By Jeff Sanford
Toronto, Ontario – July 31, 2018 – In this week's Tuesday Ticker, Axalta reports Q2 results, LKQ and much, much more.
Second quarter earnings season continues. This week Axalta reported. Net sales were $1,206.5 million, a sharp increase or 10.8 percent year-over-year (an acquisition contributed 5.6 percent of that).
Net income attributable to Axalta of $74.9 million. That reverses the net loss of $20.8 million recorded in Q2 2017/ Adjusted net income attributable to Axalta was $87.1 million, versus $75.4 million in Q2 2017.
The company announced that it had advanced its share repurchase program in Q2, which saw 100.5 million shares repurchased at a weighted average price of $30.7. On a conference call management said that general business conditions had improved in sequence, led by the performance coatings segment. The solid business was led by second quarter net sales of $1,206.5 million. Average selling prices up 1.9 percent.
Second quarter net sales growth was positive in all regions and increased in every region except Asia Pacific, which was largely impacted by lower average price of light vehicles in China. However, the company did an overall net loss of $20.8 million in the quarter. The increase was driven partly by the absence of the lower refinancing charges in 2018 versus 2017. The results were also driven by contribution from positive price and product mix, acquisitions, modest benefit from foreign currency translation, and slightly lower net operating costs. The positive factors were partially offset by higher raw material costs.
"Second quarter results demonstrated performance meeting Axalta's expectations, which came despite several one-time impacts including Light Vehicle production interruptions caused by non-paint supplier issues, a general strike in Brazil and costs associated with Axalta's footprint realignment in Europe," said Charles W. Shaver, Axalta's chairman and CEO, earlier in the week.
After the earnings announcement Shaver would be let go as CEO, to be replaced by tk. At the time Shaver also said, "Importantly, results also provided evidence of continued price recapture in key areas of the business. The second quarter benefited from fundamental global demand stability underlying our end-markets. Still, moderating GDP forecasts and modest reductions in Light Vehicle build expectations in several regions could be more significant factors in the second half of 2018.”
In the performance vehicles segment, net sales were $784.5 million, an increase of 18.3 percent year-over-year driven by 6.2 percent organic sales growth, acquisition contribution of 9.2 percent and a 2.9 percent foreign currency benefit. Refinish end-market net sales increased 6.1 percent to $447.1 million in Q2 2018 with significantly positive pricing offset by slightly lower volume.
The performance coatings segment generated [earnings] of $176.5 million in the second quarter, a year-over-year increase of 20.2 percent. Positive price and product mix, new revenue acquisitions, and modest foreign currency benefits were offset partly by higher raw material costs and slightly higher expenses.
Transportation coatings net sales were $422.0 million in Q2 2018, a decrease of 0.8 percent year-over-year including a 1.6 percent.
The company ended the quarter with cash and cash equivalents of $551.1 million on hand. Debt, net of cash, was $3.3 billion as of June 30, 2018, compared to $3.4 billion at March 31, 2018.
"Axalta's second quarter results were strong, witnessed in double digit growth in net sales and high single digit growth in [earnings] year-over-year," said Robert W. Bryant, Axalta's executive vice president and CFO.
"That said, we remain highly focused on a combination of passing through price increases as needed to offset substantial cost inflation across our businesses, while also executing ongoing productivity savings in order to enhance near-term corporate margin stability. Our initiatives thus far in 2018 are bearing fruit, but we are doubling down on certain cost measures needed to offset increasing cost inflation pressures including raw materials, transportation, logistics and packaging.”
For the year ahead the company expects net sales to grow eight to nine percent as-reported. RBC Capital Markets lowered its price target on the stock to $35 from $36. Nevertheless, the company maintains an Outperform rating on the stock.
The world’s biggest publicly traded auto recycler and used parts dealer also announced good results this quarter. On a conference call Dominick P. Zarcone said, “Overall, we had an excellent second quarter, highlighted by exceptional revenue growth in each of our segments, progress on improving margins and a successful closing of [an] acquisition. Consolidated revenue was a record of $3.031 billion, reflecting a 23 percent increase over the $2.458 billion recorded in the second quarter of last year.
This is the first time the company has crossed the $3 billion threshold in a quarter. Total revenue growth from parts and services was 22.8 percent during the second quarter, while organic revenue growth in parts and services on a global basis came in at a robust 7.2 percent. As mentioned over the past several quarters, very few companies in our sector are generating organic growth anywhere close to our level.”
LKQ also announced earnings per share of 50 cents as compared to 49 cents for the same period of 2017, an increase of 2 percent.
“These EPS results were slightly above our expectations and due largely to the strong revenue growth and progress on the profit enhancement plans discussed last quarter,” said Zarcone.
“Total parts and services revenue for our North American segment grew 8.3 percent in the second quarter of 2018 compared to the comparable quarter of last year. Organic revenue growth for parts and services for our North
American segment during the quarter was 7.4 percent, which was ahead of our expectations. We continue to perform well in North America, especially when you consider that, according to CCC Information Services, collision and liability related auto claims on a national basis were essentially flat in the second quarter of 2018 compared to last year and down sequentially from the 0.8 percent growth recorded in the first quarter… We believe that significant outperformance in our growth relative to the CCC data for repairable claims is due to the continued increase in the number of vehicles in our collision sweet spot, that being model years three to ten years old as well as a continued market share gain… Also, according to the U.S. Department of Transportation, our performance in Q2 was achieved, while miles driven in the United States were up only 0.8 percent on a nationwide basis in May… The organic growth for aftermarket parts continued to outpace that of salvage parts, as the repair shops continued to focus on improving cycle times given the increased volume of work they were processing.”
Zarcone commented on the chaotic world trade situation that Trump has ushered in.
“Lastly, in North America and as many of you know, during Q1 and Q2 of 2018, three U.S. Code trade statutes were cited by the President of the United States as requiring investigation due to national security concerns and intellectual property rights violations. Today, under the enacted round one of Section 301, there has been little impact on LKQ from the tariffs or the subsequent Canadian countermeasures given that most of the U.S. origin product shipped to Canada are indirect or stocking transfers… With that said, if the imposition of tariffs gains further traction and leads to price inflation in our North American segment, we, like many other domestic distributors exposed to tariffs, expect to pass along these increases to our customers. That said, it'll be important to keep in mind that we will not be able to earn a profit on any increases related to cover the tariffs. So, should tariffs become a real consideration, it will appear as though gross profit and [earnings] as a percent of revenue will be a bit lower.”
LKQ also managed good performance in its specialty parts sector (RVs) “During the second quarter, specialty reported total revenue growth of 13.6 percent, including organic revenue growth for parts and services of 4.1 percent and then the [acquisition] acquisition added an additional nine points of growth… As you may recall, specialty was negatively impacted by the harsh March storms both on the demand side for our RV-focused products and our ability to distribute and serve certain markets. Given this dynamic, we believe that during the second quarter, there was a bit of pent-up demand that we were able to capture, further validating the sustainability and resiliency of our business model.”
Zarcone also noted that scrap prices were up 33 percent over the comparable quarter last year and flat relative to Q1 of 2018.
“The benefit from scrap reflects the sequential movement in pricing, as car costs will generally follow scrap prices higher or lower over time. As such, there was minimal year-over-year impact from changes in scrap prices on our reported results according to Zarcone.
The estimates on the size of a possible spike in the price of a barrel of crude oil continue to expand. This past week a research paper from an economist predicts that oil prices could spike as high as $200 dollars per barrel over the next 18 months. The spike could be fueled a shortage of low-sulfur diesel in 2020 as a result of new regulations that would lower the amount of sulfur allowed in maritime fuels for ocean-going freighters.
The limit could be reduced from 3.5 percent to just 0.5 percent. Considering ships account for five percent of demand in the global economy for crude oil products, the shift could send prices soaring.
The economy melted down in 2008 when the price of a barrel of crude spiked to almost $150 a barrel, which sent gasoline to $1.20 a liter.