GLEN MILLS, PA — Axalta Coating Systems Ltd. (NYSE: AXTA) has announced its financial results for the fourth quarter and full year ended December 31, 2022.
Fourth Quarter 2022 Highlights
- Volumes grew 2.4% year-over-year as market recovery in Mobility Coatings more than offset pockets of softer demand in Industrial and a slower China recovery in Performance Coatings
- 11.7% price-mix growth year-over-year; 3.2% sequential price-mix growth
- Income from operations of $109.8 million up 15.9% versus $94.7 million in Q4 2021; Adjusted EBIT of $147.2 million up 21.7% compared with $121.0 million in Q4 2021
- Diluted EPS of $0.20 versus $0.23 in Q4 2021; Adjusted diluted EPS of $0.38 versus $0.30 in Q4 2021
- Completed Term Loan refinancing extending maturity to December 2029; Net leverage sequentially improved to 3.8x from 4.1x at September 30, 2022
Fourth Quarter 2022 Consolidated Results
Fourth quarter net sales increased 8.7% year-over-year, including a 5.4% foreign currency headwind. The strong year-over-year growth was driven by 11.7% higher average price-mix, and 2.4% better volumes. Performance Coatings net sales increased 1.8% year-over-year, driven by constant currency growth of 10.5% in Refinish and 3.2% in Industrial. Mobility Coatings net sales increased 25.5% supported by a recovery in global auto production and continued pricing momentum.
Income from operations for Q4 2022 totaled $109.8 million compared to $94.7 million in Q4 2021. Net income to common shareholders was $43.6 million, inclusive of approximately $30 million of pre-tax charges associated with the Term Loan refinancing and restructuring charges, versus $53.2 million in Q4 2021. Adjusted diluted earnings per share was $0.38 compared with $0.30 in Q4 2021. Q4 2022 benefited from robust sales growth, including significant realized pricing gains and volume improvement; however, operating income was negatively impacted by continued year-over-year variable raw material inflation and elevated logistics, energy and labor expenses. In addition, foreign currency headwinds, the Russia-Ukraine conflict and COVID-19 impacts in China represented a combined ~$17 million headwind to income from operations in the quarter.
Chris Villavarayan, Axalta’s CEO and President, commented, “I am pleased to report fourth quarter earnings at the top of our guidance range, which reflected considerable year-over-year improvement. Strong pricing gains were realized across all end-markets and supported better year-over-year profitability. Margin recovery is a key priority for us and our second-half results showed notable progress on this front. Meanwhile, volumes again improved across the portfolio as demand for our products and services continue to outpace most end-market trends. We are exiting 2022 with strong momentum and a foundation to deliver continued progress into 2023.”
Mr. Villavarayan continued, “I am thrilled to be leading the 12,000 team members of Axalta. This is an organization with an impressive legacy built on more than a century of innovation. The quality and depth of our people is impressive and I look forward to what we will accomplish together. In the months ahead my focus will be centered around execution as we look to accelerate an earnings recovery that is already underway.”
| ($ in millions) | Q4 2022 | Q4 2021 | % Change vs Q4 2021 |
% Change Due To: | ||||||||||||||||
| Volume | Price/Mix | FX | ||||||||||||||||||
| Performance Coatings | $ | 818.5 | $ | 804.0 | 1.8 | % | (4.3 | %) | 11.8 | % | (5.7 | %) | ||||||||
| Mobility Coatings | $ | 418.2 | $ | 333.2 | 25.5 | % | 18.7 | % | 11.5 | % | (4.7 | %) | ||||||||
| Total Axalta | $ | 1,236.7 | $ | 1,137.2 | 8.7 | % | 2.4 | % | 11.7 | % | (5.4 | %) | ||||||||
| Income from operations | $ | 109.8 | $ | 94.7 | 15.9 | % | ||||||||||||||
| Adjusted EBIT | $ | 147.2 | $ | 121.0 | 21.7 | % | ||||||||||||||
| % margin | 11.9 | % | 10.6 | % | ||||||||||||||||
| ($ in millions) | Q4 2022 | Q4 2021 | % Change vs Q4 2021 |
% Change Due To: | ||||||||||||||||
| Volume | Price/Mix | FX | ||||||||||||||||||
| Refinish | $ | 492.2 | $ | 470.9 | 4.5 | % | (1.0 | %) | 11.5 | % | (6.0 | %) | ||||||||
| Industrial | $ | 326.3 | $ | 333.1 | (2.0 | %) | (9.0 | %) | 12.2 | % | (5.2 | %) | ||||||||
| Performance Coatings | $ | 818.5 | $ | 804.0 | 1.8 | % | (4.3 | %) | 11.8 | % | (5.7 | %) | ||||||||
| Adjusted EBIT | $ | 106.7 | $ | 99.7 | 7.0 | % | ||||||||||||||
| % margin | 13.0 | % | 12.4 | % | ||||||||||||||||
Performance Coatings fourth quarter net sales increased 1.8% (7.5% increase ex-FX) year-over-year to $818.5 million, driven by an 11.8% price-mix benefit. Volumes declined 4.3% primarily driven by softening regional macroeconomic activity impacting demand within Industrial, slower than expected recovery in China from COVID-19 lockdowns and impacts from the Russia-Ukraine conflict. Foreign exchange in the fourth quarter was a 5.7% year-over-year headwind led by the Euro, Chinese Renminbi and British Pound.
Refinish fourth quarter net sales increased 4.5% (10.5% increase ex-FX) year-over-year to $492.2 million, driven by a price and product mix benefit of 11.5%. Volume declined 1.0% year-over-year as stronger North American activity was more than offset by reduced traffic patterns in China as a result of COVID-19 lockdowns and modest declines in EMEA driven by the impacts of the Russia-Ukraine conflict. In North America, while road congestion and miles driven are improving, office occupancy is still well below pre-pandemic levels. Growth in the quarter and full year, excluding the impacts of the Russia-Ukraine conflict, was supported by new business, driven by notable wins alongside an increase in points of distribution.
Industrial year-over-year net sales decreased 2.0% (increase of 3.2% ex-FX) to $326.3 million. Price-mix growth of 12.2% offset year-over-year raw material inflation and closing the remaining cumulative price-cost gap remains a top priority. Volume decreased 9.0% mainly due to the geographical and macroeconomic headwinds in General Industrial. Energy Solutions showed sequential improvement in the quarter, driven by robust global demand. Building Products was down year-over-year, driven by softer demand due to the elevated interest rate environment in North America.
The Performance Coatings segment generated Adjusted EBIT of $106.7 million in the quarter compared with $99.7 million in Q4 2021, with associated margins of 13.0% and 12.4%, respectively. The Adjusted EBIT improvement of 7.0% was driven by price-mix growth and share gains, offset partially by increases in raw material, energy, and labor costs as well as currency translation headwinds versus the prior-year period. The Russia-Ukraine conflict, China COVID-19 lockdowns and currency impacts were a ~$14 million Adjusted EBIT headwind year-over-year.
Mobility Coatings Results:
| ($ in millions) | Q4 2022 | Q4 2021 | % Change vs Q4 2021 | % Change Due To: | ||||||||||||||||
| Volume | Price/Mix | FX | ||||||||||||||||||
| Light Vehicle | $ | 319.6 | $ | 254.9 | 25.4 | % | 20.0 | % | 10.7 | % | (5.3 | %) | ||||||||
| Commercial Vehicle | $ | 98.6 | $ | 78.3 | 25.9 | % | 14.3 | % | 14.1 | % | (2.5 | %) | ||||||||
| Mobility Coatings | $ | 418.2 | $ | 333.2 | 25.5 | % | 18.7 | % | 11.5 | % | (4.7 | %) | ||||||||
| Adjusted EBIT | $ | 17.6 | ($ | 3.5 | ) | 602.9 | % | |||||||||||||
| % margin | 4.2 | % | (1.1 | %) | ||||||||||||||||
“Mobility Coatings fourth quarter net sales were $418.2 million, an increase of 25.5% (30.2% ex-FX) year-over-year. Demand was robust in the quarter, as volumes grew in Light Vehicle and Commercial Vehicle by 20.0% and 14.3% year-over-year, respectively. Price-mix growth of 11.5% for the segment was very strong year-over-year, as Light Vehicle and Commercial Vehicle grew 10.7% and 14.1%, respectively. Foreign exchange in the fourth quarter was a 4.7 % year-over-year headwind driven led by the Euro and Chinese Renminbi.
“Light Vehicle net sales increased 25.4% to $319.6 million (30.7% ex-FX) driven by volume recovery and robust price-mix growth, offset partially by a 5.3% foreign exchange headwind. Year-over year volume growth of 20.0% substantially exceeded global build rates, which increased 1.7% to 21.5 million builds in Q4 2022. New customer wins in key markets drove above-market performance in both the fourth quarter and the full year. Price-mix realization of 10.7% year-over-year and 5.3% sequential growth reflects the team’s commitment to recover margins by closing the cumulative price-cost gap.
“Commercial Vehicle net sales increased 25.9% year-over-year to $98.6 million (28.4% ex-FX) versus Q4 2021, driven by new customer wins and recovery in global commercial vehicle production rates. Volume growth of 14.3% outpaced global class 8 truck market growth. Demand remained robust in the Americas and western Europe region, where we have strong customer relationships and market share. Price-mix grew 14.1% year-over-year.
“The Mobility Coatings segment generated Adjusted EBIT of $17.6 million in Q4 2022, compared to an Adjusted EBIT loss of $3.5 million in Q4 2021, driven by substantial improvement in price and product mix and volume recovery from pent up demand.”
Full Year 2022 Results:
| ($ in millions) | FY 2022 | FY 2021 | % Change vs FY 2021 | % Change Due To: | |||||||||||||||||||
| Volume | Price/Mix | FX | Acq/One-Time | ||||||||||||||||||||
| Performance Coatings | $ | 3,326.7 | $ | 3,096.3 | 7.4 | % | (0.4 | %) | 10.9 | % | (5.5 | %) | 2.4 | % | |||||||||
| Mobility Coatings | $ | 1,557.7 | $ | 1,319.9 | 18.0 | % | 13.6 | % | 8.1 | % | (3.7 | %) | — | % | |||||||||
| Total Axalta | $ | 4,884.4 | $ | 4,416.2 | 10.6 | % | 3.7 | % | 10.1 | % | (4.9 | %) | 1.7 | % | |||||||||
| Income from operations | $ | 423.2 | $ | 462.4 | (8.5 | %) | |||||||||||||||||
| Adjusted EBIT | $ | 565.3 | $ | 623.2 | (9.3 | %) | |||||||||||||||||
| % margin | 11.6 | % | 14.1 | % | |||||||||||||||||||
Income from operations for full year 2022 totaled $423.2 million versus $462.4 million for full year 2021. Net income to common shareholders was $191.6 million for the year compared with $263.9 million in 2021. Adjusted diluted earnings per share was $1.48 compared with $1.67 in 2021. Full year 2022 benefited from robust sales growth, including significant realized pricing gains and volume improvement; however, operating income was negatively impacted by continued variable raw material inflation, and elevated logistics, energy and labor expenses. In addition, foreign currency headwinds, the Russia-Ukraine conflict and COVID-19 impacts in China represented a combined ~$70 million headwind to income from operations in 2022 compared to 2021.
Balance Sheet and Cash Flow Highlights
Axalta ended the fourth quarter with cash and cash equivalents of $645.2 million and total liquidity of nearly $1.2 billion. Our net debt to trailing twelve month (“LTM”) Adjusted EBITDA ratio was 3.8x at quarter end versus 4.1x as of September 30, 2022, reflecting moderately higher cash balances and stronger LTM Adjusted EBITDA. Axalta ended the fourth quarter with an Adjusted EBITDA to interest expense coverage ratio of 5.8x. During the fourth quarter, Axalta paid down $47 million of long term debt and successfully refinanced its Term Loan, which resulted in the extension of the maturity date to December 2029.
Fourth quarter total operating cash flow was $245.6 million versus $268.6 million in Q4 2021. Working capital was less of a source of cash in the period versus the prior-year period following inflationary pressures and higher physical inventory levels as of December 31, 2022. Meanwhile, accounts receivable increased reflecting stronger volumes and pricing. Free cash flow totaled $206.0 million compared with $249.4 million in Q4 2021 given lower working capital contribution versus the prior year period and modestly higher capital expenditures in Q4 2022.
Sean Lannon, Axalta’s Chief Financial Officer, commented, “We ended 2022 with momentum in our key businesses and demonstrated improvement in many metrics, including earnings growth for two consecutive quarters and margin improvement in Q4. Net leverage improved to 3.8x as we stepped-up earnings and delivered cash to the balance sheet. These developments supported a constructive credit environment for us to refinance our Term Loan where we extended the maturity from 2024 to 2029.
“Looking ahead, I expect the resilient core of Axalta to remain strong as we believe trends remain favorable for our differentiated products and services, most notably in our industry-leading Refinish end-market. Elsewhere, our Q4 results demonstrated what we believe to be the beginnings of a reversal in several cyclical factors, such as inflation, constrained auto production, and unreliable supply-chains, which together have depressed profitability and cash generation. I expect us to continue to show meaningful progress into 2023 with the Q4 sequential increase in Mobility Coatings EBIT representing a promising step in our recovery alongside a meaningful reduction in the cumulative price-cost gap. Soft demand in our most economically sensitive end-market, Industrial, is likely to persist for the time being as regional macroeconomic factors slow in certain sectors. However, we expect that the significant pricing momentum across the portfolio should more than offset modest incremental volume risk. We are committed to driving earnings and cash flow growth in the coming year and given our unique market positioning, we see a constructive setup into 2023 and the years to follow.”
Financial Guidance & Market Commentary
Axalta does not provide a reconciliation for non-GAAP estimates for constant currency net sales growth, Adjusted EBIT, Adjusted EBITDA, Adjusted Diluted EPS and income tax rate, as adjusted, 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 the Company’s “Non-GAAP Financial Measures” for more information.
Q1 2023 Outlook and Commentary:
| (in millions, except per share data & %s) | Projection | |
| Net Sales growth versus Q1 2022 | 5% – 9% | |
| FX impact on Sales | (2% – 3%) | |
| Adjusted EBIT (Adjusted EBITDA) | $126 – $146 ($185 – $205) | |
| Adjusted Diluted EPS | $0.26 – $0.33 | |
| D&A (step-up D&A) | $70 ($16) | |
| Tax Rate, As Adjusted | ~ 25% | |
| Diluted Shares | ~ 222 | |
| Interest Expense | $50 | |
Mobility Coatings: Expect sequential EBIT improvement given continued outpacing of market builds and margin recovery
Raw Materials: Stabilizing raw material environment with pressure anticipated to continue in specialties, labor and energy; expect high-single-digit % YoY raw material headwind in Q1 2023
Full Year 2023 Assumptions and Commentary:
| (in millions, except per share data & %s) | Projection | |
| Global LV Builds | 83.0 – 84.0 | |
| Capex | $190 | |
| D&A (step-up D&A) | $280 ($50) | |
| Tax Rate, As Adjusted | ~ 25% | |
| Diluted Shares | ~ 222 | |
| Interest Expense | $215 – $225 | |
Mobility Coatings: Anticipate steady quarterly progress throughout 2023 vs. Q4 EBIT run-rate
Raw Materials: Expect modest deflation in elevated upstream commodities to help offset persistent headwinds from labor and energy inflation
Overall Profitability & FCF: Expect meaningful YoY growth given carry over pricing, Refinish and Mobility market recovery, and stabilizing cost environment
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