Element Solutions Inc

NYSE:ESI

Earnings Call Transcript 2017-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to the Platform Specialty Products Corporation Fourth Quarter and Full Year 2017 Results Conference Call. [Operator Instructions]

I will now turn the call over to Carey Dorman, Senior Director of Corporate Development. Please go ahead.

[Carey Dorman, executive]

Good morning, and thank you for participating on our fourth quarter and full year 2017 earnings call.

Joining me this morning are our CEO, Rakesh Sachdev; CFO, John Connolly; Ben Gliklich, our EVP of Operations and Strategy; Scot Benson, the President of Performance Solutions; and Diego Lopez Casanello, the 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 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 statement 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 been prepared in accordance with U.S. GAAP -- 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.

As a reminder, for the purposes of this call, Platform will, in some cases, be comparing the same periods of 2017 and 2016 on a constant currency and organic sales 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 Sachdev, Platform's CEO, for opening remarks. Rakesh?

[Rakesh Sachdev, executive]

Thank you, Carey, and good morning, everyone. 2017 was an important and successful year for Platform. We embarked on a number of transformational initiatives, while, at the same time, producing financial results in line with our short-term goals and long-term strategic objectives.

Both our Performance Solutions and Agricultural Solutions businesses saw close to mid-single-digit organic sales growth in 2017. As a company, we grew adjusted EBITDA at almost twice that rate, having driven margin expansion on both segments. This led to nearly 40% free cash flow growth in 2017 to $144 million. We invested on a number of growth projects, launched exciting new products, grew our peak potential sales pipeline for Ag and entered into a number of strategic partnerships.

We also improved our cost footprint by continuing to execute against facility rationalization plans in Performance Solutions and delivering against cost savings initiatives in our Ag business.

In August of 2017, we announced our intention to separate our 2 business segments. This objective is driven by a desire to accelerate value creation for our shareholders and enhance each business' ability to deliver value to its markets. Our teams are working hard to accomplish the separation in both a timely and efficient manner. We run these 2 segments separately today with a minimal amount of shared functional support. This makes the operational separation a rather seamless undertaking, and it is well underway.

From a capital markets perspective, we have also made progress, while, at the same time, reducing our cost of debt.

For our 2018 outlook, we are announcing today an increase to our prior adjusted EBITDA guidance to a new range of $870 million to $900 million. This represents an increase of 8% versus 2017, at the midpoint of the range.

We remain focused on delivering our financial commitments, as we pursue the separation of our 2 businesses. This projected adjusted EBITDA growth and even stronger free cash flow growth should reduce Platform's leverage to below 5.5x adjusted EBITDA by the end of the year. This excludes any additional debt paydown from equity that may be raised behind the Ag business as part of the separation of the businesses.

I will spend more time on our 2017 accomplishments as well as our 2018 plans and objectives later in the call, but first, let me take you through our Q4 and full year 2017 financial results.

Slide 4 shows an overview of our fourth quarter financial performance. We reported record net sales of $1.1 billion and adjusted EBITDA of $226 million, which represents an adjusted EBITDA margin of 21%.

Year-over-year organic sales growth was 9%, driven primarily by our Agricultural Solutions segment, which grew 15% organically in the fourth quarter largely due to a late recovery in the Latin American season and a phasing shift from Q3 to Q4 in our African public health-related business.

GAAP diluted EPS was a loss of $0.49 for the quarter, driven primarily by a noncash goodwill impairment charge and the cost related to refinancing our 10 3/8% senior notes in 2017. This goodwill impairment is related to our Ag business, as the overall Ag market is taking longer to recover than in historical downturns.

Foreign exchange has also been a significant headwind to our results. However, we remain confident in the health and trend of our Ag business and have seen strong and improving performance in 2017, which, we believe, will continue in 2018 and beyond.

Adjusted EBITDA for Platform grew 4% in the quarter or 1% on a constant currency basis.

From an operating expense perspective, we were negatively impacted by the timing of several items. Because of our strong sales in the quarter, bonus accruals and commissions increased over the fourth quarter of 2016.

We also grew our investment in R&D expense to continue the successful commercialization of new products. In addition, we were negatively impacted by a tax -- by change to a tax rule in Japan as well as a year-over-year transactional FX headwind.

With regard to gross profit margin, we continue to see some pressure from raw material inflation and end market mix. In Ag, we had a positive pickup in sales in our African public health business that came at a margin below the segment average. And in Performance Solutions, we continue to see sales growth in Alpha, and industrial outpaced the other verticals.

Furthermore, while we continue to offset the vast majority of the raw material inflation through price and supply chain action, we also saw the impact of rising metal prices increase our sales in Performance Solutions without much of that dropping through to profit.

We expect gross and adjusted EBITDA margins to start to expand again in 2018. You will see our full year 2017 financial results on Slide 5. Platform grew net sales by 5% in the year, driving sales to a record level of $3.8 billion in 2017.

On an organic basis, excluding the impact of currency, acquisitions and metals prices, the company grew sales 4% year-over-year. Our Performance Solutions business saw organic sales growth of approximately 4%, driven primarily by the industrial and Alpha assembly businesses in Europe and Asia.

Our Agricultural Solutions business grew organically approximately 3%, driven primarily by market expansion activity in Europe, new product launches and growth in both South Africa and our African-focused public health business.

Biosolutions products, a key growth category for us, also grew organically in the double digits this year.

Our GAAP diluted EPS loss of $1.04 increased for the full year driven primarily by the previously mentioned goodwill impairment charge and an FX loss driven primarily by the increased strength of the euro and its impact on our debt balances. Adjusted EPS, however, grew 21% this year to $0.76 per share. This is a result of our meaningful adjusted EBITDA growth in 2017 combined with a sizable decrease in our interest expense. Our full year adjusted EBITDA was $821 million and grew 7% on a constant currency basis.

As I just mentioned, this high single-digit growth was approximately double our sales growth, which is what we target for our business over the long term. This result exceeded the midpoint of our full year 2017 guidance, and we are pleased by the efforts of our management teams to achieve these results.

Adjusted EBITDA margin improved about 50 basis points at constant currency, which is a result of both the normal operating leverage in the business as well as mix improvements, primarily in Ag, and cost efficiencies we achieved in both businesses throughout the year. We believe we have demonstrated the ability to grow adjusted EBITDA faster than sales over time, which is a strong advantage of our business model.

Turning to Slide 6. Our Performance Solutions segment reported record full year 2017 net sales of $1.9 billion and an adjusted EBITDA of $433 million or $464 million, excluding corporate cost allocations. Organic sales increased 4%, which excludes the impact of currency, metal price fluctuations and the small contribution for our -- from our OM Malaysia acquisition in January of 2016. The key driver for organic sales in the segment was Alpha, which is our electronics assembly business, which saw a meaningful growth in its bar, wire and paste products, primarily in Europe and Asia. This business saw strong net sales growth. However, some of this came at lower than segment average gross margins.

Industrial Solutions also drove significant organic sales growth in 2017, primarily in Asia, where we believe we continue to win market share as we establish our business as a strong global supplier partner to our automotive and general industrial customers.

Our core electronics business also saw positive organic sales growth driven by new mobile phone launches in Asia, particularly Korea. The core electronics business had a difficult comp in 2017 due to the strong growth we saw in 2016, but we expect our core electronics business to see accelerating growth in 2018 on a year-over-year basis, which should be supported by our increased investments in advance semiconductor-related markets.

With oil prices at slightly higher levels, our offshore business stabilized and returned to growth in 2017. We expect that 2018 will be another slow growth year for this business, but we see encouraging signs of recovery in customer CapEx decisions that are expected to boost growth for the business in the near future.

The only Performance Solutions business that experienced organic sales declines in 2017 was our Graphic Solutions business. Today, this business is primarily driven by the consumer packaged goods packaging business and has a small legacy newspaper business. We had challenges in 2017 that we believe we have worked through. We executed a global reorg of the business and are excited about the outlook for this business in 2018.

Performance Solutions constant currency adjusted EBITDA increased by 8% in the year. Overall, adjusted EBITDA margin for the year was up about 40 basis points on a constant currency basis. This was despite the negative impact of higher growth from our lower-margin Alpha and industrial businesses as well as the increase of commodity prices.

While we passed through metals price increase in our Alpha business, we use metals and other commodity chemical inputs in our other verticals as well. In general, our agreements with customers allow us to surcharge or take price when these commodities inflate. However, this increase comes at little to no incremental margin, which, of course, mutes our adjusted EBITDA conversion.

On Slide 7. The Agricultural Solutions segment reported full year 2017 net sales of $1.9 billion and an adjusted EBITDA of $388 million or $420 million, excluding the allocation of corporate cost. Organic sales increased 3%, driven primarily by market expansion in Europe, growth in our biosolutions portfolio and new product launches.

In Europe, we continue to see the benefit of our market expansion activity that established new direct businesses in Germany, the U.K. and parts of Eastern Europe. These are generally higher-value markets for us, which not only helps increase sales, but also drove margin mix improvement for the Ag segment. We saw meaningful growth in our biosolutions products in Europe, sold both standalone and as part of our broader Pronutiva offering.

Our African public health business, which focuses on malaria protection, had increased sales in 2017. We also saw growth from our South Africa business, where we believe we are a market leader. All of this was partially offset by an expected reduction in West Africa from the restructuring initiatives we took in 2016.

Our North America Ag business had a positive year of sales growth driven by both volume and price as we launched several new products. We saw mix improvements in North America driven partially by the higher specialty insecticide sales, but also by increases in our seed treatment and higher-margin biosolutions products.

In Canada, we had a particularly strong year driven by success in cross-selling our products with farmers.

In Latin America, which is a large market for our Ag business, we benefited from strong sales growth in Brazil, despite drought conditions that delayed sales into late Q4. While we benefited from volume growth, we saw expected price erosion in local currency in Brazil weigh on organic sales. Mexico also had a good sales year, as we continue to leverage our strong position in that market. While we experienced generic pressure in the region, we performed better than expected from both a price and volume standpoint.

Ag Solutions adjusted EBITDA increased 6% on a constant currency basis in 2017. Our higher-value market expansion initiatives, biosolutions growth and new product mix were the largest contributors to that increase. Margin expansion was partially offset by stronger sales in the lower margin African public health business.

We successfully took price actions to help mitigate the impact on our earnings of certain raw material inflation. An increase in operating expense in the year arose from planned growth of R&D investments and larger sales and marketing spend associated with our market expansion initiatives.

On Slide 8, we highlight the sources and uses of our cash on a full year basis. John will give you more color on the details, but what is important to note here is that we generated approximately $226 million of operating cash flow this year when adjusting for the cost to refinance our senior unsecured notes.

We spent $82 million on CapEx and product registrations, net of disposals, which overall resulted in a normalized free cash flow of $144 million. This is approximately a 40% free cash flow increase over the 2016 number and reflects strong adjusted EBITDA performance and lower interest expense, offset partially by growth in working capital and cash taxes.

We paid $44 million to fund the make-whole payment associated with refinancing the $500 million of 10 3/8% senior notes with new 5 7/8% notes maturing in 2025. While this was a meaningful use of cash in the year, it'll save us approximately $20 million per year in annual interest expense, which is roughly a 2-year payback.

We ultimately raised $800 million of the new notes, $250 million of which were used to pay down a portion of our term loans. These notes are important because they represent the first tranche of debt in our capital structure that can stay in place after the separation of the 2 businesses.

In addition, we paid down our standing local credit lines of nearly $60 million and grew cash in our balance sheet by approximately $55 million. As we look to 2018, we expect another strong year in free cash flow growth.

Turning now to Slide 9. We wanted to review our 2017 accomplishments against the priorities we laid out for the year. We once again demonstrated solid progress against these objectives. 2017 was another year of strong execution in our business segments. We achieved 4% organic sales growth, and both business segments achieved organic sales numbers roughly in the range we would expect them over the long term given their mix of geographic and end market exposures.

Our Ag business showed another year of exciting results driven by a local solutions-oriented business model and differentiated crop and geographic exposures, which have translated into adjusted EBITDA growth of almost twice the growth of sales.

The other element of our operating momentum relates to our announced 2018 separation plans. We believe that separating our businesses will drive more focused operating objectives, clearer strategic directions and healthier balance sheets, thereby accelerating long-term value creation for our shareholders.

Our sales expectations for both our business segments assumes growth level above those of the overall markets we serve. We plan to achieve this goal by driving sales in faster-growing segments, developing and successfully launching new products, licensing new technologies and bundling broad product offerings.

In our Ag business, we increase both our operational and capitalized R&D expenses, as we continue to drive a larger R&D pipeline and expand existing product registrations into new markets and new crops.

We also announced several exciting licensing deals, including with DuPont on seed treatment and Isagro on new fungicide formulations.

Finally, we continue to invest behind our biosolutions products and saw double-digit global sales growth for these offerings in 2017.

In our Performance Solutions business, we expect above-market sales growth to come from our emphasis on faster-growing subsegments, like advanced electronics, and share gain in our key markets, as well as a trend towards increasing automotive or electronic content per unit.

To that end, our Performance Solutions segment has launched a global sales excellence program and an integrated solution sales team. These initiatives will help sell through to our biggest OEM customers across our business lines.

After a little more than 2 years of integration within the Performance Solutions segment, we have achieved close to $60 million of annual cost savings relative to our initial $70 million target. We expect the remaining savings will come from facility rationalization and back-office shared service opportunities this year. Beyond this, we are driving a culture of continuous improvement, which we expect will provide us with ongoing cost-reduction opportunities.

Our fourth objective of 2017 was to generate improved free cash flow and reduce leverage. We achieved both these goals. We reduced our leverage to approximately 6x 2017 adjusted EBITDA, despite a strengthening euro, which had a negative impact of more than $200 million on our U.S. dollar debt balances. The phasing of euro sales in our business relative to the timing of the currency strength caused our debt balances to move in a disproportionate way compared to our earnings in 2017. However, based on current exchange rates, we expect to derive the benefit of a stronger euro on our adjusted EBITDA in 2018. We consider our mix of U.S. and euro debt appropriate given the amount of our business mix outside of the United States.

Slide 10 is a reminder of our previously guided long-term strategic goals in order to provide context for our 2018 adjusted EBITDA guidance. We expect on average to generate mid-single-digit sales growth from our combined businesses, which would, in turn drive adjusted EBITDA growth to compound at a rate in the high single digits. If we continue to execute on our organic plans like we did in 2017, we would expect net debt to adjusted EBITDA to be around 4.5x by the end of 2019. This is before considering any potential equity raise at the Ag level in connection with the separation.

On Slide 11. You can see our detailed outlook for 2018. Based on average exchange rates for January 2018, we expect adjusted EBITDA to be in a range of $870 million to $900 million for the full year 2018. This reflects an increase of $10 million at the midpoint from our previously indicated guidance, driven primarily by increased FX translation tailwind. We expect this adjusted EBITDA performance to be driven by low to mid-single-digit organic sales growth in both Performance Solutions and the Ag Solutions businesses.

From an end market perspective, we expect the Performance segment to see generally robust demand conditions across their end markets, except perhaps for offshore, where we still expect only a modest pickup given the long CapEx cycles. Furthermore, the trend of increasing content per vehicle and electronic content per device is also expected to continue. We also expect the mix of end market growth to normalize somewhat with a return to more normal growth for core electronics, helping our incremental margin picture.

From an Ag end market perspective, we continue to have a cautiously optimistic view of the crop protection's chemical end market as a whole, in which we anticipate low single-digit market growth.

In general, we have seen industry-level channel inventory stocks becoming healthier. We've also seen grain prices stabilize, which is beneficial to our markets, but less so for the specialty crops that we are focused on.

On the other hand, we are aware of raw material inflationary price pressures, including supply constraints out of China. Our teams are taking appropriate actions to mitigate these issues, and we plan on continuing our market expansion plans in Europe and Asia and also expect continued double-digit growth for our biosolutions and seed treatment products, both of which are above our average margin for the segment.

I would now like to turn the call over to John to review our balance sheet, cash flow and taxes. John?

[John Connolly, executive]

Thanks, Rakesh, and good morning, everyone.

Turning to Slide 12. Platform generated $144 million of free cash flow in 2017 after adjusting for the one-time payment associated with the refinancing of our 10 3/8% notes. This year-over-year growth of about 40% was primarily driven by increased earnings and reduced cash interest expense in the year.

Cash invested in working capital was about $34 million in the year, which is generally in line with our expectations, given the growth we saw in the businesses. Some of this increase is attributable to temporary inventory builds in our Performance Solutions facilities, as we continue to execute our rationalization plans. We would expect to lap that in the latter part of 2018.

Additionally, cash taxes increased about $24 million for the year, primarily attributable to higher earnings. It's important to note that this cash spend grew slower than our adjusted pretax earnings did this year, reflecting some of the tax planning initiatives currently underway. I will discuss tax in more detail on the following slide.

Our 2018 outlook on cash flow items remains unchanged from what we provided to you a few weeks ago. We expect cash interest spend of about $300 million for the year, as we capture the remaining benefit of our term loan and senior notes refinancing activities. We are also providing a cash tax outlook in the range of $145 million to $165 million for 2018, which, at the midpoint, reflects the continued improvement in the cash tax rate year-over-year. We believe that there is significant long-term tax planning opportunities to reduce global cash taxes, which we expect should start to materialize in a meaningful way in 2019.

Finally, our net CapEx outlook is approximately $100 million for the year. Given these expectations, we believe we will see another year of free cash flow growth in excess of adjusted EBITDA growth in 2018.

Platform's net debt at the end of 2017 of $5.1 billion was again impacted by the notional increases to our European debt balances due to FX translation. This impact was more than $200 million for the year.

In Q4, we also refinanced $500 million of high coupon 10 3/8% senior notes with a new $800 million 5 7/8% senior note issue that matures in 2025.

As part of our 2017 refinancings, we have paid down approximately $250 million of term loan borrowings, shifting more debt to unsecured and extending our average maturity profile.

Additionally, our cash balance was $478 million, and our revolver was undrawn at year-end. As Rakesh stated before, we expect to see debt balances continue to come down and earnings to grow next year, which would demonstrate a meaningful improvement in our expected leverage in 2018.

On Slide 13, we provide some insight into our overall tax framework in light of the new U.S. tax legislation. While Platform is in a loss position in the U.S., there were some U.S. GAAP tax implications from the legislation. In Q4, we recorded a $46 million GAAP benefit associated with the impact of the new lower tax rate on our deferred tax liabilities and a partial release of valuation allowances. This was a one-time noncash impact.

With respect to the transition tax on foreign undistributed earnings, we have determined that we have sufficient tax credits, such that we expect to offset any estimated liability. We also believe that our NOL position will largely inflate us from increased U.S. taxes due to the change in the rules related to interest deductibility. Given the recent changes, we are evaluating new strategies to improve our tax position, particularly in the context of the separation.

When it comes to our global tax picture, we have been driving planning initiatives that we believe have begun to help us reduce our overall tax expense, and cash tax is owed. You can see on the bottom left of the page that our effective statutory rate, excluding the U.S., is around 30%. We exclude the U.S. in this calculation because it is a loss-making country for us today, given the corporate overhead and the majority of our interest expense that sits inside the U.S. This also helps explain why the cash tax rate we see as a percentage of adjusted pretax income is higher than our geographic sales mix would imply. When we exclude the U.S. losses, we estimate that our cash tax rate is lower than the weighted average industry's -- weighted average and statutory rate because of tax planning.

As we look forward to 2018 and beyond, we expect to see a continued improvement in our cash tax rate when compared to adjusted pretax income. We are reducing the effective tax rate we will use for adjusted EPS in all periods of 2018 down to 34% from 35% to align with our cash tax expectations. This rate reflects our estimate of cash taxes at percentage of our adjusted pretax income.

Before handing over the call, I would like to add that I'm pleased to report that when we report -- that when we file our 10-K on time this week, we will be reporting that we have cleared 3 of our 4 material weaknesses. It is good to see that the investments we've made in people, processes and technology have begun to pay off. The one remaining material weakness is related to taxes. While we've made substantial progress in this area, complexity from the new tax bill and our plan to 2018 separation present new items to be considered. We believe it is prudent to not formally clear this material weakness until the end of 2018 when the separation has been completed and the impacts of the new tax law are fully reflected.

With that, I would like to turn the call to Ben Gliklich to provide an update to our proposed separation. Ben?

[Benjamin Gliklich, executive]

Thank you, John, and good morning.

Progress against our separation objectives continues as anticipated. We're on track to complete the separation in 2018 and working to have as many market windows available for our capital markets activities as practicable.

You will have seen that in early January, we announced a leadership team for Arysta and what we have been calling RemainCo. As we said when we announced our intention to separate last year, our internal bench is deep enough to support both companies, and we are pleased to have announced an internally sourced senior leadership team.

Formalizing leadership was just one of several operational separation objectives we set for this past January, and we are pleased to have met each of those objectives to enable the businesses to function separately with limited transition services requirements. At this juncture, we remain on track for the separation with the primary gating items relating to the documentation, regulatory approvals and, of course, a favorable capital markets environment.

As we have said before, we believe that the separation is the best path to accelerate value creation for our shareholders and deliver enhanced value to our customers.

With that, I'll pass the call over to Rakesh to wrap up. Rakesh?

[Rakesh Sachdev, executive]

Thanks, Ben. I'm now on Slide 15. We always wrap up by reminding you of our goals for the year. These are the overarching priorities we are driving towards every day and frame our decision-making.

The first 3 goals are largely unchanged from last year. We will continue to execute, focusing on growing the top line in excess of our end markets by launching new products, emphasizing faster-growing niches and continuing to take share.

Second, we will remain disciplined with regard to cost to ensure our revenue growth converts more efficiently into earnings growth. We have a robust margin position that can be further expanded in both our businesses.

Third, these businesses are attractive because of their cash flow profile, and we are committed to generating cash flow and ultimately reducing our leverage.

And finally, we are focused on accelerating value creation through the separation of our businesses. Once again, we are separating these businesses as a means to not only accelerate the creation of shareholder value, but also allow each business to be fully focused on serving their respective end markets and customers.

With that, operator, we'll take any questions from the line.

[Operator]

[Operator Instructions] And our first question is from the line of Neel Kumar of Morgan Stanley.

[Neel Kumar, analyst]

Your organic growth outlook for 2018 in agriculture of 3% to 4% is a bit below your longer-term target of 5%. Do you still believe that 5% is an achievable long-term target? And will the 5% objective require more of a pickup in the overall crop protection market growth?

[Rakesh Sachdev, executive]

So Neel, we do. One of the things that is happening, and I'll let Diego comment on that, we are gaining steam on our new product launches. If you look at even in Q4, the fact that we grew 15%, a little less than half of that growth came from new product launches. The pipeline of new product launches has expanded quite considerably. So we are -- I think that takes a couple of years before we start seeing the full brunt of the new products. This year, we are guiding to 3% to 4% for both the businesses. But longer term, I think this business should definitely do in the mid-single digits. Diego, I don't know if you want to add something.

[Diego Casanello, executive]

Yes. The market, I mean, we don't have final estimates on how the market performs overall in '17. But we estimate that we are growing above the market in '17. We have put a significant emphasis on business quality in '17. That means really driving for the right applications, new product launches, as that Rakesh was referencing, and this has basically translated in a better EBITDA margin performance for the full year.

[Rakesh Sachdev, executive]

I think the other thing you will see, our growth in Latin America was in the low single digits this year in a market that actually shrank in the low single digits. And so we significantly outperformed in the Latin American region versus the market.

[Neel Kumar, analyst]

That's helpful. And it looks like you'll complete your Performance Solutions cost synergy realizations next year. Can we expect a similar continuous cost improvement program to be implemented, like the one you're doing in Ag right now?

[Rakesh Sachdev, executive]

Yes. As I said, we don't believe there's a start and stop for these synergies. We are creating a culture where people look at taking cost and getting efficiencies every year. And Scot's got a program with his people, and I'll let Scot say a few words. We have got a global supply chain function. We have got -- not just on the back office side, but also on the customer-facing functions. We are looking at all possible ways of using technology to get more efficient. We are increasing the use of tools for our salespeople across the globe, which is substantially reducing the expenses, but -- so, you're going to continue to see that journey go forward in the years to come.

[Scot Benson, executive]

Just to follow up, Neel. We're working on what we call areas of core competence, which will be follow-ons to what synergy activity we took over the last 2 years. So as Rakesh said, these are based on efficiencies, leveraging back office, leveraging global purchasing programs, things of that nature that will give us returns on an ongoing basis versus one-time synergy action.

[Operator]

Our next question comes from the line of Daniel Jester of Citi.

[Daniel Jester, analyst]

So maybe just to follow up on that last set of questions about Ag. So if in the quarter, half of your growth was from new products, which, I assume, were good margin, you still had a 200 basis point decline in the margin overall year-over-year. So you talked about some sales in Africa. You talked about some raw material pressure. Can you just give us a little more color about what exactly is happening to the margin profile of the Ag business as we go into 2018? Why should market improve in that business?

[Rakesh Sachdev, executive]

Yes. So I think if you look at the gross margin on a reported basis in the Ag business was down in Q4, I would say you could almost entirely explain that gross margin decline because of a very significant growth we had in our public health business in Africa. In fact, most of the public health business in Africa took place in Q4. So that was -- so if you just do the math, and we can do it off-line if you want, but that kind of explains the dilution in the gross margin. There was nothing else that was happening in this business that would suggest that the gross margin was deteriorating. On the operating expense line, we did have some one-time events, which actually reduced the EBITDA margin in Q4. So we had a Japan tax issue, which is a tax issue not on revenue, but on the capital structure, which is a one-time thing that the Ag business absorbed. We had higher bonuses because we have a payout on commissions for sales growth. And sales growth was so significant in Q4 that we hadn't anticipated the growth to be that strong. We had to bill for the full year some of the commissions in that. And then finally, I think we did increase R&D spending, which tends to be lumpy during the year to be -- and that was higher in Q4 and will go back to normal levels. But because of the way we look at how we conduct R&D expense, especially in Europe, it was a higher number. And so that really put some pressure on the EBITDA margin. But otherwise -- and I would say the same thing for Performance Solutions. Performance Solutions also had the issue related to the raw material pressures, but we are recovering from that. I think the best way to look at is on the full year. If you look at the full year for both the businesses, we got about a 40% conversion in EBITDA from the organic sales growth. If you look at it, our total sales growth in the year was roughly about $130 million, roughly $80 million for MPS performance and roughly $50 million for Ag. If you remove the FX component, the metal pricing component, and we got 40% conversion on both the businesses and in corporate. So for the full year, I think we did a pretty good job. And I think when you look to -- just let me finish this, I think, as you look to 2018, we will clearly see the margin expansion in the Ag business.

[Daniel Jester, analyst]

Okay. That was very helpful. And then maybe just 2 quick ones. On CapEx, about 20% growth in 2018. Can you just talk about sort of how much of that is from new product registration? Is there sort of any one specific project that is tied in that? And then I also noticed there was $160 million goodwill impairment. Can you just talk about what that's about?

[Rakesh Sachdev, executive]

So the CapEx is roughly the same. I think we had CapEx of a little over $80 million in '17, but that was net of dispositions. We had dispositions of close to about $20 million. And so the real CapEx was $100 million, but we -- since we disposed some stuff. And it's going to be about $100 million this year. Now we may have some more dispositions this year, but we don't forecast dispositions. But if we do, then the total CapEx bills, net of dispositions, will also be lower. As far as the Ag impairment, I mean, this is -- as you know, we go through a review with the accounting folks every year. We make slight changes to the outlook, the long-term outlook for this business. And I think because of what was happening in the recovery, we made certain changes in the estimates, and I think that's all that was.

[Operator]

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

[James Sheehan, analyst]

Could you update us on the timing of the separation? How do you see that playing out? And what are the mechanics behind the separation as you see it today?

[Rakesh Sachdev, executive]

Yes. So we have had 2 streams of work from a separation standpoint. We have been working on an operational separation, which is to say that we want to be sure that we are ready to separate at launch internally. And I think we have pretty much got to the point where we think that the 2 businesses can stand on their own. I mean, the second piece of the separation is actually the mechanics of actually separating the businesses. And we have to go through a process of regulatory approvals, filing stuff. We have to get carve-out audits, including for '17. As you know, we have just closed the '17 books. So all that's just taking time as you would expect it to take time, but -- and the other thing is we want to make sure that when we launch that the capital markets are good. This is somewhat of a self-imposed timing, and we don't feel that we would just launch at an inopportune time. But nevertheless, right now, we are proceeding as if the markets will continue to stay well. I don't know, Ben, if you want to add something.

[Benjamin Gliklich, executive]

No, I think that's exactly right. We're on track to our separation objectives and putting all the pieces in place, such that we can separate these businesses this year.

[James Sheehan, analyst]

Is that still a midyear target?

[Benjamin Gliklich, executive]

Yes. So as we articulated previously, our goal is to have the separation complete middle of the year. And as we said, that deadline is self-imposed. If the markets are there and all the process steps that we have to get through are complete, we can meet that objective. But we're not going to force into -- force the separation, force the capital markets activity when the markets aren't supportive. And so we'll put ourselves in a position to access as many market windows as practicable.

[Operator]

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

[Ian Bennett, analyst]

John, you mentioned about tax savings in 2019 being significant. Could you help quantify what that is? Then also the separation is expected to result in additional tax planning opportunities. Is that just from lower interest? Or what other areas are you uncovering?

[John Connolly, executive]

So I don't expect significant tax savings in '18. I think we'll see it a bit lower than what we've seen in the past. I think we have some -- the planning is ahead of us. And what I see from a -- from an opportunity, as we separate the 2 businesses, we've got to go through the legal structure on how we want to structure the organization. I think that presents an opportunity, along with the new tax legislation, for us to reassess what our -- the structure of our business and -- because right now, we're not really getting a -- we're not getting much of a shield on the interest expense that we pay. And so we're taking the opportunity of the separation to look at changing that as we move forward.

[Ian Bennett, analyst]

And a follow-up just on the IPO. Could you help us think about the total amount of capital expected to be raised, if it all occur in one point or later tranches being sold down? And what is the desire to raise a significant amount in order to be able to acquire and roll out businesses in perspective Ag and Specialty?

[John Connolly, executive]

I think that we've previously articulated target leverage ratios for these 2 businesses on a standalone basis, and those do remain our goals. So you should expect post-separation leverage to be within shouting distance of those levels. With those healthier balance sheets, we can continue to be a consolidator on a measured basis in both of these distinct end markets. With regard to sizing and so forth for capital markets activity, it's a little early to say. So we're limited in what we can say in advance of accessing the market, but I would look at those leverage ratios that we've targeted for guidelines.

[Operator]

Our next question is from the line of Chris Parkinson of Crédit Suisse.

[Christopher Parkinson, analyst]

You hit on this a little, but can you just talk a little bit more about the degree of which the Performance margin weakness was driven by mix versus raws and then what's embedded in 2018 guidance? And the also, in the long term, can you just talk about your views in product mix as well as production costs as well as the consequent effects on margins?

[Rakesh Sachdev, executive]

Yes. So the bigger picture is that our goals, and I think I've said this in our previous calls, our goal is to expand margins roughly 50 basis points here. That's what we wanted to do. So it's important you understand that. And I think we achieved that. We achieved a 50 basis point margin expansion 2017. And if you run the math and the guidance we have given you, we will be roughly in that ZIP code of margin expansion for 2018. Now obviously, mix plays a factor in both businesses. You've got -- in 2017, the Performance Solutions business saw a faster growth in the industrial business. I mean, the industrial business was a very strong grower for us in 2017. The Alpha business, which, as you know, has a high metal content was also a faster-growing business. If you actually remove the effect of Alpha's metal business and the pass-through, our margins are roughly flat in Performance, despite the industrial business being higher. In 2018, we fully expect that the core electronics business, that didn't grow as fast as Alpha or industrial, will be a big driver of the growth. And that -- and the margin of that business segment is significantly higher. So we expect that the mix will improve in 2018. We have cost reduction initiatives, as Scot talked about. And we fully expect that his business will again see a margin -- year-over-year margin expansion about 50 basis points. I would echo the same thing for the Ag business. The Ag business actually has put in place -- I think there are several things that are driving margin expansion in Ag. One, we are expanding in certain territories in Europe, as we have talked about. Those territories have higher-value crops and so, we get higher prices and we get higher margins. Second, our biosolutions business is growing roughly 15%, 20% a year, and that's also a very high-margin business. We fully understand that we have some generic pressures in some of our products. We are absolutely aware of that. We have been working with our supplier base to get concessions, so we can offset some of that pressure, which we did quite successfully 2017. So there are puts and takes, but I would say, again, at a high level, our plans are all drawn, so that we can continue to expand margin about 50 basis points every year.

[John Connolly, executive]

If I could add one thing, it's with regard to the longer-term trajectory for the Performance Solutions margins, which was the second part of your question, I think 2017 was a bit anomalous because offshore didn't grow as fast as the rest of the businesses. Graphics was a bit weak. Those are higher-margin businesses. We continue to invest in higher-margin segments of electronics, like semiconductor. And so as you think about the long-term trajectory of Performance Solutions margins, there is more opportunity, and 2017 was a bit of an anomaly.

[Christopher Parkinson, analyst]

Great. Very helpful color. And just very broadly, if you can answer, just in regard to the capital structure of the pro forma entities, are there any -- just on a very preliminary basis or broadly intermediate-term, refinancing efforts which you're currently evaluating? Or is it simply too early to tell?

[John Connolly, executive]

We are obviously going through our capital structure and evaluating the mechanism by which we can allow for the separation. Don't want to say, in any specifics, about how we're thinking about that at this juncture, but we do need to create some flexibility in the capital structure to facilitate the separation, which we will be doing.

[Operator]

Our next question is from the line of Jon Tanwanteng of CJS Securities.

[Jonathan Tanwanteng, analyst]

I appreciate the cash flow items outlook for 2018. I guess, the missing piece is just the change in working capital. Any projections for that?

[John Connolly, executive]

This is John Connolly. We expect that to be about the same, as we had this year. I mean, what we expected to be a little bit better. We had a little bit of a working capital build at the end of the year, primarily due to the late season we had in Ag. And so we expect that to release in kind of the first half of the year. But generally speaking, in line, we expect a little bit better cash flow from working capital, but nothing substantial.

[Jonathan Tanwanteng, analyst]

Okay. Great. And then, Rakesh, I'm not sure if you covered this earlier, but can you talk about the Ag trends heading into Q1 from both the regional perspective and if weather and planting have been helpful or hurtful for your outlook?

[Rakesh Sachdev, executive]

I'll let Diego talk to that. But as you know, at the tail end of Q4, we saw a lot of strength in Latin America and Brazil. As you remember, in Q3, we talked about a very dry season and drought conditions in Brazil. I think the rains came in and that's improved. I think weather-wise, we are seeing also the rains in Africa. Europe is doing reasonably well. North America, unfortunately, there's still very cold conditions, especially around wheat and cereal, so that's impacting us maybe a little negatively in Q1. But overall, I don't know, Diego, if you want to give any more color about Q1. So...

[Diego Casanello, executive]

Yes. I think, overall, we are well positioned to grow in the first half of the year. For this season, we believe that we have adequate levels of general inventories coming into 2018. We referenced before that we are launching new products. I mean, we have products like EVEREST 3.0 in North America, new herbicide with an enhanced formulation for wheat. We have a new launch in LatAm with a product called Select One Pack, which a new herbicide for soybeans. We continue to expand geographically. We are going to benefit, obviously, also on the cost and SG&A improvement programs that we have. So overall, we are confident for the first half. Then obviously, we will follow the seasonality of the business. We have to see how much we can do in Q1 and how much we can do in Q2. But we're optimistic of other prospects.

[Rakesh Sachdev, executive]

Yes, probably -- I'll just say it's probably better to look at the first half and the second half because there's -- there are a lot of things in the Ag business that slip from a one quarter to the other. So we will monitor that because, as you know, first half is strong for the Northern hemisphere. It's strong for Europe. And then the second half is strong for the Southern hemisphere. But it's really the halves that are more important than just a quarter.

[Jonathan Tanwanteng, analyst]

Got it. And then just to touch on the Graphics business. The '17 was a little bit tougher. Is that expected to grow this year, number one? And do you still see that fitting in the portfolio going forward on a -- from a high-level basis?

[Scot Benson, executive]

Yes, John. This is Scot. Yes, '17 was a little bit tough for us in the Graphics space, but we made some significant progress. As Rakesh said earlier, we restructured the management team within the business and have had some pretty nice wins in the second half of the year that we'll see it materializing in '18. So we do expect growth in Graphics in '18. And we think it's a really nice fit within our portfolio going forward. It's a very attractive business for us with good long-term growth potential.

[Operator]

[Operator Instructions] And our next questions is coming from the line of John Roberts of UBS.

[John Roberts, analyst]

I'm looking at Slide 11 on your 2018 outlook. In Ag Solutions, you talked about the Chinese supply disruptions as a negative to your raw materials. But I think aren't there a number of Chinese producers of finished formulated products that are also being impacted, now you're picking up a benefit from less competition maybe from the Chinese as well?

[Diego Casanello, executive]

Yes. John. I think you saw it right. There are some positives and negatives of this trend. If it's a positive, I would say that generics are highly impacted by this situation. And we hope that this is going to translate into a mild -- or milder generic pressure in '18. You saw that China enforced drastically some environmental laws at the end of '17 and some plants were shut down, some suppliers. Arysta is multi-sourced for most of our key active ingredients, which is a way for us to really manage the situation. We are passing the increasing prices of selected products to pass some of those raw materials price increases. I think we're well positioned, overall, together with the mix improvements that we are starting to achieve. And obviously, we're watching the situation closely.

[John Roberts, analyst]

Okay. And then over on Performance Solutions and the raw material pressures there, aside from the metals issues. What are the key raw materials that you're having to deal with? Are we talking about solvents and organic acids, things that move with oil prices?

[John Connolly, executive]

John, we see a bit of a mix on that, depending on which business. It's really a commodity issue, so across most commodities. But what we found is our ability now with the combination of the companies is we're having pretty good success looking for alternative supply in different parts of the world and leveraging our purchasing. So we're pretty optimistic that we'll be able to mitigate most of those impacts in '18. At least, we won't see any real pressure on the business, and there's no one significant raw material that's impacting us.

[Operator]

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

[Robert Koort, analyst]

Rakesh, I wanted to discuss the value liberation on -- from the separation. Do you feel it's primarily an issue around leverage? And when you look at the 2 separated companies, do you think there's more of a value discount on fair value to your Ag business or your Performance Solutions business? And have you arrived at that conclusion?

[Rakesh Sachdev, executive]

Well, leverage is one of the factors, as you know. We obviously have been working to reduce the leverage. And frankly, by generating the cash, we can do that. It's -- it takes time. On the other hand, the separation will allow us to get there a little sooner. And I think the other thing is once these 2 businesses -- and now they have the maturity in the scale, I think just looking at how we have run these 2 businesses over the last 2 years, on their own, I think they'll be a lot more focused. I think there's -- there are a lot of exciting opportunities for both these businesses. And I think they will be valued properly by those people who want to invest in these 2 businesses. And I think that's what this is. It's the ability for these 2 businesses to create excitement and value for people who want to invest in these 2. And I think we are at a point where they absolutely can stand on their own and do well.

[Robert Koort, analyst]

And I thought you guys have maybe intimated a bit that there could be alternatives to an IPO as a capital raise strategy. What else is under consideration?

[John Connolly, executive]

There are -- the base case has always been an IPO. And there are multiple avenues that we have at our disposal to increase the proceeds from our financings. But the base case has always been articulated as an IPO behind the Ag business and remains so.

[Operator]

Our next question is from the line of Aleksey Yefremov of Nomura Instinet.

[Aleksey Yefremov, analyst]

What would have to happen from debt refinancing perspective as you separate Ag business? And what are the potential impact on your interest rates, on your debt and potential make-whole payments?

[John Connolly, executive]

As we've talked about, we would raise equity capital behind the Ag business in an IPO, which would reduce leverage across the system. That IPO would be a restricted payment under certain -- of our credit agreement. And so we need to work with our capital structure, both our term loans and our senior notes, with the exception of the $800 million we raised last year, to allow for the separation. And so that is when we had questions earlier, we talked about this, the flexibility we need to create to enable to facilitate the separation, which we're working on doing over the next couple of months.

[Aleksey Yefremov, analyst]

Okay. So basically, you have to negotiate with your debt holders how that would -- could be outside of your capital structure would look like?

[John Connolly, executive]

Yes. There are several different avenues we have to create that flexibility. I'm going to leave it at that.

[Aleksey Yefremov, analyst]

Okay. And in biosolutions, you mentioned double-digit growth this year. How big is this business now? And what's your expectation for growth in 2018?

[Rakesh Sachdev, executive]

Yes. I think biosolutions is approaching 10% of the Ag business. Not quite, it's in the high-single digits. And that growth is going to continue.

[Diego Casanello, executive]

Yes. If I can add something. I think the -- it's not only the growth of biosolutions, but also the opportunity for us to differentiate our offering in the market in combination with the conventional crop protection product. It is really what is driving growth in LatAm and Europe, and what differentiates Arysta in many instances in the market.

[Operator]

And at this time, I'm showing no further questions. I'd like to turn the conference back over to Rakesh Sachdev for the closing remarks.

[Rakesh Sachdev, executive]

Thank you, Amanda. And again, I want to thank everybody for being on the call this morning. We look forward to giving you further updates as we progress and talk to you again at the next earnings call, for sure. So thank you very much.

[Operator]

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