07.25.19
Axalta Coating Systems Ltd. announced its financial results for the second quarter ended June 30, 2019.
Second Quarter 2019 Consolidated Financial Results
Second quarter net sales of $1,157.5 million decreased 4.5% year-over-year, including 3.5% negative foreign currency impacts and 0.9% net negative M&A impact including the sale of an interest in a consolidated powder coatings JV in China. Constant currency organic net sales were essentially flat in the period, driven by 4.1% lower volumes which were offset by 4% higher average price and product mix from all regions and both segments, including notable acceleration in Light Vehicle of 3.6%. The lower volume result was driven principally by Axalta's Light Vehicle end-market, while Performance Coatings also witnessed some volume pressure, including slower global production trends evident in our Industrial end-market.
Income from operations for the second quarter totaled $157.9 million, up 7.8% from $146.5 million in Q2 2018. This was driven by lower selling, general and administrative expenses and a favorable comparison in stock based compensation year-over-year, offset partly by lower net sales, which included positive contribution from average price and product mix offset by negative foreign currency effects and the impact from the sale of our China JV interest. Reported income from operations was also negatively impacted in Q2 2019 by ongoing variable cost inflation, which trended in the low single digits on the cost of goods sold level, as well as by $6.7 million in accelerated depreciation charges associated with Axalta's previously announced Belgium plant closure.
Adjusted EBIT of $197.4 million for the second quarter increased 8.6% versus $181.7 million in Q2 2018. This result was driven by strong contribution from higher average price and product mix and from improved productivity, partly offset by lower volumes, most notably in Axalta's Light Vehicle and Industrial end-markets, as well as by year-over-year variable cost inflation and negative foreign currency translation impacts.
"We posted continued low to mid-single digit net sales growth ex-FX in both Refinish and Commercial Vehicle end-markets, though offset by anticipated pressures in Light Vehicle and Industrial end-markets in addition to ongoing FX headwinds. Despite those factors, we posted solidly improved year-over-year profits, led by accelerated price and product mix benefits as we work to recapture lost margin from ongoing variable cost inflation," said Robert W. Bryant, Axalta's CEO. "We are pleased to report substantial progress in price and product mix improvement in Transportation Coatings, while Performance Coatings also continues to efficiently offset inflation effects over time. Further, as a partial offset to volume headwinds seen most notably from China Light Vehicle markets, we continue our disciplined focus on productivity and operating cost control, which contributed positively in the second quarter. In June, Axalta's Board of Directors announced a review of strategic alternatives to maximize shareholder value. We are actively engaged in that process currently and will update the market as appropriate, but we have nothing specific to share at this point."
Performance Coatings Results
Performance Coatings second quarter net sales were $756.7 million, a decrease of 3.7% year-over-year, including a 3.5% negative currency impact. Constant currency organic net sales increased 1.2% in the period before the net negative M&A-related impact of 1.4% driven by the China JV sale, and 3.5% from negative foreign currency effect. Drivers in the period included a robust 4.7% improvement in average price and product mix, partly offset by a 3.5% volume decline including both end-markets.
Refinish end-market net sales decreased 0.2% to $447.3 million in Q2 2019 (increased 3.6% excluding foreign currency) with strong average price and product mix contribution offset partly by lower volume, including ongoing lower North America volumes we believe due in part to continued distributor inventory de-stocking. Industrial end-market net sales decreased 8.4% to $309.4 million (decreased 1.1% excluding foreign currency and M&A-related impacts), including volume declines from all regions except Asia Pacific, offset largely by positive pricing across all regions. We believe that Industrial volume pressure was aligned with moderated demand globally across multiple sub-markets as reflected in global industrial production metrics.
The Performance Coatings segment generated Adjusted EBIT of $127.6 million in the second quarter, a 17.2% year-over-year increase. Positive price and product mix and lower overall operating expenses were partially offset by volume declines, raw material inflation and modest foreign exchange impacts. Second quarter segment Adjusted EBIT margin of 16.9% improved 300 basis points from 13.9% in the prior year as price and product mix as well as productivity benefits more than offset ongoing raw material headwinds.
Transportation Coatings Results
Transportation Coatings net sales were $400.8 million in Q2 2019, a decrease of 6.0% year-over-year, including a 3.6% negative currency impact. Constant currency net sales decreased 2.4% in the period, driven by a 5.1% decrease in volume, partly offset by 2.7% in higher average price and product mix.
Light Vehicle net sales decreased 8.2% to $306.1 million year-over-year (decreased 4.3% excluding foreign currency), driven by lower volumes related to global production adjustments and foreign exchange impacts, offset by an acceleration in positive average price and product mix of 3.6%. Commercial Vehicle net sales increased 1.9% to $94.7 million from Q2 2018 (increased 4.5% excluding foreign currency), including stronger volumes in our core regions. Average price and product mix were essentially flat, similar to the first quarter result.
Transportation Coatings generated Adjusted EBIT of $40.4 million in Q2 2019, an increase of 5.5% versus Q2 2018, driven by strong price and mix benefit as well as positive contribution from productivity, though offset partly by lower volumes and ongoing impact from raw material inflation. Segment Adjusted EBIT margin of 10.1% in Q2 2019 compared with 9% in Q2 2018, representing an important inflection to positive margin comparisons.
Balance Sheet and Cash Flow Highlights
Axalta ended the quarter with cash and cash equivalents of $577.3 million. The company's debt, net of cash, was $3.3 billion as of June 30, 2019, which compared with $3.4 billion as of March quarter end. Axalta's net debt to trailing twelve month Adjusted EBITDA ratio was 3.5x at quarter end. We repurchased 1.6 million shares of its common stock in the second quarter for total consideration of $39.5 million and an average price of $24.90 per share.
Second quarter operating cash flow totaled $126.7 million versus $142 million in Q2 2018, reflecting modest working capital and FX headwinds from the prior year. Free cash flow, which includes the benefit of lower capital expenditures in the current period ended June 30, 2019, totaled $103.7 million compared to $106.9 million in the prior year quarter.
"Axalta's second quarter showed very strong financial performance set against a moderately challenging fundamental backdrop. In spite of some volume headwinds, our execution was strong, reflected in both segment margins and in strong cash flow performance," said Sean Lannon, Axalta's CFO. "For the balance of the year, we see a mix of continued selective end-market volume pressure, but also expect ongoing stable execution and easing raw material headwinds to enable us to achieve the profitability target ranges that we set out back in January. Since our last update, we have seen incremental volume headwinds in Industrial and Light Vehicle end-markets, along with ongoing Refinish volume pressure, coupled with persistent currency headwinds. Still, with help from Axalta Way productivity savings and ongoing benefit from the implementation of announced pricing actions, we expect to meet our full year guidance."
2019 Guidance Update
Second Quarter 2019 Consolidated Financial Results
Second quarter net sales of $1,157.5 million decreased 4.5% year-over-year, including 3.5% negative foreign currency impacts and 0.9% net negative M&A impact including the sale of an interest in a consolidated powder coatings JV in China. Constant currency organic net sales were essentially flat in the period, driven by 4.1% lower volumes which were offset by 4% higher average price and product mix from all regions and both segments, including notable acceleration in Light Vehicle of 3.6%. The lower volume result was driven principally by Axalta's Light Vehicle end-market, while Performance Coatings also witnessed some volume pressure, including slower global production trends evident in our Industrial end-market.
Income from operations for the second quarter totaled $157.9 million, up 7.8% from $146.5 million in Q2 2018. This was driven by lower selling, general and administrative expenses and a favorable comparison in stock based compensation year-over-year, offset partly by lower net sales, which included positive contribution from average price and product mix offset by negative foreign currency effects and the impact from the sale of our China JV interest. Reported income from operations was also negatively impacted in Q2 2019 by ongoing variable cost inflation, which trended in the low single digits on the cost of goods sold level, as well as by $6.7 million in accelerated depreciation charges associated with Axalta's previously announced Belgium plant closure.
Adjusted EBIT of $197.4 million for the second quarter increased 8.6% versus $181.7 million in Q2 2018. This result was driven by strong contribution from higher average price and product mix and from improved productivity, partly offset by lower volumes, most notably in Axalta's Light Vehicle and Industrial end-markets, as well as by year-over-year variable cost inflation and negative foreign currency translation impacts.
"We posted continued low to mid-single digit net sales growth ex-FX in both Refinish and Commercial Vehicle end-markets, though offset by anticipated pressures in Light Vehicle and Industrial end-markets in addition to ongoing FX headwinds. Despite those factors, we posted solidly improved year-over-year profits, led by accelerated price and product mix benefits as we work to recapture lost margin from ongoing variable cost inflation," said Robert W. Bryant, Axalta's CEO. "We are pleased to report substantial progress in price and product mix improvement in Transportation Coatings, while Performance Coatings also continues to efficiently offset inflation effects over time. Further, as a partial offset to volume headwinds seen most notably from China Light Vehicle markets, we continue our disciplined focus on productivity and operating cost control, which contributed positively in the second quarter. In June, Axalta's Board of Directors announced a review of strategic alternatives to maximize shareholder value. We are actively engaged in that process currently and will update the market as appropriate, but we have nothing specific to share at this point."
Performance Coatings Results
Performance Coatings second quarter net sales were $756.7 million, a decrease of 3.7% year-over-year, including a 3.5% negative currency impact. Constant currency organic net sales increased 1.2% in the period before the net negative M&A-related impact of 1.4% driven by the China JV sale, and 3.5% from negative foreign currency effect. Drivers in the period included a robust 4.7% improvement in average price and product mix, partly offset by a 3.5% volume decline including both end-markets.
Refinish end-market net sales decreased 0.2% to $447.3 million in Q2 2019 (increased 3.6% excluding foreign currency) with strong average price and product mix contribution offset partly by lower volume, including ongoing lower North America volumes we believe due in part to continued distributor inventory de-stocking. Industrial end-market net sales decreased 8.4% to $309.4 million (decreased 1.1% excluding foreign currency and M&A-related impacts), including volume declines from all regions except Asia Pacific, offset largely by positive pricing across all regions. We believe that Industrial volume pressure was aligned with moderated demand globally across multiple sub-markets as reflected in global industrial production metrics.
The Performance Coatings segment generated Adjusted EBIT of $127.6 million in the second quarter, a 17.2% year-over-year increase. Positive price and product mix and lower overall operating expenses were partially offset by volume declines, raw material inflation and modest foreign exchange impacts. Second quarter segment Adjusted EBIT margin of 16.9% improved 300 basis points from 13.9% in the prior year as price and product mix as well as productivity benefits more than offset ongoing raw material headwinds.
Transportation Coatings Results
Transportation Coatings net sales were $400.8 million in Q2 2019, a decrease of 6.0% year-over-year, including a 3.6% negative currency impact. Constant currency net sales decreased 2.4% in the period, driven by a 5.1% decrease in volume, partly offset by 2.7% in higher average price and product mix.
Light Vehicle net sales decreased 8.2% to $306.1 million year-over-year (decreased 4.3% excluding foreign currency), driven by lower volumes related to global production adjustments and foreign exchange impacts, offset by an acceleration in positive average price and product mix of 3.6%. Commercial Vehicle net sales increased 1.9% to $94.7 million from Q2 2018 (increased 4.5% excluding foreign currency), including stronger volumes in our core regions. Average price and product mix were essentially flat, similar to the first quarter result.
Transportation Coatings generated Adjusted EBIT of $40.4 million in Q2 2019, an increase of 5.5% versus Q2 2018, driven by strong price and mix benefit as well as positive contribution from productivity, though offset partly by lower volumes and ongoing impact from raw material inflation. Segment Adjusted EBIT margin of 10.1% in Q2 2019 compared with 9% in Q2 2018, representing an important inflection to positive margin comparisons.
Balance Sheet and Cash Flow Highlights
Axalta ended the quarter with cash and cash equivalents of $577.3 million. The company's debt, net of cash, was $3.3 billion as of June 30, 2019, which compared with $3.4 billion as of March quarter end. Axalta's net debt to trailing twelve month Adjusted EBITDA ratio was 3.5x at quarter end. We repurchased 1.6 million shares of its common stock in the second quarter for total consideration of $39.5 million and an average price of $24.90 per share.
Second quarter operating cash flow totaled $126.7 million versus $142 million in Q2 2018, reflecting modest working capital and FX headwinds from the prior year. Free cash flow, which includes the benefit of lower capital expenditures in the current period ended June 30, 2019, totaled $103.7 million compared to $106.9 million in the prior year quarter.
"Axalta's second quarter showed very strong financial performance set against a moderately challenging fundamental backdrop. In spite of some volume headwinds, our execution was strong, reflected in both segment margins and in strong cash flow performance," said Sean Lannon, Axalta's CFO. "For the balance of the year, we see a mix of continued selective end-market volume pressure, but also expect ongoing stable execution and easing raw material headwinds to enable us to achieve the profitability target ranges that we set out back in January. Since our last update, we have seen incremental volume headwinds in Industrial and Light Vehicle end-markets, along with ongoing Refinish volume pressure, coupled with persistent currency headwinds. Still, with help from Axalta Way productivity savings and ongoing benefit from the implementation of announced pricing actions, we expect to meet our full year guidance."
2019 Guidance Update
- Net sales decline of ~(2%) as-reported; ~0% ex-FX; includes May 2019 China JV sale for ~1% full year impact;
- Adjusted EBIT of $675-725 million (1);
- Adjusted EPS of $1.70-1.901;
- Depreciation and amortization of ~$365 million inclusive of accelerated depreciation of $25 million;
- Adjusted EBITDA of $950-975 million;
- Interest expense of ~$165 million;
- Income tax rate, as adjusted, of 20-22%;
- Diluted shares outstanding of ~236 million;
- Capital expenditures of ~$160 million;
- Free cash flow of $430-470 million
