Greetings and welcome to the Axalta Coating Systems Fourth Quarter and Full Year 2020 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Chris Mecray, Vice President, Investor Relations.

Thank you and good morning. This is Chris Mecray, VP of Investor Relations. We appreciate your continued interest in Axalta and welcome you to our fourth quarter and full year 2020 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 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 these forward-looking statements. This presentation also contains various non-GAAP financial measures. In the appendix, we have 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 will now turn the call over to Robert.

Good morning and thank you for joining today’s call. I hope you and your families remain safe and healthy. I would like to begin by expressing my thanks and appreciation to all our Axalta team members globally. Our team has persevered through a very challenging year and our global team’s continued dedication, hard work and relentless focus on our customers has produced very impressive results. We look forward to discussing them with you today. As many of you are aware, last night’s earnings release was delayed from the original date of February 3. As quick background, we were made aware in January of a potential operational matter associated with production at certain North America transportation coatings customer sites involving certain of our products over a discrete period during the fourth quarter of 2020. Unfortunately, with the uncertainty of the financial impacts and responsibilities, we had to delay our earnings date to continue our evaluation and assess the potential financial impacts. At this time, we are still reviewing the matter and do not believe that any potential liability is probable and therefore have not recorded any charge in the results we are presenting today. Similarly, our Q1 guidance which we will discuss today does not take into account any potential liabilities so keep that in mind as you assess that guidance. As we continue to assess the scope, the root cause and associated responsibilities among various parties, we believe total costs related to this matter could be material and we believe total costs could be up to $250 million based on what we know today. This does not assume any potential insurance recoveries, which we would pursue if we incur a substantial loss ultimately resulting from this matter or the likelihood of insurance coverage. It’s important to point out that at this stage we are not certain whether we will have any material losses and what, if any, responsibility we might have relative to the other relevant parties. There will be additional disclosure in the Form 10-K that we will be filing. However, given the ongoing review, we are not going to comment further today. With that brief background, overall, the fourth quarter for Axalta witnessed superb operating execution. We posted strong operating margins and converted free cash flow at a record level, driven by a combination of ongoing volume recovery and success in executing on cost actions throughout the period. Similar to the third quarter, adjusted EBIT showed impressive year-over-year growth, despite the lower overall net sales result from our Refinish business due to the impact of COVID. For net sales, we saw a sequential growth of 4.6% versus the third quarter, indicating continued recovery across all of our end markets. Still, reported net sales decreased 2.2% year-over-year or 4% excluding FX tailwinds with the consolidated business still largely impacted by lower Refinish volumes. Fourth quarter net sales beat our guidance of a year-over-year decrease of 6.8%, with upside driven by strong underlying demand in industrial coatings and ongoing recovery seen in light vehicle within Transportation Coatings. As mentioned, quarterly operating profit was impressive, with adjusted EBIT of $205 million, up 18.4% versus $174 million from the prior year quarter. Adjusted EBIT margins also impressed, with an increase from 15.8% to 19.1% year-over-year. Beyond that, we posted adjusted EBITDA of $253 million, with a margin of 23.5%, also an outstanding near record level, and adjusted earnings per share of $0.58, a 38.1% year-over-year increase. Free cash flow for the quarter was another record of $256 million, and exceeded the prior year’s quarter of $248 million, driven principally by stronger EBITDA and excellent working capital performance as well as lower CapEx. Finally, we continued to reduce our net leverage ratio, which decreased from 3.7x at September 30 to 3.3x at December 31, which reflects the significant decremental COVID impact of the first half of 2020 operating results on the full year adjusted EBITDA calculation. A few notes on full year results. I’d like to highlight, our strong fourth quarter cemented the second half recovery following the dramatic second quarter impact from COVID-19, as a strong overall volume rebound was complemented by aggressive and successful temporary and permanent cost actions and cash flow actions taken by our team and executed with great speed. While adjusted EPS for 2020 of $1.33 fell shy of $1.80 in 2019, second half results easily exceeded prior year results in both quarters, despite ongoing lower net sales levels in both periods. Free cash flow was also strong and grew year-over-year in the second half. So strong, in fact, the full year free cash flow of $442 million was only moderately below the $475 million from 2019, despite the large volume headwinds and approximately $23 million of incremental cash interest related to the two debt financing actions we took in June and in November. As we closed out the year, we took an important step forward in positioning Axalta for accelerated growth. We hired two new business unit leaders for our Transportation Coatings and our Industrial Coatings businesses who are now driving execution and addressing new market opportunities for growth. We completed an organizational realignment to a global business unit focused model, which we believe will enable accelerated decision-making and growth. We also had solid execution on the restructuring that we announced in July. Finally, we have recently hired a new Head of Strategy and Business Development to drive our enterprise strategy and our M&A activities, as we actively pursue new opportunities for inorganic growth. We are all very excited about these recent actions. Moving on to business conditions, regarding the current demand environment, our businesses benefited broadly during the fourth quarter from continued recovery across most of the markets we serve. The pace of that recovery exceeded our expectations, and Refinish remains the sole end market that continued to see material COVID demand impacts in the period. For Refinish, total miles driven for countries with available data continued to improve through October, before slipping somewhat mid-quarter, aligned with the relative severity of country-by-country pandemic restrictions. U.S. traffic during the fourth quarter remained around 10% to 15% lower year-over-year, dipping somewhat later in the quarter, while Europe has slipped from stronger levels back to weaker trends in the last four to six weeks of the fourth quarter as a result of restrictions that remained in effect in the early parts of January and February. Traffic in Asia-Pacific is more variable, including strength in recent weeks in India and Australia. But there are some signs of slowing traffic in China, Japan and some Asian countries due to the incremental pandemic effects. In the fourth quarter, U.S. data suggest insurance claims were down around 19% in the period, while Axalta’s U.S. Body Shop customers saw better demand than this level. Overall, global demand reflected the increased travel restrictions put in place as the quarter progressed. That said we expect continued recovery for Refinish throughout 2021, aligned with the pace of vaccinations and post-lockdown travel recovery. This could actually even surprise on the upside within pent-up travel demand. For Axalta’s Industrial Coatings end market, demand trends were solid and even strong in many markets we serve. In the fourth quarter, all our Industrial sub-businesses grew net sales versus the prior year period, showing the resilience of this end market in the face of the pandemic and pushing new sales to new quarterly highs in many cases. Axalta’s performance also exceeded broader Industrial production metrics, with Q4 Industrial production up a modest 0.3% globally, though clearly better than the decrease of 2.5% in the third quarter. We experienced particular strength in our Energy Solutions, Coil, and Powder Coatings businesses, driven by broader industrial production recovery. Additionally, U.S. homebuilding and remodeling continued to support our wood business, which showed excellent growth in the period. Finally, strength in auto production was a tailwind for the Industrial segment demand. Forecasts of global growth in 2021 point to continued expansion for this portfolio of businesses. In Transportation Coatings, an ongoing V-shape recovery from lows in April and May continued to play out during the fourth quarter. Global water production increased 2.5% in the quarter versus the prior year, propelled by strong global demand and efforts to restock low dealer inventories. This growth was led by Asia-Pacific with a 4.3% increase, including a 5.9% increase in China. EMEA posted a modest 0.2% increase. Latin America saw a 3.5% increase and North America lagged somewhat, posting a 1.2% decrease due to the 12.8% lower volume in Canada in the period. Axalta’s business matched pace with these global trends, led by strength in the Americas and EMEA. Current industry forecasts call for a 13.4% increase in auto production for 2021, which we expect will support Axalta’s businesses well through the year. With the Commercial Vehicle end market, overall global truck production increased 11.3% in the fourth quarter, led by a 20.3% jump in Asia-Pacific, but also supported by an 11.3% increase in North America, which continues to be the largest part of our Commercial Vehicle business. This was offset somewhat by a 15.4% lower production in EMEA and relatively flat rates in Latin America. The current forecast for Class 4 to 8 truck production for 2021 calls for a 3.1% dip in global production. However, these forecasts indicate we could expect to see impressive 18.7% market growth, excluding China, with North America at 17.3%. Current demand indicators remain healthy across most regions. In the U.S., recent order rates have been excellent, while heavy-duty truck inventories remain at longer-term normal levels, supporting continued production rates. With that, I will now turn the call over to Sean for some additional comments.

Thanks, Robert, and good morning. As mentioned, our fourth quarter was marked by a continued recovery across nearly all end markets we serve, and we executed well in the period to exceed our targets for all of our key metrics. Net sales, down 2% year-over-year, were better than expected, as recovery in automotive, commercial truck and broad industrial markets progressed faster than expected. Performance Coatings fourth quarter net sales decreased 3.5% versus the prior year quarter, with Refinish decreasing 10.4%, offset partly by Industrial, increasing an impressive 8.6%. The Refinish result was still stronger than the third quarter levels as expected. Transportation Coatings net sales returned to growth in the period, increasing a modest 0.5% compared to the prior year quarter, driven by light vehicle growth of 2.4%, offset by commercial vehicle decreasing 6.7%, though notably better than the 22.5% drop seen in the third quarter, as truck production rates increased through the period on the back of strong orders. Product price mix in the fourth quarter was essentially flat at negative 0.2% on a consolidated basis, with no major deviations between the end markets. We have previously noted an expectation that price mix would revert positively in Refinish, in alignment with volume improvement. Price remains a positive driver within Refinish in the period though. Consolidated adjusted EBIT for the quarter was a very strong $205 million, coming on the heels of the record setting $210 million in the third quarter result and representing an impressive 18.4% growth versus fourth quarter of 2019. Performance Coatings segment level adjusted EBIT of $130 million increased 9.7% year-over-year, aided by tailwinds from cost actions as well as some help from variable input costs. Adjusted EBIT margin increased an impressive 220 basis points to 18.4%. Transportation Coatings segment level adjusted EBIT of $48 million nearly doubled from the $26 million result from the fourth quarter of 2019, also driven primarily by cost actions and moderate variable cost tailwinds. Adjusted EBIT margins increased an impressive 600 basis points to 12.9%, sustained by recovering volumes as well as the cost tailwinds previously noted. Adjusted EBITDA for the quarter was $253 million, a solid 8.6% increase from the prior year quarter, with associated margins of 23.5%, up 230 basis points from 21.2% in the prior year quarter. Fourth quarter adjusted earnings per share of $0.58, a 38.1% increase above the prior year’s quarter’s $0.42 per share represents another excellent result for Axalta. Regarding cost structure actions, we were very happy with the strong execution that led to exceeding our targets for the quarter and year. We delivered over $50 million of total cost savings during the quarter, while maintaining strong temporary savings that closed the year with an impressive $215 million in total savings as well as $155 million in incremental cash actions. Regarding our balance sheet and cash flows, we are very pleased that continued focus on working capital and cash actions through 2020 resulted in strong cash conversion through the second half of the year. Fourth quarter free cash flow of $256 million represented a quarterly record compared to $248 million in the fourth quarter of 2019. The strong fourth quarter free cash flow resulted in us ending the year with total liquidity still over $1.7 billion, even considering the approximate $200 million in debt pay-down in the period associated with our November debt refinancing as well as some incremental share repurchases of $25 million in December at an average price of $28.69. Our net leverage ratio was reduced to 3.3x at year end compared to 3.7x at September 30 and 4.0x at June 30. Our metrics, of course, still include COVID-19 impacts on adjusted EBITDA from the first half of 2020. Now, I would like to share certain of our expectations for the first quarter, knowing that this guidance does not take into account any potential impacts from the operational matter that Robert covered in his opening remarks. Regarding our financial outlook, we expect net sales in the first quarter to increase versus prior year by 3% to 5%, including expected favorable currency impacts, with most of our end markets remaining in positive demand trends. Refinish remains the key exception, impacted by travel restrictions, which we expect to persist in various geographies near term. That said, we believe that the business will track reductions and COVID-related restrictions, and we anticipate a solid recovery over the course of 2021. In light vehicle, there is a moderate impact during the first quarter from the industry shortage of semiconductors, which has restricted customer production at various sites in the quarter. Much of this lost production is expected to be made up primarily in the second half of 2021. We expect to generate adjusted EBIT of approximately $155 million to $165 million and adjusted diluted earnings per share of $0.40 to $0.45 per share in the first quarter, with the other Q1 metrics noted on our guidance slide. We are holding off providing full year 2021 guidance due to the continued uncertainty associated with COVID-related impacts, especially for Refinish. Still, our broader expectation is for the current global industrial expansion to continue this year. And we see a number of supportive elements in play, including global industrial production estimated at 6.3%, a continued strong U.S. housing market, light vehicle production growth estimated at 13.4%, strong growth of Class 4 through 8 trucks outside of Asia, which is the small market for us today, and a general economic recovery globally that appears to support Axalta. Axalta remains intensely focused on enhancing productivity and reducing our cost structure. For 2021, we expect to see structural cost savings of at least $50 million, which is inclusive of the restructuring announced last July. We also expect some temporary cost savings to persist into 2021, but will be dependent on the pace of recovery in certain of our end markets. We are mindful of the potential impact of inflating raw materials and logistics costs, which have been a factor now in spot market terms for several months. The coatings industry generally has been effective over time in overcoming raw material cycles, with appropriate adjustments to selling prices and Axalta is currently focused on passing through inflationary costs with price where applicable. Regarding 2021 capital allocation, we continue to expect strong free cash flow this year and fully expect use of capital to include M&A as well as opportunistic share repurchases. With that, we will be pleased to answer any questions. Operator, please open the lines for Q&A.

Our first question is from Ghansham Panjabi with Baird. Please proceed with your question.

Hi, everyone. Good morning. I guess, first off, on Refinish, I think in your press release, you had comments that Refinish volumes were down low double-digits in the fourth quarter. Can you just give us a sense as to how the quarter evolved from a volume standpoint on a monthly basis and what are you embedding specifically for Q1 as it relates to your guidance for auto Refinish?

In the fourth quarter, Ghansham, what we saw was the quarter actually started off fairly strongly and continued the positive upward trajectory that we had seen coming out of the prior quarter. Then about the middle of the quarter, with the additional lockdowns that were put in place in many countries around the world, we saw volumes kind of pull back in the second half of the fourth quarter. So, I think a couple of things we have learned there. First, once restrictions are lifted and particularly as we see a vaccine get rolled out as things get back to normal, I think we have got enough data now that we can really feel pretty confident that we are going to see that market recover quite nicely. But likewise, if we see the restrictions put in place, you can see the direct – kind of the direct impact there. In terms of the first quarter, overall, we expect to be kind of up low single-digits compared to the first quarter of 2020 due to the recovery in Asia-Pacific in particular as we start to lap kind of the initial start of the pandemic and then also see some favorable FX. Currently, the rest of the world is still being held back by restrictions impacting miles driven. And we are seeing U.S. body shop activity down around 15% to 19% currently, but our mixing volumes in terms of the amount of paint that we are mixing, which we can measure on our scales and on our systems is down by a smaller number than that. So, I think the body shops in the market that we serve there again are performing quite well. In EMEA, we are seeing miles driven down kind of 22% to 26% as a general guideline across kind of the bulk of the countries due to the impact of the second waves of COVID. But again, our mixing machine volumes are down far less than that. So, I think overall we continue to expect to see an impact in Q1, but we are optimistic on the outlook of the market given the vaccines that are being rolled out around the world and where that is happening, the pickup and driving that’s occurring there.

Okay, thanks. That’s very helpful, Robert. And then just second question, again, specific to auto Refinish, how should we think about mix evolving for that segment as the end markets start to recover more sustainably? You called out positive pricing, but sort of some level of volatility around mix. And then just for that business as it relates to your customers, just given the length and the ferocity of the downturn from a volume standpoint, how do you think that impacts your customers from a longevity standpoint as we kind of think through the recovery phase of this pandemic?

I think overall, our expectation is that as we see volumes return to more normal levels and we will see increased sales of some of our higher margin and higher priced products that we should see a positive impact on price mix there. That’s our expectation. And then as it relates kind of specifically to what we are seeing in the market from a shop perspective, I think we see the larger MSOs and larger shops continue to perform fairly well. We have however seen a marginal uptick in smaller shops that have been closing, primarily due to COVID-19. However, we also expect many of those shops will reopen and new shops will also spring up as the market recovers, but it’s important to highlight that the closures today may actually convert to new business for Axalta given that we have strong share overall. So, those smaller shops closed down and given sort of the weighted distribution coverage we have in particular across the U.S. and many other markets, we just expect that will go into a different sales channel for us as opposed to being lost sales.

And Ghansham, just one additional data point, as we think about our distribution customers, generally speaking, they are extremely mindful of working capital and not building heavy inventory. So, we continue to see inventories pretty thin in the channel. So, as we see demand pickup even further at the body shop level, we should see that direct impact.

Perfect. Thanks so much.

Our next question is with David Begleiter with Deutsche Bank. Please proceed with your question.

Robert, on – it looks like in Q1 the sequential decline is a little bit more than typical, is that due to the shortage on oil production and would that be roughly a $10 million impact, do you think, to Axalta in Q1?

Yes. And maybe just to start, I mean, what you are really seeing if you are looking at sequential sales, Dave, between Q4 and first quarter, what you are seeing is the big impact is really the sequential typical decline that we see in Refinish, coupled with the fact that we are still seeing some pullbacks with the certain countries with the pandemic resurging, but you are seeing roughly a 10% drop in sales for Refinish specifically, fourth quarter to the first quarter and again that’s partly seasonality and partly just the pandemic. As far as light vehicle, we are actually expecting a little bit of growth between fourth quarter and first quarter and certainly the semiconductor issue is going to impact volume there, but the bigger driver is Refinish, as I pointed out.

Okay. I will follow-up later on that. And just on the operational matter, Robert, when do you expect resolution on that matter and were there other suppliers impacted as well with this matter?

Given the ongoing review, we are not able to share additional information beyond what we have already disclosed. But there are other parties involved in the matter and we are working quickly to resolve it as quickly as possible. But in terms of providing an exact timeline in terms of how long it will take to resolve it, we don’t know at this time.

Understood. Thank you.

Our next question is with Bob Koort with Goldman Sachs. Please proceed with your question.

Thank you very much. Robert, I was wondering if you could give us some help. You gave guidance on the first quarter which would imply some nice margin expansion versus the year ago period. But then I suspect you start layering back in some of the costs that were temporarily removed. How should we think about – you talked about the raw materials starting to creep up? What should we think about in terms of gross margin or operating margin comparisons as you go through the rest of the year?

So I think there are two points I’d highlight there, Bob and Sean may have a couple of comments here as well. I think, first and foremost, given the uncertainty in the market, although we have an aggressive plan this year in terms of sales as well as investment at the company, we are being very prudent in terms of when and how we add additional cost or make additional investments. So essentially, we are going to be following what happens in the market from a demand perspective. So, we are not going to be putting those costs in ahead of overall recovery in demand that we see in the marketplace, of course, heavily driven by COVID. So, I think we are going to continue to be prudent in that respect and manage our cost structure as we see market conditions. More specifically, in the area of raw materials, I think given the currently inflated Brent crude levels, we do expect to see moderate raw material inflation during 2021 and we have got categories that are most likely to be impacted like solvents and monomers as those are closer to the wellhead and then others that are farther out, resins and other categories, may see less inflation. So I think we are going to continue to monitor that during the course of the year. And the move-up in terms of the price of oil that may flow over into some of the inputs is still something that’s relatively new. But as we have done in the past, when we see this coming, we of course adjust our pricing actions as well as look at additional cost actions that we can take to offset that raw material inflation. So, if this continues to be something that’s not just temporary, but appears to be a little bit more lasting, we will take corresponding measures.

And just add on the last part. Bob, just on temporary savings, we did about $25 million in the fourth quarter. I covered in my remarks, it’s really going to depend on the pace of recovery, but we are currently anticipating our guidance construct of $15 million to $20 million and additional temporary savings for the first quarter as we continue to be very focused on our cost structure.

And then I am a financial analyst and not a legal guy, but I found your disclosure on the discrete matter, very surprisingly worried that there is not a probable loss, but there is a reasonable possible loss and the next paragraph is kind of confusing. I know you can’t say much, but could you confirm at least whatever the issue was that has been rectified and you are still supplying said customer with material?

So, the issue relates to a discrete period of time and that has been since mitigated. So the issue itself is not recurring. On the accounting front, yes, there is a lot of accounting type language in there. And certainly, there is no bright line test, but probable general rule of thumb is around 75%. And that’s why we have used the language we are not at that probable stage. There is a reasonable possibility, but a lot is going to depend on the root cause and understanding those types of aspects before we formally conclude on whether we need a liability or not.

Thank you.

Our next question is with Chris Parkinson with Credit Suisse. Please proceed with your question.

Great. In terms of what’s in your control, can you speak to the pricing dynamics in both light vehicle and industrial in ‘21? Are there any new product launches that may assist in these discussions and your ability to get price mix? And also, have you noticed any changes among your key competitors given several management changes across U.S., European and Asian suppliers versus let’s say the ‘17 and ‘18 timeframe? Just anything to assist in our thought process and factor in anything that may be different this time around will be very helpful? Thank you.

Chris, as we look at the light vehicle business, I just would highlight that most of our indexes where we have index pricing are on a lag of about six to twelve months. So we would expect that in Q2 if we continue to see – given the raw material environment, if we see those prices go up that we would see prices move up correspondingly. Price outside of indexes are going to be achieved, as you point out, with new colors as well as leveraging services and we have a pretty active pipeline in the light vehicle business in terms of new colors, new products as well as expanding our service portfolio. And I think with some of the management changes and additions that we have made in that business, we are certainly focused on growing that business. And I think our team is going to be successful in doing so. And we have got about 25% of the overall transportation business that’s covered by raw material pricing, we have got another 35% that’s kind of fixed and then about 40% of the business that has kind of contractual language that allows us to discuss pricing. And our raw material indexes generally cover about 50% of the inflation impact on a six to twelve-month lag. So overall, just from some of the structural elements that are in place in terms of how we do business with that customer base, we have those mechanisms in place and that can kind of give you a general sense. And then as I mentioned, we have new colors, new products as well as expanding our service portfolio actually inside the light vehicle and customer vehicle plants themselves. And then overall, as it relates to the market, we haven’t seen any material changes in the market dynamics. It’s a competitive market. And those that have the best technology and the best service tend to win and we have outstanding technology and I think if not the best, one of the best service teams in the industry.

Got it. Thank you. And then just – you hit on this a little, but just in terms of your cost actions, can you just further speak to your ability to potentially make some of these temporary cost savings a little bit more structural in nature? And then also your ability to calibrate some of your regional cost structures to further grow volumes in emerging markets at a margin, let’s just say, at or maybe even slightly above segment averages. I know that’s been kind of a target on you guys just to further augment growth. So, just how should we be thinking about those factors over the long-term? Thank you very much.

So as we think about the temporary savings, the $15 million to $20 million we expect in the first quarter, I would say roughly half of that relates to travel and entertainment. I suspect, given the new world we live in, some of that will become more structural in nature, but the other aspects are really just cost containment around hiring when we see attrition and just general cost management around consulting spend. I do expect that we will have some savings there. But again, until we kind of see the pace of recovery, we don’t know truly what our run-rate is going to be, but I do expect some incremental benefits that will be more structural in nature. I think as we get into the second quarter, as we continue to see recovery, Chris, we will be better prepared to be able to actually quantify what we see as structural.

And on the second part of your question, Chris, obviously growing in emerging markets, and in particular, in Asia, is our biggest opportunity as an organization and we have a tremendous amount of resources and people focused on growing in those markets. But key to doing that is kind of embedded in your question is having the right cost structure and making sure that for each market you have a China for China approach from a cost structure or India for India type of cost structure. So, we look at not only manufacturing model, but also how we run supply chain, our indirect costs, as well as product formulation and local sourcing goes into that. And I think we have those pieces of the puzzle together. And we also have – in our two business leaders that have recently joined the company, we have two business leaders that have both lived and worked in China extensively. And I think we have the recipe of what we need to do there down. And I think you’ll also expect to see some increased M&A activity, in particular, in emerging markets for us to support our strategy and make sure that we are moving to and achieve the right cost model in order to be successful and have an attractive return on invested capital in those markets.

That’s very helpful color. Thank you both.

Our next question is with P.J. Juvekar with Citi. Please proceed with your question.

Yes. Hi, good morning. Robert, I want to drill down into the semiconductor shortage and its impact on auto production. How much do you think production will be down in the first half? And then on your Slide 12, you expect light vehicle production to grow 13.4%. If this semi shortage lasts, does that number need to come down? And then secondly, does this semi shortage impact pickup trucks and Class 4 to 8 trucks as well?

P.J., I think you got three questions in there, so we’ll – I’ll try and blend it all into one answer. Market forecasters are expecting an impact of approximately, at this point, 960,000 vehicles globally during the first half. And most of that shortfall, they expect to be made up within the year. Now as a supply issue, it will actually have relatively little impact in total vehicles sold over the course of the year and beyond. We believe that we’ll see a similar impact to financial results, with a moderate impact to transportation, especially during the first quarter, but we expect to make that up based upon what we’re hearing from our customer base in the second half of the year or if the situation goes on a little longer, well into the following year. Much of it depends a little bit on – kind of on region and then also product type. So in North America, as an example, we’re seeing very strong recovery, as you all have seen, particularly within the truck and SUV market. That’s being a little bit challenged by the semiconductor shortages, but many of our customers are, to the extent they have the ability to influence Tier 2 and Tier 3 suppliers in terms of where those chips are going, are trying to direct available chips to products where they have the highest margins. And those are trucks and SUVs. So I think we’ll see an impact there, but they are redirecting as much as they can chips to those particular product types. In Europe, the semiconductor shortage and also COVID-19 are putting pressure on the European market. They’re trying to build inventories to help with that. And of course, in China, the semiconductor shortages expect to have the biggest volume disruption within that region. And I would just highlight that for Axalta, we have a good market position there, but certainly nowhere near as large as North America and Europe. So the relative impact for us is a little bit less. So you put all that together, and I think, as we highlighted, the market is expected to grow by about 13%. But given our – in the first quarter. But given our customer mix and growth in certain product types, we’re expecting to grow in excess of that number. And kind of regarding Q1 specifically, there is just a lot of pent-up demand for vehicles in most markets around the world. And as we’ve highlighted before, we’re bullish on our light vehicle business. We think people are going to drive more, and they’re going to more frequently purchase vehicles in the post COVID-19 world, given concerns that consumers are likely to have around ride-sharing services and public transportation, and that includes both vehicle travel as well as air travel. So again, we see these as just minor hiccups in a secular trend that we think favors being in the light vehicle business.

Great, thank you with that. I will leave it there. Thank you very much.

Our next question is with Vincent Andrews from Morgan Stanley. Please proceed with your question.

Hi, it’s Steve Haynes on for Vincent. Thanks for taking my question. Just wanted to maybe come back to free cash flow, you mentioned you are expecting another solid year in 2021. So can you maybe help with some of the bridge items there, working capital, CapEx, and how we should be thinking about that?

So I mean we’ve limited our guidance for the first quarter, but probably the easiest way to think about working capital as a percentage of net sales, we finished 2020 at roughly 8%. We could see a little pressure there, maybe it ticks up 0.5 basis point to 8.5%. A little bit of pressure there is really the restructuring at the end of the year sitting in accrued liability, so we had roughly $56 million, and we would expect to spend the vast majority of that. And we could see a little pressure from raw materials perspective and inventory. But by and large, we should be in that 8% to 8.5% as a percentage of net sales. CapEx for 2020, our original guidance was $160 million. Actuals came in at $82 million. As we see continued recovery as well as our global ERP project, we would expect CapEx to uptick. Full year will probably be around $180 million, but we’ll give an update in the second quarter when we get more guidance for the year.

Okay, thank you.

Our next question is from Mike Sison with Wells Fargo. Please proceed with your question.

Hey, guys. Sorry about that. I was on mute. You mentioned you hired two new leaders for Transportation and Industrial Coatings. Can you maybe give us a little bit of the background on what you think they are going to do a little bit differently going forward?

Well, as you know, we changed and have changed our organizational model. Before, we had a structure of commercial business units, regions and global functions. And as a result of the model that we’ve shifted to, it is now a full, complete, fully integrated soup to nuts, gross sales to net income to free cash flow-driven business unit, with responsibility across all areas in each one of our businesses. So that also has necessitated a different type of leader with that type of a full P&L experience. If we take our new transportation leader, Hadi Yawata, Hadi comes from Volusia and has spent a great deal of time in the automotive industry and is very, very experienced, and not only experience in where the market has been or where the market is, but rather where the market’s going. And he has extensive experience in mobility solutions that we think is going to be a real difference maker as we chart our strategy in that business. And we’ll talk more about that at our Capital Markets Day here in the spring. And you’ll hear more about that change in direction and some of the exciting things that we have there that we think are going to lead to an increase in growth. With regard to Shelley Bausch leading our Industrial business, Shelly has a very impressive career in the broader industrial sector at several companies, including formerly a coatings company, but also Dow Chemical and also a recent industrial company that sells a real diversity of products. And she has a track record of really going after and growing in new markets, both organically and inorganically. And I think that’s important, because in the industrial part of the coatings space, it is a buffet, and you can literally be tempted to want to eat everything. And we’re going to be very deliberate in terms of specific markets within industrials where we go. And there are also adjacencies that are still within the industrial coating space or slightly outside of coatings that leverage a lot of the capabilities that we have within the organization from a technical perspective in particular. And Shelly also has a great deal of experience in mobility and across the electric value chain that I think is going to be invaluable to us as we execute our strategy.

Great. And a quick follow-up, when you think about acquisitions, where do you think Jeremy is going to be focused on and how much of your balance sheet you are willing to lever up to get the right deals?

There are attractive acquisitions – acquisition candidates in each one of our businesses. And Jeremy will be focused on going after, together with our leadership teams, each one of those attractive candidates within all three of our businesses. And I think you should expect to see some pretty significant progress on that over the next 12 months. And I think we are excited about some things that we are currently working on. And in terms of leveraging our balance sheet, I think we will continue to be – manage the company financially in a very prudent manner. And I think we’ll also continue to be valuation disciplined. But again, a lot of the deal flow that we have and things that we focus on are proprietary situations and not necessarily part of large public processes where you can see valuations get completely out of hand and to a level that just doesn’t make any sense.

Our next question is with John Roberts from UBS. Please proceed with your question.

Good morning, guys. In Refinish, there appears to be an abnormally high dispersion in performance among competitors. One competitor has actually been up. I think another has been down a lot more than some of the others. Do you think there is a structural shift going on or do you think that’s just different timing in the channel inventory effects between competitors? And any thoughts on that dispersion would be appreciated.

Difficult for us to comment specifically on what’s driving the performance of individual competitors there, I think, obviously, geographic mix is a heavy component, channel mix in terms of – whether you’re with large MSO independence, more of a small body shop focus matters, also the segment of the market, whether you’re more premium mainstream or economy, plays in there as an important variable. So there are a lot of variables there that can drive differentiated performance. In the case of Axalta, we’ve been taking into account, obviously, the pandemic impact over the past 12 months. I couldn’t be prouder of what our Refinish team has accomplished and the number of changes and adjustments that we’ve made to make sure that our customers continued to be well served and successful as well as growing the number of new customers that we have and building out our portfolio of products as well as services. And you will – again, you will hear more about some of the things that we’re doing there in our spring Investor Day, and I think we are excited to share some of the things that we’re working on.

And then secondly, it would seem globally, we’ve had a harsh start to the first quarter weather-wise, not just Texas in the U.S. but Europe as well. And I think last winter was relatively mild. Do you think weather is going to affect the comp in Refinish? And would it be later in the March quarter or would it be in the start of the June quarter since distribution could create a lag here?

I always kind of hate to comment on weather, just as an excuse or as an explanation for outsized performance, but to your point, it can indeed cause incremental volume. So, if we see increased accidents because of the weather, and hopefully, again, none of those are hopefully serious. But as we do see increased accidents, typically, you would see that in a few months later as cars actually go in to be repaired. So historically, when we’ve seen a tough winter or a lot of snowfall and sleet and ice and so forth, you will see accidents in the December, January, February timeline and some of those get repaired in March. Some of that doesn’t really get repaired till April, May. So if you were going to see a bump, you would probably see a little bit of it in the first quarter, but you might see more of it in the second quarter.

Great. Thank you.

Our next question is with Kevin McCarthy from Vertical Research Partners. Please proceed with your question.

Good morning. Robert, in Transportation Coatings, there is an awful lot going on in terms of the pandemic dovetailing into the semi shortages that you commented on. If we were to boil down all of those issues and attempt to look through it, do you think your market share in light vehicles increased, decreased or trended about flat in 2020? And how would your answer differ by region if there are material differences there?

As you point out, there are a lot of variables there and there is a lot of noise. I think the best assumption there would be that market share is most likely been relatively flat.

Okay. And then as a brief follow-up, if we look ahead to 2021 and take into account the operational issue that you cited, do you expect any meaningful changes in your North America share resulting from that or any share shifts that are on your radar screen for other regions as well?

We’re working collaboratively with all the relevant parties involved in the matter. And at this point, we’re not aware of any future business loss associated with the issue.

Okay. And other regions stable enough?

This particular issue is confined to North America.

Understood. Okay, thank you very much.

Was your question more globally though, outside of that, just how the business is doing this year?

Yes.

We absolutely are working across the business in transportation on opportunities. And there are opportunities where we have taken new incremental business during the course of 2020 as well as in 2019 that will begin to actually hit positively net sales in 2021. And that’s true, in most of the areas that we look at, certainly, we’ve gained some business in the truck market. There is business that we picked up in China that’s going to benefit us this year, that we picked up previously. And there are a couple of minor losses that we experienced with the customers that have shut down sites here and there, and that counts as a share loss even though it’s not a competitive loss. But overall, you should expect that Axalta is working towards share gains in transportation this year and going forward.

Nice to hear. I appreciate the additional color, Chris.

Our next question is with Alex Yefremov with KeyBanc. Please proceed with your question.

Thank you. Good morning everyone. Robert, you have discussed your current pricing strategy. Could you describe how you have changed the way you price your product since the last time there was raw material inflation in 2016 and ‘17?

I think our overall approach to pricing, approach as well as strategy, remains unchanged. The only potential change maybe since the last kind of raw material cycle in the 2018 period is that we have a larger number of contracts that are now indexed. And that was one of the specific goals that we had in our transportation business was to move to more indexed contracts so it’s not to have to enter into and take up so much time in those discussions around price, either coming from raw material inflation, or in certain markets, from significant moves in foreign exchange.

And just a quick follow-up, Robert, I think you mentioned your current agreements cover about 50% of raw materials inflation. Do you recall what that number was the last time we had a raw material cycle?

Yes. It’s – as far as transportation goes, the number is probably closer to one-third as far as the contracts that are indexed, there was probably a 10% to 15% uptick through the ‘17, ‘18 period as we work to further index.

So I think just – just to clarify, because your question, I think I might have misunderstood what I said in the answer to a previous question, which is that we have about 25% of the business that’s covered by raw material indexing. But what we said was that raw material indexes generally recover about 50% of the inflation impact over a six to twelve-month period, that the 50% is not the percentage of contracts that are actually covered by indexing.

Understood. Thank you.

Our next question is with Arun Viswanathan from RBC Capital Markets. Please proceed with your question.

Great. Thanks for taking my question. I guess I wanted to ask about the cadence of the quarters here. Just given what you said about the chip shortage and your belief that the year still follows this – a normal route and that chip shortage is made up, does that imply that maybe the demand gets fulfilled in second and third quarter or third and fourth quarter? I know you faced some tougher comps in light vehicle in the third and fourth quarter, but does the chip shortage actually alleviate some of that?

It will. I mean we are expecting the $960,000 current forecast for the shortage for the first quarter to be largely made up in the second half of 2021. The first quarter, I think, seasonally, typically starts off a little slow, but year-over-year for the first quarter, from an LV build perspective, we’re still expecting to be up about 12% globally as it relates to industry forecast. And for the full year, we still expect – and again, what IHS is saying is the full year to be up about 13.4%. So we expect the steady ramp-up through the year.

And what about commercial vehicle, could you just elaborate on your outlook there, especially given maybe some extra pull on logistics globally, have you seen any response from OEMs to increase production due to that? Thanks.

Specifically, in the heavy-duty truck portion of the market, last year, when we talk more broadly, just commercial vehicle broadly, we continue to see a strong recovery from COVID-19, especially within the heavy-duty truck market, the other transportation portion of the market fares a little differently just depending on the segment. So for example, bus production is a little bit weaker, while other segments, such as sporting equipment and recreational vehicles and then body builders, have been strong. And so far, we’re not seeing any impact of the semiconductor shortage in these markets. So overall, we’re pretty positive on the direction of the commercial vehicle market for 2021.

Thanks.

Our next question is from Steve Byrne with Bank of America. Please proceed with your question.

Thank you. With respect to the Refinish business and the pandemic-driven slowdown in that end market, have you seen any changes in behavior of your competitors, such as getting more aggressive on pricing or investments in body shops to pick up market share as a result of the slowdown?

In the market, we haven’t seen many changes, frankly, because of COVID. We and I imagine our competitors as well have been very much focused on ensuring that our customers have product and helping them manage to slightly lower inventory levels, which has made, from a logistical perspective, us helping and working with them to make sure that they are supplied kind of when they need it and helping them manage their cash flow. That was definitely true during the – kind of the Q2 period. But really for the body shop, it’s all about the productivity that they are able to achieve with the products in their – in the body shops and also the technical service that we provide to them. And so I think we have continued to focus on making sure that our customers have the paint that they need when they need it and also keenly focused on providing technical support. And in some cases, due to COVID, they have had painters or other members that are key in the painting process may be out for periods of time. And we stepped in and helped our customers. And I think again, I am very proud of our Refinish team in how well they have been able to service all of our customers around the world.

And just real quickly, Robert, would you expect the MSOs to invest in new body shops to pick up the void that some of these smaller shops have shuttered as a result of the pandemic? And if so, would you invest with them?

So far, I think what I would expect to see is, if a smaller body shop shuts down, the MSO doesn’t have to step in and buy that body shop in order to get that business. That business will just naturally flow to other body shops. And those could be independent body shops or those could be MSOs. So it’s just volume moving from a shop. And again, I think this is a relatively small percentage of the market where this is happening, as we’ve discussed. But if there are plant body shops that permanently or temporarily close, that volume stands up going to other body shops. So MSOs don’t have to step in and make acquisitions in order to benefit from that higher volume. So I don’t think we would expect to see a big pickup in shop acquisitions during this time period.

Our next question is with Paretosh Misra from Berenberg. Please proceed with your question.

Thank you. So I realize semiconductor chip is not your core business. But just based on your conversation with the OEM customers, do you get the sense that the chip shortage issues are already getting better in any region or for certain products or things haven’t really changed much in recent weeks?

I don’t know that we have much insight into any recent changes. Based upon what we’ve heard in the last few weeks, each one of our customers is working that issue. And how they are working it depends a little bit on the region of the world where they are particularly focusing on selling vehicles as well as the particular vehicle platform and some of the affected suppliers. But what we have seen is certainly them trying to be flexible and make sure that, to the extent that they can influence which chips make it into which systems that end up going into which vehicles, that they are really focusing on products that are under – have the highest demand as well as the highest product margin.

Got it. Thanks. And then can you talk about the growth prospects for your Energy Solutions business, how much of that is electric vehicles?

We are very optimistic about our Energy Solutions business. Our Energy Solutions business, as you know, are of various coatings that go on electric motors and other electronic applications. And that business today, which, of course, goes on electric motors that – if any of the 100 to 200 electric motors in any given vehicle as well as electric cars themselves. And we’re teamed up with a number of really critical key players in that market. But we have an opportunity to grow that business to be much larger than what it is today currently. And that is a keen area of focus of our industrial team. So I think you should look to hear more about that business. And I think you’ll also see us invest more in that business given how strongly positioned we are there and what some of the market trends are as we go forward.

Our next question is with Laurent Favre with Exane. Please proceed with your question.

Thank you. Good morning. Just one, please. On the cost-cutting side, Sean, you have mentioned that the temporary savings would follow, I guess, the pace of recovery in terms of the reversal. Can you talk about the cadence of the other structural savings you started to add some, I think, in H2 of the more recent program. Can you talk about how we should think on – about that on 2021? Thank you.

Yes. So what we quantified in our opening remarks, Laurent, was $50 million in Axalta structural savings. They will come in fairly ratably over the course of the four quarters. There is a little bit of a ramp as we move through to Europe – as we move through the year, but generally speaking, it’s 25%, 25%, etcetera, etcetera, for the $50 million as we progress through the year.

Yes, and I think what you’ll see too is as we continue to see recovery in some of our end markets as we move through the second half of the year, I think you’ll expect our team is aggressively working to pursue new opportunities, both in existing customers and new customers.

Ladies and gentlemen, we have reached the end of our question-and-answer session, and I would like to turn the call back over to management for closing remarks.

Yes. Thank you all for joining us this morning. We are available over coming days to answer any follow-up questions you may have. Appreciate your interest. Have a good day.

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