Q4 2021 Axalta Coating Systems Ltd Earnings Call
Ladies and gentlemen, thank you for standing by.
Welcome to exhaust this fourth quarter and full year 2021 earnings conference call.
All participants will be in listen only mode.
And answer session will follow the presentation by management.
Today's call is being recorded and a replay will be available through February eight.
Those listening after today's call should please note that the information provided in the recording will not be updated and therefore may no longer be current.
I will now turn the call over to Chris Christopher Gray. Please go ahead Sir.
Thank you and good morning. This is Chris Mcrae V P of Investor Relations and Treasury. We appreciate your continued interest in exalt and welcome you to our fourth quarter and full year 2021 financial results Conference call. Joining me today are Robert Bryant, CEO and Sean Lannon CFO .
Yesterday afternoon, we released our quarterly and annual financial results and posted a slide presentation, along with the commentary to the Investor Relations section of our website and exalt, the dotcom, which we'll be referencing during this call also on January 25th we published a set of best in class ESG goals, including 10 commitments for 2030, which you can also referenced.
On our Investor Relations website for more details.
Both our prepared remarks and discussion today may contain forward looking statements, reflecting the company's current view of future events and their potential effect on the golf 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 those forward looking statements. This presentation also.
Contains various non-GAAP financial measures.
In the appendix. We've included reconciliations of these non-GAAP financial measures. 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.
Now I'll turn the call over to Robert.
Good morning, everyone.
To welcome you to our fourth quarter and full year 2021 earnings call our quarter and full year were marked by ongoing strong demand conditions and solid execution by our team, but also by ongoing challenges in the supply chain and input cost inflation.
Fight. These factors, we executed very well against this climate generating year over year sales growth substantial incremental pricing to offset inflation and strong free cash flow.
We further demonstrated ongoing solid capital allocation with continued share buybacks as well as completing two acquisitions during the year, while still ending the year with a very strong balance sheet.
I would like to thank all <unk> employees for their continued efforts in the quarter and also wish everybody continued health and wellbeing as the pandemic continues to impact our lives in a variety of ways.
Turning to operating performance in the fourth quarter. It's also reported strong year over year net sales growth from three of our four end markets, while customer production constraints continued to negatively impact light vehicle.
Fourth quarter net sales increased 7% year over year ex FX, including a contribution of 4% from acquisitions.
Volume growth was a clear highlight in our performance coating segment, increasing by 5% with both end markets contributing meaningfully.
This marks our fifth consecutive quarter of year over year gross within industrial and fourth consecutive quarter for refinish.
Within mobility coatings.
Commercial vehicle end market also showed volume growth of over 7%.
Light vehicle was an outlier given the known semiconductor challenges.
Price was positive in all four end markets. Despite some headwinds we saw within product mix in the quarter.
Is this demand in the quarter remained strong and stable across all of the businesses.
But raw material inflation and supply chain constraints significantly impacted both sales volumes and our cost structure.
Finished saw stable overall demand in the quarter with net sales up 12, 8% year over year or six 6% before currency and acquisition contribution.
Which was up sequentially versus third quarter for acquisitions and FX impacts.
We also ended the quarter with substantial unfilled order backlogs due to supply constraints.
Industrial net sales increased an impressive 16, 3% or 13.9% ex FX before acquisitions.
Similarly, strong growth throughout 2021, and reflecting strong overall global industrial goods demand.
Light vehicle net sales declined 13, 7% ex FX in the quarter versus the prior year with volume still constrained by chip shortages that our customers and only moderately improved from the third quarter.
This was reflected in sequential global automotive production growth with fewer shutdowns occurring in the period.
Commercial vehicle net sales increased eight 4% ex FX in the fourth quarter, driven by ongoing strong production rates and some share gains from non truck customers, including recreational vehicles and sporting equipment Oems.
Adjusted EBIT for the fourth quarter was 121 million versus $205 4 million in the year ago quarter as the business was impacted by significantly higher variable cost inflation.
Approximately 24% year over year in the fourth quarter.
Supply chain shortages companywide and headwinds from the absence of temporary cost savings through 2020.
Partly offset by growth and strong execution across both performance coatings end markets and in commercial vehicle within mobility coatings.
Refinish ended the year with substantial price pass through to offset inflation and margins and absolute adjusted EBITDA contribution at all time highs. Despite a notable impact on volumes given the lasting impacts of Covid.
Fourth quarter business conditions across the company remained stable and generally strong despite supply chain challenges.
Refinish, although modest saw continued demand improvement, including both traffic and body shop activity with some variability by country.
Part shortages body shop technician shortages, and some impact from Amazon and traffic in body shop staffing created challenges for our customers in the quarter.
New business volumes increased sequentially from the third quarter organic volumes remain down approximately high single digits below 2019 levels, suggesting continued meaningful room for improvement looking ahead.
This included some quarter end backlog that was unfilled due to supply and operating constraints.
Exalt is industrial end market remains robust globally, and net sales increased 17% ex FX and 13, 9% on an organic basis against a strong prior year comparison, indicating underlying demand strength as well as demonstrating success in our organic growth execution.
The topline was still constrained by supply chain headwinds in the period and to a greater degree than during the third quarter inclusive of both raw material supply dynamics as well as logistics and labor challenges.
Topline growth was strongest in North America, followed by EMEA and was led by the building products and general industrial businesses.
Light vehicle saw continued constraints at the customer and end consumer level.
Global vehicle production for 2021 increased only two 5% from the prior year, which of course was dramatically impacted by the pandemic principally during the second quarter of 2020.
Due to supply shortages, some $9 6 million vehicles were deferred during 2021 against the original industry production estimates, although the quarterly vehicle deferral amount decreased from $3 5 million vehicles in Q3 to $2 1 million vehicles in Q4 as chip availability improves slightly toward here.
At.
The fourth quarter impact was also 1.4 million vehicles below the high end of the forecasted range of potential production impacts from October 2021.
Commercial vehicle demand remains robust through year end with notable strength in North America retail sales.
Current North America backlog remains near all time highs and we expect strong production rates to be sustained throughout 2022.
Exalt assault intensified cost inflation during the fourth quarter coming from a broad set of raw materials due to supply dynamics and continued high feedstock prices, but also from packaging freight logistics and labor costs.
We ended the fourth quarter with 24% raw material cost inflation.
Then our 20% expectation from October and about 15% for the full year.
We were and continue to be successful and our actions to offset this inflation through incremental pricing during the fourth quarter.
We implemented price increases in all businesses during Q4 and price mix increased three 6% in the period, while pure price increase by mid single digits versus the prior year, given the negative mix effects seen in both segments.
<unk> also continues to offset inflation be a structural cost control.
We continued to benefit somewhat from the persistence of lower selling expense and functional savings that were implemented during 2020.
We realized slightly over $50 million in exalt waste savings this past year.
Including a benefit from the previously announced restructuring actions.
The integration of the equal business acquired in September 2021 is progressing well and our commercial synergies are quickly coming to fruition.
The business closed the year on plan from a net sales perspective, though it was modestly impacted by incremental inflation at the adjusted EBIT level similar to the rest of refinish.
Actions are being executed to fully offset this inflation in early 2022 to put us comfortably on the original business case.
We're very pleased with the progress on the Eupol business integration in recent months have confirmed our bullish view of the future growth opportunity for this business.
Turning to E S G.
<unk> also has made significant headway with our program since its inception in 2013.
We published our first sustainability report in 2013 and set initial ESG goals in 2017.
I'm thrilled that last week, we published a set of long term ESG and sustainability goals each of which have a substantial impact in their respective categories.
Is that these 2030 goals, we conducted a comprehensive ESG materiality assessment last year with a broad set of internal and external stakeholders.
We also worked to align with the United Nations sustainable development goals in developing our ESG framework structured under three key pillars.
Planet solutions focused on ensuring a more sustainable future for our planet with goals aimed at maximizing our environmental performance and reducing the impact of our operations.
Business solutions, which concentrates on how exalt is products services and technologies can help customers accelerate their own sustainability initiatives and achievements.
And third people solutions, which is rooted in inclusivity integrity safety and engagement.
To ensure that exalt continues operating and fostering an environment, where all our people can thrive.
Exalt is published targets include 10, new sustainability commitments for 2030.
Key among these is the commitment to produce sustainable benefits from 80% of exalt is new technology and innovation developments.
We're also committing to an absolute reduction of 50% of scope, one and two greenhouse gas emissions by 2030.
On our way to becoming carbon neutral in our operations by 2040.
This would be a decade ahead of the deadline set by the Paris agreement on climate change.
That said each of our individual targets are of critical importance and represent a step forward for <unk> and achieving long term goals to build a more sustainable future.
Exalt is seeks to lead the coatings industry by example, as well as to inspire our customers and other stakeholders by jointly ensuring the long term well being of the planet our business partners and our business.
I'll now turn the call over to Sean for some additional remarks.
Thanks, Robert and good morning.
As you've heard fourth quarter saw both stable and broadly positive demand conditions, but also continued challenges from cost inflation and supply chain constraints net sales of $1 1 billion increased five 8% year over year for the fourth quarter, while constant currency net sales increased three 1% on an organic basis driven by demand strength across most.
Of our businesses.
This constant currency organic net sales growth included a nine 6% increase from performance coatings offset by a nine 3% decrease from mobility coatings, reflecting light vehicle down 13, 7%, while commercial vehicle was up an impressive eight 4%.
Fourth quarter volume declined 5% with mid single digit increases from three of our four end markets more than offset by a single mid teen percentage pullback in light vehicle volumes due to the semiconductor constraints impacting customer production.
Price mix contribution increased three 6% in the aggregate driven by improvement in both segments and all four end markets, however, stronger than performance coatings versus mobility coatings mix was a moderate headwind falling on a similar dynamic from the third quarter.
Excluding product mix effects overall pricing improved mid single digits for the quarter.
FX translation was a headwind of one 2% for the fourth quarter, driven by the euro and the Turkish lira offset partially by the strength in the Chinese renminbi.
Fourth quarter, adjusted EBIT was 121 million versus $205 million in the prior year quarter, reflecting strong demand and volume trends in performance coatings as well as the commercial vehicle end market, which was more than offset by light vehicle volume headwinds substantially increased variable input cost inflation and lower temporary cost savings real.
Lives versus the fourth quarter of 2020.
Performance coatings fourth quarter net sales increased 14, 2% year over year, and 15, 6% ex FX driven by 5% higher volumes of.
Four 6% increase in average price mix and a 6% increase from acquisition contribution.
Refinish reported a 12, 8% net sales increase or 14, 7% ex FX driven by improved global volumes versus the prior year and by a high single digit contribution from Newport acquisition, which closed in September refinish.
Refinish volumes also increased moderately on a sequential basis, along with body shop activity in the period. The growth was impeded somewhat by supply chain and logistics constraints in the fourth quarter with significant open orders remaining at year end.
Refinish price mix increased low single digits during the fourth quarter inclusive of a product mix headwinds from mainstream and economy product growth net pricing was up mid single digits before mix effects.
Industrial Q4, net sales increased 16, 3% or 17% ex FX driven by mid single digit improvement in both volume and average price mix as well as low single digit acquisition contribution to net sales.
Demand trends in most of the industrial businesses. We serve remained healthy during the period with the exception of automotive and wind energy and with particular ongoing strength from North American housing and remodeling.
Similar to refinish supply chain constraints also impeded further growth within industrial in the period.
Performance coatings reported Q4, adjusted EBIT of $99 7 million versus $129 5 million in the fourth quarter of 2020, driven by ongoing volume growth and drop through benefits of a stronger average price mix more than offset by significant headwinds from higher variable costs and lack of temporary cost savings which benefited.
The prior year quarter.
The adjusted EBIT margin for the segment decreased to 12, 4% from 18, 4% in the prior year record setting quarterly rate given the drivers noted before.
Mobility coatings net sales decreased nine 3% in Q4 ex FX, including an 11% decrease in volume, partially offset by a one 7% improvement in average price mix.
Light vehicle net sales decreased 13, 7% ex FX in the quarter, including a mid teen volume decrease.
Largely in line with global auto production rates price mix increased low single digits in the quarter versus the prior year, which included a component of negative mix in the period.
Commercial vehicle Q4, net sales increased eight 4% ex FX driven by strong truck production globally, excluding China price mix increased low single digits inclusive modest negative mix differences from the prior year.
Mobility coatings reported a Q4 adjusted EBIT loss of $3 5 million versus income of $47 9 million in the prior year quarter, adjusted EBIT and associated margins in Q4 were impacted by the severe volume drop and further impacted by increased cost inflation with only modest offsets and positive pricing which began to occur.
True during the third quarter and continued during the fourth quarter. We are confident that expected demand recovery price increases and cost control will return in the mobility business to operating profitability, though it remains cash flow positive today in adjusted EBITDA terms.
Exalt is Q4 balance sheet and liquidity profile remains solid we ended the quarter with approximately $1 4 billion in total liquidity, including approximately $841 million of cash and cash equivalents on the balance sheet and approximately 528 million of available capacity and our undrawn revolver.
During Q4, we also completed several asset sales for net proceeds of $25 4 million illustrating ongoing focus on asset efficiency and cash flow.
Our net leverage ratio ended the quarter at three five times, even with Q3 levels driven by increased cash at the period end offset by lower latest 12 months adjusted EBITDA.
Net leverage remained somewhat elevated due to the <unk> acquisition that was funded from our balance sheet in September while the adjusted EBITDA contribution only reflects a partial year from the acquisition.
The company also repurchased $30 million and total shares in the fourth quarter for a full year 2021 total of $243 $7 million.
Free cash flow for the quarter totaled $249 4 million versus $256 million in the fourth quarter of 2020, a very strong result, considering somewhat lower operating profit year over year for.
For the full year free cash flow totaled $455 million.
Versus $441 7 million in 2020 again, demonstrating exalt is focus on cash flow and finishing the year with a strong total liquidity position to continue to enable effective capital allocation rigor.
Regarding our financial outlook, we have outlined the key expectations for the first quarter as follows for Q1 net sales, we expect approximately 5% year over year growth, including a 3% FX headwinds and a 4% positive M&A contribution.
This assumes performance coatings growth of mid to high teens offset by mobility coatings contraction of mid single digits. The topline guide also reflects pricing of mid to high single digits.
We expect to generate adjusted EBIT of $100 million to $120 million in the first quarter with DNA of $81 million inclusive of $24 million of step up D&A interest.
Interest expense for the quarter is anticipated to be approximately $32 million.
For adjusted earnings per share, we anticipate a range of 22 to 29 for the first quarter inclusive of an FX headwind of <unk> <unk> per share and a slight step up in anticipated income taxes within our first quarter forecast, we further assume raw material inflation of approximately 25% to 27% versus the <unk>.
First quarter of 2021, which the growth rates slightly higher than the fourth quarter of 2021.
As we look at the full year, we expect to see net sales growth continue driven by solid performance coatings growth from both refinished recovery and market share gain coupled with ongoing industrial coatings organic growth.
For mobility, we expect net sales growth slightly ahead of global production for both light vehicle and commercial vehicle given specific customer exposures and organic growth expectations for 2022.
Further we do expect to see an uptick in global production builds based off of industry forecasters.
Net sales growth are also expected to be somewhat offset by modest FX translation headwinds driven largely by the euro Turkish lira and Brazilian real.
Regarding cost factors. Our current assessment is that the rates of overall raw material and other cost inflation will continue at high levels near term, but may stabilize during the first half of the year based on current expectations for feedstock pricing.
For 2022 given current baseline expectations and assuming Brent crude around the mid eighties, we expect raw material inflation in the low double digits with peak inflation occurring during the first quarter that said substantial uncertainty around all aspects of cost inflation, coupled with lack of clear visibility around timing for supply chain shortages to.
<unk> informs our decision to limit full year earnings guidance at this time with.
With continued planned and expected pricing actions. During 2022. However, we also expect to fully offset anticipated inflation within the year, while we're not providing full year guidance. At this time, we do anticipate stronger profit performance. This year versus 2021, and we'll hope to refine our reviews of specific guidance elements as the year.
Regresses.
Thank you Sean I'd like to close out by simply noting that we had X also remain committed to creating value for our shareholders. We believe the path to substantially higher levels of earnings per share remains very much in view, despite the near term challenges associated with inflation headwinds and supply constraints.
This starts with the anticipated recovery in automotive volumes back to prior peak levels over the course of several years, including some anticipated relief and chip supply to enable growth in 2022.
It has furthered by ongoing solid organic growth in industrial and backed by expected net sales growth from refinish from both market share gains and modest further recovery from cyclical lows, which bottomed during 2020.
Ongoing topline growth, coupled with expected abatement of raw material inputs and calmer overall cost inflation over time.
Should clear a path to margin recovery, and perhaps enable new margin highs overtime.
Exalt has already proven an ability to navigate challenging environments and we're confident in the team that we have in place to execute our growth plans, while continuing to respond to operating and cost challenges.
I'd like to express my sincere thanks to our entire global team for all the hard work that was completed during 2021, and we look forward to demonstrating what our team can accomplish during 2022.
With that we'll be pleased to answer any questions. Operator, you can open the lines for Q&A.
Thank you well now be conducting a question and answer session.
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One moment, please while we poll for questions.
Thank you. Our first question comes from the line of Steve Byrne with Bank of America. Please proceed with your question.
Yes. Thank you so so robert's been little over a year since you ripped out the legacy matrix structure and brought in some new leadership just curious what metrics do you look at to assess whether the.
There have been benefits from either you know cross selling or regional expansions or maybe even some technology transfer.
Transfers to different products or anything you can see there or is it too challenging given the level of disruption.
We're very pleased with the organizational pivot and what it's enabled in terms of accountability decision, making and cross business unit collaboration just as one example, if we think about our electrification a platform and how that market is evolving very quickly in terms of you know whether there.
Purchase decision around.
And our energy solutions coatings and the products. They go on is in the automotive tiers in an industrial customer actually I didn't OEM customer. It's actually now at all three so we have a lot of cross selling and cross collaboration going on across across the business units.
And that's been quite beneficial so again overall, we're very happy with regard to the metrics.
We look at all the typical metrics in terms of sales profitability and free cash flow and return on invested capital not only at a total company level, but also at an individual business unit level.
Yeah.
Thank you for that and just curious about light vehicle.
You got the 11% or maybe this is mobility broadly, but 11% reduction in volume.
In the quarter and presumably you have your customers are not running flat out do you have the ability to two <unk>.
Flex your staffing as a result of that or is that fixed cost drag just remain in place and thus I'm you know, it's not until you see volumes recover that you'll see that our absorption and improve or is there something you're doing that might lead to you know an expansion in margins when the.
When the business returns to more normal operating rates.
Doing the mobility business.
We're principally focused on three actions are the most important of which are our pricing actions followed by cost management and then flexibility within our cost structure. So we're working to offset the majority of the inflation that we're encountering through.
Through pricing actions, our cost structure, we continue to manage it quite tightly until volumes come back and we're really only making targeted investment that's related specifically to wins to support our customer launches in our in our sales our sales activities. We've also been working with.
The operations organization to ensure that we've got flexibility in.
In our in our cost structure and that we can vary those costs, depending upon volume levels. We've also been looking at different models for our sales technical resources and in support and were working to flexible is those costs as well.
Thank you.
Our next question comes from the line of Ghansham Panjabi with Baird. Please proceed with your questions.
Thanks, Good morning, everybody just as a follow up to Steve's question, you know a specific to the fourth quarter. It looks like it sounds like light vehicle was a little bit better than your forecast is just based on production and then commercial was also a relatively healthy.
And then the EBIT loss was pretty much comparable to <unk>.
For the third quarter, just curious as to why why why it wasn't better than than you initially forecasted.
Yeah, I mean, the main driver just globally for exalt why we missed the initial guidance for the fourth quarter was really raw materials related we saw an uptick.
Up to 24% in light vehicle.
Bearing some of that and that's why you saw a little bit more margin contraction in the fourth quarter.
And then in your prepared comments, you called out a $200 million type bronchial cost inflation number for 'twenty one.
Is that a comprehensive.
Low double double digit inflation for 2022, as well is that 200 million roughly comparable to our inflation.
Inflation of about 2022 will be roughly comparable to that $200 million is that the right way to think about it and then specific to 'twenty, one how far behind where you on price cost.
Yeah. So gautam your math is roughly correct. We are expecting about $200 million in 2020. So you saw we got about $150 million in price you know roughly 4%.
We stated on our consolidated results, so youre looking at low better than $50 million of a gap on price versus cost.
Very helpful. Thank you.
Our next question is coming from the line of John Mcnulty with BMO capital. Please proceed with your questions.
Yeah. Good morning, Thanks for thanks for taking my questions. So I guess it maybe we were a little bit surprised on the the the momentum behind pricing or maybe the lack of it. It seems like it was roughly in line with this with the type of pricing that you saw in the third quarter. Despite a higher raw material kind of headwind. So I guess how should we.
Would be thinking about that going forward and if we can see some incremental momentum as we kind of pushed through 2022.
So.
What you saw in the fourth quarter, we were a little bit more impacted with mix excluding mix. We're in mid single digits largely in line with the third quarter I would call out on the mobility side, we've talked a bit about our indices that are in place.
With those indices the raw material inflation is really being priced off the average of the first six months of 2021 that.
We are in place through December so that will reset again on January 1st and we've characterized 25% to 30% of our contracts are on indexes, that's probably closer to 35% now and with inflation that we saw a third quarter in the fourth quarter with those going into effect January 1st you will see an uplift and just.
As far as our guidance for the first quarter, we are expecting.
Mid to high pricing whats youre going to see that obviously, a little better than the fourth quarter.
Got it that's that's helpful and then with regard to your outlook for autos or the light vehicle segment. It sounds like youre going to have at least a little bit of lift relative to kind of overall industry build rates can you help to quantify that a little bit I know you've won some business that should come in towards the end of the year I guess.
If if the forecasts are right that the industry grows at eight 5% give or take or I guess, what does that what does that mean for for exalt with some of the new business wins the share gains that kind of thing how should we be thinking about that.
Well, let me provide I guess, some additional context in particular around the phase one I think the quarterly phasing. There is important so if we look at 2021 total auto builds were 76 million units per IHS.
In IHS as full year 2022 base case build number it's about 83 million light vehicle units in the downside case of 76 million units or 2022 full year base case is 79 million units based on the historical forecast error that.
That we've seen from IHS as well as input from our customers. So for Q1 and in particular as we think about phasing in new business coming on for Q1. The IHS build number is down about two 2%.
First quarter 2022 versus first quarter of 2021, which is based on essentially flat lining the 83 million builds across the year for roughly $20 million to $21 million builds per quarter. Now Q4 of 2021 builds were actually 24 million units. So we then took that number and adjust.
Did that number down for expected later than normal plant startups and Chinese new year to arrive at approximately a 17 million dollar light vehicle build rate for our estimate for Q1 now it may be the case that we're taking a little bit more of a conservative view on the first quarter, but we believe that this is a solid.
Base case assumption given historical data variation market conditions, and then the potential ramp up of builds during the year just has more semiconductor chips become available and then of the $130 million in new business that we've won in 2021 that will come online in 2022 and 2023.
That's pretty heavily backend loaded to the second half of the year as well as the first quarter of 2023.
Got it that's helpful color. Thank you very much.
Our next question coming from the line of Vincent Andrews with Morgan Stanley . Please proceed with your question.
Thank you and good morning could you talk a bit more about the mix issues I know when we finish it was a continuation of this of the migration to economy type.
Products is that going to reverse at some point in 'twenty, two and become a become a tailwind for you folks and then mobility, what what is it that's exactly happening there versus it sounds like in commercial vehicle, you're getting a benefit. So if you could just unpack what's going on and then give us a sense of whether it's going to move for you or against you as we move through 2022.
So with regard to mix on the performance coating side, you correctly point out that it's the it's the growth of our mainstream and economy and we saw quite a bit of that in the fourth quarter just given some of the commercial initiatives that we've had but you've also had the impact of slightly lower refinish activity over.
All in particular with some of the larger MSR customers in.
In the fourth quarter as they experienced labor and parts shortages in particular, so the buy of that richer premium mixed paint was lower in Q4 than you might have typically seen so that exacerbated certainly what we saw in performance coatings and then in mobility coatings the unfavorable mix was.
Really one due to due to product mix, we sold a little bit more of a slightly a slightly lower margin products and then we also had some growth in our <unk> business in Asia Pacific, which is that in a lower average average selling price some of which gets captured in pure price and some of it.
It gets captured in mix.
But I think if we look at overall kind of mobility tracking you.
You can see that in.
We've seen pure price increase from 2% in Q3 to two 8% in Q4, and then as Sean mentioned with the indexation coming into place we will see that number tick up here as we go sequentially forward Q1, Q2 et cetera.
And Vincent just to add I just note, there's nothing structurally that changed as far as mix issues, we're not forecasting any sort of major mix aspects for the for the first quarter for the full year for 2022, but presumably it will be an easier comp in the fourth quarter of 2022 for refinish in particular.
We saw about a 3% negative mix come through in the fourth quarter of 2021.
Okay. Thank you and maybe just as a follow up could you talk a little bit about where you sit on the temporary cost reductions coming back versus versus your plan.
Yeah, so hard to say exactly we're eliminating guidance just because you know the world is constantly changing on us here, but we've continued to see you know roughly $10 million to $15 million each quarter and temporary savings at least for the first quarter.
Expect that to show up in our results.
Okay. Thanks very much.
Our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your questions.
Thank you good morning, Robert Sean do you expect any permanent our exalt way saving cost savings in 2022 versus 2021.
Yeah again, we're limiting guidance, but the plan is to at a minimum offset fixed cost inflation. There is clearly structural savings that we've previously announced that will amount to about $10 million.
But the difference will be you know continued productivity projects, but we'll give more updates when we give guidance at the end of the first quarter Dave.
Got it and just looking at our uses of.
Free cash flow, how do you look at buybacks versus debt reduction in 2022.
So given our cost of debt is still sitting below three 1% and it doesn't necessarily have attractive returns I think we'll continue to deploy the majority of the excess free cash flow for share repurchases as well as M&A. We will look to continue to build cash on the balance sheet beyond that.
Thank you.
Yeah.
Our next question comes from the line of Kevin Mccarthy with vertical research. Please proceed with your questions.
Good morning, Robert I was wondering if you could talk through some of the labor challenges in more detail. So for example.
On an internal basis, you know what impact did that have on your ability to produce and deliver and then externally.
You know how significant is that issue, becoming among body shops, and perhaps other customers and do you think its getting any better or worse, you know looking into the first quarter.
Yes, it's a great. It's a great question.
And exalt, so we've seen some labor constraints hit us certainly across the fourth quarter and specifically due to the surge in omicron, Although I don't think we'd characterize the impact is.
As equivalent to the impact we saw from material supply or logistics headwinds, but it certainly was an impact our overall maximum kind of absenteeism in December was around 15%.
But we think about labor challenges with our customers Covid related I've seen theism is definitely having an impact.
The broader the broader challenges impacting in particular on the refinish business. The larger body shops continue to be technician availability, which is related to labor and parts availability and some of our largest customers reported an increase in with a related to labor and paint shortages and in fact.
If you look at the average number of rental car days.
For people, who had their vehicle fixed in December that that number of days went up by four days. So it's taking longer for people to get their car fixed and that has a lot to do with labor shortages.
And then secondly, I think you mentioned that in the U S or North America body shop activity remained about 12% below 2019, if I got that right.
Is that the new normal what do you what are you planning for in terms of body shop activity and 2022 relative to 2019.
We don't think that's normal we still do not have normal traffic patterns in terms of people, even getting back to a hybrid work environment.
And the school certainly we've seen some of that traffic come back, but there are spots in the country where it's.
It's not it's a little bit start a start and stop and we havent seen office occupancy rates come back yet either so I think what we're what we're hoping is that once we get on the other side of omicron that we're going to start to see.
People return to the office and more of a of a much greater hybrid percentage in terms of time spent in the office versus time.
Versus time spent at home. So I think overall, we're optimistic but you know as we've said it all hinges upon recovery recovery from Omicron.
Thanks very much.
Our next question.
Comes from the line of Chris Parkinson with Mizuho.
And with your questions.
Great. Thank you very much.
The industry has been setting several key raw material shortages across additives and in some cases intermediates and other inputs yet global force majeure activity appear at least appears as if major suppliers are improving supply at least heading into the year, although some others are still taking maintenance.
As it pertains to your portfolio and just exalted.
What inputs are still missing are there differences by region just any color on how you believe this evolves will.
He will be greatly appreciated thank you.
Thanks, Chris.
We continued to see supply disruptions in the fourth quarter. There were roughly about 20 force matures in the coatings value chain. We also saw deepening energy challenges in Europe , and then in China with the dual control policies on carbon emissions as well as carbon intensity and continued impact.
From limited global logistics capacity and higher costs.
If we think about.
Overall shortages, we've seen tightness in several and several materials due to supply chain disruptions as well as kind of alternative value chain demand specifically.
Specifically isocyanate acrylic emulsions certain polyester resins, those have really been the most challenging during the second half of 2021.
And if we think about the overall situation, we have secured supply and largely been able to keep pace with strong demand for our products, but there have been some impacts on sales volumes as well as impacts at the customer level, which has constrained potential volumes.
Yeah.
And just a super quick follow up on that based on that last comment are you confident that you have just given this is affecting all of your primary peers and most obviously geographies is it safe to say that this is not a case of you know any lost business and this is factoring into pent up demand for 'twenty two.
Yes, there is certainly a question I mean, certainly there are spots, where we may be short on a given product and a customer may need to source. It from a competitor Likewise, we've had situations where one of our competitors hasn't been able to supply.
And that customers come to us and ask us to supply and we've been able to do that I don't think that there have been major markets change shifts or market share shifts.
Between competitors, but there's certainly been spot particular moments days or weeks, where we've had to step in or one of our competitors have had to step in where it's a dual supply scenario for example.
Very helpful. Thank you.
Our next question comes from the line of Alex you're far enough with Keybanc. Please proceed with your question.
Thanks, Good morning, everyone. The.
The midpoint of your EBIT guidance for first quarter is roughly $10 million lower sequentially. So I'm just trying to understand the sequential bridge at a high level, our costs rising faster than price or volume slower or is something else going on.
Yeah, It's really raws are really accounting for the vast majority when we saw a 24% year over year headwinds in the fourth quarter.
We're seeing 25% to 27% with a really peaking in the first quarter that amounts to about $10 million to $15 million and then we're seeing some margin headwinds in freight and logistics and labor pressure.
As you know being largely offset by the uptick in sales you'll see our guidance for the first quarter versus the fourth quarter is up about 2%, which correlates to about $20 million.
And then the only other.
Item to mention of.
Less effect of course is just the incremental FX impact, we're seeing and there is some small return of opex related to some of the product launches and developments we have.
Okay. Thank you very very helpful in light vehicle.
You'll have your indices are pricing. This is really sad on January 1st.
Those generally reset to an average cost for the second half of 'twenty, one or exit costs from December 21, So what will you be fully caught up on those index resets or.
We're still kind of under water.
Some time, maybe first half of 'twenty two.
Yeah. So I mean, all the contracts are a little bit different but generally the way to think about it as the average six month.
<unk> spend.
That'll be reflected but given we're expecting raw materials to continue to inflate in the first quarter. They are still going to be slightly behind.
Thank you.
Our next question is from the line of chest caucus with Jpmorgan. Please proceed with your question.
Thanks very much.
In the quarter, where did you stand with recovery of raw material inflation in refinish.
Yeah.
So we're caught up in refinish Jeff.
Okay.
And.
In the.
And the auto OEM business when you look at your customer base.
Are there wide differences in your ability to recover raw material inflation that is with some of your large customers youre doing very well and with other customers or are you doing much less well or is it pretty even across the customer base.
I think Jeff it varies somewhat by customer and it varies somewhat by by region.
As well as regional mix of competition. So I think as Sean said that certainly the indexing and we're pushing toward.
Took towards more indexing just to make this up automatic and and easier, but I think overall as we think about as.
As we think about price capture.
In our business I think that we're well.
We don't believe that we're behind the market in price capture if you look at like for like businesses.
And OEM some of our peers include for example business volumes beyond light vehicle exterior body coatings, which of course are our products and that will include some businesses that we include within industrial including certain tier suppliers that serve automotive.
So although we acknowledge that we're not where we want to be we don't believe that we're behind our competition.
Especially given continued inflationary cost headwinds, but we're very focused on offsetting cost inflation in our business during 2022 and as Sean highlighted we've seen the number of we've seen that number go from 25% of indexes to 2020 to a little bit more than 30% at the end of 2021.
We expect that to continue to increase.
Great. Thanks, so much.
The next question is coming from the line of P. J <unk> with Citi. Please proceed with your questions.
Yes, good morning, Rob.
Robert You mentioned couple of times negative mix impact in both of your segments. I was wondering if you could talk about what kind of mix impact you are seeing in each of the segments.
Sure I think I think in terms of the segments we.
We entered that question earlier, but I'll be happy to provide a little bit more color in the refinish business. We've continued to see the growth of mainstream and economy products, that's really taken off, especially with some of the new product developments.
That you've probably read about in our press releases over the past six months in.
In Asia in certain parts of eastern Europe , as well as in as well as in Latin America. Those are sold at lower price points still attractive margins, but lower price points and so that's certainly that's certainly one impact.
And then in the mobility side, it's really a function of customer mix as well as regional mix that has created that that mix differential.
Okay and then.
You know many companies have different views on this chip shortage is going to be resolved.
The auto companies they tend to be more optimistic chip companies are saying one but it is also linked to the 2023 somebody was saying 2024.
Mark showed exactly with chips, they weren't putting too, but where do you stand on when do you think.
Could begin to see some positive comps and auto OEM.
So we'll give you our well give you our view from obviously speaking with chip forecasters and our customer base I mean, I think the market forecast assume improvement in inventory and overall chip supply beginning in the first half of 2022 with a little bit more stabilization in the second half of 2022.
We think that the broader kind of one off supply chain issues unless something happens.
Could subside in the first half, but we still do expect longer lead times for chips in the second half versus what they were pre pandemic.
We think that there's going to be some improvement this year and perhaps normalization in 2023 as we start to see additional chip capacity come online and then that should free up capacity for specifically automotive end markets.
Great. Thank you.
And I'd just add one additional one additional thought there which is the auto industry. They haven't been standing still they've been.
Obviously, if recognize this as an issue and are aggressively taking action I mean, we've seen our OEM customers adapt pretty quickly to situations I mean, they're ordering chips with longer lead times, they're prioritizing vehicles with the highest profit margins like trucks and Suvs, they're removing features from certain.
Vehicles in many people's dismay, but as necessary and they are reducing the number of unique chips that are being used in consolidating down to fewer more easily available chips and then lastly, they're redesigning systems with more standardized chips as well as different architecture to really reduce the level of <unk>.
Intensity I think the first actions that I mentioned, there can actually have a benefit in 2022 and some of the redesign of the chip architecture. That's more of a 2023 2020 for impact.
The next question comes from the line of Mike Sison with Wells Fargo proceed with your question.
Hey, guys good morning.
Just curious when you think about mobility cutting margins have been kind of bumping the breakeven for the last couple of quarters.
What what's the build rate sort of gets you firmly above.
You know breakeven are you going to get there with the $83 million this year and then.
Is there a certain build rate you need to get to to get back to double digits.
At 11% or so that you did in the first quarter of 'twenty one.
Yeah.
So Mike I, just I want to point out because the EBIT is still impacted by the step up depreciation and amortization from the initial carve out from Dupont.
Yes.
Did want to call EBITDA itself, I mean, we're going to have slightly over 10% EBITDA margins.
For the full year. So we still are cash flow positive in that business and I think it's an important highlight but if we get to the 79 million builds.
We'll certainly be EBIT positive.
For mobility for the year.
Slight uplift versus where we are today for the full year 2021 will put us in a in a profitable stage I think everything we've done on our cost structure as well as what the pricing coupled with the fact that as volumes pick up there's going to be much better absorption you're going to see this business you know quickly get back to profitability.
Yeah, I would just and then I would just reiterate what Sean said there is that if you look at what we've done in costs in the mobility business. We have taken significant you know done significant cost reductions in that business at this point, it's all about.
The drop through effect of volume as well as price increases those are the really the two key levers.
Understood and then.
For 'twenty two it sounds like you're signaling that adjusted EBITDA will be up from 'twenty to 'twenty, one I understand hesitant to give specific guidance, but when you think about the range of possibilities.
Yeah. What are you most worried about in terms of being able to do to grow this year and if there was surprises to the upside where do you think you can see that potentially.
Well the key variables.
Both to the upside as well as to the downside, but certainly be macroeconomic macroeconomic changes.
<unk> political events and the impact that that could have on growth.
Cost inflation and the price of oil.
And changes in assumed auto builds and then lastly of course I think we'd have to mentioned Covid I think our hope is that we're kind of coming down the backside here with with omicron and hopeful that theres nothing that theres nothing beyond that and that we start to see overall business and global conditions.
Get back on track to normal.
Thank you.
Our next question is from the lineup of Arun Viswanathan with RBC capital markets. Please proceed with your question.
Good morning, Thanks for taking my question I.
I guess just two questions. So first off in light vehicle I guess I've heard that maybe February March.
We're already in February , but I guess maybe in March.
You guys would get a better picture of somebody out of suppliers have been saying that they'd get a better picture on on full year production would you agree with that assessment I guess would you would you be able to see if that you'd get closer to that 83 number.
Set of your 79 forecasts.
And you know maybe in March.
I think it's difficult to say there is still a fair amount of.
Variability around around the forecasts.
It's possible that there's obviously, we'll have more visibility in March, but I don't think theres anything magical or any particular specific information that's going to come out in March that's going to illuminate that I think it would just be the benefit of having our first quarter under our belt and.
And we recognize that we have taken a more conservative.
Approach there to the first quarter, but we think it's prudent to do so.
Great and then just a quick one on free cash flow.
'twenty, one I think you've got a little bit of a working capital benefit.
That helped to preserve free cash flow guidance, but how are you thinking about that for 'twenty. Two is there going to be a drag on working capital.
Yeah, we ended working capital as a percentage of sales of roughly 8% given potentially continued inflationary pressures as well as sales up ticking you could see a marginal uptick in working capital use.
Thanks.
Thank you.
Our next question is coming from the line of the rent half with BNP Paribas. Please proceed with your question.
Good morning, Rob.
Aerobics I've got a question on your ESG until it gets announced last week in particular.
And you recognize all the assets and that on the <unk> side, you seem to be very focused on the scope one and two and I was wondering what prevented you from also attacking scope III given that this is probably the majority of your total emissions. Thank you.
I think with regard to scope three it's a walk before you run and we're going to focus on scope, one and two first.
And we're embarking on that and then we'll begin scoping out.
Our scope three emissions as we as we go forward, but in terms of the work that we've done in particular over the last year. It would have been too ambitious to put out a scope one two and three target that just requires a lot of coordination with all of the partners with whom you do business.
So you know obviously for for scope, one just coming from company operations and scope to from purchased energies.
That's a little bit more a little bit more quantifiable.
Thank you and how do you size the incremental costs that you could even for instance for renewable power supply et cetera.
<unk> 'twenty 'twenty four targets.
So when we think about incremental capex related to get to some of the emissions emissions goals, specifically that we have in particular air as well as well as waste, but I think here, we're talking specifically are as it relates to greenhouse gases.
That would be part of our normal capex, our capex spend and then in terms of the act.
Use of energy what our plan there is to use renewable energy and we will continue to purchase renewable electricity when it's when it's cost effective but we're also going to explore the use of onsite renewable energy generation.
Unless the capital cost.
We're prohibited.
I think it's important to highlight though that just depending on the evolution of the global energy markets. It's possible that we might need to purchase some carbon offsets to reach the carbon neutrality goal by 2040.
But that would really only be after all of those other options had been fully explored and implemented.
I think we expect the size.
Of the global renewable energy market to continue to increase and the sophistication of that market to continue to increase.
Over the next many years and Loren just to put some quantifiable numbers. So our total.
Energy spend is $30 million to $40 million on an annual basis electricity is a fraction of that so that will be absorbed in our 2024 targets no concerns as far as major impacts there.
Thank you.
Thank you at this time, we've reached the end of the question and answer session and I'll turn the call over to Chris Macrae for closing remarks.
Thank you all for joining us. This morning, we appreciate your participation will be available through the course of the day and beyond to answer any follow up questions. You have have a great day.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.