Axalta Coating Systems Ltd.

Please stand by. Your program is about to begin. If you need audio assistance during today's program, please press star zero. Ladies and gentlemen, thank you for standing by. Welcome to Exalta's Coding Systems Q4 2024 earnings 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 February 11th. 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 Colleen Lubeck, Vice President of Investor Relations. Please go ahead.

Thank you and good morning. This is Colleen Lubeck, Vice President of Investor Relations. We appreciate your continued interest in Exalta and welcome you to our fourth quarter and full year 2024 Financial Results Conference Call. Joining me today are Chris Villa-Varion, CEO and President, and Carl Anderson, Chief Financial Officer. We released our financial results this morning and posted a slide presentation 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 this slide presentation also contain various non-GAAP financial measures. We've included reconciliations of these non-GAAP financial measures in the most directly comparable GAAP financial measures. Refer to our filings with the SEC for more information. Please note that we did recently update the presentation for certain of our non-GAAP measures as described in the current report on Form 8K that we furnished the SEC on January 21st. I will now turn the call over to Chris.

Thanks, Colleen, and good morning, everyone. Let's move to slide three. I'm excited to share that we achieved another record fourth quarter of full-year net sales and adjusted EBITDA. 2024 represented the highest net sales and adjusted EBITDA in our history. These outstanding results were made possible by the collective efforts of our global team as One Exalta, the culture that we have established with our aid plan that has brought our priorities into focus. Despite weakness across all our four end markets, we outperformed consistently this year in light vehicle and refinish, our two largest end markets, I want to express my appreciation to the Exalta team for their dedication throughout the year that has clearly paid off with these great results. We delivered fourth quarter company record net sales of $1.3 billion. Contributions from the CoverFlex acquisition in our refinish economy segment, net new body shop wins, and above industry growth in light vehicle more than offset a softer macroeconomic environment. and foreign currency headwinds. Adjusted EBITDA increased by 10% year-over-year to a fourth quarter company record of $275 million. We delivered this result despite meaningful foreign currency headwinds in our fourth quarter not anticipated in our prior guidance. This represents the 10th consecutive quarter of year-over-year adjusted EBITDA growth. Adjusted EBITDA margins improved by 170 basis points versus the prior year to 21%, which, as you know, was the margin objective set in our 2026 A-Plan. We're proud to deliver this result well in advance of our target date. Margin expansion was driven by favorable impacts from price mix, lower variable costs, savings from our transformation initiative, and conversion on revenue from light vehicle volume growth. As you can see on this chart, adjusted diluted EPS was another great story for Exalta, growing 30% year-over-year to $0.60 in the quarter. In addition, our balance sheet continued to improve, with total net leverage ratio declining for the eighth consecutive quarter for another company record of 2.5 times, the high end of the range that we set in our A plan. Let's move to slide four. Culture is at the foundation of our transformation. As demonstrated by the strength of our financial results, we have aligned the organization around the tenets of accountability, execution, and operational excellence. We are committed to safety in everything that we do and strive towards zero incidents. This year we achieved a TRIR of 0.3 and reduced our injury rate by approximately 50% compared to two years ago. In addition, we made investments in our operations and engineering, streamlined and optimized our organizational structure, and brought our corporate employees together under one roof at the Navy Yard in Philadelphia. Specific to operational excellence, we enhanced efficiency, reduced costs, and improved profitability across our manufacturing sites and supply chain. Notably, we reduced variable costs by 7%, improved delivery times by 10%, and began the closure of two manufacturing sites, one in North America and the other in Europe, which will optimize our operations and improve our fixed costs. Combined efforts across operations, procurement, and product management reduced complexity in our manufacturing sites. We made good progress in reducing the number of SKUs while creating common raw inputs across our portfolio. This work is paying off. Our transformation savings are already ahead of plan. having achieved approximately $20 million in 2024 towards their goal of $75 million as described in the A Plan. Growth is a major pillar of our A Plan. Our teams executed strategic plans to win new business and deliver industry outperformance in a year where all of our end markets were down single digits. Due to their efforts, we secured approximately 2,800 net new body shop wins in refinish and completed the acquisition of the CoverFlex Group, which positions us well in the fast-growing economy segment. We drove full-year light vehicle net sales growth of 5% despite a decline in global auto bills. And in industrial coatings, we increased our margins and earned accretive new business, which will ramp up to around $40 million at full run rate in 2025. At this point, I would like to take a moment and thank Shelley Bausch for her valuable contributions to Exalta as president of the industrial business over the past few years. She is responsible for returning the industrial business to profitability and pivoting it towards accretive growth in a challenging macro. As you may know, we announced a couple of weeks ago that Shelly is stepping down from her role at Exalta. Tim Bose, who most recently was Senior Vice President and Chief Transformation Officer at Exalta, will succeed Shelly. Tim has a strong track record of driving margin growth and business transformation. He was an excellent choice to take this business forward. Another key pillar of the A-Plan is sustainable innovation, which is what makes Exalta a global leader in coatings. We continue to push the boundaries in all end markets and have been widely recognized for these efforts. We have talked about the expected benefits of our game-changing Exalta Iris Mix Machine. We are progressing well with the adoption of this new technology, installing 300 to date, We expect this number to nearly double in 2025. This machine, combined with Exalta Iris Scan and Exalta Nimbus, delivers a full package of cutting-edge tools that measure and mix color faster and more accurately, driving efficiency and effectiveness to our Body Shop customers. In January, we announced a strategic partnership with DERR. or automotive digital paint solutions, combining Exalta's groundbreaking technology with Dura's robotic experience. Dura will serve as the robotics integrator for Exalta's NextJet or light vehicle OEMs. I believe this agreement is an important step in delivering the vehicle customization customers desire and is driving the future of digital paint technology. During 2024, Exalta was recognized with six prestigious industry awards for technology and innovation, three Edison, two Big, and one R&D 100. These achievements bring Exalta's total to 24 innovation awards over the last five years and demonstrates our commitment to developing smarter and innovative solutions for our customers. Let's turn to slide five. By all measures, 2024 was an excellent year for Exalta. We had the highest fourth quarter and annual net sales in the history of the company. We exceeded $1.1 billion in adjusted EBITDA for the first time and expanded our full-year adjusted diluted EPS by 40%. I'm encouraged by the significant performance we have demonstrated in our financial results since May, when we released our 2026 A-Plan, which is proving to be a great framework for value creation. With adjusted EBITDA margins at 21%, self-help programs in place and working, and a strong commercial playbook, we're establishing a strong foundation for long-term value creation. I will now turn the call over to Carl to go through our financial results and 2025 guidance.

Thank you, Chris, and good morning, everyone. Before I comment on our performance, I wanted to note changes to certain of our non-GAAP financial measures that we announced in an 8K on January 21st. In order to align more closely with our peers and market practice, as well as following the resolution of an SEC comment letter, We are ceasing to adjust for step-up depreciation and amortization from the acquisition of DuPont performance codings in the calculation of adjusted EBIT and adjusted net income beginning with the fourth quarter of 2024. Concurrently, we are beginning to adjust for the amortization of all acquired intangibles in the computation of those same metrics. These changes will also impact the calculations of return on invested capital and adjusted diluted earnings per share. The metrics reported today reflect these changes, and comparable historical information is available at Exalta.com. For the full year 2024, step-up depreciation and amortization from the acquisition of DuPont Performance Coatings was $48 million, and the amortization of all acquired intangibles was $92 million.

Please turn to slide 6 for a review of our fourth quarter results.

Fourth quarter net sales increased by 1% year-over-year to $1.3 billion, primarily driven by a 2% price mix impact and the acquisition of Coverflex, partially offset by foreign currency translation and lower volumes. Gross margins were 34% in the quarter, an increase of 150 basis points from the prior year period, while income from operations increased $25 million. Improvement was driven by price-mixed contributions and lower variable costs. We experienced some additional benefit from lower raw material, energy, and freight expenses when compared to last year in the fourth quarter. For the full year, variable costs declined 7%. Currently, we see inflation in certain areas, but overall excess supply in many sectors continues to be our primary factor in prices. In 2025, we anticipate minimal raw material inflation in the first quarter and project that we will experience low single-digit inflation for raw materials for the full year 2025, which we expect to offset with our productivity programs. We remain disciplined in managing our fixed operating expenses in the quarter. SG&A was roughly flat compared to last year, as the benefits from productivity programs and the transformation initiative came in ahead of plan, which minimized the impact of higher labor costs. Adjusted EBITDA in the quarter was $275 million, 10% better than last year, marking a fourth quarter record. Adjusted diluted earnings per share increased 30% to $0.60 per share, exceeding our expectations primarily driven by lower tax and interest expense. Fourth quarter 2024 cash provided by operating activities was $234 million and free cash flow totaled $177 million. The year-over-year decrease was driven primarily by increased planned capital expenditures as we continue to focus on scaling up our investments into our business. Additionally, higher-than-anticipated working capital was driven primarily by account receivable timing and lower payables resulting from inventory reductions. Moving to slide 7. Performance Coding's fourth quarter net sales declined 1% year-over-year to $843 million, primarily because of lower volumes and unfavorable foreign currency translation. These headwinds were partially offset by contributions from the CoverFlex acquisition and positive price mix in both end markets. Refinished net sales increased 2% to $545 million in the quarter. Incremental contributions from acquisitions and net body shop wins helped mitigate foreign currency headwinds and volume declines from industry trends. Industrial net sales declined 5% year-over-year to $298 million due to volume declines predominantly driven by demand weakness in North America compared to the prior year period. Industry conditions remain soft in the fourth quarter, and we expect this to continue through the first quarter of 2025. Despite the macro conditions, we expanded adjusted EBITDA margins by approximately 300 basis points this year, and are on track to exceed the 400 basis point margin improvement objective set in the A Plan. Fourth-order performance coatings adjusted EBITDA increased 4% year-over-year to $198 million. Adjusted EBITDA margin increased by 90 basis points to 23.5%, primarily driven by lower variable costs, favorable price mix, and contributions from Coverflex.

Let's move to mobility coatings results on slide 8.

Mobility Coating's fourth quarter 2024 net sales were $468 million, an increase of 4% from the prior year period. Light vehicle net sales grew 9% in the fourth quarter. Volumes increased 6% year over year, even as global auto production was down 5%. The volume growth was primarily driven by China and Latin America, which more than offset anticipated declines in North America and Europe. Price mix was a mid-single digit tailwind in the quarter, driven by the timing of pricing benefits when compared to the fourth quarter of last year. Commercial vehicle net sales declined 10% year-over-year, predominantly driven by a 13% drop in Class A production in North America and Latin America, which was consistent with the prior guidance framework. Mobility coatings adjusted EBITDA in the quarter improved to $77 million from $59 million, a 29% increase year-over-year. Adjusted EBITDA margin improved by 320 basis points versus the fourth quarter of last year, coming in at 16.4%. In addition, the full-year adjusted EBITDA margins of our mobility business ended the year at 15.3%. Through commercial courage and operational excellence, we have more than doubled the mobility coding's adjusted EBITDA margin in two years. Turning to slide 9 for a review of our full-year results. Net sales grew 2% year-over-year to $5.3 billion, a new company record. The improvement was driven by late vehicle volume growth and contributions from acquisitions, partially offset by foreign currency translation headwinds largely impacting the fourth quarter. Volumes grew up modestly on a full-year basis as growth in mobility codings was offset by a low single-digit decline in performance codings. We also achieved a record full-year adjusted EBITDA of $1,116,000,000, predominantly driven by lower variable costs, positive price mix, and an approximate $20,000,000 benefit from our transformation initiative announced early in 2024. Adjusted EBITDA margin improved by 280 basis points to 21.2%, achieving the full-year margin target outlined in the 2026A plan two years earlier than planned. Adjusted diluted earnings per share increased by 40% to $2.35. We plan to remain disciplined and strategic with capital deployment, which we expect will drive near double-digit EPS growth over the next several years. And finally, free cash flow of 451 million was roughly flat to the prior year, as higher earnings were offset by higher working capital. Turning to slide 10, We are excited to announce that we ended the year with a net leverage ratio of 2.5 times, which is almost a half turn better than a year ago and is in line with the top end of our 2026 A-Plan target. Our balance sheet is now in a much stronger position, which provides greater optionality in how we can deploy capital going forward to create shareholder value. In the fourth quarter, we paid off the remaining $105 million of revolver borrowings that was used to help finance the CoverFlex acquisition. We ended the year with $1.4 billion in total liquidity, including a cash balance of approximately $600 million. Capital outlays in 2024 amounted to approximately $630 million deployed, with $300 million for M&A, $140 million in capital expenditures, approximately $90 million of gross debt reduction, and $100 million in share repurchases. In 2025, as outlined in the A-Plan, we intend to increase CapEx to approximately $175 to $190 million, as we believe there are significant investment opportunities to drive productivity in our operations. We have 600 million remaining in share repurchase authority in a pipeline of accretive M&A opportunities, which we plan to evaluate in 2025. And finally, we continue to make excellent progress on our return on invested capital target of 15%. In 2024, we expanded ROIC by 270 basis points to 14.6% and have line of sight to potentially achieve our target this year. Let's turn to slide 11 for our view on 2025 guidance. The new tariffs put into place by the US government on Canada, Mexico, and China have the potential to create a challenging global trade environment. The duration of these actions and the ultimate impacts of global demand remain uncertain. Specific to Exalta, a majority of our raw materials are bought within the local trade borders where we produce. In addition, Less than 10% of the raw materials used in our U.S. production are imported from China, and we have minimal raw material purchases from Mexico and Canada. We are actively evaluating resourcing some of our direct material buy and will explore pricing actions as appropriate. We also believe there is excess capacity in the U.S. for certain customers to shift some production if required. Understanding that this is obviously a fluid situation, We are forecasting a full-year adjusted EBITDA impact of $10 million from tariffs, which is included in our guidance. The demand impact is still being assessed through discussions with customers. However, we still believe that net sales in 2025 will grow by a little single digit. For the full year, we expect revenues to be in a range of $5.35 billion to $5.4 billion, with positive contributions from both segments. We expect macro volatility to extend into 2025 and have plans to remain agile and execute against our strategy. In our refinish business, we are expecting industry volumes to be flat to down low single-digit percentages in both North America and EMEA. We are expecting to continue to gain share in both regions from body shop gains, increase sales from accessories and do-it-yourself in retail, and we plan to harness the full value of CoverFlex that should more than offset industry volume declines. In addition, we plan on driving pricing actions across all regions that will take effect in March. Overall, we are planning for another record net sales years in our refinished business. In industrial, we expect global industry volumes to be flat to up low single-digit percent versus 2024. Industry conditions in Europe are still challenged, which we expect to continue at least through the first half of 2025. Industry dynamics aside, we will continue to focus on gaining accretive growth, customers, and margin improvement consistent with the A-Plan strategy. For light vehicle, we assume global auto production will be in line with current industry forecasts of approximately 89 million bills. Our volume should continue to outpace global trends primarily due to customer mix and new business winds in China and Latin America. Lastly, in commercial vehicle, we assume North America Class 8 bills will remain below prior year before demand ramps back up in the second half and into 2026. Overall production is forecasted to be flat compared to 2024. For the full year, we expect adjusted diluted earnings per share to be between $2.50 and $2.60 per share, which is an increase of approximately 9% above 2024 at the midpoint of the range. Adjusted EBITDA is expected to be between $1,150,000,000 and $1,175,000,000, translating to an adjusted EBITDA margin of greater than 21%. Our guidance includes flat variable costs versus 2024, plus approximately $10 million in direct tariff costs. We also expect that our transformation initiative will drive $30 to $40 million of incremental benefits this year, mitigating headwinds from labor inflation. Full-year free cash flow is expected to be approximately $500 million in 2025, which assumes increased capital expenditures partially offset by reduced cash interest. I will now hand the call back to Chris to review slide 12 and provide an update against our A-Plan targets.

Thanks, Carl. We did a tremendous job accelerating performance in 2024 and have an opportunity to pull forward our A-Plan if the macroeconomic environment is more favorable than we anticipate. We expect to achieve greater than 21% adjusted EBITDA margins and deliver more than 50% in adjusted diluted EPS growth for next year against 2023 at the midpoint. This will be another year to stay focused and execute the key initiatives within our control. Our team is poised and ready, and I believe 2025 will prove to be another powerful story for us. Thank you for joining us today. This concludes our prepared remarks. Operator, please open the lines for Q&A.

Thank you very much. At this time, if you would like to ask a question, please press the star 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star 1 to ask a question. We'll take our first question from Mike Leathead with Barclays. Please go ahead.

Great. Thanks. Good morning, guys. Two questions for me on mobility. First, in light vehicle, 6% volume growth is a big number. So is that mostly a dynamic of your customers winning share or are you winning like for like market share as well in the coatings market? And then second, price mix of 4% of the segment. seems also like a big number. Is that mostly mixed dynamic or just help us better understand how you got there?

Well, I'll start with that. Good morning, Mike, and happy new year. And I'll start with the first one and I'll turn the second one over to Carl. Specific to the mobility wins, it's actually a combination of both. First, as you can see, over the last nine quarters, we made choices with partnering with the right local players, primarily in China, as well as the new wins that we're seeing in LATAMs. And so we're winning customers beyond what I would call market. We're gaining market share here. And we can significantly see that quarter over quarter. You know, especially if you look at China, we've had double digit growth through many of the quarters over the last year. When you look forward as well, the customers that we chose, that are growing. We've picked EV players as well as players that are in the ice market that are really growing market share beyond what we can see that the overall market is growing. And this is driven by two areas, not only their performance in China, but also their growth in Southeast Asia. We're seeing how well they're doing, whether it's in Malaysia, Indonesia, exports into Sri Lanka, even Australia, New Zealand. It's really playing well and we've partnered with the right players as well as we've partnered early on with customers that we believe our market share is growing beyond.

And Mike, just on your price mix question related, part of it is mix just with the different products and businesses that we came in in the fourth quarter this year compared to last year. The other component was a year ago in the fourth quarter of 2023, There was, you know, the comparison also provides a little bit higher price mix when you compare it to what happened a year ago.

Great. Thank you, guys. Thank you.

Our next question comes from Chris Parkinson with Wolf Research. Please go ahead.

First of all, an obligatory, go birds. Hopefully the city of Philadelphia has fully adopted you guys. When we take a step back and look at what's happening in the refinish market and we just look at the claims data over the last year, you're clearly outperforming. We know you want some decent-sized customers. There's some very decent-sized customers in the U.S. You're penetrating Iris pretty well in Europe. Can you just go ahead and give us some additional color on just how to triangulate how you perceive your relative performance in your two primary geographies over the next 12 months and what the investment community thinks? should be monitoring to confirm that outperformance. Thank you so much.

Yeah, thanks, Chris. And yeah, certainly looking forward to this weekend. But, you know, a lot of it is we set out a strategy focused on four pillars, you know, driving, continued body shop wins, moving into adjacencies, driving into the retail segment, as well as M&A, okay, with what we in 24 in what was a low and declining market. And as we look at 25, the market is no different across our two major geographies, as you've defined as Europe and North America. So from our perspective, we're going to be focused across those four elements going forward. Last year was a great story for us. We've averaged on 2,500 body shop wins is what we've always talked about, as you know, Chris. And over the last four years, we've done 10,000. But last year, we did 2,800. And so if you look at next year, the team is very, very focused on continuing to drive that body shop win and staying well about plan. That's the first thing. The second one, we're going to continue to look at a creative M&A. CoverFlex has been a great story for us. A year and a half ago, Andre Cohen, an acquisition that allowed us to go into distribution in Europe certainly played a great part. And on top of that, through our retail stores, we're going to push more in terms of adjacency. So what can we push in terms of fillers and putties and things like that that we got out of our UPOL acquisition? That's certainly another element. And the final part of this is really The, the Irish mix launch, so we did 300 last year. Our expectation is to double this this year, mostly in Europe, so that we can continue to drive that. We expect the market to be weaker as we have defined flat to weaker. What's different between the two years? I would say weather is a little different. I mean, destocking, you know, consumers pulling out, whether it's from high insurance rates or essentially pocketing the insurance claims, that those are the challenges we're facing. But I would say weather is something that has been different. Obviously, when you compare to 24 in Q1 and what we are seeing in weather with the snowstorms all the way along the East Coast, as well as snow all the way down to Florida and the devastation on the West Coast, we haven't seen it through. We're not expecting it. But if that comes through as a tailwind in Q2, that's certainly something we will be watching for.

That's very helpful. And just as a quick follow-up, you know, at your analyst day last year, you spoke a lot about industrial skew rationalization and, you know, certain things seem to be well ahead of schedule throughout mid-year. And it also seems as though you were able to raise price on certain substrates a little bit better than perhaps you were previously anticipating. Could you just give us a quick update on how the streets should be thinking about those dynamics in the 25th? Thank you.

That's a great story for us, Chris. I just purely focused on the margin story, and then I'll get into the sales story a bit. From a margin story, you know, when we released the A plan just nine months ago in May, we had a plan to get 400 basis points of margin improvement. And if you listen to Carl's script, you know, we've basis points out of that. Shelley's done a great job driving that, and I believe Tim will certainly accomplish the 100 basis points. And I do believe there's actually upside on the margin story in industrial. So I believe we can get better than what we have defined in the A plan by just continuing to focus on margin here. And that does involve a little bit more rationalization of the portfolio, which we'll be focused on. What's interesting is even with all that drive, we were able to get $40 million of new incremental business. From a perspective of market, it's actually the only market we're defining for next year to go up, to be flat to up slightly. And my expectation is with the administration's focus as one thing towards driving the economy, my expectation is we should expect to see something year, number one. Number two, the areas where we play. So the building products business that we play in North America, my expectations is that would pick up in the back half, as well as energy solutions. Energy solutions, we are getting pulled, especially from a customer perspective with all our EV work in China, towards really entering that market and seeing that those businesses sit inside our industrial business. So battery coatings and what we do for motors, coatings for motors such as impregnating resins, all fits in our industrial business.

And my expectation is we would see some more growth there in the back half of the year.

Thank you so much.

You're welcome, Chris.

Our next question comes from John McNulty with BMO Capital Markets. Please go ahead.

Yeah, good morning. Thanks for taking my question. So as part of the transformation initiative, I think you've got $30 to $40 million of efficiency that are expected to come in, I guess, this year. I guess, can you help us to think about if there are any additional levers to pull, especially if the macro or tariff issues get a little bit worse than expected? Do you have different things that you can pull to adjust that to maybe accelerate it a little bit faster or get bigger numbers from it as we look through 2025?

Yeah, good morning, John. Yeah, I think it's a fair characterization is that we do have additional levers that we would have at our disposal and that we're actively working on. So I think as you think about the transformation activities, there's probably a little bit more we can do for that this year, potentially. But I think some of the other areas for us is whether it's when we've talked about it previously would be on our freight cost and some of the logistic works that the team is doing. You know, we have really, you know, significant plans to kind of, you know, have that really impact us in 26. But I will tell you, there's a lot of energy and trying to see if we can pull that forward a little bit in the 25 as well. Also, I think for us, as we think about productivity within inside the company within our within our plant network, that continues to be a very, very big focus for us. You can see it. You know, we have a pretty significant step up in capital expenditure. as we think about some of those levers for this year.

Got it. Okay. No, that's helpful. And then I guess just the second question just is on the balance sheet. So you've executed it as you kind of expected. You've got the balance sheet in pretty solid shape. I guess, can you speak to what you're seeing in terms of opportunities out there? It sounds like the M&A markets may be starting to kind of reopen up again? I know you had some success over the last couple of years, even when they were somewhat closed. But I guess, what are you seeing from an M&A pipeline perspective? And should we assume that if it doesn't happen, if things don't materialize, it goes primarily towards buybacks?

Yeah, this is certainly something that, you know, Carl and I bounce off back and forth here, John. But certainly, you know, from where Carl and the finance team and a half times leverage here at the top end of our A plan. From my perspective, we're here a year and a half ahead of plan. And I also look at it as a great place from where the marketplace is. I think the current volatility in the marketplace is actually creating more opportunities for M&A for us. And I think the best way I can characterize this is you should expect to hear more in the next couple of quarters. We do see the opportunity to do more in M&A as long as it certainly hits our OIC targets or our return targets. But with how the company has performed structurally, where we're taking it operationally, I certainly see this at bolt-ons that we can continue to create value. The last two certainly have helped us do that, and especially in this environment, we can continue to do more here.

Great. Thanks very much for the call. You're welcome.

Our next question comes from Mike Cezanne with Wells Fargo. Please go ahead.

Hey, nice end of the year. I guess I had a question on the refinish market. You sort of noted it would be kind of flattish this year. It really hasn't helped you a lot, although you've been able to grow through not a lot of growth in the market over the last couple of years. But where do you think we are in the refinish market? Is it a market that could grow the next couple of years? I don't suspect we peaked here. Just give us some of the dynamics that you see that could maybe help grow the market over the next couple years? And on the flip side, what risks do you see in 2025 as the macro just seems challenging again? Thank you.

Thanks. Yeah, good question, Mike. I think, you know, as you can see, what we're forecasting for the market is for it to be flat to down a little bit. And so what's driving it? I think there's a lot of factors. There are factors that I believe are transitory, and I think there are factors that I would argue we need to wait and see and watch, which are more structural. And so in terms of factors that I would call are transitory, insurance rates, with where inflation is and where consumers are and folks essentially deciding to pull spending on fixing their cars to essentially buy groceries. I think those are elements that consumer confidence can certainly change that as well as any drop in insurance rates. Also, something that will be a tailwind for us is you got to remember where backlogs were in body shops, right? I mean, you go back to 23, backlogs were all the way to up to six to eight weeks. Right now, we're actually getting back to normalized backlogs. I would call it two to three weeks. And you would ask why so? I mean, if I had to wait eight weeks to fix my car, I'm either not, I'm just going to cash it and just work with the car I have, especially if it's a minor collision. or you have other conditions where you have insurance companies also making calls when you're right on the edge to write off the car. So I do believe there are elements that are transitory. Elements that I would say that we have to wait and see how this plays out is obviously the destocking that we've seen in the marketplace, a lot of which we saw in 24. two very large distributors coming together and consolidating, you would see that they've probably optimized their inventory platform. And so do you see that coming back? Probably not. So those are the things that we're balancing over time. My expectation is all the transitory elements when you start taking all that together, plus the fact that I do believe if you look at the United States, if you look at what we're driving to return to work and miles, those are all going up. So my expectation is over time, this will change. But the way we're forecasting it, just as we did in 24, is to expect this market to be flat to down so that we overperformed. So even in this market, even in 25, we're putting that as our forecast so that we keep our teams overperforming. And anything that comes on top of that will be upside. And again, as I answered, you know, Mike's first question, if, you know, weather, which we haven't tracked in all of this, you know, with the significant weather that we have seen this year. And again, this is something that you usually see a quarter later in Q2 or Q3. That could be a tailwind.

But again, this is not something that we're counting on at this point. Great. Thank you.

You're welcome. Perfect. Our next question comes from Vincent Andrews with Morgan Stanley. Please go ahead.

Thank you, and good morning, everyone. I'm wondering if you can touch a little bit more on the free cash flow. You'd raised the free cash flow guidance at 3Q, so I think about $500 million, and I think you wound up coming in below the prior guidance. So could you just bridge us to what happened between where you thought things were going to be at 2Q, 3Q, and 4Q? And then, you know, that shortfall this year, you know, how much of it do you think you can make back up next year? I see you've got it to $500 million, but that was kind of what you were expecting for this year. So if you could just help us from 2Q all the way through next year, that would be great.

Yeah, good morning, Vincent. Yeah, I think for pre-cash flow for us, this was really just working capital and from a timing perspective. So if we kind of look at kind of what happened, and this is on a year-over-year type of kind of comparison as well, We had about a $70 million, you know, working capital, you know, higher working capital this year than what we kind of did a year ago. And so, relative to the guide, it's really just the timing of some of the receivables and collections as it relates to that. You know, our account payables, you know, if I look at my DPOs, we're down probably six to seven days as well in the quarter. So, we do think a lot of that will reverse itself and come back into 2025. We did kind of go forward with just the $500 million of free cash flow as a starting point. But as I look at the business, I would expect that should definitely be the floor. And we would hopefully drive that up as we go throughout the year, depending on, obviously, market conditions.

Okay. And as a follow-up, the wins that you've had in light vehicle, I think you cited better than industry performance in none of the last 10 quarters. Have those wins been on index-based contracts or have they been on fixed-based contracts or no notable trend between the two?

It's a combination of both, I would say, as far as on those type of wins that we've had to date. So some are index-based, some are not. Obviously, it depends on the jurisdiction and really the end customer as we think about that, Vincent. But I do think You know, a point on Latin America for us, it was a very, very strong quarter. And that's where we still have pretty significant upside as we kind of go forward. So we did increase the total wins that will be beginning to come in this additional wins that will be coming in in 2025. So we're now we're seeing that 60 to 70 million originally, I think we kind of gave a 50 million number. So that business will be rolling on here over the next 18 months. So we're very excited about just what we're seeing specifically in the Brazil market.

Just maybe only to add to that, Vincent, in terms of jurisdictions, as you know, we moved our RMI indexing from about 30% of our total in mobility up to over north of 50%. And it depends on the regions. For example, in LATAM, Because there's so much volatility, we avoid RMI indexing or having something because the customers are used to having conversations at a much faster pace than if you were in other regions like North America or Europe. Okay.

Thanks very much. That's helpful.

Thank you. Our next question comes from John Roberts with Mizuho. Please go ahead.

Thank you, and congrats on a nice quarter in guidance. Do you think you'll be providing new multi-year targets once you've hit all of the 2026 aid plan targets?

Absolutely. My, you know, if you really look at this, you know, with a little bit of help from a macro, we're forecasting all our macros to be down with this slight improvement in industrial. But, you know, just finishing on page 12, and if you really look at the performance of the of where we are against our A plan. And, you know, something that we just released in May of last year, you know, and even if you look at sales, sales would be up a hundred million more if it wasn't for FX. My perspective is we can accelerate a ton of this through 25. And so my hope is that, you know, maybe by the end of this year, but certainly by the beginning of next year, we release our next plan and we show you guys where we of the performance that we've had to date with this company. And I do believe there's a great upside with what else we can do with it.

And I apologize if I missed this, but how are you thinking about FX for both the March quarter in full 25, both sales and EBITDA?

Yeah, I think, John, as we think about full year, we're planning somewhere between $80 million to $100 million of FX headwinds on a year-over-year basis. So call that you know, 1.5% to close to 2% on a year-over-year comparison. In the first quarter, we're seeing pretty close to around, say, 25, most likely $30 million of FX headwinds in the first quarter. And, you know, if you think about the EBITDA impact on that, you know, maybe just from a Q1 basis, it's probably in that $5 million range, which is also similar to, actually, if you kind of go back even into the fourth quarter of last year when we put the guide out for the year, You know, we did have FX kind of really move against us relative to our guide in October, and that was probably another $5 million headwind that we had on EBITDA for Q4.

Thank you.

Thank you. We'll next go to Duffy Fisher with Goldman Sachs. Please go ahead.

Yeah, good morning, guys. Question, just when you guys talk about, like, let's say the 2,800 wins you had last year in refinished, Help us with the economics on that. What would the average sales be on a win? And then what do the margins look like initially? Do you come in below average and then grow into it over a couple of years? Or how do we take those numbers and roll those through a model?

So we don't break that out to that level of detail. But one thing I would say is it would be, I mean, as you can see in the performance of the business, overall year over year, even if you take out a bit for pricing, what you can see is it's coming at or accretive to the margins in the refinish business. So I think that's the best way to characterize that. But we don't break out the sales per shop or provide an average in that sense. Duffy, but one other thing for you, another way to look at this is we also provide a net number, right? So this is inclusive of what losses we have. So every time you look at this number, just look at it as always incremental sales for us that's coming into the portfolio. And so you take that and you know what we do on average for pricing for the business, and you can quickly get a sense that as you can see the improvement in the business year over year, that it's coming in at or slightly accretive to the overall margin of the business.

Yeah, and Duffy, if you look at just performance codings, in total for the year 24, the margin expansion was 250 basis points. Obviously, part of that was industrial, but with refinish being the larger component of that, you could see that even with all these new wins coming on, there was still expansion during the year, which is consistent with how we think about when we go to markets.

Thank you. And then just the 10 million number that you gave out for tariffs, is that incremental just on the tariffs that are kind of being talked about, you know, the Mexico, the China, the Canada, or is that inclusive of things like the anti-dumping on epoxy in TiO2 into Europe that have kind of already occurred? And if it's not inclusive of those, roughly how big has that hit been on some of these raw materials that are getting anti-dumping?

Yeah, so I think we looked at, obviously, as we were preparing yesterday with the fluid situation, the 10 million was really attempting to incorporate both what we did in the 10% in China, as well as what we saw from Canada and Mexico yesterday. Obviously, there's a 30-day reprieve on that. So it's probably a little bit less than 10 million as we think about it now, just based off what we're seeing from Canada and Mexico. But as relates to, you know, some of those other anti-dumping, you know, TIO2, that's kind of already fully loaded into our outlook at this point. I think the teams have done, you know, a good job in managing around that as we think about whether that's through alternative sources, whether that's just some other productivity initiatives that we're executing.

Terrific. Thank you, guys. Thank you.

Just one last thing for you, Duffy. On the $10 million, I mean, obviously, this is a full year of you as a team. It's not like we found out about tariffs in the last week or on Saturday. We've obviously known tariffs were coming for a couple of months here. One of the things that we are working is looking at onshoring and also making sure some of our suppliers have strategic inventories on continent or in the United States. And so, certainly, so that's our top end of our number based on what we got from just the weekend.

But we do, there's mitigation activities that we can certainly drive towards that. Thanks again.

And we'll next go to Gancham Panjabi with Baird. Please go ahead.

Hey, guys. Good morning. You know, Chris, obviously a lot of progress on your self-improvement initiatives last year. Maybe you can share some specifics in terms of what we should look forward to in 2025 at Exalta. And then for my second question, you know, Carl, in terms of the EBITDA improvement, 24 versus 25, let's say 50 million plus or minus, can you just summarize the bridge items? I know you called out cost savings of 30 to 40 and then, you know, a bit of a tariff impact. But just, you know, what are you embedding sort of for base volume and price on a core basis, excluding CoverFlex? Thanks.

So, I'm going to start thanks for the question and happy new year. Hey, so, you know, if I think about the self help, and if I broke it up into the 3 or 4 initiatives, you know, the overall under our transformation initiative. 1 of the 1st things that we had is, you know, to look at our, we had. you know, a plan to reduce 5% of our salaried workforce, around 600 folks, as you know, with what you saw in how we announced it last quarter, or for the full year of 23, we had a target of 10 million for last year, we accomplished 20 million. Our target for this year is about 30 million. And conceptually, with the, let's call it negotiations that we put in place, inclusive of the two Plans that we had in Europe and North America to close, we are on schedule or there might be a little bit of upside, but our expectation is to still hit that 30 million. In terms of what are the other initiatives, the other one was supply chain. And again, with the current dynamics in terms of volumes and where things are moving, this remains still a very, very strong opportunity. And we certainly see this as something that we can continue to drive here. Overall, across this, over the three-year plan, we had about $25 million, and that's certainly something that we're going to continue to drive. Now, I think to that question in terms of the next one is productivity within our plans. And to the question about, you know, our free cash flow impact or our working capital impact, one of the elements is, you know, capital in Q4, if you noticed, actually doubled from Q3. And what we're doing is really investing in our plants to start driving productivity. Now, that's not going to come quickly, but my expectation is we're certainly going to be in a different spot in 26 because of the levels of investments that we're putting. Half of that investment was needed because it's sustaining. Going through COVID, there was a lot of capital or a lot of investments that we did not make, but I would call it a quarter to another half of it is driven towards certainly will come into fruit in about I would say the back half of this year into 26 so those are the elements that I believe are what's still left on the self-help front that will certainly keep us going in the right path as I look to where the markets are heading for 26 but 25 yeah I got some just the the bridge on just EBITDA here over here it's relatively straightforward and simple the way that we're looking at it so I would say on the

Uh, incremental 100Million or so of higher revenue. Um, you know, that, you know, kind of at the mid point, you should expect us to convert at that, uh, you know, at 35 to 40%, so call that 30 to 35 to 40Million dollars, which will kind of get you to the low end of the guide. Everything else being equal. You know, as relates to the transformation initiatives of the 30 to 40 million, we believe that will be somewhat offset with labor inflation that we are expecting this year, as well as the potential impact from tariffs. I think above and beyond that, where there could be further opportunity to get to the higher point would be, you know, again, right now we are assuming kind of a flattish, a variable cog or raw material environment on a net basis. If there's a little bit of opportunity there, that would actually help us get to the upper end of the range. And as Chris said, it's productivity. I think the productivity, again, if we're successful on some of the execution items, that could provide a little bit more tailwind as well.

Perfect. Thank you. Thank you.

We'll next take our question from Alexey Yervimov from KeyBank Capital Markets. Please go ahead. Thank you.

Thanks. Good morning, everyone. I wanted to come back to the refinish market and ask you about your mainstream versus premium market strategy. Any update there on how this is evolving? Do you maybe use additional M&A to enhance this mainstream market strategy in coming quarters?

Yeah, so thanks for the question, Alexi. And again, thanks. Happy New Year to you too. And just in terms of the premium segment, you know, if you look at a lot of the body shop wins, these have been very, very focused on the premium side. The entry with CoverFlex has really given us an opportunity into the mainstream and economy. So in terms of how well that's working, I would say we're right, largely in line with our deal strategy. dynamics that we established in buying it. I would say the market is slightly weaker based on obviously the consumer pressures, whether it's insurance rates or here it's a lot more where consumers are essentially pocketing the insurance claim versus investing or getting their cars fixed. But that said, The business case has been very strong, and where it's really played out well is the fact that we can drive the adjacencies, whether it's fillers, whether it's everything else that Exalta provides, putties, and everything that we bring in from third parties with tapes, and all of that is really helping us strengthen that market. I do believe, Alexi, that there's far more opportunities in adjacency. You know, we have obviously started here with North America, but I do believe that there are more opportunities as we think about Europe and Asia, and these are the things that we're going to be focused here in the next two quarters.

Great. Thanks, Chris. And maybe to follow up on Carl's answer on the $100 million of revenue, can you provide any details on volume versus price? You already gave us FXT.

Yeah, I mean, I think as we look at it in total, we are expecting, as I said in the prepared remarks, you know, our finished team is going to be executing some pricing actions beginning in March. You know, if I look at price mix for the full year, we do expect it to be, you know, positive, you know, probably up in that 1% to 2% type, volumes kind of being, you know, down a little bit with some offsets as we think about kind of new business. So, you know, if you think about the bridge, I mean, we're kind of managing it in total. That's why I think I obviously tend to look at just the conversion on that incremental revenue into that 35 to 40 percent range.

Great. Thanks a lot.

Thank you. Thank you.

We'll next go to Mike Harrison with Seaport Research Partners. Please go ahead.

Hi, good morning. Congrats on a nice quarter. I was hoping that we could dig in, Chris, a little bit more on what you guys are seeing in the China light vehicle market. It sounds like you guys are pretty happy with the customers that you're positioned with. But if you look at, you know, there's more than 100 different car brands there. A lot of them over time could be consolidated. Do you guys view this as a threat or as an opportunity? Maybe just talk a little bit about how you're thinking about your longer-term position within the Chinese light vehicle market.

Okay. Thanks for the question, Mike. Maybe I'll break it up into three parts because I will first give you a view of the customer dynamics and then maybe move it into a little bit of market dynamics, which also enables growth and why we believe strongly in this marketplace. So from a customer dynamics, the folks that we are partnered with in China are some of the largest players, especially in the EV space and on the ICE side as well. What differentiated us, what enabled us to get in here early was really, I think, four factors. The first one was we started off early with companies that were just starting out or were And we were very, very focused on the local market as opposed to entrenched players from the outside. And this enabled us to build that partnership over many years. The second one, and it enabled us to be embedded in their plans. So a lot of our folks work within their plans to provide the quality, the service, the timely delivery and response. and has just done just an amazing job in building the relationship. And that second element of it is really around the relationships between our teams and theirs over time in developing the colors. China has just done an amazing job of breaking boundaries. The customer's demand for color just breaks boundaries, and that's something that we've always been there. And the last element of this is as we work through these two, We put in capacity, I believe, before many others and had the capacity as they were growing. We built a new plant, we expanded a plant, and all of that really enabled us to grow. So the strength that we have with the large players, to your point, if there is any consolidation, my expectation is that the large players will lead a lot of the consolidation and we have a good place there. The second part of this is specific to the market dynamics. The stimulus has helped, but I think it's been a part of their growth story. Obviously, the capability, the new vehicles coming out of China, especially on the EV side, the electronics and just the interaction with the vehicles have really played a part. And just that demand is not only a China-specific demand, but we're certainly So I think China's become the manufacturing hub for, again, as I said, Malaysia, Indonesia, Australia, New Zealand, Bangladesh, I mean, and even Sri Lanka. And that demand is also pushing demand for us from a refinish standpoint because we supply the customers. So this relationship has been great on both those two fronts. And the final expectation is I do think China is going to drive to make sure that it's specific to this industry that the demand stays strong beyond stimulus going forward.

And all of this will play well for us in 25. All right.

Thanks for that. And then I was hoping that you could also talk a little bit more about this agreement with DUR on digital pains, maybe talk about how this partnership can help you accelerate the commercialization of the NextJet product line?

Sure, great. Thanks for the question on this one. This is certainly something that we are proud of and a true credit to the mobility team. Hadi, who's the president there, and his team and the great work that they've done driving this. DER is a leader. I mean, they have over 50%. of the robotics and paint systems in OE plants. And they're just, you know, putting two leaders together, you know, us from the coating side and putting them together. And the ability for us to essentially coat two-tone a car. So, imagine if you had to change the paint of a black or coat a black roof or a hood. The normal process is it goes through a paint process. It's pulled off to an offline process and that is done and it creates inefficiencies and it creates cost. And what we've been able to do is through this process, put it through the main line and bringing two strong companies together. And I believe this technology, it's not just two-toning hoods, but whatever you want in terms of essentially putting a logo or putting something specific on a car, that's something that we're able to do right off the main paint line. It's a great technology and something that we're absolutely proud of. The additional feature here from a sustainability standpoint, is the overspray coming from this is negligible. So the amount that we drive in terms of reducing overspray and paint is something that I think will be a great, you know, win for OEs as well in the future.

Thanks very much. You're welcome.

We'll next go to Jesse Kalsakis with J.P. Morgan. Please go ahead.

Thanks very much. Two questions. In order to hit your free cash flow target for next year, your cash flow from operations has to rise by, I don't know, 100 or 115 million. So I take it one principal way you would do that is increasing accounts payable. Is that a big piece of that increase? And secondly, I'm sorry, go ahead.

Oh, no, yeah, just to answer maybe the first question there, Jeff. Yeah, I think it's Specific within working capital, I think there's a couple different things. I think one is, as I did reference, our DPOs did dip a lot more in the fourth quarter, kind of, I would say, more abnormally. So we would probably normalize that. So that's called six, seven days. So that's going to be definitely a piece of the story. And then on account receivables, again, I think there continues to be some further opportunities as we think about managing that as we kind of go forward. And, of course, inventory will continue to be in focus for us. I think the teams did a very good job late in the year, but I think we need to see a consistent performance as we think about 2025.

And then for Chris, if it turned out that there really were 25% tariffs on Canada and Mexico, what do you think that would do to the price of a car made in the U.S.? And how do you think it would affect car production?

So first, maybe in terms of, you know, I kind of look at it from our perspective first, and then maybe I'll bring in, you know, if I think about Exalta, and we certainly, you know, since the weekend, we were very, very focused in terms of looking at, you know, how much of an impact this would have on us. And in reality, you know, if I think about the number of cars that are built in Exalta, In Mexico and Canada, this would affect about 5 to 6% of our revenue. Now, in terms of the impact per car, this would have about a $3,000 impact per car. However, you know, as I said, you know, the threat of tariffs is not something new. We've known about this for a couple of months. So we've certainly, you know, the mobility teams, have certainly started working with our OEs because the OEs have been making plans to look at at least the ones that we've been associated with to look at moving production, looking at what they can do to offset a lot of this. And there are specifics also when you think about what's actually built, components that are built in the U.S. then shipped to Mexico as part of an overall assembly strategy and then brought back So there are elements of this, but overall, I would say the impact on a car is about 3,000. But my expectation is over, you know, based on the time we have and over the time we have, the OEs will be driving significantly to find measures around that. And that is what we're absolutely focused with our customers to make sure that we help them offset.

Thanks so much. You're welcome.

And our last question comes from Steve Byrne with Bank of America. Please go ahead.

Hi, this is Rock Hoffman on from Steve Byrne. Just drilling into refinish, within the 2800 net body shop wins, what fraction of those are adopting iris mix? And has your view of the market potential for this technology expanded beyond high-end premium facilities?

No, we're still very focused on the high-end premium facilities. I would say the 2,800, most of those are just starting without the Iris Mix. We're using the Iris Mix, actually launching it in Europe. And a lot of that is with our premium customers in Europe. Again, next year, we're doubling the number of installations. There is probably a good chance that some of those 2,800 might have those. But at this time, we're starting with our customers

that they have the access to the equipment first. So I think, Marco, that's it.

To close, you know, I did want to take a minute and really say I'm really excited about what's happening here at Exalta. It's been two years since I've joined this incredible team. And since then, we've worked closely together towards a common aid plan goal. to optimize all areas of this great company and perform at a higher level. The improvement that we've made over this period clearly shows that we're onto something. In two years, we've increased sales by more than 8%, expanded EBITDA margins by 460 basis points, EPS by 46%, free cash flow by 177%, and improved the leverage from 3.8 to 2.5 times. This would not be possible without the dedication and company pride of every single employee here, and I am absolutely thankful for that. It's been an amazing ride, and it's exceeded my expectation in every single way, and I can't wait to show you what we're going to do in 2025. Happy New Year, everybody, and I look forward to working with you this year. Thank you.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.