Element Solutions Inc

NYSE:ESI

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to Platform Specialty Products Corporation's First Quarter 2018 Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Carey Dorman, Senior Director of Corporate Development. Please go ahead.

[Carey Dorman, executive]

[Audio Gap]

Ben Gliklich, our EVP of Operations and Strategy; Scot Benson [Audio Gap] 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 in 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 the 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 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 section under Events & Presentations. For the purposes of this call, Platform will, in some cases, be comparing the same periods in 2018 and 2017 on a non-GAAP constant-currency basis and provide non-GAAP organic sales growth, as management believes that these figures provide a better comparison and understanding of the underlying business results for its operation. Please review the press release and the web deck for further information and reconciliations. It's now my pleasure to introduce Rakesh Sachdev, Platform's CEO. Rakesh?

[Rakesh Sachdev, executive]

Thank you, Carey, and good morning, everyone. I'm pleased to report an encouraging start to the year for Platform. Both our Performance Solutions and Ag Solutions segments saw meaningful organic sales and adjusted EBITDA growth in the quarter compared to Q1 of 2017. This quarter, Platform grew revenue 12% on a reported basis or 5% on an organic basis. Both segments demonstrated several bright spots of growth bolstered by strong products and generally healthy end-markets as well as a strong currency tailwind. In Performance Solutions, we saw strong organic sales growth in our major verticals as our core Electronic Solutions business accelerated, and both our Alpha Assembly Materials and Industrial Solutions businesses continue to benefit from the positive growth trend they have seen for several consecutive quarters now. Each of these businesses grew in the mid-single digits organically this quarter. In Agricultural Solutions, an organic sales increase of 6% was primarily driven by a robust late season in Latin America, particularly in Brazil, where the effect of the slow start in the third quarter of 2017 continued to generate sales into the first quarter of this year. We also had a positive start in North America. From an earnings perspective, our adjusted EBITDA grew 7% on a reported basis though we saw margins impacted by product mix and raw material inflation. We also experienced higher warehousing and logistics costs, which we expect to be temporary due to our ongoing manufacturing rationalization. The product mix issue was primarily in our Ag business, which saw delayed growth of higher-margin products partly due to cold weather in North America and Europe, which we expect to recapture throughout the year. Overall, we expect margins to improve over the course of the year and, as a result, we are reaffirming our current adjusted EBITDA guidance in the range of $870 million to $900 million for the full year 2018.

Q1 was also a productive quarter with respect to the separation of our 2 businesses. As we have described before, the separation process requires a number of technical steps and great progress has been made on this front. We finalized the audit of the 2017 carve out financial statements for Arysta, are working through the SEC process and have prepared ourselves operationally for separation. I would note that we have received a number of questions from the investment community regarding the structure of our separation and what form it will take. I would remind our shareholders that our sole purpose of undertaking the separation is that we believe it will maximize shareholder value and allow each business to perform to its full potential post split. While we're not going to comment about the potential form of the separation, I would emphasize that we remain open to alternatives in the separation process. We remain committed to the separation, and we will be opportunistic in evaluating available options to drive towards an optimal outcome, with an eye towards maximizing shareholder value. Slide 4 provides an overview of our financial performance this quarter. We reported first quarter 2018 net sales of $964 million and adjusted EBITDA of $207 million, representing an adjusted EBITDA margin of 22%. Reported net sales growth was 12% year-over-year, or 5% on an organic basis, which is in line with the mid-single digit average sales growth goal that we have previously established for our portfolio of businesses. A strong finish for Latin America selling season and good growth in the U.S. drove improved results in our Ag business despite a decrease in sales in parts of Europe largely due to inclement weather, which we expect to recover in Q2 and beyond. Key drivers for growth in Performance Solutions were continued global strength of surface treatment chemistries within the industrial and automotive industries, our assembly material products as well as healthy growth in core electronics. On a year-over-year basis, FX rates were tailwind to sales of 7% and were positive for both segments. The euro was the primary driver, with the British pound and the yuan also contributing. We reported a GAAP earnings per diluted share this quarter of $0.13 compared to a loss per share of $0.09 in Q1 of 2017. This improvement is primarily attributable to nonoperating foreign exchange and other one-time gains, higher operating profits and lower interest expense from our senior note redemption and term loan repricings last year. Our adjusted EBITDA grew 7% in reported dollars, but declined 3% on a constant-currency basis in the first quarter. While strong sales performance translated into positive adjusted EBITDA growth, we saw gross margin pressure in both segments. We experienced impacts from product mix, input cost pressure from Chinese suppliers in our Ag Solutions segment and some temporary inefficiencies from plant rationalization costs. We expect these trends to subside during the year and margins to improve. On Slide 5, you will see our Performance Solutions segment reported first quarter net sales of $492 million and adjusted EBITDA of $112 million, or $120 million, excluding corporate cost allocations. Organic sales growth, which excludes the impact of currency and certain metal price fluctuations, increased 4%. The largest growth drivers for organic sales in the segment were Alpha, where advanced assembly products sold into semiconductor markets had a strong start to the year; and industrial, which showed meaningful growth of surface treatment chemistries in Europe and in Asia. Our core Electronic Solutions business saw volume demand grow around the world, driven by core PCB markets despite a slow start to industry demand for mobile phones in the quarter. Growth in our advanced semiconductor plating business was modest, which we expect to increase over the balance of the year. We believe there are positive demand indicators for automotive and mobile phones into the second half of the year, which should support increasing sales growth for our products. Our Offshore business saw modest growth in the quarter, particularly in Brazil, as sustained higher oil prices are beginning to encourage increased spending. We anticipate positive growth in this high-margin business throughout 2018, and I'm encouraged with the market's trajectory. Performance Solutions adjusted EBITDA increased by 9% in the quarter or 2% on a constant-currency basis versus last year. Organic sales drove overall earnings growth though adjusted EBITDA was negatively impacted by several variables. Product mix in core electronics and industrial [indiscernible] margins, which we expect to normalize as mobile phones and automotive ramp up throughout the year. A temporary increase in logistics and warehousing costs resulting from plant rationalization also impacted the results. Overall, this is a good start to the year. Turning to Slide 6. The Agricultural Solutions segment reported first quarter net sales of $472 million and adjusted EBITDA of $95 million, or $103 million, excluding the allocation of copper costs. Net sales increased 6% organically due to strong underlying sales growth around the globe, particularly in Latin America, the U.S. and Africa. Reported growth was 14%, helped by an FX tailwind in the euro. Performance in Latin America in the quarter was strong as we continued to see the impact of a late start to the 2017 selling season. Crop prices for fruits and vegetables as well as corn and soybean have been positive for farmers, which translate into increased demand for our products, particularly in Brazil and Mexico, which are 2 of our biggest markets in the region. We also continued to perform well in the selective herbicide markets in Brazil despite the impact of generic entrants last year. Given that our Latin America Ag business typically peaks in the second half of the year, we're quite encouraged by the current demand environment and are optimistic that it will continue. North America had a positive start to the year, with growth primarily in fungicides for both specialty and raw crop applications. This was despite prolonged cold weather in the Northern Plains territory. We continue to feel confident about the improvement we have made to our channel inventory levels in North America and are seeing the actions pay off now that we are in season. In Europe and the Middle East and Africa region, we saw mixed net sales results. We are once again seeing an unseasonably cold start to the season, particularly in Central and Eastern Europe, which, similar to last year, should push sales into the second quarter. North and South Africa have seen good weather, which also drove sales, although in a lower margin geography. In addition, we continued to grow sales from the new markets we invested in last year. Ag Solutions' adjusted EBITDA increased 5% in the quarter, but declined 8% on a constant-currency basis. The primary driver was a decline in margins driven by product mix and raw material inflation. As we have previously mentioned, supply constraints due to the closure of manufacturing facilities in China has driven up active ingredient pricing in the industry. We believe some of the competitors are still selling inventory purchased last year at lower prices, currently limiting the ability to drive pricing to offset raw material inflation. We expect volume benefits from our preferred supply positions and further near-term pricing actions to mitigate this impact over the course of the year. Going forward, we view these active ingredient dynamics out of China more as an opportunity than a challenge. In North America, higher sales were recorded from lower margin products for wheat and some of the higher margin biosolutions and seed treatment sales that came in Q1 of last year, which are expected to be realized later this year. Savings from our past and present cost improvement initiatives have allowed us the flexibility to continually invest in boots on the ground to drive growth in new, high-value markets. This is part of the reason we continue to remain positive about our outlook. I would also note that we announced 2 strategic investments in the quarter within our Agricultural Solutions segment. We agreed to acquire a New Zealand crop protection business, which we anticipate will add to our geographic footprint and existing portfolio. We expect this transaction to close by the end of Q2. Additionally, we licensed a compelling insecticide for the large and growing rice market in India. While this product is a few years from commercialization, it is an attractive growth opportunity demonstrative of our differentiated business model and reflective of our commitment to building a robust pipeline. I would now like to turn the call over to John to talk about the cash flow and the balance sheet. John?

[John Connolly, executive]

Thanks, Rakesh, and good morning, everyone. I'm now on Slide 7 where I will review our performance and expectations for cash flow and the balance sheet. As expected, Platform invested cash into working capital in Q1, primarily driven by seasonal patterns in the Ag business. The size of the investment is similar to Q1 of last year and within our expected range, but the late season in Latin America and delays in Europe caused slightly higher balances in both receivables and inventories in the quarter. We also continued to have some excess inventory builds in both Performance Solutions and Ag due to the plant rationalization activity, which Rakesh mentioned earlier, but see this unwinding over the course of the year. We expect our seasonal release of working capital to happen late in Q2 as it typically does and anticipate strong cash flow from that point forward. Our full year outlook on cash flow items remains unchanged, with cash interest guidance of approximately $300 million for the year as we capture the benefit of our term loan repricings and senior note redemption. We are also maintaining our cash tax outlook of $145 million to $165 million for 2018. Q1 is typically a high cash tax quarter for us as we settle on profits from the end of the previous year, particularly in LATAM. Finally, our net CapEx outlook remains unchanged from the previous view we provided of approximately $100 million for the year. Platform's net debt at the end of the quarter of $5.3 billion was impacted by FX translation increases to our euro-denominated debt balances in the quarter. Our cash balance was $413 million and the revolver balance was drawn at $52 million at quarter end due to the working capital investment I mentioned previously. We expect to continue to grow earnings and release working capital through the year, which should drive net debt down towards 5x adjusted EBITDA by year-end. We remain confident with our expectations for free cash flow generation this year and in the ability for Platform to delever meaningfully.

With that, I would like to turn the call to Ben Gliklich to provide an update on the planned separation of our 2 businesses. Ben?

[Benjamin Gliklich, executive]

Thanks, John, and good morning. We'll keep the separation update brief as Rakesh touched on all the key points in his opening remarks. Overall, we remain on track for our separation, having effectively completed our operational separation requirements. As we've said before and as Rakesh reiterated this morning, we will continue to be opportunistic in pursuing separation alternatives and remain confident that the separation of our businesses is the best path to maximize value for our shareholders. I'll turn the call over to Rakesh now for closing remarks. Rakesh?

[Rakesh Sachdev, executive]

Thanks, Ben. And turning to Slide 9. We are reaffirming our full year 2018 adjusted EBITDA guidance in the range of $870 million to $900 million, which represents a growth rate of 6% to 10% over our 2017 adjusted EBITDA performance of $821 million. This guidance is based on end of March exchange rates. While our businesses and the end-markets are generally in healthy positions, there are several areas of pressure that we remain focused on mitigating. We expect both segments to demonstrate continued organic sales growth in the second quarter of this year. In Agricultural Solutions, we anticipate the later European season and the impact of pricing initiatives to drive growth. In Performance Solutions, continued healthy end-market demand should drive another quarter of growth in our electronics, Alpha Assembly Materials and industrial businesses. A more normal mix in electronics should help drive and enhance margin on growth in the segment quarter-over-quarter. Based on our 3 months of results and current outlook for Q2, we expect our 2018 results to reflect the high quality, high cash flow potential of our businesses and demonstrate the ability to outgrow their respective end-markets. Finally on Slide 10, I would like to finish by revisiting our priorities for the year. We remain focused on operating momentum, margin improvement and generating cash flow to reduce leverage. We also remain focused on a successful separation without sacrificing our ability to deliver strong operating results. We are optimistic that 2018 will demonstrate another year of strong results and delivery on our other core objectives. Now with that, we are happy to turn the call over to your questions. Operator?

[Operator]

[Operator Instructions] Our first question or comment comes from the line of Daniel Jester from Citi.

[Daniel Jester, analyst]

So at the end of 2017, if I remember correctly, I think there was about $10 million of savings left in the Performance segment from cost rationalization. And you mentioned that you had some higher logistics and warehousing costs in the quarter as you kind of work through some plant closures. Can you just talk about where we are on the savings program and how that should flow through the rest of the year?

[Rakesh Sachdev, executive]

Yes. So I'll give you some comments and Scot's here, too, and I'll let him speak, too. But we're in the process of rationalizing a few plants, mostly in North America. And we've had to build some inventory, as John pointed out. We had to create some extra warehousing, which was normal as part of our planned process, so we're incurring some additional costs now. We will get most of the benefits by the end of this year. We did not, obviously, see those benefits in Q1, but we feel pretty confident that -- as part of our plan that we are going to get those benefits. By the end of this year, we should get those. Scot, do you want to add something?

[Scot Benson, executive]

Sure, Rakesh. I'll just reaffirm what you said in that the second half of the year, Daniel, we look to be on track. We will have the plant rationalizations completed, and the savings that we're anticipating will definitely occur in the second half of the year. So we feel we're on track.

[Daniel Jester, analyst]

Okay, that's helpful. And then regarding the raw material inflation you're seeing out of China for your active ingredients in the Ag Solutions business, can you give us any more color about sort of specific active ingredients that you're seeing the most pronounced inflation in? And how much of this impact do you think is transitory because of some sort of one-time environmental-related shutdowns? Or how much of this could be a more long-term impact that may force you to kind of rethink about some of your procurement opportunities there?

[Rakesh Sachdev, executive]

I'll mention the size of the hit we are taking out now. I'll have Diego give you a little bit of more color. But in Q1, we probably took an inflationary increase of somewhere between $6 million, $7 million net. We see that coming down quite a bit in the second quarter and really being completely mitigated in the second half. I mean, there were a few active ingredients. Now the important point to note is that we are not single-sourced. We have the ability to source from multiple suppliers. And so it's going to be a combination of that, including some additional pricing that we are going to be putting in place to help us offset these increases. Diego, do you want to add some color?

[Diego Casanello, executive]

Yes. No, I mean, I think just [indiscernible] what Rakesh said, I mean, the inflation has been -- or the situation in China has been both a tailwind and a headwind in Q1. On the headwind, I think we talk about this inflation impact. But it has been also a headwind because we have seen shortages in the market where we have been able to capture additional business, helping some of our customers because of our multisourcing position, right? So the fact that we not only multisource most of our key active ingredients, but we do this also in different geographies that has been a plus in Q1, too.

[Operator]

[Operator Instructions] Our next question or comment comes from the line of Neel Kumar from Morgan Stanley.

[Neel Kumar, analyst]

Just following up on your comments about being opportunistic with the Arysta separation with respect to separation alternatives, would you say that IPO is still your preferred path? And has your time line been pushed back a bit from the middle of this year as you weigh some of these alternatives?

[Rakesh Sachdev, executive]

So listen, Neel, we are on track as far as the timing. We said that we would be able to complete the separation as early as July. We are still -- obviously, there are other factors that could affect that timing somewhat. But having said that, I'm not going to comment on the mechanism of our separation. Suffice to say that we are committed to the separation. We have various alternatives, and we will choose the best option for our shareholders.

[Neel Kumar, analyst]

All right. And then in your slide deck, you had indicated an improved demand outlook for Offshore and Graphics. Can you give us a sense of what's embedded in your guidance for those 2 subsegments and how much growth you now expect in 2018?

[Rakesh Sachdev, executive]

So if you look at Q1, I mean, our 3 big businesses, our core electronics, our Alpha Assembly business and our industrial business, which make up almost 90% of Performance Solutions, they all grew at about -- in the mid-single digits. The Offshore business grew very slightly in Q1. The Graphics business was somewhat flat. And for the rest of the year, we are expecting that the offshore business will show some modest growth, and the Graphics business should also show a little bit of growth for the balance of the year. But again, I think all these businesses are consistently growing in the mid-single digits. The Offshore business, as I said, has showed small growth in Q1. We expect that to continue in the balance of the year. Graphics was flat and -- but we expect to start seeing some growth.

[Operator]

Our next question or comment comes from the line of Ian Bennett from Bank of America Merrill Lynch.

[Ian Bennett, analyst]

Following up on the comments on separation. If Platform decides to go down the IPO route, can you comment a little bit on what the timing and steps that need to be done in terms of filings with the SEC? Any key hires that you pointed out on your slides as well as if there will be TSAs with Arysta and Platform?

[Benjamin Gliklich, executive]

So -- this is Ben Gliklich speaking. As Rakesh mentioned, we remain on track for a separation, and the separation could come as early as July. Everything is coming according to plan. As you saw on the slides, we've started making hires and done the operational things that will facilitate the separation. With regard to the specific mechanism for the separation, we're not commenting on that. But as Rakesh said, we have alternatives, and we're going to choose the path that's best for our shareholders.

[Ian Bennett, analyst]

Okay. And for my follow-up, Rakesh, you mentioned some of the inflation headwinds earlier, $6 million to $7 million in the quarter. Just so I understand, is that year-over-year or sequentially? And could you help quantify the inflation headwind in the Performance business?

[Rakesh Sachdev, executive]

Yes. The inflation on the Performance business is actually quite small. We addressed that last year. We had some inflation. We took some pricing actions. So really, the inflation issue in Performance was a fairly small number in Q1. It was mostly in the Ag business. We did have a mix issue in the Performance business as well within the segments. In the core electronics business, some of the advanced electronic business growth is really pushed out to Q2 and later part of the year. That will help our margins. And as we start seeing more growth in the Offshore and Graphics business, that will also help our margins. The Alpha business has lower margins than the other businesses, as we have said. And Alpha grew very nicely this quarter, too. So it's more of a mix issue, which we think will normalize, but we're not really that concerned about the inflation issue in the Performance business.

[Operator]

Our next question or comment comes from the line of Jim Sheehan from SunTrust.

[James Sheehan, analyst]

Could you talk about rising logistics costs and how you're managing through them?

[Rakesh Sachdev, executive]

Yes. The logistics costs were mostly related to -- we had to get some more warehousing space and some premium freight for deliveries as we are shutting down a couple of plants, which you can imagine is normal course. That affected us by a few million dollars in Q1. We think that that's temporary, as Scot mentioned. We expect that to be [ wound ] in the second half. We shouldn't have to see those extra costs in the second half. And that's where we are.

[James Sheehan, analyst]

And could you also talk about your pricing power in Performance Solutions, specifically with Chinese automakers? How do you find those discussions? How are those discussions over pricing been going recently?

[Rakesh Sachdev, executive]

I'll let Scot comment on that. Scot, do you want to say something about that?

[Scot Benson, executive]

So -- yes. So we can't -- obviously can't talk specifically about how we handle pricing, but things are set by the market and by the competitive nature of the businesses we're in. We don't sell directly to the automakers, so we don't generally have discussions directly with automakers at all about pricing or cost of our materials into their supply chain. So -- but we're relatively comfortable with our capability to deal with pricing pressures everywhere in the world.

[Rakesh Sachdev, executive]

Having said that, I think -- just a follow-up on what Scot said, we do -- we will have some pricing opportunities, selective pricing opportunities in the Performance Solutions business, which we will communicate as we communicate in the marketplace. But that will happen when we're ready to announce some things.

[Operator]

Our next question or comment comes from the line of Bob Koort from Goldman Sachs.

[Christopher Evans, analyst]

It's Chris Evans on for Bob. I just wanted to ask about your '18 EBITDA guidance. Seems like the first quarter was pretty strong despite the headwinds you identified. I just wanted to get some context how the quarter shaped up relative to your original expectations. And then just looking -- I know one quarter doesn't make the year, but why you may have chosen not to narrow the range or make any other adjustments given the result?

[Rakesh Sachdev, executive]

Yes. I think the quarter came out pretty close to what we had expected. We are pleased, obviously, with the growth that we're seeing in the markets. The markets are helping, but we're also executing well. We like the fact that we saw some strong growth in Latin America in the Ag business, which is very encouraging. The second half of the year is a strong period for Latin America and that encourages us. Now having said that, we had a tailwind from FX in Q1. We'll probably have a slightly smaller tailwind in Q2 and probably have little or no tailwind year-over-year in the second half because the exchange rates had already played out in the second half last year. So it's the first half we will see the most benefit from FX and very small in the second half. We just want to be cautious because the FX rates continue to move around, and you know that even from the end of March, the dollar has strengthened some, but not -- we're still very comfortable with the range that we have given, but we want to just still see how the FX plays out in the coming few months and in Q2 and then we'll try and narrow this range down.

[Christopher Evans, analyst]

And just a quick clarifier. Just wanted to get some touch-up on your variable debt exposure, maybe just some sensitivities around what a move in LIBOR might do to your interest expense.

[John Connolly, executive]

Sure. I'm happy to take that. So as you know, we've got a split of debt between term loans and bonds. The term loans are floating, but only about 1/3 of them actually float because we've got interest rate swaps on the balance that were fixed back 2-plus years ago at attractive rates relative to where LIBOR is trending now.

[Christopher Evans, analyst]

Maybe just for -- I mean, what would x move in LIBOR do, given all that, to your interest expense?

[John Connolly, executive]

We can follow up on specific numbers, but note, 1/3 of our floating rate debt -- excuse me, 1/3 of our total debt is floating at the moment.

[Operator]

Our next question or comment comes from the line of Christopher Parkinson from Crédit Suisse.

[Christopher Parkinson, analyst]

A question around developments in Europe in Q2 so far. I'm wondering if you've seen any of that kind of delayed demand coming through in the order books in recent weeks or if we're still waiting a little bit to see that?

[Rakesh Sachdev, executive]

Yes. Can you repeat the question? I think you didn't come through in the first few seconds of your question.

[Christopher Parkinson, analyst]

Sorry about that. So just asking around Ag sales in Europe in Q2 so far. Wondering what you're seeing given the kind of delayed start to the season there. Wondering if you've seen some of that demand pick up or are still waiting to see it come through.

[Diego Casanello, executive]

Sure. Diego here. We are confident about Q2 in Europe. In general, as we said before, we saw, I would say, colder-than-normal conditions in Central and Northern Europe. That has kept winter crops dormant in the east and slowed down development of [ horse seed ], bread and wheat in the West. But we see, for example, the Black Sea area, which was delayed, is already starting, and there was good snowfall, there's good moisture, and some early fungicide applications were affected. We're not very much represented in that particular business. We're very confident that we can deliver on our results in Q2 overall. It's also a very good condition in the south of Europe. There has been very good rains and good conditions for fruits and veg.

[Christopher Parkinson, analyst]

Got it. And then just quickly on Performance margins. I think we've touched on this a bit, but can you just kind of break out in 1Q what was kind of the hit to margin that you saw from the cost rationalizations versus what the impact of mix was?

[Rakesh Sachdev, executive]

Yes. So really, there are 2 things that affected our margin in Q1. If you look at year-over-year, I think, if I remember the numbers, I think our margins went down 90 basis points, EBITDA margin. And if you isolate the COGS inflation issue that we just talked about, which is roughly about $7 million or so, and also the product mix issue, which was about the same size, those 2 were about 150 basis points on our EBITDA margin. Now we feel pretty confident that those 2 will become less or nonissues as the year goes forward. Had we not lost that 150 basis points because of just those 2 issues, we would've shown a 50 basis point margin expansion in the year. I know you asked about MPS, but overall, I'm just saying, that's total for total Platform, part of it came from Ag and part of it came from MPS, but both businesses would have shown a margin expansion.

[Operator]

Our next question or comment comes from the line of Duffy Fischer from Barclays.

[Michael Leithead, analyst]

This is Mike Leithead on for Duffy this morning. I guess, on the separation, you continue to use the word separation instead of maybe IPO or spin first. So is there still a potential sale out there for this business? Or are we pretty much locked in at this point to a spin versus an IPO?

[Rakesh Sachdev, executive]

Listen, I think we've been pretty clear that we are in the process of separating these 2 businesses. These are 2 solid businesses. They will stand on their own. They'll do well. We have alternatives around the separation, and I'm not going to comment anymore on that at this time. And we're tracking well to where we want to get to.

[Michael Leithead, analyst]

Fair enough. And then on your Offshore business in Performance Solutions, I guess, now with energy prices feeling a bit higher for longer, can you just remind us what drives your performance in this business? I think most people generally look at oil prices and rig count. But if I remember correctly, there's some nuance in what drives orders and revenues for you guys.

[Rakesh Sachdev, executive]

Well, Scot can speak to this. But big chunk of our business is sort of maintenance of these rigs that are already in operation. But there's also a piece of our business where we provide these hydraulic fluids for new rigs. Obviously, it's the new rigs that got impacted because the CapEx investment was reduced as oil prices went down and the oil companies were spending less in exploration. That's going to come back and that's going to give us even more oomph in this business. But there's a big chunk of business that just moves on as the production goes on. So Scot, I don't know if you wanted to add some more color to that.

[Scot Benson, executive]

Yes. The only thing I would add to that, Rakesh, is that a portion of our business in this market is in drilling and drilling was -- saw a significant decrease over the last few years. So as drilling comes back, we will see some additional growth revenue. But as Rakesh said, most of our businesses is production, maintenance, production. So that has held fairly firm. And as CapEx investments come back over the next 18 to 24 months, we will start seeing [Audio Gap]

[Rakesh Sachdev, executive]

I think we lost Scot.

[Scot Benson, executive]

We'll start seeing revenue kick in from increased spend.

[Operator]

Our next question or comment comes from the line of Jon Tanwanteng from CJS Securities.

[Jonathan Tanwanteng, analyst]

John, you said that at the end of 2018, you should be at 5x leverage. It's about $4.5 billion in net debt based on the high end of your adjusted EBITDA guidance. That implies about $800 million in cash generation from here to year-end? Is that about right? And would any proceeds from the separation be incremental to that?

[John Connolly, executive]

No. So that doesn't assume any proceeds from separation. That's just what we expect to be able to deliver in terms of our EBITDA growth for the year, our release of working capital, our interest savings throughout the year. And we're thinking we'd be towards 5x, not at 5x.

[Rakesh Sachdev, executive]

So towards 5x, right? Just to give you a little more color on cash. So last year -- in the last 3 quarters, we generated about $300 million of free cash flow, if you go back and look at it. This year, obviously, we plan to generate more than that because our earnings are going to be higher, our interest expenses are lower. I expect that we will generate in the next 3 quarters somewhere between $350 million and $400 million of free cash flow. So I mean, that's a good number that you can use towards -- as you look at our overall free cash flow and how much debt we pay down.

[Jonathan Tanwanteng, analyst]

Okay, perfect. And, Ben or Rakesh, if you do decide to go down the IPO route, can you comment on the ballpark expected capital structures for the SpinCo and the RemainCo, if you're able to.

[Benjamin Gliklich, executive]

We've already articulated previously our view on capital structure for these 2 businesses, what our target leverages would be for them as stand-alone entities and that thinking hasn't changed.

[Operator]

Our next question or comment comes from the line of John Spector (sic) [ Josh Spector ] from UBS.

[Joshua Spector, analyst]

Just a question on the plastics plating side of the business within Performance. Seen a number of specialty plastics producers talking about higher growth replacing metal with plastic parts already colored to metallic colors with a metallic feel and talking about that taking share from plastic plating. Is this anything that you guys are seeing? Is it small enough that it's still a niche application? Or is it something that your customers are considering more these days?

[Rakesh Sachdev, executive]

Scot, are you on the phone?

[Scot Benson, executive]

I'm here. I'm here. Sorry about getting cut off. There are niche applications for plating replacements. However, in the automotive industry, the specifications for wear resistance and corrosion, we feel, still continue to remain very positive [ about ] plating for the automotive industry. A lot of those replacement products, we think, are much more niche than mainstream automotive.

[Operator]

I'm showing no additional audio questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.

[Rakesh Sachdev, executive]

Okay. Well, again, I just want to thank everybody for being on the phone. As I said, we feel we had a pretty solid first quarter. We're looking forward to updating you as we roll forward. We've got a lot of exciting things happening. Obviously, the business is performing well. And we are on track on the separation, and we'll keep you updated. So thank you.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.