Raw material challenges to last through H2 - Axalta

Author: Stefan Baumgarten

2021/07/27

HOUSTON (ICIS)--Axalta Coating Systems saw “substantial increases in cost inflation” in Q2, along with tightness for key raw materials, and it expects the challenges to persist through H2, the CEO of the US-based company said on Tuesday.

The cost increases are coming from a set of raw materials, largely linked to oil and propylene benchmark prices, as well as inflation in packaging, freight and logistics within variable cost of goods sold, Robert Bryant told analysts during Axalta’s Q2 earnings call.

The surge in costs was much higher than Axalta had expected, prompting the company to raise its assumption for full-year inflation headwinds from high single digits to mid-teens, Bryant said.

For the full year, Axalta now expects a raw material headwind of $160m, compared with its earlier expectation of $80m.

For Q3 alone, Axalta expects raw material inflation up 23% year on year for variable costs of goods sold, with some moderation expected in Q4.

Higher than expected raw material costs were a big factor in prompting Axalta to cut its 2021 full-year guidance for earnings before interest and tax (EBIT) to $685m-725m, from earlier guidance of $715m-755m.

Axalta uses thousands of different raw materials, which fall into seven broad categories: liquid resins, powder resins, pigments, solvents, monomers, isocyanates and additives. On average, the company’s total raw material spend represents between 45% and 55% of its cost of sales.

AVAILABILITY
Regarding raw material availability, Bryant noted in particular tightness in isocyanates, acrylic resins and emulsions, and certain polyester resins.

"Constraints across the supply base have certainly been a driving factor [in Q2], including myriad force majeures" that affected the majority of the categories of raw materials Axalta buys, he said.

He noted that in some cases suppliers were still working through impacts and backlogs due to the plant outages during February's US Gulf Coast winter storm.

However, despite tight raw material markets, "we have secured supply and have largely been able to keep pace with the strong demand for our products", Bryant said.

PRICE HIKES TO COUNTER ‘STRUCTURAL INFLATION'
Axalta is seeking to offset the higher raw material costs by raising its product prices as well as through “productivity actions”, Bryant said.

The company already announced two rounds of price increases globally this year to close the widening price-cost gap and may implement a third round, if necessary, he said.

“Incremental pricing actions are necessary and critical to counter the broad and structural inflation that has transpired since 2020,” he said.

DEMAND
While industrial coatings demand conditions remained “robust” in Q2, demand from automotive OEM customers was hampered by the ongoing semiconductor supply issues, Bryant said.

Like the raw material inflation, the semiconductor issues will continue to impact business through H2.

In Axalta's refinish business, demand benefited from reduced coronavirus restrictions in many countries, as well as the global increase in vaccinations, leading to improved mobility and vehicle traffic, Bryant said.

Axalta’s Q2 refinish net sales increased 76.8% year on year to $463.1m, and they were up 16.1% sequentially from Q1.

However, compared with conditions from before the pandemic, refinish business volumes remained below Q2 2019 “by roughly mid-single digits”, Bryant said.

“There is more room for upside before we return to normal conditions in that [refinish] market,” he added.

Thumbnail image shows cars. Many of Axalta's coatings are used by the automobile industry. Photo by Imaginechina/REX/Shutterstock