- Earnings above guidance range driven by margin recovery initiatives and Mobility Coatings volume growth
According to the company’s website press release on May 2, 2023, Axalta Coating Systems Ltd. (NYSE:AXTA) (“Axalta”), a leading global coatings company, announced its financial results for the first quarter ended March 31, 2023.
First Quarter 2023 Highlights: ▪ Net sales increased 9.4% year-over-year (12.1% ex-FX) driven by better pricing and volume growth ▪ 9.4% price-mix growth year-over-year with strong contributions from every end-market ▪ Income from operations of $125.3 million versus $86.3 million in Q1 2022; Adjusted EBIT increased by 25% to $149.3 million compared with $119.5 million in Q1 2022 ▪ Operating margins improved 240 bps to 9.8% and Adjusted EBIT margins improved 140 bps to 11.6% versus Q1 2022
First Quarter 2023 Consolidated Financial Results
First quarter net sales increased 9.4% year over year. The strong growth was driven by 9.4% higher average price mix and 2.7% better volumes, offset by a 2.7% foreign currency headwind. Performance Coatings net sales increased 4.0% year-over-year as strong pricing across both end-markets was partially offset by currency headwinds and weaker volumes in Industrial. Mobility Coatings net sales increased 21.4% supported by new business wins, market recovery and higher realized price from both endmarkets.
Income from operations for Q1 2023 totaled $125.3 million versus $86.3 million in Q1 2022. Net income to common shareholders was $60.5 million for the quarter, inclusive of a $7.1 million pre-tax charge associated with the anticipated exit of a non-core product category within Mobility Coatings, compared with $41.5 million in Q1 2022. Diluted EPS increased to $0.27 and Adjusted Diluted EPS was $0.35 compared to Diluted EPS of $0.18 and Adjusted Diluted EPS of $0.31 in Q1 2022, despite the impact of higher interest expense.
Higher income from operations was driven predominantly by an improvement in year-over-year price-cost as strong pricing netted favorably against moderating variable cost inflation. The cumulative total income from operations and Adjusted EBIT impact since the beginning of 2021 from price-cost shifted positive for the first time; however, there remains a cumulative deficit in two of four end-markets where pricing remains a high priority. In addition to the favorable year-over-year price-cost trends, Mobility Coatings volume contribution supported year-over-year profit growth, which altogether more than offset softer volumes in Industrial and the combined ~$6.0 million pre-tax impact from foreign currency translation and the Russia-Ukraine conflict.
Chris Villavarayan, Axalta’s CEO and President, commented, “I am pleased to report first quarter earnings above our guidance range and am encouraged by the progress clearly demonstrated in our results. We are building momentum and working hard to maximize the opportunity in front of us through focusing on more efficient execution at our plants, productivity across all functions and working with our partners to realize the full value of our product and services. We are taking actions to strengthen Axalta’s long-term profitability, and as I close my first quarter as CEO, the future looks bright. I am excited to unlock the tremendous potential of this organization and wish to congratulate the entire Axalta team for a well executed quarter.”
PERFORMANCE COATINGS RESULT
Discussion of Results:
Performance Coatings first quarter net sales increased 4.0% year-over-year (6.9% increase ex-FX) to $847.1 million driven by a 10.3% price-mix benefit. Volumes declined 3.4% as modest growth in Refinish was more than offset by softer regional activity within Industrial, inclusive of slow recovery in China from COVID-19 lockdowns and softer demand in EMEA. Foreign currency translation in the first quarter was a 2.9% year-over-year headwind led by the Euro, Chinese Yuan, British Pound and Turkish Lira, partially offset by the Mexican Peso.
Refinish net sales increased 7.8% (10.9% increase ex-FX) year-over-year to $497.6 million, driven predominantly by price-mix growth of 10.0%. Volume increased modestly by 0.9% as strong growth with MSOs in North America more than offset slow recovery in China as a result of COVID-19 lockdowns. In our core North America and EMEA markets, body shop customers are still being impacted by parts and labor shortages, which is driving elevated backlogs and continues to strain volume growth. However, share gains, MSO consolidation, increased points of distribution and expansion into adjacent markets are driving growth in our business and the expected continuation of above-market performance.
Industrial net sales decreased 1.0% (1.5% increase ex-FX) year-over-year to $349.5 million. Price-mix growth of 10.5% more than offset softer volumes, which decreased 9.0% year-over-year due to a continuation of the soft macroeconomic environment in EMEA and more recently from a slowdown in North American construction activity impacting our Building Products business. Foreign currency translation represented a 2.5% headwind.
The Performance Coatings segment generated Adjusted EBIT of $109.3 million in the first quarter compared with $94.6 million in Q1 2022, with associated margins of 12.9% and 11.6%, respectively. The year-over-year Adjusted EBIT growth was primarily driven by Refinish while Industrial earnings remained consistent as price-mix growth balanced volume declines and cost inflation. Segment Adjusted EBIT margins improved by 130 bps predominantly from favorable price-cost contribution despite increases in variable and fixed costs.
MOBILITY COATINGS RESULTS
Discussion of Results:
Mobility Coatings net sales were $436.8 million in Q1 2023, an increase of 21.4% (23.7% ex-FX) year-over-year. Volume growth of 16.5% reflected robust market demand, customer wins and the ramp-up of new customer plants. Price-mix momentum continued this quarter with 7.2% year-over-year improvement realized in the period. Foreign currency translation in the first quarter was a 2.3% year-over-year headwind led primarily by the Chinese Yuan, Euro and Turkish Lira, partially offset by the Mexican Peso.
Light Vehicle net sales increased 19.2% (22.1% ex-FX) year-over-year to $328.5 million, led by above-market volume growth and price-mix benefit. Light Vehicle volume increased 15.8% year-over-year and exceeded global auto production rates, which increased 5.7% year-over-year to 21.1 million builds in Q1 2023. New business wins, along with customers outperforming their markets supported our above-market performance in the first quarter. Light Vehicle price-mix improved 6.3% year-over-year reflecting a continued focus on margin recovery following substantial variable cost inflation since early 2021.
Commercial Vehicle net sales increased 28.8% year-over-year to $108.3 million driven by customer wins and continued recovery in commercial vehicle production rates. Commercial Vehicle volume growth of 18.9% exceeded Class 4-8 truck market growth as we recognized benefits from strong customer relationships in high growth markets and the continued ramp-up of new customer plants.
The Mobility Coatings segment generated Adjusted EBIT of $23.5 million in Q1 2023 compared with Adjusted EBIT of $0.5 million in Q1 2022. Growth was driven by the second consecutive quarter of year-over-year positive price-cost as well as substantial improvement in volumes. Adjusted EBIT margins increased 530 bps to 5.4% year-over-year despite higher variable and fixed costs. On a sequential basis, Adjusted EBIT increased $5.9 million from Q4 2022 driven by strong volume improvement which more than offset approximately $5.0 million in one-time retroactive price benefits during the fourth quarter of 2022.
Balance Sheet and Cash Flow Highlights
Axalta ended the first quarter with cash and cash equivalents of $512.1 million and total liquidity over $1 billion. Our net debt to trailing twelve month ("LTM") Adjusted EBITDA ratio was 3.7x at quarter end versus 3.8x as of December 31, 2022. Axalta ended the first quarter with an Adjusted EBITDA to interest expense coverage ratio of 5.4x. Axalta paid down $75 million of principal on its term loan in the period, with $122 million of combined structural debt pay downs over the past two quarters.
First quarter cash used for operating activities was $51.8 million versus $43.9 million in Q1 2022. Increased cash use from working capital and interest expense more than offset higher operating earnings versus the prior year period. Inventory levels improved sequentially during the quarter, but were more than offset by a seasonal cash use from accounts payable and accrued liabilities. Free cash flow totaled a use of $87.6 million compared with a use of $80.2 million in Q1 2022.
Sean Lannon, Axalta's Chief Financial Officer, commented, “I am proud of the progress we demonstrated this quarter to profitably grow volumes which in turn drove margin improvement. We also began to see improvement from historically high year-end inventory balances, which we expect to be reflected in our results later this year and to support improved cash flow generation. Altogether, our strong performance in the quarter gave us the confidence to pay down $75 million in principal on our term loan as we work to strengthen our balance sheet and offset the impact of higher interest rates.”
Financial Guidance and Market Commentary
Mr. Villavarayan concluded, “Looking ahead, I expect operating income to continue to improve given momentum in price-cost and earnings recovery in Mobility Coatings. In Performance Coatings, we expect that continued focus on price should more than offset softer demand in Industrial while Refinish is set up nicely to have another record year of profitability. Axalta is committed to driving meaningful operating income and cash flow growth in 2023; we believe we are on a favorable trajectory following a solid Q1 result.”
Axalta does not provide a reconciliation for non-GAAP estimates for Adjusted EBIT, Adjusted EBITDA, Adjusted Diluted EPS, tax rate, as adjusted, and free cash flow, on a forward-looking basis because the information necessary to calculate a meaningful or accurate estimation of reconciling items is not available without unreasonable effort. See “Non-GAAP Financial Measures” for more information.
Q2 2023 Outlook and Commentary:
- Adjusted EBIT: Expect sequential operating income improvement across all four end-markets
- Raw Materials and Labor: Improving raw material environment with pockets of pressure anticipated to continue in specialties and labor; expect low-single-digit % YoY raw material benefit
- One-time Investments: Adj. EBIT and Adj. EBITDA ranges assume ~$15 million in costs associated with our enterprise resource planning system implementation in addition to fees for third-party consultants focused on improvement within procurement and operations
Full Year 2023 Assumptions and Commentary:
- Overall Performance: Expect momentum to continue in Refinish after record 2022 profitability, strong sales and margin recovery in Mobility Coatings; potentially softer Industrial markets to be balanced by contribution from pricecost normalization and share gains
- Raw Materials and Labor: Expect modest deflation in elevated upstream commodities to help offset persistent headwinds from labor inflation
- Operating Income: Expect meaningful YoY growth given carry over pricing, Refinish stability, Mobility market recovery and stabilizing input cost environment offset modestly by supplemental investments in the business
Conference Call Information
As previously announced, Axalta will hold a conference call to discuss its first quarter 2023 financial results on Wednesday, May 3, 2023 at 8:00 a.m. ET. A live webcast of the conference call will be available online at www.axalta.com/investorcall. A replay of the webcast will be posted shortly after the call and will remain accessible through May 3, 2024. The dial-in phone number for the conference call is +1-201-689-8560. For those unable to participate, a replay will be available through May 10, 2023. The replay dial-in number is +1-412-317-6671. The replay passcode is 13737570.
Public Dissemination of Certain Information
We intend to use our investor relations page at ir.axalta.com as a means of disclosing material information to the public in a broad, non-exclusionary manner for purposes of the U.S. Securities and Exchange Commission’s Regulation Fair Disclosure (or Reg. FD). Investors should routinely monitor that site, in addition to our press releases, U.S. Securities and Exchange Commission filings and public conference calls and webcasts, as information posted on that page could be deemed to be material information.
Cautionary Statement Concerning Forward-Looking Statements
This release may contain certain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 regarding Axalta and its subsidiaries including our outlook and/or guidance, which includes net sales growth, constant currency net sales, Adjusted EBIT, Adjusted diluted EPS, interest expense, tax rate, as adjusted, capital expenditures, depreciation and amortization, step-up depreciation and amortization, diluted shares outstanding, interest expense and free cash flow, the effects of COVID-19 on Axalta’s business and financial results, our and our customers’ supply chain constraints and our ability to offset the impacts of such constraints, the timing and amount of any future share repurchases, contributions from our prior acquisitions and our ability to successfully make future acquisitions. Axalta has identified some of these forward-looking statements with words such as “anticipate,” “assumptions,” “assume,” “outlook,” “believe,” “expect,” “estimates,” “likely,” “will,” “guidance,” “continued,” “look,” “priority,” “looking,” “ahead,” “should,” “opportunity,” “potential,” “projection,” “future,” “set up” and “see” and the negative of these words or other comparable or similar terminology. All of these statements are based on management’s expectations as well as estimates and assumptions prepared by management that, although they believe to be reasonable, are inherently uncertain. These statements involve risks and uncertainties, including, but not limited to, economic, competitive, governmental and technological factors outside of Axalta’s control, including the effects of COVID-19, that may cause its business, industry, strategy, financing activities or actual results to differ materially. More information on potential factors that could affect Axalta’s financial results is available in “ForwardLooking Statements,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” within Axalta’s most recent Annual Report on Form 10-K, and in other documents that we have filed with, or furnished to, the U.S. Securities and Exchange Commission. Axalta undertakes no obligation to update or revise any of the forward-looking statements contained herein, whether as a result of new information, future events or otherwise.
Non-GAAP Financial Measures
The historical financial information included in this release includes financial information that is not presented in accordance with generally accepted accounting principles in the United States (“GAAP”), including constant currency net sales growth, tax rate, as adjusted, EBIT, Adjusted EBIT, EBITDA, Adjusted EBITDA, Adjusted diluted EPS, free cash flow, net debt, Adjusted net income, Adjusted EBITDA to interest expense coverage ratio, total net leverage ratio and Adjusted EBIT margin. Management uses these non-GAAP financial measures in the analysis of our financial and operating performance because they assist in the evaluation of underlying trends in our business. Adjusted EBITDA, Adjusted EBIT and Adjusted diluted EPS consist of EBITDA, EBIT and Diluted EPS, respectively, adjusted for (i) certain non-cash items included within net income, (ii) certain items Axalta does not believe are indicative of ongoing operating performance or (iii) certain nonrecurring, unusual or infrequent items that have not otherwise occurred within the last two years or we believe are not reasonably likely to recur within the next two years. We believe that making such adjustments provides investors meaningful information to understand our operating results and ability to analyze financial and business trends on a period-to-period basis. Adjusted net income shows the adjusted value of net income (loss) attributable to controlling interests after removing the items that are determined by management to be items that we do not consider indicative of our ongoing operating performance or unusual or nonrecurring in nature. Our use of the terms constant currency net sales growth, tax rate, as adjusted, EBIT, Adjusted EBIT, EBITDA, Adjusted EBITDA, Adjusted diluted EPS, free cash flow, net debt, Adjusted net income, Adjusted EBITDA to interest expense coverage ratio, total net leverage ratio and Adjusted EBIT margin may differ from that of others in our industry. Constant currency net sales growth, tax rate, as adjusted, EBIT, Adjusted EBIT, EBITDA, Adjusted EBITDA, Adjusted diluted EPS, free cash flow, net debt, Adjusted net income, Adjusted EBITDA to interest expense coverage ratio, total net leverage ratio and Adjusted EBIT margin should not be considered as alternatives to net sales, net income (loss), income (loss) from operations or any other performance measures derived in accordance with GAAP as measures of operating performance or operating cash flows or as measures of liquidity. Constant currency net sales growth, tax rate, as adjusted, EBIT, Adjusted EBIT, EBITDA, Adjusted EBITDA, Adjusted diluted EPS, free cash flow, net debt, Adjusted net income, Adjusted EBITDA to interest expense coverage ratio, total net leverage and Adjusted EBIT margin have important limitations as analytical tools and should be considered in conjunction with, and not as substitutes for, our results as reported under GAAP. This release includes a reconciliation of certain non-GAAP financial measures with the most directly comparable financial measures calculated in accordance with GAAP. Axalta does not provide a reconciliation for non-GAAP estimates for Adjusted EBIT, Adjusted EBITDA, Adjusted diluted EPS, tax rate, as adjusted, or free cash flow on a forward-looking basis because the information necessary to calculate a meaningful or accurate estimation of reconciling items is not available without unreasonable effort. For example, such reconciling items include the impact of foreign currency exchange gains or losses, gains or losses that are unusual or nonrecurring in nature, as well as discrete taxable events. We cannot estimate or project these items and they may have a substantial and unpredictable impact on our GAAP results.
