Axalta Releases Second Quarter 2023 Results

GLEN MILLS, Pa., Aug. 01, 2023 (GLOBE NEWSWIRE) -- Axalta Coating Systems Ltd. (:AXTA) (“Axalta”), a leading global coatings company, announced its financial results for the second quarter ended June 30, 2023.

Second Quarter 2023 Highlights:

• Net sales increased 4.8% year-over-year driven by price-mix and robust volume growth in Mobility Coatings
• Price-mix improved 6.8% year-over-year with strong contributions from every end-market
• Volume declined 3.7% year-over-year primarily due to production constraints following an Enterprise Resource Planning (“ERP”) implementation in North America
• Income from operations of $137.6 million versus $103.6 million in Q2 2022; Adjusted EBIT of $154.5 million up 2.6% from prior-year despite consulting and ERP implementation costs of ~$15 million in the quarter
• Net Leverage improved to 3.6x at June 30, 2023 on earnings and cash flow improvement; cash flow from operations of $131.0 million in Q2 2023

Second Quarter 2023 Consolidated Financial Results

Second quarter net sales increased 4.8% year-over-year driven by 6.8% higher average price mix and a 1.6% benefit resulting from the absence of the commercial agreement restructuring charge incurred in Q2 2022. Volumes decreased by 3.7% as market demand in Mobility Coatings and Refinish were more than offset by temporary operational delays impacting our ability to meet customer demand from an ERP implementation in North America. Despite notable stabilization in June, warehouse management and slower shipping activities in the quarter resulted in an estimated negative 2%-3% year-over-year net sales impact and drove an elevated quarter-end sales backlog, most notably in Refinish. Mobility Coatings net sales increased 15.5% led predominantly by strong volumes and modest improvement in price-mix. Performance Coatings net sales were flat year-over-year as pricing momentum in both end-markets was offset by lower volumes in both end-markets.

Income from operations for Q2 2023 totaled $137.6 million versus $103.6 million in Q2 2022. Adjusted EBIT improved to $154.5 million from $150.6 million in Q2 2022 as price-cost trends were positive across all end-markets given the combined benefit of strong year-over-year pricing and variable cost deflation. Income from operations in the quarter was impacted negatively by higher year-over-year compensation expense and approximately $15 million of costs associated with consulting spend and the ERP implementation. Adjusted EBIT was also negatively impacted by ~$9 million in exchange losses stemming from the devaluation of net monetary assets denominated in the Turkish Lira and Argentine Peso.

Chris Villavarayan, Axalta’s CEO and President, commented, “The quarter reflected strong underlying earnings and profitability improvement, particularly in Mobility Coatings where momentum is building. I am particularly proud of how our teams rebounded from a broad and complex ERP implementation in May and delivered a solid quarter, including a sales performance for North America in June that was one of the strongest in our history. This launch was a crucial step towards achieving the margin improvement trajectory we want for Axalta.”

Consolidated Results

Performance Coatings Results

Discussion of Results:

Performance Coatings second quarter net sales were flat year-over-year at $856.0 million led by 8.5% better price-mix and a 2.4% benefit from the absence of the commercial agreement restructuring charge from Q2 2022. Volumes declined by 11.1% predominantly related to the sales impact of the ERP implementation and from a weaker Industrial market environment.

Refinish net sales increased 6.0% year-over-year to $520.7 million, driven by price-mix improvement of 10.0%, supported by new and carry-over pricing efforts. Price-mix improved 1.7% sequentially reflecting actions taken earlier in the year. Volumes decreased by 8.4% year-over-year as a supportive market environment with typical seasonal order patterns was overshadowed by the ERP implementation which drove an elevated quarter-end backlog. Market activity remained largely stable as miles driven and return to work dynamics were consistent with prior periods. Body shop backlogs are elevated given continued parts and labor shortages.

Industrial net sales decreased 8.1% year-over-year to $335.3 million, as positive price-mix was more than offset by lower volumes. Price-mix improved 6.5% year-over-year as the business continued to prioritize margin recovery. Volumes declined 14.6% year-over-year mostly from a continuation of soft market activity that began in mid-2022.

The Performance Coatings segment generated Adjusted EBIT of $117.8 million in the second quarter compared with $125.2 million in Q2 2022, with associated margins of 13.8% and 14.6%, respectively. Price-cost was a significant tailwind given strong pricing and modest raw material deflationary benefits, though this was more than offset by higher variable compensation expense and temporary costs from the ERP implementation and productivity programs.

Mobility Coatings Results

Discussion of Results:

Mobility Coatings net sales were $437.9 million in Q2 2023, an increase of 15.5% year-over-year. Volume growth of 12.8% was driven by improved Light Vehicle and Commercial Vehicle production rates as well as customer wins. Price-mix increased 2.7% with positive contributions from both end-markets.

Light Vehicle net sales increased 16.7% year-over-year to $330.2 million, led by volume growth of 14.9%. Volume growth was consistent with global light vehicle build rates, which improved by 15.5% to 22.0 million builds in Q2 2023, led primarily by very strong growth in China. Price-mix growth of 2.4% reflects continued focus on margin recovery.

Commercial Vehicle net sales increased 12.0% year-over-year to $107.7 million, led by volume growth of 6.7% and price-mix improvement of 3.6%. Volume growth was driven by strong class 4-8 production rates, especially in the Americas where Axalta has a market leading position. Class 8 builds improved 12% year-over-year in North America, driven by improved parts availability and pent-up demand. Class 4-8 demand is expected to be stable through the rest of the year supported by approximately 7 to 9 months of backlogs for both medium and heavy duty trucks in the Americas region.

The Mobility Coatings segment generated Adjusted EBIT of $23.7 million in Q2 2023 compared with $2.3 million in Q2 2022. Adjusted EBIT improvement was supported by substantial sales growth in addition to improved price-cost. Q2 2023 marked the third consecutive quarter of positive net price-cost for Mobility Coatings on a year-over-year basis. Higher compensation expense and temporary costs incurred from investments in the ERP implementation and productivity programs were headwinds in the period. Adjusted EBIT margins increased 480 bps to 5.4% year-over-year.

Balance Sheet and Cash Flow Highlights

Axalta ended the second quarter with cash and cash equivalents of $517.6 million and total liquidity over $1 billion. Net debt to trailing twelve month ("LTM") Adjusted EBITDA ratio (total net leverage ratio) was 3.6x at quarter-end versus 3.7x as of March 31, 2023 and the second quarter ended with an Adjusted EBITDA to interest expense coverage ratio of 4.9x. Axalta voluntarily paid down an additional $75 million of principal on its term loan in the period, contributing to $150 million of combined structural debt pay downs over the past two quarters.

Second quarter cash provided by operating activities was $131.0 million versus $12.2 million in Q2 2022, reflecting a significant improvement in working capital along with stronger earnings. Inventory levels improved sequentially for the second consecutive quarter leading to a cash benefit of $30.9 million in the current period, as compared to a $59.9 million use in the prior-year. Free cash flow totaled $99.0 million compared to a use of $13.5 million in Q2 2022.

Sean Lannon, Axalta's Chief Financial Officer, commented, “Our cash conversion this quarter was a great achievement and reflects the team’s focus to reverse elevated working capital balances from year-end. As a result of better earnings and cash generation, our total net leverage ratio continued to improve; we expect to end the year close to 3.0x based on the current fiscal year outlook. Debt reduction is expected to remain our highest priority use of cash given attractive returns in the current interest rate environment, with opportunistic bolt-on M&A possible in the second half. We are actively exploring additional opportunities to reduce interest expense given improvements in capital markets activities.”

Financial Guidance and Market Commentary

Mr. Villavarayan concluded, “Looking ahead we see clear opportunity to improve earnings which is reflected in our second half guidance and run rate trajectory in the fourth quarter. Price-cost dynamics remain supportive and are expected to be sufficient to offset higher compensation expenses and modest investments being made to support long-term growth. Our 2023 guidance framework points to earnings recovery, and I believe that the actions we are taking today will strengthen the business and establish the foundation for consistent long-term success.”

Q3 2023 Outlook:

Full Year 2023 Outlook:

Commentary

• Anticipate pricing to moderately increase YoY with positive contribution from all end-markets driving majority of FY sales growth
• Forecast typical quarterly seasonal demand patterns, strong demand in Mobility Coatings, stability in Refinish and a softer Industrial environment
• Expect mid-to-high single digit variable cost deflation for the second half of the year to mitigate higher operating expenses
• Project 13% YoY Adjusted EBIT growth at midpoint of FY 2023 earnings guidance

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.

Conference Call Information

As previously announced, Axalta will hold a conference call to discuss its second quarter 2023 financial results on Wednesday, August 2, 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 August 2, 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 August 9, 2023. The replay dial-in number is +1-412-317-6671. The replay passcode is 13740153.

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 (the “SEC”) Regulation Fair Disclosure (or Reg. FD). Investors should routinely monitor that site, in addition to our press releases, SEC 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, but not limited to, our outlook/commentary and/or guidance, which includes net sales growth, foreign currency effects, Adjusted EBIT, Adjusted EBITDA, Adjusted diluted EPS, depreciation and amortization, step-up depreciation and amortization, tax rate, as adjusted, diluted shares outstanding, interest expense, capital expenditures, free cash flow, prices for our products, demand patterns, variable cost deflation, operating expenses, total net leverage ratio, our supply chain constraints and our ability to offset the impacts of such constraints, potential acquisitions and financing activities, and global commercial vehicle demand. Axalta has identified some of these forward-looking statements with words such as “anticipate,” “assumptions,” “outlook,” “believe,” “expect,” “estimates,” “likely,” “will,” “guidance,” “priority,” “looking ahead,” “opportunity,” “projection,” “future,” “want,” “possible,” “to be,” “signs,” 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, as well as impacts from operational disruptions related to our ERP system implementation, 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 “Forward-Looking Statements,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations