Axalta Coating Systems Ltd. Q1 FY2024 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to Axalta Coating Systems First Quarter 2024 Earnings Call. Today's call is being recorded, and a replay will be available through May 8. Those listening after today's call should please note that the information provided in the recording will not be updated and therefore, may no longer be current. I will now turn the call over to Chris 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 first quarter 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, 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. I'm proud to report an excellent quarter at Axalta. Overall, net sales were primarily flat while adjusted EBITDA was a record for any first quarter in Axalta's history. Margins are significantly improved, and we believe we have more room to grow. Our balance sheet has continued to improve with our net leverage ratio declining for 7 consecutive quarters. I'm very confident with our trajectory this year, which has led us to raise fiscal year guidance for adjusted EBITDA, adjusted diluted EPS and free cash flow. Yet, I believe we're just getting started transforming the company and unlocking the tremendous potential of our products, technology and organizational capability. For the first quarter, net sales increased 1% year-over-year to $1.3 billion, with positive price mix. We remain committed to realizing the full value of our products and services, therefore, we continue to evaluate targeted pricing in select areas of the portfolio. Volume was approximately flat year-over-year with growth in Light Vehicle and Refinish offset by declines in Industrial and Commercial Vehicle given their softer macro environment. Adjusted EBITDA increased 22% year-over-year to $259 million, representing a record first quarter. This quarter ran ahead of guidance due to outstanding execution from the entire global team. Specifically, our commercial teams did a great job of winning new customers by focusing on accretive areas that will support a more profitable product mix and pricing for value. Our operations teams focused on reducing backlog and beginning the Axalta performance system journey, which is gaining traction. Procurement overdelivered again, driving 11% better unit variable cost. Cost optimization has been the central focus since I joined the company and will remain a high priority moving forward. Adjusted EBITDA margins improved by 340 basis points to 20% reflecting significant progress towards a return to historic margins in the 20% to 21% range. Profitability increased substantially across both segments. The largest margin contributions came from Light Vehicle and Industrial end markets, with profitability improvement in the latter stemming partly from our strategic shift towards higher-margin products. Let's move to Slide 4 for details on our business segments. Refinish had another strong quarter with net sales 4% higher year-over-year. This represents the 13th straight quarter of better top line performance with a balanced contribution from price-mix, volume and FX. Market growth was roughly flat versus the prior year period across North America and EMEA. However, we are seeing above-market performance given our 600-net body shop win and the addition of 100 new points of distribution. We're also getting traction with our strategic growth initiatives in adjacencies like U-POL aerosol, RAPTOR bedliners and accessories sold through our company-owned stores in Europe. Our acquisition of André Koch supports these strategic initiatives and has proved to be an excellent transaction for us. I'm very pleased with the pace of integration, which is ahead of our initial plan. I believe that differentiated technology is the foundation of Axalta's competitive advantage and a key reason we continue to outpace market growth. I'm happy to announce that we were recognized with several prestigious R&D awards this quarter, all centered around efficient and sustainable innovation. There is no better example than Irus Mix, fast, efficient, fully automated and completely hands-free mixing machine for the refinish industry. In addition to seeing strong customer demand in launching this product, it also won an Edison Award in the environmental and industrial solutions category. Another bright spot in the quarter was Light Vehicle growth. Net sales improved by 4% year-over-year, mostly due to strong volumes, particularly in China. Volume growth in China improved by 20% as compared to 4% auto production growth, again, against the prior year quarter. We have partnered with the fastest-growing OEM, and this is a solid business for us at an attractive return. We win new business and build lasting partnerships in this market with our products, service and technology, exemplified by our recent recognition from General Motors as a Supplier of the Year. Commercial Vehicle net sales declined by 4% year-over-year consistent with the expected slowdown in North America Class 8 production. We believe this market will further soften into the year before ramping back up in '25 and '26 ahead of the emission standards going into effect in 2027. Industrial net sales declined 6% year-over-year, driven by soft construction activity in North America and EMEA, which has offset improvement in new business wins. We have strategically deselected low-margin categories, which is yielding significantly improved profitability. My main focus since joining Axalta has been to improve efficiency and performance across the company. I'm very proud of our achievements to date. We're starting to see the benefits of our actions we have taken in our financial results, but we believe there is more to come. To further enhance our performance and results, we have announced a transformation initiative in February to enable us to be more proactive, responsive and agile. This program includes a global workforce reduction of approximately 5% and a shift in manufacturing capacity and capability. We expect this program to yield approximately $75 million in annualized run rate savings in 2026. Before passing the call to Carl for a more detailed review of our first quarter financial performance, I want to thank Bob McLaughlin for his 10 years of service on the Axalta Board, including as Chair of the Audit Committee. Bob is elected to retire next month after the Annual General Meeting. He has been an incredible thought partner for the Board, and we wish him the very, very best.

Thank you, Chris, and good morning, everyone. Let's turn to Slide 5. First quarter net sales increased by 1% year-over-year to $1.3 billion. Gross margins improved by 340 basis points to 33% versus the prior year, principally driven by 11% lower variable cost unit rate. All raw material categories were lower year-over-year with isocyanate, epoxy resin and monomers most favorable. Overall, we are comfortable in the current raw material environment and continue to project a mid-single-digit full year benefit strongly weighted to the first half. Though there are a few pockets of pressure stemming from temporary supply issues such as propylene availability in North America and butyl acetate in Europe, we view these as transitory, an isolated situation which are fully accounted for in our guidance. SG&A was flat year-over-year, demonstrating effective cost management efforts, which offset labor inflation in the category. Income from operations declined $4 million to $121 million, inclusive of a $55 million pretax charge related to employee severance and exit costs stemming from the 2024 transformation initiative that Chris noted. We expect that the annualized run rate savings from these actions will be $75 million in 2026, with $10 million expected to come in this year. Adjusted EBITDA in the quarter was $259 million, 22% above first quarter 2023, and adjusted diluted earnings per share increased 37% year-over-year to $0.48 despite a $0.05 headwind from higher interest and tax expense. Moving to Slide 6. Performance Coatings first quarter net sales were flat year-over-year at $848 million. While net sales were flat overall, we were able to drive 4% growth year-over-year in Refinish which is consistent with our portfolio strategy to accelerate growth in the business. Refinish net sales benefited from strong price-mix and a solid contribution from the André Koch acquisition. Refinish market demand in North America and Europe remained stable in the quarter, in line with our expectations. Industrial net sales declined by 6%, primarily due to lower volumes as soft global building and construction activity weighed on demand. As Chris highlighted, we are also strategically moving away from lower-margin business. We believe this strategy is being well executed by our team and is driving significant margin improvement. Industrial volumes are now approximately 20% below 2022 level, creating a cyclical upside opportunity when global construction activity reaccelerates. Performance Coatings' adjusted EBITDA increased 16% year-over-year to a first quarter record of $196 million, with both end markets contributing favorably. Adjusted EBITDA margin improved by 310 basis points compared to the prior year. On Slide 7, the first quarter Mobility Coatings net sales increased 2% year-over-year to $446 million, 4% better Light Vehicle net sales partially offset declines in Commercial Vehicle. Mobility price, excluding mix effect, was modestly favorable and more than offset contractual raw material pass-through impact in the period. Light Vehicle volumes were again solid in the quarter, exceeding global auto growth rates led primarily by China. And Commercial Vehicle volumes declined as expected, driven by lower North America Class 8 truck production. Mobility Coatings' adjusted EBITDA improved to $63 million, up from $44 million, a 44% increase year-over-year. Adjusted EBITDA margin improved by 410 basis points to 14.2%, with considerable improvement in Light Vehicle. Turning to Slide 8. We ended the first quarter with over $1.1 billion in total liquidity, including a cash balance of approximately $624 million. Free cash flow in the quarter was $15 million, an increase of $103 million year-over-year. The strong seasonal free cash flow as a result of improved working capital performance. During the quarter, we also took action to reduce interest expense. First, we paid down $75 million of gross debt, building from the $200 million of debt prepayment executed in 2023. Next, we successfully repriced our term loan lowering our effective rate by 50 basis points. Taken together, we are confident that interest expense will be lower in 2024 versus last year. Our total net leverage ratio at quarter end was 2.8x, nearly a full turn below the prior year period. Given current trends, we should end the year at the high end of our target net leverage ratio range of 2x to 2.5x. As our balance sheet continues to strengthen, we are announcing this morning a new $700 million share repurchase program. We expect to continue to drive accelerated financial performance in the coming years and believe now is an optimal time to move forward with this program as we focus on driving value creation for our shareholders. I will now turn the call back to Chris for our financial guidance and closing remarks.

Thanks, Carl. Let's turn to Slide 9. Net sales in the second quarter are expected to be 3% to 5% higher year-over-year, driven by strong growth in Light Vehicle and Refinish, stable Industrial sales and market-driven declines in Commercial Vehicle. Refinish net sales are projected to increase by high single-digit percent year-over-year in Q2, given share gain, growth in adjacencies, plus contributions from the André Koch acquisition. We will also benefit from lapping prior year production issues in North America. Light Vehicle should have another strong quarter with robust volume growth and stable price-mix. In Industrial, net sales are expected to be flat to lower as margin growth remains our highest priority in the current soft macro environment. And lastly, in Commercial Vehicle, our view is unchanged. We see North American Class 8 build slowing through the year before demand ramps back up in '25 and 2026. Our full year low single-digit sales growth target remains unchanged. We expect typical seasonal trends to play out this year, leading to a step up in second quarter net sales versus Q1. Second-quarter adjusted EBITDA is projected to be roughly up 21% year-over-year to $275 million. Adjusted diluted earnings per share is estimated to be approximately $0.50, an increase of more than 40% year-over-year. Given the strong start to the year, we have increased our full year adjusted EBITDA, adjusted diluted EPS, and free cash flow guidance. Full year 2024 adjusted EBITDA is projected to be between $1.05 billion and $1.08 billion, a $35 million increase to the midpoint versus our prior guidance. This translates to an adjusted diluted EPS range between $1.90 and $2 per share, an increase of greater than $0.07 to the midpoint. We have also increased our 2024 free cash flow guidance estimate by $50 million to a new range of $425 million to $475 million. I'm proud of our performance to start the year, and I'm confident in our performance trajectory. We believe we're on pace for another record performance in 2024 and are setting the foundation for long-term value creation. I look forward to sharing our Axalta plan with you on Strategy Day on May 15. For more detail, please contact Chris Evans or refer to our investor website. Thank you for joining us today. This concludes our prepared remarks. Operator, please open the line for Q&A.

Our first question comes from David Begleiter from Deutsche Bank.

This is David Huang here for Dave. I guess, first on guidance, I guess you raised your EBITDA guidance, and you left the sales guidance unchanged. Does the change reflect basically the restructuring benefit and any additional raw material deflation?

Yes. This is Carl. Thanks for the question. Yes, as we look, as far as the guidance, we are expecting about $10 million of benefit related to the restructuring program that we announced in February. So that is part of it. And as we think about the raw material perspective, we are still planning for the full year that we're about mid-single digits percent lower on a year-over-year basis for our raw materials. But a lot of that is, as we referenced in the prepared remarks, weighted to the first half of the year.

Okay. And then second on Refinish. Can you just talk about your expectation for volume trends in Refinish? I guess there's some divergence among your peers, noted some pre-buying activity in the prior year that's creating a difficult comp for this year. I guess can you just talk about underlying demand trends and probably your opportunity for further share gains?

Sure, David. And I'll take this one. So I'm not going to talk about what's happening with the rest of our peers; I think focused on what we're doing. We're focused on 4 strategies, and the 4 elements of that are really around body shop wins, which we had an exceptional quarter last quarter with 600 new body shop wins. And that's building on 2,400 body shops that we won last year. And if you look at the last 3, 4 years, we have gotten over 10,000 body shops. So it's certainly the new wins and body shops. That's one element of it. The second element of it is really our adjacent space. And whether it's through the aerosols that we sell with our U-POL acquisition, or our RAPTOR bedliners, all of that going through the shelves that we have with AutoZone and O'Reillys with 15,000 new shelves that we have been able to put our products on. And then on top of that, we also have the retail shops. We have 75 shops in Europe and in South America that we are able to really push our products through. And today, only 30% of our products go through these shops. And as we move more from distribution through our retail shops, we see this as an incremental opportunity here as well. And then finally, it was the acquisition of André Koch. With that acquisition, which we're proceeding well ahead of plan. As I look at it, all 4 of the elements are really building to the story. And so that's really why we're winning.

And our next question comes from Christopher Parkinson from Wolfe Capital.

This is Harris Fein on for Chris. I think I heard you say before that the procurement team took out 11% on a unit variable cost level. Just curious if you could go into maybe a little bit more detail about what's happening there, and how that flows into the raw material expectations for the full year? Because if you're down mid-single digits for the full year, wondering if that implies that maybe raw materials could be up in the back half of the year.

Certainly, I'll take this. We're very proud of what our team has accomplished. We started this program early last year and began to see the net benefits in Q3. The main objective was to drive savings, which is reflected in our financial performance. We've had an impressive, industry-leading performance, with double digits in Q4 and continued strength in Q1 of this year. We expect to see these benefits carry into part of Q2 before we start comparing against our previous performance in Q3. However, we anticipate that our purchasing team's performance may start to decline in the latter half of the year. The second goal of the team was to establish better contracts and longer-term agreements to manage through market cyclicality and volatility. These contracts typically last from six months to a year, allowing us to be more agile and manage indexing and productivity better. Both of these elements have positively impacted about two-thirds of our basket, which we believe will provide benefits this year but may be less pronounced in the latter half. The positive takeaway is that we can maintain a balanced material performance throughout the year.

Got it. That's helpful. And then I guess the second one, Light Vehicle pricing looks like it was up, excluding mix. Maybe if you could just go into a little bit more detail about how you were able to drive positive price because I believe 30% of that business is on RMIs.

Yes, absolutely. I think just absolute kudos to that team. And I think it's really 3 elements here. The first one is, if I went back, I think about a couple of years ago, we put in a great new leadership team that was really driven around listening to the customer and really focusing on getting the right products and the right capacities in place. So if you look at a perfect example being China, the market is up 4%, we grew by 21%. It kind of talks to the exceptional focus and the drive of that team. That's the first one. The second one is it's really the quality and the reliability of the product. Again, the development of the products led to ensuring that we had the right products for the market. Now a lot of folks can say this, but I think what's the difference is you can see it from our customer accolades whether it's the Daimler award as well as the GM Supplier of the Year award, I think that certainly plays well to our performance here. And then finally, it really comes to our ability to match color. I think in my 14 months at Axalta, what I am realizing is we are really good at matching and developing color. And especially in regions like China, our customers are pushing the barriers of color, and we're certainly there to respond to it.

Our next question is coming from Aleksey Yefremov from KeyBanc Capital.

Do you expect to repay more debt before year-end as you're thinking about your 2.5x leverage? And should we expect most of the free cash flow to go towards buyback for the rest of the year if you're not paying any more debt down?

Thanks, Aleksey. Looking ahead for the next nine months, we're currently at about 2.8x leverage. Based on our expectations for free cash flow and the new EBITDA guidance we provided, we anticipate being just below 2.5x net leverage by year-end. Therefore, we don't need to reduce any more debt to meet that target. We are also announcing a new $700 million share repurchase program, which we will evaluate as the year progresses.

Very helpful. And then I wanted to ask about index pricing for the rest of this year. It looks like you had some impacts in Q1. Can we expect more pronounced negative price from the indices? And where would you hit sort of the stable point where your prices are equivalent to sort of the cost indices?

Yes. I think we expected, especially if you get into the second quarter, we are expecting to have a favorable price mix as we think about where the second quarter is being shaped up at this point. And then as far as really the rest of the year, I would say we would start getting into that more equilibrium as it relates to the price-mix dynamic, coupled with the RMIs, index agreements we have in place.

Our next question comes from Ghansham Panjabi with Baird.

This is Matt Krueger sitting in for Ghansham today. So I just wanted to kick things off and touch on the Industrial business. So can you talk a bit about what inning Axalta is currently in from a business pruning perspective? And then more specifically, when should we start to lap kind of normalized base comparisons for the Industrial segment that already are lapping this ongoing pruning activity?

We consider ourselves to be in the early stages of our Industrial business. Our main focus is on managing the portfolio and enhancing margins. We’ve been very dedicated to preparing the business for when market conditions improve. Looking at the three business units, particularly in Refinish and Mobility, we've experienced notable growth. On the Industrial side, we're adopting a strategy of reducing certain aspects to facilitate growth and are making strategic decisions to drive margin improvements. Notably, our Industrial business has seen the most significant margin improvement in our recent quarterly results. We are making informed choices about customer selection and identifying areas that need pruning to ensure that our remaining business segments achieve the appropriate margin levels. Looking ahead, we anticipate further margin improvements throughout the year, even if sales remain somewhat flat, as we predict. I believe that in 2025 we will see an increase in volumes. Regarding the current quarter, in the three business segments within Industrial, general industrials and building products are experiencing some weakness, particularly in construction and residential builds, except in coil. However, our energy solutions business, which supports our Mobility sector with coatings for batteries and motors, is performing well, especially in China. Ultimately, we are confident that with time, we will establish the necessary margin profile to support growth in this business segment. Therefore, I would say we are in the early stages of our Industrial strategy.

Great. That's very helpful. And then just taking a step back, can you talk a bit about how a higher-for-longer interest rate environment would compare to your initial expectations for the year? And can you include if or where you're seeing any impact from this sort of sentiment across your portfolio? And I'm talking about higher-for-longer interest rate specifically.

Yes. Looking back at our planning assumptions from when we provided our initial guidance in late January or February, we were expecting interest rates to remain stable during that time. Therefore, we were not anticipating a reduction in rates in our baseline forecast. So far, this expectation has largely held true. In terms of our debt structure, we have approximately a 55-45 split between fixed and floating rates. This positioning should serve us well if rates eventually start to decline. Additionally, regarding our management of overall interest expenses, in the first quarter, we reduced our term loan by $75 million and secured better pricing when we updated the terms. We feel confident in the measures we have taken and our ability to navigate this environment of persistently high rates.

Our next question comes from Mike Harrison from Seaport Research Partners.

I was wondering if you could provide a little bit more color on where the $75 million of restructuring savings in that 2024 transformation are going to come from? Would you classify this as mostly SG&A, mostly manufacturing costs? I guess any key actions or buckets that you can provide for us would be helpful.

Sure, Mike. I'll start and then Carl can provide more detail on the financials. About 1.5 years ago, I observed that Axalta operated like a holding company with three separate businesses. We've worked to create a unified Axalta culture. This involved transitioning from a regional structure to a more corporate and functionally-oriented organization, which was interrupted by COVID. Our aim is to refocus on a P&L-driven model that is flatter and smaller at the top. For instance, we integrated the operations teams into the P&L to enhance our agility and efficiency as a company of our size. Essentially, we have about two-thirds of our SG&A focused on corporate priorities and one-third on our capacities and manufacturing aspects, which also informs our decisions on footprint. This gives an overall view of our project plans for the next couple of years. Additionally, we have assessed our manufacturing structure to identify areas that require more investment and areas where we may need to shift assets to stimulate growth in other business segments. With that, I'll turn it over to Carl.

No, I think, Chris, you covered it. I think, Mike, as Chris referenced, a lot of that savings we expect going forward will be in SG&A as you look at how that will come through the P&L.

All right. That's very helpful. And then a headline out this morning is saying that the U.S. government is going to try to mandate automatic emergency braking on all vehicles in 5 years. It's maybe been a little while since we kind of covered this autonomous vehicle or autonomous type of features popping up on more vehicles. Can you talk about how that kind of technology could be impacting, how you look at the Refinish business over time and might be reducing collision rates over time?

Certainly, Mike. Over time, there has been concern about how Advanced Driver Assistance Systems (ADAS) will influence collision rates in the future. Until we reach higher levels of autonomy, specifically Level 4 or Level 5, which I think will take longer to achieve, we are seeing investment levels from companies like Cruise and Apple begin to decrease. In the near term, the impact of Level 2 or Level 3 systems is likely to result in more minor collisions. This translates to increased demand for work in refinish shops, which mitigates complete vehicle write-offs and allows us to see more cars needing repairs in body shops. Recently, I've visited several body shops in the Carolinas and observed a substantial number of electric and semi-automated cars. These vehicles are in need of repair due to minor accidents rather than total losses, which benefits our operations while also ensuring safety for everyone involved.

Our next question comes from Patrick Cunningham from Citi.

This is Eric Zhang on for Patrick. On the targeted price increases across like parts of the portfolio that was mentioned at the beginning of the call, can we talk about what products were targeted and is this activity expected to continue for the remainder of the year?

We are very proud of our team for achieving pure pricing across all three of our businesses, which resulted in a 2% increase. This accomplishment is particularly noteworthy given the deflationary market conditions. To differentiate each business, our Refinish division remains stable while we focus on pricing that enhances efficiency and productivity for our customers. Our waterborne product is now 30% more efficient than previous versions, and our new chroma-based technology, moving to Cromax XP, offers a 10% improvement in efficiency for Refinish customers. In our Mobility sector, we see opportunities for pricing adjustments in select areas where our products provide added value, influenced by labor costs and raw material prices. Lastly, in our Industrial business, we are strategically exiting certain segments and customers to promote profitability, allowing us to continue investing in this area. Overall, we are implementing price increases across all three businesses, with pure pricing currently up 2%.

And our next question comes from Steve Byrne from Bank of America.

Rock Hoffman on for Steve Byrne. Could you guys inform if there's been any additional productivity gains that we should expect to come from initiatives launched last summer prior to the 2024 transformation initiative?

Sure. I would prefer to save this for our discussion on May 15, so I won't share too much more now to ensure you attend our Strategy Day. We have two main initiatives. The first is the transformation initiative we've been discussing, and the second falls under the operations category. The first operational focus is on enhancing productivity within our facilities as we plan for the next few years. The second part is a network optimization program aimed at identifying further opportunities. We've expanded our network by approximately 100 warehouses and distribution centers since before the pandemic, and we believe there's still potential for improvement, particularly on the transportation side. These are the key areas we'll be concentrating on moving forward.

And just a follow-up on the Light Vehicle business. Just wondering if you could either provide similar metrics on Light Vehicle growth for Axalta versus Light Vehicle market growth in kind of other non-China regions or just give us an idea of the extent of magnitude there?

Sure. Looking at the Light Vehicle market across all three regions, I would describe the overall market as solid for us. In North America, the market appears stable, with dealer inventory increasing by about 10 days quarter-over-quarter. However, volume levels seem relatively stable; we've seen a slight pick-up, but nothing significant. In Europe, the market has declined by approximately 2% to 3%, but we have remained stable in that region as well. In China, the market is up 4%, and we are seeing a notable growth of 21%. Overall, I would characterize our Light Vehicle performance as solid, with modest growth in North America and substantial growth in China.

We have a question from Mike Sison from Wells Fargo.

Nice start to the year. In terms of Refinish, for the markets in 2Q, I think you said your growth was flat in the first quarter for North America. And EMEA, you guys had nice growth. Do you expect the markets to be flat again in 2Q? And how do you think sort of unfolds for the rest of the year?

Yes, I would say it's flat to about just slightly growing, I'd say, flat to 1%. We obviously are showing that we're going up high single digits in Q2, and it's really, as I said, the 4 strategic initiatives that we are working on. On top of that, we also had the operational issues that we had in Q2 of last year. So lapping that performance is driving our growth in Q2. So I do believe we'll have a really good quarter here again in Q2 in our Refinish business.

There is a longer-term question that might be better addressed at the Analyst Day. Axalta has been focused on cost and productivity for a substantial period. It appears that you may be entering a more growth-oriented phase. Is that a correct perspective? Where do you anticipate the growth to be on average, and how do you foresee that growth sustaining over the next couple of years?

Absolutely. So I think we do believe there's probably 1 or 2 innings left on the margin side, but certainly a lot more that we can focus on the growth side. And to be honest, that is what we will be covering in significant detail going through our Strategy Day on the 15th. And so what we'll be doing is providing a view of where we'll be in 3 years from now across the 3 business segments by yearly targets that we will be providing. So just to give you a perspective and having a measure of where we think we can take the business with that.

Yes. I would add that while there has been considerable focus on improving operations and managing costs with Chris joining us, it's important to look at what the team aims to achieve this year. We anticipate our EBITDA will increase by 12% year-over-year, and our EPS will rise by 24%. Currently, our EBITDA margin is at 20%. As Chris mentioned, we are pleased with the direction in which we are steering the business. Our emphasis on growth will be a major topic during our upcoming Strategy Day.

Our next question comes from John Roberts with Mizuho.

Nice quarter. Could you give us an update on the geographic mix of your auto OEM sales? I'm guessing that China may be bigger than I was thinking it was.

So yes, let me break it down. So Light Vehicle for North America is about $300 million; sorry, and then if I look at EMEA, we're about $400 million and then about $100 million in China.

Yes. If you look at it from a perspective for the quarter, our China business generated a little over $60 million in revenue. This makes it the third largest region for us in terms of Light Vehicle sales. North America remains our largest market by a significant margin, followed by Europe in second place. However, as Chris mentioned, we continue to see exceptionally strong performance, particularly in China.

Our next question comes from Joshua Spector from UBS.

This is Lucas Spillman speaking for Josh. I would like to revisit the SG&A costs. They have increased only modestly in the first quarter, which contrasts with the high single-digit inflation we are observing among most of our peers. At the same time, it seems you expect to achieve around $50 million in cost savings this year from your productivity program, which is approximately 6%. Given these factors, are you anticipating that SG&A growth will remain flat or increase by low single digits this year? How should we approach this?

Yes. We are very proud of our achievements in the first quarter, as we managed to keep SG&A expenses flat year-over-year, particularly given the current environment. Looking ahead, we aim to increase our SG&A spending by very low single digits on a year-over-year basis. This approach is based on the transformation initiatives we have underway and our focus on improving business operations moving forward. It is a significant priority for us, and we have made a strong start in the first quarter.

And then just going back to kind of the Industrial exits, are you able to kind of quantify for us how much volumes are you kind of deselecting there each quarter? And I guess if you could kind of give some sort of scale on the timing on how that's going to unfold?

We're not breaking that out. But what I can tell you is, obviously, as you can see, we're down about 6% but we're not breaking out how much of that we're pulling out just because of the choices we're making right now.

But just to add to that, just a little bit further. I think as we look forward, especially as we look on a year-over-year kind of comparison perspective, while we're still going to be working on the portfolio, we are beginning to see some early signs where when we kind of compare year-on-year, we believe we're going to be kind of bottoming out, at least as far as having that type of revenue headwind on a quarterly basis, going forward.

Our next question comes from Kevin McCarthy from Vertical Research Partners.

Chris, within your Refinish business, you've got a lot of adjacent products, aerosols, bedliners, perhaps others. How big is that basket of what I would call kind of nontraditional Refinish products? And how fast do you think you might be able to grow that basket over the medium term versus body shop work, for example?

Sure, I'd be happy to. The business is approximately $700 million in total. I would estimate it to be in the range of $600 million to $700 million. When considering the overall market, it is about $7 billion. Therefore, we view this opportunity as a segment where we currently hold a small share, and we believe it is a space where we can continue to grow over time.

Okay. We'll stay tuned for May 15. But I want to ask Carl about free cash flow, maybe a 2-part question. On the micro level, what is the cash cost associated with your new $75 million transformation initiative? And then more broadly, I think you raised your annual range by $25 million. So is that mainly just the earnings upside flowing through? Or are there other moving parts that you would care to call out there?

Yes. Regarding free cash flow, we are off to a strong start this year, recording a positive free cash flow of approximately $15 million. This reflects impressive working capital performance, especially when compared year-over-year. In response to your inquiry about restructuring, we anticipate the cash impact to range from $95 million to $135 million over a multi-year period, with the majority relating to severance costs and some additional costs tied to capital expenditures as well. Some of these expenses will be recognized this year, while others will extend into 2025. The guidance we provided for free cash flow takes into account not only the increased EBITDA from our raise but also all cash costs associated with the restructuring set to occur this year.

And our next question comes from John McNulty from BMO.

This is Caleb on for John. So I saw your CapEx was about like $22 million in the quarter, but you maintained your full year guide for about $165 million. So how are you guys thinking about how that sequences through the rest of the year?

Yes, it's a good question. I think a lot of that is just due to timing. So we still are working very diligently in order to kind of be ramping up CapEx here for the next 9 months of the year. So I would expect that really to begin increasing quite significantly as we kind of get into the second quarter, and that will kind of carry through for the rest of the year as well.

Okay. And then you talked a lot about the positives going on for you in Refinish right now, like the acquisition, U-Pol, et cetera. But maybe can you just talk a little bit more about how the Irus rollout is going? And kind of like what inning we're in, in that? And then kind of your expectations for that over the next 2 to 3 years?

Absolutely, love it. So I think if we look here, we have about 90,000 body shops. There's about 70,000 manual machines in most of those. We have about 2,000 semi-automatic machines from our past. And right now, we have 100 Irus machines installed. We have orders for 300. So as I look at the next couple of years, the objective is to get that up to 2,000 plus is what the team is driving right now.

And maybe if I could just add on to that, and there was a question that was asked earlier, just about the accessory market, specifically in Refinish. That is around about $100 million, I guess, of an overall opportunity and overall market size. In total, as Chris referenced, previously, all of Refinish, as we look at that all in, not only kind of what we do from a coatings perspective but also some of these accessories, we're impacting the market size of about $7 billion.

Our next question comes from Jeff Zekauskas from JPMorgan.

How will you determine whether share repurchase is a good idea? In that, Axalta over a 5-year period has underperformed the market. There's volatility in its share price because of its cyclicality. You get 5% in the debt markets. Why is it a good idea to spend your capital now to repurchase shares? And how will you determine whether it's a good idea to have spent it?

Overall, as we reflect on our progress, I believe that the true value of Axalta is not fully recognized. If we see a chance to enhance that value, particularly for our shareholders, we will certainly pursue it. One of our key objectives is to create value. When considering the four elements of value creation, there are opportunities related to our debt, mergers and acquisitions, capital expenditures, and share buybacks. Throughout this journey, we have maintained that there is intrinsic value in our shares that should be returned to our shareholders. This is definitely an area we will explore.

And this concludes our question-and-answer session as well as the conference. Thank you very much for attending today's presentation. You may now disconnect. Have a great day.