10.31.22
Axalta Coating Systems Ltd. announced its financial results for the third quarter ended September 30, 2022.
Third Quarter 2022 Highlights:
Third quarter net sales of $1,238.7 million increased 13.8% year-over-year, including a negative 6.3% foreign currency impact. The strong year-over-year growth was driven by 9.7% higher average price-mix, a 1.6% M&A benefit and 8.8% better volumes. Performance Coatings net sales increased 7.5% year-over-year, driven by constant currency growth of 19.9% in Refinish and 7.1% in Industrial. Mobility Coatings net sales increased 29.5% supported by a recovery in global auto production from the severe supply constraints in the prior-year period.
Income from operations for Q3 2022 totaled $123.5 million versus $124.7 million in Q3 2021. Net income to common shareholders was $62.4 million for the quarter compared with $69.1 million in Q3 2021. Diluted earnings per share was $0.28 compared with $0.30 in Q3 2021. Q3 2022 benefited from robust sales growth, including significant realized pricing gains and volume improvement; however, operating income was negatively impacted by continued variable raw material inflation, and elevated logistics, energy and labor expenses. In addition, foreign currency headwinds, the Russia-Ukraine conflict and COVID-19 lockdowns in China represented a combined ~$16 million headwind to income from operations in the quarter.
Rakesh Sachdev, Axalta’s interim CEO and President, commented, “I am pleased that we were able to report earnings within our stated guidance range despite acute currency and inflationary headwinds plus pockets of softening regional demand. Our resilient third quarter performance can be attributed to the prioritization of price to offset variable cost inflation, as well as continued market recovery in our Refinish and Light Vehicle end-markets. New customer wins across the portfolio supported volume growth and again highlighted our customers’ continued preference for our industry-leading products and services. The third quarter also represented an inflection point in our price-cost trajectory as we more than offset year-over-year variable cost inflation for the first time since the current unprecedented inflationary environment began in mid-2021. Our teams are taking the steps necessary to recapture the value provided by our products and services to our partners, but more is needed for us to return to pre-COVID levels of profitability.”
Sachdev continued, “Enhancing our profitability is among my highest near-term strategic imperatives. Successful day-to-day execution is fundamental to achieving our long-term goals, which will be realized through driving improved operational performance and productivity. We have a great leadership team ready to tackle these objectives. I believe we can accelerate a return to pre-COVID profitability on our pathway to sustained growth.”
Refinish net sales increased 12.5% to $498.7 million (19.9% ex-FX) in Q3 2022, including a 4.3% increase in volume and a 3.9% contribution from M&A, partially offset by a foreign exchange headwind of 7.4%. Refinish volume growth was very strong in the Americas and stable in China and in EMEA year-over-year. The market recovery is steadily progressing with improvement in key metrics such as office occupancy and road congestion. Refinish again drove above-market volume growth with several notable MSO wins in the quarter alongside an increase in points of distribution. Sequentially, volumes declined 4.4% consistent with seasonal factors and in line with prior expectations. Price-mix was 11.7% higher year-over-year, which more than offset the impact of continued variable cost inflation.
Industrial net sales increased 1.1% to $339.3 million (7.1% ex-FX) driven by an 11.7% increase in average price-mix, which was enabled by prioritization of a value-based selling approach of our innovative offerings. Volume declined 4.6% year-over-year with strength in the Americas being offset by significant declines in China and EMEA. Sales in China have been heavily impacted by extended COVID-19 lockdowns and by lower regional export activity. Sequentially, volume declined 7.2% in Q3 driven by worsening EMEA macroeconomic factors with a modest offset from better China activity versus a more lockdown-heavy Q2.
The Performance Coatings segment generated Adjusted EBIT of $121.8 million in the third quarter compared with $122.8 million in Q3 2021, with associated margins of 14.5% and 15.8%, respectively. The contribution from substantial sales growth was offset by the significant increase in raw material, logistics, labor and energy costs, as well as currency translation headwinds versus the prior-year period.
Light Vehicle net sales increased 28.8% to $303.0 million (34.5% ex-FX) year-over-year driven by pricing gains. Light Vehicle volume increased 31.6% year-over-year and exceeded global auto production rates, which increased 27.5% year-over-year to 21 million builds in Q3 2022. New customer wins are driving the market out-performance year-to-date, particularly in China where Q3 2022 Light Vehicle volume increased 72.5% versus 31% local auto production growth. 2.9% year-over-year price-mix realization resulted from a combination of newly negotiated agreements to offset variable cost inflation and the catch-up of raw material linked index pricing in select customer contracts.
Commercial Vehicle net sales increased 31.8% to $97.7 million versus Q3 2021 (35.0% ex-FX), driven by customer wins and a recovery in global commercial vehicle production rates. Commercial Vehicle volume growth of 24.3% exceeded Class 4-8 truck market growth. Vehicle demand in this end-market remained robust in the quarter with September 2022 Class 8 order volume at historical highs.
The Mobility Coatings segment generated Adjusted EBIT of $3.6 million in Q3 2022 compared with an Adjusted EBIT loss of $2.7 million in Q3 2021, driven by better volume and improved pricing partially offset by higher variable and fixed costs.
Third quarter total operating cash flow was $79.9 million versus $142.9 million in Q3 2021. Working capital was a larger use of cash in the period versus the prior-year period following inflationary pressures and higher physical inventory levels as of September 30, 2022. Meanwhile, accounts receivable increased reflecting stronger volumes and pricing inputs. Free cash flow totaled $50.5 million compared with $111.7 million in Q3 2021.
Sean Lannon, Axalta's Chief Financial Officer, commented, “Overall demand growth in the third quarter was robust especially within Refinish and Mobility Coatings where we continue to see recovery; yet, slower regional economic activity was evident in select geographies, namely in the EMEA and Chinese Industrial markets. In these areas, sales softened considerably beginning in Q2, and continued through Q3, driven by slower than anticipated post-COVID-19 lockdown recovery in China and EMEA macroeconomic and energy headwinds, which we expect to continue through the fourth quarter. Currently, the slowdown seems to be fairly concentrated within Industrial. We have layered in the broader geographic weakness into our Q4 outlook, which also reflects substantial FX headwinds and minimal change in the sequential quarter-over-quarter cost environment. We believe that the resiliency of our Refinish end-market, deferred demand in both Commercial Vehicle and Light Vehicle and company-wide pricing momentum are natural hedges if macros step lower.”
Third Quarter 2022 Highlights:
- Net sales increased 13.8% year-over-year (20.1% ex FX) led by strong pricing and solid volume growth
- Realized 9.7% price-mix growth with contributions from every end-market; 2.5% sequential price-mix growth reflects continued pricing momentum
- Volume increased 8.8% driven largely by market recovery in both Refinish and Mobility despite impacts of the Russia - Ukraine conflict, China COVID-19 lockdowns, and Industrial EMEA slowing
- Income from operations of $123.5 million versus $124.7 million in Q3 2021; Adjusted EBIT of $148.0 million compared with $146.0 million in Q3 2021
- Diluted EPS of $0.28 versus $0.30 in Q3 2021; Adjusted diluted EPS of $0.39 flat with Q3 2021
- Third Quarter 2022 Consolidated Financial Results
Third quarter net sales of $1,238.7 million increased 13.8% year-over-year, including a negative 6.3% foreign currency impact. The strong year-over-year growth was driven by 9.7% higher average price-mix, a 1.6% M&A benefit and 8.8% better volumes. Performance Coatings net sales increased 7.5% year-over-year, driven by constant currency growth of 19.9% in Refinish and 7.1% in Industrial. Mobility Coatings net sales increased 29.5% supported by a recovery in global auto production from the severe supply constraints in the prior-year period.
Income from operations for Q3 2022 totaled $123.5 million versus $124.7 million in Q3 2021. Net income to common shareholders was $62.4 million for the quarter compared with $69.1 million in Q3 2021. Diluted earnings per share was $0.28 compared with $0.30 in Q3 2021. Q3 2022 benefited from robust sales growth, including significant realized pricing gains and volume improvement; however, operating income was negatively impacted by continued variable raw material inflation, and elevated logistics, energy and labor expenses. In addition, foreign currency headwinds, the Russia-Ukraine conflict and COVID-19 lockdowns in China represented a combined ~$16 million headwind to income from operations in the quarter.
Rakesh Sachdev, Axalta’s interim CEO and President, commented, “I am pleased that we were able to report earnings within our stated guidance range despite acute currency and inflationary headwinds plus pockets of softening regional demand. Our resilient third quarter performance can be attributed to the prioritization of price to offset variable cost inflation, as well as continued market recovery in our Refinish and Light Vehicle end-markets. New customer wins across the portfolio supported volume growth and again highlighted our customers’ continued preference for our industry-leading products and services. The third quarter also represented an inflection point in our price-cost trajectory as we more than offset year-over-year variable cost inflation for the first time since the current unprecedented inflationary environment began in mid-2021. Our teams are taking the steps necessary to recapture the value provided by our products and services to our partners, but more is needed for us to return to pre-COVID levels of profitability.”
Sachdev continued, “Enhancing our profitability is among my highest near-term strategic imperatives. Successful day-to-day execution is fundamental to achieving our long-term goals, which will be realized through driving improved operational performance and productivity. We have a great leadership team ready to tackle these objectives. I believe we can accelerate a return to pre-COVID profitability on our pathway to sustained growth.”
Performance Coatings Results
Performance Coatings third quarter net sales were $838.0 million, an increase of 7.5% year-over-year. Constant currency net sales increased 14.4% in the period as both end-markets provided strong contributions to a 11.7% price and product mix benefit. Refinish volume growth offset lower volumes in Industrial, resulting in slightly positive year-over-year segment volumes. Foreign exchange in the third quarter was a 6.9% year-over-year headwind led by the Euro, British Pound and Chinese Renminbi.Refinish net sales increased 12.5% to $498.7 million (19.9% ex-FX) in Q3 2022, including a 4.3% increase in volume and a 3.9% contribution from M&A, partially offset by a foreign exchange headwind of 7.4%. Refinish volume growth was very strong in the Americas and stable in China and in EMEA year-over-year. The market recovery is steadily progressing with improvement in key metrics such as office occupancy and road congestion. Refinish again drove above-market volume growth with several notable MSO wins in the quarter alongside an increase in points of distribution. Sequentially, volumes declined 4.4% consistent with seasonal factors and in line with prior expectations. Price-mix was 11.7% higher year-over-year, which more than offset the impact of continued variable cost inflation.
Industrial net sales increased 1.1% to $339.3 million (7.1% ex-FX) driven by an 11.7% increase in average price-mix, which was enabled by prioritization of a value-based selling approach of our innovative offerings. Volume declined 4.6% year-over-year with strength in the Americas being offset by significant declines in China and EMEA. Sales in China have been heavily impacted by extended COVID-19 lockdowns and by lower regional export activity. Sequentially, volume declined 7.2% in Q3 driven by worsening EMEA macroeconomic factors with a modest offset from better China activity versus a more lockdown-heavy Q2.
The Performance Coatings segment generated Adjusted EBIT of $121.8 million in the third quarter compared with $122.8 million in Q3 2021, with associated margins of 14.5% and 15.8%, respectively. The contribution from substantial sales growth was offset by the significant increase in raw material, logistics, labor and energy costs, as well as currency translation headwinds versus the prior-year period.
Mobility Coatings Results
Mobility Coatings net sales were $400.7 million in Q3 2022, an increase of 29.5% year-over-year. Constant currency net sales increased 34.6% year-over-year, driven by 29.9% higher volumes and 4.7% better price-mix.Light Vehicle net sales increased 28.8% to $303.0 million (34.5% ex-FX) year-over-year driven by pricing gains. Light Vehicle volume increased 31.6% year-over-year and exceeded global auto production rates, which increased 27.5% year-over-year to 21 million builds in Q3 2022. New customer wins are driving the market out-performance year-to-date, particularly in China where Q3 2022 Light Vehicle volume increased 72.5% versus 31% local auto production growth. 2.9% year-over-year price-mix realization resulted from a combination of newly negotiated agreements to offset variable cost inflation and the catch-up of raw material linked index pricing in select customer contracts.
Commercial Vehicle net sales increased 31.8% to $97.7 million versus Q3 2021 (35.0% ex-FX), driven by customer wins and a recovery in global commercial vehicle production rates. Commercial Vehicle volume growth of 24.3% exceeded Class 4-8 truck market growth. Vehicle demand in this end-market remained robust in the quarter with September 2022 Class 8 order volume at historical highs.
The Mobility Coatings segment generated Adjusted EBIT of $3.6 million in Q3 2022 compared with an Adjusted EBIT loss of $2.7 million in Q3 2021, driven by better volume and improved pricing partially offset by higher variable and fixed costs.
Balance Sheet and Cash Flow Highlights
Axalta ended the third quarter with cash and cash equivalents of $517.4 million and total liquidity of over $1.0 billion. Our net debt to trailing twelve month ("LTM") Adjusted EBITDA ratio was 4.1x at quarter end versus 4.2x as of June 30, 2022, reflecting moderately higher cash balances and stronger LTM Adjusted EBITDA. Axalta ended the third quarter with an Adjusted EBITDA to interest expense coverage ratio of 5.8x. Our Q4 financial outlook implies that the net leverage ratio should decline below 4-times at year-end.Third quarter total operating cash flow was $79.9 million versus $142.9 million in Q3 2021. Working capital was a larger use of cash in the period versus the prior-year period following inflationary pressures and higher physical inventory levels as of September 30, 2022. Meanwhile, accounts receivable increased reflecting stronger volumes and pricing inputs. Free cash flow totaled $50.5 million compared with $111.7 million in Q3 2021.
Sean Lannon, Axalta's Chief Financial Officer, commented, “Overall demand growth in the third quarter was robust especially within Refinish and Mobility Coatings where we continue to see recovery; yet, slower regional economic activity was evident in select geographies, namely in the EMEA and Chinese Industrial markets. In these areas, sales softened considerably beginning in Q2, and continued through Q3, driven by slower than anticipated post-COVID-19 lockdown recovery in China and EMEA macroeconomic and energy headwinds, which we expect to continue through the fourth quarter. Currently, the slowdown seems to be fairly concentrated within Industrial. We have layered in the broader geographic weakness into our Q4 outlook, which also reflects substantial FX headwinds and minimal change in the sequential quarter-over-quarter cost environment. We believe that the resiliency of our Refinish end-market, deferred demand in both Commercial Vehicle and Light Vehicle and company-wide pricing momentum are natural hedges if macros step lower.”
Q4 2022 Financial Guidance
- Net Sales: ~6%-8%, including ~(7%) foreign currency impact; Anticipate mid single-digit volume and nearly double-digit price-mix growth
- Adjusted EBIT: $120-145 million, correlating to Adjusted EBITDA of $185-210 million
- Adjusted Diluted EPS: $0.31-0.39; including a $0.04 year-over-year headwind from foreign currency and the Russia-Ukraine conflict
- Interest Expense: ~$37 million
- Diluted Shares: ~221 million
- Adjusted Tax Rate: ~22%-23%
- D&A: ~$75 million; including $23 million step-up D&A
- Expect raw material inflation in the high-teens versus Q4 2021 and flat-to-down modestly vs. Q3 2022
- Fourth quarter Free Cash Flow of $175-$225 million including ~$50 million of Capex
