Q1 2022 Axalta Coating Systems Ltd Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to exhaust. This first quarter 2022 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.
Today's call is being recorded and a replay will be available through may 3rd.
Those listening after today's call should please note that the information provided in this recording will not be updated and therefore may no longer be current.
I'll now turn the call over to Christopher Evans. Please go ahead Sir.
Thank you and good morning this.
This is Chris Evans VP of Investor Relations.
We appreciate your continued interest in <unk> and welcome you to our first quarter 2022 financial results Conference call.
Joining me today are Robert Bryant, CEO , and Sean Lannon CFO , yes.
Yesterday afternoon, we released our quarterly financial results and posted a slide presentation, along with commentary to the Investor Relations section of our website at exalt, the dotcom, 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 view of future events and their potential effect on exalt is operating and financial performance.
These statements involve uncertainties and risks and actual results may differ materially from those forward looking statements.
Please note that the company is under no obligation to provide updates to these forward looking statements.
Our remarks and the slide presentation also contains various non-GAAP financial measures.
In the appendix to the slide presentation.
We've included reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures.
For additional information regarding forward looking statements and non-GAAP financial measures. Please refer to our filings with the SEC.
I will now turn the call over to Robert.
Thank you, Chris and good morning.
It's most probably saw a few weeks ago, Chris Evans recently joined exhausted the lead Investor Relations and we're very excited to have him as part of our team.
With that I would like to welcome everyone to our first quarter 2022 earnings call let.
Let me begin by sharing how proud I am of what we have been able to accomplish this quarter and thank our global team for their hard work.
Momentum continues to build in each of our businesses today because of our team's customer focus and dedication to ensure that we deliver on our goals.
The entire adult the team deserves credit for fostering growth.
And minimizing the financial impact of the various geopolitical crises and the ongoing supply chain challenges.
I want to specifically call out, our China team, where essential management and our manufacturing workforce volunteer to shelter in place at our plants and at our customers' plants throughout the weeks long COVID-19, lockdown to keep operations running and meet the needs of our customers.
Thank you for your incredible commitment and resiliency.
Now to the key first quarter highlights on slide three we.
We reported a strong result, again this quarter and have a lot to be proud of given the overall environment.
Constant currency net sales growth of 13% exceeded our prior estimates in both performance and mobility coatings.
Adjusted EBIT of $120 million achieved the very top end of our guidance.
Adjusted EPS of <unk> 31 cents was above our guidance range given the flow through of strong earnings modest benefits from a lower share count and a slightly lower adjusted tax rate.
I'm pleased with these results given the unprecedented degree of challenges we had to overcome.
These include first the rapid pace of variable cost inflation, which we experienced across most cost categories and well above what we had factored into our original Q1 guidance construct.
Second raw material and labor shortages, which created a difficult operating environment constraining, many customers and our ability to fully serve our healthy consumer demand environment, and finally direct and indirect impacts from geopolitical and macroeconomic issues, including the Russia, Ukraine conflict as well as the effects of <unk>.
Covid policies in China.
Despite the approximately $22 million in earning headwinds. These three items created versus our January guidance framework, we were still able to deliver a solid quarter and exceed our sales guidance is strong pricing and better volumes yielded better than expected, 10% year over year organic ex FX growth and also did.
<unk> EBIT at the top end of our range.
Volume improved 1% year over year with positive contribution from three of our four end markets for the fifth consecutive quarter.
Growth was supported by ongoing recovery as well as from share gains that we're driving across the portfolio. These.
These achievements reflect our customers' preference for our differentiated technologies and are a nice recognition of the great work from our commercial teams across all of our business lines.
Exalt is committed to driving secular growth and we're making encouraging progress.
A stronger share position has allowed us to better leverage our fixed cost position driving higher incremental margins, which will serve us well as markets continue to recover to pre pandemic levels.
We realized a remarkable 9% price mix in the quarter up from a reported three 6% last quarter driven by pricing actions that we have continued to implement in order to offset the impact of cost inflation.
Both segments have shown strong pricing gains from past quarters with mobility coatings, reaching record quarterly percent growth.
While we're happy with our pricing progress the unprecedented rate of variable cost inflation, that's driven Q1 profitability well below our historical low twenties percentage adjusted EBITDA margin range.
New pricing actions are already underway to offset existing uncovered and anticipated further inflationary costs coming as a result of higher oil prices and tight supply demand balances in many commodity change.
We expect that our margins will begin to recover in the second quarter as we drive further price improvement and enhance our fixed costs leverage position.
During the quarter, we also repurchased $175 million in shares.
At the current valuation, we see tremendous value in our equity and we will remain opportunistic as we prioritize capital deployment for generating meaningful shareholder return, while balancing our conservative balance sheet moves.
Moving onto slide four exalt occupies a unique and highly profitable positions in the coating industry.
We're aligned with Megatrends that we believe create a strong growth trajectory for years to come however.
However, supply chain challenges have drastically impacted global trade constrained demand and reduced global GDP.
Recent geopolitical dynamics have only increased the temporary strain on global operations and worse than short term visibility.
While we continue to have strong conviction in our strategic ambitions and direction. The degree of macro uncertainty today makes it challenging to forecast beyond the near term with high confidence there.
Therefore, we are only providing Q2 guidance today.
Nonetheless, I continue to see strong underlying trends.
We're launching new innovative products every quarter and each business is making strong progress toward our growth ambition by executing on topline growth.
In refinish are highly profitable industry, leading aftermarket auto coatings business. The team is delivering on several strategic imperatives.
First increased market access this quarter, we won over 500 net body shops globally.
And well over 200, new stock points through distribution customers.
We're growing our premium market leadership, we are the leader with Msos, who continue to be allocated more workflow from insurance companies in North America, as well as independent body shops.
We are retaining and winning new customers each quarter as we capitalize on our unique customer value proposition third we continue to gain share in mainstream and economy segments, where we haven't had as large of historical presence.
The addition of new points of distribution is helping to build our sales pipeline in underrepresented geographies and markets.
We have witnessed good growth progress and execution on all fronts this quarter as evidenced in our above market volume growth.
Another area of focus is the integration of youthful.
We are well underway in integrating the business and executing on cost synergies.
But our true enthusiasm for the acquisition is centered around realizing commercial synergies, which we believe will further that you pull value creation opportunity beyond what we had previously communicated.
You poll gains as exposure to adjacencies in the automotive body repair business, namely in fillers, Huddy, glazes, and aerosols, where exalted did not participate in a meaningful way.
Moving into these categories positions us to capture more repair dollars per vehicle.
We can also drive commercial synergies through maximizing the cross selling of Alta and you pull products across our global customer base.
We're already beginning to see the value creation play out as our distribution partners and key body shop accounts are beginning to stock you pull products in.
In addition, you poll gains us exposure to Adjacencies in both consumer and industrial protective coatings.
In industrial coatings, we're driving organic growth in a constrained environment led by strong pricing gains.
Industrial price mix increase by a mid teens percentage year over year and by a mid single digit percentage sequentially.
A number of additional pricing actions were instituted in late Q1, which should sustain positive pricing momentum into the remainder of the year supporting our returns significantly higher profitability.
In mobility coatings are industry, leading light vehicle and commercial OEM business, we secured record pricing gains and outperformed the market from a volume perspective in Q1.
Pricing momentum is building every month.
While we're negotiating better pricing. We're also building a more inflation resilient portfolio by partnering with our customers to increase the percentage of mobility customer contracts with index pricing mechanisms now between 35% and 40% for the entire segment.
Recent share gains in light vehicle are driving above market growth and setting us up with the right customer mix for when global production returns to normalized levels in the future.
In commercial vehicle, we continue to hold the leadership position globally in heavy duty truck market.
We are focused on pricing traction to help offset cost inflation and see strong market demand despite customer production constraints.
Lastly.
We're driving growth across all end markets with innovative and differentiated product offering.
Two new exciting product launches just received recognition with the prestigious 2022 Edison Award.
Which one are some of the most innovative product developments in the world.
Our patented Speece Hecker, all waterborne repair system technology was awarded bronze in Edison sustainability category and represents the first paint offering for the collision repair market, where all coatings layers from primary to clear coat our water base.
This truly sustainable solution provides best in class appearance and performance, while reducing solvent emissions by more than 60%.
Next exalt is high resolution digital paint coating system won bronze and Edison's materials science category.
This patented coating technology supports the mass customization mega trend with a novel coding that can be applied with zero overspray and reduces energy consumption as well as waste generated from the masking process.
These are just two great examples of <unk> innovation pipeline and product differentiation, which are supporting customers' productivity needs in sustainability ambitions, creating a large market pool for our offerings.
Turning to slides five and six for a discussion of key market and demand trends.
<unk> miles traveled in the United States and Europe have nearly recovered to pre pandemic levels.
But changes in driving behavior, namely the prevalence of work from home seems to have led to lower congestion levels and less collision claims and before the start of the pandemic.
Based on paint consumption data from our proprietary E. Commerce platform. We estimate Q1 body shop activity remained in the mid 80, percents and low 90 percents, respectively for the U S and Europe relative to 2019, consistent with the level of collision claims.
Within the quarter, our U S body shop customers reported a step up in activity. During March that we believe reflected some modest market improvement, though remains constrained by a growing backlog of repair work given parts and labor shortages at the body shop level.
We believe that the return to in person work is an important factor in driving market recovery and are encouraged by U S office occupancy, which improved from the low 20 percents to 42% versus prior year.
In industrial coatings, a healthy demand environment was again limited by supply constraints, namely in building products and general industrial.
In total these constraints represented mid to high single digit percentage drag against our 1% volume growth in the period.
Regionally North America, and Asia Pacific contributed most significantly to our year over year growth.
Moving to mobility coatings the.
The expected normalization of global auto production rates in 2022 has been impacted by the Russia, Ukraine conflict as well as China, COVID-19, lockdowns, resulting in downward revisions of earlier production estimate.
Full year 2022 global production industry estimates are now forecasted to be $86 million, 4% above 2021, but still 9% below pre pandemic 2019 levels.
Once supply chain constraints and cost headwinds abate the benefit to exalt will be significant.
This is highlighted by an approximately $140 million earnings gap between our trailing 12 month mobility coatings, adjusted EBIT and our pre pandemic 2019 property ability levels with global auto builds reached $89 million.
We're not sitting still and waiting for the market to recover.
In the current environment, we focus on what we can control prioritizing productivity better price to offset cost inflation and new market gains.
Following these actions we expect to be in an even better position once supply chain constraints diminish in the market recovers.
In commercial vehicle, where we have an industry leading share in North America and EMEA.
Strong demand is outpacing constrained production rates.
Heavy duty and medium duty truck order backlog is now 11 months and eight months, respectively, creating a long dated growth dynamic for production rates decline beyond 2022.
Moving to slide seven I'll cover price cost and our focus on margin recovery.
First I'd like to remind everyone that we have a successful history of managing inflationary periods and quickly recovering lost profitability. Our business is resilient and we have the ability to increase price when it's needed.
From the chart on this slide you can get a sense of the pace of inflation we've experienced.
Even though this inflationary period is uniquely rapid and broad base.
We are already making great progress toward offsetting the impact.
In performance coatings, we've been able to quickly raise price and have offset the majority of the $220 million cumulative year over year variable cost and logistics inflation incurred since the second quarter of 2021.
In mobility coatings, lagging index pricing mechanisms and some contracts and multi quarter pricing discussions and others mean, we have begun to accelerate pricing.
Every business at X Ulta is focused on margin recovery and we expect to cover the majority of existing price cost gaps and incremental headwinds by Q4 of this year at the consolidated level.
Before I turn the call over to Sean to discuss our financial results I wanted to touch briefly on some ESG highlights from the quarter on slide eight as.
As you May remember, we announced our 2030 ESG goals in January which reflect how meaningful progress in environmental social and corporate governance is central to <unk> strategy and success.
We've already begun to execute against these goals and have engaged with many of our customers and other stakeholders to discuss our plans.
A major commitment is for us to develop new sustainable technologies and increase the proportion of our sales and sustainable solutions.
As many of our mobility customers are rapidly shifting to produce more electric vehicles, we're aligning our technology to support them and to drive growth in our own business.
Our new Aqua EC flex product for the mobility sector is a great example of our technology and innovation investments being deeply connected with key sustainability megatrends.
In addition to the two Edison Award products I mentioned this product enables our OEM customers to reduce cotwo emissions in their own operations by lowering the curing temperatures required for an electric vehicles more integrate body frame.
This is a great launch for us well aligned with our ESG commitment.
Now I'll turn the call over to Sean to discuss our financial results beginning with slide nine.
Thanks, Robert and good morning.
As you heard the first quarter delivered strong pricing execution with contributions from across the portfolio a healthy demand environment supported volume growth, but the continuation of supply constraints was a headwind and also contributed to further challenges from cost inflation.
Net sales of $1 2 billion increased 10% year over year for the first quarter, while constant currency net sales increased 13% driven by pricing actions demand strength across most of our businesses and benefits from two acquisitions, we completed in 2021.
Constant currency net sales growth included a 19% increase from performance coatings, and 3% growth from mobility coatings, reflecting light vehicle up 1%, while commercial vehicle was up an impressive 10%.
First quarter volume improved 1% with positive contribution from three or four end markets offset by a low single digit percent decline in light vehicle volumes.
Which outpaced the approximate 5% decline in global auto production in the first quarter.
Price mix contribution increased 9% in the aggregate up from a reported three 6% last quarter with improvement across all end markets led by mid teens improvement in industrial coatings.
FX translation was a headwind of 3% for the first quarter driven by the weaker euro and Turkish lira.
First quarter, adjusted EBIT was $120 million versus the $183 million in the prior year quarter, reflecting pricing actions strong demand and volume trends across all end markets, except light vehicle, which was more than offset by substantial increases in raw material and logistics cost inflation realized.
The first quarter of 2021.
I did want to note that we took a 6 million accounting charge associated with accounts receivable and inventory obsolescence reserves and these are excluded from our adjusted EBIT stemming from sanctions imposed on Russia.
Turning to slide 10.
Performance coatings Q1, net sales increased 15, 1% year over year, and 18, 6% ex FX driven by two 5% higher volumes of 10, 7% increase in average price mix up from the $4 six reported last quarter and a five 4% increase from acquisitions.
Refinish reported a 15, 6% net sales increase or $19 seven ex FX driven by high single digit price mix benefits above market volume growth and by a high single digit contribution from the <unk> acquisition.
Volumes increased in every region, despite raw material supply impacting our ability to meet all of our demands with the exception of China, where the Covid lockdowns drove a modest volume decline.
Industrial Q1, net sales increased 14, 5% or $17 three ex FX driven largely by mid teens percent improvement in average price mix as well as low single digit acquisition contribution and slightly positive volume growth.
Demand trends in most of the industrial and businesses. We serve remained healthy during the period.
Supply chain constraints, we're eliminate factor representing a high single digit percent drag on sales.
Performance coatings reported Q1, adjusted EBIT of $95 million versus the $117 million in Q1 of 2021, driven by ongoing volume growth and drop through benefits of price mix, which were more than offset by headwinds from higher variable costs.
The adjusted EBIT margin for the segment decreased to 11, 6% from 16, 6% in the prior year period, given the drivers noted.
Moving to slide 11.
Mobility coatings net sales increased 3% in Q1 ex FX, including a four 9% price mix tailwind offset by one 9% lower volumes.
The one 9% volume decrease has improved markedly from the 11% decrease last quarter, thanks to stronger demand from our customer base, including new business starting to come online light.
Light vehicle net sales increased 1% ex FX in the quarter, including a three 5% volume decrease which outperformed the global auto production decline of approximately 5%.
Rice increased by mid single digits.
Commercial vehicle Q1, net sales increased 10% ex FX driven by strong truck production globally, excluding China.
Price mix also increased mid single digits.
<unk> coatings reported Q1, adjusted EBIT of $1 million versus $39 million in the prior year quarter, adjusted EBIT and associated margins in Q1 were impacted by variable cost inflation with only modest offsets and positive pricing.
<unk> gains are accelerating we expect to cover the majority of incremental variable cost inflation between the second quarter and the fourth quarter.
Moving to our debt and liquidity summary on slide 12.
Exalt is Q1 balance sheet and liquidity profile remains solid we ended the quarter with slightly over $1 $1 billion in total liquidity at.
Our net leverage ratio ended the quarter at four one times, reflecting an increase from three five times at December 31.
Net leverage remained somewhat elevated due to the seasonal phasing of free cash flow and share repurchases totaling $175 million in the quarter.
We continue to expect us to drop as we move through the back end of the year on stronger full year operating results, our normal free cash flow generation on.
On slide 13 overview, Q2 guidance and full year commentary.
For the second quarter net sales, we expect between 11% and 13% year over year growth, including a 4% FX headwinds and a 4% positive M&A contribution.
The top line guide assumes low double digit better pricing continuing acceleration of gains we've seen in recent quarters.
Our forecast also includes a 2% to 3% sales headwind from China, Covid Lockdowns and from the Russia, Ukraine conflict.
We expect to generate adjusted EBIT of $135 million to $165 million in the second quarter with DNA of approximately $80 million inclusive of $24 million of step up DNA.
Interest expense for the quarter is anticipated to be approximately $34 million.
For adjusted earnings per share, we anticipate a range of 35 to 45.
For the second quarter inclusive of an FX headwind of two pennies per share.
Within our second quarter forecast, we further assume raw material inflation in the high <unk> as a percentage versus Q2 2021.
As we look for the full year it remains challenging to provide a detailed forecast given the degree of supply chain and geopolitical uncertainty. Nonetheless looking ahead, we expect strong mid teens annual organic growth in both performance and mobility coatings, driven by pricing actions already being executed and volume growth from <unk>.
Modest market recoveries and share gains.
We are encouraged by refinished recovery, given improved vehicle miles driven and upward trending office occupancy rates, but we remain measured in our outlook as we monitor the possible impacts from regional and global impacts from the conflict between Russia, and Ukraine as well as impacts from the extended COVID-19, Lockdowns in China.
For mobility global auto build rates have been revised lower month after month by industry consultants have settle close to our current 80 million production rate assumption, which is slightly above the $79 million last forecast it.
At these levels, we expect to see annual volume uplift from market growth plus upside from new customer wins.
<unk> global medium duty and heavy duty truck build rates are projected to increase 4% in 2022 ex China with our commercial vehicle volumes likely to exceed market rates, given our strong and growing positions.
Regarding cost factors. Our current assessment is that rates of overall raw material and cost inflation will continue at high levels, given current baseline expectations and assuming Brent crude between 110 and $115 per barrel.
We expect to largely cover the existing price cost gap and incremental headwinds this year with some lag in mobility coatings being offset by strength in performance coatings.
Altogether, we anticipate stronger earnings performance this year versus 2021.
Lastly, our typical second half way to distribution of operating cash flow and a favorable outlook for sequential earnings growth should reduce our net leverage considerably by year end.
Thank you Sean it was indeed, a remarkable quarter our teams delivered very strong organic growth and remain focused on driving margin recovery with additional pricing actions underway in every business.
I believe that we are laying the groundwork to deliver substantial earnings growth is supply chain constraints Wayne and end markets recover.
With that we'll be pleased to answer any questions. Operator could you. Please open the lines for Q&A.
Thank you.
Like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue you.
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In the interest of time, we ask that you each keep to one question and one follow up thank you.
Our first question comes from the line of Chris Parkinson with Mizuho. Please proceed with your question.
Great. Thank you so much Robert your team has taken out a lot of costs over the years.
I think most investors understand there obviously could be further volatility.
And variable costs, but just could you just help us perhaps sean as well just how should we be thinking about the broad framework.
For incremental margins as volumes fully recover.
Mobility, and if you want to hit on the intermediate and long term next one or two years that would be very helpful. Thank you.
Okay.
Chris as we look at our cost structure as you pointed out we've made great strides over the over the past couple of years, especially during the Covid period, where we took a lot of structural structural costs out of the business. We now feel that we have the cost structure, where we want it and the biggest lever is really going to be the return of <unk>.
Volume and leveraging our operating our operating model so as we see volumes.
Come back end costs abate, the drop through will actually be very attractive for our business.
Got it and just.
A quick follow up just relative to all of our own end market assumptions can you just discuss exalt is ability to outperform its respective end markets, starting with light vehicle, especially given some of your.
New business wins, and just perhaps obviously just the structural longevity of the refinish market and any key themes in industrial.
That would also be particularly helpful. Just so we can get a handle on the growth I'll go over the next one or two years. Thank you so much.
Yes. So if we look at if you look at things overall, I think we're seeing strong underlying market demand really across the board within our different businesses and really the primary issue right now where just supply constraints.
As it is for everyone I mean within refinish market conditions continue to be supportive, but supply constraints are somewhat limiting our ability to fully serve demand. We do believe that there is recovery coming and we're starting to see that as office occupancy rates tick back up as we highlighted from below.
20% is in the U S last year or 242% this quarter.
And that should lead to more congestion on the road. So I think our expectation continues to be that we will see the refinish market recover to pre pandemic levels and we again remain very bullish on that business and I highlight with the acquisition of <unk>. We just have a wonderful opportunity to leverage our sales and distribution channels further.
<unk> by pushing additional products and services through existing sales and distribution channels. So that's also an added plus to the secular direction of the refinish business.
Within industrial very happy to see the strong sequential volume growth as well as robust pricing gains that led to the 15% sales increase.
If we look at some of the markets within industrial just in the in the first quarter building products sales were up 22% energy solution sales were up 25% and general industrial was up 11% for the quarter versus the prior year. So with that just highlights is that we're executing extremely.
Well against our strategic plan, which was to accelerate growth in building products and energy solutions and further build out our platform and energy solutions, which we'll be talking more about in the future.
And with regard to mobility mobility, showing strong signs of return as we see sequential year over year volume improvement obviously, it's still it's still early.
But as global production improves and then also the new wins that we had last year and that we continue to generate this year come to fruition.
The one area to really highlight there is our sequential price improvement and.
And again I would just highlight that in that business. Our business includes only exterior body paint as we define it but there are elements of the automotive business automotive OE business that actually reside within industrial where we had 15% price capture therefore.
On a like for like basis with some of our peers.
Our actual price capture and mobility was much higher.
Very helpful color. Thank you so much.
Thank you. Our next question comes from the line of John Mcnulty with BMO capital markets. Please proceed with your question.
Good morning, and thanks for thanks for taking my question. So in the mobility business. You had commented you're you're about $140 million behind kind of where you were pre COVID-19 I guess can you help us to understand how much of that is volume driven and how much of that is price versus raws as you're starting to kind of see the acceleration in <unk>.
Pricing and starting to catch up maybe how much of that we can we can narrow back down even without a recovery in the volumes I guess can you help us to think about that yes, John It's probably 50 50 gone back to 2019 levels were at 89 million builds.
Certainly the controllable right now is catching up on price and clearly you saw that momentum pick up from fourth quarter, the first quarter and youre going to see it again.
Essentially double in the second quarter compared to the first quarter, but once we get back to sort of that 89 to 90 million build scale, coupled with the fact of pricing traction youre going to see the effect, Chris Parkinson's earlier question, Yes. The volumes are camouflage and all the progress we've made from a cost structure perspective, so it's really going to help margins.
When we get back to those levels.
Got it got it no that makes sense.
And then from a.
From a capital allocation perspective, so the buyback was was kind of off the charts right at least relative to kind of how we were we were expecting things to play out at least in the quarter. I guess can you speak to how much of that was just.
The buying opportunity just given how weak the stock had been earlier in the quarter versus versus how much is around your confidence in the ability to squeeze out more cash as the year goes on to.
To kind of further kind of fill up the or strengthen the balance sheet and get your kind of cash flows back on track again and can you help us to think about that.
The magnitude of the buyout that you saw in the in the first quarter was really a flexion a reflection of how undervalued. We believe our equity was and as we've always stated we would have the stock repurchase program that would offset dilution plus an additional few percentage points each year how.
We would remain opportunistic and if we ever really saw a dislocation in the intrinsic value of the company and the equity price that we would step in and step in strongly and that's what you saw in the first quarter.
John on your point on cash flow getting back on track I mean, 2020, we did over $440 million last year, we did $455 million. So we've been dropping through cash flow over 50% of EBITDA. So we're happy with the progress we're making we're confident we're going to delever as long as we don't do anything big on the M&A front and so we're again we're.
Being opportunistic given where the share price sits in the first quarter, but we expect the normal seasonality of cash flow build in the back half of 2022.
Got it thanks very much for the color I appreciate it.
Thank you. Our next question comes from the line of Ghansham Panjabi with Baird. Please proceed with your question.
Hi, everyone. Good morning. This is actually Matt Krueger on a line sitting in for Ghansham.
Yes. My first question is obviously you delivered results that were ahead of your initial first quarter expectations, but.
But can you talk about some of the key variances relative to your initial guide.
That drove that and how those variances have fared as we've moved into early <unk>.
Yes, I mean volume was probably the bright spot on the light vehicle side. We had initially assumed 17 million global builds IHS came in closer to $19 5 million belts and certainly we benefited from outperforming the actual overall market.
Saw volume improvement also within the performance side of the business and then the other bright spot is clearly pricing we were initially expecting around 7% price.
We got upwards of 9%, but that has actually offset the impacts that we saw with Russia, and China dynamics as well as the fact that we saw incrementally about $20 million and variable logistics and variable raw material costs.
I would just add to what Sean said, Matt to the second part of your question regarding April conditions, I think when you look at what we accomplished in the first quarter. It's really impressive I mean, we would've had a blowout quarter had we not have the incremental headwinds and approximately $22 million more in earnings.
And I think that's worth, noting but thus far in April topline sales conditions really appear to be similar to what we've seen in the first quarter and on the cost side, we're seeing oil trade slightly better than our guidance outlook, but the price does.
It remained pretty volatile so that could be the other variable as we think about the as we think about the second quarter. We're also closely monitoring the developments in the Russia, Ukraine situation in China, but really at this time April hasn't given us much of a reason to move guidance up or down at this point.
Great.
That's definitely helpful. And then just focusing on the bottom line here can.
Can you provide some added detail on what a realistic timeline for price cost parity across your various business units might look like and then expanding on that what level of pricing do we need to see across your portfolio to offset the level of inflation that your currency currently experiencing in the high Twenty's range.
Is that mid teens pricing high teens pricing, 20% plus pricing.
Oh through give us a sense of what we should be looking for from.
From that perspective.
So if we hit average oil and there is not a perfect correlation with all the raw material basket, but if average oil for 2022 was up around 115 per barrel, we're going to need to get almost 10% in price to offset exiting 2021, we had roughly a $70 million GAAP, including logistics, we had called out roughly 50.
Millions just raw materials, but we're solving for the full cost stack for the full year.
Great. That's that's helpful. Thanks.
Thank you. Our next question comes from the line of P. J <unk> with Citi. Please proceed with your question.
Okay.
Yes, hi, good morning.
And a question on your industrial business, you've got really good pricing there.
I'm sure a bit soft due to supply chain issues.
So it seems like the underlying demand was still strong, but you had some supply chain issues, but another question on this underlying demand with Europe slowing down with the war in China shutdowns recently with Covid.
Do you see the underlying demand for from the rest of the year.
I think as you know Theres a question of underlying demand and then there's a question of what we're able to what we're able to supply.
And just given the mix of raw materials as well as the overall volume of the of the industrial business that's really.
<unk> inhibitor P J, but if you look at the demand profile of the business demand was exceptionally strong.
In North America in particular, and we again, we talk about each one of our unique each one of our unique businesses.
We did see building products as well as energy solutions grow quite strongly and even industrial general industrial being up or being up 11% could we see some softness in particular in the general industrial business in Europe , just given some of the pressures there yeah, we could see we could see some softness there I think.
Too early to too early to really tell but I think the other you know each one of the regions is stronger in each one of the individual industrial segments. So they do kind of balance each other out somewhat and it's also just important to remember that it's a very highly fragmented customer base. So we are able to increase <unk>.
Price and it does also give us some insulation from some of those macro trends.
Great. Thank you and can you talk about your battery coatings products for E&ps at the pack level and what's in the pipeline there and what would you say your market share is in that in that business.
Well I'd highlight that in particular I know you are asking about batteries, but we're really one of the top companies in the world. When it comes to electric Motors, and our energy solutions business or energy solutions coatings for which we've won multiple technology awards. They are used in electric motors and vehicles industrial applications winter.
Were volumes transmission towers.
Electrical conduits, but also fuel storage containers battery trees closures and covers.
And so we've now leveraged our energy solutions business to grow into battery cells battery modules and battery packs.
Now that being said, we see a much larger opportunity in the global electrification market and we will be talking about that more in the future.
And in terms of in terms of market share at this point.
Our nascent but a quickly growing market share.
Thank you.
Thank you. Our next question comes from the line of Alexia <unk> with Keybanc capital markets. Please proceed with your question.
Thank you good morning, everyone. Robert you mentioned, some new wins in mobility could you discuss how are you pricing those those wins.
They are being done at <unk>.
Margins sort of similar to what we see today in the segment or some normalized level of how how you make sure that there is good return on capital for those new deals.
Sure at a variable contribution level, we've been pricing all of our new business.
At what we have historically deem to be attractive levels and I would say that are reflective of current market conditions and in particular the business that we have one in China has been at very attractive margins and Alexia just on return on invested capital.
Not necessarily need to invest additional assets I mean, we're essentially filling up our plants with the volume so as far as the Incrementals on those they are also very attractive.
I mean, it really just about your question I think the.
Increasing sales in mobility has really been through our technology, our customer intimacy and relationships and frankly, our service and our team in mobility in particular in Asia has just been doing an outstanding job.
Thank you very helpful turning to finish.
It sounds like.
Your customers continue to face shortages of materials and personnel.
Have any insight.
These issues are getting better.
Not getting better or in what could be the pace of improvement here for.
For the rest of the year.
It does still remain an issue for us.
For body shops in particular in the U S. Anecdotally, we have heard over the last month that it has been getting better but again I would characterize that is anecdotal as opposed to data driven.
Got it thanks a lot.
Thank you. Our next question comes from the line of Kevin Mccarthy with vertical Research partners. Please proceed with your question.
Yes, good morning.
Robert in your prepared remarks, you referenced company stronger share position.
And you went on to allude to penetration in the economy segment of refinish and it sounds like you picked up some share in mobility.
Is there a way to size how much volume uplift you might be enjoying in those businesses or perhaps other businesses, where you have gained share relative to underlying market growth.
Well I think we can take a look at volume in particular and if we look at volume in the in the first quarter at least our volume growth was the strongest in refinish in particular in North America, and Latin America, followed by commercial vehicles in EMEA and Latin America.
And then industrial in North America, and then as we've highlighted our light vehicle business in China.
And our penetration I think would've been even greater if we had had sufficient raw materials. If you think about it.
Lack of raw materials is kind of left us with a current backlog in refinish and industrial of approximately $50 million, which is about 4% of Q1 sales. So we actually had even more demand and potentially could have had even more share. If we had been able to get our hands on those raw materials.
So I think the team is doing a great job not only in the mobility business, but also in the industrial business and in refinish and in refinish as we highlighted the mainstream in the economy segments.
Have been areas of focus for us and we've made in particular good inroads there in Latin America with a new business model as well as with China and you poll only allows us to further leverage that position because most of you pull sales and distribution network.
Those to more mainstream and economy sites, which has allowed us from a cross selling perspective to more deeply penetrate with our refinished products as well as getting our eupol products into more of our distribution as well as some of our larger body shops in Europe and in the U S.
And then secondly, if I may can you comment on what you saw in China in the first quarter in both here in auto and the industrial businesses.
And what was the trajectory as Covid research.
In March into early April .
I'm curious as to.
Your thoughts on the underlying.
Economy there.
Well I think when you look again at underlying demand at underlying demand in China demand. There has remained really strong.
The Lockdowns, however have made it more challenging to service our customers, but our team there has been doing a great job keeping customers running even if it's meant living at their sites, which they've voluntarily been doing.
So I think we feel really good about what's going on there on the mobility side again, we made some we've made some changes from an organizational perspective over the last 18 months that have really helped us more deeply penetrate the market in particular.
With Chinese Domestics, we've had a pretty significant amount of growth in China and then on the industrial side. We've also brought in.
New talent over the past year with very specific domain expertise in the industrial markets that are at the largest and play best with our technology portfolio in China and they've also made really really good good inroads.
Now in terms of the financial impact.
As we as we look at the quarter. The COVID-19, Lockdowns in China, we saw really kind of create a relatively modest headwind.
In Q1, we expect it to be a little bit more material in Q2.
With the shutdowns. So the April results, we expect to be most impacted as the lockdowns are kind of in full swing.
In Shanghai, but we expected business should start to normalize in may unless we see COVID-19 spread to other areas and then our guidance assumption is kind of if there's a full return to normal operations in June .
If the Lockdowns are lifted.
So again all of that depends on depends on the trajectory of where we go from.
Where we go from here again as a reminder.
China is about 10% of our annual sales and we've assumed about a one five month impact in the second quarter.
That's really helpful. Thank you Robert.
Okay.
Thank you. Our next question comes from the line of Vincent Andrews with Morgan Stanley . Please proceed with your question.
Thank you and good morning, everyone.
Just wanted to get a little more insight into the 35% to 40% of the index pricing you have now which is up from from from prior indications where are you looking to get that figure.
And what is it that's driving those customers onto those contracts versus the ones that are that are staying off and the new folks that are coming in where you have new wins or is it youre converting existing customers or both.
And.
As a follow up to that just when we get to a period of deflation, which hopefully eventually we will get to presumably those contracts will automatically reset on some some timeframe.
But then you'll be looking to hold onto price and the balance of the business and I just wanted to sort of get some insight into that interplay.
Thanks.
The optimal level.
The optimal level of index contracts. This is difficult to say, it's really more of a customer preference. There are some customers that prefer to have an index contract in place. It just makes the amount of time that we as well as our customer spend on price negotiations.
<unk> run a lot more smoothly every every customer is different and every purchasing organization within each OEM is different some prefer not to have an index contract and just to have price negotiations.
So it's really more a function of what our customer.
Preferences are most of the contracts on average have about a six month adjustment. So for example July one we will see an adjustment to the majority of the index of the index contracts that will start to see that flow through at the beginning of the third quarter and then likewise, if you were to see raw material prices come down you would see those.
You would see those those prices come down six months later six months later I think the important element to emphasize there is the through cycle profitability and so as we've structured these arrangements with our customers we have tried to.
Put them through the mid point of the cycle, an attractive level of profitability for us, which we think we've achieved in terms of how we've structured those contract and in particular versus the amount of value that we actually create for our OEM customers, which as you know is quite substantial.
And then maybe just a follow up on <unk> I think you've had the business in September and obviously, it's been a tricky time with raw materials and pricing have they been able to be as nimble as you wanted them to be or if you had to come in with best practices or just how is pricing going with the acquisition.
Yes, so I mean as far as integration activities are going very well I mean, we're essentially seven months into the journey right now.
The cost side, we only had roughly $10 million of synergies and we're well on track we had targeted 12 to 18 months on that front. So we're in good shape on the cost side as.
As far as the commercial synergies and Robert covered this a business.
<unk> remarks, but we're making really good progress as far as integrating their commercial teams and really driving those efforts and actually seeing the progress the expectation pretty all the additional pricing, we're expecting to do high teens as far as growth rates and slightly higher than that from an EBIT perspective with.
With the additional pricing, we expect to be north of that but I would characterize you Paul very similar to the overall refinish with good pricing power, our anti we're making good progress on that front.
Okay, great. Thank you very much.
Yeah.
Thank you. Our next question comes from the line of Mike Sison with Wells Fargo. Please proceed with your question.
Hey, guys good morning.
In terms of mobility.
At the 86 out of build outlook that you have for 'twenty. Two is it is there.
Good improvement in the second half as pricing catches up or are we still sort of at the breakeven point.
Given you gave us an outlook for for the odd available.
Yeah, well, we'll be making steady progress as we work through the year.
We're expecting volumes to continue to pick up sequentially.
Coupled with the fact that pricing will start to outpace the VITAS inflation rates.
Got it and then.
Now just a quick follow up on the business.
Theres not a lot of businesses I don't think that our kind of losing money in coatings and I think thats probably for everybody, but is this a good business for exalt the longer term given how cyclical it's Ben.
I understand some kind of weird.
Unprecedented times, but when you think about where you could redeploy potentially and I know timing is a bad is this something that you should you should hold onto or maybe.
Divest at some point and then investing things in performance coatings, which has held up a lot better.
I think to answer your question, we have to look at kind of the moment in history that we are right now which is fairly fairly unprecedented.
I think if you take Covid and then on top of Covid. You asked you add massive cost inflation and then you add a semi conductor shortage.
And then on top of that you add supply chain supply chain issues. It does create a rather unique point in history that we would certainly hope would never would never be repeated as we think about the business over the longer over the longer term again, we think that over the next five years once those conditions ameliorate we.
We are going to see secular demand.
That is going to make this business and extremely strong performer within our portfolio.
The lack of inventory at Oems at dealer lots the need of car rental companies to replenish their fleets. There's just a tremendous amount of secular demand. In addition to the continued conversion from ice vehicles to electric vehicles, where we have additional content per vehicle.
That will also be an impetus and as that business changes and morphs. We also have some additional technologies as well as some additional areas of market focus that we think are going to even improve potentially the margin profile of the business to that of a higher level than sort of the 2016 2017.
Period, so again as far as light vehicle, we do remain positive on that business. It's just a tough point in time. When you have this many exogenous variables go against you and.
And Mike I just.
Did want to call. It one point, because I think some folks lose sight of this light vehicles still EBITDA positive EBIT.
EBIT is being impacted by all the depreciation and amortization from the carve out from Dupont back in <unk>, but it still is generating cash and I did want to highlight that point.
Got it thank you.
Thank you. Our next question comes from the line of Mike <unk> with Barclays. Please proceed with your question.
Great. Thanks, Good morning, guys.
Just one from me I wanted to circle back to John's earlier question on the buyback Robert you, obviously talked about finding great value in your equity pricing <unk> and when I just look at your current share price. That's maybe I don't know 10 ish percent below your average acquired pricing <unk>. So should we expect healthy buybacks to continue into <unk> here.
So we're not providing discrete guidance on that I think we're going to remain opportunistic. We also are keeping an eye on M&A activities as well as deleveraging over time.
But it's certainly on the agenda to continue to look at.
I guess, maybe a different way to come at it.
Have your average <unk> share diluted count what did the quarter end I'm just trying to back into your <unk> shares outstanding guidance there. Thanks.
So we acquired six 4 million shares.
We got roughly a $4 million.
Diluted average benefit in the first quarter and we're expecting Q2 guide to be at $2 22.
I'm not sure if I answered your question precisely there.
No I think thats helpful. We can follow up offline. Thank you.
Thank you. Our next question comes from the line of Josh Spector with UBS. Please proceed with your question.
Hi, Good morning. This is Lucas Beaumont answer Josh I, just wanted to go back to the contract rate crossing in light vehicle. If he could so could you tell us sort of roughly.
How much of your contracts are set again reprocess already today and how much you expect to pay any great cost by the end of the year. Please.
The weighted the way to think about that is that the contracts vary in length between three and four years.
So in any given year, there is about 25% to 33% of the contracts that are coming up for quote or for re bidding. So you have a built in price adjuster of about a quarter of the business at least kind of every year as business is rebid and re quoted the other.
Element to keep in mind is that the color palette.
Color palette evolve so as you might have a given vehicle platform as there is a color change of course youll be repricing.
Those colors at current economics.
Great. Thanks, and then just thinking about it.
Mobility market is kind of sales will improve.
End up remaining like is trying for a number of additional quarters.
Can you guys have any like contingency plans, where you would think about taking any temporary or permanent cost actions.
I guess, how meaningful could that day or did you have the name or you would just just wait it out until until we sort of get through it.
So at this point, yes over the last two years, we've done a fair amount of reductions both structural as well as holding onto some of the temporary savings.
So unless we saw a significant demand destruction I think we're in a pretty good place right now it's just a focus on price and I think what youre going to see in the second quarter second quarter is a nice uptick in price realizations to continue to help out margins.
Thank you.
Ladies and gentlemen, thank you. This concludes our Q&A session and thus concludes our call today. We thank you for your interest and participation you may now disconnect your lines.
Yeah.