Axalta Coating Systems Ltd.

Ladies and gentlemen, thank you for standing by and welcome to the Exalta fourth quarter and full year 2018 earnings conference call. 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 replays will be available through February 6th. 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 Chris McCrae. Please go ahead, sir.

Thank you, and good morning. This is Chris McCrae, VP of Investor Relations. We appreciate your continued interest in Exalta and welcome you to our fourth quarter and full year 2018 financial results conference call. Joining me today are Robert Bryant, CEO, and Sean Lannan, CFO. This morning we released our quarterly financial results and posted a slide presentation to the Investor Relations section of our website at exalta.com, which we'll be referencing during this call. Both our prepared remarks and discussion today may contain forward-looking statements reflecting the company's current view of future events and the potential effect on Exalta's operating and financial performance. These statements involve uncertainties and risks, and actual results may differ materially from those forward-looking statements. Please note that the company is under no obligation to provide updates to these forward-looking statements. This presentation also contains various non-GAAP financial measures. In the appendix, we've included reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information regarding forward-looking statements and non-GAAP financial measures, please refer to our filings with the SEC. I'll now turn the call over to Robert.

Good morning, everyone. Today I'm pleased to share with you our financial results for the fourth quarter and full year, the key operational highlights, and a few changes we'll be making to our financial reporting basis and presentation consistent with our evolution as a public company and based on shareholder feedback. Our fourth quarter results met our previously communicated ranges for 2018 guidance on both the top and bottom lines, with fourth quarter organic net sales growth of over 2% and adjusted EBITDA of $235 million. We also exceeded our free cash flow expectations for the fourth quarter, which generated a full year result of $362 million, compared to our October guidance range of $330 to $350 million. Customer demand and overall business trends remain generally consistent with our last quarterly update in October. We saw ongoing organic net sales growth in our refinish and industrial end markets, strong continued price recapture and performance codings to offset input inflation, and positive volume in North America light vehicles. We also saw the first reported quarter in over a year with positive price mix in transportation. which is the first step in showing progress on our global efforts to offset variable cost inflation in this segment. We anticipate ongoing stability in each of these items looking forward into 2019. On the flip side, we've witnessed ongoing auto production slowness in China, as well as signs of reduced overall business activity in Europe. Overall, we're satisfied with our 2018 results, especially considering the headwinds from inflation, foreign exchange, and light vehicle pricing. Some of these headwinds will persist, including expected inflation impact to the P&L at least through the first half of 2019. But we're encouraged that we seem to be past the peak of some aspects of the inflation effect, while FX impacts appear sequentially stable. Turning to slide three, I'd like to review some highlights from the quarter. We grew Q4 net sales by 2.7% year over year, excluding the impact of foreign exchange, including substantial benefit from improved price and mix in the period. Net sales and performance coatings increased an impressive 6.4% before FX, with comparable growth from both refinish and industrial end markets. This growth came largely from improved price mix in the period. Volumes were stable globally, but with some regionally specific variations, including some slowing in Europe within both end markets. In transportation codings, a net sales decrease in the low single digits was split between the light vehicle and commercial vehicle end markets. One encouraging aspect in this segment was a reported increase in price mix at 0.8%, which was the first positive transportation price mix metric in the last nine quarters. though it included some mixed benefits in the period. We also saw some volume growth in North America, though this was more than offset by lower demand in China and continued production curtailment in Europe, still being attributed to a large extent by emission testing headaches associated with the transition from diesel to gasoline engines. Shifting to adjusted EBITDA, we achieved $235 million for the quarter, even sequentially, though, below last year's $245 million, driven by double-digit inflation and variable costs at the adjusted EBITDA level and somewhat slower light vehicle volumes, offset partially by price-mixed benefits. This was coupled with the impact of foreign exchange drop-through and inflation in sources including logistics and packaging contained in operating expense. Adjusted EBITDA margins for Q4 decreased to 20.3% from 21.1%, with pressure from transportation coatings margins offset to a large extent by increased margins in performance coatings. We're really pleased that the combination of improved price mix and performance coatings and the combination of productivity across Exalta enabled us to hold margins largely constant in 2018 at 20.1% versus 20.3% in 2017. While we clearly still have a lot of work to do to offset inflation, impacts that we've accrued over the last two years in transportation codings, we saw modest initial progress this quarter and hope to show continued results in 2019 based on ongoing discussions with customers. For the full year 2018, Delta reported net sales of $4.7 billion, up 6.7%, excluding the impact of foreign currency, coming largely from strong price and mixed contribution, as well as the inclusion of 3.5% from M&A activity. Net income had a more favorable comparison due to the absence of restructuring charges and other tax reform impacts in the prior year, while adjusted net income increased 5% in 2017. Adjusted EBITDA of $937 million for 2018 increased 6% from $885 million in 2017. This result was produced by the significant headwinds from inflation as well as incremental FX headwinds that emerged during the course of the year. Turning to slide four, briefly looking at the end market highlights for the quarter. Refinished net sales growth of 6.3% XFX was solid, driven principally by positive price mix with sales growth from all regions. Business conditions in Europe were slower versus prior periods, And North America growth was constrained somewhat by lower mainstream coatings and refinished accessory sales in the period, but which also contributed to a richer mix overall. Refinished demand globally appears broadly stable based on our run rates and indication from body shop customers, as well as sell-through indications from our distribution partners. We have also been successful in offsetting inflation with price action to date. Our industrial coatings end market also grew in the quarter, with a 6.6% net sales increase XFX, including contribution from all regions except Latin America, which remains mixed. Price mix remains a bright spot in industrial, with low to mid-single digit realization in the quarter. We're on track to offset accumulated inflation by mid-year 2019, at least to compensate for much of the accumulated inflation impacts for the last two years. We had a very good year overall for industrial in 2018. Demand seems broadly stable, but we have seen some indications of slowing in certain markets in China, Latin America, and Europe, already reflected in our fourth quarter volumes. That said, we continue to project modest growth from industrial in 2019, including new product introductions. Light vehicle net sales were down 3.9% for the quarter, XFX, Volumes were down mid-single digits, with decreases seen in Asia, Latin America, and EMEA, offset partly by further North America growth. The China market downturn continued, though it is encouraging to hear that the Chinese government is now considering potential supportive measures, which have been helpful in the past to stimulate consumer behavior. EMEA continues to see production impacted by the WLTP engine technology changeover, which is expected to continue into early 2019, but then stabilize. Global production forecasts for 2018 were reduced again from growth of 0.7% to a decline of 1% since our last earnings call. More than half of the 1.7 million unit forecast reduction came from China, with Europe driving a significant portion of the remainder. Commercial vehicle net sales decreased 3.3% XFX in the fourth quarter. Consistent with the third quarter, heavy-duty truck demand remains quite strong in the Americas, though we have seen more signs of slower demand from Europe in the fourth quarter. The price mix was down slightly in the period. On the topic of price cost gap and transportation codings, we've undertaken several efforts in 2018 to achieve offsets to variable cost inflation. and our most recent dialogue with certain customers has been impactful. We believe we will see progress regarding average selling prices this year, and we continue to push for this outcome. Importantly, even with lower oil prices recently, we remain significantly impacted by variable cost inflation, and we do not expect near-term relief in many of our inputs due to tight demand conditions across numerous raw material baskets and impacts of trade tariffs. We also continue to focus on cost reduction actions and transportation coatings to help cover the price-cost gap. Regarding our balance sheet and cash flows, fourth quarter free cash flow is $220 million to drive full-year free cash flow to $362 million, above our guidance range that we offered in October. Finish the year with a net debt to adjusted EBITDA ratio of 3.4 times. On capital deployment, we repurchased $254 million worth of shares for the full year, with $106 million completed during the fourth quarter. Total spend on M&A for the year was $110 million, and we noted additional discretionary capital was used in 2018 in line with our prior guidance to invest in internal high-return investment opportunities with some of our key strategic customers. Next, I'd like to touch briefly on a few operating highlights. First, we made early progress on relocating production from our Belgium plant, including engineering work and new construction starts in new locations. We also opened new research technical centers in three locations globally and initiated new powder coating capacity upgrades in two locations to support growth plans in our industrial end market. In terms of innovation investment, we introduced over 250 new products across Exalta, beating our target here for the third year in a row. Highlights in the fourth quarter include the launch of new refinished products to complement and enhance our mainstream brands, while continuing with good success to launch and convert over 250 body shops in Asia and North America to our new Chromax EZ premium waterborne base coat system. In our industrial end market, launched a new steel conduit lining for the electrical wiring market called StrenX. Transportation coatings, we continued the launch of our HyperDur 3000 product line, which is a single component primer with improved performance for certain substrates. We also continued to gain share this quarter with our consolidated system OEM applications with new wins in Latin America and Europe. Regarding our focus areas for 2019, we continue to concentrate first on growth across our business, profitably gaining share in each market that we serve today. Second, we're squarely focused on execution and working toward even more refined targets related to overall customer satisfaction. As an organization, we are committed to profitable growth, improving operating execution, and increased accountability across the company to deliver on our goals. My mantra to our leadership is focused on simplicity, nimbleness, a focus on fewer but more critical initiatives, and decision-making based on appropriate metrics, the long-term investment mindset. I believe that if we move quickly with our customers' interests first and with a focus on building a sustainable and competitive model, we will continue to win in our markets for many years to come. Lastly, beginning in first quarter 2019, we will be shifting our reported basis and presentation to earnings per share and adjusted EBIT metrics. We will continue to offer guidance and results on an adjusted EBITDA basis as well for a period of time. After carefully evaluating the change, it seemed an appropriate time, given the maturity of our company, to adopt this approach and also based on feedback from shareholders. We've also begun to move our internal incentive compensation plans away from adjusted EBITDA to adjusted EBIT and earnings per share to better align all aspects of the business, including capital allocation. With that, I will now turn the call over to Sean, who will share some further detail on our financial results.