Axalta Coating Systems Ltd. Q1 2026 earnings call

Good morning, everyone, and thank you for joining us to discuss Axalta's first quarter 2026 financial results. I'm Colleen Lubic, Vice President of Investor Relations. Joining me today are Chris Villavarayan, our Chief Executive Officer, and Carl Anderson, our Chief Financial Officer. Before we begin, please turn to Slide two for our forward-looking statements and non-GAAP disclosures. We posted our first quarter 2026 financial results this morning. You can find today's presentation and supporting materials on the investor relations section of our website at axalta.com. Our remarks today and a slide presentation may include forward-looking statements reflecting our current views of future events and their potential impact on Axalta's performance and with respect to the proposed merger of equals between Axalta and AkzoNobel. These statements involve risks and uncertainties, and actual results and outcomes may materially differ. We are under no obligation to update these statements.

Our remarks and 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. Please refer to our filings with the SEC for more information. With that, I would like to now turn the call over to Chris.

Thank you, Colleen. Good morning, everyone. Turning to our first quarter highlights, we delivered strong results and exceeded expectations across our financial metrics. In the quarter, we generated net sales of $1.25 billion, Adjusted EBITDA of $259 million and adjusted diluted EPS of $0.56, which came in 12% above expectations. These results reflect disciplined execution and a focus on the levers within our control. We also set meaningful cash generation records this quarter. With $68 million of cash from operations and $21 million of free cash flow, an improvement of $35 million year-over-year. This period marked the 12th consecutive quarter of year-over-year profitability improvement in our industrial business, while Mobility achieved a first quarter net sales record and Adjusted EBITDA margin of 17.5%, reflecting solid execution and cost discipline.

We saw stabilization in Refinish at nearly $500 million in sales, consistent with the last five quarters. Innovation has always been and remains an important differentiator for Axalta. During the quarter, we received six Business Intelligence Group Innovation Awards and three prestigious Edison Awards. NextJet, a collaboration with Dürr and XAAR, enables OE manufacturers to provide next-generation personalized exterior finishes at production scale, shifting from a fixed palette to unlimited customization without sacrificing quality, durability, or efficiency. Elasta E-Pro FG Black, a powder coating engineered for thermal stability and secondary fire protection in electric vehicle battery systems. NextJet and Elasta E-Pro FG Black were both acknowledged with Gold Edison Awards. TintMaster AI, which was acknowledged with a Bronze Edison Award, is a breakthrough in tint manufacturing using advanced AI to address the challenge of color variability in paint manufacturing.

Edison Awards honor technologies that are redefining industries, solving complex customer challenges, and shaping the future. I want to recognize the smart and talented people at Axalta for developing and bringing to market advanced solutions with real-world impact. Let's turn to Slide four. Against a backdrop of macro uncertainty and elevated volatility, we remain focused on managing through what we can control. While recent developments have increased uncertainty across cost and supply availability, our actions over the past several years have positioned us well to mitigate raw material inflation. We're closely monitoring developments across energy, logistics, and the broader supply and demand landscape as it relates to the evolving situation in the Middle East. From a purchasing perspective, we delivered 12 consecutive quarters of year-over-year improvement in variable cost due to strong productivity projects as well as focused implementation of procurement best practices.

We now have approximately 60% of our direct spend under contract rather than spot buys. Many of our strategic supplier agreements are stronger and incorporate indexation, which is helping reduce volatility and improve visibility. As it relates to pricing, we plan to move quickly to offset the impact of inflation. We're driving solid discipline across the portfolio. In Refinish, we expect to implement mid-single-digit pricing in 2026, reflecting the value we deliver. In Mobility, more than 50% of our revenue is now tied to raw material indices, which provides a natural hedge against cost volatility. Mobility has delivered six consecutive quarters of positive year-over-year price mix, reinforcing our ability to offset inflation. Across the rest of the portfolio, we're prudent and proactive with the pricing actions and surcharges in place where appropriate to help protect margins.

From a transformation and cost discipline standpoint, we continue to tightly manage our operating expenses. In the first quarter, SG&A declined 7% year-over-year on a constant currency basis, and we exceeded our operational productivity targets. Even amid top-line pressure, our Adjusted EBITDA margins have exceeded 20% for nine consecutive quarters, underscoring the durability of our operating model. Supporting all of this is our resilient supply chain and cost structure. Approximately 90% of our direct buy is locally sourced where variable costs represent about 60% of COGS. Inventory levels remain at roughly 115 days on hand, which helps limit the impact of inflation, particularly as we enter the second quarter. Let's turn to Slide five. We see solid execution across all our businesses.

In Refinish, net body shop wins increased 10% year-over-year and generated net sales growth in the first quarter in three out of our four regions. We're also expanding with leading MSOs, which remain a key focus for the business. In Industrial, our most diversified portfolio, the weak local macro has been the story for the last few years. However, we are starting to see signs of recovery. We delivered five consecutive quarters of net sales growth in Asia, driven by our Energy Solutions business, drove volume growth in Europe during the quarter with share gains in our E-Coat business, and we're seeing positive price mix for seven straight quarters. In Mobility, we delivered record net sales in the first quarter of $452 million and growth in three out of our four regions.

Commercial Transportation Solutions, which was a bright spot in 2025, also delivered record first quarter sales, driven by continued success with new business wins. Overall, new business wins and excellent operational performance across the portfolio are helping us offset the headwinds in North America, where the macro environment has been tempered by economic anxiety, elevated consumer costs, and higher for longer interest rates. With that, I'll turn the call over to Carl to discuss our financial results.

Thank you, Chris, and good morning, everyone. Turning to Slide six, net sales were $1.254 billion, a 1% decrease year-over-year, primarily driven by lower volumes in performance coatings. This was partially offset by favorable foreign currency translation, largely due to a stronger euro. These dynamics were expected and contemplated in our 1st quarter guidance. Gross margin was 33%, down slightly from last year, driven primarily by unfavorable mix from lower volumes in North America. Net income was $91 million, a decrease of $8 million from the prior year period. This was driven primarily by $22 million in transaction costs associated with the pending merger with AkzoNobel. These costs were partially offset by a $17 million discrete income tax benefit and a reduction in interest expense. SG&A was down slightly as we continued to aggressively manage our cost structure.

Adjusted EBITDA in the quarter was $259 million, resulting in an adjusted EBITDA margin of 20.6%. While both metrics were lower year-over-year, we did perform above expectations as reductions in operating expenses and variable costs helped to offset lower volumes in performance coatings. Adjusted diluted earnings per share was $0.56, exceeding our outlook by 12%, supported by lower interest expense and stronger overall earnings in the quarter. Our momentum and cash generation remained strong. Cash provided by operating activities was $68 million, a company first quarter record. This was an increase of $42 million year-over-year. Free cash flow of $21 million was another first quarter record for Axalta and improved by $35 million versus the prior year period. This was primarily driven by improved working capital and lower interest payments.

Performance coatings first quarter net sales declined 2% year-over-year to $802 million. This decrease was driven by lower volumes primarily in North America and unfavorable price mix. These impacts were partially mitigated by favorable foreign currency translation and contributions from our acquisitions in our refinish business, which we continue to execute as part of our distribution strategy outside of North America. Refinish net sales declined 3% to $498 million, reflecting lower claims activity and shifting customer order patterns as anticipated. Industrial net sales declined 2% year-over-year to $304 million, with volume pressure in North America and Latin America partially offset by price mix and foreign exchange. Notably, Europe and China delivered volume growth in the first quarter.

First quarter performance coatings Adjusted EBITDA was $180 million, down from $197 million a year ago. Adjusted EBITDA margin decreased by 170 basis points to 22.4% due to lower volumes and unfavorable price mix, which was partially offset by a reduction in operating and variable expenses. We do expect that price mix will inflect positively beginning in the second quarter and carry on through the rest of the year. Mobility Coatings delivered record first quarter net sales coming in at $452 million, an increase of 3% from the prior year period. Light Vehicle net sales increased $9 million, driven by favorable foreign currency and organic growth in three of our four regions, including continued momentum from new business wins in Brazil.

As planned, sales in China declined in line with lower auto production in the region. Commercial vehicle net sales were also up 3% year-over-year, supported by favorable foreign currency impacts, new business wins, positive price mix, and record Commercial Transportation solution sales, which together helped offset the effect of lower Class 8 truck production. Mobility coatings Adjusted EBITDA totaled $79 million in the first quarter, compared to $73 million a year ago, reflecting benefits from lower variable costs, favorable foreign currency, and reduced operating expenses. Adjusted EBITDA margin increased 100 basis points year-over-year to 17.5%. In the first quarter, we delivered another period of consistent cash generation, which underscores the durability of our operating model.

Interest expense declined 14% year-over-year, and during the quarter, we repaid $54 million of gross debt and ended with a net leverage ratio of 2.3x. For full-year 2026, we expect interest expense of approximately $150 million, representing an improvement of more than $25 million versus last year and nearly 27% lower than 2024. For the rest of the year, we are planning on deploying most of our free cash flow to pay down our term loan and expect that our net leverage ratio will be below 2x at year end. As we turn to our outlook on Slide 10, I'll start with the macro assumptions underlying our 2026 guidance. External forecasts and key performance indicators remain relatively consistent with how we entered the year.

That said, geopolitical developments, including the situation in Iran and broader Middle East tensions, have increased uncertainty across global markets, impacting energy prices, inflation, and consumer sentiment. While the ultimate duration and economic impact of these developments is unclear, the heightened volatility has the potential to create additional pressure on both demand and cost in the back half of the year. In refinish, we are seeing signs of a more stable market as destocking trends are abating and claims activity is sequentially expected to improve. Auto insurance premiums have moderated meaningfully. Used vehicle prices are rising and miles driven are trending favorably. At the same time, consumer sentiment inflation concerns are more challenged. All this being said, we are planning for second half volumes to improve compared to last year. In industrial, we were encouraged by the results we saw in the first quarter, particularly in Europe and Asia.

However, we remain cautious about the pace and timing of recovery in North America this year. Overall, our business is positioned very well for an eventual market recovery in North America as we are performing at record margin levels and have significantly improved our operational efficiency. In mobility, we are now assuming global auto production of approximately 91 million builds, down from our prior outlook of 92 million units. In commercial vehicle, external forecasts for North America Class 8 builds have increased, and we now assume approximately 274,000 units, up 10% from previous expectations. With respect to the second quarter, we expect net sales to be roughly flat with adjusted EBIT on the range of $280 million-$290 million and adjusted diluted earnings per share of approximately $0.65, roughly in line with a year ago.

For the full-year, we are maintaining our previous guidance expectations for revenue, EBITDA, earnings per share and free cash flow. At this point, we are tracking closer to the lower end of EBITDA and EPS guidance given the demand signals we are seeing at this time. We also continue to expect to deliver adjusted EBITDA margins of approximately 22%, in line with last year as our pricing and cost actions are expected to help offset the incremental inflation we anticipate. Overall, our outlook reflects disciplined execution and continued focus on margin protection, cash generation and confidence in our ability to perform yet again in any type of environment. Turning to slide 11, I'll provide an update on the pending merger of Axalta with AkzoNobel. The transaction continues to progress very well, and we remain firmly on track with all of our key strategic work streams.

Both teams are highly aligned and are working together seamlessly as we prepare for the shareholder vote, regulatory approvals and day one readiness. A critical pillar of this combination is the substantial synergy opportunity we have identified. We remain confident in our ability to deliver $600 million in annual run rate synergies. Integration planning between both companies is well underway with dedicated clean teams established to identify and accelerate these synergies designed to capture value quickly and deliver a seamless transition at close. On the regulatory front, filings are underway, including the U.S. and the EU. We have filed a confidential Form F-4 with the SEC and are progressing as planned. In parallel, we are maintaining active and constructive engagement with shareholders, and we expect the shareholder votes for both companies to take place by early July.

Overall, we are excited and energized and remain confident in our ability to deliver meaningful, substantial, and sustainable value creation through the combination with AkzoNobel. With that, I will turn it over to Chris for closing remarks.

Thanks, Carl. We're executing well and delivering consistent performance while maintaining strong operational focus. At the same time, we made significant progress towards our combination with AkzoNobel that we expect will strengthen our portfolio, enhance our financial profile, and create significant long-term value for shareholders. The transformational actions we have taken across procurement, fixed operating costs, and network optimization have fundamentally improved the business and protected margins to prepare for the upside. We have built a solid foundation, which is strengthened with the Akzo combination, and we will be ready when the macro rebounds. Thank you for joining us today. I will now turn the call over to the operator to open the line for Q&A.