Axalta Coating Systems' (AXTA) CEO Charlie Shaver on Q4 2015 Results - Earnings Call Transcript

| About: Axalta Coating (AXTA)

Axalta Coating Systems (NYSE:AXTA)

Q4 2015 Earnings Conference Call

November 10, 2015 08:00 AM ET

Executives

Chris Mecray - VP, IR

Charlie Shaver - Chairman and CEO

Robert Bryant - EVP and CFO

Analysts

Duffy Fischer - Barclays

Dan Jester - Citi

Aleksey Yefremov - Nomura Securities

Matt Krueger - Robert W. Baird

Matt King - Morgan Stanley

Jeff Zekauskas - JPMorgan

Chris Evans - Goldman Sachs

John Roberts - UBS

Ivan Marcuse - KeyBanc Capital Markets

Mike Harrison - Seaport Global Securities

Arun Viswanathan - RBC Capital Markets

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Axalta Coating Systems’ Fourth Quarter and Full Year 2015 Earnings Conference Call. Presenting today will be Charlie Shaver, Chairman and Chief Executive Officer; and Robert Bryant, Executive Vice President and Chief Financial Officer.

At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Today’s call is being recorded. Replays of this conference will be available through February 17, 2016. Those listening after today’s call should please note that the information provided in this recording will not be updated, and it is possible that the information will no longer be current.

At this time, I will turn the call over to Chris Mecray, Vice President, Investor Relations for Axalta Coating Systems for a few brief legal notices. Please go ahead.

Chris Mecray

Thank you and good morning. This is Chris Mecray, Axalta’s VP of Investor Relations. We appreciate your continued interest in Axalta and welcome you to our fourth quarter and full year 2015 financial results conference call.

Joining us today are Charlie Shaver, Chairman and CEO; and Robert Bryant, EVP and CFO. This morning, we released our fourth quarter financial results and posted a slide presentation to the Investor Relations section of our website at axaltacs.com, which we’ll be referencing during this call.

Both the prepared remarks and discussion during this call 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, which may cause actual results to differ materially from those forward-looking statements. The company is under no obligation to provide subsequent updates to these forward-looking statements.

This presentation also contains certain non-GAAP financial measures. The appendix to the presentation contains reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information regarding these forward-looking statements and non-GAAP financial measures, please refer to our filings with the SEC.

I’d now like to turn the call over to Charlie.

Charlie Shaver

Good morning everyone. Thank you for joining us on the call today, during which we will review our fourth quarter and our full year 2015 financial results. I’d like to begin by pointing out some of the highlights from the quarter and some broader statements on or progress in 2015 and I will review in details our goals for 2016, as we continue to work to create shareholder value through continued profitable growth here at Axalta.

I’ll then turn the call over to Robert, who will provide some additional details on our financial results and basic assumptions behind our full year 2016 guidance. We’ll then love to take your questions.

If you will turn to slide 3 of our presentation, our Q4 and our full year 2015 highlights. Axalta continues to perform strongly. We delivered a good fourth quarter result to finish off a solid year for Axalta, despite a challenging emerging market and currency environment.

Fourth quarter net sales rose a solid 4.5% from the prior year, before the impact of currency translation. This was driven by strong mid-single digit volume gains in both segments, as well as ongoing positive benefit and positive price realization in our refinish end market offset somewhat by slightly lower industrial end market pricing.

We also delivered profitable growth, as adjusted EBITDA on Q4 rose 4% year-over-year, in spite of significant currency headwinds. Our adjusted EBITDA margins increased 220 basis points from last year to 21.2%. These net sales results were well within our projected ranges that we share with you for sales growth start of the year and also with our profit range that we bracketed back in December.

Notably fourth quarter profit received no help from currency, but was generated from strong execution and sum relief in China coming off of a challenging third quarter. Our operating initiatives remain well on track, with sound execution to date. We’ve highlighted our four major capacity expansions undertaken since our carve out each of which was completed or near completed by year end on time and on budget.

This is a real achievement for a new organization gearing up for growth after a long period of organic under adjustment and testament to the effectiveness of our engineering and operating teams.

Although we don’t talk much about them due to their small size, we did complete three small acquisitions last year including one company in the fourth quarter in North America named ChemSpec, which increases our presence in certain value oriented refinished coating segments.

These deals have given us some early confirmation of our tuck-in acquisition strategy that we can build over time. Our pipeline to these types of deals remains robust and attractive today.

We’ve also made strong progress in our productivity initiatives, achieving 52 million in incremental savings in 2015 from our two programs, Axalta Way and Fit-For-Growth. We remain on track to meet or exceed our guidance related to these programs given back in December, with a clear swing toward Axalta Way and now that Fit-For-Growth is closed for completion after an earlier start.

Our 2016 combined incremental savings target remains at 60 million, as we communicated at our analyst investor day back on December 4. Axalta continue to make progress increasing leverage and accelerating free cash flow during the 2015. We prepaid a 100 million of our term loans in Q4, similar to our Q4 2014 prepayment and produced over a 192 million of free cash flow in the period for a full year total of 262 million.

With our solid adjusted EBITDA growth, we ended the year with a net leverage of 3.4 times down from 3.8 times at the start of the year. We held 485 million in cash on the balance sheet at the end of the year, and have over 860 million in total liquidity available to the company, ensuring a stable financial foundation, as we work to further increase cash flow and associate leverage reduction goals in 2016.

2015 on a full year basis was a very strong year, albeit mass somewhat by challenging currency headwinds. We produced 5.3% net sales growth before currency impact and 3.2% reported adjusted EBITDA growth, which included a substantial negative currency impact. It is interesting to note that absent these large translation currency headwinds our adjusted EBITDA would have likely exceeded the high end of our communicative guidance all the way back in March.

This simply underscores the strength of our operating performance in 2015 and I’m very proud of the work that our team accomplished during the period. We review our global diversification and long term strategic positive, and we expect to associated financial benefits from this once the currency global economic conditions work their way through.

As I said before and it bears repeating, Axalta remains focused on our initiatives to grow the business, refine our cost structure and improve our operating discipline as we work to transform Axalta to a best-in-class coating company. We believe that our results of 2015 including the strong financial metrics as well as our progress in key operating initiatives sets us well on that path.

Robert will now walk us through Axalta’s financial results in more detail.

Robert Bryant

Thanks Charlie and good morning everyone. Please turn to slide 4, where you’ll find our Q4 consolidated results. Constant currency net sales in the fourth quarter increased 4.5% year-over-year, driven by a combination of volume growth from both segments and most regions. We also saw the expected price increases in performance coatings for the quarter, while pricing for transportation coatings was essentially flat.

Foreign currency translation reduced reported net sales by 11.5% in the quarter, as devaluation trends during 2015 continued in the fourth quarter. On a sequential basis, as we noted in December, the currency impact worsen slightly from third quarter levels.

Axalta’s net sale volume on a consolidated basis increased 3.9% over the prior year quarter, reflecting growth in all end markets and most regions in the period. In North America, volumes increased mid-single digits, led principally by transportation coating as in previous quarters, benefiting from a strong regional auto market and new business wins.

In Asia Pacific, volumes rebounded nicely to show renewed overall growth after a weaker Q3. In China, specifically we saw sales volumes in November, December and January return to at or above our budgeted levels. Latin America saw essentially flat volumes, held back largely by slower light vehicle production.

Finally, EMEA volume saw some acceleration in Q4 to grow mid-single digits overall, including positive contribution from all end markets. Although the price contribution in the quarter of 0.6% remained moderate in aggregate, this was on track with our expectations for the period.

Fourth quarter adjusted EBITDA of 213 million compared with 205 million in last year’s Q4 benefiting from volume and price leverage as well as variable margin savings offset substantially by currency impact for the period.

The impressive 220 basis points improvement in the adjusted EBITDA margin that Charlie mentioned reflected the volume and price tailwind noted previously, as well as savings from cost improvements and productivity enhancements offset in part by ongoing investment to support growth similar to prior periods.

Moving on to Q4, 2015 performance coating results on slide 5, net sales on our performance coating segment increased 4.8% year-over-year before the impact of foreign exchange, driven by broad based regional growth.

Volumes increased 3.6% for the quarter also in most regions including in solid increases in EMEA, led by a combination of refinish and industrial volume gains. Average segment selling prices increased 1.2% with low single digit gains in refinish offset by modest price pressure in industrial. The volume in price increases was offset by 12.9% currency translation and exchange headwinds consistent with prior quarters last year.

Refinished net sales increased a solid 4.8% on a constant currency basis Q4 2014 including pricing gains as expected and moderate volume growth in total. Constant currency net sale in our industrial end market increased 4.6% year-over-year, again showing growth easily above some of the individual end markets we serve.

Volume growth similar to the third quarter was led by increases in North America and EMEA, including bottoms-up account gains from our targeted sales efforts. Despite a mixed industrial production backdrop globally, we grew well in excess of overall market growth, thanks to our investment in commercial capabilities, introduction of new products and some share growth as we continue to focus on markets where we relatively under represented.

Performance coatings generated adjusted EBITDA of a 131 million in the fourth quarter, a slight decline from a 138 million in Q4 2014, reflecting the substantial and favorable impact of currency headwinds offset by volume, price and variable cost savings.

Adjusted EBITDA margins still increased however, rising 70 basis points to 22.2% from last year, benefiting from the drop through effect of volume, price and cost improvements in the period.

Switching now to our Q4 2015 transportations coatings results; net sales in transportation coatings increased 4.2% year-over-year in the fourth quarter before adverse currency exchange impact of 9.5%. This result included ongoing volume growth in North America and EMEA, a recovery back to growth for Asia Pacific, somewhat offset by weaker Latin American performance consistent with the third quarter.

Q4 net sales on our light vehicle end market increased 5.5% excluding foreign currency translation [including] growth in all regions except Latin America. Net sales in our commercial vehicle end market flattened for the quarter, excluding foreign currency translation, with ongoing growth in EMEA and Asia Pacific, offset by slower North American and North American performance, as heavy duty truck production slowed in the period.

As a reminder though, only about half of our sales in the commercial vehicle end market are from heavy duty trucks. The remainder of our business is mainly generated from bus, rail, agricultural and construction equipment, trailers and body builders.

Transportation coatings generated an adjusted EBITDA of 82 million in Q4, up nicely from 67 million a year ago. With positive volume drop through and progress in our cost initiatives and favorable trends in raw materials offset partly foreign exchange impacts. Segment adjusted EBITDA margin, stepped up fully 450 basis points from 15.2% to 19.7%, also driven by element just described.

Turning to our full year 2015 consolidated results, for the full year 2015, net sales increased 5.3% before currency exchange impacts, coming within our 5% to 7% target range, in spite difficult conditions in emerging markets, the third quarter inventory correction in China light vehicle and FX headwinds.

We are very proud of this result, which was achieved through a lot of hard work across the Axalta team. We believe our organic net sales growth in 2015 excluding the impact of foreign currency was highest of any company in the coatings industry. This net sales growth was split relatively evenly between the segments, with mid-digit growth coming from both performance and transportation coatings.

It’s worth highlighting that we achieved volume growth in all regions for the full year, with the strongest performance coming from North America and Asia Pacific. Adjusted EBITDA for the year increased 3.2% versus 2014, which includes substantial currency headwinds. Our 867 million in full year adjusted EBITDA was within our guided range provided in December of 860 to 870 million, in spite of currency effects.

The adjusted EBITDA result was driven by the broad volume growth noted previously and positive impact from price contribution, savings from variable cost reductions, offset in part by foreign currency and operating investments we have also previously discussed. The effect of the margin level was accretive with a 190 basis points boost from last year to 21.2% in 2015, also a bit ahead of our target.

Again, we are very proud of these results and clearly 2015 was another very strong year for Axalta. We credit this performance to our team’s focus on achieving growth with given an uneven market backdrop, relentless execution on our productivity initiatives and singular attention to driving positive cultural change in the company to make this type of strong performance a habit.

Looking at some of the key balance sheet items on slide 8, as of December 31, cash and equivalents totaled $485 million versus $112 million as of September 30, while total reported debt was 3.4 billion, resulting in a net debt balance of approximately 3 billion. Our net debt-to-full year adjusted EBITDA ratio was 3.4 times.

As expected, free cash flow improved in the quarter to a 192 million, net of CapEx of 44 million. For the year, free cash flow was 262 million net of CapEx of a 138 million. Regarding our capital allocation plans, we continue to focus our free cash flow on debt reduction, targeting leverage of 2.5 to 3 times net debt-to-LTM adjusted EBITDA.

We expect to achieve this target within the next 18 months, based on our current forecast, and with any potential variance largely associated with uncertain timing of acquisitions as an alternative use of capital. We also continue to invest capital on internal projects with high IRRs, as reflected in our CapEx guidance of a 150 million which includes approximately 90 million of growth and productivity spend.

We remain satisfied with and continue to evaluate a long list of such projects. Regarding M&A we closed a third small transaction and our first in North America in the fourth quarter as previously noted.

Charlie will now address some of our goals for 2016.

Charlie Shaver

Thank you Robert. So if you look on slide 9, we laid out much of our plan for 2016 back in December and I would like to revisit those metrics and add a little bit of color to the 2016 goals which remain unchanged.

First of all, we are targeting to grow net sales before currency 4% to 6% this year. Our plan to achieve this goal is supported detailed and realistic operating plan in each business. First, it’s useful to remind everyone that over 40% of our revenues and even more of our profitability comes from the refinished end market, serving the relatively stable and globally diversified automotive collision after market.

This provides for a stable net sales foundation from where to build and are steadily gaining share in this consolidating market over time in all our major regions. We believe that refinished demand will continue to benefit in 2016 for lower fuel prices, which correlates well with increased miles driven, and accident rates as well as the purchase of larger vehicles that consume more paint.

Further, Axalta operates in fairly diversified markets. When you factor in our four end markets in the four geographic regions, in aggregate nearly in all of our end markets and regions are expecting core volume growth in the low to mid-single digits in 2016. Of course there are known pressure points to our overall growth plans, including ongoing fundamental demand pressure in emerging market countries and expected pullback from near decade highs in North American heavy duty truck production.

That said, these pressured areas are balanced by our expectation and moderate growth in our core refinished, light vehicle and industrial niches where we participate. In addition, our plans call for continuation of modest share gain in most end markets largely building on the business success we’ve demonstrated during the course of the last several years.

While no new contract offers a guaranteed future volume, we do have good line of sight this year from key account wins of 2015 and prior periods. Finally we continue to expect modest price increases in a few key areas of the business to round up a top line buildup that produces a mid-single digit guidance for 2016 net sales.

Robert will detail some of the other financial guidance items, but I would like to touch on a couple of our operating goals for 2016 in more detail. First, we continue to progress in ramping up new capacity that has years coming online to support our medium and long term growth objectives.

Both in our existing and new plans, we’ve got an opportunity to further refine our operating processes as we see continuous improvement with benefits expected and improved working capital and associated cash flow.

While we entered 2015 with a strong and diverse global business foundation, I believe continued globalization will further fuel our growth engine. We are pleased to sell in to a 130 countries, but our presence in each country and within key markets is by no means even. This we have plans to advance our global presence with growth objectives in a variety of markets across every region including North America.

Even where we had a strong overall market share position, we believe there are many niches where our presence is still limited and we’re under represented. These presents clear growth opportunities for us going forward; of course even during period of growth, we will continue to execute this year on our productivity initiatives, particularly through our Axalta way.

Our combined savings goal of 60 million will require a great deal of hard work across many individual programs all designed to make Axalta a leaner operating entity focused on serving our customers with the right product, at the right time, and the highest level of quality and reliability.

In short, we much leverage our Axalta way processes together with our industry leading products and technologies and a process focused on innovation to ensure our durable competitive edge overtime. Our capital expenditure plan remains consistent with our 2015 levels which came in slightly below our $150 million target, largely due to timing and modest benefit from currency devaluation.

Now that we are largely finished with our major capacity expansion, we are turning our focus towards productivity spending on smaller projects designed to lower cost, increase throughput and automate processes where possible.

Regarding M&A, with the three small deals successfully completed, we are looking at and expect to execute on similar tuck-in transactions overtime and past 2016 which tend to low risk and with attractive returns without significantly impacting our balance sheet profile. In the meantime we are content to reduce our net debt leverage as the primary use of our excess capital.

In 2016, we fully expect to make strong progress in lowering our leverage ratios towards our stated target of 2.5 to 3 times net debt to full year adjusted EBITDA. Our current expectations will have more free cash flow in 2016 versus 2015 to plot on these goals.

To summarize we are extremely pleased with our 2015 results, especially in the context of currency headwinds that somewhat mass the underlying volume growth and execution processes that we accomplished. This success is seen however in our reported net sales before FX and in our reported margin improvement, bolstering positive forward progress towards our goal of being best-in-class in the coating sector, measured by growth, profitability and eventually our returns on capital invested.

In 2016, we aim to further develop on a strong fundamental business model and build on those successes. We have a strong foundation including a resilient aftermarket refinished business, as our largest end market, a broad product portfolio and wide geographic dispersion, all of which we see is a right combination long term to give us a key competitive advantage in spite of near term macro uncertainties.

We are increasing share in global markets as we introduce new products, globalize our existing products and apply discipline and metrics based management to a business that was formally not a focus area for the previous owners. Our success is paired with a persistent focus on increasing productivity and creating a durable operating model that emphasized customer service, while definitely minimizing our cost structure to ensure we can compete effectively.

So now I’d like to turn it back to Robert for a few comments on our guidance on slide 10.

Robert Bryant

Our press release and investor presentation outline our guidance components for 2016 financial modeling. I like to offer a few added notes on key areas; excluding foreign currency impacts, we continue to expect 2016 net sales to grow 4% to 6%. In addition to underlying market growth, Axalta is fortunate to have an abundance of topline growth opportunities, given the myriad self-help actions we continue to execute and our relatively smaller size in certain markets.

We’ve updated our FX assumptions as indicated in the appendix to our earnings presentation and expect reported net sale to be flat to down low single digits. Our full year forecasted rate for the euro and our guidance is at 1.05, however yesterday’s rate was 1.13.

Our constant currency growth is expected to come from all regions and end markets though we recognized that ongoing economic pressures in South America will limit growth in that region. While commercial truck vehicle growth may also be limited to somewhat by a lower North American Class A truck demand.

We continue to expect refinished market growth to remain stable on aggregate and assume modest share gain in addition to market growth. Industrial is expected to continue to outgrow with end markets as we develop our business with bottom up sales efforts and new products similar to 2015.

Light vehicle growth in low single digits in line with independent market forecasters should also be augmented by modest share gains. Commercial vehicle market performance is expected to be slower but still show modest growth globally in the face of slowing Class A demand in North America, while we do not anticipate significant out growth versus this end market in our plan.

Our expectation for adjusted EBITDA is a range of 900 million to 940 million for 2016. This range implies a moderate incremental on assumed net sales growth, additional savings from our productivity initiatives, most of which are well within our control rather than dependent on volume, offset by ongoing currency impacts and expected additional costs from ongoing investments in growth, albeit at a much lower levels than seen in 2015.

For the first quarter of 2016, we know that our expectation is for adjusted EBITDA to fall within the range of 19% to 20% of our full year EBITDA target. We are also projecting one-time cost on a full year basis of approximately $25 million for the Axalta way. Except for working capital, other model expectations remain unchanged from our presentation on December 4.

We expect interest expense of 180 million to 190 million, our income tax rate as adjusted to be between 25% and 27%, our diluted share count of 242 to 245 million shares, capital expenditures of a 150 million, and net working capital in the range of 11% to 13% of net sales.

This concludes our prepared remarks; we’d be pleased to answer any questions you may have. Operator would you please open the lines for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] our first question comes from the line of Duffy Fischer with Barclays. Please proceed with your question.

Duffy Fischer - Barclays

Just wondered if you could come in to a quick waterfall walk from your 867 to say the mid-point. You kind of called out what some of those were whether it’s FX on the negative side, new volume on the positive side. But can you kind of size the buckets of which were the big movers to get us at $60 million of improvement?

Charlie Shaver

Duffy as we look at our guidance for 2016 and the improvement. I think there’s a multitude of puts and takes throughout the year and I think too similar to 2015, the exact path on how we get there will be different than what we originally think. But in terms of what we’re projecting for 2016, we’ve got good volume growth across all of our end markets in most of our regions.

We have additional variable cost savings, we have additional fixed cost savings, and that was offset by some additional commercial investment that we’ll be making to grow the business. We’ve seen good return on incremental commercial investment that we’ve made in particular in the performance coatings side of the business and as a result I expect this end markets where we are underrated to continue to make commercial investments.

Duffy Fischer - Barclays

On the cost side, if you hold things flat today, when do you think you would start to anniversary the benefits that we’re seeing in raw materials and how do you see that playing out throughout this year?

Charlie Shaver

As we think about the cost moving forward, I think when you look at the drop of oil that really started to occur in the second quarter and then you assume approximately 3 months before you would see that appear in cost of goods sold and flow through your financial statements. It’s probably at the end of the first quarter that we really start to lap some of those benefits, vis-à-vis the lag effect on a weighted average across all of our raw material baskets.

Operator

Our next question comes from the line of PJ Juvekar with Citi. Please proceed with your question.

Dan Jester - Citi

Good morning guys, it’s Dan Jester on for PJ. So maybe we could just talk a bit about margins in the quarter. You noted that in performance coatings margins were up 70 basis points but they were up over 450 basis points, the transportation coatings. So those segments are probably benefiting from the raw material benefit, both segments had volume growth. So maybe just kind of compared and contrast, what’s going on on the margin for those few segments.

Robert Bryant

In Q4 what you see there with the greater margin expansion on the transportation side of the business, there’s a few different components that drive that. One is somewhat regional mix of earnings, the others of course are some raw material savings that did materialize and then the third is I think we’d commented on in previous calls, given in particular where the Fit-For-Growth initiative was initially focused in Europe, it was predominantly at plants that tend to serve much more in the transportation coating segment.

Dan Jester - Citi

And then on your M&A pipeline, any updated thoughts about targeted opportunities for different end markets or any comments you’d have on from a geographic focus for how we should be thinking about your pipeline. And in 2015, can you size how much revenue or profit you was at from M&A.

Charlie Shaver

Hey Dave this is Charlie. I’ll comment on the first one, I’ll let Robert comment on thinking about the sales that resulted, and again couple those in 2015 or later in the year. So their contribution really we’ll see in ’16. In our M&A pipeline I think we’ve said previously that we will primarily stay focused in the performance coating side of business. Again as we’ve always highlighted, our largest business and the strongest business globally is refinish and we think there’s a lot of areas there.

A couple of our acquisitions last year were focused refinish and focused in the mainstream segment at refinish. So I think you’ll see it this year, if we are successful with that pipeline, you’ll see us continue to add a couple of more bolt-on in the performance area. We continue to look at everything that comes across because we always learn and think about our businesses differently. But I think we’ll stay focused in the performance area where we believe there’s plenty of opportunity globally.

There’s probably regions in the world that we would prioritize. Last year if you look at the three we did, we actually did one in Latin America, we did one in North America and one in Europe. I think our priorities would be kind of in that reverse order; North America, Europe, Asia Pacific, followed by Latin America at this point.

Robert Bryant

Regarding the second part of your question in 2015 we saw $10 million to $15 million in net sales contribution from the acquisitions that we added, and in 2016 on a full run rate basis we would expect that to be approximately $50 million.

Operator

Our next question comes from the line of Aleksey Yefremov with Nomura Securities. Please proceed with your question.

Aleksey Yefremov - Nomura Securities

You show the exchange rates that you use for your current guidance and though I understand the conservatism, can you give us an idea if we were to mark-to-market let’s say Euro you used $1.05, your current FX rate is $1.12. So if we were to translate your guidance range to those current environments, what kind of range would we be talking about?

Robert Bryant

Last year we spoke about a sensitivity, the one currency sensitivity that we did provide at the net sales and at the EBITDA level, which was each euro sat being equivalent at this sort of rate that we’re currently at to approximately $13 million in sales and approximately $2 million to $2.5 million in EBITDA.

Aleksey Yefremov - Nomura Securities

And turning to performance coatings you averaged about 3.5% volume growth in the back half of the year there. Are you growing with the market or meaningfully above the market and if you’re gaining share there, have you seen any competitive response on the pricing side especially in refinish?

Charlie Shaver

Yeah Aleksey this is Charlie. I think overall we are growing a little faster than the market. And I think there are different reasons in different regions. We highlighted previously the North America, the whole image, those segment is really growing faster, taking from other parts of the markets and we are a one of a couple players really benefiting from that.

In Europe its introduction to mainstream products and in to some geographies that we are underrepresented, and in China, for example in Asia Pacific we’re actually growing a little faster in the market as we penetrate our products in to city that we were not previously there before primarily, despite seeing some domestic competition.

So I think as we always highlight, all of these markets are very competitive at any time. But we are really trying to do it not by going in with price, we’re really going in with different value propositions and in some cases in to segments of the market with products where we didn’t perform before where we felt like we can compete and the competitors in those spaces have very limited action back against us.

Operator

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

Matt Krueger - Robert W. Baird

This is actually Matt Krueger sitting in for Ghansham. First on the macro side, can you walk us through your outlook by region as it relates to your various end markets and segments?

Robert Bryant

If the context to your question is around our expected growth rate in 2016 Matt, we can provide a little bit of color there. I think more broadly from a macro level I think we’re pretty excited about the conditions that we actually see in North America, for next year in Europe.

I think we’re also cautiously optimistic about the opportunities that we see there. In Asia Pacific, I think we also are optimistic about the opportunities that we see there, unless trying to of course we were to go in a different direction than it appears to be going presently.

And then in Latin America, we continue to see - you kind of have to bifurcate it in to Mexico and South America. In Mexico, we continue to see good trends in all of our businesses. And then when you get to South American and especially Brazil, we believe that Brazil of course it’s into recession and will continue to be in 2016.

From our guidance perspective, again we had, I think just as did most companies a pretty tough year in Brazil and we have not assumed that that situation changes at all in 2016.

Matt Krueger - Robert W. Baird

And then kind of expanding on 2016 guidance, can you outline what variables would drive 2016 EBITDA to either end of your guidance range?

Robert Bryant

I think the main variable in that would be the global macroeconomic environment from a top line perspective. That’s probably the single biggest driver. I think we’ve been relatively conservative there, but as we look at it, we just have a number of opportunities in each one of our markets that are what we continue to call self-help opportunities where we may have smaller share than the share than we would expect to have in that market. And as a result we continue to have commercial opportunities that will allow us to grow pretty significantly without having to take large amounts of market share. That’s one variable.

Other variable of course would be FX and if FX rates I think you shouldn’t see from a guidance we’re assuming about 6% FX on a combined basis across all currencies. And you’ve seen our currency assumption laid out in the appendix. FX may not be as bad as we’re forecasting, I think it would be relatively conservative.

On the other hand it could go the other way and be a little bit more of a headwind. I think that’s something we don’t know. And then lastly, certainly what happens with the cost of raw materials could be an additional tailwind if we continue to be at these levels throughout the rest of the year.

Operator

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

Matt King - Morgan Stanley

This is Matt King on for Vincent. I was wondering if you could speak to the magnitude and timing of new business wins in all the OEMs and the implications for above market growth in 2016.

Charlie Shaver

Yeah Matt this is Charlie. I think I would backup a little bit to, I know when we first IPOed well over a year ago, we wanted to be very specific about number of wins and where those were. I think we’re moving away from trying to do that. I think we’re adding too confusion in some cases as people tried to add up wins, losses, revenues, everything else.

But what I would tell you is that we continue to see nice business wins both on the transportation sector and in the performance sector. In transportation we continue to see those wins not only in Asia Pacific, but in other regions of the world. Interestingly enough, even in Brazil while they are not in a great place from a macro.

We continue to grow our business down the transportation side, starting in areas like North America and Europe, we continue to pick up business, picking up some share, and in most cases that’s just part of the normal procurement processes at the OEMs go through.

We’ve actually grown share with a couple of OEMs and we felt like we are underrepresented. And we think that that will continue. So I think while there’s a lot of questions around global SARS, I think we feel like there’s plenty of runway for us and especially in some of the areas we are underrepresented again after our prior owners having not focused on some of those customers, that that could continue.

And on the performance side of the business, as you know it’s very fragmented and it’s got thousands of customers. So our wins, we kind of measure how we grow with existing customers but then also number of new customers. And particularly in the industrial coatings business, we’ve rapidly grown a whole new customer list comprising a lot of the growth in that segment which has been faster than market. There’s been new customer growth and new segments for us.

Matt King - Morgan Stanley

Do you think you are multiple to market growth is represented of a run rate in the fourth quarter or do you expect an acceleration there?

Robert Bryant

I think that some of that’s got seasonal aspects to it depending on what some of these segments are doing. But I think overall as we look at the 4% to 6% for 2016, we are approaching that kind of run rate.

Operator

Our next question comes from the line of Jeff Zekauskas with JPMorgan. Please proceed with your question.

Jeff Zekauskas - JPMorgan

I’ve a few questions on your items, what do you expect your stock comp expense to be next year. How much of the 36 million in termination charges have you actually funded, and do you consulting and advisory fees of roughly 25 million change very much next year?

Robert Bryant

Jeff we’ll take each one of your questions one at a time. Your first question on stock comp; in 2015 our stock comp charge was $30 million. In 2016 our estimate for stock comp is $40 million. That increase really comes from the amortization of the retention and the regular annual grants for May 2015 and peaks in 2016 before coming back down somewhat with the three year smoothing. In fact as we move through more normal annual stock comp grants as a public company.

Your second question was on severance?

Jeff Zekauskas - JPMorgan

Yeah, how much of the severance of the 36 million that’s been paid out?

Robert Bryant

So of the 36 million we’ve paid out all of it. We have additional 36 million to be paid.

Jeff Zekauskas - JPMorgan

36 to be paid and the consultant fees will they change very much?

Robert Bryant

Yeah, in terms of the expenses that we’re expecting for next year, we do expect if you look at the components of our one-time cost in 2015, roughly 50% to 60% of them were related to severance and consulting was around 35% to 50% depending upon whether you’re looking at just Axalta (inaudible) of the total for the company.

Next year we’re expecting one-time costs related to the Axalta way of 25 million. That number does include some of our consulting fees as well as expected severance related program that we’ve already identified and have plans for 2016. If there were to be some additional restructuring or additional plans, we would have an additional one-time cost. But as of this point 25 million is our best estimate.

Jeff Zekauskas - JPMorgan

Lastly, do you have a rough idea of your cash flow from operations next year?

Robert Bryant

In terms of cash flow from operations for next year, I think in Charlie’s comments that’s been highlighted. We expect that number to be higher than it was in 2015. But we haven’t provided specific guidance on our cash flow for next year.

Operator

Our next question comes from the line of Bob Koort with Goldman Sachs. Please proceed with your questions.

Chris Evans - Goldman Sachs

This is Chris Evans on for Bob. I was hoping you could update us on the competitive environment you cited at your investor day, around OEMs and new plans. Just wondering if the raw material deflation was being passed through as you described previously?

Charlie Shaver

Yeah, this is Charlie. I think we see a normal competitive environment, when I call normal if there is one competitive environment in the OEM space. As we highlighted most of the OEM business is put out for market test on a routine basis. So any particular OEM at any point of time may have anywhere from 20% to 30% of their business being looked at either with product changes, model changes or just normal sourcing practices. And again each one’s a little bit different.

So I would say, we see a normal environment for that right now with a normal amount of business being put out there. I think we’ve always said that we believe that if raw materials stayed down for an extended period of time that that would begin to show up in competitors bid and certainly if we went through the second half of last year, we started to see that.

At the same time we’ve enjoyed, as most of you know on the call, lower raw material prices. In spite of all of that we continue to normal margins and the ability in many cases depending on product introductions to actually increase margins. So I think we do certainly see an environment where there is pressure on the pricing side of the business in these competitive processes, but right now, if we look at 2016 and the business that we’re looking at, we think that it remains a fairly orderly and disciplined market place.

Chris Evans - Goldman Sachs

So you’ll be able to hold price or still continue to grow out there. Great. And then could you tell us or may give us, how should we be thinking about the impact of the Chinese auto stimulus, is this material in ’16, is this just pulling forward ’17 now, how should we be looking at that?

Charlie Shaver

As you know in the last several years China had a series of auto stimulus’s this is another one. I think it’s an important sector for China. As you know just not only jobs or for the economy, and I think China will stay focused on continuing to make sure that their automotive and their light industrial markets stay healthy. So who knows if it falls from ’17. Right now 4% to 5% growth we believe the economy can continue to handle that without it.

Certainly as we come in to ’16, we haven’t seen any radical buildup of dealer inventories or anything like that. So frankly everything looks stable at this point. We’ll get a real test when most markets and when everyone comes back from Chinese New Year. But everyone appears to be starting back up as normal.

So I think the market will continue 4% to 5% and stay healthy and not overrun itself just on replenishment and continued growth in the economy we’ll just have to remain to be seen if that holds. But I do think that the Chinese government is focused on maintaining that as a healthy sector and again some other macro could affect that, but that’s only a focus of theirs.

Operator

Our next question comes from the line of John Roberts with UBS. Please proceed with your questions.

John Roberts - UBS

You must have some excess capacity in South America. I know it’s hard to export finished coatings, but can you export any resins or concentrates from there to take advantage of devalued costs?

Charlie Shaver

Yeah John this is Charlie. We do have some capacity there. As you know in coatings plants we tend to take the cost out by dropping the labor cost, dropping the number of shifts. Interesting enough, we are looking and doing that out of Brazil, just think as of where they currently sit. But I don’t think it’ll be a material amount for us. But as you know we go Brazil in to Argentina and other countries like that in the region just that we can do more of that, we’ll continue to look at that.

I think we’ve started reestablishing trade flows going the other way, we always try to make sure that we’re not just doing it for one quarter that if we shift a trade flow, and we have done that between Europe and Asia over the past year and a half.

With the drop in the Euro, we’ve actually shifted some flows, but we’ll only do it if we believe that it’s a long term sustainable. Just because it’s a lot of work to go back and forth as you mentioned whether it’s on coatings whether it’s even on resins. But we are look at doing some of that.

John Roberts - UBS

And then in South America, are you seeing auto refinish customers consolidate faster given the economic pressure and is it possible that there are some share gains from that that might offset some of the market weakness.

Robert Bryant

Certainly in a country like Brazil, we are seeing two things happen, one is, consolidation among customers. At least in our share down there, we haven’t seen anything speed up there. We certainly have seen customers be more sensitive to where they can use a mainstream product instead of a premium product. They will do those types of things, where they can work on or shift may from one product to another one that is a little more productive form. We’re starting to see some of that going on.

Part of our focus in Brazil has been to introduce a broader mainstream line. Yet again as we’ve highlighted before in many cases it doesn’t mean lower margins, but it is a different product set, and we have introduced some mainstream products down there in our facts pool or car backpack some things like that to take advantage of that.

Operator

Our next question comes from the line of Ivan Marcuse with KeyBanc Capital Markets. Please proceed with your question.

Ivan Marcuse - KeyBanc Capital Markets

In terms of your 60 million in cost savings that you're looking for 2016 are those projects pretty much done and we’ll see 60 million flow through, or are there still things to do where you have to get there? And then how would you expect how it flows through the year? Is it back half weighted than first half?

Robert Bryant

Good question. In terms of the savings, we’re projecting $60 million, $20 million of that will come from different growth. At this point that program is fairly formulaic in terms of how the savings flow through, and the 40 million that we’re expecting from the Axalta Way, we have all of those programs identified, we have implementation plans developed and we’re in the process of implementing those programs as we speak. I think we have a high degree of confidence of achieving at least that $60 million number.

Ivan Marcuse - KeyBanc Capital Markets

But you would say $20 million is in the bank, $40 million is still stuff you still have to complete, but should be done by the end of the year?

Chris Mecray

Ivan its Chris. I just want to make it clear that the 20 represents incremental savings from actions taken during this year. But Robert’s point is that it’s really formulaic in a sense but they’ve been outlined and in progress for some time. But this is not representative of savings taken based on actions in ’15. They are both incremental.

Ivan Marcuse - KeyBanc Capital Markets

So $60 million, your cost structure should be $60 million, better than it was a year ago?

Chris Mecray

Correct.

Ivan Marcuse - KeyBanc Capital Markets

My quick follow-up, you talked about account wins; how much of that is in your 4% to 6% of sales growth? How much of that would you gauge to account wins? Is that 1%, 2%? I don't know if there's a way to quantify it.

Robert Bryant

We haven’t broken down new customer contribution or new product contribution for different reasons. But I’d when you look at our markets certainly on the performance and the transportation coating side of the business, we do have planned customer acquisitions and those are proceeding on track.

Operator

Your next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your questions.

Laurence Alexander - Jefferies

Given the much lower raw material environment that seems to be staying around longer than I think people would have expected six months ago, how has your thinking evolved around the longer-term opportunity to reduce costs through switching to dual sourcing or other changes in your buying practices? More over 5 to 7 years.

Charlie Shaver

When we look at that Laurence that is a key area of focus and one of the longer term projects under the Axalta Way is to work our way out of single source situations and we have a special team inside our (inaudible) organization solely dedicated to new supplier development. That’s one element of it.

The other element of it is naturally formulation and new product development, where we’re leveraging and trying to produce the number of raw materials that we used to have more of a uniform batch across our global system, which will actually enable us to require fewer suppliers.

Laurence Alexander - Jefferies

And is the magnitude of the potential savings changing much?

Robert Bryant

In terms of what we’ve forecasted for 2016 in the savings, there are not much savings assumed in the 60 million that emanates from moving out of single source situations. Most of those savings are related to other activities. I think as we look in to 2017 and beyond, that’s a significant area of opportunity for us.

Laurence Alexander - Jefferies

And in the industrial end markets where you are growing above the market growth rates, are any of them ones that you can call out where it is a long tail, or are they mostly cases of just a lot of singles and doubles put together?

Charlie Shaver

Yeah I think you’ve characterized it. It’s much more of singles and doubles over time.

Operator

Our next question comes from the line of Mike Harrison with Seaport Global Securities. Please proceed with your questions.

Mike Harrison - Seaport Global Securities

I was hoping that you could give us a little bit of additional color on the four capacity expansions and the timing of the ramp-up, and in particular do any of those ramp-ups have some costs that start to hit the P&L before you see any of the volume or efficiency benefits?

Charlie Shaver

Yeah this is Charlie and I will bow out and try and work up through this real quick. Those capacity expansion to answer in a reverse order, all those costs are already in, as we go forward 2016. The large capacity expansions are China Jiading OEM facility, our Mexico resins reactor. They include an expansion in Europe for which was part of our Fit-For-Growth and actually started out in the third and fourth quarter of last year and then project in Brazil to add some capacity as well. So I think in all four cases they are up and running and the costs are fully baked in for 2016. Clearly there’s a ramp up on the production side and revenues we go to ’16, but again that’s built in to our projections.

Mike Harrison - Seaport Global Securities

And then just on the cost side; looking at some of the uncertainty in some of the end markets, do you have some additional plans in place to maybe accelerate some cost actions if markets are turning against you, in order to maintain your EBITDA guidance or help to maintain margins?

Robert Bryant

Yeah this is Robert. We have a series of actions as part of Fit-For-Growth as well as Axalta Way that are planned. Additionally, we go through scenario planning as part of our budgeting cycle each year and we have a secondary list of action that we could take. Fortunately much of our labor base is temporary at labor, we have the ability to throttle that pretty easily and we also have other expenses that we can throttle. So I think we feel comfortable that in that downside scenario we have several levers that we could call.

Operator

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

Arun Viswanathan - RBC Capital Markets

Just a question; what’s your plans for deleveraging in 2016 and just update us on your potential refi opportunities?

Robert Bryant

In 2016 I think we’ll continue to make good progress in reducing our leverage, and over the next 18 or so months, we expect to reach our 2.5 to 3 times leverage target. As we look at refinancing opportunities, certainly the make whole premiums can actually take out some of our higher cost paper at really step down, and we are looking at opportunities.

The markets right now in the month of January and first week of February haven’t been very open to these types of transactions at attractive prices. However, we continue to evaluate that every single week and we have the materials prepared in order to be able to go out and effectuate that refinancing once the markets open and are sufficiently favorable for it to make sense.

Arun Viswanathan - RBC Capital Markets

And just a quick follow-up, what are your customers on the OEM side telling you as far as production? Are there plans to reduce production at all in ‘16 in different regions, or do you still see continued similar levels of production?

Charlie Shaver

Yeah, this is Charlie. Obviously you’ve got 13 major OEMs and about 30 parts manufacturers behind us. So probably walking through all of those wouldn’t make a lot of sense. But I would tell you overall, you’ve heard from Ford, you’ve heard from GM, you’ve heard from the Volks Wagon, Audi Group. Different models have different plans. FCA they are doing some consolidation or GE planning to do some things.

So I think every one of them is continuing to adjust their business, but overall as a rule most of them have fairly decent plans for the year. Again you got to walk by region and by model. Clearly some of them are not happy in some of the areas like Russia and Brazil. They’ve already taken actions.

But right now we don’t see anybody doing any major pullback. Again at the same time you kind of have to go model by model. So for example, if you’re looking at North America, so see pretty robust SUV and truck production, you see less emphasis on some of the smaller cars. I think those kind of trends will continue as we go through the year.

We certainly use the amount of same information and we don’t hear anything differently. But we deal with OEM kind of at a model-by-model, production site-by-production site look. And again we get a lot of question around this as, has there been peak start and I would just offer my view which is, when you look at the various state of the economies around the world, peak star occurs in different regions at different times.

So we kind of concur with people’s view right now on where North America is, kind of a flat view in Europe, continued pressure in Brazil, Mexico up slightly in support of North America, and China 4% to 5% this year. And I think that that right now is at least the best visibility all of us see. We would concur with what we hear from them, when we look at the economies and build rates. And again I think there’ll be some ups and downs as you know during the year. But overall they certainly don’t have a pessimistic view on the years. They look at consumer and continue to lower interest rates things like that.

Operator

Ladies and gentlemen, we have come to the conclusion of our allotted time for questions. I’ll turn the floor back to Mr. Shaver for any final concluding remarks.

Charlie Shaver

Just a couple of quick comments and we’ll let everyone go. First of all, thank you for the last hour. It’s been good to get back out, as we get our year-end out there and start talking a little bit more about 2016.

Again I’ll just wrap up with, we feel like we had a really good year, we navigated through massive currency swings, most of it translational but still, I think our focus is on execution not only on capital but our cash flow and focused on our earnings all bought us to a good place as we finish the year. We’re certainly very enthused about 2016, and what we do believe will be a challenging macro environment. We are really focused on new products, new markets and new customers in addition to supporting the customers we have.

As most of you know we just completed our third year as an independent company, and what a great three years it’s been, and we’re now looking forward to our next year as we execute on all the things we highlighted over the past hour.

I do think we’ve got a very good line of sight of where we’re going. I am also confident that we won’t get there exactly as we planned, but I think Axalta is a company that has a lot of leverage to pull. We are in a lot of markets, we have a lot of horse power. When you look at our market positions especially in places like refinish and in transportation, we are either the number one or number two market leader in most markets.

It really affords us a lot of opportunities to grow our business, take cost out and find new ways and new market to go in to. So again we’ll remain focused on execution. It is a risky world out there as everyone highlights and we think we can contemplate those risks and still grow in the markets we have.

So again, thanks everybody and we look forward to dialoging as we go forward over the next few days and updating everybody as we move heavily in to 2016 performance. Thank you.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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