Ladies and gentlemen, thank you for standing by, and welcome to the Axalta Coating Systems Second Quarter 2017 Earnings Conference Call. All participants will be in a listen-only mode. A question-and-answer session will follow the management presentation. Today's call is being recorded, and replays will be available through August 10. Those listening after today's call should please take note that the information provided in the recording will not be updated and therefore may no longer be current. At this time, I would like to turn the call over to Chris Mecray for a few introductory remarks. Please go ahead.

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 second quarter 2017 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 website at axaltacs.com, which we'll be referencing during this call. 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 Axalta's operating and financial performance. These statements involve uncertainties and risks, and actual results may differ materially from these 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 results. 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, and thanks for joining us today. Hopefully, you've had an opportunity to review our financial results that we released this morning. I'll provide some color on Axalta's performance and then will update how we see the rest of the year shaping up. In the second quarter, we saw solid overall revenue growth of 4% on a constant currency basis, but our organic net sales and adjusted EBITDA were somewhat below our operating plan. This was largely due to weakness in April across several lines of business, though April was followed by two noticeably better months in May and June. In spite of this challenged quarterly result, we continue to be confident in our medium-term operating plans and believe we can execute the balance of the year closer to our original expectation. As such, our revised guidance incorporates the second quarter results, offset by expected acquisition contribution in the second half, albeit muted deal integration expenses are expected to continue through the balance of the year. Other changes in our outlook are variable and also included different phasing that we communicated last quarter, based on greater visibility of specific drivers for the period. Our second quarter results include the contribution of wood coatings and Spencer Coatings acquisitions for the month of June as well as other transactions completed during the last 12 months, resulting in a 2.3% overall net sales growth or 3.8% on a constant currency basis. Organic net sales were held back to a degree by a slower quarter from Refinish, particularly from a challenging quarter in South American countries on volume and weaker price mix in other areas as well as ongoing lower average pricing in Transportation Coatings, driven by select Light Vehicle customers. The impact of flatter organic volumes and negative price mix effects…

Thanks, Charlie, and good morning, everyone. Please turn to Slide 5 to review a consolidated summary of our second quarter results. Constant currency net sales in the quarter increased 3.8% year over year, including 6.9% growth in Performance Coatings and down 0.7% in Transportation Coatings. This overall growth was driven primarily by 6.5% acquisition contribution, offset by a slight decline in organic volume and lower average pricing in the period. Negative foreign currency translation impacted net sales by 1.5% in the quarter, substantially less than the 6.9% impact in second quarter 2016 and continuing to moderate slightly versus the 2.2% seen last quarter. Most of this FX impact came from the weaker euro and yuan, that we are pleased to see relative stabilization versus the last several years. Axalta's fairly flat organic growth volume reported in the quarter was driven to a large extent by declines witnessed in Latin America Refinish as well as EMEA Light Vehicle volumes. These detracting factors were offset by continued solid growth in Industrial globally as well as some lift in Commercial Vehicle demand, particularly in North America. Overall price mix realization was a decrement of 2.4% in the quarter, including lower average prices in all end-markets, but most notably in Light Vehicle. As we've communicated before, continued sharing of savings from prior lower raw material inputs with certain key customers was going to be an ongoing feature in the quarter and without notable offsets to date from efforts under way to adjust pricing to reflect more recent variable cost inflation. Adjusted EBITDA in the second quarter of $227 million decreased 9.5% from same quarter last year with an associated margin of 20.9%, down 270 basis points year over year. This decrease was driven primarily by the impact of lower price mix in the quarter…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first questioner today is going to be Vincent Andrews with Morgan Stanley. Please go ahead with your question.

Thanks and good morning. Just want to get a sense, if I look at the underlying EBITDA guidance, I think what I heard you say was that, the shortfall in the quarter - year is more or less offset by the impact of the acquisitions in the back half. So on an underlying basis, your expectations for 3Q and 4Q haven't really changed, because you're going to be able to implement some new actions. Is that a correct assessment of what you said?

Yes, Vince, that's an accurate - an accurate assessment. Now there's been a little bit of give and take, with incremental raw material inflation, and that incremental raw material inflation we will attempt to offset with price increases, the TiO2 surcharge that we implemented and then also some additional cost-savings initiatives. So that would be the one variable that had changed compared to the original guidance in terms of how you would think about Q3, Q4 phasing.

Okay. And then just on North American Refinish, could you just a little bit more detail on what's happening with the customers as they consolidate?

Sure. So I've characterized what we've seen starting to happen in the market and then which kind of punctuated this quarter, is not so much to do with the end-customer, as it is to do with distribution. So we had a couple of our large national distributors that decided to lower inventory levels in Q2. This was based on [indiscernible] internal decision in their companies to lower working capital and is not reflective of any fundamental change in the North America Refinish market. That market remained strong with both miles driven and accident rates up year over year. Another factor was that a few larger distributors have been acquiring midsize and smaller distributors. And these larger distributors have slightly lower margins than the distributors that they've acquired, and that results in some margin pressure for Axalta. We've been in the process of adjusting our discount structure and our go-to-market model to compensate for that factor. The other elements that influenced in the quarter was that, we had price increases, Refinish price increases in two of our four regions that went into effect April 1, including North America. And that resulted in a large amount of pre-buy in March, thereby negatively impacting demands in April and in the quarter. And much of that mix was in lower margin products.

Okay, very helpful. Thanks very much, guys.

Thank you, Vincent.

And the next questioner today is John Roberts with UBS. Please go ahead with your question. I apologize. Actually, our next question is going to be from Bob Koort with Goldman Sachs. Please go ahead.

Hello, Bob. Can you hear us?

No, no. This is John Roberts. Am I the one who is on?

Go ahead, John.

Thanks. Organic volume growth excluding FX and deals is 2% for the year. It was relatively flat for the first half, up in the first quarter and down in the second quarter. So do you need 4% organic volume in the second half for the full year to be at 2%?

In the second half of the year, we're counting on a number of initiatives - a number of initiatives top-line to arrive at our guidance. The first of course is the acquisition contribution from the deals that we've done, plus the new deals that we've announced in both Wood and Spencer Coatings, John. In addition to that, we are forecasting in most of our end markets, a slightly better volume performance in the second half of the year compared to the first half of the year, with the exception of Light Vehicle, where we have adjusted our forecasts there as per updated IHS forecasts, which slowed - which shows a little bit of deterioration, in particular in North America.

And then in your revised EBITDA guidance, how much is the second half contribution from the deal?

We haven't disclosed the contribution from the acquisitions [ph].

Okay. Thank you.

And the next question today is going to come from Steve Byrne with Bank of America. Please go ahead.

Yes, pardon me. Thank you. This price action that you announced on August 1, you're referring to it as a TiO2 surcharge. Does calling it that versus a price increase imply that you would give it back if the eventual price of TiO2 comes back? Or does this give you the leverage to push through something faster and with a greater degree of a likelihood by calling it a surcharge?

Sure. Let me start, and Charlie may have a point here to add as well on that. So the thinking behind that is our overall basket of raw materials in several categories has gone up, as it has for many of our competitors. And as a result, we've had to increase prices. The category that has gone up multiple times higher than many other categories has been TiO2. So because TiO2 has gone up, has gone up so dramatically, what we wanted to do was to separate that TiO2 price increase and it's actually a separate line on our invoicing, so that as TiO2 comes down, we would expect to give that TiO2 back once market prices return to pre-increase levels. But we were trying to provide a little bit more transparency to customers as well as a little bit of flexibility to adjust our pricing algorithm going forward without having to open up a whole lot of discussions and negotiations.

Yes, this is Charlie. I think Robert is exactly right. Around the world, we've seen market price of TiO2 going from 50% to 70%. We felt like because there was already normally price increases out there this year in some of our powder and liquids accounts that we really wanted to be able to say, look, customers, we don't really know where this is going, because all these plants have been shut down in China and where supply is. So that being the case, we need to share the pain. At the same time, look, if it goes back down, we don't want to be arguing with you six months from now about it. So let's just be transparent and try to be as fair as we can as we push it through the marketplace. They know how much TiO2 they have in their products, so they can very well easily calculate that, okay, we're just trying to be fair here. But I do think TiO2, our expectation anyway, is probably continue to rise at least in the next couple quarters until some of this gets sorted out.

Okay. Thank you. I just wanted to continue with this discussion, Vincent started with the distribution channels for that the Refinish products. Do you negotiate pricing with the body shop on price? Or is this intermediary layer, this distributor channel, are they your customers and you negotiate price with them?

Charlie, do you want to take that?

Yes. It really varies. But, I would say, as a rule, larger body shop chains, for example, some of the MSOs that we've talked about on prior calls, in many cases, we negotiate directly with them. And the distributor can be a third party in that agreement. In some cases, there may be multiple distributors who serve that body shop chain. With the smaller body shops, the ones, the twos, people like that, normally that price will be negotiated with the distributor, as they're negotiating a bundle of prices to that body shop that may include sandpaper and tape and other products that we're not even involved in the chain. So it actually, we like it that way. It's much easier for us, minimizes credit risk, minimizes - the distributor, he has a lot more things to work on there. It's also incentivized - he is incentivized to push price. We typically have transparency. We know what prices they're charging the body shops for different brands, so there's transparency back and forth. And we have a right to audit all of that. But typically, on a brand price increase, we will raise price at the distributor level. And 80% to 90% of that is done with a distributor versus an individual body shop.

That's helpful. Thank you.

And the next questioner today is going to be Aleksey Yefremov with Nomura Instinet. Please go ahead.

Good morning, thank you. How can you adjust your distribution strategy in North America to counter those distributor consolidation? Is direct sale model becoming more attractive at this point? And also, is it possible to support competition in the distribution market that may be supporting second-tier players there?

Charlie, you want to take that one?

Yeah, sure. Thank you, Robert. So what we'll do, as Robert mentioned earlier in his prepared remarks, that in some cases we'll adjust the discount structure. In other cases, we may change some of the pricing on certain brands depending on the mix, or we may adjust some of the service fees that we do with those distributors. And so it's - they understand it. I mean, they understand that's coming. The reason we're able to do that and we believe we'll continue to be able to do it by channel is we've been doing this in Europe, where we're seeing some consolidation and this is - I think, the thing is really accelerated over the past years as we've seen in North America with the Refinish market being a relatively mature market, although we've grown share quite a bit, the market really grows 1% or 2%, we're seeing some consolidation just like you saw in chemical distribution over the last 5 to 10 years. But we'll use a variety of tools and we have been to adjust our margins, and we work with the distributors in some cases on service levels, where as they consolidate, they don't need as many service points and - but it does take a lot of collaborative work. We certainly always put the distributor on notice to say, look, we're not going to tolerate the different margin structure over time. And we believe we could be fair with that and they can too. The trick there is just making sure that ultimately as some of that ends up at the body shop level that everybody stays competitive. So in some cases it may take a couple quarters to do that. With some distributors, it may take up to a year as contracts allow.

Thank you. And just to follow-up on a same subject. I guess, is the price decline that you've experienced now in your view is sort of one-and-done? Or it's sort of - it's higher in magnitude than what you would expect to experience in the future?

Yes, I think if you - just looking at the economics, it's higher than what we would expect - that we would expect to see in the future. We will be adjusting, as I mentioned earlier, some of our strategy and approach and our go-to-market model, including our discount structure to compensate for that. So could there be a little bit of spillover into Q3 before that could be implemented? There could be, but we wouldn't expect to see something of this magnitude, absent, of course, any change in product mix during the course of the quarter.

Yes, the only other comment I would make is, this is - for us anyway, some of these acquisitions we've done, while that's been a little bit of a short-term pain is not necessarily a bad deal for us over time. If you're going to have a distributor who wants to sell his business, we would just soon guide it into friendly hands. So actually some of these consolidations we've actually encouraged and encouraged these larger nationals to buy these smaller ones. That's not uncharacteristic of what we've done in Europe and in some other regions of the world, where a distributor has come to us and said, look, I really have succession issues or I don't want to stay in this business any longer, and were the case but we would now let them fall into an unfriendly hand, where you might end up losing business as they push to and shift over to another supplier. In Europe, we have actually done the opposite, where we've actually encouraged some distributors. We stepped in and helped them get bought and taken competitors business as a result of that. So we know what happens if a distributor falls into an unfriendly hand, over time, you may lose shares there and then you really are - you kind of get the worst of both worlds. So what I would say is, we don't view this as necessarily a bad deal over time. But we have had two distributors, Robert highlighted that over the past year, we've got very aggressive on buying some distributors, and now we have to work through it with them. I think a lot of that has worked through to the extent they go do three or four more big acquisitions over the next year or two. We could kind of see this rolling on through. I don't think it gets any deeper than this. And in fact, it should abate as we work backwards with them on margins. But I do think that overall, the consolidation will continue, and that affects not only us but some of the other players in the industry.

Thank you very much.

And the next questioner today is going to be Mike Sison with KeyBanc. Please go ahead.

Hey, guys. When you think about your second half EBITDA growth expectations, if you take a look at the midpoint, you're going to need to grow EBITDA around 14%, kind of mid-teens. Can you help us understand how that breaks down between acquisitions and organic growth, cost savings and - et cetera to sort of give us that walk?

If you look at our EBITDA growth in the back half of the year, I think you hit on the all the factors, I'd mention a couple more. So the first factor that's relevant of course is the contribution from the new acquisitions we've done. Obviously, the wood business is pretty substantial compared to the other acquisitions. The other area is Axalta Way. We have stepped up our savings goals and accelerated some of the activities under Axalta Way in order to sort of generate additional savings. And then thirdly, in the back half of the year, we would expect to see the benefit from the price increases that we've been implementing across the board as well as the impact of the TiO2 surcharge.

Okay, great. And then, if I thought about a similar look at - in terms of sales growth in the second half, it does appear that your organic growth would have to return to that three, four, low single-digit to mid-single digit range. Are you hitting that now in July? And do you expect that to be pretty linear as we head into the second half of the year?

So far in July, we have early sales numbers for July, and we'll be getting earnings here in the next day or two. But so far, based upon what we're seeing top line in the month of July, we're seeing pretty good performance across the business and real standout, in particular, with wood acquisition, which continues to perform higher than our original deal model expectations. But I would say, overall, the market is kind of in line with our expectations.

Great. Thank you.

The next questioner today is going to be David Begleiter with Deutsche Bank. Please go ahead.

Thank you. Good morning. Charlie, just on Light Vehicle pricing, can you discuss some of the dynamics pressuring pricing again? And how and when do we reverse this negative pricing trend in Light Vehicle?

Yes, so obviously each OEM is different. And I think we talked over the past year that, clearly, as we - if oil prices stayed down, if raw material prices stayed down for an extended period of time, which they have over the last couple of years, but ultimately as bids came up, as business rolled over, there must be adjustments in pricing. And certainly, that started latter part of last year and into this year. Now a lot of those negotiations weren't actually done until - as we got into this year and into this past quarter and we get a little more clarity with them. So I think that we always knew and everybody - we had always highlighted and I think some of our competitors did too that, look, with a lower raw material base, eventually the OEMs would want to sit down and say, look guys, we now have a little bit of a level reset here and that needs to work its way through. So I think for the most part, we've seen that go through. And I don't think we really believe you're going to see further degradation of pricing, just because there's been a pretty good balance between at least what we've seen in the bids we've been involved in, business we're engaged in, I think there's been a pretty fair sharing of some of those raw material benefits. Now as far as margin coming back up, that really is a function of new product introduction over the next year, over the - in next couple of years, as we work all the time with OEMs on productivity, we share those productivity gains. So I think that's an OEM by OEM discussion that goes on. And in some cases, we're - for example, new colors we're introducing right now, some new e-coats, some new basecoats, those have pricing models and pricing formulas that are different and work to recapture some of that. The OEM gets the benefit from it too, but it's less about raw material changes now and it's more about just productivity and pricing going forward. So I think, over the next year or two, you'll certainly see - we don't believe there is a lot further degradation. There's always that chance out there, obviously, but right now, we believe we're at a pretty good place. And most people are just focused on productivity and OEMs are focused on inventories and model changeovers, things like that. So right now, I think, it kind of played out like we thought it would. You never know exactly the timing on some of that when business comes up for bid, but I don't think - we believe we'll see - we don't believe we'll see significant further degradation, frankly, because there's been a pretty fair sharing of what went on in on the raw material side.

And Robert...

David, just to put an additional point on that, to complement to what Charlie said, the price concessions have been relatively concentrated in a few OEMs, one in particular, given certain challenges in their business, we actually had a price down negotiation with one of our large LV customers. And that reached a conclusion of during April and we actually have a retroactive adjustment that was forced on us that went through all the way back to January 1. So you're seeing the degradation in price mix in Q2 at a slightly exacerbated level because of that.

Very clear. And Rob, you mentioned also on the acquisition, some onetime costs to integrate these transactions. Could you quantify the cost that won't be repeated going forward from M&A standpoint just for this year's integration?

Yes. So the way to think about that is, we've incurred approximately $10 million to date in both transition and transaction fees. For normal size acquisitions typically, we would absorb most of those costs, not all, but most. In the case of a carve-out similar to what we did with DuPont, our approach to it is slightly different. So with the carve-out, just given the magnitude of the costs and it's a different type of transaction, the Valspar Wood deal is indeed a carve-out, and we have significant TSAs in place and other support services with Sherwin. Those will continue through approximately the end of the year in some cases. Hopefully, we'll be out sooner, but by the end of the year in some cases. And therefore, I think our expectation for this back half of the year is that, those onetime costs that would expect to add back should range anywhere between $5 million and $10 million.

Thank you very much.

And the next questioner today is going to be Chris Parkinson with Credit Suisse. Please go ahead.

Thank you. Given your expectation for global auto production of 1.9% and understanding your story isn't entirely contingent on North America. Can you comment on your competitive positioning by region, just an update on that? And any key changes you anticipate over the next two or so years, particularly in China? Just any color on key business wins, regional penetration rates, et cetera, would be helpful. Thank you.

Charlie, you want to start on that? Strategically and I can complement.

Yes, sure. Right, let me make - I'll make a couple comments, and then, Robert, if you want to come back around on it. I think when we think about each region, it's clearly, North America, we've actually outperformed the market over the past year or two. That's a result of - and again, we've highlighted on several calls, there are several OEMs that we're focused on that we believe we're underserved, and we're growing our share with them, albeit, that's new product introduction, it's working on productivity on existing accounts with them. So North America, we feel like with some of the new capacities coming online in Mexico, some of the model changeovers and the models that are in favor right now, again, more trucks, bigger SUVs, things like that, we believe, we're well positioned to perform or outperform a little bit better than the market. Certainly, we've seen that this past year. As we get into Europe, I think Europe has been the one place we've been challenged probably more than some of the competitors just because of our heavy weighting with one particular OEM there, but we are growing with the other OEMs that are doing better in Europe. But again, you have long-term customer relationships that you're happy some times and sometimes it's a little more challenging. So we actually haven't lost share, but they clearly underperformed the market, and we certainly saw that in second quarter. So I think in the European marketplace, us performing at market over the next year or two would be our expectation. Again, this year, we'll probably perform 1% or 2% less. As we look out to Latin America, again, Mexico, we consider to be part of NAFTA, so I'll restrict my comments to South America. We have a good…

Great. And just a quick follow-up. But just on the M&A front, you've done obviously over 10 acquisitions over the last few years mostly in Industrial. Understanding it's pretty early on that one in Spencer, can you just comment on the cadence outside of integration costs, which I think Robert already hit on. When you expect to realize - what you would expect to be the full profitability benefits ex-integration costs, just any way for the market to interpret on how these may roll into and then through 2018 would be particularly helpful.

Yes. I'll take that. This year - yes, this year, we'll see the EBITDA of the acquisitions impacted by some of the integration costs. We should be through those in a material fashion by the first quarter of 2018, and we would expect to see a full year run rate starting in the first quarter of 2018.

And I just - I'll just want to make one comment on that, because I think people may be struggling with that. And Robert mentioned the key point which is the wood business, the reason we have the Transition Service Agreement expenses, it is a carve-out, very different than buying a company or buying a standalone division, while the business had its own two plants, its own dedicated sales team and everything else. All the back-office and all the support, and actually there's some tolling manufacturing that goes on, we'll be pulling all that out over the next two quarters and moving it all over, and it's going - it's actually going very well and I think everybody is pleased with it. I think as far as we can tell the Sherwin organization is pleased, we seem to be working really well with them on making it happen. But I think that it just - it is a carve-out, so all the back office, whether it's IT, whether it's finance, accounting, sales support, all except for the 400 and some odd employees in the business, we're moving that all that over. So - again, it's all going well, but I think that those costs we had always contemplated that it would take a couple of quarters for those transition service agreements to roll off some of the onetime. And - but I think it is people - it's very, very different than doing a small bolt-on acquisition, where you basically assume everything on day one, as Robert said, we normally just absorb those small acquisition expenses, you don't ever see them. But in this case here, it's a significant net number that it's going to impact the profitability in the next two quarters and then pretty much is behind us by the time we get into Q1 2018.

Thank you.

And our next questioner today is going to be Silke Kueck with JPMorgan. Please go ahead.

Good morning. How are you?

Good morning, Silke. How are you?

Good morning.

So I would like to belabor the TiO2 issue one more time, if I may. If you go a year back at the beginning of 2016 and where we are today, like, maybe TiO2 prices really are up, order of magnitude like 50% and maybe TiO2 costs overall, if you exclude Industrial, maybe 10% of your costs. So are the surcharges like order of magnitude to recoup costs, something like up 5%? And do you see that only once in one quarter? Or do you see that ongoing also like 12 months period?

Silke, I think it depends on the direction of the TiO2 pricing. I mean, I think we explained earlier in the call, kind of a little bit about the strategy about separating the two, the general price increases from the TiO2 surcharge. But as we move forward, if we were to see TiO2 prices go up, then we would continue to increase prices most likely on the TiO2 surcharge line. So it'll be a little bit variable depending upon what happens with TiO2.

Okay.

I think you're correct with some of our customers, it could be anywhere from a 3% to 5% increase. And some of those customers have asked, why now? And we always say is, look, up to now we wanted to watch the market, we wanted to see what was going, we've also absorbed those cost, but we just can't do that anymore. But I'm like Robert, if TiO2 goes up another 50%, well, I think we have to come back and say, guys, surcharge has to move with it. But that's also why we think it is fair to customers, because we're saying, look, to the extent it comes back down whenever it does, we'll hand it back to you. We're not trying to profit from this. But there's just no way you can - as a company, we're going to - we can continue just absorb it all. And I would guess our competitors may not be calling it a surcharge, but everyone - and we're not that big of a TiO2 buyer, but I do think over time, if there's going to be a structural change with all these Chinese plants down for good then I think people are going to reflect the reality at the current supply base.

That's helpful. And if I can ask a last question on the wood coatings acquisition. So when we look at it - and like Valspar at periods of time had talked about the wood coatings business more specifically, like what we come up with this is that probably on an annualized basis like once you get past the transition in your head, like your sales order of magnitude from that acquisition should be - I don't know, like $220 million, $230 million annualized, and that EBITDA margin should be approaching something like 20% or 21%. Is that in the ballpark? Or do you think you'll do better than that or worse? Or what's your profit?

So we haven't provided profit guidance for the business. I mean, I think your numbers for the top line of the business are accurate. I think what we would say is that, we're very optimistic about the outlook of the business. It's a business that has been able to grow volume. It's a business that has been able to get price. It's also a business that has done a lot of really good work managing their cost structure. We think that we can slightly improve the margins in that business just as we run that independently. And the quality of the management team that came with that business is outstanding. So I think we're very optimistic about the overall direction of that business.

Thanks very much and for squeezing me in so late in the call.

And the next questioner is going to be Arun Viswanathan with RBC Capital Markets. Please go ahead.

Thanks. Good morning. I was just wondering - so the back half does imply quite a bit of uplift in EBITDA. What are some of the factors that could potentially bring you to the lower end? Is it just not being able to get the price costs work out or maybe some other factors would you highlight? Thanks.

Arun, I think there are elements that could certainly be incremental opportunities for us to our outlook and then there are some elements that could be, of course, that could be risks. On the risks, I think perhaps the biggest risk in terms of the full year outlook is simply what happens with the direction of builds in Light Vehicle. As I said, we've built in as of the July report of IHS, we've used that data to feed the specific plants and models that we're on, and that underpins are forecasts for the full year. So if we were to see a change in those IAS - IHS forecasts and - or if we were to see any demand change on the models that we're on specifically, that would be one item. The other item would be the actual price increases and the TiO2 surcharge, and the capture of that would be another element. And then the third element would be the direction of raw materials overall. Do we stay at the level that we're at now or do they go up. And if they go up, we would increase prices further, but as you know, from the time they go up until the time you actually implement the price increase there is a lag, and that lag creates a little bit of leakage in the short term that's made up over the long term as the margins converge back to normal. The other area, of course, could be currency. We've assumed in our guidance going forward a more favorable rate on the euro as a U.S. dollar functional reporter, if that would go the other way that would be one element that could be a potential challenge for us.

Thank you.

And the next questioner today is going to be Laurence Alexander with Jefferies. Please go ahead.

Hi, this is Dan Rizzo on for Laurence. Thanks for taking the question.

Hi, Dan.

You mentioned - how are you? You mentioned, how well you're positioned in North America, particularly because of a –I guess, you just - your stronger presence in SUVs and larger light vehicles. I was wondering if the North American slowdown would have an outsize effect on you guys, whereas, EMEA is still rebounding and Asia doing okay, but North America is really starting to accelerate the downturn. Would that negatively impact you more so, I guess, than others?

Dan, yes, this is Charlie. I think when you look at our business and I think we highlight this on some of the calls or previously is, our OEM business is spread pretty evenly around the world. We like to say kind of a third, a third, a third. So I don't think that the North America piece would - if it accelerates to another 5% down or something like that, I don't think it would disproportionately hurt us versus anyone else or versus other part of the world.

Okay. Thank you very much.

Yes, I think, the other element to Charlie's point is, if you look at where the types of vehicles on which we're positioned in the SUV and the truck market much more strongly than we are in the passenger vehicle market. And as a result of that, we've been able to outperform the relative market given that more favorable mix.

It's certainly what we've seen come through this first half of the year. If you remember even last year, when we gave our annual guidance, we contemplated that the - we thought that the U.S. market or the North America market really would probably on builds would drop to 5% to 7%. So I think what we see coming through this first - and you never know exactly who is going to do what. But I do think so far the market in North America has behaved kind of what we thought it would this year. Again, I think we don't have any better data than anybody else on second half. But I do think OEMs as we talk with, if you remember, we deal with a lot of the big dealership groups in the U.S. We get a pretty good view from the dealers themselves what they're seeing with the consumer behavior. And so far the market - as recently as yesterday, a couple of them I talked to - has behaved exactly like we thought it would this year. They seemed to be handling inventory pretty well. They seem to be handling used car sales, which is really - what they really watch. So far at least through July, I think the market has behaved about like most of us thought it would. Could that accelerate? I think, fair question. Could the models shift on what the consumer likes or not likes? I think, the guess is - anybody's guess, we'll just have to watch that. But so far, it's been about what we thought it would do this year.

And then just quickly, the inventory issues or drawdowns you talked about before, have they lingered until third quarter? Is that kind of pretty much done? I don't know if you answered that or not.

Charlie?

Robert, do you want to comment on - oh, I'd be happy to. I think right now, I think it's pretty much at least for the acquisitions that couple of these gentlemen have done, I think a lot of that has worked its way through the system, and we don't anticipate any other big step downs. A lot of this will be around pre-buys and thinks like that. So we could still get quarter-to-quarter fluctuation as a lot of you follow the company for long time. You see it every once in a while in a quarter, because of pre-buy or because of a brand shift on somebody's shelves, they may move something around. An issue for us is a couple of these national distributors are big enough with us that they can move a quarter, and again, they're multiline distributors. So in many cases, it may not even have anything to do with us. It may be some other pre-buy they've done with another supplier, could be actually may not be paint related as they move their working capital around. So I think to a large majority, most of this has worked its way through. But we do see these perturbations from time-to-time when it actually has nothing to do with us. We always just want to make sure that they are never the distributors themselves, because they do run their own businesses. They are an extension of us, but they're independent businessmen. We do try to make sure they never put us in a situation where they could stock out or hurt any of the end customers that we all care about, but I think to a large extent a lot of that has worked through.

Thank you very much, guys.

And the next questioner today is going to be Don Carson with Susquehanna Financial. Please go ahead.

Thank you. Where are we overall in the raw material inflation cycle? And what do you see as the cadence of margin pressure as you attempt to raise prices is - was Q2 the greatest pressure? Do you expect that - or do you expect that to increase in the second half? And as you compare this inflation cycle to maybe - and I know some of you weren't there, but say 2011, 2012, is your ability to raise prices greater or lesser than it's been historically?

I'll start on that one. In terms of what we're seeing actually flow through our financials and then looking at the prices at which we're purchasing, we've seen material - raw material inflation from a purchasing perspective starting in Asia as back as - as far back as the beginning of the first quarter, and then we've seen that gradually moved to other regions. So I think we've seen some headwind from raw materials in Q2, given the lag effect, I'd expect we would see additional raw material inflation in Q3 and potentially peaking in the early part of Q4, based on our forecasts and then leveling off, given the prices that we currently see in the market. Of course, that could change if prices move up or prices move down. And I think, Axalta as well as other competitors in the industry have been increasing prices commensurate with that raw material move. There were back in the time period that you referenced, according to some of the historical data that we've seen, very sizable price increases to compensate for raw material moves. So I don't think it's something that's new to the industry or our customer base. It's just something that we have to go out and execute.

So with the lag in pricing you'd expect the gross margin pressure then to sort of peak when raws peak in Q4?

Yes, I think it would be after the peak, it would be after the peak in the raws. I don't think we see the raw materials peaking in Q4. I think we see the raw material prices themselves potentially peaking in Q3, but because of the lag effect, the flow-through, continuing to go through and perhaps peak in Q4.

Okay, great. Thank you.

And the next questioner is going to be Ghansham Panjabi with Robert W. Baird. Please go ahead.

Hi, good morning. This is actually Matt Krueger sitting in for Ghansham. Just wanted to ask, can you describe what level of acceptance you guys have seen in terms of your pricing actions across your various markets? And then how much longer do you expect pricing pressures to persist in the auto-related markets?

Charlie? Okay, I'll take that one.

Yes, I'm sorry. Yes, sorry, I was on mute there. So it's very different in every segment. I think, when we think about the Refinish marketplace, when you look at the price pressures there, it's really - those are really more - much more fragmented, standardized market. And I would say, we're in our cadence of normal routine price increases during the year. So again, there is some anomalies when you're talking about distribution channel mix that don't really have anything to do with just normal pricing actions. In the Industrial marketplaces, we've really just started raising prices over the past quarter, from the standpoint of - from a raw material perspective. So I think it's still too early to see as we're rolling through that. I think overall, as we've always highlighted these kind of things take a quarter or two as contracts allow, as other agreements work through. But I think we will - the coatings industry as a rule, we get the price, it just takes a quarter or two, in some cases, to be able to move that through the marketplace, explain it to customers and confirm that it is really not just a blip on the screen and it is truly something that deserves pricing discussion. I think on the OEM side of the business, those discussions go over time. They're always linked to multiyear agreements. On solvents and things like that, in many cases, we have formulas in place. As we've highlighted this past year, a lot of the raw material price increases are not related to the price of oil or gas. There are other structural changes in specialty chems or in TiO2 pigments, things like that. So those pricing increases are always ongoing. And I think that any kind of big movements just take time, which can take a year or two as we work through contracts with them. I don't know, Robert, do want to add to that?

Yes, I think the only nuance there and I think the question was - the previous question as well about is there anything different now from before. I mean, I think the one difference now is that what we're seeing in terms of raw material pressures, it's not really driven as much by the price of oil and by overall demand. This is really a supply driven squeeze on prices. And I think getting some customers to fully understand that compared to the paradigm that they might have seen before that takes a little bit of work. But I think at the end of the day, they understand it. And as Charlie said, we've - have launched our price increases across our end markets over the last quarter.

Okay. That's helpful. And then given that you called solid mid-single-digit in the Industrial markets on an organic basis, can you provide some added detail on what specific end markets drove this growth? If it's sustainable moving forward? And then what are your plans on kind of improving profitability and productivity in North America and Europe where you called out a little bit of a weakness?

So on the Industrial business, just to highlight a couple areas that are performing well and maybe one area that's not. I think on the wood, wood coatings has performed very well for us in the second quarter, granted it's only one month, but we have the July data now as well. And they had another gangbuster month. And if you look at coil, coil also continues to perform quite well for us, and we're starting the process of rolling that technology out in other parts of the world as well. So I think we're very excited about the steps we've made in coil. The most challenged segments within Industrial has been powder, due to the rapid rise in key raw materials for that product line and increasing price in a market that can be extremely competitive and extremely competitive locally. So as we've gone through and taken a hard look at that business, where we've really focused is looking at individual product and individual customer profitability. So what we've really been doing is focusing on what are products or customers that are below acceptable margin thresholds. Is our cost structure appropriate? And if it is adjusting prices upwards to make sure that we're at the right level. In terms of the actual underlying organic growth, again oil and gas, you see some pressure - functional pipe and valves, of course, you see some pressure, but there are other segments within Industrial, where there is actually pretty decent growth. So I think overall, it's the - there's some pros and there's some cons in the business.

Great. Thank you.

And the next questioner today is going to be PJ Juvekar with Citi. Please go ahead. Mr. Juvekar, your line is open for question. The next questioner today will be Kevin McCarthy with Vertical Research. Please go ahead.

Yes, thank you. Good morning, gentlemen. A question on capital deployment. How would you compare and contrast relative opportunities for ongoing M&A in the back half of the year given your view of the pipeline as compared to prospects to accelerate repurchases against the $675 million authorization you unveiled back in March?

So obviously, our leverage ratio went up during the quarter, but that was predominantly driven by the fact that we only had one months' worth of EBITDA from the new acquisitions there. So if you look at it on a more full year basis and where we expect to be by the end of the year, of course, that leverage ratio will come down plus when you look at the natural cash generation ability of the organic business, we will still continue to generate significant cash flow. So I think a reasonable expectation there is, we're very focused on integrating the acquisitions that we have done, but we remain active in terms of looking at attractive bolt-on and attractive transformative M&A transactions, and we'll take advantage of those as they - take advantage of those as they come up. In terms of use of excess cash beyond that, given the fact that our debt is at a weighted average cost of less than 3.5%, debt repayment isn't the most attractive option right now, investing in the business through M&A is, and after that, share repurchase. So I think we will continue on the share repurchase side to be opportunistic as we go through the quarter.

Very clear. I appreciate the comment.

This will conclude the question-and-answer session. I would like to turn the conference back over to Charles Shaver for his closing remarks.

All right. Thank you. And I'll be brief. I know we ran over a little bit here today trying to accommodate everybody's questions. And - again, a very busy quarter for us, a lot of great things going on from the acquisitions, from some of the new facilities that we brought on online that we've been working on for a while, some of our new customer capabilities in our new tech centers, both in Asia Pacific and in our Refinish training centers around the world. So very pleased, our markets remain solid, our end markets that we talked about today. I think the challenges for us, not inconsistent with industry right now, are dealing with some of these rising raw material prices that we've talked about and then relatively low organic growth in coatings. We're 2%, as I think someone highlighted earlier, that's what we had planned - that's where we thought we would be coming through the back first half of the year. We do see good solid markets, but clearly organic growth is a little bit challenged, and we have to work a little harder to go get it. So I think we're focused on that, continue to be focused on the cost initiative side. We've reduced capital spending or delayed it a little bit here to manage our free cash flow, which is ultimately what we're focused on in this company. And I think - so I think we got all the right metrics in front of us. And I think we got a good team, happy with the acquisitions we've done and just focused on capturing our fair share of the organic growth. So again I'll wrap up. Thanks everybody. We went a little bit long today, but I think with all the activities in the quarter, it was probably warranted, and appreciate all your continued support in the company. Thank you everyone.

And the conference has now concluded. Thank you all for attending today's presentation. You may now disconnect.