Axalta Coating Systems Ltd (AXTA) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Axalta Coating Systems second-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.

(Operator Instructions)

Today's call is being recorded, and replays will be available through August 5. Those listening after today's call should please note that the information provided in this recording will not be updated and therefore may no longer be current.

At this time I'd like to turn the call over to Chris Mecray, Vice President, Investor Relations for a few brief legal notices. Please go ahead.

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 second 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 second quarter financial results and posted a presentation in the Investor Relations section of our website at AxaltaCF.com, which we'll 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.

The 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 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.

Thank you and good morning, everyone. We have a number of developments at Axalta we're excited to share with you today.

We delivered a great second quarter. We've announced three highly complementary high return acquisitions in June and July, and we continued to deliver on our long term strategic goals.

If you would turn to slide 3 of our presentation, we generated solid organic sales growth and continued strong profitability, as well as cash flow from the business as a whole in the second quarter. This gives us continued confidence in our ability to meet the full year goals that were laid out back in February and affirmed in April on our last quarterly call.

Second quarter net sales rose 4.2% from last year before the impact of currency translation. This growth was driven by a fairly balanced combination of organic volumes and strong pricing mix, including robust growth in performance coatings as well as stable transportation segment net sales, in spite of demand challenges in certain commercial vehicle end markets.

Adjusted EBITDA was largely flat the second quarter, at $253 million versus $256 million last year. You may recall that we mentioned on our last call the comparison would be something of a hill to climb against last year's particularly strong second quarter, which included strong refinish performance and robust volume growth rates in both transportation end markets. Accordingly we're very satisfied with our result for the second quarter given what is a difficult year-over-year comparison.

Adjusted EBITDA margins for the second quarter results [were up] very solid, up overall 30 basis points to 23.7% versus 23.4% last year. This outcome includes good volume and price drop through, particularly from performance coatings.

Focused on our productivity initiatives, we remain on track for the full year target of achieving $60 million in combined savings from the Axalta Way and Fit-For-Growth programs. In the second quarter we made progress and in implementing standard and automated processes to improve efficiencies and take out costs in certain back office support functions. We also completed our R&D consolidation initiative in EMEA, with the opening in Germany of our EMEA tech center which consolidates employees from several locations in the region.

Our operating initiatives also remain well on track, with solid execution by the team as they work with our new operations leader Dan Key. Highlights include rolling out the foundation of our new Axalta operating system, including consistent customer facing [global] metrics, terminology, and standard processes. Dan's team has undertaken [comprehensive] review of the opportunities across our global infrastructure to prioritize productivity enhancing projects, and have initiated key productivity projects in Montbrison, France industrial powders plant, to improve product cost and throughput.

Of particular importance, Axalta remains squarely focused on investment in the next generation technologies, products, and manufacturing processes, and our commitment to this technology is seen in our annual spend of around $170 million or over 4% of our net sales annually. In the second quarter we had numerous product launches and new customer approvals, including a new Caterpillar approval for our recently introduced AquaEC 6100 high performance e-coat; the launch of our architectural grade Alesta master color product and industrial for Latin America; and the new product launch of our [dis] Centari high productive refinished coatings line in Latin America.

Regarding our balance sheet and cash flows, the second quarter saw demonstrated progress and significant year-over-year improvement, driven principally by better working capital performance. We finished the quarter with a near doubling of our cash flow from operations to $197 million, while also prepaying $100 million of our term loans in April as we continued to make progress on our debt reduction goals. Our improved cash flow is enabling a combination of absolute debt reduction as well as the headroom to make some tuck in acquisitions to fuel our growth strategy.

Consistent with our long term strategy, we announced three bolt-on acquisitions in the past month. We're excited about the prospects for these businesses both in terms of strong available synergies, as well as the ability to accelerate growth in key market segments. We believe these deals will provide compelling returns on investment for Axalta.

I would like to offer a few words on each one of these transactions. First, at the end of June we announced a definitive agreement to acquire Dura Coat Products, the number four player in the North American coil coatings market. This acquisition places Axalta strongly in a high value portion of the coils coating market in North America, serving niches in commercial construction and other general industrial end markets.

This 30 year old business is well established, highly regarded by its customers as an innovator in coil coating technology. The fit with our existing coil coatings business is highly complementary, offering significant synergies as we face the market as a single entity, with incremental intellectual property for Axalta as a result.

Secondly, we announced the acquisition of High Performance Coating, a Southeast Asian supplier of mainstream refinish coatings, which clearly enhanced our presence in the Asia Pacific region, with an expanded product offering as we as stronger sales and service capability for customers. A combination of strong regional brands with our global refinish support capability offers a compelling growth and value creating proposition for our company and their customers. We're excited to close this transaction.

Third, last week we announced the acquisition of the automotive interior rigid thermoplastic coatings business of United Paint and Chemical Corporation, based in Michigan. This transaction offers Axalta a strong set of products to serve automotive interiors and a platform from which to further grow in this channel over time.

We're also thrilled with the opportunity that this deal offers, when combined with Axalta's already strong product development team, and offers the possibility of further organic extensions into this marketplace. The acquired business already has product approvals and long standing relationships with many of the global OEMs, developed over their 60-plus year history, including those which Axalta already works with closely.

In terms of financial impact of these transactions, the combined 2015 net sales of these businesses were around $100 million, with a nice growth trajectory as we move into 2016 and 2017. The acquired businesses have attractive profit margins, which reflect generally niche-oriented business areas within their respective coatings markets. We see multiple top line and productivity synergies to further add to the combined businesses. In short these are exactly be type of tuck in transactions that we've sought, which we believe will continue to produce strong return on investment for Axalta.

We're also pleased that the portion of these deals include [earn out] provisions that further derisk returns, while incentivizing the existing owners to achieve the planned growth rates. Although we've already achieved our overall volume objective with regard to deals that we expect to close in 2016, we continue to work on an active pipeline of transactions that, if closed, would also represent similar opportunities to enhance investment returns. Timing is always difficult to predict, but we remain focused on this aspect of our stated strategy, and will continue to be an opportunistic player.

Notwithstanding these M&A deals, our free cash flow continues to be directed towards delevering, and we'll continue to believe we will achieve our net leverage goal of 2.5 to 3 times within the next year.

Looking at our plan for the full year 2016, we remain on track to meet our full metrics outlined in February. Our top line growth target of 4% to 6% excluding currency remains achievable, based on year-to-date performance and our continued expectation for solid second half volume growth from our end markets.

We're also confirming our full year $900 million to $940 million adjusted EBITDA target, and our first half has been supportive of this range, particularly with a solid second quarter now completed. We remain committed to achieving these and the other targets we've outlined, which offer a balanced mix of top line growth, as well as productivity enhancing initiatives.

Earlier in the year we acknowledged the apparent anxiety in the markets regarding the cyclical health of our end markets, while noting that we believe we have a path to executing the year with above market growth. Although no company ever gets to the finish line exactly as planned, we're pleased that we're on track to grow the company in most regions and end markets, in spite of some of the persistent headwinds.

We face continued challenges for many emerging market economies, as well as weaker demand from some heavy duty truck and other commercial vehicle products. That said, our core refinish customers and sustained demand in automotive OEM have enabled our overall performance to track expectations, and we believe the second half will bring growth opportunities to allow us to hit our target. We look forward to sharing this progress in demonstrating Axalta's continued growth in an otherwise fairly flat global economy.

To summarize, we're very pleased with our results for the second quarter, and we believe we remain on track to meet our full year 2016 targets. As a company we remain focused on shaping the culture of growth, executing on our operating plan, and delivering our strategy and related milestone metrics.

As I've noted before, and it bears repeating in a climate of lower global growth, our business remains anchored in the stable automotive refinish market, which offers both strong cash flow and structural growth opportunity, in part to our waterborne products which are widely regarded by our customers in the industry as the highest quality and most productive in the market place.

We're also optimistic about our growth plan for our industrial coatings business, based on bottoms up sales efforts leveraging our increased investment in that market. And finally, we're intent on growing in transportation coatings through focus on the customer and continued product innovation. We've successfully gained share in this segment through our ability to tackle complex [paint] systems and help our customers achieve industry leading levels of productivity on their paint lines.

Robert will now walk us through Axalta's financial results in a little more detail. Thank you. Robert?

Thanks, Charlie, and good morning, everyone. We've turned to slide 4 for a summary of our second quarter consolidated results.

Net sales in the second quarter on a constant currency basis increased 4.2% year-over-year, driven by strong 7.8% growth in performance coatings, offset slightly by 0.7% contraction in transportation coatings. This growth was driven by a fairly balanced mix of 2.8% volume growth, coupled with 1.4% average price realization.

Foreign currency translation reduced reported net sales by 6.9% in the quarter, which was somewhat less than the 11.1% currency headwind in the same quarter a year ago, and fairly in line with the 6.4% seen last quarter. The majority of the currency impact seen in the quarter and estimated to come in the second half of this year relates to the devaluation of the Venezuelan bolivar. We offer a review of the basket of our largest currency exposures in the appendix to this presentation.

Looking at sales volumes in the second quarter, we accomplished solid 2.8% volume growth, led by performance coatings with growth in all regions, as well as in transportation coatings which saw volume growth across developed markets, offset by ongoing weaker results in emerging economies, particularly in South America.

Positive price contribution of 1.4% in the second quarter was generally as expected, as we've noted over time that we expect volume to exceed price as a bridge component of net sales. For the period, we also saw more price contribution from performance coatings than transportation coatings, again to be expected in the current competitive environment.

Second quarter adjusted EBITDA of $253 million was just shy of the very strong $256 million results in the same quarter last year. This profit growth included a 30 basis point bump in adjusted EBITDA margin for 23.7%, driven by positive volume and price leverage, as well as savings from cost improvements and productivity enhancements, and offset partially by foreign exchange impacts and ongoing growth investments across the business.

Moving on to our Q2 2016 performance coatings results on slide 5, performance coatings segment net sales increased 7.8% for the quarter year-over-year, before foreign exchange impact, again driven by growth in all four regions. 5.9% volume growth was also driven by all four regions, with North America and EMEA continuing strongly, and other regions experiencing varying performance between the two end markets.

Selling prices in the segment increased 1.9%, led by solid increases in refinish and relatively flat overall selling prices in industrial. This net sales growth was offset by 8.8% currency translation headwinds, compared to 12.1% headwinds seen in Q2 2015.

Refinish net sales increased 9.3% on a constant currency basis versus last year's second quarter, driven principally by volume growth, coupled with expected price gains across most regions. This was offset by 11.8% foreign currency exchange impacts. Constant currency net sales in our industrial end market increased 3.7% year-over-year, including strong contribution from EMEA and outgrowing our basket of end markets for the period.

In the second quarter, volumes in industrial grew solidly, while price was largely flat, which met our expectation for the business overall, and demonstrated the modest sequential volume acceleration that we expect for the full year, coming from our deliberate bottoms up market approach and product development. Performance coatings generated adjusted EBITDA of $157 million in the second quarter versus $162 million in Q2 2015. This result was driven by a positive drop through effect of both volume and price, as well as variable cost leverage, though offset by unfavorable currency impact, and some increased investment spend to support growth initiatives. Adjusted EBITDA margins were fairly steady in the period from last year's Q2 at 24.9%, down 50 basis points from 25.4% last year, largely reflecting the FX and investment spend impact mentioned above.

Switching now to our Q2 2016 transportation coatings results. Net sales in transportation and coatings decreased 0.7% year-over-year in the second quarter, before currency exchange headwinds of 4.2%. This result was driven by moderate constant currency growth from light vehicle, as automotive production remained largely stable, more than offset by weaker results in the smaller commercial vehicle end market, largely due to slower North American truck production, as well as some impact from non-truck vehicle markets, primarily again in North America.

Light vehicle end market Q2 net sales increased 1.5% excluding foreign currency translation, with growth led by North America and EMEA, offset to a degree by weaker performance from South America and Asia Pacific. The weakness in South America has essentially continued to pace in the first quarter, while Asia Pacific saw the impact from slower production due to certain plant shutdowns in China in the period, as certain customers sought to realign inventories in the sales channel.

Commercial vehicle end market net sales declined 8.3%, excluding foreign currency translation, which was somewhat similar to the 9% decrease seen in the first quarter, and reflecting ongoing slower heavy duty truck production that began in Q4 of last year, while broader weakness in the non-truck related end markets such as agriculture and construction equipment also continues. Transportation coatings generated adjusted EBITDA of $95 million in Q2, up slightly from $93 million a year ago, with positive price drop through and some variable cost benefit, offset by unfavorable foreign exchange impacts and slightly lower volumes.

Margins remain strong, however, and increased 150 basis points, from 20.5% in second quarter of last year, to 22% this past quarter, including the benefit of both price and mix elements, as well as some help from the (inaudible) savings and variable cost relief year-over-year. This was partially offset by currency headwinds and modest investment spending to support certain regional growth plans, mostly in light vehicle.

Looking at some key balance sheet items on slide 7. At the June 30 close date, cash and equivalents totaled $480 million, up from $420 million at first quarter end, while total reported debt was $3.4 billion, resulting in a net debt balance of $2.9 billion. Our net debt to LTM adjusted EBITDA ratio was 3.3 times at quarter end, down from 3.5 times at Q1 end.

The improvement in the quarter came from a combination of stronger adjusted EBITDA, and better overall working capital performance, including significant contributions from both inventory and payables line items, offset somewhat by use of receivables, fairly in line with our expectations for the quarter. Free cash flow in the second quarter totaled $173 million, a notable improvement versus $79 million in the second quarter of last year, net of CapEx of $25 million in both periods. We continue to focus intently on working capital performance in our business, with an eye toward longer term reduction in capital intensity.

Regarding capital allocation, we continue to focus our free cash flow on debt reduction, targeting 2.5 to 3 times net debt to LTM adjusted EBITDA within a year, although M&A activity could impact timing if we see opportunistic plays in the market. We had planned to spend somewhere between $50 million and $100 million in 2016 on acquisitions, and our recently announced deals have realized this plan, but it will not preclude us from reaching our overall net leverage goals. We are confident that the returns associated with these transactions are far in excess of those we achieved from debt reduction, given our average cost of debt of only 4.8% today.

That said, we did prepay $100 million on our term loans in April as Charlie noted earlier. Our debt reduction goals reflect our desire to minimize equity market volatility risk, and hence it continues to be a priority for excess cash flow.

In terms of our ongoing focus on optimizing our capital structure, we continue to monitor developments in the debt markets, and post-Brexit volatility appears to have moderated. As previously noted, we plan to act opportunistically to refinance our debt, if the economics are favorable. In the meantime, we are pleased to announce that Standard & Poor's rated our corporate credit rating notch to BB from BB- in late June.

Turning to slide 8, our press release and investor presentation outline our guidance components for 2016 financial modeling. We'd like to offer a few added comments on these items.

We continue to expect 2016 net sales growth of 4% to 6% on a constant currency basis. As previous noted, we assume ongoing growth in our core markets as the basis for this forecast, though clearly certain end markets and regions remain pressured, and in several cases are incrementally weaker than the start of the year, including North America heavy-duty truck and the Latin America region. Still, we continue to expect to exceed overall market growth with our industry leading products, process, and manufacturing technologies, and specific product introductions and market extension opportunities, based on our bottoms up strategy to extend our presence in underserved markets and geographies.

We've updated our FX assumptions as indicated in the appendix to our earnings presentation, and continue to expect reported net sales for the full year to be relatively flat, given exchange rates. Although the bulk of our foreign exchange basket has moved favorably in recent months, we continue to face expected headwinds from the Venezuelan bolivar as highlighted in our filings.

Our expectation is for net sales growth before currency translation impact to come from most regions and end markets, with the exception of South America, where persistent economic weakness has led to real market contraction for the full year, albeit at levels of impact lower than seen last year. Refinish market dynamics continue to be stable and supportive for overall expected core growth, and we anticipate this to continue and offer a solid base for overall consolidated growth. We continue to gain market share across global refinish as well, most notably from geographic diversification, extension of our strategy to offer a broader array of products [in] multiple channels, and through ongoing consolidation of end customers in several regions.

Our industrial end market also remains stable overall, and our plans to outgrow these markets in those regions remain on track. To date we've demonstrated constant currency net sales growth in the mid-single digits, including some severe market headwinds in areas including North America energy related markets. In spite of that, our new customer wins have increased nicely year to date, and are running in the low double digits for the first half of 2016, as a general indicator of success in these new selling efforts.

We continue to see light vehicle net sales growth in the low single digits, still in line with independent market forecasters, which should also be augmented by modest share gain in markets where we've already won new positions from customers. We acknowledge that the forecasters such as HIS have slightly lowered global forecast for light vehicle production, after the recent Brexit vote in the UK. But we've not seen a measurable impact from this political event in our business, nor have customers indicated any near term concern that would force the reconsideration of our outlook for 2016 at this point. Although we have 2% to 3% of consolidated net sales from the UK across our businesses, much of that is refinish as well as industrial, therefore we are not broadly concerned about this exposure at the time.

As we mentioned in April, commercial vehicle market performance is slower than our initial year guidance, and our second quarter results confirm this slowing, albeit at a rate of decline less severe than seen in the first-quarter. We still do not anticipate significant outgrowth versus overall commercial vehicle end markets in our current plan for the year.

The slowing in certain non-truck markets in commercial vehicle in Q1 was larger than expected at the beginning of the year, but the financial impact of this since our smallest end market is not enough to materially alter our overall growth plans. For 2016 we continue to expect adjusted EBITDA to fall within a range of $900 million to $940 million, consistent with our outlook offered back in February. This outcome includes some puts and takes relative to our initial expectation as Charlie mentioned, but we are pleased that the overall path remains achievable by our best estimates.

The outlook is based on stable incremental margin on our planned mid single digit net sales growth, and supported by guided additional productivity savings from our ongoing Fit-For-Growth and Axalta Way savings initiatives. This is partially offset by anticipated currency impacts and continued incremental investment spend on growth, though now declining in absolute levels, as we have established adequate infrastructure and resources across our end markets to support planned future growth.

Regarding the costs related to our Fit-For-Growth and Axalta Way initiatives, we remain on track to meet our previous guidance of $25 million in expense for the full year, which is materially lower than 2015 as these programs mature. As we consider the phasing of financial results for the back half of 2016, we would first note that our second quarter result was somewhat stronger than we earlier anticipated, as alluded to in our prior commentary regarding a difficult year-over-year comparison, and witnessed the very solid growth we actually reported from the performance coatings segment in the second quarter.

For the remainder of the year, we expect both third and fourth quarters to be fairly solid, but with somewhat stronger fourth quarter top line and adjusted EBITDA relative to third. This is based on broader assumptions of volume development across our businesses, as well as the (inaudible) moderation in volume growth from performance coatings sequentially in the third quarter compared to the second quarter.

All other model expectations remain unchanged from our earlier guidance updates. We expect interest expense between $180 million and $190 million, excluding any potential refinancing of our debt; our adjusted income tax rate to fall between 25% and 27%; diluted share count of 242 million to 245 million shares; capital expenditures of approximately $150 million; and annual depreciation and amortization of approximately $320 million, which represents an incremental guidance element this quarter; and finally net working capital in the range of 11% to 13% of full year 2016 net sales.

This concludes our prepared remarks, and we'd be pleased to answer any of your questions. Operator, would you please open the lines for Q&A.

(Operator Instructions)

PJ Juvekar, Citigroup.

Hello, good morning, this is Dan Jester on for PJ. So in the first quarter, and this is in for the performance segment. In the first quarter you had a pretty substantial foreign exchange headwind but you were able to grow margins in that business year-over-year about 100 basis points. And in the second quarter I know you called out that FX was a little bit stronger sequentially but margins declined. So is there something else going on there, and maybe you could help me bridge the first quarter versus the second quarter on margin growth.

So the FX impact in performance coatings in general that we saw especially compared as we look at the transportation coatings segment, is really more reflective of the mix in sales in each period from the countries with the highest currency exposure. I know you're asking overall but since the overall is comprised by both performance and transportation, just to highlight that.

So part of what you're seeing is the fact that the OEM business in particular in some jurisdictions of higher levels of FX impact such as Latin America, that business is smaller in size than it was, given how much it's contracted, and therefore you're seeing more of an FX impact relatively speaking as a percentage of the overall mix of Axalta in performance coatings.

Okay. And then moving to the commercial vehicle business, thank you for the color that you gave in your prepared remarks. I'm just wondering what kind of visibility do you have on your customers' second half plans, maybe kind of split between the truck and the non-truck market, and it seems like at least for you that comparables do get a little bit easier going in the second half. So can you talk about the relative, what the market's doing versus how we should think about your own business performance in the second half. Thanks.

Hey Dan, this is Charlie. Our visibility when you think about in the developed markets like North America, we normally get one to two quarters as they look at their backlog and they let us know how things are going. And you're right, as we look into the second half of the year, when you look at truck sales North America, large frame vehicles, the majority of the pullback has pretty much happened. We see pretty stable operating rates, I think this year number around 230,000 builds seems to make sense.

In the non-heavy duty truck and bus segment, when we get into just more spray customers, that tends to be hundreds of accounts, and I would say most of those customers in EMEA, here in North America and Latin America, they can normally look out about a quarter and get a pretty good view. Those businesses are not that dynamic. They're pretty much GDP driven. But I think the second half of the year is a little more predictable than we saw in the first half. Certainly we see more stable conditions than we did as a couple of these markets were pulling back earlier -- late last year and earlier this year.

Great. Thank you very much.

Ghansham Panjabi, Robert W. Baird.

Hey guys, good morning. On the auto refinish growth of 9.3% for the second quarter, first off what you think the market as a whole grew as you see relevant? And second you also mentioned expected share gains in the back half of the segment slide 3. I guess what segments of the refinish market are the share gains coming from?

We saw growth in all four regions on refinish, so you have to look at regionally how you think those markets are growing. I would tell you in North America and in EMEA the refinish markets are flat to maybe up 1% to 2% this year, fairly Asia Pacific growing somewhat faster than that when you look at areas like China and India, and in Latin America basically flat.

So I think what we've seen in share gain versus just certainly picking up some from just slight market growth, but I think share gain is coming in the form of technology, where we're seeing really rapid growth in our waterborne products around the world, so there's a mix change going on there as well. Certainly affects volume but we're happy with that.

But then also just people looking for more productive systems, and a lot of that growth around the world is coming from that, as people not only shift from lower end products to in some cases higher, but even in some of the lower products, people looking for more productive systems, better color match, all the things you've heard us talk about before. So I think it was a big step up in second quarter for some specific reasons, but overall again I think it's customers coming to us looking for ways to be more efficient and more productive, and we think across the chain, whether that's economy mainstream or our premium products, we saw growth in all four regions.

And Ghansham, just to complement what Charlie said, as you know we had a strong second quarter in refinish last year, so the strong performance this year I'm sure calls out a couple of questions, and the short answer on that at the customer level is that we have had quite a bit of customer win in North America, and as we've converted those shops, and been in that process over the last few quarters, we're starting to see the top line impact of that. And then secondly in the European region, we've also had some nice wins, and as those shops have been converted over, you're also starting to see that ramp up as well.

Okay, and I guess my second question, obviously we're halfway through the year, your EBITDA guidance is still quite wide. What would drive the significant variance between the high and low end from your perspective? Are you factoring in small utility or noise associated with Brexit? Thanks so much.

I think as we think about the year we're very happy with the performance in the first half, and I think again just bears mentioning that the overall markets have been quite volatile and there have been a few events.

Brexit is not a major component for us. The UK is only 2% to 3% of our total sales as a company. Most of those sales are in refinish and industrial, which are pretty stable markets for us in that region, so given the overall low sales contribution, or lower sales contribution, coupled with the businesses that we're in there, that we don't think will be a major driver for us. Now how that develops in the back half of the year in terms of how the overall European Union reacts to Brexit, that could be something, but as it currently sits today, we don't see that as a material change in terms of how we're thinking about the region.

As we think about the guidance more broadly at the top end of the range or the bottom end of the range, as we've highlighted before, it's really about global macro, and if global macro is supportive I think you'll continue to see us perform well. If global macro pulls back for any reason I think that would pull us down more towards the bottom end of the range.

Thanks so much.

David Begleiter, Deutsche Bank.

Hi good morning, gentlemen, this is actually Jermaine Brown filling in for David. In regards to these three bolt-on acquisitions, can you just comment on the margin profile in relation to the overall company's EBITDA margins?

So the acquisitions that we've made over the last month I think are reflective of companies that are in higher margin niche coatings markets that have similar competitive dynamics as many of our markets in which we already participate, and also in geographies where those businesses are also, have attractive margin profiles.

So I think the compared to the overall company margin, it's in line with how we think about things, and as we move forward I think we see opportunities to increase those margins as we integrate those companies into Axalta, and go after some of those synergy opportunities.

Understood. And in terms of the M&A pipeline, could you just comment on the status of that and what sort of returns that you're looking for going forward?

This is Charlie. As far as the M&A pipeline I think it remains, I would describe it pretty robust. It's really the last two years we've looked at numerous opportunities around the world. You certainly see the profile right now.

We've done bolt-ons in EMEA, well actually in all four regions now. So I think we continue to look at opportunities with equal weight around the world. Clearly North America is a preference in certain markets for us just because of the healthy economy.

But I think we'll continue to look at opportunities around the world, and remain disciplined. I think we remain disciplined on the multiples we'll pay. In some of these acquisition we look to stagger the payments and do earn-outs to keep the owners involved and excited about delivering on some of the synergies and growth opportunities. So I think we'll remain disciplined on what we'll pay for acquisitions.

There's not a specific -- every one of them is a little bit different in what we're looking for as far as our return. Some cases it's more growth, in some cases it is more synergy related, technology related, market access related. But overall as Robert said I think we look at businesses that share the margin profile we have, and we look to increase those, along with being able to improve the growth prospects for the company.

But again the pipeline remains what I would say pretty active right now. We've certainly seen with some of the recent M&A activity out there, some owners' expectations as far as the multiples trying to go up. But we haven't actually found that we've had to pay anything more than we would've wanted to for these acquisitions, and tried to structure them with the advantage to the owner to stay with us and work with us for a while.

Understood. And finally can you comment on the raw material environment?

The overall raw material environment as we look at our basket of products, I think we expect raw mats to be fairly flat in the third quarter compared to what we've seen in the second quarter of 2016. Oil prices of course have flattened out. Our expectation, although we could be wrong, is that we would expect to see oil prices and some of these prices kind of stay in this range for the near future, at least according to what we're seeing in the marketplace and some of the market research reports that we're looking at.

If we look across the basket of what we buy, resins (inaudible) pigments (inaudible), pretty much every thing is either flat, slightly up, or slightly down, in terms of what we're seeing from a pricing perspective. Nothing really materially up or materially down. So I think that gives you a sense of how we see the commodity basket moving forward.

Thank you very much.

Christopher Parkinson, Credit Suisse.

Perfect. Thank you very much, You hit on this a little bit, within the auto OEM segment, can you just walk us through just very quickly any key trends in the US, Europe, and China? And in China in particular if there's anything regarding comps versus 2015, as well as your outlook for the ramp of some of the new facilities, that would be particularly helpful. Thank you.

Yes sure, this is Charlie. Let me make a couple comments and then maybe Robert will add a little detail. Certainly in North America, what we'd look at is not so much overall country trends or region trends, we tend to build our forecast based on our specific OEMs, and that's how we kind of look at the world.

I would say North America this year, last year and this year continued favorable trends in our business, both in technology shifts from some business that we've acquired, but also just in certain of the OEMs we're aligned with are doing particularly well. In EMEA it's again up year-over-year for us with the OEMs that we're aligned with, and we think both of those trends for North America and EMEA certainly will continue through the balance of the year. For North America we include, although Mexico is part of Latin America for us, we always look at Mexico as part of North America from the standpoint of the way the OEMs balance their production.

In Latin America, specifically South America, Brazil, we've seen it flatten out now, no more downward pressure. Certainly seems to be maybe Brazil is bottoming out, with car build of around 2 million this year. We'll just have to wait and see over the next quarter or two if there's some consumer optimism returns once you get past the Olympics, and (inaudible) [trial] and some things like that.

In China our OEMs, we continue to be pleased with the overall China business. Certainly as we go in through this year it's more stable than it was last year. We saw in third quarter last year if you remember certain OEMs took big shutdowns, extended those shutdowns.

So we see the environment fairly stable in China for us. We've got some new business over the next year that comes online, and the OEMs where, we're more aligned with the multinational OEMs than we are some of the Chinese OEMs. So I would say their growth is going to be slower over the next year, the multinationals versus the Chinese OEMs, but again I think they're both segments that market tend to be pretty healthy, fairly stable, and we just need normal shutdowns right now, model changeovers, there's certainly a shift to more crossover SUVs and things like that going on. But overall fairly stable marketplace at this point. We're just kind of focused on some initiatives we have over the next year over there.

Perfect --

Just to complement what Charlie said there on light vehicle again, North America very strong, consistent with what you're seeing in some the market forecasts. EMEA I think I've mentioned on our last call that we'd wanted even better performance than we had in the first quarter, and that came through in the second quarter I think we're happy to report.

Latin America continues to be challenged, and then as Charlie said the overall market conditions in Asia Pacific continue to be favorable. We did however have one of our large customers in China idle their plant for a few weeks in the quarter, which did somewhat impact our sales.

That's very helpful, thank you. And very quickly on your cash flow of $197 million, it appears better than expectations, which you at least in part attributed to lower working capital use. Can you just comment on the trends that led to these improvements, both in the present and probably more importantly the future, as well as your balancing some of these improvements with the potential needs for growth prospects. Thank you.

Sure, happy to do that. Yes, we had a material improvement in working capital as you see if you look at some of the first half data total company for the quarter, you'll see a substantial improvement. We've had a working capital improvement initiative that we launched at the beginning of the year, and we've really been tackling all aspects of working capital in the company, and I think on the previous calls we've mentioned some of the changes in operations, as well as changes in supply chain management that we've been making, that have been permitting some pretty interesting improvements in the area of inventories.

And then also through better systems and just overall management of our supply base, we've also been able to make some attractive improvements in the area of payables. And then accounts receivable, although we've made a little bit of an investment this quarter given some large new business that we won in the first quarter and second quarter, we have seen improvements in accounts receivable as well.

As we move forward though, return on invested capital and the amount that we're putting into the business from a working capital perspective is a key area of focus.

That's very helpful. Thank you.

Arun Viswanathan, RBC Capital Markets.

Good morning, thanks, guys. First off on refinish, very strong quarter, maybe you can just discuss your expectations for the second half and 2017? Would you expect mid single digit growth to continue, and would it be driven by volume? I know that there was a price increase last year in Q3 in North America. Is that still on the table for this year? How do you expect that to play out this year?

Yes, I think as we look at our refinish business we're very optimistic and very encouraged by what we're seeing in that market. We've also from a commercial execution perspective been a doing very well. We've spent a lot of time talking about North America in the past, but we've also been making some very important gains in Europe as well as Asia Pacific and Mexico, and you're starting to see the benefits of many of those commercial efforts in our results.

I think we see a fairly positive outlook for the remainder of the year for refinish, and moving forward in 2017, we haven't provided any numerical guidance yet for 2017, but I think there's no reason that we would expect to see those trends to change. Refinish continues to be the core business of Axalta. It will continue to get our full focus and attention.

Okay. And on the auto OEM side you noted that there's been some change in HIS expectations, and we've all seen some moderation in global SAAR, both in the US as well as, I know European registrations are still ticking pretty high. But what are reasonable expectations to have over the next couple of years? At the investor day you had talked about mid single digit growth globally. Is that still a fair expectation over the next couple of years, and how do you see that, what's the composition? Is that more growth from India potentially offsetting some slowing in North America and Latin America, or how do you see the regions kind of playing out? Thanks.

I think our expectations remain the same. You remember even back on investor day, we said we expected modest contribution from increase in SAARs, and again our plan is kind of built up by what we think the OEMs that we're strongest with are going to do. So I think we're thinking about it that we'll get contribution from all four regions, with some of the growth initiatives that we have, even though overall SAARs in places like North America and EMEA we don't expect to see we don't expect the, we expect those SAARs to be more flat to maybe up a couple percent.

We do believe there'll be a recovery in Brazil, albeit slow, off of its base, and we have a large business there. And then we would continue to see China with modest growth in SAARs in the next couple of years. So between initiatives we already have on content, again you just saw us last couple of weeks acquire an interior coatings business here, so we are working on increasing our content on the vehicles, and part of that growth comes from increasing content. So it's less about what's going on in SAARs and just some of our technology initiatives.

Again when you look at our overall R&D technology spend of over $170 million a year, a significant amount of that goes into OEM, so we'll continue to increase content, increase technology. So if I had to look at it I'd think half is content and technology changes, and the other half would just be the OEMs we're aligned with in the four regions having growth.

That's helpful and just lastly I don't know if you quantified the cost savings that you achieved in the quarter, and I know you're still targeting be $60 million for the year. Any chance that you'd want to accelerate those savings or increase your target there?

The cost savings programs, both Axalta Way and Fit-For-Growth, continue to move along consistent with our plan for 2016, and as we come in to be back half of the year and we start to talk about some of those targets and plans for 2017, we may be all the way through the EMEA Fit-For-Growth program. We'll have to see if in particular how FX plays out there. But we could be finished by the end of the year. We'll wait and see.

And then on the Axalta Way programs, we continue to perform exactly as per our plan for 2016, so we're very excited about that. That being said, there are additional productivity improvement initiatives that we will have. We haven't provided any guidance or any additional information about that just yet.

Great. Thank you.

Vincent Andrews, Morgan Stanley.

Good morning this is Matt Gingrich on for Vincent. I was wondering if you could quantify the impact of sales from acquisitions for the back half of the year?

Matt, as we think about the acquisitions, our goal for 2016 was to try to add around $100 million or a little more in top line sales via M&A. With these three transactions together, we've done that, but they will ramp up in the back half of the year. So only a portion of that will actually come through for the full year, but I think that should give you kind of a general sense.

Okay --

The other element is we still have one of the transactions which still has to close, and the timing of the closing of that transaction will also have an impact on that number.

Sounds good. Thank you.

Aleksey Yefremov, Nomura.

Good morning, thank you. At what level of financial leverage would you consider initiating share buybacks? Would you want to be at the high end of your target range or the low end?

Yes, this is Charlie. I think it's a topic we'll take up in the second half of the year, both as management as the board again I think what we had said was as we got in the 2.5 to 3 range, that was when we'd start those discussions. So if you think about, as we look over the next couple of quarters, and certainly over the next year, we think we get down in that range, so I would think it would be a discussion we'll have the second half of the year as a board.

I don't want us to put in place a buyback plan until we're actually really ready to do it, because I think that might be false expectations. But it is an active topic and one I think as a board and as management we'll look at here in the second half of the year. Can't promise when we would do it, but as far as the high or the low end of the range, I think my general view as a CEO is, markets are stable and we're in a favorable macro environment where we feel pretty good about visibility going forward [of] our key markets, then you could argue for, as you get into that range, there's certainly no reason that you've got to wait till you get to the lower end of the range.

Thank you, Charlie. And as a follow up, could you comment on pricing? Are you raising prices in any of your businesses in the second half? And what has been the behavior especially in the OEM market?

Yes, probably not best to comment on overall pricing or pricing strategies or plans, just because it's a competitive environment and customers don't appreciate that either, because those tend to be individual discussions. But I think the environment overall, again, we're now looking at raw materials that we think later this year start to rise, and so we're always looking at pricing across all of our markets and capturing value with technology change or shifts in the market. But I think that's kind of where we are. I think our plans when we look at second half of the year really don't change in that view right now.

Thank you very much.

Bob Koort, Goldman Sachs.

Good morning, this is Chris Evans on for Bob. Wonder if you could talk about the impact of new plant wins in the year and going forward, you're kind of setting a big number there, and just kind of wondering how these new plant wins might impact your OEM sales versus market?

I think as we've said before as we look at OEM and we have pretty good visibility on where new plants are, there's always a certain amount of business out there that OEMs have out for [RFQ] of market sales. And all I would say there is that as we're going through the year we're pretty much where we would -- we won the business that we thought we'd win, we're competitive on other business we thought we'd be competitive, so I don't think there's any change there on whether we've won more than we thought we should or not or anything else. I would say that we're pretty much where we thought we'd be on business we're going after and business we're winning.

The OEM environment again when you look at car deals, when you look at new plants out there, unlike maybe 3 or 4 years ago where there was a lot of movement and a lot of shift, I would say it's a pretty predictable environment right now. And where we've been winning business has really been on where people are doing model changes or technology changes and maybe even work with them to effect it. But I don't see any major shifts in the market right now. I think we're winning the business we've wanted to, and certainly I have had no losses that were appreciable, even.

Got you, and just want to get your comment on the consternation that many people have over North American SAARs peaking, and just how justified are those worries, and how do you see the growth rates actually trending in that North American market?

I think North America, our view certainly as we came into this year, was we thought it'd be a fairly flat environment on car builds. When you looked at lease rates, cars coming off of leases, customer preferences, you certainly see customer preferences with lower gas prices, structure [is] strong, SUVs, crossover SUVs are strong. So I think it's really more about customer preference shifting.

But we watch, we have very good insights into the aftermarket as well, not only because of refinish, but some of our customers are big in aftermarket sales. And I think overall they feel pretty comfortable about the overall balance in the environment and the balance going forward. I don't think anybody sees a big upside, but right now it's hard to see what the catalyst would be for a large downside either.

I think it's going to be more people's performance, even like ours it could be dictated more by as we go forward, are there more trucks sold, are there more crossover SUVs sold, what the customer preference is. And so for us I think over the next year we see, even if SAARs were to go down a little bit or shift around, we don't think that there's really, that there's not certainly any shift in our business. But it's hard to say what the catalyst would be for a large pullback, unless there was some geopolitical event out there.

And maybe just one real quick one. Could you tell me the impetus for the increased investment spend in performance, and what you're specifically doing?

Sure, so again without divulging too much competitive information, we continue to grow the refinish business, and that continues to be the primary focus of Axalta. Additionally, in industrial we are making very important inroads in that market and plan to grow in that market aggressively. And if you look at the acquisition of Dura Coat and our plan to build a material position in the coil coatings market in North America and over time globally, those are all indicative of the types of areas of focus that we've had in the company.

Thanks guys. Appreciate it.

John Roberts, UBS.

Thank you, and I apologise if this was asked, I've been on another call at the same time but I guess you get the slot to yourself in a quarter or so. I've lost track of the depth of the commercial vehicle decline. Do you think that we need four quarters of stability to lap how far down we've come here, or do you think there's a chance we actually might get a bounce balance before then?

I think if we look at commercial vehicle build volumes, back in 2015, 2014, we were peaking at about 320,000 units in North America heavy-duty truck. We've commented that our guidance was based on 230,000 to 250,000 builds for the North American market. The North America market's at the lower end of that range, from an independent market forecast review at this point. But it is probably still, John to your point, a few quarters at least, before we would see a material uptick back in that market, at least in terms of how we're planning and thinking about things.

Okay. And then Robert, when you mentioned the reduction in nonoperating losses in Latin America in the release, is that just FX related loss or is there something nonoperating that you're referring to?

No. That relates entirely to the impairment of a real estate investment that we have in Latin America.

Okay, got it, and how much was that?

The total amount for this quarter was $10.5 million, and we had previously impaired that asset by about $31 million.

Okay. Thank you.

Laurence Alexander, Jefferies.

Hi, this is Dan Rizzo on for Laurence. With the consolidation, some of the consolidation going on in the industrial end market, is that increasing competitive pressures at all?

This is Robert. It's always been a competitive market. We expect it to continue to be a competitive market, it's not as concentrated a market as refinish or light vehicle or commercial vehicle. But there are a multitude of segments within industrial, and we're really trying to focus on the high margin segments where there are real products that have to be specced in with the customer and have large [modes] from a competitive perspective where we can really bring to bear our competencies and our technology.

Okay. And then with M&A is there any interest in maybe moving downstream, or just diversifying away from what you guys are doing now?

I think right now we view the pipeline as pretty full. I think there's always a danger when you go downstream that you're buying into what some of your customers may view as their marketplace. So I think as long as we continue to see so much room, and specifically performance followed by transportation, we see more than enough to do over the next couple of years in just the core markets we're in, where we believe we can continue to effectively be a consolidator, through both businesses that have decent growth rates and good margins, and we can bring appreciable synergies.

So going downstream to us or even going upstream right now I think the size company we are and the opportunities in front of us, I'm not saying we wouldn't do it if there was opportunistic, but it's not part of our strategy.

All right. Thank you guys.

Before we go to the next question, this is Robert. I did want to make one addition to the answer to John Roberts' question, and that was that the item that you asked about not only includes the impairment, but also includes exchange losses. Thank you.

Mike Harrison, Seaport Global.

Good morning. I was wondering if you could give a little more color on your comment that Q2 came in better than expected, and Q3 sounds like it's going to be a little bit slower in terms of the growth rate relative to Q4. Does that suggest that you think there was some pull forward of demand into Q2 and if so, what markets did that occur in?

I think as we look at the business, as we've commented before, with each quarter especially dealing with the number of businesses that we have been involved, and how distribution between us and between the customers, the amount of inventory, and the timing of price increases unrelated to foreign exchange, just natural business price increases, the pattern of those and when those occur can cause more volume to go through in one quarter versus another.

And I think just in terms of looking at what we think our inventories in the channel as we look at Q2, we just had outperformance in a number of regions, particularly in the refinish market. And as a result of that I think from a perspective of prudence and conservativism, we wouldn't expect -- we would expect that some spillover effect in particular in our July sales.

All right, thank you. And then also was wondering if you could comment on the auto OEM business in China and just with respect to the tax incentive that's in place, my understanding is that's set to expire at the end of the year, pretty widely assumed that they're going to extend it, but what's your view on the tax incentive and what does it mean if they extend it versus letting it expire? Thank you.

I think you described it pretty well. Certainly as the incentive out there, I think the reason most people would believe that they'll extend it is that China is working -- first of all automotive is extremely important to that economy because of the number of jobs and GDP created. But also the fact that it continues to be something, a tool to help keep their economy going and it's an easy one to do. So I think we would agree with you, it will probably be extended.

If it weren't -- we've certainly seeing them change incentives in the past. I think if they don't, given that the China market has already in the last couple of years, kind of come to of a natural balance, I don't think that we see a dramatic effect, but you certainly could see for a quarter or two some readjustment on people who probably would naturally wait to see, okay, can I wait a quarter, can I wait a few months and then will the government put it back in?

We've seen several of those over the past couple of years where the government takes away an incentive or they add something. The customer, no different than here in North America, customers will wait a few months to see, well is it going to be replaced by something else? And then if it isn't, then they move forward with the purchase that they probably would have made anyway, it's just sometimes you can just see a 3 month to 6 month delay in customer behavior.

And we see that happen across all the markets where tax incentives get changed, or insurance premiums get changed, and people change their decision-making. But usually after 3 to 6 months, the discretionary or nondiscretionary purchase that they were going to make, they may go ahead and make.

But I think I tend to lean in your camp where the government needs to keep things moving over there, and this is an easy one for them. It may take some different shape or form or size engine or something like that, but it's hard to see why they would pull it at this point, given they're trying to keep the growth rate up in their economy.

Thanks very much.

At this time I will turn the floor back to management for closing remarks.

Okay, great, well listen, thanks everyone. Hopefully the information was helpful for you in our prepared remarks, and appreciate the really good questions.

Again all in all a good solid quarter for us. As we've highlighted our markets remain fairly healthy. We're certainly looking for some of our markets as we go through the next couple of quarters like Brazil to hopefully stabilize and be a little better, but overall the business remains as Robert and I both pointed out pretty much on track for the year, and as always you've got to watch some of these events going on in Europe over the last month as Brexit gets a lot of attention, people should not slight what's going on in Turkey and some of the events in Germany and France. And the only reason being that I think those types of things in my history seem to affect consumer sentiment.

And while demand always balances back out, there can always be moving parts there. So we watch those closely and not seeing any effect on our business but I think there are things to watch. But overall our markets remain sound, we're pleased with our performance as we go through this year, and look forward to being back and discussing third quarter with you. Thank you.

Thank you. This concludes today's conference. Thank you for your participation. You may now disconnect your lines at this time.