 on fourth quarter just given some of the commentary around refinish maybe not improving until 2026 how do you have visibility in that thanks yeah thanks josh yeah relative to the mobility pricing as i just articulated we we have it said there is a very specific to street actions that are across the board in every single region that the team executed on. And so I think some of those were one time in nature, but the rest of what they were able to do is more sustaining. So don't forget, we are ramping up new business in Brazil, which has definitely a positive impact in price mix for light vehicle. We also have had some businesses that have shifted around in other parts of Latin America that's also positive for price mix that will continue. So that's why I think as you look at that business, you know, we're very confident in our ability to deliver, you know, well north of 17% margins for the full year. And then as I look at the fourth quarter, again, if you look at just – we sometimes get caught up in the year-on-year comparisons on refinish. But sequentially, if you just look at what refinish has done, Q1, Q2, and, you know, added in our guide for Q3, the revenue has been roughly flat. And to Chris's point, that has been, you know, we're seeing some stability in that business. I think the year-on-year comps don't look as good, but if I look at a sequential basis, we're seeing that stability. And as we look into Q4 and what we're seeing, especially with the channels, with what we're seeing in EMEA, that we do expect that to pick up. And so we have a high degree of confidence that, you know, that will occur.

And more importantly, that will deliver on our guidance for the year.

Thank you. We'll move next with Vincent Andrews with Morgan Stanley.

Please go ahead.

Thanks, and good morning. I wanted to ask about price and performance codings, 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 when it came in. down 2%. So if you could talk about that a little bit and then I have a follow up.

Sure. So I'll take this one. Good morning. So the first thing is, you know, two reasons. The first one is obviously, you know, our strongest margin performance region is North America. So when North America is down as it was in the last quarter you get a negative mix impact primarily because of the size of north america it's not something that our performance in europe latam and asia can offset especially with the scale of the the decline year-over-year comp on uh specific to north america but the second reason was it's really our strategy it's our growth story if you really put it in perspective where we wanted to grow was mainstream and economy and as i said We had record number of mainstream and economy body shop wins in Q2 with the highest in Exalta's near-term history or as far back as we can look. And so that was a great story of number of wins. But those are actually going to come in even probably in Q3 and Q4. But our performance to the mainstream and economy segment essentially means the price point is lower. So it actually impacts us from a mixed standpoint as we grow this. For us, obviously, from let's call it a refinish margin perspective, the mix is negative. But for overall Exalta or for overall performance codings margin, it's actually accretive because of the size of the scale of how it impacts us.

Okay. Thanks for that. And if I could just ask, you know, if I think about the sort of value chain of refinish and I think about, you know, three things that were talked about today. One, obviously there's less claims coming from the consumer. You also mentioned that body shops still have backlogs. but that your distributor customers are destocking. So I'm just trying to reconcile that situation because it would seem to me that the body shops still having backlogs wouldn't so much be hurting your volume. And it just seems like there's a little tension between less claims still having a backlog and distributors destocking. So if you could help me connect that, I'd appreciate it.

Sure, 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, you know, body shops are having to find or being more cost competitive because backlogs are starting to come down from where they were, you know, two, three years ago coming out of the pandemic. So the reduction in backlogs, you know, as you could imagine, even if it's in auto or in commercial vehicle, essentially means that, you know, the body shops are becoming more cost competitive. So that's why that we're starting to see more abatement in, let's call it, repair costs. So all of these three things are actually working in our favor for, let's call it, stabilization in what I believe the future costs will be and why refinish will pick back up.

Okay, that's very helpful. Thanks so much.

Thank you.

Our next question comes from Michael Sison with Wells Fargo. Please go ahead.

Hey, good morning. Just a quick one on, you mentioned total repair costs are stabilizing. I'm just curious, is there sort of an average cost right now, and how does that compare with, let's say, several years ago? Does that number have to get to a certain point where folks can afford, you know, the cost analysis makes sense? And then maybe a follow-up would be, can you talk about the car park? I think it's pretty old. So does that impact, you know, the refinish growth going forward?

Sure. So I think an average would be something around $4,700. I think, you know, it's incredibly varied and all over the place, depending on the type of accident. But I would say, you know, in terms of what we use as an average is about, you know, $4,700 to $5,000. I think, you know, if you put it in perspective, you know, what we 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 Exalta'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've done through the last three to four 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% or 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.

Got it. Thank you. You're welcome.

Thank you. We will move next with John McNulty with BMO Capital Markets. Please go ahead. Your line is open.

Yeah, good morning. Thanks for taking my question. So when you think about the 40,000 body shops that are going to have Nimbus and Iris technologies next year, how much does that add to the growth rate when you think about 26 versus 25?

Great question, John, and good morning. Maybe I'll just give it to you in our performance without those tools this year. Really, if I think about what Nimbus provides, Nimbus gives us access to not only provide the efficiency tools and just locks those customers with us, But it also gives us the ability to sell adjacent products. And so, you know, it's our ability to sell potties, fillers, everything else that is needed and improve our share of wallet with those customers. And a perfect example is without that tool this year and with the numbers that you saw in our Q2 results, we've been able to drive about 200 basis points. Two percent of our growth came from adjacencies. in just this last quarter in this challenging marketplace. So, you know, whatever we did with our acquisitions, plus, let's call it, you know, what we're doing with such as UPOL is certainly helping as I think about this challenging marketplace. And what Nimbus will do is provide us the ability to provide that access faster, you know, as opposed to waiting for sales teams or waiting for a phone call, we can now have access into those body shops and essentially be able to tell when folks are out. We can also help them with efficiency tools and get them products faster and also start driving promotions through those tools. So we see that as a great opportunity as I think about next year on the tool. And just, you know, going back, and if you think about the four things that we established as refinished fillers, it was supposed to be M&A, which we did Andre Co. and Coverflex. And Andre Co. is being a home run for us. You know, we've gotten 600 body shops in Switzerland, which are premium customers that we've been able to sell. again accessories on top of all all the products the coatings that we sell second one was adjacencies adjacencies upol has been great and you know bringing that to the us and now partnering it with tools like iris and iris mix helps us also push adjacent products through the digital tools The third one was really getting into the economy segment, which has worked out just really well in terms of what we've done in terms of body shop wins, a perfect example, again, record order for mainstream and economy. And finally, the last one was, you know, what we're doing with pricing, and it certainly also played out just as we wanted.

Got it. Okay. No, thanks for the caller. And then Question, you know, you highlighted on the building the future slide about opportunities for M&A and 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, you know, 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?

Well, that's a great question. I probably step back and, you know, take that in two ways. The first one is, you know, part of it with Exalta is, you know, we wanted to make sure that we earned the right to grow. And so from an M&A standpoint, we wanted to make sure, you know, that even when we went through a down cycle, which is obviously something that we're going through now, you know, that the acquisitions that we had made held and the core fund as it could. And certainly our margins reflect that we can. So that was one. And I would say the reason I'm giving you that is, so I believe we're ready, but one thing is with where we're trading right now, I think, you know, our options right now would be to probably look at more share buybacks. So from our perspective, I think there's an option with, you know, for us to look at internally at, you know, how we view share buybacks. But that said, there are more bolt-on acquisitions or targets out there, even in the current market. I think the current market's actually opened up more avenues for us. But at this point, as I think about the rest of the year, unless it's something that's hugely opportunistic that adds a real growth vector to our core strength, we'll probably be looking more at share buybacks through the rest of the year at the pace we've been doing it.

Got it. Thanks very much for the caller.

Thank you.

And we will take our last question from Alexey Yefermov with KeyBank. Please go ahead. Your line is open.

Thanks. Good morning, everyone. Can you just comment on productivity in such long-run 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 26th?

Yeah, thanks, Alex. Yeah, I think from a productivity perspective, we're going to be running around 20 million or so this year of productivity. And if we get into 26, It should be running minimally at that same pace, but we would expect hopefully to do a little bit better than that. So this is the, as Chris referenced earlier, we're in the early innings of driving productivity into our plants. That's not only sustainable, that will continue to increase year on year. So we have pretty good visibility at this point, but at a minimum next year, it should be greater than $20 million.

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

Yeah. So, yeah, I think the pricing is still positive for refinish. We're probably running about 2%, you know, increases on average for the year. And, you know, as we kind of look forward, we would expect kind of that price mix and 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.

Thanks a lot. Thank you. Thank you. Take care, everyone.

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.