Axalta Coating Systems Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to Exalta's first quarter 2023 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 10th. 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 first quarter 2023 financial results conference call. Joining me today are Chris Villiver-Ryan, 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. Our prepared remarks, the slide presentation, and our 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 Chris.

Thank you, Chris. I'd like to welcome everyone to our first quarter 2023 earnings call, and we'll start by discussing the key highlights on slide three. I'm very proud of our first quarter performance. Through the commendable efforts of our global teams, we're outpacing growth in most markets we serve, driving incremental pricing, accelerating margin recovery, and improving execution across all our operations. Our first quarter adjusted EBIT was 149 million with adjusted diluted EPS of 35 cents, both of which exceeded the top end of our guidance range. Overall, I remain encouraged with the team's performance this quarter. To that end, I'm pleased to report an impressive 25% year-over-year increase in adjusted EBIT and 140 basis point year-over-year improvement in adjusted EBIT margins. This is Exalta's second consecutive quarter of margin growth as we begin to rebound from historically high cost inflation and post-COVID-19 impacts. Mobility coatings had the biggest increase in profitability growth with a 530 basis point year-over-year improvement in adjusted EBIT margins. Margin improvement was largely driven by over a 9% year-over-year price mix growth from new and carryover actions. This is our ninth consecutive quarter of price mix growth, which is up more than 18% over two years. Volume was another bright spot in the quarter, improving 3% year over year, despite a nearly 3% headwind from macro-driven volume declines in industrial and unfavorable impact from the Russia-Ukraine conflict. Volume growth was led by a double-digit gain in light vehicle and commercial vehicle, along with modest growth in refinish. We believe that most of our end markets are uniquely positioned to grow in the current macroeconomic environment. We have demonstrated this in the last two quarters. Today, we're seeing the benefits from market normalization in auto and truck production, as well as an increase in body shop activity. We believe considerable market upside still exists in the portfolio. I expect us to continue to outpace and market growth in mobility and certain refinish markets following the strategic investments we made in people, technical capabilities, and customer partnerships. For example, in February, we announced that Exalta was the recipient of three prestigious 2023 Edison Awards. making this our fifth consecutive year to be honored with this achievement. We attribute this recognition to our outstanding technical leadership and talent base that is leading the industry in innovative solutions. Our refinish business is aligned with the needs of a labor-constrained collision repair industry. Large multi-shop operators who are gaining share require incremental capabilities and productivity benefits, which I believe Exalta is uniquely positioned to offer. In light vehicle, we have deepened our relationships with many of the fastest growing EV automakers and some of the most attractive ICE platforms. And in industrial, our total solution offerings provide a breadth of capabilities to solve deeply technical and diverse challenges, creating market share growth opportunities for us. Please turn to slide four. My main focus since joining Exalta as CEO has been to drive improved execution across the company. We're prioritizing areas with the largest positive impact for shareholders, specifically price cost recovery, productivity initiatives in procurement and operations, and better cash conversion. It is our intent to accelerate the margin recovery currently underway. Let me give you some specifics. First, there's significant opportunity to expand margin in our industrial and light vehicle businesses where variable cost inflation has totaled more than 120 million cumulatively since 2021. I'm confident that carryover pricing contributions and targeted actions will drive steady margin recovery through the year. On cost productivity, we have a lot of activity underway. On an annual basis, Exalta has roughly $1.5 billion in fixed costs, net of DNA, and another $2.5 billion in variable costs. Given the large scale of spending, we anticipate even small improvements to yield a nice drop through to earnings. Our goal is to structurally reduce costs independent of market dynamics through productivity programs focused on procurement and operations. To date, We have launched market tests for most of our variable spend and are already seeing positive results. In addition, reduced freight rates and more dependable supply chains are creating a competitive marketplace. We're qualifying new suppliers and in some cases working with our technology organization to reformulate product formulas and spec in new suppliers to promote increased supply flexibility. We're removing bottlenecks and reinstituting best practices around our production planning process. We expect to drive improvements in labor productivity, expedited freight, and low volume and inefficient production behaviors, which have been persistent issues for us in the recent years. We're doubling down on inventory management with promising early results. Despite 3% volume growth in Q1, we reduced our inventory level leading to an atypical seasonal decline in the period. This is a good start to our inventory management for the year and supports our goal to unwind historically high inventory levels in order to drive better cash flow in 2023. I see significant opportunity to reduce fixed and variable costs, as well as to improve free cash flow. To expedite our performance, we have enlisted the support of external expertise which will drive a modest increase in expense mid-year that we have included in our guidance. We expect that returns on these investments will start to be realized in the back half of this year. Like every company, we're mindful of the uncertain economic environment and we're taking proactive actions to be prepared for whatever outcome may play out. Moving back to the results on slide five, I will now give you more color on first quarter volume performance. Globally, volumes have improved by 3% year-over-year driven by market recovery in mobility codings and share gains within the portfolio. While the economic climate remains difficult to forecast, the commercial environment across our end markets remains largely consistent. U.S. commercial and residential construction softened, creating a larger headwind for our industrial business this quarter than we had forecasted. Elsewhere, we see markets as largely favorable given the recovery in auto production, a robust environment for heavy and medium duty trucks, and the strengthening of body shop activity in key refinish markets that I've highlighted earlier. Moving to slide six, I will now cover the refinish business. Refinish is off to another strong start in 2023 as Q1 results were ahead of expectations. Price makes improved by 10% year over year with contributions from every region. In the quarter, we executed new pricing actions to offset pockets of incremental inflation. Market activity was largely consistent with the prior period. Parts and labor shortages continue to constrain our premium customer mix, while return to work dynamics are marginally better than we ended up in 2022. Volumes for refinish were favorable driven by continued execution of our growth initiatives, which target expansion of our MSO leadership positions. In the quarter, we added 400 new premium body shops and 140 new stock points locations for mainstream and economy customers. Refinish is also growing outside of our core products. Accessory sales in our company-owned stores exceeded budget targets in Q1, while the UPOL brands that we acquired in 2021 are driving growth in adjacent markets like body fillers and aerosols. March was a record month for the UPOL team, and we believe that significant opportunity still lies ahead. UPOL brings to Exalta the ability to grow the existing refinish business. It has also allowed us to pivot toward the highly attractive retail channel with market-leading solutions for the fast-growing automotive DIY consumer markets. Exciting new partnerships with AutoZone and O'Reilly position our aerosols and Raptor protective coatings in more than 16,000 US retail locations. We believe this puts us on pace to nearly triple our aerosol volumes in 2023 versus 2019. It is really exciting to see the refinish team execute across multiple horizons to drive growth and expand upon its record 2022 performance. Let's go to slide seven to look at our industrial performance. Constant currency net sales increased modestly in the quarter as very strong price mix growth of 11% year over year more than offset a volume decline of 9%. Price mix improved 3% sequentially as the team prioritized margin recovery. The industrial team also executed well on cost management, which helped to offset the volume decline. In EMEA, we believe that customer destocking over the past few quarters has slowed, but we are now feeling the impacts from weak North American construction activity in our building products business. Until we see a shift in housing starts or building sentiment, we expect volumes will remain somewhat challenged. In the meantime, we're focused on winning new business in attractive areas where our technology leadership is rewarded. Abcide 2060 and our self-priming kitchen cabinet coatings were both recently recognized with Edison Awards that I mentioned earlier. Moving to mobility coatings on slide eight. Mobility coatings exceeded expectations as pricing, volume, and margins were all slightly better than expected. We're on a good trajectory and I expect to show margin improvement as we continue through the rest of the year. Light vehicle 2023 production forecasts have modestly but steadily improved year to date. Industry forecasters now project more than 85 million global bills representing nearly 4% growth over 2022. This incremental volume growth is driving improved fixed cost performance in our business. In commercial vehicles, results have been consistent. We believe there is a robust multi-year outlook for the business. For Class 8 OEMs, backlogs remain elevated, especially in North America. I expect pent-up demand and backlogs to help drive another strong year in 2023. Elsewhere, There are mixed 2023 trends with better medium-duty expectations balanced by some softness in rail and the RV market. With that, I'll turn the call over to Sean for a review of our financial performance.