Axalta Coating Systems Ltd (AXTA) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Axalta Coating Systems First Quarter 2017 Earnings Conference Call. Presenting today will be Charlie Shaver, Chairman and Chief Executive Officer; and Robert Bryant, Chief Executive Vice President and Chief Financial Officer. (Operator Instructions)

Today's call is being recorded, and replays will be available through May 5. Those listening after today's call should please take note that any information provided in the 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 for a few introductory comments. Sir, 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 first quarter 2017 financial results conference call.

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

Both our prepared remarks and discussion today may contain forward-looking statements reflecting the company's current view of future events and their potential effect on Axalta's operating and financial performance. These statements involve uncertainties and risks, and actual results may differ materially from those forward-looking statements. Please note that the company is under no obligation to provide updates to these forward-looking statements.

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

I'll now turn the call over to Charlie.

Good morning, everyone, and thanks for joining us today. I'm pleased to give you an update of our first quarter 2017 financial and operating performance.

Our results overall were strong and were led by a robust 8.9% volume growth, continued solid adjusted EBITDA growth and stable margin levels versus last year. We've also continued to make progress on our operating initiatives, including ongoing productivity improvement, and we closed 2 new acquisitions in North America. We also recently signed a larger North America Industrial Wood Coatings transaction subsequent to the quarter.

Overall, we continue to see a favorable global business climate driving stable demand for our products in the vast majority of our markets as well as a stabilization in Latin America that we remarked on last quarter and fairly steady vehicle demand in North America for both Light Vehicle and Commercial Vehicle end markets.

I'd now like to review some of our first quarter highlights and progress on our 2017 priorities. So if you would turn to Slide 3 of our presentation. First quarter financial results met our expectations overall, including strong top line performance and solid bottom line growth. Net sales growth of 7.7% ex FX, which included volume growth of 8.9%, was the strongest in some time.

Organic growth of 3.2% before the 4.5% acquisition contribution was at the higher end of our previously communicated guidance for the full year. We're particularly pleased to see positive organic growth before FX for all 4 of our end markets as certain headwinds seen in 2015 and 2016 bottomed in the fourth quarter of last year. This includes broader Latin America demand as well as areas of Industrial and Commercial Vehicle coatings that tempered growth during 2016.

Broadly, Axalta execution relative to top line growth goals were on track this quarter, led by good results shown in volume contribution from all 4 end markets. Adjusted EBITDA, reported at $203 million, was also very much on track relative to our expectations, with margins of 20.2% relatively consistent with the 20.4% reported in first quarter last year.

Regarding operating highlights for the quarter, our new product innovation initiatives continue to yield positive results. We saw new product introductions across several end markets. Highlights include a new Alesta Lync Dry-on-Dry powder coating for Industrial customers globally; the new Imron 3.1 direct-to-metal coating, also for our global Industrial markets; the FlexBase 7700 clearcoat for sporting equipment; and finally, a new Imron Elite clear coat for Commercial Vehicle applications.

We're also pleased to report that our ongoing productivity initiatives remain on track for at least $50 million in net savings for the year. We continue to pull from a broad list of projects across multiple areas of opportunity. This past quarter, we approved the closure of 2 smaller facilities as part of our overall objective to better utilize capacity at other locations to drive out unnecessary overhead.

Regarding the balance sheet, after significant refinancing actions completed in 2016, which meaningfully reduced our interest expense and provided other benefits, our overall debt profile at March 31 was consistent with year-end. On the cash flow statement, we posted improved year-over-year performance with a lower cash use from operations of $6.5 million in the first quarter versus a use of $13.3 million last year, driven by stronger operating results and reduced interest expense.

This result keeps us on track to meet our free cash flow guidance for 2017 as the first quarter typically sees a seasonal use of cash.

Regarding capital deployment and M&A, we've had a highly eventful quarter, starting with the successful completions of the Ellis Paint Company and Century Industrial Coatings acquisitions in January, which we noted on our last call. Early this month, we also announced our largest transaction to date, with the agreement to purchase the North America Industrial Wood Coatings business of Valspar for $420 million, subject to final working capital adjustments. We're very excited about this transaction for a variety of reasons, foremost being the potential to create strong value for Axalta both near and long term as we use the business as a platform for future growth.

This deal came to us as a result of an agreement to divest the business to satisfy regulatory hurdles to Valspar's merger with Sherwin-Williams. We will operate the business as a separate business unit within our Industrial end market. We're excited about many facets of this transaction as it fits squarely into our strategy to expand our industrial coatings franchise by opportunistically acquiring attractive businesses with strong market positions in their Industrial verticals.

This wood coatings business is a top 3 competitor in the $1.5 billion North America Industrial wood coatings market, with a fully developed set of products and brands. These products are sold directly to manufacturers of building products, cabinets and furniture as well as to distributors through a dedicated sales staff and marketing staff.

We'll also pick up 2 dedicated production facilities as well as research and development labs and look forward to welcoming the employee base of slightly under 400 employees to the Axalta family.

Closing is subject to Federal Trade Commission and Canadian Competition Bureau approval as well as other customary closing conditions. We're planning to finance the transaction with committed secured financing and do not expect the added debt to impact our overall cost of borrowing based on the current term loan market.

Lastly, on capital allocations, we also announced in March an authorization to repurchase up to $675 million worth of Axalta shares on a discretionary basis with no time commitment to completion. We're pleased to have that option in place to take advantage of market opportunities over time in order to create value for our shareholders via this repurchase mechanism. Our approach to this will be based on disciplined view to value, with purchases to be conducted when the share price offers sufficient upside and with acceleration of activity in the event that gap widens.

In summary, we're happy to report a solid first quarter result. We demonstrated strong underlying operating results but also made excellent progress on our key strategic initiatives. This is particularly true in terms of accelerating growth, ongoing productivity improvement and the ability to source, close and integrate acquisitions that are clearly accretive to shareholder value. As you can see, with this growth, we're also steadily widening the aperture over time for further value creation as a leader in key areas of Refinish, Industrial and Transportation Coatings.

Turning to Slide 4. I'd also like to briefly update our progress regarding our key goals and priorities for 2017. I noted our objective of outgrowing our end markets, and this starts with organic growth. Each quarter, I've highlighted some of the new products we've introduced. I would also like to highlight that our Industrial end market saw a high single-digit organic growth in the first quarter coming from strong new product and new customer account additions. And finally, consolidation between coatings market participants has yielded us the wood coatings opportunity this quarter as a key inorganic growth source.

Regarding ongoing productivity initiatives, I've also already noted that we're on track to achieve our full year savings goal. We continue to measure and expect results from the organization each quarter in this area. Alongside our Axalta Way savings goals, we also continue to refine our operating cost discipline. This includes both alignment of operating investment with capital allocation discipline and measured return [hurdles] as well as a focus on improving manufacturing quality and right-first-time metrics to ensure we don't leak incremental profit dollars from poor operating execution. We believe we're making solid strides in both these areas, beginning with applying metrics to many aspects of the business and designing a formalized operating system to maximize quality performance.

In terms of driving customer productivity and innovation, we highlighted this foundational aspect of our business during our Capital Markets Day on February 22, and I believe our robust commitment to R&D and intense focus on customers through our leadership structure underscores this effort.

Looking at capital allocation discipline. We've taken several steps to deploy capital this quarter, including adding our share buyback authorization and now undertaking a larger-size M&A opportunity. We believe that execution on buybacks over time as well as the discipline we'd apply to M&A will steadily improve our overall return on capital, even with a level of capital deployment that exceeds our initial conservative guidance of at least $100 million that we laid out on our February call.

Our M&A pipeline remains robust, and we're not signaling a required pause in either deal activity or potential share repurchases. Our credit metrics and capital headroom remain excellent, giving us substantial maneuvering room for future opportunities. That being said, we'll still maintain our target leverage metrics for the medium term and would intend to return back to that 2.5 to 3x range in the absence of any significant alternative capital uses in the near term.

Our overall flexibility to undertake capital allocation rests, of course, on strong free cash flow generation and a solid balance sheet. We're pleased that Q1 free cash flow remains on track and should continue to support our objectives for growth and return to capital improvement going forward. Appreciate your support and look forward to updating you on our ongoing progress as we move through 2017.

I'll turn it now over to Robert to share some further details on our first quarter results.

Thanks, Charlie, and good morning. Please turn to Slide 5 for a summary of our first quarter consolidated results.

Constant-currency net sales in the quarter increased a strong 7.7% year-over-year, driven by 11% growth in Performance Coatings and 3.2% growth in Transportation Coatings. This growth was composed of 8.9% volume growth, slightly offset by 1.2% lower average selling price and mix realization.

Negative foreign currency translation reduced as-reported net sales by 2.2% in the first quarter compared with the 6.4% impact in the same quarter a year ago and 3% seen last quarter. The majority of the FX impact to net sales came from the euro, the yuan and the Mexican peso.

Axalta's 8.9% volume expansion included organic volume of 4.4%, coupled with 4.5% acquisition contribution, led by Dura Coat and other acquisitions completed over the past 12 months. It's important to highlight that we experienced organic volume growth in all 4 end markets, Refinish, Industrial, Light Vehicle and Commercial, and in all 4 regions. Performance Coatings organic volumes were up mid-single digits, including positive contribution in all regions except Latin America. Transportation Coatings also posted mid-single-digit organic volume growth, notably including sales growth from both Light Vehicle and Commercial Vehicle end markets.

Overall, price and mix realization was a decrement of 1.2% in the first quarter, driven by moderately lower average selling prices in most end markets except Refinish. As expected, we saw some degree of sharing of savings from lower inputs with certain key customers, though we are pleased that this did not preclude a strong overall quarterly profit result. We saw some modest impact from weaker mix in Refinish as well as other end markets.

Adjusted EBITDA in the first quarter of $203 million increased 4.3% from $195 million first quarter of last year. This profit growth was moderated somewhat by a small 20 basis point reduction in adjusted EBITDA margin to 20.2% versus the same quarter a year ago, driven largely by positive volume drop down, some variable cost savings and savings from our productivity enhancement programs, but that was more than offset by unfavorable price and mix effects, foreign exchange impacts and ongoing operating investments.

Moving on to our first quarter Performance Coatings results. First quarter net sales in Performance Coatings increased 11% year-over-year before FX, driven by solid growth in both end markets. Total volume growth of 11% included 6.7% acquisition contribution, with core volume growth of 4.3%, led by solid results in Refinish and accelerated growth in Industrial. Average prices in this segment were consistent with the prior year. Net sales growth as reported was offset by a 3% currency translation impact.

Refinish net sales increased 5.7% ex FX versus last year's first quarter, driven principally by a combination of organic volume and acquisitions and moderate pricing realization. As reported, net sales growth of 2.6% reflected a 3.1% negative foreign currency translation effect.

Constant-currency net sales in our Industrial end market increased an impressive 23.3% year-over-year, including significant contributions to volume growth from Dura Coat and other acquisitions. First quarter organic volumes in Industrial were also up solid mid-single digits as headwinds from Latin America and North America appear to have stabilized. The effect of Industrial average selling prices and mix, however, were detractors.

Performance Coatings generated an adjusted EBITDA of $117 million in Q1 versus $110 million in the year-ago quarter, a 6.2% increase. This was -- result was driven by positive contribution from both organic and inorganic volume growth and moderate variable cost benefit, partially offset by negative currency translation impact and ongoing operating investment spend. Adjusted EBITDA margins of 19.9% compared with 20.3% in last year's Q1, driven by volume growth and positive progress with our productivity initiatives, again offset by mix effects.

Switching now to our first quarter Transportation Coatings results. Transportation Coatings net sales for the first quarter increased 3.2% year-over-year before a negative translational currency impact of 1.1%. Net sales growth included 1.5% contribution from acquisitions during the period. Organic growth of 1.7% in constant currency was driven by low single-digit Light Vehicle growth while we saw consistent sales levels year-over-year in Commercial Vehicle.

Light Vehicle net sales in the quarter increased 4% before foreign currency impacts, with most regions contributing and led by solid above-market growth in EMEA, growth in China as well as a resurgent growth in Latin America, albeit off a lower market base. Stronger demand and production rates in Brazil in the first quarter do seem to indicate a potential stabilization in that market. Asia Pacific also posted mid-single-digit volume growth, though offset by price and mix pressure, as we've highlighted on previous calls.

Commercial Vehicle net sales increased 0.1% ex FX as production volumes lapped the declines that began in the fourth quarter of 2015 and were further supported by more stable orders for both North America and Latin America heavy-duty trucks as well as non-truck commercial vehicles. Stronger Class 8 truck order rates in North America for the last 4 months have led to upwardly revised production forecast for 2017, providing enhanced support for our own forecast this year. Likewise, broader Commercial Vehicle demand appear supportive overall in recent months.

Transportation Coatings has generated first quarter adjusted EBITDA of $86 million versus $85 million last year, with an associated adjusted EBITDA margin of 20.5%, which was about even with the same quarter prior year. Stronger volume drop-through was offset by weaker price and mix contribution while some variable cost tailwind was also offset by increased business investment to support growth.

Now moving on to a few items related to our balance sheet. As of March 31, cash and cash equivalents totaled $439 million, down from $535 million at year-end. Total reported debt was $3.3 billion, resulting in a net debt balance of $2.9 billion. Our net debt to trailing 12 month adjusted EBITDA ratio was 3.1x at quarter end, an uptick from 3x at year-end, including seasonally normal cash use and cash outflow from several M&A transactions completed in the quarter, along with the impact of a stronger euro on our euro principal debt balances.

We're very pleased with our first quarter free cash flow outcome, defined as free cash flow from operations less capital expenditures, which was a use of $38.8 million compared to a use of $53.6 million in Q1 2016. This included moderate volatility in working capital accounts, coming off a strong year-end balance sheet, offset by stronger cash flow from operations.

In total, we are pleased with an overall strong outcome versus last year's first quarter. There was some help as well from slightly lower capital expenditures year-over-year due to the timing of some 2017 CapEx projects. Our team at Axalta continues to focus on prudent capital allocation, and the current leverage ratio is slightly above the 2.5 to 3x medium-term target that we have set and recently achieved.

The Industrial Wood Coatings transaction, once closed, will also slightly bump up our leverage in the near term. We note that our credit metrics remain strong and we maintain our standing leverage targets, but do not look to remain within that range at all times or at the expense of missing strong value-creating deals.

The Industrial Wood Coatings transaction is a perfect example of when we would look to use leverage in a value-creating transaction, following which we would expect the ratio to return to a normal range in the absence of any incremental transactions in the immediate future. Investors should expect this pattern to continue over time, essentially using the stated leverage range as a reference point.

Moving on now to 2017 guidance. We are reconfirming our outlook in all principal components, provided on our February 8 earnings call, which also included the 2 acquisitions completed in January. We would plan to provide an update of this guidance at the time that we close the pending transaction for the Valspar wood coatings business.

In the meantime, for net sales, we expect as-reported net sales growth 1% to 3% or 4% to 6% before currency impact, which is inclusive of the 2% to 3% benefit from completed acquisitions. The 3% FX impact remains unchanged for now, based on the basket of external forecasts, in spite of running slightly below that target as of the first quarter based on composite forecasts for the remainder of the year.

Commenting on end markets in brief. Axalta's Refinish business is expected to remain stable and to support low to mid-single-digit core growth for the full year, with potential upside from share gain and geographic expansion efforts. Our Industrial end market is expected to grow in 2017, with first quarter volumes supportive of this outcome based on new account generation and boosted by M&A contribution from multiple deals. It's encouraging to see that both the energy markets in North America and the broader Latin America Industrial end market appear to have stabilized in the recent months to mitigate further headwinds seen over the last several years.

Light Vehicles anticipated to grow net sales slightly this year, driven by global auto production and Axalta-specific business wins. The first quarter outcome also supports this outlook, with overall global production up 5.8% in the first quarter, coming from upside to earlier forecasts in all 4 regions. We do expect the potential moderation of this rate, however, as the year progresses.

As previously mentioned, Commercial Vehicle market data has also been encouraging in recent months, suggesting that our volumes in this end market could be supported by slightly stronger industry demand than we had earlier assumed. It remains too early to call this a trend, however, and some industry observers note caution in the outlook for truck production based on tepid freight metrics and pressured trucking industry profits.

For adjusted EBITDA, we reiterate our full year range of $930 million to $980 million. In arriving at this range, we note that the first quarter saw solid top line performance, though it was offset in part by weaker mix. We further note that the first quarter did not see any net impact of raw material inflation due largely to inventory timing lags, but we are confident that this will become a more notable factor in the remaining quarters this year if raw materials remain at current price levels.

In recent months, we've seen fairly rapid increases in raw material cost in Asia Pacific, led largely by supply-side considerations, including stricter application of environmental regulation in China and other factors. For this reason, our quarterly phasing expectation is for the remaining quarters' adjusted EBITDA to come in, in a fairly straight-line fashion, reflecting initial pressure from raw material inflation in Q2, which would then be mitigated in the remaining quarters with pricing actions that we have initiated and will continue to implement in cooperation with our customers.

For interest expense, we maintain our $150 million guidance. It bears reminding that we maintain interest rate swaps and caps on our floating-rate debt, which offer a hedge to our interest rate exposure. In March, we executed new interest rate caps which become effective when our current swaps and caps mature at the end of the third quarter. These caps will remain in place through the end of 2019.

Our adjusted effective income tax rate is still expected to be between 22% and 24%. The lower as-adjusted effective tax rate in the first quarter included the related impact of the adoption of the accounting standard for stock-based compensation, which we adopted in the fourth quarter of 2016. We are on track for our range, excluding this onetime benefit. Other line items also remain unchanged, including capital expenditures of roughly $160 million, depreciation and amortization of approximately $335 million and free cash flow of $440 million to $480 million.

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

(Operator Instructions) Our first question comes from Robert Koort with Goldman Sachs.

Charlie, I was wondering if you could talk a little bit -- you discussed -- I think Robert said towards the end there some pricing actions. The pricing pressure you've seen, has that been formulaic? Or has that been reactive to what's going on in the marketplace?

Yes. Right now, what we've seen -- most of the pricing pressure we've seen, certainly, there has been a little bit because you've seen oil go up over $50 over the past 2 quarters here, and we see a little bit from that standpoint. But actually, most of our pricing pressure outside of what's been well documented around TiO2 has really been more supply-demand related. We've seen certain products, both in isocyanates and different resins in China, some of that's been outages that suppliers have had, some of it has been tightening supply and demand. And nothing that would have been formulaic around oil or gas. To a large extent, I think we'll continue to see some of that as we go -- as Robert mentioned in his comments, as we go into second quarter. And so some of that is pricing we will now go get, as we mentioned, and it takes us only a quarter or 2 to get that. To the extent it's oil or gas related, as you correctly point out, in many cases, it's formulaic, and it just moves through the system. But what we have seen in a series of our -- some of our commodities and specialties, where it's been more supply-demand related, starting in the fourth quarter last year, some of that will abate as those suppliers get back up and supply-demand gets more balanced. But in other cases, we expect some of those raw material prices to stay with us. In which case, again, we're moving that -- we'll move that through the system over the next quarter or 2.

And then if I could ask, I know you're going to give updated guidance post the Valspar transaction closure approval, but can you talk a little bit about if there are any technology overlaps or synergies with that particular business line and what you do today?

Yes. Actually, as we got into the business, we were actually pretty excited about that. A lot of the technology we have around low VOC, color and in some of the resins technology, we believe we'll be able to apply to that business. So innovation -- there continues to be innovation in the wood business, not just in North America but globally, and we believe we'll be able to bring some of that to the table. We do -- we are -- as part of the business, we are getting the Industrial wood R&D organization, which is complete, all the chemists and all the engineers that go with that as well as the R&D head. So we feel like we've got a great competency already. And I think in our engagement with those folks up to date, although it's been limited until we own the business, we believe that there's some great sharing that we can do there. As many of you know, we spend about 4% of sales in R&D and have about 1,500 people scattered around the world. So we're pretty excited about, long term, where we can take some of that.

Our next question comes from Arun Viswanathan from RBC Capital Markets.

So first question is just -- it sounded like you guys trended towards the upper end of your top line guidance. Maybe you can just discuss how that happened and which markets turned out slightly better than you expected.

Arun, this is Robert. I'd say, overall, when we look at our 4 end markets, Refinish performed extremely well in Q1. Our Industrial business overall also performed well. Our Light Vehicle business overall also performed well from a volumetric perspective. We did see some continued price pressure, in particular in the Asia Pacific region, which pulled back -- detracted a little bit from some of that volume growth. And then in Commercial Vehicle, we also saw some stabilization in North America as well as Latin America in the heavy-duty truck market, which was also helpful to first quarter results.

And you also mentioned some mix -- lower mix in certain of your markets. Maybe you could just elaborate on that. Have you seen kind of a trade down to less premium products in Refinish? And then you mentioned some concessions in OEM. Can you just discuss that a little bit more?

Sure. So Refinish mix in Q1, although not dramatic by any means, we have seen more sell-through of mainstream and economy products in certain markets, notably in China, somewhat in the U.S. and also in EMEA in some of the periphery countries. And collectively, this has resulted in a slightly more muted price mix picture, though still quite positive on a net basis. I think as we continue to grow our presence in mainstream and economy products over time, we would expect this to counterbalance an otherwise strong mix that we see from higher-end professional body shop sell-through in other markets. That's with regard to Refinish. With regard to Industrial, we did see lower price mix in Q1, and that was primarily due to a shift in Asia Pacific, particularly in China, and to a lesser extent, in EMEA to some lower-priced products and energy solutions, along with a slightly weaker mix in powder. And then with regard to Light Vehicle, the pricing pressure that we saw in Q4 and that we saw continuing to Q1 was consistent with what we had budgeted and planned for at the beginning of the year. I think we hope that as the raw material picture here turns the other way, we as well as many other companies have announced price increases to offset what we're not able to absorb through additional cost and productivity, and we're partnering with our customers to ensure the best outcome for both us as a supplier and they as a customer.

One quick point I'd make on that, just on your question about customer shifting. We don't actually see customers shifting to lower-priced products. These are just a different mix of customers who are purchasing in the quarter. So overall, in any region of the world where we have premium customers or mainstream customers, we don't -- they don't typically shift one way or the other. They run the products they have. So what you do see with Chemspec acquisition and some of the things we've done over the past year, you -- we will continue to see some of these mainstream products grow with us, but that is a different channel of the market than some of our premium customers.

Our next question comes from Christopher Parkinson with Crédit Suisse.

Just very quickly returning to Transportation Coatings. Can you just take us on a quick walk through around the world and run us through what you're seeing in the key geographic trends, puts and takes on your volume outlook in both Light and Commercial Vehicle? You hit on a decent amount in North America, but what about the rest of the globe?

Chris, this is Robert. Just to walk through a little bit of what we saw in the market. Again, we saw -- when you look at our performance versus the statistics published by IHS, we did see our performance in excess of what the market was in North America. In Asia Pacific, we also experienced strong growth and in line with the market. EMEA also, in a nice turn compared to the previous quarter, EMEA also performed better in the first quarter for us in Light Vehicle than what we had seen in the fourth quarter. And then lastly, in Latin America, we did see good performance. But when you weight it across Mexico, South America and Brazil, our growth was actually slightly lower than what the market composite was, but we did see a nice turn in that business there that we hope will be a sustained trend. I think some of our commentary looking forward for the rest of the year was, if you look at some of the IHS forecasts for the full year, they're projecting global volume growth of about 2% compared to the 5.8% that we are seeing in the first quarter, and hence, some of our commentary around potentially seeing that growth rate slow down slightly in certain regions during the course of the year. That's not a given. That's just what the external market forecasters are laying out at the moment.

Great. And can you just quickly update investors or simply walk through your free cash flow guidance, just in the context of the employee separation costs, facility closures, et cetera, and how we should think about the longer-term net income bridge in terms of potential cash generation? And then if there's anything new on your net working capital targets, that would also be appreciated.

So on the cash flow guidance of $440 million to $480 million, we continue from an EBITDA perspective to see a very positive projection for the rest of the year. And when we look at the other items to get to our free cash flow guidance for the full year, we remain quite, quite confident in those numbers. Don't see anything really material changing in that regard. And with regard to working capital, if you look at our working capital performance in the first quarter, we were at 14.8% of net sales compared to an expectation -- or a prior year of 15.2%. So again, we're more or less in line with where we thought we would be given our working capital outlook for the year.

Our next question comes from Ghansham Panjabi with Robert W. Baird.

Robert, just to clarify comments on EBITDA progression for 2017. Are you expecting 2Q EBITDA to grow on a year-over-year basis given the raw material cost increases that you referred to?

So I think what we -- although we don't provide quarterly guidance, we did want to indicate how we saw the development from a quarterly perspective of EBITDA for the remainder of the year. I think our expectation is that in Q2, we will see somewhat of an impact from higher raw materials, which will hit us at the same time that we have implemented price increases. As you know, there's a relatively short lag in performance. But in transportation, the lag between when those price effects actually come into effect can be several months. And therefore, what we expect to see is a little bit of a hit in that in the second quarter and then expect to make that up in the second half of the year.

Okay. And just in terms of your comments on Latin America, which you seem a little bit more optimistic on, so what do you sort of see in the market there? Is the improvement just a puncture -- function of easier comparisons from last couple of years? Or do you see a broader recovery that's starting to unfold there?

So I think when we talk about Latin America, again, we have to be careful about making generalizations. When we talk about Mexico, Mexico continues to perform extremely, extremely well in all 4 of our end markets. It's really South America, and within that, Brazil, that for us is the one that really moves the needle. It seems like Brazil was potentially starting to turn a corner. We do see lower inflation, improved confidence and a more accommodative monetary policy. But we continue to believe that it's going to be more like 2018 before we see anything more material than marginal growth. The ongoing correction of a deep macroeconomic, both fiscal and external, imbalance, that will, we believe, necessitate kind of a slow and a gradual recovery. So I think our view on Brazil is it feels like it's starting to bottom. We can't say that for sure, but we are seeing some encouraging data out of Brazil, not only on the Light Vehicle side of the business but also on the Refinish and Industrial side of the business. But we expect that path upward not to be a sharp bounce back but rather a gradual improvement in the best case.

Okay. And just one final one for Charlie, if I could. Charlie, you commented on the Valspar acquisition as a platform for future growth. Can you just expand on that aspect as it relates to your overall vision for your industrial coatings segment over time?

Yes, sure. Again, this business we're acquiring today is in the industrial side of the business, it's not retail. We like that because it's very similar to our business model that we run for other segments in Industrial. Post this acquisition, our Industrial business will be about $1.1 billion in sales for us. Again, it's a function of a couple of other acquisitions we've done that the rest of the growth comes from. But it does allow us then the platform to think about wood on a more global sense and also other adjacencies. But it fits in really well when we look at type of customers that we sell into, they're the larger industrial building products customers, but also the distribution model. So we think there'll be, for additional distributors that we're taking on, additional pull-through for other industrial products as well as some of the folks in other regions are getting pretty excited for us about being able to offer some of these products. Because we've got manufacturing in other parts of the world, that also allows us to take some of that technology on a faster sense than we would have into other regions of the world.

Our next question comes from David Begleiter with Deutsche Bank.

Charlie, on the M&A front, how is the pipeline now going forward? Is anything left in there? Are you constrained, at least in the near term, given the Valspar acquisition and your debt levels?

Yes. It's a good question. I think Robert touched on it briefly in his comments. But our pipeline remains pretty full. I think, in some cases, that's a function of some of our other -- some of the other competitors being busy on other things. But also, I think it's also a function of, when we look at the activity more in the Industrial or the performance segment for us, there's still a lot of consolidation to go around globally. So I think we're not lacking for things to work on and things to look at. Clearly, valuation, we continue to stay disciplined on valuation. And so I think for the next year -- certainly for the next year, we think we have more than enough to work on in -- as far as the bolt-ons go. I think we also want to maintain, though, plenty of liquidity for these type of opportunistic things that come up, like the wood business. So we'll continue -- I think we've given guidance that for bolt-ons, we'd like to add $100 million to $150 million top line a year, and I think we'll stay true to that course as we go on through this year and into the next year.

And just on Refinish, Charlie, how are pricing trends in that business? And how do you look for them going forward?

So on the Refinish, around the world, we continue to have our normal cadence on price increases. Again, for this year, some of that, certainly, we'll have to look at, as always, for currency movements and then also raw material movements. But we continue to get price in Refinish. As we've talked about on prior calls, that tends to be a little bit choppy as you go through the year because of the cadence we use. And I think, this year, we'll have to look at raw materials in some regions. And should we see escalation that stays up there, again, more supply-demand related than oil and gas, I think we may have to look at a different level of price increases or in some cases, maybe a second one, in some products or certain brands as we go through the year. But I think the reality there is those are pretty disciplined markets. But most importantly, when you look at the coatings space in Refinish, there's not any one who's really back-integrated that can be opportunistic in this kind of situation. So I think all of us will have to get price as raws go up, and I think it's a pretty level playing field, whether it's a regional producer or whether it's a multinational. So I think we'll continue to get price. In some cases, we may have to go for more this year. We'll just have to wait and see as the first and second quarter develop, as Robert mentioned. We do believe some of this raw material price pressure will stay with us.

Our next question comes from Kevin McCarthy with Vertical Research Partners.

Charlie, with regard to the Valspar wood coatings transaction, I was wondering if you could comment on 2 things: first, how the margin profile of the acquired business compares to Axalta's overall corporate margin; and then second, how we should think about synergy opportunities as a percent of the acquired sales.

Yes. First of all, on the margin, we really can't comment on that one. We don't own the business. But two, we certainly don't even run it at this point. So I think we probably better just hold off on that one and defer that one. But I think you could probably go back into some of the Valspar prior comments over the past year or 2 about that business and deduce kind of the industrial-type margin that it has. Remember, it's part of a larger wood business that they had. So you'd have to go back in there and dig that out. As far as the synergies, synergies for us are not operational in nature. The synergies will be more growth related, and there will be more revenue as we look to add additional products from our portfolio into some of their distribution chain. We're probably not ready to roll out a number around that right now, but there clearly are some in North America. And then again, longer term, we see some global revenue growth from some of these similar products that we'll take outside the U.S.

Okay. And then maybe a follow-up on Performance Coatings. I think you indicated on Slide 6 that your pricing was flat on a year-over-year basis. To go back to 4Q, it looks like you were running north of 5%. And I was wondering if you could help us reconcile how that has decelerated over the last quarter or -- so was it a function of the comparable period, for example? Or is something going on perhaps on the Industrial side?

Kevin, this is Robert. I hate to kind of restate the prior answer in terms of the Industrial price/mix pressure that we saw in Q1, in particular in Asia Pacific, and then also the mix effects that we meant -- that we mentioned primarily in Industrial but also in Refinish. But those, again, were the main drivers of that change.

Our next question comes from P.J. Juvekar with Citi.

Charlie, where are we in the commercial vehicle cycle? Looks like things are improving there after double-digit declines last year. And the turnaround you are seeing, what is upside from that in 2017 in terms of EBITDA?

Yes. You want to...

P.J., this is Robert. I'll step in perhaps but just with some initial comments. For us, our biggest market in Commercial Vehicle is obviously North America heavy-duty truck. And I think, as you've seen the forecast from ACT get revised up from 2,003 (sic) [ 203,000 ] units for the year up to 217,000 units, and there are some speculation that those builds may move up from there. LMC also puts out some forecast, although not exactly the same, on the same relative trajectory. So overall, in that business, I think we hope that we see some return to growth in North America. I think we see potentially early -- so we'd be early cycle, you might think about that, in North America. EMEA is -- in Europe, it's a mixture of different markets, but primarily mid-cycle, pretty good growth, pretty good performance. And then, of course, the big opportunity, as always, for us is China, where we continue to have a somewhat nascent position in that market, but we're bringing additional resources on the commercial side as well as additional products to China. And those just take a while to gain traction, but we're confident that, through those actions as well as our joint venture with Kinlita in that market, that we'll be successful in growing that market over a longer period of time. And then lastly, we did see some recuperation in the heavy-duty truck market in Latin America, and that includes both Mexico and a little bit of Brazil as well.

And on Refinish, you talked about price. But can you talk a little bit about volumes in terms of what you're seeing in terms of miles driven or number of accidents on the road?

Yes. So we continue to see -- on miles driven, when you look (inaudible), it's still pretty consistent, at least the data through March, at about 3% up year-over-year. I think that's a function of continued low fuel prices and also just better miles per gallon per car. Fuel is just less of the essential expenditure of the homeowner, and with the newer car sales, people are buying new cars and driving them. So what does that mean for Refinish? What it means is, I think, we'll continue to see probably the Refinish market grow about 2% this year in North America, when you got good new cars out on the road. Unfortunately, we are seeing an uptick in the accident rate, severity rate and, most disturbingly, fatalities the last couple of years and more charge-offs. So I would have expected the Refinish market to be up more like 3%, given the car sales that we've seen in the last couple of years. However, what I think is taking a little bit of toll on that is you are having higher severity rate, which means more charge-offs. So as we talked with a lot of our larger body shops, you just have more totals. Now that's being reflected in people's interest premiums and everything else. I think we'll continue to see a good robust market, probably grows about 2%. Clearly, we're growing faster than that with some of the consolidation going on in the industry. In Europe, same thing, grow about 1% this year. China, we think -- China Refinish market actually last year was flat overall as the new insurance constraints kicked in on the consumer. But we've seen that market tick back up in the last 2 quarters here, probably returning back to more of like a 4% to 5% annual growth. So I think when you look at 93 million vehicles being built around the world this year, up a couple of percent, I think the short-term future certainly for Refinish looks stable to growth in almost every region.

Great. Just quickly, how big is China for you in Refinish? Because that's the market that seems to be growing.

Yes. So just -- I mean, we don't disclose sales, but I think when you look at -- we're about 16% market share of the total Refinish market there, we believe, based on external data that's out there. And we continue to grow that business about 10% a year.

Our next question comes from Laurence Alexander with Jefferies.

Can you characterize a little bit the degree of fragmentation that you're seeing in China in terms of the quality of assets that are available? Like how many of the -- or how much of the market is good quality assets that you would like to have a relationship with? And then is it getting any easier acquiring control of those assets? And then the 10% figure that you just cited, is that an organic number? Or is that including sort of small bolt-on M&A?

So Laurence, I'll take the first one, and Charlie will take the second one. On the first one, in terms of what we're seeing from an M&A pipeline, there are a number of companies in the mainstream and also, especially, the economy space out there. They tend to be smaller companies in sort of the 10 to -- at the large size, maybe $50 million in sales top line. We continue to look at those acquisitions and to pursue those acquisitions. I would say that from a valuation perspective, sellers' expectations remain quite high. And they're not only looking at sort of the 15 or 16x multiples that we're seeing for large deals in -- you might say, in the U.S. or in Europe for transactional reference. They're also looking at how Asian coatings players are trading, and some of them are trading at 20x EBITDA or more. So sometimes their valuation expectation can be out of sync with where we are in terms of the relatively disciplined approach that we take to valuation. So it continues to be an area of focus for us. But in terms of quality assets, there are quality assets. It's just a question of getting those assets at a price that would allow us to achieve an appropriate return.

Yes. And on your question about the growth, all of our growth in Refinish to date has been organic. That's coming from a couple of sources. One is we've introduced a couple of mainstream products there. It's also coming from additional distribution points out in Tier 2 and Tier 3 cities and then also, growth from conversion of solvent-borne shops to waterborne. And we offer our Spies Hecker there waterborne -- in the country, which is the premium waterborne that we have out there. So it's actually coming from several different segments. Back to Robert's point, I think we will -- you will see us do some bolt-ons in China. We spent a couple of years looking at a lot of things. In some cases, either the assets -- back to your question about quality of assets. In some cases, some of their operations were not in chemical parks. As many of you know, in China, dangerous goods transfer, chemical operations, under a lot of scrutiny. So we're being very careful that we don't take on unnecessarily any liability. However, in some cases, we may do a couple of bolt-ons where we'll either transfer manufacturing to one of our existing plants or -- as all of you know, we've announced our next expansion at Nanjing, and some of it may play into just being sited there over time. The quality of assets, in some cases, is good. But in other cases, they're good assets but they're not located in chemical parks or there's issues with logistics and transportation that we're working through. But you will see us probably do 1 or 2 acquisitions over the next year, 1.5 years. As Robert pointed out, people do have fairly heavy expectations on valuation, but we think we're now narrowing in on the ones that we like.

And then secondly, I don't want to get into the ins and outs of competitor behavior. This is more of a technology positioning question. The Chemetall transaction, does that, longer term, change the landscape that had been a long-term secular trend of market share gains in Refinish, as an opportunity for yourselves and some -- one of your competitors? I mean, is there a change in the technology landscape because of who owns those assets?

Yes. Did you mean Chemetall or another player?

Yes.

I mean, chemical is -- Chemetall is pretreatment, and I don't think that changes anything out there. I think that Chemetall is pretreatment, whether that's an OEM or refinish or industrial. There are other suppliers out there. I don't think -- bundling of pretreatment with coatings, it's pretty rare that, that actually really provides any competitive advantage. Obviously, we have relationships with other pretreaters, where we need to go in with someone to provide a total solution. But I don't think that there's any -- we certainly don't have any interest in getting off into pretreatment. We think there's much better places to deploy our capital.

Our last question for today will be Duffy Fischer with Barclays.

First question is just around the stock buyback, kind of the appetite for that. The tone seems a little bit lukewarm on that. Is this more like you want to put in a floor if the stock were to get hit for some reason? Or how volatile will be the purchases be if we kind of take a 2- or 3-year view on this program?

So Duffy, with only about 2 weeks left in the quarter after our board approved the actual plan, it's just simply that, in the first quarter at least, price conditions were not met in that relatively short time window to actually initiate any share purchases. Our strategy, similar to M&A, is to remain disciplined on our buyback algorithm. And particularly, in light of the Valspar transaction that we had potentially at the door as well as other M&A activity, how we thought about what those thresholds would have to be in the plan that we put in place for the first quarter certainly had an impact on the price levels that we set that plan to activate and accelerates purchasing at lower prices and slows down at higher prices, obviously. So again, our plan is to buy back stock, but we'll always look at what is the best return for our shareholders in terms of whether it's putting that money into an M&A transaction or an internal productivity CapEx project or something of that nature.

Okay. And then just as a tangential to that, is it fair to assume the big acquisition you just announced would be at a discount to your own traded multiple?

Duffy, I think, at this point, we would hesitate to comment on anything related to valuation, just given where we are in that process and given the NDA in place that we have with Sherwin and Valspar.

At this time, I would like to turn the call back over to management for closing comments.

Yes. Thanks, everyone. And really appreciate -- again, as we've highlighted, a good quarter for us, good solid start. Our markets remain in good shape as we head into the middle of the year here.

I think as -- like you probably heard from some of the other players in the marketplace, we do see price creeping in on the raw material side. We'll be dealing with that. I think we remain in markets that, over time, you certainly can continue to pass that on through. We have to work closely with our customers. And as you know, this business has 120,000 different customers in the Axalta base, so there's a lot of people to work with and move it through. We're confident we will.

Fortunately, we've taken proactive measures, in many cases, in our positions on these raw materials. So we remain in good supply with multiple sources, and we'll be leveraging that as best we can as we go through the year.

But overall, very pleased with the first quarter. I think it's a good start in what continues to be a fairly slow macro environment out there globally. But I think we're navigating it well. We're excited about getting the wood business and then excited to talk to you a little bit more about it once we close. Again, I think the public comments around that had been people hope to -- that the other parties hope to get their larger transaction closed here sometime in the second quarter. And assuming that happens, then we follow off the back of that.

So a lot more exciting things to come. And again, as always, thanks for your support and your questions.

This concludes today's teleconference. You may disconnect your lines at this time, and have a great day.