Axalta Coating Systems (AXTA) Q4 2021 Earnings Call Transcript

Axalta Coating Systems (AXTA -0.58%)
Q4 2021 Earnings Call
Feb 01, 2022, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Axalta's fourth quarter and full-year 2021 earnings conference call. [Operator instructions] Today's call is being recorded, and a replay will be available through February 8. [Operator instructions] I will now turn the call over to Chris Mecray.

Please go ahead, sir.

Chris Mecray -- Vice President, Investor Relations and Treasury

Thank you, and good morning. This is Chris Mecray, VP of investor relations and treasury. We appreciate your continued interest in Axalta, and welcome you to our fourth quarter and full-year 2021 financial results conference call. Joining me today are Robert Bryant, CEO; and Sean Lannon, CFO.

Yesterday afternoon, we released our quarterly and annual 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. Also, on January 25, we published a set of best-in-class ESG goals, including 10 commitments for 2030, which you can also reference on our Investor Relations website for more details. Both our prepared remarks and discussion today may contain forward-looking statements reflecting the company's current view of future events and their 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 those 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 Bryant -- Chief Executive Officer

Good morning, everyone. I'd like to welcome you to our fourth quarter and full-year 2021 earnings call. Our quarter and full year were marked by ongoing strong demand conditions and solid execution by our team, but also by ongoing challenges in the supply chain and input cost inflation. Despite these factors, we executed very well against this climate, generating year-over-year sales growth, substantial incremental pricing to offset inflation and strong free cash flow.

We further demonstrated ongoing solid capital allocation with continued share buybacks, as well as completing two acquisitions during the year while still ending the year with a very strong balance sheet. I would like to thank all Axalta employees for their continued efforts in the quarter and also wish everybody continued health and wellbeing as the pandemic continues to impact our lives in a variety of ways. Turning to operating performance in the fourth quarter. Axalta reported strong year-over-year net sales growth from three of our four end markets, while customer production constraints continue to negatively impact light vehicle.

Fourth-quarter net sales increased 7% year-over-year ex-FX, including a contribution of 4% from acquisitions. Volume growth was a clear highlight in our performance coatings segment, increasing by 5% with both end markets contributing meaningfully. This marks our fifth consecutive quarter of year-over-year growth within Industrial and fourth consecutive quarter for Refinish. Within mobility coatings, our commercial vehicle end market also showed volume growth of over 7%.

light vehicle was an outlier given the known semiconductor challenges. Price was positive in all four end markets despite some headwinds we saw within product mix in the quarter. Business demand in the quarter remained strong and stable across all of Axalta businesses but raw material inflation and supply chain constraints significantly impacted both sales volumes and our cost structure. Refinish saw stable overall demand in the quarter, with net sales up 12.8% year over year or 6.6% before currency and acquisition contribution, which was up sequentially versus third quarter before acquisitions and FX impacts.

We also ended the quarter with substantial unfilled order backlogs due to supply constraints. Industrial net sales increased an impressive 16.3% or 13.9% ex-FX before acquisitions, continuing similarly strong growth throughout 2021 and reflecting strong overall global industrial goods demand. light vehicle net sales declined 13.7% ex-FX in the quarter versus the prior year. The volume is still constrained by chip shortages at our customers and only moderately improved from the third quarter.

This was reflected in sequential global automotive production growth with fewer shutdowns occurring in the period. Commercial vehicle net sales increased 8.4% ex-FX in the fourth quarter, driven by ongoing strong production rates and some share gain from non-truck customers, including recreational vehicles and sporting equipment OEMs. Adjusted EBIT for the fourth quarter was $121 million versus $205.4 million in the year-ago quarter as the business was impacted by significantly higher variable cost inflation, approximately 24% year over year in the fourth quarter. Supply chain shortages companywide and headwinds from the absence of temporary cost savings through 2020, partly offset by growth and strong execution across both performance coatings end markets and in commercial vehicle within mobility coatings.

Refinish ended the year with substantial price pass-through to offset inflation and margins and absolute adjusted EBITDA contribution at all-time highs despite a notable impact on volumes given the lasting impacts of COVID. Fourth-quarter business conditions across the company remained stable and generally strong despite supply chain challenges. Refinish, although modest, saw continued demand improvement, including both traffic and body shop activity with some variability by country. Part shortages, body shop technician shortages, and some impact from omicron in traffic and body shop staffing created challenges for our customers in the quarter.

Though business volumes increased sequentially from the third quarter, organic volumes remain down approximately high single digits below 2019 levels suggesting continued meaningful room for improvement looking ahead. This included some quarter-end backlog that was unfilled due to supply and operating constraints. Axalta's Industrial end market remains robust globally and net sales increased 17% ex-FX and 13.9% on an organic basis against a strong prior-year comparison, indicating underlying demand strength as well as demonstrating success in our organic growth execution. The top line was still constrained by supply chain headwinds in the period and to a greater degree than during the third quarter, inclusive of both raw material, supply dynamics, as well as logistics and labor challenges.

Topline growth was strongest in North America, followed by EMEA, and was led by the building products and general industrial businesses. Light vehicle saw continued constraints at the customer and end-consumer level. Global vehicle production for 2021 increased only 2.5% from the prior year, which, of course, was dramatically impacted by the pandemic principally during the second quarter of 2020. Due to supply shortages, some 9.6 million vehicles were deferred during 2021 against original industry production estimates, although the quarterly vehicle deferral amount decreased to 3.5 million vehicles in Q3 to 2.1 million vehicles in Q4 as chip availability improved slightly toward year end.

The fourth-quarter impact was also 1.4 million vehicles below the high end of the forecasted range of potential production impacts from October 2021. Commercial vehicle demand remained robust through year end with notable strength in North America retail sales. Current North America backlog remains near all-time highs and we expect strong production rates to be sustained throughout 2022. Axalta saw intensified cost inflation during the fourth quarter coming from a broad set of raw materials due to supply dynamics and continued high feedstock prices, but also from packaging, freight, logistics, and labor costs.

We ended the fourth quarter with 24% raw material cost inflation, higher than our 20% expectation from October and about 15% for the full year. We were and continue to be successful in our actions to offset this inflation through incremental pricing during the fourth quarter. We implemented price increases in all businesses during Q4, and price-mix increased 3.6% in the period while pure price increased by mid-single digits versus the prior year, given the negative mix effect seen in both segments. Axalta also continues to offset inflation via structural cost control but we continue to benefit somewhat from the persistence of lower selling expense and functional savings that were implemented during 2020.

We realized slightly over $50 million in Axalta Way savings this past year, including a benefit from the previously announced restructuring actions. The integration of the U-POL business acquired in September 2021 is progressing well, and our commercial synergies are quickly coming to fruition. The business closed the year on plan from a net sales perspective, though it was modestly impacted by incremental inflation at the adjusted EBIT level similar to the rest of Refinish. Pricing actions are being executed to fully offset this inflation in early 2022 to put us comfortably on the original business case.

We're very pleased with the progress on the U-POL business integration and recent months have confirmed a bullish view of the future growth opportunity for this business. Turning to ESG. Axalta has made significant headway with our program since its inception in 2013. We published our first sustainability report in 2013 and set initial ESG goals in 2017.

I'm thrilled that last week, we published a set of long-term ESG and sustainability goals, each of which have a substantial impact in their respective categories. To set these 2030 goals, we conducted a comprehensive ESG materiality assessment last year with a broad set of internal and external stakeholders. We also work to align with the United Nations sustainable development goals in developing our ESG framework structured under three key pillars: Planet solutions focused on ensuring a more sustainable future for our planet with goals aimed at maximizing our environmental performance and reducing the impact of our operations; business solutions, which concentrates on how Axalta's products, services, and technologies can help customers accelerate their own sustainability initiatives and achievements; and third, people solutions, which is rooted in inclusivity, integrity, safety, and engagement to ensure that Axalta continues operating and fostering an environment where all our people can thrive. Axalta's published targets include 10 new sustainability commitments for 2030.

Key among these is the commitment to produce sustainable benefits from 80% of Axalta's new technology and innovation developments. We're also committing to an absolute reduction of 50% of Scope 1 and 2 greenhouse gas emissions by 2030 on our way to becoming carbon neutral in our operations by 2040. This would be a decade ahead of the deadline set by the Paris Agreement on climate change. That said, each of our individual targets are of critical importance and represent a step forward for Axalta in achieving long-term goals to build a more sustainable future.

Axalta seeks to lead the coatings industry by example, as well as to inspire our customers and other stakeholders by jointly ensuring the long-term wellbeing of the planet, our business partners, and our business. I'll now turn the call over to Sean for some additional remarks.

Sean Lannon -- Senior Vice President and Chief Financial Officer

Thanks, Robert, and good morning. As you've heard, fourth quarter saw both stable and broadly positive demand conditions but also continued challenges from cost inflation and supply chain constraints. Net sales of $1.1 billion increased 5.8% year over year for the fourth quarter while constant currency net sales increased 3.1% on an organic basis, driven by demand strength across most of our businesses. This constant currency organic net sales growth included a 9.6% increase from performance coatings offset by a 9.3% decrease from mobility coatings, reflecting light vehicle down 13.7%, while commercial vehicle was up an impressive 8.4%.

Fourth-quarter volume declined 0.5% with mid-single-digit increases from three of our four end markets, more than offset by a single mid-teen percentage pullback in light vehicle volumes due to the semiconductor constraints impacting customer production. Price-mix contribution increased 3.6% in the aggregate, driven by improvement in both segments and all four end markets. However, stronger in performance coatings versus mobility coatings. Mix was a moderate headwind following on a similar dynamic from the third quarter.

Excluding product mix effects, overall pricing improved mid-single digits for the quarter. FX translation was a headwind of 1.2% for the fourth quarter driven by the euro and the Turkish lira, offset partially by the strength in the Chinese renminbi. Fourth-quarter adjusted EBIT was $121 million versus $205 million in the prior-year quarter reflecting strong demand and buying trends in performance coatings, as well as the commercial vehicle end market, which was more than offset by light vehicle volume headwinds, substantially increased variable input cost inflation and lower temporary cost savings realized versus the fourth quarter of 2020. Performance coatings fourth-quarter net sales increased 14.2% year over year and 15.6% ex-FX driven by 5% higher volumes, a 4.6% increase in average price-mix and a 6% increase from acquisition contribution.

Refinish reported a 12.8% net sales increase or 14.7% ex-FX, driven by improved global line versus the prior year and by a high single-digit contribution from U-POL acquisition, which closed in September. Refinish volumes also increased moderately on a sequential basis along with body shop activity in the period, though growth was impeded somewhat by supply chain and logistics constraints in the fourth quarter with significant open orders remaining at year end. Refinish's mix increased low single digits during the fourth quarter, inclusive of product mix headwinds from mainstream and economy product growth. Net pricing was up mid-single digits before mix effects.

Industrial Q4 net sales increased 16.3% or 17% ex-FX, driven by mid-single-digit improvement in both volume and average price-mix as well as low single-digit acquisition contribution to net sales. Demand trends in most of the industrial end businesses we serve remained healthy during the period with the exception of automotive and wind energy and with particular ongoing strength from North American housing and remodeling. Similar to Refinish, supply chain constraints also impeded further growth within industrial in the period. Performance coatings reported Q4 adjusted EBIT of $99.7 million versus $129.5 million in the fourth quarter of 2020, driven by ongoing volume growth and drop-through benefits of stronger average price-mix, more than offset by significant headwinds from higher variable costs and lack of temporary cost savings, which benefited the prior year quarter.

The adjusted EBIT margin for the segment decreased to 12.4% from 18.4% in the prior year record-setting quarterly rate given the drivers noted before. Mobility coatings net sales decreased 9.3% and -- Q4 ex-FX, including an 11% decrease in volume, partially offset by a 1.7% improvement in average price-mix. Light vehicle net sales decreased 13.7% ex-FX in the quarter including a mid-teen volume decrease, largely in line with global auto production rates. Price-mix increased low single digits in the quarter versus the prior year, which included a component of negative mix in the period.

Commercial vehicle Q4 net sales increased 8.4% ex-FX, driven by strong truck production globally, excluding China. Price-mix increased low single digits, inclusive of modest negative mix differences from the prior year. Mobility coatings reported a Q4 adjusted EBIT loss of $3.5 million versus income of $47.9 million in the prior-year quarter. Adjusted EBIT and associated margins in Q4 were impacted by the severe volume drop and further impacted by increased cost inflation with only modest offsets and positive pricing, which began to accrue during the third quarter and continued during the fourth quarter.

We are confident that expected demand recovery price increases and cost control will return the mobility business to operating profitability, though it remains cash flow positive today in adjusted EBITDA terms. Axalta's Q4 balance sheet and liquidity profile remains solid. We ended the quarter with approximately $1.4 billion in total liquidity, including approximately $841 million of cash and cash equivalents on the balance sheet and approximately $528 million of available capacity in our undrawn revolver. During Q4, we also completed several asset sales for net proceeds of $25.4 million, illustrating ongoing focus on asset efficiency and cash flow.

Our net leverage ratio ended the quarter at 3.5 times even with the Q3 levels, driven by increased cash at the period end offset by lower latest 12 months adjusted EBITDA. Net leverage remained somewhat elevated due to the U-POL acquisition that was funded from our balance sheet in September while the adjusted EBITDA contribution only reflects a partial year from the acquisition. The company also repurchased 30 million in total shares in the fourth quarter for a full-year 2021 total of $243.7 million. Free cash flow for the quarter totaled $249.4 million versus $256 million in the fourth quarter of 2020, a very strong result considering somewhat lower operating profit year over year.

For the full year, free cash flow totaled $455 million versus $441.7 million in 2020, again demonstrating Axalta's focus on cash flow and finishing the year with a strong total liquidity position to continue to enable effective capital allocation. Regarding our financial outlook, we have outlined key expectations for the first quarter as follows. For Q1 net sales, we expect approximately 5% year-over-year growth, including a 3% FX headwind and a 4% positive M&A contribution. This assumes performance coatings growth of mid- to high teens offset by mobility coatings contraction of mid-single digits.

The top-line guide also reflects pricing of mid- to high single digits. We expect to generate adjusted EBIT of $100 million to $120 million in the first quarter, with D&A of $81 million, inclusive of $24 million of step-up D&A. Interest expense for the quarter is anticipated to be approximately $32 million. For adjusted earnings per share, we anticipate a range of $0.22 to $0.29 for the first quarter, inclusive of an FX headwind of $0.02 per share and a slight step-up in anticipated income taxes.

Within our first-quarter forecast, we further assume raw material inflation of approximately 25% to 27% versus the first quarter of 2021, which the growth rate is slightly higher than the fourth quarter of 2021. As we look at the full year, we expect to see net sales growth continue driven by solid performance coatings growth from both Refinish recovery and market share gain coupled with ongoing industrial coatings organic growth. For mobility, we expect net sales growth slightly ahead of global production for both light vehicle and commercial vehicle, given specific customer exposures and organic growth expectations for 2022. Further, we do expect to see an uptick in global production builds based on industry forecasters.

Net sales growth are also expected to be somewhat offset by modest FX translation headwinds, driven largely by the euro, Turkish lira, and Brazilian real. Regarding cost factors, our current assessment is the rates of overall raw material and other cost inflation will continue at high levels near term but may stabilize during the first half of the year based on current expectations for feedstock pricing. For 2022, given current baseline expectations and assuming Brent crude around the mid-80s, we expect raw material inflation in the low double digits, with peak inflation occurring during the first quarter. That said, substantial uncertainty around all aspects of cost inflation, coupled with lack of clear visibility around timing for supply chain shortages to ease, informs our decision to limit full-year earnings guidance at this time.

With continued planned and expected pricing actions during 2022, however, we also expect to fully offset anticipated inflation within the year. While we're not providing full-year guidance at this time, we do anticipate stronger profit performance this year versus 2021. And we'll hope to refine our reviews of specific guidance elements as the year progresses.

Robert Bryant -- Chief Executive Officer

Thank you, Sean. I'd like to close out by simply noting that we, at Axalta, remain committed to creating value for our shareholders. We believe the path to substantially higher levels of earnings per share remains very much in view despite the near-term challenges associated with inflation headwinds and supply constraints. This starts with the anticipated recovery in automotive volumes back to prior peak levels over the course of several years, including some anticipated relief in chip supply to enable growth in 2022.

It is furthered by ongoing solid organic growth in Industrial and backed by expected net sales growth from Refinish from both market share gains and modest further recovery from cyclical lows, which bottomed during 2020. Ongoing top-line growth, coupled with expected abatement of raw material inputs and calmer overall cost inflation over time should clear a path to margin recovery and perhaps enable new margin highs over time. Axalta has already proven an ability to navigate challenging environments, and we're confident in the team that we have in place to execute our growth plans while continuing to respond to operating and cost challenges. I'd like to express my sincere thanks to our entire global team for all the hard work that was completed during 2021, and we look forward to demonstrating what our team can accomplish during 2022.

With that, we'll be pleased to answer any questions. Operator, you can open the lines for Q&A.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from the line of Steve Byrne with Bank of America. Please proceed with your questions.

Steve Byrne -- Bank of America Merrill Lynch -- Analyst

Yes. Thank you. So, Robert, it's been a little over a year since you ripped out the legacy matrix structure and brought in some new leadership. Just curious, what metrics do you look at to assess whether there have been benefits from either cross-selling or regional expansions or maybe even some technology transfers to different products? Anything you can see there? Or is it too challenging given the level of disruption?

Robert Bryant -- Chief Executive Officer

We're very pleased with the organizational pivot and what it's enabled in terms of accountability, decision-making, and cross-business unit collaboration. Just as one example, if we think about our electrification platform and how that market, it's evolving very quickly in terms of whether the purchase decision around our energy solutions coatings and the products they go on is in the automotive tiers in an industrial customer actually at an OEM customer, it's actually now at all three. So we have a lot of cross-selling and cross-collaboration going on across the business units, and that's been quite beneficial. So again, overall, we're very happy.

With regard to the metrics, we look at all the typical metrics in terms of sales, profitability, free cash flow, and return on invested capital, not only at a total company level, but also at an individual business unit level.

Steve Byrne -- Bank of America Merrill Lynch -- Analyst

Thank you for that, and just curious about light vehicle. You got 11% or maybe this is mobility broadly, but 11% reduction in volume in the quarter. And presumably, you have your customers are not running flat out. Do you have the ability to flex your staffing as a result of that? Or is that fixed cost drag just remain in place and thus it's not until you see volumes recover that you see that absorption improve? Or is there something you're doing that might lead to an expansion in margins when the business returns to more normal operating rates?

Robert Bryant -- Chief Executive Officer

So the mobility business, we're principally focused on three actions. The most important of which are our pricing actions followed by cost management and then flexibility within our cost structure. So we're working to offset the majority of the inflation that we're encountering through pricing actions. Our cost structure, we continue to manage it quite tightly until volumes come back.

And we're really only making targeted investment that's related specifically to wins to support our customer launches and our sales activities. We've also been working with the operations organization to ensure that we've got flexibility in our cost structure and that we can vary those costs depending upon volume levels. We've also been looking at different models for our sales technical resources and support, and we're working to flexibilize those costs as well.

Steve Byrne -- Bank of America Merrill Lynch -- Analyst

Thank you.

Operator

Our next question comes from the line of Ghansham Panjabi with Baird. Please proceed with your questions.

Ghansham Panjabi -- Robert W. Baird and Company -- Analyst

Thanks. Good morning, everybody. Just as a follow-up to Steve's question, specific to the fourth quarter, it looks like -- it sounds like light vehicle was a little bit better than you forecasted just based on production, and then commercial was also relatively healthy. And then the EBIT loss was pretty much comparable to the third quarter.

Just curious as to why it wasn't better than you initially forecasted?

Sean Lannon -- Senior Vice President and Chief Financial Officer

Yes. I mean, the main driver, just globally for Axalta, why we missed the initial guidance for the fourth quarter was really raw materials related. We saw an uptick up to 24%, and light vehicle is bearing some of that. And that's why you saw a little bit more margin contraction in the fourth quarter.

Ghansham Panjabi -- Robert W. Baird and Company -- Analyst

And then in your prepared comments, you called out a $200 million type rental cost inflation number for '21. Is that a -- and you have double-digit inflation for 2022 as well. Is that $200 million roughly comparable to -- inflation for 2022 will be roughly comparable to that $200 million? Is that the right way to think about it? And then specific to '21, how far behind are you on price cost?

Sean Lannon -- Senior Vice President and Chief Financial Officer

So, Ghansham, your math is roughly correct. We are expecting about $200 million in 2022. You saw we got about $150 million in price, roughly 4% that we stated in our consolidated results. So you're looking at a little better than $50 million of a GAAP price versus cost.

Ghansham Panjabi -- Robert W. Baird and Company -- Analyst

Very helpful. Thank you.

Operator

The next question is coming from the line of John McNulty with BMO Capital. Please proceed with your questions.

John McNulty -- BMO Capital Markets -- Analyst

Yeah. Good morning. Thanks for taking my questions. I guess, admittedly, we were a little bit surprised on the momentum behind pricing or maybe the lack of it.

It seems like it was roughly in line with the type of pricing that you saw in the third quarter despite higher raw material kind of headwind. So I guess, how should we be thinking about that going forward? And if we can see some incremental momentum as we kind of push through 2022?

Sean Lannon -- Senior Vice President and Chief Financial Officer

So what you saw in the fourth quarter, we were a little bit more impacted with mix. Excluding mix, we're in mid-single digits, largely in line with the third quarter. I would call out on the mobility side, we've talked a bit about our indices that are in place. With those indices, the raw material inflation is really being priced off the average of the first six months of 2021 that were in place through December.

So that will reset again on January 1. And we've characterized 25% to 30% of our contracts are on indexes. That's probably closer to 35% now. And with inflation that we saw in third quarter in the fourth quarter, with those going into effect January 1, you will see an uplift.

And just as far as our guidance for the first quarter, we are expecting mid- to high pricing, which you're going to see that obviously a little better than the fourth quarter.

John McNulty -- BMO Capital Markets -- Analyst

Got it. That's helpful. And then with regard to your outlook for autos or the light vehicle segment, it sounds like you're going to have at least a little bit of lift relative to kind of overall industry build rates. Can you help to quantify that a little bit? I know you've won some business that should come in toward the end of the year.

I guess, how -- if the forecast are right that the industry grows at 8.5% give or take, I guess, what does that mean for Axalta with some of the new business wins, the share gains, that kind of thing? How should we be thinking about that?

Robert Bryant -- Chief Executive Officer

Well, let me provide, I guess, some additional context in particular around the phase one. I think the quarterly phasing there is important. So if we look at 2021, total auto builds were 76 million units per IHS. And IHS' full year 2022 base case build number is about 83 million light vehicle units and the downside case of 76 million units.

Our 2022 full year base case is 79 million units based on the historical forecast error that we've seen from IHS as well as input from our customers. So for Q1, in particular, as we think about phasing and new business coming on, for Q1, the IHS build number is down about 2.2% first quarter 2022 versus first quarter 2021, which is based on essentially flat lining the 83 million builds across the year for roughly 20 million to 21 million builds per quarter. Now Q4 2021 builds were actually 20.4 million units. So we then took that number and adjusted that number down for expected later than normal plant start-ups and Chinese New Year to arrive at approximately a $17 million light vehicle build rate for our estimate for Q1.

Now it may be the case that we're taking a little bit more of a conservative view on the first quarter, but we believe that this is a solid base case assumption given historical data variation, market conditions, and then the potential ramp-up of builds during the year, just as more semiconductor chips become available. And then of the $130 million in new business that we've won in 2021 that will come online in 2022 and 2023, that's pretty heavily back-end loaded to the second half of the year as well as the first quarter of 2023.

John McNulty -- BMO Capital Markets -- Analyst

Got it. That's helpful color. Thanks very much.

Operator

Our next question is coming from the line of Vincent Andrews with Morgan Stanley. Please proceed with your questions.

Vincent Andrews -- Morgan Stanley -- Analyst

Thank you, and good morning. Could you talk a bit more about the mix issues? I know in Refinish, it was a continuation of the migration to economy-type products. Is that going to reverse at some point in '22 and become a tailwind for you folks? And in mobility, what is it exactly happening there versus it sounds like in commercial vehicle, you're getting a benefit? So if you could just unpack what's going on and then give us a sense of whether it's going to move for you or against you as we move through 2022.

Robert Bryant -- Chief Executive Officer

So with regard to mix on the performance coatings side, you correctly point out that it's the growth of mainstream and economy. And we saw quite a bit of that in the fourth quarter just given some of the commercial initiatives that we've had. But you've also had the impact of slightly lower Refinish activity overall in particular, with some of the larger MSO customers in the fourth quarter as they experienced labor and part shortages in particular. So the buy of that richer premium mix paint was lower in Q4 than you might have typically seen.

So that exacerbated certainly what we saw in performance coatings. And then in mobility coatings, the unfavorable mix was really one, due to product mix. We sold a little bit more of slightly lower-margin products. And then we also had some growth in our LV business in Asia Pacific, which is at a lower average selling price, some of which gets captured in pure price and some of it gets captured in mix.

But I think if we look at overall kind of mobility tracking, you can see that we've seen pure price increase from 2% in Q3 to 2.8% in Q4. And then as Sean mentioned, with the indexation coming into place, we'll see that number tick up here as we go sequentially forward Q1, Q2, etc.

Sean Lannon -- Senior Vice President and Chief Financial Officer

And, Vincent, just to add, I just note, there's nothing structurally that's changed as far as mix issues. We're not forecasting any sort of major mix aspects for the first quarter for the full year, for '22. But presumably, it will be an easier comp in the fourth quarter of 2022 for Refinish in particular. We saw about a 3% negative mix come through in the fourth quarter of 2021.

Vincent Andrews -- Morgan Stanley -- Analyst

And maybe just as a follow-up, could you talk a little bit about where you sit on the temporary cost reductions coming back versus your plan?

Sean Lannon -- Senior Vice President and Chief Financial Officer

Yes. So hard to say exactly. We're limiting guidance just because the world is constantly changing on us here. But we've continued to see roughly $10 million to $15 million each quarter in temporary savings, at least for the first quarter, we would expect that to show up in the results.

Vincent Andrews -- Morgan Stanley -- Analyst

OK. Thanks very much.

Operator

Our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your questions.

David Begleiter -- Deutsche Bank -- Analyst

Thank you. Good morning. Robert, do you expect any permanent Axalta saving -- cost savings in 2022 versus 2021?

Robert Bryant -- Chief Executive Officer

Yeah. Again, we're limiting guidance, but the plan is to, at a minimum, offset fixed cost inflation. There's clearly structural savings that we've previously announced. That will amount to about $10 million.

But the difference will be continued productivity projects. But we'll give more updates when we give guidance at the end of the first quarter, Dave.

David Begleiter -- Deutsche Bank -- Analyst

Got it. And just looking at uses of free cash flow, how do you look at buybacks versus debt reduction in 2022?

Robert Bryant -- Chief Executive Officer

So given our cost of debt still sitting below 3.1%, it doesn't necessarily have attractive returns. I think we'll continue to deploy the majority of the excess free cash flow for share repurchases as well as M&A. We'll look to continue to build cash on the balance sheet beyond that.

David Begleiter -- Deutsche Bank -- Analyst

Thank you.

Operator

Our next question comes from the line of Kevin McCarthy with Vertical Research. Please proceed with your questions.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Good morning. Robert, I was wondering if you could talk through some of the labor challenges in more detail. So for example, on an internal basis, what impact did that have on your ability to produce and deliver? And then externally, how significant is that issue becoming among body shops and perhaps other customers? And do you think it's getting any better or worse looking into the first quarter?

Robert Bryant -- Chief Executive Officer

Yes. It's a great question. At Axalta, we've seen some labor constraints, yes, certainly across the fourth quarter and specifically due to surge in omicron. Although I don't think we characterize the impact as equivalent to the impact we saw from material supply or logistics headwinds but it certainly was an impact.

Our overall maximum kind of absenteeism in December was around 15%. But when we think about labor challenges with our customers, COVID-related absenteeism is definitely having an impact. The broader challenges impacting, in particular, in the Refinish business, the larger body shops continue to be technician availability, which is related to labor, and parts availability. And some of our largest customers reported an increase in WIP related to labor and paint shortages.

And in fact, if you look at the average number of rental car days for people who have their vehicle fixed in December, that number of days went up by four days. So it's taking longer for people to get their cars fixed and that has a lot to do with labor shortages.

Kevin McCarthy -- Vertical Research Partners -- Analyst

And then secondly, I think you mentioned that in the U.S. or North America, body shop activity remained about 12% below 2019 if I got that right. Is that the new normal? What are you planning for in terms of body shop activity in 2022 relative to 2019?

Robert Bryant -- Chief Executive Officer

We don't think that's normal. We still do not have normal traffic patterns in terms of people even getting back to a hybrid work environment. And the school, certainly, we've seen some of that traffic come back, but there are spots in the country where it's not. It's a little bit start and stop.

And we haven't seen office occupancy rates come back yet either. So I think what we're hoping is that once we get on the other side of omicron that we're going to start to see people return to the office in more of a much greater hybrid percentage in terms of time spend in the office versus time spent at home. So I think overall, we're optimistic. But as we've said, it all hinges upon recovery from omicron.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Thanks very much.

Operator

Our next question comes from the line of Chris Parkinson with Mizuho. Please proceed with your questions.

Chris Parkinson -- Mizuho Securities -- Analyst

Great. Thank you very much. The industry has been setting several key raw material shortages across additives and in some cases, intermediates and other inputs, yet global force majeure activity appear -- at least, appears as if major suppliers are improving supply, at least heading into the year. Although some of these are still taking maintenance.

As it pertains to your portfolio and just Axalta, what inputs are still missing? Are there differences by region? Just any color on how you believe this evolves will be greatly appreciated.

Robert Bryant -- Chief Executive Officer

We continue to see supply disruptions in the fourth quarter. There were roughly about 20 force majeures in the coatings value chain. We also saw deepening energy challenges in Europe. And then in China, with the dual control policies, carbon emissions, as well as carbon intensity and continued impact from limited global logistics capacity and higher costs.

If we think about overall shortages, we've seen tightness in several materials due to supply chain disruptions as well as kind of alternative value chain demand, specifically isocyanates, acrylic emulsions, certain polyester resins, those have really been the most challenging during the second half of 2021. And if we think about the overall situation, we have secured supply and largely been able to keep pace with strong demand for our products, but there have been some impacts on sales volumes as well as impacts at the customer level, which has constrained potential volumes.

Chris Parkinson -- Mizuho Securities -- Analyst

And just a super quick follow-up on that. Based on that last time, are you confident that just given this is affecting all of your primary peers and most obviously, geographies, is it safe to say that this is not a case of any lost business, and this is factoring into pent-up demand for '22?

Robert Bryant -- Chief Executive Officer

Yes. There's certainly a question -- I mean, certainly, there are spots where we may be short on a given product and a customer may need to source it from a competitor. Likewise, we've had situations where one of our competitors hasn't been able to supply and that customers come to us and ask us to supply, and we've been able to do that. I don't think that there have been major market change, shifts or market share shifts between competitors, but there's certainly been spot particular moments, days or weeks where we've had to step in where one of our competitors have had to step in where it's a dual supply scenario, for example.

Chris Parkinson -- Mizuho Securities -- Analyst

Very helpful. Thank you.

Operator

Our next question comes from the line of Alex Yefremov with KeyBanc. Please proceed with your questions.

Alex Yefremov -- KeyBanc Capital Markets -- Analyst

Great. Good morning, everyone. The midpoint of your EBIT guidance for first quarter is roughly $10 million lower sequentially. So I'm just trying to understand the sequential bridge at a high level.

Are costs rising faster than price? Are volumes lower? Or is something else going on?

Sean Lannon -- Senior Vice President and Chief Financial Officer

Yes. It's really rolls are really accounting for the vast majority. We saw 24% year-over-year headwinds in the fourth quarter. We're seeing 25% to 27%, what they're really peaking in the first quarter.

That amounts to about $10 million to $15 million. And then we're seeing some marginal headwinds in freight and logistics and labor pressure, which is being largely offset by the uptick in sales. You'll see our guidance for the first quarter versus the fourth quarter is up about 2%, which correlates to about $20 million.

Robert Bryant -- Chief Executive Officer

And then the only other item to mention of less effect, of course, is just the incremental FX impact we're seeing and there is some small return of opex related to some of the product launches and developments we have.

Alex Yefremov -- KeyBanc Capital Markets -- Analyst

OK. Very helpful. In light vehicle, you'll have your indices -- price indices reset on January 1. Would those generally reset to an average cost for the second half of '21 or exit costs from December '21? So will you be fully caught up on those index resets or still kind of underwater for some time, maybe first half of '22?

Sean Lannon -- Senior Vice President and Chief Financial Officer

Yes. So I mean, all the contracts are a little bit different, but generally, the way to think about it is the average six-month procurement spend that will be reflected. But given we're expecting raw materials to continue to inflate in the first quarter, they're still going to be slightly behind.

Alex Yefremov -- KeyBanc Capital Markets -- Analyst

Thank you.

Operator

Our next question is from the line of Jeff Zekauskas with J.P. Morgan. Please proceed with your questions.

Jeff Zekauskas -- J.P. Morgan -- Analyst

Thanks very much. In the quarter, where did you stand with recovery of raw material inflation in Refinish?

Sean Lannon -- Senior Vice President and Chief Financial Officer

So we're caught up in Refinish, Jeff.

Jeff Zekauskas -- J.P. Morgan -- Analyst

OK. And in the auto OEM business, when you look at your customer base, are there wide differences in your ability to recover raw material inflation, that is with some of your large customers are you doing very well and with other customers, are you doing much less well? Or is it pretty even across the customer base?

Robert Bryant -- Chief Executive Officer

I think, Jeff, it varies somewhat by customer, and it varies somewhat by region as well as regional mix of competition. So I think as Sean said, certainly the indexing and we're pushing toward more indexing just to make this automatic and easier. But I think overall, as we think about capture in our business, I think that we're -- we don't believe that we're behind the market in price capture. If you look at like-for-like businesses, I mean an OEM, some of our peers include, for example, business volumes beyond light vehicle exterior body coatings, which, of course, are our products.

And they'll include some businesses that we include within Industrial including certain tier suppliers that serve automotive. So although we acknowledge that we're not where we want to be, we don't believe that we're behind our competition especially given continued inflationary cost headwinds. But we're very focused on offsetting cost inflation in our business during 2022. And as Sean highlighted, we've seen the number of -- we've seen that number go from 25% of indexes to -- in 2020 to a little bit more than 30% at the end of 2021.

We expect that to continue to increase.

Jeff Zekauskas -- J.P. Morgan -- Analyst

Great. Thanks so much.

Operator

The next question is coming from the line of P.J. Juvekar with Citi. Please proceed with your questions.

P.J. Juvekar -- Citi -- Analyst

Yes. Good morning. Robert, you mentioned a couple of times negative mix impact in both of your segments. I was wondering if you could talk about what kind of mix impact you're seeing in each of the segments?

Robert Bryant -- Chief Executive Officer

Sure. I think in terms of the segments, we answered that question earlier, but I'd be happy to provide a little bit more color. In the Refinish business, we've continued to see the growth of mainstream and economy products that's really taken off, especially with some of the new product developments that you probably read about in our press releases over the past 6 months in Asia, in certain parts of Eastern Europe as well as in Latin America. Those are sold at lower price points, still attractive margins, but lower price points.

And so that's certainly one impact. And then in the mobility side, it's really a function of customer mix as well as regional mix that has created that mix differential.

P.J. Juvekar -- Citi -- Analyst

OK. And then many companies have different views on this chip shortage is going to be resolved. You talk to auto companies, they tend to be more optimistic. Chip companies are saying it won't be resolved fully until 2023.

Some are even saying 2024. I'm not sure exactly which chips they were referring to, but where do you stand on when do you think you could begin to see some positive comps in auto OEM?

Robert Bryant -- Chief Executive Officer

So we'll give you our view from, obviously, speaking with chip forecasters and our customer base. I mean, I think the market forecast assume improvement in inventory and overall chip supply beginning in the first half of 2022 with a little bit more stabilization in the second half of 2022. We think that the broader kind of one-off supply chain issues unless something happens, could subside in the first half, but we still do expect longer lead times for chips in the second half versus what they were prepandemic. We think that there's going to be some improvement this year and perhaps normalization in 2023 as we start to see additional chip capacity come online.

And then that should free up capacity for specifically automotive end markets. And I'd just add one additional thought there, which is the auto industry, they haven't been standing still. They've been -- obviously, have recognized this as an issue and are aggressively taking action. I mean, we've seen our OEM customers adapt pretty quickly to the situation.

I mean, they're ordering chips with longer lead times, they're prioritizing vehicles with the highest profit margins like trucks and SUVs. They're removing features from certain vehicles to many people's dismay but is necessary. And they're reducing the number of unique chips that are being used and consolidating down to fewer more easily available chips. And then lastly, they're redesigning systems with more standardized chips as well as different architecture to really reduce the level of chip intensity.

I think the first actions that I mentioned there can actually have a benefit in 2022. And some of the redesign of the chip architecture, that's more of a 2023, 2024 impact.

Operator

The next question comes from the line of Mike Sison with Wells Fargo. Please proceed with your questions.

Mike Sison -- Wells Fargo Securities -- Analyst

Hey, guys. Good morning. Just curious when you think about mobility coatings. Margins have been kind of bumping and breakeven for the last couple of quarters.

What build rate sort of gets you firmly above breakeven? Are you going to get there with $83 million this year? And then is there a certain build rate you need to get back to double digits, sort of that 11% or so that you did in the first-quarter '21?

Sean Lannon -- Senior Vice President and Chief Financial Officer

So, Mike, I just -- I want to point out because the EBIT is still impacted by the step-up depreciation and amortization from the initial carve-out from DuPont.

Mike Sison -- Wells Fargo Securities -- Analyst

Yep.

Sean Lannon -- Senior Vice President and Chief Financial Officer

I did want to call EBITDA itself. I mean, we're going to have slightly over 10% EBITDA margins for the full year. So we still are cash flow positive in that business, and I think it's an important highlight. But if we get to the 79 million builds, we'll certainly be EBIT positive for mobility for the year.

A slight uplift versus where we are today for the full year 2021 will put us in a profitable stage. I think everything we've done on the cost structure as well as with the pricing, coupled with the fact that as volumes pick up, there's going to be much better absorption, you're going to see this business quickly get back to profitability.

Robert Bryant -- Chief Executive Officer

Yes. I would just reiterate what Sean said there is that if you look at what we've done in costs in the mobility business, we have taken significant -- done significant cost reductions in that business. At this point, it's all about the drop-through effect of volume as well as price increases. Those are really the two key levers.

Mike Sison -- Wells Fargo Securities -- Analyst

Understood. And then for '22, it sounds like you're signaling that adjusted EBIT will be up in '22 versus '21. I understand hesitancy to give specific guidance. But when you think about the range of possibilities, what are you most worried about in terms of being able to grow this year? And if there was surprise to the upside, where do you think you can see that potentially?

Robert Bryant -- Chief Executive Officer

The key variables, both to the upside as well as to the downside would certainly be macroeconomic changes, geopolitical events, and the impact that, that could have on growth, cost inflation and the price of oil, and changes in assumed auto builds. And then lastly, of course, I think we'd have to mention COVID. I think our hope is that we're kind of coming down the backside here with omicron and hopeful that there's nothing beyond that and that we start to see overall business in global conditions get back on track to normal.

Mike Sison -- Wells Fargo Securities -- Analyst

Thank you.

Operator

Our next question is from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your questions.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Good morning. Thanks for taking my questions. I guess, just two questions. So first off, in light vehicle.

I guess I've heard that maybe February, March -- we're already in February, but I guess maybe March you guys would get a better picture. Some of the auto suppliers have been saying that they've got a better picture on full-year production. Would you agree with that assessment? I guess, would you be able to see if you get closer to that 83 number instead of your 79 forecast maybe in March?

Robert Bryant -- Chief Executive Officer

I think it's difficult to say there's still a fair amount of variability around the forecast. It's possible that there's -- obviously, we'll have more visibility in March, but I don't think there's anything magical or in particular, specific information that's going to come out in March that's going to illuminate that. I think it would just be the benefit of having a first quarter under our belt. And we recognize that we have taken a more conservative approach there to the first quarter, but we think it's prudent to do so.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Great. And then just a quick one on free cash flow. '21, I think you got a little bit of a working capital benefit that helped you preserve free cash flow guidance, but how are you thinking about that for '22? Is there going to be a drag on working capital?

Sean Lannon -- Senior Vice President and Chief Financial Officer

Yes. We ended working capital percentage of sales at roughly 8% given potentially continued inflationary pressures as well as sales upticking. You could see a marginal uptick in working capital use.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Thanks.

Operator

Thank you. Our next question is coming from the line of Laurent Favre with BNP Paribas. Please proceed with your questions.

Laurent Favre -- BNP Paribas -- Analyst

Thanks, and good morning, y'all. Robert, I've got a question on your ESG targets announced last week. In particular, I -- we recognize all the efforts. But on the CO2 emission side, you seem to be very focused on Scope 1 and 2.

And I was wondering what prevented you from also tackling Scope 3, given that this is probably the majority of your total emissions? Thank you.

Robert Bryant -- Chief Executive Officer

I think with regard to Scope 3, it's a walk before you run, and we're going to focus on Scope 1 and 2 first and we're embarking on that. And then we'll begin scoping out our Scope 3 emissions as we go forward. But in terms of the work that we've done in particular over the last year, it would have been too ambitious to put out a Scope 1, 2, and 3 target. That just requires a lot of coordination with all of the partners with whom you do business.

So obviously, for Scope 1, just coming from company operations, and Scope 2 from purchased energies, that's a little bit more quantifiable.

Laurent Favre -- BNP Paribas -- Analyst

Thank you. And have you sized the incremental cost that you could incur for instance, for renewable power supply, etc.? Are those things part of your 2024 targets?

Robert Bryant -- Chief Executive Officer

So when we think about incremental capex related to get to some of the emissions goal specifically that we have, in particular, air as well as waste, but I think you were talking specifically air as it relates to greenhouse gases, that would be part of our normal capex spend. And then in terms of the actual use of energy, what our plan there is to use renewable energy. And we'll continue to purchase renewable electricity when it's cost-effective. But we're also going to explore the use of on-site renewable energy generation unless the capital cost were prohibitive.

I think it's important to just highlight though, that depending on the evolution of the global energy markets, it's possible that we might need to purchase some carbon offsets to reach the carbon neutrality goal by 2040. But that would really only be after all of those other options have been fully explored and implemented. I think we expect the size of the global renewable energy market to continue to increase and the sophistication of that market to continue to increase over the next many years.

Sean Lannon -- Senior Vice President and Chief Financial Officer

And, Laurent, just to put some quantifiable numbers. So our total energy spend is $30 million to $40 million on an annual basis. Electricity is a fraction of that. So that'll be absorbed in our 2024 targets.

No concerns as far as major impacts there.

Laurent Favre -- BNP Paribas -- Analyst

Thank you.

Operator

Thank you. At this time, we have reached the end of the question-and-answer session, and I'll turn the call over to Chris Mecray for closing remarks.

Chris Mecray -- Vice President, Investor Relations and Treasury

Thank you all for joining us this morning. I appreciate your participation. We'll be available through the course of the day and beyond to answer any follow-up questions you have. Have a great day.

Operator

[Operator signoff]

Duration: 61 minutes

Call participants:

Chris Mecray -- Vice President, Investor Relations and Treasury

Robert Bryant -- Chief Executive Officer

Sean Lannon -- Senior Vice President and Chief Financial Officer

Steve Byrne -- Bank of America Merrill Lynch -- Analyst

Ghansham Panjabi -- Robert W. Baird and Company -- Analyst

John McNulty -- BMO Capital Markets -- Analyst

Vincent Andrews -- Morgan Stanley -- Analyst

David Begleiter -- Deutsche Bank -- Analyst

Kevin McCarthy -- Vertical Research Partners -- Analyst

Chris Parkinson -- Mizuho Securities -- Analyst

Alex Yefremov -- KeyBanc Capital Markets -- Analyst

Jeff Zekauskas -- J.P. Morgan -- Analyst

P.J. Juvekar -- Citi -- Analyst

Mike Sison -- Wells Fargo Securities -- Analyst

Arun Viswanathan -- RBC Capital Markets -- Analyst

Laurent Favre -- BNP Paribas -- Analyst

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