Axalta Coating Systems Ltd (AXTA) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Axalta Coating Systems Second Quarter 2018 Earnings Conference Call. (Operator Instructions) Today's call is being recorded, and replays will be available through August 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 Second Quarter 2018 Financial Results Conference Call.

Joining us today are Charlie Shaver, Chairman, CEO and President; and Robert Bryant, EVP and CFO; as well as Terrence Hahn, who, as you saw in our press release yesterday, will become our new CEO in September.

Yesterday, after the close, we also released our quarterly financial results and posted a slide presentation to the Investor Relations section of our website at axalta.com, which we'll be referencing during this call.

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

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

I'll now turn the call over to Charlie.

Good morning, and thank you all for joining us today as we review our second quarter performance. However, before I begin the review, I'd like to address yesterday's announcement regarding our CEO transition. Terrence Hahn, who was most recently President and CEO of Honeywell's Home and Building Technologies Group, who joins us on this call, will be succeeding me as CEO and President effective September 4. Terrence will also be joining our board, which will be expanded from 8 to 9 directors. Following my comments, I'll ask Terrence to say a few words.

I am very proud of Axalta's achievements over the past several years as well as our excellent prospects for the future. While it was an extremely difficult decision to step away from the CEO role at Axalta, I was recently approached with a unique professional opportunity that I ultimately concluded I just couldn't pass up.

When I notified the board that I was considering stepping out of the CEO role, consistent with our long-term succession planning, the board commenced a search for a potential CEO who can build on our successes while I serve as the Non-Executive Chairman. Moving into a chairman role reflects my strong belief in Axalta and continued deep interest in its success. I'll only be stepping away from my operational role and expect to remain actively involved as the Chairman of the Board.

With that said, I'm very pleased to be handling -- handing the baton to Terrence as the CEO, and to be working closely with him from the board. I've come to know Terrence quite well. Seeing the range and skills and experience he brings to bear, I'm highly confident that Axalta's future is in extremely capable hands, and I look forward to an excellent partnership with him as I assist with the transition.

Serving as the CEO of Axalta over the past 5-plus years has been both an honor and a privilege. I'm also thankful to the board, our management team and our entire Axalta family for their encouragement and support, and I'm truly excited about Axalta's future under Terrence's leadership.

Regarding the CEO search process and Terrence specifically, the board conducted a robust search process with the assistance of a leading executive search firm. Terrence was our first choice, and we're confident that he is the right person to lead Axalta. He brings a clear vision and passion for the industry as well as an extensive domestic and international business leadership experience.

Terrence's résumé and track record are demonstrable and impressive, and he's clearly an established and well-known leader in the industrials and materials community. Prior to serving as President and CEO of Honeywell's Home and Building Technologies Group, Terrence led the transportation systems group at Honeywell, where he helped oversee a substantial and well-known turnaround in their fundamental performance.

In essence, Terrence developed an extensive track record of both improving and growing multibillion dollar businesses at one of America's best multi-industry companies. Prior to his work at Honeywell, Terrence held numerous and diverse leadership positions, over 20 years at Air Products and Chemicals. He also holds both a bachelor and master degree in Materials Science Engineering from Lehigh University and an MBA from Wharton.

As a board, we're confident that Terrence will hit the ground running on September 4, and even more confident that we'll build on Axalta's success, and he will lead us to new heights of growth and value creation.

With that, I'm delighted to turn the call over to Terrence for a few brief remarks.

Thank you, Charlie, and I'm honored and excited to take on the leadership role for this strong company. I valued getting to know you, Charlie and the board, during the process and appreciate the confidence that everyone has placed in me. Simply stated, I plan to continue the tradition of value creation for our shareholders.

No doubt this is a dynamic and exciting time for our company and the coatings industry. I was attracted to Axalta due to its competitive position, talented executive team and the strength of its 14,000 Axalta team members who deliver every day for customers. I look forward to developing new and innovative offerings, deepening customer relationships and playing a positive role in the coatings industry.

It would be premature for me to answer questions at this time as I've not yet formally started at Axalta and I'm not yet an employee, but know that I look forward to getting to know many of you over the coming months.

Thanks again. And now back to Charlie.

Thanks, Terrence. For the balance of this call, we'll now shift and review our second quarter performance and update our 2018 full-year outlook based on current market conditions.

Axalta's performance in the quarter demonstrated solid execution, stable market demand and overall strong progress towards our communicated full year financial goals. This was achieved against a fairly unforgiving backdrop of significant cost inflation, including raw materials, freight, logistics and packaging, as well as several onetime events during the quarter. One of our primary objectives in the current year is to offset these inflationary headwinds, which we're doing with the combination of price increases as well as ongoing structural cost reductions across our businesses.

Overall, our quarterly financial results met our guidance expectation we provided in April and featured continued strong organic industrial end-market growth, solid price pass-through in both Refinish and Industrial and the ongoing benefit from cost reduction and productivity initiatives.

Raw material inflation of low double digits compared to second quarter 2017 has posed a real challenge for our commercial teams, but we're seeing solid success in most business lines with price pass-through, while we continue to discuss this critical need with our Light Vehicle automotive customers with whom we've been having regular dialogue.

Turning to Page 3 of our slide deck, I'd like to review some of the highlights. First of all, we grew our second quarter net sales by 10.8% year-over-year, which included a positive contribution of 5.6% from acquisitions largely completed in 2017 as well as foreign currency tailwinds of 2.4%. Organic volume and price contributed an incremental 2.8% net sales growth, representing a sequential acceleration in the year-over-year comparison from our first quarter's 1% growth level.

This net sales growth result met our expectations and was delivered against the backdrop of stable global demand during the quarter but not without certain challenges, which included some incremental weakness in Latin American economies, a reduction in foreign exchange tailwinds to more modest levels and impacts to Light Vehicle production from a couple of plant-specific customer factors stemming from their suppliers largely in North America.

We're also pleased that realized average pricing accelerated in the second quarter, with almost 2% increase to average price on a consolidated basis comparing to 1% in the first quarter. We also note that the continued growth from Industrial end markets demonstrated impressive results in expanding this business via both inorganic and substantial organic investment.

Consolidated Axalta organic volume in the quarter increased by 1%, which included a substantial Industrial organic volume growth of 10%, somewhat muted by flat volumes in transportation.

Axalta's second quarter adjusted EBITDA of $248 million increased 9% from $227 million last year driven by both acquisition contribution and organic growth. Margins declined modestly to 20.5% from 20.9%, mostly due to the ongoing raw material inflation and modest business mix changes, offset partly by higher average prices, lower operating costs and foreign currency translation benefits.

Taking a look at Axalta's end-market performance. Our Refinish net sales growth of 6.1% included mid-single-digit positive price mix and ongoing moderate FX tailwinds. Business conditions in Refinish markets remain solid, and we continue to expect meaningfully stronger net sales growth for the remainder of 2018 aided by clearly less challenging year-over-year comparisons for the second half of 2018.

Our Industrial end markets posted substantial 40% net sales growth in the second quarter, including a 24% contribution from acquisitions, driven mostly by the Wood and Spencer Coatings businesses that were completed on June 1 of last year and now fully lapped our year-over-year comparisons. These deals have been great success to date for Axalta and are both meeting our target and expectations.

Organic growth is also robust in Industrial, with about 10% organic volume contribution for the quarter, underscoring the result of several years of active investment in the business. The broad Industrial demand landscape still appears supportive and robust today.

Light Vehicle net sales decreased by 1.5% in the period, with ongoing lower average pricing associated with customer price concessions given mostly in 2017, offset somewhat by low single-digit FX tailwinds. Volumes were broadly stable, with ongoing modest growth in EMEA and Asia-Pacific, offset by slightly lower volumes in the Americas, due largely to Axalta consumer exposures and some temporary impacts from plant-specific issues. These included a supplier fire and separate supplier strike impacting several OEM plants in the U.S. and the general strike in Brazil impacting logistics there for several weeks in the quarter, where we have a large presence.

Auto production globally was largely steady sequentially, including stable demand in North America through the second quarter. However, build forecasts globally has been by trimmed recently by automotive forecasters as demand appears to be moderating somewhat in Asia-Pacific and Latin America, while in EMEA, there's been an increasing impact from the timing uncertainty around the need to adapt certain engine technologies to new emission standards, which is expected to be a transitory issue as it relates to regulation as opposed to fundamental market demand. Axalta expects to broadly match this build outcome for the year adjusted for our specific customer mix.

Commercial Vehicle net sales increased 1.4% in the quarter and were modestly up in constant-currency terms. Global heavy-duty truck demand remains firm. The production rates in regions including North America have now lapped strong prior year periods. Axalta continues to see ongoing growth in Commercial Vehicle from all of our regions, except EMEA during Q2. Price/mix was flat for the period, and overall market conditions across truck -- across both truck and non-truck commercial customers remain supportive, and we do expect this business to perform well in the second half.

Regarding price/mix and transportation. We continue to discuss with our customers the need to achieve offsets for substantial cost inflation across our businesses, including low double-digit raw material inflation. Market conditions thus far 2018 have prevented significant agreements on this topic to date. Our discussions continue, and we remain optimistic that structural inflation will be recognized over time with offsets, as we've discussed previously. That said, we're working with partners to reduce our cost structure in areas required to maintain the long-term margin and competitiveness of this important business line for Axalta.

Turning to our balance sheet and cash flows. Free cash flow in the second quarter was $107 million compared with $74 million last year. The improvement was driven largely by improved earnings comparisons, coupled with modest improvement in operating assets and liabilities.

We ended the quarter with net debt to trailing 12-month adjusted EBITDA of 3.6x versus 3.7x on March 31, as increased operating profits and the slightly weaker euro were offset somewhat by lower cash balances resulting in part from our share repurchase in the quarter.

As for our capital allocation strategy, we've now spent 140 -- excuse me, $104 million year-to-date on share repurchases. Most of this was completed during the second quarter, and we plan to continue to be opportunistic with share repurchases for the remainder of the year.

Regarding operating highlights. We continue to execute on our Axalta Way program with substantial cost reductions in process, both in the long term to drive operation structural efficiency and in the near term to offset broad cost inflation headwinds.

One of our key Axalta Way initiatives relates to manufacturing equipment adjustments. As we seek all means at increasing our cost competitiveness globally, we're seeking the closure of our significant production site in Mechelen, Belgium and transferring the production to other sites within Europe. This is a perfect example of the hub and spoke operations model we discussed with our investors in February at our Capital Markets Day. Pending final board approval, we would expect to finalize this footprint decision soon, and we'll communicate an incremental restructuring charge along with associated substantial annual savings once finalized.

Also related to footprint changes, we started up our new Wood and Refinish site in Minneapolis, Minnesota, and also further invested in the land associated with a further manufacturing site in Nanjing, China.

In other operating highlights, our Axalta Operating Excellence Program continues to ramp, and we now deploy to a total of 8 sites, with 4 done this past quarter. As this progress continues, and as our AOE program matures at deployed sites, this initiative will continue to contribute at an increased rate over time from broad productivity and production quality improvement.

In terms of innovation highlights, we're on track to introduce at least 250 new products this year as we noted last quarter. Through June year-to-date, we've introduced over 120 new products, with some notable examples, including new advanced primers and clearcoat in Transportation in EMEA and the Americas, a new back-sand primer in North America Refinish and our Metalak's value Refinish product line launched in Mexico.

In summary, Axalta's second quarter results were solid and on plan and demonstrated our continued progress in both price recapture and ongoing realization of growth from significant innovation investment, notably in Industrial.

Our end markets remain largely stable. We're also carefully monitoring areas of pressure, most notably related to global growth, the potential impact of trade and tariffs, automotive production in some regions and ongoing cost inflation. We're taking immediate and proactive steps to offset these variety of headwinds. We believe our peers are doing the same and the broader stability in the coatings market should serve Axalta well as we seek to achieve strong shareholder returns this year and beyond.

Regarding the topic of tariffs and any prospective impact from escalated trade tensions, this is a challenging topic to forecast, but we note that the majority of our sales and income are generated by product source and manufactured in the regions where end products are consumed. Axalta does not shift inputs or finished goods globally in amounts that are significant in the context of our consolidated businesses. But in cases where we do this, to meet customer demand or requirements, we plan to take actions to minimize any tariff exposure over time. Based on what we know today, we believe that any impact to our reported financial results would be less than 1% of adjusted EBITDA based on current contemplated tariffs on a gross basis, and this amount could be reduced by actions taken to resource product in different regions.

Of course, the greater concern from tariffs and broader trade wars comes from the impact to global consumer behavior and demand, and this is something we will continue to monitor actively.

With that, I'll now turn the call over to Robert, who will share some further detail on our results.

Thank you, Charlie, and good morning everybody.

As you can see on Slide 4, second quarter net sales, excluding FX tailwinds, increased 8.4% year-over-year. This included 15.4% growth in Performance Coatings, while Transportation Coatings net sales declined 2.4%.

Second quarter growth was driven by 5.6% acquisition contribution, coupled with modest increases in organic volume as well as accelerating and positive price mix effects. Organic volume included strong growth in Industrial, offset by a moderate as-expected decline in Refinish volume, largely in North America as well as a modest decline in North America Light Vehicle, largely due to several one-off customer events in the period that Charlie mentioned earlier.

Overall price and product mix realization remained positive in the quarter. Most of the pricing progress to date has continued to be in Performance Coatings across both the Refinish and Industrial end markets. Price/mix in Refinish increased mid-single digits, while Industrial was also up low- to mid-single digits, underscoring solid progress in the segment to offset real inflation. Price/mix in Transportation Coatings remained slightly negative for the period.

FX translation benefits decelerated sequentially given dollar strengthening of late, down to 2.4% benefit from a 6.3% benefit in Q1, principally driven in this quarter by a weaker euro and Chinese yuan.

Adjusted EBITDA of $248 million in Q2 increased 9% versus the prior year. Adjusted EBITDA margins declined very modestly by 40 basis points in the second quarter, reflecting the impact of higher variable costs, including raw material, freight and packaging cost inflation. These cost factors were partly offset by lower operator -- operating expenses through Axalta Way savings and pricing within our Performance Coatings segment, which contributed to sequential improvement in margin in the second quarter of 160 basis points.

The one-time impact to EBITDA of the OEM plant issues related to supplier interruptions, the trucking strike in Brazil and costs related to our potential Belgium plant closure was approximately $5 million. Absent these costs, our second quarter adjusted EBITDA would have been slightly above our expectations. We do, however, expect most of this is timing and could be made up during the second half of the year.

Turning to Slide 5. Performance Coatings Q2 net sales increased 18.3% year-over-year, including an FX benefit of 2.9%. Constant-currency growth was driven by 9.2% acquisition contribution and 4.8% higher average selling prices, while organic volumes increased 1.4% for this segment.

For Refinish, Q2 net sales increased by 6.1%, including a 2.7% FX tailwind, driven by a robust net sales growth. During the quarter, we made strong progress in adding new body shops in North America, Europe and Asia, and in increasing the penetration of both our premium and mainstream product lines. Average pricing in all 4 regions was strong, with mid-single digit positive contribution globally for the period.

Industrial net sales increased 39.6% year-over-year, including acquisition contribution of 24% and 3.3% FX benefit. Organic net sales growth in the low double digits was very encouraging, including positive contribution from all regions as well as positive volume growth in all regions except Latin America, which witnessed a modest pullback overall. Average price and mix was accretive in the quarter in the low single digits benefiting from pricing actions across the businesses as required to offset inflation.

Performance Coatings delivered Q2 adjusted EBITDA of $177 million, a 20.2% year-over-year increase. Drivers included volume drop-down benefit, improved price mix and completed acquisitions, offset partly by higher raw material input inflation. Q2 adjusted EBITDA margins of 22.5% were slightly better than the 22.1% reported margin last year, reflecting our ability to offset raw material inflation with price increases in Performance Coatings.

Turning to Slide 6. Transportation Coatings net sales decreased 0.8% year-over-year in the second quarter, including a currency benefit of 1.6%, with steady constant-currency net sales in Commercial Vehicle, offset by a slight decline in Light Vehicle. Segment volumes increased low single digits in Q2, more than offset by ongoing favorable price/mix similar to last quarter.

Light Vehicle Q2 net sales decreased 1.5%, including a 1.6% FX tailwind. Volumes increased slightly, with growth in EMEA and Asia-Pacific, offset by a decline in the Americas, including the effect of several customer-specific impacts that reduced production in the period.

Q2 average price and mix was down low single digits, reflecting the digital pressure from mid-2017 customer price agreements. We remain in active discussions with numerous OEM customers regarding price increases to offset raw material inflation. We've made some progress and expect to make more as our customers recognize the structural cost pressures we continue to face. At the same time, we have increased our focus on lowering our cost structure in the Transportation business to maintain our long-term margin profile.

Second quarter Commercial Vehicle net sales increased 1.4%, including an FX benefit of 1.2%. This relatively flat net sales result reflects the annualization of strong prior year production rates for heavy-duty trucking and other Commercial Vehicle end markets.

Commercial Vehicle production for the industry remains robust, increasing 7% global growth during the quarter, including contribution and growth from all regions, albeit slowing somewhat in Europe in the period. Forecasts for Commercial Vehicle currently assumes demand stability for the remainder of the year in most regions, albeit with some slowing anticipated in China.

Nontruck commercial customers also continue to enjoy strong demand, supporting end-market growth broadly for Axalta across products as we generate around half of Commercial Vehicle sales from nontruck products.

Transportation Coatings generated second quarter adjusted EBITDA of $71 million versus $80 million last year, with associated margins of 16.8% and 18.9%, respectively. The lower margin comparison was driven by headwinds from unfavorable price/mix and raw material inflation, offset to some degree by higher segment volumes and lower operating costs.

Turning to Slide 7. Cash and equivalents totaled $551 million at June 30. Total reported debt was $3.9 billion, resulting in a net debt balance of $3.3 billion versus $3.1 billion at year-end and $3.4 billion at March quarter-end.

Our net leverage ratio was 3.6x at quarter-end versus 3.7x at first quarter-end. The slight decrease was driven by stronger operating results and the weaker euro in the sequential period, offset partially by a lower cash balance, in part due to share repurchases made in the period.

Q2 free cash flow, defined as cash flow from operations less capital expenditures, was a source of $107 million compared to $74 million in the same quarter a year ago. The improvement year-over-year was due to overall adjusted EBITDA growth and improved working capital.

Our working capital-to-net sales ratio at quarter-end was 13.4% compared with 14.4% a year ago and similar to Q1 levels. This included the effect of normal seasonal working capital fluctuations. We reiterate our expectation for the year of modest working capital use, driven largely by adjusted EBITDA growth, which would imply an improved working capital-to-sales ratio by year-end.

In April, we completed a refinancing transaction that included amending our term loans, executing cost currency swaps, which resulted in $475 million of debt being converted to euros and swapping the fixed-rate debt while improving overall pricing. As a result, our fixed-rate debt now totals 72% of our total debt.

Turning to Slide 8. We have revised our previously provided financial guidance for 2018 as shown. For net sales, we still expect growth of 6% to 7%, excluding FX. But based on updated consensus currency forecasts, we now see a 2% tailwind from FX for the year, down from the 3% we highlighted in our April call. As-reported growth, therefore, is expected to be 8% to 9%. This continues to incorporate 3% growth from acquisitions completed in the last year.

Regarding end-market conditions, Charlie noted earlier that our markets remain steady and appear healthy, but we have seen some moderation in economic forecasts and, most importantly, in automotive production expectations looking forward, which we have incorporated into our outlook within the Transportation Coatings segment. Based on our current view of Refinish markets globally, we believe we are on track to meet our expectations for the year in this end market. Finally, industrial markets we serve remain robust based on broader macro-level data.

Our adjusted EBITDA outlook has been maintained at $950 million to $980 million, but we now expect to see our results more likely reported within the bottom half of this guidance range given pricing dynamics within Light Vehicle, volume pressure notably in Europe from emissions regulation transition, raw material inflation and a slightly revised consensus FX outlook.

Regarding phasing of adjusted EBITDA in 2018, we expect third quarter to approximate 24% of full year adjusted EBITDA at the midpoint of the range, with Q4 implied at somewhat stronger than Q3.

Guidance for interest expense remains at $165 million.

Regarding taxes, we are maintaining our adjusted effective income tax rate in the range of 19% to 21% for the full year.

Our free cash flow guidance remains $420 million to $460 million, reflecting consistent overall assumption since our last update, so the drop through the cash flow will be commensurate with adjusted EBITDA results within the range.

Our capital expenditure and D&A guidance remains unchanged; while share count guidance is now at 244 million given recent share repurchases.

This concludes our prepared remarks. We would now be pleased to answer any of your questions. Operator, please open the line for Q&A.

(Operator Instructions) Our first question comes from the line of Christopher Parkinson with Crédit Suisse.

So you've recently launched a lot of new products in Light Vehicle; I believe it's Aqua E-Coat and some stuff in clearcoats. Can you just comment on any mix benefits whatsoever on a relative basis? Just the time line for the ramps here? And just any broad, and if you can make them nonquantitative, thoughts on how we should think about the Light Vehicle price/mix into the second half and into '19? Just anything that could be helpful would be appreciated.

Yes. Chris, we've got a number of products. You highlighted the E-Coat. We have a number of clearcoats as well that come in during the course of the year. We do expect volume in Light Vehicle to increase in the back half of the year. However, on balance, that's probably not helpful to the overall mix given the type of products that are being introduced.

Okay, great. And just can you just talk a little bit more about the ongoing cost-cutting efforts? Obviously, that's something you highlighted at your Analyst Day. And how we should think about this into the -- as you said into 2019? And then also, just as a corollary of that, any progress on improving working capital as well?

Chris, this is Robert. On the question regarding the cost-reduction initiatives, those continue progressing well, and we're actually right on our management budget in terms of how much we had forecast it to be in savings through the first half of the year. And we're projecting still to hit the $50 million cost savings number that we had projected for the full year. Given some of the pressures that we're seeing in the Transportation segment, we are ramping up our cost-savings initiatives to compensate of that as much as we probably can. And then regarding working capital, year-over-year, we did have some improvement second quarter of last year to the second quarter this year. We did, however, versus our own internal expectation, have a little bit of a headwind in terms of some of the inventory build that we did in preparation for entering into the consultation with the Belgian works council. And we also, from an accounts receivable perspective, were slightly higher than we had budgeted internally simply for the reason that we generated a higher level of sales than we had forecast.

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

Charlie, first off, congrats. You will be missed. And congrats to you also, Terrence. But just to clarify on Chris' question, does guidance assume price realization for auto OEM in the back half of 2018? If so, is it specific to a region or more broadly speaking? And how should we think about the time line of pricing realization in that segment as we tighten up the models for the last 2 quarters?

So in terms of the year, I think we've been fairly conservative on our price outlook, Ghansham, for the second half of the year. Unfortunately, market conditions have not been such that we have been able to increase price yet in that market. But as we mentioned, we will continue our efforts there. And we've also ramped-up our cost-reduction effort, in particular, in the Transportation segment itself.

Okay. That's helpful. And then for my second question, just in terms of auto Refinish, clearly, you're executing on pricing for this segment, broadly speaking. But did volumes come in line with your internal expectations for the second quarter? And just sort of related, can you update us on your volume forecast for the back half of '18 in context of one of your competitors making some cautious comments near term for North American auto Refinish?

Regarding North America Refinish, in terms of what we expected to see in the quarter, it was consistent with what we expected to see as we lapped the distributor working capital adjustments. And as you know, in Q3 and Q4 of last year, we had a pretty significant volume drop due to that change. So the comparisons in North America Refinish volume should be sequentially much easier in Q3 and Q4. And then in terms of overall market conditions in that end market, we have not seen over the last quarter any material change that affects our thinking for the full year.

Our next question comes from the line of Jeff Zakauskas with JP Morgan.

In your introductory remarks, Charlie, you said that you plan to stay on as Chairman. Historically, Axalta's Chairman and the CEO were the same person. Is that a different stance that the board has? And by staying on, do you mean that you intend to stay on at the pleasure of the board for a longer period of time or for a year or so?

Yes. Thanks, Jeff. I think it in no way is reflective of the long-term change in stance by the board. But a couple of comments. I think, one, we want to make sure we have a smooth transition. Obviously, as Chairman, you always stay on at the pleasure of the board, but I plan to stay on long term. I think we have a great team, not only with myself, but our lead director, Mark Garrett, who, for many of you know, is very active in the chemical industry at Nova and Borealis, and then Terrence coming in from Honeywell. So I actually feel like we've probably got the strongest executive team and board that's out there. Of course, I'm biased. But no, Jeff, I think it should also signal consistency in our strategy, our views on M&A, both on long-term industry consolidation and all the things that I think people would naturally have questions about. So I think we're going to have a lot of fun with it. It also gives Terrence the time, a good smooth transition, time to get around and meet a lot of our customers, analysts, investor base. And I think it's been well received by, as you would guess, some of our top investors on the team that we have at the top.

Okay. And then, I guess, for Robert. The SG&A really dropped nicely year-over-year, and even sequentially in spite of sequential sales growth. What were the largest factors behind the year-over-year decrease in SG&A, and also the sequential decrease in SG&A?

Jeff, the decrease in SG&A was due to the absence of the Venezuela deconsolidation impact, also the reclassification of technical sales from SG&A to cost of goods sold, and the absence of acquisition-related costs as well as the impact of cost savings. And in terms of the magnitude of that reclassification of technical sales from SG&A to cost of goods sold, that was about $15 million for the quarter and should be roughly $60 million for the full year.

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

Charlie, best of luck in your new opportunity.

Thank you, David.

Just looking at the guidance cut, maybe about $10 million to $15 million, could you break it out between the 2 segments? Was it 2/3 in Transportation and 1/3 in Performance, something like that?

David, in terms of the guide for the full year, I'd say that big picture and macro, certainly there's a lot of rhetoric at the moment on trade and tariffs. And I think everybody is still trying to understand what the global impact of that can be in terms of any potential impact on demand. We didn't see much on that in the second quarter, as we commented in our prepared remarks. In terms of sourcing product and the impact there, it's not a material number, but it's uncertain and unclear what the impact of trade and tariffs could be to overall global demand. And in terms of the overall guidance for the full year, it's not really related to Industrial, it's more related to Transportation. And we've seen IHS lower builds from 2.4% for the full year to 2.1%. We've seen builds come down in China and Europe and most notably in NAFTA. Now they've raised their forecasts for 2019, but for the remainder of the year, there is that impact.

And just on Refinish volumes, you had an easy comp in Q2. Did something happen in the underlying market that caused the number to be -- volumes to be negative in the second quarter?

No. We implemented the changes that we previously discussed in our Refinish business at the end of Q2 last year. So we had some impact last year, but it wasn't an overly material amount. So really the easier compare begins in Q3.

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

Question on Light Vehicles in Europe. I think you indicated a transitory issue there. I was wondering if you could speak to the phase out of diesel engine vehicles in that market and how that would affect Axalta over the near term and the longer term?

Yes. Thanks, Kevin. It's Charlie. I think that that's still to be determined what models, how its manufacturer is going to do that. Clearly, the shift is going on and then the whole balance is what's going to be hybrid, what's electric versus just gasoline. I think we have pretty good views from our individual customers on how that's going to work out. We actually feel like longer term, while there's some short-term issues, as you know, some of the models they're restricting purchases on, some models you can't order, and I think that that's reflected in Robert's kind of comments about a little concern in the second half of the year because we just don't really know some of those production forecasts, although to date, we'll come in a little better than we thought. But I think long term, we feel pretty good about the OEMs that we're aligned with and the models they're going to be producing and as they phase out of some of diesels, we actually think on a couple -- with a couple of OEMs, we'll pick up some business that today we don't have.

And then second, if I may, on the tariff issue. Recognizing that it's early and there's still a lot of uncertainty, I'm curious as to how you approached the calculation of the EBITDA impact of less than 1%. Coatings tend not to be traded in large volumes across border. So maybe you could help us out with how you're thinking about the impact on raw materials and inflation and so forth?

Kevin, it's Chris. We did a calculation based on what we know about existing tariffs and potentially announced tariffs, and we included any potential impact of the already announced and proposed tariffs through July. Using that, we then calculated any direct impact that we have in terms of tariffs paid and any indirect tariffs that we would experience through our suppliers. And on that basis, we came up with that result. That was the methodology we used.

Very good. Charlie, Terrence, I'd like to add my congratulations to you both as well. Best of luck.

Yes, great. Thank you.

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

Charlie, Terrence, congratulations to both of you.

Thanks, P.J.

Charlie, you had several merger discussions in the last couple of years. With your retirement announcement, does that change -- is there a change in strategy or at least maybe change in timing of any potential M&A?

No. I don't think so. I think that, as you've always heard me say in conferences and on these calls, I think that the industry continues to be very poised for consolidation. We -- certainly, we see that going on quite a bit at the lower levels with the M&A activity that if you look across the major players, we're all engaged in. And in fact, if anything, those pipelines have even gotten more robust just given some of the pressures some of these smaller companies are coming under. Now, that all said, I think there's a couple of them have highlighted some of the valuation expectations from these players. But again, I think we all feel pretty good about that. But I really believe that the industry consolidation will continue. It's certainly been on a little bit of a pause the past year, as people have been focused on other activities. For Axalta specifically, no. I think as I highlighted earlier, I don't think it's any change in strategy for us. We feel good about the company we have. We see potential things that can be done out there. But I think, me remaining as Chairman -- if you look at Terrence's background, not only in driving business excellence but also change in businesses he's been involved, I think discussions Terrence, myself and the board have had, I think we're all like-minded on the opportunity that exists out there for shareholders.

Okay. And then I want to go back to the Refinish segment. It seems like you are having some volume issues almost for a year. I think second half of last year, you had some distributor destocking. First half of this year, including this quarter, you had negative volume growth. So wondering if there is any structural issue here. Are you losing share? Or is it because of MSO consolidation? Can you talk about that?

P.J., in terms of the overall market, obviously, there's been consolidation at the shop level. There's been a consolidation at the distribution level. We've adjusted our business model to reflect that and have grown nicely. We're adding shops, as we had in our prepared remarks, in North America, in Europe and in Asia quite nicely. We're also building out our mainstream product portfolio in addition to our premium product portfolio. So at this time, in terms of the long-term structural changes in the Refinish market, we haven't really seen any.

What I would add there, P.J., is if you look at third and fourth quarter, I think it will be obvious some of the changes have started to shift through from the standpoint that -- what we're doing there. We are seeing in some regions where when you look at EBITDA growth being up and margins being up in the business, some of that's a direct reflection of conversion from solventborne to waterborne. And I think we've highlighted before, some regions like China, we're doing a lot of conversion to waterborne and that particular part of our business grows. And volumes do drop but margins go up as a result though. But I think I would step back and look at it as we look at full year, as Robert highlighted earlier in the comments, we're right exactly where we thought we'd be and very happy with what we've got coming to us in the next couple of quarters in a couple of regions like North America and EMEA.

I would add to that as well that in the second half of the year, we will fully expect to see significant revenue acceleration in Refinish. It wouldn't surprise us to see double-digit revenue growth in the second half of the year. That would include significant volume growth. Clearly, there is an easier comparison in the third quarter. We expect that, however, to continue in the fourth quarter. So I think you'll see somewhat different profile from third quarter on.

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

In Industrial, 10% organic volume growth, could you elaborate on what drives that? And also how sustainable that type of growth is?

Well, Aleksey, as you know, we've invested quite a bit in that business over the last few years, including feet on the street, in putting in place the right people with the right profile and knowledge in the different segments. But if you look at the segments within Industrial, core volume for us and price increases were strong, general industrial growth from new wins was good and we also had price increases. Powder showed strong growth from price increases as well as some volume gains. Our Energy Solutions business increased as well. And then wood market demand remained strong as building products and the kitchen market continue to expect to grow mid-single digit. So really, it's, I think, a reflection of the strength of the leadership in the business that we have as well as the investment that we've made over the last several years. Because if you look at overall Industrial production for the year, the forecast has been lowered from 3.7% to 3.4%, consistent with the lowering last year quarter, yet our team continues to exceed. And I think that's also a function of the lower market share that we have in many of those verticals.

And in China, you mentioned lower Light Vehicle prices. Can you discuss that situation? Some OEMs were talking about more challenging environment in China in general. What's your outlook there in Light Vehicle and Commercial OEM markets?

So in terms of the LV market in China, we have not seen market conditions conducive to capturing price thus far in that market. And with some of the volume pressure that's been in China as well, that may also be somewhat hindering the ability to capture price. But again, that's a keen area of focus and continues to be for us, but we will adjust our cost model accordingly to deal with that.

Our next question comes from the line of Vincent Andrews with Morgan Stanley.

And I'll offer my congratulations as well. Just another question sort of around the tariff issue. And I guess from a sort of more second derivative effect. Some of your customers are going to see higher raw material costs as a function of steel tariffs and what have you. How does that impact your conversation with them about pricing? Does it kind of make the conversation more sympathetic? And if everybody needs to kind of deal with the raws, does it make it easier? Or does it make it more challenging or does it just depend?

So far, we haven't seen any of that pressure from a standpoint of they talk a lot about volumes and where they're going to shift steel production from. But there haven't -- we certainly haven't seen them coming back and asking us to contribute to that. I think in many cases over the past year or 2 years, the coatings industry has absorbed more on the raw material pricing side than we've passed on. We continue to be very data-driven on that, not only in the coil business with some of our other markets. So right now, we continue to highlight to our customers that we bore way more pain than they have so far. But again, no conversations yet, but we are kind of watching to see how they think about sourcing and what they think it does to their end demand. My belief is still though that a lot of this depends on the relative acceleration of these tariffs and how fast they come about because in many cases, if they have to pass it on to their consumer, the more they can know about it, the more time they have, the less impact it's going to be overall. But so far, the conversations have been positive.

Okay. And then just a follow-up on Light Vehicle pricing. There obviously were some contract pricing adjustments, you said largely in 2017. But can you just give us a sense of -- I mean presumably, if you start lapping those decreases, which should make the price line, if nothing else, start to move in the right direction, notwithstanding any progress you make on increases. So can you just give us a sense on sort of the cadence of the lapping as we kind of go through the balance of this year and into next year?

So for the remainder of the year and also for this quarter, I think it's important to highlight some of the comments that Chris made around mix. And in the price category in our bridges, it's price and mix together in that category. Therefore, you are seeing some mix effects. So with the conditions overall, we are aggressively working on a number of initiatives: cost reductions, price increases, we've implemented indexing at some customers, we've implemented surcharges with others. As new products come online and new colors are launched, those are obviously launched at prices that reflect the current environment for raw materials. And then we are also working on reformulations of products in order to deal with the raw material inflation that we're seeing. But for the remainder of the year, I think we still expect it to be a challenging environment from a price and mix perspective.

Okay. So we should we think about '19 as when the sort of comparisons become easier on the negative -- on the priced impacts?

Yes, they do start to get easier as you go through the year. Robert's point is just that mix becomes an incremental headwind, so there's some balancing back there.

Our next question comes from the line of Don Carson with Susquehanna Financial Group.

Just a question on what you're expecting for overall consolidated price progression in the second half. You were 1% year-over-year in Q1, almost 2% in Q2. If you look just at the price increases that you have in place now with customers, how do you see price progressing for the balance of the year?

In Performance Coatings, our expectation is that we would continue to achieve price commensurate with what we're seeing there in the environment from a cost perspective. And in the Transportation side, I think our expectation is that it will continue to be a flattish to challenging environment from a price-mix perspective.

So overall, you expect kind of 2% price progression in the second half, similar to what you had in Q2?

Yes, we don't provide guidance on specific elements of sales. I think it's captured in our 8% to 9% guide for the full year or 6% to 7% ex FX effects. But I think we've provided some of the drivers just from a conceptual perspective.

And then from a raw material standpoint, do you think it peaks now in Q3 as you look at your raw material basket? Or do you still think that you're looking at double-digit raw material inflation for the balance of the year?

Yes. Again, as we talked about on the last earnings call, our expectation, which at the time may have seemed overly conservative, is actually proven out in the numbers. We continue to still expect to see low-double-digit inflation as we move through the back half of the year. When exactly that inflection point will occur, it's difficult to predict because it depends on a number of supply and demand factors within each commodity as well as the overall price as well. So we really -- it's difficult for us to call that out.

Yes. Don, this is Charlie. Just a couple of points on that. I think some of the uncertainty you've seen in the past months, people starting to highlight may be a rollover of some lower TiO2 prices, oil where it is and it stays where it is. So I think that's some of the uncertainty the back half of the year, I'm like Robert, I agree low double digit is still a pretty fair number. It could be a little better, could be a little worse, we just -- kind of this changing economic situation in the second half of the year, there's just uncertainty around it, certainly on some of the bigger pigments.

And the other thing that I'd add, just a final thought. We are seeing packaging costs and logistics and transportation costs also increase. So from a price capture perspective, we'll also be going after price to offset as much of that cost increase as we possibly can.

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

Charlie, good luck going forward. You're anniversary-ing the Wood Coatings bolt-on. Is it fair to say that you don't have any meaningful inbound bolt-on deals in the pipeline that you're going to drop on Terrence soon after he starts?

No. I think our pipeline always stays pretty full. So clearly, I wouldn't highlight any significant thing that we're close to, otherwise, it would be disclosure. But no. I think we remain committed to looking at small and larger bolt-ons. And as I highlighted earlier, I think the pipeline for most coatings companies right now is pretty full. We would not pause any deal with Terrence coming on board. He's already getting up to speed on everything. And I think he will be supportive as I would expect if anything is in the pipeline that we decide to do.

And then, I don't know if Terrence is there to take a question, but congratulations. And I'm just curious whether your experience at Air Products included any time in the coatings-related chemical businesses that they had there?

John, it's Chris. Because Terrence isn't an employee, he's not any longer on an active line. So please direct your questions to the team here.

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

Two quick ones. One, could we revisit the topic of the pricing versus raw materials more from the perspective of the spreads? And when you think gross margins will hit sort of flat year-over-year comparisons for each segment? And then secondly, with the comments around the improving traction for the pricing, the changes in the contracts, the indexing, the efforts to catch up to the cost inflation, and then the comment around the transitory headwinds in Q3, should we think about a second half to first half of 2019 bridge as a bit more aggressive than you've had historically because some of the effects in the back half of 2018 are transitory?

In terms of the inflection point from a margin perspective, if you look at EBITDA margin and the performance out of the business, we're actually executing quite well in terms of price capture to offset the cost of inflation that we've seen, and you can see that in the margin profile. And if you look at Q4 to Q1 to Q2, you see that steady improvement in the EBITDA margin. So we're very pleased with that. The area that is challenging, due, again, to some of the market conditions in Light Vehicle, is really getting price on that -- in that segment that's -- or in that end market that's important to really changing that. And that's difficult to predict when those market conditions will change. And in terms of the second half versus first half, I think it's too early for us to provide a guide on first half of next year. But as we get towards the back end of the year, when we have our December outlook call, we can provide more insight at that time.

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

Congrats, Charlie and Terrence. When you think about Transportation Coatings, EBITDA looks like it will be down 17, 18. What do you think broadly needs to happen to get that business back on track and growing EBITDA again?

Yes, thanks. This is Charlie. I think what happens and it always happens in their market is it's all about innovation, it's about controlling cost and it's about adjusting with each OEM. So as you know, this market is made up of many, many players, going many different directions. So certain parts of our business, I think we're very happy with and I wouldn't touch. In other parts, we're going to focus on changing demand patterns, changing models. So I think what you'll see, as Robert highlighted earlier when he talked about some of our Axalta Way initiatives, we will continue to innovate with new products to take value and get price as part of that, where the customer understands the value proposition and it makes sense for both parties. We're already doing that as we speak and you'll start to -- you'll continue to see that despite some of our older lines. But then I think also we -- like our competitors, I would guess, are doing, we will adjust the cost structures for -- to maintain long-term healthy margins in the business. Some of those cost actions we're already doing today. They were already planned, so it's not anything new. But I think we'll continue to adjust. As many of you know, we invest over 4% of sales in total R&D and process support. So we've got room to make some changes there and make adjustments. I think you'll see, as Robert highlighted, accelerate some of those efforts because we are committed to maintaining long-term healthy margins in the business and growing volumes over time. But I think we are at a point where when you look at China demand and the shifting from some multinationals to the Chinese OEMs to all these car companies with electric vehicles, self -- not self-driving but certainly more active driving technology, changing strategies, for example, at Ford and FCA, so I think those are opportunities for us that we look and say long-term, we feel pretty good about the health of business. But it's going to take a different cost structure, it's going to take a different set of products. You continue to see us launch products like ambient flash, quicker drying, less overspray, more efficient. For example, we worked with one supplier last year; while it cut consumption by over 50% on a particular line, we now enjoy that business long term 100%. So I think like any business, we're just going to adapt our strategy, but we are committed to maintaining healthy margins and price recovery in that business. We have a lot -- again, we don't want it to look any different than what we have on the Performance side of our business, and that's what we're committed to do. So I think over the couple sequential quarters, you'll see us take and continue to take actions on all fronts.

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

Just a question on Transportation Coatings, price versus volume. Going back a couple years, it looks like volumes were positive in the first part of '16 Transportation Coatings -- sorry volumes were negative and you were able to get price. I mean, is that kind of what is the trade-off that goes on here as well, that at times, when you are seeing difficulty on the volume side, it's tougher to get price as well? Maybe just discuss that.

I think in general, the 2 are not necessarily correlated. I think if you go back to 2014, 2015, we had a lot of new wins related to the carve-out of DuPont and kind of the re-equilibration of market share in the industry. We had a number of launches in a number of regions and a number of new product introductions that took place at that time. So you saw a greater amount of volume. Now that we've achieved a little bit more of a parity between the major players, it's all based on innovation and service as well as overall market conditions. But when you look specifically at Q2, I think it's important not to take Q2 and gross that up for the full year, because there were onetime events there. One of our major OEM customers had a supplier issue and another one of our major customers had another supplier issue that basically they brought down their builds, which brought down our volumes in North America in particular. And then we also had the trucking strike in Brazil. So I think really Q2 has been affected by those onetime events, and we tried to estimate what the impact from some of those onetime events were in our prepared remarks.

Right. And just another question on M&A. Is there -- it seems like you are heightening your focus internally on cost reductions and so on. Does that make it more difficult to consummate deals this year? Or how should we think about the likelihood that we'll see some deals from you guys this year itself?

No. I don't think it affects our capability at all to continue to execute on M&A. What you saw the last couple of quarters, we took a little bit of a breather because we had such high activity last year. And one of the things we're committed -- we've done 16 acquisitions over the past 2.5 years. And we felt like last year, we did 5 just within about a 4-month period. We felt like we wanted to make sure we had good integration on those. One was a carve-out. One had an SAP conversion. And I think it -- from an operations standpoint, we want to take time to digest all those. We've now done that. I don't think to take the cost out in any way affects the team and the people who do the -- the business teams that actually do the acquisitions and then the operations team who do the integration.

Ladies and gentlemen, our final question for today comes from the line of Bob Koort with Goldman Sachs.

This is Chris Evans on for Bob. Sticking with the Transportation segment, EBITDA margins there are now well below the 20-plus percent level you reported a year or so ago. With the implementation of cost programs and the potential for maybe price recovery at some point, where do you expect profitability for that segment could be over the longer term?

Well, I think it's important when you look at that business. Obviously, it's not only Light Vehicle but it's also Commercial Vehicle. And Commercial Vehicle is also a very attractive business. And in Light Vehicle, as we have -- at some point, we'll get price through introduction of new products, through indexing as well as potentially from price increases with some of the OEMs. So we would expect over the medium term to see margin improvement in that business, not only from some of the cost-reduction measures that you mentioned, Chris, but also from some of the top line adjustments that we would expect to occur in the next several quarters.

Maybe just more specifically though, just, I mean, is that -- was the 20%, 21%, is that an attainable target again going forward? Or is that sort of enhanced by the maybe deflationary factors in that time period is just kind of on a level, is that what the expectations might be?

Yes, we haven't provided forward guidance from an EBITDA perspective at the segment level. We provided that at the total company level. But I think our comments around what some of the drivers could be give you a directional sense of our thinking there.

Great. And maybe I can squeeze the last one in on -- you opined a little bit on the raws in the quarter and your guidance for the year. I mean, can you give specific color on any precise raw material that you're seeing in the quarter? Any just trends that might give you confidence or directionality on how those might trend sequentially for you in the back half?

I think if you look at our various baskets of -- or major categories of raw materials, solvents continue to move up due to the higher cost of feedstocks. On monomers, we have significant supply-side constraints. In some of the resins, we have pretty big -- pretty good demand, but also fairly constricted supply. Other resins, again, we have supply constraints that are still there. In isocyanates, there's tightness due to outages and we continue to see not only in isocyanates but other categories, force majeures that occurred during Q2. Pigments, we still see TiO2 at relatively high prices as well as some of the other pigments. And then from additive, a lot of which -- additives, a lot of which come from China, there have been supply reductions due to the enforcement of a lot of the Chinese environmental policy. So you put all that together, and I think that, for the moment at least, we continue to believe that we'll see the overall raw material basket inflate in low single -- low double digits. And as we've mentioned, there's additional inflation in packaging and in logistics and transportation that we're also going to have to go out and get price to offset.

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

Yes thanks. And I'll be real brief. I think as a company, the first half of the year, I couldn't be happier with our team on our execution. I think we said as far back as our Investor Day, that this was a year all about execution given the raw material -- or given the inflation we see not only in raw materials but, as Robert highlighted, in the freight logistics. So I'm really proud of the team that we're delivering on that.

I think it's always -- never exactly like you think you're going to get there, but we're getting there. And I do think we've got plenty of actions on the Transportation side that, over time, we feel good about that business too recovering.

So I'm even more pleased, we got good solid demand in our markets. But I think as we look at the second half of the year, it's all about execution, continuing to get price, continuing to deliver on the sort of margin recovery, taking costs out, accelerating some of our cost efforts.

And then last but not least, I look forward over the next couple of months to introducing Terrence out to our customers, our employees and to some of you on the call who haven't met him yet, and we'll be doing that and working on that over the next couple of months here in the quarter.

So again, thanks for all of you for your support, your questions, and we're -- look forward to the second half of the year. Thanks, everyone.

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