Chris Mecray - VP of IR Charles Shaver - Chairman & CEO Robert Bryant - EVP & CFO.

Kevin McCarthy - Vertical Research Partners Christopher Parkinson - Credit Suisse Chris Evans - Goldman Sachs Duffy Fischer - Barclays David Begleiter - Deutsche Bank Arun Viswanathan - RBC Capital Markets Matt Krieger - Robert W.

Baird Ivan Marcuse - KeyBanc Capital Markets PJ Juvekar - Citi Dan Rizzo - Jefferies John Roberts - UBS Silke Kueck - JPMorgan.

Ladies and gentlemen thank you for standing by. Welcome to the Axalta Coating System's Third Quarter 2016 Earnings Conference Call. Presenting today will be Charlie Shaver, Chairman and Chief Executive Officer and Robert Bryant, Executive Vice President and Chief Financial Officer. At this time, all participants are in a listen-only mode.

A question-and-answer session will follow the formal presentation. Today's call is being recorded and replays will be available through November 3. Those listening after today's call should please note that the information provided in this recording will not be updated and therefore may no longer be current.

At this time, I'd like to turn the call over to Chris Mecray for a few brief legal notices. Please go ahead sir..

Thank you and good morning. This is Chris Mecray Axalta's VP of Investor Relations. We appreciate your continued interest in Axalta and welcome you to our third quarter 2016 financial results conference call. Joining us today are Charlie Shaver, Chairman and CEO and Robert Bryant, EVP and CFO.

This morning we released our quarterly financial results and posted a slide presentation to the Investor Relations section of our Web site at www.axaltacs.com which we will be referencing during this call.

Both the prepared remarks and discussion during this call may contain forward-looking statements reflecting the company's current view of future events and their potential effect on Axalta's operating and financial performance.

These statements involve uncertainties and risks that may cause actual results to differ materially from those forward-looking statements. The company is under no obligation to provide subsequent updates to these forward-looking statements. This presentation also contains certain non-GAAP financial measures.

The appendix to the presentation contains 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 will now turn the call over to Charlie..

Good morning everyone. Thanks for listening this morning and I'm pleased to update you on our performance over the past quarter. Despite some challenging macroeconomic conditions and end-market headwinds in certain geographies, we delivered a good third quarter with both top-line and bottom-line growth year-over-year.

We also made important progress on several operational initiatives. Our overall third quarter result including net sales growth and the solid adjusted EBITDA growth with expanding margins keep us on pace to meet our full objectives for the year.

The quarter was particularly important for us due to a number of events outside of our core operating results including closing on three acquisitions which we referenced on Q2 update. The completion of Carlyle's exit from their investment in Axalta, the appointment of another new, independent Board member as part of this transition process.

We also completed two significant refinancings of our capital structure and saw multiple new product launches across several businesses.

Axalta's broader global business climate remains sound especially considering that the majority of our operating profit is generated by the fundamentally stable refinish end-market tied to the global-collision market.

We've seen some slowing in the more economically sensitive auto and commercial vehicle related OEM markets much of which is a continuation of demand pressure that we've witnessed for some quarters now and has been well noted in the trade press. We will address this as part of our prepared remarks and our forward-looking commentary.

Backing up, I will cover some highlights for the quarter and then turn the call over to Robert to review segment and financial performance in more detail. So if you would turn to Slide 3 of our presentation.

We are pleased overall with our financial performance in third quarter which included ongoing revenue and adjusted EBITDA growth versus last year achieved in the context of a still choppy global economy which is held our end-markets to a slower growth rate that we would consider structurally normal.

Clearly our progress on the cost and productivity side has played an important role in maintaining our adjusted EBITDA progression. We expect we continue to pull these levers for some time or even accelerate such actions in the event that demand does not cooperate looking ahead.

That said, for now it seems like global demand and the vast majority of our end-markets remains fundamentally stable and it's possible that the recent pullbacks in markets such as North America heavy-duty truck are more mid-cycle corrections rather than multi-year downturns.

Looking at third quarter net sales reported at just over $1 billion, we saw volume and price increase up 4.4% versus last year's third quarter before the impact of currency translation.

This growth was inclusive of a 2.6% contribution from acquisitions and tilted towards price and mix benefits over organic volume which was held back in large part by slower core growth in industrial and commercial vehicle end markets.

Our core refinish as well as our light vehicle end markets saw continued revenue growth in the mid-single digits before FX impact and the benefit of acquisitions.

Adjusted EBITDA, as we communicated on our last call as an expectation, sequentially dipped slightly from a very strong Q2 and grew a solid 7.5% year-over-year to $233 million versus $217 million last year.

This outcome was driven by a year-over-year rebound in Asia-Pacific light-vehicle volumes, progress and cost cutting and improved price and mix, particularly in refinish. Offset in part by continued operating costs from investments to support growth plans.

Adjusted EBITDA margin for the third quarter remained strong, up 110 basis points to 22.8% versus 21.7% last year reflecting our ongoing cost and productivity progress as well as benefits from improved price and mix in the quarter. Our new product innovation initiative showed ongoing progress in the third quarter as well.

We are pleased to have launched a key new refinish product in EMEA called Syrox which is a mainstream waterborne coating system which is highly competitive in that market segment and we expect to roll out globally over time to fill a largely unserved market segment today.

In addition, we also launched an early-standing primer in EMEA which further improves body shop cycle-time efficiency. In our industrial segment we introduced a new high performance epoxy primer for the agricultural construction and earth moving market.

While in light vehicle we launched a new clear coat to protect carbon fiber substrates in certain high-performance OEM applications. Regarding our productivity initiatives, including Axalta Way and Fit-For-Growth, we remain on track for our full-year $60 million combined savings target.

In the third quarter, we finalized certain European initiatives that will streamline some of our plant operations to support structure. Given timelines associated with restructuring in certain EMEA jurisdictions, we accelerated certain actions to ensure we see benefits in our 2017 cost structure.

We are also working on action plans for implementing remaining portions of the Axalta Way program for 2017. Looking at our balance sheet and cash flows, the third quarter saw some significant steps taken to refine our capital structure and take advantage of the low interest rate environment.

We completed two refinancing transactions which substantially reduced our interest expense going forward as well as other attractive terms. Additionally we took advantage of the environment to also leverage an amendment of our senior-credit facility to extend the $400 million revolver from 2018 to 2021 with better pricing.

On cash flow, we finished the quarter with cash from operations of $145 million driven by strong earnings while maintaining good discipline on working capital. We also prepaid $150 million in our U.S. term loan debt in October subsequent to the quarter end.

On the M&A front, we closed three transactions in the third quarter which we were reviewed on our last earnings call in July. We remain confident in the outlook and the contributions from these businesses in terms of both cost and revenue synergies and our acquisition-centered integrations are well on track.

The pipeline of available M&A transactions remains fairly robust for Axalta as we continue to evaluate a variety of transactions to extend our global technology and market presence in key focus areas.

In the meantime, our October $150 million debt repayment demonstrates our continued interest in and our commitment to reducing debt with excess cash flow and working towards our net leverage goal of 2.5x to 3x well within the next year, subject naturally to the timing and scale of any M&A transactions that we may consummate.

In terms of our outlook, for the full-year 2016, we believe we will come in at the lower end of our existing range of net sales, FX and adjusted EBITDA, which is inclusive of our contributions from acquisitions in 2016.

Relative to our prior outlook commentary, we've seen slower volume trends in both EMEA and Latin America, which collectively could reduce Q4 volumes somewhat. This slowing is most meaningful to our transportation coatings particularly commercial vehicle and to a much lesser extent in performance coatings, particularly in industrial.

In summary our third quarter was another good result in terms of showing our resilience to our business model, the impact of our cost savings to offset both broad-based market slowness as well as to absorb new investments that continue to be made to support longer term growth.

To end the quarter with adjusted EBITDA of $233 million against this market landscape was particularly satisfying. Also reflecting margin performance approaching 23% versus our stated objective of 22% plus.

So, we've continued to generate revenue growth, we've expanded our margins through the year consistently, we continue to target meaningful cash flow improvement as demonstrated for the nine months to date. Further, we've executed on early M&A goals while also refinancing our debt and reducing absolute debt along the way with the October prepayment.

Axalta is proud of its performance today and we're certain from an operating execution standpoint; we're just really getting going. That said, we are mindful that the backdrop is always in flux and we acknowledge a broader concern by certain investors around the health of automotive and vehicle markets.

With some signs of slowing in certain areas showing up this past month and which you've read about in the trade press.

Although, we don't see significant levels of slowdown in our customer base today, we observe that certain OEMs appear to be acting quickly to address particular inventory buildups in certain markets which in turn can impact our own volumes within the one-third of our business that serves OEM auto plants.

We are working diligently in real-time to adjust our costs and make plans to keep our cost structure appropriately scaled for the market environment whatever the outcome with the ultimate production rates. We also note that our refinish business continues to perform largely as planned and offers an ideal counterweight to any new-build cycles.

While our plans to grow share in other businesses also remain in place. We are confident in our medium and longer term success from this supply discipline and look toward to updating you on our progress along the way. Robert will now review Axalta's third quarter results in a little more detail..

Thank you, Charlie, and good morning. If you turn to Slide 4 of our earnings presentation for a summary of our third quarter consolidated results, you will see that constant-currency net sales in the quarter increased 4.4% year-over-year, driven by a 5.8% growth in performance coatings and by 2.3% growth in transportation coatings.

This growth was driven by a combination of 2.5% volume growth and 1.9% average price realization. Foreign currency translation reduced net sales by 2.1% in the quarter, which was a significantly less impactful amount compared with the 12.9% impact in the same quarter a year ago and also down from 6.9% that we saw last quarter.

As expected, the majority of the currency impact relates to the year-over-year devaluation of the Venezuelan bolivar now coupled with incremental weakness from the British pound and the Mexican peso offset in part by the appreciation of the Brazilian real.

We offer a view of the basket of our largest currency exposures in the appendix to our earnings presentation. Looking at third quarter sales volumes, Axalta generated 2.5% volume growth though volumes were flat excluding acquisition contribution of 2.6%.

Performance coatings was essentially flat for the quarter coming off a strong Q2 especially in refinish, where we originally assumed a weaker third quarter and noted our expectation of a slower, sequential result on our last call as a result of our strong performance in the second quarter.

Transportation coatings saw ongoing volume growth in light vehicle offset by continued weakness in commercial vehicle sales.

Positive price and mix contribution of 1.9% in the third quarter was similar to the second quarter amount and driven principally by our refinish end-market within performance coatings where core pricing was coupled with ongoing FX driven pricing within certain Latin American jurisdictions.

Transportation coatings was broadly flat with some offset from FX driven Latin American price recapture. Adjusted EBITDA in the second quarter of $233 million increased 7.5% from last year's $217 million.

This profit growth included a 110 basis-point jump in adjusted EBITDA margin to 22.8% driven by positive volume and price leverage as well as savings from cost improvements and productivity enhancement and offset partly by foreign exchange impacts and ongoing growth investment across some businesses. Moving on to our Q3 performance coating's results.

Segment net sales for performance coatings increased 5.8% year-over-year in the third quarter on a constant-currency basis, driven by growth in both end markets and all regions, 2.9% volume growth was more than accounted for by 3.4% acquisition contribution with core volumes impacted in part by ongoing weakness in Latin America.

Average prices in the segment increased 2.9% led by increases in refinish and relatively flat average selling prices in industrial, similar to what we experienced last quarter. Net sales growth was offset by 2.7% currency translation headwinds compared with 14.6% headwinds seen in Q3 2015, so notably tamer in terms of that overall headwind.

Refinish net sales increased 4.9% on a constant-currency basis versus last year's third quarter, driven principally by strong price and mix effects. The net sales result also included a 3.1% negative foreign exchange impact.

Constant-currency net sales in our industrial end-market increased 8.2% year-over-year, including solid contribution from the Dura Coat acquisition as the largest contributor to the volumes.

Third quarter volumes in industrial remained negative in Latin America and slowed somewhat sequentially in North America while other regions continued to show solid growth. Like last quarter price was largely flat as we expected. Performance coatings generated adjusted EBITDA of $149 million in Q3 versus $139 million in the year-ago quarter.

This result was driven by a positive drop-through effect of price and mix as well as variable cost leverage though offset in part by unfavorable currency impact in ongoing investment spend to support our planned growth.

Adjusted EBITDA margins increased notably from 23.1% last year to 24% in this year's third quarter driven by the price and mix leverage we referenced earlier as well as progress with our cost and productivity initiatives. Switching now to Q3 transportation coating's results.

Transportation coating's net sales for the third quarter increased 2.3% year over year before negative currency impact of 1.2%. Net sales growth included 1.3% contribution from acquisitions in the period.

Core growth in constant currency was driven by mid-single digit light-vehicle growth offset by the ongoing fairly notable slowdown in the smaller commercial vehicle end-market. Light vehicle third-quarter net sales increased 6.7% before foreign-currency impacts, with growth led by Asia Pacific and North America.

Offset by nearly flat performance in Latin America and also by some slowing in EMEA including both Western Europe and certain peripheral countries such as Turkey. Asia-Pacific benefited from a more normal production rate in Q3 against last year's notable inventory correction.

Commercial vehicle net sales declined 11.9% excluding foreign currency translation, which was slightly more than the 8.3% pullback seen last quarter. Driven by the continued slower production trends in both North America and Latin America heavy-duty truck that began largely in Q4 2015.

Broader commercial vehicle weakness in non-truck related end-markets equipment also continues. Transportation coatings generated third quarter adjusted EBITDA of $85 million, up from $78 million a year ago with positive net sales drop-through as well as stronger margin performance this year.

Margins remain strong with the adjusted EBITDA margin increasing 150 basis points from 19.5% in third quarter last year to 21 % this quarter. This included the benefit of both net sales drop-through as well as some help from Axalta Way savings as well as moderate variable cost relief year over year.

This was partially offset by slight currency headwinds and modest investment spending to support certain regional growth plans. Now looking at some of the key balance sheet items. As of September 30, cash and equivalents totaled $528 million up from $480 million at second quarter end.

While total reported debt was $3.48 billion resulting in a net debt balance of $2.95 billion.

Our net debt-to-LTM-adjusted EBITDA ratio was 3.3 at quarter end, sequentially even with last quarter, however, this amount includes the impact of $107 million in cash outflows in the quarter associated with M&A activities as well as debt and structure changes I will describe.

Free cash flow in the third quarter totaled $114 million, fairly close to the $123 million reported in the same quarter last year, net of Q3 CapEx of $31 million versus $37 million respectively.

We continue to focus on longer term working capital improvement and we are generally pleased with the outcome this quarter and year-to-date results as we continue to make progress on maintaining working capital discipline.

With regard to our capital structure, during the third quarter in August and then again in September, we accomplished two significant refinancing transactions, which collectively improved our capital structure.

We issued $1.38 billion in senior unsecured notes and replaced existing secured and unsecured notes while also paying down a portion of our euro-based term loans. In combination, this two-stage refinancing accomplished a number of goals. We lowered our annual interest expense by $20.6 million. We took our average cost of debt from 4.7 % to 4.0%.

We increased the portion of fixed-rate debt. We increased our mix of unsecured borrowings, which now exceed our secured debt term loans.

We increased our percentage of euro-base debt to more closely match our euro-based earnings and we substantially extended our debt maturities from 2020 to 2014, while also extending our revolver maturity to 2021 all with favorable pricing.

Regarding overall capital allocation, we continue to focus our free cash flow on debt reduction targeting leverage of 2.5x to 3x net debt-to-LTM-adjusted EBITDA within the next year. Subsequent to the quarter end, we repaid $150 million on our U.S.

term loans with cash on hand which further reduces our interest expense by another $5.6 million on an annualized basis and taking total cash interest savings to $26 million from combined capital structure optimization on an annualized basis.

Our continued interest in M&A within this framework could impact debt reduction timing if we are able to consummate additional transactions along the way. This year we expected to spend upwards of $100 million on acquisitions and we've largely achieve this goal over the summer.

We are confident that the expected returns associated with these transactions are well in excess of those we achieved from debt reduction given our average cost of debt. That said, we balance our return focus with our stated goal to minimize equity market volatility risk and hence reaffirm our debt-reduction goal.

Given this commitment, we were happy to receive further debt rating upgrades as S&P increased our corporate rating to BB in June and Moody's followed upgrading us to BA3 in August. Moving on to our 2016 full-year outlook, our press release and accompanying slide deck outline our guidance components for the remainder of the 2016 financial outlook.

I'll elaborate on a few of these items. We expect 2016 net sales to grow at the lower end of the previously communicated 4% to 6% range on a constant-currency basis.

However, we now expect to be within this range inclusive of the expected 2016 acquisition contribution as core organic sales have seen some incremental pressure recently from key markets that we have outlined.

These include slower EMEA sales in transportation, continued slower growth in commercial vehicle in North America and Latin America and slower growth in industrial particularly in North America.

We've also updated our FX assumptions as indicated in the appendix to our earnings presentation and continue to expect reported net sales for the year to be essentially flat based on current exchange rates on an as-reported basis.

Although the bulk of our foreign exchange basket has been moved favorably in recent months, including Brazil, we continue to face expected headwinds from the pound, the Venezuelan bolivar and certain other emerging market currencies.

Overall, refinish market dynamics continue to be stable and supportive for expected core growth although we observed that global-refinish volumes appear to be below our structural expectation thus far in 2016.

We do continue to gain market share across global-refinish markets coming largely from geographic expansion, introduction of new products and ongoing consolidation by our end-customers largely in North America.

Our industrial end-market also remains stable overall, though Q3 growth was somewhat held back by slower demand in North America with ongoing pressure in the oil and gas segment as well as certain general industrial customers.

We continue to add new customers at a solid rate, but core existing customers have seen some volume pressure as the year has progressed. As such, we have reduced our Q4 growth-rate expectation in industrial somewhat. We continue to see light-vehicle net sales growth in the low-single digits as we have targeted earlier in the year.

Clearly, however, some slowdown of EMEA production is having an impact in the second half and we have baked this result into our expectation for the balance of the year including increased downtime for certain customers in EMEA and North America for Q4.

This outlook has been indicated in revised forecasts by IHS and others who have pointed to Brexit as well as excess inventory in the U.S. channel as causes for this revision.

As we've noted already, commercial vehicle market performance remained slower and has been driven by from both heavy-duty truck as well as non-truck end-markets focused primarily in North America. We still do not expect significant outgrowth versus overall commercial vehicle end-markets in our current plan for the year.

We continue to expect this pressure to work its way through the year albeit at a reduced year-over-year rate of impact as we annualize the slowdown that began this time last year. Forecasters appear to be calling for a moderate decline for U.S.

class-A truck in 2017 to approximately 200,000 units, though it seems they believe the majority of the pullback is now behind us in terms of order rates and implied production.

For 2016, we back expect adjusted EBITDA to fall at the lower end of our previously communicated range of $900 million to $940 million including the contribution from 2016 acquisitions. This outlook factors in somewhat slower top-line growth than the original baseline forecast with associated reduced drop-through of earnings.

It remains well-supported by the guided $60 million in productivity savings from our ongoing Fit-For-Growth and Axalta way initiatives. This is partially offset by anticipated currency impacts and continued incremental investment spend on growth.

Regarding this spending, we note that Axalta remains committed to ensuring strong returns on capital and on spending. We are actively planning incremental cost reduction ahead of our previously communicated plan in the event that we feel that volume growth will not support operating cost growth we have introduced over recent periods.

As you have heard, with some demand slippage in certain areas evident, it is incumbent on our team to manage our cost structure to meet the demand client and we will meet that challenge.

In this regard, we have taken certain incremental actions on the cost side to accelerate some cost reduction actions, which will benefit our cost structure in 2017 and we have booked an incremental $15 million in severance costs in the quarter on top of our previously communicated non-recurring cost targets of $25 million for the year.

For interest expense, the partial-year benefit of our term-loan prepayments and refinancings has lowered our forecast to $180 million from a midpoint of $185 million in our prior guidance.

Our adjusted effective income tax rate is now expected to fall between 24% and 26% including a partial-year operating benefit from the establishment of our new European headquarters in Switzerland as well as other contributing factors.

We retained guidance for diluted share counts of 242 to 245 million shares, capital expenditures of approximately $150 million, depreciation and amortization of approximately $320 million and net working capital of 11% to 13% of full-year 2016 net sales. This concludes our prepared remarks. We would be pleased to answer any questions you may have.

Operator, could you please now open the lines for Q&A?.

Thank you. [Operator Instructions] Our first question comes from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question..

Yes. Good morning, thank you. Charlie, in guiding towards the lower end including acquisitions, you called out a number of different factors. I was wondering if you could rank order them in terms of their relative importance compared to your prior expectations, please..

Yes, Kevin. I think if I were to rank order as we look at our outlook in fourth quarter. I think it really starts with EMEA and transportation. If you look at some of the larger OEMs, they've adjusted their production schedules and that's been communicated to us.

So, while we actually continue to see a couple of them run faster than that, I think clearly what we see is everybody is adjusting inventories, looking at slower economic conditions and trying to make sure they hit their numbers for the year. So, I think that would be the first one.

I think second to that, Robert mentioned in his comments, which is just when you look at the Class 8 vehicles in North America, the commercial vehicle market that kind of lead -- they are down around just 200,000 to 220,000 builds.

The good news, we're starting to see some pickups in backlogs for those guys, but I think that's because more of a Q1, Q2 effect for next year. And then following behind that would really be Latin America commercial vehicle.

And again, Robert highlighted, to a lesser extent the North American industrial markets, both some of the liquid and powder customers.

And again, some of this is not surprising as we got into this fourth quarter; as GDPs have come off, some of these guys are adjusting inventories from some of their dealers and backing off on their production schedules. But, that's kind of how I think one through four..

That's helpful, thank you. The second question, if I may, would you comment on your outlook for volumes in the transportation coatings segment in 4Q? We have heard, or observed elsewhere, that some of the comps in Asia look difficult.

How do you see the puts and takes volumetrically in that segment finishing the year?.

Good morning Kevin. This is Robert. I would say, as we look at the fourth quarter, in addition to what the forecasters or what you've seen in some of the market data, just in terms of what we're seeing so far in October. We are actually seeing pretty decent conditions here in the U.S. and pretty decent conditions in China.

Some of the headwinds that we talked about for the third quarter in EMEA, we see those persisting into the fourth quarter. And then, unfortunately, in Latin America, we do see some incremental degradation, in particular in Brazil OEM.

However, as has been highlighted in the press as well as a little bit of what we are seeing in some of our activity there, there does seem to be somewhat of a bottoming process in that market..

I appreciate the color. Thank you very much..

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

Perfect. Thank you very much. Just very quickly, on your presentation, on Slide 5, you mentioned a performance volume contribution from acquisitions of 3.4, implying that core volumes are down negative 50 bps in that segment.

You mentioned some of this in your prepared remarks, but can you just kindly comment on the key details and the puts and takes on the volume front across refinish and industrial, including the key regional differences? Thank you..

Sure, Chris. We can provide some general commentary in that regard. I think, as Charlie just mentioned and we highlighted in our remarks, in terms of Performance Coatings, what we are seeing in North America is some pullback in the industrial market; in particular really, in oil and gas as well as some of our general industrial customers.

The other area, unfortunately, continues to be the drag from Latin America and that's both in refinish as well as industrial. But in the remainder of the regions, in terms of Performance Coatings, we are actually seeing pretty good performance. If you look at North America, EMEA, Asia Pacific refinish, performing well.

EMEA and Asia Pacific industrial, performing well. And really our industrial business continues to really gain traction in those markets..

Perfect. And just as a quick follow-up. Obviously, it seems like the macro is clearly moderating at least a little bit.

Can you give us color on the general way you are thinking about the incremental growth spend in geographic and product expansion, a lot of the things you've discussed over the last year? It is clear that there are a lot of long-term opportunities, but how should we think about how hard you will have your foot on the gas, especially in the context of any potential margin impact from some of these initiatives? Thanks..

With regard to the spend, Chris, for investment in particular, we've picked up spend, as you know, in refinish and industrial. I think we've highlighted that previously. And then also with some of the light vehicle wins we've added additional technical resources to support many of those launches in different parts around the world.

I think if our view or if the overall macro changes we will toggle back on those costs; and I think you heard a little bit in Charlie's commentary, I think we have a fairly slightly positive view of macro overall going forward globally.

However if that were to change, we would accelerate perhaps some of the cost reduction programs that we already have as part of the Axalta Way. And of course, we would potentially slow down some of that investment..

That's very helpful. Thanks..

Thank you. Our next question comes from the line of Robert Koort with Goldman Sachs. Please proceed with your question..

Good morning, everyone. This is Chris Evans on for Bob. Maybe we can go a little bit more on the cost side. You talked about potentially get more aggressive and even booked a charge in the quarter.

Is this meant to just offset some demand headwinds? Or would this be sort of a net substantial benefit to margins you'd expect going forward?.

So, with regard to the increase in the severance accrual that we took this quarter, because there is a lag effect, in particular in EMEA, in Europe, in terms of when notification takes place and to the extent that you make any headcount reductions, where some of the 2017 Axalta Way projects do incorporate some headcount adjustment in Europe.

However, we need to make those decisions actually several months before we actually begin to recognize those benefits. So we went ahead in terms of our planning for 2017 Axalta Way programs. And we went ahead and booked the accrual for some of that headcount optimization in Europe this quarter.

So that's not related to incremental headwinds that we see that additional severance charge. It's also not related to any of the Axalta Way programs that we have underway in 2016. It's getting ahead of some of the spend that we need to, just from a timing perspective, in particular as it pertains to Europe..

Got you. Maybe changing tack a little bit. In your transportation coatings, your price has been holding up despite some of the demands issues in commercial and as light vehicle demand light moderate.

Is there any thought that the OEMs might push back on some of your pricing? And the raw material environment that might be becoming a headwind, is there any pricing actions you would take to offset that?.

This is Charlie. That's actually a really good question. I think the OEMs have always been, as we've talked about on previous calls, they are always market testing all of this. They're always driving to the most competitive situation they can.

I think we continue to address those demands with productivity in many cases, with working with them on innovation, so that they recognize the benefit and that we continue to hold our margins. So I think that pressure will continue.

I think on the second part of your question, which is around the headwinds, we are trying to make sure that everyone is aware, certainly on the OEM side, that oil is now back up at $50 and while everything as you know, all of our raw materials aren't directly correlated to oil, that it does start to be a headwind as we go into 2017 and if you look at the longer-term forecast.

So we try to be really careful as we work with these OEMs that, if there is room should and when we do see that upward pressure, that neither one of us is, one, surprised by it and, two, we're ready to have those conversations. I think, as we highlighted before in any given year probably 30% of our transportation OEM mix is market tested by the OEMs.

And I think they've enjoyed lower raw material values out of paying for the last two years, certainly from us and I'm sure from our competitors as well, as they've continued to market test; but again, we really try to work with them on productivity rather than just a straight price decrease all the time, because in many cases the productivity gains can be much larger than just decreasing the unit price of the product.

So I think as long as we continue to do that, we feel good about our overall margins in the business. Clearly, in certain OEMs, if they do in 2017 and 2018 trim back on volumes, there is always competitive pressure there. But we haven't seen that to be too detrimental at this point..

Thanks for the color. I appreciate it.

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

Yes. Good morning, fellas..

Morning, Duffy..

Morning, Duffy..

can you ballpark roughly how much does now come from acquisitions in the EBITDA? And the sales number that you are guiding to for the year?.

Yes. You could think about it, ballpark, Duffy, as approximately 1% of our original EBITDA range as a general indication.

So when we look at the amount of play that we see in the fourth quarter from some of the macro and currency elements that we highlighted, plus the contribution from the acquisitions, we could very well be over excluding acquisitions. We could very well be over the $900 million mark.

And we debated a lot about how to talk about this as we prepared for our call today. But we felt that it would be most prudent to take the course of calling out that, that number would include the acquisitions. So, again, we see about a $10 million to $15 million play from an earnings perspective in Q4 given some of the macros we're seeing.

And that's why we had chose to adopt that structure..

Okay, great. And then you called out that you think you're still gaining market share in the refinish market.

Can you walk through your other businesses and talk about whether you think you are gaining, losing, or holding market share in the other markets?.

Yes, Duffy, this is Charlie. I think if you set aside refinish, which you already highlighted, look at the industrial marketplace, clearly we have been gaining share in certain sub-segments, as we put more SG&A on the ground, as we are going into territories that we weren't before. In many cases, though, this is not just against big multinationals.

A lot of that share comes from smaller local players where we go in with technology. Clearly, we are not trying become a price player there. We're focused on the sub-segments where it makes a difference. But industrial, certain sub-segments we are gaining share. And over on the transportation side, I think overall we are happy with our market share.

There is not any big changes in shares going on at this point. I think there is always certain plants that are ramping models up and down and things like that, but I think we have grown this year and a lot of that is business that came online in the past year-over-year growth.

But I don't see any big share changes going on right now in light vehicles..

Terrific. Thanks guys..

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

Thank you, good morning.

I know it's early to look at 2017, but given the slowdown you see in Q4, discuss your early thoughts on how you can and will grow EBITDA next year in a weak global demand environment?.

Yes. Dave, this is Charlie. As you know, we are really going through that process right now. And I don't think we will actually formulate a really good look until sometime in early December. And I think Robert may want to comment on the timing of that here in a few minutes.

But, I think overall, when we look at our refinish business, which is really the core of the company, I don't see any big change in that as far as growth rates initiatives we have.

When you look at the growth in the car park around the world, places like China and India still growing at a pretty good clip, although sometimes a little bit choppy depending on what insurance companies are doing, things like that. I don't think we anticipate any big change there.

I think the real question and the elephant in the room is always on the transportation side.

And it is in some of these production changes in Q4, which, by the way, have gotten more press because they are little closer to home in Europe and North America, but have actually been going on in some of the other regions in the world for the last two years, really.

So I think we are still trying to formulate a view on some of these production changes as we tie that to car sales for next year. How do we feel about that? Overall, though, my view is, I don't see a catalyst where there's a major downturn in 2017. But, I do think every one of these OEMs; some of them have models that are more accepting than others.

And I think, I would look at transportation being a fairly overall car growth, sales growth next year being flat to only moderately up. We address that by OEM and I think it is a little bit early.

So I think our plans remain kind of the same for 2017 and changes for us will really be around model changes, any business we win on those particular models, and how the OEMs feel about it. But again, I don't see any catalyst for any kind of major downturn.

As Robert highlighted, we're at the same time are very focused on our cost structure and believe we have a lot of ways to run over the next year. So I do think you will see us take aggressive actions in some areas as a company, but they're really more towards the long term, not towards any particular headwinds we think 2017 has..

Just to add, this is Robert.

Just to add to what Charlie said, I think there's a number of variables as we finalize our budgeting process here in the last two months of the year including the election, Brexit, business conditions in EMEA, central bank policy, a few things that we'd like to get a read a little bit closer to the end of the year before we make a call on or finalize our numbers for 2017.

Our plan currently is in mid-December to hold a call where we will discuss our 2017 guidance..

Very good.

And Charlie, just lastly, I note the early also on input costs, when do they actually become a headwind? Does it happen in Q4 or is it happening in Q1, what is the exact timing of the input cost change here?.

Yes, I think that is the million dollar question, right? Certainly it is not Q4. I think we are into 2017, and again $50 oil is kind of how we based our inputs off of this year. Earlier in the year, we saw oil get a lot lower than that. We didn't really realize any big benefit from that because it was relatively short-lived.

I think right now, if you assume oil is going to be between $50 and maybe growing to $60 next year, it never turns out perfectly like that, I think the headwinds are moderate. Now we have certainly seen some of our competitors and out in the industry, certain pigments that continue to have a lot of upward pressure.

TiO2 has highlighted price increases they're getting for 2017. Fortunately for us, things like TO2 are a relatively small buy. And I think we feel pretty good about our position going into 2017 there, but.

So, I think as we look at 2017, I wouldn't say it's a benign environment, because I do think there will be pressure starting in the second half of the year. A lot of that is predicated on global growth and what you think about global growth, because there clearly is plenty supply out there today and we think will be through 2017.

The question will be, will there be any shocks to the system, and will global growth pick up? And if you do, I think you could see some pressure. But I think it is second half of 2017..

Very good. Thank you very much..

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

Good morning. Thank you. I just had a question, first off, on the weakness in EMEA that you are seeing. Is this something that has come up recently? I'm just curious, because some of the registration data has been actually somewhat more positive than we would've expected.

And do you expect this to be short-lived or kind of continue into 2017?.

I think the weakness, certainly from our standpoint, has been there for several quarters. Again, as you correctly point out, it's not so much a weakness on sales. Some of it is product mix. In some cases it's certain models that are not selling well, where they're just extending some of their outages that they would have taken in fourth quarter anyway.

So, I don't think we take a dim view of Europe. As I've look at Europe over the last three or four years, there's been periods where it is a little bit more robust than others, but at the end of the day you step back and it's kind of flat to slightly up. So I don't think that there is any kind of pre-warning here of more ominous things to come.

The only caution there, as Robert pointed out earlier is, and certainly some of this is affecting consumer sentiment there, you had Brexit, you had two terrorist incidents, you've had a major coup attempt in Turkey. For those of us who spend a lot of our time in Europe, there is a lot of going on over there right now and a lot of it is not positive.

So, in some cases, I think the consumer has held up better than I would have thought. Maybe they are just becoming a little more immune to some of that in that they just recognize that is going to be part of the ups and downs. But I don't think it's any kind of structural weakness that is going to get worse.

But clearly, talking with some of our OEMs, they've got several models that are not selling as well they would have hoped earlier in the year. Again, I think some of that is because of these things I just mentioned. So, I think we still take an optimistic picture into 2017. But at the same time, we are going to be cautious on our earnings forecast..

Great. That's helpful. Just on M&A, it sounds like you guys achieved $100 million over the summer. Where are you looking in 2017 both as far as amount and markets? Are you seeing greater opportunities in industrial or is it still in transportation? Or is it across the board? Thank you..

one, we think we will do, if we're successful, $100 million to $150 million a year in investment in roughly top-line sales there. Our major area of focus is certainly more in the performance side, both in refinish and in industrial where we have good footprints around the world.

We have good competencies and there are many candidates to add onto, obviously at the right price and the right time. So, I think we will continue to do that. That doesn't mean we won't look at adding content on vehicles. We did one of our acquisitions in the third quarter was over at interior coatings for OEMs. So we will continue to add there.

But I think at the end of the day, the majority will be over in the performance and the industrial markets just because they are so much larger, they are more global and there is more opportunity out there today..

Thanks..

Thank you. Our next question comes from the line of Ghansham Panjabi with Robert W. Baird. Please proceed with your question..

Hi. This is actually Matt Krieger sitting in for Ghansham.

Can you quantify the benefit from your various cost-savings programs during the quarter while also providing some added detail on how much runway we had left on those existing programs? And then, kind of given some of the macro headwinds and end-market weakness, can we expect some additional cost-savings efforts heading into next year above and beyond the existing programs?.

Well, for the full year of 2016, Matt, we are well on track to achieve the $60 million in savings that we originally outlined from the Axalta Way and Fit-for-Growth initiatives. Both of those continued to move along extremely well.

We will provide more guidance regarding Axalta Way probably in the first quarter of next year and some preliminary thoughts potentially in the middle of December.

As we think about the market going forward, I think what we see, as Charlie talked about in his comments regarding Europe, isn't necessarily a downward trend from a macro perspective; what we see is just a lot more volatility. Since we don't know how that volatility is going to shape up, we have to be prepared whatever the eventuality is.

So the good thing is that we have quite a large bucket of opportunities that we can go after. And I think if things were to get tighter next year, or if something were to happen macro-economically, we would simply accelerate a number of those programs and go even more aggressively at our cost structure. That's how we would think about it..

Okay. That's helpful.

And then, given all the puts and takes across the various regions and end markets that you play in, can you provide an update on competitive activity by region or by end market or business? Are you seeing any deviations from the norm?.

No. I think it's an unbelievably competitive marketplace around the world. I don't think there is anything out of the norm. I think you always watch these situations where your customers aren't growing, that competitors try to take advantage of that, and that never ends well when people try to do that.

But I think all of these markets are normally very competitive. You've got to differentiate on your value propositions, be in there working with your customer and showing them your benefits.

So I think that's one of the reasons we have done well, I think, over the last couple of years is, we really tried to be even a lot closer to the customers we have and demonstrate our value proposition and be working on helping them achieve what they want rather than just being a price sale.

But I think all of these coatings markets, no one should ever assume they are not wildly competitive; not just among the multinationals, but in most of these markets we have local players. And I do think you're asking one interesting point we always deal with, which is this issue of currency depreciation around the world.

And certainly, we see places like China and others who aggressively let their currency depreciate; and then certainly that helps local producers more than us. We have to continue to fight over that.

But no, I don't see anything where on any large macro scale somebody is being silly enough to try to go grab major share because I think people will defend their territory pretty hard in these kind of circumstances..

Thank you. Our next question comes from the line of Ivan Marcuse with KeyBanc Capital Markets. Please proceed with your question..

Great. Thanks for taking my questions. The first one is, I think in your prepared statements you talked about the overall demand in the refinish market globally. Maybe a little structural demand being a little bit lower than what you would have expected this year.

What do you think is driving that? Is there changes in [insurances] in different regions for more of a longer-term perspective or is it just one of those years where some years are better than others?.

I will make a comment here and then I think Charlie will also want to chime in. As we think about the refinish market, it is a GDP-plus market in general. So when you look at it from an overall market perspective, if overall global GDP slows, you would expect to see the refinish market slow.

I think our comment was more directed in the sense that, that's a market that we see easily growing in the mid-single digits or higher in the medium to long term. There has been some volatility macro-economically in different parts of the world, especially in Latin America recently, that from an overall perspective have pulled down that number.

But that at the end of the day, we are talking about miles driven, we're talking about accident rates; and then, to a lesser extent, the size of the car park as the main drivers of those markets. But overall GDP was kind of what was behind that statement..

Just a couple quick comments on that. I think when you look at the overall new car build rate around the world, that will continue to fuel a robust refinish market. While we do see those more regional in nature in refinish. It's a regional business. So you can't look at what's going here in North America and compare that to anywhere else.

For example in China, China is now working hard on the fact that they have an astronomical accident rate and so insurance companies are teaming up. They are putting pressure on drivers, higher deductibles. And so, while it hasn't affected us this year, we certainly have seen the overall refinish market, for example, slow down this year in China.

But we think that goes on for a couple quarters and then it gets overwhelmed by the fact that they are still pumping out 24 million vehicles a year into China. So you do see these bumps off and on. But I think overall it is a GDP-plus business.

The fact that new car sales around the world are as robust as they are, that fuels long term the fact that it will stay GDP-plus. Again, a lot of technology trends going on; solvent borne to waterborne, insurance companies, things like that. But overall, when you step back and look at it, pretty solid, pretty stable business.

And all of the trends tend to favor the large multinationals over time because the productivity required to color match, all the things we talked about on previous calls..

Okay. And then, a quick follow-up on the cash flow. Your working capital, you mentioned that it was slightly higher on a year-over-year, which drove the decline in cash from operations.

Was that more of a timing issue or what drove that? And do you expect the working capital to turn back into a pretty good source of cash starting in the fourth quarter?.

I think is important to highlight that our working capital is highly seasonal. If we look at it Q1, working capital was about 15%; Q2, 14%; Q3, this quarter, we're right around 14%. We see a pretty dramatic drop-off in the fourth quarter, so on a full-year basis, we think that we will see an improvement..

Okay..

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

Yes. Hi. good morning. Charlie, you had several wins and market-share gains in the last couple of years.

Would you say that the market share battle is now a steady state in the global OEM markets? And is that true in China as well?.

I don't know about steady states, because all of us, probably including my competitors, everybody's working on innovation. But I would think that a lot of the bigger movements we saw the last couple years back and forth, a lot of that has balanced out.

Some of that is just the capacity is now on the ground with the exception of a few new plants in Mexico and in China. So a lot of that is the fact that a lot of this capacity is at, now actually come online, is up and running and everybody's with their appropriate share. So I don't think we will see going forward any major share shifts.

I think we'll all continue to work hard to grow our business and be innovative with the OEMs. But I think, as I've always highlighted, OEMs like choices. They like having us all in there innovating. And again, I think we will have to all earn our keep, continue to earn our keep, going forward. But we certainly don't see any new entrants.

There is always pressure from the Asian players trying to come West, things like that. But I think overall, as long as we continue to innovate, the shares may move around a little bit, but not any major shifts..

Okay. That's helpful. And then, commercial vehicles has been a tough segment this year. You talked about Class 8 trucks. Can you give a little bit of color on Ag and the heavy machinery market? Thank you..

Sure. I think we are not as heavy in the ace market as some of our other competitors. But we've actually gained quite a few approvals this year and starting to get some nice wins.

That being said, as we talk with all these guys around the world, I think with low commodity prices and everything else that is going to continue to be a challenged marketplace for the next couple of years as far as overall build.

I think there was a big article here just a week ago by the Caterpillar CEO, everything else kind of highlighting some of the challenges. So I think we'll continue to be aggressive in that market with some new products we have, and grow. But I don't think we see, with the lower commodity prices, things will only get better incrementally, I think..

Thank you..

Thank you. Our next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your question..

Good morning. This is Dan Rizzo on for Laurence. Just one quick question. You mentioned in the past about moving away from single sourcing and going to dual sourcing, multi-sourcing as being an instrument for cost savings.

Is that something that is closer or something you're working on now? Or something that's more for down the road?.

This is Charlie. It is a high priority for us. We are continuing to make progress on that. I'm not quoting numbers here today for competitive reasons, but we're continuing to add second and third sources in many cases. And a lot of it is about complexity reduction.

And that's a major initiative for us, which we are already seeing benefits from that today. And we think over the next year to help us as we start to think about raw material headwinds long-term. But even more importantly, just being able to reduce working capital, simplify our operations, free up capacity, all the things you would expect.

But no, it's got a number of people across several functions dedicated to that effort right now. And I think it will continue to be a multi-year effort. Because there's design and development in a lot of that as well, but it's a high priority for us..

Okay. Thank you guys..

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

Thank you.

Does the exit of Carlyle change any of the thinking around stock buyback? I assume bolt-on acquisitions and deleveraging would still be the priority?.

get to that target, which is sometime early next year, we believe, and then everything is on the table..

And then do you have any operation serving the commercial transportation segment that you will need to rationalize at some point? It's down so much that I know it's not like a big fixed process plant, but I know if you have dedicated assets there that might have blown up utilization that you're going to have to make some changes?.

No. Actually those products are actually produced in a couple of our integrated facilities around the world. And we've already taken costs out around that, contemplating that we thought this would be the kind of numbers that we'd see from that marketplace. So I think we're fine where we are.

Whenever it upturns, we will actually probably add a few resources back to support that. As you know, in coatings plants you can put more people on shifts, you can add shifts, and that's the way we think about it, but no dedicated assets..

Okay. Thank you..

Thank you. Ladies and gentlemen, we have time for one more question. And that question comes from the line of Jeff Zekauskas with JPMorgan. Please proceed with your question..

Hi, good morning, it's Silke Kueck on for Jeff..

Morning, Silke..

I was wondering if you could talk about how much of your price increases year to date have been from inflationary pricing? And how you think about it going forward? Whether all of this will go away in an environment where the currencies are not falling any further?.

Thanks Silke. This is Robert. Our pricing strategy, and again for competitive reasons we won't get into too much detail on that, our pricing strategy remains relatively unchanged. We do continue to get core price increases in our markets. And separately we also do get price adjustments for inflation and devaluation.

We do get continue to get core pricing in our core markets..

Do you think the split was like half-half if you look at it here today?.

It is a combination of both core pricing as well as pricing adjusting for inflation and devaluation. It's also important to highlight that in our bridges, price is actually price mix. So there is a component of mix in there with price as well, so it's not just pure price..

Silke, this is Charlie. I think what we've been trying to condition customers too is, we do believe there will be some core inflation creep back in.

I don't try to get guess the Fed and their numbers and everything else, but when you look at even if it is just moderately rising, raw material prices, labor wage rates, things like that, I think the inflationary environment is going to creep up on us here a little bit and I think we have got to stay out in front of that.

We try to remind customers of that as well; that they need to be paying attention to some of the macros..

the $60 million that you try to achieve today, is that a run rate or is that an absolute number? I know you plan to give guidance about 2017 targets later, I think you said in the middle of December.

But just conceptually, there are lots of things that you have already done, and if it turns out that growth slows, what is it left to be done, is it all about headcount? And is it just technically reasonable to assume whatever you achieve in 2016, you can achieve in 2017?.

So with regard to the $60 million, that's $60 million of end-year savings. That's not a run-rate number. That's an end-year number. And I think, again, we've made some progress on rationalizing our cost structure and taking advantage of some of the productivity opportunities we have.

But, because of the need to focus on many of the areas in the company as part of the carve-out process and the standup, we are just now getting to a number of areas. And it's not just headcount reduction. There are number of areas around complexity, around SG&A, around potential production optimization, supply chain optimization.

There are number of areas across the company that we have as opportunities to continue to improve our cost structure..

So, you don't think that you'll level off on savings would deteriorate next year; you can probably have different equally sizable programs that you could continue to put in place?.

Silke, what I'd say is that we continue to believe that we have meaningful cost savings opportunities moving forward. We'll provide more insight on that when we discuss that in the first quarter or if we discuss it in our 2017 guidance call that we currently plan to do in the middle of December..

Thanks very much..

Thank you. Ladies and gentlemen, I would like to turn the floor back to Mr. Shaver for any final remarks..

Yes. Thank you. I will be very brief. I think my view on the quarter, again, I am very pleased that we executed on a lot of the longer-term initiatives around refinancing and getting our acquisitions, our M&A program up and running. So a lot of great underlying strengths added to the Axalta family during the quarter.

At the same time, not taking our eye off the ball of running the current business, not only this quarter, but the fourth quarter as we look in 2017. So, as always, thanks for all of your support on it. And we look forward to coming back in the middle of December and sharing our view of 2017 with all of you. Thanks again..

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