Axalta Coating Systems' (AXTA) CEO Charlie Shaver on Q1 2016 Results - Earnings Call Transcript

| About: Axalta Coating (AXTA)

Axalta Coating Systems (NYSE:AXTA)

Q1 2016 Earnings Conference Call

April 28, 2016 08:00 ET

Executives

Chris Mecray - VP, IR

Charlie Shaver - Chairman & CEO

Robert Bryant - EVP & CFO

Analysts

John Roberts - UBS

Christopher Parkins - Credit Suisse

Duffy Fisher - Barclays

Arun Viswanathan - RBC Capital Markets

Chris Evans - Goldman Sachs

PJ Juvekar - Citigroup

Ivan Marcuse - KeyBanc Capital Markets

Matthew Grainger - Morgan Stanley

Jeff Zekauskas - JP Morgan

Laurence Alexander - Jefferies

Aleksey Yefremov - Nomura

David Begleiter - Deutsche Bank

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Axalta Coating Systems' First Quarter 2016 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. Today's call is being recorded. Replays of this conference will be available through May 5, 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 first quarter 2016 financial results conference call.

Joining us today are Charlie Shaver, Chairman and CEO; and Robert Bryant, EVP and CFO. This morning, we released our first 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 today, for review of our first quarter 2016 financial results. I will first cover some of the highlights from the quarter and update our goals for 2016. Robert will then provide some additional details on our financial results for your guidance. We'll then take your questions. So if you will turn to Slide 3 of our presentation we are showing both solid organic sales growth and continuing year-over-year margin gains and this puts us on a solid path meeting our objectives for the full year 2016.

First quarter sales rose 3% from prior year before the impact of currency translation. Component sales growth retails at more towards price and volume quarter and this was due in large part to drag from Latin America volumes as well as difficult comparisons in transportation versus last year's first half. We anticipated that in our budgeting and planning process in our plan for the period. We are highlighting that excluding Latin America our volumes for the first quarter grew low single digits across the regions versus the overall decline of 2.1% of reported ex-currency.

In addition it was an offset of data quarter from some regions due to the eastern calendar this year. We grew adjusted EBITDA at 10% the first quarter with $195 million result exceeding the range that we noted for the quarter on our last quarter due to better than expected performance on several areas that we will detail shortly. As we noted we also shared solid margin expansion in the quarter with our adjusted EBITDA margin at 200 basis points to 20.4% from 18.4% last year. Our operating additions remain well on track with in Q1.

We have highlighted four major capacity expansions that were taken since in 2013. The last thing in these projects were the expansion capacity in Mexico were commissioned in March and is successfully running products for our customers now. We are quite proud of achieved executional net project which is completed on time and on budget as a compelling overall level of capital efficiency. Regarding our productivity issues we also remain well on track for our full year of achieving $60 million in overall savings from our combined Axalta way different growth options.

We continue to evaluate all areas of company for potential efficiencies and recently we focused on several functional and back office areas of standardizing our practices across the regions in automating certain functions were possible. Turning out balance sheet and cash flows developed this first quarter also made our plan with a lower seasonal use of working capital over last year including better year-over-year performance for each of the key working capital accounts. We also repaid another $100 million of our term loans in April subsequent to quarter end demonstrating our ongoing commitment to reducing leverage for both EBITDA growth and debt reduction.

We continue to expect to see a combination of reducing that leverage and improving cash flow this year versus 2015. Though we consider our plans of growth for both sales and adjusted EBITDA for 2016, we believe we remain very much on track to accomplish our goals that we have landed in February. Top line growth of 4% to 6% excluding currency remains our target and one quarter annually continues to see our path to achieving this trend.

With clear strategies in place you get there including contribution in each of our end markets. We are also confirming our full year of $900 million to $940 million of adjusted EBITDA with the first quarter offering support for this goal given solid performance versus our plan. Our primary focus for the year will remain on achieving these goals while also executing on the successive operational productivity targets to accomplish our planned growth and productivity savings.

We continue to closely monitor our cutting markets to see solid growth this year which somewhat cheaper broader economic back drop in certain areas. That said we remain pleased with our position with these markets. See our path to moderate to single digit growth coming from a combination of modest market growth in our core refinish and inclined markets as well as continued growth in our industrial and commercially inclined markets which also remain a small share for presence in executing a ground up expansion strategy.

We look forward to updating you with the progress as we move throughout the year. Robert will now walk us through our financial results in detail.

Robert Bryant

Thanks Charlie, and good morning everyone. We turn to Slide 4 of our earnings presentation for a view of our first quarter consolidated results. Constant currency net sales in the first quarter increased 3% year-over-year including 4.8% growth in performance coatings and more modest 0.7% growth in transportation coatings.

The main driver of this growth was rack rate improvement in pricing. Foreign currency translations reduced reported net sales by 6.4% in the first quarter which compared somewhat favorably against the 10.8% currency headway in the same quarter a year ago and 11.5% against last quarter. Axalta's net sales volume on a consolidated basis decreased 2.1% from the last year's first quarter. As Charlie noted this result was largely due to a decline in Latin America due to the quarter particularly from South American countries which continued to face notable economic pressure. Offsetting this pressure we accomplished solid volume growth in performance coatings within EMEA, as well as transportation coatings in North America. Asia pacific also saw solid volume contributions in both segments as we expected. Positive price contribution in the quarter was a helpful contributors in net sales growth before foreign currency impacts.

The 5.1% positive effect price came from all regions except Asia Pacific and from both segments. We achieved first quarter adjusted EBITDA of $195 million compared with the $182 million the same quarter last year. The profit growth included an impressive 200 basis points improvement in adjusted EBITDA margins from 18.4% to 20.4%. Driven by favorable price leverage as well as saving for cost improvements and predicted the enhancements. Offset only in part by ongoing growth investments similar to prior period last year. The pace of growth in investments has slowed but remains a factor in the European comparison given the ramp up of investments made during the course of 2015. Moving on to our Q4 2015 performance coatings results. Net sales in our performance earnings segment increased 4.8% for first quarter year-over-year before the impact of foreign exchange.

Driven by the solid growth in developed markets and offset in part by slower growth in economically pressured emerging markets. Volumes declined 0.6% in the quarter but were positive if we exclude Latin America. Overall volume in other regions was less by strong growth from Asia Pacific refinish and by solid results from a mere industrial end markets.

Average segment selling prices increased 5.4% led by strong gains in refinish across 3 of the border regions and stable overall selling crisis in industrial. This net sales growth was offset by 7.3% currency translation head wins compared with 12.1% head wins seen in Q1 of the prior year. Refinish net sales increased 5.3% on a constant currency basis versus last year's first quarter driven principally by broad pricing gains regionally as well as solid volume increases largely outside of Latin America.

Constant currency net sales in our end market decreased 8.3% year-over-year demonstrating our plans to grow faster than our industrial end markets in most regions and led by showing in India in the quarter. Volumes were mixed in Q1 but increased solidly in the refinish excluding Latin America. And also showed reasonable strength in industrial led by India against the persistent backdrop of slower industrial production in most regions.

Axalta continues to benefit from investments in industrial products and still expects to show accelerated growth in the end market as we progressed through 2016. Performance coatings generated adjusted EBITDA of $110 million in the first quarter, an increase from $107 million in Q1 2015. This growth was driven primarily by the positive drop down segment price as low as variable cost leverage offset in part by favorable currency head wins and moderate increased investments path.

Adjusted EBITDA margins increased a 110 basis points to 20.3% from last year also reflecting the favorable dynamics which we just described. Switching now to our Q1 2015 transportation coating results. Net sales for transportation coatings increased 0.7% year-over-year in the first quarter before currency exchange head winds of 5.2%. This modest growth was driven by mix set of regional and end market outcomes but with growth driven by strong performance in North America like the above, ongoing solid volumes in Asia Pacific like the above, offset to a degree to a pressure in South America and a somewhat weaker than expected results in EMEA versus plan.

Q1 net sales in Axalta's light vehicle market increased 3.6% excluding foreign currency translations which was North America offset by considerable incremental weakening in South America. The commercial vehicle end market net sales declined 9.3% excluding foreign currency translations reflecting an expected slower heavy duty truck production that began a quarter ago but compounded by broader weakness in non-truck related end markets such as agriculture and construction business.

The Transportation Coatings generated adjusted EBITDA of $85 million in Q1 up nicely from $75 million from a year ago, with positive drop through from price and some variable cost benefit offset by unfavorable foreign exchange impacts. Margins have increased remarkably with a whole 320 basis points increase this quarter moving up from 17.3% from the same quarter prior year to 20.5% from both positive price and mix elements in addition to some help from Axalta and variable cost relief from the prior year.

To move on some of our balance sheet items on Slide 7 of our investor presentation. As of March 31, 2016 cash and equivalents totaled $420 million versus $485 million a year ago. While total reported debt was $3.5 billion resulting in a net debt balance of $3 billion. Our net debt to full year adjusted EBITDA ratio was 3.5 times at quarter end. An uptake through Q4, the slight bump in leverage and lower cash balance reflects our normal seasonal working capital trends with first quarter typically requiring a net use of cash flow due to a combination of seasonal working capital patterns as well as cash interest and annual employee benefit payments that are made in the period.

Free cash flow was a use of $18 million a solid improvement versus the use of $99 million from the first quarter last year net of CapEx of $40 million. This improvement came overall better working capital performance as the primary driver. Regarding capital allocation we continue to focus our free cash flow on debt reduction. Targeting leverage of 2.5 to 3 times of net debt of the adjusted EBITDA within 12 to 18 months subject to variability around the timing of acquisitions we undertake.

Subsequent to March quarter end we did repay a $100 million on our U.S. dollar term loans as currently noted. We continue to evaluate the opportunity to repeat balance and to finance our U.S. dollar and Euro bonds. However, we need interest rates to move down a little further to be materially net present positive and to achieve meaningful interest savings. Turning now to Slide 9 Charlie will now address some of our goals for 2016.

Charlie Shaver

Thank you. As we highlighted in our February call, our goals to the year have remain unchanged. First we continue to target over 6% in net sales growth before currency. For the first quarter we posted over 6%, a bit shy of our targets as volumes came in slightly behind expectations for the quarters in Latin America. That said, we remain quite close to plan which contemplates acceleration in volume as the year progresses. This reflects the reality of the comparison which are a bit more challenged to the first half as we expected fading and growth and issues with acceleration will removed to the year.

We will highlight our plan for mid-single digit growth which is incremental price component but also comes from a set of opportunities that remain within our line of sight. These include share gains and geographic expansion targets and refinish including stronger growth in North America's year-to-year. Our growth in industrial is also near planned but also has the opportunity to accelerate the product launches that are slightly to come on stream over the coming months.

On the transportation side we got good line of sight in Asia Pacific, in North America the continued growth is all the fundamental stayed larger in these steady regions. This is already happening and we saw good progress in the first quarter in both markets. In the EMEA, we see clear reasonably both markets in relative growth will enable comparisons as we look forward. Overall, we expect a balance in volume and price in our top line growth but our plans suggests it will shift somewhat through the course of the year towards ore volume versus the first quarter outcome. Regarding operations we are pleased that we have our major milestones with regards to rethink capacity expansions.

For 2016 we believe we have numerous opportunities to focus on and refine operating metrics as we seek continuous improvement. With that has expected to improve working capital over the next several years. These goals are further validation of our operating leadership and outdated by organizational changes which put fresh eyes on our assets. We believe this will ultimately help us maximize our returns from solid core base of operating assets.

I have already referenced our productivity plans being on track but would be more noting that our work continues to uncover new opportunities to go on and beyond in 2017 year point of our existing all the way targets. We have more to say about these numbers in future but we continue to believe they have numerous levers to pull as we see its turning truly optimized organization. In the meantime we are excited the company is rapidly adjusting to our performance oriented culture and we are seeing the benefits of pushing us deeper into the company each period.

Regarding M&A we continue to form a list of our targets and are optimistic we will close on a number of tuck in acquisitions during the course of 2016. Our efforts here are largely focused on low risk deals with attractive returns and which substantially impact our balance sheet profile. Beyond our free cash flow continues to be directed towards de levering in 2016 as we look forward to achieving our net leverage of goal of 2.5 times to 3 times within the next 12-18 months as Robert highlighted.

To summarize we are happy that we have exceeded our expectations for adjusted EBITDA for Q1 and we believe we are well on track that we will meet our full year goals this year. In 2016, we are focused squarely on operating execution and are excited about the expected outcome of ongoing growth. Continued margin expansion as well as conceived progress with our cash flow and balance sheet. Our business remains fundamentally anchored and stable refinish markets which will provide both a core strong cash flow and a basis for longer term growth as we build on a global presence.

Further we are anchored by our continuous innovation, we see many examples with this quarter which we are too numerous to mention. We would like to highlight our global aqua EC6100 product which is the next evolution of our electric coat offering which clearly improves both the functional performance as well proximity for our customers. Current signs in our modern volatility in our OEM markets across some investors reflect on some of the market cycle dynamics. We continue to encourage our owners to carefully assess our diversification by market and by geography as well as our strategy to gain market share in the markets that may overtime experience difficult pressure.

So now, I turn it back to Slide 9 and to Robert for guidance comments.

Robert Bryant

Our press release and investor presentation outline our guidance onwards for 2016. Lots to offer are few added comments on these items. Excluding foreign currency impacts we continue to expect 2016 net sales growth of 4% to 6%.

As we noted we believe our markets will continue to show ongoing growth this year albeit with the slower rate overall than last year given pressure in specific end markets such heavy duty trucks. We plan to exceed overall market growth with specific product introductions, market extensions opportunities and self-help actions to extend our presence in underserved regions and countries. We have updated our asset assumptions as indicated in the appendix to our earnings presentation and expect reported net sales to be flat but slightly down as reported.

Our constant currency growth is expected to come from most regions and markets. We continue to see more pressure from South America than other regions. This look contemplated in our plan going into this year. We continued to expect refinish market growth to remain generally stable and assume modest share gain on top of market growth. Our industrial business is expected to continue to outgrow its end markets as we develop our business with bottom up sales efforts and new products which we believe may accelerate somewhat later in this year.

Light vehicle growth in low single digits still in line with single market forecasters should also be augmented by modest share gains in markets where we have already won new positions with the customers. Commercial vehicle market performance is said to be expected to be slower which we witnessed in Q1 but still show modest growth globally in the face of slowing heavy duty truck in North America. We did not anticipate significant out growth versus this end market in our plan.

The slowing in certain non-truck market in commercial market in Q1 is larger than expected in the beginning of the year but the magnitude relative to our smallest end market is not enough to substantially alter our overall growth plans given offsets in other areas. Our expectations for adjusted EBITDA continues to be in the range of $900 million to $940 million in 2016. This outcome implies reasonable incremental margin on our 4% to 6% net sales growth coupled with the guided additional savings from our productivity initiatives and partially offset by ongoing currency impacts and anticipated incremental investment stand on growth which we expect to be at lower levels last year.

Regarding adjustments to EBITDA we are also working to minimize the magnitude and duration of these factors. We have already noted that we expect around $25 million this year from related onetime costs which is materially down from 2015. Also, reflecting our evolution as a public company we have instituted a balance sheet program at the start of Q2 which will help reduce foreign exchange rate of net gains and losses also reflected in non-cash adjustments.

One item regarding the second quarter. We do not expect our relative adjusted EBITDA growth year-over-year to achieve its key run-rate until the second half of this year we know that our Q2 2015 performance was notably stronger than Q3 2015. Which we acknowledged at the time was due to certain time factors that caused a stronger second quarter and which represents the tougher comp in Q2 2016.

This should be considered when modelling on a year-over-year basis. Other modelling expectations remained unchanged from our February end update. We expect interest expense to be between a $180 million and $190 million. Our income tax rate was adjusted to be between 25% and 27% of diluted share count of 245 million shares. Capital expenditure of approximately of $150 million and net working capital in the range of 11% to 13% of full year 2016 net sales.

This concludes our prepared comments. We would be pleased to answer any questions you may have. Operator could you now please open the lines for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today coming from John Roberts from UBS. Please proceed with your question.

John Roberts

Good morning guys, Charlie there could be some significant investments out of the Sean Williams, would you have any interest in the architectural market if something comes out net space?

Charlie Shaver

Yes, thanks John you know it's not that we have thought about. We just kind of watching with interest to see what is happening whether there is any or Shervin takes a different tact with the business. I think what I try to convey to investors, we are open minded to look at it whatever comes out of there opportunistically into this based on the sites. So think we will continue to watch with interest until something that we have particularly singled out as priority.

John Roberts

And then Robert what was the adjusted cash rate in the quarter that looked like your apparent tax rate we calculate was higher than your guidance?

Robert Bryant

The actual adjusted tax rate for the quarter was 26%.

John Roberts

What's' the adjustment there versus what we can see?

Robert Bryant

Yes, the adjustment is all the pre-tax adjustments laid out in the adjusted net income schedule.

John Roberts

I will work for it I will find out thank you.

Robert Bryant

Okay.

Operator

And your next question is from Christopher Parkins from Credit Suisse. Please proceed with your question.

Christopher Parkins

Perfect, thank you very much. The light vehicle volumes for pre solid despite some concerns, what geographies were particularly strong in back on trends? What are you seeing into the summer and then very quickly also in the long term have you seen progress with local manufacturers at China as well?

Robert Bryant

Yes, this is Robert Chris, on the first one in the first quarter we see North America perform quite strongly ahead of perhaps many of us had originally anticipated at the beginning of the year. We also saw Asia Pacific continue to perform. That was perhaps from some people in question with regards to some of the incentives and other breaks that were provided in China, is that demand worth continuing in the first quarter. We actually saw pretty strong demand including from international manufacturers located in China.

In Latin America, as you heard in our prepared remarks we continue to see very difficult recessionary situation in Brazil. We also saw some weakness in Argentina continue to be in Venezuela. And Mexico performed so much similar to North America which was nice offset. In Europe given the hard mix of customers and products was a market neutral performance. And I think we have some opportunity to improve there.

Charlie Shaver

This is Charlie, I think going forward looking at the rest of the year. We are performing a pretty assess of what we thought the plan would be around global stars and specifically with higher OEMs. I think the one thing we will continue is the some of these trends, with lower fuel prices, lower energy prices, we start to see these crossover SUVs, trucks not only North America but in places like Asia pacific stronger and some of the demands for smaller cars and mid-size sedans.

So I don't think it materially changes our mix, there is something we can contemplate and plan together for this year.

Christopher Parkins

Great and also in the first quarter you have continued to see a lot of MSO consultation on the refinished side with some of your largest customers. Can you just comment on how the investors should think about the potential methods here as well as the key days? And also do you anticipate any key changes to contract pricing going forward? Thank you.

Charlie Shaver

Yes, sure a couple of comments on that. We'll continue in North America. The drivers to do that are pretty obvious. From a productivity standpoint they expect from a lot of people who are doing the consolidation, not only couple of the larger ones who work admit but also some of the mid-sized ones I think are good with their job with the consolidations. It's something like delivering value to their customers not only consumers but insurance companies as well but think as long as they continue to do a good job and manage their growth, everyone kind of wins in that environment.

So I do think they will continue, I think they love external data on they actually get over the next 5 years, it shows they can grow to be top of the marketplace in the next 5 years or so we focus less on that. We really just focus on service to the customer base we have stacking up to the next year and their continuous growth which strategically is really robust is reported out there.

And I think as far as given the MSOs today's larger pricing power it has a larger buyer. Clearly a larger buyer like that, they demand a lot and they already receive a substantial discount in there. However, there business model is also very different than to what we provide, how we provide it and also the distributor. What we bring to them is a lot of productivity so I think it's ready for business model that we use and start other industry of segments in North America.

I think right now we are comfortable with where we are going. I think as long as we innovate and provide productivity to them I think we got a good balance of what they are receiving and what we are receiving out of it. But I think it's assure that we believe all the factors are in place for that consolidation to continue. That being said there are still plenty of places in North America for good well run small to mid-size shops and we will continue to support that base.

Christopher Parkins

Thank you very much.

Operator

And our next question comes from Duffy Fisher from Barclays. Please proceed with your question.

DuffyFisher

Yes, good morning guys. Question around price, really nice quarter around pricing over 5%. Can you parch that out, how much of that order would have been related to their negative currency effect in fact you are just pricing to make back up for currency?

Robert Bryant

Yes, Duffy this is Robert. We actually got price in all regions with the exception of Asia Pacific where pricing was down just a tick. Some of this increase is to our price and some of this is also like the original mix but what I would say is that no one region or no one country accounts for the majority of the price increase that we have achieved. It is naturally as a result of a lot of hard work by our teams not only this quarter but over prior quarters. As well as just the mix of products that we have been selling and some of those are higher price and higher market products.

DuffyFisher

Okay, thank you and if I just walk through the [ph] put it back on currency it would seem to relative to the first quarter fourth quarter, things should be called 2.5% to 3% better but yet annual guidance stays the same. Is that just building in a bigger buffer or is there a few things kind of big picture we are offset that we are seeing from currency?

Charlie Shaver

So It's a couple of things, on just how we would beat back Q1 on you know the peak in terms of the EBITDA as you seen in the last couple of years in terms of characters over the future quarters. We continue to be relatively conservative with that and not knowing where some of the macros are going to go. There's no question that we are enjoying some benefit versus our budget in terms of currency however, as a global company unfortunately not all the currencies are moving in our favor so at this point we are not seeing a dramatic tail wind. A dramatic tail wind on currencies in aggregate.

DuffyFisher

Great thanks a lot.

Operator

And our next question is from Ivan Marcuse from KeyBanc Capital Markets. Please proceed with your question.

Ivan Marcuse

Thanks couple of quick questions. First, in terms of what you are talking about in the second quarter high of tough comps looks like your EBITDA is about 30% of you EBITDA rolled in 2015 second quarter. Do you expect that back to mid-twenties historically or how would you serve in terms of the gains that you have?

Charlie Shaver

Yes, the point that we were trying to make there Ivan in the second quarter last year just getting some of the patterns distribution as we highlighted last year there was a fair amount of sales that not intentionally got pulled from Q3 via the Q2. Just given some of the inventory cycles. Additionally what that did was create a cover, a proper comp for us in Q2 and that was just what we wanted to highlight that the Q2 we expect to be 2016 to be a proper comp versus 2015.

That being said we did have a little bit of beat here in Q1 so as we think about the rest of the year given the programs that we have got placed, some of the customer wins, the product wins we just have to see what the external rate drilled out in here.

Ivan Marcuse

Okay thanks and in the first quarter in your refinish business in North America is there any impact historically in terms of why they are like a pretty light winner versus a pretty strong winner last year.

Charlie Shaver

Yes, certainly it can be I would say if we look at this winter we wouldn't say either with the driving tractor negatively or positively. A couple of winters ago it was a factor but this year we didn't see it as a major factor, at least from what our customers have seen in our business.

Ivan Marcuse

Okay. Great and then last question and I will jump back in. The pricing strong, is this primarily technology driven or in terms of like mix or is it also practically see it in terms of chasing currency?

Charlie Shaver

It's a combination of both yes, where we have had high inflations, we lost that high inflation with additional price increases but we also had a pretty important component of the actual price increase. The price increases jurisdiction where there's not high inflation. Some of that is most directly related to the mix. As well as the key hints of when the pricing mix runs into this year versus last year.

Ivan Marcuse

Great, thanks for taking my questions.

Operator

Thank you and the next question is coming from Kanchan Punjabi [ph]. Please proceed with your question.

Unidentified Analyst

Hi guys, good morning. If I heard you correctly it sounds like awful face down in terms of growth contribution as the year progresses, do you think that points towards the kind of waiting that's closer towards the 50:50 price point by the back half and can you also elaborate a bit more why these points will improve assuming bear markets will improve or is it your internal or both?

Robert Bryant

This is Robert, sometimes it's hard to grew up predicting exactly how you are going to get some order in year over year and I think you have just seen we have some quarters where we have had higher volumes and less price and some quarters we had less volumes and higher price, it's just looking at understand a little basis as in the single quarter fully hard to do. Have to look over a yearly period just given the number of countries and teaches them around the world and the number of customers that were in.

I would tell you though as we originally laid out in our guidance of 2016 we are expecting volume growth this year as well as contribution for price growth. Would we expect price to 5% on a full year basis on the end of 2016, probably not.

Charlie Shaver

I would agree with Robert, as we look at some of our initiatives, some of the business we have won. I think the ramping up we had always contemplated to give us more of a volume in half year.

Unidentified Analyst

Okay. And just in terms of auto, can you just break down volumes on a global basis, if you were to group from a volume perspective and in most regions did you participate in that as well thanks.

Charlie Shaver

So a volume basis we have managed the business performs as we laid out our original plan for the first quarter again can be driven also by the penetration of your water borne products which have less volume per se but will contribute on the price bridge so we tend to look at it more on a total sales basis. So I think the 5.3% performance at FX is really the factor that we look at more than a specific breakdown between price and volume.

Unidentified Analyst

Okay. Thanks so much.

Operator

Thank you. Our next question today is coming from Arun Viswanathan from RBC Capital Markets. Please proceed with your question.

Arun Viswanathan

Good morning. Just some questions on OEM, relatively strong performance I guess relative to the industry. Maybe you can tell us your expectations on how the year evolves from a volume perspective by region?

Robert Bryant

I think as we look at OEM, I think as we highlighted from previous call this year, we're expecting to be up slightly on volume this year in OEMs, that growth really comes from three of the four regions, we expect South America -- within Latin America, Mexico would be up this year but Latin America plus also food, Mexico has South America so we differentiate, we're really not expecting any recovery in South America. I think we continue to think that's how our business will perform this year with moderately on growth. Over the year we've got like in any portfolio there we've got some winners and losers whom we think will be either up or down with their bills as we go through the year. I would tell you the first quarter pretty much is as we expected. And I think short of any macro event, I think we can talk about globally being slightly up this issue, that's general in our view, we break again by specific customer, we wouldn't expect things like that.

Just to add something, Charlie said there with some numbers, I mean I think as we rigged through in the U.S., the $18 million unit mark, at least according to some of the external market forecast, certainly that is a high. However, they are projecting that that high could continue for another year or two. So it's difficult to say as you probably look out in your crystal ball how that markets is going to evolve. I think we are also encouraged, not only by what we're seeing in North America but also what we're seeing in China as where you see builds up 5.5% to 6% at a market level, as well as some strengthening with the international brands in China.

I mean I think we will continue to watch it, we watch in each region as dealer inventory, discounts, used car markets, I think that's why we expect to moderate growth this year in certain OEMs and certain models. But I think at something -- I'm sure you guys watch and we do too. And those are using leading indicators in the market. As we come to the first quarter we haven't seen anything that leveraged from what our plans.

Arun Viswanathan

Thanks. And then maybe, just give us an update -- I know that you've paid down the debt post quarter, what should we expect as far as deleveraging since the year goes on?

Charlie Shaver

So debt pay down will continue to be the primary use of our access cash flow. We have approximately $28 million from regulatory principal payments as you know which of course we'll make. We just made $100 million debt pay down and then depending upon the pace of some of the acquisitions that we're looking at currently, how this play after an year, we continue to pay down debt during the year. And as we've highlighted I think on our last call, we expect to be within our 2.5X to 3X range within the next 12 to 18 months.

Arun Viswanathan

Thanks.

Operator

Thank you. Our next question today is coming from Bob Core from Goldman Sachs. Please proceed with your question.

Chris Evans

Good morning guys. This is Chris Evans on for Bob. Just curious to hear how the declines the Latin America, how do you manage those? You're kind of curious to hear what your variable cost structure is in the region or broadly. And what are -- after these declines how do margins look for the area?

Robert Bryant

This is Robert, Chris. So on that point in Latin America, we have a very strong position in several of our key markets, in many countries. So I think it's a market that goes up, it's like part of the world that goes up and goes down and I've worked much of my career in Latin America and have seen these types of cycles. We have a fantastic position in the light vehicle market in Brazil. In good position and refinishing industrial. What we've been able to do in Brazil, essentially it's -- you've seen the market where demand has essentially fallen by 50% over the last two years. And then some additional degradation here over the last two to three months. Our business there operates above breakeven, and our team in Latin America and Brazil have done a wonderful job adjusting the cost structure necessarily, due things in that environment. We're fortunate in that about 20% to 25% of our workforce is actually temporary or variable, so we have the ability to handle that. So we are operating at a small profit in Brazil currently.

And if we look at other countries in the region again, we're positioning for when those markets rebound. Obviously Argentina has been in tough place, Venezuela has been in tough place but those are also markets where we have strong market positions. And we've been able to adjust our cost structures so that we're operating at profit. But remain committed to those markets because those are good markets with good margins. And when the tide turns back the other way they will generate some nice profits for us.

Chris Evans

And then just sort of going over to China, any thought on how beneficial the stimulus has been and any risk at that lapse later in the year that demand might weaken in '17?

Charlie Shaver

Certainly, I think as we recognized last year that auto industry was low. I think this stimulus will continue to be a key part there keeping growth going in the country. That being said, I think when we look at builds being 4%, up year-over-year, that would be consistent with how we would think about being stimulus continuing. I don't think we'll see additional actions to go any faster. In China, we've really looked at China by region to what as you know all regions are equal there. Some are doing better than others. If we have dial with our OEMs that are over there, just make sure our plan balances what they are saying from their dealers.

So I think the China market is pretty down right now, there are a couple of regions who would seek bills slowdown a little bit but it was something -- I think even in last year, we thought it would happen. I think they will continue to stimulus, I think the real questions can be from the actions, what are they going to take over the next couple of years around solution which is not really so much driven by their light vehicles but we've certainly seen other areas like Mexico City where people are interacting additional solution controls that affect driving. I think it's something you want to watch over the next couple of years and is that impact over the reconnect business and some of those where models driven would actually be changing by the consumer.

Chris Evans

Got it, thanks.

Operator

Thank you. Our next question today is coming from PJ Juvekar from Citigroup. Please proceed with your question.

PJ Juvekar

Yes, good morning. Charles and Robert, I want to go back to this pricing issue. You got a 5.4% price related performance coatings, 4.7% in transportation, that seems higher than competition is seeing. And I think competition is barely holding on the price. So what allows you to take this price increase and is there any risk to positive as a result?

Robert Bryant

Again, I think one of the areas where we've spent a lot of time is part of the new delta is understanding, exactly how much money we make in each one of our products. And very actively and cautiously managing mix in terms of product mix, customer mix, even sometimes country mix so that we are able to maximize price. However, the timing of price increases can also come into play and from one year to the next year, from one quarter to the next quarter within those years, the price increase is not always the same, it will depend on markets conditions and other situations, so forth. Some may get moved up, some may get moved out. But essentially it's heavily mixed event. We should certainly wouldn't want to leave you with the impression that in this market we're actively out there gaining lots of prices, it's been heavily mix driven and first and foremost with our customers we focus on trying to achieve additional operational efficiencies internally over our cost structure so that we can offer our products at the most competitive price we can.

Charlie Shaver

I think it's really more; everything we've been talking over the past year and a half with people about is just -- it's also why we're studying our business, studying our mix, changing our mix. In some cases its technology shifts going on and really there was a cross for region but I agree with Robert, you shouldn't walk away thinking – outpaced prices across the industry because we all know that in this environment does really challenging to do and customers expecting productivity, our prices increase.

Robert Bryant

Yes, Charlie hit on a key point that I didn't mention PJ, just the Axalta way commercial work that we've been doing in terms of price leakage, how we managed to dip down rebate incentives, all of those low down actually attract you in pricing. So we've got that well rolled out in North America and starting to roll out that in EMEA. So I think we're also starting to see some of the best fit from that project.

PJ Juvekar

Thank you. And can you talk about your OEM lines in India once that are out there? Thanks.

Charlie Shaver

Sure, we announced a couple of quarters ago, may be last fall, our new OEM facility, it's something we made aware – we actually manufacture in – area and both refinished OEM products. And with the continuous car growth there and specifically some of the OEMs that are moving into India that we do business with, they have been looking sometime for us to establish a broader manufacturing base there. We're now doing it for full line of OEM products, both online and for APC products and that's surely will come online over the next 12 to 18 months. And in – where we already have current manufacturing for OEM refinished and industrial, some of you may be aware we had a very good refinished business in India that's been around – been there for quite a while. We will continue to see India certainly the currency stabilize over the last couple of years, India is a good place to invest and to grow and with the rising middle class and more diversity of types of vehicles and manufacture vehicles it's a good process to continue to be a place to invest.

PJ Juvekar

Thanks.

Operator

Thank you. Our next question today is coming from Vincent Andrews from Morgan Stanley. Please proceed with your question.

Matthew Grainger

Thanks and good morning. This is Matthew Grainger. I'm curious in which non-truck vehicle types did you see weakness and has the commercial aftermarket held up in the light of the OEM declines?

Charlie Shaver

So when we separate out obviously there is heavy duty truck, we talk about in interest of North America. We've seen the build rates drop sort of full year expectation of kind of 250,000 for the year, that's what we had contemplated in our plan for the year. But obviously it's down over prior year, that was contemplated. But we do see in other markets potential upside and positive build when it comes to heavy duty trucks, but when you put it all together and give away in North America, that heavy duty truck returned to – certainly not an impact. But again, one that we contemplated. The non-HDT portion was basically rail, bus, utility vehicles, recreational vehicles both on land and on water, general aviation and --. So across that market we have seen a picture of mixed demand globally for those types of products, but it's not really one of those sub-segments or one region or one customer in particular that's behind that.

Matthew Grainger

Sure. And then in regards to the relative end market outgrowth, would you say that you expect the most outgrowth in industrial followed by light vehicle and may be refinish and then in line market growth in commercial vehicle?

Charlie Shaver

As you laid those out in that order, the general order that's a generous estimate. Now whether industrial is the highest growing or whether refinish or light vehicle move in that price growing, it's really hard to say. But I think in general, as you laid those out that should directionally be what we would expect to see.

Matthew Grainger

Great. Thanks guys.

Operator

Your line is -- make sure your phone is not on mute.

Jeff Zekauskas

Hello?

Charlie Shaver

Hello.

Jeff Zekauskas

Hi. This is Jeff Zekauskas.

Charlie Shaver

Good morning, Jeff.

Jeff Zekauskas

Hi. You had $23.5 million of non-recurring items, is it fair to allocate half of those to cost of goods sold? And were acquisition related volumes I don't know helping your volumes by about 1% in the quarter?

Robert Bryant

So if you look at the – of the one fine cost I think the most important thing there is that those numbers as we indicated they would for 2016 has come down and will continue to come down throughout the year. The majority of the EGL is in other expense and then in terms of the stock comp of $10.2 million about 65% of it is in SG&A and about 35% of it is in cost of goods sold.

Jeff Zekauskas

And as far as the acquisition related volumes, was it at least a percent of your volumes this quarter?

Robert Bryant

I think overall sales contribution Jeff, it was approximately 1% in dollar sales contribution.

Jeff Zekauskas

Okay. Lastly, not to beat a dead horse, if you exclude mix, this is in terms of your overall price, if you exclude mix and if you exclude South America and you assume some improvement in refinished prices, was the overall pricing of the company flat or did you do better than that?

Robert Bryant

So if you exclude those factors, we did better than that because again we got price mix as I mentioned three out of our four geographies and in both transportation as well as performance even pulling out the Latin America effect and even pulling out the factor you mentioned.

Jeff Zekauskas

Pulling out, so you got price exclusive of mix in your transportation out of those business?

Charlie Shaver

I don't think we would get that specific Jeff, but what I would say is that we got price and mix in each segment in all four geographies.

Jeff Zekauskas

Okay, great. Thank you so much.

Operator

Thank you. Our next question today is coming from Laurence Alexander from Jefferies. Please proceed with your question. Mr. Alexander perhaps your phone is on mute, please --

Laurence Alexander

Good morning. So can you talk a little bit about the interplay between R&D cycle and your ability to sustain the price mix and share gain i.e. actually the round of share gains in Asia is your R&D pipeline that we should think of it driving a noticeable uptick in either price mix or share gains in the 2018-20 plus period?

Charlie Shaver

I think our R&D pipeline is very different depending on which segment you're looking at, but I would say that over the next 12 to 24 months we have a whole series of new products that are coming out that in some cases are incremental innovation and in some other cases completely new product lines, reformulated, going into some of these industrial segments that the – industrial segment and commercial deals is a small share. So I don't think there's any one big step up or any one big paradigm but you will continue to see from us over the next couple of quarters, a steady roll out of new products. Again, we invest over $180 million totaling R&D across this so you guess we turned a lot of that over the last couple of years away from just pure core R&D and much more towards commercial innovation tied to customer doing more than existing customers may have. And again as we do that, we gain additional productivity in some cases we get pricing and in some cases mix related to what we're doing. I think you'll continue to see that add to the mix over next year. So there's not any one particular platform that I would say is a paradigm for us.

Laurence Alexander

Thank you.

Operator

Thanks. And your next question today is from Aleksey Yefremov from Nomura.

Aleksey Yefremov

Good morning. Thank you. In performance coatings, first quarter EBITDA was up 3% year-over-year. Do you expect the same pace to be sustained over the course of the rest of the year or do you expect it to accelerate meaningfully in the second half?

Robert Bryant

So in terms of the how that's going to play out sequentially I think overall we're confident on a full year basis that that business will grow quite nicely for us. Again, from one quarter to the next quarter it's going to be a little lower one quarter, a little higher next quarter. You saw that type of pattern last year as well, but just would reiterate for us, our refinished businesses is 43% of our sales, well over 50% of our profits and continues to do extremely well.

Aleksey Yefremov

And what are the typical seasonality in performance coatings and to what extent last year is a good or bad example?

Robert Bryant

Obviously you'll see in Q1 it's typically the lowest quarter of the year. You see a market pick up in Q2 and Q3 and Q4 a little bit lower than Q2 Q3 sometimes. So it just depends on what everything is going on at that time of the year. Weather can have somewhat of an impact. So far the weather this year has been – driving any additional seasonality it's likely to say two years ago.

Aleksey Yefremov

Final question if I may, on the free cash flow, if I put together your EBITDA guidance and flat working capital this year, is it too much to hope for free cash flow of around $400 million or perhaps even higher?

Robert Bryant

I think you're in the right zip code in terms of what free cash flow could potentially be if all the stars are lie in and if everything works right and if there was no FX impact on our cash position and I could probably name off two or three more. But again, we don't provide guidance on free cash flow per se, but if you look at the different components in terms of what we're assuming for working capital, the drop in our tax rate and so forth, we should generate a fair amount of free cash flow this year.

Aleksey Yefremov

Great. Thanks a lot.

Operator

Thank you. The final question today is coming from David Begleiter from Deutsche Bank. Please proceed with your question.

David Begleiter

Thank you. Just on price again on transportation. You said in your comments, prices remain steady and controversial. Does that mean, I guess it implies that the price you reflect and the sales variance was probably mix. Is that fair?

Charlie Shaver

That's a fair observation David.

David Begleiter

And if I have missed this, light vehicle volumes including South America, they were down in the quarter?

Charlie Shaver

We talked about overall transportation volumes being down in the quarter. We didn't break out light vehicle volumes from commercial vehicle volumes.

David Begleiter

Okay, understood. Thank you.

Charlie Shaver

From the overall contribution, I'd just say it's directionally. Again, light vehicle performs pretty consistently with our expectations.

David Begleiter

Got it. Thank you very much.

Operator

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further closing comments.

Charlie Shaver

This is Charlie. I appreciate it and now we're out of time, so I'll keep it brief. Again, a good start to the year, a good first quarter. Our markets remain solid, again, I think we've highlighted the ones that little weaker in this year than perhaps last year but I think overall this starts the year for us. We're pleased with our performance and we're looking forward as we go to the second quarter. In some ways, it maybe actually a boring quarter because it performed as we would have expected. So we'll take that and lot of great initiatives ongoing. I think you'll continue to see or stock us in Axalta way, driving efficiency, productivity. And again, as you saw from our earnings, you see showing in all aspects of our business, I'm really pleased with that. And looking forward to talking with you at the end of the second quarter. Thanks everyone.

Operator

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

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