05.09.22
Axalta Coating Systems Ltd. announced its financial results for the first quarter ended March 31, 2022.
First Quarter 2022 Highlights:
Net sales increased 10.4% year-over-year (13.4% ex FX) led by accelerating pricing gains in every end-market and a solid global demand profile, except in Light Vehicle due to continued auto OEM production constraints
Price-mix increased 8.8% with strong contributions across all end-markets; Industrial Coatings mid-teens price-mix growth led all end-markets; expect continued sequential pricing gains company-wide
Income from operations of $86.3 million versus $52.6 million in Q1 2021; Adjusted EBIT of $119.5 million compared with $182.8 million in Q1 2021
Diluted EPS of $0.18 versus $0.06 in Q1 2021; Adjusted diluted EPS of $0.31 versus $0.50 in Q1 2021
Completed share repurchases of $175.1 million reflecting the repurchase of 6.4 million shares during Q1 2022
First Quarter 2022 Consolidated Financial Results
First quarter net sales of $1,174.1 million increased 10.4% year-over-year, including a 3.0% foreign currency offset. The strong year-over-year growth was driven by 8.8% higher average price-mix, a 3.6% M&A benefit, and 1.0% better volumes. Performance Coatings Q1 net sales increased 15.1% year-over-year, including mid-teen sales growth in both the Industrial and Refinish end-markets. Mobility Coatings net sales increased 1.0% led by 4.9% higher price-mix and solid volume growth from Commercial Vehicle, given supportive demand and customer production rates despite moderate supply issues. This was partially offset by foreign currency translation and lower volumes in Light Vehicle stemming from customer production constraints as a result of ongoing semiconductor chip and other supply chain shortages.
Income from operations for Q1 2022 totaled $86.3 million versus $52.6 million in Q1 2021. Net income to common shareholders was $41.5 million for the quarter compared with $15.2 million in Q1 2021, and diluted earnings per share was $0.18 compared with $0.06 in Q1 2021. The first quarter benefited from robust sales growth, including significant realized pricing gains; however, operating income was negatively impacted by continued variable cost inflation, and elevated logistics, labor, and energy expenses. Q1 2022 net income to common shareholders also benefited from the absence of the operational matter which had resulted in a charge of $71.5 million, net of tax, in Q1 2021.
Robert W. Bryant, Axalta's President and CEO, commented, “Axalta's first quarter results demonstrated solid execution in a still challenging global operating environment. I am proud of the team for delivering better than anticipated results despite unresolved supply chain challenges and a number of significant unforeseen global headwinds. Specifically I want to recognize the actions of our teams in China who have been able to safely operate and serve our customers during the ongoing lockdowns. We are proving every day that we have a dedicated and resilient organization committed to delivering on our strategic growth imperative.”
“Despite the unprecedented breadth and rate of cost inflation, we are increasing prices aggressively and working hard to ensure we are fully sourced to support our customers’ needs. Raw material availability remains challenged with the potential for areas of trade flow concerns if China COVID-19 lockdowns persist deeper into Q2. As a consequence of the Russia-Ukraine conflict energy surcharges are becoming more prevalent and impactful, particularly when sourcing materials from Europe. Nonetheless, we have responded quickly to offset a significant portion of the cumulative impact, especially in Performance Coatings. I am encouraged by the rate of price execution and remain confident that we will return to pre-pandemic margins over time.”
Mr. Bryant continued, “Even in this dynamic environment we are delivering above-market growth rates across the portfolio, demonstrating the benefits of our leading technology platforms and myriad of new product launches. I expect us to continue to drive strong organic sales growth even as markets are slow to fully recover. Looking beyond the near-term, I am encouraged by the degree of pent-up consumer demand, low channel inventory levels, and successful pricing execution supporting a significant long-term growth potential for Axalta as end-markets normalize toward pre-pandemic levels of activity.” Mr. Bryant concluded, “We see tremendous opportunity in the realization of our strategy and remain committed to the execution of our plans.”
Performance Coatings first quarter net sales were $814.4 million, an increase of 15.1% year-over-year. Organic constant currency net sales increased 13.2% in the period as both end-markets provided strong contributions to a 10.7% price and product mix benefit while Refinish drove the majority of the 2.5% segment volume growth. Foreign exchange in the first quarter was a 3.5% year-over-year headwind led by a weaker Euro and Lira.
Refinish net sales increased 15.6% year-over-year to $461.4 million in Q1 2022, including a 4.0% increase in volume versus the prior year and an 8.1% contribution from M&A, partially offset by a foreign exchange headwind of 4.1%. Average price and product mix increased high-single digits in the period offsetting the impact of continued variable cost inflation. The industry recovery is steadily progressing driven by a return to in-person work, higher-miles driven, and increasing traffic congestion though supply chain constraints and customer labor availability headwinds persist.
Industrial net sales increased 14.5% to $353.0 million, driven by the 14.8% increase in average price and product mix. In response to the challenging variable cost environment, a number of pricing actions were executed in the late stages of the quarter, which should sustain positive pricing momentum into the second half of the year. Volume growth of 0.6% includes a high-single digit percent drag from supply chain constraints, which limited our ability to serve a healthy demand environment. Growth was led by stronger activity in North America, particularly in the Building Products and General Industrial businesses.
The Performance Coatings segment generated Adjusted EBIT of $94.6 million in the first quarter compared with $117.2 million in Q1 2021, with associated margins of 11.6% and 16.6%, respectively. The contributions from substantial organic sales growth was more than offset by a significant increase in raw material, logistics, labor, and energy expenses versus the prior-year period.
Mobility Coatings net sales were $359.7 million in Q1 2022, an increase of 1.0% year-over-year. Constant currency net sales increased 3.0% year-over-year, driven by a 4.9% price-mix tailwind, which included mid-single-digit higher price and slightly negative mix, offset by 1.9% lower volumes.
Light Vehicle net sales decreased 1.2% to $275.6 million year-over-year, but improved 8.1% sequentially versus Q4 2021 driven by pricing gains and above-market volume growth. Better year-over-year and sequential price realization resulted from a combination of newly negotiated pricing agreements to offset variable cost inflation and the catch-up of raw material linked index pricing in select customer contracts. Volume declined 3.5% year-over-year but exceeded global auto production rates, which declined 4.5% to 19.7 million in Q1 2022 driven by continued global supply constraints. On a sequential basis volume growth was 6.7% vs. a global production decline of 6.8% enabled by customer wins and regional mix weighted to seasonal growth in the Americas and EMEA.
Commercial Vehicle net sales increased 8.7% to $84.1 million versus Q1 2021 (a 10.0% increase excluding foreign currency offsets), driven by ongoing global production rate recovery versus the prior year quarter, excluding China, and supported by strong continued global demand across most vehicle end-businesses served. Americas and Western Europe heavy-duty and medium-duty truck order backlog is 11-months and 8-months, respectively, reflecting historically strong demand in a challenging supply chain environment.
The Mobility Coatings segment generated Adjusted EBIT of $0.5 million in Q1 2022 compared with Adjusted EBIT of $39.2 million in Q1 2021, driven by higher variable costs against the prior year period given persistent inflation coupled with global volume headwinds in Light Vehicle, offset partly by tailwinds of higher price.
Axalta ended the first quarter with cash and cash equivalents of $576.2 million and total liquidity of over $1.1 billion. Our net debt to trailing twelve month ("LTM") Adjusted EBITDA ratio increased to 4.1x at quarter end versus 3.5x as of December 31, 2021, reflecting decreased cash balances driven by $175.1 million of Q1 share repurchases, a modest seasonal use of free cash flow, as well as moderately lower year-over-year LTM Adjusted EBITDA. Axalta ended the first quarter with an Adjusted EBITDA to interest expense coverage ratio of 5.9x. Total net leverage is anticipated to decline through the year given the typical second-half weighted distribution of operating cash flow and a favorable outlook for sequential earnings growth.
First quarter total operating cash flow use was $43.9 million versus an inflow of $39.6 million in Q1 2021 largely impacted by inflationary and pricing impacts in working capital. Free cash flow totaled a use of $80.2 million compared with an inflow of $11.3 million in Q1 2021, including higher capital expenditures in the period totaling $42.5 million versus $31.8 million in the prior-year quarter. We repurchased 6.4 million shares of our common stock during the first quarter for total consideration of $175.1 million and an average price of $27.24 per share.
Sean Lannon, Axalta's Chief Financial Officer, commented, “Though Axalta faced material incremental headwinds during the quarter we are pleased that operating results met or exceeded our guidance. Our teams made excellent progress this quarter delivering on pricing execution with improving realization across every end-market. Volume growth continued for the fifth consecutive quarter in three of four end-markets as customer activity begins the process of normalization from pandemic effects. Yet, margin recovery remains among our highest priorities in this inflationary period. We are determined to offset cost inflation and accelerate a return to strong profitability. In the meantime, given the strength in our liquidity position, we will look to create further value for our shareholders through balanced capital allocation among opportunistic share repurchases, organic growth investments, and an active M&A pipeline.”
First Quarter 2022 Highlights:
Net sales increased 10.4% year-over-year (13.4% ex FX) led by accelerating pricing gains in every end-market and a solid global demand profile, except in Light Vehicle due to continued auto OEM production constraints
Price-mix increased 8.8% with strong contributions across all end-markets; Industrial Coatings mid-teens price-mix growth led all end-markets; expect continued sequential pricing gains company-wide
Income from operations of $86.3 million versus $52.6 million in Q1 2021; Adjusted EBIT of $119.5 million compared with $182.8 million in Q1 2021
Diluted EPS of $0.18 versus $0.06 in Q1 2021; Adjusted diluted EPS of $0.31 versus $0.50 in Q1 2021
Completed share repurchases of $175.1 million reflecting the repurchase of 6.4 million shares during Q1 2022
First Quarter 2022 Consolidated Financial Results
First quarter net sales of $1,174.1 million increased 10.4% year-over-year, including a 3.0% foreign currency offset. The strong year-over-year growth was driven by 8.8% higher average price-mix, a 3.6% M&A benefit, and 1.0% better volumes. Performance Coatings Q1 net sales increased 15.1% year-over-year, including mid-teen sales growth in both the Industrial and Refinish end-markets. Mobility Coatings net sales increased 1.0% led by 4.9% higher price-mix and solid volume growth from Commercial Vehicle, given supportive demand and customer production rates despite moderate supply issues. This was partially offset by foreign currency translation and lower volumes in Light Vehicle stemming from customer production constraints as a result of ongoing semiconductor chip and other supply chain shortages.
Income from operations for Q1 2022 totaled $86.3 million versus $52.6 million in Q1 2021. Net income to common shareholders was $41.5 million for the quarter compared with $15.2 million in Q1 2021, and diluted earnings per share was $0.18 compared with $0.06 in Q1 2021. The first quarter benefited from robust sales growth, including significant realized pricing gains; however, operating income was negatively impacted by continued variable cost inflation, and elevated logistics, labor, and energy expenses. Q1 2022 net income to common shareholders also benefited from the absence of the operational matter which had resulted in a charge of $71.5 million, net of tax, in Q1 2021.
Robert W. Bryant, Axalta's President and CEO, commented, “Axalta's first quarter results demonstrated solid execution in a still challenging global operating environment. I am proud of the team for delivering better than anticipated results despite unresolved supply chain challenges and a number of significant unforeseen global headwinds. Specifically I want to recognize the actions of our teams in China who have been able to safely operate and serve our customers during the ongoing lockdowns. We are proving every day that we have a dedicated and resilient organization committed to delivering on our strategic growth imperative.”
“Despite the unprecedented breadth and rate of cost inflation, we are increasing prices aggressively and working hard to ensure we are fully sourced to support our customers’ needs. Raw material availability remains challenged with the potential for areas of trade flow concerns if China COVID-19 lockdowns persist deeper into Q2. As a consequence of the Russia-Ukraine conflict energy surcharges are becoming more prevalent and impactful, particularly when sourcing materials from Europe. Nonetheless, we have responded quickly to offset a significant portion of the cumulative impact, especially in Performance Coatings. I am encouraged by the rate of price execution and remain confident that we will return to pre-pandemic margins over time.”
Mr. Bryant continued, “Even in this dynamic environment we are delivering above-market growth rates across the portfolio, demonstrating the benefits of our leading technology platforms and myriad of new product launches. I expect us to continue to drive strong organic sales growth even as markets are slow to fully recover. Looking beyond the near-term, I am encouraged by the degree of pent-up consumer demand, low channel inventory levels, and successful pricing execution supporting a significant long-term growth potential for Axalta as end-markets normalize toward pre-pandemic levels of activity.” Mr. Bryant concluded, “We see tremendous opportunity in the realization of our strategy and remain committed to the execution of our plans.”
Performance Coatings Results
Performance Coatings first quarter net sales were $814.4 million, an increase of 15.1% year-over-year. Organic constant currency net sales increased 13.2% in the period as both end-markets provided strong contributions to a 10.7% price and product mix benefit while Refinish drove the majority of the 2.5% segment volume growth. Foreign exchange in the first quarter was a 3.5% year-over-year headwind led by a weaker Euro and Lira.
Refinish net sales increased 15.6% year-over-year to $461.4 million in Q1 2022, including a 4.0% increase in volume versus the prior year and an 8.1% contribution from M&A, partially offset by a foreign exchange headwind of 4.1%. Average price and product mix increased high-single digits in the period offsetting the impact of continued variable cost inflation. The industry recovery is steadily progressing driven by a return to in-person work, higher-miles driven, and increasing traffic congestion though supply chain constraints and customer labor availability headwinds persist.
Industrial net sales increased 14.5% to $353.0 million, driven by the 14.8% increase in average price and product mix. In response to the challenging variable cost environment, a number of pricing actions were executed in the late stages of the quarter, which should sustain positive pricing momentum into the second half of the year. Volume growth of 0.6% includes a high-single digit percent drag from supply chain constraints, which limited our ability to serve a healthy demand environment. Growth was led by stronger activity in North America, particularly in the Building Products and General Industrial businesses.
The Performance Coatings segment generated Adjusted EBIT of $94.6 million in the first quarter compared with $117.2 million in Q1 2021, with associated margins of 11.6% and 16.6%, respectively. The contributions from substantial organic sales growth was more than offset by a significant increase in raw material, logistics, labor, and energy expenses versus the prior-year period.
Mobility Coatings Results
Mobility Coatings net sales were $359.7 million in Q1 2022, an increase of 1.0% year-over-year. Constant currency net sales increased 3.0% year-over-year, driven by a 4.9% price-mix tailwind, which included mid-single-digit higher price and slightly negative mix, offset by 1.9% lower volumes.
Light Vehicle net sales decreased 1.2% to $275.6 million year-over-year, but improved 8.1% sequentially versus Q4 2021 driven by pricing gains and above-market volume growth. Better year-over-year and sequential price realization resulted from a combination of newly negotiated pricing agreements to offset variable cost inflation and the catch-up of raw material linked index pricing in select customer contracts. Volume declined 3.5% year-over-year but exceeded global auto production rates, which declined 4.5% to 19.7 million in Q1 2022 driven by continued global supply constraints. On a sequential basis volume growth was 6.7% vs. a global production decline of 6.8% enabled by customer wins and regional mix weighted to seasonal growth in the Americas and EMEA.
Commercial Vehicle net sales increased 8.7% to $84.1 million versus Q1 2021 (a 10.0% increase excluding foreign currency offsets), driven by ongoing global production rate recovery versus the prior year quarter, excluding China, and supported by strong continued global demand across most vehicle end-businesses served. Americas and Western Europe heavy-duty and medium-duty truck order backlog is 11-months and 8-months, respectively, reflecting historically strong demand in a challenging supply chain environment.
The Mobility Coatings segment generated Adjusted EBIT of $0.5 million in Q1 2022 compared with Adjusted EBIT of $39.2 million in Q1 2021, driven by higher variable costs against the prior year period given persistent inflation coupled with global volume headwinds in Light Vehicle, offset partly by tailwinds of higher price.
Balance Sheet and Cash Flow Highlights
Axalta ended the first quarter with cash and cash equivalents of $576.2 million and total liquidity of over $1.1 billion. Our net debt to trailing twelve month ("LTM") Adjusted EBITDA ratio increased to 4.1x at quarter end versus 3.5x as of December 31, 2021, reflecting decreased cash balances driven by $175.1 million of Q1 share repurchases, a modest seasonal use of free cash flow, as well as moderately lower year-over-year LTM Adjusted EBITDA. Axalta ended the first quarter with an Adjusted EBITDA to interest expense coverage ratio of 5.9x. Total net leverage is anticipated to decline through the year given the typical second-half weighted distribution of operating cash flow and a favorable outlook for sequential earnings growth.
First quarter total operating cash flow use was $43.9 million versus an inflow of $39.6 million in Q1 2021 largely impacted by inflationary and pricing impacts in working capital. Free cash flow totaled a use of $80.2 million compared with an inflow of $11.3 million in Q1 2021, including higher capital expenditures in the period totaling $42.5 million versus $31.8 million in the prior-year quarter. We repurchased 6.4 million shares of our common stock during the first quarter for total consideration of $175.1 million and an average price of $27.24 per share.
Sean Lannon, Axalta's Chief Financial Officer, commented, “Though Axalta faced material incremental headwinds during the quarter we are pleased that operating results met or exceeded our guidance. Our teams made excellent progress this quarter delivering on pricing execution with improving realization across every end-market. Volume growth continued for the fifth consecutive quarter in three of four end-markets as customer activity begins the process of normalization from pandemic effects. Yet, margin recovery remains among our highest priorities in this inflationary period. We are determined to offset cost inflation and accelerate a return to strong profitability. In the meantime, given the strength in our liquidity position, we will look to create further value for our shareholders through balanced capital allocation among opportunistic share repurchases, organic growth investments, and an active M&A pipeline.”
Q2 2022 Financial Guidance
- Net Sales: ~+11-13%, including, ~(4)% foreign currency impact and ~+4% acquisition benefit; pricing expected to be low double-digits higher year-over-year
- Adjusted EBIT: $135-$165 million
- Adjusted Diluted EPS: $0.35-0.45; including a $0.02 foreign currency headwind
- Interest Expense: ~$34 million
- Diluted Shares: ~222 million
- Adjusted Tax Rate: ~21-22%
- D&A: ~$80 million; including $24 million step-up D&A
- Expect raw material inflation in the high twenties versus Q2 2021
- Guidance assumes COVID-19 lockdowns in China begin to moderate in May and no further geopolitical escalation stemming from the Russia-Ukraine conflict; includes a 2%-3% year-over-year Net Sales and $0.03 EPS impact
