Q2 2024 Axalta Coating Systems Ltd Earnings Call
Please standby your program is about to begin.
Ladies and gentlemen, thank you for standing by welcome to the X out the coating systems Q2, 2024 earnings call.
All participants will be in a listen only mode. A question and answer session will follow the presentation by management.
This call is being recorded and a replay will be available through August eight.
Those listening after today's call should please note that the information provided in the recording will not be updated and therefore may no longer be current.
I will now turn the call over to Colleen Lubick, Vice President of Investor Relations. Please go ahead.
Thank you and good morning. This is calling in Lubec, Vice President of Investor Relations.
I'm excited to join you today for my first earnings call.
We appreciate your continued interest and welcome you to our second quarter 2024 financial results conference call joining.
Joining me today are Chris Bayle, Ryan CEO, and President and Carl Anderson, Senior Vice President and Chief Financial Officer.
We released our quarterly financial results. This morning, and posted a slide presentation to the Investor Relations section of our website at exhaust the dotcom, which we will be referencing during this call.
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 exalt is operating and financial performance.
These statements involve uncertainties and risks.
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 in this 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.
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 Chris.
Thank you Colin and good morning, everyone before we get started I'm pleased to announce that Chris Evans, formerly <unk> Vice President of Investor Relations has joined our global strategy group, where he will play an important role in driving our 2026, a plan, calling blue Bank has.
Speaker Change: <unk> taken the lead for us in Investor Relations I congratulate both of them in their new positions.
The <unk> team has done an amazing job of working together to achieve and exceed our targets as demonstrated by the beat and raise this quarter I want to recognize the entire organization for executing flawlessly in a soft macro environment.
In the second quarter, we had the highest recorded quarterly net sales and adjusted EBITDA in the company's history adjusted EBITDA margins increased to 21, 5% and our balance sheet continues to strengthen with net elaborates declining for the eighth consecutive quarter two.
Another record low of four <unk> at quarter end.
Around the world, we demonstrated our ability to execute well.
I believe our success over the last 18 months has been a result of the priority we have placed on improving productivity, making smart commercial decisions and tightly managing capital returns more.
<unk> is building throughout the organization and I'm, absolutely proud of the team's accomplishment in the first half of 2024.
For the quarter net sales increased by 4% to 135 billion volumes increased by 5% year over year with positive contributions from all four end markets.
Adjusted EBITDA for the second quarter was 291 million, representing a $64 million increase year over year.
Adjusted EBITDA margin improved by 400 basis points to 21, 5% largely driven by our material and cost focus both segments showed improved profitability year over year.
I'm confident in our trajectory, which has led us to again increase our guidance for 2020 for adjusted EBITDA adjusted diluted earnings per share and free cash flow.
As I've shared with you I believe we're just beginning to transform the company and unlock the tremendous potential of our products technology and organizational capabilities.
Refinish had an excellent quarter with net sales growing 5% year over year, making this the 14th straight quarter of improved top line performance.
Speaker Change: In North America net sales were up 13% as we continue to grow and win new business.
We also benefited from favorable comparison to the second quarter of last year in connection with production constraints associated with our North American ERP implementation.
Strategically our key focus for us remains growth in the premium segment, where we believe we can win based on three key factors.
The productivity of our single visit application waterborne system second our end to end fully automated color match that now includes hands free mixing following the launch of Iris mix and finally through a host of digital tools, which is optimizing customer support.
And real time productivity monitoring for our body shop customers year to date, we have already delivered over 1200 net body shop wins, and we expect this to be another great year.
Expansion in the economy segment is another important pillar for our refinished growth strategy that we outlined in our plan.
Speaker Change: In July we completed the acquisition of the cover Flex group, which manufacturers coatings for automotive refinish and aftermarket applications focused on economy customers in North America. The business offers a wide range of coatings as well as aerosols fillers in paint shop accessories.
Speaker Change: This acquisition also provides us with the brand's commercial access and manufacturing capabilities to serve the economy segment, where we believe we have great potential for growth.
Excited to welcome the entire cover Flex group to the <unk> team.
Industrial net sales increased by 2% year over year, driven by increased volume in North American building products.
The second quarter marked the first year over year improvement in net sales for industrial in six quarters, which we believe is a signal that market activity has bottomed out and is positioned for a recovery when global construction improves.
Although global industrial demand remains relatively muted our team has done a stellar job of driving significant year over year margin improvement.
Through cost management and portfolio optimization.
Speaker Change: Innovative new products, such as dynamic cabinet coatings are gaining traction and are part of a clear commercial strategy to prioritize segments and regions, where we have strong value proposition and can generate an attractive return right.
Speaker Change: Light vehicle had another strong quarter volume growth up 7% year over year significantly outpaced global auto bills with better growth rates versus regional production rates.
China was a bright spot for us again with nearly 30% volume growth.
Globally. The team is building lasting partnerships with the fastest growing Oems at attractive margin levels.
Based on this we expect above market growth to continue.
Speaker Change: Following a flat light vehicle build environment in the first half of the year industry forecasts are now projecting the second half of the year to be approximately 3% to 4% lower year over year with most of the declines in Europe.
Commercial vehicle net sales increased by 3% year over year volumes benefited from stronger than anticipated class eight production in North America and Latam.
We still expect a modest production slowdown in the second half of 2024 before it ramps up in 2025, leading to a strong 2026.
Speaker Change: Move to slide five.
In May we introduced our 2026, a plan a multiyear strategy to accelerate performance and transform the company I expect the five unique elements of the plan will differentiate <unk> in the industry and allow us to achieve new levels of exceptional.
Speaker Change: Performance.
Speaker Change: First driven by our one exalt a mindset, we are creating a culture that is faster more effective and more responsive second is operational excellence. We will continue the journey, we have started to control the controllable and drive more efficiencies in corporate.
Speaker Change: Operations and supply chain, we expect these actions to yield approximately 125 million in annualized run rate savings in 2026.
Speaker Change: Next it's driving growth through portfolio optimization with a focus on our core strengths and profitable businesses.
Speaker Change: Fourth is sustainable innovation, which is creating the worlds best products for sustainability efficiency and color. Examples of this are next yet and the Iris mix.
Speaker Change: And finally capital allocation, where we plan to focus on investing in the business and returning value to our shareholders.
Speaker Change: As you can see with our performance in 2023 and the first half of this year, we're well on our way of achieving our targets I will now turn the call to Carl for a more detailed view of our second quarter financial performance.
Carl: Thank you, Chris and good morning, everyone, let's turn to slide six.
Carl: Second quarter net sales increased by 4% year over year to 135 billion, primarily driven by volume growth of 5% with contributions from all four end markets.
Carl: Price mix was flat in the second quarter as positive price actions were offset by contractual raw material pass through impacts.
Speaker Change: Gross margin improved by 390 basis points year over year to 34%.
Speaker Change: This improvement was supported by 8% lower variable cost strong cost management and ERP cost that did not repeat from the second quarter last year.
Speaker Change: Our procurement team delivered another great quarter with raw materials energy costs and freight expenses, all lower versus the prior year period.
Speaker Change: We continue to benefit from our productivity programs executed last year, which have generated an attractive return.
Speaker Change: Regarding raws, we remain well supplied except for specialty pigments, where we continued to experience tight supply and long lead times.
Speaker Change: More broadly we view most markets. It is balanced at this time with the only pockets of inflation in our commodity basket stemming from transitory supply issues, namely and solvents.
Speaker Change: Our forecast of a mid single digit full year benefit from raw material deflation remains unchanged and we anticipate a stable cost environment in the second half.
Speaker Change: <unk> expenses were roughly flat compared to the second quarter of last year and modestly lower as a percentage of sales underscoring our effective cost management efforts aligned with the transformation initiatives introduced earlier this year.
Speaker Change: We still expect to achieve annualized savings of $75 million from these actions by 2026 with $10 million that should be realized this year.
Speaker Change: Adjusted EBITDA in the quarter was 291 million, 28% above second quarter of last year.
Speaker Change: Adjusted diluted earnings per share increased 63% to $50 <unk>, driven by improved earnings and lower interest expense, which more than offset a modest headwind from a higher effective tax rate.
Speaker Change: A key component of our <unk> plant is a heightened emphasis on return on invested capital for which we are targeting 15% by 2026.
Speaker Change: On a trailing 12 month basis return on invested capital was 12, 7%, representing a 140 basis point improvement compared to last year and highlights good progress towards our goal.
Speaker Change: Overall, we delivered exceptional results across all of our businesses, which is due to the incredible talent and dedication of our one <unk> team.
Speaker Change: Moving to slide seven.
Speaker Change: Performance coatings second quarter, net sales increased 4% year over year to $887 million.
Speaker Change: Yeah.
Speaker Change: Mobility coatings net sales increased 6% year over year to $464 million with growth in both end markets.
Speaker Change: Light vehicle volumes were strong in the quarter outpacing auto production growth rates in all regions, particularly in China.
Speaker Change: You'll vehicle volume showed improvement due to better than expected class eight production in North America, and Latin America.
Speaker Change: Mobility coatings, adjusted EBITDA improved by 50% year over year to $68 million.
Speaker Change: Adjusted EBIT margin expanded by 440 basis points to 14, 8% with strong improvement in light vehicle, primarily driven by lower variable cost growth in the China market and strong cost management initiatives.
Turning to slide nine.
We ended the second quarter with over $1 $4 billion in total liquidity.
Speaker Change: Our cash balance of $840 million, a quarter and includes a $185 million draw on our revolving credit facility to finance the acquisition of cover flex, which closed in early July.
Speaker Change: In industrial net sales are expected to be up modestly margin growth in industrial will remain our highest priority in the current soft macro environment light vehicle net sales are expected to be flat as solid volume growth globally will be partially offset by <unk>.
Speaker Change: Contractual raw material pass throughs.
We continue to price in both our industrial and mobility business to ensure we are receiving the appropriate value for our products.
Lastly in commercial vehicle, we anticipate lower sales influenced by the forecasted decline in class eight production in North America, our full year net sales forecast is to grow low single digits compared to last year.
Third quarter adjusted EBITDA is projected to increase 5% year over year to 275 million third quarter adjusted diluted earnings per share is estimated to increase by roughly 12% to approximately 50.
Following another solid quarter for <unk>, we have increased our full year guide.
Yeah.
Speaker Change: Sure Good morning, Alan Alexi.
Starting off maybe stepping back into Q2, we feel really good about the 4% topline growth, but specifically in refinish that went up about 5% really driven by the four elements of the plan it was.
Focusing on driving more growth in gaining more body shops. So we gained 200 body shops to date.
Speaker Change: 600 in economy in Maine, and 600 in premium and then on top of that we really expanded into the adjacency space. So it really expanding our share of wallet and then on top of that we focused primarily on also on driving and executing and closing the acquisition with cover flex but.
And that the Andre co acquisition that we closed last year, it's been really providing a tailwind. We're ahead of our deal model and finally, our retail stores in Europe have been driving are doing great in terms of our growth strategy. So for all four elements of the plan have been really driving the growth story the market I would say.
It has been flat as you can.
Speaker Change: Thanks, a lot.
Thank you.
Yeah.
Speaker Change: Our next question comes from John Mcnulty with BMO capital markets. Please go ahead.
Hey, good morning, Thanks for taking my question, So light vehicle it sounds like youre going to be able to hold in pretty well against what at least the consultants are looking at is a is down about mid single digits. I guess can you speak to how much pricing pressure you are having and how that kind of offsets some of the some of the wins that youre seeing in the volumes.
Speaker Change: Attributable to that one.
Well, maybe I'll start off and I'll hand, it over to Carl but as I look at it starting off at the beginning of the year.
John What we did was we provided a forecast of $89 million bills I would say that's trended up and right now it's come back down but overall, it's in line with what we forecasted for the full year in terms of built but our story in terms of again, even in mobility is really about growth and.
Speaker Change: Our sales volume pick up by 2%. So the team's just doing a stellar job and it's primarily.
We started this whole process over a year and a half ago. The focus was really earning the right to grow.
I think that Shelly who leads the team had had a focus around let's shrink to get to the right spot and earn the right to grow and I would say, we're certainly executing down that plan.
Speaker Change: So what did we do we certainly we got out of certain customer agreements as well as certain businesses.
Low profitable powder businesses that just didn't make sense in the portfolio and we were able to consolidate and come to a point that we believe that we are in the markets that we can get value from our customer we provide value for our customers and obviously get the right level of pricing to equate with.
Speaker Change: The thing that I'm very proud of the team with is at the levels of margin that we're getting to that at this business any sign that we see an improvement in let's call it construction or residential in the future because if you look at our performance last last quarter as I mentioned, one of the areas that we really grew and.
Yes, we looked at the industrial business and as we outlined in our strategy. Today. There is about you know about maybe 10% of the overall business that we were looking at where we could potentially make some changes whether that was too.
Exit certain some of those.
Customers as well as price for it. So that's the journey that the the team has been on I think to date as Chris alluded to the execution has gone extremely well.
And you can overall.
This is the first quarter that we are actually infecting positively on the topline in industrial and Youre seeing youre getting a benefit from that but you're also getting that benefit from.
Speaker Change: Some of this de prioritization and as I referenced in my prepared remarks, we're expecting the industrial margin profile and performance to increase over 300 basis points from last year. So a really really good start from the team. We believe there is definitely more to go in.
And we will continue to execute on that as we get into into 'twenty five and beyond.
Speaker Change: Very excited about this type of performance you can see you know at the top end of our range, we kind of have it penciled in at $1 1 billion, which year on year would be about $150 million increase in overall EBITDA.
And then importantly, if I think about just kind of what we're doing with <unk>.
Earnings per share great quarter up 63% this year and then for the full year based off of $2. Five so we're going to be up over 30% year on year. So I wouldn't say necessarily conservative I think it's just it just speaks to the execution that we continue to focus on and we're excited about where we're at.
And maybe just to add to that Steve from a sales standpoint.
Steve: As you know the back half of the year.
To ensure that we drive margin stability and we get value for the products that we provide our customers in that environment, It's just a little bit harder.
Steve: Yeah.
Speaker Change: Alright, and then on the light vehicle business you mentioned that.
The market forecast is for a little bit of a decline in the second half I'm curious what you've been hearing specifically from your customers about any additional summer downtime, we're throttling back on production in the second half relative to levels in the first half as maybe some.
Those customers look to rationalize.
Speaker Change: Some of the inventory levels are.
Steve: So specific to North America, I would say our customers are there are there is a bit of.
Steve: So I would say that the.
Steve: The comp.
Speaker Change: Percentage is about 2%.
Is one element of this that I think I want to make sure that there.
Steve: There is an understanding is if you look at the.
Speaker Change: The sales that we that was impacted in North America, We said North America grew by 13% and that revenue that we lost because of the ERP implementation in Q2 of last year was about $20 million to $30 million and what Im really impressed with the team is that that revenue just doesn't sit there and wait for us.
Speaker Change: To show back up and get the teams drove a strong initiative to work with our customers and drive and get back those sales and I'm really proud of the refinish team for accomplishing that target. It's just shows the strength of the products that we provide the resiliency of the team.
Speaker Change: With the back half of the year, we're going to pivot to obviously focus on growth and we have a $500 million target for growth.
Speaker Change: As I look at this year, we've already accomplished about $130 million to $150 million of that so we still have $350 million to get over the next two years and to do that.
Speaker Change: We are positioned in the a plan half of it was through M&A and the other half was through organic growth.
Speaker Change: And as I look at the bolt ons that we were able to do in accretive parts of the business Refinish and we've also highlighted that we wanted to do something in commercial vehicle I do believe that there are opportunities here and you'll hear more from the teams as we go forward over the next year, but those are the areas that were.
Speaker Change: Highlighting and we want to keep focused on as we go forward.
Speaker Change: And 25 mm and the markets improve how do you think each of the businesses would do in that environment and in total do you think you have a pretty good improvement in volume growth next.
Speaker Change: Next year.
Speaker Change: We absolutely expect that I would say you know what what I'm really really proud of what we've been able to accomplish Mike is really building the foundation from a margin perspective, <unk> perspective, and making sure. The underlying business is that a good point so that if we see any growth it converts well so why.
Speaker Change: [music].