GLEN MILLS, PA — Axalta Coating Systems Ltd. (NYSE:AXTA) announced that Robert Bryant will step down as President and Chief Executive Officer to pursue other opportunities, effective August 31, 2022. He will also step down as a member of the Board of Directors at such time. Rakesh Sachdev, an independent director and former Chief Executive Officer of Platform Specialty Products Corporation (now renamed Element Solutions Inc.) and Sigma-Aldrich Corporation, will assume the role of interim Chief Executive Officer at that time. The Board has initiated a comprehensive search process to identify a new CEO.
Bill Cook, Axalta’s Board Chair, said, “On behalf of the Board of Directors, I would like to thank Robert for his leadership and dedication to Axalta. Robert joined the company as CFO in 2013 when it was first carved out of DuPont and played a key role in Axalta’s successful IPO and listing on the NYSE in 2014. Since being appointed President, CEO and Director in 2018, Robert has built a strong leadership team and spearheaded our transition to a business-centric operational model that has allowed us to be more customer focused, while also advancing our innovation and human capital programs. I’d like to extend a special thanks for his leadership during the unprecedented challenges we’ve faced over the past few years related to the COVID-19 pandemic and global supply chain issues. We wish Robert continued success in his next endeavors.”
Cook continued, “Our Board remains committed to continuing the acceleration of Axalta’s performance and unlocking long-term value for our shareholders and enhanced opportunities for our employees. With more than three decades of experience in the management of public and private chemical, life sciences and industrial businesses, Rakesh is a proven leader and the right choice to serve as Axalta’s interim CEO. The Board has tremendous confidence in Axalta’s leadership team and is focused on ensuring the team’s continuity during this transition.”
Sachdev commented, “Axalta is an industry leader with clear priorities and paths to achieve secular growth and market share gains by leveraging our technology platforms and continuing to launch new and innovative products. During this transitionary period, I look forward to partnering with Axalta’s deep bench of senior leaders to drive further growth as end-markets normalize over time and to execute flawlessly on our strategy to significantly enhance value for all our stakeholders.”
Bryant said, “It has been an honor and a privilege to lead such a talented team across the globe. I am proud of the tremendous progress our company has made during my tenure. I want to thank our leadership team and employees for their tireless commitment to the company and our customers around the world. I look forward to watching Axalta realize its full potential.”
Axalta Releases Second Quarter 2022 Results
Axalta Coating Systems Ltd. (NYSE: AXTA) also announced its financial results for the second quarter ended June 30, 2022.
Second Quarter 2022 Highlights:
- Net sales increased 9.6% year-over-year (14.5% ex FX) led by record pricing and solid volume growth; Mobility Coatings delivered significant above-market sales performance
- Realized record 10.0% price-mix growth with double-digit year-over-year gains in Mobility and Industrial Coatings
- Volume increased 2.7% driven by 8.4% growth in North America and 14.8% in Latin America with strong contributions from both segments
- Income from operations of $103.6 million versus $190.4 million in Q2 2021; Adjusted EBIT of $150.6 million compared with $173.4 million in Q2 2021 despite $23 million of headwinds associated with the Russia-Ukraine conflict, China lockdowns, and FX
- Diluted EPS of $0.20 versus $0.54 in Q2 2021; Adjusted diluted EPS of $0.41 versus $0.48 in Q2 2021
Second Quarter 2022 Consolidated Financial Results
Second quarter net sales of $1,234.9 million increased 9.6% year-over-year, including a negative 4.9% foreign currency impact. The strong year-over-year growth was driven by 10.0% higher average price-mix, a 3.6% M&A benefit, and 2.7% better volumes. Performance Coatings Q2 net sales increased 6.2% year-over-year, including low double-digit constant currency growth in both the Industrial and Refinish end-markets. Mobility Coatings net sales increased 18.1% led by 11.6% higher price-mix and solid above-market volume growth of 8.9% in Light Vehicle and 12.7% for Commercial Vehicle.
Income from operations for Q2 2022 totaled $103.6 million versus $190.4 million in Q2 2021. Net income to common shareholders was $44.1 million for the quarter compared with $126.4 million in Q2 2021. Diluted earnings per share was $0.20 compared with $0.54 in Q2 2021. The prior year quarter included a benefit of $71.8 million related to the operational matter in the Company’s North America Mobility Coatings business and incremental restructuring charges of $20.0 million versus Q2 2022, while Q2 2022 included a $25.0 million charge related to a commercial agreement restructuring. The second quarter 2022 benefited from robust sales growth, including significant realized pricing gains; however, operating income was negatively impacted by continued variable cost inflation, foreign currency headwinds, and elevated logistics, labor, and energy expenses. The Russia-Ukraine conflict and COVID-19 lockdowns in China represented a combined $15 million headwind to income from operations in the quarter and was more impactful than expected given unanticipated extended lockdowns.
Robert W. Bryant, Axalta’s President and CEO, commented, “The demand backdrop in the quarter was supportive, but uneven, as strong growth in the Americas and Asia Pacific excluding China was balanced against softness in pockets of EMEA stemming from the Russia-Ukraine conflict. Meanwhile, lockdowns in China paused most economic activity for the majority of Q2. Despite these headwinds, we were able to grow volumes 2.7% globally, including a meaningful contribution from share gains.”
“Our second quarter results showcased our ability to deliver above-market growth across our end-markets. Mobility Coatings had an especially strong quarter with nearly double-digit volume growth despite global industry production declines in the period. In Industrial, we expanded into battery components with several new wins with large electric vehicle customers – highlighting our strong and growing offerings. In Refinish, the need for improved body shop productivity continues to advantage our industry-leading products and services, which led us to book 1,000 net body shop gains year-to-date. The success we are having today in developing new and stronger customer partnerships is a long-term benefit and speaks to the investments we have executed in our people, assets, and technology.”
Mr. Bryant continued, “Operationally, we continue to manage through a challenging environment, but we are optimistic that the dynamic is finally beginning to stabilize. Supply availability remains tight, but is less volatile than in recent quarters, which is enabling better operational performance. Q2 2022 was our highest production volume quarter since the beginning of the pandemic. Similarly, our customers are generally more confident regarding the second-half of the year. While we experienced a sequential cost step-up in Q2 to reflect Q1 exit run-rates and tightness in categories like pigments and certain solvents used in gasoline blend stock, we are seeing variable costs begin to level off in certain areas. The situation however, remains dynamic, and pressure will likely continue in select areas into Q3.”
“The unprecedented rate of inflation over the past four-quarters has depressed company profitability and drove us to execute several rounds of price increases. Our teams are working constructively with our customers to get the price increases needed to offset inflation, and as a result we have achieved a record 10% price-mix realization in the second quarter, which very nearly offset 26% year-over-year inflation in the period. We should begin to recover lost profitability next quarter as pricing is expected to remain strong and the year-over-year cost comparisons moderate versus peak Q2 inflation rates.” Mr. Bryant concluded, “we have proven to be agile and assertive in these dynamic times. I believe that we are on track to offset cost inflation while driving strategic growth across the portfolio.”
Performance Coatings Results
Performance Coatings second quarter net sales were $855.8 million, an increase of 6.2% year-over-year. Organic constant currency net sales increased 9.3% in the period as both end-markets provided strong contributions to a 9.4% price and product mix benefit. Refinish volume growth offset lower volumes in Industrial, resulting in flat year-over-year segment volumes. Foreign exchange in the second quarter was a 5.6% year-over-year headwind led by a weaker Euro and Turkish Lira. In the quarter the Company incurred a $20 million non-cash charge associated with restructuring an existing customer sales agreement, which represented a 2.5% net sales headwind versus the prior year.
Refinish net sales increased 6.0% to $491.1 million (12.1% ex-FX) in Q2 2022, including a 2.6% increase in volume and an 8.4% contribution from M&A, partially offset by a foreign exchange headwind of 6.0% and the previously-mentioned one-time charge of 4.5%. Volume growth was very strong in the Americas and Asia Pacific excluding China as share gains continue to drive above-market performance. Price-mix was 5.5% higher, inclusive of a modest negative mix impact, and offset the impact of continued variable cost inflation. The market recovery is steadily progressing. Sequentially the Company’s Refinish volume grew 12.5% compared to Q1 2022, representing a significant potential driver of earnings upside on the expected normalization of global body shop activity over time.
Industrial net sales increased 6.4% to $364.7 million (11.4% ex-FX) driven by a 14.6% increase in average price-mix, inclusive of 2.3% of favorable mix. Volume declined 3.8% year-over-year, which includes a mid-single digit percent drag from supply chain constraints, which limited the Company’s ability to serve certain customer demand. Net sales growth was led by mid-twenties percent improvement in North America, particularly in the Building Products and General Industrial businesses. COVID-19 lockdowns in China impacted regional results as was the case for EMEA General Industrial as a consequence of the Russia-Ukraine conflict.
The Performance Coatings segment generated Adjusted EBIT of $125.2 million in the second quarter compared with $139.7 million in Q2 2021, with associated margins of 14.6% and 17.3%, respectively. The contributions from substantial organic and inorganic sales growth was more than offset by the significant increase in raw material, logistics, labor, and energy cost inflation as well as currency translation versus the prior-year period.
Mobility Coatings Results
Mobility Coatings net sales were $379.1 million in Q2 2022, an increase of 18.1% year-over-year. Constant currency net sales increased 21.4% year-over-year, driven by a 11.6% price-mix tailwind, which included high-single-digit higher price and positive mix, and 9.8% higher volumes.
Light Vehicle net sales increased 16.0% to $282.9 million (19.6% ex-FX) year-over-year driven by pricing gains and above-market volume growth. The 10.7% year-over-year and 2.7% higher sequential price-mix realization resulted from a combination of newly negotiated agreements to offset variable cost inflation and the catch-up of raw material linked index pricing in select customer contracts. Volume increased 8.9% year-over-year and far exceeded global auto production rates, which were flat year-over-year at 18.8 million in Q2 2022 given continued global supply constraints and curtailed production in China. New customer wins are driving the market out-performance year-to-date, particularly in China where Light Vehicle volume increased 15.5% versus local production declines of 6%.
Commercial Vehicle net sales increased 24.8% to $96.2 million versus Q2 2021 (27.2% ex-FX), driven by customer wins and return from constrained production rates. Volume growth of 12.7% exceeded Class 8 truck market growth, which declined by 1%. Demand is expected to continue to improve through 2022 and into 2023 as production ramps to meet pent up demand, as evidenced by the current 9-month industry backlog.
The Mobility Coatings segment generated Adjusted EBIT of $2.3 million in Q2 2022 compared with Adjusted EBIT of $5.7 million in Q2 2021, driven by higher variable costs coupled with under leveraged fixed assets given current Light Vehicle customer production constraints, offset partly by pricing tailwinds.
Balance Sheet and Cash Flow Highlights
Axalta ended the second quarter with cash and cash equivalents of $500.2 million and total liquidity of over $1.0 billion. The Company’s net debt to trailing twelve month (“LTM”) Adjusted EBITDA ratio was 4.2x at quarter end versus 4.1x as of March 31, 2022, reflecting decreased cash balances driven by continued inflationary pressures as well as moderately lower LTM Adjusted EBITDA and $25 million of share repurchases in the quarter. Axalta ended the second quarter with an Adjusted EBITDA to interest expense coverage ratio of 5.8x. Total net leverage is anticipated to decline throughout the year given the typical second-half weighted distribution of operating cash flow and a favorable outlook for earnings growth in the second half of 2022.
Second quarter total operating cash flow was $12.2 million versus $107.5 million in Q2 2021. Working capital was a use of cash in the period following inflationary pressures while accounts receivable has increased reflecting stronger volumes and pricing inputs. Free cash flow totaled a use of $13.5 million compared with an inflow of $82.6 million in Q2 2021. The Company repurchased 1.0 million shares of the Company’s common stock during the second quarter for total consideration of $25.0 million at an average price of $25.24 per share.
Sean Lannon, Axalta’s Chief Financial Officer, commented, “we are pleased that second quarter operating results were in line with the Company’s expectations given the degree of macro and geopolitical uncertainty we faced in the quarter. We see first-half momentum building into the second-half of the year supported by signs of stabilization in the variable cost environment. This increases the likelihood that we will be able to recover the majority of the cumulative price-cost gap by year-end. As we move into the second half of the year, we should grow earnings and deliver free cash flow that should together drive net leverage into the mid 3x range, assuming no major capital allocation actions.”
“We believe that Axalta is well positioned to drive growth and generate cash across a range of economic scenarios. Our Q3 2022 guidance framework assumes a continuation of Q2 trends. At present we see little evidence of economic slowdown in our core markets, but in such a scenario we believe that we are well prepared and positioned. We have resilient business models in durable areas like Refinish and Energy Solutions. There is pent-up demand in Mobility Coatings and Building Products plus a need to restock most sales channels given depleted inventory levels. We are closely monitoring our markets and customers, and if needed, we have a proven track record to quickly reduce costs.”
Q3 2022 Financial Guidance
- Net Sales: ~+15-17%, including, ~(6)% foreign currency impact and ~+2% acquisition benefit; pricing and volume expected to be up high single-digits year-over-year
- Adjusted EBIT: $140-165 million
- Adjusted Diluted EPS: $0.37-0.45; including a $0.05 year-over-year headwind from foreign currency and the Russia-Ukraine conflict
- Interest Expense: ~$35 million
- Diluted Shares: ~221 million
- Adjusted Tax Rate: ~22%-23%
- D&A: ~$78 million; including $23 million step-up D&A
- Expect raw material inflation in the high teens versus Q3 2021
Non-GAAP Financial Measures
The historical financial information included in this presentation 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, income 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, net debt to Adjusted EBITDA ratio and Adjusted EBIT margin. Management uses these non-GAAP financial measures in the analysis of the Company’s financial and operating performance because they assist in the evaluation of underlying trends in their 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 occurred within the last two years or the Company believes are not reasonably likely to recur within the next two years. The Company believes that making such adjustments provides investors meaningful information to understand the Company’s 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 the Company states that it did not consider indicative of their ongoing operating performance or unusual or nonrecurring in nature. The Company states that its use of the terms constant currency net sales growth, income 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, net debt to Adjusted EBITDA ratio and Adjusted EBIT margin may differ from that of others in their industry. Constant currency net sales growth, income 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, net debt to Adjusted EBITDA ratio and Adjusted EBIT margin should not be considered as alternatives to net sales, net income (loss), income (loss) before 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, income 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, net debt to Adjusted EBITDA ratio and Adjusted EBIT margin have important limitations as analytical tools and should be considered in conjunction with, and not as substitutes for, their results as reported under GAAP. The Company’s release included 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 constant currency net sales growth, Adjusted EBIT, Adjusted EBITDA, Adjusted diluted EPS, income 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. The Company says it cannot estimate or project these items and they may have a substantial and unpredictable impact on the Company’s US GAAP results.
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