Axalta Coating Systems Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to Exalta's third quarter 2021 earnings conference call. All participants will be in a listen-only mode. A question and answer session will follow the formal presentation by management. Today's call is being recorded and a replay will be available through November 2nd. 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 Mr. Chris McRae. Please go ahead, sir. You may begin.

Thank you, and good morning. This is Chris McRae, VP of Investor Relations and Treasury. We appreciate your continued interest in Exalta and welcome you to our third quarter 2021 financial results conference call. Joining me today are Robert Bryant, CEO, and Sean Lannan, CFO. Yesterday afternoon, we released our quarterly financial results and posted a with 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 today may contain forward-looking statements reflecting the company's current view of future events and their potential effects 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.

I'd like to welcome you to our third quarter earnings call. Our third quarter profit highlighted Exalta's excellent execution against the challenging macroeconomic, supply chain, and cost environment. Our earnings exceeded not only our pre-announcement in September, but also our original third quarter guidance provided in July. I would like to thank all Exalta employees for their exceptional efforts in the third quarter. But I especially want to recognize and thank our manufacturing, supply chain, and procurement teams for their Herculean efforts to serve our customers in a very difficult environment and to enable the results we achieved. Drivers of the performance in the quarter included continued broad-based demand recovery within performance codings, as well as solid ongoing pricing traction and continued cost discipline across all businesses. These helped to offset persistent raw material inflation and supply chain constraints, with mobility coatings facing unprecedented customer production impacts, principally from semiconductor chip shortages, which continued through the quarter. Exalta reported ongoing strong year-over-year sales growth of 6% compared to the COVID-19 impacted prior year quarter. driven by growth in all end markets other than light vehicle, which was notably impacted by ongoing customer production constraints. Reported growth included a 4.5% positive mix contribution and a 1.8% M&A contribution offset by a 1.6% decrease in volume. Volume was positive in refinish, industrial, and commercial vehicle, and price mix was positive in all four end markets. Our price capture this cost inflation cycle has been faster than the previous 2017-2018 cycle, and we expect to fully offset current cost inflation by early 2022 on a run rate basis. Refinish demonstrated continued recovery from 2020 pandemic impacts, with total net sales up 10.4% year-over-year and also up slightly versus the third quarter of 2019. Refinish underlying demand remained essentially stable sequentially from second quarter, with modest ongoing recovery from some regions linked to economic and pandemic recovery. Refinish volumes remain below 2019 levels by mid-single digits, which remains very encouraging, leaving further room for net sales recovery as we continue to expect mobility patterns to largely return to more normal levels over time. Industrial net sales increased an impressive 19.5% over a strong prior year quarter, including approximately 4% acquisition contribution, which was also a double-digit rate of improvement from the second quarter of 2019, given ongoing global demand strength. Mobility coatings net sales declined 10.1% in the third quarter and specifically 14.8% in the light vehicle end market, as the segment and end market remains constrained by ongoing semiconductor chip shortage for OEM customers. Commercial vehicle net sales increased a solid 9%, even including some customer supply constraint impacts. These impacts were greater in the third quarter in net sales terms, as well as build impacts, with no easing in the supply chain during the period, which was markedly different than the expected improvement that market forecasters had called for in July. Third quarter adjusted EBIT was 146 million versus 210 million in the same quarter last year, which was a record quarterly profit given notable cost measures we had put in during the height of the COVID pandemic in 2020. Adjusted EBIT for the third quarter included the impact of significantly higher variable cost inflation of approximately 21%, an impact in net sales of approximately 70 million in mobility due to customer supply chain shortages and headwinds from the absence of about half of the temporary third quarter 2020 cost savings of approximately 50 million we had quoted for the total company third quarter demand conditions at the end consumer level across our coatings markets remained fairly robust Refinish witnessed ongoing improvement in mobility metrics across various countries where COVID-19-related restrictions have eased since the spring, also supported by incremental vaccinations globally. Refinish net sales dipped sequentially as expected due to seasonal buying patterns from distribution customers, but Xalta's global body shop activity remained steady and showed signs of firming across most regions. Exalta made net body shop and net stock point gains during the quarter in all geographies, as our industry-leading waterborne and solvent-borne technologies continue to take share. We were pleased to close the acquisition of UPOL in mid-September and are now engaged in initial integration steps, which are all progressing well. We're extremely pleased with the transaction and fully expect to generate the planned returns, which are primarily generated from a combination of initial, highly visible cost synergies, and then more materially, the business growth that we expect to leverage in part by taking advantage of the combined company strengths across global refinish markets. As we previously noted, we anticipate annualized net sales of approximately 145 million and adjusted EBITDA contribution of approximately $38 million in 2021, before initial cost synergies of about $10 million, which we expect to be realized over the next 18 months. Industrial and market demand remains strong globally across virtually all end businesses and geographies. The business saw excellent organic growth and benefited from strategic account wins supported by new product introductions, as well as the benefits of the new industrial organizational structure implemented earlier this year. Topline contribution was strongest in North America, followed by EMEA, with solid growth witnessed in both building products, including luxury vinyl flooring, and general industrial, including the agriculture and construction equipment product lines. Net sales growth would have been even stronger absent the effects of supply chain constraints, which were most notable in intermediate inputs to our powder, building products, and coil product lines, compounded by logistics challenges. light vehicle demand was clearly hampered by curtailed oem production rates due to the ongoing semiconductor chip and other supply chain shortages forecasts of global vehicle production during the third quarter continued to be cut and we now assume around 11 million vehicles removed from global production for the full year consistent with our updated guidance issued in september and at the higher end of the current industry forecast consensus range of 10 million to 11.5 million units, as shutdowns impact nearly all OEMs globally. Our forecast essentially assumes little improvement in the supply shortages seen through year-end and are expected to continue through at least part of 2022. Despite this backdrop, we've won significant new business through the end of September that we expect to begin to ramp up during 2022. Our mobility team has done a terrific job winning new business with our advanced technologies, service, and advanced data tools. Commercial vehicle demand remained solid in the third quarter, though supply shortages have also impacted this end market to a degree. We've seen notable demand strength in North America, where truck orders have remained firm since last year and customer backlog support production rates near record highs over the coming months. Exalta continues to reinforce its position as the market leader with new customer business commitments, including those in our non-truck segments, such as recreational vehicles and sporting equipment. Our order books continue to grow, and Exalta is benefiting from new business awards that will fuel growth in the diversified commercial vehicle and market. During the third quarter, we saw substantial variable cost inflation coming from most raw material categories, as well as energy, packaging, freight, and logistics. These cost pressures deepened during the quarter, and Exalta has increased its full-year assumption of inflation headwinds versus our July guidance to now assume mid-teens growth for the full year and nearly 20% for the fourth quarter. We're working hard as a team to offset this inflation via a combination of incremental pricing actions as well as continuing to focus on cost and productivity actions. With regard to pricing, Exalta has continued to implement increases across all our businesses since last quarter, which are necessary to offset persistent inflation that we have seen since 2020. Looking forward, we expect to take further actions to counter ongoing broad-based inflation expected to continue into 2022. Exalta is also focused on continuing to implement structural cost and productivity measures. We continue to benefit somewhat from the temporary COVID-related cost savings that we have continued this year, with around half of those savings persisting in 2021, in addition to the ramping of structural savings from actions announced over the last year. As part of our continuous focus on sustainability, we made ongoing progress in our ESG programs during the third quarter, In support of environmental priorities, we broke ground on a new facility in China, which will help support the increasing demand for environmentally friendly waterborne mobility coatings. We also showcased our coating solutions for electric vehicle batteries and motors at the NOBE Battery Show in September. Finally, we're wrapping up our goal setting for ESG metrics and look forward to sharing more on this topic in early 2022. I'll now turn the call over to Sean for some additional comments.