Q1 2023 Axalta Coating Systems Ltd Earnings Call

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Speaker 1: That.

Speaker 2: Ladies and gentlemen, thank you for standing by. Welcome to Exalta's first quarter 2023 earnings conference call.

Speaker 2: All participants will be in a listen-only mode. A question-and-answer session will follow the presentation by management. Today's call is being recorded and a replay will be available through May 10th. 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.

Speaker 2: I will now turn the call over to Chris Evans. Please go ahead, sir.

Speaker 3: Thank you and good morning. This is Chris Evans, VP of Investor Relations.

Speaker 3: We appreciate your continued interest in Exalta and welcome you to our first quarter 2023 financial results conference call. Joining me today are Chris Villavarayan, CEO and President and Sean Lannon, CFO . 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 Exalta.com, which will be referencing during this call.

Speaker 3: Our prepared remarks, the slide presentation, and our discussion today may contain forward looking statements reflecting the company's current view of future events and their potential effect on exalbus operating and financial performance. These statements involve uncertainties and risks.

Speaker 3: and actual results made different materially from those forward-looking statements. Please note that the company is under no obligation to provide updates to these forward-looking statements.

Speaker 3: Our remarks and the slide presentation also contain various non-GAF financial measures.

Speaker 3: 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.

Speaker 3: For additional information regarding board looking statements and non-GAF financial measures, please refer to our filings with the SEC.

Speaker 3: I will now turn the call over to Chris.

Speaker 4: Thank you, Chris. I'd like to welcome everyone to our first quarter 2023 earnings call, and we'll start by discussing the key highlights on slide three. I'm very proud of our first quarter performance. Through the commendable efforts of our global teams, we're out facing growth in most markets we serve.

Speaker 4: driving incremental pricing, accelerating margin recovery, and improving execution across all our operations.

Speaker 4: Our first quarter adjusted EBIT was $149 million with adjusted diluted EPS of 35 cents, both of which exceeded the top end of our guidance range.

Speaker 4: Overall, I remain encouraged with the team's performance this quarter.

Speaker 4: and post COVID-19 impacts.

Speaker 4: Mobility coatings had the biggest increase in profitability growth with a 530 basis point euro-over-year improvement in adjusted EBIT margins. Margin improvement was largely driven by over a 9% euro-over-year price mix growth from new and carry-over actions. This is our ninth consecutive quarter of price mix growth which is up more than 18% over two years. Volume was another bright spot in the quarter, improving 3% euro-over-year despite a nearly 3% headwind from macro-driven volume declines.

Speaker 4: in industrial and unfavorable impact from the Russia Ukraine conflict.

Speaker 4: Volume growth was led by a double digit gain in light vehicle and commercial vehicle along with modest growth in refinish.

Speaker 4: We believe that most of our end markets are uniquely positioned to grow in the current macroeconomic environment.

Speaker 4: We have demonstrated this in the last two quarters. Today, we're seeing the benefits from market normalization in auto and truck production, as well as an increase in body shop activity.

Speaker 4: We believe considerable market upside still exists in the portfolio.

Speaker 4: I expect us to continue to outpace and market growth in mobility and certain refinish markets following the strategic investments we have made in people, technical capabilities, and customer partnerships.

Speaker 4: For example, in February , we announced that Exalta was the recipient of three prestigious 2023 Edison Awards, making this our fifth consecutive year to be honored with this achievement.

Speaker 4: We attribute this recognition to our outstanding technical leadership and talent base that is leading the industry in innovative solutions.

Speaker 4: Our refinished business is aligned with the needs of a labor constrained collision repair industry. Large multi-shop operators who are gaining share require incremental capabilities and productivity benefits which I believe Exalta is uniquely positioned to offer.

Speaker 4: In Lightwaco, we have deepened our relationships with many of the fastest growing EV automakers and some of the most attractive ice platforms. And in industrial, our total solution offerings provide a breadth of capabilities to solve deeply technical and diverse challenges creating market share growth opportunities for us. Please turn to Slide 4. My main focus since joining Exalta at CEO has been to drive improved execution across the company.

Speaker 4: We are prioritizing areas with the largest positive impact for shareholders, specifically price cost recovery, productivity initiatives in procurement and operations, and better cash conversion. It is our intent to accelerate the margin recovery currently underway.

Speaker 4: Let me give you some specifics.

Speaker 4: I'm confident that carry over pricing contributions and targeted actions will drive steady margin recovery through the year. On cost productivity, we have a lot of activity underway. On an annual basis, Exalta has roughly 1.5 billion in fixed costs, net of DNA, and another 2.5 billion in variable costs. Given the large scale of spending, we anticipate even small improvements to yield a nice drop-through to earnings.

Speaker 4: Our goal is to structurally reduce costs, independent of market dynamics, through productivity programs focused on procurement and operations.

Speaker 4: To date, we have launched market tests for most of our variable spend and are already seeing positive results.

Speaker 4: We're qualifying new suppliers and in some cases working with our technology organization to reformulate product formulas and spec in new suppliers to promote increased supply flexibility. We're removing bottlenecks and reinstituting best practices around our production planning process. We expect to drive improvements in labor productivity, expedited freight and low volume and inefficient production behaviors which have been persistent issues for us in the recent years. We're doubling down on inventory management with promising or

Speaker 4: We have enlisted the support of external expertise, which will drive a modest increase in expense mid-year that we have included in our guidance.

Speaker 4: We expect that returns on these investments will start to be realized in the back half of this year.

Speaker 4: Like every company, we're mindful of the uncertain economic environment and we're taking proactive actions to be prepared for whatever outcome may play out.

Speaker 4: Moving back to the results on slide 5, I will now give you more color on first quarter volume performance.

Speaker 4: Globally, volumes have improved by 3% year-over-year driven by market recovery in mobility co-coding and sharegames within the portfolio.

Speaker 4: While the economic climate remains difficult to forecast, the commercial environment across our end markets remains largely consistent. US commercial and residential construction soften creating a larger headwind for our industrial business this quarter than we had forecasted.

Speaker 4: Elsewhere, we see markets as largely flavorable given the recovery in auto production, a robust environment for heavy and medium duty trucks, and the strengthening of body shop activity in key refinished markets that I have highlighted earlier.

Speaker 4: Moving to slide 6, I will now cover the refinish business. Refinish is off to another strong start in 2023 as Q1 results were ahead of expectation.

Speaker 4: Price mix improved by 10% year over year with contributions from every region.

Speaker 4: In the quarter, we executed new pricing actions to offset pockets of incremental inflation.

Speaker 4: Market activity was largely consistent with the prior period. Parts and labor shortages continue to constrain our premium customer mix while returned to work dynamics are marginally better than we ended up in 2022.

Speaker 4: Volumes for refinished were favorable driven by continued execution of our growth initiatives.

Speaker 4: which target expansion of our MSO leadership positions.

Speaker 4: In the quarter, we added 400 new premium body shops and 140 new stockpoints locations for mainstream and economy customers.

Speaker 4: Refinish is also growing outside of our core products.

Speaker 4: Accessory sales in our company-owned stores exceeded budget targets in Q1, while the U-POL brands that we acquired in 2021 are driving growth in adjacent markets like body fillers and aerosols.

Speaker 4: March was a record month for the U-fall team and we believe that significant opportunity still lies ahead.

Speaker 4: You fall brings to exalt the ability to grow the existing refinish business.

Speaker 4: It has also allowed us to pivot towards the highly attractive retail channel with market leading solutions for the fast growing automotive DIY consumer market.

Speaker 4: Exciting new partnerships with AutoZone and O'Reilly position our aerosolves and Raptor protective coatings in more than 16,000 US retail locations.

Speaker 4: We believe this puts us on pace to nearly triple our aerosol volumes in 2023 versus 2019.

Speaker 4: Let's go to slide seven to look at our industrial performance. Constant currency net sales increased modestly in the quarter as very strong price mix growth of 11% year over year more than offset a volume decline of 9%. Price mix improved 3% sequentially as the teen prioritized margin recovery. The industrial teen also executed well on cost management which helps to offset the volume decline. In India we believe that customer destocking over the past few quarters has slowed.

Speaker 4: But we are now feeling the impacts from weak North American construction activity in our building products business.

Speaker 4: Until we see a shift in housing starts or building sentiment, we expect volumes will remain somewhat challenged.

Speaker 4: In the meantime, we're focused on winning new business in attractive areas where our technology leadership is rewarded. Abc. 2060 and our self-priming kitchen cabinet coatings were both recently recognized with Edison awards that I mentioned earlier. Moving to mobility coatings on Slide 8.

Speaker 4: We're on a good trajectory and I expect to show margin improvement as we continue through the rest of the year. Light vehicle, 2023 production forecasts have modestly but steadily improved year to date. Industry forecasters now project more than 85 million global bills representing nearly 4% growth over 2022. This incremental volume growth is driving improved fixed cost performance in our business.

Speaker 4: In commercial vehicles, results have been consistent. We believe there is a robust multi-year outlook for the business.

Speaker 4: For Class 8 OEM, backlogs remain elevated, especially in North America. I expect pent-up demand and backlogs to help drive another strong year in 2023. Elsewhere, there are mixed 2023 trends with better medium-beauty expectations.

Speaker 4: balanced by some thoughtfulness in rail and the RV market. With that, I'll turn the call over to Sean for a review of our financial performance.

Speaker 3: Thank you, Chris, and good morning. Net sales in the quarter were 1.3 billion, an increase of 9% year-to-year. Constant currency net sales increased 12%, driven largely by strong pricing and volume growth in three of our four end markets.

Speaker 5: Adjust the EBITM improved to 149 million from 120 million in the prior year and exceeded our guidance targets. The outperformance was driven by better price, realization, largely in performance coatings and the higher than expected buying growth in mobility coatings.

Speaker 5: Both segments contributed meaningfully to Euro-Bee Euro-Adjusted eBic growth and margin improvement in the quarter. The largest driver of our earnings performance as quarter was favorable price cost.

Our 9% year-to-year growth in price mix, more than offset variable cost inflation, which was roughly 6%. We hit a nice, inter-emiles-done this quarter as we have turned the corner on price cost, which is now positive on a cumulative basis from early 2021.

This is an important benchmark in our EBIT recovery journey to normalize margins.

However, as Chris detailed earlier, we still have a meaningful $120 million combined gap across two of our end markets, which we remain focused on addressing.

Variable cost inflation is moderating from historic levels.

Saltness in adjacent markets is loosening supply-to-man balances across many commodity inputs and creating a more favorable procurement environment. Positive e-bit contributions from price-cost and vine growth were partly offset by higher fixed costs. Operating expenses were driven higher versus the prior year by labor inflation, lower plant production rates, and temporary external spending programs, meant to accelerate achievement of our cost productivity goals. Lastly, in the quarter we took a roughly $7 million pre-tax charge associated with the anticipated exit from a non-core business within mobility coatings, which was not included in our adjusted operating performance metrics.

This is the strategic decision meant to prioritize our focus in markets where we can leverage our strengths and generate attractive returns. Turning to slide 10.

Performance coding's Q1 net sales increased 4% year-to-year or 7% XFX, driven by double-digit price mixed growth in both end markets and stronger than anticipated volumes in refenish.

Performance coding's Q1 Adjusted EBIT was 109 million versus 95 million in the same period last year.

Adjusted eBIG growth was driven by a favorable year-to-year refinish contribution and stable industrial earnings.

We finish just starting the year on a good trajectory and we believe it will deliver another record performance in 2023.

Segment adjusted EBIT margins approved by 130 basis points to 12.9% in the quarter. Moving to slide 11. Mobility coatings constant currency net sales increased by 24% in the first quarter, led by 17% better volumes. New customer wins and above market performance with certain customers enabled us to deliver growth above market again in the quarter. Price mix increased by 7% inclusive of new targeted actions taken in Q1 to accelerate margin recovery.

Segment adjusted EBIT improved considerably to $24 million from $1 million in the prior year period. Growth was driven by price and volume and a net favorable price cost benefit being the largest driver of the year of a year improvement.

All setting variable cost inflation still represents the most significant opportunity for the mobility team.

especially now that global auto production rates are approaching more normal levels. Technon adjusted EVET margins improved by 530 basis points to 5.4% in the quarter.

Now, turning toward debt and liquidity summary on slide 12. Exalt this balance sheet and liquidity profile remain very healthy. We ended the quarter with slightly over 1 billion in total liquidity, including a cash balance of 512 million. Our net leverage ratio was 3.7 times at the end of the quarter.

reflecting an improvement from 3.8 times at December 31st.

We expect that the strong momentum in our operating performance should drive sequential deleveraging of our balance sheet throughout the year. Cash flow improvement should also begin to aid further deleveraging on both the net and growth basis. We continue the target a long-term net leverage ratio between 2.5 times and 3 times, and expect we will be close to the high end of the target.

by your ends. Absent any meaningful capital allocation decisions outside of organic investments.

Our strong quarterly performance gave us the confidence to pay down $75 million in principle on our term loan during the first quarter. And we paid another 25 million in principle in April as we continue to work to offset the impact of higher interest rates.

Growth-step reduction will continue to be a priority for our free cash flow in 2023, and we'll be balanced with the potential for bold-on M&A with attractive opportunities as they present themselves. On slide 13, we will review our guidance framework and commentary. For Q2, we expect sales growth between 7 and 10% year-to-year, inclusive of an approximate 1% FX headwind. This framework assumes strong pricing and both segments to offset raw material and labor costs.

Modest overall volume growth led by stronger mobility coatings, but partly all set by softness and performance coatings, given tough prior year comparisons in refinished and continued macro pressures in industrial. We expect to generate a just a bit of approximately 150 to 170 million or 220 to 240 million.

and adjusted EBITDA in the second quarter. So, quenchally, we expect profitability to continue to improve, led by strong pricing, modest raw material deflation, and the typical seasonal step up and volume, partly all set by increases in operating expenses. For adjusted earnings per share, we anticipate a range of 34 cents to 40 cents for the second quarter. Note that our second quarter guidance framework includes approximately $15 million of temporary spending

associated with our SAP S4HANA ERP implementation in addition to certain costs for third-party consultants assisting with the productivity projects that Chris mentioned earlier.

We have planned for elevated maintenance to support the business during the ERP transition to ensure there is no impact to operations or our customers.

On Rawls, we are expecting a shift from two years of hyperinflation to stable to lower cost year to year, which we size as low single-digit impact in the second quarter. As we move further into 2023, we will be focused on improving working capital as a percentage of sales through the release of historically high inventory balances.

This, along with profitability improvement, represents a potential meaningful source of cash in 2023. We currently assume free cash flow for the year to be approximately 350 million, which is inclusive of $190 million of catbacks.

I would like to hand the call back over to Chris for closing remarks. Thanks Sean. Before we conclude our prepared remarks, I want to thank the team for their efforts this first quarter.

We're getting traction for our actions which is evident in our financial performance.

Exaltor has an excellent value proposition. Simply put, we have strong market leadership, many growth channels, and the best talent and technology in the industry. Combined with the various productivity initiatives in play, I believe.

We have the formula that will yield strong gains well into the future.

With that, we're pleased to answer any questions. Operator, please open the lines for Q&A. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue.

You may press star 2 if you would like to remove your question from the queue. We ask that you limit your questions to one enough follow-up so that others may have an opportunity to ask questions.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, will we pull for questions?

Our first question comes from Christopher Parkinson with Nizoo. Please proceed with your question. Great, thank you so much. Chris, I don't know if it's your favorite question that I imagine it's Sean's. Can we discuss just given the health of your volume growth within mobility specifically like vehicle? Can we just touch in and dig in a little bit more on?

Absolutely, Chris, and good morning. So I'd love to start and I'll give chance to foresharn to cover anything that I've missed. So first, as you can see through our cadence, you know, we had a great Q4, and if you look into Q1, we've continued with a majority of the carryover pricing, but we also had incremental pricing on the mobility space.

Where do we want to get to? Obviously the cadence is that we will continue pricing as I see going through the back end of the year. And a lot of the factors that are driving this, you know, yes we are seeing modest improvements in some of the raw material costs, but some of the baskets have headwinds as you know. We have headwinds in labor, we have headwinds in energy.

We have headwinds in certain TIO to specialty rods. So certainly something that we are focused on. And going back again to Q4, we had a gap of about $120 million of price cost across these two markets, whether it be mobility or industrial. So certainly for us to continue to provide the level of service to our customers.

we certainly intend to drive more pricing through the back end of the back end half of the year.

So that's the focus and the cadence is that we will continue pricing specific to those areas that I've addressed. Now I'll turn it over to Sean for anything more specific. Yeah, I mean Chris, we're really happy with the progress by no means. We declare and victory at this stage.

We did 18 million in EBIT in the fourth quarter, which was inclusive about $5 million catch-up on pricing. So you back that out. It's actually pretty impressive as far as large recovery and absolute EBIT growth from fourth quarter to the first quarter. Just given the volume rebound as well as us outperforming the market and we expect to continue to outperform the market for the rest of the year. We

do expect sequentially we'll continue to see margin increases as we move through the year. Great, that's helpful. And just as a quick follow up, some of the questions for performance within refinish. It seems like the markets are slowly but steadily getting back to 2019 levels.

Obviously, the cadence that is slightly debatable. But you've also been consistently discussing a lot of pencil demands, a lot of conversion optionality. There's been some advantages. Let's say consolidation among some of your best customers in the top 10 USMSOs. Can you speak to how we should think about your volume progression versus the market for 23? And then...

look from Q4 to Q1 and as we look through the rest of the year, I do believe there's more opportunity here on the growth side. And the team did a great job. If you think about Q1, we talked about the fact that they grew 400 body shops on top of the 140 distribution points.

But beyond that, I think it's really the additional incremental opportunity when we see adjacencies, you know, with the U-POL acquisition, what we've been able to get into with body fillers and aerosols. And the proof is also with what I've discussed in my comments, which is really...

pivoting towards the DIY space and the entry into AutoZone and O'Reilly's and the opportunity to put us on 16,000 retail

Shelves really gives us an opportunity to see that business growing through the back end So I look forward to talking to you about more about that over the next two quarters Other add to that crest would be just around market recovery North America still down 5 to 7% out of 2019 Although we continue to sort of outperform the market and Europe still down about 3 to 4% So we we continue to expect market

Do you compare electric vehicles to ice vehicles? Have you observed any meaningful difference in collision rates or is it the case that collision rates are nearly identical for those two categories? I think it's too good morning, Kevin, and thanks for the question. I think it's too early to make a call.

on that, I think, you know, with where the volumes are. And so far, what we've seen through what's coming through the body shops, I think it's a bit too early to make the call. What I am proud of is really how well the mobility teams have been winning on the EV side. And as you think about where the technology is going in the future, we've had some great new wins, whether it's in China.

also in North America with some of the largest players on the EV space. So very proud of that and I think in terms of how that market is transition at this point, I would call it a bit too early to call. you

Okay, and as a follow-up, if I may, I believe you took a charge to exit a business and mobility. Can you speak to what you're exiting and why as well as the sales impact from that decision?

Absolutely. So this is our APC business, which is our automotive plastic components business. It's something that we had acquired in 2016. And you know, from our perspective, this is not core. It was something that was small and something that...

We were not focused on and just did not scale appropriately. In terms of sales, it's between one or two million dollars. So it's nothing that's meaningful that will impact our business. But I do believe this is an opportunity for somebody else to really drive some growth, but it's certainly not an area of focus for us.

Yeah, and just Kevin just to add one to two million dollars in year from the sales perspective is about eight million dollars in 2022. This is a small segment within the APC segment and the crisis point. It just it wasn't high margin, but clearly not material and just not strategic for us.

Our next question comes from Gonjamb Punjabi with Baird. Please proceed with your question.

So let me, as I'll start off and maybe Sean can jump in, but just to give you a good morning again, just to give you a perspective on the short-term view, I think as I think about our approach, we've been a bit conservative looking at 23, our forecast is coming in at 83 to 84 with the markets or the external forecasters being just heading north of 85.5. So I do believe there's a bit more of a tailwind on the autoside, but to your question more on the long-term, as we think about 80, you know, where we're going through 25, Gunter, I think there's more, you know, with where the channel is.

you know, whether it's GM's results and, you know, also on the heavy side, everything's driving to a strong year. But again, we're also cushioning with the possibility of a self-quite recession for the back end. Yeah, and, and, Concham, just that, I mean, we've always characterized the normal, well, a lot of bill year of 88, 89 million bills.

It's just a matter of the pace, but we feel pretty good that we're going to see recovery for the next few years. Okay, perfect. And then for my second question, on the one-half cost, the ARP, etc., of $15 million for the second quarter, will there be any materials built over into the third quarter? I'm just asking because you're margin progression phased.

will basically stall out after just two quarters given the cost implementation for the second quarter. Yeah, and is there any spillover into the back half of the year?

Yeah, we're not expecting any meaningful spill over to the third quarter in regards to the European implementation. We're actually going live this month, so it'll carry over to June , but then it'll be largely wrapped up as far as the support costs. We are really happy with the margin regression, looking at the midpoint of the range.

You know, adding back these 50 million and more jumping up from 16 and a half from a margin perspective either to margin up to over 18 percent, 18 percent at the midpoint. So we are really happy with the progression that we're seeing. Our next question comes from John McNulty with BMO Capital Markets. Please proceed with your question.

Yeah, good morning. Thanks for taking my question. So with regard to free cash well, so you're $350 million target. I guess how much does that assume in terms of working capital release? Because I guess looking back over the last, basically since you guys went public, I think you've only...

coming below that 350 maybe once and I would expect this year to be a big pre-cashable kind of yielding year so from a working capital release so can you help us to kind of connect the dots on that. Yeah so John there's there's a few anomalies this year. CapEx you know creeping up the 190 million which is in our Guines country.

higher than normal years, and then interest expense is the other big call out. We're seeing about $70 million of incremental interest expense, specific to working capital. The expectation is working capital as a percentage in that sales is going to come down, but working capital as far as contributions will be fairly minimal from an overall free cash flow perspective. And that's partly due to we're expecting growth for the full year.

which you're going to see some level of cash outflow on accounts receivable.

Got it. Okay, no, that's helpful. And then on the refinished business in China, it sounds like it was kind of off to a slow start. Can you give us an update as to how that's progressing? I would think with China opening up a bit, people going back to work, not being locked down, etc. Like you should start to see.

a recovery there. Has that started already or is that something more on the come for later on this year? Yeah, we're seeing some nice growth in China. I would say as we start the first month, we're looking in plan to what we're giving as our Q2 guide. And again, remember for us...

China, John is a small component. It's 10% of our overall revenue. So it is something that's meaningful, but something that doesn't impact our overall business, meaning in a big way. The markets that I am focused on are obviously our largest markets when it comes to refinition.

good results. And that's what's driving the performance you see in Q1 as well as our guide for Q2.

Our next question comes from David Biglider with Deutsche Bank. Please proceed with your question.

Thank you. Good morning. Chris, you mentioned the opportunity in procurement and operations. Could you begin to quantify or talk about the potential opportunity in those two areas?

Sure, and maybe just jumping off where Sean left off, I think we talked about $15 million for the quarter as the one-time cost. A large majority of that is for the S4 implementation for which we have an excellent IS team that's doing a great...

job preparing us for the launch this month. But we have tremendous amount of work here because this is for our North American business and it never hurts to have some backup. So that's where most of this spend is. But we are looking at having another team look at the opportunity.

you know, what comes out, what is the outcome from those results. And I look forward to giving you a better perspective of that in the next quarter or certainly by two quarters from now. John , just qualitatively, we are expecting a quick payback. So the investment that we're doing in the spending in the second quarter, you know, we expect to benefit.

in the back half of this year. But to Chris's point, we'll give some more elements as we get into the July , early August time period. Chris, just on the 400 buy shop wins.

Can you provide some context how many did you win last quarter or even last year? I mean last year was three times that John for Perspective and this is what's continuing to contribute to our market outperformance. Our next question comes from Alexi Yaframov with Keybank Capital Market.

Sure, absolutely. And I think Alexei, if I think through, not specific to Exalta, but more in the broader space, starting from the COVID lockdowns as well as the supply chain disruptions that followed it, as well as specifically in Europe with the Russia Ukraine situation. I think from an operational element there's been an enormous amount of strain and stress in this system.

So, you know, what, as we said a quarter ago, the absolute focus is on operations. And when you take that and you break it down, you know, and where we can really drive the performance in the organization. And as I said in my prepared remarks, there are two buckets that have the most significant impact. You know, our variable costs are about two and a half billion or fixed costs are about one and a half billion. Anything that we do here even small drives a meaningful, you know,

drop down to our results. So these are the two areas I'm very, very focused on. We have strong operational teams here, but again, going through all the issues in terms of the supply chain, as well as the S4 launch, there is still opportunity here. And I would say that's a very, very important part of the S4

I simply put in my first 90 days there's more operational upside than I had originally thought. And so here the effort is to help those strong teams really get enablers by doubling down and putting focused teams to get that in the back end.

as we, and which I look forward to talking to you more about in a quarter from now. Thanks for this, Chris. And turning to refinish, you've over the past several quarters announced several wins in the UK and other MSO wins, and I think you also talked about potentially more wins. Could you update us on how those one contract are ramping? Yes, please.

On top of that, in terms of the growth, we are seeing a bit more growth in Europe . But I do plan to talk to you more about this in a quarter from now, because I do believe there is even more opportunity on the European front. Again, just four months in the seat, and what I'm doing right now is really spending time going through the three business units and really breaking it down piece by piece and understanding where value is created. And to your point, obviously Exalta does have an enormous performance opportunity through Refinish. So this is something that we're looking at, how can we really augment that.

become a little bit more resilient, a little bit more responsive, and also find opportunities to really grow this business in regions outside our strongest market, obviously being North America.

Our next question comes from Vincent Andrews with Morgan Stanley . Please proceed with your question. Thank you and good morning everyone. What's the message you've been giving internally, not just to your leadership team, but to the sort of rank and file?

things. And what you learn about Exalta very, very quickly is that we're incredibly customer-centric.

which is excellent as long as you're competitive and performing well financially. So here the focus, whether, you know, actually it started prior to my time with RAKASH is the focus on executions to ensure that we drive that profitability. And if you look at Q1, certainly those results have come through, whether it's, you know, just take the one matrix.

of price mix and we're up 9% as Sean pointed out. And it's great to see that when we focus the organization and you focus them on execution, they certainly deliver. And if I look at the short term strategy, the short term strategy is to continue to focus on execution.

So we're going to drive the focus on price, we're going to drive the focus on cost, and on the cost side it's purely execution around operations, around purchasing, around supply chain. And we have obviously tailwinds that are helping us, whether it's through our 3 or 4N markets on volume, and then to most of the questions here, the increasing share, whether it's mobility and refinish, are helping. So…

If you focus on execution across operations, as well as continue to drive the pricing across certainly two of our end markets, we certainly will get back to the normalized profitability that we saw pre-pandemic. And that's the message I'm driving. And as you can see from the Q1 results, it's certainly being brought up by the team.

And this is a follow-up as we move through the year, Sean, how should we be thinking about incremental margins? You know, it's what sort of implied in the two-queue guidance. Is that what we should be thinking about over the bounce of the year or should it step up as presumably Ross become more favorable in the back half and, you know, obviously different volume scenarios in the back half. But how should we be thinking about incremental??? Pres bounds are other than greater Administration. You know professional optimization oriented and

Yeah, so I mean we're clearly not providing full year guidance here, but what I can signal is two things. You should continue to expect margin recovery sequentially as we move through the year in every end market. And the other sort of key data point is we are expecting the second half of the year to be stronger than the first half.

from an overall EBITF perspective. Our next question comes from Michael D. Ted with Barclays. Please proceed with your question. Great. Thanks for morning guests. Just one from me. On mobility, obviously a couple strong quarters in a row. It's volume.

well ahead of the auto growth. So when you drill into that internally, is it your specific customer mix? Are there new platform wins? Just help us triangulate from the outside the difference there. And just broadly how we should think about your volumes to trend this year relative to, again, however industry build rates shake out. Yeah, so I think I'm going to start this and then Sean can give a little bit more color on margin.

incremental growth through 2024. And what you're seeing is that volume dropping down into our P&L already in Q1. So and we expect that growth to continue to hit the the run rate target of 200 million in 2024. So the team's done a great job there. Now the wins, where are they? Across the board.

We're seeing winds in China specifically on some great EV platforms, but certainly growth also in Europe as well as North America and some traditional strong ice platforms. And with that.

Yeah, just I mean, just to add, you know, we have a lot of things going in our favor on the mobility side. You have market recovery, you got new share wins, and then you actually have some of our key customers, their platforms are just clearly outperforming the market. And probably case in point is China, you know, we're up almost 19%.

And that market was down about 8%. Part of that, big part of that is just some of the platforms that we're on, or outpacing the overall market there in China. On top of that, we have nice pricing towel wins. So all that's healing to better margin recovery over time.

Great, thank you. Our next question comes from Duffy Fisher with Goldman Sachs. Please proceed with your question. Good morning. First question is just around raw materials. I think you made a comment about single digits in the back half, but I didn't understand if that was your exit rate at the end of the year or if you expected it.

any sort of data points in regards to Q3 and Q4. Okay, thank you. And then when you look sequentially Q1 to Q2, if you take out the two COVID years, over the last eight years, you've basically averaged about a 12 cent improvement from Q1 to Q2, and only two times has it been below a dime. So even if you adjust your $15 million for Q2,

And when you compare, quite frankly, the prior years, is interest expense is picking up quite a bit, going from $48 million up to $56 million. And then you got taxes jumping. Historically, we've run around 22 to 23 percent. You know, we're expecting closer to 25 percent effective tax rate this year. So....

There are probably two call outs for why you're not apples to apples. Okay, great. Thank you guys. Welcome.

Our next question comes from Steve's Vine with Bank of America. Please proceed with your question. Yes, thank you. It looks like it's been five years since your mobility segment posted a revenue that you had in this quarter. Back then you had a 10% EBIT margin.

Do you think you can get back to a double digit even margin in mobility and when do you think you can get there? Well I certainly believe that we can get to a double digit mobility margin if you look at the actions that we're driving certainly from a pricing standpoint from a cost standpoint that is

certainly the focus of the team. And even in my first 120 days here, Steve, I absolutely believe that that is an opportunity that we will be focused on and will be a go get. In terms of timing, I think that's the big question. I mean, if you look at the volatility in the economy and just figuring out what will happen with raw material deflation as a bet.

how much of the pricing really will stick and how much more of the pricing that we have targeted will we get as well as the cost initiatives, you know, a lot of the programs that we've talked about whether it's on the procurement side or as well as the lean opportunities that we have in our plants. There has to be a real focus here on productivity which should be always part of the algorithm. So the question is, you know, what is our timing to get that?

So I hope to give you a better perspective at this point. I can't give you an exact time of when we'll get there. And then Chris, this initiative that you have to, you know, bring in some outside help and drill into productivity and operations and so forth.

What has led you to this? Is this your experience? Is this looking at comps? Is this a benchmarking analysis? And what gives you the conviction that there is a meaningful opportunity here? It's a bit of all of those. I think it's obviously a bit of my experience from the past.

that went through some challenging times through COVID. And the supply chain disruptions as many of us did. And I do believe that there are opportunities that just doubling down the efforts here will drive the performance requirements that we need in the back end. So that's where I'm getting the conviction that there's a focus here. Steve, the one thing to add, the old guy around the table here, the teams are well.

You're welcome. Our next question comes from Aaron Vislanathan with RBC Capital Markets. Please proceed with your question.

Thanks for taking my question. I guess first off, I just wanted to clarify your deleveraging targets for this year, maybe how much gross debt pay down you expect, and is there any kind of opportunities you can take advantage of to refi and maybe bring down your interest expense going forward?

Yeah, so I mean over time we're still targeting two and a half to three times and as I covered in my remarks, you know, we expect to be at the high end. You know, Warren, we don't do anything sort of significant from the capital allocation perspective. We are actively looking at both the slot markets as well as looking at the refinancing markets. It's just things are not open right now.

But sort of the expectations will be, as far as access for cash flow, the majority, the vast majority will be used to actually pay down gross debt. But we are expected to be closer to three point of time by the end of the year. Okay, thanks. And just on the cost optimization side, is there are these programs that you're implementing similar to some of the prior exaltals?

I'm not sure how it aligns with the ExCELTA way, but from what I've heard and also from listening to Sean, I would say it's not very similar. I think our focus, first of all, the teams are just starting out, so defining exactly what is the opportunity. 2021 ExCELTA

is I would say a little bit too early to call. But all that said, as Sean alluded to in the last question, the teams are really looking forward to driving some of this opportunity, especially on the purchasing side. Again, if you think about the fact that we took...

$650 million of incremental cost, or 46% variable cost increase through 21 to 22. And that is something that is historic and not in the 10 years of exalted being in existence. So again, that's the first focus of driving to ensure that we can pull some meaningful cost out of there that will drive to the bottom line. Thanks.

$50 million of incremental cost or 46% variable cost increase over the last through 21 to 22. And that is something that is historic and not in the 10 years of exalt of being in existence. So again, that's the first focus of driving to ensure that we can pull some meaningful cost out of there that will drive to the bottom line. You're welcome. Thank you.

Our next question comes from Mike Sussan with Wells Fargo. Please proceed with your question.

Hey, good morning guys. Nice start to the year. Sean, I just wanted to make sure I heard you right. In terms of the first half, just a little bit, did you say it was going to be better than the second half? And if that's the case, is it really just the demand environment? The second half could be more difficult than the first?

Now, Mike Yavif left the second half should be more favorable in the first half. The drivers for the better second half would just be price-raud and a little bit better demand.

That's exactly right. Great. Thank you. You're welcome.

We have reached the end of our question-and-answer session. This concludes today's conference. Thank you for your participation.

You may disconnect your lines at this time.

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