Axalta Coating Systems Ltd.

Ladies and gentlemen, thank you for standing by, and welcome to Exalta Coding Systems Q3 2025 earnings call. All participants will be in a listen-only mode. A question and answer session will follow the presentation by management, and we request that you please limit yourself to only one question. Today's call is being recorded, and a replay will be available through November 4th. 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.

Good morning, everyone, and thank you for joining us to discuss Exalta's third quarter 2025 financial results. I'm Colleen Lubick, Vice President of Investor Relations. With me today are Chris Bilivarian, our president and CEO, and Carl Anderson, our chief financial officer. We posted our third 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 and the slide presentation may include forward-looking statements reflecting our current views of future events. and their potential impact on Exalta'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 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 look at slide three.

We're pleased to report another strong quarter with record-adjusted EBITDA and record-adjusted diluted EPS driven by our disciplined execution. Our team's focus on customer service and leadership in technology enabled us to outperform industry trends in many regions as we continue to secure new business across our global end markets. Net sales were approximately 1.3 billion. While the broader macro environment remains challenged, especially in North America, we're successfully navigating these headwinds. Industry trends were more stable in Europe, which represents more than 35% of our net sales. Global auto production was again a bright spot, with current forecasts ticking up in October to approximately 91 million bills for the full year 2025, a 2% increase versus 2024. We posted adjusted EBITDA of 294 million, with a margin of 22.8%. This marks 12 consecutive quarters of adjusted EBITDA and adjusted EBITDA margin growth year over year. The results demonstrate the culture of continuous improvement that we have established across the company. To that point, we expanded the adjusted EBITDA margin in both segments. Performance Codings adjusted EBITDA increased by 20 basis points from the prior year period to 25.5%, up 170 basis points from the second quarter of 2025. Net sales in mobility increased 4% to the third quarter record of $460 million due to sustained growth in China and Latin America. The team's focus on new business wins, margin stabilization, and operational rigor resulted in an adjusted EBITDA margin of 18% for the segment, an expansion of 230 basis points compared to last year. During Q3, we executed $100 million in share repurchases, reducing our shares outstanding by over 3% since 2023. Adjusted diluted EPS was $0.67, up 6% versus last year. This reflects our robust earnings power and our commitment to returning capital to our shareholders. Lastly, our net leverage was maintained at 2.5 times. remaining the lowest level in Exalta's history. Let's turn to slide four. Achieving our A-plan target remains top priority, and the third quarter results show that the strategy is leading to enhanced profitability. This quarter marks the sixth consecutive period with an adjusted EBITDA margin above our A-plan target of 21%. The consistency of our adjusted EBITDA margin performance speaks to the foundational improvements we've made to our business. Our mobility segment continues to perform well, driving 2% organic net sales growth year-to-date. This top-line momentum was driven by roughly $60 million in new business wins and 12 quarters of adjusted EBITDA margin expansion in the segment, driven by strength in China and Latin America. In Refinish, We generated approximately $90 million this year in incremental net sales from the execution of our strategies, which include gaining more than 2,200 net new body shops, expanding into adjacencies, implementing pricing actions, and integrating CoverFlex. We believe that we're well-positioned for growth in the business as volumes are expected to stabilize and grow into next year. On the industrial side, profitability remains ahead of schedule. Despite mid-single-digit declines in net sales, we're exceeding our 2026 A-Plan target for profitability expansion one year early. The results show the effectiveness of our strategic product mix and cost management. This has been a great story, and I believe the business is well-positioned to capitalize on volume upside once demand rebounds. Additionally, our cost discipline has been outstanding. Interest expense is down 15% year-to-date, bolstering our adjusted diluted EPS performance. Operating expenses declined by 5%, supported by our 2024 transformation initiative. This initiative is running well ahead of plan and has delivered approximately $40 million in incremental savings in 2025, further supporting margin expansion. Before turning the call over to Carl to discuss the results, I want to emphasize that we have delivered strong year-to-date results and are on track to achieve record-adjusted EBITDA and record-adjusted diluted EPS for the full year. Our performance reflects Exalta's dedication, the strength of the A-Plan, and our commitment to delivering value to our shareholders. In the final quarter of this year, we remain focused on execution operational excellence, and disciplined capital allocation.

Thank you, Chris, and good morning, everyone. In the third quarter, net sales were approximately $1.3 billion, down 2% year-over-year, primarily due to macro headwinds in North America. Positive price-cost actions and disciplined cost management helped offset mixed headwinds, resulting in gross margins holding steady at 35%. Variable costs declined 1% year over year, and we expect the raw material environment to remain relatively flat through at least the first half of next year. SG&A expenses declined 7%, reflecting our ongoing focus on efficiency and cost management. Adjusted EBITDA increased $3 million versus last year to $294 million, a quarterly record. Adjusted diluted earnings per share increased 6% to 67 cents, another quarterly record, primarily driven by lower interest expense and fewer shares outstanding. Operating cash flow was $137 million and free cash flow totaled $89 million. The decline from last year was driven by higher capital expenditures of $17 million and higher working capital, as we have strategically held higher inventory levels this year to manage tariff uncertainty. We anticipate that free cash flow will improve significantly in the fourth quarter as working capital unwinds. Net sales for performance coatings, as shown on slide 6, declined 6% year-over-year to $828 million, driven primarily by trends in North America impacting both businesses. Refinished net sales came in at $517 million, slightly up on a sequential basis from the second quarter. Lower body shop activity and customer order patterns drove declines versus last year in organic net sales, impacting both volume and price mix. This was partially mitigated by favorable foreign currency translation and growth in Europe and Southeast Asia. Industrial net sales declined 4% year over year, to $311 million, primarily due to volume softness in North America, driven by weakness in industrial production and building and construction. Positive price mix and favorable foreign currency translation partially mitigated volume headwinds. Performance coatings delivered adjusted EBITDA of $211 million, with a margin of 25.5%. an increase of 20 basis points year-over-year and 170 basis points sequentially.

Let's look at slide 7.

Mobility Coating's third quarter 2025 net sales were $460 million, an increase of 4% from the prior year. White vehicle net sales increased 7% in the third quarter due to net sales growth in Latin America and China and positive price mix. which offset volume declines in North America and Europe. Commercial vehicle net sales declined 7%, primarily due to volume declines from lower Class A production, which were partially offset by positive price mix, new business wins, and favorable impacts from foreign currency. Adjusted EBITDA for mobility increased 20% year-over-year to $83 million, with adjusted EBITDA margin expanding to 18%. The team's focus on accretive new business wins and cost control have delivered 12 consecutive quarters of adjusted EBITDA year-over-year margin growth, as Chris mentioned earlier. Capital allocation continues to be a critical part of Exalta's value creation story, as shown on slide 8. Since the third quarter of 2023, diluted earnings per share has increased 55%, and adjusted diluted earnings per share has grown more than 40%. We have reduced interest expense by 17% in the third quarter, and our net leverage ratio remains steady at 2.5 times aligned with our strategy. Consistent with the A plan, we have increased capital expenditures by approximately 50% when compared to the third quarter of last year, bringing our year-to-date spend to $138 million. Through the third quarter of this year, we have repurchased $165 million of shares, with $100 million being deployed this quarter. Overall, our share count has decreased by 5 million shares since the beginning of the year, or 3% since 2023. In the fourth quarter, we expect to accelerate our share repurchase strategy by repurchasing up to $250 million of our stocks. Upon completion, we would have deployed over 90% of our free cash flow to share repurchases this year while still maintaining our leveraged target. As we move forward, we expect to continue to generate sustainable earnings growth and strong free cash flow. The strength of our balance sheet gives us the flexibility to effectively allocate capital to drive long-term value for our shareholders. Let's turn to slide nine for a look at the full year. We expect to deliver record-adjusted diluted earnings per share and adjusted EBITDA on lower revenue expectations. Previously, we anticipated that the external environment in North America and Europe would pick up in the third quarter, which would have generated a sequential benefit to net sales in the fourth quarter. However, this improvement did not materialize as expected, and we are adjusting our forecast for the softer demand. Additionally, we also expect softer Class A production levels and lower late vehicle bills in some regions, given some of the temporary supply challenges that are impacting the industry. In the fourth quarter, we now expect net sales to decline by mid-single digits compared to last year. Adjusted EBITDA is anticipated to be approximately $284 million, and adjusted diluted earnings per share is projected to be around $0.60. For the full year 2025, our updated outlook reflects net sales of more than $5.1 billion, with adjusted EBITDA expected to be about $1,140,000,000, which is at the low end of our previous EBITDA guidance range. We are expecting a significant increase in free cash flow in the fourth quarter, which should put us around $450 million for the year, consistent with last year, but down slightly from our previous view. Additionally, we are forecasting adjusted diluted earnings per share to be $2.50 for the full year, an increase of 6% versus 2024, and an increase of approximately 50% versus the full year 2023. I will now turn the call back to Chris.

Thanks, Carl.

We're well underway to deliver another record earnings year here in 2025, and we have always operated with a commitments made, commitments delivered mindset. and we're excited on what we can accomplish in 2026. Next year, we're planning for an improved refinish demand environment in North America as claims stabilize and these stocking headwinds abate. We continue to gain new body shops and are excited about our growth opportunities in accessories and the economy segment. Light vehicle global production outlook is expected to be stable. and we expect to have another record year in our mobility business. In North America, expectations for lower interest rates and less trade volatility should provide a positive backdrop for customer demand in our industrial business. Our team is poised and ready to execute on new business wins and manage costs through operational excellence and a strong pipeline of productivity projects. The team remains fully committed to delivering on our $1.2 billion adjusted EBITDA target. We expect to repurchase a significant amount of Exalta stock, given my confidence on where we can take the business in the years to come. We're all about creating value for our shareholders, and I'm more excited than ever of what we can accomplish. Thanks for joining us today. Operator, please open the lines for Q&A.

Yes, sir. At this time, if you would like to ask a question, please press star 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. As a reminder, please limit yourself to one question and one question only. Our first question will come from Gansham Punjabi with Baird.

Hey, guys. Good morning. I guess, you know, first off on 3Q, just as it relates to the auto-refinish component down 7% for the third quarter, at least, you know, for the volume component, how would you disaggregate that between just volumes in the industry versus the inventory destocking? And then just related to that, Chris, you know, you talked about 2026. What are the specific strategies that you're pursuing to support an improvement going into next year from a commercial standpoint? Thank you.

Hey, good morning, Gacham. Thanks for the question. Well, giving you a view of Q3, the way we look at it is markets are down about mid to high single digits. And I would call it specific to us, destocking is also around that mid single digits number. And our performance, so whether if you look at the 90 million that I've talked about in terms of the growth that we had in the business or the incremental sales, whether it's you know, what we did in pricing actions, what we did with new body shop wins of 2,200, which is really a good news story for us because on average, if you look at us, net new body shop wins for us, if you look at the last three years, average is around 2,400. So here we are in Q3 and we're already at 2,200. So it's actually a pretty good year for us. And then on top of that, whatever we do with adjacency sales, as well as the CoverFlex integration, So I think all of that is driven, as you pointed out, let's call it this mid to high single digit drop in sales as you look at Q3. So what gives me confidence as I think about, you know, where is the market and do we see stabilization? And I can sit here and talk to you about insurance rates and what's happening with claims. But I think it's really important to start looking at our numbers. And if you look at our Q1, Q2, Q3 numbers for refinish, we're running around that $520 million sales. And if you look at Q4, we're essentially saying that's going to drop down by about $20 million, which is what is seasonal and normal for us. So you can start seeing the business is starting to stabilize. And that's what gives me confidence as I look at next year and coming out. So we expect Q1 as always to be a little bit lower, but primarily Q2, we should be lapping where we were with destocking. And then if you have the tailwind of destocking coming out starting Q2, plus assume the same win rate that we've had for this year, what we've done on average on our refinish business of $70 to $90 million, you can start seeing that refinish really starts picking up at the back half of next year.

So I hope that answers that question for you.

Thank you. Our next question comes from Chris Parkinson with Wolf Research.

Great. Thank you so much. Chris, ever since you've taken the helm, I mean, costs have been a tremendous focus of your strategy. Can you just kind of give us any context to help us conceptualize where we stand today and how we should be thinking about the ongoing progress as it relates to 2026 in the context of your end market backdrop. Is this something that can continuously improve even when volumes kind of come back? Is this something where you're going to have to add back costs and you're really operating at a fair rate? I mean, just anything to help us triangulate how we should be thinking about that progress over the next 12 to 18 months would be incredibly helpful. Thank you.

Sure, Chris. I think, you know, coming in two years ago or two and a half years ago, I think there was always this view that, you know, what Exalta had done with Exalta Weave 1, Exalta Weave 2, How could there be more cost in Exalta? And as you can see, I think, you know, if you went back to 22 and what we have accomplished, I'm really proud of the team. We've essentially executed on over 500 basis points. And a lot of that is really what we have driven in cost. Obviously, when we put the A plan in place, the markets across all our foreign markets are in a different spot. And really, a lot of the performance is really coming from what we were able to do with our cost actions. And I actually use a term that I think Carl uses all the time, which is, you know, we're still early in our innings. And why do I feel that is if I look forward, again, take a look at how much we're investing in capital. And if you look between 23, 24, and 25, even as we look at this year, under a challenged macro, we're investing more than we ever have in our plants. And so if you have that return coming through in productivity for next year, you have an element of that. If you look at our transformation initiative, we talked about that being about $75 million. To date, we've accomplished about 60 to 70 million. We still have a flow through of about probably 20 million into next year. So you got that as well. And then what we can do with supply chain optimization, what we can do with footprint optimization, I still think, as Carl points it out, we're still early in our innings. I think there's still opportunities. There is opportunity with costs that we can continue to drive into next year. And it will be...

portion of our plan while we drive the growth as we think about 26.

Thank you. Our next question comes from Joshua Spector with UBS.

Hi, guys.

This is Lucas Bowman. This is Lucas Bowman for Josh. So, I mean, most of your 26 outlook comments kind of focused on refinish So maybe if you could just kind of talk us through your expectations there for the other end markets, namely industrial and commercial vehicles that you didn't really call that much. Thanks.

Sure, Lucas. Good morning. So as I look at it, Commercial vehicle, we still expect that to be, let's call it, very muted, certainly a different perspective than what we expected for the year being this pre-buy year when we started the plan two years ago. I think the expectation was 26 was going to be 360. I think this year we're probably looking at 26 being around that 225 to 250 range at best. So I think the market certainly is down about 30%. But a true credit to the team is what they've really accomplished in pivoting towards commercial transportation solutions. So even if you look at our performance for this year, sales are down about 30%, 25% to 30% in terms of volumes in Class 8. And we're down just about 7%. And it's really because the teams have pivoted towards commercial transportation solutions. And what is that? Because we started selling to marine, we started selling to military, we started selling to RVs off highway. And so the teams pivoted to smaller customers. but a ton of smaller customers, and we're really able to pivot that. So as we look into 26, we believe that we can still continue to grow that business on the CTS side and also grow it globally. We do have opportunities in Latin America. We also have opportunities in China. So that's a great perspective as I think about CTS. And one of the things that we're primarily focusing on is really adding capacity also for our commercial vehicle business. Because at some point, that's going to return. We're well below replacement volumes. So if you think about 27, when that returns, we certainly need to have the capacity. So that's, again, one of the things that we're focused on investing in. If I look at industrial, our plans for industrial is the markets remain somewhat muted. There are signs, you know, if interest rates keep coming down, mortgage rates are at the lowest point in 25 at this point. But again, we need further interest rate cuts and obviously some kind of drive to improve residential and construction into next year. So it's not something that we're counting on, but it certainly will provide a tailwind I think as we look at it right now, Freddie Mac and Fannie Mae are expecting about 3% to 4% growth into next year. Again, we're not counting on it because that was also a thought process for this year. But certainly from an industrial dynamic, our perspective is that volumes or that market stays flat to possibly up slightly. Commercial vehicle, as I pointed out, will be down. Light vehicle, we're expecting a slight step down. We're at about 91 million bills this year, and our thought process is it will be slightly lower, maybe by 200,000 or 300,000 vehicles for next year. And then finally, refinish, we're expecting a stable environment into next year. So volumes down, but stable into next year.

Thank you. Our next question will come from Matthew Dio with Bank of America.

Good morning. Can you just rehash maybe some of the internal discussion around a dividend and thoughts there and whether or not the board is becoming maybe more receptive to this? And I guess as I think more holistically about capital deployment, I know or I should say people generally would say that you want to kind of be more acquisitive and reshape the portfolio a little bit. But how does your appetite change or does your appetite change for acquisitions considerably given your own valuation here today?

Good morning, Matt. Yeah, this is Carl. So as I think about capital allocation here in the near term, we do see tremendous value in our stock at this point. So that's why you're seeing a pretty significant shift, not only what we did in the third quarter, but also plans to deploy up to $250 million in the fourth quarter to buy back shares. I think as we look at a dividend, obviously, this is a board decision. We've had many discussions as it relates to that. And I think as we launch the next aid plan, I think that's probably a time that we'll spend even more with the board on making a final decision on that. We do recognize we're currently an outlier, at least in the chemical space. But I just continue and we continue to see just tremendous value of repurchasing shares at this point. And I do think that fits into your M&A question. Again, where our trading multiples are right now, M&A is a little bit more challenging of what we can look to accomplish here in the near term. That's why, again, pivoting back and deploying more into share purchases here, I think, is the appropriate and prudent move. But as we move forward, I think as where we can take this business longer term. M&A will definitely play a part of that, but I think we're a little bit in a timing window at this point.

Just maybe to add a little bit to Carl, especially when we look at where we can get 26, and I think as we're building more confidence around the $1.2 billion for 26, it really puts light to the fact that we should probably be focused on buying back Exalta.

Thank you. Our next question will come from John Roberts with Mizuho.

Thank you. Could you dive a little deeper into some of the underlying drivers in the refinished business? Auto accident rates, insurance inflation, overall repair costs. I mean, those are the things I think that caused the dip in the business. And what are you seeing in those drivers?

Sure, absolutely, John. Good morning. So first, as I look at accident rate, accidents or collisions, I think, you know, nothing's changed. Accidents are still occurring. That's around, there's a slight decline. It's about down 1%, but overall accidents are, let's call it, flat to down 1%. If I look at claims, obviously, you know, this is the big driver to what's driving the disconnect. And if I look at North America, that's down about high single digits. Europe is lower. It's let's call it in that mid single digit range. And the primary driver here is exactly what happened and what we've talked about quarter over quarter, which is insurance premiums going up significantly and also consumers pulling back from just a sense of the confidence and the macros. And around this, I think what you can start getting a sense, and obviously we've spent a lot of time, because the refinish business is such a large and very important part of Exalta, it's certainly something that we've watched carefully. And I think, you know, the good news is when I look at insurance costs, insurance costs, as we said, if you look back to 2004, At insurance costs, we're going up almost double digits. If I look at 25, you can start seeing insurance premiums starting to go flat. And that's an overall perspective for the United States. Actually, in 27 states, insurance costs are actually coming down quite a bit. And I would say overall, that would mean the other half of the states are going the wrong way. But overall, insurance rates are stable and starting to get flat. From repair cost perspective, what we're starting to notice is repair costs are also starting to get flat and go down 1%. Again, as volumes and backlogs start reducing at the body shops, you can start seeing that folks are starting to drive to balance this out. So that's one of the good perspectives that I think is driving a stable environment as I think of how we're preparing into 26th. From a perspective of what we're seeing on the premium side, especially with costs of vehicles going up, as well as what's happening with used car pricing, you can certainly see that work is also starting to drive back. The leading indicators are starting to turn positive. And a perfect example of this is if you look at CarMax or CarNavana, you can start seeing that Their performance is also improving by 20%, so that's a great indicator. Those guys are also large customers of ours, and we can start seeing as cars are coming back from lease or being returned, those folks are also having to fix cars before they obviously try to sell them again. So I think the right market environment is starting to switch. Obviously, winter is also coming if I think about early next year.

So I certainly believe 26 will be a different place as we start the year before we finish.

Thank you. Our next question will come from Mike Harrison with Seaport Research Partners.

Hi, good morning.

Good morning.

I was hoping that you could talk a little bit about some of the costs that you've been able to take out. I understand that the focus has been on structural cost, but I think in particular in performance coatings, you know, very surprising to see the margin performance even with volumes and with price mix lowers. So to what extent are some of the cost actions you're taking right now temporary in nature or related to lower discretionary spend that we might need to think about accruing or coming back as we think about next year's cost structure, whether that's incentive comp or other discretionary spend. Thank you.

Good morning, Mike. Yeah, I think as we look at the cost actions we've taken, not only in the third quarter, but really over the last couple of years, the vast majority, if not more, are really structural reductions that we have an ability to operate more efficiently and how we run the business. I would say there are some tactical things that we've done as relates to more discretionary around T&E as an example. So some of that may come back as we get into next year. But I think as I look forward, maybe the better way to think about it is For every $1 of incremental revenue, our conversion rate on that to EBITDA used to be around 35%. I would expect that should be running closer to, we're going to be probably getting close to about 40%. And that just speaks to the overall structural reductions we've made and that we expect to stick as we move forward.

Our next question will come from Patrick Cunningham with Citi.

Hi, good morning. Just on the refinish side, it's pretty firmly low single-digit price mix declines. Is this primarily stemming from mix as you move into more mainstream and economy? And how would you characterize your outlook on underlying structural price in 2026?

Good morning, Patrick. Maybe it's actually two things. The first one is you're absolutely right as we're growing more into our mainstream and economy. And certainly, if you look at our net new body shop wins, one of the reasons we're doing so good at body shop wins for this year ahead of what we normally have is a foray into mainstream and economy. And with the acquisition of CoverFlex, that's really enabled us to grow. Actually, the last two quarters, Q3 and Q2, were some of the highest number of mainstream and economy body shops we've won in that segment. We've normally focused on the premium segment. And so you are seeing, let's call it, a negative mix from that because the margins in mainstream and economy are lower than our premium margins. However, it's still accretive to performance coatings margins or overall Exalta margins. But separate from that, also when you think about the fact that, you know, in this last year, most of our impact from destocking is primarily a North American issue. And so whether it's the volume decline that we've seen because of where the market is in North America plus destocking, North America was one of our highest or is one of our highest margin businesses. So it drives a negative mix as well. And as we flip into next year and we get past the destocking issue, I think a lot of that will still be mitigated, especially because the mainstream wins.

It will take quite a bit to offset the, let's call it, the step up from destocking that we expect into next year.

Thank you. Our next question will come from Aleski Yermov with KeyBank Capital Markets.

Good morning, everyone. I was hoping to get some of your initial thoughts on refinish pricing strategy for next year. Should we expect 26 to be a typical refinish year, or are you adjusting your expense based on this current environment?

Our plan is probably to stick to a similar pattern as what we've accomplished for this year. So, Alexi, that normal 2% is net pricing is what we drive. At this point, that's exactly what we're thinking for next year. Primarily, it's certainly a model that's worked, and I don't see us needing anything further than that. As we pivot into, let's call it, more mainstream as well, I mean, the pricing dynamic is slightly different there, but overall, the aspect of driving growth, driving what we're going to be doing on the, let's call it, adjacencies perspective, those have a little bit of a different pricing, let's call it, algorithm. But other than that, what we do for the premium business will be probably in line with what we did this year.

Thank you. Our next question will come from David Beglitter with Deutsche Bank.

Thank you. Good morning. Just on Q4, in terms of two things, on production, are you running your plans normally or are you drawing down some inventory that could be hit to earnings? And on SG&A, should we think about a similar year-over-year decline in SG&A expenses as you saw in Q3 of roughly 7% year-over-year? Good morning, Dave.

Yeah, SG&A, I would expect that performance in the fourth quarter will be very similar to what we saw in the third quarter as it relates to that reduction. And then as it relates to inventory, we are expecting a drawdown as we think about the working capital unwind. As I said in my prepared remarks, the third quarter we did actually run higher inventory levels, really just due to some tariff uncertainty in North America. but also within Brazil as we were ramping up our new business wins in that market. So overall, you know, the fourth quarter is shaping up to be a very strong free cash flow quarter, but a big part of that will be the inventory reduction.

Thank you. Our next question will come from John McNulty with BMO Capital Markets.

Yeah, good morning. Thanks for taking my question. Can you flush out a little bit what you saw on the raw material side, what you were seeing kind of in some of the major buckets, how much tariffs impacted you, and if you think you're pretty much through that tariff headwind at this point, at least from an incremental headwind perspective?

Yeah, good morning, John. Yeah, for raw materials in tariffs, we're probably about $20 million, or the expectation would be incremental costs that have kind of come in that we've been able to kind of manage through pretty effectively. So at this point, and you never know, but I would say we believe we're pretty much kind of behind that. And kind of the big buckets for us in total, as we referenced, we saw the raw material basket down about a percent in the third quarter. And if I look at kind of the big items, I think solvents continue to be a very low-pricing environment, and we continue to see that benefit. Same thing as relates to isocyanates is another one that we've seen lower cost. There's been some offsets to that in some of the other baskets, such as monomers, as well as some pigments as well. But not a very stable backdrop to raw materials at this point, and we do believe that's going to continue on at least for the next three to four quarters.

Thank you. Our next question will come from Vincent Andrews with Morgan Stanley.

Thank you, and good morning. Chris, the slide indicates that you're expecting percentage revenue to turn positive in 2Q26. Do you expect volume to turn positive into Q26, or is that going to come later in the year or not at all?

No, volumes – good morning, Vincent. We're expecting volumes to also turn positive into Q2 as well. I think you'll get two benefits, obviously. If you think about our body shop wins as well as the adjacencies – A lot of that will transition. Obviously, you know, there's a bit of a ramp up with that as well beyond what we have this year. So that you'd have that tailwind on top of, let's call it just the destocking coming, abating. And so you'll get probably a drive from both of that.

So from our perspective, we expect volumes to start trending positive in Q2 of next year.

Thank you. Our next question will come from Jeff Zakowskis with JP Morgan.

Thanks very much. You said you might purchase up to $250 million in shares in the fourth quarter. What will determine that? Does that have to do with the price of your shares? And how much have you bought so far this quarter?

Good morning, Jeff. Yeah, I think for the quarter, we repurchased 100 million of shares in the third quarter. In the second quarter, we repurchased 65 million. So we've done $165 million to date. The 250 is where the market is today. Even if it's up probably 10% plus, we're a buyer of the stock. We have a big stock. belief in where we can continue to take this company as it relates to earnings and revenue and what the future will bring. And at these trading multiples, it makes all the sense in the world to deploy almost all of our capital at this point to buying back shares.

So we will be a big buyer of the shares here in the fourth quarter.

Thank you. Our next question will come from Mike Sison with Wells Fargo.

Hey, good morning. I'm just curious if, you know, I don't want to be a Debbie Donner, but if 2026 refinish doesn't normalize as an industry, how does your strategy change? And, you know, is there enough market share gain for you to generate some volume growth in the second half next year? And then, you know, BSF sold their business to private equity. Are there opportunities? Is that good for the industry? Are there opportunities for market share gains? How do you sort of view that?

Yeah, good morning, Mike. So maybe I'll start with the first one. You know, if I think about refinish, overall, this industry has been very stable. Obviously, I look at what happened this year as something that is more temporary. And certainly, as we look at where our numbers are coming in, and once you take out the stocking, you can get a sense that with the drop that we've seen, there's a sense of stabilization that's happening. And I certainly see it as I look at our sales quarter over quarter over quarter. And if you start thinking about the fact that, you know, if you put in perspective the fact that Exalta is a leader in the refinish industry, space and certainly, you know, with our market position and as I look at what's happening as we enter the economy space, certainly as I think about the number of body shop wins in this challenging market where we're all chasing sales, Exalta is winning when I think about the 2200 body shops. So as I think about next year in a market that is in a similar perspective, I think if you pull out the destocking, there's still an opportunity for us to continue to grow. And we will pivot into other areas. So as you look at what are we doing into adjacencies, as I look at pushing what we're doing with putties, fillers, aerosols, we've essentially been able to take the product out of Europe with the UPOL acquisition and really pull it into North America. And we've gotten on thousands of shelves at O'Reilly's and AutoZone to be able to take our aerosol product to market. And in essence, what we can do with private branding, what we can do with just expanding that portfolio, even with some small bolt-on tuck-ins, I think there's an incredible opportunity with what we have as our strength in the market to be able to continue to grow that segment. We've been very focused on cost. I think as I look at next year, we can certainly pivot towards growth, especially with the strength of the underlying business. So as I think about refinish, I think, you know, with what we have in the portfolio, as well as small elements that if we need to add, we can certainly have a growth story, even in a challenged market. So that's the first perspective as I think about, let's call it refinish. To answer the question on BASF, obviously BASF has been a competitor of ours for a very long time, back to DuPont days and all the 11 years of Exalta. And they certainly play a very strong, they're a very strong competitor of ours in both the mobility space and the refinish space. So it's a competitor we know well. And as I think about, you know, what is necessary under PE hands, I think, you know, the drive for margin will probably drive a very good competitor. And I think, you know, it will drive some discipline into the marketplace. And we've known them well, so it's probably a good story overall. So I don't expect anything different there. The good news is really the multiple that BASF was sold for, it really shows the valuation that the, let's call it that Exalta is undervalued. And I think going back to Carl's comments, this is why we're doubling down on buying 90% of our free cash flow, using that to buy back shares. And to the question earlier about, why are we confident about 250 for next year? We're just gonna essentially use our Q4 cash flow and essentially continue to buy back Exalta. And if I look at 26, And once you get very confident, and once I feel confident around 26, I think the free cash flow from there, we have about $150 million left in our authorization. We'll certainly go back for another half a billion or a billion. And I think we can certainly focus on continuing to buy back Exalta because it really shows the value that our margins can provide and what we can do with the business long term and

will certainly be an acquirer of our stock.

Thank you. And as a reminder, that is star one to ask a question. Our next question will come from Kevin McCarthy with Vertical Research Partners.

Yes, thank you, and good morning, everyone. Chris, are you still working on a new company-wide strategic plan to follow the EA plan? If so, I was wondering if you could just comment at least just qualitatively on what you think the company might need to focus on operationally in the years to come versus the last couple of years. It sounds like you see runway on cost and clearly a lot of room to accelerate repurchases, but any other color on where you'd like to take the company strategically?

Yeah, thanks for the question. Good morning, Kevin. And so certainly, I think, you know, if we think about the five elements that we defined under the aid plan, under four of them, we're certainly in a great position and we're there a year ahead of plan. So it really positions you to what we need to work on. And the five were, say, a growth, number one. Second was margin. We set a target of 21. We're close to 23 as we stand right now. The next one was EPS, and we're certainly well beyond our plan there. As I think about it, we'll be 70% if I look at where we'll close next. the full year. The next one was leverage ratio, and we're, you know, we set a target of 2 to 2.5, and we'll be right there at the end of this year at 2.5, probably 2.4. And then finally, under ROIC, we're also, you know, very close to that target. So the primary focus, as I think, about A2029, which Kevin, our plan is to roll that out by May of next year, is to really drive the growth elements. I think the underlying business is performing exceptionally well. Coming in, we had two areas to focus on. If I go back to the beginning of 23, and in the A plan, we focused, we wanted to essentially make sure we got the underlying business where we needed to. And I think that's certainly been a good story for us. And now it's to really pivot to growth And so as I look at what we will define in the A plan, there will be primarily a plan that uses, Exalta has one of the highest margins in the coatings industry. And I think we can use a little bit of that firepower as well as really focus this exceptional team towards what we need to do to drive growth.

And that's what you're going to see a lot more in the A plan.

Thank you. Our next question will come from Arun Viswasan with RBC Capital Markets.

Great. Thanks for taking my question. I hope you guys are well. I guess I just wanted to go back to kind of a structural question on refinish as well as industrial refinish. It appears that, you know, refinish claims are obviously down significantly high single digits this year. You know, industrial has also been down, you know, maybe double digits for a little while now. So what's it really going to take to get these markets back going? Is it, you know, kind of inflation on the refinish side and maybe PMIs on the industrial side or? What do you think, and is there anything that you guys can do within your own control to maybe spur some demand if you talk about innovation or maybe adding on the economy side or some other initiatives? Thanks.

So we normally start on the refinish side. So good morning, Arun. Thanks for the question. I'm going to start with industrial. The industrial story, as I said in my prepared remarks, I think has been a great story. And even if you look at this quarter, I'd say the markets have been down, let's call it high single digits, probably just north of seven. And we're down about 4%. And if I look back and go back to 22, which we were still in the COVID times, the sales, the industrial market, to your point, has been down about 20 to 25%. But we've been down, if we went back all the way to 22, our sales are only down about 100 million. So down, let's call it mid to high single digits. And so what's really this, why is this a good story is if I look through the fact that in that time, the team has driven some incredible performance in the business. We set a target of 400 basis points of margin improvement. And I would say we're north of 500 at this point. And I still think there's more gas in the tank in that business. So we took a business that was, let's call it, very low single-digit margins to almost, well, above double-digit margins. It's been a great story for us. And what did we do? We really, you know, pruned down some customers. We focused on pricing for the value that we bring to the business. And we really invested and essentially picked That business has three, let's call it segments. It's got building products. It's got industrial sales, and it's got energy solutions. And underneath that, there's 12 sub-businesses. We focused on a few. We essentially really drove the performance through those to where we knew that we made a difference to our customers. and we've certainly driven the margin as well as the growth in that business. Our energy solutions business is doing great. If we look at China, it's growing. We provide impregnating resins in that business for motors. We provide coatings for battery casings, which is doing great in not only what we provide for vehicles, but also for the industry itself for data centers. So that's Again, a business that's doing very, very well. And so it's been a great business. The margins are in a great spot. There are still elements in that business that we can look at probably at some point, as I've said before, that we might get out of. But that said, the overall business is at a great spot. And what I think is necessary for that to grow is pretty straightforward. I think waiting for mortgage rates to adjust or come down and building, to your point, PMI, anything that can spur construction is certainly something that we're waiting for. But on top of that, we do believe that we can drive growth in energy solutions, coil, and certain aspects of that business. So that's industrial solutions. In refinish, I do believe that next year we should see some stability. The destocking issue for us is specific. For us, because we go to market through three large distributors, and one of those distributors essentially worked on acquiring another one. And that essentially meant that there was over 100 locations and warehouses that were essentially closed down. And so inventory was taken out of the system that takes about a year because of the process they went through. And in essence, we see that as something that will switch and will be temporary and something that we will get out of in Q2 of next year. So that's what gives me confidence in that market that we should have some level of stability. But our story here is really the fact that we continue to win. We believe that we can grow that market at the same rate or better as we proved this year. And we can certainly grow through new body shop wins. We can certainly push more in terms of adjacencies. And we can certainly get into the economy space. We have only 9% market share that we moved to 11%. And we believe we can continue to grow that. So that's our story. And I think, you know, as Q1 starts up and as you look at our full year guide for next year, you should get confident around what our story is going to be for 26%.

Thank you. Our next question will come from Lawrence Alexander with Jefferies.

Good morning. I just wanted to come back to two brief points. So one on the working capital, how do you see your working capital days evolving when your end markets recover? And secondly, on SG&A, what do you see is, can we annualize the back half of this year as a run rate for next year, or will there be a kind of reset? in a healthier environment.

Yeah, so SG&A, I think you'll definitely see the same impact in the fourth quarter that you saw in the third quarter. As you kind of flip into the next year, there probably will be a slight increase, as I think about SG&A, just as a percent of sales, as we think about having a little bit higher costs as relates to merits in the organization. But it will still be running at a pretty low level on a percentage of sales basis as we kind of go forward. And then on working capital, as I said, I think the fourth quarter we are anticipating a pretty big increase from free cash flow. A lot of that is you can just look at how The third quarter came in. There'll be some inventory reduction. It's a very strong seasonal quarter for us anyways. If I kind of go back in time, fourth quarter of 23, we generated over $250 million of free cash flow, over $200 million back in the fourth quarter of 2022 as well. So that speaks to the power and the acceleration, what we expect in the fourth quarter. And then as we move forward into next year and an increasing revenue environment, I think we will be very, very targeted on running the right inventory level, so we don't want to overshoot that as we think about managing overall working capital, because I think getting into next year, the free cash flow capability should be very, very strong again for us.

Thank you. At this time, there are no further questions, and this does conclude today's presentation. We appreciate your participation and you may disconnect at any time.