Ladies and gentlemen, greetings and welcome to the Axalta 2017 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. If anyone should require operator assistance during the conference, please push star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Christopher Mecray. Thank you. You may begin.
Thank you and good morning. This is Christopher Mecray, Axalta's VP of Investor Relations. Welcome to our 2017 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's under no obligation to provide subsequent updates to these forward-looking statements. This presentation also contains certain non-GAAP financial measures. For additional information regarding forward-looking statements and non-GAAP financial measures, please refer to our filings with the SEC.
Thank you. I will now turn the call over to Robert. Thank you.
Great. Thanks, Chris. Morning, everyone. 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 believe that best practices in the market have gradually shifted to offering initial guidance before year-end as internal budget processes are completed. With that brief introduction, you can please turn to slide two of our deck.
Slide 3 offers detail regarding key metrics for Axalta's 2016 financial performance and expectations for 2017. We have 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%-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%-2% incremental benefit from previously completed M&A transactions. Net sales excluding FX impact are expected to grow 3%-5% next year.
For adjusted EBITDA, we are expecting to fall in a range of $930 million-$980 million, which implies margin expansion driven mostly by volume, the positive effect of price increases in certain lines of 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 $1.05, consistent with current composite forecasts. Given our series of refinancing transactions completed since August, we highlight that our interest expense should total approximately $150 million in 2017, including around a $35 million 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 22% and 24% for 2017, lower than our 2016 range of 24%-26%, due to the full-year benefit of actions completed in 2016 that we have previously discussed, as well as assumptions regarding normal operating outcomes in our business. For the first time, we are offering a guidance range for free cash flow, defined as cash flow from operations less CapEx. For 2017, we expect to generate $440 million-$480 million of free cash flow coming from assumed increases in adjusted EBITDA, lower interest expense as we have noted, and modest year-over-year improvements in working capital as we continue to focus on reducing working capital intensity across the business.
Finally, CapEx is expected to be roughly $160 million next year, making up an expected slightly lower spend of approximately $140 million this year versus our earlier expectation of $150 million, again, due to phasing of some of the spending on our current projects. Turning now to the next slide. We have 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 are also continuing to grow via new product introductions and our focus on underserved markets. Finally, we have a modest tailwind from the addition of HIPIC in Malaysia around mid-year 2016.
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%-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. 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. 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, 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&A in the coming year, we target at least $100 million in cumulative spend. Finally, we remain focused on generating strong free cash flow and expect to hit our targeted net leverage of 2.5-3 times in the relative near term. This target does not assume any meaningful impacts of M&A on our cash position. Achieving this leverage goal would allow us to reset our allocation priorities, 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. 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. If you would like to ask a question, please push star 1 on your telephone keypad now. A confirmation tone will indicate your line is in the question queue. You may push star 2 if you would like to remove your question from the queue. For any participant using speaker equipment, it may be necessary to pick up your handset before pushing the star key. One moment while we poll for questions. 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. If we see headwinds that are greater than we currently expect next year, or if we see a more challenging macroeconomic environment, we would reduce costs further.
Robert, are there any comments you can make yet on the tax proposals being discussed publicly?
Yeah, 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. 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&D tax credits, et cetera.
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, 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 on 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. Can you comment or even quantify on what you believe the longer-term opportunities are? Also just how should we think about generally, the remaining balance for Fit-For-Growth and Axalta Way, number one, but also the cadence of the improvements from the cost cuts coming out of the second half of 2016. Thank you.
Chris, let me answer your question in reverse. Our European Fit-For-Growth and our Axalta Way programs are both progressing extremely well and on plan. In 2017, we are projecting to generate an incremental $52 million in savings from Fit-For-Growth and Axalta Way, and that would complete the $200 million 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. Many of those actions relate to footprint optimization, complexity reduction, and additional SG&A right-sizing. 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. 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. That I think will be the biggest determining factor on how fast we can get to those levels.
Thank you. Just as a follow-up on, essentially a corollary of that question, on 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&A? 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 growth spend. As I said, product growth, increasing geographic penetration among existing products.
Sure
potentially any new M&A as well. Thank you.
Related first to M&A, obviously, when we first do an acquisition, we pick up and integrate, obviously the SG&A, and cost of those businesses, 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&A, and gradually work those costs down. We've had a significant amount of M&A here at the tail end of the year, which does create somewhat of an SG&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 a help, because many of the companies that we acquired had lower cost structures than we did. 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. With that said, we continue to execute on our Axalta Way commitment, and we remain focused on achieving our goals. I think the best way to describe it is, where it makes good sense, we will continue to invest in operating expense. 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.
That'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? How meaningful are they? Is it manufacturing related, research, distribution? Where are the big levers to pull, 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, 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. Just from an overall complexity and cost perspective, it's a much larger footprint than we need to run our business effectively. 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. It's not specific to any singular geography, it's across all four geographies. However, the bigger opportunity is optimizing what is made where. What I mean by that is, historically, under DuPont, as you know, the business was run on an incredibly regional basis.
There are some products where you need to make them in all four geographies for margin and shipping reasons. There are other products and certain resins where it makes sense to make them centrally, then ship 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, I think we're excited about the benefits that that can bring. In 2017, the incremental $52 million that we forecasted, there could be some upside from some of the second phase Axalta Way initiatives, 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.
Okay.
I'd just like to add on to that, Steve, just that examples of where you might see that do cross over a variety of areas of the company, including supply chain and distribution, including R&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. On your pipeline of potential M&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 to comment on that, Steve. What I would say is that in terms of how we think about that, we're aggressively pursuing M&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. 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, we 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 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 in refinish are a function of market dynamics as well as raw material costs. The other element is inflation and devaluation. I think certainly in some of the high inflation jurisdictions around the world, we are projecting less inflation and devaluation next year in some of those markets. That, of course, would also have an impact on refinish pricing.
Very good. Just in light vehicle, are you still gaining some share back in 2017 from previous contractual arrangements, and should that largely cease in 2018?
It's a good question. I'd say that related to the share rebalancing that we believe occurred between BASF, PPG, Axalta, Kansai Paint, potentially a couple of others, during the separation and carve-out period in 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 2017. We would expect things to be at a little bit more of an equilibrium, market share gains one way or another to be, again, a function of technology, customer service, and innovation. I think we feel very well-positioned in all three of those areas, 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?
Yeah, I think the vast majority of our sales, as reported, relate to translational FX impact. Our transactional impact is really de minimis at this point. When you think of that, it really is virtually all translational.
Fine. We should just flow down the top-line impact?
Yeah. You'd have to make an assumption of the drop-down on that-
Yep
On that FX impact. It is a translational impact.
Okay. Should we expect to continue to see SG&A investment in 2017, or is that going to taper off?
I think as related to perhaps, Vincent, in an earlier question we had on the SG&A, I think it'd be pretty similar. We are recognizing the environment that we're in. We are being very prudent. The way that I would think about it is, any incremental SG&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. If you think about the SG&A associated with putting in place our global transportation coatings organization and structure, our global industrial organization, building out our refinish sales force, and distribution in places like India and China, most of, if not all of that SG&A, is already put in place. Any incremental SG&A above those levels would be on an opportunistic basis.
Okay. Thank you very much.
Welcome.
Thank you. Our next question comes from the line of PJ Juvekar from Citi. Please go ahead.
Hey, good morning, guys. It's Dan Jester for PJ.
Morning, Dan.
On slide four, if you bucket the commentary by your reported segment, it seems like the performance business market climate looks like it's going to be a little bit better than transportation next year. 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 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 talk 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 in terms of pricing.
Okay. On 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? If in 2018 you get stronger growth in North America and other markets, could you see a reversal on 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 re-engineering, as well as some changes to our overall tax structure, and they are permanent in nature. That is what creates the several hundred basis point improvement in our effective tax rate from 2015 to 2017. A couple hundred 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. Thank you 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 DeYoe 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. 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.
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 onto the Chinese market after we've seen some headlines now that they're going to raise the tax on new purchases to 7.5% up from 5%.
Sure. Net-net, this is actually 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 as important as those factors overall in terms of how we think about the market. 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 Aleksey Yefremov from Instinet. Please go ahead.
Good morning. Thank you. Just to follow up on OEM pricing commentary, do you think overall pricing in transportation segment could be down in 2017? If so, by how much?
Yeah, Aleksey, 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. 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. There are a lot of various variable outcomes here, but perhaps from a baseline expectation standpoint, you could assume a bit of a headwind.
From the timing of these price pressures, have your third quarter and fourth quarter results reflected these price declines, or do you think we're yet to see the effect of these lower prices in perhaps first half or second half of 2017?
Yeah, Aleksey, you had earlier references to this as far back as December of last year, this has been a feature of the market throughout 2016. It's not new or yet to be reflected, I 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, guys. This is Chris Evans on for Bob.
Morning, Chris.
Just in your commercial segment, do you think North America trucks 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. We've seen builds in the North America Class 8 heavy duty truck market drop from around 320 last year to, I think, an expected sort of 225-ish this year, and I think they're projecting the market forecast was around 207,000 units for next year. The two big drivers, of course, of the heavy duty truck market are overall economic activity, commodity prices, and then regulatory changes which can drive engine conversions and so forth. 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 at 2017, we do see Asia-Pacific and Europe as markets that we expect to continue to see some growth. The main area where we'd see some incremental headwind, of course, would be in North America.
That's based on a market assumption drop of 225-ish to, I think, the current composite is 207, which is a much smaller drop, the drop from the 320. The rate of the decline seems to be falling. I think if we see a pick up 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. I might have missed this, in terms of the benefits of cost cutting in 2017 and your guidance, what incremental benefits did you include in these numbers? 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 folding into these programs?
The number for 2017 between our European Fit-For-Growth program and our Axalta Way program is $52 million in incremental savings. That will get us to the $200 million 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&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&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.
Morning.
Mike, 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 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 million or $30 million 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 is consistent with our peers and others out 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. In fact, it stands to reason that that environment is not by any means guaranteed in any case. It's a little difficult to be precise there, but we have made a baseline assumption that we're operating in an environment of price inflation.
All right. 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 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, from a market perspective, we 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. Given that 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. We have very active plans in progress today to increase our market shares in those countries. 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.
Therefore, we are continuing to build out and grow in distribution and sales force. Then finally, globally, as we've commented on previous calls, we're very strongly positioned in the premium segment. We also have significant efforts underway to penetrate the mainstream, the portion of the market, and that's also in all four regions of the world. I think it's a combination of market backdrop combined with very much Axalta-specific activities.
I'll pile on there a little bit with a couple 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 Syrox, which is a non-premium waterborne product that's beginning in Europe. We have other products that we're rolling out, including a new Spies Hecker 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'll help us in 2017 and beyond. There's a lot that goes on behind the scenes through R&D and development and our 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, shedding a better start to the first half of the year than they have seen in the last several years, to 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?
Laurence, 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. 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.
Yeah. 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&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 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 million in EBITDA, less $150 million in interest expense, less 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 million in pension funding, approximately $50 million 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. I just had a question on your overall outlook. In OEM especially, looks like you're calling for a couple 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 looking at your business growing over the next couple years, or at least in 2017, versus actual production forecasts out there? Thanks.
Arun, just from the standpoint of production forecasts, 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. Our underlying assumption is that the market's growing at that rate. We have every hope 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 Jolly from Gabelli & Company. Please go ahead.
Morning, guys. Thanks a lot for taking my question.
Good morning.
Good morning.
Just with the $100 million in M&A or so, do you have some idea of where across your end segments that's going to be allocated? Just with the DuraCoat execution so far, how do you see your ability to take share and acquire in the industrial end market?
I think our M&A focus and M&A strategy remains consistent with our overall corporate strategy. First and foremost, Refinish is always an area of keen focus for us. The other area of keen focus, just given the amount of white space and some of the opportunities that we see there, is the industrial end market. That would be where I think you would expect to see the overwhelming majority, if not all, of any capital allocated to M&A go. We may, if there were to be an opportunity that came up in transportation similar to United Paint that was really unique and an extremely compelling valuation, we would consider it. Again, the primary focus remains Refinish and industrial across the organization.
So far, with regard to the M&A transactions that we've done so far, the actual integration of those companies is moving along quite well, and they are performing consistent with our investment cases at the time that we approved those transactions.
Great. Thank you.
Thank you. Our next question comes from the line of Christopher Perrella from Bloomberg Intelligence. Please go ahead.
Thank you. Just to 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?
Really, you have to kind of break those markets down by region, and we're in a multitude of end markets. I think overall, it's a mix in terms of 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 to 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 2016 and 2017, 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.
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. I think, in general, we're very excited about our opportunities there. One of the benefits of being within that market, relatively speaking a smaller player, is that even though market growth is projected to be tepid or down next year in some markets. Very similar to what we saw this year, we have still grown considerably, and we expect to next year as well.
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 to make a comparison yet until we wrap up the fourth quarter. What I'd say is the opportunity set that we see in 2017 has 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.
Look, 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 preliminarily 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.
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 Axalta. Deborah Kissire 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.