You just believe there’s got to be upside with all the investment that is being put in place. And that’s certainly what we’re doing as well as to prepare for this upturn at some point.
Steve Byrne : Thank you.
Chris Villavarayan : You’re welcome.
Operator: Our next question is from Ghansham Panjabi with Baird. Please proceed with your question.
Ghansham Panjabi : Thank you. Good morning, everyone. Hey, Chris, can you just give us a sense to the market conditions for auto refinish across your major regions? I know you commented about expecting a little bit of volume growth in 2024. What was that being driven by? Is it just better uptake, easier comparisons, technology? What’s going on across your major markets there?
Chris Villavarayan : Well, I would say it’s flat to up about 2% to 3% is what we’re predicting going forward into ’24. And I’ll just walk you through the markets, to your question. North America is incredibly strong but limited in the sense of just, as you’ve always heard, the ability for body shops to get labor. So there’s inventory sitting at the body shops for work to be done. It’s just getting the labor to be able to drive that. And that’s a great case for Axalta because our story has consistently been the efficiency that we provide to our body shops. If I think about Europe, Europe is what I would call stable to flat. Here, where as you — if you look at our guidance and what we are showing as a slight increase, it’s really the new wins, whether it’s the wins with BMW that we announced last quarter or with the André Koch acquisition, there’s opportunity here to grow.
And China or Asia has been weak or flat to down is what we have seen. But the only part of that is China is also a small part of our business. But overall, I would call it flat to slightly up, Ghansham.
Ghansham Panjabi : Okay. Great. Thank you.
Chris Villavarayan : You’re welcome.
Ghansham Panjabi : And then in terms of the consumer uptake for EVs, I mean, the narrative seems to have shifted in the market just based on the trade price, et cetera, after all the outsized growth over the last few years. Can you just touch based on what you’re seeing in terms of developments, et cetera, on EVs and if that dynamic shift will impact you in any meaningful way?
Chris Villavarayan : Yeah, absolutely. I think, first of all, there’s — the overall element for Axalta is we’re EV-agnostic. I mean, I think most of our coatings are on the outside of cars so we don’t really care if it’s EV or ICE. In that sense, it’s overall been not so much of an issue. The good news, though, for us is if we look at our growth, especially if you look at last quarter, overall Axalta growing by mid single digits but mobility growing by 9%. A lot of that is our growth also in China. And in China, we’re growing at two to three times the rate of the overall market, and it’s primarily because of our growth in EV. We are with a lot of local players that are in the EV space that are growing. And the great news there is, as you know, with China investing $70 billion of incentives through — over the next four years, that’s driving the local market.
But it’s also creating like a great platform to use that to move into, let’s call it, Southeast Asia. So we see that as a growth platform. And the other element that’s helping us there is the fact that we’ve — over the last few years, we put investment in there for manufacturing, whether it’s waterborne capability at Jiading or our new plant that we just launched last quarter with Jilin with just the capacity and the ramp-up is just in line. So it’s really driving the growth that we saw in Q4.
Ghansham Panjabi : Perfect. Thank you so much.
Chris Villavarayan : You’re welcome.
Operator: Our next question is from Michael Sison with Wells Fargo. Please proceed with your question.
Michael Sison : Cheers, guys. Nice outlook for the year for ’24. On the pricing, you mentioned that be positive for both segments. And a little bit of color, fourth quarter was rough for mobility you talked about a lot of ops there. So do you think it turns the corner in the first quarter for pricing? And then — well, actually, do you need to announce price increases? Or are those already–
Carl Anderson : Yeah. Thanks, Michael. Yeah, I think as we look at mobility in the fourth quarter, I think as we referenced in the prepared remarks a little bit more than half of that really related to a comparison we had from the fourth quarter of 2022 with the rest of that being mix as an impact. So as we fast forward for the first quarter and for the full year, we do see pricing being positive in both of our segments. And specifically, as we think about our Refinish business, the team is already a couple of weeks ago actually launched and executed new pricing. So we’re already beginning to see the benefits of that.
Michael Sison : A follow up. In the first quarter, flat sales growth. Sales growth sort of throughout the year, is it in quarter better, third quarter, fourth quarter better? Just trying to get a feel of how we ramp up the low single digits.
Carl Anderson : Yeah. Our expectations, as you start getting into the second quarter, you should definitely see an increase kind of in that low single digit kind of percentage increases, which would really kind of roughly carry in the next several quarters thereafter. So it’s really just the first quarter where at least the initial guide is we’re holding it flat. But you should start seeing that step up in the second quarter.
Michael Sison : Thank you.
Carl Anderson : Thank you.
Operator: Our next question is from Aleksey Yefremov with KeyBanc Capital Markets. Please proceed with your question.
Aleksey Yefremov : Good morning, everyone. Could you give us some thoughts on your bridge for Q1 from Q4? More often than not, EBITDA is about flat sequentially from Q1 to Q4 — from Q4 to Q1, and you’re guiding to flat sales. So what are some of the other factors here?
Carl Anderson : Yeah. As we look at the bridge, we’re going to be down about $11 million of EBITDA Q4 to Q1. We referenced what we saw as it relates to just revenue being down slightly. Obviously, you have the conversion impact as it relates to that. And it’s also really — it’s just the seasonality that we have within our business, specifically in Refinish. So that tends — the first quarter for us tends to be the low point for Refinish, just based off of especially what we see here in North America and a little bit more in Europe. So those are — it’s more a more of a mix story as well that impacts us on a sequential basis. And then we also have in China, with the Chinese New Year, that also has an implication too for the first quarter, specifically for our light vehicle business there.
Aleksey Yefremov : Thanks. And turning to industrial, you’re talking about softer North American construction volumes. Could you maybe discuss residential, non-residential exposure, any potential benefit from infrastructure spending and any other factors?
Chris Villavarayan : So yes, absolutely. So I would call it a split between residential and non-residential, whether you look at our wood business or our building products business or our GI business. In terms of — as we forecast forward, again we’re showing residential being muted or down with where interest rates and where we see building comps coming out. But that said, on the industrial side, on the GI side, the question is how infrastructure spend especially this year with elections would play out in the back end. So at this point, we’re forecasting this to be flat to down slightly. And it’s primarily just to continue to drive the focus on building the foundation on the business and making sure that we have the right cost structure for when we pick up again.
Aleksey Yefremov : Thanks a lot.
Operator: Our next question is from Mike Leithead with Barclays. Please proceed with your question.
Mike Leithead : Great, thanks. Good morning, guys.
Chris Villavarayan : Good morning.
Mike Leithead : Good morning. First question for Chris. I think you made a comment in the prepared remarks around potentially pruning some areas that don’t meet your margin threshold. I guess, can you talk a little bit more, you’ve been there for about a year now, your observations where your portfolio currently stands? And is it just pruning? Or is there any bigger portfolio actions worth exploring?
Chris Villavarayan : No. It’s just — I think the starting point is just pruning. And a perfect example of that is if you look — think about our light vehicle business, last year we announced getting out of our plastics interiors business, a small portion of that where obviously we didn’t have scale. That said, as I look forward into ’24, there are segments of the business within, let’s call it, across all three portfolios, whether it’s our industrial, a bit of our mobility and then even in some sense in some of our regions in Refinish that we might be looking at. Again, the focus for me is as, I think about it, we grew by $1 billion of revenue, if you think through the last four or five years. The first thing is just returning the base case to historical margins.
That alone has about $100 million to $150 million of incremental opportunity. As you can see in what we have given as a guide for ’24, heading north of this $1 billion, we are on path to get back there but we are not there yet. So for me, I think the first set is looking at all four end markets and seeing what more we can do to drive this back. And then we’ll start thinking about if there is any portfolio mix beyond that.
Mike Leithead : Great. That’s super helpful. And then as a follow-up, I apologize, a bit of a technical question for Carl. I think earlier this year, Axalta took a fairly large charge from the Argentine peso that was included in your adjusted EBIT. I think you briefly mentioned an FX charge in the remarks but I don’t see it mentioned anywhere in the release. So did Axalta take a charge from Argentine peso deval this quarter? And was it included or excluded from your adjusted earnings results?
Carl Anderson : Yeah. So we did it for the fourth quarter for specifically Argentina. So it’s not included in EBITDA but it is included in our adjusted EBIT number, which is in the reconciliation.
Mike Leithead : Great. Thank you.
Chris Villavarayan : Thank you.
Operator: Our next question is from Jeff Zekauskas with JPMorgan. Please proceed with your question.
Jeff Zekauskas : Thanks very much. I think your SG&A was up by about 11% on an adjusted basis, maybe it’s 8% unadjusted. And your R&D was up a little bit more than 11%. Those are relatively high numbers for 2024. Do you have expectations about your growth in overhead costs?
Carl Anderson : Yeah, good morning, Jeff. If you look at SG&A, about half of that impact for at least for ’24, whether you look at even the fourth quarter or the full year for SG&A, really related to variable compensation expense with the remaining half of that being just kind of, I would call it, just more inflationary labor type of cost. And so as we look forward into 2024, that is an area of focus for us, where we would be looking to drive that rate of increase down considerably on a year-over-year basis.
Jeff Zekauskas : Great. Can you remind us what percentage of your light vehicle business roughly is China now and maybe where it was two or three years ago?
Carl Anderson : Yeah. It’s about — maybe I’ll quote in revenue basis. It’s about $250 million of revenue for China.
Jeff Zekauskas : Okay, great. Thank you so much.
Carl Anderson : Thank you.
Operator: Our next question is from Mike Harrison with Seaport Research Partners. Please proceed with your question.
Mike Harrison : Hi, good morning.
Carl Anderson : Good morning.
