Q1 2021 Axalta Coating Systems Ltd Earnings Call
Ladies and gentlemen, thank you for standing by.
Welcome to <unk> first quarter 2021 earnings conference call.
All participants will be in a listen only mode.
A question and answer session will follow the presentation by management.
Today's call is being recorded and a replay will be available through may four.
Those listening after today's call should please note that the information provided and the recording will not be updated and therefore may no longer be correct.
I'll now turn the call over to Chris Macrae. Please go ahead Sir.
Thank you and good morning. This is Chris Mcrae VP of Investor Relations and Treasury. We appreciate your continued interest in exalted and welcome you to our first quarter 2021 financial results Conference call. Joining me today are Robert Bryant, CEO and Sean Lannon CFO.
Last evening, we released our quarterly financial results and posted a slide presentation, along with commentary to the Investor Relations section of our website and exalt, the dot com, which we'll be referencing during this call.
Both our prepared remarks and discussion today may contain forward looking statements, reflecting the company's current views and future events and their potential effects on adult as operating and financial performance. These statements involve uncertainties and risks and actual results may differ materially from these forward looking statements. Please note that the company is under no obligation to provide updates to these forward looking statements. This presentation.
And also contains various non-GAAP financial measures and the appendix. We've included reconciliations to these non-GAAP financial measures and 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'll now turn the call over to Robert.
Good morning, and thank you for joining us to review Exalt is first quarter earnings and our full year financial outlook for 2020 one.
I hope each of you and your families remain safe and healthy.
I'd also like to thank the exalt the team globally for their continued perseverance and dedication to the needs of our customers and our partners.
Overall, the first quarter showed excellent operating and financial performance. Following on the heels of strong results throughout the second half of 2020.
Continued broad recovery across our end markets enabled strong year over year top line improvement ahead of our first quarter guidance provided on February 17th.
While strong incremental margins.
Leveraged our cost structure actions to date produced adjusted EBIT, and EPS and free cash flow that set new first quarter Records.
Net sales for the third quarter increased eight 1% year over year or four 9% excluding FX tailwind.
The consolidated business benefited from the comparison against early pandemic impacts during the first quarter of last year.
But some headwinds held back additional volume growth for the current period.
Refinish volumes remains below normal levels due to pandemic restrictions still in place and some key countries we serve.
And semiconductor chip shortage that has curtailed automotive production impacted light vehicle and commercial vehicle volumes and the period.
So less impactful to volumes and supply chain constraints due to severe weather primarily in the U S. During the quarter strained material availability and North America, while further fueling raw material input inflation.
Without these headwinds, which fortunately appear to be transitory.
Already strong growth reported in the first quarter would have been even better.
It's worth mentioning that we believe much of this lost volume will be made up as demand remains very strong, but we expect these headwinds to persist during at least the early parts of the second quarter.
Exalt is quarterly adjusted operating profit was impressive adjusted.
Adjusted EBIT of $183 million increased 37 eight per cent from the prior year quarter with associated margins of 17, 2% up an impressive 370 basis points from $13 five per cent and the first quarter of 2020.
These results exclude the impact of the previously disclosed operational matter at certain North America, and mobility coatings customer manufacturing sites, which resulted in a charge of $94 million in the period.
I'd note that the actual cost associated with this matter could be materially less or greater than this charge. Once we complete all aspects of the evaluation process and resolve associated liabilities.
Our initial estimate is filed and our 10-K identified a possible range of loss up to $250 million.
Additional progress on the matter since our 10-K filing and including the first quarter charge indicates a decrease possible range that is not expected to exceed $160 million in the aggregate.
Adjusted EBITDA for the first quarter was $237 million with a 22, 3% margin, reflecting a 290 basis point improvement from $19 four per cent in the prior year.
Adjusted EPS of <unk> 50.
Compared with 31 cents and the first quarter, 2020 and an increase of 61.3 per cent.
Free cash flow for the quarter was another terrific performance with a generation of $11 million versus a use of $20 million in the prior year.
First quarter free cash flow was typically a use due to timing of annual payments. So the result was aligned with the strength of our operating results in the quarter.
Regarding capital allocation elements, we closed our first ever M&A deal in China in early April.
And we Shun Gras, and a leading supplier of wire and animals to the Chinese electric motor market.
The transaction boosts, our energy solutions business, especially in Asia Pacific, while adding local manufacturing capacity at our fit for purpose cost structure.
This is a great example of a strategic bolt on deal that we will continue to pursue as we ramp up our M&A activity and leverage and active pipeline of potential targets.
We also recently announced that Exalt is board increased our share repurchase authorization by $625 million and we now have about $800 million and total availability to buy back stock through our repurchase program.
We repurchased $64 million worth of shares during the first quarter.
Regarding first quarter business conditions, we saw strong demand from all of our end markets through the period with continued recovery evident across global industrial coatings.
And notable underlying demand strength and both automotive and truck markets.
For refinish, the pace of business overall, and the first quarter was consistent with the end of the fourth quarter.
With pandemic restrictions dampening total miles driven and affected countries.
We saw signs of underlying strength in March which has continued in early April. However, we expect improving demand during the balance of 2021 to be in line with the ramp up and COVID-19 vaccinations and as more normal traffic conditions return.
North America miles driven during the fourth quarter remained around 7% lower year over year, but the pace of activity gain momentum throughout the quarter with March and early April accelerating very close to normal levels of traffic.
Body shop activity for exalt, the customers was around 12% below normal and the period.
This too was stronger towards the end of the quarter.
In EMEA and vehicle miles driven during the first quarter remained around 16% lower year over year and body shop activity was around 15% below normal.
So both were variable by country align with applicable government restrictions in place during the first quarter.
Miles driven improved sequentially through the quarter, but then slowed somewhat into April.
We expect to continue to increase through the spring and certain restrictions are expected to be reduced and lifted.
Vehicle traffic in Asia Pacific has also been quite variable, but most countries remain above pre COVID-19 levels for the quarter.
We continue to expect refinish demand recovery through the remainder of 2021 aligned with the pace of east restrictions as well as vaccinations and post lockdown travel recovery globally.
We believe that pent up travel demand a per.
Preference for using one's own vehicle instead of taking public transportation or using ridesharing services and mobility normalization will be key drivers of exalt is refinish business and 2021.
Which also suggests a brighter volume outlook as the year progresses.
And when driving patterns move back to normal operating leverage for exalt or as a whole will be quite high given the profitability of our refinish business.
And industrial coatings, and solid demand and the quarter remained firm across most market segments, we serve.
Similar to the fourth quarter, we saw strong growth and net sales year over year, and all of our and businesses.
First quarter global industrial production increased four 6% driven primarily by recovery in China versus the COVID-19 impacted quarter last year, and a flatter profile for North America and EMEA.
Exalt is net sales growth of 10, 1% and the quarter clearly outperformed the global picture, including notable outperformance relative to western industrial production results.
Standout sources of strength and our industrial and businesses included energy solutions powder coatings and general industrial.
At a market level U S homebuilding and remodeling and continued to support growth for our wood business and automotive markets remained healthy at a retail sales level globally.
Additional tailwind, we're seeing across structural steel agriculture and construction equipment.
And as well as distribution customers within Exalt is general industrial business.
Forecasts and global industrial growth and 2021 continued to support expected growth for our diversified industrial coatings portfolio.
Many may have seen that we rebranded our former transportation coating segment as mobility coatings.
While a small name change and shift is far more impactful than it may appear as it aligns with the broader lens with which our new segment leader how do you water, it's taking with the business.
We see the dramatic and fundamental shifts taking place and the mobility sector as a unique change moment for the industry and.
And exalt is proactively positioning on strategy and ambitions to meet these new opportunities.
Patty will be offering more detailed thoughts around this theme on may 5th at our capital markets day.
And mobility coatings, the global market recovery continued though marred by supply chain shortages impacting production and the first quarter.
Global auto production increased 14% and the quarter versus the prior year propelled principally by the China rebound from production shutdowns during the first quarter of 2020.
Asia Pacific led with a 32, 6% increase including a 78, 2% increase and China.
EMEA posted a 0.9% decrease Latin America saw a five 4% decrease and North America was down moderately with a 2% decrease including $14, 9% lower production in Canada.
And so all of those net sales somewhat trailed the global average largely due to our smaller position and China Automotives, while results more closely match the market and other regions.
Current industry forecasts call for an 11, 9% increase and global auto production for 2021.
Which has been trimmed from the earlier, 13% to 14% growth forecasts due to the industry semiconductor chip shortage.
While the current forecast and May continue to slip depending on how the chip shortage plays out the silver lining here is that it's building and further growth to the medium term forecast as loss production and near term is not actually lost permanently since dealer inventories and must be restocked.
And consumer spending remains strong.
For commercial vehicle end market overall global truck production increased 44, 6% and the first quarter led by a $76 one per cent jump and Asia Pacific, but also supported by a $4 one per cent increase and North America, where exalted derives the largest share of our truck related business.
EMEA and Latin America, both remained more subdued with low to mid single digit declines and truck production in the period.
The current forecast for class four to eight truck production for 2021 remains intact.
We're expecting a slight two 1% increase and global production.
Excluding China. However, the market is expected to rebound and 22, 6% led by North America at 25, 8%.
Current and near term truck demand indicators remain healthy across most regions.
In the U S order rates in March were near all time highs with class eight orders around 40000, and supporting continued solid production rates for coming months.
Switching now to innovation.
And is driven first and foremost by innovation.
Which remains the foundation of our market strength and will enable our long term growth.
Last week, it was announced that exalt from one three 2021 Edison awards, which are given for outstanding innovation and products or services.
The three awards cover innovations across multiple aspects of our businesses include.
Including coatings that enabled lidar reflectivity from autonomous vehicles.
And ultra high performance waterborne sealer for the refinish market.
And two coatings for the kitchen cabinet market that require only one coat.
Per to for coats previously, thereby reducing customer cost and time.
These three awards, followed the 2020 Edison Award that exalt from one for our volt attacks and impregnating resin for electric motors, which greatly improve electric motor efficiency and reduce electric motor size and weight.
I could not be prouder of our R&D and technology organization and the entire team at exalt.
These awards highlight that exalt is at the top of the coatings industry and innovation and delivering exceptional value for our customers.
I'll now turn the call over to Sean for some additional comments.
Thanks, Robert and good morning.
As mentioned, our first quarter witnessed continued recovery across nearly all markets, we serve and we continue to execute cleanly to exceed our targets set for the quarter.
Net sales up eight 1% year over year.
Slightly better than expected versus our 3% to 5% guidance from February as recovery and refinish as well as the broader industrial markets continued at a solid rate.
Performance coatings first quarter net sales increased nine 2% versus the prior year quarter with refinish, increasing eight five per cent and industrial increasing 10, 1%.
The Refinish result included support from a stronger China performance year over year.
Still lack the full volume profile, given ongoing lower miles driven and most regions and lower associated accident rates.
We finished did not realize a noticeable benefit from customer restocking and the period that.
And we anticipate and prove volume over the course of the year and this could include some restocking volume as the year progresses.
Mobility coatings net sales also demonstrated ongoing recovery and the first quarter, increasing six 1% compared to the prior year quarter, including light vehicle growth of seven 2% and commercial vehicle growth of two 2%.
Volumes were boosted by recovery in China, and light vehicle from the prior year comparison, but offset by the semiconductor chip shortage impacts and the current year quarter.
Product price mix was a modest <unk>, 3% positive contribution on a consolidated basis for the quarter.
Led by light vehicle, which saw mixed benefits from the period and offset by modest declines from industrial and mixed from refinish.
Price and refinish remains a positive driver and the first quarter.
Commercial vehicle was relatively flat and the period.
Consolidated adjusted EBIT for the quarter was a very strong $183 million following our record setting results during the second half of 2020 and marking another record for our first quarter, excluding the charges from the operating matter that Robert had noted.
The stark 37, 8% growth rate versus first quarter, 2020 underscores the momentum of positive cost management that persisted into the new year.
We achieved ongoing savings and operating cost for the quarter, including the continued pacing of structural cost savings from <unk> way initiatives as well as from somewhat better than expected carryover of our temporary savings from 2020.
Adjusted EBITDA for the quarter was $237 million, a solid 24% increase from the prior year quarter with associated margins of 22, 3% up 290 basis points year over year.
Fourth quarter adjusted diluted earnings per share of <unk> 50 per share.
61, 3% increase above the prior year quarters 31 per share represented another excellent result for Delta.
Performance coatings segment level, adjusted EBIT of $117 million increased 47, 6% year over year, driven primarily by continued cost management benefits and associated strong incremental margins given the volume recovery and.
Adjusted EBIT margin increased an impressive 430 basis points to 16, 6%.
Mobility coating segment level, adjusted EBIT of $39 million compared favorably against the 26 million result from the first quarter 2020 also driven primarily by cost actions and aided by the favorable volume comparison.
Adjusted EBIT margins increased 330 basis points to 11%.
Stellar level for the first quarter.
Regarding our balance sheet and cash flows we were pleased that first quarter free cash flow of $11 million represented the first quarter quarterly record compared to a use of $20 million and the first quarter of 2020.
Driven by strong EBITDA as well as continued solid working capital management.
The strong first quarter free cash flow resulted and exalt ending the quarter with total liquidity still over $1 6 billion, even after incremental share repurchases of $64 million and the period.
Our net leverage ratio decreased to three two times at March 31, compared to three three times at December 31.
Our metrics of course still include COVID-19 impacts on adjusted EBITDA from the lows of the second quarter of 2020.
Regarding our financial outlook for the full year 2021, our broader expectation remains that the current global industrial expansion will continue to support <unk> growth and.
Quote and Cal wins across most key markets that we serve.
Exalt is global and emerging markets focused businesses aligned well with this backdrop of accelerating global growth as we emerge from the pandemic period.
At the same time, we are focused on continued growth execution, and our businesses, including innovation by market share gains leveraging exalt is leading technologies and service based business models.
For full year net sales, we expect an increase of approximately 20% to 22%.
Including the 3% positive from foreign currency translation, and slightly less and a 1% benefit from the acquisition announced earlier this month.
With that net sales forecast, we anticipate strong contribution from both segments.
The weighted slightly stronger and mobility as a relative percentage of growth and both net sales and and sales volume due to the more severe impacts seen and the segment and the second quarter of 2020.
For refinish, we believe the easing of mobility restrictions coupled with the ongoing vaccination progress will produce a solid recovery over the course of 2021 for the business as vehicle traffic resumes more normal pacing.
Our current assumption is that refinish net sales volume for 2021 will remain lower than 2019 for the full year by a high single digit percentage due to the impact of the pandemic.
Light vehicle, we do anticipate ongoing impact from supply chain shortages to persist through most of the second quarter, but we believe a good portion of the production shortfalls will be made up during the second half of 2020 one.
Industry forecast currently call for approximately 1 million vehicles to be delayed from the second quarter to the second half of the year and partly in the 2020 two due to the shortages, while the first quarter saw $1 4 million vehicle production shortfall impacts.
For <unk> and net sales volumes, we expect to modestly outperform the global market forecast of 11, 9% for the full year.
We expect to generate adjusted EBIT of $715 million to $755 million and adjusted diluted earnings per share of $1 95 to $2.10 for the full year with other key income statement metrics noted on our guidance slide.
For adjusted EBIT, we expect that the second quarter will represent approximately 23 per cent of the full year adjusted EBIT, including ongoing impact from headwinds that we noted from the first quarter.
We also expect to see variable cost inflation more materially in the second quarter for the full year, we anticipate high single digit cost inflation from variable cost at the Cogs level.
<unk> is focused on passing through these cost increases primarily through selling prices to the channels, we serve while staying mindful on cost structure and as needed during the early phases of the inflationary cycle.
We continue to expect strong free cash flow this year of between $455 million to $495 million, excluding any outflows related to the mobility operational matter and expect uses of capital to include further M&A transactions as well as ongoing share repurchases with that I will be pleased to answer any questions operator.
Please open the lines for Q&A.
Thank you we will now be conducting a question and answer session. He would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is and the question queue.
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For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment. Please while we poll for your questions.
Thank you. Our first question comes from the line of Ghansham Panjabi with Baird. Please proceed with your questions.
Hey, guys. Good morning, Hope everybody's doing well I guess following up on the last few comments, Sean and in terms of auto refinish down high single digits versus a I.
I think the 2019 baseline is what you said how is that expected to evolve by region, what sort of outlook are you baking in in terms of how the mobi.
Mobility dynamic globally starts to improve.
As we cycled through the next few quarters I know, it's a very complex environment, but just curious as to what you have embedded.
For the rest of 2021.
Got you and this is Robert I'll I'll take that one I'd say that in the first quarter, we saw sequential improvement month to month and.
And for April we're expecting to see similar levels as we saw in March and driving a large increase obviously for the second quarter year over year, North America is expected to be higher than March and for EMEA, we expect it to be slightly lower given some of the recent COVID-19 locked.
And activities and then for emerging markets Asia, and Latam, It's a mixed bag there, but we expect them to be flat to slightly down.
We expect to be significantly up for the full year versus the prior year, obviously as we lap the COVID-19 impact and although we have some lingering COVID-19 restrictions throughout the world, particularly in EMEA, we expect demand to be up given pent up travel demand as well as vaccine.
<unk> rollouts so.
Sales volumes for the year are expected to be down roughly mid to high single digits from pre COVID-19 2019 levels, but we expect them to be up significantly compared to 2020.
Got it perfect. Thank you and then in terms of the cost inflation. You know obviously everybody is upgrading our raw material cost inflation guidance I think you said high single digits versus last year.
Should we think about price cost as we progress through the rest of the year and maybe from a higher level perspective.
And compared this current pricing cycle that you've been implementing across along with your peers relative to the to the most previous.
Price cost inflation cycle 17 18.
We expect to fully cover raw material inflation during the course of the year, primarily via price pass throughs, and if we think about that by business and in refinish, we typically schedule price increases and had been able to pass on raw material increases fairly efficiently I think our value.
And is not based on material costs, but rather the technology, we offer and the associated efficiency gains at the body shop level for industrial and businesses should be able to increase price.
It really full realization as determined by individual markets and competitive factors only a small portion of the total and market. There is based on index pricing. So we're fairly confident of our ability to price through on the industrial side and mobility roughly 25% of our business is covered by indexing.
With the remainder under contractual language that allows us to discuss pricing. So we've generally been able to successfully over time.
Through sustained inflation, albeit with some with some lag to the realized increases and the price increases outside of the index will also be achieved with new colors and on leveraging our services.
And Ghansham and maybe just to cover and uniqueness about second quarter and why you are seeing a little bit of a drop from a margin perspective with raw material inflation really starting to hit us industrial where we're doing a nice job and getting realization there, we're putting incremental actions and from our refinish perspective, but similar to past cycles, you'll nobility side of the business will.
Be a little bit lagging, but as Robert pointed out we expect to be fully caught up by the end of the or and the aggregate and.
And certainly to the extent and we have.
And any sort of leakage will be looking at productivity improvements to make sure our margin sold.
Okay perfect. That's very helpful. Thanks, so much.
Thank you. Our next question is coming from the line of Steve Byrne with Bank of America. Please proceed with your questions.
Good morning.
Guy on EBIT, clearly shows a shift into the second half and presumably that's that's a recovery and and the volumes from the chip shortage and the recovery of raws and so forth, but was curious Robert if youre, if youre seeing any signs yet of.
Some traction from some of the management changes you made and or the structural change slipping out that matrix structure and anything that youre seeing that.
Could be driving growth.
You're now expecting to realize and the second half.
Or is this really just simply a shift.
Well I think you hit the nail on the head when you mentioned the management team. We have added some very high quality global P&L executives to.
Our business leadership team and they are already having a dramatic impact on the aggressiveness with which we're planning to grow the business creative ideas and new approaches. We have also added some very competent functional leadership as well.
The overall matrix structure, and ripping that out and having that now would be global business units supported by by strong by strong functions has really allowed us to streamline the organization and our cost structure. So I would say that you know if you had to kind of sum it up into how much.
But would you say is due to the management impact versus how much of it is due to.
Simply market drivers I think a heavy element here is the management team and I think we are now at a point, where we have a world class management team that is really making a difference both on the commercial side of the business as well as on the cost side of the business.
And just a follow up on a couple of those innovation awards comments that you've made Robert.
The one code on our kitchen cabinet versus four seems pretty compelling.
From from the manufacturing.
And actually perspective, but could be a significant volume.
Is that is.
Is that more than offset by the potential for you to gain market share and that in that industry and or realize a much higher price.
All set lower volume and it.
Is the same true on the on the refinish and technology.
How much of an impact as your latest technology have auto body shops ability to push vehicles through the paint booth that.
It was meaningful in terms of share gains, but maybe lower volume for you.
Well I think the way to think about this.
Is we are not selling gallons of coatings.
We are selling solutions.
And so we price the value that we create for our customers accordingly.
So again the way to think about it is we're pricing for our solution and the value that we create for our customer not necessarily based.
Based on volume and therefore again as we've highlighted that it's important for these businesses and coatings to really look at net sales volume per se and can be somewhat of a tricky metric when judging how successful you are being from a from a commercial perspective on the element of the <unk>.
The Edison Awards that we won as well as other awards that we've won for our technology, you know about two and a half years ago, we really refocused some of our R&D efforts and we changed some of the emphasis that we had from incremental improvements to really spending a little bit more money on.
And some aspects applications products and even new business models, frankly that could really be game changers, and so I think youll continue to see some pretty exciting developments across all of our businesses from a product from a service from and application as well as from a business model perspective.
But I think it's going to keep us at the forefront of the coatings industry.
Thank you.
Thank you. Our next question is coming from the line of Jeff is that cost cuts with J P. Morgan. Please proceed with your question.
Alright, thanks very much.
What was the change in price and refinish exclusive of mix and the quarter.
And is it how would you compare it to normal historical patterns.
So Jeff we didnt actually quantify it and the only thing we signaled is that we actually got price and the quarter. It was modest.
But it is similar to prior periods, certainly we have and Mexican opponent.
Somewhat camouflaged and yet the pricing progress and the refinish side of.
Performance.
And in your operational issue.
Did you how much did you accrue in current liabilities.
For the payout of funds.
Yes, so theres roughly $94 million that was accrued in the quarter and that does not contemplate any sort of insurance recoveries, which we're still working on.
Is that and current liabilities.
It is.
Okay. Thank you very much.
Thank you. Our next question comes from the line of P. J D card and with Citi. Please proceed with your questions.
Yes, hi, good morning, So you made an acquisition in China, I mean, I would imagine the China coatings market is highly fragmented you know what what are the opportunities there and is this like a beachhead, there and you're establishing and to make.
More acquisitions.
P. J, we are already have a fairly good sized business in China, and our energy solutions business the acquisition of on he Schenker and added.
Somewhat less than $40 million and annualized sales for which we paid less than $50 million and in total purchase price. So it was an attractive transaction for us.
And we provide the salto with really a solid platform to further grow the energy solutions business in China, as well as and other Asia Pacific markets and it also allows exalted to substantially increase our capacity, which is something that we really needed to do because the demand there for electric.
Vehicles and other electric applications is really growing.
It also adds products for large volume applications, which will complement our portfolio of specialties and they also brought to the table a whole suite of other customer approvals.
So we believe that this acquisition provides.
And so powerful commercial as well as cost synergies with significant further growth opportunity and then in general.
E mobility and electronic coatings is a key area of focus for us not only in China, but around the world.
Great.
And then your <unk>.
And that you took potential of up to $160 million.
Can you just talk a little bit about that you took 94 million and this quarter.
So would that remaining would be and the second quarter and can you just tell us what happened here and kind of what steps have you taken too and it doesn't happen again.
Yes.
So P. J there is obviously a commercial sensitivity. So we can't go too far and and giving too much as far as details, but you'll recall as part of a year and in our form 10-K, we disclosed a reasonable possible amount of up to $250 million. So what you saw in the quarter and we've been working collaboratively with our customers at our customer sites.
And working through the issue understanding root cause getting through testing and so what you saw in the first quarter as we made it a good amount of progress.
But a number of sites actually came off the table there weren't any issues and Thats, where you see the overall range decreasing from the $2 50 to 160.
And the $94 million, that's where we have line of sight into the actual root cause. So that's why we accrued and the first quarter, it's hard to say exactly when we will reach a conclusion on the on the residual and if if there's actually a and issue there that could result in a probable liability and that's why we've actually disclosed and the 10-Q.
The possible amount of the Incrementals and $65 million, but I can't tell you exactly when we would accrue that or if we would accrue it and the other thing I did point out earlier. This is before any sort of insurance recoveries, which we're working with our insurance providers right now.
And adding to what Sean said.
The root cause has been identified has been remediated and additional controls have been put in place. So that it does not happen again.
Great. Thank you.
Thank you our next questions come from the line of Laura ranked as far with Exane. Please proceed with your questions.
Yes, good morning all.
Robert and I've got a question on textile and location and then I guess it. Thank you very much for the disclosure on the acquisition and the size of the acquisition and so it looks like you have to spend more and then on the buybacks and then on M&A I guess, so song and.
And the future how do you intend to arbitrage between I guess buybacks, we'd be upsized buyback, Ken envelope that acquisitions and can you talk about the M&A pipeline from here. Thank you.
Yeah, well, let me start I guess with the M&A pipeline.
We've concluded our first substantive acquisition over the past two years and we have a really full pipeline of bolt on transactions.
That being said, we would not have brought on someone of Jeremy Rowan's caliber unless we were planning on doing much larger acquisitions and other types of ventures. So I think you can expect to see us be more active but again valuation disciplined as we always happen and I would think.
Of share buybacks.
And M&A and as two areas, where we will deploy capital. If we continue to see our stock be undervalued, we will continue to buy back our stock at greater rates, but we will now systematically buyback our stock to offset dilution plus and additional few percentage points.
And on top of that at a minimum and as we have other opportunities due to market aberrations to buy our stock at depressed levels. We will continue to do so so I think that's really where you would expect to see the majority of our excess capital and cash flow be deployed.
And thank you and I'll just sort of went and you mentioned that there had been no restocking and refinish in Q1 I was wondering if you could talk about your own assessment from the inventory levels in industrial.
And in particular, given that you know volume study tweak sometimes very quickly.
In Q3, and seemingly AR and AP, So Dan do you seeing that and densities and actually in number and I know radio could that something later this year.
No I think pretty much across.
All of the industrial markets that we serve.
Inventory levels are really lean.
And part of that is the way people have been running but I think it's much has much more to do with some of the supply chain issues.
Issues that are out and them in the marketplace that segment of the market are much more so than light vehicle or refinish or commercial vehicle or decorative coatings and frankly industrial is really the area, where raw material shortages have really had the biggest impact. So I think a lot of the industrial customers.
They're running and a pretty lean fashion, just due to the availability of materials more than anything else. So as those.
Customers restock as there's more availability of raw materials, I think we could see somewhat of an and inventory build there at some point during the year when supply normalizes.
Thank you.
Thank you. Our next question is come from the line of John Mcnulty with BMO capital markets. Please proceed with your question.
Yeah. Thanks for taking my question just on the on the refinish and potential for restocking can you help us to understand what that actually might mean in terms of volumes for you. I mean is that a is it a one or two per cent out is it bigger than that I guess, how should we think about as as the the refinish business restock and what that could mean to the to the overall volumes.
It's difficult to put a number on it what I would say is that I would think of it as a as a rubber band John I mean, when we start to see people get back to work Kids go back to school Moore and I'm talking globally, not just U S here and we.
We see traffic patterns and traffic congestion.
Come back to normal I think we're going to see a tremendous snapback in volume and and activity and in that business and I think the interesting thing is given the profitability of that business of course, the operational leverage for a company like exalt is huge so I can't think of many companies that are.
More of a COVID-19 rebound play then exalt.
Got it fair enough and then I guess, maybe another related question on the refinish side. It seems like in part because of all the semiconductor issues and what have you for auto OEM that the used car market seems to be heating up pretty meaningfully we're seeing kind of really big sticker inflation and that type of thing does that does that move the needle when it comes to the.
The refinish side of your business do you is there any correlation that we should be thinking about in terms of used car sales picking up and used car values picking up where we could see some lift on the on the refinish side or is that a little bit too much of a stretch how should we think about that.
I would say that that element is a fairly minor variable in the total equation that drives refinish activity. So I wouldn't spend too much time on that particular area.
Got it thanks very much for the color.
Thank you. Our next question will come through the line.
Room.
And <unk> of RBC capital markets. Please proceed with your questions.
Great. Thanks, guys for taking my question Congrats on the strong performance here.
I guess first off just on light vehicle.
Just elaborate on on on your and.
Earlier comments about.
And the chip shortage potentially elongate the cycle and and I'm not.
And not necessarily being as much of a and impact.
Longer term on 22 thanks.
Well I think forecasters are estimated at approximately that about $1 4 million vehicles were impacted in the first quarter and then expected another million and the second quarter with some additional bleed through into the third quarter.
The expectation is that many of those vehicles will still be made up and the second half of the year. There was some of those units will probably now not be built until 2022.
<unk> saw a fairly similar impact to financial results relative to the global impact and expect some loss sales to be made up and the second half and those are updated market forecast actually came out.
Last week and that's why some of the data that you may hear from us on this topic versus some of our competitors may differ slightly it's because we have you know as of the time of this call the updated forecasts.
And Orion Okay. That's helpful.
When we gave year and guidance you know IHS was forecasting auto builds to be up 13, and 14% were closer to 12% now.
Still around little over 83 million cars to be built and 2021. So certainly a good amount of the $2 4 million cars. Robert referenced is going to be made up and the second half, but we will see slippage and the 2022.
Okay. Thanks, and then and maybe I can ask a question on commercial as well have you seen any impacts there due to this chip shortage or what's your outlook for I guess a how.
And how that business evolves over the next couple of quarters.
We did see some impact and in commercial vehicle, but it was I think we expect it to be.
Mostly focused and in the first quarter, and then a little bit of perhaps a little bit of impact and.
In the second quarter for the full year, we expect shrunk continuation of strength of truck strength and the Americas and EMEA.
Potentially with some retraction and China is C six and government incentives six.
We expect strong continued performance from trailer and constructors, especially those associated with some of the.
And last mile delivery scenarios.
Our sports and RV also continued to show pretty good resilience and favorable order intakes.
Bus is gonna be a little bit more dependent on vaccination and herd immunity, but government and incentives for EV powered assets could really play quite favorably.
Later, this year and beyond.
Thanks.
Thank you. Our next question is coming from the line of Vincent Andrews with Morgan Stanley. Please proceed with your questions.
Thank you and good morning, maybe just an update on the cost savings and I guess in particular.
Obviously costs that came out last year that were COVID-19 specific and some of those were.
We're supposed to come back this year. So maybe just an update on where we are there and I think Robert you also mentioned and he was Sean.
And you know that you'd have some flexibility.
And to manage for the price raws scenario. So maybe just help US bridge, where you are versus your expectations and how much incremental flex you think you actually have that you could put to work this year.
Yeah, and the temporary savings that we initiated last year.
Most of those are starting to tail off we have roughly $20 million and savings and the first quarter.
And it'll be a marginal benefit and the second quarter as those costs will start to come back and as we support volumes.
Especially heading into the second half of the year, we're expecting.
Strong recovery.
As it relates to exalt away and we have roughly $50 million baked into the guidance construct.
Part of that is are the initiatives that we announced last year and getting a full year run rate impact this year, Vince and at this point, we are expecting globally on a consolidated basis that we will offset the raw inflation with pricing and to the extent, we see a little slowness and a particular end market, that's where we may have to do a little bit more on the productivity side.
But right now we are contemplating and offset from a topline perspective.
Okay, and then Robert if I could just ask you you know the board obviously made a strong statement with the incremental share repurchase authorization.
And my question. Yeah. This has been discussed over the life of your <unk>.
Being a public company, what's the latest thinking from the board on and not paying a dividend versus buybacks and so forth and I just asked because you know not paying a dividend.
And as a group of our long only investment community that is income oriented and if theres no dividend and they just don't buy the stock.
And and Likewise, you know maybe you could throw in the latest comments just on managing the debt level. Because obviously also you know high leverage levels.
Our are an issue for some folks so just how the board sort of thinking about buybacks versus the other opportunities. Thanks.
And when it comes to capital allocation.
We always look at returns.
And what can generate the highest returns for investors. So anytime we're going to make a decision.
To invest a significant amount of capital we're looking at what our opportunities to deploy that capital internally, which tend to be pretty higher R and.
Very low risk type of projects.
Projects. We also have of course, the ability to buy back our stock and depending upon where it's trading.
That also has a certain return associated with it and then we look at M&A and depending upon what type of an acquisition that is and the risk profile of that acquisition. We also calculate our risk adjusted return and we compare all of those as well as the return from initiating a dividend.
Into into our thinking so that's going into our calculus anytime we make an investment decision at this point, we feel that fueling our innovation engine internally, which is yielding I think very good results and you'll see and you'll hear about at Investor day. Some of the exciting things that we're working on.
And I think Youll see over the next couple three years, some really revolutionary developments. So that's obviously a very attractive area for.
For us to invest is and continue and continued innovation. So as we've looked across all of those investment possibilities and the benefit that we get from innovation as well as the value that we can create from making acquisitions that are consistent with our long term strategy not acquisitions just to add sales to the <unk>.
Company, but rather acquisitions that are specifically aligned with our strategy, we feel that acquisitions investing in innovation.
And share buybacks are our best uses of capital at this time also as we bring down our leverage level over time.
And we are a little bit more mature and some of those areas. It is possible that we would start a dividend, but it's and we've talked about this a lot at a board level, but it doesn't feel like the right time for us at this juncture.
On your question and very much on your question on that.
We are not concerned investors should not be concerned net leverages at $2 6 billion. When you look at our net leverage ratio ticked down to three two times and when we get to the end of the second quarter. If we don't do anything meaningful as far as share repurchases or M&A, we'll be closer to two six or two seven times the second quarter of 2020 drops off.
And when you look at the midpoint of our range from an EBITDA perspective.
And we're going to have $135 million of interest expense ups at EBITDA at the midpoint of the range of $970 million.
So when you look at our interest coverage there is plenty of room. There. So we're not at all concerned on our parent leverage where it sits today on our balance sheet.
Thank you.
Yeah.
Thank you our next questions come from the line of David Begleiter with Deutsche Bank. Please proceed with your questions.
Thank you.
Robert can you quantify the gap between raws and selling price in Q2, and how that would trend in Q3 and Q4.
So Dave we're not going to get into the GAAP, but certainly that is adding a little pressure from a margin perspective, and the second quarter and we expect to be fully caught up as we get and the third and fourth quarter.
Understood and then just from the operational matter has there been any customer you know repercussions from this event do you expect to lose any business longer term or is this a one off event that will have no impact and the ongoing company's operations. Yeah. It's a great question, we don't believe that there's going to be any ongoing underlying impact.
And we've been working very collaboratively with the customer group and we feel really confident.
Won't be any loss.
Thank you.
Thank you. Our next question comes from the line of Kevin Mccarthy with vertical Research partners. Please proceed with your questions.
Good morning, and aside from the external issue of shortages of semiconductor chips.
Did you encounter any shortages of raw materials that you buy and if so which ones and and what were the effects related to that.
Well there are quite a number of shortages of varying degrees and quite a number of companies that have <expletive>.
<unk> declared force majeure.
I would say and in general we are.
Seeing supply shortages, largely and monomers resins and isocyanate.
And then there are specifics within within some of the other categories of certain of certain items. So I think it's across the raw material the raw material basket in general, but as I said predominantly concentrated in monomers resins, and isocyanate and you know I think for the most part in the first.
<unk>.
And we didn't see.
A meaningful impact on our businesses, but certainly.
We are monitoring and managing this on a day by day basis, and it is a little bit.
Kind of hand to mouth each day.
In certain products.
Okay. That's helpful and then one.
To follow up a little bit on the semiconductor chip shortage issue, what we've heard from some other companies outside of the coatings industry is that there were some mitigating factors such as a mix shift toward Suvs and trucks and in some cases auto manufacturers, making calls.
Cars without the chips with the intention of installing the chips later on did you see any behavior along those lines or is it more straightforward that your sales are simply ebbing and flowing with with the auto production.
Yeah, we've heard the same the same thing from some of our from some of our customers in terms of directing the chip availability and sub assembly trying to direct more of that to trucks and Suvs where of course, that's our bread and butter and where it's also a strongest so I think thats certainly.
Helpful Helpful for Us I think what it will be interesting is if we see auto manufacturers start to pay higher prices for chips and order to get a greater allocation of chips that are going into other other product types.
Thank you very much.
Okay.
Thank you our next questions come from the line of Laurence Alexander with Jefferies. Please proceed with your questions.
Good morning can you flesh out the new business models, he referred to and give a sense for what kind of departures from your business model, you're taking or how significant this could be always say three five years.
Lawrence Hi, its Chris.
And as much as we could spend time on that and I think with our with our capital markets day coming up very shortly I would really encourage people to tune into that where we can get into a little bit more detail around business model. That's just it's kind of a lot to cover on an earnings call. So.
If you don't mind, I think we'll defer that.
Okay. Thank you.
Thank you. Our next question is coming from the line of Mike Sison with Wells Fargo. Please proceed with your questions.
Hey, guys nice quarter, just one question performance coatings, EBIT margin is pretty impressive and and the first quarter.
If you did get back to 2019 levels of sales from performance coatings, Your EBIT margin and 19 was 15%.
And Ah you're run rating something more like 1920 is that kind of what's implied in the first quarter.
Well I think what I, what I would keep in mind. There is that the 2019 levels, we had not yet done the global restructuring.
At the at that time, so compared to the 2019 levels. We would have the benefit of the global restructuring and then as we talked about on previous calls in terms of just the cost.
Cost mentality, and only putting cost back into the business as we see volume recover we're continuing to run things very tightly. So I think you could expect to see higher margins on the performance side and Theres, a certain amount of costs that naturally flows back into the business as you ramp up volumes, but.
There's a another large portion of the cost that is discretionary and and particularly in particular related to staffing.
That we're really keeping a tight control over.
Great. Thank you.
Thank you our next questions come from the line and Josh Spector with UBS. Please proceed with your questions.
Yeah, Hey, guys. Thanks for taking my question.
I'm wondering if you could provide some color on on some of the industrial demand and particularly products into OEM channel. So that they can maybe powder coating customers are you seeing any changes and buying patterns through the quarter that might give any read through in terms of how those customers are thinking about inventories at this level or perhaps building we're taking.
Things down based on changing OEM forecasts.
Well overall for industrial and I know, you're asking specifically about our general industrial line, which goes into auto and I'd say overall, we expect sales to be up significantly in 2021 versus 2020, even with the strong performance of industrial in.
2020.
We've implemented price increases across all of the industrial Submarkets and expect to exceed raw material inflation for the year in the general industrial area, we continue to see strong demand from automotive.
Agricultural construction equipment and structural steel markets and for the portion of powder that powder coatings that also goes into the auto.
OE segment, we are seeing pretty strong demand there. So I think it's really more reflective of the fundamental issue or the fundamental dynamic that demand for vehicles is extremely high and if you look at dealer inventories and the U S. They're running and the in the mid Forty's or lower.
So the demand is there and automotive manufacturers are trying to make as many vehicles as they as they possibly can but it's an imperfect science to get all of the supply chain aligned.
To be producing at the same level given some of the parts shortages that are that are out there.
But at least and what we supply that goes into auto OE and were seeing pretty good demand.
Yeah.
Thanks, and I appreciate that and maybe a quick one if I if I may on just raws.
And the high single digit inflation that you guys guided towards are you willing to quantify that at all in terms of what your expectation is on the cost line what that means for the rest of the year.
And when you think about are all going through Cogs, that's 1.2 to $1 3 billion.
So I mean, you can do the rough math there.
Got it thank you.
Thank you our next questions come from the line of Prime day, and with our field Research. Please proceed with your questions.
Thank you.
One is really on the E V. If you look at your traditional sort of automotive OEM coatings coating business.
And compare it to.
Some of your new customers, how should we think about market share technology and also profitability in sort of a coating and IC car versus that and EV car.
That's my first question and then just the second question really is around raw materials, but it's more about purchasing pattern so and.
And the time, there you're seeing good demand from your end markets and the.
Raw material shortages and how much pre buy and do you guys generally engage or how much pre buy and would your procurement organization and engage and sort of the first half of all of 2021 really to secure raw material supply.
<unk> sort of that demand thanks, a lot.
On your first question regarding internal combustion engines versus electric vehicles.
We're very supportive of the growth in electric vehicles, because not only do we coat the exterior of the of the vehicle, but we also as you know.
Have a very growing business.
In electric motor coatings, and that business is growing and expanding and is going to expand into other portions of the electronic powertrain and electric vehicles. So we're happy to see.
Vehicles Switchover and fact every every electric vehicle that switches over from <unk> is great. Because we have that additional additional content content per vehicle and those coatings or at a very attractive margin. So we're very supportive of that and we work with some of the top electric vehicle companies.
In the world and are rapidly expanding our portfolio and that in that regard.
In terms of.
Essentially what you're asking about operational hedging of raw materials, we will pre buy.
Or and engage and other contracts to secure raw materials at attractive prices just depending on just depending on market conditions. So yes operational hedging is something that we do engage in.
Okay. Thanks, a lot.
Thank you and that is all the time, we have for questions. This morning, I would now like to turn the call back over to management for any closing remarks.
Yes, it's Chris Mccrary and thank you all for joining this morning, and I just want to remind everybody that we're hosting a capital markets day on May 5th you can pre register for that on our website and we really hope that you join us for that and it should be well worth the time. Thanks for joining this morning and goodbye.
Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time.
Have a great day.