Axalta Coating Systems has announced its financial results for the second quarter of 2023, reporting that robust pricing, focused execution, and solid market demand drove margin and earnings growth.
Refinish net sales increased six per cent year-over-year to US$520.7 million, driven by a price-mix improvement of 10 per cent, supported by new and carry-over pricing efforts. Price-mix improved 1.7 per cent sequentially, reflecting actions taken earlier in the year. Volumes decreased by 8.4 per cent year-over-year as a supportive market environment with typical seasonal order patterns was overshadowed by an Enterprise Resource Planning (ERP) implementation, which drove an elevated quarter-end backlog. Market activity remained largely stable as miles driven and return to work dynamics were consistent with prior periods, but body shop backlogs are elevated due to continued parts and labour shortages.
Axalta’s consolidated net sales increased 4.8 per cent year-over-year, driven by a 6.8 per cent higher average price mix and a 1.6 per cent benefit resulting from the absence of the commercial agreement restructuring charge incurred in Q2 2022.
Volumes decreased by 3.7 per cent as market demand in Mobility Coatings and Refinish were more than offset by temporary operational delays impacting Axalta’s ability to meet customer demand from the ERP implementation in North America. Despite notable stabilisation in June, warehouse management and slower shipping activities in the quarter resulted in an estimated negative two to three per cent year-over-year net sales impact and drove an elevated quarter-end sales backlog, most notably in Refinish.
Income from operations totalled US$137.6 million versus US$103.6 million in Q2 2022. Adjusted EBIT improved to US$154.5 million from US$150.6 million in Q2 2022 as price-cost trends were positive across all end-markets, given the combined benefit of strong year-over-year pricing and variable cost deflation. Income from operations in the quarter was impacted negatively by higher year-over-year compensation expense and approximately US$15 million of costs associated with consulting spend and the ERP implementation. Adjusted EBIT was also negatively impacted by ~US$9 million in exchange losses stemming from the devaluation of net monetary assets denominated in the Turkish lira and Argentine peso.
Axalta ended the second quarter with cash and cash equivalents of US$517.6 million and total liquidity over US$1 billion. Net debt to trailing twelve month (LTM) adjusted EBITDA ratio (total net leverage ratio) was 3.6x at quarter-end versus 3.7x as of 31 March 2023, and the second quarter ended with an adjusted EBITDA to interest expense coverage ratio of 4.9x. Axalta voluntarily paid down an additional US$75 million of principal on its term loan in the period, contributing to US$150 million of combined structural debt pay downs over the past two quarters.
Second quarter cash provided by operating activities was US$131 million versus US$12.2 million in Q2 2022, reflecting a significant improvement in working capital along with stronger earnings. Inventory levels improved sequentially for the second consecutive quarter, leading to a cash benefit of US$30.9 million in the current period compared to a US$59.9 million use in the prior year. Free cash flow totalled US$99 million compared to a use of US$13.5 million in Q2 2022.
Sean Lannon, Chief Financial Officer of Axalta, said debt reduction is expected to remain the company’s highest priority use of cash given attractive returns in the current interest rate environment, with “opportunistic bolt-on M and A” possible in the second half. “We are actively exploring additional opportunities to reduce interest expense given improvements in capital markets activities,” he added.
Chris Villavarayan, CEO and President of Axalta, said the quarter reflected strong underlying earnings and profitability improvement, particularly in Mobility Coatings where momentum is building. “I am particularly proud of how our teams rebounded from a broad and complex ERP implementation in May and delivered a solid quarter, including a sales performance for North America in June that was one of the strongest in our history. This launch was a crucial step towards achieving the margin improvement trajectory we want for Axalta,” he said.
Looking ahead, Villavarayan said Axalta sees clear opportunity to improve earnings which is reflected in the company’s second half guidance and run rate trajectory in the fourth quarter. Price-cost dynamics remain supportive and are expected to be sufficient to offset higher compensation expenses and modest investments being made to support long-term growth.
“Our 2023 guidance framework points to earnings recovery, and I believe that the actions we are taking today will strengthen the business and establish the foundation for consistent long-term success,” he added.