Axalta Coating Systems Ltd. Aktie

Ladies and gentlemen, thank you for standing by. Welcome to Axalta Coating Systems Second Quarter 2026 Earnings Call. [Operator Instructions]. Today's call is being recorded, and a replay will be available through May 7. 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 today to discuss Axalta's second quarter 2026 Financial Results. I'm Colleen Lubic, Vice President of Investor Relations.

Joining me today are Chris Villavarayan, our Chief Executive Officer; and Carl Anderson, our Chief Financial Officer. Before we begin, please turn to Slide 2 for our forward-looking statements and non-GAAP disclosures. We posted our second quarter 2026 financial results this morning. You can find today's presentation and supporting materials on the Investor Relations section of our website at axalta.com.

Our remarks today and the slide presentation may include forward-looking statements reflecting our current views of future events and their potential impact on Axalta's performance. And with respect to the proposed mergers equals, between Axalta and AkzoNobel. These statements involve risks and uncertainties, and actual results and outcomes 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. Please refer to our filings with the SEC for more information. I will now turn the call over to Chris.

Thank you, Colleen, and good morning, everyone. Let's turn to Slide 3. I want to begin the call by congratulating our team on an exceptional quarter. We set records for adjusted EBITDA, which increased 5% from the prior period to $305 million, adjusted diluted EPS which improved 13% year-over-year to $0.72, exceeding our expectations, and we had the lowest net leverage in Axalta's history. Also notable is net sales growth of 3% year-over-year and an excellent adjusted EBITDA margin of 22.7%, up 30 basis points from the prior year period and the highest second quarter in many years. We are clearly on track to achieve the key milestones set as part of our plan that we will close out this year.

Cash was again a great story this quarter. We delivered $152 million in cash from operations and $107 million in free cash flow, an improvement of 6% year-over-year. Based on our first half performance, we remain well positioned to deliver another year of excellent cash generation. The Axalta team has driven growth control the controllables and significantly improved the balance sheet.

Let's turn to Slide 4. Across the portfolio, the disciplined execution and operational excellence, we have worked on perfecting over the last several years has paid off investments in technology within all businesses, substantial operational enhancements and cultural changes that include accelerated decision-making and accountability has elevated our product and service offerings. These offerings have translated into meaningful business wins across all end markets.

Starting with Refinish. Net sales increased 6% year-over-year, driven primarily by the abatement of destocking this quarter and favorable price mix. Europe, our largest refinish region delivered a record quarter for net sales. Regarding Bodyshop wins, we far exceeded our normal run rate with more than 1,900 new net Body shops secured in the first half of this year. In addition, in July, we won approximately 800 new North American locations associated with leading MSOs. This represents excellent wins for Axalta and further reinforce our growth momentum.

As I've told you before, 90% of our 95,000 Refinish customers are small businesses, [ time ] in a Bodyshop is money and we optimize this for them by creating productivity and efficiency improvements. In Industrial, we're far outperforming our expectations for profitability with 13 quarters of adjusted EBITDA margin expansion, despite the choppy macro environment in North America. In Asia, we have delivered 6 consecutive quarters of net sales growth, driven by higher demand for Energy Solutions and in Europe, we have posted another quarter of volume growth.

While North America remains challenged, the business is not standing still. When demand recovers, and we certainly expect that it will. We are positioned to capitalize on volumes as we enter the next up cycle with record levels of profitability driven by our cost structure that is significantly more efficient than in prior cycles.

In Mobility, we delivered a record quarter in net sales of $474 million, including record quarterly sales in commercial vehicle. Our Commercial Transportation Solutions business continues to perform exceptionally well at record levels, and we're benefiting from the ramp-up in Class 8 production in North America.

We are equally pleased with the consistency and profitability of the Mobility segment. which delivered an adjusted EBITDA margin of 18.4%. The combination of flawless execution and disciplined cost and productivity initiatives differentiate Axalta. This represents our eighth consecutive quarter of lower operating expenses on a constant currency basis. In addition, variable input costs declined this quarter by nearly 2%.

These actions contribute to record quarterly adjusted EBITDA and the highest second quarter margin in the last decade of 22.7%. Well-defined [ a plan ] targets that put our customers first, purpose-driven innovation and profitable growth, fueled by outstanding operational performance and a global team that is second to none put us in an excellent position for our next chapter with AkzoNobel. With that, I'll turn the call over to Carl to go through the financials.

Thank you, Chris, and good morning, everyone. Turning to Slide 5. Net sales were up 3% year-over-year, coming in at just under $1.35 billion, the highest quarterly sales performance over the past 2 years. Foreign currency translation tailwinds, contributions from acquisitions and positive price mix were partially offset by lower volumes in Mobility and Industrial.

Net income was $89 million, a decrease of $21 million versus the prior year period. The decline was primarily attributable to an incremental $31 million of transaction-related costs associated with the pending merger with AkzoNobel. Adjusted net income, which excludes merger and acquisition-related costs, increased 10% year-over-year to $153, million compared to $139 million in the prior year period, driven primarily by Performance Coatings earnings and lower interest expense.

Adjusted EBITDA increased 5% to a record $305 million, resulting in an adjusted EBITDA margin of 22.7%. Our performance exceeded expectations due to favorable business mix, supported by increased sales in Performance Coatings and continued cost discipline. Adjusted diluted earnings per share increased 13% year-over-year to a quarterly record of $0.72 per share, benefiting from higher earnings and lower interest expense.

Finally, our momentum and cash generation remained consistent again in the second quarter. Cash provided by operating activities was $152 million, while free cash flow was $107 million, representing increases of 7% and 6%, respectively. The improvement compared to the prior year period was driven by better working capital performance and lower interest payments.

Turning to Performance Coatings. The segment delivered solid second quarter results with net sales increasing 4% year-over-year and 9% sequentially. Compared to the second quarter of last year, growth was driven by acquisitions, positive price/mix and favorable foreign currency translation.

Refinish net sales increased 6% to $545 million supported by volume growth in 3 out of 4 regions and positive price/mix as channel inventory normalizes in North America. Industrial net sales increased 2% year-over-year to $327 million. Volume growth in Europe and Asia, along with positive price/mix more than offset lower volumes in North America.

Performance Coatings adjusted EBITDA increased 10% to $218 million while adjusted EBITDA margin expanded 130 basis points to 25.1%. The increase was driven by the combination of positive price mix, continued cost discipline and flat volumes in Refinish allowing us to effectively convert top line growth into higher earnings.

Mobility Coatings delivered a record second quarter net sales of $474 million, an increase of 1% from the prior year period. Light Vehicle net sales declined slightly as favorable foreign currency and organic growth in Latin America, partially offset lower volumes in other regions. Commercial Vehicle net sales increased 7% year-over-year, supported by volume growth in all 4 regions and favorable foreign currency translation. We are seeing North America Class 8 production improving and expect this to continue in the second half.

Mobility Coatings adjusted EBITDA totaled $87 million in the second quarter, with adjusted EBITDA margin of 18.4%. Margins were up 90 basis points sequentially, driven by solid conversion on incremental revenue. Compared to a year ago, tailwinds from higher volumes in Commercial Vehicle were more than offset by favorable onetime items recorded in the second quarter of last year that did not repeat.

Turning to Slide 8. In the second quarter, we delivered another period of consistent cash generation, which highlights the durability of our operating model. Through June, cash provided by operating activities has increased 31% compared to the first half of 2025. We also continue to strengthen our balance sheet reducing gross debt by $80 million during the quarter and $135 million year-to-date. Through June, interest expense was 16% lower than the prior year period, reflecting the benefits of our deleveraging efforts. As a result, we ended the quarter with a net leverage ratio of 2.2x, the lowest in the company's history and remain on track to exit the year below 2x.

As we turn to our outlook on Slide 9. Our strong second quarter results and performance across the organization is putting us on an excellent path for 2026. External forecasts and key performance indicators remain broadly consistent with the assumptions underpinning our prior guidance. That said, the situation in Iran, tariffs and broader geopolitical tensions in the Middle East continue to create some uncertainty.

As a result, we believe it is prudent to maintain our previously issued full year guidance for net sales, adjusted EBITDA, adjusted diluted earnings per share and free cash flow. Having said that, we continue to operate very effectively and are prepared to convert on higher volumes if they come in stronger than planned. Specifically, for the third quarter, we expect net sales to increase by low single-digit percent compared to the prior year period, with adjusted EBITDA in the range of $295 million to $305 million. We also anticipate adjusted diluted earnings per share of approximately $0.70, up 4% from a year ago. Overall, we are encouraged by our first half results and believe we are well positioned to deliver another year of record financial performance.

Turning to Slide 10. We're now just over a week away from a defining milestone. Our Special General Meeting on August 5, where shareholders will vote on the proposed merger of equals with AkzoNobel. Regulatory clearances also continue in parallel, and we remain on track for closing in late 2026 or early 2027.

From a financial standpoint, the fundamentals of the transaction are exactly where we want them. We continue to expect approximately $600 million annual run rate cost synergies with roughly 90% captured within the first 3 years following close. We also see attractive revenue synergy opportunities through cross-selling technology sharing and expanded customer access across a broader global platform.

The planning work completed to date has only strengthened our confidence in those numbers. Just as important, the results we've walked through today mean we'll enter this combination from the strongest financial position in our history, record earnings, robust cash generation and our lowest ever net leverage. Following the vote, integration preparation will accelerate as we prepare for day 1. Now I will turn the call back to Chris for closing remarks.

Thanks, Carl. I open today's call by celebrating our outstanding quarter, and I want to close it by thanking the people who made it possible to our employees around the world, thank you for your commitment to our customers and to our performance. Your focus on execution, productivity and operational excellence have energized and strengthened Axalta as a leading coatings company.

Because of your efforts, we're well positioned to capitalize on growth opportunities, maintain industry-leading profitability and maximize the value of our proposed combination with AkzoNobel for our shareholders. Congratulations on a job well done. Thank you for joining us today. Operator, please open the line for questions.

[Operator Instructions]. And our first question will come from Matthew DeYoe with Bank of America.

Refinish looked a bit better than we had expected in 2Q. So as we look into the second half with the destocking headwinds easing, how are you feeling about volumes? Can this business grow volumetrically year-over-year in the back half? And as we look at that 800 new stores, I guess, in July, what does that mean for organic growth contribution?

Good morning, Matt. Again, certainly proud of our performance in Q2 and really, if you think about it, a lot of that is, as I think about the business, it's really tied to stability and recovery. It's a lot of what we've been seeing when it comes to the market, I would say the collisions are starting to be in line with our expectations. North America was down about mid-single digits. And as I look at Europe, that was more like low single digits. So collisions are coming in exactly where we wanted and then it transitions to the strategy. And here, when you think about the strategy, it's always what we've said we're going to do.

So it's acquisitions what we drive in new Bodyshop wins, adjacencies and then pricing. And across all those 3 elements, we're well positioned. So 3 of those elements, you can see in Q2. But really, to your point, as we look forward into Q3 and Q4, the new body shop wins, it's in total, we're at about 2,700 body shops through July. So that's -- on average, we do about 2,500 per year. So we're well ahead there.

And additionally, to the fact that we won 800 body shops that are in the MSO space, what benefit we get in the back half is really more on the volume side. So we'll certainly pick up on the volume side at the back half. We certainly have obviously what we have done on pricing that's coming through. And then additionally -- on top of that, we continue to work on acquisitions. We did some M&A on distributors outside North America, especially in Europe and Asia, primarily in Australia, that's certainly coming through in Q2, but we also expect that benefit to flow through the back half. So again, we're feeling quite good with where Performance Coatings or more importantly, Refinish is sitting at this point.

Okay. And if I could, free cash flow was similarly a bit better than expected. Primarily, it looks like working capital, which is maybe a bit counterintuitive to me in the backdrop. So how did you manage this? How sustainable is this? Are there givebacks in 2H? How should we think about the cash flow profile for the year?

Yes, Matt, thanks for the question. That's a great question. And really, I think that's, again, certainly something that we're very, very proud of. The best part of this earnings call as I think about Q2 is a ton of comments on records. But specific to cash, I think we've become really a cash-generating engine. And for that, the credit here is really to Carl and the management of cash by the finance team. So I'm going to turn it over to Carl.

Thanks, Chris. Yes, Matt, to your question, we thought the team did a really nice job of improving our cash conversion cycle year-on-year. So we improved about 10%. A lot of that was driven by turning our inventory days a lot quicker. So we actually reduced that about 8 days on a year-over-year basis. And it's important because while free cash flow is up 6%, it does include certain deal fees as well.

So if I was to exclude that, we would have been close to about 20% on free cash flow on a year-over-year comparison. And that's at the same time that we just are continuing to drive overall improvements within the business. And so overall, a good story on cash flow. Our leverage is at a record of 2.2x and so -- and you're seeing that kind of come through on lower cash interest payments as well.

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

Chris, Industrial looks like things did pick up in the second quarter. Obviously, in Europe and Asia, what was the volume improvement overall in that business? And where are you seeing the pockets of strength overall in industrial?

Yes. It's actually again, good morning, David. And I would say volumes in Industrial in Q2 were actually down about 1%. Primarily if you look at it, net sales were up 2%. So what happened here is really what we did with pricing and our actions in driving cost and just the pure focus on that team and really looking at margins. And if I look at -- from where we started about 2, 3 years ago, margins are actually up twice what they used to be. So that team has just done a phenomenal job of just managing cost with the macro where it's been.

But specific to as you look forward or what we see in terms of volumes, I would say North America still remains choppy and challenged. But our true story on wins and volume is really coming from Europe. Europe is up, primarily driven by our [ E-Coat ] business and then Asia. Asia has gone 6 quarters up from our Energy Solutions business there. And so everything that we provide, whether it's for battery casings or what we do for motors with impregnating resins, all of that is coming in just as a strong positive.

And even as we look at Q3 and our numbers in July, that performance continues. So at this point, actually, our Industrial business, as I look at Q2 is that it's the best margins or the best performance in the history of Axalta, and it's actually holding through A lot of it is we're still very, very focused on the volumes, but the strength is coming out of Europe and Asia, and we're watching the, let's call it, the weakness in North America. It feels like we've hit bottom, but we continue to say that quarter after quarter. But the expectation is that if anything picks up there, then the team really has the potential of driving that margin even higher.

Very good. And just going back to Refinish, to be clear in Q3, do you expect volumes to be flat or up or down?

I expect volumes to be pretty much flat for Q3 and then up as I think about Q4. Overall, I would say in the back half, we expect volumes to be slightly up. But in reality, it's what we're going to do in terms of -- if I look at the back half of the year, we're expecting claims to be down as we have always consistently been seeing down mid-single digits.

So what the team is doing with the wins is driving us to hold flat to up. The difference with Q3, as you know, with all the new wins that we have, it takes a bit of time for this to actually roll through into the P&L. So that's what's driving, let's call it, the ramp-ups, but we do expect Q4 to start picking up in terms of volumes.

Our next question will come from Chris Parkinson with Wolfe Research.

I'd like to just piggyback off of David's question real quick. So as it relates to the Refinish volume outlook in the second half, I know this is a tough question, but if you could just do your best to parse out, how much of this is just, hey, destocking is -- the activity is in the past and mathematically speaking, we're doing better in terms of relative stability? How much of that is actually collision rates, it seems like those are more or less in line with your expectations? And then how much of that in terms of the net body shop wins would be something like Iris contributing specifically in Europe. I'd love to hear how you're thinking about those 3 variables.

Sure. Thanks for the question. Pretty detailed one there. I'll break it out. So if you think about it and as we described, destocking, destocking has an impact for us was, let's call it, mid-single -- low to mid-single digit. And if I look at Q2 and Q3, destocking is mostly completely out. So I would call that, let's call it, a net positive from where we were.

Essentially, it's in line with what we've always said. And as I think about stabilization and recovery, where that's coming from is really the markets are starting to drop, the collision rate drops are more in line with our expectations. So if I think about North America, that's dropping about mid-single digits. Europe is probably low single digits. But on top of that, in terms of all the other metrics that you asked about, I would say miles driven is up slightly. Nothing has changed there.

In terms of insurance rates, insurance rates continue to look at and I would say that's coming in slightly better than we had planned, and certainly used car pricing is also trending the right way. So destockings a positive, miles driven as a positive. Insurance rates are slightly better. Used car pricing is good. So that's what's driving all I would call it the recovery of the expectations of a better future here.

Obviously, the counter to this is with where affordability is consumers are still, in some cases, not putting in insurance claims. And the last part of this is also total losses are going up because of the cost of repairs. So parts costs as well as cost of repairs are all having a bit of an impact on this. So that's the, let's call it, the look on the market itself, but it still comes in from our perspective. What we plan for is this mid-single digits decline through the low to mid-single-digit decline through the back half.

That said, the positive for us when you think about the wins, again, the MSO win that we won in North America is 600 Bodyshops. It's one of the top 5 MSOs in North America. We're very, very good with this. And then on top of that, additionally, what the teams have won. It's just not a North American story for us. In North America, we won actually 2 large MSOs. But in Europe, the team has done another great job of securing a large one. And if I move on to Asia, we won the BMW business in Japan, where we won 80 Bodyshops there. That's something that we've never had for a long time.

So you added all that up, the confidence on the new business wins is what gives us great confidence of where the business can really build out for the future here. And then on top of that, what we've done in adjacencies, our adjacencies growth is up $15 million. So it's been a very, very good story for us.

Got it. And then you and Carl obviously done a lot on costs irrespective of basically the macro outlook or what's been going on with your Refinish customers. Can you just comment on how things are run rating into the second half of this year, where you're seeing potentially new opportunities, how you're executing on existing opportunities? Anything to help us triangulate how you would assess your own cost execution report card into the deal closed presumably?

Yes. Thanks, Chris. As it relates to cost, it's -- this is -- really, it starts with the culture of Axalta, across whether it's functions across the us, across what we're doing in purchasing, is something that we talk about daily, weekly, monthly. And it just is the overall focus really of the company to be much more efficient as we progress. And so I think the trajectory that we're on continues we're not done.

There's more opportunities as we continue to look at what we can do throughout the rest of this year. But more importantly, I think it provides a really, really strong building block of what we could be doing when we get this merger over the finish line to get that closed with AkzoNobel. So I would just say more of the same, Chris, as we look to execute the rest of this year.

Our next question comes from Laurent Favre with BNP Paribas.

I had a question around, I guess, the interplay between volumes and pricing. And I was wondering if you had any sense during Q2 that there was a bit of pull forward as customers jump ahead of -- or price increases that are coming a guess effectively in Q3?

No, we actually saw very little of that, and I'll probably go through why. A lot of the pricing that we drove was early in Q2. So as we finished Q1, we essentially came up with a perspective that we had mid-single-digit inflation, and we essentially had all 3 businesses move out with pricing early on in the quarter. And as I look at where backlog sat at the back half of Q2 and even if I look at our July numbers where they're coming in, I would say there was very little in the form of a pull forward that was driving some of our results for Q2.

So -- and as we think about pricing, we're quite comfortable with the pricing that we have put in place. Obviously, a lot of that's flown in through. If I look at peak inflation, though, peak inflation really hits us more in Q3 and a bit in Q4. And a lot of this is driven from the fact that we actually performed incredibly well from a cost perspective, I think, in the front half in the first half. And here, if you think about the fact that we had inventory levels that we're providing us a bit of a tailwind as well as the consistent work that our purchasing teams have done in managing costs and driving productivity, all of that provided a really good tailwind.

But a lot of that -- a bit of that is also being saved into what we have in the back half the purchasing teams will continue to obviously act and keep working on the back half. From a pricing perspective, I think we're at a good spot. And we might price in certain pockets as we go forward because obviously, with the Middle East conflict, it's uncertain which way this might play out.

But at this point, from a pricing dynamic, we feel we're in a good spot. And in terms of a pull forward Laurent, we haven't seen much. And I think you can see it finally, as I think about the demand picture from all 3 of the businesses, the strength really came in areas that we had, I would say, a strong performance story. For example, Performance Coatings was weak and essentially, the pickup was a lot of it was destocking and then just the demand picture that was driving both Refinish and Industrial.

And so I guess going back to the willingness to be prudent for the guidance for the second half. What I'm hearing is that there is nothing specifically really that you're watching out for beyond uncertainty. There's nothing in terms of business unit or raw material spending into your P&L into Q3 or anything like that, just overall uncertainty.

Yes. Laurent, I think as you think of the second half, I mean even if you look at the low end of the full year guidance, that implies that the second half comes in about $12 million higher than the first half from an EBITDA basis. We are think about just the cost dynamic is what we're seeing with raw materials, obviously, were we performed -- will have performed better in the first half than we would in the second half.

But it's all part of the overall planning that we have in place that at least on a gross level, we see the cost impact on [ Ras ] being up about mid-single digits for the full year. As we -- that should be that for Q3, maybe ticks up a little bit more to get to the low end of high single digits, where you're going to be exiting the year. But as Chris talked to the productivity that the purchasing team is driving is a pretty significant offset that we would expect to be able to mitigate that to be able to deliver the guidance construct that we put forward.

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

This is Caleb on for John. I just had a quick question in commercial. If you could just talk to some of kind of like the strength you saw there came in a little bit better than we were expecting. So maybe just some color there would be great.

Yes. So it's really 2 things. The first one is, obviously, the North American [ Class 8 ] market is picking up. And so -- it's been on the normal cyclical lows. And then what we're starting to see is it returning to about 300,000 truck build for a year, which normally comes in at about 75,000 trucks per quarter, and that's what we're seeing in the back half of the year. So that's also what's driving a little bit of the improved performance. So that's one story.

But the second story what's really driving our performance here is what we're doing in commercial transportation solutions. So this team, the mobility team a few years ago, started focusing on everything that's outside just Class 8 such as off-highway military, everything that we do on ambulances, fire trucks, RVs, and the team's really been crushing it. That business has now grown to about 50% of our overall CV business.

So it's a great, great story here, and that's actually up 5% year-over-year. And so that plus where CV is going is what's driving the improvement in mobility, even though we see, let's call it, Light Vehicle markets being slightly down. Additionally, the Light Vehicle team has also done an amazing job winning new business in Europe and Lat Am. LatAm has been a just a great, great, great story for us for almost, I would say, 1 year, 1.5 years now, and they've actually had a program there called Fast and Furious, which was to essentially transition some LV customers as well as focus on some CV customers, and that's just come in well beyond our expectations. So all of that's what's driving the positive performance, not only in Mobility, but certainly in CV.

Got you. Okay. That's really helpful. Maybe just going back to Refinish. I know one of the dynamics for your business has been kind of like winning new body shop wins and also kind of like the MSO consolidation. What -- if you had to kind of like frame what inning we are in, in that dynamic kind of playing out, how would you frame that?

Well, I think it's probably early to call. The MSO consolidation has, I think, just based on where the markets have been have kind of slowed down a bit. But that said, the large MSOs obviously play a significant part in our business, primarily because a lot of what we do on the premium side is -- runs through the MSO space.

And Axalta, our Refinish business is our crown jewel. Our Refinish is a business that not only accounts for almost half of what Axalta is. But certainly, from a premium perspective, we are obviously also the leader in this marketplace. And as you think about that in terms of MSOs, we provide to now we move from 12 to about 13 of the top 20 MSOs. And why this is really, really important is the MSOs usually provide to all the insurance carriers for all the work that's done. So it's very, very important to stay focused in this space.

And for us, we're very, very focused, again, on driving this because it essentially grows or Refinish or our premium business. But additionally, it gives us the foundation to also expand in our economy business. It gives us the scale, it gives us the products, it gives us the technology -- and really, on the economy side, with what we do in adjacencies, that's been something that we were at 9%. We've grown up to 11%, 12% over the last 3 years.

In the premium space, we've been north of 40%. Now where I want to take you here is the economy space, this is a great story, but because the [indiscernible] that the merger with AkzoNobel gives us the opportunity to grow in the economy space because that's somewhere that they're very, very strong with. So again, as I think about Refinish, we're well positioned with the MSOs and I believe as far as we continue to grow here and with the merger with Akzo will become even a stronger player here.

Our next question will come from Ghansham Panjabi with Baird.

Chris, just -- obviously, there's a ton of dynamics going on with the destocks and run materials and so on and so forth. If you just zoom out a bit, what does the macroeconomic backdrop feel like across the major regions you have exposure to so North America, Europe, Asia, Latin America, are you seeing any sort of change versus the previous baseline relative to some of the distortions that we're talking about as it relates to order patterns and destocking and stuff like that?

Yes, I think not really. I would say it's pretty much consistent with what we saw in the last 2 quarters or probably consistent to what we've been saying I think if you zoom out, I would call it, overall, the expectations if we look at each of the markets I would call it, refinish is collision claims are going down mid-single digits is what we forecast here.

Are we seeing any improvements around the globe? I would say Europe is a bit better than that number, but -- that said, I would say, overall, the market is a bit sluggish here. If I look at Light Vehicle, Light Vehicle would be down, the markets are down 1% to 2% or 2% to 3% primarily North America. We're seeing weakness, obviously, in North America and China.

I would say the rest of Asia as well as Europe, seems stable. And then finally, when it comes to industrial, I would call it North America continues to be weak and Europe seems to be stable here as well. And then with that, I will probably turn it over to Carl to just maybe add some more color.

Ghansham, just the only other point that I think is helpful to add as you think about the second half for our revenue story, the foreign exchange tailwind will begin to abate. And so as you look at the second half, we are planning for revenue to be up low single digits.

Part of that will be the volume story that Chris talked to on Refinish. But also, we do expect price mix to also be positive for the year. And we continue to have a little bit of accretion from the acquisitions that we've done previously in Refinish as well. So I think it's an important story is even in this environment, we're able to kind of continue to grow top line here.

Okay. Great. And then I'm sorry if I missed this, but on the [indiscernible] cost trend line, what was the inflation for -- on the retro side for 2Q? And what's your current expectation for the back half of this year with all the ups and downs with upstream energy costs, et cetera?

Yes. So at full year, we -- at least -- it's important to know this is on a gross basis, right? So this would be not including any of the product but we do expect full year to be about a mid-single-digit headwind to overall raw materials. Q2 was about low single digits headwind as well.

Our next question comes from John Roberts with Mizuho.

It's Edlain Rodriguez on behalf of John. So a quick question on industrial. I mean I always thought in general like the U.S. is doing better than Europe. But clearly, your European business is outperforming North America. Like what do you think the U.S. is lagging for you in that business?

Well, certainly, I think when it comes to North America, it's really tied to consumer confidence and interest rates and house building. And let's call it, most of our business in North America is tied to building products. So let's call it, as construction goes, that's how our performance improves. And at this point, with interest rates and all the, let's call it, the negative sentiment in North America, that's what's driving a little bit of our performance or the lag in performance in North America.

Specific to Europe, that market specific to the products we serve Here, we provide Eco. Obviously, this is a different element that also goes into vehicles. So we have a higher market performance here and the market is also a little bit stable for us as we look at Europe, specific to the products we provide.

Okay. Great. And can you talk about China, what you see there in terms of OEM? I mean, like, what's your outlook for Chinese [indiscernible] EM?

Yes. So right now, if I think about the globe, our expectations are about $90 million. Specific to China, I would call that about $32 million for the full year. And if I look at those numbers from last year to this year, I would call that almost flat. And even if I look at, let's call it, front half to back half, I'd call it flat. And here, the dynamics is primarily driven by the fact that I think the local market, especially -- it's not a question of consumer confidence.

I think it's more a question of there's a ton of new models and new technology that's coming out, and I think folks are just waiting for the new models in terms of the customers we work with for the back half. That said, the strength for us that we're seeing in China is the export market. The export market is up 70% and on a comp basis. And so that's certainly driving some great performance from that team as we think about looking forward here.

Our next question will come from Duffy Fischer with Goldman Sachs.

Just a question on raw materials. So when you look at the increased inflation in the back half, is that just current prices rolling through the P&L? Or do you actually expect market prices for a lot of your raw materials to move higher?

And then within that, is everything moving roughly the same? Or is there a lot of differentiation between your products for summer, maybe up 15%, 20% and others are flat? Just how volatile is the basket for you guys?

Yes. Thanks, Duffy. Yes, the bulk of what we're seeing would be prices kind of holding where they are now. So it just would be the rolling effect into the P&L. We do see some pretty significant differences depending on what we are buying. So solvents, as you would expect, has been up probably 15%, 20% a bit just based on what's happening with oil prices.

Monomers has also been up as well, probably high single digits percentage basis, but others have been lower. So it is definitely a mix that we're seeing across the overall raw material basket that we're buying at this point. But at this moment, we're not forecasting really any significant changes, at least in the overall price levels for the rest of the year.

Great. And then just can you remind me the onetime benefit you got in mobility last year? How big was that?

It was about -- I think it was about $7 million of a benefit a year ago.

Our next question will come from Jeff Zekauskas with JPMorgan.

Your price/mix in mobility was down about 1.5%. Is that a bottoming for you? Do you think your price comparisons will improve from here? And can you get all the way to a positive price comparison by the end of the year?

Yes. Yes, I think as it relates to kind of our mobility overall business, we do expect it to begin to inflect in the third quarter, so you'll start seeing that turn positive for the third quarter. as we kind of think through that. Keep in mind, some of what you saw was more mix-related than price as we think about what happened in the second quarter. And also, we do have the RMIs that are -- that represent about half of the -- about 50% of the mobility segment for us that will begin to kind of kick in as we get into the fourth quarter.

Do you think your Light Vehicle volumes will grow in the second half? Or that's too hard in the current environment?

We are showing volumes to be up slightly, and it's really driven by the wins. So what the teams have done in terms of winning in Europe and Latin America, that should drive some volume growth in the back half. That's purely looking at Light Vehicle. But additionally, as we think about the overall segment of Mobility between what we see in commercial vehicle and the continued wins that the team will have on CTS. All of that when you look at the overall perspective of Mobility should show some volume growth in the back half.

Our next question will come from Joshua Spector with UBS.

This is Lucas Beaumont on for Josh. I just wanted to get back to Refinish. So I mean, it seems like price/mix there was sort of up maybe low single digits in 3Q. I know there's sort of some noise there looking forward with sort of the weak comps in North America impacting the mix. But you guys kind of called out as well that North America has been the sort of weakest area in terms of claims, too. So I just wanted to just sort of understand the interaction there and how you're thinking about a potential improvement in sort of price mix in the second half given that the higher [indiscernible] are still going to be flowing through as well?

Well, maybe I'll start and maybe turn it over to Carl. But from a perspective of how we think about North America, obviously, with a lot of the destocking coming out Q3, we should price mix, obviously, will start turning positive. So that's one element.

The second half of this is additionally -- certainly the large 600 Bodyshop wind that we just won with will -- and as we play out maybe a quarter or 2 should also help drive the benefit and the improvement in the North American business. So as I look at the North American business, my expectations are this will continue to grow positive, especially from a price mix perspective, nothing different than what we've said previously in terms of the consistency, primarily driven by destocking. But the additional benefit we also get is the new business wins coming through. But with that, Carl?

Yes. And maybe just to add a little bit more color as I think about Refinish. I think -- one, I think it is important just to note is the expectations we had for what occurred in the second quarter has been consistent with really the messaging we've been talking about over the last 12 months as well as when we thought things would begin to turn a little bit for Refinish. So it did come in as we expected, maybe even a little bit better in the second quarter. But as Chris said, a lot of the mix impacts, well, which was really one of the bigger drivers of what's impacted price/mix over the last 4 to 5 quarters. The bulk of that is behind us. And as we said, especially as we get into the third quarter that we should have another positive price mix story for us.

Great. And then I guess just on the light vehicle volume side, it looks like volumes were down maybe sort of 3 or so in the quarter versus the industry build rates were sort of down slightly or close to flat in the first half, kind of your volumes probably came in about 200 basis points below the build rates roughly. So I guess just what's sort of driving that did mention there? And how do you see sort of your outlook in the second half relative to build?

Yes. It's primarily driven with the customers that we serve and is specific to the customers in China as well. as our customers in North America. And what happens is as those customers go, we go and we saw, obviously, with those customers, maybe call it, dropping a little bit in volume. That's what's driven that a little bit of a difference.

That said, the new business wins that we're getting in Europe and Latin America. Additionally, in North America, some of those customers were also moving manufacturing between North America -- sorry, the U.S. and Mexico. So those volume changes eventually will sort itself out, and that's why we believe the back half will be back to an expectation of volume growth.

Thank you, ladies and gentlemen. We have now reached our allotted time for questions. And I'd like to turn the call back over to Chris for any closing remarks.

Well, thank you. Thanks, everyone, for calling in. And I think from my perspective, again, thanks for your continued interest and certainly to the employees of Axalta, a great quarter. Certainly, we'll be performing at this rate going into Q3 and certainly looking forward to the vote here in a week and becoming yet a stronger player as soon as we close. Thank you very much.

Thank you, ladies and gentlemen. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.

Ladies and gentlemen, thank you for standing by. Welcome to Axalta Coating Systems Q1 2026 Earnings Call. [Operator Instructions]. A question-and-answer session will follow the presentation by management. [Operator Instructions]. Today's call is being recorded, and a replay will be available through May 7, 2026.

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. Please go ahead.

Good morning, everyone, and thank you for joining us to discuss Axalta's first quarter 2026 financial results. I'm Colleen Lubic, Vice President of Investor Relations. Joining me today are Chris Villavarayan, our Chief Executive Officer; and Carl Anderson, our Chief Financial Officer.

Before we begin, please turn to Slide 2 for our forward-looking statements and non-GAAP disclosures. We posted our first quarter 2026 financial results this morning. You can find today's presentation and supporting materials on the Investor Relations section of our website at axalta.com.

Our remarks today and a slide presentation may include forward-looking statements. reflecting our current views of future events and their potential impact on Axalta's performance and with respect to the proposed merger of equals between Axalta and AkzoNobel.

These statements involve risks and uncertainties and and actual results and outcomes may materially differ. 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. Please refer to our filings with the SEC for more information.

With that, I would like to now turn the call over to Chris.

Thank you, Colleen, and good morning, everyone. Turning to our first quarter highlights. We delivered strong results and exceeded expectations across our financial metrics. In the quarter, we generated net sales of $1.25 billion, adjusted EBITDA of $259 million and adjusted diluted EPS of $0.56, which came in 12% above expectations.

These results reflect disciplined execution and a focus on the levers within our control. We also set meaningful cash generation records this quarter with $68 million of cash from operations and $21 million of free cash flow, an improvement of $35 million year-over-year.

This period marked the 12th consecutive quarter of year-over-year profitability improvement in our industrial business, while Mobility achieved a first quarter net sales record and adjusted EBITDA margin of 17.5% reflecting solid execution and cost discipline, and we saw stabilization in Refinish at nearly $500 million in sales, consistent with the last 5 quarters.

Innovation has always been and remains an important differentiator for Axalta. During the quarter, we received 6 Business Intelligence Group Innovation Awards and 3 prestigious Edison Awards. Echo next Jet, a collaboration with Dura and ZAR enables OE manufacturers to provide next-generation personalized exterior finishes at production scale, shifting from a fixed pallet to unlimited customization without sacrificing quality, durability or efficiency.

And Alesta e-Pro FG Black a powder coating engineered for thermal stability and secondary fire protection in electric vehicle battery systems. Echo NextJet and Alesta e-Pro FG Black were both acknowledged with Gold Edison Awards. St. Master AI, which was acknowledged with the Bronze Edison Award is a breakthrough intent manufacturing using advanced AI to address the challenge of color variability in paint manufacturing.

Edison Awards honor technologies that are redefining industries solving complex customer challenges and shaping the future. I want to recognize the smart and talented people at Axalta for developing and bringing to market advanced solutions with real-world impact.

Let's turn to Slide 4. We Against a backdrop of macro uncertainty and elevated volatility, we remain focused on managing through what we can control. While recent developments have increased uncertainty across cost and supply availability, our actions over the past several years have positioned us well to mitigate raw material inflation. We're closely monitoring developments across energy, logistics and the broader supply and demand landscape as it relates to the evolving situation in the Middle East.

From a purchasing perspective, we delivered 12 consecutive quarters of year-over-year improvement in variable costs due to strong productivity projects as well as focused implementation of procurement best practices. We now have approximately 60% of our direct spend under contract rather than spot buys.

Many of our strategic supplier agreements are stronger and incorporate indexation, which is helping reduce volatility and improve visibility. As it relates to pricing, -- we plan to move quickly to offset the impact of inflation. We're driving solid discipline across the portfolio. In Refinish, we expect to implement mid-single-digit pricing in 2026, reflecting the value we deliver.

In mobility, more than 50% of our revenue is now tied to raw material indices, which provides a natural hedge against cost volatility. Mobility has delivered 6 consecutive quarters of positive year-over-year price mix, reinforcing our ability to offset inflation. Across the rest of the portfolio, we are prudent and proactive with the pricing actions and surcharges in place, where appropriate to help protect margins.

From a transformation and cost discipline standpoint, we continue to tightly manage our operating expenses. In the first quarter, SG&A declined 7% year-over-year on a constant currency basis and we exceeded our operational productivity targets. Even amid top-line pressure, our adjusted EBITDA margins have exceeded 20% for 9 consecutive quarters, underscoring the durability of our operating model.

Supporting all of this is our resilient supply chain and cost structure. Approximately 90% of our direct buy is locally sourced, where variable costs represent about 60% of COGS. Inventory levels remain at roughly 115 days on hand, which helps limit the impact of inflation, particularly as we enter the second quarter.

Let's turn to Slide 5. We see solid execution across all our businesses. In Refinish, net body shop wins increased 10% year-over-year and generated net sales growth in the first quarter in 3 out of our 4 regions. We're also expanding with leading MSOs, which remain a key focus for the business. In Industrial, our most diversified portfolio, the we global macro has been the story for the last few years. However, we are starting to see signs of recovery. We delivered 5 consecutive quarters of net sales growth in Asia, driven by our Energy Solutions business, drove volume growth in Europe during the quarter with share gains in our e-code business, and we're seeing positive price/mix for 7 straight quarters.

In mobility, we delivered record net sales in the first quarter of $452 million and growth in 3 out of our 4 regions. Commercial Transportation Solutions, which was a bright spot in 2025 and also delivered record first quarter sales, driven by continued success with new business wins. Overall, new business wins and excellent operational performance across the portfolio are helping us offset the headwinds in North America where the macro environment has been tempered by economic anxiety, elevated consumer costs and higher for longer interest rates.

With that, I'll turn the call over to Carl to discuss our financial results.

Thank you, Chris, and good morning, everyone. Turning to Slide 6. net sales were $1.254 billion, a 1% decrease year-over-year, primarily driven by lower volumes in Performance Coatings. This was partially offset by favorable foreign currency translation largely due to a stronger euro. These dynamics were expected and contemplated in our first quarter guidance.

Gross margin was 33% and down slightly from last year, driven primarily by unfavorable mix from lower volumes in North America. Net income was $91 million, a decrease of $8 million from the prior year period. This was driven primarily by $22 million in transaction costs associated with the pending merger with AkzoNobel.

These costs were partially offset by a $17 million discrete income tax benefit and a reduction in interest expense. SG&A was down slightly as we continue to aggressively manage our cost structure. Adjusted EBITDA in the quarter was $259 million, resulting in an adjusted EBITDA margin of 20.6%, while both metrics were lower year-on-year, we did perform above expectations as reductions in operating expenses and variable costs helped to offset lower volumes in Performance Coatings.

Adjusted diluted earnings per share was $0.56, exceeding our outlook by 12%, supported by lower interest expense and stronger overall earnings in the quarter. Our momentum in cash generation remains strong. Cash provided by operating activities was $68 million, a company first quarter record. This was an increase of $42 million year-over-year.

Free cash flow of $21 million was another first quarter record for Axalta and improved by $35 million versus the prior year period. This was primarily driven by improved working capital and lower interest payments. Performance Coatings first quarter net sales declined 2% year-over-year to $802 million. This decrease was driven by lower volumes, primarily in North America and unfavorable price/mix.

These impacts were partially mitigated by favorable foreign currency translation and contributions from our acquisitions and our Refinish business, which we continue to execute as part of our distribution strategy outside of North America. Refinish net sales declined 3% to $498 million, reflecting lower claims activity and shifting customer order patterns as anticipated.

Industrial net sales declined 2% year-over-year to $304 million, with volume pressure in North America and Latin America, partially offset by price mix and foreign exchange. Notably, Europe and China delivered volume growth in the first quarter. First quarter Performance Coatings adjusted EBITDA was $180 million, down from $197 million a year ago.

Adjusted EBITDA margin decreased by 170 basis points to 22.4% due to lower volumes and unfavorable price mix, which was partially offset by a reduction in operating and variable expenses. We do expect that price/mix will inflect positively beginning in the second quarter and carry on through the rest of the year.

Mobility Coatings delivered record first quarter net sales coming in at $452 million, an increase of 3% from the prior year period. Light Vehicle net sales increased $9 million, driven by favorable foreign currency and organic growth in 3 of our 4 regions, including continued momentum from new business wins in Brazil. As planned, sales in China declined in line with lower auto production in the region.

Commercial Vehicle net sales were also up 3% year-over-year, supported by favorable foreign currency impacts, new business wins, positive price mix and record commercial transportation solution sales, which together helped offset the effect of lower Class A truck production. Mobility Coatings adjusted EBITDA totaled $79 million in the first quarter compared to $73 million a year ago, reflecting benefits from lower variable costs, favorable foreign currency and reduced operating expenses.

Adjusted EBITDA margin increased 100 basis points year-over-year to 17.5%. In the first quarter, we delivered another period of consistent cash generation, which underscores the durability of our operating model. Interest expense declined 14% year-over-year -- and during the quarter, we repaid $54 million of gross debt and added with a net leverage ratio of 2.3x.

For full year 2026, we expect interest expense of approximately $150 million representing an improvement of more than $25 million versus last year and nearly 27% lower than 2024. For the rest of the year, we are planning on deploying most of our free cash flow to pay down our term loan and expect that our net leverage ratio will be below 2x at year-end.

As we turn to our outlook on Slide 10, I'll start with the macro assumptions underlying our 2026 guidance. External forecasts and key performance indicators remain relatively consistent with how we entered the year. That said, geopolitical developments, including the situation I ran and broader Middle East tensions, have increased uncertainty across global markets, impacting energy prices, inflation and consumer sentiment.

While the ultimate duration and economic impact of these developments is unclear, to heightened volatility has the potential to create additional pressure on both demand and cost in the back half of the year. In Refinish, we are seeing signs of a more stable market as destocking trends are abating and claims activity is sequentially expected to improve.

Auto insurance premiums have moderated meaningfully. Used vehicle prices are rising and miles driven are trending favorably. At the same time, consumer sentiment inflation concerns are more challenged. All this being said, we are planning for second half volumes to improve compared to last year. In Industrial, we were encouraged by the results we saw in the first quarter, particularly in Europe and Asia. However, we remain cautious about the pace and timing of recovery in North America this year.

Overall, our business is positioned very well for an eventual market recovery in North America as we are performing at record margin levels and have significantly improved our operational efficiency. In mobility, we are now assuming global auto production of approximately 91 million builds, down from our prior outlook of 92 million units.

In Commercial Vehicle, external forecasts for North America Class 8 builds have increased and we now assume approximately 274,000 units, up 10% from previous expectations. With respect to the second quarter, we expect net sales to be roughly flat with adjusted EBITDA in the range of $280 million to $290 million and adjusted diluted earnings per share of approximately $0.65, roughly in line with a year ago.

For the full year, we are maintaining our previous guidance expectations for revenue, EBITDA, earnings per share and free cash flow. At this point, we are tracking closer to the lower end of EBITDA and EPS guidance given the demand signals we are seeing at this time. We also continue to expect to deliver adjusted EBITDA margins of approximately 22%, in line with last year, as our pricing and cost actions are expected to help offset the incremental inflation we anticipate.

Overall, our outlook reflects disciplined execution and continued focus on margin protection, cash generation and confidence in our ability to perform yet again in any type of environment. Turning to Slide 11, I'll provide an update on the pending merger of Ecos with AkzoNobel. The transaction continues to progress very well, and we remain firmly on track with all of our key strategic work streams. Both teams are highly aligned and are working together seamlessly as we prepare for the shareholder vote regulatory approvals and day 1 readiness.

A critical pillar of this combination is the substantial synergy opportunity we have identified. We remain confident in our ability to deliver $600 million in annual run rate synergies. Integration planning between both companies is well underway with dedicated clean teams established to identify and accelerate these synergies, and designed to capture value quickly and deliver a seamless transition at ECOS.

On the regulatory front, filings are underway, including the U.S. and the EU -- we have filed a confidential Form F-4 with the SEC and are progressing as planned. In parallel, we are maintaining active and constructive engagement with shareholders and we expect the shareholder votes for both companies to take place by early July.

Overall, we are excited and energized and remain confident in our ability to deliver meaningful substantial and sustainable value creation through the combination with AkzoNobel.

With that, I will turn it over to Chris for closing remarks.

Thanks, Karl. We're executing well and delivering consistent performance while maintaining strong operational focus. At the same time, we have made significant progress towards our combination with AkzoNobel that we expect will strengthen our portfolio, enhance our financial profile and create significant long-term value for shareholders. The transformational actions we have taken across procurement, fixed operating costs and network optimization have fundamentally improved the business and protected margins to prepare for the upside. We have built a solid foundation, which has strengthened with the Akzo combination, and we will be ready when the macro rebounds.

Thank you for joining us today. I will now turn the call over to the operator to open the line for Q&A.

[Operator Instructions] We will take our first question from Ghansham Panjabi with Baird.

I guess just given the abrupt spike in the raw material cost, has that dynamic changed the destocking dynamics impacting auto refinish, especially in North America? And could you just update us on your view for the time line for volumes in that business to inflect higher? And just a broader question as it relates to whether that dynamic might start to intersect with just a broader economic slowdown given the spike in inflation and the impact on the consumer, et cetera?

Sure, Ghansham. So I'll start, and maybe I'll turn it over to Carl. But as we see it right now, we're certainly seeing stabilization. And as April is closing. And as we look at Q2, I would say we're showing a bit of an increase in volumes in Q2 or, let's call it, sales in Q2, and we're certainly seeing that come through.

So I would say the market is pretty stable, and we're heading towards a recovery. And if you look at Carl's last slide, if you look at all the indicators, they're all positioning the right way, miles driven up. Insurance costs are starting to abate, and we can start seeing that flat line. And also the used car pricing is trending the right way. So all of this dynamic is heading the right way.

For us, the incremental benefit here is also what's happening with destocking. Destocking is starting to abate and you can start seeing that in our results in Q2 or our guide for Q2, we're essentially seeing price/mix start turn markedly positive and it's really driven by that.

Yes. And Ghansham, just to add, I think the -- in addition to all that, especially as we think about the second half on price mix with some of the price actions the teams are executing, as Chris said, that will imply positively second half, and you probably will see that in the second quarter as well. And we're also seeing the benefit from some of the more recent M&A transactions come through as well for the full year.

Thank you. We will move next with Mike Sison with Wells Fargo.

Nice start to the year. Just curious, when you think about the second half of the year, third quarter, fourth quarter, you have more heads of raw material costs and such. And if you get to the midpoint of the guidance, you're going to need a much -- well, about much target, but a stronger second half versus first half.

So -- can you sort of walk us through how you get that ramp into the third and the fourth? And how you think the raw material situation gets sort of handled during that time period?

Sure, Mike. I think it's a very good question. If I look at Q1, you can see that we had a good quarter. We had pockets of improvements across all 3 businesses. if you look at industrial, we had strong performance in Asia. We actually saw Europe return was good news. Again, 1 quarter doesn't certainly set a standard here going forward. So we're seeing positive momentum even as we look at April in Industrial.

And now moving to Refinish. Again, we're starting to see sales inflect and our performance as well, especially with destocking coming out is positive here, too. And in Mobility, the real story here is the return of CV. As you look at and our performance also in CTS -- the commercial vehicle market, if you look Q from Q, Q1 to Q1 of this year was actually down 26%, but we're only down about 6%. And it's really our performance in the growth on the CTS side.

So now if you project that forward, what's driving the benefit, it's 3 or 4 things. The first thing is we've already gone through with pricing across all 3 businesses. And then if you look at how we're normally structured, it's usually 48% in the front half and about 52% in the back half. If you look at us now, it's like 45-55. What's the difference? It's really 3 things. The first 1 is with destocking coming out, we expect that positive price mix in Refinish to inflect and continue through the back half.

The next element of this is really the the CV volumes coming back. Again, with commercial vehicle coming back in the back half, that strengthens us in the back half really drives good margin performance. As you know that those margins are higher and closer to our Refinish margin. And the last element that we have here is a little bit of a pickup in REV or, let's call it, markets.

So we expect industrial to be up slightly and also Refinish to continue to inflect through the back half. So those are the 3 things that are driving the positive momentum in the back again, the offset is certainly the inflation, which we have already priced for.

We will move next with John Roberts with Mizuho.

This is Edlain Rodriguez for John. Chris, you talked about the 50% of mobility revenue that's tied to the raw materials index. Can you talk about any lag if there is any in there? And also for the remaining 50%, will prices come on time to not have any negative impact in the second half of the year?

Yes, it's a great question, and it's reflective of what I would say the team has performed. If you look at the last 3 years, as you know, this isn't the first time we've been here. I mean, if you look through the tariffs, if you look through the Iran, Russia conflict, if you look through hyperinflation, this team over the last 3 years has had to deal with this many other times.

And I think this is the nate muscle that we've changed at [indiscernible] and it's really about driving that pricing discipline when we see it. And so I would say in terms of mobility, on the other 50%, we have already gone out with pricing. There is a 3- to 6-month lag with indexes but you also get the positive on once this starts inflecting the right way.

But overall, as you can see our margins and what we're laying out as our guide for Q2 and the rest of the year, it shows the positive performance because we absolutely believe we can capture this not only through pricing but also the cost actions from a productivity and a purchasing initiative standpoint that we have out there.

You put all that together, the whole company will be running at about almost 22 points of margin, but this business will be running at 17% to 18%, probably some of the best performance we have seen in the last 5, 6 years.

We will move next with David Begleiter with Deutsche Bank.

This is Emily Fusco on for Dave Begleiter. Just kind of turning back to Refinish and the trends you're seeing. Your competitors that have already reported have suggested share gains. So just kind of how would you characterize your positioning today? Or any more color you could give?

Yes. I think I've obviously stayed away on commenting with what our competitors do. Maybe I'll give you about 3 or 4 perspectives here. The first 1 is specific to, I think, some of the commentary that have come out in the last -- in this quarter it's easy to show improvement from double digits down to up double digits.

So maybe it's net 0. But moving from that and being more specific to us, we measure net body shop wins. And as I described it, in our Q1 performance, we saw that go up 10%, and that is a record, record quarter for Axalta. And so how are we growing? And if you look at this data also over a 3- to 4-year look, you notice we went from about 85,000 body shops to close to north of 95,000 body shops. So we continue to grow, and we can see that.

Conceptually, 1 of the things that we are growing more is in the economy space and mainstream space, this was obviously driven by our CoverFlexx acquisition, which we did almost a year ago that's really enabling us to grow in this region or this area. We used to have about 9% market share. We move north of 11%. So this has been a good story for us. And as I look to the rest of the year, we believe, especially with MSOs in North America, where we can also start seeing that we're expanding.

We already have 9 out of 12. But with those MSOs, we continue to win more body shops. And on top of that, as I look at the economy mainstream, I believe this is going to be a very strong year for us.

We will take our next question from John McNulty with BMO Capital Markets.

This is Caleb on for John. Just given some of like how much like the chemical spot rates have moved this year, can you help us understand a little bit better, like why the inflation headwind is only like mid-single digits this year and not higher like many people thought maybe just kind of like what your -- what the raw material headwind will be as you're exiting Q4?

Sure. I'll start, and maybe I'll hand it over to Carl. I would say there are probably about 3 or 4 things that may be were similar or differentiate us from others or peers than what we are seeing I think first 1 is geographic mix. If you look at the impact, which is more European and Asia from an Asian impact,

China is about 10% for us. Asia is, let's call it, just north of 15 points percent for us. So in terms of impact, it's less for us from a geographic perspective. The second part of this is if you think about our buy of our COGS is Cox. And of that, about 40% to 50% are tied to oil. So we are slightly better in this case as well compared to some of our peers. The third element of this is something that we've been working on for quite a while for the last 3 years is really our purchasing initiatives and what we -- how we have driven our material buys, we used to be 60% on spot buys, we're now 60% on contracts.

And so we have a natural hedge here based on indices and the ability to manage this at least with some visibility through the full year. So I think those are the 3, the incremental benefit we also have is the inventory levels. We're sitting on 115 days that puts us around 4 months. And if you really think about it, it's different by business and it gives us the ability to manage to push forward pricing faster or a little bit slower. But in terms of the Q2 impact, we're seeing this to be low single digits and increasing through the back half of the year.

And I would say, as we get through the back half of the year, this might feel like high single digits, but we'll certainly be out there with pricing when we see that effect come through. Maybe I'll turn it over to Carl.

Yes. And just maybe to add to that, if you look at just 2026, obviously, first quarter, we performed better. So we were low single digits that benefit as we think about a raw material performance. As Chris referenced, we do expect that for the full year to be mid-single digits. And it's really going to be a focus and more of a -- where we're going to be going as it relates to what oil is going to be doing a little bit longer term.

So whether it's mid-single digits or potentially a little bit higher that as we're exiting the year, as we look at the business, we expect to continue to drive productivity within how we manage our purchasing spend. as well as other cost measures that we look to deploy.

We will take our next question from Matt with Bank of America.

Rock Hoffman on for Matt. I think your slides have called out mid-single-digit pricing for Refinish. Is that a full year comment or a 2Q to 4Q comment? And how can I kind of square that away with the negative price mix you saw in 1Q. Also just any updates on kind of the IRIS mixing rollout would be helpful as well.

Yes, sure. Thanks for the question. Yes. So if you think of the first quarter, pure price was about low single digits, up about 2% on a year-over-year basis. Most of what you saw as far as in the quarter, related to the negative impact was on mix. And as we look forward, some of the pricing actions the team is putting into place here in the second quarter as well as in the second half.

So those numbers would be for what the full impact would be with the total gross pricing that we're going after specifically for our Refinish business. Really, as it relates to Iris mix, we're pretty excited about that. The teams are executing very, very well. I think we're getting -- we're nearing 1,000 in total installations. And that's -- it will continue to be a big focus for Refinish team as we look to get that out more broadly here in North America.

we will take our next question from Mike Harrison with Seaport Research Partners.

Chris, maybe you could give us a little more detail on what you're seeing in commercial vehicle. Just some thoughts on the timing of this big swing in Class 8 -- and then maybe some more detail on what's going on in Commercial Transportation Solutions.

I assume that, that's kind of the fruit of several quarters or years worth of effort to build out that business. But maybe give us some more detail on the momentum you're seeing and any specific customer wins or markets or applications you would call out?

Sure. Thanks, Mike. Great question. I'd love to. So as we look at commercial vehicle and obviously, coming from my past, it's certainly very cyclical. And as it goes down and goes below a replacement demand, you always expected in a few, let's call it, a few quarters later to always pick up, and we can certainly see that pick up.

So Q1 was very weak. And as you can see from many of the OEs that have reported, if you do a Q-over-Q comp, you can see the decline. But as we get into Q2, we can already see those numbers pick up in turns, not only from a forecast perspective, but also what we see in April. One of the things that we did is, as we got into the business and certainly a credit to the mobility team in terms of we were -- we had such a strong presence and such leadership on the OE side of Class 8.

And we wonder -- as the team wondered why could -- we could take that technology and certainly match it in everything that's CTS. And if you think about this space, it's really what we do in specialty, what we do in off-highway, what we do in military and also whatever we do in RVs or the recreational space. So they set a plan to really grow in this space.

And just to give you a perspective, the overall market is about $3.5 billion, and we only have about 7% market share -- so we saw this as a great opportunity to grow. And that's certainly -- the fruits of all that work is what you're seeing coming through in Q1, and it will certainly continue to come through as we go through the rest of the quarters not here to probably provide what our targets are going to be for the rest of the year.

But I just want to point out, you can see the performance, again, as I said earlier, coming through in Q1. The market is down 26 points we're just down 6 points so that offset really happened from all the wins that we had on the CTS side. Now going forward, the additional space opportunities here is this isn't just focused in North America. We're also looking at how we can really expand this globally -- and this is certainly, I think, something that's a bright star in our mobility business.

The incremental difference we also made here was at capacity. Our CTS and our Refinish business actually come out of our Refinish lines and our refinish plants. So we needed to add capacity and really make sure that we were ready once we took this volume to that once CV returned that we can ensure that we can protect and perform for those customers. And we've certainly done that. The record capital investments that you have seen part of that was to ensure that we're structurally in the right place for this business.

So I think there's far more upside here in this business as we go forward, and I look forward to tell you more about it as the rest of the year progresses.

We will move next with Patrick Cunningham with Citi.

This is actually Rachel Lee on for Patrick. So I know that you're still guiding to greater than $500 million for the full year free cash flow. So given the potential for mid-single-digit inflation and working capital requirements, how are you managing inventory levels and receivables through the balance of the year?

Yes. Thanks, Rachel, for the question. So I think maybe we'll start in the first quarter. We were pleased with the performance. If you think about our cash conversion cycle, we improved by about 6 days year-on-year in the first quarter. And as I think what is in front of us for the rest of the year, as Chris said, we are pricing. And so if I look at kind of what the impact is going to be in DSOs, we're going to get out in front of that a little bit.

So I think even with a mid-single-digit inflation kind of running through and getting an inventory, we still feel very, very confident in our ability to deliver on free cash flow. We're going to have lower interest expense this year on a year-over-year basis, and we continue to look to improve overall cash conversion cycles for not building off what we did in the first quarter, and I'm hoping that we will be able to improve that even a little bit more on a year-over-year comparison as we move throughout the year.

And I just wanted to add -- maybe just to add to a few more comments. I think I really want to add to the performance that we saw in Q1, really a credit to the finance team and Carl, but just driving some enormous performance in interest rates. And obviously, we'll get that tailwind for the rest of the year.

We will move next with Chris Parkinson with Wolfe Research.

I realize you can't necessarily jump the gun in terms of the AXA deal, but in terms of your own cost execution and just navigating what I think most of us would characterize as fairly difficult markets over the last few years. Is there any kind of update on your thoughts or the trajectory of the synergy target with the companies, Presumably, you're still going to touch with them, you've been executing on your own any quick update there would be very helpful.

Yes. Christopher. Good question. Certainly, I think on both sides, we're managing costs. But I would say Greg and I have been working with a clean team environment. We've had 2 exceptional teams on both sides to work on this, especially as we get closer to the boat and also start heading towards close to really define what is the work streams with hard to help up some external consultants so that we can keep this very clean and also look at what actions and the more and more time both of us spend on this, we can really get comfortable with the actions and be able to reiterate that the $600 million is just the floor.

And I would say -- as we get half the vote, we're going to spend far more time on really driving the actions so that we can get -- hit a gate running when we close. But I would say every day we spend and we were on calls weekly we get more and more comfortable with the fact that this will create enormous value. And I mean, you think about all the different multitude of buckets that we can focus on in terms of scale and purchasing, we go from $2 billion to $6.5 billion plus.

There's an enormous ability here from scale what we're doing right, what they're doing right, what the overall scale can provide and then from that, you can move to supply chain synergies, what we can do jointly from the fact that between the 2 of us, we have almost 400 warehouses and locations and how we could improve all of that and drive utilization, how we're approaching the same customers.

And then you go into the duplicity of everything that you have in SG&A. And finally, even beyond that, the incremental opportunities when you look at indirect and all the other cost buckets. I would say there's just a basket that is -- provides a great opportunity to work on once we become together as a combined company.

We will move next with Kevin McCarthy with Vertical Research Partners.

This is Matt Hettwer on for Kevin McCarthy. What are you seeing in the demand function for your industrial business? It sounds like like they're stronger in Asia and Europe than domestically. Could you take us through how the business is doing regionally -- and then finally, what are your thoughts on whether rising input costs for your customers in that business will lead to incremental demand weakness in the back half of the year?

Sure. I'd love to. I think maybe I'll first give you a perspective again to the 2 bright spots. Asia continues to grow. We have seen, let's call it, 5 quarters of growth. And as we project forward, -- it still looks strong for us. And again, this is primarily in our Energy Solutions business, where everything that we provide, whether it's impregnating resins for battery -- sorry, for motors or all the coatings that we provide for battery enclosures, all of that is on a positive trend.

And so certainly, a tailwind that we see there. In Europe, that inflected last quarter, again, business that we gained here in E-Coat and we continue to see positive signs in volume across even powder and architectural extrusions in this region. So that's a positive inflection for us.

Again, the positive here is also probably coming into the spring buying cycle. Now moving to North America. This continues to be weak. Again, I think interest rates being higher for longer has been an impact here. But we feel, at some point, this will inflect.

And just to add to that, for Industrial in total, we're not -- for the full year, we're seeing it really flattish on a year-over-year basis. And so if you think about even in the second half on your demand question, we're not seeing in aggregate in getting that much better through the year, and that's already reflected in our guidance numbers that we put forward.

Our next question comes from Josh Spector with UBS.

This is Lucas Beaumont on for Josh. So I mean it seems like there's kind of been a shift amongst, I guess, both you guys and the rest of the coatings peers towards like greater index linking of pricing to raw material shifts. So I guess that's probably happening more in the coatings businesses that seem to have less pricing power compared to those with more -- and I guess while we sort of might reduce shorter-term earnings volatility at the front of the cycle,

I mean, it then seems like it's set up to kind of give the pricing back on the back end and might like reduce the net price cost benefit that you're capturing over the full cycle. So I mean, I probably would have said this was like a feature as it ties to a bug in the sense that you're getting more price cost over time and it's helping kind of drive your earnings growth in the medium term.

So do you think the shift -- I guess, one, maybe just give us a view on how you see this shifting or not shifting overall? And then I mean would you -- how do you think that supports or, I guess, impairs medium-term earnings growth cycle?

Well, maybe I'll start and then hand it over to Carl. I would have to disagree with that a bit, primarily because of my view on what the indexing provides. What the indexing provides is more visibility and control so that you can price. And as I look at our business model in 2 out of our 3 businesses, this, let's call it, the indexing is not tied to that.

So when we talk about our Refinish business and when we talk about our industrial business, the best part of what we do is we see the visibility from a purchasing aspect and then we are able to go right in and price. And as you can see with what we have already defined in terms of pricing both in our industrial and Refinish business, we've already done that. We've already priced in Q1 we're already seeing the results. That's why we can already target almost 22 points of margin for Q2.

Now moving into our mobility business, that's where there's indexing tied for 50% of the business to RMI indexing. And here, your comment is solid with the exception of the fact that you do get it on a lag basis. On the rest of the business, we are able to price, and we have done it consistently through what I would call it, through the last 3 risk factors that we have faced in the last 3 years, whether it's the inflation that we saw because of the tariffs, whether it was just the pure hyperinflation that we saw in North America or whether it's the Iran conflict or for that matter now, the Middle East conflict, my simple perspective here is we set a target that was 300 to 400 basis points higher than where we were just 3 years ago.

In our A plan, we set a target of 21 points of margin, and we have been performing at that margin even through all these 4 crisis. at north of 21% to 22% for the last -- and certainly, that is reflective on our EBITDA performance for the last 3 years. But now I'll turn it to Carl, if I miss something.

I don't think you missed anything, but just as a reminder, during this whole time period when we really started to increase the overall RMIs we had in place in our mobility business, we've more than doubled the margin during that time period. And if you look back over the last probably 4 or 5 years, the overall margin profile of Axalta's expanded 600 basis points. So when we have best margins in the business in the coatings business. So we feel very good with our strategy and how we're executing

Thank you. At this time, we have reached our allotted time for questions. I will now turn the call back over to Chris Villavarayan for closing comments.

Well, to everyone, thank you for calling in and certainly for your interest. I certainly want to start by congratulating the team for a good Q1, a solid Q1. We're certainly looking forward to Q2, and we believe that we have great plans to execute here, including working with Greg and the Axo team towards our merger. And with that, thank you.

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.

Ladies and gentlemen, thank you for standing by. Welcome to Axalta Coating Systems' Q4 and Full Year 2025 Earnings Call. [Operator Instructions] A question-and-answer session will follow the presentation by management. Today's call is being recorded, and a replay will be available through February 15.

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 Fourth Quarter and Full Year 2025 Financial Results. I'm Colleen Lubic, Vice President of Investor Relations. With me today are Chris Villavarayan, our CEO and President; and Carl Anderson, our Chief Financial Officer. We posted our fourth quarter and full year 2025 financial results 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 in 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 Axalta's performance with respect to the proposed merger of equals between Axalta and AkzoNobel. These statements involve risks and uncertainties, and actual results and outcomes may differ materially. We are under no obligation to update these statements.

Our remarks in 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.

With that, I'll turn the call over to Chris.

Thank you, Colleen, and good morning, everyone. In the fourth quarter, Axalta delivered another period of strong operational execution, solid margin performance and record cash generation. We generated net sales of approximately $1.3 billion despite ongoing macro headwinds in North America with year-over-year growth in 3 of our 4 regions.

Adjusted EBITDA was $272 million with our margin remaining strong at 21.5%, an improvement of 50 basis points versus last year. This marks our seventh consecutive quarter at or above our A Plan margin target of 21%, underscoring the strength of our commercial discipline, pricing actions and cost management. Adjusted diluted EPS was $0.59, roughly flat year-over-year.

In Mobility Coatings, we delivered a record fourth quarter performance in net sales and adjusted EBITDA, supported by new business wins and steady global production. Performance Coatings sales and mix fell short of our expectations in Q4. The fourth quarter marked a record for cash generation both in terms of operating and free cash flow. Overall, the quarter caps a year of significant progress at Axalta.

Let's turn to Slide 4. Looking at 2025, we delivered record financial results this year, and I'm extremely proud of what the team accomplished. Adjusted EBITDA was $1.13 billion, representing a $317 million growth since 2022, with margins expanding over 500 basis points to 22%. Adjusted diluted EPS increased approximately 55% over the same period, reaching another all-time high. And free cash flow came in at $466 million, an increase of over $300 million compared to 2022.

These are exceptional results that highlight our strongest financial performance on record. The discipline, ownership and drive that was required to achieve these financial results speak to the strength of the Axalta team, especially considering it was accomplished in a challenging market backdrop with significantly lower demand. Our team has consistently raised the bar, reinforcing the foundation of a well-performing and resilient company.

Let's move to Slide 5. Let me briefly highlight the meaningful operational and commercial progress we delivered in 2025, progress that is strengthening our cost structure, improving service and delivering accretive growth.

Operational excellence is a core driver of our performance. As always, safety is our top priority. We reduced injuries by 40% since 2024, achieving a TRIR of 0.18, far outperforming the industry average. We won't stop until we achieve a zero-incident environment and will remain steadfast in driving safe behaviors and best practices around the world.

We delivered more than $300 million in variable cost reductions through our procurement and material productivity programs and lowered fixed expenses by over 6% on a constant currency basis in 2025. This was supported by a $100 million in incremental structural benefits from our transformation initiatives.

We invested a record $196 million in CapEx to support productivity and reduced our footprint by optimizing multiple sites over the past 2 years. We also improved service levels to our customers with a 10% improvement in on-time delivery. These actions support our strong 22% EBITDA margin for the year.

Commercially, we're building top line momentum. In Refinish, we added over 2,800 net new body shops and grew adjacencies by $25 million. In Mobility Coatings, we secured $60 million in net new wins with standout growth in Latin America and China. And in Industrial, our Asia Pac team delivered 5% net sales growth despite a weaker macro. These operational and commercial accomplishments are sustainable enhancements that are driving our financial performance.

On Slide 6, I want to highlight what our underlying performance demonstrates against a backdrop where demand significantly declined in most end markets due to the macro headwinds. Starting with Refinish. Global activity is running mid-single digits below our expectations. This shortfall is compounded by distributor consolidation in North America, which has created near-term volume pressure as the channel rationalizes inventory. In Industrial, demand across North America and Europe is significantly weaker than we all anticipated.

Light Vehicles is performing comparatively better. Revenue is tracking close to our expectations, although global auto production is running about 1% below the levels we assumed. And in Commercial Vehicles, conditions are certainly challenging. Class 8 builds in North America are down roughly 30% versus our assumptions, reflecting a broader slowdown in fleet refresh activity and softer freight demand.

But the story I want to emphasize is not the macro. The real story is what we have been able to do despite the weakness. The actions we have taken across procurement, fixed operating costs, network optimization and productivity have fundamentally strengthened the business and protected margins to prepare for the upside.

The chart on the right shows that when markets normalize, we are positioned to deliver margins well north of 21% and generate adjusted EBITDA above the $1.2 billion in the A Plan target. We have built the foundation which will further be strengthened with the Akzo combination, and we will be ready when the macro recovers.

With that, I'll turn the call over to Carl to walk through our results on Slide 7 and our outlook for 2026.

Thank you, Chris, and good morning, everyone. In the fourth quarter, net sales declined 4% year-over-year due to lower volumes in North America across all of our businesses. These headwinds more than offset favorable year-over-year foreign currency translation primarily due to the stronger euro.

Gross margins decreased 70 basis points compared to the previous year, primarily driven by unfavorable geographic mix tied to lower North America net sales compared to the prior year period. Net income was $60 million compared to $137 million in the prior year period, driven primarily by higher tax expense and $21 million in transaction costs primarily related to the announced merger with AkzoNobel.

Income tax expense was $57 million higher in the fourth quarter of this year due to a onetime deferred tax benefit recognized in the fourth quarter of 2024 and evaluation allowance accrued this quarter. These increased expenses were partially mitigated by excellent execution on costs. Interest expense declined 11%, SG&A expenses were down 8%, and other fixed operating costs were down 4% compared to a year ago.

Adjusted EBITDA in the quarter was $272 million, down slightly from last year and lower than our guidance expectations as December volumes in both Refinish and Industrial came in lower than anticipated. Adjusted EBITDA margin expanded 50 basis points year-over-year driven primarily by strong Mobility results and lower costs.

Adjusted diluted earnings per share was $0.59 in the quarter, roughly in line with a year ago, as less shares outstanding and lower interest expense helped to offset decreased income from operations. Fourth quarter cash from operations of $344 million and free cash flow of $290 million were both fourth quarter records. The year-over-year increase was driven primarily by improved working capital and lower interest payments.

Performance Coatings fourth quarter net sales declined 6% year-over-year to $791 million, primarily due to lower volumes and unfavorable price-mix. Refinish net sales decreased 7% to $509 million in the fourth quarter, reflecting ongoing low levels of claim activity and adjusted order patterns as North American customers manage their working capital.

Industrial net sales declined 5% year-over-year to $282 million due to volume declines in North America and Europe, partially offset by favorable foreign currency tailwinds in the quarter.

Fourth quarter Performance Coatings adjusted EBITDA was $180 million, down from $198 million a year ago. Adjusted EBITDA margin decreased by 70 basis points to 22.8% due to the conversion from lower sales, partially offset by a reduction in operating expenses.

Mobility Coatings fourth quarter 2025 net sales were $471 million, an increase of 1% from the prior year period. Light Vehicle net sales increased by $3 million from the fourth quarter of last year due to positive price-mix and favorable foreign currency, mitigating volume declines in North America.

Commercial Vehicle net sales were flat, supported by new business wins, favorable foreign currency impacts and positive price-mix, which, together, helped offset the effect of lower Class 8 truck production on a year-over-year basis. It's important to keep in mind that North America heavy-duty truck production was down roughly 30% in the quarter, which underscores the resiliency of the business driven by growth factors in commercial transportation solutions.

Mobility Coatings adjusted EBITDA in the quarter increased 20% to $92 million in the fourth quarter compared to $77 million in the prior year period. The increase was due to strong contributions from price-mix and lower operating expenses. Adjusted EBITDA margin was 19.4%, an increase of 300 basis points compared to last year.

Let's turn to Slide 10 for a review of our full year results. In 2025, net sales declined 3% year-over-year to $5.117 billion. The primary driver was broad industry softness in Performance Coatings. This was offset by new business wins, favorable currency translation and positive price-mix across 3 of our 4 end markets.

Overall, 2025 was the story of a challenged North America macro, which unfavorably impacted all 4 of our businesses. Importantly, we view this pressure as transitory and believe our 2025 financial results reflect the resilience and stability within our global portfolio and Axalta's ability to drive operating performance and manage costs.

Even with this top line pressure, we remain focused on our controllables, and we're able to deliver one of the strongest earnings performances in Axalta's history. Through strong execution, we achieved record full year adjusted EBITDA of $1.128 billion and adjusted EPS of $2.49, a 6% increase over 2024.

Adjusted EBITDA margin improved by 80 basis points to 22%, exceeding the full year margin target outlined in the A Plan of 21% for the second year in a row. And we delivered nearly $650 million in cash from operations, leading to $466 million of free cash flow, driven by lower cash interest payments and improved working capital, which more than offset $56 million in higher capital expenditures.

Let's go to Slide 11. 2025 was another year of disciplined execution on our capital allocation priorities. We continue to strengthen our balance sheet, invest in the business and return capital to shareholders while generating strong cash flow. We paid down approximately $230 million in gross debt, bringing our net leverage ratio down to 2.3x at year-end, the lowest level in Axalta's history.

We also took proactive steps to reduce interest expense and improve our capital structure. Interest expense for 2025 was $176 million, a reduction of nearly $30 million from last year. We are also planning for another $20 million reduction in 2026, resulting in annual interest expense of approximately $155 million for the full year with more than a 25% reduction from 2023 levels.

Consistent with our strategy to drive productivity in our plants, we increased capital expenditures to $196 million in 2025, a 40% increase compared to a year ago. We expect to generate strong returns from these investments as they will contribute to sustained productivity gains in 2026 and beyond. We also deployed $165 million in cash to share repurchases in the year. With the announced merger with AkzoNobel, we have ceased buybacks and are pivoting our capital allocation to debt reduction going forward.

Free cash flow remains a key strength of Axalta as we delivered $466 million in 2025, bringing cumulative free cash flow to more than $1.35 billion over just the last 3 years. We believe there is further opportunity to expand free cash flow generation as we plan to unlock more working capital through improvement in DSOs and inventory turns.

All of these actions, deleveraging, investing in productivity, optimizing our capital structure and improving return on invested capital, reinforce the strength of the foundation we've built and the momentum we carry into 2026 and our next chapter.

Let's turn to Slide 12 for our view on guidance. We see 2026 setup as one that will start off slower in the first quarter with recovery beginning in Q2 and building momentum into the second half. We expect pressure from distributor order patterns in Refinish as well as continued softness in Industrial and Class 8 commercial vehicle production to start the year. However, as we move throughout the year, we believe several catalysts including interest rate reductions, easing insurance costs, higher used vehicle prices, higher Class 8 production and anticipated benefits from tax reform will take hold, creating a supportive backdrop for the second half.

In Refinish, we expect inflation impacts in North America to be more manageable, supporting a second half increase in repairable claims. For 2026, we are planning for positive price-mix and higher volumes in the second half. In Industrial, we expect a slower start as the operating environment remains at trough levels with recovery likely to occur in the second half when seasonal demand is typically stronger. Interest rate reductions and improved consumer affordability should help drive volume stabilization as the year progresses.

In Light Vehicle, we are assuming global auto production of approximately 92 million builds, roughly flat year-on-year and consistent with industry forecast. In Commercial Vehicle, we expect North American Class 8 builds to remain flat in 2026 but increase throughout the year as demand trends start moving up toward normal replacement levels. We are also excited with our recent wins in Brazil and expect these to provide approximately $30 million of benefit year-over-year.

Based on the slower start to the year, in the first quarter, we are planning for revenue to decline mid-single digits, primarily driven by Performance Coatings. The approximately $50 million to $60 million decline in consolidated revenue is expected to result in first quarter adjusted EBITDA between $240 million and $250 million. For the full year, we expect revenue to be up low single digits driven by positive price-mix, favorable FX and higher volumes in the second half.

We expect adjusted diluted earnings per share to be between $2.55 and $2.70 per share, representing approximately 5% growth at the midpoint versus 2025. Adjusted EBITDA is expected to be between $1.140 billion and $1.170 billion, which will be another record year for Axalta. Adjusted EBITDA margins are also expected to be above 22% for the year.

And finally, we expect full year free cash flow of greater than $500 million even as we continue to drive productivity by investing $180 million to $200 million of CapEx back in the business. With another strong year of free cash flow in 2026, we expect net leverage will be below 2x by year-end.

With that, I will turn it over to Chris for closing remarks.

As you know, in November, we announced a merger of equals with AkzoNobel. This combination represents an extraordinary value creation opportunity, one that we believe neither company could realize a loan.

Together, we expect to create a global leader with phenomenal scale and end market diversification, significant free cash flow generation, EBITDA margins approaching 20% and an investment-grade credit rating and balance sheet flexibility. Additionally, we identified $600 million in synergy potential. And based on our joint track record, I'm confident we will deliver this.

The combined company will be listed on the New York Stock Exchange and will be a global performance coatings leader. This merger is more than a strategic milestone. It is a catalyst for unlocking powerful new growth vectors, fueled by the combined strength of our shared innovation engines and a commitment to delivering superior value creation.

As we step into 2026, we do so with a strong balance sheet and agile operating model and a clear focus on our priorities. Our teams have consistently demonstrated the ability to navigate complexity and deliver exceptional performance. I am confident that we will create sustainable value as we look ahead to completing the merger with AkzoNobel.

With that, I will now turn the call over to the operator to open the line for Q&A.

[Operator Instructions] Our first question is from Chris Parkinson with Wolfe Research.

Just could you just give us the status of global refinish markets? And I'd love to focus on in three different facets. Number one, just where we stand with destocking trends. I don't want to name names, but it seems like things should arguably be coming to an end in some of the large customers.

Number two, just how you see claims data conversion with actual collision data as we progress through 2026 just given some of the updates that we got towards the end of 2025. And then number three, just where we stand with share gain potential, Irus launches, penetration in Europe and U.S. versus expectations. Would love to just kind of hear your updates on how those presumptions are factoring in your 2026 guidance would be particularly helpful.

Sure. Chris, I'll take this one. So starting with destocking, I think this -- if I look at our Q4 performance and a little bit of Q1, it's a perfect representation of what happened associated with destocking. Three of our 4 end markets. So when we look at South America, Europe, Asia, all 3 grew. So this was really a geographic mix issue and this was just primarily related to destocking. And what I would say is destocking came in slightly worse than where we expected.

And as you know, with the margin performance that we have and how strong our North American business is, that's what kind of drove a little bit of the impact. Sales, I would say, for Q4 were primarily almost flat to slightly lower, I would say, in line. It was just the pure performance of how strong North America and how destocking obviously impacts us in this region. If I play that into Q1, we're essentially pulling that weakness through.

And as I've always said, destocking started or this consolidation of our largest distributor acquiring FM started in Q2 of last year, and we expect that to end with all our conversations and what we're tracking in Q2 of this year. So as you play that out, that's why we expect that to come back. And if you look at the expectations of performance, we just have to hit what we did last year in Q2. So from that perspective, that's what gives us confidence as we play this forward.

In terms of claims, as you think about the slide that Carl went through on the guidance I think there's a lot of green shoots that really build confidence into what we in '26. I would say claims are down 1% to 2%, which is what's been the average. On top of that, you can start seeing miles driven is still ticking up the right way, 1%, 2%. And on top of that, the great news is certainly what's happening with the insurance rates.

Insurance rates, if I go back to '23 and '24, were just going up at like 18%. And what we can certainly see in the back half of '25 and '26 is we can start that coming back to the normalized levels we saw, let's call it, prepandemic or mid-pandemic, which is a really good sign here. Consumers are starting to really shop their insurance premiums and they're starting to add back collisions. So we're certainly seeing that benefit as well as obviously new car pricing going up and used car pricing going up is also going to be a positive trend.

And for all of us on the East Coast, all the weather also helps. So I would say the overall trend as we predict into Q2, it's trending the right way. I think there's a ton of green shoots that certainly gives us a little bit more confidence as we get into Q2.

And then your last question around share gains. Nothing's changed in our perspective. We have had 4 pillars that were absolutely focused around, net body shop wins, going into adjacencies, moving into in the economy space as well as M&A. And all of those haven't changed.

And if I look at net body shops as one example, we had a great year in 2020. 2,800 body shops is higher than we have done in most years. Normally, we do around 2,200 to 2,500. So it's been a really strong year even in a challenging macro and with a lot of competition. So we feel really, really good. Even in North America, we grew 400 body shops. So it's been a great story.

And then as the slide points out, we grew in adjacencies by $25 million. We obviously did the CoverFlexx acquisition. So we grew by about 400 basis points. And we have no different expectations as we go into '26 even with the merger. So I would say from a growth perspective, we're right on plan and everything is playing out as we expect.

Got it. And just as a quick follow-up, just shifting over our attention to the deal. Obviously, there's been a lot of back and forth, and you've been communicating with both sides of the shareholder community over the last several months. What else do you believe that Carl can do in particular to further underscore or gain rather the conviction of the buy-side communities' conviction in terms of hitting the $600 million in synergies?

Is it because of regional differences? Is it because of procurement aspects? Just anything you could add in terms of what your team can do to lead the buy-side community to further embrace that number would be particularly helpful.

Sure, Chris. I'll start off with a little bit of perspective on the investor sentiment, and then I'm going to turn it over to Carl. On the investor sentiment, it's been -- I would say, it continues to improve and it's been largely positive. We've been talking to all our large investors on both sides. Greg, Rakesh, myself, Carl, we have spent a lot of time working with our investors, our long-onlies, and we've also seen new folks come into the story.

So overall, the sentiment is moving. We still have, obviously, a lot of work to do as we head into the vote. But at this point, our conversations are trending the right way. And I would say I'm very pleased with where we're going. Carl?

Yes, Chris, just to add to that, I think as we have talked to the investor community, a couple of points that are really beginning to resonate if you think about the overall merger. One, we are creating the largest global performance coatings company. We're creating the second largest paints and coating company. We are going to have 3x the revenue, 3x the EBITDA and greater than 3x the free cash flow on a combined enterprise.

So we're very excited about what this does, not only for the financial aspects but also as we think about our customers. We're going to be operating in 7 different end markets from refinish to marine to industrial to aerospace and we have leading positions in our products and all the customers we serve. So I think it will be the message. I think the synergies, as Chris articulated, we feel very, very strong and very comfortable with. And we also believe there's upside as we think about the revenue synergies that this deal provides.

We'll move on now to Ghansham Panjabi of Baird.

Chris, sorry. This is actually Josh Vesely sitting in for Ghansham. Maybe if I could just start off on the Performance Coatings side of things. Just you and Chris, you mentioned that came in a little bit below your expectations. It sounds like a lot of that was focused on Refinish. But maybe if we could just focus on the Industrial side of the aisle and just how that performed relative to your expectations and then just your current thoughts on that business and just on a regional basis, that would be great.

Sure, sure, absolutely. So I would say from a Performance Coatings, sales came in lower. So Industrial sales were also lower, primarily all of it as we look at Q4, driven by the market. But as I look into, let's call it, 2026, again, we're starting to see some green shoots, as Carl has on his guidance slide, obviously, what's happening with PMI and our expectations from a policy perspective with insurance -- sorry, with the interest rates as well as anything that's done to spur construction, residential or commercial, I believe, will be a positive trend, which is why we expect the back half of the year to pick up here.

So Industrial is probably one of the few businesses that we're counting on a bit of market, specifically in North America. But in terms of green shoots in this business, as I said in my prepared remarks, Asia for us has been very, very good. We've actually grown 5% in that space even as we look in Q4. And this is really driven around what we do. In that business, we have a lot that we do specific to EV and what we do for battery case coatings as well as impregnating resins for motors.

So we see those businesses really driving growth. And we certainly see that also being a positive trend. So Asia is working out well. I would say North America and Europe seems sluggish. But our expectation is a lot of the policy actions would drive some improvement into the back half of the year. But setting all that aside, the one thing that I'm absolutely proud of that team is what they've done, which is an amazing job of driving the margin.

If you look at the margin performance, even if we look at Q4, we talked about sales being away from our expectations but overall company margins being up 50 basis points. In the Industrial business, we had a target of 400 basis points of margin improvement. Those guys are about 200 basis points above that target. They're just kicking butt on that front. So that team has done a great job of really driving, let's call it, cost performance, operational excellence and really growing where they can get accretive margin.

We'll now move on to Laurent Favre of BNP.

I guess I've got a question around margin assumptions for the year. So you're guiding your sales up low single digits, EBITDA up low single digits. I'm a bit surprised, I guess, by the comments around productivity and also pricing. So I'm just wondering, what are you baking in, in terms of margins or safety around margins? Is it around raw materials? Is it around pricing?

Laurent, so yes, I think as we look at just maybe I'll start with revenue and then how that will kind of step down in EBITDA in our assumptions. So I think from a price-mix perspective, we do see that up for the full year about low single digits. That will be kind of coming through. Volumes, we're kind of planning for a flattish volume environment. There is a difference between the first half being down and that began to increase in the second half. And then I think FX most likely, at least on the revenue side, should be probably a very low single-digit tailwind as well.

And if you think about what that then means for overall EBITDA and the margin kind of guide that we said is last year, we did 22% EBITDA margin. I think next year, we're planning to be above 22%. And I think that does break down. There should be -- we will convert on the incremental revenue that does come through. In addition, we also have cost actions that will benefit in 2026 as well. So there is some carryover cost actions that we have from some of the previously announced execution items that we've done, so call that about $30 million to $40 million of improved benefit from that. And then we also will continue to drive a little bit more on productivity, not only in the plants but also with our purchasing team.

And then just on a follow-up on the Refinish side. Can you talk about regionally what you're seeing? Clearly, you were disappointed in the U.S., I'm sensing. I'm just wondering whether, for instance, in Europe, you're also seeing a deterioration of your top line. And is that something that you're also carrying into the guidance for '26?

Sure. So as we look at it from a regional basis, I would say, looking at Q4, south America, Europe and Asia grew. So I think from our perspective, those came in just as we planned and expected. We actually had a great story even in Europe with the weakness.

And as we play out into next year, into 2026 and how we have set up the guide, we obviously show Q1 volumes being down because of the pressures associated with destocking and a little bit of volume weakness, very little, in North America.

But with the exception of that, we're showing Q2, Q3 and Q4 -- sorry, Q2 volumes being flat and Q3 and Q4 volumes coming up slightly. So net-net, if I look at the whole year, Laurent, for Refinish volumes, we expect it to be flat to slightly up.

We'll now move on to Kevin McCarthy with Vertical Research Partners.

Chris, can you discuss how your Refinish strategy may evolve through the MOE. Thought about Axalta being focused on penetration in the economy segment, moving into adjacencies, evaluating distributor acquisitions in selected markets. Which of those elements will remain the same? And what do you think will change as you look to stabilize and hopefully grow this business in the combined company?

That's a great question, Kevin. And as I think through this, that is one of the great stories of the combinations of the companies. Obviously, if you think about the merger of both companies, and this has obviously been looked at before, the greatest aspect of these two companies coming together is the complementary nature of it. And if you really look at the perspective, whether it's in Refinish or in Mobility or a little bit in Industrial, we're absolutely complementary. And it's just a great story.

So I'm going to pick the one that you hit on, which is Refinish. In Refinish, we're stronger in premium. They're stronger in economy. And so I think at a very, very high level, the technology that we can provide and enable them to grow their capabilities and distribution, as I think about the Middle East and especially more that we can do with them in Africa and Asia and then what we can do with bringing our capabilities and then across the board with our joint distribution with, let's call it, the adjacencies products with putties, fillers, that's the opportunity to the point that Carl made about 1% to 2% revenue opportunities.

What we can provide our customers, the ability to have one point of sale to bring together the products that they're getting from two different folks at this point is just a great story. And so that, I think -- especially regionally, there is so much opportunity, whether you think about the Middle East and Africa or whether you think about Latin America. And then when you come into the two strong geographies of Europe and North America, we have complementary products that, I think, really enables us to grow. So that's Refinish as one data point.

On The mobility side, they're more into, let's call it, interior plastics or APC. We're more on the exterior. Again, the combination gives us the ability to really drive product, let's call it, enhanced value to our customers. So again, we're extremely complementary, which is a great story when you put these two companies together for not only our customers but also our employees. It creates the least amount of disruption. And I think this is why, as Greg and I looked at this, of obviously, many options that both companies had, this is a great story of why these two companies belong together.

And then secondly, with the turn of the calendar page into January, we've seen some of the commodity chemicals that we track start to percolate higher. Can you discuss what you're baking into your guide for the raw material basket in the first quarter and for the year, please?

Yes. Thanks, Kevin. Yes, for raws, we are assuming overall that it's going to be flat on a year-over-year basis at this point. I think second half, you may see that tick up a little bit, but that will be offset by maybe some of what we're seeing kind of real time in the first half. So overall what's embedded in our guide is a little bit of a flat environment for raws. I think as I look at the team and what we're being able to look to drive, we will have additional productivity above and beyond that. So on a net basis, we still expect to outperform on a year-over-year basis in total for raw materials.

We'll now move on to Matthew DeYoe of Bank of America.

You have [ Kim ] on for Matthew DeYoe. In terms of your 100 to 200 basis points of revenue synergies, where do you expect to achieve them? And what is the margin assumption on that?

Yes. I think about the revenue synergies opportunities, we'll be providing probably much more detail as we get closer and closer in this process. So I don't want to lean out too far as it relates to the implication on that. I would just say on a combined basis, if you look at the companies kind of coming together, we do expect overall margins to be in that 19%, 20% type of range. Again, just enormous opportunities that we think we'll be able to accomplish.

On synergies, we have very detailed plans across all of the different cost actions there, whether it's on SG&A, whether that's on our plants and from an operation perspective, whether it's on purchasing. So we feel very, very confident and our ability to deliver that, which will affect and drive and be one of the best performing margin companies on a combined basis. So more details to come as we progress.

As a quick follow-up. There have been discussion on keeping the dual listing for a period of time. But I see your slides are saying New York Stock Exchange only listing. Is that like the certain path going forward? And kind of can you give more color on that decision?

Yes. I think the intent of the slide was the New York Stock Exchange will be the primary listing. There probably will be at least maybe 12 months where there will be dual listing. But eventually, the combined company will be just listed on the New York Stock Exchange.

We'll now move on to Joshua Spector with UBS.

This is Lucas Beaumont for Josh. So I just wanted to kind of go back to the first quarter outlook if we could. I mean, it seems to imply that the organic expectations are probably down mid- to high single digits depending on what you're sort of assuming on FX there. I mean, backing out the current rates, it looks like it would be more in the kind of high single-digit decline range.

So I guess just what's underlying that for each of the businesses? Is it similar to what happened in the fourth quarter with Refinish down double digits, Industrial down single and Mobility down low single? Or what are you assuming there?

Yes. Thanks. I think as we think about the quarter and then maybe for the full year as it relates to kind of that question, I think as we look at Refinish, it does all in will be very similar to what we saw in the fourth quarter as far as -- at least on a year-on-year comparison as it relates to overall volumes at this point.

I think our Industrial business also, as we think on a year-over-year basis, will be down probably into that mid- to high single-digit percentages as well. And again, Mobility would be probably roughly flat as we think about on a year-over-year basis, specifically for the first quarter.

And then we start seeing inflection as we get a little bit in the second quarter. But as we said in our prepared remarks, you really start seeing that come through in Q3 and Q4 really across most of our businesses. And that's how we put together the overall guide for the year.

And then you said that you highlighted, I guess, where you thought the EBITDA could have been for the year in the steady state if the macro was better, in the $1.3 billion range. It's about $150 million higher than where you're kind of pointing to for the guide.

So I was wondering if you can kind of just talk us through where do you sort of see that earnings gap amongst the businesses? I would assume Refinish is probably a large chunk of that being kind of mid-single digits below trend. But also, I mean, Industrial as an example, volumes there have been down 4 years in a row and are down roughly 25% cumulatively. So maybe if you could kind of frame out for us where you think the different parts are and how we could see that coming back in a recovery story.

Sure, Lucas. I think you hit two of them. Just one missing, which is the Commercial Vehicle. But just let me go through it. I think Refinish, for example, if we look back over the last 2 years, I would call it, down mid- to mid-single digits as an average if you look year on year '24, '25. So that's certainly one.

But then beyond that, as I look at the next one, it's really Commercial Vehicle. Commercial Vehicle is down about 30% if you're 25% to 30% from where we predicted. And even if you play it out, it's an incredibly cyclical business. '26 was supposed to be a historic high because we were going to have the prebuy driven by the emissions change. So we were supposed to be, let's call it, on that [ $350 million to $360 million ] range. And replacement is actually [ $275 million ]. And we're, let's call it, around that [ $240 million to $250 million ] range. So we're significantly below even replacements.

We do see that ticking back up. So to answer your question of where do I see recovery, for me, where do I see recovery is certainly in CV. I think based on just the cyclicality of that business and watching it for over 20 years, from my past, I expect that to return to at least replacement levels in 2027. So that's one.

The other element of this is, obviously, as you think about Refinish, we have a specific issue with destocking. And I've always said this is not a V-shape recovery. This is going to be something that's U-shape, and we expect this to recover into Q2. And even if we get back to the numbers that we had when we had destocking in '24 Q2, that's essentially what our guide is pretty much in simplistic ways of perspective as I look at '26.

So I think that coming back will certainly be helpful. So those are the two. And then finally, in Industrial, we're counting on a little bit of, let's call it, just a return through some of the interest rate reductions and a little bit of maybe policy changes that would drive in the back end. But again, we're not counting on much. This is really 2% to 3%. It's nothing significant. And all that said, as you can think about the cost actions we're driving, we obviously have plans to mitigate some of this if everything doesn't come back up.

And Lucas, just one other point on that. I think the very simple way to think about it. Every incremental dollar of revenue, we think we're going to contribute close to 40% to EBITDA as we move forward based off all the actions that we've executed over the last several years. .

We'll now move on to Aleksey Yefremov of KeyBanc Capital Markets.

You've got Ryan on for Aleksey. Just wanted to kind of level set maybe a bridge from 1Q kind of through the balance of the year. I think looking at it, it's about maybe down high single digits kind of in 1Q, what you guys are kind of pointing to. And then is the right way to think about it on an EBITDA basis maybe flat kind of in 2Q and high single-digit growth in the back half, kind of as Refinish and Industrial normalize a little bit? Or just kind of any thoughts there would be helpful.

Yes. Ryan, yes, I think that's a good way to think about it. If you think about where we're starting the year for Q1, you can kind of see what we did last year in Q2 being in that low 290s. And then we kind of ramp as we get a little bit further in the second half. So that is the right way to think about it from a forecast and a model perspective.

Okay. Great. And then just I actually wanted to ask a little bit more about kind of CV. I think the last couple of months' worth of Class 8 orders in North America have actually shown like fairly positive growth. So is there maybe some like inventory that kind of needs to be worked through the chain before we kind of get back to a better build rate in the back half? Or just trying to understand some of the dynamics there.

No, I wouldn't say that. I think if I look at -- and it's a fair assessment. One of our large customers just announced recently, and you can see the positive trends as they look at '26. On top of that, ACT, to your point, Ryan, just released and took it up to [ 270 ]. But we obviously haven't seen that reflect in FTR. We're just being a little bit cautious here. I don't want to jump ahead of the gun. But that's a fair assessment.

I would say there is probably more positive momentum in CV, which is a great story for us. Just as you think about it, that, it comes in at a higher margin, almost Performance Coatings margin in our Mobility business. So there's probably some upside there. But again, we're going in with a realistic guide and want to make sure that we first see that improvement come through. But in terms of inventory level, I would say inventory levels are probably at standard levels at this point. There's nothing that's driving, let's call it, excess inventory sitting at OE retail footprint at this point.

We'll now move on to David Begleiter of Deutsche Bank.

Chris, on Refinish, can you discuss just on pricing alone what you got in '25, what you would expect to get in '26? Just pricing, no mix.

Yes. No change in the strategy, David. But we got 2% in 2025. And the target for 2026 is to stay consistent with what we've done historically. So it's just 2%. That is what we work towards, and that's essentially what we're doing. Last year, we went out with -- we priced twice. To hit the same target, this year, we're just going to do our standard on pricing

Very good. And on the combination, Chris, if you look at deco, any updated thoughts on role of deco in the combined portfolio? And could we see some deco divestitures down the road?

Well, I think really that's a call for Greg and the Akzo team to make. Obviously, that's not a, let's call it, an end market that we're in. Again, as I look at it, and I think Carl hit on it, the best part of this combination is really the three elements that Carl talked about, which is scale, innovation and synergies.

And I look at it as it's not -- when you think about the scale, it's not the $17 billion of complete revenue. It's the fact that we approach 7 different end markets and the complementary nature of where we do have, let's call it, an ability to service our customers better. I think that's just incredible.

But underneath that, the scale is really around the financial strength that the combined company provides. The joint free cash flow is just great and the leverage ratio is at a great spot that the leadership has the ability to then invest certainly in parts that they define as growth vectors. And it could be deco, it could be refinish. It could be any of the 7 end markets that strategically makes the most sense.

And then beyond that, I look at the innovation capability. A joint company that has over 3,500 patents with almost 3,000 engineers, just the scale and what this organization can do in the future to create the best-in-class coatings for not only our customers but for just changing the world forward, for me, it's just the joint strength of the combined company.

And obviously, the last one being synergies is just the incremental value that automatically provides for our shareholders. And I think it's great. And I mean, Carl, anything to add?

Yes. And David, just as you saw from AkzoNobel, they had a really, really phenomenal transaction when they sold their India deco business. If you look at the multiple they received on that, I think it was mid-20s. So I do know there's some opportunities that the team is continuing to evaluate in Southeast Asia as well in deco. But again, I think that's something that is kind of all part of their strategy as this thing goes forward.

We'll move on now to John Roberts with Mizuho.

This is Edlain Rodriguez for John. Chris, a quick one for me on Refinish. Do you have a good sense of when claim activity should start to improve? And most importantly, what will be the key drivers of that improvement? Is it the consumer doing better? Like is it something else? Like what's going to be the catalyst for that change in there?

Yes. I think this is the big question. From our perspective, to me, I think it's pretty straightforward. It is a lot to do with the consumer associated with really what happens with insurance claims and/or insurance rates and just getting the entire inflationary impact that they have faced, I think that's abating over time.

And there's two elements to this. Obviously, just purely what's happening with insurance costs, which, again, the green shoot is it's coming down to where we're not seeing increases as significant as what we saw in '23 and '24. But that doesn't take away from -- to drive this, we should expect this to continue to go down, not just be flat. So that's one. The second element of this is obviously repair costs. Repair costs is also an important aspect.

And the cost of repairs have gone up and that's caused a constraint. Again, there's green shoots here. Repair costs have also meant body shops don't have as much work. And I can start seeing that I think folks are starting to essentially look at appropriately pricing to make sure that the body shops get work back in. So I do think that this trend is trending the right way. But in terms of when this returns, I think that's the million-dollar question.

We'll move on now to Mike Harrison with Seaport Research Partners.

Just in terms of the mix that you're seeing in Refinish, I'm curious if you can comment on the speed at which you're seeing growth in mainstream and economy versus premium and if you expect that to continue to be a headwind to mix in 2026. And can you also comment on whether the combination with Akzo maybe enhances your Refinish opportunities in that mainstream and economy segment of the market.

Sure. That's a great question, Mike. So you're absolutely right. With the acquisition of CoverFlexx, we certainly -- last year was a record number of body shop wins in the economy space. So that certainly did help us. And so you can see a little bit of, let's call it, impact from us winning more. So from a Performance Coatings margin perspective, it's positive. Obviously, from a Refinish margin perspective, because we have more in premium, it does have a bit of an impact.

But overall Axalta, overall Performance Coatings, this was part of the strategy. This is why we wanted to grow economy because we only had about 9% market share here. We're now around that 11% market share. So it was certainly, certainly a driver and it was something that we wanted. And so I would say, in that sense, the strategy is working and we certainly are seeing growth here. And nothing's changed in that perspective. And we're going to continue to drive hard even as I look at '26 to make sure that we continue to grow in economy.

Now in terms of the overall merger, the one thing that I can say is it's complementary. So I think as we look at their capabilities versus our capabilities, it's pretty complementary. And I think this is again why this partnership makes so much sense.

All right. And then apologies if I missed this earlier. But I'm curious, in Light Vehicle, can you just talk a little bit about new business wins? And I guess, if you're expecting to grow faster than underlying markets in 2026, is that a result of business that you won last year and it's just flowing through this year? Or have you seen some recent new business wins that should be contributing in '26?

Yes. Thanks, Mike. I think if you look at the new business wins in Mobility and specifically in Light Vehicle, a lot of that is coming from Brazil. So we announced that about a year ago with up to over $70 million of new business wins. You will see about $30 million of that will carry over for this year. So that will be in the results in 2026.

But the team continues to do a really great job of executing and winning in Asia, in China as well as is in North America as well. So I think those trend lines are very, very stable. And actually, we're seeing continued growth. And what we're really excited about within that business is just the overall margin performance and the consistency of that, that we have within Mobility.

Thank you. At this time, we've reached our allotted time for questions. I'll now turn the call back over to Chris Villavarayan.

Well, thank you. Before we close the call, I really want to thank all of you and just say how I'm truly proud of the Axalta team for the performance in 2025, especially executing under such challenging circumstances. We have an incredibly exciting year ahead of us as we close the last year of the A Plan. And we all look forward to our journey with Akzo.

With that, have a great day, and look forward to talking to you all soon. Thank you.

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.

I'm joined next by Axalta, a global leader in the coatings industry with a strong focus in mobility, Refinish and aftermarket, building facades and other industrial applications.

We're joined here today by SVP and CFO, Carl Anderson. Carl has been with Axalta for 2 years as CFO and previously held CFO roles at XPO and Meritor. So Carl, thank you for joining us here today. I understand you wanted to maybe just take us off for some opening remarks.

Sure. Thank you, Patrick. Thanks, everybody, for joining here today on this beautiful day in New York. Just wanted to maybe kick off. So 2 weeks ago, we announced a transformational merger between AkzoNobel and Axalta. And I think as we look at this deal, what the combined company is going to be able to be is a very -- it's going to be a powerhouse across the board in all of the end markets we operate.

So with the combination, we will be the #1 performance coatings player a company around the globe. We'll be the #2 paints and coatings global player. We will have end markets in 7 different areas ranging from aerospace to marine to Refinish to mobility. We will -- the positions we have from a brand, from a geographical perspective will be best-in-class across all of these businesses. The company was going to have about $17 billion in revenue, over $3 billion in EBITDA and generate over $1.5 billion of free cash flow. And that's what the combined entity will kind of bring.

I think as it looks from a governance perspective, this will be a U.S.-style governance approach as we think about how the Board will be put together. The whole premise of the deal was done in a 50-50 type of mindset between the 2 parties. And you can really see that coming through in how the governance is set up. So Rakesh Sachdev is the current Chair of Axalta. He will be the Chair of the NewCo. Gregoire Poux-Guillaume who's the CEO of AkzoNobel. He will be the CEO of the NewCo. And then I'll be the CFO of the new company as well. So Chris Villavarayan will be our Deputy CEO and will be laser-focused on delivering and setting up the company for success as it relates to driving synergies.

The board makeup is really 50-50 between the parties. So there'll be 4 Axalta Board members as part of the Board. There'll be 4 AkzoNobel and there'll be 3 independents. And so I think the -- if I look at what's in front of us from a value creation perspective, we have the right team, the right governance to deliver very significant value to both shareholders.

Then specific to Axalta as I look at it, one of the key themes and why we're very excited about this transaction is that we think there's over 75% value creation in this combined enterprise that we're going to create. We are going to be driving a minimum of $600 million of cost synergies as part of this. And that is important because regardless of the end markets that we're facing, this is in our control. And I think having -- and I will tell you how we feel and how AkzoNobel, this is the floor on synergies. We think there's probably even more to go get. But at a minimum, we're going to deliver $600 million of synergies, capture on an annual run rate. And that alone is worth almost 40% value creation to Axalta shareholders.

Then if I think about what it does from a -- the potential upside above and beyond that as it relates to where we currently trade. So Axalta currently trades with an 8 multiple, plus or minus, more minus than plus as of late. I would tell AkzoNobel is probably 9, but to have value creation, at least from a turn or 2 of additional multiple from a rerate perspective also will drive us over this 75% type of value creation as a combined enterprise.

Axalta will also benefit from -- we're getting 3x as much revenue in this transaction from going from $5 billion to over $17 billion. We're going to have 3x as much EBITDA and 3x as much free cash flow over $1.5 billion. And so again, as I look at this deal, this is -- it's transformational on many levels. But in many ways, we're just going to be beginning the journey as it relates to what we can be doing as a combined company together.

So happy -- I just wanted to kind of share that in some background as we kind of get into the discussion. I think the last important point is if we think about the back to the 50-50 type of mindset from a deal structure we will own from an Axalta perspective, 45% of the new company. And I think that's an important data point because if you look at where the historical trading was on a market cap basis between the 2 companies over the many, many years, and where the spot level was, we're about 35%. So we're actually going to have 10% more ownership interest in this entity, and that will relate to and be a direct result of creating additional probably $1.4 billion of value because of the ownership to our Axalta shareholders.

So across the board, I look at this deal, it's highly accretive, over 30% EPS accretion as a phenomenal return on invested capital. And we're more than excited. I would tell you, both companies, the employee bases are beyond excited to get this deal done and over the finish line because I think the value upside here is absolutely phenomenal.

Very helpful. And obviously, post this announcement, there was a lot of emotion out there. You've got some pretty public feedback with people sharing their descent. So any sort of initial pushback or addressing some of that pushback? And why now was the right timing? Like why did you ultimately decide on this no premium MOE?

Yes. Well, I mean, really, there is a 7.3% premium as part of the deal. So I think there's some little confusion about that. But it's really not the premium as much. This is truly a merger of equals in many ways. And again, I think the upside is what we can be doing together. Scale in our space is extremely important as you think about not only the diversity of businesses and cyclicality that, that will help mitigate. But I also think in order to drive these type of synergies, you do need a lot more scale to be able to do that.

I think at Axalta, we've had a very good track record of delivering on our cost synergies that we've kind of put forth. And we have a slogan that we use internally, which we're going to be using as we move forward. It's commitments made, commitments delivered. And I think the track record that we have and in fairness, the track record that's Greg and the team Akzo are beginning to do as far as taking cost out, I think, is going to set this company up for very -- for future success.

And I mean, just on -- you've developed really strong operating cost discipline, you guys have taken a lot of cost out. So I mean there was already quite a good stand-alone EPS accretion story. So like how should we think about that story versus the accretion that this deal provides and why this isn't just something you could have continued on with your own?

Yes. Well, yes, again, I think as we look at what this deal provides, it's even factoring all that in, it will be 30% more accretive than the standalone. I think that's one. I think as I look at what the ownership allows us not only are we getting more of the over $1.4 billion of value from the higher ownership perspective. I also think that what we can be doing together as it relates to revenue synergies, which we haven't even talked about yet will really help them drive this to just a level that is much more value than we could have done on our own is how we're looking at it.

I think the other important point is some of the feedback we've received from shareholders. Well, why don't you just keep buying back your stock, like you've been doing kind of given where you're currently trading. What's interesting is when you look at the incremental 10% ownership we're getting from this deal going from 35% to 45%, we're effectively -- the multiple that we're buying on this EBITDA is about 6x.

So it's a much more attractive use, if you would, of capital to be buying essentially into EBITDA at 6x and it is buying back their own stock at 8x. And so that's why I think what we can be doing together in an environment, which traditionally from a volume perspective, has been more -- it's a relatively low growth type of overall businesses. The scale and ability to really deliver on the cost side is just much more available here with a larger...

Understood. And then maybe just on those synergies. I mean I think we're receiving a lot of questions on feasibility, the time line to execute, particularly I think procurement synergies, things like that are relatively well understood. Those are often day 1, but this is a large European company that you're merging with. So just trying to understand the feasibility of those SG&A synergies and what -- like why does the combined entity have a better sort of playbook to execute on those SG&A synergies?

Yes, Patrick. A couple of points on that. One, when I first joined Axalta 2 years ago, I heard a lot of that same commentary. Well, there's been so much cost takeout in the past portfolof Axalta, how much more left there is to do. Well, we did over $300 million, right?

At a much smaller scale, a much smaller business. That's one. I think as I look at Axalta's overall geographic makeup, close to 40% of our business is Europe today. So our team and AkzoNobel team, we know how to operate in these markets. We know how to drive synergies. And I will tell you that the $600 million if I can't say enough, that is the floor of what we're going to be able to do. We did a very detailed analysis of all of the cost synergies rolled up.

And I would tell you there's always ranges that you kind of come in at as far as kind of base case up to upside. And what was kind of put together is kind of the low end of the range that we wanted that we developed internally. So I just think there's just much more upside.

And maybe just on that floor and where you see potential sources of upside? Could you help highlight make real what the potential revenue synergies could look like, where qualitatively might those areas be?

Yes. I mean I think if I look at -- one of the best things about this transaction is the complementary nature of the businesses. The AkzoNobel has a strong track record in aerospace, marine and protective. Axalta does not play in that today.

And I think about they have a strong Deco business, but then we have a strong mobility business in Refinish business. And so in many ways, it's very complementary. But in the one area where we both compete in maybe in different subgroups or some functions and some businesses with industrial, and that's where I think if I look at the R&D spend of the combined enterprise is probably pretty close to $400 million of R&D spend.

And I will tell you that there's going to be very significant opportunities as we think about revenue synergies in the industrial aspects of what we can be doing. I also think having a larger company that we can allocate capital, probably combine more effectively to the areas where there's more growth that will also then play into what we could get from an overall revenue synergy perspective.

So we'll begin to lay out this in more detail as we move forward. But I would say, we initially wanted to focus in on immediately what we can control, and that's on the cost sideon a synergy base. And that's where that $600 million comes in. But there is more upside as we think about this deal on revenue, for sure.

And maybe you mentioned the combined R&D spend there, it's always maybe an underappreciated part of the coatings industry. So I guess what do you find most compelling from the Axalta? What do you see -- or what does Dr. Roop as the opportunities for cross-platform innovation?

Yes. Well, I would tell you, when we announced publicly, internally, anyway, I can speak to that. I would say from the Axalta side, and I know from the AkzoNobel side, there is a huge level of excitement. And so if you think about AkzoNobel's Dr. Roop's team, based not only in Philadelphia, but around the world, having access to 4 different end markets that were -- or at least 3 that we don't participate in today.

There is excitement about what people and what our phenomenal talented team can be able to do. And then likewise, with -- given the history of AkzoNobel and what they have done over the years as far as on the technology side and the end markets, that collaborative spirit, I think, will put us best in class with what we can do with coatings across the globe.

And maybe you've talked about it a couple of times just this gives you an opportunity to combine scale but also diversify away from Refinish, which is a pretty significant part of the earnings footprint now.

So is there perhaps a way or a way to have diversified a way in a more stepwise fashion or taking more targeted bolt-ons, medium check sizes to build this business in a different way?

Yes. Of course, there's different ways to create that, right? I mean, again, I've been here for 2 years. During this time period under Chris Villavarayan's leadership and myself, we've expanded EBITDA by over $300 million. We've grown our EBITDA margin by over 500 basis points. We've expanded earnings per share by 50%. We've delevered the company by 1.2, 1.3 turns to the lowest level of leverage in the company's history.

And the stock is the same level as when I joined 2 years ago. And so I use that as a framework is in this -- yes, there's always different ways, but when I'm staring at a 75% opportunity to create value and the Board steering at that level, that is such an enormous amount opportunity that's in front of us on a combined basis. In a business, right, where growth is always going to be a little bit of a premium.

And so I think getting larger having more diversification, being able to scale and really allocate capital even more effectively at a combined basis. I think it's not only a home run. It's a massive transformational deal that's going to be creating enormous value.

As you think about decision around dividend distribution, can you talk about the strategic rationale for providing the dividend to Axalta shareholders only?

Yes, that really from a structure perspective, you said 1 of the big premises that we have was we wanted -- both sides really were focused on ensuring this was more of a 50-50 type of transaction.

And if again, if you think about the special dividend, which is around EUR 2 billion, if you strip out the interim dividends that they'll pay in normal course, that distribution is really just to rightsize the ownership splits between the parties, right? So in order to go from 35% to 45% from an Axalta perspective or conversely going the other way from Akzo the dividend was the mechanic to pull that off.

Again, as I said earlier, I think it's important to note that if you think about, well, that dividend essentially on a combined basis, the Axalta shareholders essentially buying that incremental EBITDA of that delta at about a 6x ratio, which again is much more attractive than buying back my stock at 8x or 9x wherever we're going to be trading.

And maybe to the extent you can share with us, like any assets that you identified that could cause regulatory scrutiny and would potentially require divestments? Like would any -- and would any larger divestments dent the synergy potential at this point?

Well, as you said, we're obviously very early in this process going through the regulatory environment. As I said before, it's -- our businesses are highly complementary. With the end markets and the businesses that we operate in today. And so I do think it should be very limited of exposure, but it's very early in the process.

I think as we evaluate it we did put forth kind of a timetable to close 12 months to 15 months. I think all parties are -- everybody is motivated to move and accelerate as fast as we can to get the deal over the finish line. But at this point, as I said, I think it's very complementary more than it's not.

And maybe just on -- and maybe just a related follow-up there. Is there any thing that from combining assets, any potential revenue dissynergies, where there's similar overlaps in the business with having to go out and source additional suppliers as a result of the merger?

Yes. We really don't see that at all. I think based -- as I said, given that today, Axalta does not participate in aerospace or marine really much in protective or [ decal ] at this point. And so, and again, conversely, as it relates to what we do when we finish and what we do in mobility, both on light vehicle, commercial vehicle, there's just very limited overlap agreement.

And then just in terms of maintaining supplier like maintaining customer relationships, like I think some may see this and this is an 18-month plus potential to get this deal done, like how are you mitigating potential risks from a competitive standpoint as the others may think you're distracted here?

Yes. Well, the one thing I'd tell you -- well, it's 12 to 15 so I don't think -- sorry -- it's important because everybody -- it kind of brings up kind of the timing on it. I will tell you that from the Axalta side, we are steadfast in delivering on our 2026 A plan targets. Nothing will change at all on our side. And I know Greg and the team on Akzo will also be extremely focused on delivering and continuing to add value in what they're doing, we think about 2026.

So I don't lose sleep as far as worrying about just because of the announcement that there's a new distraction, I think both teams are committed to doing everything in their power to continue to execute and continue all the good work that's been done today.

And then just like closing the loop here, just lastly, sort of one-to-one ratio, cost to achieve synergies, $600 million. Like you see deals like this or other similar sort of transactions and that number is always subject to change. So it's just level of confidence around that number, how Ironclad is that?

Yes. Well, I would say I think it's a very good number as we look at it today. As I said, there are some synergies that will come very, very quickly as we think about that, whether it's especially on the purchasing side. I also think given the amount of work that's going to be done between now and close, as you think about supply chain and how we're moving products internally and externally.

There's a lot of work that's going to be done well in advance that you're going to kind of get out in front of. And so I think that 1:1 ratio is a pretty good estimate as we think that, to your point, it can always move around. But -- and the team will be extremely focused on moving at speed, having an agility, and I know we put out kind of the time period that 90% of this will be done in 3 years. That's kind of the base, but we are all going to be working to -- not only to accelerate that as quick as we can.

Got it. And maybe just moving on to sort of current trends across the business. Can I maybe just start high level in terms of where you're seeing things shape up in 4Q. It's often a period of time, which is prone to holiday shutdowns, extended maintenance customers, more so on the mobility side. But just how is things shaping up relative to your previous outlook?

Yes. Again, we're not going to talk about the kind of -- the rest of the guide for the rest year. But I will say this, if you think about Axalta's business in mobility, North America on autos, we are seeing some more time down with some of the OEs as they kind of get close to year-end.

I think they're taking a little bit extra days some cases a week off. There was another fire event in the auto world as well as a key supplier that's creating some type of noise as well.

So Again, I think that's all part of what we're facing at this point. I think the other news that there was -- if I think about Refinish, I think the Refinish business for us is there's always seasonal Q4 to Q3 kind of movements, but it's kind of performing at the very similar levels that we have been in the last couple of quarters as well.

And so that's something that we continue to expect as we get into the second quarter of next year, that at least for what we see because of what's occurred in that space at destock that event with that particular customer should be pretty much behind us at this point.

And so that's -- so again, I would say we're -- as we kind of cross over the year and get into 2026, the company, Chris, our CEO of the Board, we're still heavily focused on making sure we deliver on what we put forward on the A '26 plan.

And then maybe just on Refinish. I mean I think there's a lot of debate whether this is kind of a perfect storm of destocking, consumer weakness and some issues with U.S. customers deferring claims. But I think there's also been a debate that's put through that there's also a structural element to it.

So can you help us understand your view why this is just kind of cyclical and likely to see some stabilization? And what -- what, if anything, gives you confidence there?

Yes. So I mean, as we look at the data, I think that you always start with the frequency of accidents. And I think as we look at state-by-state and all of the work that's kind of done to kind of get at that data, the frequency of accidents really not changed much over the years. And so I think the secular concern over ADAS or autonomous or is -- we're just not seeing that in data.

So I think that's kind of important. I think, two, given consumer and behaviors and just the overall inflation costs catching up over the many years following COVID, the higher insurance premiums has played a fact into this. And what we've been noticing lately is insurance premiums have begun to level out in some cases are beginning to decline.

And I think we look specifically on our business to the refurbisher. So when cars get turned back in after use, and they're going to be sold at auction later, we are seeing a pretty significant pickup with some of our customers in that area. So that's probably up at least 25%.

And that usually is a little bit of a precursor to what's going to be happening with the general state of the market. So again, I think we see the business -- the Refinish business is stable, albeit at a little bit lower level at this point. We don't see that fluctuating too much. We get a little outside of Q1.

This destocking event should be -- with that customer will be behind us. It is important to reference in -- at least in North America, there was another merger going between 2 distributors in the U.S., which are either the #1, #3 or #4 distributors of paints that are going to be coming together. But I think it all speaks to just the continued consolidation in this marketplace.

Yes. And then maybe just -- are there any key differences between sort of the U.S. refinish environment versus the European refinish environment that you see?

So Europe for us and Refinish has actually held up very, very well. So I mean the insurance increases were not as significant in Europe as they have been in the U.S. It's a different go-to-market strategy, too. It tends to be more direct, whereas in the U.S. market, you do work through distributors.

So it's a little bit more on the indirect side. So inventory can move more in the indirect method than the direct method. But overall, Europe has been a -- it's been a pretty good market for us here this past year and finish. And really the story, if I look at just Axalta for 2025, the revenue, we're going to be down maybe about $200 million of revenue this year. Very significant amount of that really relates to just North America across all of our businesses. And so that's been the weak spot from what we've seen in our business.

And then maybe just to close the loop on Refinish, just could you just discuss how Irus Mix, Nimbus adoption have been progressing year-to-date? And what sort of customer feedback and win rates...

Yes. So I think the Nimbus, maybe we'll start with that. That is a great platform that our team is excited about rolling that out. I think we're targeting over 40,000 locations or touch points by the end of 2026. So we're executing on that. We're rolling that out. I think that's going to be a pretty significant game changer for us as we think about providing information to all of our customers an ability for automatic ordering to take place. It also unlocks being able to sell more than just paint as part of this opportunity. So I would say the Nimbus rollout is going according to plan and next year is going to be a very big year for us.

Irus Mix, I think we continue to kind of progress that. I think we -- it's probably not moving as quick as we wanted. Part of that was some tariffs earlier in the year that we're figuring -- that we figured out, but I think that's another part of what we're going to be moving at speed with as we get into '26.

Got it. And just in terms of like I guess I'll keep going on Refinish. -- like in terms of the go-forward strategy, you guys have this pending merger, just like there's been a willingness both inorganically and organically to try to move into downstream mainstream and economy rather. Is that still the case? Like do you still feel good about that strategy?

100%. So I think that's where -- if you look at the amount of body shop wins through the third quarter, we've already have won 2,500 body shops. Typically, we get that in a full year. The reason we're at a plan is that growth in mainstream and economy.

So we were always on a market share basis, running maybe in that 10% plus or minus category and economy. And I think the commitment with -- we did an acquisition over a year ago with CoverFlexx is opening more and more opportunities for us. And that path, that will continue as we get into '26 and beyond.

Maybe just pivoting to industrial business. Obviously, wood coating is a big part here. Now looking ahead to 2026, like what sort of expectations or visibility or improvement of demand in a potential rate cut environment? And maybe highlight some of the ways that you're winning new business or optimizing the portfolio to have more of a stand-alone margin story here?

Yes. So I think what the team has done internally has been really phenomenal amount work. So in a pretty tough end market the last 3 years in industrial, we have doubled our EBITDA margin. So a huge focus on cost, how we go to market has been kind of the key to success. There are some -- we talked several years ago about maybe moving away from certain part of our revenue within industrial because it wasn't at the right target. So the team has executed on that.

And I think now we kind of find ourselves in more of a position of really focusing more on growth. And so yes, if there's further rate cuts, and there's some momentum finally in building construction. I think that's a huge -- that potentially could be a big tailwind as we think about next year. I think as we're beginning to build the budget, we're not expecting a huge return yet.

That's something that we'll continue to spend more time on and we'll provide more color on that as we kind of get into the full year '26 discussion. But that is a -- I think at some point, and I think people have been saying this for the last 3 years, candidly, that will change. And I think we're in a very good spot to take advantage of that because it's not only what we've done internally with the cost side, it's our plans that we are operating across the board are running at the best levels they ever company's history.

So when we do our detailed scorecards, whether it's on safety, quality, delivery, cost and people, we are across the board in all the markets. We're performing best as we ever can. So we're ready for that volume uplift when that does occur.

Got it. And then just on commercial vehicles, can you just provide more color on expectations for EPA '27 prebuy and 26? Any planned capacity investments ahead of anticipated growth and maybe I'll save my question on the other side of the business as well.

Yes, I would say on CV, so this -- if you think about where we were maybe a year ago, 1.5 years ago, '26 was going to be a watershed year for the commercial vehicle market here. I think predictions at that time would be probably Class 8 production north of 350,000 units, which would put it at probably either the #1 or #2 best market.

Today, if you kind of fast forward to where the current projections are, we're probably running -- running way below replacement levels. So we're about 225,000 some forecasts are down to 200,000. So it's been a sea change as far as expectations for '26. Now with some of the more -- the question will be if there's no changes from the EPA, does that begin to change a little bit? It's too early yet.

But I would say we have always viewed replacement levels in the trucking world in Class 8 in North America about 275,000 units. So I think we're primed to move back to that. The question is, is it going to happen in '26 or the second half of '26 or is it more '27? So that's kind of open at this point as we think about it. But what's interesting, though, is we think about just what we've done with the margin profile of mobility, CV is a very, very good margin product for us.

And that market has been down over 20% this year. And mobility as a segment is running margins that are close to 18% from an EBITDA margin perspective. So we've done a lot with the business part of that. I know your next question on CTS. A lot of that is how our team has executed from whether it's on pricing initiatives, but more importantly, what we've done on the cost side.

Yes. And that CTS business has always surprised me because of -- you see the headlines on Class 8. It's a good strong part of your mix, but it seems like a bright spot of the portfolio has been CTS. So like how do we think about that potentially developing into next year after you've had such a strong year this year?

Yes. I think there's more room to run. So I think the team is focused on that. Don't forget next year, with the Brazil business continuing to ramp up, we will have incremental revenue growth just from that business as well. It's probably another $30 million to $40 million minimum of top line that will come in next year based off of that. The business that we won about a year ago at this point.

So I think our mobility team has performed very, very well. I think we talked about where the margins can kind of get to, but we're kind of running at really at levels the company has not run at a pretty long time period. And so now the focus for us and really the industry is, okay, where does that incremental growth begin to come from, and that's what we're going to be really focused on as we kind of get into next year.

Got it. And then maybe just to close on light vehicle. I guess maybe just first, starting out with expectations for Axalta builds relative to global builds into next year and what you're seeing after you had some nice share wins this year as well.

Yes. I think today, as we look forward to '26, we see light vehicle global builds probably in line with what they've done this year. I think you'll see a little bit of mix change between regions. As we get into next year. So I think the North America market for us anyway, was lower.

I think that's going to come back. Part of that was with some of the -- if you go back earlier in the year, some of the tariff news as OEs were beginning to shift production out of Mexico into the U.S. It always takes time. A lot of those plants and OEs will be online, and we'll have an advantage of that as we kind of get into next year.

But I would -- again, I think we're excited about our Brazil business continues to perform very, very well, adding incremental revenue. And then as I think about the bright spot in mobility for us has been China for many, many years, and tell you the team continues to do a really, really great job of executing in the China market. And I think that's what we're planning for as we close out the A plan.

Great. Please join me in thanking Carl Anderson from Axalta.

Thank you, Patrick.

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 and our commitment to returning capital to our shareholders. Lastly, our net leverage was maintained at 2.5x, remaining the lowest level in Axalta's history.

Let's turn to Slide 4. 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 CoverFlexx. 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 were 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 Axalta'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 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 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 Coatings third quarter 2025 net sales were $460 million, an increase of 4% from the prior year. Light 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 8 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 Axalta'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 remained steady at 2.5x 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 stock. Upon completion, we would have deployed over 90% of our free cash flow to share repurchases this year while still maintaining our leverage 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 9 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 8 production levels and lower Light Vehicle builds 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 billion 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 of 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 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 on investing.

If I look at industrial, our plans for industrial is the markets remain somewhat muted. There are signs 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 volume so 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 builds 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.

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 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 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 Axalta, and they certainly play a very strong -- they're a very strong competitor of ours in most -- both the Mobility space and the Refinish space. So it's a competitor we know well. And as I think about what is necessary under [indiscernible], I think the drive for margin will probably drive a very good competitor. And I think 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 Axalta 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 million for next year. We're just going to essentially use our Q4 cash flow and essentially continue to buy back Axalta. 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 $0.5 billion or $1 billion. And I think we can certainly focus on continuing to buy back Axalta because it really shows the value that our margins can provide and what we can do with the business long term, and we'll certainly be an acquirer of our stock.

[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 performance through those to where we knew that we made a difference to our customers and we have 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 as cell 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. It's I think waiting for mortgage rates to adjust and 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 have -- we go to market through 3 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 as we -- 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.

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.