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Axalta Coating Systems Ltd  (NYSE:AXTA)
Q4 2018 Earnings Conference Call
Jan. 30, 2019, 8:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Axalta Fourth Quarter and Full Year 2018 Earnings Conference Call. All participants will be in a listen-only mode. A question-and-answer session will follow the presentation by management. Today's call is being recorded and replays will be available through February 6th. Those listening after today's call, should please note that the information provided in the recording will not be updated and therefore may no longer be current.

I will now turn the call over to Chris Mecray. Please go ahead sir.

Christopher Mecray -- Vice President, Investor Relations, Treasury and Strategy

Thank you, and good morning. This is Chris Mecray, VP of Investor Relations. We appreciate your continued interest in Axalta, and welcome you to our fourth quarter and full year 2018 financial results conference call. Joining me today are Robert Bryant, CEO; and Sean Lannon, CFO.

This morning we released our quarterly financial results and posted a slide presentation in the Investor Relations section of our website at axalta.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 risk and actual results may differ materially from those forward-looking statements. Please note that the Company is under no obligation to provide updates to these forward-looking statements.

This presentation also contains various non-GAAP financial measures. In the appendix, we've included reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information regarding forward-looking statements and non-GAAP financial measures, please refer to our filings with the SEC.

I'll now turn the call over to Robert.

Robert Bryant -- Chief Executive Officer

Good morning, everyone. Today I'm pleased to share with you our financial results for the fourth quarter and full year and key operational highlights and a few changes, we'll be making to our financial reporting basis and presentation consistent with our evolution, as a public company and based on shareholder feedback.

Our fourth quarter results, net our previously communicated ranges for 2018 guidance on both the top and bottom lines with fourth quarter organic net sales growth of over 2% and adjusted EBITDA of $235 million. We also exceeded our free cash flow expectations for the fourth quarter, which generated a full year result of $362 million compared to our October guidance range of $330 million to $350 million.

Customer demand and overall business trends remained generally consistent with our last quarterly update in October. We saw ongoing organic net sales growth in our Refinish and industrial end markets, strong continued price recapture in Performance Coatings that offset input inflation and positive volume in North America Light Vehicle. We also saw the first reported quarter in over a year with positive price mix in transportation, which is the first step and showing progress on our global efforts to offset variable cost inflation in this segment. We anticipate ongoing stability in each of these items looking forward into 2019.

On the flip side, we witnessed ongoing auto production slowness in China, as well as signs of reduced overall business activity in Europe. Overall, we're satisfied with our 2018 results especially considering the headwinds from inflation, foreign exchange and light vehicle pricing. Some of these headwinds will persist including expected inflation impact to the P&L at least through the first half of 2019, but we're encouraged that we seem to be passed the peak in some aspects to the inflation effect, while FX impact appear sequentially stable.

Turning to Slide 3, I'd like to review some highlights from the quarter. We grew Q4 net sales by 2.7% year-over-year excluding the impact of foreign exchange, including substantial benefit from improved price and mix in the period.

Net sales in Performance Coatings increased an impressive 6.4% before FX with comparable growth from both Refinish and Industrial end markets. This growth came largely from improved price mix in the period. Volumes were stable globally, but with some regionally specific variations, including some slowing in Europe within both end markets.

In Transportation Coatings, net sales decreased in the low single digit with split between the Light Vehicle and Commercial Vehicle end markets. One encouraging aspect in this segment was the reported increase in price mix at 0.8%, which was the first positive transportation price mix metric in the last nine quarters that would included some mixed benefits in the period. We also saw some volume growth in North America, though this was more than offset by lower demand in China and continued production curtailment in Europe still being attributed to a large extent by a mission testing headache associated with the transition from diesel to gasoline engines.

Shifting to adjusted EBITDA, we achieved $235 million for the quarter even sequentially though below last year's $245 million driven by double-digit inflation and variable costs at the adjusted EBITDA level and somewhat slower Light Vehicle volumes offset partially by price mix benefits. This was coupled with the impact of foreign exchange drop through and inflation from -- in sources including logistics and packaging contained in operating expense.

Adjusted EBITDA margins for Q4 decreased to 20.3% from 21.1% with pressure from Transportation Coatings margins offset to a large extent by increased margins in Performance Coatings. We're really pleased that the combination of improved price mix in Performance Coatings and the combination of productivity across Axalta enabled us to hold margins largely constant in 2018 at 20.1% versus 20.3% in 2017. While we clearly still have a lot of work to do to offset inflation impacts that we've accrued over the last two years in Transportation Coatings, we saw modest initial progress this quarter and hope to show continued results in 2019 based on ongoing discussions with customers.

For the full year 2018, Axalta reported net sales of $4.7 billion, up 6.7% excluding the impact of foreign currency coming largely from strong price and mix contribution, as well as the inclusion of 3.5% from M&A activity.

Net income had a more favorable comparison due to the absence of restructuring charges and other tax reform impacts in the prior year, while adjusted net income increased 5% from 2017. Adjusted EBITDA of $937 million for 2018 increased 6% from $885 million in 2017. This result was produced in spite of the significant headwinds from inflation, as well as incremental FX headwinds that emerged during the course of the year.

Turning to Slide 4, briefly looking at the end market highlights for the quarter, Refinish net sales growth of 6.3% ex-FX was solid driven principally by positive price mix with sales growth from all regions. Business conditions in Europe were slower versus prior periods. In North America, growth was constrained somewhat by lower mainstream coatings and Refinish accessory sales in the period, but which also contributed to a richer mix overall. Refinish demand globally appears broadly stable based on our run rates and indication from body shop customers, as well as sell-through indication from our distribution partners. We've also been successful in offsetting inflation with price actions to-date.

Our Industrial Coatings end market also grew in the quarter with a 6. 6% net sales increase ex-FX including contribution from all regions, except Latin America, which remains mixed. Price mix remains a bright spot in Industrial with low to mid-single digit realization in the quarter. We're on track to offset accumulated inflation by mid-year 2019 at least to compensate for much of the accumulated inflation impacts for the last two years. We had a very good year overall for Industrial in 2018. Demand seems broadly stable, but we have seen some indications of slowing in certain markets in China, Latin America and Europe already reflected in our fourth quarter volumes. That said, we continue to project modest growth from Industrial in 2019 including new product introductions.

Light vehicle net sales were down 3.9% for the quarter ex-FX. Volumes were down mid-single digits with decreases seen in Asia, Latin America and EMEA offset partially by further North America growth. The China market downturn continued, though it is encouraging to hear that the Chinese government is now considering potential supportive measures, which have been helpful in the past to stimulate consumer behavior.

EMEA continues to see production impacted by the WLTP engine technology changeover, which is expected to continue into early 2019, but then stabilized. Global production forecast for 2018 were reduced again from growth of 0.7% to a decline of 1% since our last earnings call. More than half of the 1.7 million unit forecast reduction came from China with Europe driving a significant portion of the remainder.

Commercial Vehicle net sales decreased 3.3% ex-FX in the fourth quarter. Consistent with the third quarter, heavy-duty truck demand remains quite strong in the Americas, though we have seen more signs of slower demand from Europe in the fourth quarter. Price mix was down slightly in the period.

On the topic of price cost gap in Transportation Coatings, we've undertaken several efforts in 2018 to achieve offset the variable cost inflation, and our most recent dialogue with certain customers have been impactful. We believe we'll see progress regarding average selling prices this year, and we continue to push for this outcome. Importantly, even with lower oil prices recently, we remain significantly impacted by variable cost inflation, and we do not expect near-term release in many of our inputs due to tight demand conditions across numerous raw material baskets and impacts of trade tariffs. We also continue to focus on cost reduction actions in Transportation Coatings to help cover the price cost gap.

Regarding our balance sheet and cash flows, fourth quarter free cash flow was $220 million to drive full year free cash flow to $362 million above our guidance range that we offered in October. We finished the year with a net debt to adjusted EBITDA ratio of 3.4 times.

On capital deployment, we repurchased $254 million worth of shares the full year with $106 million completed during the fourth quarter. Total spend on M&A for the year was $110 million. And we noted additional discretionary capital was used in 2018 in line with our prior guidance to invest in internal high return investment opportunities with some of our key strategic customers.

Next, I'd like to touch briefly on a few operating highlights. First, we made early progress on relocating production from our Belgium plant, including engineering work and new construction starts in new locations. We also opened new research technical centers in three locations globally and initiated new powder coating capacity upgrades in two locations to support growth plans in our Industrial end markets.

In terms of innovation investment, we introduced over 250 new products across Axalta beating our target here for the third year in a row. Highlights in the fourth quarter include the launch of new Refinish products to complement and enhance our mainstream brands, while continuing with good success to launch and convert over 250 body shops in Asia and North America to our new Cromax EZ premium waterborne basecoat system.

In our Industrial end market, we launched the new steel conduit lining for the electrical wiring market called Strenx. Transportation Coatings, we continued the launch of our Hyper Dura 3000 (ph) product line, which is a single component primer with improved performance for certain substrates. We also continued to gain share this quarter with our consolidated systems and OEM applications with new wins in Latin America and Europe.

Regarding our focus areas for 2019, we continue to concentrate first on growth across our business and profitably gaining share in each market that we serve today. Second, we're squarely focused on execution and working toward even more refined targets related to overall customer satisfaction. As an organization, we are committed to profitable growth, improving operating execution and increased accountability across the company to deliver on our goals.

My mantra to our leadership is focused on simplicity, nimbleness, a focus on fewer, but more critical initiatives and decision-making based on appropriate metrics with a long-term investment mindset. I believe that if we move quickly with our customers' interest first and with a focus on building a sustainable and competitive model, we will continue to win in our markets for many years to come.

Lastly, beginning in first quarter 2019, we will be shifting our reported basis and presentation to earnings per share and adjusted EBIT metrics. We will continue to offer guidance and results on an adjusted EBITDA basis as well for a period of time. After carefully evaluating the change, it seems an appropriate time given the maturity of our Company to adopt this approach and also based upon feedback from shareholders. We've also begun to move our internal incentive compensation plans away from adjusted EBITDA to adjusted EBIT and earnings per share to better align all aspects of the business including capital allocation.

With that, I will now turn the call over to Sean, who will share some further detail on our financial results.

Sean Lannon -- Senior Vice President and Chief Financial Officer

Thanks, Robert, and good morning, everyone. Turning to Slide 5, fourth quarter net sales before foreign currency impacts increased 2.7% year-over-year, including 6.4% growth in our Performance Coatings segment and a decrease of 3.7% for Transportation Coatings segment. Acquisition contribution this quarter was 0.4%, as all 2017 acquisitions have now been fully locked (ph). This fourth quarter result clearly represents two separate parts with negative volume of 2.1% largely driven by decrease in Transportation Coatings and positive price mix contribution driven principally by Performance Coatings though we know that our Light Vehicle end market and Transportation Coatings also reflected positive price mix in the quarter.

FX translation shifted to a 2. 5% headwind in the third quarter and remained largely consistent in the fourth quarter with a 3.3% impact with euro weakness versus the dollar still the primary driver coupled with continued weakness in a broad set of emerging market currency.

Fourth quarter adjusted EBITDA of $235 million was in line sequentially with the third quarter and 4% lower than the prior year. Adjusted EBITDA margins decreased 70 basis points to 20.3% in the fourth quarter. The quarterly results reflect lower Transportation Coatings net sales, significant headwinds from input cost inflation, notable FX headwinds and higher overall inflation elements such as freight, logistics and packaging within other operating expenses offset by positive progress and price mix in the quarter.

Turning to Slide 6, Performance Coatings Q4 net sales increased 6.4% year-over-year excluding a 3% FX headwind. Constant currency growth was driven primarily by a 6.5% increase in average price mix, as well as 0.6% contribution from M&A. Refinish produced 6.3% constant currency net sales growth in the fourth quarter driven principally by improved price mix in the period with product mix being a notable contributor to the result in this period.

Axalta's Refinish end market saw a net sales growth in all regions in the fourth quarter, though organic volume growth was constrained, we believe in part due to cautious distributor behaviors in select markets, while body shop demand remain steady according to our collected feedback. Measured by body shop served, Axalta continued to gain market share both in the fourth quarter and for the full year.

Industrial net sales before FX headwinds increased 6.6% year-over-year in the fourth quarter, and this growth was mostly organic, as acquisition contribution was negligible. Industrial top line growth was helped by solid mid single-digit positive price mix contribution from all regions for the quarter. Volumes were also modestly positive, which included strong ongoing growth in North America and good growth in Asia Pacific offset somewhat by decreases in Latin America and slower performance in Europe, which appears to be feeling some economic deceleration, as a region in the recent period.

Performance Coatings delivered Q4 adjusted EBITDA of $172 million, a 4% year-over-year increase with strong price mix benefit, offset to a large extent by variable cost inflation, additional inflation from freight, logistics and packaging within other operating costs and modest volume in FX headwind effects.

Q4 adjusted EBITDA margins of 22.7%, were up 10 basis points year-over-year underscoring sustained improvements since the low of 19.7% in the first quarter of 2018. This comes as a result of price action and mix improvement, as well as productivity actions, as we work to offset raw material inflation in our markets with minimal delay through the cycle. 2018 was a great success story for Performance Coatings in this aspect.

Turning to Slide 7, Transportation Coatings net sales decreased 3.7% year-over-year in the quarter excluding currency headwinds of 3.7%. Segment volumes decreased 4.5% slightly offset by favorable price mix impacts resulting from early traction in this area, as Robert previously noted.

Light Vehicle fourth quarter net sales decreased 3.9% excluding a 4% FX headwind. Volumes decreased mid-single digits with ongoing growth in North America more than offset by lower volume from EMEA and Asia-Pacific as the WLTP issue, plus regional slowing in Europe and China continues to pressure global automotive markets. Average price and mix were up slightly in the quarter, however we are encouraged by indications of additional pricing benefits expected to come through in 2019.

Commercial Vehicle Q4 net sales decreased 3.3% before FX headwinds of 2.2%. This moderate reduction reflects ongoing strength of North America commercial truck and other commercial markets more than offset by slower business days (ph) in both EMEA and China consistent with what we noted in our last quarterly update. While China has little impact on our results in Commercial Vehicle, slowdown in Europe has been more meaningful. Global forecast for heavy-duty trucks have decreased modestly for 2019 since our last call most impactfully for China, while the overall market dynamics we're seeing have not changed notably over that period.

Transportation Coatings generated Q4 adjusted EBITDA of $63 million compared with $80 million in Q4, 2017 though up slightly sequentially from third quarter. Adjusted EBITDA margins were 15.7% in the period down from 18.5% in Q4, 2017. The lower margin comparison was driven primarily by significant and largely uncovered variable cost inflation witnessed over the last two years coupled with some impact from lower volumes in the period. However, adjusted EBITDA margin increased for the third quarter is 15.2%.

On Slide 8, I'll briefly comment on our consolidated 2018 results. The year was clearly challenged in several respects by the combination of substantial raw material and other variable cost inflation, as well as by fundamental headwinds in China and to some extent Europe later in the year. That said our overall results were still quite solid. We saw high single-digit net sales growth powered by strong price mix contribution in Performance Coatings, which was critical to offsetting inflation impacts.

In combination with productivity efforts, we managed the whole adjusted EBITDA margins largely constant, while growing adjusted EBITDA by nearly 6%. So while 2018 was a year of notable headwind, we navigated through and produced the result that approximated the low end of our earlier communicated expectations from last February, especially considering the rapid and unforecasted shift in FX rates around the middle of this year.

Excluding foreign currency, we produced net sales growth in line with our plan and adjusted EBITDA came just below the low end of our original guidance, in spite of higher variable cost inflation than we had anticipated in early 2018 and also less pricing offset in Light Vehicle than we had expected.

Turning to Slide 9, cash and cash equivalents totaled $694 million at year-end. Total reported debt was $3.9 billion resulting in a net debt balance of $3.2 billion versus $3.3 billion at (technical difficulty). Our net leverage ratio was slightly improved to 3.4 times largely driven by the benefit of a higher cash position.

Q4 free cash flow totaled $220 million compared to $196 million in the same quarter a year ago. The year-over-year increase was driven by improved net working capital outcomes especially from better receivable collections, partly offset by higher upfront customer incentive payments that we addressed in detail last quarter, and modestly lower adjusted EBITDA.

As a side note on free cash flow, we've also included $3 million of cash inflows from investing activities, which will equate to $9 million for the full year 2019, which relates to the interest associated with our foreign currency swaps, we executed in 2018 to fix our interest rates on $475 million of our term loan principal. We will include this within our free cash flow metric going forward consistent with our other cash interest payments. Our working capital to full year net sales ratio at year-end was 10.2% compared with 10% a year ago, which is in line with our targeted levels of 10% to 11%.

Turning to Slide 10, we provided an update of our financial guidance for 2019, which we preliminarily shared with you on our 2019 outlook call in December. Most elements remain unchanged. And as Robert mentioned, we've added new elements of guidance that corresponds with our shift in external reporting to an adjusted EBIT and adjusted EPS basis.

One note, the adjusted EBIT and adjusted EPS metrics exclude $25 million in accelerated depreciation associated with the previously announced Mechelen, Belgium plant closure. For net sales and adjusted EBITDA, our guidance remains consistent. We've included an assumption of low single digit inflation from variable input costs at the cost of goods sold level. Our guidance also continues to assume an impact from tariffs of about $30 million (ph).

Regarding taxes, we are revising our adjusted effective income tax rate slightly to 20% to 22% from 20% to 23% for the full year with the increase from 2018 largely due to the lower forecasted excess benefits for stock-based compensation, which were approximately 200 basis points in 2018, as well as the negative impact associated with year two of US tax reform and slight impact of mix on jurisdictional earnings. As a reminder, this US (ph) tax represents the adjusted tax rate corresponding to adjusted net income.

Regarding phasing of adjusted EBITDA in 2019, we expect that first quarter to reflect approximately 20% to 21% of total 2019 adjusted EBITDA. The remaining quarters should be closer to an even spread, though with moderate building, as we move through the year. This phasing assumes ongoing carryover of impact from higher raw materials and other inflation with the greatest impact on the first quarter, as well as a more challenging comparison of China versus the stronger first quarter 2019.

This concludes our prepared remarks. We'll now be pleased to answer any questions. Operator, please open the lines for Q&A.

Questions and Answers:

Operator

Thank you. At this time, we will be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of John Roberts with UBS. Please proceed with your question.

John Roberts -- UBS -- Analyst

Thank you. Robert, price mix was up 6.5% in auto Refinish. I assume the raws are up similarly and the auto OEM coatings area are roughly approximate whatever, I have a hard time seeing you get anywhere close to the amount of price in auto OEM that you've got in auto Refinish. So do you need additional restructuring there to get your margins back in auto OEM rather than just price?

Robert Bryant -- Chief Executive Officer

If we look at the margin profile of both of those businesses obviously, they are -- they are two very different businesses with different market characteristics and different market structures. In order to return to the peak profitability that we -- that we had before, we do need to continue to raise prices. We also need to continue our flow of new products for those -- for those customers and need to continue to create value for our customers. From a pure cost perspective, we have taken several cost measures in that -- in that business, and we'll continue to take cost measures in that business as necessary depending on the development of the market from this point forward.

John Roberts -- UBS -- Analyst

Okay. And then just as a follow-up. What was the FX headwind at the EBITDA level? A lot of your rise are linked to the US dollar. So I don't -- I don't think you see as much of a benefit on the cost side, when currency is unfavorable, as you see a hit in the revenue side?

Sean Lannon -- Senior Vice President and Chief Financial Officer

Yeah. We -- we haven't historically disclosed the actual FX impact at the bottom line. But it's fair to assume, the FX headwind from top line fall through at a consistent margin from an EBITDA perspective.

John Roberts -- UBS -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Don Carson with Susquehanna Financial. Please proceed with your question.

Donald Carson -- Susquehanna Financial -- Analyst

Yes. Thank you. Just want to go back to your inflation comment. So -- so overall what was the inflation in raw materials in 2018? What are you expecting in 2019? And I think you mentioned that with Industrial, you expect to close that price cost gap by -- by mid-year sort of on the Transportation side, can you comment more specifically when you would see that price cost gap closing? Or -- or do you think it can fully close?

Robert Bryant -- Chief Executive Officer

So on the first part of your question related to raw materials, as we highlighted we saw -- we saw low-double digit inflation on a year-over-year basis 2018 compared to 2017. Our current assumption based on our outlook and current oil prices, as well as other supply considerations is for low single digits in 2019. Obviously that can change and evolve as the year goes on and as we see the price of oil move up and down, as well as some of the other -- some of the other supply considerations.

And then regarding -- regarding transportation margins in that business, I mean our -- our goal long-term is to get those margins back to where they were historically. Obviously, there are cycles that any business -- that any business goes through both from a demand perspective, as well from a raw material perspective. But at the end of the day, the important thing for us and for our customers is that we continue to innovate with our products and that we continue to innovate with our services. And if we do that I'm confident that we'll continue to be rewarded with an appropriate margin level in that business.

Donald Carson -- Susquehanna Financial -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Mike Harrison with Seaport Global Securities. Please proceed with your question.

Michael Harrison -- Seaport Global Securities -- Analyst

Hi, good morning.

Robert Bryant -- Chief Executive Officer

Good morning.

Michael Harrison -- Seaport Global Securities -- Analyst

I was just wondering if you can maybe give a little bit more detail on the volume weakness that you saw in the Refinish business? It sounds like you mentioned that was related to some caution among distributors, just wondering where that was happening? And if you're seeing some of the macro weakness maybe start to weigh on demand at the consumer level maybe lower propensity to -- to get repairs done given -- given some of the -- the macro uncertainty?

Robert Bryant -- Chief Executive Officer

Mike, we continue to see that global demand appears steady, but there was a general lack of urgency at the distributor level that drove a slightly lower outcome in Q4. We see this as a normal quarterly fluctuation in the market, but not really any change to underlying -- underlying end market demand. As we've highlighted any given quarter, you can have movements up and down.

In Axalta's case, in particular -- particularly in North America, we did see slightly negative volumes due to slower mainstream and accessories sales, but we had strong pricing and that led to a mid-single digit net sales result for that business. So I think we're very happy with the results of that business globally as well as in North America.

As an additional data point a couple of our largest body shop customers did see volumes and net sales up in the fourth quarter. And we know that one of our competitors and an accessory supplier have highlighted slower sales. However, we believe that this appears to be more related to channel inventory, as opposed to any type of end market demand at least from what -- at least from what we're seeing

Michael Harrison -- Seaport Global Securities -- Analyst

All right. Thanks for that additional color. And then also just wondering if you can give us an update on what you've been seeing in the Industrial Wood Coatings business? I know that in China, there have been some signs of slowing, but I think that business is primarily North American for you. Any -- any update on that business?

Robert Bryant -- Chief Executive Officer

As you point out our business currently is -- is defined in the Americas region so that's predominantly the US and in Mexico. We did see -- due to some of the -- some of the macro trends, we did see volumes pull off just a little bit within core markets in the US, but we did have wood price increases that continued as a lot of our contracts are largely indexed to raw materials. So overall, we're quite happy with the result.

Michael Harrison -- Seaport Global Securities -- Analyst

All right. Thanks very much.

Operator

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

Christopher Parkinson -- Credit Suisse -- Analyst

Thank you. You hit almost (ph) a little on the volume side, but can you just give us a -- kind of a broader State of the Union on Refinish? Just breaking out kind of the price I guess, you already hit on volumes, but also market share trends? And whether or not you think there are any upcoming kind of structural changes in the industry that we should be aware of? Thank you.

Robert Bryant -- Chief Executive Officer

Chris, overall we continue to see the Refinish market for us perform -- perform quite well. As you know on a -- on a full year basis, we had good sales growth as I said in the mid -- in the mid single-digit range. We saw a stable marketing conditions overall. We continue to win shops and gain share in North America in particular and also -- also in Europe. As we look forward in 2019, we're expecting relatively stable markets around the world with growth in every region. The only -- the only two call offs there might be -- might be China and Latin America, where we might see a little bit lower or I'd just say more modest volume growth. But overall if you look at the underlying dynamics of the Refinish business, we feel very good about that business and we don't see any -- any major -- any major changes occurring at least at this juncture.

Christopher Parkinson -- Credit Suisse -- Analyst

Great. And once again you mentioned this a little on the raw basket, but just can you hit on the -- just a few product HDDs (ph) within the resin basket understanding there are few moving targets. Just what you see in the various regions in epoxies, isocyanates and some of the input that caused issues in '18? And also are you seeing any -- still seeing any residual effects on previous force majeures? Just any comments on that would be appreciated? Thank you.

Robert Bryant -- Chief Executive Officer

So for 2019 at least for the first quarter, resins overall, we expect to see prices potentially be slightly down. It does -- it does vary whether we're talking about -- whether we're talking about epoxy or polyesters or monomers. But overall, the overall basket we could -- you see that be slightly down. In isocyanates at least for the first quarter, we would expect prices to continue to be up predominantly due to HDI. In solvents, if oil prices continue with their current levels, we would start to see some solvent -- our solvent prices come down a little bit given how closely related that is to the price of oil.

And then for monomers overall, we're expecting prices to be -- to be up. There are some products that could potentially be down, but when you look at the overall weighting of what's in that basket for us, the monomers category, we expect to be up.

With regard to pigments, pigments finally, which we do -- do see some flattening in prices there, at least through the -- through the first quarter. And then finally in additives, we see prices that we expect to continue to move up predominantly due to tariffs and also China regulations.

Christopher Parkinson -- Credit Suisse -- Analyst

Got it. Thank you very much.

Operator

Our next question comes from the line of Robert Koort with Goldman Sachs.

Christopher Evans -- Goldman Sachs -- Analyst

Hi, good morning, guys. It's Chris Evans on for Rob. You cited price mix benefits frequently in your prepared remarks. Just curious how much mix versus price did you see in the segments in the fourth quarter? And maybe could you give a little bit more color on the origin or sustainability of this improved mix?

Robert Bryant -- Chief Executive Officer

So it was probably a 50-50 split between price mix. There was certainly richer mix on Refinish and I think what we saw a little a bit in the distribution behavior some other (ph) buy in the fourth quarter. They bought some of the higher-priced product, which obviously impacted our mix benefit there and part of the reason, why you saw volumes down a little bit in the distribution channel. But by and large, we're not expecting a bigger mix shift year-over-year heading into 2019.

Christopher Evans -- Goldman Sachs -- Analyst

Great. And then maybe if you could reflect back on the net contributions you've witnessed in 2018 from productivity and cost reductions? And just curious, how relevant productivity might be in your 2019 guidance?

Sean Lannon -- Senior Vice President and Chief Financial Officer

Our Axalta Way program continues to be an important element in terms of how we manage the company and also the contributions that it makes from a financial perspective. We exceeded the $50 million in savings that we had projected to achieve in 2018. And as we look at the remaining $150 million in that program, we expect to see that somewhat ratably over the next three years for us.

Christopher Evans -- Goldman Sachs -- Analyst

Thank you.

Operator

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

Steve Byrne -- Bank of America Merrill Lynch -- Analyst

Yes, thank you. Drilling in a little further on this price mix balance. Is Refinish the business we have the most potential to push mix? And how much longer-term opportunity do you have there? Robert you mentioned the -- the new -- the new waterborne coatings or Refinish coatings for Asia. How much of that market over there is still solvent borne? And what kind of an opportunity longer-term is that for you?

Robert Bryant -- Chief Executive Officer

So on the -- I'll take the second part of your question and I'll let -- I'll let Sean take the first part of your question. So for China, as we look at that -- as we look at that market, we expect to continue to see that -- that market migrate over time from solvent borne to waterborne technology. It's still predominantly solvent borne market. And given that the multinationals have the best waterborne technology, there are some locals that have waterborne technology, but it's not at the same level, as the large multinationals that would continue to be a benefit for Axalta, as we move -- as we move forward.

Now that being said the premium end of the market in China, which is where we historically have been quite strong is one area of focus. The other area of focus is the mainstream and the economy markets, where again we continue a strong push in those markets, in terms of building out distribution, putting feet on the street and most importantly having the right products at the right price point and with the right positioning to meet the needs of our customers in those segments.

Sean Lannon -- Senior Vice President and Chief Financial Officer

And I think mix longer-term, yeah when we -- where we see global room for volume improvements, partially in the economy and mainstream space, so we're not necessarily expecting richer mix over the long term. But when you go region-by-region and you look at the MSO space here in North America, but they really value some of our more productive systems, I mean, you could see some richer mix coming through in 2019.

Steve Byrne -- Bank of America Merrill Lynch -- Analyst

And then just a question on your auto OEM business. How many employees do you have that are in these OEM paint lines? And when they slow, is that your cost burden to bear or they do -- or you directly compensated for those employees?

Sean Lannon -- Senior Vice President and Chief Financial Officer

So for competitive reasons, we don't want to provide too much information in that regard. But just generally, we have over -- over a 1 000 employees around the world that actually work on our OEM customer paint lines and/or involved in the support of those -- of those paint lines. As volumes -- as volumes come down, there are opportunities to pullback on that -- on that sales force or on that sales support area if and when it was ever -- it was ever required.

Steve Byrne -- Bank of America Merrill Lynch -- Analyst

Okay. Thank you.

Operator

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

P.J. Juvekar -- Citigroup -- Analyst

Yes. Hi, good morning.

Robert Bryant -- Chief Executive Officer

Good morning, P.J.

P.J. Juvekar -- Citigroup -- Analyst

Robert, you and your competitor have had some destocking issues in the distributor channel in Refinish. Where do we stand on distributor inventories today? And how do you get visibility for your planning purposes for -- for demand from distributed -- distributor channels?

Robert Bryant -- Chief Executive Officer

It's hard to have, I mean I think as Axalta, we have pretty good visibility into how much product we have with our distributors in general not necessarily each and every point of distribution that they have that visibility we have. We don't necessarily have visibility into competitor levels or other products like accessories that are in this warehouses. When we visit of course, we might happen to take a glance over and see how much inventory might be there. But for the most part we don't have a lot of visibility about that overall from an industry perspective.

What I would say from an Axalta perspective is last year, as you know, I should say in 2017, we made several -- several changes there and adjusting many of our commercial policies and that resulted in distributors carrying and pulling down inventory levels. So at this juncture from an Axalta perspective, most of our -- of our distributors are carrying the amount of Axalta product that they need for the foreseeable future. Given some of this commercial changes, as well as some of the limits that we placed on the ability to privy ahead of price increases certainly that has ameliorated that aspect of the -- of the supply chain.

However, if there is consolidation within distribution that would be, I guess the primary remaining element that could result at some point in the future in actual reduction in total inventory held at distribution. But I think again, the important -- the important thing here is to look at distribution is what happens in the middle. What happens at the end with the end consumer is what's most important for the long-term health of the business.

P.J. Juvekar -- Citigroup -- Analyst

Thank you. And a question for Sean. Sean, as a new CFO, how do you think about your net leverage of 3.4 times? And we are late in the economic cycle, some economies have slowed down. So what's your comfort level in terms of leverage? And what should we expect for 2019, in terms of buyback and share repurchases? Thank you.

Sean Lannon -- Senior Vice President and Chief Financial Officer

Yeah. So today, where we sit, we are very comfortable with the free cash flow profile and where our leverage sits, where we are now targeting is 2.5 times. So we'll continue to build cash. We're not necessarily looking to actively pay down debt. When you think about our overall debt profile, we're at slightly below 3.8%. So pretty healthy interest rate there. So again, not a huge return by paying down debt.

When we think about share buyback, we did slightly over $100 million just in the fourth quarter. We'll continue to be opportunistic, but we're not going to set targets for 2019. We want to continue to remain flexibility and value all the potential items in the pipeline around M&A, internal projects, as well as share buyback from a capital deployment perspective.

P.J. Juvekar -- Citigroup -- Analyst

Thank you.

Operator

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

Arun Viswanathan -- RBC Capital Markets -- Analyst

Great. Thanks. Good morning, guys.

Robert Bryant -- Chief Executive Officer

Good morning, Arun.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Good morning. I just want to go back to the guidance range. I expect that you'd probably narrow that as you go through the year, as you did in '18, but maybe can just help us confirm what would push you to the upper or lower end. I mean, is it fair to assume given some of your comments on weakness are rising in China and Europe recently that you're expecting now to be closer to the lower end. Also is it fair to assume that volume is unlikely to surprise to the upside, so it would be more like price and cost that will be the main lever that would push you to the upside. Thanks.

Robert Bryant -- Chief Executive Officer

I think it's always -- it's fairly consistent with prior years. The overall -- the overall macro environment is certainly the most important variable from a -- from an overall demand perspective. Although it effects -- it effects cost, but it also effects volume and certainly the discussions that are ongoing with China and the trade discussions there. And I think if you see those get resolved favorably and quickly, we believe that we could see greater demand out of China across a multitude of product lines.

The other element of course, is always raw material inflation. We assumed a level of raw material inflation slightly above the current levels, at least from a Brent perspective. And then from an oil forecast then we have layered in what we believe will continue to be some of the supply constraints, as well as the impact from at least Phase I of the tariffs. Now if we go to Phase II of course that could change things quite a bit. So the overall raw material basket and then our ability to push through price increases to offset that if that's in excess of what we see in the budget would be another element. And then finally, the last element of course, is -- is foreign exchange.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Okay. That's helpful. And then, also just wanted to touch on this if you didn't -- already if I missed it. But the cost reductions that you targeted for 2019 is that $50 million? Is there a potential that you could find more in case there is a greater slowdown to stay within your EBITDA range?

Sean Lannon -- Senior Vice President and Chief Financial Officer

Yeah. So currently we are targeting the $50 million and that's largely offsetting inflation at this point. But if we see any sort of slowdowns or potential slowdown as far as getting price in the LV space, there is more potential opportunity we would aggressively go after.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Perfect. Thanks a lot.

Operator

Thank you. Our next question comes from the line of Jeff Zekauskas with JP Morgan. Please proceed with your question.

Jeffrey Zekauskas -- JP Morgan -- Analyst

Hi, thanks very much. In your -- your sales guidance for 2019, you estimate 2% to 3% growth. I would expect that that would be your price, and so your best case is that your volumes are flattish is that correct on a consolidated basis?

Sean Lannon -- Senior Vice President and Chief Financial Officer

So Jeff it's primarily priced, but there is an aspect of volume growth in their modest, but there is an aspect.

Jeffrey Zekauskas -- JP Morgan -- Analyst

So in terms of the deployment of your cash flow, in 2016 and 2017, you really were pretty aggressive in making acquisitions, and then when 2018 came along, there was something in the first quarter, but there really haven't been any acquisitions since then and you've really elevated your share repurchase outlays. Is that because the acquisition pipeline thinned out or acquisitions became more expensive or was it that your own stock became more expensive -- more inexpensive and you wanted to be opportunistic. Can you talk about the shift in cash flow deployment?

Robert Bryant -- Chief Executive Officer

Jeff, we continue to focus on M&A both small bolt-on transactions, as well as more -- as well as more transformative transactions, and we do have a -- we do have a good pipeline of deals. That being said, we have been -- we have been selective in the transactions -- in the transactions that we have pursued and we've also been focused on integrating well the acquisitions that we have made thus far.

So we have been also pretty disciplined in terms of -- in terms of valuations, not that valuations have been unreasonable, but a few of the major assets that have come to market in the past six months to nine months, many of those have been in public auction or auction scenarios, and we felt that some of the prices that were required and some of the prices that were eventually paid for some of those assets did not generate a return that we found satisfactory. So I think we're going to continue to be disciplined on capital deployment.

The larger -- that the larger spend on our share -- on our share -- our share repurchase program that really fundamentally is linked to the fact we had $675 million program. To-date we purchased about $312 million against that. So we didn't want to show progress on our share repurchase program especially given the lower stock price, it became very attractive to buyback our stock. And that's the way that the share repurchase program was structured, it was structured to be highly opportunistic. So we were offsetting dilution. But if we did see the stock price go down, the share repurchase program would kick in and would accelerate the volume of purchases, which is exactly what the program did.

Jeffrey Zekauskas -- JP Morgan -- Analyst

Okay. Great. Thank you so much.

Operator

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

David Begleiter -- Deutsche Bank -- Analyst

Thank you. Robert, what are you seeing on your auto OEM price increases. And what level of competitor support, you are seeing in the marketplace?

Robert Bryant -- Chief Executive Officer

What I'd say is, we issued a press release toward the end of last year, where we highlighted that we were going to be -- going out to the market with price increases that we had made pretty much all of the efforts that we could make internally from a cost reduction perspective without starting to cut into muscle and bone in that business that would potentially compromise the long-term health of that business. So I think we supported our customers by trying to right size our cost structure, as much as we possibly could. But we reached a point, where we had to go out with price increases. And so that is indeed what we have done and you start to see some of the results of that in our Q4 results, and I'd expect that you would -- that you would see that moving forward.

David Begleiter -- Deutsche Bank -- Analyst

Okay. And just on Refinish, Robert look like your volumes, they were down in 2017, they were roughly flat in 2018. What's the level of confidence in actually growing volumes in Refinish in 2019?

Robert Bryant -- Chief Executive Officer

Well, I think big picture you have to remember -- you have to remember a couple of things, right? First, we're always working with our customers. I mean, it's not about the volume of the paint. It's about the value that we're creating and the net sales that we're generating. So we're always working with our customers to help them use less paint and to make them more efficient, number one. Number two, as we continue to the shift from solvent borne to waterborne -- waterborne just uses a lower volume and uses less paint than solvent borne. So structurally, you will see volume decrease slightly over time just given the nature of the business.

Now, we capture that through price and we also capture that more focused on capturing just the service element of what we do not only in OEM, but also in the Refinish business. But if we -- if we look at the customer wins that we've had around the world, and if we look at the number of body shops that we have in the Axalta network and given some of the paint management systems and the color matched systems that we have, we have pretty good insight to the number of shops that we are servicing. We've actually seen a net shop gain that is higher than that stage (ph) of our competitors. And we have also experienced some important customer wins over the last 12 months that will begin to materialize in our numbers in 2019. So I think overall we feel very good about the Refinish business.

David Begleiter -- Deutsche Bank -- Analyst

Thank you.

Operator

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

Aleksey Yefremov -- Nomura Instinet -- Analyst

Thank you. Good morning, everyone. Just to piggyback on the Refinish volume question and thanks for -- for the explanation, Robert. Maybe is there a metric that we can use to assess sort of the underlying level of demand other than the number of shops, maybe is there -- do you have like a number of cars painted or something similar to assess the demand level?

Christopher Mecray -- Vice President, Investor Relations, Treasury and Strategy

Aleksey there, this is Chris. There really isn't a global metric that adequately captures the entire market. So there is hesitancy to provide something of that type for any given region that we might be able to source or capture because while that might be accurate for any given country, it really wouldn't -- it really wouldn't capture the global picture. So we stay away from trying to quote specific market metrics because it could be misleading. It is a big global business. We sell in over 130 countries. We have a desperate business across both premium and mainstream products out there. But what holds up and what's persistent is the growth in population, the growth in middle-class leading to increased car park, leading to increased miles driven globally, and so there is a structural driver there underlying everything else, all this discussion about waterborne versus solvent bone and other things within given markets is in that broader context of market growth.

Aleksey Yefremov -- Nomura Instinet -- Analyst

So -- so maybe just to follow-up again. Do -- do you think the actual area painted by Axalta in the Refinish business, is it growing flat, declining?

Christopher Mecray -- Vice President, Investor Relations, Treasury and Strategy

Do you mean geographic area?

Aleksey Yefremov -- Nomura Instinet -- Analyst

No, I mean, we -- I don't know square -- square feet of panels painted in 2009 -- 2018 versus 2017 and so forth?

Christopher Mecray -- Vice President, Investor Relations, Treasury and Strategy

Well, we wouldn't have visibility on a fine metric like that, but we do know for example that broader trends like the removal of a bumper to repair lead to the painting of the entire bumper, whereas a years ago, they might just bang out a dent and paint that section. So there are some things like that -- that happened in the market. But no, we don't have -- we don't have a fine point metric like that to capture it.

Aleksey Yefremov -- Nomura Instinet -- Analyst

Got it. Thank you very much.

Operator

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

Ghansham Panjabi -- Baird -- Analyst

Hi,guys, good morning. I guess just a quick question on Industrial. Obviously volumes were positive during the fourth quarter, which was encouraging given just what we have seen from the macro standpoint. Did you see any deterioration toward the end of the quarter, as customers perhaps scale back on inventories. Just give us some more context on how volume stays for that business during the quarter?

Robert Bryant -- Chief Executive Officer

We have to remember that Industrial for us is the multitude of market. It's wood, it's oil, it's energy solutions, it's our general industrial business, it's powder coating, so it does vary a little bit -- a little bit by market. The one business, where we did see a little softening through the quarter was in the -- was in the North America wood business for us, that would be the main area that I think we would call out and highlight. But again as we've mentioned before our Industrial business even though it's $1.2 billion, $1.3 billion business for us globally given the size of the addressable market, we still have a lot of room to grow and we have a very good team that's executing extremely well. So I think our -- our general outlook on Industrial continues to be quite positive.

Ghansham Panjabi -- Baird -- Analyst

Okay. And then just -- just to clarify Sean's point on 2.5 times net debt to EBITDA being target from a balance sheet standpoint. Should we interpret that as the priority for '19 being debt pay down? Or is that sort of a longer-term target and we should still expect M&A and sort of share buybacks, as the year unfolds? Thanks so much.

Robert Bryant -- Chief Executive Officer

Yeah. Unfortunately debt pay down won't help us with our net leverage ratio, only with the gross -- the gross leverage ratio. So I think what you would expect to see there is given how low our cost of debt is, it doesn't really make a lot of sense to pay down gross debt in this environment, it makes more sense to build out cash, and then selectively deploy that cash to the highest -- to the highest return projects across the Company.

That being said if we do see rates move up more considerably, I'll remind everyone that we are fairly significantly hedged or capped out across the majority of our debt portfolio, so we are in a very -- in a very good position. So we wouldn't expect to do much debt pay down in 2019 unless again, we were to see a spike in rates or a dramatic change in the macro environment. When you look at something like interest rate coverage, we are in a very, very healthy position even when you run certain downside scenarios on -- on the business. That being said if there are momentary aberrations in the debt markets, where we have the opportunity to do something creative and potentially break down our gross debt level, we'll take advantage of those.

Ghansham Panjabi -- Baird -- Analyst

Thanks for clarifying.

Operator

Thank you. Our next question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.

Vincent Andrews -- Morgan Stanley -- Analyst

Thank you, and good morning. A question on Europe. Obviously, the WLTP situation is -- is sort of shading volume there. Do you have any sense when that sort of expires or runs its course sort of what do you think the underlying volume trends are going to be like in that market in 2019?

Robert Bryant -- Chief Executive Officer

If you look at Europe overall for 2018, at least according to IHS the -- from a build or production perspective, the market was down about 1% -- about 1.2%. And I think the current forecast that they have for Europe is to be flat on the year at 0%. And embedded in that -- in that assumption is the belief that WLTP will work its way through the system. And then as it -- as it does your (inaudible) production return to more normal rates unaffected by WLTP. That being said I think with all the activities that the macroeconomic environment in Europe today, I think our view on -- on -- at least light vehicle in that market and also commercial vehicle for 2019 is fairly cautious at this point.

Vincent Andrews -- Morgan Stanley -- Analyst

Okay. If I could just ask a follow-up, Robert, when you talked about changing the -- you're going to show EBIT instead of EBITDA. Did you -- did you say I thought you maybe said something about that you're going to change the way you add back incentive comps, in other words, maybe you're not going to add back stock-based compensation anymore, was that -- was that correct?

Sean Lannon -- Senior Vice President and Chief Financial Officer

So that's accurate. Robert also commented on the fact we are changing our incentive compensation target internally for management to align with our externally reported numbers. But you're exactly right, stock-based compensation will no longer be added back for EBIT reporting going forward.

Vincent Andrews -- Morgan Stanley -- Analyst

Okay. Great. Thank you very much.

Operator

Thank you. Ladies and gentlemen, our final question for this morning will from the line of Duffy Fischer with Barclays. Please proceed with your question.

Duffy Fischer -- Barclays -- Analyst

Yeah. Good morning, fellows. Just -- first question on P&L. SG&A was down almost 25% in Q4. What were the drivers there? And can we extend those lower levels going forward into this year?

Robert Bryant -- Chief Executive Officer

Yeah. So Duffy two points that kind of get back to apples-to-apples. So in 2017, there was about $43 million in there related to severance and one-time elements around the merger and acquisition talks with Akzo and Nippon. And then there was an $18.7 million reclass out of SG&A up in the COGS in 2018. So that drives your entire difference between '17 and '18. So you roughly have a flat '17 versus '18 comparison when you normalize for those. But as far as extrapolating the result for the fourth quarter, yes I mean that should be a normal run rate as a percentage of net sales.

Duffy Fischer -- Barclays -- Analyst

Okay, great. And then if you go to the cash flow statement, the prepaid expenses and other line has eaten roughly almost $250 million in cash over the last two years. Should we think about that as coming back in cash at some point getting released or is that more like an investment that we should think about that earning 10%, 12%, 15% and so that's actually running through the P&L today.

Robert Bryant -- Chief Executive Officer

So what you're seeing in that line item are these upfront customer incentive payments that we talked about in length last quarter. I mean, you saw an uptick from the run rate, historically it's been running around $80 million. You saw a bigger uptick this year because of a few bigger customers, where we give the incentives to. But as far as the cash coming back end that will be coming in through price over time. It won't be coming through that line item, but it will be coming back through AR collections, as we get more price with those customers.

Duffy Fischer -- Barclays -- Analyst

Great. Thanks, guys.

Operator

Thank you. Ladies and gentlemen that does conclude our question-and-answer session. I'll turn the floor back to Mr. Bryant for any final comments.

Robert Bryant -- Chief Executive Officer

Thank you for everyone for joining today. Appreciate your -- your interest in Axalta and look forward to talking with you again when we have our Q1 results.

Operator

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

Duration: 64 minutes

Call participants:

Christopher Mecray -- Vice President, Investor Relations, Treasury and Strategy

Robert Bryant -- Chief Executive Officer

Sean Lannon -- Senior Vice President and Chief Financial Officer

John Roberts -- UBS -- Analyst

Donald Carson -- Susquehanna Financial -- Analyst

Michael Harrison -- Seaport Global Securities -- Analyst

Christopher Parkinson -- Credit Suisse -- Analyst

Christopher Evans -- Goldman Sachs -- Analyst

Steve Byrne -- Bank of America Merrill Lynch -- Analyst

P.J. Juvekar -- Citigroup -- Analyst

Arun Viswanathan -- RBC Capital Markets -- Analyst

Jeffrey Zekauskas -- JP Morgan -- Analyst

David Begleiter -- Deutsche Bank -- Analyst

Aleksey Yefremov -- Nomura Instinet -- Analyst

Ghansham Panjabi -- Baird -- Analyst

Vincent Andrews -- Morgan Stanley -- Analyst

Duffy Fischer -- Barclays -- Analyst

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