Axalta Coating Systems Ltd (AXTA) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Axalta Coating Systems' First Quarter 2018 Earnings Conference Call. (Operator Instructions) Today's call is being recorded and replays will be available through May 2. 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 first quarter 2018 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 will now turn the call over to Charlie.

Thank you, Chris, and good morning. Thanks for joining us on our results call, where today we're pleased to review our first quarter performance and update our 2018 full year outlook based on current market conditions. Overall, Axalta's end markets remain broadly supportive and healthy, and we're pleased that our Q1 financial results have enabled us to increase our guidance range for sales growth and adjusted EBITDA for the year, incorporating somewhat more favorable FX tailwind as well as strong operating execution to date.

Overall, our quarterly results were slightly better than we had previously projected, including both ongoing strong organic growth in Industrial; continued solid performance in Commercial Vehicle, highlighted by the robust North America heavy-duty truck market; and a welcome benefit from incremental currency tailwinds. As expected, raw material cost continued to inflate with a particularly notable comparison in Q1 versus last year, given that raw materials were still a tailwind to reported results in Q1 2015. With that context, we've also begun to make progress both in price offsets as well as accelerating cost reductions to meet this input cost challenge.

Turning to Page 3 in our slide deck, I'd like to review some of the highlights. First of all, we grew Q1 net sales by 15.7% year-over-year, which included growth contributions of 8.4% from completed acquisitions as well as foreign currency tailwinds of over 6.3%. Organic volume and price contributed an incremental 1%. This overall growth was generally as expected, supported by ongoing stability and strength in our key end markets and in nearly all regions.

Net realized price continued to remain positive in the first quarter after turning positive in Q4 2017, aided by various pricing-related actions taken to offset ongoing raw material inflation. Overall, organic volume was modest for the period, but this masked meaningful ongoing growth in our industrial end market, consistent with our plans. Consolidated volume was held back primarily by challenging quarterly contribution to Q1 2017 in Refinish, which benefited from sales timing factors last year. Axalta's Q1 adjusted EBITDA of $220 million increased 8.3% from $203 million last year, driven to a large degree by acquisition contribution. Margins declined slightly at 18.9% from 20.2% from ongoing raw material inflation, offset partly by lower operating cost, slightly higher average prices and foreign currency translation benefits.

Taking a look at Axalta's end market performance. Refinish sales growth of 6.2% was driven primarily by FX tailwinds and included low single-digit positive price/mix, offset by somewhat lower volume due to a challenging year-over-year comparison from normal seasonal factors, but well in line with our expectations for the period. Axalta's refinish markets remain healthy. We continue to target mid-single-digit growth for the year. We are gaining market share and expect to see favorable growth comparisons in the second half of the year. Axalta's industrial end market continued to exhibit excellent top line trends with almost 60% reported net sales growth, including high single-digit organic growth reflecting strong volumes and price improvement and significant acquisition contribution. Key organic growth drivers were consistent sequentially, indicating a generally robust industrial demand globally.

Light Vehicle net sales grew 2.9% in the period, including mid-single-digit FX tailwinds, offset by lower average pricing from concessions previously noted that were given to select OEMs last year. Volumes were broadly stable with ongoing modest growth in North America, offset by flatter trends for the quarter in other regions. Auto production globally appears to be steady with notable ongoing strength in North America standing out relative to more cautious predictions that we had made for 2018 for the region. We continue to expect flat to low single-digit growth in auto production globally in 2018 and slight outperformance versus the industry for Axalta.

Commercial Vehicle posted healthy net sales growth of 8% and 3% constant currency growth. Volume growth was witnessed again in nearly all regions, led by a continued healthy truck demand in North America and elsewhere while price/mix was slightly negative, given residual impact from OEM price concessions we made last year and somewhat adverse product mix in certain regions.

Turning to the balance sheet and cash flows. Free cash flow in the first quarter was a use of $61 million compared with a use of $37 million last year. This included our typical seasonal working capital use as well as some severance payments and timing of bond interest payments accounting for the majority of the year-over-year difference. We ended the quarter with net debt to trailing 12-month adjusted EBITDA of 3.7x versus 3.6x at year-end due to slightly lower cash balances resulting from acquisition spending and a strong euro, which increased our overall debt balances. Robert will take an opportunity to detail our refinancing in April, which will help offset this FX headwind for the balance of the year as well as provide incremental cash interest savings.

Regarding capital deployment. We spent $105 million in the first quarter on M&A with the largest portion going to internalize a Refinish color-matching technology platform with significant cost synergies to Axalta while we also increased our ownership interest in an existing consolidated joint venture that we had initially purchased in 2016. These deals have no effect to near-term top line impact but contribute to earnings via lower cost and increased profit contribution. Additionally, we repurchased very little stock in the first quarter but have devoted additional capital to repurchase this year in April. We plan to continue to be opportunistic with share repurchases this year with an expected offset to our share dilution from stock grant vesting as a minimum allocation target.

Regarding operating highlights across Axalta's businesses. We continue to show progress in lowering our cost structures this quarter. And you likely noticed that we set a new $200 million Axalta Way cost savings target at our Investor Day in New York in March, which we are beginning to execute on already. Clearly, the key focal point this year will be offsetting raw material inflation. And we're committed to doing so via a combination of pricing and productivity.

Additionally, we acquired a manufacturing and distribution site in Sacramento, California to support our wood business as well as other businesses over time. Finally, we inaugurated a new coatings plant in Savli, India, which is set to serve the local light vehicle marketplace. In terms of innovation highlights, we're on track to introduce at least 250 new products this year as we noted last quarter. Some notable examples in the first quarter of recent new products launched include Nason Finishes in South Africa and new fast-drying aerosol topcoats in our global industrial markets.

So in summary, Axalta's first quarter results were solid while meeting our expectations across both end markets and regions. This result keeps us on plan to meet our objectives for the year. And we feel we're well positioned to deliver strong value for shareholders in 2018. This is supported by stable end market demand conditions as well as focused and expected strong execution by our Axalta team. We continue to address the relentless upward pressure of raw material and logistics inflation. And our offset plans remain a top priority in the coming months as we continue to pursue our baseline plan for growth and value creation.

Now Robert will share some further details on our results. Thank you.

Thank you, Charlie, and good morning, everyone. As you can see on Slide 4, first quarter net sales, excluding FX tailwinds, increased 9.4% year-over-year. This includes 17% growth in Performance Coatings while Transportation Coatings was slightly down at 1.3%. First quarter growth was driven by 8.4% acquisition contribution, coupled with modest increases on organic volume as well as positive price/mix effects. Organic volume included strong growth in Industrial and Commercial Vehicle for most regions, offset by a modest decline in Refinish volume due to a challenging year-over-year comparison and flat volumes in Light Vehicle.

Overall price realization remained positive in the quarter. Most of the pricing progress to date has been in Performance Coatings across both refinish and industrial end markets. Price/mix, excluding any price increases related to currency, exceeded 6% in some markets. FX translation benefits accelerated again sequentially to 6.3%, indicating broadly supportive global economic conditions and principally driven this quarter by a strong euro and Chinese RMB. Adjusted EBITDA of $220 million in Q1 increased 8.3% versus prior year. Adjusted EBITDA margins declined from 20.2% last year to 18.9% in the first quarter, reflecting the impact of higher variable cost pressure, including raw material and freight cost inflation. These decremental factors were partly offset by lower operating expenses through Axalta Way savings and pricing within our Performance Coatings segment.

Turning to Slide 5. Performance Coatings Q1 net sales increased 24.3% year-over-year, including a benefit -- an FX benefit of 7.3%. Constant currency growth was driven by 14.4% acquisition contribution and 3.3% higher average selling prices while organic volumes were slightly down from the prior year due to a challenging year-over-year comparison from sales timing factors in Refinish. For Refinish, Q1 net sales increased by 6.2%, including a 7.4% FX tailwind, driven by robust growth in our EMEA region, offset by a challenging year-over-year comparison in North America. Pricing in all 4 regions was strong with low to mid-single-digit positive contribution globally for the period.

Industrial net sales increased 59.8% year-over-year, resulting from the substantial acquisition contribution and a 7.2% FX benefit. Organic net sales growth in the high single digits demonstrated continued strong performance with positive contribution from all regions, similar to growth seen last quarter. Average price and mix was accretive in the quarter in the low single digits, benefiting from the pricing actions across the business needed to offset persistent raw material inflation.

Performance Coatings generated Q1 adjusted EBITDA of $143 million, a 22.5% year-over-year increase. Drivers included improved price/mix, completed acquisitions, FX tailwinds and lower operating expense, offset partly by higher raw material input inflation. Q1 adjusted EBITDA margins of 19.7% were consistent with 19.9% same quarter last year, illustrating the resilience of our Performance Coatings business.

Turning to Slide 6. Transportation Coatings net sales increased 3.7% year-over-year in the first quarter, including a currency benefit of 5% with constant currency growth in Commercial Vehicle offset by a slight decline in Light Vehicle, consistent with the last several quarters. Segment volumes increased low single digits in Q1, offset by slightly unfavorable price/mix. Light Vehicle Q1 net sales increased 2.8%, including a 5.1% FX tailwind. Volumes increased slightly, including growth in North America to offset flatter trends in other regions.

As we indicated on our Q4 earnings call in February, Q1 average price/mix was down low to mid-single digits, continuing to reflect residual pressure from mid-2017 customer agreements. And this quarter should be our toughest comp. In addition, mix was a slight decrement in the period due to strong growth in lower-margin product sales. We are in active discussions with numerous customers regarding price increases to offset the impact of raw material inflation on our Light Vehicle business.

Commercial Vehicle net sales increased 7.6%, including an FX benefit of 4.7%, driven by continued strength in global heavy-duty truck production and other vehicle markets. Commercial Vehicle production globally increased a remarkable 14.5% in Q1, driven particularly by ongoing strength in North America and resurgent strength in China, along with solid recovery in Latin America from recession lows. Current forecasts continue to include an assumption of demand moderation globally through 2018, though revisions remain upwardly biased to date. ACT recently increased its North America Class 8 forecast to 328,000 units with a similarly strong year expected in 2019. Non-truck commercial customers also continue to enjoy solid demand, supporting end market growth for Axalta from a wide range of product types.

Transportation Coatings generated Q1 adjusted EBITDA of $77 million versus $86 million last year with associated margins of 17.6% versus 20.5% in Q1 2017. The lower-margin comparison was driven by headwind from unfavorable price/mix and raw material inflation, offset to some degree by moderate FX tailwinds and higher volumes contributing to margin and absolute EBITDA accretion.

Moving on now to debt and liquidity. Cash and cash equivalents totaled $600 million at March 31, a decrease of $170 million from year-end. Total reported debt was $3.96 billion, resulting in a net debt balance of $3.36 billion versus $3.15 billion at year-end. Our net leverage ratio was 3.7x at quarter-end versus 3.6x for Q4 2017. The slight increase was caused by lower cash balances as a result of spending on investment activities and the impact of a stronger euro, which increased our debt balances, offset by latest 12 months' EBITDA growth in the denominator.

Q1 free cash flow, defined as cash flow from operations less capital expenditures, was a use of $61 million compared to a use of $37 million in the same quarter a year ago. The change year-over-year was due to the previously mentioned headwinds from severance costs and interest payments. Our working capital to net sales ratio at quarter-end was 13.4% compared with 14.2% a year ago. This included the effect of normal seasonal working capital fluctuations. And we reiterate our expectation for the full year of modest working capital use, driven largely by EBITDA growth, which would imply an improved working capital to sales ratio by year-end.

In April, we completed a refinancing transaction to amend our existing term loan debt, which benefits our cash interest cost as well as other aspects of our debt portfolio. The amendment included a repricing and upsize of our U.S. dollar term loan to repay our existing euro term loans. We improved our interest spreads by 25 basis points while extending maturities by slightly over a year on the previous euro portion. We also entered into cross-currency swap transactions, which locked in the upsized term loan portion at a fixed euro interest rate of 1.95% to maintain a debt mix by currency that best matches our cash flows. The amendments and swap transactions are expected to reduce our cash interest expense by approximately $10 million on an annual basis.

Turning to Slide 8. We have revised our previously provided guidance for 2018 as shown. For net sales, we still expect 6% to 7% growth excluding FX. And based on consensus forecasts for our currency baskets, we now see a tailwind of 3% from FX for the full year. As-reported growth, therefore, is now expected to be 9% to 10%.

Regarding end market conditions. Charlie noted earlier that our markets remained steady and healthy. And our general expectation for growth by end market remains consistent. Recent body shop distributor and insurer-level feedback in Refinish indicates a favorable market trajectory for the year. And the industrial markets we serve remain robust, consistent with what we observed on our February update call and March Capital Markets Day. Data in the transportation segment markets has also been strong with any surprises coming from stronger-than-expected demand in both North America automotive and global commercial vehicle markets, especially in heavy-duty truck.

Our adjusted EBITDA outlook has been raised from $940 million to $980 million to $950 million to $980 million as we are more optimistic regarding our ability to offset raw material headwinds via a combination of pricing actions across our markets as well as active core costs and productivity management. Our updated currency forecast is also supportive to our guidance. Regarding phasing of adjusted EBITDA in 2018. We expect the remaining quarters of the year to approximate 25% to 26% of full year adjusted EBITDA with Q2 and Q4 slightly stronger and fairly comparable versus a slightly slower Q3, given normal seasonality and expected business phasing. Guidance for interest expense remains at $165 million due to LIBOR and euro currency movement impacting debt balances, offset equally by recent refinancing results.

Regarding taxes. After ongoing review of the impact of the U.S. tax reform and certain specific actions taken in response, we are maintaining our adjusted effective income tax rate in a range of 19% to 21% for the full year, though we were slightly below that range in the first quarter. Our free cash flow guidance remains at $420 million to $460 million, reflecting consistent assumptions since our last update. Our capital expenditures guidance range remains unchanged. And our depreciation and amortization has increased slightly from FX impact and from recent acquisitions.

This concludes our prepared remarks. And we would now 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 the line of Vincent Andrews with Morgan Stanley.

Just a question on the pricing environment, it sounds like you're more positive on. Is that as much in Transportation Coatings as it is in Performance Coatings, your confidence?

We're working to offset cost inflation across the board with pricing actions kind of that are appropriate to each market. We're working closely with customers in every area to appreciate that persistent and the real inflation is something that we need to address. Now all those efforts, Vincent, relate to all of our markets and they're going on simultaneously. We do see success rates varying slightly depending upon segment and actual end market. But as you point on, we've had notable success in Performance Coatings to date and we expect progress in transportation to follow shortly. And you can actually see the success in Performance Coatings as evidenced by the EBITDA margin, which is essentially the same as last year despite the raw material inflation, even if you back out the benefit of the FX tailwind. So we're making really good progress in Performance Coatings. And there are a number of active discussions going on at the moment in all regions of the world in our transportation business that we expect to produce results.

And then just as a follow-up, I think at the Investor Day, you talked about being in discussion on 4 acquisitions. Does sort of the advent of share repurchases in the quarter sort of indicate that maybe those aren't going to come forward? Or are they not -- is one not a function of the other?

No, not at all. We actually completed 2 transactions in the quarter as we highlighted in our remarks and our release, and we're very happy with those. We have a good pipeline of transactions as we see it for the rest of the year. And the share repurchase, our goal has always been, as we've said, to offset dilution in any given year, which in the case of 2018 is approximately 2 million shares. And then in addition to that, we also said that we would buy back stock as we saw the price at an opportunistic level. So even if we meet our dilution or when we meet our dilution target, depending upon where the price is, you will see us purchase additional stock moving forward. However, it will not be at a level such that it inhibits us from pursuing any attractive M&A opportunities that we'd like to pursue.

Our next question comes from the line of Christopher Parkinson with Crédit Suisse.

Can you just give us a quick update on your new cost-cutting initiatives, including improving and multi-sourcing your procurement platform, which you hit on at your Analyst Day? Just any color on that initiative in '18 and any updated thoughts for the intermediate to long term would be very helpful.

Chris, we continue to make really good progress. Of course, we have mapped out internally where we would like to be on Axalta Way on each initiative by quarter. And we're happy to report that through the first quarter, we actually slightly exceeded what the budget was for savings. So we feel that we're on pace to achieve our target of $200 million over the next 4 years. And the buckets from which we expect of those savings to come are consistent with what we outlined at our Analyst and Investor Day, hasn't been any real change in where that's coming from. On the procurement side, we are making progress in those situations where we are single-sourced or maybe dual-sourced but would like to have more options. Obviously, it's a challenging raw material environment at the moment. But we have a team now dedicated in our procurement organization to nothing but new supplier development. And they've been quite active, so we have made progress on that.

And you mentioned you were taking a little share in Refinish. Can you just offer a little more color by region as well as the key drivers? Is it mainly MSO consolidation in the U.S., new products in Europe or something else? And then also just any quick comment, are you still seeing a little bit more consolidation among your European customers, at least on a preliminary basis?

So if we look at it by market, if we look at North America, we continue to have very good progress, not only with the multi-site operators that you would think of in terms of the larger sort of top 4 to 10 but also in that next level down of more medium-sized MSOs, we continue to gain there. And also although we don't talk about them very much, in the independent market, we are gaining share in that market as well, so very happy with our performance in our North America Refinish business. Doesn't necessarily show through as much in Q1 here, as someone else I think has already highlighted, for the simple reason that we had a tough compare in Q1 2017, where if you were going back to that call, you may remember that we had an unusually strong quarter in Q1 2017 just due to seasonal factors. So that tough compare is masking a lot of really good progress that's been made by the global Refinish team. In EMEA, we had very strong performance in Q1. And that's in core countries as well as starting to make some inroads in some of the periphery countries, where our market share has been an opportunity for us, so very happy with how things are going there. In China and Asia Pacific more broadly and Middle East, we continue to make great progress in Middle East and Asia Pacific ex China in terms of building out our distributor network as well as having put some key strategic commercial resources in place to help us accelerate growth in that business even further. And then in China, we do continue to make progress in the mainstream part of the market. And more broadly, as we talked about on the last call, our mainstream product offering does continue to gain traction, not only in China but also in the U.S. and in Europe.

Our next question comes from the line of Duffy Fischer with Barclays.

Question just on the FX impact for EBITDA for the quarter. Can you walk through how that impacted both the segments? And then in the guidance, as we look for the rest of the year, how big is the FX change impact on that guidance?

Duffy, for the -- as we talked about in our original guidance construct, we were looking at about a 2% tailwind from FX, which at the time was roughly about $95 million top line. And then you can use your judgment there in terms of the appropriate drop-down from an EBITDA perspective. As we update that tailwind, we now see that tailwind at approximately 3% for the full year. So that $95 million tailwind from FX increases to approximately $130 million. So yes, there is an FX benefit at the EBITDA level that we do foresee for the rest of the year based on the current Bloomberg composite FX rates.

Okay. And then just on the auto OE business, the concessions that you gave last year for business, when do those anniversary this year? And then when we get to that anniversary point, is the game plan just to stabilize pricing at that point? Or do we think we can actually increase pricing in OE?

Duffy, in the first quarter, this is our toughest compare because this was the quarter where last year, we hadn't yet started to see any of the -- or hadn't given yet any price concessions that unfortunately we were forced to give. And then if you'll remember in second quarter of last year, we had the double whammy of the catch-up because that price concession was made effective back to January 1 of the year. So really from a comparison perspective, Q2s are really tough compare. Obviously, our goal there is not only to improve our profitability in that business at a gross margin level. But also just moving forward, I think our Light Vehicle customers and the dialogues we're having are starting to see that obviously there's been material raw material inflation. And that has to be dealt with. So I do think that we expect to see some progress in the ensuing quarters. But again, those discussions do take a little bit of time, so there's a lag effect. So I think we're reasonably confident that we will make progress in those discussions. However, there is a time delay in terms of when those actually will come in.

Our next question comes from the line of P.J. Juvekar with Citigroup.

It seems that the coatings industry cannot grow without acquisitions. And your underlying volume growth was 0.2%. Can you tell us why you are lagging behind the IP or GDP growth?

So P.J., I wouldn't necessarily -- I guess, I might frame up just an observation about that a little bit differently. In terms of looking at overall volume growth, what really affected our Q1 volume growth this year was frankly the tough compare that we had in Refinish. Refinish being our largest business, North America being our largest market and just some of the timing factors that we mentioned there as a difficult compare are what really drives the volume result. If we were to pull out North America Refinish, the volume result would look quite impressive. Actually, if you look at our Industrial business, our Industrial business had a fantastic first quarter reflecting strong global demand across our industrial markets and excellent execution by our team. We had low double-digit organic growth and over 40% inorganic growth, and that was all done while achieving price capture in all regions. If you look at Commercial Vehicle, it's up low single digits ex FX on mid-single-digit volume growth. So I think if you look at Industrial, look at Commercial Vehicle, we're definitely getting it. Refinish, unfortunately, this quarter is slightly masked by the tough compare.

And P.J., we continue to expect mid-single-digit growth in Refinish for the full year. So obviously, the first quarter was the hardest quarter. But we expect that to improve as we go through the year.

Yes, P.J., this is Charlie. And as you know, over the past year, we've been working pretty hard to really try to smooth out the way the Refinish dynamics work. Again, as you know, we've got some relatively large distributors around the world that working with them on smoothing that supply chain out, some of the prebuys out, some of the quarter-to-quarter fluctuations. Because I think every year, we end up having to point to a quarter where you had a strong quarter a year before. And I don't think it'll ever totally go away because it's part of the industry and there are seasonal factors. But we've got a pretty concerted effort, as you know, starting last year to really try to smooth out that supply chain more. That also takes cost out because you're not cycling your plants up and down and you're not stacking inventory in places. But we are going against how the industry has always worked a little bit with our bigger distributors but making good progress. And I think you'll see it over the next year, that continue to smooth out globally, where quarter-to-quarter, year-over-year compares look a lot smoother. And I think back to Robert's point, that's such a big part of our business that it doesn't take much of a change on a price increase or prebuy to mask volume growth in some other segment because Refinish is just so big for us.

And P.J., this is Robert, I'd just add on one final point. My colleagues here are just pointing out that I omitted discussing Light Vehicle. Volume was up low single digits in that business. And if you look at in particular the North America market, the overall market contracted by 3.5%. But we were up nicely volumetrically in North America. So just didn't want to leave out the Light Vehicle market as we talk about that.

Great. And my second question is on transportation. After your IPO, you had gained significant share in China. So my question is can you just update on your China OEM business? I think your rest of the world was flat in OEM. But how did China grow? And what are you in terms of share, et cetera?

P.J., the China market for us from an LV perspective from -- whether when you look at body panels or when you look at automotive plastic parts, we continue to make good progress there. The issue has been price capture, which from a total sales perspective, obviously the price concessions is what have resulted there in the net sales impact. But from an overall volume perspective, we've been performing consistent with our plan. The other point to make, just as we talk about transportation in China, is Commercial Vehicle. That's still a big opportunity for us and we do continue to make good progress there.

Our next question comes from the line of Bob Koort with Goldman Sachs.

It's Chris Evans on for Bob. I was hoping you could deconstruct a little bit just your initial expectations for the quarter that were maybe towards the $200 million versus where you ended up coming much, much higher than that. And then sort of the logic around and the thought process behind your guidance, which it doesn't really flow that beat through on some of the more optimistic trends that you've citing in the businesses.

Chris, the way to think about Q1, we had stronger execution from a business perspective in terms of some of the commercial initiatives in particular. We had stronger growth in Industrial than we had originally been projecting. And then we also had help on a sales level from acquisition contribution, which came in a little bit stronger than what we had projected as well as FX being more favorable. When you get to an EBITDA level, we had greater price capture in Performance Coatings than we had been expecting. And then we also had cost savings that were higher than we had originally projected when we put together the guidance. So great news for Q1. However, we thought that the most prudent approach would be to be cautious in terms of raising the full year EBITDA guidance. As you should know, 1 quarter doesn't make a year. There's a lot of volatility out there in the market. So we just thought that it was prudent to raise the guidance range a little bit and then wait and see how we perform in Q2 before potentially increasing it further if our performance in Q2 warrants that.

And then previously, you were pointing towards a high single-digit raw material impact in 1Q. Just curious how the quarter played out? And then as you look to the balance of the year, what is your expectation for the raws impact and any notable differences between the 2 segments?

So the raw impact that we saw on Q1, Q1 2018 compared to Q1 2017, the total impact was 11%, in line with what we had expected it to be kind of on a full year basis. And between the 2 segments, it's relatively consistent between the 2 segments.

Our next question comes from the line of Ghansham Panjabi with Baird.

I guess, first off, Robert, back to your prepared comments on the cadence of EBITDA distribution for the year and 2Q and 4Q being stronger than 3Q. 3Q '17 was down substantially on auto refinish. That is one of your more profitable businesses. I'm just curious as to why 3Q would not be stronger in 2018.

Yes, it's a very fair question, Ghansham. And the answer is the timing of price increases have been and will continue to move around based on what we're seeing in the raw material environment. And therefore, the original price increase plan and cadence that we had when oil was at $54 and then when oil moved to $68, obviously, that changed. If we see oil stay at the $70 to $75 range, that would also impact how we would think about price increases. But it is a fair point in terms of Q3, that it should be a relatively easier compare. But again, it depends on our ability to capture price, in particular in our transportation segment.

And another point just to make that in the transportation side of the business, it's definitively the weakest quarter of the year. So that somewhat offsets the relative strength that you'd expect to see out of Refinish that you pointed out.

Got it. And then on Industrial, some of your competitors seemed to have lost some share in that business as they've executed on price. Your past 2 quarters have been very, very strong. Can you just sort of comment on your overall share position? And are you seeing any signs of any cracks in pricing rationality across the industry?

It is interesting that as we have gone out with substantial price increases in Industrial that we have continued to be able to grow volume. I think we did expect to potentially see some volume loss. We have seen some. It's not been significant. But overall, you look at the amount of investment over the last 2 years that we've put into the Industrial business, in particular in terms of the commercial team, feet on the ground and developing relationships, we're expecting a return on that investment. And so we have been pushing our commercial teams strongly. And if you look across the board, growth in general Industrial has been strong and Energy Solutions has been strong, powder has been strong and wood has also been consistent with the market. Think about the only segment that's maybe been a little bit slower than what we had originally projected was the coil segment. And I think that's more driven by some of the issues around trade than anything else. But overall, I think it's just good execution by our team.

Our next question comes from the line of John McNulty with BMO Capital Markets.

A question in the Light Vehicle area. You indicated that you had some negative mix issues. Can you walk us through what those were and whether there's something that you would expect to continue going through the rest of the year or if it's kind of a onetime blip in terms of how we should think about it?

John, it's Chris. The main issue in Light Vehicle there isn't anything "wrong" in the business. It's actually just coming from growth in product lines that tend to have a wider margin than some of the core product lines. So there's nothing weakening in Light Vehicle. In fact, we're very pleased with some of the growth of the product lines that we've been introducing. And that's across a number of areas and a couple different regions. But by and large, it's coming from growth, not from any change of mix of existing lines that are running.

Got it, appreciate it. And then I guess just one other question in terms of -- I mean, look, you had a bunch of headwinds over the past, I guess, a year, 1.5 years or so and the margins kind of every quarter for, I guess, the last 5 have been negative in terms of the comps. And I guess -- but it does seem like you're starting to catch up with regard to price. And maybe raw materials, while they're high, that doesn't necessarily -- it's hard to see them necessarily ripping dramatically further here. Do we hit an inflection point, do you think, in the next couple of quarters in terms of margins, where you've kind of seen the bottom or the end of margin degradation and we actually start to see things pushing higher? Like how should we be thinking about that as we go through 2019?

There's 2 variables there. One variable is again what the trajectory of raw materials is and what the trajectory of oil is. And I think it's important to highlight that the supply issues that we've talked about for the last couple of quarters, there are a few exceptions. But in general, those supply issues persist. So it's not only a function of the price of oil but also a question of supply, depending on the category of raw material and the specific raw material. So it'll depend a little bit on that. And then it will also be driven by our ability to capture price with our Light Vehicle customers. And that's a combination of capturing price, but it's also introduction of new colors. It's implementation of indexing at a larger number of our customer base and some other initiatives that we have in place in that segment.

I might just add on to that, that based on our guidance, we wouldn't necessarily expect the margins to inflect positive on a comparable basis in the second quarter. However, if we are successful in capturing price and in getting cost out according to our plan, it is possible that you see an inflection point in the back half of the year, where margins turn positive on a comparable basis.

Our next question comes from the line of John Roberts with UBS.

One of your competitors noted that epoxy costs are up something like 40%. When you see -- I just want to use that as an example. When you see something extreme like that, is price your only tool for trying to recover margins? Are you able to reformulate to other resin systems? And how long does that take if you're able to do some of that?

John, it's Charlie. I think when you see a spike is that certainly over the last couple of quarters, they're correct. Epoxy prices, depending on where you are in the world, have been up 40% to 50%. Certain polyesters have been up that amount as well in certain regions. But when that happens, that's short term. There's very little opportunity to just substitute or reformulate. Now what we've been doing in certain products, both liquid and powder coatings, is over the last 2 years working on reformulation to look at where we can get the same performance but with a less expensive resin. And we're doing that not only in epoxies but in some of our polyesters, in some of our acrylic resins as well, where customers, if they really need a cheaper product or they can't pay more, then we work on an overall performance or spec shift with them. So I would say at any point in time, Robert mentioned earlier, we have a full-time procurement team that works -- they actually work in a matched pair with the R&D community on that because even just a change of raw material in our business is a big deal, even if it's just a supplier change. So I think you'll continue to see us and probably our competitors as well continue to work on, where the customer -- where the value proposition is going to be different for them or if they can't pay the additional price, we'll look to not necessarily go to a "cheaper resin" but just different functionality. So I think at any point in time, we probably have 30 or 40 of those kind of efforts going on. Now if it's a short-term spike and we really believe it's just supply-driven, like Robert mentioned, and the price isn't going to come back down, then we normally let the customers know what's going on. But we don't try to take draconian action if we think it's just -- you've seen in the past year, for example, in certain isocyanates, prices spike when there's been force majeures. Those kind of cases, we don't go often: one, try to raise price; or two, try to change the formulation because that's such an expensive deal to go do. But I think you'll see more of that in the future. And I would say this isn't just an oil and gas issue on raw materials increasing. We actually -- for us, we have as much invested in pigments and in resins as we do just straight solvents and other products. And I think we're just going to be, as I mentioned in my opening comments, in a general inflation environment, not only in raw materials but logistics, wages and everything else that's going to -- it's not a coatings issue, it's just a function of global GDP increasing. So I think we're in for, as we go through the next few quarters and probably the next couple of years, just generally higher inflation across the board. And I think that's going to mean working a lot with your customers on what are they looking for, what can they afford and where you have to change the value proposition. My last comment on that is definitely in the refinish market is why you've seen us over the last couple of years be really focused on mainstream and economy and improving those segments, so we can supply across the value chain and not just in the more premium markets. Because we really do believe in a general inflationary environment, you've got to be working with what the customer really needs and not be trying to force something on that maybe they can't afford. But I do think you'll see more of that as we go forward, where we segment these markets more than we have in the past. And epoxy is just a perfect example, where you'll see these spikes and it's going to cause -- you've got to be close to your customers and work what they're going to need.

And then in auto OEM, where you gave some price concessions last year, should we think about you raising prices from those new lower levels? Or was there anything in those concessions that's going to make it harder to raise price with those customers without losing volume?

Yes, I think just given that we're getting pretty specific in terms of price and price strategy and how we might work with customers, I think we have a number of levers and -- that we will work on. And that's a collaborative effort with our Light Vehicle customers. They, of course, expect us to lower costs and to not only increase price. And we're working on that internally in terms of improving our cost structure as well as working with them not only on the cost of the paint, but of course on the cost of the application of the paint, which as you know is 4 to 5x the cost of the paint. So the more that we can innovate in productivity, the more flexibility it gives us from a paint pricing perspective as well. And we don't want to lose sight of that.

Our next question comes from the line of Jeff Zekauskas with JPMorgan.

It's Silke Kueck for Jeff. I have 2 short questions. The first is I was wondering whether you can give an update on like the acquisition of IVA and whether that's part of your guidance in terms of acquisitions or it's not and like when that might conclude. And my second question has to do with the $26 million investment that you made in the noncontrollable entity. I was just wondering whether that's onetime and what exactly that is.

Silke, so on IVA, we expect by the end of May to hear back from the European Commission on what their thoughts are. They could either decide to approve the transaction, they could request more information or they could decline the transaction. At this point, it's difficult to handicap which one of those they're going to do. So we are waiting for their decision. We certainly do hope that they approve it. It would be, we believe, a good transaction for customers as well as for Axalta. On the additional purchase of interest in our Dura Coat business, we did purchase an additional 24.5% of that business as was part of the original transaction structure. And then we'll have a final 24.5% stake to take us up to 100% that we will purchase in January of 2019.

Our next question comes from the line of Aleksey Yefremov with Nomura Instinet.

One of your competitors talked about intentionally walking away from business in order to prioritize price. In general, do you see more disciplined price behavior from your competitors today compared to 2017?

Yes, I think -- well, first of all, you never -- I don't know, in my career, I've never tried to intentionally walk away from a customer without it being a discussion first on what they can afford, what's going on in the industry. And I would tell you over the past year though, as we look at all the price increases we've done across all these segments, the amount of business we've lost is actually almost just negligible. I wouldn't even categorize it as nonmaterial, it's almost nothing. But I give a lot of credit to our sales teams: one, in starting early; but two, in making sure customers understood exactly what's going on and why. So I think we don't try to make strong statements like that. However, I do think it's inevitable when you're faced with this kind of price increases, which by the way, we had back in 2012 and '13. People forget we've seen this before, this movie before, I think. So it doesn't mean you won't lose a customer or somebody might not try to take advantage of it. What I have seen over the past quarter is certainly I think we have certain competitors -- and we highlighted this in previous conversations. Certain competitors have been slow to the party in realizing that these increases just aren't transitory in nature. That fundamentally price supports building under oil, under pigment prices. Specialty cams in some cases are not adding capacity like they have in the past. So we believe there's some more fundamental change rather than just transitory going on. And I do think we have several competitors in certain segments that were slow to the party that made it a little slower and tougher. Clearly, over the last 90 days, and if you follow our competitors' calls as we listen to them just like you do, people certainly have begun to recognize that it's paramount to be protecting their business and raising price. So definitely more disciplined over the last couple of months, not only by large multinationals, but in many cases in Industrial and Refinish, we have good local competitors as well. And I think it's finally worked its way to the supply chains, where people who might have been trying to take advantage of short-term share grab, that kind of the stuff, we're seeing less of that.

And a follow-up on the cost side. Have you seen any increase in transportation cost in North America? And to what extent do you rely on truck deliveries in North America?

I would say -- this is Robert, I'd say that we have seen an increase in transportation cost, not only in truck but also in marine and not only in North America but also in other geographies. So that transportation cost is an input into the calculus that we use to determine what price increases we need to get. So it's not only price increases to offset raw material inflation, we also need price increases to offset some of the logistics and transportation costs that we have also seen inflate.

Our next question comes from the line of David Begleiter with Deutsche Bank.

On Refinish, last week, one of your competitors announced they had about roughly 5% organic sales growth in their refinish business. Can you bridge their performance of your down organic sales growth this quarter?

I think, David, as we highlighted, we did have some seasonal factors related to pricing -- timing of price increases that we had in 2017 versus 2018 that make it a challenging compare. I think if we were to adjust for that, it would be a very different picture that we would be painting.

Okay. And just in Q2, you have a pretty easy comparison year-over-year in Transportation Coatings. So in that segment, should you be able to post up year-over-year EBITDA growth in Transportation Coatings EBITDA, do you think, in Q2 year-over-year?

Yes, we haven't, as you know, provided guidance. We provided a guidance construct for overall approximately how much EBITDA we expected to fall in each quarter, David. But we haven't broken that down by segment or certainly by end market. And probably, it wouldn't be appropriate to do so.

Our next question comes from the line of Mike Sison with KeyBanc Capital Markets.

In terms of Refinish, are you seeing the growth now? And I know it's a little bit early for 2Q. But are you seeing some organic growth as post 1Q?

Yes, this is Charlie and then I'll let Robert comment. But I think we saw organic growth in Q1. It's just when we look at Q1, as we highlighted earlier, Q1 last year, we had some relatively large advance buying by some large distributors. So I think we're seeing -- we see organic growth in all 4 segments, not inconsistent with mid-single digits going on. I think the market is healthy, it's growing. Frankly, we're not paying a whole lot attention to it. It's in pretty good shape, where we focus on introducing new products around the world. So I don't see anything new going on there one way or the other. But I think you've got to balance again as we smooth things out. But I think when you take -- as Robert said, when you take out a couple of large advance purchases as we saw in Q1 last year and the underlying market continues to grow, depending on where the region of the world it is, anywhere from 3% to 5%.

I think I'll just pile on to that and just make a comment that, I think, as the year progresses, it will be seen that the first quarter is a bit of an aberration in terms of that reported volume result.

Yes, I think I'm very happy with Q1 as far as North America Refinish. I think shops are full. A couple of our MSOs are really growing. You had good, as far as Refinish goes, it was pretty good weather from the standpoint of -- it was a little bit late and we got hit with all these storms in Northeast. But that's got Q2 pretty loaded up with all the body shop work that I think will go on. So I think overall, we're set up for a pretty decent year, given the -- you do get a little seasonal factor there that whatever happens to the weather in Q1, you see more that in Q2 as far as the shop activity. But everything we see from our shops and the shop growth, setting up to be a really nice year.

Great. And then a quick follow-up. In Transportation Coatings, you did start the year down in terms of EBITDA. And I know you're not giving guidance per segment. But what do you think needs to happen to get EBITDA for Transportation Coatings growing again when you think about the rest of the year?

There's probably -- the one thing that's immediately coming to mind is that difficult comparison from price and from raw materials in the first quarter. So I think it's important to put into context what that first quarter comparison look like when you look at the rest of the year. Obviously, things have to happen, there needs to be execution, there needs to be price capture to get the full outcome that we project, but we have noted that the first quarter was a difficult comparison.

Our next question comes from the line of Arun Viswanathan with RBC Capital Markets.

Just a couple clarifications. So first, on Refinish, you noted mid-single-digit growth potential for the year. I just wanted to clarify, is that ex FX? And if you were to agree with that, I guess, is it kind of evenly split between volume and price?

Yes. When we spoke originally, when we talked about our 2018 guidance that we were expecting mid-single-digit growth, that is organically.

Great. And then on Light Vehicle, you commented that Q3 is one of the weakest periods. But I'm just curious if you're seeing any changes. We noted that the China auto OEM season was a little bit late to start back up, given the later Chinese New Year. But any other regional differences that concern you as the year progresses in auto OEM?

No, I think right now, as we look at demand in the different regions and what we've got against our plan, I don't think even by OEM, we've really seen any surprises on kind of how we thought from a build rate and who was going to do what, I don't think we've seen any major shifts from what our thoughts had been.

Our next question comes from the line of Laurence Alexander with Jefferies.

It's Dan Rizzo on for Laurence. You mentioned before that some customers may be willing to change their product due to rising cost. Is there a particular end market where that's more prevalent? I mean, where I would think would be something more along the lines of Industrial. But I was wondering if there's an area where it's already happening, where people are already considering it.

Yes, you're right, it is Industrial. If you think about Light Vehicle, just the time to qualify and then getting line time to qualify your new product if you make an engineering change, that process takes a while. And Industrial is where we can make adjustments to formulation and be a little bit more agile in terms of reacting to some of those raw material changes. However, we have very demanding Industrial customers from a quality and a performance point of view. It's just that the qualification process may be a little bit simpler in some cases.

Thank you. Ladies and gentlemen, we have come to the end of our time allowed for questions. I'll now turn the floor back to Mr. Shaver for any final comments.

Yes, sure, just a couple of quick comments, then we'll let everybody go. First of all, overall, a good start to the year and consistent with our plans, certainly sets us up. I think what I'm most encouraged by is just that across the board the markets we're in globally appear to be healthy, as Robert noted in his comments and I think set up to do good year. Our focus is really on execution around price growth and cost initiatives, cost reductions. I think our M&A plan is solid, as we mentioned earlier. We would look to add $100 million to $200 million on top line from the standpoint of acquisitions.

I think our pipeline is in good shape to do that, along with what we've already done in the first quarter. And again, I think the thing, I think, we keep in front of us is and certainly what I'm seeing is just general inflation creeping into -- it's not necessarily a coatings issue but overall just general inflation creeping in, not only raw materials. Consumers are just starting to see that at pump with $75 oil. We're moving back into an environment we had several years ago. So I think raw materials, a gentleman earlier asked about logistics cost, I think we'll continue to see just general inflation. Whether it's logistics cost, raw materials, wages, things like that, we're certainly seeing that. I think we'll continue to deal with it, just like we have, so I don't think anything new there. In fact, I think it's offset by the fact that you just see stronger global GDP out there. And this is a natural result of that and the removal of monetary stimulus out there.

So I think we're well positioned. I think we're ahead of it. And I think we'll continue to deal with it as a company. But it will continue to stay front and center. And I think if we continue to do a good job of that, we'll see the organic growth that comes from being able to do that and service our customers, and in some cases, take share from those competitors who can't deal with all of those factors ongoing.

So again, thanks for your time, thanks for your attention. Good to start the year off like this, and we'll look forward to our next round with you after Q2. So best wishes, thank you.

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