Ladies and gentlemen, thank you for standing by, and welcome to Axalta Coating Systems' Q3 2025 Earnings Call. [Operator Instructions] Today's call is being recorded, and a replay will be available through November 4. Those listening after today's call should please note that the information provided in the recording will not be updated and therefore, may no longer be current. I will now turn the call over to Colleen Lubic, Vice President of Investor Relations.

Good morning, everyone, and thank you for joining us to discuss Axalta's third quarter 2025 financial results. I'm Colleen Lubic, Vice President of Investor Relations. With me today are Chris Villavarayan, our President and CEO; and Carl Anderson, our Chief Financial Officer. We posted our third quarter 2021 financial results and earnings release this morning. You can find today's presentation and supporting materials on the Investor Relations section of our website at axalta.com, which we will be referring to on this call. Our remarks today and the slide presentation may include forward-looking statements reflecting our current views of future events and the potential impact on Axalta's performance. These statements involve risks and uncertainties and actual results may differ materially. We are under no obligation to update these statements. Our remarks and the slide presentation also contains 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 3. 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 forecast ticking up in October to approximately 91 million builds 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 improvements that we have established across the company. To that point, we expanded the adjusted EBITDA margin in both segments. Performance Coatings 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…

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 to offset mix 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 $0.67, 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. Refinish 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…

Thanks, Carl. We're well underway to deliver another record earnings year here in 2025, and we have always operated with the commitments made, commitments delivered mindset, and we're excited on what we can accomplish in 2026. Next year, we are planning for an improved Refinish demand environment in North America as claims stabilize and destocking 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 Axalta 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. [Operator Instructions] Our first question will come from Ghansham Panjabi with Baird.

I guess first off on 3Q, just as it relates to the auto Refinish component down 7% for the third quarter, at least 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 talked about 2026. What are the specific strategies that you're pursuing to support an improvement going into next year from a commercial standpoint?

Ghansham, thanks for the question. Well, giving you a view of Q3, what -- 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 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 3 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 CoverFlexx integration. So I think all of that is driven what's, 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 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 the 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 million 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.

Our next question comes from Chris Parkinson with Wolfe Research.

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? Or 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?

Sure, Chris. I think coming in 2 years ago or 2.5 years ago, I think there was always this view that what Axalta had done with Axalta Way I, Axalta Way II, how could there be more cost in Axalta. And as you can see, I think if you went back to '22 and what we have accomplished, I'm really proud of the team. We have 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 4 end 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 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 plans. 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 have accomplished about $60 million 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 pointed 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 a portion of our plan while we drive the growth as we think about '26.

Our next question comes from Joshua Spector.

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

Sure, Lucas. 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 2 years ago. I think the expectation was '26 was going to be $60. 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 of just about 7%. And it's really because the teams have pivoted towards commercial transportation solutions. And what is that as 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, but 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 beyond -- 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…

Our next question will come from Matthew DeYoe with Bank of America.

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?

Matt, yes, 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 buying back shares. I think as we look at the 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 A 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. What we can look to accomplish here in the near term. That's why I got back pivoting back and deploying more into share repurchases here, I think, is the appropriate and prudent move. But as we move forward, I think as -- where we could take this business longer term, M&A will definitely play a part of that. But I think we're a little bit of 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 Axalta.

Our next question will come from John Roberts with Mizuho.

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

Sure. Absolutely, John. So first, as I look at accident rate, accidents or collisions, I think 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, 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, 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 macro. 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 Axalta is certainly something that we've watched carefully. And I think the good news is when I look at insurance cost -- insurance costs, as we said, if you look back to '24, insurance costs were 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 back -- going the wrong way. But overall, insurance rates are stable and starting to get flat. From a 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 backlog start reducing at the body shops, you can start seeing that folks are starting to drive to balance this out. So I would -- that's one of the good perspectives that I think is driving a stable environment as I think of how we're preparing into '26. From a perspective of what we're seeing on the premium side, especially with cost 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 Navana -- Carvana, 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 pace as we start the year for Refinish.

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

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, very surprising to see the margin performance even with volumes and with price/mix lower. 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?

Yes, 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 it 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.

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 into 2026?

Patrick, just -- maybe it's actually 2 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 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 foray into mainstream and economy. And with the acquisition of CoverFlexx that's really enabled us to grow. Actually, the last 2 quarters, Q3 and Q2, where some of the highest number of mainstream and economy body shops with one in that segment. We have normally focused on the premium segment. And so you are seeing, let's call it, 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 Axalta margins. But separate from that, also, when you think about the fact that 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 have 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 as 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.

Our next question will come from Aleksey Yefremov with KeyBanc 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 to probably to stick to a similar pattern as what we've accomplished for this year. So, Aleksey, 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 mix, 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.

Our next question will come from David Begleiter with Deutsche Bank.

Just on Q4, in terms of 2 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?

David, yes, 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, 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.

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

Can you flesh 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 if you think you're pretty much through that tariff headwind at this point at least from an incremental headwind perspective?

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 1% 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 it relates to [indiscernible] 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 net-net, very stable backdrop to raw materials at this point and we do believe that's going to continue on at least for the next 3 to 4 quarters.

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

Chris, the slide indicates that you're expecting Refinish revenue to turn positive in 2Q '26. Do you expect volume to turn positive in 2Q '26? Or is that going to come later in the year or not at all?

No, volumes -- Vincent, we're expecting volumes to also turn positive into Q2 as well. I think you'll get 2 benefits. Obviously, if you think about our body shop wins as well as the adjacencies, a lot of that will transition. Obviously, there's a bit of a ramp-up with that as well beyond what we have this year. So that you would have that tailwind on top of, let's call it, just the destocking coming -- abating. And so that you will get probably a drive from both of that. So from our perspective, we expect volumes to start trending positive in Q2 of next year.

Our next question will come from Jeff Zekauskas with JPMorgan.

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?

Jeff, yes, 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 million 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 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.

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

I'm just curious if -- I don't want to be a [indiscernible], but is 2026 Refinish doesn't normalize as an industry, how does your strategy change? And is there enough market share gain for you to generate some volume growth in the second half next year? And then BASF 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?

Mike, so maybe I'll start with the first one. 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 destocking, you can get a sense that with the drop that we have 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 so -- and if you start thinking about the fact that if you put in perspective the fact that Axalta is a leader in the Refinish space and certainly, 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, Axalta is winning when I think about the 2,200 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 is 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 within the U-POL acquisition and really pull it into North America. And we've gotten on thousands of shelves at O'Reilly 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…

[Operator Instructions] Our next question will come from Kevin McCarthy with Vertical Research Partners.

Yes. Chris, are you still working on a new company-wide strategic plan to follow the A 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 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?

Yes. Thanks for the question, Kevin. And so certainly, I think if we think about the 5 elements that we defined under the A Plan, under 4 of them, we're certainly in a great position and we are there, a year ahead of plan. So you -- it really positions you to what we need to work on. And the 5 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 were, as I think about it, will be 70%, if I look at where we'll close the full year. The next one was leverage ratio, and we're -- we set a target of 2 to 2.5, and we'll be the -- right there at the end of this year at 2.5, probably 2.4. And then finally, under ROIC, we're also very close to that target. So the primary focus, as I think about, a, 2029, which are -- 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 2 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 -- Axalta 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.

Our next question will come from Arun Viswanathan with RBC Capital Markets.

I guess I just wanted to go back to just kind of a structural question on Refinish as well as Industrial. It appears that Refinish claims are obviously down significantly high single digits this year. Industrial has also been down maybe double digits for a little while now. So what's it really going to take to get these markets back going? Is it 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?

So we normally start on the Refinish side. So 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 7%, 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 -- 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 -- 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 [indiscernible] 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 3, let's call it, segments, it's got building products. It's got industrial sales and it's got energy solutions. We focus -- and underneath that, there's 12 sub businesses. We focused on a few. We essentially really drove the…

Our next question will come from Laurence Alexander with Jefferies.

Just wanted to come back to 2 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?

Yes. 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 cost as it 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 in the fourth quarter, we are anticipating a pretty big increase from free cash flow. A lot of that is, as you can just look at how the third quarter came in, there will 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 of what we expect in the fourth quarter. And then as we move forward into next year on 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.