Axalta Coating Systems Q4 2024 Earnings Report

Axalta Coating Systems EPS Results

• Actual EPS: $0.60
• Consensus EPS: $0.51
• Beat/Miss: Beat by +$0.09
• One Year Ago EPS: $0.43

Axalta Coating Systems Revenue Results

• Actual Revenue: $1.31 billion
• Expected Revenue: $1.31 billion
• Beat/Miss: Beat by +$5.65 million
• YoY Revenue Growth: +1.10%

Axalta Coating Systems Announcement Details

• Quarter: Q4 2024
• Date: 2/4/2025
• Time: Before Market Opens
• Conference Call Date: Tuesday, February 4, 2025
• Conference Call Time: 8:00AM ET

Axalta Coating Systems (NYSE:AXTA), through its subsidiaries, manufactures, markets, and distributes high-performance coatings systems in North America, Europe, the Middle East, Africa, the Asia Pacific, and Latin America. The company operates through two segments, Performance Coatings and Mobility Coatings. It also offers water and solvent-borne products and systems to repair damaged vehicles for independent body shops, multi-shop operators, and original equipment manufacturer (OEM) dealership body shops. In addition, the company provides functional and decorative liquid, and powder coatings used in various industrial applications, including building materials, cabinet, wood and luxury vinyl flooring and furniture market under the Voltatex, AquaEC, Durapon, Hydropon, UNRIVALED, Ceranamel, Industrial, Corlar Industrial, Tufcote, Imron Industrial, Alesta, Teodur, Nap-Gard, Abcite, and Plascoat brands for powder coatings. Further, it develops and supplies electrocoat, primer, the basecoat, and clearcoat products for OEMs of light and commercial vehicles; and coatings systems for various commercial applications, including HDT, MDT, bus, and rail under the Imron, Imron Elite, Centari, Rival, Corlar epoxy undercoats, and AquaEC brands. The company offers products under the Audurra, Abcite, Alesta, AquaEC, Centari, Ceranamel, Challenger, Chemophan, ColorNet, Cromax, Cromax Mosaic, Durapon 70, Duxone, Harmonized Coating Technologies, Imron ExcelPro, Lutophen, Nason, Spies Hecker, Standox, Stollaquid, Syntopal, Syrox, Raptor, U-POL, and Vermeera brand names. The company was formerly known as Axalta Coating Systems Bermuda Co., Ltd. and changed its name to Axalta Coating Systems Ltd. in August 2014. Axalta Coating Systems Ltd. was founded in 1866 and is headquartered in Glen Mills, Pennsylvania.

Axalta Coating Systems Q4 2024 Earnings Call Transcript

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to Axalta's Coating Systems Q4 2024 Earnings Call. All participants will be in a listen only mode. A question and answer session will follow the presentation by management. Today's call is being recorded and a replay will be available through February 11.

[Operator]

Those listening after 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 Colleen Lubick, Vice President, Investor Relations. Please go ahead.

[Colleen Lubic, Vice President - IR at Axalta Coating Systems]

Thank you, and good morning. This is Colleen Lubick, Vice President of Investor Relations. We appreciate your continued interest in Axalta and welcome you to our Q4 full year 2024 financial results conference call. Joining me today are Chris Villavarian, CEO and President and Carl Anderson, Chief Financial Officer. We released our financial results this morning and posted a slide presentation to the Investor Relations section of our Web site at axalta.com, which we will be referencing during this call.

[Colleen Lubic, Vice President - IR at Axalta Coating Systems]

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 this slide presentation also contain various non GAAP financial measures. We've included reconciliations of these non GAAP financial measures to the most directly comparable GAAP financial measures.

[Colleen Lubic, Vice President - IR at Axalta Coating Systems]

Refer to our filings with the SEC for more information. Please note that we did recently update the presentation for certain of our non GAAP measures as described in the current report on Form 8 ks that we furnished to the SEC on January 21. I will now turn the call over to Chris.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

Thanks, Colleen, and good morning, everyone. Let's move to Slide 3. I'm excited to share that we achieved another record Q4 of full year net sales and adjusted EBITDA. 2024 represented the highest net sales and adjusted EBITDA in our history. These outstanding results were made possible by the collective efforts of our global team as 1 Exalta.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

The culture that we have established with our A Plant that has brought our priorities into focus. Despite weakness across all our 4 end markets, we outperformed consistently this year in light vehicle and refinish, our 2 largest end markets. I want to express my appreciation to the Axalta team for their dedication throughout the year that has clearly paid off with these great results. We delivered 4th quarter company record net sales of $1,300,000,000 Contributions from the CoverFlex acquisition in our Refinish Economy segment, net new body shop wins and above industry growth in light vehicle more than offset a softer macroeconomic environment and foreign currency headwinds. Adjusted EBITDA increased by 10% year over year to a 4th quarter company record of $275,000,000 We delivered this result despite meaningful foreign currency headwinds in our 4th quarter not anticipated in our prior guidance.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

This represents the 10th consecutive quarter of year over year adjusted EBITDA growth. Adjusted EBITDA margins improved by 170 basis points versus the prior year to 21%, which as you know was the margin objectives set in our 2026 A Plan. We're proud to deliver this result well in advance of our target date. Margin expansion was driven by favorable impacts from price mix, lower variable costs, savings from our transformation initiative and conversion on revenue from light vehicle volume growth. As you can see on this chart, adjusted diluted EPS was another great story for Axalta, growing 30% year over year to $0.60 in the quarter.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

In addition, our balance sheet continued to improve with total net leverage ratio declining for the 8th consecutive quarter for another company record of 2.5 times, the high end of the range that we set in our A plan. Let's move to slide 4. Culture is at the foundation of our transformation. As demonstrated by the strength of our financial results, we have aligned the organization around the tenants of accountability, execution and operational excellence. We are committed to safety in everything that we do and strive towards 0 incidents.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

This year, we achieved a TRIR of 0.3 and reduced our injury rate by approximately 50% compared to 2 years ago. In addition, we made investments in our operations and engineering, streamlined and optimized our organizational structure and brought our corporate employees together under one roof at the Navy Yard in Philadelphia. Specific to operational excellence, we enhanced efficiency, reduced costs and improved profitability across our manufacturing sites and supply chain. Notably, we reduced variable costs by 7%, improved delivery times by 10% and began the closure of 2 manufacturing sites, 1 in North America and the other in Europe, which will optimize our operations and improve our fixed costs. Combined efforts across operations, procurement and product management reduced complexity in our manufacturing sites.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

We made good progress in reducing the number of SKUs while creating common raw inputs across our portfolio. This work is paying off. Our transformation savings are already ahead of plan, having achieved approximately $20,000,000 in 2024 towards our goal of $75,000,000 as described in the A Plan. Growth is the major pillar of our A Plan. Our teams executed strategic plans to win new business and deliver industry outperformance in a year where all of our end markets were down single digits.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

Due to their efforts, we secured approximately 2,800 net new body shop wins in refinish and completed the acquisition of the CoverFlex Group, which positions us well in the fast growing economy segment. We drove full year light vehicle net sales growth of 5% despite a decline in global auto builds. And in Industrial Coatings, we increased our margins and earned accretive new business, which will ramp up to around $40,000,000 dollars at full run rate in 2025. At this point, I would like to take a moment and thank Shelly Bausch for her valuable contributions to Axalta as President of the Industrial Business over the past few years. She is responsible for returning the Industrial business to profitability and pivoting it towards accretive growth in a challenging macro.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

As you may know, we announced a couple of weeks ago that Shelly is stepping down from her role at Axalta. Tim Bose, who most recently was Senior Vice President and Chief Transformation Officer at Axalta will succeed Shelly. Tim has a strong track record of driving margin growth and business transformation. He was an excellent choice to take this business forward. Another key pillar of the A Plan is sustainable innovation, which is what makes Axalta a global leader in coatings.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

We continue to push the boundaries in all end markets and have been widely recognized for these efforts. We have talked about the expected benefits of our game changing Axalta Iris Mix Machine. We are progressing well with the adoption of this new technology, installing 300 to date. We expect this number to nearly double in 2025. This machine combined with Axalta Iris Scan and Axalta Nimbus delivers a full package of cutting edge tools that measure and mix color faster and more accurately driving efficiency and effectiveness to our body shop customers.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

In January, we announced a strategic partnership with Durer for automotive digital paint solutions combining Axalta's groundbreaking technology with Durer's robotic experience. Dura will serve as the robotics integrator for Axalta's next jet for light vehicle OEMs. I believe this agreement is an important step in delivering the vehicle customization customers desire and is driving the future of digital paint technology. During 2024, Axalta was recognized with 6 prestigious industry awards for technology and innovation, 3 Edison, 2 Big and 1 R and D 100. These achievements bring Axalta's total to 24 innovation awards over the last 5 years and demonstrates our commitment to developing smarter and innovative solutions for our customers.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

Let's turn to slide 5. By all measures, 2024 was an excellent year for Axalta. We had the highest 4th quarter and annual net sales in the history of the company. We exceeded $1,100,000,000 in adjusted EBITDA for the first time and expanded our full year adjusted diluted EPS by 40%. I'm encouraged by the significant performance we have demonstrated in our financial results since May when we released our 2026 A Plan, which is proving to be a great framework for value creation.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

With adjusted EBITDA margins at 21%, self help programs in place and working and a strong commercial playbook, we're establishing a strong foundation for long term value creation. I will now turn the call over to Carl to go through our financial results and 2025 guidance.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

Thank you, Chris, and good morning, everyone. Before I comment on our performance, I wanted to note changes to certain of our non GAAP financial measures that we announced in an 8 ks on January 21. In order to align more closely with our peers and market practice as well as following the resolution of an SEC comment letter, we are ceasing to adjust for step up depreciation and amortization from the acquisition of DuPont Performance Coatings and the calculation of adjusted EBIT and adjusted net income beginning with the Q4 of 2024. Concurrently, we are beginning to adjust for the amortization of all acquired intangibles in the computation of those same metrics. These changes will also impact the calculations of return on invested capital and adjusted diluted earnings per share.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

The metrics reported today reflect these changes and comparable historical information is available at axalta.com. For the full year 2024 step up depreciation and amortization from the acquisition of DuPont Performance Coatings was $48,000,000 and the amortization of all acquired intangibles was $92,000,000 Please turn to slide 6 for a review of our 4th quarter results. 4th quarter net sales increased by 1% year over year to $1,300,000,000 primarily driven by 2% price mix impact and the acquisition of CoverFlex, partially offset by foreign currency translation and lower volumes. Gross margins were 34% in the quarter, an increase of 150 basis points from the prior year period, while income from operations increased $25,000,000 Improvement was driven by price mix contributions and lower variable costs. We experienced some additional benefit from lower raw material, energy and freight expenses when compared to last year in Q4.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

For the full year, variable costs declined 7%. Currently, we see inflation in certain areas, but overall excess supply in many sectors continues to be our primary factor in prices. In 2025, we anticipate minimal raw material inflation in the Q1 and project that we will experience low single digit inflation for raw materials for the full year 2025, which we expect to offset with our productivity programs. We remain disciplined in managing our fixed operating expenses in the quarter. SG and A was roughly flat compared to last year as the benefits from productivity programs and the transformation initiatives came in ahead of plan, which minimized the impact of higher labor costs.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

Adjusted EBITDA in the quarter was $275,000,000 10% better than last year, marking a 4th quarter record. Adjusted diluted earnings per share increased 30% to $0.60 per share, exceeding our expectations, primarily driven by lower tax and interest expense. 4th quarter 2024 cash provided by operating activities was $234,000,000 and free cash flow totaled $177,000,000 The year over year decrease was driven primarily by increased planned capital expenditures as we continue to focus on scaling up our investments into our business. Additionally, higher than anticipated working capital was driven primarily by account receivable timing and lower payables resulting from inventory reductions. Moving to Slide 7.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

Performance Coatings 4th quarter net sales declined 1% year over year to $843,000,000 dollars primarily because of lower volumes and unfavorable foreign currency translation. These headwinds were partially offset by contributions from the CoverFlex acquisition and positive price mix in both end markets. Refinish net sales increased 2% to $545,000,000 in the quarter. Incremental contributions from acquisitions and net body shop wins helped mitigate foreign currency headwinds and volume declines from industry trends. Industrial net sales declined 5% year over year to $298,000,000 due to volume declines predominantly driven by demand weakness in North America compared to the prior year period.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

Industry conditions remained soft in the Q4 and we expect this to continue through the Q1 of 2025. Despite the macro conditions, we expanded adjusted EBITDA margins by approximately 300 basis points this year and are on track to exceed the 400 basis point margin improvement objective set in the A plan. 4th quarter Performance Coatings adjusted EBITDA increased 4% year over year to 198,000,000 dollars Adjusted EBITDA margin increased by 90 basis points to 23.5 percent, primarily driven by lower variable costs, favorable price mix and contributions from CoverFlex. Let's move to Mobility Coatings results on Slide 8. Mobility Coatings 4th quarter 2024 net sales were $468,000,000 an increase of 4% from the prior year period.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

Light Vehicle net sales grew 9% in the 4th quarter. Volumes increased 6% year over year even as global auto production was down 5%. The volume growth was primarily driven by China and Latin America, which more than offset anticipated declines in North America and Europe. Price mix was a mid single digit tailwind in the quarter, driven by the timing of pricing benefits when compared to the Q4 of last year. Commercial vehicle net sales declined 10% year over year predominantly driven by a 13% drop in Class 8 production in North America and Latin America, which was consistent with the prior guidance framework.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

Mobility Coatings adjusted EBITDA in the quarter improved to $77,000,000 from $59,000,000 a 29% increase year over year. Adjusted EBITDA margin improved by 3 20 basis points versus the Q4 of last year coming in at 16.4%. In addition, the full year adjusted EBITDA margins of our mobility business ended the year at 15.3%. Through commercial courage and operational excellence, we have more than doubled the Mobility Coatings adjusted EBITDA margin in 2 years. Turning to slide 9 for a review of our full year results.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

Net sales grew 2% year over year to $5,300,000,000 a new company record. The improvement was driven by late vehicle volume growth and contributions from acquisitions, partially offset by foreign currency translation headwinds largely impacting the Q4. Volumes were up modestly on a full year basis as growth in Mobility Coatings was offset by a low single digit decline in Performance Coatings. We also achieved a record full year adjusted EBITDA of $1,116,000,000 predominantly driven by lower variable costs, positive price mix and an approximately $20,000,000 benefit from our transformation initiative announced early in 2024. Adjusted EBITDA margin improved by 280 basis points to 21.2 percent, achieving the full year margin target outlined in the 2026A plan 2 years earlier than planned.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

Adjusted diluted earnings per share increased by 40% to $2.35 We plan to remain disciplined and strategic with capital deployment, which we expect will drive near double digit EPS growth over the next several years. And finally, free cash flow of $451,000,000 was roughly flat to the prior year as higher earnings were offset by higher working capital. Turning to Slide 10, we are excited to announce that we ended the year with a net leverage ratio of 2.5 times, which is almost a half turn better than a year ago and is in line with the top end of our 2026 A Plan target. Our balance sheet is now in much stronger position, which provides greater optionality in how we can deploy capital going forward to create shareholder value. In the Q4, we paid off the remaining $105,000,000 of revolver borrowings that was used to help finance the CoverFlex acquisition.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

We ended the year with $1,400,000,000 in total liquidity, including a cash balance of approximately $600,000,000 Capital outlays in 2024 amounted to approximately $630,000,000 deployed with $300,000,000 for M and A, $140,000,000 in capital expenditures, approximately $90,000,000 of gross debt reduction and $100,000,000 in share repurchases. In 2025, as outlined in the A plan, we intend to increase CapEx to approximately $175,000,000 to $190,000,000 as we believe there are significant investment opportunities to drive productivity in our operations. We have $600,000,000 remaining in share repurchase authority and a pipeline of accretive M and A opportunities, which we plan to evaluate in 2025. And finally, we continue to make excellent progress on our return on invested capital target of 15%. In 2024, we expanded ROIC by 2 70 basis points to 14.6% and have line of sight to potentially achieve our target this year.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

Let's turn to slide 11 for our view on 2025 guidance. The new tariffs put into place by the U. S. Government on Canada, Mexico and China has the potential to create a challenging global trade environment. The duration of these actions and the ultimate impacts of global demand remain uncertain.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

Specific to Axalta, a majority of our raw materials are bought within the local trade borders where we produce. In addition, less than 10% of the raw materials used in our U. S. Production are imported from China and we have minimal raw material purchases from Mexico and Canada. We are actively evaluating resourcing some of our direct material buy and we'll explore pricing actions as appropriate.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

We also believe there is excess capacity in the U. S. For certain customers to shift some production if required. Understanding that this is obviously a fluid situation, we are forecasting a full year adjusted EBITDA impact of $10,000,000 from tariffs, which is included in our guidance. The demand impact is still being assessed through discussions with customers.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

However, we still believe that net sales in 2025 will grow by low single digit. For the full year, we expect revenue to be in a range of $5,350,000,000 to 5,400,000,000 dollars with positive contributions from both segments. We expect macro volatility to extend into 2025 and have plans to remain agile and execute against our strategy. In our Refinish business, we are expecting industry volumes to be flat to down low single digit percentages in both North America and EMEA. We are expecting to continue to gain share in both regions from body shop gain, increased sales from accessories and do it yourself in retail, and we plan to harness the full value of CoverFlex that should more than offset industry volume decline.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

In addition, we plan on driving pricing actions across all regions that will take effect in March. Overall, we are planning for another record net sales years in our Refinish business. In industrial, we expect global industry volumes to be flat to up low single digit percent versus 2024. Industry conditions in Europe are still challenged, which we expect to continue at least through the first half of twenty twenty five. Industry dynamics aside, we will continue to focus on gaining accretive growth, customers and margin improvement consistent with A Plant strategy.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

For light vehicle, we assume global auto production will be in line with current industry forecast of approximately 89,000,000 build. Our volumes should continue to outpace global trends primarily due to customer mix and new business wins in China and Latin America. Lastly, in commercial vehicle, we assume North America Class 8 bills will remain below prior year before demand ramps back up in the second half and into 2026. Overall production is forecasted to be flat compared to 2024. For the full year, we expect adjusted diluted earnings per share to be between $2.50 $2.60 per share, which is an increase of approximately 9% above 20.24 at the midpoint of the range.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

Adjusted EBITDA is expected to be between $1,150,000,000 and $1,175,000,000 translating to an adjusted EBITDA margin of greater than 21%. Our guidance includes flat variable costs versus 2024 plus approximately $10,000,000 in direct tariff costs. We also expect that our transformation initiative will drive $30,000,000 to $40,000,000 of incremental benefit this year, mitigating headwinds from labor inflation. Full year free cash flow is expected to be approximately $500,000,000 in 2025, which assumes increased capital expenditures partially offset by reduced cash interest. I will now hand the call back to Chris to review Slide 12 and provide an update against our A Plan targets.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

Thanks, Carl. We did a tremendous job accelerating performance in 2024 and have an opportunity to pull forward our A Plan if the macroeconomic environment is more favorable than we anticipate. We expect to achieve greater than 21% adjusted EBITDA margins and deliver more than 50% in adjusted diluted EPS growth for next year against 2023 at the midpoint. This will be another year to stay focused and execute the key initiatives within our control. Our team is poised and ready and I believe 2025 will prove to be another powerful story for us.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

Thank you for joining us today. This concludes our prepared remarks. Operator, please open the lines for Q and A.

[Operator]

Thank you very much. We'll take our first question from Mike Leithead with Barclays. Please go ahead.

[Michael Leithead, Director - Equity Research at Barclays]

Great. Thanks. Good morning, guys. Good morning. Two questions for me on mobility.

[Michael Leithead, Director - Equity Research at Barclays]

First, in light vehicle, 6% volume growth is a big number. So is that mostly a dynamic of your customers winning share or are you winning like for like market share as well in the coatings market? And then second, price mix of 4% of the segment seems also like a big number. Is that mostly mix dynamic or just help us better understand how you got there?

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

Well, I'll start with good morning, Mike and Happy New Year and I'll start with the first one and I'll turn the second one over to Carl. Specific to the mobility wins, it's actually a combination of both. First, as you can see over the last 9 quarters, we made choices with partnering with the right local players, primarily in China, as well as the new wins that we're seeing in LatAm. And so we're winning customers beyond what I would call market we're gaining market share here. And we can significantly see that quarter over quarter, especially if you look at China, we've had double digit growth through many of the quarters over the last year.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

When you look forward as well, the customers that we chose to play with, especially in China, has worked out to be the China customers that are growing. We've picked TV players as well as players that are in the ICE market that are really growing market share beyond what we can see that the overall market is growing. And this is driven by 2 areas, not only their performance in China, but also their growth in Southeast Asia. We're seeing how well they're doing, whether it's in Malaysia, Indonesia, exports into Sri Lanka, even Australia, New Zealand. It's really playing well.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

And we've partnered with the right players as well as we've partnered early on with customers that we believe our market share is growing beyond.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

And Mike just on your price mix question related part of it is mix just with the different products and businesses that we came in, in the Q4 this year compared to last year. The other component was a year ago in the Q4 of 2023 there was the comparison also provides a little bit higher price mix when you compare it

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

to what happened a year ago.

[Michael Leithead, Director - Equity Research at Barclays]

Great. Thank you, guys.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

Thank you.

[Operator]

Our next question comes from Chris Parkinson with Wolfe Research. Please go ahead.

[Christopher Parkinson, Managing Director at Wolfe Research, LLC]

First of all, an obligatory go birds. Hopefully, the city of Philadelphia has fully adopted you guys. When we take a step back and look at what's happening in the Refinish market and we just look at the claims data over the last year, you're clearly outperforming. We know you want some decent sized customers or some very decent sized customers in the U. S.

[Christopher Parkinson, Managing Director at Wolfe Research, LLC]

You're penetrating Iris pretty well in Europe. Can you just kind of give us some additional color on just how to triangulate how you perceive your relative performance in your 2 primary geographies over the next 12 months and what the investment community should be monitoring to confirm that outperformance? Thank you so much.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

Yes. Thanks, Chris. And yes, certainly looking forward to this weekend. But a lot of it is we set out a strategy focused on 4 pillars, driving continued body shop wins, moving into adjacencies, driving into the retail segment as well as M and A, okay, with what we did with CoverFlex. Those were the 4 pillars that we drove in 2024 in what was a low and declining market.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

And as we look at 2025, the market is no different across our 2 major geographies as you've defined as Europe and North America. So from our perspective, we're going to be focused across those four elements going forward. Last year was a great story for us. We've averaged on 2,500 body shop wins is what we've always talked about, as you know, Chris. And over the last 4 years, we've done 10,000, but last year we did 2,800.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

And so if you look at next year, the team is very, very focused on continuing to drive that body shop win and staying well above plan. That's the first thing. The second one, we're going to continue to look at accretive M and A. CoverFlex has been a great story for us. A year and a half ago, Andre Cohen, an acquisition that allowed us to go into distribution in Europe certainly played a great part.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

And on top of that, through our retail stores, we're going to push more in terms of adjacencies. So what can we push in terms of fillers and putties and things like that we got out of our UPAUL acquisition, That's certainly another element. And the final part of this is really the Iris mix launch. So we did 300 last year. Our expectation is to double this year, mostly in Europe, so that we can continue to drive that.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

We expect the market to be weaker as we have defined flat to weaker. What's different between the 2 years? I would say weather is a little different. I mean, destocking, consumers pulling out, whether it's from high insurance rates or essentially pocketing the insurance claims that those are the challenges we're facing. But I would say weather is something that has been different.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

Obviously, when you compare to 24 in Q1 and what we are seeing in weather with the snowstorms all the way along the East Coast as well as snow all the way down to Florida and the devastation on the West Coast. We haven't seen it through. We're not expecting it. But Mike, if that comes through as a tailwind in Q2, that's certainly something we will be watching for.

[Christopher Parkinson, Managing Director at Wolfe Research, LLC]

That's very helpful. And just as a quick follow-up, at your Analyst Day last year, you spoke a lot about industrial SKU rationalization and certain things seem to be well ahead of schedule throughout mid year and it also seems as though you were able to raise price on certain substrates, a little bit better than perhaps you were previously anticipating. Could you just give us a quick update on how the Street should be thinking about those dynamics into 2025? Thank you.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

That's a great story for us, Chris. Just purely focused on the margin story and then I'll get into the sales story a bit. From a margin story, when we released the A plan just 9 months ago in May, we had a plan to get 400 basis points of margin improvement. And if you listen to Carl's script, we have essentially accomplished 300 basis points out of that. Shelly has done a great job driving that and I believe Tim will certainly accomplish the 100 basis points.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

And I do believe there is actually upside on the margin story in industrial. So I believe we can get better than what we have defined in the A plan by just continuing to focus on margin here. And that does involve a little bit more rationalization of the portfolio, which we'll be focused on. What's interesting is even with all that drive, we were able to get $40,000,000 of new incremental business. From a perspective of market, it's actually the only market we're defining for next year to go up to be flat to up slightly.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

And my expectation is with the administration's focus as one thing towards driving the economy, my expectation is we should expect to see something improve on the back half of the year, number 1. Number 2, the areas where we play. So the building products business that we play in North America, my expectations is that would pick up in the back half as well as energy solutions. Energy solutions, we are getting pulled, especially from a customer perspective with all our EV work in China towards really entering that market and seeing that those businesses sit inside our industrial business. So battery coatings and what we do for motors, coatings for motors such as impregnating resins all sits in our industrial business.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

And my expectation is we would see some more growth there in the back half of the year.

[Christopher Parkinson, Managing Director at Wolfe Research, LLC]

Thank you so much.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

You're welcome, Chris.

[Operator]

Our next question comes from John McNulty with BMO Capital Markets. Please go ahead.

[John McNulty, Managing Director - Chemicals Analyst at BMO Capital Markets]

Yes, good morning. Thanks for taking my question. So as part of the transformation initiative, I think you've got $30,000,000 to $40,000,000 of efficiency that are expected to come in, I guess, this year. I guess, can you help us to think about if there are any additional levers to pull, especially if the macro or tariff issues get a little bit worse than expected? Do you have different things that you can pull to adjust that to maybe accelerate it a little bit faster or get bigger numbers from it as we look through 2025?

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

Yes. Good morning, John. Yes, I think it's a fair characterization is that we do have additional levers that we would have at our disposal and that we're actively working on. So I think as you think about the transformation activities, there's probably a little bit more we can do for that this year potentially. But I think some of the other areas for us is whether it's and we've talked about it previously would be on our freight cost and some of the logistic works that the team is doing.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

We have really significant plans to kind of have that really impact us in 2026. But I would tell you there's a lot of energy in trying to see if we can pull that forward a little bit into 2025 as well. Also I think for us as we think about productivity inside the company within our plant network that continues to be a very, very big focus for us. And you can see it, we have a pretty significant step up in capital expenditures this year. So you may not get the full run rate, but there's hopefully some a little bit more upside as we think about some

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

of those levers for this

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

year.

[John McNulty, Managing Director - Chemicals Analyst at BMO Capital Markets]

Got it. Okay. No, that's helpful. And then I guess just the second question just is on the balance sheet.

[John McNulty, Managing Director - Chemicals Analyst at BMO Capital Markets]

So you've executed as you kind of expected, you've got the balance sheet in pretty solid shape. I guess can you speak to what you're seeing in terms of opportunities out there? It sounds like the M and A markets may be starting to kind of reopen up again.

[John McNulty, Managing Director - Chemicals Analyst at BMO Capital Markets]

I know

[John McNulty, Managing Director - Chemicals Analyst at BMO Capital Markets]

you had some success over

[John McNulty, Managing Director - Chemicals Analyst at BMO Capital Markets]

the last couple of years, even when they were somewhat closed. But I guess, what are you seeing from an M and A pipeline perspective? And should we assume that if it doesn't happen, if things don't materialize, it goes primarily towards buybacks?

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

Yes. This is certainly something that Carl and I bounce off back and forth here, John. But certainly, from where Carl and the finance team have done an exceptional job getting us down to a 2.5 times leverage here at the top end of our A plan. From my perspective, we're here a year and a half ahead of plan. And I also look at it as a great place from where the marketplace is.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

I think the current volatility in the marketplace is actually creating more opportunities for M and A for us. And I would I think that the best way I can characterize this is you should expect to hear more from us on this front in the next couple of quarters. We do see the opportunity to do more in M and A as long as it certainly hits our ROIC targets or our return targets. But with what how the company has performed structurally, where we are taking it operationally, I certainly see this as an opportunity where we can look at bolt ons that we can continue to create value. The last 2 certainly have helped us do that.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

And especially in this environment, we certainly think that we can continue to do more here.

[John McNulty, Managing Director - Chemicals Analyst at BMO Capital Markets]

Great. Thanks very much for the color. You're welcome.

[Operator]

Our next question comes from Mike Sison with Wells Fargo. Please go ahead.

[Michael Sison, Managing Director at Wells Fargo Securities]

Hey, nice end of the year. I guess I had a question on the Refinish market. You sort of noted it would be kind of flattish this year. It really hasn't helped you a lot, although you've been able to grow through not a lot of growth in the market over the last couple of years. But where do you think we are in the Refinish market?

[Michael Sison, Managing Director at Wells Fargo Securities]

Is it a market that could grow the next couple of years? I don't suspect we peaked here. Just give us some of the dynamics that you see that could maybe help grow the market over the next couple of years? And on the flip side, what risk do you see in 2025 as the macro just seems challenging again? Thank you.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

Thanks. Yes, good question, Mike. I think as you can see, what we're forecasting for the market is for it to be flat to down a little bit. And so what's driving it? I think there's a lot of factors.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

There are factors that I believe are transitory and I think there are factors that I would argue we need to wait and see and watch which are more structural, right? And so in terms of factors that I would call are transitory, insurance rates with where inflation is and where consumers are and folks essentially deciding to pull spending on fixing their cars to essentially buy groceries. I think those are elements that consumer confidence can certainly change that as well as any drop in insurance rates. Also, something that will be a tailwind for us is you got to remember where backlogs were in body shops, right? I mean, you go back to 2023, backlogs were all the way to up to 6 to 8 weeks.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

Right now, we're actually getting back to normalized backlogs, I would call it 2 to 3 weeks. And you would ask why so. I mean, if I had to wait 8 weeks to fix my car, I mean, either or not, I'm just going to cash it and just work with the car I have, especially if it's a minor collision or you have other conditions where you have insurance companies also making calls when you're right on the edge to write off the car. So I do believe there are elements that are transitory. Elements that I would say that we have to wait and see how this plays out is obviously the destocking that we've seen in the marketplace, a lot of which we saw in 'twenty four.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

2 very large distributors coming together and consolidating, you would see that they've probably optimized their inventory platform. And so do you see that coming back? Probably not. So those are the things that we're balancing over time. My expectation is all the transitory elements when you start taking all that together, plus the fact that I do believe if you look at the United States, if you look at what we're driving to return to work and miles, those are all going up.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

So my expectation is over time this will change, but the way we're forecasting it, just as we did in 2024 is to expect this market to be flat to down so that we over performed. So even in this market, even in 2025, we're putting that as our forecast so that we keep our teams over performing and anything that comes on top of that will be upside. And again, as I answered Mike's first question, if weather, which we haven't tracked in all of this, with the significant weather that we have seen this year. And again, this is something that you usually see a quarter later in Q2 or Q3. That could be a tailwind, but again, this is not something that we're counting on at this point.

[Michael Sison, Managing Director at Wells Fargo Securities]

All right. Thank you.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

You're welcome.

[Operator]

Our next question comes from Vincent Andrews with Morgan Stanley. Please go ahead.

[Vincent Andrews, Analyst at Morgan Stanley]

Thank you and good morning everyone. Wondering if you can touch a little bit more on the free cash flow. You'd raised the free cash flow guidance at 3Q, to I think about $500,000,000 and I think you wind up coming in below the prior guidance. So could you just bridge us to what happened between where you thought things were going to be at 2Q, 3Q and 4Q? And then that shortfall this year, how much of it do you think you can make back up next year?

[Vincent Andrews, Analyst at Morgan Stanley]

I see you've guided to $500,000,000 but that was kind of what you were expecting for this year. So if you could just help us from 2Q all the way through next year, that would be great.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

Yes. Good morning, Vincent. Yes, I think for free cash flow for us this was really just working capital and from a timing perspective. So if we kind of look at kind of what happened and this is a year over year type of kind of comparison as well. We made about a $70,000,000 working capital higher working capital this year than what we kind of did a year ago.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

And so relative to the guide, it's really just the timing of some of the receivables and collections as it relates to that. In our account payables, if I look at my DPOs, we're down probably 6 to 7 days on a as well in the quarter. So we do think a lot of that will reverse itself and come back into 2025. We did kind of go forward with just the $500,000,000 of free cash flow as a starting point. But as I look at the business, I would expect that should definitely be the floor and we would hopefully drive that up as we go throughout the year depending on obviously market conditions.

[Vincent Andrews, Managing Director at Morgan Stanley]

Okay.

[Vincent Andrews, Managing Director at Morgan Stanley]

And as a follow-up, the wins that you've had in light vehicle, I think you cited better than industry performance in none of the last 10 quarters. Have those wins been on index based contracts? Have they been on fixed based contracts? Or no notable trend between the 2?

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

It's a combination of both, I would say, on as far as on those type of wins that we've had to date. So some are index based, some are not. Obviously, it depends on the jurisdiction and really the end customer as we think about that, Vincent. But I do think a point on Latin America for us, it was a very, very strong quarter. And that's where we still have pretty significant upside as we kind of go forward.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

So we did increase the total wins that will beginning to come in this additional wins that will be coming in, in 2025. So we're now seeing that $60,000,000 to $70,000,000 originally. I think we kind of gave a $50,000,000 number. So that business will be rolling on here over the next 18 months. So we're very excited about just what we're seeing specifically in the Brazil market.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

Just maybe

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

only to add to that Vincent in terms of jurisdictions. As you know, we moved our RMI indexing from about 30% of our total in mobility up to over north of 50%. And it depends on the regions. For example, in LatAm, because there's so much volatility, we stay we avoid RMI indexing or having something because we the customers are used to having conversations at a much faster pace than if you were in other regions like North America or Europe.

[Vincent Andrews, Analyst at Morgan Stanley]

Okay. Thanks very much. That's helpful.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

Thank

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

you.

[Operator]

Our next question comes from John Roberts with Mizuho. Please go ahead.

[John Roberts, Managing Director at Mizuho Financial Group]

Thank you and congrats on a nice quarter and guidance. Do you think you'll be providing new multiyear targets once you've hit all of the 2026 A Plan target?

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

Absolutely, Mike. If you really look at this with a little bit of help from a macro, we're forecasting all our macros to be down with this slight improvement in industrial. But just finishing on Page 12, and if you really look at the performance of where we are against our A plan and it's something that we just released in May of last year. And even if you look at sales, sales would be up $100,000,000 more if it wasn't for FX. My perspective is we can accelerate a ton of this through 2025.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

And so my hope is that maybe by the end of this year, but certainly by the beginning of next year, we release our next plan and we show you guys where we can go with this company in the future. I'm absolutely thrilled that of the performance that we've had to date with this company. And I do believe there's great upside with what else we can do with it.

[John Roberts, Managing Director at Mizuho Financial Group]

And I apologize if I missed this, but how are you thinking about FX for both the March quarter and full 25% both sales and EBITDA? Yes.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

I think, John, as we think about full year, we're planning somewhere between $80,000,000 to $100,000,000 of FX headwinds on a year over year basis. So call that 1.5% to close to 2% on a year over year comparison. In the Q1, we're seeing pretty close to around say 25 dollars most likely $30,000,000 of FX headwinds in the Q1. And if you think about the EBITDA impact on that, maybe just from a Q1 basis, it's probably in that $5,000,000 range, which is also similar to actually if you kind of go back even into the Q4 of last year when we were put the guide out for the year, we did have FX kind of really move against us relative to our guide in October and that was probably another $5,000,000 headwind that we had on EBITDA for Q4.

[John Roberts, Managing Director at Mizuho Financial Group]

Thank you.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

Thank you.

[Operator]

We'll next go to Duffy Fischer with Goldman Sachs. Please go ahead.

[Duffy Fischer, Equity Research Analyst at Goldman Sachs]

Yes, good morning guys. Question just when you guys talk about like let's say the 2,800 wins you had last year in Refinish, help us with the economics on that. Like what would the average sales be on a win? And then what do the margins look like initially? Do you come in below average and then grow into it over a couple of years?

[Duffy Fischer, Equity Research Analyst at Goldman Sachs]

Or how do we take those numbers and roll those through a model?

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

So we don't break that out to that level of detail. But one thing I would say is it would be I mean, as you can see in the performance of the business overall year over year, even if you take out a bit for pricing, what you can see is it's coming at or accretive to the margins in the Refinish business. So I think that's the best way to characterize that. But we don't break out the sales per shop or provide an average in that sense, Duffy. But one other thing for you is for you, another way to look at this is we also provide a net number, right?

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

So this includes this is inclusive of what losses we have. So every time you look at this number, just look at it as always incremental sales for us that's coming into the portfolio. And so you take that and you know what we do on average for pricing for the business and you can quickly get a sense that as you can see the improvement in the business year over year that it's coming in at or slightly accretive to the overall margin of the business. Yes.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

And Duffy, if you look at just Performance Coatings, in total for the year in 2024, the margin expansion was 2.50 in 2020 4, the margin

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

expansion was 2.50 basis points. Obviously, part of that was industrial,

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

but with Refinish being the larger component of that, you could see that even with all these new wins coming on, there was still expansion during the year, which is consistent with how we think about when we go to market.

[Duffy Fischer, Equity Research Analyst at Goldman Sachs]

Thank you. And then just the $10,000,000 number that you gave out for tariffs, is that incremental just on the tariffs that are kind of being talked about, the Mexico, the China, the Canada? Or is that inclusive of things like the antidumping on epoxy in TiO2 into Europe that have kind of already occurred? And if it's not inclusive of those, roughly how big is that hit been on some of these raw materials that are getting antidumping?

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

Yes. So Duffy, I think we looked at obviously as we were preparing yesterday with the fluid situation, the $10,000,000 was really attempting to incorporate both what we did in the 10% in China as well as what we saw from Canada and Mexico yesterday. Obviously, there's a 30 day reprieve on that. So it's probably a little bit

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

more

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

and Mexico yesterday. Obviously, there's a 30 day

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

reprieve on that. So it's probably a little bit

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

less than $10,000,000 as we think about it now just based off what we're seeing from that from Canada and Mexico. But as it relates to some of those other antidumping, TiO2, that's kind of already fully loaded into our outlook at this point. I think the teams have done a good job in managing around that as we think about whether that's through alternative sources, whether that's just some other productivity initiatives that we're that were executed.

[Duffy Fischer, Equity Research Analyst at Goldman Sachs]

Terrific. Thank you, guys.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

Thank you. And just one last thing for you Duffy on the $10,000,000 I mean obviously this is a full year view and as a team it's not like we found out about tariffs in the last week or on Saturday. We've obviously known tariffs were coming for a couple of months here. One of the things that we are working is looking at on shoring and also making sure some of our suppliers have strategic inventories on continent or in the United States. And so certainly so that's our top end of our number based on what we thought from just the weekend, but we do think that there's mitigation activities that we can certainly drive towards that.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

Thanks again.

[Operator]

And we'll next go to Ghansham Panjabi with Baird. Please go ahead.

[Ghansham Panjabi, Senior Research Analyst at Baird]

Hey guys, good morning. Good morning. Chris, obviously a lot of progress on your self improvement initiatives last year. Maybe you can share some specifics in terms of what we should look forward to in 2025 at Axalta? And then for my second question, Karl, in terms of the EBITDA improvement, dollars 24,000,000 versus $25,000,000 of let's say $50,000,000 plus or minus, Can you just summarize the bridge items?

[Ghansham Panjabi, Senior Research Analyst at Baird]

I know you called out cost savings of $30,000,000 to $40,000,000 and then a bit of a tariff impact. But just what are you embedding sort of for base volume and price on a core basis excluding CoverFlex? Thanks.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

So I'm going to start. Thanks for the question Ghansham and Happy New Year. So if I think about the self help and if I broke it up into the 3 or 4 initiatives, overall under our transformation initiative, one of the first things that we had is to look at our SG and A. We had a plan to reduce 5% of our salaried workforce around 600 folks. As with what you saw and how we announced it last quarter or for the full year of $23,000,000 We had a target of $10,000,000 for last year.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

We accomplished $20,000,000 Our target for this year is about $30,000,000 And conceptually with the, let's call it, negotiations that we put in place inclusive of the 2 plants that we had in Europe and North America to close. We are on schedule or there might be a little bit of upside, but our expectation is to still hit that 30,000,000 dollars In terms of what are the other initiatives, the other one was supply chain. And again, with the current dynamics in terms of volumes and where things are moving, this remains still a very, very strong opportunity and we certainly see this as something that we can continue to drive here. Overall, across this over the 3 year plan, we had about $25,000,000 and that's certainly something that we're going to continue to drive. Now I think to that question in terms the next one is productivity within our plants.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

And to the question about our free cash flow impact or our working capital impact, one of the elements is capital in Q4, if you noticed, actually doubled from Q3. And what we're doing is really investing in our plants to start driving productivity. Now that's not going to come quickly, but my expectation is we're certainly going to be in a different spot in 2026 because of the levels of investments that we're putting. We needed half of that investment was needed because it's sustaining. Going through COVID, there was a lot of capital or a lot of investments that we did not make.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

But I would call it a quarter to another half of it is driven towards productivity initiatives. And that certainly will come into fruit in about, I would say, the back half of this year into 2026. So those are the elements that I believe are what's still left on the self help front that will certainly keep us going in the right path as I look to where the markets are heading for 'twenty six for 'twenty five.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

Got you. And just the bridge on just EBITDA year over year, it's relatively straightforward and simple the way that we're looking at it. So I would say on the incremental $100,000,000 or so of higher revenue, that kind of at the midpoint, you should expect us to convert at that of 35% to 40%. So call that $35,000,000 to $40,000,000 which will kind of get you to the low end of the guide, everything else being equal. As it relates to the transformation initiatives of the $30,000,000 to $40,000,000 we believe that will be somewhat offset with labor inflation that we are expecting this year as well as the potential impact from tariffs.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

I think above and beyond that where there could be further opportunity to get to the higher point would be again right now we are assuming kind of a flattish variable COG or raw material environment on a net basis. If there's a little bit of opportunity there that would actually help us get to the upper end of the range. And as Chris said, it's productivity. I think the productivity again if we're successful on some of the execution items that could provide a little

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

bit more tailwind as well.

[Ghansham Panjabi, Senior Research Analyst at Baird]

Perfect. Thank you.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

Thank you.

[Operator]

We'll next take our question from Aleksey Yefremov from KeyBanc Capital Markets. Please go ahead.

[Aleksey Yefremov, MD & Equity Research at KeyBanc Capital Markets]

Thanks and good morning everyone. I wanted to come back to the Refinish market and ask you about your mainstream versus premium market strategy. Any update there on how this is evolving? Could you maybe use additional M and A to enhance this mainstream market strategy in coming quarters?

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

Yes. So thanks for the question, Alexi, and again, and thanks, happy New Year to you too. And just in terms of the premium segment, if you look at a lot of The Body Shop wins, these have been very, very focused on the premium side. The entry with CoverFlex has really given us an opportunity into the mainstream and economy. So in terms of how well that's working, I would say we're right largely in line with our deal dynamics that we established in buying it.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

I would say the market is slightly weaker based on obviously the consumer pressures, whether it's insurance rates or here it's a lot more where consumers are essentially pocketing the insurance claim versus investing, but or getting their cars fixed. But that said, the business case has been very strong and where it's really played out well is the fact that we can drive the adjacencies, whether it's fillers, whether it's everything else that Axalta provides, putties and everything that we bring in from 3rd parties with tapes and all of that is really helping us strengthen that market. I do believe, Alexei, that there is far more opportunities in adjacencies here, especially in other regions, right? So we have obviously started here with North America, but I do believe that there are more opportunities as we think about Europe and Asia, and these are the things that we're going to be focused here in the next two quarters.

[Aleksey Yefremov, MD & Equity Research at KeyBanc Capital Markets]

Great. Thanks, Chris. And maybe follow-up on Karl's answer on the $100,000,000 of revenue. Can you provide any details on volume versus price you already gave us FX?

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

Yes. I mean, I think as we look at it in total, we are expecting, as I said in the prepared remarks, our finished team is going to be executing some pricing actions beginning in March. If I look at price mix for the full year, we do expect it to be positive, probably up in that 1% to 2% type. Volumes kind of being down a little bit with some offsets as we think about kind of new business wins. So if you think about the bridge, I mean, we're kind of managing it in total.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

That's why I think I obviously tend to look at just the conversion on that incremental revenue into that 35% to 40% range.

[Aleksey Yefremov, MD & Equity Research at KeyBanc Capital Markets]

Great. Thanks a lot.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

Thank you.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

Thank you.

[Operator]

We'll next go to Mike Harrison with Seaport Research Partners. Please go ahead.

[Mike Harrison, Managing Director and Senior Chemicals Analyst at Seaport Research Partners]

Hi, good morning. Congrats on a nice quarter. I was hoping that we could dig in, Chris, a little bit more on what you guys are seeing in the China light vehicle market. It sounds like you guys are pretty happy with the customers that you're positioned with. But if you look at there's more than 100 different car brands there.

[Mike Harrison, Managing Director and Senior Chemicals Analyst at Seaport Research Partners]

A lot of them over time could be consolidated. Do you guys view this as a threat or as an opportunity? Maybe just talk a little bit about how you're thinking about your longer term position within the Chinese light vehicle market?

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

Okay. Thanks for the question, Mike. Maybe I'll break it up into 3 parts because I will first give you a view of the customer dynamics and then maybe move it into a little bit of market dynamics, which is which also enables growth and why we believe strongly in this marketplace. So from a customer dynamic, the folks that we are partnered with in China are some of the largest players, especially in the EV space and on the ICE side as well. What differentiated us, what enabled us to get in here early was really, I think, 4 factors.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

The first one was we worked we started off early with companies that were just starting out or and we were very, very focused on the local market as opposed to entrenched players from the outside. And this enabled us to build that partnership over many years. The second one enabled us to be embedded in their plans. So a lot of our folks work within their plans to provide the quality, the service, the timely delivery and response and has just done just an amazing job in building the relationship. And that second element of it is really around the relationships between our teams and theirs over time in developing the colors.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

China has just done an amazing job of breaking boundaries. The customers demand for color just breaks boundaries and that's something that we've always been there. And the last element of this is as we work through these 2, we put in capacity, I believe before many others and had the capacity as they were growing. We built a new plant, we expanded a plant and all of that really enabled us to grow. So the strength that we have with the large players, to your point, if there is any consolidation, my expectation is that the large players will lead a lot of the consolidation and we have a good place there.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

The second part of this is specific to the market dynamics. The stimulus has helped, but I think it's been a part of their growth story. Obviously, the capability, the new vehicles coming out of China, especially on the EV side, the electronics and just the interaction with the vehicles have really played a part and just that demand is not only a China specific demand, but we're certainly seeing it in Southeast Asia. So I think China has become the manufacturing hub for, again, as I said, Malaysia, Indonesia, Australia, New Zealand, Bangladesh, I mean, and even Sri Lanka. And that demand is also pushing demand for us from a refinish standpoint because we supply the customers.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

So this relationship has been great on both those two fronts. And the final expectation is I do think China is going to drive to make sure that it's specific to this industry that the demand stays strong beyond stimulus going forward and all of this will play well for us in 2025.

[Mike Harrison, Managing Director and Senior Chemicals Analyst at Seaport Research Partners]

All right. Thanks for that. And then I was hoping that you could also talk a little bit more about this agreement with DIR on digital paints. Maybe talk about how this partnership can help you accelerate the commercialization of the NextGen product line?

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

Sure. Great. Thanks for the question on this one. This is certainly something that we are proud of and a true credit to the mobility team. Hadi, who's the President there and his team and the great work that they've done driving this.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

Durer is a leader. I mean, they have over 50% of the robotics and systems in OE plants And they're just putting 2 leaders together, us from the coding side and putting them together and the ability for us to essentially code two tone a car. So imagine if you had to change the paint a black or coat a black roof or a hood, the normal process is it goes through a paint process, it's pulled off to an offline process and that is done and it creates inefficiencies and it creates cost. And what we've been able to do is through this process, put it through the mainline and bringing 2 strong companies together. And I believe this technology, it's not just 2 toning hoods, but whatever you want in terms of essentially putting a logo or putting something specific on a car, that's something that we're able to do right off the main paint line.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

It's a great technology and something that we're absolutely proud of. The additional feature here from a sustainability standpoint is the over spray coming from this is negligible. So the amount that we drive in terms of reducing over spray and paint is something that I think will be a great win for OEs as well in the future.

[Mike Harrison, Managing Director and Senior Chemicals Analyst at Seaport Research Partners]

Thanks very much.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

You're welcome.

[Operator]

We'll next go to Jeff Zekauskas with JPMorgan. Please go ahead.

[Jeffrey Zekauskas, Analyst at JP Morgan]

Thanks very much. Two questions. In order to hit your free cash flow target for next year, your cash flow from operations has to rise by, I don't know, dollars 100,000,000 or $115,000,000 So I take it one principal way you would do that is increasing accounts payable. Is that a big piece of that increase? And secondly

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

Go ahead.

[Jeffrey Zekauskas, Analyst at JP Morgan]

I'm sorry, go ahead.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

No, yes, just to answer maybe the first question there, Jeff. Sure. Yes, I think it's specific within working capital. I think there's a couple of different things. I think one is, as I did reference, our DPOs did dip a lot lower in the Q4, kind of, I would say, more abnormally.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

So that would we would probably normalize that. So that's called 6, 7 days. So that's going to be definitely a piece of the story. And then on account receivables, again, I think there continues to be some further opportunities. We think about managing that as we kind of go forward.

[Carl Anderson, Senior VP & CFO at Axalta Coating Systems]

And of course, inventory will continue to be in focus for us. I think the teams did a very good job late in the year, but I think we need to see a consistent performance as we think about P5.

[Jeffrey Zekauskas, Analyst at JP Morgan]

Okay. And then, for Chris, if it turns out that there really were 25% tariffs on Canada and Mexico, what do you think that would do to the price of a car made in

[Jeffrey Zekauskas, Analyst at JP Morgan]

the U.

[Jeffrey Zekauskas, Analyst at JP Morgan]

S? And how do you think it would affect car production?

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

So first maybe in terms of I kind of look at it from our perspective first and then maybe I'll bring in. If I think about Axalta and we certainly since the weekend, we were very, very focused in terms of looking at how much of an impact this would have on us. And in reality, if I think about the number of cars that are built in Mexico and Canada, this would have in fact about 5% to 6% of our revenue. Now in terms of the impact per car, this would have about a $3,000 impact per car. However, as I said, the threat of tariffs is not something new.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

We've known about this for a couple of months. So we've certainly the mobility teams have certainly started working with our OEs because the OEs have been making plans to look at at least the ones that we've been associated with to look at moving production, looking at what they can do to offset a lot of this. And there are specifics also when you think about what's actually built components that are built in the U. S. Then shipped to Mexico as part of an overall assembly strategy and then brought back.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

So there are elements of this, but overall, I would say the impact on a car is about 3,000, but my expectation is over based on the time we have and over the time we have, the OEs will be driving significantly to find measures around that and that is what we're absolutely focused with our customers to make sure that we help them offset.

[Jeffrey Zekauskas, Analyst at JP Morgan]

Great. Thanks so much.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

You're welcome.

[Operator]

And our last question comes from Steve Byrne with Bank of America. Please go ahead.

[Rock Hoffman, Analyst at Bank of America]

Hi, this is Rock Hoffman on for Steve Byrne. Just drilling into Refinish, within the 2,800 net body shop wins, what fraction of those are adopting Iris mix? And has your view of the market potential for this technology expanded beyond high end premium facilities?

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

No, we're still very focused on the high end premium facilities. I would say the 2,800, most of those are just starting without the Iris mix. We're using the Iris mix, actually launching it in Europe and a lot of that is with our premium customers in Europe. Again, next year, we're doubling the number of installations. There is probably a good chance that some of those 2,800 might have those.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

But at this time, we're starting with the customers that have been with us for a long time and making sure that they have the access to the equipment first. So I think, Marco, that's it. To close, I did want to take a minute and really say I'm really excited about what's happening here at Axalta. It's been 2 years since I've joined this incredible team and since then we've worked closely together towards a common A Plan goal to optimize all areas of this great company and perform at a higher level. The improvement that we have made over this period clearly shows that we're onto something.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

In 2 years, we have increased sales by more than 8%, expanded EBITDA margins by 4 60 basis points, EPS by 46%, free cash flow by 177% and improved the leverage from 3.8 to 2.5 times. This would not be possible without the dedication and company pride of every single employee here and I am absolutely thankful for that. It's been an amazing ride and it's exceeded my expectation in every single way and I can't wait to show you what we're going to do in 2025. Happy New Year everybody and I look forward to working with you this year. Thank you.

[Chris Villavarayan, President & CEO at Axalta Coating Systems]

Thank you.

[Operator]

This does conclude today's program. Thank you for your participation. You may disconnect at any time.

Participants

Executives

• Colleen Lubic, Vice President - IR
• Chris Villavarayan, President & CEO
• Carl Anderson, Senior VP & CFO

Analysts

• Michael Leithead, Director - Equity Research at Barclays
• Christopher Parkinson, Managing Director at Wolfe Research, LLC
• John McNulty, Managing Director - Chemicals Analyst at BMO Capital Markets
• Michael Sison, Managing Director at Wells Fargo Securities
• Vincent Andrews, Analyst at Morgan Stanley
• Vincent Andrews, Managing Director at Morgan Stanley
• John Roberts, Managing Director at Mizuho Financial Group
• Duffy Fischer, Equity Research Analyst at Goldman Sachs
• Ghansham Panjabi, Senior Research Analyst at Baird
• Aleksey Yefremov, MD & Equity Research at KeyBanc Capital Markets
• Mike Harrison, Managing Director and Senior Chemicals Analyst at Seaport Research Partners
• Jeffrey Zekauskas, Analyst at JP Morgan
• Rock Hoffman, Analyst at Bank of America