Axalta Coating Systems Ltd (AXTA) 2016 Q1 法說會逐字稿

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 listen-only mode. A question-and-answer session will follow the formal presentation. Today's call will be recorded. Replays of the 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'd like to turn the conference over to Chris Mecray, vice president of investor relations for Axalta Coating Systems for a few brief legal notices. Please go ahead, sir.

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 will be referencing during this call. Both prepared remarks and discussion during this call may contain forward-looking statements reflecting the company's current view of future events and their potential effect on Axalta's operating and financial performance. These statements involve uncertainties and risks 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 for 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 like to now turn the call over to Charlie.

Good morning, and thanks for joining us today for review of our first quarter 2016 financial results. I'll first cover some of the highlights from the quarter and update our goals for 2016. Robert will then provide some additional detail on our financial results for your guidance. We'll then be happy to take your questions.

So if you would, turn to Slide 3 of our presentation. We're pleased with our first quarter result, which showed both solid organic sales growth and continued year-over-year margin gains that we believe puts us on a solid path to meeting our objectives for the full-year 2016.

First quarter net sales rose 3% from the prior year before the impact of currency translation. Components to this growth were tilted more towards price and volume for the quarter, and this was due in large part to a drag from Latin America volumes, as well as difficult comparisons in transportation versus last year's first half. We anticipate these dynamics in our budgeting and planning process and in our plans for the period. It is worth 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% we reported ex-currency. In addition, there was also an offset a day and a quarter from some regions due to the early Easter calendar this year.

We grew adjusted EBITDA 7% in the first quarter, with 195 million result exceeding the range that we noted for the quarter on our last call due to better than expected performance from several areas that we'll detail shortly. As I noted, we also showed solid margin expansion in the quarter with our adjusted EBITDA margin up 200 basis points to 20.4% from 18.4% last year.

Our operating initiatives remain well on track, with sound execution seen in Q1. We've highlighted four major capacity expansions undertaken since our carve-out of 2013. The last of these projects, an expansion of our resin capacity in Mexico, was commissioned in March and is successfully running product for our customers now. We're quite proud of our team's execution on that project, which was completed on time and on budget and at a compelling overall level of capital efficiency.

Regarding our productivity initiatives, we also remain well on track for our full-year targets of achieving 60 million in overall savings from our combined Axalta Way and Fit-for-Growth programs. We continue to evaluate all areas of the company for potential efficiencies. And recently, we focused on some of our functional and back office areas where we are standardizing our practices across the regions and automating certain functions when possible.

Turning to our balance sheet and cash flows, Axalta's first quarter also met our plan, with a lower seasonal use of working capital versus last year, including better year-over-year performance in each of the key working capital accounts. We also prepaid another $100 million of our term loans in April, subsequent to the 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 reduced net leverage and improved cash flow this year versus 2015. When we consider our plan for growth for both sales and adjusted EBITDA for 2016, we believe we remain very much on track to accomplish our goals that we outlined in February. Top line growth of 4% to 6% excluding currency remains our target, and one quarter in we continue to see our path to achieving its range with clear strategies in place to get there, including contributions from each of our in markets.

We're also confirming our full-year $900 million to $940 million of adjusted EBITDA target, with the first quarter offering some 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 specific operational productivity targets to accomplish our plan growth and productivity savings.

We continue to closely monitor our coatings in markets to see solid growth this year amid somewhat tepid broader economic backdrop in certain areas. That said, we remain pleased with our position in these markets and see our path to moderate mid-single-digit growth coming from a combination of modest market growth in our core refinish and light vehicle in markets, as well as continued growth in our industrial and commercial vehicle in markets which also remains a smaller share presence in our executing at ground-up expansion strategy.

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

Thanks, Charlie, and good morning, everyone. Please 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 fairly robust 4.8% growth in performance coatings and more modest 0.7% growth from transportation coatings. The main driver of this growth was broad-based improvement in pricing. Foreign currency translation reduced reported net sales by 6.4% in the first quarter, which compared somewhat favorably against the 10.8% currency headwind in the same quarter a year ago, and 11.5% against last quarter.

Axalta's net sales volumes on a consolidated basis decreased 2.1% from last year's first quarter. As Charlie noted, this result was largely due to a decline in Latin America during the quarter, particularly from South American countries, which continue 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 contribution in both segments, as we expected.

Positive price contribution in the quarter was a helpful contributor to net sales growth before current 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 $182 million same quarter last year. This profit growth included an impressive 200 basis point improvement in adjusted EBITDA margins, from 18.4% to 20.4%, driven by favorable price leverage as well as savings for cost improvements and productivity enhancement, offset only in part by ongoing growth investments, similar to prior periods of last year. The pace of growth on the investment has slowed, but remains a factor in the year-over-year 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 coating segment increased 4.8% for first quarter year over year, before the impact of foreign exchange, driven by solid growth in the developed markets and offset in part by slower growth in the economically-pressured emerging markets. Volumes declined 0.6% in the quarter, but were positive if we exclude Latin America. Overall, volume growth in other regions was led by strong growth from Asia Pacific refinish and by solid results from EMEA industrial end markets.

Average segment selling prices increased 5.4%, led by strong gains in refinish across three of the four regions and stable overall selling prices in industrial. This net sales growth was offset by 7.3% currency translation headwinds, compared with 12.1% headwinds 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 industrial end market increased 3.8% year over year, demonstrating our plan to grow faster than our industrial end markets in most regions, and led by a strong showing in EMEA in the quarter.

Volumes were mixed in Q1, but increased solidly in refinish, excluding Latin America, and also showed reasonable strength in industrial, led by EMEA, against the persistent backdrop of slower industrial production in most regions. Axalta continues to benefit from investment in industrial products and still expects to show accelerated growth in this end market as we progress 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 dropdown effect of price, as well as variable coast leverage, offset in part by unfavorable currency headwinds and moderate increased investment spend. Adjusted EBITDA margins increased 110 basis points to 20.3% from last year, also reflecting the favorable dynamics just described.

Switching now to our Q1 2015 transportation coatings results, net sales in transportation coatings increased 0.7% year over year in the first quarter before currency exchange headwinds of 5.2%. This modest growth was driven by a mixed set of regional and end market outcomes, but with growth driven by strong performance in North America light vehicle, ongoing solid volumes in Asia Pacific light vehicle, offset to a degree by ongoing pressure in South America and a somewhat weaker than expected result in EMEA versus plan.

Q1 net sales in Axalta's light vehicle end market increased 3.6%, excluding foreign currency translation, with growth led by North America offset by considerable incremental weakening from South America. The commercial vehicle end market end sales declined 9.3%, excluding foreign currency translation, reflecting 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 equipment.

Transportation coatings generated adjusted EBITDA of $85 million in Q1, up nicely from $75 million a year ago, with positive dropthrough from price and some variable cost benefit offset by unfavorable foreign exchange impacts. Margins have increased markedly, with a full 320-basis point increase booked this quarter, moving up from 17.3%, same quarter prior year, to 20.5% from both positive price and mix elements, in addition to some help from Axalta Way savings and variable cost relief from the prior year.

We move on now to 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 at year end, 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 uptick from 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 the use of $18 million, a solid improvement versus the use of $99 million in the first quarter of last year. Net of CAPEX of $40 million. This improvement came from 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 net debt to LTM adjusted EBITDA within 12 to 18 months, subject to variability around the timing of any acquisitions we may undertake.

Subsequent to March quarter end, we did prepay $100 million on our U.S. dollar term loans, as Charlie noted. We continue to evaluate the opportunity to rebalance and refinance our U.S. dollar and euro bonds. However, we need interest rates to move down a little further to be materially net present value positive and to achieve meaningful interest savings.

Turning now to Slide 9, Charlie will now address some of our goals for 2016.

Thank you. As we had highlighted on our February call, our goals for the year remain unchanged. First, we continue to target 4% to 6% net sales growth before currency. For the first quarter, we posted 3%, a bit shy of our target, as volumes came in slightly behind expectations for the quarter due to Latin America. That said, we remain quite close to plan, which contemplates acceleration of volume as the year progresses.

This reflects the reality of the comparisons, which are a bit more of a challenged in the first half, as we expected phasing new growth initiatives with acceleration as we move through the year. We would highlight that our plan for mid-single-digit growth includes an incremental price component, but also comes from a set of opportunities that remain within our line of sight. These include market share gains and geographic expansion targets in refinish, including stronger growth in North America as we move later in the year.

Our growth in industrial is also near plan, but also has the opportunity to accelerate with new product launches that are slated to come onstream over the coming months.

On the transportation side, we've got good line of sight in both Asia Pacific and North America, the continued growth, as long as fundamentals remain largely steady in these regions. This is already happening, and we saw good progress in first quarter in both markets. In EMEA, we see clear reasonably both market and our other growth will enable stronger comparisons as we look forward.

Overall, we expect the balance between volume and price for our top line growth that our plan suggests will shift somewhat through the course of the year, towards more volume versus the first quarter outcome.

Regarding operations, we're pleased that we've met all of our major milestones with regards to recent capacity expansions. For 2016, we believe we have numerous opportunities to focus on and refine operating metrics as we seek continuous improvement, with benefits expected to improve working capital over the next several years. These goals are furthered by the addition of new senior operating leadership and augmented by additional organizational changes, which have put some fresh eyes on our assets. We believe this will help us ultimately maximize our returns with solid core base of operating asset.

I've already referenced our productivity plans as being on track, but it would be worth noting that our work continues to uncover new opportunities to go on beyond the 2017 endpoint of our existing Axalta Way targets. We'll have more to say about these elements in the future, but we continue to believe they have numerous levers to pull as we seek to turn Axalta into a truly optimized organization. In the meantime, we're excited the company's rapidly adjusting to our performance-oriented culture, and we're seeing the benefits of pushing that deeper into the company each period.

Regarding M&A, we continue to farm our list of targets and are optimistic we'll close on a number of tuck-in acquisitions during the course of 2016. Our efforts here are largely focused on lower risk deals with an attractive return that wouldn't substantially impact our balance sheet profile. Beyond M&A, our free cash flow continues to be directed towards delevering in 2016, as we look forward to achieving our net leverage goal of 2.5 to 3 times within the next 12 to 18 months, as Robert highlighted.

To summarize, we're happy, we exceeded our expectations for adjusted EBITDA for Q1, and we believe we're well on track to meet our full-year goals this year. In 2016, we're focused squarely on operating execution and are excited about the expected outcome of ongoing growth, continued margin expansion, as well as continued progress with our cash flow and our balance sheet.

Our business remains fundamentally anchored in stable refinish markets, which will provide both a core of strong cash flow and a basis for longer-term growth as we build out our global presence. Further, we are anchored by our continuous innovation. We've see many examples at this quarter, which are too numerous to mention. We would like to highlight the global launch of our Aqua EC 6100 product, which is the next evolution of our cathodic epoxy electracoat offering, which clearly improves both functional performance as well as productivity for our customers.

Current signs of moderate volatility in our OEM markets have cost some investors to reflect on some of the market cycle dynamics. We continue to encourage our owners to carefully assess both diversification by market and by geography, as well as our strategy to gain market share in these markets that may over time experience cyclical pressure.

So now turning back to Slide 9 and to Robert for guidance comments.

Our press release and investor presentation outline our guidance components for 2016. I'd like to offer a few added comments on these items.

Excluding foreign currency impacts, we continue to expect 2016 net sales growth of 4% to 6%. As we've noted, we believe our markets will continue to show ongoing growth this year, albeit possibly at a slower rate overall than last year, given pressure in specific end markets such as heavy duty trucks.

We plan to exceed overall market growth with specific product introductions, market extension opportunities, and self-help actions to extend our presence in underserved regions and countries. We have updated our FX assumptions, as indicated in the appendix to our earnings presentation, and expect reported net sales to be flat to slightly down, as reported.

Our constant currency growth is expected to come from most regions and end markets, though we continue to see more pressure from South America than other regions. This was contemplated in our plan going into this year. We continue to expect refinished 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 with end markets, as we develop our business with bottom-up sales efforts and new products, which we saw in Q1, but believe may accelerate somewhat later in the year.

Light vehicle growth in low single digits still in line with independent market forecasters should also be augmented by modest share gains in markets where we've already won new positions with customers.

Commercial vehicle market performance is expected to be slower, which we witnessed in Q1, but still show modest growth globally in the face of slowing Class B heavy duty truck in North America. We do not anticipate significant outgrowth versus this end market in our plan.

The slowing in certain non-truck markets in commercial vehicle in Q1 was larger than expected at 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 expectation for adjusted EBITDA continues to be in the range of $900 to $940 million for 2016. This outcome implies a reasonable incremental margin on our 4% to 6% net sales growth with XFX, coupled with the guided additional savings from our productivity initiatives, and partially offset by ongoing currency impacts and anticipated incremental investment spend on growth, which we expect to be at lower levels than last year.

Regarding adjustments to EBITDA, we're also working to minimize the magnitude and duration of these factors. We've already noted that we expect around $25 million this year from Axalta Way-related one-time costs, which is materially down from 2015. Also, reflecting our evolution as a public company, we have instituted the balance sheet hedging program at the start of Q2, which will help reduce foreign exchange rate remeasurement gain 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 peak run rate until the second half of this year. We note that our Q2 2015 performance was notably stronger than Q3 2015, which we acknowledged at the time was due to certain timing factors that caused the stronger second quarter, and which represents a tougher comp in Q2 2016. This should be considered when modeling on a year-over-year basis.

Other model expectations remain unchanged from our February 10th update. We expect interest expense to be between $180 million and $190 million, our income tax rate as adjusted to be between 25% and 27%, a diluted share count of 242 to 245 million shares, capital expenditures of approximately $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.

(Operator Instructions) Our first question today is coming from John Roberts from UBS. Please proceed with your question.

Good morning, guys.

Good morning, John.

Good morning, John.

Charlie, there could be some significant divestments out of this Sherwin-Williams Valspar deal. Would you have any interest in the architectural paint market if something comes out in that space?

Yeah, thanks, John. You know, it's not something we've thought about. We just kind of watch it with interest to see what ends up happening, whether there's any forced investitures or if Sherwin takes a different tack with the business. I think what I've tried to convey to investors and certainly to our board is that we're open-minded to look at whatever comes out there opportunistically and consider it based on its face. So I think we'll continue to watch with interest, but it's not something that we particularly singled out at this point as a priority.

And then Robert, what was the adjusted tax rate in the quarter? It looked like at least the apparent tax rate that we can calculate was higher than your guidance.

That's correct. The actual adjusted tax rate for the quarter was 26%.

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

Yeah, the adjustment is all the pre-tax adjustments that you see laid out in the adjusted net income schedule.

Yeah, I'll work through it offline, then. Thank you.

Okay.

Thank you. Our next question today is coming from the line of Christopher Parkinson from Credit Suisse. Please proceed with your question.

Perfect. Thank you very much. Your light vehicle volumes were pretty solid despite some concerns. What geographies were particularly strong, and based on your backlog trends, what are you seeing into the summer, and then very quickly also in the long term, have you seen any progress with local manufacturers in China as well?

Yeah, this is Robert, Chris. On the first point, I think in the first quarter, we saw North America perform quite strongly, ahead of perhaps what many of us had originally anticipated at the beginning of the year. We also saw I think Asia Pacific continue to perform. That was perhaps from some people a question with regard to some of the tax incentives and other breaks that were provided in China if that demand would continue in the first quarter. And we actually saw a pretty strong demand, including from international manufacturers located in China.

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

And then I think -- this is Charlie -- I think going forward as we look at the rest of the year, I think the only -- we're performing pretty consistent with what we thought the plan would be around global SARs, and specifically with our OEMs, I think the one thing that we will continue to see is some of these trends where with lower fuel prices, lower energy prices, we certainly see these crossover SUVs, trucks. Not only North America, but places like Asia Pacific, stronger, and some of the demand for smaller cars and midsize sedans to be weaker. So I don't think that materially changes our mix, and it's something we kind of contemplated when we put our plan together for this year.

Great. And also, in the first quarter, you've continued to see a lot of MSO consolidation on the refinish side, including for some of your larger customers. Can you just comment on how investors should think about the potential benefits here, as well as the cadence? And then also as the large get a little bit larger, do you anticipate any changes to contract pricing going forward? Thank you.

Yeah, sure. A couple comments on that. I do think MSO consolidation will continue in North America. The drivers to do that are pretty obvious from a productivity standpoint. I think second of all, the people who are doing the consolidation, not only a couple of the larger ones who we're affiliated with, but also some of the midsize ones, I think they're doing a good job with the consolidations. So I think they're delivering value to their customers, not only consumer but the insurance companies as well.

So I 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 it'll continue, and I think there's a lot of external data on, you know, who knows how big they actually get over the next five years. There's a lot of data that shows they could grow to be half of the marketplace, maybe, over the next five years or so. We focus less on that. We just really focus on service to the customer base we have today and over the next year or two, and their continued growth, which continues to be really robust as reported out there.

And then I think as far as -- you know, MSOs today as far as their pricing power, we get asked a lot about. I think clearly, a large buyer like that, they demand a lot and they already receive a fairly substantial, if you want to call it a discount, in there. However, their business model is also very different, both in what we provide, how we provide it, and also the distributor, and what we bring to them is a lot of productivity. So I think that it's a very different business model than we use in certain other segments of the industry in North America.

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

Thank you very much.

Thank you. Our next question today is coming from Duffy Fischer from Barclays. Please proceed with your question.

Yes. Good morning, fellows.

Good morning, Duffy.

Morning, Duffy.

A question around price. Really nice quarter for pricing over 5%, but can you parse that out? How much of that would have been directly related to the negative currency effect where you were kind of just pricing to make back up currency?

Yeah, Duffy, this is Robert. I think it's important to highlight that we actually got price in all regions, with the exception of Asia Pacific, where pricing was down just a tick. Some of this increases pure price and some of it is also a slightly richer 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 achieved. It's actually just 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've been selling, and some of those are higher priced and higher margin products.

Okay, thank you. And then if I just walk through the handy table you guys put at the back on currency, it would seem to indicate that relative to first quarter or to fourth quarter, things should be, call it 2.5% to 3% better, but yet annual guidance stays the same. Is that just building in a bigger buffer, or are there a few things kind of big picture that are offsetting some of the benefit we're seeing from currency?

So I think it's a couple things, Duffy. I guess on just, in terms of how we think about Q1 on the beat in terms of EBITDA, as you've seen us in the last couple years, in terms of carrying any of that over into future quarters, we continue to be relatively conservative with that, especially it being the first quarter and not knowing where some of the macros are going to go and not knowing how some of the currency is going to develop.

There's no question that we're enjoying some benefit versus our budget in terms of currency. However, as a global company, and unfortunately not all of the currencies are moving in our favor. So at this point, we're not seeing a dramatic tailwind on currencies in aggregate for the company.

Great. Thanks a lot.

Thank you. Our next question today is coming from Ivan Marcuse from KeyBanc Capital Markets. Please proceed with your question.

Great, thanks. A couple quick questions. First, in terms of what you were talking about in the second quarter, how you have tough comps that look like EBITDA, there's about 30% of your EBITDA enrolled in 2015 in the second quarter. Do you expect that to sort of revert back to the mid-20s where it's been historically, or how would you sort of gauge it in terms of the cadence of the year?

Yeah, I think the point that we were trying to make there, Ivan, in the second quarter of last year, just given some of the patterns in distribution, as we highlighted last year, there was a fair amount of sales that not intentionally got pulled from Q3 into Q2, just given some of the inventory cycles.

Additionally, what that did was create a tougher comp for us in Q2, and that was just what we wanted to highlight was that Q2 we expect to be -- '16 to be a tougher comp versus 2015. That being said, you know, we did have a little bit of a beat in Q1, but as we think about the rest of the year, given the programs that we've got in place and some of the customer wins and product wins, we expect to see EBITDA accelerate throughout the year.

Okay, thanks. And then in the first quarter in your refinish business in North America, is there any impact historically in terms of weather, so we had like a pretty light winter versus a pretty strong winter last year, so I would imagine in a strong winter there's more accidents, et cetera. Or is that not too meaningful on a seasons -- in terms of seasonality for the refinish business?

Yeah, certainly, it can be. I would say if we look at this winter, we wouldn't say that it was a driving factor either positively or negatively. A couple of winters ago, yeah, I mean, it was a factor. But this year, we didn't see it as a major factor, at least from what we've heard from our customers and seen in our business.

Okay, great. And then my last question and I'll jump back in. Is the pricing strong? Is this primarily technology-driven, or -- in terms of like mix, or is it also price increases in terms of just changing currency?

Yeah, it's a combination of both. I mean, in jurisdictions where we've had high inflation, we've offset that high inflation with additional price increases, but we also had a pretty important component of the actual price increase be price increases in jurisdictions where there was not high inflation, and some of that is most directly related to mix, as well as the cadence of when certain price increases went into effect this year versus last year.

Great. Thanks for taking my questions.

Thank you. Our next question today is coming from Ghansham Panjabi from Robert W. Baird. Please proceed with your question.

Yeah. Hey, guys. Good morning. Charlie, if I heard you correctly, it sounded like price will phase down in terms of sales growth contribution as the year progresses. Do you think that kind of points towards a weighting that's closer to 50-50 price line by the back half, and can you also elaborate a bit more on why you think lines will improve. Are you assuming the end markets improve, or is it your own internal initiatives, or both?

Well, I think, as we've said before -- and this is Robert -- sometimes it's hard to predict exactly how you're going to get from quarter to quarter and year from year. And I think you're just seeing, you know, we've had some quarters where we've had higher volumes and less price, and some quarters where we've had more price and less volume, and I think it's just looking at it on a standalone basis on a single quarter, it's really hard to do. You have to look at it I think over a yearly period, just given the number of countries and regions that we're in around the world and the number of types of customers that we're in.

I would say, though, that as we originally laid out in our guidance for 2016, we are expecting volume growth this year, as well as a contribution from price growth. Would we expect price to be 5% on a full-year basis at the end of 2016? Probably not.

And I would agree with Robert. I think as we look at some of our initiatives, as we've gone through the year, business we won or things that are ramping up, we had always contemplated it as more of a volume in the second half of the year.

Okay, and then just in terms of auto refinish, I'm sorry if I missed this, but can you just kind of break down volumes on a global basis? It seems like your peer group were up from a volume perspective in most regions. Did you participate in that as well? Thanks.

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

Okay. Thanks so much.

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

Good morning, guys.

Good morning, Arun.

Good morning. I just had some questions on OEM, relatively strong performance, I guess, you know, relative to the industry. Maybe you could just tell us your expectations on how the year evolves from a volume perspective by region, if you have that.

I think as we look at OEM, I think, as we had highlighted on a 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. And within Latin America, Mexico would be up this year, but Latin America for us also includes Mexico and South America, so I would differentiate, but we're really not expecting any recovery in South America. I think we can continue to think that that's how our business will perform this year, with moderately up on growth over the year.

We've got, like in any portfolio there, we've got some winners and losers who we think will be either up or down with their builds as we go through the year. I would tell you the first quarter pretty much as we had expected, and I think short of any macro event, I think we talk about global SARs being slightly up this year. That's in general our view. We break it down by specific customer and we would expect to see the same thing.

Just to add something to what Charlie said there with some numbers, I think as we break through in the U.S. the 18 million unit mark, at least according to some of the external market forecasters, certainly that is a high. However, they're projecting that that high could continue for, you know, another year or two.

So it's difficult to say as you kind of look out at your crystal ball, how that market's going to evolve. I think we're also encouraged not only by what we're seeing in North America, but also what we're seeing in China, where you see it 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 that being said, we'll continue to watch. What we watch in each region is dealer inventories, discounts, used car markets, and I think that's why we expected a moderate growth this year in certain OEMs and certain models. But I think that's something I'm sure you guys watch and we do, too, and those are usually leading indicators of the (inaudible). As we come through the first quarter, we haven't seen anything that diverge from what our plans for the year would be.

All right. Great, thanks. And then maybe you can just give us an update. I know that you paid down some debt post-quarter. What should we expect as far as deleveraging as the year goes on?

So debt pay-down will continue to be the primary use of our excess cash flow. We have approximately $28 million in mandatory principal payments, as you know, which of course will make -- we've just made a $100 million debt pay-down, and then depending upon the pace of some of the acquisitions that we're looking at currently, how those play out during the year, we'll continue to pay down debt during the year. As we highlighted I think on our last call, we expect to be within our two and a half to three times range within the next 12 to 18 months.

Great, thanks.

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

Good morning, guys. This is Chris Evans on for Bob. Just curious to hear how, given the declines in Latin America, how do you manage those? I'd be 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?

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 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, a good position in refinish and industrial. What we've been able to do in Brazil, essentially, you've seen a market where demands have 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 break-even, and our team in Latin America and in Brazil have done a wonderful job adjusting the cost structure necessarily to 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 toggle 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 a tough place, Venezuela's been a tough place, but those are also markets where we have strong market positions, and we've been able to adjust our cost structure so that we are operating on a profit.

But we remain committed to those markets because those are good markets with good margins, and when the tide turns back the other way, they'll generate some nice profit for us.

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

You know, I think -- certainly, I think that they recognized last year how important the auto industry was to them. I think the stimulus will continue to be a key part of their keeping growth going in the country. You know, 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 things, the stimulus continuing. I don't think we'll see additional action to go any faster.

You know, China, we really look at China by region to what -- as you know, all regions aren't created equal over there. Some are doing better than others and we dialogue with our OEMs that are over there to make sure our plan balances what they're seeing from their dealers. So I think the China market is pretty balanced right now. There are a couple of regions where we're seeing builds slow down a little bit, but it was something we -- I think even last year, we thought would happen.

I think they will continue the stimulus. I think the real question is going to be from the actions, what are they going to take over the next couple years around pollution, which is not really so much driven by their light vehicles, but we've certainly seen in other areas like Mexico City where people are enacting additional pollution controls that affect driving, and I think that's something you want to watch for over the next couple years and did that impact more of the refinished business as some of those where miles driven would actually be changing or behavior changing by the consumer.

Got it. Thanks.

Thank you. Our next question today is going to be from P.J. Juvekar from Citi. Please proceed with your question.

Yes, hi, good morning.

Morning, P.J.

So Charlie and Robert, I want to go back to this pricing issue. You've got a 5.4% price included in performance coatings, 4.7% in transportation. That seems higher than competition is seeing, and I think competition is barely holding onto price. So what allows you to take this price increase, and is there any risk to positives as a result?

Fair question, P.J. Again, I think one of the areas where we've spent a lot of time as part of the new Axalta is understanding exactly how much money we make in each one of our products, and very actively and consciously managing things in terms 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, or from one quarter to the next quarter within those years, the price increase cadence is not always the same. It'll depend on market condition, competitive situation and so forth. And some may get moved up, some may get moved out. But essentially, it's heavily mix-driven in the case of Q1.

We certainly wouldn't want to leave you with the impression that in this market that we're actively out there gaining lots of price. It's been heavily mix-driven, and first and foremost with our customers we focus on trying to achieve additional operational efficiencies, internally lower our cost structure internally so that we can offer our products at the most competitive price we can.

Thank you.

Yeah, P.J., I would second that. I think it's really more everything we've been talking over the past year and a half with people about is just Axalta Way, studying our business, studying our mix, changing our mix. In some cases, there's technology shifts going on and you're seeing that, and that's why it really was across all four regions. But I agree with Robert. You shouldn't walk away thinking we went out and raised prices across the industry, because we all know that just -- in this environment, that's really challenging to do, and customers are expecting productivity, not price increases.

And then just because Charlie hit on a key point that I didn't mention, P. J., which is the Axalta Way commercial work that we've been doing in terms of price leakage, how we manage discount rebates incentives. You know, all of those flow down and actually affect you in price when you look at these bridges. 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 benefit from that project.

Thank you, and can you talk about your new OEM lines in India and what's your outlook there? Thanks.

Sure. We announced a couple of quarters ago, I believe it was last fall, our new OEM facility. So as some of you are maybe aware, we actually manufacture in Savli, up in the Gujarat area, and both refinished and OEM products. And with the continued car growth there and specifically some of the OEMs that are moving into India that we do business with, they've been looking for some time for us to establish a broader manufacturing base there. We're now doing that for a full line of OEM products, both online and for APC products, and that facility will come online over the next 12 to 18 months. And they'll be based in Savli, where we already have current manufacturing for OEM, refinish, and industrial. As some of you may be aware, we have a very good refinish business in India that's been there for quite a while.

And again, we would continue to see India, certainly with currency stabilized with Modi over the last couple years, we continue to see India is a good place to invest and to grow, and with the rising middle class and more diversity in types of vehicles and manufacturing of those vehicles, it's a we believe a cautious but a continued good place to invest.

Thank you.

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

Thanks, and good morning. This is Matt Gingrich on for Vincent. I'm curious in which non-truck vehicle types you see a weakness and how has the commercial aftermarket held up in light of the OEM declines?

So when we separate out, obviously there's heavy duty truck, we talk about in terms of North America. You know, we've seen the build rates drop to sort of full-year expectation of kind of 230,000 to 250,000 builds 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 a potential upside and positive builds when it comes to heavy duty truck. But when you put it all together and give it our weighting in North America, of course that heavy duty truck turn in North America it certainly has an impact. But again, one that we contemplated.

The non-HDT portion is basically rail, bus, utility vehicles, recreational vehicles, both on land and on water, general aviation, and trailers. So across that market, we have seen a picture of mixed demand global for coatings 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.

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, then maybe refinish, and then in line market growth and commercial vehicle?

I'd say, as you've laid those out in that order, the general order, that's a fair assessment. Now, whether industrial is the highest growing or whether refinish or light vehicle is the next highest growing, it's really hard to say. But I think in general as you've laid those out, that should directionally be what we would expect to see this year.

Great. Thanks, guys.

Your line is now live, sir. Perhaps your phone is on mute.

Hi, this is Jeff Zekauskas.

Good morning, Jeff.

Hi. You had 23.5 million of nonrecurring items. Is it fair to allocate half of those to cost of goods sold and or acquisition related volumes, I don't know, helping your volumes by about 1% in a quarter?

So if you look at the addback for the onetime cost, I think the most important thing there is that those numbers, as we indicated they would for 2016, have 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.

Okay. And as far as the acquisition-related volumes, was it at least a percent of your volumes this quarter, or no?

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

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

So if you exclude those factors, we did better than that. Because again, we got price mix in, as I've 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 other factor you mentioned.

Pulling out. So you got price exclusive of mix in your transportation coatings business.

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

Okay, great. Thank you so much.

Thank you. Our next question today coming from Laurence Alexander from Jefferies. Please proceed with your question.

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? That is after current around your share gains in Asia is there anything in your R&D pipeline that we should think of as driving a noticeable uptick in either price mix or share gains in the 2018, 2020-plus period?

This is Charlie. I think our R&D pipeline is very different depending on which segment you're looking at, but I would say 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 are completely new product lines reformulated going into some of these industrial segments that in the past we had -- both the industrial segments and commercial vehicle segments where we have relatively small share.

So I don't think there's any one big step up or one big paradigm, but you will continue to see from us over the next couple quarters a steady rollout of new products. Again, we invest over $180 million a year total in R&D and process support though as you guessed 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 customers, doing more with existing customers we have.

And again, as we do that and as we gain additional productivity from those, we in some cases get pricing and in some cases it's mix related to what we're doing. So I think you'll continue to see that add to the mix over the next year or two. But there's not any one particular platform that I would say is a paradigm for us.

Thank you.

Thank you. Our next question today is coming from Aleksey Yefremov from Nomura. Please proceed with your question.

Good morning. Thank you. In performance coatings, your 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?

So in terms of 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. We saw that type of pattern last year as well. But I just would reiterate, I mean, for us, our refinish business is 43% of our sales, well over 50% of our profits, and continues to do extremely well.

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

So you'll see, obviously you'll see in Q1 is typically the lowest quarter of the year. You see a pretty marked pickup in Q2 and Q3, and then Q4, that can be a little bit lower than Q2, Q3 sometimes. It just depends on what everything is going on at that time of the year. Weather can have somewhat of an impact. So far, weather this year, as we mentioned earlier on the call, does not seem to be driving any additions in seasonality like it did say a couple years ago.

A final question if I may. On free cash flow, if I put together a 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?

I think you're in the right zip code in terms of what free cash flow could potentially be if at all the stars aligned and if everything worked 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 and the drop in our tax rate and so forth, we should generate a fair amount of free cash flow this year.

Great. Thanks a lot.

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

Thank you. Just on price again, on transportation, you said in comments, price remains steady in light vehicle and commercial. I guess that implies that the price you reflect in the sales variances are primarily mixed. Is that fair?

That's a fair observation, David.

And sorry if I missed this. Light vehicle volumes, including South America, they were down in the quarter?

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

Okay. Understood. Thank you very much.

But from the overall contribution, I'd just say it's directionally, again, light vehicle performed pretty consistently with our expectations.

Got it. Thank you very much.

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.

Yeah, thank you. This is Charlie. I appreciate it. I know we're out of time, so I'll keep it brief. Again, a good start to the year, good first quarter. Our markets remain solid. Again, I think we've highlighted the ones that are a little weaker this year than perhaps last year, but I think overall a good start to the year for us. Pleased with our performance, and we're looking forward to going to the second quarter.

In some ways, maybe actually a boring quarter because it performed as we would have expected, so we'll take that. But a lot of great initiatives ongoing, and I think you'll continue to see us focused on Axalta Way, driving efficiency, productivity. And again, as you saw from our earnings, you see it showing up in all aspects of our business. I'm really pleased with that. And look forward to talking to with at the end of the second quarter. Thanks, everyone.

Thank you. That concludes today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.