Axalta Coating Systems Ltd. 2026 Q3 Earnings Call

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. You can find today's presentation and supporting materials on the investor relations section of our website at axalta.com. Before we begin, please turn to slide 2 for our forward-looking statements and non-GAAP disclosures. 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 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 differ. We're under no obligation to update these statements. Our remarks and the slide presentation also contain various non-GAAP financial measures.

We have 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 will now turn the call over to Chris.

Thank you, Colleen, and good morning, everyone. Let's turn to slide 3. Net sales in the third quarter increased 2% year-over-year to $1.3 billion, with volume growth in three of our four end markets and three of our four regions. Mobility Coatings performed exceptionally well, delivering record quarterly net sales and record third-quarter adjusted EBITDA. Commercial Vehicle net sales grew 24%. Light Vehicle, once again, outperformed underlying global production trends, and Industrial showed modest growth. We delivered adjusted EBITDA of $282 million and adjusted EBITDA margin of 21.5%, marking our 11th consecutive quarter above 20%. While our performance in the quarter remained strong, results were below our expectations, driven primarily by softer volumes in Europe Refinish.

Sales in the region were lower than anticipated, following five consecutive quarters of record sales as a weakening macroeconomic environment led distributors to adopt more cautious ordering patterns during the quarter. Importantly, our pricing actions this year continued to offset inflation, resulting in positive price mix for the business. While the current operating environment is affected by sluggish end markets, geopolitical uncertainty, and rapidly increasing raw material and freight costs, we continue to strengthen our financial position. Free cash flow was $92 million, up 3% year-over-year, despite absorbing approximately $21 million of merger-related cash costs during the quarter. Year to date, free cash flow is up 25% compared to the prior year period, inclusive of approximately $42 million of M&A related cash costs while capital investment remained at record levels.

Total net leverage ended at a record low 2.1 times, and gross debt fell below $3 billion for the first time in company history, approximately $500 million lower than two years ago. We are gaining new business in attractive markets, generating strong margins, and converting earnings into cash at a high level. Through September, we have won approximately 2,600 net new body shops and believe the pipeline remains strong. Additionally, Industrial sales in Asia-Pacific grew again in the third quarter, marking seven straight quarters of net sales growth, and CTS grew double digits year-over-year to a quarterly net sales record. Combined with the strength of our balance sheet, we are well-positioned to navigate the current environment. Now to Carl for the results.

Thank you, Chris, and good morning, everyone. Turning to slide 4. Third quarter net sales increased $23 million versus the prior year period, coming in at $1 billion, 311 million. The year-over-year improvement was driven by significant growth in Commercial Vehicle, favorable foreign currency, contributions from Refinish acquisitions, and favorable price mix. Net income was $95 million for the quarter, and adjusted EBITDA totaled $282 million, a decline of 4% compared to the prior year period. This decline was primarily driven by lower Refinish volumes in Europe and higher freight rates due to the significant increase in diesel prices. Overall, freight costs were up over 15% year on year. SG&A was up 2%, while operating expenses declined 3%, reflecting strong cost discipline across the organization. As a result, adjusted EBITDA margin was 21.5%, a good outcome given the volatility in costs and demand experienced during the quarter.

Adjusted diluted earnings per share was $0.63, down 6% year-over-year as lower volumes, primarily in Refinish Europe, and higher variable costs were partially offset by lower interest expense. Cash provided by operating activities was $135 million, in line with the prior year period, and free cash flow increased 3% year-over-year to $92 million, inclusive of approximately $21 million of incremental merger-related cash costs incurred during the quarter. Let's turn to the segment results, beginning with Performance Coatings on slide 5. Performance Coatings net sales were $818 million in the third quarter, a decrease of 1% to the prior year. Refinish net sales were $504 million, a decrease of 2%. Lower volumes in Europe were the primary headwind in the quarter, more than offsetting positive price mix and contributions from acquisitions.

Encouragingly, on a year-to-date basis, Refinish net sales are modestly above prior year levels, supported by contributions from acquisitions, new body shop wins, and positive price mix, demonstrating our ability to outperform the market. Industrial net sales were $314 million, an increase of approximately 1% compared to the prior year, driven primarily by volume growth in Asia-Pacific. Demand remained strong in Energy Solutions, Europe remained resilient, while demand in North America continues to be subdued. Performance Coatings adjusted EBITDA was $188 million, a decrease of 11% versus the prior year period, and adjusted EBITDA margin was 23%. This decline reflects lower volumes, higher raw material and freight costs, and increased investments to accelerate conversion of our recent MSO wins that we were awarded during the quarter. These headwinds were partially offset by positive price mix and contributions from acquisition.

The velocity of body shop conversions are expected to increase in the fourth quarter, which speaks to the success of our team. However, it does create short-term margin compression as we finish out the year. Turning to slide 6. Mobility Coatings was a clear bright spot in the third quarter. Net sales increased 7% year-over-year to a quarterly record of $493 million. Light vehicle net sales were $374 million, an increase of 2%, driven primarily by favorable foreign currency translation. Global auto production was down almost 2% in the third quarter, while our volumes were roughly flat year-over-year. Our commercial vehicle business delivered an outstanding quarter. Net sales increased 24% year-over-year to $119 million, supported by volume growth across all four regions.

Our commercial transportation solutions business continues to perform at exceptionally high levels, and we are benefiting from increased Class 8 production in North America. Momentum in the business has been building for several quarters, and with Class 8 production back above replacement demand levels, we believe the business is well positioned to benefit from the expected production ramp into 2027. Adjusted EBITDA was $94 million, up 13% year-over-year, with adjusted EBITDA margin expanding 100 basis points to 19%. This improvement reflects strong operational execution, favorable volume leverage, and disciplined cost management. Turning to Slide 7. During the first nine months of the year, we reduced gross debt by $211 million, bringing total debt below $3 billion for the first time in the company's history. In fact, since September 2024, we have reduced debt by approximately $500 million, highlighting the consistent cash flow generation of our business model.

As a result, year-to-date interest expense declined by $22 million versus the prior year. Through the first nine months of the year, cash from operating activities increased 16% to $355 million. Free cash flow increased 25% to $220 million, inclusive of more than $40 million of merger-related cash payments. Excluding these costs, underlying free cash flow is up nearly 50% year-over-year. Total net leverage ended the quarter at 2.1 times, a record low for the company. This financial strength provides significant flexibility and positions us well as we prepare to close the merger with AkzoNobel in early 2027. Turning to Slide 8. Based on our third quarter results and revised expectations for the fourth quarter, we are adjusting our full-year expectations for 2026. There are two primary factors driving this change. First, third quarter results were lower than planned, driven primarily by lower Refinish volumes in Europe.

Second, we are taking a more measured view of the fourth quarter, given the recent increase in macroeconomic uncertainty in our end markets. We now expect fourth quarter net sales to be approximately flat year-over-year, compared to being up 3% previously. Additionally, we are accelerating investments to convert the strategic MSO wins announced in July, which sets us up for future growth that does create some near-term margin pressure. In the fourth quarter, we now expect adjusted EBITDA of $254 million-$264 million and adjusted diluted earnings per share of approximately $0.55. For the full year, we now anticipate adjusted EBITDA of $1.1 billion-$1,110,000 and adjusted diluted earnings per share of approximately $2.45. We also expect free cash flow of approximately $450 million, resulting from the reduction in EBITDA and higher merger-related costs as we get closer to deal closing.