Axalta Coating Systems Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to Exalta's third 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 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 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 third quarter 2022 financial results conference call. Joining me today is Rakesh Sachdev, Interim CEO and President, 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 this 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 Rakesh.

Thank you, Chris. I'd like to welcome everyone to our third quarter 2022 earnings call, and we'll start by discussing the key highlights on slide three. I'm very proud of our team and what we were able to accomplish this quarter. We delivered adjusted EBIT of 148 million and adjusted EPS of 39 cents, both within our third quarter guidance range. despite acute currency and inflationary headwinds, plus pockets of softening regional demand within our industrial business. Constant currency net sales growth of 20% was extremely strong, driven by both volume and price almost in equal parts. Volume increased 9% year-over-year as we benefited from market recovery in refinish, light vehicle, and commercial vehicle. Normalization of market demand in most of our businesses are being bolstered with new customer wins across our business portfolio. We again delivered strong year-over-year price mix growth of 10% in Q3, which more than offset inflation from raw materials and logistics inflation costs in the period. This represents an important inflection point toward our goal of recovering lost profitability during this two year period of unprecedented inflation. Before I review the quarter in more depth, I wanted to take a moment to comment on our strategic prioritization, organization, and my focus as interim CEO, which is summarized on slide four. Let me begin by reiterating that it has been an honor to work alongside this accomplished leadership team. After spending the last two months with the team, I believe more than ever that there is a great future for this company, and I share the team's strategic vision to unlock value for shareholders. Exalta's strategic priorities remain unchanged and focus on strengthening our industry-leading positions. We are the number one or number two player in the majority of our end markets. We are investing to support our differentiated capabilities and the needs of our customers, which is driving growth. Exalta's above-market growth accomplishments have been masked by challenging post-COVID dynamics, which has been inclusive of constrained auto production, hybrid work environments temporarily reducing body shop activity, unprecedented cost inflation, geopolitical headwinds and China's zero-COVID policy, and headwinds from currency translation given strengthening of the US dollar. Nonetheless, we are expanding the reach of our technologies and deep customer relationships into adjacencies, while also establishing platforms in new verticals to diversify our portfolio. We continue to explore bolt-on acquisitions largely within our industrial coatings business, where we have had success deploying capital and where there remains compelling opportunities. However, the pace of M&A clearly has and will remain slow for the time being, as we focus on our balance sheet. Rest assured that we are building a quality book of business which positions us to capitalize on post-COVID market normalization. Now on to my primary focus as interim CEO, which is centered on successful near-term execution. Of utmost importance today is price-cost recovery. We have made great strides with pricing in most key areas, but select products, customers, and regions need continued focus. Next, our single largest cost category is raw materials, where we now spend over $2 billion per year. Small productivity enhancements can deliver significant savings, while we also look to take advantage of any market dynamics. And lastly, operational and supply chain excellence is an area of emphasis and opportunity. Through more efficient planning and execution, We believe we can release capacity, improve operating costs, and reduce working capital needs. This requires a high degree of focused effort by many members of the organization across many sites, but I anticipate that we can transition to a more efficient environment over time. Altogether, we are focusing on controlling our own destiny to enhance profitability, no matter the near-term external environment. Before moving back to discuss the quarterly results, I wanted to touch on the board's search for a new CEO. There are no updates to provide today on timing, but I can pass along that the board and myself are working expeditiously. We are seeking a proven leader, someone who has the relevant industrial experiences and the tools to unlock value for shareholders. I'm pleased with the search committee's progress and increasingly optimistic that we will be able to onboard a real difference maker. Moving back to the results and slide five, where I'll give you more color on our third quarter volume performance. Globally, volumes improved 9% year over year, driven by end market recovery trends and share gains across the portfolio. This is a remarkable result given the global macro environment and speaks to Exalta's unique positioning today in the markets we serve. Volume growth was positive across all regions, but uneven driven by different macroeconomic end market and regional dynamics. It is also notable that three or four of our businesses increased volumes in the quarter. The Americas region was strong again this quarter with year-over-year improvements and contribution across all end markets. China led all regions with more than 20% volume growth year-over-year, as strong auto OEM production offset a somewhat weaker China industrial demand environment. In EMEA, the demand environment is again challenging as weakening macroeconomic conditions are becoming more evident, coupled with the continued geopolitical headwinds from the Russia-Ukraine conflict. For Exalta, the brunt of the impact was felt in industrial coatings, which is more economically sensitive than our other end markets and also lacks the sizable market normalization benefits we see today in refinish and mobility coatings. Altogether, volume in EMEA increased 1% year-over-year. Pockets of softness emerged in general industrial markets where volume dropped modestly. Moving to slide six. We are cautiously monitoring trends, and at the moment there are some early signs of softening in some of our industrial coatings exposure outside of EMEA. However, we believe that the risk of further macro headwinds to Exalta is mostly contained within select pockets of our industrial exposures. Elsewhere, we see bright spots heading into 2023 and expect to grow in most end markets. Market volumes have yet to recover to pre-COVID levels in most of the markets we serve. At year-end 2022, market volumes are estimated to be below 2019 levels, 8% for the refinish markets, 11% for light vehicles, and 5% lower for commercial vehicles, in particular within the heavy-duty truck space. Years of supply constraints have created deferred demand, evident in the aging auto fleets and also in low channel inventory levels, which continue to operate below normal. When taken together, we see significant upside opportunity for Exalta upon market normalization, which also represents an offset to near-term recessionary headwinds. Lastly, it is worth noting that our volume growth outperformed market performance since 2019. Exalta's differentiated technologies and superior service remain a powerful driver of our above-market volume performance. Given our pipeline of new customer wins, we expect to continue this trend going forward. Nowhere is this more evident than in our industry-leading refinish end market, which we will cover on slide 7. In refinish, our industry-leading aftermarket auto coatings business, we had a strong quarter with volumes up 4%. and price mix 12% better year-over-year. The team continues to gain market share in the mainstream and economy segments. Year-to-date, we added over 1,200 net body shops globally and 600-plus new stock points through distribution customers. Our leadership position with large multi-shop operators expanded during the quarter with the addition of several large UK-based MSOs. Our partners continue to recognize that we have a better way of doing business centered around what we believe to be the most productive paint system and technical teams in the industry. Meanwhile, we are seeing favorable trends in return to work leading to increased congestion rates and improved body shop activity in both North America and EMEA. Industry volumes are recovering but remain below 2019 levels in EMEA and North America. Normalization continues to represent an impactful demand tailwind and earnings driver over the medium term. Moving to industrial on slide eight. Industrial constant currency net sales increased 7% year over year, driven by 12% increase in average price mix, partially offset by 5% lower volume. The business teams are doing an excellent job prioritizing pricing to offset variable cost inflation. Even still, the business is under-earning today, and so the team is actively pursuing more actions to recover our cumulative price-cost deficits. The industrial portfolio is our most economically sensitive end market, and therefore our lower year-over-year volume is a result of macroeconomic cooling in EMEA and a slow recovery in China. Partially offsetting these challenges is robust demand for building products in North America. Our current capacity is essentially sold out for the remainder of the year, and we should continue to benefit from advantageous consumer trends going forward. Also, new product offerings like our R&D 100 winning Abisite 2060, which is a sustainable single-layer powder coating, are expected to support above-market growth. Moving to mobility coatings on slide nine. In mobility coatings, An industry leader in light vehicle and commercial vehicle exterior OEM coatings. Volume growth of 30% outpaced relevant industry production rates again as we continue to drive share gains. Trends for commercial vehicle are very favorable within North America in the second half of this year and is looking likely to exceed expectations. September Class 8 orders were a market record, and we expect a good end to the year for our business. The teams are doing a fantastic job, as evidenced by a leading industry position and external recognition from our customers. Exalta was the sole recipient of the Daimler Truck Supplier Award for Quality, a prestigious honor, and we have held the title of Master of Quality for 15 consecutive years as well. I'm very proud of the team's accomplishment and their tremendous performance. In light vehicle, new business wins made over the past year are increasing our exposure in China and should support continued market outperformance in 2023 and 2024. The contracts are attractive for the business and are coming in at variable contribution margins comparable to 2019 levels as evidenced by the current profitability of light vehicle in Asia Pacific. Yet at the segment level, we have much more to do to return to historic levels of profitability. Below normal, auto production is still a drag on earnings. But price cost remains a core challenge for the segment and worsened marginally in the quarter. We will cover this in more detail on the following slide. It is our intent to fully offset the impact of raw material, energy, and logistics inflation on our businesses. This quarter represented an inflection point in our price-cost trajectory, as we more than offset year-over-year variable cost inflation for the first time since the current unprecedented inflationary environment began mid-2021. Inflation has proven to be more persistent than we initially expected at the beginning of the year. We now forecast a 2021 and 2022 combined impact of approximately $650 million. versus a $400 million initial projection earlier this year. However, the raw material market has become more favorable in recent months. We are now seeing greater availability of bulk commodities, enabled by softening in adjacent markets and improved global arbitrage given normalized global shipping and logistics. Pockets of pressure do remain, however, with EMEA energy inflation becoming more significant. Elsewhere, inflation is mostly isolated to specialties like additives and certain pigments. Therefore, we believe that Q3 represents peak inflation and we see an opportunity for flat to modestly lower unit rates in the fourth quarter. The anticipated raw material benefits will come through on slight lag as we turn over higher cost inventory on our balance sheet during Q4. Pricing remains a focal point for the teams given incremental pressures like higher energy costs in EMEA and the need to offset the remaining $100 million price-cost gap impacting our margins. Now I'll turn the call over to Sean to discuss our financial results, beginning with slide 11. Sean?