Axalta Coating Systems Ltd. (AXTA) Q3 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Axalta Coating Systems’ third quarter 2015 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. [Operator Instructions] Today’s call is being recorded. Replays of this conference will be available through November 4, 2015. Those listening after November 4, 2015 should please note that the information provided in this recording will not be updated, and it is possible that the information will no longer be current. At this time, I will turn the call over to Chris Mecray, Vice President, Investor Relations for Axalta Coating Systems for a few brief legal notices. Please go ahead.

Good morning, everyone. This is Chris Mecray, Axalta’s VP of Investor Relations. We appreciate your continued interest in Axalta and welcome you to our third quarter 2015 financial results conference call. Joining us today are Charlie Shaver, Chairman and CEO; and Robert Bryant, EVP and CFO. This morning, we released our third quarter 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 the prepared remarks and discussion during this call may contain forward-looking statements, reflecting the company’s current view of future events and the potential effect on Axalta’s operating and financial performance. These statements involve uncertainties and risks, which 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’d now like to turn the call over to Charlie.

Good morning and thank you for joining us today as we review our third quarter 2015 financial results. I’d like to begin with some highlights from the quarter and broader comments on our progress. Then, I’ll turn the call over to Robert who will provide a little more detail on our financial results and full-year guidance. We’ll then be available to take your questions. So if you would refer to slide 3 of our presentation, I’m pleased to report that our overall strategic execution for Axalta remains on track through the quarter. This quarter demonstrated our continued volume growth coupled with margin expansion, keeps us in line to meet our previously communicated goals for the year in net sales and adjusted EBITDA. Our reported $217 million in adjusted EBITDA exceeded the midpoint of the target range we communicated in August. Also importantly, we generated over $122 million of free cash flow in the quarter, which enables us to continue our balanced and value generating capital deployment plans. We remain focused on our initiatives to grow the business, refine our cost structure and improve our operating discipline as we transform Axalta to a best-in-class publicly traded company. Turning to sales, from a financial perspective, our third quarter was in line with expectations. Net sales increased by 3% over last year’s third quarter, excluding unfavorable currency translation impacts of over 13%. Volume growth in this third quarter was 2% with more contribution for performance coatings and we did feel some downward pressure with slower than expected demand growth in China that has been extensively covered in the press. So we continue to launch new business with a variety of customers in China. This was offset by reduced volumes from existing lines as a lot of our customers aggressively reduced inventory levels, particularly starting in July and all the way through August. On subject to global demand, overall, we believe our net sales results suggest that overall balanced global demand backdrop for all of our products across each of our end markets and in most regions, a leading region in this aspect, with automotive and commercial truck demand quite strong. Automotive refinished markets are all well supported by increasing miles driven, propelled by low fuel prices and new car sales growth. In Europe, excluding Russia, we’ve also seen signs of real improvement in the third quarter, notably with firming automotive production for periphery nations that have suffered multi-year recessions. And emerging market nations continue to face headwinds; this has been true for us over a year now. Demand remains challenged, notably in parts of Latin America and Asia Pacific. And in China, the market is well understood to have slipped somewhat in the third quarter. So the combination of demand reduction and dealer inventory corrections led to pullback of production by the automotive OEMs. Axalta’s results in the quarter in China largely reflect this market performance though we are starting to see offsetting benefits from market outgrowth given the new launches for us that have been progressing over the course of 2015. We’ve also noted that September data from China indicated a small increase in overall production of over 2%, which showed a solid sequential pickup as well as healthy amount of destocking auto inventory in the channel, the direct result of extend plant shutdowns that were taken by customers in July and August, and in some cases lasting over two weeks. We noted that our customers are trying to do more normal production pattern in September and near-term demand forecast point to continuation of the same as we progress through the fall. This outlook seems to be supported in part by the announced cut in registration taxes from 10% to 5% to be paid on smaller cars that represent the bulk of the sales in the country which are an effort to support overall production and sales against a slowing economic backdrop. On the subject of EBITDA, the third quarter profit [Technical Difficulty] adjusted EBITDA of $217 million, really reflected our continued focus on profitable growth, rightsizing our cost structure and operational execution thought we saw unfavorable impacts of currency translation as compared with 2014. Although a negative year-over-year comparison on a GAAP basis, given factors including this negative currency pressure, we continue to see very solid margin expansion which reflects our ability to effectively manage our cost structure. Our adjusted EBITDA margin of 21.7% increased 110 basis points from 20.6% in last year’s third quarter. Year-to-date, our margin is 21.2% versus 19.4% for the same nine month period in 2014. We are offsetting a negative impact of currency through profitable growth, a leveraged cost base and the impact from our key productivity initiatives as well as the overall adoption of metrics-based management practices which we believe are already making the significant impact on behavior and the results across the company. This demonstrated by the margin expansion driven by the dropdown benefit of incremental sales growth of 5.5% year-to-date before currency effects. Regarding variable cost savings, we continue to work with our supplier base to adjust our input cost to market rate and we've made very good progress as we saw a slightly higher rate of savings sequentially in the third quarter. With potential modern additional capture looking ahead, based on our current read of market prices across our raw material basket. Turning to guidance, we still believe net sales for the full year to be in the range 5% to 7% excluding the impact of currency as we continue to move forward with our expansion project in Germany and Mexico as well as having completed our first M&A transaction in July. We've also commented on our adjusted EBITDA guidance range, noting higher confidence at the lower end of range of $870 million to $900 million. Though we're gaining traction among our productivity initiatives, we feel that some of the incremental headwinds with us in the third quarter including currency in the slowing of China combined to tilt our confidence towards the lower end. As I stated last quarter, product demand across our markets remain generally supportive in each of our segments and our end markets. That being said, the economic pressure in certain countries intensified in Q3 including Brazil and China, which along with the transitional impact of weakening currency are all factors we feel like need to be considered in the outlook. Turning to slide 4. Taking a look at our progress year-to-date with respect to our 2015 operating and financial goals, we remain pleased by our current market and product position, we continue to execute on our plan in a disciplined manner to create shareholder value through profitable revenue growth, strong cash generation and total shareholder return based capital allocations. We’ve highlighted a few of those milestones for you from the third quarter. In terms of revenue growth, our net sales growth remained on plan through the first nine months, driven by solid growth on a constant currency basis as I mentioned earlier totaling 5.5%. In the third quarter, we saw volume growth from both segments, so clearly more tilted towards refinish given impact from China and Transportation during the third quarter. In terms of highlights North American demand remains very strong in both segments and we are pleased by the volume growth generated in our industrial end markets. Taken a moment to look at those end markets. In refinish, we continue to target global growth leveraging our leading technology and strong positions in core markets to drive growth in emerging markets. We are also gaining share alongside our customers in North America in both the MSO and the core collision segment. This includes growth in large, medium and small shops, so we are very pleased that our offering at this point in time we believe benefits all customers across the spectrum of size and shape in the industry. In industrial, our goal of accelerating growth through a modest share base saw tangible success in Q3 with a 5% net sales growth before currency effects. We saw key account wins in North America as well as solid volume growth in other regions in the quarter as we look to extend our strong technology and new niches and leverage existing sales and marketing efforts this year, all despite of a clearly more constrained industrial macro environment that makes our growth in industrial perhaps standout even more. In the light vehicle segment, we continued to launch our new customer platform contracts in 2015 and made solid progress year-to-date. So the volume benefits from many of these launches will accumulate gradually and have a more notable impact upcoming on our 2016 results once those new plans are fully online. This year we have seen incremental new volumes in several key regions offset somewhat in Q3 by destocking and production pullbacks in China. Overall, we remain very confident in our leading technologies and continue to serve our customers globally with strong success evidenced by the broader market share gains that we’ve achieved in multiple regions since our separation. In the commercial vehicle segment, we benefited from strong overall Class 5 through 8 truck demand in nearly all regions this year. Strong overall volume growth continued in the third quarter and we continue to grow market share in underserved markets that we previously were not focused on in prior years. With respect to the Axalta Way, our Fit-For-Growth and our Axalta Way initiatives for productivity enhancement and cost reduction, we remain on track to meet our commitments for both programs, including $200 million in combined run rate savings by the end of 2017. Our expectation of combined savings from these programs remains within the $30 million to $35 million range in 2015 and building from there as we go into the following year. From a subject of capital allocation and M&A, regarding capital occasion, nothing has really changed in our priorities and Axalta remains committed to balancing high return organic investments in the business while reducing our net debt leverage using our excess free cash flow. At the end of Q3, our net debt to last 12 months adjusted EBITDA was 3.7 times, similar to last quarter. We continue to expect solid fourth quarter free cash flow as is typical for our cash seasonality and we just recently pre-paid $100 million of our term loan debt in the latter part of October. Regarding our interest in M&A transaction, we did complete our second transaction in 2015 during the third quarter buying a distributor in the Benelux region called Metalak. This transaction will be typical of our current focus seeking to close lower-risk transactions close to our existing markets and paying prices that allow for solid returns on capital. As I’ve commented before, we continue to evaluate transactions in our core end markets and expect to gradually increase our deal base as we move forward taking advantage of ongoing consolidation in the coatings market while also possibly extending our technology and market positions in select performance coatings niches. As always, we will seek to balance this capital allocation with an eye towards enhancing our internal capital and shareholder returns. Wrapping up, I would like to simply comment, we believe we have a powerful business model in Axalta. Our business features a resilient after-market refinished business as our largest end market. We have a broad product portfolio that expands in number of markets that is very geographically dispersed. We think that this diversity is the right play long term and have a competitive advantage even though it does necessitate that we endure the current challenging foreign currency translation environment. We believe the benefits of the local market wins significantly outweigh the negative optics of the current gap currency situation. In our largest regions, Europe and North America, we're growing and have increased market share in a variety of areas. Finally, we have several operating levers we can continue to pull to improve the productivity of our cost structure and returns of our capital investments. Over time, this should show up and will result in a strong free cash flow with optionality on additional delevering or inorganic growth. I'd now like to turn the call over to Robert who will walk us through Axalta’s financial results in more detail as well as review our updated guidance. Thank you. Robert?

Thanks, Charlie, and good morning. Please turn to slide 5 of our earnings presentation where you'll find our Q3 consolidated results. Constant currency net sales for the third quarter of 2015 increased 3.1% year-over-year driven by a combination of volume growth and higher average selling prices in both segments and in most regions. Foreign currency translation reduced reported net sales by 12.9% in the quarter, again mainly from devaluation of the euro and certain currencies in Latin America. On a sequential basis, the currency impact was slightly greater than the second quarter overall. Axalta’s net sales volume on a consolidated basis grew 2.1% over Q3 2014 reflecting growth across both segments and in nearly all regions. In North America, volumes were up 5% led principally by Transportation Coatings, which had growth similar to last quarter. In Asia-Pacific, volumes were down slightly due to the reduced production rates by our customers in the quarter. Latin America continued to post positive volume comparisons led by refinish and solid commercial vehicle production. Finally, EMEA volumes were relatively flat reflecting the impact of headwinds from Russia and Eastern Europe, but they showed solid growth overall, excluding those two markets. Although the price contribution in the quarter of 1% overall was modest, we continue to track on plan at each segment individually according to our broader pricing strategy. Third quarter adjusted EBITDA of $217 million compared with $228 million in Q3 2014 with the negative comparison largely driven by foreign exchange rates was offset by moderate net sales growth leverage. Variable margins also benefited from moderate raw material cost relief in Q3 at a level slightly more than Q2. Adjusted EBITDA margin expanded by a strong 110 basis points from last year to 21.7% from 20.6%, primarily driven by volume and improved selling prices coupled with cost savings from cost improvements and productivity enhancement. These positive underlying trends were offset somewhat by moderate cost headwinds from investments made to support future growth across our businesses. Moving on to Q3 2015 Performance Coatings results on slide 6, net sales in our Performance Coatings segment increased 5.1% year-over-year before the impact of foreign exchange driven by growth in all regions. Volumes increased 3.4% for the quarter also in all regions, though EMEA results remain constrained by a weak environment in Russia and Eastern Europe. Average selling prices were up 1.7% with higher price growth coming from refinish compared to industrial. The volume and price increases were offset by 14.6% unfavorable currency exchange translation on the topline, again primarily driven by the euro and currencies in Latin America. Net sales in our refinish end-market increased by a solid 5.2% year-over-year on a constant currency basis, including as anticipated pricing gains and moderate volume growth globally. Notably, our core pricing in refinish, excluding foreign exchange pricing was higher in Q3 than it was in the first half of this year. Constant currency net sales in our industrial end-market increased 4.7% year-over-year as we posted some really strong growth against the fairly constrained industrial macro climate. Volume growth was led by gains in North America and in EMEA driven by bottoms-up account gains from a more focused sales effort and a larger sales force. Performance Coatings generated adjusted EBITDA of $139 million in the third quarter, a negative comparison from the $149 million, primarily reflecting the unfavorable impact of currency headwinds. Adjusted EBITDA margin jumped 70 basis points to 23.1% on the drop through of volume, price and cost improvements. Switching now to our Q3 2015 Transportation Coatings results. Net sales on our Transportation Coatings segment increased a modest 0.2% year-over-year in the third quarter before foreign currency translation impacts of 10.5%. This result included ongoing volume growth in North America and EMEA, but some pull back in Latin America and in Asia-Pacific sequentially. Net sales in our light vehicle end-market declined 0.9%, excluding foreign currency translation in Q3, including volume growth in North America and EMEA, offset by reductions in Latin America and Asia Pacific. Net sales in our commercial vehicle end-market continued to grow at 4%, excluding foreign currency translation due to strong volumes in nearly all regions in both truck and other vehicle segments. Transportation coatings generated adjusted EBITDA of $78 million in the third quarter, fairly flat versus $80 million in the year ago quarter with progress in our cost initiatives and favorable trends in raw materials, offset by foreign exchange impacts. Segment adjusted EBITDA margin in Q3 grew by 170 basis points to 19.5%. Moving on to some balance sheet items on slide 8, as of September 30, cash and equivalents totaled $412 million versus $308 million as of June 30, while total reported debt was $3.55 billion, resulting in a net debt balance of $3.1 billion. Our net debt to latest twelve-month adjusted EBITDA ratio remains at 3.7%. Our expectation continues to be for solid free cash flow in 2015 and we expect the seasonally strong working capital result in Q4 to finish the year. Free cash flow in the third quarter improved as expected to $122 million, CapEx of $37 million, which is on target for our annual budget of $150 million. Regarding our capital allocation focus, we continue to focus the majority of our free cash flow on debt paydown, targeting leverage of 2.5 to 3 times net debt to adjusted EBITDA. We’re also investing substantial capital in inorganic investments with solid IRRs as reflected in our CapEx guidance of $150 million, which includes $90 million of growth and productivity spend for the full year. We remain satisfied with the range and opportunity of these projects. Charlie mentioned our interest in M&A, which is a feature of our planning and we executed on one small transaction that he highlighted in the third quarter in Europe. Moving onto slide 9, excluding foreign currency impacts, 2015 net sales are still expected to grow by 5% to 7% over last year and we have updated our FX assumptions that now imply net sales growth in the mid-single digits versus our previous expectation of a low to mid-single digit growth rate. Our constant currency growth is still expected in all regions and end markets. So we recognized some incremental impact since our last quarter from weakening conditions in Latin America and Asia Pacific. Our outlook for the year assumes a continuation of the gradual improvement in China light vehicle for the balance of the year, consistent with updated market forecasts. We continue to expect to generate adjusted EBITDA of $870 million to $900 million. Given the increased foreign currency impact plus more moderate assumptions for growth in Latin America and Asia Pacific, we do anticipate that our result will likely come in closer to the bottom of this revised guidance range. Other expectations for the year remain unchanged. We expect our normalized effective tax rate to be between 27% and 29% of pre-tax earnings, capital expenditures to be approximately $150 million and net working capital to be in the range of 13% to 15% of net sales, excluding the unusual items of $95 million carryover from 2014 and 2015 restructuring spending that we highlighted on previous calls. This concludes our prepared remarks. We would now be pleased to answer any questions you may have. Operator, would you please open the lines for Q&A?

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Ghansham Panjabi with Robert W. Baird. Please proceed with your question.

Hi. This is actually Mehul Dalia sitting in for Ghansham. How are you doing?

Good morning, Mehul. How are you?

Great. You outlined $30 million to $35 million in cost savings this year, how much are you expecting in 2016 and then in 2017?

We haven’t provided guidance yet on the cost saves for 2016 and 2017. We expect to provide some guidance on that with our Analyst and Investor Day on December 4, but there is a pretty significant ramp up in the cost saves between 2015 and 2016.

Okay. Great. And then can you provide some more details on trends in your industrial business, how is demand during the quarter in the various end markets that you're exposed to?

I think on the overall -- as far as the industrial markets go, we continue to see pretty steady performance in North America and in EMEA, we’ve seen you know as we talk about previously when we look at Asia Pacific and China industrial activity has been subdued, we've actually been flat this year out there in that region but actually seeing growth in our markets in the other three regions.

Great, and just one last one. There was a significant jump in share counts sequentially, just wondering what drove that? Thank you.

Yeah, the increase in the number of shares on a fully diluted basis is a stock exercise.

Our next question comes from the line of Bob Koort with Goldman Sachs. Please proceed with the question.

Good morning, this is Chris Evans on for Bob. I was hoping you could talk about what's going on in China OEM, there was a lot of chatter going into the quarter, PPG seemed like they were able to mitigate some of that, maybe you could provide a little guidance on that?

So, yeah, overall with mix in comments overall about China and then specifically about light vehicle. I think overall as we look at that market, market sentiment is better, Q3 GDP was reported at 6.9%. Auto production is expected to continue to rebound, the government’s lowered interest rate to spurt consumer spending and consumer sentiment is getting better with the backdrop of a more stable stock market. Now I’ve seen in the market there was a Q3 slowdown in China and the September data from China indicated a small increase in overall production of 2%, again in September, which showed a solid sequential pickup as well as a healthy amount of destocking of auto inventory in the channel and that was really a direct result of extended plant shutdowns that several OEMs took in July and August. The government has really sought to arrest the slowdown in auto that occurred in June, July, and August by reducing interest rates to encourage additional consumer spending.

I think just one additional comment on that I think our market in refinish and commercial vehicle and everything performed fairly close to expectations as Robert mentioned, really what we saw was with couple of our bigger OEMs, they took turnarounds in July and August and actually just stayed down an extra week or so and started coming back in September. So, I think our general view going forward is they’ll continue to ramp back up but again maybe at a little slower rate than originally anticipated but we really saw -- and we had actually seen this probably coming a little bit in a couple of OEMs where they had been building some inventory in the first half of the year and we were curious how they were going to address that and to a larger extent they addressed it pretty swiftly in July and August.

Just a quick follow-up. You talk about your new business wins and there's a bit of delay with some of your Chinese partners there, how is the pipeline looking for new business?

Pipeline in China is actually quite strong again I think as we highlighted, we had 32 wins that we expect to come online globally, about half of those are -- a little bit more than half of those are in China in 2015, 2016 and 2017. Many of those launches of course happened this year and start and gradually ramp up during the year but really when the bulk of that volume starts to flow through from an Axalta perspective and also from unit produced at those plants is really in 2016.

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

Yeah, good morning fellows. The question, you talked a couple of times about inventory destocking at your customer level. And I was just curious is that them destocking their finished goods i.e. automobiles or is that them destocking physical gallons of paint sitting on their plant sites. And then volume metric, what would be kind of a big destocking hit to you guys, is that 1% or 2% of your volumes in the quarter?

Duffy on that point, it's primarily destocking that we saw in the automotive dealer channel in China. Inventories were up in the mid-to-high 50s in the terms of average days sold and we saw those dropdown into the low 40s according to some of the market data that we saw. So as dealers work down their inventory, you saw shipments slowdown and I think a lot of those OEM producers in China recognizing that, of course idled their plants and some of them maybe shutting down entirely for a week or two in that June July time period and also a little bit into August. But that does have in a given quarter somewhat of an impact to the results for the overall industry and Axalta as well. However, what we’re seeing in September, again as we saw 2% rebound in production and so far through this time period, through today in October, we are seeing similar trend that continues to indicate that there will be a pickup in October. And then according to the two main market research companies that forecast for that market, they are projecting a gradual pick up through the end of the year.

Okay, thanks. And then it seems like at least verbally on the call today, you highlighted M&A a little bit more than historic. Should we read into that that your deal pipeline looks a little bit forward than they did six months ago? And then kind of a corollary to that with the pain that some of the Asian markets have felt, has the willingness of folks to be sellers there and the multiples come down?

Hi, this is Charlie. I think our view always was this year that we would probably conclude a couple small transactions that may sense for us. We have as we moved into 2015, I wouldn’t say ramped up our activities, so we became very active in looking at all four regions in the world, looking at transactions with the view that as we go through 2015 and 2016, more likely than not, we would do small bolt-ons that make obvious sense for us right down our fairway and then over time, we might think about some larger transactions. I would tell you two thoughts on the pipeline. First of all, there is certainly plenty of activity out there as far as sellers. I think what we’re working through is staying disciplined on valuations. I would say expectations are still fairly high among most sellers. And I do think you will continue to see us over the next couple of quarters do several just tuck-ins that we think make sense for us, they’ve kind of been sitting on our plate for a while, unlikely we – that we would be launching on any big transformative acquisitions. I think we are trying to stay true to our direction here and balance that with all of our other desires for free cash flow among growth capital and paying down debt. So I don’t think you will see anything out of the norm for us, but I do think that we do have a nice pipeline and out there things that we would like to do over the next year, we will continue to navigate that with other demands. As far as, Asia Pacific specifically, again, I don’t think valuations have changed a whole lot yet. Certainly some owners are beginning to recognize that as they’ve seen their growth rates drop over the past year, that there is probably a day of reckoning coming, but I haven’t seen we certainly haven’t seen anybody drastically alter their views of their business yet, but I think we’ll start to see that in 2016. As we already said [indiscernible] some of these people who enjoy probably relatively rapid market share growth over the last couple of years and has now moderated.

Great, thanks guys.

Our next questions comes from the line of Ramanan Sivalingam with Deutsche Bank. Please proceed with your question.

Hey, guys good morning. Just quick question on the commercial vehicle and industrial obviously same amount out growth versus the market in the last couple of quarters. How are you guys thinking about the trajectory in terms of time where you can continue to outpace the markets there?

It’s Charlie, Ram. I think because as we’ve talked about previously in some regions like Asia Pacific, we compare relatively low market share and now make some arrangements that allow us to grow faster, I think we’ll continue to see above average growth on places like Asia Pacific. I think North America, where we already enjoy relatively good position, I think the general view is that market may come off a little bit next year. We haven’t seen it yet, but certainly there are people out there thinking in commercial heavy duty truck that market might slow mid-single digits next year in growth. If that happens, I think we are well prepared with some new accounts that we have to compensate for that. And if doesn’t, we will continue to jeopardize market growth. I think in the Europe, Middle East area, again, I think that market will stay relatively stable and we’ve got some good growth opportunities there next year to add to our portfolio.

Got you. And then maybe follow-up, again really strong performance in refinish, but a question on pricing. Is there any difference you are seeing in pricing between MSOs and some of the smaller medium-size and body shops?

This is Charlie again. I think as we look across our different segments and again our market is segmented in every region of the world, I think we see very similar margins across those very different business models. So how service is done and how things are priced are very different in those segments. But I would say that while the MSO growth gets a lot of press, we’ve actually seen nice growth in North America even in our core small shop segment. So we are very pleased with the fact that we believe our offerings are different across those segments has been well received in the past year or so. But I think as far as margins go, just very different business models, but I think again the value propositions are different and I think we see pretty similar margins across the portfolio.

Thank you, guys. That’s very helpful.

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

Yes, hi, good morning.

Good morning, PJ.

A question on commercial vehicles. You have a strong market share there, you grew 4% after a solid 2Q, are you seeing any moves by your competitors who sort of muscle in or is there any change market dynamics that you could see?

PJ, I think that that’s always a very competitive marketplace. I think every day we, all of us have to get up and earn our living. So I think the way we continue to stay in front of that from our standpoint is just innovation. We actually came out with a whole new set of more productive coatings this year than we introduced to the marketplace. There is a shift in some cases from solventborne to waterborne in some marketplaces like out in China, so I think you just have to kind of every day wake up and keep bringing operating submarkets just like we do into the light vehicle segments. But it’s already a very competitive marketplace. If anything, I think over time, the markets, the commercial markets are starting to favor the large multinationals over some of the locals just because of technology and I think that's where certainly we try to work with, there is a value proposition that is may be replacing a local player or disadvantaged player or there is a technology change rather than just trying to go ahead. But it is always a marketplace where the customers are always looking at alternatives and always benchmarking us and it’s very a competitive market.

Thank you. And, Charlie, one sort of long term question for you. Would you ever think about getting into architectural paints, I mean given that you have the technology, you have the marketing skills, you have a big shareholder in Berkshire, so is that something that you would think of down the road?

Yeah, that might be something for down the road. I think as we said, I think the next couple of years, our pipeline is pretty full with just what we’ve got going in this organic growth on the transportation side and then both organic and inorganic on the performance side. We do a couple parts the world has small architectural businesses, but it is not an area – I think in the next couple of years only through acquisition, if a business has a deco business with it, would we consider that. Now, one comment I would make is that we do have a foot in architectural that comes in through power coatings business, but it is not your classical as you would think of them on the deco side of the business, but we do. We are such a large powder coater that as you could guess one of our main segments there is architectural and we do well there, but again that’s a very different sale process than what you would see on the residential or the home improvement side.

So what you are saying is, after next couple of years you get all this cost cutting out of the way, you could potentially think about something like this?

Yeah, I mean, it’s out there, but it would be a couple of years out, you are right.

Okay, thank you.

Our next question comes from the line of Jeff Zekauskas with JPMorgan. Please proceed with your questions.

Thanks very much.

Good morning, Jeff.

Hi, good morning. What’s the stock comp number that was included in your adjusted EBITDA for the quarter and for the year in terms of your guidance?

So the stock comp number for the quarter, Jeff, was $7.9 million in expense and then on a full-year basis, it’s $22 million year-to-date. We're not expecting a material increase in that amount between now and the end of the year. And there is approximately another $8 million that could be accelerated under the Treasury method.

And $8 million, that would be accelerated for next year or for this year?

For this year.

For this year. Okay. Secondly, it looks like your industrial business accelerated a little bit in the third quarter. Why is that?

Yes, Jeff. This is Charlie. I mean some of that is, we’ve made -- as you remember all the way back to the IPO, we’ve made a very concerted effort to really focus and begin to grow that business. So it's coming in two ways. One, we’ve put additional sales force around the world and you see that a little bit in some of our pickup in the cost structure that was intentional. And then the second thing is, we're actually just taking some products that we had in certain regions and moving them to other regions and then introducing them. So it's kind of a combination of additional sales people out there and then also introduction of new products in this region and the sales that are going with those.

Okay. When you talked about your cost reduction, achieving 30 million to 35 million for 2015, is that for all of 2015 or that's a year-to-date figure?

That's a number, Jeff that we expect for the full year, the 30 to 35.

Right. So if you expect 30 to 35, then you need, I don't know, roughly 170 to hit your goal by the end of ’17, which is, I don't know, 85 a year, which would mean that you’d have to start knocking out maybe 20 million in costs per quarter and right now, it looks like you're doing something around 8 or 9. So…

So directionally Jeff, you’re correct and that the savings will ramp up. The piece of the puzzle there is that we already incurred $37 million of savings in 2014.

Oh, I see. So that limits…

Yeah. It’s a figure you bring it down to about 60.

So does that start up in the first quarter of, I mean do you get a material step-up beginning in the first quarter of 2016 or is it a more gradual increase overtime?

Yeah. We’ll provide in terms of the actual quarterly sequential or kind of how we see that playing out on Analyst and Investor Day, on December 4th, we’ll provide a little bit more insight into that, but certainly in terms of the -- there will be an acceleration in the way savings, that's pretty material as we go in to 2016 and 2017.

Okay, great. Thank you so much.

Our next question comes from the line of Aleksey Yefremov with Nomura. Please proceed with your question.

Thank you, good morning. What has been your experience with new customer wins in the OEM business this year? Are you continuing your market share gaining or perhaps losing?

This is Charlie. On the OEM customer wins, I would say they kind of continue at the same pace that we've had. Again, we were going to kind of trying to highlight number of new wins each quarter, but I think we have pointed out in the past that as you go through the year, you always have RFQs out there from different OEMs and I would say our win rate and new business versus old business continues at the same pace that it has. So very pleased with that. Again, some of those are new plants, our new lines that are coming up. In other cases there, technology or service offerings that have been brought to us. So right now, I think we're pretty pleased with as we go into ‘16 that momentum continuing.

Thank you. And then on the performance coating side, your role continues to accelerate, perhaps some of that is in the refinished business, what is driving that, some of the insurance companies have been talking about higher accident rate, is that one of the drivers or are you perhaps gaining market share in that market as well?

Yah. It's different in each region. Out in Asia-Pacific, it’s just share growth of the business going on. In North America, it's a combination of certainly the well-publicized MSOs and we top the MSOs and again these are not just the real large ones, but there is a whole host of mid-sized players out there. What they will report is exactly what you heard from insurance companies that the shops are full. And I think that's a result of increasing severity on accidents that are out there and I guess there is multiple reasons for that, texting and driving, all kinds of things going on, smaller cars. But also just a fact that miles driven are up 3% this year in North America year to date and you’ve got a car sales rate at 17 million to 18 million annualized. So I think in North America it’s a combination of things going on. The average age is still around 11, 10.5 to 11 years, so I think that the North America car build rate and sales rate into the refinish market will continue to be fairly robust over the next couple of years barring some economic pullback. So I think we feel pretty good about those kind of rates continuing. In Europe, it’s just general recovery due to market being up a couple of percent this year. Certainly seeing some of the periphery countries like Spain, Portugal, Italy are doing better than they have in the last couple of years and we've actually picked up some share in Europe in a couple of those countries because gaps felt by couple of our competitors. In Latin America, I would say Mexico up nicely even though we've had everyone has currency issue with the peso in Mexico, the market there has been up nicely year over year. And Brazil flat for us. So I think that the last comment on just North America since everybody seems really interested in that is that and again I think I highlighted earlier just that we're seeing a growth not only in MSOs but in the small and mid-sized body shops. Those are certainly still a very important area for us, it's one that we’re working hard on our value proposition, we’ve seen nice growth this year. So I think everybody is enjoying the unfortunate side of refinish, which is more accidents in North America and I think our general view is that will continue, both the consolidation, the MSO consolidation but also just an increase collision market over the next couple of years.

Very helpful thank you Charlie.

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

Hey guys, thanks for taking my question. So just want to understand the cost savings side a little bit more, if you did 37 last year and you're targeting 30 to 35 this year, does that mean that your 870 to 900 EBITDA range, does that include $72 million of cost savings or is it, that you’ll at a run rate of $77 million.

So those are incremental savings off of 2014, the 30 to 35, so those are incremental off of the numbers that we achieved in 2014. So that the 870 to 900 includes the $30 million to $35 million cost saving estimate.

Okay great, and to relatively large range with one quarter less here in the year, so I guess just help us understand would you at the lower end or the upper end, it sounds like you're targeting a lower end. And then maybe you can also talk a little bit about your raw material potential benefit and how that works out for the year?

So, this is Robert again. So on the range, I mean, I just reiterate again that this is our first year as a public company, we started out the year with a fairly broad range both topline and EBITDA. We're coming into the fourth quarter and this is the first year as a public company we thought we would take the liberty of continuing with that range. When you think about the things that could drive you to the upper end of that range versus the lower end of the range, for us the biggest driver of that is going to be currency. Currency has moved around quite a bit we filled in a currency assumption for fourth quarter but if actual currency ends up being worse than what we projected, we could end up more at the bottom part of that -- on the bottom part of that range. Conversely, in particular if the euro were to materially strengthen that could be a nice tailwind for us. The second element is that we have assumed consistent with the market forecasts a gradual recovery not a hockey stick recovery by any stretch of the imagination but a gradual recovery in the China light vehicle markets throughout the end of the year. And that would be the other element that you know it’s different could bring us down into the lower end of guidance.

Great. And can you just talk a little bit about potential raw material impact, I mean, by my math there is $2.5 billion or so in cost of goods sold. I would imagine fair amount of that is in raw materials. Would you expect any incremental benefit from raw materials in 2016 and why or why not?

So I think, your original question is about – as we look at guidance in terms of raw materials, I think we saw a step up in raw materials savings sequentially between Q2 and Q3. We could see some small incremental savings between Q3 and Q4 based on where oil prices are currently at and have been for the last few weeks, but it’s not going to be – we don’t expect it to be material. And then in terms of 2016, again, we haven’t provided any guidance on our raw material outlook yet for 2016. Based upon what we see today, there is not anything to indicate that the environment is going to be dramatically different than what it is today. So I think our best guess based on today’s data is relatively flat, but that’s going to change a lot over the next three months as we finalize our budget and our guidance for 2016.

Okay, great. Thanks.

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

Good morning, guys. Was price negative in light vehicle in the segment little hard to tell?

We don’t typically comment on price at the end-market level, however what I would say is, at the beginning of the year, we expected in transportation, both in light vehicle as well as in commercial vehicle for price to be relatively flat during the course of the year and for most of our sales growth to come from volume and that is indeed how it’s played out during the year.

I wish they, John, on that because one of the questions we’ve got in the past is just had there any give backs to OEMs during the year and the answer there is no material give backs. So any kind of price bouncing around would have just been – just normal mix or shifting from one OEM to the other. There has been no downward pressure from the OEMs as we gone this year.

Okay. And then it sounded like price accelerated in the refinish business. What’s allowing the acceleration in price?

I think as we talked about kind of in the first few quarters in terms of Performance Coatings, what we saw in our most important market there in the Performance Coatings segment, again is I think quarter-to-quarter, price can move around. And in the third quarter, we saw strong core pricing, excluding any FX pricing adjustments in the quarter. Nothing really substantially different there in terms of the market dynamics, hasn’t more to do with the timing of price increases and their calendar [indiscernible].

Okay, thank you.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. Mr. Shaver, I would now like to turn the floor back over to you for closing comments.

Yes, thanks everyone for all your interest and certainly few questions. We look forward to dialoguing with you over the next few days and your questions that you may still have around the business. That would just summarize as we come out of third quarter and look into fourth quarter. Overall, as we mentioned today, I think our markets remain healthy, our customers as a whole remain in really good shape. And I think the year with the exception of currency, we are very pleased with year-to-date, the progress we have made both in customer wins, our productivity. If you look at the amount of currency translation we’ve had this year, I’m proud of the team and being able to more than offset that with productivity and sourcing initiatives and other things that’s going on in the business. So as we go into the fourth quarter, as Robert mentioned, I think our major variability is probably still currency translation more than anything else. Certainly or hopefully what we have highlighted for you today is pretty good look at our markets and the fact that overall they remain with the exception of a couple of spots such as Brazil and Russia in relatively healthy condition as we go into 2016. Certainly we look forward to our Analyst Day that we are having and the Investor Day in early December with lot of you, an opportunity for you to meet some additional members of our management team and share our views as we go into 2016. So with that, thank you and look forward to the quarter.

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.