Element Solutions - Earnings Call - Q1 2017

Transcript

Speaker 0

Good morning, ladies and gentlemen, and welcome to the Platform Specialty Products Corporation First Quarter twenty seventeen Results Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. I will now turn the call over to Carey Dorman, Director of Corporate Development. Please go ahead.

Speaker 1

Thank you. Good morning, everyone, and thank you for participating on our first quarter twenty seventeen earnings call. Joining me this morning are our CEO, Rakesh Soshtev CFO, John Connolly Ben Glicklitch, our EVP of Operations and Strategy Scott Benson, President of Performance Solutions and Diego Lopez Castanello, President of Agricultural Solutions. Please note that in accordance with Regulation FD or fair disclosure, we are webcasting this conference call. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Platform is strictly prohibited.

Before Before we begin, please take note of Platform's cautionary statement regarding forward looking statements in the earnings release and supplemental slides issued and posted today in connection with this conference call. Some of the statements made today will be considered forward looking. All forward looking statements are based on currently available information and Platform's reported results could differ materially from those predicted. Platform undertakes no obligation to update such statements as a result of new information, future events or otherwise. Please refer to Platform's SEC filings for a more detailed description of the risk factors that may affect Platform's results.

Please note that in the earnings release and the supplemental slides, Platform has provided financial information that has not been prepared in accordance with U. S. In accordance with Regulation G, Platform is providing reconciliations of these non GAAP measures to comparable GAAP financial measures in both the press release and the supplemental slides, which can be found on Platform's website at www.platformspecialtyproducts.com in the Investor Relations section under Events and Presentations. As a reminder, for the purposes of this call, Platform will, in some cases, be comparing the same periods in 2017 and 2016 on a constant currency basis as management believes that these figures provide a better comparison and understanding of the underlying business results for its operations. Please review the press release and the web deck for further information.

It is now my pleasure to introduce Rakesh Sachdev, Platform's CEO, for opening remarks. Rakesh?

Speaker 2

Thank you, Carrie, and good morning. I'm very pleased to report a strong start to 2017 for Platform. Both our Performance Solutions and our Ag Solutions segments saw meaningful organic sales and adjusted EBITDA growth compared to 2016. We achieved organic net sales growth of 3% for the combined company and adjusted EBITDA growth of 15%. EBITDA margins also improved by approximately 200 basis points, driven by the ongoing success of our integrations and a continued focus on higher margin products.

The end market strength we saw in Q4 in several of our markets continued into Q1 and FX movements caused only minor volatility in our results. Q1 is typically our smallest quarter for the year. And while we are pleased that we have outperformed our expectations in the quarter, we still have most of the year ahead of us and we are reaffirming our full year 2017 adjusted EBITDA guidance of 800,000,000 to $830,000,000 Before we get further into the results, I would like to recognize our promotion of John Connolly, our CFO. Hopefully, you saw our recent announcement with this news a few weeks ago. And I'm speaking on behalf of everyone at the company when I say that we are delighted to have him on board as our new CFO.

And he's joining us here on the call today. I worked closely with John since he joined Platform, and I'm confident he brings all the credentials and experience needed to help take the company forward. John will continue to focus on strategic priorities like tax planning, working capital management and enhancing financial reporting capabilities amongst others. And you'll hear from John later in the call. Page four shows an overview of our financial performance this quarter.

We reported first quarter twenty seventeen net sales of $862,000,000 and adjusted EBITDA of $193,000,000 which represents 22% of net sales. These results were above our expectations for the quarter. We saw better than expected demand in our Electronics and Industrial Solutions business and the Latin American ag market is off to a better than usual start as well. Reported net sales grew 5% year over year. Excluding the impact of currency, metals pricing and the impact of a small acquisition in Q1 twenty sixteen, we grew sales organically by 3% in the quarter.

Both businesses saw positive organic growth. In Performance Solutions, our Electronics and Industrial Solutions business drove most of the growth. Our Ag volumes grew in EMEA and Latin America. While Western Europe suffered from a cooler climate in the quarter, our sales were essentially flat as we benefited from shifting to a direct sales strategy in certain of the European markets. We do expect weakness in the European Ag markets in Q2 due to continued poor weather.

On a year over year basis, FX rates were a modest headwind for our Performance Solutions business, mainly driven by the euro and the British pound, while the Brazilian real and Japanese yen were a small tailwind for our Ag business. Overall FX was a headwind to sales as we anticipated. We reported a GAAP loss per share for the quarter of $09 compared to a loss per share of $0.59 in 2016. The improvement year over year has been from operating earnings growth, a reduction in acquisition related expenses and a reduced interest expense driven by the recent successful term loan repricings. Our constant currency adjusted EBITDA grew 18% in the first quarter versus a year ago.

You can see that both segments had solid growth in adjusted EBITDA and that a larger portion of the increase came from our Performance business. The Performance business is still reaping the benefit of its integration initiatives, meaningfully taking out operating costs and focusing the business on higher growth and higher margin market opportunities. As we mentioned late last year, our Ag business continues to drive improvements in mix by focusing on higher value, higher growth segments and has embarked on a five year continuous cost improvement plan, which we are already benefiting from this quarter. This helped offset some of the natural wage inflation in several of our markets as we continue to negotiate better costs and terms from our supplier partners. Platform corporate cost reduction was also a benefit in the quarter as corporate spending fell $2,000,000 from Q1 of last year.

Finally, as I've mentioned, our platform completed several term loan repricings over the last six months. The third one, which closed in April, is expected to further reduce interest expense by approximately $20,000,000 per year. You will see on Slide five, our Performance Solutions segment reported first quarter net sales of $447,000,000 and an adjusted EBITDA of $102,000,000 or $110,000,000 excluding corporate costs. Organic sales increased 5%, which excludes the impact of currency, metals pricing and a small acquisition we made in early twenty sixteen. Sales of specialty chemicals in our Industrial Solutions and core electronic verticals both realized close to double digit increase year over year.

Asia industrial growth was well into the double digits this quarter, as the Chinese automotive market continues to show strength and capacity continues to be added throughout Asia for our functional and decorative painting chemistry. While U. S. Automotive reported declines, increasing content per vehicle as well as significant increases in Mexican production helped our North America business to grow nicely as well. Ex U.

S. Automotive strength as well as recent robust demand in our consumer electronics drove growth in our electronic markets. We saw exciting growth in our advanced electronic businesses, which sell into advanced semiconductor markets and is an area in which we have been investing. We are not counting on this level of electronic market growth to be sustained throughout the year, given the maturity we are seeing in certain smartphone related categories. Overall, we expect our growth rate in the Performance Solutions segment will moderate some over the course of the year as we face more difficult and higher comps.

That being said, we are very pleased by the strong start we have seen. Excluding the impact of metals pricing, our Alpha business grew modestly in the quarter. Our Offshore business was flat, which is consistent with our belief that the business troughed at the end of last year. Our Graphics business saw slight declines driven primarily by lower flexographic sheet volumes, particularly in Latin America. Performance Solutions constant currency adjusted EBITDA increased by 27% in the quarter versus last year.

We saw margin improvement in all of our five verticals driven by positive mix improvements as well as synergy realization and business efficiencies. The largest improvements in our core Electronics and Industrial Solutions verticals were the integration of Allent, the OEM Electronics business and McDermott continues to go well. We reported a year over year increase in cost synergies of $7,000,000 in the P and L this quarter and have actioned total to date run rate annualized savings through March of $50,000,000 in the Performance business. Now turning to Slide six. The Agricultural Solutions segment reported first quarter twenty seventeen net sales of $415,000,000 and adjusted EBITDA of $91,000,000 or $99,000,000 excluding corporate costs.

Organic sales grew 2% driven by increased volume in certain European markets where we have expanded our presence and higher sales in Africa. As we have refined our strategy for the Integrated Ag business, we chose to expand our direct sales presence in Europe, including in The UK, Germany and Romania. These market expansion efforts have proven successful now that the European season is underway and has helped offset some of the pressure from an overall colder and delayed European season, which we discussed on our last call. We now expect this pressure from colder weather to continue in the second quarter. Our Latin America business, although seasonally smaller in Q1, has also been off to a better start than expected.

Weather conditions were favorable and farmers are spending due to reduced macro volatility and stable prices. Our BioSolutions product sales grew double digits globally, again this quarter for the Ag business and were a significant driver of volume growth in the Latin America region. While we experienced the pricing pressure we had anticipated coming into the year in Latin America from currency and generic entrants, the mix and cost improvements in the rest of the portfolio have helped offset the margin erosion. This early strength in Latin America also helped drive a year over year improvement in inventories that John will take you through later. Ag Asia was relatively flat in the quarter as we saw growth in our Health and Nutrition business as well as good growth in Southeast Asia.

This growth, however, was partly offset by softness in the Chinese market driven by reduced prices of vegetables and other crops for local consumption. North America, like Europe, was also off to a slower start due to colder weather, which combined with the phase out of certain lower margin businesses drove a decrease in sales year over year. Overall, however, EBITDA margins grew in North America, leading to a slight growth in earnings year over year in the region. After our efforts in 2016 to destock our channel inventories and to roll out a new commercial strategy, we are confident to have stabilized our business in North America and we expect this to ultimately show through on a year over year full year basis. In summary, our Ag business constant currency adjusted EBITDA grew 8% in the quarter and we believe we remain on track to achieve mid to high single digit growth for the full year.

It is now my pleasure to turn the call over to John Connolly to talk about cash flow and the

Speaker 3

balance sheet. John? Thank you, Rakesh, and thanks to everyone for the warm welcome today. I'm excited to be talking with you as Platform CFO and for the opportunity to help propel Platform forward and drive value for the company and shareholders. With that, I would like to talk about cash flow and the balance sheet for Q1.

As you can see on Slide seven, the Platform business invested about $170,000,000 of cash into working capital in the quarter. This has historically been the seasonal peak for working capital and will once again and will be once again this year. However, we reduced the cash investment in working capital by more than $50,000,000 compared to 2016 despite a growth in sales year over year. This improvement from last year can be attributed to a combination of better inventory and payable management. We are continuing to reduce excess inventory in our ag business.

For the full year, we still expect working capital to be a use of cash, similar magnitude to last year, even on higher sales. This requires working capital as a percent of sales to improve year over year, which we believe we're on track to achieve. Moving to the balance sheet. You will see that we had an $85,000,000 draw on a corporate revolver at the end of Q1, mainly to fund the working capital investments we just spoke about. This compares to $115,000,000 draw at the end of Q1 twenty sixteen, with the decrease primarily attributable to lower working capital investment and some initiatives we've taken primarily in Europe to free up cash movements in the region.

Gross debt for the business at the end of Q1 was $5,400,000,000 which is $5,100,000,000 net of $366,000,000 of cash. I'm also happy to report in April, we continue to execute against our plan to reduce interest expense in the business. While Q1 already saw the benefit of the two term loan repricings we executed in late twenty sixteen, we managed to reprice $1,930,000,000 of term loans in April to save approximately $20,000,000 of additional annualized interest. This is a great result and brings the total annualized interest reduction since 2016 to approximately $45,000,000 We will continue to monitor the credit markets for these opportunities going forward. Lastly, you will see our cash tax payments for Q1 increased $16,000,000 year over year.

Of that increase, nearly $14,000,000 was related to earnings in prior periods and thus not driven by the current quarter's operating results. The rest of the increase is largely attributable to year over year earnings growth. Importantly, the total taxes paid this quarter is in line with our full year expectations that we shared with you on the prior call. Reducing our cash tax rate over time continues to be a critical focus item for the management team. And now I'd like to turn

Speaker 2

the call back to Rakesh for an update on guidance and some concluding remarks. Rakesh? Thanks again, John. Turning to Slide eight, I would like to revisit our guidance and give some color on the second quarter. As you have seen, Q1 was a strong quarter for Platform, driven by both company specific factors and the markets as a whole.

On the Ag side, high industry inventory stocks at the customer level are leading to what has so far been another year of muted crop protection sales volume growth. FX rates at March 31 have also remained fairly stable against our guidance rates at the January. Q1 earnings came in stronger than we expected, but we anticipate the downturn in North American auto production and the continuing cold weather in Europe will slow growth in Q2. The overall forward momentum in our business remains strong. We're therefore reaffirming our adjusted EBITDA guidance of 800,000,000 to $830,000,000 and we'll refresh this guidance as appropriate in the coming quarters.

Slide nine highlights our key priorities for 2017, which we remain acutely focused on. The operating momentum is clear in both business segments and we are benefiting from broadly favorable end markets. In addition, we are seeing growth in many exciting areas, including advanced semiconductor chemistries and our Ag Biosolution products, both of which we have been investing behind for several quarters. We make these investments to provide new solutions that enable our customers to grow their businesses. And it is exciting for us that they are responding positively and we look forward to further momentum from our continued R and D initiatives.

As you know, we are driving a continuous improvement culture in the company. And as a result, we have shown significant margin improvement in both business segments as well as a reduction in platform corporate overhead. Finally, we continue to focus on generating cash flow from these businesses and using that in the near term to reduce debt. Again, I want to thank all of our employees and stakeholders for contributing to a strong start to 2017. And with that, we're now happy to turn the call over to your questions.

Operator?

Speaker 0

Our first question comes from Daniel Jester with Citi.

Speaker 4

Hey, good morning everyone. So on this the European weather issue that is impacting the ag business, can you talk a little bit about going into the second quarter, how much of that delay sale, if that continues, how much of the sales might just be lost for the year? And then can you also talk a bit about the channel change and how that could have an impact on 2Q ag results? Thanks.

Speaker 2

Yes. So good morning. I'll have Diego give you a little more color. But clearly, I think we are benefiting from a direct sales presence that we have increased in several countries in Europe. We've had a smaller presence in some of these countries and I think we started making those investments and they're clearly helping us get new sales.

But the weather has been an issue. We thought going into Q2 that we'll start seeing strength in April. We haven't seen that as yet because the weather has been to put it mildly, it's still pretty crummy in parts of Western Europe. But Diego, do you want to add some more color?

Speaker 5

Yes. I weather we had in Eastern Europe in particular was unexpectedly cold. So we had some snow in several countries in Eastern Europe. It's too early to say if this will translate into reduced sales for the industry. But obviously, we are monitoring that situation closely.

As Rakesh said, we have a lot of momentum in several countries in Europe where we have built new teams and where we have been registering products in the last couple of years. So that is helping us offset. And we will see in Q2 what happens. Think we maintain our guidance as we said originally.

Speaker 4

Okay. And then turning over to performance and your comments on the auto cycle. Sort of the market has become more challenged, have you seen any change in the growth rate for how much, you know, your content per vehicle is going into the cars? And then as the cycle weekend, has your customers become more stringent in terms of pricing or or any of the terms that could have implications on you as the year progresses?

Speaker 2

Yes. So most of the content per vehicle growth, really the content is growing in Asia, right? So there is definitely more capacity being placed in Asia, especially when it comes to plating on plastics. And we are benefiting from that additional capacity that our customers are putting. And frankly, we're also gaining share.

So that's helping us. For us, a big part of that is the Asia story. So even though the auto production in North America, as you've seen in the last couple of months, as they posted a decline, we are not being impacted much by that. We've also seen growth in the Mexico auto industry. And so overall, I think we're still feeling good, have to be cautious about what happens to the automotive industry in general.

But so far, we're feeling good. Scott can make a few additional comments on that. Scott, you're on the line. Would you care to comment on that?

Speaker 6

Yes, sure. Just a follow-up, Rakesh, with your point. The growth we're seeing in Asia and outside of China as well, not just China, but Southeast Asia, is clearly going to continue for the foreseeable future and should mitigate any impact we see in North America or even Western Europe. So content continues to increase in the Asia markets and so does production. So we feel pretty strongly that we're in great shape in the automotive space for the remainder of this year.

Speaker 0

Our next question comes from Neal Kumar with Morgan Stanley.

Speaker 7

Good morning, Neal. It seems that you're more positive on Latin America in the second half in ag. And I was wondering if you can maybe give us a sense of how you expect demand to evolve there this season from a volumetric standpoint? And also how would you characterize channel inventories and farmer fundamentals there?

Speaker 2

Yes. So obviously Latin America is an important segment in the Ag business in the second half, right? I mean Europe is our story in the first half. Approximately, I would just say approximately half of our Ag business comes from EMEA in the first half and approximately half of our business comes from Latin America in the second half. So even though Q1 is a smaller quarter for Latin America, the fact that we have outperformed our own expectations was a good sign.

I think we see the pharma spending, the co ops spending money. And we are cautiously optimistic. We hope the Brazilian real stays strong because the currency becomes more important in Latin America in the second half for us as you can imagine, right? So I think which is why we want to watch how we do in Q2 before we come back and revisit our guidance. Q2 is an important quarter for us in for both the Ag and the Performance Solutions business.

But Diego, do you have any additional color for Latin America for the year?

Speaker 5

I mean, we had a good start in the year. The campaign is running well. There have been good rains in Latin America. We had a very good stock situation coming into the year. Overall, we have good pricing power despite of the appreciation of the real.

We are gaining share. We are gaining share in BioSolutions. We're gaining share with herbicides. We have a new launch of herbicide in corn that is running very well. So overall, I'm positive.

I think the market although the market is soft and actually has declined in Q1, we have shown growth in Q1. I expect this to continue throughout the year. And obviously, like I said, second half is really important for LatAm, but we are confident to deliver growth.

Speaker 7

Thanks. That's helpful. And I was also wondering if you had an update on the $100,000,000 of continuous cost savings in agriculture in terms of how you expect it to phase in over the next five years and how much we could expect in 2017?

Speaker 5

Yes. So we announced $100,000,000 of cost saving potential in five years. We don't give a guidance year by year. But what I can tell you is that we are running we're tracking well to our plans. There are several areas where we are seeking savings.

We have the opportunity to exit some tolling contracts. We are consolidating formulation assets. We have some administration costs that we can save, IT costs by harmonizing our IT landscape. We have consolidated our lab infrastructure, and that is giving us opportunities to reduce R and D cost or increase R and D efficiency despite the fact that we are increasing our pipeline and increasing the amount of projects. So there's a lot of opportunity and the team is committed.

Just to give a little

Speaker 2

more color, we have started seeing some benefits of those programs even now. If you looked at the bridge for Q1, the sales organic sales growth of Ag was about 7,000,000 or $8,000,000 and we got an EBITDA growth of 7,000,000 or $8,000,000 So obviously that's not coming from conversion. Since we have stopped talking about synergies, a good piece of that is coming from the initiatives our $100,000,000 initiative. And we expect to continue to see that over the course of this year.

Speaker 7

Great. Thanks.

Speaker 2

You're welcome.

Speaker 0

Our next question comes from Robert Koort with Goldman Sachs.

Speaker 8

Thank you very much. Question for Diego. I know you guys referenced some vegetable prices in China causing some volatility. I was wondering if you could just maybe talk more broadly about what the biggest drivers for better or worse volume are generally. Is it acreage?

Is it weather? Is it pest pressure? What creates the volatility around your ag business when you look around the world?

Speaker 5

Okay. So our business is well diversified, I have to say. So we are more resilient to volatility in general than eventually the cycles that you see in the industry. However, obviously, we are exposed here and there to certain volatility. In the case of China, China is still a small business for us.

Actually, it's one of our expansion territories that where we see growth in the future. And here, especially for in terms of local consumption, GDP growth in China has slowed down and this is impacting prices for some of the fruit and vegetables in that country. But I would say overall, we are not as exposed to commodity price fluctuations as the average of the industry.

Speaker 8

And if I might ask Rakesh, you guys have done a bunch

Speaker 5

of deals, maybe a bit

Speaker 8

of a pause here in the last year. From a corporate strategy point standpoint, what's next? Or what do you think the next inflection point will be for Platform? And then do you see any threat or opportunity from all the musical chairs, M and A in the amongst the majors in the ag side? Thanks.

Speaker 2

Yes. So as I pointed out, we have got two very good businesses. There are still a lot of growth opportunities in both these verticals. We've got we're obviously driving much of the growth as you know in the last several quarters, we're driving organically and I think we're doing quite well. Having said that, we are not blind to inorganic opportunities.

I would say for the most part, we still continue to evaluate relatively small opportunities, but some of these are highly accretive opportunities. So we continue to study that and we will decide to deploy some capital in a way that doesn't increase our leverage because we are also very committed to obviously reducing leverage in the company. But having said that, we're going to continue to look at some string of pearls, things that help us in both these businesses. To answer your question about Threads, mean, there's nothing happening on the bigger scene where there's more consolidation taking place that we see is that we are missing out or becomes a threat because I think our strategy is to be a niche player. We are there's ample opportunity and we are capitalizing on that.

Speaker 0

Our next question comes from with Bank of America Merrill Lynch.

Speaker 9

Hi, thank you. I noticed that reduced corporate expense added to earnings in both of the segments in this quarter. Can you talk a little bit about the outlook for corporate spend over the next year or two and if you're seeing any benefits from that?

Speaker 2

Yes. So I think as I said, I think a couple of calls ago that we had peaked. And a big chunk of our corporate spend has been with third parties, whether it's on the finance side or the system side. And we have been developing internal capabilities, which I think we have come a long way. And I think we are beginning to reduce our third party costs, consulting costs.

And so it's going to be a slow write down but we are definitely in the direction where we're going to be reducing corporate costs.

Speaker 9

Okay. Thank you. And on the Performance Solutions side, I know that new customer wins added to sales growth last year. Can you remind us how much sales grew because of new wins last year and what the expectation is for this year?

Speaker 2

Yes. So Scott, do you want to address that? I know we don't give guidance on new wins, and we don't separate it, but maybe Scott can give you a little bit of color on that.

Speaker 6

Sure. I think if you consider what the state of our major markets were last year, I can tell you this. I think we clearly grew faster than the markets themselves, which represents share gain. And we see that continuing this year. So we are focused 100% on new business and new customer captures.

So that will remain a focus for us well into the future. That is our strategy to be able to grow faster than the market. So you should be able to count on us returning higher than market rate growth due to share capture.

Speaker 2

I might just add a little bit of color. Clearly, we are seeing a lot of growth in the semi market. While that's a smaller portion of our total electronics business, it's been good. A lot of the growth in semi is coming from the memory market these days, which is still a smaller portion of our business. I mean, our larger portion of our overall business is still in circuit boards and for mobile devices and other electronics.

But we expect this year to be a good one for electronics overall because several new mobile platforms will go into production as you guys know in the second half of the year. And so we fully expect to see us benefiting from that in the back half of this year.

Speaker 9

Okay. That's helpful. And then one just last one if I may. I know that BioSolutions continues to grow at a very fast rate for Platform. How much of the Ag segment is BioSolutions now?

And what's the appetite to further invest in that segment either organically or inorganically?

Speaker 2

Yes. So BioSolutions is, I would say, approximately about 10% of our ag sales and it's obviously growing well into the double digits. This business was from a legacy standpoint strong in countries like France and Mexico. And I think one of the things that we are doing quite successfully as we have built a strong BioSolutions business in Latin America, which has really become a core of our overall offering, which is also helping not just our BioSolutions business, but several of our conventional crop chemicals are riding on the coattails of our BioSolutions business very successfully in Latin America. Diego?

Yes. I think although the share of BioSolutions is not yet that prominent,

Speaker 5

the importance of biosolutions in our portfolio is crucial because we are branding our crop solutions in LatAm, in Europe and in other regions. We have actually our brand Pronutiva, which is combining conventional crop protection with biosolutions to either increase yields or reduce residue. And that has been very successful. We have a pipeline that is going to increase sales in the next couple of years. We have inorganic growth opportunities that we are also evaluating.

So this we have put biosolutions at the core of our strategy.

Speaker 9

Thank you very much.

Speaker 0

Our next question comes from Chris Parkinson with Credit Suisse.

Speaker 10

Thank you. Can you just hit on your general expectations for the net pricemix effects in both North And South America? As in your PowerPoint, you mentioned that North America, you're still seeing some low margin businesses, but you're also facing some pricing pressure. So if you could just kind of walk through the puts and takes that would be greatly appreciated. Thank you.

Speaker 5

Yes. We don't give a guidance specifically to every region. But what I can tell you is that we are expecting the North American business to have stabilized. And obviously, we're positioning the business in the future for growth. We're confident here that we can improve our margins this year.

We are rolling out a new commercial strategy that is gaining traction. Our customers are giving us very positive feedback about the results. And in LatAm, I mentioned already LatAm before that we are confident about our growth this year. Same in Asia. Europe is the only region where this year we're looking if we can deliver additional growth overall.

We actually we're still forecasting to show growth this year.

Speaker 2

So maybe I can add a little more color. Pricing hasn't been much of a story in North America. It's our deliberate plan to move away from low margin products. Pricing has been something that we manage very carefully in Latin America, right? So I think in this quarter, had to give some pricing.

I would say most of the pricing was an adjustment for FX because we have benefited quite significantly from the stronger real. We gave some of that, that was part of the plan. And a small piece was because of the generic pressure. I would say that our business is very durable. We have lots of moats when we talk about Latin America.

But the registration process was somewhat changed in Brazil where people can register a little faster. So we were a little cautious. And we still are cautious about what that would do. But I think we are selling the quality and reliability of our products to our customers to the point where I think it's not that easy for a farmer to simply switch because of a reduction in prices on certain of these products that they offer.

Speaker 10

That's helpful. And just obviously the focus on Europe is a little more short term in nature right now based on weather. But when you think about your long term strategy in the European region, inclusive of Central And Eastern, how should we think about both your product portfolio development and distribution efforts? So just if you could walk us through the kind of the key themes that you're looking at for the next two, three years, not just the next, you know, three months. Thank you.

Speaker 8

One moment.

Speaker 0

Ladies and gentlemen, please stand by. You're now back on.

Speaker 2

Okay. Hey, sorry guys. First technical hitch. I apologize. I think we got dropped.

Hopefully most of the folks are still on the line. So operator can we just pick up the question please?

Speaker 0

Sure. If you could ask your question again.

Speaker 1

Chris was asking about Europe.

Speaker 10

Sorry about that. So the question was, you're thinking about your longer term strategy in Europe, specifically Europe, inclusive of both the Central And Eastern regions, Can you just walk us through your key initiatives on product portfolio development and distribution? Just over the next two to three years, what are kind of the key themes for you in that region? Thank you.

Speaker 5

Yes. So our focus is on building direct sales presence in all relevant countries in Europe. Our presence is stronger or our emphasis has been historically stronger Eastern Europe and Southern Europe. We are entering now the Western European market, which is a big market and also a high profitable market. We have a pipeline as we announced globally of $1,200,000,000 of peak sales value, dollars 1,300,000,000.0 to be more exact.

But a big part of that pipeline is going to impact Europe. We have also we're building teams right now in most of the relevant countries in Europe. And I think Europe, when we talk about EMEA, we talk about Europe and Africa, that's part of the business unit. Africa is a growing region. And we are right now positioned as a number three in Africa and number one in some of the key African markets like South Africa and West Africa.

So overall, Europe has been in the last years a growth region for us and will be also in the next couple of years.

Speaker 10

That's helpful. Thank you.

Speaker 0

Our next question comes from John Roberts with UBS. Thank you. I just wanted to drill down a

Speaker 11

little further on automotive. When you talk about increased content, is that decorative chrome? Or is that more electronics content that pulls through printed circuit boards for auto?

Speaker 2

Yes. Think when we were talking about that we were definitely talking about decorative and corrosion resistant applications in Asia. Sure. I mean that's been a big growth driver for us. I think in the developed world probably less so in terms of content per vehicle.

So I think clearly when we say growth and content I think we are referring more to the Asian growth and the Asian content. Scott, do you want to add something?

Speaker 6

Yes. From an industrial side, clearly, there's more content being produced decorative content being produced in Asia than there was in prior years. As the quality and the demands on the vehicles increase. As well as from an electronics side, John, we do kind of see that across the board. There's continued acceleration in electronic content that we will see and benefit from in our electronics business as well.

Speaker 11

And then the strength you're seeing in Mexico, is that dependent on vehicles being re exported back to The U. S? Or is that final content ending up going outside of North America?

Speaker 6

It's a little of both, but quite a bit of the content and quite a bit of the capacity being added in Mexico is for Latin American consumption or export out of Mexico, not to The United States. So we think that the market there will remain strong as they build for the export market out of Mexico.

Speaker 8

And then lastly, how

Speaker 0

is the subsea hydraulic fluids business performing?

Speaker 6

I think our offshore business is in line right now with where we thought it would be. I think Rakesh mentioned earlier that we think that the business did hit the bottom of the trough last year, and we're seeing it pretty much as expected with we see growth coming beginning late this year into 2018. We're a little more optimistic about that.

Speaker 0

Thank you. Next question comes from Jim Sheehan with SunTrust.

Speaker 12

Good morning. A question on your Ag business in Latin America. We're seeing some crop protection businesses commenting that they are planning to build inventory for Latin America in the second half and also maybe a little bit for Asia. Can you talk about whether you're planning to build any inventory or how you view that situation?

Speaker 5

No. Nothing really substantial. I mean, we try to align sales to the timing of application to make sure that we control our working capital. And I think if you look at our Q1 working capital performance for platform, ag has had a significant impact. And it's also a reflection of how we ended Q4 last year.

We manage our inventories well enough to start in Q1 with a good situation. We are also in terms of net working capital, not only focusing on inventories, but also on collection performance. So overall, our strategy is to align the timing of sales to the timing of application to make sure that we control our inventories over the year.

Speaker 12

Great. And in North America, can you talk about the pricing outlook there? I mean, it seems like there might be some price pressure, but I recognize that you guys are also pruning some low margin business. If we just focus on the high margin business that you guys are trying to optimize, what's the underlying pricing outlook for that?

Speaker 5

Overall, our pricing in North America on our specialty brands is stable. And really here, we're winning by mix, right? So we are really focusing on our five key priority segments that we have defined as part of our strategy. And we're moving the business in that direction. I'm not expecting in our Specialty Brands a significant pressure this year.

Speaker 2

Thank you.

Speaker 0

Ladies and gentlemen, does conclude the Q and A portion of today's conference. I'd like to turn the call back over to Rakesh for closing comments.

Speaker 2

Okay. Thank you. And again, I just want to thank everybody for being on this call. We obviously are pleased with the way this quarter performed in Q1 and we're looking forward to giving you updates as we roll forward in 2017. And I think I speak on behalf of my team here.

But I think we feel pretty good as we go into the rest of the year. So thank you and we'll talk again soon.

Speaker 0

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.