Ladies and gentlemen, thank you for standing by, and welcome to the Axalta Third Quarter 2018 Earnings Conference Call. All participants will be in a listen only mode. A question and answer session will follow the management presentation. Today's call is being recorded and replays will be available through November 1st. Dated and therefore may no longer be current.
I would now like to turn the call over to Chris McCray for a few introductory remarks. Chris, please go ahead, sir.
Thank you, and good morning. This is Chris McCray, VP of Investor Relations. We appreciate your continued interest in Axalta and welcome you to our third quarter 2018 financial results conference call. Joining us today are Charlie Shaver, Chairman Robert Bryant, Interim CEO as well as Sean Landon, Interim CFO. This morning, we released our quarterly financial results and posted a slide presentation in 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 the potential effect on Axalta's operating and financial performance. These statements involve uncertainties and risks, and actual results may differ materially from those forward looking statements. Please note that the company is under no obligation to provide updates to these forward looking statements. This presentation also contains various non GAAP financial measures. In the appendix, we've included reconciliations of these non GAAP financial measures to the most directly comparable GAAP financial measures.
For additional information regarding forward looking statements and non GAAP financial measures, please refer to our filings with the SEC. I will now turn the call over to Charlie.
Good morning, everyone. I'd like to begin our call this morning with a few brief comments, and then I'll turn it over to Robert. Clearly, with the announced CEO transition earlier this month, and stock market volatility in the coatings group immediately following, it's understandable that some of you might have questions relating to these topics. I don't have anything specific to add to what was stated on the October 8th press release regarding Mr. Hans's departure from Exalta, as you can likely appreciate.
But the board took swift action on the matter, and I'm glad that it was addressed efficiently, which was in the best interest of Exalta. As we look forward, simply like to say that both the board and I have great confidence in Robert as a leader. And we're really pleased that he agreed to step into the interim CEO role. Having worked with Robert for the past 6 years, I'm certain that he has the qualifications, acumen, and skill set to ably take on the role and be a very effective leader for Axalta. He clearly has the support of the management team and other many of you have also provided highly supportive feedback, which we all appreciate.
Regarding next steps, The board is undertaking appropriate deliberation in accordance with good governance principles to ensure that we make the correct decision regarding a permanent CEO position. We intend to conclude this process without undue delay, and we thank you for your patience in the meantime. With that, I'll turn the call over to Robert.
Good morning and thank you for joining us today as we review our third quarter financial and operating performance and provide an update on our 2018 full year outlook. Before we begin, I'd like to note that I'm excited and very proud to take the helm as Axalta's interim CEO. Having served as Axalta's CFO for nearly 6 years and given my background in both financial and operating roles, I feel very well prepared for this job. I'm honored to serve Axalta and our shareholders and I'm very excited to continue the path of value creation that we've pursued since we carved out and stood up this business in 2013. While clearly subject to a board decision on my interim title, I look forward over time to adding focus and energy to initiatives that I believe can accelerate Axalta's path to value creation.
We have a strong strategy in place that guides our operating execution that we have implemented for some time now. And team outlook call expected to be held in mid December. I look forward to our ongoing dialogue and updating you on our progress over time. Regarding Axalta's 3rd quarter performance, our results reflect solid operating execution and exceeded previously provided guidance We continue to see broadly steady demand across our businesses, enabling strong progress toward our 2018 financial goals. That said, our business economics continue to be impacted by substantial variable input cost inflation.
We remain focused on offsetting this inflation via a combination of price increases and productivity initiatives to backstop our margin structure. Broadly speaking, we are pleased with both our quarterly and year to date performance. While we face certain challenges common to coatings companies, including input cost inflation and foreign exchange headwinds, which we have factored into our outlook and revised guidance, We are largely on track Turning now to page 3 of our earnings presentation, I will review some quarterly highlights. We grew 3rd quarter net sales by 4.4% year over year. Which included constant currency organic growth of 6.5 percent as we have almost fully lapped all of the 2017 acquisitions.
This was driven by volume growth as well as continued acceleration of price and product mix components We reported substantial volume growth the prior year as a result of working capital adjustments with certain distributors in North America that we experienced in the second half of twenty seventeen. We also generated ongoing volume growth in industrial coatings, as well as in transportation coatings, where we forecasted and realized some light vehicle growth driven by new product launches slated for mid-twenty 18 and saw ongoing solid demand within heavy duty truck markets. Overall demand across our markets remains generally healthy, though we did experience some pressure from weakening emerging market countries. As well as modest volume pressure in industrial and EMEA due to the impact on our overall focus on margin performance over volume and some trade offs were made. Finally, we have witnessed some deceleration in automotive markets in China as demand has waned in the last several or WLTP transition from gas from diesel to gas engines.
Which is expected to be transitory We saw continued progress and acceleration of weighted average pricing sequentially in the third quarter, particularly within our Performance Coatings segment. On a consolidated basis, average prices and product mix increased nearly 3%. In Performance Coatings, average price and mix increased 5.7%. So while there remains work to be done to recapture inflation impacts and transportation coatings, we are doing quite well as a whole, which is reflected in our stable margins as a company this year. Our third quarter margins win from variable costs performance given some of the margin challenges we are seeing with some of our peers.
Axalta's 3rd quarter adjusted EBITDA of 235,000,000 increased 12% from $210,000,000 last year, driven by organic growth and improved average pricing, though offset substantially by variable cost inflation. Foreign exchange negatively impacted adjusted EBITDA by about 5,000,000 EBITDA margins for 3rd quarter increased to 20.6% from 19.2% given positive volume drop through from refinish and overall stronger price and mix effects. We are proud of our track record this year in offsetting inflation with both price and to sales growth of 13 price mix. The strongest overall contributor was North America, benefiting from comparisons to last year's results, which were impacted by distributor working capital adjustments. Business conditions in Refinish markets remain solid, based on our sales run rates and indications of ongoing market health from our body shop and customers.
Exalta's industrial coatings end markets reported another strong growth quarter with 7.2% constant currency net sales increases. Led by the Americas and Asia Pacific, though partially offset by a slower EMEA result this quarter. Including some of the timing factors unrelated to demand. Price mix continues to show progress here as well, with mid single digit increases for the period. So industrial end markets appear healthy, albeit including some uneven regional volume results, which may also be due in part to more challenging year over year comparisons and our preference for price over volume.
We remain on 2018 at a double digit rate of growth. Light Vehicle net sales were essentially flat for the quarter. Volumes grew low single digits, led by growth in the Americans, while Europe and China were impacted by broader auto demand trends. Auto production globally remains broadly intact, though we continue to see some impact from slowing demand in China. EMEA continues to see slower production associated with the WLTP engine technology changeover as a temporary factor but clearly seen in the third quarter data and in demand for Axalta.
Global production forecasts have been reduced from 2.1% growth for the year, to 0.7% growth of which a bit less than half of that reduction comes from China. Axalta has tracked broader macro auto demand this year, though we saw some boost to North America from new product launches around the middle of the year. Commercial vehicle net sales decreased 2.2.2. Percent on a constant currency basis in the quarter. Global heavy duty truck demand remains largely steady.
Though industry orders from Europe have moderated somewhat, and China is now firmly in the downtrend. As a reminder, we are not a significant share of the China heavy duty truck currently. North America And Latin America markets remain very robust lapping prior year production strength as well. Price mix was essentially flat in the period. Regarding average prices in mix and transportation coatings, we continue to dialogue with our key OEM light vehicle customers regarding achieving economic offsets to persistent raw material inflation.
While we've made selective progress in this regard so far this year, we continue to require substantial incremental economic gains to offset the inflation we've absorbed in the last 2 years. In the meantime, we're also executing additional cost savings and transportation coatings. A necessary component to stay competitive and maintaining our medium term margin profile. Touching on our balance sheet and cash flows, 3rd quarter free cash flow was $90,000,000 compared with $183,000,000 last year. We ended the quarter with net debt to trailing 12 month adjusted EBITDA of 3.5 times versus 3.6 times at June 30.
As increased cash balances at higher last 12 month adjusted EBITDA were partially offset by unfavorable currency impacts on our euro debt balances for the period. Regarding capital allocation, we have repurchased $150,000,000 as of Q3 year to date in shares of our common stock, including $50,000,000 in the 3rd quarter. This outlook for excess capital remains opportunistic, and we were also active in October subsequent to the quarter end. Passed on a few M and A opportunities in Q3 due to valuation expectations and because we had some internal high return investment opportunities with some of our key strategic First, our Axalta Way productivity program continues apace, and we are on track to realize our goal for the year of around $50,000,000 in savings. While laying the foundation for significant incremental savings over the coming years.
These savings have been helpful this year as well as an offsetting inflation across our businesses. We did report a $10,000,000 severance charge in Q3, which will yield $6,000,000 in annual savings. Included in our Exalta Way planning. 2nd, we finalized plans for the closure of our Meckland Belgium production site, and we are transferring production to other sites using our hub and spoke operating model substantial economic savings, of approximately $30,000,000 annually, which will start to be realized in the back half of twenty twenty as we execute against our plans. In addition to the $10,000,000, we also incurred $71,000,000 in severance charges in Q3 related to disclosure.
The cash for which will go out over the next 2 years. In terms of innovation investment, we continue to expect to introduce at least 250 new products this year. In the third quarter, highlights included the launch of in Refinish of a new low VOC base code in Canada. The global launch of Corollis, Portfolio And Industrial for Iron And steel substrates. And in transportation, the launch of a multilayer product system on 2 production lines for a major customer in the Americas.
In summary, Axalta's 3rd quarter results met our expectations, including demonstrated growth for refinish, near record high margins for Performance Coatings, ongoing growth from innovation, While we've done well to date, this outcome has not come without its challenges, including a reversion back to foreign exchange headwinds. As well as ongoing significant input and cost inflation running in the low double digits, including raw materials, freight and packaging. Looking to the balance of the year and into 2019, our end markets in most cases remained attractive and growing. Still we're monitoring global GDP growth, the impact of trade and tariffs, automotive production adjustments in some regions, and ongoing cost inflation. Our top strategic focus in 2018 remains offsetting these headwinds through ongoing productivity improvement and updating commercial terms with our customers.
For those of you who did not see our earlier form 8 k, Sean Lannon has been asked by me and the board, step into the interim CFO position. I have been grooming Sean to be my successor over the past 5 years. Sean joined Axalta in July of 2013 as our Vice President And Global Controller and has continued to pick up additional responsibilities since then. Including Financial Planning And Analysis as well as Treasury And Risk Management. Immediately prior to Axalta, Sean was role or at Trinseo.
Sean's broad experience and knowledge of Axalta positions him perfectly to fit in the role and allow the organization to stay focused on meeting our strategic a strategic thought partner. I could not be more pleased with his appointment. With that, I will now turn the call over to Sean, who will share some further detail on our financial results.
Thank you, Robert, and good morning, everyone. As you can see on slide 4, 3rd quarter net sales excluding FX increased 6.9% year over year, including 11.1% growth in our Performance Coatings segment and relatively flat in sales comparisons in Transportation Coatings. Acquisition contribution this quarter was also nominal as we have lapped the 12 month anniversary for most acquisitions closed in 2017. Broader drivers of 3rd quarter top line growth were led by organic volumes which rose 3 end. Most of the pricing progress to date has continued to be in the Performance Coatings segment across both the Refinish and Industrial end markets.
While price has yet to make substantive contribution and transportation, we are pleased that the consolidated picture remains very positive. We are doing well at maintaining our overall corporate margins. FX translation shifted to a headwind in the 3rd quarter. As expected and noted in our last update and outlook, given sequential dollar strengthening versus the euro as well as various emerging market currencies. The 2.5% headwinds compared with a 2.4% benefit in Q2 and a 6.3% benefit in Q1.
This dramatic reversal during 2018 was expected partially in the last quarter financial guidance update, but the magnitude was greater than our previous outlook. And as such, we have again revised our assumptions here looking forward. Q3 adjusted EBITDA of $235,000,000 increased 12% versus the prior year. Adjusted EBITDA margins increased 100 and 40 basis points to 20.6% in the 3rd quarter. The 3rd quarter results reflect a strong contribution of volume and price mix in the quarter, offset impactfully by higher variable costs, including raw material, freight and packaging cost inflation, as well as by notable FX headwinds.
Margins increased 10 basis points sequentially from the second primarily reflecting improved business mix and sequential continued improvement in average consolidated pricing. Turning to slide 5. Performance Coatings Q3 net sales increased 11.1% year over year, excluding an FX headwind of 2.2%. Constant currency growth was driven primarily by 5.7%, higher average selling price and mix benefits and organic volume growth of 4.8 percent for the segment. For refinish, 13.9 percent ex FX net sales growth were reflected both underlying market the as measured by end customer body shop count.
Refinish volumes increased in all regions and by nearly double digits in North America as expected given the less challenging comparison there. Average pricing in all four regions was also strong, with overall reported price mix up mid single digits globally for period. Product mix also contributed positively in North America. Year, excluding the 1.8 percent FX headwinds and including very modest acquisition contribution. Organic net sales growth for Industrial continue led by positive pricing contribution from all regions and mid single digit overall price mix tailwinds for the quarter.
Robert already noted that volumes were impacted somewhat by weaker performance for Europe in the quarter, which was driven primarily by certain volume trade as we continue to focus on getting certain customers back to appropriate margins to account for raw material inflation. Performance Coatings delivered Q3 adjusted EBITDA of $176,000,000, a 31% year over year increase, with strong price mix benefits, and solid volume drop through offset substantially by variable cost inflation and modest headwinds from FX. Q3 adjusted EBITDA margins of 23.4 percent were up 3.90 basis points year over year, representing the 2nd sequential quarterly improvement from the low of 19.7 percent in Q1. This is despite net sales being down sequentially from the 2nd quarter. This result reflects our success and performance and offsetting raw material inflation to date with price increases as required, coupled with incremental productivity, for Marig's Ultaway initiatives.
Turning to slide 6. Transportation Coating net sales decreased slightly year over year in third quarter. Excluding the currency headwind of 3.1 percent. Segment volumes increased 1.5%, which were slightly more than set by on ongoing unfavorable price mix impacts. The price component continued to show sequential reduced impact, while mix impacts was greater due to increased volume in light vehicle from certain new launches.
Light vehicle Q3 net sales were essentially flat excluding a 3.5% headwind. Volumes increased low single digits with growth in the Americas, partially offset by lower volume from Europe and Asia Pacific. Average price and mix were down low single digits in the period. Q3 commercial vehicle net sales decreased 2.2%, excluding a negative impact of 1.8 but we did see moderation of demand impacting net sales in both Europe and China in the quarter. Forecast commercial vehicle appear largely stable for the remainder of the year, led by ongoing growth in the Americas, albeit with some moderation in demand, seen in Europe and Asia Pacific.
Transportation Coatings generated Q3 adjusted EBITDA of 58 $4,000,000 last year with associated margins of 15.2% and 18.7% respectively. The lower margin comparison was driven by headwinds from unfavorable price mix and raw material inflation, partially offset by positive benefit from volume drop through. Turning to slide 7. Cash and cash equivalents totaled 588,000,000 at September end. Total reported debt was at year end and flat sequentially to the second quarter of 2018.
Our net leverage ratio was 3.5 times at quarter end versus 3.6 times at June 30th. A slight decrease was driven by stronger operating results and a slightly higher cash position, which we somewhat offset by a weaker dollar euro exchange rate of period end. Q 3 free cash flow defined as cash flow from operations, less CapEx totaled $90,000,000 compared to $183,000,000 in the same quarter a year ago. The year over year decline is primarily related to investment working capital, which was largely timing related, as well as the raw material inflation impact on inventory, and certain customer specific arrangements, which were a detriment to third quarter operating free cash flow. During third quarter, we took the opportunity to lock in attractive long term sales commitments and certain commercial terms with several performance go to customers.
Which impacted 3rd quarter and will impact the full year cash flows given cash investments made an amount at targets. These investments are expected to yield very attractive returns comparable to many of our historical M and A transaction which we have noted tend to target at least high teen unlevered returns. Our working capital to latest 12 month net sales ratio at quarter end was 12.6% compared with 12.4% a year ago and down from 13.4% in 2nd quarter. This includes the effect of normal seasonal working capital fluctuations. We expect overall working capital levels for the year 2018 to improve in the 4th quarter following a similar pattern to that of 2017.
For 2018. For net sales, we see growth of around 7% excluding FX. Based on consensus, currency forecasts, we see a 1% tailwind from FX for the year, down from 3% forecast in April and 2% in our July update. As reported growth, therefore, is expected to be around 8%. This continues to incorporate 3% growth from acquisitions completed in the last year.
Regarding end market conditions, our updated guidance incorporates some moderation and economic forecast including automotive production expectations for the balance of the year referenced earlier. We continue to believe we're on track to meet our expectations and refinished for the year and industrial end markets we serve appear to remain consistent and healthy based on broader macro level data. For adjusted EBITDA, expecting to finish the year moderately below the low end of our previous guidance range at approximately 935 to 950,000,000 whereas we had indicated the lower half of the previous range in our July update call. Impacts to adjusted EBITDA since our last update come primarily from foreign exchange impacts amounting to approximately $50,000,000 incremental negative driver between our July and October full year outlook. We also note somewhat lower net sales and margins from light vehicle, most notably in China, but also including revisions in EMEA.
Guidance for interest expense remains at $165,000,000. Regarding taxes, we are revising our adjusted effective income tax rate slightly to 18% to 20% for the full year, which represents the adjusted tax rate corresponding to adjusted net income and reflect some additional benefit associated with excess tax benefits to stock based compensation. Our free cash flow guidance has been revised to $330,000,000 to 350,000,000 This includes some impacts from reduced operating results and the cash outflow associated with the Performance Coatings customer business incentive payments, I referenced a moment ago. Our CapEx, depreciation, amortization, and share count guidance all remains unchanged. This concludes our prepared remarks.
We will now be
Thank you. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question today is coming from Duffy Fischer from Barclays. Your line is live.
Yeah, good morning. I was wondering, could you flush out a little bit more the program that's going to take some of the cash in Performance Coatings It sounds like maybe you're making a large investment in working capital, a $100,000,000 ish or so. So you know, if you kind of think about the high teens you talked about, that should be an incremental, you know, $15,000,000 plus of EBIT next year, but can you just kind of talk through what that is and exactly how that's going to work out?
Good morning, Duffy. Yeah, this is Robert. Regarding those investments, we're not going to comment specifically on the individual investments. But we do evaluate all customer investments from a value creation standpoint and enter into only those agreements that we view as having attractive financial and strategic returns. The agreements that we entered into in the third quarter, were very attractive from that perspective.
That makes up the majority of the variance that you mentioned. And then the other part is just related to the timing of some working capital accounts.
Okay. And then the market share that you guys are gaining in the body shops, Two questions there. Geographically, how is that broken out? And then 2, in general, when you pick up new body shops, the per body shop number, is that accretive or decretive to, kind of the overall business?
In the Refinish business globally, we're gaining shops in all geographies around the world. And it pertains to each individual shop and the accretion of those, it really depends on it really depends on the market and the size of the body shop, but the body shop that we add are accretive.
Our next question today is coming from Ghansham Panjabi from Baird. Your line is now live.
Hi, everyone. Good morning. I guess just following up on Duffy's question on auto refinish. Can you just maybe take that one step further and just characterize for us what you're seeing in this market on a global basis adjusting from your for your comparison from a year ago? Do you see any shift in end markets across North America and Europe just given the lower collision rates etcetera so far in 2018?
No, I think overall, we see very stable market conditions in each one of the individual geographies. As we expected in America given the commercial changes that we made last year, we expected to see a strong rebound in the 3rd quarter in terms of the year over year comparison and that's exactly what happened.
Okay. Thanks, Robert. And then just one more in terms of your low double digit cost inflation for 2018, realizing it's early. How should we sort of think about cost inflation for 2019 at this point? Are there any pockets that you're starting to see on a global basis.
It looks like TiO2, for example, has weakened a bit in certain geographies. Just trying to get, get some level setting from your end. As it relates to 2019? Thanks so much.
Yes, I think if we see oil prices stay at the levels that they're at today, essentially as we look forward into 2019, and we're not yet providing guidance for 2019, but as we look forward to next year, the rollover, the carryover effect of the inflation that we've seen this year would translate roughly into a low single digit, inflation number for raw material And at this point, in general, we're not seeing much relief in any of the categories, in each one of the categories of raw materials that we purchase, we do continue to see inflation.
Thank you, Robert, and good luck in your new role too. Thank you.
Thank you. Our next question today is coming from Arun Viswan from RBC Capital Markets. Your line is now live.
Great. Thanks. Good morning. And, yeah, congrats on the the new role, Robert. Just a just a question here.
On, and and welcome, Sean, as well. So on on light vehicle, I guess, you know, understanding that, you do have some new assumptions in place for for Q4. Are you also seeing potentially some moderation in your outlook for 'nineteen? From a IHS Builds forecast that perspective. Is is that likely to come down as well?
Up. So yeah, I mean, I think if you look at the IHS data for 2019, you do see that start to pull off a little bit and the primary driver of that, of course, is China. We saw China believe in July builds come down about 0.6% and then in in August, I think they came down something around 7.7% and then in September, 7.6%. So we've got a couple of months here, of China really pulling back from a build perspective. So I think we'll have to see, if that's just a momentary blip or if that's if that's an overall trend.
That's probably the biggest driver. We do see a little bit, of a slowdown in EMEA from a production from a production perspective, as well. But at this point overall for the market, I think we're not projecting outside of that any type of cyclical downturn.
Okay, great. And then just as a follow-up on the price cost side, Given some of the productivity gains, say the $50,000,000 this year and potential for similar amount next year, and your price increases, when do you expect that, you know, pricing should fully offset costs, including, you know, some of the the challenges you faced in in light vehicle. Thanks.
So overall within performance, I think we've, we've done a nice job as far as, you know, offsetting that raw material inflation, both between, you know, getting price as well as getting the productivity, you know, transportation as you clearly can see. And we're still a little behind as it relates to 2019. We'll be giving more guidance on that when we give our December update as far as the 2019 outlook goes.
Okay. Thanks.
Thanks. Our next question is coming from David Begleiter from Deutsche Bank. Your line is now live.
Thank you. Good morning. On Robert, in performance and Refinish, were the customer arrangements you signed related to the market share gains you referenced as well in Refinish?
No, they were not. These type of customer arrangements into which we entered are long term contracts. With strategic large customers in Performance Coatings. So we would see the benefit of that as we as we move forward over the next over the several years, they wouldn't have had any impact at all on third quarter.
Were these new customers to Axalta?
These are existing customers to Axalta who are growing quite nicely. Very good. And lastly, on OEM pricing,
I know it's been difficult challenging pricing. Any movement by your large German or Japanese competitors in perhaps raising OEM pricing?
Probably shouldn't get that specific in terms of pricing trends that we're seeing in the marketplace. I think, you know, overall as a market, that market continues to be somewhat challenged from a profitability perspective for all the players in the coatings market. I think we all continue to work with all of our customers in order to explain and highlight the amount of cost inflation not only on the raw material side, but also on the freight, logistics and packaging side, and then now the new element of tariffs. And I think we're all working together with our customers to highlight, the impact that that's had to our profitability. Additionally though, our customers always expect us to continue to work on our cost structure and to become as efficient as we can.
And we're also doing the same thing.
Thank you. Thank
you. Our next question is coming from Bob Court from Goldman Sachs. Your line is now live.
Good morning, everyone. This is Chris Evans on for Bob. In North America refinished, just curious if you were to exclude the benefit from comping against the prior year issue, what might you estimate the volume growth would have been in the third quarter? And then also, U. S.
Vehicle miles driven is finally stalling out after several years of steady growth. How correlated is this metric to Axalta Refinish sales in the U. S? And curious if you have any insights into trends in other significant regions?
Chris, I'll let Chris McCray comment on the second part of your question. On the first part of your question, if we take the sales and profitability drop, that we saw in the third quarter of last year related to some of the changes that we made. The increase in sales and profitability that we've seen this year more than offsets that drop. So that gives us a general indication that not only did we recuperate, what saw in the third quarter of last year, but given some of the market share gains, specifically that we've made in North America, refinish, that we've also had some growth.
Yeah, Chris, I think that it's unfortunate and we wish there were one, but, to date, we've been unable to find any publicly available source data that really properly correlates to our business that we could use as a direct indicator. So while we have, snippets of the market from insurance companies, from other industry observers, nothing that, that really correlates directly to refinish sales, either North America or our global business.
Thanks. And then a question just regarding the rationale behind the recent, consent solicitations you put out about a week or so ago. In that release, you cited this as being an enabling fact or potentially permitting the company to affect certain corporate transactions. Can you provide more color here on what terms are restrictive and maybe the underlying need for this change?
Yeah, this is really just a technical amendment. Our parent company, the registrant was not a guarantor under the debt structures. So we're adding that as part of the consent and it'll allow for additional flexibility. Just as far as internal legal entity restructuring and really going forward. This just allows us on a quickly changing regulatory environment to move our legal loans around and have that flexibility.
Perfect. Thanks guys. Thank
you. Our next question is coming from Kevin McCarthy from Vertical Research Partners.
Good morning. Would you comment on the impact of the implementation of WLTP in Europe on your auto OEM coatings volumes in 3Q and whether or not you would anticipate, any impact in the current quarter.
Basically for Q3 and Q4, we've seen Western Europe light vehicle builds decrease approximately, year on year by about 400,000 units. And we can't directly attribute that to to the impact of WLTP, but we believe it's safe to say that this would be the primary driver of that reduction when looking at industry level data.
Okay. And then a second question, if I may, on capital deployment, I think you mentioned in the prepared remarks, that you passed on a few opportunities recently. Obviously public market equity prices are shifting rapidly. You know, how would you, how your thinking evolved with regard to repurchases versus, ongoing acquisitions in industrial and perhaps other areas?
Kevin, on that one, we had, as I said, we had a couple of, internal high IRR customer investment opportunities. And so we did in terms of looking at some M and A deals that we had in the pipeline now. We did take that into consideration in terms of our thinking. And in terms of our capital allocation moving forward, we have, as we've commented before, we have a $675,000,000 share repurchase plan, in the market, we repurchased a little over $200,000,000 against that plan. And our stock repurchase plan will continue to be, continue to be opportunistic in nature.
And then the only variable there is really the amount that we would buy back in any given quarter as a function of what we see in terms of those internal investment opportunities as well as M and A opportunities. And there, it's basically just a risk reward trade off decision
Thanks very much.
Thank you. Our next question is coming from Don Carson from Susquehanna Financial. Your line is now live. Yes. I want to go
back to refinish. I had 2 specific questions. First one is related to the underlying end market growth back at your Capital Markets Day in March. You said you thought the market would grow 3% to 4%. Is that still the case?
Because I know a competitor of yours is saying that the market's actually declining by that amount in in the EU and, in the Americas.
Yeah. I think overall if we look at, at we look at the global Refinish market, we continue to see favorable market trends certainly in North America even stripping out what we think the estimated effect was of the change in commercial terms that we made last year, we feel that we made good us in the third quarter. In terms of Europe, some of the overall economic conditions have slowed slightly. But we continue to have a franchise business in that region. And I would point out, as we've mentioned before, Capital Markets Days and other conversations, you know, we are overweighted in some countries, but, underweighted in, in other countries within, the Europe, Middle East and Africa region.
And so we're really focusing on some of those countries where we are underweighted for growth, and we are making progress there.
And a follow-up on the mix benefit in Refinish. I know over time you said that, you know, you're transitioning to more, higher percentage of value product lines in your Refinish business, which I would think would be negative from a price standpoint, but you had a positive contribution from mix. Is this because the year ago comparisons where you had the destocking and most of that destocking was in your premium product lines?
That's correct. And at this point, the mainstream, and product lines that we have around the world, it's a growing area for But in terms of absolute contribution, it's not large enough yet to really have a material impact, on the overall profitability of the business. Now in mainstream, we have not only mainstream, waterborne, but mainstream solventborne products. In the mainstream solventborne products, that product line, as you know, utilizes much more paint, than our waterborne solution, which is much more efficient So although you may see, and from a percentage percentage basis, some margin impact, you do see greater volume And that's where a lot of the volume growth is globally is in the mainstream part of the market.
Thank you. Our next question is coming from P. J. Juvekar from Citigroup. Your line is now live.
Yes. Hi. Good morning. Had a question on your light vehicle sales, the OEM business. Europe and China were clearly down.
Can you talk about where dealer inventories are there in those regions? And was there a destocking going on, meaning that the results at the end of the quarter were far worse than at the beginning of the quarter.
P. J, in terms of a dealer dealer inventories in those markets. There's not really a lot of updated, terribly accurate data in that regard. We really haven't seen dealer inventories necessarily build in those particular markets. We've just seen lower build rates in particular in China.
And then as it relates to Europe, that really has more to do with our customer in Europe compared to the market more than anything else.
Okay. And then question on M and A, you talked about valuation expectations are still high. So, you know, strategically, does the industry need consolidation to get pricing with larger customers?
I think we'll stay away from commenting directly on anything related to pricing. What I would say regarding industry structures that our belief continues to be that we will continue to see consolidation in the coatings industry given some of the strategic as well as operational benefits from doing so.
And I just had a
quick question on TiO2 surcharge that you had. As TiO2 prices go down, do you have to give anything back? Thank you.
Great question, P. J. I think most of our customers with the surcharge just in terms of implementing that surcharge in their in their billing and information systems I've actually said, just roll it into the price increase. We have some customers that where we have separated it out. But as we actually implemented that, many of our customers said that it's just easier from a systems and accounting perspective just to just roll it into the price increase.
Which we did in many cases. If we were to see a significant pullback in the price of TiO2, we would of course evaluate that and what that means in terms of our value position.
Our next question is coming from Christopher from Credit Suisse. Your line is now live.
Good morning. Can you just give us some preliminary thoughts on how you're thinking about the incremental non raw material cost improvements as we head into 2019. I know you've had a few facility closures and you discussed it a little your prepared remarks. And Dan has also been working on a few different efficiency initiatives. Just can you just give us any general sense on how strong your the fight is here?
So in the results that we've seen year to date for our Axalta Way, our Axalta Way program and our overall restructuring initiatives that have been in addition to the Axalta Way program, year to date, we've had very good results. And as we move into the planning phase of many of those activities, for next year. The pipeline for Axalta Way looks strong. And the one area that we are excited about is optimizing, our manufacturing operations and supply chain footprint, not so much from a cost perspective, but really to be as efficient and effective as we can in servicing our customers.
Just to add on, as far as the Belgium comment, most of those benefits really start to come in the latter part of 2020. And towards the end of 2021, we'll beat our full run rate savings of that $30,000,000. So that's essentially 2 years out from today, given the announcement.
Okay.
And just on the just broader M and A opportunities, can you just give us any update or brief insights on strategic rationale, geographic focusing, you know, and on the former, you know, these still mostly industrial technology focus initiatives? Just any broad insight would be appreciated. Thank you.
Chris, as we've said before, our M and A strategy is just reflective of our overall corporate strategy, which is to continue to strengthen our franchise in our Refinish business globally. Certainly, an area of focus for us is mainstream and that is a keen area of focus within, within our M and A pipeline. And then on our Industrial business, continuing to build out the verticals in which we participate, as well as the verticals in which we've made act with making acquisitions in those verticals in other areas of the world to continue to grow those businesses. So our M and A strategy, remains very focused. And I think we remain valuation, disciplined.
We haven't found that valuation has been an impediment actually, just given the value proposition that we bring to the table when we sit down and speak with with potential companies. It just happened that in the second and third quarter here, we just had even more attractive internal investment opportunities. And that's why you saw more capital deployed in that area.
Our next question is coming from from KeyBanc Capital Markets.
Hey, Robert. Can you hear me? Sorry.
Yes. We can hear you.
So I I I guess when you think about 19 And I know it's a little bit too early to give specific guidance, but qualitatively, where where do you think we should see some growth next year and and how do you sort of gave some of the headwinds that that could could pop up next year that, you know, somehow surprisingly always pops up in a given year.
From a big picture structural perspective, I think we see opportunity for continued growth in our Refinish business, continued growth in our industrial business. And in pockets of our this as well, particularly in commercial vehicle. The big question is really going to be to see how, car production evolves over the quarter? And what impact there is, if any, in particular, of some of the tariff and trade discussions that are going on between the U. S.
And many other countries in terms of what the outlook for that market is. As always, FX is, a variable that's that's difficult to, to project. But hopefully, you know, we will get some greater insight at least into what U. S. Monetary Policy is gonna which will be probably, you know, 1 of the US dollar, which of course is our functional currency reporting.
So we'll go from there.
Okay. Great. And then when you think about where you're at the beginning of the year in terms of your outlook for EBITDA and where you're at now, it's it's you know, it's about a 20,000,000 dollars, $25,000,000 impact. When you think about the Delta, can you maybe talk about Is that all inflation? Some of it
is it is some of it,
you know, kind of just weak demand? And then how much of that do you think you can make up as you head into next year?
Yes, if you look at the sort of guide down from the midpoint of our guidance at the beginning of the year to the midpoint of our guidance this year. Essentially, you would say that the majority of that is due to unfavorable FX. Unfortunately, that's not something that, not something that we can control, but we do our best to offset that. And then the other portion would be lower builds and certain challenges from a commercial perspective in our light vehicle business, those would be the 2 primary
drivers. Great.
And congrats on your new role.
Thank you very much.
Thank you. Our next question is coming from Jeff Zekauskas from JP Morgan. Your line is now live.
Thanks very much. Of your $82,500,000 charge, how much of that is cash? How much of that is will you take in cash terms this year? How much next year? How much is Axalta weigh?
How much is other stuff?
So, Jeff, the $82,000,000 will all be cash. I guess, from a sequencing perspective, there'll probably be around $10,000,000 that gets spent next year with the difference going out in 2020. And this is all Axalta Way related. So $70,000,000 relates specifically to the Belgium closure. And the incremental 10 was just another global initiative we did as part of Axalta Way, which we fully expect second half of next year of 2019, we'll start to be at the run rate savings of around $6,000,000 on that $10,000,000 charge.
So this year, you've described your free cash flow as $340,000,000. Last year, it was $4.15 and your EBITDA is going to grow roughly $60,000,000. So if you add the $60,000,000 to the 2017 free cash flow, you would be at about $475,000,000 instead of 3.40. So given these payments that you've made on or these maybe receivable terms that you've given to your customers, Is that a one time item and all things being equal? Should your free cash flow next year, you know, assuming that the you know, the business is flat or roughly flat.
Should your free cash flow be 4.75 next year, roughly?
So, Jeff, we'll give further updates on 2019 and back when we get to December. But as it relates
from a logical standpoint, not am not asking you to forecast your business. That is, is this a one time outlay? And then it all comes back next year, or these outlays just keep going.
Yes. So maybe to comment on 2018 on your first part of your question. So these incentives, they're certainly up versus prior year. The essentially be double what they were in 2017. So it's one time from that perspective, we're not necessarily expecting this to be the run rate.
The other nuance in 2018 compared to 2017 as the raw material headwinds. You know, we are seeing a roughly $25,000,000 of headwinds in inventory. So they're really the 2 big pieces and they go back to the other comment on accounts receivable. We have not extended any sort of terms with our customers as part of these incentive programs.
I think your, aren't your inventories roughly flat?
Inventories are up slightly year over year, but there's about $25,000,000 of raw material inflation in those numbers.
And there's also, just to add to what Sean said, there's also some inventory build related to the Meclin plant closure and the stand up of some of our spoke sites as part of our manufacturing strategy.
Okay great. Thank you so much.
Thank you. Our next question is coming from John Roberts from UBS. Your line is now live.
Thank you. PPG appears to be going through a refinish channel issue that looks kind of similar to what you experienced earlier. Should we just expect these sort of episodic channel shifts to occur because of the difficulty in tracking channel inventory and the fragmentation in the channel?
It's difficult for us to compare and contrast with PPG because we don't know the nature of their comments around 3rd quarter, 3rd quarter refinish. I think as we commented last year, in terms of the change that we needed to make, just given the changes in the market dynamic, with distribution as well as end customers. I think in our case, that was a one time change that we intended to make. We would not expect to see moving forward those same type of or that same type of variability in refinished volumes. Distribution, of course, can always from 1 quarter to another vary some and we can't control that.
But in certainly, I think in terms of factors within Axalta's control, we don't foresee those types of changes moving forward.
Thank you. Our next question is coming from Laurent Far from Exane. Your line is now live.
Yes, good morning, everyone. My question is going back to Jeff's point on cash conversion. And I guess, there was about a million swing in prepaid expenses. I assume this is where, we've got those growth investments, those high returns growth investments So I guess first question is, am I right? And are we looking at about 1,000,000 of those investments?
And I guess the second question is, should we assume further investments in Q4, or would you say that, the change in your free cash flow guidance for the year was related to Q3, customer investments Thank you.
So these investments actually run through other assets within long term assets. What you're seeing in the prepaid change is an impact as it relates to the revenue recognition adoption that we did back in January of 2018. There was roughly a $40,000,000 impact on that adoption. You should see a continued, out flow as far as the other assets go at, when we get into Q4. And that's why we're revising, you know, the full year impact from a cash flow perspective.
Got it. Thank you.
Thank you. We reached the end of our question and answer session. I'd like to turn the floor back over to Robert for any further or closing comments.
Great. Thank you. I just want to make sure that in the overall picture of what's going on from a macroeconomic perspective, Obviously, as well as some of the activity in the industry that we put things in the proper perspective. We delivered really 1 heck of a quarter We had 6.5% top line growth excluding FX and acquisitions. Our EBITDA grew 12% Our refinish third quarter sales and profits were strong exactly as we said they would be.
Industrial was over 6% growth ex FX, and we've now lapped the acquisition contribution. And we had strong contribution from our from our Axalta Way initiatives. So as a company, I think we delivered 1 heck of a third quarter and we're executing quite well. So we look forward to updating everybody in our in our December outlook call for 2019. And thank you all for joining today.
Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.