Ghansham Panjabi — Analyst, Baird
Hey guys, good morning. 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 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?
Thank you.
Chris Villavarayan — CEO and President, Axalta Coating Systems
Hey, good morning. Gotcha and thanks for the question. Giving you a view of Q3, 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. Whether 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 bodyshop wins of 2,200, which is really a good news story for us because on average if you look at us net new bodyshop wins for us, if you look at the last three years, averages around 2,400. Here we are in Q3 and we're already at 2,200. It's actually a pretty good year for us.
On top of that, whatever we do with adjacency sales as well as the CoverFlexx integration, I think all of that has driven what, as you pointed out, let's call it this mid to high single digit drop in sales as you look at Q3. What gives me confidence as I think about where is the market and do we see stabilization? 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. 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.
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. We expect Q1, as always, to be a little bit lower. Primarily Q2, we should be lapping where we were with the destocking. If you have the tailwind of destocking coming out, starting Q2 plus assume, you know, the same win rate that we've had for this year, what we've done on average on our Refinish business of $70 million-$90 million, you can start seeing that Refinish really starts picking up at the back half of next year. I hope that answers that question for you.
Chris Parkinson — Managing Director, Wolfe Research
Great.
Thank you so much. 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? Is this something where you're going to have to add back costs to and you're really operating at a fair rate? Anything to help us triangulate how we should be thinking about that progress over the next 12 months-18 months would be incredibly helpful.
Thank you.
Chris Villavarayan — CEO and President, Axalta Coating Systems
Sure.
Chris.
I think coming in two years ago or two and a half years ago, I think there was always this view that what Axalta had done with Axalta wave one, Axalta wave two, how could there be more cost in Axalta? As you can see, I think if you went back to 2022 and what we have accomplished, I'm really proud of the team. We've 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 foreign markets are in a different spot. Really, a lot of the performance is really coming from what we were able to do with our cost actions. I actually use a term that I think Carl uses all the time, which is we're still early in our innings.
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 2023, 2024, and 2025, even as we look at this year under a challenged macro, we're investing more than we ever have in our plants. 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've accomplished about $60 million-$70 million. We still have a flow through of about probably $20 million into next year, so you got that as well. What we can do with supply chain optimization, what we can do with footprint optimization, I still think, as Carl points 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 2026.
Lucas Beaumont — Analyst, UBS
This is Lucas Beaumont. This is Lucas Beaumont on for Josh. Most of your 2026 outlook comments kind of focused on Refinish. 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. Thanks.
Chris Villavarayan — CEO and President, Axalta Coating Systems
Sure. Lucas, good morning. 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 two years ago, I think the expectation was 2026 was going to be 360. I think this year we're probably looking at 2026 being around that 225-250 range at best. I think the market certainly is down about 30%. A true credit to the team is what they've really accomplished in pivoting towards commercial transportation solutions. Even if you look at our performance for this year, sales are down about 30%, 25%-30% in terms of volumes in Class 8 and we're down just about 7%. It's really because the teams have pivoted towards commercial transportation solutions.
What that is, is we started selling to marine, we started selling to military, we started selling to RVs, off-highway. The teams pivoted to smaller customers, but a ton of smaller customers and were really able to pivot that. As we look into 2026, 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. That's a great perspective as I think about CTS. 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. If you think about 2027, when that returns, we certainly need to have the capacity. 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, you know, if interest rates keep coming down, mortgage rates are at the lowest point in 2025 at this point. We need further interest rate cuts and obviously some kind of drive to improve residential and construction into next year. 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%-4% growth into next year. Again, we're not counting on it because that was also a thought process for this year. Certainly from an Industrial dynamic, our perspective is that volumes or 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. Our thought process is it will be slightly lower, maybe by 200,000 vehicles or 300,000 vehicles for next year and finally Refinish. We're expecting a stable environment into next year. Volumes down, but stable into next year.
Matthew DeYoe — Analyst, Bank of America
Good morning. 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? 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.
How does your appetite change or.
Does your appetite change for acquisitions considerably given your own valuation here today?
Carl Anderson — SVP and CFO, Axalta Coating Systems
Good morning, Matt. Yeah, this is Carl.
As I think about capital allocation here in the near term, we do see tremendous value in our stock at this point. 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 a dividend, obviously this is a board decision. We've had many discussions as it relates to that. I think as we launch the next plan, 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. I just continue and we continue to see just tremendous value of repurchasing shares at this point.
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 of what we can look to accomplish here in the near term. That's why, again, pivoting back and deploying more into share repurchases here I think is the appropriate and prudent move.
As we move forward, I think.
Is where we can take this business longer term. M&A will definitely play a part of that. I think we're a little bit of in a timing window at this point.
Chris Villavarayan — CEO and President, Axalta Coating Systems
Just maybe to add a little bit to Carl, especially when we look at where we can get 2026. I think as we're building more confidence around the $1.2 billion for 2026, it really puts light to the fact that we should probably be focused on buying back Axalta.
John Roberts — Managing Director, Mizuho
Thank you. 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. What are you seeing in those drivers?
Chris Villavarayan — CEO and President, Axalta Coating Systems
Sure, absolutely. John, good morning. First, as I look at accident rate accidents or collisions, I think nothing's changed. Accidents are still occurring. There's a slight decline. It's about down 1%. Overall, accidents are, let's call it flat to down 1%. If I look at in claims, obviously this is the big driver to what's driving the disconnect. 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. 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.
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. It's certainly something that we've watched carefully. I think the good news is when I look at insurance costs, insurance costs, as we said, if you look back to 2024, insurance costs were going up almost double digits. If I look at 2025, you can start seeing insurance premiums starting to go flat. That's an overall perspective for the United States. Actually, in 27 states, insurance costs are actually coming down quite a bit. I would say overall, that would mean the other half of the states are going back, going the wrong way. 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 bodyshops, you can start seeing that folks are starting to drive to balance this out. That's one of the good perspectives that I think is driving a stable environment. As I think of how we're preparing into 2026 from a perspective of what we're seeing on the premium side, especially with costs 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. A perfect example of this is if you look at CarMax or Carvana, you can start seeing that their performance is also improving by 20%. 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. I think the right market environment is starting to switch. Obviously, winter is also coming if I think about early next year. I certainly believe 2026 will be a different place as we start the year before we finish.
Mike Harrison — Analyst, Seaport Research Partners
Hi, good morning.
Chris Villavarayan — CEO and President, Axalta Coating Systems
Good morning.
Mike Harrison — Analyst, Seaport Research Partners
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, you know, very surprising to see the margin performance even with volumes and with price mix lower. 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, you know, coming back as we think about next year's cost structure, whether that's incentive comp or other discretionary spend. Thank you.
Carl Anderson — SVP and CFO, Axalta Coating Systems
Good morning, Mike.
Yeah, I think as we look at it.
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 relates to more discretionary around T&E as an example. Some of that may come back as we get into next year. 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.
Patrick Cunningham — Analyst, Citi
Hi, good morning.
Just on the Refinish side, you know, it's pretty firmly low single-digit price mix declines.
Is this primarily stemming from mix?
You move into more mainstream and economy, and how would you characterize your outlook on underlying structural price into 2026?
Chris Villavarayan — CEO and President, Axalta Coating Systems
Good morning, Patrick. Maybe it's actually two 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 net new bodyshop wins, one of the reasons we're doing so good at bodyshop wins for this year ahead of what we normally have is a foray into mainstream and economy. With the acquisition of CoverFlexx, that's really enabled us to grow. The last two quarters, Q3 and Q2, were some of the highest number of mainstream and economy bodyshops we've won in. In that segment, we've normally focused on the premium segment. 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 segment margins or overall Axalta margins.
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. Whether it's the volume decline that we've 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. It drives a negative mix as well. As we flip into next year and we get past the destocking issue, I think a lot of that will still be mitigated, especially because, you know, 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.
Aleksey Yefremov — Analyst, 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 2026 to be a typical Refinish year, or are you adjusting your stance based on this current environment?
Chris Villavarayan — CEO and President, Axalta Coating Systems
Our plan is 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, call it, adjacencies perspective, those have a little bit of a different pricing mix, let's call it, algorithm. Other than that, what we do for the premium business will be probably in line with what we did this year.
David Begleiter — Director, Deutsche Bank
Thank you. Good morning. Just on Q4, in terms of two things on production, are you running your...
Plant normally, or are you drawing down?
Some inventory that could be a hit to earnings? 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.
Carl Anderson — SVP and CFO, Axalta Coating Systems
Yeah, good morning, Dave.
Yeah, SG&A. I would expect that performance in the fourth quarter will be very similar to what we saw in the third quarter as relates to that reduction, and then as 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. Overall, the fourth quarter is shaping up to be a very strong free cash flow quarter, and a big part of that will be the inventory reduction.
John McNulty — Analyst, BMO Capital Markets
Yeah, good morning.
Thanks for taking my question.
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?
Have tariffs impacted you, and do you think you're pretty much through that tariff headwind at this point, at least from an incremental headwind perspective?
Carl Anderson — SVP and CFO, Axalta Coating Systems
Yeah, good morning, John.
For raw materials and 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. At this point, you never know, but I would say we believe we're pretty much kind of behind that, and the big buckets for us in total, as we referenced, we saw the raw material basket down about.
[A %] in the third quarter.
If I look at kind of the big items, I think solvents continue to be a very low pricing environment, and we can continue to see that benefit. Same thing as relates to isocyanates, which is another one that we've seen lower cost.
There's been some offsets to that.
Some of the other baskets, such as monomers as well as some pigments as well. Net, net, very stable backdrop to raw materials at this point. We do believe that's going to continue on at least for the next three quarters-four quarters.
Vincent Andrews — Managing Director, Morgan Stanley
Thank you and good morning, Chris. The slide indicates that you're expecting Refinish revenue to turn positive in 2Q26. Do you expect volume to turn positive in 2Q26 or is that going to.
Come later in the year or not at all?
Chris Villavarayan — CEO and President, Axalta Coating Systems
No volumes. Good morning, Vincent. We're expecting volumes to also turn positive into Q2 as well. I think you'll get two benefits. Obviously, if you think about our bodyshop wins as well as the adjacencies, a lot of that will transition. There's a bit of a ramp up with that as well beyond what we have this year. You'd have that tailwind on top of, let's call it just the destocking coming, abating. You will get probably a drive from both of that. From our perspective, we expect volumes to start trending positive in Q2 of next year.
Jeff Zekauskas — Analyst, JPMorgan
Thanks very much. 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?
Carl Anderson — SVP and CFO, Axalta Coating Systems
Good morning, Jeff.
Yeah, I think for the quarter, we repurchased $100 million of shares in the third quarter. In the second quarter, we repurchased $65 million. We've done $165 million to date. The $250 million is, you know, where the market is today, even if it's up probably 10%+ 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, 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. We will be a big buyer of the shares here in the fourth quarter.
Mike Sison — Managing Director, Wells Fargo
Hey, good morning. I'm just curious, I don't want to be a Debbie downer, but if 2026 Refinish doesn't normalize as in, how does your strategy change, and is there enough market share gains for you to generate some volume growth in the second half next year? BASF sold their business to private equity. Is that good for the industry? Are there opportunities for market share gains? How do you view that?
Chris Villavarayan — CEO and President, Axalta Coating Systems
Yeah. Good morning, Mike. Maybe I'll start with the first one. You know, 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 the destocking, you can get a sense that with the drop that we've seen, there's a sense of stabilization that's happening. I certainly see it as I look at our sales quarter over quarter over quarter.
If you start thinking about the fact that, you know, if you put in perspective the fact that Axalta is a leader in the Refinish space and certainly, you know, 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 bodyshop wins in this challenging market where we're all chasing sales, Axalta is winning when I think about the 2,200 bodyshops. As I think about next year in a market that is in a similar perspective, I think if you pull out the destocking, there's still an opportunity for us to continue to grow and we will pivot into other areas.
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 with the U-POL acquisition and really pull it into North America. We've gotten on thousands of shelves at O'Reilly's and AutoZone to be able to take our aerosol product to market. In essence, you know 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.
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. 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 base and all the 11 years of Axalta, and they certainly play a very strong, they're a very strong competitor of ours in both the Mobility space and the Refinish space. It's a competitor we know well. As I think about what is necessary under [PE hands], I think the drive for margin will probably drive a very good competitor, and I think it will drive some discipline into the marketplace.
We've known them well, so it's probably a good story overall. 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, let's call it, that Axalta is undervalued. 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. 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 its delta. If I look at 2026, and once you get very confident, and as I feel confident around 2026, I think the free cash flow from there, we have about $150 million left in our authorization, we'll certainly go back for another $500,000,000 or a $1,000,000,000
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. We'll certainly be an acquirer of our stock.
Kevin McCarthy — Partner, Vertical Research Partners
Yes, thank you and good morning everyone. 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 qualitatively on what you think the company might need to focus on operationally in the years to come versus the last couple of years. It sounds like you see runway on cost and clearly a lot of room to accelerate repurchases. Any other color on where you'd like to take the company strategically?
Chris Villavarayan — CEO and President, Axalta Coating Systems
Yeah, thanks for the question. Good morning, Kevin. Certainly, I think if we think about the five elements that we defined under the A-plan, under four of them, we're certainly in a great position and we're a year ahead of plan. It really positions you to what we need to work on. The five were, say, a growth number. One, second was margin and 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. As I think about it, we'll be 70%. If I look at where we'll close the full year, the next one was leverage ratio and we set a target of 2-2.5 and we'll be right there at the end of this year at 2.5, probably 2.4.
Finally, under ROIC, we're also very close to that target. The primary focus, as I think about A 2029, which, 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 two areas to focus on. If I go back to the beginning of 2023 and in the A-plan we focused, we wanted to essentially make sure we got the underlying business where we needed to. I think that's certainly been a good story for us. Now it's to really pivot to growth. As I look at what we will define in the A-plan, there will be primarily a plan that uses Axalta.
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. That's what you're going to see a lot more in the A-plan.
Arun Viswanathan — Analyst, RBC Capital Markets
Great.
Thanks for taking my question. I hope you guys are well. I guess I just wanted to go back to 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. What's it really going to take to get these markets back going? Is it inflation on the Refinish side and maybe PMIs on the Industrial side or what do you think? 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.
Chris Villavarayan — CEO and President, Axalta Coating Systems
Thanks. We normally start on the Refinish sides. Good morning 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. 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%. If I look back and go back to 2022, which we were still in the COVID times, the sales, the Industrial market to your point has been down about 20%-25%, but we've been down, we went back all the way to 2022. Our sales are only down about $100 million, so down, let's call it mid to high single digits.
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 basis points at this point, and I still think there's more gas in the tank in that business. 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. What did we do? We really pruned 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 three, let's call it segments, it's got building products, it's got Industrial sales, and it's got Energy Solutions. Underneath that there's 12 sub businesses.
We focused on a few. We essentially really drove the performance through those to, you know, where we knew that we made a difference to our customers. We've 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 itself or data centers. That's again a business that's doing very, very well. 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. That said, the overall business is at a great spot.
What I think is necessary for that to grow is pretty straightforward. 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. On top of that, we do believe that we can drive growth in Energy Solutions coil and certain aspects of that business. 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 go to market through three large distributors, and one of those distributors essentially worked on acquiring another one. That essentially meant that there were 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.
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. That gives me confidence in that market that we should have some level of stability. 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. We can certainly grow through new bodyshop 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. That's our story.
I think 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 2026.
Laurence Alexander — Analyst, Jefferies
Good morning.
Just wanted to come back to two brief points. One, on the working capital, how do you see your working capital days evolving when your end markets recover? Secondly, on SG&A, what do you see as 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?
Carl Anderson — SVP and CFO, Axalta Coating Systems
Yeah, 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. It will still be running at.
A pretty low level on a percent
Of sales basis as we kind of go forward. On working capital, as I said, I think the fourth quarter we are anticipating a pretty big increase from free cash flow. A lot of that is you can just look at how the third quarter came in. There'll be some inventory reduction where it's a very strong seasonal quarter for us anyways. If I kind of go back in time, fourth quarter of 2023, we generated over $250 million of free cash flow, over $200 million back in the fourth quarter of 2022 as well. That speaks to the power in the acceleration, what we expect in the fourth quarter. As we move forward into next year and an increasing revenue environment.
I think we will be very, very.
Targeted on running the right inventory level. We don't want to overshoot that as we think about managing overall working capital. I think getting into next year, the free cash flow capability should be very, very strong again for us.