Axalta Coating Systems Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

There are 13 speakers on the call.

Operator

Ladies and gentlemen, Welcome to the Axalta Coating Systems Q2 2024 Earnings Call. All participants will be in a listen only mode. A question and answer session will follow the presentation by management.

Operator

Today's call is being recorded and a replay will be available through August 8. Those listening after today's call should please note that the information provided in the recording will not be updated and therefore may no longer be current. I will now turn the call over to Colleen Lubik, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, and good morning. This is Colleen Lubick, Vice President of Investor Relations. I am excited to join you today for my first earnings call. We appreciate your continued interest and welcome you to our Q2 2024 financial results conference call. Joining me today are Chris Villavarian, CEO and President and Carl Anderson, Senior Vice President and Chief Financial Officer.

Speaker 1

We've 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, the 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 this slide presentation also contain various non GAAP financial measures.

Speaker 1

In the appendix to 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.

Speaker 2

Thank you, Colleen, and good morning, everyone. Before we get started, I'm pleased to announce that Chris Evans, formerly Axalta's Vice President of Investor Relations, has joined our Global Strategy Group, where he'll play an important role in driving our 2026 A Plan. Colleen Lubig has taken the lead for us in Investor Relations. I congratulate both of them in their new positions. The Axalta team has done an amazing job of working together to achieve and exceed our targets as demonstrated by the beat and raise this quarter.

Speaker 2

I want to recognize the entire organization for executing flawlessly in a soft macro environment. In the Q2, we had the highest recorded quarterly net sales and adjusted EBITDA in the company's history. Adjusted EBITDA margins increased to 21.5 percent and our balance sheet continues to strengthen with net leverage declining for the 8th consecutive quarter to another record low for Axalta at quarter end. Around the world, we demonstrated our ability to execute well. I believe our success over the last 18 months has been a result of the priority we have placed on improving productivity, making smart commercial decisions and tightly managing capital returns.

Speaker 2

Momentum is building throughout the organization and I'm absolutely proud of the team's accomplishment in the first half of twenty twenty four. For the quarter, net sales increased by 4% to $1,350,000,000 Volumes increased by 5% year over year with positive contributions from all four end markets. Adjusted EBITDA for the Q2 was $291,000,000 representing a $64,000,000 increase year over year. Adjusted EBITDA margin improved by 400 basis points to 21.5%, largely driven by our material and cost focus. Both segments showed improved profitability year over year.

Speaker 2

I'm confident in our trajectory, which has led us to again increase our guidance for 2024 adjusted EBITDA, adjusted diluted earnings per share and free cash flow. As I've shared with you, I believe we're just beginning to transform the company and unlock the tremendous potential of our products, technology and organizational capabilities. Refinish had an excellent quarter with net sales growing 5% year over year, making this the 14th straight quarter of improved top line performance. In North America, net sales were up 13% as we continue to grow and win new business. We also benefited from favorable comparison to the Q2 of last year in connection with production constraints associated with our North American ERP implementation.

Speaker 2

Strategically, a key focus for us remains growth in the premium segment where we believe we can win based on 3 key factors. First, the productivity of our single visit application Waterborne system. 2nd, our end to end fully automated color match that now includes hands free mixing following the launch of Iris Mix. And finally, through a host of digital tools, which is optimizing customer support and real time productivity monitoring for Our Body Shop customers. Year to date, we have already delivered over 1200 net body shop wins and we expect this to be another great year.

Speaker 2

Expansion in the economy segment is another important pillar for our refinish growth strategy that we outlined in our A plan. In July, we completed the acquisition of the CoverFlex Group, which manufactures coatings for automotive refinish and aftermarket applications focused on economy customers in North America. The business offers a wide range of coatings as well as aerosols, fillers and paint shop accessories. This acquisition also provides us with the brand's commercial access and manufacturing capabilities to serve the economy segment where we believe we have great potential for growth. I'm excited to welcome the entire CoverFlex Group to the Axalta team.

Speaker 2

Industrial net sales increased by 2% year over year, driven by increased volume in North American building products. The 2nd quarter marked the 1st year over year improvement in net sales for industrial in 6 quarters, which we believe is a signal that market activity has bottomed out and is positioned for recovery when global construction improves. Although global industrial demand remains relatively muted, our team has done a stellar job of driving significant year over year margin improvement through cost management and portfolio optimization. Innovative new products such as enamel cabinet coatings are gaining traction and are part of a clear commercial strategy to prioritize segments and regions where we have strong value proposition and can generate an attractive return. Light vehicle had another strong quarter.

Speaker 2

Volume growth of 7% year over year significantly outpaced global auto bills with better growth rates versus regional production rates. China was a bright spot for us again with nearly 30% volume growth. Globally, the team is building lasting partnerships with the fastest growing OEMs at attractive margin levels. Based on this, we expect above market growth to continue. Following a flat light vehicle build environment in the first half of the year, industry forecasts are now projecting the second half of the year to be approximately 3% to 4% lower year over year with most of the declines in Europe.

Speaker 2

Commercial vehicle net sales increased by 3% year over year. Volumes benefited from stronger than anticipated Class 8 production in North America and LatAm. We still expect a modest production slowdown in the second half of 2024 before it ramps up in 2025 leading to a strong 2026. Let's move to Slide 5. In May, we introduced our 2026 A Plan, a multiyear strategy to accelerate performance and transform the company.

Speaker 2

I expect the 5 unique elements of the plan will differentiate Axalta in the industry and allow us to achieve new levels of exceptional performance. First, driven by our 1 Axalta mindset, we are creating a culture that is faster, more effective and more responsive. 2nd is operational excellence. We will continue the journey we have started to control the controllable and drive more efficiencies in corporate, operations and supply chain. We expect these actions to yield it's driving growth through portfolio optimization with a focus on our core strengths and profitable businesses.

Speaker 2

4th is sustainable innovation, which is creating the world's best products for sustainability, efficiency and color. Examples of this are NextJet and the Iris mix. And finally, capital allocation, where we plan to focus on investing in the business and returning value to our shareholders. As you can see with performance in 2023 and the first half of this year, we're well on our way of achieving our targets. I will now turn the call to Carl for a more detailed view of our Q2 financial performance.

Speaker 3

Thank you, Chris, and good morning, everyone. Let's turn to Slide 6. 2nd quarter net sales increased by 4% year over year to $1,350,000,000 primarily driven by volume growth of 5% with contributions from all four end markets. Price mix was flat in the second quarter as positive price actions were offset by contractual raw material pass through impacts. Gross margin improved by 3.90 basis points year over year to 34%.

Speaker 3

This improvement was supported by 8% lower variable costs, strong cost management and ERP costs that did not repeat from the Q2 last year. Our procurement team delivered another great quarter with raw materials, energy costs and freight expenses all lower versus the prior year period. We continue to benefit from our productivity programs executed last year, which have generated an attractive return. Regarding raws, we remain well supplied except for specialty pigments where we continue to experience tight supply and long lead times. More broadly, we view most markets as balanced at this time with the only pockets of inflation in our commodity basket stemming from transitory supply issues, namely insolvent.

Speaker 3

Our forecast of a mid single digit full year benefit from raw material deflation remains unchanged and we anticipate a stable cost environment in the second half. Operating expenses were roughly flat compared to the Q2 of last year and modestly lower as a percentage of sales, underscoring our effective cost management efforts aligned with the transformation initiative introduced earlier this year. We still expect to achieve annualized savings of $75,000,000 from these actions by 2026 with $10,000,000 that should be realized this year. Adjusted EBITDA in the quarter was $291,000,000 28% above Q2 of last year. Adjusted diluted earnings per share increased 63% to $0.57 driven by improved earnings and lower interest expense, which more than offset a modest headwind from a higher effective tax rate.

Speaker 3

A key component of our A Plant is a heightened emphasis on return on invested capital for which we are targeting 15% by 2026. On a trailing 12 month basis, return on invested capital was 12.7%, representing a 140 basis point improvement compared to last year and highlights good progress towards our goal. Overall, we delivered exceptional results across all of our businesses, which is due to the incredible talent and dedication of our 1 Axalta team. Moving to Slide 7. Performance Coatings 2nd quarter net sales increased 4% year over year to $887,000,000 Refinish net sales were up 5% year over year to $546,000,000 supported by strong volume growth in North America and a solid contribution from the Andre Co acquisition.

Speaker 3

Industrial net sales increased 2% year over year to $341,000,000 The team continues to improve margins despite a softer macroeconomic environment through accretive new wins and the deprioritization of lower margin business. In fact, we expect to be on track to expand industrial margins by over 300 basis points from last year. Overall, we believe this strategy positions us for considerable upside when global demand improves. Performance Coatings adjusted EBITDA increased 22% year over year to 223,000,000 dollars Adjusted EBITDA margin increased by 3.80 basis points, primarily driven by lower variable costs, increased volume and strong cost control. Let's move to Mobility Coatings results on Slide 8.

Speaker 3

Mobility Coatings net sales increased 6 percent year over year to $464,000,000 with growth in both end markets. Late vehicle volumes were strong in the quarter, outpacing auto production growth rates in all regions, particularly in China. Commercial vehicle volumes showed improvement due to better than expected Class 8 production in North America and Latin America. Mobility Coatings adjusted EBITDA improved by 50% year over year to $68,000,000 Adjusted EBITDA margin expanded by 4.40 basis points to 14.8% with strong improvement in light vehicle, primarily driven by lower variable costs, growth in the China market and strong cost management initiatives. Turning to Slide 9.

Speaker 3

We ended the 2nd quarter with over $1,400,000,000 in total liquidity. Our cash balance of $840,000,000 at quarter end includes 100 and $85,000,000 draw on our revolving credit facility to finance the acquisition of CoverFlex, which closed in early July. From a capital allocation standpoint, we intend to prioritize repayment of the revolver as we generate free cash flow for the remainder of the year. And to that fact, we have already repaid $50,000,000 to date. During the quarter, we increased our capacity on our revolving credit facility from $550,000,000 to $800,000,000 and extended the maturity date to 2029.

Speaker 3

Additionally, we repurchased $50,000,000 of Axalta shares in the quarter. We see strong value in our equity and expect to remain a programmatic buyer going forward. Total net leverage at quarter end was a company record of 2.6 times and a full turn below the Q2 of last year. We expect to end the year at or better than 2.5 times inclusive of the recent acquisition. During the next 3 years, we believe we can drive over $2,000,000,000 of cumulative operating cash flow.

Speaker 3

This will provide us with an opportunity to supplement value creation through share repurchases and accretive M and A. We also expect to further reduce our gross debt balance we target interest expense savings of $30,000,000 by 2026. I will now turn the call back to Chris for an update on our Q3 and full year 2024 financial guidance.

Speaker 2

Thanks, Carl. Let's turn to Slide 10. We expect net sales in the 3rd quarter to be flat to up low single digit percentage compared to last year. Refinish should have another good quarter and we expect share gains, pricing and contribution from our acquisitions to mitigate impacts from market, mix and distributor consolidation. In industrial, net sales are expected to be up modestly.

Speaker 2

Margin growth in industrial will remain our highest priority in the current soft macro environment. Light vehicle net sales are expected to be flat as solid volume growth globally will be partially offset by contractual raw material pass throughs. We continue to price in both our industrial and mobility business to ensure we are receiving the appropriate value for our products. Lastly, in commercial vehicle, we anticipate lower sales influenced by the forecasted decline in Class 8 production in North America. Our full year net sales forecast is to grow low single digits compared to last year.

Speaker 2

3rd quarter adjusted EBITDA is projected to increase 5% year over year to $275,000,000 3rd quarter adjusted diluted earnings per share is estimated to increase by roughly 12% to approximately $0.50 Following another solid quarter for Axalta, we have increased our full year guide. Full year 2024 adjusted EBITDA is expected to be approximately 1.09 to $1,100,000,000 a $30,000,000 increase versus the midpoint of our prior guidance. This translates to an adjusted diluted EPS of $2.05 per share, which is a 30% increase compared to our last year. We have also raised our 2024 free cash flow guidance to a range of 475 dollars to $500,000,000 representing a $37,000,000 increase at the midpoint. Overall, 2024 is shaping up to be the highest revenue and the most profitable year Axalta has ever had.

Speaker 2

While we are pleased with our performance, we believe that we are at the early stages of capturing our full potential. Thank you for joining us today. This concludes our prepared remarks. Operator, please open the lines for Q and A.

Operator

Thank you. And at this time, we will open the floor for your questions. I will take our first question from Aleksey Yefremov with KeyBanc Capital Markets. Please go ahead.

Speaker 4

Thanks and good morning everyone. I just wanted to ask you for any color on refinish market volumes and demand in the Q2 and expectations for the second half. And as sort of a follow-up to that, you mentioned distributor consolidation, if you could elaborate on that as well.

Speaker 2

Sure. Good morning, Alexey. Starting off, maybe stepping back into Q2, we feel really good about the 4% top line growth, but specifically in Refinish that went up about 5%, really driven by the four elements of the plan. It was focusing on driving more growth in gaining more body shops. So we gained 1200 body shops to date, 600 in economy and main and 600 in premium.

Speaker 2

And then on top of that, we really expanded into the adjacency space. So it really expanding our share of wallet. And then on top of that, we focused primarily also on driving and executing and closing the acquisition with CoverFlex. But beyond that, the Andre Co acquisition that we closed last year has been really providing a tailwind. We're ahead of our deal model.

Speaker 2

And finally, our retail stores in Europe have been driving doing great in terms of a growth strategy. So all four elements of the plan have been really driving the growth story. The market, I would say, has been flat as you can as I'm sure you've heard, But the team has just done a stellar job of driving the growth elements. If I look at Q3, I would say what we're seeing is a market is getting a little bit more stable or soft. We see a little bit of softness in Europe, more a stable market in North America.

Speaker 2

North America has been driven by some distributor consolidation, as I've said. In Europe, we see a little bit of destocking. But all in all, we still believe that we're going to have continued growth even in Q3 because all the elements of the plan are driving what we see as low single digit growth in even in Q3 with the softer market. And the overall dynamics for the business still show, I would say, long term growth. So from our perspective, we're seeing that 2% to 3% organic growth story still sticking strong for us as we look at the full year.

Speaker 4

Thank you, Chris. And the second question, could you try to bridge EBITDA sequentially? Based on your guidance, you're looking at about $15,000,000 EBITDA decline. So what are the components in terms of seasonality, price indexing, auto OEM, etcetera?

Speaker 3

Yes. Alexia, this is Karl. As we look at the Q3 guide compared to Q2, it's really I would just focus on the top line. So if you think about revenue, we expect it to be down sequentially, probably around $30,000,000 to $35,000,000 and it would really just be essentially a little bit downside conversion that you would normally expect that would explain most of that. And there's a little bit of mix as well that kind of gets you down to that $275,000,000 EBITDA guide for Q3.

Speaker 2

Maybe just adding on Carl's points. The one thing is if you look at our second half, you'll notice that commercial vehicle is actually down about what we're forecasting is down 20%. And that is one of our strongest businesses. And it kind of shows you that the margin stabilization that we've built into the business, which essentially means that our across the other three businesses, we're really performing strong as we look at the back half.

Speaker 4

Thanks a lot.

Speaker 2

Thank you.

Operator

Our next question comes from John McNulty with BMO Capital Markets. Please go ahead.

Speaker 5

Yes, good morning. Thanks for taking my question. So light vehicle, it sounds like you're going to be able to hold in pretty well against what at least the consultants are looking at as down about mid single digits. I guess can you speak to how much pricing pressure you're having and how that kind of offsets some of the wins that you're seeing and the volumes attributable to that?

Speaker 2

Well, maybe I'll start off and I'll hand it over to Carl. But as I look at it, starting off at the beginning of the year, John, what we did was we provided a forecast of 89,000,000 bills. I would say that's trended up and right now it's come back down. But overall, it's in the line with what we forecasted for the full year in terms of build. But our story in terms of, again, even in mobility is really about growth.

Speaker 2

And it's about profitable growth. If you look at the last quarter, we're running at about we've just gotten to almost 15 points of margin. And it's I truly credit the team in terms of what we've accomplished. It's actually 8 quarters of growth. If I go back to last quarter, I would say the market was about flat to slightly down and we were able to show 7% growth in the quarter.

Speaker 2

And it's really around 2 regions that we're really driving significant incremental growth, one being China and the second one being LatAm. Again, in LatAm, we were up double digits and in China, we were up almost 30%. And the incremental growth is coming in at accretive pricing and that's really offsetting a lot of the weakness that you see in the marketplace. And for us at this point, all the new business is coming in at great pricing. And contractually, I would say we feel that we're in a good place.

Speaker 2

There is a bit of pricing pressure specific to Europe, but the teams are managing that as we go forward.

Speaker 5

Got it. Okay. No, that's really helpful color. And then just a question on the cost initiatives. I think of the $75,000,000 initiative about $10,000,000 of it's supposed to hit this year, I believe.

Speaker 5

I assume that's mostly back end loaded or back half loaded. Is that fair? Or can you help us to think about how that flows through throughout the year?

Speaker 3

Yes, John. It's been flowing through about pretty equally since we announced the initiative back in the beginning of Q1. So that's kind of the expectations. It's been embedded in our guide really all along for this year. And as we think forward into 2025 even, we should probably be somewhere in between the $10,000,000 and the $75,000,000 as you think from a modeling perspective.

Speaker 3

And then when we get into 2026, we would get the full run rate of that $75,000,000

Speaker 5

Got it. Thanks very much for the color.

Speaker 2

Thanks, John.

Operator

Our next question comes from Chris Parkinson with Wolfe Research. Please go ahead.

Speaker 4

Great. Thank you so much. You did pretty well in industrial in the quarter despite a choppy macro environment. It's also our understanding that you've been divesting some of the lower margin businesses in terms of your rationalization plans. Could you just give us a quick update on where you stand with those initiatives and how we should begin to think about them 2025 onwards?

Speaker 4

Thank you.

Speaker 2

Yes. Thanks, Chris. Really proud of what the team's been able to accomplish. If I looked at a Q1 to Q2 flow, the largest improvement in margin across our four businesses. We're actually in our industrial business.

Speaker 2

The team's not only done a great job of improving margin, but they've also essentially grown sales if I look at what they've done in Q3. As to your point about a soft macro environment, we're seeing market our sales volume pick up by 2%. So the team is just doing a stellar job and it's primarily as we started this whole process over a year and a half ago, the focus was really earning the right to grow. I think that Shelly, who leads the team, had a focus around let's shrink to get to the right spot and earn the right to grow. And I would say we're certainly executing down that plan.

Speaker 2

And so what did we do? We certainly we got out of certain customer agreements as well as certain businesses, low profitable powder businesses that just didn't make sense in the portfolio. And we were able to consolidate and come to a point that we believe that we are in the markets that we can get value from our customer. We provide value for our customers and obviously get the right level of pricing to equate with that. The thing that I'm very proud of the team with is at the levels of margin that we're getting to the at this business, any sign that we see an improvement in, let's call it, construction or residential in the future.

Speaker 2

Because if you look at our performance last quarter, as I mentioned, one of the areas that we really grew in is in the building products business. I believe we've gotten the conversion margin at a good point and our SG and A at a great point that we can really convert on the upside of the sales when we do see some change or some upside on the residential markets or the construction

Speaker 4

just going back to your remarks about the organic growth in Refinish, there have been a lot of interesting dynamics. On the one hand, we can all track collision claims. On the other hand, when you look at reimbursement rates from insurance companies, national tech shortage in terms of what your customers are facing. Is this are those narratives coming up in your negotiations on a kind of a day to day basis in terms of potential iris penetration in the value added of your product portfolio? Or is that more like a sell side hypothetical argument?

Speaker 4

I'm just trying to understand how much potential benefit you've already had or what you will have from what's going on in the ultimate industry you're selling into? Thank you.

Speaker 2

That's an absolutely a great question, Chris. It is Axalta's strength, if you really put it in perspective in the Refinish business, is we lead in the premium segment. And the premium segment, it's all about efficiency and cost. And to your point with where costs are going from a perspective of labor and the cost in a paint shop, this is a huge impact as well as the impact on the insurance claim. So anything that we can provide in productivity and cost efficiency certainly provides a positive.

Speaker 2

And that's the best part of the iris mix. I mean, right now, we have requests for over 700 iris mix. We have 300 that will install this year. Our objective is to get about 1,000 by the end of next year and it provides the efficiency it provides between 8 to 12 hours a week in a body shop depending on the number of cars going through the paint shop, it certainly provides a benefit. But it's just not only that, it's whether it's our waterborne solution that provides a single coat application power, it's our digital tools or it's the Iris mix.

Speaker 2

There is a whole host of tools that provides that efficiency and that's certainly what's helping us win. As I said, if I look at the first half of the year, half of the wins are in the premium segment. And if you think about the fact that we already have 40% market share there, it just tells you about the strength of the portfolio of the products that we provide our customers.

Speaker 3

Thank you for the color. You're welcome.

Operator

Our next question comes from Mike Leithead with Barclays. Please go ahead.

Speaker 6

Great. Thanks. Good morning, guys. Good morning. Just one for me.

Speaker 6

I wanted to ask around CoverFlex. A couple of things there. Can you just help us understand how much you're assuming it contributes in the back half of this year just in terms of revenue and EBITDA? And then I know you've given us how the business has done in 2023, but just directionally can you talk about how it's done so far year to date?

Speaker 3

Yes, Mike. As you look at what's embedded in the forecast for us, we're assuming around $40,000,000 of revenue that would come in the second half from CoverFlex. And while we don't give exact kind of margin details on it, I would say, if you look at the Performance Coatings overall margin for the quarter, it's probably a pretty good proxy about how to think of that, the impact for us for the second half. And as we look forward with that business, I think we're very excited with really even in the 1st month as far as the ownership and some of the opportunities that we're seeing not only commercially, but as well as with on the cost side as well. So I think we're off to a very good start.

Speaker 3

The expectation is this is really going to help jump start a lot of our activities is really growing that in the economy space here as we go forward.

Speaker 6

Great. Thank you so much.

Speaker 4

Thanks, Sams.

Operator

Our next question comes from David Begleiter with Deutsche Bank. Please go ahead.

Speaker 7

Hey, this is David Huang here for Dave.

Speaker 8

I guess first maybe just follow-up on industrial. What's the scope of the prioritization of low margin businesses, I guess, as a percentage of your total sales? And then if I look at the portfolio today, what's the margin gap between these businesses you're trying to walk away from versus your highest margin business?

Speaker 3

Yes. As we looked at the industrial business and as we outlined in our strategy today, there is about maybe 10% of the overall business that we were looking at where we could potentially make some changes, whether that was to exit certain some of those customers as well as price for it. So that's the journey that the team has been on. I think to date, as Chris alluded to, the execution has gone extremely well. And you can overall this is the Q1 that we are actually inflecting positively on the top line in industrial.

Speaker 3

And you're seeing you're getting a benefit from that, but you're also getting that benefit from some of this deprioritization. And as I referenced in my prepared remarks, we're expecting the industrial margin profile and performance increase over 300 basis points from last year. So a really good start from the team. We believe there's definitely more to go and we'll continue to execute on that as we get into 2025 and beyond.

Speaker 8

And then just on Performance Coatings Q3 EBITDA margin, I guess given the momentum in refinishing, improvement in Industrial, do you expect EBITDA margin to be up sequentially versus Q2?

Speaker 2

Well, I would say again,

Speaker 3

I mean, if you look at it in totality from a margin perspective in total when you kind of run the quick math, the margins will be down a little bit from a consolidated basis sequentially from Q2 to Q3. There's some seasonality kind of components that drive that. There's some mix kind of considerations as well. And that type of differences also would be attributable to the Performance Coatings segment as well as you get into Q3.

Speaker 8

Okay. Thanks.

Speaker 2

Thank you.

Operator

Our next question comes from Ghansham Panjabi with Baird. Please go ahead.

Speaker 9

Hi, good morning, everyone. This is Matt Krueger sitting in for Ghansham. So given that you cited lower variable costs in the release and the presentation and you're doing a nice job of offsetting labor and other inflation with self help initiatives. What are your expectations for price cost as we move through the remainder of the year? What is the benefit then through 2Q or on a year to date basis?

Speaker 9

And then how does that compare to what we should expect for the second half?

Speaker 3

Yes. I mean, thanks for the question. As we look at just the kind of that price kind of cost differential, I think we've done a lot of work if you kind of look at it by business. So obviously within the Refinish business for us that's kind of something that we're pricing Generally comes in it's pretty, pretty steady every single year. There's always some mix components that can kind of move around as you kind of get into the quarter by quarter look as well.

Speaker 3

As Chris also outlined, the industrial team has done a very good job as far as also managing that environment. And some of the offsets to that, of course, are what we're seeing with it's a mix of higher inflation kind of coming in and some labor. So overall, I think we feel it's pretty neutral as I think about some of that, especially in Performance Coatings business, at least what we're seeing on that. And I think Mobility across the board, the team has done a very good job as far as continuing to get increased prices where we think it's appropriate as well as that's helping to mitigate some of the impact that we're seeing from the RMI indices that we have in place. And so I think there will be a little bit of movement as we kind of get into Q3.

Speaker 3

But overall, we are looking at this business across the board just from a margin perspective. And as you can see not only in the results this quarter, but what we expect for the full year, overall we're going to be having a very solid year as it relates to increasing margins while it's about 200 basis points for the full year across the company.

Speaker 2

Amy, just to add a little bit to Carl, our focus really was about margin stabilization and hitting our getting to our 2026 targets in our A plan. And as you can see, we've accomplished in Q2. And if you look at the full year, as we work in this macro environment that seems to be soft and somewhat volatile, what we're ensuring is that we protect the margin and we drive stability in the margins through even with the changes that we see in raw material through what we're doing either in pricing or our cost actions. And that's what you'll see. You can see that in our back half guidance.

Speaker 2

That's what you'll see from us going forward.

Speaker 9

Got it. That's helpful. And then just digging into the cost savings initiatives a little bit deeper. Can you talk about which businesses you expect to benefit most from the cost savings initiatives through 2026? And then where is the greatest opportunity remaining at this point as you've gained momentum in the initiative, have the teams uncovered any further opportunity for future initiatives or iterations?

Speaker 3

Yes. I mean, as we look at in total, as we outlined about $125,000,000 of total savings

Speaker 10

that

Speaker 3

we expect to drive as we get through 20 26. A very significant amount of that was as relates to what we're doing with kind of some of the corporate related roles as well. So I think you're going to see that kind of spread across all of the BUs as far as that impact. And then the other 2 big categories for us as we think about productivity in our network, again that will you will see that benefit in all of our BUs as well because that is a very important strategic priority that we have as far as driving that type of productivity savings that we kind of model out about $25,000,000 And we believe that's just the start. I think you should start seeing that increase even more as we kind of get out in 2027 beyond.

Speaker 3

And then the other big category for us is just the optimization as we think about how we move freight around the network, some opportunities with some consolidation of warehouses. Again, that really kind of affects all of the business units. So I wouldn't say there's one that's more outsized than others as we think about it.

Speaker 9

Okay, great. That's helpful. That's it for me. Thank you.

Speaker 3

Thank you.

Operator

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

Speaker 6

Hey, good morning. This is Steve Haynes on for Vincent. Thanks for taking my question. I wanted to ask a question on the guide on the EBITDA side of things. I think once you kind of flow through the beat in the 2nd quarter and maybe $10,000,000 or so from CoverFlex based on your prior comments, It doesn't really leave a ton of upside for the back half.

Speaker 6

So, I guess, why not why isn't back half coming up as well? Is there some offset there that might be missing in that bridge? And or is it just kind of positioned conservatively at this point? Thank you.

Speaker 3

Well, yes, I mean, as you look at what we've kind of put forth, maybe I'd start with the quarter that we just have and really the 1st 6 months of the year. So we delivered about $550,000,000 of EBITDA for 6 months of 2024. If I can compare it to last year that same number was $440,000,000 So $110,000,000 step up and we're kind of running, especially in this type of environment around that $275,000,000 of EBITDA, which is kind of what you're seeing in the guide. And so I think actually we're very excited about this type of performance. You could see at the top end of our range, we kind of have it penciled in at 1,100,000,000 dollars which year on year would be about $150,000,000 increase in overall EBITDA.

Speaker 3

And so and then importantly, if I think about kind of what we're doing with earnings per share, great quarter up 63% this year. And then for the full year, based off of $2.05

Speaker 10

$5 we're going to

Speaker 3

be up over 30% year on year. So I wouldn't say necessarily conservative. I think it just speaks to the execution that we continue to focus on and we're excited about where we're at.

Speaker 2

And maybe just to add to that Steve from a sales standpoint, as you know, the back half of the year, most of the forecast in most of our segments has volumes coming down and coming down 3% to 4%. We're actually showing sales growth of mid low single digits. So we're essentially offsetting that and growing some. So to drive that level of growth in the back half is what we need to do to be and we're maintaining margins, as Carl pointed out, through the back half. So we're actually quite comfortable with the guide that we have out there.

Speaker 7

Okay. Thank you.

Speaker 2

Thank you. You're welcome.

Operator

Our next question comes from Josh Spector with UBS. Please go ahead.

Speaker 7

Yes. Hi, good morning. Maybe a similar question on kind of the EBITDA cadence here, but maybe more focused on 4th quarter. So I mean typically seasonally that's down a little bit more than I think implied in your guide. I guess is that the cost savings stepping up or is there some other assumption you would say that drives that?

Speaker 3

I think as we look at it, there's a little bit of piece of some cost savings that we kind of expect to kind of continue on as well as when as you saw in the what we're kind of guiding to implicitly for Q3 that what does imply that 4th quarter revenue steps up a little bit from where that was. So we have that conversion on that incremental revenue that we're also we're assuming in the overall guide. But yes, I think it's where you also have to remember what kind of we're also having with CoverFlex kind of coming in, that's also helping the overall top line as well as we think about the rest of this year.

Speaker 7

Thanks. And if I could just ask a quick follow-up just on buybacks where you talk about being programmatic. At $50,000,000 you did in 2Q. Is that the programmatic level? Or can you talk about what's programmatic versus opportunistic and what level we should be expecting?

Speaker 7

Thanks.

Speaker 3

Yes. I think we're going to execute on the authority that we have from the Board, which we did announce last quarter of $700,000,000 So I think we did $50,000,000 We're kind of right out of the gate. As I said in my prepared remarks, I would say short term, we're also looking at paying back the revolver draw that we did to help fund and finance the CoverFlex acquisition. We paid $50,000,000 of that already. But as we kind of go forward, we will without putting a dollar amount on it, our expectation is to continue to be a buyer of our stock as we kind of go forward and be able to exercise and really use up the $700,000,000 over the next several years.

Speaker 7

Got it. Thank you.

Operator

Our next question comes from Mike Harrison with Seaport Research Partners. Please go ahead.

Speaker 10

Hi, good morning. A couple of questions on the commercial vehicle business. First of all, it sounds this quarter was a little bit stronger than you expected, but it sounds like you're expecting that to weaken in the second half and then start to improve again in '25 ahead of the big pre buy in 'twenty six. So I just want to make sure I understand that correctly. And then can you also comment on the opportunity that you see in Asia in the heavy truck business?

Speaker 10

I think that a lot of production takes place there, but I believe you've been historically pretty focused on North America. Is that an opportunity?

Speaker 2

Yes. So maybe I'll start. Thanks for the question. First, you're right in your forecast. So I think what came in stronger than we forecasted was really Class 8 production in North America That in Q2, we saw that come in strong.

Speaker 2

Most a lot of our customers continue to pull at strong rates as we looked at Q2 in North America. And I think the fleets were still pulling trucks. You do see the backlog getting going down a bit, but overall, the market was stronger. And again, we're forecasting that market aligned with where our customers are and where the forecasts are to drop down about 20% as we think about the next two quarters. And as you know, with the pre buy and the strong the emissions change in 'twenty seven, we do believe a part of 'twenty five and certainly 'twenty six will be much higher than where we are at this point.

Speaker 2

Another strong market for us was really LatAm. LatAm, especially on the commercial vehicle side, we're doing a great job there. And I see the team continuing to win new agreements. I look forward to announcing some here in the future. So I think the teams are doing a stellar job here.

Speaker 2

Specific to the China market, probably one of the reasons you haven't heard us talk much about it is from a margin perspective, it is a little bit tougher to work in that environment. Market that, as I've always said, our goal is to ensure that we drive margin stability and we get value for the products that we provide our customers. And in that environment, it's just a little bit harder.

Speaker 10

All right. And then on the light vehicle business, you mentioned that the market forecasted for a little bit of a decline in the second half. I'm curious what you've been hearing specifically from your customers about any additional summer downtime or throttling back on production in the second half relative to levels in the first half as maybe some of those customers look to rationalize where some of the inventory levels are?

Speaker 2

So specific to North America, I would say our customers are there are there is a bit of, let's call it, inventory building on lots. But specific to our customers, I would say we have done I would say 3 quarters of them are don't show significant decline. And we actually show a pretty stable market as I think about the customers we deal with in North America. We are seeing weakness in Europe, and as I think everybody is. And specific to that, the interesting thing for us is if I look across the globe in Q3, what is really helping us is the business is winning across pretty much all the three business all the four regions and the volume that's coming up that's driving our growth the volume that's offsetting that is really our growth.

Speaker 2

The growth story across, I would call it, all the regions is really being driven by the growth.

Operator

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

Speaker 6

Hi. I have Brock Hoffman on for Steve Byrne. My first question is given the easier year over year volume comparison in 2Q from ERP implementation related production constraints, could you give any indications of how volume growth was sequentially in your business versus normal seasonality? And how should we think about that year over year volume growth as this beneficial comparison goes away in 3Q?

Speaker 2

Well, I would say that the comp percentage is about 2%. There is one element of this that I think I want to make sure that we there's an understanding is, if you look at the sales that we that was impacted

Speaker 10

in North America, we said North America grew by 13% and that revenue that we lost because of the ERP implementation in

Speaker 2

Q2 of last year was about $20,000,000 to $30,000,000 And revenue just revenue just doesn't sit there and wait for us to show back up and get. The teams drove a strong initiative to work with our customers and drive and get back those sales. And I'm really proud of the Refinish team for accomplishing that target. It just shows the strength of the products that we provide, the resiliency of the team and really our customers are driving back to come back and working with us. So overall, just really pleased with how that turned out.

Speaker 6

Great. Thanks. And wondering if you could provide any updates to the Iris mixing rollout and refinish?

Speaker 2

Yes. Thanks, Roch. That's a great question. I mean, it's going great. We've got 300 plus out there this year.

Speaker 2

If you talk to Troy who runs the business, he would say he wishes he could get 1,000 out there. Our target is to get about 1,000 by the end of next year. The rollout is going good. The customers are I've had the opportunity to talk to some customers in Europe last in the quarter. And you can really see the interest in the product.

Speaker 2

And so we've started the rollout mostly in Europe and we're starting to get transition also into North America and the objective is to get about 1,000 out by the end of next year.

Speaker 6

Okay. Thank you.

Operator

Our next question comes from John Roberts with Mizuho Securities. Please go ahead.

Speaker 11

Thank you. Good morning. This is Edlain Rodriguez for John. Chris, just a quick one for me on M and A. I mean, you've done a couple of bolt ons recently.

Speaker 11

Can you talk about the pipeline for new acquisitions? And are you still seeing opportunities in there?

Speaker 2

Yes. Thanks for the question. We absolutely are as we laid out in our A plan a quarter ago, the idea across the entire business as we pivot, especially since we've seen margin stabilization here and we're certainly going to prove that out through the back half of the year, we're going to pivot to focus on growth and we have a $500,000,000 target for growth. As I look at this year, we've already accomplished about $130,000,000 to $50,000,000 of that. So we still have $350,000,000 to get over the next 2 years.

Speaker 2

And to do that, as we positioned in the A plan, half of it was through M and A and the other half was through organic growth. And as I look at the bolt ons that we were able to do in accretive parts of the business, refinish and we've also highlighted that we want to do something in commercial vehicle. I do believe that there are opportunities here and you'll hear more from the teams as we go forward over the next year. But those are the areas that we're highlighting and we want to keep focused on as we go forward.

Speaker 11

Okay. Thank you. That's all I have. Thanks.

Operator

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

Speaker 6

Hi, this is Matt Hetler on for Kevin McCarthy. Just one question for me. I wanted to touch on interest rates given the recent FOMC meeting and looking like cuts become increasingly likely in September. How do you see lower rates impacting your businesses? And do you have the impact of lower rates built into your guide at all?

Speaker 3

So today we do not have the impact from lower rates in the guide. I think expectations, our consensus is moving around a 25 basis point cut in September. I think more importantly longer term, I think that will be very helpful if if rate cuts continue as you kind of get into next year where that will be helping the consumer and the consumer across different categories that would affect our business whether that's in purchasing new vehicles, whether that's in our industrial business on housing. I think those would be a little bit of the tailwinds that

Speaker 10

could be potentially there if rate

Speaker 3

cuts come in 2025 that material overall. I think for us on our balance sheet from an interest expense perspective, I like how we're positioned with about 50% of our debt, which would be floating rate debt. So we would naturally get a little bit of pickup when or if rates to begin to decline.

Speaker 6

Thank you.

Operator

Our next question comes from Mike Sison with Wells Fargo. Please go ahead.

Speaker 12

Hey, good morning. Nice quarter and raise there. Thank you, you think about volume growth, this year you're tracking low single digits, not a great year overall in demand. If demand picks up in 2025 and the markets improve, how do you think each of the businesses would do in that environment? And in total, do you think you have a pretty good improvement in volume growth next year?

Speaker 2

We absolutely expect that. I would say, what I'm really, really proud of what we've been able to accomplish, Mike, is really building the foundation from a margin perspective and making sure the underlying business is at a good point so that if we see any growth, it converts well. So I believe our gross margin and our SG and A is at a good point that anything that we get incrementally across all the businesses will be accretive. We've and I believe, overall, the portfolio is at a

Speaker 3

good spot that we've struggled in

Speaker 2

2 businesses going back. If I look back 500 days ago, And I believe overall, the portfolio is at a good spot that we can start really driving growth through all elements of the portfolio. And that's what I'm really proud of what we have gotten accomplished here over the last 6 quarters. So anything that happens in terms of even from a perspective of industrial markets improving because of construction or mobility as to Carl's point on where we see interest rates and any decline in interest rates that drives more automotive business or even from our Refinish business, the acquisition that we just did with CoverFlex gets us into the economy segment where we only have 11% share. The opportunity to grow here is just great.

Speaker 2

So as I think about all the segments, growth engine.

Speaker 12

Great. Thank you.

Speaker 2

You're welcome.

Operator

Thank you. And this will conclude our Q and A session as well as our conference call. Thank you all for your participation and you may disconnect at any time.

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Earnings Conference Call
Axalta Coating Systems Q2 2024
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