Ladies and gentlemen, thank you for standing by. Welcome to Axalta's Fourth Quarter and Full Year 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 February 8.

Those listening after today's call should 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 fourth quarter and full year 2021 financial results conference call. Joining me today are Robert Bryant, CEO; and Sean Lannon, CFO.

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

Also, on January 25, we published a set of best-in-class ESG goals, including 10 commitments for 2030 which you can also reference on our Investor Relations website for more details.

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

Please note that the company is under no obligation to provide updates to those 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..

Planet Solutions focused on ensuring a more sustainable future for our planet with goals aimed at maximizing our environmental performance and reducing the impact of our operations; Business Solutions which concentrates on how Axalta's products, services and technologies can help customers accelerate their own sustainability initiatives and achievements; and third, People Solutions which is rooted in inclusivity, integrity, safety and engagement to ensure that Axalta continues operating and fostering an environment where all our people can thrive.

Axalta's published targets include 10 new sustainability commitments for 2030. Key among these is the commitment to produce sustainable benefits from 80% of Axalta's new technology and innovation developments.

We're also committing to an absolute reduction of 50% of Scope 1 and 2 greenhouse gas emissions by 2030 on our way to becoming carbon-neutral in our operations by 2040. This would be a decade ahead of the deadline set by the Paris Agreement on climate change.

That said, each of our individual targets are of critical importance and represent a step forward for Axalta in achieving long-term goals to build a more sustainable future.

Axalta seeks to lead the coatings industry by example, as well as to inspire our customers and other stakeholders by jointly ensuring the long-term well-being of the planet, our business partners and our business. I'll now turn the call over to Sean for some additional remarks..

Thanks, Robert and good morning. As you've heard, fourth quarter saw both stable and broadly positive demand conditions but also continued challenges from cost inflation and supply chain constraints.

Net sales of $1.1 billion increased 5.8% year-over-year for the fourth quarter while constant currency net sales increased 3.1% on an organic basis, driven by demand strength across most of our businesses.

This constant currency organic net sales growth included a 9.6% increase from Performance Coatings offset by a 9.3% decrease from Mobility Coatings, reflecting Light Vehicle down 13.7% while Commercial Vehicle was up an impressive 8.4%.

Fourth quarter volume declined 0.5% with mid-single-digit increases from three of our four end markets, more than offset by a single mid-teen percentage pullback in Light Vehicle volumes due to the semiconductor constraints impacting customer production.

Price-mix contribution increased 3.6% in the aggregate, driven by improvement in both segments and all four end markets, however, stronger in Performance Coatings versus Mobility Coatings. Mix was a moderate headwind following on a similar dynamic from the third quarter.

Excluding product mix effects, overall pricing improved mid-single digits for the quarter. FX translation was a headwind of 1.2% for the fourth quarter driven by the euro and the Turkish lira, offset partially by the strength in the Chinese renminbi.

Fourth quarter adjusted EBIT was $121 million versus $205 million in the prior year quarter reflecting strong demand and buying trends in Performance Coatings as well as the Commercial Vehicle end market which was more than offset by Light Vehicle volume headwinds; substantially increased variable input cost inflation; and lower temporary cost savings realized versus the fourth quarter of 2020.

Performance Coatings fourth quarter net sales increased 14.2% year-over-year and 15.6% ex-FX driven by 5% higher volumes, a 4.6% increase in average price-mix and a 6% increase from acquisition contribution.

Refinish reported a 12.8% net sales increase or 14.7% ex-FX, driven by improved global volume versus the prior year and by a high single-digit contribution from the U-POL acquisition which closed in September.

Refinish volumes also increased moderately on a sequential basis along with body shop activity in the period, though growth was impeded somewhat by supply chain and logistics constraints in the fourth quarter with significant open orders remaining at year-end.

Refinish's mix increased low single digits during the fourth quarter, inclusive of product mix headwinds from mainstream and economy product growth. Net pricing was up mid-single digits before mix effects.

Industrial Q4 net sales increased 16.3% or 17% ex-FX, driven by mid-single-digit improvement in both volume and average price-mix as well as low single-digit acquisition contribution to net sales.

Demand trends in most of the Industrial end businesses we serve remained healthy during the period with the exception of automotive and wind energy and with particular ongoing strength from North American housing and remodeling. Similar to Refinish, supply chain constraints also impeded further growth within Industrial in the period.

Performance Coatings reported Q4 adjusted EBIT of $99.7 million versus $129.5 million in the fourth quarter of 2020, driven by ongoing volume growth and drop-through benefits of stronger average price-mix more than offset by significant headwinds from higher variable costs and lack of temporary cost savings which benefited the prior year quarter.

The adjusted EBIT margin for the segment decreased to 12.4% from 18.4% in the prior year record-setting quarterly rate given the drivers noted before. Mobility Coatings net sales decreased 9.3% and in Q4 ex-FX, including an 11% decrease in volume, partially offset by a 1.7% improvement in average price-mix.

Light Vehicle net sales decreased 13.7% ex-FX in the quarter including a midteen volume decrease, largely in line with global auto production rates. Price-mix increased low single digits in the quarter versus the prior year which included a component of negative mix in the period.

Commercial Vehicle Q4 net sales increased 8.4% ex-FX, driven by strong truck production globally excluding China. Price-mix increased low single digits inclusive of modest negative mix differences from the prior year. Mobility Coatings reported a Q4 adjusted EBIT loss of $3.5 million versus income of $47.9 million in the prior year quarter.

Adjusted EBIT and associated margins in Q4 were impacted by the severe volume drop and further impacted by increased cost inflation with only modest offsets and positive pricing which began to accrue during the third quarter and continued during the fourth quarter.

We are confident that expected demand recovery, price increases and cost control will return the Mobility business to operating profitability, though it remains cash flow positive today in adjusted EBITDA terms. Axalta's Q4 balance sheet and liquidity profile remained solid.

We ended the quarter with approximately $1.4 billion in total liquidity, including approximately $841 million of cash and cash equivalents on the balance sheet and approximately $528 million of available capacity in our undrawn revolver.

During Q4, we also completed several asset sales for net proceeds of $25.4 million, illustrating ongoing focus on asset efficiency and cash flow. Our net leverage ratio ended the quarter at 3.5x, even with the Q3 levels, driven by increased cash at the period end offset by lower latest 12 months adjusted EBITDA.

Net leverage remained somewhat elevated due to the U-POL acquisition that was funded from our balance sheet in September, while the adjusted EBITDA contribution only reflects a partial year from the acquisition. The company also repurchased $30 million in total shares in the fourth quarter for a full year 2021 total of $243.7 million.

Free cash flow for the quarter totaled $249.4 million versus $256 million in the fourth quarter of 2020, a very strong result considering somewhat lower operating profit year-over-year.

For the full year, free cash flow totaled $455 million versus $441.7 million in 2020, again demonstrating Axalta's focus on cash flow and finishing the year with a strong total liquidity position to continue to enable effective capital allocation. Regarding our financial outlook, we have outlined key expectations for the first quarter as follows.

For Q1 net sales, we expect approximately 5% year-over-year growth, including a 3% FX headwind and a 4% positive M&A contribution. This assumes Performance Coatings growth of mid-to-high teens offset by Mobility Coatings' contraction of mid-single digits. The top line guide also reflects pricing of mid-to high single digits.

We expect to generate adjusted EBIT of $100 million to $120 million in the first quarter with D&A of $81 million, inclusive of $24 million of step-up D&A. Interest expense for the quarter is anticipated to be approximately $32 million.

For adjusted earnings per share, we anticipate a range of $0.22 to $0.29 for the first quarter, inclusive of an FX headwind of $0.02 per share and a slight step-up in anticipated income taxes.

Within our first quarter forecast, we further assume raw material inflation of approximately 25% to 27% versus the first quarter of 2021 which the growth rate is slightly higher than the fourth quarter of 2021.

As we look at the full year, we expect to see net sales growth continue driven by solid Performance Coatings growth from both Refinish recovery and market share gain, coupled with ongoing Industrial Coatings organic growth.

For Mobility, we expect net sales growth slightly ahead of global production for both Light Vehicle and Commercial Vehicle, given specific customer exposures and organic growth expectations for 2022. Further, we do expect to see an uptick in global production builds based off of industry forecasters.

Net sales growth are also expected to be somewhat offset by modest FX translation headwinds, driven largely by the euro, Turkish lira and Brazilian real.

Regarding cost factors, our current assessment is the rates of overall raw material and other cost inflation will continue at high levels near term but may stabilize during the first half of the year based on current expectations for feedstock pricing.

For 2022, given current baseline expectations and assuming Brent crude around the mid-80s, we expect raw material inflation in the low double digits with peak inflation occurring during the first quarter.

That said, substantial uncertainty around all aspects of cost inflation, coupled with lack of clear visibility around timing for supply chain shortages to ease, informs our decision to limit full year earnings guidance at this time.

With continued planned and expected pricing actions during 2022, however, we also expect to fully offset anticipated inflation within the year. While we're not providing full year guidance at this time, we do anticipate stronger profit performance this year versus 2021.

And we'll hope to refine our reviews of specific guidance elements as the year progresses..

Thank you, Sean. I'd like to close out by simply noting that we, at Axalta, remain committed to creating value for our shareholders. We believe the path to substantially higher levels of earnings per share remains very much in view despite the near-term challenges associated with inflation headwinds and supply constraints.

This starts with the anticipated recovery in automotive volumes back to prior peak levels over the course of several years, including some anticipated relief in chip supply to enable growth in 2022.

It is furthered by ongoing solid organic growth in Industrial and backed by expected net sales growth from Refinish from both market share gains and modest further recovery from cyclical lows which bottomed during 2020.

Ongoing top line growth, coupled with expected abatement of raw material inputs and calmer overall cost inflation over time, should clear a path to margin recovery and perhaps enable new margin highs over time.

Axalta has already proven an ability to navigate challenging environments and we're confident in the team that we have in place to execute our growth plans while continuing to respond to operating and cost challenges.

I'd like to express my sincere thanks to our entire global team for all the hard work that was completed during 2021 and we look forward to demonstrating what our team can accomplish during 2022. With that, we'll be pleased to answer any questions. Operator, you can open the lines for Q&A..

[Operator Instructions] Our first question comes from the line of Steve Byrne with Bank of America. Please proceed with your questions..

Yes, thank you. So Robert, it's been a little over a year since you ripped out the legacy matrix structure and brought in some new leadership.

Just curious, what metrics do you look at to assess whether there have been benefits from either cross-selling or regional expansions or maybe even some technology transfers to different products? Anything you can see there? Or is it too challenging given the level of disruption?.

We're very pleased with the organizational pivot and what it's enabled in terms of accountability, decision-making and cross-business unit collaboration.

Just as one example, if we think about our electrification platform and how that market is evolving very quickly in terms of whether the purchase decision around our energy solutions coatings and the products they go on is in the automotive tiers in an industrial customer or actually at an OEM customer, it's actually now at all three.

So we have a lot of cross-selling and cross collaboration going on across the business units and that's been quite beneficial. So again, overall, we're very happy.

With regard to the metrics, we look at all the typical metrics in terms of sales, profitability, free cash flow and return on invested capital not only at a total company level but also at an individual business unit level..

And just curious about Light Vehicle, you got 11% -- or maybe this is Mobility broadly but 11% reduction in volume in the quarter and presumably you have your customers are not running flat out.

Do you have the ability to flex your staffing as a result of that? Or is that fixed cost drag just remain in place and thus it's not until you see volumes recover that you see that absorption improve? Or is there something you're doing that might lead to an expansion in margins when the business returns to more normal operating rates?.

So on the Mobility business, we're principally focused on three actions. The most important of which are our pricing actions followed by cost management and then flexibility within our cost structure. So we're working to offset the majority of the inflation that we're encountering through pricing actions.

Our cost structure, we continue to manage it quite tightly until volumes come back. And we're really only making targeted investment that's related specifically to wins to support our customer launches and our sales activities.

We've also been working with the operations organization to ensure that we've got flexibility in our cost structure and that we can vary those costs depending upon volume levels. We've also been looking at different models for our sales technical resources and support and we're working to flexibilize those costs as well..

Thank you..

Our next question comes from the line of Ghansham Panjabi with Baird. Please proceed with your questions..

Thanks. Good morning, everybody. Just as a follow-up to Steve's question. Specific to the fourth quarter, it looks like -- it sounds like Light Vehicle was a little bit better than you forecasted just based on production and then Commercial was also relatively healthy. And then the EBIT loss was pretty much comparable to the third quarter.

Just curious as to why it wasn't better than you initially forecasted?.

Yes. I mean, the main driver, just globally for Axalta, why we missed the initial guidance for the fourth quarter was really raw materials related. We saw an uptick up to 24% and Light Vehicle is bearing some of that. And that's why you saw a little bit more margin contraction in the fourth quarter..

And then in your prepared comments, you called out a $200 million type raw material cost inflation number for '21. Is that a -- and you have low double-digit inflation for 2022 as well.

Is that $200 million roughly comparable to -- inflation for 2022 will be roughly comparable to that $200 million, is that the right way to think about it? And then specific to '21, how far behind were you on price-cost?.

So Ghansham, your math is roughly correct. We are expecting about $200 million in 2022. You saw we got about $150 million in price, roughly 4% that we stated in our consolidated results. So you're looking at a little better than $50 million of a gap price versus cost..

Very helpful. Thank you..

The next question is coming from the line of John McNulty with BMO Capital. Please proceed with your questions..

Yes, good morning. Thanks for taking my questions. I guess, admittedly, we were a little bit surprised on the momentum behind pricing or maybe the lack of it. It seems like it was roughly in line with the type of pricing that you saw in the third quarter despite a higher raw material kind of headwind.

So I guess how should we be thinking about that going forward? And if we can see some incremental momentum as we kind of push through 2022?.

So what you saw in the fourth quarter, we were a little bit more impacted with mix. Excluding mix, we're in mid-single digits, largely in line with the third quarter. I would call out on the Mobility side, we've talked a bit about our indices that are in place.

With those indices, the raw material inflation is really being priced off the average of the first six months of 2021 that were in place through December. So that will reset again on January 1. And we've characterized 25% to 30% of our contracts are on indexes. That's probably closer to 35% now.

And with inflation that we saw in third quarter and the fourth quarter, with those going into effect January 1, you will see an uplift. And just as far as our guidance for the first quarter, we are expecting mid-to high pricing which you're going to see that obviously a little better than the fourth quarter..

Got it, that's helpful. And then with regard to your outlook for autos or the Light Vehicle segment, it sounds like you're going to have at least a little bit of lift relative to kind of overall industry build rates. Can you help to quantify that a little bit? I know you've won some business that should come in toward the end of the year.

I guess how -- if the forecast are right that the industry grows at 8.5%, give or take, I guess, what does that mean for Axalta with some of the new business wins, the share gains, that kind of thing? How should we be thinking about that?.

Well, let me provide, I guess, some additional context in particular around the Phase 1. I think the quarterly phasing there is important. So if we look at 2021, total auto builds were 76 million units per IHS. And IHS' full year 2022 base case build number is about 83 million light vehicle units and a downside case of 76 million units.

Our 2022 full year base case is 79 million units based on the historical forecast error that we've seen from IHS as well as input from our customers.

So for Q1, in particular, as we think about phasing and new business coming on, for Q1, the IHS build number is down about 2.2% first quarter 2022 versus first quarter 2021 which is based on essentially flat lining the 83 million builds across the year for roughly 20 million to 21 million builds per quarter.

Now Q4 2021 builds were actually 20.4 million units. So we then took that number and adjusted that number down for expected later-than-normal plant start-ups and Chinese New Year to arrive at approximately a $17 million [ph] light vehicle build rate for our estimate for Q1.

Now it may be the case that we're taking a little bit more of a conservative view on the first quarter but we believe that this is a solid base case assumption given historical data variation, market conditions and then the potential ramp-up of builds during the year, just as more semiconductor chips become available.

And then of the $130 million in new business that we've won in 2021 that will come online in 2022 and 2023, that's pretty heavily back end-loaded to the second half of the year as well as the first quarter of 2023..

Got it. That's helpful color. Thanks very much..

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

Thank you and good morning. Could you talk a bit more about the mix issues? I know in Refinish, it was a continuation of the migration to economy-type products.

Is that going to reverse at some point in '22 and become a tailwind for you, good folks? And in Mobility, what is it exactly happening there versus it sounds like in Commercial Vehicle you're getting a benefit? So if you could just unpack what's going on and then give us a sense of whether it's going to move for you or against you as we move through 2022..

So with regard to mix on the Performance Coatings side, you correctly point out that it's the growth of mainstream and economy. And we saw quite a bit of that in the fourth quarter just given some of the commercial initiatives that we've had.

But you've also had the impact of slightly lower Refinish activity overall, in particular, with some of the larger MSO customers in the fourth quarter as they experienced labor and part shortages in particular. So the buy of that richer premium mix paint was lower in Q4 than you might have typically seen.

So that exacerbated certainly what we saw in Performance Coatings. And then in Mobility Coatings, the unfavorable mix was really, one, due to product mix. We sold a little bit more of slightly lower-margin products.

And then we also had some growth in our LV business in Asia Pacific which is at a lower average selling price, some of which gets captured in pure price and some of it gets captured in mix. But I think if we look at overall kind of Mobility tracking, you can see that we've seen pure price increase from 2% in Q3 to 2.8% in Q4.

And then as Sean mentioned, with the indexation coming into place, we'll see that number tick up here as we go sequentially forward Q1, Q2, etcetera..

And Vincent, just to add, I'd just note, there's nothing structurally that's changed as far as mix issues. We're not forecasting any sort of major mix aspects for the first quarter, for the full year for 2022. But presumably, it will be an easier comp in the fourth quarter of 2022 for Refinish in particular.

We saw about a 3% negative mix come through in the fourth quarter of 2021..

And maybe just as a follow-up, could you talk a little bit about where you sit on the temporary cost reductions coming back versus your plan?.

Yes, so hard to say exactly. We're limiting guidance just because the world is constantly changing on us here. But we've continued to see roughly $10 million to $15 million each quarter in temporary savings, at least for the first quarter. We would expect that to show up in the results..

Okay, thanks very much..

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

Thank you. Good morning.

Rob and Sean, do you expect any permanent Axalta Way saving -- cost savings in 2022 versus 2021?.

Yes, again, we're limiting guidance but the plan is to, at a minimum, offset fixed cost inflation. There's clearly structural savings that we've previously announced. That will amount to about $10 million. But the difference will be continued productivity projects. But we'll give more updates when we give guidance at the end of the first quarter, Dave..

Got it.

And just looking at uses of free cash flow, how do you look at buybacks versus debt reduction in 2022?.

So given our cost of debt still sitting below 3.1%, it doesn't necessarily have attractive returns. I think we'll continue to deploy the majority of the excess free cash flow for share repurchases as well as M&A. We'll look to continue to build cash on the balance sheet beyond that..

Thank you..

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

Good morning. Robert, I was wondering if you could talk through some of the labor challenges in more detail.

So for example, on an internal basis, what impact did that have on your ability to produce and deliver? And then externally, how significant is that issue becoming among body shops and perhaps other customers? And do you think it's getting any better or worse looking into the first quarter?.

Yes. It's a great question. At Axalta, we've seen some labor constraints hit us certainly across the fourth quarter and specifically due to surge in Omicron. Although I don't think we characterize the impact as equivalent to the impact we saw from material supply or logistics headwinds but it certainly was an impact.

Our overall maximum kind of absenteeism in December was around 15%. But when we think about labor challenges with our customers, COVID-related absenteeism is definitely having an impact.

The broader challenges impacting, in particular, in the Refinish business, the larger body shops continue to be technician availability which is related to labor and parts availability. And some of our largest customers reported an increase in WIP related to labor and paint shortages.

And in fact, if you look at the average number of rental car days for people who had their vehicle fixed in December, that number of days went up by four days. So it's taking longer for people to get their cars fixed and that has a lot to do with labor shortages..

And then secondly, I think you mentioned that in the U.S. or North America, body shop activity remained about 12% below 2019 if I got that right.

Is that the new normal? What are you planning for in terms of body shop activity in 2022 relative to 2019?.

We don't think that's normal. We still do not have normal traffic patterns in terms of people even getting back to a hybrid work environment. And the school, certainly, we've seen some of that traffic come back but there are spots in the country where it's not, it's a little bit start and stop.

And we haven't seen office occupancy rates come back yet either. So, I think what we're hoping is that once we get on the other side of Omicron that we're going to start to see people return to the office in more of a much greater hybrid percentage in terms of time spent in the office versus time spent at home.

So I think, overall, we're optimistic but as we've said, it all hinges upon recovery from Omicron..

Thanks very much..

Our next question comes from the line of Chris Parkinson with Mizuho. Please proceed with your questions..

Great. Thank you very much. The industry has been studying several key raw material shortages across additives and in some cases, intermediates and other inputs yet global force majeure activity appear -- at least appears as if major suppliers are improving supply at least heading into the year although some of these are still taking maintenance.

As it pertains to your portfolio and just Axalta, what inputs are still missing? Are there differences by region? Just any color on how you believe this evolves will be greatly appreciated..

Thanks, Chris. We continue to see supply disruptions in the fourth quarter. There were roughly about 20 force majeures in the coatings value chain.

We also saw deepening energy challenges in Europe and then in China, with the dual control policies on carbon emissions as well as carbon intensity and continued impact from limited global logistics capacity and higher costs.

If we think about overall shortages, we've seen tightness in several materials due to supply chain disruptions as well as kind of alternative value chain demand, specifically isocyanates, acrylic emulsions, certain polyester resins. Those have really been the most challenging during the second half of 2021.

And if we think about the overall situation, we have secured supply and largely been able to keep pace with strong demand for our products but there have been some impacts on sales volumes as well as impacts at the customer level which has constrained potential volumes..

And just a super quick follow-up on that.

Based on that last comment, are you confident that just given this is affecting all of your primary peers and most obviously geographies, is it safe to say that this is not a case of any lost business and this is factored into pent-up demand for '22?.

Yes. There's certainly a question -- I mean, certainly, there are spots where we may be short on a given product and a customer may need to source it from a competitor. Likewise, we've had situations where one of our competitors hasn't been able to supply and that customers come to us and ask us to supply and we've been able to do that.

I don't think that there have been major market change, shifts -- or market share shifts between competitors but there's certainly been spot particular moments, days or weeks where we've had to step in or where one of our competitors have had to step in where it's a dual supply scenario, for example..

Very helpful. Thank you..

The next question comes from the line of Alex Yefremov with KeyBanc. Please proceed with your question..

Great. Good morning, everyone. The midpoint of your EBIT guidance for first quarter is roughly $10 million lower sequentially. So I'm just trying to understand the sequential bridge at a high level.

Are costs rising faster than price? Are volumes lower? Or is something else going on?.

Yes. It's really rows are really accounting for the vast majority. We saw 24% year-over-year headwinds in the fourth quarter. We're seeing 25% to 27% where they're really peaking in the first quarter. That amounts to about $10 million to $15 million.

And then we're seeing some marginal headwinds in freight and logistics and labor pressure which is being largely offset by the uptick in sales. You'll see our guidance for the first quarter versus the fourth quarter is up about 2% which correlates to about $20 million..

And then the only other item to mention of less effect, of course, is just the incremental FX impact we're seeing and there is some small return of OpEx related to some of the product launches and developments we have..

Okay, very helpful. In Light Vehicle, you'll have your indices -- price indices reset on January 1.

Would those generally reset to an average cost for the second half of '21 or exit costs from December '21? So will you be fully caught up on those index resets or still kind of underwater for some time, maybe first half of '22?.

Yes. So I mean all the contracts are a little bit different but generally the way to think about it is the average 6-month procurement spend that will be reflected. But given we're expecting raw materials to continue to inflate in the first quarter, they're still going to be slightly behind..

Thank you..

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

Thanks very much.

In the quarter, where did you stand with recovery of raw material inflation in Refinish?.

So we're caught up in Refinish, Jeff..

Okay.

And in the auto OEM business, when you look at your customer base, are there wide differences in your ability to recover raw material inflation? That is, with some of your large customers are you doing very well and with other customers are you doing much less well? Or is it pretty even across the customer base?.

I think, Jeff, it varies somewhat by customer and it varies somewhat by region as well as regional mix of competition. So I think as Sean said, certainly the indexing and we're pushing toward more indexing just to make this automatic and easier.

But I think overall, as we think about price capture in our business, I think that we're -- we don't believe that we're behind the market in price capture. If you look at like-for-like businesses, I mean, an OEM, some of our peers include, for example, business volumes beyond Light Vehicle exterior body coatings which, of course, are our products.

And they'll include some businesses that we include within Industrial including certain tier suppliers that serve automotive. So, although we acknowledge that we're not where we want to be, we don't believe that we're behind our competition especially given continued inflationary cost headwinds.

But we're very focused on offsetting cost inflation in our business during 2022. And as Sean highlighted, we've seen the number of -- we've seen that number go from 25% of indexes to -- in 2020 to a little bit more than 30% at the end of 2021. We expect that to continue to increase..

Great. Thanks so much..

The next question is coming from the line of P.J. Juvekar with Citi. Please proceed with your question..

Yes, good morning. Robert, you mentioned a couple of times negative mix impact in both of your segments.

I was wondering if you could talk about what kind of mix impact you're seeing in each of the segments?.

Sure. I think in terms of the segments, we answered that question earlier but I'd be happy to provide a little bit more color.

In the Refinish business, we've continued to see the growth of mainstream and economy products that's really taken off, especially with some of the new product developments that you probably read about in our press releases over the past six months in Asia, in certain parts of Eastern Europe as well as in Latin America.

Those are sold at lower price points. Still attractive margins but lower price points. And so that's certainly one impact. And then in the Mobility side, it's really a function of customer mix as well as regional mix that has created that mix differential..

Okay. And then many companies have different views on this chip shortage is going to be resolved. You talk to auto companies, they tend to be more optimistic. Chip companies are saying it won't be resolved fully till 2023. Some are even saying 2024.

I'm not sure exactly which chips they were referring to but where do you stand on when do you think you could begin to see some positive comps in auto OEM?.

So we'll give you our view from, obviously, speaking with chip forecasters and our customer base. I mean, I think the market forecasts assume improvement in inventory and overall chip supply beginning in the first half of 2022 with a little bit more stabilization in the second half of 2022.

We think that the broader kind of one-off supply chain issues, unless something happens, could subside in the first half but we still do expect longer lead times for chips in the second half versus what they were pre-pandemic.

We think that there's going to be some improvement this year and perhaps normalization in 2023 as we start to see additional chip capacity come online. And then that should free up capacity for specifically automotive end markets. And I'd just add one additional thought there which is the auto industry, they haven't been standing still.

They've been -- obviously, have recognized this as an issue and are aggressively taking action. I mean we've seen our OEM customers adapt pretty quickly to the situation. I mean they're ordering chips with longer lead times. They're prioritizing vehicles with the highest profit margins like trucks and SUVs.

They're removing features from certain vehicles, to many people's dismay but is necessary. And they're reducing the number of unique chips that are being used and consolidating down to fewer, more easily available chips.

And then, lastly, they're redesigning systems with more standardized chips as well as different architecture to really reduce the level of chip intensity. I think the first actions that I mentioned there can actually have a benefit in 2022. And some of the redesign of the chip architecture, that's more of a 2023, 2024 impact..

The next question comes from the line of Mike Sison with Wells Fargo. Please proceed with your question..

Hey guys, good morning. Just curious when you think about Mobility Coatings, margins have been kind of bumping at breakeven for the last couple of quarters.

What build rate sort of gets you firmly above breakeven? Are you going to get there with 83 million this year? And then is there a certain build rate you need to get back to double digits, sort of that 11% or so that you did in the first quarter '21?.

So Mike, I just -- I want to point out because the EBIT is still impacted by the step-up depreciation and amortization from the initial carve-out from DuPont. I did want to call EBITDA itself. I mean we're going to have slightly over 10% EBITDA margins for the full year.

So we still are cash flow positive in that business and I think it's an important highlight. But if we get to the 79 million builds, we'll certainly be EBIT positive for mobility for the year. A slight uplift versus where we are today for the full year 2021 will put us in a profitable stage.

I think everything we've done on the cost structure as well as with the pricing, coupled with the fact that as volumes pick up, there's going to be much better absorption, you're going to see this business quickly get back to profitability..

Yes. I would just reiterate what Sean said there is that if you look at what we've done in costs in the Mobility business, we have taken significant -- done significant cost reductions in that business. At this point, it's all about the drop-through effect of volume as well as price increases. Those are really the two key levers..

Understood. And then for '22, it sounds like you're signaling that adjusted EBIT will be up in '22 versus '21. I understand hesitancy to give specific guidance.

But when you think about the range of possibilities, what are you most worried about in terms of being able to grow this year? And if there was surprise to the upside, where do you think you can see that potentially?.

The key variables, both to the upside as well as to the downside, would certainly be macroeconomic changes, geopolitical events and the impact that, that could have on growth, cost inflation and the price of oil and changes in assumed auto builds. And then lastly, of course, I think we'd have to mention COVID.

I think our hope is that we're kind of coming down the backside here with Omicron and hopeful that there's nothing beyond that and that we start to see overall business and global conditions get back on track to normal..

Thank you..

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

Good morning. Thanks for taking my questions. I guess just two questions. So first off, in Light Vehicle. I guess I've heard that maybe February, March -- we're already in February but I guess maybe March you guys would get a better picture. Some of the auto suppliers have been saying that they'd get a better picture on full year production.

Would you agree with that assessment? I guess, would you be able to see if that you get closer to that 83 number instead of your 79 forecast maybe in March?.

I think it's difficult to say. There's still a fair amount of variability around the forecast. It's possible that there's -- obviously, we'll have more visibility in March but I don't think there's anything magical, or in particular, specific information that's going to come out in March that's going to illuminate that.

I think it would just be the benefit of having a first quarter under our belt. And we recognize that we have taken a more conservative approach there to the first quarter but we think it's prudent to do so..

Great. And then just a quick one on free cash flow. '21, I think you've got a little bit of a working capital benefit that helped you preserve free cash flow guidance.

But how are you thinking about that for '22? Is there going to be a drag on working capital?.

Yes, we ended working capital as a percentage of sales at roughly 8% given potentially continued inflationary pressures as well as sales upticking. You could see a marginal uptick in working capital use..

Thanks..

Our next question is coming from the line of Laurent Favre with BNP Paribas. Please proceed with your questions..

Thanks and good morning, all. Robert, I've got a question on your ESG targets announced last week. In particular, we recognize all the efforts. But on the CO2 emission side, you seem to be very focused on Scope 1 and 2.

And I was wondering what prevented you from also tackling Scope 3, given that this is probably the majority of your total emissions?.

I think with regard to Scope 3, it's a walk before you run and we're going to focus on Scope 1 and 2 first and we're embarking on that. And then we'll begin scoping out our Scope 3 emissions as we go forward.

But in terms of the work that we've done, in particular, over the last year, it would have been too ambitious to put out a Scope 1, 2 and 3 target. That just requires a lot of coordination with all of the partners with whom you do business.

So obviously, for Scope 1, just coming from company operations and Scope 2 from purchased energies, that's a little bit more quantifiable..

And have you sized the incremental cost that you could incur, for instance, for renewable power supply, etcetera? Are those things part of your 2024 targets?.

So when we think about incremental CapEx related to get to some of the emissions goal specifically that we have, in particular, air as well as waste but I think here we're talking specifically air as it relates to greenhouse gases, that would be part of our normal CapEx spend.

And then in terms of the actual use of energy, our plan there is to use renewable energy. And we'll continue to purchase renewable electricity when it's cost effective. But we're also going to explore the use of on-site renewable energy generation unless the capital costs were prohibitive.

I think it's important to just highlight though, that depending on the evolution of the global energy markets, it's possible that we might need to purchase some carbon offsets to reach the carbon neutrality goal by 2040. But that would really only be after all of those other options have been fully explored and implemented.

I think we expect the size of the global renewable energy market to continue to increase and the sophistication of that market to continue to increase over the next many years..

And Laurent, just to put some quantifiable number. So our total energy spend is $30 million to $40 million on an annual basis. Electricity is a fraction of that. So that will be absorbed in our 2024 targets. No concerns as far as major impacts there..

Thank you..

At this time, we have reached the end of the question-and-answer session and I'll turn the call over to Chris Mecray for closing remarks..

Thank you all for joining us this morning. Appreciate your participation. We'll be available through the course of the day and beyond to answer any follow-up questions you have. Have a great day..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..