Element Solutions - Earnings Call - Q3 2017
November 2, 2017
Transcript
Speaker 0
Good day, ladies and gentlemen, and welcome to the Platform Specialty Products Corporation Third Quarter Financial Results Call. At this time, all participants are in a listen only mode. And later, we will conduct a question and answer session and instructions will follow at that time. And as a reminder, this conference is being recorded. I would like to now turn the conference over to Carey Doorman, Senior Director of Corporate Development.
Sir, you may begin.
Speaker 1
Good morning and thank you for participating on our third quarter twenty seventeen earnings call. Joining me this morning are our CEO, Rakesh Soshtev CFO, John Connolly Ben Glicklich, 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 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 connection with the 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. 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 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's now my pleasure to introduce Rakesh Tashdev, Platform's CEO, for opening remarks. Rakesh?
Speaker 2
Thank you, Carrie, and good morning, everyone. In the third quarter, Platform grew revenue 2% as reported, but was down 1% on an organic basis. This was a mixed quarter with several meaningful strides forward across the business. We saw a recovery in our North American ag inventory channels, continued earnings growth from our Performance Solutions business and progress towards the separation of our two businesses. This was weighed down however by some difficult macro conditions, particularly in the Brazilian ag market.
Our Performance Solutions segment contributed positively to organic sales growth this quarter, as both our Industrial and Alpha, which is our Electronics Assembly business, grew in the high single digits. In our Agricultural Solutions segment, an organic sales decline was primarily driven by drought conditions in Brazil, which led to a delay in soybean planting impacting the pre selling season. The weather impact was partially offset by strength in our North American Ag business. From an earnings perspective, we delivered adjusted EBITDA margin expansion of 24 basis points on a constant currency basis as margin expansion in our Ag business was partially offset by some margin pressure in Performance Solutions. We continue to execute on our synergy plans in Performance Solutions, which combined with organic growth and some positive pricing activity helped us offset increased raw material prices and negative mix impacts between business verticals.
Our Ag business saw continued growth from higher margin products, particularly in the EMEA region, which helped improve margins in the segment despite seeing an overall constant currency decline resulting from lower Latin American volumes. Our earnings expectation for the 2017 remains unchanged, but we will closely watch the progress of the ag season in Brazil, which is expected to be a critical driver of our fourth quarter and ultimately full year financial performance. As a result, we are reaffirming our current adjusted EBITDA range of $810,000,000 to $830,000,000 for the full year 2017. Continued poor weather in Brazil would leave us towards the low end of our range, while the stronger season there would push us above the midpoint. As you know, earlier in the third quarter, we announced our planned separation of the ag business into a standalone publicly traded company.
Ben will provide you some details around the progress we have made thus far, but I wanted to reaffirm our commitment to the separation, which we expect to occur in mid-twenty eighteen. As we have mentioned before, management and our Board believe that this path will create value for our shareholders and enable our high quality businesses to thrive as more focused enterprises. Both of our businesses have the scale, management depth and compelling end market opportunities to be great public companies. Our teams are currently working hard to make this happen. Slide four shows an overview of our financial performance this quarter.
We reported third quarter twenty seventeen net sales of $9.00 $4,000,000 and adjusted EBITDA of $197,000,000 representing an adjusted EBITDA margin of 22%. Reported net sales growth was 2% year over year or flat at constant currency. Key drivers for growth in our Performance Solutions segments were continued strength in our Industrial Solutions and Electronics Assembly businesses around the globe, partially offset by declines in Graphics. Drought conditions in Brazil had a negative impact on overall results in our Ag business, which masked a strong result in North America this quarter. On a year over year basis, FX rates were a tailwind of 2% and positive for sales in both segments.
The euro was the primary positive contributor for our Performance Solutions business, while the euro and Brazilian real gave the largest benefit to Ag. We reported a GAAP loss per diluted share for the quarter of $0.24 compared to a loss per share of $0.15 in the 2016. The year over year increase in loss per diluted share is primarily attributable to higher tax expense and FX losses on long term debt, partially offset by lower interest expense from our term loan repricings and higher operating profits. Our constant currency adjusted EBITDA grew 1% in the third quarter. The Performance Solutions business continues to execute against its integration initiatives with a focus on facility rationalization and supply chain efficiencies.
We also implemented pricing initiative this quarter to help offset raw material price pressure in certain business lines. The Ag business partly mitigated the impact of lower volumes in Latin America, achieving greater growth in higher margin products as well as savings from continuous improvement initiatives. You will see on Slide five, our Performance Solutions segment reported third quarter net sales of $481,000,000 and adjusted EBITDA of $116,000,000 or 123,000,000 excluding corporate cost allocations. Organic sales increased 4%, 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 growth in its bar and paste products in all regions.
However, since the margins in our assembly materials are lower than the electronic surface treatment products, we saw muted overall adjusted EBITDA growth in the quarter. Industrial Solutions also drove organic sales growth in the quarter, primarily in Europe and Asia, where our plating on plastic technology continues to build a stronger market position. Industrial Solutions has had an excellent performance year to date. Our core electronics was essentially flat in the quarter. We saw demand for metallization and market share gains in South Korea and China, offset by declines in a few lower margin business lines in the quarter.
The comps in the electronic surface treatment business will continue to be difficult in the fourth quarter, given the high growth we achieved in the same period last year. We believe the overall electronics demand environment remains encouraging from a long term trend perspective and we are pleased with how we are performing. Our offshore business saw modest growth this quarter as we begin to lap meaningful declines in 2016 and see some stabilization in oil prices. While we don't expect the fourth quarter to be much different, there are positive demand indicators for 2018. Our Graphics business experienced decline as we continue to see the year over year volume impact of our customers specific customer lost business earlier in 2017, as well as general softness in our Americas business.
As mentioned on our prior call, we believe the new management team we have put in place has positioned this business for growth in 2018 and beyond. Performance Solutions constant currency adjusted EBITDA increased by 4% in the quarter versus last year. Overall adjusted EBITDA margin for Performance Solutions on a constant currency basis was negatively impacted by faster growth of our lower margin verticals this quarter and raw material cost increases. However, it's important to note that each of our three largest business verticals improved their margins year over year. We believe our margins and adjusted EBITDA would have been more significantly impact had we not taken appropriate pricing and supply chain actions to help offset these increases.
Our results this quarter also reflect a year over year achievement in cost synergies of $4,000,000 and we now have action run rate annualized savings of approximately $56,000,000 in our Performance Solutions business. Turning to Slide six, the Agricultural Solutions segment reported third quarter net sales of $424,000,000 and adjusted EBITDA of $81,000,000 or $89,000,000 excluding the allocation of corporate costs. Organic sales declines of 5% were primarily driven by the impact of drought conditions in Brazil on volumes in the region. We are watching the situation carefully and hopeful that we will see demand recovery in the later part of Q4. In EMEA, which overall saw a slight organic decline in the period, we saw strength in South Africa as the season has started well, offset by some softness in Central And Eastern Europe that we expect will improve in the coming months.
Our North America business had a very strong third quarter. Higher mite pressures bolstered our sales of specialty insecticides and new product launches in wheat and corn helped sales in our new crop business in our row crop business. Other parts of our specialty portfolio, particularly fungicides also performed well and helped offset declines we saw in our Canada business. Overall, we feel good about our channel inventory levels in North America, which should position us well for more quarters of healthy growth ahead. Ag Solutions adjusted EBITDA declined 3% on a constant currency basis in the quarter.
The primary driver of the decline was lower sales volume in Latin America. The EMEA region saw mix improvements from expanded business in higher margin countries in Western Europe, but this was offset by some expected generic pressure in Eastern Europe. The expense associated with expanding our sales force in newly opened subsidiaries in Germany and UK also had an impact. Sales growth in North America, which tends to be a higher margin region for the Ag business, also helped drive the improvement in EBITDA margins in the segment over last year. Lastly, we saw some positive impact to adjusted EBITDA this quarter from our continuous improvement initiatives.
I would now like to turn the call over to John Connelly to talk about cash flow and the balance sheet. John?
Speaker 3
Thanks, Rakesh, and good morning, everyone. Turning to Slide seven, where I will talk briefly about our performance and expectations for cash flow and the balance sheet. Platform had another strong quarter from a cash flow perspective, generating approximately $87,000,000 of free cash flow. This was primarily driven by profits in the quarter and a release of working capital quarter over quarter from the ag business as seasonally expected. On a year to date basis, cash invested in working capital was about $60,000,000 lower than the same nine month period last year, helped by better working capital practices and increased factoring.
In our Performance Solutions business, we temporarily increased the build of inventory banks related to our facility rationalization plans. Additionally, cash taxes decreased year over year and sequentially in the quarter. On a full year outlook, our full year outlook on cash flow items remains unchanged from Q2 with cash interest guidance of approximately $330,000,000 for the year as we capture the benefit of our term loan repricing activity. We're also maintaining our cash tax outlook of 130,000,000 to $150,000,000 for 2017, which is now consistent with the year to date trend. Finally, our net CapEx outlook remains unchanged from the previous view we provided of approximately $100,000,000 for the year, although we are trending better than that so far.
Platform's net debt at the end of the quarter was of $5,100,000,000 was impacted by increases to our European debt balances in the quarter due to FX translation. Our cash balance was $391,000,000 and the revolver balance declined to a draw of only $25,000,000 at quarter end. We expect to continue to grow earnings in the fourth quarter and release working capital, which should drive net debt under $5,000,000,000 assuming no further material moves in FX rates. We are relatively pleased with our expectations for free cash flow generation this year and remain confident in the Abiliate platform or its future standalone businesses to continue to delever meaningfully in the future. With that, I'd like to turn the call to Ben Glicklitch to provide an update on the proposed separation of our two businesses.
Ben?
Speaker 4
Thank you, John. As Rakesh mentioned earlier in the call, Platform remains committed to separating our two businesses into two stand alone publicly traded companies in 2018. On Slide eight, we provide an update on this plan and also share some of the work that is progressing internally to ensure smooth execution. We've established two global work streams, one focused on the operational separation and the second focused on the capital market and balance sheet separations. Both these teams are working full bore and making progress.
The operational work stream is tasked with ensuring both businesses are able to stand alone with their own functions, systems and reporting capabilities to meet the needs of their independent employee bases, lenders and shareholders. As you know, we are stand alone from a commercial perspective, so the focus is primarily related to back office functions including financial reporting, treasury, HR, tax and IT, which currently share some overlap between the businesses. This work stream is establishing new org structures, identifying the right leaders both internally and externally and ensuring proper change management procedures. While we're establishing additional roles at Arista, we continue to target no net corporate cost increase from separating these businesses. The transaction work stream is focused on potential debt financings that we may decide to pursue and an expected Arista equity issuance.
The team has identified the several potential attractive paths available to us and we will ultimately be ready to execute the path that is best considering the market environment at the time. All
Speaker 3
of
Speaker 4
these options anticipate a new capital structure for Arista and a smaller capital structure for the remaining business that takes into account the separation of a significant portion of our assets. We will continue to provide everyone with updates at the appropriate times going forward. With that, I'd like to turn the call back to Rakesh to discuss guidance and provide some closing remarks. Rakesh?
Speaker 2
Thanks, Ben. And now turning to Slide nine, as I said, we are reaffirming our full year 2017 adjusted EBITDA guidance of $810,000,000 to $830,000,000 which represents a healthy 5% to 8% growth over our 2016 performance of $769,000,000 This guidance is based on September exchange rates. And while our business and the end markets are generally in healthy positions, there are several areas of pressure that we are focused on mitigating as we look into the fourth quarter. We expect both businesses to demonstrate positive sales growth in the final quarter of this year with a larger year over year increase in Ag Solutions. We anticipate recovery from the drought conditions, thereby shifting more Latin American sales into Q4.
And in the Performance Solutions segment, our Electronics, Assembly Materials and Industrial businesses should continue to demonstrate growth, while we will also expect to see another tough comp for our core electronics business. We expect to benefit from attainment of cost synergies and our continuous improvement initiatives, but we will need to see stability in raw material prices for these to fully impact bottom line results. Based on our nine months of results and current outlook for Q4, we expect our 2017 results to exemplify the high quality, high cash flow generative businesses we own and demonstrate the consistent ability to outgrow their respective end markets. With that, we are happy to turn the call over to your questions. Operator?
Speaker 0
Thank you. And our first question is from the line of Ian Bennett of Bank of America Merrill Lynch. Your line is open.
Speaker 5
Thank you and good morning.
Speaker 2
Good morning, Ian.
Speaker 5
Can you discuss what the several paths that you're exploring to raise equity for the ag business are?
Speaker 4
I think as we've articulated, primary path here is an IPO of the Arista business at some point in the middle of 2018. We have suggested a willingness to explore creative ways to bring in equity in advance, but the baseline should be an IPO next year.
Speaker 5
Okay. Thank you. And on the Performance business, can you discuss a little bit the Graphics customer that was lost, why occurred and expectations for customer gains or losses into 2018? When I look across kind of broader group of chemical electronic peers, it seems like most of your peers are experiencing similar levels of high single or double digit growth in electronics business that you did and just want to understand that dynamic moving forward.
Speaker 2
Ian, I'll let Scott answer that. But generally, we don't refer we won't talk about specific customers. We had a qualification issue earlier in the year on one customer, which by the way, we're going to win that business back and we're going to lap it in 2018. Just to give you a little color on graphics, the overall business is still very healthy. As you guys know about a third of that business though is tied to newspaper print, which is on a slow decline.
But the consumable packaging business, which is a large part of our business is very healthy and growing. And that's where we are going to continue to see opportunities. But I'll turn it over to Scott, who's on the phone, and maybe he can give a little more color. But we're not going to talk about specific customers.
Speaker 6
Sure. Thanks, Rakesh. Ian, yes, as Rakesh indicated, we had a very specific technical challenge at one customer. But the positive thing is we continue to work with that customer to resolve the issue we had. And as Rakesh said, we expect to recapture portion or if not all of the volume that we had.
But the good news is going into 2018, we had a very good quarter in Graphics. The new management team is performing well, and we captured significant new contract business in the quarter, which will help mitigate any loss we have at that one customer as well. So things are looking very positive going forward.
Speaker 5
Thank you very much.
Speaker 0
Thank you. Our next question is from the line of John Tanwanteng of CJS Securities. Your line is open.
Speaker 7
Good morning, guys. Thank you for taking my questions. My first one is, are you seeing any relief from the conditions yet in Brazil? Or are you still waiting for that? Just an update on what the conditions are on the ground and if you can actually make up what you kind of lost in Q3 and Q4?
Speaker 2
Yes. So Diego, you want to try and Yes.
Speaker 8
Hi, John. We have seen some more regular rain patterns since October, still not enough to say we are on the safe side. But I would say, we're hopeful that we can see some more rain, especially in Central Brazil where we have seen
Speaker 2
Mato Grosso and in the Goias state most of the impact of this drought. The other comment I'd make is Q3 is not the planting season. In Brazil, people tend to pre buy in Q3 ahead of the planting season. So we get this question, has this business been lost? And the answer is no.
We've been talking to our customers in Brazil. I think they have just delayed the purchases. The planting season really starts later this quarter and goes into Q1. So we are still hopeful. The question is will we recover all of that in Q4 or will some of that spill into Q1 of next year?
That's really the issue.
Speaker 7
Got it. That's helpful. And I think the last time you spoke to investors, you had mentioned that you expected Q3 and Q4 EBITDA for the consolidated business to follow a roughly 45% to 55% split. Is that do you still feel that's the case? And if so or if not, why?
Speaker 2
I think that's roughly right. I don't have that exact number in my head. I'm sorry, but I think it's it hasn't really changed a whole lot.
Speaker 7
Okay, great. And then finally, just how should we think about the market and the demand for your offshore oil product right now with crude getting back in mid-50s?
Speaker 2
I think we're cautiously optimistic. Scott, do you want to give a little more color?
Speaker 6
Yes. I think some stability at these levels will be helpful, John, for us. As you know, it takes a while for them to turn the CapEx investment back on. We've seen continued strong production business, but of course, we need drilling to come back and we need capital investment for new exploration. And that will take a little time at these oil prices.
Speaker 7
Okay, great. Thank you very much.
Speaker 0
Thank you. And our next question is from the line of Neel Kumar of Morgan Stanley. Your line is open.
Speaker 9
Hi, good morning. I was wondering if there's any scenario which could cause you to not proceed with the ag separation. Perhaps it could be valuation levels or the amount of equity to be raised. But just wanted to get a sense of how you're thinking about
Speaker 2
No, I think we've already got Neil, we've got a stated path. I think we are pretty confident that the path we have stated is the one that we will proceed down and we are proceeding down. Short of something very dramatic, I don't see us changing that path.
Speaker 9
Okay, thanks. And then also a question on the outlook for ag. So this year looks to be shaping up as pretty flattish growth, probably driven by elevated channel inventory
Speaker 3
for
Speaker 9
the industry. So I was wondering if you expect these inventory levels to come down at the end of the year? And do you have an early read on market demand in 2018?
Speaker 8
So Neil, yes, I mean, are seeing overall channel inventories still high for the industry, but coming down slowly. This is a good indication, I believe that we could be seeing a path for growth for the market for next year. We're still, I would say, carefully optimistic that we could see a low single digit market growth in 2018. But it's probably early to say. I mean, we have to wait and see how Q4 unfolds.
Our position, as we said in the last quarter, we have a favorable channel inventory position. We have done our homework, I would say, in 2016 and in 2015. And we're certainly seeing the benefits of this and we will see the benefits of this also in 2018.
Speaker 9
Great. Thanks.
Speaker 0
Thank you. And our next question is from the line of John Robert of UBS. Your line is open.
Speaker 10
Thank you. Was Ben's comment on debt leverage meant to imply that it would be higher on Arista and lower on McDermott?
Speaker 4
Certainly not, John. You may refer to an investor presentation we gave a couple of weeks back where we articulated our target leverage objectives for these businesses, Arista at 3.5 times within twelve months of the IPO and the RemainCo business somewhere between four and four point five within twelve to eighteen months of the IPO. Those are our objectives for the balance sheets of the two standalone entities subsequent to the separation.
Speaker 10
Okay. I misunderstood your comment then. And then the founder shares are pretty out of the money. What happens to the founder shares in the business separation?
Speaker 4
The Founder shares are indeed below the high watermark. That's a consideration that we'll have to deal with in the context of the separation. I don't think we've given any guidance around how that will play out on a go forward basis yet.
Speaker 9
Okay. Thank you.
Speaker 0
Thank you. And our next question is from the line of Robert Koort of Goldman Sachs. Your line is open.
Speaker 5
Good morning, guys. This is Chris Evans on for Bob. About the separation a little bit, what impact or benefit do you suspect is possible to your cost of debt or potentially in your tax rate?
Speaker 2
Yes. So that's a good question. So on the cost of debt, clearly, think we have the opportunity given that the markets are still very strong that we'll be able to reduce in a meaningful way the interest expense overall, which will reflect be reflected in both those businesses. We have those opportunities in front of us right now and we are looking at the timing of the refinancing. But clearly, think we would move in a direction where the interest expense would be lower for the two companies.
On the tax planning, we've been doing a lot of tax planning because this is an event that gives us an opportunity to do some legal entity and tax planning, which will should reduce our tax rates. We have done some work to look at on a more normal basis of what the tax rates could be for these two businesses. What I would tell you, we haven't completed our work, but it will be somewhere in the 20% range, in the mid to high 20% is where I think we can go for these businesses.
Speaker 5
That's great. And then you cited some raw materials and some negative mix issues. I was wondering if you could specify specifically the raw materials and maybe what impact you saw in the quarter and the cadence of what you suspect might happen going forward?
Speaker 2
Yes. Let me give you a sort of a high level picture and then I'll have Scott talk specifically about the raw material. Just so you know, our sales were up in the performance business in Q3 about $17,000,000 And normally, we would have expected that to translate to an additional 5,000,000 to $6,000,000 of EBITDA. Half of that, about half of that was just a mix issue because our Alpha business grew much faster and that has lower margins. The other half, about 2,000,000 to $3,000,000 is what we got hit with from raw material price increases.
Now let me remind you, it would have been a much higher number had we not acted on some pricing decisions we took towards the tail end of the quarter. We think that that number will start getting mitigated as we get into Q4, but I just want to give you a little dimensioning of the numbers of what we're looking at in Q3. Scott, in terms of specific and the other thing that we have done is we have renegotiated some contracts with our suppliers to actually help mitigate that as well. Scott, do you want to add some color to that? Yes.
I don't have a
Speaker 6
whole lot more to add to that, Rakesh, other than just to affirm what you said that the pricing action we've taken, the renegotiation of some contracts on raws, we think will help us mitigate quite a bit of any of the impact that we've seen year to date, and we're pretty optimistic going forward.
Speaker 9
Thanks, Chris.
Speaker 6
Yes.
Speaker 0
Thank you. Our next question is from the line of Christopher Parkinson of Credit Suisse. Your line is open.
Speaker 11
Hey, good morning, everyone. This is Graham Wells on for Chris. Just had a quick question around how to kind of think about margins in the Ag business moving forward. Clearly, mix was a benefit in this quarter just gone. But as you guys kind of grow out sales in The UK and Germany, when can we kind of expect some of that build out of cost as you build out your sales organizations there to drop off?
How should we think about the margin lift going forward from increased presence in those areas? Thanks.
Speaker 2
Yes. Listen, I think we have done we've been very pleased with the margin progression in our ag business. This quarter, I think, on a constant currency basis, our margins despite the decline in Latin America, our margins, I think, have gone up about 100 basis points in the ag business in Q3. Clearly, our margins improved in Latin America. We've been benefiting with some strong pricing discipline that we have put in place in Latin America.
We've also been successful in getting concessions from our suppliers on and so we've been reducing our cost of goods sold as well. So we are doing the right things. Diego and his team are clearly focused on growing our higher margin businesses, which has also been helping us.
Speaker 11
Got it. And then just a quick follow-up. You guys have made some improvements on the working capital front this year to date. Kind of how are you what's kind of your kind of early expectations for the additional progress that you can continue to make on that front? Where do you see some kind of key opportunities for areas that you still have to hit to improve on that side?
Speaker 2
Well, why don't we talk about specifically of the two businesses? We have, as you know, since last year, put incentives for our management teams to be really focused on working capital. And I think we've got our global teams very focused on how we are negotiating with our suppliers and our ability to improve the aging of the collections. I think there's a lot of just normal operational stuff that helping. And as you know, it's different in the ag business than it is in the performance business.
Ag business is clearly more seasonal. We've made progress on the working capital side. We clearly have a lot more opportunities to harness. I'm not saying that we are where we need to be. So this is an area that's going to get continued focus in both the businesses.
Speaker 11
Got it. Thanks very much.
Speaker 0
Thank you. And our next question is from the line of Alexey Warflev of Nomura Instinet. Your line is open.
Speaker 12
Thank you. Good morning. This is Matt Skoronski on for Alexey. In the slide deck, it states that generic pressures in Latin America was less than expected. Can you talk about the crops that was in specifically?
And then can you go through channel inventory by region and how your outlook is for the rest of the year? Thank you.
Speaker 8
So we have more than 7,000 registrations around the world and we are always accounting for some generic pressure here and there. But we have many ways to mitigate that pressure overall. We work on new mixtures. We develop new formulations. We really make a big deal out of our supply reliability, very strong supply position.
We invest in branding. The team is doing a great job this year on this regard. I mean, always account for some pressure. But in this year, we're seeing really that we're mitigating
Speaker 2
a good part of it.
Speaker 8
And that is what is allowing us to capitalize really on the organic growth that we're seeing with new products and also the geographic expansion that we are mentioning also in some countries. We the expectation we had on generic pressure was in LatAm in particular due to obviously the very difficult situation in Brazil. You can expect that farmers are going to think twice before taking the more higher value solution. But our products are really value added and we're not as impacted. In terms of channel inventories, I would say LatAm is probably where you have the highest industry channel inventories.
But as I said before, for us, we are on the safe side in this regard. North America is coming closer to normal channel inventories. In Europe, especially in Eastern Europe due to the cold weather conditions in the early parts of this year, we are seeing some higher inventories. The rest I would say is a mixed picture, but that should give you some color.
Speaker 12
Thank you.
Speaker 0
Thank you. Our next question is from the line of Jim Sheehan of SunTrust. Your line is open.
Speaker 5
Thank you. Coming back to the pricing question versus raw materials, can you give us a sense for when you might see incremental margins in Performance Solutions start to inflect higher?
Speaker 2
Well, I think once we have mitigated this raw material issue, it's going to be more the margin itself or the overall margin is going to be more a reflection of the mix than anything else. Know what's I don't know if you caught what I said earlier, but despite the overall mix, if you look individually into the margins of our businesses like the industrial business, the alpha business, the electronics business, the margin actually expanded in each of our three principal businesses even in Q3. But it's just that the Alpha business grew so much more than our other businesses that the margin actually declined. If you look at the margin structure within the Performance business, we've got the Graphics and Offshore business that has pretty high margins because it's really a specialty niche business and then followed by our core Electronics business and then our Industrial business and our Alpha business tends to be lower than the rest. And so I think mix plays a big part.
As long as we are improving the margins of each of our individual businesses, I think we're pretty happy and then the focus is to grow organically each of these businesses. So we have got strong leaders for each of these five businesses. They understand their marching orders is to grow both organically as well as expand the margins and that's what we're doing. It. I want mix to mask this margin issue in the Performance Solutions.
Speaker 5
Understood. And also on U. S. Auto production headwinds, I think last quarter you were fairly sanguine about this. You were talking about some offsets in Mexico for your North America business.
It seems like maybe The U. S. Situation is a little weaker this quarter or the outlook is a little weaker. Can you talk about how that's impacting your business and if you still see any offsets?
Speaker 2
Scott, do you want to take that?
Speaker 6
Sure. Yes, I think the outlook for the growth rates in the North American auto production market are fairly muted. So we continue just to remain focused on share gain within our space and are optimistic that we will be able to continue to execute on that plan so that even if production rates remain where they are or even if they decline slightly that we can still grow that business. Our new structure with the combined companies is strong enough we think and with our new product introductions that we have planned coming up over the next twelve to eighteen months that we will continue to be able to grow that business in spite of a bit of a muted outlook on overall production.
Speaker 7
Thank you.
Speaker 0
Thank you. And our next question comes from the line of Joseph Vergara of Roth Capital. Your line is open.
Speaker 5
Good morning, guys, and thanks for taking the questions. Morning. Most of things I wanted to touch on already were, but one maybe a bigger picture question. You guys historically have talked about synergies and operating performance numbers that you had for targets for the two separate companies. And now essentially, they we've moved away from that conversation a bit given the separation plans.
But post separation, can you guys quantify what you still think is meat left on the bone there and confidence level in that?
Speaker 4
Sure, Joe. Thanks for the question. The Ag Solutions business, we had originally articulated a synergy target of $80,000,000 and we are run rating that number. We stopped talking about specific synergies in Ag because we felt like that had been delivered. There were continuous improvement opportunities that we highlighted and we continue to execute against that and mentioned those earlier on the call.
In the Performance Solutions business, our target was $70,000,000 and our run rate is just south of 60,000,000 at the moment. We expect to be able to get to that $70,000,000 in the near term and should be run rating north of 60,000,000 by the end of Q4. So those opportunities continue and the separation doesn't impact our ability to get at those at all.
Speaker 10
All right. Thank you.
Speaker 0
Thank you. And our next question is from the line of Daniel Jester of Citi. Your line is open.
Speaker 9
Yes. Thanks. Good morning, everyone.
Speaker 4
It sounds like for the fourth quarter, the biggest variable is how the Brazil season develops. Is there anything else that you would call out as that could drive you to the high or low end of your guidance range?
Speaker 2
No, I think that's the biggest factor. I think we're pretty comfortable with the rest. It's just because Latin America is such a big piece of our ag business in Q4, right? I mean, typically, I think it's probably at least 40% of sales. So it's one that we will watch closely.
Listen, they're all hands on deck on this. We have a great relationship, a working relationship with our customers in Brazil. And to the extent that there are opportunities weather wise, we will capitalize on those opportunities. But we are obviously just like everybody else subject to the weather conditions. I think we're still cautiously hopeful that this is going to be a good quarter.
Speaker 3
That's the biggest issue.
Speaker 0
Thank you. And at this time, I'm showing no further questions. I'd like to turn the conference back over to Mr. Rakesh Vachdev for closing remarks.
Speaker 2
Thank you. And once again, I just want to thank everybody for being on the call this morning. I think we continue to make very good progress in our businesses and also as you heard on our separation, there's a lot of work that our folks are doing and I really also want to thank all our global employees for all the hard work that they're doing and appreciate it and we will be back you again soon. Thank you.
Speaker 0
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everybody have a great day.