Executive Summary / Key Takeaways

• Axalta has demonstrated exceptional operational execution and cost management through its Transformation Initiative and A Plan, achieving its 2026 adjusted EBITDA margin target of 21% two years ahead of schedule and driving a streak of consecutive quarterly margin and EPS growth.
• Despite facing soft macroeconomic conditions and industry-specific headwinds across its end markets (Refinish, Industrial, Light Vehicle, Commercial Vehicle), the company has consistently outperformed market trends through strategic initiatives like gaining net new body shops, expanding in the economy Refinish segment via acquisitions, and securing accretive new business wins in Mobility, particularly in China and Latin America.
• Technological innovation, including digital color matching tools (Irus ecosystem) and advanced coatings for EVs and industrial applications (Voltatex, Cerulean), provides a competitive moat by enhancing customer efficiency and product performance, supporting premium positioning and growth in targeted segments.
• The balance sheet has significantly strengthened, with net leverage reaching a record low of 2.5x, providing financial flexibility for disciplined capital allocation focused on investing in productivity-enhancing CapEx, opportunistic M&A, and share repurchases.
• While the near-term outlook for Q2 and the full year 2025 reflects continued macro caution and incorporates potential tariff impacts, management maintains its full-year adjusted EBITDA and EPS guidance, relying on ongoing cost controls, productivity gains, and the ramp-up of new business wins to offset revenue pressures, signaling confidence in the resilience of the operating model.

The Coatings Canvas: Setting the Scene for Axalta's Transformation

Axalta Coating Systems, with a heritage spanning over 150 years, stands as a leading global provider of high-performance coatings. Operating across more than 140 countries, the company serves a diverse customer base through two primary segments: Performance Coatings and Mobility Coatings. The Performance Coatings segment addresses the Refinish market (automotive body shops) and a wide array of Industrial applications, while Mobility Coatings focuses on Light Vehicle and Commercial Vehicle Original Equipment Manufacturers (OEMs). Axalta's position in this competitive landscape is defined by its long-standing expertise, extensive global footprint, and a strategic pivot towards operational excellence and targeted growth, encapsulated in its 2026 "A Plan."

The coatings industry is characterized by intense competition from global giants like Sherwin-Williams (SHW), PPG Industries (PPG), and AkzoNobel (AKZA), as well as numerous regional and niche players. Success hinges on a combination of factors: technological innovation, product quality, customer service, distribution network strength, and cost management. While larger, more diversified players like SHW may boast broader distribution and scale, Axalta has historically differentiated itself through specialized technology and deep customer relationships, particularly in the demanding automotive and industrial sectors. The company's strategic response to this competitive environment and prevailing macroeconomic volatility has been to sharpen its operational focus and selectively pursue growth opportunities where its technological edge and service model provide a distinct advantage.

The Power of the Pigment: Axalta's Technological Edge

At the heart of Axalta's competitive strategy lies its differentiated coatings technology. In the Refinish market, where speed, accuracy, and efficiency are paramount for body shops, Axalta's waterborne systems offer a single-visit application process, contributing to faster cycle times. Complementing this is the Irus ecosystem, featuring the Irus Scan handheld color measurement device and Axalta Nimbus software, which scientifically measures and digitally delivers highly accurate color formulas. The recent introduction of the Irus Mix machine further enhances this by enabling hands-free mixing, collectively offering efficiency gains estimated at 8 to 12 hours per week in a body shop. This suite of tools is a tangible benefit for customers, directly impacting their profitability and strengthening Axalta's value proposition, particularly in the premium segment where it holds over 40% market share.

Beyond refinish, Axalta's technological prowess extends to its Mobility and Industrial segments. The Voltatex wire enamel improves the reliability and efficiency of electric vehicle motors and other high-performance electrical systems, addressing critical needs in the evolving EV landscape. In industrial applications, products like Cerulean, a water-based platform for interior wood finishes, demonstrate the company's commitment to sustainable solutions with enhanced performance characteristics, such as a smoother finish. Strategic R&D initiatives, including the newly launched Axalta Fellows Forum and collaboration with the Technology Incubator team, aim to identify and develop cutting-edge technologies, positioning Axalta at the forefront of innovation. A partnership with Dürr on the NextJet digital paint technology for Light Vehicle OEMs highlights the pursuit of advanced application methods, promising precise paint placement and negligible over-spray, a significant sustainability advantage. These technological advancements are not merely product features; they are critical components of Axalta's competitive moat, enabling higher average selling prices, supporting margin expansion, and driving growth in targeted, high-value applications.

Operational Transformation Meets Macro Headwinds

Axalta's recent financial performance reflects the impact of its strategic initiatives amidst a challenging global backdrop. The company's 2024 Transformation Initiative, aimed at simplifying the organizational structure and lowering the cost base, has been a key driver of profitability improvements. This initiative, expected to result in over 500 global employee reductions and total pre-tax charges of approximately $80 million (with cash expenditures of $105 million to $115 million), is on track to yield approximately $75 million in annualized net savings by 2026, with $20 million realized in 2024 and $30 million to $40 million expected in 2025. These actions, coupled with broader operational efficiencies and favorable variable input costs, have fueled a remarkable streak of adjusted EBITDA margin expansion, marking the 10th consecutive quarter of year-over-year growth in Q1 2025. The company proudly achieved its 2026 A Plan adjusted EBITDA margin target of 21% two years ahead of schedule in 2024, further expanding to 24.1% in Performance Coatings and 16.5% in Mobility Coatings in Q1 2025.

Despite these operational successes, the macroeconomic environment has presented headwinds. In Q1 2025, net sales decreased by 2.5% year-over-year to $1,262 million, primarily due to unfavorable foreign currency translation (-2.7%) and lower sales volumes (-1.5%). This was partially offset by contributions from the CoverFlexx acquisition (+1.1%) and positive price/mix (+0.6%). Cost of goods sold decreased by 4.2% to $829 million, improving as a percentage of sales from 66.8% to 65.7%, benefiting from favorable currency, lower volumes, and reduced ERP/productivity program costs. Selling, general and administrative expenses also decreased by 2.4% to $202 million. The significant decrease in other operating charges from $61 million to $14 million in Q1 2025 reflects lower restructuring and environmental remediation costs compared to the prior year period, which included higher initial charges from the 2024 Transformation Initiative. Interest expense, net decreased by 18.5% to $44 million, benefiting from lower principal and variable rates on debt. Net income for Q1 2025 rose significantly to $99 million, or $0.45 per diluted share, compared to $39 million, or $0.18 per diluted share, in Q1 2024, driven by improved operating performance and lower interest expense.

Segment performance in Q1 2025 mirrored these trends. Performance Coatings net sales decreased by 3.1% to $822 million, impacted by lower volumes and unfavorable FX, though Adjusted EBITDA increased slightly to $197 million, with margin expanding to 24.1%. Mobility Coatings net sales decreased by 1.3% to $440 million, primarily due to unfavorable FX, but Adjusted EBITDA grew by 15.9% to $73 million, with margin expanding significantly by 230 basis points to 16.5%, the highest since Q1 2021. This margin expansion was driven by price/mix, lower variable costs, and reduced operating expenses.

Navigating the Competitive Currents and Market Dynamics

Axalta operates within distinct market segments, each with its own competitive dynamics and macro sensitivities.

In Refinish, Axalta is a leader in the premium segment (over 40% market share), competing on efficiency, color accuracy, and service. While the industry has faced headwinds for several quarters (down mid-single digits in Q1 2025), driven by factors like insurance premium inflation, rising repair costs, and waning consumer confidence leading to fewer collision claims, Axalta has consistently outperformed. In Q1 2025, organic net sales decreased by only 1%, significantly better than the market decline. This outperformance is attributed to gaining net new body shops (900 in Q1 2025, above the normal 600 average, contributing to over 10,000 wins in the last 3-4 years), expanding in adjacencies, and strategically growing in the economy segment (9-11% market share) through acquisitions like CoverFlexx. While the economy segment has lower margins than premium, it is accretive to Axalta overall and represents a significant growth opportunity. Management anticipates the Refinish market to remain down low to mid-single digits in 2025 but expects Axalta to continue outpacing the industry. Potential tailwinds include stabilizing insurance claims, rising used car prices (making repairs more viable), increasing miles driven, and potentially lower repair costs as body shop backlogs normalize.

The Industrial segment faces a muted global demand environment, with mixed signals across regions (slight U.S. growth but March contraction, European declines, continued NA housing decline). Q1 2025 net sales decreased by 5.6% to $311 million. Despite this, Axalta's focus on portfolio mix, cost actions, and productivity has driven Adjusted EBITDA margin expansion for eight consecutive quarters. The company is on track to exceed its 400 basis point margin improvement target for Industrial set in the A Plan. Strategic wins in areas like building products (North America) and energy solutions (Voltatex in China) are providing pockets of growth. Management expects the Industrial market to remain flat to down low single digits in 2025, with potential for expansion dependent on future trade policy and construction recovery in the second half.

In Mobility Coatings, Axalta serves global Light Vehicle and Commercial Vehicle OEMs. This segment requires high technical expertise for complex, environmentally responsible coatings. Q1 2025 net sales decreased by 1.3% to $440 million. Light Vehicle organic net sales grew by 2%, outpacing global auto production growth (+1%), driven by double-digit volume growth in China and Latin America, where Axalta has secured new business wins with fast-growing OEMs, including top EV players. Commercial Vehicle organic net sales grew by 2%, significantly mitigating the severe decline in North America Class 8 heavy-duty production (-17%) through focus on commercial transportation solutions (RVs, public safety) and expansion outside the Americas. The segment's strong margin expansion (16.5% in Q1 2025) is supported by favorable price/mix and cost controls. While global auto production forecasts for 2025 are down slightly (under 88 million units, -2%) due to tariffs and affordability concerns, and NA Class 8 forecasts are sharply lower (255,000 units, -20%), Axalta expects to outpace the industry in both Light Vehicle and Commercial Vehicle due to new business ramp-ups and strategic positioning. The partnership with Dürr on digital paint technology (NextJet) is a key initiative to capture future growth in OEM customization and sustainability.

A significant market dynamic is the emergence of increased trade tensions and tariffs, particularly impacting materials sourced from China, Mexico, and Canada. While approximately 90% of Axalta's products are manufactured and sold regionally, about 10% of raw material purchases are currently affected. Tariffs imposed in 2025 could cost approximately $50 million annually, with about $25 million expected to impact the current year. Axalta is implementing mitigation strategies, including in-sourcing, local sourcing, reformulation, strategic inventory management, and pricing actions, and is confident in offsetting the $25 million impact in 2025, though it may take a quarter for full realization.

Financial Strength and Capital Allocation

Axalta's operational improvements and profitability growth have significantly strengthened its financial position. The company ended 2024 with a record low total net leverage ratio of 2.5x, reaching the high end of its A Plan target two years early. This robust balance sheet provides substantial financial flexibility. As of March 31, 2025, the company had $575 million in cash and cash equivalents and $778 million available under its revolving credit facility.

Capital allocation priorities are focused on driving shareholder value. In 2024, the company deployed approximately $630 million, including $300 million for M&A (CoverFlexx being a key acquisition), $140 million in capital expenditures, $90 million in gross debt reduction, and $100 million in share repurchases. For 2025, CapEx is planned to increase to $175 million to $190 million, reflecting investments in productivity-enhancing projects. The company has $600 million remaining in share repurchase authority and sees a pipeline of accretive M&A opportunities, particularly bolt-ons in Refinish (economy segment, adjacencies) and Commercial Vehicle, leveraging market volatility to create value. Management expects to naturally delever further given the current profile and strong cash flow generation.

Free cash flow generation is a key focus. For the full year 2025, free cash flow is expected to be in the range of $475 million to $500 million. This is a slight downward revision from the previous outlook, primarily driven by increased cash outlays from higher restructuring costs associated with the Transformation Initiative. Despite this, the company believes it can drive over $2 billion in cumulative operating cash flow over the next three years, supporting its capital deployment strategy and progress towards its 2026 ROIC target of 15% (reaching 14.6% in 2024).

Outlook and the Path Ahead

Axalta's guidance for Q2 and the full year 2025 reflects a cautious stance on the global demand environment but confidence in its ability to execute and outperform. For Q2 2025, net sales are projected to decrease low single digits year-over-year, with adjusted EBITDA expected between $280 million and $290 million and adjusted diluted EPS between $0.60 and $0.63.

For the full year 2025, net sales are expected in the range of $5.3 billion to $5.375 billion, an approximate 1% increase at the midpoint year-on-year. This reflects a slight downward revision based on current industry dynamics and a less severe foreign currency headwind ($25 million vs. $100 million previously). Crucially, the full year adjusted EBITDA outlook remains unchanged at $1.150 billion to $1.175 billion, translating to adjusted diluted EPS of $2.50 to $2.60 (a ~9% increase over 2024 at the midpoint). Adjusted EBITDA margins are expected to be close to 22%, expanding approximately 60 basis points over 2024.

This stable profitability outlook despite a slightly lower sales forecast underscores management's confidence in offsetting revenue pressures through operational cost controls, productivity gains (including the $30 million to $40 million incremental benefit from the Transformation Initiative), and managing raw material costs (expected to be flat year-on-year excluding tariffs, with inflation offset by productivity). The ramp-up of new business wins, particularly in Brazil Light Vehicle in the second half of 2025, is expected to provide a tailwind.

Management asserts that based on the 2025 guidance, Axalta is on track to achieve four of its five A Plan financial objectives a full year ahead of schedule. The focus is now on accelerating the A Plan, particularly the growth pillar, leveraging the strengthened operational foundation and balance sheet.

Key risks to the outlook include continued macroeconomic uncertainty, particularly regarding consumer confidence and industrial activity, the duration and impact of trade tensions and tariffs, and potential volatility in raw material costs. However, Axalta's diversified geographic footprint, focus on local-for-local production, mitigation strategies for tariffs, and disciplined cost management provide layers of resilience.

Conclusion

Axalta Coating Systems has successfully navigated recent macroeconomic turbulence by focusing intensely on operational excellence and strategic execution. The company's Transformation Initiative and A Plan have yielded significant results, driving impressive adjusted EBITDA margin expansion ahead of schedule and strengthening the balance sheet to a record low net leverage. While facing challenging end markets, particularly in Refinish and parts of Mobility and Industrial, Axalta has demonstrated a consistent ability to outperform industry trends through market share gains, targeted M&A, and leveraging its differentiated technology in areas like digital color matching and specialized coatings.

The outlook for 2025 reflects continued caution regarding global demand, incorporating potential tariff impacts, but management's commitment to cost control and productivity supports a stable profitability forecast. The acceleration of the A Plan, with a renewed focus on profitable growth through organic wins and opportunistic M&A, positions Axalta to capitalize on market opportunities as conditions potentially improve. Investors should monitor the company's progress in offsetting tariff impacts, the ramp-up of new business wins, particularly in Mobility, and the continued execution of cost and productivity initiatives, which are critical to maintaining margin resilience and driving future value creation. Axalta's story is one of a company leveraging operational strength and technological leadership to build a more resilient and growth-oriented business, even in uncertain times.