Greetings, and welcome to the Axalta Coating Systems 4th Quarter and Full Year 2020 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Chris MacRae, Vice President, Investor Relations.
Thank you, and good morning. This is Chris MacRae, VP of Investor Relations. We appreciate your continued interest in Axalta and welcome welcome to our Q4 and Full Year 2020 Financial Results Conference Call. Joining me today are Robert Bryant, CEO and Sean Lannon, CFO. Last evening, we released our quarterly financial results and posted a slide presentation along with commentary to the Investor Relations section of our website ataxalta.com, which we'll be referencing during this call.
Both our prepared remarks and discussion today may contain forward looking statements reflecting currently view the future events and the potential effect on Axalta's operating and financial performance. These statements involve uncertainties and risks and actual results may differ materially from those forward looking statements. Please note that the company is under no obligation to provide updates to these forward looking statements. This presentation also contains various non GAAP financial measures. In the appendix, we've included reconciliations of these non GAAP financial measures to the most directly are in line with the SEC.
For additional information regarding forward looking statements and non GAAP financial measures, please refer to our filings with the I'll now turn the call over to Robert.
Good morning and thank you for joining today's call. I hope you and your families remain safe and healthy. I'd like to begin by expressing my thanks and appreciation to all our Axalta team members globally. Our team has persevered through a very challenging year and our global team's continued dedication, hard work and relentless focus on our customers participants have produced very impressive results. We look forward to discussing them with you today.
As many of you are aware, last night's earnings release delayed from the original date of February 3rd. As quick background, we remain aware in January of a potential operational matter associated with are at certain North America Transportation Coatings customer sites involving certain of our products over a discrete period during the Q4 of 2020. Unfortunately, with the uncertainty of the financial participants and responsibilities. We have to delay our earnings date to continue our evaluation and assess the potential At this time, we're still reviewing the matter and do not believe that any potential liability is probable and therefore have not recorded any charge in the results we are presenting today. Similarly, our Q1 guidance, which we will discuss today, does not take into account any potential liabilities.
So keep that in mind as you assess that guidance. As we continue to assess the scope, participants are subject to the risk of the company's financial statements. We believe total costs related to this matter could be material and we believe total costs could be up to $250,000,000 based on what we know today. This does not assume any potential insurance recoveries, which we would pursue if we incur a substantial loss ultimately resulting from this matter or the likelihood of insurance coverage. It's important to point out that at this stage, we're not certain whether we will have any material losses and what, if any, responsibility we might have relative to the other relevant parties.
There will be additional disclosure in the Form 10 ks that we will be filing. However, given the ongoing review, we're not going to comment further today. With that brief background, overall, The Q4 for Axalta witnessed superb operating execution. We posted strong operating margins and converted free cash flow at a record level, are driven by a combination of ongoing volume recovery and success in executing on cost actions throughout the period. Similar to the 3rd quarter, adjusted EBIT showed impressive year over year growth despite the lower overall net sales result from our Refinish business due to the impact of COVID.
Participants for net sales, we saw sequential growth of 4.6% versus the 3rd quarter, indicating continued recovery across all of our end markets. Still, reported net sales decreased 2.2% year over year or 4% excluding FX tailwinds, with the consolidated business still largely impacted by lower refinish volumes. 4th quarter net sales meet our guidance of a year over year decrease of 6.8% with upside driven by strong underlying demand in industrial coatings and ongoing recovery seen in light vehicle within transportation coatings. As mentioned, quarterly operating profit was impressive with adjusted EBIT of $205,000,000 up 18.4% versus $174,000,000 from the prior year quarter. Adjusted EBIT margins also impressed with an increase from 15.8% to 19.1% year over year.
Beyond that, we posted adjusted EBITDA of $253,000,000 with a margin of 23.5%, participants are also an outstanding near record level and adjusted earnings per share of $0.58 a 38.1% year over year increase. Free cash flow for the quarter was another record of $256,000,000 and exceeded the prior year's quarter of $248,000,000 are driven principally by stronger EBITDA and excellent working capital performance as well as lower CapEx. Finally, we continue to reduce our net leverage ratio, which decreased from 3.7 times at September 30 to 3.3 times at December 31, participants. A few notes on full year results. I'd like to highlight our strong 4th quarter cemented the second half are in the range of 2nd quarter, and we expect to see a significant increase in the While adjusted EPS for 2020 of $1.33 fell shy of $1.80 in 2019, second half results easily exceeded prior year results in both quarters despite ongoing lower net sales levels in both periods.
Free cash flow was also strong and grew year over year in the second half, so strong in fact. The full year free cash flow of $442,000,000 was only moderately below the $475,000,000 from 20 19 participants are in the range of $1,000,000 of incremental cash interest related to the 2 debt financing actions participants we took in June and in November. As we closed out the year, we took an important step forward in positioning Axalta for are participants who are now driving execution and addressing new market opportunities for growth. We completed an organizational are committed to a global business unit focused model, which we believe will enable accelerated decision making and growth. We also had solid execution of the are in the restructuring that we announced in July.
Finally, we recently hired a new Head of Strategy and Business Development to drive our enterprise strategy and our M and A activities as we actively pursue new opportunities for integrated growth. We're all very excited about these recent actions. Moving on to business conditions. Regarding the current demand environment, Our businesses benefited broadly during the Q4 from continued recovery across most of the markets we serve. The pace of that recovery exceeded our expectations and Refinish remains the sole end market that continued to see material COVID demand impacts in the period.
To refinance, total model driven for countries with available data continued to improve through October before slipping somewhat mid quarter participants are aligned with the relative severity of country by country pandemic restrictions. US traffic during the Q4 remained around 10% to 15 are lower year over year, dipping somewhat later in the quarter. While Europe has slipped from stronger levels back to weaker trends in the last 4 to 6 weeks of the 4th are in the same quarter as a result of restrictions that remained in effect in the early parts of January February. Traffic in Asia Pacific is more variable, including strength in recent weeks in India and Australia, but there are some signs of slowing traffic in China, Japan and some ASEAN countries due to the incremental pandemic effects. In the 4th quarter, participants were down around 19% in the period, while Axalta's U.
S. Body shop customers saw better demand than this level. Overall global demand reflected the increased travel restrictions put in place as the quarter progressed. That said, we expect continued recovery for Refinish will be finished throughout 2021 aligned with the pace of vaccinations and post lockdown travel recovery. This could actually even surprise on the upside participants are in pent up travel demand.
For Axalta's industrial coatings end market, demand trends were solid and even strong in many markets we serve. In the Q4, all our industrial sub businesses grew net sales versus the prior year period, are showing the resilience of this end market in the face of the pandemic and pushing new sales to new quarterly highs in many cases. Exalta's performance also exceeded broader industrial production metrics with Q4 industrial production up a modest 0.3% globally, though are clearly better than the decrease of 2.5% in the 3rd quarter. We experienced particular strength in our energy solutions, coil and powder coatings businesses driven by broader industrial production recovery. Additionally, U.
S. Homebuilding and remodeling continued to buoy our wood business, participants showed excellent growth in the period. Finally, strength in auto production was a tailwind for the industrial eco demand. Forecast of global growth in 2021 point to continued expansion for this portfolio of businesses. Participants are in the range of 2.5% in the quarter versus the prior year.
Participants increased 2.5% in the quarter versus the prior year, propelled by strong global demand and efforts to restock low dealer inventories. This growth was led by Asia Pacific with a 4.3% increase, including a 5.9% increase in China. EMEA posted a modest 0.2 participants increased. Latin America saw a 3.5% increase, and North America lagged somewhat, posting a 1.2% decrease are due to the 12.8% lower volume in Canada in the period. Axalta's business matched pace with these global trends, led by strength in the Americas and EMEA.
Current industry forecasts call for a 13.4% increase in auto production for 2021, production increased 11.3% in the 4th quarter, led by a 20.3% jump in Asia participants are also supported by an 11.3% increase in North America, which continues to be the largest part of our commercial vehicle business. This was offset somewhat by 15.4% lower production in EMEA and relatively flat rates in Latin America. The current forecast for Class 4 to 8 truck production for 2021 calls for a 3.1% dip in global production. However, these forecasts indicate we could expect to see impressive 18.7 percent market growth excluding China with North America at 17.3%. Current demand indicators remain healthy across most regions.
In the U. S, recent order rates have been excellent, With that, I'll now turn the call over to Sean for some additional comments. Thanks, Robert, and good morning. As mentioned, our 4th quarter was marked by continued recovery across nearly all end markets we serve, and we executed well in the period will exceed our targets for all of our key metrics. Net sales, down 2% year over year, were better than expected as recovery in automotive, commercial truck and broad industrial markets progress faster than expected.
Performance Coatings 4th quarter net sales decreased 3.5% versus the prior year quarter, with Refinish decreasing 10.4%, offset partly by Industrial increasing an impressive 8.6%. The refinish result was still stronger than the 3rd quarter levels as expected. Transportation Coatings net sales returned to growth in the period,
are in the
range of 6.7%, though notably better than the 22.5% drop seen in the 3rd quarter as truck production rates increased through the period on the back of strong orders. Product price mix in the 4th quarter was essentially flat at negative 0.2% on a consolidated basis, have no major deviations between the end markets. We have previously noted an expectation that price mix would revert positively in Refinish participants are in alignment with volume improvement. Price remains a positive driver within Refinish in the period though. Consolidated adjusted EBIT for the quarter was a very are in a strong $205,000,000 coming on the heels of a record setting $210,000,000 in the 3rd quarter results are participating in the process of 18.4 percent growth versus Q4 2019.
Performance Coatings segment level adjusted EBIT of $130,000,000 increased 9.7% year over year aided by tailwinds from cost actions as well as some help from variable input costs. Adjusted EBIT margins increased an impressive 220 basis points to 18.4%. Transportation Coatings segment level adjusted EBIT of $48,000,000 nearly doubled the $26,000,000 result from the Q4 2019, also driven primarily by participants and moderate variable cost tailwinds. Adjusted EBIT margins increased an impressive 600 basis points to 12.9%, participants are sustained by recovering volumes as well as the cost tailwinds previously noted. Adjusted EBITDA for the quarter was 253,000,000 participants are in a solid 8.6% increase from the prior year quarter with associated margins of 23.5%, are up 230 basis points from 21.2 percent in the prior year quarter.
4th quarter adjusted earnings per share of $0.58 participants are in a 38.1% increase above the prior year's quarter's $0.42 per share represents another excellent result for Axaltra. Regarding cost structure actions, we were very happy with the strong execution that led to exceeding our targets for the quarter We delivered over $50,000,000 of total cost savings during the quarter while maintaining strong temporary savings closed the year with an impressive $215,000,000 in total savings as well as $155,000,000 in incremental cash actions. Regarding our balance sheet and cash flows, we're very pleased that continued focus on working capital and cash actions through 2020 resulted in strong cash conversion are in the second half of the year. 4th quarter free cash flow of $256,000,000 represented a quarterly record compared to 2 are $48,000,000 in the Q4 of 2019. The strong 4th quarter free cash flow resulted in us ending the year with total liquidity are still over $1,700,000,000 even considering the approximate $200,000,000 in debt pay down in the period associated with our November debt refinancing as well as some incremental share repurchases of $25,000,000 in December at an average price of 28 point are $0.69 Our net leverage ratio was reduced to 3.3x@yearendcomparedto3.7x@september30 and 4.0x at June 30.
Our metrics, of course, still include COVID-nineteen impacts on adjusted EBITDA from the first half of twenty twenty. Now I'd like to share certain of our expectations for the Q1, noting that this guidance does not take into account any potential impacts from the operational matter Robert covered it in his opening remarks. Regarding our financial outlook, we expect net sales in the Q1 to increase versus prior year by 3% to 5%, including expected favorable currency impacts with most of our end markets remaining in a positive demand trend. Refinish remains the key exception impacted by travel restrictions, which we expect to persist in various geographies near term. That said, we believe that the business will track reductions are in the range of $1,000,000 and we anticipate a solid recovery over the course of 2021.
In light vehicle, there is a moderate impact during the Q1 from the industry shortage of semiconductors, which has restricted customer production at various sites in the quarter. Much of this lost production is expected to be made up primarily in the second half of twenty twenty one. We expect to generate adjusted EBIT of approximately 155,000,000 to are in the range of $165,000,000 and adjusted diluted earnings per share of $0.40 to $0.45 per share in the Q1 with the other Q1 metrics noted on our guidance slide. We are holding off providing full year 2021 guidance due to the continued uncertainty associated with COVID related impacts, participants are ready to take questions. Still, our broader expectation is for the current global industrial expansion to continue this year, and we see a number of supportive elements in play, including global industrial production estimated at 6.3%, a continued strong U.
S. Housing market, participants are in the line with our expectations. Light vehicle production growth estimated at 13.4 percent, strong growth of Class 4 through 8 trucks outside of Asia, participants are in the are intensely focused on enhancing productivity and reducing our cost structure. For 2021, we expect to see structural cost savings of at least 50,000,000 which is inclusive of the restructuring announced last July. We also expect some temporary cost savings to persist are expected to be in the range of 20 21, but will be dependent on the pace of recovery in certain of our end markets.
We are mindful of the potential impact of inflating raw materials and logistics costs, which have been affected now in spot market terms for several months. The coatings industry generally has been effective over time in overcoming raw material cycles participants are currently focused on passing through inflationary costs with price where applicable. Regarding 2021 capital allocation, we continue to expect strong free cash flow this year and fully expect use of capital to include M and A as well as opportunistic share repurchases. With that, we will be pleased to answer any questions. Operator, please open the lines for Q and A.
At this time, we will be conducting a question and answer Our first question is from Ghansham Panjabi with Baird. Please proceed with your question.
Hi, everyone. Good morning. I guess first off on Refinish. I think in your press release, you had comments that Refinish were down low double digits in the 4th quarter. Can you just give us a sense as to how the quarter evolved from a volume standpoint on a monthly basis?
And what are you embedding specifically for 1Q as it relates to your guidance for auto refinish?
In the 4th are in the quarter, Ghansham, what we saw was the quarter actually start off fairly strongly and continue the positive are in the upward trajectory that we had seen coming out of the prior quarter, then about the middle of the quarter with the additional lockdowns that were put in place in many countries around the world, we saw volumes kind of pull back in the second half of the fourth quarter. So I think a couple of things we've learned there. First, once restrictions are lifted, participants And particularly as we see a vaccine get rolled out and things get back to normal, I think we've got enough data now that we can really feel pretty confident that we're going to see that market recover quite nicely. But likewise, if we see the restrictions put in place, you can see the direct Kind of the direct impact there. In terms of the Q1, overall, we expect to be kind of up low single digits compared to the Q1 of 2020, due to the recovery in Asia Pacific, in particular, as we start to lap kind of participants are in the initial start of the pandemic and then also see some favorable FX.
Currently, the rest of the world is still being held back are in the range of
15% to 19%
currently, but our mixing volumes in terms of the amount of paint that we're mixing, which we can measure on our scales and on our systems is down by a smaller number than that. So I think the body shops in the market that we serve there, again are performing quite well. In EMEA, we're seeing miles driven down kind of 22% to 26% as a general guideline across kind of the bulk of the countries are due to the impact of the second waves of COVID, but again, our mixing machine volumes are are far less than that. So I think overall, we continue to expect to see an impact in Q1, but we're optimistic on the outlook of the market, given the vaccines that are being rolled out around the world and where that is happening, the pickup and driving that's occurring there.
Okay, thanks. That's very helpful, Robert. And then just second question, again, specific to auto refinish. How should we think about mix evolving for that segment as the end market starts to recover more sustainably. You've called it positive pricing, but sort of some level of volatility around mix.
And then just for that business as it relates to your customers, just given the length and the ferocity of the downturn from a volume standpoint, how do you think that impacts your customers From a longevity standpoint, as we kind of think through the recovery phase of this pandemic.
I think overall, our expectation is that as we see volumes return to more normal levels and we'll see increased sales of some of our higher margin and higher priced products that we should see a positive impact on price mix there. That's our expectation. And then as it relates kind of specifically to what we're seeing in the market, from a shop perspective, I think we see the larger MSOs and larger shops continue to perform fairly well. We have, however, seen a marginal uptick in smaller shops that have been closing are primarily due to COVID-nineteen. However, we also expect many of those shops will reopen and new shops will also spring up are in the market recovers.
But it's important to highlight that the closures today may actually convert to new business for Axalta, participants are in the range of $1,000,000 given that we have strong share overall. So those smaller shops close down and given sort of the weighted distribution coverage we have in particular across the U. S. And many other markets, we just expect that will go into a different sales channel for us As opposed to being lost to sales.
Got you. And just one additional data point, as we think about our distribution customers, Generally speaking, they're extremely mindful of working capital and not building heavy inventory. So we continue to see inventories pretty thin in the channel. So as we see demand pick up even further at The Body Shop level, we
should see that direct impact.
Our next question is with David are Beglider with Deutsche Bank. Please proceed with your question.
Robert, on it looks like in Q1, the sequential decline is a little bit more than typical. Is that due to the chip shortage on oil production? And would that be roughly a $10,000,000 impact, do you think, to evolve in Q1.
I think go ahead. Yes.
And maybe just to start, I mean, what you're really seeing if you're looking at sequential sales, Dave, between Q4 and first are seeing is the big impact is really the sequential typical decline that we see in Refinish, coupled with the fact participants are still seeing some pullbacks with the certain countries with the pandemic resurging, but you're seeing roughly a 10% drop in sales for Refinish specifically, Q4 to Q1. And again, that's partly seasonality and partly just the pandemic. As far as light vehicle, we're actually expecting a little bit of growth between Q4 and Q1. Certainly, the semiconductor issue is going to impact volume there, but the bigger driver is Refinish, I pointed out.
Okay. I'll follow-up later on that. And just on the operational matter, Robert, when do you expect resolution on that matter? And were there other suppliers impacted as well
Given the ongoing review, we're not able to share will be available for the full year 2020 earnings conference call. At this time, all participants will be available for the full year, but there are other parties are involved in the matter and we're working quickly to resolve it as quickly as possible. But in terms of providing An exact timeline in terms of how long it will take to resolve it, we don't know at this time.
Understood. Thank you.
Our next question is with Bob Koort with Goldman Sachs. Please proceed with your question.
Thank you very much. Robert, I was wondering if you could give us some participants You gave guidance on the Q1, which would imply some nice margin expansion versus the year ago period. But then I suspect you start layering back in some of the costs That were temporarily removed. What should we think about you talked about the raw materials starting to creep up. What should we think about in terms of
So I think there's Two points I'd highlight there. Bob and Sean may have a couple of comments here as well. I think 1st and foremost, given the uncertainty in the market, are being very prudent in terms of when and how we add additional cost or make additional investments. So essentially, We're going to be following what happens in the market from a demand perspective. So we're not going to be putting those costs in ahead of overall recovery participants in demand that we see in the marketplace, of course, heavily driven by COVID.
So I think we're going to continue should be prudent in that respect and manage our cost structure as we see market conditions. More specifically in the area of raw materials, I think given the currently inflated Brent crude levels, we do expect to see moderate raw material inflation during 2021. And we've got categories that are most likely to be impacted like solvents and monomers as those are closer of the wellhead and then others that are farther out, resins and other categories may see less inflation. So I think we're going to continue to monitor that during the course of the year and the move up in terms of the price of oil that may flow over into some of the inputs is still something that's relatively new. But as we have done in the past, when we see this coming, we of course adjust our pricing actions as well as look at additional cost actions that we can take to offset that raw material inflation.
So if this continues to be something that's not just temporary, but appears to be a little bit more lasting. We'll take corresponding measures. And participants are
Bob, just on temporary savings, we did about $25,000,000 in the 4th quarter. I covered in my remarks, it's really going to depend on the pace of are currently anticipating in
our guidance construct of $15,000,000
to $20,000,000 in additional temporary savings for the Q1 as we continue to be very focused on our cost structure.
Participants And then, I'm a financial analyst and not a legal guy, but I found your disclosure on the discrete matter very are Surprisingly worded that there's not a probable loss, but there's a reasonable possible loss in the next paragraph. It's kind of confusing. I know you can't say much, but could you confirm at least whatever the issue was that has been rectified and you're still supplying said customer with material?
Participants So the issue relates to a discrete period of time and that has been since mitigated. So the issue itself is not recurring. On the accounting front, yes, there's a lot of accounting type language in there and certainly there's no bright line test, but are going to depend on the root cause and understanding those types of aspects before we
Our next question is with Chris Parkinson with Credit Suisse. Please proceed with your question.
Great. In terms of what's in your control, can you speak to the pricing dynamics in both light vehicle participants are there any new product launches that may assist in these discussions and your ability to get price mix? And also, have you noticed any changes are among your key competitors given several management changes across U. S, European and Asian suppliers versus, let's say, the are in the 'seventeen and 'eighteen timeframe, just anything to assist in our thought process and factor in anything that may be different this time around would be very helpful. Thank you.
Chris, as we look at the light vehicle business, I just would highlight that most of our indexes where we have indexed pricing are on a lag of about 6 to 12 months. So we'd expect that in Q2, if we continue to see given the raw material environment, we see those prices go up, that we would see prices move up correspondingly. Price outside of indexes are going to be achieved, as you point out, with new colors, as well as leveraging services. And we have a pretty active pipeline in the light vehicle business in terms of new colors, new products, as well as expanding our service portfolio. And I think with some of the management changes and additions participants that we've made in that business, we're certainly focused on growing that business and I think our team is going to be successful in doing so.
And we've got participants about 25% of the overall transportation business that's covered by raw material pricing. We've got another 35% that's are fixed and then about 40% of the business that has kind of contractual language that allows us to discuss pricing. And our raw material indexes generally cover about 50% of the inflation impact on a 6 to 12 month lag. So overall, just from some of the structural elements that are in place in terms of how we do business with that customer base, participants have those mechanisms in place and I can kind of give you a general sense. And then as I mentioned, we have participants and then overall, as it relates to the market, We haven't seen any material changes in the market dynamics.
It's a competitive market and those that have the best technology participants tend to win. And we have outstanding technology and I think participants, if not the best, one of the best service teams in the industry.
Got it. Thank you. And then just, you hit on this a little, but Just in terms of your cost actions, can you just further speak to your ability to potentially make some of these temporary cost savings a little bit more structural in nature? And then also your ability to calibrate some of your regional cost structures to further grow volumes in emerging markets at a margin, let's just say, participants are at or maybe even slightly above segment averages. I know that's been the kind of target you guys just to further augment So just how should we be thinking about those factors over the long term?
Thank you very much.
So as we think about the temporary savings, the 15 to 20 we expect in the Q1, I would say roughly half of that relates to travel and entertainment. I suspect given the new world we live in, some of that will become more structural in nature. But the other aspects are really just Cost containment around hiring when we see attrition and just general cost management around consulting spend. Participants I do expect that we'll have some savings there. But again, until we kind of see the pace of recovery, we don't know truly what our run rate is going to be, but I do expect some incremental benefits that will be more structural in nature.
I think as we get into the Q2, as we continue to see recovery, Chris will be better prepared to be able to actually quantify what we see as structural.
And on the second part of your question, Chris, obviously growing in emerging markets and in particular in Asia is our biggest opportunity as an organization, and we have a tremendous amount of resources and people focused are on growing in those markets, but key to doing that is kind of embedded in your question is having the right cost structure are in India for India type of cost structure. So we look at not only manufacturing model, but also how we run supply chain, our indirect costs as well as product formulation and local sourcing goes into that. And I think we have those pieces of the puzzle together. And we also have, in our 2 business leaders that have recently joined the company, we have 2 business leaders that have both lived and worked in China extensively and I think we have the recipe of what we need to do there down. And I think you'll also expect to see some increased model in order to be successful and have an attractive return on invested capital in those markets.
Our next question is with P. J. Juvekar with Citi. Please proceed with your question.
Yes. Hi, good morning. Robert, I want to drill down into the semiconductor shortage and its impact on auto production. Participants How much do you think production will be down in first half? And then on your Slide 12, you expect light vehicle production grow 13.4%.
If this semi shortage lasts, does that number need to come down? And then secondly, does this semi shortage impact pickup trucks and Class 4th weight trucks as well?
Participants Vijay, I think you've got 3 questions in there. So we'll I'll try and blend it all into one answer. Market forecasters are expecting an impact of approximately at this point 960,000 vehicles globally during the first half and most of that shortfall, they expect to be made up within the year. Now as a supply issue, it will actually have relatively little impact participants sold over the course of the year and beyond, we believe that we'll see a similar impact to financial results are participating in the second half of the year or if the situation goes on a little longer, well into the following year. Much of it depends a little bit on kind of on region and then also product type.
So North America, as an example, we're seeing very strong recovery As you all have seen, particularly within the truck and SUV market, that's being a little bit challenged by the semiconductor shortages, but many of our customers are, To the extent they have the ability to influence Tier 2 and Tier 3 suppliers in terms of where those chips are going, are trying to direct available chips to products participants have the highest margins. And those are trucks and SUVs. So I think we'll see an impact there, But they are redirecting as much as they can chips to those particular product types. In Europe, the semiconductor shortage and also COVID-nineteen are putting pressure on the European market and they're trying to build inventories to help with that. And of course, in China, the semiconductor shortages expect to have the biggest volume disruption within that region.
And I would just highlight that for Axalta, we have a good market position there, but certainly nowhere near as large as North America and Europe. So the relative impact for us is a little bit less. So you put all that together and I think as we highlighted, the market is are expected to grow by about 13%, but given our in the Q1, but given our customer mix and growth in certain product types we're expecting to grow in excess of that number. And kind of regarding Q1 specifically, there's just a lot of pent up demand for vehicles in most markets around the world. And as we've highlighted before, are bullish on our light vehicle business.
We think people are going to drive more and they're going to more frequently purchase vehicles in the post COVID-nineteen world, given concerns that consumers are likely to have around ride sharing services and public transportation, and that includes both vehicle travel as well as air travel. So again, we see these as just minor hiccups in a secular trend that we think favors participants are in the light vehicle business.
Great. Thank you for that. I'll leave it there. Thank you very much.
Our next question is with Vincent Andrews from Morgan Stanley. Please proceed with your question.
Hi. This is Steve Haynes on for Vincent. Thanks for taking my question. Just wanted to maybe come back to free cash flow. You mentioned expect another solid year in 2021.
So can you maybe help with some of the bridge items there, working capital, CapEx, And how we should be thinking about that?
So, I mean, we've limited our guidance to the Q1, but probably the easiest way to think about working capital as a percentage of net sales. We finished 2020 at roughly 8%. We could see a little pressure there. Participants are in the range of $0.05 to $0.05 a little bit of pressure there is really the restructuring at the end of the year are sitting in accrued liabilities, so we had roughly $56,000,000 and we would expect to spend the vast majority of that and we could see a little pressure from a raw materials perspective in inventory, but by and large, we should be in that 8% to 8.5% as a percentage of net sales. CapEx for 2020, Our original guidance was $160,000,000 Actuals came in at $82,000,000 As we see continued recovery, as well as our global ERP project, we would expect CapEx, Deltek full year will probably be around $180,000,000 but we'll give an update in the second are in the same quarter when we get more guidance for the year.
Okay. Thank you.
Our next question is from Mike
You mentioned you hired 2 new leaders for Transportation Industrial Coatings. Can you maybe give us a little bit of the grab and what you think they're going to do a little bit differently going forward?
Well, as you know, we changed participants have changed our organizational model. Before, we had a structure of commercial business units, regions and global functions. And as a result of the model that we've shifted to, it is now a full complete fully integrated soup to nuts gross sales to net income to free cash flow driven business unit with responsibility across all areas in each one of our businesses. So that also has necessitated a different type of leader with that type of full P and L experience. If we take our new transportation leader, Hadi Awada, Hadi comes from Fallujah and has spent a great deal of time in the automotive industry and has been very, very experienced and not only experienced in where the market has been are where the market is, but rather where the market is going.
And he has extensive experience in mobility solutions that we think is going to be a real difference maker as we chart our strategy in that business. And we'll talk more about that at our are in the spring, and you'll hear more about that change in direction and some of the exciting things that we have there that we think are going to lead will be able to see increasing growth. With regard to Shelley Bausch leading our industrial business, Shelley has have a very impressive career in the broader industrial sector at several companies, including formerly a coatings company, but also Dow Chemical and also a recent industrial company that sells a real diversity of products. And she has a track record of really going after and growing in new markets, both organically and inorganically. And I think that's important Because in the industrial part of the coating space, it is a buffet and you can literally be tempted to want to eat everything.
Participants are going to be very deliberate in terms of specific markets within industrials where we go. And there are also adjacencies that are still within the industrial coating space or slightly outside of coatings that leverage a lot of the capabilities that we have within the organization from a technical perspective in particular and Shelly also has a great deal of experience in mobility and across are in the electric value chain that I think is going to be invaluable to us as we execute our strategy.
Great. And a quick follow-up. When you think about acquisitions, where do you think Jeremy is going to be focused on? And How much of your balance are you willing to lever up to get the right deals?
There are attractive acquisitions acquisition candidates in each one of our businesses, and Jeremy will be focused on going after together with our leadership teams, each one of those attractive candidates within all three of our businesses. And I think you should expect to see some pretty significant progress on that over the next 12 months. And I think we're excited about some things that we're currently working on. And in terms of leveraging our balance sheet, I think we will continue to manage the company financially in a very prudent manner. And I think we'll also continue to be valuation disciplined.
But again, a lot of the deal flow that we have and things that we focus on are proprietary situations and not necessarily part of large public processes
Our next question is with John Roberts from UBS. Please proceed with your question.
Good morning, guys. In Refinish, There appears to be an abnormally high dispersion in performance among competitors. 1 competitor has actually been up. I think another has been down a lot more than some of the others. Do you think there's a structural shift going on or you think that's just different timing in the channel inventory effects between competitors?
And Any thoughts on that dispersion would be appreciated.
Difficult for us to comment specifically on what's driving The performance of individual competitors there, I think obviously geographic mix is a heavy component, channel mix in terms of whether you're with large MSO independents, more of a small body shop focus matters, all participants are in the market, whether you're more premium, mainstream or economy, plays in there as an important variable. So there are a lot of are in the range of $1,000,000 in the case of Axalta. We've been taking into account, Obviously, the pandemic impact over the past 12 months, I couldn't be prouder of what our Refinish team has accomplished participants and the number of changes and adjustments that we've made to make sure that our customers continue to be well served and successful, As well as growing the number of new customers that we have and building out our portfolio of products As well as services. And you'll again, you'll hear more about some of the things that we're doing there in our spring Investor Day, and I we're excited to share some of the things that we're working on.
And then secondly, it would seem globally we've had a harsh start to the Q1 weather wise, not just Texas and the U. S, but Europe as well. And I think last winter was relatively mild. Do you think weather is going to affect the comp in Refinish? And would it be later in the March quarter?
Or would it be in the start of the June quarter since distribution could create a lag here?
I always kind of hate to comment on weather, just as an excuse or as an explanation for outsized performance. Participants But to your point, it can indeed cause incremental volume. So if we see participants are in the range of the year. And hopefully, again, none of those are hopefully serious. But as we do see increased accidents, typically, you would see that participants a few months later as cars actually go in to be repaired.
So historically, when we've seen a tough winter participants were a lot of snowfall and sleet and ice and so forth, you'll see accidents in the December, January, February timeline and some of those get repaired in March, some of that can really get repaired until April, May. So if you were going to see a bump, you'd probably see a little bit of it in the Q1, but you might see more of it in the Q2.
Great. Thank you.
From Vertical Research Partners. Please proceed with your question.
Good morning. Robert, in transportation coatings, there's an awful lot are going on in terms of the pandemic dovetailing into the semi shortages that you commented on. If If we were to boil down all of those issues and attempt to look through it, do you think your market share in light vehicles increased, decreased or trended about flat in 2020 and how would your answer differ by region if there are material differences there?
As you point out, there's a lot of variables there and there's a lot of noise. I think the best assumption there would be that market share is most likely been relatively flat. Okay.
And then as a brief follow-up, If we look ahead to 2021 and take into account the operational issue that you cited, Do you expect any meaningful changes in your North America share resulting from that or
participants are working are in the same position as the other parties involved in the matter. And at this point, we're not aware of any future business loss associated with the issue.
Participants Okay. And other regions stable enough?
This particular issue is confined to North America.
Participants are in
the line with your question more globally though outside of that, participants are doing this year.
Yes. Yes.
We We absolutely are working across the business in transportation, on opportunities and there are opportunities where we have taken new will be in the course of 2020 as well as in 2019 that will begin to actually hit positively net sales in 2021. That's true. In most of the areas that we look at, certainly we've gained some business in the truck market. There's business that we picked up in China that's going to benefit us this year that we picked up previously. And there are a couple of minor losses that we experienced with customers that have shut down sites here and there, and that counts as a share loss even though it's not a competitive loss.
But overall, you should expect that Axalta is working towards share gains in transportation this year and going forward.
Our next question is with Alex Yefremov with KeyBanc. Please proceed with your question.
Thank you. Good morning, everyone. Robert, you discussed your card pricing are ready to take questions. Could you describe how you have changed the way you price your products since the last time there was raw material inflation
I think our overall approach to pricing, approach as well as strategy remains unchanged. The only potential change maybe since the last kind of raw material cycle in the 2018 period is that we have a larger number of contracts that are now indexed. And that was one of the specific goals that we had in our transportation business was to move to more indexed contracts, so as not to have to enter into and take up so much time in those discussions around price either coming from raw material inflation or in certain markets are from significant moves in foreign exchange.
And just a quick follow-up, Robert. I think you mentioned Your current agreements cover about 50% of raw materials inflation. Do you recall what that number was the last time we had a raw material cycle?
As far as transportation goes, The number is probably closer to a third as far as the contracts that are indexed. There was probably a 10% to 15% uptick participants are in the 20 seventeentwenty eighteen period as we work to further index.
So I think just to clarify Just to clarify, because your question I think might have misunderstood what I said in the answer to your previous question, which is that we have about 25% of the business is covered by raw material indexing, but what we said was that raw material indexes generally cover about 50% of the inflation impact over a 6 to 12 month period. The 50% is not the percentage of contracts that are actually covered by indexing.
Our next question is with Arun Viswanathan from RBC Capital Markets. Please proceed with your question.
Great. Thanks for taking my question. I guess I wanted to ask about the cadence of the quarters here. Just given what you said about Chip shortage and your belief that the year is still follows a normal route and that chip shortage is made up. Does that imply that maybe the demand gets fulfilled in 2nd and third quarter or third and fourth quarter?
I know you faced some tougher comps in light vehicle in 3rd Q4, but does the ship shortage actually alleviate some of that?
It will. I mean, we're expecting the 960,000 current forecast for the shortage for the Q1 to be largely made up in the second half of twenty twenty one. The Q1, I think seasonally typically starts off a
little slow, but year over year for
the Q1 from LV build perspective, We're still expecting to be up about 12% globally, as it relates to industry forecast. And for the full year, we still expect And again, what IHS is saying is the full year to be up about 13.4%. So we expect a steady ramp up through the year.
And what about commercial vehicle? Could you just elaborate on your outlook there, especially given maybe some are full on logistics globally. Have you seen any response from OEMs to increased production due to that? Thanks.
Are participating in the heavy duty truck portion of the market or actually, let me talk more broadly, just commercial vehicle broadly. We continue to see a strong recovery from COVID-nineteen, especially within the heavy duty truck market. The other transportation portion of the market fares a little differently just depending on the segment. So for example, bus production participants are a little bit weaker, while other segments such as sporting equipments and recreational vehicles and then bodybuilders participants have been strong. And so far, we're not seeing any impact of the semiconductor shortage in these markets.
So overall, participants are very positive on the direction of the commercial vehicle market for 2021.
Thanks.
Our next question is from Steve Byrne with Bank of America. Please proceed with your question.
Yes. Thank you. With respect to the Refinish business and the pandemic driven slowdown in that end market. Have you seen any changes in behavior of your competitors, such as getting more aggressive on pricing or investments in body shops
participants In the market, we haven't seen have many changes, frankly, because of COVID. We and I imagine our competitors as well have been very much focused are on ensuring that our customers have product and helping them manage to slightly lower inventory levels, which has made from a logistical perspective, us helping and working with them to make sure that they're supplied kind of when they need it and helping them manage their cash flow that was definitely true during the kind of the Q2 period. But really for the body shops, It's all about the productivity that they're able to achieve with the products in the body shops and also The technical service that we provide to them. And so I think we've continued to focus on making sure that our customers have the paint that they need when they need it and also keenly focused on providing technical support. And in some cases, due to COVID, they have had painters or other members that are may be out for periods of time and we stepped in and helped our customers.
And I think, again, I'm very proud of our Refinish team and how well they've been able to service all of our customers around the world.
Just real quickly, Robert, would you expect the MSOs to invest in new body shops to pick up participants have shuttered as a result of the pandemic and if so,
So far, I think what I would expect to see is participants if a smaller body shop shuts down, the MSO doesn't have to step in and buy that body shop in order are interested in that business. That business will just naturally flow to other body shops. And those could be independent body shops or those could be MSOs. So it's participants are in the market. And again, I think this is a relatively small percentage of the market where this is happening as we've discussed.
But if there are body shops that permanently or temporarily close, that volume stems up going to other body shops. So MSOs don't have to step in make acquisitions in order to benefit from that higher volume. So I don't think we would expect to see a big will be in shop acquisitions during this time period.
Okay. Thank you.
Our next question is with Paretosh Mishra from Berenberg. Please proceed with your question.
Thank you. So I realize semiconductor chip is not your core business, but just based on your conversation with the OEM customers, Do you get the sense that the chip shortage issues already getting better in any region or for certain products or things haven't really changed much in recent weeks?
I don't know that we have much insight into any recent changes Based upon what we've heard in the last few weeks, each one of our customers is working that issue and how they're working it depends a little bit on the region of the world where they're particularly focusing on selling vehicles as well as the particular vehicle platform and some of the affected suppliers, but what we have seen is certainly them trying to be flexible and make sure that to the extent that they can influence which chips make it into which systems that end up going into which vehicles, that they're really are focusing on products that are under have the highest demand, as well as the highest product margin.
Participants Got it. Thanks. And then could you talk about the growth prospects for your Energy Solutions business? How much of that is the electric vehicles?
We're very optimistic about our Energy Solutions business. Our Energy Solutions business, as you know, are various coatings that go on electric motors and other electronic applications. And that business today, which of course goes on electric motors that if any of the 100 to 200 electric motors in any given vehicle as well as electric cars themselves and were teamed up with a number of really critical key players in that market. But we have an opportunity to grow that business should be much larger than what it is today currently, and that is a keen area of focus of our are in the industry. So I think you should look to hear more about that business and I think you'll also see us invest more in that business given how strongly positioned we are there and what some of the market trends are as we go forward.
Our next question is with Laurent Favre with Exane. Please proceed with your
question. Thank you. Good morning. Just one please. On the cost cutting side, Sean, you've mentioned that the temporary savings would follow, I guess, the pace of recovery in terms of the reversal.
Can you talk about the cadence of the other structural savings, you started to have some I think in H2 of the more recent program. Can you talk about how we should think on that on 2021? Thank you.
Yes. So what we quantified in our opening remarks, Laurent, was $50,000,000 in Axalta Way structural savings. Participants will come in fairly ratably over the course of the 4 quarters. There is a little bit of a ramp as we move through the Europe, but generally
As we move through the
year, but generally speaking, it's 25%, 25%, etcetera, etcetera, for the $50,000,000 as we progress through the year.
Ladies and gentlemen, we have reached the end of our question and answer session. And I would like to turn the call back over to management for closing remarks.
Yes. Thank you all for joining us this are available over coming days to answer any follow-up questions you may have. Appreciate your interest.