By Jeff Sanford
Toronto, Ontario -- February 14, 2016 -- Last month employees of Axalta Canada celebrated the 60th anniversary of the company's operations at its Ajax, Ontario plant. To mark the date Axalta employees gathered at a local hotel and celebrated both Axalta's 60th year of operations in Canada, but also the 150th business anniversary of the parent company. This is a long and impressive corporate history.
Axalta opened the doors on the Ajax factory in 1956. Since then the company has been producing acrylic lacquer paints, basecoat and clearcoats for use throughout Canadian industry. In 2000 the facility was identified as an Axalta corporate development and manufacturing flagship for the “paint on plastics” products. More recently, due to rising production, Ajax added a new distribution centre to the campus. Products from Ajax are shipped to customers across North America. The business is busier than ever.
Considering the success of the company it is no surprise that in an analyst report to clients released February 8, analysts as the investment banking arm of Royal Bank Canada reiterated their “Outperform” rating on shares of Axalta and assigned the company a $31.00 target price per share. Considering the company closed at $23 a share on February 12, RBC Capital Markets’ sees real potential and upside in the Axalta story. Can investors assume that potential will be realized? An earnings call hosted by Axalta executives earlier this week suggests as much.
Axalta Coating Systems' CEO Charlie Shaver hosted the earnings call, along with Robert Bryant, executive vice president and chief financial officer. The two took time to talk about the latest quarterly financial performance at the company. Axalta missed analysts expectations by two cents a share this past quarter, but Shaver said he was happy with the performance of the company over the last reporting period of 2015.
“We delivered a good fourth quarter result to finish off a solid year for Axalta, despite a challenging emerging market and currency environment,” he said. A rising US dollar can be tough on American companies. Offshore profits are marked down. Clients might turn to the products of cheaper, foreign competitors, and so a rising dollar is part of the reason financial numbers may not have been what analysts wanted.
But Shaver was careful to note that net sales at the company rose a solid 4.5 percent over the same period in 2014. That is, the real, underlying business is doing well. “We also delivered profitable growth, as adjusted [earnings] on Q4 rose 4 percent year-over-year, in spite of significant currency headwinds,” said Shaver. “Notably fourth quarter profit ... was generated from strong execution and some relief in China coming off of a challenging third quarter. He went on to say that Axalta's operating initiatives remain on track. The company is undertaking four major capacity expansions. Three acquisitions last year will add new business. The company also made strong progress in its productivity initiatives, achieving 52 million in incremental savings in 2015 from two programs, Axalta Way and Fit-For-Growth.
“Our 2016 combined incremental savings target remains at 60 million, as we communicated at our analyst investor day back on December 4,” said Shaver. The company is in good financial health. It held $485 million in cash on the balance sheet at the end of the year, and has over $860 million in total liquidity available to the company. According to Shaver the company will, “work to further increase cash flow and [achieve] leverage reduction goals in 2016.”
Shaver also noted that the company produced growth of 5.3 percent in net sales before the impact of currency shifts were taken into account.
“It is interesting to note that absent these large translation currency headwinds our adjusted [earnings] would have likely exceeded the high end of our communicative guidance all the way back in March,” said Shaver. “This simply underscores the strength of our operating performance in 2015 and I’m very proud of the work that our team accomplished during the period. We review our global diversification and long term strategic positive, and we expect to associated financial benefits from this once the currency global economic conditions work their way through.”
Turning the call over to the CFO, Bryant, it was noted that, “Foreign currency translation reduced reported net sales by 11.5 percent in the quarter.” The company's net sale volume “increased 3.9 percent over the prior year quarter, reflecting growth in all end markets and most regions in the period. In North America, volumes increased mid-single digits, led principally by transportation coating as in previous quarters, benefiting from a strong regional auto market and new business wins,” according to Bryant. In Asia Pacific, “volumes rebounded nicely to show renewed overall growth after a weaker Q3. In China, specifically we saw sales volumes in November, December and January return to at or above our budgeted levels. Latin America saw essentially flat volumes, held back largely by slower light vehicle production,” according to Bryant. “We are very proud of this result, which was achieved through a lot of hard work across the Axalta team. We believe our organic net sales growth in 2015 excluding the impact of foreign currency was highest of any company in the coatings industry. This net sales growth was split relatively evenly between the segments, with mid-digit growth coming from both performance and transportation coatings.”
Looking ahead Shaver said that the company is targeting growth in net sales before currency of “4 percent to 6 percent.” He also noted that “it’s useful to remind everyone that over 40 percent of our revenues and even more of our profitability comes from the refinish end market, serving the relatively stable and globally diversified automotive collision aftermarket. This provides for a stable net sales foundation from where to build and are steadily gaining share in this consolidating market over time in all our major regions. We believe that refinish demand will continue to benefit in 2016 for lower fuel prices, which correlates well with increased miles driven, and accident rates as well as the purchase of larger vehicles that consume more.”
For more information on Axalta, please visit axalta.ca.