Ladies and gentlemen, thank you for standing by. Welcome to Axalta’s Fourth Quarter and Full Year 2019 Earnings Call. All participants will be in a listen-only mode. A question-and-answer session will follow the comments by management. Today’s call is being recorded, and replays will be available through February 6th. Those listening after today’s call, should please take note that the information provided in this recording will not be updated and therefore may no longer be current. I will now turn the call over to Chris Mecray. Please go ahead, sir.

Thank you, and good morning. This is Chris Mecray, VP of Investor Relations. We appreciate your continued interest in Axalta and welcome you to our fourth quarter and full year 2019 financial results conference call. Joining me today are Robert Bryant, CEO, and Sean Lannon, CFO. This morning, we released our quarterly financial results and posted a slide presentation to the Investor Relations section of our website at axalta.com, which we will be referencing during this call. Both our prepared remarks and discussion today may contain forward-looking statements reflecting the Company’s current view of future events and their potential effect on Axalta’s operating and financial performance. These statements involve uncertainties and risks and actual results may differ materially from those forward-looking statements. Please note that the Company is under no obligation to provide updates to these forward-looking statements. The presentation also contains various non-GAAP financial measures in the appendix. We’ve included reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information regarding forward-looking statements and non-GAAP financial measures, please refer to our filings with the SEC. Separately, Axalta’s review of strategic alternatives is ongoing. We do not have news on that front to share with you, but we will provide updates as warranted. We will not be addressing the strategic review process any further during this call and we thank you for your ongoing patience. I’ll now turn the call over to Robert.

Thank you, Chris, and good morning everyone. We appreciate you joining us on our call to review our fourth quarter and full year 2019 results as well as our 2020 guidance. Axalta delivered a strong fourth quarter. Our adjusted EBIT and adjusted EPS were both in line with our expectations, and our free cash flow well exceeded our targets, also producing a record annual cash flow results. Despite fundamental demand headwinds in some end markets linked to an uneven global industrial economy, I’m proud to say that the Axalta team executed very well closing out the year by meeting or exceeding key aspects of our financial goals. Axalta’s vision as a reminder for our investors and shareholders is to be the preferred coatings partner for customers seeking the most innovative products and services delivered by the most talented team in the industry. I’m proud to note that the results we saw this year fully reflect that commitment and hard work by the people of Axalta that our vision lays out. And I want to thank our team for the passion for performance they exhibit every day that enables our innovation and fosters the industry’s leading coatings technology. Turning to Slide 3, let’s take a look at some of our 2019 highlights in more detail. 2019 was not an easy year, with demand pressure in global vehicle markets and weakening global manufacturing activity resulting in volume pressure for the coatings industry. Despite that, Axalta’s net sales held very stable decreasing just 0.5% in the aggregate compared to 2018 before negative foreign currency and divestiture related impacts. For Axalta, growth engines in Performance Coatings continue to offset other more cyclically impacted end markets. Fourth quarter net sales decreased 2.5% year-over-year, excluding the impact of foreign exchange and the China joint venture sale.…

Thanks, Robert, and good morning. Turning to Slide 5, fourth quarter net sales, before FX impacts, decreased 4.5% year-over-year, including a 2.8% decrease from Performance Coatings and 7.7% from Transportation Coatings. These results included the 2% impact from the sale of a China joint venture interest in the second quarter, meaning that organic net sales decreased 2.5% overall for the quarter. The 5% lower volume for the quarter was driven heavily by Transportation Coatings, while the positive price mix contribution came principally from the Performance Coatings segment. We saw continued strong progress on price in Light Vehicle in the quarter, which is now the fifth quarter in a row. FX translation impact continued to moderate somewhat with a 1.3% headwind reflected in the fourth quarter, given ongoing euro weakness coupled with impact from the Brazilian real, the Chinese renminbi and the Argentine peso. Q4 adjusted EBIT of $174 million was a 1.6% increase versus the prior year and adjusted EBIT margins increased 110 basis points to 15.8% in the fourth quarter. The higher income result reflects strong drop through of price and mix benefits as well as positive contribution from lower variable and operating expenses, partially offset by the impact of lower volumes in the period, most notably in Transportation Coatings. As Robert mentioned, we also saw headwinds in the quarter of approximately $10 million from annual incentive compensation expense, primarily associated with our outperformance on delivering a strong free cash flow result. Turning to Slide 6, Performance Coatings Q4 net sales decreased 2.8% year-over-year, excluding a 1.2% FX headwinds and increased 0.3% excluding the impact of the China JV sale. The net sales result was driven by a 3% increase in average price mix benefits, offset in large part by lower volumes. Refinish reported 3.5% net sales growth ex-FX,…

Thank you, Sean. In summary, we’re very pleased with our financial and operational performance for the fourth quarter and the full-year 2019. Despite volume softness, we were able to achieve our profitability target through cost management and price increases. We executed on several key projects to competitively position Axalta for the future, including footprint adjustments in Europe and China, as well as the launch of our SAP S/4 HANA upgrade. We continue to innovate in our products, services and go-to-market strategies, including ongoing R&D and technology investment of approximately 4% of net sales, the highest in the coatings industry. Our innovation success was well recognized by our customers and the industry at large as evidenced by several key innovation, quality and sustainability awards we received in 2019. As we look forward to 2020, we will remain focused on pursuing sales growth opportunities, offsetting past inflation with appropriate actions to recover value, adjusting our cost structure to market conditions with additional Axalta Way efforts, leveraging innovation to create value for our customers, generating significant free cash flow, and achieving the highest return possible on our asset base. Finally, I'd like to note that none of our existing progress and growth would be possible without the hard work and dedication of our global team. The Axalta team collectively delivered in 2019. And I'd like to express my sincere appreciation for the hard work of our teams around the globe who made this possible. This concludes our prepared remarks. We now be pleased to answer any questions. So operator, would you please open up the lines for Q&A?

Hey, it's David Huang here for David. I guess first question, just on price versus raw, in terms of your four segments, where are you still seeing a gap and when do you expect that gap to close?

As far as all the segments as we've, I think, previously stated Performance Coatings we are fully caught up as far as the price cost gap. Light Vehicles still lagging a bit. I think we've made a lot of progress in 2019. We got about 2.2% in price over the course of the full year, about 1.9% in the fourth quarter. We are still lagging there and that continues to be a focus for the company.

And then just in terms of the cost-saving program, how much is still left in the Axalta Way Program. And I guess, do you need additional cost saving programs in 2020 achieve your target?

Yes, so when we announced the Axalta Way too back in 2018 we said about $200 million, it was going to come in ratably. So we're about a $100 million into the overall project. So we would anticipate another $50 million coming through for 2020.

Thanks.

Our next question is from Robert Koort with Goldman Sachs.

Hi guys, this is Anthony on for Bob. You guys mentioned an expectation for improvement in the second half of 2020 relative to the first half. Can you just talk through what gives you confidence in a recovery in 2 H? And what business or geographies you might be seeing some green shoots today?

So I mean a lot of our guidance is following industrial production trends, as well as we're seeing recovery as far as IHS data on Light Vehicle. Certainly, there are elements around stability of Refinish, our business performed extremely well for 2020. In Refinish end market we continue to see volume stability for 2020 and we continue to see and expect pricing in that business. But that's by and large kind of how we're seeing 2020.

Okay. And then just as a follow-up to that how should we think about your ability to recapture price and transportation in light of the volume headwinds you are expecting? And can you segment your price expectations between Light Vehicle and Commercial, just given the 8.5% decline that you're expecting for the year? Thanks.

As we look at the Light Vehicle end market our goal, of course, always is to lower our cost structure continually in that line of business internally to maintain margin, however, an increased margin. However, with the Light Vehicle customer base they do recognize the value that we are creating from them from a new product innovation, as well as from a service component. We have a number of products that will continue to roll through in that business. They just by virtue of the new product introductions, as well as additional business we've picked up that are at more current raw material pricing baselines, we should see some natural pickup there that would offset we believe any softness. So overall, as we think about – as we think about it we're looking for a fairly flattish to low single digit year in terms of pricing in that end market.

Our next question is from Mike Leithead with Barclays. Please proceed.

Thanks. Good morning guys.

Good morning.

I guess first question on the China footprint decision, I think, in the release you pointed to evolving market conditions driving your decision. So I guess from when you initially started the engineering work to today, has demand in the region just not developed as you anticipated, because, I guess, I'm assuming the capital cost control wasn't the issue?

Correct. As we've looked at forecast in that region, we had – I think we're overall optimistic on China and the growth that will occur there over long-term. However, in the shorter term projected bills had pulled back quite a bit. And therefore we have adjusted our CapEx planning there accordingly to essentially put in and build out additional capacity at our existing facilities in order to meet market demand. So our commitment to China, our commitment to our Light Vehicle customers in that market is unwavering. We've been present in China for more than 30 years. And I expect we’ll be a major player in China 30 years from now as well. However, in the short term, we did consider it prudent to put in some of the required capacity expansion to meet the market demand that will still grow in a more modular fashion just given the development of projected bills in the country.

Got it. That makes a lot of sense. And then bigger picture question just on Refinish, I guess when I think about that business, I've always thought of Refinish being this Steady Eddy 3% to 4% annual grower. But if I look at your revenue the past few years, it seems Refinish is kind of stuck in this $1.7 billion to $1.8 billion range. So I guess can you maybe just talk about the underlying profit growth you've seen in this business over the past few years versus the flat top line? And just how you think about structural growth going forward there?

We continue to believe that the Refinish market over the medium and the long term will grow and is an attractive market. We actually saw in the fourth quarter some more favorable trends than we saw, for example, in the third quarter. And that's not uncommon that you see quarter-to-quarter variation in the business. As we've highlighted previously though the global market shift from solventborne to waterborne products does create structural volume reduction since the waterborne products do require less product to apply. And there's also a mix effect from the growth of MSOs who are more efficient with paint usage and who mostly use waterborne products. And that being said, we did see Refinish volumes a little bit more subdued globally, despite the growth that we saw in the period in North America that we highlighted. And we believe that that relates mostly to economic conditions, which have been a little bit more challenged globally.

Thank you.

Our next question is from Arun Viswanathan with RBC Capital Markets. Please proceed.

Hi. Sorry about that. Excuse me. Just curious has any of the recent developments in China as far as the coronavirus and everything entered into your thoughts? And if so, what do you assess is potentially the impact? And then secondly, as far as the price cost relationship goes I understand that you are largely caught up, just curious about potential for further price initiatives in case inflation does crop up. Thanks.

So here's what we know so far. As you know, as of this morning, there are approximately, I think, 7,700 confirmed cases and about 170 deaths. We were expecting most business in China to resume around January 31 before the coronavirus outbreak. As of yesterday, the government has pushed out the resumption of business activities to February 3 for a large number of provinces and cities and that includes our Northern China plant, and February 10 for a smaller group of provinces and cities that includes our Shanghai plant. Now, we have seen many of our Light Vehicle customers that have pushed out their production schedules by between one and three weeks at this point. And we've also heard that some car dealerships are expected to remain closed until well after the Chinese New Year ends. We've also seen some of our customers in Refinish, Industrial, and the Light Vehicle, notify us of their intention to delay or push out their order somewhat. I'd say at this point, perhaps the biggest unknown is the impact on logistics. Roads in and out of some of the major cities are closed and the impact on product movement, shipping, and inbound raw materials is not yet clear. However, above all, our primary goals are our employee safety and taking care of our customers and we've taken a multitude of steps to ensure that we're doing the best to both of them. Like others, we will continue to monitor the situation closely and be in a position to provide a better update on any potential impact on the business as we know more. And on your second question, I'll let Sean answer that one.

Yes, so currently the construct topline assumes we're going to get price in Refinish and modest price in Light Vehicle, that's assuming that it's a relatively flat raw material backdrop. I think if things were to change on us and we are to see oil spike and some of the supply-demand dynamics to change, then we quickly have to react and look at our Industrial business for pushing price like we've done in past years.

Great. I'll turn it over. Thanks.

Our next question is from Josh Spector with UBS. Please proceed.

Yes, hey, guys. Just a question on Refinish. Wondering if you could provide some more context about what you're seeing maybe specifically within Europe and maybe how far down that was in the quarter, and if you see anything changing over the next couple of quarters here?

Refinish in Europe remains relatively stable. We did see some softness in some markets and indicative of the overall global – the overall economic conditions in that market. But overall, it remained fairly stable for us.

So then if North America was up, where was the major offset or is North America only slightly up?

So, North America was only slightly up. Volume was down slightly in Europe, but it was a relatively flat performance. I mean, we're not talking big numbers here. And that's why you're ending up with a net result of about down 0.3% globally.

Okay, thanks. That's helpful. And just on your CapEx guide for 2020, I was wondering if you could just kind of put that into some larger buckets just from the standpoint of what you would consider kind of base maintenance growth, the ERP spend. And I know timing was an impact on your 2019 number. But just wondering kind of what's the flex within that $160 million as you look at 2020?

Yes, so certainly, the biggest aspect is the SAP S/4 HANA of about $40 million. Maintenance typically runs $40 million to $50 million and then growth in productivity is the difference.

Thank you.

Our next question is from Christopher Parkinson with Credit Suisse. Please proceed.

Hi, this is Harris Fein on for Chris. Thanks for taking my question. On Refinish, can you discuss what you're seeing in terms of pace of MSO consolidation and maybe how you're framing the share gain opportunity and maybe any differences you're seeing between Europe and the U.S.?

MSO consolidation, as you know, in terms of the number of body shops that were acquired by major MSOs, we've seen that really – excuse me, peak in terms of the activity of all the major MSOs in the 2016, 2017 time period in terms of just pure acquisition activity. What we're seeing now more is there are still acquisitions, but we're seeing more brownfield and greenfield investment by many of the MSO players in North America. We do expect that MSO players will continue to grow and represent a larger portion of the market over time. We did see, of course, more recently the merger of a couple of the largest MSOs in the North America space, which of course, was a major consolidation event. But in terms of each one of the MSOs, the sheer number of individual body shops that they're acquiring, that has slowed down from the pace it was a few years ago. In terms of Europe, I'd characterize it as overall market conditions and then more Axalta-specific opportunities. From an overall market perspective, as we highlighted, the market has been relatively flat. We believe that's heavily linked to just the global economic activity that we're seeing in the region and also impacted somewhat by some of the more country-specific situations in Europe, such as Brexit. For Axalta, we have a very strong market position in several of the larger markets within the region. However, we have a lower market share in some of the periphery countries in the region and also Eastern Europe and Russia. So that's a nice growth opportunity for us. And our global Refinish team and EMEA Refinish team were both very focused on that growth opportunity.

Our next question is from Steven Haynes with Morgan Stanley. Please proceed.

Hi guys, thanks for taking my question. If I could just ask a quick one on the SAP project, I know it's in early innings. But any idea of I guess maybe how to quantify the future savings? I know you're saying in excess of the investment. But kind of any early learnings and how we should be thinking about how to quantify the benefits? Thanks.

Yes. So we're extremely early into the project, just kicking it off in December formally. We are going to provide incremental updates as we progress through the project. We can't help you with exactly how to quantify, but when we think about the underlying productivity, it's going to be extending from all the way around pricing practices to back office support, all the way through working capital improvement. And we would expect one-time benefit as far as working capital, and then sustainable savings as it relates to back office and productivity across a number of the functional areas.

And I would just add to what Sean said. Many ERP upgrades do not generate the benefits of that they're projected to. However, I would remind you that in Axalta's case, we're using an instance of SAP that's more than 20 years old and that was highly customized by DuPont. So we believe the benefits that we will achieve are actually very real.

Our next question is from Stephen Byrne with Bank of America Merrill Lynch. Please proceed.

Hi, this is Luke Washer on for Steve. I wanted to ask, did you see any market share shifts in Refinish in the fourth quarter or kind of throughout 2019? And if so, did any kind of technological advances propel that either from yourself or competitors?

There is not a regularly updated, reliable Refinish markets share study. Essentially to have a keen view on that, you have to commission a market study and go out and conduct surveys and pull together statistically reasonable-enough sample to really have a keen view on that. However, we do through our shop management software as well as other tools that we have, have a pretty good view on the number of shops that we service, and any adds and drops. And so from a net shop count, we have seen a sharp count increase. As we highlighted in North America, we have increased our penetration of some of our largest existing MSO customers. So I think we feel fairly confident that in North America, we have continued to gain share. We also look at shops and body shop activity in other regions of the world and that also indicates that we're performing quite well. I would highlight from a product technology perspective that Spies Hecker waterborne product is the most productive in the industry and that continues to enable us to win market share especially with customers who value high degrees of productivity in their operation.

Our next question is from Mike Sison with Wells Fargo. Please proceed.

Hey guys, nice end of the year. In terms of your guidance for Q1, I think, you said 22% of either earnings or EBIT would be in Q1. And if I just did that off EBIT, it does seem like you'll be able to generate double-digit growth, kind of $160 million versus $144 million? It's pretty good growth. So can you maybe walk through why Q1 starts off pretty strong?

One of the bigger – biggest elements is purely raw materials. So if you recall at the end of 2018, we were sitting on three months of high dollar inventory, which all turned back in the first quarter. That's probably the biggest element from a loss perspective. And then we'll continue to see price realization coming through as it relates to the Refinish side of the business.

Got it. And...

Our next question is from Ghansham Panjabi with Baird. Please proceed.

Hey guys, good morning. I guess, I'm sorry if I missed this. But can you touch on how you're thinking about the weighting of EBITDA or earnings or whatever metric you want to use for 2020 on a quarterly basis? And then specific to 4Q, what was cost inflation year-over-year, raw material cost inflation during the quarter and how are you thinking about the next at the first half of 2020? Thanks.

Well, let me take the second part of your question, and I'll let Sean take the first part of your question Ghansham. In terms of raw material inflation, we did see some tailwinds as we came into the – as we came into the end of the year. And on a full-year basis at a COGS level, there was less than 1% benefit. What we expect to see is some benefit in the first quarter from a raw material perspective. However, given the most recent projections that we have, we expect those prices to go up during the course of the year, but perhaps not dramatically. Hence, our projection that raw material inflation will be flat to relatively down for the full-year 2020 at least in terms of how we're thinking about our guidance construct.

Yes and as it relates to sequential EBIT and EBITDA contributions, for the first quarter, we're estimating at 22% and then the next three quarters, essentially pro rata, with a slightly heavier weighting towards the second half of 2020.

Our next question is from Jeff Zekauskas with JP Morgan. Please proceed.

Good morning. It's Silke Kueck on for Jeff. How are you?

Good morning, Silke. How are you?

Good. I wonder if you could quantify how much of raw material benefit you did realize in the fourth quarter? And how much of a restructuring benefit did you realized in the fourth quarter in dollar terms?

Yes, so we historically have not quantified all those elements, certainly productivity is partially offsetting inflation that we saw in 2019. The fourth quarter as it relates to raw materials, we did see an inflection point. So from a quarter-over-quarter, that was – the first quarter that we actually saw a benefit, it was fairly modest. But it's giving us some comfort as we head into 2020, and looking at more of a flat environment for the year.

Our next question is from P. J. Juvekar with Citi. Please proceed.

Hi, good morning, this is Eric Petrie on for P. J.

Good morning, Eric.

In a subdued volume environment, how do you view M&A or bolt-ons versus continuing to improve your net leverage ratio to a target of 2.5 times?

2019 was a little bit of a pause year for us in terms of completing acquisitions which we believe is partly due to obviously focus on other matters including our strategic review and a slower M&A environment in 2019 for larger coatings assets, which is where we are trying to focus more. That being said, we haven't seen any transactions come to market recently that we really viewed as critical targets for Axalta. Now, we continue to believe that the long-term consolidation trend is here to stay and we have many identifiable targets of interest and we will continue to pursue those. As we think about capital allocation, our goal is to continue to pay down debt, opportunistically repurchase shares, and then to destine an appropriate amount of capital to M&A. And as I mentioned, we've been focused more on medium size to larger size M&A targets that can really move the needle for the company during the course of this year and as we come into 2020.

Our next question is from Mike Harrison with Seaport Global Securities. Please proceed.

Hi, good morning.

Good morning.

I was wondering you referenced that the 250 new products that you introduced in 2019, can you talk about the topline contribution of those and maybe help us understand what portion of those would break out in the – to Refinish, Industrial and Light Vehicle? And then also give a sense of the selling cycle, how long would we typically expect it to take from the time you introduce a product to the time that it sees more widespread customer adoption? Thank you.

That's always a difficult question to ask, because you get into the – or difficult question to answer, I should say, because you get into the question of what exactly is a new product. So you may have an existing product, but if there is a new color development, do you actually count that as a new product? And there is not really from what we've seen in our industry a consistent definition of that. We think about targeting more than 250 new product innovations, which we consider as more significant variations or modifications to our products, is our definition. And new product development occurs in all four of our end markets. Perhaps in terms of actual number of new product developments, Industrial, is the end market where we have the greatest number of new product introductions, because of the sheer number of end markets that the Industrial business actually serves. In terms of how long it takes a product to get up to speed and really contribute, that varies, but you can think about a time horizon of six to twelve months in most cases, depending upon whether the product is going direct to a particular customer or whether it's going through distribution initially.

Our next question is from Laurent Favre with Exane. Please proceed.

Yes, good morning guys. I just have one more question.

Good morning.

I was wondering, I mean, last time we had a couple of years of disinflation or deflationary pressure, we ended up with a bit of lack of pricing discipline, especially in autos OEM, so I guess back in 2017. I was wondering if you could talk about the risk of that happening again this year, in particular, thinking about some of your key competitors who may not be as disciplined and as focused on pricing and margins as you are.

With regard to the raw materials cycle that happens in coatings and how different companies react to that, I think all of us, as key players in the coatings industry focus on creating the most value possible for our customers. And when there is inflation, we're trying to offset that inflation with cost cutting internally, so that we don't have to pass on too much of that to our customers. But there are incidences where the inflationary cycle is so quick or so large in total magnitude, where coatings players have no choice but to pass on price to the end customers. So I think that's how most players in the industry think about it.

This concludes our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

It's Chris Mecray, thank you all for joining us this morning. We appreciate your interest and are available through the day and going forward, if you have any questions. Thanks again. Have a good day.

Thank you. This concludes today’s conference. You may disconnect your lines at this time. And thank you for your participation.