Axalta Coating Systems Ltd.

Good morning. This is Chris McRae, Vice President of Investor Relations. Thank you for joining the call today to review our third quarter 2019 financial results and for your interest in Exalta. Joining me today are Robert Bryant, CEO, and Sean Landon, CFO. We released our financial results this morning and posted a slide presentation to the Investor Relations section of the website at exalta.com, which we'll be referencing during this call. Both the prepared remarks and discussion today may contain forward-looking statements reflecting the company's current view of future events and their 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 and thank you for joining us. Exalta delivered a strong third quarter with adjusted EBIT, adjusted EBITDA, adjusted EPS, and free cash flow well ahead of expectations. We overcame important macroeconomic, political, and currency headwinds, as well as the distraction caused by a strategic review process, which underscores the resiliency of our business model, our multiple value levers, and the commitment of our employees. Though net sales were impacted by volume headwinds across global markets where Exalta participates, Exalta's sales were still positive in the aggregate before FX and divestiture related impacts. Operating profit and earnings per share both showcased solid execution and the benefit of continued margin recovery from pricing actions across most businesses and end markets. and year-over-year operating cost reduction driven by our continual focus on Exalta Way. Free cash flow also improved notably from the prior year quarter. Exalta's review of strategic alternatives, initiated in late June, is also progressing. We do not have any incremental news to share with you today, but we will provide updates to the market as circumstances warrant. Turning to slide three, let's review a few operating highlights for the quarter. Consolidated organic and constant currency net sales were stable in Q3, in fact, increasing 0.4%. This growth outcome included ongoing favorable price mix effects of 3.8% this quarter, which included some of the best improvements we have seen in any quarter as a public company. Performance coatings net sales increased 0.7% before foreign currency and M&A-related impacts. Transportation coatings net sales were flat XFX, reflecting lower light vehicle production volumes offset by volume growth in our commercial vehicle and market. Price mix in light vehicle continued to show positive gains with an increase of 2.8% as we made ongoing progress with multiple OEM customers to offset persistent and ongoing raw material inflation impacting the business since 2017. This is now our fourth consecutive quarter with positive price mix including an acceleration in the last two quarters. We reported third quarter consolidated adjusted EBIT of $191 million, a 17% increase from last year's third quarter, driven principally by strong price-mix earnings drop-through, as well as from improved productivity and lower stock-based compensation expense. Volume headwinds, FX impacts, and modest variable cost inflation were partial offsets to the quarterly profit growth. Notably, our adjusted EBIT margin of 17.3% was a full 300 basis points higher year over year, and Exalta's margins broadly are approaching all-time highs since we have been an independent company, largely due to our success in recapturing lost pricing from 2017 to 2018. Exalta's consolidated fixed operating expense, excluding FX impacts, was also 14% lower in the third quarter of 2018. Our adjusted EBITDA margin of 22.5% has materially improved, now approaching the all-time high of 23.5% achieved in 2016, despite margins in light vehicles still lagging due to volume pressure, pricing headwinds from 2017, and uncaptured raw material inflation to date. Adjusted earnings per share for the quarter was 52 cents per share, which compared with 40 cents per share in the prior year quarter, with drivers consistent with those mentioned at the operating level. Looking at our end markets briefly, Exalt has refinished net sales increased 2.5% XFX in the quarter. We grew net sales XFX solidly across North America and EMEA, while Latin America and Asia Pacific were impacted by weaker macroeconomic conditions. Our refinish team continues to effectively offset variable cost inflation with appropriate price management to sustain the broader margins of this business. In volume terms, we continue to see moderate pressure globally, driven by a combination of distributor inventory management, continued structural volume reduction from the conversion to waterborne products, increasing body shop productivity and efficiency, which we drive with our customers every day, and by an element of broader economic weakness. Despite this, the business has seen continued share gains in many regions exhibited in our increase in total net customer shop count. In North America, we're seeing significant growth in our mainstream refinish markets as we've rolled out multiple product systems in recent years with great success. Our industrial end market net sales declined about 1% in the quarter, XFX, and before negative M&A-related impacts from the China joint venture sale. Drivers of this pullback include global volume weakness, with volumes down mid-single digits, largely offset by improved average price mix. The contraction, as with last quarter, correlates with global industrial production indicators, which remain pressured in many key countries and nearly all regions. Our overall execution remains solid, though, and we continue to drive for share gain via new product introductions and innovation, which may also help explain our lower rate of decline relative to many underlying macro-industrial indicators. Light vehicle net sales declined 0.8% XFX for the third quarter, reflecting lower global automotive production rates, most notably in China, though year-over-year comparisons have eased since China's market contraction began over a year ago. Lower net sales were also influenced by strike impacts in North America for the last half of September. IHS production forecasts for 2019 have been further reduced, now 14 months in a row for the global picture and now calling for a 5.8% global production decline for 2019 versus a 3.7% lower assumption as of July end. The updated global production guidance now includes a 5.8% reduction from EMEA, a 4.5% decline in North America, and a 6.5% decrease for Asia Pacific, including an 8.8% decrease in China. Despite this fundamental backdrop, we continue to execute well in our business, and we're working on multiple significant business opportunities for the 2020 to 2021 period. Additionally, line service revenues continue to grow, offering some offset to production volume pressure. Commercial vehicle net sales increased 2.9% XFX in Q3, including ongoing strong overall vehicle production rates in the Americas and solid demand for non-truck customers in most regions. Price mix, consistent with last quarter, was slightly down in the period, due largely to mixed effects this quarter. Regarding our balance sheet and cash flows, third quarter free cash flow was strong, and we're reconfirming our full year free cash flow targets of $430 to $470 million. We finished the quarter at 3.2 times net leverage, a significant improvement versus the 3.5 times at June 30th, as we continue to target lower overall leverage over time with a 2.5 times longer-term goal. In terms of innovation and investment highlights, in Refinish, we continue to launch several new Refinish products in North America, including Nason XL and the Challenger mainstream brands to support new distributor channels. Also, we will launch our new Speed Hacker sealer technology this month that will provide a VOC-friendly sealer to use with our premium waterborne base coats. In Industrial, we launched our new high thermal conductivity impregnating resin for energy solutions that lowers electric motor operating temperatures by 10 to 30%. We also continue to globalize key quill technologies, expanding the introduction of Durapon into the Asia Pacific marketplace. In transportation, we mark the third quarter of the Lumira Clearcoats global rollout. These 1K and 2K products represent Exalta's newest product line of high-performance clearcoats for the OEM market. and leverage our latest resin technology for improved appearance and enhanced scratch resistance while reducing cost and use. In terms of operating highlights, we completed the acquisition of UA-based Capital Paints in the quarter, which gives us a strong entrée into the Middle East in the powder business. Overall, we're pleased to continue to produce well-executed quarters year-to-date in 2019. We've seen persistent volume pressure across global coatings markets, along with some acceleration in FX headwinds this past quarter, which we have incorporated into our revised guidance. That said, much of the impact has been mitigated by ongoing productivity efforts, as well as by somewhat moderating variable cost inflation. Raw material headwinds have been abating in recent months, and in fact, we saw a modest year-over-year tailwind in the month of September, which also bodes well for coming quarters, given the mark on current commodity prices. We're very pleased that in the third quarter, we fully closed out the price-cost gap that developed since 2017 at the total company level. While an important achievement, we also acknowledge that light vehicle and certain industrial submarkets still have more to do in terms of gap closure, and we continue to discuss this important need with our customers in these end markets. In addition to focus on needing pricing adjustments, we also continue to work hard to improve our cost structure and productivity. Accordingly, we took another charge this quarter, totaling $29 million, which will help us reach our ExaltaWay cost savings goals, and we continue to make real-time adjustments to our cost structure and transportation codings to meet our broader financial objectives despite near-term cyclical pressures. I'll now turn the call over to Sean to review our financial results.

Thanks, Robert, and good morning. Turning to slide four, consolidated constant currency net sales decreased 1.4% year-over-year, including a 2% decrease in performance codings and a flat result in transportation codings. Excluding net negative divestiture-related impacts, consolidated net sales increased 0.4%, with performance codings posting a 0.7% increase. The top line result consistent with last quarter reflected robust positive price mix contribution, offset by volume pressure across all regions. Price mix was notably strong in performance coatings, including a component of mixed benefit and refinish, along with solid underlying price recapture. Transportation coatings price mix was also positive, including ongoing recapture in light vehicle for the fourth sequential quarter, offset slightly by weaker mix within commercial vehicle. FX translation was a 2% year-over-year net sales headwind for the period. The impact of FX translation at the profit level remains largely aligned with the overall corporate margins. Key sources of pressure included the euro, the renminbi, Argentinian peso, and pounds. Q3 adjusted EBIT of $191 million was a 17% increase from the prior year, and margins improved 300 basis points to 17.3%. driven by a combination of the price next drop-through benefit, as well as lower overall operating costs from continued productivity savings and lower stock-based compensation expense in the quarter. Partial offsets to these drivers included volume headwinds across most end markets, accelerating negative FX impact, and modest raw material inflation for the quarter. Turning to slide five, performance coding's third quarter net sales decreased 2% year-over-year, excluding a 2.3% negative FX impact and increased 0.7% excluding FX and net negative M&A related impacts. Drivers of this 0.7 organic constant currency growth included a 5% increase in average price mix, partially offset by a 4.3% buying decrease. Exalta's refinish end market produced Q3 constant currency net sales growth of 2.5% year over year, including improved price mix contribution in the mid single digits. Net sales growth XFX was led by North America and EMEA, while Latin America and Asia Pacific were more subdued in the period consistent with the second quarter. Volume decreased in the period globally, including distributor-level inventory adjustments, ongoing conversion to waterborne products, as well as macroeconomic weakness in some regions. Industrial and market net sales XFX decreased 8.4% year-over-year in the third quarter. but decreased only 0.9% excluding the China JV sale impact. This modest decline was driven by volume pressure in all regions, which aligns with global industrial production weakness, offset by solid gains and average price mix from all regions. Performance Coding's third quarter adjusted EBIT of $125 million increased 20% year-over-year with strong price mix contribution, the realization of productivity benefits as well as lower year-over-year stock-based compensation. partially offset by negative volume drop-through, FX impacts, and modest variable cost inflation effects. Adjusted EBIT margins of 17.3% increased 350 basis points year-over-year, reflecting price mix benefits and lower operating costs versus the prior year quarter. Turning to slide six, third quarter transportation coatings net sales were flat year-over-year before FX headwinds of 1.7%. Segment volumes decreased 1.5% offset in equal amount by price mix benefit despite moderate negative product mix impacts from commercial vehicle. Light vehicle third quarter net sales decreased 0.8% excluding a 1.8% FX headwind. Volumes decreased low to mid single digits overall driven by lower automotive production rates globally, but most notably in China, as well as by the two-week impact in September from strikes in North America which have continued into October. Average price mix remains positive, up 2.8%, reflecting ongoing price recapture associated with persistent raw material inflation over the previous two years. Commercial vehicle third quarter net sales increased 2.9% before FX headwinds of 1.2%, driven by solid overall vehicle demand globally, excluding China. Forecast updates for truck production have begun to moderate in recent months given ongoing order rate weakness in North America, which continues to reduce backlog and lead times in the region. Transportation Coatings Q3 adjusted EBIT of $37 million increased 45% versus $26 million in the prior year quarter. And associated margins of 9.7% increased over 300 basis points versus 6.6% in Q3 2018 as the benefits of improved price mix and lower operating expense were partially offset by volume declines and modest ongoing input cost inflation. Turning to slide seven, third quarter free cash flow totaled $198 million versus $96 million in Q3 2018. The notable increase was driven by stronger operating results and improved overall working capital outcomes. Lower CapEx also contributed about $8 million of the improvement. We ended the quarter with cash and cash equivalents of $767 million and a net debt balance of $3 billion versus $3.3 billion at June 30th end. Our net leverage ratio was 3.2 times versus 3.5 times at June 30th, primarily reflecting the stronger cash balance coupled with improved the latest 12 months adjusted EBITDA. Turning to slide eight, we've updated our financial guidance for 2019. For net sales, XFX, we now assume a decline of approximately 1% versus a flat expectation from our previous assumption, which incorporates slightly lower volume assumptions across most end markets, including a reduction in light vehicle build forecast, as well as ongoing global industrial demand slowness. Our new assumptions also reflect the North America OEM strikes, which are not fully expected to be made up in 2019. The net sales forecast continues to incorporate an approximate 1% negative impact from the China JV interest sale in May, and hence organic net sales before FX impact would essentially be flat. For as reported net sales, we expect to be around 4% lower year over year, including an approximate 3% FX headwinds versus approximately 2% in our prior assumption, and including the other impacts just noted. For adjusted EBIT and adjusted EPS, we have maintained our previous guidance, as well as seen offsetting benefits to net sales pressure with lower stock-based compensation expense. For adjusted EBITDA, we now expect to generate 940 to 960 million for the full year. This incorporates the drop-through effect of the top-line adjustments just mentioned, offset partly by accelerated cost reduction and moderately better input inflation outcomes versus our budget. DNA is also assumed to be $5 million lower principally due to FX translation impacts. We have maintained the range for income tax rates as adjusted, but we appear to be trending in the lower half of the range for the full year. For free cash flow, we do assume CapEx for the full year to come in around $130 million, which is $30 million lower than the previously contemplated amounts due largely to timing. We have also incorporated cash impacts for employee retention awards and costs associated with the strategic review of approximately $25 to $30 million. This concludes our prepared remarks. We would now be pleased to answer any questions. Operator, please open the lines for Q&A.