Element Solutions Inc (ESI) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Platform Specialty Products third quarter earnings call. At this time all participants are in a listen-only mode. Later well conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). I would like to introduce your host for today's conference, Carey Dorman. You may begin.

Good morning, everyone, and thank you for participating on our third quarter 2016 earnings call. Joining me this morning are our Chairman, Martin E. Franklin; our CEO, Rakesh Sachdev; CFO, Sanjiv Khattri; Ben Gliklich, our EVP of Operations and Strategy; Scot Benson, President of Performance Solutions; and Diego Lopez Casanello, 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 express written consent of Platform is strictly prohibited.

Before we begin, please take note of Platform's cautionary statement regarding forward-looking statements in the press release and supplemental slides issued and posted today in connection with this conference call. Some of the statements made today will be considered forward-looking. All forward looking statements are based on currently available information, and Platform's reported results could differ materially from those predicted. Platform undertakes no obligation to update such statements as a result new information, future events, or otherwise. Please refer to Platform's SEC filings for a more detailed description of the risk factors that may affect Platform's results. Please note that in the press release and supplemental slides, Platform has provided financial information that is not been an accordance US 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 and Presentations. As a reminder, for the purposes of this call, Platform will be comparing the same periods in 2016 and 2015 on a "comparable" and "comparable constant currency" basis, as Management believes that these figures provide a better comparison and understanding of the underlying business results for its operations. Comparable information assumes full period contribution of all Platform's acquired businesses to-date. Please review the press release and the supplemental slides for further information. It is now my pleasure to introduce Rakesh Sachdev, Platform's CEO, for opening remarks. Rakesh?

Thank you, Carey, and good morning everyone. I am happy to report a very strong third quarter for Platform. Both of our business segments saw solid organic sales growth and constant currency EBITDA growth, which led to a meaningful cash flow generation for the Company. Margins also improved, driven by the ongoing success of our integration efforts and synergy realization. We achieved these results despite a difficult macro environment for many of our end markets, which only reinforces the quality of our businesses and the teams that we have managing them.

Platform had a productive quarter on multiple fronts. In September, we announced a settlement agreement with Permira with respect to our Series B convertible preferred stock obligations. We have felt that Series B was an overhang on the balance sheet, and the resolution of this issue and the savings it implies was a meaningful step forward. If exercised, which we expect to do before year-end, our negotiated settlement option would reduce the number of underlying shares issuable to Permira from 22 million to only 5.5 million shares, and reduce the total value payable to Permira by over is $100 million.

Next, in order to de-lever the balance sheet we raised approximately $400 million dollars in an equity offering in September. The dilution from this offering is meaningfully offset by the reduced number of shares that would be issued to Permira, as I just mentioned. On the back of this balance sheet improvement and healthy debt capital markets, we extended and favorably repriced about $2 billion of our term loans which will generate savings of approximately $11 million in interest expense annually. Given our current tax footprint, this should translate nearly dollar for dollar into free cash flow.

Subject to certain conditions, we also successfully extended the maturities of this debt by three years. The resulting net adjusted EPS dilution from the settlement, the equity raise, and the re-pricing was in the mid single-digits. We are thoughtful about issuing equity and we think this small dilution was a modest price to pay for significant enhancements to our capital structure.

Finally as you saw earlier this morning in our press release, we have further improved our full-year adjusted EBITDA guidance to a new range of $750 million to $765 million. We will discuss those guidance revision in further details shortly.

Now before we dive into the business results, I would like to spend a moment on slide five, reviewing a few key take-aways from our Investor Day held this past September, and I would like to thank all of you on this call who attended in person or by webcast. It was great to meet with many of our key stakeholders and to get the opportunity to share many of the initiatives we are working on, and I hope you will all agree that there is a lot to be excited about at Platform. The bulk of the Investor Day presentation was focused on our strategic objectives, our plans for Platform as a company, and the specific strategies for each of the business units. We also introduced long-term financial objectives that we expect to achieve as we execute our plan.

For the Performance Solutions business, our strategy focuses on becoming an integral to our customers supply chain by selling our portfolio of solutions, which we believe is one of the broadest in the industry to both OEMs and applicators. We are leveraging the breadth and depth of our specialty chemical products in the different components of the supply chain to work directly with the OEMs to innovate new products while focusing on providing best in class technical service to the applicators who are using our products every day.

As many of you know, our Performance Solutions business serves a diverse set of industries globally, including electronics, automotive, packaging, oil and gas, and other industrial markets.

In our Agricultural Solutions business, we plan to focus on fast-growing niche specialty segments where we know as Arysta has differentiated innovative solutions and a strong presence. We plan to expand our existing library of active ingredients by becoming partner of choice for research-based agricultural chemical companies. Our pipeline of new products is robust, with over $700 million of peak potential sales value as of last year. This potential value number has already grown meaningfully and this pipeline aligns nicely with the core priority segments we outlined at our Investor Day.

We believe our strategies should enable above market growth rates for the business units over the medium term, leading to a blended topline target of mid single-digit organic growth. Coupling this organic growth with a committed focus on continuous improvement in our cost footprint, should lead to a high single-digit adjusted EBITDA growth for Platform. We expect that combining this earnings performance with continued emphasis on optimizing taxes, interest, capital, expenditures, and working capital, should result in even stronger cash flow growth.

We think this result is achievable and we are committed to using this cash flow to reduce balance sheet leverage to our 4.5 times target of net debt to EBITDA, which we expect to achieve within the next three years. We also plan to be flexible, opportunistic, and creative about accelerating this timeline.

Now, let's review the results. Slide six of the web deck shows highlights from our third quarter financial performance. Platform reported third quarter 2016 net sales of $891 million and an adjusted EBITDA of $190 million, which represents 21% of sales.

These results were above our expectations for the quarter. September in particular was strong due to early buying patterns in certain markets. Net sales grew 49% year-over-year driven largely by our acquisitions, excluding the impact of currency movements, metal pricing, and a small divestiture in our an Ag business, we grew sales organically by 3% in the quarter. Both businesses grew well organically, with electronics and alpha assembly contributing in Performance Solutions, and volume growth in most regions contributing in Ag solutions.

This is an encouraging result in the context of the challenged macro environment we are facing. Our comparable constant currency adjusted EBITDA through 13% in the third quarter versus a year ago.

There were a handful of drivers of this earnings growth. We believe we continue to gain share in certain key Performance Solution markets, like Asian electronics and automotive, and also benefited from positive mix improvements. We also believe the combination of our acquired businesses is opening up the opportunity for additional markets to enter, and we are encouraged.

In our Ag solutions business, we benefited both from our supply chain leverage to negotiate procurement savings, and solid pricing management in Latin America. We also benefited from mixed improvement in this business, as we focused more in higher- margin specialty products like sea treatments, niche insecticides, biosolutions. Finally corporate costs were relatively flat this quarter year-over-year.

You will see on slide seven, our Performance Solutions segment reported third quarter net sales of $455 million and adjusted EBITDA of $110 million. Organic sales increased 2%, excluding the positive impact of metals price and the negative impact of currency translation; primarily from the Chinese Yuan and the British Pound. It is important to note that nearly all of the currency impacts in this business are translational, as our costs are pretty well matched to our sales.

Every vertical of our Performance Solutions segment saw growth this quarter, excluding our offshore solutions business which continues to see the impact of reduced capital expenditures by oil and gas producers. Growth in electronics and alpha assembly came primarily from Asian smartphone manufacturers. This growth came more from share gains and new product launches than from overall market growth, although we do believe the overall market was modestly improved both year-over-year and sequentially.

While we are beginning to see some softness in western automotive production and a rise of inventories in the channel, we still saw modest growth in the industrial vertical. Share gains, particularly in Asia, are a great example of how the combination of Enthone and MacDermid are improving our ability to win new business. This performance also demonstrates our businesses? ability to grow sales despite pressure in the market.

We expect this strength to continue for a couple of reasons. First, our globally consistent product and an otherwise local and fragmented market offer share begin opportunities with our global customers. Second, the increasing content per (vehicle) of electronics, and both functional and decorative finishes is continuing to trend upwards.

Our graphics business was up slightly in the quarter as we launched new programs with several large global accounts. The success of these programs was largely offset by slow downs and price competition in parts of Europe. Lastly, as you might expect, the challenges in our offshore business continue and although there is modest optimism about 2017 in the marketplace, we remain cautious at this time.

Comparable constant currency adjusted EBITDA of our Performance Solutions business increased 9% in the quarter versus a year ago. This led to margin improvement on a comparable constant currency basis, driven by positive mix as well as synergy realization and business efficiencies. And this is the type of operating leverage we expect out of this business, and a testament to the continued positive progress of our integration efforts.

On slide eight, the Agricultural Solutions segment reported third quarter 2016 net sales of $436 million and adjusted EBITDA of $80 million. Currencies positively impacted sales by 2% in the quarter as we began to lap the devaluations in the Real and other currencies that were a big translational detriment to our Ag business over the previous four quarters.

Excluding the impact of currency movements and the small divestiture we have mentioned before, organic sales grew 4%. Sales growth this quarter was mainly driven by increased volume and share gains in most regions and new product introductions in Latin America.

Sales of our high biosolutions products also continued to grow well in the double digits year-to-date. While the Ag industry as a whole continues to see difficult to market conditions, we believe our results this quarter once again demonstrates the success of our specialty strategy.

Asia was a big contributor to sales growth in Ag this quarter. In China, we saw growth in several seed treatment and specialty crop protection products. We also executed a strategy change to focus more on up proprietary brands which helped support the growth, despite lower commodity prices in key crops like rice. Europe benefited from increased sales of fungicides in the northern and eastern countries. Sales in France were also up as our herbicides for weed resistant management, which is a key part of our growth strategy, continued to gain traction.

Meanwhile good weather across the Africa and Middle East drove volume increases for our businesses there. Latin America, which typically sees its biggest sales in the third and fourth quarters, demonstrated resilience in quite a weak market. As we expected, the rapid weakening of the dollar in the quarter - primarily against the Brazilian Real - created pricing headwinds for the industry and some of our largest products as well. We, however, fared well through effective price management and raw material price savings, allowing us to capture a good part of the translational benefit on sales to improve our margins.

While we expect increased pricing pressure in Brazil for the rest of the year, we are comfortable with its impact in Q4 relative to our updated guidance. I am pleased to report that in North America, a challenging market for us in recent quarters, we have began to see signs of stabilization. We grew in the region, although modestly, as the third quarter is generally a slow one in North America. Specialty crop sales were an important driver of this growth, and our new commercial strategy is starting to gain momentum. We have had positive feedback from our distribution partners on the changes we have made, and are cautiously optimistic that these trends will continue.

In our Ag business, comparable constant currency EBITDA grew 19% in the quarter versus a year ago. Meaningful drivers of this growth were favorable mix from specialty crop and biosolutions sales, supply chain synergies, and price management in Latin America. It is encouraging to see margin expansion in this type of market environment. Our ability to take our costs and be nimble with our sourcing is a key tenant of asset-light formulation-based business model; and we will continue to pursue these improvements in both weak and strong markets.

Turning to slide nine, I would like to review our new full year 2016 adjusted EBITDA guidance. We have improved our adjusted EBITDA guidance to new range of $750 million to $765 million for the full year. We previously indicated that the second half would be a larger contributor of earnings than the first half, which has been borne out thus far.

We expect translational FX benefits to continue in Q4, primarily with the Real, based on September 30 exchange rates. I would note, however, that FX is not entirely a good story, as some currencies have strengthened, and we have had to give up price in certain instances and the Chinese Yuan and British Pound continue to weaken, hurting our translational results. FX is still expected to be a headwind in our Performance Solutions business in the fourth quarter.

Finally, with regard to synergies, we expect incremental savings, primarily in the Performance Solutions segment. We remain comfortable with our overall expectations for the second half, and as a result we have raised our guidance modestly. And now, I will turn the call over to Ben Gliklich to review our integrations successes this quarter. Ben?

Thank you, Rakesh. Good morning, everyone. As you just heard, our integration efforts are evident in our results this quarter, from both a sales and margin perspective. On slide ten, you can see that we reported $13 million of new cost synergies into our P&L year-over-year. This is composed of $5 million from our Ag business, primarily from the supply chain and G&A actions we took in previous quarters; and another $8 million of new cost synergies in our performance business. from a variety of actions including organizational design, procurement, and supply chain.

We have already achieved $39 million of the $40 million dollars of cost synergies we guided to for 2016. We are happy with this result and we are confident to exceed the initial estimate for the year, pulling forward savings from 2017 and 2018. On a run rate basis we have achieved $74 million of cost synergies from the Ag integration, very close to the $80 million total estimated we closed the Arysta acquisition. An as we have said before, we do not intend to raise this estimate further, but instead to move from talking about synergies to continuous improvement in the Ag business. We do believe there is room for more costs to be taken out here.

In the performance segment, we have achieved $39 million of run rate savings, more than half of our initial estimate, and we are less than ten months into the integration. You have also heard that the combined businesses have been taking market share in some of our key markets. We are successfully executing on both goals of our integration plans here.

We have begun implementing the first phase of our facility rationalizations, which we expect will be an important contributor to the realized savings next year. The legacy performance business historically demonstrated an ability to manage costs well in both strong and weak markets, and the synergy achievement to date is another testament to that skill.

Slide 11 provides integration highlights from both businesses. As has been the case for several quarters now, we are heavily focused on both cost and revenue synergy opportunities in both segments. The combination of businesses we have created is allowing our teams to execute against the exciting growth plans we highlighted at our Investor Day.

Importantly, everything we have done to date has kept the customer as priority number one, and we believe the topline story is proof that we have not disrupted our commercial operations. Rather, we believe we have enhanced them through our integration efforts. With that, I will turn the call over to Sanjiv to take you through the financial results in more detail.

Thank you Ben, and good morning, everybody. Thank you again for joining our Q3 call today. As I am sure you would agree, we had a solid quarter of performance. I am going to review our financial performance in the quarter and provide some more detail on the balance sheet initiatives we took recently.

Like the last quarter, we are providing numbers on an actual, but also on a comparable basis. Comparable is the same calculation we did when we used the term "pro forma", but we have renamed the metric to avoid any confusion with other SEC-defined terms. We have no acquisition activity in the current quarter, but comparable Q3 of 2015, assumes that we owned the Alent and the OMG businesses for the whole third quarter. We also compare certain results on a comparable constant currency basis in order to illustrate the impact that cost translational to currency movements had on our financial performance.

Finally, as we indicated in the footnote of slide six of the web deck, we used certain non-GAAP measures to provide what we believe is useful additional information for you as you analyze our results. We believe these non-GAAP metrics provide better insight into the business. We discussed the adjustments in significant detail and provide all appropriate reconciliations in the appendix of this presentation and in our earnings release that we filed this morning.

Now onto the numbers on slide 13. As Rakesh highlighted both of our business segments performed well this quarter, despite a challenging macro backdrop. Organic sales, a key focus of Platform, showed strong 3% growth year-over-year. Year-to-date organic growth is approximately 1% with our mixed single-digit expectations, but the trends have been positive.

A quick comment on our EPS and share count this quarter. These metrics are impacted by two discrete items; one is the successful equity raise of approximately 49 million shares in September, the second is the settlement option negotiated with Permira for the Series B preferred. This settlement option resulted in a large accounting gain that has been normalized out in our non-GAAP adjusted metrics, including adjusted EPS and adjusted EBITDA.

To calculate our adjusted EPS, we have been using a non-GAAP share count for the last several quarters, made up of our fully diluted share balance and our adjusted for the impact of the PDH shares, the Series A founder shares and the Series B shares. We feel this is a better representation of the total claims on our per share earnings. With the activities in the third quarter this amount is now 299 million shares up from 266 million in the second quarter.

We have shown a reconciliation on slide 19 of the web deck to walk you through this number. Essentially this share count assumes first that we exercise our option under the settlement agreement with Permira, thereby issuing only 5.5 million shares of common stock instead of the 22.1 million shares that they are currently entitled to receive. And that was previously accounted for in the 266 million number.

Second, it assumes that the shares we issued in September had been issued at the beginning of the quarter. As the alternative settlement is the most likely outcome for us to take, we believe that looking at EPS this way is helpful. Using this share count for the quarter, adjusted EPS of $0.14 is a year-over-year improvement of $0.03 from the fully comparable 2015 performance.

And lastly, as Rakesh mentioned, we also narrowed our adjusted EBITDA guidance to range of $750 million to $765 million for the full year 2016, a modest improvement since the last update. This is based on September 30 exchange rates. Please note that year-to-date, we have recorded $2.6 billion in net sales and $551 million in adjusted EBITDA.

In terms of cash flow impacts, the only change you will see on the chart is to our CapEx guidance; CapEx up to $55 million through the first three quarters is tending lower than the previous outlook of approximately $100 million for the full year. Q4 is typically a heavier CapEx quarter for the business due to increased Ag registration spend. Nevertheless, we have updated our guidance to be between $75 million and $100 million due to some spending that moved into 2017. You can see that our cash interest is in line with our plan although the term loan re-pricing should have a small impact even on our 2016 cash interest expense.

We have provided by-quarter details of our cash flow statement in the earnings release. Q3 was a strong quarter for free cash flow. We improved working capital by approximately $48 million, primarily driven by better receivables management. This is consistent with the full year outlook we have previously provided. We are still anticipating a large, working capital release in the fourth quarter. The magnitude of this release will vary to some degree, depending on both our overall sales performance, and the regional mix of Ag sales in the fourth quarter. We also expect to fund the Permira settlement in this quarter, which of course would be a non-operating cash flow.

Slide 14 shows our sales bridge walking through Q3 2015 comparable sales to Q3 2016 comparable sales. Volume and mix increases were the biggest driver of growth in comparable sales year-over-year. The $14 million of pricing headwind here is all from our Ag business. This number would have been higher if not for the pricing management initiatives we have in place.

The translational FX number also deserves some attention. Overall the Company saw a modest tailwind, and benefited from a strong year; both the performance business suffered from a weaker pound and Chinese Yuan.

We have reconciled organic sales for you in the appendix on slide 12. Twenty-one, excuse me. On slide 15, you can see our adjusted EBITDA bridge. This is the same format and presentation we have made in previous quarters, and we have reconciled it the GAAP in the appendix. Again, volume and mix improvements, as well as synergies, are the biggest contributors to the year-over-year increase.

The FX impact to adjusted EBITDA in the quarter was fairly modest when considering both translational and transactional pieces. Transactional FX, primarily in the Ag business, was still a modest headwind as some products sold this quarter were still purchased at less favorable exchange rates. Topline pricing headwinds, again primarily in the Ag business, were largely offset by reduced cost of sales.

Slide 16 shows our current capital structure. As of September 30, 2016, Platform's net debt was $4.7 billion, which includes $714 million of cash, $460 million of which may be used to pay Permira under the terms of our alternative settlement. You will also note that our revolver was fully un-drawn at quarter end. This cash balance and the revolver balance were facilitated both by strong operating cash flows in the quarter and the roughly $390 million of net proceeds from our September equity raise.

The capital structure we are providing here is modified to show the positive impact of the recent favorable term loan repricing and extension we did in October. We extended $1.95 billion of debt by another three years, subject to certain conditions, and reduced our interest expense by approximately $11 million a year. We also moved more than $150 million of debt to Europe, which is much better from a global capital perspective,

This was all on the back of the Permira settlement and equity days; three solid steps to improve our balance sheet. I am happy with the improvements we are making on both cash flow and balance sheet management items. I look forward to reporting further progress in the coming quarters. It is now my pleasure to turn the call back to Rakesh for closing remarks. Rakesh?

Thanks, Sanjiv. I just want to correct something that Sanjiv may have misstated accidentally. You know, I think Sanjiv said that we expect, in Q4, our working capital to increase significantly. Actually, we expect working capital in Q4 to decrease significantly. So anyway, thanks.

So in conclusion, I would like to revisit our 2016 priorities on slide 17. This is the third quarter where we have shown this slide, and we are pleased with our progress against each of these this year-to-date. Integration is going well. Our businesses are growing; and perhaps more importantly, they have formulated strategies that should enable them to continue to grow.

We have settled into a more steady operating rhythm, and we are demonstrating positive earnings momentum. Finally, we are generating free cash flow and expect a strong fourth quarter in that regard.

Before I turn the call over to questions, I would like to recognize the hard work of our teams who have been doing double duty as both operators and integrators. This has been a transformational year so far, and no one knows that more than our people. With regard to 2017, while we are still in the midst of our budgeting process, the outlook remains the same as outlined on our last call high single-digit adjusted EBITDA growth. In this context, barring any alternative uses of cash flow, we expect to have reduced our leverage ratio of net debt to adjusted EBITDA in the high 5s, by the end of next year.

We are really excited by our progress and we look forward to continuing to build on it in 2017. So now, Operator, we will open up the call for questions. Thank you.

(Operator Instructions). And our first question comes from the line of Daniel Jester from Citi. Your line is open.

Good morning, everyone. Just starting with performance. I think you mentioned this very briefly in your prepared remarks, but can you just give us an insight into what your customers are thinking about in terms of the North American and Western European auto cycle? It seems like we have seen some reports of slowing production rates, so just wanted to hear what your latest is there.

Yes, I am going to transfer it to Scot to make a couple of remarks here. But you know, you have seen the automotive production is still very strong in North America. It may have flattened out, but we continue to see growth in Asia which is where we are gaining share. And as I said, the electronic content for the cars -- and it is not just the electronic content, we sell our chemicals for non-electronic components as well, for plastic components where we provide the finish. And we have seen growth there. Scot, can you add some color?

Sure. Daniel, a lot of this is happening -- has happened fairly recently, but we have seen a build of inventories in both North America and in Europe. And of course, it has been reported that incentives are high et cetera, and there has been some manufacturing slow downs primarily in North America. So we still continue to see some very aggressive capital spending for expansion plans, particularly in Mexico and North America, which we think is going to continue to help us mitigateany of these that we view as temporary slow downs.

We are confident in the continued increase in content that we supply within the supply chain, and although we think growth rates have slowed down, we do not see it as a sign of any real trouble in the near future.

Okay. That is helpful. Thank you and then moving to Ag, can you just give us a little bit more color about which specific end markets, potentially in Brazil, are seeing the most price pressure? And if you have any updated comments on either your inventory levels or maybe the industry inventory levels for chemicals in Brazil, that would be helpful as well. Thank you.

Yes, Diego here. With respect to pricing in Brazil, overall, since we have combined our former legacies, we see that our pricing power has increased. And what you see in this quarter is a reflection of that. We have seen a very strong pricing performance in Brazil. Overall the markets remains a challenge in Brazil because, of course, what you have is an appreciation of the Real, and in such a situation farmers are asking for reductions in prices in US dollars.

The game here is to really resist that pressure. I think we did a good job in Q3. We will see in Q4, of course, increased pressure, but we are confident in the job we are making in Brazil right now.

And just to add to that, I think we have been also very successful in getting the benefits from suppliers especially in Latin America to get reduction in prices quite significantly. So, while we have had to give some pricing in Q3 and we think we will have to give some pricing in Q4, but net-net from the benefits we are getting from our supply base as well as the transactional benefits we get, I think we are doing pretty well.

Thank you very much.

Thank you.

Thank you. And our next question comes from the line of Ian Bennett from Bank of America Merrill Lynch. Your line is open.

Hi. Thank you. Good morning. So it seems the outlook and results for revenue and adjusted EBITDA have been improving, and that is evident in the results recorded in the outlook for the fourth quarter. But cash flow from operations has not been improving. Can you comment on why that is, and what the priorities for the next 12 months are?

Good morning. Yes. Consistent with the correction that Rakesh made in my script, our cash flow is very seasonal. It is driven by, primarily the Ag sector, because working capital is a big use, and consistent with the outlook that we have been discussing with you, we expect Q4 to be a very positive cash flow quarter. Even in Q3 our cash flow from operations was approximately $90 million dollars, and in Q4 with the way the seasonality works both in North America and LatAm. Consistent with our plan we would expect to generate, which would then end up being a solid positive number for the full year, in terms of cash flow from operations.

And this is no different than what we saw last year in 2015 as well.

That is correct.

Okay. And then for 2017, just directionally and any notable items that you would call out in kind of the bridge from adjusted EBITDA down to cash flow from operations that you expect to recur or improve?

So again if you step back, we have a fairly unique tax position. We have talked to you about this in previous quarters. First off Rakesh has been talking consistently about organic sales growth. Organic sales growth and better cost management will lead to a higher EBITDA, so that is sort of the starting number. We will again expect to have a decent cash tax expense. On CapEx we have given you guidance throughout the year so you know what is happening in CapEx.

Working capital management is a key priority for us. And then as we continue to reduce our debt burden and improve or debt structure, you will see some savings on interest expense. In addition, we have some non-operating expenses, but net-net that is a good walk, of what you should expect. And consistent with our goals to reduce our leverage over time, you would expect this cash to be allocated to reducing the debt levels in the balance sheet.

If I can just add, I think when you look at 2017, we clearly expect that what is going to drive even more enhanced cash is our earnings growth. As I said, we expect our earnings to grow in the high single-digits, that is going to be a significant factor.

We are going to be very focused on working capital, not that we have not been but I think we are beginning to really drive all our teams to be far more efficient in managing our working capital. And as I said, I think we expect our net debt to adjusted EBITDA by next year end to be in the high 5s, which is a fairly significant move that we would have made into our net debt ratios.

Thank you very much.

You are welcome.

Thanks Ian.

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

Thank you. Do you think some of the shared gains at MacDermid may be coming from distractions at the number one and number two players? I mean Dow is the middle of an anti-trust review, and Total's recent deal has generated speculation that they could exit your market. So do you think some of that is behind it?

Hi, John. This is Scot. Actually, I think that that potentially provides us some additional growth in the future. I do not think that the activity that we have had to date could be directly tied to that. I think what we have experienced to date has more been a result of the combination in the integration of our teams, and the broader product portfolio that we offer.

Our customer base has responded positively to the fact that we have such a broad product range. So as far as it relates to distractions, I think that we might see some more benefit from that in the future than we have seen year-to-date.

Okay. And then secondly, when do you lap the weakness in hydraulic fluids for sub-c well controls?

That is a terrific question. That is going to depend on the CapEx investments, of course, from the major oil companies going forward. We have definitely seen a positive, or a stabilization, of oil pricing which is helpful. I think we still need to see some appreciation in oil before we see significant increased capital investment in either exploration or additional production capacity.

Okay. Thank you.

Operator next question please.

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

Yes. Good morning, fellas.

Good morning.

Good morning.

First question is just around Ag. Brazil gets a lot of commentary but Argentina seems to be the market that might be moving the most with the new government down there. Can you talk about your business in Argentina and you know, what that market looks like from a growth perspective for you guys over the next couple years?

Sure, yes, that is a good question. I think our timing is good in Argentina because we are changing our go-to market in Argentina to have a more direct access to the market. We are registering products from the different legacies that were not in that market before. We are building a team, we have a great strategy in that country, and just in time for what we expect will be a rebound in that market. I mean, we see this already happening.

We see much more corn in Argentina already due to the different policy of the government to reduce the export taxes for those crops. So obviously, weather is going to play a role. Political stability moving forward is going to a play a role. But we are confident that we will see growth for our business in the coming years.

Okay. And then just on the commentary around high single-digit EBITDA growth next year, when you look at the segment, should both you know basically equally contribute to that? Or would one or another pull greater weight in getting you there?

Yes, Duffy, we are still finalizing all our numbers, but I would say directionally we would expect the growth in both the businesses to contribute to the high single-digits EBITDA growth.

I think, just to be clear, Performance Solutions has a bigger synergy story in 2017 because the Alent acquisition happened more recently. Ag has already produced a lot of those synergies. So you probably will see a little more growth on the performance side, but I think hopefully we will bring to you pretty impressive numbers on both businesses.

Terrific. Thank you guys.

You are welcome.

Thank you, Duffy.

Thank you. And our next question comes from the line of Jon Tanwanteng from CJS Securities. Your line is open.

Good morning, gentlemen. Congratulations on a nice quarter. Can you touch on the North American Ag market, where you are seeing the improvements specifically? And can you give an update on the inventory over there, what is burning off and is it doing better than planned?

Sure. I will turn it to Diego, but we had a good quarter in North America. As you know we had a tough second quarter in North America. And even though Q3 is a low quarter for North America, we actually saw growth, and so we were pleased. I think Diego can talk about some of the steps we have taken in stabilizing our business in the region, but we are cautiously hopeful. We are going into a quarter in Q4 with where we expect North America to be fairly strong for us, and so that is important. Diego?

Yes. The market remains difficult, as you know. We see farmer incomes, still low; commodity prices are not helping either. However, we have worked, we have done our homework over the last couple of months, specifically in the second half of last year and the first half of this year, destocking the channel. So this was the first step that we took.

But secondly, and I think most importantly moving forward really the changes we are making on our commercial policy and commercial strategy. We have established a key management organization in North America that is fully focused on our key accounts, aligning the objectives of the customer with our objectives and aligning those activities in the field.

We are putting focus on the right products. I think this is very important. Really emphasizing those products that bring us a higher margin, and we are putting a great team together. We have made good changes over the last two years in the team and are confident we have the right team in place to start seeing the stabilization and growth in the coming quarters.

Got it, that is helpful. And then just following the re-fi of some of your term loans, are there further opportunities for refinancing and lowering the interest expense on your other outstanding debt in the near term?

Morning, Jon. As you know we have built a fairly flexible capital structure, and in light of the market, our term loan debt has fairly modest call protection. So we are always opportunistically looking for opportunities to refinance the debt and to the mix of it. So this is something we are nimble about. I do not want to specifically talk about any plans but I do think having a big term loan structure gives us flexibility. Even our high-yield debt as we generate cash, as we get through the period of -- call back periods, we will have some flexibility with that also in the next couple of years.

Great. And then just finally on the currency move since the end of the quarter, how much of a tailwind or headwind should we be expecting, you know, just since you gave us guidance based on September 30th?

Yes, so I think currency did not have a big impact in Q3. In Q4, we will have some tailwind from currency, mostly in the Ag business. But you know, relative to the guidance we gave you at the last quarter, the currency picture really has not changed for us in the second half much. So it is really not a factor in our guidance change.

And in the period since the end of Q3 that our guidance is based on, it really has not changed too materially.

The Real has weakened a bit but not by much

Great. Thank you very much.

You are welcome.

Thank you Jon.

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

Hi, this is Matthew Stevenson on for Jim. Question about your credit situation in Latin America. Is that impacting volumes?

On the contrary, as we have reviewed how we are doing on collections in Latin America, our experience has actually improved. In fact, when we look at how we are collecting, how we did in Q3, our performance improved from even the prior quarters.

Diego, is there anything you want to add?

No. I think, obviously we have been very selective when it comes to the customers we are serving; our teams are very focused on this. Our sales organization is measured by collected sales. All this helps manage the risk there. So we know credit availability is an issue in Brazil, but we are confident about how we are managing the business over there.

Thank you very much. And then a follow-up. There is -- it was mentioned several times there is a lot of M&A going on in the Ag space, and there is likely to be product divestitures going on over the course of, let us say, the next year. You also have a very full portfolio, given the three different businesses that have now been combined. Are you likely to participate either as a buyer or a seller in the product -- individual product acquisitions and divestitures?

So for starters, certainly not as a seller. This is Ben Gliklich speaking, by the way. Certainly not as a seller. And with regard to regulatory fouled assets that look like they are going to come loose in the context of consolidation, we have certainly seen a few things; none of them have peaked our interest. We are going to be super disciplined in that regard, looking for things that could fit our strategy, which Diego has articulated. If something fits right we will consider it, but right now we are on the sidelines.

Thank you very much.

Thank you.

Thank you. And our next question comes from the line of Aleksey Yefremov from Nomura Securities. Your line is open.

Good morning, everyone. Thank you. I was going to ask about synergy expectation for the next year. On slide 20 of the presentation, you list $73 million add back to EBITDA for prospective synergies. Is it a good proxy for the next 12 months, next year?

So, some of those synergies will be 2018 synergies from the Performance business. Recall we are in the first year of integration of the Performance Solutions acquisitions. And as we noted, we pulled some synergy forward into 2016, as we are going to exceed our initial expectation for synergies for the year. But the balance, you know sort of the preponderance of that number, will come through next year.

And if we think about the cost of achieving those synergies, should they flow sort of in a similar fashion, or are you expecting to maybe prefund the achievement on those costs earlier or later?

So we have historically said that synergies cost about $0.75 per dollar realized in the P&L that year. That having been said, we are running a bit inside of that to date. But there should not be too much of a lag in that regard, as you think about cash flow modeling.

Thank you. And turning to corporate costs, you have been flat this quarter. Is there an opportunity to reduce this access corporate costs over the next 12 to 24 months? And then, in the short-term would you expect corporate costs to remain similar in the next couple quarters as well?

Yes, as I said in our last call, we believe the corporate costs have peaked. You saw this quarter we had, year-over-year the corporate costs were flat. Clearly we will see an opportunity to start reducing the corporate costs starting in 2017.

As I have said before, today we have relied on third parties for a lot of services at corporate because you know, we became large very quickly. I think we are getting our own people now to develop the expertise in-house. We are pulling the infrastructure, we are investing in IT, and I think we will start seeing that in 2017 and going into 2018.

Exactly.

Thank you very much.

Thanks.

Thank you. And our next question comes from the line of Roger Spitz from Bank of America Merrill Lynch. Your line is open.

Thanks, good morning. Regarding Q4 2016 release of cash and working capital, I wonder if you might put some very broad brackets of guidance what it could look like? For instance, would it be closer to $50 million release, $100 million, $150 million; compared to anything?

I am sort of reluctant to give a specific number, but if you look, two things play in to this, one is seasonality of earnings; the second impact of FX. So if you look at nominal working capital in terms of specific numbers, we were over our $200 million negative in Q1, we had a solid positive in Q2, a solid positive in Q3, and we expect to have a much bigger number -- I am reluctant to give you an exact --

I think it is fair to say, Sanjiv, we would be in excess of $100 million.

That is fair, Rakesh, definitely. We would be in excess of $100 million

That is what I was looking for. Thank you.

You are welcome.

And lastly, you show a benefit of 14 for volume this quarter. How much -- can you give any split of Ag versus performance? It sounds like it was mostly Ag, but I just wonder if you have a -- can you split that out a little bit.

Sorry. Can you just repeat the question again?

Yes. In Q3 the volume mix on the EBITDA bridge, there was a 14 for volume mix. It sounds like most of the volume was in Ag, but I was wondering if you could say whether most of it was Ag, or almost all of it was Ag, or 75% was Ag? Some other number?

It was mostly Ag.

Mostly Ag. So if you look through the presentation we provided, you can see that the Ag business grew organically close to 4%; the Performance business grew close to 2%. So you know, clearly it is mostly Ag contributing to that growth, but Performance also was a contributor.

Okay. Thank you. Just lastly, the slides in the Ag talk about share gains driven in part by price. I just want to make sure. Does that mean you are reducing price to gain share, or how should I read that sentence?

No, no. Definitely not. So the share gains that we are mentioning here is through geographic expansion, most of the time. We are extending our reach in Eastern Europe. We are growing in some countries in Latin America, in Asia. Specifically, through cross-selling opportunities of bringing products from legacies into markets where other legacies were stronger, this is really what is driving our share gains in this case.

Thank you very much.

Thank you.

Thank you at this time this does conclude the Q&A portion I would like to turn the call over to Rakesh for closing remarks.

Thank you. Again, I appreciate everybody joining in this morning. We are very pleased with the way the business is performing and how we did in Q3, and I am pretty confident that we will continue this story in Q4 and 2017. So, look forward to updating all of you the next time we meet. Thank you for joining the call.

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.