Axalta Coating Systems Ltd.

Ladies and gentlemen, thank you for standing by and welcome to the Exalta first quarter earnings conference call. All participants will be in a listen only mode. A question and answer session will follow the formal presentation by management. Today's call is being recorded and replays will be available through May 2nd. Those listening after today's call should please note that the information provided in the recording will not be updated and therefore may no longer be current. I would now like to turn the call over to Chris McCrae. Please go ahead, sir.

Thank you, and good morning. This is Chris McCrae, VP of Investor Relations. Thank you for joining the call today to review our first quarter 2019 financial results and for your interest in Exalta. Joining me today are Robert Bryant, CEO, and Sean Lannan, CFO. We released our financial results this morning and posted a slide presentation to the Investor Relations section of our website at exalta.com, which we'll be referencing during this call. Sean will address this in more detail later, but I'd like to note that we changed the basis of our profit guidance metrics to assume an incremental adjustment for the step-up of depreciation and amortization related to the February 2013 carve-out transaction. Our reported profit results referred to in this call have made this adjustment, which will be further detailed in our 10-Q filing. Both our prepared remarks and discussion today may contain forward-looking statements reflecting the company's current view of future events and their potential effect on Exalta's operating and financial performance. These statements involve uncertainties and risks, and actual results may differ materially from those forward-looking statements. Please note that the company is under no obligation to provide updates to these forward-looking statements. This presentation also contains various non-GAAP financial measures. In the appendix, we've included reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information regarding forward-looking statements and non-GAAP financial measures, Please refer to our filings with the SEC. I'll now turn the call over to Robert.

Good morning. Today I'm pleased to review our first quarter financial results and some key operational highlights from the period. Our first quarter results met and slightly exceeded our previously communicated expectations for the quarter with $144 million in adjusted EBIT and $207 million in adjusted EBITDA, putting us on track to deliver our full year financial expectations. During the quarter, the overall business climate for Exalta was mixed, including some volume headwinds given unsteady economies, particularly in China and parts of EMEA. That said, average price mix in the quarter remains solidly positive, and we continue to close the price-cost gap at a good pace, including ongoing strong price recapture in performance coatings and continued progress seen in light vehicle within transportation coatings. There were also many examples in the quarter of new product innovation and launches, and we continue to invest actively to promote long-term growth in our business, with successes seen in many areas. Turning to slide three, we grew first quarter net sales by 0.3% year over year, excluding the 4.8% negative impact from foreign currency headwinds. The growth, XFX, was driven in large part by ongoing tailwinds from price mix across the business as we continue to make solid progress in closing the consolidated price-cost gap that widened substantially in 2017 and 2018 due to significant raw material inflation pressures. This growth progress was offset to a large extent by volume headwinds, most notably in light vehicle, where build rates slowed in most major markets we served. Performance coatings net sales increased 2.4% before FX, with somewhat better overall growth from the refinish end market. This was largely driven by continued robust price mix capture and refinish, and by moderate fundamental volume headwinds witnessed in global industrial markets during the period, particularly in Europe. In transportation coatings, net sales decreased in the low single digits, XFX, consistent with the outcome from the fourth quarter, and driven by lower vehicle production in most global markets year over year, as we had largely expected in our first quarter guidance that we discussed in January. Price mix and light vehicle remain positive as we continue to make progress on our goal of returning to prior price levels with key automotive customers. For adjusted EBIT, we reported $144 million for the quarter, which was right around the high end of our expectations, driven by strong price mix drop through to earnings, offset in part by relatively modest consolidated volume largely from slower global auto production in the period. The comparison to last year's adjusted EBIT of $159 million was challenged by continued double-digit inflation and variable cost at the adjusted EBIT level, as well as by substantial swings in foreign exchange translation drop-through. FX was a 6% net sales tailwind in the prior year quarter and a 4.8% headwind this quarter. with associated EBIT impact at roughly our consolidated margin drop through. Adjusted EPS for the period, including the add back for depreciation and amortization step up from the original acquisition of our business, was $0.34, which compared with $0.39 in the prior year quarter, similarly burdened by the combination of FX headwinds and substantial variable cost inflation against the prior year comparison, in addition to automotive volume pressure. As you will see in our guidance, comparisons for these items are less challenging as the year progresses, and we believe the first quarter is likely the hardest of the 2019 quarters in terms of year-over-year comparisons. Turning for a minute to our end markets, for refinish, net sales grew 3.5% XFX in the period. We grew net sales in the mid-single digits across most regions we served, and volumes were notably higher in China. We continue to gain traction in offsetting variable inflation with appropriate price management to sustain the broader economics of this business. On the volume side, we've seen moderately lower results in North America, which we attribute to ongoing distributor channel focus on working capital management to increase cash flow, lower growth in miles driven, and the continued shift from solvent to waterborne paint systems. We remain confident in our full year targets in this region from both top and bottom line performance. In terms of our overall progress in refinish, we continue to build market share at the end shop level globally. And we see car throughput demand at the end market is stable from our channel checks and customer visits. Over time, we expect share gains to also translate to sustainable paint demand uptake. Our industrial coatings end market grew net sales at a modest 1% XFX in the quarter. including positive contribution from the Americas, offset somewhat by lower volumes in EMEA. Overall market conditions in EMEA were slower during the first quarter, as reflected in the macro level data for the region. The price mix outcome was strong, however, with low to mid single digit realization continuing in the quarter. Overall, we remain on track for our full year outlook for industrial, and are excited about the myriad new products that we are introducing in the end market this year on a similar cadence to the last several years. Light vehicle net sales declined 5.4% XFX in the quarter, driven by lower production volumes at our OEM customers in all regions except Latin America. The China market remained under pressure, but encouragingly appears to have bottomed and we are optimistic about several different support measures that the Chinese government has announced in the last month specific to the automotive sector, which could help lift demand relatively quickly in this market. EMEA did see a combination of continued impact from regulatory overhang from the emission standard changes, as well as likely fundamental softness related to Brexit and China demand. But these factors may be mitigated as the year progresses. Global production forecasts from IHS for the year have come down slightly during the last quarter and now remain at assumed 1% production decline for the full year, including a 3.6% reduction from EMEA and a 2.7% decline in North America, offset by a 2.8% growth in Latin America and a flat outcome for China, including a back half rebound in that market. Commercial vehicle net sales increased 6.6% XFX in the quarter, driven by ongoing strength across the America's truck markets and broadly stable global commercial vehicle markets. Price mix remained down slightly in the quarter, which is sequentially consistent and reflects customer and sub-market variability in terms of realized pricing. Regarding our balance sheet and cash flows, first quarter free cash flow was as expected with a use of $75 million. in our normally seasonally weaker first quarter given debt interest and other annually scheduled cash payments. We have reconfirmed our full year free cash flow targets of $430 to $470 million for the full year. In terms of leverage, we finished the quarter at 3.6 times net debt to trailing 12 months adjusted EBITDA, up from 3.4 times at year end, which reflected slightly lower adjusted EBITDA, a use of cash from working capital, and incremental share repurchases. We continue to see value in our stock at current levels and repurchased $66 million in the first quarter at an average price of $25.82. Exalta made strong strides in many areas within our operations as we continue to push to lower total production cost, increase global efficiency, and satisfy our customers. In the quarter, We finished installing a new bonding metallic powder line in our Houston plant, offering new capacity to serve this fast-growing segment within powder coatings. Overall, we would note that we are on track to offset fixed-cost inflation this year through a broad set of productivity initiatives. We are also making progress related to our significant project to shut down and relocate our production site in Belgium. In terms of innovation and investment highlights, In refinish, we extended our fast cure technologies in Asia Pacific with the launch of VOC Extreme, a highly productive filler, and a new Chromax productive clear coat. In our industrial end market, we launched a wide range of new products in the first quarter. A few examples include new products in industrial wood coatings to address the pre-finished commercial siding markets, successful extension of our Durapon coil and extrusion product line to China markets, and the energy solution We gained new approvals to extend our market share of insulating coatings in the motor market used in electric vehicles. We also had record success rates in the first quarter in growing our industrial e-coat market presence globally. Finally, in transportation coatings, Exalta continued its global introduction of Lumero 1K and 2K products, our newest high-performance clearcoats for the OEM market, offering improved appearance and enhanced scratch resistance at lower dry film thickness. As of this quarter, we have launched a 1K offering in the US and a 2K offering in Europe. Regarding our 2019 execution priorities, we remain firmly focused on meeting our objective of generating profitable growth. We expect second quarter to remain moderately challenging given ongoing lower auto production rates in key markets we serve as well as somewhat subdued industrial coatings demand in North America and Europe. Still, we are encouraged by signs of acceleration in macro data points from China in recent weeks, by the China stimulus measures enacted in April for the auto sector, and by attention paid to resolving ongoing trade disputes. These and other factors continue to underpin our confidence in the full-year outlook. Further, We remain committed to actively managing our cost structure to ensure broader margin stability regardless of the volume backdrop, and our Exalta Way planning remains highly engaged and an integral part of our goal achievement. During the first quarter, as our new CEO, I hosted Exalta's leaders from around the world at a meeting where we aligned on our four key strategic imperatives, people, innovation, performance, and growth. Our goal with people is to implement a high-performance, customer-centric, and metrics-driven culture to increase accountability. For innovation, we seek to adopt a mindset of innovation and change across Exalta to increase speed and nimbleness. For performance, our goal is to deliver industry-leading profitability and operational performance. For growth, our objective remains to achieve above-market growth and diversify our portfolio through organic growth and acquisitions. For each of these priorities, we have designated KPIs for every leader across our organization to align with these goals. Importantly, we have also adjusted some of our compensation metrics to further align management with our financial objectives, which we also touched on back in January. We have steepened the risk-reward payout curve associated with overall execution while adding focus on cash generation. We have also included return on invested capital and earnings per share growth as longer-term metrics for key leaders. These changes are further detailed in our recently filed proxy statement. As you know, we have a few open key positions at Exalta, but we are on track to fill those with excellent candidates who are aligned with Exalta's strategic imperatives and the execution-oriented culture we are striving to create. I'm excited about the team we are putting together and look forward to providing you with future updates. Finally, as you have seen, we've launched this quarter a revised approach to our reporting format, which we highlighted also on our last earnings call. We are pleased to now be reporting out with a focus on adjusted EBIT and adjusted earnings per share, and we have likewise aligned our internal compensation metrics along the same lines. We believe this change refines the focus of our leadership on the complete picture of value creation as well as capital deployment, which we anticipate will help us generate profitable growth and create solid shareholder value in the long term. With that, I'll turn the call over to Sean to further review our financial results.

Thanks, Robert, and good morning. Turning to slide four, first quarter net sales before FX impacts increased 0.3% year over year, including 2.4% growth in our performance coding segment and a decrease of 3.1% in transportation codings. Acquisitions this quarter were not a meaningful contributor. This result continues to reflect ongoing positive outcomes and price-driven growth for performance coatings and offsetting volume pressure within transportation coatings from light vehicle. Importantly, we did see a positive price metric within light vehicle as a partial offset to OEM auto production declines in certain markets. FX translation shifted from a 6% tailwind in Q1 2018 to a 4.8% headwind in the current year first quarter. The drop-through impact of this was a substantial driver for reported profit and a factor to consider as this is largely a translational impact. Key sources of pressure included the euro, renminbi, and real. Q1 adjusted EBIT of $144 million was 9% lower than the prior year, and margins decreased 70 basis points to 12.9% in the first quarter. Drivers of this result included volume headwinds primarily in light vehicle, the FX impact noted, as well as the negative effect of low double-digit inflation and input costs at the EBIT level against the relatively difficult comparison in the prior year quarter. It's worth highlighting that these comparisons for inflation ease as the year progresses given the pattern of increasing impact seen during the course of 2018. Turning to slide five, performance coding's first quarter net sales increased 2.4% year-over-year excluding a 4.8% negative FX impact. This constant currency growth was led by a 3.3% increase in average price mix, M&A contribution of 0.5%, offset partially by a 1.4% decrease in volumes. Refinish produced 3.5% first quarter constant currency net sales growth, driven principally by improved price mix in the period in the mid single digits. Refinish once again generated net sales growth in all regions, XFX, while organic volume growth remained subdued, we believe, due to distributor channel inventory management in select markets, and most notably in North America. Body shop demand and product usage remained steady according to our collected channel checks, and as Robert noted, we gained further market share in terms of shop served during the period. Also, we would note that overall adjusted EBIT grew year-over-year in spite of these volume headwinds noted. Industrial and market net sales, XFX, increased 1% year-over-year in Q1, led by solid gains in average pricing from all regions, but offset partly by volume pressure in EMEA during the period, as we noted in our last earnings call. This pressure correlates to macro data points, and we believe is driven principally by China trade disputes, Brexit concerns, and generally slower GDP growth in key European countries. Performance codings delivered Q1 adjusted EBIT of 79 million, a 3.4% year-over-year increase, with strong price-mix traction offset to a large extent by variable cost inflation, modestly lower volume, and negative FX drop-through impacts. Q1 adjusted EBIT margins of 11% increased 60 basis points year-over-year, demonstrating the benefit from continued price mix recapture against the raw material inflation backdrop, as well as our continued efforts to improve productivity via cost control and operating efficiencies. Turning to slide six, transportation coatings net sales decreased 3.1% year-over-year in the first quarter before FX headwinds of 4.8%. Segment volumes decreased 3.3%, slightly offset by favorable price impacts from light vehicle. Light vehicle Q1 net sales decreased 5.4%, excluding a 5.2% FX headwinds. Volumes decreased mid-single digits from nearly all regions as the regulatory overhang issues in EMEA and ongoing slowdown in China pressured global automotive production rates. North America production and net sales were also moderate headwinds. Average price mix remains positive in the period, and we saw modest incremental price traction from certain global accounts during the quarter. Commercial vehicle Q1 net sales increased 6.6% before FX headwinds of 4%. This growth came from ongoing strength of the North America commercial truck market, as well as other commercial vehicle markets. China commercial markets were weaker in the period, largely impacting Exalta to a lesser extent due to our lower non-truck exposures. AMEA remained slower as well. Global forecasts for heavy-duty truck production remained steady for 2019, despite slower current order rates seen in North America heavy truck in the last several months, driven by exceptionally strong backlogs that are expected to carry steady production rates throughout 2019. Transportation codings generated Q1 adjusted EBIT of $34 million versus $45 million in first quarter of 2018. and associated margins of 8.4% in Q1, compared with 10.2% in the year-ago period. Lower margins were driven by substantial and ongoing input cost inflation, which began to impact our income statement largely after Q1 2018, as well as by the drop-through effect of lower volumes. We do expect profit margin comparisons to ease substantially as the year progresses, given the timing of input inflation and FX headwinds over 2018, and benefit of higher expected volumes sequentially in certain markets. Turning to slide seven, cash and cash equivalents totaled $501 million at quarter ends. Total reported debt was $3.9 billion, resulting in a net debt balance of $3.4 billion versus $3.2 billion at year ends. Our net leverage ratio was 3.6 times, reflecting the combined impact of lower, latest 12 months adjusted EBITDA, the use of capital for share repurchases, M&A-related spend to purchase the remaining share of our existing majority-owned door coil coatings business and by higher overall working capital uses in the period. Our net leverage has historically increased in the first quarter, primarily due to the seasonality of our cash flows. Q1 free cash flow totaled a use of $75 million versus a use of $61 million in Q1 2018. The greater use was driven by net working capital outcomes as well as lower operating income due to drivers previously covered. These items were offset partly by lower capital expenditures compared to Q1 2018, which are timing related. Turning to slide eight, we're updating our financial guidance for 2019, which we provided in our last earnings call in late January. Key guidance elements and underlying operating assumptions remain unchanged, but we note several points of interest. First, the decrease of expected next sales growth of 1% comes from the sale of our consolidated majority-owned interest in a joint venture in China within the industrial end market expected to occur in the second quarter. This move allows us to focus our efforts on a more profitable niche within the market served, as well as allows us to run our business independently and has little impact to adjusted EBIT guidance given the margin profile of that business. Second, we decided during the period to make an incremental adjustment to our new reporting methodology for adjusted EBIT and adjusted EPS. These adjustments have not been reflected on our adjusted EBIT for our segment results. Considering the common methodology and treatment of acquisition-related accounting step-up related to depreciation and amortization by public peers, we have opted to conform with the common practice of adding back to specific step-up DNA. In our case, associated with a carve-out transaction by Exalta from DuPont in February of 2013. This add-back amounts to $115 million on a pre-tax basis and $90 million on an after-tax basis for the full year and is the sole driver of the change in adjusted EBIT and adjusted EPS guidance presented. Our guidance also continues to exclude $25 million in accelerated depreciation associated with the previously announced Belgium plant closure. For adjusted EBIT, our guidance remains consistent prior to the step-up DNA adjustment. We continue to assume low single-digit variable cost inflation at the cost of goods sold level, which we feel is appropriate in part given the recent increase in oil prices. This variable inflation also still includes a tariff impact of about $13 million with no expected relief assumed for the full year. Other line items remain consistent, as you can see. though share count is adjusted for completed share repurchases through March 31st, partially offset by option exercises in the quarter. We expect second quarter profit rates to be modestly pressured versus our prior assumption of a relatively even spread for remaining quarters, with the primary driver of this being anticipated auto production rates expecting to build more momentum in the second half of the year in select regions. Finally, we did adopt a new accounting standard in Q1 2019 as it relates to lease accounting. Although this has an impact to various line items in our balance sheet, this will not have a material impact on any of our income measures for 2019. This concludes our prepared remarks. We would now be pleased to answer any questions. Operator, please open the lines for Q&A.

Thank you. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Mike Sison with KeyBank Capital Markets. Please proceed with your question.

Hey, guys.

Morning, Mike. Morning.

Oh, sorry about that. Hey, guys. Nice start to the year. In terms of refinish, can you maybe talk about momentum potentially building in 2Q, 3Q, 4Q? It looks like the little bit weaker start, but it sounds like you've got some new products and market share potential as the year unfolds.

I think we're excited about the potential of our refinish business globally. We've actually been taking share and had some nice wins recently. in particular in the Americas over the last six months that we expect to see start to flow through the results in the coming quarters, and I think we're very excited about that. As you mentioned, Mike, we do have a number of new products as well as variants on existing products, in particular our mainstream waterborne coatings that we have launched and are now selling on a global basis. So overall, from a global refinish perspective, we feel pretty good about the business and the direction that it's headed in for the full year.

Great. And then just a quick one on pricing continues to follow through pretty well. Can you maybe talk about the gap a little bit? Are you getting close to closing it? And how does it look as we head into the second half of the year with your raw material outlook?

I think it's pretty consistent with what we've highlighted in the past. We continue to close the gap between price and cost. In performance coatings, of course, we're pretty far along in that endeavor and in pretty good shape. And in transportation, you would actually see even a little bit more than what's actually shown in the bridges in our financial results for the first quarter. We actually got a little bit more price than what the bridge actually shows. because we did have a slight negative mix effect for the first quarter. So I think we're very pleased with the price increases that we have already implemented as well as the price increases that we plan to implement moving forward.

Great. Thank you.

Thank you. Our next question comes from line of Duffy Fisher with Barclays. Please proceed with your question.

Hey, guys. It's actually Mike Leadhead on for Duffy this morning. follow-up on refinish. It seems like North American distributors have had a number of inventory or working capital fluctuations over the past year or two. I guess, where do you think we are in that process for the distribution channel, and when do you think volumes then would be better representative of underlying demand quarter to quarter?

So, a couple things. Just as a reminder, there are certain structural factors, Mike, as you know, that really would direct you to looking at net sales for the refinish business as a better indicator in terms of how the business is performing because structurally in the market, especially with the growth of MSOs, we will continue to see faster growth of waterborne versus solvent-borne products, not only in North America but also in other regions of the world. And since the waterborne products use less paint and since MSOs are more heavily indexed to waterborne compared to solvent-borne paint, there's a natural structural volume reduction that occurs there that you make up for, of course, with the price and margin profile of waterborne being higher. In terms of the first quarter and also the past few quarters, I think we can say now that what we've seen is that large distributors have been focused on operational improvement and and working capital management to increase cash flow, essentially to fund some of the acquisitions that they've made of other distributors and other businesses around the world, and also with the increasing efficiency of MSOs. This is not the same as we saw in 2017. I mean, in 2017, we changed our commercial terms and pre-buy policies And that resulted in the inventory change that you saw in 2017. I think the trend that you're seeing now in 2018 and the start here to 2019 is not related really to any changes that we're making, but rather pushes by distribution to become more efficient.

Got it. That's helpful. And then question on the decision to strip out the step-up DNA related to the 2013 DuPont transaction. First, I was wondering if you could talk a little bit more about what drove the decision to shift the reporting methodology now versus before. And second, it looks like step-up DNA expense was lower, call it roughly 20% year over year. Should we expect that to continue to wind lower over the next couple of years?

So the rationale and the reason in the first quarter that we're changing, really, you know, in January when we elected to start to change the prominence of our measures, moving away from adjusted EBITDA to adjusted EPS and EBIT, there was a number of capital market participants that gave us feedback as far as, you know, thinking about this. We actually did, you know, a heavy study as far as precedents. And it's fairly common practice for large carve-outs coming from multinational companies for SEC registrants to start adding this back, including a few in the actual coatings industry. So that was really the catalyst behind that. As far as the step-down, after year six, we did see a fairly sizable step-down, but for the next three to four years, you could assume that it's a fairly stable DNA add-back as it relates to the step-up. Got it.

Thank you.

Thank you. Our next question comes from the line of Christopher Parkinson with Credit Suisse. Please proceed with your question.

Hi, this is Harris Fine. I'm for Chris. Just looking toward industrial, are there any regions or end markets that you would highlight as outperforming or underperforming the broader segment? And then as we think about the M&A pipeline, are there any adjacencies that you see, as you did with coil and wood, that are attractive that you're not involved in today? Thank you.

Overall in industrial, the business continues to perform well. We did see a little bit of a sequential slowdown in industrial, just given some of the softness that we saw in Europe in the first quarter. If we look at different sub-markets, in general, we're seeing COIL relatively consistent with what our expectations were at the beginning of the year. General industrial, we are seeing a little bit of weakness in North America, but in other parts of the world, better performance, so it varies slightly by geography. Our powder business continues to perform extremely well in most regions of the world, with the exception of Europe. Energy solutions, I'd say that in that business we're performing relatively well. We have seen the wind energy market slow down somewhat. and that has had somewhat of an impact. However, in the other sub-markets within energy solutions, that part of the business is performing well. Then in wood, we had price increases that were put in place as part of contractual renewals, and some of those are largely indexed to raw materials. So that is offsetting any of the slight volume challenges that the market as a whole is seeing just given some of the housing and other construction data here in the U.S. And then as far as adjacencies, there are several verticals within industrial where we are not present at all or in a meaningful way today where we would like to be. And those are focus areas from an M&A strategy perspective. We won't comment on which verticals those are specifically on this call for obvious reasons.

And then could you just quickly walk through the movements that you've seen in some of the different raw materials buckets and where you're still seeing the biggest challenge? And then for resin specifically, how do you see the basket evolving? Anything incremental versus your guidance in January? Thank you.

Overall, I'd say we expected to see somewhat of a peak in terms of purchase value, you might say, in the fourth quarter. And then in the first quarter, we expected to start to see some relief, which we did start to see a little bit of relief in terms of prices that we actually transacted at for raw materials. However, with the recent increase in the price of Brent now up to $74, it's come back to be a little bit more in line with what our original expectation was in terms of how we thought about our guidance. So we'll have to wait and see how the rest of the year plays out. If we continue to see oil at this level or near it, we potentially will have to go out for some additional price increases as well as potential cost cuts. But at the level we're at currently, it was essentially the level that we had contemplated in our guidance. The two headwinds, obviously, that everybody is facing at the moment continue to be the tariff discussions, and we talked about tariff and trade. We talked about what that amount was in our prepared remarks. In terms of categories, for the moment we're seeing solvents being sort of relatively flat as an overall category. Monomers, we continue to see up low single digits. Liquid and powder resins, we continue to see up, relatively speaking, low single digits. Isocyanates, particularly HDI, continues to be a sore point. That's up in the mid-teens from a lot of the data that we're seeing. And then pigments and additives, which had been slightly flatter, are now up in the low to mid single digits, especially given the explosions and impact in Jiangsu, China.

Great. Thank you.

Thank you. Our next question comes from Arun Viswanathan with RBC Capital Markets. Please proceed with your question.

Great. Good morning, guys. How are you doing? Hey, Arun.

Good morning.

Good morning. Just a question on maybe, Robert, you can discuss some of the positive impacts you noted in China that gives you confidence on, you know, a potential second to half recovery there. Thanks.

Yeah, I think we have seen the decrease. We've seen the decrease in NVAT. We've seen some of the efforts that obviously they are undertaking in terms of potential changes to boost the light vehicle sector in China. And I think we're hopeful that eventually we are going to see a resolution in the trade discussions. And as we thought about it, we were reasonably, I think, fairly conservative as we thought about the year from what we expected out of China, especially given the exposure to light vehicle. However, what I would say is if we do see additional stimulus put in place by the Chinese government and or we see a resolution to the trade discussions, that could be some upside to that market as we think about things. And as our business is there, I'd say that light vehicle is kind of performing as well as commercial vehicle, pretty consistent with what we had expected for the year given the challenges there. As we highlighted in our prepared remarks, our refinish business had a very good first quarter. And then industrial, given some of the conditions in the market there in our process of exiting our joint venture, that business is relatively flat at the current time.

Great, thanks. And then, if I may, I just wanted to ask your thoughts on the guidance. I understand it's early in the year, relatively favorable Q1 result. Maybe you can just give us some swing factors that would push you to the upper or lower end of the guidance? Maybe you can just bucket it out. You called out ongoing inventory issues in the North American refinish. Would that be a potential headwind? And then would ROS, you know, and improving price cost, you know, be a potential tailwind? You know, what would push you to the upper end of your guidance? Thanks.

This is Sean. I guess a few of the items that could push us to the higher end. Clearly, FX has been a headwind for us in the first quarter, certainly with a stronger euro and Chinese renminbi. That could help push us toward the upper end. RALs, given what's happening in the market today, if we see that subsiding, there could be some upside, as Robert called out. The RALs, where they're at currently today as far as oil prices, it's largely aligned with our expectations for the full year. So certainly, If you see some degradation there, you could see some upside. As far as the inflection point, as far as the IHS data for auto builds, we are expecting a strong rebound in the second quarter. If that was to pick up quicker, again, we could see more upside as it relates to the expectations for the full year. As far as refinish, where we're seeing the market today and given first quarter results, we actually feel pretty good. We're not seeing much as far as downside risk at this point. But certainly on the auto production side, if that inflection point does not happen in particular in Europe and China, we could see more of a downturn as it relates to light vehicle.

Great. Thanks.

Thank you. Our next question comes from the line of John Roberts with UBS. Please proceed with your question.

Thank you. Robert, the wood coatings position you acquired was relatively narrow geographically. Do you have any plans to expand your footprint globally?

We do. When we made that acquisition, I think our original thinking was a keen focus on the Americas. We have already made strides in terms of growing our wood business in Mexico, and we have aspirations to grow that business globally. where our most important current and potential future customers are. So you should expect to see movement on that in the ensuing years. Thank you.

Thank you. Our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.

Thank you. Robert, just on auto OEM pricing, one of your competitors referenced they got about 200% pricing in the quarter with their auto OEM customers. Are you experiencing and realizing similar types of price increases in that area?

In LV and certain markets, we are decreasing. obtaining pricing increases. Obviously, we endeavor to do everything we can from a cost reduction perspective and an innovation perspective, so as not to have to increase prices to our customers. However, there are markets where we have gone in with price increases, and we are getting price increases because it's necessary given the raw material inflation that we have seen, and we're encouraged by the progress we've made.

And on the same subject, are you realizing higher prices in auto OEM in all regions or just some regions?

I think, David, on the question of price there, I think getting any more detailed by region at this point is probably more information than we're willing to share. What I would say is that it's certainly top of the list for everybody in all regions. However, not all regions are created equal in terms of the amount of raw material inflation that they've seen or the amount of cost inflation that they've seen. There are some regions that have seen more than others, and therefore, the amount of price increase that we're going after in those regions varies.

Thank you very much.

Thank you. Our next question comes from the line of Gancham Punjabi with Baird. Please proceed with your question.

Hi, good morning. This is actually Matt Krieger sitting in for Gancham. How are you doing?

Hey, Matt. Good morning. Good morning.

So understanding that mix can skew the optics of this a little bit, can you talk about the apparent moderation in pricing contributions across each of your segments? And then should we expect pricing contributions on that price mix line to reaccelerate during the remainder of the year or remain kind of in line with 1Q?

So overall, with regard to the moderation, I think, as we said before, in any given quarter, when you look at price capture in the performance side, there are timings of when price increases occur. There's timings. There are some markets where you'll be increasing price only once a year, other times when you'll be increasing it multiple times a year, depending on inflation and what jurisdiction that market is located in. So sort of quarter-to-quarter variability on the performance side in particular, you're going to see that. And then in terms of light vehicle, as we begin to get full quarters worth of the price increases that we have put in place, you should see that benefit. The other variable within transportation, of course, is the amount of production that actually comes out of the individual companies or brands where we've increased prices. So obviously if they produce less vehicles, even though we may have gotten the price increase, the actual amount of price that will flow through in absolute dollars could be somewhat less. Likewise, if they produce more on those models, then we could see more price flow through.

And as far as full year guidance, full year guidance as far as pricing, you'll see as far as what we've reiterated 1% to 2% XFX. We've been fairly cautious as it relates to volume and price within the transportation segment, but you could expect, you know, largely that 1% to 2% coming from the performance side, you know, split evenly between volume and price.

Okay, that's very helpful. And then... Just touching on demand a little bit, can you provide some added detail on the cadence of core growth performance across your business by month during the first quarter? And any comments on how that's progressed as we move into April could be helpful. Just trying to get a sense as to whether demand has accelerated as the year progressed or if there's been any volatility.

I'd say that the overall profile that we've seen in the first quarter is very similar to what we've seen in years past. Typically January is one of the lightest months of the year. Things tend to pick back up as everybody comes back to work. In some jurisdictions or some countries, people come back more the middle of January, things pick up. And then really March is a critical month for anybody that's in our markets because it's such an oversized month compared to the full quarter. And then in terms of what we're seeing thus far through the month of April, I'd say that we continue to see conditions that are fairly similar to what we saw in the month of March.

Okay, that's helpful. That's it for me. Thanks.

Thank you. Our next question comes from the line of PJ Javicar with Citi. Please proceed with your question.

Yes, hi. Good morning. Robert, you're going from EBITDA reporting to EBIT. So you're adding a capital charge to your matrix and to compensation matrix of your people. How do you think that will change the behavior of your managers and salespeople?

So we've made, certainly we've received feedback from investors and also just looking at our evolution as where we are as a company. One of the things that we're trying to focus much more as a management team and a broader organization is on return on invested capital and making sure that we are making always the right decisions in how we spend and how we allocate capital. So the move from more of a private equity carve-out metric like EBITDA to EBIT, essentially you're including depreciation and amortization there. So when you think about whether your sales force or other people, as they think about the assets that are actually going to be required to be put in place to effectuate sales or grow the business, whether those are financial assets in the form of customer incentives or whether those are physical assets in terms of expansions. We want everybody thinking in the company about that it's not free. All of those decisions do have a cost associated with them, and we're happy to underwrite those costs but there has to be an associated return with that. And I think that's going to go a long way in the culture and the evolution of the company to aligning the way management is compensated and the way the broader organization thinks more in line with what long-term shareholders' expectations are in terms of how we think about and how we run our business.

Thank you. That's useful. And my second question is about your M&A pipeline. I know in the past you had complained about valuations, expectations by the sellers. Has that changed or have the valuations moderated at all? And how are you thinking about M&A versus buyback? Thank you.

Great question, PJ. In terms of what we're seeing in the market, there were about three deals that we've looked at, that we took a hard look at over the past four or five months. And on those transactions, the returns, the valuation, and not so much the valuation, but the associated return that we could achieve was not at a level that was more attractive than other internal options we had, whether putting money to work internally in the company in high productivity CapEx projects or in buying back our stock, which we felt was at a very attractive level, and thus we stepped up the rate of buybacks. M&A is an integral part of our strategy in terms of building out our coverage globally building out different verticals within each one of our end markets. And we remain committed to M&A, but not M&A at any price. And so we will continue to be return disciplined as we go forward and look at M&A transactions.

Okay. So correct me if I'm wrong, but you're saying that the seller's expectations haven't changed much, right?

It depends on, I'd say that the deals that have been in the market over the last five to six months that we've looked at, and there are others in the industry that have looked at those same transactions, the values that we were going to have to pay and that were eventually paid for those transactions or for those companies were not values that generated a return that we felt was sufficient given other alternative uses that we had for our capital. So it's not to say that they were good deals or bad deals. We just had better opportunities for our money. In general, however, I would say in the marketplace, you're not seeing expectations come down meaningfully in terms of valuation. I would say the one market where you're starting to see things come off a little bit is China. We're starting to see people have a little bit more reasonable expectations for their businesses. But in North America and in Europe, valuations still remain relatively high. Great. Thank you.

Thank you. Our next question comes from the line of Steve Byrne with Bank of America Merrill Lynch. Please proceed with your question.

Yes, thank you. What do you view as the primary barriers to switching a refinished coating supplier for an auto body shop? What are those primary barriers? What would you say is what led to your market share gains recently? Was it your technology or perhaps investments like you've made in the past in some of these body shops?

Our goal in working with our body shop customers is always to help them be more efficient and to help them be more effective. We have the most productive waterborne paint system in the industry, and that paint system has allowed us to penetrate a number of markets. And we've actually had tests of our product against competitors' products, and our system's been proven time and again to be the most efficient. And as we've seen customers that we didn't previously have or body shops maybe within customers that hadn't sprayed our paint before, and they spray our paint, and they look at a cost per labor hour, we're able to achieve a level of efficiency that's better than our competition. And as a result of that, we continue to grow our business. Additionally, the service that we're able to provide, we have one of the largest technical service support organizations in the industry, not only for North America, but also for Europe and certain countries in Asia as well. And I think we're able to provide a level of service and a level of customer intimacy that is difficult to beat. In terms of recent share gains that we have made, those have not been on the back of customer investments.

And for a customer to switch to your Waterborne, do they need to invest or modify their paint booth? And how do you view... your investments in these types of opportunities as opposed to using that capital in share repo?

It depends on the type of body shop. If it's a body shop that already has booths that are appropriate to spray waterborne coatings, then the switch doesn't require any capital investment. What it does require is new mixing machine, new computer balances, as well as the training of painters. And that's really where the investment comes in is having our technical team work with and train the painters because each paint manufacturer's spray system will spray differently and does have a learning curve associated with it. Now, if it's a body shop that was historically spraying solvent-borne and they have to upgrade their paint foos or replace their paint foos in order to be able to spray waterborne, for those customers, they need to have a certain amount of volume over a break-even level to have the investment as well as the higher cost of spraying waterborne make sense. And that's really on a case-by-case basis. Most of the investment, if we make it in our customers, we try and link to specific targets, either related around acquiring additional body shops, or if they are planning to dramatically increase the size of the business, then we'll set pretty aggressive performance targets. But those are really the two drivers of if there is a customer investment. And the number of opportunities you... In terms of stock buybacks, just the last part of your question there, I wouldn't say that we think about body shop conversions and, you know, doing more or less as having any material impact on stock buybacks.

Okay, thank you.

Thank you. Our next question comes from the line of Jeff Zakowskis with J.P. Morgan. Please proceed with your question.

Thanks very much. I think your light vehicle volumes were down some high single-digit rate in the quarter, but you said in the call that you thought that IHS global auto builds this year I think would be down 1%. So if IHS is correct and they are down about 1%, would that mean that your volumes in light vehicles would be down roughly 1% or would it be different?

So, Jeff, we haven't provided that exact guidance, but we historically and follow for 2019 IHS, and we adjust it for our specific customers in specific regions. What we've said and what we're reiterating, volumes are fairly flat with 2018.

Volumes will be flat for 2018. Okay. And can you update us as to your cost reduction programs, how much you – achieved this quarter, how much you expect to achieve for 2019 and for 2020?

So the phasing of Exaltaway 2, sequentially it's $50 million a year when we announced it. We're still expecting to get $50 million in productivity. Largely, that's going to offset inflationary impacts. We haven't actually quantified the first quarter impacts, but we're on track to hit that $50 million goal for this year.

Okay, great. Thank you so much.

Thank you. Our next question comes from the line of Don McNulty with BMO Capital Markets. Please proceed with your question.

Yeah, thanks for taking my question. Just on the distributor channel inventory management that seems to be going on, does that change how you have to do your business, either helping you to reduce your own working capital needs, or do you have to even have them a little bit higher because it seems like it's more of a just-in-time model? I guess, how should we be thinking about what the impact is on your business?

So basically, in terms of how we run our business, it doesn't fundamentally change how we run our business on a day-to-day basis. If a given large distributor reduces the number of inventory locations that they have and consolidates inventory, or if they decide to run at lower levels of inventory to reduce working capital and generate more cash, Obviously, that can have a slight impact on volume, which we're seeing. However, in terms of how we run and organize our business, we're not seeing changes there.

That makes sense. And then with regard to the share gains and account wins that you're seeing in the refinish segment, I guess, can you help us to think about quantifying that? I mean, can it move the needle, you know, a point or two in terms of overall volumes as we're kind of looking out to the back half of this year and into next year, or was that maybe too aggressive?

So the way to think about it is... We're not providing specific insight into the numbers themselves, but typically what you'll see when there is shop conversion, there'll be some initial spend in terms of, as I said, getting the painters up to speed and trained, as well as some initial investment in the initial stock and mixing machines for a body shop. All of that is at the beginning, and then you see the gains from that filter in over time.

Got it. Thanks very much for the call.

Thank you. Ladies and gentlemen, this concludes our time allowed for questions. I'll turn the floor back to management for any final comments.

Thank you all for dialing in today and I look forward to any questions you have as follow-up. Thanks again.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.