Ladies and gentlemen, thank you for standing by. Welcome to Axalta’s Q4 and Full Year 2023 Earnings Call. All participants will be in a listen-only mode. A question-and-answer session will follow the formal presentation by management. Today's call is being recorded and a replay will be available to February 15. 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 Evans. Please go ahead, sir.

Thank you and good morning. This is Chris Evans, VP of Investor Relations. We appreciate your continued interest in Axalta and welcome you to our fourth quarter and full year 2023 financial results conference call. Joining me today are Chris Villavarayan, CEO and president and Carl Anderson, CFO. We released our quarterly financial results this morning and posted a slide presentation to the investor relations section of our website at axalta.com which we will be referencing during this call. Our prepared remarks, the slide presentation, and our 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 these forward-looking statements. Our remarks and the slide presentation also contain various non-GAAP financial measures. In the appendix of the slide presentation, 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 will now turn the call over to Chris.

Thank you, Chris. And good morning, everyone. This was another great quarter for Axalta. I'm pleased that we met or exceeded all targets for our full year guidance. And I want to thank the entire global team for their dedication and strong execution. Q4 net sales increased 5% year-over-year to $1.3 billion with positive contributions from both segments. Volumes improved 2% year-over-year, led by a 9% growth in Mobility coatings. This represents our seventh consecutive quarter of mobility volume growth as auto productions have normalized from historic lows, and we have successfully repositioned our portfolio with some of the fastest-growing automotive OEMs. Price mix was a 1% year-over-year improvement, with pure pricing approximately 3% better year-over-year when excluding mix effects and one-time pricing realization. All end markets contributed to better year-over-year pricing gains. This was a great achievement for our commercial teams and a demonstration of our ongoing emphasis on pricing realization. Going forward, we will remain disciplined as we face pressure from higher labor costs and strive to restore margins to historical levels. Adjusted EBITDA increased 21% year-over-year to $251 million and adjusted EBITDA margins improved by 250 basis points to 19.3%. I would like to now review some of our key accomplishments from the past year on Slides 4 and 5. 2023 was a tremendous year for Axalta, during which we achieved record net sales and adjusted EBITDA. Net sales were $5.2 billion, 6% better versus 2022, with all end markets reporting positive price mix growth. Mobility Coatings volume growth of 10.6% was supported by normalization of global auto production and further supplemented by new business wins, particularly in China. We have made substantial investments to support growth with local Chinese OEMs over the past several years, as exemplified by the opening of our new manufacturing site in Jilin. We continue to see this region as an attractive long-term opportunity for the business. However, strong growth in Mobility Coatings was balanced by volume weakness in Performance Coatings that were centered around soft construction activity within our industrial end market. Yet, Refinish remains a very attractive and resilient market. The team delivered another excellent year with over 2,500 net body shop wins, expanding on our leading position. Altogether, we remain focused on what we can control and are committed to profitable growth initiatives that reinforce the foundation of Axalta. To that end, I'm excited that during 2023, the technology team was honored with several awards for the incredible new innovations we produce for our customers. New offerings such as Axalta Irus and NextJet are critical to support our long-term growth ambitions. Lastly, we completed the acquisition of André Koch, a Swiss Refinish distributor. This strategic acquisition positions us well in the attractive Swiss auto aftermarket and brings us closer to our body shop customers. Early results have been promising. We're on track with the integration plan and see lots of opportunities for growth including in non-paint accessories. My main focus since joining Axalta has been to drive improved efficiency and performance across the enterprise. We have made progress on both fronts this year. I'm excited to report record annual adjusted EBITDA of $951 million, an improvement of 17% year-over-year. This was an incredible achievement for the team and an early reflection of the transformational journey underway. All four end markets delivered improved earnings and profitability versus 2022. Refinish had another solid performance with the third consecutive year of achieving record sales and earnings. In both light and commercial vehicles, we have made incredible progress after several years of market challenges. Mobility Coatings' second half adjusted EBITDA is now consistent with 2019 run rates, setting us up well for 2024. And lastly, Industrial earnings improved versus 2022, despite volumes being almost 20% below 2021 levels. The entire enterprise is delivering on our stated goal to drive profitable growth, and we're making progress towards a return to historic margins. Full year adjusted EBITDA margins improved by 180 basis points to 18.4%. During the year, we drove urgency and speed with our productivity and purchasing initiatives, which we believe accelerated the capture of incremental benefits, in addition to deflationary gains. We're driving growth in areas with attractive returns while selectively shedding others that don't meet our margin threshold. Free cash flow was another bright spot. We ended the year at near record levels and drove inventory reduction while benefiting from increased operating earnings. 2023 adjusted diluted EPS of $1.57 improved by 6% year-over-year. For the first time in the history of Axalta, we ended the fiscal year with net leverage below three times and plan to continue to strengthen the balance sheet going forward. We demonstrated significant improvements in our operating performance and ended the year significantly more profitable than we started. While Axalta’s transformation is just beginning, I'm encouraged by the pace of progress. Our teams are focused on the right objectives, and we're winning together as One Axalta. As we exit 2023, I'm encouraged by the trajectory of our core markets and excited about the investments being made across the business. I believe we're well set up as we head into 2024 after a solid fourth quarter and a transformational 2023. I will now hand the call off to Carl to review our financial results.

Thank you, Chris. And good morning, everyone. Before reviewing our financial results in more detail, I would like to highlight that we have changed our primary reporting metric from adjusted EBIT to adjusted EBITDA. The change was made to reflect the way we measure the financial performance of our two segments and allocate resources, as well as more closely align to the design of our long-term incentive plans. We have provided historical reconciliations in the appendix of the press release. Let's turn to Slide 6. Fourth quarter net sales increased 5% year-over-year to $1.3 billion, with positive sales contributions from both segments. Consolidated volumes were up 2% year-over-year, and strong Mobility Coatings growth more than offset declines in Performance Coatings. Price mix improved by 90 basis points compared to the prior year period. The pure pricing benefit was approximately 300 basis points higher compared to last year, but was partially offset by negative mix and a challenging comparison from the fourth quarter of 2022. Adjusted EBITDA in the quarter was $251 million, a 21% increase from $208 million in the prior year period. Adjusted EBITDA margin improved by 250 basis points to 19.3%. Unit rate variable costs were approximately 12% lower year-over-year, with improvements across nearly all categories, marking the third consecutive quarter of realized deflation. Supply/demand imbalances in isocyanates, monomers, and epoxy resins helped drive a large portion of the benefit. We are also pleased with the additional savings driven by the productivity initiatives we launched last year, which enabled us to improve negotiating flexibility in contract terms. We believe that the favorable raw material environment will continue into 2024 with comparisons strongly benefiting the first half of the year. Yet, as Chris highlighted earlier, we will remain disciplined in managing our cost structure as we go forward. Finally, adjusted diluted earnings per share increased 13% year-over-year to $0.43 despite significantly higher interest expense. Moving to Slide 7. Performance Coatings’ fourth quarter net sales improved by 4% year-over-year to $849 million. Refinish organic net sales improved by a mid-single digit percent compared to the prior year period with positive price mix and volume. This was the 12th consecutive quarter of positive year-over-year net sales growth, and we ended the year with record annual Refinish earnings. Industrial organic net sales were mid-single digit percent lower year-over-year as positive price mix was more than offset by lower volumes, principally due to weaker activity in the North America construction market as well as from the strategic decision to exit certain customers. We see early signs of stabilization. However, demand appears at this time to be relatively muted in the early parts of 2024. Despite lower reported volumes amid a soft macroeconomic backdrop, the industrial team improved margins considerably year-over-year through cost management and pricing discipline. Performance Coatings fourth quarter adjusted EBITDA was $192 million versus $169 million in the prior year period with solid contributions from both end markets. Segment adjusted EBITDA margins improved by 200 basis points, led by favorable price cost dynamics, which more than offset lower volumes in industrial and higher variable labor costs. Turning to Mobility Coatings’ results on Slide 8. Fourth quarter Mobility Coatings’ net sales increased 7% to $449 million year-over-year. Light vehicle organic net sales increased by a mid-single digit percent compared to the prior year period. Volumes were once again very strong, led primarily by above-market growth in China. The UAW strike in North America ultimately had limited impact in the quarter. Our expectation for global light vehicle production in 2024 is relatively stable following the strong recovery in builds over the past two years. Over this time, the team has done a great job in diversifying our sales mix and positioning us favorably with the fastest-growing OEMs. Price mix declined year-over-year driven by negative mix impacts and the absence of a one-time price benefit we realized in the fourth quarter of 2022. However, pure pricing was up low single digits versus the prior year. Commercial vehicle organic net sales improved by a high single-digit percentage compared to the fourth quarter of 2022. The year-over-year improvement was led by low-teens volume growth in Latin America with sustained strong demand in North America. We expect North America Class 8 truck demand will decline modestly in 2024 as we are encouraged by elevated backlogs and positive comments from our large customers who see less downside than third-party industry forecasters. Mobility Coatings adjusted EBITDA improved to $59 million from $39 million, a 50% increase year-over-year. Adjusted EBITDA margin improved by 380 basis points to 13.2%, driven by lower variable input costs and robust volume growth. Turning to Slide 9 for a review of our full year results. Net sales grew 6% year-over-year to $5.2 billion, a new company record. Net sales improvement was driven primarily by positive price mix contributions across every end market. Volumes were down modestly on a full year basis as growth in Mobility Coatings was offset by a slight decline in Performance Coatings. Adjusted EBITDA was $951 million, a $141 million improvement and a new company record, as favorable price and raw material trends offset headwinds from increased productivity investments and higher variable labor expenses. The contribution from Mobility Coatings to adjusted EBITDA growth was substantial, improving by nearly $100 million versus the prior year period. Adjusted EBITDA margin improved by 180 basis points to 18.4%, with a notable step-up in the second half of the year to 19.6% versus 17% in the first half. Adjusted diluted earnings per share increased by 6% to $1.57 despite a $74 million interest expense headwind, a modestly higher tax expense, and $23 million in exchange losses stemming from the revaluation of assets denominated principally in the Argentinian peso and Turkish lira. We have recently taken action intended to mitigate foreign exchange risk in Argentina going forward. Free cash flow of $447 million increased by 174% compared to the prior year, led by higher operating profit and targeted working capital reductions stemming from mid-year productivity initiatives. As a result of the stronger operating results, we ended the year with a substantially improved balance sheet. Turning to Slide 10, we ended the year with $1.2 billion in total liquidity, including a cash balance of approximately $700 million. Our total net leverage ratio ended the year at 2.9 times, nearly a full turn below last year and our best-ever year-end leverage ratio. Capital outlays in 2023 amounted to over $500 million, balanced between $214 million of gross debt reduction, $138 million in capital expenditures, $106 million in M&A, and $50 million in share repurchases. Going forward, we expect to modestly increase internal investments in CapEx, net of a significant decline in ERP-related spending in 2024, with an emphasis on improving return on invested capital. We see many value creation avenues for capital allocation, including further gross debt reduction, opportunistic share buybacks, and accretive M&A and strategic opportunities. During the fourth quarter, we refinanced our 2025 senior notes set to mature in January of '25 with approximately $500 million of new notes with a maturity date of February 2031. As a result of this refinancing, we do not have another bond maturity until 2027. Our plan is to keep interest expense flat in 2024 despite the net increase in interest associated with the bond refinancing. Available offsets include gross debt reduction, interest rate derivatives, and the option to reprice our term loan at potentially favorable rates. We intend to continue to strengthen our balance sheet and believe deleveraging is one of the most important value creation levers for Axalta in the near term. The high end of our target net leverage of 2.5 times should be achievable in 2024 through natural deleveraging and disciplined capital allocation. I will now turn the call back to Chris for our 2024 financial guidance and closing remarks.

Thanks, Carl. Let's turn to Slide 11. I'm proud of the team for executing well and driving record 2023 financial performance. I see considerable opportunity to build from here and fully expect us to achieve another record year of earnings in 2024. Net sales in the first quarter are expected to be approximately flat year-over-year. We project volumes and price mix growth to be modest and roughly balanced for the period. First quarter adjusted EBITDA is projected to be roughly 13% year-over-year to approximately $240 million, with the majority of the improvement supported by margin growth. First quarter adjusted diluted EPS is expected to be roughly $0.40. Full year net sales are expected to grow by a low single-digit percent year-over-year with positive contributions from both segments. As for the end markets, we assume a stable refinish environment with upside opportunity for Axalta as we continue to drive body shop wins and further penetrate non-paint accessories. In industrial, we expect volumes to remain at current run rates through the year as we do not yet see signs of an upturn. For light vehicles, we assume flat global build rates following a strong production recovery in 2023 and expect Axalta to slightly outperform driven by the business wins and mix. Price mix is expected to be positive net of any RMI impacts. And lastly, in commercial vehicles, we assume North American Class 8 builds will begin to slow midyear before demand ramps back up in 2025 and 2026, ahead of new emission standards being implemented in 2027. Full year adjusted EBITDA is expected to be between $1.01 billion and $1.05 billion, equating to adjusted diluted EPS between $1.80 and $1.95. We foresee a typical quarterly earnings cadence with seasonal strength in the middle of the year. Guidance includes a mid-single-digit variable cost deflation tailwind that is first-half weighted. Full year free cash flow is expected to be between $400 million and $450 million in 2024. The midpoint of our range assumes increased capital expenditures and less of an improvement from working capital after a significant one-time benefit of reductions we saw in 2023. I believe that we are well positioned to deliver on these commitments as we continue to drive Axalta to new record levels of sales and earnings. I'd like to invite everyone to an event on May 15, where we intend to introduce our three-year strategy. For more details and registration information, please refer to our IR website and the save-the-date included in our Q4 presentation materials. Thank you for joining us today. This concludes our prepared remarks. Operator, please open the lines for Q&A.

Thank you. We will now conduct a question-and-answer session. Our first question is from David Begleiter with Deutsche Bank. Please proceed with your question.

Hey, good morning. Chris, can you discuss in Refinish your expectations for pricing in 2024?

Yeah, good morning, David. We are still aiming for mid-single digits, specifically low to mid-single digits pricing as we consider our performance from last year and our outlook for 2024.

Very good. And can you discuss just also anywhere in the portfolio you're seeing pricing pressure that might impact 2024?

That's a great question. So far, as I see the portfolio, the industry is being quite disciplined. I think we're all facing the same pressures, whether it's labor or uncertainties moving forward. A lot of the recovery we have seen in pricing has been a result of making sure that we're all pricing for value, and we can see that benefit. That said, I would say on the industrial side, we are seeing some pressure in Europe. However, as I think about our portfolio, we will stay focused on driving the value we provide for our customers.

Thank you.

Our next question is from John McNulty of BMO Capital Markets. Please proceed with your question.

Yeah, good morning. Thanks for taking my question. It seems like in addition to price raws mix, you've made some decent headway early on in kind of efficiency improvements and that type of thing. I guess, can you call out some of the bigger items there and how we should be thinking about how that may continue as we look through 2024?

That's a great question, John. When I joined a year ago, we talked about the purchasing initiatives we had in place. These initiatives have been beneficial, especially in Q4, where we saw a 12% reduction in material costs. If you consider that a portion of this is what the industry refers to as deflation, we definitely outperformed our larger competitors. It’s encouraging to see this performance, and it was rewarding for our purchasing teams to collaborate closely with our suppliers. As you know, we managed to reduce costs by about $650 million over the past two years, which really allowed us to capture these benefits. This process began around mid-year, and as we noted on previous calls, it involved managing our inventory effectively, which positively impacted Q4. Looking ahead to 2024, we aim to establish agreements that will enhance our resilience against market fluctuations. We anticipate low to mid-single-digit deflation rates throughout 2024.

Got it. Fair enough. And then just maybe like a small one on the industrial side. It sounds like you walked away from some business. I guess, how should we think about what that sales impact would be as we look at 2024? Is that something of note where it's a few percent? Is it kind of a rounding error? How should we think about it?

I would describe it as low to flattish, specifically in the low to mid-single digits. Our guidance indicates that we anticipate the overall business to grow by flat to mid-single digits, primarily leaning towards the mid-single digits. We are confident that we will continue to see growth in Refinish and expect to grow in the auto segment, even with the market showing flat conditions. We believe we will gain market share in China as we keep winning there. However, for the industrial sector, we expect a decline in low-single digits, particularly with potential CV impacts later in the year.

Got it. Thanks very much for the color.

You're welcome.

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

Yes. Good morning. Chris, can you speak to the amount of variable cost deflation in the fourth quarter? And what your outlook would be for raw materials and variable costs in 2024?

I'm going to start and then probably hand it over to Carl. We certainly saw, I would call it, a low single-digit to double-digit performance in variable cost performance at 12%, as I mentioned in the prepared remarks. But I’ll turn it over to Carl for insights on what we see going forward.

Yeah, good morning, Kevin. As we look for 2024, we expect probably about mid-single digits in most of our commodity spend. I think that will be front-loaded, so we should perform a little better in the first half of the year. The comparisons will become tougher as we approach Q3 and Q4. For the full year, we anticipate about mid-single digit deflationary benefits from our spend.

Very good. And then as a second question, Carl, you noted in your prepared remarks the progress that you've made on the balance sheet. What are your latest thoughts on capital allocation in terms of kind of reinvigorating some repurchase activity, what you're seeing in the private market but also potential to establish a common dividend at some point?

Well, first, obviously we're pleased with having leverage sub-three at 2.9 times. If you look at the guidance we provided, we will be right in line at the top end of our target range by the end of this year. This does provide us a little more flexibility and optionality in how we deploy capital. Share repurchases will definitely be part of the overall strategy as well as M&A. As Chris pointed out, we had the acquisition completed in the fourth quarter in Switzerland. We will look to deploy capital where we can see those types of accretive deals, especially in the Refinish sector. Overall, we are just pleased because I think the balance sheet now offers us lots of flexibility going forward.

Thank you.

Thank you.

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

Yeah, thank you. Is the 9% EBIT margin in mobility where you're presenting it as more of a 13% EBITDA margin? It seems like it’s back to where it was historically. Is this the new normal? Does this have some meaningful upside, from something other than just projecting auto build rates and commercial vehicle build? If there's anything that you're doing in mobility that could drive a real change, whether it's technology or some kind of structural change, anything that you would highlight is giving you more optimism than just a 9% EBIT margin.

It's a great question, Steve. I wouldn't call it the new normal. The Axalta has grown by about $1 billion of revenue over the last four to five years. The challenge has been to convert it back to historical margins. I believe there's more upside in what we can do both structurally and in growth in other regions. Investment-wise, we've talked about a $35 million increase in capital investment that can drive productivity initiatives in this business. This is a part of what we plan to discuss in our May strategy meeting, detailing what more we can do with this business.

And then one question for you on the industrial exposure in construction. Do you have visibility into distributor inventory levels of products that your coatings were a part of? Do you have a view as to whether those inventory levels in the channel are normal now? Or is there a share loss or gain? Anything that you can comment on that?

I would say that consistently, with the exception of businesses we've decided to exit, our market share has been in line with prior levels. That said, inventories at our customers or within distributors are low compared to historical levels. If the market picks up, especially in North America, there is potential for upside. Good news is that our wood coatings business is seeing all major customers investing heavily in capacity, with about $1 billion in investments announced for new plant constructions over the past six to nine months. As this market recovers, I believe there will be an upside, particularly for our wood siding business. We are preparing for that upturn.

Thank you.

You're welcome.

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

Thank you. Good morning, everyone. Hey, Chris, can you just give us a sense of the market conditions for auto refinish across your major regions? I know you commented about expecting a little bit of volume growth in 2024. What is that being driven by? Is it just better uptake, easier comparisons, or technology? What's going on across your major markets there?

Well, I would say it's flat to up about 2% to 3% is what we're predicting going forward into '24. North America is incredibly strong but limited due to the difficulty body shops have in obtaining labor. There's inventory sitting at these body shops waiting for work. This is beneficial for Axalta because our efficiency drives value for these body shops. If I think about Europe, it's stable to flat. The slight increase we show in guidance really stems from wins like those with BMW that we announced last quarter or the André Koch acquisition, which presents growth opportunities. Meanwhile, China or Asia have been weak or flat to down; however, this segment represents a smaller part of our business. Overall, I would categorize it as flat to slightly up.

Okay. Great. Thank you.

You're welcome.

And then in terms of the consumer uptake for EVs, I mean, the narrative seems to have shifted in the market just based on the trade price, et cetera, after all the outsized growth over the last few years. Can you just touch base on what's going on in terms of developments, et cetera, on EVs and if that dynamic shift will impact you in any meaningful way?

Absolutely. First of all, our position on EVs is that we are EV-agnostic. Most of our coatings are used on the exterior of cars, so whether it’s EV or ICE isn't a differentiator for us. The good news is that we're growing at two to three times the rate of the overall market in China, primarily due to our EV business. We've partnered with many local players in the EV space that are experiencing significant growth. The Chinese government is investing $70 billion in incentives over the next four years, which is boosting the local market and creating a great platform for expansion into Southeast Asia. Our investments in manufacturing capabilities, including waterborne capacity in Jiading and our new plant in Jilin, are also aligning well, driving our growth seen in Q4.

Perfect. Thank you so much.

You're welcome.

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

Cheers, guys. Nice outlook for the year for '24. On the pricing, you mentioned that it would be positive for both segments. The fourth quarter was rough for mobility – you talked about a lot of operations there. Do you think it turns the corner in the first quarter for pricing? And then – well, actually, do you need to announce price increases? Or are those already in place?

Thanks, Michael. Looking at mobility in the fourth quarter, as we referenced in the prepared remarks, a little more than half was tied to a comparison with the fourth quarter of 2022, with the rest being impacted by mix. For the first quarter and the full year, we see pricing being positive in both of our segments. Specifically, our Refinish business team already launched new pricing a couple of weeks ago, so we are beginning to see the benefits of that.

A follow-up. In the first quarter, you're guiding for flat sales growth. Sales growth throughout the year, will it be better in the second and third quarters? Just trying to get a feel for how we ramp up the low single digits.

Our expectations are that as you start to get into the second quarter, you should definitely see an increase in low single-digit percentage increases, which will roughly carry into the following quarters. So it's primarily just the first quarter where we are holding it flat. You should start seeing a step up in the second quarter.

Thank you.

Thank you.

Our next question is from Aleksey Yefremov with KeyBanc Capital Markets. Please proceed with your question.

Good morning, everyone. Could you give us some thoughts on your bridge for Q1 from Q4? More often than not, EBITDA is about flat sequentially from Q1 to Q4, and you're guiding to flat sales. So what are some of the other factors here?

As we look at the bridge, we are anticipating about an $11 million drop in EBITDA from Q4 to Q1. We referenced revenue being down slightly, and there is a conversion impact which ties back to seasonal trends we have in our business, predominantly in Refinish. The first quarter tends to be the low point for Refinish, especially based on what we see here in North America and somewhat in Europe. The Chinese New Year will also impact the first quarter, particularly for our light vehicle business there.

Thanks. And turning to industrial, you're talking about softer North American construction volumes. Could you maybe discuss residential, non-residential exposure, any potential benefit from infrastructure spending, and any other factors?

Yes, certainly. There's a split between residential and non-residential within our wood and building products business. In terms of our forecasts, we're seeing residential as muted or down given current interest rates and building comparisons. However, for industrial on the GI side, the question is how infrastructure spending may play out, especially given this year’s elections. At this point, we are forecasting this to be flat to slightly down. The focus remains on building a solid foundation for the business and ensuring we have the right cost structure for when we experience an uptick.

Thanks a lot.

Our next question is from Mike Leithead with Barclays. Please proceed with your question.

Great, thanks. Good morning, guys.

Good morning.

First question for Chris. I think you made a comment in the prepared remarks around potentially pruning some areas that don't meet your margin threshold. I guess, can you talk a little bit more about where your portfolio currently stands? Is it just pruning? Or is there any bigger portfolio actions worth exploring?

It's primarily pruning. A perfect example is our light vehicle business; we announced exiting our plastics interiors business last year, which constituted a small portion where we lacked scale. Looking forward into '24, there are segments within industrial, mobility, and even some regions in Refinish that we might evaluate. My initial focus is just returning our base case to historical margins. There’s about $100 million to $150 million of incremental opportunity there. We will outline this in detail during our May meeting and explore further opportunities for growth.

Great. That's super helpful. And then as a follow-up, I apologize for the technical question for Carl. Earlier this year, Axalta took a fairly large charge from the Argentine peso that was included in your adjusted EBIT. I think you briefly mentioned an FX charge in the remarks but I don't see it mentioned anywhere in the release. Did Axalta take a charge from the Argentine peso devaluation this quarter? And was it included or excluded from your adjusted earnings results?

Yes, we did take a charge in the fourth quarter specifically related to Argentina. It is not included in EBITDA but was included in our adjusted EBIT number, which is in the reconciliation.

Great. Thank you.

Thank you.

Our next question is from Jeff Zekauskas with JPMorgan. Please proceed with your question.

Thanks very much. I think your SG&A was up by about 11% on an adjusted basis, maybe it's 8% unadjusted. And your R&D was up a little bit more than 11%. Those are relatively high numbers for 2024. Do you have expectations about your growth in overhead costs?

If you look at SG&A, about half of that impact for at least for '24, whether you look at even the fourth quarter or the full year for SG&A, really related to variable compensation expense. The other half stems from inflationary labor type costs. As we look forward into 2024, that is an area of focus for us, where we would be looking to drive that rate of increase down considerably on a year-over-year basis.

Great. Can you remind us what percentage of your light vehicle business roughly is China now and maybe where it was two or three years ago?

It's about $250 million of revenue for China now.

Okay, great. Thank you so much.

Thank you.

Our next question is from Mike Harrison with Seaport Research Partners. Please proceed with your question.

Hi, good morning.

Good morning.

We saw the nice improvement that you guys delivered in inventory levels during 2023. Are those inventories where you want them to be at this point in the year? And I guess, is there any way for you to quantify the impact? Presumably, if you're working down inventory, you were running your plants more slowly. Can you quantify the impact of lower fixed cost absorption last year? And presumably, you'll make some of that up this year if you're running your plants a little bit harder?

In terms of quantifying the improvement, we did see significant one-time improvement. From our perspective, less than half of the improvement in free cash flow was driven by inventory performance. Looking ahead to 2024, we're not indicating that we'd get much better than current levels, but there are areas within the business we could improve. Specifically, in our four end markets, there may be opportunities in the industrial business to further reduce inventories. The focus is also on optimizing fixed cost absorption. We have shown positive signals in two of our businesses moving slightly upward in volume.

To add to that, from our conversion rate perspective on the incremental revenue we delivered in 2023, we saw about $300 million of higher revenue, and our EBITDA increased by $140 million; that's about a 47% conversion on incremental revenue. For 2024, we anticipate conversion on incremental revenue to be between 60% to 65%. So while we’re pleased with our current status, we consistently look to drive productivity and efficiencies, and the conversion appears to be pretty healthy.

Alright. Thanks very much. And then just curious about the Refinish business. I don't see that there's an acquisition contribution line in there. Can you comment on how much of the volume that you saw in the quarter or revenue in the quarter was from that André Koch acquisition?

We had about $14 million of revenue in the fourth quarter related to the recent acquisition of André Koch.

Perfect. Thanks very much.

Thank you.

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

Thank you for taking my question and congratulations on your progress in 2023. I wanted to get your insight on your evolution. You've talked about long-term margin targets several times during this call, but it seems you're not quite there yet. You made notable progress in 2023, with margins increasing by 180 basis points to 18.4%. It appears that your Performance Coatings division, particularly Refinish, is nearing normalized levels of over 20%. How much more improvement do you anticipate in terms of margins? Do you expect to reach a consolidated margin of 20% in the next couple of years? Also, is the $100 million you mentioned essential for achieving this goal?

That's a good question, Arun. If I offer an answer, you might not be inclined to attend the May session. To your point, we made substantial progress in '23, achieving an increase of 180 basis points from our target. The estimate of about 100 basis points of improvement is feasible. As for the guidance, Q2 and Q3 are traditionally more robust quarters; thus, we will aim for those timelines to near 20%. While we are close, I believe further opportunities exist to extend beyond current thresholds. We want to showcase the three-year vision in May, including how we can leverage growth and improve earnings potential to create shareholder value.

That's great. And then maybe as a follow-up regarding free cash flow. You're converting over 40% of your EBITDA into free cash flow given your incremental margins increasing. It seems likely that you will see higher conversion rates as well. Over the next couple of years, with your leverage down under three now and free cash flow possibly reaching $500 million plus, is that kind of normalized free cash flow? How do you expect to spend that once you reach that level?

We would consider that over $500 million projection as normalized cash flow as we progress into 2025 and beyond. We intend to deploy some capital and focus on share buybacks as well as evaluating accretive M&A-related opportunities. Those are the two areas we will emphasize moving forward, aiming to maintain momentum from our success in '23 into '24 while ensuring leverage aligns with our target range.

Thanks.

Thank you.

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

Good morning. This is Steve Haynes on for Vincent. Maybe I just wanted to come back to the guide for a sec. Historically, your first quarter is typically 22% or 23% of your annual performance. Using that, it suggests something a bit above the midpoint of your full-year guidance. So is there something different in the phasing this year? Or are you being a bit conservative in the back half that might be causing some miscommunication?

You are looking at it the right way. Simplicitywise, dividing $240 million EBITDA by 0.23 suggests about $1.43 billion, slightly above the midpoint of our guidance. The seasonality for this year will largely align with past trends.

Okay. And then in 2023 numbers, there are elevated costs tied to ERP and other investments. What does the 2024 guide look like in terms of any further costs related to either of those?

We accounted for about $40 million in costs tied to ERP and consulting for productivity initiatives this year. We anticipate that number to drop by at least $30 million in our 2024 costs, reaching a new run rate of approximately $5 million to $10 million.

Okay. Thank you. Appreciate it.

Our next question is from Josh Spector with UBS. Please proceed with your question.

Yeah, hi. Good morning. If I go back earlier in the year, when you guys had the production issue that impacted Refinish, you talked about a couple of hundred million dollar backlog. Where is that now? Does that still exist? Does that really matter as we look into 2024?

All our North American plants are back to pre-implementation run rates, and our West Virginia facility has effectively eliminated the backlog associated with S/4. Moving forward, we don't foresee any benefits from backlog improvement in Q1. The focus will be on retrieving efficiency from our S/4 system, enhancing productivity as we plan to roll it out on a broader scale over the coming years.

Thanks. And a quick follow-up on the acquisition. You previously cited around 1% or so of performance from that acquisition. Did you report that in volumes? Is that how you plan to report M&A going forward? Why not separate it out to clarify organic volume?

Yes, it is reported in volumes. Given the acquisition's relatively small size, we will evaluate for future opportunities to break it out accordingly.

Okay. Thank you.

Thank you.

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

Thank you, Chris. I think the prior management switched from EBITDA to adjusted EBIT back in 2019 to focus on reinvestment and growth and to incorporate capital allocation in the earnings numbers. Why switch back to EBITDA right now?

As we consider how we manage the business across our units, we find greater alignment with our financial performance being based on EBITDA. A key focus will be on achieving returns on invested capital performance. This area will govern capital investments going forward.

Carl summarized it well. As we pivot the company, our goal is to emphasize operational performance, driving accountability across business unit leaders and focusing on initiatives to create shareholder value. We'll have further discussions at our May meeting.

And then were Powder Coatings volumes up in the quarter? Or were they down in line with the overall Industrial Coatings segment?

Powder Coatings volumes were generally in line with the overall segment itself.

Thank you.

Thank you.

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