Axalta Coating Systems Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to Exalt's second 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 August 3rd. Those listening after today's call should please note that information provided in the recording will not be updated, therefore may be no longer current. I will now turn the call over to Chris 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 second quarter 2022 financial results conference call. 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 this slide presentation also contain various non-GAAP financial measures. In the appendix of 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. In conjunction with our earnings release yesterday, Exalta also announced that Robert Bryant will step down as president and CEO, effective August 31st. Rakesh Sachdev, an independent director of the board and an experienced executive in the chemicals and life sciences industry, has been appointed interim CEO, effective upon Robert's departure, while the board conducts a search for a successor. The press release can be found in the investor relations section of our website. Robert Bryant, CEO, Sean Lannan, CFO, and Rakesh Sachdev, incoming interim CEO, are all with us today. And I will now turn the call over to Robert.

Hello, everyone, and welcome to our second quarter 2022 earnings call. Before we discuss our results, I'd like to make a few comments on yesterday's announcement that I will be leaving Exalta to pursue new opportunities. It's been a privilege to serve as Exalta's CEO and I'm incredibly proud of what we have all accomplished throughout my tenure at this amazing company. I'd like to thank the entire global Exalta organization for their focus on execution, commitment to excellence, and dedication to serving our customers. I am confident that Exalta will be in great hands under Rakesh's leadership and will continue to thrive in the years ahead. With that, I'll now turn to our quarterly results beginning with the key highlights on slide three. Let me begin by extending my appreciation to the entire global team for another solid quarter. Our results demonstrate that we remain focused on the most important strategic elements, namely driving growth and recovering profitability through pricing actions following an unprecedented rise in variable costs. We made progress on both fronts this quarter and are building momentum into the second half of the year setting up Exalta for significant earnings upside. In the quarter, we achieved adjusted EBIT of $151 million and adjusted earnings per share of 41 cents, both of which were above the midpoint of our expectations we set out in our Q1 earnings call, despite incremental headwinds of $8 million associated with foreign currency and China lockdowns, both of which were higher than our original expectations. When excluding the impact from foreign currency, we reported constant currency and net sales growth of 15%, with double-digit contributions from every end market. We benefited from a broadly constructive demand environment and yielded higher growth versus most of our markets. We also delivered a record of 10% higher price mix in the second quarter, which nearly offset the raw material and logistics inflation costs in the same periods. I'm encouraged by the signs of stabilization we're beginning to see across many input categories, which supports our prior expectation of recovering the majority of the cumulative cost inflation by year end. Moving on to slide four, I'll give some more color on our second quarter performance. Globally, volumes approved 3% year over year, driven by solid demand trends and market share gains across the portfolio. Growth was uneven across the regions, with 10% growth in the Americas leading all geographies. This growth more than offset softness in EMEA and China, stemming from the Russia-Ukraine conflict and extended China COVID-19 lockdowns, respectively. In total, we believe these two impacts alone account for a 4% net sales headwind in the quarter. We continue to expect a favorable demand environment in the Americas broadly and should see recovery play out in China in coming quarters. Volumes improved in three of our four end markets. Performance coating segment volume was flat, as solid refinish growth was offset by modest declines in industrial. Mobility segment volume was very strong, with 9% higher light vehicle and 13% better in commercial vehicle. Both mobility end markets, as well as refinish, greatly exceeded relevant industry growth rates. Exalta's differentiated technologies and superior service remain a powerful driver of our above-market volume performance. In refinish, we continue to sign new exclusive agreements with large multi-shop operators and continue to make progress on our new business pipeline. In mobility, we're beginning to feel the benefits from business wins made over the past six quarters, which in total, we expect to contribute more than $200 million of annualized revenue. And in industrial, we booked new wins this quarter in the battery protection space, where we see great long-term potential with electric vehicles as we gain traction beyond just electric motor coatings, where we have a strong position today. Operationally, the second quarter was our highest production volume quarter since the beginning of the pandemic, with 7% sequential production growth. The backlog of open orders across both end markets and performance codings continues to be a challenge given supply chain constraints impacting our business. Customer constraints remain prevalent in the quarter and continue to be a significant drag on growth. These are most apparent in light vehicle and refinish, where both markets are operating well below normalized levels, given severe parts and labor shortages. creating more consumer demand that should benefit our business if supply chains loosen. Now let's move to slide five for a discussion of key refinish market trends and highlights from the quarter. In refinish, our industry leading aftermarket auto coatings business, we had a strong quarter with volumes up 3% year over year and 13% sequentially, despite the aforementioned geopolitical headwinds in EMEA and COVID lockdowns in China. We're winning new customers at a record pace. Year to date, we added nearly 1,000 net body shops globally and over 500 stock points through distribution customers. Our partners continue to recognize that we just have a better way of doing business centered around the most productive paint system in the industry with a significant technological lead over our competition. In fact, Since 2019, while the market has contracted approximately 8% due to COVID, our refinish business has grown volumes by 5%. We believe that we have gained several percentage points of share and expect this trend to continue going forward based on recent and expected wins. During the quarter, we noted marginal improvement in body shop activity quarter over quarter, but activity remains in the high 80% in North America and low 90% in EMEA. We see activity normalizing over time, driven by relief of body shop constraints and also return to office dynamics, which we expect will lead to a step up in congestion rates toward pre-COVID levels over time. Moving on to industrial. In industrial coatings, volumes declined 4% year over year, a strong demand in the Americas, namely from building products and general industrial, was more than offset by declines in EMEA General Industrial and Asia Pacific Energy Solutions, given the previously mentioned geopolitical and COVID headwinds. Supply and production constraints were again a drag on overall performance in industrial coatings by as much as a mid-single digit percentage. Earlier, I highlighted a few wins in battery component coatings with several electric vehicle manufacturers. This is an important milestone for us as we see a long pipeline of opportunity in this space with a long-dated market opportunity. Moving on to mobility coatings. In mobility coatings, an industry leader in light vehicle and commercial vehicle exterior OEM coatings, volume growth outpaced relevant industry production rates as we continue to drive share. Specifically, light vehicle volumes improved 9% year over year, considerably outpacing the flat global auto growth rates. In commercial vehicle, volume grew 13%, which far exceeded Class 8 truck production, which declined by approximately 1%. New light vehicle and commercial vehicle customer wins are driving above market growth and setting us up with the right customer mix for when global production returns to normalized levels. Automotive OEM customers are increasingly confident about second half production rate improvements given the post-lockdown ramp-up of Chinese auto production and improved supply sentiment. We expect sequential market growth through year-end, with Q4 production nearly at 22 million builds, 17% above second quarter rates, and an annualized run rate in the high 80 million builds, which was last achieved in 2019. As we discussed on our Q1 earnings call, we see normalization of light vehicle production rates as roughly one half of the path to recovering the approximate $140 million earnings gap between our trailing 12-month mobility codings adjusted EBIT and our pre-pandemic 2019 profitability levels. The other half of the recovery will be from offsetting significant variable cost inflation where we're making great progress and we'll discuss further on the following slide. It's our intent to fully offset the impact of raw material, energy, and logistics inflation on our businesses. In every market, we're working with customers to implement the necessary degree of price increases to operate at more attractive levels of profitability. In refinish, the team has done a remarkable job increasing price quarter after quarter and has been able to fully neutralize the impact of inflation in real time. Further pricing actions were executed beginning in July in certain regions to address modest sequential inflationary impacts. In industrial, second quarter price mix improved by 15% year over year, or 20% on a two-year stacked basis, which for the first time in this inflationary period is fully offsetting the impact of inflation. Industrial, however, remains behind on price cost, given the rapid rise of inflation that began in the third quarter of 2021. As a result, profitability is below target levels, but should improve throughout the year. In the second quarter, pricing stepped up considerably in both light vehicle and commercial vehicle, resulting in 12% higher year-over-year mobility price mix. This is a great outcome, but the scale was insufficient to fully offset run rate inflationary impacts, and hence, The cumulative price-cost gap widened in the quarter, but was as we expected when we provided guidance in April. We're optimistic that the highly inflationary environment is finally beginning to stabilize, though raw material availability still remains tight and variable costs are likely to continue to rise modestly in the third quarter. There are pockets of softening in some base chemicals, isocyanates, as well as plastic and metal packaging, but we continue to face bottlenecks in certain pigments, additives, logistics, and resins following recent force majeures. This will continue to be a dynamic environment. Nonetheless, with the visibility we have today, we believe we will recover the majority of the cumulative price-cost gap by year end. Now I will turn the call over to Sean to discuss our financial results, beginning with slide nine.