01.30.19
Axalta Coating Systems Ltd. announced its financial results for the fourth quarter and full year ended Dec. 31, 2018.
Fourth Quarter Consolidated Financial Results
Net sales of $1,158.1 million for the fourth quarter of 2018 decreased 0.6 percent, including 3.3 percent negative foreign currency translation impact. Constant currency net sales increased 2.7 percent in the period, driven by 4.4 percent higher average selling prices, offset partly by a 1.7 percent volume decrease inclusive of 0.4 percent acquisition contribution. Organic net sales were driven by growth in Performance Coatings with relatively equal contribution from both Refinish and Industrial end-markets, offset partly by lower net sales from Transportation Coatings. Average price and product mix contributed solidly in the quarter, adding 4.4 percent overall, including a 6.5 percent price contribution from Performance Coatings. Transportation Coatings saw the positive price and product mix contribution of 0.8 percent in the quarter.
Net income attributable to Axalta for the fourth quarter was $75.4 million compared with a loss of $61.5 million in Q4 2017, primarily driven by the absence of certain charges for restructuring, offerings and transactions, as well as U.S. tax reform in Q4 2017 that did not recur to the same extent in 2018. Fourth quarter adjusted net income of $80.1 million decreased compared with $90.2 million in Q4 2017.
Adjusted EBITDA was $234.9 million for the fourth quarter compared with $245.4 million in Q4 2017, including headwinds from volumes largely in Transportation Coatings, higher raw material costs, incremental operating expenses, as well as foreign exchange headwinds, offset partially by a substantive contribution from improved price and product mix largely from Performance Coatings.
"Axalta ended the year in line with our communicated guidance from October, with both net sales and Adjusted EBITDA, reflecting strong execution by our team given continued currency and automotive challenges," said Robert W. Bryant, Axalta's CEO. "We saw continued pricing momentum in Performance Coatings and a return to positive average price and product mix in our Light Vehicle end-market within Transportation Coatings.
"In 2018, Axalta accomplished a great deal in the face of several headwinds, managing to offset input cost inflation as well as a slowdown in certain coatings markets in China with a combination of incremental global pricing actions and substantial productivity gains. This enabled us to hold margins nearly constant for the year, which was a meaningful accomplishment in this context. We also recorded high single-digit net sales growth, in line with our objectives, including a strong contribution from both end-markets in Performance Coatings.
"As we focus on 2019, we remain cautiously optimistic regarding key end-market drivers, with broad stability and supportive conditions in Performance Coatings globally, but flatter global demand in Transportation Coatings. We target ongoing market outgrowth through product innovation and strong execution against this backdrop, and we are highly focused on continuing to differentiate Axalta through speed, agility and focus on the customer," Bryant continued. "Our key goals for 2019 include continued new business wins in core markets, execution to margin recovery targets, and ongoing optimization of overall business returns, including strong free cash flow generation."
Performance Coatings Results
Performance Coatings net sales were $757.5 million in Q4 2018, an increase of 3.4 percent year-over-year including three percent unfavorable foreign currency impact. Constant currency net sales increased 6.4 percent, driven by 6.5 percent higher average selling price and mix benefits and a modest 0.6 percent acquisition contribution offset by volume decreases of 0.7 percent.
Net sales in our Refinish end-market increased 3.1 percent in Q4 2018 (increased 6.3 percent excluding foreign currency translation), driven by price and mix benefits from all regions, and a modest decrease in overall volumes. Industrial end-market net sales increased 3.9 percent in the fourth quarter (increased 6.6 percent excluding foreign currency translation) as organic volume grew in the low single digits and price increased in the mid-single digits.
The Performance Coatings segment generated Adjusted EBITDA of $172.2 million in the fourth quarter, a 4.1 percent year-over-year increase, driven by positive price and mix contribution offset partly by headwinds from variable cost inflation and foreign exchange impacts. Adjusted EBITDA margin of 22.7 percent in Q4 2018 reflected a 10 basis point increase compared to the corresponding prior-year quarter.
Transportation Coatings Results
The Transportation Coatings segment produced net sales of $400.6 million in Q4 2018, a decrease of 7.4 percent versus Q4 2017. Constant currency net sales decreased 3.7 percent year-over-year, driven by a 4.5 percent decrease in volumes, offset partly by 0.8 percent higher average selling price and mix benefits.
Light Vehicle net sales decreased 7.9 percent year-over-year (decreased 3.9 percent excluding foreign currency translation), largely impacted by lower sales in China and EMEA, offset partly by growth in North America. Commercial Vehicle net sales decreased 5.5 percent versus Q4 2017 (decreased 3.3 percent excluding foreign currency translation), driven by moderate reductions in other global truck markets and from certain non-truck customers, offset by ongoing strength in the Americas heavy-duty truck production.
The Transportation Coatings segment generated Adjusted EBITDA of $62.7 million in Q4 2018, a decrease of 21.6 percent compared to Q4 2017, with increased variable cost pressure, foreign exchange headwinds and slightly lower volumes offset partly by slightly higher average selling price and mix benefits. Segment Adjusted EBITDA margin of 15.7 percent in Q4 2018 compared to 18.5 percent in the prior year quarter and improved from 15.2 percent in Q3 2018.
Balance Sheet and Cash Flow Highlights
Axalta ended the year with cash and cash equivalents of $693.6 million. Net debt was $3.2 billion as of year-end, compared to $3.3 billion as of Q3 2018, driven by higher cash balances. Net debt to Adjusted EBITDA was 3.4x at year-end. Axalta repurchased 4.0 million shares of our common stock in the fourth quarter for total consideration of $106 million. Share repurchases for the year ended Dec. 31, 2018, were 9.1 million for total consideration of $253.8 million.
Fourth quarter operating cash flow was $250.6 million versus $233.6 million in the corresponding quarter of 2017, reflecting improved cash collections partially offset by increased upfront customer incentive payments in conjunction with attractive long-term contractual commitments. Free cash flow totaled $220.2 million, an improvement versus $195.8 million in the prior year quarter.
"In spite of significant inflation and select fundamental headwinds in automotive markets experienced during 2018, Axalta performed well in both operating execution and meeting our financial targets," said Sean Lannon, Axalta's SVP and CFO. "We finished the year with free cash flow slightly above the higher end of our communicated range from October, resulting in slightly lower net debt leverage. For 2019, we are focused on continued operating and financial discipline and delivering on the goals outlined below, which include ongoing sales and profit growth and substantially higher free cash flow. We look forward to updating our investors on progress against these goals as we move through the year."
2019 Guidance Update
Axalta is updating our outlook for the full year 2019 as follows:
• Net sales growth of 1-2 percent as reported, or 2-3 percent excluding FX headwinds;
• Adjusted EBIT of $560-610 million;
• Diluted adjusted EPS range of $1.30-1.50, assuming the mid-point of the income tax rate, as adjusted;
• Depreciation and amortization of ~$375 million (inclusive of ~$25 million accelerated depreciation for our Mechelen, Belgium site);
• Adjusted EBITDA of $950-1,000 million;
• Interest expense of ~$165 million;
• Income tax rate, as adjusted, of 20-22 percent;
• Diluted shares outstanding of ~239 million;
• Capital expenditures of ~$160 million
• Free cash flow of $430-470 million
Fourth Quarter Consolidated Financial Results
Net sales of $1,158.1 million for the fourth quarter of 2018 decreased 0.6 percent, including 3.3 percent negative foreign currency translation impact. Constant currency net sales increased 2.7 percent in the period, driven by 4.4 percent higher average selling prices, offset partly by a 1.7 percent volume decrease inclusive of 0.4 percent acquisition contribution. Organic net sales were driven by growth in Performance Coatings with relatively equal contribution from both Refinish and Industrial end-markets, offset partly by lower net sales from Transportation Coatings. Average price and product mix contributed solidly in the quarter, adding 4.4 percent overall, including a 6.5 percent price contribution from Performance Coatings. Transportation Coatings saw the positive price and product mix contribution of 0.8 percent in the quarter.
Net income attributable to Axalta for the fourth quarter was $75.4 million compared with a loss of $61.5 million in Q4 2017, primarily driven by the absence of certain charges for restructuring, offerings and transactions, as well as U.S. tax reform in Q4 2017 that did not recur to the same extent in 2018. Fourth quarter adjusted net income of $80.1 million decreased compared with $90.2 million in Q4 2017.
Adjusted EBITDA was $234.9 million for the fourth quarter compared with $245.4 million in Q4 2017, including headwinds from volumes largely in Transportation Coatings, higher raw material costs, incremental operating expenses, as well as foreign exchange headwinds, offset partially by a substantive contribution from improved price and product mix largely from Performance Coatings.
"Axalta ended the year in line with our communicated guidance from October, with both net sales and Adjusted EBITDA, reflecting strong execution by our team given continued currency and automotive challenges," said Robert W. Bryant, Axalta's CEO. "We saw continued pricing momentum in Performance Coatings and a return to positive average price and product mix in our Light Vehicle end-market within Transportation Coatings.
"In 2018, Axalta accomplished a great deal in the face of several headwinds, managing to offset input cost inflation as well as a slowdown in certain coatings markets in China with a combination of incremental global pricing actions and substantial productivity gains. This enabled us to hold margins nearly constant for the year, which was a meaningful accomplishment in this context. We also recorded high single-digit net sales growth, in line with our objectives, including a strong contribution from both end-markets in Performance Coatings.
"As we focus on 2019, we remain cautiously optimistic regarding key end-market drivers, with broad stability and supportive conditions in Performance Coatings globally, but flatter global demand in Transportation Coatings. We target ongoing market outgrowth through product innovation and strong execution against this backdrop, and we are highly focused on continuing to differentiate Axalta through speed, agility and focus on the customer," Bryant continued. "Our key goals for 2019 include continued new business wins in core markets, execution to margin recovery targets, and ongoing optimization of overall business returns, including strong free cash flow generation."
Performance Coatings Results
Performance Coatings net sales were $757.5 million in Q4 2018, an increase of 3.4 percent year-over-year including three percent unfavorable foreign currency impact. Constant currency net sales increased 6.4 percent, driven by 6.5 percent higher average selling price and mix benefits and a modest 0.6 percent acquisition contribution offset by volume decreases of 0.7 percent.
Net sales in our Refinish end-market increased 3.1 percent in Q4 2018 (increased 6.3 percent excluding foreign currency translation), driven by price and mix benefits from all regions, and a modest decrease in overall volumes. Industrial end-market net sales increased 3.9 percent in the fourth quarter (increased 6.6 percent excluding foreign currency translation) as organic volume grew in the low single digits and price increased in the mid-single digits.
The Performance Coatings segment generated Adjusted EBITDA of $172.2 million in the fourth quarter, a 4.1 percent year-over-year increase, driven by positive price and mix contribution offset partly by headwinds from variable cost inflation and foreign exchange impacts. Adjusted EBITDA margin of 22.7 percent in Q4 2018 reflected a 10 basis point increase compared to the corresponding prior-year quarter.
Transportation Coatings Results
The Transportation Coatings segment produced net sales of $400.6 million in Q4 2018, a decrease of 7.4 percent versus Q4 2017. Constant currency net sales decreased 3.7 percent year-over-year, driven by a 4.5 percent decrease in volumes, offset partly by 0.8 percent higher average selling price and mix benefits.
Light Vehicle net sales decreased 7.9 percent year-over-year (decreased 3.9 percent excluding foreign currency translation), largely impacted by lower sales in China and EMEA, offset partly by growth in North America. Commercial Vehicle net sales decreased 5.5 percent versus Q4 2017 (decreased 3.3 percent excluding foreign currency translation), driven by moderate reductions in other global truck markets and from certain non-truck customers, offset by ongoing strength in the Americas heavy-duty truck production.
The Transportation Coatings segment generated Adjusted EBITDA of $62.7 million in Q4 2018, a decrease of 21.6 percent compared to Q4 2017, with increased variable cost pressure, foreign exchange headwinds and slightly lower volumes offset partly by slightly higher average selling price and mix benefits. Segment Adjusted EBITDA margin of 15.7 percent in Q4 2018 compared to 18.5 percent in the prior year quarter and improved from 15.2 percent in Q3 2018.
Balance Sheet and Cash Flow Highlights
Axalta ended the year with cash and cash equivalents of $693.6 million. Net debt was $3.2 billion as of year-end, compared to $3.3 billion as of Q3 2018, driven by higher cash balances. Net debt to Adjusted EBITDA was 3.4x at year-end. Axalta repurchased 4.0 million shares of our common stock in the fourth quarter for total consideration of $106 million. Share repurchases for the year ended Dec. 31, 2018, were 9.1 million for total consideration of $253.8 million.
Fourth quarter operating cash flow was $250.6 million versus $233.6 million in the corresponding quarter of 2017, reflecting improved cash collections partially offset by increased upfront customer incentive payments in conjunction with attractive long-term contractual commitments. Free cash flow totaled $220.2 million, an improvement versus $195.8 million in the prior year quarter.
"In spite of significant inflation and select fundamental headwinds in automotive markets experienced during 2018, Axalta performed well in both operating execution and meeting our financial targets," said Sean Lannon, Axalta's SVP and CFO. "We finished the year with free cash flow slightly above the higher end of our communicated range from October, resulting in slightly lower net debt leverage. For 2019, we are focused on continued operating and financial discipline and delivering on the goals outlined below, which include ongoing sales and profit growth and substantially higher free cash flow. We look forward to updating our investors on progress against these goals as we move through the year."
2019 Guidance Update
Axalta is updating our outlook for the full year 2019 as follows:
• Net sales growth of 1-2 percent as reported, or 2-3 percent excluding FX headwinds;
• Adjusted EBIT of $560-610 million;
• Diluted adjusted EPS range of $1.30-1.50, assuming the mid-point of the income tax rate, as adjusted;
• Depreciation and amortization of ~$375 million (inclusive of ~$25 million accelerated depreciation for our Mechelen, Belgium site);
• Adjusted EBITDA of $950-1,000 million;
• Interest expense of ~$165 million;
• Income tax rate, as adjusted, of 20-22 percent;
• Diluted shares outstanding of ~239 million;
• Capital expenditures of ~$160 million
• Free cash flow of $430-470 million
