Axalta Coating Systems Ltd. (NYSE:AXTA) Q1 2024 Earnings Call Transcript May 1, 2024

Axalta Coating Systems Ltd. beats earnings expectations. Reported EPS is $0.48, expectations were $0.4. Axalta Coating Systems Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. Welcome to Axalta Coating Systems First Quarter 2024 Earnings Call. [Operator Instructions] Today's call is being recorded and a replay will be available through May 8. Those listening after today's call should please note that the information provided in the recording will be -- will not be updated and therefore, may no longer be current. I will now turn the call over to Chris Evans. Please, go ahead, sir.

Chris Evans: Thank you and good morning. This is Chris Evans, VP of Investor Relations. We appreciate your continued interest in Axalta and welcome you to our first quarter financial results conference call. Joining me today are Chris Villavarayan, CEO and President; and Carl Anderson, CFO. We released our quarterly financial results this morning and posted a slide presentation to the Investor Relations section of our website at axalta.com which we will be referencing during this call. Our prepared remarks, slide presentation and our discussion today may contain forward-looking statements reflecting the company's current view of future events and their potential effect on Axalta's operating and financial performance. 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. Our remarks and the slide presentation also contain various non-GAAP financial measures. In the appendix of the slide presentation, 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 will now turn the call over to Chris.

Chris Villavarayan: Thank you, Chris and good morning, everyone. I'm proud to report an excellent quarter at Axalta. Overall, net sales were primarily flat while adjusted EBITDA was a record for any first quarter in Axalta's history. Margins are significantly improved and we believe we have more room to grow. Our balance sheet has continued to improve with our net leverage ratio declining for 7 consecutive quarters. I'm very confident with our trajectory this year which has led us to raise fiscal year guidance for adjusted EBITDA, adjusted diluted EPS and free cash flow. Yet, I believe we're just getting started transforming the company and unlocking the tremendous potential of our products, technology and organizational capability.

For the first quarter, net sales increased 1% year-over-year to $1.3 billion, with positive price mix. We remain committed to realizing the full value of our products and services, therefore, we continue to evaluate targeted pricing in select areas of the portfolio. Volume was approximately flat year-over-year with growth in Light Vehicle and Refinish offset by declines in Industrial and Commercial Vehicle given their softer macro environment. Adjusted EBITDA increased 22% year-over-year to $259 million, representing a record first quarter. This quarter ran ahead of guidance due to outstanding execution from the entire global team. Specifically, our commercial teams did a great job of winning new customers by focusing on accretive areas that will support a more profitable product mix and pricing for value.

Our operations teams focused on reducing backlog and beginning the Axalta performance system journey which is gaining traction. Procurement overdelivered again, driving 11% better unit variable cost. Cost optimization has been the central focus since I joined the company and will remain a high priority moving forward. Adjusted EBITDA margins improved by 340 basis points to 20% reflecting significant progress towards a return to historic margins in the 20% to 21% range. Profitability increased substantially across both segments. The largest margin contributions came from Light Vehicle and Industrial end markets, with profitability improvement in the latter stemming partly from our strategic shift towards higher-margin products. Let's move to Slide 4 for details on our business segments.

Refinish had another strong quarter with net sales 4% higher year-over-year. This represents the 13th straight quarter of better top line performance with a balanced contribution from price-mix, volume and FX. Market growth was roughly flat versus the prior year period across North America and EMEA. However, we are seeing above-market performance given our 600-net body shop win and the addition of 100 new points of distribution. We're also getting traction with our strategic growth initiatives in adjacencies like U-POL aerosol, RAPTOR bedliners and accessories sold through our company-owned stores in Europe. Our acquisition of André Koch supports these strategic initiatives and has proved to be an excellent transaction for us. I'm very pleased with the pace of integration which is ahead of our initial plan.

I believe that differentiated technology is the foundation of Axalta's competitive advantage and a key reason we continue to outpace market growth. I'm happy to announce that we were recognized with several prestigious R&D awards this quarter, all centered around efficient and sustainable innovation. There is no better example than Irus Mix, a fast, efficient, fully automated and completely hands-free mixing machines for the refinish industry. In addition to seeing strong customer demand in launching this product, it also won an Edison Award in the environmental and industrial solutions category. Another bright spot in the quarter was Light Vehicle growth. Net sales improved by 4% year-over-year, mostly due to strong volumes, particularly in China.

Volume growth in China improved by 20% as compared to 4% auto production growth, again, against the prior year quarter. We have partnered with the fastest-growing OEM and this is a solid business for us at an attractive return. We win new business and build lasting partnerships in this market with our products, service and technology which is exemplified with our recent recognition from General Motors as a Supplier of the Year. Commercial Vehicle net sales declined by 4% year-over-year consistent with the expected slowdown in North America Class 8 production. We believe this market will further soften into the year before ramping back up in '25 and '26 ahead of the emission standards going into effect in 2027. Industrial net sales declined 6% year-over-year, driven by soft construction activity in North America and EMEA which has offset improvement in new business wins.

We have strategically deselected low-margin categories which is yielding significantly improved profitability. My main focus since joining Axalta has been to improve efficiency and performance across the company. I'm very proud of our achievements to date. We're starting to see the benefits of our actions we have taken in our financial results but we believe there is more to come. To further enhance our performance and results, we have announced a transformation initiative in February to enable us to be more proactive, responsive and agile. This program includes a global workforce reduction of approximately 5% and a shift in manufacturing capacity and capability. We expect this program to yield approximately $75 million in annualized run rate savings in 2026.

Before passing the call to Carl for a more detailed review of our first quarter financial performance, I want to thank Bob McLaughlin for his 10 years of service on the Axalta Board, including as Chair of the Audit Committee. Bob is elected to retire next month after the Annual General Meeting. He has been an incredible thought partner for the Board and we wish him the very, very best.

Carl Anderson: Thank you, Chris and good morning, everyone. Let's turn to Slide 5. First quarter net sales increased by 1% year-over-year to $1.3 billion. Gross margins improved by 340 basis points to 33% [ph] versus the prior year, principally driven by 11% lower variable cost unit rate. All raw material categories were lower year-over-year with isocyanate, epoxy resin and monomers most favorable. Overall, we are comfortable in the current raw material environment and continue to project a mid-single-digit full year benefit strongly weighted to the first half. Though there are a few pockets of pressure stemming from temporary supply issues such as propylene availability in North America and butyl acetate in Europe, we view these as transitory, an isolated situation which are fully accounted for in our guidance.

SG&A was flat year-over-year, demonstrating effective cost management efforts which offset labor inflation in the category. Income from operations declined $4 million to $121 million, inclusive of a $55 million pretax charge related to employee severance and exit costs stemming from the 2024 transformation initiative that Chris noted. We expect that the annualized run rate savings from these actions will be $75 million in 2026, with $10 million expected to come in this year. Adjusted EBITDA in the quarter was $259 million, 22% above first quarter 2023 and adjusted diluted earnings per share increased 37% year-over-year to $0.48 despite a $0.05 headwind from higher interest and tax expense. Moving to Slide 6. Performance Coatings first quarter net sales were flat year-over-year at $848 million.

While net sales were flat overall, we were able to drive 4% growth year-over-year in Refinish which is consistent with our portfolio strategy to accelerate growth in the business. Refinish net sales benefited from strong price-mix and a solid contribution from the André Koch acquisition. Refinish market demand in North America and Europe remained stable in the quarter, in line with our expectations. Industrial net sales declined by 6%, primarily due to lower volumes as soft global building and construction activity weighed on demand. As Chris highlighted, we are also strategically moving away from lower-margin business. We believe this strategy is being well executed by our team and is driving significant margin improvement. Industrial volumes are now approximately 20% below 2022 level, creating a cyclical upside opportunity when global construction activity reaccelerates.

Performance Coatings' adjusted EBITDA increased 16% year-over-year to a first quarter record of $196 million, with both end markets contributing favorably. Adjusted EBITDA margin improved by 310 basis points compared to the prior year. On Slide 7, first quarter Mobility Coatings net sales increased 2% year-over-year to $446 million, 4% better Light Vehicle net sales partially offset declines in Commercial Vehicle. Mobility price, excluding mix effect, was modestly favorable and more than offset contractual raw material pass-through impact in the period. Light Vehicle volumes were again solid in the quarter, exceeding global auto growth rates led primarily by China. And Commercial Vehicle volumes declined as expected, driven by lower North America Class 8 truck production.

Mobility Coatings' adjusted EBITDA improved to $63 million, up from $44 million, a 44% increase year-over-year. Adjusted EBITDA margin improved by 410 basis points to 14.2%, with considerable improvement in Light Vehicle. Turning to Slide 8. We ended the first quarter with over $1.1 billion in total liquidity, including a cash balance of approximately $624 million. Free cash flow in the quarter was $15 million, an increase of $103 million year-over-year. The strong seasonal free cash flow as a result of improved working capital performance. During the quarter, we also took action to reduce interest expense. First, we paid down $75 million of gross debt, building from the $200 million of debt prepayment executed in 2023. Next, we successfully repriced our term loan lowering our effective rate by 50 basis points.

Taken together, we are confident that interest expense will be lower in 2024 versus last year. Our total net leverage ratio at quarter end was 2.8x, nearly a full turn below the prior year period. Given current trends, we should end the year at the high end of our target net leverage ratio range of 2x to 2.5x. As our balance sheet continues to strengthen, we are announcing this morning a new $700 million share repurchase program. We expect to continue to drive accelerated financial performance in the coming years and believe now is an optimal time to move forward with this program as we focus on driving value creation for our shareholders. I will now turn the call back to Chris for our financial guidance and closing remarks.

Chris Villavarayan: Thanks, Carl. Let's turn to Slide 9. Net sales in the second quarter are expected to be 3% to 5% higher year-over-year, driven by strong growth in Light Vehicle and Refinish, stable Industrial sales and market-driven declines in Commercial Vehicle. Refinish net sales are projected to increase by high single-digit percent year-over-year in Q2, given share gain, growth in adjacencies, plus contributions from the André Koch acquisition. We will also benefit from lapping prior year production issues in North America. Light Vehicle should have another strong quarter with a robust volume growth and stable price-mix. In Industrial, net sales are expected to be flat to lower as margin growth remain our highest priority in the current soft macro environment.

And lastly, in Commercial Vehicle, our view is unchanged. We see North American Class 8 build slowing through the year before demand ramps back up in '25 and 2026. Our full year low single-digit sales growth target remains unchanged. We expect typical seasonal trends to play out this year, leading to a step up in second quarter net sales versus Q1. Second quarter adjusted EBITDA is projected to be roughly up 21% year-over-year to $275 million. Adjusted diluted earnings per share is estimated to be approximately $0.50, an increase of more than 40% year-over-year. Given the strong start to the year, we have increased our full year adjusted EBITDA, adjusted diluted EPS and free cash flow guidance. Full year 2024 adjusted EBITDA is projected to be between $1.05 billion and $1.08 billion, a $35 million increase to the midpoint versus our prior guidance.

This translates to an adjusted diluted EPS range between $1.90 and $2 per share, an increase of greater than $0.07 to the midpoint. We have also increased our 2024 free cash flow guidance estimate by $50 million to a new range of $425 million to $475 million. I'm proud of our performance to start the year and I'm confident in our performance trajectory. We believe we're on pace for another record performance in 2024 and are setting the foundation for long-term value creation. I look forward to sharing our Axalta plan with you on Strategy Day on May 15. For more detail, please contact Chris Evans or refer to our investor website. Thank you for joining us today. This concludes our prepared remarks. Operator, please open the line for Q&A.

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