Ladies and gentlemen, thank you for standing by. Welcome to Axalta's First Quarter 2023 Earnings Conference Call. [Operator Instructions] Today's call is being recorded and a replay will be available through May 10. Those listening to today's call should please note that the information provided in the recording will not be updated and therefore, may no longer be current. I will now turn the call over to Chris Evans. Please go ahead, sir.

Thank you, and good morning. This is Chris Evans, VP of Investor Relations. We appreciate your continued interest in Axalta, and welcome you to our first quarter 2023 financial results conference call. Joining me today are Chris Villavarayan, CEO and President; and Sean Lannon, CFO. Yesterday afternoon, we released our quarterly financial results and posted a slide presentation along with commentary to the Investor Relations section of our website at axalta.com, which we'll be referencing during this call. Our prepared remarks, the slide presentation and our 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. Our remarks and the slide presentation also contains various non-GAAP financial measures. In the appendix to the slide presentation, 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. I will now turn the call over to Chris.

Thank you, Chris. I'd like to welcome everyone to our first quarter 2023 earnings call, and we'll start by discussing the key highlights on Slide 3. I'm very proud of our first quarter performance. Through the commendable efforts of our global teams, we're outpacing growth in most markets we serve, driving incremental pricing, accelerating margin recovery and improving execution across all our operations. Our first quarter adjusted EBIT was $149 million, with adjusted diluted EPS of $0.35, both of which exceeded the top end of our guidance range. Overall, I remain encouraged with the team's performance this quarter. To that end, I'm pleased to report an impressive 25% year-over-year increase in adjusted EBIT and a 140 basis point year-over-year improvement in adjusted EBIT margins. This is Axalta's second consecutive quarter of margin growth as we begin to rebound from historically high cost inflation and post-COVID-19 impacts. Mobility Coatings had the biggest increase in profitability growth with a 530 basis point year-over-year improvement in adjusted EBIT margins. Margin improvement was largely driven by over a 9% year-over-year price mix growth from new and carryover actions. This is our ninth consecutive quarter of price mix growth, which is up more than 18% over two years. Volume was another bright spot in the quarter, improving 3% year-over-year despite a nearly 3% headwind from macro driven volume declines in industrial and unfavorable impact from the Russia-Ukraine conflict. Volume growth was led by a double-digit gain in Light Vehicle and Commercial Vehicle, along with modest growth in Refinish. We believe that most of our end markets are uniquely positioned to grow in the current macroeconomic environment. We have demonstrated this in the last two quarters. Today, we're seeing the benefits from market normalization in auto and truck production as well as an increase in body…

Thank you, Chris, and good morning. Net sales in the quarter were $1.3 billion, an increase of 9% year-over-year. Constant currency net sales increased 12%, driven largely by strong pricing and volume growth in three of our four end markets. Adjusted EBIT improved to $149 million from $120 million in the prior year and exceeded our guidance targets. The outperformance was driven by better price realization, largely in Performance Coatings and the higher-than-expected volume growth in Mobility Coatings. Both segments contributed meaningfully to year-over-year adjusted EBIT growth and margin improvement in the quarter. The largest driver of our earnings performance this quarter was favorable price/cost. Our 9% year-over-year growth in price-mix more than offset variable cost inflation, which was roughly 6%. We hit a nice interim milestone this quarter as we have turned the corner on price cost, which is now positive on a cumulative basis from early 2021. This is an important benchmark in our EBIT recovery journey to normalized margins. However, as Chris detailed earlier, we still have a meaningful $120 million combined gap across two of our end markets, which we remain focused on addressing. Variable cost inflation is moderating from historic levels. Raw material costs were up year-over-year, but were in line with our expectations sequentially. Softness in adjacent markets is loosening supply/demand balances across many commodity inputs and creating a more favorable procurement environment. Positive EBIT contributions from price cost and volume growth were partly offset by higher fixed costs. Operating expenses were driven higher versus the prior year by labor inflation, lower plant production rates and temporary external spending programs meant to accelerate achievement of our cost productivity goals. Lastly, in the quarter, we took a roughly $7 million pretax charge associated with the anticipated exit from a non-core business within mobility coatings, which…

Thanks, Sean. Before we conclude our prepared remarks, I want to thank the team for their efforts this first quarter. We're getting traction for our actions, which is evident in our financial performance. Axalta has an excellent value proposition. Simply put, we have strong market leadership, many growth channels and the best talent and technology in the industry. Combined with the various productivity initiatives in play, I believe we have the formula that will yield strong gains well into the future. With that, we're pleased to answer any questions. Operator, please open the lines for Q&A.

[Operator Instructions] Our first question comes from Christopher Parkinson with Mizuho. Please proceed with your question.

Great. Thank you so much. Chris, I don't know if it's your favorite question, but I imagine it's Sean's. Can we discuss just given the health of your volume growth within mobility, specifically Light Vehicle. Could we just touch on and dig in a little bit more on the cadence of the mobility margin recovery process in terms of how you're thinking about the first half into the second half as well as any longer-term thoughts of essentially where you want to get back to over the intermediate to long term? Thank you so much.

Absolutely, Chris. Good morning. So I'd love to start and I'll give a chance for Sean to cover anything that I've missed. So first, as you can see through our cadence, we had a great Q4. And if you look into Q1, we have continued with a majority of the carryover pricing, but we also had incremental pricing on the mobility space. Where do we want to get to? Obviously, the cadence is that we will continue pricing as I see going through the back end of the year. And a lot of the factors that are driving this yes, we are seeing modest improvements in some of the raw material costs, but some of the baskets have headwinds. As you know, we have headwinds in labor. We have headwinds in energy. We have headwinds in certain TiO2 specialty raws. So certainly something that we are focused on. And going back again to Q4, we had a gap of about $120 million of price cost across these two markets, whether it be mobility or industrial. So certainly, for us to continue to provide the level of service to our customers, we certainly intend to drive more pricing through the back end of the back half of the year. So that's the focus. And the cadence is that we will continue pricing specific to those areas that I've addressed. Now I'll turn it over to Sean for anything more specific.

Yes. I mean, Chris, we're really happy with the progress. By no means we declare an victory at this stage. We did $18 million in EBIT in the fourth quarter, which was inclusive of about $5 million of catch-up on pricing. So you back that out, it's actually pretty impressive as far as margin recovery and absolute EBIT growth from fourth quarter to the first quarter, just given the volume rebound as well as us outperforming the market, and we expect to continue to outperform the market for the rest of the year, we do expect sequentially, we'll continue to see margin increases as we move through the year.

Great. That's helpful. And just as a quick follow-up, some of the questions for performance within Refinish. It seems like the markets are slowly but steadily getting back to 2019 levels. Obviously, the cadence of that slightly debatable. But you've also been consistently discussing a lot of pent-up demand, a lot of conversion optionality. There's been some advantageous, let's say, consolidation amongst some of your best customers in the top 10 U.S. MSOs. Can you speak to how we should think about your volume progression versus the market for '23? And then just any longer-term thought there as well. Once again, that would be helpful. Thank you so much.

Sure. Absolutely, Chris. Again, great quality business that's stable even through some software sessions we have seen in our past. But -- what's really driving the business if you look from Q4 to Q1 and as we look through the rest of the year, I do believe there's more opportunity here on the growth side. And the team did a great job. If you think about Q1, we talked about the fact that they grew 400 body shops on top of the 140 distribution points. But beyond that, I think it's really the additional incremental opportunity when we see adjacencies with the U-POL acquisition, what we have been able to get into with body fillers and aerosol. And the proof is also with what I've discussed in the -- in my comments, which is really pivoting towards the DIY space and the entry into AutoZone and O'Reilly's and the opportunity to put us on 16,000 retail shelves really gives us an opportunity to see that business growing through the back end. So I look forward to talking to you more about that over the next 2 quarters.

The only other add to that, Chris, would be just around market recovery. North America is still down 5% to 7% opposite 2019, although we continue to sort of outperform the market. and Europe is still down about 3% to 4%. So we continue to expect market recovery. We're not calling exactly when it's going to get back to 2019 levels, but that should be some nice upside as you think about the growth algorithm.

Our next question comes from Kevin McCarthy with Vertical Research Partners. Please proceed with your question.

Yes. Good morning. When you compare electric vehicles to ICE vehicles, have you observed any meaningful difference in collision rates? Or is it the case that collision rates are nearly identical for those two categories?

I think it's too - good morning, Kevin and thanks for the question. I think it's too early to make a call on that. I think with where the volumes are so far, what we have seen through what's coming through the body shops. I think it's a bit too early to make the call. What I am proud of is really how well the mobility teams have been winning on the EV side. And as you think about where the technology is going in the future, we've had some great new wins, whether it's in China or also in North America with some of the largest players on the EV space. So very proud of that. And I think in terms of how that market is transition at this point, I would call it a bit too early to call.

Okay. As a follow-up, if I may. I believe you took a charge to exit a business in mobility. Can you speak to what you're exiting and why as well as the sales impact from that decision?

Absolutely. So this is our APC business, which is our automotive plastics components business. It's something that we had acquired in 2016. And from our perspective, this is not core. It was something that was small and something that we were not focused on and just did not scale appropriately. In terms of sales, it's between $1 million or $2 million. So it's nothing that's meaningful that will impact our business. But I do believe this is an opportunity for somebody else to really drive some growth, but it's certainly not an area of focus for us.

Yes. And just - Kevin, just to add $1 million to $2 million in a year from a sales perspective, it was about $8 million in 2022. This is a small segment within the APC segment. And to Chris' point, it just - it wasn't high margin, but clearly not material and just not strategic for us.

Our next question comes from Ghansham Panjabi with Baird. Please proceed with your question.

Hi guys, good morning. I guess, first off, on Slide 8, you have a nice chart with the projection of global light vehicle builds with a nice improvement estimated through 2025. How are you kind of thinking about the risk about a broader macroeconomic slowdown impacting the recovery cadence? I assume that in 2023, there's some sort of inventory replenishment that will still take hold, but I'm curious as to your thoughts as we look out to 2024 and beyond?

So let me - I'll start off and maybe Sean can jump in. But just to give you good morning again, just to give you a perspective, on the short-term view. I think as I think about our approach, we've been a bit conservative looking at 23%. Our forecast is coming in at 83% to 84% with the markets, or the external forecasters being just heading north of 85.5%. So I do believe there's a bit more of a tailwind on the auto side, but to your question, more on the long-term and as we think about - where we're going through '25. Ghansham I think there's more - with where the channel is and where inventory levels are through the channel. I would say we are still at historic lows. So I do believe that there's more of an opportunity as this builds out. In terms of recession, as we talked about in our prepared remarks, this is one of the primary drivers why we're ensuring that we have some - we're investing in our operations and looking at our SG&A cost in the possibility of a soft recession so we can provide some cushion. But all in all, from everything we're seeing with how well the auto OEMs are performing, you can see whether it's GM's results. And also on the heavy side, everything is driving to a strong year. But again, we're also cushioning with the possibility of a soft - recession for the back end.

Yes. And Ghansham, just to add, I mean, we've always characterized the normal global auto build year of $88 million to $89 million builds. And given the fact we've essentially been in a recession for the last three years, every month, it goes by for 2023, we're gaining a little bit more confidence that this year will certainly be better than 2022 as far as global auto builds. But industry forecasters are expecting bullish outlook for the next four to five years. It's just a matter of the pace, but we feel pretty good, that we're going to see recovery for the next few years.

Okay perfect. And then for my second question, on the one-off cost ERP, et cetera, $50 million for the second quarter. Will there be any material spillover into the third quarter? I'm just asking because your margin progression phase, we'll basically saw that after just two quarters given the cost implementation for the second quarter - yes. And is there any spillover into the back half of the year?

Yes, we're not expecting any meaningful spillover in the third quarter in regards to the ERP implementation. We're actually going live this month. So it will carry over to June, but then it will be largely wrapped up as far as the support cost. We are really happy with the margin progression, looking at the midpoint of the range and adding back these $50 million, and we're jumping up from $16.5 million from a margin perspective, EBITDA margin up to over 18% at the midpoint. So we are really happy with the progression that we're seeing.

Our next question comes from John McNulty with BMO Capital Markets. Please proceed with your question.

Yes, good morning, thanks for taking my questions. So with regard to free cash flow, so your $350 million target. I guess how much does that assume in terms of working capital release? Because I guess looking back over the last basically, since you guys went public, I think you've only come in below that $350 million maybe once, and I would expect this year to be a big free cash flow kind of yielding year so from a working capital release. So can you help us to kind of connect the dots on that?

Yes. So John, there's a few anomalies this year. CapEx creeping up to $190 million, which is in our guidance construct and that's, after three years of sort of under spending. If you go back to 2020, it was $80 million, jumped up to $120 million we did $150 million last year. So we have a little bit of a catch-up this year as well as the S/4 implementation, which is driving CapEx except a bit higher than normal years. And then interest expense is the other big call out. We're seeing about $70 million of incremental interest expense. Specific to working capital, the expectation is working capital as a percentage of net sales is, going to come down. But working capital as far as contributions will be fairly minimal from an overall free cash flow perspective. And that's partly due to we're expecting growth for the full year, which you're going to see some level of cash outflow on accounts receivable.

Got it. Okay no, that's helpful. And then on the Refinish business in China, it sounds like it was kind of off to a slow start. Can you give us an update as to how that's progressing? I would think, with China opening up a bit, people going back to work, not being locked down, et cetera, like you should start to see a recovery there. Have you started, has that started already or is that something more on the come for later on this year?

Yes, we're seeing some - nice growth in China. I would say - as we start the first month, we're looking in plan to what we're giving as our Q2 guide. And again, remember, for us China, John, is a small component. It's 10% of our overall revenue. So it is something that's meaningful, but something that it doesn't impact our overall business, meaning in a big way. We are - the markets that I am focused on are obviously our largest markets when it comes to Refinish North America and Europe. And these two markets are - if I look at Q4 to Q1, we saw a great jump and then also the incremental sales that we're getting on the adjacencies or in the medium as well as the economy markets are really driving through some good results, and that's what's driving the performance you see in Q1 as well as our guide for Q2.

Our next question comes from David Begleiter with Deutsche Bank. Please proceed with your question.

Thank you. Good morning. Chris, you mentioned the opportunity in procurement and operations. Could you begin to quantify or talk about the potential opportunity in those two areas?

Sure. And maybe just jumping off where Sean left top, I think we talked about $15 million for the quarter as the one-time costs. A large majority of that is for the S/4 implementation for which we have an excellent IS team that's doing a great job preparing us for the launch - this month. But we have tremendous amount of work here because this is for our North American business, and it never hurts to have some backup. So that's where most of the spend is but we are looking at having another team look at the opportunities to accelerate our cost optimization in the plants, whether it be procurement, supply chain and the inventory management. But those groups are just starting out right now. And primarily what I'd like to do is take a quarter or so and see what comes out, what is the outcome from those results. And I look forward to giving you a better perspective of that in the next quarter or certainly by two quarters from now?

Yes. And John, just qualitatively, we are expecting a quick payback, so the investment that we're doing in the spending in the second quarter. We expect to benefit in the back half of this year. But to Chris' point, we'll give some more elements as we get into the July, early August time period.

Understood. And Chris, just on the 400 buy shop wins, could you provide some context how many did you win last quarter or even last year? Thank you.

I mean last year it was 3x that, John, for perspective, and this is what's continuing to contribute to our market outperformance.

Our next question comes from Aleksey Yefremov with KeyBanc Capital Markets. Please proceed with your question.

Thanks and good morning everyone. Chris, Axalta has been a stand-alone company for a long time, one history of productivity focus. Could you just expand on why procurement and operations have a lot of room for improvement?

Sure absolutely. And I think Aleksey if I think through not specific to Axalta, but more in the broader space starting from the COVID lockdowns as well as the supply chain disruptions that followed it as well as specifically in Europe with the Russia Ukraine situation. I think from an operational element, there's been an enormous amount of strain and stress in the system. So what - as we said a quarter ago, the absolute focus is on operations. And when you take that and you break it down and where we can really drive the performance in the organization. As I said in my prepared remarks, there are two buckets that have the most significant impact. Our variable costs are about $2.5 billion. Our fixed costs are about $1.5 billion. Anything that we do here even small drives a meaningful - drop down to our results. So these are the two areas I'm very, very focused on. We have strong operational teams here, but again, going through all the issues in terms of the supply chain as well as the S/4 launch. There is still opportunity here. And I would say that's simply put, in my first 90 days, there is more operational upside than I had originally thought. And so here, the effort is to help those strong teams really get enablers by doubling down and putting focus teams to get that in the back end as we - and which we - I look forward to talking to you more about in a quarter from now.

Thanks for this, Chris. And turning to Refinish you've over the past several quarters announced, several wins in the U.K. and other MSO wins. And I think you also talked about potentially more wins. Could you update us on how those won contracts are ramping and how your growth strategy in European Refinish is progressing?

Sure. Let me start off with just a perspective. So again, the U-POL acquisition was in Europe as well as on top of that. Just the fact that we have our retail stores in Europe is really helping us drive this business. On top of that, in terms of the growth, we are seeing a bit more growth in Europe. But I do plan to talk to you more about this in a quarter from now, because I do believe there's even more opportunity on the European front. Again, just four months in the seat, and what I'm doing right now is really spending time going through the three business units and really breaking it down piece-by-piece and understanding where value is created. And to your point, obviously, Axalta does have an enormous performance opportunity through Refinish. So this is something that we're looking at how can, we really augment this become a little bit more resilient, a little bit more responsive and also find opportunities to really grow this business in regions outside our strongest market, obviously, being North America.

Our next question comes from Vincent Andrews with Morgan Stanley. Please proceed with your question.

Thank you, and good morning, everyone.

Good morning.

Chris, what's the message you've been giving internally, not just to your leadership team, but to the sort of the rank and file from a cultural perspective in terms of what you're trying to drive here what buying you need from them? And obviously, we already talked about you'll need a bit more restructuring and all that comes with that? But what's the message you've been providing? And have you been pleased with the uptake and the energy level that you're seeing in the organization? And is there anything else that you think you might have do differently there?

Yes, and thank you very much for the question, Vincent. I love it. In this sense, my first quarter, going through the 120 days has reinforced my belief that Axalta has great products that our customers really want. And you can see that even if you take out the price equation, we are continuing to grow through Q1. And we have a lot of excellent people doing the right things. And what you learn about Axalta very, very quickly is that we're incredibly customer-centric, which is excellent as long as you're competitive and performing well financially. So here, the focus whether actually it started prior to my time with Rakesh is the focus on execution to ensure if we drive that profitability. And if you look at Q1 certainly, those results have come through, whether it's just take the one metric of price-mix, and we're up 9% as Sean pointed out And it's great to see that when we focus the organization and you focus them on execution, they certainly deliver. And if I look at the short-term strategy, the short-term strategy is to continue to focus on execution. So, we're going to drive the focus on price. We're going to drive the focus on cost. And on the cost side, it's purely execution around operations, around purchasing around supply chain. And we have obviously, tailwinds that are helping us, whether it's through our three of our four end markets on volume. And then, to most of the questions here, the increasing share, whether its mobility and refinish are helping. So, if you focus on execution across operations as well as continue to drive the pricing across. Certainly two of our end markets, we certainly will get back to the normalized profitability that we saw pre-pandemic. And that's the message I'm driving. And as you can see from the Q1 results, it's certainly being bought up by the team.

Okay. And just as a follow-up, as we move through the year, Sean, how should we be thinking about incremental margins? Is what sort of implied in the 2Q guidance? Is that what we should be thinking about over the balance of the year? Or should it should it step up as presumably raws become more favorable in the back half and obviously, different volume scenarios in the back half, but how should we be thinking about incremental?

Yes. So I mean we're clearly not providing full year guidance here, but what I can signal is two things. You should continue to expect margin recovery sequentially as we move through the year in every end market. And the other sort of key data point is we are expecting in the second half of the year to be stronger than the first half from an overall EBITDA perspective.

Our next question comes from Mike Leithead with Barclays. Please proceed with your question.

Great, thanks good morning guys. Just one for me on mobility, obviously, a couple of strong quarters in a row with volume well ahead of the auto growth. So when you drill into that internally, is it your specific customer mix? Is there new platform wins? Just help us transit from the outside the difference there? And just broadly how we should think about your volumes to trend this year relative to again, however, industry build rates shake out?

Yes. So I think I'm going to start this, and then Sean can give a little bit more color on margins. But in terms of volumes and growth, as we've talked about in the prepared remarks, we certainly are seeing volume growth that is outpacing the market. And it's really going back to - the team has done an excellent job starting last year of driving $200 million of incremental growth through 2024. And what you're seeing is that volume dropping down into our P&L already in Q1. So and we expect that growth to continue to hit the run rate target of $200 million in '24. So, the team has done a great job there. Now the wins where are they across the board? We're seeing wins in China, specifically on some great EV platforms, but certainly growth also in Europe as well as North America and some traditional strong ICE platforms. And with that...

Yes. Just I mean, just to add, we have a lot of things going in our favor on the mobility side. You have market recovery, you've got new share wins and then you actually have some of our key customers, their platforms are just clearly outperforming the market. And probably a case in point is China, we're up almost 19% and that market was down about 8%. And part of that - a big part of that is just some of the platforms that we're on. We're outpacing the overall market there in China. On top of that, we have nice pricing tailwinds so, all that's yielding to better margin recovery over time.

Great, thank you.

Our next question comes from Duffy Fischer with Goldman Sachs. Please proceed with your question.

Good morning. First question is just around raw materials. I think you made a comment about single-digits in the back half. But I didn't understand if that was your exit rate at the end of the year or if you expected to actually capture that much in the second half?

Yes, so that was specific to the second quarter. We're expecting low single-digits from a year-over-year perspective. We didn't give any guidance on the second half, but our expectation is raws will continue to moderate, but we're not actually calling any sort of data points in regards to Q3 and Q4.

Okay. Thank you. And then when you look sequentially Q1 to Q2, if you take out the two COVID years, over the last eight years, you basically averaged about a $0.12 improvement from Q1 to Q2. And only 2x has it been below a dime. So even if you adjust your $15 million for Q2, it's still seasonally, it looks like kind of a weak step-up relative to history. Is that because seasonality has changed? Or can you kind of walk through and maybe triangulate the historic move from Q1 to Q2 versus what you're looking at this year?

Yes. Duffy, the two anomalies that are really happening from first quarter to second quarter and when you compare quite frankly, in the prior years is interest expense is picking up quite a bit gone from $48 million up to $56 million. And then you got taxes jumping. Historically, we've run around 22% to 23%. We're expecting closer to 25% effective tax rate this year. So there, you're probably two call-outs for a while you're not apples to apples.

Okay. Great. Thank you, guys.

Welcome.

Our next question comes from Steve Byrne with Bank of America. Please proceed with your question.

Thank you. It looks like it's been five years since your mobility segment posted a revenue that you had in this quarter. Back then, you had a 10% EBIT margin, do you think you can get back to a double-digit EBIT margin in mobility? And when do you think you can get there?

Well, I certainly believe that we can get to a double-digit mobility margin. If you look at the actions that we're driving certainly, from a pricing standpoint, from a cost standpoint, that is certainly the focus of the team. And even in my first 120 days here, Steve, I absolutely believe that, that is an opportunity that we will be focused on and will be a go get. In terms of timing, I think this is -- that's the big question. I mean if you look at the volatility in the economy and just figuring out where -- what will happen with raw material deflation as a bid, how much of the pricing really will stick and how much more of the pricing that we have targeted will we get as well as the cost initiatives. A lot of the programs that we have talked about, whether it's on the procurement side as well as the lean opportunities that we have in our plants. There has to be a real focus here on productivity, which should be always part of the algorithm. So the question is, what is our timing to get that. So I hope to give you a better perspective. At this point, I can't give you an exact time of when we'll get there.

And then, Chris, this initiative that you have to bringing some outside help and drill into productivity and operations and so forth, what has led you to this? Is this your experience? Is this looking at comps. Is this a benchmarking analysis? And what gives you the conviction that there is a meaningful opportunity here? .

It's a bit of all of those. I think it's obviously a bit of my experience from the past. It's more importantly, I don't want there to be a view that something is broken at Axalta. It's purely the fact that just going back to the comps that we had pre-pandemic and the performance levels. We have an incredibly strong team that went through some challenging times through COVID and the supply chain disruptions as many of us did. And I do believe that there are opportunities that just doubling down the efforts here will drive the performance requirements that we need in the back end. So that's where I'm getting the conviction that there's a focus here.

Steve, the one thing to add, being the old guy around the table here, the teams are welcoming the help, especially on the procurement side, doubling down on resources with analytics and helping drive RFP outcomes. The procurement team is all about driving value realization. Anything we can do to accelerate that is, quite frankly, welcome by the team. So it's been a nice teaming effort here to drive improvement.

Thank you.

You're welcome.

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

Great. Thanks for taking my question. I guess first off, I just wanted to clarify your deleveraging targets for this year, maybe how much gross debt paydown you expect -- and is there any kind of opportunities you can take advantage of to refi and maybe bring down your interest expense going forward?

Yes. So I mean over time, we're still targeting 2.5 to 3x. And as I covered in my remarks, we expect to be at the high end. Barn, we don't do anything sort of significant from a capital allocation perspective. We are actively looking at both the spot markets, as well as looking at the refinancing market just things are not open right now. But sort of the expectation is we'll be as far as excess free cash flow, the majority, the vast majority will be used to actually pay down gross debt. But we are expected to be closer to 3.0x by the end of the year.

Okay. And just on the cost optimization side, is there -- are these programs that you're implementing similar to some of the prior Axalta Way programs. Out of that, say, $2.5 billion of fixed costs, how much of that structurally do you think you can take out over the next couple of years. And does that depend on volume would you have to add back any as volume recovers?

Well, from not being here, I'm not sure how it aligns with the Axalta way. But from what I've heard and also from listening to Sean, I would say it's not very similar. I think our focus -- first of all, the teams are just starting out. So defining exactly what is the opportunity is, I would say, a little bit too early to call, but all that said, as Sean alluded to in the last question, the teams are really looking forward to driving some of this opportunity, especially on the purchasing side. Again, if you think about the fact that we took $650 million of incremental cost or 46% variable cost increase over the last -- through '21 to '22 That is something that is historic and not in the 10 years of Axalta being in existence. So again, that's the first focus of driving to ensure that we can pull some meaningful costs out of there that will drive to the bottom line.

Thanks.

You're welcome.

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

Hi, good morning. Nice start to the year. Sean, I just wanted to make sure I heard you right. In terms of the first half adjusted EBIT, did you say it was going to be better than the second half? And if that's the case, is it really just the demand environment in the second half could be more difficult than the first?

No, Mike, you have it flipped. The second half should be more favorable in the first half.

Okay. And the drivers for the better second half would just the price raws and a little bit better demand?

That's exactly right.

Great. Thank you.

You're welcome.

We have reached the end of our question-and-answer session. This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.