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Axalta Coating Systems Ltd (NYSE:AXTA)
Q4 2020 Earnings Call
Feb 18, 2021, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Axalta Coating Systems' Fourth Quarter and Full Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I would now like to turn the conference over to your host, Chris Mecray Vice President, Investor Relations.

Christopher Mecray -- Vice President, Investor Relations, Treasury and Strategy

Thank you and good morning. This is Chris Mecray, VP of Investor Relations. We appreciate your continued interest in Axalta and welcome you to our fourth quarter 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 at axalta.com which we'll be referencing during this call.

Both our prepared remarks and discussion today may contain forward-looking statements reflecting the company's current view of 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 comparable GAAP financial measures. For additional information regarding forward-looking statements and non-GAAP financial measures, please refer to our filings with the SEC. I'll now turn the call over to Robert.

Robert W. Bryant -- Chief Executive Officer

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 teams continued dedication, hard work and relentless focus on our customers has produced very impressive results. We look forward to discussing them with you today. As many of you are aware, last night's earnings release was delayed from the original date of February 3, 2021. As quick background, we were made aware in January of a potential operational matter associated with production at certain North America Transportation Coatings customer site involving certain of our product over a discrete period during the fourth quarter of 2020. Unfortunately with the uncertainty of the financial impacts and responsibilities, we had to delay our earnings today to continue our evaluation and assess the potential financial impacts. 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 would have that guidance. As we continue to assess the scope, recast, and associated responsibilities among various parties, we believe total costs related to this matter could be material and we believe total costs could be up to $250 million based on what we know today. This does not assume any potential insurance recoveries which we would pursue if we incur 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-K that we will be filing; however, given the ongoing review, we're not going to comment further today. With that brief background, overall the fourth quarter for Axalta witnessed superb operating execution. We posted strong operating margins and converted free cash flow at a record level driven by a combination of ongoing volume recovery and success in executing on cost actions throughout the period. Similar to the third quarter, adjusted EBIT showed impressive year-over-year growth despite the lower overall net sales results from our Refinish business due to the impact of COVID. For net sales, we saw sequential growth of 4.6% versus the third 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. Fourth quarter net sales beat our guidance of the year-over-year decrease of 6.8% with upside, driven by strong underlying demand and industrial coatings and ongoing recovery seen in Light Vehicle within Transportation Coatings. As mentioned, quarterly operating profit was impressive with adjusted EBIT of $205 million, up 18% versus $174 million 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 million with the margin of 23.5%, also an outstanding new 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 million and exceeded the prior year's quarter of $248 million driven principally by stronger EBITDA, an excellent working capital performance as well as lower capex.

Finally, we continue to reduce our net leverage ratio, which decreased in 3.7 times at September 30th to 3.3 times at December 31st which reflects a significant detrimental COVID impact of the first half of 2020 operating results on the full-year adjusted EBITDA calculation.

A few notes on full-year results.

Like a highlight, our strong fourth quarter cemented the second half recovery following the dramatic second quarter impact from COVID-19 as a strong overall volume rebound was complemented by aggressive and successful temporary and permanent cost actions and cash flow actions taken by our team and executed with great speed. While adjusted EPS for 2020 of $1.33 fell shy of the dollar in $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 $424 million was only moderately below the $475 million from 2019 despite the large volume headwinds and approximately $23 million of incremental cash interest related to the 2 debt financing actions we took in June and in November. As we closed out the year, we took an important step forward in positioning Axalta for accelerated growth. We hired 2 new business unit leaders for our Transportation Coatings and our Industrial Coatings businesses who are now driving execution and addressing new market opportunities for growth. We completed an organizational realignment to a global business unit focused model which we believe will enable accelerated decision making and growth. We also had solid execution on 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&A activities as we actively pursue new opportunities for inorganic growth. We're all very excited about these recent actions.

Moving onto business conditions. Regarding the current demand environment, our business has benefited broadly during the fourth quarter and continued recovery across most of the markets we serve. The case of that recovery exceeded our expectations and Refinish remains the sole end market that continue to see material-COVID-demand impacts in the period. The Refinish total miles driven for countries with available data continue to improve through October before slipping somewhat mid quarter aligned with the relative severity of country by country pandemic restrictions. US traffic during the fourth quarter remained around 10% to 15% 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 from the fourth quarter as a result of restrictions that remained effect in the early parts of January and In February. But I think 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 of the countries due to the incremental pandemic effect. In the fourth quarter, US data suggest insurance claims were down around 19% in the period while Axalta's US body shop customers saw a better demand in 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 throughout 2021 aligned with the pace of vaccinations and post-locked down travel recovery. This could actually even surprise on the upside, been pent up travel demand. For Axalta's Industrial coatings end market, demand trends were solid and even strong in many markets we served.

In the fourth quarter, all our Industrial sub-businesses grew net sales versus the prior-year period, showing the resilience of this end market in the face of the pandemic and pushing new sales to new quarterly highs in many cases.

Axalta's performance also exceeded broader industrial production metrics with Q4 industrial production up a modest 0.3% globally, though clearly better than the decrease of 2% in the third quarter. We experienced particular strength in our energy solutions, coil and powder coatings businesses driven by broader industrial production recovery. Additionally, US homebuilding remodeling continue to do [Indecipherable] wood business which showed excellent growth in the period. Finally, strength in auto production was a tailwind for the Industrial E-Coat demand. Forecast of global growth in 2021 [Indecipherable] continued expansion for this portfolio of businesses.

In Transportation Coatings, an ongoing V-shape recovery and [Indecipherable] in April and May continue to play out during the fourth quarter. Global auto-production increased 2.5% in the quarter versus the prior year was held 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% increase. Latin America saw a 3.5% increase and North America lag somewhat hosting a 1.2% decrease due to the 12.8% lower volume in Canada in the period.

Axalta's business match paced with these global trends led by strength in the Americas in EMEA. Current industry forecasts call for a 13.4% increase in auto production for 2021 which we expect will support Axalta's businesses well through the year. With Commercial Vehicle end-market, overall global truck production increased to 11.3% in the fourth quarter led by a 20.3% jump in Asia Pacific, but 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 a 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% market growth excluding China with North America at 17.3%. Current demand indicators remain healthy across most regions. In the US, recent order rates have been excellent while heavy-duty truck inventories remain at longer term [indecipherable ] loan levels supporting continued production rates. With that, I'll now turn the call over to Sean for some additional comments.

Sean Lannon -- Senior Vice President and Chief Financial Officer

Thanks, Robert, and good morning. As mentioned, our fourth quarter was marked by continued recovery across nearly all end markets we serve and we executed well in the period to 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 progressed faster than expected.

Performance Coatings fourth 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 third quarter levels as expected.

Transportation Coatings net sales returned to growth in the period increasing a modest 0.5% compared to the prior year quarter driven by Light Vehicle growth of 2.4% offset by Commercial Vehicle decrease in 6.7% though notably better than the 22.5% drop seen in the third quarter as truck production rates increased through the period on the back of strong orders. Product price mix in the fourth quarter was essentially flat at negative 0.2% on a consolidated basis, but no major deviations between the end markets. We have previously noted an expectation of price mix would revert positively and refinish in alignment with volume improvement. Price remained a positive driver within Refinish in the period though.

Consolidated adjusted EBIT for the quarter was a very strong $205 million coming on the heels of the record setting $210 million in the third quarter result and representing an impressive 18.4% growth versus fourth quarter 2019. Performance Coatings segment level adjusted EBIT of $130 million increased 9.7% year-over-year aided by tailwinds from cost actions as well as some help from variable input costs. Adjusted EBIT margin increased an impressive 220 basis points to 18.4%. Transportation Coatings segment level adjusted EBIT of $48 million nearly doubled to $26 million result from the fourth quarter 2019 also driven primarily by cost actions and moderate variable cost tailwinds. Adjusted EBIT margins increased an impressive 600 basis points to 12.9% sustained by recovering volumes as well as the cost tailwinds previously noted. Adjusted EBITDA for the quarter was $253 million, a solid 8.6% increase from the prior year quarter with associated margins of 23.5% of 230 basis points from 21.2% in the prior year quarter. Fourth quarter adjusted earnings per share of $0.58, a 38.1% increase above the prior year's quarters $0.42 per share represents another excellent result for Axalta. Regarding cost structure actions, we were very happy with the strong execution that led to exceeding our targets for the quarter and year. We delivered over $50 million of total cost savings during the quarter, while maintaining strong temporary savings to close the year with an impressive $215 million in total savings as well as $155 million 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 during the second half of the year. Fourth quarter free cash flow of $256 million represented the quarterly record compared to $248 million in the 4th quarter of 2019. A strong fourth quarter free cash flow resulted enough ending the year with total liquidity still over $1.7 billion, even considering the approximate $200 million and debt pay down in the period associated with our November debt refinancing, as well as some incremental share repurchases of $25 million in December, at an average price of $28.69. Our net leverage ratio was reduced to 3.3 times at year-end compared to 3.7 times at September 30th and 4.0 times at June 30th. Our metrics of course still include COVID 19 impacts on adjusted EBITDA from the first half of 2020.

Now, I'd like to share of certain of our expectations for the first quarter [Indecipherable] that this guidance does not take into account any potential impacts from the operational matter that Robert covered in his opening remarks. Regarding our financial outlook, we expect net sales in the first quarter to increase versus prior year by 3% to 5% including expected favorable currency impacts with most of our end markets remaining and a positive demand trends. Refinish remains the key exception impacted by travel restrictions, which we expect persist in various geographies near term. That said we believe that the business will track reductions in COVID-related restrictions and we anticipate a solid recovery over the course of 2021. In Light Vehicle, there is a moderate impact during the first quarter from industry shortage of semiconductors, which has restricted customer production of various sites in the quarter. Much of this loss production is expected to be made up primarily in the second half of 2020. We expect to generate adjusted EBIT of approximately $155 to $165 million and adjusted diluted earnings per share of $0.40 to $0.45 per share in the first quarter 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, especially for Refinish. Still our broader expectation is for the current global industrial expansion to continue this year and we see a number of supportive elements of play, including global industrial production estimated at 6.3%, a continued strong US housing market. Light vehicle production growth estimated at 13.4%, strong growth of Class 4 to 8 trucks outside of Asia, which is the small markets for us today and a general economic recovery globally that appears to support Axalta. Axalta remains intensely focused on enhancing productivity and reducing our cost structure.

For 2021, we expect to see structural cost savings of at least $50 million, which is inclusive of other restructuring announced last July. We also expect some temporary cost savings to persist into 2021, 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 factor now in spot market terms for several months. The coatings industry generally has been effective over time and overcoming raw material cycles with appropriate adjustments to selling prices and Axalta is 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&A as well as opportunistic share repurchases. With that, we will be pleased to answer any questions. Operator, please open the lines for Q&A.

Questions and Answers:

Operator

At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question is from Ghansham Panjabi with Baird. Please proceed with your question.

Ghansham Panjabi -- Baird -- Analyst

Hi, everyone. Good morning. I guess, first off on Refinish. I think in your press release, you had comments that Refinish volumes were down low-double digits in the Fourth 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.

Robert W. Bryant -- Chief Executive Officer

In the 4th quarter Ghansham, what we saw was the quarter actually start off fairly strongly and continue the positive upward trajectory that we had seen coming out of the prior quarter. Then about the middle of the quarter with the additional lock-downs that were put in place in many countries around the world, we saw volumes kind of pulled back in the second half of the 4th quarter. So I think a couple of things we've learned there -first once restrictions are lifted 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 and put in place, you can see the kind of the direct impact there. In terms of the first quarter, overall we expect to be kind of up low single digits compared to the first quarter of 2020 due to the recovery in Asia Pacific in particular as we start to lap kind of the initial start of the pandemic and then also see some favorable FX. Currently, the rest of the world is still being held back by restrictions impacting miles driven and we're seeing US body shop activity down around 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 and the markets that we serve there again are performing quite well. In EMEA, we are seeing miles driven down--kind of 22% to 26% as a general guideline across kind of the bulk of the countries, due to the impact of the second waves of COVID but again our mixing machine volumes are down, far less than that. So that, 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 this occurring there.

Ghansham Panjabi -- Baird -- Analyst

Okay, thanks. It'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 call a positive pricing but sort of some level of volatility of our mix and then just for that business as it relates to your customers, just given the length and the porosity of the downturn from a volume standpoint, how do you think that it impacts your customers from a longevity standpoint as we kind of think through the recovery phase of this pandemic.

Robert W. Bryant -- Chief Executive Officer

I think overall, our expectation is that as we see volumes return to more normal levels and we will 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, that's our expectation and then as it relates to 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 continued to perform fairly well. We have; however, seen a marginal uptick in smaller shops that have been closing primarily due to COVID-19. However, we also expect many of other shops will reopen and new shops will also spring up as the market recovers. But it's important to highlight that the closures today may actually convert to new business for Axalta given that we have strong share overall. So if the smaller shops closed down and given sort of the weighted distribution coverage we have in particular across the US and many other markets, we just expect that will go into a different sales channel for us as opposed to being lost sales.

Ghansham. Just one additional data point as we think about our distribution customers. Generally speaking, they are extremely mindful of working capital and not building heavy inventory. So we continue to see inventory pretty thin in the channel. So as we see demand pick up even further as a body shop level, we should see that direct impact.

Ghansham Panjabi -- Baird -- Analyst

Thanks so much.

Operator

Our next question is with David Begleiter with Deutsche Bank. Please proceed with your question.

David Begleiter -- Deutsche Bank -- Analyst

Robert, it looks like in Q1 the sequential decline is a little bit more than typical. Is that due to the shortage or production and would that be roughly a $10 million impact do you think to Axalta in Q1.

Robert W. Bryant -- Chief Executive Officer

Ok. And maybe just to start. I mean, what you're really seeing if you're looking at sequential sales save between Q4 and first quarter, what you're seeing is the big impact is really the sequential typical decline that we see in Refinish coupled with the fact that we're 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 fourth quarter and first quarter 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 fourth quarter and first quarter and certainly the semiconductor issue is going to impact volume there. But the bigger driver is Refinish that I pointed out OK.

David Begleiter -- Deutsche Bank -- Analyst

I'll follow up later on that. And just on the operational matter, Robert. When do you expect a resolution on that matter and whether other suppliers impacted as well with this matter?

Robert W. Bryant -- Chief Executive Officer

Given the ongoing review. We're not able to share additional information beyond what we've already disclosed, but there are other parties 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.

David Begleiter -- Deutsche Bank -- Analyst

Understood. Thank you.

Operator

Our next question is with Bob Koort with Goldman Sachs. Please proceed with your question.

Bob Koort -- Goldman Sachs -- Analyst

Thank you very much. What I was wondering if you could give us some help [Indecipherable] guidance on the first quarter -- we should 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 --should we think about, you talked about the raw materials, starting to creep up, which we think about in terms of gross margin or operating margin, comparisons as you go through the rest of the year.

Robert W. Bryant -- Chief Executive Officer

So I think there's 2 points I highlight there, Bob and Sean may have a couple of comments here as well. I think first and foremost, given the uncertainty in the market although we have an aggressive plan this year in terms of sales as well as investment at the company-we're 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 in demand but we see the marketplace of course, heavily driven by COVID. So I think we're going to continue to 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 to 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 then move up in terms of the price of oil that may flow over into some of the inputs, 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 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.

Sean Lannon -- Senior Vice President and Chief Financial Officer

And I'm just on temporary savings, we did about $25 million in the fourth quarter, I covered in my remarks, it's really demand on the pace of recovery, but we're currently anticipating in our guidance construct of $15 to $20 million an additional temporary savings for the first quarter as we continue to be very focused on cost structure.

Bob Koort -- Goldman Sachs -- Analyst

And then you know I'm a financial analyst and not a legal guide but I found in your disclosure in the discrete matter very surprisingly worried that there is not a probable loss but there is a reasonable possible loss in the next paragraph it is kind of confusing. I know you can't say much but can you confirm, at least, whatever the issue was that has been rectified and you're still supplying said customer with material.

Robert W. Bryant -- Chief Executive Officer

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, just there's a lot of accounting type language in there and certainly, there is no bright line test but probable general rule of thumb is around 75% and that's why we've used the language. We're not at that probable stage-there is a reasonable possibility, but a lot is going to depend on the root cause and understanding those types of aspects before we formally conclude on whether we need a liability or not.

Bob Koort -- Goldman Sachs -- Analyst

Thank you.

Operator

Our next question is with Chris Parkinson with Credit Suisse. Please proceed with your question.

Christopher Parkinson -- Credit Suisse -- Analyst

Great. In terms of what's in your control-can you speak of the pricing dynamics in both Light Vehicle and Industrial in 2021? Are there any new product launches that may assist in these discussions in your ability to get price mix and also have you noticed any changes among your key competitors given several management changes across US, European and Asian suppliers versus updated ' 17 and ' 18 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.

Robert W. Bryant -- Chief Executive Officer

Chris, as we look at the Light Vehicle business would highlight that most of our indexes where we have index 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 if 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 in some of the management changes and additions that we've made enough 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 about 25% of the overall Transportation business that's covered by raw material pricing. We've got another 35%-it is kind of fixed and then about 40% of the business that has kind of contractual language 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 are in place in terms of how we do business with that customer base. We have those mechanisms in place and I can kind of give you a general sense, and then as I've mentioned, we have new colors, new products as well as expanding our service portfolio actually inside the Light Vehicle and Customer Vehicle plants themselves 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 and the best service tend to win and we have outstanding technology, and I think if not the best, one of the best service teams in the industry.

Christopher Parkinson -- Credit Suisse -- Analyst

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 to say add or maybe even slightly evolve segment average. I know that's been the kind of a target that you guys just further augments. So, just how should we be thinking about those factors over the long term? Thank you very much.

Robert W. Bryant -- Chief Executive Officer

So as we think about the temporary savings, the 15 to 20, we expect in the first quarter, 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, I do expect that we'll have some savings there, but again until we kind of see the pace 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 second quarter as we continue to see recovery, Chris, we will be better prepared to be able to actually quantify what we see a structural.

Christopher Mecray -- Vice President, Investor Relations, Treasury and Strategy

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 on growing in those markets, but key to doing that is kind of embedded in your question is having the right cost structure and making sure that for each market, you have the China for China approach from a cost structure or 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 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 M&A activity in particular in emerging markets for us to support our strategy and make sure that we are moving to and achieve the right cost model in order to be successful and have and an attractive return on invested capital in those markets.

Christopher Parkinson -- Credit Suisse -- Analyst

That's very helpful color. Thank you, both.

Operator

Our next question is with PJ Juvekar with Citi. Please proceed with your question.

P.J. Juvekar -- Citi -- Analyst

Yes, hi, good morning. Robert, I want to drill down into the semiconductor shortage and its impact on auto production. How much do you think production will be down in the first half? And then on your slide 12 you expect Light Vehicle production to grow 13.4%-if this semi shortage last-does that number need to come down. And then secondly does this semi shortage impact pickup trucks and Class 4 to 8 trucks as well?

Robert W. Bryant -- Chief Executive Officer

PJ, I think you've got, you got 3 questions in there. So 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 in total vehicles sold over the course of the year and beyond. We believe that we'll see a similar impact to financial results with a moderate impact to transportation, especially during the first quarter, but we expect to make that up based upon what we're hearing from our customer base 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 in 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 2 products, where they 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 19 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 shortage is 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 in 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 expected to grow by about, by about 13% in the first quarter 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-it's just a lot of pent-up demand for vehicles in most markets around the world. And as we've highlighted before, we're 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-19 world given concerns that consumers are likely to have around right sharing services and public transportation. And that includes both vehicle travel as well as air travel. So again we see these as just a minor hiccups and a secular trend that we think favors being in the Light Vehicle business.

P.J. Juvekar -- Citi -- Analyst

Great, thank you for that. I'll leave it there. Thank you very much.

Operator

Our next question is with Vincent Andrews from Morgan Stanley. Please proceed with your question.

Steve Haynes -- Morgan Stanley -- Analyst

Hi. This is Steve on for Vincent. Thanks for taking my question. You come back to free cash flow-you mentioned expecting another solid year in 2021. So can you maybe help us some of the bridge items they're working capital, capex and how we should be thinking about that?

Robert W. Bryant -- Chief Executive Officer

So I mean we have limited our guidance for the first quarter. But probably the easiest way to think about working capital is the percentage of net sales. We finished 2020 at roughly 8%. We could see a little pressure there may be it picks up half a basis point to 8.5%, a little bit of pressure there is really the restructuring at the end of the year sitting in accrued liabilities. So, we have roughly $56 million and we would expect to spend the vast majority of that and we could see a little pressure from 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 in our original guidance was $160 million, actual came in $82 million as we see continued recovery as well as our global ERP project, we would expect capex to uptick full year. We will probably be around $180 million but we will give an update in the second quarter when we get more guidance for the year.

Steve Haynes -- Morgan Stanley -- Analyst

Okay, thank you.

Operator

Our next question is from Mike Sison with Wells Fargo. Please proceed with your question.

Mike Sison -- Wells Fargo -- Analyst

Hey guys, sorry about that. I was on mute. You mentioned you hired 2 new leaders for transportation industrial coatings, can you maybe give us a little bit of the background and what you think they're going to do a little bit differently going forward?

Robert W. Bryant -- Chief Executive Officer

Well, you know, we changed our organizational model. Before we had a structure of commercial business units regions and in 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 for 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&L experience. If we take our new transportation leader, Hadi Awada-Hadi comes from Faurecia and has spent a great deal of time in the automotive industry and is very, very experienced, and not only experienced in where the market has been or where the market is, but rather where the market's going, and he has extensive experience in mobility solutions that we think it's going to be a real difference maker as we chart our strategy in that business and we'll talk more about that at our Capital Markets Day here 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 you're going to lead to increased growth. With regard to Shelley Bausch leading our Industrial business-Shelley has a very impressive career in the broader industrial sector at several companies including formally 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 and we're 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 in a slightly outside of coatings that leverage a lot of the capabilities that we have within the organization from a technical perspective in particular and Shelley has a great deal of experience in mobility and across the electric value chain that I think it's going to be invaluable to us as we execute our strategy.

Mike Sison -- Wells Fargo -- Analyst

And a quick follow-up, when you think about acquisitions, what do you think Jeremy, is going to be focused on and how much of your balance sheet you are willing to lever up to get the right deal.

Robert W. Bryant -- Chief Executive Officer

There are attractive acquisitions 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 3 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 managed 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 our proprietary situations and not necessarily part of large public processes where you can see valuations get completely out of hand and to a level that just doesn't make any sense.

Mike Sison -- Wells Fargo -- Analyst

Thank you.

Operator

Our next question is with John Roberts from UBS. Please proceed with your question.

John Roberts -- UBS -- Analyst

Good morning, guys. In Refinish there appears to be an abnormally high dispersion in performance among competitors-when competitors actually been up, I think another has been down a lot more than some of the others, do you think there is 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?

Robert W. Bryant -- Chief Executive Officer

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 independence, more of a small body shop focus matters. Also, the segment of the market whether you're more premium, mainstream or economy plays in there as an important variable. So there are a lot of variables there that can drive differentiated performance. 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 and a 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 in building out our portfolio of products as well as services and again you'll hear more about some of the things that we're doing there in our spring Investor Day and I think we're excited to share some of the things that we're working on.

John Roberts -- UBS -- Analyst

And then secondly, it would seem globally we've had a harsh start to the first quarter weather wise, not just Texas in the US, but Europe as well and I think last winter was relatively mild, do you think weather it's 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.

Robert W. Bryant -- Chief Executive Officer

I always kind of hate to comment on weather-it's just as an excuse or as an explanation for outsized performance. But to your point, it can indeed cause incremental volume. So if we see increased accidents because of the weather and hopefully can none of those are hopefully serious, but as we do see increased accidents, typically you would see that in a few months later as cars is actually go into be repaired. So historically when we've seen a tough winter or a lot of that snowfall and sleet nice and so forth. If you'll see accidents in the December, January, February time line and some of those get repaired in March. Some of that doesn't really get repaired until April, May. So if you were going to see a bump, you probably see a little bit of it in the first quarter, but you might see more of it in the second quarter.

John Roberts -- UBS -- Analyst

Great. Thank you.

Operator

Our next question is with Kevin McCarthy from Vertical Research Partners. Please proceed with your question.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Good morning. Robert, in Transportation Coatings, there is an awful lot going on in terms of the pandemic dovetailing into the semi shortages that you commented on, 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-that's there material differences there?

Robert W. Bryant -- Chief Executive Officer

As you point out, there is a lot of variables there and there is a lot of noise. I think the best assumption there would be that market shares, most likely have been relatively flat.

Kevin McCarthy -- Vertical Research Partners -- Analyst

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 any share shifts that are on your radar screen for other regions as well?

Robert W. Bryant -- Chief Executive Officer

We're working collaboratively with all the relevant parties involved in the matter. And at this point we're not aware of any future business loss associated with the issue.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Okay. And are the regions stable enough?

Christopher Mecray -- Vice President, Investor Relations, Treasury and Strategy

This particular issue is confined to North America.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Understood. Okay, thank you very much.

Robert W. Bryant -- Chief Executive Officer

Was your question more globally though that side of that, just how the business is doing this year.

Christopher Mecray -- Vice President, Investor Relations, Treasury and Strategy

Yes, it was yeah, I'm sorry. We absolutely are working across the business in Transportation on opportunities and there are opportunities where we have taken new incremental business during the course of 2020 as well as in 2019 that will begin to actually hit positively that sales in 2021 and that's true in most of the areas that we look at. Certainly, we have gained some business in the truck market. This business that we've picked up in China that's going to benefit us this year that we picked up previously and there are couple of minor losses that we experienced with the customers that have shut down sites here and there, and that accounts as a share loss, even though it's not a competitive loss. But overall, you should expect that result is working toward share gains in Transportation this year and going forward.

Robert W. Bryant -- Chief Executive Officer

Nice to hear. I appreciate the additional color, Chris.

Operator

Our next question is with Alex Yefremov with KeyBanc. Please proceed with your question.

Alex Yefremov -- KeyBanc Capital Markets -- Analyst

Thank you. Good morning, everyone. Robert, you discussed your card pricing strategy. Could you describe how you have changed the way you price your products since the last time it was a raw material inflation in 2016 and 2017?

Robert W. Bryant -- Chief Executive Officer

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 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 from significant moves in foreign exchange.

Alex Yefremov -- KeyBanc Capital Markets -- Analyst

Just a quick follow-up. Robert, I think you mentioned you according to agreements cover about 50% of raw materials inflation, do you recall what that number was the last time we had a raw material cycle.

Robert W. Bryant -- Chief Executive Officer

Yeah, it's. As far as transportation goes, the number is probably closer to a 3rd. As far as the contracts that are indexed there was probably a 10% to 15% uptick through the 17-18 period as we work to further index.

So I think just to clarify, because your question-I think might have misunderstood what I said, in answer to a previous question, which is that we have about 20% of the business. It's covered by raw material indexing, but what we said was it raw material index generally recover about 50% of the of inflation impact over 6 to 12-month period, that the 50% is not the percentage of contracts that are actually covered by indexing.

Alex Yefremov -- KeyBanc Capital Markets -- Analyst

Understood. Thank you.

Operator

Our next question is with Arun Viswanathan from RBC Capital Markets. Please proceed with your question.

Arun Viswanathan -- RBC Capital Markets -- Analyst

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 the chip shortage and your belief that the year is still follows as a normal route and that chip shortage is made up, does that imply that maybe the demand gets fulfilled in second and third quarter, or third and fourth quarter. I know you facing some tougher times in Light Vehicle in the third and fourth quarter, but does the chip shortage actually alleviate some of that?

Robert W. Bryant -- Chief Executive Officer

It will. I mean we're expect the 960,000 current forecasted for the shortage for the first quarter to be largely made up in the second half of 2021. The first quarter I think seasonally typically starts off a little slow, but year-over-year for the first quarter 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%. So we expect a steady ramp up through the year.

Arun Viswanathan -- RBC Capital Markets -- Analyst

And what about commercial Vehicle. Could you just elaborate on your outlook there, especially given may be some extra pull on logistics globally. Have you seen any response from OEMs, increased production due to that? Thanks.

Robert W. Bryant -- Chief Executive Officer

Specifically in the in the heavy-duty truck portion of the market. Actually, when we talk more broadly, just commercial Vehicle broadly. We continue to see a strong recovery from COVID-19 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 was a little bit weaker, while other segments such as supporting equipments and recreational vehicles and then body builders have been, have been strong and so far, we're not seeing any impact of the semiconductor shortage in these in these markets. So overall, we're pretty positive on the direction of the commercial vehicle market for 2021.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Thanks.

Operator

Our next question is from Steve Byrne with Bank of America. Please proceed with your question.

Steve Byrne -- Bank of America -- Analyst

Yes, thank you. With respect to the Refinish business and the pandemic driven slowdown in that end markets, have you seen any changes in behavior in your competitors such as getting more aggressive on pricing or investments in body shops to pick up market share as a result of the slowdown?

Robert W. Bryant -- Chief Executive Officer

In the market, we haven't seen many changes frankly. Because of COVID, we and I imagine our competitors as well have been very much focused on ensuring that our customers have product and helping them manage to slightly lower inventory levels, which has made it from a logistical perspective us helping and working with them to make sure that their supply 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 are 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 year and also keenly focused on providing technical support and in some cases due to COVID, they have had painters or other members that are key in the painting process maybe 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.

Steve Byrne -- Bank of America -- Analyst

And just real quickly, Robert, would you expect the MSOs to invest in new body shops to pick up the void that some of these smaller shops have shuttered as a result of the pandemic, and if so, would you, would you invest with them?

Robert W. Bryant -- Chief Executive Officer

So far, I think what I would expect to see is if smaller body shop shuts down, the MSO doesn't have to step in and buy that body shop in order to get that business. That business which is naturally flow to other body shops and those could be independent body shops or those could be MSOs. So it's just volume moving from a shop, 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 plant body shop that permanently or temporarily close, that volume stands up going to other body shop. So MSOs don't have to step in and make acquisitions in order to benefit from that, from the higher volume. So I don't think we would expect to see a big pick up in shop acquisitions during this time period.

Steve Byrne -- Bank of America -- Analyst

Thank you.

Operator

Our next question is with Paretosh Misra from Berenberg. Please proceed with your question.

Paretosh Misra -- Berenberg Bank -- Analyst

Thank you. So I realized 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 any region or certain products or things haven't really changed much in recent weeks?

Robert W. Bryant -- Chief Executive Officer

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 is that issue and how they're working it depends a little bit on the region of the world where there are 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, I'm 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 focusing on products that have the highest demand as well as the highest product margin.

Paretosh Misra -- Berenberg Bank -- Analyst

Got it, thanks. And then can you talk about the growth prospects for your Energy Solutions business, how much of that is to the electric vehicles?

Robert W. Bryant -- Chief Executive Officer

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 if any of 100 to 200 electric motors in any given vehicle as well as electric cars themselves and we're teamed up with a number of really critical key players in that market, but we have an opportunity to grow that business to be much larger than what it is today currently, and that is a keen area of focus of our Industrial team. 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.

Paretosh Misra -- Berenberg Bank -- Analyst

Thanks, Robert. Appreciate the color.

Operator

Our next question is with Laurent Favre with Exane BNP Paribas. Please proceed with your question.

Laurent Favre -- Exane BNP Paribas -- Analyst

Thank you and good morning. And 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 structural savings you started to have some [Indecipherable] of the more recent program. Can you talk about how we should think on that's on 2021?

Sean Lannon -- Senior Vice President and Chief Financial Officer

Thank you. Yeah. So what we quantified in our opening remarks was $50 million in Axalta Way Structural Savings. They'll 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 speaking, it's 25% and 25% etc. for the $50 million as we progress through the year.

Laurent Favre -- Exane BNP Paribas -- Analyst

Perfect, thank you.

Operator

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.

Christopher Mecray -- Vice President, Investor Relations, Treasury and Strategy

Yes, thank you all for joining us this morning. And we're available over coming days to answer any follow-up questions you may have. I appreciate your interest. Have a good day.

Operator

[Operator Closing Remarks]

Duration: 67 minutes

Call participants:

Christopher Mecray -- Vice President, Investor Relations, Treasury and Strategy

Robert W. Bryant -- Chief Executive Officer

Sean Lannon -- Senior Vice President and Chief Financial Officer

Ghansham Panjabi -- Baird -- Analyst

David Begleiter -- Deutsche Bank -- Analyst

Bob Koort -- Goldman Sachs -- Analyst

Christopher Parkinson -- Credit Suisse -- Analyst

P.J. Juvekar -- Citi -- Analyst

Steve Haynes -- Morgan Stanley -- Analyst

Mike Sison -- Wells Fargo -- Analyst

John Roberts -- UBS -- Analyst

Kevin McCarthy -- Vertical Research Partners -- Analyst

Alex Yefremov -- KeyBanc Capital Markets -- Analyst

Arun Viswanathan -- RBC Capital Markets -- Analyst

Steve Byrne -- Bank of America -- Analyst

Paretosh Misra -- Berenberg Bank -- Analyst

Laurent Favre -- Exane BNP Paribas -- Analyst

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