Ladies and gentlemen, greetings and welcome to the Axalta twenty seventeen Financial Outlook Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.
Chris McCray. Thank you. You may begin.
Thank you and good morning. This is Chris McRae, Axalta's VP of Investor Relations. Welcome to our twenty seventeen 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 to the Investor Relations section of our website at axaltacs.com.
Both 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 certain non GAAP measures. For additional information regarding forward looking statements and non GAAP financial measures, please refer to our filings with the SEC.
Thank you. And I will now turn the call over to Robert. Thank you.
Great. Thanks, Chris. Good morning, everyone, and thanks for joining us today. Today, we're offering a few key data points and comments around our expectations for financial performance in 2017. Last year, as you may recall, we held an Analyst Day in December and gave certain forward looking assumptions for 2016.
Since our next Analyst Day is not until February, we've opted to hold this separate call to set initial 2017 expectations. We will, of course, update these as needed on our Q4 and full 2016 results call to be held in February. But we believe that best practices in the market have gradually shifted to offering initial guidance before year end as internal budget processes are completed. So with that brief introduction, you can please turn to Slide two of our deck. Slide two offers some detail regarding key metrics, I should say, excuse me, Slide three offers detail regarding key metrics for Axalta's 2016 financial performance and expectations for 2017.
We've not specifically updated our Q4 expectations previously communicated on our third quarter results conference call and do not plan to provide any update on this call. We will focus solely on our 2017 preliminary guidance. For 2017, we expect net sales on an as reported basis to grow 0% to 2% next year, following essentially flat as reported sales in 2016. This is inclusive of a projected negative translational currency impact of approximately 3% and also inclusive of 1% to 2% incremental benefit from previously completed M and A transactions. Net sales excluding FX impact are expected to grow 3% to 5% next year.
For adjusted EBITDA, we're expecting to fall in a range of $930,000,000 to $980,000,000 which implies margin expansion driven mostly by volume, the positive effect of price increases in certain lines of business, businesses, moderate incremental contribution from completed acquisitions and the benefit of ongoing and incremental cost reduction inclusive of our previously communicated Axalta Way program savings. These will be offset by year over year translational FX headwinds, in particular the euro. For our guidance today, we have assumed a euro exchange rate of one point dollars consistent with current composite forecasts. Given our series of refinancing transactions completed since August, we highlight that our interest expense should total approximately $150,000,000 in 2017, including around a $35,000,000 reduction from the run rate of expense prior to our refinancings and term loan prepayments made in October. Axalta's adjusted book tax rate is expected to fall between 2224% for '17, lower than our 2016 range of 24% to 26% due to the full year benefit of actions completed in 2016 that we've previously discussed, as well as assumptions regarding normal operating outcomes in our business.
For the first time, we're offering a guidance range for free cash flow, defined as cash flow from operations less CapEx. For 2017, we expect to generate $440,000,000 to $480,000,000 of free cash flow coming from assumed increases in adjusted EBITDA, lower interest expenses we've noted and modest year over year improvements in working capital as we continue to focus on reducing intensity across the business. Finally, CapEx is expected to be roughly 160,000,000 next year, making expected slightly lower spend of approximately $140,000,000 this year versus our earlier expectation of $150,000,000 again, due to phasing of some of the spending on
our current
projects. Turning now to the next slide. We've noted a few key drivers for each of our end markets as we look into 2017, and I will briefly review these. In Refinish, the overall market backdrop remains consistent and healthy overall. For Axalta, we expect ongoing modest market growth, coupled with share gain from our company specific efforts in all geographies.
We're also continuing to grow via new product introductions and our focus on underserved markets. Finally, we have a modest tailwind from the addition of HIPEC in Malaysia around mid year twenty sixteen. In Industrial, we acknowledge that the market backdrop remains fundamentally tepid in terms of growth, though certainly not universally so in all geographies. Axalta is focused on growth within this context to be achieved via our product expansion strategy as well as additional sales and selling efforts in key targeted geographies. In our light vehicle OEM business, we currently base our expectations off the broader market forecasts, which call for a 1% to 2% global auto production growth led by Asia Pacific and offset by slightly lower production rates in North America and Europe.
For Axalta, we're expecting modest market outgrowth based on company specific opportunities, principally coming from Asia Pacific in our 2017 plan. Finally, in Commercial Vehicle, we expect to see growth in all regions except North America, where the market remains under some pressure in both truck related and non truck markets, as we noted on our Q3 call. That said, we expect the headwinds in North America to abate somewhat next year from the aggressive step downs that we've seen in 2016. Axalta expects to outgrow our served markets slightly due to new customer additions and the growth in Asia Pacific and EMEA as well as stabilization in Latin America, which represented, as you know, a very significant headwind the last two years. For consolidated results, it's clear that Refinish continues to provide a broad foundation for our business, including solid cash flow support.
We believe that our end market specific strategies are continuing to offer myriad opportunities for market share gains on a global basis. As such, the 2017 outlook for our company remains positive, and we believe further upside could be added from new acquisitions given our robust and active pipeline. Turning to the final slide, I'd like to highlight a few key objectives and areas of focus for our business as we look into 2017. First, we expect continued market outgrowth for Axalta, driven by new product introductions, ongoing globalization of our business and our over indexed position with Refinish customers who are actively consolidating their end channels. Second, we continue to focus intently on improving productivity across our businesses, and we are still expecting to generate significant incremental savings from our current Axalta Way initiatives as well as additional cost cutting measures we will be taking in 2017.
Third, as we look at our entire cost structure inclusive of both growth initiatives and our productivity enhancement program, we are committed to maintaining active discipline with respect to operating costs. We've noted over the last several years that we have invested actively in our business for growth. This path of investment could continue if markets justify such investment and we are rewarded with additional growth. However, this path of investment could continue however, we should excuse me, should we face a more difficult demand climate, we remain poised to act on incremental cost structure adjustments quickly. This is supported by established plans of action and a clear willingness on our part to target ongoing profitable growth across a variety of top line outcomes.
Fourth, we remain very focused on driving top level customer service and innovation. Perhaps this goes without saying to many of you, but we want to highlight this as it remains the bedrock of our business and a fundamental driver of Axalta's value to our customers. Fifth, we remain focused on disciplined capital allocation. In addition to internal investment projects with strong returns, we believe we will have additional opportunities to allocate capital to M and A in the coming year, and we target at least $100,000,000 in cumulative spend. Finally, we remain focused on generating strong free cash flow and expect to hit our targeted net leverage of 2.5 to three times in the relative near term.
This target does not assume any meaningful impacts of M and A on our cash position. Achieving this leverage goal would allow us to reset our allocation priorities, and we continue to expect a total shareholder return model to form the basis of any allocation over time. That concludes a few brief remarks on our preliminary guidance for next year. And with that, I wanted to thank you for your attention and would like to open up the line for any questions. Operator?
Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. Our first question comes from the line of John Roberts from UBS. Please go ahead.
Great. Thank you. With the increase in oil prices recently, what are you expecting from petrochemicals that go into the resin solvents and additives? Given where hydrocarbon prices are currently, we would expect a mild headwind to input costs next year. We'd also expect to recoup part of any headwinds with price adjustments and part from our ongoing cost reduction and productivity initiatives.
Now if we see headwinds that are greater than we currently expect next year or if we see a more challenging macroeconomic environment, then we would reduce costs further. And Robert, are there any comments you can make yet on the tax proposals being discussed publicly? Yes, it's a great question. I think as we think about just more broadly Trump as President and the impact of that globally as well as on taxes specifically, I think our early read is that revenue growth could be even better than we're forecasting under a Trump presidency just given his pro business stance, his desire to boost infrastructure investment, which could be a boost for coatings and plans to make The U. S.
Tax structure more competitive globally. Now that being said, I think the big picture is that overhauling The U. S. Tax structure could be a positive for economic growth. However, we all need to understand the specifics around certain potential proposals that we have heard about, including the elimination of interest deductions, certain adjustments to R and D tax credits, etcetera.
I think we, as an organization, have spent some time over the last couple of weeks looking at this and discussing it with our advisors. And just given our heavily foreign structure from a legal entity and a tax perspective, we think that relative to some of our peers that we would potentially be less affected. Thank you.
Thank you. Our next question comes from the line of Christopher Parkinson from Credit Suisse. Please go ahead.
Thank you. You mentioned some ongoing initiatives to further reduce costs and improve working capital. But can you comment or even quantify on what you believe the longer term opportunities are? And then also just how should we think about generally the remaining balance for Fit for Growth in Axalta Way, number one, but also the cadence of the improvements from the cost cuts coming out of the second half Thank you.
Chris, let me answer your question in reverse. Our European Fit for Growth and our Exalt Away programs are both progressing extremely well and on plan. In 2017, we are projecting to generate an incremental $52,000,000 in savings from Fit for Growth and Axalta Way, and that would complete the $200,000,000 in combined savings that we had targeted originally. We have detailed plans for a second phase of Axalta Way that we will begin implementing next year and that we expect to generate more material incremental savings in 2018. And many of those actions relate to footprint optimization, complexity reduction and additional SG and A rightsizing.
And again, if for any reason the macro environment becomes more challenged next year, we do have the option to accelerate that second phase of the Axalta Way. With regard to your question on working capital, our long term goal is to be at similar levels to our peers, which are high single digits as a percentage of sales. This year, I think we've made some important progress on working capital. And I think we expect to make some incremental progress in working capital next year. Really key for us to get from the levels we are today down to those numbers in the high single digits has a lot to do with footprint and supply chain optimization and rationalization.
So that think will be the biggest determining factor on how fast we can get to those levels.
Thank you. And just as a follow-up on essentially corollary of that question. In terms of growth spending, how should we think about growth spend in the context of new product growth, increasing geographic penetration or even growth associated with existing or even new M and A? So I guess the question would be for both a growth perspective and you hit a little on working capital needs. Is there just any long term rule of thumb that we should be utilizing?
Thank you.
Chris, just to clarify your question in terms of you're talking specifically about incremental operating costs?
Correct. Associated with new gross spend as I said, product growth increasing geographic penetration among existing products and So especially any new M and A as well.
I think related first to M and A, obviously, we first do an acquisition, we pick up and integrate, obviously, the SG and A and cost of those business. And then we rapidly, especially in the first six months, go after the integration of our targets like anybody who does a lot of M and A and gradually work those costs down. We've had a significant amount of M and A here at the tail end of the year, which does create somewhat of an SG and A headwind that we're very quickly working through. When you look at it in an absolute dollar basis, as a percentage of sales basis, it's actually helped because many of the companies that we acquired had lower cost structures than we did. But the absolute dollar does create a headwind.
I think in the markets where we expect to see continued growth, we're continuing to invest in our capabilities to be able to serve those markets. But with that said, we continue to execute on our Axalta Way commitment and we remain focused on achieving our goals. So I think the best way to describe it is, where it makes good sense, we will continue to invest in operating expense. But the payback on that operating expense needs to be quite short. I think especially just given the global macroeconomic environment as well as some of the behavior of our competitors in terms of them following up on our example of additional cost reduction and productivity initiatives.
It's great color. Thank you.
Thank you, Chris.
Thank you. Our next question comes from the line of Steve Byrne from Bank of America. Please go ahead.
Hey, Robert, when you think about these footprint optimization opportunities, where specifically are they the most meaningful in your overall organization? And how meaningful are they? Is it manufacturing related, research, distribution? Where are the big levers to pull? And can you give us a little more detail on how much of that is in your guidance for 2017?
Sure, Steve. Let me try and paint a little bit of a picture. I think if you look at Axalta as an organization and you include all of our sites, whether they're production facilities, sales offices, administrative offices, distribution points, we have over 200 different points around the globe. And just from an overall complexity and cost perspective, it's a much larger footprint than we need to run our business effectively. So we've been working on not only rationalizing, but really optimizing.
And I think I'd stress the word optimize. We do have the opportunity to rationalize some of our production assets. And it's not specific to any singular geography. It's across all four geographies. However, the bigger opportunity is optimizing what is made where.
And what I mean by that is historically under DuPont, as you know, the business was run on an incredibly regional basis. So there are some products where you need to make them in all four geographies for margin and shipping reasons. There are other costs I mean, there are other products in certain resins where it makes sense to make them centrally and then them to other regions. Working on that is a big part of our complexity initiative, which is a huge cross functional effort currently ongoing at Axalta. And I think we're excited about the benefits that, that can bring.
In 2017, the incremental $52,000,000 that we forecasted, there could be some upside from some of the second phase Axalta Away initiatives. But I think in terms of setting initial expectations, at least on this call, we would view the bulk of those savings coming in 2018 and beyond as opposed to 2017. I'd like
to add on to that Steve, just that examples of where you might see that do crossover a variety of areas of the company including supply chain and distribution, including R and D, where we've already announced some key consolidation moves and potentially including some of our operating assets for production as well.
Okay. That's very helpful. And then on your pipeline of potential M and A actions, is there anything that's far along that could meaningfully contribute in 2017 that's not yet been finalized?
We'd like to be able comment on that, Steve. What I would say is that in terms of how we think about that, we're aggressively pursuing M and A in all four regions of the world. We've got a robust pipeline and we have different potential acquisitions at different parts of the process. And as soon as we're able to comment on those as they come up, we will definitely do so.
Very good. Thank you.
Thank you. Our next question comes from the line of David Begleiter from Deutsche Bank. Please go ahead.
Thank you. Robert, can you comment on your expectation for refinish price potential gains in 2017? Overall, don't see much of a change. We haven't seen much of a change between 2015 and 2016. We don't expect to see much of a change from 2016 to 2017.
I do think if you we start to see raw material prices move upwards, you could see the industry potentially increase prices more than would be standard to compensate partially for that. I think the other thing to highlight there is, as you know, part of our price increases and refinish are a function of market dynamics as well as raw material costs. Then the other element is inflation and devaluation. And I think certainly in some of the high inflation jurisdictions around the world, we are projecting less inflation into valuation next year in some of those markets. So that of course would also have an impact on refinish pricing.
Very good. And just in Light Vehicle, are you still gaining some share back in 2017 from previous contractual arrangements? And should that largely cease in 2018? Yes, good it's question. I'd say that related to the share rebalancing that we believe occurred between BASF, PPG, Axalta, Kanzai, Nippon, potentially a couple of others during the separation and carve out period and a lot of the business that we won in 2013 and 2014, we expect that beneficial layer to essentially work its way through the system from incremental above market gains, strictly due to that event through the middle of twenty seventeen.
And then we would expect things to be at a little bit more of an equilibrium. And then market share gains one way or another to be, again, a function of technology, customer service and innovation. And I think we feel very well positioned in all three of those areas and I think we'll continue to do quite well. Very good. Thank you very much.
Thank you. Our next question comes from the line of Vincent Andrews from Morgan Stanley. Please go ahead.
Thanks. A couple of quick ones. Could you give us a sense of the transactional FX impact you're going to see on the EBITDA line?
Yes, I think the vast majority of our sales as reported relates to transactional FX impact. Our transactional impact is really de minimis at this point. So when you think of that, really is virtually all translation.
So fine. So we should just flow down the top line impact?
Yes. Have to make an
assumption of the dropdown on that FX impact, but it is a translational impact.
Okay. And should we expect to continue to see SG and A investment in 2017 or is that going to taper off?
So I think it's related to perhaps, Vincent, an earlier question we had on the SG and A, I think it'd be pretty similar. Mean, we are recognizing the environment that we're in, we are being very prudent. So the way that I would think about it is any incremental SG and A investment as we move forward, We're looking for an even shorter payback, just given some of the competitive as well as the macroeconomic pressures. But if you think about the SG and A associated with putting in place our global transportation coatings organization and structure, our global industrial organization, building out our refinished sales force and distribution in places like India and China, most of, if not all of that SG and A is already put in place. So any incremental SG and A kind of above those levels would be on an opportunistic basis.
Okay. Thank you very much.
You're welcome.
Thank you. Our next question comes from the line of P. J. Judiker from Citi. Please go ahead.
Hey, good morning guys. It's Dan Jester on for P. J.
Good morning, Dan.
So on Slide four, if you bucket the commentary by your reporting segment, it seems like the performance business market climate looks like it's going be a little bit better than transportation next year. So if we think about EBITDA growth by segment, should that follow the overall market climate? Or is there something you're doing on the cost side, which could adjust kind of how you see EBITDA growth by business line next year? Thanks.
We haven't with this initial view of our guidance, Dan, provided additional color in terms of that guidance by segment. We'll do a little bit more of that when we in February. I think the only thing to highlight potentially from an EBITDA drop through perspective as you think about how to model between performance and between transportation is we are seeing an increasingly competitive environment in transportation coatings and pressures from both customers as well as competitors
Okay. And then on the tax, the things that you've worked on to lower the tax rate for 2017, are those permanent adjustments or is this because of a shift in sales and if in 2018 you get stronger growth in North America and other markets, could you see a reversal in some of the improvement in the tax rate? Thanks.
Sure. The changes that we've made that drive the improvement in the tax rate are essentially driven by value chain reengineering as well as some changes to our overall tax structure and they are permanent in nature. So that is what creates the several 100 basis point improvement in our effective tax rate from 2015 to 2017, couple of 100 basis points this year and maybe as much as 400 basis points next year improvement versus the 2015 level. That's structural and that's permanent. Additionally, we have other tax planning activities going on that could give us some additional upside.
Great. Thanks very much.
Thank you. Our next question comes from the line of Kevin McCarthy from Vertical Research Partners. Please go ahead.
Hi, this is Matthew Dio on for Kevin. Just wanted to talk about auto OEM pricing a bit. I know the segment has historically been fairly competitive, but do you see any potential for prices to move higher as raw material pressure increases?
I think what we're seeing now in the market essentially is I think we experienced a period of time where raw materials consistently moved down. There wasn't that much adjustment in pricing. And then we've seen a period over maybe the last six months where we started to see OEMs demand price downs and kind of work through the math on what those levels should be. What I would expect is if we move forward in 2017 in an inflationary or slightly inflationary raw material environment, the typical discussions that would go on between coatings producers and OEMs about sharing that cost and adjusting prices upwards would occur. I think the important thing to note, of course, is that there is a lag effect of anywhere between four and nine months in those discussions.
So if you see if we start to see raw material prices go up, figure four to nine months before you would see that materialize in adjusted pricing in the OEM channel.
Okay. To stick on the light vehicle OEM side, just wanted to ask for any insights you might have on to the Chinese market after we've seen some headlines now if they're going to raise the tax on new purchases to 7.5% up from 5%?
Sure. Net net, this is actually it's a positive for Axalta. In the overall scheme of the Chinese auto market, economic growth in China and government stimulus actually has a far greater impact, we believe, on the market than the purchase tax on the vehicles with engines 1.6 liters and smaller. The tax really isn't important as important as those factors overall in terms of how we think about the market. But on the perhaps smaller portion of the impact that it might have, the increase in the purchase tax from 5% to 7.5% that was announced yesterday could have a slight impact on total car production next year.
However, the impact of the vehicle sales mix is expected to be a positive for Axalta, given our customer mix, our vehicle mix and our split between domestic and international brands.
Okay. Thank you.
Thank you. Our next question comes from the line of Yalix Rekhmatov from Instinet. Please go ahead.
Good morning. Thank you. Just a follow-up on OEM pricing commentary. Do you think overall pricing in Transportation segment could be down in 2017? And if so, by how much?
Yeah, Alex, I think we haven't actually guided anything specific there. But obviously you have to go and make a baseline assumption as you look forward. I think if you were in a virtually flat raw materials environment, given the trajectory that Robert referenced, it would probably be prudent to assume a little bit of headwind by some magnitude. However, clearly there are a lot of potential outcomes. And again, as he just referenced, if raw materials do inflect up next year, that in itself does change the tone and substance of some of those conversations.
So there are a lot of various variable outcomes here. But perhaps from a baseline expectation standpoint, you could assume a bit of a headwind. And from the timing of these price pressures, have you have your third quarter and fourth quarter results reflected these price declines? Or do you think there's we're yet to see the effect of these lower prices in mid perhaps first half or second half of twenty seventeen? Yes, Alex, had earlier references to this as far back as December.
So this has been a feature of the market throughout 2016. So it's not new or yet to be reflected, would say, by and large. Great. Thanks a lot.
Thank you. Our next question comes from the line of Bob Koort from Goldman Sachs. Please go ahead.
Hi, This is Chris Evans
on for Bob. In your Commercial segment, do you think North America truck will remain a headwind after 2017? I think it's forecast to be down pretty significantly. Or do you think we can finally moderate and move beyond?
Honestly, it's difficult to say. I mean, we've seen bills in the North America Class eight heavy duty truck market dropped from around $3.20 last year to I think an expected sort of two twenty five ish this year. And I think they're projecting market forecast was around 207,000 units for next year. The two big drivers of course of that of the heavy duty truck market are overall economic activity, commodity prices and then regulatory changes, which can drive engine conversions and so forth. So it's hard for us to really step out for 2018 and have a view other than what you've probably seen from the market forecasters.
I think as we look 2017, we do see Asia Pacific and Europe as markets that we expect to continue to see some growth. And the main area where we see some incremental headwind, of course, would be in North America. But that's based on a market assumption drop of $225 ish million to I think the current composite is $2.00 $7 which is a much smaller drop, but then the drop from the $320 So the rate of the decline seems to be falling. I think if we see a pickup in economic activity here in The U. S, who knows, we could potentially end up better than that for next year.
As far as 2018, it's just too far to really be able to have a perspective yet.
Thanks. And then I might have missed this, but in terms of the benefits of cost cutting in 2017 and your guidance, what incremental benefits did you include in these numbers? And in terms of the actual actions you're undertaking, is this just a continuation of your current programs? Or is there something new that you're holding into these programs?
Yes. The number for 2017 between our European Fit for Growth program and our Axalta Way program is $52,000,000 in incremental savings. That will get us to the $200,000,000 in combined savings between those two programs that we had originally targeted. Those continue to be spread across the commercial side of the business, SG and A purchasing, plant fixed costs across a whole range of cost buckets. Incremental savings opportunities that we see that we'll start working on next year, again, include footprint optimization and rationalization, complexity reduction and ongoing SG and A rightsizing.
Thank you.
Thank you. Our next question comes from the line of Mike Harrison from Seaport Global Securities.
Please go ahead. Hi, good morning. Good morning. Hi, Mike.
I was hoping that you could talk a little bit more. I think we've kind of beaten the auto OEM pricing discussion to death here. But just looking at overall pricing efforts that you have in place and your expectation for pricing overall next year, what's the range of pricing versus input cost assumptions at the high end of guidance and at the low end? Is there a chance any chance at all that at the high end of guidance we could see pricing outpace higher input costs? Or is it sort of neutral at best to maybe a 20,000,000 or $30,000,000 deficit?
Yeah, Mike, I don't think we're prepared today to break out the specific assumption on each portion of the range with regard to price contribution. What I would say is that, as we've said before and as I think it's consistent with our peers and others out there, there is an anticipation of an overall inflationary environment as we get into 2017. Obviously, the outcomes themselves are determined by how we respond and react to that environment. And in fact, it stands to reason that that environment is not by any means guaranteed in any case. So it's a little difficult to be precise there, but we have made a baseline assumption that we're operating in environment of price inflation.
All right. And then looking at the slide where you have Refinish looking like it's the strongest end market next year, can you just give a little bit more color on what gives you confidence on that strength? Is it broader market factors? Or does it have more to do with actions that Axalta has taken over the last several quarters that should set the stage for above market growth?
It's actually a combination it's a combination of both. We continue to see whether you look at accident rates, whether you look at miles driven,
some
of the technological changes going on in the marketplace. Overall, a market perspective, continue to see a favorable market backdrop really in all four regions. In North America, we continue to expect to see MSO consolidation as a driver for additional volume. And given our strength, in particular in that market segment, we believe that we'll continue to benefit from that. In Europe, although we have a very strong market position already, there are specific countries where we're underrepresented and we have very active plans in progress today to increase our market shares in those countries.
And then in Asia Pacific, we're a strong player in China, but we're not the number one or number two player, which is our aspiration. And therefore, we are continuing to build out and grow in distribution and sales force. And then finally, globally, as we've commented on previous calls, we're very strongly positioned in the premium segment, but we are also have significant efforts underway to penetrate the mainstream portion of the market and that's also in all four regions of the world. So I think it's a combination of market backdrop combined with very much Axalta specific activities.
And I'll pile on there a little bit with a couple of product references. We do have a lot of new products that are helping drive growth for us in that channel. Those include new products that we've announced such as Cyrox, which is a non premium waterborne product that's beginning in Europe. We have other products that we're rolling out, including a new SpeedHacker clear coat technology, as well as a fast drying sanding surfacer, and a variety of other things that we're putting out to market that will help us in 2017 and beyond. So there's a lot that goes on behind the scenes through commercialization efforts to drive this result.
All right. Thanks very much.
Thank you. Our next question comes from the line of Laurence Alexander from Jefferies. Please go ahead.
Hello. Just a quick one on seasonality. Some companies have started calling out that order trends have been firming shutting some a better start to the first half of the year than they have seen in the last several years. So more of an equally weighted first half, back half than previous years. Are you seeing anything that would suggest a material shift in your seasonality from what we're familiar with?
Lawrence, probably not. The only comment I think we would make is that we continue to expect from a phasing standpoint that first quarter is always a bit of a lighter quarter from an earnings operating standpoint, as well as from a cash flow standpoint. And that's typical seasonality for us. When you get past first quarter, we would expect reasonable balance in the middle of the year. And then typically seasonally, you see a little bit of a dip in the fourth quarter.
So just from a phasing standpoint that should be our overall baseline.
Okay, perfect. Thanks.
Thank you. Our next question comes from the line of Arun Viswanathan from RBC Capital Markets. Please go ahead.
Great. Thanks guys. Good morning.
Good morning Arun.
Just wondering if you guys could help us bridge the EBITDA guidance to free cash flow. Are you looking at what kind of level of D and A are you looking at? What kind of level of working capital use or source? Anything else that we should be aware of? Thanks.
Sure, Arun. Let me walk you through the math on that. I think if you the way that we've thought about it is if you look from EBITDA to free cash flow for 2017, and again, just for the avoidance of any doubt, defined as cash flow from operations less CapEx. If you take a guidance range midpoint of $955,000,000 in EBITDA, less $150,000,000 in interest expense, less actual actual cash taxes that we'll pay in 2017, which will be, of course, significantly lower than our earnings before taxes affected by our lower tax rate. And that's due to NOLs as well as some other items.
From that, you'd also subtract approximately $15,000,000 in pension funding and then approximately $50,000,000 in one time costs related to restructuring actions that we'll talk in more detail about on our Q4 call, less customer incentive payments and a marginal benefit from working capital. Those would be the elements that would walk you from EBITDA to free cash flow.
Okay, great. That's very helpful. Thank you. And then I just had a question on your overall outlook. I mean, in OEM especially, it looks like you're calling for a couple of points of growth and that appears to be above some of the forecasts out there from IHS and so on.
Is that mainly due to customer wins? Or how are you kind of looking at your business growing over the next couple of years versus or at least in 2017 versus actual production forecast out there? Thanks.
So Arun, just from the standpoint of production forecast, we have IHS currently at around 1.3 for next year in terms of light vehicle production. Our own outcomes obviously depend on our specific customer exposure and what we can do relative to that broader market forecast to produce potential outgrowth. So our underlying assumptions that the markets are growing at that rate, we have every hope not to be able to exceed that certainly, that's clearly embedded in that overall guidance.
Okay, great. Thanks.
Thank you.
Our next question comes from the line of Carolina Jolley from Gabelli and Company. Please go ahead.
Good morning, guys. Thanks a lot for taking my question.
Good morning. Good morning.
So just with the $100,000,000 in M and A or so, do you have some idea of where across your end segments that's going to be allocated? And then just with the DuraCoast execution so far, how do you see your ability to take share and acquire in the industrial end market?
I think our M and A focus and M and A strategy remains consistent with our overall corporate strategy. First and foremost, refinish is always an area of keen focus for us. The other areas of keen focus just given the amount of white space and some of the opportunities that we see there is industrial end market. So that would be where I think you would expect to see the overwhelming majority, if not all of any capital allocated to M and A go. We may, if there were to be an opportunity that came up in transportation similar to United Paints that was really unique and an extremely compelling valuation, we would consider it.
But again, the primary focus remains refinish in industrial across the organization. So far, with regard to the M and A transactions that we've done so far, the actual integration of those companies is along quite well. And they are performing consistent with our investment cases at the time that we approve those transactions.
Great. Thank you.
Thank you. Our next question comes from the line of Christopher Pirella from Bloomberg Intelligence. Please go ahead.
Thank you. Just a follow-up on that. In the Industrial Coatings business, where do you see outperformance on your end among those end markets there? And how is
the heavy
equipment industrial coatings end market performing?
So really, you have to kind of break those markets down by region. And we're in a multitude of end markets. And I think overall, it's a mix in terms what we're seeing when you think about functional pipe and oil and gas. Given that oil prices have been lower, that's been an area of industrial coatings, that's been a little bit more challenged when you think about electrical insulation or wire enamel coatings. That's been a market where given our technological advantage, we've continued grow that extremely well.
And we could just continue to tick through each one of the end markets. I think the new end market that we have for twenty sixteen and twenty seventeen about which we're very excited, of course, is coil coatings. We did have a small amount of coil coatings prior to the acquisition of DuraCoat. But now with the acquisition of DuraCoat, we really have a platform that we can leverage not only in North America, but also the set of technologies and products which we plan to take globally with our coil coatings business. So I think in general, we're very excited about our opportunities there.
And one of the benefits of being within that market, relatively speaking, smaller player is that even though market growth is projected to be tepid or down next year in some markets, similar to what we saw this year, we have still grown considerably and we expect to next year as well.
So should I continued growth along the lines of what you've seen in 2016 continuing on into
2017 in the Industrial segment?
We haven't yet finished up 2016. So I don't want make a comparison yet until wrap up the fourth quarter. What I'd say is the opportunity set that we see in 2017 is only been enhanced by the acquisitions and other steps that we've taken in terms of talent acquisition and so forth in 2016.
All right.
Thank you very much.
Thank you. Ladies and gentlemen, there are no further questions at this time. I would like to turn the floor back over to management for closing comments.
We'd like to thank everybody for your participation today. And hopefully, we've given you some helpful guidance in terms of how we're preliminary thinking about 2017. When we have our Q4 earnings call, we will reiterate many elements of our guidance most likely as well as make some tweaks based on any changes we see between now and then and look forward to speaking with you then. And it's Chris. I'd also like to thank you for joining.
And I just want to make a quick note to take note of the press release out this morning announcing our new Director joining Exalta Deborah Kasiri joins us and replaces Martin Sumner, one of the Carlyle partners. And we welcome her aboard and I encourage you to take a look at that press release. Just want to make sure that doesn't go unnoticed. Thank you.
Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.