Ladies and gentlemen, thank you for standing by. Welcome to Axalta’s Q4 and Full Year 2023 Earnings Call. All participants will be in a listen-only mode. A question-and-answer session will follow the formal -- will follow the presentation by management. Today's call is being recorded and a replay will be available to February 15. Those listening after today's call. So 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 fourth quarter and full year 2023 financial results conference call. Joining me today, are Chris Villavarayan, CEO and president and Carl Anderson, CFO. We released our quarterly financial results this morning and posted a slide presentation to the investor relations section of our website at axalta.com which we will 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 exalt is 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 contain various non-GAAP financial measures. In the appendix of 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. And good morning, everyone. This was another great quarter for Axalta. I'm pleased that we met or exceeded all targets for our full year guidance. And I want to thank the entire global team for their dedication and strong execution. Q4 net sales increased 5% year-over-year to $1.3 billion with positive contributions from both segments. Volumes improved 2% year-over-year, led by a 9% growth in Mobility coatings. This represents our seventh consecutive quarter of mobility volumes growth as auto productions have normalized from historic lows, and we have successfully repositioned our portfolio with some of the fastest growing automotive OEM. Price makes was a 1% year-over-year improvement with pure pricing approximately 3% better year-over-year when excluding mix effects and onetime pricing realization. All end markets contributor to better year-over-year pricing gains. This was a great achievement for our commercial teams, and a demonstration on our ongoing emphasis on pricing realization. Going forward, we will remain disciplined as we face pressure from higher labor costs and strive to restore margins to historical levels. Adjusted EBITDA increased 21% year-over-year to $251 million and adjusted EBITDA margins improved by 250 basis points to 19.3%. I would like to now review some of our key accomplishments from the past year on Slides 4 and 5. 2023 was a tremendous year for Axalta, in which we achieved record net sales and adjusted EBITDA 2023. Net sales were 5$.2 billion, 6% Better versus 2022, with all end markets reporting positive price mix growth. Mobility Coatings volumes growth of 10.6% was supported by normalization of global auto production and further supplemented by new business wins, particularly in China. We have made substantial investments to support growth with local Chinese OEMs over the past several years as exemplified with the opening of our new manufacturing…

Thank you, Chris. And good morning, everyone. Before reviewing our financial results in more detail, I would like to highlight that we have changed our primary reporting metric from adjusted EBIT to adjusted EBITDA. The change was made to reflect the way we measure the financial performance of our two segments and allocate resources, as well as more closely aligned to the design of our long-term incentive plans. We have provided historical reconciliations in the appendix of the press release. Let's turn to Slide 6. Fourth quarter net sales increased 5% year-over-year to $1.3 billion, with positive sales contributions from both segments. Consolidated volumes were up 2% year-over-year, and strong Mobility Coatings growth more than offset declines in Performance Coatings. Price mix improved by 90 basis points compared to the prior year period. The pure pricing benefit was approximately 300 basis points higher compared to last year, but was partially offset by negative mix and a challenging comparison from the fourth quarter of 2022. Adjusted EBITDA in the quarter was $251 million, a 21% increase from $208 million in the prior year period. Adjusted EBITDA margin improved by 250 basis points to 19.3%. Unit rate variable costs were approximately 12% lower year over year, with improvements across nearly all categories, marking the third consecutive quarter of realize deflation. Supply/demand imbalances in isocyanates, monomers and epoxy resins helped drive a large portion of the benefit. We are also pleased with the additional savings driven by the productivity initiatives we launched last year, which enabled us to improve negotiating flexibility in contract terms. We believe that the favorable raw material environment will continue into 2024 with comparisons strongly benefiting the first half of the year. Yet, as Chris highlighted earlier, we will remain disciplined in managing our cost structure as we go…

Thanks, Carl. Let's turn to Slide 11. I'm proud of the team for executing well and driving record 2023 financial performance. I see considerable opportunity to build from here and fully expect us to achieve another record year of earnings in 2024. Net sales in the first quarter are expected to be approximately flat year-over-year. We project volumes and price mix growth to be modest and roughly balanced for the period. First quarter adjusted EBITDA is projected to be roughly 13% year-over-year to approximately $240 million, with the majority of the improvement supported by margin growth. First quarter adjusted diluted EPS is expected to be roughly $0.40. Full year net sales are expected to grow by a low single digit percent year-over-year with positive contributions from both segments. As for the end markets, we assume a stable refinish environment with upside opportunity for Axalta as we continue to drive body shop wins and further penetrate non-paint accessories. In industrial, we expect volumes to remain at current run rates through the year as we do not yet see signs of an upturn. For light vehicle, we assumed flat global build rates following a strong production recovery in 2023 and expect Axalta to slightly over perform driven by the business wins and mix. Price mix is expected to be positive net of any RMI impacts. And lastly, in commercial vehicle, we assume North American Class 8 builds will begin to slow midyear before demand ramps back up in 2025 and '26, ahead of new emission standards being implemented in 2027. Full year adjusted EBITDA is expected to be between $1.01 billion and $1.05 billion, equating to adjusted diluted EPS between $1.80 and $1.95. We foresee a typical quarterly earnings cadence with seasonal strength in the middle of the year. Guidance includes a mid-single digit variable cost deflation tailwind that is first half weighted. Full year free cash flow is expected to be between $400 million and $450 million in 2024. The midpoint of our range assumes increased capital expenditures and less of an improvement from working capital after a significant onetime benefit of reductions we saw in 2023. I believe that we are well positioned to deliver on these commitments as we continue to drive Axalta to new record levels of sales and earnings. I'd like to invite everyone to an event on May 15, where we intend to introduce our three-year strategy. For more details and registration information, please refer to our IR website and the save-the-date included in our Q4 presentation materials. Thank you for joining us today. This concludes our prepared remarks. Operator, please open the lines for Q&A.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from David Begleiter with Deutsche Bank. Please proceed with your question.

Hey, good morning. Chris, can you discuss in Refinish your expectations for pricing in 2024?

Yeah, good morning, David. We're still planning to had, let's call it, mid single digits -- low to mid single digits pricing as we think about how we performed last year and where we see '24.

Very good. And can you discuss just also anywhere in the portfolio you're seeing pricing pressure that might impact 2024?

That's a great question. So far, as I see the portfolio, I think we're seeing that the industry is being quite disciplined. I think we're all facing the same pressures, whether it's labor and also uncertainties going forward. And I think a lot of the recovery we have seen in pricing and making sure that we're all pricing for value, we can see that benefit. That said, I would say on the industrial side, we are seeing some pressure in Europe. But as I think about our portfolio, we're going to stay focused on driving for the value we provide for our customers.

Thank you.

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

Yeah, good morning. Thanks for taking my question. It seems like in addition to the price raws mix, you've made some decent headway early on in kind of efficiency improvements and that type of thing. I guess, can you call out some of the bigger items there and how we should be thinking about how that may continue as we look through 2024?

That's a great question, John. I think coming onboard a year ago, we talked about some of the purchasing initiatives that we had in place. And that certainly paid dividend, especially if you look at Q4 and our performance of 12% on material performance. And if you take a look at, let's call it, half of it being what the industry is calling as deflation, we certainly did better than that, and especially when I compare with our peers that I would call being three to four times our size. It's great to see the performance coming through and was really worth the purchasing teams sitting down with our suppliers and driving some of that -- those actions to really price ourselves back to where we saw. As you know, we took about $650 million of incremental cost through the last two years. And it was really resetting a bit of that and driving that cost benefit through. Now this started, I would call it, midyear. And so as we talked about in previous calls, it was really about burning through that inventory. And we saw that benefit certainly hit us in Q4. As I think about '24, it's really how are we structuring agreements so that we could be more resilient as we see, let's call it, fluctuations in the market, and that's certainly how we're playing it. But I would call it, as we -- as you can see in our guide, what we're seeing is we're driving, I would call, mid single digits -- low to mid single digits expectations for deflation going through '24.

Got it. Fair enough. And then just maybe like a small one, on the industrial side. It sounds like you walked away from some business. I guess, how should we think about what that sales impact would be as we look at 2024? Is that something of note where it's a few percent? Or is it kind of a rounding error? How should we think about it?

I would call it low to -- flat to low mid single digits. As you can look at our guide and in terms of volume, we're essentially calling it overall the business growing by flat to mid single digits up, mostly mid-single digits up. And the difference there is we believe we'll continue to grow on Refinish. We'll certainly grow on auto, even though the market is flat. We believe that on the auto side, we will gain in China as we continue to win there. But in industrial, we expect that to be low-single digits down as well as the CV [ph] impact at the back end of the year.

Got it. Thanks very much for the color.

You’re welcome.

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

Yes. Good morning. Chris, can you speak to the amount of variable cost deflation in the fourth quarter? And what your outlook would be for raw materials and variable costs in 2024?

So I'm going to start and then probably hand it over to Carl. I mean, we certainly saw, I would call it, a low single digit – double digit performance in variable cost performance, 12%, as I said in the prepared remarks. But I'll turn it over to Carl as to how -- what we see going forward.

Yeah, good morning, Kevin. Yeah, as we look for 2024, we're expecting probably about mid single digits in most of our commodity spend. And I think that will be front weighted. So I think we'll probably do a little bit better in the front half of the year. And the comps will get tougher as we think about Q3 and Q4 going forward. But for the full year, we are expecting about a mid-single digit deflationary benefits from our spend.

Very good. And then as a second question, Carl, you noted in your prepared remarks the progress that you've made on the balance sheet. What are your latest thoughts on capital allocation in terms of kind of reinvigorating some repurchase activity, what you're seeing in the private market but also potential to establish a common dividend at some point?

Well, I think -- well, first, obviously we're very pleased with having leverage sub-three at 2.9 times. I think if you just do -- look at the guidance we provided, we'll be right in line at the top end of our target range by the end of this year. So it does provide us a little bit more flexibility and optionality in how we deploy capital. So I think share repurchases will definitely be part of the overall strategy and as well as M&A. As Chris pointed out, we had the acquisition we did in the fourth quarter in Switzerland. And I think where we can see those types of very accretive deals, especially more in refinish, we would look to deploy capital there as well. But we're -- overall just pleased because I think the balance sheet now will provide us a lot of flexibility going forward.

Thank you.

Thank you.

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

Yeah, thank you. Is the 9% EBIT margin in mobility where you're presenting it as more of a 13% EBITDA margin seems like it's back to where it was historically, is this the new normal? Is this -- does this have some meaningful upside, in your view, from something other than just projecting auto build rates and commercial vehicle build? If there's anything that you're doing in mobility that could drive a real change, whether it's technology or some kind of a structural change that you're doing internally, anything that you would highlight is giving you more optimism than just a 9% EBIT margin.

It's a great question, Steve. It's certainly -- I wouldn't call it the new normal. Just looking back at Axalta over the last four-five years, I would say we have grown by $1 billion of revenue, just under $1 billion of revenue. But the challenge has been to convert on it back to historical margins. So if I look at that business, I do believe there's more upside in what we can do both structurally, both in growth in other regions as well as you put the investment. We've talked about a $35 million increase in capital investment, what we can do to drive productivity initiatives in this business. And so this is part of what we plan to discuss or show you in our May strat meeting, is what more we can do with this business.

And then one question for you on the industrial exposure in construction. Do you have visibility into distributor inventory levels of products that your coatings were a part of? Do you have a view as to whether those inventory levels in the channel are normal now? Or is there a share loss or gain? Anything that you can comment on that?

Consistently, with the exception of the businesses we have decided to exit, I would say we are -- our share has been pretty much in line with what we had previously. That said, inventories that are at our customers or at distributors are low from where we have seen historically. There's only -- as I look at it, if this market picks up especially in North America, there is only upside here. And the good news here is that especially when we think about our wood coatings business, you can see all our major customers investing heavily on capacity. I mean, if I look over the last six months to nine months, we have seen announcements of about $1 billion being put into investments to build plants. So as this market recovers, there's just all I see here, especially on our wood siding business. You just believe there's got to be upside with all the investment that is being put in place. And that's certainly what we're doing as well as to prepare for this upturn at some point.

Thank you.

You’re welcome.

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

Thank you. Good morning, everyone. Hey, Chris, can you just give us a sense to the market conditions for auto refinish across your major regions? I know you commented about expecting a little bit of volume growth in 2024. What was that being driven by? Is it just better uptake, easier comparisons, technology? What's going on across your major markets there?

Well, I would say it's flat to up about 2% to 3% is what we're predicting going forward into '24. And I'll just walk you through the markets, to your question. North America is incredibly strong but limited in the sense of just, as you've always heard, the ability for body shops to get labor. So there's inventory sitting at the body shops for work to be done. It's just getting the labor to be able to drive that. And that's a great case for Axalta because our story has consistently been the efficiency that we provide to our body shops. If I think about Europe, Europe is what I would call stable to flat. Here, where as you -- if you look at our guidance and what we are showing as a slight increase, it's really the new wins, whether it's the wins with BMW that we announced last quarter or with the André Koch acquisition, there's opportunity here to grow. And China or Asia has been weak or flat to down is what we have seen. But the only part of that is China is also a small part of our business. But overall, I would call it flat to slightly up, Ghansham.

Okay. Great. Thank you.

You’re welcome.

And then in terms of the consumer uptake for EVs, I mean, the narrative seems to have shifted in the market just based on the trade price, et cetera, after all the outsized growth over the last few years. Can you just touch based on what you're seeing in terms of developments, et cetera, on EVs and if that dynamic shift will impact you in any meaningful way?

Yeah, absolutely. I think, first of all, there's -- the overall element for Axalta is we're EV-agnostic. I mean, I think most of our coatings are on the outside of cars so we don't really care if it's EV or ICE. In that sense, it's overall been not so much of an issue. The good news, though, for us is if we look at our growth, especially if you look at last quarter, overall Axalta growing by mid single digits but mobility growing by 9%. A lot of that is our growth also in China. And in China, we're growing at two to three times the rate of the overall market, and it's primarily because of our growth in EV. We are with a lot of local players that are in the EV space that are growing. And the great news there is, as you know, with China investing $70 billion of incentives through -- over the next four years, that's driving the local market. But it's also creating like a great platform to use that to move into, let's call it, Southeast Asia. So we see that as a growth platform. And the other element that's helping us there is the fact that we've -- over the last few years, we put investment in there for manufacturing, whether it's waterborne capability at Jiading or our new plant that we just launched last quarter with Jilin with just the capacity and the ramp-up is just in line. So it's really driving the growth that we saw in Q4.

Perfect. Thank you so much.

You’re welcome.

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

Cheers, guys. Nice outlook for the year for '24. On the pricing, you mentioned that be positive for both segments. And a little bit of color, fourth quarter was rough for mobility you talked about a lot of ops there. So do you think it turns the corner in the first quarter for pricing? And then -- well, actually, do you need to announce price increases? Or are those already--

Yeah. Thanks, Michael. Yeah, I think as we look at mobility in the fourth quarter, I think as we referenced in the prepared remarks a little bit more than half of that really related to a comparison we had from the fourth quarter of 2022 with the rest of that being mix as an impact. So as we fast forward for the first quarter and for the full year, we do see pricing being positive in both of our segments. And specifically, as we think about our Refinish business, the team is already a couple of weeks ago actually launched and executed new pricing. So we're already beginning to see the benefits of that.

A follow up. In the first quarter, flat sales growth. Sales growth sort of throughout the year, is it in quarter better, third quarter, fourth quarter better? Just trying to get a feel of how we ramp up the low single digits.

Yeah. Our expectations, as you start getting into the second quarter, you should definitely see an increase kind of in that low single digit kind of percentage increases, which would really kind of roughly carry in the next several quarters thereafter. So it's really just the first quarter where at least the initial guide is we're holding it flat. But you should start seeing that step up in the second quarter.

Thank you.

Thank you.

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

Good morning, everyone. Could you give us some thoughts on your bridge for Q1 from Q4? More often than not, EBITDA is about flat sequentially from Q1 to Q4 -- from Q4 to Q1, and you're guiding to flat sales. So what are some of the other factors here?

Yeah. As we look at the bridge, we're going to be down about $11 million of EBITDA Q4 to Q1. We referenced what we saw as it relates to just revenue being down slightly. Obviously, you have the conversion impact as it relates to that. And it's also really -- it's just the seasonality that we have within our business, specifically in Refinish. So that tends -- the first quarter for us tends to be the low point for Refinish, just based off of especially what we see here in North America and a little bit more in Europe. So those are -- it's more a more of a mix story as well that impacts us on a sequential basis. And then we also have in China, with the Chinese New Year, that also has an implication too for the first quarter, specifically for our light vehicle business there.

Thanks. And turning to industrial, you're talking about softer North American construction volumes. Could you maybe discuss residential, non-residential exposure, any potential benefit from infrastructure spending and any other factors?

So yes, absolutely. So I would call it a split between residential and non-residential, whether you look at our wood business or our building products business or our GI business. In terms of -- as we forecast forward, again we're showing residential being muted or down with where interest rates and where we see building comps coming out. But that said, on the industrial side, on the GI side, the question is how infrastructure spend especially this year with elections would play out in the back end. So at this point, we're forecasting this to be flat to down slightly. And it's primarily just to continue to drive the focus on building the foundation on the business and making sure that we have the right cost structure for when we pick up again.

Thanks a lot.

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

Great, thanks. Good morning, guys.

Good morning.

Good morning. First question for Chris. I think you made a comment in the prepared remarks around potentially pruning some areas that don't meet your margin threshold. I guess, can you talk a little bit more, you've been there for about a year now, your observations where your portfolio currently stands? And is it just pruning? Or is there any bigger portfolio actions worth exploring?

No. It's just -- I think the starting point is just pruning. And a perfect example of that is if you look -- think about our light vehicle business, last year we announced getting out of our plastics interiors business, a small portion of that where obviously we didn't have scale. That said, as I look forward into '24, there are segments of the business within, let's call it, across all three portfolios, whether it's our industrial, a bit of our mobility and then even in some sense in some of our regions in Refinish that we might be looking at. Again, the focus for me is as, I think about it, we grew by $1 billion of revenue, if you think through the last four or five years. The first thing is just returning the base case to historical margins. That alone has about $100 million to $150 million of incremental opportunity. As you can see in what we have given as a guide for '24, heading north of this $1 billion, we are on path to get back there but we are not there yet. So for me, I think the first set is looking at all four end markets and seeing what more we can do to drive this back. And then we'll start thinking about if there is any portfolio mix beyond that.

Great. That's super helpful. And then as a follow-up, I apologize, a bit of a technical question for Carl. I think earlier this year, Axalta took a fairly large charge from the Argentine peso that was included in your adjusted EBIT. I think you briefly mentioned an FX charge in the remarks but I don't see it mentioned anywhere in the release. So did Axalta take a charge from Argentine peso deval this quarter? And was it included or excluded from your adjusted earnings results?

Yeah. So we did it for the fourth quarter for specifically Argentina. So it's not included in EBITDA but it is included in our adjusted EBIT number, which is in the reconciliation.

Great. Thank you.

Thank you.

Our next question is from Jeff Zekauskas with JPMorgan. Please proceed with your question.

Thanks very much. I think your SG&A was up by about 11% on an adjusted basis, maybe it's 8% unadjusted. And your R&D was up a little bit more than 11%. Those are relatively high numbers for 2024. Do you have expectations about your growth in overhead costs?

Yeah, good morning, Jeff. If you look at SG&A, about half of that impact for at least for '24, whether you look at even the fourth quarter or the full year for SG&A, really related to variable compensation expense with the remaining half of that being just kind of, I would call it, just more inflationary labor type of cost. And so as we look forward into 2024, that is an area of focus for us, where we would be looking to drive that rate of increase down considerably on a year-over-year basis.

Great. Can you remind us what percentage of your light vehicle business roughly is China now and maybe where it was two or three years ago?

Yeah. It's about -- maybe I'll quote in revenue basis. It's about $250 million of revenue for China.

Okay, great. Thank you so much.

Thank you.

Our next question is from Mike Harrison with Seaport Research Partners. Please proceed with your question.

Hi, good morning.

Good morning.

We saw the nice improvement that you guys delivered in inventory levels during 2023. Are those inventories where you want them to be at this point in the year? And I guess, is there any way for you to quantify the impact? Presumably, if you're working down inventory, you were running your plans more slowly. Can you quantify the impact of lower fixed cost absorption last year? And presumably, you'll make some of that up this year if you're running your plans a little bit harder?

Sure, I'll take that. So in terms of -- as I think about quantifying the improvement, we certainly saw a significant onetime improvement. If you take our improvement in free cash flow, I would call it, just less than half of that was driven by that performance. Looking forward into 2024, we're not obviously signaling that we would get too much better than that, though, as there are pockets of the business that we can improve. Maybe I'll break it down by business. If you look at the four end markets, my perspective is, especially with where we are forecasting volumes to be possibly lower especially on our industrial business that is certainly something that we are looking at further opportunities. In inventory reduction as well, that's probably an area where we're also looking at fixed cost absorption. So that's something that the team -- the industrial team is very focused on as we look forward on what extra opportunity there is in terms of utilization of the facilities we have, with the understanding that this volume will obviously be needed at some point. So that's certainly something that we're focused on. Across the rest of the platform, I think we're at a good point in terms of efficiency. There is probably something more that we can do in terms of utilization, but that will be probably something that we would work through the year because we are showing two of the businesses going up slightly in volume.

And Michael, maybe just to add to that as well, as I just look at the top of the house from our conversion on the incremental revenue. So in 2023, we had about $300 million of higher revenue and our EBITDA was up $140 million. So it's about a 47% conversion on the incremental revenue. And as you look to 2024, we're expecting to have conversion on incremental revenue of 60% to 65%, if you just look at what we put out for a guide perspective. So I do think, as what Chris alluded to, we kind of like where we are. But there's always more productivity and there's more efficiencies we can get, and I think you're seeing a pretty healthy conversion as we enter into this year.

All right. Thanks very much. And then just curious in the Refinish business. I don't see that there's an acquisition contribution line in there. Can you comment on how much of the volume that you saw in the quarter or revenue in the quarter was from that André Koch acquisition?

Yeah. We had about $14 million of revenue in the fourth quarter that related to the recent acquisition of André Koch.

Prefect. Thanks very much.

Thank you.

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

Great. Thanks for taking my question. Congrats on the '23 progress. I guess I just wanted to get your perspective on where you are in your evolution. So I think you've mentioned long-term margin targets several times on this call, but that you're not necessarily there. So obviously, you had very good progress in '23, up 180 basis points on a consolidated basis to the 18.4. And Refinish now -- or at least Performance Coatings, I know it's being dragged down a little bit by industrial, but it appears that you're potentially closer to that normalized level within Refinish at least over 20%. So how much more do you think there is on the margin front? Do you expect to kind of approach 20% on a consolidated basis over the next couple of years? And is that $100 million that you referenced kind of the main driver of that coming back to you?

That's a good question, Arun. If I give you the answer to that, you might not show up in May. So -- but I'll give it to you. I'll break it down a bit more. I think if you -- to your point, the progress in '23, we jumped up 180 basis points if you take where we're heading for '24. It's that, call it, 100 basis points. But I think there's been a lot of questions about Q1 to Q2, Q3 jump up. But if you look at how the guide would work through Q1 to Q2, Q3 and Q4, Q2 and Q3 have always been our stronger quarters as we have been somewhat cyclical. And you would argue Q2 and Q3 would need to get to that 20% almost to be able to hit where we have guided, to your point that essentially means we're coming back very close. I still believe there's more opportunity here. If we look at the earnings potential of this company, going back to just converting on the incremental sales as Carl answered to that last question, I do believe that there's more opportunity here. And that's what you will see in May. We want to lay out a three-year target with what we are going to accomplish year-over-year, to see what more we can do to drive the earnings potential. And on top of that, even if we look at, let's call it, this low single digits or mid single digit growth, what more we can accomplish with that. And so across the growth and the earnings potential, I think there's a lot of value that we can drive to shareholders. And that's certainly what we'll lay out for you in May.

That's great. And then maybe I can just ask a similar question as a follow-up on free cash flow. So you're converting over 40% of your EBITDA into free cash flow. And given what you've said so far with your incremental margins going up, it looks like you're probably going to be headed higher on that conversion as well. So over the next couple of years, with your leverage down under three now and free cash flow may be approaching $500 million plus in the next couple of years, is that kind of normalized free cash flow? And if so, how do you expect to spend that once you reach that level?

Yeah. I think we would view that as normalized cash flow, especially being over $500 million as we get into 2025 and beyond. I think we will be -- as I mentioned, leverage will be right where we want from a target perspective at the end of this year. And so we will have optionality in front of us. And so I think we will be looking to deploy some of that capital and looking at share repurchases as well as we will be evaluating -- continuing to evaluate M&A-related opportunities that we believe will be accretive for the company. So those are kind of the two areas that we will be focused on. And I think we're definitely going to be looking to continue the momentum that we had in '23 into '24 and getting leverage where -- to the target range that we outlined.

Thanks.

Thank you.

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

Good morning. This is Steve Haynes on for Vincent. Maybe I just wanted to come back to the guide for a sec. So I think historically, your first quarter is maybe 22% or 23% of what you do annually. So if we were to kind of use that to annualize your first quarter guide, it suggests something a bit above the midpoint of where you've guided the full year. So is there something different in the phasing this year? Or are you being a bit conservative in the back half that's, I guess, maybe causing some of this? Or maybe there's just something else in the math that we're missing there.

No, yeah, I think you're looking at it the right way. I mean, simplicity, if you take the $240 million EBITDA divided by 0.23, you get about $1.43 billion, which is kind of right in the guidance range that we provided, albeit a little bit at the higher end versus the midpoint. But no, I think the seasonality that we expect this quarter and for this full year is similar to what we've had in the past.

Okay. And then also in the 2023 numbers, there's some elevated costs tied to ERP and other investment. What does the 2024 guide, I guess, assuming the bridge in terms of further costs related to either of those things?

Yeah. So we had about $40 million of costs related to ERP as well as consulting costs for some of the productivity initiatives that we had this year. As we look into 2023 [ph], I would expect that to drop down by at least $30 million. So kind of that new run rate of costs in '24 would be, call it, in that $10 million -- maybe $5 million to $10 million type of range.

Okay. Thank you. Appreciate it. Thank you.

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

Yeah, hi. Good morning. If I go back earlier in the year, I mean, when you guys had the production issue that impacted Refinish, you talked about a couple of hundred million dollar backlog. Where is that now? Does that still exist? Does that really matter as we look into 2024?

Yeah. Josh, I'll take this one. So you certainly won't hear us talking about S/4 going forward. I think in terms of where we finished the year. I would say all our North American plants are back to pre-implementation run rates, and our facility in West Virginia has done a stellar job of bringing the backlog back to what we have normalized pre the implementation of S/4. And as we think about -- going forward, as you think about Q1, we don't show -- there is no upside or we don't see any benefit from, let's call it, a backlog improvement. We are back to where we are. We do believe there's more efficiency that we can get from our S/4 system. So that is something that the IT and the operational teams are working on, but certainly not something that should drive something meaningful through, let's call it, the front half of the year. The objective there is just to get the efficiency in the system working great before we roll that out into smaller chunks into -- over the next several years in the rest of the world.

Thanks. And just a quick follow-up on the acquisition. So I mean, you cited earlier maybe 1% or so of performance. Did you report that in volumes? And I guess, is that how you plan to report M&A forward? I guess, why not separate it out to make the organic volume more clear or so?

Yeah. I mean, it is reported in volumes as well. And given the size of that particular acquisition, it was relatively small. Obviously, depending on where we end up on the next one, we would have -- we would evaluate and most likely break that out for you.

Okay. Thank you.

Thank you.

Our next question is from John Roberts with Mizuho. Please proceed with your question.

Thank you. Chris, I think the prior management switched from EBITDA to adjusted EBIT back in 2019 to get the organization focused on reinvestment and growth and to have some capital allocation in the earnings numbers. Why the switch back to EBITDA right now?

Yeah, I'll start, and this is Carl. I can turn it to Chris. As we look at just how we manage the business across our business units, it is on -- it's more on an EBITDA basis. I think one of the key items that we are really going to be driving the organization is return on invested capital performance. And we will be kind of using that as we approve new capital investments in the business, we're going to be attacking that, if you would, on the front end of the process as opposed to -- especially given that all of the team now is in place, we have operations kind of running up and being run by each of the BU presidents. So that's how we kind of run it. I would -- but I would tell you that we'll have a very keen interest, and we will be highly focused on getting our return on invested capital to levels, candidly, the company has not achieved before.

And maybe -- I think Carl has captured most of it, but maybe just stepping out and maybe just to level off. And overall, the perspective I have is some of those choices that were made in the past of growth for the sake of growth is something that we have to change. And really that ROIC metric and driving it into EBITDA became more significant as I thought -- as we repivot the company. And I think that's where we really drove the decision to first drive the operational teams into the P&L and have the BU teams run it as one unit and be responsible for the choices that we make. And as we can see with our first acquisition under the Refinish team, we certainly are seeing that performance come through. And that's how we'd like to manage going forward.

And then were Powder Coatings volumes up in the quarter? Or were they down in line with the overall Industrial Coatings segment?

That was roughly in line with the overall segment itself.

Thank you.

Thank you.

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