Axalta Coating Systems - Earnings Call - Q1 2016
April 28, 2016
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by. Welcome to the Axalta Coating Systems First Quarter twenty sixteen Earnings Conference Call. Presenting today will be Charlie Shaver, Chairman and Chief Executive Officer and Robert Bryant, Executive Vice President and Chief Financial Officer. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Today's call will be recorded. Replays of the conference will be available through 05/05/2016. Those listening after today's call should please note that the information provided in this recording will not be updated and it is possible that the information will no longer be current. At this time, I'd to turn the conference over to Chris McCray, Vice President, Investor Relations for Axalta Coating Systems for a few brief legal notices. Please go ahead, sir.
Speaker 1
Thank you and good morning. This is Chris McCray, Axalta's VP of Investor Relations. We appreciate your continued interest in Axalta and welcome you to our first quarter twenty sixteen financial results conference call. Joining us today are Charlie Shaver, Chairman and CEO and Robert Bryant, EVP and CFO. This morning, we released our first quarter financial results and posted a slide presentation to the Investor Relations section of our website at axaltocs.com, which we will be referencing during this call.
Both prepared remarks and discussion during this call may contain forward looking statements reflecting the company's current view of future events and their potential effect on Axalta's operating and financial performance. These statements involve uncertainties and risks, which may cause actual results to differ materially from those forward looking statements. The company is under no obligation to provide subsequent updates to these forward looking statements. This presentation also contains certain non GAAP financial measures. The appendix to the presentation contains reconciliations of these non GAAP financial measures to the most directly comparable GAAP financial measures.
For additional information regarding these forward looking statements and non GAAP financial measures, please refer to our filings with the SEC. I'd like to now turn the call over to Charlie. Good morning, and thanks for joining us today for a review of our first quarter twenty sixteen financial results. I'll first cover some of the highlights from the quarter and update our goals for 2016. Robert will then provide some additional detail on our financial results and full year guidance.
We'll then be happy to take your questions. So if you would, turn to Slide three of our presentation. We're pleased with our first quarter result, which showed both solid organic sales growth and continued year over year margin gains that we believe puts us on a solid path to meeting our objectives for the full year 2016. First quarter net sales rose 3% from the prior year before the impact of currency translation. Components of this growth were tilted more towards price than volume for the quarter, and this was due in large part to a drag from Latin America volumes as well as difficult comparisons in transportation versus last year's first half.
We anticipate these dynamics in our budgeting and planning process and in our plan for the period. It is worth highlighting that excluding Latin America, our volumes for the first quarter grew low single digits across the regions versus the overall decline of 2.1% we reported ex currency. In addition, there was also an offset a day in the quarter from some regions due to the early Easter calendar this year. We grew adjusted EBITDA 7% in the first quarter with $195,000,000 result exceeding the range that we noted for the quarter on our last call due to better than expected performance from several areas that we'll detail shortly. As I noted, we also showed solid margin expansion in the quarter with our adjusted EBITDA margin up 200 basis points to 20.4% from 18.4% last year.
Our operating initiatives remain well on track with sound execution seen in Q1. We've highlighted four major capacity expansions undertaken since our carve out in 2013. The last of these projects, an expansion of our resin capacity in Mexico, was commissioned in March and is successfully running product for our customers now. We're quite proud of our team's execution on that project, which was completed on time and on budget and at a compelling overall level of capital efficiency. Regarding our productivity initiatives, we also remain well on track for our full year targets of achieving $60,000,000 in overall savings from our combined Axalta Way and Fit for Growth programs.
We continue to evaluate all areas of the company for potential efficiencies. Recently, we focused on some of our functional and back office areas where we're standardizing our practices across the regions and automating certain functions where possible. Turning to our balance sheet and cash flows. Axalta's first quarter also met our plan with a lower seasonal use of working capital versus last year, including better year over year performance in each of the key working capital accounts. We also prepaid another $100,000,000 of our term loans in April subsequent to the quarter end, demonstrating our ongoing commitment to reducing leverage from both EBITDA growth and debt reduction.
We continue to expect to see a combination of reduced net leverage and improved cash flow this year versus 2015. As we consider our plan for growth for both sales and adjusted EBITDA for 2016, we believe we remain very much on track to accomplish our goals that we outlined in February. Top line growth of 4% to 6% excluding currency remains our target. And one quarter end, we continue to see our path to achieving this range. With clear strategies in place to get there including contribution from each of our end markets.
We're also confirming our full year 900,000,000 to $940,000,000 of adjusted EBITDA target with the first quarter offering support for this goal given solid performance versus our plan. Our primary focus for the year will remain on achieving these goals while also executing on the specific operational productivity targets to accomplish our planned growth and productivity savings. We continue to closely monitor our coatings end markets to see solid growth this year amid somewhat tepid broader economic backdrop in certain areas. That said, we remain pleased with our position in these markets and see our path to moderate mid single digit growth coming from a combination of modest market growth in our core refinish and light vehicle end markets as well as continued growth in our industrial and commercial vehicle end markets, where Xalta remains a smaller share presence and are executing a ground up expansion strategy. We look forward to updating you on our progress with this plan as we move throughout the year.
Robert will now walk us through our financial results in more detail. Thanks, Charlie, and good morning, everyone. Please turn to Slide four of our earnings presentation for a view of our first quarter consolidated results. Constant currency net sales in the first quarter increased 3% year over year, including fairly robust 4.8% growth in Performance Coatings and more modest 0.7% growth from Transportation Coatings. The main driver of this growth was broad based improvement in pricing.
Foreign currency translation reduced reported net sales by 6.4% in the first quarter, which compared somewhat favorably against the 10.8% currency headwind in the same quarter a year ago and 11.5% against last quarter. Axalta's net sales volumes on a consolidated basis decreased 2.1 from last year's first quarter. As Charlie noted, this result was largely due to a decline in Latin America during the quarter, particularly from South American countries, which continue to face notable economic pressure. Offsetting this pressure, we accomplished solid volume growth in Performance Coatings within EMEA as well as Transportation Coatings in North America. Asia Pacific also saw solid volume contribution in both segments as we expected.
Positive price contribution in the quarter was a helpful contributor to net sales growth before foreign currency impacts. The 5.1% positive effective price came from all regions except Asia Pacific and from both segments. We achieved first quarter adjusted EBITDA of $195,000,000 compared with $182,000,000 same quarter last year. This profit growth included an impressive 200 basis point improvement in adjusted EBITDA margin from 18.4% to 20.4%, driven by favorable price leverage as well as savings from cost improvements and productivity enhancement, offset only in part by ongoing growth investments similar to prior periods last year. The pace of growth in investment has slowed, but remains a factor in the year over year comparison given the ramp up of investments made during the course of 2015.
Moving on to our Q4 twenty fifteen Performance Coatings results. Net sales in our Performance Coatings segment increased 4.8% for first quarter year over year before the impact of foreign exchange, driven by solid growth in the developed markets and offset in part by slower growth in the economically pressured emerging markets. Volumes declined 0.6% in the quarter, but were positive if we exclude Latin America. Overall, volume growth in other regions was led by strong growth from Asia Pacific Refinish and by solid results from EMEA Industrial end markets. Average segment selling prices increased 5.4%, led by strong gains in Refinish across three of the four regions and stable overall selling prices in Industrial.
This net sales growth was offset by 7.3% currency translation headwinds compared with 12.1% headwinds seen in Q1 of the prior year. Refinish net sales increased 5.3% on a constant currency basis versus last year's first quarter, driven principally by broad pricing gains regionally as well as solid volume increases largely outside of Latin America. Constant currency net sales in our industrial end market increased 3.8% year over year, demonstrating our plan to grow faster than our industrial end markets in most regions and led by a strong showing in EMEA in the quarter. Volumes were mixed in Q1, but increased solidly in Refinish excluding Latin America and also showed reasonable strength in Industrial led by EMEA against the persistent backdrop of slower industrial production in most regions. Axalta continues to benefit from investment in industrial products and still expects to show accelerated growth in this end market as we progress through 2016.
Performance Coatings generated adjusted EBITDA of $110,000,000 in the first quarter, an increase from $107,000,000 in Q1 twenty fifteen. This growth was driven primarily by the positive drop down effect of price as well as variable cost leverage, offset in part by unfavorable currency headwinds and moderate increased investment spend. Adjusted EBITDA margins increased 110 basis points to 20.3% from last year, also reflecting the favorable dynamics just described. Switching now to our Q1 twenty fifteen Transportation Coatings results. Net sales in Transportation Coatings increased 0.7% year over year in the first quarter before currency exchange headwinds of 5.2%.
This modest growth was driven by a mixed set of regional and end market outcomes, but with growth driven by strong performance in North America Light Vehicle, ongoing solid volumes in Asia Pacific Light Vehicle, offset to a degree by ongoing pressure in South America and a somewhat weaker than expected result in EMEA versus planned. Q1 net sales in Axalta's light vehicle end market increased 3.6% excluding foreign currency translation with growth led by North America offset by considerable incremental weakening in South America. The Commercial Vehicle end market end sales declined 9.3%, excluding foreign currency translation, reflecting expected slower heavy duty truck production that began a quarter ago, but compounded by broader weakness in non truck related end markets such as agriculture and construction equipment. Transportation Coatings generated adjusted EBITDA of $85,000,000 in Q1, up nicely from $75,000,000 a year ago, with positive drop through from price and some variable cost benefit offset by unfavorable foreign exchange impacts. Margins have increased markedly with a full three twenty basis point increase booked this quarter, moving up from 17.3% the same quarter prior year to 20.5% from both positive price and mix elements in addition to some help from Axalta Way savings and variable cost relief from the prior year.
We move on now to some of our balance sheet items on Slide seven of our investor presentation. As of March 3136, cash and equivalents totaled $420,000,000 versus $485,000,000 at year end, while total reported debt was $3,500,000,000 resulting in a net debt balance of $3,000,000,000 Our net debt to full year adjusted EBITDA ratio was 3.5 times at quarter ten at quarter end, an uptick from Q4. The slight bump in leverage and lower cash balance reflects our normal seasonal working capital trends with first quarter typically requiring a net use of cash flow due to a combination of seasonal working capital patterns as well as cash interest and annual employee benefit payments that are made in the period. Free cash flow was a use of $18,000,000 a solid improvement versus the use of $99,000,000 in the first quarter last year, net of CapEx of $40,000,000 This improvement came from overall better working capital performance as the primary driver. Regarding capital allocation, we continue to focus our free cash flow on debt reduction, targeting leverage of 2.5 to three times net debt to LTM adjusted EBITDA within twelve to eighteen months, subject to variability around the timing of any acquisitions we may undertake.
Subsequent to March, we did prepay $100,000,000 on our U. S. Dollar term loans, as Charlie noted. We continue to evaluate the opportunity to rebalance and refinance our U. S.
Dollar and euro bonds. However, we need interest rates to move down a little further to be materially net present value positive and to achieve meaningful interest savings. Turning now to Slide nine. Charlie will now address some of our goals for 2016. Thank you.
As we highlighted on our February call, our goals for the year remain unchanged. First, we continue to target 4% to 6% net sales growth before currency. For the first quarter, we posted 3%, a bit shy of our target as volumes came in slightly behind expectations for the quarter due to Latin America. That said, we remain quite close to plan, which contemplates acceleration of volume as the year progresses. This reflects the reality of the comparisons, which are a bit more challenged in the first half as we expected phasing of growth initiatives with acceleration as we move through the year.
We would highlight that our plan for mid single digit growth includes an incremental price component, but also comes from a set of opportunities that remain within our line of sight. These include market share gains, geographic expansion targets and refinish, including stronger growth in North America as we move later in the year. Our growth in industrial is also near plan, but also has the opportunity to accelerate with new product launches that are slated to come on stream over the coming months. On the transportation side, we've got good line of sight in both Asia Pacific and North America to continue growth as long as fundamentals remain largely steady in these regions. This is already happening and we saw good progress in first quarter in both markets.
In EMEA, we see clear reason to believe both market and our relative growth will enable stronger comparisons as we look forward. Overall, we expect a balance between volume and price for our top line growth, but our plan suggests we'll shift somewhat through the course of the year towards more volume versus the first quarter outcome. Regarding operations, we're pleased that we've met all of our major milestones with regards to recent capacity expansions. For 2016, we believe we have numerous opportunities to focus on and refine operating metrics as we see continuous improvement, with benefits expected to improve working capital over the next several years. These goals are furthered by the addition of new senior operating leadership and augmented by additional organizational changes, which have put some fresh eyes on our assets.
We believe this will help us ultimately maximize our returns from solid core base of operating assets. I've already referenced our productivity plans as being on track, but it would be worth noting that our work continues to uncover new opportunities to go on beyond the 2017 endpoint of our existing Exalt Away targets. We'll have more to say about these elements in the future, but we continue to believe they have numerous levers to pull as we seek to turn Axalta into truly optimized organization. In the meantime, we're excited the company is rapidly adjusting our performance oriented culture, and we're seeing the benefits of pushing that deeper into the company each period. Regarding M and A, we continue to farm our list of targets and are optimistic we'll close on a number of tuck in acquisitions during the course of 2016.
Our efforts here are largely focused on lower risk deals with attractive returns that would substantially impact our balance sheet profile. Beyond M and A, our free cash flow continues to be directed towards delevering in twenty sixteen sixteen as we look forward to achieving our net leverage goal of 2.5 to three times within the next twelve to eighteen months, as Robert highlighted. To summarize, we're happy we exceeded our expectations for adjusted EBITDA for Q1, and we believe we're well on track to meet our full year goals this year. In 2016, we're focused squarely on operating execution and are excited about the expected outcome of ongoing growth, continued margin expansion as well as continued progress with our cash flow and our balance sheet. Our business remains fundamentally anchored in stable refinish markets, which will provide both a core of strong cash flow and a basis for longer term growth as we build out our global presence.
Further, we are anchored by our continuous innovation. We see many examples of that this quarter, which are too numerous to mention. We would like to highlight the global launch of our Aqua EC6100 product, which is the next evolution of our cathodic epoxy electrocoat offering, which clearly improves both functional performance as well as productivity for our customers. Current signs of moderate volatility in our OEM markets have caused some investors to reflect on some of the market cycle dynamics. We continue to encourage our owners to carefully assess both diversification by market and by geography as well as our strategy to gain market share in these markets that may over time experience cyclical pressure.
So now turning back to Slide nine and to Robert for guidance comments. Our press release and investor presentation outline our guidance components for 2016. I'd like to offer a few added comments on these items. Excluding foreign currency impacts, we continue to expect 2016 net sales growth of 4% to 6%. As we've noted, we believe our markets will continue to show ongoing growth this year, albeit possibly at a slower rate overall than last year given pressure in specific end markets such as heavy duty trucks.
We plan to exceed overall market growth with specific product introductions, market extension opportunities and self help actions to extend our presence in underserved regions and countries. We have updated our FX assumptions as indicated in the appendix to our earnings presentation and expect reported net sales to be flat to slightly down as reported. Our constant currency growth is expected to come from most regions and end markets, though we continue to see more pressure from South America than other regions. This was contemplated in our plan going into this year. We expected we continue to expect Refinish market growth to remain generally stable and assume modest share gain on top of market growth.
Our Industrial business is expected to continue to outgrow its end markets as we develop our business with the bottom up sales efforts and new products, which we saw in Q1, but believe may accelerate somewhat later in the year. Light Vehicle growth in low single digits, still in line with independent market forecasters, should also be augmented by modest share gains in markets where we've already won new positions with customers. Commercial vehicle market performance is expected to be slower, which we witnessed in Q1, but still show modest growth globally in the face of slowing Class eight heavy duty truck in North America. We do not anticipate significant outgrowth versus this end market in our plan. The slowing in certain non truck markets in Commercial Vehicle in Q1 was larger than expected at the beginning of the year, but the magnitude relative to our smallest end market is not enough to substantially alter our overall growth plans given offsets in other areas.
Our expectation for adjusted EBITDA continues to be in the range of 900,000,000 to $940,000,000 for 2016. This outcome implies a reasonable incremental margin on our 4% to 6% net sales growth ex FX, coupled with the guided additional savings from our productivity initiatives and partially offset by ongoing currency impacts and anticipated incremental investment spend on growth, which we expect to be at lower levels than last year. Regarding adjustments to EBITDA, we're also working to minimize the magnitude and duration of these factors. We've already noted that we expect around $25,000,000 this year from Axalta Way related onetime costs, which is materially down from $20.15. Also, reflecting our evolution as a public company, we have instituted a balance sheet hedging program at the start of Q2, which will help reduce foreign exchange rate remeasurement gains and losses also reflected in non cash adjustments.
One item regarding the second quarter. We do not expect our relative adjusted EBITDA growth year over year to achieve its peak run rate until the second half of this year. We note that our Q2 twenty fifteen performance was notably stronger than Q3 twenty fifteen, which we acknowledged at the time was due to certain timing factors that caused a stronger second quarter and which represents a tougher comp in Q2 twenty sixteen. This should be considered when modeling on a year over year basis. Other model expectations remain unchanged from our February 10 update.
We expect interest expense to be between 180,000,000 and $190,000,000 our income tax rate as adjusted to be between 2527%, a diluted share count of $242,000,000 to $245,000,000 shares, capital expenditures of approximately $150,000,000 and net working capital in the range of 11% to 13% of full year 2016 net sales. This concludes our prepared comments. We would be pleased to answer any questions you may have. Operator, could you now please open the lines for Q and A?
Speaker 0
Certainly. At this time, we'll be conducting a question and answer session. Session. Our first question today is coming from John Roberts from UBS. Please proceed with your question.
Speaker 1
Good morning, guys.
Speaker 2
Good morning, John. Good morning, John.
Speaker 1
Charlie, there could be some significant divestments out of the Shawn Williams and Valspar deal. Would you have any interest in the architectural paint market if something comes out in that space? Yes. Thanks, John. It's not something we thought about.
We just kind of watching with interest to see what ends up happening, whether there's any forced divestitures or Sherwin takes a different tack with the business. I think what I've tried to convey to investors and certainly to our Board is that we're open minded to look at whatever comes out there opportunistically and consider based on its base. So I we'll continue to watch with interest, but it's not something that we've particularly singled out at this point as a priority. And then Robert, what was the adjusted tax rate in the quarter? It looked like at least the apparent tax rate that we can calculate was higher than your guidance.
That's correct. The actual adjusted tax rate for the quarter was 26. What's the adjustment there versus what we can see? Yes. The adjustment is all the pretax adjustments that you see laid out in the adjusted net income schedule.
Yes. I'll work sort of offline then. Thank you.
Speaker 0
Okay. Thank you. Our next question today is coming from the line of Christopher Parkinson from Credit Suisse. Please proceed with your question.
Speaker 3
Perfect. Thank you very much. Your light vehicle volumes were pretty solid despite some concerns. What geographies were particularly strong? And based on your backlog trends, what are you seeing into the summer?
And then very quickly also in the long term, have you seen progress with local manufacturers in China as well?
Speaker 1
Yes, this is Robert, Chris. On the first point, think in the first quarter, saw North America perform quite strongly ahead of perhaps what many of us had originally anticipated at the beginning of the year. We also saw, I think Asia Pacific can continue to perform. That was perhaps from some people a question with regard to some of the tax incentives and other breaks that were provided in China if that demand would continue in the first quarter. We actually saw pretty strong demand, including from international manufacturers located in China.
In Latin America, I think as you heard in our prepared remarks, we continue to see very difficult recessionary situation in Brazil. We also saw some weakness in Argentina, continued weakness in Venezuela, and Mexico performed somewhat similar to North America, which was a nice offset. In Europe, just given our mix of customers and products, it was sort of I would characterize it as kind of a market neutral performance, and I think we have some opportunity to improve there. And then I think this is Charlie. I think going forward as we look at the rest of the year, I think the only we're performing pretty consistent what we thought the plan would be around global SAARs and specifically with our OEMs.
I think the one thing that we will continue to see is some of these trends where with lower fuel prices, lower energy prices, we certainly see these crossover SUVs, trucks, not only North America, but places like Asia Pacific stronger and some of the demand for smaller cars and midsize sedans to be weaker. So I don't think that materially changes our mix and it's something we kind of contemplated when we put our plan together for this year.
Speaker 3
Great. And also in the first quarter, you've continued to see a lot of MSO consolidation on the refinish side, including for some of your largest customers. Can you just comment on how investors should think about the potential benefits here as well as the cadence? And then also as the large get a little bit larger, do you anticipate any changes to contract pricing going forward? Thank you.
Speaker 1
Yes, sure. A couple of comments on that. I do think the MSO consolidation will continue in North America. The drivers to do that are pretty obvious from a productivity standpoint. Think second of all, the people who are doing the consolidation, not only a couple of the larger ones who we're affiliated with, but also some of the mid sized ones, I think they're doing a good job with the consolidations.
So I think they're delivering value to their customers, not only consumer, but the insurance companies as well. So I think as long as they continue to do a good job and manage their growth, everyone kind of wins in that environment. So I do think it will continue and I think there's a lot of external data on who knows how big they actually get over the next five years. There's a lot of data that shows they could grow to be half of the marketplace maybe over the next five years or so. We focus less on that.
We just really focus on service to the customer base we have today and over the next year or two and their continued growth, which continues to be really robust as reported out there. And then I think as far as the MSOs today as far as their pricing power, get asked a lot about. I mean, clearly a large buyer like that, they demand a lot and they already receive a fairly substantial, if you want to call it a discount in there. However, business model is also very different both in what we provide, how we provide it and also the distributor. What we bring to them is a lot of productivity.
So I think that it's a very different business model than we use in certain other segments of the industry in North America. So I think right now we're comfortable with where we're going. I think as long as we innovate and provide productivity to them, think we've got a good balance on what they're receiving and what we're receiving out of it. But I think in short that we believe all the factors are in place for that consolidation to continue. That being said, there's still plenty of place in North America for good well run small to midsize shops and we'll continue to support that base accordingly.
Thank you very much.
Speaker 0
Thank you. Our next question today is coming from Duffy Fischer from Barclays. Please proceed with your question.
Speaker 4
Yes. Good morning, fellows.
Speaker 1
Good morning, Duffy. Question
Speaker 4
around price, really nice quarter for pricing over 5%. But can you parse that out, how much of that would have been directly related to the currency, the negative currency effect where you're kind of just pricing to make backup currency?
Speaker 1
Yes, Duffy, this is Robert. I think it's important to highlight that we actually got price in all regions with the exception of Asia Pacific, where it was down where pricing was down just a tick. Some of this increase is pure price and some of it is also a slightly richer mix. But what I would say is that no one region or no one country accounts for the majority of the price increase that we achieved. It's actually just a result of a lot of hard work by our teams, not only this quarter, but over prior quarters as well as just the mix of products that we've been selling and some of those are higher priced and higher margin products.
Speaker 4
Okay. Thank you. And then if I just walk through the handy table you guys put at the back on currency, it would seem to indicate that relative to first quarter to fourth quarter, things should be, call it, 2.5% to 3% better, but yet annual guidance stays the same. Is that just building in a bigger buffer? Or are there a few things kind of big picture that are offsetting some of the benefit we're seeing from currency?
Speaker 1
So I think it's a couple of things, Duffy. I guess on just in terms of how we think about Q1 on the beat in terms of EBITDA, as you've seen us in the last couple of years in terms of carrying any of that over into future quarters, we continue to be relatively conservative with that, especially it being the first quarter and not knowing where some of the macros are going to go and not knowing how some of the currency is going to develop. There's no question that we're enjoying some benefit versus our budget in terms of currency. However, as a global company and unfortunately, not all the currencies are moving in our favor. So at this point, we're not seeing a dramatic tailwind on currencies in aggregate for the company.
Speaker 4
Thanks a lot.
Speaker 0
Thank you. Our next question today is coming from Ivan Marques from KeyBanc Capital Markets. Please proceed with your question.
Speaker 5
Great. Thanks. A couple of quick questions. First, in terms of what you're talking about in the second quarter, how you have tough comps, it looked like EBITDA, there's about 30% of your EBITDA rolled in 2015 in the second quarter. Do you expect that to sort of revert back to sort of the mid-20s where it's been historically?
Or how would you sort of gauge it in terms of the cadence through the year?
Speaker 1
Yes. I think the point that we were trying to make there, Ivan, is in the second quarter of last year, just given some of the patterns in distribution, as we highlighted last year, was a fair amount of sales that not intentionally got pulled from Q3 into Q2, just given some of inventory cycles. Additionally, what that did was create a tougher comp for us in Q2 And that was just what we wanted to highlight was that Q2, expect to be 2016 to be a tougher comp versus 2015. That being said, we did have a little bit of a beat here in Q1. But as we think about the rest of the year, given the programs that we've got in place and some of the customer wins and product wins, we expect to see EBITDA accelerate throughout the year.
Speaker 5
Okay. And then in the first quarter in your Refinish business in North America, was there is there any impact historically in terms of weather? So we had like a pretty light winter versus a pretty strong winter last year. So I would imagine in a strong winter there's more accents, etcetera. Or is that not too meaningful on a season in terms of seasonality for the Refinish business?
Speaker 1
Yes. Certainly, it can be. I would say if we look at this winter, we wouldn't say that it was a driving factor either positively positively or negatively. A couple of winters ago, yes, I mean it was a factor, but this year we didn't see it as a major factor, at least from what we've heard from our customers and seen in our business.
Speaker 5
Okay, great. And then my last question, I'll jump back in. Is the pricing strong, is this primarily technology driven or in
Speaker 0
terms
Speaker 5
of like mix or is it also price increases in terms of just chasing currency?
Speaker 1
It's a yes, it's a combination of both. I mean in jurisdictions where we've had high inflation, we've offset that high inflation with additional price increases. But we also had a pretty important component of the actual price increase fee, price increases in jurisdictions where there was not high inflation and some of that is most directly related to mix as well as the cadence of when certain price increases went into effect this year versus last year.
Speaker 5
Great. Thanks for taking my questions.
Speaker 0
Thank you. Our next question today is coming from Ghansham Panjabi from Robert W. Baird. Please proceed with your question.
Speaker 1
Yes. Hey, guys. Good morning.
Speaker 3
Good morning, Kash.
Speaker 6
Morning. Charlie, if I heard you correctly, it sounded like price will phase down in terms of sales growth contribution as the year progresses. Do you think that kind of points towards a weighting that's closer to fifty-fifty price volume by the back half? And can you also elaborate a bit more on why you think volumes will improve? Are you assuming the end markets improve?
Or is it your internal initiatives or both?
Speaker 1
No. I think as we've said before, it's this is Robert. Sometimes it's hard to predict exactly how you're going to get from quarter to quarter and year from year. And I think you're just seeing we've had some quarters where we've had higher volumes and less price and some quarters where we've had more price and less volume. And I think it's just looking at it on a stand alone basis in a single quarter, it's really hard to do.
You have to look at it, I think, over a yearly period just given the number of countries and regions that we're in around the world and the number of types of customers that we're in. I would say though that as we originally laid out in our guidance for 2016, we are expecting volume growth this year as well as contribution from price growth. Would we expect price to be 5% on a full year basis at the end of twenty sixteen? Probably not. Would And agree with Robert.
I think we've just as we look at some of our initiatives as we've gone through the year, business we've won, our things that are ramping up, we had always contemplated that some it was more of a volume in the second half of the year.
Speaker 6
Okay. And then just in terms of auto refinish, I'm sorry if I missed this, but can you just kind of break down volumes on a global basis? It seems like your peer group were up from a volume perspective in most regions. Did you participate in that as well? Thanks.
Speaker 1
So on a volume basis in Refinish, the business performed as we laid out kind of in our original plan for the first quarter. Again, volume can be driven also by the penetration of your waterborne products, which have less volume per se, but will contribute more on the price bridge. So we tend to look at it more on a total sales basis. So I think the 5.3% performance ex FX is really the factor that we look at more than the specific breakdown between price and volume.
Speaker 0
Okay. Thanks so much. Thank you. Our next question today is coming from Arun Viswanathan from RBC Capital Markets. Please proceed with your question.
Speaker 7
Good morning, guys. Good morning, Arun. Good morning. Just I guess some questions on auto OEM. Relatively strong performance, I guess, relative to the industry.
Maybe you can just tell us your expectations on how the year evolves from a volume perspective by region if you have that?
Speaker 1
I think as we look at OEM, I think as we had highlighted on previous calls this year, we're expecting to be up slightly on volume this year in OEMs. That growth really comes from three of the four regions we expect. South America, now within Latin America, Mexico would be up this year, but Latin America for us also includes Mexico and South America. So I would differentiate, but we're really not expecting any recovery in South America. I think we continue to think that that's how our business will perform this year with moderately up on growth over the year.
We've got like any portfolio there, we've got some winners and losers who we think will be either up or down with their bills as we go through the year. I would tell you the first quarter pretty much as we had expected. And I think short of any macro event, I think we talk about global SARS being slightly up this year. That's in general our view. We break it down by specific customers, we would expect to see the same thing.
But just to add something to what Charlie said there with some numbers. I mean, I think as we break through in The U. S, the 18,000,000 unit mark, at least according to some of the external market forecasters, certainly that is a high. However, they're projecting that that high could continue for another year or two. So it's difficult to say, as you kind of look out in your crystal ball how that market is going to evolve.
I think we're also encouraged not only by what we're seeing in North America, but also what we're seeing in China where you see builds up 5.5% to 6% at a market level as well as some strengthening with the international brands in China. I mean, think that being said, we'll continue to watch. What we watch in each region is dealer inventories, discounts, used car markets and I think that's why we expected some moderate growth this year in certain OEMs and certain models. But
Speaker 7
I
Speaker 1
think that's something I'm sure you guys watch and we do too as those are usually leading indicators of the market. As we come through the first quarter, we haven't seen anything that diverge from what our plans here would be.
Speaker 7
Right. Okay. Great. And then maybe you can just give us an update. I know that you paid down some debt post quarter.
What should we expect as far as deleveraging as the year goes on? Thanks.
Speaker 1
So debt paydown will continue to be the primary use of our excess cash flow. We have approximately $28,000,000 in mandatory principal payments as you know, which of course we'll make. We've just made $100,000,000 debt pay down. And then depending upon the pace of some of the acquisitions that we're looking at currently and how those play out during the year, we'll continue to pay down debt during the year. And as we've highlighted, I think on our last call, we expect to be within our 2.5 to three times range within the next twelve to eighteen months.
Speaker 8
Great. Thanks.
Speaker 0
Thank you. Our next question today is coming from Bob Koort from Goldman Sachs. Please proceed with your question.
Speaker 1
Good morning, guys. This is Chris Evans on for Bob. Just curious to hear how given the declines in Latin America, how you manage those? Kind of curious to hear what your variable cost structure is in the region or broadly. What are after these declines, how do margins look for the area?
So this is Robert, Chris. So on that point in Latin America, have a very strong position in several of our key markets in many countries. So I think it's a market that goes up it's like part of the world that goes up and goes down and I've worked much of my career in Latin America and have seen these types of cycles. We have a fantastic position in the light vehicle market in Brazil, good position in refinish and industrial. What we've been able to do in Brazil essentially, it's you've seen a market where demand has essentially fallen by 50% over the last two years and then some additional degradation here over the last two or three months.
Our business there operates above breakeven. And our team in Latin America and in Brazil have done a wonderful job adjusting the cost structure necessarily to that environment. We're fortunate in that about 20% to 25 of our workforce is actually temporary or variable. So we have the ability to toggle that. So we are operating at a small profit Brazil currently.
And if we look at other countries in the region, again, we're positioning for when those markets rebound. Obviously, Argentina has been a tough place. Venezuela has been a tough place, but those are also markets where we have strong market positions. And we've able to adjust our cost structure so that we're so that we are operating at a profit. But we remain committed to those markets because those are good markets with good margins.
And when the tide turns back the other way, they'll generate some nice profits for us.
Speaker 8
Thanks, Robert. And then just sort of going
Speaker 1
over to China, any thought on how beneficial the stimulus has been? And any risk that as that laps later in the year that demand might weaken in 'seventeen? I think certainly, I think that they recognized last year that how important the auto industry was to them. I think the stimulus will continue to be a key part of their keeping growth going in the country. That being said, I think when we look at builds being 4% up year over year, that would be consistent with how we would think about things with stimulus continuing.
I don't think we'll see additional actions to go any faster. China, we really look at China by region to what as you know, all regions aren't created equal over there. Some are doing better than others. And we dialogue with our OEMs that are over there to make sure our plan balances what they're seeing from their dealers. So I think the China market is pretty balanced right now.
There are a couple of regions where we're seeing build slow down a little bit, but it was something we I think even in last year we thought would happen. So I think they will continue to stimulus. I think the real question is going to be some of the actions, what are they going to take over the next couple of years around pollution, which is not really so much driven by their light vehicles, but we certainly have seen in other areas like Mexico City where people are enacting additional pollution controls that affect driving. And I think that's something you want to watch for over the next couple of years. And does that impact more of the Refinish business in some of those where miles driven would actually be changing or behavior changing by the consumer?
Speaker 8
Got it. Thanks.
Speaker 0
Thank you. Our next question today is coming from P. J. Juvekar from Citigroup. Please proceed with your question.
Juvekar:] Yes, hi. Good morning.
Speaker 2
Good morning, P. J. Charlie, Robert, I want to go back to this pricing issue. You got a 5.4% price increase in Performance Coatings, 4.7% in Transportation. That seems higher than competition is seeing.
And I think competition is barely holding on to price. So what allows you to take this price increase? And is there any risk to volumes as a result?
Speaker 1
Yes. Fair question, Vijay. Again, I think one of the areas where we've spent a lot of time as part of the new Delta is understanding exactly how much money we make in each one of our products and very actively and consciously managing mix in terms of product mix, customer mix, even sometimes country mix, so that we are able to maximize price. However, the timing of price increases can also come into play. And from one year to the next year or from one quarter to the next quarter, within those years, the price increase cadence is not always the same.
It will depend on market condition, competitive situation and so forth. So some may get moved up, some may get moved out. But essentially, it's heavily mix driven in the case of Q1. We certainly wouldn't want to leave you with the impression that in this market that we're actively out there gaining lots of price. It's been heavily mix driven.
And first and foremost with our customers, we focus on trying to achieve additional operational efficiencies internally, lower our cost structure internally so that we can offer our products at the most competitive price we can. Thank you. Yes. P. J, I would second that.
I think it's really more everything we've been talking over the past year and a half with people about is just exalts away studying our business, studying our mix, changing our mix. In some cases, there's technology shifts going on and you're seeing that. That's why it really was across all four regions. But I agree with Robert, you shouldn't walk away thinking we went out and raised prices across the industry because we all know that just in this environment that's really challenging to do and customers are expecting productivity, not price increases. And then just because Charlie hit on a key point that I didn't mention, PJ, which is the Axalta Way commercial work that we've been doing in terms of price leakage, how we manage discount rebates incentives, all of those flow down and actually affect you in price when look at these bridges.
So we've got that well rolled out in North America and starting to roll out of that in EMEA. So I think we're also starting to see some of the benefit from that project.
Speaker 2
And can you talk about your new OEM plants in India? And what's your outlook there? Sure.
Speaker 1
We announced a couple of quarters ago, I believe it was last fall, our new OEM facility. So as some of you may be aware, we actually manufacture in Sabli up in the Guajat area both refinish and OEM products. And with the continued car growth there and specifically some of the OEMs that are moving into India that we do business with, they've been looking for some time for us to establish a broader manufacturing base there. We're now doing that for a full line of OEM products, both online and for APC products. And that facility will come online over the next twelve to eighteen months.
And they'll be based in Savli, where we already have current manufacturing for OEM, refinish and industrial. Some of you may be aware, we have a very good refinish business in in India that's been around we've been there for quite a while. And again, we will continue to see India certainly with currency stabilized with Modi over the last couple of years. Continue to see India as a good place to invest and to grow and with a rising middle class and more diversity in types of vehicles and manufacturers vehicles. We believe we are cautious, but a good continue to place to invest.
Thank you.
Speaker 0
Thank you. Our next question today is coming from Vincent Andrews from Morgan Stanley. Please proceed with your question.
Speaker 1
Thanks and good morning. This is Matt Ginger on for Vincent. I'm curious in which non truck vehicle types you see weakness and how has the commercial aftermarket held up in light of the OEM declines? So when we separate out, obviously, there's heavy duty truck we talked about in terms of North America. We've seen the build rates dropped into sort of full year expectation of kind of 230,000 to 250,000 builds for the year.
That's what we had contemplated in our plan for the year, but obviously, it's down over prior year. That was contemplated. But we do see in other markets potential upside and positive builds when it comes to heavy duty truck. But when you put it all together and given our weighting in North America, of course, that heavy duty truck turn in North America has certainly has an impact, but again, one that we contemplated. The non HDT portion is basically rail, bus, utility vehicles, recreational vehicles, both on land and on water, general aviation and trailers.
So across that market, we have seen a picture of mixed demand globally for coatings for those types of products. But it's not really one of those sub segments or one region or one customer in particular that's behind that. Sure. And then in regards to the relative end market outgrowth, would you say that you expect the most outgrowth in industrial followed by light vehicle, then maybe refinish and then in line market growth in commercial vehicle? I'd say as you've laid those out in that order, the general order, that's a fair assessment.
Now whether industrial is the highest growing or whether refinish or light vehicle is the next highest growing. It's really hard to say. But I think in general, as you've laid those out, that should directionally be what we would expect to see this year. Great. Thanks, guys.
Speaker 0
Your line is now live, sir. Perhaps your phone is on mute. Hello? Yes. Hello.
Hi. This is Jeff Zekauskas.
Speaker 8
You had $23,500,000 of nonrecurring items. Is it fair to allocate half of those to cost of goods sold? And were acquisition related volumes, I don't know, helping your volumes by about 1% in the quarter?
Speaker 1
So if look at the add backs or the one time costs, I think the most important thing there is that those numbers, as we indicated, they would for 2016, have come down and will continue to come down throughout the year. The majority of the EGL is in other expense. And then in terms of the stock comp of 10,200,000.0 about 65% of it is in SG and A and about 35% of it is in cost of goods sold.
Speaker 8
And as far as the acquisition related volumes, was it at least 1% of your volumes this quarter or no?
Speaker 1
Think overall sales contribution, Jeff, it was approximately 1% in dollar sales contribution.
Speaker 8
Okay. And then lastly, not to beat a dead horse. If you exclude mix, this is in terms of your overall pricing. If you exclude mix and if you exclude South America and you assume some improvement in refinish prices, was the overall pricing of the company flat or did you do better than that?
Speaker 1
So if exclude those factors, we did better than that. Because again, we had we got price mix in, as I've mentioned, three out of our four geographies and in both transportation as well as performance, even pulling out the Latin America effect and even pulling out the other factor you mentioned.
Speaker 8
Pulling out. So you got price exclusive of mix in your transportation coatings business?
Speaker 1
I don't think we would get that specific Jeff, but what I would say is that we got price and mix in each segment and in all geographies.
Speaker 8
Okay, great. Thank you so much.
Speaker 0
Thank you. Our next question today is coming from Laurence Alexander from Jefferies. Please proceed with your question. Mr. Alexander, perhaps your phone is on mute.
Please pick up your handset.
Speaker 2
Good morning. So can you talk a
Speaker 9
little bit about the interplay between R and D cycles and your ability to sustain the price mix and share gain? That is after the current round of share gains in Asia, is there anything in your R and D pipeline that we should think of as driving a noticeable uptick in either pricemix or share gains in the twenty eighteen to twenty twenty plus period?
Speaker 1
This is Charlie. I think our R and D pipeline is very different depending on which segment you're looking at. But I would say over the next twelve to twenty four months, we have a whole series of new products that are coming out that in some cases are incremental innovation and in some other cases are completely new product lines reformulated going into some of these industrial segments that in the past we had both industrial segments and commercial vehicle segments where we have relatively small share. So I don't think there's any one big step up or any one big paradigm, but you will continue to see from us over the next couple of quarters a steady rollout of new products. Again, we invest over $180,000,000 a year total in R and D and process support.
So as you would guess, we've turned a lot of that over the last couple of years away from just pure core R and D and much more towards commercial innovation tied to customers, doing more with existing customers we have. And again, as we do that, as we gain additional productivity from those, in some cases get pricing, in some cases it's mix related to what we're doing. So I think you'll continue to see that add to the mix over the next year or two. But there's not any one particular platform that I would say is a paradigm for us.
Speaker 0
Thank you. Thank you. Our next question today is coming from Alex Zaffermalt from Nomura. Please proceed with your question.
Speaker 1
Good morning. Thank you. In Performance Coatings, your first quarter EBITDA was up 3% year over year. Do you expect the same pace to be sustained over the course of the rest of the year? Or expect it to accelerate meaningfully in the second half?
So in terms of the how that's going to play out sequentially, I think overall, we're confident on a full year basis that that business will grow quite nicely for us. Again, from one quarter to the next quarter, it's going to be a little lower one quarter or a little higher next quarter, Alexia. We saw that type of pattern last year as well. But just would reiterate, I mean, for us, our Refinish business is 43% of our sales, well over 50% of our profits and continues to do extremely well. And what is the typical seasonality in Performance Coatings?
And to what extent last year is a good or bad example? So you'll see it's obviously you'll see in Q1 is typically the lowest quarter of the year. You see a pretty market pickup in Q2 and Q3 and then Q4 that can be a little bit lower than Q2, Q3 sometimes. So it just depends on what everything is going on at that time of the year. Weather can have somewhat of an impact.
So far weather this year, as we mentioned earlier on call, does not seem to be driving any additional seasonality like you did say a couple of years ago. And final question, I may. On free cash flow, if I put together EBITDA guidance and flat working capital this year, is it too much to hope for free cash flow of around $400,000,000 or perhaps even higher? I think you're in the right zip code in terms of what free cash flow could potentially be if all the stars aligned and if everything worked right and if there was no FX impact on our cash position. And I could probably name off two or three more.
But again, we don't provide guidance on free cash flow per se. But if you look at the different components in terms of what we're assuming for working capital and the drop in our tax rate and so forth, we should generate a fair amount of free cash flow this year.
Speaker 0
Great. Thanks a lot. Thank you. Excuse me. Our final question today is coming from David Begleiter from Deutsche Bank.
Please proceed with your question.
Speaker 1
Thank you. Sorry, just on price again on transportation. You said in the comments price remained steady in light vehicle and commercial. Does that mean I guess that implies that the price you reflect in the sales variance was primarily mix. Is that fair?
That's a fair observation, David. And if I missed this, light vehicle volumes, including South America, they were down in the quarter? We talked about overall transportation volumes being down in the quarter. Didn't break out light vehicle volumes from commercial vehicle volumes. Okay.
Understood.
Speaker 0
Thank you
Speaker 1
very From the overall contribution, I'd just say directionally, again, Light Vehicle performed pretty consistently with our expectations. Got it. Thank you very much.
Speaker 0
Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further or closing comments.
Speaker 1
No, thank you. It's Charlie. I appreciate it. I know we're out of time, so I'll keep it brief. Again, a good start to the year, good first quarter.
Our markets remain solid. Again, I think we've highlighted the ones that are a little weaker this year than perhaps last year. But I think overall, a good start to the year for us. Pleased with our performance and we're looking forward as we go into the second quarter. In some ways, maybe actually a boring quarter because it performed as we would have expected.
So we'll take that, but a lot of great initiatives ongoing. And I think you'll continue to see us focus on the Axalta Way, driving efficiency productivity. And again, as you saw from our earnings, you see it showing up in all aspects of our business. I'm really pleased with that. And look forward to talking with you at the end of the second quarter.
Thanks, everyone.
Speaker 0
Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.