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Milacron Holdings Corp  (NYSE:MCRN)
Q4 2018 Earnings Conference Call
Feb. 21, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Milacron Holdings Corp. Fiscal 2018 Fourth Quarter Financial Release. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Mr. Andy Kitzmiller, Corporate Controller for Milacron. Thank you. You may begin.

Andrew Kitzmiller -- Corporate Controller

Good morning and thank you for joining us for our fourth quarter fiscal year 2018 earnings call. With me on today's call are Tom Goeke and Bruce Chalmers. A copy of our earnings release that was distributed this morning can be found on our milacron.com website under the Investors section. We will also provide a link for the replay of this webcast. During our call today, we will be referring to the earnings release supplemental slides which are also posted on our website.

I'd like to remind everyone that today's discussion will contain certain forward-looking statements based on the business environment as we currently see it and as such does include certain risks and uncertainties. Please refer to our press release and our SEC filings for more information on specific risk factors, that could cause our actual results to differ materially from the projections described in today's discussion. Any forward-looking statements that we make on this call are based on assumptions as of today and we undergo no obligations to update these statements as a result of new information or future events. Also, we will discuss certain non-GAAP measures on today's call, including pro forma net sales and pro forma new orders. The pro forma figures included within today's presentation exclude certain product lines, which have been eliminated through restructuring plant closures or certain discontinued product lines. We believe the presentation of these non-GAAP financial measures enhance the understanding of our performance. Reconciliations to comparable GAAP financial measures can be found in our earnings press release and are also available as part of the presentation materials posted on our website.

And with that, I'll turn the call over to Tom Goeke, President and Chief Executive Officer of Milacron.

Tom Goeke -- President and Chief Executive Officer

Thank you Andy, and good morning. As Andy mentioned, we have a slide presentation on our website to accompany our earnings call and it includes additional details to the commentary presented this morning. Before we review our 2018 performance, I would like to recalibrate everyone on our strategic plan, touch on significant progress we have made and highlight a major milestone the company achieved in 2018.

Starting on Page three. Our strategy, which we initiated in 2013 of transforming a capital equipment company to a plastics technology company with a focus on consumables remains on track. The secular trends of the plastic industry remain unchanged, automobile lightweighting, conversion of medical devices to plastic for safety and disposability, packaging for food and beverage from glass and metal to plastic, the reduced lifecycles cycles of electronics and telecommunications, design flexibility for consumer goods and appliances, the use of plastics in construction and infrastructure and the purchasing power in the emerging markets.

Our equipment business is approximately 34% of the total revenue and represents approximately 20% of our adjusted EBITDA. Our strategy is to continue to profitably grow our installed base and capture the aftermarket and other consumables, which represent a four times opportunity of the original cost of the machine over a 20-year period. Our growth in margin opportunity stems from our well-established and leading position in the Americas served from the US and from our leading position in India. We have made substantial investment and have excellent economies of scale in India to serve the global markets. We continue to invest in new product development to stay performance and cost competitive worldwide. We are currently rolling out the Cincinnati, large tonnage platform, the Q-series, small tonnage platform and expanding the FANUC, all-electric platform.

Consumables represents 66% of our sales mix and 80% of our adjusted EBITDA, and is the fastest growing part of the business. This is comprised of MDCS, fluids and the APPT aftermarket parts and service business. The leading business in MDCS is our Mold-Masters hot runner business. Mold-Master produces engineered melt delivery and process control systems for high quality and precision molded parts. Typically, new designs and redesigns require new melt delivery systems. The product life cycle depending on industry is typically one to three years. The growth in this segment is one times to two times GDP depending on hot runner penetration in the various regions.

Our Fluids business CIMCOOL is a highly specialized metalworking fluids business that develops custom formulations that extend the useful life of the fluids, provide longer tool life and superior surface finishes. The application areas are automotive, aerospace and general machining. CIMCOOL continues to execute and grow in all regions and end markets through product differentiation, solution selling and excellent service.

The APPT aftermarket parts and service business is complementary to our equipment business. We serve approximately 30% of our installed base. Our offering is parts, service, retrofits, rebuilds and a suite of connected services, which include remote monitoring and remote troubleshooting to support our customers with uptime, productivity and part quality. We have spent the last several years investing in the infrastructure to support this business. This represents about one-third of the APPT revenue. These businesses represent the cornerstone of our current consumables strategy and provide very sustainable growth opportunities with industry-leading financial performance. In 2018, we achieved 5% growth and our goal is to grow the consumables mix to 75% of total revenue through continued investment in talent, capacity and market penetration.

Moving to Page four. In the first half of 2014, our Board approved a restructuring plan to shift our manufacturing footprint and build out a shared service center in best cost countries. The result of this was the closure of three manufacturing locations in Europe, significant expansion of our plants in India and China, consolidation of our European warehousing for MDCS and the aftermarket to a state-of-the-art warehouse in the Czech Republic and consolidation of our financial transaction and back office activities in the US and Europe to India.

This restructuring plan has come to a completion with the last machine shipped from our Malterdigen, Germany facility in December of 2018. Over this period, we have managed our consumables mix from 60% to 66%, driven EBITDA margins from 14.9% to 18.2%, reduced working capital from 22.4% to 19.3%, improved free cash flow from negative to $102 million, reduced leverage from 4.8 times to 2.9 times, reduced net debt from $950 million to $660 million and reduced cash interest from over $70 million to $43 million. We are thrilled to have this behind us, so that we can direct all of our energy and effort to further improvement of our operations, optimizing our product mix, improving our service to customers and improving our financial performance for our shareholders.

Moving to Page five. We are pleased with our 2018 results, which met our expectation for sales and EBITDA margins and exceeded our expectations on free cash flow. 2018 can be characterized as a tale of two halves with solid growth in the global economy during the first half and the introduction of policy generated headwinds in the second half. In the first half of 2018 sales were up 7% on a reported basis and 4% on a constant currency basis. This growth was driven by our expanding APPT equipment business in India and strengthen our consumables business that grew at 10%.

Within the consumables business, hot runners were notably strong along with solid execution in our Fluids segment. The second half of 2018 was impacted by the tariff and trade policy headwinds, which resulted in a negative 1% growth on a constant currency basis. The primary driver for the weaker second half was China, which was down 12% year-on-year on a constant currency basis. This headwind impacted our orders in the second half of the year, which resulted in a 4% decline in pro forma orders versus full year 2017.

Moving to Page six. As I mentioned earlier, 2018 was the tale of two halves. Our Q4 performance was very similar to our Q3 performance. Q4 was impacted by trade policy headwinds and a strong prior-year comp in revenue, margin, and cash flow. Regionally, we continue to perform well in North America and India and we're challenged in China. In end markets, we had strength in medical, consumer products, and custom molders; flat in automotive and construction; down in electronics and down in packaging due to the closure of our manufacturing facility in Germany and discontinued product lines.

Moving to Page seven. We've reported in prior quarters, the impact and actions from tariffs. We break down actions into four categories; exclusions, these are filings to the US trade representative, negotiation with current and new vendors, price management, supply chain reorganization outside of China. The US trade representative has lifted the tariff for at least one year on injection mold from China to the US. This is very positive for Mold-Masters. We have offset 60% of the estimated $10 million cost impact and have projects to continue to mitigate the balance. We achieved a 1% price increase in Q4 and a 1% price increase for the full year to offset tariffs and inflation. We have not embarked on structural supply chain changes.

Our biggest concern remains the impact of tariffs on the economy in China which is influencing our current run rate for the Mold-Masters business. We have maintained our capacity in China to be positioned for the rebound, which we expect in the second half of the year. We remain attentive to market conditions and order rates and are starting to see more projects in the pipeline. If orders do not bounce back to an acceptable rate, we will take actions on our cost to protect margins.

I'll now turn the call over to Bruce for a more detailed review of our financial performance.

Bruce Chalmers -- Chief Financial Officer

Thank you Tom, and good morning everyone. I will walk you through our financial performance for the full year and fourth quarter before turning the call back over to Tom for his closing remarks.

I will start on Page eight of the presentation. For the year net sales were $1.26 billion, a 2% reported, 1% constant currency, and 5% pro forma increase. On these sales we generated 18.2% adjusted EBITDA margins or $228.6 million. For the fourth quarter net sales were $311 million, down 4% and 2% on a reported and constant currency basis respectively and flat on a pro forma basis. On the sales we generated 17.3% adjusted EBITDA margins or $53.8 million.

Geographically, our growth was driven by very strong performance in India and other Asian countries throughout 2018. Our China business had strong performance during the first half of 2018. However, the macroeconomic factors, created by the trade issues impacted demand during the second half of the year. From an end market perspective, medical and industrial were strong throughout the entire year. Most other end markets were strong in the front-end of the year with varying levels of performance in the back end of the year. The automotive and construction end markets held up well with just a slight decrease in sales compared to prior year, while the electronics and packaging end markets were weaker during the back end of the year.

Now let me walk you through our three segments, beginning on Page nine with MDCS. MDCS's full year and fourth quarter sales were up 4% and 1% respectively, primarily driven by growth in all regions, with the exception of China in Q4, which declined by 19%, primarily driven by the packaging and electronics segments. MDCS generated adjusted EBITDA of $137 million and $25 million for the full year and fourth quarter respectively.

Turning to our Fluid Technology segment on Page 10. Fluid's full year and fourth quarter sales were up 5% and 3% respectively, primarily driven by growth in all major regions and in all major end markets. Fluids generated adjusted EBITDA of $29 million and $7 million for the full year and fourth quarter respectively.

Lastly, our APPT segment results are on Page 11. Sales were $677 million and $178 million for the full year and fourth quarter respectively. Constant currency revenue growth was negative 1% for the full year and negative 4% for the quarter and impacted by changes in our European and North American product portfolios. On a pro forma basis, revenue growth was positive 3% for the full year and positive 1% in the fourth quarter.

Adjusted EBITDA was $89 million and $27 million for the full year and fourth quarter respectively. On a percentage basis, our goal of 15% margins in this business was achieved in the fourth quarter and was driven by a mix of products with strong margins. For the full year, margins were 13.2%. We continue to work through several continuous improvement initiatives to ensure that we can consistently generate 15% plus margins on a full year basis.

I'd like to now discuss cash flow performance and our debt structure on Pages 12 and 13 of our presentation. 2018 cash flow was $102 million for the full year. To expand on Tom's earlier comments on our free cash flow performance, we have been working hard over the past several years to improve the cash flow performance of the Company and have turned it from negative in 2015 to over $100 million in 2018. This result was achieved with a significant amount of work put into cost reduction and working capital initiatives across that period.

In addition to funding the restructuring initiatives since the IPO we have also allocated cash over the same period to improving our capital structure and derisking our balance sheet by, one, refinancing and repricing our debt to take advantage of improving financial performance and favorable debt markets. Two, fixing $483 million or 58% of our debt through an interest rate and cross currency swap; and three, paying down debt, including a $100 million of voluntary debt reduction in 2018. The impact of all of these actions has resulted in a stronger balance sheet and a healthy capital structure as evidenced by a net debt ratio of 2.9 times, down from 4.1 times at the time of the IPO.

Cash interest costs of $43 million are down from $72 million at the time of the IPO. Minimal interest rate risk will be further reduced as we continue to allocate capital to pay down debt. Working capital of 19.3% of sales is down from nearly 30% experienced during the peak of our restructuring efforts and $247 million of total liquidity at the end of 2018. At our current valuation, our cash flow yield is approximately 10%. We are proud of our cash flow performance during 2018 and I'm pleased to have our restructuring efforts behind us.

Turning to 2019 guidance on Page 14. We have based our 2019 annual guidance on the assumption that the policy induced trade headwinds subside midyear and create a dynamic that is the mirror image of fiscal year 2018, with some sequential weakness in the first half and a stronger second half. Full-year revenue growth is expected to be between negative 4% and negative 3% with the first half, down 7.5% versus H2 of 2018 sequentially and up 12% sequentially in the second half.

The midpoint of our revenue guidance range is $1.214 billion, which is a 2.5% constant currency decrease versus 2018. Adjusted EBITDA margin will be in the range of 17.5% to 18%. The first half of the year will be impacted by the tariff issue with revenue in our highest margin business, resulting in an average first half margin of approximately 16%. Assuming a recovery from the trade dispute in the second half of the year, we expect H2 margins to be approximately 19.5%. Free cash flow will be between $100 million and $110 million in 2019, another strong performance.

I'll now turn the call back over to Tom for his closing remarks.

Tom Goeke -- President and Chief Executive Officer

Thank you, Bruce. Moving to Page 15 for our wrap up. I would like to reiterate, our strategy remains unchanged. We have eliminated several of our underperforming sites and product lines and streamlined our structural cost. We've strengthened the balance sheet and have sustainable free cash flow. All of our growth platforms are well positioned for continued growth and margin expansion. We are well prepared for the challenges and opportunities in 2019.

Thank you for joining us. We can now move to Q&A.

Questions and Answers:

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Mike Halloran with Robert W Baird. Please proceed with your question.

Michael Halloran -- Robert W. Baird & Co. -- Analyst

So, first a clarification on those comments, Bruce. When you say the back half of the year on the trade resolution side, are you just assuming that you guys are able to offset the trade related pressures on the margin line or are you assuming that the trade issue more broadly at a geopolitical level gets resolved?

Bruce Chalmers -- Chief Financial Officer

I'm assuming it gets resolved more broadly and that we see demand levels approaching where they were in the second half of 2018.

Michael Halloran -- Robert W. Baird & Co. -- Analyst

Okay. And then on the orders side, if I think back historically on the orders, the movement you saw from 3Q to 4Q feels like pretty consistent with normal seasonality, hoping you can either confirm that or not? And then also maybe just discuss a little bit of the underlying trajectory you saw by region and whether you're seeing stability or not or if there's any kind of pressure in any of those areas?

Tom Goeke -- President and Chief Executive Officer

Yes. So as you said, we had a uptick of about 3% from Q3 to Q4. If we look at APPT, we feel pretty good about the run rate and into Q1. Fluids is continuing through Q3, Q4 and early into the year with solid performance. If we look at Melt Delivery, really the challenge is China. Europe and Asia, more or less OK and China, still down. And I would say if you look at where the differences are, in Europe the significant drop is the exit from product lines and the closure of the facility at the end of the year and the run rate of orders dropping through Q3, Q4 into Q1. And North America is holding up pretty well. India, remains strong. So really it triangulates to China.

The drop-off with the equipment in Europe and I would say specifically the hot runner business in China. I mean, there's a couple of things to think about with the hot runner business dropping off in China. One is fortunate, with the US Trade Representative lifting the tariff from China to US. The second, I would say is, we had an incredible run up in Q1 and Q2 of orders in electronics and really a drop-off in the second half and that's really where it is. So I think in China, we got a couple of impacts, like one is, it's related to product development. Mold-Masters and the hot runner business is really wrapped around product development, new product launch and early part of the year was pretty heavy. Second is with the tariff in place, I think there was a lot of in decision of what to do, shall we move, shall we say. We'll see how that plays out now that they change the ruling.

And then the third part is, the economy in China is down, and when you think about local -- for local, that's really the economic balance or the economic piece of that. And then how does that play into other regions. So, for us, we're keeping the capacity in place because it will rebound because products development worldwide didn't stop and there will be product launches and it is the multinationals in China who were principally tied to. So we'll just have to see how that plays out. Auto in general on the year held up pretty well. I think it's about 3% down in total, even for the quarter. So that's sort of the order picture.

Michael Halloran -- Robert W. Baird & Co. -- Analyst

Yes. Super helpful there Tom. Two follow-ups; one on the order side in China, was it stable sequentially 3Q to 4Q or did it take another drop down? And the second question related is, could you just quantify how much the European exits are costing on revenue in 2019?

Tom Goeke -- President and Chief Executive Officer

So first, we saw a another $2 million drop from Q3 to Q4 in China. And on the second question, Bruce, do you have the number in terms of the -- what drops out of the figures from Europe?

Bruce Chalmers -- Chief Financial Officer

In total FY 2018 it was $44 million of total pro forma adjustments and we have a reconciliation in the back of the deck that you can refer to and in Q4, it was $10 million.

Michael Halloran -- Robert W. Baird & Co. -- Analyst

Okay. And then...

Tom Goeke -- President and Chief Executive Officer

One point of clarity I think I misspoke when, recovery in the second half embedded in our guidance is performance that mirrors the first half of 2018. I think I misspoke on that.

Michael Halloran -- Robert W. Baird & Co. -- Analyst

Oh right. No, no that makes sense. And then last question here. Free cash flow can be healthy next year, strong free cash flow yield and -- healthy this year, excuse me, free -- strong free cash flow yield implied. Maybe just talk about the capital use priorities right now and how much share buybacks factor into your thought process?

Tom Goeke -- President and Chief Executive Officer

We have continued primary focus on delevering. We'll have strong equivalent cash flow performance in 2019 as compared to 2018, even with a weak first half, we'll be able to hit the same range. And the priority will be to continue to pay down debt and we'll get into a rhythm starting in Q2 of about $5 million a month. We'd like to continue to just knock of what -- chip away at that and bring down our interest cost. The share buyback is more on an opportunistic basis and so far this year we were about $2 million to $3 million on buying back shares. So it's very, very opportunistic and not a primary focus of capital allocation.

Yes, and that's done under a plan we have in place, the 10b5-1 plan. So it's a structured plan that we put in place to just make sure that we can continue to take advantage of where the share prices is that's a good allocation and good use of shareholder capital. We do have some other things that we're looking at, but they're really dependent on how the economy shapes up throughout the year and if things continue and unfolds as we expect, we have some good opportunities in some of our high growth regions and emerging markets to continue to put capacity on the ground and migrate some of the manufactured product from high-cost country to low-cost country to keep that moving in more of a continuous improvement fashion.

Michael Halloran -- Robert W. Baird & Co. -- Analyst

I appreciate the color gentlemen.

Operator

Thank you. Our next question comes from Ann Duignan with JPMorgan. Please proceed with your question.

Unidentified Participant -- -- Analyst

This is (inaudible) on for Ann. I was just wondering if you could give us more color on what your automotive customers are guiding 2019 CapEx?

Tom Goeke -- President and Chief Executive Officer

Could you repeat the question please. I'm sorry.

Unidentified Participant -- -- Analyst

Yes, I'm just wondering if you could provide a bit more color on what your automotive customers are guiding suppliers for 2019 CapEx?

Tom Goeke -- President and Chief Executive Officer

We don't get specific guidance, our customers are generally Tier 1, Tier 2, we follow their capital plan and in many cases, a lot of it is incremental capacity being added in plans and we see at the moment, a pretty healthy trend in the case of the Tier 2s and Tier 3s, but what I am going to assume may not occur or what historically has been a pretty big piece of the automotive capital investment are the huge Tier 1 plant constructions. We don't really see any of those in the pipe. But, I think if you look back through 2018, we made a conscientious effort to kind of refocus what we're doing and in our position this differently than we were in the past.

Unidentified Participant -- -- Analyst

Got it. Thank you.

Operator

Thank you. Our next question comes from the line of Brian Drab with William Blair. Please proceed with your question.

Brian Drab -- William Blair -- Analyst

Can you -- it's just, I think an issue on my end. Can you just explain what exactly pro forma means on these figures here, unlike Slide eight? Again, I think I just missed it.

Bruce Chalmers -- Chief Financial Officer

If you go to the back of the deck...

Tom Goeke -- President and Chief Executive Officer

In 22 and 23.

Bruce Chalmers -- Chief Financial Officer

Pages 22 and 23, we've actually laid it out on the reconciliation.

Tom Goeke -- President and Chief Executive Officer

And, Brian, it's all related to the plant closures and from those plant closures, the product lines that we've exited.

Brian Drab -- William Blair -- Analyst

Okay, yes, so it has to do with the exiting of the certain product lines, OK. And then Tom, what -- I guess in terms of the tariffs and the situation in China, you've talked a lot about it today, obviously but what has changed the most or what surprised you the most just in the last two months or so, two or three months there, because it -- I would imagine if we rewind to the third quarter call, which I guess was probably in early November. You didn't expect 2019, probably to be shaping up quite like those released in the first half of 2019, is that a fair and what has changed the model?

Tom Goeke -- President and Chief Executive Officer

I would say, we are being careful about it, as opposed to being bullish in the first half and really facing our business a little bit slower, on the rebound. I mean that's principally what's behind it. I think -- I think everybody sees, I mean it's not a Milacron evaluation, what started is as a trade issue, or as a tariff issue has really turned into a global economic kind of fallout. And I think that's really the thing that's going to prompt attention to it. So, but timing is everybody's guess, I don't -- I'll be watching TV on March 2nd like you will be on March 1st, see what happens.

But I guess we're a little bearish on the recovery as opposed to being bullish in seeing a rebound early in the year. The only exception is, I mentioned it is, the two other impacts in China being with the US Trade Representative already making an exclusion for injection mold to be exported from China and into the US, that could have some impact earlier and the fact that the hot runner businesses is really wrapped around product development, and as I said earlier, we're tied to multinationals, all of the global suppliers that produced electronics. We all have seen that the electronics is down, it was robust first half of the year cooled in the second half of the year and then they haven't stopped developing products, but at the moment, we had -- we really didn't see the launches in Q3 and Q4. So, we'll have to wait and see how that plays out as well in the first half of the year.

Bruce Chalmers -- Chief Financial Officer

Brian, let me add two things to that. One is, the cash flow guidance to have H1 down so much in our assumptions and still be able to protect that level of cash flow, I think is a great performance and we will work hard to make sure that we protect that and we've got our hands around a couple of levers to make sure that we hit that number. So we're very confident there. The other thing I'll point to is on Page nine. So if you look at the Melt Delivery segment, it's a -- even with everything going on to have that segment operating at 25% EBITDA margins, it's is a great performance if you kind of step back and with a little perspective on the broader issue.

So, I think we are extremely well positioned to make sure that we can get through H1 with good performance and take advantage of the growth when it comes back in the second half of the year. And as Tom mentioned, it's really around product redesign that that Q4 number dip is around product redesign and just those being pushed back. Products will continue to be redesigned and that demand will come back. If it does migrate geographically, we're one of the few businesses in the industry with strong manufacturing plants in four different regions. So regardless of what happens, we're confident that we will capture that growth and we will get it back in our financials.

Brian Drab -- William Blair -- Analyst

Got it. Okay, understood. Thanks very much for all that detail.

Operator

Thank you. Our next question comes from the line of Ken Newman with KeyBanc Capital Markets. Please proceed with your question.

Kenneth Newman -- KeyBanc Capital Markets -- Analyst

If demand doesn't come back the way that you are expecting in the second half, can you just talk through some of the contingency plans you have to keep the back half from looking like the front half?

Tom Goeke -- President and Chief Executive Officer

So we've kept everything in place, more or less, right? Then, so it is -- really it's managing the internal cost of the company to protect margins and cash. And as Bruce said that is our highest priority, should things change and we will calibrate around whatever it looks like. We think taking the opportunity through the first half, we'll probably take a harder look from early Q2 of what the order book looks like, what it looks like regionally by segment, et cetera. In order to really start making decisions at that point. So that's really next steps. There is an awful lot of opportunity that is still in the company just through efficiency, but all the heavy lifting is done, and really the cost structure is in really good shape.

Kenneth Newman -- KeyBanc Capital Markets -- Analyst

Okay. You started off the call just talking about some of the aftermarket initiatives that you had mentioned at your Analyst Day. Can you just update us on the progress of that capture on your own installed base and you think you can get to your 75% portfolio target by the end of 2019?

Tom Goeke -- President and Chief Executive Officer

The 75% is aspirational, it's not a 2019 number. And I'm certain that we'll incrementally improve it through 2019. In terms of what we've done, what have we done. The parts depots are in place, call centers are in place, field service has been added, stocking parts is under control, the area where we've had very good success in 2019 or excuse me, in 2018 was parts and service. And I would say through 2019, that we will really focus on retrofit and rebuilt, where it's sort of an endless opportunity in the case of -- even when you think about it. If things slowdown, but where things remain the way they are. We have an aging fleet issue in North America. The average age of the fleets are somewhere between 13 years and 15 years and every one of our customers is looking at best use of capital. And in many cases, best use of capital is retrofit or rebuilding existing equipment and that'll be a laser focused effort for 2019.

Kenneth Newman -- KeyBanc Capital Markets -- Analyst

Got it. Last one for me. You did a lot on delevering the balance sheet this year, which I think was great. Can you just talk about what is the right leverage point for Milacron at this point in time and how should we think about the capital structure going forward?

Bruce Chalmers -- Chief Financial Officer

For us, our target is to get below 2.5 times and stay below 2.5 times. So it's within reach this year. We see no problem in getting there and no problem in staying there. So, we think we've got a lot of flexibility and along the way we've got our costs, our debt structure and debt cost very low and very efficient. And the other thing I'll point out there is, over half of it is fixed. So, I think from a interest rate risk standpoint, we're in great shape as well.

Kenneth Newman -- KeyBanc Capital Markets -- Analyst

Thank you.

Operator

Our next question comes from the line of Andrew Obin with Bank of America Merrill Lynch. Please proceed with your question.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Yes, just a question. How has your mix in China has changed between Western manufacturers and Chinese manufacturers and have you noticed difference in growth rates between your local customers and multinational customers in China, for China? Thank you.

Tom Goeke -- President and Chief Executive Officer

Great question. In 2016, there was an economic interruption and Q3, I think Q3 into Q4 and at that time we actually made a conscious decision to dig deeper into the market. I would call it mid-tier and at that time we did so. So, I would say our balance is a bit different. It's difficult to call it a 100% because some of the local -- for local these guys also support mold making for the multinationals. But we did make a conscious effort to dig deeper into the market. So in the portfolio, there is a bit more local for local today than there was in the past, but the largest part of what we still do today is for multinationals.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

And is there a big change in growth rate in China, the QC-ing (ph) between your Chinese customers are multinational customers?

Tom Goeke -- President and Chief Executive Officer

So we're sort of stuck with looking at statistics and comp and ourselves against, what is called Interconnect and Interconnect is an annual hot runner survey and in the survey, they continue to show growth in China and that comes from two things. One is, penetration, cold runner, hot runner that's still happening. It's about 50-50, maybe 55% hot runner, and the balance cold running in China. So, penetration continues because of automation. And then just the total economic picture and size of China and I think I don't have it in front of me, but I believe it's in high upper single digits annual growth in China for the hot runner business.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Got you. And just a follow up on this pro forma revenue metrics. I did not see it in your proxy -- your proxy sort of compensation is based on thresholds. Is pro forma, will we see pro forma reference in the proxy for compensation purposes or it's just an illustrative sort of measure that you want us to understand the business better?

Bruce Chalmers -- Chief Financial Officer

It's illustrated.

Tom Goeke -- President and Chief Executive Officer

Yes, it's illustrated. We get no credit for that.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Thank you very much.

Operator

Thank you, ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Goeke for any final comments.

Tom Goeke -- President and Chief Executive Officer

I'd like to thank you all for joining the call today. And with that, we look forward to check in back with Q1 results. Thank you.

Operator

Thank you, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Duration: 44 minutes

Call participants:

Andrew Kitzmiller -- Corporate Controller

Tom Goeke -- President and Chief Executive Officer

Bruce Chalmers -- Chief Financial Officer

Michael Halloran -- Robert W. Baird & Co. -- Analyst

Unidentified Participant -- -- Analyst

Brian Drab -- William Blair -- Analyst

Kenneth Newman -- KeyBanc Capital Markets -- Analyst

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

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