Axalta Coating Systems Ltd. (AXTA) Q1 2024 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Axalta Coating Systems First Quarter 2024 Earnings Call. [Operator Instructions] Today's call is being recorded, and a replay will be available through May 8. Those listening after today's call should please note that the information provided in the recording will be -- 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 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, 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 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. I'm proud to report an excellent quarter at Axalta. Overall, net sales were primarily flat while adjusted EBITDA was a record for any first quarter in Axalta's history. Margins are significantly improved, and we believe we have more room to grow. Our balance sheet has continued to improve with our net leverage ratio declining for 7 consecutive quarters. I'm very confident with our trajectory this year, which has led us to raise fiscal year guidance for adjusted EBITDA, adjusted diluted EPS and free cash flow. Yet, I believe we're just getting started transforming the company and unlocking the tremendous potential of our products, technology and organizational capability. For the first quarter, net sales increased 1% year-over-year to $1.3 billion, with positive price mix. We remain committed to realizing the full value of our products and services, therefore, we continue to evaluate targeted pricing in select areas of the portfolio. Volume was approximately flat year-over-year with growth in Light Vehicle and Refinish offset by declines in Industrial and Commercial Vehicle given their softer macro environment. Adjusted EBITDA increased 22% year-over-year to $259 million, representing a record first quarter. This quarter ran ahead of guidance due to outstanding execution from the entire global team. Specifically, our commercial teams did a great job of winning new customers by focusing on accretive areas that will support a more profitable product mix and pricing for value. Our operations teams focused on reducing backlog and beginning the Axalta performance system journey, which is gaining traction. Procurement overdelivered again, driving 11% better unit variable cost. Cost optimization has been the central focus since I joined the company and will remain a high priority moving forward. Adjusted EBITDA margins improved by 340 basis points to 20% reflecting significant progress towards a return to historic margins in the 20% to 21% range. Profitability increased substantially across both segments. The largest margin contributions came from Light Vehicle and Industrial end markets, with profitability improvement in the latter stemming partly from our strategic shift towards higher-margin products. Let's move to Slide 4 for details on our business segments. Refinish had another strong quarter with net sales 4% higher year-over-year. This represents the 13th straight quarter of better top line performance with a balanced contribution from price-mix, volume and FX. Market growth was roughly flat versus the prior year period across North America and EMEA. However, we are seeing above-market performance given our 600-net body shop win and the addition of 100 new points of distribution. We're also getting traction with our strategic growth initiatives in adjacencies like U-POL aerosol, RAPTOR bedliners and accessories sold through our company-owned stores in Europe. Our acquisition of André Koch supports these strategic initiatives and has proved to be an excellent transaction for us. I'm very pleased with the pace of integration, which is ahead of our initial plan. I believe that differentiated technology is the foundation of Axalta's competitive advantage and a key reason we continue to outpace market growth. I'm happy to announce that we were recognized with several prestigious R&D awards this quarter, all centered around efficient and sustainable innovation. There is no better example than Irus Mix, a fast, efficient, fully automated and completely hands-free mixing machines for the refinish industry. In addition to seeing strong customer demand in launching this product, it also won an Edison Award in the environmental and industrial solutions category. Another bright spot in the quarter was Light Vehicle growth. Net sales improved by 4% year-over-year, mostly due to strong volumes, particularly in China. Volume growth in China improved by 20% as compared to 4% auto production growth, again, against the prior year quarter. We have partnered with the fastest-growing OEM, and this is a solid business for us at an attractive return. We win new business and build lasting partnerships in this market with our products, service and technology, which is exemplified with our recent recognition from General Motors as a Supplier of the Year. Commercial Vehicle net sales declined by 4% year-over-year consistent with the expected slowdown in North America Class 8 production. We believe this market will further soften into the year before ramping back up in '25 and '26 ahead of the emission standards going into effect in 2027. Industrial net sales declined 6% year-over-year, driven by soft construction activity in North America and EMEA, which has offset improvement in new business wins. We have strategically deselected low-margin categories, which is yielding significantly improved profitability. My main focus since joining Axalta has been to improve efficiency and performance across the company. I'm very proud of our achievements to date. We're starting to see the benefits of our actions we have taken in our financial results, but we believe there is more to come. To further enhance our performance and results, we have announced a transformation initiative in February to enable us to be more proactive, responsive and agile. This program includes a global workforce reduction of approximately 5% and a shift in manufacturing capacity and capability. We expect this program to yield approximately $75 million in annualized run rate savings in 2026. Before passing the call to Carl for a more detailed review of our first quarter financial performance, I want to thank Bob McLaughlin for his 10 years of service on the Axalta Board, including as Chair of the Audit Committee. Bob is elected to retire next month after the Annual General Meeting. He has been an incredible thought partner for the Board, and we wish him the very, very best.

Thank you, Chris, and good morning, everyone. Let's turn to Slide 5. First quarter net sales increased by 1% year-over-year to $1.3 billion. Gross margins improved by 340 basis points to [ 33% ] versus the prior year, principally driven by 11% lower variable cost unit rate. All raw material categories were lower year-over-year with isocyanate, epoxy resin and monomers most favorable. Overall, we are comfortable in the current raw material environment, and continue to project a mid-single-digit full year benefit strongly weighted to the first half. Though there are a few pockets of pressure stemming from temporary supply issues such as propylene availability in North America and butyl acetate in Europe, we view these as transitory, an isolated situation, which are fully accounted for in our guidance. SG&A was flat year-over-year, demonstrating effective cost management efforts, which offset labor inflation in the category. Income from operations declined $4 million to $121 million, inclusive of a $55 million pretax charge related to employee severance and exit costs stemming from the 2024 transformation initiative that Chris noted. We expect that the annualized run rate savings from these actions will be $75 million in 2026, with $10 million expected to come in this year. Adjusted EBITDA in the quarter was $259 million, 22% above first quarter 2023, and adjusted diluted earnings per share increased 37% year-over-year to $0.48 despite a $0.05 headwind from higher interest and tax expense. Moving to Slide 6. Performance Coatings first quarter net sales were flat year-over-year at $848 million. While net sales were flat overall, we were able to drive 4% growth year-over-year in Refinish which is consistent with our portfolio strategy to accelerate growth in the business. Refinish net sales benefited from strong price-mix and a solid contribution from the André Koch acquisition. Refinish market demand in North America and Europe remained stable in the quarter, in line with our expectations. Industrial net sales declined by 6%, primarily due to lower volumes as soft global building and construction activity weighed on demand. As Chris highlighted, we are also strategically moving away from lower-margin business. We believe this strategy is being well executed by our team and is driving significant margin improvement. Industrial volumes are now approximately 20% below 2022 level, creating a cyclical upside opportunity when global construction activity reaccelerates. Performance Coatings' adjusted EBITDA increased 16% year-over-year to a first quarter record of $196 million, with both end markets contributing favorably. Adjusted EBITDA margin improved by 310 basis points compared to the prior year. On Slide 7, first quarter Mobility Coatings net sales increased 2% year-over-year to $446 million, 4% better Light Vehicle net sales partially offset declines in Commercial Vehicle. Mobility price, excluding mix effect, was modestly favorable and more than offset contractual raw material pass-through impact in the period. Light Vehicle volumes were again solid in the quarter, exceeding global auto growth rates led primarily by China. And Commercial Vehicle volumes declined as expected, driven by lower North America Class 8 truck production. Mobility Coatings' adjusted EBITDA improved to $63 million, up from $44 million, a 44% increase year-over-year. Adjusted EBITDA margin improved by 410 basis points to 14.2%, with considerable improvement in Light Vehicle. Turning to Slide 8. We ended the first quarter with over $1.1 billion in total liquidity, including a cash balance of approximately $624 million. Free cash flow in the quarter was $15 million, an increase of $103 million year-over-year. The strong seasonal free cash flow as a result of improved working capital performance. During the quarter, we also took action to reduce interest expense. First, we paid down $75 million of gross debt, building from the $200 million of debt prepayment executed in 2023. Next, we successfully repriced our term loan lowering our effective rate by 50 basis points. Taken together, we are confident that interest expense will be lower in 2024 versus last year. Our total net leverage ratio at quarter end was 2.8x, nearly a full turn below the prior year period. Given current trends, we should end the year at the high end of our target net leverage ratio range of 2x to 2.5x. As our balance sheet continues to strengthen, we are announcing this morning a new $700 million share repurchase program. We expect to continue to drive accelerated financial performance in the coming years and believe now is an optimal time to move forward with this program as we focus on driving value creation for our shareholders. I will now turn the call back to Chris for our financial guidance and closing remarks.

Thanks, Carl. Let's turn to Slide 9. Net sales in the second quarter are expected to be 3% to 5% higher year-over-year, driven by strong growth in Light Vehicle and Refinish, stable Industrial sales and market-driven declines in Commercial Vehicle. Refinish net sales are projected to increase by high single-digit percent year-over-year in Q2, given share gain, growth in adjacencies, plus contributions from the André Koch acquisition. We will also benefit from lapping prior year production issues in North America. Light Vehicle should have another strong quarter with a robust volume growth and stable price-mix. In Industrial, net sales are expected to be flat to lower as margin growth remain our highest priority in the current soft macro environment. And lastly, in Commercial Vehicle, our view is unchanged. We see North American Class 8 build slowing through the year before demand ramps back up in '25 and 2026. Our full year low single-digit sales growth target remains unchanged. We expect typical seasonal trends to play out this year, leading to a step up in second quarter net sales versus Q1. Second quarter adjusted EBITDA is projected to be roughly up 21% year-over-year to $275 million. Adjusted diluted earnings per share is estimated to be approximately $0.50, an increase of more than 40% year-over-year. Given the strong start to the year, we have increased our full year adjusted EBITDA, adjusted diluted EPS and free cash flow guidance. Full year 2024 adjusted EBITDA is projected to be between $1.05 billion and $1.08 billion, a $35 million increase to the midpoint versus our prior guidance. This translates to an adjusted diluted EPS range between $1.90 and $2 per share, an increase of greater than $0.07 to the midpoint. We have also increased our 2024 free cash flow guidance estimate by $50 million to a new range of $425 million to $475 million. I'm proud of our performance to start the year, and I'm confident in our performance trajectory. We believe we're on pace for another record performance in 2024 and are setting the foundation for long-term value creation. I look forward to sharing our Axalta plan with you on Strategy Day on May 15. For more detail, please contact Chris Evans or refer to our investor website. Thank you for joining us today. This concludes our prepared remarks. Operator, please open the line for Q&A.

[Operator Instructions] Our first question comes from David Begleiter from Deutsche Bank.

This is David Huang here for Dave. I guess, first on guidance, I guess you raised your EBITDA guidance, and you left the sales guidance unchanged. Does the change reflect basically the restructuring benefit and any additional raw material -- I mean, deflation?

Yes. This is Carl. Thanks for the question. Yes, as we look -- as far as the guidance, we are expecting about $10 million of benefit related to the restructuring program that we announced in February. So that is part of it. And as we think about the raw material perspective, we are still planning for the full year that we're about mid-single digits percent lower on a year-over-year basis for our raw materials. But a lot of that is, as we referenced in the prepared remarks, weighted to the first half of the year.

Okay. And then second on Refinish. Can you just talk about your expectation for volume trends in Refinish? I guess there's some divergence among your peers, noted some pre-buying activity in the prior year that's creating a difficult comp for this year. I guess can you just talk about underlying demand trends and probably your opportunity for further share gains?

Sure, David. And I'll take this one. So I'm not going to talk about what's happening with the rest of our peers, I think, focused on what we're doing. We're focused on 4 strategies, and the 4 elements of that are really around body shop wins, which we had an exceptional quarter last quarter with 600 new body shop wins. And that's building on 2,400 body shops that we won last year. And if you look at the last 3, 4 years, we have gotten over 10,000 body shops. So it's certainly the new wins and body shops. That's one element of it. The second element of it is really our adjacent space. And whether it's through the aerosols that we sell with our U-POL acquisition, or our RAPTOR bedliners, all of that going through the shelves that we have with AutoZone and O'Reillys with 15,000 new shelves that we have been able to put our products on. And then on top of that, we also have the retail shops. We have 75 shops in Europe and in South America that we are able to really push our products through. And today, only 30% of our products go through these shops. And as we move more from distribution through our retail shops, we see this as an incremental opportunity here as well. And then finally, it was the acquisition of André Koch. With that acquisition, which we're proceeding well ahead of plan. As I look at it, all 4 of the elements are really building to the story. And so that's really why we're winning.

And our next question comes from Christopher Parkinson from Wolfe Capital.

This is Harris Fein on for Chris. I think I heard you say before that the procurement team took out 11% on a unit variable cost level. Just curious if you could go into maybe a little bit more detail about what's happening there, and how that flows into the raw material expectations for the full year? Because if you're down mid-single digits for the full year, wondering if that implies that maybe raw materials could be up in the back half of the year.

Certainly, I'll take this. So we're actually very proud of the team for what they accomplished here. And we started this program actually early last year, and we really saw the net benefit starting in Q3 of last year. And so what we did was -- the objective of this was really around two elements. And the first element was really to drive the savings, which you're seeing come through the P&L. And again, whether it's last quarter -- Q4 or Q1, I think we've had an incredible performance, industry-leading performance, even double digits in Q4 and then what we saw in Q1 of this year. We also see this benefit continuing into a bit of Q2, before we start lapping our performance that we saw in Q3. So to your point, we do believe our purchasing team's performance will start being muted as we think about the back half of this year. The second objective of this team was to really get better contracts or more longer-term agreements so that would help us manage through the cyclicality and a little bit of the volatility we saw in the marketplace. So these aren't long contracts, but there are 6 to -- 6 months to a year-long contracts that really enables us to be more responsive and manage with indexing as well as productivity. So both of those 2 elements have really been driven through about 2/3 of our basket, and that's certainly the benefit that you see through this year and what we expect to get somewhat muted through the back half of the year. But the good thing is we can at least balance our performance in material through the full year.

Got it. That's helpful. And then I guess the second one, Light Vehicle pricing looks like it was up, excluding mix. Maybe if you could just go into a little bit more detail about how you were able to drive positive price because I believe 30% of that business is on RMIs.

Yes, absolutely. I think just absolute kudos to that team. And I think it's really 3 elements here. The first one is, if I went back, I think about a couple of years ago, we put in a great new leadership team that was really driven around listening to the customer and really focusing on getting the right products and the right capacities in place. So if you look at a perfect example being China, the market is up 4%, we grew by 21%. It kind of talks to the exceptional focus and the drive of that team. That's the first one. The second one is it's really the quality and the reliability of the product. Again, the development of the products led to ensuring that we had the right products for the market. Now a lot of folks can say this, but I think what's the difference is you can see it from our customer accolades whether it's the Daimler award as well as the GM Supplier of the Year award, I think that certainly plays well to our performance here. And then finally, it really comes to our ability to match color. I think in my 14 months at Axalta, what I am realizing is we are really good at matching and developing color. And especially in regions like China, our customers are pushing the barriers of color, and we're certainly there to respond to it.

Our next question is coming from Aleksey Yefremov from KeyBanc Capital.

Do you expect to repay more debt before year-end as you're thinking about your 2.5x leverage? And should we expect most of the free cash flow to go towards buyback for the rest of the year if you're not paying any more debt down?

Thanks, Aleksey. Yes, as we look forward for really the next 9 months, if you just look -- we're sitting at about 2.8s leverage today. If you run kind of what our expectations are on free cash flow and the new EBITDA guide we gave you, you can see pretty quickly we're going to be right below our -- 2.5x net leverage at year-end. So as we look forward, we don't really need to pay any more debt down in order to achieve that objective. So we are obviously announcing today the new $700 million share repurchase program. We will be taking a closer look at executing on that as we kind of go forward this year.

Very helpful. And then I wanted to ask about index pricing for the rest of this year. It looks like you had some impacts in Q1. Can we expect more pronounced negative price from the indices? And where would you hit sort of the stable point where your prices are equivalent to sort of the cost indices?

Yes. I think we expected, especially if you get into the second quarter, we are expecting to have a favorable price mix as we think about where the second quarter is being shaped up at this point. And then as far as really the rest of the year, I would say we would start getting into that more equilibrium as it relates to the price-mix dynamic, coupled with the RMIs, index agreements we have in place.

Our next question comes from Ghansham Panjabi with Baird.

This is Matt Krueger sitting in for Ghansham today. So I just wanted to kick things off and touch on the Industrial business. So can you talk a bit about what inning Axalta is currently in from a business pruning perspective? And then more specifically, when should we start to lap kind of normalized base comparisons for the Industrial segment that already are lapping this ongoing pruning activity?

Certainly, Matt. So I would call us probably in the third inning in our Industrial business. Certainly, what's our focus here is primarily managing the portfolio and driving for margin enhancement. That's essentially what we have been very, very focused on and getting the business ready for when the markets return. So as I think about the 3 business units, and you can see it on the Refinish side and on the Mobility side, we've seen certain significant growth. What I would call on our Industrial side, we would call it, we are shrinking to grow, and we're making the right choices to make sure that we're driving margin. In fact, if I look at our Q1 margin improvement by the 3 business segments, the one that has seen the most significant margin improvement was our Industrial business. So we're driving that certainly in the right direction. And then so -- and what are we doing here? What we're doing here is whether it's making the right choices in customers, whether it's making the right choices in the long tail and making calls on what we have to prune so that we can make sure that with the rest of the business, we're at the right margin levels to go forward. Even as I look at the rest of the year, we're actually driving far more margin improvement through the balance of the year. And this is with sales being somewhat flat, which is what we're forecasting for the rest of the year. I do believe that '25 is certainly a year that we do see volumes certainly picking up. And specific to the quarter, if I went through the 3 business segments within Industrial, general industrials, building products, obviously, with construction and residential builds, those two are somewhat weak, except in coil. But in our energy solutions business, which sits in Industrial, which supports Light Vehicle or our Mobility business in terms of coatings for batteries and motors, we're actually doing quite well with this, especially in China. So again, I do believe it's a question of time, but we're certainly going to make sure we have the margin profile for when we get there to see that business grow. So I would call it, we're in the third inning of where we are with Industrial.

Great. That's very helpful. And then just taking a step back, can you talk a bit about how a higher-for-longer interest rate environment would compare to your initial expectations for the year? And can you include if or where you're seeing any impact from this sort of sentiment across your portfolio? And I'm talking about higher-for-longer interest rate specifically.

Yes. If we look at the -- from a planning assumption, when we gave the original guidance back in, I guess, it was late January, February, we were planning for rates to be flat at that period of time. So we were not necessarily planning for a rate reduction in our baseline forecast. So obviously, that's kind of played out as we expected to date. If I look at what our debt is, we have about 55-45 fixed float percentage from a debt perspective in how we operate. So if and when, if rates ever do begin to reduce, I think we're positioned appropriately as it relates to that. And then I think the last point is we look at just managing overall interest expense. You saw what we did in the first quarter, we did pay down $75 million of our term loan. And we also updated our term loan where we kind of got better pricing as well. So we feel pretty good with some of the actions that we've been able to execute and being able to operate in this environment where rates are looking to be higher-for-longer.

Our next question comes from Mike Harrison from Seaport Research Partners.

I was wondering if you could provide a little bit more color on where the $75 million of restructuring savings in that 2024 transformation are going to come from? Would you classify this as mostly SG&A, mostly manufacturing costs? I guess any key actions or buckets that you can provide for us would be helpful.

Sure, Mike. So I'll start it, maybe Carl will pick up right after just to maybe give you more color on the financials. But overall, coming in about 1.5 years ago, what I noticed with Axalta was Axalta felt like we were a holding company with three individual businesses. And one of the things that we've really driven from a culture standpoint is to drive this one Axalta culture. And what that really meant was as we look through the organization, I think a few years ago, there was a pivot to go from more of a regional organization to more of a corporate and more functionally-driven organization that stopped somewhere in COVID. And the objective was to redrive it back into this more -- a P&L-driven organization that was, I would call it, flatter and also smaller at the top. And a perfect example of this was the drive that we did to put the operations teams under the P&L as one example, so that we could be -- for a company of our size, be more nimble, agile and efficient. We wanted to be -- get as close to the customer and be as responsive and fast as possible. So I would call it 2/3 SG&A, more corporate focused and then 1/3 in looking at our capacities as well as our manufacturing in certain aspects of the business and then making calls on footprint there. So that's the overall perspective of the project that we have going over the next couple of years. So that -- I hope it gives you a good description. One last element of this is in terms of the structure or what we did with the with the manufacturing side, it was really looking at areas of the business where we were underinvested in and areas that we really need to overinvest in. And so we're looking at also over the period of time moving some of those assets or that capacity so that we could essentially drive growth in other parts of the business. With that, I'll turn it to Carl.

No, I think, Chris, you covered it. I think, Mike, as Chris referenced, a lot of that savings we expect going forward will be in SG&A as you look at how that will come through the P&L.

All right. That's very helpful. And then a headline out this morning is saying that the U.S. government is going to try to mandate automatic emergency braking on all vehicles in 5 years. It's maybe been a little while since we kind of covered this autonomous vehicle or autonomous type of features popping up on more vehicles. Can you talk about how that kind of technology could be impacting, how you look at the Refinish business over time and might be reducing collision rates over time?

Certainly, Mike. I think as we've watched this over time, and I think there's always been this concern of how is ADAS going to affect collisions going forward. Until we get to, let's call it, Level 4, Level 5 autonomous, which is, I believe, moving further and further out, if you look at Cruise or Apple, I think you can start seeing those investments tapering out. I think in the short term, the part about let's call it, what's being driven with Level 2 or Level 3, what this would lead to is minor collisions, which essentially drive for more work in refinish shops for us. So I do believe that takes away, let's call it, full car write-offs and gives us an opportunity to actually see more cars in body shops. And in the last couple of months, I've had a couple of -- many chances to go out to some body shops in the Carolinas and just looking at the number of, let's call it, cars that are electric or that have some level of automation. And what you can see is there's a lot of cars in body shops that are looking for work because it's actually minor collisions versus the full write-offs that you would normally see. So I think it's great because it does the right thing for ensuring that we protect folks. But at the same time, it does provide us a benefit in our business.

Our next question comes from Patrick Cunningham from Citi.

This is [ Eric Zhang ] on for Patrick. On the targeted price increases across like parts of the portfolio that was mentioned at the beginning of the call, can we talk about what products were targeted and is this activity expected to continue for the remainder of the year?

We did -- actually, we're very proud of the team for the pure pricing. We did it across the board, all 3 businesses essentially drove pricing. Our pure pricing was actually up 2%. And so we're very proud of the team for accomplishing this in a very deflationary market, as someone pointed out. But I think very, very quickly, let me just point at what differentiates all 3 businesses. If I think about our Refinish business, obviously, there's the point that this business is stable and we continue to price, but we don't price for the sake of pricing here, it's really the efficiency and the productivity we drive to our customers. If I look at our waterborne product, it is 30% more efficient than what was here previously. If I look at currently what we're doing with our base coats, we had chroma-based technology that we're moving to Cromax XP. That drives the 10% improvement in efficiency for our Refinish customers. So we're pricing for the efficiency and the productivity that we provide our customers there. So that's, as I look at the Refinish business. On the Mobility side, we continue to have pockets of the business, which are still where we believe that there's more value for the products that we bring to our customers. So in certain pockets, we are pricing. And we also have the impact of labor and certain elements of the basket of raws that we continue to price. And then finally, in our Industrial business, this is something that over time that we're making the right choices of getting out of certain segments or getting out of, let's call it, certain customers and a portion of the tail to make sure that we can continue to invest in that business, which drives the right level of profitability. So right now, we're pricing across all 3 elements of the business and pure pricing is up 2%.

And our next question comes from Steve Byrne from Bank of America.

Rock Hoffman on for Steve Byrne. Could you guys, I guess, inform if there's been any additional productivity gains that we should expect to come from initiatives launched last summer prior to the 2024 transformation initiative?

Sure. I'm hoping that I could save this for the discussion on May 15. So probably won't give you too much more color, Otherwise, you might not show up to our Strategy Day there. But we're -- we have two initiatives. Obviously, the transformation initiative that we're talking about. And then a couple under the operations umbrella. The first one is productivity that we're going to drive through our facilities as we think about the next couple of years. And then the second element of that will be a network optimization process or program where we're looking for more opportunities. We've grown about 100 warehouses and distribution centers over -- from the pre-pandemic time to now. And we do believe with that as well as some of the work that we can do on the transportation side, there's still more opportunities. So those are certainly the elements that we're going to work on going forward.

And just a follow-up on the Light Vehicle business. Just wondering if you could either provide similar metrics on Light Vehicle growth for Axalta versus Light Vehicle market growth in kind of other non-China regions or just give us an idea of the extent of magnitude there?

Sure. So as I look at the market, and I'll just go through the Light Vehicle market and give you a perspective for all 3 regions. I would call the overall market being solid for us. In North America, we see that as stable. We are starting to see inventory at the dealers kind of pick up quarter-over-quarter by about 10 days. But that said, volumes here seem somewhat stable. So our -- we've picked up a little bit, but I wouldn't say anything that's significant here. In Europe, again, markets have gone down about 2% to 3%, and we have stayed very stable here as well from a market standpoint. China is up 4%. And in that marketplace, as you know, we're up 21%. So overall, I would call the Light Vehicle performance solid with a little bit of growth in North America and significant growth in China.

We have a question from Mike Sison from Wells Fargo.

Nice start to the year. In terms of Refinish, for the markets in 2Q, I think you said your growth was flat in the first quarter for North America. And EMEA, you guys had nice growth. Do you expect the markets to be flat again in 2Q? And how do you think sort of unfolds for the rest of the year?

Yes, I would say it's flat to about just slightly growing, I'd say, flat to 1%. We obviously are showing that we're going up high single digits in Q2, and it's really, as I said, the 4 strategic initiatives that we are working on. On top of that, we also had the operational issues that we had in Q2 of last year. So lapping that performance is driving our growth in Q2. So I do believe we'll have a really good quarter here again in Q2 in our Refinish business.

And more of a longer-term question, which again, probably addressed at the Analyst Day. But Axalta has been really focused on cost and productivity for a long time. And it does sound like you're maybe getting to more of a growth phase. Is that the way to sort of think about it? And where do you think the growth is sort of just maybe on average. What do you -- how do you see that growth holding over the next couple of years?

Absolutely. So I think we do believe there's probably 1 or 2 innings left on the margin side, but certainly a lot more that we can focus on the growth side. And to be honest, that is what we will be covering in significant detail going through our Strategy Day on the 15th. And so what we'll be doing is providing a view of where we'll be in 3 years from now across the 3 business segments by yearly targets that we will be providing. So just to give you a perspective and having a measure of where we think we can take the business with that.

Yes. And then Mike, I just would add to that, if you just -- while there's been a lot of focus with Chris coming in as far as how improving operations, focus on costs. If you step back and just look at what the team is planning to accomplish for this year, as we referenced, we expect our EBITDA to be up 12% year-on-year. EPS is going to be up 24%. The implied margin of the business now is running 20% as far as on an EBITDA margin perspective. So I think, as Chris said, we like the trajectory of where we're taking the business. And this pivot to growth is what we will -- spending a lot of time with in the next couple of weeks when we have our Strategy Day.

Our next question comes from John Roberts with Mizuho.

Nice quarter. Could you give us an update on the geographic mix of your auto OEM sales? I'm guessing that China may be bigger than I was thinking it was.

So yes, let me break it down. So Light Vehicle for North America is about $300 million -- sorry, and then if I look at EMEA, we're about $400 million and then about $100 million in China.

So China -- you called out China in terms of the strength in the quarter's volumes that's there. It didn't seem like it was big enough to actually drive the total.

Yes. I think, John, if you look at it -- just a little bit of perspective, for the quarter, the China business for us was a little bit north of $60 million of revenue. Which is now -- it is the third largest region for us from a pure Light Vehicle perspective. So if I look at it, still North America by far in the way is our largest with Europe being second. But as Chris is referencing not only in prepared remarks, in some of the questions, we continue just to see very, very strong performance, specifically in China.

Our next question comes from Joshua Spector from UBS.

This is [ Lucas Spillman ] on for Josh. So I just want to go back to the SG&A costs, if we could. So they are kind of only up modestly in the first quarter -- that compares to kind of the high single-digit inflation we're sort of seeing across most of the peers. At the same time, it sounds like you're going to get kind of $50 million in cost savings there through the year from your productivity program, which is about sort of 6%. So I guess just net of these factors, are you expecting SG&A growth to kind of be flat or up low single digits this year? How should we kind of think about that?

Yes. As we look at SG&A, we're very proud of the -- what we were able to accomplish in the first quarter, as you referenced, we really were flat year-over-year in SG&A, especially in the environment that we're in. And -- as we look forward, we are hoping to be able to manage that SG&A spend to be up probably very, very low single digits on a year-on-year basis. It's how we're looking at that, just based off not only the transformation initiatives that we are well underway on but also just as we look at how best to operate the business kind of going forward. So that is a big focus for us. And first quarter, we're off to a very good start.

And then just going back to kind of the Industrial exits, are you able to kind of quantify for us how much volumes are you kind of deselecting there each quarter? And I guess if you could kind of give some sort of scale on the timing on how that's going to...

We're not breaking that out. But what I can tell you is, obviously, as you can see, we're down about 6%, but we're not breaking out how much of that we're pulling out just because of the choices we're making right now.

But just to add to that, just a little bit further. I think as we look forward, especially as we look on a year-over-year kind of comparison perspective, while we're still going to be working on the portfolio, we are beginning to see some early signs where when we kind of compare year-on-year, we believe we're going to be kind of bottoming out, at least as far as having that type of revenue headwind on quarterly basis, going forward.

Our next question comes from Kevin McCarthy from Vertical Research Partners.

Chris, within your Refinish business, you've got a lot of adjacent products, aerosols, bedliners, perhaps others. How big is that basket of what I would call kind of nontraditional Refinish products? And how fast do you think you might be able to grow that basket over the medium term versus body shop work, for example?

Sure, love to. So the business is about $700 million in total. And then I would say -- $600 million to $700 million in total, and I would call it, if you think about the overall market, it's -- the overall market is about $7 billion. So we do see that opportunity as something where we have a small portion that we play here. So we do see this as an area that we can continue to grow over time.

Okay. We'll stay tuned for May 15. But I want to ask Carl about free cash flow, maybe a 2-part question. I guess -- on the micro level, what is the cash cost associated with your new $75 million transformation initiative? And then more broadly, I think you raised your annual range by $25 million. So is that mainly just the earnings upside flowing through? Or are there other moving parts that you would care to call out there?

Yes. So maybe a couple of things on free cash flow. I think one, we're off to a very good start for the year, having a positive free cash flow of about $15 million. So a really strong performance in working capital to help drive that, especially when you can kind of compare us on a year-over-year basis. Specific to your question on restructuring, in total, we expect the cash impact to be somewhere between $95 million to $135 million over -- and that's over a several year type of time period. And the bulk of that really does relate to severance costs. And then there's also some additional costs, including there for capital expenditures as well. And so -- but obviously, that will kind of be -- we'll have -- some of that will come in this year, some of that will come in '25 as well. But the guide we gave you on free cash flow is not only incorporating the higher EBITDA in the raise that we have, but also some of these cash costs or all these cash costs that will be coming in related to the restructuring this year as well.

And our next question comes from John McNulty from BMO.

This is [ Caleb ] on for John. So I saw your CapEx was about like $22 million in the quarter, but you maintained your full year guide for about $165 million. So how are you guys thinking about how that sequences through the rest of the year?

Yes, it's a good question. I think a lot of that is just due to timing. So we still are working very diligently in order to kind of be ramping up CapEx here for the next 9 months of the year. So I would expect that really to begin increasing quite significantly as we kind of get into the second quarter, and that will kind of carry through for the rest of the year as well.

Okay. And then you talked a lot about the positives going on for you in Refinish right now, like the acquisition, U-Pol, et cetera. But maybe can you just talk a little bit more about how the Irus rollout is going? And kind of like what inning we're in, in that? And then kind of your expectations for that over the next 2 to 3 years?

Absolutely, love it. So I think if we look here, we have about 90,000 body shops. There's about 70,000 manual machines in most of those. We have about 2,000 semi-automatic machines from our past. And right now, we have 100 Irus machines installed. We have orders for 300. So as I look at the next couple of years, the objective is to get that up to 2,000 plus is what the team is driving right now.

And maybe if I could just add on to that, and there was a question that was asked earlier, just about the accessory market, specifically in Refinish. That is around about $100 million, I guess, of an overall opportunity and overall market size. In total, as Chris referenced, previously, all of Refinish as we look at that all in, not only kind of what we do from a coatings perspective, but also some of these accessories, we're [ packing ] the market size of about $7 billion.

Our next question comes from Jeff Zekauskas from JPMorgan.

How will you determine whether share repurchase is a good idea? In that, Axalta over a 5-year period has underperformed the market. There's volatility in its share price because of its cyclicality. You get 5% in the debt markets. Why is it a good idea to spend your capital now to repurchase shares? And how will you determine whether it's a good idea to have spent it?

Well, I think overall, as we look at our journey to this point, there -- and just as you think about our quarter-over-quarter performance, I do believe that the underlying value of Axalta is not realized. And if there's an opportunity for us to create that value, especially for shareholders, we certainly will. So I think that's certainly one of our goals. As you look through the 4 elements of creating value, to your point, there's an opportunity in how we look at the debt, there's certainly an opportunity in how we look at M&A., there's certainly an opportunity in how we look at CapEx. And then finally, there's certainly an opportunity in how we look at share buybacks. But again, as we've played this journey out, we do believe that there is an underlying value in our share value and that we -- that's something that we should provide back to our shareholders. So it's certainly an element that we'll look at.

And this concludes our question-and-answer session as well as the conference. Thank you very much for attending today's presentation. You may now disconnect. Have a great day.