Element Solutions - Earnings Call - Q2 2017

Transcript

Speaker 0

day, ladies and gentlemen, and welcome to the Platform Specialty Products Corporation's Second 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. As a reminder, today's conference call is being recorded. I'll now turn the call over to Carey Doorman, Senior Director of Corporate Development.

Please go ahead.

Speaker 1

Good morning and thank you for participating on our second quarter twenty seventeen earnings call. Joining me this morning are our CEO, Rakesh Shashdev CFO, John Connolly Ben Glicklich, our EVP of Operations and Strategy Scott Benson, the President of Performance Solutions and Diego Lopez Cocinello, the President of Agricultural Solutions. Our Chairman, Martin Franklin is also on the line. 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 we begin, please take note of Platform's cautionary statement regarding forward looking statements in the earnings release and the 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. GAAP. 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

Speaker 2

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's now my pleasure to introduce Rakesh Daschev, Platform's CEO for opening remarks. Rakesh? Thank you, Carrie, and good morning, everyone.

Platform continued its positive momentum with another solid quarter of results in the second quarter. Overall, the combined business achieved organic sales growth of 2% and realized a constant currency adjusted EBITDA margin improvement of over 100 basis points. Our Performance Solutions segment was the primary driver of the organic sales growth in this quarter, as organic sales in the Industrial business grew high single digits and in the Electronics Assembly business, sales grew in the low teens on a percentage basis. In our Agricultural Solutions segment, we also saw modest organic sales growth in all regions, excluding EMEA, where a slow season in parts of Eastern Europe and a change in our selling strategy in West Africa weighed on otherwise solid organic sales results from Central And Southern Europe. From an earnings perspective, we continue to execute on our synergy plans in Performance Solutions and benefited from product mix improvements in Ag, driven by organic sales growth in higher margin geographies and continued traction with our BioSolutions products.

Our outlook for the second half of the year remains largely unchanged. We are encouraged with our overall growth opportunities, but we are also aware of certain macro factors like softening U. S. Auto production, more challenging electronic comps and continued low commodity prices for certain crops. In light of our solid performance through the first half and the better visibility it gives us for the full year, we are raising the low end of our full year 2017 adjusted EBITDA range up by $10,000,000 for a new adjusted EBITDA guidance range of $810 to $830,000,000 Slide four shows an overview of the financial performance this quarter.

We reported second quarter twenty seventeen net sales of $941,000,000 and adjusted EBITDA of $2.00 $5,000,000 representing an adjusted EBITDA margin of 22. Reported net sales growth was 2% year over year or 3% at constant currency. As I mentioned previously, key drivers for Performance Solutions were continued strength in our Industrial Solutions business around the globe and our Electronics Assembly business in Europe and Asia, partially offset by declines in the Graphics business, particularly in Latin America. Our Ag business saw growth in most regions, but experienced a decline in EMEA largely driven by a planned change in selling strategy in West Africa and the slow season in parts of Eastern Europe. On a year over year basis, FX rates were a headwind for sales in our Performance Solutions business, mainly driven by the British pound, Chinese yuan and the euro, while the Brazilian real was a small tailwind for sales in our Ag business.

Overall, FX was a 1% headwind to net sales. We reported a GAAP loss per share for the quarter of $0.21 compared to a loss per share of $04 in 2016. The increased loss year over year is primarily attributable to effect of FX declines on long term debt, partially offset by lower interest expense from our term loan repricings. Our constant currency adjusted EBITDA grew 8% in the quarter. Both segments contributed meaningfully to this earnings growth.

The Performance Solutions business continues to execute against its integration initiatives with a focus on facility rationalization and supply chain efficiencies, while investing in higher growth and higher margin market opportunities and driving cross selling between our Performance Solutions businesses. The Ag business continues to emphasize growth in higher margin products and market expansion into countries in Western Europe with higher margin opportunities, while also pursuing our continuous cost improvement plans. You will see on Slide five, our Performance Solutions segment reported second quarter net sales of $462,000,000 and adjusted EBITDA of $103,000,000 or $110,000,000 excluding corporate cost allocations. Organic sales increased 6%, which excludes the impact of currency and metals price fluctuations. The largest growth driver for sales in the segment was Alpha, our electronics assembly business, which saw meaningful demand pickup in Europe and Asia.

Demand for Assembly Materials is tied to overall electronics production, including phones, cars and other computing devices. The margins in Alpha are lower than the electronic surface treatment products, which contributed to essentially flat adjusted EBITDA margins year over year in our Performance segment on a constant currency basis, despite growth and synergy realization. Industrial Solutions also drove significant organic sales growth in the quarter across all regions. While only half of our Industrial business is tied to automotive, slowing auto production in The U. S.

Is beginning to impact our results and expectations for the rest of the year. So far, however, growth in our Mexican business tied more to global consumption than domestic consumption has more than offset any softness in North America, and we expect this trend to continue. Similar to Alpha, the Industrial Solutions margins are also slightly below the average for the segment. Our core Electronics business saw modest organic sales growth in the quarter, driven by memory disk demand as drive capacity requirements continue to increase. The comps in the electronic surface treatment business unit will be more difficult in the second half of the year, given the growth achieved in the 2016.

We are cautiously optimistic that mobile phone launches and the ongoing consumer replacement cycle will be tailwinds in the second half of the year. While our offshore business remained relatively stable from a dollar sales perspective this quarter, The Graphics business experienced a decline from secular headwinds in newspapers and lower packaging demand in The Americas. We have made some organizational leadership changes in this business and are starting to see results that we expect will create growth in the long term. Performance Solutions constant currency adjusted EBITDA increased by 7% in the quarter versus last year. Margins improved across our Electronics, Assembly and Industrial verticals, driven by synergy realization and business efficiencies.

While the adjusted EBITDA margin for Performance Solutions on a consolidated basis was negatively impacted by the mix of sales growth in the quarter, each of these three businesses units displayed a positive trend in margins. Our results this quarter reflect a year over year increase in cost synergies of $5,000,000 in the P and L this quarter, and we have now actioned run rate annualized savings of more than $52,000,000 in the Performance business. Now turning to Slide six. The Agricultural Solutions segment reported second quarter twenty seventeen net sales of $479,000,000 and adjusted EBITDA of 103,000,000 or $110,000,000 excluding the allocation of corporate costs. Organic sales declined 2%.

The biggest driver of the sales decline this quarter was the previously disclosed change in selling strategy in West Africa, which was a 2% headwind to organic sales growth for the Ag segment. This number accounts for essentially the entire decline in the segment, which implies good performance for the rest of the segment in an overall difficult market. In addition to the West Africa change, the EMEA region was also impacted by a slow season in Russia and Ukraine, driven by weather. These headwinds were partially offset by the expansion of business of subsidiaries in Germany and UK, two large higher margin markets, where we have been underrepresented historically. This overall result in Europe was strong given the market backdrop.

Latin America was an important contributor to net sales growth in the quarter. We have a great portfolio in the region of both niche conventional crop protection products and biosolution products, which we are successfully selling together under our ProNutiva program. As expected, we have been experiencing some generic pressure on a few key products in the region. The quality of our brands and our products have helped us perform better than our expectations in terms of both volume and price against these generic offerings. While industry channel stocks in Latin America are high, we believe our level of stocking is in line with historical practice and therefore has not been a concern for us to date.

We remain cautiously optimistic for the Latin American business in the second half. Our North America and Asia businesses also both experienced moderate organic sales growth in the quarter, mainly driven by volume. In North America, our Canadian herbicides business as well as our U. S. Specialty crop business both experienced volume growth.

Both of these markets were under pressure in previous years from channel inventories. In Asia, volumes were up primarily from new product launches as well as market growth in Japan and India. This was partially offset by softness in the China market, which impacted the performance of our seed treatment business in the region. Ag Solutions adjusted EBITDA grew 9% on a constant currency basis in the quarter. The EMEA region saw significant mix improvements coming from both the expanded business and subsidiaries in higher margin geographies in Western Europe and a reduction of lower margin sales in West Africa due to our change in selling strategy.

North America also saw positive adjusted EBITDA margin trends from higher sales of specialty miticides. SG and A savings initiatives in the segment were meaningful, but were offset by investments in additional sales force in Western Europe and operating cost inflation in Latin America. We also saw positive benefits from raw material price reductions we achieved in all of which led to a very strong earnings performance. Now before I turn the call over to John Connolly to talk about cash flow and the balance sheet, I'd like to make a few comments in light of recent media speculation about our portfolio. We have two very good businesses that are on track to deliver meaningful growth this year, and we continue to invest in both of these businesses to support growth for the long term.

We will always consider alternatives to maximize shareholder value, whether this be through continuing as one company or separating the Performance Solutions and Ag businesses. Our decision in this regard will be dictated by our belief in what is best for our shareholders and as with all decisions that we make for Platform's long term future and that of each of our businesses. As is our practice, we will not comment on specific media speculation. And if and when we have something to share in the future, as with all our strategic decisions, we would communicate to all of our stakeholders, including employees, customers and investors at the appropriate time. Rest assured, our leadership team remains focused on driving long term growth in sales and profitability for both businesses.

Now I'd like to turn the call over to John to talk about cash flow and

Speaker 3

the balance sheet. John? Thanks, Rakesh, and good morning, everyone. I'm now on Slide seven, where I'll talk briefly about our performance and expectations for cash flow and the balance sheet. Platform had a strong quarter from a cash perspective, generating approximately $88,000,000 of free cash flow in the quarter.

This was driven by an improvement in working capital quarter over quarter as well as the benefit of our term loan repricing activity on interest expense. Our cash flow generation from the release of working capital in the first half of the year improved modestly versus 2016 on a like for like basis. Cash flow in the quarter was further improved by our implementation of a new factoring program in Europe for our Ag business. As we expected, we saw some increased inventory in the Performance Solutions business tied primarily to safety stocks as we continue to execute our facility rationalization plans. We expect working capital to return to a normal full year trends across Q3 and Q4.

As we look to the rest of the year, we are providing an update on our key cash flow drivers. We are updating our cash flow interest guidance to approximately $330,000,000 for the year as we capture the benefit of all of the term loan repricing activity. We are narrowing the range of our cash tax guidance by $10,000,000 to a range of 130,000,000 to $150,000,000 for 2017. This update reflects our slightly more optimistic view of earnings for the full year and the impact of some payments related to earnings in prior periods. Finally, our net CapEx guidance remains unchanged from the previous view we provided of approximately 100,000,000 for the year, which is within our long term target range of 2% to 3% of annual net sales.

Q2 seasonally highest working capital point for Platform with net debt at the end of the quarter of just over $5,100,000,000 Cash grew to a balance of $427,000,000 at quarter end June 3037. As we expect to continue to grow earnings and for working capital to continue to release over the balance of the year, we expect net debt to decline by more than 200,000,000 Overall, we remain comfortable with our deleveraging plans for the remainder of this year and the next several years. With that, I'd

Speaker 2

like to turn the call back to Rakesh for an update on guidance and some concluding remarks. Rakesh? Thanks, John. Turning to Slide eight, I would like to provide details on our updated guidance. Platform, as we just said, showed solid performance over the 2017.

Global GDP is continuing to perform in line with our expectations, and Europe is showing signs of some additional growth. We are, however, seeing the expected slowdown in U. S. Automotive production, which inevitably impacts our business. On the ag side, there has not been much movement in commodity prices, and we still expect the overall market to be flat to slightly down for the year.

These dynamics have both positive and negative impacts on the outlook for our business. In Ag, Latin America stability is good for us as this is our biggest market and the biggest driver of results in the second half. The Brazilian real has some remained somewhat volatile against the dollar, so that is something we'll be watching closely and reacting to within our business in real time. Coupled with increased demand for Ag specialty portfolio in North America, we believe our Ag business can achieve a low single digit organic sales growth number for the full year. This is better than our previous guidance on organic sales growth.

In Performance Solutions, U. S. Auto production softness has so far been offset with strong Mexican production, which has kept our industrial business growing nicely. We expect this trend to continue throughout the rest of the year, and we expect to start seeing some moderation in Asia growth as well. From an Electronics perspective, the comps in the second half become more challenging as we saw a robust recovery at the end of last year.

We currently expect full year organic sales growth in Performance Solutions to be in the mid single digits, which implies a moderation to what we have seen in the first half, but slightly improved over our last guidance. We expect adjusted EBITDA for the company overall to grow faster than net sales due to operating leverage from higher sales, mix improvements and cost reduction activities, including our execution of synergy plans. These are the factors we considered when increasing the lower end of our adjusted EBITDA guidance by $10,000,000 for the year, ending with a new full year 2017 range of $810,000,000 to $830,000,000 based on June 30 exchange rates. Slide nine again highlights our key priorities for 2017, which we continue to execute against. I'll remind you that all of us at Platform spend time thinking about how our daily decisions drive the company towards these priorities.

Operating momentum continues in both business segments, even as certain end markets are indicating some signs of moderation. Healthy growth continues in many markets we are currently investing in, like advanced electronics and performance and biosolutions and some of the underserved geographic markets in ag. We also continue to deliver on synergies from our business combinations and our continuous cost improvement initiatives. All of this at the end of the day should drive cash flow, which has grown nicely year over year. We are now happy to turn the call over to your questions.

Operator?

Speaker 0

And our first question comes from the line of Ian Bennett of Bank of America. Your line is now open.

Speaker 4

Thank you and good morning. How does the CapEx and cash taxes that Platform expects to pay this year comparing the different businesses in Arista and Specialty Products?

Speaker 2

You want to answer that? Sure.

Speaker 3

We don't provide that level of breakout in terms of cash taxes or CapEx. As you're probably aware, we have a bit more of our CapEx is on the Ag side. We're a little bit more capital have a little bit more capital investment than on the MPS side. But we don't expect that to be significantly different than what we've had in

Speaker 2

the prior year. So Ian, typically it's a sixty-forty mix. 60,000,000 of the $100,000,000 or so will be in Ag, partly because of the registration work we do. And about 40,000,000 would be in our Performance business.

Speaker 4

And that would be perhaps a similar split in the cash taxes?

Speaker 2

Well, don't break that because a lot of our cash tax planning is really done together. And so we have never really guided to that. We can try and give you some guidance offline, but we don't sort of break that up.

Speaker 4

Okay. No worries. And then as a follow-up, if Platform were to materially delever and find itself below the 4.5x net debt target, what would be the priorities for the use of cash in that scenario?

Speaker 2

Yes. So let me first of all say, we are not cash starved for organic growth. So we continue to invest appropriate amounts in both the businesses to drive organic growth. And you can see, we are driving both top line and bottom line. Now to the extent that we delever the company and we have opportunities to make acquisitions on the inorganic path, there are opportunities on both sides.

There's we are a niche businesses. There's a lot of fragmentation across the globe. And I think there are going to be some terrific opportunities for us to continue that path. We are not there today, but the plan would be that when we get there, we will continue that journey.

Speaker 0

Thank you. And our next question comes from Neel Kumar of Morgan Stanley. Your line is now open.

Speaker 5

Hi, good morning. I was wondering if you can discuss your expectations for price mix in the second half of the year in Latin America for ag? And how would you characterize industry stocks relative to last year at this time?

Speaker 2

Yes. So as and I'll let Diego, who's here, to give you a little more color. But as you know, we manage our pricing in Latin America very carefully with the movement of the FX rates. And typically, when the Brazilian real gets very strong or gets stronger, our customers expect us to give them some price relief and vice versa. And I think if you look at how we have managed that over the last several years, it really is a zero sum game.

And it's going to be no different this year. In addition to pricing from FX adjustments, there's also obviously the issue of how we are combating generic pressures, right? So there are two issues in Latin America. One is how we manage prices due to movements in FX. And two is how do we manage pricing as it relates to the competitive pressures.

And I think we have done as I said, we have done well on the competitive pressure side. We expected in fact, it's clearly demonstrating that the brands that we have and the closeness that we have to our customers, distributors and co ops in Brazil, we are able to charge a premium price and we are doing so. So I don't know, Diego, do you want to add some more color?

Speaker 6

To add maybe to that, we are assuming an exchange rate real to U. S. Dollar, which is the same as we see currently. This is a modest tailwind compared to the 3.2 to $3.3 that we saw last year. But at the same time, the campaign in LatAm is just starting.

So the market has time to adjust. This is why we see I mean, we see our pricing power strong, but it's exchange rate tailwind going to translate immediately into EBIT.

Speaker 5

It. Thanks. That's helpful. And I was wondering also if you could elaborate on your comments of decline in overall Performance Solutions EBITDA margins for the quarter. Was that primarily driven by product mix?

And do you expect that to continue to have an impact in second half of the year?

Speaker 2

Yes. So we had two things that drove our margins to be flat. We would have expected margins to be up. And obviously, one was the mix issue, where we had greater sales of our assembly product chemistries, which has lower margin. I think the second thing that we got affected somewhat in the quarter was on because of raw material price increases that we couldn't correct this quarter, but it's something that Scott, who's here, will talk about is that in the coming quarters, we are going to address and correct that.

So it's really it's been more of a mix issue clearly that hampered our margin expansion in the business in Q2.

Speaker 7

Scott? Sure, Rakesh. And just to follow-up on that a little bit. Clearly, we see some increased demand in our electronics business. Overall, our core electronics business in the second half, which has higher margins than some of the business that we had in Q2.

And as Rakesh said, we are implementing plans to help mitigate some of the raw material price increases that we saw in the quarter. So we do expect better performance in the second half.

Speaker 0

Thank you. And our next question comes from John Tanwanteng Your line is now open.

Speaker 8

Good morning, gentlemen. Nice quarter and thank you for taking my questions. Good morning.

Speaker 2

Can you just give us

Speaker 8

an update on the ability to delever through strategic actions? What if anything is in the pipeline or would be considered from acquisition or divestiture standpoint? Any color on that would be appreciated.

Speaker 2

Yes. So I think most of our deleveraging that we are taking that's taking place now is through organic growth of increasing EBITDA. We have been talking about increasing our EBITDA in the high single digits every year. And you can do the math. If we increase our EBITDA in the high single digits, which we have been doing, and obviously, interest expense is going down, we can get to the point we have said we want to get to in a couple of years.

Now in terms of accelerating that delevering, if there are opportunities to both buy businesses at the right price that gives us high EBITDA and reduces the leverage that way, as long as it makes strategic sense, we'll continue to do that. As far as through dispositions, we don't have a lot of noncore businesses in the two businesses that we would say could delever dramatically. But we always take a look at that. So I would say that strategically, we look we are always considering the overall portfolio of the company. We are always looking at both acquisition and disposition of the company.

We feel that even if we are on an organic path, that we are on a good path, given the businesses have good outlook for both businesses that we'll still get to where we want to get to in a couple of years. The question is can we get there sooner? And that will depend on strategic decisions that we make.

Speaker 8

Okay, great. Just drilling down on the auto markets, can you talk about the ability to continue growing there given the tough comps and decelerating U. S. Market? Can global performance or content improvements more than offset those headwinds?

What is your exposure to The U. S. On the auto side?

Speaker 7

Yes, John, we're still optimistic about our ability to continue to grow in the auto space. We're doing very well in Asia, which was the smallest region for us in our industrial business. We see the ability to continue to grow in that space for in the long term. Clearly, The U. S.

Has seen a decline in the growth rates that we've experienced over the last four or five years. So we don't expect that to change materially. But we are making share gains as a result of the combination of the company. So even in the mature markets, we feel pretty good about our ability to capture share in the long term. So content growth in emerging markets and share gain in mature markets are all part of our outlook.

Speaker 0

Thank you. And our next question comes from Daniel Jester of Citi. Your line is now open.

Speaker 9

Yes, good morning everyone. I just wanted to ask a question about the guidance. So Rakesh, I think in your prepared remarks you talked about that organic growth in both the Performance and the Ag business for the full year is going to be a little bit more than you had previously expected. And if I remember correctly, on the first quarter you had talked about EBITDA headwind from FX about 15,000,000 Now it seems like it's going be about $5,000,000 So I'm wondering if you could help me bridge for the full year only adjusting the guidance by $10,000,000 even though organic growth is going to be higher and the FX headwind is going be lower? Thanks.

Speaker 2

Yeah, thanks. That's a good question. So clearly, think we have said that we are more optimistic about our top line growth. And so we took the guidance up. I would say we are still a little concerned about the mix and some of the inflationary pressures we have seen recently on the raw material side.

So we just want to be cautious about the conversion of the higher growth into higher margins. We want to see what happens over the next couple of months, two, three months. So we'll come back to that. The question about FX is yes, it is it was a headwind of $15,000,000 Now it's going to be a headwind of 5 So that's an increase of $10,000,000 And we've raised the bottom end by $10,000,000 The question is, does it translate? We're still a little cautious about the volatility in the Brazilian real.

And remember that most of our Latin American sales in the ag business, which is our biggest business in Latin America, occurs in the second half. And to the extent that there is volatility, we have to be cautious. And also on the other hand, most of our euro sales has already taken place in the first half. So if you look at the ag sales in Europe, it's a first half phenomenon. So that's behind us.

We're going to have some sales in the second half. So the mix really doesn't help us, especially if we think about the volatility in the Brazilian real. And we'll just see. I mean, you guys know how volatile the situation can be in South America. And for that reason, we want to be a little cautious.

Speaker 9

Okay. That's very helpful color. Thank you. And then just on Europe Ag, can you talk about how your inventory levels are exiting the season? And should we expect some of the release of working capital in the third quarter that you would typically see in the second quarter?

Or can you maybe just walk us through how seasonality can affect your working capital there in Europe? Thanks.

Speaker 6

So at the end of the campaign and at the beginning of the next campaign, we usually assess our stocks levels in the channel. And we are doing this in LatAm, and we have done this in Europe. We are ending the campaign in both regions with a healthy level of stock. I would say far below the average of the industry. And that is what gives us confidence in the forecast that we have also for the rest of the year.

That with respect to stock levels in terms of net working capital, usually we see the peak of our net working capital in Q1 when we're still selling in Europe, in LatAm and in North America. And after that, we start seeing a decrease quarter by quarter until Q4. Due to the collection picking up in North America in Q2 and in LatAm and in Europe in Q3. This year, we are expecting a slightly increase in net working capital in Q3 versus Q2. This is because of the delay in the European season that we referred to based on weather.

And but overall, you will see that we are doing very good progress in working capital management. If you think net of factoring and both at constant and actual exchange rates, are reducing DSOs and we are also reducing our DIV and increasing our DPOs. So overall, until today, we are exceeding our internal stretch targets with respect to working capital management.

Speaker 2

Obviously, the question behind that is perhaps what's happening to our free cash flow. And it's going to be no different. If we look at the first half of the year, we obviously built working capital. We are sitting through the first six months with a negative free cash flow of approximately $50,000,000 We fully expect that the second half, we will generate more than $200,000,000 of free cash flow. And as a result, I expect that our free cash flow this year will be somewhere between 50% to 100 higher than 2016.

So I think this will be a good year for us from a free cash flow standpoint.

Speaker 0

Thank you. And our next question comes from Chris Parkinson of Credit Suisse. Your line is now open.

Speaker 10

Thanks. You hit on this a little on your prepared remarks, but within Performance Solutions, can you just walk us through the breakdown of organic growth? Just any additional color memory, PCB, service treatment, etcetera? And just explicitly highlight any material shifts versus your original expectations as of 1Q? Thanks.

Speaker 7

I think coming out of we had a pretty strong Q1 in our core electronics business, which we were not expecting to continue at that rate. So the organic growth in the second quarter was really driven by Electronics Assembly and our Industrial businesses, which we're expecting to continue, although a bit moderated, especially in the Industrial segment for the second half of the year. But things have not fundamentally changed really from when we talked after Q1.

Speaker 2

I mean, just to give you a little more color behind what just Scott said, our Alpha business grew double digits. Our Industrial business grew mid single digits. And our core Electronics business also grew in the low to mid single digits. So we had good growth. The offshore business was down in Q2, but we expect recovery in the second half.

There have been some delays in the program and the orders in Brazil, but we expect the offshore business to come back in the second half. We expect overall for the year, the offshore business to be somewhat flat, maybe slightly down, not a whole lot down, although this quarter it was down quite a bit. And the Graphics business, as I said in my prepared remarks, that was down probably in the high single digits, and that's the one that we are focused on and turning around.

Speaker 10

Great. And just turning to Ag. You mentioned some headwinds in EMEA driven by near term weather issues, the shift in selling strategy in West Africa, etcetera. But in the intermediate to long term, just can you give us an update about how you feel about the overall product offer in terms of strength and breadth? And then also if you're seeing any preliminary indicators that credit availability is improving in Eastern Europe given the growth prospects there.

It's interesting to see you entered a few new euro markets. So just kind of putting that all together, an update on your long term thoughts. Thank you.

Speaker 6

Good. So we ended actually a solid second quarter and a solid first half in Europe. Overall, we have sales growth in a market that very likely will show a decline in the first half. We offset the sales decline in Russia and Ukraine due to weather with very solid profitable growth in three new subsidiaries that we opened this year and last year in Germany, U. K.

And Romania. You have to think that Germany and UK are two of the largest ag markets in the world, and we are optimistic to expect an important contribution from the teams that we are establishing and the products that we are registering in these markets. We have now a much broader portfolio as the new Arista coming from the three legacies in Europe. And we are rolling out our ProNutiva programs that combine bio solutions with conventional crop protection. You know that Europe is very conscious with respect to reducing residues on fruit and veg, for example, and we are profiting from those trends in Europe as we speak.

So we are very confident about our position in Europe and the growth in the future. We have a strong market share in Eastern Europe and Southern Europe, which are growth regions for Europe overall.

Speaker 0

Thank you. And our next question comes from Robert Koort of Goldman Sachs. Your line is now open.

Speaker 9

Hey, good morning, everyone. This is Chris Evans on for Bob. Wondering if could give your expectation and maybe the cadence of your cost reductions and performance maybe for the rest of the year and maybe just going forward beyond that? And then in prior calls, talked about some opportunity for a cost program in ag, and I was wondering if you could give an update on that as well.

Speaker 2

Okay. Scott, do

Speaker 7

you want to talk Sure, about that for Chris. We're focused right now on our manufacturing operations and facilities around the world. This is a program that we embarked on very heavily towards the end of last year, beginning of this year, and we're making great progress. We expect this project to continue well into next year. Facilities are, as you can imagine, not easy to simply just close, but we've made great progress.

We have active programs really in every region of the world. So we will expect to see the benefit of these actions coming in the second half of this year and then well into 'eighteen.

Speaker 9

Any numbers you could put around that?

Speaker 7

I'd rather not throw a specific No,

Speaker 2

I mean, so that I think Scott's talking about two things. One is the synergies that we've already committed to. That number is the $20,000,000 plus that we are going to get in our P and L this year in Scott's business. And I said we are at about a $50,000,000 run rate. We are committed to getting at least $70,000,000 So we are going to get the 20,000,000 plus this year.

We're going to get more coming next year from the facility footprint rationalization that we are doing. But in addition to that, there's obviously this continuous cost improvement that Scott's supply chain teams are doing, and that's the piece that they're ramping up. And that goes to what we are doing also on the Ag side, because we talked about the $100,000,000 program coming from cost reductions in Ag. And I think we are progressing well there. And I'm sure Diego can say

Speaker 6

a few words on that. Yes. So we announced $100,000,000 in five years. We are very well on track this year compared to that target. We will deliver savings north of 20,000,000 This is both in COGS of good sales, project based savings and SG and A.

And these are initiatives like, for example, gaining efficiency on our laps. I mean, we have consolidated 17 labs into eight labs, and that is giving us not only cost improvement, but also efficiency in terms of our time to market. And we're working also with suppliers on our key active ingredients with our engineering team to reduce costs at their facilities and with that getting savings also in cost of goods, and this is impacting our P and L this year.

Speaker 0

Thank you. And our next question comes from Duffy Fischer of Barclays. Your line is now open.

Speaker 11

Yes, good morning, fellows. First two questions on Ag. One, just how big is that business in Africa relative to your Ag business that's been affected by the change in business strategy? And then two, with all the deals going on in ag, is there a meaningful market share opportunity for you where competitors maybe are dropping the ball today, where maybe a channel supplier doesn't want consolidation in his supply base, so he comes to you guys. Is that something that two years from now will turn around and you guys have taken meaningful market share?

Speaker 6

So our Africa business, the size of our Africa business overall is north of $200,000,000 on the full year. And so it's a meaningful business for us. I mean, are number three in Africa. And this is a growth opportunity for us. We were slightly impacted this year by the change of our strategy in West Africa with an impact in Q2 of around $10,000,000 But we are very confident about the growth momentum in our private channel.

The business is actually doing very well. And with respect to your question on the consolidation, we are profiting out of, I would say, the uncertainty that many distributors are having of not knowing how this market is going to look like in two, three years. And we are obviously very customer focused, and we are working with them as a Tier two player with a high degree of flexibility. Our team is very customer oriented. So we're taking advantage of that.

You know that we are not playing a market share game. I mean, are focused on niche specialty segments with higher value products. But nevertheless, the fact that we are focused on the customer is helping us this year.

Speaker 11

Okay. And then just bigger picture question for Rakesh. How much do you think your multiple is retarded today by the high leverage? So if you get down to your target rate, would you anticipate a higher enterprise value for the company? Or is it just shifting value from the debt guys to the equity guys over time?

Speaker 2

Yes. Maybe you have a better answer for me on that. But listen, I think we as stewards of this business, all we can do is drive growth. I think we are I'm just very pleased with the way we are headed in these businesses. I don't lose sleep on the leverage issue.

I think we are generating good solid cash. We are going to delever this company. I don't think there's cause for anybody to be concerned. And I just hope that it reflects and gets translated by the investment community as they understand our ability to perform and our ability to generate cash that will translate in all the right things. I mean, that's not something that I control.

Speaker 0

Thank you. And our next question comes from John Roberts of UBS. Your line is now open.

Speaker 12

Thank you. I think all of the automotive exposure is in the McDermott unit. And I think that during the 2009 collapse in automotive that McDermott's overall EBITDA held up quite well. So if auto continues to decline, should we expect EBITDA there to hold up well or is there something different this time?

Speaker 7

So I think we should probably be a little cautious about the word decline. We're really just seeing a slowing of growth rates in the mature markets. We're still seeing growth clearly in the emerging markets and the new markets, Asia in particular. And I don't expect our ability to generate and deliver strong EBITDA percentages

Speaker 11

will change at all, John. Okay.

Speaker 12

And then over on the ag side, I think Chemtura was producing some key ingredients for you. Did that arrangement transfer over to LANXESS unchanged? And is that a long term contract?

Speaker 6

So we have an agreement with Chemtura that will transfer to LANXESS, and we continue to produce our few brands in a few plants actually from Temtura. That agreement is can be renewed. It's a long term agreement.

Speaker 0

Thank you. And our next question comes from Olesky Wayframov of Nomura. Your line is now open.

Speaker 13

Thank you. Good morning, everyone. What do you see in Latin America that makes you more optimistic about the second half? Is it below level of inventories or good demand from farmers? And also if you could add any comments on specific crops?

Speaker 6

Corn and soy prices rebounded slightly in Q1, right? They came back down in Q2, but they are at a fair level compared to last year. If the exchange rate stays at this level as we see right now and the macro conditions continue to be stable, Weather wise, we're not seeing any dramatic events. It's actually rather positive overall. And our farmers are having good margins.

So the starting point is good. If you did your homework on the stock channel stock size, which we did, is a good starting point. And the rest is really our organic growth strategy in LatAm. I mean, we have a tremendous portfolio in LatAm. These are our biggest region.

We have a very solid go to market. So I'm positive that we can repeat what we did also last year in terms of growth in LatAm.

Speaker 13

Thank you. And as a follow-up on the comment you made earlier on the second quarter impact of $10,000,000 from channel adjustment in Africa. Would you first of is it $10,000,000 sales or EBITDA? And would you consider that sort of a onetime nonrecurring event?

Speaker 6

Yes. No, it's a onetime event. It's sales, not EBITDA, so sales. And it's a low margin business. So the impact on EBITDA was small overall.

Speaker 0

Thank you. And our next question comes from Jim Sheehan of SunTrust. Your line is now open.

Speaker 14

Good morning. Thanks for taking my question. So on your Ag business, can you discuss your the situation in Canada? I believe there has been drought conditions there in July that's affecting some of the Ag market. Are you seeing any impact of that in your business?

Speaker 6

So that's a good question. Yes, we had we're seeing some dry conditions in the Northern Plains, including parts of Canada. Obviously, we need to monitor the movement of our product on the ground. But we are also launching new products, specifically a new product and new herbicide in that market that is gaining traction. So we don't see this as a threat for the full year.

But in those cases, we are always very close to our distributors and farmers to monitor the situation.

Speaker 14

Great. And on Performance Solutions, you discussed some raw material headwinds. Can you discuss some of the key raw materials that are rising in price? And have you seen any changes in those in the third quarter? Are they starting are those headwinds starting to ease yet?

Speaker 7

I'm sorry, can you repeat

Speaker 2

what particular raw materials putting pressure on assets? So

Speaker 7

yeah, we've seen some basic commodity raw material price increases, sodium hydroxide and things of that nature that kind of came fairly quickly. But we're definitely making adjustments and have programs in the future to address that.

Speaker 0

Thank you. I'm showing no further questions at this time. I'd like to turn the conference back over to Rakesh for any closing remarks.

Speaker 2

Okay. Thank you, operator. And again, I want to thank everybody for joining us this morning. As I said and as we've discussed in this call, we had a solid first half of this year. We are looking forward to a solid second half.

I think there's a lot to be cautiously optimistic in our businesses. We like where we sit today, and we look forward to updating you when we talk again. Thank you.

Speaker 0

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.