Axalta Coating Systems Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to Exalted's fourth quarter and full year 2019 earnings call. All participants will be in a listen-only mode. A question and answer session will follow the comments by management. Today's call is being recorded and replays will be available through February 6. Those listening after today's call should please note that the information provided in this recording will not be updated and therefore may no longer be current. I will now turn the call over to Chris McRae. Please go ahead, sir.

Thank you, and good morning. This is Chris McRae, VP of Investor Relations. We appreciate your continued interest in Exalta and welcome you to our fourth quarter and full year 2019 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 will 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. The 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. Separately, Exalta's review of strategic alternatives is ongoing. We do not have news on that front to share with you, but we will provide updates as warranted. We will not be addressing the strategic review process any further during this call, and we thank you for your ongoing patience. I'll now turn the call over to Robert.

Thank you, Chris, and good morning, everyone. We appreciate you joining us on our call to review our fourth quarter and full year 2019 results, as well as our 2020 guidance. Exalta delivered a strong fourth quarter. Our adjusted EBIT and adjusted EPS were both in line with our expectations, and our free cash flow well exceeded our targets, also producing a record annual cash flow result. Despite fundamental demand headwinds, and some end markets linked to an uneven global industrial economy, I'm proud to say that the Exalta team executed very well, closing out the year by meeting or exceeding key aspects of our financial goals. Exalta's vision, as a reminder for our investors and shareholders, is to be the preferred codings partner for customers seeking the most innovative products and services delivered by the most talented team in the industry. I'm proud to note that the results we saw this year fully reflect that commitment and hard work by the people of Exalta that our vision lays out. And I want to thank our team for the passion for performance they exhibit every day that enables our innovation and fosters the industry's leading coding technologies. Turning to slide three, let's take a look at some of our 2019 highlights in more detail. 2019 was not an easy year. with demand pressure in global vehicle markets and weakening global manufacturing activity resulting in volume pressure for the coatings industry. Despite that, Exalta's net sales held very stable, decreasing just 0.5% in the aggregate compared to 2018 before negative foreign currency and divestiture-related impacts. For Exalta, growth engines and performance coatings continue to offset other more cyclically impacted end markets. Fourth quarter net sales decreased 2.5% year-over-year, excluding the impacts of foreign exchange and the China joint venture sale. Net sales continued to benefit from strong price-mixed tailwinds for the ninth consecutive quarter, which increased 2.5% in the period, while volume reflected slower demand conditions across global industrial markets. Performance Coding's net sales increased 0.3% before FX and impact from the China JV sale, including the benefit of improved price mix in the period. Volume remained subdued with pressure and industrial coatings, while refinish was stable with essentially flat volume but strong growth in North America. Transportation coatings net sales decreased 7.7% XFX due to lower volumes broadly. The price mix recapture was a positive offset for the fifth straight quarter in light vehicle, enabling higher margins for the segment even with the volume drag. Adjusted EBIT of $174 million increased 1.6% year-over-year, driven by the combined benefits of positive price mix, moderate variable cost tailwinds, and reduced overall operating expense, notably Fourth quarter results also included a headwind of approximately $10 million year over year from incentive compensation expense, which was driven principally by our exceptional free cash flow results. We elevated free cash flow as one of the primary metrics in our global incentive compensation plan for 2019. We're very pleased that we increased operating margins in a quarter where volumes were pressured, decreasing 5% in the aggregate, Adjusted EBIT margins for the fourth quarter increased 110 basis points, 15.8%, with notable improvement in performance codings and ongoing recovery in transportation codings. This was accomplished first through operating discipline and continued ExaltaWave productivity improvement, but also through focused attention on pricing actions cross our end markets globally as we seek to recapture lost margin associated with significant cost inflation in the last several years. For the full year 2019, net sales of $4.5 billion decreased 4.6% from the prior year, but were down only 0.5% before foreign exchange and the China JV sale impacts. Lower volumes from select end markets were largely offset by positive price mix traction oriented to cover cumulative variable cost inflation incurred in the last several years. Adjusted EBIT of $706 million for the full year 2019 increased 4.7% from 2018. Significant benefit from price mix coupled with lower operating expenses were the main positive drivers in the year. offset partly by foreign exchange and variable cost headwinds from earlier in the year. Operating expense included a benefit from lower stock-based compensation expense of approximately $21 million, which was largely offset by an increase in global incentive compensation expense previously mentioned for a moderate net benefit for the full year. We also increased our adjusted EBIT margins by 140 basis points. an impressive achievement in a period of lower volumes from the contraction in global manufacturing activity. Turning to slide four, refinish net sales growth in the fourth quarter of 3.5% XFX remains strong, driven principally by positive price mix in all regions, with strong growth contribution from both North America and EMEA. We continue to displace competitors and key customers, especially within the MSO space in North America. Refinished demand appeared to remain stable globally, and we showed ongoing success in offsetting inflation with price actions during 2019. We also continued to focus on innovation-focused growth, including the continued launch of new value-focused clears and primers in North America, and the extended launch of our new waterborne sealer technology to use with our premium base coat systems. Industrial codings exhibited weakening demand during the fourth quarter in line with broader industrial economy weakness, with net sales decreasing 4.5% XFX and before the China JV sale impact. We saw a more notable negative inflection in North America and EMEA, while China showed some more encouraging signs of stability in the fourth quarter. Price mix continued to display positive trajectory, increasing low single digits in the quarter. Full year results were also strong, and we held the end market sales nearly flat, down around 1% before foreign currency and the JV sale impact, against the challenging macro environment in many geographies. Delta's outperformance versus the market rates benefited from new product introductions. In the fourth quarter, this included launching new vehicle wheel-related products to expand our presence in that market and the launch of a new high-performance top coat for the agriculture and construction market. In our powder business, we developed a new robust anti-gassing product for galvanized steel applications and expanded our metallic bonded powder product portfolio. Light vehicle net sales were down 6.7% for the quarter XFX. Volumes were down high single digits with decreases seen in all regions, generally in sync with global OEM production patterns. For the quarter, global light vehicle production declined 5.4%, including a 1% increase in China against an easier comparison from the prior year and an 8% decrease in North America, inclusive of the impact from a customer strike in the period. In transportation coatings, we continue to drive innovation to support long-term growth for the sector. In the fourth quarter, we focused on advanced modeling techniques, color development, and measurement of coatings for radar transmissivity and LIDAR reflectivity. This aligns the business with increased sensor usage related to both driver-assisted as well as autonomous vehicle adoption. Commercial vehicle net sales decreased 11.2% XFX in the fourth quarter. Global truck markets have experienced a downturn beginning in the second half of 2019, while North America production was also impacted by a customer strike in the period. Price mix was down slightly in the period, inclusive of negative mix impact from Euro. Regarding our balance sheet and cash flows, fourth quarter free cash flow of nearly $250 million improved markedly versus the prior year quarter, and we exceeded the upper end of our full year range with $475 million in free cash flow. We reprioritized free cash flow at the start of 2019 and were very pleased by the strong result delivered by our teams. The strong cash flow result resulted in our finishing the year with total cash on the balance sheet of over $1 billion for the first time in our operating history and with a net debt to adjusted EBITDA ratio of 3.0 times, which is a significant step down since the end of 2018. Turning now to a few manufacturing highlights, we made significant progress during 2019 on our Belgium site closure and are on track to complete the project in the first quarter of 2020. The Belgium plant was closed during the fourth quarter and the resin production transfer will be completed around the end of the first quarter. We are now starting to see some of the productivity benefits of this project after a tremendous effort from our teams to execute on this major initiative. which is designed to broadly lower our cost structure in the region with benefit accruing to most of our business segments in EMEA. We continued our sustainability efforts focused on environmental protection, social performance, human rights, and good governance. In the fourth quarter, we completed the rollout of our new safety commitment, which we call Driving Perfect Performance, to all remaining Exalta sites. Our 2019 global total recordable incident rate was 0.27, a top decile result within the U.S. paint and coatings industry. We thank all our employees for the great attention placed on safe work practices. We also continue to collaborate with our customers, suppliers, and industry groups to advance responsible sourcing practices throughout our supply chain. we are proud to have been recognized as a top 50 ESG company by Investors Business Daily in November. During the fourth quarter, we reassessed plans that we had begun executing to expand our China operations footprint. We are adjusting these expansion plans and will now focus on shifting production largely within our current site footprint, which is expected to result in improved returns relative to our prior plans. As a result, we took charges of $17.7 million in the fourth quarter, primarily associated with this decision, which underscores our commitment to ensuring that return on capital remains front and center in all of our decision-making. With that, I will now turn the call over to Sean, who will share some further detail on our financial results.