Ladies and gentlemen, thank you for standing by. Welcome to Axalta's First Quarter 2021 Earnings Conference 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 May 4.

Those listening after today's call should be 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 Chris Mecray. Please go ahead, sir..

Thank you, and good morning. This is Chris Mecray, VP of Investor Relations and Treasury. We appreciate your continued interest in Axalta, and welcome you to our first quarter 2021 financial results conference call. Joining me today are Robert Bryant, CEO; and Sean Lannon, CFO.

Last evening, we released our quarterly financial results and posted a slide presentation along with commentary to the Investor Relations section of our website at axalta.com, which we will be referencing during this call.

Both our prepared remarks and discussion today may contain forward-looking statements reflecting the Company's current view of future events and the potential effects on Axalta's operating and financial performance. These statements involve uncertainties and risks, and actual results may differ materially from these forward-looking statements.

Please note that the Company is under no obligation to provide updates to these forward-looking statements. This presentation also contains various non-GAAP financial measures. In the appendix, we've included reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures.

For additional information regarding forward-looking statements and non-GAAP financial measures, please refer to our filings with the SEC. I'll now turn the call over to Robert..

Good morning and thank you for joining us to review Axalta's first quarter earnings and our full year financial outlook for 2021. I hope each of you and your families remain safe and healthy. I'd also like to thank the Axalta team globally for their continued perseverance and dedication to the needs of our customers and our partners.

Overall, the first quarter showed excellent operating and financial performance, following on the heels of strong results throughout the second half of 2020.

Continued broad recovery across our end markets enabled strong year-over-year top line improvement, ahead of our first quarter guidance provided on February 17, while strong incremental margins leveraged our cost structure actions to date produced adjusted EBIT, EPS and free cash flow that set new first quarter records.

Net sales for the third quarter increased 8.1% year-over-year or 4.9% excluding FX tailwinds. The consolidated business benefited from the comparison against early pandemic impacts during the first quarter of last year, but some headwinds held back additional volume growth for the current period.

Refinish volumes remained below normal levels due to pandemic restrictions still in place in some key countries we serve. The semiconductor chip shortage that has curtailed automotive production impacted light vehicle and commercial vehicle volumes in the period.

Though less impactful to volumes, supply chain constraints due to severe weather, primarily in the U.S. during the quarter, strained material availability in North America, while further fueling raw material input inflation.

Without these headwinds, which fortunately appear to be as, the already strong growth reported in the first quarter would have been even better. It's worth mentioning that we believe much of this lost volume will be made up as demand remains very strong, but we expect these headwinds to persist during at least the early parts of the second quarter.

Axalta's quarterly adjusted operating profit was impressive. Adjusted EBIT of $183 million increased 37.8% from the prior year quarter, with associated margins of 17.2%, up an impressive 370 basis points from 13.5% in the first quarter of 2020.

These results exclude the impact of the previously disclosed operational matter at certain North America mobility coatings customer manufacturing sites, which resulted in a charge of $94 million in the period.

I'd note that the actual costs associated with this matter could be materially less or greater than this charge once we complete all aspects of the evaluation process and resolve associated liabilities. Our initial estimate, as filed in our 10-K, identified a possible range of loss up to $250 million.

Additional progress on the matter since our 10-K filing and including the first quarter charge indicates a decreased possible range that is not expected to exceed $160 million in the aggregate. Adjusted EBITDA for the first quarter was $237 million, with a 22.3% margin, reflecting a 290 basis point improvement from 19.4% in the prior year.

Adjusted EPS of $0.50 compared with $0.31 in the first quarter 2020, an increase of 61.3%. Free cash flow for the quarter was another terrific performance, with a generation of $11 million versus a use of $20 million in the prior year.

First quarter free cash flow is typically a use due to timing of annual payments, so the result was aligned with the strength of our operating results in the quarter.

Regarding capital allocation elements, we closed our first ever M&A deal in China in early April, Anhui Shengran, a leading supplier of wire enamels to the Chinese electric motor market. The transaction boosts our Energy Solutions business, especially in Asia Pacific, while adding local manufacturing capacity at a fit-for-purpose cost structure.

This is a great example of a strategic bolt-on deal that we will continue to pursue as we ramp up our M&A activity and leverage an active pipeline of potential targets.

We also recently announced that Axalta's Board increased our share repurchase authorization by $625 million and we now have about $800 million in total availability to buy back stock through our repurchase program. We repurchased $64 million worth of shares during the first quarter.

Regarding first quarter business conditions, we saw strong demand from all of our end markets through the period, with continued recovery evident across global and industrial coatings and notable underlying demand strength in both automotive and truck markets.

For Refinish, the pace of business overall in the first quarter was consistent with the end of the fourth quarter, with pandemic restrictions dampening total miles driven in. We saw signs of underlying strength in March, which has continued in early April.

However, we expect improving demand during the balance of 2021 to be in line with the ramp-up in COVID vaccinations and as more normal traffic conditions return. North America miles driven during the fourth quarter remained around 7% lower year-over-year.

The pace of activity gained momentum throughout the quarter, with March and early April accelerating very close to normal levels of traffic. Bodyshop activity for Axalta customers was around 12% below normal in the period. This too was stronger towards the end of the quarter.

In EMEA, vehicle miles driven during the first quarter remained around 16% lower year-over-year and Bodyshop activity was around 15% below normal, though both were variable by country aligned with applicable government restrictions in place during the first quarter.

Miles driven improved sequentially through the quarter, but then slowed somewhat into April. We expect the continued increase through the spring as certain restrictions are expected to be reduced and lifted. Vehicle traffic in Asia Pacific has also been quite variable, but most countries remain above pre-COVID levels for the quarter.

We continue to expect Refinish demand recovery through the remainder of 2021, aligned with the pace of eased restrictions as well as vaccinations and post lockdown travel recovery globally.

We believe that pent-up travel demand, a preference for using one's owned vehicle instead of taking public transportation or using ridesharing services and mobility normalization will be key drivers of Axalta's Refinish business in 2021, which also suggests a brighter volume outlook as the year progresses.

When driving patterns move back to normal, operating leverage for Axalta as a whole will be quite high given the profitability of our Refinish business. In Industrial Coatings, solid demand in the quarter remained firm across most market segments we serve.

Similar to the fourth quarter, we saw strong growth of net sales year-over-year in all of our end businesses. First quarter global industrial production increased 4.6%, driven primarily by recovery in China versus the COVID-impacted quarter last year and a flatter profile for North America and EMEA.

Axalta's net sales growth of 10.1% in the quarter clearly outperformed the global picture, including notable outperformance relative to Western industrial production results. Standout sources of strength in our Industrial end businesses included Energy Solutions, Powder Coatings and General Industrial. At a market level, U.S.

homebuilding and remodeling continued to support growth for our wood business and automotive markets remained healthy at a retail sales level globally. Additional tailwinds were seen across structural steel, agriculture and construction equipment, pipe as well as distribution customers within Axalta's general industrial business.

Forecasts of global industrial growth in 2021 continue to support expected growth for our diversified Industrial Coatings portfolio. Many may have seen that we rebranded our former Transportation Coatings segment as Mobility Coatings.

While a small name change, the shift is far more impactful than it may appear as it aligns with the broader lens with which our new segment leader, Hadi Owada, is taking with the business. We see the dramatic and fundamental shifts taking place in the mobility sector as a unique change moment for the industry.

And Axalta is proactively positioning our strategy and ambitions to meet these new opportunities. Paddy will be offering more detailed thoughts around this theme on May 5 at our Capital Markets Day. In Mobility Coatings, the global market recovery continued, though marked by supply chain shortages, impacting production in the first quarter.

Global auto production increased 14% in the quarter versus the prior year, propelled principally by the China rebound from production shutdowns during the first quarter of 2020. Asia Pacific led with a 32.6% increase, including a 78.2% increase in China. EMEA posted a 0.9% decrease. Latin America saw a 5.4% decrease.

And North America was down moderately with a 2% decrease, including 14.9% lower production in Canada. Axalta's net sales somewhat trailed the global average, largely due to our smaller position in China automotive, while results more closely match the market in other regions.

Current industry forecasts call for an 11.9% increase in global auto production for 2021, which has been trimmed from the earlier 13% to 14% growth forecasts due to the industry semiconductor chip shortage.

While the current forecasts may continue to slip depending on how the chip shortage plays out, the silver lining here is that it's building and further growth to the medium-term forecast, as loss production near term is not actually lost permanently since dealer inventories must be restocked and consumer spending remains strong.

For commercial vehicle end market, overall global truck production increased 44.6% in the first quarter, led by a 76.1% jump in Asia Pacific, but also supported by a 4.1% increase in North America, where Axalta derives the largest share of our truck-related business.

EMEA and Latin America both remain more subdued, with low to mid-single-digit declines in truck production in the period. The current forecasts for Class 4 to 8 truck production for 2021 remains intact, expecting a slight 2.1% increase in global production.

Including China however, the market is expected to rebound 22.6%, led by North America at 25.8%. Current and near-term truck demand indicators remain healthy across most regions. In the U.S., order rates in March were near all-time highs, with Class 8 orders around 40,000, supporting continued solid production rates for coming months.

Switching now to innovation. Axalta is driven first and foremost by innovation, which remains the foundation of our market strength and will enable our long-term growth. Last week, it was announced that Axalta won three 2021 Edison Awards, which are given for outstanding innovation in products or services.

The three awards cover innovations across multiple aspects of our businesses, including coatings that enable LiDAR reflectivity for autonomous vehicles, an ultrahigh performance waterborne sealer for the refinish market, and two coatings for the kitchen cabinet market that require only one coat compared to four coats previously, thereby reducing customer cost and time.

These three awards follow the 2020 Edison Award that Axalta won for our Voltatext resin for electric motors, which greatly improve electric motor efficiency and reduce electric motor size and weight. I could not be prouder of our R&D and technology organization and the entire team at Axalta.

These awards highlight that Axalta is at the top of the coatings industry and innovation and delivering exceptional value for our customers. I'll now turn the call over to Sean for some additional comments..

Thanks, Robert, and good morning. As mentioned, our first quarter witnessed continued recovery across nearly all markets we serve, and we continue to execute cleanly to exceed our targets set for the quarter.

Net sales, up 8.1% year-over-year, were slightly better than expected versus our 3% to 5% guidance from February, as recovery in Refinish as well as the broader Industrial markets continued at a solid rate.

Performance Coatings first quarter net sales increased 9.2% versus the prior year quarter, with Refinish increasing 8.5% and Industrial increasing 10.1%.

The Refinish result included support from a stronger China performance year-over-year, but still lack a full volume profile given ongoing lower miles driven in most regions and lower associated accident rates.

Refinish did not realize a noticeable benefit from customer restocking in the period, though we anticipate improved volume over the course of the year, and this could include some restocking volume as the year progresses.

Mobility Coatings net sales also demonstrated ongoing recovery in the first quarter, increasing 6.1% compared to the prior year quarter, including light vehicle growth of 7.2% and commercial vehicle growth of 2.2%.

Volumes were boosted by recovery in China in light vehicle from the prior year comparison, but offset by the semiconductor chip shortage impacts in the current year quarter.

Product price mix was a modest 0.3% positive contribution on a consolidated basis for the quarter, led by light vehicle, which saw mix benefits in the period and offset by modest declines from Industrial and mix from Refinish. Price in Refinish remained a positive driver in the first quarter. Commercial vehicle was relatively flat in the period.

Consolidated adjusted EBIT for the quarter was a very strong $183 million, following our record-setting results during the second half of 2020 and marking another record for our first quarter, excluding the charges from the operating matter that Robert had noted.

The stark 37.8% growth rate versus first quarter 2020 underscores the momentum of positive wealth management that persisted into the new year.

We achieved ongoing savings and operating costs for the quarter, including the continued pacing of structural cost savings from Axalta Way initiatives as well as from somewhat better than expected carryover of our temporary savings from 2020.

Adjusted EBITDA for the quarter was $237 million, a solid 24% increase from the prior year quarter, with associated margins of 22.3%, up 290 basis points year-over-year.

Fourth quarter adjusted diluted earnings per share of $0.50 per share, a 61.3% increase, above the prior year quarter's $0.31 per share, represented another excellent result for Axalta.

Performance Coatings segment level adjusted EBIT of $117 million increased 47.6% year-over-year, driven primarily by continued cost management benefits and associated strong incremental margins given the volume recovery. Adjusted EBIT margins increased an impressive 430 basis points to 16.6%.

Mobility Coatings segment level adjusted EBIT of $39 million compared favorably against the $26 million result from the first quarter 2020, also driven primarily by cost actions and aided by the favorable volume comparison. Adjusted EBIT margins increased 330 basis points to 11%, a stellar level for the first quarter.

Regarding our balance sheet and cash flows, we were pleased that first quarter free cash flow of $11 million represented a first quarter quarterly record compared to a use of $20 million in the first quarter of 2020, driven by strong EBITDA as well as continued solid working capital management.

The strong first quarter free cash flow resulted in Axalta ending the quarter with total liquidity still over $1.6 billion, even after incremental share repurchases of $64 million in the period. Our net leverage ratio decreased to 3.2x at March 31 compared to 3.3x at December 31.

Our metrics, of course, still include COVID-19 impacts on adjusted EBITDA from the lows of the second quarter of 2020. Regarding our financial outlook for the full year 2021, our broader expectation remains that the current global industrial expansion will continue to support Axalta's growth, including tailwinds across most key markets that we serve.

Axalta's global and emerging markets focused business is aligned well with this backdrop of accelerating global growth as we emerge from the pandemic period.

At the same time, we are focused on continued growth execution in our businesses, including innovation-led market share gains, leveraging Axalta's leading technologies and service-based business models.

For full year net sales, we expect an increase of approximately 20% to 22%, including the 3% positive from foreign currency translation and slightly less than a 1% benefit from the acquisition announced earlier this month.

With that net sales forecast, we anticipate strong contribution from both segments, though weighted slightly stronger in Mobility as a relative percentage of growth in both net sales and in sales volumes due to the more severe impact seen in the segment in the second quarter of 2020.

For Refinish, we believe the easing of mobility restrictions, coupled with the ongoing vaccination progress, will produce a solid recovery over the course of 2021 for the business as vehicle traffic resumes more normal pacing.

Our current assumption is that Refinish net sales volumes for 2021 will remain lower than 2019 for the full year by a high single-digit percentage due to the impact of the pandemic.

For light vehicle, we do anticipate ongoing impact from supply chain shortages to persist through most of the second quarter, but we believe a good portion of the production shortfalls will be made up during the second half of 2021.

Industry forecasts currently call for approximately 1 million vehicles to be delayed from the second quarter to the second half of the year and partly into 2022 due to the shortages, while the first quarter saw 1.4 million vehicle production shortfall impacts.

For Axalta net sales volumes, we expect to moderately outperform the global market forecast of 11.9% for the full year. We expect to generate adjusted EBIT of $715 million to $755 million and adjusted diluted earnings per share of $1.95 to $2.10 for the full year, with other key income statement metrics noted on our guidance slide.

For adjusted EBIT, we expect that the second quarter will represent approximately 23% of the full year adjusted EBIT, including ongoing impacts from headwinds that we noted from the first quarter. We also expect to see variable cost inflation more materially in the second quarter.

For the full year, we anticipate high single-digit cost inflation from variable cost at the COGS level. Axalta is focused on passing through these cost increases, primarily through selling prices to the channels we serve, while staying mindful on cost structure as needed during the early phases of the inflationary cycle.

We continue to expect strong free cash flow this year of between $455 million to $495 million, excluding any outflows related to the Mobility operational matter and expect uses of capital to include further M&A transactions as well as ongoing share repurchases. With that, I will be pleased to any questions. Operator, please open the lines for Q&A..

[Operator Instructions] Our first questions come from the line of Ghansham Panjabi with Baird. Please proceed with your question..

Hope everybody is doing well. I guess following up on the last few comments, Sean, in terms of Auto Refinish down high single digits versus I think the 2019 baseline is what you said.

How is that expected to evolve by region? What sort of outlook are you baking in, in terms of how the Mobility dynamic globally starts to improve as we cycle through the next few quarters? I know it's a very complex environment, but just curious as to what you have embedded for the rest of 2021..

Ghansham, this is Robert. I'll take that one. I'd say that in the first quarter, we saw sequential improvement month-to-month. And for April, we're expecting to see similar levels as we saw in March, driving a large increase, obviously, for the second quarter year-over-year. North America is expected to be higher than March.

And for EMEA, we expect it to be slightly lower, given some of the recent COVID lockdown activities. And then for emerging markets, Asia and LatAm, it's a mixed bag there, but we expect them to be flat to slightly down. We expect to be significantly up for the full year versus the prior year, obviously, as we lap the COVID impact.

And although we have some lingering COVID restrictions throughout the world, particularly in EMEA, we expect demand to be up given pent-up travel demand as well as vaccination rollouts.

So sales volumes for the year are expected to be down roughly mid- to high-single-digits from pre-COVID 2019 levels, but we expect them to be up significantly compared to 2020..

Got it. Perfect. And then in terms of the cost inflation, obviously, everybody is upgrading raw material cost inflation guidance. I think you said high single digits versus last year.

How should we think about price costs as we progress through the rest of the year? And maybe from a higher level perspective, you can compare this current pricing cycle that you've been implementing across -- along with your peers relative to the most previous price -- cost inflation cycles '17 and '18?.

We expect to fully cover raw material inflation during the course of the year, primarily via price pass-throughs. And if we think about that by business, in Refinish, we typically schedule price increases and have been able to pass on raw material increases fairly efficiently.

I think our value proposition is not based on material costs, but rather the technology we offer and the associated efficiency gains at the Bodyshop level. For Industrial, end businesses should be able to increase price, but really, full realization is determined by individual markets and competitive factors.

Only a small portion of the total end market there is based on index pricing. So we're fairly confident of our ability to price through on the Industrial side. In Mobility, roughly 25% of our business is covered by indexing, with the remainder under contractual language that allows us to discuss pricing.

So we've generally been able to successfully over time pass through sustained inflation, albeit with some lag to the realized increases. And the price increases outside of the index will also be achieved with new colors and on leveraging our services..

And Ghansham, maybe just to cover the uniqueness about second quarter and why you're seeing a little bit of a drop from a margin perspective with the raw material inflation really starting to hit us. Industrial, we're doing a nice job in getting realization there. We're putting incremental actions in from a Refinish perspective.

But similar past cycles, Mobility side of the business will be a little bit lagging. But as Robert pointed out, we expect to be fully caught out by the end of the year in the aggregate. And certainly, to the extent we have any sort of leakage, we'll be looking at productivity improvements to make sure our margins hold..

Our next questions come from the line of Steve Byrne with Bank of America. Please proceed with your question..

The guide on EBIT clearly shows a shift into the second half. And presumably, that's a recovery in volumes from the chip shortage and the recovery of raws and so forth. But I was curious, Robert, if you're seeing any signs yet of some traction from some of the management changes you made and/or the structural change ripping out that matrix structure.

Anything that you're seeing that could be driving growth that you're now expecting to realize in the second half? Or is this really just simply a shift?.

Well, I think you hit the nail on the head when you mentioned the management team. We have added some very high-quality global P&L executives to our business leadership team. And they are already having a dramatic impact on the aggressiveness with which we're planning to grow the business, creative ideas and new approaches.

We've also added some very confident functional leadership as well. The overall matrix structure and ripping that out and having that now be global business units supported by strong functions has really allowed us to streamline the organization and our cost structure.

So I'd say that if you had to kind of sum it up into how much of it would you say is due to the management impact versus how much of it is due to simply market drivers, I think a heavy element here is the management team.

And I think we are now at a point where we have a world-class management team that is really making a difference, both on the commercial side of the business as well as on the cost side of the business..

And just to follow-up on a couple of those innovation awards comments that you made, Robert. The one coat on a kitchen cabinet versus four seems pretty compelling from the manufacturing perspective, but could be a significant volume hit.

Is that more than offset by the potential for you to gain market share in that industry and/or realize a much higher price to offset lower volume? And is the same true on the Refinish technology? How much of an impact does your latest technology have on a Bodyshop's ability to push vehicles through that paint booth that is meaningful in terms of share gains, but maybe lower volume for you?.

Well, I think the way to think about this is, we are not selling gallons of coatings. We are selling solutions. And so we price the value that we create for our customers accordingly. So again, the way to think about it is we're pricing for a solution and the value that we create for a customer, not necessarily based on volume.

Therefore, again, as we've highlighted, it's important for these businesses in coatings to really look at net sales. Volume per se can be somewhat of a tricky metric when judging how successful you're being from a commercial perspective.

On the element of the Edison Awards that we won as well as other awards that we've won for our technology, about 2.5 years ago, we really refocused some of our R&D efforts.

And we changed some of the emphasis that we had, from incremental improvements, to really spending a little bit more money on some aspects, applications, products and even new business models, frankly, that could really be game-changers.

And so I think you'll continue to see some pretty exciting developments across all of our businesses, from a product, from a service, from an application as well as from a business model perspective that I think is going to keep us at the forefront of the coatings industry..

Our next questions come from the line of Jeff Zekauskas with JPMorgan. Please proceed with your question..

What was the change in price in Refinish, exclusive of mix in the quarter? And is it -- how would you compare it to normal historical patterns?.

So Jeff, we didn't actually quantify it. The only thing we signaled is that we actually got price in the quarter. It was modest, but it's similar to prior period. Certainly, we have a mix component that's somewhat camouflaging the pricing progress in the Refinish side of performance..

In your operational issue, did you -- how much did you accrue in current liabilities for the payout of funds?.

Yes. So there's roughly $94 million that was accrued in the quarter. And that does not contemplate any sort of insurance recoveries, which we're still working on..

Is that in current liabilities?.

It is..

Our next questions come from the line of P.J. Juvekar with Citi. Please proceed with your question..

Yes. So you made an acquisition in China. I mean, I would imagine the China coatings market is highly fragmented.

What are the opportunities there? And is this like a beachhead that you're establishing to make further more acquisitions?.

P.J., we already have a fairly good-sized business in China in our Energy Solutions business. The acquisition of Anji Changan added somewhat less than $40 million in annualized sales, for which we paid less than $50 million in total purchase price. So it was an attractive transaction for us.

Anji provides Axalta with really a solid platform to further grow the Energy Solutions business in China as well as in other Asia Pacific markets.

And it also allows Axalta to substantially increase our capacity, which is something that we really needed to do because the demand there for electric vehicles and other electric applications is really growing. It also adds products for large-volume applications, which will complement our portfolio of specialties.

And they also brought to the table a whole suite of other customer approvals. So we believe that this acquisition provides a powerful commercial as well as cost synergies with significant further growth opportunity. And in general, e-mobility and electronic coatings is a key area of focus for us, not only in China but around the world..

Great. And then your potential of up to $160 million. Just talk a little bit about that.

You took $94 million in this quarter, so would that remaining would be in the second quarter? And can you just tell us what happened here? And kind of what steps have you taken to that it doesn't happen again?.

So P.J., there's obviously commercial sensitivity. So we can't go too far in giving too much as far as details, but you'll recall as part of year-end in our Form 10-K we disclosed a reasonable possible amount of up to $250 million.

So what you saw in the quarter is we've been working collaboratively with our customers at our customer sites and working through the issue, understanding root cause, getting through testing. So what you saw in the first quarter is -- we made a good amount of, but a number of sites actually came off the table.

There weren't any issues, and that's where you see the overall range decreasing from the $250 million to $160 million. The $94 million, that's where we have line of sight into the actual root call, so that's why we accrued in the first quarter. It's hard to say exactly when we'll reach conclusion on the residual.

And if there's actually an issue there, that could result in a probable liability. And that's why we've actually disclosed in the 10-Q, the possible amount of the incremental $65 million, but I can't tell you exactly when we would accrue that or if we would accrue it.

And the other thing I did point out earlier, this is before any sort of insurance recoveries, which we're working with our insurance providers right now..

And adding to what Sean said, the root cause has been identified, has been remediated, and additional controls have been put in place so that it does not happen again..

Our next questions come from the line of Laurent Favre with Exane. Please proceed with your question..

Robert, I've got a question on capital allocation. And I guess thank you very much for the disclosure on the acquisition and the size of the acquisition. So it looks like you have spent more on buybacks than on M&A, I guess, so far.

In the future, how do you intend to arbitrage between, I guess, buybacks with the upsized buyback envelope versus acquisitions? And can you talk about the M&A pipeline from here? Thank you..

Yes. Well, let me start, I guess, with the M&A pipeline. We've concluded our first substantive acquisition over the past two years. And we have a really full pipeline of bolt-on transactions.

That being said, we would not have brought on someone of Jeremy Rowan's caliber unless we were planning on doing much larger acquisitions and other types of ventures.

So I think you can expect to see us be more active, but again, valuation discipline as we always have been and I would think of share buybacks and M&A as two areas where we will deploy capital. If we continue to see our stock be undervalued, we will continue to buy back our stock at greater rates.

But we will now systematically buy back our stock to offset dilution, plus an additional few percentage points on top of that at a minimum. And if we have other opportunities due to market aberrations to buy our stock at depressed levels, we will continue to do so.

So I think that's really where you would expect to see the majority of our excess capital and cash flow be deployed..

And as a follow-up. You mentioned that there have been no restocking in Refinish in Q1. I was wondering if you could talk about your assessment on inventory levels in Industrial. In particular, given that your volume started to recover very quickly in Q3, seemingly ahead of IP.

So there, do you think that inventories have actually normalized already? Or could that happen later this year?.

No. I think pretty much across. All of the Industrial markets that we serve, inventory levels are really lean. Part of that is the way people have been running. But I think it's much -- has much more to do with some of the supply chain issues that are out in the marketplace.

That segment of the market, much more so than light vehicle or Refinish or Commercial Vehicle or Decorative Coatings, frankly, Industrial is really the area where raw material shortages have really had the biggest impact.

So I think a lot of the Industrial customers are running in a pretty lean fashion just due to the availability of materials more than anything else. So as those customers restock, there's more availability of raw materials. I think we could see somewhat of an inventory build there at some point during the year when supply normalizes..

Our next questions come from the line of John McNulty with BMO Capital Markets. Please proceed with your question..

Yes.

Just on the Refinish potential for restocking, can you help us to understand what that actually might mean in terms of volumes for you? I mean is that a -- is it a 1% or 2% add? Is it bigger than that? I guess how should we think about, as the Refinish business restocks, what that could mean to the overall volumes?.

It's difficult to put a number on it. What I would say is that I would think of it as a rubber band, John. I mean when we start to see people get back to work, kids go back to school or -- I'm talking globally, not just U.S. here.

And we see traffic patterns and traffic congestions come back to normal, I think we're going to see a tremendous snapback in volume and activity in that business. And I think the interesting thing is, given the profitability of that business, of course, the operational leverage for a company like Axalta is huge.

So I can't think of many companies that are more of a COVID rebound play than Axalta..

Got it. No. Fair enough. And then I guess maybe another related question on the refinish It seems like in part because of all the semiconductor issues and what have you for auto OEM, that the used car market seems to be heating up pretty meaningfully. We're seeing kind of really big sticker inflation, that type of thing.

Does that move the needle when it comes to the Refinish side of your business? Do you -- is there any correlation that we should be thinking about in terms of used car sales picking up and used car values picking up where we could see some lift on the Refinish side? Or is that a little bit too much of a stretch? How should we think about that?.

I would say that, that element is a fairly minor variable in the total equation that drives Refinish activity. So I wouldn't spend too much time on that particular area..

Our next questions come from the line of Arun Viswanathan of RBC Capital Markets. Please proceed with your question..

Congrats on the strong performance here. I guess, first off, just on light vehicle.

Can you just elaborate on your earlier comments about the ship shortage potentially elongating the cycle and then not necessarily being as much of an impact longer term on '22?.

Well, I think forecasters estimated approximately that about 1.4 million vehicles were impacted in the first quarter and then expected another 1 million in the second quarter, with some additional bleed through into the third quarter.

The expectation is that many of those vehicles will still be made up in the second half of the year, though some of those units will probably now not be built until 2022. Axalta saw a fairly similar impact to financial results relative to the global impact and expect some lost sales to be made up in the second half.

And those updated market forecasts actually came out last week. And that's why some of the data that you may hear from us on this topic versus some of our competitors may differ slightly. It's because we have, as of the time of this call, the updated forecasts..

Back when we gave year-end guidance, IHS was forecasting auto builds to be up 13% to 14%. We're closer to 12% now. Still around -- a little over 83 million cars to be built in 2021. So certainly, a good amount of the 2.4 million cars Robert referenced is going to be made up in the second half, but we will see slippage in 2022..

Okay. And then maybe I can ask a question on commercial as well.

Have you seen any impacts there due to this chip shortage? Or what's your outlook for, I guess, how that business evolves over the next couple of quarters?.

We did see some impact in commercial vehicle, but it was -- I think we expect it to be mostly focused in the first quarter and then a little bit of -- perhaps a little bit of impact in the second quarter.

For the full year, we expect strong continuation of truck strength in the Americas and EMEA, potentially with some retraction in China as C6 and government incentive cease. I think we expect strong continued performance from trailer and constructors, especially those associated with some of the last-mile delivery scenarios.

Power Sports and RV also continue to show pretty good resilience and favorable order intakes. Bus is going to be a little bit more dependent on vaccination and herd immunity, but government incentives for EV powered assets could really play quite favorably later this year and beyond..

Our next questions come from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question..

Maybe just an update on the cost savings. And I guess, in particular, there were obviously costs that came out last year that were COVID specific, and some of those were supposed to come back this year. So maybe just an update on where we are there.

And I think, Robert, you also mentioned -- maybe Sean, you'd have some flexibility to manage sort of the price raws scenario. So maybe just help us bridge where you are versus your expectations and how much incremental flex you think you actually have that you could put to work this year..

Yes. On the temporary savings that we initiated last year, yes, most of those are starting to tail off. We had roughly $20 million in savings in the first quarter.

It will be a marginal benefit in the second quarter, as those costs will start to come back in as we support volumes, especially heading into the second half of the year where we're expecting a strong recovery. As it relates to Axalta Way, we have roughly $50 million baked into the guidance construct.

A big part of that is -- are the initiatives that we announced last year and getting the full year run rate impact this year. Vincent, at this point, we are expecting globally, on a consolidated basis, that we will offset the raw inflation with pricing.

To the extent we see a little slowness in a particular end market, that's where we may have to do a little bit more on the productivity side. But right now, we are contemplating an offset from a top line perspective..

Okay. And then, Robert, if I could just ask you, the Board obviously made a strong statement with the incremental share repurchase authorization. And my question -- this has been discussed over the life of your -- being a public company.

What's the latest thinking from the Board on not paying a dividend versus buybacks and so forth? And I just asked because not paying a dividend, there is a group of the long-only investment community that is income oriented. And if there's no dividend, they just don't buy the stock.

And likewise, maybe you could throw in the latest comments just on managing the debt level, because obviously, also high leverage levels are an issue for some folks, so just how the Board sort of thinking about buybacks versus the other opportunities?.

When it comes to capital allocation, we always look at returns and what can generate the highest returns for investors. So anytime we're going to make a decision to invest a significant amount of capital, we're looking at what are opportunities to deploy that capital internally, which tend to be pretty high ARR and very low risk type of projects.

We also have, of course, the ability to buy back our stock. And depending upon where it's trading, that also has a certain return associated with it. And then we look at M&A. And depending upon what type of an acquisition it is and the risk profile of that acquisition, we also calculate a risk-adjusted return.

And we compare all of those as well as the return from initiating a dividend into our thinking. So that's going into our calculus anytime we make an investment decision. At this point, we feel that fueling our innovation engine internally, which is yielding, I think, very good results.

And you'll see and you'll hear about it at Investor Day some of the exciting things that we're working on. And I think you'll see over the next couple three years some really revolutionary developments. So that's obviously a very attractive area for us to invest is in continued innovation.

So as we've looked across all of those investment possibilities and the benefit that we get from innovation as well as the value that we can create from making acquisitions that are consistent with our long-term strategy, not acquisitions just to add sales to the Company, but rather acquisitions that are specifically aligned with our strategy, we feel that acquisitions, investing in innovation and share buybacks are our best uses of capital at this time.

Also, as we bring down our leverage level over time and we are a little bit more mature in some of those areas, it is possible that we would start a dividend. But it's -- and we've talked about this a lot at a board level, but it doesn't feel like the right time for us at this juncture..

On your question on debt, we are not concerned. Investors should not be concerned. Net leverage is at $2.6 billion. When you look at our net leverage ratio, it ticked down to 3.2x.

When we get to the end of the second quarter, if we don't do anything meaningful,as far as share repurchases or M&A, we'll be closer to 2.6x or 2.7x as the second quarter of 2020 drops off.

And when you look at the midpoint of our range from an EBITDA perspective, we're going to have $135 million of interest expense, opposite EBITDA at the midpoint of the range of $970 million. So when you look at our interest coverage, there is plenty of room there.

So we're not at all concerned on our current leverage where it sits today on our balance sheet..

Our next questions come from the line of David Begleiter with Deutsche Bank. Please proceed with your question..

Robert, can you quantify the gap between raws and selling prices in Q2? And how that will trend in Q3 and Q4?.

So Dave, we're not going to get into the gap. But certainly, that is adding a little pressure from a margin perspective in the second quarter, and we expect to be fully caught up as we get in the third and fourth quarter..

Understood.

And just on the operational matter, have there been any customer repercussions from this event? Do you expect to lose any business longer term? Or is this a one-off event that have no impact on the ongoing company's operations?.

Yes. It's a great question. We don't believe that there's going to be any ongoing underlying impacts. We've been working very collaboratively with the customer group. We feel really confident that there won't be any loss..

Our next questions come from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question..

Aside from the external issue of shortages of semiconductor chips, did you encounter any shortages of raw materials that you buy? And if so, which ones? And what were the effects related to that?.

Well, there are quite a number of shortages of varying degrees and quite a number of companies that have declared force majeures. I would say, in general, we're seeing supply shortages largely in monomers, resins and isocyanates. And then there are specifics within some of the other categories of certain items.

So I think it's across the raw material basket in general, but as I said, predominantly concentrated in monomers, resins and isocyanates. And I think for the most part, in the first quarter, we didn't see a meaningful impact on our businesses. But certainly, we are monitoring and managing this on a day-by-day basis.

And it is a little bit kind of hand-to-mouth each day in certain products..

Okay. That's helpful. And then I wanted to follow up a little bit on the semiconductor chip shortage issue.

What we've heard from some other companies outside of the coatings industry is that there were some mitigating factors, such as a mix shift toward SUVs and trucks and in some cases, auto manufacturers making cars without the chips, with the intention of installing the chips later on.

Did you see any behavior along those lines? Or is it more straightforward that your sales are simply ebbing and flowing with the auto production?.

Yes. We've heard the same thing from some of our customers in terms of directing the chip availability in subassembly, trying to direct more of that to trucks and SUVs, where, of course, that's our bread and butter and where result is strongest. So I think that's certainly helpful for us.

I think what will be interesting is if we see auto manufacturers start to pay higher prices for chips in order to get a greater allocation of chips that are going into other product types..

Our next questions come from the line of Laurence Alexander with Jefferies. Please proceed with your question..

Can you flesh out the new business models you referred to? Give a sense for what kind of departures from your business model you're taking? Or how significant this could be over, say, three, five years?.

Laurence, it's Chris. As much as we could spend time on that, I think with our Capital Markets Day coming up, very shortly, I'd really encourage people to tune into that where we can get into a little bit more detail around business models. It's just -- it's kind of a lot to cover on an earnings call. So if you don't mind, I think we'll defer that..

Our next question is come from the line of Mike Sison with Wells Fargo. Please proceed with your question..

Just one question. Performance Coatings EBIT margin is pretty impressive in the first quarter. If you did get back to 2019 levels of sales for Performance Coatings, your EBIT margin in '19 was 15%.

Are you run rating something more like 19, 20? Is that kind of what's implied in the first quarter?.

Well, I think what I would keep in mind there is that the 2019 levels, we had not yet done the global restructuring at that time. So compared to the 2019 levels, we would have the benefit of the global restructuring.

And then as we talked about on previous calls, in terms of just the cost mentality and only putting costs back into the business as we see volume recover, we're continuing to run things very tightly. So I think you could expect see higher margins on the performance side.

Now there's a certain amount of costs that naturally flows back into the business as you ramp up volumes. But there's another large portion of the cost that's discretionary and in particularly -- in particular related to staffing that we're really keeping a tight control over..

Our next questions come from the line of Josh Spector with UBS. Please proceed with your question..

Wondering if you could provide some color on some of the industrial demand, and particularly products into OEM channels, so thinking maybe powder coating customers.

Are you seeing any changes in buying patterns through the quarter that might give any read-through in terms of how those customers are thinking about inventories at this level or perhaps building or taking things down based on changing OEM forecasts?.

Well, overall, for industrial, I know you're asking specifically about our general industrial line which goes into auto. I'd say, overall, we expect sales to be up significantly in 2021 versus 2020.

Even with the strong performance of Industrial in 2020, we've implemented price increases across all the Industrial submarkets and expect to exceed raw material inflation for the year. In the general industrial area, we continue to see strong demand from automotive, agriculture, construction equipment and structural steel markets.

And for the portion of powder that -- powder coatings that also goes into the OE segment, we are seeing pretty strong demand there. So I think it's really more reflective of the fundamental issue -- or the fundamental dynamic that demand for vehicles is extremely high.

I mean if you look at dealer inventories in the U.S., they're running in the mid-40s or lower. So the demand is there and automotive manufacturers are trying to make as many vehicles as they possibly can.

But it's an imperfect science to get all of the supply chain aligned to be producing at the same level given some of the parts shortages that are out there. But at least in what we supply that goes into auto OE, we're seeing pretty good demand..

Really appreciate that.

And maybe a quick one, if I may, on just raws, I mean the high single-digit inflation that you guys guided towards, are you willing to quantify that at all in terms of what your expectation is on the cost line and what that means for the rest of the year?.

Well, when you think about our raws going through COGS, it's $1.2 billion to $1.3 billion. So I mean you can do the rough math there..

Our next questions come from the line of Jaideep Pandya with On Field Research. Please proceed with your question..

First one is really on EVs. If you look at your traditional sort of automotive OEM coating business and compare it to some of your new EV customers, how should we think about market share, technology and also profitability in sort of coating and ICE car versus an EV car? That's my first question.

And then just a second question really is around raw materials, but it's more about purchasing patterns.

So in a time where you're seeing good demand from your end markets and raw material shortages, how much pre-buying do you guys generally engage? Or how much pre-buying would your procurement organization engage in sort of the first half for the all of 2021 really to secure raw material supply to feed sort of that demand?.

On your first question regarding internal combustion engines versus electric vehicles, we're very supportive of the growth in electric vehicles, because not only do we coat the exterior of the vehicle, but we also, as you know, have a very growing business in electric motor coatings.

And that business is growing and expanding and is going to expand into other portions of the electronic powertrain in electric vehicles. So we're happy to see vehicle switchover. In fact, every three electric vehicle that switches over from ICE is great because we have that additional content per vehicle.

And those coatings are at very attractive margins. So we're very supportive of that, and we work with some of the top electric vehicle companies in the world and are rapidly expanding our portfolio in that regard.

In terms of essentially what you're asking about operational hedging of raw materials, we will prebuy or engage in other contracts to secure raw materials at attractive prices just depending on market conditions. So yes, operational hedging is something that we do engage in..

Thank you. That is all the time we have for questions this morning. I would now like to turn the call back over to management for any closing remarks..

Yes. It's Chris Mecray. Thank you all for joining this morning. I just want to remind everybody that we're hosting a Capital Markets Day on May 5. You can preregister for that on our website. And we really hope that you join us for that. It should be well worth your time. Thanks for joining this morning. Goodbye..

Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day..