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Axalta Coating Systems Ltd (NYSE:AXTA)
Q1 2020 Earnings Call
May 6, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Axalta's First Quarter 2020 Earnings Conference Call. [Operator Instructions] Today's call is being recorded, and replays will be available through May 14. 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 Chris Mecray. Please go ahead, sir.

Christopher H. Mecray -- Vice President, Investor Relations, Treasury and Strategy

Thank you, and good morning. This is Chris Mecray, VP of Investor Relations. We appreciate your continued interest in Axalta, and welcome you to our first quarter 2020 financial results conference call. Joining me today are Robert Bryant, CEO; and Sean Lannon, CFO. Last night, we released our quarterly financial results and posted a slide presentation, along with commentary to the Investor Relations section of our website at axalta.com, which we'll be referencing during this call. Both our prepared remarks and discussion today may contain forward-looking statements reflecting the company's current view and of future events and the potential effect on Axalta's operating and financial performance, including those related to the expected or potential impact of COVID-19.

These statements involve uncertainties and risks, and actual results may differ materially from those forward-looking statements. Please note that the company is under no obligation to provide updates to these forward-looking statements. This presentation also contains various non-GAAP financial measures. In the appendix, we've included reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information regarding forward-looking statements and non-GAAP financial measures, please refer to our filings with the SEC.

I'll now turn the call over to Robert.

Robert W. Bryant -- Chief Executive Officer

Thank you, Chris, and good morning, everyone. We appreciate you joining us. Today, we will provide an update on our first quarter results, the impact of COVID-19 on Axalta's operations and the actions we are taking in response as well as touch on the conclusion of our strategic review.

I'd like to start today by wishing everyone well, and I hope that you and your loved ones remain safe. The health of our colleagues and friends around the world always remains top of mind for all of us at Axalta. We spent significant time and energy taking steps to ensure the continued safe operation of our company while adhering to social distancing guidelines everywhere we operate. We're all very proud of the hard work that has gone into preparing and executing plans for this safe operation. And I want to thank all of my Axalta colleagues around the world for this extraordinary effort. We're also proud that a number of our sites have converted production to provide critical needed products such as hand sanitizer and personal protective equipment in many countries as a way to give back to the communities where we live and operate. I'm pleased to report that for the most part, our facilities globally have remained operational through the Coronavirus period, and we have continued to serve customers without interruption where possible.

Our first quarter was, of course, quickly overshadowed by the emergence of the Coronavirus pandemic. We're navigating this challenging business environment with a thoughtful, proactive and aggressive approach as it relates to both safe operation as well as the company's financial health. Our top priority remains the safety and well-being of our employees as we continue to serve those customers with critical requirements. We're not taking a one-size-fits-all operating approach, but rather tailoring our response to each business and region. We're very focused on decision-making speed facilitated by global and regional COVID-19 task forces, representing all aspects of our business. Finally, we remain in close communication with our suppliers and customers to ensure the safe operation of our entire value chain.

As we navigate with the COVID-19 crisis, we have three priorities that guide our decisions and actions. The first is maintaining employee safety and well-being. This is paramount. And we have careful plans, programs and support for all our employees, encompassing these elements. To date, Axalta has had very few Coronavirus cases globally. And we continue to follow CDC protocols for operational safety and risk mitigation. The second priority is maintaining operating flexibility. We're focused on supporting our customers by maintaining operating capability where necessary and permitted in compliance with regulatory protocols. To date, we have not had any material supply or delivery disruptions, and we feel confident that we can serve our customers at the highest level today. The third priority is maintaining financial flexibility. We continue to implement an aggressive action plan to mitigate the financial impacts of reduced demand. This is tailored to each business, with a particular focus on maximizing cash flow and liquidity, while maintaining a focus on the long-term goals of each business.

Regarding our first quarter financial results. Net sales decreased 8.5% before foreign exchange and the impact from the second quarter 2019 divestiture of our China joint venture. Price mix increased 1.8%, led by Performance Coatings, while volumes contracted by a negative 10.3%. We estimate that the impact of COVID-19 to net sales was approximately $90 million or 8% year-over-year accounting for most of the organic constant currency net sales decline for the quarter. Adjusted EBIT for the quarter declined 7.8% versus Q1 2019. While margins increased 60 basis points to 13.5%, benefiting from ongoing price mix improvement, continued cost reduction and lower variable costs, which more than overcame the impact of the volume pressure in the period. We estimate the COVID-19 impact on adjusted EBIT was $40 million, with an associated impact to earnings per share of $0.13. Free cash flow for the first quarter improved by $55 million from the same period in the first quarter of 2019 on improved working capital. We were very pleased to see this continued progress in cash flow performance.

Turning to the demand environment. It's obviously very dynamic, but our global team is adjusting well to customer demand in real time. In Refinish, we continue to see healthy customer orders through mid-March, with some evidence of slowing activity in the final weeks of the quarter. In April, Refinish demand was impacted by many body shops closing and by lower orders from distributors. Clearly, reduced miles driven due to stay-at-home restrictions has impacted Refinish demand near term. Market demand indicates a peak decline in miles driven in the U.S. at 45% to 50% from the pre-Coronavirus normal levels. Encouragingly, a bottom may have been set in early April as states start to relax their stay-at-home mandates. U.S. traffic began to recover starting mid-April with sources reporting traffic about 30% lower than normal in the last week of April. In Europe, traffic levels have been highly variable by country depending on the various levels of lockdown. Uniformly, however, we have seen traffic bottom out around the beginning of April and begin to rebound steadily since then. Germany, for example, has improved from down 60% to closer to down 30% over the last three weeks in April. In China, once mobility restrictions were lifted during March, traffic resumed to nearly normal levels within weeks. This is a very strong indication that miles driven is likely to be very quick to rebound from current unprecedented lows as lockdowns are lifted. In the month of April, our body shop customers in the U.S. and Europe have seen reduced activity in the range of 30% to 50% in general. Some customers are closing a portion of their body shops while concentrating remaining volumes in a select group of regional locations. It's clear that demand in shops globally is quite variable. And our best estimate is that the majority of shops we serve are seeing demand down over 40%, while some shops remained at higher levels through April.

In our Industrial end market, our performance in the fourth quarter showed better resilience overall relative to other businesses, given the wide dispersion of global demand and markets served as well as ongoing new account wins and market share gains. As we consider the balance of 2020, we generally would expect volumes to track industrial production gauges in markets we serve, perhaps with an adjustment factor for new product penetration and ongoing share gain. Looking at the current environment and April operating rates in terms of our specific markets served, we have seen a more notable impact in Industrial e-coat, where automotive is a key end customer segment. Conversely, in building and construction as well as agriculture and construction equipment, we have seen operating rates for customers at around 70% to 80% of normal during April. Portions of our Energy Solutions business, serving motor manufacturers have retained demand up to 90% of normal through April. Our transportation segment is directly linked to global automotive and commercial vehicle OEM global production rates. Many vehicle OEMs have temporarily halted production in North America and Europe beginning mid-March, but we now see most of them seeking to restart production in the coming weeks. We generally expect to track the recovery rate of the global vehicle markets and forecasts currently assume a bottom in April with a gradual rebound in the balance of the year.

We see Commercial Vehicle possibly recovering slightly ahead of light vehicle markets based on indications from customers on production time lines. Each region, importantly, is at a different stage in terms of the COVID-19 impact. In China, we've seen significant production recovery across all our end markets as the country has reopened substantially from the mandated lockdowns. Customer production rates began to reopen in early March and utilization rates are increasing. We anticipate utilization of China light vehicle plants that we serve to approach 80% of normal in May. Encouragingly, passenger vehicle retail sales in China have rebounded solidly. In fact, for April, the first three weeks were only 7% below the prior year, with the third week, essentially flat from the same week a year ago. This comes after a March where there was a 40% year-over-year drop in retail sales. This experience could serve as a template for other geographies in terms of recovery pacing once the Coronavirus is more under control. I remain cautious on this, however, given the delayed and weaker response actions taken by Western governments relative to China. As a result, our plans and responses will be flexible and adaptive to the realities on the ground in each market. In the U.S., in automotive, aggressive incentives that have been rolled out already, coupled with low financing rates, may help the recovery process with demand stimulation, bolstering the possibility for an early cycle recovery for the sector.

Moving on to mitigation actions. Axalta is extremely focused on counteracting COVID-19 financial impacts on our business as much as possible. We are proactively adjusting our cost structure in real time, aligned with demand changes. Our action steps initially targeted at discretionary costs, freezing travel, freezing new hiring, reducing or eliminating the need for contractors and adjusting capital-spending plans. As demand impacts became clearer during March, we've taken further actions globally, including furloughs, reduced workweeks and temporary 20% salary reductions, including both senior management and the Board of Directors. Our current plans implemented to date are expected to generate cost savings totaling over $100 million during 2020, with initial savings beginning to accrue in late March. We're also taking further actions to maximize cash flow, including capex reductions of 50% from our prior full year guidance. Curtailments of discretionary capital uses and steps to enable net working capital improvement. Collectively, these steps are expected to provide at least $125 million in incremental cash flow, separate from the cost action cash benefits.

The measures I have described thus far fall under playing defense, which is certainly justified in the current environment. However, we're also continuing to play offense across many aspects of our business. We have not materially reduced our research and development investment, and we continue to fund new product development and the industry's best technical service program to ensure ongoing quality and high levels of customer service. Axalta continues to play to its strengths, witnessed in top market share positions in many of the markets we serve to ensure that we can leverage growth in the recovery phase of the pandemic. We continue to see new account wins, uptake of new products and wins in our global distribution network. Axalta is well positioned to weather this challenging environment. We are resilient and our business model and management approach should serve us well during this downturn. We've often noted that the coatings industry in general has a very high variable cost structure. Axalta's costs are over 60% variable at the cost of goods sold level, which provides a natural hedge against volume reductions.

In combination with targeted fixed cost structure actions and a strong balance sheet, we're confident in our positioning and approach for navigating the pandemic. It is also reminding that the coating sector is also inherently a fast-based and flexible production environment, with limited large runs, we further minimize the decremental effects of reduced volumes unlike major chemical producers with large production runs. The coating sector is fairly low in capital intensity. Axalta's maintenance capex is approximately $40 million to $50 million per year which affords flexibility in reducing outlays over temporary periods. Axalta continues to maintain a strong balance sheet, and our ample liquidity also serves to bolster our position against current demand headwinds as well as unforeseen challenges we could face as we overcome the pandemic.

Lastly, I'd like to briefly comment on Axalta's strategic review, which concluded on March 30. The decision to end the review was taken by the Board in light of the dislocation in global markets caused by COVID-19. The termination came after evaluating a broad range of alternatives. Among other actions, a comprehensive sale process was initiated and pursued. And the process was thorough. We communicated initially with over 50 interested parties regarding potential transactions. We signed disclosure agreements with 18 potential purchasers to facilitate due diligence. We then conducted robust due diligence processes with multiple parties. At the end of March, the Board decided that continuing to execute our strategic plan was the best current path for shareholder value creation. We also noted that despite termination of the process, our Board will continue to evaluate all opportunities to increase shareholder value. We strongly believe our track record, particularly in areas under our control, demonstrates the continued execution of our strategic plan will deliver significant value for our shareholders. We are eager to share our perspectives and long-term growth plans as well as thoughts around our market positioning, topics such as business portfolio and diversification and intended plans for capital allocation once we emerge from this pandemic. Right now, we are completely focused on successfully managing Axalta through this health crisis and associated market disruption. Once the path out of the pandemic is clear, we look forward to sharing with you more about our medium and longer-term growth and value creation plans.

With that, I will now turn the call over to Sean.

Sean M. Lannon -- Senior Vice President and Chief Financial Officer

Thank you, Robert, and good morning. I'd like to briefly touch on our balance sheet, our first quarter highlights and conclude with a few comments on our financial outlook. Axalta continues to maintain a very solid balance sheet and liquidity profile. Our net leverage ratio was 3.1 times at March 31 versus 3.0 times at year-end. The nearest debt maturities on both our term loans and our unsecured notes are 2024. We have no affirmative financial covenants on our current outstanding indebtedness, and we ended the first quarter with an interest coverage ratio of 5.9 times. In January, as a reminder, we prepaid $300 million of our U.S. dollar term loan, which lowered our full year cash interest expense by over $10 million. With $657 million of cash on the balance sheet at March 31 and $361 million of available capacity in our undrawn revolver, we had over $1 billion in total liquidity available at first quarter end. As we mentioned, we also expect to capture incremental cash exceeding $225 million from reduced capex, discretionary working capital reductions and the cash benefit associated with the cost action plans we have already instituted. Our final decisions on any capital decisions will be updated at least monthly based on the pacing of recovery of our end markets.

In terms of first quarter results, I'd highlight just a few things. As Robert noted, organic constant currency net sales decreased 8.5% overall for the quarter, and most of that was by our estimation due to the Coronavirus impacts of 8% in the period. We were pleased to see ongoing positive price mix contributions from both segments in the period but led by Performance Coatings. The COVID-19 impact on first quarter results to net sales and adjusted EBIT were estimated at $90 million and $40 million, respectively. The correlating impact to earnings per share was $0.13. The largest contributor of this shortfall was China, where light vehicle production was essentially halted from late January through February with March seeing partial recovery. Overall, China sales dropped 65% from a December 2019 run rate to the trough in February prior to recovery beginning in early March. Notably, the China industrial business was only moderately impacted during the period, which speaks to the nature of certain customers within critical need sectors that continue to operate during the period, including our Energy Solutions business. Beginning in March, we began to see COVID-19 impacts in western economies. As such, the relative impact from Asia Pacific and the rest of the world were equally balanced for the quarter, with transportation and specifically, light vehicle was the most impacted end market globally. Refinished is the second most impacted, and industrial was the relatively more stable component of our business.

First quarter adjusted EBIT of $133 million was a 7.8% decrease versus the prior year but adjusted EBIT margins increased 60 basis points to 13.5% as cost reductions, price improvement and lower variable input costs outweighed the notable volume drag in margin terms. Free cash flow for the quarter, although a use, which is seasonal and as expected, improved $55 million versus the prior year first quarter, reflecting a substantial working capital improvement versus the prior year. In the first quarter, we also took an $18.5 million restructuring charge. This charge will enable further structural cost savings aligned with our Axalta Way program and goals. We also completed our Belgium site closure during the first quarter, and productivity benefits of this project are beginning to be realized.

For Performance Coatings, Q1 net sales decreased 5%, excluding FX and M&A impacts. Refinish reported a 7% net sales decline, excluding FX. We estimate that net sales, excluding the COVID-19 impact would have been slightly up in the period. Industrial net sales decreased a fairly modest 2.4% year-over-year, excluding FX, and also excluding the China JV divestiture. Industrial sales were largely flat in China despite COVID-19 impacts to the Chinese economy. And the overall result benefited from year-over-year growth in sub businesses, including wood, coil and energy solutions. We believe the industrial business was essentially flat top line, excluding the impacts of COVID-19 in the quarter. First quarter segment adjusted EBIT increased 1% from the prior year and segment margins of 12.3% increased 130 basis points. Lower volume and FX pressure were more than offset by positive price mix, lower operating expenses and some tailwinds and variable input costs.

Transportation Coatings net sales decreased 14.7% ex FX. Light Vehicle first quarter net sales decreased 14.9%, excluding FX, as volume decreased relatively in line with global automotive production shutdowns for the customers we serve. Average price mix increased slightly in the period before the estimated impacts of COVID-19 in the period, we believe Light Vehicle net sales would have declined in the mid-single digits. For the quarter, global light vehicle production declined 23%, including a 30% decrease in Asia Pacific and a 47% decrease in China. Current IHS forecasts call for a 47% drop in global builds in the second quarter, followed by recovery to negative 9% in each of the back half quarters, respectively. For the full year, current forecasts call for a 22% global bill drop with April as the trough month.

Axalta outperformed global build in the first quarter despite actually seeing a worse outcome in China versus market due to specific customer exposures in other regions. Commercial Vehicle first quarter net sales decreased 14%, excluding FX. This reduction was driven by lower global truck production, again due in part to COVID-19 impacts, which came in addition to slowing production rates going into the quarter. Price mix was slightly positive in the period. Overall truck production decreased 30% in the quarter and current global forecast for Class four through eight truck production suggests a similar 29% decline for the year, with second quarter down 37%. Axalta's outperformance relative to the truck market decline came from non-truck customers, which saw less decline in the period as we've not seen complete shutdowns of production in these markets. We would expect this dichotomy to continue this year with non-truck customers, with heavy-duty truck production completely shut down in April, while recovering faster than light vehicle, partly given fewer plants to restart. Despite net sales headwinds in the quarter, Transportation Coatings generated first quarter-adjusted EBIT of $25.8 million, relatively in line with Q4 results but 24.6% lower than the prior year given lower volume, offset partly by lower operating costs. Adjusted EBIT margins of 7.7% compared with 8.4% in the prior year, driven primarily by the lower volume decremental impacts.

As you know, we withdrew our full year guidance in March, and hence, are not providing updates to each line item we noted in our January earnings release. Regarding near term performance, April saw net sales down approximately 60% with a more severe volume impact in Transportation Coatings than Performance Coatings in the period due to a prevalence of vehicle plant shutdowns during the month. As we look to May, it appears that we'll see some rebound in overall net sales levels. Our vehicle OEM customers have stated that they plan to resume production in many locations this month, and some states in the U.S. have announced that the stay-at-home restrictions will gradually be reduced. One point that I can make about recovery based partly on the China experience in the first quarter is that populations appear to resume driving very quickly once restrictions are lifted. This appears to also be true in other regions given the recent rebound in data before most travel restrictions have officially been lifted. It's possible that the automotive-related supply could, therefore, be more of an early cycle recovery group. Based on what we know today, our current best estimate of volume impact on net sales is around 40% decrease in May, following approximately 60% down in April, as I noted. And we currently expect further recovery in June from the May levels.

As we expect, the cost opportunities to phase in through the course of the year and given that we believe the most difficult year-over-year sales comparison will be in the second quarter, our expectation currently is the second quarter will end slightly positive at the adjusted EBITDA level. Additionally, our baseline recovery assumptions still assume solidly positive free cash flow for the full year 2020. Were we to see a further delay in recovery in May and June, we would move to pull additional cost levers to continue to reduce our cost position.

I'll now turn the call back to Robert for concluding comments.

Robert W. Bryant -- Chief Executive Officer

Thanks, Sean. We are clearly in an unprecedented and dynamic time for our markets and our business. I'd like to emphasize that at Axalta, we're taking proactive and aggressive steps to address this crisis. You can see that in our immediate actions around reduced discretionary spending and capital investments, our shift to focus on balance sheet liquidity and cash flow, our immediate adjustments at an operating level to ensure plants and operating health in the COVID-19 climate, and certainly in our double down focus on employees, customers and communities. We're proud to be supporting our communities with both hand sanitizer and personal protective equipment across many countries in which we operate as a way to give back.

To conclude, I'd like to thank each and every one of our global employees for their dedication and hard work, particularly over recent weeks, as we have had to rapidly pivot to address a global health and economic crisis. We're very proud that our employees were able to transform some of our manufacturing capacity to support our communities. Our team has stepped up even beyond our high expectations. And this gives me confidence in saying that Axalta will not only get through this period, but will become stronger because of it. Our strength comes from our passion to serve our customers, our passion to innovate and create some of the world's best coatings and our passion to execute every day and be considered the best in what we do. To see our global team exhibiting these qualities even in the face of today's unprecedented challenges and even while working remotely for many, is truly amazing.

With that, we'll be pleased to answer any questions. Operator, please open the lines for Q&A.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Ghansham Panjabi with Baird. Please go ahead.

Ghansham Panjabi -- Baird -- Analyst

Hey guys, good morning. Hope everybody is doing well.

Robert W. Bryant -- Chief Executive Officer

I want to Ghansham morning.

Ghansham Panjabi -- Baird -- Analyst

I guess, first off, what sort of lag is there typically between any inflection in miles driven, and let's call it demand variability for auto Refinish? Are there any sort of historical parallels that you can share with us? And maybe take us through on that sort of same vantage point in terms of what you saw in China throughout the first quarter and so far in auto Refinish, specifically in April as well?

Robert W. Bryant -- Chief Executive Officer

Miles driven is a pretty good indicator for our business, Ghansham, as well as accident rates. There's typically not that much of a lag as we see people get out and drive more, we would expect to see body shop activity pick up pretty quickly. In China, we saw our Refinish business down about 46% in the first quarter. The good news is, in April, it was up 14% in constant currency. So that business has recovered pretty quickly and is now trending to the positive.

If we look at overall, kind of some of the elements here, in particular, just for Refinish globally. Obviously, if there are fewer cars on the road, there's fewer miles being driven, fewer accidents. So body shops will need to sort of refill their demand pipe to speak. But we expect that to occur pretty quickly. Once it is filled we expect demand should recover gradually to normal, and I think we are actually cautiously optimistic about the Refinish business, we've seen U.S. gasoline consumption declined about 50% in the last two weeks of March, but is already up slightly in the first week of April. The CCC claims that they report the period to have bottomed at about 49% down in April. And then we also have an additional perspective, which is our body shop management system software, where we can actually measure how frequently the scales are being used to weigh and mix paint. And that was down about 48% in the U.S. and Europe in April, but has since been rising. So we have data from a multitude of perspectives to give insight into our view.

Ghansham Panjabi -- Baird -- Analyst

Okay. That's helpful. And then just one second question in terms of decremental margins by segment, how should we think about that? I know Sean made some comments on EBITDA specific to the second quarter, but just by segment, how should we think about decremental margin?

Sean M. Lannon -- Senior Vice President and Chief Financial Officer

By and large, it's, I mean, fairly similar cost structure. So obviously, it's a higher-margin business on the performance side. But I think the guidance, Robert gave in his opening comments, when we think about gross margin, specifically COGS, roughly 60% is variable. So you can think about the drop-through from that perspective. Clearly, looking at what we quantified around the COVID impacts, $90 million in sales, $40 million EBIT impacts, it's about slightly over 40% EBIT margin. Clearly, we didn't have the opportunity to start taking costs out, similar to what we're actually doing in the second quarter and what we've implemented. So I think that margin construct as far as decremental is sort of a worse case, just for perspective there.

Ghansham Panjabi -- Baird -- Analyst

Thanks so much.

Operator

Our next question comes from Vincent Andrews with Morgan Stanley.Please go ahead.

Vincent Andrews -- Morgan Stanley -- Analyst

Hi guys, This is actually Steve on for Vincent. Just curious if you could talk a little bit more about some of the discussions you're having with your Refinish customers in regards to inventory levels. And I appreciate the color and the answer to the previous question, but just maybe a little bit more color on the discussions there.

Robert W. Bryant -- Chief Executive Officer

I think our in terms of our Refinish customers, our goal is to make sure that we have paint available for them as they restart operations. So we've been focusing on, as they've looked at concentrating and have concentrated some of their body shops regionally into fewer shops during the Corona period, making sure that we have product available for them. And as we toggle and manage our supply chain and our raw materials and inventory management overall, but we're making sure that we've got product availability for them. I think that's one key element. The other element is we have been working virtually with a number of our Refinish customers to the extent that they've encountered any daily just kind of run-of-the mill technical issues. So we haven't let the Coronavirus get in our way in terms of providing top-notch service to our customers. So I think all in all, we've been doing a good job in making sure that they get what they need.

Sean M. Lannon -- Senior Vice President and Chief Financial Officer

And just one incremental point. And certainly, we don't have perfect line of sight into distribution. But inventories, by and large, are pretty thin. I think, similar to what we're doing as a manufacturer and focusing on liquidity and working capital efficiencies. I think you're also seeing that in the middle of the channel. So to the extent we were to see a rebound, you could expect a slight restocking just given how thin the inventory layers are sitting in distribution today.

Vincent Andrews -- Morgan Stanley -- Analyst

Okay, thanks guys.

Sean M. Lannon -- Senior Vice President and Chief Financial Officer

Appreciate it.

Operator

Our next question comes from Mike Harrison with Seaport Global Securities.Please go ahead.

Mike Harrison -- Seaport Global Securities -- Analyst

Hi, good morning.

Sean M. Lannon -- Senior Vice President and Chief Financial Officer

Good morning.

Mike Harrison -- Seaport Global Securities -- Analyst

Looking at the Refinish business, this downturn is potentially going to be harder on some of the smaller body shops than on MSOs. Can you comment on maybe how much of your business could be at credit risk? And if the potential share gain by MSOs could be a positive for you guys in the long run?

Sean M. Lannon -- Senior Vice President and Chief Financial Officer

Yes. So much of our actual credit exposure is actually with distribution, just given the sales model and risk of title that's actually borne by distribution. So just, I guess, one point as far as the credit risk perspective. I guess there could be an expectation that you could see some of the mom-and-pop body shops go under, which would be a net benefit if that hypothetical situation was to occur, just given our broader exposure to the MSO space. So if you were to see either those body shops be sold down the road or just that inventory as far as cars coming from insurers going to the MSOs versus that bankrupt body shop. Again, it's a net benefit for Axalta overall.

Mike Harrison -- Seaport Global Securities -- Analyst

All right. And then in terms of the strategic review, I was just curious, at any point, have you been exploring selling a part of the company? In other words, are there pieces of the portfolio as you look at it now that maybe you view as non-core or less core or more valuable in another owner's hands?

Robert W. Bryant -- Chief Executive Officer

Over the course of the nine month review, the Board explored a full range of alternatives to increase shareholder value. And that included, of course, a comprehensive sale process, looking at ideas like you're talking about now in terms of the sale of specific assets or businesses, change in capital allocation along with the full evaluation of Axalta's operating strategies, core underlying business and stand-alone value creation potential. And at the end of that, concluded that the execution of our strategic plan was what had the opportunity to create the most value. That being said, although the process has concluded, our Board will continue to evaluate, of course, all opportunities to increase shareholder value.

Mike Harrison -- Seaport Global Securities -- Analyst

Thanks very much.

Operator

Our next question comes from Steve Byrne with Bank of America.Please go ahead.

Steve Byrne -- Bank of America -- Analyst

Yes, thank you And thank you for the monthly data you provided in the slide deck, given the magnitude of the swings right now, it's really helpful to have that. And I might suggest an update in another month with April and May data would be very helpful, just given how significant these moves are. I wanted to ask you about that.

Robert W. Bryant -- Chief Executive Officer

We appreciate that feedback. And that's actually one of the reasons that we pushed out when we would normally report earnings by a week so that we could have that April sales data and be able to provide our investors as well as the analyst community with the most up-to-date view of what we're seeing in the markets. And we do plan on doing a mid-quarter update sometime in June for the trends that we're seeing in May. We also think that would be beneficial.

Steve Byrne -- Bank of America -- Analyst

Glad to hear that. And the general comments made about a 60% volume down in April and 40% in May. Can you differentiate that by end market? Which are the ones that you think might do better versus worse?

Sean M. Lannon -- Senior Vice President and Chief Financial Officer

Well, I'll give you a broad-brush response to that. I think what you're seeing in April. Light Vehicle is clearly an outlier. I think what you're seeing in the press is indicative of kind of what we're seeing. You are seeing a nice recovery with most of the OEMs actually signaling they'll be up in the middle of May. As far as the utilization from that point forward, I think that's still a question. But I do see kind of that catalyst for a jump from a light vehicle perspective. Robert's comments on Refinish are obviously helpful. We're starting to see really nice trends in Refinish. China is a great example where we're back to normal and actually slightly above April as far as normal levels. But industrial wasn't hit that hard in the first quarter. We are seeing a little bit of slowing as far as some of the end markets as it relates to wood. We're seeing new housing starts to be a little slow. But by and large, the other end markets, the trajectory is heading in the right direction. But again, calling out kind of light vehicle as the single biggest jump from March to April to May as far as the OEMs coming up.

Steve Byrne -- Bank of America -- Analyst

And the $100 million of cost cuts is a fairly significant percentage of SG&A. It seems to be relatively large compared to some actions of your peers. It's not like we would have thought of Axalta as being one with lots of fat to cut. So it's certainly commendable. Anything in there that's more than just discretionary and temporary? Anything that is in there that is potentially learnings that could continue post the pandemic?

Robert W. Bryant -- Chief Executive Officer

Yes. I think one of the misconceptions that's been out there for a long time is related to the overall cost structure of the company, and that significant cost has been taken out of the company. And while that's true, over the last many years, there's also been a fair amount of cost put back into the company, particularly in the 2015 to 2017 time period. So as we go forward, the cost opportunity for us in terms of getting to competitive levels in our cost structure both to enable greater profitability of the business, but also to permit growing in lower-margin segments, which could become higher-margin if we adjusted our cost structure. That opportunity is actually quite large and continues to be quite large.

Sean M. Lannon -- Senior Vice President and Chief Financial Officer

And Steve, just as far as SG&A, it's not entirely coming out of SG&A. We've sort of looked under every rock, but operations is a contributor as well. So we looked across operations, we looked across the commercial teams as well as all the commercial areas for reducing discretionary spend as well as the temporary labor reductions that we commented on in our opening remarks.

Steve Byrne -- Bank of America -- Analyst

Great, good thank you.

Operator

Our next question comes from Don Roberts with UBS.Please go ahead.

John Roberts -- UBS -- Analyst

Thank you. This is John Roberts on for Josh Spector this morning. Are you seeing a wide diversion in your raw material decline given the rapid drop in oil prices? Maybe you could comment on what's down the most and what's down the least in the raw material basket?

Robert W. Bryant -- Chief Executive Officer

So if we think about on a category basis, John, and then I'll give you some comments where we see headwinds and where we see tailwinds. One would expect the overall raw material basket to be down as the COVID-19 situation has eroded demand across various markets. Lower oil prices will also aid in pushing feedstocks down. Unfortunately, we actually expect to realize very little of that potential benefit given how little we are buying currently at the moment. So I think in terms of seeing savings, kind of the earliest that we would expect to see savings could be in the third quarter, and those savings, we would expect to actually be fairly modest.

In terms of headwinds, just to call out a few, epoxy resins would be an area where we continue to see headwinds just because of the tightness of certain feedstocks due to outages, white and black pigments. So if you think about TiO2 and also carbon black, just lower capacity in some cases as well as IMO increases in black. And then in certain pigments, red, yellow and blue, in particular, some of the Chinese regulation has limited feedstock capacity. It hasn't been an issue but could become more of an issue as we go forward. And then in terms of tailwinds in isocyanates we are seeing pricing for HDNI come down. Some of the specialty monomers that we buy, we expect to also continue to come down. Solvents, of course, being so closely correlated and linked, we will see those come down. And then additives, just given the drop in the overall demand environment have also come down.

John Roberts -- UBS -- Analyst

The general industrial finishes is one of the most fragmented markets. Is the stability there related to share gain? Or is the mix of your customers tilted toward things that were OK like personal computers or tilted away from large ticket items? You mentioned wood, but maybe give us a little bit more color on the mix within that general industrial.

Robert W. Bryant -- Chief Executive Officer

So in industrial, we have such a diversity of end markets and many of those end markets, essentially, our products went into industries that were considered critical products and continued operating. Kind of the star, you might say at the moment among our various industrial businesses is our Energy Solutions business. It appears to be the most resilient of all of our industrial end markets. We're seeing strong demand there for motor manufacturers. And we're also gaining share with innovation in all our Energy Solutions products, be it wire enamels and impregnating resins or core sheet varnishes. And I'm sure you've seen the many innovation awards our products in this business segment, in particular, have won over the last couple of years. In coil, we are seeing a slowdown in commercial construction projects. There are some projects that are on hold for now, but we remain optimistic for the potential further direction of that business.

And then in wood, where we sell into furniture, cabinetry, building products and then also distribution, return to work and low interest rates should put this business on a good trajectory once the crisis passes. But as Sean mentioned, the business is largely based on new housing starts, repair, remodel spend, so consumer sentiment there is quite important. And then lastly, powder. Powder is more of a technology as opposed to an end customer segment. There, we are seeing the agricultural, construction equipment market down, architectural market down, oil and gas, obviously down for the moment. But in infrastructure-related demand for end products like rebar and some other powder products, we're seeing those much less affected, at least in Q1 and in April than in other parts of the business.

John Roberts -- UBS -- Analyst

Thank you.

Operator

Our next question comes from Jeff Zekauskas with JPMorgan. Please go ahead.

Silke Kueck -- JPMorgan -- Analyst

Ask it's Silke Kueck for Jeff. How are you.

Robert W. Bryant -- Chief Executive Officer

Good morning silica your. Great.

Silke Kueck -- JPMorgan -- Analyst

Thank you. I have two questions I was wondering, given the currency headwinds, I was wondering whether you can discuss what level of currency-type pricing you might be able to push through in the coming quarter? And my second question is on cost savings. I was wondering if the $100 million cost savings you are targeting is in addition to like the $50 million from the Axalta Way II cost savings? And if you had to guess, I was wondering if you can quantify what the headwinds could be next year, given that one of the cost savings this year are onetime in nature?

Robert W. Bryant -- Chief Executive Officer

So I'll take your first question. I think on FX-related pricing, it does depend on which segment of the business Performance versus Transportation Coatings to some extent. However, in general, we follow the principle of trying to recuperate any FX exposure or material devaluation or in-country inflation that we see through our pricing mechanisms.

Sean M. Lannon -- Senior Vice President and Chief Financial Officer

Yes. And as far as the cost savings question, we are still committed to the Axalta Way targets. So the $50 million, the $18.5 million severance charge that we took in the quarter, that's a continuation of the Axalta Way progress, and that's unrelated to the $100 million that we called out in the opening remarks. On the $100 million, I mean, most of that is more temporary in nature, given its short weeks, given it's furlough, given it's 20% pay reductions. The hope is that we'll actually be able to hold on to some of that discretionary change on kind of how we go to market. But as far as incremental $50 million as we get into 2021, we aren't necessarily seeing any headwinds. I think coming out of the strategic review, I think we actually have better line of sight into some of the opportunities. And again, when we come out of this pandemic, we are going to be delighted to share some of that information.

Silke Kueck -- JPMorgan -- Analyst

Thanks.

Operator

Our next question comes from Chris Parkinson with Credit Suisse. Please go ahead.

Chris Parkinson -- Credit Suisse -- Analyst

Great, thank you. Just as a corollary of the cost questions. Just an extension of the $125 million cash flow improvement efforts. Can you just remind us of your general long-term projected cash flow conversion metric targets, working capital targets, once we're out of this mess. Just how should we be thinking about kind of the normalized environment, hopefully, in 2021 and '22?

Robert W. Bryant -- Chief Executive Officer

Yes. Chris, cash flow conversion has historically been in the sort of 45% to 50% EBITDA range. And that's something that's a couple of years old now in terms of the way we used to talk about that. I think there are a number of elements there. One is normalizing and whatever period that's going to take. But once we get through that, and we do normalize we are continuously working toward working capital improvement overall. And we do expect to see structural working capital improvement across the business over a two to three year period. It's probably a little premature to put out definitive targets. But we've always said that from a low teens, working capital to sales-type of metric that we thought there was opportunity to be in the high single digits. And we have trended in an improving trend through 2019 over recent years. So we have made progress, but I think it's clear that there is more opportunity there over time. And that's one of the things that Sean referred to that we'd like to talk more about once we get through the current period. And once those numbers kind of become more relevant again.

Chris Parkinson -- Credit Suisse -- Analyst

Great. And then just a very quick question just in terms of Refinish inventories. It seems as though the industry over the last several years in terms of the larger distributors have really taken down inventories going back to, I guess, 2017. Can you just comment on your confidence level that your businesses should basically track miles driven and there's nothing else really else in the channel. And if you could extend that question to body shops as well, I'd be curious on your thoughts.

Robert W. Bryant -- Chief Executive Officer

Chris, with regard to the end consumer, we believe that the drivers continue to be the same, miles driven, accident rates and the size of the car park. The data and the trends out for that is pretty clear. So we have pretty good visibility into what's happening at the end body shop level also just given our body shop management software and how that's used and so forth throughout the operation of the body shop, gives us pretty good insight than in between with distribution. As you mentioned, there has been consolidation within the distribution channel, which has had the impact of bringing down overall industry level inventory levels in the channel. So in terms of the sales into distribution, it will be a function of how distribution continues to evolve in the ensuing quarters in the next couple of years.

Chris Parkinson -- Credit Suisse -- Analyst

Thank you, Stacey.

Robert W. Bryant -- Chief Executive Officer

Thank you, Chris.

Operator

Our next question comes from Alex Yefremov with KeyBanc. Please go ahead.

Alex Yefremov -- KeyBanc -- Analyst

Thank you. Good morning, everyone. I just wanted to clarify something Sean had said in prepared remarks. Do you expect your total EBITDA to be slightly positive in the second quarter?

Sean M. Lannon -- Senior Vice President and Chief Financial Officer

Yes. That's the comment I made, Alex.

Alex Yefremov -- KeyBanc -- Analyst

Okay. Got it. And then the second question, in Refinish, you have a lot of small customers. Do you have an insight how they're coping financially with the current crisis? And for that segment of your Refinish business for smaller customers, to what degree the credit risk is borne by Axalta versus third-party distributors?

Robert W. Bryant -- Chief Executive Officer

So in terms of the activity that we're seeing, in particular, the smaller, the mom-and-pop body shop segment, of course, many of those shops have been closed. We won't really have full insight into the full state or the full status of those body shops until we start to see some more recovery and things come back online. So it's a little early for us to give you much of a read at this point. And then in terms of the credit risk, Sean had mentioned, in the U.S., we don't have a direct ship model. So everything that eventually ends up in the hands of a body shop goes through distribution. So with the exception of MSO customers, where we have a direct credit risk exposure, for all the other body shops, that credit risk is borne entirely by the distributor.

Alex Yefremov -- KeyBanc -- Analyst

And outside of the U.S., if I may follow-up?

Robert W. Bryant -- Chief Executive Officer

Yes. In Europe, in some countries, we do have a direct distribution and a direct sales relationship. It varies a little bit by country, but it is not the majority of our sales.

Alex Yefremov -- KeyBanc -- Analyst

Thanks a lot.

Robert W. Bryant -- Chief Executive Officer

Thanks for letting

Operator

Our next question comes from Kevin McCarthy with Vertical Research Partners. Please go ahead.

Kevin McCarthy -- Vertical Research Partners -- Analyst

That's. Good morning, gentlemen. Hope you're well my question relates to decremental margins in the second quarter. If I think about the notion that your EBITDA could be slightly positive and kind of marry that to the sales guidance that you gave, it seems to imply a decremental margin maybe close to 40%, which is a lot larger, obviously, than the March quarter. Is that consistent with what you're meaning to convey?

Robert W. Bryant -- Chief Executive Officer

I think, I mean, what we're trying to get across is just an appreciation for ultimately the cash flow use. I think we are we've only signaled April, May. This is obviously a very dynamic environment, but the current expectation is June should be better than May as long as there's not any big surprises. And what we wanted to do is provide a little comfort that we're still expected to be positive at the EBITDA line. Certainly, when you think about decremental margins, of the $100 million cash benefit as it relates to cost actions or as it relates to the actual cost actions themselves, roughly 50% of that benefit is actually going to accrue in the second quarter with a lot of the temporary reductions going into effect.

Kevin McCarthy -- Vertical Research Partners -- Analyst

I see. That's helpful. And the second question, if I may, is on the subject of capex. 50% reduction is obviously quite substantial and I get the new level of $80 million is still somewhat materially above the maintenance capex level that you indicated. Can you speak to that as well as which growth projects, if any, have survived this haircut to the capital budget? And any early thoughts on what the trajectory could look like into next year?

Sean M. Lannon -- Senior Vice President and Chief Financial Officer

So the big project that relates to growth, above and beyond the maintenance capex actually relates to our S/4HANA SAP project that we had communicated back in January. So we're keeping that project on track, and that's making up essentially the vast majority of the difference between the maintenance and the total capex now expected for 2020. As we think about longer term, I think we've historically spent anywhere from $140 million to $160 million. We've not provided any forward-looking information as it relates to capex. But generally, the historical level should be somewhat indicative of going forward.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Okay, thank you so much.

Operator

Our next question comes from Bob Koort with Goldman Sachs. Please go ahead.

Anthony Walker -- Goldman Sachs -- Analyst

Thanks guys. This is Anthony Walker on for Bob. I just had a quick follow-up on the free cash flow. So you've obviously taken a number of actions to improve working capital. Can you help us through the other bridge items to getting to cash from ops? I think historically, you've had decently sized rebates to Refinish customers. Can you just help us think through what those look like relative to prior years in 2020?

Sean M. Lannon -- Senior Vice President and Chief Financial Officer

Yes. So historically, outside of the 2018 year, we've spent $80 million to $90 million annually. That certainly is one of the cash levers that we're executing on. So when you sthink about the $125 million we quoted, $80 million is coming from capex and roughly $40 million is coming from these business incentive payments. But when we think about cash levers, we said a minimum of $125 million. We're going after and looking at everything from a working capital perspective to drive even further improvement. The target is well beyond $125 million. But where we sit today, we are comfortable with the $125 million level as far as incremental levers we've already executed on.

Anthony Walker -- Goldman Sachs -- Analyst

Great. And then just one follow-up on that. In reducing the cash incentives, does that have any implication for the likelihood of winning that business on a go-forward basis or getting the volumes from those customers once volumes recover? Or is that simply to take into account the lower volumes that you're expecting in the first two quarters?

Robert W. Bryant -- Chief Executive Officer

Yes. It's largely a function of what we're seeing in the market. Obviously, in this type of environment, body shops, which typically body shops that are using looking to acquire other body shops or upgrade their spray booths or make material investments, that's typically where you see this type of customer investment utilized. So because of the demand environment, there's simply less demand for that type of customer investment from our customers. So it's just following from a normal flow of what we're seeing in the market as opposed to being any type of a deliberate action by the company. We will continue to invest alongside of our customers in strategic ways where it makes sense.

Operator

Our next question comes from P.J. Juvekar with Citigroup. Please go ahead.

P.J. Juvekar -- Citigroup -- Analyst

Yes, good morning. Sean. And Chris, good to hear from you, Robert. I have a question on Refinish. There's two schools of thought. One of your competitors was saying that Refinish will lag because you need more traffic and morning rush hour and congestion. And so that will lag the recovery. The other school of thought is, consumers will rather drive than take mass transit. And so maybe auto demand will go up as a result of that. How do you think about those two things?

Robert W. Bryant -- Chief Executive Officer

Well, I think the argument that you may see some people prefer to drive as opposed to take public transport. There could be some I think some validity in that perspective. And we may see that. However, I think for the majority of the people that take mass transit, it's more of an economic or personal financial decision as opposed to being necessarily a choice of having one option or the other. That's part of the population. And then the part of the population are people that actually have the choice to take public transport or drive their own vehicles. So when you start to slice it up into the different kind of types of person and situation. It feels like, yes, that could be a tailwind, but it's nowhere near as large as the impact that we could see from the resumption of driving. I think, different than the '08, '09 crisis, where people were still driving and were still getting into accidents this crisis is different. So because people haven't been driving, we're less likely to see a lot of pent-up demand that's suddenly going to be released into the market. But I think as people do begin to resume driving, we will see the market snap back. And we have seen that as we talked about in China, where we've gone from being down quite a bit in Q1 to kind of to a snap back here in April. So I think the trajectory will be upward and strong. But not quite as strong as perhaps what was seen in '08, '09, just because you haven't had a buildup in pent-up demand of people driving during the crisis, getting into accidents but not getting their vehicles repaired because there wasn't consumer confidence to do so.

P.J. Juvekar -- Citigroup -- Analyst

Great, thank you.

Operator

Our next question comes from Laurence Alexander with Jefferies. Please go ahead.

Laurence Alexander -- Jefferies -- Analyst

Sure. 2 Just a quick one. As you look at what you've seen in Europe and Asia, how important is the recovery in congestion relative to the improvement in miles driven for driving Refinish rates?

Robert W. Bryant -- Chief Executive Officer

Laurence, I think we'll be able to discern perhaps discern some of those variables and be able to comment some on that in the future. At the moment since we haven't seen a recovery with the exception of China and even there, it is only kind of one month really, we just don't have enough data to be able to give your question the answer that it deserves.

Laurence Alexander -- Jefferies -- Analyst

Thank you.

Operator

Our next question comes from Arun Viswanathan with RBC Capital Markets.Please go ahead.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Good morning. Hope you're well. I just wanted to. sort of go back to the raw material question. When you look at price cost, you've been making some headway on the OEM side, I guess, recently how does that look like in this current environment, especially with the decline in raws as well? And then maybe you can just comment on Refinish price mix as well.

Robert W. Bryant -- Chief Executive Officer

From a pricing perspective, we fully expect to capture price in 2020. We still have price that we need to capture to make up for the dramatic increase in raw material costs that we experienced during 2017 and 2018. We've captured some of that price to offset this, but we still have a long way to go. And then in terms of Refinish, and overall, I wouldn't expect to see any material changes in terms of how we think about how we approach that market in the value that we continue to deliver for our customers there, again, that we don't really see any changes in that equation.

Operator

This concludes the question-and-answer session. I would like to turn the conference back over to the presenters for any closing remarks.

Christopher H. Mecray -- Vice President, Investor Relations, Treasury and Strategy

Yes, it's Chris. Thanks, everybody, for joining, and I hope you have a great day, and good luck with all your other earnings calls today. Thank you.

Operator

[Operator Closing Remarks].

Duration: 67 minutes

Call participants:

Christopher H. Mecray -- Vice President, Investor Relations, Treasury and Strategy

Robert W. Bryant -- Chief Executive Officer

Sean M. Lannon -- Senior Vice President and Chief Financial Officer

Ghansham Panjabi -- Baird -- Analyst

Vincent Andrews -- Morgan Stanley -- Analyst

Mike Harrison -- Seaport Global Securities -- Analyst

Steve Byrne -- Bank of America -- Analyst

John Roberts -- UBS -- Analyst

Silke Kueck -- JPMorgan -- Analyst

Chris Parkinson -- Credit Suisse -- Analyst

Alex Yefremov -- KeyBanc -- Analyst

Kevin McCarthy -- Vertical Research Partners -- Analyst

Anthony Walker -- Goldman Sachs -- Analyst

P.J. Juvekar -- Citigroup -- Analyst

Laurence Alexander -- Jefferies -- Analyst

Arun Viswanathan -- RBC Capital Markets -- Analyst

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