Ladies and gentlemen, thank you for standing by. Welcome to Axalta's Second Quarter 2021 Earnings Conference Call. [Operator Instructions]. Today's call is being recorded, and a replay will be available through August 3. Those listening after today's call should please note that the information provided in the recording will not be updated and therefore may no longer be current. I will now turn the call over to Mr. Chris Mecray. Please go ahead, sir.

Thank you, and good morning. This is Chris Mecray, VP of Investor Relations and Treasury. We appreciate your continued interest in Axalta and welcome you to our second quarter 2021 financial results conference call. Joining me today are Robert Bryant, CEO; and Sean Lannon, CFO. Last evening, we released our quarterly financial results and posted a slide presentation, along with commentary to the Investor Relations section of our website at axalta.com, which we'll be referencing during this call. Both the prepared remarks and discussion today may contain forward-looking statements reflecting the company's current view of future events and the potential effect on Axalta's operating and financial performance. These statements involve uncertainties and risks and actual results may differ materially from those forward-looking statements. Please note that the company is under no obligation to provide updates to those forward-looking statements. This presentation also contains various non-GAAP financial measures. In the appendix, we've included reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information regarding forward-looking statements and non-GAAP financial measures, please refer to our filings with the SEC. I'll now turn the call over to Robert.

Good morning. Thank you for joining us to review Axalta's second quarter earnings and our updated 2021 full year financial outlook. The second quarter showed continued strong operating and financial performance, marking the fourth straight quarter of earnings exceeding our expectations since the pandemic impacted second quarter of last year. Ongoing demand tailwinds for global industrial end markets, coupled with supportive recovery within Axalta's Refinish business combined to offset headwinds above our original forecast for the second quarter, including ramping raw material cost inflation, supply constraints with key raw materials and semiconductor chip shortages from Mobility Coatings customers. While these headwinds are expected to continue during the second half of 2021 and run higher than prior forecasts, Axalta has begun to implement additional mitigation measures that will provide effective offsets over the coming quarters and into 2022. Net sales in the second quarter increased 72.6% year-over-year including a 5.3% FX tailwind, driven by broad-based recovery from all end markets globally, though underlying strong auto demand was masked by the supply shortages impacting the ability of our Mobility customers to meet end consumer demand. price-mix contribution in the quarter was a record 9.3%. Performance Coatings price-mix increased 14%, including a positive 21% move in Refinish, of which approximately 5% represented pure price improvement and a mid-single-digit price-mix increase in Industrial, with most of that coming from price. Refinish volumes showed strong sequential recovery, which is tracking well with continued traffic rebound and remain below pre-pandemic levels as expected, but now only down mid-single digits versus the comparable quarter in 2019. Axalta's second quarter adjusted EBIT of $173 million was a dramatic improvement from the prior year quarter and moderately below first quarter levels given the anticipated impacts from higher cost inflation and Mobility customer supply chain shortages, both of which came…

Thanks, Robert, and good morning. Second quarter saw strong overall financial performance given ongoing robust demand conditions and continue the refinish recovery globally. And our team executed well to exceed our quarterly net sales and adjusted EBIT targets again. The reported net sales increase of 72.6% was ahead of our prior expectations, as recovery in Refinish as well as strong Industrial demand more than offset the persistent production headwinds with our Mobility customers. The Performance Coatings second quarter net sales increase of 67.1% was notably above our expectation as Refinish results saw better-than-expected volumes in North America as well as globally. Axalta did not realize an appreciable benefit from customer restocking in the period. Though most distributor orders reflected improved demand conditions, we did see a benefit from increased volumes in premium Refinish brands, as seen in the unusual lift in price-mix. In Industrial, demand was very strong throughout our businesses, with the sole exception of the auto end market for tier suppliers. Net sales would also have been even better absent some volume impact from tight raw material supply for specific products, largely in North America and EMEA. Mobility Coatings net sales increased 88.2% for the quarter, which is a strong rebound from the prior year period where production shutdowns were pervasive. The result was moderately below expectations due to repeated production halts relating to the semiconductor chip shortages. Positive product price-mix of 9.3% was a record level due to effects previously noted, including positive mix in Refinish as well as strong absolute price progress in Industrial, around mid single-digits during the quarter. This was partly offset by 4.1% negative price-mix in Mobility, which stem from negative mix in both light and commercial vehicle. As Robert alluded to, we do expect Mobility to revert to positive price-mix due to…

[Operator Instructions]. Your first question comes from the line of Ghansham Panjabi with Baird.

On the lowering of EBIT for 2021 relative to your previous guidance, can you just give us a bridge of the differential of roughly $30 million, how much of it is from higher cost versus the deferral in auto OEM versus any other bucket on the downside? And how much are you embedding for U-POL at this point?

So as far as U-POL, nothing is factored into the guidance construct. But as you think about bridging full year guidance back -- provided back in April, really, the first big impact is the semi impact on light vehicle. We did quantify the sales. You can estimate the drop-through. But that $60 million in the second half was not forecasted. And the impact we actually saw in the second quarter itself, we estimate about half of what we actually realized of that $55 million. And then the raw materials, we had assumed originally in our guide, there was about an $80 million headwind. We're a little over double that now for the full year, so almost $100 million incremental impact from raws. And then that's partly being offset by the pricing actions that we noticed.

Got it. That's helpful. And then can you give us some -- some more color on the 4% decline for Mobility from a price-mix standpoint? I know you called out mix. And then just separately, on U-POL, you called out that it serves in mainstream economy subsegments. What percentage of the overall auto refinish market do you think is mainstream and economy? And how big is it for you at current? And will the brands be stand-alone or merged with existing brands in your portfolio?

Okay, Ghansham. We'll take those three questions. In terms of the Mobility price-mix being down 4%, the negative mix really came from just a combination of customer and regional impacts associated with the chip shortage on volumes as well as differences from the prior year quarter across the segment. I would highlight that we have been able to increase prices in light vehicle. And just as a reminder, roughly 25% of our Mobility contracts, especially in light vehicle, are covered by raw material indexing. And we have about 40% of the contracts that have contractual language that allow us to discuss pricing. So we'll see more price show up in the third quarter given that most of our index contracts have a 6-month lag. And then as far as U-POL, I don't think we can express enough how excited we are to bring the business into Axalta. As you know, it's a leading manufacturer of repair in refinish products used primarily for automotive refinish and aftermarket protective applications. About 2/3 of the company's sales are aerosol, fillers and coatings. And those are primers, top coats and clear coats for the refinish market, but more focused on mainstream and economy. And then about 1/3 of the business are protective coatings that include spray, spray-on pickup truck bed liners and they're marketed under the Raptor brand name. And many are kind of consumer do-it-yourself products sold through retail automotive aftermarket stores. And they're also sold online. The protective products are used in camper vans, boats and a plethora of other industrial applications. So we're really excited about what the product portfolio brings. And certainly, we'll be able to sell their products through our sales and distribution channels. And we'll also be able to sell our products through their sales and distribution channels. And as far as integration, we think of it more as a value creation plan and how we bring the 2 companies together and leverage both of the assets. Not so much on the cost side, there are some minor cost synergies. But really, on the commercial side, there are a number of expected commercial synergies.

Your next question comes from the line of Steve Byrne with Bank of America.

Yes. So earlier this year, Robert, you removed the matrix organization structure, and just wanting to hear whether you're seeing any signs of it enabling your segment leaders to drive maybe either some cross-selling opportunities or more productivity initiatives. Anything that you're seeing that is constructive from that action?

I think we're seeing a number of benefits. And it's not only across the businesses, but even within the businesses themselves. And for example, if we look at our Mobility business, I'm really excited and confident about the future of the Mobility business for many reasons, and some of them are directly related to the organizational pivot. If you look at our new business launches that are projected, we expect them to be more than double in the second half of this year compared to the first half. A lot of that has to do with the focus that the team now has and how that business is organized. We've also achieved some pretty nice wins over the last 2 quarters at key customers in Asia, EMEA and the Americas. And the revenue from those wins will come in over the next 1 to 2 years. Also, if you look at our year-to-date win ratio, our win ratio has actually been higher than our current market share, as we've won key new business based on our technology, our service and our relationships. So I think if we look at light vehicle, it's going really well. In the Industrial side, it's been really interesting. Of all the many achievements that, that business has, perhaps one of the most exciting changes has really been the pivot from focusing on product technologies to focusing on end markets and providing customers with integrated solutions that include liquid, powder and E-Coat. And so that total solutions approach that we've taken in Industrial has resulted in some new wins that are nascent, but a growing portion of our Industrial portfolio. And then in our Refinish business, in terms of running that as a truly global business, the efforts that we've seen there in standardization of marketing as well as product development platforms, we're actually getting products to market faster. And you can see that in some of the press releases that we've made around some of the launches we've had. They're global launches as opposed to region-specific launches. So I think, overall, in terms of how the organizational pivot has worked, it's worked extremely well.

And maybe just an extension on that, Robert. You're -- you talked about a few products that are focused from innovation. This Daisy Wheel color match system in Refinish and then the waterborne clear coat. You also mentioned the E-Coat in Mobility. Can you just comment on those as to whether they are more likely to lead the market share gains? Or is this really to drive a mix shift up in price? Can you rank those various initiatives?

So on your first question around the mixing around the Daisy Wheel, our Daisy Wheel system has been in the market for years and years and years, and we've launched the third generation of that product. Now I think when you step back and you look at the overall Refinish business, you have to remember, our waterborne refinish system is 55% faster than our next closest competitor and uses 30% less materials than our next closest competitor. So we're already starting from a pretty nice advantage from a product technology perspective. And the Daisy Wheel 3.0 is just an upgrade to what was the industry's first fully automated colored dosing system. And what that does is it enables the fastest and most accurate color mixing in the marketplace. That being said, you got to remember, paint mixing is only 3 to 7 minutes of a typical process time of 45 to, say, 120 minutes. And that's why you don't see greater adoption of these automated dosing systems in the marketplace, because the capital investment that you have to make, offset by the productivity improvement that you get, it's just not that large. But we want to make sure that we're meeting the needs of all of our customers so we continue to innovate on that platform. And then in terms of some of the E-Coat developments we have, our technology team, both on the Mobility side as well as on the Industrial side of E-Coat has just done an outstanding job in moving up our E-Coat technology. Not an incremental step, but a couple of steps up compared to where we were. So net-net, in terms of innovation overall and product development, I think we expect that to continue to power our organic growth as we go forward and allow us to gain additional market share.

Your next question comes from the line of P.J. Juvekar with Citi.

It seems like that in Performance Coatings, you offset a majority of your raw materials, if not all of them, with price-mix. I guess my question is on the mix impact, especially in Refinish. It's a little hard to understand from outside. What is the mix impact? Are you selling better quality paint that you can charge more? Or are you painting more SUVs over cars that get some mix impact? Can you elaborate that? And just sort of talk to us about what is the mix impact this quarter.

Sure. Yes. And you would have noticed the last few quarters, we've actually had a negative price dynamic, and this really started back in the second quarter of 2020 -- sorry, on the price side -- or on the mix side. Yes, back in the second quarter, when we saw the volume declines, we really saw a thinning out of inventory within the distribution channel. And you can imagine, as the focus of distributor partners is taking out the heavier-priced inventory. So we saw that thinning out. So it's not necessarily we're moving away from mainstream and more into premium, it's just things are more normalizing as volumes come back. So what you're seeing now is a heavier mix coming through as we get back to more normal volume levels as far as what we're selling through distribution. But fundamentally, we haven't seen any sort of bigger changes in how we think about premium versus mainstream as to how we sell our products today.

I would just add to what Sean said, P.J., is that this was a dynamic at the time when we saw volumes down in Refinish that we know was an area of concern for people with price-mix being down, but we explained that it was heavily driven by the mix factors that Sean outlined. And that, that trend would reverse itself once we saw volumes come back up to more normal levels. And so as we move forward and we continue to see the Refinish market recover, we expect that we'll see price-mix trend return to what is more normally expected.

Okay. Great. And what is your position or market share in EVs, especially in battery coatings? Do you have a battery coating product out today? And if yes, what kind of ramp-up do you see? And if no, then what's sort of time line to get that commercial?

We have a very strong position in the electric vehicle market overall, given our strong position in an electric motor coatings. We are working to build out our platform across the entire electric vehicle skateboard. And we do have commercially available products for part of the battery coating solution, and we're working to develop additional products so that we can more broadly participate in that market. Today, it's a very nascent position.

Your next question comes from the line of Vincent Andrews with Morgan Stanley.

Robert, if I could ask on U-POL, in the press release, you sort of talked about it's setting you up for sort of further bolt-ons. And then in your comments a few minutes ago, I sense some optimism, some enthusiasm, significant enthusiasm about the part of the acquisition, and it seems like it also served some of the retail orientation. So I was just wondering, is that going to be an incremental area of focus for bolt-ons from here through the DIY angle or the retail angle?

I just want to be careful that we don't put the cart before the horse. I think we have to wait until we actually own the business. But assuming that all goes well between -- obviously, between signing and closing, which I think we expect it will. As we go forward, certainly, with U-POL, there are a number of platforms and directions that we can take that business. And although the business is -- think of it as predominantly a refinish accessories business in aerosols, fillers and coatings, they do have a very attractive technology portfolio. And as you pointed out, not only do they go into the traditional B2B channel, they also are in the B2C channel in retail automotive aftermarket as well as online. And that was one of the -- or 2 of the aspects that we found particularly attractive about that business and certainly gives us some strategic optionality as we go forward. But as we move forward and hopefully close on that transaction, we'll be able to provide a little bit more color just around some of the strategic directions that we can go with the business.

Okay. And then I also noticed in the -- either in the release or the slides or the comment that you're not assuming any buybacks over the balance of the year. Is that just sort of a simplifying assumption? Or is that an indication that the M&A pipeline is robust?

Yes. You shouldn't take it. I mean we have -- I mean we're expecting to generate at the midpoint almost $455 million. So we have adequate liquidity to both do M&A as well as share buyback. But it was just simplicity for our assumptions for the full year guide. You shouldn't take that as we're not doing any buybacks for the remainder of the year.

Your next question is from the line of David Begleiter with Deutsche Bank.

Robert, just on Performance Coatings, it looks like in Q2, you were able to offset raws with price actions. In Q3, do you think that can be the same dynamic pricing offset raws? Or do you expect some negative raw price-mix in the quarter for Performance Coatings?

I think we've taken actions in both Our Refinish end market as well as our Industrial end market, pretty real time in terms of cost inflation and additional pricing actions that we need to take. As you saw in our prepared remarks as well as our commentary, we are forecasting additional raw material inflation in the third quarter in terms of what will actually flow through our financial statements. So in general, we are expecting to continue to be able to offset it on that side of the business, as we have seen in previous cycles. And then on the Mobility side of the business, of course, there's a little bit of a lag given the typical conversations with that customer set as well as the timing of how the index contracts work.

Got it. And just in Refinish, Rob, you mentioned that body shop activity is below miles driven in both the U.S. and Europe. Why is that occurring?

Well, we've seen -- if you look at the data, I think in June, North America miles driven are projected to be up about 105% of pre-COVID levels. And in EMEA, about 112% of pre-COVID levels projected looking at pre-COVID seasonally adjusted levels. But we do still see collisions, and thus, body shop activity in terms of actual collision data as well as through our point of sale and customer support systems in the body shops. We've got a good read on the amount of paint that's being made on sort of unified basis. And when you look at that, it has everything to do with traffic congestion levels returning to normal levels. So I'd say that we expect to see that trend continue until we get to September when we expect that back-to-school and back-to-work will result in greater traffic congestion at more typical times of the day and thus caused collision activity to return to more normal levels. That's our expectation at this time.

And Dave, just to add. We've seen somewhat of a lag between miles driven and collision rates, but as Robert pointed out, the congestion factor is also an element. But when we noted full year guidance, we had expected volumes to be down opposite 2019, high single digits. We've seen the pace of recovery in the second quarter come back much faster than anticipated. And we're now expecting volumes to be down mid-single digits. So it's certainly a nice development that we've seen over the last few months.

Your next question comes from the line of Kevin McCarthy with Vertical Research Partners.

Several other coatings companies have pointed not only to the level of raw material cost inflation, but also the availability of certain raw materials as being a constraint on their own production. Have you been able to navigate through this period without availability constraints? And if so, would you expect that to be the case in the third quarter as well?

We've navigated actually quite well. While we haven't had shortages, we certainly have had tightness in various materials due to supply chain disruptions. Specifically, just isocyanates, acrylic emulsions and certain polyester resins have been most challenging. But despite the market situation, we've secured supply and have largely been able to keep pace with the strong demand for our products. But there still have been some impacts on sales volumes as well as impacts at our customer level, which has left certainly some sales that we could have made if we had the availability of raw materials to make them. So I think the results that you're seeing here in the second quarter are constrained results. So when you put that constraint plus the semiconductor impact, I think just stepping back, Kevin, we really couldn't be happier with the beat that we achieved this quarter. We delivered on what we said we would despite all of the constraints that were imposed. So I'm really proud of our performance.

And Kevin, this is Chris. I just wanted to add on to that, that I think the real effect of that tightness is showing up in pricing for raw materials that we've been buying. So for those of you who have noted, not only ourselves but others have seen higher than previously forecast of raw material inflation, a lot of that is directly the result of the tightness that you're seeing and which persisted through the quarter longer than what was previously expected. So that's really the biggest effect. More than missed sales, it's the levels of inflation that you see as a result of this very, very tight supply.

Yes. I think Chris makes a very important point, and our focus has been keeping our customers running and in helping them deal with the issues that they've had to deal with. So where we've had to step out and buy the spot market at significantly higher prices because of how low the supply has been in certain materials, we've done so. But you certainly have seen the impact of that from a cost perspective.

And secondly, I wanted to follow up on the prior thread of discussion regarding price-mix. It looks like you ran up 14% in the quarter in performance. How would you characterize the underlying price trend exclusive of mix and Refinish as well as Industrial?

Yes. So on the Refinish side, we realized about 21% in price-mix. Roughly 5% of that 21% was pure price. And we're closer to 6% on Industrial. And I would say the vast majority was actual price realization.

Your next question comes from the line of Bob Koort with Goldman Sachs.

Robert, I was wondering if you could help me on the raw materials, the source of the tightness there. As your analysis suggests, there's just not enough of those raw materials capacity in the world or was it a product of the supplier disruptions, force majeures? In other words, what's your comfort level as we get some of that production normalized that you could see some relief versus remaining in a very tight and constrained environment for the foreseeable future?

Well, the actual pricing, I mean, there's a price component and then there's an availability component that's driving price. And I think everybody can get a pretty good beat just looking at some of the input costs and what the actual inflation is just on pure kind of underlying oil price. But as it pertains to availability, supply constraints across the supply base had certainly been a driving factor, including myriad force majeures across pretty much all of the coating -- not all the categories have purchased, but certainly the majority of the categories. That's really been combined with a pretty significant demand recovery that we've all seen globally. And then we've had several local logistics bottlenecks, whether it's containers coming out of China or just mismatch of supply and demand from a logistics perspective and different points around the world. And Winter Storm Uri that occurred earlier in the year in Texas, you might say, well, why are we sitting here in July talking about that? And the reason for that is it created a pretty significant backlog of product that had to be made. And given the length and the severity of that outage, it certainly -- or outages in suppliers there certainly did create a backlog that they're still working through in some cases and are not totally back up. So I think we've taken a relatively conservative estimate of both the underlying price inflation as well as what availability could be like in the third and fourth quarter. Based upon what we're seeing in the marketplace currently, things could be a little bit better than we're expecting. We'll just have to wait and see.

And maybe related to that, some conservatism. Your light vehicle build rate, you acknowledge, is quite a bit below the consensus expectations or maybe the consultant expectations. Is that just a function of you think they're inevitably going towards your numbers, so let's get there quicker and not see 1,000 paper cuts as the consultants keep lowering their numbers? Or what's the basis for your differential there?

Well, I think as we -- I think as you described it, Bob, that's certainly one aspect that ran through our minds. But we really spent a fair amount of time this quarter doing some homework, speaking with actual semiconductor experts from various different consulting firms and from industry to try and triangulate as well as with some customer feedback around what we think the assumptions could be. And so we believe that the 7 million units globally that are not going to get made this year based on semiconductor shortages is actually a reasonable expectation. And we think that the assumptions we have around materiality and expected duration of the headwind are reasonable. We certainly hope that the situation is better than that. But we certainly didn't want to have that perspective, go out with a more conservative number and then report Q3 earnings and say, no, actually, it was -- ended up being worse than we thought. So I think we've tried to take the approach of being somewhat conservative in our view here and going out with what we think the full year number is based on. And that's not based on automotive forecast or input. That's based on actually speaking with consultants who actually work directly in the semiconductor industry and have put together a supply-demand buildup by industry across all industries, whether it's consumer or industrial, et cetera, and looking at when you start to see supply exceed demand.

Your next question comes from the line of Mike Harrison with Seaport Research Partners.

You had kind of suggested that you didn't think that much of the Refinish strength was driven by restocking. But you also commented that there was some normalization in the mix that may have been driven by some inventory normalization. So can you just maybe give a little bit more color on what you're seeing in terms of Refinish distributor inventory levels and kind of buying patterns as we get into the second half?

As we've said before, and I think continues to be the case today, we have not seen a large distributor restocking. At this point, I think everybody is still waiting to see what happens in that September, October time period in terms of return to work and return to school before we're going to see distributors really stock back up on inventory. They continue to run at relatively thin levels. But what you are seeing is due to the increase in accident rates and activity at the body shop, you're starting to see them buy more. So that's really where the volume normalization is coming from that's yielding the price-mix that you see this quarter, it's not because of a big restocking.

All right. And then a lot of the supply chain disruption impact conversation has been focused on the chip shortage. But in your slide deck, you also mentioned some constraints in Americas building products and in global general industrial. Can you give a little more color on what you're seeing there in terms of raw material availability or supply chain disruption? And is that fixed at this point? Or do you still expect some additional challenges in that industrial market in Q3?

We continue to see tightness in acrylic resins, which is one of the major components of our wood coatings business. And that's at an industry-wide level, it's not specific to Axalta. We have seen some additional capacity come into the system and certainly a broadening of suppliers in the marketplace that are producing acrylic resins. And so we think it could be a little bit better. But if we look at the underlying demand that we have in that business, it's quite strong. So the way that we think about it is although we expect the business to continue to perform well, it could be performing much better if we weren't limited on the supply, in particular, of acrylic resins.

Your next question comes from the line of Arun Viswanathan with RBC Capital Markets.

Great. Yes, I guess my question is on -- back onto the raw materials and the price-cost dynamics. So if I heard that correctly, it sounded like you were looking for an $80 million headwind on raws, and it turns out to be a $160 million headwind or so for the year. Yet your EBIT guidance is only down, say, $25 million. So it does -- at the midpoint, it does appear that there's price actions that are successful. And if you look at the Q3, Q4 guidance, it looks like you're expecting a lot of those to be successful in Q4. So I guess, is that the right read? And so if we think about price-costs for the rest of this year and into next year, when do you expect that, say, $160 million raw material headwind to abate? Is that kind of a 4-quarter dynamic? And maybe you can just give us your thoughts on -- or is it sooner, just given the Q4 guidance?

Yes. It's hard to judge exactly when and it will abate. We do expect fourth quarter to moderate slightly versus Q3 highs. But I think what you can take away as far as the price-cost dynamic, we'll continue to take action on the pricing side. We would expect by the end of the fourth quarter, from a run rate perspective, we'll be largely caught up in the price-cost gap. And we're also consciously looking at our cost structure. So you did see, we did take a charge this quarter, which will really start to accrue those benefits in 2022. But we're also being extremely mindful of discretionary spend until we actually see that moderation in oil prices.

Okay. Great. That's helpful. And then maybe just a medium to longer-term question. If I just go back to your -- some of the targets you laid out at Investor Day, you noted 9% to 10% total sales growth, including acquisitions, 4% to 5% ex -- and levels of EPS around $3 by 2024. So I guess, obviously, this one quarter isn't going to make a big difference. But maybe I can just get your thoughts on how you see those longer-term targets, if they're still intact, and what they would need from an M&A standpoint to get there. Is it more deals similar to U-POL? I guess my impression was that you'd be focusing a little bit more on the Industrial side, so maybe you can also just address how this came about so quickly.

In terms of our longer-term goals, we're very excited about the direction of the company. I think nobody could have foreseen the semiconductor situation or kind of the dramatic increase in raw materials that we've seen here in the short term. But in terms of the longer-term goals of the company, if you look at what we're doing commercially, what we're doing organizationally, what we're doing strategically, I think we feel very confident in our ability to achieve those goals. And as we've said, it's not going to be a linear ride upwards. There will be some variability to it. So I think it's just normal in this type of business and the type of world that we're in today. So I think we're very confident in our forward-looking numbers.

Your next question comes from the line of Josh Spector with UBS.

Just around the guidance, specifically fourth quarter. If I look at what you're implying for the EBIT in Performance Coatings, it looks like to be a fourth quarter record and a significant improvement sequentially. Is that a sustainable level that we should bridge off of as we look into 2022? And I guess is there anything onetime-ish that we should be considering as we look at that quarter?

I mean your read through on the fourth quarter, yes, I mean, at the midpoint of the range, we're going to be up around $280 million. From an EBITDA perspective, it's hard to say if it's sustainable. I mean it really depends on what happens with raw materials, and ultimately, what happens from a pricing perspective. But as we get further into the second half of the year, we are expecting the pricing actions really start showing up as well as we'll continue to get momentum on the cost structure side of the house.

The other aspect that I would add to what Sean said is that we have taken during COVID a number of actions to our cost structure. And our cost structure is in a fundamentally different place. So the drop-through that we expect to see moving forward is different than the drop-through that we've seen historically. So as we see a rebound in the Refinish business, the continued performance of the Industrial business as well as if Refinish -- not Refinish. If Mobility surprises to the upside there, the profitability of the drop-through that would occur is pretty substantial.

Now that's helpful. I appreciate that. And just on U-POL, I appreciate the 2021 estimates that you provided. How does that compare versus the performance of that business a couple of years ago? Is it similar to what you guys are seeing in Refinish? Or is there anything notable to point out there?

Yes. We've certainly seen that business grow over recent years, and it's doing very well. We don't have a report out that we can provide on prior performance, but it has been a successfully growing business over time.

Okay. I guess can you frame that relative to 2019 at all? So if you're thinking Refinish this year for you guys is down 5%, is that a kind of similar performance for U-POL or meaningfully different?

I think we'll -- given we haven't actually closed on the transaction, we're being a little careful about sharing too much on the U-POL acquisition. We'll be in a better place once we actually have it closed to provide a little bit more insight into the historical financial.

Your next question comes from the line of Jeff Zekauskas with JPMorgan.

In the Refinish area, sometimes your mix is negative, and this quarter, it was positive. And then there's the reverse in Mobility. What's the average mix? That is did you over-earn in the Refinish business and you under-earned in the Mobility business? And can you size that? What's the impact either for the quarter or the year?

Jeff, I wouldn't characterize it that we over-earned on the Performance side of the business and under-earned on the Mobility side of the business. When we did see the volumes in the Refinish business during the COVID period in particular and as we were first coming out of COVID, of course, we saw volumes drop pretty dramatically, in particular, at the premium end of the market. And we saw distribution essentially take inventories down to extremely, extremely low levels, and in particular, premium high-moving, high-margin products. And so that volume impact also has a -- there's a mix impact, but there's also an average price impact. And so what we had said before was that as volumes come back in the Refinish business, we'll see price-mix really start to normalize. I also think that looking at second quarter of this year compared to second quarter of last year, it's a really tough compare to draw too many conclusions from because last year's second quarter, really the depth of COVID in terms of impact on financial performance just really creates some aberrations. I do think that the encouraging thing to look at is just pure price capture in Refinish and Industrial, which were 5% and 6%, respectively. In terms of the Mobility business, it really has a lot to do with customer as well as regional mix. And some customers were more impacted by the semiconductor outage than others, and that certainly played into average price-mix in the Mobility business as well as we saw some regional differences in terms of some regions performing better than other regions in the second quarter as it relates to the semiconductor shortage directly that has an impact on price-mix.

So if I could just reask the question. Did you have a normal mix in Refinish and a normal mix in Mobility? Or was it below average or was it above average?

So Refinish is getting back to a more normal mix as our volumes are getting back to more normal levels. Light vehicle, as Robert pointed out, it was just such an anomaly last year that you're ending up with an odd result. But I wouldn't say we're at normal levels yet for light vehicle given the impacts from a semiconductor perspective.

So you think your mix is below average in both segments? Is that the conclusion we should take?

That is a fair read through.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I'd like to turn the call back to management for closing remarks.

Thank you, everybody, for participating this morning. As always, we look forward to any follow-up conversations you'd like to have. We appreciate your interest in Axalta, and have a great day.

This concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.