Ladies and gentlemen, thank you for standing by, and welcome to the Axalta Coating Systems twenty eighteen Financial Outlook Call. All participants will be in a listen only mode. A question and answer session will follow the presentation. Today's call is being recorded and replays will be available through December 21. Those listening after today's call should please take note that the information provided in the recording will not be updated and therefore may no longer be current.
I will now turn the call over to Chris McCray for introductory remarks. Please go ahead, sir.
Thank you, and good morning. This is Chris McCray, Axalta's VP of Investor Relations. Welcome to our twenty eighteen financial outlook conference call. I'm joined today by Robert Bryant, Axalta's EVP and CFO. This morning, we posted a slide presentation to accompany this call in the Investor Relations section of our website at axaltacs dot com.
Both the prepared remarks and discussion during this call 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 that may cause actual results to differ materially from those forward looking statements. The company is under no obligation to provide subsequent updates to these forward looking statements. This presentation also contains non GAAP financial measures. For additional information regarding forward looking statements and non GAAP financial measures, please refer to our filings with the SEC.
All right. I'll now turn the call over to Robert. Thank you.
Good morning, everyone, and thanks for joining us. Today, we're offering a preliminary outlook regarding our expectations for financial performance in 2018, which we will update and finalize as needed on our full year 2017 results call in February. First, as you know, we recently spent some time and effort exploring the potential for strategic M and A with our coatings peers. Axalta has periodically considered strategic M and A options as part of our overall value creation process. Recent discussions have fit with this continuum as we balance our independent growth strategy with opportunities to accelerate shareholder value creation through larger transactions.
While these discussions did not conclude with a transaction at this time, it's always a challenge to conclude such large deals. Deals. That's why we prefer to keep such approaches private and regret the distraction that these events caused for our shareholders. We recently stated that these discussions were terminated for various reasons, and we remain focused on running our business and executing our strategy, which we believe offers a compelling value creation opportunity for our shareholders.
That said,
the continuum of strategic options remains open for the coatings industry, and we remain supportive of positive sector consolidation at the appropriate time and where we can discern clear shareholder value. Moving on now to the main purpose of today's call, starting with Slide three in our investor deck. This page offers some key metrics for Axalta's twenty eighteen financial performance outlook compared against our current guidance expectations for 2017, which we last updated in our 2016 earnings release. Regarding fourth quarter performance, our results through November have been on plan with our guidance. The third month of every quarter tends to be determinative for overall quarterly results, but trends across our end markets so far this quarter have been encouraging.
Notably, the North America Refinish volumes have returned to normal historical levels and behaviors over the past two months. 2018, we expect net sales growth excuse me, we expect net sales to grow six percent to 7%, consistent with growth estimates for 2017. Current forecasts indicate that foreign currency may be a modest tailwind next year, and we will detail our assumptions on our next quarterly call in February. The net sales forecast also includes approximately 3% incremental contribution from completed M and A transactions. For adjusted EBITDA, we're projecting an initial range of $940,000,000 to $980,000,000 which implies modest margin expansion driven by organic volume growth, incremental contribution from completed acquisitions, the benefit of incremental productivity and some tailwind from price increases offset by projected high single digit raw material price increases and slightly higher OpEx from acquisitions.
At the midpoint, this range implies a margin of 20.7% versus 20.3% this year. Interest expense for 2018 should approximate $150,000,000 Axalta's adjusted book tax rate is expected to fall between 2123% for 2018, slightly lower than our 2017 range of 22% to 24% due to normal operating assumptions. Any impact from prospective U. Tax reform would be incorporated once we have a law signed, But our current view based on existing bills is that any legislation may not offer benefit to Axalta due to the loss of interest deductibility offsetting any reduced corporate tax rate. For free cash flow, defined as cash flow from operations less CapEx, we expect to generate four thirty million dollars to $470,000,000 in 2018, including estimated adjusted EBITDA growth and the moderate assumed use of working capital and other operating elements of around $100,000,000 Finally, CapEx this year is expected to be roughly $160,000,000 which will make up somewhat for the reduced spend from this year from our original forecast, including a few delayed projects.
Moving on to the next slide. We've described here some commentary on the key drivers for each one of our end markets in 2018. Starting with Performance Coatings and Refinish, the global market remains consistent and steady from our vantage point. We expect ongoing modest market growth correlated generally with miles driven, coupled with ongoing Axalta share gain across most geographies that we serve. This comes from broadening our served markets, introducing new products and benefiting from the unique position with customers who are consolidating in their markets.
We expect that distributor working capital adjustments taken in North America in mid-twenty seventeen will not repeat and impact our 2018 results. For 2018, we expect mid single digit organic growth in Refinish. In Industrial, we continue to drive growth as well as leverage M and A to extend our products and markets served. For the last several years, we've invested substantially in innovation to introduce new products as well as adding sales coverage to call on new accounts and locations. We've translated this investment into significant organic growth over the last four years while also expanding margins with stronger product mix.
With M and A, we've added over $400,000,000 in cumulative annualized net sales in Industrial, while acquiring 10 manufacturing sites and adding about 800 employees. For 2018, we continue to expect mid single digit organic growth plus the contribution from M and A from deals previously completed. Moving on now to our Transportation Coatings segment. In our light vehicle end market, we would observe that global forecasts of production currently call for around 1.5% to 2% global automotive production growth, including modest growth in Asia Pacific and EMEA, offset by slightly lower production rates in North America. Latin America is forecast to continue a recovery, albeit from a small base with limited impact to the global picture.
For Axalta, we're expecting modest market outgrowth based on company specific opportunities and global customer exposures that we expect to lead to low single digit organic growth based on current market forecasts for 2018. Finally, in the commercial vehicle truck markets, they are expected to continue to grow again following a particularly strong year this year for orders, largely in North America. Axalta expects to maintain market share in this end market while focusing on the opportunity to broaden our presence in underserved markets, including China and other specific markets, including bus and train, among others. For 2018, we expect mid single digit organic growth. For our consolidated results, we see a reasonable balance of market drivers to support our forecast of moderate organic growth in 2018, including a stable foundation of volume from Refinish, reflecting the stability of that end market, coupled with solid visibility into Axalta sales volumes globally.
We see little demand inflection fundamentally in our served markets and would characterize the global demand environment for our business as stable and sound. Adding to this foundation of demand is the tailwind from completed M and A, the support from refinish of a more stable volume picture in North America and gains from initiatives to introduce new products across each of our businesses. Moving on now to our key goals and priorities for 2018. First, we continue to focus as with every year on market outgrowth for Axalta. The drivers remain consistent.
New products across more markets, geographic diversification and leveraging consolidation at the end customer level. Second, we expect to drive incremental productivity as we have done since the carve out from DuPont. In 2018, we're targeting productivity both to offset core labor inflation as well as incremental amounts as needed to offset other inflation. Complexity reduction, footprint rationalization and SG and A optimization will be the three main focus areas of Axalta Way in 2018. Third, we expect to achieve incremental progress as we implement our Axalta operating excellence system to drive continuous improvement across our production sites.
With now 50 plants serving our business and comprising the bulk of our fixed cost of goods sold, this focus can be meaningful as a source of productivity, enhanced quality and reliability and incremental capacity within our existing footprint. Fourth, our focus on customer service and innovation is witnessed by our close to $180,000,000 annual spend on core R and D, technical service and customer support. In 2018, we expect to roll out at least two fifty new products, including initial impactful sales from key products introduced in 2017, such as Cyrox in Asia Pacific Refinish and Aqua EC6000 electrocoat in all markets. Fifth, our capital allocation plan remains steady. In addition to the $160,000,000 in capital spending, including a strong component for automation and other internal projects with strong returns, we expect to deploy significant capital toward bolt on and tuck in M and A opportunities based on a strong pipeline of transactions we currently have.
This strategy is consistent with 2017 and is limited only by factors that are always a challenge to control. We also retain our share buyback authorization with deployment dependent on share price opportunity and conducted largely via quarterly buyback programs with established price parameters. Finally, we remain focused on generating strong free cash flow and seek to maintain a solid balance sheet. At current leverage, we would not be opposed to some reduction in the ratio largely from growth in adjusted EBITDA as well as increased cash for now given the limited return from paying down our current debt. I'd like to thank everybody for their attention to our prepared remarks.
Christine, I'd like to ask you to please open up the lines now for any questions we might have.
Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Mike Sison with KeyBanc. Please proceed with your question.
Guys. Good morning. Good terms of Refinish good morning and happy holidays to you coming down the road. But in terms of Refinish, what gives you confidence that as you head into 2018 that some of the issues you saw in 2017 have subsided? It sounds like you have some new good new product introductions coming in, maybe spend a little bit of time of where you can show some growth there.
Regarding Refinish, I think as we mentioned in 2017, what we saw this year, again, was not any change in fundamental end market dynamics in terms of miles driven, accident rates, the car park, body shop activity. What we really saw were onetime events. We talked in prior calls, obviously, about the impact of the hurricanes, the earthquake to our Mexico refinish business and then perhaps most importantly, the onetime working capital adjustment that there was with some of our distributors in North America. We now believe that those working capital adjustments at the distributor level are behind us. And based on what we're seeing in October and November and thus far in December, buying patterns appear to have returned to normal levels.
So that, I think, Refinish gives us confident that that onetime blip that we saw in Q2 and Q3 of this year, where we simply had to make some structural adjustments, is largely behind us. And then the second part of your question on the new products. The new products really are across all four of our end markets. It's not concentrated in any one end market. I think the only point perhaps to highlight, as we've mentioned, we have a keen focus on the mainstream part of the market four end in of markets.
So you will see some new product introductions coming this year, not only in our premium product offering, but also in our mainstream product offering.
Got it. Then as a quick follow-up, I think you talked about raw materials being up high single digits. I think that that's probably more than a lot of folks had initially expected as they head into 2018. Any particular areas that you're seeing more pressure than maybe what you had a couple quarters ago or months ago?
Yeah. I think the main
thing that, you know, we would highlight, you know, compared to, for example, you know, our call our call on on on October 26 is that we've really seen, you know, oil continue to to rise. And Brent has, for example, risen another 7%, in that in that time period. Now it's difficult to forecast what's gonna happen between now and February when we next, when we next update our, you know, put forth our our formal final guidance. But we thought that, you know, taking a little bit more of a conservative route with review you know, with respect to our our raw material guide made sense. And so if we flow that through our models, basically we get to a high single digits type of outcome.
And, you know, in specific areas, monomers, you know, we're seeing up pretty substantially, resins, pigments, and, you know, we could kind of go on through the categories. But those are the ones that are up the most, but pretty much everything but certain select additives are materially up.
Great. Thank you.
Our next question comes from the line of Ghansham Panjabi with Baird. Please proceed with your question.
Hi, good morning. This is actually Matt Kreger sitting in for Ghansham. How are you doing today?
Hey, good morning, Matt. How are you?
Good, good. First,
what is your working capital assumption for 2018? And then can you provide some added color on any restructuring or pension payments that are included in your free cash flow guidance?
So with regard to working capital, we're assuming 10% to 11% of the change in net sales roughly. And then between working capital and some other operating items together, it's about $100,000,000 And then outside of that, in terms of onetime charges that we have at this point, including pension, it would be roughly $25,000,000
Okay. That's very helpful. And then as a quick follow-up, given where your tax rate guidance sits right now at 21% to 23 without any tax reform impact, can you provide a best guess as to what your tax rate could look like if the reform bill is passed kind of as it looks today?
Yes, think Mike, we're it's Chris. We're going to beg off of that one for the time being, take a look at the final law once it's passed and include formal guidance related to tax in our fourth quarter call. But we did note in the prepared commentary that the loss of interest deductibility is a significant offset to the proposed lower corporate tax rate.
That's helpful. Thank you.
Our next question comes from the line of Arun Viswanathan with RBC. Please proceed with your question.
Hey, good morning guys. How are you doing?
Hey, good morning Arun.
Good. Yes, so I guess I had two questions. So first off, a little bit more near term, you had talked about a typical or greater than normal ramp sequentially between 3Q and 4Q than you'd seen previously. And today, you are kind of reiterating that the full guidance range, you're still eight seventy million to 900,000,000 So could you just give us an update on if you still expect that large ramp, I guess, Q3 to Q4? And maybe what some of the big buckets are, whether it be cost savings or price cost recovery or kind of the ending of the refinish destocking or what you're seeing?
The main drivers in Q4 in terms of the ramp up, obviously, is the contribution from acquisitions because we do have now the full contribution from the Wood transaction in particular. We have a positive tailwind from FX. We do have cost saves, which I think we talked about before as not being linear through the year, but picking up slightly more heavily in the back half of the year given, in particular, the notice periods, of some of the, some of the individuals in in in Europe, peeling off the payroll in the second half of the in the second half of the year. And then lastly, again, the return of Refinish to normal volume levels and with new commercial terms also has a pretty material impact on Q4. Okay.
And then I guess the other question I had was on your last call, talked about double digit growth in EBITDA for next year, and that's kind of implied at the midpoints of your range is slightly below if we were to consider your midpoint for 'seventeen of eight eighty five and then midpoint. But has anything changed versus your view Q3 wise? Mike asked about the raws, so I guess that could be a little bit more conservative. But any differences in your expectations to get price to offset that? Or commercial, you're saying is flat.
Is that was that weaker than you expected? Any changes to those views?
Matt, a few points there. I mean, think, first, in terms of the up 10% year over year. First, this is preliminary guidance. It's not final guidance. Our final guidance will be provided in February.
So again, this is a preliminary early look based on what we know today. Second, our guidance approach for 2018 is to be conservative. Third, since we last discussed potential EBITDA growth on October 26, as I mentioned in my earlier comment, oil is up another 7%. So we are expecting to see incremental raw material inflation in 2018 on top of our prior expectation. Now by February, projected oil prices that they could be higher, they could be lower, who knows?
But we have to go with what we have today. And then lastly, if you look at the 2017 estimated full year EBITDA range and the 2018 estimated EBITDA range, within those two ranges, it is up over it is up over 10%. Mhmm. So I know, you know, a couple notes came out this morning choosing exactly the, you know, exactly the midpoint. You know, we don't know exactly at this point where we're gonna end up between the $8.70 and the 900, just like we don't know between the September and the September exactly where we're gonna end up.
But I think we feel, you know, pretty confident where we're headed. But the incremental raw material inflation that we have seen, That is a new variable that we will have to take into account as we put together our final guidance in February.
Great. Thank you.
Our next question comes from the line of Christopher Parkinson with Credit Suisse. Please proceed with your question.
Great. Thank you. Can you just talk a little more about the global auto OEM by region, just including any of your views on regional competitive positioning, especially in China and who you're linked up with there as well as any view you have on the recent tick up on LatAm? You mentioned in your prepared remarks, but given your market share there, is
there anything incremental you'd like to share? Thank you. Thanks, Chris. Appreciate the question. So in terms of the light vehicle growth rates, if we look at the two companies that publish outlooks and forecasts, Essentially, we're looking at North America being down roughly 0.8%.
That's the current expectation by the market forecasters in 2018. EMEA up about 2.1%, Latin America up about 6.8% and Asia Pacific up roughly 0.7% for a total global growth that would be approximately 1.3%. So I think overall, you know, it's a it's a it's a at this point anyway, you know, it's a it's a slight a slight growth environment overall from a from a a macro perspective. And we also have, I think, some unique customer conquest opportunities and new plants that we have won, especially in North America and China that are coming on in 2018. And then the other element to think about vis a vis Latin America is, as I've mentioned, we were coming off a very challenging situation in Brazil where demand was down more than think it's reached I the peak of about 70 unitary demand decrease in Brazil.
And that market has started to come back, and we've dramatically lowered our cost structure there. So we're expecting some nice flow through from that. And then lastly, we'll just point out that I think Latin America is a reasonably conservative outlook for us just given that with the deconsolidation of Venezuela, we also have Venezuela no longer contributing to sales and EBITDA within Light Vehicle.
That's very helpful. And then just can you talk a little more about your industrial platform organic growth assumptions and just how the five to six key target areas you've identified over the last year are trending? Are there any key outliers you could identify for 2018 or 2019? And then also, given that, would you have any assumptions on your industrial margins over the long term based on subsegment mix? Thank you.
As we highlighted, Chris, on the call, I think we see good growth in our Industrial business, both organically as well as from acquisitions. Coil and wood, as you know, are two new platforms for us, and we continue to have success in both of those areas and continue expect to build out that platform globally. Industrial was impacted pretty importantly in 2017 by the rapid rise in raw material prices, especially in Asia Pacific. We've been quite aggressive in terms of pushing through price increases in our industrial business as well as certain product reformulations and certain product portfolio changes. So I think we feel pretty good about where the Industrial business is headed overall in 2018.
Thank you.
Our next question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.
Thanks very much. Just on the pricing side of things, my sense when you talk about being conservative in your guidance, maybe you're being conservative as well in terms of the pricing that you're expecting to get. So maybe just give us an update sort of where in the continuum of the price conversations we are and from a progress perspective where you think you are versus a quarter ago or earlier this year? And just what your expectations are that are baked in to that volume sorry, to the revenue guidance for next year? So
Vincent, we're I'd say overall, we're expecting to socialize and move price across all end markets as the primary mechanism to overcome this challenge of clear and persistent input inflation that we've really seen since the latter portion of 2016 and that's accelerated since 2017. I think the ability and the speed with which we can accomplish that varies by end market. But we note that over a longer period of time, the coating sector has generally managed to pass through inflation via price through the cycle historically. We do expect to see positive pricing revisions in our end markets in 2018, but the realization of that is highly sensitive to the competitive factors. Now we remain fairly disciplined, you know, a a fairly disciplined player in the markets that we that we serve, but the competitive backdrop will will will determine that to, you know, to a to a great extent.
So I'd say more specifically on the Performance Coatings side, we feel confident that we will go out and that we will get price in 2018 and that we will get not only price that we have traditionally achieved, but also price reflective of the incremental raw material inflation that we have seen. In the Transportation segment, there it can be a little bit more challenging given how highly competitive that market is. But price is generally set annually according to agreements with large customers. But that said, I mean, we believe the market is broadly recognizing the seriousness and structural nature of the input inflation that we're witnessing globally. And hence, we do anticipate that the tone of discussions with OEM customers, not only by Axalta, but perhaps by other players, is starting to shift to acknowledge that fact.
But the exact moment of where you see that inflection point is difficult to pinpoint.
Okay. And just as a follow-up on your bolt on M and A pipeline, I'm just curious whether all the news flow on the various M and A activity that may or may not have happened, did anything change in the dialogue with the bolt on people in terms of are they more interested or willing to enter into discussions or bid ask spreads narrowing or it's just is there any movements in terms of how you're assessing the bolt on pipeline?
I think overall, when look at the M and A pipeline around the world, it remains robust in each region. We haven't seen a decrease in inbounds or in processes or in the number of deals, you know, that our our business teams come across in the normal course of in the normal course of business. We did, of course, have a number of, you know, key management resources in M and A, in finance as well as in the businesses focused on the integration of the Valspar Wood business. So activity took a momentary, you might say, a slight slowdown during that period. But even during that period, part of our M and A team was still pursuing other bolt on transactions.
And I think you'll continue to see those.
Okay, great. Thank you very much.
Our next question comes from the line of Duffy Fischer with Barclays. Please proceed with your question.
Yes. Good morning, Good morning, Duffy. First question, just on market share, what are the two or three areas where you think you gained the most market share this year? And then are there any of your areas where you actually lost market share, do you believe?
With regard to market share, Duffy, it really varies, again, as you know, by business, by end market, by country. I think overall, when we look at share, think we feel that in Refinish, we continued to gain share not only in The US, but globally. In the light vehicle business, we feel that we have likely maintained share broadly, but we've gained some share in certain markets. And then potentially just from product changeovers and so forth, sold a little bit less in other markets. Commercial vehicle, I think we would see that we've continued to increase share, in particular, given the rather nascent position that we have in China in commercial vehicle.
And then in industrial, we have gained quite a bit of share, organically and then obviously inorganically.
I would add Duffy to that, that in the Refinish market, we've continued to gain market share globally, and that includes each region. The disruptions that occurred in the middle of this year were in the middle market, the distributor channel, at the body shop level. We continue to accumulate share, and that's been a consistent story for recent years.
Okay.
And then secondly, last year's guidance was roughly in line with where this year's is. Obviously, we ended up 5% ish below the low end of the range. Were there lessons learned from that?
Because I think when we look
at this last year, there wasn't a lot of tremendous dislocation. I mean, a few things went wrong. But I think most people would argue probably within what should be a normal guidance range. So is it fair to assume that this year's guidance builds in more conservatism than last year's?
Duffy, it's really challenging to really characterize guidance on a call like this going into a year, but Robert did make that point briefly. But I would note that going into 2017, we did not forecast nor expect anywhere near the level of raw material inflation that occurred, and really began to accelerate starting in the first quarter. So that's a notable difference in what happened this year. And of course, the other element was just what took place in Refinish, which was not forecast at the start of the year. So actually, forecast going into 2017 on a market level was achieved with relative accuracy.
And there were some, obviously factors operating factors in the business that affected the outcome. Fair enough. Thanks, guys.
Our next question comes from the line of P. J. Juvekar with Citi. Please proceed with your question.
Hi. Good morning.
Good morning, P. J.
Robert, can you talk about your TiO2 surcharge that you had put in, in 2017? How is that working out? And what's the plan for TiO2 that surcharge in 2018 as prices have continued to go up in fourth quarter and into first quarter?
If I think about
the TiO2 surcharge, PJ, it's just part of our overall price increase strategy. And there are certain markets, particularly in the industrial space, where TiO2 is a very high percentage of the overall product, where it really makes sense to separate that out and call that out. I'd say that the t I two surcharge is, you know, has been has been well well received. But again, it's the whole package of the t I two surcharge plus the standard price increases that kind of make up the overall the overall commercial approach. But if we do see TiO2 prices despite, you know, some of the market news in the last couple weeks here that might have slowed things down a little bit, if we do see pricing go up, we will, of course, adjust that TFG surcharge and expect that our customers would understand that.
But more broadly, I'd just say it's progressing quite well.
Thank you. And then you had two interested parties in discussions for M and A, and none of those deals worked out. Was it a matter of price? Or it seems a bit more complicated than that. So can you shed some light on that?
And there was also some news about a merger of equals or MOE with no premium. Are you interested in an MOE type transaction? Or would you be more interested in an outright sale?
Well, let me start with perhaps your last question and then come back to the first one. I think Axalta the management team at Axalta you know, hopes to be a major player in the consolidation of the industry. And we've always viewed, you know, the bolt on and tuck in acquisitions as, you know, part of that. But more broadly, as you've heard us make reference to before, you know, we are open to and do pursue transformative acquisitions where we could, you know, become substantially larger and likely, you know, maintain control of our destiny. And I think we have a team that has a track record of doing those types of very complex transactions, you know, that could actually do that type of a deal and and could create a lot of a lot of value.
So I think that will continue to remain, you know, our our focus. That being said, if somebody does present the company with an offer, unfortunately, management doesn't get a chance to decide whether or not that offer, you know, should or shouldn't be considered. We have an obligation to take that offer to the board, and that's for the board to deliberate on. And that's just, you know, good good governance, and and and we will we will continue to do that. Regarding the the merger of equals, I would say the merger I mean, you think about a merger of equals, there are so many elements that go into that from valuation to governance to social issues to the overall legal construct.
I think that Axalta is very open to a merger a merger of equals provided that it's with a a strong player where we would both, you know, complement ourselves well and and where the shareholders of Axalta would receive an appropriate valuation of their stock in the company, as well as have to the extent that they are going to, you know, receive stock in the new company as opposed to cash. We need to make sure that we have a structure in place that allows us to really drive the key the key value elements, the key value drivers of whatever that new company is moving forward. On your on your first question, you know, I think with Axo in particular, that's a deal that had very, you know, strong industrial logic and significant synergies. And I think both companies felt like could be, you know, a positive transaction for both of our shareholders. Fortunately, we we couldn't reach mutually acceptable, deal terms on on on that transaction, and so that transaction, ended.
And then in the case of, of of of Nippon coming in and and and making an offer during that same time period, again, you know, we had a fiduciary responsibility to take that proposal, that proposal to the board. But on that particular transaction, we could not reach terms that were, you know, that that were acceptable. And therefore, that transaction did not come to fruition.
Thank you. Thank you for the detailed color. You said that Axo transaction has ended. Has it ended?
Well, I think, you know, Axo issued a press release, stating that the discussions were off. And then I think after they issued that press release, we issued a press release stating that there were that there were an ongoing that there were no ongoing discussions about a potential merger. That continues to be the case today. Whether or not that changes in the future, I think depends on any number of variables that are outside of our control.
Thank you. That's fair enough. Thank you.
Thank you, P. J. Our
next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.
Good morning. This is Catherine Griffin on for David. So on Refinish, can you just briefly discuss the mechanics of the distributor working capital adjustments, which occurred in 2017? And what gives you confidence that, that won't repeat next year?
I think on our Q2 call and our Q3 call, we provided a fair amount of commentary about that at that time. Obviously, the relationship that Axalta has with its, with its distributor partners, is a is a very, is a very important, commercial relationship, and we don't get into great detail, about the commercial, conditions or other details, about that relationship. I I would surmise it to say that, you know, in that in that, in that time period, if you go back to those, transcripts, it'll provide a fair amount of detail. But, as we look at as we look at October and and November, we are seeing our distribution partners, ordering under normal order patterns, you know, and we have been able to make the adjustments that we, had wanted to make in order to ensure the ongoing success or the long term success of both Axalta as well as our distribution partners.
Fair enough. Thank you. Yeah. Apologize. Most of my questions have been answered.
But so again, just going back to TiO2, it seems like you disagree with some of the sentiment that's out there for pricing in 2018. So could you just talk a bit more about your expectations for that material inflation in 2018 and kind of what's driving your thought there?
Yes. I don't think we've made reference on this call to any specific expectations around TiO2 pricing, either where we are today or where we expect to be in 2018. So it's a little bit difficult for me to answer your question.
Yes. I think we there's nothing we particularly disagree with, but we are indeed embedding an expectation of inflation in 2018 across virtually all of our materials basket, as Robert had mentioned.
Great. Thank you.
Our next question comes from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question.
Yes, good morning. Morning, Question on the scope of your future M and A, Robert, obviously, of the two major deals you would have considered would have had the effect of broadening the portfolio composition quite a bit into architectural and other verticals where Axalta doesn't currently participate. So if we were to assume for a moment a standalone scenario, what is your appetite for step out acquisitions into architectural or other verticals? Is it meaningful? Or is there really a critical mass issue whereby those sorts of deals would only make sense in a much larger construct?
Again, I think we look at deals that we feel could make create the most value for our shareholders. In our M and A strategy, we've outlined that within Industrial Coatings, there are many segments within Industrial that we find interesting. We have made acquisitions in some of those, and there are several where we have not yet made an acquisition and where we do not yet play. I think that will continue to be a priority. And of course, as always, our number one priority is in strengthening our global Refinish franchise and looking at markets where we have a chance to make meaningful acquisitions in Refinish.
Regarding architectural, that could be something that we look at some point in the future, perhaps not a global architectural play, but entering architectural in certain geographies.
Okay. That's helpful. Then a question on CapEx with regard to your $160,000,000 forecast in 2018. I think you indicated in your slides, you're looking at some high IRR growth projects. Will you provide a little color on maybe top couple of projects that you have in mind for the year ahead?
So on the high IRR projects, we have a number of productivity productivity related projects, at our at our plants. Again, those tend to be, very high IRR projects, typically, substitution of of labor, with with automation. We still have a number, you know, a number of those just given the size of the of the plant, of the plant network. We also have, some additional expansion, within some of the newly acquired businesses, namely wood. And then we also have additional expansion that we will be putting into China gradually over the next few years.
And then we also have investment in our global innovation centers that also have attractive returns.
Thank you very much.
Thanks, Kevin.
Our next question comes from the line of Don Carson with Susquehanna. Please proceed with your question.
Yes. I wanted to clarify your top line growth outlook. So you talked of six to 7% with a 3% contribution from completed acquisitions. Are there any bolt on acquisitions in that? And of the remainder, can you break out price versus volume?
Yes. So for any there no bolt on acquisitions that are included in that number. That's strictly the acquisitions that we've done to date.
Yes, Don. It would be Wood plus Spencer and Plastco would be the three contributors to the balance of the year incrementally in 2018. Generally speaking on price versus volume, we would expect kind of low single digits for each our baseline planning for 2018. Then from a margin I'm sorry.
I'm sorry, go ahead.
From a margin standpoint, is the price increase just recovering raw material increases or is there a net contribution from higher prices from a margin standpoint?
Yes. In this type of inflationary environment, Don, I mean, the you can't offset it entirely with price. You have to go after structure, and our customers expect us to go after our cost structure. So we're going after that went after that fairly strongly in 2017. We'll continue to do so in 2018.
So it's really the combination of cost reduction and the price increases in order be to offset raw material inflation. And then the more favorable pricing that we expect to get in Refinish this year, given the adjustments that occurred in Q2 and Q3 being behind us, will also be a contributor. Coming back to your question on volume and price, just to hit the end markets quickly. And again, this is our preliminary financial guidance as we sharpen our pencils here to finalize the budget for the board between now and January. Some of these numbers might move around a little bit.
But for Refinish, expect the combination of low single digit volume growth and low single digit price growth. And that really reflects normal growth in North America, introduction of new products in mainstream lines and then market broadening strategies in each region. For Industrial, we expect mid single digit growth, including both volume and price contribution from each of our six focus markets and from all regions. For Light Vehicle, we see low single digit growth, including solid volume upside from the new launches that I mentioned and some of the wins and most likely offset in part by some ongoing price headwinds, in particular, in the first half of twenty eighteen. For Commercial Vehicle, we expect mid single digit growth coming from new volume development and also offset by some headwind from price similar to Light Vehicle, although we expect it to be much less severe.
Thank you.
Our next question comes from the line of Robert Koort with Goldman Sachs. Please proceed with your question.
Good morning, guys. Chris Evans on for Hey, Chris.
Just wanted to get a little color on the quarterly cadence of your margin expansion that you're expecting. You got 40 basis points at the midpoint. Just kind of wondering, you talked a little bit about some of the sort of price cost dynamics. Just kind of wondering when on a year over year basis you might start seeing expansion in 2018?
Chris, maybe we ought to defer that to the fourth quarter final guidance. So at this point, allow us to come back to you with more quarterly phasing commentary.
Fair enough. And then the distributor
working capital adjustments that you discussed being resolved with new commercial terms, I was just wondering if there's any change in the pricing expectations you might be able to get and refinish out of that or any other adjustments or maybe benefits you might see in 2018?
Our general expectation there is that the regular gross price increase cadence that we've seen in previous years, would expect to have a similar cadence in 2018. Pricing would most likely be higher, reflecting the raw material inflation, of course, that we've seen. But when you think about the net price realization, you know, from the adjustments made to the discounts and rebates and incentives and so forth, we would expect that to be a little bit richer.
And just maybe a quick clarifier. On the $400,000,000 of annualized sales you guys have acquired in Industrial, just on the net, would those be at a margin below or above the segment of the company as a whole?
Almost always, we find that Industrial Coatings margins are typically below the company average just given some of the margin profile of the other businesses that we operate in. I would add to that, though, that of the businesses that we acquire within Industrial, they are typically, more often margin accretive to that end market relative to the base. So we're buying good industrial businesses, but it's pretty rare to buy businesses that are margin accretive to the corporate average.
Our next question comes from the line of John Roberts with UBS. Approximately
what percent of twenty eighteen sales would you expect to be in The U. S? And for your tax planning, what percent of twenty eighteen taxable income would be budgeted from The U. S?
I think we'll provide a little bit more color on that in February. We wouldn't expect to see a material change. Obviously, we've added, you know, adding the wood business here in The US that will increase the amount of sales as a percentage of the total, John, that that that comes here from The US. And and on the tax side, you know, it it it really depends on interest deductibility and the lower corporate tax rate, you know, being at being at 21 at at 21%, you know, is is helpful. But we also, you know, have, offsets, which include, the deduct deductibility in particular on things like third party interest.
So those two things have to be balanced out. Roughly, it's about 30% of our sales are from The U. S.
Okay. And then on tax reform, again, mentioned you might have some limitation issues there on deductibility. I realize it can change, but what's your current understanding of what's out there as the current proposal?
So I think just it's hard to say. It's going to be dependent on how things shake out. I mean, of today, the news broke yesterday that the House and Senate Republicans instructed, obviously, the tentative deal on the tax bill. The full details are still you know, have still yet to be released, but at least it appears there's alignment on the corporate tax rate of of 21%. You know, we haven't seen the full details of the final bill, but we've reviewed separately, you know, the house and the senate bills that were released in the weeks prior.
Now they differ in, you know, they differ in many ways, but kind of the fundamental principles in each, are fairly are fairly similar, and we expect them to survive in whatever the final, you know, the final bill is. But, you know, there'll be new limitations, as you know, on the deductibility of interest, both third party, you know, as as as well as internal executive compensation and payments made abroad to foreign related parties. So we think that those things together more or less, you know, more or less will offset the benefit from the reduced tax rate of 21%. But, you know, here again, the the variability around is
it a full offset, is
it a partial offset, is it a net good guy and how much or a slight net bad guy. We'll have to wait until we have the final bill and with our tax team can go through it in detail, model out the final scenarios and I think we should have a good answer on that in February.
You.
Due to time constraints, we have reached the end of the question and answer session. I would now like to turn the floor back over to management for closing comments.
Yes. Thanks, everybody, for joining us. I really appreciate it. We went a good deal over to just try and take as many as we could. There are three or four of you left who I will reach separately.
Thank you for joining us, and feel free to follow-up with any questions you have. Good day.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.