Q4 2020 Axalta Coating Systems Ltd Earnings Call
During 2021.
And we've got categories that are most likely to be impacted like solvents and.
<unk> those are closer to the wellhead.
And then others that are farther out resins and other categories may see less inflation.
So I think we're going to continue to monitor that monitor that during the course of the year and the move up in terms of the price of oil that may flow over into.
Some of the some of the inputs, it's still something thats relatively relatively new but as we have done.
In the past when we see this coming we of course adjust our pricing.
Pricing actions as well as look at additional cost actions that we can take to offset that raw material inflation. So if this continues to be something thats not just temporary but appears to be a little bit more lasting will take corresponding measures.
And just wanted to ask for.
Bob just on temporary savings, we did about $25 million on the fourth quarter income.
In my remarks, it's really going to depend on the pace of recovery, but we're currently anticipating in our guidance construct for $15 million to $20 million and additional temporary savings for the first quarter as we continue to be very focused on our cost structure.
And then.
On the financial analysts day illegal guy, but I found your disclosure on the discrete manner very surprisingly warranted that.
Not a probable loss that theres, a reasonable possible loss in the next paragraph was kind of confusing I know you can't say much but can you confirm at least whatever the issue was that.
It's been rectified and Youre still supplying said customer with material.
So the issue relates to a discrete period of time and that has been since mitigated the issue itself is not recurring on the.
The accounting front and yes, there is a lot of accounting type language in there and certainly there is no bright line test but.
Probable general rule of thumb was around 75% and that's why we've used the language we're not at that probable stage, there's a reasonable possibility, but a lot is going to depend on the root cause.
On an understanding those types of aspects before.
Before we.
Formerly conclude on whether we need a liability or not.
Thank you.
Yes.
Our next question is with Chris Parkinson with Credit Suisse. Please proceed with your question.
In terms of what's on your control can you speak to the pricing dynamics on both light vehicle and industrial on 'twenty. One are there any new product launches that may assist in these discussions on your ability to get price mix and also have you noticed any changes among your key competitors given several management changes.
Across U S European and Asian suppliers versus the updated 2017 and 18 timeframe just.
Anything to assist in our thought process.
Factor in anything that may be different this time around will be very helpful. Thank you.
Chris as we look at the light vehicle business I just would highlight that.
Most of our indexes, where we have where we have index pricing or on a lag of about six months to 12 months. So we would expect that in Q2, if we continue to see given the raw material environment. If we see those prices go up.
We would see prices move up course, correspondingly price outside of indexes are going to be achieved as you point out with with new colors as well as leveraging services and we have a pretty active pipeline in the light vehicle business in terms of new colors, new products as well as expanding our service port.
Palio and I think with.
Some of the management changes and additions.
But we've made a net business.
Certainly focused on growing that business and I think our team is going to be successful in doing so and we've got about 25% of the overall transportation business. That's covered by raw material pricing. We've got another 35 percentage kind of fixed and then about 40% of the business that has kind of contractual language that allows us to.
Discuss discuss pricing.
On our raw material index is generally cover about 50% of the inflation impact on a six to 12 month on a six to 12 month lag. So overall just for some of the structural elements that are in place in terms of.
How we do business with that customer base.
We.
Have those have those mechanisms in place and I can kind of give you a general sense and then we as I had mentioned, we have new colors, new products as well as expanding our service portfolio actually inside the light vehicle on customer vehicle plant for themselves and then overall as it relates to the as it relates to the market.
We haven't seen any.
Any material changes in the in the market dynamics.
It's a competitive market and those that have the best technology and the best and the best.
Service.
<unk> tend to win and we have outstanding technology, and I think if.
If not the best one of the best service teams in the industry.
Got it. Thank you and then just you hit on this a little but just in terms of your cost actions.
Can you just further speak to your ability to potentially make some of these temporary cost savings a little bit more structural nature.
And then also your ability to calibrate some of your regional cost structures.
Further grow volumes in emerging markets on a margin lets just say at or maybe even slightly above segment average as I know that's been a kind of a target and you guys. Just further on.
<unk> on growth. So just how should we be thinking about those factors over the long term. Thank you very much.
So as we think about the temporary savings the 15 to 20, we expect in the first quarter I would say roughly half of that relates to travel and entertainment I suspect given the new world. We live in some of that will become more structural in nature, but the other aspects are really just cost containment around hiring when we see <unk>.
<unk> and just general cost management around consulting spend.
Do expect that we will have some savings there, but again until we kind of see the pace for recovery, we don't know truly what our run rate's going to day, but I do expect some incremental benefits that will be more structural in nature and I think as we get into the second quarter. As we continue to see recovery, Chris we'll be better prepared to be able to actually quantify what we see is structural.
And on the second part of your question, Chris obviously growing in emerging markets and in particular in Asia.
Is our biggest opportunity as a as an organization and we have a tremendous amount of resources and people focused on growing in those in those markets, but key to doing that is kind of embedded in your question is having the right the right cost structure and making sure that for each market you have a.
China for China.
From a cost structure or India for India type of type of cost structure. So we look at not only manufacturing model, but also how we run supply chain, our indirect costs as well as product formulation and local sourcing goes into that and I think we have those pieces of the puzzle together.
We also have in our two business leaders that have recently joined the company. We have two business leaders that have both lived and worked in China extensively and I think we have the recipe of what we need to do there down and I think Youll also expect to see some increased M&A activity in particular in.
Emerging markets for us to support our strategy and make sure that we are moving to and achieve the right cost model in order to be successful and have an attack on attractive return on invested capital in those markets.
That's very helpful color. Thank you both.
Our next question is with P. J <unk> with Citigroup. Please proceed with your question.
Yes, hi, good morning.
Robert I wanted to drill down into the semiconductor on the shortage and its impact on auto production.
How much do you think production will be down in first half and then on your slide 12 do you expect.
Vehicle production to grow 13, 4%.
This cash.
Semi shortage last does that number need to come down and then secondly does this semi shortage impact pickup trucks and class for Duane.
Trucks as well.
P. J I think you've got you've got three questions in there so.
I'll try and blend it all into into one answer.
Market forecasters are expecting an impact of approximately at this point 960000 vehicles globally. During the first half and most of that shortfall they expect to be made up within the year.
Now is the supply issue it'll.
It will actually have relatively little impact in total vehicles sold over the course of the year and beyond we believe that we will see a similar a similar impact to financial results with a moderate impact to transportation, especially during the during the first quarter, but we expect to make that up.
Based upon what we're hearing from our customer base in the second half of the year or if the situation goes on a little longer.
Well into into the following year.
Much of it depends a little bit on kind of on region and then also product type So in North America as an example.
We're seeing very strong recovery.
You all have seen particularly within the truck and SUV market.
That's being a little bit challenged by the semiconductor shortages, but many of our customers or to the extent they have the ability to influence tier two and tier three suppliers in terms of where those chips are going are trying to direct available chips to products, where they have the highest margins.
And those are trucks and Suvs. So I think we'll see an impact there, but they are redirecting as much as they can chips to those particular for this particular product types.
And in Europe.
Semiconductor shortage and also COVID-19 are putting pressure on the on the European market and they are trying to build inventories.
With that.
And of course in China, the semiconductor shortages expect to have the biggest volume disruption within that region and I would just highlight debt for its also we have a good market position, there, but certainly nowhere near as large as North America and in Europe. So the relative impact for us is a little bit less.
So you put all that together and I think as we highlighted the market is expected to grow by about by about 13%, but given our in the first quarter.
But given our customer mix and growth in certain product types, we're expecting to grow in excess of.
That number.
Regarding Q1, specifically.
There's just a lot of pent up demand for vehicles in most markets around the world and as we've highlighted before we are bullish on our light vehicle business. We think people are going to drive more and theyre going to more frequently purchased vehicles in the post COVID-19 world given concerns that consumers are likely to have around ride sharing.
<unk> and public transportation and that includes both vehicle travel as well as air travel. So again, we see these as just minor minor hiccups in a secular trend that we think favors being in the light vehicle business.
Great. Thank you for that I'll leave it there. Thank you very much.
Our next.
Question is Richard Vincent Andrews from Morgan Stanley. Please proceed with your question.
Alright, <unk> hands on preventing thanks for taking my question on.
Just wanted to maybe come back to free cash flow in on some.
On another solid year.
2021 can you maybe help with some of the bridge items on our working capital Capex.
On how we should be thinking about that.
So I mean, we've limited our guidance for the first quarter.
Probably the easiest way to think about working capital as a percentage of net sales. We finished 2020 at roughly 8% we could see a little pressure there maybe it picks up half a base half a basis point.
The eight 5%.
Little bit of pressure there is really the restructuring at the end of the year sitting in accrued liabilities. So we had roughly $56 million and we would expect to spend the vast majority of that and we could see a little pressure from raw materials perspective, and inventory, but by and large and we should be in that eight to eight five percentage as a percentage of net sales capex for 2020 original guidance for the 100 <unk>.
$60 million actuals came in at $82 million.
As we see continued recovery on as well as our global ERP project, we would expect capex to uptick full year will probably be around $180 million, but we will give an update in the second quarter. When we when we get more guidance for the year.
Okay. Thank you.
Our next question is from Mike She's on.
With.
Wells Fargo. Please proceed with your question.
Hey, guys, sorry about that I was on mute.
You had mentioned you hired two new leaders for transportation industrial coatings.
Can you maybe give us a little bit on the background on what you think they're going to do a little bit differently going forward.
Well as you know we changed and have changed our organizational model before we had a a structure of.
Commercial business units.
<unk> and global functions and as a result of the model that we've shifted to it is now.
For complete fully integrated Soup-to-nuts gross sales for net income to free cash flow driven business unit with responsibility across all areas in each one of each one of our businesses. So that also has necessitated a.
A different type of leader with that type of for a full P&L a full P&L experience.
If we take our new transportation leader, how do you water.
It comes from for Lucia and has spent a great deal of time in the automotive industry and is a very.
Three very experienced and not only experienced in where the market has been or where the market is but rather where the market's going and he has extensive experience in mobility solutions that we think is going to be a real difference maker.
As we chart our strategy in that business and we will talk more about that at our capital markets day here in the spring and Youll hear more about that.
That change in direction and some of the exciting things that we have there that we think youre going to lead to increasing growth.
With regard to Shelley Bausch, leading our industrial business Shelly has a very impressive career.
In the broader industrial sector at several at several companies, including formerly our coatings company, but also to our.
Dow chemical and also our recent industrial company that sells a real diversity of products and she has a track record of.
Really going after and growing in new markets, both organically and Inorganically and I think that's important because in the industrial part of the coating space.
It is a buffet and you can literally be tempted to want to eat everything and we're going to be very deliberate in terms of specific markets within industrials, where we go and there are also adjacencies that are still within the industrial coating space or slightly outside of coatings that leveraged a lot of the capabilities that we have.
<unk>.
Within the organization from a from a technical for.
<unk> in particular and Shelly also has a great deal of experience.
In mobility and across the electric value chain that I think is going to be invaluable to us as we execute our strategy.
Great and a quick follow up.
When you think about acquisitions, what do you think Jeremy is going to be focused on and.
How much of your balance sheet, you're willing to lever up to to get the right deal.
There are attractive acquisitions Act.
Acquisition candidates in each one.
Our businesses and Jeremy will be focused on going after <unk>.
Together with our leadership teams each one of those attractive candidates within all three of our of our businesses and I think you should expect to see some pretty significant progress on that.
Over the next 12 months and I think we're excited about some things that were that were currently that were currently working on and in terms of leveraging our balance sheet I think we will continue to be.
Manage the company financially in a very prudent in a very prudent manner and I think we'll also continue to be valuation discipline, but again a lot of the deal flow that we have and things that we focus on our proprietary situations and not necessarily part of large public processes, where you can see valuations get <unk>.
<unk> out of hand and to a level that just doesn't make any sense.
Thank you.
Our next question is with John Roberts from UBS. Please proceed with your question.
Morning, guys.
In refinish, there appears to be an abnormally high dispersion in performance among competitors when competitors has actually been up I think another spin down a lot more than some of the others.
Think theres a structural shift going on do you think there's just different timing in the channel inventory effects between competitors.
Your thoughts on that dispersion would be appreciated.
Difficult for us to comment specifically on what's driving the performance of individual competitors there.
I think obviously geographic mix is a heavy component.
Channel mix in terms of weather year with large <unk> independence more of a small body shop focus matters also the segment of the market with a year more premium mainstream or economy.
Play then there is a as an important variable. So there are a lot of variables there that can drive differentiated performance.
In the case of in the case of <unk>, we've been taking into account obviously, the pandemic impact over the past 12 months I couldnt be prouder of what our refinish team has accomplished and the number of changes and adjustments that we've made to make sure that our customers continue to be well.
Served and successful as well as growing.
The number of new customers that we have in building out our portfolio of products as well as services and you'll again youll hear more about some of the things that we're that we're doing there in our spring Investor day on I think we're excited to share some of the things that we're working on.
And then secondly, it would seem globally, we have had a harsh start to the first quarter weather wise, not just Texas in the U S, but Europe as well and I think last winter was relatively mild do you think weather is going to affect the comp in refinish and would it be later in the March quarter or would it be in the start of the June quarter since distribution could create a law.
Thank you.
I always kind of hate to comment on weather.
As a as an excuse or as an explanation for outsized outsized performance, but but to your point.
It can indeed cause.
Incremental incremental volume so if we see if.
If we see.
Increased accidents because of the because of the weather and hopefully again, none of those are hopefully serious.
But as we do see increased accidents typically you would see that in a few months later as cars actually as cars actually go in to be to be repaired. So.
Historically, when we've seen it a tough winter or a lot of snowfall and sweet nice and so forth youll see.
Accidents in the December January February time line and some of those get repaired in March some of that doesn't really get repair till April may. So if you were going to see a bump you would probably see a little bit of it in the first quarter, but you might see more of it in the second quarter.
Alright, thank you.
Our next question is with Kevin Mccarthy from vertical Research partners. Please proceed with your question.
Good morning, Robert and transportation coatings for us an awful lot going on in terms of the pandemic dovetailing into the semi shortages that you commented on.
If we were to boil down all of those issues and intend to look through it do you think your market share.
In light vehicles.
Increased decreased or trend in about flat in 2020, and how would your answer differ by region.
Cereal different systems.
As you pointed out there there is a lot of there are a lot of variables, there and theres a lot of and Theres a lot of noise.
I think the best assumption, there would be that market shares most likely been relatively flat.
Okay, and then as a brief follow up if we look ahead to 2021.
And take into account the operational issue that you cited do you expect any meaningful changes in your North America share.
<unk> from that or.
Any share shifts.
On your radar screen for other regions as well.
We're working collaboratively with all the relevant parties involved in the matter and at this point, we're not aware of any future business losses associated with the issue.
Okay in other regions stable on us.
This particular issue is confined to North America.
Understood. Okay. Thank you very much.
Was your question more globally, though outside of that just how it is doing this year.
Yes.
Yes.
Just wanted to just for a lifetime.
We absolutely are working across the business on transportation.
On opportunities and there are opportunities, where we have taken new incremental business. During the course of 2020 as well as in 2019 that will begin to actually hit positively net sales in 2021.
That's true.
And most of the areas that we look at where we are gaining some business and in the truck market.
There is business that we picked up in China, that's going to benefit us this year.
We picked up previously.
And there are a couple of minor losses that we experience with the.
With customers that have shut down sites here and there and that accounts as a share loss, even though its not a competitive loss, but overall you should expect that exalt is working towards share gains.
Inspiration this year and going forward.
Nice to hear I appreciate the additional color Chris.
Our next question is with Alex <unk> with Keybanc. Please proceed with your question.
Thank you good morning, everyone. Robert you discuss your pricing.
The strategy could you describe how you have changed the way you price products.
So for the last on the raw material inflation interest.
16 to 17.
I think our overall approach to pricing.
Approach as well as strategy remains unchanged the only potential changed maybe since the last kind of raw material cycle on the 2018 period is that we have a larger number of contracts that are that are now indexed.
And that was one of the specific goals that we had in our transportation business was to move to more indexed contracts. So as not to have to enter into and take up so much time in those discussions around around price either coming from raw material inflation or in certain markets from significant moves.
In foreign exchange.
And just a quick follow up Robert I think you mentioned neocart agreements cover about 50% of raw materials inflation for Europe.
Paul what that number was the last time, we had on our raw material cycle.
Yes.
As far as transportation goes the number's, probably closer to a third as far as the contracts that are index.
There was probably a 10% to 15% uptick.
Through the 17 18 period.
As we work to further index.
So I think just unclear Ryan just to clarify because your question I think might have.
Might have misunderstood what I said.
The answer to your previous question, which is that we have.
About 25%.
The business is covered by raw material indexing, but what we said was that raw material index is generally recover about 50% of the of the inflation impact over six to 12 month period that.
The 50% is not the percentage of contracts that are actually covered by indexing.
Thank you.
Our next question is with our on this for some time.
From RBC capital markets. Please proceed with your question.
Great. Thanks for taking my question.
Yes.
Wanted to ask about the cadence through the quarters here just given what you said about the chip shortage and your beliefs that the year is still.
Followers.
Normal route and that chip shortage is made up.
Does that imply that.
Maybe.
On the demand gets fulfilled in second and third quarter on third and fourth quarter I know you're facing some tougher comps on light vehicle in third and fourth quarter, but since the chip shortage actually alleviate some of that.
It will I mean, we're expecting the 960000 current forecasted for the shortage for the first quarter to be largely made up in the second half of 2021.
The first quarter I think seasonally.
Typically starts off a little slow but year over year for the first quarter from Lv build perspective, we're still expecting to be up about 12% globally.
As it relates to industry forecast and for the full year, we still expect and again, what IHS is saying is the full year to be up about 13, 4%.
So we expect a steady ramp up through the year.
And what about commercial vehicle could you could you just elaborate on your outlook there.
Especially given maybe some some extra pull on logistics globally have you seen any response from Oems increased production due to that.
Specifically in the in the heavy duty truck a portion.
Of the market or actually let me talk more broadly just commercial vehicle broadly.
We continue to see a strong recovery from COVID-19, especially within the heavy duty truck market.
Is the other transportation portion of the market fares, a little differently just depending on the segment. So for example bus production.
It was a little bit weaker while other segments, such as sporting equipment and recreational vehicles and then bodybuilders.
Have been have been strong and so far we're not seeing.
Any impact of the semiconductor shortage in these in these markets. So overall.
We're pretty positive on the on the direction of the commercial vehicle market for 2021.
Thanks.
Our next question is from Steve Byrne with Bank of America. Please proceed with your question.
Yes. Thank you with respect to the refinish business on the pandemic driven slowdown in that and that is in that end market have you seen any changes in behavior of your competitors, such as getting more aggressive on pricing or investments.
And in body shops to pick up market share as a result of the slowdown.
In the market, we haven't seen many changes frankly because of <unk>.
Because of Covid, we and I imagine our competitors as well have been very much focused on ensuring that our customers have product.
And helping them manage to slightly lower inventory levels, which.
<unk> made it from a logistical perspective us, helping and working with them to make sure that their supply kind of when they need it and helping them manage their cash flow that was definitely true during the.
For Q2, the Q2 period, but really for the body shop and it's all about.
The productivity that theyre able to achieve with the products.
In there in the body shops and also.
Technical service.
We provide for them and so I think we've continued to focus on making sure that our customers have the paint that they need when they yet and also keenly focused on providing providing technical support and in some cases due to COVID-19. They have had painters or other other members that are key in.
The painting process.
Maybe be out for periods of time, and we stepped in and helped our customers and I think on again I'm very proud of our refinish team and how well they've been able to service all of our customers around the world.
And just real quickly Robert would you expect the msos to invest in new body shops to pick up.
The void that some of these smaller shops have shuttered as a result of the pandemic and if so would you would you invest with them.
So far I think what I would expect to see us.
It's a smaller body shop shuts down the MSR it doesn't have to step in and buy that body shop in order to get that business that business will just naturally flow to other body shops, and those could be independent body shops or those could be msos. So it's just volume moving from a shop and again I think this is a relatively small for.
<unk> on the market, where this is happening.
As we've discussed but if there are plant body shops that permanently or temporarily closed that volume stands up going to other body shops. So msos don't have to step in and make acquisitions in order in order to benefit.
From that from the higher volume. So I don't think we would expect to see a big pickup in shop acquisitions. During this time period.
Okay. Thank you.
Okay.
Our next question is with Karen cash Mishra from Bahrenburg. Please proceed with your question.
Thank you.
So.
I realize semiconductor chip is not your core business, but just based on your conversation with the OEM customers do you get the sense that the chip shortage issues already getting better any region or certain products.
I haven't really changed much in recent weeks.
I don't know that we have that we have much insight.
Into any any any recent changes based upon what we've heard in the last in the last few weeks. Each one of our customers is working is working that issue and how theyre working it depends a little bit on the region of the world, where they are where they are particularly focusing on selling vehicles as well as the particular.
Vehicle platform and some of the affected suppliers, but we have seen is certainly that I'm trying to be flexible and make sure that to.
For the extent that they can influence, which chips make it into which systems that ended up going into which vehicles.
They are really focusing on products that are under have the highest demand as well as the highest.
Product margin.
Got it thanks, and then could you talk about the growth prospects for your energy solutions business, how much of that is for the electric vehicles.
We're very optimistic about our energy solutions business.
Our energy solutions business as you know are our various coatings that go on electric motors and other electronic electronic applications and that business today, which of course goes on electric motors.
Any of the 100 to 200 electric motors in any given vehicle as well as as.
As well as electric cars themselves and we're teamed up with a number of really critical key players in that in that market, but we have an opportunity to grow that business to be much larger than what it is today currently and that has a keen area of focus of our industrial team. So I think you should look.
To.
Hear more about that business and I think you'll also see us invest more in that business given how strongly positioned we are there and what some of the market trends are as we go forward.
Thanks, Robert appreciate the color.
Our next question is with Lorang for with <unk>. Please proceed with your question.
Okay. Thank you and good morning, just one piece on the cost cutting side, Sean you had mentioned that.
On the temporary savings would fund on I guess, the pace of recovery in terms of the reserves. So can you talk about the cadence of the on the structural savings you sounded too on some of the thinking H two of the more recent program.
On how.
We should see income on that so on 2021. Thank you.
Yes, so what we quantified in our opening remarks, along was $50 million and <unk> structural savings.
They'll come in fairly Ratably.
Over the course of the four quarters, there's a little bit of a ramp as we move through the Europe, but channel as we move through the year, but generally speaking.
It's 25%, 25% et cetera, et cetera for the $50 million as we progress for the year.
Perfect. Thank you.
Ladies and gentlemen, we have reached the end of our question and answer session and I would like to turn the call back over to management for closing remarks.
Yes. Thank you all for joining us this morning on where available over coming days to answer any follow up questions. You may have I appreciate your interest.
Good day.
Okay.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Okay.
Alright.
Operator are you still with us.