Element Solutions Inc (ESI) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Platform Specialty Products Corporation Third Quarter Financial Results Call. [Operator Instructions] And as a reminder, this conference is being recorded. I'd like to now turn the conference over to Carey Dorman, Senior Director of Corporate Development. Sir, you may begin.

Good morning, and thank you for participating on our third quarter 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, 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 expressed written consent of Platform is strictly prohibited. Before we begin, please take note of Platform's cautionary statement regarding forward-looking statements in the earnings release and supplemental slides issued and posted today in connection with the conference call. Some of the statements made today will be considered forward-looking. All forward-looking statements are based on currently available information, and Platform's reported results could differ materially from those predicted. Platform undertakes no obligation to update such statements as a result of new information, future events or otherwise. Please refer to Platform's SEC filings for a more detailed description of the risk factors that may affect Platform's results. Please note that in the earnings release and the supplemental slides, Platform has provided financial information that has not been prepared in accordance with U.S. GAAP. In accordance with Regulation G, Platform is providing reconciliations of these non-GAAP measures to comparable GAAP financial measures in both the press release and the supplemental slides, which can be found on Platform's website at www.platformspecialtyproducts.com in the Investor Relations section under Events & Presentations. As a reminder, for the purposes of this call, Platform will, in some cases, be comparing the same periods in 2017 and 2016 on a constant currency basis as management believes that these figures provide a better comparison and understanding of the underlying business results for its operations. Please review the press release and the web deck for further information. It's now my pleasure to introduce Rakesh Sachdev, Platform's CEO, for opening remarks. Rakesh?

Thank you, Carey, and good morning, everyone. In the third quarter, Platform grew revenue 2% as reported, but was down 1% on an organic basis. This was a mixed quarter with several meaningful strides forward across the business. We saw recovery in our North American Ag inventory channels, continued earnings growth from our Performance Solutions business and progress towards the separation of our 2 businesses. This was weighed down, however, by some difficult macro conditions, particularly, in the Brazilian Ag market. Our Performance Solutions segment contributed positively to organic sales growth this quarter as both our industrial and Alpha, which is our electronic assembly business, grew in the high single digits. In our Agricultural Solutions segment, an organic sales decline was primarily driven by drought conditions in Brazil, which led to a delay in soybean planting impacting the preselling season. The weather impact was partially offset by strength in our North American Ag business. From an earnings perspective, we delivered adjusted EBITDA margin expansion of 24 basis points on a constant currency basis as margin expansion in our Ag business was partially offset by some margin pressure in Performance Solutions. We continue to execute on our synergy plans in Performance Solutions, which combined with organic growth and some positive pricing activity, helped us offset increase raw material prices and negative mix impacts between business verticals. Our Ag business saw continued growth from higher-margin products, particularly in the EMEA region, which helped to improve margins in the segment despite seeing an overall constant currency decline resulting from Latin -- lower Latin American volumes. Our earnings expectation for the second half of 2017 remains unchanged, but we will closely watch the progress of the Ag season in Brazil, which is expected to be a critical driver of our fourth quarter, and ultimately, full year financial performance. As a result, we are reaffirming our current adjusted EBITDA range of $810 million to $830 million for the full year 2017. Continued poor weather in Brazil would leave us towards the low-end of our range, while a stronger season there would push us above the midpoint. As we know, earlier in the third quarter, we announced our planned separation of the Ag business into a stand-alone publicly traded company. Ben will provide you some details around the progress we have made thus far, but I wanted to reaffirm our commitment to the separation, which we expect to occur in mid-2018. As we have mentioned before, management and our board believe that this path will create value for our shareholders and enable our high-quality businesses to thrive as more focused enterprises. Both of our businesses have the scale, management depth and compelling end-market opportunities to be great public companies. Our teams are currently working hard to make this happen. Slide 4 shows an overview of our financial performance this quarter. We reported third quarter 2017 net sales of $904 million and adjusted EBITDA of $197 million, representing an adjusted EBITDA margin of 22%. Reported net sales growth was 2% year-over-year or flat at constant currency. Key drivers for growth in our Performance Solutions segments were continued strength in our industrial solutions and electronics assembly businesses around the globe, partially offset by declines in graphics. Drought conditions in Brazil had a negative impact on overall results in our Ag business, which masked a strong result in North America this quarter. On a year-over-year basis, FX rates were a tailwind of 2% and positive for sales in both segments. The Euro was the primary positive contributor for our Performance Solutions business, while the Euro and Brazilian Real gave the largest benefit to Ag. We reported a GAAP loss per diluted share for the quarter of $0.24 compared to a loss per share of $0.15 in the third quarter of 2016. The year-over-year increase in loss per diluted share is primarily attributable to a higher tax expense and FX losses on long-term debt, partially offset by lower interest expense from our term loan repricings and higher operating profits. Our constant currency adjusted EBITDA grew 1% in the third quarter. The Performance Solutions business continues to execute against its integration initiatives with a focus on facility rationalization and supply chain efficiencies. We also implemented pricing initiative this quarter to help offset raw material price pressure in certain business lines. The Ag business partly mitigated the impact of lower volumes in Latin America, achieving greater growth in higher-margin products as well as savings from continuous improvement initiatives. You will see on Slide 5, our Performance Solutions segment reported third quarter net sales of $481 million and adjusted EBITDA of $116 million or $123 million, excluding corporate cost allocations. Organic sales increased 4%, which excludes the impact of currency and metals price fluctuations. The largest growth driver for sales in the segment was Alpha, our electronics assembly business, which saw meaningful growth in its bar and paste products in all regions. However, since the margins in our assembly materials are lower than the electronics surface treatment products, we saw muted overall adjusted EBITDA growth in the quarter. Industrial Solutions also drove organic sales growth in the quarter, primarily in Europe and Asia where our plating on plastic technology continues to build its stronger market position. Industrial Solutions have had an excellent performance year-to-date. Our core electronics was essentially flat in the quarter. We saw demand from metallization and market share gains in South Korea and China offset by declines in a few lower margin business lines in the quarter. The comps in the electronic surface treatment business will continue to be difficult in the fourth quarter given the high growth we achieved in the same period last year. We believe the overall electronics demand environment remains encouraging from a long-term trend perspective, and we're pleased with how we're performing. Our offshore business saw modest growth this quarter as we begin to lap meaningful declines in 2016 and see some stabilization in oil prices. While we don't expect the fourth quarter to be much different, there are positive demand indicators for 2018. Our Graphics business experienced a decline as we continue to see the year-over-year volume impact of a customer -- specific customer lost business earlier in 2017 as well as general softness in our Americas business. As mentioned in our prior call, we believe the new management team we have put in place has positioned this business for growth in 2018 and beyond. Performance Solutions constant currency adjusted EBITDA increased by 4% in the quarter versus last year. Overall adjusted EBITDA margin for Performance Solutions on a constant currency basis was negatively impacted by faster growth of our lower margin verticals this quarter and raw material cost increases. However, it's important to note that each of our 3 largest business verticals improved their margins year-over-year. We believe our margins and adjusted EBITDA would have been more significantly impacted had we not taken appropriate pricing and supply chain actions to help offset these increases. Our results this quarter also reflect a year-over-year achievement in cost synergies of $4 million, and we now have action run rate annualized savings of approximately $56 million in our Performance Solutions business. Turning to Slide 6. The Agricultural Solutions segment reported third quarter net sales of $424 million and adjusted EBITDA of $81 million or $89 million, excluding the allocation of corporate costs. Organic sales declines of 5% were primarily driven by the impact of drought conditions in Brazil on volumes in the region. We're watching the situation carefully and hopeful that we will see demand recovery in the latter part of Q4. In EMEA, which overall saw a slight organic decline in the period, we saw strength in South Africa as the season has started well, offset by some softness in Central and Eastern Europe that we expect will improve in the coming months. Our North America business had a very strong third quarter. Higher mite pressures bolstered our sales of specialty insecticides, and new product launches in wheat and corn helped sales in our new crop business -- in row crop business. Other parts of our specialty portfolio, particularly fungicides, also performed well and helped offset declines we saw in our Canada business. Overall, we feel good about our channel inventory levels in North America, which have positioned us well for more quarters of healthy growth ahead. Ag solutions adjusted EBITDA declined 3% on a constant currency basis over the quarter. The primary driver of the decline was lower sales volume in Latin America. The EMEA region saw mix improvements from expanded business in higher-margin countries in Western Europe, but this was offset by some expected generic pressure in Eastern Europe. The expense associated with expanding our sales force in newly opened subsidiaries in Germany and U.K. also had an impact. Sales growth in North America, which tends to be a higher-margin region for the Ag business, also helped drive the improvement of EBITDA margins in the segment over last year. Lastly, we saw some positive impacts to adjusted EBITDA this quarter from our continuous improvement initiatives. I would now like to turn the call over to John Connolly to talk about cash flow and the balance sheet. John?

Thanks, Rakesh, and good morning, everyone. Turning to Slide 7, where we'll talk briefly about our performance and expectations for cash flow and the balance sheet. Platform had another strong quarter from a cash flow perspective, generating approximately $87 million of free cash flow. This was primarily driven by profits in the quarter and a release of working capital quarter-over-quarter from the Ag business, as seasonally expected. On a year-to-date basis, cash invested in working capital was about $60 million lower than the same 9-month period last year, helped by better working capital practices and increased factoring. In our Performance Solution business, we temporarily increased the build of inventory banks related to our facility rationalization plans. Additionally, cash taxes decreased year-over-year and sequentially in the quarter. On a full year outlook -- our full year outlook on cash flow items remains unchanged from Q2 with cash interest guidance of approximately $330 million for the year as we capture the benefit of our term loan repricing activity. We're also maintaining our cash tax outlook of $130 million to $150 million for 2017, which is now consistent with the year-to-date trend. Finally our net CapEx outlook remains unchanged from the previous view we provided of approximately $100 million for the year, although we're trending better than that so far. Platform's net debt at the end of the quarter was -- of $5.1 billion, was impacted by increases to our European debt balances in the quarter due to FX translation. Our cash balance was $391 million and the revolver balance declined to draw only $25 million at quarter-end. We expect to continue to grow earnings in the fourth quarter and release working capital, which should drive net debt under $5 billion assuming no further material moves in FX rates. We're relatively pleased with our expectations for free cash flow generation this year and remain confident in the ability of Platform or its future stand-alone businesses to continue to delever meaningfully in the future. With that, I'd like to turn the call to Ben Gliklich to provide an update on the proposed separation of our 2 businesses. Ben?

Thank you, John. As Rakesh mentioned earlier in the call, Platform remains committed to separating our 2 businesses into 2 stand-alone publicly traded companies in 2018. On Slide 8, we provide an update on this plan and also share some of the work that is progressing internally to ensure smooth execution. We've established 2 global work streams; one focused on the operational separation and the second focused on the capital market -- and balance sheet separations. Both these teams are working full bore and making progress. The operational work stream is tasked with ensuring both businesses are able to stand-alone with their own functions, systems and reporting capabilities to meet the needs of their independent employee basis, lenders and shareholders. As you noted already stand-alone from a commercial perspective, so the focus is primarily related to back-office functions, including financial reporting, treasury, HR, tax and IT, which currently shares some overlap between the businesses. This workstream is establishing new org structures identifying the right leaders, both internally and externally and ensuring proper change management procedures. While we're establishing additional roles at Arysta, we continue to target no net corporate cost increase from separating new businesses. The transaction work stream is focused on potential debt financings that we may decide to pursue at an expected Arysta equity issuance. The team has identified the several potential attractive paths available to us and we'll ultimately be ready to execute the path that is best, considering the market environment at the time. All of these options anticipate a new capital structure for Arysta and a smaller capital structure for the remaining business that takes into account the separation of a significant portion of our assets. We'll continue to provide everyone with updates at the appropriate times going forward. With that, I'd like to turn the call back to Rakesh to discuss guidance and provide some closing remarks. Rakesh?

Thanks, Ben. And now, turning to Slide 9, as I said, we're reaffirming our full year 2017 adjusted EBITDA guidance of $810 million to $830 million, which represents a healthy 5% to 8% growth over our 2016 performance of $769 million. This guidance was based on the end of September exchange rates. And while our business and the end markets are generally in healthy positions, there are several areas of pressure that we're focused on mitigating as we look into the fourth quarter. We expect both businesses to demonstrate positive sales growth in the final quarter of this year with a larger year-over-year increase in Ag solutions. We anticipate recovery from the drought conditions, thereby shifting more Latin American sales into Q4. And in the Performance Solutions segment, our electronics assembly materials and industrial businesses should continue to demonstrate growth, while we'd also expect to see another tough comp for our core electronics business. We expect to benefit from attainment of cost synergies and our continuous improvement initiatives, but the we will need to see stability in raw material prices for these to fully impact bottom line growth. Based on our 9 months of results and current outlook for Q4 ,we expect our 2017 results to exemplify the high quality, high cash flow generative businesses we own and demonstrate the consistent ability to outgrow their respective end markets. With that, we are happy to turn the call over to your questions. Operator?

[Operator Instructions] And our first question is from the line of Ian Bennett of Bank of America Merrill Lynch.

Can you discuss what the several paths that you're exploring to raise equity for the Ag business are?

I think, as we've articulated, our primary path here is an IPO of the Arysta business at some point in middle of 2018. We have suggested our willingness to explore creative ways to bring in equity and advance, but the baseline should be an IPO next year.

Okay. Thank you. And on the Performance business, can you discuss a little bit the Graphics customer that was lost? Why that occurred and expectations for customer gains or losses into 2018? When I look across kind of the broader group of chemical, electronic peers, it seems like most of your peers are experiencing similar levels of high single or double-digit growth in electronics business that you did, and just wanted to understand that dynamic moving forward.

So Ian, I'll let Scot answer that, but generally -- we don't refer -- we don't talk about specific customers. We had a qualification issue earlier in the year on one customer, which by the way we're going to win that business back, and we're going to lap it in 2018. Just to give you a little color on Graphics, the overall business is still very healthy, as you guys know about, 1/3 of that business though is tied to newspaper print, which is on a slow decline. But the consumer and packaging business, which is a large part of our business, is very healthy and growing and that's where we're going to continue to see opportunities. But I'll turn it over to Scot who is on the phone and maybe he can give a little more color. But we don't want to talk about specific customers.

Sure, thanks Rakesh. Ian, yes, as Rakesh indicated, we had a very specific technical challenge at one customer, but the positive thing is we continue to work with that customer to resolve the issue we had. And as Rakesh said, we expect to recapture on portion or if not at all of the volume that we had. But the good news is going into 2018, we had a very good quarter in Graphics. The new management team is performing well, and we captured significant new contract business in the quarter, which will help mitigate any loss we had with that one customer as well. So things are looking very positive going forward.

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

My first one is, are you seeing any relief from the drought conditions yet in Brazil? Or are you still waiting for that? Just an update on what the conditions are on the ground? And if you can actually make up what you kind of lost in Q3 and Q4?

Yes. So, Diego, you want to try?

Yes. Jon, we have seen some more regular rain patterns since mid of October, still not enough to say, we're on the safe side. But I would say, we're hopeful that we can see some more rain, especially in central Brazil where we have seen Mato Grosso and in the Goiás state most of the impact of this drought.

Well, the other comment I'd make is Q3 is not a planting season. In Brazil, people tend to prebuy in Q3 ahead of the planting season. So we get this question as this business been lost. And the answer is no, we've been talking to our customers in Brazil. I think, we have just delayed the purchases. The planting season really starts later this quarter and goes into Q1. So we are still hopeful. The question is, will we recover all of that in Q4? Or will some of that spill into Q1 of next year? That's really the issue.

Got it. That's helpful. And, I think, the last time you spoke to investors, you had mentioned that you expected Q3 and Q4 EBITDA for that the consolidated business to follow a roughly 45% to 55% split. Is that -- do you still feel that's the case? And if so or if not, why?

I think that's roughly right. I don't have that exact number in my head, and sorry, but I think it hasn't really changed a whole lot.

Okay, great. And then finally just, how should we think about the market and the demand for your offshore oil product right now with crude getting back on in the mid-50s?

I think we're cautiously optimistic. Scot, do you want to give a little more color?

Yes. I think some stability at these levels will be helpful, Jon, for us. As you know, it takes a while for them to turn the CapEx investment back on. We've seen continued strong production business, but of course, we need drilling to come back and we need capital investment for new exploration and that will take a little time at these oil prices.

And our next question is from the line of Neel Kumar of Morgan Stanley.

I was wondering if there's any scenario, which could cause you to not proceed with the Ag separation, perhaps it could be valuation levels and the amount of equity could be raised, but just want to get a sense how you're thinking about this?

No. I think, we've already got, Neel -- we've got a stated path. I think, we're very confident that the path we have stated is the one that we will proceed down and we are proceeding down. So short of something very dramatic, I don't see us changing that path.

Okay. And then also a question on the outlook for Ag. So this year looks to be shaping up as pretty flattish growth, probably driven by elevated channel inventory for the industry. So I was wondering if you expect these inventory levels to come down at the end of the year. And do you have any earlier read on market demand in 2018?

So, Neel, yes. I mean, we're seeing overall channel inventories still high for the industry, but coming down slowly, it is a good indication. I believe that we could be seeing a path for growth for the market for next year. We're still, I will say, carefully optimistic that we could see a low single-digit market growth in '18, but it's probably early to say. I mean, we have to wait and see how Q4 unfolds. Our position, as we said in the last quarter, we have a favorable channel inventory position. We've done our homework, I would say, in '16 and in '15. And we're certainly seeing the benefits of this, and we will see the benefits of this also in '18.

And our next question is from the line of John Robert (sic)[ Roberts ] of UBS.

Was Ben's comment on debt leverage meant to imply that it would be higher on Arysta and lower on MacDermid?

Certainly not, John. You may refer to an investor presentation we gave a couple of weeks back, where we articulated our target leverage, objectives for these businesses: Arysta at 3.5x of the 12 months of the IPO and the RemainCo business somewhere between 4x and 4.5x within 12 to 18 months of the IPO. Those are our objectives for the balance sheets of the 2 stand-alone entities subsequent to the separation.

Okay. I misunderstood your comment then. And then the founder shares are pretty out of the money. What happens to the founder shares in the business separation?

The founder shares are, indeed, below the high-water mark. That's a consideration that we'll have to deal with in the context of the separation. I don't think we've given any guidance around how that will play out on a go-forward basis yet.

And our next question is from the line of Robert Koort of Goldman Sachs.

This is Chris Evans on for Bob. Thinking about the separation a little bit, what impact or benefit do you suspect is possible to your cost of debt are potentially in your tax rate?

So that's a good question. On the cost of debt, clearly, I think, we have the opportunity given that the markets are still very strong that we will be able to reduce in a meaningful way the interest expense overall, which will reflect -- be reflected in both those businesses. We have those opportunities in front of us right now, and then we're looking at -- even on the timing of the refinancing. But, clearly, I think, we would move in a direction where the interest expense would be lower for the 2 companies. On the tax planning, we've been doing a lot of tax planning because this is an event that gives us an opportunity to do some legal entity and tax planning, which will -- should reduce our tax rates. We've done some work to look at on a more normal basis of what the tax rates could be for these 2 businesses. What I would tell you, we haven't completed our work, but it'll be somewhere in the 20% range in the mid- to high 20%, is where, I think, we can go for these businesses.

That's great. And then you cited some raw materials and some negative mix issues. I was wondering if you could specify, specifically, the raw materials and maybe what impact you saw in the quarter and the cadences of what you expect might happen going forward.

Yes. Let me give you a sort of a high-level picture and then I'll have Scot talk specifically about the raw material here. Just so -- our sales were up in the Performance business in Q3 about $17 million. And normally, we would have expected that to translate to an additional $5 million to $6 million of EBITDA. 1/2 of that -- about 1/2 of that was just a mix issue because our Alpha business grew much faster and that has lower margins. The other half, about $2 million to $3 million, is what we got headwind from raw material price increases. Now let me remind you, it would have been a much higher number had we not acted on some pricing decisions we took towards the tail end of the quarter. We think that, that number will start getting mitigated as we get into Q4. But I just want to give you a little dimensioning of the numbers of what we're looking at in Q3. Scot, in terms of specific and -- the other things that we've done is we have renegotiated some contracts with our suppliers to actually help mitigate that as well. Scot, do you want to add some color to that?

Yes. I don't have a whole lot more to add to that, Rakesh, other than just to affirm what you said that the pricing action we've taken, the renegotiation of some contracts on raws we think will help us mitigate quite a bit of any of the impact that we've seen year-to-date, and we're pretty optimistic going forward.

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

This is Graeme Welds on for Chris. Just had a quick question around how to kind of think about margins in the Ag business moving forward? Clearly, your mix was a benefit in this quarter, just gone, as you guys kind of grow out sales in the U.K. and Germany, when can we kind of expect some of that build, also cost as you build out your sales organizations there to drop off? And how should we think about the margin lift going forward from increased presence in those areas?

Yes. Listen, I think we've done -- we've been very pleased with the margin progression in our Ag business. This quarter, I think on a constant currency basis, our margins -- despite the decline in Latin America, our margins, I think, have gone up about 100 basis points in the Ag business in Q3. Clearly, our margins improved in Latin America, we've been benefiting with some strong pricing discipline that we have put in place in Latin America. We've also been successful in getting concessions from our suppliers on. And so we've been reducing our cost of goods sold as well. So we're doing the right things. Diego and his team are clearly focused on growing our higher-margin businesses, which has also been helping us. So...

Got it. And then just a quick follow-up. You guys have made some improvements on the working capital front this year-to-date. Kind of how are you -- what's kind of your -- kind of early expectations for the additional products that you can continue to make on the front? Where do you see some kind of key opportunities for areas that you still have to hit to improve room on that side?

Well, while we talk about specifically of the 2 businesses, we have, as you know, since last year, put incentives for our management teams to be really focused on working capital. And, I think, we've got our global teams very focused on how we're negotiating with our suppliers, and our ability to reduce -- improve the aging of the collections. I think, there is a lot of just normal operational stuff that is helping. And, as you know, it's different in the Ag business than it is in the Performance business. Ag business is, clearly, more seasonal. We've made progress on the working capital side. We, clearly, have a lot more opportunities to harness. I'm not saying that we are where we need to be. So this is an area that we want to get continued focus in both the businesses.

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

This is Matt Skowronski on for Aleksey. In the slide deck, it states that generic pressure in Latin America was less than expected. Can you talk about the crops that was in specifically? And then can you go through channel inventory by region? And how your outlook is for the rest of the year?

So we have more than 7,000 registrations around the world, and we're always accounting for some generic pressure here and there. But we have many ways to mitigate that pressure. Overall, we work on new mixtures. We develop new formulations. We really make a big deal out of -- our supply reliability are in very, very strong supply position. We invest in branding. The team is doing a great job this year in this regard. I mean, we always account for some pressure, but in this year, we're seeing really that we're mitigating a good part of it. And that is what is allowing us to capitalize really on the organic growth that we're seeing with new products and also the geographic expansion that we're mentioning also in some countries. The expectation we have on generic pressure was in LATAM, in particular, due to obviously very difficult situation in Brazil. You can expect that farmers are going to think twice before taking the more higher-value solution. But our products are really value-added, and they were not as impacted. In terms of channel inventories, I would say LATAM is probably where you have the highest industry channel inventories. But as I said before, for us, we're on the safe side in this regard. North America is coming closer to normal channel inventories. In Europe, especially in Eastern Europe, due to the cold weather conditions in the early parts of this year, we're seeing some higher inventories. The rest, I would say, is a mix picture, but that should give you some color.

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

Coming back to the pricing question versus raw materials, can you give us a sense for when you might see incremental margins in Performance Solutions start to inflect higher?

Well, I think, once we have mitigated this raw material issue, it's going to be more -- the margin itself -- or the overall margin is going to be more reflection of the mix than anything else. I don't know if you caught what I said earlier, but despite the overall mix, if you look individually into the margins of our businesses, like the industrial business, the Alpha business, the electronics business, the margin actually expanded in each of our 3 principal businesses, even in Q3. But it's just that the Alpha business grew so much more than our other businesses that the margin actually declined. If you look at the margin structure within the Performance business, we've got the Graphics and offshore business that has pretty high margins because it's really a specialty niche business and then followed by our core electronics business and then our industrial business. And our Alpha business tends to be lower than the rest. And so, I think, mix plays a big part. As long as we're improving the margins of each of our individual businesses, I think we're pretty happy and then the focus is to grow organically each of these businesses. So we have got strong leaders for each of these 5 businesses. They understand their marching orders is to grow both organically as well as expand the margin. And that's what we're doing. I don't want the mix to mask this margin issue in the Performance Solutions.

Understood. And also on U.S. auto production headwinds, I think last quarter, you were fairly sanguine about this. You were talking about some offsets in Mexico for your North America business. It seems like maybe the U.S. situation is a little weaker this quarter or the outlook is a little weaker. Can you talk about how that's impacting your business? And if you still see any offsets?

Scot, do you want to take that?

Sure. Yes, I think, the outlook for the growth rates in the North American auto production market are fairly muted. So we continue just to remain focused on share gain within our space and are optimistic that we will be able to continue to execute on that plan so that even if production rates remain where they are or even if they decline slightly, that we can still grow that business. Our new structure with the combined companies is strong enough we think and with our new product introductions that we have planned coming up over the next 12 to 18 months, that we will continue to be able to grow that business in spite of a bit of a muted outlook and overall production.

And our next question comes from the line of Joseph Reagor of Roth Capital.

Most of the things I want to touch on are already -- but one may be a bigger picture question. You guys historically have talked about synergies and operating performance numbers that you had for targets for the 2 separate companies and now essentially they -- we've moved away from that conversation a bit given the separation plans. But post separation, can you guys quantify what do you still think is meat left on the bone there and confidence level in that?

Sure, Joe. Thanks for the question. In the Ag Solutions business, we had originally articulated a synergy target of $80 million and we are run rating that number. We stopped talking about specific synergies in Ag because we felt like that had been delivered. There were continuous improvement opportunities that we highlighted, and we continue to execute against that and mentioned those earlier on the call. In the Performance Solutions business, our target was $70 million. And our run rate is just out at $60 million at the moment, and we expect to be able to get to that $70 million in the near term. We should be run rating north of $60 million by the end of Q4. So those opportunities continue and the separation doesn't impact our ability to get at those at all.

And our next question is from the line of Daniel Jester of Citi.

It sounds like for the fourth quarter, the biggest variable is how the Brazil season developed. Is there anything else that you would call out as that could drive you to the high or low end of your guidance range?

No. I think, that's the biggest factor. I think we're pretty comfortable with the rest. It's just because Latin America is such a big piece of our Ag business in Q4, right, I mean, typically, I think, it's probably at least 40% of sales. So it's one that we will watch closely. Listen, there are all hands on deck on this. We have a great relationship -- a working relationship with our customers in Brazil. And to the extent that there are opportunities, otherwise, we will capitalize on those opportunities. But we are, obviously, just like everybody else, subject to the weather condition. So, I think, we're still cautiously hopeful that this is going to be a good quarter. So...

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

Thank you. And, once again, I just want to thank everybody for being on the call this morning. I think, we continue to make very good progress in our businesses and also, as you heard on our separation, there's a lot of work that our folks are doing. And I really also want to thank all our global employees for all the hard work that they're doing. And I appreciate it. And we will meet with all of you again soon. Thank you.

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