Axalta Coating Systems Ltd (AXTA) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Axalta Coating Systems' Earnings Report Conference Call. (Operator Instructions) Today's call is being recorded and replays will be available through February 13. Those listening after today's call should please take note that the information provided in the recording will not be updated and, therefore, may no longer be current.

I would now like to turn the call over to Chris Mecray for a few introductory remarks. Please go ahead, sir.

Thank you, and good morning. This is Chris Mecray, Axalta's VP of Investor Relations. We appreciate your continued interest in Axalta, and welcome you to our fourth quarter and full year 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 will 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 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, and thank you all for joining us to review our fourth quarter and full year 2017 performance and add some color to our 2018 outlook based on our read of current market conditions, which we view as fundamentally stable across all of our end markets.

Fourth quarter results met or exceeded our expectations that we laid out on the October and December outlook calls. It was a fairly strong fourth quarter result, including 10% top line growth, excluding currency, positive organic growth, a favorable inflection in average pricing and strong cash flow. Grounded in broadly supportive market demand, we believe 2018 should produce fairly solid financial results going forward. While we face ongoing challenges from input price inflation, which is common to the whole coatings market, we have plans in place to address this and an objective to neutralize the impact for the full year.

Turning to Page 3 in our posted slide deck. I'd like to review some of the highlights from the period. We grew the fourth quarter net sales by 13.4% year-over-year, which included 8.6% acquisition contribution. While strong relative to the coatings group, our organic result was impacted by residual distributor working capital adjustments in North America Refinish, largely in October.

Beyond this anticipated effect, the business was in line with expected outcomes in the period and showed strong underlying trends in nearly all of our business lines. Net price also turned positive in the fourth quarter following several quarters of tougher comps. And this comes as a result of a myriad of pricing-related initiatives needed to address rising input cost across our business.

Finally, we also saw a 3.5% FX tailwind in the fourth quarter and little overall impact for the full year as FX has turned from an aggressive and insidious headwind for the last 3 to 4 years to now a moderate tailwind, which we welcome as a sign of a stabilizing global economy and improved health in emerging markets. For Axalta, this is particularly helpful in countries such as Brazil, where we're leaders in Light Vehicle as well as a major Refinish player.

Axalta's fourth quarter adjusted EBITDA of $245 million increased 9% from $225 million in the prior year quarter while margins declined slightly to 21.1% largely from low-teens year-over-year inflation in raw material costs, offset by lower operating cost from our productivity initiatives and a moderate FX tailwind. Axalta Way savings accelerated as planned in the final quarter of the year. And acquisitions also contributed substantially to profit growth in the period.

For the full year 2017, we grew net sales by 7%, including a slight benefit from FX tailwind and including nearly $300 million or 7.4% acquisition contribution. Adjusted EBITDA was $885 million, a bit below the $902 million reported in 2016, largely driven by North America Performance Coatings volume shortfall that primarily impacted the third quarter as well as the year-over-year headwind from the loss of the Venezuela contribution due to our deconsolidation in May of 2017.

As such, the essentially flat organic top line result last year masked some very positive elements of the business, including strong Industrial end market growth, accelerated Commercial Vehicle growth, ongoing increases in Light Vehicle volume and supportive growth seen in our Refinish markets, excluding the noted working capital adjustments.

Focusing briefly on the end markets. For Refinish, overall core growth in the fourth quarter excluding North America was nicely positive, including accelerated growth from EMEA and ongoing growth in Asia-Pacific. We also saw positive price performance globally in the low- to mid-single digits, a solid confirmation that pricing trends remain on track. Axalta's overall presence in the global Refinish market remains strong, where we're the global leader and continue to gain share in 2017 based on total body shop served globally as well as in North America.

Meanwhile, the market itself remains stable and growing based on both growth of the car fleet and globally steady accident rates. We continue to outgrow the market by broadening our reach in both product and geographic terms while benefiting from customer preference over time for the most productive and advanced Refinish technologies.

Axalta's Industrial end market continues to show strong performance in the fourth quarter with a 57% reported net sales growth, including organic growth in the high single digits and positive contribution from all regions. Key growth contributors were broad-based and tend to conform with global macro industrial acceleration, including strong general industrial demand throughout our global powder business.

Light Vehicle net sales declined slightly in the period with the same drivers that we experienced in the third quarter, including lower volumes from certain plants in North America and some impact from previous price concessions that were given to select OEMs earlier in 2017. Total price/mix decrement in the fourth quarter was less than Q3, offering confirmation that we're working on addressing some headwinds we had faced earlier in the year. Broad demand for autos appear to be holding steady and with genuine market data coming in line or ahead of estimates in each region. We continue to expect flat to low single-digit growth in auto production globally throughout 2018.

Commercial Vehicle posted accelerating net sales growth with our fourth quarter top line growth of 20.4%, showing strong year-over-year and sequential improvement. Volume growth came in all regions and price/mix was nearly flat, also a notable sequential improvement. Our Commercial Vehicle business is benefiting from strongly rebounding global truck volumes while other non-truck markets also remain robust.

On Page 4, turning to the balance sheet and cash flows. Our free cash flow in the fourth quarter of $196 million was excellent, resulting in over $415 million for the full year, which was slightly above the high end of our revised guidance from October. We had forecasted some improvement by the year-end. And our result allowed our working capital ratios to finish the year ahead of plan and better than our 2016 metrics. We ended the year with our net debt-to-trailing 12-month adjusted EBITDA of 3.6x, down from 3.8x as of the third quarter, due to the increase in cash balances at year-end, offset slightly by a stronger euro impacting our euro-denominated debt.

Regarding capital deployment. Highlights for the year include the application of over $564 million in capital to 8 total acquisitions, including the wood coatings carve-out from Valspar. We also repurchased $58.4 million in Axalta stock in 2017 at an average price of $29.31 per share. There was one small M&A transaction and no share buybacks during the fourth quarter. Regarding the wood coatings integration, we met our target of largely completing the necessary carve-out activities by year-end, which was a considerable effort by our team. And I'm very pleased with the initial performance of that business as part of our Axalta Industrial portfolio.

Regarding operating highlights across Axalta's business. We're pleased that we met our Axalta Way targets for the year, which also completed our 3-year target set shortly after our IPO of achieving $200 million in run rate savings exiting 2017. Our focus on productivity and cost savings remains sharp and doubly so today due to the pressures we faced from raw material inflation. You'll note that we recorded a substantial charge in the quarter for severance-related activities, which will result in incremental headcount reduction in 2018 in part to address inflationary raw material concerns while also continuing our overall process of cost structure optimization.

In terms of innovation highlights, we met our goal for 2017 to introduce at least 250 new products. And we expect a similar number of new launches to take place in 2018, given the robust pipeline of development still under way. In the fourth quarter, some notable examples of recent new products include: introducing a new insulating varnish for the electrical steel coatings industry, which we call Voltatex 1230; announcing the launch of our first shatterproof glass coating; an expanded Tufcote economy series with epoxy products for the industrial market; and launching a series of a new high-performance protective railcar coatings.

In our Refinish business, we recently launched new waterborne systems into the mainstream markets in multiple regions of the world. The growth of our Syrox line in EMEA as well as in China has surpassed our expectations to date, though still very early stages at this point. The launch of Cromax EZ in North America, another high-performance waterborne system targeting new and incremental customers for Axalta, represents a highly exciting new product line for us.

For Light Vehicle, we're just launching a new paint shop for an OEM customer that dramatically lowers cure temperatures by around 50 degrees, utilizing our new waterborne technologies. This launch increases throughput, lowers cost for the customer and supports the OEM drive towards lightweighting and use of alternative substrates.

The market is clearly beginning to also focus on technologies being applied to future vehicles, including autonomous vehicles. Axalta has an active pipeline of technology fit to serve this market, including developing coatings with enhanced infrared reflectivity as well as applying our leading position in electric motor and related coatings to meet the needs of electric vehicles as they begin to increase fleet penetration rates. Axalta will continue to develop technology to meet the future needs across this spectrum of applications for the car of the future.

So just a few examples, among many, and these new product and technology highlights are representative of Axalta's intent to continue a high focus on R&D and technical support that help form the foundation of our company's success. Our investment here is witnessed by the opening of our major Asia-Pacific Technology Center in Shanghai in 2017 as well as by 9 total R&D training centers that we completed this past year in locations such as Dubai and North Carolina here in North America.

In summary, we're pleased that Axalta's fourth quarter results met our revised expectations, given strong execution across nearly all of our business lines, while also producing strong cash flow and an improved balance sheet metrics at year-end. We also believe this result sets us up well for 2018, which also seems supported currently by stable end market demand. The magnitude of the raw material inflation will be a key driver of the year. And we plan to address this headwind with a combination of pricing actions across our entire business as well as incremental cost reduction to offset any price cost gap that may otherwise exist.

Robert would now like to share some further detail on our results.

Thank you, Charlie, and good morning, everybody. Turning to Slide 5 of our investor presentation. Q4 consolidated constant currency net sales increased 9.9% year-over-year, including robust 16.5% growth in Performance Coatings, while Transportation Coatings was flat year-over-year. Growth in Q4 was driven in large part by 8.6% acquisition contribution.

Positive organic volume was slightly under 1% and was propelled by strong growth in Industrial and Commercial Vehicle for most regions, offset by the distributor working capital adjustment that temporarily impacted volumes in North America Refinish in Q3 and October. Notably overall price realization turned positive in Q4, an encouraging inflection point.

Foreign currency translation benefit accelerated from third quarter to 3.5% in Q4, which we welcome because it tends to indicate stronger global demand conditions. Adjusted EBITDA of $245 million in Q4 increased 9.3% from last year with associated margins of 21.1% versus 21.9% last year, reflecting the impact of higher variable cost pressure and business mix shifts due to acquisitions, though largely offset by lower operating expenses.

Turning now to Performance Coatings. Performance Coatings Q4 net sales increased 20.7% year-over-year, including an FX benefit of 4.2%, driven by a 14.5% growth from acquisition contribution and 2.5% higher average selling prices. For Refinish, Q4 net sales increased by 4.7%, including a 4.1% FX tailwind driven by lower volumes in North America from remaining distributor working capital adjustments in the beginning of the period but offset by ongoing volume growth from EMEA and continued growth in Asia Pacific.

Industrial net sales increased 56.8% year-over-year, including substantial acquisition contribution and a 4% FX benefit. Industrial organic net sales also saw very strong performance, growing high single digits with positive contribution from all regions. Average price/mix also increased in the quarter following several negative comparisons in 2017. This stemmed from numerous pricing actions across the business, which began to contribute to offsetting raw material inflation.

Performance Coatings generated Q4 adjusted EBITDA of $165 million, a 21.2% year-over-year increase. Drivers included completed acquisitions, significantly lower operating expense and a net pricing tailwind, offset partly by higher raw material input inflation, which picked up as anticipated in the period. Q4 adjusted EBITDA margins of 22.6% were consistent with 22.5% last year.

Moving on to Transportation Coatings. Transportation Coatings Q4 net sales increased 2.8% year-over-year, including a currency benefit of 2.6% with strong growth in Commercial Vehicle, offset by a slight decline in Light Vehicle similar to last quarter. Segment volumes were up low single digits in the quarter, offset by slightly lower average pricing.

Light Vehicle Q4 net sales decreased 1.2%, including a 2.6% FX tailwind. Volumes declined low single digits, largely impacted by North America, while EMEA saw improved volumes. Average pricing continued to reflect previously noted concession to select customers, but price decreases moderated sequentially in an encouraging sign of inflection.

Commercial Vehicle net sales increased an impressive 20.4%, including a moderate FX benefit, driven by continued strength in North America truck production and other vehicle markets. Commercial Vehicle production globally increased 3.8% in Q4 and even stronger in North America. Current forecasts assume a slight leveling off globally in 2018 but with supportive 10% growth from North America and ongoing growth in EMEA, regions where Axalta remains overweight. Order rates for non-truck customers also remained strong, particularly in bus and rail segments globally.

Transportation Coatings generated Q4 adjusted EBITDA of $80 million versus $88 million last year with associated margins of 18.5% versus 20.9% last year. The comparison was driven by lower average pricing and raw material inflation, partially offset by reduced operating expenses and higher volumes.

Moving on to our full year 2017 consolidated results on Page 8. For the full year of 2017, Axalta's net sales grew 7% or 6.6%, excluding the impact of foreign currency. This growth was driven by mergers and acquisitions as well as strong growth in key areas of the business, including Industrial and Commercial Vehicle. For M&A, we closed 8 transactions last year, spending well over $500 million in capital and contributing nearly $300 million in total sales for the partial year effect. We're very satisfied with this outcome, particularly given what we regard as very strong expected returns from these transactions over the next few years.

Growth in Industrial was a key driver of the year with a 43% increase in net sales to $1 billion and a run rate Q4 of closer to $1.2 billion. Clearly much of this was M&A-driven, but we've highlighted that the business has also generating strong organic growth with high single-digit volume expansion seen for the full year 2017. Commercial Vehicle has also benefited from excellent demand across all regions, posting nearly 7% net sales growth for the full year while accelerating notably in the back half of the period.

We've discussed previously the North America Refinish adjustments largely in the third quarter as well as the impact of lost Venezuela sales and EBITDA in 2016, which collectively resulted in a mid-single-digit net sales decline in Refinish for the full year and flat overall volumes for 2017. Excluding these effects, the company showed solid overall volume growth closer to mid-single digits, even including moderating growth from Light Vehicle for the year. Also of note, we continued to gain share in Refinish globally in 2017, including in North America in spite of working capital adjustments in the middle of the channel. This is evidenced by increases in end market points-of-sale both globally and in North America in 2017.

Adjusted EBITDA for the full year totaled $885 million, compared with $902 million in 2016. The strong contribution of profit from completed acquisitions as well as progress made in cost reductions was more than offset by lower average price/mix, growth in raw material input costs and by the drop-through of lower Refinish volumes in the period.

Regarding these drivers, we expect to see acquisition contribution from completed deals at a somewhat higher level in 2018 versus the prior year. Price/mix was a headwind in 2017 but finished the year in positive territory, underscoring that our efforts to increase price are beginning to bear fruit. Also while input cost inflation is expected to be a larger factor in 2018, we have also initiated incremental operating cost reduction efforts to help counter this effect.

This is seen in the Q4 pretax charge recorded of $28.7 million, which is part of our ongoing Axalta Way cost and productivity planning and will include substantive headcount reductions to directly help offset expected incremental raw material inflation, in addition to already planned price increases. Finally, we also continue to expect Refinish sales to return to a normal cadence in 2018, eliminating the headwind from last year.

Touching on our reported net loss briefly. We reported a Q4 net loss of $61.5 million compared with $37.2 million in Q4 2016. This increase included several items that were adjusted for and deriving our adjusted net income of a positive $90.2 million. First, income tax impacts of $112.5 million in Q4 2017, which relate to the U.S. tax reform legislation enacted in December, are primarily related to the revaluation of our deferred tax asset attributes from the federal rate of 35% to 21%. Second, we had a $12.3 million charge in pretax M&A-related costs primarily associated with the merger-related discussions and activities that took place in the fourth quarter. Third, we booked a $28.7 million severance charge that I mentioned a moment ago.

Turning now to our debt and liquidity summary on Slide 9. Cash and equivalents totaled $770 million at December 31, an increase of $181 million from last quarter. Total reported debt was $3.9 billion, resulting in a net debt balance of $3.1 billion versus $3.3 billion at September 30. Our net leverage ratio declined to 3.6x at quarter-end from 3.8x last quarter, reflecting the higher cash balances, offset partly by the impact of the stronger euro on our euro debt reported balance.

Free cash flow for the fourth quarter, defined as cash flow from operations less capital expenditures, was $196 million compared to $187 million in the same quarter a year ago. Our working capital to sales ratio closed the year at 10% compared with 10.3% a year ago. This included the effect of somewhat lower reported profit for the year, offset by overall cash conversion cycle improvements.

Turning to Slide 10, regarding our 2018 full year guidance. We've largely reiterated our previously provided financial guidance for 2018 on December 14 with a few minor adjustments. For net sales, we still expect growth of 6% to 7%, excluding FX, and based on consensus forecasts for our currency baskets, a tailwind of 2% from FX for the year. As-reported growth, therefore, is expected to be 8% to 9%.

It's also worth noting that we will be implementing the new revenue recognition accounting standard effective January 1, 2018. Although the impacts from the standard will result in a onetime catch-up associated with certain consignment-related inventories within our transportation segment, we do not anticipate any material change to our net sales, net income or adjusted EBITDA. We further anticipate there will be some geography changes on certain cost elements that are considered integral to the completion of our service-related performance obligations, which would be moved from SG&A to cost of goods sold. Again, we expect these changes to be minor.

Regarding end market conditions. We generally see supportive demand, as Charlie previously noted. And our end market commentary from December 14 still holds today. Since that time, we've seen supportive data points in most key markets of the business, including automobile production, commercial truck demand and key industrial segment demand. Our adjusted EBITDA outlook remains at $940 million to $980 million as the drop-through from the incremental FX tailwind experienced over the last 6 weeks will largely be offset by incremental oil and raw material headwinds.

Regarding phasing of adjusted (inaudible). We expect the first quarter to come in relatively close to the first quarter of 2017 with incremental acquisition contribution more than offset by rising raw material inflation. The second and third quarters are likely to approximate 25% to 26% of full year adjusted EBITDA. And we expect fourth quarter EBITDA to come in closer to 27% of the full year adjusted EBITDA. Guidance for interest expense increases to $165 million due to LIBOR and euro currency movement as well as the full year impact of the upsized term loan we completed in June of 2017 to complete our Valspar Wood and Century acquisitions.

Regarding taxes. After a detailed review of the impact of U.S. tax reform, we have updated our adjusted income tax rate to a range of 19% to 21%. This includes the lower U.S. corporate rate, principally offset by the loss of deductions on certain interest and taxes on foreign-related party payments. Our free cash flow guidance is now $420 million to $460 million, reflecting modest pull-forward of 2018 into 2017 on the timing of CapEx and certain M&A expenses. Our guidance for capital expenditures and D&A remain unchanged.

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

(Operator Instructions) Our first question is from Ghansham Panjabi from Robert W. Baird.

This is actually Matt Krueger sitting in for Ghansham. So my first question is given the substantial raw material inflation that you've seen across your cost basket and understanding that turning net price positive during 4Q '17 is a big step in the right direction, when do you expect to achieve price cost neutrality across your business? Is this sometime during 2018 or even pushed out a little further?

Matt, this is Robert. It depends on the trajectory of raw material inflation. I think currently, we're expecting to see raw material inflation at about a $68 per barrel oil cost in Q1 and Q2. And our projections, at least which I think match some of the market projections, are that we would start to see some relief in Q3 and Q4. And if that actually is the case between the cost savings initiatives that we have in place inside the company as well as the planned price increases, we think we could almost entirely offset the amount of incremental raw material inflation. However, if we see that raw materials remain at a higher price and, let's say, oil is at $68 continually for the remainder of the year and/or moves up, then we would have the typical lag effect, and it would probably take us longer than the calendar year to fully catch up.

Okay, that's very helpful. And then can you parse out your organic sales expectations by subsegment or business during 2018? And if you could do that by volumes versus pricing, that would be particularly helpful.

Matt, we'll do as best as we can here with the time we have. But that could be a pretty long question. But overall for 2018, I think as we highlighted on our December 14 call, we do expect overall Axalta to have mid-single-digit organic growth. Of course, that will be supplemented with acquisitions. And we believe that, that organic growth is strongly supported by the stability that we see in the Refinish market as well as business that we have in hand in the Industrial business and Commercial Vehicle, and then assuming a global Light Vehicle market, in terms from a build perspective, of approximately 2%. In global Refinish, we see relatively stable market conditions globally. And we expect mid-single-digits growth. And that will be a combination of volume and price. In Industrial, we see pretty supportive market conditions with good Industrial growth in almost all regions. And we expect mid-single-digit growth. Similar to Q4, we expect that will be more driven by volume than it will be by price. But we did start to get price in the Industrial end market in the fourth quarter. In Light Vehicle, we're expecting low single-digit growth. Again, we're expecting the global market to grow at about 1% to 2% with good growth in EMEA and South America, also decent growth in China. And then we are projecting, similar to IHS and LMC, lower production rates in North America. But again, there, a lot of our customer-specific opportunities and our technology are giving us some unique opportunities in 2018 that we'll take advantage of. And then lastly, in Commercial Vehicle for 2018, we expect mid-single-digit growth. There, we see supportive market conditions in the truck and non-truck markets, supported by good heavy-duty truck build rates. There, we expect North America, Latin America and EMEA to be up. The China market may be a bit flatter. But we do expect some growth opportunities there, given that we're growing from a relatively smaller base, and we also have a good opportunity set in that market.

Our next question is from Christopher Parkinson with Crédit Suisse.

First of all, as a Philadelphian, I'd like to thank you for coming up with the solution to the Eagles' goalposts earlier in the season, so you didn't have to repaint multiple times a year. And I'm a little upset to see the city go Mad Max. But hopefully, you're also poised to win some volumes from the rebuild process in Philly. So on that, Refinish volumes. You mentioned you had some lingering inventory issues in the beginning of the quarter. How confident are you that these are finally over? And what is your general view of the market as we head into '18 regarding collision trends, insurance and MSO consolidation?

So overall, in terms of the market conditions in Refinish, we believe in North America that inventories in the supply chain are largely normal and aligned with end customer demand. We don't really foresee any further impact from any of the inventory adjustments. And again, that was in the distribution channel, not with the actual end customer. So we did see some of that, as we know, Q3 and a little bit in October, Chris, in the first month of the quarter. But we saw a strong November, a strong December. And so far here in January, orders are strong and indicating that stability has returned to that marketplace. So I think we feel pretty good about where we are in North America Refinish. From the perspective of MSO consolidation, we are continuing to see that trend, and we have seen that trend and expect to see it in 2018. But it's not only with some of the larger, well-known MSOs. We are seeing mid-sized MSOs also not only acquire new shops but also do some brownfields, where they'll buy an existing shop, tear it down or make some significant investment as an opportunity to grow points-of-sale. Axalta continues to be a beneficiary of that. We actually grew our points-of-sale over the last 12 months by 2.5%. So again, although we did have some hiccups in 2017 in the distribution channel at the end market customer, we continue to experience growth and we continue to gain market share.

That's helpful. And just on the auto OEM side, I think the vast majority of investors understand some modest headwinds in North America. But can you comment on how to assess your own prospects in Europe and how you believe you should perform versus the market in '18 versus in years past? And then also maybe just touch on emerging markets, such as Brazil and Russia, on the peripheral.

Look, we look at overall Light Vehicle demand, as we talked about earlier, we're looking at 1% to 2% overall globally. If we look at the NAFTA markets, so here, you'd be talking about North America as well as Mexico and Canada, the market is projecting to be up actually about 1.7%. Most of that is from Mexico. We do expect to see some pressures due to lower builds here in North America. We think that we're pretty well positioned, given our customer base in North America, to perform relatively in line with the market. In Europe, as we've highlighted in previous quarters, we've had some opportunities there. There's been a great deal of focus by our global transportation team in EMEA. And we saw a nice result here in Q4 reflecting the efforts of that team as well as Europe being up about 6% from a build perspective. 2018, we're projecting them to be up close to 2%. So I think we feel pretty good about our position in Europe. China, as everybody knows, the market was down from a build perspective about 0.8% in the fourth quarter. It's projecting to be up about 0.7% in 2018, so relatively flatter conditions in China. But again, given our market share there in that market as well as some of our opportunities with the domestics, I think we're pretty excited about some of the opportunities that we have before us there in China. And then lastly, in South America, we always comment that if you go back a couple years that the market in Brazil in particular was quite challenged, but that we were looking forward to the day when the market rebounded because we had lowered our cost structure in that market so much. And that day has come. We don't see a parabolic recovery. We see a more steady, linear recovery in Brazil, in particular. But overall South America, Q4 was up 15%. And I think in 2018, the market forecasts are about 14%. So again, it's a smaller base than in China, in North America or Europe, but it's good growth and we'll take it.

Our next question is from David Begleiter with Deutsche Bank.

This is David Huang here for David. I guess, can you maybe give us your thoughts on your Q1 EBITDA by segment? Do you expect any margin erosion? And if any, where do you see the headwinds coming from?

Overall for Q1, as we highlighted from the phasing, we're projecting about 23% of our full year EBITDA to -- 21% of our full year EBITDA to come in, in the first quarter compared to 23% in the prior year. That 2% difference is really reflective of the timing of our price increases as well as the timing of when some of the raw material inflation flows in. So we think that Q1, and then depending upon trajectory, Q2 will be the quarters where we see most of that inflation flow-through, especially on a year-over-year comparison basis. And then between the 2 segments, in performance, given the traction that we're getting with price increases not only in Refinish but also in Industrial, I think we feel good about our ability to offset a large portion of that inflation together with cost reductions. On the transportation side of the business, it's more challenging because the price increases take more time to negotiate and are more complicated to negotiate. However, we would say that in our business, we are seeing slightly less negative price/mix in Q4. And just in terms of some of the market quotes and bids that we're seeing in the last couple months at least, we are starting to see a sense that prices are starting to firm overall in the market.

And M&A, can you briefly talk about your M&A pipeline? What products, areas or regions do you see as the most attractive to do M&A, if there are any opportunities?

Yes, this is Charlie. I think as you witnessed by last year, I think us completing over 8 acquisitions, I think overall, we feel like the pipeline has been good and will continue to be good for us. Overall, we would target to add between $100 million, $150 million in top line growth on an annualized basis through bolt-on M&As. Clearly, we're always looking at things that would be opportunistic out there. But I would say our overall pipeline is full. As far as the focus of that pipeline, we really look at both segments, both performance and transportation. However, many more opportunities on the performance side. And as we've said, our stated strategy has been to continue to, on a pro rata basis, grow out preferentially our Industrial portfolio within performance. So I think you would see a majority of our acquisitions, bolt-on acquisitions, continue to be over in our performance segment.

Our next question is from Aleksey Yefremov from Nomura Instinet.

This is Matt Skowronski on for Aleksey. Just to start off, some pigment players have talked about long-term pricing contracts. Have you looked into this as sort of a solution to raw material volatility, not just on pigments but on other raw materials that you use?

This is Robert. Our procurement team, in terms of negotiating those contracts, we look at every situation on a unique basis and where it is in the cycle and if entering into an indexed contract would be something that would make sense or not make sense. In terms of pigments specifically, we haven't seen much activity in terms of indexed contracts at the moment. It continues to be very much of a sellers' market with a lot of sole-sourced or dual-sourced situations for most of the players or all of the players really in the coatings industry. So we haven't really seen those conditions. And then in terms of the other categories, the other commodities within raw materials, it really varies by category, so we have to kind of go into each one.

And then can you talk about the cadence of productivity and cost initiatives. It sounds as if it's going to be front half-weighted. Is that correct?

This year, we would expect our productivity program to be fairly similar, I would say, to what we had last year in terms of you would expect to see a little bit more back half-loaded, especially in the fourth quarter, as some of the actions that we've taken and that we've discussed in our press release and our prepared remarks take effect during the course of the year, given the delay in terms of some of those initiatives.

Our next question is from Arun Viswanathan with RBC Capital Markets.

It's actually Tom for Arun. First, congrats on getting the distributor issue in the rearview mirror. Of course, I don't know what's going to happen with the stock market today. But I guess, on that distributor issue, just trying to understanding that better, is this something that's typical in the industry for refinish players, your peers? What are the chances something like this could happen again? How about other geographies? Those are the questions we've been getting a lot.

Yes. No, I don't -- this is Charlie. I think overall, this was unique to the fact that we had a couple of distributors who had been on a very large acquisitions spree over a couple of years and consolidated. And as they look to reduce their inventories and as we looked at what was optimal to be able to price appropriately and get the number turned in our marketplace, we felt like it was prudent to do, as many of you know. But I don't think that we -- we don't believe there's another big setup coming there. There is always distributor consolidation going on around the world. We see it going on in Europe right now in several countries. In many cases, we're anticipating that and managing through that. But I think we'll always see distributor consolidations happen. If any of you follow the chemical industry, this has been 30 years where distribution channels have continued to consolidate, moving through commodities, specialties and in coatings. So I think we'll continue to see it. When we look at our particular distributors we have right now, we think a lot of that is in the rearview mirror. We think that there will still be consolidation, but not to the extent that we saw over the prior 30-month period with -- and especially with these 2 particular distributors that we dealt with.

Understood. And I know you guys don't issue kind of a formal new Axalta Way program or anything like that. But in the past, I think you've mentioned that it's typically cost saves in the area of like $50 million a year post the initial $200 million program. Is that kind of something we could expect for 2018 as well, something like a $50 million cost save number? Or is it kind of different?

That's a good estimate. And I think the other assumption would be to the extent that we launch other initiatives, which we have in addition to kind of our standard Axalta Way program, above and beyond offsetting fixed cost inflation, anything additional on that would be basically a hedge against incremental raw material inflation that we might see during the course of the year. But $50 million is a good estimate from a modeling perspective.

Great. And then my final one is just a quick housekeeping thing. Is it correct that the free cash flow guidance from the Analyst Day was changed a little bit? I think you said, what was it, a timing of CapEx and M&A expense. What was behind that?

Yes, it was a $10 million adjustment, entirely timing-related.

Our next question is from Jeff Zekauskas with JPMorgan.

It's Silke Kueck for Jeff. Can you tell me what your cash tax rate was in 2017 and whether it will go up or down in 2018 and to what extent?

Yes, so from a -- we don't talk about the exact cash tax rate per se. What I would say is our adjusted book tax rate, which is what we use in our guidance construct, basically that adjusted rate was lower than we had originally projected. I think our last guidance was 21% to 23%. We came in at 16.2%. And that was lower due to the impact of excess tax benefits related to share-based compensation, which was approximately 4 percentage points. And then finally or additionally, we also had a different mix of regional earnings than we have projected as of the last time we updated our tax forecast. And that's why you see that difference. So that was not factored into our guidance rate of 21% to 23% since we can't estimate when or at what price employees will exercise stock options. So our guidance for 2018 is 19% to 21%. But that rate does not consider any potential excess tax benefits related to share-based compensation. And from a cash tax perspective, given the net operating loss and tax carryforwards that we still have, our cash tax rate will continue to run lower than our adjusted book tax rate for 2018.

Okay, that's helpful. And secondly, do you expect to reassess where you stand with your restructuring efforts and where your costs are throughout the year? And do you think there would be additional restructuring charges that you may take this year?

So that's something that we continue to evaluate. I think we have a fairly aggressive plan this year from an optimization perspective. I think if you hear our competitors talk, it's part of the DNA of, I think, anybody in the coatings space. It's part of our DNA as well. We're taking additional measures this year, just given the step-up in raw material inflation and to cover the risk that we can't recuperate all of that through price or the timing difference. So you will see a step-up in some of our cost activities this year. And if we do need to take any additional charges in the future for that, we'll communicate it once they become known and estimatable.

Okay. And lastly, if you look at your acquisitions that you've made in '17 and the benefit to 2018, can you quantify what EBITDA and sales benefit you may expect from the acquisitions that you've already -- that you sort of completed to date and in '17?

So if you look at 2017, our acquisition sales contribution was 7.4%. 2018, we're projecting 3%. You can do the math on the sales. And then from the perspective of what the drop-through is from an EBITDA perspective, we have bought some good businesses, highlighting, of course, the Valspar Wood business, which is an attractive business for us. So we would expect it to drop through accordingly.

Our next question is from P.J. Juvekar with Citigroup.

It's Dan Jester on for P.J. I wanted to revisit a question earlier about index pricing but flipping it around a little bit. Have you talked to your Light Vehicle customers and their willingness to maybe do index pricing with you so that in the future, during raw material periods of inflation, you don't have such a long catch-up period to get back to square?

Yes, this is Charlie. I mean, what I would tell you is that in certain cases with OEMs, we already have index pricing. As a rule though, the industry, the coatings industry is kind of interesting, has stayed away from that. I think a lot of us how who have been in OEM for a long time know in other markets, that it's more prevalent. So I do think that you'll see not only with us, but I would imagine with our competitors as well over the last couple of years, a request by either the OEM or by us to put more index factoring into these contracts. And so I think overall, in general, we'll do more of that. I think the OEMs will do more of that. Whether that will actually become the dominant way that paint is sold into the multitude of OEMs we have, I think, over the next couple of years, that's probably a little bit of a stretch. But I think in general, people will look to manage risk both ways. I don't think the OEMs like it when price really drops, and then they have to go back and try to claw it back. And certainly, we don't like it on the other side. So I think we will push to do more of that. But we actually do some of that today. And I think both sides, if we could find the right metrics and the right indexes, we'll continue to push for more of that as will they. Again, as a rule, I think coatings companies, in the past anyway, you try to stay away from that because price capture was always better if you were handling that rather than just being an automatic formula. But again, I think just given the relative volatility and what investors demand, you will see the industry continue to move more and more towards that. But I don't think in the next couple of years that will be the dominant way that -- I don't think you'll see a majority of the contracts in those markets have indexing for some time to come though.

Okay, that's great color. And can you just give us an insight about the conversation, maybe the differences, between your pricing conversations with Light Vehicle and your Commercial Vehicle customers?

From a market perspective, they're somewhat similar. Commercial Vehicle customers are obviously equally as sophisticated on the heavy-duty truck side as on the Light Vehicle side. It's very similar. I think where you see a difference is when you get in the non-HDT areas of Commercial Vehicle. I mean, remember, in Axalta's business, of the -- in our Commercial Vehicle business, only 25% of that is heavy-duty truck, 25% is about medium-duty truck, and then the other 50% is bus, rail, recreational vehicle, trailers and other applications. And so there, the dynamics in terms of what they're looking for in product efficiency and technology, customization, et cetera, are different. So the pricing discussion can also have a different dynamic.

Okay. And then if I could sneak in one more, the $35 million increase in CapEx year-over-year, is there 1 or 2 specific projects that are driving that?

No, not really. The main reason is CapEx was pulled back from our original estimate of $150 million for 2017 back to $125 million, where we came in at the end of the year. Some of that is timing, and then some of that was also just projects in terms of when we had expected the cash to go out for those projects moving out into 2018. So there are no additional projects. It's really catch-up from projects and payments that we expected to make in 2017 that actually are going to go out in 2018.

Our next question is from Laurence Alexander with Jefferies.

It's Dan Rizzo on for Laurence. Are you going to multi-sourcing for your raw materials to try to mitigate some of the uptick in costs? Is that something that's possible over the next couple of years?

That's been an area of focus at Axalta really since the separation from DuPont, but in particular, in the last 3 years really in earnest. We now have a separate team within our procurement organization that's fully dedicated to supplier development. And we have made some progress there and integrated additional suppliers in situations where we are single-sourced. But we're very careful to do that in terms of any potential impact on quality as well as meeting our customers' expectations. So we are making progress. I think the kind of corollary to your question is how do you deal with a raw material environment that's so inflationary? And part of it, of course, is adding additional suppliers and creating more of a competitive dynamic. But there are other elements. And a lot of that has to do with reformation and having common platforms across products. And that really goes to Axalta's complexity initiative, which is really the heart of what that initiative is all about. So we have made good progress there, but there's still a ways to go.

Okay. And then the raw materials are, as what you've discussed, an obvious headwind. But I mean, how much of an effect is the new acquisitions having on overall margins rolling in 2017 and 2018?

So the acquisitions we've made, we haven't purchased many fixer-uppers. The businesses that we have acquired have been good businesses. They all, of course, don't have exactly the same margin. And there may be a little bit of incremental cost at the beginning of an acquisition when you put together the integration team and you're charging certain costs to that business. But then as you integrate that business, move it on to your ERP system as well as other company systems, you start to see some synergies in the fixed costs on the operational side and on the SG&A side as well. So I think in an initial year of an acquisition, you may see a little bit more of a cost bump compared to when it operated as a stand-alone entity. But then you see that come down over the next -- we try and do as quickly as we can, but certainly within the next 12 to 18 months to see those cost come back down more to the company average.

Our next question is from Don Carson with Susquehanna.

This is Emily Wagner on for Don. Do you still expect the auto OEM pricing comps to ease in the second half of 2018? And is the negative pricing concentrated in the region or a specific customer? Or is it more uniform?

On a year-over-year compare basis, we really started to see the higher -- the inflection of some of these pricing pressures. And it's not just price, there's also a mix element to it as well that started early last year and really kind of peaked in the second and third quarter of last year. So as we move through the first and second quarter of this year, we'll turn those comps as we go into the back half of the year. So from a purer, things within Axalta's control, I would say that's how we would see those numbers shaking out. And then in terms of pricing, there's a component that we control, and then there's a component, of course, that's the market. And a lot of what happens with price will depend on how the overall market conditions and what business comes up for bid. And then lastly, in terms of the concentration or the dispersion of that price pressure, it's been concentrated in a couple of accounts. It's not a broad-based phenomenon across all brands.

Okay. And then in 2017, you imposed a TiO2 surcharge. And now with inflation spreading to other raws, notably epoxies and oil-linked raws, are you indexing price increases to a broader basket of raw materials? I know you're still expecting high single-digit inflation for the full year.

So on the raw material side, we did implement a TiO2 surcharge, in particular really for the benefit of some of our Industrial products that have a very high component of TiO2. But you could think about it as our overall price increase plan is based on a weighted index of all of the raw materials that we purchase. So that's all together within our general price increase. And the TiO2 surcharge is supplemental for certain types of products and really certain types of customers. And as far as the expectation for 2018, currently at $68 oil, and then assuming that we start to see some relief in Q3 and Q4, we would estimate raw material inflation to be roughly 10% in 2018.

Our next question is from John Roberts with UBS.

Robert, the Valspar termination impact on your interest expense would have been known when you gave your guidance. Was the $50 million all currency in 2018, the increase?

So there's 2 elements. The first one you hit on is currency, and then the other one is the actual uptick in LIBOR. Now that does have a much reduced effect than perhaps at other companies because we do have our variable interest rate risk hedged. So if you look at it, our overall structure, we're about 62% variable, 38% fixed pre hedging. And then post hedging, which are interest rate caps, we're about 40% variable, 60% fixed. And of our U.S. dollar-denominated variable interest rate debt, 60% of that is hedged within interest rate cap. So we don't have it all hedged, but we have 60% of it hedged, which helps offset the increase in LIBOR but not all of the increase because there's still 40% of it that comes through.

Okay. And then Charlie, I don't know if there's anything you can tell us about what the impediments were to you executing the deals you had discussions on last quarter, whether it was governance or valuation. Or is there anything -- any color you can provide to us in why we couldn't get anything executed?

Well, I think the 2 different transactions had different issues. Certainly, the one, what we said and I think what the other party said as far as on the Akzo transition -- transaction, as it was looked at, is a potential merger. Clearly, there were governance and valuation issues that we just reached a point where we just couldn't quite get there at that point in time. And on the other transaction, as we highlighted and I think the other side did, too, their value and their ability to get their large shareholder onboard, you've now seen subsequent actions by him. Clearly, there were other issues going on in that company at the time. And we had noted that when we got the offer, that we felt like there was some -- there were constraints that were probably going to keep that one from happening. Again, it wasn't a transaction we announced. It was actually leaked by someone else. So neither one of them were actually at the finish line, like maybe some people had proposed. So I think in both cases, clearly the Akzo transaction had great synergies. We felt like there's a great industrial logic for it. But again, just some things I think -- and especially given their -- all the activities they have going on in their company, I think there were just too many loose ends there, as we work with them in earnest. And I think both parties worked hard and in earnest to try to get there but just too many loose ends and variables on one side of the equation there to close it down.

John, this is Robert. One correction to what I told you. 60% of our debt structure is now fixed, given our hedging program. But specifically on our U.S. dollar variable rate loan, that particular instrument, 43% of it is hedged with an interest rate cap. I previously told you 60% and the correct number is 43%.

Yes, John, just to finish up, I think, I would just say, we continue to be supportive of consolidation in the industry. And I continue to believe over the next year or 2 or 3, you'll see a couple steps happen in the industry as people drive for additional productivity and as customers look for more global solutions to things.

And our last question for today is Kevin McCarthy with Vertical Research Partners.

This is Matt on for Kevin. Just wanted to piggyback a bit on a prior question. So margins in Performance Coatings were just about flat year-over-year. Can you discuss how legacy Axalta margins are performing, I guess, year-over-year versus perhaps the mix impact from Valspar wood coatings business?

Yes, I think if you look at margins in Performance Coatings, there are a number of moving parts in there. Certainly, the Industrial margins have tended to improve at the core, excluding the acquisitions that we've done. Some of those acquisitions have been accretive to the overall margin that we've performed out at Industrial but not all necessarily. So there's a mixture of deals that go in there. And then of course, within performance, you have Refinish, which was affected last year primarily by the lower volumes in North America that we've highlighted.

Okay. And then I guess, auto Refinish sales were up, I think, 0.6%. Can you kind of break that down a little bit more in between price and volume? And can you expect volume to trend positively in that business in 1Q because I know you have some pretty tough comps?

Yes, you had a really nicely positive price performance in Refinish in the fourth quarter in the low single digits. We highlighted that volumes were impacted by the ongoing working capital adjustments that took place through October primarily. So you did see some pullback versus a normal trend in volume in the fourth quarter in Refinish, again from North America. The rest of the world is growing nicely.

And this is Robert, I would just add to what Chris said. It's only 1 month of the quarter. But as we look at our sales results here in the month of January for the Refinish end market, we've had good performance thus far in the month of January. So I think that's also an encouraging sign.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back over to management for closing remarks.

Yes, thanks. We'll be brief here. Again, overall, I'm really pleased with the way we came out 2017. I think that when we look at 2018, which is more important at this juncture, again good sound markets. Setting aside the stock market for the last week, our overall demand starts off the year in good shape. I think the biggest challenge we all in the coatings industry will see this year is just core inflation and pricing through that. Again, we have good plans already in place. Many of those actions are already taking place as we've highlighted on the call. So I think when we look at our operating plan, we are going to navigate through an environment that's going to have some core inflation in raw materials and potentially later on in the year, in other markets such as in some of our transportation and logistics as some of these higher fuel prices work their way through the economy. Again, I think we have good plans to address that. But overall, as we start the year, I think we're very encouraged with the core strength of our markets, the new businesses we acquired last year and look forward to being able to deliver on all the metrics that we've laid out in our 2018 guidance. So thanks, everyone, and we look forward to any additional questions or details that you have over the coming days.

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