presented by charlie shaver chairman of the board, …...the global paint & coatings industry is...

Sensitivity: Business Internal

Presented by Charlie ShaverChairman of the Board, Axalta Coating Systems

Global growth strategies for coatings

The Coatings Summit

Sensitivity: Business Internal 2PROPRIETARY

Agenda

▪ State of the industry

▪ Opportunities & future outlook


The global paint & coatings industry is a $135B market that includes decorative and non-decorative segments

53

135

52

13

9

7

Automotive

Total

Decorative

General industrial

Protective

Refinish

Global paint and coatings market by application

$B, 2017 Segment description

▪ Architectural paint for buildings and homes

(e.g., building exterior coatings, interior wall paint)

▪ General coatings applications including Coil, Powder,

Wood, and other Industrial

▪ Vehicle coatings, commercial and light vehicles (E.g.,

interior and exterior trim, door handles, trunk bodies)

▪ High performance coatings for high-value infrastructure

(e.g., power generation, oil and gas, mining)

▪ Refinishing of vehicles and coatings for OEM fleet and

specialized commercial vehicles (e.g., body panels and

doors repair)

SOURCE: Orr and Boss; Company Annual Reports; IHS Paint and Coatings Industry Overview, 2017; PPG company presentation, 2016


The paint and coatings landscape remains fragmented with the top 9 players accounting for ~45% of market share

~45

~55

100% = 135

Paint and coatings market share

% of total revenue

Top 9 players

Others

Decorative, Automotive (OEM &

Commercial), Refinish, Aerospace,

Industrial

Decorative, Industrial, Automotive,

Powder, Protective, Marine,

Aerospace, Coil, Packaging

Decorative, Industrial, Protective,

Refinish, Packaging, Coil, Wood

Core segments

Automotive (OEM & Commercial),

Refinish, Industrial, Wood

Automotive OEM, Decorative,

Industrial, Marine, Protective

Paint and coatings

revenue $B, 2017

14.8

11.5

15.0

4.4

5.4

5.0Corrosion, Wood, Roofing, Specialty

paints

SOURCE: Company Annual Reports; IHS Paint and Coatings Industry Overview, 2017


Slow organic growth coupled with raw material and cost headwinds is driving margin compression

SOURCE: S&P Global; FactSet; IHS Paint and Coatings Industry Overview, 2017

1 Estimated based on 2017 financials of 11 global public coating companies including PPG, Sherwin Williams, RPM, Axalta, Akzo Nobel, Nippon Paint Holdings, Kansai Paint,

DuluxGroup, Asian Paints Limited,Tikkurila Oyi, and Berger Paints India

Paint & coatings market

projected growth

% CAGR 2016-2020Segment

4Decorative

2Marine

3Protective

5Coil

3Automotive

4Powder

4General

Industrial

“We continued to experience significant

raw material and elevating logistics

cost inflation…these inflationary

impacts increased during the quarter

and, as a result, we experienced the

highest level of cost inflation since the

cycle began two years ago”

– PPG CEO Michael McGarry,

October 2018

“During fiscal 2019, we expect

the challenging raw material

environment to continue,

perpetuating the stress on

gross profit margins. All of our

businesses are aggressively

pursuing price increases”

– RPM CEO Frank Sullivan,

July 2018

Industry profitability: EBITDA margin

EBITDA as a % of sales

4Refinish

16,314,7 14,3

20172016 Q3 2018


M&A activity continues to be a major growth driver in the paint & coatings market

SOURCE: Wall Street research; Barclays Banking estimates; Press Search; CrunchBase

20172016

acquired by

2018

acquired by acquired byacquired by acquired by acquired byacquired by acquired by

acquired by acquired byacquired by

acquired by

acquired by acquired byacquired byacquired byacquired byacquired by

NOT COMPREHENSIVE

http://valsparwood.com/


Market consolidation has continued with the largest players owning an increasing share of revenue

SOURCE: Wall Street research; Barclays Banking estimates

119

7

20

53

Next 6AkzoNobel PPG OtherICI

11 119

18

51

Next 6PPG Sherwin

Williams

Akzo

Nobel

Other

Other players 69% (4 pts.)

Top 3 players 31% 4 pts.

Market share ∆ vs. 2002

Top 3 players 27%

Market share

Other players 73%

Estimated global paint & coatings market share

%, 2002

Estimated global paint & coatings market share

%, 2017


The industry has and will continue to become increasingly global, with 60% of production occurring in Asia by 2021

SOURCE: IHS Paints and Coatings Overview, 2017

18%

8%

15%

53.7

14%

7%

24%

23%

67.5

23%

2010

5%

8%

34%

21%

5%

2016

13%

16%

7%

37%

23%

2021F

39.7

+5.2% p.a.

+4.7% p.a.

NA LATAM MEAEU China APAC

3%

1%

2%

4%

7%

6%

World Production of paints and coatings

Million metric tonnes, % of total

CAGR

2016-2021


Deceleration of economic expansion in China may dampen local paint and coatings production growth

SOURCE: Reuters; The New York Times

1 December 2018; The New York Times

686926

1.186

2021F20162011

6% p.a.5% p.a.

346

635785

2021F2011 2016

13% p.a.4% p.a.

16 172011 12 14 1513

10%

18 2020190%

2%

6%

4%

8% -4%

China decorative coatings production

10 thousands tons

China industrial coatings production

10 thousands tons

China GDP annual growth rate

%

▪ Growth rates declining as China transitions from manufacturing-driven to service-driven economy

▪ ~20% year over year decline in local auto sales1

▪ Housing sales expected to fall 5% in 2019


Agenda

▪ State of the industry

▪ Opportunities & future outlook


The paint & coatings industry has a strong balance sheet and is well-positioned for continued M&A activity

SOURCE: Company Annual Reports; S&P Global, Capital IQ, www.tradingeconomics.com; Dealogic; American Coatings Association

1 Estimated based on 2017 annual reports of 11 major global coating companies

2 Excludes Nippon Paints and Asian Paints due to negative net debt

Debt / equity 17.8%

Net debt / EBITDA2 2.4

EBIT / interest 27.7

Industry financial health

Industry financial metrics1

Average 2017

Global PE transaction value in chemicals

$B

Private equity outlook

▪ Opportunistic PE activity expected to continue

2014 2015

$12.9

3.8

2016

$9.4

2017

$4.7

76 60 54 56

Number of deals

Select PE holdings in

coatings value chain


Global demand and preferences are evolving as the population mix changes and people are living longer

SOURCE: World Population Prospects: The 2017 Revision

88

87

85

84

82

81

80

79

12

13

15

16

18

19

20

21

8.9

2050E

2020E

2015A 7.4

2040E

2025E

2045E

9.2

2030E

2035E

100% =

7.8

8.2

8.6

9.5

9.8

Age <60 yrs. Age 60 yrs.+

70.9

75.8

78.1

79.6

81.1

76.5

68.9

71.0

69.4

77.9

71.9

73.8

2015-20 2025-30

World

19

18

4

3

3

100

Global population projection by age cohorts

% of population, billions of people

Life expectancy at birth

Years

Share of 2018

global population

%


Millennials are rapidly becoming a larger segment of the market

▪ Millennials’ rapidly changing tastes and trendspotting will force paint and coatings producers to adopt leaner color change processes and quicker formulation approval and manufacturing

▪ Millennials value and expect higher levels of social & environmental responsibility from manufacturers

SOURCE: Spectrum Group; McKinsey Global Institute; Morgan Stanley Institute for Sustainable Investing Survey, 2015


Other industries have adopted approaches to rapid innovation in order to respond to changing preferences

▪ Key success factors include:

─ Superior customer insights

─ Speed, agility, & flexibility

─ Close collaboration between product design & production

Value

proposition

▪ Trendy, high-fashion apparel at affordable prices

▪ Fresh assortment, with new items every two weeks

Operating

model

▪ High vertical integration—from manufacturing plants through retail stores

▪ Strong research capabilities create deep insights into local market tastes

Economic

model

▪ Lower distressed inventory levels trains customers to “buy before it’s gone”

▪ Lower marketing spend due to strong retail footprint

Delivery

model

▪ Direct retail stores located near more expensive, high-fashion brands

▪ High-speed logistics to enable fast transfer onto retail floor

Production

model

▪ Co-location of designers and production lines enables faster production

▪ Less trendy, ephemeral products manufactured in lower cost locations

SOURCE: Press search


The broader chemicals industry is leveraging digital approaches to accelerate innovation

Current trend Focus on short cycle innovation

▪ Rethinking

current attitudes

towards

manufacturing

and focus on

more high-tech

innovation

▪ Facilitating "short-

cycle" innovation

is a prerequisite for

leading

performance of top

innovators

Dow Chemicals radically accelerated its innovation cycles over

the past years by using robots in research and testing:

▪ Number of experiments increased from 20K to 2M

▪ Lead times were shortened significantly

▪ Number of products launched increased from 0.5K to 5K per year

SOURCE: Press search


Regulations related to technology, environment, and safety issues will continue to tighten

SOURCE: IHS Paint and Coatings Industry Overview, 2017; Press Search

Product technology Environment Employee and user safety

▪ Regulations on VOCs driving up product development costs

▪ Waterborne paints becoming increasingly prevalent

▪ Tightening enforcement of environmental regulation, particularly in China (e.g., permanent closure of 73 Chinese TiO2 feedstock plants)

▪ Higher global standards for plant working conditions

“Through the next five years, government

regulations in the United States and Europe,

especially regarding air pollution, will continue

to be a driving force behind the adoption of

new, solvent-free coating technologies such

as radiation-cured coatings”

- IHS Coating Report 2017

“Environmental regulations are becoming

more stringent in all regions to limit emissions

of volatile organic compounds (VOCs) and

hazardous air pollutants (HAPs), not only in

the industrialized world, but also in

developing countries like China”

- IHS Coating Report 2017


Declining cross-regional trade flows and tariff increases may impact raw material costs

SOURCE: McKinsey Global Institute, “Globalization in transition: The future of trade and value chains”, 2019; American Coatings Association; PPG Press Release

28

22

2007 2017

-6 pts.

Global trade intensity: gross exports/gross output

%

The share of goods produced around the world that is

traded has dropped 6 points from 2007 to 2017 due to:

▪ Increase in tariffs, quotas, and anti-dumping policies

▪ China and other emerging economies consuming more

of what they produce

▪ Decline in labor-cost arbitrage in trade

“The significant tariff increases proposed by the USTR in

this regard will almost certainly impose costs on the U.S.

coatings industry that will not only harm consumers and

end users, but will also damage the currently strong

competitive position internationally”

– American Coatings Association, 2018

“Tariffs are adding “modest cost” to raw materials,

especially for tinplate used for paint cans”

– PPG Industries, 2018


Emerging markets are a significant growth opportunity

SOURCE: IPPIC; IHS; Global Insight; Orr&Boss; Coatings World; The Economist Intelligence Unit

0 20,000 40,00010,000 30,0000

5

10

15

Disposable income/capita – 2016$/capita

Japan & Korea

Paint consumption/capita – 2016Liter/capita

APAC

Europe

East

Europe West

China

India

MENAMiddle&South America

NAFTA

SEAANZ

Subsahara Africa

Developed/mature

Nascent

Emerging


Success in low price countries such as India requires high product quality similar to that expected in high price areas

SOURCE: IHS Paints and Coatings Overview, 2017; “How did Nokia Succeed in the Indian Mobile Market, While Its Rivals Got Hung Up?” (The Wharton School); “GE Healthcare in India” (The Case Centre)

India paint & coatings demand

% of total demand, 2016 ($6.5B)

Lullaby & Lullaby Warmer

Prime: “frugal innovation”

tailored for Indian markets

India-specific handsets

with local production and

investment in domestic

branding

72

28

Decorative Non-decorative

Key success factors:

‒ Localization

‒ Low cost manufacturing model

‒ Tailoring of products to match

local standards; examples from

other industries include:


What does this mean for paint & coatings companies?

What paint & coatings companies need to know

▪ Emerging markets are here to stay

▪ Demographic changes are already driving shifts in consumer preferences

▪ Customers are demanding more unique solutions for their needs

▪ For the first time in several decades, global trade flows are declining

▪ Consolidation continues unabated

▪ Regulators are adopting more local and restrictive requirements

▪ Digitization is ongoing across functions (e.g., commercial, innovation, production)

What paint & coatings companies need to do

▪ Develop a deep understanding of customers as needs and preferences are changing at a faster pace

▪ Develop fast, nimble, and flexible operating models

▪ Accelerate innovation models as other industries have already done

▪ Continue to localize, especially in emerging markets, to meet regulatory requirements, be cost competitive, and cater to local tastes

▪ Continue to develop M&A strategy and transaction execution expertise

▪ Explore digital solutions across the value chain

presented by charlie shaver chairman of the board, …...the global paint & coatings industry is...

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