Axalta Coating Systems Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to Exalta's first quarter 2022 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 a replay will be available through May 3rd. 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 Christopher Evans. Please go ahead, sir.

Thank you, and good morning. This is Chris Evans, VP of Investor Relations. We appreciate your continued interest in Exalta and welcome you to our first quarter 2022 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 slide presentation along with commentary 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 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. Our remarks and the slide presentation also contain various non-GAAP financial measures. In the appendix to the slide presentation, 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 will now turn the call over to Robert.

Thank you, Chris, and good morning. As most probably saw a few weeks ago, Chris Evans recently joined Exalta, the lead investor relations, and we're very excited to have him as part of our team. With that, I would like to welcome everyone to our first quarter 2022 earnings call. Let me begin by sharing how proud I am of what we have been able to accomplish this quarter and thank our global team for their hard work. Momentum continues to build in each of our businesses today because of our team's customer focus and dedication to ensure that we deliver on our goals. The entire Exalta team deserves credit for fostering growth and minimizing the financial impact of the various geopolitical crises and the ongoing supply chain challenges. I want to specifically call out our China team, where essential management and our manufacturing workforce volunteered to shelter in place at our plants and at our customers' plants throughout the weeks-long COVID-19 lockdown to keep operations running and meet the needs of our customers. Thank you for your incredible commitment and resiliency. Now to the key first quarter highlights on slide three. We reported a strong result again this quarter and have a lot to be proud of given the overall environment. Constant currency net sales growth of 13% exceeded our prior estimate in both performance and mobility coding. Adjusted EBIT of $120 million achieved the very top end of our guidance. Adjusted EPS of $0.31 was above our guidance range given the flow through of strong earnings, modest benefits from a lower share count, and a slightly lower adjusted tax rate. I'm pleased with these results given the unprecedented degree of challenges we had to overcome. These include First, the rapid pace of variable cost inflation, which we experience across most cost categories and well above what we had factored into our original Q1 guidance construct. Second, raw material and labor shortages, which created a difficult operating environment, constraining many customers and our ability to fully serve a healthy consumer demand environment. And finally, direct and indirect impacts from geopolitical and macroeconomic issues, including the Russia-Ukraine conflict, as well as the effects of zero COVID policies in China. Despite the approximately $22 million in earning headwinds these three items created versus our January guidance framework, we were still able to deliver a solid quarter and exceed our sales guidance as strong pricing and better volumes yielded better than expected 10% year-over-year organic XFX growth and also delivered EBIT at the top end of our range. Volume improved 1% year over year, with positive contributions from three of our four end markets for the fifth consecutive quarter. Growth was supported by ongoing recovery, as well as from share gains that we are driving across the portfolio. These achievements reflect our customers' preference for our differentiated technologies and are a nice recognition of the great work from our commercial teams across all of our business lines. Exalta is committed to driving secular growth, and we're making encouraging progress. A stronger share position has allowed us to better leverage our fixed cost position, driving higher incremental margins, which will serve us well as markets continue to recover to pre-pandemic levels. We realized a remarkable 9% price mix in the quarter, up from a reported 3.6% last quarter, driven by pricing actions that we have continued to implement in order to offset the impact of cost inflation. Both segments have shown strong pricing gains from past quarters, with mobility codings reaching record quarterly percent growth. While we're happy with our pricing progress, the unprecedented rate of variable cost inflation has driven Q1 profitability well below our historical low 20s percentage adjusted EBITDA margin range. New pricing actions are already underway to offset existing uncovered and anticipated further inflationary costs. coming as a result of higher oil prices and tight supply-demand balances and many commodity changes. We expect that our margins will begin to recover in the second quarter as we drive further price improvement and enhance our fixed-cost leverage position. During the quarter, we also repurchased $175 million in shares. At the current valuation, we see tremendous value in our equity and will remain opportunistic as we prioritize capital deployment for generating meaningful shareholder return while balancing a conservative balance sheet. Moving on to slide four, Exalta occupies unique and highly profitable positions in the coding industry. We're aligned with megatrends that we believe create a strong growth trajectory for years to come. However, supply chain challenges have drastically impacted global trade, constrained demand, and reduced global GDP. Recent geopolitical dynamics have only increased the temporary strain on global operations and worsened short-term visibility. While we continue to have strong conviction in our strategic ambitions and direction, the degree of macro uncertainty today makes it challenging to forecast beyond the near term with high confidence. Therefore, we're only providing Q2 guidance today. Nonetheless, I continue to see strong underlying trends We're launching new innovative products every quarter, and each business is making strong progress toward our growth ambition by executing on top-line growth. In Refinish, our highly profitable, industry-leading aftermarket auto coatings business, the team is delivering on several strategic imperatives. First, increased market access. This quarter, we won over 500 net body shops globally and well over 200 new stock points through distribution customers. Second, we're growing our premium market leadership. We are the leader with MSOs who continue to be allocated more workflow from insurance companies in North America, as well as independent body shops. We are retaining and winning new customers each quarter as we capitalize on our unique customer value proposition. Third, we continue to gain share in mainstream and economy segments where we haven't had as large of a historical presence. The addition of new points of distribution is helping to build a sales pipeline in underrepresented geographies and markets. We have witnessed good growth progress and execution on all fronts this quarter, as evident in our above-market volume growth. Another area of focus is the integration of U-Poll. We are well underway in integrating the business and executing on cost synergies, but our true enthusiasm for the acquisition is centered around realizing commercial synergies which we believe will further the UPOL value creation opportunity beyond what we have previously communicated. UPOL gains us exposure to adjacencies in the automotive body repair business, namely in fillers, putties, glazes, and aerosols, where Exalta did not participate in a meaningful way. Moving into these categories positions us to capture more repair dollars per vehicle. We can also drive commercial synergies through maximizing the cross-selling of Exalta and U-Poll products across our global customer base. We're already beginning to see the value creation play out as our distribution partners and key body shop accounts are beginning to stock U-Poll products. In addition, U-Poll gains us exposure to adjacencies in both consumer and industrial protective coatings. In industrial coatings, we're driving organic growth in a constrained environment led by strong pricing gains. Industrial price mix increased by a mid-teens percentage year over year and by a mid-single-digit percentage sequentially. A number of additional pricing actions were instituted in late Q1, which should sustain positive pricing momentum into the remainder of the year, supporting a return to significantly higher profitability. In mobility coatings, our industry-leading light vehicle and commercial OEM business, we've secured record pricing gains and outperformed the market from a volume perspective in Q1. Pricing momentum is building every month. While we're negotiating better pricing, we're also building a more inflation-resilient portfolio by partnering with our customers to increase the percentage of mobility customer contracts with index pricing mechanisms, now between 35% and 40% for the entire segment. Recent share gains in light vehicle are driving above market growth and setting us up with the right customer mix for when global production returns to normalized levels in the future. In commercial vehicle, we continue to hold the leadership position globally in heavy duty truck markets. We are focused on pricing traction to help offset cost inflation and see strong market demand despite customer production constraints. Lastly, We're driving growth across all end markets with innovative and differentiated product offerings. Two new exciting product launches just received recognition with the prestigious 2022 Edison Award, which honors some of the most innovative product developments in the world. Our patented Spiess-Hecker full waterborne repair system technology was awarded bronze in Edison's sustainability category and represents the first paint offering for the collision repair market where all coatings layers, from primer to clear coat, are water-based. This truly sustainable solution provides best-in-class appearance and performance while reducing solvent emissions by more than 60%. Next, Exalta's high-resolution digital paint coating system won bronze in Edison's material science category. This patented coating technology supports the mass customization megatrend with a novel coating that can be applied with zero overspray and reduces energy consumption as well as waste generated from the masking process. These are just two great examples of Xalta's innovation pipeline and product differentiation, which are supporting customers' productivity needs and sustainability ambitions, creating a large market pool for our offerings. Turning to slides five and six for discussion of key market and demand trends, vehicle miles traveled in the United States and Europe have nearly recovered to pre-pandemic levels. But changes in driving behavior, namely the prevalence of work from home, seems to have led to lower congestion levels and less collision claims than before the start of the pandemic. Based on paint consumption data from our proprietary e-commerce platform, We estimate Q1 body shop activity remained in the mid 80s percents and low 90s percents respectively for the U.S. and Europe relative to 2019, consistent with the level of collision claims. Within the quarter, our U.S. body shop customers reported a step up in activity during March that we believe reflected some modest market improvement, though remains constrained by a growing backlog of repair work given parts and labor shortages at the body shop level. We believe that the return to in-person work is an important factor in driving market recovery and are encouraged by U.S. office occupancy, which improved from the low 20s percent to 42 percent versus prior year. In industrial coatings, a healthy demand environment was again limited by supply constraints, namely in building products and general industrial. In total, these constraints represented mid to high single-digit percentage drag against our 1% volume growth in the period. Regionally, North America and Asia Pacific contributed most significantly to our year-over-year growth. Moving to mobility codings, the expected normalization of global auto production rates in 2022 has been impacted by the Russia-Ukraine conflict, as well as China COVID-19 lockdowns, resulting in downward revisions of earlier production estimates. Whole year 2022 global production industry estimates are now forecasted to be 80.6 million, 4% above 2021, but still 9% below pre-pandemic 2019 levels. Once supply chain constraints and cost headwinds abate, the benefit to Exalta will be significant. This is highlighted by an approximately $140 million earnings gap between our trailing 12-month mobility coatings adjusted EBIT and our pre-pandemic 2019 profitability levels with global auto bills reached 89 million. We're not sitting still and waiting for the market to recover. In the current environment, we focus on what we can control, prioritizing productivity, better price to offset cost inflation, and new market gains. Following these actions, we expect to be in an even better position once supply chain constraints diminish and the market recovers. commercial vehicle where we have an industry leading share in north america and emea strong demand is outpacing constrained production rates heavy duty and medium duty truck order backlog is now 11 months and 8 months respectively creating a long-dated growth dynamic for production rates to climb beyond 2022. moving to slide 7 i'll cover price costs and our focus on margin recovery first I'd like to remind everyone that we have a successful history of managing inflationary periods and quickly recovering lost profitability. Our business is resilient. We have the ability to increase price when it's needed. From the chart on this slide, you can get a sense of the pace of inflation we've experienced. Even though this inflationary period is uniquely rapid and broad-based, we are already making great progress toward offsetting the impact. In performance codings, we've been able to quickly raise price and have offset the majority of the $220 million cumulative year-over-year variable cost and logistics inflation incurred since the second quarter of 2021. In mobility codings, lagging index pricing mechanisms in some contracts and multi-quarter pricing discussions in others mean we have begun to accelerate pricing. Every business at Exalta is focused on margin recovery, and we expect to cover the majority of existing price cost gaps and incremental headwinds by Q4 of this year at the consolidated level. Before I turn the call over to Sean to discuss our financial results, I wanted to touch briefly on some ESG highlights from the quarter on slide 8. As you may remember, we announced our 2030 ESG goals in January, which reflect how meaningful progress in environmental, social, and corporate governance is central to Exalta's strategy and success. We've already begun to execute against these goals and have engaged with many of our customers and other stakeholders to discuss our plans. A major commitment is for us to develop new sustainable technologies and increase the proportion of our sales and sustainable solutions. As many of our mobility customers are rapidly shifting to produce more electric vehicles, we're aligning our technologies to support them and to drive growth in our own business. Our new Aqua EC Flex product for the mobility sector is a great example of our technology and innovation investments being deeply connected with key sustainability megatrends. In addition to the two Edison Award products I mentioned, this product enables our OEM customers to reduce CO2 emissions in their own operations by lowering the curing temperatures required for an electric vehicle's more intricate body frame. This is a great launch for us, well aligned with our ESG commitment. Now, I'll turn the call over to Sean to discuss our financial results, beginning with slide nine.