07.28.21
Axalta Coating Systems announced its financial results for the second quarter ended June 30, 2021.
Second Quarter 2021 Consolidated Financial Results
Second quarter net sales of $1,126.8 million increased 72.6% year-over-year, including a 5.3% foreign currency benefit, driven by 56.4% higher volumes and 9.3% higher average price and product mix. Volume growth across all end-markets was driven by ongoing recovery from pandemic-related macroeconomic impacts. Both price and product mix were positive in the period within Performance Coatings and included initial pricing offsets to the variable input inflation witnessed in 2021 that intensified during second quarter. Mobility Coatings segment price and product mix was impacted by negative mix effects, offset by stable overall pricing versus the prior year quarter. Performance Coatings recorded a 67.1% net sales increase, including ongoing strong growth for the Industrial end-market and a continued recovery in Refinish end-market demand conditions. The 88.2% net sales increase for Mobility Coatings included the rebound from COVID-19-related vehicle production shut-downs in the prior year quarter, offset partly by ongoing volume impacts due to semiconductor chip shortages, primarily in Light Vehicle.
Income from operations for Q2 2021 totaled $190.4 million versus a loss of $64.5 million in Q2 2020. Net income to common shareholders was $126.4 million for the quarter compared with a loss of $82.8 million in Q2 2020, and diluted earnings per share was $0.54 compared with $(0.35) in Q2 2020. Results were driven principally by continued net sales volume recovery from COVID-19-driven lows during Q2 2020, combined with substantial progress in achieving price and product mix offsets to the variable cost inflation, which increased substantially during the second quarter. Operating expenses were relatively flat in the period with the loss of temporary cost reductions from Q2 2020 offset by a benefit from ongoing structural savings actions and the absence of COVID-related accounting charges from Q2 2020. The Q2 2021 results also included a benefit of $71.8 million recorded in the period related to the operational matter in our North America Mobility Coatings business, related to changes in estimates and inclusive of anticipated insurance recoveries, and $22.5 million for additional restructuring expense for incremental cost savings initiatives, mainly in Europe, which we expect to provide annual run-rate savings of approximately $15 million.
Robert W. Bryant, Axalta's President and CEO, commented, "Axalta's second quarter represented a strong rebound from the pandemic-impacted second quarter last year and was slightly better than our expectation set for the period communicated in our last earnings release. The company saw notable improvement across all businesses from the prior year period, including continued strong growth in Industrial coatings and solid sequential recovery in Refinish. While Mobility Coatings rebounded well from the prior year, the business has and will continue to see impact from the semiconductor chip shortages, primarily impacting Light Vehicle production globally."
"Our team at Axalta remains focused on disciplined capital allocation. Following the acquisition in China announced in March of Anhui Shengran within our Energy Solutions business, we were very pleased to sign a definitive agreement to acquire U-POL in July," Bryant noted. "This acquisition, which is expected to close in late Q3 or early Q4 of 2021, represents a clear and compelling strategic fit with our Refinish business. We believe that the U-POL business will generate strong returns and will also accelerate growth for our existing Refinish businesses given the expected commercial synergies in product offerings, distribution channels, and customer opportunities. We are also excited to be bringing onboard a terrific management team that has proven an ability to grow the business substantially during its tenure."
Bryant continued, "We remain focused on achieving offsets to the substantial variable cost inflation headwinds that accelerated across the business globally. Our strong price and product mix result showcases the ability of our people and our business to react quickly to shifting input cost conditions. Given that the magnitude of such inflation headwinds has continued to increase through the period, we will continue to pursue offsets via price as well as productivity actions in order to maintain Axalta's margins and anticipate this process to continue through the remainder of the year. Axalta's ability to adapt to volatile conditions remains a core strength of our business, witnessed last year with the pandemic volume impacts and this year as we adjust dynamically to rising input costs and tight supply availability."
Bryant concluded, "We have continued this year to focus relentlessly on innovating and introducing new products. Among many other examples, our progress in the second quarter included the launch of the Daisy Wheel 3.0, an upgrade of the first fully automated color dosing system in the market, launched with a range of our premium refinish brands in EMEA. We also introduced an enhanced version of the Durapon 70 line of 40-year exterior weathering coil products, which are a sustainable, PFOA-free upgrade suitable for roofing and other end uses. These innovations are illustrations of the myriad of sustainable new product activities that surround our organic growth strategy, and we remain very excited about our pipeline looking forward."
Performance Coatings Results
Performance Coatings second quarter net sales were $805.8 million, an increase of 67.1% year-over-year. Constant currency net sales ex-M&A increased 59.5% in the period as both end-markets provided strong contributions to a 45.5% volume increase and a 14.0% price and product mix benefit, which included positive mix benefit within Refinish after the lapping of the negative mix effect seen in the prior year quarter. Foreign exchange in second quarter was a 5.5% tailwind year-over-year led by the stronger Euro and Chinese Renminbi.
Refinish net sales increased 76.8% year-over-year to $463.1 million in Q2 2021 with nearly 50% volume increases, benefiting from continued global traffic recovery. Net sales increased 16.1% in Q2 sequentially versus Q1, including improvement in each month of the quarter. Volume within the Refinish business continued to increase sequentially, but volumes remain below 2019 levels for a pre-pandemic comparable period as congestion levels are still rebounding despite total net sales increasing versus the comparable period in 2019. Average price and product mix increased ~21%, including substantial mix benefits as well as solid increases in average product pricing as required to offset rising variable cost inflation.
Industrial net sales increased 55.6% to $342.7 million, including significant volume growth coupled with mid-single digit increases in average price and product mix largely from improved pricing to offset variable cost inflation. The contribution from the Anhui Shengran acquisition was approximately 4% of total sales growth in the period. Net sales increased substantially in all Industrial end-businesses and in all regions during the second quarter. Despite a strong result, constrained availability of key raw materials during the period had a modest impact on the ability to meet market demand. Compared with net sales levels in 2019, the Industrial end-market increased over 10% for net sales.
The Performance Coatings segment generated Adjusted EBIT of $139.7 million in the second quarter compared with $1.5 million in Q2 2020, with associated margins of 17.3% and 0.3%, respectively, led by continued volume recovery and growth as well as positive price and product mix.
Mobility Coatings Results
Mobility Coatings net sales were $321.0 million in Q2 2021, an increase of 88.2% year-over-year, including a 4.9% positive currency translation benefit. Constant currency net sales increased 83.3% in the period, driven by an 87.4% increase in volume and offset partially by a 4.1% average price and product mix headwind, principally due to mix differences in the year-over-year period.
Light Vehicle net sales increased 93.1% to $243.9 million year-over-year (increased 87.7% excluding foreign currency tailwinds), driven largely by global recovery in automotive production and FX tailwinds in the period. Axalta's Light Vehicle net sales continued to see impact from semiconductor chip shortages in the period, with North America as the most impacted region. Production curtailment associated with this global supply chain issue is currently expected to continue through the second half of the year.
Commercial Vehicle net sales increased 74.0% to $77.1 million versus Q2 2020 (increased 71.0% excluding foreign currency), driven by global production rate recovery versus the pandemic-impacted prior year quarter, including largely stable production rates sequentially as strong global demand continues. Average price and product mix was a moderate headwind in the period driven by mix differences from the prior year quarter. Overall Commercial Vehicle demand remains healthy, with new truck order trends supporting a strong and healthy production backlog globally, excluding China.
The Mobility Coatings segment generated Adjusted EBIT of $5.7 million in Q2 2021 compared with a loss of $39.3 million in Q2 2020, driven by improved volume benefit and modest tailwinds in operating expenses, offset partly by headwinds in average price and product mix largely from mix differences, as well as increasing variable cost headwinds.
Balance Sheet and Cash Flow Highlights
Axalta ended the second quarter with cash and cash equivalents of $1.2 billion and total liquidity of $1.7 billion. Our net debt to trailing twelve month Adjusted EBITDA ratio was 2.6x at quarter end versus 3.2x as of March 31, 2021, benefiting from strong cash flow and Adjusted EBITDA growth to achieve a record level of LTM Adjusted EBITDA. This was the first quarter that Axalta has reported net leverage below 3.0x, moving toward our stated longer-term net leverage target of 2.5x. Axalta ended the second quarter with an Adjusted EBITDA to interest expense coverage ratio of 6.9x.
Second quarter total operating cash flow was $107.5 million versus a use of $1.7 million in Q2 2020, reflecting stronger underlying operating performance. Free cash flow totaled $82.6 million compared with a use of $17.8 million in Q2 2020, including higher capital expenditures in the period totaling $28.5 million versus $19.7 million in the prior year quarter. We repurchased 1.9 million shares of our common stock under our share repurchase program during the second quarter for total consideration of $60.0 million and an average price of $31.73 per share.
Sean Lannon, Axalta's Chief Financial Officer, commented, "We are pleased that second quarter operating and financial performance met our overall expectation set out in April, despite continued significant impacts from the ongoing semiconductor chip shortage on our OEM customers, as well as increased pressure from variable cost inflation and tight supply of certain raw materials. The consolidated result was accomplished through ongoing strong demand and volume recovery across both of our segments and by solid progress in achieving net price improvement against the inflation headwinds that continue across all Axalta businesses."
Lannon continued, "Regarding our full year guidance, we continue to expect ongoing demand improvement in Refinish for the balance of the year, coupled with continued demand strength in the Industrial end-market. In Mobility Coatings, while underlying end consumer demand for cars and trucks remains strong, demand for light vehicle coatings is expected to be negatively impacted by the customer component shortages for the remainder of the year. Once the component shortages abate, we expect higher than normal customer production rates to replenish back orders and historically low automotive dealer inventories. Axalta has seen an increase in the rate of variable cost inflation in the last several months, and we now expect inflation to increase year-over-year in the mid-teens at the cost of goods sold level for the full year. We will continue to work to offset such headwinds principally via pricing mechanisms, but anticipate this process may not be completed during the current fiscal year, with this nearer-term gap anticipated in our revised guidance. Axalta remains focused on our cost structure, as reflected in the incremental $22.5 million in restructuring charges taken in the quarter."
Lannon concluded, "We are very excited about the capital deployment and M&A deals that we have undertaken year-to-date, which collectively utilized excess cash flow with strong expected returns for our stakeholders. We anticipate these types of cash uses and deployment to continue with positive implications for shareholder value creation."
2021 Financial Guidance Update
Full Year
Net Sales: ~+20-22%, including ~3% FX and ~1% M&A benefit
Adjusted EBIT: $685-725 million
– Q3 ~20% of full year
– Q4 ~30% of full year
Adjusted Diluted EPS: $1.85-2.00
Interest Expense: ~$135 million
Diluted Shares: ~234 million
Free Cash Flow: $445-485 million; including $165 million capex
Tax Rate: ~21-22%
D&A: ~$318 million; including $106 million step-up D&A
Second Quarter 2021 Consolidated Financial Results
Second quarter net sales of $1,126.8 million increased 72.6% year-over-year, including a 5.3% foreign currency benefit, driven by 56.4% higher volumes and 9.3% higher average price and product mix. Volume growth across all end-markets was driven by ongoing recovery from pandemic-related macroeconomic impacts. Both price and product mix were positive in the period within Performance Coatings and included initial pricing offsets to the variable input inflation witnessed in 2021 that intensified during second quarter. Mobility Coatings segment price and product mix was impacted by negative mix effects, offset by stable overall pricing versus the prior year quarter. Performance Coatings recorded a 67.1% net sales increase, including ongoing strong growth for the Industrial end-market and a continued recovery in Refinish end-market demand conditions. The 88.2% net sales increase for Mobility Coatings included the rebound from COVID-19-related vehicle production shut-downs in the prior year quarter, offset partly by ongoing volume impacts due to semiconductor chip shortages, primarily in Light Vehicle.
Income from operations for Q2 2021 totaled $190.4 million versus a loss of $64.5 million in Q2 2020. Net income to common shareholders was $126.4 million for the quarter compared with a loss of $82.8 million in Q2 2020, and diluted earnings per share was $0.54 compared with $(0.35) in Q2 2020. Results were driven principally by continued net sales volume recovery from COVID-19-driven lows during Q2 2020, combined with substantial progress in achieving price and product mix offsets to the variable cost inflation, which increased substantially during the second quarter. Operating expenses were relatively flat in the period with the loss of temporary cost reductions from Q2 2020 offset by a benefit from ongoing structural savings actions and the absence of COVID-related accounting charges from Q2 2020. The Q2 2021 results also included a benefit of $71.8 million recorded in the period related to the operational matter in our North America Mobility Coatings business, related to changes in estimates and inclusive of anticipated insurance recoveries, and $22.5 million for additional restructuring expense for incremental cost savings initiatives, mainly in Europe, which we expect to provide annual run-rate savings of approximately $15 million.
Robert W. Bryant, Axalta's President and CEO, commented, "Axalta's second quarter represented a strong rebound from the pandemic-impacted second quarter last year and was slightly better than our expectation set for the period communicated in our last earnings release. The company saw notable improvement across all businesses from the prior year period, including continued strong growth in Industrial coatings and solid sequential recovery in Refinish. While Mobility Coatings rebounded well from the prior year, the business has and will continue to see impact from the semiconductor chip shortages, primarily impacting Light Vehicle production globally."
"Our team at Axalta remains focused on disciplined capital allocation. Following the acquisition in China announced in March of Anhui Shengran within our Energy Solutions business, we were very pleased to sign a definitive agreement to acquire U-POL in July," Bryant noted. "This acquisition, which is expected to close in late Q3 or early Q4 of 2021, represents a clear and compelling strategic fit with our Refinish business. We believe that the U-POL business will generate strong returns and will also accelerate growth for our existing Refinish businesses given the expected commercial synergies in product offerings, distribution channels, and customer opportunities. We are also excited to be bringing onboard a terrific management team that has proven an ability to grow the business substantially during its tenure."
Bryant continued, "We remain focused on achieving offsets to the substantial variable cost inflation headwinds that accelerated across the business globally. Our strong price and product mix result showcases the ability of our people and our business to react quickly to shifting input cost conditions. Given that the magnitude of such inflation headwinds has continued to increase through the period, we will continue to pursue offsets via price as well as productivity actions in order to maintain Axalta's margins and anticipate this process to continue through the remainder of the year. Axalta's ability to adapt to volatile conditions remains a core strength of our business, witnessed last year with the pandemic volume impacts and this year as we adjust dynamically to rising input costs and tight supply availability."
Bryant concluded, "We have continued this year to focus relentlessly on innovating and introducing new products. Among many other examples, our progress in the second quarter included the launch of the Daisy Wheel 3.0, an upgrade of the first fully automated color dosing system in the market, launched with a range of our premium refinish brands in EMEA. We also introduced an enhanced version of the Durapon 70 line of 40-year exterior weathering coil products, which are a sustainable, PFOA-free upgrade suitable for roofing and other end uses. These innovations are illustrations of the myriad of sustainable new product activities that surround our organic growth strategy, and we remain very excited about our pipeline looking forward."
Performance Coatings Results
Performance Coatings second quarter net sales were $805.8 million, an increase of 67.1% year-over-year. Constant currency net sales ex-M&A increased 59.5% in the period as both end-markets provided strong contributions to a 45.5% volume increase and a 14.0% price and product mix benefit, which included positive mix benefit within Refinish after the lapping of the negative mix effect seen in the prior year quarter. Foreign exchange in second quarter was a 5.5% tailwind year-over-year led by the stronger Euro and Chinese Renminbi.
Refinish net sales increased 76.8% year-over-year to $463.1 million in Q2 2021 with nearly 50% volume increases, benefiting from continued global traffic recovery. Net sales increased 16.1% in Q2 sequentially versus Q1, including improvement in each month of the quarter. Volume within the Refinish business continued to increase sequentially, but volumes remain below 2019 levels for a pre-pandemic comparable period as congestion levels are still rebounding despite total net sales increasing versus the comparable period in 2019. Average price and product mix increased ~21%, including substantial mix benefits as well as solid increases in average product pricing as required to offset rising variable cost inflation.
Industrial net sales increased 55.6% to $342.7 million, including significant volume growth coupled with mid-single digit increases in average price and product mix largely from improved pricing to offset variable cost inflation. The contribution from the Anhui Shengran acquisition was approximately 4% of total sales growth in the period. Net sales increased substantially in all Industrial end-businesses and in all regions during the second quarter. Despite a strong result, constrained availability of key raw materials during the period had a modest impact on the ability to meet market demand. Compared with net sales levels in 2019, the Industrial end-market increased over 10% for net sales.
The Performance Coatings segment generated Adjusted EBIT of $139.7 million in the second quarter compared with $1.5 million in Q2 2020, with associated margins of 17.3% and 0.3%, respectively, led by continued volume recovery and growth as well as positive price and product mix.
Mobility Coatings Results
Mobility Coatings net sales were $321.0 million in Q2 2021, an increase of 88.2% year-over-year, including a 4.9% positive currency translation benefit. Constant currency net sales increased 83.3% in the period, driven by an 87.4% increase in volume and offset partially by a 4.1% average price and product mix headwind, principally due to mix differences in the year-over-year period.
Light Vehicle net sales increased 93.1% to $243.9 million year-over-year (increased 87.7% excluding foreign currency tailwinds), driven largely by global recovery in automotive production and FX tailwinds in the period. Axalta's Light Vehicle net sales continued to see impact from semiconductor chip shortages in the period, with North America as the most impacted region. Production curtailment associated with this global supply chain issue is currently expected to continue through the second half of the year.
Commercial Vehicle net sales increased 74.0% to $77.1 million versus Q2 2020 (increased 71.0% excluding foreign currency), driven by global production rate recovery versus the pandemic-impacted prior year quarter, including largely stable production rates sequentially as strong global demand continues. Average price and product mix was a moderate headwind in the period driven by mix differences from the prior year quarter. Overall Commercial Vehicle demand remains healthy, with new truck order trends supporting a strong and healthy production backlog globally, excluding China.
The Mobility Coatings segment generated Adjusted EBIT of $5.7 million in Q2 2021 compared with a loss of $39.3 million in Q2 2020, driven by improved volume benefit and modest tailwinds in operating expenses, offset partly by headwinds in average price and product mix largely from mix differences, as well as increasing variable cost headwinds.
Balance Sheet and Cash Flow Highlights
Axalta ended the second quarter with cash and cash equivalents of $1.2 billion and total liquidity of $1.7 billion. Our net debt to trailing twelve month Adjusted EBITDA ratio was 2.6x at quarter end versus 3.2x as of March 31, 2021, benefiting from strong cash flow and Adjusted EBITDA growth to achieve a record level of LTM Adjusted EBITDA. This was the first quarter that Axalta has reported net leverage below 3.0x, moving toward our stated longer-term net leverage target of 2.5x. Axalta ended the second quarter with an Adjusted EBITDA to interest expense coverage ratio of 6.9x.
Second quarter total operating cash flow was $107.5 million versus a use of $1.7 million in Q2 2020, reflecting stronger underlying operating performance. Free cash flow totaled $82.6 million compared with a use of $17.8 million in Q2 2020, including higher capital expenditures in the period totaling $28.5 million versus $19.7 million in the prior year quarter. We repurchased 1.9 million shares of our common stock under our share repurchase program during the second quarter for total consideration of $60.0 million and an average price of $31.73 per share.
Sean Lannon, Axalta's Chief Financial Officer, commented, "We are pleased that second quarter operating and financial performance met our overall expectation set out in April, despite continued significant impacts from the ongoing semiconductor chip shortage on our OEM customers, as well as increased pressure from variable cost inflation and tight supply of certain raw materials. The consolidated result was accomplished through ongoing strong demand and volume recovery across both of our segments and by solid progress in achieving net price improvement against the inflation headwinds that continue across all Axalta businesses."
Lannon continued, "Regarding our full year guidance, we continue to expect ongoing demand improvement in Refinish for the balance of the year, coupled with continued demand strength in the Industrial end-market. In Mobility Coatings, while underlying end consumer demand for cars and trucks remains strong, demand for light vehicle coatings is expected to be negatively impacted by the customer component shortages for the remainder of the year. Once the component shortages abate, we expect higher than normal customer production rates to replenish back orders and historically low automotive dealer inventories. Axalta has seen an increase in the rate of variable cost inflation in the last several months, and we now expect inflation to increase year-over-year in the mid-teens at the cost of goods sold level for the full year. We will continue to work to offset such headwinds principally via pricing mechanisms, but anticipate this process may not be completed during the current fiscal year, with this nearer-term gap anticipated in our revised guidance. Axalta remains focused on our cost structure, as reflected in the incremental $22.5 million in restructuring charges taken in the quarter."
Lannon concluded, "We are very excited about the capital deployment and M&A deals that we have undertaken year-to-date, which collectively utilized excess cash flow with strong expected returns for our stakeholders. We anticipate these types of cash uses and deployment to continue with positive implications for shareholder value creation."
2021 Financial Guidance Update
Full Year
Net Sales: ~+20-22%, including ~3% FX and ~1% M&A benefit
Adjusted EBIT: $685-725 million
– Q3 ~20% of full year
– Q4 ~30% of full year
Adjusted Diluted EPS: $1.85-2.00
Interest Expense: ~$135 million
Diluted Shares: ~234 million
Free Cash Flow: $445-485 million; including $165 million capex
Tax Rate: ~21-22%
D&A: ~$318 million; including $106 million step-up D&A
