Element Solutions Inc (ESI) Q4 2018 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Platform Specialty Products Preliminary 2018 Results Conference Call. This call is being recorded. [Operator Instructions] It is now my pleasure to turn the floor over to Carey Dorman, Corporate Treasurer and Vice President, Investor Relations. Please go ahead.

Good morning, and thank you for participating on our preliminary fourth quarter and full year 2018 results conference call. Joining me this morning are our Chairman, Martin Franklin; CEO, Rakesh Sachdev; CFO, John Connolly; Ben Gliklich, our EVP of Operations & Strategy; and Scot Benson, President of Performance 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 that all results presented are preliminary, unaudited and subject to the completion of Platform's year-end financial close process and its audited financial statements as of and for the fiscal year ended December 31, 2018. Actual results may differ materially from those preliminary estimates. Unless otherwise specified, these results relate to Platform's continuing operations and exclude any contribution from Agricultural Solutions, which is shown as discontinued operations in Q4 and full year 2018. Please also note 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 presented. 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 press release and in the supplemental slides, Platform has provided financial information that has not been prepared in accordance with U.S. GAAP. For definitions and reconciliations of these non-GAAP measures to comparable GAAP measures, please refer to 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. It's now my pleasure to introduce Martin Franklin, Platform's Chairman, for opening remarks. Martin?

Thank you, Carey, and good morning, everyone. Today marks a special day for Platform. We have reached the last stage in the sale process of Arysta LifeScience, and I'm making several important announcements in that context. We're beginning a new and exciting chapter for our company. Let's start with the sale of Arysta. We have received all necessary approvals to complete the transaction, and we expect to close on Thursday, January 31. The journey to separate our Agricultural and Performance Solutions businesses started back in 2017, but the rationale and benefits of the separation have stayed constant -- consistent. I'd like to thank all of our employees for the truly collaborative effort in getting us to the finishing line. Effective immediately, following the Arysta closing, we will be changing our company's name to Element Solutions Inc and our ticker on the New York Stock Exchange to ESI. We're excited to be celebrating this event on Friday by ringing the opening bell to commemorate this watershed moment. The newly named company will also start with a fresh vision and strategy to reflect a more streamlined approach. We believe this structure will both provide us with the opportunity to drive cost savings over the next 2 years by merging the current Platform and Performance Solutions corporate overhead function and allow us to be more nimble and efficient in supporting our operating businesses. As our CEO, Rakesh Sachdev, considered the transition to Element Solutions, he decided with the board's blessing that this inflection point was the appropriate time for him to retire from his role as Chief Executive Officer and make room for the next generation of leaders. When we were looking for a new CEO for Platform in late 2015, I met Rakesh, and over a long walk, I outlined what I believe Platform needed from its next leader. Looking back, he has delivered everything we outlined together and more. Over the last 3 years, Rakesh helped transform Platform into the mature and disciplined company it is today. His experience and insights were invaluable, and we are pleased that he will be -- he will remain an active director on our board, so that we can continue to benefit from his wisdom and experience. Looking to the future, Rakesh and I are pleased to announce that the board has appointed on our joint recommendation Ben Gliklich as our new Chief Executive Officer effective at the closing of the Arysta transaction. Ben, along with Scot Benson who will become President and Chief Operating Officer of ESI, will form the new Office of the Chairman, which I will lead as Executive Chairman of Element Solutions for the foreseeable future. Ben will take the reins after having successfully served in a variety of global leadership positions at Platform over the past 5 years, including Chief Operating Officer and Executive Vice President of Operations & Strategy. Ben is an extraordinarily thoughtful and dynamic individual who has led significant transformation within Platform, including most recently the separation of Arysta and the launch of Element Solutions. He also has a clear vision for the future of the company, and he is fully aligned with the board on the path to executing this plan. Sitting on the Board of Restaurant Brands International has shown me the impact that young, hungry and smart leaders can have on business performance, energizing companies and delivering results. Absent that, Ben would -- still would have been the right person for this role as Rakesh, myself and the board were unanimous in this decision. But my experience with RBI only gives me more confidence in this choice. Ben has been my partner since the first day on the job. So from experience, I can say that his focus on accountability, his high standards for performance, his analytical decision-making and his ability to get the best from the team, will make him a truly effective leader. He has a deep familiarity with and the respect of all of our stakeholders inside and outside the company. And I am confident he is ready to lead Element Solutions forward. By the same standard, I'm excited to have Scot become a member of the Office of the Chairman. Scot's deep operational expertise, long history within our Performance Solutions segment and knowledge of our specialty chemicals markets and customers make him an important partner in our leadership team. Whereas Ben will be more front-facing for issues at Element Solutions, the public company, Scot's focus will be more operationally oriented, and we will ensure he has the adequate tools to drive profitable growth and efficiency. As Executive Chairman, I plan to become more involved in activities at the company. I will walk with Ben and Scot to ensure we are setting the right objectives and, of course, meeting them as well as driving a strong culture of encouraging and rewarding performance and accountability. Today, we will also be discussing our preliminary fourth quarter and full year 2018 results and financial guidance for 2019. I will let the team go into more detail on this point shortly, but I'd like to comment that despite a deceleration in some of our key end markets, Platform was able to, once again, significantly grow both organic sales and adjusted EBITDA in 2018. Our expectation for 2019 is also for organic sales and adjusted EBITDA growth, but we do anticipate continuing pressure from FX and the overall macroeconomic environment, which we will discuss further. With respect to capital allocation, we expect to use our balance sheet capacity and vastly improved free cash flow generation on share buybacks as a priority in the year. Before handing over the call one last time to Rakesh to review our 2018 preliminary unaudited results, I'd like to say that I'm very encouraged about the future and truly appreciative of the team who has helped us get to this key inflection point. I want to thank Rakesh for his service and dedication and want to thank all of our stakeholders for supporting our exciting new chapter. Rakesh?

Thank you, Martin, for your kind words. It truly has been an honor to work with you and the entire team at Platform. I'm proud of all we have accomplished, and I'm excited to be involved in the next phase of Element Solutions, or ESI. The past 3 years at Platform have been very fulfilling to me. When I started as CEO in the beginning of 2016, Platform had just acquired Alent and OM Group's assets. Alongside Ben and Scot, we've set a goal to maximize operational synergies and to align the organization along a strategy of consistent, long-term organic growth and margin expansion. Ben and Scot have been instrumental in establishing a thorough and multipronged strategy to achieve these goals. As ESI embarks on this multiyear journey, it'll benefit from a high energy and capable leadership team that is committed to a long-term plan to drive shareholder value creation. Ben and Scot provide that. Ben, who I've had the pleasure of working closely with during my tenure at Platform, is well suited to take Element Solutions forward. He has proven his ability to make tough decisions and to listen and consider divergent perspectives. His strong financial acumen and thoughtful business mind positions him well to lead ESI as its CEO in the future. He has my utmost confidence and respect. I've also enjoyed working closely over the past several years with Scot, who bring decades of operational excellence to the leadership team. As the President of the Performance Solutions segment, no one is better equipped to drive the commercial business. Scot has a great track record of creating profitable growth in these businesses, and I'm confident this will continue. And I'm pleased to see him in this new expanded role. Overall, the new ESI is an exceptional collection of businesses led by exceptional commercial and functional managers. Now turning to Page 5, I'd like to review our preliminary unaudited full year 2018 financial results. We reported net sales of approximately $1.96 billion and full year 2018 adjusted EBITDA in the range of $420 million to $422 million. Net sales grew 3% on an organic basis, while adjusted EBITDA grew approximately 4% on a constant currency basis based on the midpoint of the given range. These results were slightly lower than our expectations entering the year but reflect what we believe to be outperformance relative to our end markets in increasingly mixed macroeconomic conditions. We also experienced a significant FX deterioration in the latter part of the year, which weighed on our reported dollar results. In the 2 reporting segments we began to report in the fourth quarter, we saw mixed results. In our Electronics segment, strong gains in assembly and semiconductor markets were partially offset by softness in circuitry due to lower global demand for high-end mobile phones and softer macroeconomic trends, especially in China. Our assembly solutions vertical also benefited from successful new product launches over the course of the year. I would note that this business caters to the broad Electronics market and is, therefore, somewhat insulated against changes in demand trends for specific device categories or price points. In circuitry solutions, we saw modest pressure, especially in the second half of this year, as consumer demand for high-end mobile phones was lower than anticipated. Despite some remaining uncertainty around unit growth in 2019, we expect to continue to outpace market growth as we see increasing electronic content and, therefore, increasing chemistry content used per electronic device. Semiconductor solutions also saw strong organic sales growth in 2018, with our advanced packaging and advanced assembly products benefiting from the expansion of automotive electronic content and increasing focus on electric vehicles. We see a continuing opportunity for growth in our semiconductor solutions business, and we plan to further invest in it in 2019. In our Industrial & Specialty segment, we saw organic growth in all our verticals in 2018. Industrial saw meaningful gains in Europe and the Americas year-over-year, but this was partially offset by the slowdown in economic activity in China in the latter part of the year. We anticipate this will extend into 2019 and are watching demand trends in Europe as well. Our Graphic Solutions business benefited from some key new customer wins and performed in line with our expectations for the year. Lastly, our energy vertical also showed strong year-over-year growth in 2018, as capital expenditures and offshore drilling and production increased, in line with energy prices throughout the year. Assuming the midpoint of the adjusted EBITDA range of $420 million to $422 million, we grew approximately 5% year-over-year in reported dollars or 4% on a constant currency basis. Contributions from the increase in organic net sales were partially offset by the relative margin mix of that growth, raw material inflation and FX translation headwinds. We were successful at mitigating some raw material pressure by increasing prices where necessary, particularly in our Industrial Solutions vertical. We plan to continually work to demonstrate our value to customers and drive pricing to retain margin for products across all of our businesses. On a free cash flow basis, we note that by adjusting our balance sheet to reflect the planned post-Arysta capital structure, our normalized free cash flow for 2018 would have been approximately $200 million. The strong free cash flow generation in our business and our meaningfully improved balance sheet will provide significant flexibility and opportunities for strategic capital allocation. On the next page, we highlight our estimated postclosing balance sheet. As previously announced, the new term loan we referenced here has already been syndicated, so the debt and interest rates are locked in. Our cash balance is dependent on the actual closing adjustments in the Arysta sale, but we expect approximately $550 million of balance sheet cash at close. This leaves our net debt in line with the previously communicated target of $1 billion and net leverage of approximately 2.3. We also acted to reduce our new term loan interest expense by more than 2% through a euro swap, which also better matches our earnings and cash flow footprint. We believe this new balance sheet is a pillar of strength and stability. And going forward, we intend to maintain our net leverage ratio under 3.5x. Before turning the call over to Ben, I want to again thank everyone for allowing me to serve as the leader of this great company for the past few years. I want to thank Martin and the board for their support, and I want to thank my leadership team for driving this journey. I'll surely miss working with this team day in and day out, but I will look forward to staying actively involved as a Director. It is now my pleasure to turn the call over to the Ben Gliklich, the next CEO of Element Solutions. Ben?

Thank you, Rakesh, and thank you to Martin as well. I'm excited for the opportunity the board has given me to lead Element Solutions into its next chapter of growth and success. I'm lucky to be stepping in to lead a truly great business. Element Solutions is a leader in its market, and most importantly, it is a business supported by a group of expert, talented people around the world. My mandate is clear: drive strong earnings growth through commercial excellence, innovation, cost discipline and prudent strategic capital allocation. We have an opportunity to do all of these things. Slide 7 highlights ESI's organizational structure and management team. Martin, Scot and I will form the new Office of the Chairman, supported by a deep bench of experienced operating business unit and functional leaders. There's an incredible amount of experience and expertise across this group with leaders who have been participating in these markets for decades, supported by local teams with deep, technical and customer knowledge. Since we announced the Arysta sale, we've been reflecting on how best to position Element Solutions for long-term success. We distilled these discussions down to a series of strategic pillars to guide us on our journey. On Slide 8, you can see the behaviors we believe will allow us to outperform. These pillars fall generally into 2 buckets: commercial and organization. The first 3, commercial excellence, market-leading innovation and enabling sustainability, are in the first bucket. Our products and processes are specifically geared to meeting the particular needs of each of our customers. Having the best sales force and the most talented technical service teams, investing and developing selling and technical processes and on-time delivery and effective customer service will differentiate Element Solutions and drive growth. Our technology enables our customers' innovation. So we need to remain the most innovative company in our markets. We should be nothing less than our customers' primary partner for the development of new enabling technology. Finally, developing sustainable products and enabling sustainable solutions for our customers will allow us to continue to differentiate ESI as this is an increasingly crucial variable to customers and other stakeholders. Our culture is one of recognizing the enormous contribution our employees make to our success, and the next 2 pillars are primarily organizational. We believe these are behaviors and attributes that will allow us to be an effective and nimble company that attracts great talent and develops it for future growth. Our business is people and relationship-based, and our most important assets go home every night. Our organization is global, and enabling our talented team to make decisions quickly and locally will allow us to compete even more efficiently and further meet customer needs. Importantly, these strategic pillars may be new, but these behaviors are not. We are formalizing the strategy and ensuring it is consistently followed globally. However, much of this is already happening in our business around the world. Slide 9 introduces our guidance for 2019, and to provide some color on markets, I'll turn it to my partner and the next President and Chief Operating Officer of Element Solutions, Scot Benson. Scot?

Thanks, Ben. Before addressing the markets, I would like to echo the enthusiasm you have heard already for the opportunities we have as Element Solutions. I am thrilled to be working with Martin and Ben to drive our company forward. I share their vision for the business and optimism about our path to create value for shareholders and opportunities for our people. Heading into 2019, our markets are markedly more mixed than they have been in recent years. We are optimistic about continued growth in the semiconductor market and growth in overall Electronics, driven by automotive electronics and other end markets. On the other hand, our circuitry business is facing headwinds from the slowdown in mobile electronics we saw in Q4 2018, which we expect to persist. We expect a stable but generally flat automotive market this year with the exception of China where we expect some continued weakness barring any government intervention in the economy. While it is difficult for us to point to a specific growth rate for our end markets overall, we expect a flat to down environment on average during 2019. Our goal is to exceed the growth rates of our macro markets. With that as context, while we expect positive organic growth in 2019, we believe achieving our long-term average target growth rate of 4% will be challenging given the overall macroeconomic environment. We are guiding to 1% to 3% organic net sales growth for 2019, which translates to 5% to 8% constant currency adjusted EBITDA growth. We have achieved about $5 million in corporate cost savings in 2018 out of the estimated $25 million we had guided to from the separation. This year, we expect to realize an additional $10 million through the P&L and to be close to the full run rate by the end of the year. Currency is a material headwind looking into 2019, particularly in the first half of the year. We have about a 2% headwind to sales and an approximately $15 million headwind to adjusted EBITDA based on 12/31 FX rates. As part of the transition to Element Solutions, we now plan to provide annual adjusted EPS guidance and view this metric as measuring our success as both operators and capital allocators. For 2019, we expect adjusted EPS will be $0.75 to $0.80 per share. This implies a double-digit growth rate over our 2018 normalized earnings per share. This growth reflects expected improved profitability for the ESI business and significant reduction to our expected tax rate, driven by the jurisdictional mix of the ESI business relative to legacy Platform business. Importantly, this EPS guidance does not include any impact from potential share repurchases or other capital allocation activity. Like many others, we are attentively watching the macroeconomic indicators but remain upbeat about the medium- and long-term global outlook. Asia, mainly China, is of particular importance to us given the size of our business there and their overall contribution to consumer demand growth. Importantly, our capital-light and high-margin business model should allow us to adapt to various economic climates, and our focus on content growth, mix shift and margin expansion should all create levers for adjusted EBITDA outperformance. With that, Martin will wrap up with some final comments. Martin?

Thanks, Scot. To conclude this call and on Slide 7, we want to introduce our 2019 goals for Element Solutions. Our first goal is to ensure we successfully launch Element Solutions. We want to set the right tone in terms of culture, strategy and expectations for strong performance. The next goal is to deliver on our financial commitments and strategic initiatives. We have a business model that should provide relative resilience in difficult economic climates, and we believe our flexible cost structure affords us multiple levers to deliver growth. We have often reiterated the compelling cash flow characteristics of our business, but our balance sheet has absorbed so much of that cash in prior years. 2019 will be [ different ], and we are focused on delivering strong free cash flow growth during the course of this year. Absent any buybacks, we would expect to see leverage well inside of 2x by year-end. Finally, with our strong balance sheet, we have a great opportunity to deploy capital to compound long-term value creation for our shareholders. We have a $750 million share buyback authorization from our board, and at current stock price levels, we intend to start buying our shares, of course, keeping our 3 to 3.5 net leverage cap in front of our minds. We will be out to see investors today and tomorrow, and we will remain close to our shareholders in the weeks to come. We're looking forward to continuing to keep you posted on our progress and seeing many of you very soon. With that, operator, please open the line for questions.

[Operator Instructions] Your first question will be coming from Daniel Jester with Citi.

So maybe first off, on the quarter, the 4% organic growth in Industrial, that's quite good given some of the unevenness we have seen in the markets. Can you just dive in a little bit deeper, how much of that was driven by improvements in the Graphics business, in the energy business versus some of the other end markets? And how do you think that starts to play out as 2019 progresses?

Thanks, Dan. So the Industrial & Specialty business, as you outlined, includes our industrial surface treatment business as well as our offshore vertical and the Graphics vertical. Both offshore and Graphics had very strong years. Offshore had a very, very strong year. And Industrial business also saw organic growth. So it was really a mix of all 3 of those businesses. The Industrial business, the surface treatment business is the bigger of them. And it also contributed to positive top line in the year.

And then in 2019, do you expect that mix to continue?

Yes. So as our comments indicated, we see organic growth next year across the business. We see persistent strength from offshore, maybe not as strong as 2018. We expect the Graphics business to perform well as well. And we see growth in industrial. So we think all of our businesses, all of our verticals, can grow into 2019.

[Operator Instructions] We'll take our next question from Ian Bennett with Bank of America Merrill Lynch.

Congratulations, Ben, on the new role. A question on the buyback. So you have in one of your slides here that there's $350 million of excess cash, and there's some comments about repurchases and also comments about deleveraging capacity. And so of the $750 million, how should we think about the benchmarks here, what you're looking for in terms of more deleveraging versus more buybacks through the course of the year? And am I right to think that the $350 million excess cash and $200 million of free cash flow, that would be kind of $550 million of potential share repurchases that could occur this year?

I think you answered -- this is Martin. I think you answered your own question because I think your numbers are about right. That is how we think about it. Now obviously, during the course of the year, if trailing 12-months' EBITDA gives us more room, we'll act upon that. But a lot of it depends, obviously, on market movements and the macros. Obviously, multiples will come in quite a bit for this business and its comp group over the course of the last year. We at least see that as an opportunity. But where we have, if you like, drawn a rather strong line, we think it's important to widening our shareholder base, which is one of our objectives. We're going to hold true to capping our net debt leverage to 3.5x. We're going to generate a lot of free cash. We can delever quite quickly. It will give us the ability to use the full authorization, whether it takes 12 months or 18 months, yes.

The only other comment I'd add, Ian, is that the $350 million of excess cash implies that $200 million of cash that sort of resides within the business. And we're working actively to reduce that number and get cash out of certain jurisdictions to enable us to have a bit more dry powder for things like buybacks.

Okay. And as a follow-up, just kind of on the longer-term strategy here and how you see Platform over -- or Element Solutions over the next 5 years and 10 years. This business was the combination of MacDermid and Alent, and there was industrial logic behind that and synergies. I'm wondering what you learned from that experience of integrating these businesses and how you think, longer term, this industry is still relatively unconsolidated among specialty chemicals and electronics and auto. You have announcements today, 2 of your peers, I guess, merging. I mean, what was the benefit to combining Alent and MacDermid? Is there further benefits to consolidating the supply chain longer term? And how you think about that competitive positioning?

Ian, it's a great question. There was a tremendous benefit in bringing the legacy MacDermid business together with the Alent portfolio and the OM assets we acquired. It gave us more scale and a true market-leading position in each of our core end markets. That allowed us to be a more global supplier to our global customers and really be front of mind with them, which drove a market share opportunity, not to mention the synergies that were available to us. We're fortunate to participate, while we are market leaders, in what are fragmented markets. And so we certainly will be looking for bolt-ons and tuck-ins in our existing markets and in adjacent markets. Now we do have some diversification across the portfolios. There's a lot of surface area around these businesses for bolt-ons. But most importantly, I would say, this business does not require a transformative M&A in order to drive value for shareholders. The strategy here is not an acquisition strategy. It's an operational excellence strategy married with prudent capital allocation. So we're not going to be relying on large M&A to drive value. I don't know, Scot, do you have anything you'd add?

Yes. I think the -- as we've talked in the past, the complementary nature of the businesses that we combined have proven to be extremely beneficial, Ian. Our position across the Electronics supply chain, for example, gives us really pretty much an unprecedented set of touch points into that entire industry. And the complementary nature of the historic Enthone business with the MacDermid business, having been competitors for so long, that complementary nature has exceeded our expectations. So we're really excited. And we add to that being the ability for us to leverage our innovation and R&D teams across companies this size and the global scope of it has been extremely positive as well.

We'll take our next question from Neel Kumar with Morgan Stanley.

You talked about the softer demand in the high-end mobile phone market. Can you just talk about your presence in the high-end mobile market versus the lower-end and the margin differential there?

Sure, Neel. We focus on enabling technology, which really drives us to that certain segment of the market, phones that have tremendous amount of features and complexity. Clearly, that innovation leads towards attractive margin positions in that space. As you get down into the lower-feature phones and lower-technology phones, it becomes a little bit more broad-based market approach to the circuitry that's involved in those, like other consumer electronics. So we're definitely focused on the high-end, technology-enabling devices.

That's helpful. And then beyond the $25 million cost savings goal, can you just discuss the opportunity to take additional costs out of the business?

Sure. And that's going to be a key focus of mine in the first year here. We talked about a $25 million savings opportunity from combining sort of the functions within Platform and the legacy Performance Solutions segment, and we're well on our way with $5 million of that delivered in 2018 and an expectation of being at the full run rate by the end of 2019. We're also going to think about where we can identify more efficiency throughout these businesses. And a continuous improvement mindset is one that Rakesh has pushed during his tenure as the CEO of Platform, and I intend to continue. As a more nimble and focused operation, we do believe there will be efficiency we can drive over the coming months and years and look forward to seeing those come through in the results.

We'll take our next question from Aleksey Yefremov with Nomura Instinet.

Congratulations on getting this deal across the board, and congratulations on everyone's new roles. As to the business, how did your automotive business do in the fourth quarter across both electronics and industrial lines? It looked like sales were fairly steady, minus 1% in constant currency. It could have been worse if you just lift out auto builds in some regions. So do you have any comments about maybe volume or how your business did versus global SAR numbers?

Sure. So the Electronics business, we don't break out at -- what sales from Electronics go into auto, but we have a nice tailwind from increasing content -- electronic content into auto. And our Industrial business is about 50% automotive and 50% into other end markets, like building products and energy pipelines and so forth, and that business did grow. So we certainly think we outperformed end markets in terms of the growth rate in Q4, given how weak we saw the automotive end market was.

Yes. And just to follow up Ben's comments, we're definitely also seeing the effects of the combination of the companies that we spoke earlier. We're benefiting from share gain within our markets, so that is clearly helping us outperform in general.

Great. And then second question, please. You made comments about, I think, mobile staying weak in 2019 or softer. Is this more a reflection of your visibility into first quarter and first half of '19? Or do you also see weakness extending into second half?

So it's more a reflection of recent headlines in the news that you guys have seen with regard to production rates from the large electronics OEMs. We don't have a crystal ball for the second half of 2019 from an electronics perspective. So we're not counting on a robust recovery in the back of the year.

We'll take our next question from Josh Spector with UBS.

Yes, kind of on a similar theme. Just curious what your planning basis within Electronics is. So the bridge to your 1% to 3% organic number, what are you assuming for growth in 2019 for semis versus circuit board versus assembly?

Yes. So we haven't given guidance along those lines in the past, Josh. As you heard from our comments, we're expecting flat to down markets. That's certainly our expectation in the electronics space. As you would've heard from Scot, the circuitry business is much more oriented towards the high end, where the assembly business is more broadly focused in electronics. So we would expect the assembly business to have a stronger end market tailwind than the circuitry business. In the semi business, while we've seen deceleration in that market, we've got some nice new product wins there, and we do expect that market to be up on a volume basis. So we should have a tailwind macroeconomically there as well.

All right, that's helpful. And maybe back to 4Q, so in terms of Electronics, the difference between Alpha and Enthone, which now you've combined, what were the volumes kind of like for those different segments within 4Q roughly?

Yes. So the Alpha business and then the Electronics business is probably the right way to call it. We call it MacDermid Enthone Electronics. We brought those together now into 1 electronics unit. And Alpha has had stronger growth in the core Electronics business for the same reason we just outlined with regard to our 2019 outlook from a macroeconomic perspective. The Electronics business didn't have that strong of a fourth quarter as hoped.

And we'll take our next question from Duffy Fischer with Barclays.

First question, just some housekeeping. You talked about the tax rate being down. What do you anticipate the tax rate being in 2019?

Yes. So the tax rate for 2019 is around 27% relative to the 34% we had in 2018. And that's driven by several variables, as we mentioned on the prepared remarks, the jurisdictional mix of earnings in ESI relative to Platform's; the other is the improved balance sheet. As you guys know, some of our interest expense is not providing us with a tax shield. And now that we've vastly improved the balance sheet, the tax rate will come down.

Okay. And then you've talked about your compelling free cash flow. '19 and maybe even kind of a 3-year view, how should we think about free cash flow as a percentage of, let's say, EBITDA or maybe of earnings? I mean, how much should get converted to cash flow?

It's a great question, Duffy, and that's exactly right. We talked about how excited we are for the opportunity to show the free cash flow generative characteristics of these businesses now with a better balance sheet. We can go through the specific line items. And in the past, we've given some guidance around that, and you should expect to hear some of that in the future. But CapEx of less than 3% of sales; interest expense, meaningfully lower; we gave a weighted average cost of debt of inside of 4.3%.; taxes at 27%; and modest working capital requirements for the business. So you should expect a couple of hundred million dollars of free cash flow this year.

Yes, we'll take our next question from Jon Tanwanteng with CJS Securities.

Congrats, everyone, on the sale and, Rakesh, on retirement; and, Ben, promotion. Martin, you mentioned taking a more active role going forward. What are the operational or strategic areas you plan to be focusing on? And maybe, Ben, give us your 1 or 2 biggest priorities this year as well.

It's not so much operational as spending more time guiding the -- Ben through the ins and outs of the public company life. Obviously, as you know, I've had 25 years of experience as CEO doing this. I think in Rakesh's absence, I think Ben needs a little gray hair, if you like, around him. That was the reason for that change. Also, in terms of prioritization, I think the biggest -- probably the biggest thing I'll be focused on is not just capital allocation and staying very close to that decision-making, but really the prioritization of the biggest opportunities in front of us. So it's not so much an M&A story, obviously, anymore. This is an operational story. One of the things that I think people -- I always felt people never really appreciated as much as they perhaps could have, but Jarden, the secret of Jarden's success was not its M&A, but its operational performance. And that wasn't luck. That was planning and prioritization and culture-building. Those are the places where, really, I'm going to be focused, that I'd say that before the divestiture, given the breadth of what we had and, if you like, the restraints that we were under from the balance sheet perspective, there was, I'd say, a more limited scope of what we could do. I think today, we've got a much more, if you like, paintable canvas. So I'm going to be spending time and effort with both Scot and Ben to help architect that.

Yes. Jon, from my perspective, my goals and objectives for the year are those outlined in the presentation on Slide 10, right? The successful launch of Element Solutions, this is a really critical initiative. It's not just a new name, right? It's bringing all of these businesses under this umbrella, creating a culture of strong performance, delivering on commitments, accountability, things that are resident in this business but really bringing the global team together there. And obviously, there's cost savings associated with that, which we're going to be laser-focused on. Becoming a company or continuing to be a company that delivers on its commitments and on its strategic objectives. And as we said before, we're really excited to show how much cash flow this business can generate. So we're going to be very focused on making sure that, that happens and maximizing it. And finally, with an improved balance sheet, we have an opportunity to allocate capital for long-term value creation. So thinking about how to do that best and making sure it gets done well and right will be where I spend my time.

Great. And then just on the EBITDA growth for 2019, it looks like at the midpoint you have about $10 million to $15 million year-over-year, and that's including the currency headwinds. Where is that growth coming from? Is it all the cost cutting from the merging the corporate functions? Or is there putting new products or mix factoring into it? Or any more color on that would be appreciated.

Yes. So the answer is yes. 1% to 3% top line with margin expansion to get to 5% to 8% constant currency EBITDA growth. So there's earnings growth on the top line contributing to that. There's margin expansion from mix in some of the new products we have being launched. And then there's obviously cost savings that we expect to realize through the P&L this year.

And we'll take our next question from Jim Sheehan with SunTrust.

Could you comment on your raw material profile in Elements? And where you stand in pricing versus raw materials? I know you made some progress on that in the fourth quarter. How much more do you have to do?

Jim, this is Scot. We're pretty happy with where we are on a raw material and a sourcing standpoint. We added some considerable horsepower to our global sourcing team and our supply chain management last year. We're working on several new initiatives in terms of additional lines of raw material supply from different places around the world. And I think we still have some leverage coming from that effort in 2019. So we're pretty comfortable where we are from a raw material and sourcing standpoint.

Yes. There's real opportunity there.

What are your main raw materials?

We generally don't talk too specifically about our raws. Our biggest purchase, of course, is in metals. We spend a lot of money on metals. So clearly, we don't have as much opportunity around metals as we do some of the other things, but metals represent a significant portion of our spend.

Yes, and metals represent a significant portion of the spend, and the rest, there's really not a lot of concentration in any specific class of raw materials. It's a very diversified set of buys. I don't think any specific raw material outside of metals accounts for more than 2% of our COGS.

In your offshore business, what does your 2019 outlook assume for the price of oil? Are you assuming a slowdown in that business? Or should we be watching the price of oil or the rig count as a key indicator for your business?

Yes. Our crystal ball is probably as clear as anybody's on the price of oil. But we made some significant progress in other areas of the business over the last 2 years, primarily in the drilling market, which we've seen some strength in. So we're comfortable with the growth rates we saw last year and anticipate some continued growth into 2019 for that segment.

Yes. And operators have been able to take a lot of costs out of their production costs and drilling costs. So lower oil than where it was a few years ago doesn't necessarily translate to weaker earnings growth and opportunity for us.

With no further questions on the line, I'll turn the call back to Platform's Chairman, Martin Franklin, for closing remarks.

So thank you very much for your time, everybody. A lot of information to absorb in one session, so we appreciate your questions. And we look forward to reporting to you in the coming weeks and months and presenting our first quarter results as Element Solutions. Thank you very much, everyone. Bye-bye.

This does conclude today's conference call. Please disconnect your line at this time, and have a wonderful day.