Axalta Coating Systems Ltd. Q4 2025 earnings call

Good morning, everyone, and thank you for joining us to discuss Axalta's fourth quarter and full-year 2025 financial results. I'm Colleen Lubic, Vice President of Investor Relations. With me today are Chris Villavarayan, our CEO and President, and Carl Anderson, our Chief Financial Officer. We posted our fourth quarter and full-year 2025 financial results this morning. You can find today's presentation and supporting materials on the Investor Relations section of our website at axalta.com, which we will be referring to on this call. Our remarks today and the slide presentation may include forward-looking statements reflecting our current views of future events and their potential impact on Axalta's performance with respect to the proposed merger of equals between Axalta and AkzoNobel. These statements involve risks and uncertainties, and actual results and outcomes may differ materially. We are under no obligation to update these statements.

Our remarks in the slide presentation also contain various non-GAAP financial measures. We included reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. Refer to our filings with the SEC for more information. With that, I'll turn the call over to Chris.

Thank you, Colleen, and good morning, everyone. In the fourth quarter, Axalta delivered another period of strong operational execution, solid margin performance, and record cash generation. We generated net sales of approximately $1.3 billion despite ongoing macro headwinds in North America with year-over-year growth in three of our four regions. Adjusted EBITDA was $272 million, with a margin remaining strong at 21.5%, an improvement of 50 basis points versus last year. This marks our seventh consecutive quarter at or above our A-Plan margin target of 21%, underscoring the strength of our commercial discipline, pricing actions, and cost management. Adjusted diluted EPS was $0.59, roughly flat year-over-year. In Mobility Coatings, we delivered a record fourth-quarter performance in net sales and adjusted EBITDA, supported by new business wins and steady global production. Performance Coatings sales and mix fell short of our expectations in Q4.

The fourth quarter marked a record for cash generation, both in terms of operating and free cash flow. Overall, the quarter caps a year of significant progress at Axalta. Let's turn to slide 4. Looking at 2025, we delivered record financial results this year, and I'm extremely proud of what the team accomplished. Adjusted EBITDA was $1.13 billion, representing a $317 million growth since 2022, with margins expanding over 500 basis points to 22%. Adjusted diluted EPS increased approximately 55% over the same period, reaching another all-time high, and free cash flow came in at $466 million, an increase of over $300 million compared to 2022. These are exceptional results that highlight our strongest financial performance on record.

The discipline, ownership, and drive that was required to achieve these financial results speak to the strength of the Axalta team, especially considering it was accomplished in a challenging market backdrop with significantly lower demand. Our team has consistently raised the bar, reinforcing the foundation of a well-performing and resilient company. Let's move to slide 5. Let me briefly highlight the meaningful operational and commercial progress we delivered in 2025, progress that is strengthening our cost structure, improving service, and delivering a creative growth. Operational excellence is a core driver of our performance. As always, safety is our top priority. We reduced injuries by 40% since 2024, achieving a TRIR of 0.18, far outperforming the industry average. We won't stop until we achieve a zero-incident environment and will remain steadfast in driving safe behaviors and best practices around the world.

We delivered more than $300 million in variable cost reductions through our procurement and material productivity programs, and lowered fixed expenses by over 6% on a constant currency basis in 2025. This was supported by $100 million in incremental structural benefits from our transformation initiatives. We invested a record $196 million in CapEx to support productivity and reduced our footprint by optimizing multiple sites over the past two years. We also improved service levels to our customers with a 10% improvement in on-time delivery. These actions support our strong 22% EBITDA margin for the year. Commercially, we're building top-line momentum. In Refinish, we added over 2,800 net new body shops and grew adjacencies by $25 million. In Mobility coatings, we secured $60 million in net new wins with standout growth in Latin America and China. In industrial, our Asia-Pac team delivered 5% net sales growth despite a weaker macro.

These operational and commercial accomplishments are sustainable enhancements that are driving our financial performance. On slide 6, I want to highlight what our underlying performance demonstrates against a backdrop where demand significantly declined in most end markets due to the macro headwinds. Starting with Refinish, global activity is running mid-single digits below our expectations. This shortfall is compounded by distributor consolidation in North America, which has created near-term volume pressure as the channel rationalizes inventory. In Industrial, demand across North America and Europe is significantly weaker than we all anticipated. Light vehicle is performing comparatively better. Revenue is tracking close to our expectations, although global auto production is running about 1% below the levels we assumed. And in commercial vehicles, conditions are certainly challenging. Class 8 builds in North America are down roughly 30% versus our assumptions, reflecting a broader slowdown in fleet refresh activity and softer freight demand.

But the story I want to emphasize is not the macro. The real story is what we have been able to do despite the weakness. The actions we have taken across procurement, fixed operating costs, network optimization, and productivity have fundamentally strengthened the business and protected margins to prepare for the upside. The chart on the right shows that when markets normalize, we're positioned to deliver margins well north of 21% and generate adjusted EBITDA above the $1.2 billion in the A-Plan target. We have built the foundation, which will further be strengthened with the Akzo combination, and we will be ready when the macro recovers. With that, I'll turn the call over to Carl to walk through our results on slide 7 and our outlook for 2026.

Thank you, Chris, and good morning, everyone. In the fourth quarter, net sales declined 4% year-over-year due to lower volumes in North America across all of our businesses. These headwinds more than offset favorable year-over-year foreign currency translation, primarily due to the stronger euro. Gross margins decreased 70 basis points compared to the previous year, primarily driven by unfavorable geographic mix tied to lower North America net sales compared to the prior year period. Net income was $60 million compared to $137 million in the prior year period, driven primarily by higher tax expense and $21 million in transaction costs, primarily related to the announced merger with AkzoNobel. Income tax expense was $57 million higher in the fourth quarter of this year due to a one-time deferred tax benefit recognized in the fourth quarter of 2024 and valuation allowance accrued this quarter.

These increased expenses were partially mitigated by excellent execution on costs. Interest expense declined 11%, SG&A expenses were down 8%, and other fixed operating costs were down 4% compared to a year ago. Adjusted EBITDA in the quarter was $272 million, down slightly from last year and lower than our guidance expectations as December volumes in both Refinish and Industrial came in lower than anticipated. Adjusted EBITDA margin expanded 50 basis points year-over-year, driven primarily by strong Mobility results and lower costs. Adjusted diluted earnings per share was $0.59 in the quarter, roughly in line with a year ago, as less shares outstanding and lower interest expense helped to offset decreased income from operations. Fourth-quarter cash from operations of $344 million and free cash flow of $290 million were both fourth-quarter records. The year-over-year increase was driven primarily by improved working capital and lower interest payments.

Performance Coatings, fourth-quarter net sales declined 6% year-over-year to $791 million, primarily due to lower volumes and unfavorable price mix. Refinish net sales decreased 7% to $509 million in the fourth quarter, reflecting ongoing low levels of claim activity and adjusted order patterns as North America customers manage their working capital. Industrial net sales declined 5% year-over-year to $282 million due to volume declines in North America and Europe, partially offset by favorable foreign currency tailwinds in the quarter. Fourth-quarter Performance Coatings Adjusted EBITDA was $180 million, down from $198 million a year ago. Adjusted EBITDA margin decreased by 70 basis points to 22.8% due to the conversion from lower sales, partially offset by a reduction in operating expenses. Mobility Coatings, fourth-quarter 2025 net sales were $471 million, an increase of 1% from the prior year period.

Light Vehicle net sales increased by $3 million from the fourth quarter of last year due to positive price mix and favorable foreign currency, mitigating volume declines in North America. Commercial vehicle net sales were flat, supported by new business wins, favorable foreign currency impacts, and positive price mix, which together helped offset the effect of lower Class 8 truck production on a year-over-year basis. It's important to keep in mind that North America heavy-duty truck production was down roughly 30% in the quarter, which underscores the resiliency of the business driven by growth factors in commercial transportation solutions. Mobility Coatings, Adjusted EBITDA in the quarter increased 20% to $92 million in the fourth quarter compared to $77 million in the prior year period. The increase was due to strong contributions from price mix and lower operating expenses.

Adjusted EBITDA margin was 19.4%, an increase of 300 basis points compared to last year. Let's turn to slide 10 for a review of our full year results. In 2025, net sales declined 3% year-over-year to $5,117 million. The primary driver was broad industry softness in performance coatings. This was offset by new business wins, favorable currency translation, and positive price mix across three of our four end markets. Overall, 2025 was the story of a challenged North America macro, which unfavorably impacted all four of our businesses. Importantly, we view this pressure as transitory and believe our 2025 financial results reflect the resilience and stability within our global portfolio and Axalta's ability to drive operating performance and manage costs. Even with this top-line pressure, we remain focused on our controllables and were able to deliver one of the strongest earnings performances in Axalta's history.

Through strong execution, we achieved record full year adjusted EBITDA of $1,128 million and adjusted EPS of $2.49, a 6% increase over 2024. Adjusted EBITDA margin improved by 80 basis points to 22%, exceeding the full year margin target outlined in the A-plan of 21% for the second year in a row. We delivered nearly $650 million in cash from operations, leading to $466 million of free cash flow driven by lower cash interest payments and improved working capital, which more than offset $56 million in higher capital expenditures. Let's go to slide 11. 2025 was another year of disciplined execution on our capital allocation priorities. We continue to strengthen our balance sheet, invest in the business, and return capital to shareholders while generating strong cash flow.

We paid down approximately $230 million in gross debt, bringing our net leverage ratio down to 2.3 times at year-end, the lowest level in Axalta's history. We also took proactive steps to reduce interest expense and improve our capital structure. Interest expense for 2025 was $176 million, a reduction of nearly $30 million from last year. We are also planning for another $20 million reduction in 2026, resulting in annual interest expense of approximately $155 million for the full year, which is more than a 25% reduction from 2023 levels. Consistent with our strategy to drive productivity in our plants, we increased capital expenditures to $196 million in 2025, a 40% increase compared to a year ago. We expect to generate strong returns from these investments as they will contribute to sustained productivity gains in 2026 and beyond.

We also deployed $165 million in cash to share repurchases in the year. With the announced merger with AkzoNobel, we have ceased buybacks and are pivoting our capital allocation to debt reduction going forward. Free cash flow remains a key strength of Axalta as we delivered $466 million in 2025, bringing cumulative free cash flow to more than $1.35 billion over just the last three years. We believe there is further opportunity to expand free cash flow generation as we plan to unlock more working capital through improvement in DSOs and inventory turns. All of these actions, de-leveraging, investing in productivity, optimizing our capital structure, and improving return on invested capital, reinforce the strength of the foundation we've built and the momentum we carry into 2026 and our next chapter. Let's turn to slide 12 for our view on guidance.

We see the 2026 setup as one that will start off slower in the first quarter, with recovery beginning in Q2 and building momentum into the second half. We expect pressure from distributor order patterns in Refinish, as well as continued softness in Industrial and Class 8 commercial vehicle production to start the year. However, as we move throughout the year, we believe several catalysts, including interest rate reductions, easing insurance costs, higher used vehicle prices, higher Class 8 production, and anticipated benefits from tax reform, will take hold, creating a supportive backdrop for the second half. In Refinish, we expect inflation impacts in North America to be more manageable, supporting a second-half increase in repairable claims. For 2026, we are planning for positive price mix and higher volumes in the second half.

In Industrial, we expect a slower start as the operating environment remains at trough levels, with recovery likely to occur in the second half when seasonal demand is typically stronger. Interest rate reductions and improved consumer affordability should help drive volume stabilization as the year progresses. In light vehicle, we are assuming global auto production of approximately 92 million builds, roughly flat year-over-year and consistent with industry forecasts. In commercial vehicle, we expect North America Class 8 builds to remain flat in 2026 but increase throughout the year as demand trends start moving up toward normal replacement levels. We are also excited with our recent wins in Brazil and expect these to provide approximately $30 million of benefit year-over-year. Based on this slower start to the year, in the first quarter, we are planning for revenue to decline mid-single digits, primarily driven by Performance Coatings.

The approximately $50 million-$60 million decline in consolidated revenue is expected to result in first-quarter adjusted EBITDA between $240 million and $250 million. For the full year, we expect revenue to be up low single digits, driven by positive price mix, favorable FX, and higher volumes in the second half. We expect adjusted diluted earnings per share to be between $2.55 and $2.70 per share, representing approximately 5% growth at the midpoint versus 2025. Adjusted EBITDA is expected to be between $1,140 million and $1,170 million, which will be another record year for Axalta. Adjusted EBITDA margins are also expected to be above 22% for the year. And finally, we expect full year free cash flow of greater than $500 million, even as we continue to drive productivity by investing $180 million-$200 million of CapEx back in the business.

With another strong year of free cash flow in 2026, we expect net leverage will be below 2x by year-end. With that, I will turn over to Chris for closing remarks.

As you know, in November, we announced a merger of equals with AkzoNobel. This combination represents an extraordinary value creation opportunity, one that we believe neither company could realize alone. Together, we expect to create a global leader with phenomenal scale and end-market diversification, significant free cash flow generation, EBITDA margins approaching 20%, and an investment-grade credit rating and balance sheet flexibility. Additionally, we identified $600 million in synergy potential, and based on our joint track record, I'm confident we will deliver this. The combined company will be listed on the New York Stock Exchange and will be a global Performance Coatings leader. This merger is more than a strategic milestone. It is a catalyst for unlocking powerful new growth vectors, fueled by the combined strength of our shared innovation engines and a commitment to delivering superior value creation.

As we step into 2026, we do so with a strong balance sheet, an agile operating model, and a clear focus on our priorities. Our teams have consistently demonstrated the ability to navigate complexity and deliver exceptional performance. I am confident that we will create sustainable value as we look ahead to completing the merger with AkzoNobel. With that, I will now turn the call over to the operator to open the line for Q&A.