Ladies and gentlemen, thank you for standing by, and welcome to Axalta Coating Systems First Quarter 2018 Earnings Conference Call. All participants will be Today's call is being recorded and replays will be available through May 2nd. Those listening after today's call should please take note that the information provided in the recording will not be updated and therefore may longer no longer be current. I would now like to turn the call over to Chris McCray for a few introductory remarks. Please go ahead, sir.
Thank you, and good morning. This is Chris McCragg, Zolta's VP of Investor Relations. We appreciate your continued interest in Zolta and welcome you to our first quarter 2018 financial results conference call. Joining us today are Charlie Shaver, Chairman and CEO and Robert Brian, EVP and CFO. This morning, we released our quarterly results and posted a slide presentation to the Investor Relations section of our website at agdaltacs.com, which we'll be referencing during this call.
Both our prepared remarks and discussion today may contain forward looking statements reflecting the company's current view of future events and their potential effect on Axalta's operating and financial performance, These statements involve uncertainties and risks, and the actual results may differ materially from those forward looking statements. Please note that the company is under no obligation to provide updates updates to these forward looking statements. This presentation also contains various non GAAP financial measures in the appendix we've included ciliations of these non GAAP financial measures to the most directly comparable GAAP financial measures. For additional information regarding forward looking statements, and non GAAP financial measures, please refer to our filings with the SEC. I will now turn the call over to Charlie.
Thank you, Chris, and good morning. Thanks for joining us on our results call, where today we're pleased to review our first quarter performance and update our 2018 full year outlook based on current market conditions. Overall, Axalta's end markets remain broadly supportive and healthy and we're pleased that our Q1 financial results have enabled us to increase our guidance range for sales growth and adjusted EBITDA for the year. Incorporating somewhat more favorable FX tailwind as well as strong operating execution to date. Overall, our quarterly results were slightly better than we have previously projected including both ongoing strong organic growth in industrial, continued solid performance in commercial vehicle, highlighted by the robust North America heavy duty truck market, and a welcome benefit from incremental currency tailwinds.
As expected, raw material costs continue to inflate with a particularly notable comparison in Q1 versus last year, given the raw materials were still a tailwind to reported results in Q1 2017. That context, we've also begun to make progress both in price offset as well as accelerating cost reductions to meet this input cost challenge. Turning to page 3 in our slide deck, I'd like to review some of the highlights. First of all, we grew Q1 net sales by 15.7% year over year, which included a growth contribution of 8.4 percent from completed acquisitions as well as foreign currency tailwinds of over 6.3%. Organic volume and price contributed an incremental 1%.
This overall growth was generally as expected, supported by ongoing stability and strength in our key end markets in the nearly all regions. Net realized price continued to remain positive in the first quarter after turning positive in Q4 2017, aided by various price and related actions taken to offset ongoing raw material inflation. Overall, organic volume was modest for the period with this mass meaningful ongoing growth in our industrial end market, consistent with our plans. Consolidated volume was held back primarily by a challenging quarterly contribution to Q1 2017 in Refinish, which benefited from sales timing factors last year. Exolsa's Q1 adjusted EBITDA of $220,000,000 increased 8.3 percent from $203,000,000 last year.
Driven to a large degree by acquisition contribution. Margins declined slightly to 18.9% from 20.2% from ongoing raw material inflation, offset partly by lower operating costs, slightly higher average prices, and foreign currency translation benefits. Taking a look at Axalta's end market performance, refinish sales growth of 6.2% was driven primarily by FX tailwinds and included low single digit positive price mix, offset by somewhat lower volume due to a challenging year over year comparison, from normal seasonal factors, but well in line with our expectations for the period. Exhaust's refinished markets remain healthy We continue to target mid single digit growth for the year. We are gaining market share and expect to see favorable growth comparisons in the second half of the year.
Galta's industrial end market continued to exhibit excellent top line trends with almost 60% reported net sales growth, including high single digit organic growth, reflecting strong volumes and price improvement and significant acquisition contribution. Key organic growth drivers were consistent sequentially indicating a generally robust industrial demand globally. Like vehicle net sales grew 2.9 percent in the period, including mid single digit FX tailwinds, offset by lower average pricing, from concessions previously noted that were given to select OEMs last year. Volumes were broadly stable with ongoing modest growth in North America, offset by flatter trends for the quarter and other regions. Auto Production globally appears to be steady with notable ongoing strength in North America standing out relative to more cautious predictions that we have made for 2018 for the region.
We continue to expect flat to low single digit growth in auto production globally in 2018 and slight outperformance versus the industry for Axalta. Commercial vehicle posted healthy net sales growth of 8% and 3% constant currency growth. Volume growth was witnessed again in nearly all regions, led by continued healthy truck demand in North America and elsewhere. While price mix was slightly negative, given residual impact from OEM price concessions we made last year and somewhat adverse product mix in certain regions. Turning to the balance sheet and cash flows.
Free cash flow in the first quarter was a use of $61,000,000 compared with the use of $37,000,000 last year. This included our typical seasonal working capital use as well as some severance payments and timing of bond interest payments accounting for the majority of the year over year difference. We ended the quarter with net debt to trailing 12 month adjusted EBITDA of 3.7 times versus 3.6 times at year end. Due to slightly lower cash balances resulting from acquisition spending and a strong euro, which increased our overall debt balance Robert will take an opportunity to detail our finance refinancing in April, which will help offset this FX headwind for the balance of the year as well as provide incremental cash interests savings. Regarding capital deployment, we spent $105,000,000 in the first quarter in M and A, with the largest portion going to internalize a refinish color matching technology platform with significant cost synergies to Axalta.
While we also increased our ownership interest in an existing consolidated joint venture, we had initially purchased in 2016. These deals have no effective near
term
top line impact but contribute to earnings via lower cost and increased profit contribution. Additionally, we repurchased very little stock in the first quarter, but have devoted additional capital to repurchases here in April. We plan to continue to be opportunistic with share repurchases this year with an expected offset to our share dilution from stock grant vesting as a minimum allocation target. Regarding operating highlights across Axalta's businesses, We continue to show progress in lowering our cost structure this quarter and you likely notice that we set a new $200,000,000 Exelt away cost savings target at our Investor Day in New York in March, which we are beginning to execute on already. Clearly, the key focal point this year will be offsetting raw material inflation, and we're committed to doing so via a combination of pricing and productivity.
Additionally, we acquired a manufacturing and distribution site in Sacramento, California to support our wood business as well as other businesses over time. Finally, we inaugurated a new, coatings plant in Stavli, India, which is set to serve a local light vehicle marketplace. In terms of innovation highlights, we're on track to introduce at least 250 new products this year as we noted last quarter. Some notable examples in the first quarter of recent new products launched include nation finishes in South Africa and new fast drying aerosol topcoats, in our global industrial markets. So in summary, Axalta's first quarter results were solid while meeting our expectations across in regions.
This result keeps us on plan to meet our objectives for the year. We feel we're well positioned to deliver strong value for shareholders in 2018. This is supported by stable end market demand conditions as well as focus and expected strong execution by our Axalta team. We continue to address the relentless upward pressure of raw material and logistics inflation and our offset plans remain a top priority the coming months as we continue to pursue our baseline plan for growth and value creation. Now Robert will share some further details on our results.
Thank you.
Thank you, Charlie, and good morning, everyone. As you can see on slide 4, 1st quarter net sales excluding FX tailwinds increased 9.4% year over year, This includes 17% growth in Performance Coatings, while Transportation Coatings was slightly down at 1.3%. 1st quarter growth was driven by 8.4 percent acquisition contribution, coupled with modest increases in organic volume as well as positive price mix effects. Organic volume included strong growth in industrial and commercial vehicle for most regions, offset by a modest decline in refinish volume due to a challenging year over year comparison and flat volumes in light vehicle. Overall, price realization remained positive in the quarter.
Most of the pricing progress to date has been in Performance Coatings across both refinish and industrial end markets. Price mix, excluding any price increases related to currency, exceeded 6% in some markets. FX translation benefits accelerated again sequentially to 6.3%, indicating broadly supported global economic conditions and principally driven this quarter by a strong euro and Chinese RMB. Adjusted EBITDA of $220,000,000 in Q1 increased 8.3% versus prior year. Adjusted EBITDA margins declined from 20.2% last year to 18.9% in the first quarter, reflecting the impact of higher variable cost pressure, including raw material and freight cost inflation.
These decremental factors were partly offset by lower operating expenses through Axalta Way Savings and pricing within our Performance Coatings segment. Turning to Slide 5, Performance Coatings Q1 net sales increased 24.3% year over year, including a benefit and FX benefit of 7.3%. Constant currency growth was distribution and 3.3% higher average selling prices, while organic volumes were slightly down from the prior year due to a challenging year over year comparison from sales timing factors in refinish. For refinish, Q1 net sales increased by 6.2% including a 7.4% FX tailwind, driven by robust growth in our EMEA region, offset by a challenging year over year comparison in North America. Pricing in all four regions was strong with low to mid single digit positive contribution globally for the period.
Industrial net sales increased 59.8 percent year over year, resulting from the substantial acquisition contribution and a 7.2 FX benefit. Organic net sales growth in the high single digits demonstrated continued strong performance, with positive contribution from all regions similar to growth seen last quarter. Average price and mix was accretive in the quarter in the low single digits. Benefiting from pricing actions across the business needed to offset persistent raw material inflation. Performance Coatings generated Q1 adjusted EBITDA of $143,000,000, a 22.5 percent year over year increase.
Drivers included improved price mix, completed acquisitions, FX tailwinds and lower operating expense, offset partly by higher raw material input inflation. Q1 adjusted EBITDA margins of 19.7% were consistent with 19.9% same quarter last year, illustrating the resilience of our Performance Coatings business. Year over year in the first quarter, including a currency benefit of 5% with constant currency growth in commercial vehicle, offset by a slight decline in light vehicle, consistent with the last several quarters. Segment volumes increased low single digits in Q1, offset by slightly unfavorable pricemix. Light Vehicle Q1 net sales increased 2.8%, including a 5.1% FX tailwind.
Volumes increased slightly, including growth in North America to offset flatter trends in other regions. As we indicated on our Q4 earnings call in February, Q1 average price mix was down low to mid single digits continuing to reflect residual pressure from mid-twenty 17 customer agreement. And this quarter should be our toughest comp. In addition, mix was a slight decrement in the period due to strong growth in lower margin product sales. We are in active discussions with numerous Commercial vehicle net sales increased 7.6%, including an FX benefit of 4.7%, driven by continued strength in global heavy duty truck production and other vehicle markets.
Commercial vehicle production globally increased a remarkable 14.5% in Q1, driven particularly by ongoing strength in North America and resurgent strength in China, along with solid recovery in Latin America from recession lows. Current forecast continue to include an assumption of demand moderation globally through 2018, though revisions remain upwardly biased to date. ACT recently increased its North America Class 8 forecast to 328,000 units with a similarly strong year expected in 2019. Non truck commercial customers also continue to enjoy solid demand, supporting end market growth for Axalta from a wide range of product types. Transportation Coatings generated Q1 adjusted EBITDA of $77,000,000 versus $86,000,000 last year.
With associated margins of 17.6% versus 20.5% in Q1 2017. The lower margin comparison was driven by headwinds from unfavorable price mix and raw material inflation, offset to some degree by moderate FX tailwinds and higher volumes contributing to margin and absolute EBITDA accretion. Moving on now to debt and liquidity, Cash and cash equivalents totaled $600,000,000 at March 31, a decrease of $170,000,000 from year end. Total reported debt was $3,960,000,000, resulting in a net debt balance of $3,360,000,000 versus $3,150,000,000 at year end. Our net leverage ratio was 3.7x@quarterendversus3.6x for Q4 2017.
The slight increase was caused by lower cash balances as a result of spending on investment activities and the impact of a stronger euro which increased our debt balances offset by latest 12 month EBITDA growth in the denominator. Q1 free cash flow defined as cash flow from operations plus capital expenditures was a use of $61,000,000 compared to a use of 30 $7,000,000 in the same quarter a year ago. The change year over year was due to the previously mentioned headwinds with severance costs and interest payments. Our working capital to net sales ratio at quarter end was 13.4% compared with 14.2% a year ago. This included the effect of normal seasonal working capital fluctuations, and we reiterate our expectation for the full year of modest working capital use, driven largely by EBITDA growth, which would imply an improved working capital to sales ratio by year end.
In April, we completed a refinancing transaction to amend our existing term loan debt, which benefits our cash interest costs as well as other aspects of our debt portfolio. The amendment included a repricing and enough size of our U. S. Dollar term loan to repay our existing euro term loans. We improved our interest spread by 25 basis points while extending maturities by slightly over a year on the previous euro portion.
We also entered 9 5 percent to maintain a debt mix by currency that best matches our cash flows. The amendment and swap transactions are expected to reduce our cash interest expense by approximately $10,000,000 on an annual basis. We've revised our previously provided guidance for 2018 as shown. For net sales, we still expect 6% to 7% growth, excluding FX, And based on consensus forecast for our currency baskets, we now see a tailwind of 3% from FX for the full year. As reported growth, therefore, is now expected to be 9% to 10%.
Regarding end market conditions, Charlie noted earlier that system. Recent body shop distributor and insurance level feedback and refinish indicates a favorable market trajectory for the year. And the industrial markets we serve remain robust, consistent with what we observed on our February update call in March Capital Markets Day. Data in the Transportation segment markets has also been strong. With any surprises coming from stronger than expected demand, in both North America Automotive And Global Commercial Vehicle markets, especially in heavy duty truck.
Our adjusted EBITDA outlook has been raised from $940,000,000 to $980,000,000 to $950,000,000 as we are more optimistic regarding and productivity management. Our updated currency forecast is also supported to our guidance. Regarding phasing of adjusted EBITDA in 2018, we expect the remaining quarters of the year to approximate 25% to 26% a full year adjusted EBITDA, with Q2 and Q4 slightly stronger and fairly comparable versus a slightly slower Q3. Given normal seasonality and expected business days. Guidance for interest expense remains at $165,000,000, due to LIBOR and euro currency movement impacting debt balances, offset equally by recent refinancing results.
Regarding taxes, after ongoing review of the impact of the of income tax rate in a range of 19 percent to 21 percent for the full year, though we were slightly below that range in the first quarter. Our free cash flow guidance remains at $420,000,000 to $460,000,000, reflecting consistent assumptions since our last update. Our capital expenditures guidance remains unchanged, and our depreciation and amortization has increased slightly from FX impact and from recent acquisitions. This concludes our prepared remarks, and we would now be pleased to answer any of your questions. Operator, would you please open up the lines for
session. Our first question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.
Thank you, and good morning, everybody. Just a question on the pricing environment. It sounds like you're more positive on Is that, as much in Transportation Coatings as it is in Performance Coatings, your confidence?
We're working to offset cost inflation across the board, with pricing actions kind of that are appropriate to each market. We're working closely with customers in every area to appreciate the persistent and the real inflation is something that we need to address. Now all those efforts, Vincent, relate to all of our markets and they're going on simultaneously, we do see success rates very slightly depending upon, segment and actual, an actual end market. But as you point out, we've had notable success in Performance Coatings to date, and we expect progress in transportation to follow shortly. And you can actually see the success in Performance Coatings is evidenced by the EBITDA margin, which is essentially the same as last year, despite the raw material inflation, even if you back out the benefit of the FX tailwind.
So we're making really good progress in Performance Coatings And there are a number of active discussions going on at the moment in all regions of the world in our transportation business that we expect to produce results.
And then just as a follow-up, I think at the Investor Day, you talked about being in discussion on 4 acquisitions. The sort of the advent of share repurchases in the quarter sort of indicate that maybe those aren't going to come forward or are they not as one not a function or the other?
No, not at all. We actually completed 2 transactions in the quarter as we highlighted in our in our release, and we're very happy with those. We have a good pipeline of transactions as we see it for the rest of the year. The share repurchased, our goal has always been, as we said, to offset dilution in any given year, which in the case of 2018 is approximately 2 1,000,000 shares. And then in addition to that, we also said that we would buy back stock as we saw the price at an opportunistic level So even if we meet our dilution or when we meet our dilution target, depending upon where the price is, you will see us purchase additional stock moving forward.
However, it will not be at a level such that it inhibits activities that we'd like to pursue.
Very clear. Thanks very much, guys.
Thank you. Our next question comes from the line of Christopher Parkinson with Credit Suisse. Please proceed with your question.
Thank you. Can you just give us a quick update on your new cost cutting initiatives including improving and multi sourcing your procurement platform that you hit on at your Analyst Day. Just any color on that initiative in 2018 and any updated thoughts for the intermediate to long term would be very helpful. Thanks.
Chris, we continue to make really good progress. Of course, we have mapped out internally where we would like to be on Axalta Way on each initiative by quarter. And we're happy to report that through the first quarter, we actually slightly exceeded what the budget was for for savings that we feel that we're on that we're on pace, to achieve our target of $200,000,000 over the next over 4 years. And the buckets, from which we expect those savings to come are consistent with what we outlined at our Analyst today hasn't been any real change in where that's coming from. On the procurement side, we are making progress in those situations where we are single sourced or maybe dual sourced, but would like to have more options.
Obviously, it's a challenging, environment at the moment, but we have a team now dedicated in our procurement organization to nothing but new supplier development. And they've been quite active. So we have made progress on that.
And you mentioned you were taking a little share and refinish Can you just offer a little more color by region as well as the key drivers? Is it mainly MSO consolidation in the US, new products in Europe, or something else? And then also just any quick comment, are you still seeing a little bit more consolidation among your European customers at least on a preliminary basis? Thank you.
So, if we look at it, if we look at it by market, if we look at North America, we continue to have very good progress not only with the multi site, with the multi site operators that you would think of in terms of the larger sort of top 4 to 10, but also in that next level down. Of more medium sized MSOs, we continue to gain there. And also, although we don't talk about them very much in the independent, in the independent market, we are gaining share, in that market as well. So very happy with our performance in our North America Refinish business. Doesn't necessarily show through as much in Q1 here, as someone else, I think, has already highlighted for the simple reason that we had a tough compare in Q1 twenty seventeen, where if you were going back to that call, you may remember that we had an unusually strong quarter, in Q1 17 just due to seasonal factors.
So that tough compare is masking a lot of really good progress that's been made by the Global Refinish team. In EMEA, we had very strong performance in Q1, and that's in core countries, as well as starting to make some inroads in some of the periphery countries where our market share, has been an opportunity an opportunity for us. So very happy with how things are going, are going there. In China and Asia Pacific more broadly in Middle East, we continue to make great progress in Middle East And Asia Pacific ex China in terms of building out our distributor network, as well as having put some key strategic commercial resources in place to help us accelerate growth in that business even further And then in China, we do continue to make progress in the mainstream part of the market. And more broadly, as we talked about on the last call, our mainstream product offering does continue to gain traction, not only in China, but also in the U.
S. And in Europe.
Our next question comes from the line of Duffy Fischer with Barclays.
Yes, good morning,
Fellas. Question just
on the FX impact for EBITDA for the quarter. Can you walk through how that impacted both the segments? And then in the guidance as we look for the rest of the year, how big is the FX change impact on that guidance?
Duffy, for the as we talked about in our original guidance construct, we were looking at about a 2% tailwind from FX, which at the time was roughly about $95,000,000 top line. And then you can, use your judgment there in terms of the appropriate dropdown from an EBITDA perspective as we update that, that tailwind, we now see that tailwind at approximately 3% for the full year. So that $95,000,000 tailwind from FX increases to $130,000,000. So yes, there is an FX benefit at the EBITDA level that we do foresee for the rest of the year. Based on the current Bloomberg composite FX rates.
Okay.
Just on the auto OE business, the concessions that you gave last year, for business, when do those anniversary this year And then when we get to that anniversary point, is the game plan just to stabilize pricing at that point, or do we think we can actually increase pricing and OE?
Duffy, we in the first quarter, this is our toughest compare, because this was the quarter where last year, we had yet started to see any of the or hadn't given yet any of the price concessions, but unfortunately we were forced to give then if you'll remember, in second quarter of last year, we had the double whammy of the catch up, because that price concession was made effective back to January 1st, of the year. So really from a comparison perspective, Q2 is a really tough compare Obviously, our goal there is not only to improve profitability in that business at a gross margin level. But also just moving forward, I think our light vehicle customers and the dialogues we're having are starting to see that Obviously, there's been material raw material inflation. And that has to be that has to be dealt with. So I do think that we expect to see some progress in the ensuing quarters.
But again, those discussions do take a little bit of time. So there's a lag effect I think we're reasonably confident that we will make progress in those discussions. However, there is a time, a time delay in terms of when those actually will come in.
Thank you. Our next question comes from the line of P. J. Juvekar with Citigroup.
You know, it seems that the coatings industry cannot grow without acquisitions. And your underlying volume growth was 0.2%. Can you tell us why you're lagging behind the IP or GDP growth?
So PG, I wouldn't necessarily, I guess I would, I might frame up just an observation about that a little bit differently. In terms of looking at overall, overall volume growth, what really affected our Q1 volume growth this year was frankly the tough compare that we had in refinish. Refinish being our largest business, North America being our largest market and just some of the timing factors that we mentioned there is a difficult air are what really drives the volume result. If we were to pull out North America refinish, the volume result would look quite impressive. Actually, if you look at our industrial business, our industrial business had a fantastic first quarter, reflecting strong global demand across our real markets and excellent execution by our team.
We had low double digit organic growth and over 40% inorganic growth and that was all done while achieving price capture in all regions. If you look at commercial vehicle, it's up low single digits ex FX on mid single digit volume growth. So I think if you at industrial, look at commercial vehicle, we're definitely getting it refinish, unfortunately, this quarter is slightly masked by the tough compare.
And P. J, we continue to expect mid single digit growth and refinish for the full year. So obviously, you know, the first quarter was the hardest quarter. We expect that to improve as we go through the year.
Yes. P. J, this is Charlie. This is Charlie. And as you know, over the past year, we've been working pretty hard to really excited to smooth out the way the refinished dynamics work.
And again, as you know, we've got some relatively large distributors around the world that working with them on smoothing that to supply chain out, some of the pre buys out, some of the, due to quarter to quarter fluctuations, because I think every year, we end up having to point to a quarter where you had a strong quarter year before. And I don't think it'll ever totally go away because part of the industry and there are seasonal factors, but we got a pretty concerted effort, as you know, starting last year to really try to smooth out that supply chain more. That also takes cost out because you're not you're not cycling your plants up and down. You're not stacking inventory places, but we are going against how the industry has always worked a little bit with our bigger distributors, but making good progress. I think you'll see it over the next year.
That continue to smooth out globally where quarter to quarter year over year compares look a lot, a lot smoother. And I think back to Robert's point, that's such a big part of our business that it doesn't take much of a change on a price increase pre buy to mask volume growth in some other segment. Just good refinish is just so big for us.
And PGI, this is Robert. I'll just add on one final point. My colleagues here are just pointing out that I omitted discussing light vehicle. Volume was up low single digits in that business. And if you look at a particular, the North America market, the overall market contracted by by 3.5%.
But we were up nicely volumetrically in North America. So just didn't want to leave out the light vehicle market we talk about that.
Great. Thank you. Thanks for the explanation. And my second question is on transportation. You know, after your IPO, you had gained significant share in China.
So my question is, can we just update on your China OEM business? I think the rest of the world was flat in OEM, but how did China grow? And what are you in terms of share, etcetera? Thank you.
TJ, the China market for us from an LV perspective, from a whether we look at body panels or we look at automotive plastic parts, we continue to make good good progress there. The issue has been has been price capture, which from a total sales perspective, obviously the price sessions is what have resulted there in the net sales impact. But from an overall, from an overall volume perspective, we've been performing consistent with our plan. Together point to make, just as we talk about transportation in China, is commercial vehicle that's still a big opportunity for us and we do continue to make good progress there.
Thank you. Thank
you. Our next question comes from the line of Bob Koort with Goldman Sachs. Please proceed with your question.
Good morning guys.
This is Chris Evans on for Bob. I was hoping you could deconstruct a little bit. Just your initial expectations for the quarter that were maybe towards the $200,000,000 versus where you ended up coming much, much higher than that. And then you sort of the logic around and the thought process behind your guidance, which doesn't really flow that beat through some of the more optimistic trends that you've been citing in the businesses?
Chris, the way that we the way to think about Q1, we had stronger execution from a business perspective in terms of some of the commercial initiatives in particular, we had stronger growth in industrial than we had originally been projecting. And then we also had we also had help, on a sales level from acquisition contribution, which came in a little bit stronger than what we had projected as well as FX being more favorable. When you get to an EBITDA level, we had greater price capture, performance coatings than we had been expecting. And then we also had, cost savings that were higher than we had originally projected when we together to guidance. So great news for Q1.
However, we thought that the most prudent approach would be to be cautious in terms of raising the full year EBITDA guidance. As you know, 1 quarter doesn't make a year. There's a lot of volatility out there, out there in the market. So we just thought that it was prudent to raise the guidance range a little bit. And then wait and see how we perform in Q2 before potentially increasing it further if our performance in Q2 warrants that.
Thanks. And then previously you were pointing towards the high single digit raw material impact, in 1Q. Just curious how the quarter played out. And then as you've looked at the balance of the year, what is your expectation for the raws impact and any notable differences between the two segments?
So the raw impact that we saw in Q1, Q1 2018 compared to Q11 2017, the total impact was 11% in line with what we had expected, it to be kind of on a full year on a full year basis. And between the two segments, it's it's relatively consistent between the two segments.
Thank you. Our next question comes from the line of Ghansham Panjabi with Baird. Please proceed with your question.
Hey guys, good morning. I guess first off, Robert, back to your prepared comments on the cadence of EBITDA distribution for the year. And 2Q and 4Q being stronger than 3Q. 3Q 2017 was down substantially not a refinish. That is one of your more profitable businesses.
Just curious as to why 3Q would not be stronger in 2018?
Yes, it's a very fair question Ghansham and the answer is the timing of price increases, have been and will continue to move around. Based on what we're seeing in the raw material environment. And therefore, the original pricing increase plan in K that we had when oil was at $54. And then when oil moved to $68, obviously, that changed. If we see oil, today, if it's a $70 to $75 range, that would also impact, how we would think about price increases.
But it is a fair point in terms of Q3 that it should be a relatively easier fare. But again, it depends on our ability to capture price in particular in our transportation segment.
Yes. And the point is just to make that the, in the transportation side of the business, it's definitively the weakest quarter. Of the year. So that somewhat offsets the relative strength that you'd expect to see out of that refinance that you pointed out.
Got it. And then
on industrial, some of your competitors seem to have lost some share in that business as they've executed on price. Your past 2 quarters have been very, very strong. Can you just sort of comment on your overall share position? And are you seeing any signs of any cracks in pricing rationality across the industry? Thanks so much.
It is interesting that as we have gone out with substantial price increases in industrial that we have
continued to be able to grow volume. I think
we did expect to potentially see some volume loss. We have seen we have seen some. It's not been it's not been significant, but overall, you look at the amount of investment over the last 2 years that we've put into the industrial business, in particular, in terms of the commercial team, feed on the ground and developing relationships, we're
expecting a
return on that investment. And so we have been pushing our commercial teams strongly. And if you look across the board, growth in general industrial has been strong. Energy solutions has been strong, powder has been strong and wood has also been, consistent with the market. Think about the only segment that's maybe been a little bit slower than what we had originally projected, was the coil segment.
And I think that's more driven by some of the issues around trade than anything else. But overall, I think it's just good execution by our team.
Okay, terrific. Thanks so much, Robert.
Thank you. Our next question comes from the line of John McNulty with BMO Capital Markets. Please proceed with your question.
Yes, good morning.
Thanks for taking my question. A question in the light vehicle area, you indicated that you had some negative mix issues. Can you walk through what those were and whether there's something that you would expect to continue going through the rest of the year or if it's kind of a one time blip in terms of how we should think about it?
Hey, John. It's, it's Preston. The main issue in my vehicle there isn't any, anything wrong in the business. It's actually just coming from growth in product lines that tend
to have a lighter margin
in some of the core product lines. So, there's nothing weakening in light vehicle. In fact, we're very pleased with some of the growth of the product lines that we've been introducing. And that's across a number of areas and in a couple of different regions. But by and large, it's coming from growth, not from, from any change of mix of existing lines that are running.
Got it. Appreciate it. And then, I
guess, just one other question in terms of, I mean, look, you had a bunch of headwinds over the past, I guess, year, year and a half or so and the margins kind of every quarter for the, I guess, the last five have been negative in terms of the comps. And I guess, but it does seem like you're starting to catch up with regard to price and maybe raw materials while they're high that doesn't necessarily it's hard to see them necessarily ripping dramatically further here. Do we hit an inflection point? Do you think in the next couple of quarters in terms of margins where you've kind of seen the bottom or the end of margin degradation? And we actually start to see things pushing higher?
Like how should we be thinking about that as we go through 2019? There's 2 variables there. One variable is again what the trajectory of raw materials is and what the trajectory of oil is. And I think it's important to like the supply issues, the supply issues that we've talked about for the last couple of quarters, there are a few exceptions, but in general, those supply issues persist. So it's not only a function of the price of oil, but also a question of also a question of supply depending on the category of raw material and specific raw material.
So it'll depend a little bit on that. And then it will also be driven by our ability to capture price, with our light vehicle customers. And that's a combination of capturing price, but it's also introduction of new colors. It's implementation of indexing at a larger number of our streamer base and some other initiatives that we have in place in that segment. Great.
Thanks very much for the color.
I might just add on to that that based on our guidance, we wouldn't necessarily expect margins to inflect positive on a comparable basis in the 2nd quarter. However, if we are successful in CAPT during price and then getting cost out, according to our plan, it is possible that you see an inflection point in the back half of the year where margins turn positive in a comparable basis.
Thank you. Our next question comes from the line of John Roberts with UBS. Please proceed with your question.
Thank you. One of your competitors noted that epoxy costs are up something like 40%. When you see I just want to use that as an example. When you see something extreme like that, is price your only tool for trying to recover margins? Are you able to reformulate to other resin systems?
And how long does that take if you're able to do some of that?
Hey, John, this is Charlie. I think when you see a spike, it's that, certainly over the last couple of quarters, they're correct. Epoxy prices, depending on where you are in the world, have been up 40% to 50%. Certain polyesters have been up that amount as well in certain regions. But when that happens, that short term, there's very little opportunity to just substitute or reformulate.
Now what we've been doing in certain products, both liquid and powder coatings, is over the last 2 years working on reformulation to look at where we can get the same performance but with a less expensive, resin. And we're doing that not only in epoxies, but in some of our polyesters and some of our acrylic resins as well where the customers if they really need a cheaper product or they can't pay more, and we work on an overall performance or spec shift with them. So I would say at any point in time Robert mentioned earlier, we have a full time procurement team that works actually work in a match pair with the R and D community on that because even just a change of raw material in our business is a big deal. Even if it's just a supplier change. So I think you'll continue to see us and probably our competitors as well continue to work on know, where the customer, where the value proposition's gonna be different for them or if they can't pay the additional price, you know, we'll look to we'll look to not necessarily go to a cheaper resin, but just different functionality.
So I think at any point in time, we probably have 30 or 40 of those kind of going on. Now if it's a short term spike and we really believe it's just supply driven, like Robert mentioned, and the price is going to come back down And we normally let the customers know what's going on, but we don't try to take draconian action if we think it's just you've seen in the past year, for example, in certain isocyanates prices spike when there's been force majeures. Those kind of cases, we don't go often. 1, try to raise price or 2, try to change population because that's such an expensive deal to go do. But I think you'll see more of that in the future.
And I would say, this isn't just an oil and gas issue on raw materials increasing. We actually for us, we had as much invested in pigments and in resins as we do just trade solvents and other products. And I think we're just gonna be, you know, as I mentioned in my opening comments, a general inflation environment, not only in raw materials, but logistics, wages, and everything else, it's going to it's not a coating's issue. You know, it's just a function of global GDP increasing. So I think we're in for as we go through the next few quarters and probably the next couple of years, just generally higher inflation across the board.
I think that's going to be working a lot with your customers on what are they looking for, what can they afford and where do you have to where do you have to change the value proposition? My last comment on that is definitely in the refinished market. It's why you've seen it over the last couple of years. Be really focused on mainstream and economy in improving those segments so we can supply across the value chain and not just in the more premium markets because we really do believe in a general inflationary environment, you've got to be working with what the customer really needs and not be trying to force something on them, maybe they can't afford. But I do think you'll see more of that as we go forward where we segment these markets more than we had in the past.
The proxy is just an perfect example where you'll see these spikes and it's going to cause you got to be close to your customers and work with what they're going to need.
And then in auto OEM, where you gave some price concessions last year, should we think about you raising prices from those new lower levels or was there anything in those concessions that's going to make it harder to raise price with those customers without losing volume?
Yes. I think just given that we're getting pretty specific in terms of price and price strategy and how we might work with customers. I think we have a number of levers, a number of levers and, that that we will work on. And, you know, that's a collaborative effort with our light vehicle customers. They, of course, us to lower costs, and to not only increase price.
And we're working on that internally in terms of improving our cost structure as well as working with them, not only on the cost of the paint, but of course, on the cost of the application of the paint, which, as you know, is, 4 to 5 times the cost of the paint. So the more that we can innovate in productivity the more flexibility it gives us from a paint pricing perspective as well. And we don't want to lose sight of that.
Thank you. Our next question comes from the line of Jeff Zekauskas with JP Morgan. Please proceed with your question.
Good morning. It's Hilton Cook for Jeff. How are you?
Good morning, Sophie.
I have two short questions. The first is I was wondering whether you can give an update on, like, the acquisition of IBA and, whether that's part of your guidance in terms of acquisitions or it's not and like, you know, when that might conclude? And my second question has to do with the
it's a $26,000,000
investment that you've made in the non controllable entity. I was just wondering whether that's one time and what exactly that is. Thank you.
Sophie, so on IBA,
we expect by the by the end of May, to hear back from the European Commission on what their thoughts are. They could either decide to approve the transaction, they could request more information or they could decline the transaction. At this point, it's difficult to handicap which one of those they're going to do. So we are waiting, for their decision. We certainly do hope that, that they approve it.
It would be we believe a good transaction, for customers as well as, as well as for Axalta. On the additional purchase of interest in, in our Duraco business, we did purchase an additional 24.5 percent of that business as part of the original transaction structure. And then we'll have a final 24.5% stake, to take us up to 100% that we will
Thank
you. Our next question comes from the line of Alexia Yefremov with Nomura Instinet Please proceed with your question.
Thank you. Good morning, everyone. One of your competitors talked about intentionally walking away from business in order to prioritize price. In general, do you see more disciplined price behavior from your competitors today compared to 2017?
Yeah. I think, well, first of all, you know, you never I don't I don't know in my career. I've never tried to intentionally walk away from a customer. Without it being a discussion first on what they can afford, what's going on in the industry. And I would tell you over the past year though, As we look at all the price increases we've done across all these segments, the amount of business we've lost is actually almost just negligible.
It's not I wouldn't even categorize it as nonmaterial. It's almost nothing, but I give a lot of credit to our sales teams, 1, and starting early, the 2 in in making sure customers understood exactly what's going on and why. So I think we you know, we don't we don't try to make strong statements like that. However, I do think it's inevitable, you know, when you're faced with these kind of price increases, which by the way, we had back in 2012 2013, people forget we've seen this before, this movie before. I think so much.
It doesn't mean you won't lose a customer or somebody might not take it try to take advantage of it. What I have seen over the past quarter is certainly, I think we had certain competitors and we highlighted this in previous conversations. Certain competitors have been slow to the party and realizing that these these increases just aren't transitory in nature that fundamentally price supports building under oil under pigment prices, specialty cans in some cases are not adding capacity like they have in the past. So we believe there's some more fundamental change rather than just transitory going on And I do think we had several competitors in certain segments that were slow to the party that made it a little slower and tougher clearly over the last 90 days and if you follow competitors calls as we listen to them just like you do, people certainly have begun to recognize that it's paramount to be protecting their business and raising price. So definitely more disciplined over the last couple months, not only by large multinationals, but in many cases in industrial and refinish, we have we have good local competitors as well.
And I think it's finally worked its way through the supply chain where people who might have been trying to take advantage of short term share graph, that kind of stuff. We're seeing less of that.
Thank you, Charlie. And a follow-up on the cost side, have you seen any increase in transportation costs in North America? And to what extent do you rely on truck deliveries in North America?
I would say that this is Robert. I'd say that we have seen, we've seen an increase in interest exportation costs, not only, in truck, but also in marine and not only in North America, but also in other geographies. So that transportation cost, is an input into the calculus that we use to determine what price increases we need to get. So it not only price increases to offset raw material inflation, we also need price increases to offset some of the logistics and transportation costs that we have also seen in Blake.
Our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your questions.
Thank you. On the finish last week when a competitor's announced, they, roughly 5% organic sales growth. In their finished business. Can you bridge their performance of your down organic sales growth this quarter?
I think it's I think David, as we highlighted, we did have some seasonal factors related to pricing, timing of price increases that we had in 2017 versus 2018, that make it a challenging challenging compare. I think if we were to adjust for that, it would be a very different picture that we would be painting.
Okay. And just in Q2, you have a pretty easy comparison year over year in Transportation Coatings. So in in that segment, should you be able to post, up year over year EBITDA growth in Transportation Coatings EBITDA? Do you think in Q2, year over year?
We haven't, as you know, provided guidance. We provided a guidance, construct for overall approximately how much EBITDA we expect it to fall in each quarter, David, but we haven't broken that down by segments or certainly by end market and probably wouldn't be appropriate to do so.
Okay. Thank you. Thank
you. Our next question comes from the line of Mike Sison with KeyBanc Capital Markets. Please proceed with your question.
Hey guys, nice quarter. In terms of refinish, are you seeing the growth now? And I know it's a little bit early for 2Q, but
Are you seeing some organic growth as,
as, as, post 1Q?
Yes, this is Charlie and Robert comment, but I think we saw organic growth in Q1. It's just when we look at Q1, as we highlighted earlier, Q1 last year, we had some relatively large advanced buying glass of large distributors. So I think we're seeing we see organic growth in all four segments not inconsistent with mid single digits going on. I think the market's healthy, it's growing. Frankly, we're not paying a whole lot of attention to it.
It's in pretty good shape. We're really focused on introducing new products around the world. So I don't see anything new going on there one way or the other. But I think you got a balance again, as we smooth things out, but I think when you take as Robert said, when you take out a couple of large, advanced purchases we saw in Q1 last year. If the underlying market continues to grow, depending on what region of the world it is anywhere from 3 to 5%.
I think I'll just pile on and just making the comment that I think as the year progresses, it will be seen that the first quarter is a bit of an aberration terms of that reported volume result.
Yes, I think I'm very happy with Q1 as far as North America Refinish. I think shops are full. A couple of our MSOs are really growing. You had good, as far as refinish goes, it was pretty good weather. From the standpoint of it was a little bit late all of a sudden we got hit with all these storms in Northeast, but that's got the that's got Q2 pretty loaded up with all the body shop work.
That I think will go on. So I think overall we're set up for a pretty decent year, given the season you do get a little seasonal factor there that whatever happens weather in Q1, you see more of that in Q2 as far as the the shop activity. But everything we see from our from our shops and the op growth setting up to be a really nice year.
Great. And then a quick follow-up in Transportation Coatings, you did start the year down in terms of EBITDA. I know you're not giving guidance per segment, but, what do you think needs to happen to get EBITDA for Transatase Coatings growing again when you think about the rest of the year?
There's probably the one thing that immediately coming to mind is that difficult comparison from price and from raw materials in the first quarter. So I think it's important to put into context what that first quarter comparison look like when you look at the rest of the year. Obviously, things have to happen. There needs to be execution. There needs to be price capture, to get to get the full outcome that we project.
But we have noted that
the first quarter was a difficult comparison.
Our next question comes from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your question.
Great. Thanks. Just a couple of quick clarifications. So first on Refinish, you noted mid single digit growth potential for the year. I just wanted to clarify is that X FX?
And if you were to agree with that, I guess, is it, you know, kind of evenly split between volume and and price?
Yes. When we spoke originally, when we talked about our 2018 guidance that we were expecting mid single digit growth that is organically.
Great. And then on light vehicle, You know, you commented that, Q3 is one of the weakest periods, but I'm just curious, if you're seeing any changes You know, we noted that the, the China auto OEM season was a little bit late to start back up given the later Chinese New Year, but any other regional differences that concern you as the year progresses and not OEM? Thanks.
No, I think right now as we look at demand, in the different regions and what we got to get to our plan, don't think even by OEM, we've really seen any surprises on kind of how we thought from a build rate and who was going to do what. I don't think we've seen any major shifts in what our our thoughts have been.
Thank you. Our next question comes from the line of Lawrence Alexander with Jefferies. Please proceed with your question.
Good morning. How are you?
Hi. You mentioned before that, that some customers may be willing to change their product due to rising costs. Is there a particular end market where that's more prevalent I mean, where I would think would be something more along the lines of industrial, but I was wondering what if there's an area where it's already happening or are people already considering it?
Yes, you're right. It is industrial. If you think about light vehicle, just the time to qualify and then getting line time to qualify your new product. If you make an engineering change, that process takes a while. Industrial is where we can make adjustments to formulation and be a little bit more agile in terms of reacting to some of those raw material changes.
However, we have very demanding, industrial customers from a quality and a performance point of view. It's just that the qualification process may be a little bit simpler in some cases.
Thank you,
ladies and gentlemen. We have come to the end of our time. Allow for questions. I'll now turn floor back to Mr. Shaffer for any final comments.
Yeah. Sure. Just a couple a couple of quick comments and we'll let everybody go. First of all, overall, a good start to the year. And consistent with our plan, certainly sets us up.
I think what I'm most encouraged by is just that across the board, the markets we're in globally, appear to be healthy as Robert noted in his comments. And I think, set up to do a good year. Our focus is really on execution around price where and cost initiatives, cost reductions. I think we our M and A plan is solid as we mentioned earlier. We would look to add $100,000,000 to $200,000,000 on top line from endpoint of acquisitions.
I think our pipeline is in good shape to do that along with what we've already done in the first quarter. And again, I think the the thing I think we keep in front of us is and certainly what I'm seeing is just general inflation, creeping into, it's not necessarily a coating this but overall, just general inflation creeping in not only raw materials, consumers are certainly going to start to see that at the pump with $75 oil. We're moving back into an environment we had several years ago. So I think raw materials, gentleman earlier asked about logistics costs. I think we'll continue to see just general inflation whether it's logistics cost, raw materials, wages, things like that.
We're certainly seeing that. I think we'll continue to deal with it just like we have I don't think anything new there. In fact, I think it's offset by the fact that you just see stronger global GDP out there and this is a natural result of that. And the and the, removal of monetary stimulus out there. So I think I think we're well positioned.
I think we're in a head of it, and I think continue to deal with it as a company, but it'll continue to stay, front and center. And I think if we continue to do a good job of that, we'll see the organic growth that comes from being able to do that and service our customers. And in some cases, take share from those, competitors who can't deal with all of those those factors ongoing. So, again, thanks for your time. Thanks for your attention.
Good to start the year off like this, and we'll look forward to, our next round with you after Q2. So, best wishes. Thank you.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.