Axalta Coating Systems Ltd.

Ladies and gentlemen, thank you for standing by and welcome to Exalta's third quarter 2020 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 October 30th. 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 McRae, VP of Investor Relations. We appreciate your continued interest in Exalta and welcome you to our third quarter 2020 financial results conference call. Joining me today are Robert Bryant, CEO, and Sean Lannan, CFO. Last evening, we released our quarterly financial results and posted this live presentation along with the commentary. 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 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, everyone. As you've seen, we achieved outstanding financial and operating results in the third quarter thanks to the snapback in demand in our end markets, the rapid cost structure adjustments we made in response to COVID-19, and the unbelievable effort and commitment of our employees around the world. First and foremost, I'd like to thank all the employees of Exalta around the world for the strong financial and operating results. which were the product of hard work and focus during a challenging time while many of our colleagues continued to work remotely with a myriad of restrictions, both business and personal. Despite these, in the third quarter, we delivered record quarterly adjusted EBITDA and adjusted EPS. Before we discuss our third quarter results in more detail, I'd like to step back and provide some perspective about the journey Exalta has been on. Now that we've completed our strategic review and appear to be through the worst of COVID-19, we're finally in a position to be able to pursue the many opportunities I've wanted to go after since I first became CEO in late 2018, and also those we identified during our strategic review. We're now actively making changes that include aspects of our strategy, how our organization functions, and refining our operations to lower our cost structure globally to unlock additional growth. These changes will allow us to accelerate growth, be more nimble, and create more value for our shareholders, while also increasing our focus on our people, our customers, and the communities in which we operate. We plan to hold a Capital Markets Day in the spring, where we will provide more detail about our vision, strategy, and specific value creation opportunities. In the meantime, you will hear more about certain changes in the coming months as you have in the past few months. From a corporate governance perspective, we've strengthened our board by adding two outstanding board members with specific expertise in two areas that are important for Exalta, growing businesses in China and emerging markets, and leveraging innovation to grow in transportation-related markets. Over the past six months, we've also added key talent at all levels of the organization that will help drive innovation and a focus on people development. These are two of my highest priorities as CEO, and I'm confident they will take Exalta to the next level of performance. Regarding our operating model and cost structure, despite the great financial result in the third quarter, we need to continue to drive down our costs in certain market segments and geographies where we operate to enable a higher level of revenue growth. We've begun this journey, but have much more to accomplish. We can, and we'll do this without sacrificing capabilities, market positions, or impacting the organization's ability to innovate. Since Exalta's IPO, we've been asked how the company would perform in a downturn, like we saw back in 2008 to 2009, what levers could be pulled and how quickly management could react. COVID-19 has been a much more severe test case than any of us could have ever imagined. And I think this question has been answered. Since the start of the COVID-19 pandemic, we have substantially reduced our cost structure with $195 million in expected savings during 2020 alone. We've taken further actions to maximize our cash flow and liquidity with an additional $140 million in incremental cash savings expected this year. Both cost and cash actions offer immediate and real offsets to the unprecedented volume impacts. all while our global team continues to serve our customers at the highest levels of quality, delivery, and technical support. These results speak to the strength and resiliency of Exalta's business model, the speed at which management took action, and the truly unbelievable support and dedication of the company's employees around the world. I could not be prouder of our global team. Now I will discuss a few highlights from our third quarter financial results. On the top line, we were pleased to see significant ongoing recovery during the third quarter, with net sales 57.3% higher than second quarter, a major achievement as we saw rapid recovery in all end markets. The 7.2% net sales decrease from the prior year also beat our expectation going into the quarter. The improvement was driven by broad-based economic and business recovery, including monthly net sales recovery globally in nearly every geography served. While net sales recovery was a major component of the third quarter, there was clearly more to the story given the robust profit that we reported. We saw a record quarterly consolidated adjusted EBIT of $210 million coming on the heels of a loss during the second quarter. We also reported record adjusted EBITDA with margins of 26.5% and a record quarterly adjusted earnings per share of 59 cents. Finally, our free cash flow of $223 million was also a stellar outcome. Given substantial excess cash at this point and the broader recovery in the business, we expect to begin to shift back to a more normal capital allocation approach, although we're mindful that we could see further COVID-19 impacts in certain businesses or regions. We expect capital deployment across a combination of return accreted uses, including M&A and opportunistic share repurchases, assuming a more stable forward-looking demand picture holds. We are actively building an M&A pipeline at this time, with sell side activity clearly picking up in recent months. Over time, we would expect to deploy the majority of free cash flow between these uses, but we would also expect to reduce our net leverage to our target of 2.5 times. which could happen from a combination of normalized adjusted EBITDA as well as executing on strong cash flow conversion, which you saw during the quarter. Regarding the overall demand environment, we're pleased to see ongoing business recovery through the third quarter. In refinish, total miles driven globally continues to improve, aligned overall with pandemic-related lockdowns in each country we serve. In the U.S., traffic during the third quarter recovered to roughly 10 to 15% lower than prior year after rebounding strongly from the lows during the spring and closing the gap with pre-COVID-19 baseline levels by mid-June. In Europe, traffic levels improved even earlier than the U.S., though renewed lockdowns do suggest caution is warranted on the pace of the recovery. In China, traffic appears to be continuing to recover and body shop activity and refinished volumes have recovered to prior year levels. In the third quarter, body shop customers saw activity in the range of 85 to 90% in the U.S. versus the prior year toward the end of the period, 95% in Europe and around even in China. This represented a continued recovery from the second quarter and is an encouraging trend for our global refinish business. For the industrial end market, net sales trends continue to demonstrate the resilience of our business. with some businesses showing year-over-year increases for the quarter and all end businesses up in September. At the market segment level, home building, construction, agriculture, and construction equipment have recovered to operating rates above prior year levels, notably in North America. In Europe, our business has seen strong recovery to date in both powder and energy solutions. In China, all industrial businesses have fully recovered, with notable strength in powder and energy solutions tied to wind energy customers. In transportation coatings, third-quarter recovery well outpaced expectations, including fairly strong recovery in most regions. In China, we've seen significant production recovery as well, and China automotive retail sales have increased from the prior year in each of the last three months, including 8% in September, possibly indicating a measure of pent-up demand after the Chinese automotive pullback in 2018 and 2019. China-like vehicle net sales for Exalta decreased mid-single digits during the third quarter, reflecting specific customer exposures in the country, slightly lagging the broader market. In the U.S., aggressive auto sector incentives coupled with low financing rates continue to help the recovery. Auto sales during the third quarter increased in sequential months, with September's expected 16.4 million SAR well above earlier expectations and only moderately below the year-ago level of 17.2 million to solidify what appears to be a potential V-shaped recovery for U.S. car sales. For the quarter, global light vehicle production declined 3.5 percent, including a 1.4 percent decrease in Asia-Pacific and a 10.7 percent increase in China. North America production increased 2.5% on the heels of a 66.2% drop suffered during the second quarter. Current industry forecasts call for a 17.9% drop in global builds for the full year, including a small decrease of 2.7% for the fourth quarter. This forecast has increased at each of the last several months and appears to show that automotive could be experiencing a form of V-shaped recovery presently. For the commercial vehicle end market, overall global truck production increased 0.8% in the third quarter in a dramatic and unprecedented sequential rebound, driven principally by strong growth from China, but also better production in other regions. Current forecasts for Class 4-8 truck production suggest a 13.7% decline for the year, revised from a 27% expected decline a month ago, with fourth quarter down 11.3%. Stronger new truck order rates have continued, and production estimates by industry forecasters have increased, now calling for a positive rebound in production in 2021 to 5% growth, but with a 15% to 20% rebound seen in North America and Europe. I will now turn the call over to Sean for some additional comments.