Global growth strategies for coatings

The Coatings Summit

Presented by Charlie Shaver
Chairman of the Board, Axalta Coating Systems

Sensitivity: Business Internal

 Agenda

▪ State of the industry

▪ Opportunities & future outlook

PROPRIETARY 2
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 The global paint & coatings industry is a $135B market that includes decorative
and non-decorative segments

Global paint and coatings market by application

$B, 2017 Segment description
▪ Architectural paint for buildings and homes
Decorative 53 (e.g., building exterior coatings, interior wall paint)

▪ General coatings applications including Coil, Powder,

General industrial 52
Wood, and other Industrial

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

Automotive 13
interior and exterior trim, door handles, trunk bodies)

▪ High performance coatings for high-value infrastructure

Protective 9
(e.g., power generation, oil and gas, mining)
▪ Refinishing of vehicles and coatings for OEM fleet and
Refinish 7 specialized commercial vehicles (e.g., body panels and
doors repair)

Total 135

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

PROPRIETARY 3
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 The paint and coatings landscape remains fragmented with the top 9 players
accounting for ~45% of market share

Paint and coatings market share Paint and coatings

% of total revenue revenue $B, 2017 Core segments

100% = 135 Decorative, Industrial, Protective,

15.0
Refinish, Packaging, Coil, Wood
Top 9 players
~45 Decorative, Automotive (OEM &
14.8 Commercial), Refinish, Aerospace,
Industrial
Decorative, Industrial, Automotive,
Others ~55 11.5 Powder, Protective, Marine,
Aerospace, Coil, Packaging
Automotive OEM, Decorative,
5.4 Industrial, Marine, Protective

Corrosion, Wood, Roofing, Specialty

5.0 paints

Automotive (OEM & Commercial),

4.4 Refinish, Industrial, Wood

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

PROPRIETARY 4
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 Slow organic growth coupled with raw material and cost headwinds is driving
margin compression

Paint & coatings market

projected growth Industry profitability: EBITDA margin
Segment % CAGR 2016-2020 EBITDA as a % of sales
16,3 14,7
Decorative 4 14,3

General
4
Industrial

Automotive 3 2016 2017 Q3 2018

Protective 3 “We continued to experience significant “During fiscal 2019, we expect

raw material and elevating logistics the challenging raw material
Refinish 4 cost inflation…these inflationary environment to continue,
impacts increased during the quarter perpetuating the stress on
Powder 4 and, as a result, we experienced the gross profit margins. All of our
highest level of cost inflation since the businesses are aggressively
cycle began two years ago” pursuing price increases”
Coil 5
– PPG CEO Michael McGarry, – RPM CEO Frank Sullivan,
October 2018 July 2018
Marine 2

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

PROPRIETARY 5
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 M&A activity continues to be a major growth driver in the paint & coatings market
NOT COMPREHENSIVE

acquired by acquired by acquired by acquired by acquired by acquired by acquired by acquired by acquired by

2016 2017 2018

acquired by acquired by acquired by acquired by acquired by acquired by acquired by acquired by acquired by

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

PROPRIETARY 6
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 Market consolidation has continued with the largest players owning an increasing
share of revenue

Estimated global paint & coatings market share Estimated global paint & coatings market share
%, 2002 %, 2017
53 51

20 18
11 11 11
9 9
7

AkzoNobel PPG ICI Next 6 Other PPG Sherwin Akzo Next 6 Other
Williams Nobel

Market share Market share ∆ vs. 2002

Top 3 players 27% Top 3 players 31% 4 pts.
Other players 73% Other players 69% (4 pts.)

SOURCE: Wall Street research; Barclays Banking estimates

PROPRIETARY 7
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 The industry has and will continue to become increasingly global, with 60% of
production occurring in Asia by 2021

World Production of paints and coatings CAGR

Million metric tonnes, % of total 2016-2021
NA LATAM EU MEA China APAC

+4.7% p.a.
67.5
13% 3%
+5.2% p.a.
53.7 5% 1%
14% 16%
5% 2%
39.7 7%
15% 18% 4%
7% 8% 7%
23% 37%
8% 34%
24%
23% 6%
23% 21%

2010 2016 2021F

SOURCE: IHS Paints and Coatings Overview, 2017

PROPRIETARY 8
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 Deceleration of economic expansion in China may dampen local paint and
coatings production growth

China GDP annual growth rate China decorative coatings production

% 10 thousands tons

10% 4% p.a.
13% p.a. 785
635
8% -4% 346

6%
2011 2016 2021F
4%
China industrial coatings production
2%
10 thousands tons

0% 5% p.a.
2011 12 13 14 15 16 17 18 19 2020 6% p.a. 1.186
926
▪ Growth rates declining as China transitions from 686
manufacturing-driven to service-driven economy
▪ ~20% year over year decline in local auto sales1
▪ Housing sales expected to fall 5% in 2019
2011 2016 2021F

1 December 2018; The New York Times

SOURCE: Reuters; The New York Times

PROPRIETARY 9
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 Agenda

▪ State of the industry

▪ Opportunities & future outlook

PROPRIETARY 10
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 The paint & coatings industry has a strong balance sheet and is well-positioned
for continued M&A activity
Select PE holdings in
Industry financial health Private equity outlook coatings value chain

Industry financial metrics1 ▪ Opportunistic PE activity expected to continue

Average 2017

Global PE transaction value in chemicals

17.8% $B
Debt / equity
$12.9 Number of deals

$9.4

Net debt / EBITDA2 2.4 $4.7

3.8

2014 2015 2016 2017

EBIT / interest 27.7
76 60 54 56

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

PROPRIETARY 11
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 Global demand and preferences are evolving as the population mix changes and
people are living longer

Share of 2018
Global population projection by age cohorts Life expectancy at birth global population
% of population, billions of people Years %
Age <60 yrs. Age 60 yrs.+ 2015-20 2025-30
100% =
2015A 88 12 7.4 76.5
19
78.1
2020E 87 13 7.8
68.9
18
85 15 71.0
2025E 8.2
79.6
2030E 84 16 8.6 4
81.1

2035E 82 18 8.9 69.4

70.9 3
2040E 81 19 9.2 75.8
77.9 3
2045E 80 20 9.5
71.9
2050E 79 21 9.8 World 100
73.8

SOURCE: World Population Prospects: The 2017 Revision

PROPRIETARY 12
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 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

PROPRIETARY 13
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 Other industries have adopted approaches to rapid innovation in order to
respond to changing preferences

Value ▪ Trendy, high-fashion apparel at affordable prices

proposition ▪ Fresh assortment, with new items every two weeks

Operating ▪ High vertical integration—from manufacturing plants through retail stores

model ▪ Strong research capabilities create deep insights into local market tastes ▪ Key success factors
include:
─ Superior customer
insights
Production ▪ Co-location of designers and production lines enables faster production
─ Speed, agility, &
model ▪ Less trendy, ephemeral products manufactured in lower cost locations flexibility
─ Close collaboration
between product
design & production
Delivery ▪ Direct retail stores located near more expensive, high-fashion brands
model ▪ High-speed logistics to enable fast transfer onto retail floor

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

Economic gone”
model
▪ Lower marketing spend due to strong retail footprint

SOURCE: Press search

PROPRIETARY 14
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 The broader chemicals industry is leveraging digital approaches to accelerate
innovation

Current trend Focus on short cycle innovation

▪ Rethinking
current attitudes
Dow Chemicals radically accelerated its innovation cycles over
towards
the past years by using robots in research and testing:
manufacturing
and focus on ▪ Number of experiments increased from 20K to 2M
more high-tech ▪ Lead times were shortened significantly
innovation ▪ Number of products launched increased from 0.5K to 5K per year
▪ Facilitating "short-
cycle" innovation
is a prerequisite for
leading
performance of top
innovators

SOURCE: Press search

PROPRIETARY 15
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 Regulations related to technology, environment, and safety issues will continue
to tighten

Product technology Environment Employee and user safety

▪ Regulations on VOCs driving ▪ Tightening enforcement of ▪ Higher global standards for
up product development costs environmental regulation, plant working conditions
▪ Waterborne paints becoming particularly in China (e.g.,
increasingly prevalent permanent closure of 73
Chinese TiO2 feedstock plants)

“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

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

PROPRIETARY 16
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 Declining cross-regional trade flows and tariff increases may impact raw material costs

Global trade intensity: gross exports/gross output

%
28 The share of goods produced around the world that is
22 -6 pts. 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

2007 2017

“Tariffs are adding “modest cost” to raw materials, “The significant tariff increases proposed by the USTR in
especially for tinplate used for paint cans” this regard will almost certainly impose costs on the U.S.
– PPG Industries, 2018 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

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

PROPRIETARY 17
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 Emerging markets are a significant growth opportunity

Paint consumption/capita – 2016

Liter/capita
15
Japan & Korea NAFTA

Europe West

10 Emerging
SEAANZ Developed/mature
Europe
China East
APAC
5
Middle&South America
MENA
India Nascent
Subsahara Africa
0
0 10,000 20,000 30,000 40,000
Disposable income/capita – 2016
$/capita

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

PROPRIETARY 18
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 Success in low price countries such as India requires high product quality similar
to that expected in high price areas

India paint & coatings demand Key success factors:

% of total demand, 2016 ($6.5B) ‒ Localization
Decorative Non-decorative ‒ Low cost manufacturing model
‒ Tailoring of products to match
local standards; examples from
other industries include:
28
Lullaby & Lullaby Warmer
Prime: “frugal innovation”
tailored for Indian markets

72 India-specific handsets
with local production and
investment in domestic
branding

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)

PROPRIETARY 19
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 What does this mean for paint & coatings companies?

What paint & coatings companies need to know What paint & coatings companies need to do

▪ Emerging markets are here to stay ▪ Develop a deep understanding of customers

▪ Demographic changes are already driving shifts as needs and preferences are changing at a
in consumer preferences faster pace

▪ Customers are demanding more unique ▪ Develop fast, nimble, and flexible operating
solutions for their needs models

▪ For the first time in several decades, global trade ▪ Accelerate innovation models as other
flows are declining industries have already done

▪ Consolidation continues unabated ▪ Continue to localize, especially in emerging

markets, to meet regulatory requirements, be
▪ Regulators are adopting more local and cost competitive, and cater to local tastes
restrictive requirements
▪ Continue to develop M&A strategy and
▪ Digitization is ongoing across functions (e.g., transaction execution expertise
commercial, innovation, production)
▪ Explore digital solutions across the value
chain

PROPRIETARY 20
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