Axalta's Q3 2025 Earnings Call: Contradictions Emerge on Refinish Market Stabilization, Cost Management, and Volume Outlook

Date of Call: None provided

Financials Results

• Revenue: $1.3 billion, down 2% year over year
• EPS: $0.67 adjusted diluted EPS, up 6% versus last year
• Gross Margin: 35%, holding steady year over year

Guidance:

• Net sales expected to decline mid single digits vs. prior year; full-year net sales > $5.1B.
• Q4 adjusted EBITDA expected to be approximately $284M and Q4 adjusted diluted EPS around $0.60.
• Full-year adjusted EBITDA expected ≈ $1.14B (at low end of prior range); full-year adjusted diluted EPS forecast $2.50 (+6% vs. 2024).
• Free cash flow expected ~ $450M for the year with a significant Q4 improvement.
• Plan to repurchase up to $250M of stock in Q4.

Business Commentary:

* Record Financial Performance: - Axalta reported net sales of $1.3 billion for Q3 2025, with an adjusted EBITDA of $294 million and a margin of 22.8%. - The company achieved record adjusted diluted EPS of $0.67, reflecting a 6% increase year-on-year. - The strong performance was driven by disciplined execution, customer service, and leadership in technology.

• Segment Growth and Challenges:
• The Performance Coatings segment saw net sales decline by 6% year-over-year, impacted by trends in North America and Europe, while the Mobility Coatings segment increased by 4%.
• Mobility net sales benefited from growth in Latin America and China, despite volume declines in North America and Europe.

• The challenges in North America were exacerbated by macroeconomic headwinds and inventory destocking.

• Strategic Initiatives and Cost Management:

• Axalta executed $100 million in share repurchases in Q3, reducing shares outstanding by over 3% since 2023.
• The company maintained a net leverage ratio of 2.5 times, aligning with strategic objectives.

• Cost discipline, including efficiency and cost management, was instrumental in achieving these results.

• Market Outlook and 2026 Expectations:

• Despite challenges in the broader macroeconomic environment, Axalta anticipates record adjusted diluted EPS and adjusted EBITDA for the full year 2025.
• The company expects net sales to decline by mid-single digits in Q4, but anticipates a significant improvement in free cash flow.
• For 2026, Axalta plans for improvements in the refinish demand environment and growth in industrial and commercial vehicle segments.

Sentiment Analysis:

Overall Tone: Positive

• Management emphasized "record adjusted EBITDA and record adjusted diluted EPS," maintained net leverage at 2.5x ("lowest level in Axalta’s history"), reported margin expansion across segments, and announced aggressive buybacks ($100M repurchased in Q3; up to $250M planned in Q4), while acknowledging near-term demand headwinds.

Q&A:

• Question from Ghansham Panjabi (Baird): On Q3 refinish down 7% in volume — how much was industry volume versus destocking, and what commercial strategies support improvement in 2026?
  Response: Management: Q3 declines were roughly mid-to-high single digits from markets and mid single digits from destocking; confidence in stabilization and recovery (volumes improving by Q2 2026) driven by new body-shop wins (~2,200 YTD), pricing, adjacencies and Cover Flex integration.

• Question from Chris Parkinson (Wolfe Research): Can you contextualize cost progress and sustainability into 2026 — will improvements persist when volumes return?
  Response: Management: Delivered >500 bps of margin improvement; majority are structural savings, transformation ~$75M (≈$60–70M realized) with ~$20M flow‑through into next year, and expect higher conversion of incremental revenue to EBITDA (~40% vs prior ~35%).

• Question from Lucas Beaumont (UBS): Beyond refinish, what are expectations for industrial and commercial vehicle markets in 2026?
  Response: Management: Commercial vehicle expected to remain muted (Class 8 volumes sharply lower), offset by CTS diversification (marine/military/RV); industrial expected flat-to-slightly up if rates fall; light vehicle builds modestly lower (~200–300k fewer).

• Question from Matthew Dio (Bank of America): Thoughts on a dividend and appetite for M&A given current valuation?
  Response: Management: Board has discussed dividends but no decision; current priority is share repurchases given attractive valuation and constrained M&A environment — M&A remains a longer‑term option.

• Question from John Roberts (Mizuho): Can you detail drivers in refinish — accident rates, insurance inflation, repair costs?
  Response: Management: Accidents roughly flat/down ~1%; primary headwind is claims (North America down high single digits) driven by insurance dynamics; insurance premiums and repair costs are stabilizing which supports recovery into 2026.

• Question from Mike Harrison (Seaport Research Partners): Are cost cuts structural or temporary; will discretionary spend return?
  Response: Management: Majority of cost reductions are structural and sustainable; some tactical/discretionary items (e.g., T&E) may normalize, but overall improved margins and conversion should persist.

• Question from Patrick Cunningham (Citi): Refinish price/mix down — is this mix shift to mainstream/economy and outlook for structural pricing in 2026?
  Response: Management: Price/mix headwind is mainly mix-driven as wins in mainstream/economy (lower margin) and North America mix decline; expect mitigation as destocking abates and normalization occurs into 2026.

• Question from Aleksey Yefremov (KeyBanc Capital Markets): What is the refinish pricing strategy for 2026 — typical or adjusted for current environment?
  Response: Management: Plan to maintain similar pricing cadence as 2025, targeting roughly +2% net pricing in refinish for 2026.

• Question from David Begleiter (Deutsche Bank): For Q4, are you drawing down inventory (impacting earnings) and will SG&A decline similar to Q3 (~7% y/y)?
  Response: Management: Expect a working capital unwind with inventory drawdown supporting a strong Q4 free cash flow; SG&A performance in Q4 anticipated to be similar to Q3's reduction.

• Question from John McNulty (BMO Capital Markets): Update on raw materials and tariffs — how much impact and are you through the headwind?
  Response: Management: Tariff/incremental cost impact roughly $20M and largely behind them; raw material basket stable with benefits from lower solvent and isocyanate costs and a steady backdrop expected for 3–4 quarters.

• Question from Vincent Andrews (Morgan Stanley): Slide suggests refinish revenue turns positive in 2Q26 — will volumes also turn positive then?
  Response: Management: Yes — expect volumes to begin trending positive in Q2 2026 as destocking abates and body‑shop wins/adjacencies ramp.

• Question from Jeff Zekauskas (JPMorgan): You may purchase up to $250M in Q4 — what determines that and how much bought so far this quarter?
  Response: Management: Determined by valuation and market opportunity; $165M repurchased YTD ($100M in Q3), and they plan to be a significant buyer up to $250M in Q4.

• Question from Mike Sison (Wells Fargo): If refinish doesn’t normalize, how does strategy change and any share gain opportunity from BASF sale to PE?
  Response: Management: If weak persists, will accelerate adjacencies, economy segment expansion, distribution and small tuck‑ins to sustain growth; BASF PE deal not expected to materially alter competition and may increase marketplace discipline.

• Question from Kevin McCarthy (Vertical Research Partners): Are you working on a post‑A plan strategic plan and where will focus shift operationally?
  Response: Management: Yes — A2029 being developed (rollout by May); shift will prioritize growth acceleration leveraging Axalta’s strong margins while maintaining margin, EPS and leverage discipline.

• Question from Arun Narayanan (RBC Capital Markets): What will it take to revive refinish and industrial; can Axalta spur demand via innovation or product mix?
  Response: Management: Refinish recovery needs insurance/claims normalization; industrial needs lower interest rates and construction activity; company can drive share through adjacencies, targeted product focus and selective channel expansion.

• Question from Lawrence Alexander (Jefferies): How will working capital days evolve with recovery and can SG&A back‑half run rate annualize into next year?
  Response: Management: Expect to target appropriate inventory levels and a Q4 inventory unwind to boost FCF; SG&A should remain at a low percentage of sales with only a modest uplift next year for normal merits.

Contradiction Point 1

Refinish Market Conditions and Stabilization

It involves differing perspectives on the stabilization and outlook for the Refinish market, which impacts revenue expectations and strategic planning.

Will refinish revenue turn positive in Q2 2026, and when will volumes follow? - Vincent Andrews(Morgan Stanley)

2025Q3: We expect both revenue and volumes to turn positive in Q2 2026. Destocking will abate, and new body shops and adjacency growth will contribute. - Chris Villavarayan(CEO)

What is your assessment of the U.S. Refinish market given the divergence between collision claims and collision rates? What are your expectations for the coming year? - Christopher S. Parkinson(Wolfe Research)

2025Q2: There are challenges in North America with distributors having excess inventory, but things are improving. We see stabilization in the market going forward, reflected in our Q3 guidance. - Carl Anderson(CFO)

Contradiction Point 2

Cost Management and Structural Improvements

It highlights differing views on the nature and sustainability of cost management initiatives, which are crucial for maintaining financial performance.

Can you clarify the nature of the cost reductions—temporary or structural? - Mike Harrison(Seaport Research Partners)

2025Q3: The majority of cost reductions are structural, providing an efficiency gain. Some discretionary actions may return, but the overall structural improvements will stick. - Chris Villavarayan(CEO)

How is the pull-forward in auto sales impacting new car production, and is there positioning in Canada and Mexico due to tariff changes? - John Ezekiel E. Roberts(Mizuho Securities)

2025Q2: We are ahead of plan in cost management, achieving $300 million in savings. $3.5 billion remains in labor and material costs. - Chrishan Anthon Sebastian Villavarayan(CEO)

Contradiction Point 3

Refinish Market Conditions and Volume Expectations

It involves expectations for the refinish market and volume stabilization, which are crucial for business planning and revenue projections.

How is the auto refinish component performing regarding volumes and market conditions? What strategies are in place for 2026? - Ghansham Panjabi (Baird)

2025Q3: Market volumes are down mid to high single digits, with destocking accounting for about the same level. 2026 strategies include new business wins, gaining more net new body shops, expanding into adjacencies, and integrating COVEX Flex. Destocking effects are expected to mitigation, and volume stabilization suggests stabilization in 2026. - Chris Villavarayan(CEO)

How is Axalta addressing the Refinish industry downturn, and is the downturn temporary or structural? - Mike Leithead (Barclays)

2025Q1: Refinish's downturn is primarily due to insurance premium inflation, repair costs, and consumer confidence. It's a mix of structural and temporary factors. Axalta is focusing on adding new body shops and expanding into economy segments. There is potential for stabilization in the second half of 2025. - Chris Villavarayan(CEO)

Contradiction Point 4

Cost Actions and Structural Improvements

It pertains to the nature and sustainability of cost reductions, which impact financial performance and operational strategies.

Can you discuss your cost focus and progress in 2026 given current market conditions? - Chris Parkinson (Wolfe Research)

2025Q3: Of the 500 basis points of cost actions implemented, 300 are structural. We are early in operational improvements. Capital investments, transformation initiatives, and supply chain optimization offer further opportunities for cost improvements. - Chris Villavarayan(CEO)

What is the progress on the 400 bps industrial margin expansion goal, and are there additional initiatives beyond the A Plan? - Steve Byrne (Bank of America)

2025Q1: Achieved 300 basis points of margin improvement in 2024, and plans to exceed the 400 basis point target in 2025. Cost actions, purchasing improvements, and selective pricing actions are driving this. - Carl Anderson(CFO)

Contradiction Point 5

Refinish Market Conditions and Volume Expectations

It involves differing perspectives on the current state and expected trajectory of the Refinish market, which directly impacts revenue forecasts and operational strategies.

How is the auto refinish component performing in terms of volume and market conditions? What strategies are in place for 2026? - Ghansham Panjabi(Baird)

2025Q3: Market volumes are down mid to high single digits, with destocking accounting for about the same level. 2026 strategies include new business wins, gaining more net new body shops, expanding into adjacencies, and integrating COVEX Flex. Destocking effects are expected to mitigation, and volume stabilization suggests stabilization in 2026. - Chris Villavarayan(CEO)

What are the key drivers of growth and new business wins? - Unspecified Analyst

2024Q4: Our teams executed strategic plans to win new business despite challenging end markets. We secured approximately 2,800 net new body shop wins in Refinish and completed the acquisition of the CoverFlexx Group. - Chris Villavarayan(CEO)