Q3 2024 Axalta Coating Systems Ltd Earnings Call
Speaker Change: Ladies and gentlemen, thank you for standing by.
Speaker Change: Welcome to Exalta Coding Systems 3rd Quarter 2024 Earnings Call.
Speaker Change: 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 November 6.
Speaker Change: 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 Lube, Vice President of Investor Relations. Please go ahead.
Speaker Change: Thank you and good morning. This is Colleen Lubick, Vice President of Investor Relations.
Speaker Change: We appreciate your continued interest in the Exalta story and welcome you to our third quarter 2024 financial results conference call.
Speaker Change: Today, our Chief Executive Officer Chris Villavarayan and our Chief Financial Officer Carl Anderson will provide a financial review of the third quarter and an update to our 2024 outlook.
Speaker Change: We released our quarterly financial results this morning and posted a slide presentation to the investor relations section of our website at Exalta.com, which we will be referencing during this call.
Speaker Change: 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 Exalta's operating and financial performance.
Speaker Change: These statements involve uncertainties and risks, and actual results may differ materially from those forward-looking statements.
Speaker Change: Please note that the company is not obligated to update these forward-looking statements.
Speaker Change: During the discussion, references may be made to non-GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and applicable reconciliations.
Speaker Change: For additional information regarding forward-looking statements and non-GAAP financial measures, please refer to our filings with the SEC.
Speaker Change: I will now turn the call over to Chris. Thanks, Colleen. And good morning, everyone. Let's move to slide three. This was an exceptional quarter for Exalta, demonstrating our ability to execute our priorities and control the controllable.
Speaker Change: In the quarter, net sales increased to $1.32 billion.
Speaker Change: This represents the 15th consecutive quarter of net sales growth year over year. Share gains, mix management, and contributions from recent acquisitions more than offset a softer macroeconomic environment.
Speaker Change: Adjusted EBITDA increased by 30 million year-over-year to a third-quarter company record of 291 million. This outstanding result represents the ninth consecutive quarter of adjusted EBITDA growth year-over-year.
Speaker Change: Adjusted EBITDA margin was 22%, an improvement of 220 basis points from the same period last year.
Speaker Change: Margin expansion was the result of lower variable costs, contributions from acquisitions, and a reduction in operating expenses due to our transformation actions introduced earlier this year.
Speaker Change: Growth is a primary objective for the 2026 A-Plan.
Speaker Change: This quarter, we had several achievements that should contribute to achieving our growth target. First, we were excited to begin converting a top five refinished MSO in North America.
Speaker Change: This new award was driven by the outstanding technology and efficiency of our product portfolio. In building products, we continue to be awarded business with strategic customers, reinforcing our position as a leader in this space.
Speaker Change: We were awarded this new business due to our color technology and our ability to expand capacity to meet our customers' expectations.
Speaker Change: In terms of innovations that we expect will expand our business, we recently launched Exalta Nimbus and Exalta Iris Scan. These are great examples of us bringing new and innovative tools to the market.
Speaker Change: Iris scan is an advanced handheld tool that scientifically measures vacal color for accurate readings.
Speaker Change: Upon retrieving data from IrisScan, Nimbus digitally compares and delivers a highly accurate color formula that ensures a perfect match each and every time.
Speaker Change: These tools are leading technologies that enable body shops to improve efficiency, enhance productivity, and deliver consistent quality leading to higher profitability.
Speaker Change: In building products, we launched Cerulean, an extension of our water-based platform for interior finishes, including cabinets.
Speaker Change: Our technology offers a smoother coatings from a visual and touch perspective. We developed this new product line using our expertise in performance coatings and are pleased that it extends our commitment to developing sustainable solutions.
Speaker Change: Within Mobility, our customer collaboration extends from the early stages of product development to working alongside OEM in their paint shops.
Speaker Change: We are incredibly excited that great customers like BYD, Daimler, Ford, and General Motors have recognized our efforts and awarded us multiple honors. This speaks to the excellence of our product, quality, service, and customer relationships.
Speaker Change: This quarter's results demonstrate our resolve to deliver on our commitments and expand profitability with a clear focus on priorities and alignment across the company.
Speaker Change: Given our better than expected third quarter results, we're confident that our full year 2024 adjusted EBITDA will exceed $1.1 billion.
Speaker Change: Let's move to slide 4.
Speaker Change: The Refinish business posted another strong quarter with net sales growing 5% year-over-year.
Speaker Change: We have achieved 15 quarters of net sales growth year-over-year with a soft macro environment. Year-to-date, we have outperformed the industry by mid-single digits driven by net new body shop wins, M&A and pricing.
Speaker Change: And with the recent CoverFlex acquisition, we expanded our position in North America's economy segment.
Speaker Change: While it is still early in the integration, CoverFlex results exceeded our expectations in the quarter.
Speaker Change: Year-to-date, we have delivered 5% volume growth year-over-year against production rates that declined 2% in the same period.
Speaker Change: This type of outperformance is not new to Exalta, as our volume growth has outpaced light vehicle bills in nine of the last ten quarters.
Speaker Change: Our China and LATAM strategy have diversified our customer base and brought accretive business into the portfolio. I'm very proud of the results we have seen in revenue growth and margin expansion.
Speaker Change: By reducing some of the volatility caused by the commodity cycle through raw material indexing, the team has been able to dedicate their time in delivering exceptional products and service. This has enabled us to build and expand excellent customer relationships.
Speaker Change: Despite the volatility we expect in the auto industry over the next few quarters, our diversified customer base and significant new business wins should help us weather these headwinds.
Speaker Change: Let's move to slide 5.
Speaker Change: The A plan is the absolute focus. We believe our strategy is achievable as shown so far this year with our financial results. We're well on our way to delivering the plan earlier than anticipated. This is the consistent performance we're aiming to deliver going forward.
Speaker Change: As we approach the end of the calendar year, I want to thank Exalta's global employees for coalescing around the A-Plan and executing flawlessly thus far in 2024.
Speaker Change: I could not be prouder of this great team and I look forward to closing out the year strong and preparing for 2025. With that, I'll turn the call over to Carl.
Carl Anderson: Thank you, Chris. And good morning, everyone. Let's turn to slide six.
Carl Anderson: Third quarter net sales increased by approximately 1% year-over-year to 1.32 billion, primarily driven by contributions from our recent acquisitions which outweighed the macro headwinds in the quarter.
Carl Anderson: Price mix declined 1% in the quarter as positive price actions were offset by anticipated contractual raw material pass-through impacts and an unfavorable mix within refinish.
Carl Anderson: Improvement was supported by 6% lower variable cost and strong cost management.
Carl Anderson: Our procurement team delivered another great quarter with raw materials, energy costs, and freight expenses all lower versus the prior year period.
Carl Anderson: We are benefiting from our continued focus on productivity programs which are generating excellent returns.
Carl Anderson: Regarding RAWs, we remain well-supplied across the commodity base.
Carl Anderson: We view most markets as balanced at this time, with pockets of inflation remaining, but slightly better than expected on softer overall market demand.
Carl Anderson: In the fourth quarter, we are expecting raw material costs to be similar to fourth quarter of 2023 as we begin to lap the deflationary impacts that started late last year.
Carl Anderson: Income from operations increased $30 million in the third quarter compared to the prior year.
Carl Anderson: This improvement was supported by a mid-single-digit decline in variable cost unit rates, productivity improvements, and approximately $15 million of consulting and ERP costs that did not repeat from the third quarter of last year.
Carl Anderson: SG&A was roughly flat compared to last year as we continue to actively manage our cost structure.
Carl Anderson: Additionally, the financial impact from the Transformation Initiative is coming in ahead of plan this year, and we expect to be well on our way to achieve an annualized savings of $75 million in 2026.
Carl Anderson: Adjusted EBITDA in the quarter was $291 million, 12% above last year, marking another record quarter for EBITDA performance.
Carl Anderson: And adjusted diluted earnings per share increased 31% to 59 cents, driven by higher overall earnings and lower shares outstanding.
Carl Anderson: Let's move to slide seven.
Carl Anderson: Net sales for performance coatings increased 2% year-over-year to $877 million, largely due to the impact from the recent acquisition.
Carl Anderson: Refinished net sales grew 5% to $554 million, driven by incremental contributions from CoverFlex and NetNewBodyShopLens, offset partially by unfavorable macro trends and mixed headwinds.
Carl Anderson: Industrial net sales declined 1% year-over-year to $323 million in line with industry trends.
Carl Anderson: While we expect the industry conditions to remain muted through the remainder of this year, we continue to be on track to deliver 300 basis points of margin improvement in 2024, consistent with our prior guide.
Carl Anderson: Performance Codings Adjusted EBITDA increased $21 million or 11% year-over-year to $221 million.
Carl Anderson: Adjusted EBITDA margin increased by 200 basis points, primarily driven by lower variable costs, conversion on incremental revenue, and lower operating expenses.
Carl Anderson: Let's move to Mobility Codings results in slide 8.
Carl Anderson: Mobility Coding's net sales decreased 2% year-over-year to $443 million.
Carl Anderson: Late vehicle net sales were flat in the third quarter versus the third quarter of 2023 despite a 5% decline in build rates.
Carl Anderson: Volumes grew 5%, outpacing auto production growth rates in all regions.
Carl Anderson: As expected, price mix was a low single-digit headwind in the quarter, primarily driven by raw material pass-through impacts and timing of pricing actions when compared to last year.
Carl Anderson: We are encouraged by the volume growth and believe that the team can continue to drive sustained relative outperformance at these levels.
Carl Anderson: In the fourth quarter, we expect favorable price mix results as favorable mix is expected to more than offset headwinds from raw material passers.
Speaker Change: Commercial vehicle net sales declined 8%, primarily driven by a drop in Class 8 production in North America and Latin America.
Speaker Change: Mobility Codings Adjusted EBITDA increased by 14% year-over-year to 70 million dollars.
Speaker Change: Adjusted EBITDA margin expanded by 230 basis points year-over-year to 15.7% with another quarter of margin expansion in both businesses primarily driven by lower variable costs and a reduction in operating expenses.
Speaker Change: Turning to slide nine.
Speaker Change: We ended the third quarter with over $1.2 billion in total liquidity, inclusive of $567 million in cash on hand.
Speaker Change: Total net leverage at quarter end was 2.7 times and we are on track to be at 2.5 times by the end of the year.
Speaker Change: Total gross leverage at quarter end was 3.2 times, a 0.2 times improvement sequentially, and a 0.7 times lower than the third quarter of 2023, consistent with our strategy to drive our gross debt leverage to a range of 2.5 times to 3 times.
Speaker Change: In the quarter, we repaid $80 million of the $185 million draw on a revolving credit facility used to finance the purchase of CoverFlex that was completed in the third quarter.
Speaker Change: Additionally, we repurchased 50 million of Exalta shares this quarter.
Speaker Change: Since announcing the 700 million share repurchase program earlier this year, we have repurchased 100 million of shares to date.
Speaker Change: Capital expenditures in the third quarter were $33 million, bringing year-to-date CapEx to $78 million.
Speaker Change: We see many opportunities to deploy capital in our manufacturing facilities to drive productivity and improve efficiencies.
Speaker Change: We remain committed to spending on high-return projects and investing in the business.
Speaker Change: Our year-to-date operating cash flow is $342 million, and we have deployed approximately $560 million this year, inclusive of the CoverFlex acquisition.
Speaker Change: Our balanced approach to capital allocation and the speed at which we have executed against our priorities is critical to achieve the A-Plan target of 15% return on invested capital in 2026.
Speaker Change: As of this quarter, return on invested capital exceeded 13% on a trailing 12-month basis, which is an increase of 180 basis points compared to full year 2023.
Speaker Change: Let's turn to slide 12.
Speaker Change: With another strong quarter completed, we are pleased to increase our fiscal 2024 earnings outlook.
Speaker Change: Full year 2024 adjusted EBITDA is projected to be approximately $1,115,000,000, an increase of $20,000,000 versus the midpoint of our prior guidance, and a 17% increase in adjusted EBITDA year over year.
Speaker Change: Additionally, Adjusted Diluted Earnings Per Share is now forecasted to be at approximately $2.15, representing a 37% increase compared to last year.
Speaker Change: Despite most economic indicators suggesting that the macroeconomic trends will remain soft in the first half of next year.
Speaker Change: We believe our relative outperformance in refinish and light vehicle will continue and we expect to remain opportunistic with M&A.
Speaker Change: Our transformation initiative is off to a great start, and we expect a $30-40 million incremental benefit next year.
Speaker Change: And lastly, any further interest rate reductions will help lower our interest expense next year as nearly 50% of our debt is floating rate.
Speaker Change: The balance sheet is in great shape. The organization has remained focused and we believe we have the financial flexibility to deliver value for our shareholders.
Speaker Change: Fiscal year 2024 is shaping up to be a record year, and we expect to deliver another record year in 2025.
Speaker Change: Thank you for joining us today. This concludes our prepared remarks.
Speaker Change: Operator, please open the lines for Q&A.
Speaker Change: At this time, if you would like to ask a question, please press star one on your telephone keypad.
Speaker Change: If at any point your question has been answered, you may remove yourself by pressing star 2.
Speaker Change: Once again, to ask a question, please press star one.
Speaker Change: Our first question will come from Don McNulty with BMO Capital Markets. Please go ahead.
Don McNulty: Yeah, good morning and thanks for thanks for taking my question.
Don McNulty: So maybe I can start out on the margin side. So for 2024, you're pretty much already at
Don McNulty: your your long term 2026 a plan and it sounds like you've got some incremental at least one incremental good guy.
Don McNulty: coming in in 2025 around the transformation initiative. So can you speak to some of the other good guys and bad guys as you're looking out to 2025? Because it does seem like you're already way ahead of kind of the pace that you were expecting for your longer term plans.
Speaker Change: Hey, good morning, John. I didn't realize your name got replaced. I hope you're having a good week here.
Speaker Change: I'll start and then I'll hand it over to Carl.
Carl Anderson: Yeah, I mean, it's great to see that we have come along here and hit our plan for 2026 from a margin perspective at 21%.
Carl Anderson: As we look at the full year.
Carl Anderson: Again, as we think about the transformation initiative and where we can go with that, there's also supply chain initiatives that we're driving and operational productivity.
Carl Anderson: That we see that can add to that margin. And if you remember when we rolled out the a plan, we actually had 21% plus as a sign there. So.
Carl Anderson: It was to essentially drive the point that we can actually do better than that.
Carl Anderson: But that said, we are quite comfortable with where the margins are. As we look at pivoting towards growth. I think, you know, when I came in, one of the things that I talked about was getting back to historical margins.
Carl Anderson: and we certainly are back.
Carl Anderson: And what I would like to make sure that we do is pivot some of that strength that we have in the margin.
Carl Anderson: and focus towards the growth going forward. We have about $400 million of growth ahead of us.
Carl Anderson: As I think about the aid plan, and the great story there is over the last two years, we were able to get 400 million if you look at 23 and 24. So, 24, 25, 26, we have the same target. I believe we can get there. And we certainly have the foundation to be able to do it with.
Speaker Change: So that's our focus is, you know, stabilize the margin and then build from there and I'll turn it over to Carl. Yeah, John, the only thing else I would add is I think we believe we're just in the early innings of what we can do.
Carl Anderson: A big part of that will be really focused on productivity.
Carl Anderson: Initiative. So I think while we have some, you know, early momentum, it's still early and there's a lot more in front of us over the next several years.
Speaker Change: Got it. Okay. No, thanks. That's helpful color. And then I guess just as the second question, you know, you spoke to some new wins in the auto OEM arena. I know autos is kind of a question mark as we look to next year. If we had a flat auto environment, based on the wins that you have, how how should we be thinking about what your growth is or what the new, new wins contribute to the to the top line for you?
Speaker Change: That's a great question. I think, you know, let me define that growth primarily in two regions. One is China, and the other one is LATAM. In China, if you look at the last full year, we've been performing about 20% above market as I look at the full year. And as I, you know, project that forward, especially with the stimulus,
Speaker Change: We certainly have upside.
Speaker Change: It's primarily the fact that we have launched a lot of these new products and we put a new plant in place. In terms of defining that number, we're not at this point.
Speaker Change: Another area that we have growth is certainly LATAM with the change of the competitive dynamic there. What's helped us is we've had the opportunity to grow both in light vehicle and commercial vehicle and that's certainly providing a tailwind.
Speaker Change: There I could probably provide a number that's let's call it. It's north of 50 million as we think about next year It'll start ramping up through next year and we'll certainly see most of that in 26
Speaker Change: Got it. Great. Thanks very much for the color.
Speaker Change: Thank you. Our next question will come from David Begleiter with Deutsche Bank. Please go ahead. Thank you. Good morning. Chris, I'm going to finish. What were volumes down in the quarter and why were they down in the quarter?
Speaker Change: Well, primarily a couple of things, I think, you know, as you've seen from most of the folks.
Speaker Change: that I've reported so far, it's about two or three things. First, if I think about it, there was some consolidation with some distributors that created, let's call it some de-stocking in the marketplace, as well as I think, you know, if I looked at
Speaker Change: the last two, three quarters.
Speaker Change: with where the insurance rates are driving, I believe the market essentially impacted us a bit. But all that said, as you know, you know, it feels like it's a one quarter, two quarter issue. And the reason I point that out to that.
Speaker Change: is, if you look at our growth, and specific to the quarter,
Speaker Change: Hoverflex came in and that came in, let's call it, for about four or five percent.
Speaker Change: So that essentially took a lot of the softness that we saw, but if you look at Q1 and Q2, we were actually up 5% against, you know, a similar marketplace where, let's call it, we were down 2 to 3%.
Speaker Change: So I feel, you know, our growth will drive a lot of the dynamics, even if you play forward what we're positioning for Q4, we believe the outgrowth will drive, let's call it that offset of that 2 to 3% softness that we're seeing.
Speaker Change: And on that point, Chris, you mentioned on slide 4 of Bioshopping to be down 2-3%.
Speaker Change: What changes that going forward in 25 or even even longer?
Speaker Change: Well, I believe it's a it's a pretty secular market and it you know, if you look at the fact that
Speaker Change: I will not look at this as a quarter over quarter basis. I think you need to look at it as a full year basis. And, you know, I believe with interest rates being as high as they are, folks are essentially holding back on doing repairs.
Speaker Change: and as well, if I think forward into next year, there's also a feeling of the uncertainty in the marketplace with the consumer.
Speaker Change: But that will shift if I think more as a four-year basis, number one. Number two, if you think about our entry into the economy space,
Speaker Change: that we primarily knew that this over time was something that we needed to focus on. And the CoverFlex acquisition really enables us to get closer to those folks that are aiming to be save some money here and look at repairs in a different perspective outside the insurance
Speaker Change: framework, let's call it. So I believe the real growth is being driven by our strategy on how we grow.
Speaker Change: Thank you.
Speaker Change: You're welcome.
Speaker Change: http://TheBusinessProfessor.com
Speaker Change: Thank you. Our next question will come from Chris Parkinson with Wolf Research. Please go ahead.
Chris Parkinson: Great, thank you. So can we talk a little bit more about the, you know, the IRS rollout? I know it's kind of very preliminary, especially in Europe, but if we could just hit on that and how that's funneling through into this, you know, kind of continuous wind cycle on the refinish side, you know, anything there would be very helpful. Thank you.
Speaker Change: Awesome, Chris. Good morning. And thanks for the question.
Speaker Change: It's been going great. We have launched about 300, most of them.
Speaker Change: have been in Europe.
Speaker Change: Our objective is to multiply that by three as we think about next year and get to look to get about 900 out. What let's call it limiting our ability is really our capacity to build the machines and get them out and
Speaker Change: It's with the customers that we've launched in Europe, you know, I've had the opportunity to speak to a few of them last
Speaker Change: last quarter and they just absolutely love them. So, you know, I see that as a great, great opportunity to help us with growth in our premium space, as well as hold on to the, you know, the great set of customers we have.
Speaker Change: That's very helpful. And the other question I had is, there have been across your various end markets, I'd say, fairly dramatic actions on behalf of, you know, some asset closures, asset optimization.
Speaker Change: Distribution Rationalizations. In terms of your own thought process about servicing your customers, you know, have you, do you feel that you're optimally positioned given the, let's say, the growth outlook for the foreseeable future and defined as still multiple years? Or do you think, you know, there are other actions that management will need to take in the foreseeable future? Thank you.
Speaker Change: That's a pretty good question, Chris. And I think, you know, the one thing that we did, let's call it with our transformation initiative is we started
Speaker Change: Early, if I think about, you know, going through it in twenty, twenty three.
Speaker Change: And, you know, as I look forward, I believe, you know, the best part of our margin story is we've built the foundation to now then pivot towards.
Speaker Change: really supporting the growth and supporting the infrastructure for growth going forward.
Speaker Change: and what it helps us do with our transformation initiative really then.
Speaker Change: is pivot towards putting more service folks on the ground, pivot towards putting more
Speaker Change: Folks to approach customers to grow the business as well as investment in technology as well as you know, how to your question
Speaker Change: and Chris about how are we going to get the Iris mix out there, you know, we can now drive investments towards really driving the service teams to get it out there, you know, and that is one business. That is just the look on just the refinish business. The cool part about this.
Speaker Change: is, if I looked at the industrial business,
Speaker Change: The industrial margins have grown 300 basis points.
Speaker Change: and our A-Plan target was 400 basis points. We just have 100 basis points with two years to go.
Speaker Change: and the industrial business has certainly earned the right to grow and we can certainly pivot towards that.
Speaker Change: So I believe that if you think through that process, you know, whether it's
Speaker Change: putting capacity in place, whether it's launching new products as we talked about with Sorrelian.
Speaker Change: And if you think about interest rates dropping here or the fact that China is also doing stuff to stabilize the
Speaker Change: That we were really not planning for at this point, but there is an opportunity there as well But certainly we can start investing towards that at this point
Speaker Change: It's very helpful. Thank you so much.
Speaker Change: You're welcome.
Speaker Change: Thank you. Our next question will come from Vincent Andrews with Morgan Stanley. Please go ahead.
Vincent Andrews: Thank you. Good morning, everyone. Just a couple of questions on price. Could you give us a little bit more color on performance coatings, where it looks like price mix was flat, just sort of what was the interplay there between what you got and refinished versus maybe what happened in industrial? And then secondly,
Vincent Andrews: It sounds like you're expecting sort of raw materials to flatten out in 4Q and I guess into 2025. So could you just update us on where you are in terms of those pricing contracts you have that are indexed to raws?
Vincent Andrews: is there another quarter or so of catch up where we're going to see negative price on those indexes or are you close to that flattening out as well?
Speaker Change: Yeah, good morning, Vincent. Yeah, as we look at price mix and refinish, I would say pricing continues to hold up very well for us. I think what you're seeing mostly in the quarter, it's just some change in mix. Don't forget a year ago, we did have the ERP implementation, you know, that we were still kind of working through, which had some.
Speaker Change: Unknown Executive, Chrishan Villavarayan, Carl Anderson
Speaker Change: Unknown Executive, Chrishan Villavarayan, Carl Anderson
Speaker Change: as well. So, I think, you know, there we feel very good with.
Speaker Change: You know, just what, how we're able to execute in a pretty benign, flattish type of market and industrial. So I think all of that is holding up fairly well.
Speaker Change: And if I think about the raw material kind of question, as you said, I, you know, one.
Speaker Change: We were very, very pleased with the results in the third quarter, seeing our variable cost down 6% year on year. You know, if I look at kind of the commodity basket, you know, we continue to see some favorability in isocyanates and monomers, which are kind of some of the drivers of that.
Speaker Change: We do believe year-on-year it's going to flatten out, you know, in the fourth quarter.
Speaker Change: And as we shift into 2025, we're currently planning for, you know, to see just kind of normal inflation, maybe in that 2%, maybe 3% year on year. But as Chris said, you know, we do have some continued productivity.
Speaker Change: is that we would expect hopefully to offset some or all of that for next in 2020.
Speaker Change: Unknown Speaker 25.
Speaker Change: just in July. Thank you, Carl Anderson.
Speaker Change: Just the last thing to add to that Vincent is, you know, across all foreign markets we had positive pricing.
Speaker Change: Unknown Speaker
Speaker Change: and I'll turn it back to you on indexing. Yeah, and then just on the indexing, as I said, you know, you saw in this particular quarter, specifically in light vehicle, you know, we were planning for some of that.
Speaker Change: Unknown Executive, Chrishan Villavarayan, Carl Anderson
Speaker Change: Unknown Executive, Chrishan Villavarayan, Carl Anderson
Speaker Change: Executive Admin for us next.
Speaker Change: Okay.
Speaker Change: Thank you very much.
Speaker Change: Thank you. You're welcome.
Speaker Change: Thank you. Our next question will come from Ghanshyam Panjavi with Bayard. Please go ahead.
Speaker Change: Hey, good morning, everyone. This is Matt Krieger sitting in for Gotsham. So, you know, for my first question,
Speaker Change: We talked a little bit about the share gains and mobility already, but
Matt Krieger: I was hoping that we could get some more detail on what exactly is driving the share wins and better than market growth in both refinish and, you know, any added detail on mobility is great. Now, are these ongoing wins or should we think about lapping these gains into 2025 at any point? And then, you know, how have peers been reacting from a competitive standpoint to Exalta taking share in the market?
Speaker Change: So good morning, Matt, and I'll cover this. So I think, you know, when I look at the the wind, we had a specific, let's call it opportunity in LATAM with one of the competitors leaving.
Speaker Change: The Space.
Speaker Change: And, you know, it created an opportunity for us to come in and serve and add.
Speaker Change: volumes for existing customers as well as it gave us an opportunity to win new customers in the space that which which was exceptional
Speaker Change: And if I look at that between commercial vehicle and light vehicle, we've been able to win what I believe, you know, by by next year, as I said earlier, we'll be about $60 million, $50 to $60 million plus that we see in in that business coming in.
Speaker Change: <unk> also implemented additional capacity between two plants and thats been winning I don't see that lapping next year I believe that team is going to continue to win and win and win because if you look at just the volume from this year, we have been able to grow by 20%.
Speaker Change: We haven't specified any customers, but as you can see.
Speaker Change: <unk> made it very clear that on the EV side, where on the top two customers that play in this space. So it's just been great and we continue to win with local Oems as I think about our growth story for the next year and it's been.
Speaker Change: Exceptional the stimulus is also helping us.
Speaker Change: My thoughts are it will go through the Chinese new year.
Speaker Change: And I don't know what will happen beyond that but that's also been a tailwind if I think about the startup of 25%.
Speaker Change: Got it that's that's very helpful. And then just switching over to the margin side of things can you talk about some of the contributors to margin expansion during the record third quarter versus your original forecast was the primary driver incrementally positive price.
Speaker Change: Price cost contributions or is this essentially all self improvement from the businesses.
Speaker Change: Yes, Matt it's a combination so obviously the variable cost performance that the purchasing.
Speaker Change: Team drove was was definitely one of the large drivers of the year on year.
But you saw margins.
Speaker Change: I also.
Speaker Change: We also benefit from some of the transformation initiatives.
Speaker Change: I mentioned in my prepared remarks, we are coming in a little bit better than we originally anticipated that line item as well. So I think between the two of those those are kind of the big drivers for us.
Speaker Change: I think it was extremely helpful, especially in this type of macro environment now.
Speaker Change: The materials team so our purchasing team.
Speaker Change: Essentially if we look at it performed above the market for at least the last six seven quarters. So that's certainly been a tailwind that's up to us here.
Speaker Change: Got it that's helpful. That's it for me thanks.
Speaker Change: Thanks, Matt.
Speaker Change: Thank you. Our next question will come from Mike <unk> with Barclays. Please go ahead.
Speaker Change: Yes. Thank you good morning, guys.
Mike: I wanted to estimate 2026 eight plan it looks like most of the metrics youre about halfway to your three year goals. After a good first year here. So other than perhaps sales do you think most of the <unk> plan targets are reachable in 2025, and if that's the case how should the investors at least on a preliminary basis think about what.
Speaker Change: Beyond the <unk> plan for adults.
So that's a great question.
Speaker Change: Mike.
Speaker Change: As I look at it.
Speaker Change: That's the main.
Speaker Change: You would have noticed it in our remarks, a few times one of the things that we're going to focus on is accelerating our <unk> plan.
Speaker Change: If you look across the five metrics.
Speaker Change: Where let's call it 25% on sales and on the rest of the metrics, where I would say somewhere between 70% to almost 100%. There. So it's a great story. So you can see that we can certainly accelerate it and specific to the sales line item.
Speaker Change: And my view on confidence there and so if I look at the last two years. This company has been able to drive $400 million to $500 million of sales growth. So it's pretty straightforward. How you can track to growth in the next two years of 'twenty five 'twenty six.
Speaker Change: That said I believe that with the pace of new wins coming in and maybe with a little bit of favorable markets.
Speaker Change: Our goal is to ensure that we accelerate.
Speaker Change: Our plan over the next bit of time.
Speaker Change: As we lay out our 25, let's call It guide three.
Speaker Change: Three months from now.
Speaker Change: Youll get a better picture based on where we think we will go with that and we will certainly look at.
Speaker Change: Seeing if we need to pull forward. The next time, we do an investor.
Speaker Change: Release of the let's call it the 2029 plan.
Speaker Change: Great. That's Super helpful. And then maybe just a follow up on capital deployment. How are you guys looking at the relative value between the M&A pipeline and buying back your own <unk>.
Speaker Change: Shares appear at current levels.
Speaker Change: I'll start that up and I'll hand, it over to Carl here, but the plan essentially Pat is working on for let's call. It the pillars of which was share buybacks M&A.
Carl Anderson: Investing in our plants that had.
Directed towards capital.
Carl Anderson: And then M&A and at this point for our from our perspective, we bought $100 million, so far and if I look at it at what it came in at where the current share prices even at this point.
Carl Anderson: We have certainly created value so.
Carl Anderson: We're quite proud of what we've been able to accomplish there.
Carl Anderson: But obviously M&A and investing in the business certainly as pillars of it and we will deploy it I would call it pretty equally across that but im just going to maybe hand, it off to Carlisle unless I missed something I think I think the word as balanced as we think about how we're going to continue to deploy capital not only to M&A as well as share.
Carl Anderson: Repurchases those.
Those will be kind of the two primary things.
Speaker Change: Things that will be focused on but candidly I think theres, a little bit more on gross debt reduction as well that we're going to be focused on especially here in the near term.
Speaker Change: Great. Thank you.
Speaker Change: Thank you. Our next question will come from Alexia <unk> with Keybanc capital markets. Please go ahead.
Speaker Change: Good morning, good morning, everyone.
Chris Parkinson: Good morning, Chris.
Speaker Change: I wanted to ask about just the more recent trends and the body shop activity as it is.
Speaker Change: Stable improving or softening in the recent months.
Speaker Change: It's I would call it stable to softening so it depends on the region Alexey I would call.
Speaker Change: China is a bit yes.
Speaker Change: China is a bit soft I would call Europe being stable I would call. It North America soft a bit and then I would call Latam being strong so I hope that's a bit helpful.
Speaker Change: In terms of body shop activity now I want to see how the next year.
Speaker Change: Works through but at this time you know as we have already finished a month anywhere, giving our Q4 guide.
Speaker Change: Giving a full year perspective here.
We're quite comfortable with where the volumes are.
Speaker Change: Okay that makes sense.
Speaker Change: Given your strategy for sharing economy refinish market.
Speaker Change: What have you observed this year in terms of differences in the economy or or premium.
Speaker Change: Is the pressure then about the same on the market or didn't want to do better than the other.
Speaker Change: I think let's just start with the economy segments of the economy. Our approach into this quest with cover flex and don't forget we just started that.
Speaker Change: Just.
Speaker Change: Just over a quarter ago, and if I was just to talk to the deal itself. It's ahead of.
And as we call it I would call it revenue right on plan, but let's call it margin and performance on the bottom line is that ahead of plan so against our deal dynamics. It's in great shape. So I think thats certainly.
Speaker Change: The last question that Mike asked if I think about M&A between Andre coal and.
Speaker Change: Cover flex that we did this year.
Speaker Change: Certainly seeing recent.
Speaker Change: A recent competency R&R ability to execute so we will continue to look at let's call. It bolt on acquisitions to get us more into Adjacencies and to the economy space. If I think about the first half.
Speaker Change: The first half to the.
Speaker Change: The full year next year.
Speaker Change: Because that business from the one quarter that we have looked at it alexie seems somewhat stable.
Speaker Change: As we go through.
Just one month's of one quarter's view.
Speaker Change: The premium segment.
Speaker Change: Obviously, the current dynamic makes it quite competitive marketplaces competitive however, yes, as I announced we are certainly one.
Speaker Change: MSL here in this space.
Speaker Change: And I believe here the difference it is solid.
Speaker Change: Being the leader in the premium segment, we've certainly earned our right to be here at play here and the service level.
Speaker Change: Iris ecosystem.
Speaker Change: <unk>.
Speaker Change: 160 years of experience all of that builds to the strength of the company that we have here so.
Speaker Change: Look at losses here, we've still been able to able to win 2100 net body shops, if I look at the full year I believe we will get up to about 2500 body shops, if I look at 10 year, sorry, a four year look we have 10000 body shops that we have won so.
Speaker Change: So at this point, even though that the marketplaces competitive we continue to win so feel quite confident here.
Speaker Change: Thanks, Chris.
Chris Parkinson: Youre welcome.
Thank you. Our next question will come from Steve Byrne with Bank of America. Please go ahead.
Steve Byrne: Thank you.
Steve Byrne: Im sure Youre aware your valuation multiple is compared to your peers.
Steve Byrne: As significantly different depending on whether you're looking at a p/e multiple or EBITDA multiple.
Steve Byrne: With the Delta driven largely by your <unk>.
Steve Byrne: Interest expense in your tax rate.
Speaker Change: Carl you made a comment about 50% of your debt is floating.
Speaker Change: Do you have a view on where interest expense could be for 2025 and any any plans to.
Speaker Change: To structurally change your your.
Speaker Change: Your tax tax expense.
Yes, Steve.
Steve Byrne: Got out in front in 2025, we're still finalizing the plans already.
Speaker Change: Some of it will be subject to what happens with the fed and how many rate moves there are but I would say, it's fair to say that you should we will definitely be sub $200 million of interest expense as we kind of get next year, I think where could it be in that 190 range or even a little bit below most likely as we think about where interest expense should go.
Speaker Change: So we'll be very proactive as we kind of manage the debt maturity profile as well, so I'm feeling better and better about where we are from a leverage perspective.
Speaker Change: You can see even if I look out next year, we're tracking to be probably closer to the lower end of our of our leverage target range as well. So I think youll see a little bit of a tailwind just from interest expense, Steve as we think about next year and then from a tax rate perspective, obviously agree I think we have a lot of initiatives that we're beginning to.
Speaker Change: Work on where we're trying to determine how we can continue to drive that down lower.
Speaker Change: At the end, it's all of that feeds into EPS as you know.
Speaker Change: I think this year being up 37% year over year, we're off to a great start but I also think there is a lot more we can be doing in those two items next year and.
Speaker Change: And Steve maybe just to add Bob.
Speaker Change: If I think about the multiple story I think part of it is the consistency of execution I believe <unk>.
Speaker Change: It's been viewed as goldilocks now it needs to be too hard or needs to be too cold or needs to be called I think the difference is that has changed we're holding ourselves to a higher standard here and that has certainly demonstrated through the past three four quarters, where we are.
Speaker Change: And waste.
Speaker Change: The last three times. So my hope is through the focus on execution.
Speaker Change: The growth that you should see through the next few quarters.
Speaker Change: That that will be achieved through eliminating a plan that we get there.
Speaker Change: <unk> that we need here.
Speaker Change: Very good and maybe one follow up on SG&A.
Speaker Change: On an absolute dollar roll you flat year over year, one would think that incentive comp would be up just simply from.
Speaker Change: From an earnings growth.
Speaker Change: What are you doing there is that head count reduction.
Enabling you to keep SG&A flat.
Speaker Change: Yes, I think it's a combination.
Speaker Change: Head count reduction that we.
Speaker Change: <unk> been talking to the last couple of quarters, but then I think even on a year over year basis purely on incentive comp.
Speaker Change: It's pretty flat on a year over year basis. So it's really not kind of youre not seeing that incremental expense come through in 2024. So overall I think this will continue to be a focus for us as we are managing.
Speaker Change: The business here, especially here in the near term as we think about where markets are.
Speaker Change: But.
Speaker Change: To date, we've done I think a pretty decent job in managing just not on the SG&A, but all of the cost structures.
Speaker Change: This year.
Speaker Change: Pretty good thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question will come from Kevin Mccarthy with vertical research partners. Please go ahead.
Kevin Mccarthy: Thank you and good morning.
Kevin Mccarthy: Chris It sounds like you have a lot of.
Kevin Mccarthy: Positive fundamental momentum in the marketplace today and yet if we look at your fourth quarter guidance. It seems to imply a little bit more sequential deceleration into year end than has been evidenced over the last couple of years. So can you speak to kind of your working view of <unk>.
Kevin Mccarthy: <unk> and maybe other puts and takes that would impact the near term profile and how conservative do you think youre being in and setting for quarterly guidance.
Speaker Change: Hey, Kevin Good morning, I think if you look at the Q over Q4 Q4 comp.
Speaker Change: Obviously commercial vehicle is down from where it was a year ago.
Speaker Change: About 25% from what we saw in the CV side in North America class eight is the second element of this is obviously with the seasonality that we normally see in light vehicle and our OE business that trends down at this period and also the Christmas shutdowns that we see so a lot of that is.
Speaker Change: Driven by that dynamic.
Speaker Change: The good thing about it if you look through that even with that dynamic. We're I think doing a good job in maintaining margins is there upside.
Speaker Change: Just being cautious here and being careful and watching the market as we go through.
Speaker Change: So just to make sure.
Speaker Change: It's certainly something that.
Speaker Change: There's a lot of dynamics that we have to watch here, obviously in North America, we have the elections, if I think about the global crisis, whether it's.
Speaker Change: In terms of what's happening in Israel, or what's happening in Ukraine, and so theres a little bit of uncertainty that we have to watch. So we want to also manage our volatile our volumes or our view of market. That's how we've done it to this point, we have assumed that even with markets wherever they would be that we make.
Speaker Change: Sure that we drive to hit.
Speaker Change: Our performance in terms of a margin perspective, and that's clearly our focus here, but yes.
Speaker Change: So I think that's that's what we're doing the cool part about this again is if you know that the CV margins in the mobility business is quite strong and even with that.
Speaker Change: Again as I pointed out the Q4 margins for mobility should tell you that stability that the business has built into it.
Speaker Change: Making sure that we watched the bottom half of the P&L.
Speaker Change: Yes.
Speaker Change: Fair enough I appreciate that and then secondly, if I may just to follow up on the margin discussion and specifically the margin opportunity in mobility.
Speaker Change: Maybe you're tracking to an EBITDA margin of I don't know, 15% this year and mobility, plus or minus and as good as that level is versus recent history. You know there is precedent for segment margins being.
Speaker Change: 400, or 500 basis points better than that if we go all the way back to the 2015 to 17 timeframe.
Speaker Change: So one question would be.
Speaker Change: If the cycle cooperated in terms of global auto production levels.
Speaker Change: Do you think there is upside to the high teens over the next several years or have things changed in the structure of the business.
Speaker Change: Whereby that would be kind of an unrealistic stretch goal.
Speaker Change: Well I think in terms of 400 basis points that would that would be a little bit I think that was.
Speaker Change: Venezuela in there was elements of that in South America and that was.
Speaker Change: Parts of the business that were structured differently. If we go back almost 10 years ago, but is there upside in the in the margin profile.
Speaker Change: Certainly.
Speaker Change: Faith.
Speaker Change: We should see some more upside going forward into next year. The new business that we are winning is margin accretive to the overall portfolio. So.
Speaker Change: My expectation is that the business will continue to see some upside in margin as long as markets.
Speaker Change: We support that going forward.
Speaker Change: The other element of this is.
Speaker Change: The fifth element of this is if you think about the commercial vehicle.
Speaker Change: Pre buy for the 27% emissions change that would mean in 'twenty six and probably the back half of 'twenty five you should see that volume pick back up again and sorry, if you know where we are and you assume.
Speaker Change: 26 at this point is being projected at 350000 trucks that should give us.
Speaker Change: Good tailwind as I look about where margins could go into $2025 20, the back half of 'twenty, five and certainly into 'twenty six.
Speaker Change: Very helpful. Thank you.
Speaker Change: Smoothing out and coming back coming into Latam or coming into Mexico, our strength, there as well as our strength with our you know our let's call. It established partners is something that is what's really driving that growth of the business. If I look at what we see as new wins for 25.
Speaker Change: So I hope that's helpful. John.
Speaker Change: Thank you I'll pass it.
Speaker Change: Yes, so as I think this is the last question as we close out here. It just you know if since I won't be talking to we won't be talking to a lot of you.
Speaker Change: Until the end of the year really wanted to thank all our investors and certainly our our employees for three quarters of beats and raises and we look forward to continuing.
Speaker Change: Progressing on our plan as I think about 2025 and beyond Thank you very much absolutely excited for the future of this company.
Speaker Change: Thank you. This does conclude the exalt coating systems' third quarter 2024 earnings call.
Speaker Change: You may disconnect. Your line at this time and have a wonderful day.
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