Axalta Coating Systems Ltd. (NYSE:AXTA) Q4 2023 Earnings Call Transcript
Axalta Coating Systems Ltd. (NYSE:AXTA) Q4 2023 Earnings Call Transcript February 8, 2024
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’s Q4 and Full Year 2023 Earnings Call. All participants will be in a listen-only mode. A question-and-answer session will follow the formal -- will follow the presentation by management. Today's call is being recorded and a replay will be available to February 15. Those listening after today's call. So please note that the information provided in the recording will not be updated and therefore may no longer be current. I will now turn the call over to Chris 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 fourth quarter and full year 2023 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 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 exalt is 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. This was another great quarter for Axalta. I'm pleased that we met or exceeded all targets for our full year guidance. And I want to thank the entire global team for their dedication and strong execution. Q4 net sales increased 5% year-over-year to $1.3 billion with positive contributions from both segments. Volumes improved 2% year-over-year, led by a 9% growth in Mobility coatings. This represents our seventh consecutive quarter of mobility volumes growth as auto productions have normalized from historic lows, and we have successfully repositioned our portfolio with some of the fastest growing automotive OEM. Price makes was a 1% year-over-year improvement with pure pricing approximately 3% better year-over-year when excluding mix effects and onetime pricing realization.
All end markets contributor to better year-over-year pricing gains. This was a great achievement for our commercial teams, and a demonstration on our ongoing emphasis on pricing realization. Going forward, we will remain disciplined as we face pressure from higher labor costs and strive to restore margins to historical levels. Adjusted EBITDA increased 21% year-over-year to $251 million and adjusted EBITDA margins improved by 250 basis points to 19.3%. I would like to now review some of our key accomplishments from the past year on Slides 4 and 5. 2023 was a tremendous year for Axalta, in which we achieved record net sales and adjusted EBITDA 2023. Net sales were 5$.2 billion, 6% Better versus 2022, with all end markets reporting positive price mix growth.
Mobility Coatings volumes growth of 10.6% was supported by normalization of global auto production and further supplemented by new business wins, particularly in China. We have made substantial investments to support growth with local Chinese OEMs over the past several years as exemplified with the opening of our new manufacturing site in Jilin. We continue to see this region as an attractive long-term opportunity for the business. However, strong growth in Mobility Coatings was balanced by volume weakness in Performance Coatings that were centered around soft construction activity within our industrial end market. Yet, Refinish remains a very attractive and resilient market. The team delivered another excellent year with over 2500 net body shop wins, expanding on our leading position.
Altogether, we remain focused on what we can control and are committed to profitable growth initiatives that reinforce the foundation of Axalta. To that end, I'm excited that during 2023, the technology team was honored with several awards for the incredible new innovations we produce for our customers. New offerings such as Axalta our Irus, and NextJet are critical to support our long-term growth ambitions. And lastly, we come to needed the acquisition of André Koch, a Swiss Refinish distributor. This strategic acquisition positions as well in the attractive Swiss auto aftermarket, and gets us closer to our body shop customers. Early results have been promising. We're on track with the integration plan and see lots of opportunity for growth including in non-paint accessories.
My main focus since joining Axalta has been to drive improved efficiency and performance across the enterprise. We have made progress on both these fronts this year. I'm excited to report record annual adjusted EBITDA of $951 million an improvement of 17% year-over-year. This was an incredible achievement for the team and an early reflection of the transformational journey underway. All four end markets delivered improved earnings and profitability versus 2022. Refinish had another solid performance with the third consecutive year of achieving record sales and earnings. In both light and commercial vehicle, we have made incredible progress after several years of market challenges. Mobility Coating’s second half adjusted EBITDA is now consistent with 2019 Run rates, setting us up well for 2024.
And lastly, Industrial earnings improved versus 2022, despite volumes being almost 20% below 2021 levels. The entire enterprise is delivering on our stated goal to drive profitable growth, and we're making progress towards a return to historic margins. Full year adjusted EBITDA margins improved by 180 basis points to 18.4%. During the year, we drove urgency and speed with our productivity and purchasing initiatives, which we believe accelerated the capture of incremental benefits, in addition to deflationary gains. We're driving growth in areas with attractive returns, while selectively shedding others that don't meet our margin threshold. Free cash flow was another bright spot. We ended the year at near record levels and drove inventory reduction and benefited from increased operating earnings.
2023 adjusted diluted EPS of $1.57 improved by 6% year-over-year. For the first time in the history of Axalta, we ended the fiscal year with net leverage below three times and plan to continue to strengthen the balance sheet going forward. We demonstrated significant improvements in our operating performance and ended the year significantly more profitable than we started. While Axalta’s transformation is just beginning. I'm encouraged by the pace of progress. Our teams are focused on the right objectives, and we're winning together as One Axalta. As we exit 2023, I'm encouraged by the trajectory of our core markets, and excited about the investments being made across the business. I believe we're well set up as we head into 2024 after a solid fourth quarter, and a transformational 2023.
I will now hand the call off to Carl to review our financial results.
Carl Anderson : Thank you, Chris. And good morning, everyone. Before reviewing our financial results in more detail, I would like to highlight that we have changed our primary reporting metric from adjusted EBIT to adjusted EBITDA. The change was made to reflect the way we measure the financial performance of our two segments and allocate resources, as well as more closely aligned to the design of our long-term incentive plans. We have provided historical reconciliations in the appendix of the press release. Let's turn to Slide 6. Fourth quarter net sales increased 5% year-over-year to $1.3 billion, with positive sales contributions from both segments. Consolidated volumes were up 2% year-over-year, and strong Mobility Coatings growth more than offset declines in Performance Coatings.
Price mix improved by 90 basis points compared to the prior year period. The pure pricing benefit was approximately 300 basis points higher compared to last year, but was partially offset by negative mix and a challenging comparison from the fourth quarter of 2022. Adjusted EBITDA in the quarter was $251 million, a 21% increase from $208 million in the prior year period. Adjusted EBITDA margin improved by 250 basis points to 19.3%. Unit rate variable costs were approximately 12% lower year over year, with improvements across nearly all categories, marking the third consecutive quarter of realize deflation. Supply/demand imbalances in isocyanates, monomers and epoxy resins helped drive a large portion of the benefit. We are also pleased with the additional savings driven by the productivity initiatives we launched last year, which enabled us to improve negotiating flexibility in contract terms.
We believe that the favorable raw material environment will continue into 2024 with comparisons strongly benefiting the first half of the year. Yet, as Chris highlighted earlier, we will remain disciplined in managing our cost structure as we go forward. And finally, adjusted diluted earnings per share increased 13% year-over-year to $0.43 despite significantly higher interest expense. Moving to Slide 7. Performance Coatings’ fourth quarter net sales improved by 4% year-over-year to $849 million. Refinish organic net sales improved by a mid-single digit percent compared to the prior year period with positive price mix and volume. This was the 12th consecutive quarter of positive year-over-year net sales growth, and we ended the year with record annual Refinish earnings.
Industrial organic net sales were mid-single digit percent lower year-over-year as positive price mix was more than offset by lower volumes, principally due to weaker activity in the North America construction market and from the strategic decision to exit certain customers. We see early signs of stabilization. However, demand appears at this time to be relatively muted in the early parts of 2024. Despite lower reported volumes amid a soft macroeconomic backdrop, the industrial team improved margins considerably year-over-year through cost management and pricing discipline. Performance Coatings fourth quarter adjusted EBITDA was $192 million versus $169 million in the prior year period with solid contributions from both end markets. Segment adjusted EBITDA margins improved by 200 basis points, led by favorable price cost dynamics, which more than offset lower volumes in industrial and higher variable labor costs.
Turning to Mobility Coatings’ results on Slide 8. Fourth quarter Mobility Coatings’ net sales increased 7% to $449 million year-over-year. Light vehicle organic net sales increased by a mid-single digit percent compared to the prior year period. Volumes were once again very strong, led primarily by above-market growth in China. The UAW strike in North America ultimately had limited impact in the quarter. Our expectation for global light vehicle production in 2024 is relatively stable following the strong recovery in builds over the past two years. Over this time, the team has done a great job in diversifying our sales mix and positioning us favorably with the fastest-growing OEMs. Price mix declined year-over-year driven by negative mix impacts and the absence of a onetime price benefit we realized in the fourth quarter of 2022.
However, pure pricing was up low single digits versus the prior year. Commercial vehicle organic net sales improved by a high single digit percentage compared to the fourth quarter of 2022. The year-over-year improvement was led by low-teens volume growth in Latin America with sustained strong demand in North America. We expect North America Class 8 truck demand will decline modestly in 2024 as we are encouraged by elevated backlogs and positive comments from our large customers who see less downside than third-party industry forecasters. Mobility Coatings adjusted EBITDA improved to $59 million from $39 million, a 50% increase year-over-year. Adjusted EBITDA margin improved by 380 basis points to 13.2%, driven by lower variable input costs and robust volume growth.
Turning to Slide 9 for a review of our full year results. Net sales grew 6% year-over-year to $5.2 billion, a new company record. Net sales improvement was driven primarily by positive price mix contributions across every end market. Volumes were down modestly on a full year basis as growth in Mobility Coatings was offset by a slight decline in Performance Coatings. Adjusted EBITDA was $951 million, $141 million improvement and a new company record, as favorable price and raw material trends offset headwinds from increased productivity investments and higher variable labor expenses. The contribution from Mobility Coatings to adjusted EBITDA growth was substantial, improving by nearly $100 million versus the prior year period. Adjusted EBITDA margin improved by 180 basis points to 18.4%, with a notable step-up in the second half of the year to 19.6% versus 17% in the first half.
Adjusted diluted earnings per share increased by 6% to $1.57 despite a $74 million interest expense headwind, a modestly higher tax expense and $23 million in exchange losses stemming from revaluation of assets denominated principally in the Argentinian peso and Turkish lira. We have recently taken action that is intended to mitigate foreign exchange risk in Argentina going forward. Free cash flow of $447 million increased by 174% compared to the prior year, led by higher operating profit and targeted working capital reductions stemming from midyear productivity initiatives. As a result of the stronger operating results, we ended the year with a substantially improved balance sheet. Turning to Slide 10. We ended the year with $1.2 billion in total liquidity, including a cash balance of approximately $700 million.
Our total net leverage ratio ended the year at 2.9 times, nearly a full turn below last year and our best ever year-end leverage ratio. Capital outlays in 2023 amounted to over $500 million, balanced between $214 million of gross debt reduction, a $138 million in capital expenditures, $106 million in M&A and $50 million in share repurchases. Going forward, we expect to modestly increase internal investments in CapEx, net of a significant decline in ERP-related spending in 2024 with an emphasis on improving return on invested capital. We see many value creation avenues for capital allocation, including further gross debt reduction, opportunistic share buybacks and accretive M&A and strategic opportunities. During the fourth quarter, we refinanced our 2025 senior notes set to mature in January of '25 with approximately $500 million of new notes with a maturity date of February 2031.
As a result of this refinancing, we do not have another bond maturity until 2027. Our plan is to keep interest expense flat in 2024 despite the net increase in interest associated with the bond refinancing. Available offsets include gross debt reduction, interest rate derivatives and the option to reprice our term loan at potentially favorable rates. We intend to continue to strengthen our balance sheet and believe deleveraging is one of the most important value creation levers for Axalta in the near term. The high end of our target net leverage of 2.5 times should be achievable in 2024 through natural deleveraging and disciplined capital allocation. I will now turn the call back to Chris for our 2024 financial guidance and closing remarks.
Chris Villavarayan : Thanks, Carl. Let's turn to Slide 11. I'm proud of the team for executing well and driving record 2023 financial performance. I see considerable opportunity to build from here and fully expect us to achieve another record year of earnings in 2024. Net sales in the first quarter are expected to be approximately flat year-over-year. We project volumes and price mix growth to be modest and roughly balanced for the period. First quarter adjusted EBITDA is projected to be roughly 13% year-over-year to approximately $240 million, with the majority of the improvement supported by margin growth. First quarter adjusted diluted EPS is expected to be roughly $0.40. Full year net sales are expected to grow by a low single digit percent year-over-year with positive contributions from both segments.
As for the end markets, we assume a stable refinish environment with upside opportunity for Axalta as we continue to drive body shop wins and further penetrate non-paint accessories. In industrial, we expect volumes to remain at current run rates through the year as we do not yet see signs of an upturn. For light vehicle, we assumed flat global build rates following a strong production recovery in 2023 and expect Axalta to slightly over perform driven by the business wins and mix. Price mix is expected to be positive net of any RMI impacts. And lastly, in commercial vehicle, we assume North American Class 8 builds will begin to slow midyear before demand ramps back up in 2025 and '26, ahead of new emission standards being implemented in 2027.
Full year adjusted EBITDA is expected to be between $1.01 billion and $1.05 billion, equating to adjusted diluted EPS between $1.80 and $1.95. We foresee a typical quarterly earnings cadence with seasonal strength in the middle of the year. Guidance includes a mid-single digit variable cost deflation tailwind that is first half weighted. Full year free cash flow is expected to be between $400 million and $450 million in 2024. The midpoint of our range assumes increased capital expenditures and less of an improvement from working capital after a significant onetime benefit of reductions we saw in 2023. I believe that we are well positioned to deliver on these commitments as we continue to drive Axalta to new record levels of sales and earnings.
I'd like to invite everyone to an event on May 15, where we intend to introduce our three-year strategy. For more details and registration information, please refer to our IR website and the save-the-date included in our Q4 presentation materials. Thank you for joining us today. This concludes our prepared remarks. Operator, please open the lines for Q&A.
Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from David Begleiter with Deutsche Bank. Please proceed with your question.
See also 15 Free Dating Sites For Singles in the US and 25 Countries with Best Education System in the World.
To continue reading the Q&A session, please click here.
