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spk06: Ladies and gentlemen, thank you for standing by. Welcome to the South's fourth quarter and full year 2021 earnings conference call. All participants will be in the listen-only mode. Question and answer session will follow the presentation by management. Today's call is being recorded and a replay will be available through February 8th. 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'll now turn the call over to Chris McCrae. Please go ahead, sir. Thank you and good morning.
spk08: This is Chris McRae, VP of Investor Relations and Treasury. We appreciate your continued interest in Exalta and welcome you to our fourth quarter and full year 2021 financial results conference call. Joining me today are Robert Bryant, CEO, and Shawn Lannan, CFO. Yesterday afternoon, we released our quarterly and annual financial results and posted a slide presentation along with a commentary to the investor relations section of our website at exalta.com, which we'll be referencing during this call. Also, on January 25th, we published a set of best-in-class ESG goals, including 10 commitments for 2030, which you can also reference on our investor relations website for more details. Both our prepared remarks and discussion today may contain forward-looking statements reflecting the company's current view of future events and their potential effect on Ignalta'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 those 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, 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 fourth quarter and full year 2021 earnings call. Our quarter and full year were marked by ongoing strong demand conditions and solid execution by our team, but also by ongoing challenges in the supply chain and input cost inflation. Despite these factors, we executed very well against this climate, generating year-over-year sales growth, substantial incremental pricing to offset inflation, and strong free cash flow. We further demonstrated ongoing solid capital allocation with continued share buybacks as well as completing two acquisitions during the year, while still ending the year with a very strong balance sheet. I would like to thank all Exalta employees for their continued efforts in the quarter and also wish everybody continued health and well-being as the pandemic continues to impact our lives in a variety of ways. Turning to operating performance in the fourth quarter, exalta reported strong year-over-year net sales growth from three of our four end markets while customer production constraints continued to negatively impact light vehicle fourth quarter net sales increased seven percent year-over-year xfx including a contribution of four percent from acquisitions volume growth was a clear highlight in our performance coding segment increasing by five percent with both end markets contributing meaningfully this marks our fifth consecutive quarter year-over-year growth within industrial, and fourth consecutive quarter for refinish. Within mobility coatings, our commercial vehicle end market also showed volume growth of over 7%. Light vehicle was an outlier given the known semiconductor challenges. Price was positive in all four end markets, despite some headwinds we saw within product mix in the quarter. Business demand in the quarter remained strong and stable across all of Exalt's businesses, But raw material inflation and supply chain constraints significantly impacted both sales volumes and our cost structure. Refinish saw stable overall demand in the quarter, with net sales of 12.8% year-over-year, or 6.6% before currency and acquisition contribution, which was up sequentially versus third quarter before acquisitions and FX impacts. We also ended the quarter with substantial unfilled order backlogs due to supply constraints. Industrial net sales increased an impressive 16.3% or 13.9% XFX before acquisitions, continuing similarly strong growth throughout 2021 and reflecting strong overall global industrial goods demand. Light vehicle net sales declined 13.7% XFX in the quarter versus the prior year, with volume still constrained by chip shortages at our customers and only moderately improved from the third quarter. This was reflected in sequential global automotive production growth, with fewer shutdowns occurring in the period. Commercial vehicle net sales increased 8.4% XFX in the fourth quarter, driven by ongoing strong production rates and some share gain from non-truck customers, including recreational vehicles and sporting equipment OEMs. Adjusted EBIT for the fourth quarter was $121 million versus $205.4 million in the year-ago quarter as the business was impacted by significantly higher variable cost inflation, approximately 24% year-over-year in the fourth quarter, supply chain shortages company-wide, and headwinds from the absence of temporary cost savings through 2020, partly offset by growth and strong execution across both performance coatings and markets and in commercial vehicle within mobility coatings. Refinish ended the year with substantial price pass through to offset inflation and margins and absolute adjusted EBITDA contribution at all time highs, despite a notable impact on volumes given the lasting impacts of COVID. Fourth quarter business conditions across the company remain stable and generally strong despite supply chain challenges. Refinish, although modest, saw continued demand improvement, including both traffic and body shop activity, with some variability by country. TARP shortages, body shop technician shortages, and some impact from Omicron in traffic and body shop staffing created challenges for our customers in the quarter. Though business volumes increased sequentially from the third quarter, organic volumes remained down approximately high single digits below 2019 levels, suggesting continued meaningful room for improvement looking ahead. This included some quarter-end backlog that was unfilled due to supply and operating constraints. Exalta's industrial end market remained robust globally, and net sales increased 17% XFX and 13.9% on an organic basis against a strong prior year comparison, indicating underlying demand strength as well as demonstrating success in our organic growth execution. The top line was still constrained by supply chain headwinds in the period and to a greater degree than during the third quarter. inclusive of both raw material, supply dynamics, as well as logistics and labor challenges. Topline growth was strongest in North America, followed by EMEA, and was led by the building products and general industrial businesses. Light vehicle saw continued constraints at the customer and end consumer level. Global vehicle production for 2021 increased only 2.5% from the prior year, which of course was dramatically impacted by the pandemic principally during the second quarter of 2020. Due to supply shortages, some 9.6 million vehicles were deferred during 2021 against original industry production estimates, although the quarterly vehicle deferral amount decreased from 3.5 million vehicles in Q3 to 2.1 million vehicles in Q4 as chip availability improved slightly toward year-end. The fourth quarter impact was also 1.4 million vehicles below the high end of the forecasted range of potential production impacts from October 2021. Commercial vehicle demand remained robust through year end, with notable strength in North America retail sales. Current North America backlog remains near all-time highs, and we expect strong production rates to be sustained throughout 2022. Exalta saw intensified cost inflation during the fourth quarter, coming from a broad set of raw materials due to supply dynamics and continued high feedstock prices, but also from packaging, freight, logistics, and labor costs. We ended the fourth quarter with 24% raw material cost inflation, higher than our 20% expectation from October and about 15% for the full year. We were and continue to be successful in our actions to offset this inflation through incremental pricing during the fourth quarter. We implemented price increases in all businesses during Q4, and price mix increased 3.6% in the period, while pure price increased by mid-single digits versus the prior year, given the negative mix effect seen in both segments. Exalta also continues to offset inflation via structural cost control, we continued to benefit somewhat from the persistence of lower selling expense and functional savings that were implemented during 2020. We realized slightly over $50 million in exalt away savings this past year, including a benefit from the previously announced restructuring actions. The integration of the UPOL business acquired in September 2021 is progressing well, and our commercial synergies are quickly coming to fruition. The business closed the year on plan from a net sales perspective, though it was modestly impacted by incremental inflation at the adjusted EBIT level, similar to the rest of refinish. Pricing actions are being executed to fully offset this inflation in early 2022 to put us comfortably on the original business case. We're very pleased with the progress on the UPOL business integration, and recent months have confirmed our bullish view of the future growth opportunity for this business. Turning to ESG, Exalta has made significant headway with our program since its inception in 2013. We published our first sustainability report in 2013 and set initial ESG goals in 2017. I'm thrilled that last week we published a set of long-term ESG and sustainability goals, each of which have a substantial impact in their respective categories. To set these 2030 goals, we conducted a comprehensive ESG materiality assessment last year with a broad set of internal and external stakeholders. We also worked to align with the United Nations Sustainable Development Goals in developing our ESG framework, structured under three key pillars. Planet solutions, focused on ensuring a more sustainable future for our planet, with goals aimed at maximizing our environmental performance and reducing the impact of our operations. Business solutions, which concentrates on how Exalta's products, services, and technologies can help customers accelerate their own sustainability initiatives and achievements. And third, people solutions, which is rooted in inclusivity, integrity, safety, and engagement to ensure that Exalta continues operating and fostering an environment where all our people can thrive. Exalta's published targets include 10 new sustainability commitments for 2030. Key among these is the commitment to produce sustainable benefits from 80% of Exalta's new technology and innovation developments. We're also committing to an absolute reduction of 50% of scope one and two greenhouse gas emissions by 2030 on our way to becoming carbon neutral in our operations by 2040. This would be a decade ahead of the deadline set by the Paris Agreement on climate change. That said, each of our individual targets are of critical importance and represent a step forward for Exalta in achieving long-term goals to build a more sustainable future. Exalta seeks to lead the coatings industry, by example, as well as to inspire our customers and other stakeholders by jointly ensuring the long-term well-being of the planet, our business partners, and our business. I'll now turn the call over to Sean for some additional remarks. Thanks, Robert, and good morning. As you've heard, fourth quarter saw both stable and broadly positive demand conditions, but also continued challenges from cost inflation and supply chain constraints. Net sales of $1.1 billion increased 5.8% year-over-year for the fourth quarter, while constant currency net sales increased 3.1% on an organic basis driven by demand strength across most of our businesses. This constant currency organic net sales growth included a 9.6% increase from performance coatings, offset by a 9.3% decrease from mobility coatings, reflecting light vehicle down 13.7%, while commercial vehicle was up an impressive 8.4%. Fourth quarter volume declined 0.5%, with mid-single-digit increases from three of our four end markets, more than offset by a single mid-teen percentage pullback in light vehicle volumes, due to the semiconductor constraints impacting customer production. Price mix contribution increased 3.6% in the aggregate, driven by improvement in both segments and all four end markets, however, stronger in performance coatings versus mobility coatings. Mix was a moderate headwind, following on a similar dynamic from the third quarter. Excluding product mix effects, overall pricing improved mid-single digits for the quarter. FX translation was a headwind of 1.2% for the fourth quarter, driven by the Euro and the Turkish Lira, offset partially by the strength in the Chinese renminbi. Fourth quarter adjusted EBIT was $121 million versus $205 million in the prior year quarter, reflecting strong demand and volume trends in performance codings, as well as the commercial vehicle end market, which was more than offset by light vehicle volume headwinds, substantially increased variable input cost inflation, and lower temporary cost savings realized versus the fourth quarter of 2020. Performance Coding's fourth quarter net sales increased 14.2% year-over-year and 15.6% XFX, driven by 5% higher volumes, a 4.6% increase in average price mix, and a 6% increase from acquisition contribution. Refinish reported a 12.8% net sales increase, or 14.7% XFX, driven by improved global volumes versus the prior year, and by a high single-digit contribution from UPO acquisitions, which closed in September. Refinished volumes also increased moderately on a sequential basis, along with body shop activity in the period, though growth was impeded somewhat by supply chain and logistics constraints in the fourth quarter, with significant open orders remaining at year ends. Refinished price mix increased low single digits during the fourth quarter, inclusive of product mix headwinds from mainstream and economy product growth. Net pricing was up mid-single digits before mix effects. Industrial Q4 net sales increased 16.3% or 17% XFX, driven by mid-single-digit improvement in both volume and average price mix, as well as low single-digit acquisition contribution to net sales. Demand trends in most of the industrial businesses we served remained healthy during the period, with the exception of automotive and wind energy, and with particular ongoing strength from North American housing and remodeling. Similar to refinish, supply chain constraints also impeded further growth within industrial in the period. Performance coatings reported Q4 adjusted EBIT of $99.7 million versus $129.5 million in the fourth quarter of 2020, driven by ongoing volume growth and drop-through benefits of stronger average price mix. more than offset by significant headwinds from higher variable costs and lack of temporary cost savings, which benefited the prior year quarter. The adjusted EBIT margin for the segment decreased to 12.4% from 18.4% in the prior year, record-setting quarterly rate, given the drivers noted before. Mobility coatings net sales decreased 9.3% in Q4 XFX, including an 11% decrease in volume, partially offset by a 1.7% improvement and average price mix. Light vehicle net sales decreased 13.7% XFX in the quarter, including a mid-teen volume decrease largely in line with global auto production rates. Price mix increased low single digits in the quarter versus the prior year, which included a component of negative mix in the period. Commercial vehicle Q4 net sales increased 8.4% XFX, driven by strong truck production globally, excluding China. Price mix increased below single digits, inclusive of modest negative mix differences from the prior year. Mobility Codings reported a Q4 adjusted EBIT loss of $3.5 million versus income of $47.9 million in the prior year quarter. Adjusted EBIT and associated margins in Q4 were impacted by the severe volume drop and further impacted by increased cost inflation, with only modest offsets and positive pricing, which began to accrue during the third quarter and continued during the fourth quarter. We are confident that expected demand recovery, price increases, and cost control will return the mobility business to operating profitability, though it remains cash flow positive today in adjusted EBITDA terms. Exalta's Q4 balance sheet and liquidity profile remain solid. We ended the quarter with approximately $1.4 billion in total liquidity, including approximately $841 million of cash and cash equivalents on the balance sheet and approximately $528 million of available capacity in our undrawn revolver. During Q4, we also completed several asset sales for net proceeds of $25.4 million, illustrating ongoing focus on asset efficiency and cash flow. Our net leverage ratio ended the quarter at 3.5 times, even with Q3 levels, driven by increased cash at the period end offset by lower latest 12-month adjusted EBITDA. Net leverage remained somewhat elevated due to the U-Poll acquisition that was funded from our balance sheet in September. while the adjusted EBITDA contribution only reflects a partial year from the acquisition. The company also repurchased $30 million in total shares in the fourth quarter for a full year 2021 total of $243.7 million. Free cash flow for the quarter totaled $249.4 million versus $256 million in the fourth quarter of 2020, a very strong result concerning somewhat lower operating profit year over year. For the full year, free cash flow totaled $455 million versus $441.7 million in 2020, again demonstrating Exalta's focus on cash flow and finishing the year with a strong total liquidity position to continue to enable effective capital allocation. Regarding our financial outlook, we have outlined key expectations for the first quarter as follows. For Q1 net sales, we expect approximately 5% year-over-year growth including a 3% FX headwind and a 4% positive M&A contribution. This assumes performance coding's growth of mid to high teens, offset by mobility coding's contraction of mid single digits. The top line guide also reflects pricing of mid to high single digits. We expect to generate adjusted EBIT of 100 to 120 million in the first quarter, with DNA of 81 million, inclusive of 24 million of step-up DNA. Interest expense for the quarter is anticipated to be approximately $32 million. For adjusted earnings per share, we anticipate a range of $0.22 to $0.29 for the first quarter, inclusive of an FX headwind of $0.02 per share and a slight step up in anticipated income taxes. Within our first quarter forecast, we further assume raw material inflation of approximately 25% to 27% versus the first quarter of 2021. which is a growth rate slightly higher than the fourth quarter of 2021. As we look at the full year, we expect to see net sales growth continue, driven by solid performance coatings growth from both refinish recovery and market share gain, coupled with ongoing industrial coatings organic growth. For mobility, we expect net sales growth slightly ahead of global production for both light vehicle and commercial vehicle, given specific customer exposures and organic growth expectations for 2022. Further, we do expect to see an uptick in global production builds based off of industry forecasters. Net sales growth are also expected to be somewhat offset by modest FX translation headwinds, driven largely by the Euro, Turkish lira, and Brazilian real. Regarding cost factors, our current assessment is that the rates of overall raw material and other cost inflation will continue at high levels near term, but may stabilize during the first half of the year based on current expectations for feedstock pricing. For 2022, given current baseline expectations and assuming Brent crude around the mid-80s, we expect raw material inflation in the low double digits, with peak inflation occurring during the first quarter. That said, substantial uncertainty around all aspects of cost inflation, coupled with lack of clear visibility around timing for supply chain shortages to ease, informs our decision to limit full-year earnings guidance at this time. with continued planned and expected pricing actions during 2022. However, we also expect to fully offset anticipated inflation within the year. While we're not providing full-year guidance at this time, we do anticipate stronger profit performance this year versus 2021, and we'll hope to refine our views of specific guidance elements as the year progresses. Thank you, Sean. I'd like to close out by simply noting that we at Exalta remain committed to creating value for our shareholders. We believe the path to substantially higher levels of earnings per share remains very much in view despite the near-term challenges associated with inflation headwinds and supply constraints. This starts with the anticipated recovery in automotive volumes. back to prior peak levels over the course of several years, including some anticipated relief in chip supply to enable growth in 2022. It is furthered by ongoing solid organic growth in industrial and backed by expected net sales growth from refinish from both market share gains and modest further recovery from cyclical lows, which bottomed during 2020. Ongoing top line growth coupled with expected abatement of raw material inputs and calmer overall cost inflation over time should clear a path to margin recovery and perhaps enable new margin highs over time. Exalta has already proven an ability to navigate challenging environments, and we're confident in the team that we have in place to execute our growth plans while continuing to respond to operating and cost challenges. I'd like to express my sincere thanks to our entire global team for all the hard work that was completed during 2021, and we look forward to demonstrating what our team can accomplish during 2022. With that, we'll be pleased to answer any questions. Operator, you can open the lines for Q&A.
spk06: Thank you. We'll now be conducting the question and answer session. If you'd like to ask a question today, please press star 1 from your telephone keypad and a confirmation tone indicate your line is in the question queue. You can press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Steve Byrne with Bank of America. Please proceed with your question.
spk04: Yes, thank you. So, Robert, it's been a little over a year since you ripped out the legacy matrix structure and brought in some new leadership. Just curious, what metrics do you look at to assess whether there have been benefits from either cross-selling or regional expansions or maybe even some technology transfers to different products? Anything you can see there, or is it too challenging given the level of disruption?
spk08: We're very pleased with the organizational pivot and what it's enabled in terms of accountability decision-making and cross-business unit collaboration. Just as one example, if we think about our electrification platform and how that market is evolving very quickly in terms of whether the purchase decision around our energy solutions coatings and the products they go on is in the automotive tiers, in an industrial customer or actually at an OEM customer, It's actually now at all three. So we have a lot of cross-selling and cross-collaboration going on across the business units, and that's been quite beneficial. So, again, overall, we're very happy. With regard to the metrics, you know, we look at all the typical metrics in terms of sales, profitability, free cash flow, and return on invested capital, not only at a total company level but also at an individual business unit level.
spk04: Thank you for that. And just curious about light vehicle, you've got 11%, or maybe this is mobility broadly, but 11% reduction in volume in the quarter, and presumably you have your customers are not running flat out. Do you have the ability to... flex your staffing as a result of that? Or is that fixed cost drag just remain in place and thus, you know, it's not until you see volumes recover that you see that absorption improve? Or is there something you're doing that might lead to, you know, an expansion in margins when the business returns to more normal operating rates?
spk08: So in the mobility business, we're principally focused on three actions, the most important of which are pricing actions, followed by cost management and then flexibility within our cost structure. So we're working to offset the majority of the inflation that we're encountering through pricing actions. Our cost structure, we continue to manage it quite tightly until volumes come back. And we're really only making targeted investment that's related specifically to wins to support our customer launches and our sales activities. We've also been working with the operations organization to ensure that we've got flexibility in our cost structure and that we can vary those costs depending upon volume levels. We've also been looking at different models for our sales technical resources and support, and we're working to flexibilize those costs as well.
spk06: Thank you. Our next question comes from the line of Gansham Sanchavi with Baird. Please proceed with your question.
spk07: Thanks. Good morning, everybody. Just as a follow-up to Steve's question, you know, specific to the fourth quarter, It sounds like light vehicle was a little bit better than you forecasted just based on production, and then commercial was also relatively healthy. And then the EBIT loss was pretty much comparable to the third quarter. Just curious as to why it wasn't better than you initially forecasted.
spk08: Yeah, I mean, the main driver just globally for Exalta, why we missed the initial guidance for the fourth quarter was really raw materials related. You know, we saw an uptick, you know, up to 24%, and light vehicle, you know, is bearing some of that. And that's why you saw a little bit more margin contraction in the fourth quarter.
spk07: And then in your prepared comments, you call that a $200 million type raw material cost inflation number for 2021. Is that a – you know, and you have low double-digit inflation for 2022 as well. Is that $200 million roughly comparable to – Inflation for 2022 will be roughly comparable to that $200 million. Is that the right way to think about it? And then specific to 2021, how far behind were you on price cost?
spk08: Yeah. So, Gautam, your math is roughly correct. We are expecting about $200 million in 2022. You saw we got about $150 million in price, roughly 4% that we stated in our consolidated results. So you're looking at a little better than $50 million of a gap, you know, price versus cost. Very helpful. Thank you.
spk06: Our next question is coming from the line of John McNulty with BMO Capital. Please proceed with your questions.
spk08: Yeah, good morning. Thanks for taking my question. So I guess admittedly, we were a little bit surprised on the momentum behind pricing or maybe the lack of it. It seems like it was roughly in line with the type of pricing that you saw in the third quarter, despite a higher raw material kind of headwind. So I guess, how should we be thinking about that going forward? And if we can see some incremental momentum as we kind of push through 2022? So what you saw in the fourth quarter, we were a little bit more impacted with mix, excluding mix. We're mid single digits, largely in line with the third quarter. I would call out on the mobility side, we've talked a bit about our indices that are in place. With those indices, the raw material inflation, is really being priced off the average of the first six months of 2021 that were in place through December. So that will reset again on January 1st. And we've characterized 25% to 30% of our contracts are on indexes. That's probably closer to 35% now. And with inflation that we saw third quarter and the fourth quarter, with those going into effect January 1st, you will see an uplift. And just as far as our guidance for the first quarter, we are expecting mid to high pricing, which you're going to see that obviously a little better than the fourth quarter. Got it. That's helpful. And then with regard to your outlook for autos or the white vehicle segment, it sounds like you're going to have at least a little bit of of lift relative to kind of overall industry build rates can you help to quantify that a little bit i know you've won some business that should come in toward the end of the year i guess you know how if if the the forecasts are right that the industry grows at eight and a half percent give or take i guess what does that what does that mean for for exalta with some of the new business wins the share gains that kind of thing how should we be thinking about that let me provide i guess some additional context in particular around the phase one i think the quarterly phasing there you know is important so if we look at 2021 total auto builds were 76 million units per ihs and ihs's full year 2022 base case build number is about 83 million light vehicle units and the downside case of 76 million units our 2022 full year base case is 79 million units based on the historical forecast error that we've seen from IHS as well as input from our customers. So for Q1 in particular, as we think about phasing and new business coming on, for Q1, the IHS build number is down about 2.2% first quarter 2022 versus first quarter 2021, which is based on essentially flatlining the 83 million builds across the year. for roughly 20 to 21 million builds per quarter. Now Q4 2021 builds were actually 20.4 million units. So we then took that number and adjusted that number down for expected later than normal plant startups in Chinese New Year to arrive at approximately a $17 million light vehicle build rate for our estimate for Q1. Now, it may be the case that we're taking a little bit more of a conservative view on the first quarter, but we believe that this is a solid base case assumption, given historical data variation, market conditions, and then the potential ramp up of bills during the year, just as more semiconductor chips become available. And then of the $130 million in new business that we've won in 2021 that will come online in 2022 and 2023, that's pretty heavily back-end loaded to the second half of the year, as well as the first quarter of 2023. Got it. That's helpful, Colin. Thanks very much.
spk06: Our next question is coming from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.
spk09: Thank you. And good morning. Could you talk a bit more about the next issues? You know, I know when we're finished, it was a continuation of the of the migration to economy type product. Is that going to reverse at some point in 22 and become and become a tailwind for you folks? And in mobility, what is it that's exactly happening there versus assembling a commercial vehicle, you're getting a benefit. So if you could just unpack what's going on and then give us a sense of whether it's going to move for you or against you as we move through 2022.
spk08: So with regard to MIPS on the performance coding side, you correctly point out that it's the growth of mainstream and economy. And we saw quite a bit of that in the fourth quarter, just given some of the commercial initiatives that we've had. But you've also had the impact of slightly lower refinish activity overall, in particular with some of the larger MSO customers in the fourth quarter as they experienced labor and park shortages in particular. So the buy of that richer premium mixed paint was lower. in Q4 than you might have typically seen. So that exacerbated certainly what we saw in performance coatings. And then in mobility coatings, the unfavorable mix was really one due to product mix. We sold a little bit more of slightly lower margin products. And then we also had some growth in our LV business in Asia Pacific. which is at a lower average selling price, some of which gets captured in pure price and some of it gets captured in mix. But I think if we look at overall kind of mobility tracking, you can see that we've seen pure price increase from 2% in Q3 to 2.8% in Q4. And then as Sean mentioned, with the indexation coming into place, we'll see that number tick up here as we go sequentially forward Q1, Q2, et cetera. And Vincent, just to add, I just note, there's nothing structurally that changed as far as mix issues. And we're not forecasting any sort of major mix aspects for the first quarter, for the full year, for 2022. But presumably, it'll be an easier comp in the fourth quarter of 2022 for refinish in particular. We saw about a 3% negative mix come through in the fourth quarter of 2021.
spk09: Okay, thank you. And maybe just as a follow-up, could you talk a little bit about where you sit on the temporary cost reductions coming back versus your plan?
spk08: Yeah, so hard to say exactly. You know, we're limiting guidance just because, you know, the world is constantly changing on us here. But, you know, we've continued to see, you know, roughly $10 to $15 million each quarter in temporary savings, at least for the first quarter. You know, we expect that to show up in the results.
spk06: Okay, thanks very much. Our next question comes from the line of David Begleder with Deutsche Bank. Please proceed with your questions.
spk05: Thank you. Good morning. Rob and Sean, do you expect any permanent exult away cost savings in 2022 versus 2021?
spk08: Yeah, again, we're limiting guidance, but the plan is to, at a minimum, offset fixed cost inflation. There's clearly structural savings that we've previously announced that will amount to about $10 million. But the difference will be, you know, continued productivity products. But we'll give more updates when we give guidance at the end of the first quarter, Dave.
spk05: Got it. And just looking at uses of free cash flow, how do you look at buybacks versus debt reduction in 2022?
spk08: So given our cost of debt still sitting below 3.1%, It doesn't necessarily have attractive returns. I think we'll continue to deploy the majority of the excess free cash flow for share repurchases as well as M&A. We'll look to continue to build cash on the balance sheet beyond that. Thank you.
spk06: Our next question comes from the line of Kevin McCarthy with Vertical Research. Please proceed with your questions.
spk08: Good morning. Robert, I was wondering if you could talk through some of the labor challenges in more detail. So, for example, on an internal basis, what impact did that have on your ability to produce and deliver? And then externally, how significant is that issue becoming among body shops and perhaps other customers? And do you think it's getting any better or worse looking into the first quarter? Yeah, it's a great question. At Exalta, we've seen some labor constraints hit us, certainly. across the fourth quarter and specifically due to the surge in omicron although i don't think we characterized the impact as you know as equivalent to the impact we saw from material supply or logistics headwinds but it certainly was an impact our overall maximum kind of absenteeism in december was around 15 percent but we think about labor challenges with our customers COVID-related absenteeism is definitely having an impact. The broader challenges impacting in particular in the refinish business, the larger body shops continue to be technician availability, which is related to labor, and parts availability. And some of our largest customers reported an increase in WIP related to labor and paint shortages. And in fact, if you look at the average number of rental car days for people who had their vehicle fixed, you know, in December, that number of days went up by four days. So it's taking longer for people to get their cars fixed, and that has a lot to do with labor shortages. And then secondly, I think you mentioned that in the U.S. or North America, body shop activity remained about 12% below 2019, if I got that right. Is that the new normal? What are you planning for in terms of body shop activity in 2022 relative to 2019? We don't think that's normal. We still do not have normal traffic patterns in terms of people even getting back to a hybrid work environment. And, you know, the schools, certainly we've seen some of that traffic come back, but there are spots in the country where It's a little bit start and stop. And we haven't seen office occupancy rates come back yet either. So I think what we're hoping is that once we get on the other side of Omicron, that we're going to start to see people return to the office in more of a much greater hybrid percentage in terms of time spent in the office versus time spent at home. So I think overall we're optimistic, but, you know, as we've said, it all hinges upon recovery from Omicron.
spk06: Thanks very much. Our next question comes from the line of Chris Parkinson with the Zufo. This is here with your question. Great. Thank you very much.
spk08: The industry has been setting several key raw material shortages across additives and, in some cases, intermediates and other inputs, yet global force majeure activity at least appears as if major suppliers are improving supply, at least heading into the year, although some others are still taking maintenance. As it pertains to your portfolio and Just Exalta, know what inputs are still missing are there differences by region just any color on how you believe this evolves uh would be greatly appreciated thank you thanks chris um we continued to see supply disruptions in the fourth quarter there were roughly about 20 force measures in the coatings value chain we also saw deepening energy challenges in in europe And then in China with the dual control policies on carbon emissions as well as carbon intensity and continued impact from limited global logistics capacity and higher costs. If we think about overall shortages, we've seen tightness in several materials due to supply chain disruptions as well as kind of alternative value chain demand. Specifically, isocyanates, acrylic emulsions, certain polyester resins. Those have really been the most challenging during the second half of 2021. And if we think about the overall situation, we have secured supply and largely been able to keep pace with strong demand for our products. But there have been some impacts on sales volumes as well as impacts at the customer level, which has constrained potential volumes. And just a super quick follow up on that, you know, based on that last comment, are you confident that given this is affecting, you know, all of your primary peers and most obviously geographies, is it safe to say that this is not a case of, you know, any lost business and you know, this is factoring into times of demand for 22? Yes, there's certainly a question. I mean, certainly there are spots where we may be short on a given product and a customer may need to source it from a competitor. Likewise, we've had situations where one of our competitors hasn't been able to supply and that customer has come to us and asked us to supply, and we've been able to do that. I don't think that there have been major market share shifts between competitors, but there have certainly been spot particular moments, days, or weeks, where we've had to step in or where one of our competitors have had to step in where it's a dual supply scenario, for example.
spk02: Very helpful.
spk06: Thank you. The next question comes from the line of Alex with KeyBank. Please proceed with your question.
spk03: Thanks. Good morning, everyone. The midpoint of your EBIT guidance for first quarter is roughly $10 million lower sequentially. So I'm just trying to understand the sequential bridge at a high level. Are costs rising faster than price? Are volumes lower? Or is something else going on?
spk08: Yeah, it's really – rolls are really accounting for the vast majority. You know, we saw 24% year-over-year headwinds in the fourth quarter. We're seeing 25% to 27% with it really peaking in the first quarter. that amounts to about $10 to $15 million. And then we're seeing some marginal headwinds in freight and logistics and labor pressure, which is, you know, being largely offset by the uptick in sales. You'll see our guidance for the first quarter versus the fourth quarter is up about 2%, which correlates to about $20 million. And then the only other, you know, Item to mention of less effect, of course, is just the incremental FX impact we're seeing, and there is some small return of OPEX related to some of the product launches and developments we have.
spk03: Okay. Thank you. Very helpful. In light vehicle, you will have your indices, price indices reset on January 1st. Would those generally reset to an average cost for the second half of 21 or exit costs from December 21? So will you be fully caught up on those index resets or still kind of underwater for some time, maybe first half of 22?
spk08: Yeah, so, I mean, all the contracts are a little bit different, but generally the way I think about it is the average six-month procurement spent That'll be reflected. But given we're expecting raw materials to continue to inflate in the first quarter, they're still going to be slightly behind.
spk06: Thank you. Our next question is from the line of Jeff Sakakis at J.P. Morgan. Please receive your question. Thanks very much.
spk08: In the quarter, where did you stand with recovery of raw material inflation in recent? So we're called up and refinish, Jeff.
spk05: Okay.
spk08: And in the auto OEM business, when you look at your customer base, are there wide differences in your ability to recover raw material inflation, that is? With some of your large customers, are you doing very well? And with other customers, are you doing much less well, or is it pretty even across the customer base? I think, Jeff, it varies somewhat by customer, and it varies somewhat by region, as well as regional mix of competition. So I think, as Sean said, certainly the indexing, and we're pushing toward more indexing just to make this automatic and easier competition. But I think overall, as we think about price capture in our business, I think that we don't believe that we're behind the market in price capture. If you look at like-for-like businesses, I mean, in OEM, some of our peers include, for example, business volumes beyond light vehicle exterior body coatings, which, of course, are our products. And they'll include some businesses that we include within industrial, including certain tier suppliers that serve automotive. So although we acknowledge that we're not where we want to be, we don't believe that we're behind our competition, especially given continued inflationary cost headwinds. But we're very focused on offsetting cost inflation in our business during 2022. And as Sean highlighted, we've seen the number of We've seen that number go from 25% of indexes in 2020 to a little bit more than 30% at the end of 2021. We expect that to continue to increase. Great.
spk06: Thanks so much. The next question is coming from the line of PJ Shuva, Harvard City. Let's hear your questions.
spk00: Yes, good morning. Robert, you mentioned a couple of times negative mixed impact in both of your segments. I was wondering if you could talk about what kind of mix impact you're seeing in each of the segments?
spk08: Sure. I think in terms of the segments, we answered that question earlier, but I'd be happy to provide a little bit more color. In the refinish business, we've continued to see the growth of mainstream and economy products. That's really taken off, especially with some of the new product developments that you probably read about in our press releases over the past six months. In Asia, in certain parts of Eastern Europe, as well as in Latin America, those are sold at lower price points. Still attractive margins, but lower price points. And so that's certainly one impact. And then in the mobility side, it's really a function of customer mix as well as regional mix that has created that mix differential.
spk00: Okay, and then, you know, many companies have different views on this chip shortage is going to be resolved. You talk to auto companies, they tend to be more optimistic. Chip companies are saying it won't be resolved fully until 2023. Some are even saying 2024. Not sure exactly which chips they were referring to, but where do you stand on when do you think you could begin to see some positive comps in auto EM?
spk08: So we'll give you our view from obviously speaking with chip forecasters and our customer base. I mean, I think the market forecasts assume improvement in inventory and overall chip supply beginning in the first half of 2022 with a little bit more stabilization in the second half of 2022. We think that the broader kind of one-off supply chain issues, unless something happens, could subside in the first half, but we still do expect longer lead times for chips in the second half versus what they were pre-pandemic. We think that there's going to be some improvement this year and perhaps normalization in 2023 as we start to see additional chip capacity come online, and then that should free up capacity for specifically automotive end markets. Great. Thank you. And I'll just add, you know, one additional thought there, which is the auto industry, you know, they haven't been standing still. They've been, you know, obviously have recognized this as an issue and are aggressively taking action. I mean, we've seen our OEM customers adapt pretty quickly to the situations. I mean, they're ordering chips with, you know, longer lead times. They're prioritizing vehicles with the highest profit margins like trucks and SUVs. They're removing features from certain vehicles to many people's dismay, but it's necessary. And they're reducing the number of unique chips that are being used and consolidating down to fewer, more easily available chips. And then lastly, they're redesigning systems with more standardized chips, as well as different architecture to really reduce the level of chip intensity. I think the first actions that I mentioned there can actually have a benefit in 2022. and some of the redesign of the chip architecture, that's more of a 2023-2024 impact.
spk06: The next question comes from the line of Mike Sisson with Wells Fargo. We can see your question.
spk02: Hey, guys. Good morning. Just curious, when you think about mobility cuttings, you know, margins have been kind of bumping and breaking even for the last couple quarters. What build rate sort of gets you, you know, firmly above – you know, break even, are you going to get there with the 83 million this year? And then is there a certain build rate you need to get to, to get back to double digits, you know, sort of that 11% or so that you did in the first quarter of 21.
spk08: So Mike, I just, I want to point out cause the EBIT is still impacted by the step up depreciation and amortization from the initial carve out from DuPont. Yeah. I, I did want to call EBITDA itself. I mean, we're going to have slightly over 10% EBITDA margins for the full year. So we still are cash flow positive in that business, and I think it's an important highlight. But if we get to the 79 million builds, we'll certainly be EBIT positive for mobility for the year. A slight uplift versus where we are today for the full year 2021 will put us in a in a profitable stage. I think everything we've done on the cost structure, as well as with the pricing, you know, coupled with the fact that, you know, as volumes pick up, there's going to be much better absorption. You're going to see this business, you know, quickly get back to profitability. Yeah, I would just reiterate what Sean said there, is that if you look at what we've done in costs in the mobility business, we have taken significant, you know, done significant cost reductions in that business. At this point, It's all about the drop-through effect of volume as well as price increases. Those are really the two key levers.
spk02: Understood. And then for 22, it sounds like you're signaling that adjusted EBIT will be up in 22 versus 21. I understand hesitancy to give specific guidance. But when you think about the range of possibilities, what are you most worried about in terms of being able to grow this year and If there was surprises to the upside, where do you think you can see that potentially?
spk08: Well, the key variables, you know, both to the upside as well as to the downside, would certainly be macroeconomic changes, geopolitical events and the impact that that could have on growth, cost inflation and the price of oil, and changes in assumed auto bills. And then lastly, of course, I think we'd have to mention COVID. I think our hope is that, you know, we're kind of coming down the backside here with Omicron and hopeful that there's nothing beyond that and that we start to see overall business and global conditions get back on track to normal.
spk06: Thank you. Our next question is from the line of Arun Viswanathan with RBC Capital Markets. Let's just hear your question.
spk01: Good morning. Thanks for taking my question. I guess just two questions. So first off, in light vehicle, I guess I've heard that maybe February, March, we're already in February, but I guess maybe March, you guys would get a better picture. Some of the auto suppliers have been saying that they'd get a better picture on full year production. Would you agree with that assessment? I guess would you be able to see if you'd get closer to that 83 number instead of your 79 forecast?
spk08: you know maybe in march i think it's difficult to say there's still a fair amount of variability around uh around the forecasts um it's it's possible um that there's obviously we'll have more visibility in march but i don't think there's anything magical or any particular specific information that's going to come out in march that's going to illuminate that i think it would just be the benefit of having a first quarter under our belt And we recognize that we have taken a more conservative approach there to the first quarter, but we think it's prudent to do so.
spk01: Great. And then just a quick one on free cash flow. You know, 21, I think you got a little bit of a working capital benefit that helped you preserve free cash flow guidance. But how are you thinking about that for 22? Is there going to be a drag on working capital? Thanks.
spk08: Yeah, we ended working capital percentage of sales at, you know, roughly 8%. Given potentially, you know, continued inflationary pressures as well as sales upticking, you know, you could see a marginal uptick in working capital use. Thanks.
spk06: Thank you. Our next question is coming from the line of Laurent Favre with BNP Pirates. Please proceed with your question.
spk10: Good morning, all. Robert, I've got a question on your ESG target announced last week. In particular, I recognize all the efforts, but on the CO2 emission side, you seem to be very focused on Scope 1 and 2, and I was wondering what prevented you from also tackling Scope 3, given that this is probably the majority of your total emissions. Thank you.
spk08: I think with regard to Scope 3, it's a walk before you run. And we're going to focus on scope one and two first. And we're embarking on that. And then we'll begin scoping out our scope three emissions as we go forward. But in terms of the work that we've done in particular over the last year, it would have been too ambitious to put out a scope one, two, and three target. That just requires a lot of coordination with all of the partners with whom you do business. So, you know, obviously for scope one, just coming from company operations and scope two from purchased energies, that's a little bit more quantifiable.
spk10: Thank you. And how do you size the incremental costs that you could incur, for instance, for renewable power supply, et cetera? Are those things part of your 2024 targets?
spk08: So when we think about incremental capex related to get to some of the emissions, emissions goals specifically that we have in particular air as well as waste. But I think here we're talking specifically air as it relates to greenhouse gases. That would be part of our normal capex spend. And then in terms of the actual use of energy, what our plan there is is to use renewable energy And we'll continue to purchase renewable electricity when it's cost effective. But we're also going to explore the use of on-site renewable energy generation unless the capital costs, you know, were prohibitive. I think it's important to highlight, though, that depending on the evolution of the global energy markets, it's possible that we might need to purchase some carbon offsets to reach the carbon neutrality goal by 2040. But that would really only be after all of those other options have been fully explored and implemented. I think we expect the size of the global renewable energy market to continue to increase and the sophistication of that market to continue to increase over the next many years. And Laurent, just to put some quantifiable numbers, so our total Energy spend is $30 to $40 million on an annual basis. Electricity is a fraction of that. So that will be absorbed in our 2024 targets. No concerns as far as, you know, major impacts there.
spk10: Thank you.
spk06: Thank you. At this time, we've reached the end of the question and answer session, and I'll turn the call over to Chris McCrae for closing remarks. Thank you all for joining us this morning. Appreciate your participation.
spk08: We'll be available through the course of the day and beyond to answer any follow-up questions you have. Have a great day.
spk06: This concludes today's conference. May disconnect your lines at this time. Thank you for your participation.
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